annual reports · December 31, 2014

Annual Report of the Federal Reserve Board, 2015

102nd Annual Report 2015 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

This and other Federal Reserve Board reports and publications are available online at www.federalreserve.gov/publications/default.htm. To order copies of Federal Reserve Board publications offered in print, see the Board’s Publication Order Form (www.federalreserve.gov/pubs/orderform.pdf) or contact: 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 Board of Governors of the Federal Reserve System Washington, D.C. May 2016 The Speaker of the House of Representatives: Pursuant to the requirements of section 10 of the Federal Reserve Act, I am pleased to submit the 102nd annual report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar-year 2015. Sincerely, Janet L. Yellen Chair

v Contents 1 Overview .............................................................................................................................. 1 About This Report ...................................................................................................................... 1 About the Federal Reserve System ............................................................................................. 2 2 Monetary Policy and Economic Developments ..................................................... 5 Monetary Policy Report February 2016 ....................................................................................... 5 Monetary Policy Report July 2015 ............................................................................................. 22 3 Financial Stability ........................................................................................................... 35 Monitoring Risks to Financial Stability ....................................................................................... 35 Macroprudential Supervision and Regulation of Large, Complex Financial Institutions ................. 41 Domestic and International Cooperation and Coordination ......................................................... 43 4 Supervision and Regulation ......................................................................................... 45 2015 Developments ................................................................................................................. 45 Supervision ............................................................................................................................. 47 Regulation ............................................................................................................................... 70 5 Consumer and Community Affairs ........................................................................... 75 Supervision and Examinations .................................................................................................. 75 Consumer Laws and Regulations .............................................................................................. 86 Consumer Research and Emerging-Issues and Policy Analysis .................................................. 87 Community Development ......................................................................................................... 89 6 Federal Reserve Banks ................................................................................................... 93 Federal Reserve Priced Services ............................................................................................... 93 Currency and Coin ................................................................................................................... 96 Fiscal Agency and Government Depository Services .................................................................. 97 Use of Federal Reserve Intraday Credit ................................................................................... 100 FedLine Access to Reserve Bank Services .............................................................................. 101 Information Technology .......................................................................................................... 101 Examinations of the Federal Reserve Banks ............................................................................ 102 Income and Expenses ............................................................................................................ 102 SOMA Holdings and Loans ..................................................................................................... 104 Federal Reserve Bank Premises .............................................................................................. 105 Pro Forma Financial Statements for Federal Reserve Priced Services ..................................... 106

vi 7 Other Federal Reserve Operations ........................................................................... 111 Regulatory Developments ....................................................................................................... 111 The Board of Governors and the Government Performance and Results Act ............................. 114 8 Record of Policy Actions of the Board of Governors ...................................... 115 Rules and Regulations ............................................................................................................ 115 Policy Statements and Other Actions ...................................................................................... 118 Discount Rates for Depository Institutions in 2015 ................................................................... 120 9 Minutes of Federal Open Market Committee Meetings .................................. 121 Meeting Held on January 27–28, 2015 ..................................................................................... 122 Meeting Held on March 17–18, 2015 ....................................................................................... 144 Meeting Held on April 28–29, 2015 .......................................................................................... 169 Meeting Held on June 16–17, 2015 ......................................................................................... 180 Meeting Held on July 28–29, 2015 .......................................................................................... 205 Meeting Held on September 16–17, 2015 ................................................................................ 218 Meeting Held on October 27–28, 2015 .................................................................................... 242 Meeting Held on December 15–16, 2015 ................................................................................. 254 10 Litigation .......................................................................................................................... 279 11 Statistical Tables ............................................................................................................. 281 12 Federal Reserve System Audits ................................................................................. 311 Board of Governors Financial Statements ................................................................................ 312 Federal Reserve Banks Combined Financial Statements .......................................................... 335 Office of Inspector General Activities ....................................................................................... 387 Government Accountability Office Reviews .............................................................................. 388 13 Federal Reserve System Budgets .............................................................................. 389 System Budgets Overview ...................................................................................................... 389 Board of Governors Budgets .................................................................................................. 391 Federal Reserve Banks Budgets ............................................................................................. 396 Currency Budget .................................................................................................................... 401 14 Federal Reserve System Organization .................................................................... 405 Board of Governors ................................................................................................................ 405 Federal Open Market Committee ............................................................................................ 411 Board of Governors Advisory Councils .................................................................................... 413 Federal Reserve Banks and Branches ..................................................................................... 417 15 Index .................................................................................................................................. 433

1 1 Overview The Federal Reserve, the central bank of the United For More Background on States, is a federal system composed of a central gov- Board Operations ernmental agency—the Board of Governors—and 12 regional Federal Reserve Banks. For more information about the Federal Reserve Board and the Federal Reserve System, visit the Board’s website at www.federalreserve.gov/ The Board of Governors, located in Washington, aboutthefed/default.htm. An online version of this D.C., consists of seven members appointed by the annual report is available at www.federalreserve.gov/ President of the United States and supported by a publications/annual-report/default.htm. 2,825-person staff. Besides conducting research, analysis, and policymaking related to domestic and international financial and economic matters, the as well as the Board’s compliance with the Govern- Board plays a major role in the supervision and regu- ment Performance and Results Act of 1993. lation of U.S. financial institutions and activities, has broad oversight responsibility for the nation’s pay- • Policy actions and litigation. Section 8 and ments system and the operations and activities of the section 9 provide accounts of policy actions taken Federal Reserve Banks, and plays an important role by the Board in 2015, including new or amended in promoting consumer protection, fair lending, and rules and regulations and other actions as well as community development. the deliberations and decisions of the Federal Open Market Committee (FOMC); section 10 summarizes litigation involving the Board. About This Report • Statistical tables. Section 11 includes 14 statistical This report covers Board and System operations and tables that provide updated historical data concernactivities during calendar-year 2015. The report ing Board and System operations and activities. includes the following sections: • Federal Reserve System audits. Section 12 provides • Monetary policy and economic developments. detailed information on the several levels of audit Section 2 provides adapted versions of the Board’s and review conducted in regards to System operasemiannual monetary policy reports to Congress. tions and activities, including those provided by outside auditors and the Board’s Office of Inspec- • Federal Reserve operations. Section 3 provides a tor General. summary of Board and System activities in the areas of financial stability policy and research; • Federal Reserve System budgets. Section 13 presents section 4, in supervision and regulation; section 5, information on the 2015 budget performance of in consumer and community affairs; and section 6, the Board and Reserve Banks, as well as their 2015 in Reserve Bank operations. budgets, budgeting processes, and trends in their expenses and employment. • Dodd-Frank Act implementation and other requirements. Section 7 summarizes the Board’s efforts in • Federal Reserve System organization. Section 14 2015 to implement provisions of the Dodd-Frank provides listings of key officials at the Board and in Wall Street Reform and Consumer Protection Act the Federal Reserve System, including the Board of

2 102nd Annual Report | 2015 Governors, its officers, FOMC members, several The Federal Reserve Banks are the operating arms of System councils, and Federal Reserve Bank and the central banking system, carrying out a variety of Branch officers and directors. System functions, including operating a nationwide payment system; distributing the nation’s currency and coin; under authority delegated by the Board of Governors, supervising and regulating a variety of About the Federal Reserve System financial institutions and activities; serving as fiscal agents of the U.S. Treasury; and providing a variety The Federal Reserve System, which serves as the of financial services for the Treasury, other governnation’s central bank, was created by an act of Con- ment agencies, and other fiscal principals. gress on December 23, 1913. The System consists of a seven-member Board of Governors with headquar- The following maps identify Federal Reserve Disters in Washington, D.C., and the 12 Reserve Banks tricts by their official number, city, and letter located in major cities throughout the United States. designation. ■ Federal Reserve Bank city ■N Board of Governors of the Federal Reserve System, Washington, D.C.

Overview 3 ■ Federal Reserve Bank city ● Federal Reserve Branch city ■N Board of Governors of the Federal Reserve System, Washington, D.C. — Branch boundary

5 2 Monetary Policy and Economic Developments As required by section 2B of the Federal Reserve Act, ditions is needed to achieve the Committee’s maxithe Federal Reserve Board submits written reports to mum employment mandate. The labor force particithe Congress that contain discussions of “the con- pation rate remains somewhat below most assessduct of monetary policy and economic developments ments of its trend, and an unusually large number of and prospects for the future.” The Monetary Policy people continue to work part time when they would Report, submitted semiannually to the Senate Com- prefer full-time employment. mittee on Banking, Housing, and Urban Affairs and to the House Committee on Banking and Financial Inflation remains below the FOMC’s longer-run goal Services, is delivered concurrently with testimony of 2 percent: The price index for personal consumpfrom the Federal Reserve Board Chair. tion expenditures (PCE) rose only ½ percent over the 12 months ending in December. The PCE price index The following discussion is a review of U.S. monetary excluding food and energy items, which often propolicy and economic developments in 2015, excerpted vides a better indication of future inflation, also from the Monetary Policy Report published in Febru- remained subdued, rising 1½ percent over that ary 2016 and July 2015. Those complete reports period. Inflation has been held down substantially by are available on the Board’s website at www the drop in energy prices; declines in the prices of .federalreserve.gov/monetarypolicy/files/20160210_ non-oil imported goods have contributed as well. mprfullreport.pdf (February 2016) and www Meanwhile, survey-based measures of longer-run .federalreserve.gov/monetarypolicy/files/20150715_ inflation expectations have drifted down a little since mprfullreport.pdf (July 2015). the middle of last year and generally stand near the lower ends of their historical ranges; market-based Other materials in this annual report related to the measures of inflation compensation have fallen and conduct of monetary policy can be found in sec- are at low levels. tion 9, “Minutes of Federal Open Market Committee Meetings,” and section 11, “Statistical Tables” (see Real gross domestic product (GDP) is reported to tables 1–4). have increased at an annual rate of about 1¼ percent over the second half of the year, slower than the firsthalf pace. The expansion in economic activity Monetary Policy Report reflected continued increases in private domestic final February 2016 demand, supported by ongoing job gains and accommodative monetary policy. Government purchases Summary rose modestly. By contrast, the rise in the foreign exchange value of the dollar over the past year and a Labor market conditions continued to improve dur- half and the sluggish pace of economic activity ing the second half of 2015 and into early 2016. Pay- abroad have continued to weigh on exports. In roll employment has increased at a solid average pace addition, the pace of inventory accumulation slowed of 225,000 per month since June. The unemployment markedly from its elevated first-half pace, thereby rate, which had reached a high of 10 percent in late reducing overall GDP growth in the second half of 2009, declined from 5.3 percent last June to 4.9 per- 2015. cent in January. Although the unemployment rate now equals the median of Federal Open Market Domestic financial conditions have become some- Committee (FOMC) participants’ estimates of its what less supportive of economic growth since midlonger-run normal level, other considerations suggest 2015. Recent months have been marked by bouts of that some further improvement in labor market con- turbulence in financial markets that largely reflected

6 102nd Annual Report | 2015 concerns about the global economic outlook and tion would move back to 2 percent over the medium developments in oil markets. Broad measures of U.S. term; thus, the criteria set out by the Committee in equity prices have declined, on net, roughly returning March 2015 had been met. these indexes to levels that prevailed during the first half of 2014. And the dollar has strengthened fur- The Committee anticipates that economic conditions ther, on balance, since the summer of 2015. Corpo- will evolve in a manner that will warrant only gradual rate risk spreads have widened, particularly for lower- increases in the federal funds rate. This expectation is rated issuers. Nonetheless, interest rates for consistent with the view that the neutral nominal fedinvestment-grade issuers are generally still low, eral funds rate—defined as the value of the federal reflecting declines in yields on longer-term Treasury funds rate that would be neither expansionary nor securities. Moreover, although debt issuance by contractionary if the economy was operating at its lower-rated firms has slowed, credit flows to nonfi- productive potential—is currently low by historical nancial businesses have remained solid since the standards and is likely to rise only gradually over middle of last year, supported by continued strong time, as headwinds to economic growth dissipate bond issuance of higher-rated firms and by bank slowly and as inflation rises toward the Committee’s lending. Household access to credit was mixed, with goal of 2 percent. Consistent with this outlook, in the mortgages and credit cards still difficult to access for most recent Summary of Economic Projections some borrowers while student and auto loans (SEP), which was compiled at the time of the Decemremained broadly available, even to borrowers with ber FOMC meeting, FOMC participants projected lower credit scores. Overall, debt growth in the that the appropriate level of the federal funds rate household sector has remained modest and continues would be below its longer-run level through 2018. to be concentrated among borrowers with strong (The December SEP is included as Part 3 of the Febcredit histories. ruary 2016 Monetary Policy Report on pages 35–48; it is also included in section 9 of this annual report.) The U.S. financial system overall has been resilient to the stresses that have emerged since mid-2015, and With respect to its securities holdings, the Committee financial vulnerabilities remain moderate. Regulatory will continue to reinvest principal payments from its capital ratios and holdings of liquid assets at large securities portfolio, and it expects to maintain this banking firms are at historically high levels. Usage of reinvestment policy until normalization of the level short-term wholesale funding in the financial system of the federal funds rate is well under way. This is relatively low, and the use of leverage to finance policy, by keeping the Committee’s holdings of securities purchases has declined somewhat. The longer-term securities at sizable levels, should help ratio of aggregate private nonfinancial credit to GDP maintain accommodative financial conditions. is below most estimates of its long-run trend, although leverage of speculative-grade nonfinancial The Committee has emphasized that the actual path corporations has risen further since the middle of last of monetary policy will depend on how incoming year and is relatively high. Risk premiums for many data affect the economic outlook. In determining the asset classes have increased. For instance, the rise in timing and size of future adjustments to the target spreads on corporate debt has been larger than range of the federal funds rate, the Committee will would be expected given the evolution of expected assess realized and expected economic conditions defaults. The direct exposures of the largest U.S. relative to its objectives of maximum employment banking firms to the oil sector and to emerging mar- and 2 percent inflation. Stronger growth or a more ket economies are limited. If conditions in those sec- rapid increase in inflation than the Committee curtors worsen, however, wider stresses could emerge rently anticipates would likely call for faster increases and be transmitted to the United States through indi- in the federal funds rate; conversely, if conditions rect global financial linkages. prove weaker, a lower path of the federal funds rate would likely be appropriate. In December, after holding the federal funds rate near zero for seven years, the FOMC raised the target To move the federal funds rate into the new target range for that rate to ¼ to ½ percent. The decision to range announced in December, the Federal Reserve increase the federal funds rate reflected the Commit- raised the rate of interest paid on required and excess tee’s assessment that there had been considerable reserve balances and also employed an overnight improvement in the labor market last year and that reverse repurchase agreement facility. The effective the Committee was reasonably confident that infla- federal funds rate was moved successfully into the

Monetary Policy and Economic Developments 7 increased target range. The FOMC remains confi- Figure 1. Net change in payroll employment dent that it has the tools it needs to adjust short-term interest rates as appropriate. 3-month moving averages Thousands of jobs Part 1: Recent Economic and Financial 400 Developments Private 200 The labor market continued to improve during the + _0 second half of last year and early this year. Payroll employment has increased 225,000 per month, on Total nonfarm 200 average, since June. The unemployment rate fell from 400 5.3 percent in June to 4.9 percent in January and thus 600 has reached the median estimate among Federal Open Market Committee (FOMC) participants of 800 the level of unemployment that is considered to be normal in the longer run. Even so, the relatively low 2009 2010 2011 2012 2013 2014 2015 2016 labor force participation rate and the unusually large Source: Department of Labor, Bureau of Labor Statistics. number of people working part time who would prefer full-time employment suggest that some cyclical weakness is still present in the labor market. Since remained robust, averaging about 235,000 per month mid-2014, a steep drop in crude oil prices has exerted over the second half of last year, similar to the gains significant downward pressure on overall inflation, over the first half; factoring in the January increase of and declines in the prices of non-oil imported goods about 150,000, monthly gains since June have averhave held down inflation as well. The price index for aged about 225,000 (figure 1). The increase in 2015 personal consumption expenditures (PCE) increased followed an even faster pace of job gains in 2014, only ½ percent during the 12 months ending in and, in total, some 5¾ million jobs were added over December, a rate that is well below the FOMC’s the two years. In addition, the unemployment rate— longer-run objective of 2 percent; the index excluding which had reached 10 percent in late 2009—declined food and energy prices rose 1½ percent over the same from 5.3 percent in June 2015 to 4.9 percent in Januperiod. Both survey- and market-based measures of ary of this year; this level is ¾ percentage point lower inflation expectations have moved down since June. than a year earlier and is equal to the median of Meanwhile, real gross domestic product (GDP) FOMC participants’ estimates of its longer-run norincreased at an annual rate of 1¼ percent over the mal level (figure 2). Broader measures of labor second half of 2015, slower than in the first half. The underutilization, such as those including individuals growth in GDP has been supported by accommoda- who are classified as marginally attached to the labor tive monetary policy, favorable consumer confidence, force, declined by similar amounts. (A “marginally and the boost to household purchasing power from attached” individual is defined as someone who is lower oil prices. However, lower oil prices have also not looking for work currently and therefore treated exerted downward pressure on domestic investment as not in the labor force, but who wants and is availin the energy sector. In addition, sluggish growth able for work and has looked for a job in the past abroad and the higher foreign exchange value of the 12 months.) dollar have weighed on exports, and financial condi- . . . though some labor market slack likely tions more generally have become somewhat less supremains . . . portive of economic growth. Concerns about economic conditions abroad and the energy sector have While payroll employment and the unemployment contributed to lower equity prices and higher bor- rate have improved further since mid-2015, the labor rowing rates for some businesses. force participation rate fell from an average of 62.7 percent of the working-age population during Domestic Developments the second quarter of 2015 to 62.5 percent in the fourth quarter; the participation rate moved back up The labor market has continued to improve . . . to 62.7 percent in January. Changing demograph- Labor market conditions strengthened further across ics—most notably the increasing share of older a variety of dimensions over the second half of 2015 people in the population, who are less likely to be in and early this year. Payroll employment gains the labor force—and other longer-run structural

8 102nd Annual Report | 2015 Figure 2. Measures of labor underutilization Monthly Percent U-6 16 U-4 14 U-5 12 10 8 Unemployment rate 6 4 2004 2006 2008 2010 2012 2014 2016 Note: U-4 measures total unemployed plus discouraged workers, as a percent of the labor force plus discouraged workers. Discouraged workers are a subset of marginally attached workers who are not currently looking for work because they believe no jobs are available for them. U-5 measures total unemployed plus all marginally attached to the labor force, as a percent of the labor force plus persons marginally attached to the labor force. Marginally attached workers are not in the labor force, want and are available for work, and have looked for a job in the past 12 months. U-6 measures total unemployed plus all marginally attached workers plus total employed part time for economic reasons, as a percent of the labor force plus all marginally attached workers. The shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research. Source: Department of Labor, Bureau of Labor Statistics. changes in the labor market have continued to push out most of the recovery. In contrast, the employdown the participation rate even as cyclical forces ment cost index for private industry workers, which have been pushing it up. That said, labor force par- measures both wages and the cost to employers of ticipation appears to remain a little weaker than can providing benefits, increased about 2 percent over the be explained by structural factors alone, pointing to 12 months ending in December, similar to the pace the likelihood that some slack remains in this dimen- seen throughout most of the recovery. All of these sion of labor utilization. In addition, although the measures of compensation are increasing at slower share of workers who are employed part time but rates than those seen prior to the recession. This would like to work full time has fallen noticeably deceleration probably reflects a variety of factors, since June, it is still relatively high, indicating some including the slower growth of productivity, the scope for improvement on this dimension as well. slower pace of inflation, and perhaps some remaining slack in the labor market. Despite the continued . . . while labor compensation has shown some relatively small increases in nominal wages, the recent tentative signs of accelerating . . . very low inflation led to a noticeably larger wage gain As the labor market has continued to improve, the last year on a purchasing-power-adjusted (or rates of increase in some measures of hourly labor so-called real) basis than had been evident earlier in compensation have begun to pick up while others the expansion. remain relatively subdued. For example, average hourly earnings for all employees increased 2½ per- . . . and productivity growth has been lackluster cent over the 12 months ending in January, above the Over time, increases in productivity are a key deter- 2 percent pace seen throughout most of the recovery. minant of the rise in real wages and living standards. In addition, compensation per hour in the business Labor productivity in the business sector increased at sector—a volatile measure derived from the labor an annual rate of just ½ percent in 2015 and at an compensation data in the national income and prod- average annual rate of just 1 percent since the last uct accounts, or NIPA—is reported to have increased business cycle peak in 2007. The average pace since more quickly in 2015 than its average pace through- 2007 is a little below the 1974–95 average and well

Monetary Policy and Economic Developments 9 Figure 3. Brent spot and futures prices Figure 4. Change in the price index for personal consumption expenditures Weekly Dollars per barrel Monthly 12-month percent change 130 Spot price 120 4 110 100 Total 3 90 2 Dec. 2018 futures contracts 80 70 1 Excluding food 60 and energy + _0 50 40 1 30 2 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014 2015 Note: The data are weekly averages of daily data and extend through February 4, 2016. Note: The data extend through December 2015; changes are from one year Source: NYMEX. earlier. Source: Department of Commerce, Bureau of Economic Analysis. below the pace during the period from the mid-1990s The drop in crude oil prices continues to pass to 2007. The reasons behind the slower productivity through to gasoline prices: The national average of performance in recent years are not well understood, retail gasoline prices (on a seasonally adjusted basis) but one factor seems to be the slower pace of capital moved down from more than $2.50 per gallon in June accumulation. to about $2.00 per gallon in January. Falling oil prices continue to hold down overall Largely because of the decline in energy prices, overconsumer prices . . . all consumer price inflation, as measured by the PCE Consumer price increases have remained muted and price index, was running at just ¼ percent for the below the FOMC’s longer-run objective of 2 percent. 12 months ending in June 2015; the 12-month change As discussed in the box “Effects of Movements in Oil remained near that pace until year-end, when it Prices and the Dollar on Inflation” on pages 8–9 of edged up to ½ percent as some of the sharpest the February 2016 Monetary Policy Report, crude oil declines from a year earlier fell out of the 12-month prices have plummeted since June 2014, and the dol- calculation (figure 4). lar has moved appreciably higher; both factors have contributed importantly to the low inflation readings Food prices were little changed over the past six of the past year. months after edging down during the first half of 2015. Consumer food prices were held down in 2015 Since July, the price of crude oil has fallen apprecia- by falling food commodity prices, but futures marbly further, on net, with the spot price of Brent crude kets suggest that these commodity prices will flatten oil dropping below $35 per barrel, a level last seen out, implying that this source of downward pressure more than a decade ago (the blue line in figure 3). on consumer food price inflation is likely to wane. Futures prices have also dropped significantly and . . . but even outside of the energy and food indicate that market participants expect only modest categories, inflation has remained subdued price increases over the next few years. Although concerns about global growth have contributed to the As is also discussed in the box “Effects of Movefall in prices, much of the recent decline can be ments in Oil Prices and the Dollar on Inflation” on attributed to the abundance of global supply. Reduc- pages 8–9 of the February 2016 Monetary Policy tions in U.S. production have been slower and smaller Report, another important factor holding down inflathan expected, and OPEC has abandoned its official tion has been the behavior of import prices. After production target in favor of maintaining robust pro- declining sharply in the first half of 2015, non-oil duction despite declining prices and the likely import prices continued to fall in the second half, increase in Iranian oil exports in the coming months. albeit at a slightly more modest pace; the further

10 102nd Annual Report | 2015 Figure 5. Non-oil import prices and U.S. dollar exchange Figure 6. Median inflation expectations rate Percent Monthly 12-month percent change 20 Michigan survey expectations 4 16 for next 5 to 10 years 12 3 Non-oil Broad import prices nominal dollar 8 4 2 + SPF expectations _0 for next 10 years 4 1 8 12 2002 2004 2006 2008 2010 2012 2014 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016 Note: The Michigan survey data are monthly. The SPF data for inflation expectations for personal consumption expenditures are quarterly and extend from Note: The data for non-oil import prices extend through December 2015. 2007:Q1 through 2015:Q4. Source: Department of Labor, Bureau of Labor Statistics; Federal Reserve Board, Source: University of Michigan Surveys of Consumers; Federal Reserve Bank of Statistical Release H.10, “Foreign Exchange Rates.” Philadelphia, Survey of Professional Forecasters (SPF). declines in the second half reflected lower commodity after having declined notably between mid-2014 and prices as well as additional increases in the foreign mid-2015. Although changes in inflation compensaexchange value of the dollar (figure 5). In addition, tion could reflect changes in expected inflation, they slack in labor and product markets likely placed also may reflect a variety of other considerations, downward pressure on inflation, although this factor including an inflation risk premium, liquidity premihas probably waned significantly. For all of these rea- ums, and other factors.1 sons, inflation for items other than food and energy (so-called core inflation) remained modest. Core PCE Economic activity expanded at a moderate pace prices rose about 1½ percent over the 12 months end- in the second half of 2015 ing in December, similar to the increase in 2014. Real GDP is reported to have increased at an annual rate of 1¼ percent in the second half of last year, Survey- and market-based measures of inflation slower than the first-half pace (figure 7). As in the expectations have moved down since June first half of the year, economic activity during the Wage- and price-setting decisions are likely influ- second half was supported by solid gains in private enced by expectations for inflation. Survey measures domestic final purchases—that is, final purchases by of longer-term inflation expectations have been quite households and businesses—and by modest increases stable over the past 15 years but appear to have in government purchases of goods and services. By moved down some lately, including over the past contrast, aggregate demand continued to be held 6 months, to the lower end of their historical ranges. down by weak export performance, reflecting the rise This decline has occurred both for the measure of in the foreign exchange value of the dollar and sluginflation expectations over the next 5 to 10 years as gish foreign economic growth. In addition, inventory reported in the University of Michigan Surveys of investment slowed markedly from its elevated first- Consumers and for the median expectation for the half pace, thereby reducing overall GDP growth in annual rate of increase in the PCE price index over the second half of 2015. the next 10 years from the Survey of Professional Forecasters, conducted by the Federal Reserve Bank of Philadelphia (figure 6). Market-based measures of 1 For further discussion of inferring inflation expectations from medium- (5-year) and longer-term (5-to-10-yearmarket-based measures, see the box “Challenges in Interpreting ahead) inflation compensation derived from the dif- Measures of Longer-Term Inflation Expectations” in Board of ference between yields on nominal Treasury securities Governors of the Federal Reserve System (2015), Monetary Policy Report (Washington: Board of Governors, February), and Treasury Inflation-Protected Securities moved www.federalreserve.gov/monetarypolicy/mpr_20150224_part1 down further, on net, over the second half of the year .htm.

Monetary Policy and Economic Developments 11 Consumer spending last year was also likely sup- Figure 7. Change in real gross domestic product, gross ported by further increases in household net worth. domestic income, and private domestic final purchases Although the value of corporate equities edged down last year, prices of houses—which are owned much Percent, annual rate more widely than are corporate equities—posted sig- Gross domestic product 6 nificant gains, and the wealth-to-income ratio Gross domestic income Private domestic final purchases 5 remained elevated relative to its historical average. In 4 nominal terms, national house price indexes are now H1 H2* 3 close to their peaks of the mid-2000s, but relative to 2 rents, house price valuations are much lower than a decade ago. 1 + _0 Coupled with low interest rates, the rise in incomes 1 has lowered debt payment burdens for many house- 2 holds. The household debt service burden—the ratio 3 of required principal and interest payments on out- 2009 2010 2011 2012 2013 2014 2015 standing household debt to disposable income, meas- * Gross domestic income is not yet available for 2015:H2. ured for the household sector as a whole—has Source: Department of Commerce, Bureau of Economic Analysis. remained at a very low level by historical standards. As interest rates rise, the debt burden will move up only gradually, as most household debt is in fixedinterest products. Gains in income and wealth are supporting consumer spending . . . . . . as is credit availability Real personal consumption expenditures rose at an Consumer credit continued to expand moderately annual rate of 2½ percent in the second half of 2015, through late 2015, as lending standards for both auto about the same as the first-half pace (figure 8). These lending and student loans remained accommodative. increases have been supported by income gains from In addition, credit card lending has been rebounding the improving labor market as well as the fall in gasosince early last year. Standards and terms on credit line and other energy prices, which has bolstered concards are still relatively tight for riskier borrowers, sumers’ purchasing power. As a result, real disposalthough there has been some modest increase in able income—that is, income after taxes and adjusted access for borrowers with subprime credit histories. for price changes—rose a robust 3½ percent in 2015 Delinquencies on credit card and auto loans are still after a similar gain in 2014. near historical lows, in part due to the tight standards. Consumer confidence remains high Figure 8. Change in real personal consumption Household spending has also been supported by expenditures and disposable personal income favorable consumer sentiment. For the past year or so, the overall index of consumer sentiment from the Percent, annual rate University of Michigan Surveys of Consumers has registered levels comparable to those that prevailed Personal consumption expenditures 6 Disposable personal income before the recession. Rising real incomes, partly 5 driven by falling energy prices and improvements in H1 H2 4 the labor market, have likely driven up consumer 3 confidence. These same factors are probably behind 2 the more upbeat expectations that households report 1 + for real income changes over the next year or two, _0 which are now near pre-recession levels. 1 2 Residential construction has improved modestly 3 The gradual recovery in residential construction activity continued over the second half of last year. 2009 2010 2011 2012 2013 2014 2015 Both single- and multifamily housing starts registered Source: Department of Commerce, Bureau of Economic Analysis. moderate increases in 2015 (figure 9). Sales of new

12 102nd Annual Report | 2015 Figure 9. Private housing starts and permits Figure 10. Change in real private nonresidential fixed investment Monthly Millions of units, annual rate Percent, annual rate Structures Single-family starts 1.8 Equipment and intangible capital 16 1.4 H1 8 H2 + _0 1.0 8 Single-family permits .6 16 Multifamily starts .2 24 32 2003 2005 2007 2009 2011 2013 2015 2009 2010 2011 2012 2013 2014 2015 Note: The data extend through December 2015. Source: Department of Commerce, Bureau of the Census. Source: Department of Commerce, Bureau of Economic Analysis. and existing homes also rose moderately, abstracting during the second half of 2015 after increasing at a from the temporary plunge in existing home sales in 3 percent pace during the first half of the year (fig- November, which reportedly reflected a lengthening ure 10). Spending on equipment rose modestly, and a in closing times due to new mortgage disclosure rules. bit faster than during the first half of 2015, but But while multifamily starts have recovered to their spending on intangibles, such as research and develpre-recession level, single-family construction continopment, and investment in structures outside of ues to be well below its earlier pace. The level of drilling and mining flattened out after posting strong housing starts is still being held down by a meager gains during the first half of the year. Investment in pace of household formation, tighter-than-average structures used in the energy sector continued to fall mortgage credit supply, and shortages of skilled precipitously, as the drop in oil prices has scuttled labor and other inputs in the construction sector. investment in higher-cost oil and gas wells. For the year as a whole, the pace of overall business invest- Although the October 2015 and January 2016 Senior ment slowed compared with 2014, mostly as a result Loan Officer Opinion Survey on Bank Lending Pracof the drop in the energy sector. Investment has been tices (SLOOS) reports suggest that a gradual easing supported by low interest rates and financing condiof bank lending standards has continued over the tions that are still generally accommodative, though past six months, mortgage credit is still difficult to somewhat less so than earlier. access for borrowers with low credit scores, undocumented income, or high debt-to-income ratios.2 For Corporate financing conditions have become borrowers who can obtain credit, interest rates on somewhat less supportive mortgages remain near their historical lows, although Domestic financial conditions for nonfinancial firms they inched up, on net, over the second half of the have become somewhat less supportive of growth year. In 2015, outstanding mortgage debt rose for the since last June, particularly for non-investment-grade first time since the recession as mortgage originations firms. Equity prices have declined and bond spreads for home purchases increased and write-downs of have widened amid concerns about the global ecomortgage debt continued to ebb. nomic outlook and oil prices. Downgrades of bonds issued by nonfinancial companies have increased, Overall business investment has slowed as a and the leverage of these companies is near the top result of a sharp drop in investment in the energy end of its range over the past few decades. Nonethesector less, profitability has remained high outside the Business investment (private nonresidential fixed energy sector. Against a backdrop of low interest investment) rose at an annual rate of only ½ percent rates, investment-grade nonfinancial businesses have continued to raise substantial amounts of funds in 2 The SLOOS is available on the Board’s website at www .federalreserve.gov/boarddocs/snloansurvey. bond and loan markets since last June, in part to

Monetary Policy and Economic Developments 13 Figure 11. Change in real government expenditures on Figure 12. Change in real imports and exports of goods and consumption and investment services Percent, annual rate Percent, annual rate Federal Imports State and local 6 Exports 15 12 4 H1 H2 9 2 + H1 6 _0 H2 3 2 + _0 4 3 6 6 8 9 2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015 Source: Department of Commerce, Bureau of Economic Analysis. Source: Department of Commerce, Bureau of Economic Analysis. finance mergers and acquisitions activity. nomic expansion as well as the modest increase in Speculative-grade bond issuance also was solid for purchases. A deficit of this size is small enough to much of 2015 but diminished toward the end of the stabilize the ratio of the debt held by the public to year as spreads widened notably, particularly for nominal GDP; that said, the current level of that firms in the energy sector. ratio is elevated relative to its average over the post– World War II period. The Congressional Budget Loan demand remained strong across most major Office projects the deficit to move up to about 3 percategories through the end of 2015. Of note, demand cent of GDP in fiscal 2016. for commercial real estate (CRE) loans strengthened further and issuance of commercial mortgage-backed . . . and state and local government expenditures securities (CMBS) remained robust. Credit condi- are rising moderately tions tightened for this sector as concerns about Fiscal conditions of most state and local governcredit quality led to wider spreads on CMBS and, ments continue to improve gradually. Tax revenues according to the results of the October and January have been rising moderately, supported by the expan- SLOOS reports, a moderate number of banks had sion of economic activity and increasing house tightened lending standards for CRE loans, particu- prices. These governments boosted spending at a larly for construction and land development. A mod- moderate rate in 2015. In particular, real state and est fraction of banks also reported having tightened local purchases of goods and services rose 1½ perlending standards for commercial and industrial cent last year, as employment posted another modest loans to firms of all sizes since the second quarter. gain and real construction spending rose markedly for the first time since the recession. The drag from federal fiscal policy has ended . . . In contrast, net exports still held down growth in After being a drag on aggregate demand during gross domestic product slightly much of the expansion, federal fiscal policy has Exports held about flat in the second half of 2015, shifted to a more neutral stance as fiscal consolida- weighed down by the appreciation of the dollar tion efforts have abated. During 2015, policy actions and by soft foreign economic growth (figure 12). had little effect on taxes and transfers, and real fed- Although the stronger dollar made imports more eral purchases of goods and services edged up affordable, import growth was also relatively sub- (figure 11). dued. Imports for inputs related to oil exploration and production were particularly weak, consistent The federal budget deficit narrowed further in fiscal with steep declines in that industry. In all, real net year 2015 to 2½ percent of GDP, largely reflecting trade continued to be a drag on real GDP growth in the increase in tax receipts owing to the ongoing eco- the second half of 2015. Although the real trade bal-

14 102nd Annual Report | 2015 ance deteriorated, the nominal trade balance was Figure 13. Yields on nominal Treasury securities little changed in 2015 in part because the value of imports declined, largely because of the decline in oil prices. Still, the current account deficit widened a bit Daily Percent to near 3 percent of nominal GDP as U.S. net invest- 7 ment income declined. 6 10-year 30-year Financial Developments 5 4 The expected path for the federal funds rate over the next several years declined 3 Despite further strengthening in labor market condi- 2 5-year tions and a range of other indicators that market 1 participants viewed as consistent with continued 0 expansion in the U.S. economy, market-based measures of the expected path of the federal funds rate 2000 2002 2004 2006 2008 2010 2012 2014 2016 over the next several years have moved down, on bal- Note: The Treasury ceased publication of the 30-year constant maturity series on ance, since the middle of last year. Contributing to February 18, 2002, and resumed that series on February 9, 2006. this shift were concerns about the foreign economic Source: Department of the Treasury. outlook and global disinflationary pressures, as well as Federal Reserve communications anticipating that economic conditions will warrant only gradual increases in the federal funds rate. Survey-based decreased notably, on net, as concerns about the formeasures of the expected path of policy also moved eign economic outlook appeared to weigh on risk down. According to the results of the most recent sentiment and the outlook for corporate earnings Survey of Primary Dealers, conducted by the Federal growth (figure 14). Stock prices for companies in the Reserve Bank of New York just prior to the January energy and basic materials sectors dropped sharply, FOMC meeting, respondents’ expectations for the reflecting the continued fall in oil and other comfederal funds rate target at the end of this year and modity prices. Implied volatility for the overall next year were lower than those reported last June. S&P 500 index, as calculated from options prices, Market-based measures of uncertainty about the increased, on balance, since the middle of last year; at policy rate approximately one to two years ahead times, its movement was notable. declined, on balance, from their mid-2015 levels. Longer-term Treasury yields decreased Figure 14. Equity prices Yields on longer-term nominal Treasury securities have declined since the middle of last year on net (figure 13). The decreases in nominal yields largely Daily December 31, 2007 = 100 reflected reductions in inflation compensation; yields 160 on long-term inflation-protected Treasury securities were little changed. Participants in the U.S. Treasury 140 Dow Jones bank index market reportedly were particularly attentive to 120 developments abroad, especially turbulence in 100 Chinese financial markets, and to fluctuations in oil 80 prices. Consistent with the changes in yields on Treasury securities, yields on 30-year agency 60 mortgage-backed securities (MBS)—an important S&P 500 index 40 determinant of mortgage interest rates—decreased, 20 on balance, over the second half of 2015 and early 2016. 1995 1998 2001 2004 2007 2010 2013 2016 Note: For Dow Jones Indices licensing information, see the note on the Contents Broad equity price indexes decreased . . . page of the February 2016 Monetary Policy Report. Since the middle of last year, amid considerable vola- Source: The Dow Jones Bank Index and the S&P 500 Index are a product of S&P Dow Jones Indices LLC and/or its affiliates. tility, broad measures of U.S. equity prices have

Monetary Policy and Economic Developments 15 . . . and risk spreads on speculative-grade Figure 15. Ratio of total commercial bank credit to nominal corporate bonds moved up substantially, gross domestic product particularly for firms in the energy sector Credit spreads in the corporate sector have widened Quarterly Percent across the credit spectrum. The spread of yields on investment-grade corporate bonds to yields on Treasury securities of comparable maturity rose moder- 75 ately, and credit spreads on speculative-grade bonds widened substantially. Spreads for firms in the energy 70 sector increased particularly sharply, reflecting the 65 further drops in the price of oil since late June. Mutual funds investing in speculative-grade bonds 60 experienced significant outflows over the second half of 2015 and early 2016, and, in December, redemp- 55 tions from one such fund were suspended. During the second half of last year, the respondents to the Senior Credit Officer Opinion Survey on Dealer 2005 2007 2009 2011 2013 2015 Financing Terms reported a moderate deterioration Source: Federal Reserve Board, Statistical Release H.8, “Assets and Liabilities of Commercial Banks in the United States”; Department of Commerce, Bureau of in liquidity and market functioning in speculative- Economic Analysis. grade corporate bonds and some tightening of the terms under which dealers were willing to provide financing to clients against such bonds.3 In addition, some metrics of corporate bond market liquidity sug- Meeting” on page 34 of the February 2016 Monetary gest a slight deterioration over the second half of Policy Report. 2015 and early 2016, though most indicators remain at levels comparable with those seen prior to the cri- Treasury market functioning and liquidity sis. For further discussion of corporate bond markets conditions in the mortgage-backed securities and other financial stability issues, see the box market were generally stable “Developments Related to Financial Stability” on Indicators of Treasury market functioning have pages 20–21 in the February 2016 Monetary Policy remained broadly stable over the second half of 2015 Report. and early 2016. A variety of liquidity metrics—including bid-asked spreads and bid sizes—have dis- Short-term funding markets continued to played no notable signs of liquidity pressures over function well the same period. In addition, Treasury auctions gen- Short-term dollar funding markets have functioned erally continued to be well received by investors. smoothly during the second half of 2015 and early 2016. Markets for unsecured offshore dollar funding Liquidity conditions in the agency MBS market were and repurchase agreements, or repos, generally did also generally stable. Dollar-roll-implied financing not exhibit signs of stress. Year-end funding presrates for production coupon MBS—an indicator of sures were modest. the scarcity of agency MBS for settlement—suggested limited settlement pressures over the second Money market participants continued to focus on the half of 2015 and early 2016. Federal Reserve’s use of its monetary policy tools. These tools proved effective in raising the federal Bank credit has continued to expand and bank funds rate following the FOMC’s decision to increase profitability rose further the target range in December, while other money market rates also moved up broadly in line with the Aggregate credit provided by commercial banks increase in the federal funds target range. For a increased at a solid pace in the second half of 2015 detailed discussion, see the box “Monetary Policy (figure 15). The expansion in bank credit was mainly Implementation following the December 2015 FOMC driven by strong growth in loans coupled with an increase in banks’ holdings of agency MBS. The growth of loans on banks’ books was generally con- 3 More information on the Senior Credit Officer Opinion Survey sistent with the SLOOS reports of increased loan on Dealer Financing Terms is available on the Board’s website at www.federalreserve.gov/econresdata/releases/scoos.htm. demand for many loan categories.

16 102nd Annual Report | 2015 Measures of bank profitability remained below their Figure 16. U.S. dollar exchange rate indexes historical averages but improved slightly during the third quarter of 2015 (the latest available data), supported by lower noninterest expenses. Net interest Weekly July 1, 2014 = 100 margins were about unchanged, on average, during 130 the third quarter. Delinquency and charge-off rates Broad for most major loan types were generally stable, near 125 or at their lowest levels since the financial crisis. 120 115 Among large bank holding companies (BHCs), 110 despite generally positive third- and fourth-quarter earnings reports, equity prices have decreased mark- Advanced foreign economies 105 edly, on balance, since the middle of last year. The 100 Emerging market economies decline in bank equity prices likely reflected concerns 95 about global growth, the effects of a flatter yield curve on the outlook for bank profitability, and 2013 2014 2015 2016 potential losses due to the decrease in energy prices. Note: The data, which are in foreign currency units per dollar, are weekly averages Credit default swap (CDS) spreads for large BHCs of daily data and extend through February 4, 2016. increased on net. Source: Federal Reserve Board, Statistical Release H.10, “Foreign Exchange Rates.” The M2 measure of the money stock has increased at an average annualized rate of about 6 percent since even while most foreign central banks maintained or last June, about the same pace registered in the first expanded monetary policy accommodation, boosted half of 2015 and faster than nominal GDP growth. the value of the dollar. (For more discussion, see the Demand for liquid deposits has continued to boost box “Monetary Policy Divergence in the Advanced M2 growth. Economies ” on page 24 of the February 2016 Monetary Policy Report.) The dollar has also appreciated Municipal bond markets functioned smoothly, but against the renminbi since last summer, when the some issuers remained strained People’s Bank of China (PBOC) announced it was Credit conditions in municipal bond markets have changing its policy to allow market forces to play a generally remained stable since the middle of last greater role in determining the renminbi’s exchange year. Over that period, the MCDX—an index of rate. The PBOC allowed the renminbi to depreciate CDS spreads for a broad portfolio of municipal 3 percent against the dollar in August and another bonds—and ratios of yields on 20-year general obli- 1½ percent after the turn of the year. These developgation municipal bonds to those on longer-term ments, which contributed to intensified uncertainty Treasury securities edged up on net. about China’s exchange rate policy and the prospects for its economy, fostered episodes of global market Nevertheless, significant financial strains were still turbulence that further boosted the dollar. Investors evident for some issuers. In particular, Puerto Rico, became more focused on downside risks to prospects which continued to face challenges from subdued for growth in China and, by implication, global economic performance, severe indebtedness, and growth. These concerns about growth, along with other fiscal pressures, defaulted on some bond issues still-strong oil production and high inventories, connot backed by guarantees from the commonwealth tributed to a sharp drop in commodity prices, which and is seeking to restructure its debt. in turn weighed on the currencies of several commodity-exporting countries. International Developments . . . while equity prices and foreign sovereign The dollar continued to strengthen . . . bond yields have declined The foreign exchange value of the dollar rose further, Triggered in part by the unexpected devaluation of on net, since the middle of last year, bringing its the renminbi and an ensuing increase in concerns increase since mid-2014, when the most recent run-up about global economic growth, equity indexes have began, to over 20 percent by the beginning of 2016 dropped, on net, in most emerging market economies (figure 16). Expectations that the Federal Reserve (EMEs) and advanced foreign economies (AFEs) would soon start increasing its policy interest rates, since the beginning of the summer. In particular,

Monetary Policy and Economic Developments 17 Economic activity in most of emerging Asia, which had Figure 17. 10-year nominal benchmark yields in selected been restrained in the first half of the year by soft exteradvanced economies nal demand and by the outbreak of MERS (Middle East Respiratory Syndrome) in South Korea, picked up Weekly Percent in the second half, as the drag from these pressures subsided. In China, GDP growth is reported to have held 3.0 steady around 7 percent in the second half of the year, United States 2.5 boosted in part by relatively strong growth in services. Germany However, weak manufacturing, as well as the financial 2.0 market volatility noted previously, led to a pronounced 1.5 heightening of concerns about the economy during the United Kingdom 1.0 second half of the year. Japan .5 In Latin America, the decline in commodity prices, 0 along with other macroeconomic challenges, continued to weigh on the economic activity of several 2013 2014 2015 2016 countries. In Mexico, the economy continued to grow Note: The data are weekly averages of daily data and extend through February 4, at a moderate pace in the second half of 2015, sup- 2016. ported by improving household demand. However, Source: Bloomberg. low oil prices have pressured public finances, and manufacturing exports faltered toward the end of the year. In Brazil, the economy is undergoing its most severe recession in decades. Tight monetary policy in Chinese stock prices tumbled more than 40 percent response to high inflation, low commodity prices, despite official interventions, including circuit breakand the fallout from a high-profile corruption scaners and bans on stock sales, that were intended to dal eroded business confidence and contributed to a mute some of the downward pressure. The fall in collapse in investment. Brazilian stock prices was also very sharp, as global market turbulence as well as domestic developments, Inflation remained subdued in many EMEs, as the including a corruption scandal, declining output, and continuing decline in commodity prices contributed persistent high inflation, prompted stock prices to to a moderation of headline inflation. Consequently, fall nearly 25 percent since last summer. some central banks, including those of Korea and India, loosened monetary policy to support growth. As in the United States, 10-year sovereign yields In China, the PBOC also lowered its benchmark rate declined in most AFEs, likely in part because of and cut the reserve requirement ratio in August and increasing concerns about potential deflationary October to address weakness in the economy. In conpressure amid falling commodity prices (figure 17). trast, faced with inflationary pressures stemming In the euro area, Greek sovereign yields, which had partly from their depreciating currencies, Brazil, risen sharply in the first half of the year, declined Chile, and Colombia raised their policy rates in the substantially as an agreement was reached last sumsecond half of 2015. mer between the European Union and Greece. In contrast, bond spreads in a number of EMEs rose . . . and in the advanced foreign economies, modestly, on net, in the second half of the year economic activity expanded at a moderate pace before moving up more steeply after the start of 2016 In Canada, where low oil prices induced a mild conamid a widespread increase in risk aversion. traction earlier in the year, economic activity rebounded in the third quarter as exports recovered Growth in the emerging market economies and business-sector investment contracted at a slower moved back up from earlier in 2015 . . . pace. That said, more recent indicators of growth Following weak growth in the first half of 2015, eco- weakened markedly during the fourth quarter. In nomic activity in the EMEs improved in the second contrast, in the euro area, Japan, and the United half, as the pace of growth picked up in Asia and Kingdom, economic activity grew moderately in the Latin America. However, growth has been held back third quarter, and recent indicators for fourthin part by exports from EMEs, which declined appre- quarter growth, such as purchasing managers ciably early in 2015 and remain subdued on average. indexes, have largely held steady.

18 102nd Annual Report | 2015 Figure 18. Selected interest rates Daily Percent 5 10-year Treasury rate 4 3 2 2-year Treasury rate 1 0 Target range for the federal funds rate 1/304/30 8/510/291/284/29 8/1211/41/274/28 8/1011/31/264/27 8/9 11/21/254/25 8/110/241/30 5/1 7/3110/301/294/307/3010/291/284/297/2910/281/27 3/18 6/259/1612/163/18 6/249/2312/163/16 6/239/2112/143/15 6/229/2112/133/13 6/209/1312/123/206/199/1812/183/196/189/1712/173/186/17 9/1712/16 2008 2009 2010 2011 2012 2013 2014 2015 2016 Note: The 2-year and 10-year Treasury rates are the constant-maturity yields based on the most actively traded securities. The dates on the horizontal axis are those of regularly scheduled Federal Open Market Committee meetings. Source: Department of the Treasury; Federal Reserve Board. As in the United States, inflation remained low in rate by ¼ percentage point after seven years in which most advanced foreign economies. Further declines that rate had been held near zero. The FOMC’s deciin commodity prices weighed on inflation in the sion reflected the considerable improvement in the AFEs; in the euro area, Japan, and the United King- labor market last year and the Committee’s assessdom, consumer prices changed little in 2015. Over ment that, even with the modest reduction in policy the same period, consumer prices rose about 1½ per- accommodation, the labor market would continue to cent in Canada, reflecting the boost to import prices strengthen and inflation would return over the from the sharp depreciation of the Canadian dollar medium term to the FOMC’s 2 percent objective. over the past year. Monetary policy remains accommodative, and the Committee expects that economic conditions will With inflation low, AFE central banks maintained warrant only gradual increases in the federal funds highly accommodative monetary policies, and some sig- rate. However, the actual path of the federal funds naled their intention to maintain large balance sheets rate will depend on the economic outlook as well into the future. The European Central Bank, in informed by incoming data. addition to lowering its deposit rate further into negative territory, announced an extension of the intended The FOMC raised the federal funds rate target range in December . . . duration of its asset purchase program through at least March 2017 and that it would reinvest principal pay- Since last March, the FOMC had anticipated that it ments for as long as necessary. The Bank of England would be appropriate to increase the federal funds announced that it will start shrinking its balance sheet rate when it had seen further improvement in the only after its policy rate rises to about 2 percent from its labor market and was reasonably confident that current level of ½ percent. Meanwhile, in response to inflation would move back to 2 percent over the weak economic performance earlier in 2015, the Bank medium term. In December, the FOMC, judging that of Canada cut its policy rate further. More recently, the these criteria had been met, raised the target range Bank of Japan cut the interest rate that it pays on a por- for the federal funds rate to ¼ to ½ percent tion of banks’ current account deposits to negative (figure 18).4 0.1 percent. Part 2: Monetary Policy 4 See Board of Governors of the Federal Reserve System (2015), “Federal Reserve Issues FOMC Statement,” press release, In December, the Federal Open Market Committee December 16, www.federalreserve.gov/newsevents/press/ (FOMC) raised the target range for the federal funds monetary/20151216a.htm.

Monetary Policy and Economic Developments 19 The Committee’s decision to raise the federal funds Another reason that the Committee expects only a rate recognized the time it takes for policy actions to gradual increase in the federal funds rate will be waraffect future economic outcomes; if the FOMC ranted is that, with the federal funds rate near zero, delayed the start of policy normalization for too the FOMC can respond more readily to upside surlong, a relatively abrupt tightening of policy might prises to inflation, economic growth, and employeventually be needed to keep the economy from over- ment than to downside shocks. This asymmetry sugheating and inflation from significantly overshooting gests that it is appropriate to be more cautious in the Committee’s 2 percent objective. Such an abrupt normalizing the stance of monetary policy than tightening could disrupt financial markets and per- would be the case if short-term nominal interest rates haps even inadvertently push the economy into were appreciably above zero. recession. In part reflecting this concern, the FOMC continued . . . but monetary policy remains accommodative to reinvest principal payments from its securities Even after the increase in the federal funds rate late portfolio, and the Committee expects that this reinlast year, the stance of monetary policy remains vestment policy will be maintained until normalizaaccommodative. The FOMC anticipates that eco- tion of the level of the federal funds rate is well under nomic conditions will evolve in a manner that will way. Maintaining sizable holdings of longer-term warrant only gradual increases in the federal funds securities should help support accommodative finanrate, and that the federal funds rate is likely to cial conditions and reduce the risk that the Commitremain, for some time, below the levels that are tee would not be able to deliver sufficient accommoexpected to prevail in the longer run. dation by lowering the federal funds rate in the event of future adverse shocks. This expectation is consistent with the view that the neutral nominal federal funds rate—defined as the The FOMC expects that, supported by an accommovalue of the federal funds rate that would be neither dative monetary policy, economic activity will continue expansionary nor contractionary if the economy was to expand at a moderate pace and the labor market operating at its productive potential—is currently low will continue to strengthen. Inflation is expected to by historical standards and is likely to rise only remain low in the near term, in part because of recent gradually over time. One indication that the neutral further declines in energy prices, but to rise to 2 perfederal funds rate is low is that U.S. economic growth cent over the medium term as the transitory effects of has been only moderate in recent years despite the declines in energy and import prices dissipate and the very low level of the federal funds rate and the Fed- labor market strengthens further. In light of the cureral Reserve’s very large holdings of longer-term rent shortfall of inflation from 2 percent, the Commitsecurities. Had the neutral rate been running closer to tee is carefully monitoring actual and expected progthe average level estimated to have prevailed in recent ress toward its inflation goal. decades, these policy actions would have been expected to foster a much more rapid economic The FOMC’s policy decisions will continue to be expansion. data dependent Although the Committee expects that economic con- An array of persistent economic headwinds have ditions will warrant only gradual increases in the fedweighed on aggregate demand since the financial cri- eral funds rate, the Committee has emphasized that sis; these headwinds included, at various times, lim- the actual path of monetary policy will depend on ited access to credit for some borrowers, contraction- how incoming data affect the economic outlook. In ary fiscal policy, and weak growth abroad coupled determining the timing and size of future adjustwith a significant appreciation of the dollar. ments to the target range, the Committee will assess Although the overall restraint imposed by such head- realized and expected economic conditions relative to winds has declined over the past few years, the effects its objectives of maximum employment and 2 percent of some headwinds have remained significant. As inflation. Stronger growth or a more rapid increase in these effects abate further, the neutral federal funds inflation than the Committee currently anticipates rate should gradually move higher over time. (For a would likely call for faster increases in the federal discussion of how the neutral federal funds rate is funds rate; conversely, if conditions prove weaker, a likely to evolve over time, see the box “The Neutral lower path of the federal funds rate would likely be Federal Funds Rate in the Longer Run” on pages appropriate. Similarly, the timing of a change in the 32–33 of the February 2016 Monetary Policy Report.) reinvestment policy will depend on economic devel-

20 102nd Annual Report | 2015 Figure 19. Federal Reserve assets and liabilities 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 2016 Note: “Credit and liquidity facilities” consists of primary, secondary, and seasonal credit; term auction credit; central bank liquidity swaps; support for Maiden Lane, Bear Stearns, and AIG; and other credit facilities, including the Primary Dealer Credit Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, and the Term Asset-Backed Securities Loan Facility. “Other assets” includes unamortized premiums and discounts on securities held outright. “Capital and other liabilities” includes reverse repurchase agreements, the U.S. Treasury General Account, and the U.S. Treasury Supplementary Financing Account. The data extend through February 3, 2016. Source: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.” opments and their implications for progress toward Reserve Act contained in the Fixing America’s Surthe FOMC’s goals of maximum employment and face Transportation Act of 2015. Remittances from price stability. In assessing realized changes in eco- 2008 through 2015 total about $600 billion on a nomic conditions and forming its outlook, the Com- cumulative basis—an average of about $75 billion a mittee will take into account a wide range of meas- year, compared with about $25 billion a year, on ures, including measures of labor market conditions, average, over the decade prior to 2008. indicators of inflation pressures and inflation expectations, and readings on financial and international The Committee continued to focus on the developments. implementation of monetary policy Consistent with the FOMC’s Policy Normalization The size of the Federal Reserve’s balance sheet Principles and Plans published on September 17, has remained stable 2014, the Federal Reserve used interest paid on With the continuation of the Committee’s reinvest- reserve balances and also employed an overnight ment policy, the Federal Reserve’s total assets have reverse repurchase agreement (ON RRP) facility to held steady at around $4.5 trillion (figure 19). Hold- implement its decision in December to raise the tarings of U.S. Treasury securities in the System Open get range for the federal funds rate.5 Specifically, the Market Account (SOMA) have remained at $2.5 tril- Board of Governors raised the interest rate paid on lion, and holdings of agency debt and agency required and excess reserve balances to ½ percent, mortgage-backed securities at approximately while the FOMC authorized ON RRP operations at $1.8 trillion. Consequently, total liabilities on the an offering rate of ¼ percent. (For further informa- Federal Reserve’s balance sheet were largely tion, see the box “Monetary Policy Implementation unchanged. following the December 2015 FOMC Meeting” on page 34 of the February 2016 Monetary Policy Given the Federal Reserve’s large securities holdings, Report.) In addition, the Board of Governors interest income on the SOMA portfolio has contin- approved an increase in the discount rate (the priued to support substantial remittances to the U.S. mary credit rate) to 1 percent. Treasury Department. Preliminary results indicate that the Reserve Banks provided for payments of $97.7 billion of their estimated 2015 net income to the Treasury. In addition, the Reserve Banks trans- 5 See Board of Governors of the Federal Reserve System (2014), “Federal Reserve Issues FOMC Statement on Policy Normalizaferred to the Treasury $19.3 billion from their capital tion Principles and Plans,” press release, September 17, www surplus as required by an amendment to the Federal .federalreserve.gov/newsevents/press/monetary/20140917c.htm.

Monetary Policy and Economic Developments 21 Along with the decision to increase the target range aggregate cap. The Committee intends to phase out for the federal funds rate, the FOMC also temporar- this facility when it is no longer needed to help conily suspended the aggregate cap on ON RRP transac- trol the federal funds rate. tions, indicating that ON RRP operations would be undertaken in amounts limited only by the value of The Federal Reserve also continued to test the opera- Treasury securities held outright in the SOMA that tional readiness of other policy tools. Three Term are available for such operations and by a per- Deposit Facility operations were conducted in the counterparty limit of $30 billion per day. Nonethe- second half of 2015. The operations offered either less, total reverse repurchase agreement transactions 7- or 14-day deposits at a floating rate of 1 basis with the Federal Reserve have remained near levels point over the interest rate on excess reserves. In observed prior to the increase in the target range for these operations, deposit volumes declined slightly the federal funds rate and the suspension of the from previous tests with similar parameters.

22 102nd Annual Report | 2015 Monetary Policy Report July 2015 second quarter. The economic expansion continues to be supported by rising incomes resulting from ongoing job gains, accommodative monetary policy, Summary and generally favorable financial conditions. Further- The overall condition of the labor market continued more, the sizable drop in oil prices since last summer to strengthen over the first half of 2015, albeit at a has been a substantial benefit to households, more moderate pace than in 2014. So far this year, although the negative side of that decline has been payroll employment has increased by about 210,000 quite evident in cutbacks in the energy sector of our on average per month compared with the robust economy. In addition, the sluggish pace of economic 260,000 average in 2014, and the unemployment rate activity abroad, together with the appreciation of the has declined about ¼ percentage point to 5.3 percent dollar, has weighed on net exports. in June, close to most Federal Open Market Committee (FOMC) participants’ estimates of its longer-run The Committee expects that, with appropriate policy normal level. Other measures of labor market activity accommodation, economic activity will expand at a also point to ongoing improvement in labor market moderate pace and labor market conditions will conconditions even as they continue to suggest that fur- tinue to move toward levels the Committee judges to ther improvement is needed to achieve the Commit- be consistent with its dual mandate of maximum tee’s maximum employment mandate. In particular, employment and price stability. In addition, the the labor force participation rate has generally been Committee anticipates that, with stable inflation holding steady but nevertheless remains below most expectations and strengthening economic activity, assessments of its trend, and the number of people inflation will rise gradually over the medium term working part time when they would prefer full-time toward the Committee’s 2 percent objective. Those employment has declined further but remains expectations are reflected in the June Summary of elevated. And, while some measures of labor com- Economic Projections (SEP), which provides projecpensation are starting to rise more rapidly, they nev- tions of the individual FOMC participants and is ertheless remain consistent with the view that labor included as Part 3 of the July 2015 Monetary Policy resources likely are still not being fully utilized. Report on pages 37–50; it is also included in section 9 of this annual report. Consumer price inflation remains below the FOMC’s longer-run goal of 2 percent. The price index for per- Domestic financial conditions have generally sonal consumption expenditures (PCE) edged up remained supportive of economic growth. After havonly ¼ percent over the 12 months ending in May, ing declined notably in 2014, longer-term interest held down by the pass-through of a sizable decline in rates have increased somewhat, on net, over the first crude oil prices over the second half of last year. half of the year, but they remain at historically low However, consumer energy prices appear to have sta- levels. Broad measures of U.S. equity prices have bilized in recent months. Changes in the PCE price been little changed, on balance, this year after having index excluding food and energy items, which are risen considerably in recent years. Credit flows to often a better indicator of where overall inflation will large nonfinancial businesses have remained solid, be in the future, also remained relatively low; this and financing generally appears to have become index rose 1¼ percent over the 12 months ending in available to small businesses as well. Credit condi- May, partly restrained by declines in the prices of tions for households have been mixed: While the non-energy imported goods. Meanwhile, survey- availability of mortgage loans continues to expand based measures of longer-run inflation expectations gradually, mortgages remain relatively difficult to have remained relatively stable; market-based meas- obtain for some individuals, and credit card lending ures of inflation compensation have moved up some- standards and terms are tight for borrowers with what from their lows earlier this year but remain below-prime scores. Meanwhile, auto and student below levels that prevailed until last summer. loans continued to be widely available, and outstanding balances of such loans have continued to rise Real gross domestic product is reported to have been significantly. little changed in the first quarter of this year. Some of this weakness likely reflected temporary factors Financial vulnerabilities in the United States overall that will reverse over the coming quarters. Indeed, a have remained moderate since the previous Monetary number of recent spending indicators suggest that Policy Report. Capital and liquidity positions at the economic activity increased at a moderate pace in the largest banking firms have remained strong, maturity

Monetary Policy and Economic Developments 23 transformation outside the banking system has con- Part 1: Recent Economic and Financial tinued to trend lower, and debt growth by the house- Developments hold sector has been modest. Valuation pressures in Labor market conditions continued to improve over many fixed-income markets, while having eased, have the first half of 2015, although at a more moderate remained notable; prices and valuation measures for pace than last year. Gains in payroll employment commercial real estate have increased further; and since the start of the year have averaged close to borrowing by lower-rated businesses has continued at 210,000 per month, somewhat below last year’s avera rapid rate. Although market participants have age pace, while the unemployment rate edged down expressed concerns about the resilience of liquidity slightly to 5.3 percent in June, close to most Federal during stress events, a variety of metrics do not sug- Open Market Committee (FOMC) participants’ estigest a significant deterioration in market liquidity; mates of its longer-run normal level. Since last sumthe Federal Reserve is watching developments closely. mer, a steep drop in crude oil prices has exerted Foreign developments, such as the situation in downward pressure on overall inflation, and price Greece and financial conditions in China, could pose increases for other goods and services have been subsome risks to the United States if they lead to dued, partly reflecting declines in prices for imported broader strains in those regions. non-energy goods. The price index for personal con- The FOMC has continued to judge that a high sumption expenditures (PCE) increased only ¼ perdegree of policy accommodation remains appropri- cent during the 12 months ending in May, a rate that ate to support continued progress toward maximum is well below the FOMC’s longer-run objective of employment and price stability. As a result, it has 2 percent; the index excluding food and energy prices maintained the exceptionally low target range of 0 to was up 1¼ percent over this period. Survey-based ¼ percent for the federal funds rate and has kept the measures of longer-run inflation expectations have Federal Reserve’s holdings of longer-term securities been fairly stable, whereas measures of inflation comat their current elevated levels to help maintain pensation derived from financial market quotes, accommodative financial conditions. The Committee while up from their lows earlier this year, remain has reiterated that in deciding how long to maintain below the levels that prevailed prior to last summer. the current target range for the federal funds rate, it Meanwhile, real gross domestic product (GDP) was will consider a broad set of indicators to assess real- reported to have been little changed in the first quarized and expected progress toward its objectives. ter of this year. Some of this weakness likely was the Since its April meeting, the Committee has stated it result of temporary factors, and recent indicators anticipates that raising the target range for the fed- suggest that economic activity picked up in the seceral funds rate will be appropriate when it has seen ond quarter; even so, the pace of output growth further improvement in the labor market and is rea- appears to have slowed so far this year, on average, sonably confident that inflation will move back to its relative to its pace last year. The economic expansion 2 percent objective over the medium term. In the continues to be supported by rising real incomes June SEP, most policymakers anticipated that these driven by gains in employment and, recently, lower conditions would be met sometime this year. The oil prices; by improving consumer and business con- Committee continues to expect that, even after fidence; and by accommodative monetary policy and employment and inflation are near mandate- generally favorable financial conditions. However, the consistent levels, economic conditions may, for some low level of oil prices also pushed down investment time, warrant keeping the target federal funds rate spending in the energy sector early this year, and below levels the Committee views as normal in the sluggish growth abroad and the higher foreign longer run. exchange value of the dollar have weighed on U.S. exports. The Federal Reserve has continued to plan for the eventual normalization of the stance and conduct of Domestic Developments monetary policy, including by testing the operational readiness of the policy tools to be used. The FOMC The labor market has continued to improve but at remains confident that it has the tools it needs to a more gradual pace . . . raise short-term interest rates when doing so becomes Labor market conditions strengthened further over appropriate. the first half of 2015 but at a more moderate pace

24 102nd Annual Report | 2015 than last year. Payroll employment gains have aver- up from gains of about 2 percent that had prevailed aged about 210,000 per month so far this year, a solid over the past few years. Two other prominent measpace but down from an average of 260,000 jobs per ures of compensation—average hourly earnings and month in 2014. The unemployment rate has contin- business-sector compensation per hour—have ued to edge lower and reached 5.3 percent in June, increased a bit more slowly than the ECI over the ¼ percentage point lower than in December; in 2014, past year and have shown little sign of acceleration. the unemployment rate declined more rapidly. In Since the recession began, the gains in all three of addition, the share of unemployed who have been these measures of nominal compensation have fallen out of work for more than six months has declined well short of their pre-recession averages, and growth noticeably this year. After falling steeply during the of real compensation has fallen short of productivity recession and the early part of the recovery, the labor growth over much of this period. That said, the drop force participation rate has remained roughly flat in energy prices boosted real wage growth over the since late 2013, although it ticked lower in June. The past year. continued stability of the participation rate likely represents cyclical improvement relative to its declining . . . and productivity growth has been especially trend, which reflects ongoing demographic trends weak such as the aging of members of the baby-boom gen- Labor productivity in the business sector is reported eration into their retirement years. With employment to have declined in both the fourth quarter of 2014 rising and the participation rate holding steady, the and the first quarter of 2015, as the recovery in hours employment-to-population ratio edged up further worked progressed even as output growth slowed. over the first half of this year. Furthermore, the job Over such short periods, however, productivity openings rate has continued to move up this year and growth is often quite volatile, both because of diffinow stands above its pre-recession level, and the quits culties in measuring output and hours and because rate, which is often considered a measure of workers’ other transitory factors may affect productivity confidence in labor market opportunities, has growth from quarter to quarter. Taking a longer view, remained at relatively high levels. Unemployment output per hour in the business sector has risen at an insurance claims are now very low. average annual rate of 1¼ percent since the recession began in late 2007, a gain that is modest by historical . . . and some labor market slack remains . . . standards. The relatively slow pace of productivity With these improvements, the labor market has growth since 2007 reflects, in part, the sustained shown further progress toward the Committee’s weakness in capital investment over the recession and maximum employment mandate. Nevertheless, as recovery period; consequently, productivity gains described in the box “Slack in the Labor Market” on may improve in the future as investment in pages 6–7 of the July 2015 Monetary Policy Report, productivity-enhancing capital equipment and other labor market indicators are consistent with research and development strengthens. more slack in resource utilization than is indicated by the unemployment rate alone. In particular, although A plunge in crude oil prices has held down consumer prices . . . these measures have improved, the participation rate remains below most assessments of its trend, and the Overall consumer price inflation has slowed to near share of workers who are employed part time but zero over the past year, well below the FOMC’s would like to work full time is still high; in large part longer-run objective of 2 percent. In May, the for this reason, the more comprehensive U-6 measure 12-month change in the overall PCE price index was of labor underutilization remains elevated relative to only ¼ percent, down from 1¾ percent in May 2014. the unemployment rate. This deceleration importantly reflects the sharp drop in oil and farm commodity prices over this period as . . . while compensation has shown some signs of well as declines in non-energy import prices. Howaccelerating . . . ever, energy prices have stabilized in recent months, As the labor market has continued to improve, with the result that one-month changes in overall increases in some measures of hourly labor compen- PCE prices have firmed somewhat. sation have begun to pick up but, nonetheless, remain relatively subdued. The employment cost index (ECI) After plunging in the second half of 2014, the spot for private-industry workers, which measures both price of crude oil moved up somewhat in the first wages and the cost of employer-provided benefits, half of 2015, reflecting in part a sharp decline in rose 2¾ percent over the 12 months ending in March, investment in the U.S. energy sector. Over the past

Monetary Policy and Economic Developments 25 few weeks, prices have moved lower as both U.S. and index over the next 10 years has been unchanged at foreign oil production have been stronger than 2 percent. Furthermore, in the Survey of Primary expected and as concerns about global growth per- Dealers, conducted by the Federal Reserve Bank of sist. As of early July, at below $60 per barrel, the spot New York, distributions of inflation expectations price of Brent crude oil remains at about half of its 5 to 10 years ahead have also remained stable. mid-2014 peak. Moreover, oil futures prices suggest that market participants expect only a moderate . . . while market-based measures of inflation increase in oil prices over the next couple of years as compensation have declined since last summer global demand firms and North American supply In contrast, market-based measures of longer-term growth slows. The large cumulative drop in crude oil inflation compensation—derived from inflation prices was fully passed through to lower retail prices swaps or from differences between yields on nominal for gasoline and other energy products early this Treasury securities and Treasury Inflation-Protected year. More recently, gasoline prices have increased Securities (TIPS)—declined noticeably between the somewhat, although prices at the pump remain at lev- middle of 2014 and early this year, and, while they els substantially below those of last summer. have retraced part of that decline in recent months, they remain below the levels that prevailed prior to Food commodity prices have fallen considerably last summer. Deducing the sources of changes in from their levels of a year ago, and the gradual pass- inflation compensation is difficult because such through of these costs to the retail level has led to movements reflect not only expected inflation, but declines in consumer food prices over the first five also an inflation risk premium—the compensation months of this year. Meanwhile, non-oil import that holders of nominal securities demand for bearprices have been declining sharply so far this year, ing inflation risk—as well as other factors. Neverthereflecting lower commodity prices as well as the rise less, one cannot rule out a decline in inflation expecsince last summer in the exchange value of the dollar. tations among market participants since last summer. . . . and outside of the energy and food Economic activity slowed earlier this year categories, inflation has remained subdued Real GDP is reported to have been little changed in Inflation for items other than food and energy (so- the first quarter of this year after increasing 2½ percalled core inflation) has remained relatively low. cent in 2014. Some of this weakness likely reflected Core PCE prices rose about 1¼ percent over the temporary disruptions due to unusually severe winter 12 months ending in May, down slightly from its weather and a labor dispute at West Coast ports; in year-earlier pace. Falling import prices likely held addition, residual seasonality in some components of down core inflation over the past year, and lower oil GDP may have held down measured first-quarter prices and easing prices for commodities more gener- growth.1 Both of these factors would tend to boost ally may have played a role in holding down firms’ measured GDP growth over the remainder of the costs and prices. In addition, ongoing slack in labor year. Indeed, a number of recent spending indicators and product markets has likely placed downward suggest that economic activity rose moderately in the pressure on inflation, although with the improving second quarter. labor market, the effect of this factor likely is waning. Survey-based measures of longer-term inflation 1 Residual seasonality is the presence of a predictable seasonal pattern in data that have already been seasonally adjusted. For expectations have remained stable . . . recent discussions of this issue, see Jason Furman (2015), “Sec- Because inflation expectations likely factor into ond Estimate of GDP for the First Quarter of 2015,” Council of Economic Advisers Blog, May 29, www.whitehouse.gov/blog/ wage- and price-setting decisions, the Federal Reserve 2015/05/29/second-estimate-gdp-first-quarter-2015; and tracks a variety of indicators of these expectations. Charles E. Gilbert, Norman J. Morin, Andrew D. Paciorek, and Survey-based measures of longer-term inflation Claudia R. Sahm (2015), “Residual Seasonality in GDP,” FEDS Notes (Washington: Board of Governors of the Federal Reserve expectations have been quite stable over the past System, May 14), www.federalreserve.gov/econresdata/notes/ 15 years. Readings on inflation expectations over the feds-notes/2015/residual-seasonality-in-gdp-20150514.html. The next 5 to 10 years, as reported in the University of Bureau of Economic Analysis discusses its plans to revise seasonal adjustment procedures for GDP in its upcoming annual Michigan Surveys of Consumers, have continued to revision in Stephanie H. McCulla and Shelly Smith (2015), “Premove within a narrow range, and, in the Survey of view of the 2015 Annual Revision of the National Income and Professional Forecasters, conducted by the Federal Product Accounts,” Bureau of Economic Analysis, Survey of Current Business (June), www.bea.gov/scb/pdf/2015/06%20June/ Reserve Bank of Philadelphia, the median expecta- 0615_preview_of_2015_annual_revision_of_national_income_ tion for the annual rate of increase in the PCE price and_product_accounts.pdf.

26 102nd Annual Report | 2015 However, some of the slowdown in GDP growth rela- cent over the first five months of this year, a slightly tive to its pace last year likely reflects somewhat more faster pace than in 2014. persistent factors. In particular, expectations that the relative strength of the U.S. economy will lead to an Coupled with low interest rates, the rise in incomes earlier normalization of monetary policy than in our has reduced debt payment burdens for many housetrading partners have contributed to a substantial holds. The household debt service ratio—that is, the appreciation of the dollar over the past year. The ratio of required principal and interest payments on appreciation, combined with sluggish foreign growth, outstanding household debt to disposable personal is weighing on the demand for U.S. exports. And the income—has remained at a very low level by historisizable drop in oil prices since last summer has led to cal standards. marked cutbacks in investment in the energy sector of our economy even though those price declines Consumer spending growth also continues to be suphave been a substantial benefit to households. These ported by increases in household net worth. Over the factors also contributed to the 2¾ percent annual rate first half of this year, broad measures of U.S. equity of decline in industrial production in the first five prices were little changed, on balance, after having months of this year. Despite the drag on production risen considerably in recent years, and house prices from these headwinds, the economic expansion con- moved up further. Buoyed by cumulative increases in tinues to be supported by accommodative financial home and equity prices, aggregate household net conditions—including the low cost of borrowing for worth has risen appreciably from its levels during the many households and businesses—and by increases recession and its aftermath to more than six times the in households’ real incomes spurred by continuing value of disposable personal income. job gains and the earlier decline in oil prices. . . . as is credit availability for consumers that Net exports were a substantial drag on real GDP remains generally favorable growth in the first quarter Consumer credit has continued to expand this year. Exports fell markedly in the first quarter, held back Auto and student loans remain widely available even by lackluster growth abroad, the appreciation of the to borrowers with lower credit scores, and outstanddollar, and transitory factors, including the West ing balances of such loans expanded significantly Coast port labor dispute. In contrast, imports grew through May. Credit card borrowing slowed early briskly in the first quarter, supported in part by the this year, likely reflecting weak retail activity, but has stronger dollar. As a result, net exports were an rebounded in recent months. However, credit card unusually large drag on real GDP growth. Trade data availability remains unusually tight for borrowers through May suggest that exports recovered from with below-prime credit scores. their first-quarter drop and import growth slowed, pointing to a small negative contribution from net Consumer confidence remains high exports in the second quarter. The current account Indicators of consumer sentiment suggest that confideficit widened a bit to 2.6 percent of nominal GDP dence among households remains high. The Michiin the first quarter of this year but remains near its gan survey’s index of consumer sentiment—which narrowest readings since the late 1990s. incorporates households’ views about their own financial situations as well as broader economic con- Gains in income and wealth are supporting ditions—moved up noticeably over the second half of consumer spending . . . 2014 as oil prices plunged and labor market condi- The rate of growth in consumer spending slowed tions improved and has remained upbeat so far this during this year’s harsh winter but has picked up in year. Responses to the Michigan survey’s question recent months. Smoothing through these monthly about households’ expectations of real income fluctuations, real consumer spending increased at an changes over the next year or two have also moved up average annual rate of 2¾ percent over the first five over the past year to their highest levels since before months of this year, about the same as its average the recession. pace over 2014. The ongoing improvement in the labor market has supported income growth, and low The pace of homebuilding has improved only gasoline prices have boosted households’ purchasing slowly power. As a result, real disposable personal income— The recovery in residential investment continued at a that is, income after taxes and adjusted for price gradual pace over the first half of this year. Smoothchanges—increased at an annual rate of nearly 4 per- ing through the effects of harsh winter weather,

Monetary Policy and Economic Developments 27 single-family housing starts have edged up since last tors that supply oil production companies, including summer, while sales of new and existing homes have steel and certain types of machinery. The drop in been trending up, on balance, over the past year. In drilling and mining investment subtracted more than addition, multifamily construction activity has recov- ½ percentage point from first-quarter real GDP ered to its pre-recession level, reflecting a shift in growth, and, with the contraction in that sector condemand toward rental units. All told, real residential tinuing, it likely took a similar amount off of GDP investment looks set to post a moderate gain over the growth in the second quarter. first half of the year. Nevertheless, overall construction activity remains well below its pre-recession lev- Business outlays for structures outside of the energy els, likely due to a rate of household formation that, sector also declined in the first quarter, while spendnotwithstanding tentative signs of a recent pickup, ing on equipment and intellectual property products has generally run quite low relative to demographic (E&I) increased at a modest 3½ percent annual rate. norms since the recession. Forward-looking indicators, such as orders and shipments of capital goods and surveys of business con- The slow advances in single-family construction and ditions, point to continued modest gains in E&I home sales have likely been supported, at least to investment in the second quarter. Overall business some degree, by low interest rates and a gradual eas- investment has been supported by low interest rates ing in mortgage credit. In the April Senior Loan Offi- and generally accommodative financial conditions cer Opinion Survey on Bank Lending Practices but has been held back by slowing business output (SLOOS), banks reported having eased lending stan- growth, which reflects, in part, weakening exports by dards for a number of categories of residential mort- domestic businesses due to the stronger dollar. gage loans in the first quarter.2 Even so, loans remain difficult to obtain for potential borrowers with low Corporate financing conditions were generally favorable credit scores as well as for any potential borrowers that cannot meet a number of other requirements, Financing conditions for nonfinancial firms such as fully documenting their income and meeting remained solid in the first half of the year. Although debt-to-income ratios. Meanwhile, for qualified bor- corporate profits as reported by the Bureau of Ecorowers, interest rates for 30-year fixed mortgages nomic Analysis declined in the first quarter, profitremain near their historical lows despite having ability stayed high, and default rates on nonfinancial moved up somewhat, on net, over the first half of the corporate bonds were generally low. Nonfinancial year. Increases in house prices and mortgage rates businesses have raised substantial amounts of funds have been balanced out by rising household incomes, in bond, equity, and loan markets so far this year, in with the result that standard measures of housing part to finance a recent pickup in mergers and acquiaffordability have stayed flat at relatively high levels sitions activity. Bond issuance by both investmentover the first half of this year. With the number of and speculative-grade firms has remained quite mortgage originations for home purchase still well strong, as firms continued to take advantage of hisbelow pre-crisis levels, aggregate net mortgage debt torically low interest rates. Commercial and industrial growth has continued to be quite sluggish. loans on banks’ books have expanded at a solid pace this year, in part reflecting narrower loan spreads. Overall business investment has turned down as Meanwhile, financing conditions for small businesses investment in the energy sector has plunged continued to improve, although the growth of small Business investment (that is, private nonresidential business loans remained subdued, evidently reflecting fixed investment) fell at an annual rate of 2 percent in still-tepid demand for credit from small business the first quarter, reflecting a sizable decline in invest- owners. In the first quarter, some banks with loans to ment in the equipment and structures used in the firms in the oil and gas drilling or extraction sectors drilling and mining sector. The number of drilling indicated they were reducing existing lines of credit rigs in operation has fallen precipitously this year in to these firms and tightening standards on new loans response to the earlier steep drop in crude oil prices, or lines of credit. and a number of oil and gas companies have announced plans to cut capital expenditures this year. In the commercial real estate (CRE) sector, financing As a result, activity has also slowed markedly in sec- remained broadly available. CRE loans on banks’ books increased appreciably this year through May, consistent with stronger loan demand and a further 2 The SLOOS is available on the Board’s website at www .federalreserve.gov/boarddocs/snloansurvey. easing of lending standards reported in the April

28 102nd Annual Report | 2015 SLOOS. Banks also reported that, over the past path of policy rates over the next several years shifted 12 months, they had eased spreads, increased maxi- downward in the first half of 2015. Contributing to mum loan sizes, and extended the maximum maturity this shift were weak data on real economic activity in on such loans. Issuance of commercial mortgage- the first quarter of this year and Federal Reserve backed securities (CMBS) continued to be robust, communications that were seen as more accommodaand the spreads of CMBS rates over Treasury rates tive than expected—including the downward reviremained narrow. sions to FOMC participants’ projections for the federal funds rate, real GDP growth, inflation, and the The drag from federal fiscal policy has longer-run unemployment rate, particularly in waned . . . March. On balance, market-based measures of the Fiscal policy at the federal level had been a factor expected path of the federal funds rate through late restraining GDP growth for several years. However, 2016 have flattened. The expected timing of the inithe contractionary effects of fiscal policy changes eased tial increase in the federal funds rate has been pushed appreciably last year as the restraining effects of the out from mid-2015 toward the end of the year, 2013 tax increases abated, transfers increased from the although the expected pace of increases in the federal Affordable Care Act, and federal purchases flattened funds rate after 2016 is now somewhat faster. In the out after falling sharply from 2011 through 2013. Survey of Primary Dealers and the Survey of Market Participants conducted by the Federal Reserve Bank The federal unified deficit narrowed further this year, of New York just prior to the June FOMC meeting, reflecting both previous years’ spending cuts and an respondents judged that the initial increase in the tarincrease in tax receipts resulting from the ongoing get federal funds rate was most likely to occur at the economic expansion. Federal receipts have edged up FOMC’s September 2015 meeting, about one quarter to around 18 percent of GDP, their highest level in later than they had expected last December.3 Meanmore than a decade. Meanwhile, nominal federal out- while, as the anticipated date of the beginning of lays as a share of GDP have flattened out at about normalization has become closer, measures of policy 20 percent, still a little above the levels that prevailed rate uncertainty based on interest rate derivatives before the start of the recession. As a result, the bud- have continued to edge higher. get deficit currently stands at about 2½ percent of . . . and longer-term Treasury yields have GDP, down considerably from its peak at nearly remained low 10 percent during the recession. Overall federal debt held by the public stabilized as a share of GDP in Yields on longer-term Treasury securities have risen 2014 and early 2015, albeit at a relatively high level. notably since early February, reversing the downward trend over the previous 13 months. However, they . . . and state and local government expenditures remain at historically low levels. On net, yields on 10are rising anemically and 30-year nominal Treasury securities are 16 basis The expansion of economic activity and further points and 43 basis points, respectively, above their gains in house prices—which should help boost prop- levels at the end of 2014. The increases were most erty tax revenues over time—continue to support a pronounced in longer-horizon forward rates. For gradual improvement in the fiscal positions of most example, the five-year forward rate five years ahead state and local governments. Consistent with slowly rose 42 basis points over the first half of 2015 and in improving finances, states and localities expanded early July after falling nearly 2 percentage points in employment slightly, on average, over 2014 and the 2014. U.S. Treasury yields continued to be especially first half of this year following several years of sensitive to foreign monetary policy and political declines. In addition, these governments have developments and movements in core European sovincreased outlays for construction projects somewhat ereign yields (for more details, see the section “Interover this period. national Developments”). Uncertainty about longterm interest rates has also risen somewhat amid Financial Developments higher realized volatility of long-term yields, fluctua- Market expectations for the path of the federal funds rate over the next several years 3 The results of the Survey of Primary Dealers and of the Survey declined . . . of Market Participants are available on the Federal Reserve Bank of New York’s website at www.newyorkfed.org/markets/ Despite the continued improvement in labor market primarydealer_survey_questions.html and www.newyorkfed.org/ conditions, market participants’ expectations for the markets/survey_market_participants.html, respectively.

Monetary Policy and Economic Developments 29 tions in oil prices, and uncertainties surrounding the combination of term and ON RRP operations supglobal outlook. ported these rates around quarter-ends. Consistent with moves in the yields on longer-term Broad equity price indexes and stock market Treasury securities, yields on 30-year agency volatility were both little changed, on net, and risk spreads on speculative-grade corporate mortgage-backed securities (MBS)—an important bonds narrowed slightly determinant of mortgage interest rates—have increased about 20 basis points, on balance, so far in Despite higher interest rates and notable declines in 2015. Wall Street analysts’ projections for corporate earnings, broad measures of U.S. equity prices were little Liquidity conditions in the Treasury and agency changed, on balance, over the first half of the year. MBS markets were generally stable . . . Stock prices for firms in the utilities sector, which are Indicators of Treasury market functioning remained more sensitive to interest rates, fell substantially. broadly stable over the first half of 2015. While mar- Implied volatility for the S&P 500 index, as calcuket commentary increasingly pointed to a possible lated from options prices, was little changed, on net, deterioration in liquidity in these markets, a variety and remained below its historical median level. of liquidity metrics—including bid-asked spreads and bid sizes—have displayed no notable signs of Corporate bond spreads for investment-grade firms liquidity pressures over the past half-year. Moreover, were little changed and stayed close to their historical Treasury auctions generally continued to be well average levels. Spreads for speculative-grade bonds received by investors. (See the box “Liquidity Condi- narrowed modestly—in part because of improvetions in the Bond Market” on pages 20–21 of the ments for energy firms—and are somewhat below July 2015 Monetary Policy Report.) their historical norms. (For further related discussion, see the box “Developments Related to Financial Sta- As in the Treasury market, liquidity conditions in the bility” on pages 24–25 of the July 2015 Monetary agency MBS market were generally stable. Dollar- Policy Report.) roll-implied financing rates for production-coupon MBS—an indicator of the scarcity of agency MBS Bank credit expanded and bank profitability for settlement—suggested limited settlement pres- improved slightly sures in these markets over the first half of 2015. Aggregate credit provided by commercial banks increased at a solid pace in the first quarter of 2015. . . . as were short-term funding markets The expansion in bank credit reflected moderate loan Conditions in short-term dollar funding markets also growth coupled with continued expansion of banks’ remained broadly stable during the first half of 2015. holdings of securities. The growth of loans on banks’ Both unsecured and secured money market rates books was generally consistent with the SLOOS have stayed at modestly higher levels since late 2014 reports of increased loan demand for most loan catbut continued to be close to the average rates egories and further easing of lending standards for observed since the federal funds rate reached its effec- real estate loans over the first quarter of 2015. Meantive lower bound. Secured money markets generally while, delinquency and charge-off rates continued to functioned smoothly, but rates in these markets expe- improve across most major loan types. rienced some volatility in the first half of 2015, particularly around quarter-ends, consistent with moder- Measures of bank profitability remained below their ate quarter-end funding pressures. Unsecured off- historical averages but improved slightly in the first shore dollar funding markets generally did not quarter of 2015. Several subcomponents of noninterexhibit signs of stress. est income increased, although declining net interest margins continued to put downward pressure on the Money market participants continued to focus on the profitability of banks. Equity prices of large domesongoing testing of the Federal Reserve’s monetary tic bank holding companies (BHCs) have increased policy tools. The overnight reverse repurchase agree- modestly, on net, since the end of last year. Credit ment (ON RRP) operations have continued to pro- default swap (CDS) spreads for large BHCs were vide a soft floor for money market rates, and the about unchanged on balance.

30 102nd Annual Report | 2015 The M2 measure of the money stock has increased at other European authorities, and the International an average annualized rate of about 6 percent since Monetary Fund (IMF) over official financial assis- January, somewhat faster than the pace of nominal tance to Greece have been protracted. In late June, GDP growth. Demand for liquid deposits and cur- Greek authorities decided to hold a referendum on rency has continued to boost M2 growth. their creditors’ proposals, stalling negotiations and resulting in the cash-strapped Greek government Municipal bond markets functioned smoothly, but missing a payment of €1½ billion in principal to the some issuers remained strained IMF. With fears of a potential exit from the euro Credit conditions in municipal bond markets have area and acute problems at Greek banks accelerating generally remained stable since the end of last year. withdrawals of Greek bank deposits, Greek authori- Over that period, the MCDX—an index of CDS ties declared a bank holiday and imposed capital spreads for a broad portfolio of municipal bonds— controls. Negotiations resumed after Greek citizens increased slightly, while ratios of yields on 20-year voted to reject the creditor proposals, but the closure general obligation municipal bonds to those on of the banks contributed to a further deterioration of comparable-maturity Treasury securities moved economic conditions in Greece. Over the previous down a bit. weekend, Greece and its creditors reached a preliminary agreement to begin negotiations on a new Nevertheless, significant financial strains were still financing and adjustment program, subject to Greece evident for some issuers. In particular, Puerto Rico, completing several prior actions. Greek sovereign which continued to face challenges from subdued spreads spiked at the end of June, and Italian and economic performance, severe indebtedness, and Spanish sovereign spreads rose modestly. These other fiscal pressures, could reportedly seek to spreads have since retraced substantially; as a result, restructure at least part of its debt. Greek spreads remain somewhat wider since mid- February, and Italian and Spanish spreads are little International Developments changed. Sovereign bond yields are higher . . . . . . and the dollar remains well above levels of a After declining, on balance, during the first few year ago months of the year, sovereign yields in the advanced The foreign exchange value of the dollar rose appreforeign economies (AFEs) began to climb rapidly in ciably in the second half of 2014 and early 2015. It late April. In Germany, long-term yields traded at has changed little, on balance, since then. The dollar record lows in mid-April, in part in response to the is stronger against emerging market economy (EME) initiation of the public-sector purchase program of currencies since February, as U.S. yields have risen the European Central Bank (ECB). However, the and concerns about economic prospects for the 10-year government bond yield subsequently rose EMEs mounted. about 60 basis points. Most of this rise appeared to reflect an increase in the term premium, which had Equities in Europe and Japan have moved higher this likely become very low earlier in the year. However, year, buoyed by encouraging macroeconomic data. the timing of this increase has no clear explanation. The Nikkei increased roughly 15 percent, boosted by The rise in German yields also appeared to reflect stronger-than-expected consumer price releases and higher expected short-term rates, which rose, at least strong corporate earnings in addition to continued in part, in response to euro-area inflation data that quantitative easing. EME equity prices are also gencame in higher than had been expected. (For more erally higher. Notably, the Shanghai Composite index discussion, see the box “Monetary Policy and Inter- has been unusually volatile. It soared 60 percent in est Rates in Advanced Economies” on page 27 of the the first five months of 2015, reportedly reflecting July 2015 Monetary Policy Report.) More recently, repeated monetary policy easing measures and however, German yields have moved back down increased investor leverage. However, since mid-June, some in reaction to developments in Greece. the index has dropped about 20 percent, on net, even while Chinese authorities have introduced a number Sovereign yields rose even more in other euro-area of measures to stem the decline, including the Peocountries, especially in Greece. Since the previous ple’s Bank of China providing direct liquidity supreport, negotiations among the Greek government, port to fund stock purchases.

Monetary Policy and Economic Developments 31 In numerous foreign economies, economic Part 2: Monetary Policy growth stepped down in the first quarter Economic growth slowed in the first quarter in many To support further progress toward maximum of our main trading partners. In China, weakness in employment and price stability, the Federal Open exports and the real estate sector led to a significant Market Committee (FOMC) has kept the target fedstep-down in GDP growth in the first quarter. Weak eral funds rate at its effective lower bound and mainexports also constrained growth in Mexico and the tained the Federal Reserve’s holdings of longer-term United Kingdom. GDP contracted around ½ percent securities at sizable levels. At its two most recent in Brazil. And, in Canada, real GDP also contracted meetings, the Committee indicated that it will be in the first quarter, in part because lower oil prices appropriate to raise the target range for the federal weighed on investment in the energy sector and funds rate when it has seen further improvement in severe winter weather depressed consumption. the labor market and is reasonably confident that Recent economic data for the second quarter have inflation will move back to its 2 percent objective been mixed. over the medium term. The Federal Reserve has continued to plan for the eventual normalization of monetary policy, including by testing the operational By contrast, in the euro area and Japan, economic readiness of the policy tools to be used. growth picked up during the first quarter of 2015, and data thus far point to solid growth during the To support further progress toward its statutory second quarter. Growth in these economies continues objectives, the FOMC has kept the target federal to receive support from highly accommodative monfunds rate at its lower bound . . . etary policies and lower commodity prices. Neverthe- The FOMC has maintained the target range of 0 to less, the situation in Greece remains a concern for the ¼ percent for the federal funds rate to support contineuro area. ued progress toward its statutory objectives of maximum employment and price stability. The Committee After falling significantly at the beginning of the has further reiterated that, in determining how long to year, foreign inflation began to recover but remained low maintain this target range, it will assess realized and expected progress toward its objectives. This assess- Largely reflecting the plunge in oil prices last year, ment will continue to take into account a wide range of headline inflation fell further early in the year in the information, including measures of labor market con- AFEs and the EMEs. However, as energy prices ditions, indicators of inflation pressures and inflation rebounded during the first half of the year, monthly expectations, and readings on financial and internaforeign inflation readings also began to turn up. Nevtional developments. Based on its assessment of those ertheless, 12-month inflation in a number of major factors, the Committee maintained the judgment at its trading partners remained substantially below their January meeting that it could be patient in beginning central banks’ target, including in the euro area, to normalize the stance of monetary policy, and it Japan, and the United Kingdom. stated at its March meeting that a start of the normalization process remained unlikely at its April meeting.4 In response, foreign central banks maintained Chair Yellen indicated that, subsequent to the April highly accommodative monetary policies meeting, the FOMC would determine the timing of A number of foreign central banks eased monetary the initial increase in the target federal funds rate on a policy. Some central banks cut policy rates, including meeting-by-meeting basis, depending on its assessment those in Canada, China, India, and Korea. In several of incoming economic information and its implicacases, including in Denmark, Sweden, and Switzertions for the economic outlook.5 land, these cuts included moves that left policy rates negative. In addition to cutting benchmark rates, the People’s Bank of China also lowered the reserve 4 See Board of Governors of the Federal Reserve System (2015), “Federal Reserve Issues FOMC Statement,” press release, Janurequirement ratio. The ECB launched a program to ary 28, www.federalreserve.gov/newsevents/press/monetary/ purchase public-sector securities, and the Bank of 20150128a.htm; and Board of Governors of the Federal Reserve Japan continued to purchase assets at a rapid pace. System (2015), “Federal Reserve Issues FOMC Statement,” press release, March 18, www.federalreserve.gov/newsevents/ Meanwhile, the Bank of England kept its policy rate press/monetary/20150318a.htm. at the historically low level of 0.5 percent, where it 5 See Board of Governors of the Federal Reserve System (2015), has been since March 2009. “Transcript of Chair Yellen’s FOMC Press Conference,”

32 102nd Annual Report | 2015 Specifically, the FOMC anticipates that it will be tors, and the Committee’s actual policy decisions appropriate to raise the target range for the federal over time will be data dependent. The FOMC does funds rate when it has seen further improvement in not intend to embark on any predetermined course the labor market and is reasonably confident that of tightening following an initial decision to raise the inflation will move back to its 2 percent objective federal funds rate target range. Accordingly, if the over the medium term. While the Committee has not expansion proves to be more vigorous than currently decided on the timing of the initial increase in the anticipated and inflation moves higher than target range for the federal funds rate, according to expected, then the appropriate path would likely folthe June Summary of Economic Projections (SEP), low a higher and steeper trajectory; conversely, if 15 of the 17 policymakers anticipated that conditions conditions were to prove weaker, then the appropriate may warrant a first increase in the federal funds rate trajectory would be lower and less steep. target sometime this year. (The June SEP is included as Part 3 of the July 2015 Monetary Policy Report on The size of the Federal Reserve’s balance sheet pages 37–50; it is also included in section 9 of this has remained stable annual report.) The Committee has maintained its existing policy of reinvesting principal payments from its holdings of The Committee has reiterated that, when it decides to agency debt and agency mortgage-backed securities begin to remove policy accommodation, it will take a (MBS) in agency MBS and of rolling over maturing balanced approach consistent with its longer-run Treasury securities at auction. This policy, by keeping goals of maximum employment and inflation of the Federal Reserve’s holdings of longer-term securi- 2 percent. Even after the initial increase in the target ties at sizable levels, is expected to help maintain federal funds rate, the Committee’s policy is likely to accommodative financial conditions by putting remain highly accommodative in order to support downward pressure on longer-term interest rates and continued progress toward its objectives of maximum supporting mortgage markets. In turn, those effects employment and 2 percent inflation. are expected to contribute to progress toward both the maximum employment and price-stability objec- In addition, the Committee continues to anticipate tives of the FOMC. that, even after employment and inflation are near mandate-consistent levels, economic conditions may, After the conclusion of the large-scale asset purchase for some time, warrant keeping the target federal program at the end of October 2014 and with the funds rate below levels the Committee views as nor- continuation of the Committee’s reinvestment policy, mal in the longer run. As pointed out by Chair Yellen the Federal Reserve’s total assets have held steady at in her recent press conferences, FOMC participants around $4.5 trillion. Holdings of U.S. Treasury secuprovide a number of explanations for this view, with rities in the System Open Market Account (SOMA) many citing the residual effects of the financial cri- have remained at $2.5 trillion, and holdings of sis.6 These effects are expected to ease gradually, but agency debt and agency MBS at $1.8 trillion. Consethey are seen as likely to continue to constrain spend- quently, total liabilities on the Federal Reserve’s baling and credit availability for some time. ance sheet were largely unchanged. . . . and stressed that its policy decisions will be Given the Federal Reserve’s large securities holdings, data dependent interest income on the SOMA portfolio has contin- In her recent speeches and press conferences, Chair ued to support substantial remittances to the U.S. Yellen emphasized that, while the return of the fed- Treasury Department. The Federal Reserve provided eral funds rate to a more normal level is likely to be $96.9 billion of such distributions to the Treasury in gradual, forecasts of the appropriate path of the fed- 2014 and $21.7 billion during the first quarter of eral funds rate are conditional on individual projec- 2015.7 Remittances total over $500 billion on a tions for economic output, inflation, and other fac- cumulative basis since 2008. March 18, www.federalreserve.gov/mediacenter/files/ FOMCpresconf20150318.pdf; and Board of Governors of the 7 See Board of Governors of the Federal Reserve System (2015), Federal Reserve System (2015), “Transcript of Chair Yellen’s “Federal Reserve System Publishes Annual Financial State- Press Conference,” June 17, www.federalreserve.gov/ ments,” press release, March 20, www.federalreserve.gov/ mediacenter/files/FOMCpresconf20150617.pdf. newsevents/press/other/20150320a.htm; and Board of Gover- 6 See Board of Governors, “Transcript of Chair Yellen’s FOMC nors of the Federal Reserve System (2015), Quarterly Report on Press Conference,” March 18, and Board of Governors, “Tran- Federal Reserve Balance Sheet Developments (Washington: script of Chair Yellen’s Press Conference,” June 17, in note 5. Board of Governors, May), www.federalreserve.gov/

Monetary Policy and Economic Developments 33 The FOMC continued to plan for the eventual appropriate to reduce the capacity of the facility normalization of monetary policy . . . fairly soon after it commences policy firming. FOMC meeting participants have continued their Regarding the balance sheet, the Committee intends discussions about the eventual normalization of the to reduce securities holdings in a gradual and predictstance and conduct of monetary policy.8 The partici- able manner primarily by ceasing to reinvest repaypants emphasized that, during the early stages of ments of principal on securities held in the SOMA. policy normalization, it will be a priority to ensure The Committee noted that economic and financial appropriate control over the federal funds rate and conditions could change, and that it was prepared to other short-term interest rates. Consequently, the dis- make adjustments to its normalization plans if warcussions involved various tools that could be used to ranted. (For more information, see the box “Policy control the level of short-term interest rates, even Normalization Principles and Plans: Additional while the balance sheet of the Federal Reserve Details” on page 35 of the July 2015 Monetary Policy remains very large, as well as approaches to eventu- Report.) ally normalizing the size and composition of the Federal Reserve’s balance sheet. . . . including by testing the policy tools to be used As was the case before the crisis, the Committee The Federal Reserve continued to test the operational intends to adjust the stance of monetary policy dur- readiness of its policy tools, conducting daily ON ing normalization primarily through actions that RRP operations and a series of term RRP operainfluence the level of the federal funds rate and other tions. At its March meeting, the Committee approved short-term interest rates. The Committee indicated further tests of term RRP operations over quarterthat, when economic conditions warrant the com- ends through January 2016.9 In addition, the Federal mencement of policy firming, the Federal Reserve Reserve conducted two further series of Term intends to continue to target a range for the federal Deposit Facility (TDF) operations. In these TDF funds rate that is 25 basis points wide, set the interest operations, the Federal Reserve eliminated the threerate it pays on excess reserves (the IOER rate) equal day lag between the execution of an operation and to the top of the target range for the federal funds settlement that existed in previous tests. These operarate, and set the offering rate associated with an over- tions showed that bank demand for term deposits night reverse repurchase agreement (ON RRP) facil- continues to be strong even for incremental increases ity equal to the bottom of the target range for the in yield. federal funds rate. The Committee will further allow aggregate capacity of the ON RRP facility to be tem- To date, testing has progressed smoothly, and, in parporarily elevated to support policy implementation ticular, short-term market rates have generally traded and will use other tools, such as term operations, as above the ON RRP rate, which suggests that the necessary. The Committee expects that it will be facility will be a useful supplementary tool for the FOMC in addition to the IOER rate to control the monetarypolicy/files/quarterly_balance_sheet_developments_ federal funds rate during the normalization process. report_201505.pdf. Overall, testing operations reinforced the Federal 8 See Board of Governors of the Federal Reserve System (2015), “Minutes of the Federal Open Market Committee, March 17– Reserve’s confidence in its view that it has the tools 18, 2015,” press release, April 8, www.federalreserve.gov/ necessary to tighten policy at the appropriate time. newsevents/press/monetary/20150408a.htm; and Board of Governors of the Federal Reserve System (2015), “Minutes of the Federal Open Market Committee, April 28–29, 2015,” press release, May 20, www.federalreserve.gov/newsevents/press/ 9 See Board of Governors, “Minutes of the Federal Open Market monetary/20150520a.htm. Committee, March 17–18, 2015,” in note 8.

35 3 Financial Stability The Federal Reserve promotes financial stability and employment. And price stability contributes not through its supervision and regulation of financial only to the efficient allocation of resources in the real institutions; coordination of activities with domestic economy, but also to reduced uncertainty and effiagencies through the Financial Stability Oversight cient pricing in financial markets, thereby supporting Council (FSOC) and directly; and efforts to engage financial stability. the global community in monitoring, supervision, and regulation that limit the risk and consequences of This section discusses key financial stability activities financial instability domestically and abroad. undertaken by the Federal Reserve in 2015, which include monitoring risks to financial stability; macro- A central tenet of the Federal Reserve’s efforts in this prudential supervision and regulation of large, comarea is the adoption of a macroprudential approach plex financial institutions; and domestic and internato supervision and regulation. Whereas a tradi- tional cooperation and coordination. tional—or microprudential—approach to supervision and regulation focuses on the safety and soundness of Some of these activities are also discussed elsewhere individual institutions, the macroprudential approach in this annual report. A broader set of economic and centers on the stability of the financial system as a financial developments are discussed in section 2, whole. “Monetary Policy and Economic Developments,” with the discussion that follows concerning surveil- In particular, the macroprudential approach informs lance of economic and financial developments the supervision of systemically important financial focused on financial stability. The full range of activiinstitutions, including large bank holding companies ties associated with supervision of systemically (BHCs), the U.S. operations of certain foreign bank- important financial institutions, designated nonbank ing organizations (FBOs), and financial market utili- companies, and designated FMUs is discussed in secties (FMUs). In addition, the Federal Reserve serves tion 4, “Supervision and Regulation.” as a “consolidated supervisor” of nonbank financial companies that have been designated by the FSOC as Monitoring Risks to institutions whose distress or failure could pose a threat to the stability of the U.S. financial system as a Financial Stability whole (see “Financial Stability Oversight Council Activities” later in this section). Financial institutions are linked together through a complex set of relationships, and their condition Furthermore, the changing nature of risks and fluc- depends on the economic condition of the nonfinantuations in financial markets and the broader cial sector. In turn, the condition of the nonfinancial economy require timely monitoring of conditions in sector is linked to the strength of financial institudomestic and foreign financial markets, among finan- tions’ balance sheets because the nonfinancial sector cial institutions, and in the nonfinancial sector in borrows from the financial sector. Research on finanorder to identify the buildup of vulnerabilities that cial stability is aimed at better understanding these might require further study or policy action. complex linkages and has been an important part of Federal Reserve efforts in pursuit of overall economic Promotion of financial stability strongly comple- stability (see box 1 for information on recent ments the primary goals of monetary policy—price research). stability and full employment. A smoothly operating financial system promotes the efficient allocation of In order to understand the interaction among these saving and investment, facilitating economic growth factors and consider appropriate policy responses,

36 102nd Annual Report | 2015 Box 1. 2015 Research on Financial Stability Themacroprudentialapproachtoensuringfinancial theprimaryvulnerabilitiesinthefinancialsystem. stabilitybuildsonasubstantialandgrowingbodyof Themonitoringprogramtracksthesevulnerabiliresearchonthefactorsthatleadtovulnerabilitiesin tiesinfoursectorsoftheeconomy:assetmarkets, thefinancialsystemandhowpoliciescanmitigate thebankingsector,shadowbanking,andthenonsuchrisks. financialsector.Developmentsin2015includea methodthatappliesfixedcriteria(thatis,astatic Itremainsthecase,however,thatunderstandingof algorithm)toamedium-sizedsetofindicatorscovthearrayoffactorsimportantforfinancialstabilityis eringafairlywiderangeoffinancialactivities,a incompleteandevolving.Asaresult,theFederal taxonomyofmeasuresofinterconnectedness,and Reserveengagesactivelyinfinancialstability amoredisaggregatedanalysisoftheratioof research.Thisresearchseekstoimproveundercredittogrossdomesticproductforimplementing standingofrelatedissues,engagesthebroader macroprudentialpolicies.1 researchcommunityinpolicyissues,andoften involvescollaborationwithacademiaandresearch- (continuedonnextpage) ersatotherdomesticandinternationalinstitutions. Finally,researcheffortsbyFederalReservestaff 1 SeeDavidAikman,MichaelKiley,SeungJungLee,Michael reflecttheirattemptstoidentifyandgrapplewithtop- Palumbo, and Missaka Warusawitharana (2015), “Mapping Heat icsofconcerntotheFederalReserve,andthe in the U.S. Financial System: A Summary,” FEDS Notes (Washington: Board of Governors of the Federal Reserve System, viewsexpressedarethoseoftheindividualauthors August 5), www.federalreserve.gov/econresdata/notes/fedsandnotthoseoftheFederalReserve.Examplesof notes/2015/mapping-heat-in-the-us-financial-system-a-summaryresearchonfinancialstabilityin2015includethe 20150805.html; David Aikman, Michael T. Kiley, Seung Jung following: Lee, Michael G. Palumbo, and Missaka N. Warusawitharana (2015), “Mapping Heat in the U.S. Financial System,” Finance • Identifyingandmeasuringthreatstofinancial and Economics Discussion Series 2015-059 (Washington: Board of Governors of the Federal Reserve System, June), http://dx.doi stability.Threeresearchnotesandaworking .org/10.17016/FEDS.2015.059; Gazi Kara, Mary Tian, and Marpaperdevelopingmeasurementaspectsofa garet Yellen (2015), “Taxonomy of Studies on Interconnectedforward-lookingmonitoringprogramtoidentifyand ness,” FEDS Notes (Washington: Board of Governors of the tracktime-varyingsourcesofsystemicrisk.The Federal Reserve System, July 31), www.federalreserve.gov/ econresdata/notes/feds-notes/2015/taxonomy-of-studies-onprogramdistinguishesbetweenshocks,whichare interconnectedness-20150731.html; and William Bassett, Ainsley difficulttoprevent,andthevulnerabilitiesthat Daigle, Rochelle Edge, and Gazi Kara (2015), “Credit-to-GDP amplifyshocks,whichcanbeaddressed.Drawing Trends and Gaps by Lender- and Credit-Type,” FEDS Notes onasubstantialbodyofresearch,theauthors (Washington: Board of Governors of the Federal Reserve System, December 3), www.federalreserve.gov/econresdata/ identifyleverage,maturitytransformation,interconnotes/feds-notes/2015/credit-to-gdp-trends-and-gaps-by-lendernectedness,complexity,andthepricingofriskas and-credit-type-20151203.html. the Federal Reserve maintains a flexible, forward- broader monitoring efforts, such as those by the looking financial stability monitoring program to FSOC and the Financial Stability Board (FSB). help inform policymakers of the financial system’s vulnerabilities to a range of potential adverse events The more specific discussion that follows focuses on or shocks. Such a monitoring program is a critical a subset of the most important developments over part of a broader program in the Federal Reserve the course of 2015 concerning specific indicators, System to assess and address vulnerabilities in the including asset valuations and risk appetite, leverage, U.S. financial system. maturity and risk transformation, and nonfinancialsector borrowing. Federal Reserve Board staff regularly assess a standard set of vulnerabilities relevant for financial stabil- Asset Valuations and Risk Appetite ity: asset valuations and risk appetite, leverage in the financial system, liquidity risks and maturity trans- Overvalued assets constitute a fundamental vulnerformation by the financial system, and borrowing by ability because the unwinding of high prices can be the nonfinancial sector (households and nonfinancial destabilizing, especially if the assets are widely held businesses). These monitoring efforts inform internal and the values are supported by excessive leverage, discussions concerning both macroprudential super- maturity transformation, or risk opacity. Moreover, vision and regulatory policies and monetary policy. stretched asset valuations may be an indicator of a They also inform Federal Reserve interactions with broader buildup in risk-taking. Nonetheless, it is very

Financial Stability 37 Box 1. 2015 Research on Financial Stability—continued • Quantifyingtheaggregateeffectsofbanking- withnominalrigiditiesandfinancialintermediasectorlosses.Aworkingpapersummarizingthe tion.3 resultsofaresearchprogramattheFederal • Interestrates,secondary-marketliquidity,and Reserveusingtoolsinmacroeconomicstoderive firmaccesstodebtmarkets.Twoworking quantitativeestimatesoftheeffectofcapitalshortpapersstudyingtheimplicationsofnonconvenfallsinthefinancialsectoronaggregateeconomic tionalmonetarypoliciesandsecondary-market activity.Themacrospillovereffectsofcapital liquidityforfirmdebt-financingdecisions.4 shortfallsinthefinancial-intermediationsectorare comparedacrossfivedynamicequilibriummodels • Therealeffectofcreditcontractions.Twoforthforpolicyanalysis.Althoughallofthemodelscon- comingjournalarticlesstudyingempiricallythe sideredshareantecedentsandamethodological effectsofcreditcontractionsonthebroader core,eachmodelemphasizesdifferenttransmis- economy.5 sionchannels.Thisresearchprogramdelivers “model-basedconfidenceintervals”forthereal 3 SeeMichaelT.KileyandJaeSim(2015),“OptimalMonetary andfinancialeffectsofshocksoriginatinginthe and Macroprudential Policies: Gains and Pitfalls in a Model of Financial Intermediation,” Finance and Economics Discussion financialsector.2 Series 2015-078 (Washington: Board of Governors of the Federal Reserve System, September), http://dx.doi.org/10.17016/ • Theinterplayofmonetaryandmacroprudential FEDS.2015.078. policies.Aworkingpaperexaminingtherelative 4 SeeSirioAramonte,SeungJungLee,andViktorsStebunovs contributionofmonetaryandmacroprudentialpoli- (2015), “Risk Taking and Low Longer-Term Interest Rates: Evidence from the U.S. Syndicated Loan Market,” Finance and ciesastoolstoachievefinancialstabilitybyesti- Economics Discussion Series 2015-068 (Washington: Board of matingaquantitativegeneral-equilibriummodel Governors of the Federal Reserve System, July), http://dx.doi .org/10.17016/FEDS.2015.068; and David M. Arseneau, David E. Rappoport, and Alexandros Vardoulakis (2015), “Secondary Market Liquidity and the Optimal Capital Structure,” Finance and Economics Discussion Series 2015-031 (Washington: Board of Governors of the Federal Reserve System, May), http://dx.doi 2 SeeLucaGuerrieri,MatteoIacoviello,FranciscoB.Covas,John .org/10.17016/FEDS.2015.031. C. Driscoll, Michael T. Kiley, Mohammad Jahan-Parvar, Albert 5 SeeAntonioFalatoandNellieLiang(forthcoming),“DoCreditor Queralto Olive, and Jae W. Sim (2015), “Macroeconomic Effects RightsIncreaseEmploymentRisk?EvidencefromLoanCovof Banking Sector Losses across Structural Models,” Finance enants,”JournalofFinance;andRodneyRamcharan,Stephane and Economics Discussion Series 2015-044 (Washington: Board Verani,andSkanderJ.VanDenHeuvel(forthcoming),“From of Governors of the Federal Reserve System, June), http://dx.doi WallStreettoMainStreet:TheImpactoftheFinancialCrisison .org/10.17016/FEDS.2015.044. ConsumerCreditSupply,”JournalofFinance. difficult to judge whether an asset price is overvalued (figure 1). Those spreads appear to have risen by relative to fundamentals. As a result, analysis typi- more than the compensation required for higher cally considers a broad range of possible valuation expected losses, suggesting that risk premiums have metrics and tracks developments in areas in which also increased. Some of the widening in spreads, asset prices are rising especially rapidly, into which especially for high-yield borrowers, reflected investor flows have been considerable, or where vola- increased concerns about the ability of firms in the tility has been at unusually low or high levels. energy sector to repay their borrowing as oil prices continued to decline over the course of the year. Looking across markets, valuation pressures were more notable early in 2015, with a reduction in such Issuance of high-yield bonds declined steadily in pressures in some areas over the course of, and espe- 2015, particularly in the second half of the year, and cially late in, the year. Throughout 2015, Treasury issuance of leveraged loans remained stable term premiums remained low. In private debt mar- (figure 2). As a result, issuance of risky debt in the kets, valuation pressures eased through 2015. In the fourth quarter of the year was close to the lowest corporate bond market, spreads of high-yield and level in recent years. investment-grade bonds relative to comparablematurity Treasury yields, a gauge of the compensa- Despite these signs of easing valuation pressures, tion that investors demand for exposure to the credit there were indications that the quality of corporate risk of corporate borrowers, widened over the year, debt worsened. As described in more detail later, the ending near the higher ends of their historical ranges level of risky debt ramped up in 2015, reaching

38 102nd Annual Report | 2015 Figure 1. Corporate bond spreads to similar-maturity Figure 3. Expected year-ahead defaults of nonfinancial Treasury securities, 1997–2016 firms, 2004–15 2222 Percent Percent 1155 Monthly Percent of liabilities 6 2200 Monthly All firms 1188 1100--yyeeaarr hhiigghh--yyiieelldd ((lleefftt ssccaallee)) Oil firms 5 1122 1100--yyeeaarr ttrriippllee--BB ((rriigghhtt ssccaallee)) 1166 4 1144 99 1122 3 1100 66 Dec. 88 2 66 Feb. 44 33 1 22 00 00 1998 2001 2004 2007 2010 2013 2016 0 Note: The data extend through February 2016. Source: Staff estimates based on corporate bond data from BofA Merrill Lynch -1 Global Research (used with permission), computed using Nelson-Siegel yield 2005 2007 2009 2011 2013 2015 curve model; semiannually compounded 10-year Treasury yield (par) estimated by Note: The data extend through December 2015. Firm-level estimates of default Svensson term structure model. weighted by firm liabilities as a percent of total liabilities, excluding defaulted firms. Source: Moody’s Analytics CreditEdge® (www.creditedge.com). record highs. Throughout the year, the volume of nonfinancial bonds that were downgraded by especially in the oil sector (figure 3). In addition, Moody’s Investors Service significantly outpaced while indicators of the underwriting quality of leverthat of upgrades, and a measure of expected default aged loans showed a modest improvement, overall of nonfinancial firms, Moody’s KMV, rose steadily, underwriting standards remained weak. Issuance of leveraged loans declined over the year but was robust in the first half. Market participants pointed to the Figure 2. Leveraged loan and high-yield bond issuance, 2004–15 leveraged lending guidance issued in 2013 as having affected the market.1 Overall, despite the recent cool- Billions of dollars (annual rate) Four-quarter ing of valuation pressures, the continued growth in 1600 percent change 35 debt among lower-rated corporations may place High-yield bonds (left scale) 1400 Total outstanding 30 strains on these firms, especially if macroeconomic Leveraged loans (left scale) (right scale) 1200 25 conditions turn out to be weaker than expected. Q2 1000 20 Q1 Forward price-to-earnings ratios were somewhat 800 Q3 15 elevated over the year, although the equity premium, 600 Q4 10 measured as the gap between the expected return on 400 5 equity and the real long-term Treasury yield, is esti- 200 0 mated to have remained near its historical norm. 0 -5 Although commercial real estate (CRE) lending stan- 2004 2006 2008 2010 2012 2014 2015 dards did not ease, CRE prices rose and capitaliza- Note: Total outstanding is quarterly data, which start in 2005:Q1. Data include tion rates on CRE continued to decline, owing in bonds and loans to both financial and nonfinancial companies, as well as unrated bonds and loans. For LCD and FISD, S&P and its third-party information providers expressly disclaim the accuracy and completeness of the information provided to the Board, as well as any errors or omissions arising from the use of such infor- 1 For more details on the 2013 leveraged lending guidance, see mation. Further, the information provided herein does not constitute, and should Board of Governors of the Federal Reserve System (2013), not be used as, advice regarding the suitability of securities for investment purposes or any other type of investment advice. “Interagency Guidance on Leveraged Lending,” Supervision and Regulation Letter SR 13-3 (March 21; revised Novem- Source: Standard & Poor’s Leveraged Commentary & Data (LCD); Mergent Corpober 13, 2014), www.federalreserve.gov/bankinforeg/srletters/ rate Fixed Income (FISD). sr1303.htm.

Financial Stability 39 Figure 4. Ratio of prices to rents, 2000–16 Figure 5. Regulatory capital ratios, all BHCs, 1997–2015 Jan. 2010 = 100 200 20 Monthly Quarterly, s.a. Percent United States 18 Median 180 Total (Tier 1 + Tier 2) Common equity Tier 1 ratio 16 Interquartile range Leverage ratio 160 14 Q4 12 140 10 120 8 Jan. 100 6 4 80 1997 2000 2003 2006 2009 2012 2015 Note: Prior to 2014:Q1, the numerator of the common equity Tier 1 ratio is Tier 1 60 common capital. Beginning in 2014:Q1 for advanced-approaches bank holding 2000 2002 2004 2006 2008 2010 2012 2014 2016 companies (BHCs) and in 2015:Q1 for all other BHCs, the numerator is common Note: The data extend through January 2016. Percentiles are based on 25 metro- equity Tier 1 capital. The data for the common equity Tier 1 ratio start in 2001:Q1. politan statistical areas. An advanced-approaches BHC is defined as a large internationally active banking organization, generally with at least $250 billion in total consolidated assets or at Source: For house prices, CoreLogic; for rent data, Bureau of Labor Statistics. least $10 billion in total on-balance-sheet foreign exposure. The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research. part to low interest rates.2 In addition, residential real Source: Federal Reserve Board, FR Y-9C, Consolidated Financial Statements for estate valuations appear within historical norms. For Holding Companies. example, house prices relative to rents—one measure of valuations—have remained well within a typical U.S. bank holding companies to further strengthen range and continue to be far below the levels seen in their capital positions. As discussed in more detail the past decade across much of the country later, under the rule, a firm that is identified as a (figure 4). global systemically important bank holding company (G-SIB) will have to hold additional capital to Leverage in the Financial System increase its resilience in light of the greater threat it poses to the financial stability of the United States. The financial strength of the banking sector contin- Although delinquency rates on loans to the oil and ued to improve in 2015. Banks increased their capital gas industry have increased, these loans account for a ratios in order to meet the new stricter regulatory small share of large banks’ portfolios. Yet declining requirements set by Basel III. Both the ratio of Tier 1 oil prices may pose a threat to the quality of the loan common equity to risk-weighted assets and the leverportfolio of small banks in some parts of the country age ratio have continued to rise and are far above the with larger exposure to the oil industry. Overall, as a levels seen in the mid-2000s (figure 5). The increase in result of steady improvements in capital positions capital reflects the tougher standards implemented since the financial crisis, U.S. banks, in aggregate, globally as part of the Basel III process and addiappear to be better positioned to absorb potential tional efforts implemented following the passage of shocks, such as those related to litigation, falling oil the Dodd-Frank Wall Street Reform and Consumer prices, and financial contagion stemming from Protection Act of 2010 (Dodd-Frank Act), including abroad. more stringent standards and the annual stress tests for larger banking organizations. The Federal Securitization, which continues to be an important Reserve Board approved a final rule in July 2015 means of financing for several asset classes, remained requiring the largest, most systemically important relatively subdued—with issuance slowing notably in the second half of 2015, particularly for asset-backed 2 CRE lending standards remained the focus of bank supervision, as the federal banking agencies issued on December 18, 2015, a securities (ABS)—and stayed muted through yearjoint statement that reinforces existing guidance for prudent risk end, as more stringent issuance requirements became management of CRE lending activity. The statement is available effective. New issuance also involved less maturity at Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller transformation than before the crisis, as there have of the Currency (2015), “Agencies Issue Statement on Prudent been no notable volumes of asset-backed commercial Risk Management for Commercial Real Estate Lending,” joint paper programs and issuance of ABS collateralized press release, December 18, www.federalreserve.gov/newsevents/ press/bcreg/20151218a.htm. debt obligations, with which pre-crisis maturity trans-

40 102nd Annual Report | 2015 formation was largely associated. Recent results from Figure 6. High-yield taxable bond mutual fund and the Federal Reserve’s Senior Credit Officer Opinion ETF flows, 2007–15 Survey on Dealer Financing Terms indicate that dealers somewhat tightened conditions for the use of Monthly Billions of dollars 20 financial leverage by their institutional investor cli- Mutual fund high-yield bonds ents to fund the purchases of securities in the last 15 Mutual fund high-yield bank loans quarter of 2015.3 ETF high-yield 10 Liquidity Risks and Maturity 5 Dec. Transformation by the Financial System 0 Bank balance sheets show that the quality of liquid- -5 ity positions remained high in 2015 as the largest -10 BHCs transitioned to Basel III liquidity requirements. The Basel III liquidity coverage ratio (LCR) -15 requirement began phasing in for U.S. BHCs with -20 2007 2009 2011 2013 2015 greater than $250 billion in consolidated assets on January 1, 2015, and will take full effect in Janu- Note: The data for exchange-traded fund (ETF) high-yield flows start in January 2011. ary 2017. In January 2016, a “modified” LCR Source: Investment Company Institute (ICI), www.ici.org. requirement for BHCs with between $50 billion and $250 billion in assets began to be phased in. Against this backdrop, balance sheet data through 2015:Q3 the event did not leave a lasting imprint on the show that the ratio of high-quality liquid assets to broader corporate bond market (figure 6). total assets at large- and medium-sized BHCs remained high and well above its pre-crisis levels. Borrowing by the Nonfinancial Sector Excessive borrowing by the private nonfinancial sec- Although short-term wholesale and dealer funding tor has been an important contributor to financial remained subdued throughout 2015, in line with crises in the past. Highly indebted households and recent years’ trends, vulnerabilities from liquidity nonfinancial businesses may have a difficult time mismatches at high-yield bond and loan mutual withstanding negative shocks to incomes or asset valfunds have risen somewhat. These funds have grown ues and may be forced to curtail spending in ways rapidly in recent years and now hold a much higher that amplify the effects of financial shocks. In turn, fraction of the available stock of relatively less liquid losses among households and businesses can lead to assets—such as high-yield corporate debt, bank mounting losses at financial institutions, creating an loans, and international debt—than they did before “adverse feedback loop” in which weakness among the financial crisis. It is possible that, because they households, nonfinancial businesses, and financial may appear to offer greater liquidity than the marinstitutions causes further declines in income and kets in which they transact, these funds may pose a financial losses, potentially leading to financial instathreat to financial stability if large forced sales in the bility and a sharp contraction in economic activity. underlying markets are triggered by outsized investor redemptions. Borrowing by households remained relatively subdued through 2015. At the same time, borrowing by The surprise suspension of redemptions by a fixedthe nonfinancial business sector grew moderately in income fund that was liquidated in December 2015 the second half of the year. As a result, the ratio of highlighted concerns about liquidity mismatches at household and nonfinancial business credit to nomihigh-yield bond mutual funds that promise daily nal gross domestic product (GDP) has continued to redemptions. While net outflows from high-yield and grow at a rate roughly in line with nominal GDP and leveraged loan funds increased notably right after the stayed significantly below the peak seen in the 2000s suspension on December 9, the pace of outflows has (figure 7). Nonetheless, this ratio remains above levels steadily slowed in subsequent weeks, suggesting that seen prior to the mid-2000s. 3 The Senior Credit Officer Opinion Survey on Dealer Financing Within the household sector, the level of borrowing Terms is available on the Board’s website at www.federalreserve .gov/econresdata/releases/scoos.htm. edged up among households with strong credit histo-

Financial Stability 41 Figure 7. Ratio of nonfinancial-sector credit to GDP, 1980–2015 Quarterly Ratio 2.0 Q4 1.5 1.0 Business 0.5 Household 0.0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Note: GDP is gross domestic product. The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research. Source: Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States.” ries, while borrowing by households with damaged led to a notable increase in leverage—that is, debt credit histories—so-called subprime borrowing— relative to book equity—among speculative-grade contracted further, in the aggregate, in 2015. corporations, which now stands near or at multi- Although growth in residential real estate borrowing decade highs (figure 8). The gross leverage ratio for was moderate and driven by households with strong speculative-grade firms rose spectacularly in the oil credit histories, there was continued and sizable industry, as the book value of oil-related assets was growth in riskier credit segments—for example, in written down. As noted in the earlier discussion, oil subprime auto lending—a trend that should be and is firms experienced sharp increases in expected yearbeing monitored closely. ahead default probabilities amid increased leverage and heightened volatility of their assets. However, In the business sector, the rapid growth in borrowing from an economy-wide perspective, firms in the oil in riskier segments of corporate debt markets, high- industry account for only about 9 percent of the total lighted in the discussion of asset valuations earlier, speculative-grade debt outstanding, and the expected default rates of non-oil firms increased only modestly over the same period. Figure 8. Gross leverage for investment-grade and speculative-grade firms, 1999–2015 Macroprudential Supervision and 60 Quarterly Percent of assets Regulation of Large, Complex 55 Speculative-grade Financial Institutions Investment-grade 50 45 Large, complex financial institutions interact with 40 financial markets and the broader economy in a Q3 35 manner that may—during times of stress and in the 30 absence of an appropriate regulatory framework and 25 effective supervision—lead to financial instability.4 20 15 10 1999 2001 2003 2005 2007 2009 2011 2013 2015 Note: The data extend through 2015:Q3. Gross leverage is the ratio of the book 4 For more on the Federal Reserve’s supervision and regulation of value of total debt to total assets. For S&P, all rights reserved. For intended recipient only. No further distribution and/or reproduction permitted. large institutions, and especially related to the integration of the microprudential objective of safety and soundness of individual Source: Compustat North America © 2015 Standard & Poor’s Financial Services institutions with the macroprudential efforts outlined later in LLC (“S&P”). this section, see section 4, “Supervision and Regulation.”

42 102nd Annual Report | 2015 Key Supervisory Activities severely adverse scenario were projected to be $490 billion. In CCAR 2015, the Federal Reserve did One important element of enhanced supervision of not object to the capital plan and intended capital large banking organizations is the stress-testing pro- distributions for 29 of the 31 BHCs. cess, which includes the Dodd-Frank Act stress tests (DFAST) and the Comprehensive Capital Analysis Key Regulatory Activities and Review (CCAR). In addition to fostering the safety and soundness of the participating institu- Over the course of 2015, the Federal Reserve has tions, stress tests embed macroprudential elements by taken a number of steps to continue improving the resilience of financial institutions and the overall • examining the loss-absorbing capacity of institufinancial system, which are summarized as follows. tions under a common macroeconomic scenario First, in July, the Board finalized a rule that increases that has features similar to the strains experienced risk-based capital requirements for U.S. G-SIBs.6 The in a severe recession and which includes, as approfinal rule establishes the procedure for identifying a priate, identified salient risks; G-SIB and for calculating the appropriate bank-level • conducting horizontal testing across large institu- G-SIB surcharge. The applicable surcharges are calitions to understand the potential correlated expo- brated based on the systemic footprint of each U.S. sures; and G-SIB so that the amount of additional capital a firm must hold increases with the costs that its failure • considering the effects of counterparty distress on would impose in terms of U.S. financial stability. The the largest, most interconnected firms. G-SIB surcharge rule is designed to ensure that U.S. G-SIBs either hold substantially more capital, reduc- The results from the 2015 supervisory stress tests ing the likelihood that they will fail, or choose to conducted as part of DFAST and the related CCAR shrink their systemic footprint, reducing the harm were both released in March 2015.5 For DFAST that their failure would do to the financial system. 2015, the Federal Reserve conducted supervisory G-SIBs will need to become compliant by Janustress tests of 31 BHCs. The adverse and severely ary 2019 after a transition period that is set to begin adverse supervisory scenarios that were used in 2015 on January 1, 2016. feature U.S. and global recessions. In particular, the severely adverse scenario is characterized by a sub- Second, in December 2015, the Board announced it stantial global weakening in economic activity, is seeking public comment on a proposed policy including a severe recession in the United States, statement detailing the framework the Board would large reductions in asset prices, a significant widening follow in setting the countercyclical capital buffer of corporate bond spreads, and a sharp increase in (CCyB) and voted to affirm the CCyB amount at the equity market volatility. The adverse scenario is charcurrent level of 0 percent—consistent with the conacterized by a global weakening in economic activity tinued moderate level of financial vulnerabilities.7 and an increase in U.S. inflationary pressures that, The buffer is a macroprudential tool that can be used overall, result in a rapid increase in both short- and to increase the resilience of the financial system by long-term U.S. Treasury rates. The results of the raising capital requirements on internationally active DFAST 2015 projections suggested that, in the aggregate, the 31 BHCs would experience substantial losses under both the adverse and the severely 6 For more information, see Board of Governors of the Federal adverse scenarios. Over the nine quarters of the plan- Reserve System (2015), “Federal Reserve Board Approves Final ning horizon, losses at the 31 BHCs under the Rule Requiring the Largest, Most Systemically Important U.S. Bank Holding Companies to Further Strengthen Their Capital Positions,” press release, July 20, www.federalreserve.gov/ newsevents/press/bcreg/20150720a.htm. See also Board of Governors of the Federal Reserve System (2015), “Calibrating the 5 For additional information on DFAST, see Board of Governors GSIB Surcharge,” white paper (Washington: Board of Goverof the Federal Reserve System (2015), Dodd-Frank Act Stress nors, July), www.federalreserve.gov/aboutthefed/boardmeetings/ Test 2015: Supervisory Stress Test Methodology and Results gsib-methodology-paper-20150720.pdf. (Washington: Board of Governors, March), www.federalreserve 7 Details on the proposed framework are available at Board of .gov/newsevents/press/bcreg/bcreg20150305a1.pdf. Governors of the Federal Reserve System (2015), “Federal For more details on CCAR, see Board of Governors of the Fed- Reserve Board Seeks Public Comment on Proposed Policy eral Reserve System (2015), Comprehensive Capital Analysis and Statement Detailing the Framework the Board Would Follow in Review 2015: Assessment Framework and Results (Washington: Setting the Countercyclical Capital Buffer (CCyB),” press Board of Governors, March), www.federalreserve.gov/ release, December 21, www.federalreserve.gov/newsevents/press/ newsevents/press/bcreg/bcreg20150311a1.pdf. bcreg/20151221b.htm.

Financial Stability 43 banking organizations when there is an elevated risk swap margin rule will reduce the risk that derivatives of above-normal losses in the future. The CCyB transactions would act as a channel for financial conwould then be available to help banking organiza- tagion and, by imposing higher margin requirements tions absorb shocks associated with declining credit on uncleared swaps than apply to cleared swaps, will conditions. Implementation of the buffer could also incentivize market participants to shift derivatives help moderate fluctuations in the supply of credit. In activity to central clearinghouses. releasing the framework for comment, the Board consulted with the Federal Deposit Insurance Corpo- The enhanced prudential standards, together with ration and the Office of the Comptroller of the Cur- stress testing and other regulatory safeguards, help rency. Should the Board decide to increase the CCyB ensure that large U.S. BHCs and FBOs operating in amount in the future, banking organizations would the United States have robust levels of capital and have 12 months before the change became effective, liquidity and strong risk management. Together, unless the Board established an earlier effective date. these efforts not only help guarantee that these firms are financially robust individually, but also limit the Third, in October, the Board issued for public com- risk that financial distress at these firms could cause ment a proposed rule that would impose total loss- negative spillovers to the financial sector and the absorbing capacity and long-term debt requirements broader economy. Improvements in resolution planon U.S. G-SIBs and on the U.S. operations of certain ning will mitigate adverse effects from perceptions of foreign G-SIBs.8 The proposal would require each “too big to fail” and contribute to more orderly concovered firm to maintain a minimum amount of ditions in the financial system if institutions face unsecured long-term debt that could be converted strains. For more information on recovery and resointo equity in a resolution of the firm, thereby lution planning activity, see section 4, “Supervision recapitalizing the firm without putting public money and Regulation.” at risk. The proposal would diminish the threat that a G-SIB’s failure would pose to financial stability and is an important step in addressing the perception that Domestic and International certain institutions are “too big to fail.” Under the Cooperation and Coordination proposed rule, six banks would collectively need to raise an additional $120 billion, with full compliance The Federal Reserve cooperated or coordinated with not required until January 2022. both domestic and international institutions in 2015 to promote financial stability. Finally, the Board, acting in conjunction with other federal regulatory agencies, issued a final rule impos- Financial Stability Oversight ing minimum margin requirements on certain derivatives transactions that are not centrally cleared.9 The Council Activities As mandated by the Dodd-Frank Act, the FSOC was 8 See Board of Governors of the Federal Reserve System (2015), created in 2010 and is chaired by the Treasury Secre- “Federal Reserve Board Proposes New Rule to Strengthen the Ability of Largest Domestic and Foreign Banks Operating in tary (box 2). It establishes an institutional framework the United States to Be Resolved without Extraordinary Gov- for identifying and responding to sources of systemic ernment Support or Taxpayer Assistance,” press release, Octorisk. The Federal Reserve Chairman is a member of ber 30, www.federalreserve.gov/newsevents/press/bcreg/ 20151030a.htm. For additional information, see Board of Gov- the FSOC. ernors of the Federal Reserve System (2015), “Total Loss- Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for Systemically Important U.S. Bank Through collaborative participation in the FSOC, Holding Companies and Intermediate Holding Companies of U.S. financial regulators monitor not only institu- Systemically Important Foreign Banking Organizations; Regutions, but the financial system as a whole. The Fedlatory Capital Deduction for Investments in Certain Unsecured Debt of Systemically Important U.S. Bank Holding Compa- eral Reserve plays an important role in this macronies,” notice of proposed rulemaking (Docket No. R-1523), Fed- prudential framework: It assists in monitoring finaneral Register, vol. 80 (November 30), pp. 74926–64, www.gpo cial risks, analyzes the implications of those risks for .gov/fdsys/pkg/FR-2015-11-30/pdf/2015-29740.pdf. financial stability, and identifies steps that can be 9 See Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of taken to mitigate those risks. In addition, when an the Currency, Farm Credit Administration, and Federal Hous- institution is designated by the FSOC as systemically ing Finance Agency (2015), “Agencies Finalize Swap Margin important, the Federal Reserve assumes responsibil- Rule,” joint press release, October 30, www.federalreserve.gov/ newsevents/press/bcreg/20151030b.htm. ity for supervising that institution.

44 102nd Annual Report | 2015 cial companies for potential designation.10 The Box 2. Regular Reporting on changes adopted fall into three broad categories: Financial Stability Oversight Council 1. engagement with companies under consideration Activities by the FSOC, which will be informed earlier The Financial Stability Oversight Council (FSOC), when they come under review and will be procreated under the Dodd-Frank Wall Street Reform vided with additional opportunities to engage and Consumer Protection Act of 2010 and chaired with the council; by the Secretary of the Treasury Department, meets regularly to coordinate on financial stability topics 2. transparency to the broader public regarding the that potentially affect the U.S. economy and disdesignations process; and closes its activities. 3. engagement during the FSOC’s annual reevalua- Monthly meeting minutes. In 2015, the FSOC met monthly, and the minutes for each meeting are tion of designations, with changes to the process available on the U.S. Treasury website (www for the council’s annual reviews of its designa- .treasury.gov/initiatives/fsoc/council-meetings/ tions aimed at enabling more engagement Pages/meeting-minutes.aspx). between designated companies and the council FSOC annual report. On May 19, 2015, the FSOC and providing ample opportunity for companies released its fifth annual report (www.treasury.gov/ to present information and to understand the initiatives/fsoc/studies-reports/Pages/2015-Annualcouncil’s analysis. Report.aspx), which includes a review of key developments through the beginning of 2015 and a set of recommended actions that could be taken to Financial Stability Board Activities ensure financial stability and to mitigate systemic risks that affect the economy. The Federal Reserve participates in international bodies, such as the FSB, given the interconnected For more on the FSOC, see www.treasury.gov/ initiatives/fsoc/pages/home.aspx. global financial system and the global activities of large U.S. financial institutions. The FSB is an international body that monitors the In 2015, the Federal Reserve worked, in conjunction global financial system and promotes financial stabilwith other FSOC participants, on the following ity through the adoption of sound policies across major initiatives: countries. The Federal Reserve participates in the FSB, along with the Securities and Exchange Com- • Following up on earlier public initiatives. Such ini- mission and the U.S. Treasury.11 tiatives included the conference examining the asset management industry on May 19, 2014, and the In 2015, the Federal Reserve continued its active parrequest for public comments on asset management ticipation in the FSB. The FSB is engaged in several industry risks on December 18, 2014. The FSOC issues, including shadow banking, supervision of reviewed comment letters in response to the request global systemically important financial institutions, for public comments, and the Federal Reserve has and the development of effective resolution regimes continued its ongoing analysis of potential risks to for large financial institutions. In July, the FSB the financial system posed by the asset manage- announced that it is delaying completion of the ment industry. Specifically, the analysis has been methodologies for designation of asset managers focused on understanding the potential risks to the while it conducts more work on evaluating systemic system associated with certain products and activi- risks from marketwide activities and assesses whether ties in the asset management industry relating to existing regulation is sufficient to address these risks. liquidity and redemptions, leverage, operational functions, and resolution. 10 For more information, see U.S. Department of the Treasury (2015), “Financial Stability Oversight Council Announces • Adoption of changes to nonbank designations pro- Changes to Nonbank Designations Process,” press release, February 4, www.treasury.gov/press-center/press-releases/Pages/ cess. On February 4, 2015, the FSOC announced jl9766.aspx. that it adopted changes and formalized practices 11 See the Financial Stability Board website at relating to its process for reviewing nonbank finan- www.financialstabilityboard.org.

45 4 Supervision and Regulation The Federal Reserve has supervisory and regulatory year ending December 31, 2014. The proportion of authority over a variety of financial institutions and unprofitable BHCs continued to decline, reaching activities with the goal of promoting a safe, sound, 2 percent, down from 4 percent in 2014, the lowest and stable financial system that supports the growth level since 1998. However, assets from unprofitand stability of the U.S. economy. As described in able BHCs increased to 2.1 percent in 2015, up from this report, the Federal Reserve carries out its super- 0.7 percent in 2014. Net interest margin continued to visory and regulatory responsibilities and supporting decline, reaching 2.1 percent, the lowest level in over functions primarily by 20 years. While provisions increased to 0.23 percent of average assets, up from 0.19 percent in 2014, they • promoting the safety and soundness of individual remained in line with historical lows. Nonperforming financial institutions supervised by the Federal assets continued to decline, but remained elevated Reserve; relative to historical levels at 2.8 percent of loans and • taking a macroprudential approach to the supervi- foreclosed assets, down from 3.4 percent as of yearsion of the largest, most systemically important end 2014. (Also see “Bank Holding Companies” later financial institutions (SIFIs);1 in this section.) • developing supervisory policy (rulemakings, super- Performance of state member banks. The perforvision and regulation letters (SR letters), policy mance at state member banks in 2015 improved from statements, and guidance); 2014. In aggregate, state member banks reported • identifying requirements and setting priorities for profits of $21.8 billion for 2015, up 15.3 percent from supervisory information technology initiatives; $18.9 billion in 2014. Return-on-assets (ROA) and return-on-equity (ROE) also improved, but both • ensuring ongoing staff development to meet evolvmeasures still lagged pre-crisis levels. The percent of ing supervisory responsibilities; profitable state member banks continued to increase • regulating the U.S. banking and financial structure and now exceeds pre-crisis levels, as only 2.4 percent by acting on a variety of proposals; and of firms reported a loss for the year, down from 3.6 percent in 2014. Problem loans continued to • enforcing other laws and regulations. decline from 1.8 percent of total loans in 2014 to 1.6 percent in 2015, and are now in line with pre- 2015 Developments crisis levels. However, problem loans increased in state member bank commercial & industrial and agricultural loan portfolios due to increases in nonac- During 2015, the U.S. banking system and financial crual loans. Provisions (as a percent of revenue) markets continued to improve following their recovincreased to 2.7 percent after falling five consecutive ery from the financial crisis that started in mid-2007. years from a high of 32.4 percent in 2009 to a low of 2.2 percent in 2014. The risk-based capital ratios for Performance of bank holding companies. An improvestate member banks slipped 32 basis points from ment in bank holding companies’ (BHCs) perfor- 14.83 percent in 2014 to 14.51 percent in 2015, howmance was evident during 2015. U.S. BHCs, in aggreever the percent of banks deemed well capitalized gate, reported earnings reaching an all-time high of under prompt corrective action standards increased $160 billion for 2015, up from $139 billion for the slightly to 99.5 percent. In 2015, one state member bank, with $31.7 million in assets, failed. (Also see 1 For a detailed discussion of macroprudential supervision and regulation, refer to section 3, “Financial Stability.” “State Member Banks” later in this section.)

46 102nd Annual Report | 2015 Box 1. Regulation of Global Systemically Important Banking Institutions In 2015, the Board continued to advance its macro- The systemic footprint scores are recalculated reguprudential regulatory program for global systemically larly, meaning that a firm can reduce its surcharge important banking institutions (G-SIBs), the banking going forward by reducing the harm to the financial firms whose failure would cause the most harm to the system that its failure would cause. The rule thus U.S. financial system and the broader economy. In confronts the U.S. G-SIBs with a choice to either keeping with the Dodd-Frank Act’s objective of pro- hold substantially more capital, thereby reducing the tecting the financial stability of the United States by likelihood that it will fail, or shrink its systemic footending “too big to fail,” the Board’s rules for G-SIBs print, reducing the impact of its failure. Either outpursue two complementary goals: reducing the prob- come would enhance U.S. financial stability. ability that a G-SIB will fail, and reducing the harm Proposed TLAC rule. In October 2015, the Board that a G-SIB’s failure would cause. issued for public comment a proposed rule to require G-SIB surcharge rule. In July 2015, the Board final- the top-tier BHCs of U.S. G-SIBs and the U.S. interized a rule that raises the risk-based capital require- mediate holding companies of foreign G-SIBs to ments for U.S. G-SIBs. The rule establishes a test for maintain minimum levels of unsecured, long-term determining whether a BHC is a G-SIB based on an debt and “total loss-absorbing capacity” (TLAC), evaluation of its systemic footprint—that is, the which is made up of both capital and long-term debt. amount of harm that its failure would do to the finan- The proposal also prohibits covered holding compacial stability of the United States. This evaluation nies (but not their operating subsidiaries) from engaglooks to quantitative measures in five broad catego- ing in certain financial activities, such as short-term ries: size, interconnectedness, substitutability, com- debt issuance and derivatives contracts with third plexity, and cross-jurisdictional activity. Under this parties, that would pose a substantial risk to financial test, the eight U.S. BHCs that currently qualify as stability if the holding company were to fail. G-SIBs are Bank of America Corporation; The Bank If a covered holding company were to fail and enter of New York Mellon Corporation; Citigroup, Inc.; resolution, its unsecured, long-term debt could be Goldman Sachs Group, Inc.; JP Morgan Chase & converted into equity to recapitalize the firm’s critical Co.; Morgan Stanley; State Street Corporation; and operations. The TLAC proposal would particularly Wells Fargo & Company. improve a G-SIB’s resolvability under a “single-point- Under the rule, each U.S. G-SIB is assigned a capital of-entry” strategy, pursuant to which the failed firm’s surcharge that applies on top of the generally appli- recapitalized subsidiaries would continue to operate cable capital requirements for BHCs. The surcharges normally—limiting disruption to the financial are graduated based on each G-SIB’s attributes in system—while only the top-tier holding company the five categories listed above and its reliance on would enter a resolution proceeding (such as bankrunnable short-term wholesale funding. The Board ruptcy). The TLAC proposal constitutes an important has estimated that the surcharges will range from step forward in addressing the “too big to fail” prob- 1 percent to 4.5 percent of risk-weighted assets if the lem by substantially reducing the harm a G-SIB’s failattributes of the U.S. G-SIBs remain the same as ure would do to U.S. financial stability. when the rule was issued. These surcharges will be phased in from 2016 to 2019. Enhanced prudential standards. The Dodd-Frank the most harm to the U.S. financial system and the Wall Street Reform and Consumer Protection Act of broader economy. In this regard, the Board in 2015 2010 (Dodd-Frank Act) directs the Board, in part, to issued a final rule that raises the risk-based capital establish prudential standards in order to prevent or requirements for G-SIBs, and issued for public commitigate risks to U.S. financial stability that could ment a proposed rule to require the top-tier BHCs of arise from the material financial distress or failure, or U.S. G-SIBs and the U.S. intermediate holding ongoing activities of, large, interconnected financial companies of foreign G-SIBs to maintain minimum institutions. In 2015, the Board established or pro- levels of unsecured, long-term debt and “total lossposed to establish a variety of enhanced prudential absorbing capacity” (TLAC), which is made up of standards. (See “Enhanced Prudential Standards” both capital and long-term debt. (See box 1 for more later in this section for details.) information). Regulation of global systemically important banking Federal Reserve supervision of insurance companies. institutions (G-SIBs). The Board continued to The Board is the consolidated supervisor of all advance its macroprudential regulatory program for BHCs, savings and loan holding companies G-SIBs, the banking firms whose failure would cause (SLHCs), and nonbank financial companies that the

Supervision and Regulation 47 Financial Stability Oversight Council (FSOC) has cies of foreign banks, and Edge Act and agreement determined should be subject to Federal Reserve corporations. In a process distinct from examinasupervision and prudential standards (nonbank tions, it conducts inspections of holding companies financial companies). During 2015, the Board contin- and their nonbank subsidiaries. Whether an examiued to develop and enhance its supervision of non- nation or an inspection is being conducted, the bank financial companies, SLHCs, and banking review of operations entails organizations, including those engaged in insurance • an evaluation of the adequacy of governance proactivities, with a focus on consolidated risk expovided by the board and senior management, sures, financial strength, capital adequacy, and including an assessment of internal policies, proceliquidity. (See box 2 for more information.) dures, controls, and operations; Supervision • an assessment of the quality of the riskmanagement and internal control processes in place to identify, measure, monitor, and control The Federal Reserve is the federal supervisor and risks; regulator of all U.S. BHCs, including financial holding companies, and state-chartered commercial • an assessment of the key financial factors of capibanks that are members of the Federal Reserve tal, asset quality, earnings, and liquidity; and System. The Federal Reserve also has responsibility • a review for compliance with applicable laws and for supervising the operations of all Edge Act and regulations. agreement corporations, the international operations of state member banks and U.S. BHCs, and the U.S. Table 1 provides information on examinations and operations of foreign banking organizations. Furinspections conducted by the Federal Reserve during thermore, through the Dodd-Frank Act, the Federal the past five years. Reserve has been assigned responsibilities for nonbank financial firms and financial market utilities Consolidated Supervision (FMUs) designated by the FSOC as systemically Consolidated supervision, a method of supervision important. In addition, the Dodd-Frank Act transthat encompasses the parent company and its subsidferred authority for consolidated supervision of more iaries, allows the Federal Reserve to understand the than 400 SLHCs and their non-depository subsidiarorganization’s structure, activities, resources, risks, ies from the former Office of Thrift Supervision and financial and operational resilience. Working (OTS) to the Federal Reserve. with other relevant supervisors and regulators, the Federal Reserve seeks to ensure that financial, opera- In overseeing the institutions under its authority, the tional, or other deficiencies are addressed before they Federal Reserve seeks primarily to promote safety pose a danger to the consolidated organization, its and soundness, including compliance with laws and banking offices, or the broader economy.2 regulations. Large financial institutions increasingly operate and Safety and Soundness manage their integrated businesses across corporate The Federal Reserve uses a range of supervisory boundaries. Financial trouble in one part of a finanactivities to promote the safety and soundness of cial institution can spread rapidly to other parts of financial institutions and maintain a comprehensive the institution. Risks that cross legal entities or that understanding and assessment of each firm. These are managed on a consolidated basis cannot be activities include horizontal reviews, firm-specific monitored properly through supervision that is examinations and inspections, continuous monitor- directed at any one of the legal entity subsidiaries ing and surveillance activities, and implementation of within the overall organization. enforcement or other supervisory actions as necessary. The Federal Reserve also provides training and To strengthen its supervision of the largest, most technical assistance to foreign supervisors and complex financial institutions, the Federal Reserve minority-owned and de novo depository institutions. created a centralized, multidisciplinary body called the Large Institution Supervision Coordinating Examinations and Inspections 2 “Banking offices” are defined as U.S. depository institution sub- The Federal Reserve conducts examinations of state sidiaries, as well as the U.S. branches and agencies of foreign member banks, FMUs, the U.S. branches and agen- banking organizations.

48 102nd Annual Report | 2015 Box 2. Federal Reserve Supervision of Insurance Companies in 2015 TheBoard’ssupervisionofbankingorganizations, financialcompaniesisfocusedonenhancingthe includingthoseengageddirectlyorindirectlyin resiliencyofthefirmtolowertheprobabilityofits insuranceactivities,isfocusedonconsolidatedrisk failureorinabilitytoserveasafinancialintermediexposures,financialstrength,capitaladequacy,and ary,reducingtheimpactthatthefirm’sfailureor liquidity.TheBoard’sauthoritytosupervisethese materialweaknesscouldhaveonthefinancialstacompaniesisprovidedintheBankHoldingCom- bilityoftheUnitedStates.Additionally,theBoard panyActof1956,theHomeOwners’LoanAct,the monitorsdevelopmentsatthenonbankfinancial InternationalBankingAct,andtheDodd-FrankAct. companiesandexercisesitssupervisoryauthorityto SimilartoitsauthoritiesrelatedtolargeBHCs,the fostersafeandsoundpracticesandtopromote Board’sauthoritiesconcerningnonbankfinancial financialstability.ForISLHCs,oneoftheprimary companiesincludepowertoimposecapital,liquidity, goalsoftheBoard’sconsolidatedsupervisionisto andrisk-managementrequirements;conductexami- protectthedepositoryinstitutionsubsidiariesfrom nationsandinspections;requirethecreationofinter- potentialrisksposedbytheholdingcompanyand mediateholdingcompanies;andtakeenforcement otheraffiliates. action,amongotherthings. Theprimarysupervisorsoftheinsuranceactivities In2015,theBoardsupervisedinsurancefirmsrep- ofBHCs,SLHCs,statememberbanks,foreign resentingapproximately$3.1trillionintotalassets, bankingorganizations,andnonbankfinancialcomillustratedinfigureA.TheBoardsupervisedthree paniesarethestateorforeignauthoritieswherethe nonbankfinancialcompanieswithsignificantinsur- activitiesareconducted.ConsistentwithU.S.legal anceactivities—AmericanInternationalGroup,Inc.; andregulatoryframeworks,theBoardworksclosely PrudentialFinancial,Inc.;andMetLife,Inc.1These withotherappropriatestate,federal,andforeign companieshaveapproximately$2.1trillionincom- regulators,throughconsultation,andreliancetothe binedtotalassets.Inaddition,thereare12insur- fullestextentpossibleontheexaminationsand anceSLHCs(ISLHCs)withapproximately$989bil- reportsofotherregulatorsrelatingtosupervised lionincombinedtotalassets.Formostofthese entities. ISLHCs,subsidiarysavingsassociationsaccountfor Enhancedprudentialstandards.TheDodd-Frank lessthan20percentoftheircombinedassets. ActrequirestheBoardtoapplyenhancedprudential standardsandearlyremediationrequirementsto FigureA.Insurancecompanyassetsbyportfolio BHCswithatleast$50billioninconsolidatedassets Inthousands andtononbankfinancialcompanies.TheDodd- FrankActauthorizestheBoardtotailortheapplicationofthesestandardsandrequirementstodifferent $20,000,000 companiesonanindividualbasisorbycategory. $2,139,000,000 TheBoardisdevelopingenhancedprudentialstan- $77,000,000 dards,includingstandardsregardingcapital,fornonbankfinancialcompanies.Thesestandardswillbe appropriatelytailoredandappliedtothefirmsaftera $892,000,000 processofnoticeandcomment. Nonbank Insurance Companies (3 firms) ParticipationintheInternationalAssociationof $10–$50 billion (4 firms) InsuranceSupervisors(IAIS).TheBoardremains Greater than $50 billion (4 firms) committedtotailoringinsurancesupervisionto reflectthedifferentbusinessmodelsandsystemic Less than $10 billion (4 firms) footprintsofinsurersascomparedtotheotherfirms supervisedbytheBoard.TheBoard’sconsolidated Supervisoryapproach.TheBoard’ssupervisory supervisionsupplementsandcomplementsthe approachtothethreenonbankfinancialcompanies existingstate-basedlegal-entitysupervision,which isgenerallyconsistentwiththeapproachusedfor focusesonpolicyholderprotection,withaperspecthelargestBHCsbutistailoredtoaccountfordiffer- tivethatconsiderstherisksacrosstheentireenterentmaterialcharacteristicsofthefirms.Specifically, prise.Inaddition,theFederalReserveparticipates thescopeofconsolidatedsupervisionfornonbank intheIAISalongwiththeU.S.FederalInsurance OfficeandNationalAssociationofInsuranceCom- 1 InMarch2016,theU.S.DistrictCourtinWashington,D.C. missioners,workingtogethertoensurethatany rescindedtheFSOCdesignationofMetLifeasasystemically internationalstandardputforwardbytheIAISbest importantfirmsubjecttoFederalReservesupervision.Theeffect meetstheneedsoftheU.S.insurancemarket, ofthecourt’sactionisthatMetLifeisnolongersubjecttoFederalReservesupervision. insurers,andconsumers.

Supervision and Regulation 49 Table 1. State member banks and bank holding companies, 2011–15 Entity/item 2015 2014 2013 2012 2011 State member banks Total number 839 858 850 843 828 Total assets (billions of dollars) 2,356 2,233 2,060 2,005 1,891 Number of examinations 698 723 745 769 809 By Federal Reserve System 392 438 459 487 507 By state banking agency 306 285 286 282 302 Top-tier bank holding companies Large (assets of more than $1 billion) Total number 547 522 505 508 491 Total assets (billions of dollars) 16,961 16,642 16,269 16,112 16,443 Number of inspections 709 738 716 712 672 By Federal Reserve System1 669 706 695 691 642 On site 458 501 509 514 461 Off site 211 205 186 177 181 By state banking agency 40 32 21 21 30 Small (assets of $1 billion or less) Total number 3,719 3,902 4,036 4,124 4,251 Total assets (billions of dollars) 938 953 953 983 982 Number of inspections 2,783 2,824 3,131 3,329 3,306 By Federal Reserve System 2,709 2,737 2,962 3,150 3,160 On site 123 142 148 200 163 Off site 2,586 2,595 2,814 2,950 2,997 By state banking agency 74 87 169 179 146 Financial holding companies Domestic 442 426 420 408 417 Foreign 40 40 39 38 40 1 For large bank holding companies subject to continuous, risk-focused supervision, includes multiple targeted reviews. Committee (LISCC) to oversee the supervision and bined U.S. operations in the case of foreign bankevaluate conditions of supervised firms. The commit- ing organizations) and its core business lines can tee also develops cross-firm perspectives and moni- survive under a broad range of internal or extertors interconnectedness and common practices that nal stresses. This requires financial resilience by could lead to systemic risk. maintaining sufficient capital and liquidity, and operational resilience by maintaining effective The framework for the consolidated supervision of corporate governance, risk management, and LISCC firms and other large financial institutions recovery planning. was issued in December 2012.3 This framework 2. Reducing the impact on the financial system and strengthens traditional microprudential supervision the broader economy in the event of a firm’s failure and regulation to enhance the safety and soundness or material weakness. Each firm is expected to of individual firms and incorporates macroprudential ensure the sustainability of its critical operations considerations to reduce potential threats to the staand banking offices under a broad range of interbility of the financial system. The framework has two nal or external stresses. This requires, among primary objectives: other things, effective resolution planning that 1. Enhancing resiliency of a firm to lower the prob- addresses the complexity and the interconnectivability of its failure or inability to serve as a finan- ity of the firm’s operations. cial intermediary. Each firm is expected to ensure that the consolidated organization (or the com- The framework is designed to support a tailored supervisory approach that accounts for the unique 3 For more information about the supervisory framework, see the risk characteristics of each firm, including the nature Board’s press release and SR letter 12-17/CA 12-14 at www and degree of potential systemic risk inherent in a .federalreserve.gov/newsevents/press/bcreg/20121217a.htm.

50 102nd Annual Report | 2015 firm’s activities and operations, and is being imple- The Federal Reserve uses a risk-focused approach to mented in a multi-stage approach. supervision, with activities directed toward identifying the areas of greatest risk to financial institutions The Federal Reserve uses a range of supervisory and assessing the ability of institutions’ management activities to maintain a comprehensive understanding processes to identify, measure, monitor, and control and assessment of each large financial institution: those risks. For medium- and small-sized financial institutions, the risk-focused consolidated supervi- • Coordinated horizontal reviews. These reviews sion program provides that examination and inspecinvolve examining several institutions simultanetion procedures are tailored to each organization’s ously and encompass firm-specific supervision and size, complexity, risk profile, and condition. The the development of cross-firm perspectives. In supervisory program for an institution, regardless of addition, the Federal Reserve uses a multidisciits asset size, entails both off-site and on-site work, plinary approach to draw on a wide range of perincluding development of supervisory plans, prespectives, including those from supervisors, examexamination visits, detailed documentation, and iners, economists, financial experts, payments syspreparation of examination reports tailored to the tems analysts, and other specialists. Examples scope and findings of the examination. include analysis of capital adequacy and planning through the Comprehensive Capital Analysis and Capital Planning and Stress Tests Review (CCAR), as well as horizontal evaluations Since the financial crisis, the Board has led a series of of resolution plans and incentive compensation initiatives to strengthen the capital positions of the practices. largest banking organizations. Two related initiatives • Firm-specific examinations and/or inspections and are the CCAR and the Dodd-Frank Act stress tests continuous monitoring activities. These activities are (DFAST). designed to maintain an understanding and assessment across the core areas of supervisory focus. CCAR is a horizontal exercise to evaluate capital These activities include review and assessment of adequacy, internal capital planning processes, and changes in strategy, inherent risks, control pro- planned capital distributions at large BHCs. In cesses, and key personnel, and follow-up on previ- CCAR, the Federal Reserve assesses whether these ously identified concerns (for example, areas sub- BHCs have sufficient capital to withstand highly ject to enforcement actions), or emerging stressful operating environments and be able to convulnerabilities. tinue operations, maintain ready access to funding, meet obligations to creditors and counterparties, and • Interagency information sharing and coordination. serve as credit intermediaries. Capital is central to a In developing and executing a detailed supervisory BHC’s ability to absorb losses and continue to lend plan for each firm, the Federal Reserve generally to creditworthy businesses and consumers. Through relies to the fullest extent possible on the informa- CCAR, a BHC’s capital adequacy is evaluated on a tion and assessments provided by other relevant forward-looking, post-stress basis as the BHCs are supervisors and functional regulators. The Federal required to demonstrate in their capital plans how Reserve actively participates in interagency inforthey will maintain, throughout a very stressful mation sharing and coordination, consistent with period, capital above minimum regulatory capital applicable laws, to promote comprehensive and requirements. From a microprudential perspective, effective supervision and limit unnecessary duplica- CCAR provides a structured means for supervisors tion of information requests. Supervisory agencies to assess not only whether these BHCs hold enough continue to enhance formal and informal discuscapital, but also whether they are able to rapidly and sions to jointly identify and address key vulneraccurately determine their risk exposures, including abilities and to coordinate supervisory strategies how those might evolve under stress, which is an for large financial institutions. essential element of effective risk management. From • Internal audit and control functions. In certain a macroprudential perspective, the use of a common instances, supervisors may be able to rely on a scenario allows us to assess how a particular risk or firm’s internal audit or internal control functions in combination of risks might affect the banking system developing a comprehensive understanding and as a whole under stressful conditions—not just indiassessment. vidual institutions. The 2015 CCAR results are avail-

Supervision and Regulation 51 able at www.federalreserve.gov/newsevents/press/ eral Reserve conducted 392 exams of state member bcreg/bcreg20150311a1.pdf. banks in 2015. DFAST is a supervisory stress test conducted by the Bank Holding Companies Federal Reserve to evaluate whether large BHCs and At year-end 2015, a total of 4,739 U.S. BHCs were in all nonbank financial companies designated by the operation, of which 4,266 were top-tier BHCs. These FSOC have sufficient capital to absorb losses result- organizations controlled 4,508 insured commercial ing from stressful economic and financial market banks and held approximately 97 percent of all conditions. The Dodd-Frank Act also requires BHCs insured commercial bank assets in the United States. and other financial companies supervised by the Federal Reserve to conduct their own stress tests. Federal Reserve guidelines call for annual inspections Together, the Dodd-Frank Act supervisory stress of large BHCs and complex smaller companies. In tests and the company-run stress tests are intended to judging the financial condition of the subsidiary provide company management and boards of direc- banks owned by holding companies, Federal Reserve tors, the public, and supervisors with forward- examiners consult examination reports prepared by looking information to help gauge the potential effect the federal and state banking authorities that have of stressful conditions on the capital adequacy of primary responsibility for the supervision of those these large banking organizations. The 2015 DFAST banks, thereby minimizing duplication of effort and results are available at www.federalreserve.gov/ reducing the supervisory burden on banking newsevents/press/bcreg/bcreg20150305a1.pdf. organizations. State Member Banks Inspections of BHCs, including financial holding At the end of 2015, a total of 1,829 banks (excluding companies, are built around a rating system intronondepository trust companies and private banks) duced in early January of 2005. The system reflects were members of the Federal Reserve System, of the shift in supervisory practices away from a historiwhich 839 were state chartered. Federal Reserve cal analysis of financial condition toward a more System member banks operated 56,669 branches, and dynamic, forward-looking assessment of riskaccounted for 34 percent of all commercial banks in management practices and financial factors. Under the United States and for 71 percent of all commer- the system, known as RFI but more fully termed cial banking offices. State-chartered commercial RFI/C(D), holding companies are assigned a combanks that are members of the Federal Reserve, com- posite rating (C) that is based on assessments of monly referred to as state member banks, represented three components: Risk Management (R), Financial approximately 15 percent of all insured U.S. commer- Condition (F), and the potential Impact (I) of the cial banks and held approximately 16 percent of all parent company and its nondepository subsidiaries insured commercial bank assets in the United States. on the subsidiary depository institution. The fourth component, Depository Institution (D), is intended Under section 10 of the Federal Deposit Insurance to mirror the primary supervisor’s rating of the sub- Act, as amended by section 111 of the Federal sidiary depository institution.6 Noncomplex BHCs Deposit Insurance Corporation Improvement Act of with consolidated assets of $1 billion or less are sub- 1991 and by the Riegle Community Development ject to a special supervisory program that permits a and Regulatory Improvement Act of 1994, the Fed- more flexible approach.7 In 2015, the Federal Reserve eral Reserve must conduct a full-scope, on-site examination of state member banks at least once a year,4 existing regulations were issued on September 21, 2007. Secalthough certain well-capitalized, well-managed orga- tion 83001 of the FAST Act became effective on December 4, 2015, which raised the threshold from $500 million to $1 billion. nizations with total assets of less than $500 million The federal banking agencies initiated changes to rules to incormay be examined once every 18 months.5 The Fed- porate the change into existing regulations shortly thereafter to be effective for 2016 examinations. 6 Each of the first two components has four subcomponents: 4 The Office of the Comptroller of the Currency examines nation- Risk Management—(1) Board and Senior Management Overally chartered banks, and the Federal Deposit Insurance Corpo- sight; (2) Policies, Procedures, and Limits; (3) Risk Monitoring ration examines state-chartered banks that are not members of and Management Information Systems; and (4) Internal Conthe Federal Reserve. trols. Financial Condition—(1) Capital, (2) Asset Quality, 5 The Financial Services Regulatory Relief Act of 2006, which (3) Earnings, and (4) Liquidity. became effective in October 2006, authorized the federal bank- 7 The special supervisory program was implemented in 1997, most ing agencies to raise the threshold from $250 million to recently modified in 2013. See SR letter 13-21 for a discussion of $500 million, and final rules incorporating the change into the factors considered in determining whether a BHC is com-

52 102nd Annual Report | 2015 Table 2. Savings and loan holding companies, 2011–15 Entity/item 2015 2014 2013 2012 20111 T op-tier savings and loan holding companies Large (assets of more than $1 billion)2 Total number 67 76 81 94 n/a Total assets (billions of dollars) 1,525 1,493 1,500 1,715 n/a Number of inspections 58 83 72 82 n/a By Federal Reserve System1 57 82 71 80 n/a On site 31 45 58 53 n/a Off site 26 37 13 27 n/a By states’ Department of Insurance 1 1 1 2 n/a Small (assets of $1 billion or less) Total number 194 221 251 272 n/a Total assets (billions of dollars) 55 65 76 82 n/a Number of inspections 187 212 258 229 n/a By Federal Reserve System 187 212 258 229 n/a On site 13 10 21 46 n/a Off site 174 202 237 183 n/a 1 Responsibility for SLHCs was transferred to the Board in 2011. Asset data are not available for year-end 2011 due to transition. 2 Excludes SIFI SLHCs (AIG and GE). n/a Not applicable. conducted 669 inspections of large BHCs and 2,709 SLHCs). Excluding nonbank SIFI SLHCs, the 25 inspections of small, noncomplex BHCs. largest SLHCs accounted for more than $1.4 trillion of total combined assets. Approximately 90 percent Financial Holding Companies of SLHCs engage primarily in depository activities. Under the Gramm-Leach-Bliley Act, BHCs that These firms hold approximately 16 percent ($251 bilmeet certain capital, managerial, and other require- lion) of the total combined assets of all SLHCs. The ments may elect to become financial holding compa- Office of the Comptroller of the Currency (OCC) is nies and thereby engage in a wider range of financial the primary regulator for most of the subsidiary savactivities, including full-scope securities underwrit- ings associations of the firms engaged primarily in ing, merchant banking, and insurance underwriting depository activities. Table 2 provides information on and sales. As of year-end 2015, a total of 442 domes- examinations of SLHCs for the past five years. tic BHCs and 40 foreign banking organizations had financial holding company status. Of the domestic Board staff continues to work on operational, policy, financial holding companies, 25 had consolidated and supervisory issues while engaging the industry, assets of $50 billion or more; 31, between $10 billion Reserve Banks, and other regulatory agencies. Nearly and $50 billion; 129, between $1 billion and $10 bil- all of the SLHCs are now filing all required Federal lion; and 257, less than $1 billion. Reserve regulatory reports. Significant milestones achieved include the formal incorporation of Federal Savings and Loan Holding Companies Reserve policies into the SLHC supervision program. The Dodd-Frank Act transferred responsibility for Several complex policy issues continue to be addressed supervision and regulation of SLHCs from the OTS by the Board, including those related to consolidated to the Federal Reserve in July 2011. At year-end capital requirements for insurance SLHCs (see box 2 2015, a total of 470 SLHCs were in operation, of for information about the Board’s supervisory which 261 were top tier SLHCs. These SLHCs con- approach for insurance SLHCs), issues pertaining to trol 266 thrift institutions and include 21 companies intermediate holding companies for commercial engaged primarily in nonbanking activities, such as SLHCs, and the adoption of formal rating systems. insurance underwriting (12 SLHCs), securities brokerage (4 SLHCs), and commercial activities (5 Financial Market Utilities FMUs manage or operate multilateral systems for the purpose of transferring, clearing, or settling payplex or noncomplex (www.federalreserve.gov/bankinforeg/ srletters/sr1321.htm). ments, securities, or other financial transactions

Supervision and Regulation 53 among financial institutions or between financial authority for certain FMUs. The Federal Reserve’s institutions and the FMU. Under the Federal work with these agencies under title VIII, including Reserve Act, the Federal Reserve supervises FMUs the sharing of appropriate information and particithat are chartered as member banks or Edge Act cor- pation in designated FMU examinations, aims to porations and coordinates with other federal banking improve consistency in FMU supervision, promote supervisors to supervise FMUs considered bank ser- robust FMU risk management, and improve regulavice providers under the Bank Service Company Act. tors’ ability to monitor and mitigate systemic risks. In July 2012, the FSOC voted to designate eight Designated Nonfinancial Companies FMUs as systemically important under title VIII of Since 2013, the FSOC has designated four nonbank the Dodd-Frank Act. As a result of these designa- financial companies for supervision by the Board: tions, the Board assumed an expanded set of respon- American International Group, Inc.; General Electric sibilities related to these designated FMUs that Capital Corporation, Inc. (GECC); Prudential include promoting uniform risk-management stan- Financial, Inc.; and MetLife, Inc.8 dards, playing an enhanced role in the supervision of designated FMUs, reducing systemic risk, and sup- The Federal Reserve’s supervisory approach for desporting the stability of the broader financial system. ignated companies is consistent with the approach For certain designated FMUs, the Board established used for the largest BHCs, tailored to account for difrisk-management standards and expectations that are ferent material characteristics of each firm. The articulated in Board Regulation HH. In addition to Dodd-Frank Act requires the Board to apply setting minimum risk-management standards, Regu- enhanced prudential standards to the nonbank finanlation HH establishes requirements for the advance cial companies designated by the FSOC for supervinotice of proposed material changes to the rules, pro- sion by the Board. The act authorizes the Board to cedures, or operations of a designated FMU for tailor the application of these standards and requirewhich the Board is the supervisory agency under title ments to different companies on an individual basis VIII. Finally, Regulation HH also establishes mini- or by category. In July 2015, the Board issued a final mum conditions and requirements for a Federal order that established enhanced prudential standards Reserve Bank to establish and maintain an account for GECC. In the case of the remaining nonbank for, and provide services to, a designated FMU. The financial companies, which are primarily in the busi- Federal Reserve Banks maintain accounts for and ness of insurance, the Federal Reserve is developing provide services to several designated FMUs. enhanced prudential standards, including standards regarding capital. These standards will be appropri- The Federal Reserve’s risk-based supervision pro- ately tailored and applied to the firms after a process gram for FMUs is administered by the FMU Super- of notice and comment. Additionally, the Federal vision Committee (FMU-SC). The FMU-SC is a Reserve monitors developments at the designated multidisciplinary committee of senior supervision, nonbank financial companies and exercises its superpayment policy, and legal staff at the Board of Gov- visory authority to foster safe and sound practices ernors and Reserve Banks who are responsible for, and to promote financial stability. (See box 2 for and knowledgeable about, supervisory issues for more information about the Board’s supervisory FMUs. The FMU-SC’s primary objective is to pro- approach for insurance firms.) vide senior level oversight, consistency, and direction to the Federal Reserve’s supervisory process for International Activities FMUs. The FMU-SC coordinates with the LISCC The Federal Reserve supervises the foreign branches on issues related to the roles of LISCC firms in and overseas investments of member banks, Edge FMUs; the payment, clearing, and settlement activi- Act and agreement corporations, and BHCs (includties of LISCC firms; and the FMU activities and ing the investments by BHCs in export trading comimplications for financial institutions in the LISCC panies). In addition, it supervises the activities that portfolio. foreign banking organizations conduct through enti- In an effort to promote greater financial market stability and mitigate systemic risk, the Board works 8 In March 2016, the U.S. District Court in Washington, D.C., closely with the Securities and Exchange Commission rescinded the FSOC’s designation of MetLife as a systemically important firm subject to Federal Reserve supervision.The effect (SEC) and the Commodity Futures Trading Comof the court’s action is that MetLife is no longer subject to mission (CFTC), both of which also have supervisory supervision by the Federal Reserve.

54 102nd Annual Report | 2015 ties in the United States, including branches, agen- system. As of year-end 2015, a total of 154 foreign cies, representative offices, and subsidiaries. banks from 49 countries operated 176 state-licensed branches and agencies, of which 6 were insured by the Foreign operations of U.S. banking organizations. In Federal Deposit Insurance Corporation (FDIC), and supervising the international operations of state mem- 49 OCC-licensed branches and agencies, of which 4 ber banks, Edge Act and agreement corporations, and were insured by the FDIC. These foreign banks also BHCs, the Federal Reserve generally conducts its owned 9 Edge Act and agreement corporations and 1 examinations or inspections at the U.S. head offices of commercial lending company. In addition, they held a these organizations, where the ultimate responsibility controlling interest in 46 U.S. commercial banks. Altofor the foreign offices resides. Examiners also visit the gether, the U.S. offices of these foreign banks conoverseas offices of U.S. banking organizations to trolled approximately 20 percent of U.S. commercial obtain financial and operating information and, in banking assets. These 154 foreign banks also operated some instances, to test their adherence to safe and 91 representative offices; an additional 41 foreign sound banking practices and compliance with rules banks operated in the United States through a repreand regulations. Examinations abroad are conducted sentative office. The Federal Reserve—in coordination with the cooperation of the supervisory authorities of with appropriate state regulatory authorities—examthe countries in which they take place; for national ines state-licensed, non-FDIC-insured branches and banks, the examinations are coordinated with agencies of foreign banks on-site at least once every the OCC. 18 months.9 In most cases, on-site examinations are conducted at least once every 12 months, but the At the end of 2015, a total of 35 member banks were period may be extended to 18 months if the branch or operating 429 branches in foreign countries and over- agency meets certain criteria. As part of the superviseas areas of the United States; 19 national banks were sory process, a review of the financial and operational operating 377 of these branches, and 16 state member profile of each organization is conducted to assess the banks were operating the remaining 52. In addition, 8 organization’s ability to support its U.S. operations nonmember banks were operating 15 branches in for- and to determine what risks, if any, the organization eign countries and overseas areas of the United States. poses to the banking system through its U.S. operations. The Federal Reserve conducted or participated Edge Act and agreement corporations. Edge Act corpo- with state and federal regulatory authorities in 452 rations are international banking organizations char- examinations of foreign banks in 2015. tered by the Board to provide all segments of the U.S. economy with a means of financing international busi- Compliance with Regulatory Requirements ness, especially exports. Agreement corporations are The Federal Reserve examines institutions for comsimilar organizations, state or federally chartered, that pliance with a broad range of legal requirements, enter into agreements with the Board to refrain from including anti-money-laundering (AML) and conexercising any power that is not permissible for an sumer protection laws and regulations, and other Edge Act corporation. Sections 25 and 25A of the laws pertaining to certain banking and financial Federal Reserve Act grant Edge Act and agreement activities. Most compliance supervision is conducted corporations permission to engage in international under the oversight of the Board’s Division of Bankbanking and foreign financial transactions. These cor- ing Supervision and Regulation (BS&R), but conporations, most of which are subsidiaries of member sumer compliance supervision is conducted under the banks, may (1) conduct a deposit and loan business in oversight of the Division of Consumer and Commustates other than that of the parent, provided that the nity Affairs (DCCA).10 The two divisions coordinate business is strictly related to international transactions their efforts with each other and also with the and (2) make foreign investments that are broader than Board’s Legal Division to ensure consistent and comthose permissible for member banks. prehensive Federal Reserve supervision for compliance with legal requirements. At year-end 2015, out of 41 banking organizations chartered as Edge Act or agreement corporations, 3 operated 7 Edge Act and agreement branches. These corporations are examined annually. 9 The OCC examines federally licensed branches and agencies, and the FDIC examines state-licensed FDIC-insured branches in coordination with the appropriate state regulatory authority. U.S. activities of foreign banks. Foreign banks continue 10 For a detailed discussion of consumer compliance supervision, to be significant participants in the U.S. banking refer to section 5, “Consumer and Community Affairs.”

Supervision and Regulation 55 Anti-Money-Laundering Examinations During 2015, the Federal Reserve contributed to The Treasury regulations implementing the Bank updates to the FFIEC Information Technology Secrecy Act (BSA) generally require banks and other Examination Handbook (IT Handbook), which protypes of financial institutions to file certain reports vides guidance to examiners, financial institutions, and maintain certain records that are useful in crimi- and technology service providers. The Management nal, tax, or regulatory proceedings. The BSA and Booklet was substantially revised to reflect the separate Board regulations require banking organiza- importance of incorporating technology operations tions supervised by the Board to file reports on suspi- management into an institution’s enterprise risk cious activity related to possible violations of federal management program. The updated booklet law, including money laundering, terrorism financ- addresses how changes in technology could introduce ing, and other financial crimes. In addition, BSA and new sources of risk to the institution and emphasizes Board regulations require that banks develop written how IT risk management is an essential component BSA compliance programs and that the programs be of effective governance and operational risk formally approved by bank boards of directors. The management. Federal Reserve is responsible for examining institutions for compliance with applicable AML laws and In addition, the Business Continuity Planning Bookregulations and conducts such examinations in accor- let was updated with Appendix J, “Strengthening the dance with the Federal Financial Institutions Exami- Resilience of Outsourced Technology Services,” to nation Council’s (FFIEC) Bank Secrecy Act/Anti- explain the components of an effective third-party Money Laundering Examination Manual.11 management program to identify, measure, monitor, and control the risks associated with outsourcing. Specialized Examinations The appendix highlights the importance of business continuity planning at technology service providers The Federal Reserve conducts specialized examinathat perform or support critical operations for finantions of supervised financial institutions in the areas cial institutions. of information technology, fiduciary activities, transfer agent activities, and government and municipal Fiduciary Activities securities dealing and brokering. The Federal Reserve The Federal Reserve has supervisory responsibility also conducts specialized examinations of certain for state member banks and state member nondenonbank entities that extend credit subject to the pository trust companies, which hold assets in vari- Board’s margin regulations. ous fiduciary and custodial capacities. On-site exami- Information Technology Activities nations of fiduciary and custodial activities are riskfocused and entail the review of an organization’s In recognition of the importance of information compliance with laws, regulations, and general fidutechnology to safe and sound operations in the financiary principles, including effective management of cial industry, the Federal Reserve reviews the inforconflicts of interest; management of legal, operamation technology activities of supervised financial tional, and reputational risk exposures; and audit institutions, as well as certain service providers that and control procedures. In 2015, Federal Reserve provide information technology services to these examiners conducted 103 fiduciary examinations, organizations. All safety-and-soundness examinaexcluding transfer agent examinations, of state memtions conducted by the Federal Reserve include a ber banks. risk-focused review of information technology riskmanagement activities. During 2015, the Federal Transfer Agents Reserve continued as the lead supervisory agency for As directed by the Securities Exchange Act of 1934, 6 of the 16 large, multiregional data processing serthe Federal Reserve conducts specialized examinavicers recognized on an interagency basis. tions of those state member banks and BHCs that are registered with the Board as transfer agents. Among other things, transfer agents countersign and 11 The FFIEC is an interagency body of financial regulatory agen- monitor the issuance of securities, register the transcies established to prescribe uniform principles, standards, and fer of securities, and exchange or convert securities. report forms and to promote uniformity in the supervision of financial institutions. The council has six voting members: the On-site examinations focus on the effectiveness of an Board of Governors of the Federal Reserve System, the FDIC, organization’s operations and its compliance with the National Credit Union Administration, the OCC, the Conrelevant securities regulations. During 2015, the Fedsumer Financial Protection Bureau, and the chair of the State Liaison Committee. eral Reserve conducted transfer agent examinations

56 102nd Annual Report | 2015 at nine state member banks that were registered as ments at a select group of large financial institutions transfer agents. and FMUs. The Federal Reserve also contributed to the FFIEC joint statements on cyber attacks involv- Government and Municipal Securities ing extortion, cyber attacks compromising creden- Dealers and Brokers tials, and destructive malware. These statements and The Federal Reserve is responsible for examining other resources are available on the FFIEC cybersestate member banks and foreign banks for compli- curity awareness web page, which is a central reposiance with the Government Securities Act of 1986 tory for FFIEC-related materials on cybersecurity and with the Treasury regulations governing dealing (www.ffiec.gov/cybersecurity.htm). and brokering in government securities. Fourteen state member banks and six state branches of foreign The Federal Reserve continued to contribute to interbanks have notified the Board that they are govern- agency groups such as the Financial and Banking ment securities dealers or brokers not exempt from Information Infrastructure Committee, the Cybersethe Treasury’s regulations. During 2015, the Federal curity Forum for Independent and Executive Branch Reserve conducted six examinations of broker–dealer Regulators, and the FFIEC’s Cybersecurity and activities in government securities at these organiza- Critical Infrastructure Working Group (CCIWG) to tions. These examinations are generally conducted share information and collaborate on cyber- and concurrently with the Federal Reserve’s examination critical infrastructure-related issues impacting the of the state member bank or branch. financial services sector. In 2015, the CCIWG released a Cybersecurity Assessment Tool to help The Federal Reserve is also responsible for ensuring institutions identify their risks and determine their that state member banks and BHCs that act as cybersecurity preparedness. The assessment tool promunicipal securities dealers comply with the Securi- vides a repeatable and measurable process for finanties Act Amendments of 1975. Municipal securities cial institutions to measure their cybersecurity predealers are examined, pursuant to the Municipal paredness over time. Securities Rulemaking Board’s rule G-16, at least once every two calendar years. Four entities super- The Federal Reserve also collaborated with the U.S. vised by the Federal Reserve that dealt in municipal Treasury to plan and execute several financial sersecurities were examined during 2015. vices sector-wide tabletop exercises in 2015. The exercises focused on strategic, operational, and tactical Securities Credit Lenders considerations that tested both government and pri- Under the Securities Exchange Act of 1934, the vate sector processes and capabilities for addressing Board is responsible for regulating credit in certain cyber incidents across the financial services sector. In transactions involving the purchasing or carrying of addition, the Board coordinated with the U.S. Treassecurities. As part of its general examination pro- ury and the Bank of England to plan the first intergram, the Federal Reserve examines the banks under national financial services sector cybersecurity tableits jurisdiction for compliance with Board Regula- top exercise. The Resilient Shield exercise was a tion U (Credit by Banks and Persons other than Bro- collaborative public–private initiative with an interkers or Dealers for the Purpose of Purchasing or national dimension, focused on responding to a sig- Carrying Margin Stock). In addition, the Federal nificant cyber-incident impacting the financial ser- Reserve maintains a registry of persons other than vices sectors in both the United States and the banks, brokers, and dealers who extend credit subject United Kingdom (U.K.). The exercise focused on to Regulation U. The Federal Reserve may conduct enhancing processes and mechanisms for maintainspecialized examinations of these lenders if they are ing a shared awareness of cybersecurity threats not already subject to supervision by the Farm Credit between the U.S. and U.K. governments and further- Administration (FCA) or the National Credit Union ing a mutual understanding of each country’s cyber- Administration (NCUA). security information-sharing processes and incident response coordination structures. Cybersecurity and Critical Infrastructure The Federal Reserve is actively engaged in raising The Federal Reserve also announced an expansion of financial institution awareness of supervisory expec- its Emergency Communications System (ECS) to tations relative to cybersecurity risk assessment and include contact information of employees at Federal risk mitigation. In 2015, Federal Reserve examiners Reserve-supervised financial institutions who are continued to conduct targeted cybersecurity assess- capable of acting upon cyber emergencies. The Fed-

Supervision and Regulation 57 eral Reserve previously issued guidance to highlight assigned similar supervisory ratings. To supplement the supervisory practices that the Federal Reserve the SR-SABR screening, the Federal Reserve also can employ when financial institutions and their cus- monitors various market data, including equity tomers are affected by a major disaster or emergency. prices, debt spreads, agency ratings, and measures of The Federal Reserve enhanced its communications expected default frequency, to gauge market percepcapabilities by expanding the ECS contact informa- tions of the risk in banking organizations. In addition in response to heightened efforts by cyber crimi- tion, the Federal Reserve prepares quarterly Bank nals to penetrate financial institutions. Holding Company Performance Reports (BHCPRs) for use in monitoring and inspecting supervised Enforcement Actions banking organizations. The BHCPRs, which are The Federal Reserve has enforcement authority over compiled from data provided by large BHCs in quarthe financial institutions it supervises and their affili- terly regulatory reports (FR Y-9C and FR Y-9LP), ated parties. Enforcement actions may be taken to contain, for individual companies, financial statistics address unsafe and unsound practices or violations and comparisons with peer companies. BHCPRs are of any law or regulation. Formal enforcement actions made available to the public on the National Inforinclude cease and desist orders, written agreements, mation Center (NIC) website, which can be accessed prompt corrective action directives, removal and pro- at www.ffiec.gov. hibition orders, and civil money penalties. In 2015, the Federal Reserve completed 51 formal enforce- Federal Reserve analysts use Performance Report ment actions. Civil money penalties totaling Information and Surveillance Monitoring (PRISM), $2,197,656,265 were assessed. As directed by statute, a querying tool, to access and display financial, surall civil money penalties are remitted to either the veillance, and examination data. In the analytical Treasury or the Federal Emergency Management module, users can customize the presentation of Agency. Enforcement orders and prompt corrective institutional financial information drawn from Call action directives, which are issued by the Board, and Reports, Uniform Bank Performance Reports, FR written agreements, which are executed by the Y-9 statements, BHCPRs, and other regulatory Reserve Banks, are made public and are posted on reports. In the surveillance module, users can generthe Board’s website (www.federalreserve.gov/apps/ ate reports summarizing the results of surveillance enforcementactions/). screening for banks and BHCs. During 2015, two major and two minor upgrades to the web-based In 2015, the Reserve Banks completed 90 informal PRISM application were completed to enhance the enforcement actions. Informal enforcement actions user’s experience and provide the latest technology. include memoranda of understanding (MOU), commitment letters, and board of directors’ resolutions. The Federal Reserve works through the FFIEC Task Force on Surveillance Systems to coordinate surveil- Surveillance and Off-Site Monitoring lance activities with the other federal banking The Federal Reserve uses automated screening sys- agencies. tems to monitor the financial condition and performance of state member banks and BHCs in the Training and Technical Assistance period between on-site examinations. Such monitor- The Federal Reserve provides training and technical ing and analysis helps direct examination resources to assistance to foreign supervisors and minority-owned institutions that have higher risk profiles. Screening depository institutions. systems also assist in the planning of examinations by identifying companies that are engaging in new or International Training and Technical Assistance complex activities. In 2015, the Federal Reserve continued to provide technical assistance on bank supervisory matters to The primary off-site monitoring tool used by the foreign central banks and supervisory authorities. Federal Reserve is the Supervision and Regula- Technical assistance involves visits by Federal tion Statistical Assessment of Bank Risk model (SR- Reserve staff members to foreign authorities as well SABR). Drawing mainly on the financial data that as consultations with foreign supervisors who visit banks report on their Reports of Condition and the Board of Governors or the Reserve Banks. Income (Call Reports), SR-SABR uses econometric techniques to identify banks that report financial The Federal Reserve offered a number of training characteristics weaker than those of other banks courses exclusively for foreign supervisory authori-

58 102nd Annual Report | 2015 ties, both in the United States and in many foreign supervisory guidance, identifying additional jurisdictions. Federal Reserve staff also took part in resources, and fostering mutually beneficial partnertechnical assistance and training assignments led by ships between MDIs and community organizations. the International Monetary Fund, the World Bank, As of year-end 2015, the Federal Reserve’s MDI and the Financial Stability Institute. The Federal portfolio included 18 state member banks. Reserve also contributed to the regional training provision under the Asia Pacific Economic Cooperation Throughout 2015, the Federal Reserve System con- Financial Regulator’s Training Initiative. tinued to support MDIs through the following activities: Training partners that collaborated with the Federal • co-organized the bi-annual 2015 Interagency Reserve during 2015 to organize regional training Minority Depository Institutions and Community programs also included The South East Asian Cen- Development Financial Institutions (CDFI) Bank tral Banks Research and Training Centre, The Carib- Conference. PFP staff at the Board of Governors bean Group of Bank Supervisors, Banque de France, and Federal Reserve Banks co-hosted this meeting the Central Bank of the United Arab Emirates, the with staff from the OCC and FDIC. The theme Union of Arab Banks, and Banco de Portugal. was “Celebrating 150 Years of MDIs: Changes, Challenges, and Opportunities,” with over 200 The Federal Reserve is an associate member of the people in attendance; Association of Supervisors of Banks of the Americas (ASBA), an umbrella group of bank supervisors • formalized a partnership between the Board’s from countries in the Western Hemisphere. The Fed- DCCA and BS&R divisions to share management eral Reserve contributes significantly to ASBA’s of the PFP program and diversify the resources organizational management and to its training and and programing available to MDIs in 2016; technical assistance activities. The group, headquar- • participated in the 88th annual National Bankers tered in Mexico, Association (NBA) convention; • promotes communication and cooperation among • provided technical assistance to MDIs on a wide bank supervisors in the region; variety of topics, including topics focused on • coordinates training programs throughout the improving regulatory ratings, navigating the regularegion with the help of national banking supervi- tory applications process, the Community Reinsors and international agencies; and vestment Act, and refining capital-planning practices; • aims to help members develop banking laws, regulations, and supervisory practices that conform to • created formal procedures related to monitoring international best practices. MDI-related proposals and continuing to offer prereview of MDI applications to support early identi- Efforts to Support Minority-Owned fication and resolution of issues that could create Depository Institutions delays in the review process; The Federal Reserve System implements its responsi- • in conjunction with DCCA, conducted joint outbilities under section 367 of the Dodd-Frank Act prireach efforts to educate MDIs on community reinmarily through its Partnership for Progress (PFP) vestment and supervisory topics; and program. Established in 2008, this program promotes the viability of minority depository institutions • participated in an interagency task force to con- (MDIs) by facilitating activities designed to sider and address supervisory challenges facing strengthen their business strategies, maximize their MDIs. resources, and increase their awareness and understanding of regulatory topics. In addition, the Fed- Throughout 2015, PFP representatives hosted and eral Reserve continues to maintain the PFP website, participated in numerous banking workshops and which supports MDIs by providing them with techni- seminars aimed at promoting and preserving MDIs, cal information and links to useful resources (www including the NBA’s Legislative and Regulatory Con- .fedpartnership.gov). Representatives from each of ference. Further, program representatives continued the 12 Reserve Bank districts, along with staff from to collaborate with community leaders, trade groups, the Board of Governors, continue to offer technical the CDFI Fund, and other organizations to seek supassistance tailored to MDIs by providing targeted port for MDIs.

Supervision and Regulation 59 Supervisory Policy certain discretionary bonus payments. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2015-08- The Federal Reserve’s supervisory policy function, 14/pdf/2015-18702.pdf. carried out by the Board, is responsible for develop- • In July, the Board issued a final order establishing ing regulations and guidance for financial institutions enhanced prudential standards for GECC, a nonunder the Federal Reserve’s supervision, as well as bank financial company designated by the FSOC guidance for examiners. The Board, often in concert for supervision by the Board (also see “Designated with the OCC and the FDIC (together, the federal Nonfinancial Companies” earlier in this section). banking agencies), issues rulemakings, public SR let- Because of the substantial similarity of GECC’s ters, and other policy statements and guidance in current activities and risk profile to that of a large order to carry out its supervisory policies. Federal BHC, the enhanced prudential standards are simi- Reserve staff also take part in supervisory and regular to those applied to large BHCs. To take into latory forums, provide support for the work of the account General Electric’s announced timeline to FFIEC, and participate in international policymaksubstantially shrink GECC’s systemic footprint ing forums, including the Basel Committee on Bankand retain only those business lines that support ing Supervision (BCBS), the Financial Stability General Electric’s core industrial businesses, the Board, the Joint Forum, and the International Assofinal order provides for application of enhanced ciation of Insurance Supervisors (IAIS).12 prudential standards in two phases. The final order is available at https://federalregister.gov/a/2015- Consistent with the Federal Reserve’s risk-focused 18124. approach to supervision and when permitted by law, the Federal Reserve tailors supervisory rules and • In October, the Board proposed a rule that would guidance in a way that applies the most stringent strengthen the ability of the largest domestic and requirements to the largest, most complex banking foreign banks operating in the United States to be organizations that pose the greatest risk to the finan- resolved without extraordinary government supcial system. port or taxpayer assistance. The proposed rule would apply to firms identified by the Board as Enhanced Prudential Standards G-SIBs and to U.S. operations of foreign G-SIBs, The Board is responsible for issuing a number of and would require these firms to meet a new longrules and guidance statements under the Dodd- term debt requirement and a new TLAC require- Frank Act, sometimes in conjunction with other ment. The proposed requirements will bolster agencies. Listed below are the initiatives undertaken financial stability by improving the ability of bankby the Board in 2015. ing organizations covered by the rule to withstand financial stress and failure without imposing losses • In July, the Board issued a final rule requiring the on taxpayers. In addition, the proposed rule would largest, most systemically important U.S. BHCs to require the parent holding company of a U.S. further strengthen their capital positions. Under the G-SIB to avoid entering into certain financial rule, a firm identified as a global systemically imporarrangements that would create obstacles to an tant bank holding company is required to hold addiorderly resolution. The proposed rule is available at tional capital to increase its resiliency in light of the www.gpo.gov/fdsys/pkg/FR-2015-11-30/pdf/2015greater threat it poses to U.S. financial stability. The 29740.pdf. final rule establishes the method for identifying whether a U.S. BHC is a G-SIB, and establishes a • In November, the Board issued a final rule modifysurcharge requirement that is calibrated to each ing its capital plan and stress testing rules that will firm’s overall systemic risk. The final rule builds on take effect for the 2016 capital plan and stress testa G-SIB capital surcharge framework agreed to by ing cycle. Specifically, the final rule makes targeted the BCBS and is augmented to address the risk aris- amendments that delay and/or modify the applicaing from the overreliance on short-term wholesale tion of certain rules to BHCs and SLHCs based on funding. The G-SIB surcharge will generally be the amount of total consolidated assets held by higher than under the BCBS approach. Failure to such firms. The final rule is available at www.gpo maintain the capital surcharge will subject the .gov/fdsys/pkg/FR-2015-12-02/pdf/FR-2015-12-02 G-SIB to restrictions on capital distributions and .pdf. • Additionally in 2015, the enhanced prudential stan- 12 See box 2 for more information on the Board’s participation in the IAIS. dards rule (Regulation YY) and the liquidity cover-

60 102nd Annual Report | 2015 age ratio rule (Regulation WW) became effective available at www.gpo.gov/fdsys/pkg/FR-2015-04for certain large U.S. banking organizations. The 15/pdf/2015-08513.pdf. complementary liquidity standards required by • In June, the federal banking agencies issued a final these regulations build upon the Board’s overall rule modifying the capital rules applicable to supervisory framework for liquidity adequacy and advanced approaches banking organizations. The liquidity risk supervision. The enhanced prudential revisions correct technical and typographical errors standards rule ensures that BHCs with total conand clarify certain requirements of the advanced solidated assets of $50 billion or more maintain approaches rule based on observations made by the robust liquidity risk management practices, includagencies during the parallel run review, while simuling liquidity stress testing for determining the taneously enhancing the consistency of the adequacy of their liquidity resources. The liquidity advanced approaches rule with relevant internacoverage ratio rule establishes, for the first time, a tional standards. The final rule is available at www quantitative minimum liquidity requirement for .gpo.gov/fdsys/pkg/FR-2015-07-15/pdf/2015-15748 large U.S. banking organizations that will be fully .pdf. phased in by January 2017. The rule requires the largest and most internationally active U.S. bank- • In November, the federal banking agencies issued a ing organizations to maintain an amount of unen- supervisory guidance statement, SR letter 15-13, to cumbered high-quality liquid assets that is no less clarify the interaction between the regulatory capithan the expected net cash outflows of the organi- tal rule and the Volcker rule with respect to the zation over a 30-day period of liquidity stress. appropriate capital treatment for investments in Requiring these banking organizations to hold certain private equity funds and hedge funds (covhigh-quality liquid assets that they can use to meet ered funds). Specifically, the guidance clarifies their short-term obligations in a time of stress will supervisory expectations on how a banking organihelp strengthen the resilience of these organiza- zation’s regulatory capital deductions of investtions and the broader U.S. financial system. ments in covered funds made pursuant to the Volcker rule relate to deductions of these invest- Other Capital Adequacy Standards ments pursuant to the regulatory capital rule. The In 2015, the Board issued several rulemakings and supervisory guidance is available at www guidance documents related to capital adequacy, .federalreserve.gov/bankinforeg/srletters/sr1513 including joint rulemakings with the other federal .htm. banking agencies that would implement certain revi- • In December, the Board issued a final rule providsions to the Basel capital framework. ing information regarding the application of the • In March and September, the Board and the OCC Board’s regulatory capital framework to depository permitted certain banking organizations to exit institution holding companies that have nonfrom the parallel run stage of the agencies’ traditional capital structures (such as depository advanced approaches risk-based capital frame- institution holding companies that are not orgawork, and henceforth, to use the advanced nized as traditional stock corporations). The final approaches rule to determine their risk-based capi- rule is available at www.gpo.gov/fdsys/pkg/FRtal requirements. 2015-12-09/pdf/2015-31013.pdf. • In April, the Board published a final rule to expand • In December, the Board proposed a policy statethe applicability of its Small Bank Holding Com- ment detailing the framework for setting the counpany Policy Statement and also apply it to certain tercyclical capital buffer (CCyB), which would SLHCs. The final rule raises the asset threshold of apply only to banking organizations subject to the the policy statement from $500 million to $1 billion advanced approaches rule. The proposed policy in total consolidated assets and also expands the statement provides background on the range of application of the policy statement to certain factors the Board could take into account in setting SLHCs. Holding companies that meet the qualifi- the buffer. Once fully phased in, the CCyB could cation requirements of the policy statement, range from 0 percent of risk-weighted assets in including those pertaining to nonbanking activities, times of moderate financial-system vulnerabilities off-balance sheet activities, and publicly registered to a maximum of 2.5 percent when vulnerabilities debt and equity, are excluded from consolidated are significantly elevated. Banks that fail to meet regulatory capital requirements. The final rule is the CCyB requirement would face restrictions on

Supervision and Regulation 61 capital distributions and certain discretionary • Fundamental review of the trading book – interim bonus payments. The proposed policy statement is impact analysis (issued in November and available available at www.gpo.gov/fdsys/pkg/FR-2016-02- at www.bis.org/bcbs/publ/d346.htm). 03/pdf/2016-01934.pdf. Consultative papers: International Coordination on • Interest rate risk in the banking book – consultative Supervisory Policies document (issued in June and available at www.bis As a member of the BCBS, the Federal Reserve .org/bcbs/publ/d319.htm). actively participates in efforts to advance sound • Review of the Credit Valuation Adjustment (CVA) supervisory policies for internationally active bankrisk framework – consultative document (issued in ing organizations and to enhance the strength and July and available at www.bis.org/bcbs/publ/d325 stability of the international banking system. .htm). Basel Committee on Banking Supervision • Haircut floors for non-centrally cleared securities During 2015, the Federal Reserve participated in financing transactions – consultative document ongoing international initiatives to track the progress (issued in November and available at www.bis.org/ of implementation of the BCBS framework in membcbs/publ/d340.htm). ber countries. • TLAC Holdings – consultative document (issued in The Federal Reserve contributed to supervisory November and available at www.bis.org/bcbs/publ/ policy recommendations, reports, and papers issued d342.htm). for consultative purposes or finalized by the BCBS • Capital treatment for “simple, transparent and comthat are designed to improve the supervision of parable” securitisations – consultative document banking organizations’ practices and to address spe- (issued in November and available at www.bis.org/ cific issues that emerged during the financial crisis. bcbs/publ/d343.htm). The list below includes key final and consultative papers issued in 2015. • Revisions to the Standardised Approach for credit risk – second consultative document (issued in Final papers: December and available at www.bis.org/bcbs/publ/ d347.htm). • Revised Pillar 3 disclosure requirements (issued in January and available at www.bis.org/bcbs/publ/ • Identification and measurement of step-in risk – cond309.htm). sultative document (issued in December and available at www.bis.org/bcbs/publ/d349.htm). • Margin requirements for non-centrally cleared derivatives (issued in March and available at www Financial Stability Board .bis.org/bcbs/publ/d317.htm). In 2015, the Federal Reserve continued its active par- • Net Stable Funding Ratio disclosure standards ticipation in the activities of the Financial Stability (issued in June and available at www.bis.org/bcbs/ Board, an international group that helps coordinate publ/d324.htm). the work of national financial authorities and international standard-setting bodies, and develops and • Frequently asked questions on the Basel III leverage promotes the implementation of financial sector poliratio framework (issued in July and available at cies in the interest of financial stability. www.bis.org/bcbs/publ/d327.htm). • Criteria for identifying simple, transparent and com- For more information on the work of the Financial parable securitisations (issued in July and available Stability Board, refer to section 3, “Financial at www.bis.org/bcbs/publ/d332.htm). Stability.” • Basel III: The standardised approach for measuring Joint Forum counterparty credit risk exposures: Frequently asked In 2015, the Federal Reserve continued its participaquestions (issued in August and available at www tion in the Joint Forum—an international group of .bis.org/bcbs/publ/d333.htm). supervisors of the banking, securities, and insurance • Frequently asked questions on the Basel III Counter- industries established to address various cross-sector cyclical Capital Buffer (issued in October and avail- issues, including the regulation of financial conglomable at www.bis.org/bcbs/publ/d339.htm). erates. The Joint Forum operates under the aegis of

62 102nd Annual Report | 2015 the BCBS, the International Organization of Securi- Accounting and Auditing Working Group. These ties Commissions, and the IAIS. One final paper was groups represent their respective organizations at issued by the Joint Forum in 2015: international meetings on accounting, auditing, and disclosure issues affecting global banking and insur- • Developments in credit risk management across secance organizations. Working with international bank tors: current practices and recommendations (issued supervisors, Federal Reserve staff contributed to the in June and available at www.bis.org/bcbs/publ/ development of publications that were issued by the joint38.htm). BCBS, including guidance on accounting for expected credit losses. In collaboration with interna- Accounting Policy tional insurance supervisors, Federal Reserve staff The Federal Reserve supports sound corporate goveralso made contributions to work related to enhancing nance and effective accounting and auditing practices IAIS standards on valuation, disclosures, and expecfor all regulated financial institutions. Accordingly, tations for external audit-related matters. the Federal Reserve’s accounting policy function is responsible for providing expertise in policy develop- In 2015, the Federal Reserve issued supervisory guidment and implementation efforts, both within and ance to financial institutions and supervisory staff on outside the Federal Reserve System, on issues affectaccounting matters, as appropriate, and participated ing the banking and insurance industries in the areas in a number of supervisory-related activities. For of accounting, auditing, internal controls over finanexample, Federal Reserve staff cial reporting, financial disclosure, and supervisory financial reporting. • developed and participated in a number of domestic and international supervisory training programs Federal Reserve staff regularly consult with key conand sessions to educate supervisors and bankers stituents in the accounting and auditing professions, about new and emerging accounting and reporting including domestic and international standardtopics affecting financial institutions and setters, accounting firms, accounting and financial sector trade groups, and other financial sector regula- • supported the efforts of the Reserve Banks in tors to facilitate the Board’s understanding of financial institution supervisory activities through domestic and international practices; proposed participation in examinations and provision of accounting, auditing, and regulatory standards; and expert guidance on specific questions related to the interactions between accounting standards and financial accounting, auditing, reporting, and regulatory reform efforts. The Federal Reserve also disclosures. participates in various accounting, auditing, and regulatory forums in order to both formulate and Federal Reserve System staff also provided their communicate its views. accounting and business expertise through participation in other supervisory activities during the past During 2015, Federal Reserve staff addressed numer- year. These activities included supporting Doddous issues including accounting for transfers of Frank Act initiatives related to stress testing of banks financial instruments, troubled debt restructurings, as well as various Basel capital-related issues. accounting alternatives for private companies, financial instrument accounting and reporting, consolida- Credit-Risk Management tion of structured entities, securitizations, securities The Federal Reserve works with the other federal financing transactions, and external and internal banking agencies to develop guidance on the manaudit processes. agement of credit risk; to coordinate the assessment of regulated institutions’ credit-risk management The Federal Reserve shared its views with accounting practices; and to ensure that institutions properly and auditing standard-setters through informal disidentify, measure, and manage credit risk. cussions and public comment letters. A comment letter on the Financial Accounting Foundation’s proposal related to revisions to the operating procedures Shared National Credit Program of the Private Company Council was issued during In November, the Federal Reserve and the other the past year. banking agencies released summary results of the 2015 annual review of the Shared National Credit Federal Reserve staff also participated in meetings of (SNC) program, a long-standing program to further the BCBS Accounting Experts Group and the IAIS sound credit risk management, gain insight into

Supervision and Regulation 63 credit trends, and promote an efficient and consistent past year continued to exhibit structures that were review and classification of shared national credits. cited as weak by examiners. The persistent structural deficiencies found in loan underwriting by the agen- A SNC is any loan or formal loan commitment—and cies warrant continued attention. any asset, such as other real estate, stocks, notes, bonds, and debentures taken as debts previously con- The review also noted an increase in weakness among tracted—extended to borrowers by a supervised insti- credits related to oil and gas exploration, production, tution, its subsidiaries, and affiliates, which has the and energy services following the decline in energy following characteristics: an original loan amount prices since mid-2014. Aggressive acquisition and that aggregates to $20 million or more and either exploration strategies from 2010 through 2014 led to (1) is shared by three or more unaffiliated supervised increases in leverage, making many borrowers more institutions under a formal lending agreement, or (2) a susceptible to a protracted decline in commodity portion of which is sold to two or more unaffiliated prices. Oil and gas commitments to the exploration supervised institutions with the purchasing institu- and production sector and the services sector totaled tions assuming their pro rata share of the credit risk. $276.5 billion, or 7.1 percent, of the SNC portfolio. Classified commitments among oil and gas borrow- The 2015 SNC review was prepared in the second ers totaled $34.2 billion, or 15.0 percent, of total clasquarter of 2015 using data as of December 31, 2014. sified commitments, compared with $6.9 billion, or The 2015 SNC portfolio totaled $3.9 trillion, with 3.6 percent, in 2014. Classified commitments are 10,675 credit facilities to approximately 6,600 defined as substandard, doubtful, or loss. borrowers. Refinancing risk decreased in the SNC portfolio as The SNC examination found that the volume of 22.3 percent of SNC commitments will mature in criticized assets increased 9.4 percent to $372.6 bil- 2016 and 2017, compared with 25.0 percent for the lion. As a percentage of total commitments, the over- same period in the 2014 SNC Review. During 2014 all criticized asset rate remained elevated at 9.5 per- and into 2015, syndicators continued to refinance cent, and is historically high when compared to SNC and modify loan agreements to extend maturities. portfolios at this stage of the economic cycle. These transactions had the effect of relieving nearterm refinancing risk, but, in many instances, did not Leveraged lending, which accounts for approximately improve borrowers’ ability to repay their debts in the one quarter of the SNC portfolio, remained a focus longer term. of the agencies as they continue to evaluate the safety and soundness of bank underwriting and risk- For more information on the 2015 SNC review, visit management practices relative to expectations articu- the Board’s website at www.federalreserve.gov/ lated in the 2013 Interagency Guidance on Leveraged newsevents/press/bcreg/20151105a.htm. Lending (guidance) and subsequent Frequently Asked Questions documents. The review found that Compliance Risk Management risk in the overall SNC portfolio continues to be cen- The Federal Reserve works with international and tered in the leveraged portfolio. Leveraged loans domestic supervisors to develop guidance that promake up 82.8 percent of all SNC special mention motes compliance with Bank Secrecy Act and anticommitments, 65.2 percent of all substandard loans, money-laundering compliance (BSA/AML) and 65.1 percent of all doubtful loans, and 59.3 percent counter-terrorism laws. of all nonaccrual loans. The prevalence of leveraged lending is the primary contributor to the overall SNC special mention and classified rate of 9.5 percent. Bank Secrecy Act and Anti-Money-Laundering Compliance This year’s review found that banks are making prog- In 2015, the Federal Reserve continued to actively ress in aligning their underwriting practices with the promote the development and maintenance of effecguidance as the incidence of non-pass loan origina- tive BSA/AML compliance risk-management protions to new borrowers (to either hold or distribute) grams, including developing supervisory strategies fell in the second half of 2014. However, the review and providing guidance to the industry on trends in highlighted continuing gaps between industry prac- BSA/AML compliance. For example, the Federal tices and the expectations for safe and sound bank- Reserve supervisory staff participated in a number of ing. Leveraged transactions originated within the industry conferences to continue to communicate

64 102nd Annual Report | 2015 regulatory expectations and policy interpretations for The Federal Reserve has a long-standing role in the financial institutions. U.S. delegation to the intergovernmental Financial Action Task Force (FATF) and its working groups, The Federal Reserve is a member of the Treasury-led contributing a banking supervisory perspective to BSA Advisory Group, which includes representatives formulation of international standards. The Federal of regulatory agencies, law enforcement, and the Reserve contributed to the guidance issued in Octofinancial services industry and covers all aspects of ber 2015 by FATF to more fully understand effective the BSA. The Federal Reserve also participated in AML supervision and enforcement. Throughout several Treasury-led private/public sector dialogues 2015, the Federal Reserve also assisted in preparation with Mexican, Chinese, U.K., and Gulf State finan- for the 2016 FATF mutual evaluation of the United cial institutions, regulators, and supervisors. These States. The FATF mutual evaluation assesses the U.S. dialogues are designed to promote information shar- AML and counter-terrorist financing framework ing and understanding of issues surrounding corre- against the FATF recommendations and includes a spondent banking relations between U.S. and review of the U.S. legal, law enforcement, and supercountry-specific financial sectors. In addition, the visory structures. Federal Reserve participated in meetings during the year to discuss BSA/AML issues with delegations The Federal Reserve also continues to participate in from China and Mexico regarding managing and committees and subcommittees through the Bank for reporting on AML risk, customer due diligence, and International Settlements. Specifically, the Federal emerging payments. The Federal Reserve also partici- Reserve actively participates in the AML Experts pates in the FFIEC BSA/AML working group, a Group under the BCBS that focuses on AML/ monthly forum for the discussion of pending BSA counter-terrorism financing issues, as well as the policy and regulatory matters. In addition to the Committee on Payments and Market Infrastructures FFIEC agencies, the BSA/AML working group (CPMI). With respect to the AML Experts Group, includes the Financial Crimes Enforcement Network the Federal Reserve contributed to updating and (FinCEN) and, on a quarterly basis, the SEC, the revising a consultative paper on the general guide to CFTC, the Internal Revenue Service, and the Office account opening, originally issued in 2003. Also, the of Foreign Assets Control (OFAC). The chairman- Federal Reserve participated in drafting a consultaship rotates among its members and in 2015, the Fedtive report on Correspondent Banking (Octoeral Reserve assumed the position of Chairman of ber 2015). The report, issued by the CPMI Correthe working group for the next two years. spondent Banking Working Group, made recommendations which could potentially alleviate some of the The FFIEC BSA/AML working group is responsible costs and concerns associated with the reduction of for updating the FFIEC Bank Secrecy Act/Antiforeign correspondent banking services. Money Laundering Examination Manual. The FFIEC developed this manual as part of its ongoing commit- Incentive Compensation ment to provide current and consistent interagency guidance on risk-based policies, procedures, and pro- To foster improved incentive compensation practices cesses for financial institutions to comply with the in the financial industry, the Federal Reserve along BSA and safeguard their operations from money with the other federal banking agencies has adopted laundering and terrorist financing. interagency guidance oriented to the risk-taking incentives created by incentive compensation Throughout 2015, the Federal Reserve and other fed- arrangements.13 The guidance is principles-based, eral banking agencies continued to regularly share recognizing that the methods used to achieve approexamination findings and enforcement proceedings priately risk-sensitive compensation arrangements with FinCEN as well as with OFAC under the inter- likely will differ significantly across and within firms. agency MOUs finalized in 2004 and 2006. Three principles are at the core of the guidance: • Incentive compensation arrangements should bal- International Coordination on Sanctions, Anti-Money-Laundering, and ance risk and financial results in a manner that Counter-Terrorism Financing does not encourage employees to expose their organizations to imprudent risks. The Federal Reserve participates in a number of international coordination initiatives related to sanc- 13 See “Guidance on Sound Incentive Compensation Policies,” tions, money laundering, and terrorism financing. 75 Fed. Reg. 36,395–36,414 (June 25, 2010).

Supervision and Regulation 65 • A banking organization’s risk-management pro- • In October, the federal banking agencies, together cesses and internal controls should reinforce and with the FCA and the FHFA, issued a final rule to support the development and maintenance of bal- establish capital and margin requirements for swap anced incentive compensation arrangements, and dealers, major swap participants, security-based incentive compensation should not hinder risk swap dealers, and major security-based swap parmanagement and controls. ticipants regulated by one of these prudential regulators. Specifically, the margin requirements man- • Banking organizations should have strong and date the collection and posting of initial and variaeffective corporate governance of incentive tion margin for non-cleared swap activity (that is, compensation. not cleared through a clearinghouse), subject to certain exemptions, with the amount of margin Section 956 of the Dodd-Frank Act requires the varying based on the relative riskiness of the nonfinancial regulatory agencies to prohibit incentivecleared swap activity. The requirements are based arrangements which the agencies determine to intended to help ensure the safety and soundness of encourage inappropriate risks by covered institutions. non-cleared swap trading by reducing risk to the The Federal Reserve continues to work with five fedfinancial system, increasing transparency, and proeral agencies (OCC, FDIC, SEC, NCUA, and Fedmoting market integrity. The final rule is available eral Housing Finance Agency (FHFA)) on a Doddat www.gpo.gov/fdsys/pkg/FR-2015-11-30/pdf/ Frank rulemaking on incentive compensation. The 2015-28671.pdf. number of agencies, the complexity of the subject, and scope of firms covered by the potential rulemak- • In December, the federal banking agencies issued a ing (all over $1 billion in assets) have resulted in an supervisory guidance statement, SR letter 15-17, ongoing multiyear effort. Additionally, through our which reminds financial institutions of existing ongoing supervision, the Federal Reserve continues regulatory guidance on prudent risk-management to help improve incentive compensation practices at practices for commercial real estate (CRE) lending the largest firms. activity through economic cycles. Specifically, in light of substantial growth in many CRE assets and lending markets, financial institutions should Other Policymaking Initiatives maintain underwriting discipline and exercise pru- • In February, the federal banking agencies issued a dent risk-management practices as well as develop supervisory guidance statement, SR letter 15-4, risk-management practices commensurate with the which presents an automated tool developed by the level and nature of their CRE concentration risk. agencies to assist financial institutions subject to The guidance is available at www.federalreserve the regulatory capital rule in calculating risk-based .gov/bankinforeg/srletters/sr1517.htm. capital requirements for individual securitization • In December, the Board issued two supervisory exposures. Specifically, institutions that use the guidance statements, SR letter 15-18 and SR letter regulatory capital rule’s Simplified Supervisory 15-19, to explain its supervisory expectations for Formula Approach to calculate risk-based capital capital planning at (1) U.S. BHCs and intermediate requirements for securitization exposures may use holding companies of foreign banking organizathe tool to calculate capital requirements for such tions that are subject to the Federal Reserve’s exposures. The guidance is available at www LISCC framework, or that have total consolidated .federalreserve.gov/bankinforeg/srletters/SR1504 assets of $250 billion or more or consolidated total .htm. on-balance-sheet foreign exposure of $10 billion or • In April, the federal banking agencies issued a more; and (2) U.S. BHCs and intermediate holding supervisory guidance statement, SR letter 15-6, companies of foreign banking organizations that which responds to frequently asked questions from have total consolidated assets of at least $50 billion regulated institutions about the agencies’ regula- but less than $250 billion, have consolidated total tory capital rule. The guidance provides responses on-balance sheet foreign exposures of less than to questions on a variety of topics, including, but $10 billion, and are not otherwise subject to the not limited to, the definition of capital, high- Board’s LISCC framework. The Board has differvolatility commercial real estate exposures, and ent expectations for sound capital planning and credit valuation adjustments. The guidance is avail- capital adequacy depending on the size, scope of able at www.federalreserve.gov/bankinforeg/ operations, activities, and systemic importance of a srletters/sr1506.htm. firm. Accordingly, the guidance provides the

66 102nd Annual Report | 2015 Board’s core capital planning expectations for the solidated financial reporting requirements (FR respective firms. SR 15-18 is available at www Y-9C) and parent-only statements (FR Y-9LP) for .federalreserve.gov/bankinforeg/srletters/sr1518 approximately 470 of these institutions, and .htm and SR 15-19 is available at www instead required semiannual parent-only financial .federalreserve.gov/bankinforeg/srletters/sr1519 statements (FR Y-9SP). The Board also eliminated .htm. all FR Y-9SP regulatory capital reporting items for approximately 240 SLHCs with less than $500 mil- Regulatory Reports lion in total consolidated assets. The Board made The Federal Reserve’s risk, surveillance, and data these changes effective March 31, 2015, for the function is responsible for developing, coordinating, FR Y-9C and FR Y-9LP, and June 30, 2015, for and implementing regulatory reporting requirements the FR Y-9SP. Also, the FR Y-9C was revised, for various financial reporting forms filed by domes- effective March 31, 2015, to implement changes tic and foreign financial institutions subject to Fed- related to the regulatory capital rules. eral Reserve supervision. Federal Reserve staff mem- • FR 2052a—to provide additional data items to bers interact with other federal agencies and relevant facilitate a more sophisticated approach to monistate supervisors, including foreign bank supervisors toring liquidity risk. Additionally, the revisions to as needed, to recommend and implement appropriate the FR 2052a allow the Federal Reserve to monitor and timely revisions to the reporting forms and the compliance with the liquidity coverage ratio rule. attendant instructions. The revisions tailor the FR 2052a data items and frequency of reporting to the size and complexity Holding Company Regulatory Reports of the firms. Less data and maturity granularity are The Federal Reserve requires that U.S. holding comrequired for smaller, less-complex firms. Also, the panies (HCs) periodically submit reports that provide Federal Reserve revised the FR 2052b reporting information about their financial condition and panel by modifying the firms that are required to structure.14 This information is essential to formulatrespond and the applicable asset threshold, as well ing and conducting bank regulation and supervision. as eliminating monthly reporting. It is also used in responding to requests by Congress and the public for information about HCs and their • FR Y-6, FR Y-7, and FR Y-10—to collect the Legal nonbank subsidiaries. Foreign banking organizations Entity Identifier (LEI) for all banking and nonalso are required to periodically submit reports to the banking legal entities reportable on the Banking, Federal Reserve. For more information on the vari- Non-Banking, SLHC, and 4K schedules (excluding ous reporting forms, see www.federalreserve.gov/ Branch schedules) of the FR Y-10 and on the apps/reportforms/default.aspx. Organization Chart section of the FR Y-6 and FR Y-7, if an LEI has already been obtained (effec- During 2015, the following reporting forms were tive December 31, 2015). The Federal Reserve did revised: not require an LEI to be obtained for the sole purpose of reporting the LEI on the FR Y-6, FR Y-7, • FR Y-9C, FR Y-9LP, and FR Y-9SP—to reflect and FR Y-10. changes related to a law passed by the Congress in December 2014 (Public Law 113-250) and associ- • FR Y-14—to shift the FR Y-14A as-of date by one ated changes to the Board’s Small Bank Holding quarter in accordance with the modifications to the Company Policy Statement and regulatory capital Federal Reserve capital plan and stress test rules rules. The changes to implement the law increased (effective December 31, 2015). The Federal Reserve the asset threshold of the policy statement from also aligned the reports with changes in the regula- $500 million to $1 billion and applied the policy tory capital rule by removing certain items related statement to SLHCs (also see “Other Capital to tier 1 common capital, implemented the FR Adequacy Standards” earlier in this section). Con- Y-14A Business Plan Changes schedule, and elimicurrent with this change, the Board took steps to nated an FR Y-14Q Securities sub-schedule. relieve regulatory reporting burden for the BHCs • FR Y-15—to add a new schedule to capture shortand SLHCs that also meet the qualitative requireterm wholesale funding, new data items on total ments of the policy statement. Specifically, the exposures and intra-financial system liabilities, and Board eliminated quarterly and more complex conmore dimensions of a firm’s systemic footprint (effective December 31, 2015). The Federal Reserve 14 HCs are defined as BHCs, SLHCs, and securities holding companies. also aligned definitions with international stan-

Supervision and Regulation 67 dards published by the BCBS and expanded the to the banking agencies’ regulatory capital rules. scope of the reporting panel to include SLHCs. Information from the Call Reports provide the These changes allow the Federal Reserve to moni- most current statistical data available for evaluating tor, on an ongoing basis, the systemic risk profile institutions’ corporate applications, for identifying of the institutions that are subject to enhanced pru- areas of focus for both on-site and off-site examidential standards under section 165 of the Dodd- nations, and for considering monetary and other Frank Act. public policy issues. • FR Y-16—to change the report as-of date from Call Report Burden Reduction Initiative September 30 to December 31, and in effect, for Community Institutions change the corresponding report due date from In September 2015, the FFIEC announced detailed March to July (effective December 31, 2015). The steps regulators are taking to streamline and simplify Federal Reserve also modified the reporting regulatory reporting requirements for community instructions to make technical changes related to banks and reduce their reporting burden. The objecfinal implementation of the Basel capital requiretives of the community bank burden-reduction initiaments, and clarified the instructions in coordinative are consistent with the early feedback the FFIEC tion with the other federal regulatory agencies. received as part of the regulatory review currently being conducted under the Economic Growth and FFIEC Regulatory Reports Regulatory Paperwork Reduction Act of 1996. The law establishing the FFIEC and defining its functions requires the FFIEC to develop uniform As an initial step to streamline some reporting reporting systems for federally supervised financial requirements, the federal banking agencies, under the institutions. The Federal Reserve, along with the auspices of the FFIEC, sought comment on proposother member FFIEC agencies, requires banks to als to, in part, eliminate or revise several Call Report submit various uniform regulatory reports. This data items. These changes would simplify the reportinformation is essential to formulating and conducting requirements for banks and savings associations. ing bank regulation and supervision and for the ongoing assessment of the overall soundness of the In evaluating changes to the Call Reports, the FFIEC nation’s banking system. During 2015, the following sought to balance reporting burden against regula- FFIEC reporting forms were implemented or revised. tors’ need for reliable data to ensure banks and sav- • FFIEC 102 was implemented as of March 31, ings associations operate in a safe and sound manner 2015, to collect information from insured deposi- and are able to meet the financial needs of the comtory institutions and HCs subject to the market munities they serve. risk rule. The report collects key information from these institutions on how they measure and calcu- In addition to the reporting changes proposed, the late market risk under these revised rules. FFIEC also focused on four other areas: • FFIEC 030 and FFIEC 030S were revised to • Accelerating the start of a statutorily required include a change to the officer declaration requirereview of the continued appropriateness of the ment, eliminate the requirement for a branch to data items collected in the Call Reports, which was submit the cover page of the applicable report if it scheduled to commence in 2017;15 is consolidated into the report for the institution’s principal branch in a country, and add a new field • Evaluating the feasibility and merits of creating a on the FFIEC 030 cover page for an institution to streamlined version of the quarterly Call Report indicate whether the branch meets the criteria for for community institutions; annual or quarterly filing when submitting a year- • Continuing dialogue with community institutions end report (effective December 31, 2015). These to identify additional opportunities to reduce data are used to plan examinations and to analyze reporting burden by revising or redefining Call the foreign operations of domestic banks. Addi- Report data items; and tionally, growth trends can be measured by bank, by country, and by bank within country. • Reaching out to banks and savings associations through teleconferences and webinars to explain • FFIEC 031 and FFIEC 041 (Call Reports) were revised (Schedule RC-R, Regulatory Capital) effec- 15 This review is mandated by section 604 of the Financial Services tive March 31, 2015, to implement changes related Regulatory Relief Act of 2006 (12 USC 1817(a)(11)).

68 102nd Annual Report | 2015 upcoming reporting changes and clarify technical support to several critical national business applicareporting requirements. tions supporting the supervisory business line. While this initiative will span several years, progress Large bank and foreign bank supervision. In 2015, SIT made during 2015 by the FFIEC included: helped to improve the supervision of large financial institutions and foreign banking organizations • publishing a Federal Register notice with several through the integration of document repositories for proposed burden-reducing changes to the Call continuous monitoring and point-in-time examina- Reports, tions. In addition, a key accomplishment was the • visiting a limited number of institutions to gather integration of platforms and tools used for sharing additional information on challenges related to Call and collaborating on supervisory information Report preparation, and between Reserve Banks, the Board of Governors, and other federal agencies, which better aligns the • holding two teleconferences to train bankers on large financial institution supervisory documents recent changes to regulatory capital data items. available to authorized users, and improves the quality and consistency of reports being filed. Finally, as a foundation for the actions it is undertaking, the FFIEC has developed a set of guiding prin- Community and regional bank supervision. For bankciples for use in evaluating potential additions and ing institutions with less than $50 billion in assets, deletions of Call Report data items and other revi- SIT worked with bank examiners, the FDIC, and the sions to the Call Reports. In general, any Call Report Conference of State Banking Supervisors to deploy changes must meet three guiding principles for the new functionality, which improves usability, process data items to be collected: standardization, examiner efficiency, and supervisory • The data items serve a long-term regulatory or effectiveness. In line with efforts to improve standardpublic policy purpose by assisting the FFIEC’s ization and efficiency, SIT standardized examination member entities in fulfilling their missions of documentation and supported an interagency platensuring the safety and soundness of financial form providing states with electronic loan review institutions and the financial system and protecting tools to prepare for the automation of production consumers, as well as entity-specific missions and maintenance of loan line sheets in 2016. affecting national and state-chartered institutions; Supervisory support tools. To support examiners and • The data items maximize practical utility and miniother supervisory staff, SIT deployed tools to supmize, to the extent practicable and appropriate, port the collection, use, and storage of supervisory burden on financial institutions; and data. SIT integrated supervisory planning and collec- • Equivalent data items are not readily available tion tools with a task and resource management prothrough other means. gram allowing management to better track and align resources. Additionally, a new user front-end to the Supervisory Information Technology Consolidated Supervision Comparative Analysis, Planning and Execution (C-SCAPE) program was The Federal Reserve’s supervisory information tech- implemented to provide simpler access to key reports. nology function (SIT), under the guidance of the On the analysis side, SIT also provides and supports Subcommittee on Supervisory Administration and software to analyze the data gathered through the Technology, works to deliver information technology supervisory process. Quantitative analysis and data solutions within the supervision and regulation busi- visualization software allow supervisory analysts to ness line. The services provided to the business line glean insights from supervisory data. include the development and maintenance of applications and tools to assist with the examination of Content, collaboration and mobility. The SIT provides supervised institutions, data collection and storage, applications and programs designed to be used across development and deployment of collaboration tools, the supervisory function to enhance efficiency and provisioning and support of quantitative analysis increase collaboration and mobility. As part of SIT’s and data visualization software, and information effort to enhance collaboration between agencies and security. SIT also provides IT project management examiners, the team completed a targeted review of

Supervision and Regulation 69 connectivity options to move to an “always con- management software. The newly deployed software nected” posture where examiners working remotely eliminates point-to-point interfaces between docuhave solutions for situations when network connec- ment management systems and systems uploading or tivity is limited. referencing documents. The software also moves and tracks documents between management systems as Streamlined data access and improved security. In the documents progress through their life cycle. addition to data collection and collaboration, SIT continued to streamline ease of data access for the Data quality and usability. Due to the constant acquisupervisory function, while enhancing overall infor- sition of new data sets, the data housed in NIC is mation security. SIT provides access to data through continuously changing. The NIC continues to ensure a central area for all access-related responsibilities, that the underlying data is consistent, readily availand establishes effective prevention and detection able, and easily accessible for authorized use. The controls to limit information security threats. In addi- NIC also works to ensure that all NIC data is easily tion to data access provisioning, the team provides understood and integrated in a flexible manner. information security measures through routine procedures to check and verify users with access to Staff Development information. The Federal Reserve’s staff development program The National Information Center supports the ongoing development of about 3,100 The NIC is the Federal Reserve’s comprehensive professional supervisory staff, ensuring that they have repository for supervisory, financial, and banking the requisite skills necessary to meet their evolving structure data, as well as supervisory documents. The supervisory responsibilities. The Federal Reserve also NIC includes (1) data on banking structure through- provides course offerings to staff at state banking out the United States and foreign banking concerns; agencies. Training activities in 2015 are summarized (2) the National Examination Data, an application in table 3. that enables Federal Reserve supervisory personnel and federal and state banking authorities to access Examiner Commissioning Program NIC data; (3) the Banking Organization National The Federal Reserve System’s examiner commission- Desktop, an application that facilitates secure, real- ing program for assistant examiners is set forth in the time electronic information sharing and collabora- Examiner Commissioning Program (SR letter tion among federal and state banking regulators for 98-2).16 Examiners choose from one of two specialty the supervision of banking organizations; and (4) the tracks—(1) safety and soundness or (2) consumer Central Document and Text Repository, an applica- compliance. In 2015, 103 examiners passed the profition that contains documents supporting the supervi- ciency examination (77 in safety and soundness and sory process. 26 in consumer compliance). Information sharing and external collaboration. In On average, individuals move through a combination 2015, the NIC prioritized the review of all existing of classroom offerings, self-paced learning, virtual data exchange relationships with state agencies, fed- instruction, and on-the-job training over a period of eral government agencies, and internal applications three years. Achievement is measured by completing within the Federal Reserve System. The review the required course content, demonstrating adequate ensured all data being shared is accurate, used in a on-the-job knowledge, and passing a professionally consistent and secure manner, and within the bounds validated proficiency examination. specified in the user agreement. NIC broadened the scope and focus of information provided to the pub- In 2015, The Federal Reserve completed a major inilic in 2015 through the NIC public website. Addition- tiative to modernize its Community Bank Examiner ally, the NIC made strides in improving efficiencies Commissioning Program. Additionally, learning and reducing redundancies in national applications units were released for the Large Financial Instituutilized throughout the Federal Reserve System and tions Examiner Commissioning Program (LFI ECP). by the other federal and state regulators. The LFI ECP program will continue to be developed and deployed over the course of 2016 and 2017. Document management. A high priority for the NIC was to improve document tracking, storage, and 16 SR letter 98-2 is available at www.federalreserve.gov/boarddocs/ access through the implementation of document srletters/1998/sr9802.htm.

70 102nd Annual Report | 2015 Table 3. Training for banking supervision and regulation, 2015 Number of enrollments I nstructional time Course sponsor or type Federal Reserve S b t a a n te k i a n n g d a f g e e d n e c r y a l (approxi d m ay a s te )1 training Num o b f e fe r r o in f g c s ourse personnel personnel Federal Reserve System 2,117 456 720 195 FFIEC 703 307 392 98 Rapid Response2 19,421 2,966 10 83 1 Training days are approximate. System courses were calculated using five days as an average, with FFIEC courses calculated using four days as an average. 2 Rapid Response® is a virtual program created by the Federal Reserve System as a means of providing information on emerging topics to Federal Reserve and state bank examiners. Continuing Professional Development In administering these statutes, the Federal Reserve Throughout the course of 2015, the Federal Reserve acts on a variety of applications and notices that System made enhancements to the continuing profes- directly or indirectly affect the structure of the U.S. sional development (CPD) program for examiners banking system at the local, regional, and national through the addition and modernization of several levels; the international operations of domestic bankcourses, tools, job aids, and learning programs. Most ing organizations; or the U.S. banking operations of notably, the Federal Reserve developed a multi- foreign banks. The applications and notices concern layered Capital Markets Specialty Track to develop BHC and SLHC formations and acquisitions, bank varying degrees of capital markets expertise across mergers, and other transactions involving banks and the System. The Federal Reserve System CPD pro- savings associations or nonbank firms. In 2015, the grams are also available to state and federal banking Federal Reserve acted on 1,014 applications filed agency personnel. under the six statutes. In 2015, the Federal Reserve released its second and Regulation third Semiannual Report on Banking Applications Activity, which provides aggregate information on The Federal Reserve exercises important regulatory proposals filed by banking organizations and influence over entry into the U.S. banking system reviewed by the Federal Reserve. The report includes structure through its administration of several federal statistics on the number of proposals that have been statutes. The Federal Reserve is also responsible for approved, denied, withdrawn, mooted or returned, as imposing margin requirements on securities transac- well as general information about the length of time tions. In carrying out its responsibilities, the Federal taken to process proposals. Additionally, the report Reserve coordinates supervisory activities with the discusses common reasons that proposals have been other federal banking agencies, state agencies, func- withdrawn from consideration. The reports are availtional regulators (that is, regulators for insurance, able at www.federalreserve.gov/bankinforeg/ securities, and commodities firms), and foreign bank semiannual-reports-banking-applications-activity regulatory agencies. .htm. Regulation of the U.S. Banking Structure Bank Holding Company Act Applications Under the BHC Act, a corporation or similar legal The Federal Reserve administers six federal statutes entity must obtain the Federal Reserve’s approval that apply to BHCs, financial holding companies, before forming a BHC through the acquisition of member banks, SLHCs, and foreign banking organi- one or more banks in the United States. Once zations: the BHC Act, the Bank Merger Act, the formed, a BHC must receive Federal Reserve Change in Bank Control Act, the Federal Reserve approval before acquiring or establishing additional Act, section 10 of the Home Owners Loan Act banks. Also, BHCs generally may engage in only (HOLA), and the International Banking Act. those nonbanking activities that the Board has previ-

Supervision and Regulation 71 ously determined to be closely related to banking Bank Merger Act Applications under section 4(c)(8) of the BHC Act. Depending on The Bank Merger Act requires that all applications the circumstances, these activities may or may not involving the merger of insured depository institurequire Federal Reserve approval in advance of their tions be acted on by the relevant federal banking commencement.17 agency. The Federal Reserve has primary jurisdiction if the institution surviving the merger is a state mem- When reviewing a BHC application or notice that ber bank. In acting on a merger application, the Fedrequires approval, the Federal Reserve considers the eral Reserve considers the financial and managerial financial and managerial resources of the applicant, resources of the applicant, the future prospects of the the future prospects of both the applicant and the existing and combined organizations, financial stabilfirm to be acquired, financial stability factors, the ity factors, the convenience and needs of the commuconvenience and needs of the community to be nities to be served, and the competitive effects of the served, the potential public benefits, the competitive proposed merger. The Federal Reserve also must coneffects of the application, and the applicant’s ability sider the views of the U.S. Department of Justice to make available to the Federal Reserve information regarding the competitive aspects of any proposed deemed necessary to ensure compliance with appli- bank merger involving unaffiliated insured deposicable law. The Federal Reserve also must consider the tory institutions. In 2015, the Federal Reserve views of the U.S. Department of Justice regarding approved 73 merger applications under the Bank the competitive aspects of any proposed BHC acqui- Merger Act. sition involving unaffiliated insured depository institutions. In the case of a foreign banking organization Change in Bank Control Act Applications seeking to acquire control of a U.S. bank, the Federal The Change in Bank Control Act requires individuals Reserve also considers whether the foreign bank is and certain other parties that seek control of a U.S. subject to comprehensive supervision or regulation bank, BHC, or SLHC to obtain approval from the on a consolidated basis by its home-country supervirelevant federal banking agency before completing sor. In 2015, the Federal Reserve acted on 299 applithe transaction. The Federal Reserve is responsible cations and notices filed by BHCs to acquire a bank for reviewing changes in the control of state member or a nonbank firm, or to otherwise expand their banks, BHCs, and SLHCs. In its review, the Federal activities. Reserve considers the financial position, competence, experience, and integrity of the acquiring person; the A BHC may repurchase its own shares from its effect of the proposed change on the financial condishareholders. Certain stock redemptions require tion of the bank, BHC, or SLHC being acquired; the prior Federal Reserve approval. The Federal Reserve future prospects of the institution to be acquired; the may object to stock repurchases by holding compaeffect of the proposed change on competition in any nies that fail to meet certain standards, including the relevant market; the completeness of the information Board’s capital adequacy guidelines. In 2015, the submitted by the acquiring person; and whether the Federal Reserve acted on four stock repurchase proposed change would have an adverse effect on the applications by BHCs. Deposit Insurance Fund. A proposed transaction should not jeopardize the stability of the institution The Federal Reserve also reviews elections submitted or the interests of depositors. During its review of a by BHCs seeking financial holding company status proposed transaction, the Federal Reserve also may under the authority granted by the Gramm-Leachcontact other regulatory or law enforcement agencies Bliley Act. BHCs seeking financial holding company for information about relevant individuals. In 2015, status must file a written declaration with the Federal the Federal Reserve approved 152 change in control Reserve. In 2015, 40 domestic and two foreign finannotices. cial holding company declarations were approved. Federal Reserve Act Applications Under the Federal Reserve Act, a bank must seek 17 Since 1996, the BHC Act has provided an expedited prior notice Federal Reserve approval to become a member bank. procedure for certain permissible nonbank activities and for acquisitions of small banks and nonbank entities. Since that A member bank may be required to seek Federal time, the BHC Act has also permitted well-run BHCs that sat- Reserve approval before expanding its operations isfy certain criteria to commence certain other nonbank actividomestically or internationally. State member banks ties on a de novo basis without first obtaining Federal Reserve approval. must obtain Federal Reserve approval to establish

72 102nd Annual Report | 2015 domestic branches, and all member banks (including Federal Reserve acted on six applications filed by national banks) must obtain Federal Reserve MHCs to convert to stock form, and seven applicaapproval to establish foreign branches. When review- tions to waive dividends. ing applications for membership, the Federal Reserve considers, among other things, the bank’s financial When reviewing an SLHC application or notice that condition and its record of compliance with banking requires approval, the Federal Reserve considers the laws and regulations. When reviewing applications to financial and managerial resources of the applicant, establish domestic branches, the Federal Reserve con- the future prospects of both the applicant and the siders, among other things, the scope and nature of firm to be acquired, the convenience and needs of the the banking activities to be conducted. When review- community to be served, the potential public benefits, ing applications for foreign branches, the Federal the competitive effects of the application, and the Reserve considers, among other things, the condition applicant’s ability to make available to the Federal of the bank and the bank’s experience in interna- Reserve information deemed necessary to ensure tional banking. In 2015, the Federal Reserve acted on compliance with applicable law. The Federal Reserve 31 membership applications, 360 new and merger- also must consider the views of the U.S. Department related domestic branch applications, and no foreign of Justice regarding the competitive aspects of any branch applications. SLHC proposal involving the acquisition or merger of unaffiliated insured depository institutions. State member banks also must obtain Federal Reserve approval to establish financial subsidiaries. The Federal Reserve also reviews elections submitted These subsidiaries may engage in activities that are by SLHCs seeking status as financial holding compafinancial in nature or incidental to financial activities, nies under the authority granted by the Dodd-Frank including securities-related and insurance agency- Act. SLHCs seeking financial holding company starelated activities. In 2015, one financial subsidiary tus must file a written declaration with the Federal application was approved. Reserve. In 2015, no SLHC financial holding company declarations were received. Home Owners’ Loan Act Applications Under HOLA, a corporation or similar legal entity Overseas Investment Applications by must obtain the Federal Reserve’s approval before U.S. Banking Organizations forming an SLHC through the acquisition of one or U.S. banking organizations may engage in a broad more savings associations in the United States. Once range of activities overseas. Many of the activities are formed, an SLHC must receive Federal Reserve conducted indirectly through Edge Act and agreeapproval before acquiring or establishing additional ment corporation subsidiaries. Although most forsavings associations. Also, SLHCs generally may eign investments are made under general consent proengage in only those nonbanking activities that are cedures that involve only after-the-fact notification to specifically enumerated in HOLA or that the Board the Federal Reserve, large and other significant has previously determined to be closely related to investments require prior approval. In 2015, the Fedbanking under section 4(c)(8) of the BHC Act. eral Reserve approved 20 applications and notices for Depending on the circumstances, these activities may overseas investments by U.S. banking organizations, or may not require Federal Reserve approval in many of which represented investments through an advance of their commencement. In 2015, the Fed- Edge Act or agreement corporation. eral Reserve acted on 12 applications filed by SLHCs to acquire a bank or a nonbank firm, or to otherwise International Banking Act Applications expand their activities. The International Banking Act, as amended by the Foreign Bank Supervision Enhancement Act of Under HOLA, a savings association reorganizing to 1991, requires foreign banks to obtain Federal a mutual holding company (MHC) structure must Reserve approval before establishing branches, agenreceive Federal Reserve approval prior to its reorgani- cies, commercial lending company subsidiaries, or zation. In addition, an MHC must receive Federal representative offices in the United States. Reserve approval before converting to stock form, and MHCs must receive Federal Reserve approval In reviewing applications, the Federal Reserve generbefore waiving dividends declared by the MHC’s ally considers whether the foreign bank is subject to subsidiary. In 2015, the Federal Reserve acted on two comprehensive supervision or regulation on a conapplications for MHC reorganizations. In 2015, the solidated basis by its home-country supervisor. It

Supervision and Regulation 73 also considers whether the home-country supervisor Financial Disclosures by State Member Banks has consented to the establishment of the U.S. office; Under the Securities Exchange Act of 1934 and Fedthe financial condition and resources of the foreign eral Reserve’s Regulation H, certain state member bank and its existing U.S. operations; the managerial banks are required to make financial disclosures to resources of the foreign bank; whether the home- the Federal Reserve using the same reporting forms country supervisor shares information regarding the (such as Form 10K—annual report and Schedoperations of the foreign bank with other supervi- ule 14A—proxy statement) that are normally used by sory authorities; whether the foreign bank has pro- publicly held entities to submit information to the vided adequate assurances that information concern- SEC.18 As most of the publicly held banking organiing its operations and activities will be made available zations are BHCs and the reporting threshold was to the Federal Reserve, if deemed necessary to deter- recently raised, only two state member banks were mine and enforce compliance with applicable law; required to submit data to the Federal Reserve in whether the foreign bank has adopted and imple- 2015. The information submitted by these two small mented procedures to combat money laundering and state member banks is available to the public upon whether the home country of the foreign bank is request and is primarily used for disclosure to the developing a legal regime to address money launder- bank’s shareholders and public investors. ing or is participating in multilateral efforts to combat money laundering; and the record of the foreign Assessments for Supervision and Regulation bank with respect to compliance with U.S. law. In The Dodd-Frank Act directs the Board to collect 2015, the Federal Reserve approved five applications assessments, fees, or other charges equal to the total by foreign banks to establish branches, agencies, or expenses the Board estimates are necessary or approrepresentative offices in the United States. priate to carry out the supervisory and regulatory responsibilities of the Board for BHCs and SLHCs Public Notice of Federal Reserve Decisions with total consolidated assets of $50 billion or more Certain decisions by the Federal Reserve that involve and nonbank financial companies designated for an acquisition by a BHC, a bank merger, a change in Board supervision by the FSOC. As a collecting control, or the establishment of a new U.S. banking entity, the Board does not recognize the supervision presence by a foreign bank are made known to the and regulation assessments as revenue nor does the public by an order or an announcement. Orders state Board use the collections to fund Board expenses; the the decision, the essential facts of the application or funds are transferred to the Treasury. The Board colnotice, and the basis for the decision; announcements lected and transferred $443,068,345 for the 2014 state only the decision. All orders and announce- supervision and regulation assessment in 2015. ments are made public immediately and are subsequently reported in the Board’s weekly H.2 statistical Securities Credit release. The H.2 release also contains announcements Under the Securities Exchange Act of 1934, the of applications and notices received by the Federal Board is responsible for regulating credit in certain Reserve upon which action has not yet been taken. transactions involving the purchasing or carrying of For each pending application and notice, the related securities. The Board’s Regulation T limits the H.2A release gives the deadline for comments. The amount of credit that may be provided by securities Board’s website provides information on orders and brokers and dealers when the credit is used to purannouncements (www.federalreserve.gov/newsevents/ chase debt and equity securities. The Board’s Regulapress/orders/2015orders.htm) as well as a guide for tion U limits the amount of credit that may be pro- U.S. and foreign banking organizations that wish to vided by lenders other than brokers and dealers when submit applications (www.federalreserve.gov/ the credit is used to purchase or carry publicly held bankinforeg/afi/afi.htm). 18 Under section 12(g) of the Securities Exchange Act, certain companies that have issued securities are subject to SEC regis- Enforcement of Other Laws tration and filing requirements that are similar to those imposed and Regulations on public companies. Per section 12(i) of the Securities Exchange Act, the powers of the SEC over banking entities that fall under section 12(g) are vested with the appropriate banking The Federal Reserve’s enforcement responsibilities regulator. Specifically, state member banks with 2,000 or more also extend to the disclosure of financial information shareholders and more than $10 million in total assets are required to register with, and submit data to, the Federal by state member banks and the use of credit to pur- Reserve. These thresholds reflect the recent amendments by the chase and carry securities. Jumpstart Our Business Startups Act (JOBS Act).

74 102nd Annual Report | 2015 equity securities if the loan is secured by those or Industry Regulatory Authority, and the Chicago other publicly held equity securities. The Board’s Board Options Exchange examine brokers and deal- Regulation X applies these credit limitations, or mar- ers for compliance with Regulation T. With respect to gin requirements, to certain borrowers and to certain compliance with Regulation U, the federal banking credit extensions, such as credit obtained from for- agencies examine banks under their respective juriseign lenders by U.S. citizens. dictions; the FCA and the NCUA examine lenders under their respective jurisdictions; and the Federal Several regulatory agencies enforce the Board’s secu- Reserve examines other Regulation U lenders. rities credit regulations. The SEC, the Financial

75 5 Consumer and Community Affairs The Division of Consumer and Community Affairs opportunities. The division analyzed longstanding (DCCA) has primary responsibility for carrying out and emerging consumer financial services and comthe Board of Governors’ role in consumer financial munity risks, practices, issues, and opportunities in protection and community development. DCCA con- order to understand and act on their implications ducts consumer and community development- for the economic and supervisory policies that are focused supervision, research, and policy analysis, as core to the central bank’s functions, as well as to well as implements relevant statutory requirements gain insight into consumer decisionmaking related for community reinvestment. Through these efforts, to financial services, implications of the financial the division works to ensure that consumer and com- crisis on young workers, and access to credit for munity perspectives inform Federal Reserve policy, small businesses. research, and actions that advance DCCA’s mission • Engaging, convening, and informing key stakeholdto promote a fair and transparent consumer financial ers to identify emerging issues and advance what services marketplace and effective community works in community reinvestment and consumer reinvestment. protection. The division continued to promote fair and informed access to financial markets for all Throughout 2015, the division engaged in numerous consumers, particularly underserved populations, consumer and community-related functions and by engaging lenders, government officials, and policy activities in the following areas: community leaders. Throughout the year, DCCA • Formulating consumer-focused supervision and convened programs to share information and examination policy to ensure that financial institu- research on effective community development politions for which the Federal Reserve has authority cies and strategies. comply with consumer protection laws and regula- • Writing and reviewing regulations that effectively tions and meet requirements of community reinvestimplement consumer protection and community reinment laws and regulations. The division provided vestment laws. The division manages the Board’s oversight for the Reserve Bank consumer compliregulatory responsibilities with respect to certain ance supervision and examination programs in entities and specific statutory provisions of the state member banks and bank holding companies consumer financial services and fair lending laws. (BHCs) through its policy development, examiner In 2015, DCCA participated in drafting intertraining, and supervision oversight programs, agency regulations, interpretations and compliance which include evaluation of state member banks’ guidance for the industry and the Reserve Banks. implementation of the Community Reinvestment Act (CRA), enforcement of a wide range of consumer protection laws and regulations including Supervision and Examinations those related to fair lending, unfair or deceptive acts or practices (UDAP), and flood insurance; DCCA develops and supports supervisory policy and analysis of bank and BHC applications in regard examination procedures for consumer protection to consumer protection, convenience and needs laws and regulations, as well as the CRA, as part of and the CRA; and processing of consumer its supervision of the organizations for which the complaints. Board has authority, including holding companies, • Conducting rigorous research, analysis, and data state member banks,1 and foreign banking organizacollection to inform Federal Reserve and other policymakers about consumer protection risks and 1 The Federal Reserve has examination and enforcement authorcommunity economic development issues and ity for federal consumer financial laws and regulations for

76 102nd Annual Report | 2015 tions. The division also administers the Federal Bank Holding Company Reserve System’s risk-focused program for assessing Consolidated Supervision consumer compliance risk at the largest bank and financial holding companies in the System, with divi- During 2015, staff reviewed 119 bank and financial sion staff ensuring that consumer compliance risk is holding companies to ensure consumer compliance effectively integrated into the consolidated supervi- risk was appropriately incorporated into the consolision oversight of the holding company. The division dated risk-management program of the organization. oversees the efforts of the 12 Reserve Banks to ensure Division staff participated with staff from the that consumer protection laws and regulations are Board’s Division of Banking Supervision and Regurigorously and consistently enforced for the approxi- lation on numerous projects related to ongoing mately 840 state member banks that the Federal implementation of the Dodd-Frank Act, including Reserve supervises for compliance with consumer standards for assessing corporate governance and protection and community reinvestment laws and continued integration of savings and loan holding regulations. Division staff provide guidance and companies (SLHCs) under Federal Reserve superviexpertise to the Reserve Banks on consumer protec- sion.3 tion laws and regulations, bank and BHC application analysis and processing, examination and enforce- Mortgage Servicing and Foreclosure ment techniques and policy matters, examiner training, and emerging issues. Finally, staff members par- Payment Agreement Status ticipate in interagency activities that promote consis- Throughout 2015, Board staff continued to work to tency in examination principles, standards, and oversee and implement the enforcement actions processes. against 16 mortgage loan servicers that were issued by the Federal Reserve and the Office of the Comp- Examinations are one of the Federal Reserve’s meth- troller of the Currency (OCC) between April 2011 ods of ensuring compliance with consumer protec- and April 2012. At the time of the enforcement tion laws and assessing the adequacy of consumer actions, along with other requirements, the two regucompliance risk-management systems within regu- lators directed servicers to retain independent consullated entities. During 2015, the Reserve Banks com- tants to conduct comprehensive reviews of foreclopleted 253 consumer compliance examinations of sure activity to determine whether eligible4 borrowers state member banks and 42 examinations of foreign suffered financial injury because of servicer errors, banking organizations, two examinations of Edge misrepresentations, or other deficiencies. The file Act corporations, and two examinations of agree- review initiated by the independent consultants, comment corporations.2 bined with a significant borrower outreach process, was referred to as the Independent Foreclosure Review (IFR). insured depository institutions with $10 billion or less that are state member banks and not affiliates of covered institutions, as well as for conducting CRA examinations for all state member In 2013, the regulators entered into agreements with banks regardless of size. The Federal Reserve Board also has 15 of the mortgage loan servicers to replace the IFR examination and enforcement authority for certain federal conwith direct cash payments to all eligible borrowers sumer financial laws and regulations for insured depository institutions that are state member banks with over $10 billion in and other assistance (the Payment Agreement).5 The assets, while the Consumer Financial Protection Bureau has examination and enforcement authority for many federal contions, U.S. banks are able to gain portfolio exposure to financial sumer financial laws and regulations for insured depository investing operations not available under standard banking laws. institutions with over $10 billion in assets and their affiliates (covered institutions), as mandated by the Dodd-Frank Wall 3 In November 2014, the Federal Reserve issued a detailed listing Street Reform and Consumer Protection Act of 2010 (Dodd- of Federal Reserve supervisory guidance documents that are Frank Act). applicable to SLHCs. The listing is supplemental to previously issued guidance that informed SLHCs to comply with Federal 2 Agency and branch offices of foreign banking organizations, Reserve guidance and not Office of Thrift Supervision (OTS) Edge Act corporations, and agreement corporations fall under guidance issued prior to July 21, 2011—the date that supervision the Federal Reserve’s purview for consumer compliance activiand regulation of SLHCs transferred from the OTS to the Fedties. An agreement corporation is a type of bank chartered by a eral Reserve. state to engage in international banking. The bank agrees with the Federal Reserve Board to limit its activities to those allowed 4 Borrowers were eligible if their primary residence was in a foreby an Edge Act corporation. An Edge Act corporation is a closure action with one of the sixteen mortgage loan servicers at banking institution with a special charter from the Federal any time in 2009 or 2010. Reserve to conduct international banking operations and certain 5 One OCC-regulated servicer elected to complete the Indepenother forms of business without complying with state-by-state dent Foreclosure Review, and did not, therefore, enter into the banking laws. By setting up or investing in Edge Act corpora- Payment Agreement.

Consumer and Community Affairs 77 participating servicers agreed to pay an estimated Federal Reserve directed Rust to redistribute any $3.9 billion to 4.4 million borrowers whose primary funds remaining after all outstanding checks expire residence was in a foreclosure process in 2009 or on March 31, 2016, to eligible borrowers of Federal 2010. The Payment Agreement also required the ser- Reserve-supervised servicers who have cashed or vicers to contribute an additional $5.8 billion dollars deposited their checks. This direction applied only to in other foreclosure prevention assistance, such as funds related to mortgage servicers supervised by the loan modifications and forgiveness of deficiency Federal Reserve, and the redistribution of remaining judgments. For the participating servicers, fulfillment funds is expected to occur in mid-2016. The Federal of the agreement will satisfy the foreclosure review Reserve intends to distribute the maximum amount requirements of the enforcement actions issued by of funds to borrowers affected by deficient servicing the regulators in 2011 and 2012. The Payment Agree- and foreclosure practices. ment did not affect the servicers’ continuing obligations under the enforcement actions to address defi- Foreclosure Prevention Actions ciencies in their mortgage servicing and foreclosure The Payment Agreement also required servicers to policies and procedures. undertake well-structured loss-mitigation efforts focused on foreclosure prevention, with preference A paying agent, Rust Consulting, Inc., (Rust) was given to activities designed to keep borrowers in their retained to administer payments to borrowers on homes through affordable, sustainable, and meaningbehalf of the participating servicers. Beginning in ful home preservation actions within two years from April 2013, a letter with an enclosed check was sent the date the agreement in principle was reached. The to borrowers who had a foreclosure action initiated, foreclosure prevention actions are expected to propending, or completed in 2009 or 2010 with any of vide significant and meaningful relief or assistance to the participating servicers. Letters with checks were qualified borrowers and, as stated in the agreement, mailed to eligible borrowers throughout 2013, 2014, “should not disfavor a specific geography within or and 2015, including checks that were reissued upon among states, nor disfavor low and/or moderate the borrower’s request due to expiration, a request income borrowers, and not discriminate against any for a change in payee, or a request by borrowers to protected class.” split the check amongst the borrowers on the loan. For checks that have not been cashed or were Servicers may fulfill their obligations through three returned undeliverable, the agencies directed Rust to specific consumer-relief activities set forth in the expand its efforts to locate more-current address National Mortgage Settlement, including first-lien information for the unpaid borrowers. For nearly all loan modifications, second-lien loan modifications, borrowers, by December 31, 2015, at least two years and short sales or deeds-in-lieu of foreclosure. Serhave passed since their initial checks were mailed. vicers were given the option, subject to non-objection During that two-year period, at least two and in most from their regulator, to meet their foreclosure prevencases, three attempts have been made to reach each tion assistance requirements by paying additional borrower. cash into the qualified settlement funds to be used for direct payments to consumers or by providing cash As of December 31, 2015, $3.5 billion has been dis- or other resource commitments to borrower counseltributed through 3.9 million checks, representing ing or education. Several of the participating sernearly 91 percent of the total value of the funds. vicers chose this option and have met their foreclo- Receiving a payment under the agreement will not sure prevention obligations. prevent borrowers from taking any action they may wish to pursue related to their foreclosure. Servicers All servicers were required to submit reports detailare not permitted to ask borrowers to sign a waiver ing the consumer-relief actions they had taken to satof any legal claims they may have against their ser- isfy these requirements. The foreclosure prevention vicer in connection with receiving payment.6 assistance actions reported included loan modifications, short sales, deeds-in-lieu of foreclosure, debt In November, Board members approved the key elecancellation, and lien extinguishment. In order to ments of a plan to end the implementation of the receive credit toward the servicer’s total foreclosure Payment Agreement. On November 19, 2015, the prevention obligation, the actions submitted must be validated by the regulators. As of December 31, 6 For more information, see www.federalreserve.gov/ 2015, a third party is in the process of completing consumerinfo/independent-foreclosure-review-paymentagreement.htm. this validation and ensuring that the foreclosure-

78 102nd Annual Report | 2015 prevention assistance amounts meet the requirements laws are enforced consistently and rigorously of the amendments to the enforcement actions. throughout the Federal Reserve System. Servicer Efforts to Address Deficiencies With respect to fair lending, pursuant to the ECOA, In addition to the foreclosure review requirements, if the Board has reason to believe that a creditor has the enforcement actions required mortgage servicers engaged in a pattern or practice of discrimination in to submit acceptable written plans to address various violation of the ECOA, the matter must be referred mortgage loan servicing and foreclosure processing to the Department of Justice (DOJ). The DOJ deficiencies. In the time since the enforcement actions reviews the referral and determines whether further were issued, the banking organizations have been investigation is warranted. A DOJ investigation may implementing the action plans, including enhanced result in a public civil enforcement action or settlecontrols, and improving systems and processes. To ment. Alternatively, the DOJ may decide to return date, the supervisory review of the mortgage ser- the matter to the Board for administrative enforcevicers’ action plans has shown that the banking orga- ment. When a matter is returned to the Board, staff nizations under the enforcement actions have imple- ensure that the institution takes all appropriate cormented significant corrective actions with regard to rective action. their mortgage servicing and foreclosure processes, but additional actions need to be taken for some ser- During 2015, the Federal Reserve referred the followvicers. Federal Reserve supervisory teams will con- ing four matters to the DOJ: tinue to monitor and evaluate the servicers’ progress • One referral involved discrimination on the basis of on implementing the action plans to address unsafe race and national origin in violation of the ECOA and unsound mortgage servicing and foreclosure and the FHA. For secondary market mortgage practices as required by the enforcement actions. loans, the lender charged African American and Hispanic borrowers higher prices than similarly Supervisory Matters situated non-Hispanic white borrowers. Legitimate pricing factors failed to explain the pricing Enforcement Activities disparities. • Two referrals involved discrimination on the basis Fair Lending and UDAP Enforcement of national origin, in violation of the ECOA. The With respect to fair lending, the Consumer Financial lenders charged Hispanic borrowers higher interest Protection Bureau (CFPB) supervises state member rates than non-Hispanic borrowers for direct autobanks with assets of more than $10 billion for commobile loans. Legitimate pricing factors failed to pliance with the Equal Credit Opportunity Act explain the pricing disparities. (ECOA). The Board also has supervisory authority for compliance with the Fair Housing Act. For the • One referral involved discrimination on the basis of 829 state member banks with assets of $10 billion or marital status, in violation of the ECOA. The less, the Board retains the authority to enforce both banks improperly required spousal guarantees on the ECOA and the Fair Housing Act. With respect to mortgage loans, in violation of Regulation B. the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices (UDAP), the In 2015, the Board issued a consent order to cease Board has supervisory authority over state member and desist, required restitution of approximately banks, regardless of asset size. $24 million, and assessed a civil money penalty of $2.2 million against a non-bank agent for deceptive Fair lending and UDAP reviews are conducted regu- practices associated with an account that was in violarly within the supervisory cycle. Additionally, lation of the Federal Trade Commission Act. The examiners may conduct fair lending and UDAP actions addressed in this order involved several pracreviews outside of the usual supervisory cycle, if war- tices that, at various points in the financial aid refund ranted by fair lending and UDAP risk. When exam- selection process, misled students about significant iners find evidence of potential discrimination or aspects of the account, including terms and fees.7 potential UDAP violations, they work closely with DCCA’s Fair Lending and UDAP Enforcement Sections, which provide additional legal and statistical 7 For more information, see www.federalreserve.gov/newsevents/ expertise and ensure that fair lending and UDAP press/enforcement/20151223a.htm.

Consumer and Community Affairs 79 If there is a fair lending violation that does not con- Agency (FEMA) for deposit into the National Flood stitute a pattern or practice under ECOA or a UDAP Mitigation Fund. violation, the Federal Reserve takes action to ensure that the violation is remedied by the bank. Most In 2015, the Federal Reserve issued eight formal conlenders readily agree to correct fair lending and sent orders and assessed $125,015 in civil money pen- UDAP violations, often taking corrective action as alties against state member banks to address violasoon as they become aware of a problem. Thus, the tions of the flood regulations. These statutorily man- Federal Reserve frequently uses informal supervisory dated penalties were forwarded to the National Flood tools (such as memoranda of understanding between Mitigation Fund held by the Department of the banks’ boards of directors and the Reserve Banks, or Treasury for the benefit of FEMA. board resolutions) to ensure that violations are corrected. When necessary, the Board can bring public The enactment of two statutes, the Biggert-Waters enforcement actions. Flood Insurance Reform Act of 2012 and the Homeowner Flood Insurance Affordability Act of 2014, Given the complexity of this area of supervision, the requires the federal financial institution supervisory Federal Reserve seeks to provide clarity on its per- agencies to update certain provisions of the federal spectives and processes to the industry and the pub- flood insurance regulations. To that end, the Board lic. Fair Lending and UDAP Enforcement staff meet and four other federal agencies issued a final rule in regularly with consumer advocates, supervised insti- July 2015 to incorporate provisions regarding the tutions, and industry representatives to discuss fair escrow of flood insurance payments, and the forced lending and UDAP issues and receive feedback. placement of flood insurance (see “Consumer Laws Through this outreach, the Board is able to address and Regulations” later in this section). To assist lendemerging fair lending and UDAP issues and promote ers in understanding and complying with these new sound fair lending and UDAP compliance. For regulations, the Federal Reserve hosted in Octoexample, in 2015, the Board sponsored a free inter- ber 2015 an interagency webinar, attended by over agency webinar on fair lending supervision through 5,000 participants, entitled “Interagency Flood Compliance Outlook Live, which was attended by Insurance Regulation Update.” The agencies conmore than 6,000 registrants, most of which were tinue work to finalize additional regulations to implecommunity banks.8 In addition, DCCA staff partici- ment provisions of these statutes related to lenders’ pate in numerous meetings, conferences, and train- acceptance of private flood insurance. ings sponsored by consumer advocates, industry representatives, and interagency groups. Community Reinvestment Act The CRA requires that the Federal Reserve and other Flood Insurance federal banking and thrift regulatory agencies The National Flood Insurance Act imposes certain encourage financial institutions to help meet the requirements on loans secured by buildings or mobile credit needs of the local communities in which they homes located in, or to be located in, areas deter- do business, consistent with safe and sound operamined to have special flood hazards. Under the Fed- tions. To carry out this mandate, the Federal Reserve eral Reserve’s Regulation H, which implements the • examines state member banks to assess their peract, state member banks are generally prohibited formance under the CRA; from making, extending, increasing, or renewing any such loan unless the building or mobile home, as well • considers state member banks’ and bank holding as any personal property securing the loan, are cov- companies’ CRA performance in context with ered by flood insurance for the term of the loan. The other supervisory information when analyzing law requires the Board and other federal financial applications for mergers and acquisitions; and institution regulatory agencies to impose civil money penalties when they find a pattern or practice of vio- • disseminates information about community devellations of the regulation. The civil money penalties opment techniques to bankers and the public are payable to the Federal Emergency Management through Community Development offices at the Reserve Banks. The Federal Reserve assesses and rates the CRA per- 8 For more information and to obtain the webcast, see https:// formance of state member banks in the course of consumercomplianceoutlook.org/outlook-live/2015/interagencyfair-lending-hot-topics/. examinations conducted by staff at the 12 Reserve

80 102nd Annual Report | 2015 Banks. During the 2015 reporting period, the Reserve As part of the analysis of managerial resources, the Banks completed 195 CRA examinations of state Federal Reserve reviews the institution’s record of member banks. Of those banks examined, 14 were compliance with consumer protection laws and regurated “Outstanding,” 178 were rated “Satisfactory,” lations. The institution’s most recent consumer com- 3 were rated “Needs to Improve,” and none were pliance rating is central to this review because, like rated “Substantial Non-Compliance.” the CRA performance evaluation, it represents the detailed findings of the institution’s supervisory During the 2015 review period, the Board, the Fed- agency. eral Deposit Insurance Corporation (FDIC), and the OCC reviewed public comments received in response Less than satisfactory CRA or consumer compliance to proposed additional revisions to the Interagency ratings or other significant consumer compliance Questions and Answers Regarding Community Rein- issues can pose an impediment to the processing and vestment (Interagency Questions and Answers) that approval of the application. Federal Reserve staff were issued in September 2014.9 The proposed revi- gather additional information about CRA and consions focus on issues such as alternative systems for sumer compliance performance in many circumdelivering retail banking services; community devel- stances, including when the financial instituopment, including economic development; and the tion(s) involved in an application have less than satisconsideration of qualitative factors such as innova- factory CRA or compliance ratings or recently tive and flexible lending practices. The agencies have identified consumer compliance issues, or when the reviewed comments received in response to the pro- Federal Reserve receives comments from interested posed revisions and expect to publish revised Inter- parties that raise CRA or consumer compliance agency Questions and Answers during 2016. issues. To further enhance transparency about this process, the Board issued guidance to the public in Mergers and Acquisitions 2014 describing the Federal Reserve’s approach to The Federal Reserve analyzes expansionary applica- applications and notices, indicating those that may tions by banks or BHCs, taking into account the not satisfy statutory requirements for approval of a likely effects of the acquisition on competition, the proposal or that otherwise raise supervisory or reguconvenience and needs of the communities to be latory concerns.10 served, the financial and managerial resources and future prospects of the companies and banks The Board provides information on its actions assoinvolved, and the effectiveness of the company’s poli- ciated with these merger and acquisition transactions, cies to combat money laundering. As part of this issuing press releases and Board Orders for each.11 process, DCCA evaluates whether the institutions are As part of the 2014 guidance, the Federal Reserve currently meeting the convenience and needs of their also publishes semiannual reports that provide perticommunities and the effectiveness of existing mana- nent information on applications and notices filed gerial resources, as well as the institutions’ ability to with the Federal Reserve.12 The reports include statismeet the convenience and needs of their communities tics on the number of proposals that had been and the adequacy of their managerial resources after approved, denied, and withdrawn as well as general the proposed transaction. information about the length of time taken to process proposals. Additionally, the reports discuss common The depository institution’s CRA record is a critical reasons that proposals have been withdrawn from component of this analysis. The CRA requires the consideration. Federal Reserve to consider a depository institution’s record of helping to meet the credit needs of its local Because these applications are of interest to the pubcommunities in evaluating applications for mergers, lic, they often generate comments that raise various acquisitions, and branches. An institution’s most issues for Board staff to consider in their analyses of recent CRA performance evaluation is a particularly the supervisory and lending records of the appliimportant, and often controlling, consideration in cants. With respect to consumer compliance and the applications process because it represents a detailed on-site evaluation of the institution’s perfor- 10 For more information, see www.federalreserve.gov/bankinforeg/ srletters/sr1402.htm. mance under the CRA by its federal supervisor. 11 To access the Board’s Orders on Banking Applications, see www .federalreserve.gov/newsevents/press/orders/2014orders.htm. 9 For more information, see www.federalreserve.gov/newsevents/ 12 For these reports, see www.federalreserve.gov/bankinforeg/ press/bcreg/20140908a.htm. semiannual-reports-banking-applications-activity.htm.

Consumer and Community Affairs 81 community reinvestment, one of the more common Bancshares, Inc., and thereby indirectly acquire allegations is that either or both the target and the First State Bank, both of Union City, Tennessee, acquirer fail to make credit available to certain and Simmons First National Corporation to merge minority groups and to low- and moderate-income with Liberty Bancshares, Inc., and thereby indi- (LMI) individuals, or when they do extend credit to rectly acquire Liberty Bank, both of Springfield, those borrowers, it is at a higher cost. Commenters Missouri, were approved in February. also often express concerns about branch closures or • IBERIABANK Corporation, Lafayette, Louisithe banks’ record of lending to small businesses in ana, to acquire Florida Bank Group, Inc., and its LMI geographies. wholly owned subsidiary, Florida Bank, both of Tampa, Florida, and IBERIABANK, Lafayette, In evaluating the applications and the merits of pub- Louisiana, to merge with Florida Bank and to lic comments, the Board considers information proestablish and operate branches at the locations of vided by applicants and analyzes supervisory infor- Florida Bank’s main office and branches were mation, including examination reports with evaluaapproved in February. tions of compliance with fair lending and other consumer protection laws and regulations, and con- • BB&T Corporation, Winston-Salem, North fers with other regulators, as appropriate, for their Carolina, to acquire The Bank of Kentucky Finansupervisory views. If warranted, the Federal Reserve cial Corporation and thereby indirectly acquire its will also conduct pre-membership exams for a trans- wholly owned subsidiary, The Bank of Kentucky, action in which an insured depository institution will Inc., both of Crestview Hills, Kentucky, was become a state member bank or in which the surviv- approved in June. ing entity of a merger would be a state member bank. • Sterling Bancorp, Montebello, New York, to In October 2015, the Federal Reserve issued guidance acquire Hudson Valley Holding Corporation and providing further explanation on its criteria for waivthereby indirectly acquire its wholly owned subsiding or conducting such pre-merger or preiary, Hudson Valley Bank, National Association, membership examinations.13 both of Yonkers, New York, was approved in June. During 2015, the Board considered over 100 applica- • Cathay General Bancorp, Los Angeles, California, tions, with topics ranging from change in control to acquire Asia Bancshares, Inc., and thereby indinotices, to branching requests, to mergers and acqui- rectly acquire its wholly owned subsidiary, Asia sitions. DCCA staff analyzed the following 16 unre- Bank, National Association, both of Flushing, lated notices and applications for transactions involv- New York, was approved in July. ing bank mergers and branching that involved • CIT Group, Inc., Livingston, New Jersey, to adverse public comments on CRA issues or conacquire IMB Holdco LLC and thereby indirectly sumer compliance issues, such as fair lending, which acquire its wholly owned subsidiary, OneWest the Board considered and approved:14 Bank, National Association, both of Pasadena, • Comerica Bank, Dallas, Texas, to establish a California, was approved in July. branch at 31 68th Avenue in Coopersville, • Empresas Juan Yarur SpA and its subsidiary, Michigan, was approved in January. Banco de Credito e Inversiones, both of Santiago, • Hillister Enterprises, II, Inc., Umphrey II Family Chile, to acquire CM Florida Holdings, Inc., Coral Gables, Florida, and thereby indirectly acquire its Limited Partnership, both of Beaumont, Texas, subsidiary, City National Bank of Florida, Miami, and CBFH, Inc., Orange, Texas, to acquire MC Florida, was approved in September. Bancshares, Inc. and thereby indirectly acquire its subsidiary, Memorial City Bank, both of Houston, • First Horizon National Corporation, Memphis, Texas, was approved in January. Tennessee, to acquire TrustAtlantic Financial Corporation and thereby indirectly acquire its wholly • Simmons First National Corporation, Pine Bluff, owned subsidiary, TrustAtlantic Bank, both of Arkansas, to merge with Community First Raleigh, North Carolina, was approved in September. 13 For more information, see www.federalreserve.gov/bankinforeg/ srletters/SR1511.htm. • PacWest Bancorp, Los Angeles, California, to 14 Related notices and applications for which a single Board Order merge with Square 1 Financial, Inc., and thereby was issued were counted as a single notice or application in this total. indirectly acquire its wholly owned subsidiary,

82 102nd Annual Report | 2015 Square 1 Bank, and the nonbank subsidiaries of Coordination with Other Square 1 Financial, all of Durham, North Federal Banking Agencies Carolina, was approved in September. The member agencies of the Federal Financial Institutions Examination Council (FFIEC) develop con- • M&T Bank Corporation (“M&T”), Buffalo, New sistent examination principles, standards, procedures, York, to acquire Hudson City Bancorp, Inc., Paraand report formats.15 In 2015, the FFIEC member mus, New Jersey; and by M&T’s subsidiary bank, organizations continued to work together on various Manufacturers and Traders Trust Company, Bufinitiatives. falo, to merge with Hudson City Savings Bank, Paramus, and retain and operate branches at the Updating Examination Procedures under locations of Hudson City Savings Bank’s main Regulations X, Z, and P office and branches was approved in September. In February, the FFIEC developed examination pro- • Royal Bank of Canada, Montreal, Canada, and cedures that incorporated amendments to Regula- RBC USA Holdco Corporation, New York, New tions X (Real Estate Settlement Procedures Act York, to acquire City National Corporation and (RESPA)) and Z (Truth in Lending Act (TILA)), thereby indirectly acquire its wholly owned subsid- including the CFPB’s final TILA-RESPA Integrated iary, City National Bank, both of Los Angeles, Disclosures Rule. The updated interagency Regula- California, was approved in October. tion Z examination procedures also incorporated changes associated with the interagency higher- • Community Bank System, Inc., DeWitt, New priced mortgage loan appraisal rule and other minor York, to acquire Oneida Financial Corp., and revisions made to the title XIV rules. thereby indirectly acquire Oneida Savings Bank, both of Oneida, New York, and State Bank of The Regulation X and Regulation Z examination Chittenango, Chittenango, New York, was procedures were updated again in September to approved in November. reflect the revised effective date of the TILA-RESPA • BB&T Corporation, Winston-Salem, North Integrated Disclosure rule and to incorporate minor, Carolina, to acquire National Penn Bancshares, technical updates. In September, the FFIEC also Inc., and thereby indirectly acquire its wholly developed updated Regulation P (Privacy of Conowned subsidiary, National Penn Bank, both of sumer Financial Information) examination proce- Allentown, Pennsylvania, was approved in dures that incorporated a CFPB rulemaking that December. amended the requirements regarding financial institutions’ provision of annual disclosure of privacy • Chemical Bank, Midland, Michigan, to establish a practices to customers.16 The updated Regulation P mobile branch in several counties in Michigan was examination procedures also reflect the CFPB’s approved in December. recodification in Regulation P of the privacy regulations that were previously issued by six other federal Coordination with the Consumer Financial financial institution regulatory agencies as well as Protection Bureau clarify requirements and improve readability. During 2015, staff continued to work through the implementation of the Interagency Memorandum of Understanding on Supervision Coordination with the CFPB. The agreement is intended to establish arrangements for coordination and cooperation 15 The FFIEC is a formal interagency body empowered to preamong the CFPB and the OCC, the FDIC, the scribe uniform principles, standards, and report forms for the National Credit Union Association (NCUA), and the federal examination of financial institutions by the Board, the CFPB, the FDIC, the NCUA, and the OCC and to make rec- Board of Governors. The agreement strives to miniommendations to promote uniformity in the supervision of mize unnecessary regulatory burden and to avoid financial institutions. In 2006, the State Liaison Committee was unnecessary duplication of effort and conflicting added to the council as a voting member. The State Liaison Committee includes representatives from the Conference of supervisory directives amongst the prudential regula- State Bank Supervisors, the American Council of State Savings tors. The regulators work cooperatively to share Supervisors, and the National Association of State Credit exam schedules for covered institutions and covered Union Supervisors. activities to plan simultaneous exams, provide final 16 On December 4, 2015, section 75001 of the Fixing America’s Surface Transportation Act, which was effective upon enactdrafts of examination reports for comment, and ment, superseded the referenced CFPB amendment to the share supervisory information. annual privacy notice requirement.

Consumer and Community Affairs 83 Coordinating Transfer of Regulation C (HMDA) Examiner Training Data Operations Ensuring that financial institutions comply with laws Also in 2015, the FFIEC established a plan for the that protect consumers and encourage community transfer of Regulation C (Home Mortgage Disclo- reinvestment is a fundamental aspect of the bank sure Act (HMDA)) data operations to the CFPB in examination and supervision process. As the com- January 2018. The Board will administer and main- plexity of both consumer financial transactions and tain the current HMDA data operations system and the regulatory landscape has increased, training for continue to collect and process HMDA data through consumer compliance examiners has become more December 2017. important than ever before. The division’s examiner training function is responsible for the ongoing devel- Guidance on Private Student Loans with opment of the professional consumer compliance Graduated Repayment Terms at Origination supervisory staff, from an initial introduction to the In January, the Board, the CFPB, the FDIC, the Federal Reserve System through the development of NCUA, and the OCC, in conjunction with the State proficiency in consumer compliance topics sufficient Liaison Committee, issued guidance that provides to earn an examiner’s commission. DCCA’s role is to principles that financial institutions should consider ensure that examiners have the skills necessary to in their policies and procedures for underwriting pri- meet their supervisory responsibilities now and in the vate student loans with graduated repayment terms future. at origination. The guidance indicates that financial institutions that originate private student loans with Consumer Compliance Examiner graduated repayment terms should prudently under- Training Curriculum write the loans in a manner consistent with safe and Currently, the consumer compliance examiner trainsound lending practices. Additionally, the guidance ing curriculum consists of five courses focused on states that financial institutions should comply with consumer protection laws, regulations, and examinall applicable federal and state consumer laws and ing concepts. In 2015, these courses were offered in regulations, including providing disclosures that 10 sessions, and training was delivered to a total of clearly communicate the timing and the amount of 188 Federal Reserve consumer compliance examiners payments to facilitate borrower understanding of and staff members and 8 state banking agency examloan terms and features. iners. These courses are principally conducted by traditional classroom method, and when appropriate, Guidance to Encourage Financial Institutions’ courses are delivered via alternative methods, such as Youth Savings Programs and Address Related the Internet or other distance-learning technologies. Frequently Asked Questions Several courses use a combination of instructional In February, the Board, the FDIC, the NCUA, and methods, including both classroom instruction the OCC (as members of the Financial Literacy and focused on case studies and specially developed Education Commission) and the U.S. Department of computer-based instruction that includes interactive the Treasury’s Financial Crimes Enforcement Net- self-check exercises. Board and Reserve Bank staff work issued guidance intended to encourage financial regularly review the core curriculum for examiner institutions to develop and implement programs to training, updating subject matter and adding new eleexpand the financial capability of youth and build ments as appropriate. opportunities for financial inclusion for more families. The guidance also addresses frequently asked Early in 2015, a large-scale Federal Reserve System questions that may arise as financial institutions col- effort was launched to modernize consumer complilaborate with schools, local and state governments, ance examiner training. A multiyear effort slated for nonprofit organizations, and corporate entities to completion in mid-2018, the curriculum modernizafacilitate youth savings and financial education pro- tion began with a transition from traditional grams. The guidance does not impose additional classroom-based training to virtual, self-directed, and compliance or examination requirements on financial blended delivery methods designed by experts in institutions or examiners, respectively. Rather, the adult learning. guidance is intended to clarify the applicability of existing legal and regulatory requirements in a man- To maintain the rigor and excellence of the Federal ner intended to remove perceived barriers for finan- Reserve’s examiner training, the effort will utilize cial institutions to establish school-based youth sav- resources with an adult learning background coupled ings programs. with experienced, dedicated consumer compliance

84 102nd Annual Report | 2015 examiners from throughout the Federal Reserve as designed, developed, and presented to Federal well as Board of Governors staff. In the second quar- Reserve staff during 2015 on the following topics: ter of 2015, staff completed several keys steps: • implementation of the new TILA/RESPA regulanamely, they developed a budget and business plan, tion (two sessions) identified Federal Reserve personnel to manage and staff the program, held an orientation meeting, and • introduction to the risk-focused supervision of began the analysis of examination tasks performed large financial institutions for compliance by examiners and fundamental to curriculum devel- examiners opment. As the modernization is fully implemented • the Fair Lending Tool 5.1 into 2018, the effort will also incorporate continuing professional development and on-the-job training • the Secure and Fair Enforcement for Mortgage into the program. Licensing Act (SAFE Act) for consumer compliance examiners Outreach and Training: Dodd-Frank Act During 2015, the Federal Reserve collaborated with Responding to Consumer Complaints the other federal banking agencies to offer four webi- and Inquiries nars (Outlook Live) focused on delivering timely and The Federal Reserve investigates complaints against relevant compliance information to the banking state member banks and selected nonbank subsidiarindustry, experienced examiners, and other regula- ies of BHCs (Federal Reserve regulated entities), and tory and supervisory personnel. In May, the Federal forwards complaints against other creditors and busi- Reserve hosted the fifth in a series of CFPB-led Out- nesses to the appropriate enforcement agency. Each look Live webinars dedicated to the CFPB’s TILA- Reserve Bank investigates complaints against Federal RESPA Integrated Disclosures Rule. In July, senior Reserve regulated entities in its District. The Federal Federal Reserve examiners delivered a webinar Reserve also responds to consumer inquiries on a addressing a variety of common consumer compli- broad range of banking topics, including consumer ance violations and emerging topics. The FFIEC protection questions. banking regulatory agencies partnered to offer a webinar update in October on flood insurance regu- In late 2007, the Federal Reserve established Federal lation and agencies charged with Fair Lending over- Reserve Consumer Help (FRCH) to centralize the sight delivered a “hot topics” webinar.17 intake of consumer complaints and inquiries. In 2015, FRCH processed 34,251 cases. Of these cases, Ongoing Training Opportunities 24,804 were inquiries and the remainder (9,447) were In addition to providing core examiner training, the complaints, with most cases received directly from examiner staff development function emphasizes the consumers. Approximately 5 percent of cases were importance of continuing lifelong learning. Opportu- referred to the Federal Reserve from other agencies. nities for continuing learning include special projects and assignments, self-study programs, rotational While consumers can contact FRCH by telephone, assignments, the opportunity to instruct at Federal fax, mail, e-mail, or online, most FRCH consumer Reserve schools, mentoring programs, and an annual contacts occurred by telephone (61 percent). Thirtyconsumer compliance examiner forum where senior seven percent (12,338) of complaint and inquiry subconsumer compliance examiners receive information missions were made electronically (via e-mail, online on emerging compliance issues and are able to share submissions, and fax), and the online form page best practices from across the System. received approximately 47,359 visits during the year. Consumer Complaints The Federal Reserve continued to offer Rapid Response sessions designed to provide examiners Complaints against Federal Reserve regulated entities brief updates on emerging issues and deliver training totaled 2,106 in 2015. Approximately 4 percent tied to the implementation of new laws, regulations, (77) of these complaints were closed without investior supervisory guidance as well as case studies. Five gation, pending the receipt of additional information consumer compliance Rapid Response sessions were from consumers. Nearly 9 percent of the total complaints were still under investigation in December 2015. Sixty-four percent (1,341) involved unregulated practices and 36 percent (765) involved regu- 17 For more information, see www.consumercomplianceoutlook .org/outlook-live/archives/. lated practices. (Table 1 shows the breakdown of

Consumer and Community Affairs 85 insufficient funds/overdraft charges and procedures Table 1. Complaints against state member banks and (28 percent), funds availability not as expected selected nonbank subsidiaries of bank holding companies about regulated practices, by regulation/act, 2015 (21 percent), disputed withdrawal of funds (10 percent), and alleged forgery/fraud/embezzlement/theft Regulation/act Number (10 percent). The most common real estate complaints by problem code related to debt collection/ Regulation AA (Unfair or Deceptive Acts or Practices) 12 Regulation B (Equal Credit Opportunity) 29 foreclosure concerns (14 percent); disputed rates, Regulation BB (Community Reinvestment) 2 terms, and fees (11 percent); and payment errors/ Regulation CC (Expedited Funds Availability) 65 delays (7 percent). The most common credit card Regulation D (Reserve Requirements) 3 complaints related to inaccurate credit reporting Regulation DD (Truth in Savings) 56 (47 percent), bank debt-collection tactics (11 per- Regulation E (Electronic Funds Transfers) 90 cent), and payment errors/delays (9 percent). Regulation H (National Flood Insurance Act / Insurance Sales) 8 Regulation M (Consumer Leasing Act) 2 Regulation P (Privacy of Consumer Financial Information) 36 Twenty-four regulated practices complaints alleging Regulation V (Fair and Accurate Credit Transactions) 47 discrimination on the basis of prohibited borrower Regulation Z (Truth in Lending) 135 traits or rights were received in 2015. Twelve discrimi- Check21 2 Garnishment Rule 2 nation complaints were related to the race, color, Fair Credit Reporting Act 173 national origin or ethnicity of the applicant or bor- Fair Debt Collection Practices Act 49 rower. Twelve discrimination complaints were related Fair Housing Act 24 to either the age, handicap, familial status, or religion HOPA (Homeowners Protection Act) 4 of the applicant or borrower. Of the closed com- Real Estate Settlement Procedures Act 23 plaints alleging discrimination based on a prohibited Right to Financial Privacy 2 Servicemembers Civil Relief Act (SCRA) 1 basis in 2015, there were no violations related to ille- Total 765 gal credit discrimination. In 76 percent of investigated complaints against Fedcomplaints about regulated practices by regulation or eral Reserve regulated entities, evidence revealed that act; table 2 shows complaints by product type.) institutions correctly handled the situation. Of the Complaints about Regulated Practices remaining 24 percent of investigated complaints, 4 percent were deemed violations of law, 3 percent The majority of regulated practices complaints conwere identified errors which were corrected by the cerned credit cards (38 percent), checking accounts bank, and the remainder included matters involving (23 percent), and real estate (12 percent).18 The most litigation or factual disputes, withdrawn complaints, common checking account complaints related to 18 Real estate loans include adjustable-rate mortgages, residential improvement loans, home purchase loans, home refinance/ construction loans, open-end home equity lines of credit, home closed-end loans, and reverse mortgages. Table 2. Complaints against state member banks and selected nonbank subsidiaries of bank holding companies about regulated practices, by product type, 2015 All complaints C omplaints involving violations Subject of complaint/product type Number Percent Number Percent Total 765 100 29 3.8 Discrimination alleged Real estate loans 19 2.5 1 0.1 Credit Cards 0 0 0 0 Other loans 5 0.7 0 0 Nondiscrimination complaints Checking accounts 177 23.1 3 0.4 Real estate loans 94 12.3 11 1.4 Credit cards 292 38.2 2 0.3 Other 178 23.3 12 1.6

86 102nd Annual Report | 2015 internally referred complaints, or information was jointly issued a final rule to amend regulations perprovided to the consumer. taining to loans secured by residential improved real estate or mobile homes located in special flood haz- Complaints about Unregulated Practices ard areas.20 The rule implements provisions of the The Board continued to monitor complaints about Biggert-Waters Flood Insurance Reform Act of 2012 banking practices not subject to existing regulations. (Biggert-Waters Act) relating to forced placement of In 2015, the Board received 1,341 complaints against flood insurance and provisions of the Homeowner Federal Reserve regulated entities that involved these Flood Insurance Affordability Act of 2014 (HFIAA) unregulated practices. The majority of the com- relating to escrowing flood insurance payments and plaints were related to electronic transactions/prepaid the exemption of certain detached structures from products (31 percent), credit cards (21 percent), the mandatory flood insurance purchase requirechecking account activity (15 percent), and commer- ment. HFIAA amends the escrow provisions of the cial loans/leases (4 percent). Biggert-Waters Act. Complaint Referrals In issuing the final rule, the agencies implemented the In 2015, the Federal Reserve forwarded 7,336 com- Biggert-Waters Act force placement of flood insurplaints against other banks and creditors to the ance provisions to clarify that lenders have the appropriate regulatory agencies and government authority to charge a borrower for the cost of flood offices for investigation. To minimize the time insurance coverage commencing on the date on required to re-route complaints to these agencies, which the borrower’s coverage lapsed or became referrals were transmitted electronically. insufficient. The rule also stipulates the circumstances under which the lender must terminate force- The Federal Reserve also forwarded 23 complaints to placed flood insurance and sets forth documentary the Department of Housing and Urban Develop- evidence of flood insurance that a lender must ment (HUD) that alleged violations of the Fair accept. Housing Act.19 The Federal Reserve’s investigation of these complaints revealed no instances of illegal In accordance with HFIAA, the final rule requires credit discrimination and were closed in 2015. regulated lending institutions to escrow flood insurance premiums and fees for loans made, increased, Consumer Inquiries extended, or renewed on or after January 1, 2016, The Federal Reserve received 24,804 consumer inqui- unless the regulated lending institution or a loan ries in 2015 covering a wide range of topics. Consum- qualifies for a statutory exception. In addition, for ers were typically directed to other resources, includ- outstanding residential loans made before that date, ing other federal agencies or written materials, to the rule requires institutions to provide borrowers the address their inquiries. option to escrow flood insurance premiums and fees. To facilitate compliance, the agencies’ rule includes new and revised sample notice forms and clauses Consumer Laws and Regulations concerning the escrow requirement and the option to escrow. Throughout 2015, DCCA continued to administer the Board’s regulatory responsibilities with respect to Consistent with HFIAA, the rule eliminates the legal certain entities and specific statutory provisions of requirement to purchase flood insurance for a structhe consumer financial services and fair lending laws. ture that is a part of a residential property located in This included drafting regulations and issuing intera special flood hazard area if that structure is pretations and compliance guidance for the industry detached from the primary residential structure and and the Reserve Banks. does not also serve as a residence. Under HFIAA, however, lenders may nevertheless require the pur- Flood Insurance Rule chase of flood insurance for such structures to protect the value of the collateral securing the loan. In July 2015, the Board, along with the Farm Credit Administration, the FDIC, the NCUA, and the OCC 19 A memorandum of understanding between HUD and the federal bank regulatory agencies requires that complaints alleging a 20 For more information, see www.federalreserve.gov/newsevents/ violation of the Fair Housing Act be forwarded to HUD. press/bcreg/20141024a.htm.

Consumer and Community Affairs 87 In a separate rulemaking, the agencies will address in the mobile financial services market, DCCA plans provisions of the Biggert-Waters Act related to lend- to consider what has been learned from the five surers’ acceptance of private flood insurance. veys to determine the future direction of the research in this area. Consumer Research and In addition, results from DCCA’s newest survey in Emerging-Issues and Policy Analysis the financial services area—the Survey of Household Economics and Decisionmaking (SHED) —were Throughout 2015, DCCA analyzed emerging issues published in the Report on the Economic Well-Being in consumer financial services policies and practices of U.S. Households in 2014, released in May 2015. in order to understand their implications for the DCCA launched the survey to better understand market-risk surveillance and supervisory policies consumer decisionmaking in the wake of the that are core to the Federal Reserve’s functions, as Great Recession, with the aim to capture a snapshot well as to gain insight into consumer financial of the financial and economic well-being of decisionmaking. U.S. households. In doing so, the SHED collects information on households that is not readily avail- Researching Issues Affecting Consumers able from other sources or is not available in combiand Communities nation with other variables of interest. Key findings from the 2014 survey include: In 2015, DCCA explored various issues related to • Individuals and their families experienced only consumers and communities by convening experts, mild improvements in their overall well-being, but conducting original research, and fielding new and they are increasingly optimistic about the trajectory ongoing surveys. The information gleaned from these of their well-being going forward. undertakings provided insights into the factors affecting consumers and households. • Forty-nine percent of part-time workers and 36 percent of all workers would prefer to work Consumer Behavior Research Surveys more hours at their current wage if they were able In order to better understand consumer decisionto do so. making in the rapidly evolving financial services sector, DCCA periodically conducts Internet panel sur- • Twenty-nine percent of respondents expect their veys to gather data on consumers’ experiences and income to be higher in the year after the survey perspectives on various issues of interest. than in the year prior to the survey. • Most renters express a preference for homeowner- With respect to ongoing surveys, DCCA conducted ship. However, many renters—and especially lowerits annual survey of consumers’ use of, and opinions income renters—indicate that financial barriers to about, mobile financial services. Since 2011, the homeownership prevent them from purchasing a survey has polled more than 2,200 individuals each home. year to learn whether and how they use mobile devices for banking and payments. The survey was • Forty-seven percent of respondents say they either also among the first to integrate questions about could not cover an emergency expense costing using mobile devices for shopping and comparing $400, or would cover it by selling something or borproducts along with questions about using mobile rowing money. devices for banking and payments. • Twenty percent of respondents report that their The findings of these surveys, conducted in the win- spending exceeded their income in the 12 months ter, are released each spring in the report Consumers prior to the survey. and Mobile Financial Services. Results from the • Sixty percent of respondents indicate they are survey conducted in November 2014 were published either somewhat or very confident they would be in March 2015.21 For the fifth survey, conducted approved for a mortgage if they were to apply. in December 2015, results will be published in March 2016. Given the rapid pace of developments • Just under one-third of those who applied for credit in the 12 months prior to the survey were 21 See Board of Governors of the Federal Reserve System, Consumers and Mobile Financial Services 2015 (Washington: Board econresdata/consumers-and-mobile-financial-services-reportof Governors, March 2015), www.federalreserve.gov/ 201503.pdf.

88 102nd Annual Report | 2015 Box 1. Why Research on Economic Mobility Matters Opportunitiestoadvanceeconomicallythroughthe ReserveChairJanetYellenprovidedopening achievementofhigherincomesandwealthaccumu- remarksfortheevent.2 lationarefundamentaltothegrowthandvitalityof Researchandperspectiveswerepresentedinadiafamilies,communities,andtheoveralleconomy. loguewithpolicymakersandcommunitypractitioners Whileeconomic,technological,andsocialchanges whocanutilizethelessonsgleanedfromthefindhavehistoricallyprovidedasparkforinnovationand ings.Scholarsexploredwhetherfundamental improvedmobility,inthewakeofthefinancialcrisis changesinoureconomy—especiallythoseassocithereissomeconcernaboutfutureprogress,paratedwiththeGreatRecession—arediminishingthe ticularlyforfinanciallyvulnerablepopulations.Underabilityoffamilies,communities,andtheeconomyto standingthefactorsthathelporhindereconomic adapt,innovate,andgrow.3Theirpresentations mobilitycanleadtomoresuccessfuleffortsto focusedonthreecentralquestions: advanceit. • Howdofamilies,households,andindividuals Tobridgethegapbetweenresearch,policy,and experienceeconomicmobility? practiceonkeyissuesfacingthecountryaround economicmobility,theFederalReserveSystem’s • Whatistherelationshipbetweencommunitiesand CommunityDevelopmentOfficesdedicatedtheninth economicmobility? biennialCommunityDevelopmentResearchConferencetothistopicinApril2015.1Titled“Economic • Howdoeseconomicmobility,orthelackofit, impactthebroadereconomy?Howdomacroeco- Mobility:ResearchandIdeasonStrengthening nomicforcesaffectindividual-orcommunity-level Families,Communities&theEconomy,”theconfereconomicmobilityoptionsandoutcomes? enceofferedresearchandpresentationsthat focusedonthefactorsthatcontributetoandchal- Apublicationdrawingonthesepresentationswillbe lengeeconomicmobility,particularlyamonglower- publishedandmadeavailableonlinein2016. incomehouseholdsandcommunities.Federal 2 Chair Yellen’s remarks are available at www.federalreserve.gov/ newsevents/speech/yellen20150402a.htm. For more information, see also www.federalreserve.gov/newsevents/speech/ yellen20141017a.htm. 3 FeaturedspeakersincludedFederalReserveBoardGovernor 1 Formoreinformationontheagendaandresearchpresented, Lael Brainard, whose speech, “Coming of Age in the Great see www.stlouisfed.org/community-development/economic- Recession,” is available at www.federalreserve.gov/newsevents/ mobility-conference-2015. speech/brainard20150402a.htm. turned down or given less credit than they what has changed over time. (See box 1 for more applied for. details.) Emerging research was presented in a dialogue with policymakers and community practitio- • Many individuals report that they are not planning ners who can utilize the lessons gleaned from for retirement and not saving for retirement. research. • Across a range of dimensions, individuals in lowerincome households express a higher frequency of Emerging-Issues Analysis financial challenges. The Policy Analysis function of DCCA provides key System Research Conference insights, information, and analysis on emerging In April 2015, DCCA staff organized (in partnership financial services issues that affect the well-being of with the Federal Reserve Bank of St. Louis) the ninth consumers and communities. To this end, Policy biennial Federal Reserve System’s Community Devel- Analysis staff analyze and anticipate trends, lead opment Research Conference. Over the years, this division-wide issues working groups, and organize unique event has aimed to bridge the gap among expert roundtables to identify emerging consumer research, policy, and practice on key issues facing the risks and inform policy recommendations. country. The 2015 conference informed a robust public conversation about economic mobility. The con- In 2015, the Policy Analysis team developed analyses ference organizers used the broad theme of economic on a broad range of issues that have the potential to mobility to advance understanding about how people pose risks in consumer financial service markets. and communities get ahead, where impediments Also, the team contributed to the planning for the six exist, how factors such as inequality play a role, and public outreach meetings held as part of decennial

Consumer and Community Affairs 89 review of banking regulations under the Economic expanding access to credit, the industry also raises Growth and Regulatory Paperwork Reduction Act. potential risks for borrowers, as these products can be considerably more expensive than traditional Student Loan Forum credit. Typical quantitative surveys do not probe Though research suggests that the lifetime returns to small businesses’ trust, understanding, or perceptions completing a college degree are, on average, positive of these alternatives. Together with colleagues at the and substantial, these returns largely depend upon Federal Reserve Bank of Cleveland, the Board’s program completion, institution attended, and sub- Policy Analysis team conducted online focus groups ject matter studied. In fact, many students take on of potential small business borrowers to help shed debt that they are later unable to repay. In Octo- light on these issues. Online focus groups are an ber 2015, the Policy Analysis team hosted an effective way to convene geographically dispersed invitation-only forum for researchers and college small business respondents—a group particularly administrators to discuss issues related to the finan- hard to reach face-to-face. cial decisionmaking of students, in particular, taking on student debt. Current research presented at the A report, Alternative Lending through the Eyes of forum focused on how students and their parents Mom & Pop Small Business Owners, was published in gather information about enrolling in and paying for August 2015.22 The study revealed that online lender college. For example, studies show that Hispanics are websites are appealing, but raise data security and more sensitive to distance from home relative to privacy concerns. Furthermore, small businesses find blacks or whites when it comes to choosing where to comparing products difficult using information typiapply and that a disproportionate share of blacks cally presented on lenders’ websites. Finally, small enroll in for-profit schools, which tend to have lower businesses appear to view “online” as a place, rather expected returns than public and nonprofit than a category of lending—a finding with important institutions. implications for future quantitative work on this topic. As for policy implications, participants noted that many students are not aware of how much they bor- Community Development row to pay for college and cannot accurately estimate how large their monthly payments will be once in repayment. Participants also discussed strategies for The Federal Reserve System’s Community Developmore effectively delivering financial information to ment function promotes economic growth and finanborrowers and identified opportunities for improving cial stability—particularly for underserved housethe existing student loan repayment system. holds and communities—by informing research, policy, and action. As a decentralized function, the Monitoring Trends in Auto Lending Community Affairs Officers at each of the 12 The Policy Analysis team continued to monitor Reserve Banks design activities to respond to the spedevelopments in auto lending. Federal Reserve cific needs of the communities they serve, with overresearch shows a solid recovery of the auto market sight from Board staff to promote and coordinate post-crisis and growth in auto loan originations. Systemwide priorities. However, concerns have been raised among consumer advocates and the media that increased lend- Exploring Experiences and Expectations ing to below-prime borrowers and the use of high- in the Labor Market cost loans and longer loan terms could result in The fragility and unevenness of the economic recovfinancial hardship for households struggling with livery has motivated many individuals (entrant, current, ing expenses and other debt obligations. and former workers) to search for remedies and stop- Small Business Borrowers and gap measures for making ends meet. In 2015, the Alternative Lending Community Development staff at the Federal Reports suggest more small businesses are turning to 22 See Barbara J. Lipman and Ann Marie Wiersch, Alternative online alternative lenders for working capital. These Lending through the Eyes of “Mom & Pop” Small Business Ownnonbank lenders offer small-dollar cash advances ers: Findings from Online Focus Groups (Cleveland: Federal and short-term loans. Many provide funds in days Reserve Bank of Cleveland, August 2015), www.clevelandfed .org/en/newsroom-and-events/publications/special-reports/sror even hours, using data-driven approaches for 20150825-alternative-lending-through-the-eyes-of-mom-andunderwriting and pricing. While promising for pop-small-business-owners.aspx.

90 102nd Annual Report | 2015 Reserve fielded two surveys to explore the experi- cational choices and employment opportunities. It ences and expectations of individuals in the labor captures the satisfaction of young workers in their market. Staff reviewed existing research and engaged jobs and in their prospects of upward mobility. external research and policy experts to identify the Lastly, the survey examines the respondents’ outlook potential economic implications of changing nature on the economy and the drivers behind their optiin these labor market trends. This initial exploration mism and pessimism. raised several questions about the experiences of workers that were not fully explained by existing Reports that summarize the findings from these surdata. veys, as well as frame future research and policy considerations by the Federal Reserve, will be forthcom- The Survey of Enterprising and Informal Work ing in 2016. Activity examined the extent to which individuals are increasingly acting as their own agents of employ- Engaging the Board on Community ment rather than employees of a particular firm to Development Issues and Concerns supplement or supplant income. The survey measures In 2015, DCCA led the formation of the Federal the incidence of various income-generating activities Reserve Board’s new Community Advisory Council and their economic importance to the individuals (CAC), which the Board created to serve as an advithat engage in them. It also assesses the relative fresory committee on issues affecting consumers and quency and importance of work activities over time, communities (see box 2).23 The CAC will compleparticularly in response to the growing income ment two of the Board’s other advisory councils— inequality and difficulty in securing employment with the Federal Advisory Council and the Community living-wages and secure benefits. Finally, the survey Depository Institutions Advisory Council—whose identifies the characteristics of these entrepreneurial members represent depository institutions. (For a list individuals and the corresponding types of activities of CAC members in 2015, as well as members of they pursue. other Board advisory councils, see section 14, “Federal Reserve System Organization.”) Similarly, the Survey of Young Workers examines the perceptions and experiences of adults—ranging in 23 For more information see www.federalreserve.gov/newsevents/ age from 18 to 30—in the labor market. The survey press/other/20150413a.htm and www.federalreserve.gov/ attempts to understand the connection between edu- newsevents/press/other/20150922a.htm.

Consumer and Community Affairs 91 Box 2. Advising the Board on Consumer and Community Development Issues OnNovember20,2015,theBoardconvenedthe andassetandwealthbuilding.Councilmembers inauguralmeetingofitsCommunityAdvisoryCoun- alsorepresentvariousurbanandruralcommunities cil(CAC),whichwasestablishedtoofferdiverse fromacrossthecountry,bringinggeographically perspectivesontheeconomiccircumstancesand diverseviewpointstothediscussions. financialservicesneedsofconsumersandcommu- TheFederalReservecarriesoutnumerousfunctions nities.TheBoardwillmeetsemiannuallywiththe thatbenefitfromtheadvicethecouncilprovides. CACtogaintheseinsightsdirectlyfromcommunity Theseincludebankingsupervisionandregulatory leadersandotherexpertsoncommunityandconcompliance(includingtheenforcementofconsumer sumeraffairs.TheCACcomplementsinformation protection,fairlending,andcommunityreinvestment providedbythemembersoftheBoard’sotheradvilaws)forthefinancialinstitutionsitsupervises;syssorycouncils—theFederalAdvisoryCouncilandthe temicriskoversight;andtheBoard’sassessmentof CommunityDepositoryInstitutionsAdvisoryCouneconomicandfinancialconditionsaspartofitsmoncil—whicharecomprisedofrepresentativesoffinanetarypolicydecisionmaking. cialinstitutions. TheCAC’s15memberswereselectedfromsubmis- During their initial meeting with the Board, CAC sionsreceivedthroughapublicprocessandinclude members emphasized that the economic recovery abroadgroupofexpertsandrepresentativesof has not reached all segments of the population, parconsumerandcommunitydevelopmentorganizaticularly LMI individuals and communities of color. tionsandinterests,withaparticularfocusonthe Members also noted that underserved households concernsoflow-andmoderate-income(LMI)conand communities have found it exceedingly difficult sumersandcommunities.1Forinstance,members to access fair and affordable credit and financial serrepresentsuchfieldsasaffordablehousing,commuvices since the Great Recession. A summary of the nityandeconomicdevelopment,smallbusiness, CAC’s discussion with the Board of Governors is available at www.federalreserve.gov/aboutthefed/cac .htm under “Records of the meetings of the Commu- 1 For more information, see www.federalreserve.gov/newsevents/ nity Advisory Council.” press/other/20150413a.htm and www.federalreserve.gov/ newsevents/press/other/20150922a.htm.

93 6 Federal Reserve Banks The Federal Reserve Banks provide payment services amendments to Regulation J adopted by the Federal to depository and certain other institutions, distribute Reserve Board in December 2014.2 Under the new the nation’s currency and coin to depository institu- posting rules, commercial and government ACH tions, and serve as fiscal agents and depositories for debit and credit transactions specified for future the U.S. government and other entities. The Reserve settlement post at 8:30 a.m., and commercial check Banks also contribute to setting national monetary transactions settle at 8:30 a.m., 1:00 p.m., and 5:30 policy and supervision of banks and other financial p.m., with the bulk of credits for deposits and debits entities operating in the United States (discussed in for presentments settling at 8:30 a.m.3 The amendsections 2 through 4 of this annual report). ments to Regulation J permit the Reserve Banks to obtain settlement from paying banks as early as 8:30 a.m. for checks that the Reserve Banks present. The Federal Reserve Priced Services amendments also permit the Reserve Banks to require paying banks that receive presentment of Reserve Banks provide a range of payment and checks from the Reserve Banks to make the proceeds related services to depository and certain other insti- of settlement for those checks available to the tutions; these “priced services” include collecting Reserve Banks as soon as 30 minutes after receipt of checks, operating an automated clearinghouse the checks. (ACH) service, transferring funds and securities, and providing a multilateral settlement service.1 Cost Recovery The Reserve Banks have been engaged in a number The Monetary Control Act of 1980 requires that the of multiyear technology initiatives that will modern- Federal Reserve establish fees for priced services to ize their priced-services processing platforms. The recover, over the long run, all direct and indirect costs Reserve Banks reached a significant milestone in the actually incurred as well as the imputed costs that multiyear Fedwire Modernization Program by suc- would have been incurred—including financing costs, cessfully migrating the Fedwire Securities Service off taxes, and certain other expenses—and the return on the legacy mainframe system in November 2015. equity (profit) that would have been earned if a pri- (The Banks completed the migration of the Fedwire vate business firm had provided the services.4 The Funds Service in 2014.) The Reserve Banks sus- imputed costs and imputed profit are collectively pended the FedACH technology modernization ini- referred to as the private-sector adjustment factor tiative and began to investigate the use of other tech- (PSAF). From 2006 through 2015, the Reserve Banks nology solutions in 2014, and after an extensive review of options for an alternative processing solu- 2 Federal Reserve Policy on Payment System Risk; Procedures for tion, the Reserve Banks selected a vendor and signed Measuring Daylight Overdrafts, 79 Fed. Reg. 72,112 (Decema contract in December 2015 to proceed with the new ber 5, 2014), www.gpo.gov/fdsys/pkg/FR-2014-12-05/pdf/2014- FedACH platform. 28664.pdf; Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers Through Fedwire: Time of Settlement by a Paying Bank for an Item Received From a On July 23, 2015, the Reserve Banks implemented Reserve Bank, 79 Fed. Reg. 72,107 (December 5, 2014), www new posting rules for ACH and commercial check .gpo.gov/fdsys/pkg/FR-2014-12-05/pdf/2014-28516.pdf. transactions associated with the changes to part II of 3 All times are eastern time unless otherwise specified. 4 Depository Institutions Deregulation and Monetary Control the Policy on Payment System Risk and companion Act, Pub. L. No. 96–221, 94 Stat. 132 (1980). Financial data reported throughout this section—including revenue, other 1 The ACH enables depository institutions and their customers to income, costs, income before taxes, and net income—will referprocess large volumes of payments through electronic batch ence the “Pro Forma Financial Statements for Federal Reserve processes. Priced Services” at the end of this section.

94 102nd Annual Report | 2015 Table 1. Priced services cost recovery, 2006–15 Millions of dollars, except as noted Year Revenue from services1 O per i a m ti p n u g t e e d xp c e o n s s t e s2 s and Targeted return on equity3 Total costs Cost recovery (percent)4 2 006 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 2015 429.1 397.8 5.6 403.4 106.4 2006–15 6,397.7 5,941.6 292.9 6,234.5 102.6 Note: Here and elsewhere in this section, components may not sum to totals or yield percentages shown because of rounding. 1 For the 10-year period, includes revenue from services of $6,019.7 million and other income and expense (net) of $378.0 million. 2 For the 10-year period, includes operating expenses of $5,710.5 million, imputed costs of $24.6 million, and imputed income taxes of $206.5 million. 3 From 2009 to 2012, the PSAF was adjusted to reflect the actual clearing balance levels maintained; previously, the PSAF had been calculated based on a projection of clearing balance levels. 4 Revenue from services divided by total costs. For the 10-year period, cost recovery is 92.8 percent, including the effect of accumulated other comprehensive income (AOCI) reported by the priced services under ASC 715. For details on changes to the estimation of priced services accumulated other comprehensive income and their effect on the pro forma financial statements, refer to note 3 to the “Pro Forma Financial Statements for Federal Reserve Priced Services” at the end of this section. recovered 102.6 percent of the total priced services Banks recovered 113.0 percent of the total costs of costs, including the PSAF (see table 1).5 their commercial check-collection service, including the related PSAF. Revenue from operations totaled In 2015, Reserve Banks recovered 106.4 percent of $160.6 million, resulting in net income of $20.4 milthe total priced services costs, including the PSAF.6 lion. The Reserve Banks’ operating expenses and The Reserve Banks’ operating expenses and imputed imputed costs totaled $140.2 million. Reserve Banks costs totaled $397.8 million. Revenue from opera- handled 5.5 billion checks in 2015, a decrease of tions totaled $429.1 million, resulting in net income 5.0 percent from 2014 (see table 2). The average daily from priced services of $31.3 million. All services value of checks collected by the Reserve Banks in achieved full cost recovery. Greater-than-expected 2015 was approximately $32.3 billion, or roughly the check volume processed by the Reserve Banks was same as in 2014. the single most significant factor influencing priced services cost recovery. Commercial Automated Clearinghouse Service Commercial Check-Collection Service The commercial ACH service provides domestic and The commercial check-collection service provides a cross-border batched payment options for same-day suite of electronic and paper processing options for and next-day settlement. In 2015, the Reserve Banks forward and return collections. In 2015, the Reserve recovered 100.7 percent of the total costs of their commercial ACH services, including the related 5 According to the Accounting Standards Codification (ASC) PSAF. Revenue from operations totaled $125.5 mil- Topic 715 (ASC 715), Compensation–Retirement Benefits, the Reserve Banks recognized a $107.8 million reduction in equity lion, resulting in net income of $2.7 million. The related to the priced services’ benefit plans through 2015. Reserve Banks’ operating expenses and imputed Including this reduction in equity, which represents a decline in costs totaled $122.8 million. The Reserve Banks proeconomic value, results in cost recovery of 92.8 percent for the 10-year period. For details on how implementing ASC 715 cessed 12.3 billion commercial ACH transactions in affected the pro forma financial statements, refer to note 3 to the 2015, an increase of 5.8 percent from 2014 (see pro forma financial statements at the end of this section. table 2). The average daily value of FedACH trans- 6 Total cost is the sum of operating expenses, imputed costs fers in 2015 was approximately $81.9 billion, an (income taxes, interest on debt, interest on float, and sales taxes), and the targeted return on equity. increase of 3.4 percent from the previous year.

Federal Reserve Banks 95 Table 2. Activity in Federal Reserve priced services, 2013–15 Thousands of items, except as noted Percent change Service 2015 2014 2013 2014 to 2015 2013 to 2014 Commercial check 5,452,369 5,741,527 5,988,302 -5.0 -4.1 Commercial ACH 12,298,307 11,620,376 11,142,821 5.8 4.3 Fedwire funds transfer 146,006 138,133 137,219 5.7 0.7 National settlement 508 597 661 -14.9 -9.7 Fedwire securities 4,218 4,578 6,535 -7.9 -30.0 Note: Activity in commercial check is the total number of commercial checks collected, including processed and fine-sort items; in commercial ACH, the total number of commercial items processed; in Fedwire funds transfer and securities transfer, the number of transactions originated online and offline; and in national settlement, the number of settlement entries processed. In September 2015, after consideration of public increased 5.7 percent from 2014, to approximately comment, the Board approved enhancements, effec- 146 million (see table 2). The average daily value of tive beginning September 23, 2016, to the Reserve Fedwire funds transfers in 2015 was $3.3 trillion, a Banks’ same-day ACH service. The enhancements decrease of 6 percent from the previous year. require receiving depository financial institutions (RDFIs) to participate in the service and require National Settlement Service originating depository financial institutions to pay a The National Settlement Service is a multilateral fee to the RDFIs for each same-day ACH forward settlement system that allows participants in privatetransaction. The enhancements align the Reserve sector clearing arrangements to settle transactions Banks’ same-day ACH service with amendments to using their balances at Reserve Banks. In 2015, the NACHA’s (formerly the National Automated Clear- service processed settlement files for 17 local and ing House Association) ACH operating rules and national private-sector arrangements. The Reserve establish a ubiquitous same-day ACH service with Banks processed 9,372 files that contained 507,559 improved efficiency for the ACH network and the settlement entries for these arrangements in 2015 (see broader U.S. payment system. The enhancements will table 2). Activity in 2015 represents a 5.3 percent facilitate the use of the ACH network for certain decrease in settlement files and a 10.9 percent time-critical payments, accelerate final settlement, decrease in settlement entries compared with 2014. and improve funds availability to payment recipients, consistent with the Federal Reserve System’s Strate- Fedwire Securities Service gies for Improving the U.S. Payment System (see box 1, “Improving the U.S. Payment System”). The Fedwire Securities Service allows its participants to transfer electronically to other service participants Fedwire Funds and National certain securities issued by the U.S. Treasury Depart- Settlement Services ment, federal government agencies, governmentsponsored enterprises, and certain international orga- In 2015, the Reserve Banks recovered 103.9 percent nizations.7 In 2015, the Reserve Banks recovered of the costs of their Fedwire Funds and National 108.2 percent of the costs of their Fedwire Securities Settlement Services, including the related PSAF. Rev- Service, including the related PSAF. Revenue from enue from operations totaled $116.0 million, resulting operations totaled $27.1 million, resulting in a net in a net income of $5.9 million. The Reserve Banks’ income of $2.4 million. The Reserve Banks’ operatoperating expenses and imputed costs totaled ing expenses and imputed costs totaled $24.7 million $110.1 million in 2015. in 2015. In 2015, the number of non-Treasury securi- Fedwire Funds Service 7 The expenses, revenues, volumes, and fees reported here are for The Fedwire Funds Service allows its participants to transfers of securities issued by federal government agencies, send or receive domestic time-critical payments using government-sponsored enterprises, and certain international their balances at Reserve Banks to transfer funds in organizations. Reserve Banks provide Treasury securities services in their role as Treasury’s fiscal agent. These services are real time. In 2015, the number of Fedwire funds not considered priced services. For details, see “Treasury Securitransfers originated by depository institutions ties Services” later in this section.

96 102nd Annual Report | 2015 Box 1. Improving the U.S. Payment System The Federal Reserve plays many roles in the payment approved effectiveness criteria that will be used to system, including payment system operator, supervi- assess potential faster payments solutions; and cresor of financial institutions and systemically important ated a plan for conducting a qualified independent financial market utilities, regulator, researcher, and assessment of faster payments solutions. In its next catalyst for improvement. Acting primarily in its cata- phases, the Faster Payments Task Force, with input lyst role, the Federal Reserve encouraged payments from the Secure Payments Task Force, plans to stakeholders to join together to improve the payment assess possible faster payment solutions and lay out system in the United States in its “Strategies for its thinking on the opportunities and potential issues Improving the U.S. Payment System” paper, issued or barriers for implementing faster payments in the in January 2015. The paper communicates desired United States. outcomes for the payment system and outlines the The Secure Payments Task Force developed success strategies and tactics the Federal Reserve will purstatements to guide the task force’s efforts, dissue, in collaboration with stakeholders, to help the cussed areas of focus and identified four topiccountry achieve these outcomes. Two of the stratespecific work groups to be launched in 2016, and gies called for the creation of task forces focused on developed a list of ideas for advising the Federal faster payments and payment security. The task Reserve. The task force is also actively engaged with forces will allow private-sector participants to colthe work of the Faster Payments Task Force. laborate to create new approaches that will serve the public. More than 300 participants from a range of The Federal Reserve and the task forces are working stakeholders have joined the Faster Payments Task to maintain transparency throughout the process. For Force, and almost 200 have joined the Secure Pay- example, the Federal Reserve has developed the ments Task Force. FedPayments Improvement website (https:// fedpaymentsimprovement.org/), which hosts a Fed- Over the course of the year, the Faster Payments Payments Improvement Community that enables Task Force developed a decisionmaking framework interested parties to stay informed and to engage in for approving key task force processes, initiatives, an exchange of information pertaining to the Federal and work products; issued a glossary of terms Reserve’s efforts to improve the U.S. payment to provide a foundation for a common lexicon; system. ties transfers processed via the service decreased receive currency and coin through depository institu- 7.9 percent from 2014, to approximately 4.2 million tions in response to public demand. Together, the (see table 2). The average daily value of Fedwire Board and Reserve Banks work to maintain the Securities transfers in 2015 was $1.2 trillion, an integrity of and confidence in Federal Reserve notes. increase of 2.6 percent from the previous year. In 2015, the Reserve Banks distributed 36.8 billion Float Federal Reserve notes into circulation, a 1.5 percent decrease from 2014, and received 35.1 billion Federal In 2015, the Reserve Banks had daily average credit Reserve notes from circulation, a 1.5 percent decrease float of $193.2 million, compared with daily average from 2014. In 2015, the Reserve Banks also distribcredit float of $590.8 million in 2014.8 uted 71.4 billion coins into circulation, a 2.9 percent increase from 2014, and received 55.9 billion coins from circulation, a 0.9 percent decrease from 2014. Currency and Coin The value of Federal Reserve notes in circulation The Board is the issuing authority for the nation’s increased nearly 6.2 percent in 2015, to $1,380 billion currency (in the form of Federal Reserve notes). In at year-end. The increase in value is largely attribut- 2015, the Board paid Treasury’s Bureau of Engraving able to increased demand for $100 notes, which are and Printing (BEP) $637.3 million for costs associused internationally primarily as a store of value. ated with the production of nearly 7.1 billion Federal Demand for denominations primarily used for Reserve notes. The Reserve Banks distribute and domestic transactions also increased. The volume of $1 and $20 notes in circulation increased 4.2 percent 8 Credit float occurs when the Reserve Banks debit the paying in 2015, compared with 6.7 percent growth in the volbank for checks and other items prior to providing credit to the depositing bank. ume of $100 notes in circulation.

Federal Reserve Banks 97 Improvements to Efficiency and Treasury and other entities.9 Support for Treasury Risk Management programs accounted for 94.1 percent of expenses, and support for other entities accounted for During 2014 and 2015, the Reserve Banks tested and 5.9 percent. implemented several new concepts in receiving and high-speed processing of cash to improve operational In April 2014, as part of the federal government’s flexibility and cost-effectiveness, while still maintain- effort to increase operational efficiency and effectiveing a well-controlled environment. The Federal ness, Treasury announced the consolidation of the Reserve estimates that the implementation of these fiscal agency services provided by the Reserve Banks. new concepts will result in savings of more than Although Treasury expects long-term savings by $5 million between 2014 and 2016, primarily because reducing the number of Reserve Banks that provide of lower personnel expenses. fiscal agency services, an increase in expenses is projected during the consolidation process, which will Other Improvements and Efforts continue over the next several years. In 2015, total consolidation expenses amounted to $27.2 million, as During 2015, the Reserve Banks continued to a result of the first three Reserve Bank business lines develop a new cash automation platform (CashFor- that transitioned and preparations for the upcoming ward) that will replace legacy software applications, transitions.10 Consolidation expenses are included in automate business concepts and processes, and the line items for Payment, Collection, and Cashemploy technologies to meet the cash business’s cur- management services in table 3. rent and future needs more cost-effectively. The new platform will also facilitate business continuity and Treasury Securities Services contingency planning and enhance the support provided to Reserve Bank customers. During 2015, the The Reserve Banks work closely with Treasury’s Fis- Federal Reserve completed development of the appli- cal Service in support of the borrowing needs of the cation and began integration and quality assurance federal government. The Reserve Banks auction, testing. Deployment of the application at each issue, maintain, and redeem securities; provide cus- Reserve Bank is estimated to begin in mid-2016 and tomer service; and operate the automated systems finish by late 2017. supporting U.S. savings bonds and marketable Treasury securities (bills, notes, and bonds). Treasury securities services consist of retail securities programs, Fiscal Agency and Government which primarily serve individual investors, and wholesale securities programs, which serve institu- Depository Services tional customers. As fiscal agents and depositories for the federal gov- Retail Securities Programs ernment, the Reserve Banks auction Treasury securities, process electronic and check payments for Treas- Reserve Bank operating expenses for the retail securiury, collect funds owed to the federal government, ties program decreased to $52.9 million in 2015, maintain Treasury’s bank account, and develop, largely because of the transition of the savings bond operate, and maintain a number of automated sys- print operation from the Reserve Banks to the Treastems to support Treasury’s mission. The Reserve ury and the decommissioning of the Legacy Treasury Banks also provide certain fiscal agency and deposi- Direct system as part of an ongoing effort to elimitory services to other entities; these services are primarily related to book-entry securities. Treasury and other entities fully reimburse the Reserve Banks for 9 Board policy requires the Reserve Banks to seek reimbursement for the costs to provide fiscal agency services. Historically, the the expense of providing fiscal agency and depository Reserve Banks did not seek reimbursement for pension benefits services. to Reserve Bank employees who support fiscal agency services. The Reserve Banks began to seek reimbursement for the onetime pension costs that resulted from consolidation activities in In 2015, fiscal agency expenses increased to 2014 and to seek full reimbursement for all fiscal agency-related $650.6 million (see table 3), primarily as a result of pension costs beginning in 2015. Pension costs are shown in the aggregate across programs in table 3 rather than by each requests from Treasury’s Bureau of the Fiscal Service program. (Fiscal Service) and the addition of $54.6 million in 10 The 10 remaining business lines are scheduled to transition over Reserve Bank pension costs to be reimbursed by the next three years, with the majority transitioning in 2016.

98 102nd Annual Report | 2015 Table 3. Expenses of the Federal Reserve Banks for fiscal agency and depository services, 2013–15 Thousands of dollars Agency and service 2015 2 014r 2013 Department of the Treasury Treasury securities services Treasury retail securities 52,945 54,958 55,334 Treasury auction 35,701 29,491 26,673 Treasury securities safekeeping and transfer 21,254 16,568 14,397 Computer infrastructure development and support 6,371 5,792 5,801 Other services 2,194 853 2,971 Total 118,465 107,662 105,176 Payment, collection, and cash-management services Payment services 161,681 157,869 151,715 Collection services 59,513 52,878 44,788 Cash-management services 79,161 74,428 66,519 Computer infrastructure development and support 89,069 79,289 75,565 Other services 10,998 11,465 9,360 Total 400,422 375,928 347,947 Other Treasury Total 41,971 44,756 42,826 Total, Treasury 560,857 528,346 495,949 Other entities Total, other entities 35,140 34,588 34,077 Pension costs Total, Treasury and other entities 54,586 6,704 n/a Total reimbursable expenses 650,583 569,638 530,026 Note: “Pension costs” is a new category in this table. The 2014 figures were restated to reflect this change. r Revised. n/a Not applicable. nate aging technology platforms.11 Program expense marketable Treasury security with a floating rate drivers included the Reserve Banks’ implementation interest payment that was introduced in 2014.12 of a virtual case-file system and a virtual contact center to modernize retail securities services, and In 2015, Reserve Bank operating expenses to support increased staffing to manage the increasing inventory Treasury securities auctions increased to $35.7 milof savings bond redemption work. lion. Operating expenses were driven by upgrades to the auction system, which receives and processes bids The Reserve Banks also provided support to Trea- submitted primarily by wholesale securities auction sury’s Retail Program Review initiative, which will participants.13 define the retail securities program’s future mission, vision, and operating model. Operating expenses to Operating expenses associated with Treasury securisupport this effort were $1.4 million in 2015. ties safekeeping and transfer activities increased to $21.3 million in 2015, as a result of the Reserve Wholesale Securities Programs Banks’ effort to migrate the securities services from a mainframe system to a distributed computing The Reserve Banks support wholesale securities pro- environment. grams through the sale, issuance, safekeeping, and transfer of marketable Treasury securities for institutional investors. The Reserve Banks conducted 272 Treasury securities auctions in 2015. Of the 272 auc- 12 Floating Rate Notes were the first new Treasury security issued tions, 12 auctions were for Floating Rate Notes—a since the introduction of Treasury Inflation-Protected Securities almost two decades ago. 13 Wholesale securities auction participants include depository 11 The Legacy Treasury Direct system was established in 1986. The institutions, dealers and brokers, investment funds, pension and system allowed U.S. individual investors to purchase and hold retirement funds, foreign and international entities, and indi- Treasury marketable securities (for example, notes and bonds). vidual investors.

Federal Reserve Banks 99 Payment Services In 2015, Reserve Bank operating expenses for Treasury’s SVC business increased to $19.8 million, The Reserve Banks work closely with the Treasury’s largely because of $3.3 million in expenses associated Fiscal Service and other government agencies to pro- with the transition of the Navy Cash program from a cess payments to individuals and companies. The third-party financial agent, and $3.7 million in con- Reserve Banks process federal payroll payments, solidation costs.14 Social Security and veterans’ benefits, income tax refunds, vendor payments, and other types of The Reserve Banks operate the U.S. Treasury Elecpayments. tronic Payment Solution Center, which helps convert individuals’ federal benefit payments from paper Reserve Bank operating expenses for payments- check to electronic delivery. As of December 2015, related activity increased to $161.7 million in 2015. 98.0 percent of all federal benefit payments were Expenses were primarily attributable to increased made electronically. In 2015, expenses for the U.S. consolidation expenses, and increased program Treasury Electronic Payment Solution Center were expenses associated with Do Not Pay (DNP), Inter- $15.7 million. national Treasury Services (ITS), Post Payment System (PPS), and Stored Value Card (SVC). These The IPP is part of Treasury’s all-electronic initiaexpense increases were partly offset by decreased tive—an electronic invoicing and payment informaexpenses for the U.S. Treasury Electronic Payment tion system that allows vendors to enter invoice data Solution Center (formerly known as the Go Direct electronically, through either a web-based portal or Contact Center) and Invoice Processing Platform electronic submission. The IPP accepts, processes, (IPP). and presents data from agencies and supplier systems related to all stages of a payment transaction, including the purchase order, invoice, and other payment In support of Treasury’s DNP initiative, the Reserve information. In 2015, the Reserve Banks’ IPP Banks continued to enhance the DNP Portal, which expenses decreased to $21.4 million, primarily is a single point of access through which federal because of decreased consolidation expenses. The agencies can query multiple data sources before makreduction of expenses was partially offset by ing federal payments. In 2015, expenses for DNP increased program expenses to support a new Office increased to $17.7 million, largely because of of Management and Budget mandate that requires increased staffing to support the advanced analytics agencies to implement an electronic invoicing solufunction. tion for commercial transactions by 2018. The Reserve Banks operate the ITS application, Collection Services which provides cross-border payment and collection services as well as cash-management functions on The Reserve Banks also work closely with the Fiscal behalf of the Treasury. U.S. government agencies use Service to collect funds owed to the federal govern- ITS to issue international benefit, payroll, and venment, including various taxes, fees for goods and serdor payments in 100 currencies to recipients in estabvices, and delinquent debts. In 2015, Reserve Bank lished and emerging markets. ITS expenses in 2015 operating expenses related to collection services increased to $20.2 million primarily because of increased to $59.5 million, largely because of greater $6.5 million in consolidation costs. operating expenses for Pay.gov, eCommerce, and the Collections Information Repository (CIR). The Reserve Banks continued work on the PPS initiative, a multiyear effort to modernize several of The Reserve Banks operate Pay.gov, an application Treasury’s legacy post-payment processing systems that allows the public to use the Internet to authorize into a single application to enhance operations, and initiate payments to federal agencies. During the reduce expenses, improve data analytics capabilities, year, the Pay.gov program expanded to include and provide a centralized and standardized set of payment data. In 2015, program expenses for PPS 14 The Reserve Banks currently operate two military “smart card” increased to $16.6 million, as the result of greater programs, EagleCash and EZpay, on behalf of the Treasury, and will assume additional responsibilities for the Navy Cash prosystem development expenses, and $2.1 million in gram over the next two years. The Reserve Banks began working consolidation expenses. on the transition of Navy Cash in 2015.

100 102nd Annual Report | 2015 100 new agency programs and processed more than for CARS increased to $19.9 million as a result of 167 million online payments totaling $148 billion. increased application development expenses. Increased operational support and expanded functionality resulted in expenses of $19.1 million in Services Provided to Other Entities 2015. When permitted by federal statute or when required by the Secretary of the Treasury, the Reserve Banks The Reserve Banks also continued supporting the provide fiscal agency and depository services to other Treasury’s electronic commerce initiative (eComdomestic and international entities. merce) to expand ways for agencies and the public to do business with the Treasury through online bank- Reserve Bank operating expenses for services proing solutions, mobile technologies, and other payvided to other entities increased slightly to $35.1 milment methods. Program expenses for eCommerce lion in 2015. Book-entry securities issuance and increased to $4.3 million in 2015, primarily because maintenance activities account for a significant of expenses associated with developing a new mobile amount of the work performed for other entities, payment platform that will facilitate more efficient with the majority performed for the Federal Home federal revenue collections. Loan Mortgage Association (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), In 2015, the Reserve Banks began working on the and the Government National Mortgage Association transition of the CIR application from a third-party (Ginnie Mae). financial agent.15 Expenses for CIR totaled $2.9 million in 2015 and were largely attributable to application development. Use of Federal Reserve Intraday Credit Treasury Cash-Management Services The Board’s Payment System Risk policy governs the The Reserve Banks maintain Treasury’s operating use of Federal Reserve Bank intraday credit, also cash account and provide collateral-management and known as daylight overdrafts. A daylight overdraft collateral-monitoring services for those Treasury prooccurs when an institution’s account activity creates grams that have collateral requirements. The Reserve a negative balance in the institution’s Federal Reserve Banks also support Treasury’s efforts to modernize account at any time in the operating day. Daylight its financial management processes by developing overdrafts enable an institution to send payments software, operating help desks, and managing projmore freely throughout the day than if it were limited ects on behalf of the Fiscal Service. In 2015, Reserve strictly by its available intraday funds balance. The Bank operating expenses related to Treasury cash- Payment System Risk policy recognizes explicitly the management services increased to $79.2 million, of role of the central bank in providing intraday balwhich $7.1 million was attributable to the ances and credit to healthy institutions; under the consolidation. policy, the Reserve Banks provide collateralized intraday credit at no cost. During 2015, the Reserve Banks continued to support Treasury’s efforts to improve centralized govern- Before the 2007–09 financial crisis, overnight balment accounting and reporting functions. In ances were much lower and daylight overdrafts sig- March 2015, the Reserve Banks, in collaboration nificantly higher than levels observed since late 2008. with the Fiscal Service, deployed the Central The use of daylight overdrafts spiked amid the mar- Accounting Reporting System (CARS) as Treasury’s ket turmoil near the end of 2008, but dropped new central accounting system of record.16 Expenses sharply as various liquidity programs initiated by the Federal Reserve took effect. During this period, the Federal Reserve also began paying interest on bal- 15 The CIR is a platform that enables the Fiscal Service to standardize the availability of financial information across all settle- ances held at the Reserve Banks, increased its lending ment mechanisms and collection systems, furthering transpar- under the Term Auction Facility, and began purchasency goals and enabling federal agencies to improve cash maning government-sponsored enterprise mortgageagement decisions and performance. The CIR will transition from a third-party financial agent to the Federal Reserve System backed securities. These measures tended to increase by year-end 2016. 16 CARS provides Treasury with a modernized system for the col- accounting information transmitted by and to federal program lection and dissemination of financial management and agencies.

Federal Reserve Banks 101 and allocate the associated costs and revenue to the Figure 1. Aggregate daylight overdrafts, 2007–15 various services. There are currently five FedLine channels through which customers can access the Billions of dollars 200 Reserve Banks’ priced services: FedMail, FedLine Peak daylight overdrafts Web, FedLine Advantage, FedLine Command, and FedLine Direct. These FedLine channels are Average daylight overdrafts 150 designed to meet the individual connectivity, security, and contingency requirements of depository institution customers. 100 Between 2007 and 2015, the number of depository institutions in the United States declined 25 percent, 50 and Reserve Bank priced FedLine connections decreased nearly 15 percent. During this same period, the number of employees within depository 0 institutions who have FedLine credentials increased 2007 2008 2009 2010 2011 2012 2013 2014 2015 23 percent, reflecting in part the expansion of valueadded services provided and use of the network for balances institutions held at the Banks, which central bank applications.17 Between 2012 and 2015, decreased the demand for intraday credit. In 2007, more than 11,000 credentials for FedLine were issued for example, institutions held, on average, less than to individuals accessing central bank applications for $20 billion in overnight balances, and total average regulatory reporting purposes. daylight overdrafts were around $60 billion. In contrast, institutions held historically high levels of over- The Reserve Banks continue to maintain their focus night balances—on average more than $2.77 tril- on security and resiliency by upgrading critical elelion—at the Reserve Banks in 2015, while daylight ments of the FedLine solutions. Enhancements to the overdrafts remained historically low. In fact, average FedLine Advantage and FedLine Command access daylight overdrafts across the Federal Reserve System solutions were deployed to approximately 5,000 declined further in 2015 to $1.13 billion from financial institutions, and enhancements to the Fed- $1.62 billion in 2014, a decrease of about 30 percent Line Direct solution, used by approximately 250 of (see figure 1). The average level of peak daylight the largest financial institutions, are under way. overdrafts fell to $5.27 billion in 2015 from $8.44 billion in 2014; the average level of peak daylight over- Information Technology drafts in 2015 was just a fraction of its level in 2008 (about 3 percent). The Reserve Banks continued to improve the effi- Daylight overdraft fees are also at historically low ciency, effectiveness, and security of information levels. In 2015, institutions paid about $14,100 in technology (IT) services and operations in 2015. The daylight overdraft fees; in contrast, fees totaled more Reserve Banks’ National IT organization led the than $50 million in 2008. The decrease in fees is completion of the first year of the System IT roadlargely attributable to the elevated level of reserve map to help System leaders forecast their future busibalances that began to accumulate in late 2008 and to ness technology needs, identify additional opportunithe 2011 policy revision that eliminated fees for day- ties to employ common technology services, and light overdrafts that are collateralized. make better-informed IT investment and prioritization decisions. FedLine Access to Reserve Bank The Reserve Banks remained vigilant about their Services cybersecurity posture, investing in risk-mitigation initiatives and programs and continuously monitoring and assessing cybersecurity risks to its operations. The Reserve Banks’ FedLine access solutions provide The Federal Reserve completed implementation of a financial institutions with a variety of alternatives for electronically accessing the Banks’ payment and 17 The number of employees within depository institutions who information services. For priced services, the Reserve have FedLine credentials reflects a revision to the methodology Banks charge fees for these electronic connections used in previous years.

102 102nd Annual Report | 2015 new information security framework for key systems may not perform services for the Reserve Banks or in 2014 and in keeping with its requirements has others that would place it in a position of auditing its started recertifying key systems every three years. The own work, making management decisions on behalf framework, known as Security Assurance for the of the Reserve Banks, or in any other way impairing Federal Reserve, is based on guidance from the its audit independence. In 2015, the Reserve Banks National Institute of Standards and Technology and did not engage KPMG for significant non-audit adapted to the Federal Reserve’s environment. services. The Board’s reviews of the Reserve Banks include a Examinations of the wide range of off-site and on-site oversight activities, Federal Reserve Banks conducted primarily by its Division of Reserve Bank Operations and Payment Systems. Division personnel The combined financial statements of the Reserve monitor on an ongoing basis the activities of each Banks—as well as the financial statements of each of Reserve Bank, National IT, and the System’s Office the 12 Reserve Banks and Maiden Lane LLC of Employee Benefits (OEB). They conduct a com- (ML)—are audited annually by an independent pub- prehensive on-site review of each Reserve Bank and lic accountant retained by the Board of Governors.18 OEB at least once every three years and review In addition, the Reserve Banks are subject to over- National IT, the System Open Market Account sight by the Board of Governors, which performs its (SOMA), and Fedwire annually. own reviews. The comprehensive on-site reviews include an assess- The Reserve Banks use the 2013 framework estab- ment of the internal audit function’s effectiveness lished by the Committee of Sponsoring Organiza- and its conformance to the Institute of Internal tions of the Treadway Commission (COSO) to assess Auditors’ (IIA) International Standards for the Protheir internal controls over financial reporting, fessional Practice of Internal Auditing, applicable including the safeguarding of assets. Within this policies and guidance, and the IIA’s code of ethics. framework, the management of each Reserve Bank annually provides an assertion letter to its board of The Board also reviews SOMA and foreign currency directors that confirms adherence to COSO holdings to standards. • determine whether the New York Reserve Bank, while conducting the related transactions and asso- The Federal Reserve Board engaged KPMG LLP ciated controls, complies with the policies estab- (KPMG) to audit the 2015 combined and individual lished by the Federal Open Market Committee financial statements of the Reserve Banks and ML.19 (FOMC); and In 2015, KPMG also conducted audits of the inter- • assess SOMA-related IT project management and nal controls associated with financial reporting for application development, vendor management, and each of the Reserve Banks. Fees for KPMG’s services system resiliency and contingency plans. totaled $6.7 million, of which $0.4 million was for the audit of ML. To ensure auditor independence, the In addition, KPMG audits the year-end schedule of Board requires that KPMG be independent in all participated asset and liability accounts and the matters relating to the audits. Specifically, KPMG related schedule of participated income accounts. The FOMC is provided with the external audit 18 Maiden Lane LLC is a variable interest entity (VIE) created in reports and a report on the Board review. response to the 2007–09 financial crisis, and the New York Reserve Bank is considered to be the controlling financial interest holder. Income and Expenses See “Federal Reserve Banks Combined Financial Statements” in section 12 of this report. 19 In addition, KPMG audited the Office of Employee Benefits of Table 4 summarizes the income, expenses, and distrithe Federal Reserve System (OEB), the Retirement Plan for butions of net earnings of the Reserve Banks for Employees of the Federal Reserve System (System Plan), and 2015 and 2014. Income in 2015 was $114.2 billion, the Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The System Plan and the Thrift Plan provide compared with $116.7 billion in 2014. retirement benefits to employees of the Board, the Federal Reserve Banks, the OEB, and the Consumer Financial Protection Bureau.

Federal Reserve Banks 103 Table 4. Income, expenses, and distribution of net earnings of the Federal Reserve Banks, 2015 and 2014 Millions of dollars Item 2015 2 014 Current income 114,234 1 16,562 Loan interest income * 2 SOMA interest income 113,610 1 15,933 Other current income1 624 627 Net expenses 11,140 10,715 Operating expenses 4,042 3,926 Reimbursements -650 -570 Net periodic pension expense 563 383 Interest paid on depository institutions deposits and term deposits 6,935 6,862 Interest expense on securities sold under agreements to repurchase 248 112 Other expenses 2 2 Current net income 103,094 105,847 Net additions to (deductions from) current net income -1,306 -2,718 Federal agency and government-sponsored enterprise mortgage-backed securities 43 81 Foreign currency translation losses -1,382 -2,907 Net income (loss) from consolidated VIEs 36 110 Other deductions -3 -2 Assessments by the Board of Governors 1,884 1,864 For Board expenditures 705 590 For currency costs 689 711 For Consumer Financial Protection Bureau costs2 490 563 Net income before providing for remittances to the Treasury 99,904 101,265 Earnings remittances to the Treasury 117,099 96,902 Interest on Federal Reserve notes 91,143 96,902 Required by the Federal Reserve Act, as amended by the FAST Act 25,956 0 Net (loss) income after providing for remittances to the Treasury -17,195 4,363 Other comprehensive gain (loss) 366 -1,612 Comprehensive income -16,829 2,751 Total distribution of net income 100,270 99,653 Dividends on capital stock 1,743 1,686 Transfer to surplus and change in accumulated other comprehensive income -18,572 1,065 Earnings remittances to the Treasury 117,099 96,902 1 Includes income from priced services, compensation received for services provided, and securities lending fees. 2 The Board of Governors assesses the Reserve Banks to fund the operations of the Consumer Financial Protection Bureau. * Less than $500,000. Expenses totaled $13,024 million: • $490 million for Consumer Financial Protection Bureau costs; and • $6,935 million in interest paid to depository institutions on reserve balances and term deposits; • $2 million in other costs. • $4,042 million in Reserve Bank operating expenses; The expenses were reduced by $650 million in reim- • $563 million in net periodic pension expense; bursements for services provided to government agencies. Net deductions from current net income • $248 million in interest expense on securities sold totaled $1,306 million, which includes $1,382 million under agreements to repurchase; in unrealized losses on foreign currency denominated investments revalued to reflect current market • $705 million in assessments for Board of Goverexchange rates, $36 million in net income associated nors expenditures; with consolidated VIEs, and $43 million in realized • $689 million for the cost of producing, issuing, and gains on federal agency and government-sponsored retiring currency; enterprise mortgage-backed securities (GSE MBS).

104 102nd Annual Report | 2015 Table 5. System Open Market Account (SOMA) holdings of the Federal Reserve Banks, 2015 and 2014 Millions of dollars, except as noted Average daily assets (+)/liabilities (–) Current income (+)/expense (–) Average interest rate (percent) Item 2015 2014 2015 2014 2015 2014 U.S. Treasury securities1 2,588,099 2,520,120 63,317 63,011 2.45 2.50 Government-sponsored enterprise debt (GSE) securities1 36,630 46,122 1,330 1,579 3.63 3.42 Federal agency and GSE mortgage-backed securities2 1,793,787 1,700,521 48,931 51,264 2.73 3.01 Foreign currency denominated investments3 19,846 23,296 31 78 0.15 0.33 Central bank liquidity swaps4 209 192 1 1 0 .68 0.52 Other SOMA assets5 30 28 * * 0.01 0.01 Total SOMA assets 4,438,601 4,290,279 113,610 115,933 2.56 2.70 Securities sold under agreements to repurchase: Primary dealers and expanded counterparties -125,656 -130,281 -84 -68 0.07 0.05 Securities sold under agreements to repurchase: Foreign official and international accounts -157,929 -102,968 -164 -44 0.10 0.04 Total securities sold under agreements to repurchase -283,585 -233,249 -248 -112 0 .09 0.05 Other SOMA liabilities6 -1,116 -1,899 n/a n/a n/a n/a Total SOMA liabilities -284,701 -235,148 -248 -112 0 .09 0.05 Total SOMA holdings 4,153,900 4,055,131 113,362 115,821 2.73 2 .86 1 Face value, net of unamortized premiums and discounts. 2 Face value, which is the remaining principal balance of the securities, net of unamortized premiums and discounts. Does not include unsettled transactions. 3 Foreign currency denominated assets are revalued daily at market exchange rates. 4 Dollar value of foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. This exchange rate equals the market exchange rate used when the foreign currency was acquired from the foreign central bank. 5 Cash and short-term investments related to the federal agency and government-sponsored enterprise mortgage-backed securities (GSE MBS) portfolio. 6 Represents the obligation to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE MBS, as well as obligations that arise from the failure of a seller to deliver securities on the settlement date. n/a Not applicable. * Less than $500,000. Dividends paid to member banks for 2015, set at Act amendment, aggregate Reserve Bank capital sur- 6 percent of paid-in capital for all member banks, plus was $29 billion. The Reserve Banks reported a totaled $1,743 million. comprehensive loss of $16.8 billion after providing for remittances to Treasury. The Reserve Banks provided for remittances to Treasury of $117.1 billion in 2015, which included an Section 11 of this report, “Statistical Tables,” proinitial transfer of $19.3 billion made in Decem- vides more detailed information on the Reserve ber 2015 to reduce aggregate Reserve Bank surplus to Banks. Table 9 is a statement of condition for each $10 billion, as required by the Fixing America’s Sur- Reserve Bank; table 10 details the income and face Transportation Act (FAST Act).20 The FAST expenses of each Reserve Bank for 2015; table 11 Act, which amended section 7(a) of the Federal shows a condensed statement for each Reserve Bank Reserve Act, requires that any Reserve Bank capital for the years 1914 through 2015; and table 13 gives surplus in excess of $10 billion be transferred to the number and annual salaries of officers and Treasury. At the effective date of this Federal Reserve employees for each Reserve Bank. A detailed account of the assessments and expenditures of the Board of 20 The FAST Act, Pub. L. No. 114-94, 129 Stat. 1312 (2015), was Governors appears in the Board of Governors enacted on December 4, 2015. Before the enactment of the Financial Statements (see section 12, “Federal FAST Act, the Board of Governors required the Reserve Banks Reserve System Audits”). to maintain a surplus equal to the amount of capital paid-in. The FAST Act also amended section 7 of the Federal Reserve Act related to Reserve Bank payment of dividends to member banks. The FAST Act changed the dividend rate for member SOMA Holdings and Loans banks with more than $10 billion of consolidated assets, effective January 1, 2016, to the smaller of 6 percent or the rate equal to the high yield of the 10-year Treasury note auctioned at the The Reserve Banks’ average net daily SOMA holdlast auction held prior to the payment of the dividend. The ings during 2015 amounted to $4,154 billion, an FAST Act did not change the 6 percent dividend rate for member banks with $10 billion or less of total consolidated assets. increase of $99 billion from 2014 (see table 5).

Federal Reserve Banks 105 SOMA Securities Holdings Lending In 2015, the average daily primary, secondary, and The average daily holdings of Treasury securities seasonal credit extended by the Reserve Banks to increased by $68 billion, to an average daily amount depository institutions increased by $7 million, to of $2,588 billion. The average daily holdings of $125 million. The average rate of interest earned on GSE debt securities decreased by $9 billion, to an primary, secondary, and seasonal credit increased to average daily amount of $37 billion. The average 0.28 percent in 2015, from 0.21 percent in 2014. daily holdings of federal agency and GSE MBS increased by $93 billion, to an average daily amount ML is a lending facility established in 2008 under of $1,794 billion. authority of FRA section 13(3) in response to the 2007–09 financial crisis. Net portfolio assets of ML The increases in average daily holdings of federal decreased from $1,811 million in 2014 to $1,778 milagency and GSE MBS are due to reinvestment of lion in 2015 and liabilities decreased from $127 milprincipal payments from other SOMA holdings in lion to $57 million. ML net income of $36 million in federal agency and GSE MBS. The average daily 2015 comprised interest income of $4 million, gains holdings of GSE debt securities decreased as a result on investments of $35 million, and operating of maturities. expenses of $3 million. There were no significant holdings of securities pur- Federal Reserve Bank Premises chased under agreements to resell in 2015 or 2014. Average daily holdings of foreign currency denomi- Several Reserve Banks took action in 2015 to mainnated investments in 2015 were $19,846 million, comtain and renovate their facilities. The multiyear renopared with $23,296 million in 2014. The average daily vation programs at the New York, Richmond, balance of central bank liquidity swap drawings was Kansas City, and San Francisco Reserve Banks’ $209 million in 2015 and $192 million in 2014. The headquarters buildings continued. All Reserve Banks average daily balance of securities sold under agreecontinued to implement projects to maintain building ments to repurchase was $283,585 million, an systems to ensure efficient and reliable operations. increase of $50,336 million from 2014. The New York Reserve Bank continued repairs and renovations to the 33 Maiden Lane building, and the The average rates of interest earned on the Reserve Chicago Federal Reserve Bank continued construc- Banks’ holdings of Treasury securities decreased to tion of security enhancements to its building. In 2.45 percent, and the average rates on GSE debt secu- 2015, the St. Louis Reserve Bank secured leased rities increased to 3.63 percent in 2015. The average office space to accommodate increased Treasury serrate of interest earned on federal agency and GSE vices. The amount previously reported as “other real MBS decreased to 2.73 percent in 2015. The average estate” for the Houston Branch of the Dallas Reserve interest rates for securities sold under agreements to Bank was reclassified to the “land” account in 2015, repurchase increased to 0.09 percent in 2015. The reflecting the Bank’s intention to retain ownership. average rate of interest earned on foreign currency denominated investments decreased to 0.15 percent For more information on the acquisition costs and while the average rate of interest earned on central net book value of the Reserve Banks and Branches, bank liquidity swaps increased to 0.68 percent in see table 14 in section 11 (“Statistical Tables”) of this 2015. annual report.

106 102nd Annual Report | 2015 Pro Forma Financial Statements for Federal Reserve Priced Services Table 6. Pro forma balance sheet for Federal Reserve priced services, December 31, 2015 and 2014 Millions of dollars Item 2015 2 014 S hort-term assets (note 1) Imputed investments 132.8 556.7 Receivables 37.2 36.9 Materials and supplies 0.6 0.7 Prepaid expenses 10.6 11.1 Items in process of collection 209.9 85.7 Total short-term assets 391.1 691.2 Long-term assets (note 2) Premises 123.8 131.2 Furniture and equipment 37.6 35.9 Leases, leasehold improvements, and long-term prepayments 110.5 101.7 Deferred tax asset 189.8 325.6 Total long-term assets 461.7 594.4 Total assets 852.8 1,285.6 Short-term liabilities Deferred-availability items 342.7 642.4 Short-term debt 8.2 24.8 Short-term payables 20.8 24.0 Total short-term liabilities 371.7 691.2 Long-term liabilities Long-term debt 0.0 60.9 Accrued benefit costs 426.2 459.3 Total long-term liabilities 426.2 520.2 Total liabilities 797.9 1,211.4 Equity (including accumulated other comprehensive loss of $657.5 million and $549.7 million at December 31, 2015 and 2014, respectively) 54.9 74.2 Total liabilities and equity (note 3) 852.8 1,285.6 Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.

Federal Reserve Banks 107 Table 7. Pro forma income statement for Federal Reserve priced services, 2015 and 2014 Millions of dollars Item 2015 2 014 Revenue from services provided to depository institutions (note 4) 429.1 433.1 Operating expenses (note 5) 381.2 399.0 Income from operations 47.9 34.1 Imputed costs (note 6) Interest on debt 4.2 7.1 Interest on float -0.2 -0.5 Sales taxes 3.6 7.5 4.5 11.0 Income before income taxes 40.4 23.0 Imputed income taxes (note 6) 9.0 8.6 Net income 31.3 14.5 Memo: Targeted return on equity (note 6) 5.6 5.5 Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements. Table 8. Pro forma income statement for Federal Reserve priced services, by service, 2015 Millions of dollars Commercial check Item Total Commercial ACH Fedwire funds F edwire securities collection Revenue from services (note 4) 429.1 160.6 125.5 116.0 27.1 Operating expenses (note 5)1 381.2 131.6 119.8 106.2 23.5 Income from operations 47.9 29.0 5.7 9.7 3.6 Imputed costs (note 6) 7.5 2.7 2.2 2.2 0.5 Income before income taxes 40.4 26.3 3.5 7.6 3.1 Imputed income taxes (note 6) 9.0 5.9 0.8 1.7 0.7 Net income 31.3 20.4 2.7 5.9 2.4 Memo: Targeted return on equity (note 6) 5.6 2.0 1.8 1.6 0.3 Cost recovery (percent) (note 7) 106.4 113.0 100.7 103.9 108.2 Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements. 1 Operating expenses include pension costs, Board expenses, and reimbursements for certain nonpriced services.

108 102nd Annual Report | 2015 Notes to Pro Forma Financial Statements for Priced Services (1) Short-Term Assets Receivables are composed of fees due the Reserve Banks for providing priced services and the share of suspense- and difference-account balances related to priced services. Items in process of collection are gross Federal Reserve cash items in process of collection (CIPC), stated on a basis comparable to that of a commercial bank. They reflect adjustments for intra-Reserve Bank items that would otherwise be double-counted on the combined Federal Reserve balance sheet and adjustments for items associated with nonpriced items (such as those collected for government agencies). Among the costs to be recovered under the Monetary Control Act is the cost of float, or net CIPC during the period (the difference between gross CIPC and deferred-availability items, which is the portion of gross CIPC that involves a financing cost), valued at the federal funds rate. Investments of excess financing derived from credit float are assumed to be invested in federal funds. (2) Long-Term Assets Long-term assets consist of long-term assets used solely in priced services and the priced-service portion of long-term assets shared with nonpriced services, including a deferred tax asset related to the priced services pension and postretirement benefits obligation. The tax rate associated with the deferred tax asset was 22.4 percent and 37.2 percent for 2015 and 2014, respectively. Long-term assets also consist of an estimate of the assets of the Board of Governors used in the development of priced services. (3) Liabilities and Equity Under the matched-book capital structure for assets, short-term assets are financed with short-term payables and imputed short-term debt, if needed. Longterm assets are financed with long-term liabilities, imputed long-term debt, and imputed equity, if needed. To meet the Federal Deposit Insurance Corporation requirements for a well-capitalized institution, in 2015 equity is imputed at 6.4 percent of total assets and 10.0 percent of risk-weighted assets, and in 2014 equity is imputed at 5.8 percent of total assets and 10 percent of risk-weighted assets. In 2014, the Board approved revisions to the Payment System Risk policy to reflect the new international standards for financial market infrastructures developed by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions in the Principles for Financial Market Infrastructures. The policy retains the expectation that the Fedwire Services will meet or exceed the applicable risk-management standards. Effective December 31, 2105, the Reserve Banks’ priced services imputed six months of the Fedwire Funds Service’s current operating expenses as liquid net financial assets and equity on the pro forma balance sheet. The imputed assets held as liquid net financial assets are cash items in process of collection, which are assumed to be invested in federal funds. In accordance with Accounting Standards Codification (ASC) Topic 715 (ASC 715), Compensation–Retirement Benefits, the Reserve Banks record the funded status of pension and other benefit plans on their balance sheets. To reflect the funded status of their benefit plans, the Reserve Banks recognize the deferred

Federal Reserve Banks 109 items related to these plans, which include prior service costs and actuarial gains or losses, on the balance sheet. This results in an adjustment to the pension and other benefit plan liabilities related to priced services and the recognition of an associated deferred tax asset with an offsetting adjustment, net of tax, to accumulated other comprehensive income (AOCI), which is included in equity. The Reserve Bank priced services recognized a pension liability, which is a component of accrued benefit costs, of $26.2 million in 2015 and $42.0 million in 2014. The change in the funded status of the pension and other benefit plans resulted in a corresponding increase in accumulated other comprehensive loss of $107.8 million in 2015. (4) Revenue Revenue represents fees charged to depository institutions for priced services and is realized from each institution through direct charges to an institution’s account. (5) Operating Expenses Operating expenses consist of the direct, indirect, and other general administrative expenses of the Reserve Banks for priced services and the expenses of the Board related to the development of priced services. Board expenses were $3.3 million in 2015 and $4.1 million in 2014. In accordance with ASC 715, the Reserve Bank priced services recognized qualified pension-plan operating expenses of $33.7 million in 2015 and $22.7 million in 2014. Operating expenses also include the nonqualified net pension expense of $3.2 million in 2015 and $4.7 million in 2014. The adoption of ASC 715 does not change the systematic approach required by generally accepted accounting principles to recognize the expenses associated with the Reserve Banks’ benefit plans in the income statement. As a result, these expenses do not include amounts related to changes in the funded status of the Reserve Banks’ benefit plans, which are reflected in AOCI. The income statement by service reflects revenue, operating expenses, imputed costs, other income and expenses, and cost recovery. The tax rate associated with imputed taxes was 22.4 percent and 37.2 percent for 2015 and 2014, respectively. (6) Imputed Costs Imputed costs consist of income taxes, return on equity, interest on debt, sales taxes, and interest on float. Many imputed costs are derived from the PSAF model. The 2015 cost of short-term debt imputed in the PSAF model is based on nonfinancial commercial paper rates; the cost of imputed long-term debt is based on Merrill Lynch Corporate and High Yield Index returns; and the effective tax rate is derived from U.S. publicly traded firm data, which serve as the proxy for the financial data of a representative private-sector firm. The after-tax rate of return on equity is based on the returns of the equity market as a whole.21 Interest is imputed on the debt assumed necessary to finance priced-service assets. These imputed costs are allocated among priced services according to the ratio of operating expenses, less shipping expenses, for each service to the total expenses, less the total shipping expenses, for all services. 21 See Federal Reserve Bank Services Private-Sector Adjustment Factor, 77 Fed. Reg. 67,007 (November 8, 2012), www.gpo.gov/fdsys/pkg/FR-2012-11-08/pdf/2012-26918.pdf, for details regarding the PSAF methodology change.

110 102nd Annual Report | 2015 Interest on float is derived from the value of float to be recovered for the check and ACH services, Fedwire Funds Service, and Fedwire Securities Services through per-item fees during the period. Float income or cost is based on the actual float incurred for each priced service. The following shows the daily average recovery of actual float by the Reserve Banks for 2015, in millions of dollars: Total float -193.2 Float not related to priced services1 0.1 Float subject to recovery through per-item fees - 193.1 1 Float not related to priced services includes float generated by services to government agencies and by other central bank services. Float that is created by account adjustments due to transaction errors and the observance of nonstandard holidays by some depository institutions was recovered from the depository institutions through charging institutions directly. Float subject to recovery is valued at the federal funds rate. Certain ACH funding requirements and check products generate credit float; this float has been subtracted from the cost base subject to recovery in 2015 and 2014. (7) Cost Recovery Annual cost recovery is the ratio of revenue, including other income, to the sum of operating expenses, imputed costs, imputed income taxes, and after-tax targeted return on equity.

111 7 Other Federal Reserve Operations Regulatory Developments higher surcharges and replaces substitutability with a measure of the firm’s reliance on short-term wholesale funding. The surcharges are phased in between Dodd-Frank Implementation January 1, 2016, and January 1, 2019. Throughout 2015, the Federal Reserve continued to Capital Planning and Stress Testing implement the Dodd-Frank Wall Street Reform and Requirements (Regulations Y and YY) Consumer Protection Act (Dodd-Frank Act) (Pub. L. No. 111-203), which gives the Federal Reserve In November 2015, the Board issued a final rule that important responsibilities to issue rules and supervise makes minor amendments to its capital plan and financial companies to enhance financial stability stress testing rules. For BHCs with more than $10 biland preserve the safety and soundness of the banking lion but less than $50 billion in total consolidated system. The Board also continued to implement assets and savings and loan holding companies with other regulatory reforms to increase the resiliency of total consolidated assets of more than $10 billion, banking organizations and help to ensure that they the final rule modifies certain mandatory capital are operating in a safe and sound manner. action assumptions in the stress test rules and delays the application of the company-run stress test The following is a summary of the key regulatory ini- requirements to savings and loan holding companies tiatives that were completed during 2015. until January 1, 2017. Risk-Based Capital Surcharge for Global For BHCs that have total consolidated assets of Systemically Important Bank Holding $50 billion or more and state member banks that are Companies (Subpart G of Regulation Q) subject to the Board’s advanced approaches capital In July 2015, the Board issued a final rule requiring requirements, the final rule delays the use of the the largest, most systemically important U.S. bank supplementary leverage ratio for one year and indefiholding companies (BHCs) to further strengthen nitely defers the use of the advanced approaches risktheir capital positions. Under the rule, a firm that is based capital framework in the capital plan and stress identified as a global systemically important bank test rules. For BHCs that have total consolidated holding company, or G-SIB, will have to hold addi- assets of $50 billion or more, the final rule removes tional capital to increase its resiliency in light of the the tier 1 common capital ratio requirement and greater threat it poses to the financial stability of the modifies certain mandatory capital action assump- United States. tions. The final rule also makes other technical amendments to reflect other recent rulemakings. The The final rule establishes the criteria for identifying a final rule became effective on January 1, 2016. G-SIB and the methods that those firms will use to calculate a risk-based capital surcharge, which is cali- Swaps Margin and Capital Requirements brated to each firm’s overall systemic risk. The final (Regulation KK) rule requires G-SIBs to calculate their surcharges In November 2015, the Board, the Office of the under two methods and use the higher of the two Comptroller of the Currency, the Federal Deposit surcharges. The first method is based on the frame- Insurance Corporation, the Federal Housing Finance work agreed to by the Basel Committee on Banking Agency, and the Farm Credit Administration issued Supervision and considers a G-SIB’s size, intercon- a joint final rule to establish minimum margin nectedness, cross-jurisdictional activity, substitutabil- requirements for registered swap dealers, major swap ity, and complexity. The second method uses similar participants, security-based swap dealers and major inputs but is calibrated to result in significantly security-based swap participants for which one of the

112 102nd Annual Report | 2015 agencies is the prudential regulator. In particular, the mum levels of total loss-absorbing capacity and longagencies adopted a risk-based approach that would term unsecured debt, and a related buffer. establish initial and variation margin requirements on all non-cleared swaps and non-cleared security-based The proposed rule would also require the top-tier swaps to offset the greater risk to such entities and U.S. intermediate holding companies (IHCs) of forthe financial system arising from the use of swaps eign global systemically important banking organizaand securities-based swaps that are not cleared. tions (covered IHCs) to maintain outstanding minimum levels of total loss-absorbing capacity and long- In November 2015, the agencies also issued an term unsecured debt instruments issued to their interim final rule that exempts from the margin foreign parent company and related buffer. The prorequirements certain non-cleared swaps and non- posed rule would subject the covered BHCs and the cleared security-based swaps used for hedging pur- covered IHCs to “clean holding company” limitaposes by commercial end-users and certain other tions that would prohibit or limit those companies counterparties. from entering into certain financial arrangements in order to further improve their resolvability and the Key Regulatory Initiatives Proposed resiliency of their operating subsidiaries. in 2015 Finally, the proposed rule would require banking The following is a summary of additional regulatory organizations subject to the Board’s capital requireinitiatives that the Board proposed in 2015. ments to apply a regulatory capital deduction treatment to any investments in unsecured debt instru- Liquidity Risk Measurement Standards ments issued by covered BHCs. The Board also (Regulation WW) invited comment on whether, and if so how, the In May 2015, the Board issued a proposed rule that Board should regulate the mechanisms used by a covwould amend the liquidity coverage ratio (LCR) rule ered BHC or a covered IHC to transfer losses up to include certain U.S. general obligation municipal from the operating subsidiaries that incur the losses securities as high-quality liquid assets (HQLA). The to the covered BHC or covered IHC. The public proposed rule would apply only to entities supervised comment period for the proposed rule ended on Febby the Board that are subject to the LCR. The pro- ruary 19, 2016. posed rule would permit companies to include as level 2B liquid assets U.S. general obligation munici- Liquidity Coverage Ratio Rule Disclosures pal securities that meet the same criteria as corporate (Regulation WW) debt securities that are included as level 2B liquid In November 2015, the Board proposed an amendassets. It also would apply limits to the amount of ment to the LCR rule to implement public disclosure U.S. general obligation municipal securities included requirements for certain companies subject to the in a company’s total HQLA amount to address the LCR rule. The proposed rule would apply to BHCs unique structure of the U.S. municipal securities mar- and certain savings and loan holding companies with ket and to ensure appropriate diversification of the total consolidated assets of $50 billion or more or assets included in the total HQLA amount. total on-balance-sheet foreign exposure of $10 billion or more and to nonbank financial companies desig- Long-Term Debt Requirement nated by the Financial Stability Oversight Council (Regulations Q and YY) for Board supervision to which the Board has applied In October 2015, the Board issued a proposed rule the LCR rule. These companies would be required to that would strengthen the ability of the largest disclose information about certain components of domestic and foreign banks operating in the United their LCR calculations on a quarterly basis in a stan- States to be resolved without extraordinary govern- dardized format and to discuss certain features of ment support or taxpayer assistance. The proposed their LCR results. In addition, this proposal included rule would require the parent holding companies of an amendment to the modified LCR rule to provide U.S. global systemically important banking organiza- one full year for BHCs and certain savings and loan tions (covered BHCs) to maintain outstanding mini- holding companies to come into compliance with the

Other Federal Reserve Operations 113 rule. The public comment period for the proposed on internationally active banking organizations when rule ended on February 2, 2016. there is an elevated risk of above-normal losses in the future. The proposed policy statement provides back- The Board’s Framework for Implementing the ground on the range of financial system vulnerabili- Countercyclical Capital Buffer (Appendix A to ties and other factors the Board could take into Regulation Q) account as it evaluates settings for the U.S. CCyB, including but not limited to, leverage in the nonfi- In December 2015, the Board issued a proposed nancial sector, leverage in the financial sector, matupolicy statement detailing the framework the Board rity and liquidity transformation in the financial secwould follow in setting the U.S. Countercyclical tor, and asset valuation pressures. The public com- Capital Buffer (CCyB). The CCyB is a macroprudenment period for the CCyB policy statement ended on tial tool that can be used to increase the resilience of March 21, 2016. the financial system by raising capital requirements

114 102nd Annual Report | 2015 The Board of Governors and the performance toward achieving the strategic objectives. Government Performance and Results Act The annual performance plan outlines the planned projects, initiatives, and activities that support the Overview framework’s long-term objectives and resources necessary to achieve those objectives. The annual perfor- The Government Performance and Results Act mance report summarizes the Board’s accomplish- (GPRA) of 1993 requires federal agencies, in consul- ments that contributed toward achieving the strategic tation with Congress and outside stakeholders, to goals and objectives identified in the framework. prepare a strategic plan covering a multiyear period. GPRA also requires each agency to submit an annual The framework, performance plan, and performance performance plan and an annual performance report. report are available on the Board’s website at www The GPRA Modernization Act of 2010 further .federalreserve.gov/publications/gpra/files/2012-2015refines those requirements to include quarterly perstrategic-framework.pdf, www.federalreserve.gov/ formance reporting. Although the Board is not covpublications/gpra/files/2015-gpra-performance-plan ered by GPRA, the Board follows the spirit of the act .pdf, and www.federalreserve.gov/publications/gpra/ and, like other federal agencies, prepares an annual files/2014-gpra-performance-report.pdf. performance plan and an annual performance report. On July 7, 2015, the Board approved the Strategic Strategic Framework, Performance Plan, Plan 2016–19, which identifies and frames critical and Performance Report organizational challenges facing the Board. In addition to investing in ongoing operations, the Board The Board’s 2012–15 Strategic Framework (frame- will prioritize investments and dedicate sufficient work) articulates the Board’s mission within the con- resources to six pillars over the 2016–19 period, text of resources required to meet Dodd-Frank Act which will allow the Board to advance its mission mandates, close cross-disciplinary knowledge gaps, and respond to these continuing and evolving chaldevelop appropriate policy, and continue addressing lenges. The Board’s Strategic Plan 2016–19 is availthe recovery of a fragile global economy. The frame- able on the Board’s website at www.federalreserve work sets forth major goals, outlines strategies for .gov/publications/gpra/files/2016-2019-gpra-strategicachieving those goals, and identifies key measures of plan.pdf.

115 8 Record of Policy Actions of the Board of Governors Policy actions of the Board of Governors are pre- insolvent, and imposes certain other limitations. The sented pursuant to section 10 of the Federal Reserve final rule defines a “broad-based” program or facility Act. That section provides that the Board shall keep as one in which at least five entities would be eligible a record of all questions of policy determined by the to participate. The final rule also provides that an Board and shall include in its annual report to Con- emergency lending program or facility must not be gress a full account of such actions. This chapter pro- designed for the purpose of aiding any number of vides a summary of policy actions in 2015, as imple- failing firms, and it broadens the definition of insolmented through (1) rules and regulations, (2) policy vency beyond formal bankruptcy or resolution prostatements and other actions, and (3) discount rates ceedings. In addition, the final rule requires among for depository institutions. Policy actions were other things the interest rate for emergency credit to approved by all Board members in office, unless indi- be set at a premium to the rate that would be the cated otherwise. More information on the actions is market rate in normal circumstances. The final rule is available from the relevant Federal Register notices or effective January 1, 2016. other documents (see links in footnotes) or on request from the Board’s Freedom of Information Voting for this action: Chair Yellen, Vice Chair- Office. man Fischer, and Governors Tarullo, Powell, and Brainard. For information on the Federal Open Market Committee’s policy actions relating to open market opera- Regulation D (Reserve Requirements of tions, see section 9, “Minutes of Federal Open Mar- Depository Institutions) ket Committee Meetings.” On June 17, 2015, the Board approved a final rule (Docket No. R-1513) to make technical amendments Rules and Regulations to the calculation of interest payments on excess balances maintained by or on behalf of depository insti- Regulation A (Extensions of Credit by tutions at Federal Reserve Banks.2 Specifically, the Federal Reserve Banks) amendments permit interest payments on excess reserves (IOER) to be based on a daily rate rather On November 30, 2015, the Board approved a final than on a maintenance period average rate. The rule (Docket No. R-1476) specifying its policies amendments are intended to enhance the effectiveand procedures for emergency lending under sec- ness of changes in the IOER rate in moving the fedtion 13(3) of the Federal Reserve Act, as amended by eral funds rate into the target range established by the the Dodd-Frank Wall Street Reform and Consumer Federal Open Market Committee when changes in Protection Act (Dodd-Frank Act).1 The Dodd-Frank those rates do not coincide with the beginning of a Act requires the Board, in consultation with the Sec- maintenance period. The final rule is effective retary of the Treasury, to establish emergency lending July 23, 2015. (Note: The Board increased the interpolicies and procedures. The Dodd-Frank Act limits est rate paid on required and excess reserves on the Board’s emergency lending authority to lending December 16, 2015. See “Policy Statements and through programs and facilities with broad-based eli- Other Actions” later in this section.) gibility that have been approved by the Secretary of the Treasury, prohibits lending to entities that are 1 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2015- 2 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2015- 12-18/html/2015-30584.htm. 06-22/html/2015-15238.htm.

116 102nd Annual Report | 2015 Voting for this action: Chair Yellen, Vice Chair- AMC that is a subsidiary of an insured depository man Fischer, and Governors Tarullo, Powell, institution and is regulated by a federal financial and Brainard. institution regulatory agency (that is, a federally regulated AMC) must meet the same minimum require- Regulation H (Membership of State ments as state-regulated AMCs, except for the Banking Institutions in the Federal requirement to register with the state. Although the Reserve System) final rule applies only to those states that elect to register and supervise AMCs pursuant to title XI, non- On June 11, 2015, the Board approved a final rule federally regulated AMCs generally may not perform (Docket No. R-1498), published jointly with the Fed- appraisal management services related to federally eral Deposit Insurance Corporation, Office of the related transactions in states that have not established Comptroller of the Currency, National Credit Union regulatory structures for AMCs within a 36-month Administration, and Farm Credit Administration, period from the rule’s effective date. regarding loans in areas having special flood hazards.3 The final rule implements amendments to the The final rule, published jointly with the Federal National Flood Insurance Act made by the Biggert- Deposit Insurance Corporation, Office of the Comp- Waters Flood Insurance Reform Act and the Home- troller of the Currency, National Credit Union owner Flood Insurance Affordability Act. The final Administration, Consumer Financial Protection rule requires the escrow of flood insurance payments Bureau, and Federal Housing Finance Agency, is on residential improved real estate securing a loan. It effective August 10, 2015. also incorporates an exemption for certain detached structures from the mandatory requirement to pur- Voting for this action: Chair Yellen, Vice Chairchase flood insurance. In addition, the final rule man Fischer, and Governors Tarullo, Powell, implements provisions related to the force placement and Brainard. of flood insurance. The final rule is effective October 1, 2015, except for the escrow provisions, which Regulation Q (Capital Adequacy of Bank are effective January 1, 2016. Holding Companies, Savings and Loan Holding Companies, and State Member Voting for this action: Chair Yellen, Vice Chair- Banks) man Fischer, and Governors Tarullo, Powell, and Brainard. On January 26, 2015, the Board approved an interim final rule (Docket No. R-1508) to exclude from the Regulations H (Membership of State Board’s regulatory capital requirements savings and Banking Institutions in the Federal loan holding companies that have total consolidated Reserve System) and Y (Bank Holding assets of less than $500 million and that meet certain Companies and Change in Bank Control) qualitative requirements of the Board’s Small Bank Holding Company Policy Statement (Policy State- On April 29, 2015, the Board approved a final rule ment).5 Bank holding companies that have total con- (Docket No. R-1486) to implement minimum solidated assets of less than $500 million and that requirements to be applied by states that elect to reg- meet the qualitative requirements of the Policy Stateister and supervise appraisal management companies ment are already excluded from the Board’s regula- (AMCs), in accordance with title XI of the Financial tory capital requirements. The interim final rule is Institutions Reform, Recovery, and Enforcement Act effective January 30, 2015. of 1989, as amended by the Dodd-Frank Act.4 An AMC is an entity that provides appraisal manage- Voting for this action: Chair Yellen, Vice Chairment services to lenders or underwriters or other man Fischer, and Governors Tarullo, Powell, principals in the secondary mortgage markets that and Brainard. include contracting with licensed and certified appraisers to perform appraisal assignments. An On June 11, 2015, the Board approved a final rule (Docket No. R-1502), published jointly with the Federal Deposit Insurance Corporation and Office of the 3 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2015- 07-21/html/2015-15956.htm. 4 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2015- 5 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2015- 06-09/html/2015-12719.htm. 02-03/html/2015-02038.htm.

Record of Policy Actions of the Board of Governors 117 Comptroller of the Currency, to revise aspects of the On November 24, 2015, the Board approved a final regulatory capital framework applicable to large, rule (Docket No. R-1506) amending its regulatory internationally active banking organizations subject capital framework to clarify how the definition of to the advanced approaches risk-based capital rule.6 common equity tier 1 capital applies to ownership The advanced approaches rule generally applies to interests issued by depository institution holding banking organizations with $250 billion or more in companies that are structured as limited liability cortotal consolidated assets or $10 billion or more in porations or partnerships.8 The final rule provides on-balance-sheet foreign exposure. The final rule examples of how instruments issued by these firms (1) clarifies the qualification criteria for banking may qualify as regulatory capital. The applicable organizations’ use of the advanced approaches rule, compliance date with the Board’s revised capital (2) reduces to zero the capital risk-weight applicable framework is extended to July 1, 2016. The final rule to the exposure of a clearing member banking orga- also provides temporary exclusions from the regulanization to a central counterparty where the clearing tory capital framework for savings and loan holding member does not guarantee the performance of the companies that are personal or family trusts and central counterparty to the clearing member client, depository institution holding companies that are (3) enhances consistency of the agencies’ advanced employee stock ownership plans. The final rule is approaches rule with relevant international stan- effective January 1, 2016. dards, and (4) makes other technical updates and corrections. The final rule is effective October 1, 2015. Voting for this action: Chair Yellen, Vice Chairman Fischer, and Governors Tarullo, Powell, Voting for this action: Chair Yellen, Vice Chair- and Brainard. man Fischer, and Governors Tarullo, Powell, and Brainard. Regulations Y (Bank Holding Companies and Change in Bank Control) and YY On July 20, 2015, the Board approved a final rule (Enhanced Prudential Standards) (Docket No. R-1505) to implement a risk-based capital surcharge for firms identified as global systemi- On November 24, 2015, the Board approved a final cally important bank holding companies, or G-SIBs.7 rule (Docket No. R-1517) to amend its capital plan The final rule establishes the criteria for identifying a and stress testing rules.9 For bank holding companies G-SIB. It also requires G-SIBs to determine their sur- with more than $10 billion but less than $50 billion in charge under two methods and use the higher of the total consolidated assets and savings and loan holdtwo surcharges. The first method uses a broad set of ing companies with total consolidated assets of more categories correlated with systemic importance to than $10 billion, the final rule modifies certain mandetermine a firm’s surcharge. The second method datory capital-action assumptions in the stress test uses similar categories but incorporates a measure of rules and delays the application of the company-run a firm’s reliance on short-term wholesale funding and stress test requirements to savings and loan holding is calibrated to result in a higher surcharge in most companies until January 1, 2017. For bank holding instances. The G-SIB surcharge is phased in begin- companies that have total consolidated assets of ning on January 1, 2016, and becomes fully effective $50 billion or more and state member banks that are on January 1, 2019. (Note: On December 31, 2015, subject to the Board’s advanced approaches capital the Board approved the 2015 aggregate global indica- requirements, the final rule delays the use of the tor amounts for purposes of a calculation required supplementary leverage ratio for one year and indefiunder the final rule.) nitely defers the use of the advanced approaches riskbased capital framework in the capital plan and stress Voting for this action: Chair Yellen, Vice Chair- test rules. For bank holding companies that have man Fischer, and Governors Tarullo, Powell, total consolidated assets of $50 billion or more, the and Brainard. final rule removes the tier 1 common capital ratio requirement and modifies certain mandatory capital- 6 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2015- 8 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2015- 07-15/html/2015-15748.htm. 12-09/html/2015-31013.htm. 7 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2015- 9 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2015- 08-14/html/2015-18702.htm. 12-02/html/2015-30471.htm.

118 102nd Annual Report | 2015 action assumptions. To reflect other recent rulemak- requirements for swaps and security-based swaps that ings, the final rule also makes other amendments to are not cleared through a clearinghouse.11 The final the capital plan and stress test rules. The final rule is rule, issued jointly with the Federal Deposit Insureffective January 1, 2016. ance Corporation, Office of the Comptroller of the Currency, Farm Credit Administration, and Federal Voting for this action: Chair Yellen, Vice Chair- Housing Finance Agency, establishes capital and man Fischer, and Governors Tarullo, Powell, margin requirements for swap dealers, major swap and Brainard. participants, security-based swap dealers, and major security-based swap participants regulated by one of Regulation II (Debit Card Interchange Fees the agencies, in accordance with the Dodd-Frank and Routing) Act. The margin requirements mandate the exchange of initial and variation margin for non-cleared swaps On August 10, 2015, the Board approved a clarifica- and non-cleared security-based swaps between covtion (Docket No. R-1404) to the treatment of ered swap entities and certain counterparties. The transactions-monitoring costs under its Regulation II amount of margin will vary based on the relative risk in response to a court decision.10 Regulation II of the non-cleared swap. The requirements are implements standards for assessing whether inter- intended to reduce risk, increase transparency, and change transaction fees for electronic debit transac- promote market integrity. tions are reasonable and proportional to the cost incurred by the issuer, as required by section 920 of The Board, jointly with the other agencies, also the Electronic Fund Transfer Act. Transactions- approved an interim final rule with request for commonitoring costs are costs incurred by the issuer dur- ment (Docket No. R-1415) to implement the requireing the authorization process to detect indications of ments of title III of the Terrorism Risk Insurance fraud or other anomalies in order to assist in the issu- Program Reauthorization Act of 2015, which er’s decision to authorize or decline the transaction. exempts from the agencies’ swap margin rules non- In March 2014, the U.S. Court of Appeals for the cleared swaps in which a counterparty qualifies for District of Columbia Circuit largely upheld Regula- an exemption or exception from clearing under the tion II against a challenge by merchant groups Dodd-Frank Act. In particular, the interim final rule (NACS v. Board of Governors of the Federal Reserve exempts certain financial institutions with $10 billion System). The court, however, held that the Board’s or less in total assets and commercial end users that treatment of transactions-monitoring costs required enter into swaps for hedging purposes and that meet further explanation. The Board’s clarification states the exceptions available to those institutions from the that transactions-monitoring costs are included in requirement to clear standardized swaps through a the interchange fee standard because these costs are clearinghouse. The final rule and interim final rule incurred in the course of effecting a particular trans- are effective April 1, 2016. action and are an integral part of the authorization of a specific electronic debit transaction. The Board Voting for this action: Chair Yellen, Vice Chairconcluded that it should consider the costs of all man Fischer, and Governors Tarullo, Powell, activities that are integral to authorization, even if and Brainard. those costs are also incurred for the dual purpose of helping to prevent fraud. Policy Statements and Other Actions Voting for this action: Chair Yellen, Vice Chairman Fischer, and Governors Tarullo and Powell. Community Advisory Council Absent and not voting: Governor Brainard. On January 14, 2015, the Board approved the establishment of an advisory council to provide Board Regulation KK (Margin and Capital members with information, advice, and recommenda- Requirements for Covered Swap Entities) tions on the economic circumstances and financial On October 30, 2015, the Board approved a final rule (Docket No. R-1415) to establish minimum margin 11 See Federal Register notices at www.gpo.gov/fdsys/pkg/FR- 10 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2015- 2015-11-30/html/2015-28671.htm and www.gpo.gov/fdsys/pkg/ 08-14/html/2015-19979.htm. FR-2015-11-30/html/2015-28670.htm.

Record of Policy Actions of the Board of Governors 119 services needs of consumers and communities, with a Interagency Policy Statement Establishing particular focus on the concerns of low- and Joint Standards for Assessing the moderate-income populations.12 The 15 members of Diversity Policies and Practices of Entities the newly formed Community Advisory Council Regulated by the Agencies (CAC) were selected by the Board through a public nomination process of candidates with expertise in On June 3, 2015, the Board approved a final interconsumer and community development matters. The agency policy statement (Docket No. OP-1465), pub- Board held the first CAC meeting in the fourth quar- lished jointly with the Federal Deposit Insurance ter of 2015 and will hold meetings semiannually Corporation, Office of the Comptroller of the Curthereafter. rency, National Credit Union Administration, Consumer Financial Protection Bureau, and Securities Voting for this action: Chair Yellen, Vice Chair- and Exchange Commission, to establish joint stanman Fischer, and Governors Tarullo, Powell, dards for assessing the diversity policies and practices and Brainard. of the entities regulated by the agencies.14 The standards are required under section 342 of the Dodd- Frank Act and provide a framework for regulated Small Bank Holding Company entities to create and strengthen their diversity poli- Policy Statement cies and practices, including their organizational commitment to diversity, workforce and employment On April 8, 2015, the Board approved a final rule practices, procurement and business practices, and (Docket No. R-1509) amending its Small Bank Holdpractices to promote transparency of organizational ing Company Policy Statement to raise from diversity and inclusion within their U.S. operations. $500 million to $1 billion the asset threshold to The interagency policy statement is effective June 10, qualify for the policy statement and to expand the 2015. scope of companies eligible under the statement to include savings and loan holding companies.13 The Voting for this action: Chair Yellen, Vice Chairpolicy statement facilitates the transfer of ownership man Fischer, and Governors Tarullo, Powell, of small community banks and savings associations and Brainard. by allowing their holding companies to operate with higher levels of debt than would normally be permit- Enhancements to Federal Reserve Bank ted. The policy statement contains several conditions Same-Day ACH Service and restrictions designed to ensure that the higher levels of debt permitted for the holding companies On September 22, 2015, the Board approved do not present an undue risk to the safety and soundenhancements to the Federal Reserve Banks’ sameness of their subsidiary banks. The Board also day automated clearing house (ACH) service (Docket approved final conforming revisions to Regulation Y OP-1515) to require receiving depository financial (Bank Holding Companies and Change in Bank institutions (RDFIs) to participate in the service and Control), Regulation LL (Savings and Loan Holding to require originating depository financial institu- Companies), and Regulation Q (Capital Adequacy of tions to pay a fee to the RDFIs for each same-day Bank Holding Companies, Savings and Loan Hold- ACH forward transaction.15 The enhancements are ing Companies, and State Member Banks). The final intended to align the Federal Reserve Banks’ samerule is effective May 15, 2015. day ACH service with amendments to NACHA’s (formerly National Automated Clearing House Asso- Voting for this action: Chair Yellen, Vice Chairciation) ACH operating rules and will facilitate the man Fischer, and Governors Tarullo, Powell, use of the ACH network for certain time-critical payand Brainard. ments, accelerate final settlement, and improve funds availability to payment recipients. The enhancements will be adopted by incorporation of the NACHA amended operating rules into Operating Circular 4, 12 See press release at www.federalreserve.gov/newsevents/press/ 14 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2015other/20150116a.htm. 06-10/html/2015-14126.htm. 13 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2015- 15 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2015- 04-15/html/2015-08513.htm. 09-28/html/2015-24551.htm.

120 102nd Annual Report | 2015 governing the Reserve Banks’ ACH service. The of the Reserve Bank boards of directors in conjuncchanges are effective September 23, 2016. tion with the FOMC’s decision to raise the target range for the federal funds rate by 25 basis points, to Voting for this action: Chair Yellen, Vice Chair- ¼ percent to ½ percent. Monetary policy developman Fischer, and Governors Tarullo, Powell, ments are reviewed more fully in other parts of this and Brainard. report (see section 2, “Monetary Policy and Economic Developments”). Interest on Reserves Secondary credit is available in appropriate circum- On December 16, 2015, the Board approved raising stances to depository institutions that do not qualify the interest rate paid on required and excess reserve for primary credit. The secondary credit rate is set at balances from ¼ percent to ½ percent, effective a spread above the primary credit rate. Throughout December 17, 2015.16 This action was taken to sup- 2015, the spread was set at 50 basis points. At yearport the Federal Open Market Committee’s decision end, the secondary credit rate was 1½ percent. on December 16 to raise the target range for the federal funds rate by 25 basis points, to ¼ percent to Seasonal credit is available to smaller depository ½ percent. institutions to meet liquidity needs that arise from regular swings in their loans and deposits. The rate Voting for this action: Chair Yellen, Vice Chair- on seasonal credit is calculated every two weeks as an man Fischer, and Governors Tarullo, Powell, average of selected money-market yields, typically and Brainard. resulting in a rate close to the target range for the federal funds rate. At year-end, the seasonal credit rate was 0.40 percent.17 Discount Rates for Depository Institutions in 2015 Votes on Changes to Discount Rates for Depository Institutions Under the Federal Reserve Act, the boards of direc- About every two weeks during 2015, the Board tors of the Federal Reserve Banks must establish approved proposals by the 12 Reserve Banks to rates on discount window loans to depository institumaintain the formulas for computing the secondary tions at least every 14 days, subject to review and and seasonal credit rates. Details on the action by the determination by the Board of Governors. Board to approve a change to the primary credit rate Primary, Secondary, and Seasonal Credit are provided below. Primary credit, the Federal Reserve’s main lending December 16, 2015. Effective December 17, 2015, the program for depository institutions, is extended at Board approved actions taken by the directors of the the primary credit rate, which is set above the usual Federal Reserve Banks of Boston, New York, Philalevel of short-term market interest rates. It is made delphia, Cleveland, Richmond, Atlanta, Chicago, available, with minimal administration and for very St. Louis, Kansas City, Dallas, and San Francisco to short terms, as a backup source of liquidity to increase the primary credit rate from ¾ percent to depository institutions that, in the judgment of the 1 percent. On December 17, 2015, the Board lending Federal Reserve Bank, are in generally sound approved an identical action subsequently taken by financial condition. During 2015, the Board the directors of the Federal Reserve Bank of Minneapproved one change to the primary credit rate, an apolis, effective immediately. increase from ¾ percent to 1 percent, effective December 17, 2015. The Board reached this determi- Voting for this action: Chair Yellen, Vice Chairnation on the primary credit rate recommendations man Fischer, and Governors Tarullo, Powell, and Brainard. 16 See press release at www.federalreserve.gov/newsevents/press/ monetary/20151216a1.htm and Federal Register notice at www 17 For current and historical discount rates, see www .gpo.gov/fdsys/pkg/FR-2015-12-22/html/2015-32099.htm. .frbdiscountwindow.org/.

121 Minutes of 9 Federal Open Market Committee Meetings The policy actions of the Federal Open Market Com- a decision, they are identified in the minutes and a mittee, contained in the minutes of its meetings, are summary of the reasons for their dissent is provided. presented in the Annual Report of the Board of Governors pursuant to the requirements of section 10 of Policy directives of the Federal Open Market Comthe Federal Reserve Act. That section provides that mittee are issued to the Federal Reserve Bank of New the Board shall keep a complete record of the actions York as the Bank selected by the Committee to taken by the Board and by the Federal Open Market execute transactions for the System Open Market Committee on all questions of policy relating to open Account. In the area of domestic open market operamarket operations, that it shall record therein the tions, the Federal Reserve Bank of New York opervotes taken in connection with the determination of ates under instructions from the Federal Open Maropen market policies and the reasons underlying each ket Committee that take the form of an Authorizapolicy action, and that it shall include in its annual tion for Domestic Open Market Operations and a report to Congress a full account of such actions. Domestic Policy Directive. (A new Domestic Policy Directive is adopted at each regularly scheduled The minutes of the meetings contain the votes on the meeting.) In the foreign currency area, the Federal policy decisions made at those meetings, as well as a Reserve Bank of New York operates under an Authosummary of the information and discussions that led rization for Foreign Currency Operations, a Foreign to the decisions. In addition, four times a year, start- Currency Directive, and Procedural Instructions with ing with the October 2007 Committee meeting, a Respect to Foreign Currency Operations. Changes in Summary of Economic Projections is published as an the instruments during the year are reported in the addendum to the minutes. The descriptions of eco- minutes for the individual meetings.1 nomic and financial conditions in the minutes and the Summary of Economic Projections are based solely on the information that was available to the Commit- 1 As of January 1, 2015, the Federal Reserve Bank of New York tee at the time of the meetings. was operating under the Domestic Policy Directive approved at the December 16–17, 2014, Committee meeting. The other policy instruments (the Authorization for Domestic Open Mar- Members of the Committee voting for a particular ket Operations, the Authorization for Foreign Currency Operaaction may differ among themselves as to the reasons tions, the Foreign Currency Directive, and Procedural Instructions with Respect to Foreign Currency Operations) in effect as for their votes; in such cases, the range of their views of January 1, 2015, were approved at the January 28–29, 2014, is noted in the minutes. When members dissent from meeting.

122 102nd Annual Report | 2015 Meeting Held on January 27–28, 2015 David Altig, Thomas A. Connors, Michael P. Leahy, Jonathan P. McCarthy, William R. Nelson, Glenn D. Rudebusch, Daniel G. Sullivan, and William Wascher A meeting of the Federal Open Market Committee Associate Economists was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Simon Potter Tuesday, January 27, 2015, at 10:00 a.m. and contin- Manager, System Open Market Account ued on Wednesday, January 28, 2015, at 9:00 a.m. Lorie K. Logan Deputy Manager, System Open Market Account Present Robert deV. Frierson1 Janet L. Yellen Secretary of the Board, Office of the Secretary, Chair Board of Governors William C. Dudley Michael S. Gibson Vice Chairman Director, Division of Banking Supervision and Lael Brainard Regulation, Board of Governors Charles L. Evans Nellie Liang Director, Office of Financial Stability Policy and Stanley Fischer Research, Board of Governors Jeffrey M. Lacker James A. Clouse Deputy Director, Division of Monetary Affairs, Dennis P. Lockhart Board of Governors Jerome H. Powell William B. English Daniel K. Tarullo Senior Special Adviser to the Board, Office of Board Members, Board of Governors John C. Williams Andrew Figura, David Reifschneider, James Bullard, Esther L. George, and Stacey Tevlin Loretta J. Mester, and Eric Rosengren Special Advisers to the Board, Office of Board Alternate Members of the Federal Open Market Members, Board of Governors Committee Trevor A. Reeve Richard W. Fisher, Narayana Kocherlakota, Special Adviser to the Chair, Office of Board and Charles I. Plosser Members, Board of Governors Presidents of the Federal Reserve Banks of Dallas, Minneapolis, and Philadelphia, respectively David E. Lebow Senior Associate Director, Division of Research and Thomas Laubach Statistics, Board of Governors Secretary and Economist Michael T. Kiley Matthew M. Luecke Senior Adviser, Division of Research and Statistics, Deputy Secretary and Senior Associate Director, Office of Financial Michelle A. Smith Stability Policy and Research, Assistant Secretary Board of Governors Scott G. Alvarez Jeremy B. Rudd General Counsel Senior Adviser, Division of Research and Statistics, Thomas C. Baxter Board of Governors Deputy General Counsel Joyce K. Zickler Steven B. Kamin Senior Adviser, Division of Monetary Affairs, Economist Board of Governors David W. Wilcox 1 Attended the joint session of the Federal Open Market Com- Economist mittee and the Board of Governors.

Minutes of Federal Open Market Committee Meetings | January 123 Fabio M. Natalucci2 and Gretchen C. Weinbach3 Elmar Mertens Associate Directors, Division of Monetary Affairs, Senior Economist, Division of Monetary Affairs, Board of Governors Board of Governors Joseph W. Gruber Bernd Schlusche and Emre Yoldas Deputy Associate Director, Division of International Economists, Division of Monetary Affairs, Finance, Board of Governors Board of Governors David López-Salido Peter M. Garavuso Deputy Associate Director, Division of Monetary Information Management Analyst, Division of Affairs, Board of Governors Monetary Affairs, Board of Governors Jennifer Gallagher Blake Prichard Special Assistant to the Board, Office of Board First Vice President, Federal Reserve Bank of Members, Board of Governors Philadelphia Edward Nelson Jeff Fuhrer and Alberto G. Musalem Assistant Director, Division of Monetary Affairs, Executive Vice Presidents, Federal Reserve Banks of Board of Governors Boston and New York, respectively Shane M. Sherlund Troy Davig, Michael Dotsey, Joshua L. Frost,4 Assistant Director, Division of Research and Evan F. Koenig, Samuel Schulhofer-Wohl, Statistics, Board of Governors and Christopher J. Waller Senior Vice Presidents, Federal Reserve Banks of Burcu Duygan-Bump and Robert J. Tetlow2 Kansas City, Philadelphia, New York, Dallas, Advisers, Division of Monetary Affairs, Minneapolis, and St. Louis, respectively Board of Governors Todd E. Clark and Douglas Tillett Eric C. Engstrom Vice Presidents, Federal Reserve Banks of Cleveland Adviser, Division of Research and Statistics, and Chicago, respectively Board of Governors Robert L. Hetzel Penelope A. Beattie1 Senior Economist, Federal Reserve Bank of Assistant to the Secretary, Office of the Secretary, Richmond Board of Governors Annual Organizational Matters5 Dana L. Burnett and Christopher J. Gust Section Chiefs, Division of Monetary Affairs, In the agenda for this meeting, it was reported that Board of Governors advices of the election of the following members and Katie Ross1 alternate members of the Federal Open Market Com- Manager, Office of the Secretary, mittee (the “Committee”) for a term beginning Janu- Board of Governors ary 27, 2015, had been received and that these individuals had executed their oaths of office. David H. Small Project Manager, Division of Monetary Affairs, The elected members and alternate members were as Board of Governors follows: Carlos O. Arteta William C. Dudley Senior Economist, Division of International Finance, President of the Federal Reserve Bank of New York, Board of Governors with Kimberly Bayard Christine Cumming Senior Economist, Division of Research and First Vice President of the Federal Reserve Bank of Statistics, Board of Governors New York, as alternate. 2 Attended the portion of the meeting following the joint session 4 Attended through the discussion on liftoff tools and possible of the Federal Open Market Committee and the Board of liftoff options. Governors. 5 Versions of the current Committee documents are available at 3 Attended through the conclusion of the joint session of the www.federalreserve.gov/monetarypolicy/rules_authorizations Federal Open Market Committee and the Board of Governors. .htm.

124 102nd Annual Report | 2015 Jeffrey M. Lacker Richard M. Ashton President of the Federal Reserve Bank of Richmond, Assistant General Counsel with Steven B. Kamin Eric Rosengren Economist President of the Federal Reserve Bank of Boston, David W. Wilcox as alternate. Economist Charles L. Evans David Altig President of the Federal Reserve Bank of Chicago, with Thomas A. Connors Loretta J. Mester Eric M. Engen President of the Federal Reserve Bank of Cleveland, Michael P. Leahy as alternate. Jonathan P. McCarthy Dennis P. Lockhart William R. Nelson President of the Federal Reserve Bank of Atlanta, Glenn D. Rudebusch with Daniel G. Sullivan James Bullard President of the Federal Reserve Bank of St. Louis, John A. Weinberg as alternate. William Wascher Associate Economists John C. Williams President of the Federal Reserve Bank of By unanimous vote, the Federal Reserve Bank of San Francisco, with New York was selected to execute transactions for Esther L. George the System Open Market Account (“SOMA”). President of the Federal Reserve Bank of Kansas City, as alternate. By unanimous vote, the Committee selected Simon Potter and Lorie K. Logan to serve at the pleasure of By unanimous vote, the following officers of the the Committee as manager and deputy manager of Committee were selected to serve until the selection the SOMA, respectively, on the understanding that of their successors at the first regularly scheduled their selection was subject to their being satisfactory meeting of the Committee in 2016: to the Federal Reserve Bank of New York. Janet L. Yellen Secretary’s note: Advice subsequently was Chairman received that the manager and deputy manager William C. Dudley selections indicated above were satisfactory to the Vice Chairman Federal Reserve Bank of New York. Thomas Laubach By unanimous vote, the Authorization for Domestic Secretary and Economist Open Market Operations was approved with two sets Matthew M. Luecke of amendments. The first set of amendments aimed Deputy Secretary at simplifying the language by defining common terms, eliminating duplication of language, and stan- David W. Skidmore6 dardizing references to the Committee.7 The second Assistant Secretary set of amendments clarified or modified existing Michelle A. Smith authority, in particular by introducing the defined Assistant Secretary term “Selected Bank” as part of prudent planning to simplify transfer of authority from the Federal Scott G. Alvarez Reserve Bank of New York to another Federal General Counsel Thomas C. Baxter 7 To improve consistency, references to “the FOMC,” “the Federal Open Market Committee,” and “the Committee” were stan- Deputy General Counsel dardized, where appropriate, around the convention of “the Committee.” This change was implemented in other affected 6 Effective February 2, 2015. documents.

Minutes of Federal Open Market Committee Meetings | January 125 Reserve Bank selected by the Committee in the event ness days or less, at rates that, unless othof a significant contingency, removing the authoriza- erwise authorized by the Committee, are tion to use agents for agency mortgage-backed secu- determined by competitive bidding, after rities (“MBS”) transactions, defining the types of applying reasonable limitations on the collateral accepted in securities lending operations volume of agreements with individual described in paragraph 3, and updating the language counterparties; relating to the Chair’s authority to act in exceptional circumstances.8 The Guidelines for the Conduct of B. To allow Eligible Securities in the SOMA to System Open Market Operations in Federal-Agency mature without replacement; Issues remained suspended. C. To exchange, at market prices, in connection Authorization for Domestic Open Market with a Treasury auction, maturing Eligible Operations (As Amended Effective Securities in the SOMA with the Treasury, in January 27, 2015) the case of Eligible Securities that are direct obligations of the United States or that are 1. The Federal Open Market Committee (the “Comfully guaranteed as to principal and interest mittee”) authorizes and directs the Federal by the United States; and Reserve Bank selected by the Committee to execute open market transactions (the “Selected D. To exchange, at market prices, maturing Eli- Bank”), to the extent necessary to carry out the gible Securities in the SOMA with an agency most recent domestic policy directive adopted by of the United States, in the case of Eligible the Committee: Securities that are direct obligations of that agency or that are fully guaranteed as to A. To buy or sell in the open market securities principal and interest by that agency. that are direct obligations of, or fully guaranteed as to principal and interest by, the 2. The Committee authorizes the Selected Bank to United States, and securities that are direct undertake transactions of the type described in obligations of, or fully guaranteed as to prinparagraph 1 from time to time for the purpose of cipal and interest by, any agency of the testing operational readiness, subject to the fol- United States, that are eligible for purchase lowing limitations: or sale under Section 14(b) of the Federal Reserve Act (“Eligible Securities”) for the A. All transactions authorized in this paragraph System Open Market Account (“SOMA”): 2 shall be conducted with prior notice to the i. As an outright operation with securities Committee; dealers and foreign and international accounts maintained at the Selected B. The aggregate par value of the transactions Bank: on a same-day or deferred delivery authorized in this paragraph 2 that are of the basis (including such transactions as are type described in paragraph 1.A.i shall not commonly referred to as dollar rolls and exceed $5 billion per calendar year; and coupon swaps) at market prices; or C. The outstanding amount of the transactions ii. As a temporary operation: on a same-day described in paragraph 1.A.ii shall not exceed or deferred delivery basis, to purchase $5 billion at any given time. such Eligible Securities subject to an agreement to resell (“repo transactions”) or to sell such Eligible Securities subject 3. In order to ensure the effective conduct of open to an agreement to repurchase (“reverse market operations, the Committee authorizes the repo transactions”) for a term of 65 busi- Selected Bank to operate a program to lend Eligible Securities held in the SOMA to dealers on 8 The change regarding the introduction of the term “Selected an overnight basis (except that the Selected Bank Bank” was implemented in other affected documents, including may lend Eligible Securities for longer than an the Authorization for Foreign Currency Operations, Procedural overnight term to accommodate weekend, holi- Instructions with Respect to Foreign Currency Operations, and Program for Security of FOMC Information. day, and similar trading conventions).

126 102nd Annual Report | 2015 A. Such securities lending must be: i. Undertake repo transactions in Eligible Securities with dealers with a correspondi. At rates determined by competitive ing reverse repo transaction in such Elibidding; gible Securities with the Customer ii. At a minimum lending fee consistent with Accounts; and the objectives of the program; ii. Undertake intraday reverse repo transaciii. Subject to reasonable limitations on the tions in Eligible Securities with Foreign total amount of a specific issue of Eli- Accounts. gible Securities that may be auc- Transactions undertaken with Customer tioned; and Accounts under the provisions of this paragraph iv. Subject to reasonable limitations on the 4 may provide for a service fee when appropriate. amount of Eligible Securities that each Transactions undertaken with Customer borrower may borrow. Accounts are also subject to the authorization or approval of other entities, including the Board of B. The Selected Bank may: Governors of the Federal Reserve System and, when involving accounts maintained at a Federal i. Reject bids that, as determined in its sole Reserve Bank as fiscal agent of the United States, discretion, could facilitate a bidder’s abilthe United States Department of the Treasury. ity to control a single issue; ii. Accept Treasury securities or cash as col- 5. The Committee authorizes the Chairman of the lateral for any loan of securities author- Committee, in fostering the Committee’s objecized in this paragraph 3; and tives during any period between meetings of the Committee, to instruct the Selected Bank to act iii. Accept agency securities as collateral only on behalf of the Committee to: for a loan of agency securities authorized in this paragraph 3. A. Adjust somewhat in exceptional circumstances the stance of monetary policy and to 4. In order to ensure the effective conduct of open take actions that may result in material market operations, while assisting in the provision changes in the composition and size of the of short-term investments or other authorized assets in the SOMA; or services for foreign central bank and international accounts maintained at a Federal Reserve Bank B. Undertake transactions with respect to Eli- (the “Foreign Accounts”) and accounts maingible Securities in order to appropriately tained at a Federal Reserve Bank as fiscal agent address temporary disruptions of an operaof the United States pursuant to section 15 of the tional or highly unusual nature in U.S. dollar Federal Reserve Act (together with the Foreign funding markets. Accounts, the “Customer Accounts”), the Committee authorizes the following when undertaken Any such adjustment described in subparagraph on terms comparable to those available in the A of this paragraph 5 shall be made in the conopen market: text of the Committee’s discussion and decision about the stance of policy at its most recent meet- A. The Selected Bank, for the SOMA, to undering and the Committee’s long-run objectives to take reverse repo transactions in Eligible foster maximum employment and price stability, Securities held in the SOMA with the Cusand shall be based on economic, financial, and tomer Accounts for a term of 65 business monetary developments since the most recent days or less; and meeting of the Committee. The Chairman, whenever feasible, will consult with the Committee B. Any Federal Reserve Bank that maintains before making any instruction under this para- Customer Accounts, for any such Customer graph 5. Account, when appropriate and subject to all other necessary authorization and approv- The Committee voted to amend the Authorization als, to: for Foreign Currency Operations and the Procedural

Minutes of Federal Open Market Committee Meetings | January 127 Instructions with Respect to Foreign Currency Mexican pesos Operations, and to reaffirm the Foreign Currency New Zealand dollars Directive in the form shown below. The approval of Norwegian kroner these documents included approval of the System’s Pounds sterling warehousing agreement with the U.S. Treasury. A Singapore dollars change was made to the Authorization for Foreign Swedish kronor Currency Operations to increase the duration limit of Swiss francs the foreign currency portfolio to 24 months from 18 months. This change was made to provide greater B. To hold balances of, and to have outstanding flexibility in the management of the foreign currency forward contracts to receive or to deliver, the portfolio, in an environment in which interest rates foreign currencies listed in paragraph A are low in many major economies. Mr. Lacker dis- above. sented in the votes on the Authorization for Foreign Currency Operations and the Foreign Currency C. To draw foreign currencies and to permit for- Directive to indicate his opposition to foreign cur- eign banks to draw dollars under the rency intervention by the Federal Reserve. In his arrangements listed in paragraph 2 below, in view, such intervention would be ineffective if it did accordance with the Procedural Instructions not also signal a shift in domestic monetary policy; with Respect to Foreign Currency and if it did signal such a shift, it could potentially Operations. compromise the Federal Reserve’s monetary policy independence. D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. Authorization for Foreign Currency Operations For this purpose, the overall open position in (As Amended Effective January 27, 2015) all foreign currencies is defined as the sum (disregarding signs) of net positions in indi- 1. The Federal Open Market Committee (the “Com- vidual currencies, excluding changes in dollar mittee”) authorizes and directs the Federal value due to foreign exchange rate move- Reserve Bank selected by the Committee to ments and interest accruals. The net position execute open market transactions (the “Selected in a single foreign currency is defined as Bank”), for the System Open Market Account, to holdings of balances in that currency, plus the extent necessary to carry out the Committee’s outstanding contracts for future receipt, foreign currency directive and express authoriza- minus outstanding contracts for future delivtions by the Committee pursuant thereto, and in ery of that currency, i.e., as the sum of these conformity with such procedural instructions as elements with due regard to sign. the Committee may issue from time to time: 2. The Committee directs the Selected Bank to A. To purchase and sell the following foreign maintain for the System Open Market Account currencies in the form of cable transfers (subject to the requirements of section 214.5 of through spot or forward transactions on the Regulation N, Relations with Foreign Banks and open market at home and abroad, including Bankers): transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established A. Reciprocal currency arrangements with the by section 10 of the Gold Reserve Act of following foreign banks: 1934, with foreign monetary authorities, with the Bank for International Settlements, and Foreign bank Amount of arrangement with other international financial institutions: (millions of dollars equivalent) Bank of Canada 2,000 Australian dollars Bank of Mexico 3,000 Brazilian reais Canadian dollars B. Standing dollar liquidity swap arrangements Danish kroner with the following foreign banks: euro Japanese yen Bank of Canada Korean won Bank of England

128 102nd Annual Report | 2015 Bank of Japan Macaulay duration). Such investments may European Central Bank include buying or selling outright obligations of, Swiss National Bank or fully guaranteed as to principal and interest by, a foreign government or agency thereof; buying C. Standing foreign currency liquidity swap such securities under agreements for repurchase arrangements with the following foreign of such securities; selling such securities under banks: agreements for the resale of such securities; and holding various time and other deposit accounts Bank of Canada at foreign institutions. In addition, when appro- Bank of England priate in connection with arrangements to pro- Bank of Japan vide investment facilities for foreign currency European Central Bank holdings, U.S. government securities may be pur- Swiss National Bank chased from foreign central banks under agreements for repurchase of such securities within 30 Dollar and foreign currency liquidity swap calendar days. arrangements have no pre-set size limits. Any new swap arrangements shall be referred for review 6. All operations undertaken pursuant to the preand approval to the Committee. All swap ceding paragraphs shall be reported promptly to arrangements are subject to annual review and the Foreign Currency Subcommittee (the “Subapproval by the Committee. committee”) and the Committee. The Subcommittee consists of the Chairman and Vice Chair- 3. All transactions in foreign currencies undertaken man of the Committee, the Vice Chairman of the under paragraph 1.A above shall, unless other- Board of Governors, and such other member of wise expressly authorized by the Committee, be at the Board as the Chairman may designate (or in prevailing market rates. For the purpose of prothe absence of members of the Board serving on viding an investment return on System holdings the Subcommittee, other Board members desigof foreign currencies or for the purpose of adjustnated by the Chairman as alternates, and in the ing interest rates paid or received in connection absence of the Vice Chairman of the Committee, with swap drawings, transactions with foreign the Vice Chairman’s alternate). Meetings of the central banks may be undertaken at non-market Subcommittee shall be called at the request of exchange rates. any member, or at the request of the manager, System Open Market Account (“manager”), for 4. It shall be the normal practice to arrange with the purposes of reviewing recent or contemplated foreign central banks for the coordination of foroperations and of consulting with the manager eign currency transactions. In making operating on other matters relating to the manager’s arrangements with foreign central banks on responsibilities. At the request of any member of System holdings of foreign currencies, the the Subcommittee, questions arising from such Selected Bank shall not commit itself to maintain reviews and consultations shall be referred for any specific balance, unless authorized by the determination to the Committee. Committee. Any agreements or understandings concerning the administration of the accounts 7. The Chairman is authorized: maintained by the Selected Bank with the foreign banks designated by the Board of Governors A. With the approval of the Committee, to enter under section 214.5 of Regulation N shall be into any needed agreement or understanding referred for review and approval to the with the Secretary of the Treasury about the Committee. division of responsibility for foreign currency operations between the System and the 5. Foreign currency holdings shall be invested to Treasury; ensure that adequate liquidity is maintained to meet anticipated needs and so that each currency B. To keep the Secretary of the Treasury fully portfolio shall generally have an average duration advised concerning System foreign currency of no more than 24 months (calculated as

Minutes of Federal Open Market Committee Meetings | January 129 operations, and to consult with the Secretary accordance with the Authorization for Foron policy matters relating to foreign currency eign Currency Operations. operations; E. Cooperate in other respects with central C. From time to time, to transmit appropriate banks of other countries and with internareports and information to the National tional monetary institutions. Advisory Council on International Monetary and Financial Policies. 3. Transactions may also be undertaken: 8. All Federal Reserve Banks shall participate in the A. To adjust System balances in light of probforeign currency operations for System Account able future needs for currencies. in accordance with paragraph 3G(1) of the Board of Governors’ Statement of Procedure with B. To provide means for meeting System and Respect to Foreign Relationships of Federal Treasury commitments in particular curren- Reserve Banks dated January 1, 1944. cies, and to facilitate operations of the Exchange Stabilization Fund. 9. The Committee authorizes the Selected Bank to undertake transactions of the type described in C. For such other purposes as may be expressly paragraphs 1, 2, and 5, and foreign exchange and authorized by the Committee. investment transactions that it may be otherwise authorized to undertake from time to time for the 4. System foreign currency operations shall be purpose of testing operational readiness. The conducted: aggregate amount of such transactions shall not exceed $2.5 billion per calendar year. These trans- A. In close and continuous consultation and actions shall be conducted with prior notice to cooperation with the United States Treasury; the Committee. B. In cooperation, as appropriate, with foreign Foreign Currency Directive (As Reaffirmed monetary authorities; and Effective January 27, 2015) C. In a manner consistent with the obligations 1. System operations in foreign currencies shall gen- of the United States in the International erally be directed at countering disorderly market Monetary Fund regarding exchange arrangeconditions, provided that market exchange rates ments under IMF Article IV. for the U.S. dollar reflect actions and behavior consistent with IMF Article IV, Section 1. Procedural Instructions with Respect to Foreign Currency Operations (As Amended 2. To achieve this end the System shall: Effective January 27, 2015) In conducting operations pursuant to the authoriza- A. Undertake spot and forward purchases and tion and direction of the Federal Open Market Comsales of foreign exchange. mittee (the “Committee”) as set forth in the Authorization for Foreign Currency Operations and the For- B. Maintain reciprocal currency arrangements eign Currency Directive, the Federal Reserve Bank with foreign central banks in accordance with selected by the Committee to execute open market the Authorization for Foreign Currency transactions (the “Selected Bank”), through the man- Operations. ager, System Open Market Account (“manager”), shall be guided by the following procedural under- C. Maintain standing dollar liquidity swap standings with respect to consultations and cleararrangements with foreign banks in accor- ances with the Committee, the Foreign Currency dance with the Authorization for Foreign Subcommittee (the “Subcommittee”), and the Chair- Currency Operations. man of the Committee, unless otherwise directed by the Committee. All operations undertaken pursuant D. Maintain standing foreign currency liquidity to such clearances shall be reported promptly to the swap arrangements with foreign banks in Committee.

130 102nd Annual Report | 2015 1. For the reciprocal currency arrangements author- B. Any changes in the terms of existing swap ized in paragraphs 2.A of the Authorization for arrangements shall be referred for review and Foreign Currency Operations: approval to the Chairman. The Chairman shall keep the Committee informed of any A. Drawings must be approved by the Subcom- changes in terms, and the terms shall be conmittee (or by the Chairman, if the Chairman sistent with principles discussed with and believes that consultation with the Subcom- guidance provided by the Committee. mittee is not feasible in the time available) if the swap drawing proposed by a foreign bank 3. Any operation must be approved by: does not exceed the larger of (i) $200 million or (ii) 15 percent of the size of the swap A. The Subcommittee (or by the Chairman, if arrangement. the Chairman believes that consultation with the Subcommittee is not feasible in the time B. Drawings must be approved by the Commit- available) if it: tee (or by the Subcommittee, if the Subcomi. Would result in a change in the System’s mittee believes that consultation with the full overall open position in foreign currencies Committee is not feasible in the time availexceeding $300 million on any day or able, or by the Chairman, if the Chairman $600 million since the most recent regular believes that consultation with the Subcommeeting of the Committee. mittee is not feasible in the time available) if the swap drawing proposed by a foreign bank ii. Would result in a change on any day in exceeds the larger of (i) $200 million or the System’s net position in a single for- (ii) 15 percent of the size of the swap eign currency exceeding $150 million, or arrangement. $300 million when the operation is associated with repayment of swap drawings. C. The manager shall also consult with the Subcommittee or the Chairman about proposed iii. Might generate a substantial volume of swap drawings by the System. trading in a particular currency by the System, even though the change in the D. Any changes in the terms of existing swap System’s net position in that currency (as arrangements shall be referred for review and defined in paragraph 1.D of the Authoriapproval to the Chairman. The Chairman zation for Foreign Currency Operations) shall keep the Committee informed of any might be less than the limits specified in changes in terms, and the terms shall be con- 3.A.ii. sistent with principles discussed with and guidance provided by the Committee. B. The Committee (or by the Subcommittee, if the Subcommittee believes that consultation 2. For the dollar and foreign currency liquidity swap with the full Committee is not feasible in the arrangements authorized in paragraphs 2.B and time available, or by the Chairman, if the 2.C of the Authorization for Foreign Currency Chairman believes that consultation with the Operations: Subcommittee is not feasible in the time available) if it would result in a change in the A. Drawings must be approved by the Chairman System’s overall open position in foreign curin consultation with the Subcommittee. The rencies exceeding $1.5 billion since the most Chairman or the Subcommittee will consult recent regular meeting of the Committee. with the Committee prior to the initial drawing on the dollar or foreign currency liquidity 4. The Committee authorizes the Selected Bank to swap lines if possible under the circumstances undertake transactions of the type described in then prevailing; authority to approve subse- paragraphs 1, 2, and 5 of the Authorization for quent drawings for either the dollar or for- Foreign Currency Operations and foreign eign currency liquidity swap lines may be del- exchange and investment transactions that it may egated to the manager by the Chairman. be otherwise authorized to undertake from time

Minutes of Federal Open Market Committee Meetings | January 131 to time for the purpose of testing operational its medium-term outlook, and its assessments of readiness. The aggregate amount of such transac- the balance of risks, including risks to the finantions shall not exceed $2.5 billion per calendar cial system that could impede the attainment of year. These transactions shall be conducted with the Committee’s goals. prior notice to the Committee. The inflation rate over the longer run is primar- By unanimous vote, the Committee amended its Pro- ily determined by monetary policy, and hence gram for Security of FOMC Information with the Committee has the ability to specify a changes to how Federal Reserve Banks classify and longer-run goal for inflation. The Committee access Committee information. reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change In its annual reconsideration of the Statement on in the price index for personal consumption Longer-Run Goals and Monetary Policy Strategy, expenditures, is most consistent over the longer participants generally agreed that only a minor run with the Federal Reserve’s statutory manupdate was required at this meeting. Several partici- date. Communicating this inflation goal clearly pants observed that this statement had helped to to the public helps keep longer-term inflation increase public understanding of the Committee’s expectations firmly anchored, thereby fostering goals and policy framework. It was noted, however, price stability and moderate long-term interest that the Committee should continue to discuss pos- rates and enhancing the Committee’s ability to sible enhancements to the statement over the coming promote maximum employment in the face of year. significant economic disturbances. The maximum level of employment is largely determined Following the discussion, the Committee voted to by nonmonetary factors that affect the structure reaffirm the statement with an updated reference to and dynamics of the labor market. These factors participants’ estimates of the longer-run normal may change over time and may not be directly unemployment rate. Mr. Tarullo abstained because measurable. Consequently, it would not be he did not believe the statement reflects sufficient appropriate to specify a fixed goal for employconsensus in the principles underlying the Commit- ment; rather, the Committee’s policy decisions tee’s policy actions so as to significantly advance must be informed by assessments of the maxipublic understanding of its monetary policy strategy. mum level of employment, recognizing that such assessments are necessarily uncertain and sub- Statement on Longer-Run Goals and Monetary ject to revision. The Committee considers a wide Policy Strategy (As Amended Effective range of indicators in making these assessments. January 27, 2015) Information about Committee participants’ esti- “The Federal Open Market Committee (FOMC) mates of the longer-run normal rates of output is firmly committed to fulfilling its statutory growth and unemployment is published four mandate from the Congress of promoting maxi- times per year in the FOMC’s Summary of Ecomum employment, stable prices, and moderate nomic Projections. For example, in the most long-term interest rates. The Committee seeks to recent projections, FOMC participants’ estiexplain its monetary policy decisions to the pub- mates of the longer-run normal rate of unemlic as clearly as possible. Such clarity facilitates ployment had a central tendency of 5.2 percent well-informed decisionmaking by households to 5.5 percent. and businesses, reduces economic and financial uncertainty, increases the effectiveness of mon- In setting monetary policy, the Committee seeks etary policy, and enhances transparency and to mitigate deviations of inflation from its accountability, which are essential in a demo- longer-run goal and deviations of employment cratic society. from the Committee’s assessments of its maximum level. These objectives are generally Inflation, employment, and long-term interest complementary. However, under circumstances rates fluctuate over time in response to economic in which the Committee judges that the objecand financial disturbances. Moreover, monetary tives are not complementary, it follows a balpolicy actions tend to influence economic activ- anced approach in promoting them, taking into ity and prices with a lag. Therefore, the Commit- account the magnitude of the deviations and the tee’s policy decisions reflect its longer-run goals, potentially different time horizons over which

132 102nd Annual Report | 2015 employment and inflation are projected to program. Other possible options presented at the return to levels judged consistent with its briefing included adjusting the values of the IOER mandate. and ON RRP rates associated with a given target range for the federal funds rate and the use of term The Committee intends to reaffirm these prin- deposits. ciples and to make adjustments as appropriate at its annual organizational meeting each January.” In their discussion of these issues, participants generally agreed that it was very important for the com- Developments in Financial Markets and mencement of policy firming to proceed successfully. the Federal Reserve’s Balance Sheet Consequently, most were prepared to take the steps necessary to ensure that the federal funds rate traded In a joint session of the Committee and the Board of within the target range established by the Federal Governors of the Federal Reserve System, the man- Open Market Committee (FOMC). However, a few ager of the System Open Market Account (SOMA) participants noted that day-to-day volatility in the reported on developments in domestic and foreign federal funds rate, potentially including temporary financial markets. The deputy manager followed with movements outside the target range, would not be a review of System open market operations con- surprising, and that historical experience suggested ducted during the period since the Committee met on that such temporary movements had few, if any, December 16–17, 2014. The deputy manager also dis- implications for overall financial conditions or the cussed the outcomes of recent tests of term and over- aggregate economy. night reverse repurchase agreements (term RRPs and ON RRPs, respectively). These tests suggested that With regard to the appropriate setting of the cap for the combination of term RRP and ON RRP opera- ON RRP operations at the beginning of normalizations had been effective in supporting money market tion, the staff reported that testing to date suggested rates leading into and over year-end. The presenta- that ON RRP operations have generally been suction also outlined some staff recommendations for cessful in establishing a floor on the level of the fedfurther testing of Term Deposit Facility operations. eral funds effective rate and other short-term interest rates, as long as market participants judge that the By unanimous vote, the Committee ratified the Open aggregate cap is quite unlikely to bind. Against this Market Desk’s domestic transactions over the inter- backdrop, most meeting participants indicated that a meeting period. There were no intervention opera- sizable ON RRP cap would be appropriate to suptions in foreign currencies for the System’s account port policy implementation at the time of liftoff, and over the intermeeting period. a couple of participants suggested that the aggregate cap might be suspended for a time. A couple of par- Liftoff Tools and Possible Liftoff Options ticipants expressed continued concerns about the potential risks to financial stability associated with a A staff briefing provided some background on pos- large ON RRP facility and the possible effect of such sible options for the use of supplementary tools, in a facility on patterns of financial intermediation. addition to interest on excess reserves (IOER), that Moreover, some participants were concerned that a the Committee could choose to use during the early decision to allow a temporary increase in the maxistages of policy normalization. The purpose of these mum size of the ON RRP facility could be viewed by options was to help ensure sufficient control over the market participants as a signal that a large ON RRP federal funds rate and other short-term interest rates facility would be maintained for a longer period than during this period while mitigating potential risks those participants deemed appropriate. While associated with particular policy tools. The presenta- acknowledging these concerns, many participants tion discussed the possibility of establishing, on a believed that a temporarily elevated cap on the ON temporary basis, an aggregate cap for ON RRP RRP operations at a time when the Committee saw operations that was substantially above the cap the conditions as appropriate to begin normalization Committee had chosen for the purposes of testing would likely pose limited risks; another participant such operations. In addition, the presentation dis- judged that an ON RRP program was, in any case, cussed the possible use of term RRP operations, unlikely to materially increase the risks to financial either before or after the commencement of policy stability. Some participants noted that a relatively firming, as a way to reinforce control of short-term high cap could be established and then reduced fairly interest rates and to manage the size of the ON RRP soon after the initial policy firming if it was deter-

Minutes of Federal Open Market Committee Meetings | January 133 mined that it was not needed, and that such a reduc- interest payments to depository institutions until the tion could help underscore the Committee’s intent to beginning of a new maintenance period. Participants use such a facility only to the extent necessary. A generally suggested that it would be useful for the number of participants emphasized that the Com- staff to investigate changes in the method used to mittee should develop plans to ensure that such a determine the interest payments on reserves that facility is temporary and that it can be phased out could tighten the link between the IOER rate in place once it is no longer needed to help control the federal each day and the level of reserve balances held by funds rate. depository institutions each day. With regard to the possible use of term RRP opera- At the conclusion of their discussion, participants tions as an additional supplementary tool, partici- generally agreed that it would be useful to discuss pants noted that recent testing showed that term further at coming meetings specific calibrations of RRP operations ahead of the year-end were associ- policy tools that could be used during the early stages ated with a significant decline in the level of take-up of policy normalization. In addition, many noted at ON RRP operations. The staff presentation sug- that it would be useful to communicate additional gested that risks to financial stability associated with information to the public on these issues to provide term RRPs could be somewhat lower than those greater clarity about the Committee’s approach to associated with ON RRP operations because term policy implementation at that time. RRP operations would be conducted only on selected dates, the Federal Reserve would set the quantity A staff briefing outlined two proposals that the Comauctioned, and the rate on term RRPs would be mittee could consider for further testing of term determined by the auction process. However, a few RRP operations. In the first of these proposals, the participants expressed the view that term RRPs were Desk would conduct a series of preannounced term unlikely to lower risks to financial stability signifi- RRP operations that would span the end of the first cantly. In addition, some participants noted that the quarter. In the second proposal, the Desk would conuse of term RRP operations could complicate com- duct small term RRP operations in February and munications. A few others observed that the Com- early March, in addition to the quarter-end option mittee should not design its operations to reduce presented in the first proposal. In their discussion of year-end or quarter-end volatility induced by finan- term RRP testing, participants noted that the testing cial firms’ reporting practices. Nonetheless, many could provide further information about the substiparticipants agreed that the use of term RRP opera- tutability between the ON and term RRP operations, tions during the period of policy tightening could be including outside year-end and quarter-end periods. useful in some situations. A number of participants emphasized that, even if the Committee conducted additional tests, it had not With regard to the potential use of other tools, sev- yet decided whether to use term RRP operations as eral participants noted that the IOER and ON RRP part of policy normalization. rates should be set at the top and bottom, respectively, of the target range for the federal funds rate. Following the discussion of the testing of term RRP To deviate from such a structure would complicate operations, the Committee approved the following communications about the policy framework and resolution on term RRP testing over the end of the therefore should be avoided if possible. However, first quarter of 2015: some participants judged that adjustments to the relationship of the IOER rate and the ON RRP rate “During the period of March 19, 2015, to to the target range for the federal funds rate might, in March 30, 2015, the Federal Open Market Comsome circumstances, be helpful for improving control mittee (FOMC) authorizes the Federal Reserve of the federal funds rate. A few participants noted Bank of New York to conduct a series of term that use of term deposits during the tightening phase reverse repurchase operations involving U.S. could also be appropriate in some circumstances. government securities. Such operations shall: (i) mature no later than April 9, 2015; (ii) be The staff presentation also discussed a technical issue subject to an overall size limit of $200 billion related to the calculation of the payment of interest outstanding at any one time; (iii) be subject to a on reserves. Under current arrangements, an increase maximum bid rate of five basis points above the in the IOER rate that is implemented in the middle of ON RRP offering rate in effect on the day of the a reserve maintenance period is not fully reflected in operation; (iv) be awarded to all submitters:

134 102nd Annual Report | 2015 (A) at the highest submitted rate if the sum of operations. The Chair must approve the terms the bids received is less than or equal to the pre- of, timing of the announcement of, and timing announced size of the operation, or (B) at the of the operations. These operations shall be constop-out rate, determined by evaluating bids in ducted in addition to the authorized overnight ascending order by submitted rate up to the reverse repurchase agreements, which remain point at which the total quantity of bids equals subject to a separate overall size limit of the preannounced size of the operation, with all $300 billion per day.” bids below this rate awarded in full at the stopout rate and all bids at the stop-out rate awarded Mr. Lacker dissented in the votes on both resolutions on a pro rata basis, if the sum of the counter- because he felt that the testing to date had already party offers received is greater than the prean- provided sufficient information about this tool, and nounced size of the operation. Such operations that authorizing further testing could encourage the may be for forward settlement. The System incorrect impression that the Committee had already Open Market Account manager will inform the decided that it would be engaging in term RRP FOMC in advance of the terms of the planned operations during the period of policy normalization. operations. The Chair must approve the terms of, timing of the announcement of, and timing The Board meeting concluded at the end of the disof the operations. These operations shall be con- cussion of liftoff tools and possible liftoff options. ducted in addition to the authorized overnight reverse repurchase agreements, which remain Staff Review of the Economic Situation subject to a separate overall size limit of $300 billion per day.” The information reviewed for the January 27–28 meeting indicated that economic activity expanded at The Committee also approved the following resolu- a solid pace over the second half of 2014, and that tion on testing term RRP operations during Febru- labor market conditions had again improved in ary and March: recent months. Consumer price inflation moved further below the FOMC’s longer-run objective of “During the period of February 12, 2015, to 2 percent, held down by continuing large decreases in March 10, 2015, the Federal Open Market Com- energy prices. While longer-term market-based measmittee (FOMC) authorizes the Federal Reserve ures of inflation compensation declined substantially Bank of New York to conduct a series of term in recent months, survey measures of longer-run reverse repurchase operations involving U.S. inflation expectations remained stable. government securities. Such operations shall: (i) mature no later than March 12, 2015; (ii) be Total nonfarm payroll employment expanded in subject to an overall size limit of $50 billion out- December and the gains for October and November standing at any one time; (iii) be subject to a were revised up, putting the increase for the fourth maximum bid rate of five basis points above the quarter above that for the third quarter. The unem- ON RRP offering rate in effect on the day of the ployment rate declined to 5.6 percent in December, operation; (iv) be awarded to all submitters: the labor force participation rate decreased, and the (A) at the highest submitted rate if the sum of employment-to-population rate was unchanged. The the bids received is less than or equal to the pre- share of workers employed part time for economic announced size of the operation, or (B) at the reasons declined. The rate of private-sector job openstop-out rate, determined by evaluating bids in ings moved up in November, while the rates of hiring ascending order by submitted rate up to the and of quits edged down but remained well above point at which the total quantity of bids equals their year-earlier readings. the preannounced size of the operation, with all bids below this rate awarded in full at the stop- Industrial production rose at a robust pace in the out rate and all bids at the stop-out rate awarded fourth quarter, with a strong increase in manufacturon a pro rata basis, if the sum of the counter- ing output and a modest gain in mining output. party offers received is greater than the prean- Automakers’ assembly schedules for the first quarter nounced size of the operation. Such operations and broader indicators of manufacturing production, may be for forward settlement. The System such as the readings on new orders from national and Open Market Account manager will inform the regional manufacturing surveys, generally pointed to FOMC in advance of the terms of the planned moderate gains in factory output early this year. In

Minutes of Federal Open Market Committee Meetings | January 135 contrast, some indicators of mining activity, such as chases were rising modestly in the fourth quarter, as counts of drilling rigs in operation, weakened, pre- nominal construction expenditures for October and sumably reflecting the recent sharp declines in energy November were little changed, on net, and the payprices. rolls of these governments increased somewhat. Real personal consumption expenditures (PCE) The U.S. international trade deficit narrowed subappeared to have risen at a robust pace over the sec- stantially in November, with imports declining more ond half of 2014. Data on spending in the third than exports. The decrease in the value of imports quarter were revised up, and the components of stemmed in large part from a reduction in the value nominal retail sales used to construct estimates of of petroleum imports, reflecting both lower prices PCE rose briskly in the fourth quarter. Light motor and volumes. However, many other categories of vehicle sales in the fourth quarter maintained their goods imports were also weaker. Export declines were robust third-quarter pace. Important factors influ- concentrated in capital goods, particularly aircraft. encing household spending remained supportive of Despite the narrowing of the nominal trade deficit in further solid gains in real PCE early this year. Real November, real net exports appeared to be on track disposable personal income increased in November; to decline in the fourth quarter after adding considersince then, continued declines in energy prices likely ably to real gross domestic product (GDP) growth in raised the purchasing power of households’ incomes. the third quarter. Households’ net worth likely increased as home values and equity prices advanced, and consumer senti- Total U.S. consumer prices, as measured by the PCE ment, as measured by the Thomson Reuters/ price index, increased 1¼ percent over the 12 months University of Michigan Surveys of Consumers, ending in November, while core prices, as measured moved up in early January to its highest level in more by PCE prices excluding food and energy, rose about than a decade. 1½ percent; consumer energy prices declined, and consumer food prices increased faster than overall The pace of housing market activity improved some- prices. Over the 12 months ending in December, total what but remained slow. Starts of new single-family inflation as measured by the consumer price index homes increased in December to their highest level (CPI) was ¾ percent, while core CPI inflation was since 2008, and permits for new construction also 1½ percent. Over the 3 months ending in December, moved higher. Starts of multifamily units were the total CPI decreased at an annual rate of 2½ perunchanged in December and within the range they cent, reflecting recent declines in consumer energy have been in for the past year. Sales of new homes prices, and the core CPI increased at a 1 percent pace. increased, on net, in November and December, while Measures of expected long-run inflation from a varisales of existing homes declined, on average, over ety of surveys, including the Michigan survey and the those two months. Desk’s Survey of Primary Dealers, remained stable. In contrast, market-based measures of inflation com- Real private expenditures for business equipment and pensation 5 to 10 years ahead declined further. Over intellectual property appeared to decelerate in the the 12 months ending in December, nominal average fourth quarter. Nominal orders and shipments of hourly earnings for all employees increased only nondefense capital goods, excluding aircraft, declined slightly faster than core consumer price inflation. in November and December. Moreover, the level of new orders for these capital goods was only a little Foreign real GDP growth appeared to increase above that for shipments, which pointed to modest slightly in the fourth quarter. In the euro area, retail near-term gains in business equipment spending sales, car registrations, and industrial production despite relatively positive readings on business condi- through November were above their third-quarter tions from national and regional surveys. Firms’ averages, and in Japan, strengthening consumption nominal spending for nonresidential structures edged and exports suggested a recovery of output after two down in November but remained higher than in the quarters of contraction. However, growth slowed in third quarter. China, partly reflecting further moderation in residential investment, and declining construction activ- Real federal government purchases appeared likely to ity also contributed to slowing GDP growth in Korea have decreased sharply in the fourth quarter, revers- and the United Kingdom. Inflation in the advanced ing much of the surprisingly strong increase in the foreign economies declined sharply at the end of last third quarter. Real state and local government pur- year, amid rapidly falling energy prices. By contrast,

136 102nd Annual Report | 2015 inflation in the emerging market economies fell only moved lower on net. Corporate bond spreads were modestly, as several of these economies have also volatile over the intermeeting period but were government-administered energy prices and some little changed, on net, for investment-grade issuers have been experiencing upward price pressures from and ended the period lower for speculative-grade currency depreciations. issuers, particularly energy companies. Staff Review of the Financial Situation Credit flows to nonfinancial firms generally remained strong through the last quarter of 2014, though they Over the intermeeting period, amid trading that was slowed somewhat for riskier firms. Gross corporate volatile at times, longer-term sovereign yields in the bond issuance continued to be solid, although United States and other advanced economies speculative-grade bond issuance declined late in the declined. These moves were attributed in part to a year and remained subdued into January. Commerdeterioration in market sentiment associated with cial and industrial loans on banks’ books continued downward pressure on inflation, increased concern to expand at a robust rate in the fourth quarter of about the global economic outlook, and announced 2014, consistent with the stronger loan demand from and anticipated foreign central bank policies. More- large and middle-market firms reported in the Januover, continued sharp declines in oil prices and U.S. ary Senior Loan Officer Opinion Survey on Bank economic data releases that were viewed by investors Lending Practices (SLOOS). Issuance of syndicated as a bit weaker than anticipated, on balance, report- leveraged loans in the fourth quarter was at its slowedly weighed on sentiment. est pace in two years, as spreads on newly issued loans increased and refinancing activity declined sig- Federal Reserve communications over the intermeet- nificantly. Issuance of collateralized loan obligations ing period were apparently seen as about in line with declined but remained elevated; 2014 was the stronexpectations on balance. However, reflecting in part gest year on record for the issuance of such securities. the deterioration in market sentiment, the expected path for the federal funds rate implied by market Financing conditions in the commercial real estate quotes shifted down. Results from the Desk’s Janu- (CRE) sector stayed accommodative. In the January ary Survey of Primary Dealers indicated that dealers SLOOS, banks reported that standards continued to continued to put the highest probability on scenarios ease, on net, for CRE lending and noted stronger in which the FOMC chooses to commence policy demand for all CRE loan types. Issuance of commerfirming around the middle of the year, although the cial mortgage-backed securities continued at a solid average probability assigned to a commencement pace in November and December. after June increased somewhat. Residential mortgage credit conditions, while remain- Yields on nominal Treasury securities continued to ing tight, showed some further signs of gradual easmove lower over the intermeeting period, with mar- ing. According to the January SLOOS, lending stanket expectations of the policy rate path being revised dards eased for a number of categories of residential downward, and with term premiums declining, in mortgage loans in the fourth quarter. The price of part reflecting actual and expected policy easing mortgage credit for qualified borrowers declined abroad. On balance, the Treasury yield curve flat- again over the intermeeting period, with interest rates tened over the intermeeting period, while interest rate on 30-year fixed-rate mortgages reaching levels close volatility increased somewhat. Although the measure to their all-time lows. Refinance applications rose of inflation compensation over the next 5 years based near the end of the intermeeting period. on Treasury Inflation-Protected Securities (TIPS) increased, inflation compensation 5 to 10 years ahead Conditions in consumer credit markets stayed largely declined further to its lowest level in a decade. Yields accommodative over the intermeeting period. Auto on 5- and 10-year TIPS moved lower over the period. and student loan balances continued to post significant gains through November, while the expansion of Over the intermeeting period, U.S. equity markets credit card loans on banks’ books remained moderwere volatile. Option-implied volatility for the S&P ate during the fourth quarter as a whole. Respon- 500 index declined, on balance, but remained in the dents to the January SLOOS indicated that demand upper half of the range seen over the past year. for auto and credit card loans had strengthened fur- Broad U.S. equity price indexes moved higher, while ther in the fourth quarter. Consumer credit quality stock prices for large domestic banking organizations has remained strong on balance. The credit perfor-

Minutes of Federal Open Market Committee Meetings | January 137 mance of auto loans, however, reportedly deterio- increased role of bond and loan mutual funds, in rated a bit further for some lenders, and several conjunction with other factors, may have increased banks indicated in the January SLOOS that they the risk that liquidity pressures could emerge in expect the performance of subprime auto loans to related markets if investor appetite for such assets worsen this year. wanes. The effects on the largest banking firms of the sharp decline in oil prices and developments in for- The U.S. dollar strengthened against the currencies eign exchange markets appeared limited, although of most other advanced economies amid investor other institutions with more concentrated exposures concerns about growth in those economies as well as could face strains if oil prices remain at current levels increased monetary accommodation in some of for a prolonged period. them; the dollar was largely unchanged, on average, against the currencies of emerging market economies. Staff Economic Outlook Sovereign yields abroad moved lower, with euro-area yields reflecting the expected and actual easing of the The staff estimated that real GDP growth in the secstance of monetary policy by the European Central ond half of 2014 was faster than in the projection Bank (ECB) and U.K. yields responding to a shift in prepared for the December meeting, primarily expectations toward a later start of Bank of England reflecting stronger-than-expected consumer spendpolicy firming. Global equity markets were broadly ing. Even so, real GDP was still estimated to have higher, rebounding from declines in mid-December. risen more slowly in the fourth quarter than in the third quarter, as changes in both net exports and fed- Several central banks announced monetary policy eral government purchases appeared likely to have actions during the period. The ECB announced that subtracted from real GDP growth in the fourth quarit would expand its asset purchase program to ter following large positive contributions in the previinclude the purchase of sovereign bonds; the euro ous quarter. depreciated significantly against the dollar both in anticipation of and following this announcement. The staff’s outlook for economic activity over the The Swiss National Bank (SNB) ended its policy of first half of 2015 was revised up since December, in defending the exchange rate floor of 1.20 Swiss part reflecting an anticipated boost to consumer francs per euro, resulting in a significant appreciation spending from declines in energy prices. However, the of the franc. At the same time, the SNB reduced forecast for real GDP growth over the medium term policy rates, moving the rate it pays on deposits and was little revised, as the greater momentum implied its target range for Swiss franc LIBOR, or London by recent spending gains and the support to houseinterbank offered rate, further into negative territory. hold spending from lower energy prices was about The Bank of Canada, National Bank of Denmark, offset by the restraint implied by the recent apprecia- Reserve Bank of India, and Central Bank of Turkey tion of the dollar. The staff continued to forecast also cut policy rates in January to support their that real GDP would expand at a modestly faster economies and, in some cases, to foster higher infla- pace in 2015 and 2016 than it did in 2014 and that it tion, while the Central Bank of Brazil raised rates in would rise more quickly than potential output, supresponse to concerns about elevated inflation. ported by increases in consumer and business confidence and a pickup in foreign economic growth, as The staff provided its latest report on potential risks well as by a U.S. monetary policy stance that was to financial stability. Relatively high levels of capital assumed to remain highly accommodative for some and liquidity in the banking sector, moderate levels of time. In 2017, real GDP growth was projected to maturity transformation in the financial sector, and a begin slowing toward, but to remain slightly above, relatively subdued pace of borrowing by the nonfi- the rate of growth of potential output. The expannancial sector continued to be seen as important fac- sion in economic activity over the medium term was tors limiting the vulnerability of the financial system anticipated to lead to a slow reduction in resource to adverse shocks. However, the staff report noted slack, and the unemployment rate was expected to valuation pressures in some asset markets. Such pres- decline gradually and to move slightly below the sures were most notable in corporate debt markets, staff’s estimate of its longer-run natural rate for a despite some easing in recent months. In addition, time. valuation pressures appear to be building in the CRE sector, as indicated by rising prices and the easing in The staff’s forecast for inflation in the near term was lending standards on CRE loans. Finally, the revised down, as further sharp declines in crude oil

138 102nd Annual Report | 2015 prices since the December FOMC meeting pointed 5 to 10 years ahead had registered a further decline, toward a somewhat larger transitory decrease in the while survey-based measures of longer-term inflation total PCE price index early this year than was previ- expectations remained stable. Participants generally ously projected. In addition, the incoming data on anticipated that inflation would rise gradually toward consumer prices apart from those for energy showed the Committee’s 2 percent objective as the labor mara somewhat smaller rise than anticipated. The staff’s ket improved further and the transitory effects of forecast for inflation in 2016 and 2017 was essentially lower energy prices and other factors dissipated. The unchanged, with inflation projected to remain below risks to the outlook for economic activity and the the Committee’s 2 percent objective. Nevertheless, labor market were seen as nearly balanced. Particiinflation was projected to reach 2 percent over time, pants generally regarded the net effect of the recent with inflation expectations in the longer run assumed decline in energy prices as likely to be positive for to be consistent with the Committee’s objective and economic activity and employment. Many particislack in labor and product markets anticipated to pants continued to judge that a deterioration in the fade. foreign economic situation could pose downside risks to the outlook for U.S. economic growth. Several saw The staff viewed the uncertainty around its projec- those risks as having diminished over the intermeettions for real GDP growth, the unemployment rate, ing period, with lower oil prices and actions of forand inflation as similar to the average over the past eign central banks both being supportive of growth 20 years. The risks to the forecast for real GDP abroad, but others pointed to heightened geopolitical growth were viewed as tilted a little to the downside, and other risks. reflecting the staff’s assessment that neither monetary policy nor fiscal policy was well positioned to With respect to the U.S. economy, participants noted help the economy withstand adverse shocks. At the that household spending was rising moderately. same time, the staff viewed the risks around its out- Recent declines in oil prices, which had boosted look for the unemployment rate as roughly balanced. household purchasing power, were among the factors The downside risks to the forecast for inflation were likely to underpin consumer spending in coming seen as having increased somewhat, partly reflecting months; other factors cited as supporting household the recent soft monthly readings on core inflation. spending included low interest rates, easing credit standards, and continued gains in employment and Participants’ Views on Current Conditions income. However, it was noted that the recovery in and the Economic Outlook the housing sector remained slow and that tepid nominal wage growth, if continued, could become a In their discussion of the economic situation and the significant restraining factor for household spending. outlook, meeting participants regarded the information received over the intermeeting period as indicat- Industry contacts pointed to generally solid business ing that economic activity had been expanding at a conditions, with businesses in many parts of the solid pace. Although growth likely slowed from the country continuing to express optimism about prosrapid rate recorded for the third quarter of 2014, a pects for further improvement in 2015. Although variety of indicators suggested that real GDP contin- manufacturing activity appeared to have slowed ued to grow faster than potential GDP late in the somewhat over the intermeeting period in some year and during January. Labor market conditions regions, business contacts suggested that this slowing improved further, with strong job gains and a lower was likely to prove temporary, and information from unemployment rate; participants judged that the some parts of the country suggested that capital underutilization of labor resources was continuing to investment was poised to pick up. Several particidiminish. Participants expected that, over the pants noted that there were signs of layoffs in the oil medium term, real economic activity would increase and gas industries, and that persistently low energy at a moderate pace sufficient to lead to further prices might prompt a larger retrenchment of improvements in labor market conditions toward lev- employment in these industries. In addition, it was els consistent with the Committee’s objective of observed that if capital investment in energymaximum employment. Inflation had declined fur- producing industries slowed significantly, it could ther below the Committee’s longer-run objective, damp the overall expansion of economic activity for largely reflecting declines in energy prices, and was a period, especially if the slowing took place after anticipated to decline further in the near term. most of the positive effects of lower energy prices on Market-based measures of inflation compensation growth in household spending had occurred. A few

Minutes of Federal Open Market Committee Meetings | January 139 participants observed that government spending was vides little information about the future behavior of unlikely to be a major contributor to the expansion price inflation. Participants also discussed the possiof demand in the period ahead, with real federal pur- bility that, because of the infrequent occurrence of chases projected to be fairly flat over the medium reductions in nominal wages, wages may not have term. fully adjusted downward in the period of high unemployment, and therefore pent-up wage deflation In their discussion of the foreign economic outlook, might have weighed on wage gains for a time during participants noted that a number of developments the expansion. If this was the case, nominal wage over the intermeeting period had likely reduced the growth could be expected to pick up in coming peririsks to U.S. growth. Accommodative policy actions ods and to resume a more normal relationship with announced by a number of foreign central banks had labor market slack. Most participants expected that likely strengthened the outlook abroad. The decline continuing reductions in resource slack would be in energy prices was also seen as potentially exerting helpful in returning inflation over the medium term a stronger-than-anticipated positive effect on growth to the Committee’s 2 percent longer-run objective, in the domestic economy and abroad. However, the but a few participants voiced concern that nominal increase in the foreign exchange value of the dollar wage growth might rise rapidly and inflation might was expected to be a persistent source of restraint on exceed 2 percent for a time. U.S. net exports, and a few participants pointed to the risk that the dollar could appreciate further. In Participants discussed the sizable decline in marketaddition, the slowdown of growth in China was based measures of inflation compensation that had noted as a factor restraining economic expansion in a been observed over the past year and continued over number of countries, and several continuing risks to the intermeeting period. A number of them judged the international economic outlook were cited, that the decline mostly reflected a reduction in the including global disinflationary pressure, tensions in risk premiums embedded in nominal interest rates the Middle East and Ukraine, and financial uncer- rather than a decline in inflation expectations; this tainty in Greece. Overall, the risks to the outlook for interpretation was supported by results of some ana- U.S. economic activity and the labor market were lytical models used to decompose movements in seen as nearly balanced. market-based measures of inflation compensation and also by the continuing stability of survey-based Participants noted that inflation had moved further measures of inflation expectations. However, other below the Committee’s longer-run objective, largely participants put some weight on the possibility that reflecting declines in energy prices and other transi- the decline in inflation compensation reflected a tory factors. A number of participants observed that, reduction in expected inflation. These participants with anchored inflation expectations, the fall in further argued that the stability of survey-based energy prices should not leave an enduring imprint measures of inflation expectations should not be on aggregate inflation. It was pointed out that the taken as providing much reassurance; in particular, it recent intensification of downward pressure on infla- was noted that in Japan in the late 1990s and early tion reflected price movements that were concen- 2000s, survey-based measures of longer-term inflatrated in a narrow range of items in households’ con- tion expectations had not recorded major declines sumption basket, a pattern borne out by trimmed even as a disinflationary process had become mean measures of inflation. Several participants entrenched. In addition, a few participants argued remarked that inflation measures that excluded that even if the shift down in inflation compensation energy items had also moved down in recent months, reflected lower inflation risk premiums rather than but these declines partly reflected transitory factors, reductions in expected inflation, policymakers might including downward pressure on import prices and still want to take that decline into account because it the pass-through of lower energy costs to the prices could reflect increased concern on the part of invesof non-energy items. Nonetheless, several partici- tors about adverse outcomes in which low inflation pants saw the continuing weakness of core inflation was accompanied by weak economic activity. Particimeasures as a concern. In addition, a few partici- pants generally agreed that the behavior of marketpants suggested that the weakness of nominal wage based measures of inflation compensation needed to growth indicated that core and headline inflation be monitored closely. could take longer to return to 2 percent than the Committee anticipated. In contrast, a couple of par- Participants also discussed other aspects of the subticipants suggested that nominal wage growth pro- stantial decline in nominal longer-term interest rates

140 102nd Annual Report | 2015 and its implications. The fall had occurred despite the United States and abroad in which monetary policy strengthening U.S. economic outlook and market transitioned to a tightening phase after a lengthy expectations that policy normalization could begin period of low policy rates, and issues related to comlater this year. Some participants suggested that munications regarding the likely timing and pace of shifts of funds from abroad into U.S. Treasury securi- normalization. ties may have put downward pressure on term premiums; the shifts, in turn, may have reflected in part a Participants discussed the tradeoffs between the risks reaction to declines in foreign sovereign yields in that would be associated with departing from the response to actual and anticipated monetary policy effective lower bound later and those that would be actions abroad. A couple of participants noted that associated with departing earlier. Several participants the reduction in longer-term real interest rates tended noted that a late departure could result in the stance to make U.S. financial conditions more accommoda- of monetary policy becoming excessively accommotive, potentially calling for a somewhat higher path dative, leading to undesirably high inflation. It was for the federal funds rate going forward. Others also suggested that maintaining the federal funds rate observed that insofar as the shifts reflected concerns at its effective lower bound for an extended period or about growth prospects abroad or were accompanied raising it rapidly, if that proved necessary, could by a stronger dollar, the implications for U.S. mon- adversely affect financial stability. Some participants etary policy were less clear. It was further noted that were concerned that a decision to delay the cominvestment flows from abroad could also be contrib- mencement of tightening could be perceived as indiuting to the decline in TIPS-based measures of infla- cating that an overly accommodative policy is likely tion compensation, as such flows tend to be concen- to prevail during the firming phase. In connection trated in nominal Treasury securities rather than with the risks associated with an early start to policy inflation-protected securities. normalization, many participants observed that a premature increase in rates might damp the apparent Participants saw broad-based improvement in labor solid recovery in real activity and labor market condimarket conditions over the intermeeting period, tions, undermining progress toward the Committee’s including strong gains in payroll employment and a objectives of maximum employment and 2 percent further reduction in the unemployment rate. Some inflation. In addition, an earlier tightening would participants believed that considerable labor market increase the likelihood that the Committee might be slack remained, especially when indicators other than forced by adverse economic outcomes to return the the unemployment rate were taken into account, federal funds rate to its effective lower bound. Some including the unusually large fraction of the labor participants noted the communications challenges force working part time for economic reasons. A few associated with the prospect of commencing policy observed that the combination of recent labor mar- tightening at a time when inflation could be running ket improvements and continued softness in inflation well below 2 percent, and a few expressed concern had led them to lower their estimates of the longer- that in some circumstances the public could come to run normal rate of unemployment. However, a few question the credibility of the Committee’s 2 percent others saw only a limited degree of remaining labor goal. Indeed, one participant recommended that, in underutilization or anticipated that underutilization light of the outlook for inflation, the Committee conwould be eliminated relatively soon. sider ways to use its tools to provide more, not less, accommodation. Participants’ Discussion of Policy Planning Many participants indicated that their assessment of Participants discussed considerations related to the the balance of risks associated with the timing of the choice of the appropriate timing of the initial firming beginning of policy normalization had inclined them in monetary policy and pace of subsequent rate toward keeping the federal funds rate at its effective increases. Ahead of this discussion, the staff gave a lower bound for a longer time. Some observed that, presentation that outlined some of the key issues even with these risks taken into consideration, the likely to be involved, including the extent to which federal funds rate may have already been kept at its similar economic outcomes could be generated by lower bound for a sufficient length of time, and that different combinations of the date of the initial firm- it might be appropriate to begin policy firming in the ing of policy and the pace of rate increases thereaf- near term. Regardless of the particular strategy ter, how these combinations could affect the risks to undertaken, it was noted that, provided that the dataeconomic outcomes, a review of past episodes in the dependent nature of the path for the federal funds

Minutes of Federal Open Market Committee Meetings | January 141 rate after its initial increase could be communicated tighten the stance of monetary policy. A number of to financial markets and the general public in an participants noted that while forward guidance had effective manner, the precise date at which firming been a very useful tool under the extraordinary concommenced would have a less important bearing on ditions of recent years, as the start of normalization economic outcomes. approaches, there would be limits to the specificity that the Committee could provide about its timing. Participants discussed the economic conditions that Looking ahead, some participants highlighted the they anticipate will prevail at the time they expect it potential benefits of streamlining the Committee’s will be appropriate to begin normalizing policy. postmeeting statement once normalization has There was wide agreement that it would be difficult begun. More broadly, it was suggested that the Comto specify in advance an exhaustive list of economic mittee should communicate clearly that policy deciindicators and the values that these indicators would sions will be data dependent, and that unanticipated need to take. Nonetheless, a number of participants economic developments could therefore warrant a suggested that they would need to see further path of the federal funds rate different from that curimprovement in labor market conditions and data rently expected by investors or policymakers. pointing to continued growth in real activity at a pace sufficient to support additional labor market gains Committee Policy Action before beginning policy normalization. Many participants indicated that such economic conditions would In their discussion of monetary policy for the period help bolster their confidence in the likelihood of ahead, members judged that information received inflation moving toward the Committee’s 2 percent since the FOMC met in December indicated that ecoobjective after the transitory effects of lower energy nomic activity had been expanding at a solid pace. prices and other factors dissipate. Some participants Labor market conditions had improved further, with noted that their confidence in inflation returning to strong job gains and a lower unemployment rate; 2 percent would also be bolstered by stable or rising numerous labor market indicators suggested that the levels of core PCE inflation, or of alternative series, underutilization of labor resources was continuing to such as trimmed mean or median measures of infla- diminish. Household spending was rising moderately; tion. A number of participants emphasized that they recent declines in energy prices had boosted housewould need to see either an increase in market-based hold purchasing power. Business fixed investment measures of inflation compensation or evidence that was advancing, while the recovery in the housing seccontinued low readings on these measures did not tor remained slow. Inflation had declined further constitute grounds for concern. Several participants below the Committee’s longer-run objective, largely indicated that signs of improvements in labor com- reflecting declines in energy prices, and was expected pensation would be an important signal, while a few to decline further in the near term. Market-based others deemphasized the value of labor compensa- measures of five-year, five-year-forward inflation tion data for judging incipient inflation pressures in compensation had declined substantially in recent light of the loose short-run empirical connection months, but survey-based measures of longer-term between wage and price inflation. inflation expectations had remained stable. The Committee expected that, with appropriate monetary Participants discussed the communications chal- policy accommodation, economic activity would lenges associated with signaling, when it becomes continue to expand at a moderate pace, with labor appropriate to do so, that policy normalization is market indicators moving toward levels the Commitlikely to begin relatively soon while remaining clear tee judges consistent with its dual mandate. The that the Committee’s actions would depend on Committee also expected that inflation would rise incoming data. Many participants regarded dropping gradually toward 2 percent as the labor market the “patient” language in the statement, whenever improves further and the transitory effects of lower that might occur, as risking a shift in market expecta- energy prices and other factors dissipate. In view of tions for the beginning of policy firming toward an the uncertainties about the inflation outlook, the unduly narrow range of dates. As a result, some Committee agreed that it should continue to monitor expressed the concern that financial markets might inflation developments closely. overreact, resulting in undesirably tight financial conditions. Participants discussed some possible commu- In their discussion of language for the postmeeting nications by which they might further underscore the statement, members generally agreed that they data dependency of their decision regarding when to should acknowledge the solid growth over the second

142 102nd Annual Report | 2015 half of 2014 as well as the further improvement in inflation are near mandate-consistent levels, ecolabor market conditions over the intermeeting nomic conditions may, for some time, warrant keepperiod. Job gains had been strong, and the Commit- ing the target federal funds rate below levels the tee judged that labor market slack continued to Committee views as normal in the longer run. diminish. In addition, members decided that the statement should note the further decline of inflation At the conclusion of the discussion, the Committee seen of late and the additional decline that was in voted to authorize and direct the Federal Reserve prospect in the near term, while also registering their Bank of New York, until it was instructed otherwise, judgment that these short-term movements of infla- to execute transactions in the SOMA in accordance tion largely reflected the recent decline in energy with the following domestic policy directive: prices and other transitory factors, and that inflation was likely to rise gradually toward 2 percent over the “Consistent with its statutory mandate, the Fedmedium term. Members also agreed that it was eral Open Market Committee seeks monetary appropriate to observe that lower energy prices had and financial conditions that will foster maxiboosted household purchasing power. The Commit- mum employment and price stability. In particutee further decided that the postmeeting statement lar, the Committee seeks conditions in reserve should explicitly acknowledge the role of interna- markets consistent with federal funds trading in tional developments as one of the factors influencing a range from 0 to ¼ percent. The Committee the Committee’s assessment of progress toward its directs the Desk to undertake open market objectives of maximum employment and 2 percent operations as necessary to maintain such condiinflation. tions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury The Committee agreed to maintain the target range securities into new issues and its policy of reinfor the federal funds rate at 0 to ¼ percent and to vesting principal payments on all agency debt reaffirm the indication in the statement that the and agency mortgage-backed securities in Committee’s decision about how long to maintain agency mortgage-backed securities. The Comthe current target range for the federal funds rate mittee also directs the Desk to engage in dollar would depend on its assessment of actual and roll and coupon swap transactions as necessary expected progress toward its objectives of maximum to facilitate settlement of the Federal Reserve’s employment and 2 percent inflation. Members agency mortgage-backed securities transactions. agreed to continue to include, in the forward guid- The System Open Market Account manager and ance, language indicating that the Committee judges the secretary will keep the Committee informed that it can be patient in beginning to normalize the of ongoing developments regarding the System’s stance of monetary policy. Members agreed that balance sheet that could affect the attainment their policy decisions would remain data dependent, over time of the Committee’s objectives of and they continued to include wording in the state- maximum employment and price stability.” ment noting that if incoming information indicates faster progress toward the Committee’s employment The vote encompassed approval of the statement and inflation objectives than the Committee now below to be released at 2:00 p.m.: expects, then increases in the target range for the federal funds rate would likely occur sooner than cur- “Information received since the Federal Open rently anticipated, and, conversely, that if progress Market Committee met in December suggests proves slower than expected, then increases in the tar- that economic activity has been expanding at a get range would likely occur later than currently solid pace. Labor market conditions have anticipated. The Committee decided to maintain its improved further, with strong job gains and a policy of reinvesting principal payments from its lower unemployment rate. On balance, a range holdings of agency debt and agency mortgage- of labor market indicators suggests that underbacked securities in agency mortgage-backed securi- utilization of labor resources continues to ties and of rolling over maturing Treasury securities diminish. Household spending is rising moderat auction. This policy, by keeping the Committee’s ately; recent declines in energy prices have holdings of longer-term securities at sizable levels, boosted household purchasing power. Business should help maintain accommodative financial con- fixed investment is advancing, while the recovery ditions. Finally, the Committee also decided to reiter- in the housing sector remains slow. Inflation has ate its expectation that, even after employment and declined further below the Committee’s longer-

Minutes of Federal Open Market Committee Meetings | January 143 run objective, largely reflecting declines in anticipated. Conversely, if progress proves energy prices. Market-based measures of infla- slower than expected, then increases in the target tion compensation have declined substantially in range are likely to occur later than currently recent months; survey-based measures of anticipated. longer-term inflation expectations have remained stable. The Committee is maintaining its existing policy of reinvesting principal payments from its hold- Consistent with its statutory mandate, the Com- ings of agency debt and agency mortgagemittee seeks to foster maximum employment backed securities in agency mortgage-backed and price stability. The Committee expects that, securities and of rolling over maturing Treasury with appropriate policy accommodation, eco- securities at auction. This policy, by keeping the nomic activity will expand at a moderate pace, Committee’s holdings of longer-term securities with labor market indicators continuing to move at sizable levels, should help maintain accommotoward levels the Committee judges consistent dative financial conditions. with its dual mandate. The Committee continues to see the risks to the outlook for economic When the Committee decides to begin to remove activity and the labor market as nearly balanced. policy accommodation, it will take a balanced Inflation is anticipated to decline further in the approach consistent with its longer-run goals of near term, but the Committee expects inflation maximum employment and inflation of 2 perto rise gradually toward 2 percent over the cent. The Committee currently anticipates that, medium term as the labor market improves fur- even after employment and inflation are near ther and the transitory effects of lower energy mandate-consistent levels, economic conditions prices and other factors dissipate. The Commit- may, for some time, warrant keeping the target tee continues to monitor inflation developments federal funds rate below levels the Committee closely. views as normal in the longer run.” To support continued progress toward maxi- Voting for this action: Janet L. Yellen, William C. mum employment and price stability, the Com- Dudley, Lael Brainard, Charles L. Evans, Stanley mittee today reaffirmed its view that the current Fischer, Jeffrey M. Lacker, Dennis P. Lockhart, 0 to ¼ percent target range for the federal funds Jerome H. Powell, Daniel K. Tarullo, and John C. rate remains appropriate. In determining how Williams. long to maintain this target range, the Committee will assess progress—both realized and Voting against this action: None. expected—toward its objectives of maximum employment and 2 percent inflation. This assess- It was agreed that the next meeting of the Committee ment will take into account a wide range of would be held on Tuesday–Wednesday, March 17–18, information, including measures of labor market 2015. The meeting adjourned at 12:55 p.m. on Januconditions, indicators of inflation pressures and ary 28, 2015. inflation expectations, and readings on financial and international developments. Based on its Notation Vote current assessment, the Committee judges that it can be patient in beginning to normalize the By notation vote completed on January 6, 2015, the stance of monetary policy. However, if incoming Committee unanimously approved the minutes of the information indicates faster progress toward the Committee meeting held on December 16–17, 2014. Committee’s employment and inflation objectives than the Committee now expects, then Thomas Laubach increases in the target range for the federal funds Secretary rate are likely to occur sooner than currently

144 102nd Annual Report | 2015 Meeting Held on March 17–18, 2015 Steven B. Kamin Economist A meeting of the Federal Open Market Committee David W. Wilcox was held in the offices of the Board of Governors of Economist the Federal Reserve System in Washington, D.C., on Tuesday, March 17, 2015, at 10:30 a.m. and contin- David Altig, Thomas A. Connors, Michael P. Leahy, ued on Wednesday, March 18, 2015, at 9:00 a.m. William R. Nelson, Glenn D. Rudebusch, Daniel G. Sullivan, William Wascher, and John A. Weinberg Present Associate Economists Janet L. Yellen Simon Potter Chair Manager, System Open Market Account William C. Dudley Lorie K. Logan Vice Chairman Deputy Manager, System Open Market Account Lael Brainard Robert deV. Frierson1 Secretary of the Board, Office of the Secretary, Charles L. Evans Board of Governors Stanley Fischer Michael S. Gibson Jeffrey M. Lacker Director, Division of Banking Supervision and Regulation, Board of Governors Dennis P. Lockhart James A. Clouse Jerome H. Powell Deputy Director, Division of Monetary Affairs, Daniel K. Tarullo Board of Governors John C. Williams William B. English Senior Special Adviser to the Board, Office of Board James Bullard, Christine Cumming, Members, Board of Governors Esther L. George, Loretta J. Mester, and Eric Rosengren Andrew Figura, David Reifschneider, Alternate Members of the Federal Open Market and Stacey Tevlin Committee Special Advisers to the Board, Office of Board Narayana Kocherlakota Members, Board of Governors President of the Federal Reserve Bank of Trevor A. Reeve Minneapolis Special Adviser to the Chair, Office of Board Helen E. Holcomb and Blake Prichard Members, Board of Governors First Vice Presidents, Federal Reserve Banks of Linda Robertson Dallas and Philadelphia, respectively Assistant to the Board, Office of Board Members, Thomas Laubach Board of Governors Secretary and Economist David E. Lebow and Michael G. Palumbo Matthew M. Luecke Senior Associate Directors, Division of Research and Deputy Secretary Statistics, Board of Governors David W. Skidmore Michael T. Kiley Assistant Secretary Senior Adviser, Division of Research and Statistics, and Michelle A. Smith Senior Associate Director, Office of Financial Assistant Secretary Stability Policy and Research, Scott G. Alvarez Board of Governors General Counsel Thomas C. Baxter 1 Attended the joint session of the Federal Open Market Com- Deputy General Counsel mittee and the Board of Governors.

Minutes of Federal Open Market Committee Meetings | March 145 Ellen E. Meade and Joyce K. Zickler David Andolfatto, Todd E. Clark, Senior Advisers, Division of Monetary Affairs, Antoine Martin, Joe Peek, Board of Governors and Douglas Tillett Vice Presidents, Federal Reserve Banks of St. Louis, Fabio M. Natalucci2 and Gretchen C. Weinbach1 Cleveland, New York, Boston, and Chicago, Associate Directors, Division of Monetary Affairs, respectively Board of Governors Jane E. Ihrig and David López-Salido Developments in Financial Markets and Deputy Associate Directors, Division of Monetary the Federal Reserve’s Balance Sheet Affairs, Board of Governors In a joint session of the Federal Open Market Com- John J. Stevens mittee (FOMC) and the Board of Governors of the Deputy Associate Director, Division of Research and Federal Reserve System, the manager of the System Statistics, Board of Governors Open Market Account (SOMA) reported on developments in domestic and foreign financial markets. Glenn Follette The deputy manager followed with a review of Assistant Director, Division of Research and System open market operations conducted during the Statistics, Board of Governors period since the Committee met on January 27–28, Elizabeth Klee 2015. The deputy manager also discussed the out- Assistant Director, Division of Monetary Affairs, comes of recent tests of supplementary normaliza- Board of Governors tion tools—namely, the Term Deposit Facility (TDF) and term and overnight reverse repurchase agreement Penelope A. Beattie1 operations (term RRP operations and ON RRP Assistant to the Secretary, Office of the Secretary, operations, respectively). The TDF operations were Board of Governors executed as three overlapping 21-day term operations Dana L. Burnett and Don Kim with same-day settlement; the total amount of term Section Chiefs, Division of Monetary Affairs, deposits outstanding peaked at roughly the same Board of Governors level as in the largest operation conducted in prior testing. The term RRP operations were executed as a Katie Ross1 series of four one-week operations and conducted Manager, Office of the Secretary, away from quarter-end; take-up primarily repre- Board of Governors sented substitution away from ON RRP operations. David H. Small The combination of these term and ON RRP test Project Manager, Division of Monetary Affairs, operations continued to provide a soft floor for Board of Governors money market rates over the intermeeting period. Zeynep Senyuz By unanimous vote, the Committee ratified the Open Economist, Division of Monetary Affairs, Market Desk’s domestic transactions over the inter- Board of Governors meeting period. There were no intervention operations in foreign currencies for the System’s account Kenneth C. Montgomery over the intermeeting period. First Vice President, Federal Reserve Bank of Boston Ron Feldman Normalization Tools Executive Vice President, Federal Reserve Bank of Minneapolis A staff briefing provided background on options for setting the aggregate capacity of the ON RRP facility Michael Dotsey, Craig S. Hakkio, in the early stages of the normalization process. Two Evan F. Koenig, and Paolo A. Pesenti options were discussed: initially setting a temporarily Senior Vice Presidents, Federal Reserve Banks of elevated aggregate cap or suspending the aggregate Philadelphia, Kansas City, Dallas, and New York, cap for a time. The briefing noted that, as the balance respectively sheet normalizes and reserve balances decline, usage of the ON RRP facility should diminish, allowing 2 Attended the portion of the meeting following the joint session the facility to be phased out over time. In addition, of the Federal Open Market Committee and the Board of Governors. the briefing outlined strategies for actively reducing

146 102nd Annual Report | 2015 take-up at the ON RRP facility after policy normal- a couple of participants questioned their effectiveization is under way, while maintaining an appropri- ness in placing upward pressure on market interest ate degree of monetary control, if take-up is larger rates, and a few did not see term RRPs as reducing than the FOMC desires. These strategies included the Federal Reserve’s presence in money markets, adjusting the values of the interest on excess reserves arguing that investors view term and overnight RRPs (IOER) and ON RRP rates associated with a given as close substitutes. Many participants mentioned target range for the federal funds rate, relying on that selling assets that will mature in a relatively short tools such as term RRPs and the TDF to broaden time could be considered at some stage, if necessary arbitrage opportunities and to drain reserve balances, to reduce ON RRP usage. However, a number of and selling shorter-term Treasury securities to reduce participants noted that it could be difficult to comthe size of the balance sheet at a faster pace. In addi- municate the reason for such sales to the public, and, tion, the briefing presented some information on spe- in particular, that the announcement of such sales cific calibrations of policy tools that could be used would risk an outsized market reaction, as the public during the early stages of policy normalization. could view the sales as a signal of a tighter overall stance of monetary policy than they had anticipated In their discussion of the options and strategies sur- or as an indication that the Committee might be rounding the use of tools at liftoff and the potential more willing than had been thought to sell longersubsequent reduction in aggregate ON RRP capacity, term assets. Some participants pointed out that an participants emphasized that during the early stages earlier end to reinvestments of principal on maturing of policy normalization, it will be a priority to ensure or prepaying securities would help reduce the level of appropriate control over the federal funds rate and reserve balances, thereby increasing the effectiveness other short-term interest rates. Against this back- of the IOER rate and allowing a more rapid reducdrop, participants generally saw some advantages to tion in the size of the ON RRP facility. A number of a temporarily elevated aggregate cap or a temporary participants suggested that it would be useful to consuspension of the cap to ensure that the facility sider specific plans for these and other details of would have sufficient capacity to support policy policy normalization under a range of post-liftoff implementation at the time of liftoff, but they also scenarios. indicated that they expected that it would be appropriate to reduce ON RRP capacity fairly soon after Participants also discussed whether to communicate the Committee begins firming the stance of policy. A to the public additional details regarding the couple of participants stated their view that the risks approach they intend to take when it becomes approto financial stability that might arise from a tempo- priate to begin the normalization process, including rarily elevated aggregate ON RRP capacity were the width of the target range for the federal funds likely to be small, and it was noted that there might rate, the settings of the IOER and ON RRP rates, be little potential for a temporarily large Federal and the use of supplementary tools. A couple of par- Reserve presence in money markets to affect the ticipants suggested communicating a specific comstructure of those markets if plans for reducing the mitment to reducing ON RRP capacity soon after facility’s capacity were clearly communicated and liftoff. However, a number of participants emphawell understood. However, a couple of participants sized that maintaining control of short-term interest expressed financial stability concerns, and one rates would be paramount in the initial stages of stressed that more planning was needed to address policy normalization, and that it was difficult to the potential risks before the Committee decides on know in advance when a reduction would be approthe appropriate level of ON RRP capacity at the time priate. They therefore desired to retain some flexibilof liftoff. ity over the timing of any reduction. That said, many participants agreed that an elevated aggregate capac- In their discussion regarding strategies for reducing ity for the facility would likely be appropriate only ON RRP usage, should it become undesirably large for a short period after liftoff. during the early stages of normalization, most participants viewed raising the IOER rate, thereby wid- At the conclusion of their discussion, all participants ening the spread between the IOER and ON RRP agreed to augment the Committee’s Policy Normalrates, as an appropriate initial step. A majority of ization Principles and Plans by providing the followparticipants thought term reserve draining tools ing additional details regarding the operational could be useful in reducing ON RRP usage, although approach the FOMC intends to use when it becomes

Minutes of Federal Open Market Committee Meetings | March 147 appropriate to begin normalizing the stance of mon- resolution on term RRP testing over quarter-ends etary policy.3 through January 29, 2016: When economic conditions warrant the commence- “During each of the periods of June 18 to 29, ment of policy firming, the Federal Reserve 2015; September 18 to 29, 2015; and Decemintends to: ber 17 to 30, 2015, the Federal Open Market Committee (FOMC) authorizes the Federal • Continue to target a range for the federal funds Reserve Bank of New York to conduct a series rate that is 25 basis points wide. of term reverse repurchase operations involving • Set the IOER rate equal to the top of the target U.S. government securities. Such operations range for the federal funds rate and set the offering shall: (i) mature no later than July 8, 2015, Octorate associated with an ON RRP facility equal to ber 7, 2015, and January 8, 2016, respectively; the bottom of the target range for the federal funds (ii) be subject to an overall size limit of $300 bilrate. lion outstanding at any one time; (iii) be subject to a maximum bid rate of five basis points above • Allow aggregate capacity of the ON RRP facility the ON RRP offering rate in effect on the day of to be temporarily elevated to support policy implethe operation; (iv) be awarded to all submitters: mentation; adjust the IOER rate and the param- (A) at the highest submitted rate if the sum of eters of the ON RRP facility, and use other tools the bids received is less than or equal to the presuch as term operations, as necessary for appropriannounced size of the operation, or (B) at the ate monetary control, based on policymakers’ stop-out rate, determined by evaluating bids in assessments of the efficacy and costs of their tools. ascending order by submitted rate up to the The Committee expects that it will be appropriate point at which the total quantity of bids equals to reduce the capacity of the facility fairly soon the preannounced size of the operation, with all after it commences policy firming. bids below this rate awarded in full at the stopout rate and all bids at the stop-out rate awarded A staff briefing outlined some options for further on a pro rata basis, if the sum of the countertesting of term RRP operations over future quarterparty offers received is greater than the preanends. While the tests of term RRPs to date had been nounced size of the operation. Such operations informative, the staff suggested that if the Committee may be for forward settlement. The System envisioned using term RRPs as part of its strategy at Open Market Account manager will inform the liftoff, or potentially at some other point during nor- FOMC in advance of the terms of the planned malization, continued testing may be useful. Particioperations. The Chair must approve the terms pants discussed whether a resolution that authorized of, timing of the announcement of, and timing term RRP test operations at quarter-ends through of the operations. These operations shall be conthe end of 2015 might reduce the probability that ducted in addition to the authorized overnight market participants mistakenly interpret future decireverse repurchase agreements, which remain sions about testing term RRPs over quarter-ends as subject to a separate overall size limit authorized containing information about the likely timing of by the FOMC.” liftoff. It was noted that such a resolution would be more efficient from an administrative and communi- Mr. Lacker dissented in the vote on the resolution cations standpoint, as it would simply allow a conbecause the March end-of-quarter testing had not yet tinuation of recent quarter-end testing of term been completed and he felt that there was no need to RRPs. Moreover, the resolution would not convey authorize additional testing before then. any information regarding either the timing of the start of policy normalization or whether term RRP The Board meeting concluded at the end of the disoperations might be employed at the time of liftoff cussion of normalization tools. and, if so, for how long. Staff Review of the Economic Situation Following the discussion of the testing of term RRP operations, the Committee approved the following The information reviewed for the March 17‒18 meeting suggested that real gross domestic product (GDP) 3 The statement titled Policy Normalization Principles and Plans growth moderated in the first quarter and that labor is available on the Board’s website at www.federalreserve.gov/ newsevents/press/monetary/20140917c.htm. market conditions improved further. Consumer price

148 102nd Annual Report | 2015 inflation was restrained significantly by declines in family homes declined over January and February. energy prices and continued to run below the Starts of multifamily units also decreased, on net, FOMC’s longer-run objective of 2 percent. Market- over the past two months. Sales of new and existing based measures of inflation compensation were still homes moved down in January, although pending low, while survey measures of longer-run inflation home sales increased somewhat. expectations remained stable. Real private expenditures for business equipment and Nonfarm payroll employment continued to expand intellectual property products appeared to be strongly in January and February. The unemploy- expanding in the first quarter at about the same modment rate declined to 5.5 percent in February. Both est pace as in the previous quarter. Both nominal the labor force participation rate and the orders and shipments of nondefense capital goods employment-to-population ratio rose slightly over the excluding aircraft rose in January. New orders for first two months of the year, and the share of work- these capital goods remained above the level of shipers employed part time for economic reasons edged ments, indicating that shipments may increase in subdown. The rate of private-sector job openings moved sequent months. Other forward-looking indicators, up in January and was at an elevated level; the rate of such as national and regional surveys of business quits remained the same as in the fourth quarter, but conditions, were generally consistent with modest the rate of hiring stepped down. increases in business equipment spending in the near term. Firms’ nominal spending for nonresidential Industrial production decreased a little, on net, in structures moved down in January after rising in the January and February, as declines in the output of fourth quarter. the manufacturing and mining sectors more than offset an increase in utilities production. Some indica- Federal spending data for January and February tors of mining activity, such as counts of drilling rigs pointed toward a further decline in real federal govin operation, dropped further. However, automakers’ ernment purchases in the first quarter. Real state and assembly schedules and broader indicators of manu- local government purchases appeared to be rising facturing production, such as the readings on new modestly in the first quarter as their payrolls orders from national and regional manufacturing sur- increased in recent months, although their construcveys, generally pointed to modest gains in factory tion expenditures decreased a little in January. output in coming months. The U.S. international trade deficit widened substan- Real personal consumption expenditures (PCE) tially in December before narrowing somewhat in appeared to decelerate somewhat going into the first January. Exports declined in both December and quarter after rising markedly in the fourth quarter. January, reflecting weak agricultural goods exports, The components of the nominal retail sales data used the lower price of petroleum products, and falling or by the Bureau of Economic Analysis to construct its flat exports of most other categories of goods. estimate of PCE declined slightly in January and Imports rose in December, with an increased volume February, and light motor vehicle sales stepped of petroleum imports, but declined in January, driven down; unusually severe weather in some regions in by lower prices and volumes for petroleum. February may have accounted for a small part of the slowing in consumer spending in that month. Recent Total U.S. consumer prices, as measured by the PCE information about key factors that influence house- price index, edged up only ¼ percent over the hold spending pointed toward a pickup in PCE in the 12 months ending in January, as energy prices coming months. The purchasing power of house- declined significantly. The core PCE price index, holds’ income continued to be supported by low which excludes food and energy prices, rose 1¼ perenergy prices, and real disposable income rose briskly cent over the same 12-month period. Measures of in January. Moreover, households’ net worth likely expected long-run inflation from a variety of surveys, increased as equity prices and home values advanced including the Michigan survey, the Blue Chip Ecofurther, and consumer sentiment in the University of nomic Indicators, the Survey of Professional Fore- Michigan Surveys of Consumers was still near its casters, and the Desk’s Survey of Primary Dealers, highest level since prior to the most recent recession. remained stable. Market-based measures of inflation compensation were still low. Measures of labor com- The pace of activity in the housing sector remained pensation continued to increase at a modest pace, slow. Both starts and building permits for new single- although faster than consumer prices. Both compen-

Minutes of Federal Open Market Committee Meetings | March 149 sation per hour in the nonfarm business sector and than offset by reactions to stronger-than-expected the employment cost index rose 2¼ percent over the data for the labor market and consumer inflation, year ending in the fourth quarter. Average hourly along with perceptions of receding downside risks to earnings for all employees increased 2 percent over the foreign economic outlook. On net, the expected the 12 months ending in February. path for the federal funds rate implied by financial market quotes shifted up over the period. Foreign real GDP appeared to expand at a moderate pace in the fourth quarter. While GDP growth Yields on nominal Treasury securities increased stepped down in several economies, including across the maturity spectrum, and the Treasury yield Canada and China, it picked up in the euro area, curve steepened. Measures of inflation compensation Japan, and Mexico. Indicators for the first quarter based on Treasury Inflation-Protected Securities suggested continued firming in the euro area and fur- increased early in the intermeeting period amid rising ther slowing in China and Canada. Consumer prices oil prices but ended the period little changed, on net, in many foreign economies declined further in the after oil prices dropped back. first months of this year, reflecting the falls in energy prices as well as decreases in food prices in some Broad U.S. equity price indexes moved up, on balemerging market economies. Many central banks ance, over the intermeeting period, and one-month took steps to ease monetary policy during the period, option-implied volatility on the S&P 500 index including the European Central Bank (ECB), which moved down on net. Spreads of 10-year corporate began purchasing sovereign bonds under its public bond yields over those on comparable-maturity sector purchase program (PSPP), and the People’s Treasury securities for both BBB-rated and Bank of China, which lowered required reserve ratios speculative-grade issuers narrowed notably, likely for banks. A number of other central banks in reflecting increased appetite for riskier investments. advanced and emerging market economies cut policy While the tightening of spreads was broad based, the interest rates. declines in short- and intermediate-term spreads for speculative-grade energy firms were particularly pro- Staff Review of the Financial Situation nounced, retracing most of their strong run-up approaching the end of last year. Movements in asset prices over the intermeeting period largely seemed to reflect receding concerns Results from the Desk’s Survey of Primary Dealers about downside risks to the global economic out- and Survey of Market Participants for March indilook. Two strong U.S. employment reports and the cated that the respondents attached the greatest January consumer price index release, all of which probabilities to the first increase in the target range were above market expectations; the start of sover- for the federal funds rate occurring at either the June eign bond purchases by the ECB; and the somewhat or September FOMC meeting; those probabilities more encouraging economic news from Europe all were marked up relative to the January survey. In appeared to contribute to the improved sentiment in addition, survey respondents widely expected the financial markets. Equity prices were higher, on net, “patient” language to be removed from the FOMC although they declined later in the period. statement following the March meeting. Conditional on this change in the statement, respondents assigned Federal Reserve communications over the intermeet- a roughly 40 percent probability, on average, to liftoff ing period, including the minutes of the January occurring two meetings ahead and assigned most of FOMC meeting, reportedly were perceived as slightly the remaining probability to later dates. more accommodative than expected on balance. Market commentary also highlighted Chair Yellen’s Credit conditions faced by large nonfinancial firms statement at the Monetary Policy Report testimony remained generally accommodative. Corporate bond that the eventual removal of the language in the issuance increased in February, mostly reflecting policy statement noting that “the Committee judges activity by investment-grade firms. Commercial and that it can be patient in beginning to normalize the industrial loans on banks’ books continued to stance of monetary policy” should not be viewed as expand strongly, reportedly in part to fund increased indicating that the federal funds rate would necessar- merger and acquisition activity. Institutional leverily be increased within a couple of meetings. How- aged loan issuance during January and February was ever, the effects of these communications on the supported by strong issuance of new money loans, expected path for the federal funds rate were more while refinancing activity effectively came to a stop,

150 102nd Annual Report | 2015 likely reflecting elevated loan spreads. On net, issu- on German government securities declined, with ance of collateralized loan obligations was only mod- negative yields extending to longer maturities than at estly below the strong pace registered in the fourth the time of the January meeting, likely in reaction to quarter of 2014. the PSPP, and yield spreads of most other euro-area sovereign bonds over German bonds narrowed. The Financing for the commercial real estate (CRE) sec- main exception was Greek bonds, spreads on which tor stayed broadly available over the intermeeting widened, on net, amid heightened volatility as negoperiod. Growth of CRE loans on banks’ books tiations between Greece and its official creditors over remained solid, in part supported by loans to finance support for the country’s public finances continued. construction activity. The issuance of commercial Yields on the long-term sovereign bonds of many mortgage-backed securities (CMBS) was still robust other countries, including Japan and the United so far this year, and spreads continued to be low. Kingdom, rose during the period. After taking into account deals in the pipeline for March, issuance in the first quarter of 2015 was Staff Economic Outlook expected to be the strongest since the financial crisis. According to the March Senior Credit Officer Opin- In the U.S. economic forecast prepared by the staff ion Survey on Dealer Financing Terms, dealers’ will- for the March FOMC meeting, projected real GDP ingness to provide warehouse financing for loans growth in the first half of this year was lower than in intended for inclusion in CMBS increased since the the forecast prepared for the January meeting, largely beginning of 2014. In addition, demand for funding reflecting downward revisions to the near-term foreof CMBS by hedge funds and real estate investment casts for household spending, net exports, and resitrusts reportedly rose over the same period. dential investment. The staff’s medium-term forecast for real GDP growth also was revised down, mostly Credit conditions for mortgages remained tight for because of the effects of a higher projected path for riskier borrowers, with relatively few mortgages origi- the foreign exchange value of the dollar. Nonetheless, nated to borrowers in the lower portion of the credit the staff continued to forecast that real GDP would score distribution. For borrowers who qualify for a expand at a faster pace than potential output in 2015 mortgage, the cost of credit stayed low by historical and 2016, supported by increases in consumer and standards. business confidence and a small pickup in foreign economic growth, even as the normalization of mon- Consumer credit rose further over the intermeeting etary policy was assumed to begin. In 2017, real period. Auto and student loan balances continued to GDP growth was projected to slow toward, but to expand robustly through January, while credit card remain above, the rate of potential output growth. balances decelerated slightly. Issuance of consumer The expansion in economic activity over the medium asset-backed securities remained robust. term was anticipated to gradually reduce resource slack; the unemployment rate was expected to decline The dollar appreciated against most other currencies slowly and to temporarily move a little below the over the intermeeting period, as policymakers in the staff’s estimate of its longer-run natural rate. In its euro area, Sweden, Denmark, and many emerging medium-term and longer-run projections, the staff market economies eased monetary policy even as slightly lowered its assumptions for potential GDP market participants anticipated monetary policy growth and real equilibrium interest rates. tightening in the United States. Central bank policymakers in Sweden and Denmark lowered the rates on The staff’s forecast for inflation in the near term was their respective deposit facilities further below zero. little changed, with the large declines in energy prices In addition, in Sweden, the benchmark repurchase since last June still anticipated to lead to a temporary agreement (or repo) rate was reduced in February to decrease in the 12-month change in total PCE prices below zero for the first time, and a further cut was in the first half of this year. The staff’s forecast for announced in March. Equity prices rose in most of inflation in 2016 and 2017 was unchanged, as energy the advanced foreign economies, with euro-area prices and non-oil import prices were still expected to stocks rallying both before and after the early March bottom out and begin rising later this year; inflation commencement of sovereign bond purchases by the was projected to move closer to, but remain below, ECB under its PSPP. Stock market performance in the Committee’s longer-run objective of 2 percent the emerging market economies was more varied, over those years. Inflation was anticipated to move with net losses in some and net gains in others. Yields back to 2 percent thereafter, with inflation expecta-

Minutes of Federal Open Market Committee Meetings | March 151 tions in the longer run assumed to be consistent with pants expected that, over the medium term, real ecothe Committee’s objective and slack in labor and nomic activity would expand at a moderate pace and product markets projected to have waned. there would be additional improvements in labor market conditions. Participants generally regarded The staff viewed the extent of uncertainty around its the net effect of declines in energy prices as likely to March projections for real GDP growth, the unem- be positive for economic activity and employment in ployment rate, and inflation as similar to the average the United States, although a couple noted that over the past 20 years. The risks to the forecasts for physical limits on the accumulation of stocks of real GDP growth and inflation were viewed as tilted crude oil could result in further downward pressure a little to the downside, reflecting the staff’s assess- on prices and reduce U.S. oil and gas production and ment that neither monetary policy nor fiscal policy investment. Inflation had declined further below the was well positioned to help the economy withstand Committee’s longer-run objective, largely reflecting adverse shocks. At the same time, the staff viewed the declines in energy prices, and was expected to stay risks around its outlook for the unemployment rate near its recent low level in the near term. Marketas roughly balanced. based measures of inflation compensation 5 to 10 years ahead remained low, while survey-based Participants’ Views on Current Conditions measures of longer-term inflation expectations had and the Economic Outlook remained stable. Participants generally anticipated that inflation would rise gradually toward the Com- In conjunction with this FOMC meeting, members mittee’s 2 percent objective as the labor market of the Board of Governors and participating Federal improved further and the transitory effects of energy Reserve Bank presidents submitted their projections price declines and other factors dissipated. While of the most likely outcomes for real GDP growth, the almost all participants noted potential risks to the unemployment rate, inflation, and the federal funds economic outlook resulting from foreign economic rate for each year from 2015 through 2017 and over and financial developments, most saw the risks to the the longer run, conditional on each participant’s outlook for economic growth and the labor market judgment of appropriate monetary policy.4 The as nearly balanced. longer-run projections represent each participant’s assessment of the rate to which each variable would Household spending appeared to have slowed somebe expected to converge, over time, under appropriate what over the intermeeting period, with some particimonetary policy and in the absence of further shocks pants suggesting that the recent softness in spending to the economy. These economic projections and indicators was likely due in part to transitory factors, policy assessments are described in the Summary of such as unseasonably cold winter weather in parts of Economic Projections, which is attached as an the country. Some participants expressed the view addendum to these minutes. that growth in consumer spending over the medium term would be supported by the strong labor market In their discussion of the economic situation and the and rising income, increases in wealth and improveoutlook, meeting participants regarded the informa- ments in household balance sheets, lower gasoline tion received over the intermeeting period as indicat- prices, and gains in consumer confidence. Although ing that the pace of economic activity had moderated activity in the housing sector remained sluggish, a somewhat. Labor market conditions continued to few participants were cautiously optimistic that improve, with strong job gains and a lower unem- recent higher rates of household formation, together ployment rate, and participants judged that underuti- with low mortgage rates, would enable a faster pace lization of labor resources was continuing to dimin- of recovery. ish. A number of participants noted that slow growth of productivity or the labor force could reconcile the Business contacts in many parts of the country conmoderation in economic growth with the solid per- tinued to express optimism about prospects for future formance of some labor market indicators. Partici- sales or investment. However, there were widespread reports of a slowdown in growth during the first quarter across a range of industries, partly reflecting 4 The president of the Federal Reserve Bank of Dallas did not participate in this FOMC meeting, and the incoming president severe winter weather in some regions as well as labor of the Federal Reserve Bank of Philadelphia is scheduled to disputes at West Coast ports that temporarily disassume office on July 1. Helen E. Holcomb and Blake Prichard, rupted some supply chains. In several parts of the First Vice Presidents of the Federal Reserve Banks of Dallas and Philadelphia, respectively, submitted economic projections. country, persistently low oil prices had resulted in

152 102nd Annual Report | 2015 declines in drilling and delays in planned capital Many participants judged that the inflation data expenditures in the energy sector, and had negatively received over the intermeeting period had been about affected state government revenues. Manufacturing in line with their expectations that inflation would contacts in a couple of regions reported a softening move temporarily further below the Committee’s in export sales. In contrast, service-sector activity had goal, largely reflecting declines in energy prices and been reasonably strong in several parts of the coun- lower prices of non-oil imports. They continued to try, as had auto sales, and the increase in household expect that inflation would move up toward the purchasing power from lower gasoline prices was Committee’s 2 percent objective over the medium expected to boost retail sales. Labor market condi- term as the effects of these transitory factors waned tions continued to improve in most regions, with and conditions in the labor market improved further. wage pressures generally reported to be modest. Survey-based measures of inflation expectations had remained stable, and market-based measures of In their discussion of the foreign economic outlook, inflation compensation over the longer term were several participants noted that the dollar’s further about unchanged from the time of the January meetappreciation over the intermeeting period was likely ing, although they had exhibited some volatility over to restrain U.S. net exports and economic growth for the intermeeting period. It was noted that the a time. A few participants suggested that accommo- market-based measures had tracked quite closely the dative policy actions by a number of foreign central movements in crude oil prices over the period, first banks could lead to a further appreciation of the dol- rising and then falling back. Participants offered varilar, but another noted that such actions had also ous explanations for this correlation, including that strengthened the outlook for growth abroad, which market-based measures of inflation compensation would bolster U.S. exports. Participants pointed to a were responding to the same global developments as number of risks to the international economic out- oil prices, that these measures were capturing changes look, including the slowdown in growth in China, fis- in risk or liquidity premiums, or that inflationcal and financial problems in Greece, and geopolitical indexed securities were subject to mispricing. A tensions. couple of participants pointed out that the movements in crude oil prices and market-based inflation Participants saw broad-based improvement in labor compensation measures had not been particularly market conditions over the intermeeting period, well aligned over a longer historical period, or that including strong gains in payroll employment and a information gleaned from inflation derivatives sugfurther reduction in the unemployment rate. Several gested a substantial increase in the probability that participants judged, based on the improvement in a inflation would remain well below the Committee’s variety of labor market indicators, that the economy target over the next decade. One of them judged that was making further progress toward the Committee’s the low level of inflation compensation could reflect goal of maximum employment. Nonetheless, many increased concern on the part of investors about judged that some degree of labor market slack adverse outcomes in which low inflation was accomremained, as evidenced by the low rate of labor force panied by weak economic activity, and that it was participation, still-elevated involuntary part-time important not to dismiss this possible interpretation. employment, or subdued growth in wages. A few of them noted that continued modest wage growth In their discussion of communications regarding the could prompt them to reduce their estimates of the path of the federal funds rate over the medium term, longer-run normal rate of unemployment. A few par- almost all participants favored removing from the ticipants observed that the absence of a notable forward guidance in the Committee’s postmeeting pickup in wages might not be a useful yardstick for statement the indication that the Committee would evaluating the degree of remaining slack because of be patient in beginning to normalize the stance of the long lags between declines in unemployment and monetary policy. These participants continued to the response of wages or uncertainty about trend think that an increase in the target range for the fedproductivity growth. One participant, however, saw eral funds rate was unlikely in April. But, with consome evidence of rising wage growth and suggested tinued improvement in economic conditions, they that compositional changes in the labor force could preferred language that would provide the Commitbe masking underlying wage pressures, particularly as tee with the flexibility to subsequently adjust the tarmeasured by average hourly earnings. get range for the federal funds rate on a meeting-by-

Minutes of Federal Open Market Committee Meetings | March 153 meeting basis. It was noted that eliminating the refer- Committee should seek to signal its policy intentions ence to being patient would be appropriate in light of at the meeting before liftoff appeared likely, but two the considerable progress achieved toward the Com- others judged that doing so would be inconsistent mittee’s objective of maximum employment, and that with a meeting-by-meeting approach. Finally, many such a change would not indicate that the Committee participants commented that it would be desirable to had decided on the timing of the initial increase in provide additional information to the public about the target range for the federal funds rate. Partici- the Committee’s strategy for policy after the beginpants generally judged that the appropriate timing of ning of normalization. Some participants emphaliftoff would depend on their assessment of improve- sized that the stance of policy would remain highly ment in the labor market and their degree of confi- accommodative even after the first increase in the dence that inflation would move back to the Com- target range for the federal funds rate, and several mittee’s 2 percent objective over the medium term, noted that they expected economic developments and that it would be helpful to convey to the public would call for a fairly gradual pace of normalization this data-dependent approach to monetary policy. A or that a data-dependent approach would not necesfew participants emphasized that the decision regard- sarily dictate increases in the target range at every ing the appropriate timing of liftoff should take meeting. account of the risks that could be associated with departing from the effective lower bound later and Committee Policy Action those that could be associated with departing earlier. One participant did not favor the change to the for- In their discussion of monetary policy for the period ward guidance because, with inflation well below the ahead, members judged that information received Committee’s 2 percent longer-run target, the since the FOMC met in January indicated that ecoannouncement of a meeting-by-meeting approach to nomic growth had moderated somewhat. Labor marpolicy could lead to a tightening of financial condi- ket conditions had improved further, with strong job tions that would slow progress toward the Commit- gains and a lower unemployment rate; a variety of tee’s objectives. labor market indicators suggested that the underutilization of labor resources continued to diminish. Participants expressed a range of views about how Household spending was rising moderately, with they would assess the outlook for inflation and when declines in energy prices boosting household purthey might deem it appropriate to begin removing chasing power. Business fixed investment was policy accommodation. It was noted that there were advancing, although the recovery in the housing secno simple criteria for such a judgment, and, in par- tor remained slow and export growth had weakened. ticular, that, in a context of progress toward maxi- Inflation had declined further below the Committee’s mum employment and reasonable confidence that longer-run objective, largely reflecting the declines in inflation will move back to 2 percent over the energy prices. Market-based measures of inflation medium term, the normalization process could be ini- compensation remained low; survey-based measures tiated prior to seeing increases in core price inflation of longer-term inflation expectations had been stable. or wage inflation. Further improvement in the labor The Committee expected that, with appropriate monmarket, a stabilization of energy prices, and a level- etary policy accommodation, economic activity ing out of the foreign exchange value of the dollar would expand at a moderate pace and labor market were all seen as helpful in establishing confidence that indicators would continue to move toward levels the inflation would turn up. Several participants judged Committee judges consistent with its dual mandate. that the economic data and outlook were likely to The Committee also expected that inflation would warrant beginning normalization at the June meet- remain near its recent low level in the near term but ing. However, others anticipated that the effects of rise gradually toward 2 percent over the medium energy price declines and the dollar’s appreciation term as the labor market improves further and the would continue to weigh on inflation in the near transitory effects of energy price declines and other term, suggesting that conditions likely would not be factors dissipate. In light of the uncertainties attendappropriate to begin raising rates until later in the ing the outlook for inflation, the Committee agreed year, and a couple of participants suggested that the that it should continue to monitor inflation developeconomic outlook likely would not call for liftoff ments closely. until 2016. With regard to communications about the timing of the first increase in the target range for the In their discussion of language for the postmeeting federal funds rate, two participants thought that the statement, the Committee agreed that the data

154 102nd Annual Report | 2015 received over the intermeeting period suggested that conditions and the outlook, and that the change in economic growth had moderated somewhat. One fac- the forward guidance was not intended to indicate tor behind that moderation was a slowdown in the that the Committee had decided on the timing of the growth of exports, and members decided that the initial increase in the target range for the federal statement should explicitly note that factor. In addi- funds rate. tion, data received over the intermeeting period indicated that inflation had declined, as the Committee The Committee also decided to maintain its policy of had anticipated, and members agreed to update the reinvesting principal payments from agency debt and statement to reflect their judgment that inflation was agency mortgage-backed securities in agency likely to remain near its recent low level in the near mortgage-backed securities and of rolling over term. Members also judged that it was appropriate to maturing Treasury securities at auction. This policy, note that market-based measures of inflation com- by keeping the Committee’s holdings of longer-term pensation remained near levels registered at the time securities at sizable levels, should help maintain of the January FOMC meeting. accommodative financial conditions. The Committee agreed to reiterate its expectation that, even after The Committee agreed to maintain the target range employment and inflation are near mandatefor the federal funds rate at 0 to ¼ percent and to consistent levels, economic conditions may, for some reaffirm in the statement that the Committee’s deci- time, warrant keeping the target federal funds rate sion about how long to maintain the current target below levels the Committee views as normal in the range for the federal funds rate would depend on its longer run. assessment of actual and expected progress toward its objectives of maximum employment and 2 percent At the conclusion of the discussion, the Committee inflation. Members continued to judge that this voted to authorize and direct the Federal Reserve assessment of progress would take into account a Bank of New York, until it was instructed otherwise, wide range of information, including measures of to execute transactions in the SOMA in accordance labor market conditions, indicators of inflation pres- with the following domestic policy directive: sures and inflation expectations, and readings on financial and international developments. In light of “Consistent with its statutory mandate, the Fedthe considerable progress to date toward the Com- eral Open Market Committee seeks monetary mittee’s maximum-employment objective and the and financial conditions that will foster maxiimplications of that progress for the outlook for mum employment and price stability. In particuinflation, members agreed to remove from the for- lar, the Committee seeks conditions in reserve ward guidance in the postmeeting statement the indi- markets consistent with federal funds trading in cation that the Committee judges that it can be a range from 0 to ¼ percent. The Committee patient in beginning to normalize the stance of mon- directs the Desk to undertake open market etary policy and to indicate instead that the Commit- operations as necessary to maintain such conditee anticipates that it will be appropriate to raise the tions. The Committee directs the Desk to maintarget range for the federal funds rate when it has tain its policy of rolling over maturing Treasury seen further improvement in the labor market and is securities into new issues and its policy of reinreasonably confident that inflation will move back to vesting principal payments on all agency debt its 2 percent objective over the medium term. Mem- and agency mortgage-backed securities in bers viewed the new guidance as consistent with the agency mortgage-backed securities. The Comoutlook for policy that the Committee had expressed mittee also directs the Desk to engage in dollar in January, and they agreed that the postmeeting roll and coupon swap transactions as necessary statement should note that an increase in the target to facilitate settlement of the Federal Reserve’s range for the federal funds rate remained unlikely at agency mortgage-backed securities transactions. the April FOMC meeting; in addition, they generally The System Open Market Account manager and saw the new language as providing the Committee the secretary will keep the Committee informed with the flexibility to begin raising the target range of ongoing developments regarding the System’s for the federal funds rate in June or at a subsequent balance sheet that could affect the attainment meeting. Members noted that the timing of the first over time of the Committee’s objectives of increase would depend on the evolution of economic maximum employment and price stability.”

Minutes of Federal Open Market Committee Meetings | March 155 The vote encompassed approval of the statement information, including measures of labor market below to be released at 2:00 p.m.: conditions, indicators of inflation pressures and inflation expectations, and readings on financial “Information received since the Federal Open and international developments. Consistent with Market Committee met in January suggests that its previous statement, the Committee judges economic growth has moderated somewhat. that an increase in the target range for the fed- Labor market conditions have improved further, eral funds rate remains unlikely at the April with strong job gains and a lower unemploy- FOMC meeting. The Committee anticipates ment rate. A range of labor market indicators that it will be appropriate to raise the target suggests that underutilization of labor resources range for the federal funds rate when it has seen continues to diminish. Household spending is further improvement in the labor market and is rising moderately; declines in energy prices have reasonably confident that inflation will move boosted household purchasing power. Business back to its 2 percent objective over the medium fixed investment is advancing, while the recovery term. This change in the forward guidance does in the housing sector remains slow and export not indicate that the Committee has decided on growth has weakened. Inflation has declined fur- the timing of the initial increase in the target ther below the Committee’s longer-run objec- range. tive, largely reflecting declines in energy prices. Market-based measures of inflation compensa- The Committee is maintaining its existing policy tion remain low; survey-based measures of of reinvesting principal payments from its holdlonger-term inflation expectations have ings of agency debt and agency mortgageremained stable. backed securities in agency mortgage-backed securities and of rolling over maturing Treasury Consistent with its statutory mandate, the Com- securities at auction. This policy, by keeping the mittee seeks to foster maximum employment Committee’s holdings of longer-term securities and price stability. The Committee expects that, at sizable levels, should help maintain accommowith appropriate policy accommodation, eco- dative financial conditions. nomic activity will expand at a moderate pace, with labor market indicators continuing to move When the Committee decides to begin to remove toward levels the Committee judges consistent policy accommodation, it will take a balanced with its dual mandate. The Committee continues approach consistent with its longer-run goals of to see the risks to the outlook for economic maximum employment and inflation of 2 peractivity and the labor market as nearly balanced. cent. The Committee currently anticipates that, Inflation is anticipated to remain near its recent even after employment and inflation are near low level in the near term, but the Committee mandate-consistent levels, economic conditions expects inflation to rise gradually toward 2 per- may, for some time, warrant keeping the target cent over the medium term as the labor market federal funds rate below levels the Committee improves further and the transitory effects of views as normal in the longer run.” energy price declines and other factors dissipate. The Committee continues to monitor inflation Voting for this action: Janet L. Yellen, William C. developments closely. Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Jeffrey M. Lacker, Dennis P. Lockhart, To support continued progress toward maxi- Jerome H. Powell, Daniel K. Tarullo, and John C. mum employment and price stability, the Com- Williams. mittee today reaffirmed its view that the current 0 to ¼ percent target range for the federal funds Voting against this action: None. rate remains appropriate. In determining how long to maintain this target range, the Commit- It was agreed that the next meeting of the Committee tee will assess progress—both realized and would be held on Tuesday–Wednesday, April 28–29, expected—toward its objectives of maximum 2015. The meeting adjourned at 10:45 a.m. on employment and 2 percent inflation. This assess- March 18, 2015. ment will take into account a wide range of

156 102nd Annual Report | 2015 Notation Vote value to which each variable would be expected to converge, over time, under appropriate monetary By notation vote completed on February 17, 2015, policy and in the absence of further shocks to the the Committee unanimously approved the minutes of economy. “Appropriate monetary policy” is defined the Committee meeting held on January 27–28, 2015. as the future path of policy that each participant deems most likely to foster outcomes for economic Thomas Laubach activity and inflation that best satisfy his or her indi- Secretary vidual interpretation of the Federal Reserve’s objectives of maximum employment and stable prices. Addendum: All FOMC participants but one expected that eco- Summary of Economic Projections nomic growth under appropriate policy would be somewhat faster in 2015 and in 2016 than their individual estimates of the U.S. economy’s longer-run In conjunction with the Federal Open Market Comnormal growth rate and at or near its longer-run rate mittee (FOMC) meeting held on March 17–18, 2015, in 2017 (table 1 and figure 1). Most participants promeeting participants submitted their projections of jected that the unemployment rate would continue to the most likely outcomes for real output growth, the decline in 2015 and 2016, and all participants prounemployment rate, inflation, and the federal funds jected that the unemployment rate would be at or rate for each year from 2015 to 2017 and over the below their individual judgments of its longer-run longer run.5 Each participant’s projection was based normal level by the end of 2017. Participants saw on information available at the time of the meeting inflation, as measured by the four-quarter change in plus his or her assessment of appropriate monetary the price index for personal consumption expendipolicy and assumptions about the factors likely to tures (PCE), slowing this year but picking up notably affect economic outcomes. The longer-run projecnext year; almost all of the participants projected tions represent each participant’s assessment of the that inflation would be at or close to the Committee’s 2 percent longer-run objective in 2017. 5 The president of the Federal Reserve Bank of Dallas did not participate in this FOMC meeting, and the incoming president of the Federal Reserve Bank of Philadelphia is scheduled to As shown in figure 2, all but two participants anticiassume office on July 1. Helen E. Holcomb and Blake Prichard, pated that it would be appropriate to begin raising First Vice Presidents of the Federal Reserve Banks of Dallas and Philadelphia, respectively, submitted economic projections. the target range for the federal funds rate in 2015. Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, March 2015* Percent Central tendency1 Range2 Variable 2 015 2016 2017 Longer run 2015 2016 2017 Longer run Change in real GDP 2.3 to 2.7 2.3 to 2.7 2.0 to 2.4 2.0 to 2.3 2.1 to 3.1 2.2 to 3.0 1.8 to 2.5 1 .8 to 2.5 December projection 2.6 to 3.0 2.5 to 3.0 2.3 to 2.5 2.0 to 2.3 2.1 to 3.2 2.1 to 3.0 2.0 to 2.7 1 .8 to 2.7 Unemployment rate 5.0 to 5.2 4.9 to 5.1 4.8 to 5.1 5.0 to 5.2 4.8 to 5.3 4.5 to 5.2 4.8 to 5.5 4 .9 to 5.8 December projection 5.2 to 5.3 5.0 to 5.2 4.9 to 5.3 5.2 to 5.5 5.0 to 5.5 4.9 to 5.4 4.7 to 5.7 5.0 to 5.8 PCE inflation 0.6 to 0.8 1.7 to 1.9 1.9 to 2.0 2.0 0.6 to 1.5 1.6 to 2.4 1.7 to 2.2 2.0 December projection 1.0 to 1.6 1.7 to 2.0 1.8 to 2.0 2.0 1.0 to 2.2 1.6 to 2.1 1.8 to 2.2 2.0 Core PCE inflation3 1.3 to 1.4 1.5 to 1.9 1.8 to 2.0 1.2 to 1.6 1.5 to 2.4 1.7 to 2.2 December projection 1.5 to 1.8 1.7 to 2.0 1.8 to 2.0 1.5 to 2.2 1.6 to 2.1 1 .8 to 2.2 Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The December projections were made in conjunction with the meeting of the Federal Open Market Committee on December 16–17, 2014. 1 The central tendency excludes the three highest and three lowest projections for each variable in each year. 2 The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year. 3 Longer-run projections for core PCE inflation are not collected. * The lower end of the central tendency for longer-run unemployment from the December projections was corrected on April 8, 2015. The error only affected the PDF version of the March Summary of Economic Projections.

Minutes of Federal Open Market Committee Meetings | March 157 Figure 1. Central tendencies and ranges of economic projections, 2015–17 and over the longer run Percent Change in real GDP Central tendency of projections 4 Range of projections 3 2 Actual 1 + 0 - 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Percent Unemployment rate 10 9 8 7 6 5 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Percent PCE inflation 3 2 1 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Percent Core PCE inflation 3 2 1 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Note: Definitions of variables are in the general note to table 1. The data for the actual values of the variables are annual.

158 102nd Annual Report | 2015 Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy Number of participants Appropriate timing of policy firming 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 2015 2016 2017 Longer run Note: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under appropriate monetary policy, the first increase in the target range for the federal funds rate from its current range of 0 to ¼ percent will occur in the specified calendar year. In December 2014, the numbers of FOMC participants who judged that the first increase in the target federal funds rate would occur in 2015, and 2016 were, respectively, 15, and 2. In the lower panel, each shaded circle indicates the value (rounded to the nearest ⅛ percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.

Minutes of Federal Open Market Committee Meetings | March 159 Most expected that it would be appropriate to raise tendencies of participants’ current projections for the target federal funds rate fairly gradually over the real GDP growth were 2.3 to 2.7 percent in 2015 and projection period as labor market conditions and in 2016, and 2.0 to 2.4 percent in 2017. The central inflation move toward values the Committee judges tendency of the projections of real GDP growth over consistent with the attainment of its mandated objec- the longer run was 2.0 to 2.3 percent, unchanged tives of maximum employment and stable prices. from December. Most participants continued to expect that it would be appropriate for the federal funds rate to stay Most participants projected that the unemployment appreciably below its longer-run level after inflation rate would continue to decline through 2016, and all and unemployment are near mandate-consistent lev- projected that by the fourth quarter of 2017 the els, reflecting the effects of remaining headwinds unemployment rate would be at or below their indiholding back the recovery, along with other factors. vidual judgments of its longer-run normal level. The central tendencies of participants’ forecasts for the Most participants viewed the uncertainty associated unemployment rate in the fourth quarter of each with their outlooks for economic growth and the year were 5.0 to 5.2 percent in 2015, 4.9 to 5.1 perunemployment rate as broadly similar to the average cent in 2016, and 4.8 to 5.1 percent in 2017. Comlevel of the past 20 years. Most participants also pared with the December SEP, participants’ projudged the level of uncertainty about inflation to be jected paths for the unemployment rate generally broadly similar to the average level of the past shifted down slightly through 2017. Many partici- 20 years, although several participants viewed it as pants noted that recent data pointing to faster-thanhigher. In addition, most participants continued to expected improvement in labor market conditions see the risks to the outlook for economic growth and were an important factor underlying the downward for the unemployment rate as broadly balanced, revisions to their unemployment rate forecasts. More though some viewed the risks to economic growth as than half of the participants revised down their estiweighted to the downside. Equal numbers of partici- mates of the longer-run normal rate of unemploypants saw the risks to inflation as balanced or as ment; as a result, the central tendency of these estiweighted to the downside, while one judged these mates shifted down to 5.0 to 5.2 percent. Several parrisks as tilted to the upside. ticipants noted that still-subdued wage and price inflation despite the stronger-than-expected momen- The Outlook for Economic Activity tum in the labor market suggested a lower level of the longer-run normal unemployment rate than they had Participants generally projected that, conditional on thought previously, and a couple mentioned research their individual assumptions about appropriate mon- indicating that demographic groups with lower averetary policy, real gross domestic product (GDP) age unemployment rates have accounted for an would grow in 2015 and 2016 at a pace somewhat increasing fraction of the labor force. faster than their estimates of its longer-run normal rate and at or near its longer-run rate in 2017. Par- Figures 3.A and 3.B show the distribution of particiticipants pointed to a number of factors that they pants’ views regarding the likely outcomes for real expected would contribute to solid real output GDP growth and the unemployment rate through growth over the next few years, including improving 2017. Some of the diversity of views reflected particilabor market conditions, strengthened household and pants’ individual assessments of the effects of lower business balance sheets, the boost to consumer oil prices on consumer spending and business investspending from low energy prices, diminishing ment, of the extent to which dollar appreciation restraint from fiscal policy, and still-accommodative would affect real activity, of the rate at which the monetary policy. forces that have been restraining the pace of the economic recovery would continue to abate, of the tra- Compared with their Summary of Economic Projec- jectory for growth in consumption as labor market tions (SEP) contributions in December, all but a slack diminishes, and of the appropriate path of couple of participants revised down their projections monetary policy. Relative to the December SEP, the of real GDP growth over the forecast period. A num- dispersion of participants’ projections for real GDP ber of participants cited the further appreciation of growth was a bit narrower from 2015 through 2017, the dollar and recent weakness in spending and pro- while for the unemployment rate, the dispersion was duction data as reasons for their revision. The central roughly unchanged.

160 102nd Annual Report | 2015 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2015–17 and over the longer run Number of participants 2015 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 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 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 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 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 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 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 - 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Percent range Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | March 161 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2015–17 and over the longer run Number of participants 2015 March projections 18 December projections 16 14 12 10 8 6 4 2 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Number of participants 2016 18 16 14 12 10 8 6 4 2 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Note: Definitions of variables are in the general note to table 1.

162 102nd Annual Report | 2015 The Outlook for Inflation consistent with the attainment of its mandated objectives of maximum employment and price stability. As Compared with the December SEP, all participants shown in figure 2, all but two participants anticipated marked down their projections for PCE inflation this that it would be appropriate to begin raising the taryear, noting that inflation had been running below get range for the federal funds rate during 2015. their earlier projections and that significant declines However, a large majority projected that the approin energy prices and import prices were putting tem- priate level of the federal funds rate would remain porary downward pressure on inflation. All partici- below their individual estimates of its longer-run norpants saw PCE inflation picking up in 2016, and mal level through 2017. almost all saw inflation at or close to the Committee’s 2 percent longer-run objective in 2017. All of the par- Most participants projected that the unemployment ticipants also marked down their projections for core rate would be at or somewhat above their estimates of PCE inflation this year, and nearly half revised down its longer-run normal level at the end of the year in their projections for core PCE inflation in 2016 by which they judged the initial increase in the target 0.2 percentage point or more, with many noting that range for the federal funds rate would be warranted. core inflation had run below their earlier projections Almost all participants projected that inflation would in recent months and several citing declines in non-oil be below the Committee’s 2 percent objective that import prices and pass-through of declines in energy year, but they also saw inflation rising substantially prices. Almost all expected core inflation to rise closer to 2 percent in the following year. gradually over the projection period and to reach a level at or near 2 percent in 2017. The central tenden- Figure 3.E provides the distribution of participants’ cies for PCE inflation were 0.6 to 0.8 percent in 2015, judgments regarding the appropriate level of the tar- 1.7 to 1.9 percent in 2016, and 1.9 to 2.0 percent in get federal funds rate at the end of each calendar year 2017, and the central tendencies for core PCE infla- from 2015 to 2017 and over the longer run. The tion were 1.3 to 1.4 percent in 2015, 1.5 to 1.9 percent median values of the federal funds rate at the end of in 2016, and 1.8 to 2.0 percent in 2017. Factors cited 2015, 2016, and 2017 decreased 50, 62, and 50 basis by participants as likely to contribute to a rise of points, respectively, relative to December, to 0.63, inflation toward 2 percent included stable longer- 1.88, and 3.13 percent, while the mean values for term inflation expectations, steadily diminishing those years declined 35, 52, and 32 basis points, resource slack, a pickup in wage growth, the waning respectively, to 0.78, 2.03, and 3.19 percent. Comeffects of declines in energy prices, and still- pared with December, the dispersion of the projecaccommodative monetary policy. tions for the appropriate level of the federal funds rate was a bit narrower over the projection period. Figures 3.C and 3.D provide information on the distribution of participants’ views about the outlook for Most participants judged that it would be appropriinflation. The range of participants’ projections for ate for the federal funds rate in 2017 to remain below PCE inflation in 2015 narrowed somewhat compared its longer-run normal level, with nearly half of them with December. The range for PCE inflation in 2016 projecting the federal funds rate in 2017 to be more widened slightly, likely reflecting in part differences in than ½ percentage point lower than their estimates of participants’ assessments of the effects of the its longer-run value. Participants provided a number declines in energy and import prices on the outlook of reasons why they thought it would be appropriate for inflation. Similarly, the ranges for core PCE infla- for the federal funds rate to remain below its longertion narrowed in 2015 and widened slightly in 2016. run normal level for some time after inflation and the The range for both measures in 2017 was relatively unemployment rate were near mandate-consistent little changed and continued to show a very substan- levels. These reasons included an assessment that the tial concentration near the Committee’s 2 percent headwinds that have been holding back the recovery longer-run objective by that time. will continue to exert some restraint on economic activity at that time, that weak real activity abroad Appropriate Monetary Policy and the recent appreciation of the dollar are likely to continue to restrain U.S. net exports for some time, Participants judged that it would be appropriate to that residual slack in the labor market will still be eviraise the target range for the federal funds rate over dent in measures of labor utilization other than the the projection period as labor market conditions and unemployment rate, and that the risks to the ecoinflation move toward values the Committee judges nomic outlook are asymmetric as a result of the con-

Minutes of Federal Open Market Committee Meetings | March 163 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2015–17 and over the longer run Number of participants 2015 March projections 18 December projections 16 14 12 10 8 6 4 2 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.6 0.8 1.0 1.2 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 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.6 0.8 1.0 1.2 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 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note: Definitions of variables are in the general note to table 1.

164 102nd Annual Report | 2015 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2015–17 Number of participants 2015 March projections 18 December projections 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2016 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | March 165 Figure 3.E. Distribution of participants’ judgments of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate, 2015–17 and over the longer run Number of participants 2015 March projections 18 December projections 16 14 12 10 8 6 4 2 0.00 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Number of participants 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 - 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 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 - 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 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: The midpoints of the target ranges for the federal funds rate and the target levels for the federal funds rate are measured at the end of the specified calendar year or over the longer run.

166 102nd Annual Report | 2015 term objective of 2 percent, the implications of inter- Table 2. Average historical projection error ranges national developments for the domestic economy, the Percentage points desire to minimize potential disruptions in financial Variable 2015 2016 2017 markets, and the balance of risks around the outlook. Some participants also mentioned the prescrip- Change in real GDP1 ±1.6 ±2.1 ±2.0 tions of various monetary policy rules as factors they Unemployment rate1 ±0.5 ±1.2 ±1.7 considered in judging the appropriate path for the Total consumer prices2 ±0.9 ±1.0 ±1.0 federal funds rate. Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 1995 through 2014 that were released in the winter by various private and government forecasters. As described in the box “Forecast Uncertainty and Risks Uncertainty,” under certain assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, and consumer prices will be in ranges implied by the average size of projection errors made in the past. For more Nearly all participants continued to judge the levels information, see David Reifschneider and Peter Tulip (2007), “Gauging the of uncertainty attending their projections for real Uncertainty of the Economic Outlook from Historical Forecasting Errors,” Finance and Economics Discussion Series 2007-60 (Washington: Board of Governors of GDP growth and the unemployment rate as broadly the Federal Reserve System, November), available at www.federalreserve.gov/ similar to the norms during the previous 20 years pubs/feds/2007/200760/200760abs.html; and Board of Governors of the Federal Reserve System, Division of Research and Statistics (2014), “Updated Historical (figure 4).6 Most participants continued to see the Forecast Errors,” memorandum, April 9, www.federalreserve.gov/foia/files/ risks to their outlooks for real GDP growth as 20140409-historical-forecast-errors.pdf. 1 Definitions of variables are in the general note to table 1. broadly balanced, though some participants viewed 2 Measure is the overall consumer price index, the price measure that has been the risks to real GDP growth as weighted to the most widely used in government and private economic forecasts. Projection downside. Those participants who viewed the risks as is percent change, fourth quarter of the previous year to the fourth quarter of the year indicated. weighted to the downside cited, for example, concern about the limited ability of monetary policy at the effective lower bound to respond to further negative straints on monetary policy associated with the effecshocks to the economy or about the trajectory for tive lower bound on the federal funds rate. economic growth abroad. Nearly all participants again judged the risks to the outlook for the unem- Relative to the December SEP, almost half of the ployment rate to be broadly balanced. participants revised down their estimates of the longer-run level of the federal funds rate, typically by As in the December SEP, participants generally ¼ percentage point, with a lower assessment of the agreed that the levels of uncertainty associated with economy’s longer-run potential growth rate generally their inflation forecasts were broadly similar to hiscited as a contributing factor for those revisions. torical norms. Almost half of participants viewed the Though the median estimate of the longer-run norrisks to their inflation forecast as balanced. However, mal federal funds rate was unchanged from Decemthe risks were seen as tilted to the downside by an ber, the central tendency narrowed to 3.5 to 3.75 perequal number of participants, an increase since the cent from 3.5 to 4.0 percent in December, and the December SEP. These participants cited the possibilrange moved down a bit to 3.0 to 4.25 percent from ity that the recent low levels of inflation could prove 3.25 to 4.25 percent in December. All participants more persistent than anticipated or that the upward judged that inflation in the longer run would be equal pressure on prices from inflation expectations might to the Committee’s inflation objective of 2 percent, be weaker than assumed, or the judgment that, in implying that their individual judgments regarding current circumstances, it would be difficult for the the appropriate longer-run level of the real federal Committee to respond effectively to low-inflation funds rate in the absence of further shocks to the outcomes. Conversely, one participant saw upside economy ranged from 1.0 to 2.25 percent. risks to inflation, citing uncertainty about the timing and efficacy of the Committee’s withdrawal of mon- Participants’ views of the appropriate path for monetary policy accommodation. etary policy were informed by their judgments about the state of the economy, including the values of the 6 Table 2 provides estimates of the forecast uncertainty for the unemployment rate and other labor market indicachange in real GDP, the unemployment rate, and total contors that would be consistent with maximum employ- sumer price inflation over the period from 1995 through 2014. ment, the extent to which the economy was currently At the end of this summary, the box “Forecast Uncertainty” discusses the sources and interpretation of uncertainty in the falling short of maximum employment, the prospects economic forecasts and explains the approach used to assess the for inflation to return to the Committee’s longer- uncertainty and risks attending the participants’ projections.

Minutes of Federal Open Market Committee Meetings | March 167 Figure 4. Uncertainty and risks in economic projections Number of participants Number of participants Uncertainty about GDP growth Risks to GDP growth March projections March projections 18 18 December projections December projections 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 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: For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.” Definitions of variables are in the general note to table 1.

168 102nd Annual Report | 2015 Forecast Uncertainty The economic projections provided by the members in the third year. The corresponding 70 percent confiof the Board of Governors and the presidents of the dence intervals for overall inflation would be 1.1 to Federal Reserve Banks inform discussions of mon- 2.9 percent in the current year and 1.0 to 3.0 percent etary policy among policymakers and can aid public in the second and third years. understanding of the basis for policy actions. Con- Because current conditions may differ from those siderable uncertainty attends these projections, howthat prevailed, on average, over history, participants ever. The economic and statistical models and relaprovide judgments as to whether the uncertainty tionships used to help produce economic forecasts attached to their projections of each variable is are necessarily imperfect descriptions of the real greater than, smaller than, or broadly similar to typiworld, and the future path of the economy can be cal levels of forecast uncertainty in the past, as affected by myriad unforeseen developments and shown in table 2. Participants also provide judgments events. Thus, in setting the stance of monetary as to whether the risks to their projections are policy, participants consider not only what appears to weighted to the upside, are weighted to the downbe the most likely economic outcome as embodied in side, or are broadly balanced. That is, participants their projections, but also the range of alternative judge whether each variable is more likely to be possibilities, the likelihood of their occurring, and the above or below their projections of the most likely potential costs to the economy should they occur. outcome. These judgments about the uncertainty Table 2 summarizes the average historical accuracy and the risks attending each participant’s projections of a range of forecasts, including those reported in are distinct from the diversity of participants’ views past Monetary Policy Reports and those prepared by about the most likely outcomes. Forecast uncertainty the Federal Reserve Board’s staff in advance of is concerned with the risks associated with a particumeetings of the Federal Open Market Committee. lar projection rather than with divergences across a The projection error ranges shown in the table illus- number of different projections. trate the considerable uncertainty associated with As with real activity and inflation, the outlook for the economic forecasts. For example, suppose a particifuture path of the federal funds rate is subject to conpant projects that real gross domestic product (GDP) siderable uncertainty. This uncertainty arises primarily and total consumer prices will rise steadily at annual because each participant’s assessment of the approrates of, respectively, 3 percent and 2 percent. If the priate stance of monetary policy depends importantly uncertainty attending those projections is similar to on the evolution of real activity and inflation over that experienced in the past and the risks around the time. If economic conditions evolve in an unexpected projections are broadly balanced, the numbers manner, then assessments of the appropriate setting reported in table 2 would imply a probability of about of the federal funds rate would change from that 70 percent that actual GDP would expand within a point forward. range of 1.4 to 4.6 percent in the current year, 0.9 to 5.1 percent in the second year, and 1.0 to 5.0 percent

Minutes of Federal Open Market Committee Meetings | April 169 Meeting Held on April 28–29, 2015 David W. Wilcox Economist A meeting of the Federal Open Market Committee David Altig, Thomas A. Connors, Eric M. Engen, was held in the offices of the Board of Governors of Michael P. Leahy, and William Wascher the Federal Reserve System in Washington, D.C., on Associate Economists Tuesday, April 28, 2015, at 1:00 p.m. and continued on Wednesday, April 29, 2015, at 9:00 a.m. Simon Potter Manager, System Open Market Account Present Lorie K. Logan Janet L. Yellen Deputy Manager, System Open Market Account Chair Robert deV. Frierson1 William C. Dudley Secretary of the Board, Office of the Secretary, Vice Chairman Board of Governors Lael Brainard Michael S. Gibson Director, Division of Banking Supervision and Charles L. Evans Regulation, Board of Governors Stanley Fischer Nellie Liang Jeffrey M. Lacker Director, Office of Financial Stability Policy and Research, Board of Governors Dennis P. Lockhart James A. Clouse and Stephen A. Meyer Jerome H. Powell Deputy Directors, Division of Monetary Affairs, Daniel K. Tarullo Board of Governors John C. Williams William B. English Senior Special Adviser to the Board, Office of Board James Bullard, Christine Cumming, Members, Board of Governors Esther L. George, Loretta J. Mester, and Eric Rosengren Andrew Figura, David Reifschneider, Alternate Members of the Federal Open Market and Stacey Tevlin Committee Special Advisers to the Board, Office of Board Narayana Kocherlakota Members, Board of Governors President of the Federal Reserve Bank of Trevor A. Reeve Minneapolis Special Adviser to the Chair, Office of Board Helen E. Holcomb and Blake Prichard Members, Board of Governors First Vice Presidents, Federal Reserve Banks of Linda Robertson Dallas and Philadelphia, respectively Assistant to the Board, Office of Board Members, Thomas Laubach Board of Governors Secretary and Economist Michael T. Kiley Matthew M. Luecke Senior Adviser, Division of Research and Statistics, Deputy Secretary and Senior Associate Director, Office of Financial David W. Skidmore Stability Policy and Research, Assistant Secretary Board of Governors Michelle A. Smith Ellen E. Meade and Joyce K. Zickler Assistant Secretary Senior Advisers, Division of Monetary Affairs, Scott G. Alvarez Board of Governors General Counsel Steven B. Kamin 1 Attended the joint session of the Federal Open Market Com- Economist mittee and the Board of Governors.

170 102nd Annual Report | 2015 Jeremy B. Rudd Troy Davig, Michael Dotsey, Senior Adviser, Division of Research and Statistics, Evan F. Koenig, and Spencer Krane Board of Governors Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, Dallas, and Chicago, Joshua Gallin respectively Associate Director, Division of Research and Statistics, Board of Governors Todd E. Clark, Sylvain Leduc, Giovanni Olivei, Douglas Tillett, Fabio M. Natalucci2 and David C. Wheelock Associate Director, Division of Monetary Affairs, Vice Presidents, Federal Reserve Banks of Cleveland, Board of Governors San Francisco, Boston, Chicago, and St. Louis, Beth Anne Wilson respectively Associate Director, Division of International Finance, Kei-Mu Yi Board of Governors Special Policy Advisor to the President, Jane E. Ihrig1 and David López-Salido Federal Reserve Bank of Minneapolis Deputy Associate Directors, Division of Monetary Matthew D. Raskin Affairs, Board of Governors Assistant Vice President, Federal Reserve Bank of Edward Nelson New York Assistant Director, Division of Monetary Affairs, Andreas L. Hornstein Board of Governors Senior Advisor, Federal Reserve Bank of Richmond Burcu Duygan-Bump James M. Egelhof1 Adviser, Division of Monetary Affairs, Markets Officer, Federal Reserve Bank of New York Board of Governors Eric C. Engstrom Developments in Financial Markets and Adviser, Division of Research and Statistics, the Federal Reserve’s Balance Sheet Board of Governors In a joint session of the Federal Open Market Com- Penelope A. Beattie1 mittee (FOMC) and the Board of Governors of the Assistant to the Secretary, Office of the Secretary, Federal Reserve System, the manager of the System Board of Governors Open Market Account (SOMA) reported on devel- Dana L. Burnett opments in domestic and foreign financial markets. Section Chief, Division of Monetary Affairs, The deputy manager followed with a review of Board of Governors System open market operations conducted during the period since the Committee met on March 17–18, Katie Ross1 2015. The deputy manager also discussed the out- Manager, Office of the Secretary, comes of continued testing of the Federal Reserve’s Board of Governors term and overnight reverse repurchase agreement operations (term RRP operations and ON RRP Jonathan E. Goldberg operations, respectively). The Open Market Desk Economist, Division of Monetary Affairs, conducted two term RRP operations over the March Board of Governors quarter-end. The combination of term and ON RRP James M. Lyon operations continued to provide a soft floor for First Vice President, Federal Reserve Bank of money market rates over the intermeeting period, Minneapolis including around quarter-end. Based on experience around recent quarter-ends, the deputy manager dis- James J. McAndrews cussed possible plans for June test RRP operations. Executive Vice President, Federal Reserve Bank of The manager summarized ongoing staff work related New York to improved data collection for, and possible adjustments to, the calculation of the effective federal funds rate that were intended to provide a more robust 2 Attended the portion of the meeting following the joint session measure of trading conditions in the federal funds of the Federal Open Market Committee and the Board of Governors. market over time.

Minutes of Federal Open Market Committee Meetings | April 171 The Committee voted to renew the reciprocal cur- policy normalization was well under way and policyrency arrangements with the Bank of Canada and makers had considered carefully the potential benthe Bank of Mexico; these arrangements are associ- efits and costs of such a change. In part, that view ated with the Federal Reserve’s participation in the reflected concerns that an increase in the spread that North American Framework Agreement of 1994. In coincided with the initial step in policy normalization addition, the Committee voted to renew the dollar could complicate communications regarding the and foreign currency liquidity swap arrangements Committee’s policy intentions. with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the The Board meeting concluded at the end of the dis- Swiss National Bank. The votes to renew the Federal cussion of normalization procedures. Reserve’s participation in these standing arrangements are taken annually at the April meeting. Mr. Staff Review of the Economic Situation Lacker dissented on both votes because of his opposition, as indicated at the January meeting, to foreign The information reviewed for the April 28–29 meetexchange market intervention by the Federal Reserve, ing indicated that real gross domestic product (GDP) which such swap arrangements might facilitate, and only edged up in the first quarter, with growth likely because, in his view, such arrangements were best left held down, in part, by transitory factors. The pace of to fiscal authorities. improvement in labor market conditions moderated somewhat, and the unemployment rate was By unanimous vote, the Committee ratified the unchanged over the intermeeting period. Consumer Desk’s domestic transactions over the intermeeting price inflation continued to run below the FOMC’s period. There were no intervention operations in for- longer-run objective of 2 percent, partly restrained eign currencies for the System’s account over the by earlier declines in energy prices along with further intermeeting period. decreases in non-energy import prices. Market-based measures of inflation compensation were still low, Normalization Procedures while survey measures of longer-run inflation expectations remained stable. The staff provided a briefing on issues related to the implementation of monetary policy during the Payroll employment expanded at a solid pace in the period immediately following the first increase in the first quarter, on average, but the gain in March was target range for the federal funds rate, when it smaller than in earlier months. The unemployment becomes appropriate. In their subsequent discussion, rate remained at 5.5 percent in March, the labor force participants agreed that the Committee’s testing of participation rate edged down, and the employmentnormalization tools, in conjunction with its other to-population ratio was little changed. The share of planning, had created conditions under which policy workers employed part time for economic reasons normalization would likely proceed smoothly once it was also little changed. In the private sector, the rate commences. Nonetheless, as part of prudent contin- of job openings edged up in February and was well gency planning, participants agreed to have the staff above its pre-recession level, while the rates of hiring provide more frequent updates on financial market and of quits were about flat and remained slightly developments for a period after firming begins. Such above their levels of a year ago. updates would ensure that, if adjustments to policy normalization tools prove necessary to maintain Industrial production fell in the first quarter, with appropriate control over money market rates, policy- another drop in the drilling of new oil and gas wells makers could make such changes in a timely manner. as well as a decrease in manufacturing output that Participants also considered whether it might be appeared to reflect, in part, the effects of the labor appropriate, when the Committee first raises the tar- dispute at West Coast ports. Automakers’ assembly get range for the federal funds rate, to increase the schedules suggested that light motor vehicle producspread between the primary credit rate and the top of tion would increase at a solid pace in the second the federal funds rate target range. One participant quarter, but broader indicators of manufacturing argued for such a step in order to bring the spread up activity, such as the readings on new orders from to a level closer to that prevailing prior to the finan- national and regional manufacturing surveys, pointed cial crisis, but several participants favored maintain- to only modest gains in factory output over the next ing the current spread at least until the process of several months.

172 102nd Annual Report | 2015 Real personal consumption expenditures (PCE) exports was largest for durable goods and industrial increased in the first quarter, albeit at a much slower supplies, with exports to Canada and China accountpace than in the fourth quarter of 2014. Light motor ing for most of the drop. Despite the narrowing of vehicle sales, as well as the components of nominal the nominal trade deficit in February, the BEA estiretail sales used by the Bureau of Economic Analysis mated that real net exports were a substantial drag on (BEA) to construct its estimate of PCE, rebounded the growth of real GDP in the first quarter. in March after declining in February, suggesting that unusually severe winter weather in February likely Total U.S. consumer prices in the first quarter, as held down spending. Among the factors that influ- measured by the PCE price index, were only ¼ perence household spending, real disposable income rose cent higher than a year earlier, importantly reflecting strongly, on net, in the first quarter, buoyed in part the decrease in consumer energy prices. The core by earlier declines in energy prices. In addition, fur- PCE price index, which excludes food and energy ther gains in house values and equity prices likely prices, increased 1¼ percent over the same fourraised households’ net worth, and the index of con- quarter period, partly restrained by the declines in sumer sentiment in the University of Michigan Sur- prices of non-energy imported goods. The PCE price veys of Consumers remained near its highest level index in February and the consumer price index since prior to the most recent recession. (CPI) in March rose at a faster pace than in previous months, as energy prices reversed a small part of Residential investment increased at a slow pace in the their earlier declines. Survey-based measures of first quarter, and other indicators of housing-sector expected long-run inflation were stable, with the activity remained weak. Starts and building permits measure from the Desk’s Survey of Primary Dealers for single-family homes decreased during the first unchanged and the Michigan survey measure down a quarter despite small gains in March; starts of multi- little but still in the range seen over recent years. family units also declined during the first quarter. Market-based measures of inflation compensation at Sales of new homes were little changed, on average, longer horizons increased somewhat but were still over February and March, while existing home sales low. Over the 12 months ending in March, nominal edged up on net. average hourly earnings for all employees increased 2 percent, somewhat faster than the increase in core Real private expenditures on business equipment and consumer prices over the same period. intellectual property products rose modestly in the first quarter, and forward-looking indicators— Economic growth in both advanced foreign and including data on orders and shipments of nonde- emerging market economies appeared to slow, on balfense capital goods and the national and regional sur- ance, in the first quarter of 2015. Global trade and veys of business conditions—were generally consis- industrial production weakened. Among advanced tent with only small further gains in the near term. economies, output growth declined in the United Real spending for nonresidential structures fell con- Kingdom and economic indicators for Canada and siderably in the first quarter, as outlays for drilling Japan also pointed to slower growth in the first quarand mining structures dropped sharply and outlays ter. In contrast, real GDP growth seemed to have for other structures declined. increased in the euro area. In emerging market economies, real GDP growth slowed sharply in China Real government purchases moved down in the first and indicators of activity weakened in Mexico and quarter. Federal spending was flat. But construction Brazil, but real GDP growth picked up in some expenditures by state and local governments con- emerging Asian economies. Inflation remained low in tracted, while these governments’ payrolls were most economies, partly as a result of earlier declines unchanged. in oil prices. The U.S. international trade deficit narrowed sharply Staff Review of the Financial Situation in February, as imports fell more than exports. Imports of all major categories of goods moved Financial conditions eased, on balance, over the lower as imports from several major trading part- intermeeting period. Federal Reserve communicaners—including Canada, China, Japan, and Korea— tions that were reportedly viewed as more accommoregistered declines. Disruptions related to the West dative than anticipated put downward pressure on Coast port labor disputes likely contributed to the interest rates. A number of weaker-than-expected decline in imports in February. The reduction in U.S. economic data releases, including the March

Minutes of Federal Open Market Committee Meetings | April 173 employment report, also pushed interest rates lower. was strong in the first quarter, and seasoned equity On net, measures of inflation compensation rose, offerings rose. Commercial and industrial loans on equity prices increased somewhat, and the foreign banks’ books again expanded briskly. In the leverexchange value of the dollar declined. aged loan market, issuance of new money loans to institutional investors slowed in the first quarter but The expected path of the federal funds rate moved stayed robust, supported by continued strong issudown following the March FOMC statement and the ance of collateralized loan obligations. Chair’s postmeeting press conference. Investors reportedly took note of changes in the Summary of Financing for commercial real estate (CRE) remained Economic Projections, including downward revisions broadly available. CRE loans on banks’ books to FOMC participants’ projections of the appropri- increased appreciably in the first quarter, consistent ate level of the federal funds rate at the end of 2015, with stronger loan demand reported in the April 2016, and 2017. During the remainder of the inter- Senior Loan Officer Opinion Survey on Bank Lendmeeting period, the expected policy rate path implied ing Practices (SLOOS). Issuance of commercial by financial market quotes shifted down further, in mortgage-backed securities continued to be robust. part because U.S. economic data were weaker, on net, than anticipated. Results from the Survey of Primary Measures of residential mortgage lending conditions Dealers and Survey of Market Participants for April were generally little changed over the intermeeting indicated that respondents saw the September 2015 period, and lending volumes remained light. In the meeting as the most likely time for the first increase April SLOOS, some large banks reported having in the target range for the federal funds rate; the eased lending standards for a number of categories of probabilities attached to scenarios in which policy residential mortgage loans in the first quarter. House firming did not begin until after the July 2015 meet- prices continued to rise moderately in February. ing were higher than the corresponding probabilities Nonetheless, estimates of the share of mortgages in a in the surveys conducted before the March meeting. negative equity position were little changed in recent quarters, and they remained elevated when judged Over the intermeeting period, 5- and 10-year nominal against levels prevailing prior to the crisis. Treasury yields decreased, but yields on Treasury Inflation-Protected Securities declined by a greater Financing conditions in consumer credit markets amount. Measures of inflation compensation over stayed generally accommodative. Auto and student the next 5 years rose significantly, consistent with loan balances expanded robustly through February. increases in oil prices and somewhat higher-than- Growth in credit card loans slowed a bit on a yearexpected February and March consumer price inflaover-year basis, likely reflecting weaker retail activity. tion data. Inflation compensation 5 to 10 years ahead also increased but remained at the lower end of its The U.S. dollar depreciated during the intermeeting range over the past few years. period, as U.S. macroeconomic data generally came in weaker than expected, and as market participants On balance, U.S. equity price indexes rose somewhat appeared to mark down somewhat their expectations and option-implied volatility for the S&P 500 index for the path of the federal funds rate. Nonetheless, over the next month declined. Energy firms’ stock the cumulative appreciation of the dollar since midprices retraced a small portion of their substantial 2014 remained substantial. Government bond yields drop since mid-2014. Spreads of yields on 10-year in most advanced foreign economies declined modspeculative-grade corporate bonds over those on estly, pushing some yields, particularly in Europe, comparable-maturity Treasury securities narrowed, further into negative territory. By contrast, Greek in part because of a further decrease in spreads on sovereign yields stayed elevated as the difficult negospeculative-grade bonds issued by energy firms. tiations between Greece and its official creditors con- About 40 percent of firms in the S&P 500 index had tinued. Spillovers from Greek markets into other reported earnings for the first quarter, with those peripheral financial markets remained limited. Equity reports generally viewed as better than anticipated. prices in most advanced foreign economies moved Nonetheless, first-quarter earnings per share were higher, buoyed in part by ongoing monetary policy expected to be lower than in the previous quarter. accommodation. Equity prices also rose in most emerging market economies, with the stock market in Financing conditions for nonfinancial firms China outperforming. remained accommodative. Corporate bond issuance

174 102nd Annual Report | 2015 The staff provided its latest report on potential risks move a little below the staff’s estimate of its longerto financial stability. A number of factors appeared run natural rate for a time. to limit the vulnerability of the U.S. financial system to adverse shocks. Leverage in the banking system The staff’s forecast for inflation in the near term was remained relatively low, and increases in household revised up a little, reflecting the slightly higher-thandebt stayed modest and continued to be associated expected recent monthly data on core consumer primarily with borrowers with strong credit scores. prices and a path for crude oil prices that was a bit However, some indicators suggested that valuations higher than in the previous projection. The mediumremained stretched for some asset classes. An esti- term forecast for inflation was little changed, with mate of the expected real return on equities moved inflation in 2016 and 2017 projected to move closer down, reflecting an increase in stock prices and to, but remain below, the Committee’s longer-run downward revisions to forecasts of corporate earn- objective of 2 percent, as energy prices were expected ings, and corporate bond spreads declined somewhat. to rise, import prices to turn up, and resource utiliza- The staff also noted changes in the structure of some tion to tighten further. Thereafter, inflation was fixed-income markets that could increase volatility. anticipated to move back to 2 percent, with inflation In addition, the staff discussed the risks to financial expectations in the longer run assumed to be consisstability associated with the possibility of substantial tent with the Committee’s objective and slack in unanticipated changes in longer-term U.S. interest labor and product markets projected to have waned. rates, including the scope for a sharp increase in such rates to affect financial conditions in emerging mar- The staff viewed the uncertainty around its April ket economies. A number of other risks were noted, projections for real GDP growth, the unemployment including geopolitical tensions and the potential for rate, and inflation as similar to the average of the an increase in financial strains related to the negotia- past 20 years. The risks to the forecast for real GDP tions between Greece and its official creditors. and inflation were seen as tilted to the downside, reflecting the staff’s assessment that neither monetary nor fiscal policy appeared well positioned to Staff Economic Outlook help the economy withstand substantial adverse shocks. At the same time, the staff viewed the risks In the U.S. economic forecast prepared by the staff around its outlook for the unemployment rate as for the April FOMC meeting, real GDP growth in roughly balanced. the first half of the year was lower than in the projection prepared for the March meeting, as the data on Participants’ Views on Current Conditions economic activity received during the intermeeting and the Economic Outlook period were generally weaker than the staff had expected. However, much of this weakness was In their discussion of the economic situation and the attributed to transitory factors or statistical noise, outlook, meeting participants regarded the informawith little implication for the pace of expansion tion received over the intermeeting period as suggestbeyond the near term. Indeed, the medium-term pro- ing that economic growth had slowed during the winjection for real GDP growth was revised up modestly, ter months, in part reflecting transitory factors. The as monetary policy was assumed to be a little more pace of job gains had moderated, and the unemployaccommodative in this projection and the projected ment rate had remained steady, with a range of labor path for the foreign exchange value of the dollar was market indicators suggesting that underutilization of a little lower. The staff continued to project that real labor resources was little changed. Most participants GDP would expand at a faster pace than potential expected that, following the slowdown in the first output in 2015 and 2016, supported by increases in quarter, real economic activity would resume expanconsumer and business confidence and a small sion at a moderate pace, and that labor market condipickup in foreign economic growth, even as the nor- tions would improve further. Inflation continued to malization of monetary policy was assumed to begin. run below the Committee’s longer-run objective, In 2017, real GDP growth was projected to slow partly reflecting earlier declines in energy prices and toward, but to remain above, the rate of growth of decreasing prices of non-energy imports. Marketpotential output. The expansion in economic activity based measures of inflation compensation remained over the medium term was expected to lead to a low, while survey-based measures of longer-term gradual reduction in resource slack; the unemploy- inflation expectations had remained stable. Particiment rate was projected to decline slowly and to pants generally anticipated that inflation would rise

Minutes of Federal Open Market Committee Meetings | April 175 gradually toward the Committee’s 2 percent objective had worsened in some parts of the country, but as the labor market improved further and the transi- effects on production were limited and planting tory effects of declines in energy prices and non- intentions remained strong. Finally, if the decline in energy import prices dissipated. Participants judged oil prices and the rise in the foreign exchange value of that recent domestic economic developments had the dollar did not continue, then their influence on increased uncertainty regarding the economic out- the growth rate of investment and the change in net look. While participants continued to see potential exports would likely recede. downside risks resulting from foreign economic and financial developments, most still viewed the risks to Various reasons were also advanced for believing that the outlook for economic growth and the labor mar- some of the recent weakness in the pace of economic ket as nearly balanced. activity might persist. A number of participants suggested that the damping effects of the earlier appre- Participants generally agreed that data on private ciation of the dollar on net exports or of the earlier spending for the first quarter had been disappointing, decline in oil prices on firms’ investment spending with unexpectedly weak household expenditures and might be larger and longer-lasting than previously investment spending. Retail sales had continued to be anticipated. In addition, the expected boost to housetepid, although consumer sentiment stayed high and hold spending from lower energy prices had apparauto sales rebounded in March. The recovery in the ently so far not materialized, highlighting the possihousing sector remained slow. Business fixed invest- bility of less underlying momentum in consumer ment softened, in part reflecting sizable reductions in expenditures than participants had previously capital expenditures in the energy sector. Exports judged. Some participants expressed particular concontracted, likely reflecting the damping influence of cern about this prospect, as their expectations of a the dollar’s appreciation. In combination with a moderate expansion of economic activity in the decline in government spending, the weakness of pri- medium term, combined with further improvements vate spending had led to a substantial slowing in eco- in labor market conditions, rested largely on a scenomic growth in the first quarter. nario in which consumer spending grows robustly despite softness in other components of aggregate Participants discussed whether the weakness of demand. Participants discussed downside risks to spending in the first quarter primarily reflected tem- economic growth, and a few indicated that, in their porary factors or instead suggested a longer-lasting assessment, such risks had risen since the March loss of momentum for the economy. A number of meeting. However, most participants continued to see reasons were advanced for believing that the weak- the risks to the outlook for economic growth and the ness in spending observed during the first quarter labor market as nearly balanced. was partly or even largely transitory. Most notably, the severe winter weather in some regions had report- In their discussion of the foreign economic outlook, edly weighed on economic activity, and the labor dis- several participants noted that the foreign exchange pute at West Coast ports temporarily disrupted some value of the U.S. dollar had fallen back somewhat supply chains. Furthermore, a pattern observed in over the intermeeting period. Nonetheless, the value previous years of the current expansion was that the of the dollar had increased significantly since the first quarter of the year tended to have weaker sea- middle of last year, and it was seen as likely to consonally adjusted readings on economic growth than tinue to be a factor restraining U.S. net exports and did the subsequent quarters. This tendency sup- economic growth for a time. It was suggested that ported the expectation that economic growth would one element underpinning the strength of the U.S. return to a moderate pace over the rest of this year. dollar was the increasing prevalence of negative inter- Participants also pointed to other reasons for antici- est rates on sovereign debt in some key European pating that the weakness seen in the first quarter economies. Participants also pointed to a number of would not endure. A number of the fundamental fac- risks to the international economic outlook, includtors that drive consumer spending remained favor- ing the slowdown in growth in China and fiscal and able, among them low interest rates, high consumer financial problems in Greece. confidence, and rising household real income. In addition, business contacts in several parts of the Many participants judged that the pace of improvecountry continued to be optimistic and expected ment in labor market conditions had slowed. The sales, investment, and hiring to expand over the rest March increase in payrolls had been smaller than of the year. In the agricultural sector, drought effects expected, and the unemployment rate had remained

176 102nd Annual Report | 2015 steady. However, it was noted that the intermeeting inflation was accompanied by weak economic period had also witnessed some more-positive news activity. on labor market conditions, including a further increase in the rate of job openings. Various business In their discussion of financial market developments contacts in energy-related sectors reported layoffs in and financial stability issues, policymakers highresponse to low oil prices, but some information lighted possible risks related to the low level of term received from business contacts suggested a tighten- premiums. Some participants noted the possibility ing in labor markets, with shortages of skilled labor that, at the time when the Committee decides to reported in some areas and sectors; there had also begin policy firming, term premiums could rise been an increase in transitions of workers to better- sharply—in a manner similar to the increase paying jobs. Larger wage gains were also reported in observed in the spring and summer of 2013—which some regions, although in other parts of the country might drive longer-term interest rates higher. In this wage pressures reportedly remained muted. One par- connection, it was suggested that the tendency for ticipant suggested that a significant rise in aggregate bond prices to exhibit volatility may be greater than nominal wage growth should be a criterion in assess- it had been in the past, in view of the increased role ing the Committee’s degree of confidence regarding of high-frequency traders, decreased inventories of the return of inflation to the Committee’s 2 percent bonds held by broker-dealers, and elevated assets of longer-run objective. However, a couple of other par- bond funds. A couple of participants underscored ticipants argued that the behavior of nominal wage the need for a better understanding of the structure growth should not play a significant role in that of the bond market in the current environment, assessment, on the grounds that there was only a including the effect on bond market behavior of loose relationship between nominal wage growth and regulatory changes. Some participants noted that inflation in the United States. careful Committee communications regarding its policy intentions could help damp any resulting Many participants noted that measures of inflation increase in market volatility around the time of the averaged over several months or more continued to commencement of normalization. It was also noted run below the Committee’s longer-run objective. that financial stability and the Committee’s macro- However, this shortfall partly reflected the earlier economic goals were likely to be complementary declines in energy prices and decreasing prices of objectives, but different views were expressed about non-energy imports, and some participants pointed the potential implications for financial stability of out that, by some measures, the most recent monthly monetary policy tightening in current economic inflation readings had firmed a bit. Although partici- conditions. pants expected that inflation would continue, in the near term, to be below the Committee’s 2 percent In their discussion of communications regarding the longer-run objective, energy prices were no longer path of the federal funds rate over the medium term, declining and most participants continued to expect participants expressed a range of views about when that inflation would move up toward the Commit- economic conditions were likely to warrant an tee’s 2 percent objective over the medium term as the increase in the target range for the federal funds rate. effects of the transitory factors waned and conditions Participants continued to judge that it would be in the labor market and the overall economy appropriate to raise the target range for the federal improved further. Survey-based measures of inflation funds rate when they had seen further improvement expectations had remained broadly stable. Market- in the labor market and were reasonably confident based measures of inflation compensation had risen that inflation would move back to its 2 percent objecslightly but remained low. One participant suggested tive over the medium term. Although participants that, in the past, market-based measures of inflation expressed different views about the likely timing and compensation had been of little value in predicting pace of policy firming, they agreed that the Commitinflation one to two years ahead, and that measures tee’s decision to begin firming would appropriately of inflation expectations from surveys of professional depend on the incoming data and their implications forecasters were more useful for forecasting inflation. for the economic outlook. A few anticipated that the Another participant argued that low values for information that would accrue by the time of the market-based measures of inflation compensation June meeting would likely indicate sufficient improveshould concern policymakers, on the grounds that ment in the economic outlook to lead the Committee these low values reflected investors placing at least to judge that its conditions for beginning policy firmsome likelihood on adverse outcomes in which low ing had been met. Many participants, however,

Minutes of Federal Open Market Committee Meetings | April 177 thought it unlikely that the data available in June ticular, that a decision to raise the Committee’s would provide sufficient confirmation that the condi- longer-run inflation objective might work against the tions for raising the target range for the federal funds achievement of maximum employment and price starate had been satisfied, although they generally did bility because such a change could undermine the not rule out this possibility. Participants discussed Committee’s credibility and, in addition, lead to the merits of providing an explicit indication, in post- adverse changes in inflation dynamics that could meeting statements released prior to the commence- pose significant challenges for policymakers. ment of policy firming, that the target range for the federal funds rate would likely be raised in the near Committee Policy Action term. However, most participants felt that the timing of the first increase in the target range for the federal In their discussion of monetary policy for the period funds rate would appropriately be determined on a ahead, members judged that information received meeting-by-meeting basis and would depend on the since the FOMC met in March suggested that ecoevolution of economic conditions and the outlook. nomic growth slowed during the winter months, in In keeping with this data-dependent approach, some part reflecting transitory factors. The pace of job participants further suggested that the postmeeting gains moderated, and the unemployment rate statement’s description of the economic situation remained steady. A range of labor market indicators and outlook, and of progress toward the Commit- suggested that underutilization of labor resources tee’s goals, provided the appropriate means by which was little changed. Although growth in household the Committee could help the public assess the likely spending declined, households’ real incomes rose timing of the initial increase in the target range for strongly, partly reflecting earlier declines in energy the federal funds rate. prices, and consumer sentiment remained high. Business fixed investment softened, the recovery in the During their discussion of economic conditions and housing sector remained slow, and exports declined. monetary policy, participants also commented on dif- Inflation continued to run below the Committee’s ferent concepts of the equilibrium real federal funds longer-run objective, but this partly reflected earlier rate—that is, a reference value of the inflation- declines in energy prices and decreasing prices of adjusted federal funds rate consistent with the non-energy imports. Market-based measures of economy achieving, over a specified time horizon, inflation compensation remained low, while surveymaximum employment and price stability. Estimates based measures of longer-term inflation expectations of such equilibrium real interest rates were highly had remained stable. Despite the slower growth in uncertain, but some participants reported that their output and employment observed of late, members estimates were currently unusually low by historical continued to expect that, with appropriate policy standards, reflecting, for example, factors weighing accommodation, economic activity would expand at persistently on aggregate demand. In light of their a moderate pace, with labor market indicators conlow estimates, a few of these participants questioned tinuing to move toward levels the Committee judged whether the Committee was providing sufficient consistent with its dual mandate. Members generally accommodation at the present time and cautioned continued to see the risks to the outlook for ecoagainst initiating policy firming in the near future. nomic activity and the labor market as nearly bal- However, other participants cited factors, including anced. Inflation was anticipated to remain near its the current low level of term premiums, that might recent low level in the near term, but members cast doubt on the notion that the equilibrium real expected inflation to rise gradually toward 2 percent federal funds rate was particularly low. Some partici- over the medium term as further improvement in the pants observed that more discussion of this topic was labor market occurred and the transitory effects of likely to be helpful in assessing these issues. One par- declines in energy and import prices dissipated. In ticipant suggested that, in part because of the evi- light of the uncertainties associated with the outlook dence that the equilibrium real interest rate was low for inflation, the Committee agreed that it would by historical standards, the Committee should dis- continue to monitor inflation developments closely. cuss the possibility of increasing its longer-run inflation objective. This participant and a few others In their discussion of language for the postmeeting thought such a discussion could be useful but empha- statement, members agreed that the wording should sized that any decision to change the Committee’s reflect their assessment that economic conditions had longer-run goals and policy strategy should not be progressed to a stage at which the Committee’s decimade lightly. One of these participants noted, in par- sion to begin normalizing policy would appropriately

178 102nd Annual Report | 2015 be determined on a meeting-by-meeting basis. The The Committee also decided to maintain its policy of Committee agreed that the statement should indicate reinvesting principal payments from agency debt and that the data received over the intermeeting period agency mortgage-backed securities in agency suggested that economic growth had slowed and to mortgage-backed securities and of rolling over note that this partly reflected transitory factors. The maturing Treasury securities at auction. This policy, Committee also agreed to change the statement’s by keeping the Committee’s holdings of longer-term characterization of the labor market data to note securities at sizable levels, should help maintain that the pace of job growth slowed over the inter- accommodative financial conditions. The Committee meeting period and that a number of labor market agreed to reiterate its expectation that, even after indicators suggested that there was little change in employment and inflation are near mandateunderutilization of labor resources, and to update the consistent levels, economic conditions may, for some statement’s description of investment and export time, warrant keeping the target federal funds rate behavior in light of the recent weaker readings. In below levels the Committee views as normal in the addition, members agreed to modify the discussion longer run. of inflation developments to indicate that inflation, although no longer declining, was still below the At the conclusion of the discussion, the Committee Committee’s longer-term objective and was likely to voted to authorize and direct the Federal Reserve remain so in the near term, partly because of transi- Bank of New York, until it was instructed otherwise, tory factors such as earlier declines in energy prices to execute transactions in the SOMA in accordance and decreasing prices of non-energy imports. The with the following domestic policy directive: Committee altered its characterization of the economic outlook to indicate that, while economic “Consistent with its statutory mandate, the Fedgrowth slowed in the first quarter, the Committee eral Open Market Committee seeks monetary continued to expect that, with appropriate policy and financial conditions that will foster maxiaccommodation, economic activity would expand at mum employment and price stability. In particua moderate pace, and that it anticipated that labor lar, the Committee seeks conditions in reserve market indicators would resume their movement markets consistent with federal funds trading in toward levels that the Committee judged consistent a range from 0 to ¼ percent. The Committee with its dual mandate. With respect to the outlook directs the Desk to undertake open market for inflation, members expected inflation to rise operations as necessary to maintain such condigradually toward 2 percent over the medium term as tions. The Committee directs the Desk to mainthe labor market improves further and the transitory tain its policy of rolling over maturing Treasury effects of declines in energy and import prices securities into new issues and its policy of reindissipate. vesting principal payments on all agency debt and agency mortgage-backed securities in The Committee agreed to maintain the target range agency mortgage-backed securities. The Comfor the federal funds rate at 0 to ¼ percent and to mittee also directs the Desk to engage in dollar reaffirm in the statement that the Committee’s deci- roll and coupon swap transactions as necessary sion about how long to maintain the current target to facilitate settlement of the Federal Reserve’s range for the federal funds rate would depend on its agency mortgage-backed securities transactions. assessment of actual and expected progress toward The System Open Market Account manager and its objectives of maximum employment and 2 percent the secretary will keep the Committee informed inflation. Members continued to judge that this of ongoing developments regarding the System’s assessment of progress would take into account a balance sheet that could affect the attainment wide range of information, including measures of over time of the Committee’s objectives of labor market conditions, indicators of inflation pres- maximum employment and price stability.” sures and inflation expectations, and readings on financial and international developments. Members The vote encompassed approval of the statement agreed to retain the indication that the Committee below to be released at 2:00 p.m.: anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen “Information received since the Federal Open further improvement in the labor market and is rea- Market Committee met in March suggests that sonably confident that inflation will move back to its economic growth slowed during the winter 2 percent objective over the medium term. months, in part reflecting transitory factors. The

Minutes of Federal Open Market Committee Meetings | April 179 pace of job gains moderated, and the unemploy- and international developments. The Committee ment rate remained steady. A range of labor anticipates that it will be appropriate to raise the market indicators suggests that underutilization target range for the federal funds rate when it of labor resources was little changed. Growth in has seen further improvement in the labor marhousehold spending declined; households’ real ket and is reasonably confident that inflation incomes rose strongly, partly reflecting earlier will move back to its 2 percent objective over the declines in energy prices, and consumer senti- medium term. ment remains high. Business fixed investment softened, the recovery in the housing sector The Committee is maintaining its existing policy remained slow, and exports declined. Inflation of reinvesting principal payments from its holdcontinued to run below the Committee’s longer- ings of agency debt and agency mortgagerun objective, partly reflecting earlier declines in backed securities in agency mortgage-backed energy prices and decreasing prices of non- securities and of rolling over maturing Treasury energy imports. Market-based measures of securities at auction. This policy, by keeping the inflation compensation remain low; survey- Committee’s holdings of longer-term securities based measures of longer-term inflation expec- at sizable levels, should help maintain accommotations have remained stable. dative financial conditions. Consistent with its statutory mandate, the Com- When the Committee decides to begin to remove mittee seeks to foster maximum employment policy accommodation, it will take a balanced and price stability. Although growth in output approach consistent with its longer-run goals of and employment slowed during the first quarter, maximum employment and inflation of 2 perthe Committee continues to expect that, with cent. The Committee currently anticipates that, appropriate policy accommodation, economic even after employment and inflation are near activity will expand at a moderate pace, with mandate-consistent levels, economic conditions labor market indicators continuing to move may, for some time, warrant keeping the target toward levels the Committee judges consistent federal funds rate below levels the Committee with its dual mandate. The Committee continues views as normal in the longer run.” to see the risks to the outlook for economic activity and the labor market as nearly balanced. Voting for this action: Janet L. Yellen, William C. Inflation is anticipated to remain near its recent Dudley, Lael Brainard, Charles L. Evans, Stanley low level in the near term, but the Committee Fischer, Jeffrey M. Lacker, Dennis P. Lockhart, expects inflation to rise gradually toward 2 per- Jerome H. Powell, Daniel K. Tarullo, and John C. cent over the medium term as the labor market Williams. improves further and the transitory effects of declines in energy and import prices dissipate. Voting against this action: None. The Committee continues to monitor inflation developments closely. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, June 16–17, To support continued progress toward maxi- 2015. The meeting adjourned at 11:00 a.m. on mum employment and price stability, the Com- April 29, 2015. mittee today reaffirmed its view that the current 0 to ¼ percent target range for the federal funds rate remains appropriate. In determining how Notation Vote long to maintain this target range, the Committee will assess progress—both realized and By notation vote completed on April 7, 2015, the expected—toward its objectives of maximum Committee unanimously approved the minutes of the employment and 2 percent inflation. This assess- Committee meeting held on March 17–18, 2015. ment will take into account a wide range of information, including measures of labor market Thomas Laubach conditions, indicators of inflation pressures and Secretary inflation expectations, and readings on financial

180 102nd Annual Report | 2015 Meeting Held on June 16–17, 2015 Steven B. Kamin Economist A meeting of the Federal Open Market Committee Thomas Laubach was held in the offices of the Board of Governors of Economist the Federal Reserve System in Washington, D.C., on Tuesday, June 16, 2015, at 1:00 p.m. and continued David W. Wilcox on Wednesday, June 17, 2015, at 9:00 a.m. Economist David Altig, Eric M. Engen,1 Michael P. Leahy, Present Jonathan P. McCarthy, William R. Nelson, Janet L. Yellen Glenn D. Rudebusch, and William Wascher Chair Associate Economists William C. Dudley Simon Potter Vice Chairman Manager, System Open Market Account Lael Brainard Lorie K. Logan Deputy Manager, System Open Market Account Charles L. Evans Robert deV. Frierson2 Stanley Fischer Secretary of the Board, Office of the Secretary, Jeffrey M. Lacker Board of Governors Dennis P. Lockhart Michael S. Gibson Director, Division of Banking Supervision and Jerome H. Powell Regulation, Board of Governors Daniel K. Tarullo James A. Clouse and Stephen A. Meyer Deputy Directors, Division of Monetary Affairs, John C. Williams Board of Governors James Bullard, Esther L. George, Daniel M. Covitz Loretta J. Mester, and Eric Rosengren Deputy Director, Division of Research and Statistics, Alternate Members of the Federal Open Market Board of Governors Committee Andreas Lehnert Narayana Kocherlakota Deputy Director, Office of Financial Stability Policy President of the Federal Reserve Bank of and Research, Board of Governors Minneapolis Helen E. Holcomb and Blake Prichard William B. English First Vice Presidents, Federal Reserve Banks of Senior Special Adviser to the Board, Office of Board Dallas and Philadelphia, respectively Members, Board of Governors Brian F. Madigan David Bowman, Andrew Figura, Secretary David Reifschneider, and Stacey Tevlin Special Advisers to the Board, Office of Board Matthew M. Luecke Members, Board of Governors Deputy Secretary Trevor A. Reeve David W. Skidmore Special Adviser to the Chair, Office of Board Assistant Secretary Members, Board of Governors Michelle A. Smith Linda Robertson Assistant Secretary Assistant to the Board, Office of Board Members, Board of Governors Scott G. Alvarez General Counsel 1 Attended Wednesday’s session only. Thomas C. Baxter 2 Attended the joint session of the Federal Open Market Com- Deputy General Counsel mittee and the Board of Governors.

Minutes of Federal Open Market Committee Meetings | June 181 Christopher J. Erceg and Beth Anne Wilson Mark A. Gould Senior Associate Directors, Division of International First Vice President, Federal Reserve Bank of Finance, Board of Governors San Francisco David E. Lebow and Michael G. Palumbo Michael Strine Senior Associate Directors, Division of Research and Executive Vice President, Federal Reserve Bank of Statistics, Board of Governors New York Ellen E. Meade and Joyce K. Zickler Kartik B. Athreya, Evan F. Koenig, Senior Advisers, Division of Monetary Affairs, Susan McLaughlin,3 Samuel Schulhofer-Wohl, Board of Governors Ellis W. Tallman, Geoffrey Tootell, and Christopher J. Waller Gretchen C. Weinbach Senior Vice Presidents, Federal Reserve Banks of Associate Director, Division of Monetary Affairs, Richmond, Dallas, New York, Minneapolis, Board of Governors Cleveland, Boston, and St. Louis, respectively Jane E. Ihrig Roc Armenter, Deborah L. Leonard, Deputy Associate Director, Division of Monetary Anna Paulson, Douglas Tillett, Affairs, Board of Governors and Jonathan L. Willis Glenn Follette and Paul A. Smith Vice Presidents, Federal Reserve Banks of Assistant Directors, Division of Research and Philadelphia, New York, Chicago, Chicago, and Statistics, Board of Governors Kansas City, respectively Robert J. Tetlow Developments in Financial Markets and Adviser, Division of Monetary Affairs, the Federal Reserve’s Balance Sheet Board of Governors Penelope A. Beattie2 In a joint session of the Federal Open Market Com- Assistant to the Secretary, Office of the Secretary, mittee (FOMC) and the Board of Governors of the Board of Governors Federal Reserve System, the manager of the System Open Market Account (SOMA) reported on devel- Katie Ross2 opments in domestic and foreign financial markets. Manager, Office of the Secretary, The manager also discussed System open market Board of Governors operations conducted by the Open Market Desk during the period since the Committee met on April 28– David H. Small 29. The Desk’s overnight reverse repurchase agree- Project Manager, Division of Monetary Affairs, ment (RRP) operations continued to provide a soft Board of Governors floor for money market interest rates. The manager Stephen Lin updated the Committee on plans for term RRP Senior Economist, Division of International Finance, operations at the end of the second quarter and Board of Governors noted that testing of the Federal Reserve’s Term Deposit Facility continued. The manager also Deborah J. Lindner reviewed the reinvestment policy for maturing Treas- Senior Economist, Division of Research and ury securities. Specifically, at Treasury auctions, the Statistics, Board of Governors Desk rolls over the maturing securities held in the Benjamin K. Johannsen, Marcel A. Priebsch, SOMA into newly issued securities in proportion to and Francisco Vazquez-Grande3 the issue amounts of the new securities, and the Fed- Economists, Division of Monetary Affairs, eral Reserve receives the interest rate determined Board of Governors competitively in the public auction of the newly issued securities. Randall A. Williams Information Management Analyst, Division of The manager updated the Committee on tentative Monetary Affairs, Board of Governors plans to improve the calculation of the effective federal funds rate published by the Federal Reserve Bank of New York. The effective federal funds rate, 3 Attended Tuesday’s session only. currently defined as the volume-weighted mean of

182 102nd Annual Report | 2015 interest rates on federal funds transactions, would be Staff Review of the Economic Situation redefined as the volume-weighted median. Staff analysis suggested that the volume-weighted median The information reviewed for the June 16–17 meeting would usually differ little from the volume-weighted suggested that real gross domestic product (GDP) mean, but that the median would be a more robust was increasing moderately in the second quarter after statistic when some trades occur at interest rates that edging down in the first quarter. Labor market conare unrepresentative of general market conditions or ditions improved somewhat further in recent months. when there are data problems such as reporting Consumer price inflation continued to run below the errors. The change in approach would be imple- FOMC’s longer-run objective of 2 percent and was mented next year in conjunction with the transition restrained significantly by earlier declines in energy to the Report of Selected Money Market Rates (FR prices and decreases in prices of non-energy imports. 2420) as the data source for the calculation of the Survey measures of longer-run inflation expectations effective federal funds rate. A volume-weighted remained stable, while market-based measures of median would also be used to construct a representa- inflation compensation were still low. tive measure of conditions in the broader set of markets covered by the new overnight bank funding Total nonfarm payroll employment expanded at a rate.4 The manager noted that additional background faster pace in April and May than in the first quarter. information on these changes would be published by The unemployment rate was 5.5 percent in May, the Desk shortly following the release of the minutes about the same as its first-quarter average. The labor from this meeting. Participants expressed no objec- force participation rate and the employment-totions to the proposal. population ratio rose a bit over April and May, and the share of workers employed part time for eco- The staff also provided an update to the Committee nomic reasons edged down on net. The rate of on a review of the current system of primary dealers private-sector job openings moved up a little, on baland the Desk’s overall framework for establishing, ance, in March and April, while the rates of hiring maintaining, and publishing information on the Fed- and quits were essentially unchanged. eral Reserve’s counterparty relationships for operations in both domestic and foreign financial markets. Industrial production decreased during April and While the current sets of counterparties were per- May after declining in the first quarter. The output forming well and meeting the Desk’s needs, the staff of both the manufacturing and mining sectors fell noted that it would report back to the Committee in over the past two months, likely reflecting the conthe future should potential enhancements to the tinuing effects of earlier increases in the foreign counterparty framework be identified. The Desk exchange value of the dollar and lower crude oil anticipated that it would conduct regular reviews of prices. Automakers’ assembly schedules suggested the counterparty framework approximately every that light motor vehicle production would increase at three years in the future. a solid pace in the near term, but broader indicators of manufacturing production, such as the readings By unanimous vote, the Committee ratified the Open on new orders from national and regional manufac- Market Desk’s domestic transactions over the inter- turing surveys, generally pointed to modest gains in meeting period. There were no intervention opera- factory output in the coming months. tions in foreign currencies for the System’s account over the intermeeting period. Growth in real personal consumption expenditures (PCE) appeared to pick up early in the second quar- The Board meeting concluded at the end of the dis- ter from its modest pace in the previous quarter. The cussion of developments in financial markets and the components of the nominal retail sales data used by Federal Reserve’s balance sheet. the Bureau of Economic Analysis to construct its estimate of PCE increased in May, and the data for sales in the previous two months were revised up. Sales of light motor vehicles were much higher in 4 On February 2, 2015, in addition to announcing preliminary May than in April. Among the factors that influence plans to improve the calculation of the effective federal funds rate, the Federal Reserve Bank of New York indicated that it household spending, real disposable income rose in planned to begin to publish an additional interest rate, the over- April and gains in households’ net worth were supnight bank funding rate, which will be based on both federal ported by further advances in home values. Morefunds transactions and the Eurodollar transactions of U.S.managed banking offices. over, consumer sentiment in the University of Michi-

Minutes of Federal Open Market Committee Meetings | June 183 gan Surveys of Consumers in early June remained in April, held down primarily by earlier large declines near its highest level since prior to the most recent in energy prices. Core PCE inflation, which excludes recession. food and energy prices, was 1¼ percent over the same 12-month period, restrained in part by declines in the Activity in the housing sector improved somewhat in prices of non-energy imports. Measures of expected recent months but continued to be slow. Starts and longer-run inflation from a number of surveys, building permits of both new single-family homes including the Michigan survey, the Survey of Profesand multifamily units increased, on balance, in April sional Forecasters, and the Desk’s Survey of Primary and May. Sales of new homes rose in April; existing Dealers, remained stable. However, market-based home sales moved down, although pending home measures of inflation compensation were still low, sales increased. although somewhat higher than early in the year. Measures of labor compensation rose at moderate Growth in real private expenditures for business rates, outpacing the rise in consumer prices over the equipment and intellectual property products past year. The employment cost index increased appeared to remain relatively slow in the second 2¾ percent over the four quarters ending in the first quarter. Nominal shipments of nondefense capital quarter, while compensation per hour in the nonfarm goods excluding aircraft rose in April. Forward- business sector rose 1¾ percent over the same period. looking indicators, such as new orders for these capi- Average hourly earnings for all employees increased tal goods along with national and regional surveys of 2¼ percent over the 12 months ending in May. There business conditions, pointed to only modest increases were some tentative signs that these labor compensain business equipment spending in the near term. tion measures were accelerating a little in the first Firms’ nominal spending for nonresidential struc- quarter. tures excluding drilling and mining rose in April. In contrast, the number of oil rigs in operation contin- Economic growth in many foreign economies slowed ued to fall through early June, suggesting a further in the first quarter. Real GDP contracted in Canada, decline in real business spending for drilling and min- where lower oil prices depressed investment, and in ing structures in the second quarter. Brazil, where business and consumer confidence weakened and high inflation prompted a significant Nominal federal spending data for April and May tightening of monetary policy. In addition, real GDP pointed toward a further decline in real federal gov- growth slowed in China and Mexico. By contrast, the ernment purchases in the second quarter. Real state euro-area economy continued its recovery, and real and local government purchases appeared to be ris- GDP growth in Japan increased sharply. Inflation ing in the second quarter, with increases in both pay- rates turned positive in recent months in many forrolls and nominal construction spending in recent eign economies following the trough in oil prices earmonths. lier this year. The U.S. international trade deficit widened substan- Staff Review of the Financial Situation tially in March but narrowed in April, leaving the deficit modestly wider than in February. After Over the intermeeting period, longer-term Treasury decreasing for four straight months, exports yields increased notably amid heightened volatility, increased in both March and April, as shipments to apparently boosted by a rise in yields on core euro- Asia picked up following the resolution in February area sovereign bonds and, to a lesser extent, strongerof labor disputes at West Coast ports. Imports than-anticipated news about the U.S. labor market rebounded in March from the depressed levels in late in the period. The sharp rise in yields on core January and February but fell back in April, close to euro-area sovereign bonds seemed to reflect a notable the first-quarter average. While real net exports made rise in term premiums from significantly compressed a large negative contribution to the change in real levels as well as an increase in the path of expected GDP in the first quarter of 2015, April data sug- future short-term rates following some positive data gested that net exports might be a considerably for the European economy. smaller drag on GDP growth in the second quarter of the year. The nominal Treasury yield curve steepened appreciably, on net, with 2-, 5-, and 10-year yields ending Total U.S. consumer prices, as measured by the PCE the intermeeting period about 15 to 35 basis points price index, only edged up over the 12 months ending higher. Most of the increase in nominal yields was

184 102nd Annual Report | 2015 attributable to a rise in real yields, as measures of Financing conditions for large nonfinancial busiinflation compensation were relatively stable. nesses continued to be accommodative. Gross corporate bond issuance remained quite strong, and insti- Various measures typically used to assess liquidity in tutional leveraged loan issuance picked up signifi- Treasury and mortgage-backed securities (MBS) cantly. Commercial and industrial loans on banks’ markets were little changed over the intermeeting balance sheets continued to increase at a solid pace. period; they have generally pointed to relatively stable Meanwhile, financing conditions for small businesses market functioning over the past several years. How- continued to improve, though the growth of small ever, the majority of respondents to the June Senior business loans on banks’ books remained subdued, Credit Officer Opinion Survey on Dealer Financing partly reflecting still-tepid demand for credit from Terms indicated that, over the past five years, liquid- owners of small businesses. ity and functioning in these markets, especially in Treasury markets, have deteriorated. Respondents Financing for commercial real estate remained attributed the deterioration primarily to securities broadly available, although the expansion of comdealers’ decreased willingness to provide balance mercial real estate loans on banks’ books slowed in sheet resources for market making as a result of both April and May, reportedly because of sales of loans regulatory changes and changes in internal risk- secured by nonfarm nonresidential properties into management practices. pools of commercial mortgage-backed securities. Measures of residential mortgage credit availability On balance, the expected path of the federal funds continued to improve gradually over the intermeeting rate implied by futures contracts steepened notice- period. Nevertheless, credit remained tight for borably beyond 2015, with a portion of this shift coming rowers with lower credit scores. Interest rates on after the May employment report. Some evidence 30-year fixed-rate mortgages increased about 30 basis suggested that a significant part of the increase may points, broadly in line with MBS yields and other have reflected higher term premiums. By contrast, longer-term rates. Financing conditions in consumer Federal Reserve communications following the April credit markets stayed accommodative in March and FOMC meeting were characterized by investors as April. Auto and student loans expanded at a robust generally in line with expectations and elicited limited pace through April, while revolving credit picked up market reaction. in March and April after a slow start at the beginning of the year. Results from the June Survey of Primary Dealers and the June Survey of Market Participants indicated Sovereign bond yields in foreign economies rose little change since the April survey in modal forecasts notably during the intermeeting period, especially in of the federal funds rate through 2018. Respondents the advanced economies, led by a substantial increase again saw the September 2015 FOMC meeting as the in German bund yields. A number of factors may most likely time for the first increase in the target have contributed to the increase in yields, including a range for the federal funds rate. The expected pace of reappraisal of term premiums, which appeared to tightening after the initial increase in the target range have fallen to very low levels in April. The rise in for the federal funds rate, whenever that might occur, yields was also supported by the release of some was similar to that reported in the April survey. stronger-than-expected inflation data in the euro area and by European Central Bank communications that Over the intermeeting period, most broad U.S. equity volatility in yields was to be expected. Against this price indexes moved down a bit, on net, amid mixed backdrop and with a step-up in concerns about macroeconomic news and little information on earn- developments in Greece, equity prices declined in ings. Option-implied volatility on the S&P 500 index most countries. Stock prices in Japan and especially over the next month increased, on balance, but in China were the main exceptions. The foreign remained near the lower end of its historical range. exchange value of the dollar increased a bit, on bal- Spreads on 10-year triple-B-rated corporate bonds ance, during the intermeeting period against the curover comparable-maturity Treasury securities wid- rencies of major U.S. trading partners. While the dolened somewhat, on net, while spreads on speculative- lar declined against the euro and other European curgrade corporate bonds narrowed slightly. rencies, it rose against the Canadian dollar, the yen,

Minutes of Federal Open Market Committee Meetings | June 185 and many emerging market currencies, boosted in Participants’ Views on Current Conditions part by the strong U.S. employment report for May. and the Economic Outlook Staff Economic Outlook In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve In the economic forecast prepared by the staff for the Bank presidents submitted their projections of the June FOMC meeting, real GDP growth in the second most likely outcomes for real GDP growth, the half of this year was expected to step up from its unemployment rate, inflation, and the federal funds pace in the first half. However, economic growth in rate for each year from 2015 through 2017 and over the second half was projected to be a little lower than the longer run, conditional on each participant’s in the projection prepared for the April meeting, judgment of appropriate monetary policy.5 The largely reflecting a small downward revision to the longer-run projections represent each participant’s forecast for household spending. The staff’s medium- assessment of the rate to which each variable would term projection for real GDP growth was essentially be expected to converge, over time, under appropriate unrevised from the previous forecast. The staff con- monetary policy and in the absence of further shocks tinued to project that real GDP would expand at a to the economy. These projections and policy assessfaster pace than potential output in 2016 and 2017, ments are described in the Summary of Economic supported primarily by increases in consumer spend- Projections, which is an addendum to these minutes. ing, even as the normalization of the stance of monetary policy was assumed to proceed. The expansion In their discussion of the economic situation and the in economic output over the medium term was outlook, meeting participants viewed the information anticipated to trim resource slack; the unemployment received over the intermeeting period as indicating rate was expected to decline gradually to the staff’s that economic activity was expanding moderately estimate of its longer-run natural rate. after little change in the first quarter of the year. Early in 2015, a number of factors—including unfa- The staff’s forecast for inflation in the near term was vorable weather in parts of the country and labor dislittle changed, and it was unrevised over the medium putes at West Coast ports—temporarily held down term. Energy prices and non-oil import prices were real GDP; several analyses also suggested that diffiexpected to begin steadily rising next year, but the culties with seasonal adjustment likely contributed to staff projected that inflation would continue to be an underestimate of first-quarter real GDP. The below the Committee’s longer-run objective of 2 per- unemployment rate was unchanged over the period cent over 2016 and 2017. However, inflation was between the April and June meetings, but payroll anticipated to reach 2 percent thereafter, with infla- employment posted solid gains, and, on balance, a tion expectations in the longer run assumed to be range of labor market indicators suggested that consistent with the Committee’s objective and slack underutilization of labor resources diminished somein labor and product markets projected to have what. Although participants marked down their waned. expectations for the rate of increase in real GDP over the first half of the year, their projections for economic growth in the second half of 2015 and over The staff viewed the extent of uncertainty around its 2016 and 2017 were broadly similar to those prepared June projections for real GDP growth, the unemployfor the March meeting. Under their respective ment rate, and inflation as similar to the average over assumptions about appropriate monetary policy, parthe past 20 years. The risks to the forecasts for real ticipants generally expected real GDP to expand at a GDP growth and inflation were seen as tilted a little to the downside, reflecting the staff’s assessment that 5 The incoming president of the Federal Reserve Bank of Philaneither monetary policy nor fiscal policy was well delphia assumed office after the June FOMC meeting, on positioned to help the economy withstand substantial July 1, and a new president of the Federal Reserve Bank of Daladverse shocks. At the same time, the staff saw the las has yet to be selected. Blake Prichard and Helen E. Holcomb, first vice presidents of the Federal Reserve Banks of risks around its outlook for the unemployment rate Philadelphia and Dallas, respectively, submitted economic as roughly balanced. projections.

186 102nd Annual Report | 2015 rate sufficient to continue to move labor market con- related to whether the apparent weakness in producditions toward levels judged consistent with the Com- tivity growth recently would be reversed or continue. mittee’s dual mandate. Inflation readings available On the one hand, a rebound in productivity growth since the April meeting continued to run below the in coming quarters might restrain hiring and slow the Committee’s longer-run objective, partly reflecting improvement in labor market conditions. On the earlier declines in energy prices and continued other hand, if productivity growth remained weak, decreases in prices of non-energy imports. However, the labor market might tighten more quickly and energy prices appeared to have stabilized. Partici- inflation might rise more rapidly than anticipated. pants continued to project a gradual rise in inflation toward 2 percent over the medium term as the labor At the time of the April meeting, the increase in conmarket improved further and the transitory effects of sumer spending was estimated to have been unexearlier declines in energy and import prices pectedly weak in the first quarter following strong dissipated. gains in the second half of 2014. The additional information that had become available since then, In discussing how to interpret the reported weakness including more complete estimates of outlays for serin real GDP during the first quarter, participants vices and revised data on retail sales, indicated that considered alternative estimates of real economic consumer spending was somewhat better than previactivity based on various data-filtering models main- ously reported, rising at a moderate pace in the first tained by Board and Reserve Bank staff. These mod- quarter. In addition, the strong rebound in motor els yielded a range of estimates, but, overall, they sug- vehicle sales and the solid gain in retail sales in May gested that real activity in the first quarter was likely suggested that the pace of consumer spending was stronger than the then-current official estimate of picking up in the current quarter. Moreover, a numreal GDP. Some participants indicated that the ber of fundamental factors determining consumer higher alternative estimates seemed more consistent spending remained positive, including the boost to with the increases in real gross domestic income and real income from the earlier decline in energy prices, private domestic final purchases in the first quarter low interest rates, sustained moderate gains in wage as well as the strength in employment and hours and salary income, stronger household balance worked. However, the alternative estimates left open sheets, and the high levels of households’ confidence the question of when and to what extent the seasonal about the economic outlook and about their income adjustment and other measurement issues associated prospects. Many participants anticipated that these with official estimates of GDP in the first quarter factors would support a solid pace of consumer might unwind. spending going forward. However, others remained concerned that consumers had not increased their While participants generally saw the risks to their spending as much as expected in response to the drop projections of economic activity and the labor mar- in energy prices, and that the rise in the saving rate ket as balanced, they gave a number of reasons to be since last fall may signal more cautious behavior cautious in assessing the outlook. Some pointed to among households that might last for some time. the risk that the weaker-than-anticipated rise in economic activity over the first half of the year could A number of participants noted that housing starts reflect factors that might continue to restrain sales and permits rose considerably in recent months, and and production, and that economic activity might indicators of sales activity turned more positive. not have sufficient momentum to sustain progress Nonetheless, home construction was still below the toward the Committee’s objectives. In particular, trend that would appear consistent with population they were concerned that consumers could remain growth, sales remained at low levels, and credit availcautious or that the drag on sectors affected by lower ability was still relatively tight. energy prices and the higher dollar could persist. Others, however, viewed the strength in the labor Reports on manufacturing in a number of regions market in recent months as potentially signaling a offered some signs that the sector was no longer stronger-than-expected bounceback in economic weakening, with a couple of Districts’ diffusion activity. Several mentioned their uncertainty about indexes turning up. Still, cutbacks in spending on whether Greece and its official creditors would reach drilling and mining equipment, slow demand for an agreement and about the likely pace of economic other business equipment, and the drag on exports growth abroad, particularly in China and other from slow foreign demand and previous increases in emerging market economies. Other concerns were the dollar continued to weigh on industrial produc-

Minutes of Federal Open Market Committee Meetings | June 187 tion. Motor vehicle production was highlighted as a business contacts in a number of Districts, many bright spot. In those Districts in which activity had firms looking for new workers said they had been been adversely affected by the drop in energy prices, raising wages selectively to attract them; some had drilling activity was either contracting less rapidly or also begun to raise wages more generally. However, was stabilizing. Higher oil production could continue several participants pointed out that, even with the to hold down energy prices in the near term, but recent upturn, wage increases remain subdued. industry contacts anticipated some recovery in prices over the coming year, which should stem layoffs and Participants discussed how the incoming information cuts in capital spending in the energy sector. Agricul- regarding inflation influenced their expectations for tural production in several Districts appeared likely reaching the FOMC’s 2 percent inflation objective to benefit from wet weather, but weak farm income over the medium term. Total PCE inflation continued continued to weigh on the sector. Several participants to run below the Committee’s objective. However, reported that the services sector was a relative source participants noted that the apparent stabilization of of strength in their Districts. In general, business crude oil prices and the foreign exchange value of the contacts continued to express optimism about dollar would reduce the downward pressure on inflastronger sales and production in the second half of tion from falling prices of energy and imported the year. goods. Core PCE price inflation, as measured on a 12-month change basis, had slowed slightly from an In their discussion of labor market conditions, par- already low rate. However, several participants ticipants offered their views on recent developments pointed out that the 3-month change in that index and the progress that had occurred in reducing had firmed recently, signaling some improvement in underutilization of labor resources. They generally the inflation outlook. In addition, some cited alternaagreed that labor market conditions had improved tive measures of inflation, such as the trimmed mean somewhat over the intermeeting period, variously cit- and median consumer price indexes (CPIs) and the ing solid increases in payroll employment and job trimmed mean PCE, which continued to run at openings; low levels of unemployment insurance higher levels than overall PCE inflation. Survey claims; and, despite an unchanged unemployment measures of longer-term inflation expectations rate, some further reduction in broader measures of remained stable, and market-based measures of underutilization, particularly among those not inflation compensation, while still low, were higher actively searching for jobs, but available and inter- than earlier in the year. Nonetheless, a couple of parested in work. Several participants pointed to some ticipants continued to be concerned that the extended favorable trends that had developed over a longer period of low inflation might persist and feed period, such as the flattening out of the labor force through to inflation expectations, citing estimates participation rate and a shift in the flow of workers from various inflation forecasting models and the into more stable and higher-skilled jobs. A number of downtrend in the 10-year CPI projections in the Surparticipants noted that the outlook for continued job vey of Professional Forecasters. Participants contingains was evident in reports on hiring intentions from ued to anticipate that, with appropriate monetary business contacts in their Districts who indicated that policy, inflation would move up to or toward the more firms planned additions to their payrolls over Committee’s objective over the medium term. the coming year than a year earlier. While the cumu- Among the factors influencing the trajectories of lative improvements in labor market conditions over their inflation forecasts were their outlooks for the the past year had been substantial, most participants pace of real activity, labor market conditions and judged that further progress would be required to wage developments, and inflation expectations. eliminate underutilization of labor resources; some of them anticipated that the utilization gap would close In their discussion of financial market developments around the end of the year. Several other participants over the intermeeting period, several participants indicated that, in their view, labor market slack had commented on the rise in the 10-year Treasury yield, already been largely eliminated. which accompanied a steeper run-up in the 10-year German yield. The sharp rise in German yields The ongoing rise in labor demand appeared to have appeared to reflect a retracing of the earlier decline begun to result in a firming of wage increases. Recent in German rates to unsustainably low levels. It was readings on the employment cost index, hourly com- noted that the increase in U.S. yields was not espepensation, and average hourly earnings of employees cially large in a historical context and that volatility suggested some acceleration in wages. According to in U.S. fixed-income markets was still somewhat

188 102nd Annual Report | 2015 below pre-crisis levels. However, many participants remain data dependent in making adjustments to the expressed concern that a failure of Greece and its target range. official creditors to resolve their differences could result in disruptions in financial markets in the euro Participants also discussed plans for publishing area, with possible spillover effects on the United operational details regarding the implementation of States. And some participants reiterated the impor- monetary policy around the time of the first increase tance of effective Committee communications in in the target range. All participants supported a staff reducing the likelihood of an outsized financial mar- proposal for the Federal Reserve to issue an impleket reaction around the time that policy normaliza- mentation note that would communicate separately tion begins. from the Committee’s postmeeting policy statement the specific measures to be employed to implement During their discussion of economic conditions and the FOMC’s decision about the stance of policy. Folmonetary policy, participants commented on a num- lowing scheduled FOMC meetings, this implementaber of considerations associated with the timing and tion note would be released at the same time as the pace of policy normalization. Most participants Committee’s postmeeting statement; it would convey judged that the conditions for policy firming had not operational details regarding the settings of the yet been achieved; a number of them cautioned policy tools and the changes in administered rates against a premature decision. Many participants being employed to achieve the Committee’s desired emphasized that, in order to determine that the crite- stance of policy, and it would include the FOMC’s ria for beginning policy normalization had been met, domestic policy directive to the Desk. If adjustments they would need additional information indicating to policy tools or administered rates subsequently that economic growth was strengthening, that labor proved necessary to implement an unchanged policy market conditions were continuing to improve, and stance, the implementation note could be revised that inflation was moving back toward the Commit- without altering the Committee’s policy statement. tee’s objective. Other concerns that were mentioned Participants agreed that this strategy provided a were the potential erosion of the Committee’s cred- number of advantages, including focusing the Comibility if inflation were to persist below 2 percent and mittee’s postmeeting statement on information about the limited ability of monetary policy to offset down- economic conditions and the stance of monetary side shocks to inflation and economic activity when policy; communicating the details of policymakers’ the federal funds rate was at its effective lower bound. operational decisions, including the FOMC’s domes- Some participants viewed the economic conditions tic policy directive, in one place; reducing the risk for increasing the target range for the federal funds that Federal Reserve communications regarding any rate as having been met or were confident that they technical adjustments to the operation of its policy would be met shortly. They identified several possible tools after the commencement of policy firming risks associated with delaying the start of policy might be mistaken as conveying information about firming. One such risk was the possibility that the the stance of policy; and emphasizing that opera- Committee might need to tighten more rapidly than tional decisions regarding the Federal Reserve’s financial markets currently anticipate—an outcome policy tools will be made in concert by the Federal that could be associated with a significant rise in Reserve Board and the FOMC with the aim of mainlonger-term interest rates or heightened financial taining the federal funds rate in the range established market volatility. Another was that prolonging a high by the FOMC. Participants also discussed how the degree of monetary policy accommodation might language of the domestic policy directive could be result in an undesirable increase in inflation or might revised when the first increase in the target range for have adverse consequences for financial and macro- the federal funds rate becomes appropriate. It was economic stability. It was also pointed out that a noted that the Committee might, in addition to proprompt start to normalization would likely convey viding specific instructions to the Desk regarding the Committee’s confidence in prospects for the operations at that time, update other language in the economy. During the discussion, a number of par- directive. ticipants recommended that, around the time of the first increase in the target range, the Committee con- Committee Policy Action sider how it would update its communications regarding the likely path of the federal funds rate, In its discussion of monetary policy for the period with several indicating that the Committee should ahead, the Committee agreed that the weakness in

Minutes of Federal Open Market Committee Meetings | June 189 the first quarter was at least in part the result of Inflation had continued to run below the Committransitory factors, and members anticipated that eco- tee’s 2 percent objective. Most members agreed that nomic growth would resume in the second quarter. the recent stability in crude oil prices had increased Although they expressed some uncertainty about the their confidence that the downward pressure on extent of the likely near-term pickup, members inflation from earlier declines in energy prices was expected moderate economic growth over the abating, and some noted the recent stability of the medium term. Labor market conditions had foreign exchange value of the dollar, which could improved somewhat further, and members antici- eventually stem the decline in prices of imports. pated further progress in coming months. Ongoing Market-based measures of inflation compensation gains in employment and wages along with a high remained low, but they had risen some from their levlevel of consumer confidence were expected to pro- els earlier in the year, and survey measures of inflavide support to household spending. Signs of tion expectations continued to be stable. However, stronger housing activity were encouraging. However, core inflation was still well below 2 percent. The the outlook for business investment remained soft, Committee agreed to continue to monitor inflation and net exports were likely to continue to be developments closely. In considering the Committee’s restrained by the earlier appreciation of the dollar. criteria for beginning policy normalization, all mem- Inflation had been well below the Committee’s bers but one indicated that they would need to see longer-run objective, but, with oil prices and the for- more evidence that economic growth was sufficiently eign exchange value of the dollar stabilizing, mem- strong and labor market conditions had firmed bers expected that inflation would gradually rise enough to return inflation to the Committee’s longertoward 2 percent over the medium term. Members run objective over the medium term; one member thus saw economic conditions as continuing to was already reasonably confident of such an approach those consistent with warranting a start to outcome. the normalization of the stance of monetary policy. In these circumstances, members agreed to continue The Committee concluded that, although it had seen making decisions about the appropriate target range some progress, the conditions warranting an increase for the federal funds rate on a meeting-by-meeting in the target range for the federal funds rate had not basis, with their decisions depending on the implica- yet been met, and that additional information on the tions of economic and financial developments for the outlook, particularly for labor markets and inflation, prospects for labor markets and inflation. would be necessary before deciding to implement such an increase. One member, however, indicated a With respect to its objective of maximum employ- readiness to take that step at this meeting but also ment, the Committee judged that, on balance, a expressed a willingness to wait another meeting or range of labor market indicators suggested that two for additional data before raising the target underutilization of labor resources had diminished range. somewhat over the intermeeting period. Most members saw room for additional progress in reducing In considering how to communicate the rationale for labor market slack, while a couple of members indi- the Committee’s policy decision, members discussed cated that they viewed the unemployment rate as very the importance of adjusting the language in the postclose or essentially identical to its mandate-consistent meeting statement to acknowledge the evolution of level. Many expected that labor market underutiliza- progress toward the Committee’s objectives. The tion would be largely eliminated around year-end if Committee judged it appropriate to communicate economic activity strengthened as they expected. that it had seen some further improvement in labor However, some members were more uncertain about market conditions over the intermeeting period, statthe extent of progress in the labor market to date or ing that a range of labor market indicators suggested were concerned that if the pace of economic growth that underutilization of labor resources diminished remained slow, labor market conditions might somewhat. It also decided to indicate the likelihood improve only gradually. Most agreed that they would that energy prices might soon exert less downward need more information on developments in the labor influence on inflation, saying that energy prices market to establish a solid basis for assessing whether appeared to have stabilized, and to restate its expeclabor market conditions had improved sufficiently to tation that inflation would rise gradually toward initiate tightening. 2 percent over the medium term as the labor market

190 102nd Annual Report | 2015 improves further and the transitory effects of earlier tain its policy of rolling over maturing Treasury declines in energy and import prices dissipate. securities into new issues and its policy of reinvesting principal payments on all agency debt The Committee agreed to maintain the target range and agency mortgage-backed securities in for the federal funds rate at 0 to ¼ percent and to agency mortgage-backed securities. The Comreaffirm in the statement that the Committee’s deci- mittee also directs the Desk to engage in dollar sion about how long to maintain the current target roll and coupon swap transactions as necessary range for the federal funds rate would depend on its to facilitate settlement of the Federal Reserve’s assessment of actual and expected progress toward agency mortgage-backed securities transactions. its objectives of maximum employment and 2 percent The System Open Market Account manager and inflation. Members continued to judge that their the secretary will keep the Committee informed evaluation of progress on their objectives would take of ongoing developments regarding the System’s into account a wide range of information, including balance sheet that could affect the attainment measures of labor market conditions, indicators of over time of the Committee’s objectives of inflation pressures and inflation expectations, and maximum employment and price stability.” readings on financial and international developments. Members agreed to retain the indication that the The vote encompassed approval of the statement Committee anticipates that it will be appropriate to below to be released at 2:00 p.m.: raise the target range for the federal funds rate when it has seen further improvement in the labor market “Information received since the Federal Open and is reasonably confident that inflation will move Market Committee met in April suggests that back to its 2 percent objective over the medium term. economic activity has been expanding moderately after having changed little during the first The Committee also maintained its policy of rein- quarter. The pace of job gains picked up while vesting principal payments from agency debt and the unemployment rate remained steady. On balagency mortgage-backed securities in agency ance, a range of labor market indicators suggests mortgage-backed securities and of rolling over that underutilization of labor resources diminmaturing Treasury securities at auction. This policy, ished somewhat. Growth in household spending by keeping the Committee’s holdings of longer-term has been moderate and the housing sector has securities at sizable levels, should help maintain shown some improvement; however, business accommodative financial conditions. The Committee fixed investment and net exports stayed soft. agreed to reiterate its expectation that, even after Inflation continued to run below the Commitemployment and inflation are near mandate- tee’s longer-run objective, partly reflecting earconsistent levels, economic conditions may, for some lier declines in energy prices and decreasing time, warrant keeping the target federal funds rate prices of non-energy imports; energy prices below levels the Committee views as normal in the appear to have stabilized. Market-based measlonger run. ures of inflation compensation remain low; survey-based measures of longer-term inflation At the conclusion of the discussion, the Committee expectations have remained stable. voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, Consistent with its statutory mandate, the Comto execute transactions in the SOMA in accordance mittee seeks to foster maximum employment with the following domestic policy directive: and price stability. The Committee expects that, with appropriate policy accommodation, eco- “Consistent with its statutory mandate, the Fed- nomic activity will expand at a moderate pace, eral Open Market Committee seeks monetary with labor market indicators continuing to move and financial conditions that will foster maxi- toward levels the Committee judges consistent mum employment and price stability. In particu- with its dual mandate. The Committee continues lar, the Committee seeks conditions in reserve to see the risks to the outlook for economic markets consistent with federal funds trading in activity and the labor market as nearly balanced. a range from 0 to ¼ percent. The Committee Inflation is anticipated to remain near its recent directs the Desk to undertake open market low level in the near term, but the Committee operations as necessary to maintain such condi- expects inflation to rise gradually toward 2 pertions. The Committee directs the Desk to main- cent over the medium term as the labor market

Minutes of Federal Open Market Committee Meetings | June 191 improves further and the transitory effects of approach consistent with its longer-run goals of earlier declines in energy and import prices dissi- maximum employment and inflation of 2 perpate. The Committee continues to monitor infla- cent. The Committee currently anticipates that, tion developments closely. even after employment and inflation are near mandate-consistent levels, economic conditions To support continued progress toward maxi- may, for some time, warrant keeping the target mum employment and price stability, the Com- federal funds rate below levels the Committee mittee today reaffirmed its view that the current views as normal in the longer run.” 0 to ¼ percent target range for the federal funds rate remains appropriate. In determining how Voting for this action: Janet L. Yellen, William C. long to maintain this target range, the Commit- Dudley, Lael Brainard, Charles L. Evans, Stanley tee will assess progress—both realized and Fischer, Jeffrey M. Lacker, Dennis P. Lockhart, expected—toward its objectives of maximum Jerome H. Powell, Daniel K. Tarullo, and John C. employment and 2 percent inflation. This assess- Williams. ment will take into account a wide range of information, including measures of labor market Voting against this action: None. conditions, indicators of inflation pressures and inflation expectations, and readings on financial It was agreed that the next meeting of the Committee and international developments. The Committee would be held on Tuesday–Wednesday, July 28–29, anticipates that it will be appropriate to raise the 2015. The meeting adjourned at 10:40 a.m. on target range for the federal funds rate when it June 17, 2015. has seen further improvement in the labor market and is reasonably confident that inflation Notation Vote will move back to its 2 percent objective over the medium term. By notation vote completed on May 19, 2015, the Committee unanimously approved the minutes of the Committee meeting held on April 28–29, 2015. The Committee is maintaining its existing policy of reinvesting principal payments from its hold- By notation vote completed on June 3, 2015, the ings of agency debt and agency mortgage- Committee unanimously approved the selection of backed securities in agency mortgage-backed Brian F. Madigan to serve as secretary, effective securities and of rolling over maturing Treasury June 4, 2015, until the selection of a successor at the securities at auction. This policy, by keeping the first regularly scheduled meeting of the Committee in Committee’s holdings of longer-term securities 2016. at sizable levels, should help maintain accommodative financial conditions. Brian F. Madigan Secretary When the Committee decides to begin to remove policy accommodation, it will take a balanced

192 102nd Annual Report | 2015 Addendum: FOMC participants generally expected that, under appropriate monetary policy, growth of real gross Summary of Economic Projections domestic product (GDP) in 2015 would be somewhat below their individual estimates of the U.S. econo- In conjunction with the Federal Open Market Commy’s longer-run normal growth rate but would mittee (FOMC) meeting held on June 16–17, 2015, increase in 2016 before slowing to or toward its meeting participants submitted their projections of longer-run rate in 2017 (table 1 and figure 1). Particithe most likely outcomes for real output growth, the pants generally expected that the unemployment rate unemployment rate, inflation, and the federal funds would continue to decline in 2015 and 2016, and that rate for each year from 2015 to 2017 and over the the unemployment rate would be at or below their longer run.6 Each participant’s projection was based individual judgments of its longer-run normal level on information available at the time of the meeting by the end of 2017. Participants anticipated that together with his or her assessment of appropriate inflation, as measured by the four-quarter percent monetary policy and assumptions about the factors change in the price index for personal consumption likely to affect economic outcomes. The longer-run expenditures (PCE), would be appreciably below projections represent each participant’s assessment of 2 percent this year but expected it to step up next the value to which each variable would be expected to year, and a substantial majority of participants proconverge, over time, under appropriate monetary jected that inflation would be at or close to the Compolicy and in the absence of further shocks to the mittee’s goal of 2 percent in 2017. economy. “Appropriate monetary policy” is defined as the future path of policy that each participant As shown in figure 2, all but two participants anticideems most likely to foster outcomes for economic pated that further improvement in economic condiactivity and inflation that best satisfy his or her inditions and the economic outlook would make it vidual interpretation of the Federal Reserve’s objecappropriate to begin raising the target range for the tives of maximum employment and stable prices. federal funds rate in 2015. The economic outlooks of individual participants implied that it likely would be 6 The incoming president of the Federal Reserve Bank of Philaappropriate to raise the target federal funds rate delphia assumed office after the June FOMC meeting, on July 1, and a new president of the Federal Reserve Bank of Dal- fairly gradually over the projection period in order to las has yet to be selected. Blake Prichard and Helen E. Hol- promote labor market conditions and inflation the comb, first vice presidents of the Federal Reserve Banks of Committee judges most consistent with attaining its Philadelphia and Dallas, respectively, submitted economic projections. mandated objectives of maximum employment and Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, June 2015 Percent Central tendency1 Range2 Variable 2 015 2016 2017 Longer run 2015 2016 2017 Longer run Change in real GDP 1.8 to 2.0 2.4 to 2.7 2.1 to 2.5 2.0 to 2.3 1.7 to 2.3 2.3 to 3.0 2.0 to 2.5 1 .8 to 2.5 March projection 2.3 to 2.7 2.3 to 2.7 2.0 to 2.4 2.0 to 2.3 2.1 to 3.1 2.2 to 3.0 1.8 to 2.5 1 .8 to 2.5 Unemployment rate 5.2 to 5.3 4.9 to 5.1 4.9 to 5.1 5.0 to 5.2 5.0 to 5.3 4.6 to 5.2 4.8 to 5.5 5 .0 to 5.8 March projection 5.0 to 5.2 4.9 to 5.1 4.8 to 5.1 5.0 to 5.2 4.8 to 5.3 4.5 to 5.2 4.8 to 5.5 4 .9 to 5.8 PCE inflation 0.6 to 0.8 1.6 to 1.9 1.9 to 2.0 2.0 0.6 to 1.0 1.5 to 2.4 1.7 to 2.2 2.0 March projection 0.6 to 0.8 1.7 to 1.9 1.9 to 2.0 2.0 0.6 to 1.5 1.6 to 2.4 1.7 to 2.2 2.0 Core PCE inflation3 1.3 to 1.4 1.6 to 1.9 1.9 to 2.0 1.2 to 1.6 1.5 to 2.4 1.7 to 2.2 March projection 1.3 to 1.4 1.5 to 1.9 1.8 to 2.0 1.2 to 1.6 1.5 to 2.4 1.7 to 2.2 Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The March projections were made in conjunction with the meeting of the Federal Open Market Committee on March 17–18, 2015. 1 The central tendency excludes the three highest and three lowest projections for each variable in each year. 2 The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year. 3 Longer-run projections for core PCE inflation are not collected.

Minutes of Federal Open Market Committee Meetings | June 193 Figure 1. Central tendencies and ranges of economic projections, 2015–17 and over the longer run Percent Change in real GDP Central tendency of projections 4 Range of projections 3 2 Actual 1 + 0 - 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Percent Unemployment rate 10 9 8 7 6 5 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Percent PCE inflation 3 2 1 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Percent Core PCE inflation 3 2 1 2010 2011 2012 2013 2014 2015 2016 2017 Longer run Note: Definitions of variables are in the general note to table 1. The data for the actual values of the variables are annual.

194 102nd Annual Report | 2015 Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy 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 2015 2016 2017 Longer run Note: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under appropriate monetary policy, the first increase in the target range for the federal funds rate from its current range of 0 to ¼ percent will occur in the specified calendar year. In March 2015, the numbers of FOMC participants who judged that the first increase in the target federal funds rate would occur in 2015 and 2016 were, respectively, 15 and 2. In the lower panel, each shaded circle indicates the value (rounded to the nearest ⅛ percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.

Minutes of Federal Open Market Committee Meetings | June 195 stable prices. Most participants continued to expect GDP growth were 1.8 to 2.0 percent in 2015, 2.4 to that it would be appropriate for the federal funds rate 2.7 percent in 2016, and 2.1 to 2.5 percent in 2017. to stay appreciably below its longer-run level for The central tendency of the projections of GDP some time after inflation and unemployment are near growth in the longer run was unchanged from March mandate-consistent levels, reflecting the effects of at 2.0 to 2.3 percent. remaining headwinds holding back the economic expansion, and other factors. Most participants projected that the unemployment rate would continue to decline through 2016, and Most participants viewed the uncertainty associated nearly all projected that by the fourth quarter of with their outlooks for economic growth and the 2017, the unemployment rate would be at or below unemployment rate as broadly similar to the average their individual judgments of its longer-run normal level of the past 20 years. Most participants also level. The central tendencies of participants’ forecasts judged the level of uncertainty about inflation to be for the unemployment rate in the fourth quarter of broadly similar to the average level of the past each year were 5.2 to 5.3 percent in 2015, and 4.9 to 20 years, although some participants viewed it as 5.1 percent in both 2016 and 2017. Compared with higher. In addition, most participants continued to the March SEP, participants’ projections for the see the risks to the outlook for economic growth and unemployment rate edged up in 2015 but were little for the unemployment rate as broadly balanced, different over the medium term. Several participants though some viewed the risks to economic growth as indicated that the differences from their March proweighted to the downside. A majority of participants jections for the unemployment rate over the medium saw the risks to inflation as balanced; of the five who term were modest in part because of the monetary did not see inflation risks as balanced, four saw risks policy response that they incorporated into their as tilted to the downside. forecasts to mitigate an otherwise weaker trajectory for expenditures. The Outlook for Economic Activity Figures 3.A and 3.B show the distribution of partici- Participants generally projected that, conditional on pants’ views regarding the likely outcomes for real their individual assumptions about appropriate mon- GDP growth and the unemployment rate through etary policy, real GDP would grow slowly in the first 2017 and in the longer run. Some of the diversity of half of 2015, but that this near-term weakness would views reflected participants’ individual assessments of give way to growth in 2016 that exceeds their esti- a number of factors, including the effects of lower oil mates of its longer-run normal rate; most partici- prices on consumer spending and business investpants expected real GDP growth to slow in 2017 to ment, the extent to which dollar appreciation would rates at or near their individual estimates of the affect real activity, the rate at which the forces that longer-run rate. Participants generally regarded the have been restraining the pace of the economic recovweakness in economic activity in the first half of this ery would continue to abate, the trajectory for growth year to be temporary and pointed to a number of in consumption as labor market slack diminishes, factors that they expected would contribute to solid and the appropriate path of monetary policy. Relaoutput growth through 2016, including improving tive to the March SEP, the dispersion of participants’ labor market conditions, strengthened household and projections for real GDP growth in 2015 narrowed business balance sheets, waning effects of the earlier considerably, reflecting in part the release of the increases in the exchange value of the dollar, a boost national income and product accounts data for the to consumer spending from low energy prices, dimin- first quarter of this year, which were not available ishing restraint from fiscal policy, and still- when the FOMC met in March. accommodative monetary policy. The Outlook for Inflation Compared with their Summary of Economic Projections (SEP) contributions in March, all participants All participants projected headline PCE inflation to revised down their projections of real GDP growth come in at or below 1 percent this year—mostly due for 2015, but many expected the economy to make up to the temporary effects of earlier declines in energy at least some of the shortfall over the remainder of prices and decreases in non-energy import prices— the forecast period. Beyond the near term, changes in but to climb to 1½ percent or more in 2016. A sizable participants’ forecasts were small. The central ten- majority of participants expected that headline infladencies of participants’ current projections for real tion would be at or close to the Committee’s goal in

196 102nd Annual Report | 2015 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2015–17 and over the longer run Number of participants 2015 June projections 18 March projections 16 14 12 10 8 6 4 2 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 Percent range Number of participants 2016 18 16 14 12 10 8 6 4 2 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 Percent range Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | June 197 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2015–17 and over the longer run Number of participants 2015 June projections 18 March projections 16 14 12 10 8 6 4 2 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Number of participants 2016 18 16 14 12 10 8 6 4 2 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Note: Definitions of variables are in the general note to table 1.

198 102nd Annual Report | 2015 2017. Most participants projected only a slight rising notably closer to 2 percent in the following decline in core PCE inflation this year and antici- year. pated a gradual rise over the remainder of the forecast period. Relative to the March SEP, participants’ Figure 3.E provides the distribution of participants’ projections for PCE inflation changed very little. The judgments regarding the appropriate level of the tarcentral tendencies for PCE inflation were 0.6 to get federal funds rate at the end of each calendar year 0.8 percent in 2015, 1.6 to 1.9 percent in 2016, and from 2015 to 2017 and over the longer run. Relative 1.9 to 2.0 percent in 2017; for core PCE inflation, the to their March projections, most participants considcentral tendencies were 1.3 to 1.4 percent in 2015, ered a lower level of the federal funds rate to be 1.6 to 1.9 percent in 2016, and 1.9 to 2.0 percent in appropriate over some part of the projection period. 2017. Factors cited by participants as likely to con- The median projection for the federal funds rate at tribute to inflation rising toward 2 percent included the end of 2015 was unchanged from March at stable longer-term inflation expectations, steadily 0.63 percent; however, the mean federal funds rate diminishing resource slack, a pickup in wage growth, projection of 0.58 percent for that date was 19 basis the waning effects of declines in energy prices, and points lower than in March. The median projections still-accommodative monetary policy. for the ends of 2016 and 2017 were 1.63 percent and 2.88 percent, respectively—both 25 basis points lower Figures 3.C and 3.D provide information on the dis- than in March. Compared with the March SEP, the tribution of participants’ views about the outlook for dispersion of the projections for the appropriate level inflation. The range of projections for PCE inflation of the federal funds rate was a bit narrower over 2015 in 2015 narrowed, albeit mostly on the basis of the and 2016, and about the same as in March for 2017. lowering of just one projection; otherwise, the ranges of participants’ projections for both headline and A sizable majority of participants judged that it core PCE inflation were nearly identical to what was would be appropriate for the federal funds rate at the reported in March. end of 2017 to remain below its longer-run normal level, with about half of all participants projecting the federal funds rate at that time to be more than Appropriate Monetary Policy ½ percentage point lower than their estimates of its longer-run value. Participants provided a number of Participants judged that it would be appropriate to reasons why they thought it would be appropriate for begin normalization of monetary policy as labor the federal funds rate to remain below its longer-run market indicators and inflation moved to or toward normal level for some time after inflation and the values the Committee regards as consistent with the unemployment rate were near mandate-consistent attainment of its mandated objectives of maximum levels. These reasons included the expectation that employment and price stability. As shown in figure 2, headwinds that have been holding back the recovery all but two participants anticipated that it would be would continue to exert some restraint on economic appropriate to begin raising the target range for the activity, that weak real activity abroad and the recent federal funds rate during 2015. However, a sizable appreciation of the dollar were likely to persist and majority projected that the appropriate level of the temper spending and production in the United federal funds rate would remain below their indi- States, that residual slack in the labor market would vidual estimates of its longer-run normal level still be evident in some measures of labor utilization through 2017. other than the unemployment rate, and that the risks to the economic outlook were asymmetric in part All but a few participants projected that the unem- because of the constraints on monetary policy assoployment rate would be at or somewhat above their ciated with the effective lower bound on the federal estimates of its longer-run normal level at the end of funds rate. the year in which they judged the initial increase in the target range for the federal funds rate would be Relative to the March SEP, participants made at warranted, and all participants projected that unem- most modest adjustments to their estimates of the ployment would decline further after the commence- longer-run level of the federal funds rate. These ment of normalization. All participants projected changes left the median estimate of the longer-run that inflation would be below the Committee’s 2 per- normal federal funds rate unchanged from March at cent objective that year, but they also saw inflation 3.75 percent; the central tendency for the federal

Minutes of Federal Open Market Committee Meetings | June 199 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2015–17 and over the longer run Number of participants 2015 June projections 18 March projections 16 14 12 10 8 6 4 2 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.6 0.8 1.0 1.2 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 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.6 0.8 1.0 1.2 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 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note: Definitions of variables are in the general note to table 1.

200 102nd Annual Report | 2015 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2015–17 Number of participants 2015 June projections March projections 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2016 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | June 201 Figure 3.E. Distribution of participants’ judgments of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate, 2015–17 and over the longer run Number of participants 2015 June projections 18 March projections 16 14 12 10 8 6 4 2 0.00 - 0.3 8 - 0.6 3 - 0.8 8 - 1.1 3 - 1.3 8 - 1.6 3 - 1.8 8 - 2.1 3 - 2.3 8 - 2.6 3 - 2.8 8 - 3.1 3 - 3.3 8 - 3.6 3 - 3.8 8 - 4.1 3 - 0.37 0.62 0.87 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Number of participants 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 - 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 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 - 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 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: The midpoints of the target ranges for the federal funds rate and the target levels for the federal funds rate are measured at the end of the specified calendar year or over the longer run.

202 102nd Annual Report | 2015 Uncertainty and Risks Table 2. Average historical projection error ranges Percentage points A large majority of participants continued to judge the levels of uncertainty attending their projections Variable 2015 2016 2017 for real GDP growth and the unemployment rate as Change in real GDP1 ±1.4 ±2.0 ±2.1 broadly similar to the norms of the previous 20 years Unemployment rate1 ±0.4 ±1.2 ±1.8 (figure 4).7 As in March, most participants saw the Total consumer prices2 ±0.8 ±1.0 ±1.0 risks to their outlooks for real GDP growth as Note: Error ranges shown are measured as plus or minus the root mean squared broadly balanced, although some participants again error of projections for 1995 through 2014 that were released in the summer by various private and government forecasters. As described in the box “Forecast viewed the risks to real GDP growth as weighted to Uncertainty,” under certain assumptions, there is about a 70 percent probability the downside. Those participants who viewed the that actual outcomes for real GDP, unemployment, and consumer prices will be in ranges implied by the average size of projection errors made in the past. For more risks as weighted to the downside cited, for example, information, see David Reifschneider and Peter Tulip (2007), “Gauging the concern about the limited ability of monetary policy Uncertainty of the Economic Outlook from Historical Forecasting Errors,” Finance and Economics Discussion Series 2007-60 (Washington: Board of Governors of to respond to negative shocks to the economy when the Federal Reserve System, November), available at www.federalreserve.gov/ the federal funds rate is at its effective lower bound, a pubs/feds/2007/200760/200760abs.html; and Board of Governors of the Federal Reserve System, Division of Research and Statistics (2014), “Updated Historical fragile foreign economic outlook, and weak readings Forecast Errors,” memorandum, April 9, www.federalreserve.gov/foia/files/ on productivity growth. A large majority of partici- 20140409-historical-forecast-errors.pdf. 1 Definitions of variables are in the general note to table 1. pants judged the risks to the outlook for the unem- 2 Measure is the overall consumer price index, the price measure that has been ployment rate to be broadly balanced. most widely used in government and private economic forecasts. Projection is percent change, fourth quarter of the previous year to the fourth quarter of the year indicated. Participants generally agreed that the levels of uncertainty associated with their inflation forecasts were broadly similar to historical norms. A few policymakfunds rate in the longer run was 3.5 to 3.75 percent, ers indicated that their confidence in the likelihood of also the same as in March. inflation moving toward the policy objective of 2 percent inflation had increased. In all, 11 partici- Participants’ views of the appropriate path for monpants viewed the risks to their inflation forecast as etary policy were informed by their judgments about balanced, up from 8 in the March SEP. The risks the state of the economy, including their estimates of were still seen as tilted to the downside by 5 particithe values of the unemployment rate and other labor pants who cited the possibility that the effects of the market indicators that would be consistent with high exchange value of the dollar on domestic inflamaximum employment, the extent to which labor tion could persist for longer than anticipated, that market conditions were currently perceived to be falllonger-term inflation expectations might coalesce on ing short of maximum employment, and the prosa lower level of inflation than assumed, or that, in pects for inflation to return to the Committee’s current circumstances, it could be difficult for the longer-term objective of 2 percent over the medium Committee to respond effectively to low-inflation term. Also noted by participants were the implicaoutcomes. Conversely, 1 participant saw risks to tions of international developments for the domestic inflation as weighted to the upside, citing uncertainty economy, the uncertainty regarding the reaction by about the timing and efficacy of the Committee’s economic decisionmakers to the beginning of policy withdrawal of monetary policy accommodation. normalization after a lengthy period with the federal funds rate at the effective lower bound, the economic benefits of limiting any associated disruptions in financial markets, and a general desire to practice 7 Table 2 provides estimates of the forecast uncertainty for the risk management in setting monetary policy. In addichange in real GDP, the unemployment rate, and total contion, some participants mentioned the prescriptions sumer price inflation over the period from 1995 through 2014. of various monetary policy rules as factors they con- At the end of this summary, the box “Forecast Uncertainty” discusses the sources and interpretation of uncertainty in the sidered in judging the appropriate path for the federal economic forecasts and explains the approach used to assess the funds rate. uncertainty and risks attending the participants’ projections.

Minutes of Federal Open Market Committee Meetings | June 203 Figure 4. Uncertainty and risks in economic projections Number of participants Number of participants Uncertainty about GDP growth Risks to GDP growth June projections June projections 18 18 March projections March projections 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 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: For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.” Definitions of variables are in the general note to table 1.

204 102nd Annual Report | 2015 Forecast Uncertainty The economic projections provided by the members in the third year. The corresponding 70 percent confiof the Board of Governors and the presidents of the dence intervals for overall inflation would be 1.2 to Federal Reserve Banks inform discussions of mon- 2.8 percent in the current year and 1.0 to 3.0 percent etary policy among policymakers and can aid public in the second and third years. understanding of the basis for policy actions. Con- Because current conditions may differ from those siderable uncertainty attends these projections, howthat prevailed, on average, over history, participants ever. The economic and statistical models and relaprovide judgments as to whether the uncertainty tionships used to help produce economic forecasts attached to their projections of each variable is are necessarily imperfect descriptions of the real greater than, smaller than, or broadly similar to typiworld, and the future path of the economy can be cal levels of forecast uncertainty in the past, as affected by myriad unforeseen developments and shown in table 2. Participants also provide judgments events. Thus, in setting the stance of monetary as to whether the risks to their projections are policy, participants consider not only what appears to weighted to the upside, are weighted to the downbe the most likely economic outcome as embodied in side, or are broadly balanced. That is, participants their projections, but also the range of alternative judge whether each variable is more likely to be possibilities, the likelihood of their occurring, and the above or below their projections of the most likely potential costs to the economy should they occur. outcome. These judgments about the uncertainty Table 2 summarizes the average historical accuracy and the risks attending each participant’s projections of a range of forecasts, including those reported in are distinct from the diversity of participants’ views past Monetary Policy Reports and those prepared by about the most likely outcomes. Forecast uncertainty the Federal Reserve Board’s staff in advance of is concerned with the risks associated with a particumeetings of the Federal Open Market Committee. lar projection rather than with divergences across a The projection error ranges shown in the table illus- number of different projections. trate the considerable uncertainty associated with As with real activity and inflation, the outlook for the economic forecasts. For example, suppose a particifuture path of the federal funds rate is subject to conpant projects that real gross domestic product (GDP) siderable uncertainty. This uncertainty arises primarily and total consumer prices will rise steadily at annual because each participant’s assessment of the approrates of, respectively, 3 percent and 2 percent. If the priate stance of monetary policy depends importantly uncertainty attending those projections is similar to on the evolution of real activity and inflation over that experienced in the past and the risks around the time. If economic conditions evolve in an unexpected projections are broadly balanced, the numbers manner, then assessments of the appropriate setting reported in table 2 would imply a probability of about of the federal funds rate would change from that 70 percent that actual GDP would expand within a point forward. range of 1.6 to 4.4 percent in the current year, 1.0 to 5.0 percent in the second year, and 0.9 to 5.1 percent

Minutes of Federal Open Market Committee Meetings | July 205 Meeting Held on July 28–29, 2015 Thomas Laubach Economist A meeting of the Federal Open Market Committee David W. Wilcox was held in the offices of the Board of Governors of Economist the Federal Reserve System in Washington, D.C., on Tuesday, July 28, 2015, at 10:30 a.m. and continued David Altig, Thomas A. Connors, on Wednesday, July 29, 2015, at 9:00 a.m. Michael P. Leahy, William R. Nelson, Daniel G. Sullivan, and William Wascher Present Associate Economists Janet L. Yellen Simon Potter Chair Manager, System Open Market Account William C. Dudley Lorie K. Logan Vice Chairman Deputy Manager, System Open Market Account Lael Brainard Robert deV. Frierson1 Secretary of the Board, Office of the Secretary, Charles L. Evans Board of Governors Stanley Fischer Michael S. Gibson Jeffrey M. Lacker Director, Division of Banking Supervision and Dennis P. Lockhart Regulation, Board of Governors Jerome H. Powell Nellie Liang Director, Office of Financial Stability Policy and Daniel K. Tarullo Research, Board of Governors John C. Williams James A. Clouse and Stephen A. Meyer James Bullard, Esther L. George, Loretta J. Mester, Deputy Directors, Division of Monetary Affairs, Eric Rosengren, and Michael Strine Board of Governors Alternate Members of the Federal Open Market Andreas Lehnert Committee Deputy Director, Office of Financial Stability Policy Patrick Harker and Narayana Kocherlakota and Research, Board of Governors Presidents of the Federal Reserve Banks of Andrew Figura, David Reifschneider, Philadelphia and Minneapolis, respectively and Stacey Tevlin Helen E. Holcomb Special Advisers to the Board, Office of Board First Vice President, Federal Reserve Bank of Dallas Members, Board of Governors Brian F. Madigan Trevor A. Reeve Secretary Special Adviser to the Chair, Office of Board Matthew M. Luecke Members, Board of Governors Deputy Secretary Linda Robertson David W. Skidmore Assistant to the Board, Office of Board Members, Assistant Secretary Board of Governors Michelle A. Smith David E. Lebow Assistant Secretary Senior Associate Director, Division of Research and Statistics, Board of Governors Scott G. Alvarez General Counsel Thomas C. Baxter Deputy General Counsel Steven B. Kamin 1 Attended the joint session of the Federal Open Market Com- Economist mittee and the Board of Governors.

206 102nd Annual Report | 2015 Michael T. Kiley Marie Gooding Senior Adviser, Division of Research and Statistics, First Vice President, Federal Reserve Bank of Atlanta and Jeff Fuhrer Senior Associate Director, Office of Financial Executive Vice President, Federal Reserve Bank of Stability Policy and Research, Boston Board of Governors Troy Davig, Michael Dotsey, Evan F. Koenig, Ellen E. Meade2 and Joyce K. Zickler Julie Ann Remache, Samuel Schulhofer-Wohl, Senior Advisers, Division of Monetary Affairs, and Ellis W. Tallman Board of Governors Senior Vice Presidents, Federal Reserve Banks of Jeremy B. Rudd Kansas City, Philadelphia, Dallas, New York, Senior Adviser, Division of Research and Statistics, Minneapolis, and Cleveland, respectively Board of Governors Todd E. Clark,2 Ayşegül Şahin, Fabio M. Natalucci3 Mark Spiegel, and Stephen Williamson Associate Director, Division of Monetary Affairs, Vice Presidents, Federal Reserve Banks of Cleveland, Board of Governors New York, San Francisco, and St. Louis, respectively Jane E. Ihrig2 Matthew Nemeth4 Assistant Vice President, Federal Reserve Bank of Deputy Associate Director, Division of Monetary New York Affairs, Board of Governors Robert L. Hetzel and Carlo Rosa Glenn Follette and Steven A. Sharpe Senior Economists, Federal Reserve Banks of Assistant Directors, Division of Research and Richmond and New York, respectively Statistics, Board of Governors Elizabeth Klee In the agenda for this meeting, it was reported that Assistant Director, Division of Monetary Affairs, Michael Strine had been elected an alternate member Board of Governors of the Federal Open Market Committee and that he had executed his oath of office. Burcu Duygan-Bump Adviser, Division of Monetary Affairs, Developments in Financial Markets, Board of Governors Open Market Operations, and Penelope A. Beattie1 Policy Normalization Assistant to the Secretary, Office of the Secretary, Board of Governors In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Dana L. Burnett Federal Reserve System, the manager of the System Section Chief, Division of Monetary Affairs, Open Market Account (SOMA) reported on devel- Board of Governors opments in domestic and foreign financial markets. Katie Ross1 The deputy manager followed with a discussion of System open market operations conducted by the Manager, Office of the Secretary, Open Market Desk during the period since the Com- Board of Governors mittee met on June 16–17. The Desk’s overnight David H. Small reverse repurchase agreement (ON RRP) operations Project Manager, Division of Monetary Affairs, continued to provide a soft floor for money market Board of Governors interest rates. The deputy manager also updated the Committee on plans for tests of the Term Deposit Etienne Gagnon Facility in August and of term RRPs at the end of Senior Economist, Division of Monetary Affairs, the third quarter. Board of Governors The staff next summarized some of the recent steps 2 Attended through the discussion on potential enhancements to the System had taken to prepare further for the prothe Summary of Economic Projections. 3 Attended the discussion of the economic and financial situation 4 Attended through the discussion on System Open Market through the close of the meeting. Account reinvestment policy.

Minutes of Federal Open Market Committee Meetings | July 207 cess of normalization of monetary policy. The staff generally favored continuing reinvestments during the also proposed that future changes in the FOMC’s early stages of normalization, initially using only target federal funds rate range as well as associated increases in the target range for the federal funds rate changes in related administered interest rates—in- to reduce monetary policy accommodation. This cluding the interest rates on excess and required approach was viewed as consistent with the Commitreserves, the ON RRP rate, and the primary credit tee’s plans to rely on changes in the target range for rate—all be effective on the day after the Commit- the federal funds rate as the primary indicator of the tee’s policy decision. Making all such rate changes stance of monetary policy. Most participants effective on the same day would enhance the clarity thought that it might be best either to wind down of Federal Reserve communications. It would also reinvestments or to manage them in a manner that help promote federal funds trading within the new would smooth the decline in the balance sheet in a target range, partly by enabling the Desk to conduct predictable way. However, some participants sup- ON RRP operations at the new rate specified by the ported ceasing reinvestments all at once at the appro- Committee on the same day that the new target range priate time. Participants indicated a range of views becomes effective. Participants supported the staff on various issues specific to agency mortgage-backed proposal. securities (MBS) and Treasury markets. Using the same strategy for both agency MBS and Treasury By unanimous vote, the Committee ratified the maturities was viewed as simpler to communicate, Desk’s domestic transactions over the intermeeting but a number of market-specific considerations period. There were no intervention operations in for- might suggest employing different strategies for each eign currencies for the System’s account over the asset class. No decisions regarding the Committee’s intermeeting period. strategy for ceasing or phasing out reinvestments were made at this meeting. Participants requested The Board meeting concluded at the end of the dis- additional analysis from the staff related to alternacussion of financial markets, open market operations, tive approaches to halting or phasing out reinvestand policy normalization issues. ments, including consideration of the possible market effects, and agreed that it would be helpful to con- System Open Market Account tinue to discuss these issues at upcoming meetings. Reinvestment Policy Potential Enhancements to the Summary In the Policy Normalization Principles and Plans of Economic Projections adopted at its September 16–17, 2014 meeting, the Committee indicated that it expects to cease or com- Next, participants considered a proposal by the submence phasing out reinvestments of principal on committee on communications for a few modest securities held in the SOMA after it begins increasing modifications to the Summary of Economic Projecthe target range for the federal funds rate; the timing tions (SEP) that could provide further information to of this decision will depend on how economic and the public. A staff briefing reviewed the subcommitfinancial conditions and the economic outlook tee’s proposal for publishing median values of the evolve. A staff briefing at this meeting provided projections starting at the time of the September background on alternative strategies the Committee meeting, noting that public commentary frequently could employ with respect to reinvestments. These focuses on the midpoint of the central tendency of strategies included either characterizing qualitatively the projections and that medians would provide a or specifying numerically the economic conditions more robust summary measure of the distribution of under which reinvestments would cease, or establish- participants’ views. The subcommittee also proposed ing a date or time interval following the initial firm- the removal of the histogram depicting participants’ ing of the federal funds rate for the new policy on preferred year of liftoff from the SEP exhibits at the reinvestments to begin. The briefing also noted that time that the Committee decides to commence the the Committee could phase out reinvestments gradu- normalization process or in the first SEP thereafter. ally or end reinvestments all at once. In their comments, participants noted that the inclusion of medians would provide an additional useful In their discussion, most participants expressed a summary statistic of participants’ perspectives; howpreference that the timing of the cessation of rein- ever, they also emphasized that the medians would vestments be based on a qualitative assessment of not represent a collective view or Committee forecast. economic conditions and the outlook. Participants Participants unanimously supported the addition of

208 102nd Annual Report | 2015 medians for all variables—economic growth, the vehicle production in the third quarter, but broader unemployment rate, total and core inflation, and indicators of manufacturing production, including individual assessments of the projected appropriate readings on new orders from national and regional federal funds rate—to the September SEP and the manufacturing surveys, generally suggested only removal of the histogram of preferred liftoff years modest increases in factory output in the coming following the commencement of normalization. The months. briefing also raised the possibility of eventually including graphs in the SEP that would illustrate the Real personal consumption expenditures (PCE) uncertainty that attends participants’ macroeco- appeared to have risen at a solid pace in the second nomic projections, but noted that further work was quarter. The components of the nominal retail sales needed before a specific proposal could be presented data used by the Bureau of Economic Analysis to to the Committee. The Chair asked the subcommittee construct its estimate of PCE edged down in June, on communications to continue to investigate the but the decline for that group of components folpossibility of incorporating a graphical depiction of lowed a strong reading in May. Similarly, light vehicle uncertainty into the SEP. sales in June partly reversed a large increase in May but remained robust. Among the factors that influ- Staff Review of the Economic Situation ence household spending, real disposable income rose in May and gains in households’ net worth were sup- The information reviewed for the July 28–29 meeting ported by further advances in home values. Moresuggested that real gross domestic product (GDP) over, consumer sentiment in the University of Michirose moderately in the second quarter after edging gan Surveys of Consumers in early July remained down in the first quarter, and that labor market con- near its highest level since before the most recent ditions continued to improve. Consumer price infla- recession. tion continued to run below the FOMC’s longer-run objective of 2 percent, restrained by earlier declines Activity in the housing sector improved somewhat in in energy prices and further decreases in non-energy recent months but remained slow. Starts of new import prices. Survey measures of longer-term infla- single-family houses declined in June but rose for the tion expectations remained stable, while market- quarter as a whole, and the level of permit issuance based measures of inflation compensation were pointed to increases in starts in subsequent months. still low. In the multifamily sector, starts and permits increased sharply in June, likely reflecting in large Total nonfarm payroll employment continued to part a pull-forward of activity due to an expiring tax expand at a solid pace in June. The unemployment credit in New York City. Sales of new homes declined rate declined to 5.3 percent, its lowest reading so far in June; in contrast, existing home sales increased this year, and the share of workers employed part and pending home sales were at a level consistent time edged lower; however, the labor force participa- with little change in closed sales over the next couple tion rate and the employment-to-population ratio of months. both moved down. The rate of private-sector job openings was unchanged in May at a high level, and Real private expenditures for business equipment and the rates of hiring and quits were also little changed. intellectual property products appeared to rise at a On balance, labor market indicators suggested that modest rate in the second quarter. Nominal shipunderutilization of labor resources had diminished ments of nondefense capital goods excluding aircraft since early this year. were little changed in June. Forward-looking indicators, such as new orders for these capital goods along After declining for five consecutive months, indus- with national and regional surveys of business conditrial production rose in June, partly reflecting an tions, pointed to further modest increases in business increase in the output of mines. Nonetheless, for the equipment spending in the near term. Real spending second quarter as a whole, mining output contracted for nonresidential structures excluding drilling and sharply and manufacturing production rose only mining appeared to rise solidly in the second quarter, modestly; both sectors were weak over the first half as firms’ nominal outlays for such structures of the year, likely reflecting the continuing effects of increased at a robust pace again in May. In contrast, earlier increases in the foreign exchange value of the real business spending for drilling and mining strucdollar and lower crude oil prices. Automakers’ assem- tures likely fell sharply last quarter, consistent with bly schedules pointed to a solid gain in light motor the drop in the number of oil rigs in operation. How-

Minutes of Federal Open Market Committee Meetings | July 209 ever, the rig count appeared to be bottoming out in sion. Headline foreign inflation remained low, imporrecent weeks. tantly reflecting past oil price declines. Nominal federal spending data through June indi- Staff Review of the Financial Situation cated that real federal government purchases likely decreased in the second quarter. However, real state Financial conditions were affected by developments and local government purchases appeared to have abroad over the intermeeting period but were little risen last quarter, as nominal construction spending changed on balance. Federal Reserve communicarebounded following a decline in the first quarter and tions and economic data releases, including the June payrolls for these governments were little changed. employment report and retail sales data, put some downward pressure on the path of expected future After narrowing in April, the U.S. international trade short-term interest rates. On net, 5-year and 10-year deficit widened in May, as exports decreased more Treasury yields were somewhat lower, measures of than imports. The decrease in exports largely inflation compensation over the next 5 years based reflected a fall in aircraft shipments. The decline in on Treasury Inflation-Protected Securities declined, imports was driven by reductions in imports of capi- equity prices were little changed, and the foreign tal goods, particularly computers and oilfield equip- exchange value of the dollar rose modestly. ment. By contrast, imports of automotive products increased to a record level. While real net exports The expected path of the federal funds rate moved made a large negative contribution to the change in down following the June FOMC statement and the real GDP in the first quarter of 2015, the available Chair’s postmeeting press conference. Market particitrade data indicated that the drag on GDP growth pants reportedly saw as notable the downward reviexerted by net exports in the second quarter was con- sions in the June SEP to FOMC participants’ projecsiderably smaller. tions of the appropriate level of the federal funds rate at the end of 2015. Results from the Desk’s July Sur- Total U.S. consumer prices, as measured by the PCE vey of Primary Dealers and Survey of Market Parprice index, only edged up over the 12 months ending ticipants indicated that a majority of respondents to in May, held down primarily by earlier large declines both surveys continued to view the September 2015 in energy prices. Core PCE inflation, which excludes meeting as the most likely time for the first increase food and energy prices, was 1¼ percent over the same in the target range for the federal funds rate; however, period, restrained in part by declines in the prices of respondents to both surveys continued to place signon-energy imports. Over the 12 months ending in nificant probability on scenarios in which the first June, total consumer prices as measured by the con- increase in the target range occurred at subsequent sumer price index (CPI) were little changed, while the meetings. As in the June survey, after the initial core CPI increased 1¾ percent. Measures of expected increase, respondents expected the target range for longer-run inflation from a variety of surveys, includ- the federal funds rate to rise only gradually. ing the Michigan survey and the Desk’s Survey of Primary Dealers, remained stable. However, market- Over the intermeeting period, market yields fluctubased measures of inflation compensation were still ated in response to news about developments abroad, low, although they were somewhat higher than early including Greek debt negotiations. Yields on 5- and in the year. Over the 12 months ending in June, 10-year nominal Treasury securities fell somewhat on nominal average hourly earnings for all employees net. Market-based measures of inflation compensaincreased 2 percent. tion over the next 5 years moved lower amid a decline in oil prices, whereas inflation compensation 5 to Foreign economic growth appeared to remain sub- 10 years ahead was relatively stable. dued in the second quarter. In Canada, indicators suggested that low oil prices weighed on investment On balance, broad U.S. equity price indexes were in the energy sector, and energy production in April little changed over the intermeeting period. Optionwas curtailed by wildfires and maintenance shut- implied volatility on the S&P 500 index over the next downs. Economic activity also weakened in some month increased for a time in response to foreign Latin American countries. By contrast, second- developments before falling back to the lower end of quarter economic growth was strong in China and in its range over recent years. Based on reports from the United Kingdom, and euro-area indicators were about 40 percent of firms in the S&P 500 index, earnconsistent with continued moderate economic expan- ings per share in the second quarter were about

210 102nd Annual Report | 2015 unchanged or slightly higher than their first-quarter ment. In China, stock prices fell substantially, levels. Spreads on 10-year triple-B-rated and prompting a number of policy and regulatory actions speculative-grade corporate bonds over comparable- by Chinese officials to support the stock market. maturity Treasury securities widened somewhat over While these developments attracted investor attenthe period. tion, reaction in asset markets outside Greece and China was limited on balance. Financing conditions for nonfinancial firms continued to be accommodative. Corporate bond issuance Sovereign bond yields and monetary policy expectaremained strong in the second quarter; issuance of tions in the United Kingdom changed little, on net, institutional leveraged loans picked up noticeably, over the intermeeting period. By contrast, yields in likely due in part to tighter loan spreads as compared Canada, New Zealand, Norway, and Sweden with the beginning of the year. Commercial and decreased following weaker-than-expected macroecoindustrial loans on banks’ balance sheets continued nomic data releases and additional monetary policy to expand. accommodation. The foreign exchange value of the U.S. dollar increased during the intermeeting period Financing for commercial real estate (CRE) remained against the currencies of major U.S. trading partners. broadly available. CRE loans on banks’ books Stock markets in most advanced foreign economies expanded in the second quarter, consistent with ended the period higher. Equity prices in emerging stronger loan demand reported in the July Senior market economies, however, generally moved lower Loan Officer Opinion Survey on Bank Lending Prac- on net. tices (SLOOS). Issuance of commercial mortgagebacked securities continued to be robust. The staff provided its latest report on potential risks to financial stability. The strong capital position of According to available measures, residential mort- the U.S. banking sector, low to moderate use of gage lending conditions stayed accommodative for leverage elsewhere in the financial system, stability in many consumers. However, credit conditions the level of maturity transformation by financial remained tight for riskier borrowers, such as those institutions, and still-moderate rates of borrowing by with low credit scores, undocumented income, or the private nonfinancial sector were seen as factors high debt-to-income ratios. Interest rates on 30-year supporting overall financial stability. However, rising fixed-rate mortgages were little changed, in line with debt burdens for riskier businesses as well as some- MBS yields and other longer-term interest rates. what elevated valuations and loosening lending standards for many asset classes pointed to some increas- Outstanding balances of auto and student loans con- ing concerns. The effect of financial stresses related tinued to expand at a robust pace through May. to Greece and China on the largest U.S. financial Banks indicated in the July SLOOS that their lending firms was limited to date, perhaps reflecting the relastandards for credit card loans had eased somewhat tively strong financial positions and low direct exporelative to the past few years. However, a number of sures among such firms and a view among market indicators suggested that terms on credit card loans participants that foreign authorities would take remained tight, especially for subprime borrowers. actions to stem spillovers. Credit conditions in municipal bond markets were Staff Economic Outlook stable over the intermeeting period. Despite the announcement that Puerto Rico might seek to The U.S. economic forecast prepared by the staff for restructure at least part of its debt, spreads on an the July FOMC meeting was broadly similar to that index of 20-year general obligation municipal bonds prepared for the June FOMC meeting. Real GDP over comparable-maturity Treasury securities was again expected to increase faster in the second changed little, and the pace of issuance of long-term half of this year than in the first half and to expand municipal bonds remained robust. more rapidly than potential output in 2016 and 2017, even as the normalization of the stance of monetary After having widened amid concerns about the diffi- policy was assumed to proceed. However, real GDP cult negotiations between Greece and its creditors, growth over the medium term was revised down a Greek and other peripheral euro-area sovereign small amount, in part because of a slightly stronger spreads narrowed, on net, over the intermeeting forecast for the exchange value of the dollar. The period as news emerged of progress toward an agree- staff also made two small adjustments to its supply-

Minutes of Federal Open Market Committee Meetings | July 211 side assumptions. First, the projected rates of pro- to further improvement in labor market conditions. ductivity gains and potential output growth over the However, a few participants observed that although medium term were trimmed. With actual and poten- GDP growth appeared to have picked up in recent tial GDP growth both a bit weaker, the projected nar- months relative to the first-quarter pace, the level of rowing of the output gap over the medium term was GDP remained lower than had been projected earlier little revised. Second, the staff lowered slightly its in the year. Inflation continued to run below the estimate of the longer-run natural rate of unemploy- Committee’s 2 percent longer-run objective, partly ment. The unemployment rate was expected to reflecting earlier declines in energy prices and further decline gradually to this revised estimate. decreases in prices of non-energy imports. Marketbased measures of inflation compensation remained The staff’s forecast for inflation was revised down, low, while survey-based measures of longer-term particularly in the near term, as the decline in crude inflation expectations remained stable. Participants oil prices over the intermeeting period was expected generally anticipated that inflation would rise graduto result in lower consumer energy prices. Although ally toward 2 percent as the labor market improved energy prices and non-oil import prices were further and the transitory effects of earlier declines in expected to begin rising steadily next year, the staff energy and import prices dissipated. Although many continued to project that inflation would be below continued to see some downside risks arising from the Committee’s longer-run objective of 2 percent economic and financial developments abroad, parover 2016 and 2017. Inflation was anticipated to ticipants generally viewed the risks to the outlook for move up gradually to 2 percent thereafter, with infla- domestic economic activity and the labor market as tion expectations in the longer run assumed to be nearly balanced. consistent with the Committee’s objective and slack in labor and product markets projected to have With respect to consumer spending, the incoming waned. data had been uneven but participants cited reports from contacts suggesting a pickup since the first The staff viewed the uncertainty around its July pro- quarter. Participants generally expected consumer jections for real GDP growth, the unemployment spending to rise moderately over the near term. Conrate, and inflation as similar to the average of the tinued gains in employment and income, high housepast 20 years. The risks to the forecast for real GDP hold net worth, and low gasoline prices were viewed and inflation were seen as tilted to the downside, as factors that should support consumer spending in reflecting the staff’s assessment that neither mon- coming months. Consumer credit conditions were etary nor fiscal policy was well positioned to help the also seen as favorable, with business contacts pointeconomy withstand substantial adverse shocks. At ing to steady loan growth, especially for auto loans the same time, the staff viewed the risks around its and credit cards. However, a couple of participants outlook for the unemployment rate as roughly were concerned about the outlook for consumer balanced. spending, noting that spending had been disappointing in recent months even though real income had Participants’ Views on Current Conditions already been boosted by the lower gasoline prices and and the Economic Outlook the improved labor market. In their discussion of the economic situation and the Participants viewed the recent data on housing starts outlook, meeting participants viewed the information and permits as well as the higher levels of sales and received over the intermeeting period as suggesting prices as indicative of continued recovery in the that economic activity had been expanding moder- housing sector. The easing of lending standards for ately in recent months. The pace of job gains had residential mortgages evidenced in the most recent been solid and the unemployment rate had declined, SLOOS was cited as a factor likely to support further with a range of labor market indicators suggesting progress. However, a couple of participants noted that underutilization of labor resources had contin- that they did not expect this sector to be a major conued to diminish. Participants generally viewed the tributor to economic growth over the remainder of incoming data as confirming their earlier assessment the year. that the weak report on real GDP in the first quarter reflected transitory factors and expected that real Participants also observed that activity in other sececonomic activity would continue to expand at a tors of the economy continued to be subdued. Busimoderate pace over the balance of the year, leading ness fixed investment remained soft even as the drag

212 102nd Annual Report | 2015 from the sharp contraction in drilling rigs over the pressure on commodity prices and the weakness in first half of this year appeared to be fading. net exports. Although investment spending was expected to pick up over the second half of this year, a few partici- Participants agreed that labor market conditions had pants were concerned that the further decline in oil improved further, citing increases in payroll employprices that had occurred in recent weeks might con- ment and job openings, the decrease in the unemtinue to hold down energy-related investment. In ployment rate, and some further reduction in broader addition, government spending was expected to add measures of labor market underutilization. Although very little to growth in aggregate spending this year. the labor force participation rate declined in June and Participants also expected net exports to continue to the national hiring and quits rates were little changed subtract from GDP growth over the second half of in May, several participants noted that reports from the year, reflecting in part the damping influence of business contacts in their Districts pointed to continthe dollar’s earlier appreciation. ued job gains and relatively strong labor markets. They cited anecdotal reports of firms having con- Industry contacts pointed to generally solid business cerns about retaining workers and facing difficulties conditions, with firms in many parts of the country in filling even medium- and lower-skilled jobs. Howcontinuing to report positive assessments of current ever, several participants contended that, despite the activity and optimism about future sales. Manufac- progress over the past few years, some noticeable turing activity had slowed somewhat over the inter- margins of slack remained, citing as evidence the meeting period, but conditions were mixed across dif- high number of workers not actively searching for ferent industries. Those firms connected to the auto, jobs but available and interested in work as well as aerospace, and construction industries, for example, the high share of employees working part time for reported strong demand. However, businesses par- economic reasons compared with pre-recession levels. ticularly exposed to the appreciation of the dollar or falling commodity prices—including those in the The ongoing rise in labor demand still appeared not heavy equipment and steel, oil and gas extraction, to have led to a broad-based firming of wage and petrochemical industries—reported slower activ- increases. While business contacts in a number of ity. The service sector reports were mostly positive. Districts continued to report that the pace of wage Overall, most contacts viewed the recent slow-down increases had picked up, recent national readings on in manufacturing as likely to prove temporary and hourly compensation and average hourly earnings of remained optimistic about future demand, even employees had remained subdued. The most recent though the recent decreases in oil prices and the pos- employment cost index, released in April, had sugsibility of adverse spillovers from slower economic gested an increase in wage gains. However, questions growth in China raised some concerns. Regarding the were raised about how to interpret this reading agricultural sector, a very wet spring had significantly because the pickup was concentrated in the Northreduced the percentage of crops in good condition, east and might have resulted from particular factors and declining commodity prices had further reduced that were not associated solely with a general tightenexpectations for farm income. ing of labor market conditions, such as minimum wage adjustments and market conditions in certain In their discussion of the foreign economic outlook, occupations. In addition, it was noted that considerparticipants generally viewed the risks from the fiscal able uncertainty remained about when wages might and financial problems in Greece as having dimin- begin to accelerate and whether that development ished somewhat, although it was observed that might translate into increased price inflation. Greece still faced many challenges and that Greek economic progress was likely to be limited over the Participants discussed how recent developments near term. While the recent Chinese stock market influenced their expectations for reaching the decline seemed to have had limited implications to FOMC’s 2 percent inflation objective over the date for the growth outlook in China, several partici- medium term. Total PCE inflation continued to run pants noted that a material slowdown in Chinese eco- below the Committee’s longer-run objective. Core nomic activity could pose risks to the U.S. economic PCE price inflation, as measured on a 12-month outlook. Some participants also discussed the risk change basis, also remained low, but other measures, that a possible divergence in interest rates in the such as the trimmed mean PCE and median CPI, United States and abroad might lead to further continued to run at higher levels than core PCE inflaappreciation of the dollar, extending the downward tion. Moreover, core CPI inflation had picked up

Minutes of Federal Open Market Committee Meetings | July 213 over recent months. Some participants cited down- they anticipated. However, some participants side risks to inflation, pointing to the absence of any expressed the view that the incoming information noticeable response of inflation to the reduction in had not yet provided grounds for reasonable confiresource slack over the past several years, risks of dence that inflation would move back to 2 percent further declines in oil and commodity prices, and the over the medium term and that the inflation outlook possibility of further appreciation in the dollar. thus might not soon meet one of the conditions Although most readings on longer-term inflation established by the Committee for initiating a firming expectations were little changed recently, participants of policy. Several of these participants cited evidence discussed how to interpret downward movements in that the response of inflation to the elimination of some survey and market-based measures of inflation resource slack might be attenuated and expressed expectations over the past few years. Most partici- concern about risks of further downward pressure on pants still expected that the downward pressure on inflation from international developments. Another inflation from the previous declines in energy prices concern related to the risk of premature policy tightand the effects of past dollar appreciation would ening was the limited ability of monetary policy to prove to be temporary. Participants generally contin- offset downside shocks to inflation and economic ued to anticipate that, with appropriate monetary activity when the federal funds rate was near its effecpolicy, inflation would move up to the Committee’s tive lower bound. objective over the medium term, reflecting the anticipated tightening of product and labor markets and Some participants, however, emphasized that the stable longer-term inflation expectations. economy had made significant progress over the past few years and viewed the economic conditions for Participants discussed a range of topics associated beginning to increase the target range for the federal with financial market developments and financial sta- funds rate as having been met or were confident that bility. They commented on issues related to the dete- they would be met shortly. A few of these particirioration in bond market liquidity reported by mar- pants judged that the stance of monetary policy, ket participants, the potential migration of leveraged including the extraordinarily low level of the federal loan underwriting to the nonbank sector in light of funds rate and the current size of the Federal Reserve current supervisory guidance, and the assessment of balance sheet, was very accommodative. A couple of valuation risks when term premiums were narrow others thought that an appreciable delay in beginning while most other risk premiums were not. In addi- the process of normalization might result in an undetion, it was observed that Puerto Rico faced signifi- sirable increase in inflation or have adverse consecant challenges servicing its debts, though the risks of quences for financial stability. Some participants contagion to other U.S. financial markets were advised that progress toward the Committee’s objecjudged to be low. Participants also noted the chal- tives should be viewed in light of the cumulative lenges associated with identifying newly emerging gains made to date without overemphasizing monthrisks as well as the implications for monetary policy to-month changes in incoming data. It was also of a hypothetical future situation in which financial noted that a prompt start to normalization would imbalances were increasing. likely convey the Committee’s confidence in prospects for the economy. During their discussion of economic conditions and monetary policy, participants mentioned a number of In their discussion of the appropriate path for the considerations associated with the timing and pace of federal funds rate and associated communications at policy normalization. Most judged that the condi- and after the time of the first increase in the target tions for policy firming had not yet been achieved, range, participants expressed support for emphasizbut they noted that conditions were approaching that ing that the course of policy would remain condipoint. Participants observed that the labor market tional on the Committee’s assessment of economic had improved notably since early this year, but many developments and the outlook relative to its objecsaw scope for some further improvement. Many par- tives. It was also noted that the Committee’s commuticipants indicated that their outlook for sustained nications around the time of the first rate increase economic growth and further improvement in labor should emphasize that the expected path for policy, markets was key in supporting their expectation that not the initial increase, would be the most important inflation would move up to the Committee’s 2 per- determinant of financial conditions and should cent objective, and that they would be looking for acknowledge that policy would continue to be evidence that the economic outlook was evolving as accommodative to support progress toward the Com-

214 102nd Annual Report | 2015 mittee’s dual objectives. While monetary policy In considering the Committee’s criteria with respect adjustments ultimately would be data dependent, to inflation for beginning policy normalization, most some participants expressed the view that, in light of members viewed the incoming data as reinforcing their current outlook, it likely would be appropriate their earlier assessment that, although inflation conto adjust the federal funds rate gradually after the tinued to run below the Committee’s objective, the first increase to help ensure that the economy would downward pressure on inflation from the previous be able to absorb higher interest rates and that infla- decreases in energy prices and the effects of past doltion was moving toward the Committee’s objective. lar appreciation would abate. However, core inflation on a year-over-year basis also was still below 2 percent. Moreover, some members continued to see Committee Policy Action downside risks to inflation from the possibility of further dollar appreciation and declines in commod- In their discussion of monetary policy for the period ity prices. In addition, several members noted that ahead, members judged that information received higher rates of resource utilization appeared to have since the FOMC met in June indicated that economic had only very limited effects to date on wages and activity had been expanding moderately in recent prices, and underscored the uncertainty surrounding months. The labor market had also continued to the inflation process as well as the role and dynamics improve, with solid job gains and declining unem- of inflation expectations. The Committee agreed to ployment. A range of labor market indicators, on continue to monitor inflation developments closely, balance, suggested that underutilization of labor with almost all members indicating that they would resources had diminished since early this year. Mem- need to see more evidence that economic growth was bers generally viewed these developments, together sufficiently strong and labor markets conditions had with appropriate monetary policy accommodation, firmed enough for them to feel reasonably confident as supporting their expectations for moderate eco- that inflation would return to the Committee’s nomic growth in the medium term and for further longer-run objective over the medium term. improvement in labor market conditions. They also continued to see the risks to the outlook for eco- The Committee concluded that, although it had seen nomic activity and the labor market as nearly bal- further progress, the economic conditions warranting anced. Inflation had continued to run below the an increase in the target range for the federal funds Committee’s longer-run objective, but members rate had not yet been met. Members generally agreed expected it to rise gradually toward 2 percent over the that additional information on the outlook would be medium term as the labor market improved further necessary before deciding to implement an increase in and the transitory effects of earlier declines in energy the target range. One member, however, indicated a and import prices dissipated. readiness to take that step at this meeting but was willing to wait for additional data to confirm a judg- In assessing whether economic conditions had ment to raise the target range. improved sufficiently to initiate a firming in the stance of monetary policy, the Committee noted In their discussion of language for the postmeeting that, on balance, a range of labor market indicators statement, members agreed that the wording should suggested that underutilization of labor resources reflect their assessment that economic conditions had diminished further. Most members saw room for showed continued progress toward the Committee’s some additional progress in reducing labor market objectives. The Committee updated the statement to slack, although several viewed current labor market indicate that economic activity had been expanding conditions as at or very close to those consistent with moderately in recent months and that it had seen furmaximum employment. Many members thought that ther improvement in labor market conditions over labor market underutilization would be largely elimi- the intermeeting period, pointing specifically to solid nated in the near term if economic activity evolved as job gains and declining unemployment. In addition, they expected. However, several were concerned that the Committee agreed to state that a range of labor labor market conditions consistent with maximum market indicators suggested that underutilization of employment could take longer to achieve, noting, for labor resources had diminished since early this year, example, the lack of convincing signs of accelerating acknowledging the cumulative progress that had been wages, which might be signaling that the natural rate made in the labor market. The Committee also modiof unemployment could currently be lower than they fied the discussion of inflation developments slightly previously thought. to recognize the more recent declines in energy prices

Minutes of Federal Open Market Committee Meetings | July 215 while restating the expectation that inflation would and financial conditions that will foster maxirise gradually toward 2 percent over the medium mum employment and price stability. In particuterm as the labor market improved further and the lar, the Committee seeks conditions in reserve transitory effects of earlier declines in energy and markets consistent with federal funds trading in import prices dissipated. a range from 0 to ¼ percent. The Committee directs the Desk to undertake open market The Committee agreed to maintain the target range operations as necessary to maintain such condifor the federal funds rate at 0 to ¼ percent and to tions. The Committee directs the Desk to mainreaffirm in the statement that the Committee’s deci- tain its policy of rolling over maturing Treasury sion about how long to maintain the current target securities into new issues and its policy of reinrange for the federal funds rate would depend on its vesting principal payments on all agency debt assessment of actual and expected progress toward and agency mortgage-backed securities in its objectives of maximum employment and 2 percent agency mortgage-backed securities. The Cominflation. Members also agreed that their evaluation mittee also directs the Desk to engage in dollar of progress on their objectives would take into roll and coupon swap transactions as necessary account a wide range of information, including to facilitate settlement of the Federal Reserve’s measures of labor market conditions, indicators of agency mortgage-backed securities transactions. inflation pressures and inflation expectations, and The System Open Market Account manager and readings on financial and international developments. the secretary will keep the Committee informed To further reflect the Committee’s assessment that of ongoing developments regarding the System’s economic conditions had continued to progress balance sheet that could affect the attainment toward its objectives, the Committee slightly altered over time of the Committee’s objectives of its characterization of when it anticipates that it will maximum employment and price stability.” be appropriate to begin the process of policy normalization. Specifically, members agreed to indicate the The vote encompassed approval of the statement Committee’s anticipation that it would be appropri- below to be released at 2:00 p.m.: ate to raise the target range for the federal funds rate when it has seen some further improvement in the “Information received since the Federal Open labor market and is reasonably confident that infla- Market Committee met in June indicates that tion will move back to its 2 percent objective over the economic activity has been expanding modermedium term. ately in recent months. Growth in household spending has been moderate and the housing The Committee also maintained its policy of rein- sector has shown additional improvement; howvesting principal payments from agency debt and ever, business fixed investment and net exports agency mortgage-backed securities in agency stayed soft. The labor market continued to mortgage-backed securities and of rolling over improve, with solid job gains and declining maturing Treasury securities at auction. This policy, unemployment. On balance, a range of labor by keeping the Committee’s holdings of longer-term market indicators suggests that underutilization securities at sizable levels, should help maintain of labor resources has diminished since early accommodative financial conditions. The Committee this year. Inflation continued to run below the reiterated its expectation that, even after employment Committee’s longer-run objective, partly reflectand inflation are near mandate-consistent levels, eco- ing earlier declines in energy prices and decreasnomic conditions may, for some time, warrant keep- ing prices of non-energy imports. Market-based ing the target federal funds rate below levels the measures of inflation compensation remain low; Committee views as normal in the longer run. survey-based measures of longer-term inflation expectations have remained stable. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Consistent with its statutory mandate, the Com- Bank of New York, until it was instructed otherwise, mittee seeks to foster maximum employment to execute transactions in the SOMA in accordance and price stability. The Committee expects that, with the following domestic policy directive: with appropriate policy accommodation, economic activity will expand at a moderate pace, “Consistent with its statutory mandate, the Fed- with labor market indicators continuing to move eral Open Market Committee seeks monetary toward levels the Committee judges consistent

216 102nd Annual Report | 2015 with its dual mandate. The Committee continues Voting for this action: Janet L. Yellen, William C. to see the risks to the outlook for economic Dudley, Lael Brainard, Charles L. Evans, Stanley activity and the labor market as nearly balanced. Fischer, Jeffrey M. Lacker, Dennis P. Lockhart, Inflation is anticipated to remain near its recent Jerome H. Powell, Daniel K. Tarullo, and John C. low level in the near term, but the Committee Williams. expects inflation to rise gradually toward 2 percent over the medium term as the labor market Voting against this action: None. improves further and the transitory effects of earlier declines in energy and import prices dissi- Long-Run Monetary Policy Implementation pate. The Committee continues to monitor infla- Framework tion developments closely. At the conclusion of the meeting, the Chair noted To support continued progress toward maxi- that the staff would soon begin an extended effort to mum employment and price stability, the Com- evaluate potential long-run monetary policy implemittee today reaffirmed its view that the current mentation frameworks. In view of the likely time 0 to ¼ percent target range for the federal funds frames for normalization of the stance of monetary rate remains appropriate. In determining how policy and the System’s balance sheet, the Committee long to maintain this target range, the Commit- probably would not need to reach any final decisions tee will assess progress—both realized and regarding such a framework for several years. Moreexpected—toward its objectives of maximum over, the process of normalization will likely provide employment and 2 percent inflation. This assess- a great deal of information about money markets ment will take into account a wide range of and the Federal Reserve’s policy tools that will help information, including measures of labor market inform the Committee’s judgment about a long-run conditions, indicators of inflation pressures and implementation framework. Nonetheless, because the inflation expectations, and readings on financial analysis will likely address a wide range of topics, it and international developments. The Committee seemed appropriate to begin now to organize and anticipates that it will be appropriate to raise the undertake the work. target range for the federal funds rate when it has seen some further improvement in the labor Previous staff work on implementation frameworks market and is reasonably confident that inflation was presented to the Committee in April 2008 and will move back to its 2 percent objective over the focused largely on alternative frameworks that could medium term. be used to target the federal funds rate. Those topics would be an important part of the current undertak- The Committee is maintaining its existing policy ing as well. However, in light of experience over of reinvesting principal payments from its hold- recent years, policymakers agreed that a number of ings of agency debt and agency mortgage- related issues warranted attention, including topics backed securities in agency mortgage-backed such as the effectiveness of alternative implementasecurities and of rolling over maturing Treasury tion frameworks in scenarios that could require a securities at auction. This policy, by keeping the return to the zero lower bound, regulatory and other Committee’s holdings of longer-term securities structural developments that could affect financial at sizable levels, should help maintain accommo- institutions and markets in ways that would affect dative financial conditions. monetary policy implementation, and the long-run structure of the Federal Reserve’s assets and liabili- When the Committee decides to begin to remove ties that best supports the System’s macroeconomic policy accommodation, it will take a balanced objectives and financial stability. In discussing the approach consistent with its longer-run goals of range of issues contemplated for study under this maximum employment and inflation of 2 per- project, it was noted that the Policy Normalization cent. The Committee currently anticipates that, Principles and Plans reflect the Committee’s inteneven after employment and inflation are near tion that, in the longer run, the Federal Reserve will mandate-consistent levels, economic conditions hold no more securities than necessary to implement may, for some time, warrant keeping the target monetary policy efficiently and effectively and that federal funds rate below levels the Committee the Federal Reserve will hold primarily Treasury views as normal in the longer run.” securities.

Minutes of Federal Open Market Committee Meetings | July 217 Policymakers agreed that it would be important to Notation Vote draw on the perspectives of staff across the Federal Reserve System and to consult widely with other cen- By notation vote completed on July 7, 2015, the tral banks, academics, and other experts on markets, Committee unanimously approved the minutes of the financial institutions, and monetary policy. The proj- Committee meeting held on June 16–17, 2015. ect was expected to run through the end of 2016. Policymakers will review progress and provide input Brian F. Madigan as the work proceeds. Secretary It was agreed that the next meeting of the Committee would be held on Wednesday–Thursday, September 16–17, 2015. The meeting adjourned at 10:45 a.m. on July 29, 2015.

218 102nd Annual Report | 2015 Meeting Held Thomas Laubach Economist on September 16–17, 2015 David W. Wilcox Economist A joint meeting of the Federal Open Market Committee and the Board of Governors was held in the David Altig, Thomas A. Connors, offices of the Board of Governors of the Federal Michael P. Leahy, William R. Nelson, Reserve System in Washington, D.C., on Wednesday, Daniel G. Sullivan, William Wascher, September 16, 2015, at 1:00 p.m. and continued on and John A. Weinberg Thursday, September 17, 2015, at 8:30 a.m. Associate Economists Simon Potter Present Manager, System Open Market Account Janet L. Yellen Lorie K. Logan Chair Deputy Manager, System Open Market Account William C. Dudley Robert deV. Frierson Vice Chairman Secretary of the Board, Office of the Secretary, Lael Brainard Board of Governors Charles L. Evans Michael S. Gibson Director, Division of Banking Supervision and Stanley Fischer Regulation, Board of Governors Jeffrey M. Lacker Nellie Liang Director, Office of Financial Stability Policy and Dennis P. Lockhart Research, Board of Governors Jerome H. Powell James A. Clouse and Stephen A. Meyer Daniel K. Tarullo Deputy Directors, Division of Monetary Affairs, Board of Governors John C. Williams William B. English James Bullard, Esther L. George, Loretta J. Mester, Senior Special Adviser to the Board, Office of Board Eric Rosengren, and Michael Strine Members, Board of Governors Alternate Members of the Federal Open Market David Bowman, Andrew Figura, Committee David Reifschneider, and Stacey Tevlin Patrick Harker, Robert S. Kaplan, Special Advisers to the Board, Office of Board and Narayana Kocherlakota Members, Board of Governors Presidents of the Federal Reserve Banks of Trevor A. Reeve Philadelphia, Dallas, and Minneapolis, respectively Special Adviser to the Chair, Office of Board Brian F. Madigan Members, Board of Governors Secretary Linda Robertson Matthew M. Luecke Assistant to the Board, Office of Board Members, Deputy Secretary Board of Governors David W. Skidmore Christopher J. Erceg Assistant Secretary Senior Associate Director, Division of International Finance, Board of Governors Michelle A. Smith David E. Lebow and Michael G. Palumbo Assistant Secretary Senior Associate Directors, Division of Research and Scott G. Alvarez Statistics, Board of Governors General Counsel Ellen E. Meade and Joyce K. Zickler Steven B. Kamin Senior Advisers, Division of Monetary Affairs, Economist Board of Governors

Minutes of Federal Open Market Committee Meetings | September 219 John J. Stevens Developments in Financial Markets, Deputy Associate Director, Division of Research and Open Market Operations, and Statistics, Board of Governors Policy Normalization Stephanie R. Aaronson The manager of the System Open Market Account Assistant Director, Division of Research and (SOMA) reported on developments in domestic and Statistics, Board of Governors foreign financial markets. The deputy manager fol- Francisco Covas and Elizabeth Klee lowed with a briefing on money market develop- Assistant Directors, Division of Monetary Affairs, ments and System open market operations conducted Board of Governors by the Open Market Desk during the period since the Federal Open Market Committee (FOMC) met on Eric C. Engstrom July 28–29. Daily take-up in the Desk’s overnight Adviser, Division of Research and Statistics, reverse repurchase agreement operations declined Board of Governors somewhat, apart from month-ends, likely reflecting Penelope A. Beattie1 some increase in money market interest rates. The Assistant to the Secretary, Office of the Secretary, deputy manager also discussed recent test operations Board of Governors of the Term Deposit Facility and updated the Committee on plans for tests of term reverse repurchase Katie Ross1 agreement operations at the end of the third quarter. Manager, Office of the Secretary, Board of Governors By unanimous vote, the Committee ratified the Desk’s domestic transactions over the intermeeting David H. Small period. There were no intervention operations in for- Project Manager, Division of Monetary Affairs, eign currencies for the System’s account over the Board of Governors intermeeting period. Elmar Mertens Senior Economist, Division of Monetary Affairs, Board of Governors System Open Market Account Reinvestment Policy Randall A. Williams Information Management Analyst, Division of A staff briefing provided background on the macro- Monetary Affairs, Board of Governors economic effects of alternative approaches to ceasing reinvestments of principal on securities held in the Gregory L. Stefani SOMA after the Committee begins to normalize the First Vice President, Federal Reserve Bank of stance of policy by increasing the target range for the Cleveland federal funds rate. The briefing presented analysis Alberto G. Musalem that was based on an assumption that the cessation Executive Vice President, Federal Reserve Bank of of reinvestments, once implemented, would be per- New York manent. The briefing suggested that if economic conditions evolved in line with a modal outlook, differ- Mary Daly, Troy Davig, Evan F. Koenig, ences in macroeconomic outcomes would be minor Paolo A. Pesenti, Samuel Schulhofer-Wohl, across approaches that ceased reinvestments soon Ellis W. Tallman, and Christopher J. Waller after initial policy firming or continued reinvestments Senior Vice Presidents, Federal Reserve Banks of until certain levels of the federal funds rate, such as San Francisco, Kansas City, Dallas, New York, 1 percent or 2 percent, were reached. As a result, the Minneapolis, Cleveland, and St. Louis, respectively appropriate path of the federal funds rate would be Giovanni Olivei, Keith Sill, and Douglas Tillett only modestly affected. However, if substantial Vice Presidents, Federal Reserve Banks of Boston, adverse shocks occurred, continuing reinvestment Philadelphia, and Chicago, respectively until normalization of the level of the federal funds rate was well under way could help avoid situations that would warrant a larger reduction in the federal funds rate than perhaps could be accomplished given the constraint posed by the effective lower bound to 1 Attended Wednesday’s session only. nominal interest rates.

220 102nd Annual Report | 2015 In the ensuing discussion, participants considered the put of motor vehicles and parts that reversed a subadvantages and disadvantages of alternative stantial portion of its jump in July. Automakers approaches to reinvestment. Participants referred to scheduled further declines in assemblies over the the Committee’s statement on Policy Normalization remainder of the year, and broader indicators of Principles and Plans, which indicates that the timing manufacturing production, including readings on of the cessation or phasing out of reinvestments will new orders from national and regional manufacturdepend on how economic and financial conditions ing surveys, generally suggested that factory output and the economic outlook evolve. Several partici- would be little changed over that period. Mining outpants emphasized that continuing reinvestments for put moved up, on net, in July and August after a some time after the initial policy firming could help steep decline in the second quarter. manage potential risks, particularly by reducing the probability that the federal funds rate might return to Real personal consumption expenditures (PCE) the effective lower bound. Some participants appeared to be rising at a moderate pace in the third expressed a view that, in contrast to the assumption quarter. The components of the nominal retail sales in the staff analysis, the Committee could choose to data used by the Bureau of Economic Analysis to resume reinvestments if macroeconomic conditions construct its estimates of PCE increased at a strong warranted. At the same time, it was also highlighted rate in July and August, and sales of light motor that a larger balance sheet could entail costs, and that vehicles moved up in both months. Household spendthe Principles and Plans indicate that, in the longer ing was supported by moderate growth in real disposrun, the SOMA portfolio should be no larger than able income in July and a wealth-to-income ratio that necessary to conduct monetary policy efficiently and remained high even after recent declines in equity valeffectively. The Committee made no decisions regard- ues. Consumer sentiment in the University of Michiing its strategy for ceasing or phasing out reinvest- gan Surveys of Consumers decreased in early Sepments at this meeting. tember, reportedly in part because of the recent decline in stock market prices, but it remained above Staff Review of the Economic Situation its year-earlier level. The information reviewed for the September 16–17 Activity in the housing sector remained on a gradual meeting suggested that real gross domestic product upward trend. Starts of new single-family homes rose (GDP) was expanding at a moderate pace in the third further early in the third quarter and were slightly quarter. Labor market conditions continued to above the pace of permit issuance. In the multifamily improve, but labor compensation gains were modest. sector, starts fell back after having been temporarily Consumer price inflation remained below the Com- elevated in June. Sales of new and existing homes mittee’s longer-run objective of 2 percent and was both increased in July. restrained by further declines in energy prices and non-energy import prices. Survey measures of Real private expenditures for business equipment and longer-run inflation expectations remained stable, intellectual property products appeared to be rising while market-based measures of inflation compensa- moderately. Nominal shipments of nondefense capition moved lower. tal goods excluding aircraft increased in July, and orders for nondefense capital goods pointed to mod- Total nonfarm payroll employment expanded at a est gains in shipments in the coming months, consissolid pace in July and August. The unemployment tent with recent readings from surveys of business rate stayed at 5.3 percent in July but fell to 5.1 per- conditions. Real spending for nonresidential struccent in August. With the labor force participation tures excluding drilling and mining increased sharply rate unchanged over this period, the employment-to- in the second quarter, and nominal business expendipopulation ratio edged up. The share of workers tures for such structures rose further in July. In conemployed part time for economic reasons remained trast, real business spending for drilling and mining elevated. The rate of private-sector job openings structures fell steeply in the second quarter. Available increased in July and was at a high level, while the indicators of drilling activity, such as counts of rigs rates of hiring and quits were little changed. in operation, suggested spending would decline less rapidly in the third quarter. Industrial production increased, on balance, during July and August. Manufacturing production fell in Total real government purchases appeared to be August primarily because of a large drop in the out- declining slightly in the third quarter. Federal govern-

Minutes of Federal Open Market Committee Meetings | September 221 ment purchases likely decreased, as defense spending Canada suggested that some of the first-half weakmoved down further through August. State and local ness there was dissipating. However, recent indicators government purchases seemed to be increasing, on for some other countries, most notably China, were balance, as the payrolls of these governments subdued. Inflation rates continued to be quite low in expanded at a faster pace in July and August than in the advanced foreign economies, and market-based the second quarter, while their nominal construction measures of inflation compensation had recently expenditures edged down in July after a large gain in moved down in the euro area and Japan. In contrast, the second quarter. inflation in the emerging market economies had risen in recent months as a result of higher food prices and The U.S. international trade deficit widened in June widespread currency depreciation. before narrowing substantially in July. Exports rose in July, supported by increased shipments of nonaircraft capital goods and automobiles, but remained Staff Review of the Financial Situation subdued. In contrast, imports declined in July, reversing a June increase, as imports of consumer goods Although U.S. economic data releases generally met fell back. market expectations, domestic financial conditions tightened modestly as concerns about prospects for Total U.S. consumer prices, as measured by the PCE global economic growth, centered on China, price index, edged up over the 12 months ending in prompted an increase in financial market volatility July, restrained importantly by declines in energy and a deterioration in risk sentiment during the interprices. Core PCE prices, which exclude food and meeting period. Stock market indexes in most energy prices, increased 1¼ percent over the same advanced and emerging market economies ended the period, with the increase damped in part by declines period sharply lower. Tighter financial market condiin the prices of non-energy imports. Over the tions and greater volatility contributed to a reduction 12 months ending in August, total consumer prices as of the odds that market participants appeared to measured by the consumer price index (CPI) edged place on the first increase in the federal funds rate up, while the core CPI increased 1¾ percent. Meas- occurring at the September FOMC meeting and to a ures of expected longer-run inflation from a variety flatter expected path for the policy rate thereafter. of surveys, including the Michigan survey, the Survey Nevertheless, yields on short- and longer-term nomiof Professional Forecasters, and the Desk’s Survey of nal Treasury securities were modestly higher than Primary Dealers, remained stable. However, market- when the Committee met in July. based measures of inflation compensation fell to near their historical lows, reportedly in response to the Over the intermeeting period, the concerns about recent appreciation of the dollar, the decline in oil global economic growth and turbulence in financial prices, and readings on realized inflation that were markets led to greater uncertainty among market slightly below market expectations. participants about the likely timing of the start of the normalization of the stance of U.S. monetary policy. Measures of labor compensation rose faster than Based on federal funds futures, the probability of a consumer prices over the past year, but the modest first increase in the target range for the federal funds increases in compensation were similar to those seen rate at the September meeting fell slightly; the probin recent years. Over the four quarters ending in the abilities attached to subsequent meetings through second quarter, the employment cost index increased January 2016 were generally little changed and rose nearly 2 percent and compensation per hour in the for meetings later that year. Similarly, results from nonfarm business sector rose 2¼ percent. Over the the Desk’s September Survey of Primary Dealers and 12 months ending in August, average hourly earnings Survey of Market Participants indicated that, on for all employees increased 2¼ percent. average, respondents pushed out their expected timing of the first increase in the target range for the Foreign economic growth remained weak in the sec- federal funds rate. Regarding the most likely meeting ond quarter, held back by contractions in real GDP date for the first rate increase, survey respondents in Canada, Japan, Brazil, and Taiwan, even as activ- were about evenly split between September and ity continued to expand at a moderate pace in the December. Data on overnight index swap rates indieuro area and the United Kingdom. Indicators for cated that investors marked down the expected path the third quarter pointed to a slight pickup in the of the federal funds rate, on balance, over the interpace of foreign growth, particularly as recent data for meeting period.

222 102nd Annual Report | 2015 Despite the decline in global equity markets and the Financing conditions in consumer credit markets downward shift in the expected path of the federal remained generally accommodative, and the perforfunds rate, yields on nominal Treasury securities mance of outstanding consumer loans was largely moved up modestly, with some market participants stable. Credit card balances expanded amid gradually citing purported sales of Treasury securities by for- easing lending standards, and student and auto loans eign government authorities to finance foreign continued to be broadly available, even to borrowers exchange market intervention as a factor that likely with subprime credit scores. Delinquency rates on put upward pressure on Treasury yields. Measures of credit card loans and auto loans stayed low through inflation compensation based on Treasury Inflation- the second quarter, while delinquency rates on stu- Protected Securities fell to near their historical lows. dent loans remained elevated. Broad U.S. equity price indexes were highly corre- The exchange value of the U.S. dollar rose notably lated with foreign equity indexes over the intermeet- over the period against the currencies of most major ing period and posted net declines. Although con- U.S. trading partners. While the dollar depreciated cerns about global economic growth likely contrib- against the euro and the yen, it appreciated against uted to the declines in domestic equity prices, the Canadian dollar. The dollar also strongly appreinvestors may also have reassessed valuations and risk ciated against the currencies of most emerging marin equity markets. Domestic equity indexes were ket economies, as most Asian currencies weakened quite volatile in late August and early September, and against the dollar following a depreciation of the one-month-ahead option-implied volatility on the Chinese renminbi, and as the currencies of commod- S&P 500 index reached levels last seen in 2011. ity exporters fell along with declining commodity Spreads on 10-year triple-B-rated and speculative- prices. Sovereign yields in the advanced foreign grade corporate bonds over comparable-maturity economies ended the period roughly unchanged. Treasury securities widened slightly over the inter- Changes in peripheral euro-area sovereign yield meeting period. spreads were mixed, with Greek sovereign spreads narrowing significantly over the period as Greece and Financing conditions for nonfinancial businesses the euro area finalized Greece’s third bailout packtightened modestly over the summer. Corporate age. In contrast, falling commodity prices and conbond and institutional leveraged loan issuance cerns about the pace of global growth contributed to remained solid through July but moderated in capital outflows and generally wider spreads on August. The growth of commercial and industrial dollar-denominated debt in emerging Asia and Latin loans on banks’ books slowed in July and August; America. the deceleration was concentrated in banks with greater exposures to oil and gas firms. Financing for Staff Economic Outlook commercial real estate (CRE) remained broadly available, with CRE loans on banks’ books expanding The U.S. economic forecast prepared by the staff for and issuance of commercial mortgage-backed securi- the September FOMC meeting was a little weaker, on ties (CMBS) staying robust. However, spreads on balance, than the one prepared for the July FOMC investment-grade CMBS widened noticeably in meeting. Recent information on real U.S. economic August, reportedly a result of heavy issuance as well activity was generally stronger than expected, but as the increased volatility in broader financial equity prices declined, the foreign exchange value of markets. the dollar appreciated further, and indicators of foreign economic growth were generally weak. The staff Conditions in the market for residential mortgages left its forecast for real GDP growth over the second continued to improve slowly, with interest rates on half of the year little changed but lowered its projec- 30-year fixed-rate mortgages declining slightly. Bank tion for economic growth over the next several years. holdings of closed-end residential loans increased The staff also further trimmed its assumptions for modestly, and the Mortgage Bankers Association’s the rates of increase in productivity and potential index of mortgage credit availability edged up fur- output over the medium term. On net, the level of ther. However, credit availability for borrowers with GDP was anticipated to rise above its potential next low credit scores, hard-to-document income, or high year, and that gap was projected to widen gradually debt-to-income ratios remained tight. over the medium term. The unemployment rate was

Minutes of Federal Open Market Committee Meetings | September 223 projected to run a little below the staff’s estimate of In their discussion of the economic situation and the its longer-run natural rate over this period. outlook, meeting participants viewed the information received over the intermeeting period as indicating The staff projected that consumer price inflation that economic activity was expanding moderately. would move down over the near term by more than Although net exports remained soft, household in the previous projection. Crude oil prices declined spending and business fixed investment were increasfurther over the intermeeting period and were ing moderately, and the housing sector recovered furexpected to result in lower consumer energy prices, ther. The labor market continued to improve, with and the effects of recent dollar appreciation and solid job gains and declining unemployment, and lower commodity prices were anticipated to push labor market indicators showed that underutilization down non-oil import prices. With energy prices and of labor resources had diminished since early in the non-oil import prices expected to begin to increase year. steadily next year, the staff projected that inflation would rise gradually over the next several years but Growth in real GDP over the first half of the year would still be slightly below the Committee’s longer- was stronger than participants expected when they run objective of 2 percent at the end of 2018. Infla- prepared their June forecasts, and the unemployment tion was anticipated to move up to 2 percent thereaf- rate declined somewhat more than anticipated. Parter, with inflation expectations in the longer run ticipants made only small adjustments to their proassumed to be consistent with the Committee’s jections for economic activity over the medium term. objective and slack in labor and product markets pro- They continued to anticipate that, with appropriate jected to have waned. policy accommodation, the pace of expansion of real activity would remain somewhat above its longer-run The staff viewed the uncertainty around its Septem- rate over the next two years and lead to further ber projections for real GDP growth, the unemploy- improvement in labor market conditions. Most conment rate, and inflation as similar to the average of tinued to see the risks to real activity and unemploythe past 20 years. The risks to the forecast for real ment as nearly balanced, but many acknowledged GDP and inflation were seen as tilted to the down- that recent global economic and financial developside, reflecting the staff’s assessment that neither ments may have increased the downside risks to ecomonetary nor fiscal policy was well positioned to nomic activity somewhat. help the economy withstand substantial adverse shocks. Consistent with this downside risk to aggre- Inflation continued to run below the Committee’s gate demand and with the further adjustments to the longer-run objective, partly reflecting declines in staff’s supply-side assumptions, the staff viewed the energy prices and in prices of non-energy imports. risks to its outlook for the unemployment rate as Market-based measures of inflation compensation tilted to the upside. moved lower; survey measures of longer-term inflation expectations remained stable. Participants antici- Participants’ Views on Current Conditions pated that recent global developments would likely and the Economic Outlook put further downward pressure on inflation in the near term; compared with their previous forecasts, In conjunction with this FOMC meeting, members more now saw the risks to inflation as tilted to the of the Board of Governors and Federal Reserve downside. But participants still expected that, as the Bank presidents submitted their projections of the labor market continued to improve and the transitory most likely outcomes for real GDP growth, the effects of declines in energy and non-oil import unemployment rate, inflation, and the federal funds prices dissipated, inflation would rise gradually rate for each year from 2015 through 2018 and over toward 2 percent over the medium term. the longer run, conditional on each participant’s judgment of appropriate monetary policy. The Consumer spending was rising at a solid rate after a longer-run projections represent each participant’s modest increase in the first quarter. Participants assessment of the rate to which each variable would noted that ongoing gains in employment and real be expected to converge, over time, under appropriate income were providing support for the rise in spendmonetary policy and in the absence of further shocks ing, and this support was expected to continue going to the economy. These projections and policy assess- forward. Household credit performance was also ments are described in the Summary of Economic favorable, with delinquency rates on credit cards and Projections, which is an addendum to these minutes. auto loans low. The available reports from District

224 102nd Annual Report | 2015 contacts in the retail and auto industries confirmed of labor resources had been substantially reduced, the recent solid gains in consumer spending. Con- and a few of them expressed the view that underutitacts were generally optimistic about the outlook, lization had been eliminated. But some others although retail sales appeared to be softening in a few believed that labor market slack in addition to that areas where economic activity was adversely affected measured by the unemployment rate remained and by declines in the energy sector and the increase in that further progress was possible before labor marthe foreign exchange value of the dollar. ket conditions were fully consistent with the Committee’s objective of maximum employment. They Housing activity was improving, with sales and new pointed out that, even recognizing the downward construction trending higher. Solid gains in employ- trend in labor force participation, the level of the parment and favorable mortgage rates were anticipated ticipation rate, particularly for prime-age adults, to continue to underpin the recovery in housing. remained depressed; similarly, the number of workers Contacts in a number of Districts were upbeat about on part-time schedules for economic reasons was still prospects for the sector, citing strengthening sales, elevated. A number of participants noted that elimirising home prices, an upturn in household forma- nating slack along such broader dimensions might tions, and reports that buyers had accelerated pur- require a temporary decline in the unemployment chases in anticipation of the possibility that mort- rate below its longer-run normal level, and that this gage rates might move higher in the near term. Mul- development could speed the return of inflation to tifamily construction was particularly strong in a 2 percent. couple of Districts, but in another a shortage of lots was constraining builders’ ability to meet strong The incoming information on wages and labor comdemand for new single-family homes. pensation, including an especially low reading on the employment cost index for the second quarter, The information on business spending from District showed no broad-based acceleration. To some, the contacts was mixed. Nonresidential construction was continued subdued trend in wages was evidence of an reported to be expanding in a number of regions. In absence of upward pressure on inflation from current manufacturing, the auto industry remained a bright levels of labor utilization. Several others, however, spot, but the appreciation of the dollar was still noted that weak productivity growth and low price restraining production of goods for export. Opti- inflation might be contributing to modest wage mism remained relatively high according to some increases. A number of participants reported that District contacts, although a few regional activity some of their business contacts were experiencing surveys noted some caution related to uncertainty labor shortages in various occupations and geoabout recent economic developments abroad. The graphic areas resulting in upward pressure on wages, weakness in commodity prices and the appreciation with a few indicating that the pickup in wages had of the dollar also continued to weigh on activity in become more widespread. the energy and agricultural sectors. Moreover, the outlook for the energy sector appeared to be worsen- Recent readings on headline consumer price inflation ing. The substantial global supply of crude oil reflected only small increases in core inflation and seemed likely to maintain downward pressure on renewed weakness in consumer energy prices. As a energy prices for some time, leading to a deteriora- result, the 12-month changes in both the total and tion in credit conditions for some U.S. producers and core PCE price indexes for August were expected to a further reduction in their capital outlays. still be well below the Committee’s 2 percent objective. Participants continued to judge that a significant Participants agreed that labor market conditions had portion of the shortfall was the result of the transiimproved considerably since earlier in the year. Pay- tory effects of declines in prices of oil and nonroll employment had been increasing steadily. Under- energy commodities. A few participants pointed out utilization of labor resources had diminished along a that since January when the steep drop in energy number of dimensions: The unemployment rate had prices ended, core PCE prices had risen at an annual fallen to a level close to most participants’ estimates rate of 1.7 percent, closer to the Committee’s objecof its longer-run normal rate, and the numbers of tive, despite the continued decline in prices of nondiscouraged workers and those employed part time energy imports. Still, almost all participants anticifor economic reasons had moved lower. With the pated that inflation would continue to run below cumulative improvement in labor market conditions, 2 percent in the near term, particularly in light of the most participants thought that the underutilization further decline in oil prices and further appreciation

Minutes of Federal Open Market Committee Meetings | September 225 of the dollar over the intermeeting period. Partici- tion as small or transitory. Most participants continpants also discussed various measures of expecta- ued to anticipate that, based on their assessment of tions for inflation over the longer run. Surveys con- current economic conditions and their outlook for tinued to show stable longer-run inflation expecta- economic activity, the labor market, and inflation, tions, and most participants continued to anticipate the conditions for policy firming had been met or that longer-run inflation expectations would remain would likely be met by the end of the year. However, well anchored. A few participants expressed some some participants judged that the downside risks to concern about the decline in market-based measures the outlook for economic growth and inflation had of inflation compensation. However, it was noted increased. In their view, although the time for policy that the decline seemed to be related to the further normalization might be near, it would be appropriate drop in oil prices or may importantly reflect shifts in to wait for information, including evidence of further risk and liquidity premiums, and thus may not signal improvement in the labor market, confirming that additional broad and persistent downward price the outlook for economic growth had not deteriopressures. rated significantly and that inflation was still on a path to return to 2 percent over the medium term. A Participants discussed the potential implications of few mentioned that a pickup in wage increases could recent economic and financial developments abroad bolster their confidence that resource utilization had for U.S. economic activity and inflation. A material tightened sufficiently to help move inflation toward slowdown in economic growth in China and potential the Committee’s objective, but they did not view an adverse spillovers to other economies were likely to acceleration in wages as a necessary condition for depress U.S. net exports to some extent. In addition, gaining such confidence. concerns associated with developments in China and other emerging market economies had contributed to Participants weighed a number of risks associated a further appreciation of the dollar and declines in with the timing of policy firming. Some participants prices of oil and other commodities, which were were concerned that the downside risks to inflation likely to hold down U.S. consumer price inflation in could be realized if the target range for the federal the near term. In the United States, equity prices fell, funds rate was increased before it was clear that ecoon balance, amid significant volatility, and risk nomic growth would remain at an above-trend pace spreads for businesses widened. Many participants and downward pressures on inflation had abated. judged that the effects of these developments on They also worried that such a premature tightening domestic economic activity were likely to be small, might erode the credibility of the Committee’s inflabut they acknowledged the risk that they might tion objective if inflation stayed at a rate below 2 perrestrain U.S. economic growth somewhat. In particu- cent for a prolonged period. It was noted that monlar, the appreciation of the dollar since mid-2014 was etary policy was better positioned to respond effecstill a substantial drag on net exports, and the further tively to unanticipated upside inflation surprises than rise in the dollar over the intermeeting period could to persistent below-objective inflation, particularly augment the restraint on U.S. net exports. Some par- when the federal funds rate was still near its effective ticipants commented that the recent decline in equity lower bound. Such considerations also argued for prices needed to be viewed in the context of overall increasing the target range for the federal funds rate valuation levels, which they saw as relatively high, gradually after policy normalization was under way. and a couple noted that volatility had begun to Some other participants, however, expressed concerns subside. about delaying the start of normalizing the target range for the federal funds rate much longer. For During their discussion of economic conditions and example, a significant delay risked an undesired monetary policy, participants indicated that they did buildup of inflationary pressures or economic and not see the changes in asset prices during the inter- financial imbalances that would be costly to unwind meeting period as bearing significantly on their and that eventually could have adverse consequences policy choice except insofar as they affected the out- for economic growth. In addition, a prompt decision look for achieving the Committee’s macroeconomic to firm policy could provide a signal of confidence in objectives and the risks associated with that outlook. the strength of the U.S. economy that might spur Many of them saw the likely effects of recent devel- rather than restrain economic activity. These particiopments on the path of economic activity and infla- pants preferred to begin policy firming soon, with

226 102nd Annual Report | 2015 most of them expecting that beginning the process beginning policy normalization. But some indicated before long would allow the target range for the fed- that their confidence that inflation would gradually eral funds rate to be increased gradually. return to the Committee’s 2 percent objective over the medium term had not increased, in large part Committee Policy Action because recent global economic and financial developments had imparted some restraint to the eco- In their discussion of monetary policy for the period nomic outlook and placed further downward presahead, members judged that information received sure on inflation in the near term. Most members since the FOMC met in July indicated that economic agreed that their confidence that inflation would activity was expanding at a moderate pace. Although move to the Committee’s inflation objective would net exports remained soft, economic growth was increase if, as expected, economic activity continued broadly based. Members noted that recent global and to expand at a moderate rate and labor market condifinancial market developments might restrain eco- tions improved further. Many expected those condinomic activity somewhat as a result of the higher tions to be met later this year, although several memlevel of the dollar and possible effects of slower eco- bers were concerned about downside risks to the outnomic growth in China and in a number of emerging look for real activity and inflation. market and commodity-producing economies. Nevertheless, they still viewed the risks to U.S. economic Other factors important to the Committee’s assessactivity as nearly balanced, and they continued to ment of the inflation outlook were the expectation expect that, with appropriate policy accommodation, that the influences of lower energy and commodity economic activity would most likely continue to prices on headline inflation would abate, as had expand at a moderate pace. occurred in previous episodes, and that inflation expectations would remain stable. With energy and Members agreed that labor market conditions had commodity prices expected to stabilize, members’ improved considerably since earlier in the year, with projections of inflation incorporated a step-up in ongoing solid gains in payroll employment and the headline inflation next year. However, several memunemployment rate falling to a level quite close to bers saw a risk that the additional downward prestheir estimates of its longer-run normal rate. Mem- sure on inflation from lower oil prices and a higher bers anticipated that economic activity was likely to foreign exchange value of the dollar could persist continue to expand at a pace sufficient to lead to a and, as a result, delay or diminish the expected further reduction in underutilization of labor upturn in inflation. And, while survey measures of resources. Headline inflation continued to be held longer-run inflation expectations remained stable, a down by the effects of declines in energy and com- couple of members expressed unease with the decline modity prices, and the year-over-year increase in core in market-based measures of inflation compensation PCE inflation remained below the Committee’s over the intermeeting period. objective. Survey-based measures of longer-term inflation expectations had remained stable; market- After assessing the outlook for economic activity, the based measures of inflation compensation had labor market, and inflation and weighing the uncermoved lower. Members anticipated that the declines tainties associated with the outlook, all but one memin oil prices and the appreciation of the dollar over ber concluded that, although the U.S. economy had the intermeeting period were likely to exert some strengthened and labor underutilization had diminadditional downward pressure on inflation in the ished, economic conditions did not warrant an near term. Members expected inflation to rise gradu- increase in the target range for the federal funds rate ally toward 2 percent over the medium term as the at this meeting. They agreed that developments over labor market improved further and the transitory the intermeeting period had not materially altered the effects of declines in energy and import prices dissi- Committee’s economic outlook. Nevertheless, in part pated, but they agreed to continue to monitor infla- because of the risks to the outlook for economic tion developments closely. activity and inflation, the Committee decided that it was prudent to wait for additional information con- In assessing whether economic conditions had firming that the economic outlook had not deterioimproved sufficiently to initiate a firming in the rated and bolstering members’ confidence that inflastance of policy, many members said that the tion would gradually move up toward 2 percent over improvement in labor market conditions met or the medium term. One member, however, preferred would soon meet one of the Committee’s criteria for to raise the target range for the federal funds rate at

Minutes of Federal Open Market Committee Meetings | September 227 this meeting, indicating that the current low level of markets consistent with federal funds trading in real interest rates was not appropriate in the context a range from 0 to ¼ percent. The Committee of current economic conditions. directs the Desk to undertake open market operations as necessary to maintain such condi- The Committee agreed to maintain the target range tions. The Committee directs the Desk to mainfor the federal funds rate at 0 to ¼ percent and to tain its policy of rolling over maturing Treasury reaffirm in its postmeeting statement that the Com- securities into new issues and its policy of reinmittee’s decision about how long to maintain the cur- vesting principal payments on all agency debt rent target range for the federal funds rate would and agency mortgage-backed securities in depend on its assessment of actual and expected agency mortgage-backed securities. The Comprogress toward its objectives of maximum employ- mittee also directs the Desk to engage in dollar ment and 2 percent inflation. Members agreed that roll and coupon swap transactions as necessary the Committee’s evaluation of progress on its objec- to facilitate settlement of the Federal Reserve’s tives would take into account a wide range of infor- agency mortgage-backed securities transactions. mation, including measures of labor market condi- The System Open Market Account manager and tions, indicators of inflation pressures and inflation the secretary will keep the Committee informed expectations, and readings on financial and interna- of ongoing developments regarding the System’s tional developments. They also agreed to indicate balance sheet that could affect the attainment that the Committee continued to anticipate that it over time of the Committee’s objectives of would be appropriate to raise the target range for the maximum employment and price stability.” federal funds rate when it sees some further improvement in the labor market and is reasonably confident The vote encompassed approval of the statement that inflation will move back to its 2 percent objective below to be released at 2:00 p.m.: over the medium term. It was noted that the expected path of the federal funds rate, rather than the exact “Information received since the Federal Open timing of the initial increase, was most important in Market Committee met in July suggests that influencing financial conditions and thus the outlook economic activity is expanding at a moderate for the economy and inflation. The Committee reiter- pace. Household spending and business fixed ated its expectation that, even after employment and investment have been increasing moderately, and inflation are near mandate-consistent levels, eco- the housing sector has improved further; hownomic conditions may, for some time, warrant keep- ever, net exports have been soft. The labor maring the target federal funds rate below levels the ket continued to improve, with solid job gains Committee views as normal in the longer run. and declining unemployment. On balance, labor market indicators show that underutilization of The Committee also maintained its policy of rein- labor resources has diminished since early this vesting principal payments from its agency debt and year. Inflation has continued to run below the agency mortgage-backed securities in agency Committee’s longer-run objective, partly reflectmortgage-backed securities and of rolling over ing declines in energy prices and in prices of maturing Treasury securities at auction. This policy, non-energy imports. Market-based measures of by keeping the Committee’s holdings of longer-term inflation compensation moved lower; surveysecurities at sizable levels, should help maintain based measures of longer-term inflation expecaccommodative financial conditions. tations have remained stable. At the conclusion of the discussion, the Committee Consistent with its statutory mandate, the Comvoted to authorize and direct the Federal Reserve mittee seeks to foster maximum employment Bank of New York, until it was instructed otherwise, and price stability. Recent global economic and to execute transactions in the SOMA in accordance financial developments may restrain economic with the following domestic policy directive: activity somewhat and are likely to put further downward pressure on inflation in the near “Consistent with its statutory mandate, the Fed- term. Nonetheless, the Committee expects that, eral Open Market Committee seeks monetary with appropriate policy accommodation, ecoand financial conditions that will foster maxi- nomic activity will expand at a moderate pace, mum employment and price stability. In particu- with labor market indicators continuing to move lar, the Committee seeks conditions in reserve toward levels the Committee judges consistent

228 102nd Annual Report | 2015 with its dual mandate. The Committee continues Voting for this action: Janet L. Yellen, William C. to see the risks to the outlook for economic Dudley, Lael Brainard, Charles L. Evans, Stanley activity and the labor market as nearly balanced Fischer, Dennis P. Lockhart, Jerome H. Powell, but is monitoring developments abroad. Infla- Daniel K. Tarullo, and John C. Williams. tion is anticipated to remain near its recent low level in the near term but the Committee expects Voting against this action: Jeffrey M. Lacker. inflation to rise gradually toward 2 percent over the medium term as the labor market improves Mr. Lacker dissented because he believed that mainfurther and the transitory effects of declines in taining exceptionally low real interest rates was not energy and import prices dissipate. The Com- appropriate for an economy with persistently strong mittee continues to monitor inflation develop- consumption growth and tightening labor markets. ments closely. He viewed current disinflationary forces as likely to be transitory, and was reasonably confident that To support continued progress toward maxi- inflation would move toward 2 percent. In his view, mum employment and price stability, the Com- further delay in removing monetary policy accommomittee today reaffirmed its view that the current dation would represent a risky departure from past 0 to ¼ percent target range for the federal funds patterns of FOMC behavior in response to such ecorate remains appropriate. In determining how nomic conditions. long to maintain this target range, the Committee will assess progress—both realized and It was agreed that the next meeting of the Committee expected—toward its objectives of maximum would be held on Tuesday–Wednesday, October 27– employment and 2 percent inflation. This assess- 28, 2015. The meeting adjourned at 10:55 a.m. on ment will take into account a wide range of September 17, 2015. information, including measures of labor market conditions, indicators of inflation pressures and Notation Vote inflation expectations, and readings on financial and international developments. The Committee By notation vote completed on August 18, 2015, the anticipates that it will be appropriate to raise the Committee unanimously approved the minutes of the target range for the federal funds rate when it Committee meeting held on July 28–29, 2015. has seen some further improvement in the labor market and is reasonably confident that inflation Brian F. Madigan will move back to its 2 percent objective over the Secretary medium term. Addendum: The Committee is maintaining its existing policy Summary of Economic Projections of reinvesting principal payments from its holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed In conjunction with the Federal Open Market Comsecurities and of rolling over maturing Treasury mittee (FOMC) meeting held on September 16–17, securities at auction. This policy, by keeping the 2015, meeting participants submitted their projec- Committee’s holdings of longer-term securities tions of the most likely outcomes for real output at sizable levels, should help maintain accommo- growth, the unemployment rate, inflation, and the dative financial conditions. federal funds rate for each year from 2015 to 2018 and over the longer run. Each participant’s projec- When the Committee decides to begin to remove tion was based on information available at the time policy accommodation, it will take a balanced of the meeting together with his or her assessment of approach consistent with its longer-run goals of appropriate monetary policy and assumptions about maximum employment and inflation of 2 per- the factors likely to affect economic outcomes. The cent. The Committee currently anticipates that, longer-run projections represent each participant’s even after employment and inflation are near assessment of the value to which each variable would mandate-consistent levels, economic conditions be expected to converge, over time, under appropriate may, for some time, warrant keeping the target monetary policy and in the absence of further shocks federal funds rate below levels the Committee to the economy. “Appropriate monetary policy” is views as normal in the longer run.” defined as the future path of policy that each partici-

Minutes of Federal Open Market Committee Meetings | September 229 pant deems most likely to foster outcomes for eco- projected that inflation would be at or close to the nomic activity and inflation that best satisfy his or Committee’s 2 percent longer-run objective in 2018. her individual interpretation of the Federal Reserve’s objectives of maximum employment and stable As shown in figure 2, all but four participants anticiprices. pated that it would be appropriate to begin raising the target range for the federal funds rate in 2015. FOMC participants generally expected that, under Most expected that it would be appropriate to raise appropriate monetary policy, economic growth in the target federal funds rate fairly gradually over the 2015 would be at or slightly above their individual projection period as headwinds to economic growth estimates of the U.S. economy’s longer-run normal fade, labor market indicators reach levels consistent growth rate and would increase somewhat in 2016 with the Committee’s mandated objective of maxibefore slowing to or toward its longer-run rate in mum employment, and inflation moves up to 2 per- 2017 and 2018 (table 1 and figure 1). Most partici- cent. Most participants continued to expect that it pants projected that the unemployment rate would would be appropriate for the federal funds rate still to decline a bit further over the remainder of 2015 and be appreciably below its longer-run level in 2016 and be at or slightly below their individual judgments of 2017, reflecting the effects of remaining headwinds its longer-run normal level from 2016 through 2018. along with other factors. Participants projected that inflation, as measured by the four-quarter change in the price index for per- Most participants viewed the levels of uncertainty sonal consumption expenditures (PCE), would be associated with their outlooks for economic growth very low this year but then would pick up notably and the unemployment rate as broadly similar to the next year and rise further in 2017; all participants average level of the past 20 years. Most also judged Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, September 2015 Percent Median1 Central tendency2 Range3 Variable Longer Longer L onger 2 015 2016 2017 2018 run 2015 2016 2017 2018 run 2 015 2 016 2 017 2 018 run Change in real GDP 2.1 2.3 2.2 2.0 2.0 2 .0–2.3 2.2–2.6 2.0–2.4 1.8–2.2 1.8–2.2 1.9–2.5 2.1–2.8 1.9–2.6 1.6–2.4 1.8–2.7 June projection 1.9 2.5 2.3 n.a. 2.0 1.8–2.0 2.4–2.7 2.1–2.5 n.a. 2.0–2.3 1.7–2.3 2.3–3.0 2.0–2.5 n.a. 1.8–2.5 Unemployment rate 5.0 4.8 4.8 4.8 4.9 5.0–5.1 4.7–4.9 4.7–4.9 4.7–5.0 4.9–5.2 4.9–5.2 4.5–5.0 4.5–5.0 4.6–5.3 4.7–5.8 June projection 5.3 5.1 5.0 n.a. 5.0 5.2–5.3 4.9–5.1 4.9–5.1 n.a. 5.0–5.2 5.0–5.3 4.6–5.2 4.8–5.5 n.a. 5.0–5.8 PCE inflation 0.4 1.7 1.9 2.0 2.0 0.3–0.5 1.5–1.8 1.8–2.0 2.0 2.0 0.3–1.0 1.5–2.4 1 .7–2.2 1 .8–2.1 2.0 June projection 0.7 1.8 2.0 n.a. 2.0 0.6–0.8 1.6–1.9 1.9–2.0 n.a. 2.0 0.6–1.0 1.5–2.4 1.7–2.2 n.a. 2.0 Core PCE inflation4 1.4 1.7 1.9 2.0 1.3–1.4 1.5–1.8 1.8–2.0 1.9–2.0 1.2–1.7 1.5–2.4 1.7–2.2 1.8–2.1 June projection 1.3 1.8 2.0 n.a. 1.3–1.4 1.6–1.9 1.9–2.0 n.a. 1.2–1.6 1.5–2.4 1.7–2.2 n.a. Memo: Projected appropriate policy path Federal funds rate 0.4 1.4 2.6 3.4 3.5 0.1–0.6 1.1–2.1 2.1–3.4 3.0–3.6 3.3–3.8 -0.1–0.9 -0.1–2.9 1.0–3.9 2 .9–3.9 3.0–4.0 June projection 0.6 1.6 2.9 n.a. 3.8 0.4–0.9 1.4–2.4 2.4–3.8 n.a. 3.5–3.8 0.1–0.9 0.4–2.9 2.0–3.9 n.a. 3.3–4.3 Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The projections for the federal funds rate are the value (rounded to the nearest ⅛ percentage point) of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. The June projections were made in conjunction with the meeting of the Federal Open Market Committee on June 16–17, 2015. 1 For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the average of the two middle projections. 2 The central tendency excludes the three highest and three lowest projections for each variable in each year. 3 The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year. 4 Longer-run projections for core PCE inflation are not collected.

230 102nd Annual Report | 2015 Figure 1. Medians, central tendencies, and ranges of economic projections, 2015–18 and over the longer run Percent Change in real GDP Median of projections 4 Central tendency of projections Range of projections 3 2 Actual 1 + 0 - 2010 2011 2012 2013 2014 2015 2016 2017 2018 Longer run Percent Unemployment rate 10 9 8 7 6 5 2010 2011 2012 2013 2014 2015 2016 2017 2018 Longer run Percent PCE inflation 3 2 1 2010 2011 2012 2013 2014 2015 2016 2017 2018 Longer run Percent Core PCE inflation 3 2 1 2010 2011 2012 2013 2014 2015 2016 2017 2018 Longer run Note: Definitions of variables are in the general note to table 1. The data for the actual values of the variables are annual.

Minutes of Federal Open Market Committee Meetings | September 231 Figure 2. Overview of FOMC participants’ assessments of appropriate monetary policy Number of participants Appropriate timing of policy firming 14 13 13 12 11 10 9 8 7 6 5 4 3 3 2 1 1 2015 2016 2017 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 - 0.5 2015 2016 2017 2018 Longer run Note: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under appropriate monetary policy, the first increase in the target range for the federal funds rate from its current range of 0 to ¼ percent will occur in the specified calendar year. In June 2015, the numbers of FOMC participants who judged that the first increase in the target federal funds rate would occur in 2015, 2016, and 2017 were, respectively, 15, 2, and 0. In the lower panel, each shaded circle indicates the value (rounded to the nearest ⅛ percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.

232 102nd Annual Report | 2015 the level of uncertainty about inflation to be broadly through 2018. Compared with the June SEP, particisimilar to the average level of the past 20 years, pants’ projected paths for the unemployment rate although a few participants viewed it as higher. In generally shifted down somewhat through 2017. addition, most participants continued to see the risks Many participants noted that recent data pointing to to the outlook for economic growth and for the faster-than-expected improvement in labor market unemployment rate as broadly balanced, although conditions were an important factor underlying the some viewed the risks to economic growth as downward revisions to their unemployment rate foreweighted to the downside and some saw the risks to casts. All but a few participants revised down their unemployment as weighted to the upside. A few more estimates of the longer-run normal rate of unemparticipants saw the risks to inflation as weighted to ployment; as a result, the median estimate edged the downside than as balanced, while one judged down to 4.9 percent. Several participants noted that these risks to be tilted to the upside. still-subdued wage and price inflation despite the stronger-than-expected momentum in the labor mar- The Outlook for Economic Activity ket suggested a lower level of the longer-run normal rate of unemployment than they had thought previ- Participants generally projected that, conditional on ously. A few also mentioned research indicating that their individual assumptions about appropriate mon- demographic groups with lower average unemployetary policy, real gross domestic product (GDP) ment rates have accounted for an increasing fraction would grow from 2015 through 2017 at a pace of the labor force. slightly above their estimates of its longer-run normal rate, and that real GDP growth would then slow in Figures 3.A and 3.B show the distribution of partici- 2018 to a rate at or near their individual estimates of pants’ views regarding the likely outcomes for real the longer-run rate. Participants pointed to a number GDP growth and the unemployment rate through of factors that they expected would contribute to 2018 and in the longer run. The diversity of views moderate real output growth over the next few years, across participants reflected, in part, their individual including improving labor market conditions, assessments of a number of factors, including the strengthened household and business balance sheets, effects of lower oil prices on consumer spending and the boost to consumer spending from low energy business investment, the extent to which dollar appreprices, diminishing restraint from fiscal policy, and ciation and weaker foreign economic growth would still-accommodative monetary policy. affect real activity, the rate at which the forces that have been restraining the pace of the economic Compared with their Summary of Economic Projec- expansion would continue to abate, the degree to tions (SEP) contributions in June, all participants which ongoing improvements in the labor market revised up their projections of real GDP growth for would support stronger consumption growth, and 2015, reflecting stronger-than-anticipated growth the appropriate path of monetary policy. Relative to over the first half of the year. Most participants the June SEP, the dispersion of participants’ projecrevised down their projections of real GDP growth in tions for real GDP growth was roughly unchanged 2016 and 2017. Several participants cited slower pro- through 2016 but was somewhat wider in 2017 and jected productivity growth as a reason for their the longer run. The dispersion of participants’ prodownward revisions. The median value of partici- jections for the unemployment rate in the longer run pants’ current projections for real GDP growth was also widened somewhat. 2.1 percent in 2015, 2.3 percent in 2016, 2.2 percent in 2017, and 2.0 percent in 2018. Although about half The Outlook for Inflation of the participants marked down their projections of real GDP growth in the longer run, the median Compared with the June SEP, almost all participants remained at 2.0 percent. marked down their projections for PCE inflation this year, noting that inflation had been running below Most participants projected that the unemployment their earlier projections and that further declines in rate would decline a bit further over the remainder of energy prices and import prices were putting addi- 2015 and be at or below their individual judgments of tional temporary downward pressure on PCE inflaits longer-run normal level from 2016 through 2018. tion. Nearly all participants saw PCE inflation pick- The median of participants’ forecasts for the unem- ing up in 2016 and rising further in 2017, and almost ployment rate in the fourth quarter of each year was all saw inflation at or close to the Committee’s 2 per- 5.0 percent in 2015 and 4.8 percent from 2016 cent longer-run objective in 2018. Some participants

Minutes of Federal Open Market Committee Meetings | September 233 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2015–18 and over the longer run Number of participants 2015 September projections 18 June projections 16 14 12 10 8 6 4 2 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 Percent range Number of participants 2016 18 16 14 12 10 8 6 4 2 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 3.0 - 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 Percent range Note: Definitions of variables are in the general note to table 1.

234 102nd Annual Report | 2015 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2015–18 and over the longer run Number of participants 2015 September projections 18 June projections 16 14 12 10 8 6 4 2 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Number of participants 2016 18 16 14 12 10 8 6 4 2 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | September 235 also marked down their projections for core PCE Most participants projected that the unemployment inflation from 2015 through 2017, although almost rate would be at or only slightly above their estimates all still expected core inflation to rise gradually over of its longer-run normal level at the end of the year the projection period and to reach a level at or near in which they judged the initial increase in the target 2 percent in 2018. The median values of projections range for the federal funds rate would be warranted. for PCE inflation were 0.4 percent in 2015, 1.7 per- All participants projected that inflation would be cent in 2016, 1.9 percent in 2017, and 2.0 percent in below the Committee’s 2 percent objective in that 2018, and the median values for core PCE inflation year, but they also saw inflation rising substantially were 1.4 percent in 2015, 1.7 percent in 2016, 1.9 per- closer to 2 percent in the following year. cent in 2017, and 2.0 percent in 2018. Factors cited by participants as likely to contribute to a rise of Figure 3.E provides the distribution of participants’ inflation toward 2 percent included stable longer- judgments regarding the appropriate level of the tarterm inflation expectations, tighter resource utiliza- get federal funds rate at the end of each calendar year tion, a pickup in wage growth, the waning effects of from 2015 to 2018 and over the longer run. Relative declines in energy prices and appreciation of the dol- to June, the median value of the federal funds rate lar, and still-accommodative monetary policy. decreased 25 basis points at the end of 2015, 2016, and 2017 to 0.38 percent, 1.38 percent, and 2.63 per- Figures 3.C and 3.D provide information on the dis- cent, respectively, and the dispersion of the projectribution of participants’ views about the outlook for tions for the federal funds rate widened from 2015 inflation. The range of participants’ projections for through 2017. PCE inflation in 2015 widened slightly compared with June, reflecting in part differences in partici- Almost all participants judged that it would be pants’ assessments of the effects of the declines in appropriate for the federal funds rate to remain energy and import prices on the outlook for infla- noticeably below its longer-run normal level over the tion. The dispersion for PCE inflation for 2016 and next two years even though the unemployment rate 2017 was about unchanged. Similarly, the ranges for was anticipated to be near its mandate-consistent core PCE inflation widened slightly in 2015 and were level and most participants expected inflation to be unchanged for 2016 and 2017. The distributions for close to 2 percent by 2017. The reasons cited for only both inflation measures in 2017 and 2018 were nota- gradually increasing the federal funds rate included bly more concentrated near the Committee’s 2 per- an assessment that the headwinds that have been cent longer-run objective than those for 2015 and holding back the economic expansion will continue 2016. to exert some restraint on economic activity, partly because weak activity abroad and the recent appre- Appropriate Monetary Policy ciation of the dollar are likely to continue to damp U.S. net exports for some time. As support for a view Participants judged that it would be appropriate to that accommodative monetary policy would remain raise the target range for the federal funds rate over appropriate over the next few years, some particithe projection period as forces that have been pants also noted their assessment that residual slack restraining the expansion abate and as labor market in the labor market will still be evident in measures of indicators and inflation move toward values the labor utilization other than the unemployment rate, Committee judges consistent with the attainment of or that the risks to the economic outlook are asymits mandated objectives of maximum employment metric as a result of the constraints on monetary and price stability. As shown in figure 2, all but four policy associated with the effective lower bound on participants anticipated that it would be appropriate the federal funds rate. Most participants expected the to begin raising the target range for the federal funds federal funds rate to be at or only slightly below its rate during 2015. However, most projected that the longer-run normal level by 2018. appropriate level of the federal funds rate would remain noticeably below their individual estimates of Relative to the June SEP, more than half of the parits longer-run normal level through 2017. Most par- ticipants revised down their estimates of the longerticipants saw the appropriate level of the federal run level of the federal funds rate, with a lower funds rate as close to its longer-run normal level by assessment of the economy’s longer-run growth 2018. potential generally cited as a contributing factor. The

236 102nd Annual Report | 2015 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2015–18 and over the longer run Number of participants 2015 September projections 18 June projections 16 14 12 10 8 6 4 2 0.3 - 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.4 0.6 0.8 1.0 1.2 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 0.3 - 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.4 0.6 0.8 1.0 1.2 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 0.3 - 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 0.3 - 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 0.3 - 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | September 237 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2015–18 Number of participants 2015 September projections 18 June projections 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2016 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note: Definitions of variables are in the general note to table 1.

238 102nd Annual Report | 2015 Figure 3.E. Distribution of participants’ judgments of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate, 2015–18 and over the longer run Number of participants 2015 September projections 18 June projections 16 14 12 10 8 6 4 2 −0.37 - −0.1 2 - 0.1 3 - 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 - −0.13 0.12 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 18 16 14 12 10 8 6 4 2 −0.37 - −0.1 2 - 0.1 3 - 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 - −0.13 0.12 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 2017 18 16 14 12 10 8 6 4 2 −0.37 - −0.1 2 - 0.1 3 - 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 - −0.13 0.12 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 2018 18 16 14 12 10 8 6 4 2 −0.37 - −0.1 2 - 0.1 3 - 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 - −0.13 0.12 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 18 16 14 12 10 8 6 4 2 −0.37 - −0.1 2 - 0.1 3 - 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 - −0.13 0.12 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: The midpoints of the target ranges for the federal funds rate and the target levels for the federal funds rate are measured at the end of the specified calendar year or over the longer run.

Minutes of Federal Open Market Committee Meetings | September 239 tions in financial markets that could result from a Table 2. Average historical projection error ranges steep increase in the target federal funds rate follow- Percentage points ing liftoff, and the risks around the outlook for eco- Variable 2015 2016 2017 2018 nomic activity and inflation. Some participants also mentioned the prescriptions of various monetary Change in real GDP1 ±1.3 ±1.9 ±2.1 ±2.2 policy rules as factors they considered in judging the Unemployment rate1 ±0.3 ±1.0 ±1.7 ±1.9 appropriate path for the federal funds rate. Total consumer prices2 ±0.8 ±1.0 ±1.1 ±1.0 Note: Error ranges shown are measured as plus or minus the root mean squared Uncertainty and Risks error of projections for 1995 through 2014 that were released in the fall by various private and government forecasters. As described in the box “Forecast Uncertainty,” under certain assumptions, there is about a 70 percent probability Nearly all participants continued to judge the levels that actual outcomes for real GDP, unemployment, and consumer prices will be in ranges implied by the average size of projection errors made in the past. For more of uncertainty attending their projections for real information, see David Reifschneider and Peter Tulip (2007), “Gauging the GDP growth and the unemployment rate as broadly Uncertainty of the Economic Outlook from Historical Forecasting Errors,” Finance and Economics Discussion Series 2007-60 (Washington: Board of Governors of similar to the norms during the previous 20 years the Federal Reserve System, November), available at www.federalreserve.gov/ (figure 4).2 Most participants continued to see the pubs/feds/2007/200760/200760abs.html; and Board of Governors of the Federal Reserve System, Division of Research and Statistics (2014), “Updated Historical risks to their outlooks for real GDP growth as Forecast Errors,” memorandum, April 9, www.federalreserve.gov/foia/files/ broadly balanced, although a larger number than in 20140409-historical-forecast-errors.pdf. 1 Definitions of variables are in the general note to table 1. June viewed the risks to real GDP growth as 2 Measure is the overall consumer price index, the price measure that has been weighted to the downside. Those participants who most widely used in government and private economic forecasts. Projection viewed the risks as weighted to the downside cited, is percent change, fourth quarter of the previous year to the fourth quarter of the year indicated. for example, a weaker outlook for economic activity abroad and the recent appreciation of the dollar. Most participants judged the risks to the outlook for median estimate of the longer-run normal federal the unemployment rate to be broadly balanced, funds rate declined 25 basis points from June, and the though more participants than in June viewed the range moved down from 3.25 to 4.25 percent to risks to the unemployment rate as weighted to the 3.0 to 4.0 percent. All participants judged that inflaupside. tion in the longer run would be equal to the Committee’s objective of 2 percent, implying that their indi- As in the June SEP, participants generally agreed that vidual judgments regarding the appropriate longerthe levels of uncertainty associated with their inflarun level of the real federal funds rate in the absence tion forecasts were broadly similar to historical of further shocks to the economy ranged from 1.0 to norms. Many participants viewed the risks to their 2.0 percent. inflation forecast as balanced. However, the risks were seen as tilted to the downside by more than half Participants’ views of the appropriate path for monof the participants, an increase since the June SEP. etary policy were informed by their judgments about These participants cited the recent declines in the state of the economy, including the values of the market-based measures of inflation compensation unemployment rate and other labor market indicaand commodity prices and the appreciation of the tors that would be consistent with maximum employdollar as factors that could place greater downward ment, their estimates of the current extent of slack in pressure on prices than anticipated. the labor market, the prospects for inflation to return to the Committee’s longer-term objective of 2 per- 2 Table 2 provides estimates of the forecast uncertainty for the cent, the implications of international developments change in real GDP, the unemployment rate, and total confor the domestic economy, the pace at which head- sumer price inflation over the period from 1995 through 2014. winds that have been restraining economic activity At the end of this summary, the box “Forecast Uncertainty” discusses the sources and interpretation of uncertainty in the dissipate and underlying momentum in the economy economic forecasts and explains the approach used to assess the strengthens, the desire to minimize potential disrup- uncertainty and risks attending the participants’ projections.

240 102nd Annual Report | 2015 Figure 4. Uncertainty and risks in economic projections Number of participants Number of participants Uncertainty about GDP growth Risks to GDP growth September projections September projections 18 18 June projections June projections 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 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: For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.” Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | September 241 Forecast Uncertainty The economic projections provided by the members year. The corresponding 70 percent confidence interof the Board of Governors and the presidents of the vals for overall inflation would be 1.2 to 2.8 percent in Federal Reserve Banks inform discussions of mon- the current year, 1.0 to 3.0 percent in the second etary policy among policymakers and can aid public year, 0.9 to 3.1 percent in the third year, and 1.0 to understanding of the basis for policy actions. Con- 3.0 percent in the fourth year. siderable uncertainty attends these projections, how- Because current conditions may differ from those ever. The economic and statistical models and relathat prevailed, on average, over history, participants tionships used to help produce economic forecasts provide judgments as to whether the uncertainty are necessarily imperfect descriptions of the real attached to their projections of each variable is world, and the future path of the economy can be greater than, smaller than, or broadly similar to typiaffected by myriad unforeseen developments and cal levels of forecast uncertainty in the past, as events. Thus, in setting the stance of monetary shown in table 2. Participants also provide judgments policy, participants consider not only what appears to as to whether the risks to their projections are be the most likely economic outcome as embodied in weighted to the upside, are weighted to the downtheir projections, but also the range of alternative side, or are broadly balanced. That is, participants possibilities, the likelihood of their occurring, and the judge whether each variable is more likely to be potential costs to the economy should they occur. above or below their projections of the most likely Table 2 summarizes the average historical accuracy outcome. These judgments about the uncertainty of a range of forecasts, including those reported in and the risks attending each participant’s projections past Monetary Policy Reports and those prepared by are distinct from the diversity of participants’ views the Federal Reserve Board’s staff in advance of about the most likely outcomes. Forecast uncertainty meetings of the Federal Open Market Committee. is concerned with the risks associated with a particu- The projection error ranges shown in the table illus- lar projection rather than with divergences across a trate the considerable uncertainty associated with number of different projections. economic forecasts. For example, suppose a partici- As with real activity and inflation, the outlook for the pant projects that real gross domestic product (GDP) future path of the federal funds rate is subject to conand total consumer prices will rise steadily at annual siderable uncertainty. This uncertainty arises primarily rates of, respectively, 3 percent and 2 percent. If the because each participant’s assessment of the approuncertainty attending those projections is similar to priate stance of monetary policy depends importantly that experienced in the past and the risks around the on the evolution of real activity and inflation over projections are broadly balanced, the numbers time. If economic conditions evolve in an unexpected reported in table 2 would imply a probability of about manner, then assessments of the appropriate setting 70 percent that actual GDP would expand within a of the federal funds rate would change from that range of 1.7 to 4.3 percent in the current year, 1.1 to point forward. 4.9 percent in the second year, 0.9 to 5.1 percent in the third year, and 0.8 to 5.2 percent in the fourth

242 102nd Annual Report | 2015 Meeting Held Thomas Laubach Economist on October 27–28, 2015 David W. Wilcox A joint meeting of the Federal Open Market Com- Economist mittee and the Board of Governors was held in the David Altig, Thomas A. Connors, offices of the Board of Governors of the Federal Eric M. Engen, Michael P. Leahy, Reserve System in Washington, D.C., on Tuesday, William R. Nelson, Glenn D. Rudebusch, October 27, 2015, at 10:00 a.m. and continued on Daniel G. Sullivan, and William Wascher Wednesday, October 28, 2015, at 9:00 a.m. Associate Economists Present Simon Potter Manager, System Open Market Account Janet L. Yellen Lorie K. Logan Chair Deputy Manager, System Open Market Account William C. Dudley Robert deV. Frierson1 Vice Chairman Secretary of the Board, Office of the Secretary, Lael Brainard Board of Governors Charles L. Evans Michael S. Gibson Director, Division of Banking Supervision and Stanley Fischer Regulation, Board of Governors Jeffrey M. Lacker Nellie Liang Director, Office of Financial Stability Policy and Dennis P. Lockhart Research, Board of Governors Jerome H. Powell Margaret Shanks2 Daniel K. Tarullo Deputy Secretary, Office of the Secretary, Board of Governors John C. Williams James A. Clouse and Stephen A. Meyer James Bullard, Esther L. George, Loretta J. Mester, Deputy Directors, Division of Monetary Affairs, Eric Rosengren, and Michael Strine Board of Governors Alternate Members of the Federal Open Market Committee Andreas Lehnert Deputy Director, Office of Financial Stability Policy Patrick Harker, Robert S. Kaplan, and Research, Board of Governors and Narayana Kocherlakota Presidents of the Federal Reserve Banks of William B. English Philadelphia, Dallas, and Minneapolis, respectively Senior Special Adviser to the Board, Office of Board Members, Board of Governors Brian F. Madigan Andrew Figura and Stacey Tevlin Secretary Special Advisers to the Board, Office of Board Matthew M. Luecke Members, Board of Governors Deputy Secretary Trevor A. Reeve David W. Skidmore Special Adviser to the Chair, Office of Board Assistant Secretary Members, Board of Governors Michelle A. Smith Linda Robertson Assistant Secretary Assistant to the Board, Office of Board Members, Board of Governors Scott G. Alvarez General Counsel 1 Attended Tuesday morning’s discussion of equilibrium real interest rates and Wednesday’s session. Steven B. Kamin 2 Attended Tuesday’s session following the discussion of equilib- Economist rium real interest rates.

Minutes of Federal Open Market Committee Meetings | October 243 David E. Lebow Benjamin K. Johannsen5 Senior Associate Director, Division of Research and Economist, Division of Monetary Affairs, Statistics, Board of Governors Board of Governors Jeremy B. Rudd David Sapenaro Senior Adviser, Division of Research and Statistics, First Vice President, Federal Reserve Bank of Board of Governors St. Louis Joyce K. Zickler Jeff Fuhrer Senior Adviser, Division of Monetary Affairs, Executive Vice President, Federal Reserve Bank of Board of Governors Boston Fabio M. Natalucci Kei-Mu Yi Associate Director, Division of Monetary Affairs, Special Policy Advisor to the President, Federal Board of Governors Reserve Bank of Minneapolis Joseph W. Gruber3 Michael Dotsey, Michael Held, Evan F. Koenig, Deputy Associate Director, Division of International and Christopher J. Waller Finance, Board of Governors Senior Vice Presidents, Federal Reserve Banks of Philadelphia, New York, Dallas, and St. Louis, Jane E. Ihrig4 and David López-Salido5 respectively Deputy Associate Directors, Division of Monetary Affairs, Board of Governors Edward S. Knotek II and George A. Kahn Vice Presidents, Federal Reserve Banks of Cleveland Glenn Follette and John M. Roberts and Kansas City, respectively Assistant Directors, Division of Research and Statistics, Board of Governors Robert Rich and Andrea Tambalotti5 Assistant Vice Presidents, Federal Reserve Bank of Christopher J. Gust New York Assistant Director, Division of Monetary Affairs, Board of Governors Andreas L. Hornstein Senior Advisor, Federal Reserve Bank of Richmond Robert J. Tetlow Adviser, Division of Monetary Affairs, Jing Zhang5 Board of Governors Senior Economist, Federal Reserve Bank of Chicago Penelope A. Beattie3 Equilibrium Real Interest Rates Assistant to the Secretary, Office of the Secretary, Board of Governors The staff presented several briefings regarding the concept of an equilibrium real interest rate—some- Dana L. Burnett times labeled the “neutral” or “natural” real interest Section Chief, Division of Monetary Affairs, rate, or “r*”—that can serve as a benchmark to help Board of Governors gauge the stance of monetary policy. Various con- Andrea Raffo5 cepts of r* were discussed. According to one defini- Section Chief, Division of International Finance, tion, short-run r* is the level of the real short-term Board of Governors interest rate that, if obtained currently, would result in the economy operating at full employment or, in David H. Small some simple models of the economy, at full employ- Project Manager, Division of Monetary Affairs, ment and price stability. The staff summarized the Board of Governors behavior of estimates of the short-run equilibrium Yuriy Kitsul real rate over recent business cycles as well as longer- Senior Economist, Division of Monetary Affairs, run trends in real interest rates and key factors that Board of Governors influence those trends. Estimates derived using a variety of empirical models of the U.S. economy and a 3 Attended Tuesday’s session only. range of econometric techniques indicated that 4 Attended through the discussion of financial developments and short-run r* fell sharply with the onset of the open market operations. 2008–09 financial crisis and recession, quite likely to 5 Attended through the discussion of equilibrium real interest rates. negative levels. Short-run r* was estimated to have

244 102nd Annual Report | 2015 recovered only partially and to be close to zero cur- policymakers would not be able to reduce the federal rently, still well below levels that prevailed during funds rate enough to promote a strong economic recent economic expansions when the unemployment recovery and rapid return to maximum employment rate was close to estimates of its longer-run normal or to maintain price stability in the aftermath of level. negative shocks to aggregate demand. Some participants noted that it would be prudent to have addi- With respect to longer-run trends, the staff noted tional policy tools that could be used in such that multiyear averages of short-term real interest situations. rates had been declining not only in the United States, but also in many other large economies for the Developments in Financial Markets, past quarter-century and stood near zero in most of Open Market Operations, and those economies. Moreover, economic theory indi- Policy Normalization cates that the equilibrium level of short-term real interest rates would likely remain low relative to esti- The deputy manager of the System Open Market mates of its level before the financial crisis if trend Account (SOMA) reported on developments in growth of total factor productivity does not pick up domestic and foreign financial markets, money marand if demographic projections for slow growth in kets, and System open market operations conducted working-age populations are borne out. Finally, the by the Open Market Desk during the period since the staff discussed the implications of uncertainty about Federal Open Market Committee (FOMC) met on the level of the equilibrium real rate for using esti- September 16–17. Take-up of the System’s overnight mates of short-run r* as a guideline for appropriate reverse repurchase agreement operations increased monetary policy. during this period, evidently reflecting a modest narrowing of the spread of money market interest rates In their comments on the briefings and in their dis- over the offered rate on such operations. Total cussion of the potential use of r* in monetary policy take-up of overnight and term reverse repurchase deliberations, policymakers made a number of obser- agreements at the end of the third quarter was also vations. The unemployment rate has declined gradu- elevated. The deputy manager briefed the Committee ally in recent years, indicating that real gross domes- on plans for the upcoming quarterly test of the Term tic product (GDP) growth has, on average, exceeded Deposit Facility in December and for term reverse growth of potential GDP, but not by a substantial repurchase agreement operations to be conducted margin. This outcome, in turn, suggested that the ahead of year-end. In addition, an update was proactual level of short-term real interest rates has been vided on a data collection that will allow the calculabelow but not substantially below the equilibrium tion of the federal funds effective rate and a new real rate, consistent with estimates that r* currently is overnight bank funding rate based on transactionclose to zero, notably below its historical average. level data reported by depository institutions that are active in overnight bank funding markets; as previ- A number of participants indicated that they ously reported, the Federal Reserve expects to begin expected short-run r* to rise as the economic expan- publication of the rates based on these data in the sion continued, but probably only gradually. More- first few months of 2016. over, it was noted that the longer-run downward trend in real interest rates suggested that short-run r* A staff presentation reviewed issues that could arise would likely remain below levels that were normal if the Treasury was temporarily unable to meet its during previous business cycle expansions, and that obligations because of constraints associated with the longer-run normal level to which the nominal fed- the statutory federal debt limit. Following the preseneral funds rate might be expected to converge in the tation, policymakers indicated that, if such issues absence of further shocks to the economy—that is, arose, it remained appropriate to follow the strategy the level that would be consistent, in the long run, for open market operations, the discount window, with maximum employment and 2 percent infla- and other System responsibilities that was discussed tion—would likely be lower than was the case in pre- at the Committee’s video-conference meeting of vious decades. A lower long-run level of r* would October 16, 2013, and summarized in the minutes of also imply that the gap between the actual level of the that meeting. federal funds rate and its near-zero effective lower bound would be smaller on average. A smaller gap By unanimous vote, the Committee ratified the might increase the frequency of episodes in which Desk’s domestic transactions over the intermeeting

Minutes of Federal Open Market Committee Meetings | October 245 period. There were no intervention operations in for- over the intermeeting period. Moreover, consumer eign currencies for the System’s account over the sentiment in the University of Michigan Surveys of intermeeting period. Consumers improved in early October. Staff Review of the Economic Situation Activity in the housing sector was mixed, but it generally continued to recover slowly. Starts of new The information reviewed for the October 27–28 single-family homes stepped down modestly, on net, meeting suggested that real GDP was increasing at a over August and September, although building permoderate pace, but that the improvement in labor mits increased slightly. Meanwhile, starts of multimarket conditions had slowed somewhat in recent family units rose notably. Sales of new and existing months. Inflation continued to run below the homes moved down somewhat on balance. FOMC’s longer-run objective of 2 percent, restrained in part by declines in energy prices and Real private expenditures for business equipment and prices of non-energy imported goods. Survey meas- intellectual property products appeared to increase at ures of longer-run inflation expectations remained a solid pace in the third quarter. Nominal shipments stable; market-based measures of inflation compen- of nondefense capital goods excluding aircraft rose in sation moved slightly lower. September. However, forward-looking indicators, such as new orders for these capital goods along with Total nonfarm payroll employment expanded at national and regional surveys of business conditions, about the same rate in September as in August, pointed to more modest increases in business equipalthough at a slower pace than earlier this year, and ment spending in the coming months. Firms’ nomithe unemployment rate remained at 5.1 percent. Both nal spending for nonresidential structures excluding the labor force participation rate and the drilling and mining rose in August, although availemployment-to-population ratio edged down. How- able indicators of drilling activity, such as the numever, the share of workers employed part time for ber of oil and gas rigs in operation, continued to fall. economic reasons fell a little. The rate of private- Real private inventory investment appeared to have sector job openings declined in August but was still slowed markedly in the third quarter. at a high level, while the rates of hiring and quits were unchanged. Total real government purchases looked to have moved sideways in the third quarter. Federal govern- Industrial production decreased in September as the ment purchases likely declined a little, as defense output of both the manufacturing and mining sec- spending stepped down further. In contrast, state and tors declined, likely reflecting the effects of the appre- local government purchases appeared to have been ciation in the foreign exchange value of the dollar rising; the payrolls of these governments expanded and the fall in crude oil prices since the middle of last further in September, and their nominal construction year. Automakers’ assembly schedules, as well as spending in July and August was above its level in the broader indicators of manufacturing production, second quarter. such as the readings on new orders from national and regional manufacturing surveys, generally pointed to The U.S. international trade deficit widened in further decreases in factory output in coming August as exports declined and imports rose. The fall months. Recent information on crude oil and natural in exports was concentrated in industrial supplies, gas extraction indicated further declines in mining while consumer and capital goods accounted for output. much of the growth in imports. Advance estimates for September indicated a narrower merchandise Real personal consumption expenditures (PCE) trade deficit, with a rebound in exports and a decline appeared to rise at a solid rate in the third quarter as in imports relative to August. After falling sharply a whole. The components of the nominal retail sales early this year, real net exports were little changed in data used by the Bureau of Economic Analysis to the second quarter and appeared to have stayed flat construct its estimate of PCE increased only slightly in the third quarter, with real exports remaining soft. in September, but the rate of sales of light motor vehicles rose to a new high for the year. Real dispos- Total U.S. consumer prices in August, as measured able income grew at a solid pace in July and August. by the PCE price index, were unchanged from Households’ net worth was boosted by recent gains 12 months earlier, reflecting large declines in conin home values and the net increase in equity prices sumer energy prices. Core PCE inflation, which

246 102nd Annual Report | 2015 excludes changes in food and energy prices, was have led investors to expect a later start date for mon- 1¼ percent over the same 12-month period, etary policy normalization and a more gradual path restrained in part by declines in the prices of non- for the federal funds rate thereafter. According to energy goods imports. In September, total consumer federal funds futures quotes just before the October prices as measured by the consumer price index FOMC meeting, as well as results from the Desk’s (CPI) were unchanged from a year earlier, while the Survey of Primary Dealers and Survey of Market core CPI increased almost 2 percent. Measures of Participants, market participants saw a significantly expected longer-run inflation from a number of sur- lower chance of the initial increase in the target range veys, including the Michigan survey, the Blue Chip for the federal funds rate occurring before year-end Economic Indicators, and the Desk’s Survey of Pri- than they perceived just before the September meetmary Dealers, remained stable. However, market- ing, while the likelihood of liftoff occurring at or based measures of inflation compensation moved a after the March 2016 meeting rose. The expected little lower. Average hourly earnings for all employees path for the federal funds rate implied by quotes on increased 2¼ percent over the 12 months ending in overnight index swap rates flattened notably over the September, a pace that was faster than consumer intermeeting period. price inflation. Nominal Treasury yields declined further, reflecting Foreign economic growth appeared to have improved FOMC communications, concerns about global ecosomewhat in the third quarter following two quarters nomic growth, and generally weaker-than-expected of slow growth. Economic activity rebounded in U.S. economic data releases. Measures of inflation Canada after disruptions to energy production ear- compensation based on Treasury Inflation-Protected lier in the year, and real GDP growth jumped to Securities moved slightly lower on net. 5 percent in South Korea as the effects of the MERS (Middle East Respiratory Syndrome) outbreak faded. Broad U.S. equity price indexes fell in the first few Chinese real GDP growth remained around 7 percent weeks after the September FOMC meeting but subseon a four-quarter change basis, and information on quently more than retraced those declines. Spreads of economic activity in the euro area and the United yields on triple-B-rated corporate bonds over Kingdom was consistent with continued expansion. comparable-maturity Treasury securities changed However, indicators of economic activity in Japan little, on balance, and those on speculative-grade corand Brazil remained weak. Headline inflation was porate bonds widened notably across sectors. Across low in many countries as a result of falling energy the credit spectrum, spreads were generally near their prices. Inflation rates remained high in some South highest levels in several years and ended the period American countries whose currencies had recently above their historical medians. Based on available depreciated sharply. reports and analysts’ estimates, aggregate corporate earnings per share in the third quarter were expected Staff Review of the Financial Situation to decrease slightly, with large declines in the energy and materials sectors. Spreads on leveraged loans Continued concerns about the global economic increased in August and moved up, on balance, over growth outlook weighed on market sentiment in the the intermeeting period. United States and abroad early in the intermeeting period, but sentiment improved somewhat in the Overall, financing conditions for nonfinancial busiweeks preceding the October FOMC meeting. Fol- nesses were generally accommodative but tightened lowing the weaker-than-expected report on the U.S. somewhat for lower-rated firms. Corporate bond employment situation in September, market partici- issuance rebounded in September after a slowdown pants’ expectations for the timing of the initial in August. The expansion of commercial and indusincrease in the target range for the federal funds rate trial loans on banks’ books moderated slightly during shifted out, and their expectation for the subsequent the third quarter, and lending standards were little path of the federal funds rate flattened. Financing changed, on net, after several years of easing, accordconditions for most businesses and households ing to the October Senior Loan Officer Opinion Surremained accommodative but tightened somewhat vey on Bank Lending Practices (SLOOS). Financing for businesses with lower credit quality. conditions for small businesses continued to improve, with loan originations maintaining their upward Federal Reserve communications and economic data trend, although indicators of the optimism of small releases over the intermeeting period appeared to business owners declined in recent months. Financing

Minutes of Federal Open Market Committee Meetings | October 247 conditions for municipalities remained accommoda- monetary policy accommodation abroad. These tive on balance. Even though news reports on Puerto shifting expectations also contributed to a decline in Rico’s public-sector debt situation garnered attention sovereign yields in the advanced foreign economies. of market participants, credit default swap spreads on Puerto Rico’s general obligation debt were little The staff provided its latest report on potential risks changed over the intermeeting period. to financial stability. Since the previous report in July, financial markets around the globe experienced a Spreads on commercial mortgage-backed securities surge in volatility that peaked in late August amid (CMBS) widened over the intermeeting period, while concerns regarding slowing economic growth in respondents in the SLOOS reported that standards emerging market economies and potential implicaon commercial real estate (CRE) loans were little tions for advanced economies. This volatility was changed in the third quarter. Overall, CRE financing accompanied by sizable declines in the prices of some appeared to remain broadly available. All major cat- risky assets, and an increase in risk aversion eased egories of CRE loans on banks’ balance sheets valuation pressures in the corporate bond market. expanded robustly through September, consistent Issuance of speculative-grade corporate bonds and with reports of stronger demand for such loans in the leveraged loans slowed from the rapid pace seen ear- SLOOS. lier this year. The U.S. financial system appeared to absorb the shocks without systemic strains, sup- Credit conditions for residential mortgages eased ported by relatively high capital positions of large modestly, on net, in the third quarter. A moderate net banking organizations and insurance firms and by fraction of SLOOS respondents continued to ease restrained use of short-term wholesale funding across standards on loans eligible for purchase by the the financial sector. Moreover, leverage in the nonfigovernment-sponsored enterprises and on jumbo nancial sector remained modest overall. However, loans, but standards on government-backed loans leverage of speculative-grade and unrated nonfinantightened somewhat. Interest rates on 30-year fixed- cial corporations stayed near record levels. Rising rate mortgages declined over the intermeeting period. CRE prices, accompanied by loosening underwriting standards in CMBS markets, continued to suggest Conditions in consumer credit markets remained valuation pressures. accommodative on balance. Outstanding credit card balances expanded further in August, and a moderate Staff Economic Outlook net fraction of banks in the SLOOS indicated that they eased standards on such loans during the third In the economic forecast prepared by the staff for the quarter. However, credit card limits remained mostly October FOMC meeting, real GDP growth in the flat overall and were fairly tight for subprime borrow- second half of this year was a little lower, on balance, ers. The growth of auto and student loans stayed than in the projection for the September meeting, robust. largely reflecting a downward revision to estimated inventory investment. The staff’s medium-term pro- Continued concerns about the outlook for global jection for real GDP growth was essentially unrevised economic growth weighed on commodity and foreign from the previous forecast. The staff continued to equity prices early in the intermeeting period. These project that real GDP would expand at a somewhat declines subsequently were reversed, and foreign faster pace than potential output from 2016 through equity price indexes ended the period higher, pushed 2018, supported primarily by increases in consumer up by expectations of additional monetary policy spending. The unemployment rate was expected to accommodation in major foreign economies and decline gradually and to run a little below the staff’s some favorable economic indicators in China. estimate of its longer-run natural rate over this period. The broad nominal index of the dollar’s foreign exchange value ended the period little changed on The staff’s forecast for inflation in the near term was balance. The dollar depreciated early in the period revised up a little, reflecting recent data, and it was following the weaker-than-expected U.S. employment unrevised over the medium term. Energy prices and report for September and the subsequent downward prices of non-energy imported goods were expected shift of the expected path for U.S. policy rates. But to begin steadily rising next year. The staff projected this decline was balanced by subsequent apprecia- that inflation would increase gradually over the next tion, in part as expectations increased for greater several years but would still be slightly below the

248 102nd Annual Report | 2015 Committee’s longer-run objective of 2 percent at the moved slightly lower; survey-based measures of end of 2018. However, inflation was anticipated to longer-term inflation expectations remained stable. reach 2 percent thereafter, with inflation expectations Participants generally anticipated that inflation in the longer run assumed to be consistent with the would rise gradually toward 2 percent as the labor Committee’s objective and slack in labor and product market improved further and the transitory effects of markets projected to have waned. earlier declines in energy and import prices dissipated. The staff viewed the uncertainty around its October projections for real GDP growth, the unemployment Notwithstanding the disappointing retail sales data rate, and inflation as similar to the average of the in September, participants were encouraged by the past 20 years. The risks to the forecast for real GDP solid pace of consumption growth in the third quarand inflation were seen as tilted to the downside, ter and generally expected consumer spending to rise reflecting the staff’s assessment that neither mon- moderately going forward. Gains in employment and etary nor fiscal policy was well positioned to help the income, low gasoline prices, and a high level of coneconomy withstand substantial adverse shocks. Con- sumer confidence were viewed as factors that should sistent with this downside risk to aggregate demand, support consumer spending. The available reports the staff viewed the risks to its outlook for the unem- from District contacts in the retail and auto indusployment rate as tilted to the upside. tries indicated solid gains in consumer spending, and contacts were optimistic about the near-term Participants’ Views on Current Conditions outlook. and the Economic Outlook Participants generally viewed the housing sector as In their discussion of the economic situation and the continuing to recover, although a couple of particioutlook, meeting participants saw the information pants noted that the pace of recovery was slow. Conreceived over the intermeeting period as suggesting tacts in a number of Districts were upbeat about the that economic activity had been expanding moder- sector, citing rising home prices and a healthy pace of ately. Household spending and business fixed invest- construction and sales. ment increased at solid rates in recent months, and the housing sector improved further. However, net Participants noted that business fixed investment exports remained soft. Participants noted that the appeared to be increasing at a solid rate despite the pace of job gains slowed while the unemployment sharp contraction in energy-related investment. Nonrate held steady; nonetheless, a range of labor market residential construction was reported to be expandindicators, on balance, suggested that underutiliza- ing in a number of regions. A large decline in invention of labor resources had diminished since early tory investment was expected to reduce the pace of this year. With private domestic final demand GDP growth in the third quarter, but participants expanding at a solid pace, participants generally saw further outsized declines in inventory accumulaviewed the incoming data as confirming their assess- tion as unlikely. Participants expected net exports to ment that economic activity would continue to continue to subtract from GDP growth in the second expand at a moderate rate, leading to further half of the year, reflecting weak foreign activity as improvement in labor market conditions. However, well as the earlier appreciation of the dollar. Howsome participants were concerned that the recent ever, solid underlying momentum in private domestic slowdown in employment growth might prove more demand was anticipated to support economic growth than temporary, and that improvement in labor mar- going forward. ket conditions might not continue. Most participants saw the downside risks arising from economic and Manufacturing activity had slowed somewhat over financial developments abroad as having diminished the intermeeting period in a number of regions, and judged the risks to the outlook for domestic eco- importantly reflecting the weakness in exports, nomic activity and the labor market to be nearly bal- although the auto industry remained a bright spot. anced. A few participants, though, noted that down- Weakness in commodity prices also continued to side risks from abroad were still significant. Inflation weigh on activity in the energy and agricultural seccontinued to run below the Committee’s 2 percent tors. Moreover, industry contacts remained pessimislonger-run objective, partly reflecting declines in tic about the outlook for the energy sector. The subenergy prices and prices of non-energy imports. stantial global supply of crude oil seemed likely to Market-based measures of inflation compensation weigh on energy prices for some time, contributing to

Minutes of Federal Open Market Committee Meetings | October 249 an increase in restructurings and bankruptcies in this FOMC’s 2 percent inflation objective over the sector. In contrast, service-sector reports were mostly medium term. Total PCE price inflation, as measured positive. on a 12-month basis, continued to run below the Committee’s longer-run objective. Core PCE infla- Although employment growth slowed and the unem- tion also remained low, but some other measures of ployment rate held steady in September, participants inflation, such as the trimmed mean PCE and agreed that underutilization of labor resources had trimmed mean CPI measures, continued to run at been reduced since earlier in the year. A number of higher levels than core PCE inflation and had participants expressed the view that further progress recently moved up modestly. Moreover, a few particiwould be necessary before labor market conditions pants noted that the September CPI data appeared were fully consistent with maximum employment, consistent with some firming in inflation. Surveys while some others judged that there was little or no continued to suggest that longer-run inflation expecremaining underutilization of labor resources. Sev- tations remained stable. Participants still expected eral participants observed that the recent employ- that the downward pressure on inflation from the ment reports had increased the uncertainty about the previous declines in energy prices and the effects of outlook for the labor market. They discussed past dollar appreciation would prove temporary. Sevwhether the slowdown in job gains was merely transi- eral participants, however, cited downside risks to tory or indicative of a more persistent slowdown in inflation, pointing, for example, to declines in which labor market conditions might no longer market-based measures of inflation compensation. improve. Some other indicators, such as the labor Nonetheless, participants generally continued to force participation rate and data on job openings, anticipate that, with appropriate monetary policy, quits, and hiring, had also been softer. Other partici- inflation would move toward the Committee’s objecpants viewed a broad range of recent labor market tive over the medium term, reflecting the anticipated data as indicating a further reduction in slack and tightening of product and labor markets, the waning stressed the importance of assessing the cumulative of downward pressures from energy and import improvement in the labor market since early in the prices, and stable inflation expectations. year, which had been significant. Moreover, several participants indicated that they viewed the pace of Participants also discussed a range of topics related monthly job gains in September as still above the rate to financial market developments and financial staconsistent with stable or declining labor market bility. They noted that volatility in global financial slack, and a few participants interpreted slower markets had abated since the previous FOMC meetincreases in payrolls as evidence that labor markets ing, with equity prices in the United States largely had tightened. retracing the declines experienced late in the summer. The U.S. financial system appeared to have weath- The incoming information on wages and labor com- ered the turbulence in global financial markets withpensation, including recent data on average hourly out any sign of systemic stress. Participants comearnings of employees, suggested that the pace of mented on issues related to financial stability moniwage gains remained subdued. A number of partici- toring and the use of macroprudential tools, the pants cited staff analysis indicating that the modest assessment of valuation risks in leveraged loan and pace of labor compensation growth in recent years real estate markets, the widening of credit spreads on may have reflected slower trend productivity growth corporate bonds, and potential risks to financial stathat offset the upward pressure on wages from the bility stemming from interest rates remaining low for narrowing of labor market slack. However, other a prolonged period in an environment of a low neuparticipants noted that the continued subdued trend tral (or equilibrium) real rate. In addition, it was in wages was evidence of an absence of upward pres- noted that Puerto Rico continued to face significant sure on inflation from the current level of resource challenges servicing its debts, although the associated utilization. A number of participants reported that systemic risks for U.S. financial markets were likely some of their business contacts were experiencing to be minimal. increasing challenges in hiring, resulting in upward pressure on wages in various occupations and in During their discussion of economic conditions and some geographic areas. monetary policy, participants focused on a number of issues associated with the timing and pace of policy Participants discussed how recent economic develop- normalization. Some participants thought that the ments influenced their expectations for reaching the conditions for beginning the policy normalization

250 102nd Annual Report | 2015 process had already been met. Most participants market and increasing their confidence that inflation anticipated that, based on their assessment of the was on a path to return to 2 percent over the medium current economic situation and their outlook for eco- term before raising the target range for the federal nomic activity, the labor market, and inflation, these funds rate. In addition, a couple of participants cited conditions could well be met by the time of the next concerns that a premature tightening might damage meeting. Nonetheless, they emphasized that the the credibility of the Committee’s inflation objective actual decision would depend on the implications for if inflation stayed below 2 percent for a prolonged the medium-term economic outlook of the data period. received over the upcoming intermeeting period. Some others, however, judged it unlikely that the Several participants indicated that, in the current low information available by the December meeting interest rate environment, it would be prudent for the would warrant raising the target range for the federal Committee to consider options for providing addifunds rate at that meeting. tional monetary policy accommodation if the outlook for economic activity were to weaken to a A number of participants pointed to various reasons degree that seemed likely to undermine continued why the Committee should avoid a delay in policy progress in labor market conditions and impede the firming. One concern was that such a delay, if the movement of inflation back to the Committee’s reasons were not well understood by market partici- 2 percent objective over the medium term. It was also pants, could increase uncertainty in financial markets noted that the Committee would need to reformulate and unduly magnify the perceived importance of the its communications regarding the near-term outlook beginning of the policy normalization process. for monetary policy if the economic outlook weak- Another concern mentioned was the increasing risk ened significantly. of a buildup of financial imbalances after a prolonged period of very low interest rates. It was also During their discussion of the likely path for the fednoted that a decision to defer policy firming could be eral funds rate after the time of the first increase in interpreted as signaling lack of confidence in the the target range, participants generally agreed that it strength of the U.S. economy or erode the Commit- would probably be appropriate to remove policy tee’s credibility. Some participants emphasized that accommodation gradually. Participants also indicated progress toward the Committee’s objectives should that the expected path of policy, rather than the timbe assessed in light of the cumulative gains made to ing of the initial increase, would be the more impordate without placing excessive weight on month-to- tant influence on financial conditions and thus on the month changes in incoming data. outlook for the economy and inflation, and they noted the importance of underscoring this view at Several participants indicated that, despite lessening the time of liftoff. It was noted that beginning the concerns about the implications of recent global eco- normalization process relatively soon would make it nomic and financial developments for domestic eco- more likely that the policy trajectory after liftoff nomic activity and inflation, appreciable downside could be shallow. It was also emphasized that, while risks to the outlook remained. They were concerned participants’ most recent economic projections sugabout a potential loss of momentum in the economy gested that a gradual increase in the target range for and the associated possibility that inflation might fail the federal funds rate will likely be appropriate to to increase as expected. Such concerns might suggest support progress toward the Committee’s dual objecthat the initiation of the normalization process may tives, monetary policy adjustments ultimately would not yet be warranted. They also noted uncertainty be dependent on economic and financial developabout whether economic growth was robust enough ments. These adjustments thus could be either more to withstand potential adverse shocks, given the lim- or less gradual than the Committee currently anticiited ability of monetary policy to offset such shocks pates, responding to the Committee’s assessment of when the federal funds rate is near its effective lower the implications of incoming information for the bound, and concern that the beginning of policy nor- medium-run outlook. malization might be associated with an unwarranted tightening of financial conditions. They believed that Committee Policy Action in these circumstances, risk-management considerations called for a cautious approach. They judged it In their discussion of monetary policy for the period appropriate to wait for additional information pro- ahead, members judged that information received viding evidence of further improvement in the labor since the FOMC met in September indicated that

Minutes of Federal Open Market Committee Meetings | October 251 economic activity had been expanding at a moderate would need to see to judge it appropriate to raise the pace. Although net exports had been soft and inven- target range for the federal funds rate in December. tory accumulation appeared to have slowed, major domestic components of spending were increasing at Members continued to anticipate that inflation solid rates. With concerns about global economic and would gradually return to the Committee’s 2 percent financial developments having lessened, members objective over the medium term, but most of them continued to see the risks to the outlook for eco- were not yet sufficiently confident of that outlook to nomic activity as nearly balanced, although they were begin the normalization process. They generally still monitoring these developments. Members indi- agreed that their confidence would increase if, as cated that they expected that, with appropriate policy anticipated, economic activity continued to expand at accommodation, economic activity would continue a pace sufficient to increase resource utilization. to expand at a moderate pace. Other factors important to the inflation outlook were the expectation that the influence of lower energy Almost all members agreed that, even though the and commodities prices and the stronger dollar pace of job gains had slowed and the unemployment would subside, and that longer-term inflation expecrate had held steady over the intermeeting period, tations would remain stable. In this regard, a couple labor market indicators, on balance, showed that of members expressed concern about the continued underutilization of labor resources had diminished decline in market-based measures of inflation comsince early in the year. Members anticipated that eco- pensation. Moreover, the risk was noted that downnomic activity was likely to expand at a pace suffi- ward pressures on inflation from the appreciation of cient for labor market indicators to continue to move the dollar could persist. toward, or to remain at, levels the Committee judged consistent with its dual mandate. Inflation continued After assessing the outlook for economic activity, the to run below the Committee’s longer-run objective, labor market, and inflation and weighing the uncerheld down in part by the effects of declines in energy tainties associated with the outlook, all but one memprices and in prices of non-energy imports. Survey- ber agreed to leave the target range for the federal based measures of longer-term inflation expectations funds rate unchanged at this meeting. Members genhad remained stable; market-based measures of erally agreed that, in light of some weaker-thaninflation compensation had moved slightly lower. expected readings on measures of labor market con- While inflation was anticipated to remain near its ditions and in the absence of greater confidence recent low level in the near term, reflecting the transi- about the inflation outlook, it would be prudent to tory effects of declines in energy and import prices, wait for additional information bearing on the members continued to expect inflation to rise gradu- medium-term outlook before initiating the process of ally toward 2 percent over the medium term as the policy normalization. One member, however, prelabor market improved further and such transitory ferred to raise the target range for the federal funds effects dissipated. Nonetheless, they agreed to con- rate by 25 basis points at this meeting. tinue monitoring inflation developments closely. In its postmeeting statement, rather than framing its In assessing whether economic conditions and the near-term policy path in terms of how long to mainmedium-term economic outlook warranted begin- tain the current target range, the Committee decided ning the process of policy normalization at this meet- to indicate that, in determining whether it would be ing, members noted a variety of indicators, including appropriate to raise the target range at its next meetsome weaker-than-expected readings on measures of ing, it would assess both realized and expected proglabor market conditions, and almost all members ress toward its objectives of maximum employment agreed it was appropriate to wait for additional infor- and 2 percent inflation. Members emphasized that mation to clarify whether the recent deceleration in this change was intended to convey the sense that, the pace of progress in the labor market was transi- while no decision had been made, it may well become tory or reflected more persistent factors that might appropriate to initiate the normalization process at jeopardize further progress. They indicated that they the next meeting, provided that unanticipated shocks would be assessing a range of labor market indica- do not adversely affect the economic outlook and tors over the period ahead to confirm further that incoming data support the expectation that improvement in the labor market. Members, however, labor market conditions will continue to improve and expressed a range of views regarding the extent of that inflation will return to the Committee’s 2 perfurther progress in labor market indicators they cent objective over the medium term. Members saw

252 102nd Annual Report | 2015 the updated language as leaving policy options open vesting principal payments on all agency debt for the next meeting. However, a couple of members and agency mortgage-backed securities in expressed concern that this wording change could be agency mortgage-backed securities. The Commisinterpreted as signaling too strongly the expecta- mittee also directs the Desk to engage in dollar tion that the target range for the federal funds rate roll and coupon swap transactions as necessary would be increased at the Committee’s next meeting. to facilitate settlement of the Federal Reserve’s While members differed in their assessment of the agency mortgage-backed securities transactions. likelihood that incoming information will warrant an The System Open Market Account manager and increase in the target range for the federal funds rate the secretary will keep the Committee informed when the Committee meets in December, they agreed of ongoing developments regarding the System’s that, in making the decision, the Committee will balance sheet that could affect the attainment evaluate progress toward its objectives, taking into over time of the Committee’s objectives of account a wide range of information, including maximum employment and price stability.” measures of labor market conditions, indicators of inflation pressures and inflation expectations, and The vote encompassed approval of the statement readings on financial and international developments. below to be released at 2:00 p.m.: It was noted that the expected path of the federal funds rate, rather than the exact timing of the initial “Information received since the Federal Open increase, was most important in influencing financial Market Committee met in September suggests conditions and thus in affecting the outlook for the that economic activity has been expanding at a economy and inflation. The Committee reiterated its moderate pace. Household spending and busiexpectation that, even after employment and infla- ness fixed investment have been increasing at tion are near mandate-consistent levels, economic solid rates in recent months, and the housing conditions may, for some time, warrant keeping the sector has improved further; however, net target federal funds rate below levels the Committee exports have been soft. The pace of job gains views as normal in the longer run. slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on bal- The Committee also maintained its policy of rein- ance, show that underutilization of labor vesting principal payments from its agency debt and resources has diminished since early this year. agency mortgage-backed securities in agency Inflation has continued to run below the Commortgage-backed securities and of rolling over mittee’s longer-run objective, partly reflecting maturing Treasury securities at auction. This policy, declines in energy prices and in prices of nonby keeping the Committee’s holdings of longer-term energy imports. Market-based measures of securities at sizable levels, should help maintain inflation compensation moved slightly lower; accommodative financial conditions. survey-based measures of longer-term inflation expectations have remained stable. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Consistent with its statutory mandate, the Com- Bank of New York, until it was instructed otherwise, mittee seeks to foster maximum employment to execute transactions in the SOMA in accordance and price stability. The Committee expects that, with the following domestic policy directive: with appropriate policy accommodation, economic activity will expand at a moderate pace, “Consistent with its statutory mandate, the Fed- with labor market indicators continuing to move eral Open Market Committee seeks monetary toward levels the Committee judges consistent and financial conditions that will foster maxi- with its dual mandate. The Committee continues mum employment and price stability. In particu- to see the risks to the outlook for economic lar, the Committee seeks conditions in reserve activity and the labor market as nearly balanced markets consistent with federal funds trading in but is monitoring global economic and financial a range from 0 to ¼ percent. The Committee developments. Inflation is anticipated to remain directs the Desk to undertake open market near its recent low level in the near term but the operations as necessary to maintain such condi- Committee expects inflation to rise gradually tions. The Committee directs the Desk to main- toward 2 percent over the medium term as the tain its policy of rolling over maturing Treasury labor market improves further and the transitory securities into new issues and its policy of rein- effects of declines in energy and import prices

Minutes of Federal Open Market Committee Meetings | October 253 dissipate. The Committee continues to monitor even after employment and inflation are near inflation developments closely. mandate-consistent levels, economic conditions may, for some time, warrant keeping the target To support continued progress toward maxi- federal funds rate below levels the Committee mum employment and price stability, the Com- views as normal in the longer run.” mittee today reaffirmed its view that the current 0 to ¼ percent target range for the federal funds Voting for this action: Janet L. Yellen, William C. rate remains appropriate. In determining Dudley, Lael Brainard, Charles L. Evans, Stanley whether it will be appropriate to raise the target Fischer, Dennis P. Lockhart, Jerome H. Powell, range at its next meeting, the Committee will Daniel K. Tarullo, and John C. Williams. assess progress—both realized and expected— toward its objectives of maximum employment Voting against this action: Jeffrey M. Lacker. and 2 percent inflation. This assessment will take into account a wide range of information, Mr. Lacker dissented because he continued to believe including measures of labor market conditions, that maintaining exceptionally low real interest rates indicators of inflation pressures and inflation was not appropriate for an economy with persistently expectations, and readings on financial and strong consumption growth and tightening labor international developments. The Committee markets. Data received since the September FOMC anticipates that it will be appropriate to raise the meeting suggested that the global economic and target range for the federal funds rate when it financial developments of late summer had little has seen some further improvement in the labor effect on the medium-term outlook for U.S. growth market and is reasonably confident that inflation and inflation. He remained reasonably confident that will move back to its 2 percent objective over the inflation would return to the Federal Reserve’s 2 permedium term. cent goal once temporary disinflationary impulses had passed. The Committee is maintaining its existing policy of reinvesting principal payments from its hold- It was agreed that the next meeting of the Committee ings of agency debt and agency mortgage- would be held on Tuesday–Wednesday, Decembacked securities in agency mortgage-backed ber 15–16, 2015. The meeting adjourned at 11:40 securities and of rolling over maturing Treasury a.m. on October 28, 2015. securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities Notation Vote at sizable levels, should help maintain accommodative financial conditions. By notation vote completed on October 7, 2015, the Committee unanimously approved the minutes of the When the Committee decides to begin to remove Committee meeting held on September 16–17, 2015. policy accommodation, it will take a balanced approach consistent with its longer-run goals of Brian F. Madigan maximum employment and inflation of 2 per- Secretary cent. The Committee currently anticipates that,

254 102nd Annual Report | 2015 Meeting Held Thomas C. Baxter Deputy General Counsel on December 15–16, 2015 Steven B. Kamin A joint meeting of the Federal Open Market Com- Economist mittee and the Board of Governors was held in the Thomas Laubach offices of the Board of Governors of the Federal Economist Reserve System in Washington, D.C., on Tuesday, December 15, 2015, at 1:00 p.m. and continued on David W. Wilcox Wednesday, December 16, 2015, at 9:00 a.m. Economist David Altig, Eric M. Engen, Present Michael P. Leahy, William R. Nelson, Janet L. Yellen and William Wascher Chair Associate Economists William C. Dudley Simon Potter Vice Chairman Manager, System Open Market Account Lael Brainard Lorie K. Logan Deputy Manager, System Open Market Account Charles L. Evans Robert deV. Frierson Stanley Fischer Secretary of the Board, Office of the Secretary, Jeffrey M. Lacker Board of Governors Dennis P. Lockhart Michael S. Gibson Jerome H. Powell Director, Division of Banking Supervision and Regulation, Board of Governors Daniel K. Tarullo Nellie Liang John C. Williams Director, Office of Financial Stability Policy and James Bullard, Esther L. George, Loretta J. Mester, Research, Board of Governors Eric Rosengren, and Michael Strine James A. Clouse and Stephen A. Meyer Alternate Members of the Federal Open Market Deputy Directors, Division of Monetary Affairs, Committee Board of Governors Patrick Harker and Robert S. Kaplan William B. English Presidents of the Federal Reserve Banks of Senior Special Adviser to the Board, Office of Board Philadelphia and Dallas, respectively Members, Board of Governors James M. Lyon David Bowman, Andrew Figura, First Vice President, Federal Reserve Bank of David Reifschneider, and Stacey Tevlin Minneapolis Special Advisers to the Board, Office of Board Brian F. Madigan Members, Board of Governors Secretary Trevor A. Reeve Matthew M. Luecke Special Adviser to the Chair, Office of Board Deputy Secretary Members, Board of Governors David W. Skidmore Linda Robertson Assistant Secretary Assistant to the Board, Office of Board Members, Michelle A. Smith Board of Governors Assistant Secretary Michael G. Palumbo Scott G. Alvarez Senior Associate Director, Division of Research and General Counsel Statistics, Board of Governors

Minutes of Federal Open Market Committee Meetings | December 255 Beth Anne Wilson Troy Davig, Michael Dotsey, Evan F. Koenig, Senior Associate Director, Division of International Spencer Krane, Samuel Schulhofer-Wohl, Finance, Board of Governors Ellis W. Tallman, Geoffrey Tootell, and Christopher J. Waller Ellen E. Meade and Joyce K. Zickler Senior Vice Presidents, Federal Reserve Banks of Senior Advisers, Division of Monetary Affairs, Kansas City, Philadelphia, Dallas, Chicago, Board of Governors Minneapolis, Cleveland, Boston, and St. Louis, Wayne Passmore respectively Senior Adviser, Division of Research and Statistics, Douglas Tillett, Robert G. Valletta, Board of Governors and Alexander L. Wolman Joseph W. Gruber Vice Presidents, Federal Reserve Banks of Chicago, Deputy Associate Director, Division of International San Francisco, and Richmond, respectively Finance, Board of Governors William E. Riordan2 Francisco Covas, Christopher J. Gust, and Jason Wu Markets Officer, Federal Reserve Bank of New York Assistant Directors, Division of Monetary Affairs, Board of Governors Developments in Financial Markets and Open Market Operations John M. Roberts and Steven A. Sharpe Assistant Directors, Division of Research and The manager of the System Open Market Account Statistics, Board of Governors (SOMA) reported on developments in domestic and Patrick E. McCabe foreign financial markets, including expectations of Adviser, Division of Research and Statistics, market participants for monetary policy action by Board of Governors the Federal Open Market Committee (FOMC) at this meeting and in the future. The deputy manager fol- Penelope A. Beattie lowed with a briefing on money market develop- Assistant to the Secretary, Office of the Secretary, ments and System open market operations conducted Board of Governors by the Open Market Desk during the period since the David H. Small Committee met on October 27–28. It was noted that Project Manager, Division of Monetary Affairs, the System’s reverse repurchase (RRP) agreement Board of Governors operations continued to provide a soft floor under Katie Ross1 short-term interest rates. The deputy manager also discussed plans to publish additional information on Manager, Office of the Secretary, details of the Committee’s current Treasury securities Board of Governors reinvestment policy. The manager then briefed the Valerie Hinojosa Committee on several other matters, including plans Information Manager, Division of Monetary Affairs, to begin publishing the effective federal funds rate Board of Governors and a broader overnight bank funding rate based on the Report of Selected Money Market Rates (FR Mark L. Mullinix 2420) in early March 2016; the possibility that the First Vice President, Federal Reserve Bank of Federal Reserve, in cooperation with the Office of Richmond Financial Research, might publish a reference rate for James J. McAndrews overnight transactions collateralized by Treasury Executive Vice President, Federal Reserve Bank of securities; and the staff’s ongoing review of the readi- New York ness of various Desk operations and facilities. 2 Attended through the discussion of financial developments and 1 Attended Wednesday session only. open market operations.

256 102nd Annual Report | 2015 By unanimous vote, the Committee ratified the Real personal consumption expenditures (PCE) Desk’s domestic transactions over the intermeeting appeared to be rising at a solid rate in the fourth period. There were no intervention operations in for- quarter. The components of the nominal retail sales eign currencies for the System’s account over the data used by the Bureau of Economic Analysis to intermeeting period. construct its estimate of PCE increased in October and moved up at a faster pace in November, while the rate of sales of light motor vehicles remained Staff Review of the Economic Situation high. Household spending was supported by strong growth in real disposable income in September and The information reviewed for the December 15–16 October, and households’ net worth was bolstered by meeting suggested that real gross domestic product recent gains in home values. In addition, consumer (GDP) was increasing at a moderate pace and that sentiment in the University of Michigan Surveys of labor market conditions had improved further. Con- Consumers improved a little in November and early sumer price inflation continued to run below the December. FOMC’s longer-run objective of 2 percent, restrained in part by declines in both energy prices Recent information on activity in the housing sector and the prices of non-energy imported goods. Some was mixed. Starts of new single-family homes were survey-based measures of longer-run inflation expec- somewhat lower in October than in the third quarter, tations edged down, while market-based measures of although building permits moved up. Meanwhile, inflation compensation were still low. starts of multifamily units declined. Sales of new homes rose in October, while existing home sales Total nonfarm payroll employment expanded at a decreased. faster monthly rate in October and November than in the third quarter. The unemployment rate ticked Real private expenditures for business equipment and down to 5.0 percent in October and remained at that intellectual property products increased at a solid level in November; over the 12 months ending in pace in the third quarter, but business spending November, the unemployment rate fell ¾ percentage growth looked to be slowing somewhat in the fourth point. Both the labor force participation rate and the quarter. Nominal shipments of nondefense capital employment-to-population ratio increased slightly, goods excluding aircraft edged down in October, on net, over October and November. The share of although new orders for these capital goods continworkers employed part time for economic reasons ued to move up. Recent readings from national and was flat, on balance, in recent months after declining regional surveys of business conditions were consisconsiderably over the previous year. The rates of tent with more modest increases in business equipprivate-sector job openings, hires, and quits were ment spending than in the third quarter. Firms’ little changed in October from their average levels in nominal spending for nonresidential structures the third quarter. Recent measures of the gains in excluding drilling and mining rose in October, labor compensation were mixed: Over the four quar- although available indicators of drilling activity, such ters ending in the third quarter, compensation per as the number of oil and gas rigs in operation, conhour in the business sector advanced at a strong tinued to fall through early December. 3½ percent rate, while the employment cost index rose at a more moderate 2 percent pace. Average Total real government purchases appeared to be hourly earnings for all employees increased 2¼ per- about flat in the fourth quarter. Federal government cent over the 12 months ending in November. spending for defense moved roughly sideways, on balance, over recent months. State and local government Manufacturing production increased in October, payrolls were little changed, on net, in October and although output in the mining sector continued to November, while the level of nominal construction decrease. Automakers’ assembly schedules and spending of these governments in October was essenbroader indicators of manufacturing production, tially the same as its average in the third quarter. such as the readings on new orders from national and regional manufacturing surveys, generally pointed to The U.S. international trade deficit widened in Octoa slow pace of gains in factory output in the coming ber after narrowing in September. Exports declined, months. Information on crude oil and natural gas on balance, to the lowest level in three years; lower extraction through early December indicated further prices for commodities, along with reduced shipdeclines in mining output. ments of capital and consumer goods, weighed on

Minutes of Federal Open Market Committee Meetings | December 257 nominal exports. Imports decreased in September rate at the December FOMC meeting. The October and October, partly reflecting further declines in the FOMC statement and the stronger-than-expected price of imported oil. The available trade data sug- October employment report, in particular, boosted gested that declines in real net exports would likely expectations of FOMC action at this meeting. Subsecontinue to be a drag on real GDP growth in the quent data releases and FOMC communications fourth quarter. firmed those views, and in the weeks before the meeting, market participants came to attach high odds to Total U.S. consumer prices, as measured by the PCE the possibility of a December increase. price index, rose only ¼ percent over the 12 months ending in October, held down by large declines in The expected path of the federal funds rate implied consumer energy prices. Core PCE inflation, which by market quotes on interest rate derivatives rose excludes changes in food and energy prices, was moderately over the intermeeting period. Nominal 1¼ percent over the same 12-month period, partly yields on 2- and 10-year Treasury securities rose restrained by declines in the prices of non-energy about 40 basis points and 25 basis points, respecimported goods. Over the 12 months ending in tively. Measures of inflation compensation based on November, total consumer prices as measured by the Treasury Inflation-Protected Securities remained low. consumer price index (CPI) rose ½ percent, while core CPI inflation was 2 percent. Survey measures of Over the first few weeks of the intermeeting period, expected longer-run inflation were relatively stable, the increase in the perceived likelihood of an increase although they showed some hints of having edged in the target range for the federal funds rate at the slightly lower: In November and early December, the December meeting was not accompanied by a rise in Michigan survey measure continued to run some- implied or realized volatility in domestic equity and what below its typical range of the past 15 years, fixed-income markets. However, later in the period, though historical patterns suggest that these relatively concerns among market participants about the implilow readings may have reflected softness in total cations of falling crude oil prices and the credit qualinflation and energy prices. The measures from both ity of high-yield bonds evidently increased. In reacthe Survey of Professional Forecasters for the fourth tion, broad measures of U.S. equity prices declined, quarter and the Survey of Primary Dealers in with a steep selloff in energy-sector stocks, and the December moved down slightly. one-month-ahead option-implied volatility on the S&P 500 index, the VIX, climbed. In addition, Foreign real GDP growth improved in the third quar- strains in the high-yield bond market increased notater after being weak in the first half, and recent indi- bly after a mutual fund that specialized in very lowcators were consistent with a further moderate rated and unrated bonds suspended investor redempexpansion in the fourth quarter. Economic activity in tions and closed. Over the intermeeting period, high- Canada rebounded in the third quarter, boosted by yield bond spreads widened significantly, on net, rising exports and a smaller drag from declines in oil- particularly for bonds rated triple-C or below, with sector investment. The Japanese economy expanded more pronounced increases for firms in the energy in the third quarter following a small contraction in sector. In contrast, spreads on investment-grade corthe previous quarter. In contrast, growth in the euro- porate bonds were little changed on balance. area economy slowed in the third quarter. Recent indicators for economic activity in China were rela- Nonfinancial businesses continued to tap financial tively favorable, and several other emerging Asian markets at a brisk pace in the intermeeting period. economies strengthened in the third quarter. Mexican Issuance of investment-grade corporate bonds and economic growth also picked up in the third quarter, institutional leveraged loans remained solid, buoyed but the Brazilian economy continued to contract. by demand to finance mergers and acquisitions. Falling energy prices kept headline inflation very low Growth of commercial and industrial loans on in many foreign economies. banks’ books continued to be strong in October and November, driven mainly by the expansion of large Staff Review of the Financial Situation loans at large banks. However, high-yield bond issuance slowed and refinancing-related leveraged loan Federal Reserve communications and economic data issuance stayed weak during the intermeeting period. releases over the intermeeting period appeared to have led investors to raise the odds they assigned to Corporate earnings and credit quality continued to an increase in the target range for the federal funds show some signs of weakening. Available reports and

258 102nd Annual Report | 2015 analysts’ estimates suggested that aggregate earnings index of the dollar rose appreciably. Equity indexes per share in the third quarter declined slightly com- declined in many advanced and emerging market pared with year-earlier levels, in line with expecta- economies amid concerns about corporate earnings tions. Earnings were particularly weak in the energy and falling oil and metals prices. Short-term soverand materials sectors because of declines in prices of eign yields changed little in the euro area and Japan crude oil and metals. The stronger dollar appeared to but rose moderately in the United Kingdom. Longerweigh on earnings growth across many sectors. term sovereign yields moved higher in Europe along with U.S. Treasury yields. Conditions in the municipal bond market were generally stable. Gross issuance of municipal bonds was Staff Economic Outlook solid in recent months. Yields on municipal bonds declined a little, leaving their ratios to long-term In the economic forecast prepared by the staff for the Treasury yields somewhat lower but still near the December FOMC meeting, real GDP growth in the high end of their historical range. second half of this year was little changed, on net, relative to the projection for the October meeting. Financing conditions for commercial real estate tight- The staff’s medium-term projection for real GDP ened somewhat. Spreads on commercial mortgage- growth was revised up slightly, on balance, from the backed securities (CMBS) widened further, suggest- previous forecast, primarily because the recently ing that investors in CMBS continued to reassess the passed Bipartisan Budget Act of 2015 was anticirisks in this sector following several years of robust pated to lead to somewhat higher federal government demand for these securities. Nonetheless, underwrit- purchases. The staff continued to project that real ing standards continued to be relatively loose, and GDP would expand at a somewhat faster pace than financing conditions appeared to remain quite potential output in 2016 through 2018, supported accommodative overall. CMBS issuance stayed primarily by increases in consumer spending. The strong. unemployment rate was expected to decline gradually and to run somewhat below the staff’s estimate of its Residential mortgage market conditions were little longer-run natural rate over this period. changed, on net, over the intermeeting period. Credit remained tight for borrowers with low credit scores, The staff’s forecast for inflation was revised down hard-to-document income, or higher debt-to-income slightly in the near term in response to recent data for ratios. Interest rates on 30-year fixed-rate mortgages consumer prices and the further decline in the price increased 30 basis points, in line with increases in of crude oil; over the medium term, the projection yields on mortgage-backed securities and was little revised. Energy prices and prices of noncomparable-maturity Treasury securities. Neverthe- energy imported goods were expected to begin less, mortgage rates continued to be quite low by his- steadily rising next year. The staff projected that torical standards. inflation would increase gradually over the next several years and reach the Committee’s longer-run Consumer credit markets remained accommodative objective of 2 percent by the end of 2018. for most borrowers. Consumer loan balances continued to rise at a robust pace through October because The staff viewed the uncertainty around its Decemof sustained expansion in credit card balances and ber projections for real GDP growth, the unemploysizable increases in auto and student loans; growth of ment rate, and inflation as similar to the average of student loans continued to slow gradually. Student the past 20 years. The risks to the forecast for real and auto loans remained broadly available, even to GDP were seen as tilted somewhat to the downside, borrowers with subprime credit histories, but the reflecting the staff’s assessment that neither monavailability of credit card loans for subprime borrow- etary nor fiscal policy was currently well positioned ers was still tight. to help the economy withstand substantial adverse shocks. Consistent with this downside risk to aggre- Movements in foreign financial markets over the gate demand, the staff viewed the risks to its outlook period reflected increased expectations that the for the unemployment rate as skewed somewhat to FOMC would begin raising the target range for the the upside. The risks to the projection for inflation federal funds rate in December, investors’ views were seen as weighted to the downside, reflecting the about monetary policies abroad, and substantial possibility that longer-term inflation expectations declines in commodity prices. The broad nominal may have edged down and that the foreign exchange

Minutes of Federal Open Market Committee Meetings | December 259 value of the dollar could rise substantially further, Incoming data indicated that inflation continued to which would put downward pressure on inflation. run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices Participants’ Views on Current Conditions and prices of non-energy imports. The price of crude and the Economic Outlook oil fell further over the intermeeting period, and many participants lowered their near-term forecasts In conjunction with this FOMC meeting, members for inflation somewhat while leaving their mediumof the Board of Governors and Federal Reserve term forecasts little changed. Nearly all continued to Bank presidents submitted their projections of the anticipate that inflation would rise to or very close to most likely outcomes for real GDP growth, the 2 percent over the medium term as the transitory unemployment rate, inflation, and the federal funds effects of declines in energy and import prices dissirate for each year from 2015 through 2018 and over pated and the labor market strengthened further. the longer run.3 Each participant’s projections were Over the intermeeting period, market-based measconditioned on his or her judgment of appropriate ures of inflation compensation stayed low; some monetary policy. The longer-run projections repre- survey-based measures of longer-term inflation sent each participant’s assessment of the rate to expectations edged down. Although many particiwhich each variable would be expected to converge, pants remained concerned about downside risks over time, under appropriate monetary policy and in attending the outlook for inflation, a majority of the absence of further shocks to the economy. These participants saw the risks to the outlook for inflation projections and policy assessments are described in as balanced. the Summary of Economic Projections, which is an addendum to these minutes. Consumer spending continued to rise at a solid rate in recent months; retail sales picked up over the In their discussion of the economic situation and the October–November period, and motor vehicle sales outlook, meeting participants viewed the information remained strong. The available information from Disreceived over the intermeeting period as indicating trict business contacts was generally consistent with that economic activity was expanding moderately the recent trend in data on spending, although a and confirming that underutilization of labor couple of reports noted that households were spendresources had diminished appreciably since early in ing cautiously and that some price discounting was the year. Participants’ outlook indicated that, with likely. Over the coming year, participants expected gradual adjustments in the stance of monetary consumer outlays to be supported importantly by policy, real GDP would continue to increase at a ongoing gains in jobs, rising income, and improved moderate rate over the medium term and that labor household balance sheets. In addition, several particimarket indicators would continue to strengthen. pants pointed out that low energy costs should help They anticipated that the relative strength in domes- support consumer expenditures. tic demand would be only partially offset by some further weakness in net exports. Participants gener- The housing market was recovering gradually, with ally saw the downside risks to U.S. economic activity single-family homebuilding continuing to trend up from global economic and financial developments, and multifamily construction remaining at a high although still material, as having diminished since level. The reports on the pace of construction and late summer. In addition, new and revised informa- real estate activity across Districts varied. Nonethetion on employment in recent months had reduced less, several participants noted factors pointing to earlier concerns about a possible slowing of progress continued improvement in the housing sector, includin the labor market. Accordingly, taking into account ing ongoing house price appreciation, low levels of domestic and international developments, most par- home inventories, the substantial gap between the ticipants judged the risks to the outlook for both eco- rate of household formation and the relatively slow nomic activity and the labor market to be balanced. pace of construction, and the possibility that homebuyers may be entering the market in anticipation of higher mortgage rates. Outside of the residential sector, commercial building was highlighted as an area 3 The president of the Federal Reserve Bank of Minneapolis did of relative strength in a few Districts. not participate in this FOMC meeting, and the incoming president is scheduled to assume office on January 1, 2016. James M. As a result of the recently passed Bipartisan Budget Lyon, First Vice President of the Federal Reserve Bank of Minneapolis, submitted economic projections. Act, federal spending was expected to provide a mod-

260 102nd Annual Report | 2015 est boost to economic activity over the next few prices; core PCE prices posted only small increases. years. Contacts in one District with a relatively large Over the intermeeting period, crude oil prices amount of federal government activity reported that dropped notably, other commodity prices declined, their businesses would also benefit from the reduced and the dollar appreciated further. The 12-month uncertainty about the federal fiscal outlook. change in the core PCE price index was 1.3 percent in October and had been running at about that rate Business activity was solid outside of sectors since the beginning of the year, despite the declines in adversely affected by low energy prices and weak prices of non-energy imported goods over the period. exports. A number of participants commented on the Several participants noted that alternative indicators strength in the services sector in their Districts, citing, of underlying inflation, such as the core CPI, the in particular, activity in high-tech, transportation, lei- trimmed mean PCE, and the sticky price CPI, sure and hospitality, and health-related businesses. showed somewhat higher year-over-year increases, Some reported that the stronger manufacturing close to or above 2 percent. Inflation by these measindustries in their Districts included aerospace, power ures, however, had typically run higher than PCE generation equipment, and medical equipment, and price inflation, and a range of views was expressed that the domestic auto industry was still a bright about their implications for the outlook for PCE spot. However, manufacturing activity overall contin- inflation. ued to be restrained by weakness in industries with significant international exposures, such as steel, agri- Almost all participants continued to expect that once cultural and drilling equipment, and chemicals. In energy prices and prices of non-energy commodities addition, domestic energy producers and their service stabilized, the effects of the declines in those prices suppliers remained under significant pressure from on headline and core PCE inflation would fade. the excess supply of crude oil and declining prices. Moreover, with margins of resource underutilization The cutbacks in drilling led to further reductions in having already diminished appreciably and longercapital spending and to layoffs; credit conditions for run inflation expectations reasonably stable, most some firms continued to deteriorate. In the agricul- anticipated that tightening resource utilization over tural sector, high levels of domestic crop production the next year would contribute to higher inflation. and weak global demand had depressed commodity Nearly all participants were now reasonably confiprices, and farm income was expected to decline. dent that inflation would move back to 2 percent over the medium term. However, because of the Participants generally agreed that the drag on U.S. recent further decline in crude oil prices, many pareconomic activity from the appreciation of the dollar ticipants judged that falling energy prices would since the summer of 2014 and the slowdown in for- depress headline inflation somewhat longer than preeign economic growth, particularly in emerging mar- viously anticipated. Also, several observed that the ket economies, was likely to continue to depress U.S. additional appreciation of the dollar would continue net exports for some time. Many expressed the view to hold down the prices of imported goods. that the risks to the global economy that emerged late Although almost all still expected that the downward this summer had receded and anticipated moderate pressure on inflation from energy and commodity improvement in economic growth abroad in the com- prices would be transitory, many viewed the persising year as currency and commodity markets stabi- tent weakness in those prices as adding uncertainty lized. However, participants cited a number of linger- or posing important downside risks to the inflation ing concerns, including the possibility that further outlook. dollar appreciation and persistent weakness in commodity prices could increase the stress on emerging Participants also discussed readings from various market economies and that China could find it diffi- market- and survey-based measures of longer-run cult to navigate the cyclical and structural changes inflation expectations. Recently, some of the available under way in its economy. Several upside risks to the surveys had reported softer longer-run inflation U.S. outlook also were noted, including the possibil- expectations, while others suggested still-stable expecity that declining energy prices could spur consumer tations. In addition, the market-based measures of spending more than currently anticipated. inflation compensation that had declined earlier were still at low levels. A number of participants noted, Consumer prices, as measured by the PCE index, based on historical patterns, that some of the surveywere little changed, on net, in September and Octo- based measures could be overly sensitive to energy ber, held down importantly by declines in energy price fluctuations rather than indicating shifts in per-

Minutes of Federal Open Market Committee Meetings | December 261 ceptions of underlying inflation trends and that the unemployment would be unlikely to lead to a buildup declines in the market-based measures could reflect of unduly strong inflation pressures. A few comchanges in risk and liquidity premiums. Many con- mented that a sustained period of labor market activcluded that longer-run inflation expectations ity above levels consistent with maximum employremained reasonably stable. However, some expressed ment should speed the rise in inflation to the Comconcerns that inflation expectations may have already mittee’s objective. moved lower, or that they might do so if inflation persisted for much longer at a rate below the Com- Financial conditions tightened modestly over the mittee’s objective. intermeeting period. Quotes in financial markets and survey results suggested that investors were quite Labor market conditions improved further in recent confident that the Committee would raise the federal months: Monthly gains in nonfarm payroll employ- funds target range 25 basis points at the current ment averaged more than 200,000 over the period meeting. Concerns among investors about the highfrom September to November, and the unemploy- yield bond market increased notably in the days ment rate edged lower. The cumulative reduction in before the meeting after an open-ended mutual fund the underutilization of labor resources since early in specializing in junk bonds suspended redemptions the year was appreciable. The unemployment rate, at and closed. In their discussion, several participants 5.0 percent in November, was 0.7 percentage point commented that markets for leveraged finance had lower than in January and close to most participants’ been correcting since midyear—particularly for the estimates of its longer-run normal level. Broader most risky assets, including those associated with measures of underemployment that include margin- energy firms—and noted that the widening of credit ally attached workers and those employed part time spreads in corporate bond markets appeared to be for economic reasons also fell substantially since largely due to the repricing of riskier assets. January. However, the labor force participation rate moved down since January as well, with some During their consideration of economic conditions FOMC participants attributing part of the decline to and monetary policy, almost all participants agreed demographic trends or a structural rise in detach- that the improvements that had occurred in the labor ment among prime-age men. A number of partici- market and their confidence in a return of inflation pants observed that wage increases had begun to pick to 2 percent over the medium term now satisfied the up, or that they appeared likely to do so over the Committee’s criteria for beginning the policy normalcoming year. Although many participants judged ization process. Participants also discussed the implithat the improvement in labor market conditions had cations of economic conditions going forward for the been substantial, some others indicated that further likely future path of the target range for the federal progress in reducing labor market slack would be funds rate. Even after the initial increase in the target required before conditions would be consistent with range, the stance of policy would remain accommothe Committee’s objective of maximum employment. dative. Participants saw several reasons why a gradual In particular, some participants stressed the impor- removal of policy accommodation would likely be tance of the pace of economic growth staying above appropriate. Normalizing policy gradually would that of potential output in order to reduce remaining keep the stance of monetary policy sufficiently labor underutilization across broader dimensions— accommodative to support further improvement in for example, by lowering the still-elevated numbers of labor market conditions and to exert upward presworkers employed part time for economic reasons sure on inflation. Also, a number of participants and by encouraging additional workers who are cur- pointed out that because inflation was still running rently outside the labor force but want a job to reen- well below the Committee’s objective and the outter the labor force. look for inflation was subject to considerable uncertainty, it would probably take some time for the data Most participants expected that the unemployment to confirm that inflation was on a trajectory to rate would edge below their estimates of its longer- return to 2 percent over the medium term. Gradual run level in the coming year and then stabilize for a adjustments in the federal funds rate would also allow time, with the further strengthening of the labor mar- policymakers to assess how the economy was ket helping move inflation higher. Because labor responding to increases in interest rates. In addition, compensation was still increasing at a subdued rate by several estimates, the neutral short-term real interand inflation remained well below 2 percent, some est rate was currently close to zero and was expected participants judged that a moderate further decline in to rise only slowly as headwinds restraining the

262 102nd Annual Report | 2015 expansion receded. Moreover, the ability of mon- Market-based measures of inflation compensation etary policy to offset the economic effects of an remained low; some survey-based measures of unanticipated economic shock remained asymmetric, longer-term inflation expectations had edged down. and a cautious approach to normalizing policy could Members anticipated that the further decline in crude help minimize the risk of having to respond to a oil prices over the intermeeting period was likely to negative economic shock while the policy rate exert some additional transitory downward pressure remained near its effective lower bound. on inflation in the near term. While viewing a gradual approach to policy normal- Regarding the medium-term outlook, inflation was ization as likely to be appropriate given their eco- projected to increase gradually as energy prices and nomic outlook, participants emphasized the need to prices of non-energy imports stabilized and the labor adjust the policy path as economic conditions market strengthened. Overall, taking into account evolved and to avoid appearing to commit to any economic developments and the outlook for ecospecific pace of adjustments. They stressed the nomic activity and the labor market, the Committee importance of communicating clearly that the future was now reasonably confident in its expectation that policy path could become shallower if the economic inflation would rise, over the medium term, to its expansion weakened and inflation rose more slowly 2 percent objective. However, for some members, the than currently anticipated, and that it could become risks attending their inflation forecasts remained consteeper if real activity and inflation surprised to the siderable. Among those risks was the possibility that upside. A few participants also indicated that signifi- additional downward shocks to prices of oil and cant risks to financial stability, should they emerge, other commodities or a sustained rise in the exchange could alter their view of the appropriate policy path. value of the dollar could delay or diminish the expected upturn in inflation. A couple also worried Committee Policy Action that a further strengthening of the labor market might not prove sufficient to offset the downward In their discussion of monetary policy for the period pressures from global disinflationary forces. And sevahead, members judged that information received eral expressed unease with indications that inflation since the FOMC met in October indicated that eco- expectations may have moved down slightly. In view nomic activity had been expanding at a moderate of these risks and the shortfall of inflation from pace. Although net exports remained soft, consumer 2 percent, members expressed their intention to careand business spending remained solid, and the hous- fully monitor actual and expected progress toward ing sector improved further. Overall, taking into the Committee’s inflation goal. account domestic and foreign developments, members saw the risks to the outlook for both economic After assessing the outlook for economic activity, the activity and the labor market as balanced, and they labor market, and inflation and weighing the uncerexpected that, with gradual adjustments in the stance tainties associated with the outlook, members agreed of monetary policy, economic activity would most to raise the target range for the federal funds rate to likely continue to expand at a moderate pace. ¼ to ½ percent at this meeting. A number of members commented that it was appropriate to begin Members agreed that a range of recent labor market policy normalization in response to the substantial indicators, including ongoing job gains and declining progress in the labor market toward achieving the unemployment, showed further improvement and Committee’s objective of maximum employment and confirmed that underutilization of labor resources their reasonable confidence that inflation would had diminished appreciably since early this year. move to 2 percent over the medium term. Members Members anticipated that economic activity was agreed that the postmeeting statement should report likely to continue to expand at a pace sufficient to that the Committee’s decision reflected both the ecolead to a further increase in the utilization of labor nomic outlook and the time it takes for policy actions resources, and many members judged that additional to affect future economic outcomes. If the Commitprogress would be required to reach the Committee’s tee waited to begin removing accommodation until it maximum-employment objective. was closer to achieving its dual-mandate objectives, it might need to tighten policy abruptly, which could Inflation continued to run below the Committee’s risk disrupting economic activity. Members observed longer-run objective, held down in part by the effects that after this initial increase in the federal funds rate, of declines in energy and non-energy import prices. the stance of monetary policy would remain accom-

Minutes of Federal Open Market Committee Meetings | December 263 modative. However, some members said that their Bank of New York, until it was instructed otherwise, decision to raise the target range was a close call, par- to execute transactions in the SOMA in accordance ticularly given the uncertainty about inflation with the following domestic policy directive, to be dynamics, and emphasized the need to monitor the released at 2:00 p.m.: progress of inflation closely. “Effective December 17, 2015, the Federal Open Members also discussed their expectations for the Market Committee directs the Desk to undersize and timing of adjustments in the target range for take open market operations as necessary to the federal funds rate going forward. Based on their maintain the federal funds rate in a target range current forecasts for economic activity, the labor of ¼ to ½ percent, including: (1) overnight market, and inflation, as well as their expectation reverse repurchase operations (and reverse that the neutral short-term real interest rate will rise repurchase operations with maturities of more slowly over the next few years, members expected than one day when necessary to accommodate economic conditions would evolve in a manner that weekend, holiday, or similar trading convenwould warrant only gradual increases in the federal tions) at an offering rate of 0.25 percent, in funds rate. However, they also recognized that the amounts limited only by the value of Treasury appropriate path for the federal funds rate would securities held outright in the System Open Mardepend on the economic outlook as informed by ket Account that are available for such operaincoming data. Members stressed the potential need tions and by a per-counterparty limit of $30 bilto accelerate or slow the pace of normalization as the lion per day; and (2) term reverse repurchase economic outlook evolved. In the current situation, operations to the extent approved in the resolubecause of their significant concern about still-low tion on term RRP operations approved by the readings on actual inflation and the uncertainty and Committee at its March 17–18, 2015, meeting. risks present in the inflation outlook, they agreed to indicate that the Committee would carefully monitor The Committee directs the Desk to continue actual and expected progress toward its inflation rolling over maturing Treasury securities at aucgoal. In determining the size and timing of further tion and to continue reinvesting principal payadjustments to monetary policy, some members ments on all agency debt and agency mortgageemphasized the importance of confirming that infla- backed securities in agency mortgage-backed tion would rise as projected and of maintaining the securities. The Committee also directs the Desk credibility of the Committee’s inflation objective. to engage in dollar roll and coupon swap trans- Based on their current economic outlook, they con- actions as necessary to facilitate settlement of tinued to anticipate that the federal funds rate was the Federal Reserve’s agency mortgage-backed likely to remain, for some time, below levels that the securities transactions.” Committee expected to prevail in the longer run. The vote also encompassed approval of the statement The Committee also maintained its policy of rein- below to be released at 2:00 p.m.: vesting principal payments from agency debt and agency mortgage-backed securities in agency “Information received since the Federal Open mortgage-backed securities and of rolling over Market Committee met in October suggests that maturing Treasury securities at auction. In view of economic activity has been expanding at a modmembers’ outlook for moderate growth in economic erate pace. Household spending and business activity, inflation moving toward its target only fixed investment have been increasing at solid gradually, and the asymmetric risks posed by the rates in recent months, and the housing sector continued proximity of short-term interest rates to has improved further; however, net exports have their effective lower bound, the Committee antici- been soft. A range of recent labor market indipated retaining this policy until normalization of the cators, including ongoing job gains and declinlevel of the federal funds rate was well under way. ing unemployment, shows further improvement This policy, by keeping the Committee’s holdings of and confirms that underutilization of labor longer-term securities at sizable levels, should help resources has diminished appreciably since early maintain accommodative financial conditions. this year. Inflation has continued to run below the Committee’s 2 percent longer-run objective, At the conclusion of the discussion, the Committee partly reflecting declines in energy prices and in voted to authorize and direct the Federal Reserve prices of non-energy imports. Market-based

264 102nd Annual Report | 2015 measures of inflation compensation remain low; are expected to prevail in the longer run. Howsome survey-based measures of longer-term ever, the actual path of the federal funds rate will inflation expectations have edged down. depend on the economic outlook as informed by incoming data. Consistent with its statutory mandate, the Committee seeks to foster maximum employment The Committee is maintaining its existing policy and price stability. The Committee currently of reinvesting principal payments from its holdexpects that, with gradual adjustments in the ings of agency debt and agency mortgagestance of monetary policy, economic activity backed securities in agency mortgage-backed will continue to expand at a moderate pace and securities and of rolling over maturing Treasury labor market indicators will continue to securities at auction, and it anticipates doing so strengthen. Overall, taking into account domes- until normalization of the level of the federal tic and international developments, the Commit- funds rate is well under way. This policy, by tee sees the risks to the outlook for both eco- keeping the Committee’s holdings of longernomic activity and the labor market as balanced. term securities at sizable levels, should help Inflation is expected to rise to 2 percent over the maintain accommodative financial conditions.” medium term as the transitory effects of declines in energy and import prices dissipate and the Voting for this action: Janet L. Yellen, William C. labor market strengthens further. The Commit- Dudley, Lael Brainard, Charles L. Evans, Stanley tee continues to monitor inflation developments Fischer, Jeffrey M. Lacker, Dennis P. Lockhart, closely. Jerome H. Powell, Daniel K. Tarullo, and John C. Williams. The Committee judges that there has been considerable improvement in labor market condi- Voting against this action: None. tions this year, and it is reasonably confident that inflation will rise, over the medium term, to To support the Committee’s decision to raise the tarits 2 percent objective. Given the economic outget range for the federal funds rate, the Board of look, and recognizing the time it takes for policy Governors voted unanimously to raise the interest actions to affect future economic outcomes, the rates on required and excess reserve balances by Committee decided to raise the target range for ¼ percentage point, to ½ percent, effective Decemthe federal funds rate to ¼ to ½ percent. The ber 17, 2015. The Board of Governors also voted stance of monetary policy remains accommodaunanimously to approve a ¼ percentage point tive after this increase, thereby supporting furincrease in the primary credit rate (discount rate) to ther improvement in labor market conditions 1 percent, effective December 17, 2015.4 and a return to 2 percent inflation. After these policy decisions, the deputy manager of In determining the timing and size of future the System Open Market Account briefed the Comadjustments to the target range for the federal mittee on plans for term RRPs over year-end. funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into 4 In taking this action, the Board approved requests submitted by account a wide range of information, including the boards of directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. measures of labor market conditions, indicators Louis, Kansas City, Dallas, and San Francisco. This vote also of inflation pressures and inflation expectations, encompassed approval by the Board of Governors of the estaband readings on financial and international lishment of a 1 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of December 17, developments. In light of the current shortfall of 2015, and the date such Reserve Banks informed the Secretary inflation from 2 percent, the Committee will of the Board of such a request. (Secretary’s note: Subsequently, carefully monitor actual and expected progress the Federal Reserve Banks of New York and Minneapolis were informed by the Secretary of the Board of the Board’s approval toward its inflation goal. The Committee expects of their establishment of a primary credit rate of 1 percent, that economic conditions will evolve in a man- effective December 17, 2015.) This vote of the Board of Governer that will warrant only gradual increases in nors also encompassed approval of the renewal by all 12 Federal Reserve Banks of the existing formulas for calculating the rates the federal funds rate; the federal funds rate is applicable to discounts and advances under the secondary and likely to remain, for some time, below levels that seasonal credit programs.

Minutes of Federal Open Market Committee Meetings | December 265 It was agreed that the next meeting of the Committee Notation Vote would be held on Tuesday–Wednesday, January 26– 27, 2016. The meeting adjourned at 10:30 a.m. on By notation vote completed on November 17, 2015, December 16, 2015. the Committee unanimously approved the minutes of the Committee meeting held on October 27–28, 2015. Brian F. Madigan Secretary

266 102nd Annual Report | 2015 Addendum: longer-run projections represent each participant’s assessment of the value to which each variable would Summary of Economic Projections be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks In conjunction with the Federal Open Market Comto the economy. “Appropriate monetary policy” is mittee (FOMC) meeting held on December 15–16, defined as the future path of policy that each partici- 2015, meeting participants submitted their projecpant deems most likely to foster outcomes for ecotions of the most likely outcomes for real output nomic activity and inflation that best satisfy his or growth, the unemployment rate, inflation, and the her individual interpretation of the Federal Reserve’s federal funds rate for each year from 2015 to 2018 objectives of maximum employment and stable and over the longer run.5 Each participant’s projecprices. tion was based on information available at the time of the meeting, together with his or her assessment of FOMC participants generally expected that, under appropriate monetary policy and assumptions about appropriate monetary policy, real gross domestic the factors likely to affect economic outcomes. The product (GDP) growth in 2016 and 2017 would be at or somewhat above their individual estimates of the longer-run growth rate and would converge toward 5 The president of the Federal Reserve Bank of Minneapolis did not participate in this FOMC meeting, and the incoming presi- its longer-run rate in 2018 (table 1 and figure 1). All dent is scheduled to assume office on January 1, 2016. James M. participants projected that the unemployment rate Lyon, First Vice President of the Federal Reserve Bank of Minwould decline further in 2016. Most participants neapolis, submitted economic projections. Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, December 2015 Percent Median1 Central tendency2 Range3 Variable Longer Longer L onger 2 015 2016 2017 2018 run 2015 2016 2017 2018 run 2 015 2 016 2 017 2 018 run Change in real GDP 2.1 2.4 2.2 2.0 2.0 2.1 2 .3–2.5 2.0–2.3 1.8–2.2 1.8–2.2 2.0–2.2 2.0–2.7 1 .8–2.5 1 .7–2.4 1.8–2.3 September projection 2.1 2.3 2.2 2.0 2.0 2.0–2.3 2.2–2.6 2.0–2.4 1.8–2.2 1.8–2.2 1.9–2.5 2.1–2.8 1.9–2.6 1 .6–2.4 1.8–2.7 Unemployment rate 5.0 4.7 4.7 4.7 4.9 5.0 4.6–4.8 4.6–4.8 4.6–5.0 4.8–5.0 5.0 4.3–4.9 4.5–5.0 4.5–5.3 4.7–5.8 September projection 5.0 4.8 4.8 4.8 4.9 5.0–5.1 4.7–4.9 4.7–4.9 4.7–5.0 4.9–5.2 4.9–5.2 4.5–5.0 4.5–5.0 4 .6–5.3 4.7–5.8 PCE inflation 0.4 1.6 1.9 2.0 2.0 0.4 1.2–1.7 1.8–2.0 1.9–2.0 2.0 0.3–0.5 1.2–2.1 1.7–2.0 1 .7–2.1 2.0 September projection 0.4 1.7 1.9 2.0 2.0 0.3–0.5 1.5–1.8 1.8–2.0 2.0 2.0 0.3–1.0 1.5–2.4 1.7–2.2 1.8–2.1 2 .0 Core PCE inflation4 1.3 1.6 1.9 2.0 1.3 1.5–1.7 1.7–2.0 1.9–2.0 1.2–1.4 1.4–2.1 1.6–2.0 1.7–2.1 September projection 1.4 1.7 1.9 2.0 1.3–1.4 1.5–1.8 1.8–2.0 1.9–2.0 1.2–1.7 1.5–2.4 1 .7–2.2 1 .8–2.1 Memo: Projected appropriate policy path Federal funds rate 0.4 1.4 2.4 3.3 3.5 0.4 0.9–1.4 1.9–3.0 2.9–3.5 3.3–3.5 0.1–0.4 0.9–2.1 1.9–3.4 2 .1–3.9 3.0–4.0 September projection 0.4 1.4 2.6 3.4 3.5 0.1–0.6 1.1–2.1 2.1–3.4 3.0–3.6 3.3–3.8 -0.1–0.9 - 0.1–2.9 1 .0–3.9 2.9–3.9 3 .0–4.0 Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The projections for the federal funds rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. The September projections were made in conjunction with the meeting of the Federal Open Market Committee on September 16–17, 2015. 1 For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the average of the two middle projections. 2 The central tendency excludes the three highest and three lowest projections for each variable in each year. 3 The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year. 4 Longer-run projections for core PCE inflation are not collected.

Minutes of Federal Open Market Committee Meetings | December 267 Figure 1. Medians, central tendencies, and ranges of economic projections, 2015–18 and over the longer run Percent Change in real GDP Median of projections 4 Central tendency of projections Range of projections 3 2 Actual 1 + 0 - 2010 2011 2012 2013 2014 2015 2016 2017 2018 Longer run Percent Unemployment rate 10 9 8 7 6 5 4 2010 2011 2012 2013 2014 2015 2016 2017 2018 Longer run Percent PCE inflation 3 2 1 2010 2011 2012 2013 2014 2015 2016 2017 2018 Longer run Percent Core PCE inflation 3 2 1 2010 2011 2012 2013 2014 2015 2016 2017 2018 Longer run Note: Definitions of variables are in the general note to table 1. The data for the actual values of the variables are annual.

268 102nd Annual Report | 2015 expected that in 2018 the unemployment rate would years, including labor market conditions that are supremain somewhat below their individual judgments portive of economic expansion, household and busiof its longer-run normal rate. Participants projected ness balance sheets that had improved significantly that inflation, as measured by the four-quarter since the financial crisis, and a stance of monetary change in the price index for personal consumption policy that was expected to remain accommodative. expenditures (PCE), would pick up in 2016 and 2017 from the very low rate seen in 2015. Almost all par- Compared with their contributions to the Summary ticipants projected inflation in 2018 to be at or very of Economic Projections (SEP) in September, particinear the Committee’s 2 percent objective. pants’ projections of real GDP growth from 2016 to 2018 were generally little changed. The median value As shown in figure 2, all but two participants thought of participants’ projections for real GDP growth in that it would be appropriate to raise the target range 2016 was revised up slightly to 2.4 percent; some parfor the federal funds rate before the end of 2015. ticipants cited the Bipartisan Budget Act of 2015, Most participants expected that it would be appro- which was passed in late October, as adding support priate to raise the target range for the federal funds to economic growth in the near term. Very few parrate gradually over the projection period as head- ticipants changed their forecasts for real GDP growth winds to economic growth dissipate slowly over time in the longer run, resulting in an unchanged median. and as inflation rises toward the Committee’s goal of 2 percent. Consistent with this outlook, most partici- All participants projected that the unemployment pants projected that the appropriate level of the fed- rate would be at or below their individual judgments eral funds rate would be below its longer-run level of its longer-run normal level from 2016 through through 2018. 2018. Compared with the September SEP, most participants’ projected paths for the unemployment rate Almost all participants viewed the levels of uncer- were revised down a little over those three years, with tainty associated with their outlooks for economic the median of the projections in the fourth quarter of growth and the unemployment rate as broadly simi- each year at 4.7 percent. Many also revised down lar to the norms of the previous 20 years. Nearly all slightly their estimates of the longer-run normal rate also viewed the levels of uncertainty associated with of unemployment, although the median forecast of their inflation forecasts as broadly similar to histori- 4.9 percent was unchanged since September. Particical norms. Most participants saw the risks to their pants generally cited stronger-than-expected labor outlooks for real GDP growth and the unemploy- market data in recent months as a factor explaining ment rate as broadly balanced. A majority viewed the the downward revisions to their unemployment rate risks attending their projections for both PCE and forecasts. core PCE inflation as broadly balanced, but many saw these risks as weighted to the downside. Among Figures 3.A and 3.B show the distribution of particithose who saw the risks to their inflation outlook as pants’ views regarding the likely outcomes for real tilted to the downside, several highlighted the contin- GDP growth and the unemployment rate through ued strength of the dollar and some recent indica- 2018 and in the longer run. The distributions of the tions that inflation expectations had declined as con- projections for real GDP growth over the next several tributing to those risks. years and in the longer run narrowed some since the September SEP. The diversity of views across partici- The Outlook for Economic Activity pants on the outlook for GDP growth reflected, in part, differences in their individual assessments of the Participants generally projected that, conditional on size and persistence of the effects of lower energy their individual assumptions about appropriate mon- prices and a stronger dollar on real activity; the time etary policy, real GDP would increase in 2016 and it would take for the headwinds that have been 2017 at a pace somewhat above their estimates of its restraining the pace of the economic expansion, such longer-run rate. Real GDP growth would then slow as financial and economic conditions abroad, to disin 2018 to a rate at or near their individual estimates sipate; and the appropriate path of monetary policy. of the longer-run normal rate. Participants pointed With regard to the unemployment rate, the distributo a number of factors that they expect will contrib- tions of projections over the next three years shifted ute to moderate output growth over the next few modestly to lower values since September.

Minutes of Federal Open Market Committee Meetings | December 269 Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate Percent 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2015 2016 2017 2018 Longer run Note: Each shaded circle indicates the value (rounded to the nearest ⅛ percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.

270 102nd Annual Report | 2015 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2015–18 and over the longer run Number of participants 2015 December projections 18 September projections 16 14 12 10 8 6 4 2 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 1.7 1.9 2.1 2.3 2.5 2.7 2.9 Percent range Number of participants 2016 18 16 14 12 10 8 6 4 2 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 1.7 1.9 2.1 2.3 2.5 2.7 2.9 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 1.7 1.9 2.1 2.3 2.5 2.7 2.9 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 1.7 1.9 2.1 2.3 2.5 2.7 2.9 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 2.8 - 1.7 1.9 2.1 2.3 2.5 2.7 2.9 Percent range Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | December 271 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2015–18 and over the longer run Number of participants 2015 December projections 18 September projections 16 14 12 10 8 6 4 2 4.2 - 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Number of participants 2016 18 16 14 12 10 8 6 4 2 4.2 - 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 4.2 - 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 4.2 - 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 4.2 - 4.4 - 4.6 - 4.8 - 5.0 - 5.2 - 5.4 - 5.6 - 5.8 - 4.3 4.5 4.7 4.9 5.1 5.3 5.5 5.7 5.9 Percent range Note: Definitions of variables are in the general note to table 1.

272 102nd Annual Report | 2015 The Outlook for Inflation end of 2018. Given their expectations that economic headwinds will persist and that inflation will rise Nearly all participants saw PCE price inflation pick- gradually to 2 percent over the next three years, most ing up in 2016, rising further in 2017, and then reach- participants judged that it would be appropriate for ing a rate in 2018 at or very close to the Committee’s the federal funds rate to remain below its longer-run 2 percent longer-run objective. However, relative to normal level from 2016 to 2018. Participants prothe September SEP, almost all participants marked jected that a gradual rise in the federal funds rate down their projections for PCE price inflation in over that period would be appropriate as some of 2016, observing that recent declines in energy prices those headwinds, such as sluggish foreign economic and the continued strength in the dollar could exert growth, diminish and the temporary factors holding additional downward pressure on inflation in the down inflation dissipate. Some participants noted near term. Revisions to participants’ inflation fore- that a gradual increase in the federal funds rate casts in 2017 were more mixed, while the projections would be consistent with their expectation that the for inflation in 2018 were little changed. Most par- neutral short-term real interest rate will rise slowly ticipants also marked down their projections for core over the next few years. PCE price inflation in 2016, although almost all still expected core inflation to rise gradually over the pro- Both the median and the range of participants’ projection period and to be at or very close to 2 percent jections of the federal funds rate in the longer run, at by 2018. Factors cited by participants as contributing 3.5 percent and 3 to 4 percent, respectively, were to their outlook that inflation will rise over the unchanged since September. However, several particimedium term included recent signs of a pickup in pants revised their projections for the longer-run fedwage growth, their expectation of tighter resource eral funds rate slightly lower. All participants judged utilization, their expectation that the effects of recent that inflation in the longer run would be equal to the appreciation in the dollar and declines in oil prices on Committee’s objective of 2 percent, implying that inflation will fade, their anticipation that inflation their individual judgments regarding the appropriate expectations will remain at levels consistent with the longer-run level of the real federal funds rate, in the FOMC’s longer-run objective, and still- absence of further shocks to the economy, ranged accommodative monetary policy. from 1 to 2 percent, the same as in September. Figures 3.C and 3.D provide information on the dis- Participants’ views of the appropriate path for montribution of participants’ views about the outlook for etary policy were informed by their judgments about inflation. The distribution of participants’ projecthe state of the economy and the outlook for labor tions for PCE price inflation in 2016 and 2017 shifted markets and inflation. One important consideration to the left compared with the September SEP, while for many participants was their estimate of the extent the distributions of projections for 2018 and in the of slack remaining in the labor market, as informed longer run were little changed. The distributions of by the incoming data on various labor market indicaprojections for core PCE price inflation moved lower tors. Another was prospects for inflation to return to for 2016 and 2017 compared with September but did the Committee’s objective of 2 percent; in making not change for 2018. such assessments, participants considered a range of factors, including measures of inflation compensa- Appropriate Monetary Policy tion and longer-run inflation expectations as well as the likely persistence and size of the effects from low Figure 3.E provides the distribution of participants’ energy prices and the strong dollar. Participants also judgments regarding the appropriate level of the taremphasized the potential for international developget federal funds rate at the end of each calendar year ments to continue to have important implications for from 2015 to 2018 and over the longer run. Relative domestic economic activity and inflation and thus for to September, the projections of the appropriate levappropriate monetary policy. Several participants disels of the federal funds rate over the next three years cussed potential interactions between policy normalgenerally shifted to lower values. The median projecization and risks to financial stability. In addition, tion for next year was unchanged, but the medians given the continued proximity of short-term interest for 2017 and 2018 declined slightly. The median prorates to their effective lower bound, asymmetric risks jection now stands at 1.4 percent at the end of 2016, around the outlook for employment and inflation 2.4 percent at the end of 2017, and 3.3 percent at the

Minutes of Federal Open Market Committee Meetings | December 273 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2015–18 and over the longer run Number of participants 2015 December projections 18 September projections 16 14 12 10 8 6 4 2 0.3 - 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.4 0.6 0.8 1.0 1.2 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 0.3 - 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.4 0.6 0.8 1.0 1.2 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 0.3 - 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 0.3 - 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 0.3 - 0.5 - 0.7 - 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note: Definitions of variables are in the general note to table 1.

274 102nd Annual Report | 2015 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2015–18 Number of participants 2015 December projections 18 September projections 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2016 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 2.3 - 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | December 275 Figure 3.E. Distribution of participants’ judgments of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate, 2015–18 and over the longer run Number of participants 2015 18 December projections 16 September projections 14 12 10 8 6 4 2 −0.3 7 - −0.1 2 - 0.13 - 0.38 - 0.63 - 0.88 - 1.13 - 1.38 - 1.63 - 1.88 - 2.13 - 2.38 - 2.63 - 2.88 - 3.13 - 3.38 - 3.63 -3.88 - −0.13 0.12 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 Percent range Number of participants 2016 18 16 14 12 10 8 6 4 2 −0.3 7 - −0.1 2 - 0.13 - 0.38 - 0.63 - 0.88 - 1.13 - 1.38 - 1.63 - 1.88 - 2.13 - 2.38 - 2.63 - 2.88 - 3.13 - 3.38 - 3.63 -3.88 - −0.13 0.12 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 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 −0.3 7 - −0.1 2 - 0.13 - 0.38 - 0.63 - 0.88 - 1.13 - 1.38 - 1.63 - 1.88 - 2.13 - 2.38 - 2.63 - 2.88 - 3.13 - 3.38 - 3.63 -3.88 - −0.13 0.12 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 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 −0.3 7 - −0.1 2 - 0.13 - 0.38 - 0.63 - 0.88 - 1.13 - 1.38 - 1.63 - 1.88 - 2.13 - 2.38 - 2.63 - 2.88 - 3.13 - 3.38 - 3.63 -3.88 - −0.13 0.12 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 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 −0.3 7 - −0.1 2 - 0.13 - 0.38 - 0.63 - 0.88 - 1.13 - 1.38 - 1.63 - 1.88 - 2.13 - 2.38 - 2.63 - 2.88 - 3.13 - 3.38 - 3.63 -3.88 - −0.13 0.12 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 Percent range Note: The midpoints of the target ranges for the federal funds rate and the target levels for the federal funds rate are measured at the end of the specified calendar year or over the longer run.

276 102nd Annual Report | 2015 were noted as one reason why a gradual approach to Table 2. Average historical projection error ranges raising the federal funds rate may be appropriate. Percentage points Uncertainty and Risks Variable 2015 2 016 2017 2018 As in the September SEP, nearly all participants con- Change in real GDP1 ±0.9 ± 1.8 ±2.1 ±2.1 Unemployment rate1 ±0.1 ± 0.8 ±1.4 ±1.8 tinued to judge the levels of uncertainty around their Total consumer prices2 ±0.2 ± 1.0 ±1.0 ±1.0 projections for real GDP growth and the unemployment rate as broadly similar to the average level of Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 1995 through 2014 that were released in the fall by the past 20 years (figure 4).6 Most participants saw various private and government forecasters. As described in the box “Forecast the risks to their outlooks for real GDP growth and Uncertainty,” under certain assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, and consumer prices will be in unemployment as broadly balanced, as the number of ranges implied by the average size of projection errors made in the past. For more participants who viewed the risks to economic information, see David Reifschneider and Peter Tulip (2007), “Gauging the Uncertainty of the Economic Outlook from Historical Forecasting Errors,” Finance growth as weighted to the downside and the risks to and Economics Discussion Series 2007-60 (Washington: Board of Governors of the unemployment rate as weighted to the upside fell the Federal Reserve System, November), available at www.federalreserve.gov/ pubs/feds/2007/200760/200760abs.html; and Board of Governors of the Federal appreciably since September. Diminished risks to Reserve System, Division of Research and Statistics (2014), “Updated Historical domestic economic activity from developments Forecast Errors,” memorandum, April 9, www.federalreserve.gov/foia/files/ 20140409-historical-forecast-errors.pdf. abroad and the strength of recent labor market data 1 Definitions of variables are in the general note to table 1. were among the reasons noted for the more upbeat 2 Measure is the overall consumer price index, the price measure that has been assessment of risks. most widely used in government and private economic forecasts. Projection is percent change, fourth quarter of the previous year to the fourth quarter of the year indicated. As in the September SEP, participants generally agreed that the levels of uncertainty associated with participants who viewed the risks to their inflation their inflation forecasts were broadly similar to the forecasts as weighted to the downside declined average level over the past 20 years. The number of slightly since September, and a majority now viewed the risks to both PCE and core PCE inflation as 6 Table 2 provides estimates of the forecast uncertainty for the broadly balanced. Among those who saw risks to change in real GDP, the unemployment rate, and total consumer price inflation over the period from 1995 through 2014. inflation as tilted to the downside, several highlighted At the end of this summary, the box “Forecast Uncertainty” the continued strength of the dollar and some recent discusses the sources and interpretation of uncertainty in the indications that inflation expectations had declined economic forecasts and explains the approach used to assess the uncertainty and risks attending the participants’ projections. as contributing to their perception of those risks.

Minutes of Federal Open Market Committee Meetings | December 277 Figure 4. Uncertainty and risks in economic projections Number of participants Number of participants Uncertainty about GDP growth Risks to GDP growth December projections December projections 18 18 September projections September projections 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 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: For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.” Definitions of variables are in the general note to table 1.

278 102nd Annual Report | 2015 Forecast Uncertainty The economic projections provided by the members in the third and fourth years. The corresponding of the Board of Governors and the presidents of the 70 percent confidence intervals for overall inflation Federal Reserve Banks inform discussions of mon- would be 1.8 to 2.2 percent in the current year, and etary policy among policymakers and can aid public 1.0 to 3.0 percent in the second, third, and fourth understanding of the basis for policy actions. Con- years. siderable uncertainty attends these projections, how- Because current conditions may differ from those ever. The economic and statistical models and relathat prevailed, on average, over history, participants tionships used to help produce economic forecasts provide judgments as to whether the uncertainty are necessarily imperfect descriptions of the real attached to their projections of each variable is world, and the future path of the economy can be greater than, smaller than, or broadly similar to typiaffected by myriad unforeseen developments and cal levels of forecast uncertainty in the past, as events. Thus, in setting the stance of monetary shown in table 2. Participants also provide judgments policy, participants consider not only what appears to as to whether the risks to their projections are be the most likely economic outcome as embodied in weighted to the upside, are weighted to the downtheir projections, but also the range of alternative side, or are broadly balanced. That is, participants possibilities, the likelihood of their occurring, and the judge whether each variable is more likely to be potential costs to the economy should they occur. above or below their projections of the most likely Table 2 summarizes the average historical accuracy outcome. These judgments about the uncertainty of a range of forecasts, including those reported in and the risks attending each participant’s projections past Monetary Policy Reports and those prepared by are distinct from the diversity of participants’ views the Federal Reserve Board’s staff in advance of about the most likely outcomes. Forecast uncertainty meetings of the Federal Open Market Committee. is concerned with the risks associated with a particu- The projection error ranges shown in the table illus- lar projection rather than with divergences across a trate the considerable uncertainty associated with number of different projections. economic forecasts. For example, suppose a partici- As with real activity and inflation, the outlook for the pant projects that real gross domestic product (GDP) future path of the federal funds rate is subject to conand total consumer prices will rise steadily at annual siderable uncertainty. This uncertainty arises primarily rates of, respectively, 3 percent and 2 percent. If the because each participant’s assessment of the approuncertainty attending those projections is similar to priate stance of monetary policy depends importantly that experienced in the past and the risks around the on the evolution of real activity and inflation over projections are broadly balanced, the numbers time. If economic conditions evolve in an unexpected reported in table 2 would imply a probability of about manner, then assessments of the appropriate setting 70 percent that actual GDP would expand within a of the federal funds rate would change from that range of 2.1 to 3.9 percent in the current year, 1.2 to point forward. 4.8 percent in the second year, and 0.9 to 5.1 percent

279 10 Litigation During 2015, the Board of Governors was a party in Love v. Federal Reserve Board, No. 15-cv-1077 (D. 5 lawsuits or appeals filed that year and was a party Kansas, filed March 16, 2015), was a challenge to the in 12 other cases pending from previous years, for a Board’s monetary policy actions. On June 11, 2015, total of 17 cases. The Board intervened in or initiated the district court granted the Board’s motion to disan additional 3 cases relating to privileged documents miss the action. or testimony. In 2014, the Board had been a party in a total of 19 cases. As of December 31, 2015, 9 cases Colonial BancGroup, Inc. v. PricewaterhouseCoopers were pending. LLP, No. 15-mc-201 (D. District of Columbia, filed February 19, 2015), was an action to quash deposi- Ruiz v. Board of Governors, et al., No. 15-cv-547 (D. tion subpoenas to a senior Board official and officials Rhode Island, filed December 22, 2015), is an action of the FDIC. On June 9, 2015, the court granted the seeking a writ of mandamus and declaratory judg- agencies’ motions to quash. ment that the Board failed to perform certain duties under golden parachute regulations. Ramey v. Board of Governors, No. 14-cv-220 (D. District of Columbia, filed December 22, 2014), was a Burford v. Yellen, No. 15-cv-02074 (D. District of Freedom of Information Act case. On December 10, Columbia, filed December 1, 2015), is an employ- 2015, the district court granted the Board’s motion to ment discrimination claim. dismiss the action. SBAV v. Porter Bancorp., No. 13-cv-710 (W.D. Ken- Ferrer v. Bernanke, No. 14-15325 (Eleventh Circuit, tucky, motion to intervene filed October 10, 2015), appeal filed November 25, 2014), is an appeal of the was an action by private investors against a Boarddismissal of an action alleging that plaintiffs received regulated bank holding company under the Kentucky improper relief under the Board’s and the Office of Securities Act and Kentucky common law. On Octothe Comptroller of the Currency’s financial remediaber 14, 2015, the court granted the Board’s and Fedtion orders regarding deficient mortgage servicing eral Deposit Insurance Corporation’s motion to and foreclosure practices. intervene to seek reconsideration of the court’s March 31, 2015, order requiring production of privi- The Loan Syndications and Trading Association v. leged bank examination materials. On December 1, Board of Governors, No. 14-1240 (D.C. Circuit, peti- 2015, the court granted the agencies’ motion to tion for review filed November 10, 2014), is a chalvacate the order as moot. lenge to the credit risk retention rules issued under section 941 of the Dodd-Frank Wall Street Reform Artis v. Greenspan, No. 15-5260 (D.C. Circuit, notice and Consumer Protection Act of 2010. of appeal filed September 19, 2015), was an appeal of the dismissal of plaintiffs’ Equal Employment Opportunity claims. On December 21, 2015, the Court of Richardson v. Yellen, No. 14-cv-01673 (D. District of Appeals summarily affirmed the district court’s Columbia, filed October 8, 2014), is an employment dismissal. discrimination claim. White Arnold & Dowd, P.C., v. Board of Governors, In re Wilmington Trust Securities Litigation, No. 10- No. 15-cv-00789 (N.D. Alabama, filed May 12, 2015), cv-990 (D. Delaware, motion to intervene filed was a Freedom of Information Act case. On Octo- August 20, 2014), is a securities class action against ber 30, 2015, the district court dismissed the case on Wilmington Trust Corporation and related entities. the parties’ stipulation. On August 22, 2014, the court granted the Board’s

280 102nd Annual Report | 2015 motion to intervene for the limited purpose of assert- On March 21, 2014, the Court of Appeals reversed ing the bank examination privilege. the District Court’s grant of summary judgment and remanded the action to the district court. On Janu- Community Financial Services Association of ary 20, 2015, the Supreme Court denied NACS’s peti- America, Ltd., v. Board of Governors, No. 14-cv- tion for certiorari (No. 14-200), and on October 2, 00853 (D. District of Columbia, filed June 11, 2014), 2015, the District Court entered judgment for the is a challenge to actions of the Board, the Federal Board. Deposit Insurance Corporation, and the Office of the Comptroller of the Currency that allegedly disadvan- State National Bank of Big Spring v. Bernanke, tage payday lenders. No. 13-5247 (D.C. Circuit, notice of appeal filed August 2, 2013), is an appeal of a district court ruling Johnson v. Federal Reserve Board, No. 14-cv-50 (E.D. dismissing plaintiffs’ challenge to the constitutionality North Carolina, filed March 28, 2014), was a com- of the Consumer Financial Protection Bureau plaint by incarcerated individual that his prosecution (CFPB) and the Financial Stability Oversight Counand imprisonment violated his rights under the cil. On July 24, 2015, the Court of Appeals affirmed “redemption theory.” On January 30, 2015, the dis- in part and remanded in part to the district court to trict court granted the Board’s motion to dismiss the consider issues related to the CFPB. action. Ball v. Board of Governors, No. 13-cv-00603 (D. Dis- WMI Liquidating Trust v. Board of Governors, trict of Columbia, filed April 30, 2013), was a Free- No. 13-cv-01706 (W.D. Washington, filed Septem- dom of Information Act case. On March 31, 2015, ber 20, 2013), is an action for a declaratory judgment the District Court granted the Board’s motion for regarding golden parachute payments. On July 3, summary judgment. 2014, the action was transferred to the United States Bankruptcy Court for the District of Delaware (Adv. Crisman v. Board of Governors et al., No. 12-cv-1871 Pro. No. 14-50435-MFW (Bankr. D. Del.)). (D. District of Columbia, filed November 19, 2012), is a Freedom of Information Act case. NACS et al. v. Board of Governors, No. 13-5720 (D.C. Circuit, notice of appeal filed August 21, 2013), was Wise v. Federal Reserve Board, No. 12-cv-1636 (D. an appeal from a District Court ruling invalidating District of Columbia, filed October 2, 2012), was a Board regulations issued pursuant to section 1075 of claim under the Federal Tort Claims Act. On Novemthe Dodd-Frank Wall Street Reform and Consumer ber 17, 2015, the court entered judgment for the Protection Act relating to debit card interchange fees. Board.

281 11 Statistical Tables Table 1. Federal Reserve open market transactions, 2015 Millions of dollars Type of security Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total and transaction U.S. Treasury securities1 O utright transactions2 T reasury bills Gross purchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Gross sales 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 For new bills 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 O thers up to 1 year Gross purchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 0 -2 0 -450 -1,448 0 0 -1,287 0 0 -326 0 -3,513 Redemptions 1 0 2 1 0 1 1 0 1 0 0 0 8 O ver 1 to 5 years Gross purchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 0 1 0 344 543 0 0 482 0 0 122 0 1,492 O ver 5 to 10 years Gross purchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 0 1 0 106 543 0 0 482 0 0 122 0 1,255 M ore than 10 years Gross purchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 0 1 0 0 362 0 0 322 0 0 82 0 766 A ll maturities Gross purchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0 Redemptions 1 0 2 1 0 1 1 0 1 0 0 0 8 Net change in U.S. Treasury securities -1 0 -2 -1 0 -1 -1 0 -1 0 0 0 -8 F ederal agency obligations Outright transactions2 Gross purchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0 Redemptions 1,089 711 0 982 0 0 802 0 0 947 1,202 0 5,733 Net change in federal agency obligations - 1,089 -711 0 -982 0 0 -802 0 0 -947 -1,202 0 -5,733 M ortgage-backed securities3 N et settlements2 Net change in mortgage-backed securities 1,844 1,547 - 8,297 -13,067 3,574 9,621 2,789 1,806 4,584 2,859 697 2,672 1 0,629 T otal net change in securities holdings4 755 835 -8,298 -14,050 3,574 9,620 1,986 1,805 4,583 1,912 -505 2,672 4,888 (continued on next page)

282 102nd Annual Report | 2015 Table 1.—continued Type of security Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total and transaction Temporary transactions Repurchase agreements5 G ross purchases 0 0 0 0 840 0 0 0 0 0 0 590 1,430 Gross sales 0 0 0 0 840 0 0 0 0 0 0 590 1,430 R everse repurchase agreements5 G ross purchases 5,084,722 4 ,966,806 5,184,737 5,571,299 5,180,212 5,710,637 6,385,427 5,169,677 5,313,442 6 ,815,533 5,689,191 7 ,224,426 6 8,296,108 Gross sales 4,890,590 4,991,115 5,381,581 5,325,287 5,205,940 5,952,229 6,126,536 5,193,423 5,631,503 6 ,600,318 5,603,092 7,597,059 6 8,498,672 Net change in temporary transactions 194,132 -24,310 -196,844 246,012 -25,728 -241,592 258,892 -23,746 -318,061 215,215 86,099 -372,633 -202,564 Note: Purchases of Treasury securities and federal agency obligations increase securities holdings; sales and redemptions of these securities decrease securities holdings. Exchanges occur when the Federal Reserve rolls the proceeds of maturing securities into newly issued securities, and so exchanges do not affect total securities holdings. Positive net settlements of mortgage-backed securities increase securities holdings, while negative net settlements of these securities decrease securities holdings. Components may not sum to totals because of rounding. See table 2 of the H.4.1 release (www.federalreserve.gov/releases/h41/) for the maturity distribution of the securities. 1 Transactions exclude changes in compensation for the effects of inflation on the principal of inflation-indexed securities. Transactions include the rollover of inflation compensation into new securities. The maturity distributions of exchanged Treasury securities are based on the announced maturity of new securities rather than actual day counts. 2 Excludes the effect of temporary transactions—repurchase agreements and reverse repurchase agreements. 3 Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Monthly net change in the remaining principal balance of the securities, reported at face value. 4 The net change in securities holdings reflects the settlements of purchases, reinvestments, sales, and maturities of portfolio securities. 5 Cash value of agreements, which are collateralized by U.S. Treasury securities, federal agency debt securities, and mortgage-backed securities.

Statistical Tables 283 Table 2. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities, December 31, 2013–15 Millions of dollars December 31 C hange Description 2015 2014 2013 2014 to 2015 2013 to 2014 U.S. Treasury securities Held outright1 2,461,552 2,461,363 2,208,775 189 252,588 By remaining maturity Bills 1–90 days 0 0 0 0 0 91 days to 1 year 0 0 0 0 0 Notes and bonds 1 year or less 216,115 3,520 474 212,595 3,046 More than 1 year through 5 years 1,118,349 1,112,927 763,329 5,422 349,598 More than 5 years through 10 years 489,226 686,627 864,700 -197,401 -178,073 More than 10 years 637,862 658,289 580,272 -20,427 78,017 By type Bills 0 0 0 0 0 Notes 1,634,772 1,634,949 1,467,427 -177 167,522 Bonds 826,780 826,414 741,348 366 85,066 Federal agency securities Held outright1 32,944 38,677 57,221 -5,733 -18,544 By remaining maturity Discount notes 1–90 days 0 0 0 0 0 91 days to 1 year 0 0 0 0 0 Coupons 1 year or less 16,764 5,733 18,544 11,031 -12,811 More than 1 year through 5 years 13,833 30,597 36,268 -16,764 -5,671 More than 5 years though 10 years 0 0 62 0 -62 More than 10 years 2,347 2,347 2,347 0 0 By type Discount notes 0 0 0 0 0 Coupons 32,944 38,677 57,221 -5,733 -18,544 By issuer Federal Home Loan Mortgage Corporation 15,711 19,515 24,986 -3,804 -5,471 Federal National Mortgage Association 11,541 13,470 25,555 -1,929 -12,085 Federal Home Loan Banks 5,692 5,692 6,680 0 -988 Mortgage-backed securities2 H eld outright1 1,747,461 1,736,833 1,490,162 10,628 246,671 By remaining maturity 1 year or less 0 0 0 0 0 More than 1 year through 5 years 467 13 5 454 8 More than 5 years though 10 years 9,014 6,453 2,549 2,561 3,904 More than 10 years 1,737,980 1,730,367 1,487,608 7,613 242,759 By issuer Federal Home Loan Mortgage Corporation 510,463 501,914 426,311 8,549 75,603 Federal National Mortgage Association 872,113 886,716 774,689 -14,603 112,027 Government National Mortgage Association 364,885 348,203 289,162 16,682 59,041 Temporary transactions Repurchase agreements3 0 0 0 0 0 Reverse repurchase agreements3 712,401 509,837 315,924 202,564 193,913 Foreign official and international accounts 237,809 113,132 118,169 124,677 -5,037 Primary dealers and expanded counterparties 474,592 396,705 197,755 77,887 198,950 Note: Components may not sum to totals because of rounding. 1 Excludes the effect of temporary transactions—repurchase agreements and reverse repurchase agreements. 2 Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. 3 Cash value of agreements, which are collateralized by U.S. Treasury securities, federal agency debt securities, and mortgage-backed securities.

284 102nd Annual Report | 2015 Table 3. Federal Reserve Bank interest rates on loans to Table 4. Reserve requirements of depository institutions, depository institutions, December 31, 2015 December 31, 2015 Percent Requirements Reserve Bank 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 Type of deposit Percentage Effective of deposits date All banks 1.00 1.50 0.40 Net transaction accounts1 Note: For details on rate changes over the course of 2015, see the section on $ 0 million–$15.2 million2 0 12/17/2015 discount rates in section 8 of this annual report (“Record of Policy Actions of the More than Board of Governors”). Primary credit is available for very short terms as a backup $15.2 million–$110.2 million3 3 12/17/2015 source of liquidity to depository institutions that are in generally sound financial More than $110.2 million 10 12/17/2015 condition in the judgment of the lending Federal Reserve Bank. Secondary credit is available in appropriate circumstances to depository institutions that do not Nonpersonal time deposits 0 12/27/1990 qualify for primary credit. Seasonal credit is available to help relatively small Eurocurrency liabilities 0 12/27/1990 depository institutions meet regular seasonal needs for funds that arise from a clear pattern of intra-yearly movements in their deposits and loans. The discount Note: Required reserves must be held in the form of vault cash and, if vault cash rate on seasonal credit takes into account rates charged by market sources of is insufficient, also in the form of a deposit with a Federal Reserve Bank. An funds and is reestablished on the first business day of each two-week reserve institution must hold that deposit directly with a Reserve Bank or with another maintenance period. institution in a pass-through relationship. Reserve requirements are imposed on commercial banks, savings banks, savings and loan associations, credit unions, U.S. branches and agencies of foreign banks, Edge corporations, and agreement corporations. 1 Total transaction accounts consist of demand deposits, automatic transfer service (ATS) accounts, NOW accounts, share draft accounts, telephone or preauthorized transfer accounts, ineligible acceptances, and affiliate-issued obligations maturing in seven days or less. Net transaction accounts are total transaction accounts less amounts due from other depository institutions and less cash items in the process of collection. For a more detailed description of these deposit types, see Form FR 2900. 2 The amount of net transaction accounts subject to a reserve requirement ratio of 0 percent (the “exemption amount”) is adjusted each year by statute. The exemption amount is adjusted upward by 80 percent of the previous year’s (June 30 to June 30) rate of increase in total reservable liabilities at all depository institutions. No adjustment is made in the event of a decrease in such liabilities. 3 The amount of net transaction accounts subject to a reserve requirement ratio of 3 percent is the “low reserve tranche.” By statute, the upper limit of the low reserve tranche is adjusted each year by 80 percent of the previous year’s (June 30 to June 30) rate of increase or decrease in net transaction accounts held by all depository institutions.

Statistical Tables 285 Table 5. Banking offices and banks affiliated with bank holding companies in the United States, December 31, 2014 and 2015 Commercial banks1 State- Type of office Total Member chartered savings Total N onmember banks Total National State A ll banking offices Banks Number, Dec. 31, 2014 5,887 5,604 1,894 1,057 837 3,710 283 Changes during 2015 New banks 23 17 7 6 1 10 6 Banks converted into branches -251 -245 -89 -52 -37 -156 -6 Ceased banking operations2 -38 -36 -14 -10 -4 -22 -2 Other3 0 1 -1 -19 18 2 -1 Net change -266 -263 -97 -75 -22 -166 -3 Number, Dec. 31, 2015 5,621 5,341 1,797 982 815 3,544 280 Branches and additional offices Number, Dec. 31, 2014 83,189 80,501 57,084 42,987 14,097 23,417 2,688 Changes during 2015 New branches 1,789 1,641 1,182 864 318 459 148 Banks converted to branches 251 240 109 53 56 131 11 Discontinued2 -2,051 -2,022 -1,556 -1,183 -373 -466 -29 Other3 0 -20 -150 -301 151 130 20 Net change -11 -161 -415 -567 152 254 150 Number, Dec. 31, 2015 83,178 80,340 56,669 42,420 14,249 2 3,671 2,838 Banks affiliated with bank holding companies Banks Number, Dec. 31, 2014 4,835 4,708 1,670 924 746 3,038 127 Changes during 2015 BHC-affiliated new banks 53 47 17 9 8 30 6 Banks converted into branches -200 -197 -74 -44 -30 -123 -3 Ceased banking operations2 -37 -37 -13 -9 -4 -24 0 Other3 0 1 2 -16 18 -1 -1 Net change -184 -186 -68 -60 -8 -118 2 Number, Dec. 31, 2015 4,651 4,522 1,602 864 738 2,920 129 Note: Includes banks, banking offices, and bank holding companies in U.S. territories and possessions (affiliated insular areas). 1 For purposes of this table, banks are entities that are defined as banks in the Bank Holding Company Act, as amended, which is implemented by Federal Reserve Regulation Y. Generally, a bank is any institution that accepts demand deposits and is engaged in the business of making commercial loans or any institution that is defined as an insured bank in section 3(h) of the Federal Deposit Insurance Corporation Act. 2 Institutions that no longer meet the Regulation Y definition of a bank. 3 Interclass changes and sales of branches.

286 102nd Annual Report | 2015 Table 6A. Reserves of depository institutions, Federal Reserve Bank credit, and related items, year-end 1984–2015 and month-end 2015 Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Period S pecial T reasury G old drawing rights S ec h u e r l i d ti es 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 c r a e n d d it Float Oth R e e r s F e e r d ve e ral 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 g 5 outright1 extensions3 assets4 1 984 167,612 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 1 0,018 20,402 1991 272,531 15,898 218 731 34,567 323,945 11,059 1 0,018 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 2013 3,756,158 0 2,177 -962 246,947 4,004,320 11,041 5,200 45,493 2014r 4,236,873 0 3,351 -555 239,238 4,478,908 11,041 5,200 46,301 2015 4,241,958 0 2,830 -36 221,448 4,466,199 11,041 5,200 47,581 (continued on next page)

Statistical Tables 287 Table 6A.—continued Factors supplying reserve funds Federal Reserve Bank credit outstanding Period S pecial T reasury G old drawing rights S ec h u e r l i d ti es 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 c r a e n d d it Float Oth R e e r s F e e r d ve e ral 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 g 5 outright1 extensions3 assets4 2015, month-en d Jan 4,237,009 0 1,778 -314 243,701 4,482,174 11,041 5,200 46,475 Feb 4,237,198 0 1,702 -357 230,517 4,469,060 11,041 5,200 46,568 Mar 4,228,366 0 2,550 -748 232,292 4,462,460 11,041 5,200 46,671 Apr 4,214,806 0 1,753 -448 235,702 4,451,813 11,041 5,200 46,785 May 4,219,055 0 1,797 -312 226,332 4,446,872 11,041 5,200 46,883 Jun 4,228,907 0 2,497 -412 229,234 4,460,226 11,041 5,200 47,000 Jul 4,231,475 0 2,201 -23 232,838 4,466,492 11,041 5,200 47,128 Aug 4,233,683 0 2,087 354 220,770 4,456,895 11,041 5,200 47,222 Sep 4,238,274 0 2,635 -87 224,659 4,465,482 11,041 5,200 47,327 Oct 4,240,023 0 2,008 332 229,458 4,471,821 11,041 5,200 47,455 Nov 4,239,338 0 1,946 668 217,013 4,458,964 11,041 5,200 47,511 Dec 4,241,958 0 2,830 -36 221,448 4,466,199 11,041 5,200 47,581 Note: Components may not sum to totals because of rounding. 1 Includes U.S. Treasury securities, federal agency debt securities, and mortgage-backed securities. U.S. Treasury securities and federal agency debt securities include securities lent to dealers, which are fully collateralized by U.S. Treasury securities, federal agency securities, and other highly rated debt securities. 2 Cash value of agreements, which are collateralized by U.S. Treasury securities, federal agency debt securities, and agency mortgage-backed securities. 3 As of 2015, includes only central bank liquidity swaps; primary, seasonal, and secondary credit; and net portfolio holdings of Maiden Lane LLC. For disaggregated loans and other credit extensions from 1984 to 2014, refer to “Table 6B. Loans and other credit extensions, by type, year-end 1984-2014 and month-end 2014” of the 2014 Annual Report. 4 As of 2013, unamortized discounts on securities held outright are included as a component of Other Federal Reserve assets. Previously, they were included in Other Federal Reserve liabilities and capital. 5 Includes currency and coin (other than gold) issued directly by the U.S. Treasury. The largest components are fractional and dollar coins. For details, refer to “U.S. Currency and Coin Outstanding and in Circulation,” Treasury Bulletin. r Revised.

288 102nd Annual Report | 2015 Table 6A.—continued Factors absorbing reserve funds R eserve Deposits with Federal Reserve Banks, other than reserve balances balances Period C c u ir r c r u e l n a c t y io i n n a r g e R r p e e u e v r m e ch r e s a n e s t s e 6 h T o re c ld a a i s s n u h g r s y 7 de T p e o rm sit s 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 t a ry Foreign Other8 b R c a e l l e a q a n u r c i i r n e e g s d 9 a O n t d h l R i a e c e b r a s i F p e li e i t r t i d v a e e e l s 4 r , a 1 l 0 wi R th B e a s F n e e k r d v s e e r al account account 1 984 183,796 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 1 8,977 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 3 6,231 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 6 3,219 973,814 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 7 2,766 1 ,559,731 2012 1,169,159 107,188 1 50 0 92,720 0 6,427 27,476 n/a 6 6,093 1 ,491,044 2013 1,241,228 315,924 2 34 0 162,399 0 7,970 26,181 n/a 63,049 2 ,249,070 2014r 1,342,957 509,837 201 0 223,452 0 5,242 20,320 n/a 61,447 2,377,995 2015 1,424,981 712,401 266 0 333,447 0 5,231 31,212 n/a 45,320 1 ,977,163 (continued on next page)

Statistical Tables 289 Table 6A.—continued Factors absorbing reserve funds R eserve Deposits with Federal Reserve Banks, other than reserve balances balances Period C c u ir r c r u e l n a c t y io i n n a r g e R r p e e u e v r m e ch r e s a n e s t s e 6 h T o re c ld a a i s s n u h g r s y 7 de T p e o rm sit s 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 t a ry Foreign Other8 b R c a e l l e a q a n u r c i i r n e e g s d 9 a O n t d h l R i a e c e b r a s i F p e li e i t r t i d v a e e e l s 4 r , a 1 l 0 wi R th B e a s F n e e k r d v s e e r al account account 2015, month-end Jan 1,329,471 315,705 202 0 156,815 0 5,467 8,967 n /a 62,677 2,665,586 Feb 1,351,278 340,015 216 216,067 34,929 0 5,234 6,675 n/a 64,437 2,513,018 Mar 1,359,069 536,859 196 0 100,084 0 5,230 21,061 n /a 65,592 2,437,282 Apr 1,360,698 290,847 2 29 0 273,869 0 5,231 10,530 n/a 65,153 2,508,284 May 1,367,912 316,574 1 60 145,702 198,947 0 5,233 8,442 n/a 66,166 2,400,861 Jun 1,368,678 558,167 1 02 0 254,340 0 5,247 28,399 n/a 66,070 2,242,466 Jul 1,372,471 299,275 107 0 209,982 0 5,244 13,727 n/a 65,410 2,563,643 Aug 1,379,282 323,021 155 0 131,787 0 5,269 17,937 n/a 66,362 2,596,545 Sep 1,387,621 641,081 191 0 198,716 0 6,231 32,267 n/a 65,285 2,197,657 Oct 1,395,040 425,866 2 38 0 22,892 0 5,259 24,501 n/a 6 5,284 2,596,435 Nov 1,411,448 339,768 237 0 253,274 0 5,249 21,140 n /a 66,468 2,425,133 Dec 1,424,981 712,401 266 0 333,447 0 5,231 31,212 n/a 45,320 1,977,163r 6 Cash value of agreements, which are collateralized by U.S. Treasury securities, federal agency debt securities, and agency mortgage-backed securities. 7 Coin and paper currency held by the Treasury. 8 As of 2014, includes desposits of designated financial market utilites. 9 Required clearing balances were discontinued in July 2012. 1 0In 2010, includes funds from American International Group, Inc. asset dispositions, held as agent. r Revised. n/a Not applicable.

290 102nd Annual Report | 2015 Table 6B. Reserves of depository institutions, Federal Reserve Bank credit, and related items, year-end 1918–1983 Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Special Period drawing T reasury S o e u c h t u r e i r g l i d t h i e t1 s a R g e r p e u e r m ch en as ts e 2 Loans Float3 ot A he ll r4 R F O e e s d th e e e r r v a r e l Total s G to o c l k d 6 c a e r c r i t c g if o h ic u ts a n t t e ou c ts u t r a re n n d c in y g 7 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 1 4,512 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 (continued on next page)

Statistical Tables 291 Table 6B.—continued Factors supplying reserve funds Federal Reserve Bank credit outstanding Period d S r p a e w c i i n a g l T reasury S o e u c h t u r e i r g l i d t h i e t1 s a R g e r p e u e r m ch en as ts e 2 Loans Float3 ot A he ll r4 R F O e e s d th e e e r r v a r e l Total s G to o c l k d 6 c a e r c r i t c g if o h ic u ts a n t t e ou c ts u t r a re n n d c in y g 7 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 1 0,410 400 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 1 0,810 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 1 1,831 1979 124,507 1,660 1,454 6,767 704 5 ,613 140,705 11,172 1,800 1 3,083 1980 128,038 2,554 1,809 4,467 776 8 ,739 146,383 11,160 2,518 1 3,427 1981 136,863 3,485 1,601 1,762 195 9 ,230 153,136 11,151 3,318 1 3,687 1982 144,544 4,293 717 2,735 1,480 9,890 163,659 11,148 4,618 1 3,786 1983 159,203 1,592 918 1,605 418 8 ,728 172,464 11,121 4,618 15,732 Note: For a description of figures and discussion of their significance, see Banking and Monetary Statistics, 1941–1970 (Board of Governors of the Federal Reserve System, 1976), pp. 507–23. Components may not sum to totals because of rounding. 1 In 1969 and thereafter, includes securities loaned—fully guaranteed by U.S. government securities pledged with Federal Reserve Banks—and excludes securities sold and scheduled to be bought back under matched sale–purchase transactions. On September 29, 1971, and thereafter, includes federal agency issues bought outright. 2 On December 1, 1966, and thereafter, includes federal agency obligations held under repurchase agreements. 3 In 1960 and thereafter, figures reflect a minor change in concept; refer to Federal Reserve Bulletin, vol. 47 (February 1961), p. 164. 4 Principally acceptances and, until August 21, 1959, industrial loans, the authority for which expired on that date. 5 For the period before April 16, 1969, includes the total of Federal Reserve capital paid in, surplus, other capital accounts, and other liabilities and accrued dividends, less the sum of bank premises and other assets, and is reported as ‘‘Other Federal Reserve accounts”; thereafter, ‘‘Other Federal Reserve assets’’ and ‘‘Other Federal Reserve liabilities and capital’’ are shown separately. 6 Before January 30, 1934, includes gold held in Federal Reserve Banks and in circulation. 7 Includes currency and coin (other than gold) issued directly by the Treasury. The largest components are fractional and dollar coins. For details refer to ‘‘U.S. Currency and Coin Outstanding and in Circulation,’’ Treasury Bulletin. n/a Not applicable.

292 102nd Annual Report | 2015 Table 6B. Reserves of depository institutions, Federal Reserve Bank credit, and related items, year-end 1918–1983—continued Millions of dollars Factors absorbing reserve funds M ember bank reserves9 Deposits with Federal Reserve Banks, other than reserve balances Other Period C urrency Treasury F O ed th e e ra r l R equired Federal circu in la tion ho c ld a i s n h g s8 T reasury 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 n cy Required11 E xcess11,12 coin10 Banks 1 918 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 1 9,277 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 1 9,397 763 1954 30,509 796 563 490 441 907 0 0 18,876 n/a 1 8,618 258 1955 31,158 767 394 402 554 925 0 0 19,005 n/a 1 8,903 102 1956 31,790 775 441 322 426 901 0 0 19,059 n/a 1 9,089 -30 1957 31,834 761 481 356 246 998 0 0 19,034 n/a 1 9,091 -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 1 8,619 -135 1960 32,869 377 485 217 533 941 0 0 17,081 2 ,544 1 8,988 637 1961 33,918 422 465 279 320 1,044 0 0 17,387 2,823 2 0,114 96 1962 35,338 380 597 247 393 1,007 0 0 17,454 3,262 2 0,071 645 1963 37,692 361 880 171 291 1,065 0 0 17,049 4,099 2 0,677 471 1964 39,619 612 820 229 321 1,036 0 0 18,086 4,151 2 1,663 574 1965 42,056 760 668 150 355 211 0 0 18,447 4 ,163 2 2,848 -238 1966 44,663 1,176 416 174 588 -147 0 0 19,779 4 ,310 2 4,321 -232 1967 47,226 1,344 1,123 135 653 -773 0 0 21,092 4 ,631 2 5,905 -182 (continued on next page)

Statistical Tables 293 Table 6B.—continued Factors absorbing reserve funds M ember bank reserves9 Deposits with Federal Reserve Banks, other than reserve balances Other Period C urrency Treasury F O ed th e e ra r l R equired Federal circu in la tion ho c ld a i s n h g s8 T reasury 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 n cy Required11 E xcess11,12 coin10 Banks 1 968 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 2 8,173 -901 1970 57,093 431 1,156 148 1,233 0 0 1,986 24,150 5,423 3 0,033 -460 1971 61,068 460 2,020 294 999 0 0 2,131 27,788 5,743 3 2,496 1,035 1972 66,516 345 1,855 325 840 0 0 2,143 25,647 6,216 3 2,044 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 3 5,197 -1,10314 1 976 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 3 7,615 - 1,265 1978 114,645 240 4,196 368 1,256 0 0 4,275 31,152 1 0,538 4 2,694 -893 1979 125,600 494 4,075 429 1,412 0 0 4,957 29,792 1 1,429 4 4,217 - 2,835 1980 136,829 441 3,062 411 617 0 0 4,671 27,456 1 3,654 40,558 675 1981 144,774 443 4,301 505 781 0 117 5,261 25,111 1 5,576 4 2,145 -1,442 1982 154,908 429 5,033 328 1,033 0 436 4,990 26,053 1 6,666 4 1,391 1,328 1983 171,935 479 3,661 191 851 0 1,013 5,392 20,413 1 7,821 3 9,179 -945 8 Coin and paper currency held by the Treasury, as well as any gold in excess of the gold certificates issued to the Reserve Bank. 9 In November 1979 and thereafter, includes reserves of member banks, Edge Act corporations, and U.S. agencies and branches of foreign banks. On November 13, 1980, and thereafter, includes reserves of all depository institutions. 1 0Between December 1, 1959, and November 23, 1960, part was allowed as reserves; thereafter, all was allowed. 1 1Estimated through 1958. Before 1929, data were available only on call dates (in 1920 and 1922 the call date was December 29). Since September 12, 1968, the amount has been based on close-of-business figures for the reserve period two weeks before the report date. 1 2For the week ending November 15, 1972, and thereafter, includes $450 million of reserve deficiencies on which Federal Reserve Banks are allowed to waive penalties for a transition period in connection with bank adaptation to Regulation J as amended, effective November 9, 1972. Allowable deficiencies are as follows (beginning with first statement week of quarter, in millions): 1973—Q1, $279; Q2, $172; Q3, $112; Q4, $84; 1974—Q1, $67; Q2, $58. The transition period ended with the second quarter of 1974. 1 3For the period before July 1973, includes certain deposits of domestic nonmember banks and foreign-owned banking institutions held with member banks and redeposited in full with Federal Reserve Banks in connection with voluntary participation by nonmember institutions in the Federal Reserve System program of credit restraint. As of December 12, 1974, the amount of voluntary nonmember bank and foreign-agency and branch deposits at Federal Reserve Banks that are associated with marginal reserves is no longer reported. However, two amounts are reported: (1) deposits voluntarily held as reserves by agencies and branches of foreign banks operating in the United States and (2) Eurodollar liabilities. 1 4Adjusted to include waivers of penalties for reserve deficiencies, in accordance with change in Board policy, effective November 19, 1975. n/a Not applicable.

294 102nd Annual Report | 2015 Table 7. Principal assets and liabilities of insured commercial banks, by class of bank, June 30, 2015 and 2014 Millions of dollars, except as noted Member banks Item Total Nonmember banks Total National State 2 015 Assets L oans and investments 10,309,409 8,304,926 6,712,155 1,592,771 2,004,483 Loans, gross 7,327,089 5,749,028 4,686,550 1,062,478 1,578,061 Net 7,325,477 5,748,003 4,685,758 1,062,245 1,577,474 Investments 2,982,321 2,555,899 2,025,605 530,294 426,422 U.S. Treasury and federal agency securities 567,556 475,103 367,368 107,735 92,453 Other 2,414,767 2,080,797 1,658,238 422,559 333,970 Cash assets, total 1,470,967 1,323,091 1,025,952 297,139 147,876 Liabilities Deposits, total 9,715,920 7,917,604 6,366,937 1,550,667 1,798,316 Interbank 176,803 153,815 110,950 42,865 22,988 Other transactions 1,644,207 1,339,882 976,521 363,361 304,325 Other nontransactions 7,894,910 6,423,907 5,279,466 1,144,441 1,471,003 Equity capital 1,638,328 1,360,460 1,117,298 243,162 277,868 Number of banks 5,463 1,843 1,026 817 3,620 2014 Assets Loans and investments 9,670,341 7,782,728 6,321,059 1,461,669 1,887,613 Loans, gross 6,853,639 5,389,058 4,422,864 966,194 1,464,581 Net 6,852,378 5,388,378 4,422,392 965,986 1,464,000 Investments 2,816,701 2,393,670 1,898,195 495,475 423,031 U.S. Treasury and federal agency securities 447,422 357,483 276,926 80,557 89,939 Other 2,369,280 2,036,187 1,621,269 414,918 333,093 Cash assets, total 1,495,224 1,344,453 1,028,672 315,781 150,771 Liabilities Deposits, total 9,195,662 7,490,342 6,078,366 1,411,976 1,705,320 Interbank 179,607 156,756 122,673 34,083 22,851 Other transactions 1,585,334 1,306,779 926,377 380,402 278,555 Other nontransactions 7,430,720 6,026,807 5,029,316 997,491 1,403,913 Equity capital 1,572,070 1,307,811 1,077,877 229,934 264,259 Number of banks 5,714 1,935 1,109 826 3,779 Note: Includes U.S.-insured commercial banks located in the United States but not U.S.-insured commercial banks operating in U.S. territories or possessions. Data are domestic assets and liabilities (except for those components reported on a consolidated basis only). Components may not sum to totals because of rounding. Data for 2014 have been revised.

Statistical Tables 295 Table 8. Initial margin requirements under Regulations T, U, and X Percent of market value Short M argin Effective date Convertible bonds sales, stocks T only1 1 934, 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, July 5 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, July 28 70 n/a 70 1962, July 10 50 n/a 50 1963, Nov. 6 70 n/a 70 1968, Mar. 11 70 50 70 1968, June 8 80 60 80 1970, May 6 65 50 65 1971, Dec. 6 55 50 55 1972, Nov. 24 65 50 65 1974, Jan. 3 50 50 50 Note: These regulations, adopted by the Board of Governors pursuant to the Securities Exchange Act of 1934, limit the amount of credit that may be extended for the purpose of purchasing or carrying margin securities (as defined in the regulations) when the loan is collateralized by such securities. The margin requirement, expressed as a percentage, is the difference between the market value of the securities being purchased or carried (100 percent) and the maximum loan value of the collateral as prescribed by the Board. Regulation T was adopted effective October 1, 1934; Regulation U, effective May 1, 1936; and Regulation X, effective November 1, 1971. The former Regulation G, which was adopted effective March 11, 1968, was merged into Regulation U, effective April 1, 1998. 1 From October 1, 1934, to October 31, 1937, the requirement was the margin “customarily required” by the brokers and dealers. n/a Not applicable.

296 102nd Annual Report | 2015 Table 9A. Statement of condition of the Federal Reserve Banks, by Bank, December 31, 2015 and 2014 Millions of dollars Total Boston New York Philadelphia Cleveland Richmond Item 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 Assets Gold certificates 11,037 11,037 347 352 3,709 4,125 340 338 505 464 783 824 S pecial drawing rights certificates 5,200 5,200 196 196 1,818 1,818 210 210 237 237 412 412 Coin 1,890 1,873 45 30 72 79 129 122 135 120 301 307 Loans and securities Primary, secondary, and seasonal loans 115 145 0 11 0 4 0 7 0 0 0 1 Treasury securities, bought outright1 2,461,552 2,461,363 62,399 49,789 1,477,698 1,510,695 61,222 58,967 59,182 53,740 133,696 137,567 Government-sponsored enterprise debt securities, bought outright1 32,944 38,677 835 782 19,777 23,739 819 927 792 844 1,789 2,162 Federal agency and government-sponsored enterprise mortgage-backed securities, bought outright2 1,747,461 1,736,833 44,297 35,133 1,049,022 1,066,005 43,462 41,609 42,013 37,921 94,911 97,073 Unamortized premiums on securities held outright3 189,486 206,835 4,804 4,184 113,752 126,948 4,713 4,955 4,556 4,516 10,292 11,560 Unamortized discounts on securities held outright3 -16,570 -18,394 -420 -372 -9,947 -11,290 -411 -441 -399 -402 -900 -1,028 Total loans and securities 4,414,988 4,425,459 1 11,915 89,527 2,650,302 2,716,101 109,805 106,024 1 06,144 96,619 239,788 247,335 Accrued interest receivable - System Open Market Account 25,418 25,644 646 521 15,241 15,715 634 619 615 565 1,392 1,446 Net portfolio holdings of consolidated variable interest entities4 1,778 1,811 n/a n/a 1,778 1,811 n/a n/a n/a n/a n /a n/a Foreign currency denominated investments5 19,567 20,900 887 951 6,306 6,720 1,093 1,571 1,525 1,662 4,490 4,358 Central bank liquidity swaps6 997 1,528 45 70 321 491 56 115 78 122 229 319 Other SOMA assets 14 29 0 1 9 18 0 1 0 1 1 2 Other assets Items in process of collection 210 86 0 0 0 0 0 0 0 0 0 0 Bank premises 2,240 2,263 125 124 438 437 75 76 106 110 212 220 Deferred asset (accrued liability)remittances to the Treasury 0 667 0 0 0 923 0 0 0 5 0 0 All other assets7 1,426 1,277 68 66 304 341 41 43 45 45 245 244 Interdistrict settlement account 0 0 -3,804 49,233 -265,063 -187,283 17,050 -4,108 37,004 38,162 29,869 -3,289 Total assets 4,484,765 4,497,774 110,470 141,071 2,415,235 2,561,296 129,433 105,011 146,394 138,112 277,722 252,178 Liabilities Federal Reserve notes outstanding 1,549,750 1,469,554 49,477 45,956 498,609 475,290 49,312 46,452 82,794 68,649 106,647 103,087 (continued on next page)

Statistical Tables 297 Table 9A.—continued Total Boston New York Philadelphia Cleveland Richmond Item 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 Less: Notes held by Federal Reserve Bank 170,199 170,829 4,871 4,688 64,415 56,971 5,358 4,940 8,137 7,811 10,988 11,152 Federal Reserve notes outstanding, net 1,379,551 1,298,725 44,606 41,268 434,194 418,319 43,954 41,512 74,657 60,838 95,659 91,935 Securities sold under agreements to repurchase8 712,401 509,837 18,059 10,313 427,663 312,919 17,719 12,214 17,128 11,132 38,693 28,495 Deposits Depository institutions 1,977,166 2,377,996 45,875 86,758 1,175,023 1,560,513 65,374 47,897 51,363 61,513 133,840 118,097 Treasury, general account 333,447 223,452 n/a n/a 333,447 223,452 n/a n/a n/a n/a n /a n/a Foreign, official accounts 5,231 5,242 2 2 5,204 5,214 2 3 3 3 9 8 Other9 31,301 20,318 2 2 23,738 20,177 2 25 0 0 131 92 Total deposits 2,347,145 2,627,008 45,879 86,762 1,537,412 1,809,356 65,378 47,925 51,366 61,516 133,980 118,197 Other liabilities Accrued remittances to Treasury10 1,953 0 56 16 1,023 0 56 7 80 0 183 28 Deferred credit items 246 641 0 0 2 3 0 0 0 0 0 0 Consolidated variable interest entities 57 127 n/a n/a 57 127 n/a n/a n/a n /a n /a n/a All other liabilities11 3,904 4,292 124 120 1,851 2,156 152 159 153 170 395 409 Total liabilities 4,445,257 4,440,630 108,724 138,479 2,402,202 2,542,880 127,259 101,817 143,384 133,656 268,910 239,064 Capital accounts Capital paid-in 29,508 28,572 1,304 1,296 9,734 9,208 1,624 1,597 2,248 2,228 6,582 6,557 Surplus (including accumulated other comprehensive loss) 10,000 28,572 442 1,296 3,299 9,208 550 1,597 762 2,228 2,230 6,557 Total liabilities and capital accounts 4,484,765 4,497,774 110,470 141,071 2,415,235 2,561,296 129,433 105,011 146,394 138,112 277,722 252,178 Note: Components may not sum to totals because of rounding. 1 Par value. Includes securities loaned—fully collateralized by U.S. Treasury securities, other investment-grade securities, and collateral eligible for tri-party repurchase agreements pledged with Federal Reserve Banks. 2 The par amount shown is the remaining principal balance of the securities. 3 Reflects the premium or discount, which is the difference between the purchase price and the face value of the securities that has not been amortized. For U.S. Treasury and Federal agency debt securities, amortization is on a straight-line basis. For mortgage-backed securities (MBS), amortization is on an effective-interest basis. 4 The Federal Reserve Bank of New York is the primary beneficiary of Maiden Lane LLC, and, as a result, the accounts and results of operations of Maiden Lane LLC are included in the combined financial statements of the Federal Reserve Banks. 5 Valued daily at market exchange rates. 6 Dollar value of foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. This exchange rate equals the market exchange rate used when the foreign currency was acquired from the foreign central bank. 7 Includes furniture and equipment and depository institution overdrafts. 8 Contract amount of agreements. 9 Includes deposits of government-sponsored enterprises (GSEs), the Consumer Financial Protection Bureau, international organizations, and designated financial market utilities. These deposits are primarily held by the Federal Reserve Banks of New York and Chicago. 1 0Represents the estimated weekly remittances to U.S. Treasury. 1 1Includes accrued benefit costs and cash collateral posted by counterparties under commitments to purchase and sell federal agency and GSE MBS. n/a Not applicable.

298 102nd Annual Report | 2015 Table 9A. Statement of condition of the Federal Reserve Banks, by Bank, December 31, 2015 and 2014—continued Millions of dollars Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Item 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2 015 2014 2 015 2014 Assets Gold certificates 1,600 1,349 734 706 299 278 171 173 288 291 891 880 1,370 1,257 Special drawing rights certificates 654 654 424 424 150 150 90 90 153 153 282 282 574 574 Coin 184 208 282 279 31 23 49 45 149 152 196 188 316 320 Loans and securities Primary, secondary, and seasonal loans 31 5 9 30 35 0 38 48 2 31 0 0 0 8 Treasury securities, bought outright1 138,615 136,063 91,458 100,599 25,670 30,359 14,970 15,084 31,977 32,422 79,295 74,998 2 85,369 261,080 Government-sponsored enterprise debt securities, bought outright1 1,855 2,138 1,224 1,581 344 477 200 237 428 510 1,061 1,179 3,819 4,103 Federal agency and governmentsponsored enterprise mortgage-backed securities (MBS), bought outright2 98,403 96,011 64,926 70,987 18,223 21,423 10,627 10,644 22,701 22,878 56,291 52,922 202,584 184,228 Unamortized premiums on securities held outright3 10,670 11,434 7,040 8,454 1,976 2,551 1,153 1,268 2,461 2,725 6,104 6,302 21,967 21,939 Unamortized discounts on securities held outright3 -933 -1,017 -615 -752 -172 -227 -100 -113 -216 -242 -534 -561 -1,921 -1,951 Total loans and securities 248,641 244,634 164,042 180,899 46,076 54,583 26,888 27,168 57,353 58,324 1 42,217 1 34,840 5 11,818 4 69,407 Accrued interest receivable - System Open Market Account 1,431 1,418 944 1,047 265 316 154 157 330 338 818 780 2,949 2,723 Net portfolio holdings of consolidated variable interest entities4 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 currency denominated investments5 1,113 1,202 526 577 182 176 82 88 206 220 282 349 2,873 3,024 Central bank liquidity swaps6 57 88 27 42 9 13 4 6 11 16 14 26 146 221 Other SOMA assets 1 2 1 1 0 0 0 0 0 0 0 1 2 3 Other assets Items in process of collection 210 86 0 0 0 0 0 0 0 0 0 0 0 0 Bank premises 207 212 205 201 118 122 92 96 240 241 227 223 197 201 Deferred asset (accrued liability)remittances to the Treasury 0 0 0 0 0 0 0 14 0 0 0 0 0 0 All other assets7 91 100 63 66 97 80 33 39 62 48 56 62 321 142 Interdistrict settlement account 27,634 13,938 21,637 -923 15,633 -4,483 8,418 3,814 5,535 3,760 32,425 23,691 73,661 67,487 Total assets 281,823 263,891 188,885 183,319 62,860 51,258 35,981 31,690 64,327 63,543 1 77,408 1 61,322 5 94,227 5 45,359 Liabilities Federal Reserve notes outstanding 218,998 214,198 103,023 101,373 51,721 41,433 26,791 23,220 40,705 38,323 125,620 120,243 196,054 1 91,329 (continued on next page)

Statistical Tables 299 Table 9A.—continued Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Item 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2 015 2014 2 015 2014 Less: Notes held by Federal Reserve Bank 20,469 22,254 9,480 10,427 4,449 4,734 2,512 3,077 4,366 4,537 12,739 14,760 22,417 25,476 Federal Reserve notes outstanding, net 198,529 191,944 93,543 90,946 47,272 36,699 24,279 20,143 36,339 33,786 1 12,881 105,483 173,637 1 65,853 Securities sold under agreements to repurchase8 40,117 28,183 26,469 20,838 7,429 6,288 4,333 3,124 9,254 6,716 22,949 15,535 82,589 54,079 Deposits Depository institutions 40,417 39,629 60,295 69,727 7,506 7,610 6,982 7,978 18,185 22,332 40,767 39,292 3 31,540 3 16,649 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 Other9 7 6 7,225 12 97 0 1 0 12 1 65 1 24 2 Total deposits 40,426 39,637 67,521 69,740 7,603 7,610 6,983 7,978 18,197 22,333 40,833 39,294 3 31,570 316,657 Other liabilities Acrued remittances to Treasury10 150 51 75 24 32 12 18 0 41 3 67 19 172 114 Deferred credit items 163 556 0 0 0 0 82 82 0 0 0 0 0 0 Consolidated variable interest entities 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 All other liabilities11 244 268 218 237 118 117 117 123 101 103 177 167 248 264 Total liabilities 279,629 260,639 187,826 181,785 62,454 50,726 35,812 31,450 63,932 62,941 1 76,907 160,498 588,216 5 36,967 Capital accounts Capital paid-in 1,639 1,626 791 767 303 266 126 120 295 301 374 412 4,490 4,196 Surplus (including accumulated other comprehensive loss) 555 1,626 268 767 103 266 43 120 100 301 127 412 1,521 4,196 Total liabilities and capital accounts 281,823 263,891 188,885 183,319 62,860 51,258 35,981 31,690 64,327 63,543 1 77,408 161,322 5 94,227 545,359 Note: Components may not sum to totals because of rounding. 1 Par value. Includes securities loaned—fully collateralized by U.S. Treasury securities, other investment-grade securities, and collateral eligible for tri-party repurchase agreements pledged with Federal Reserve Banks. 2 The par amount shown is the remaining principal balance of the securities. 3 Reflects the premium or discount, which is the difference between the purchase price and the face value of the securities that has not been amortized. For U.S. Treasury and Federal agency debt securities, amortization is on a straight-line basis. For mortgage-backed securities (MBS), amortization is on an effective-interest basis. 4 The Federal Reserve Bank of New York is the primary beneficiary of Maiden Lane LLC, and, as a result, the accounts and results of operations of Maiden Lane LLC are included in the combined financial statements of the Federal Reserve Banks. 5 Valued daily at market exchange rates. 6 Dollar value of foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. This exchange rate equals the market exchange rate used when the foreign currency was acquired from the foreign central bank. 7 Includes furniture and equipment and depository institution overdrafts. 8 Contract amount of agreements. 9 Includes deposits of government-sponsored enterprises (GSEs), the Consumer Financial Protection Bureau, international organizations, and designated financial market utilities. These deposits are primarily held by the Federal Reserve Banks of New York and Chicago. 1 0Represents the estimated weekly remittances to U.S. Treasury. 1 1Includes accrued benefit costs and cash collateral posted by counterparties under commitments to purchase and sell federal agency and GSE MBS. n/a Not applicable.

300 102nd Annual Report | 2015 Table 9B. Statement of condition of the Federal Reserve Banks, December 31, 2015 and 2014 Supplemental information—collateral held against Federal Reserve notes: Federal Reserve agents’ accounts Millions of dollars Item 2015 2014 Federal Reserve notes outstanding 1,549,750 1,469,554 Less: Notes held by Federal Reserve Banks not subject to collateralization 170,199 170,829 Collateralized Federal Reserve notes 1,379,551 1,298,725 Collateral for Federal Reserve notes Gold certificates 11,037 11,037 Special drawing rights certificates 5,200 5,200 U.S. Treasury securities1 1,363,314 1,282,488 Total collateral 1,379,551 1,298,725 1 Face value. Includes compensation to adjust for the effect of inflation on the original face value of inflation-indexed securities.

Statistical Tables 301 Table 10. Income and expenses of the Federal Reserve Banks, by Bank, 2015 Thousands of dollars Kansas San Item Total Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Dallas City Francisco Current income Interest income Primary, secondary, and seasonal loans 349 7 12 2 7 2 34 48 46 118 16 10 45 Treasury securities 63,317,2841,519,48838,234,895 1,559,521 1,485,3883,465,3413,548,2722,414,627 692,149 3 85,851 825,5632,010,532 7,175,657 Government-sponsored enterprise debt securities, net 1,329,438 31,627 803,523 32,695 31,069 72,845 74,445 50,899 14,636 8,104 17,344 42,120 150,131 Federal agency and government-sponsored enterprise mortgage-backed securities, net 48,931,2081,165,28629,571,240 1,203,587 1,144,0322,680,7552,740,2751,872,516 538,225 298,265 638,3081,550,676 5,528,044 Foreign currency denominated investments, net 30,420 1,380 9,801 1,776 2,378 6,899 1,733 820 280 128 320 447 4,459 Central bank liquidity swaps1 1,417 64 456 83 111 321 81 38 13 6 15 21 208 Total interest income 113,610,1162,717,85268,619,927 2,797,664 2,662,9856,226,1636,364,8404,338,9481,245,349 692,472 1,481,5663,603,80612,858,544 Income from priced services 429,108 n/a 103,975 n/a n/a n/a 242,109 83,024 n/a n/a n/a n/a n/a Compensation received for services provided2 175,324 14,762 1,661 2,598 2,506 16,790 768 24,446 2,511 61,663 31,720 7,206 8,692 Securities lending fees 8,127 195 4,909 200 190 445 455 310 89 50 106 258 920 Other income 11,001 197 7,669 181 188 422 616 310 106 63 107 256 885 Total other income 623,560 15,154 118,214 2,979 2,884 17,657 243,948 108,090 2,706 61,776 31,933 7,720 10,497 Total current income 114,233,6762,733,00668,738,141 2,800,643 2,665,8696,243,8206,608,7884,447,0381,248,055 754,248 1,513,4993,611,52612,869,041 Net expenses Personnel Salaries and other personnel expenses 2,219,098 136,911 515,367 98,708 98,130 331,036 160,056 173,641 131,480 103,513 150,195 113,307 206,753 Retirement and other benefits 705,923 35,816 159,260 32,894 35,044 103,952 60,399 55,822 37,587 34,853 43,400 42,566 64,329 Administrative Fees 200,505 4,390 39,220 9,798 4,480 85,770 15,268 9,451 13,156 4,140 3,654 2,215 8,962 Travel 93,593 4,421 13,558 3,303 5,582 14,365 8,112 10,430 5,561 3,592 7,468 5,264 11,938 Postage and other shipping costs 13,420 234 1,185 232 1,325 565 2,465 238 703 328 1,006 2,290 2,850 Communications 45,834 1,131 5,781 574 567 29,597 1,382 2,119 1,013 948 700 890 1,132 Materials and supplies 65,197 3,548 22,530 6,439 2,426 5,816 4,798 4,688 2,639 1,589 3,072 3,345 4,308 Building Taxes on real estate 51,134 6,757 15,864 999 1,811 2,458 3,218 4,135 727 3,578 3,228 3,898 4,462 Property depreciation 139,341 13,859 28,823 6,733 6,949 14,779 10,203 15,732 8,007 4,385 8,642 9,196 12,032 Utilities 38,507 4,153 9,608 1,657 1,506 4,233 3,127 2,225 1,731 1,784 2,234 2,848 3,401 Rent 33,534 292 3,100 901 990 22,854 294 973 2,150 201 758 813 208 Other building 63,484 5,690 13,068 5,354 3,360 5,790 5,032 7,314 2,446 2,683 1,839 5,898 5,010 Equipment/software Purchases 33,123 2,002 5,592 1,345 1,763 6,964 2,065 2,115 2,208 1,688 2,977 2,112 2,292 Rentals 3,790 311 1,132 184 284 858 286 603 22 67 5 23 15 Depreciation 78,124 4,911 5,603 2,375 2,169 42,171 3,541 3,492 1,761 1,507 3,285 2,800 4,509 Repairs and maintenance 66,555 5,309 5,518 1,829 2,088 28,013 5,544 3,729 1,613 1,288 1,946 3,628 6,049 Software 205,074 9,027 35,338 10,128 7,243 69,212 15,348 6,669 10,182 8,632 11,484 10,176 11,635 Other expenses Compensation paid for service costs incurred2 175,324 n/a 40,664 n/a n/a n/a 123,588 11,072 n/a n /a n /a n/a n/a Other expenses 74,193 13,029 87,488 21,607 8,209 -353,123 27,646 65,143 106,656 27,920 18,987 25,220 25,410 Recoveries -178,562 -19,975 -22,785 -5,166 -6,490 -58,506 -14,619 -10,559 -4,446 -2,939 -8,015 -15,439 -9,622 (continued on next page)

302 102nd Annual Report | 2015 Table 10.—continued Item Total Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas Dallas San City Francisco Expenses capitalized3 -84,057 -4,688 -26,786 -3,767 -7,231 3,162 -224 -3,832 -3,848 -376 -11,890 -1,618 -22,958 Total operating expenses before pension expense and reimbursements 4,043,134 227,128 959,128 196,127 170,205 359,966 437,529 365,200 321,348 1 99,381 244,975 219,432 342,715 Net periodic pension expense4 562,562 2,240 541,916 798 2,800 2,840 1,304 2,176 1,829 838 1,551 766 3,505 Reimbursements -650,490 -46,501 -169,289 -34,168 -34,209 -42,221 -23,897 -5,747 -174,951 -32,939 -49,671 -19,252 -17,645 Operating expenses 3,955,206 182,867 1,331,755 162,757 138,796 320,585 414,936 361,629 148,226 167,280 196,855 200,946 328,575 Interest expense on securities sold under agreements to repurchase 247,733 5,995 149,466 6,111 5,833 13,543 13,893 9,411 2,690 1,509 3,228 7,883 28,171 Interest on reserves5 6,846,148 165,566 4,608,535 159,473 133,437 400,826 108,615 190,884 22,433 18,307 55,084 107,457 875,530 Interest on term deposits 6 89,205 69 48,895 14,394 5,249 592 230 3,707 21 13 1,209 567 14,258 Other expenses 1,664 40 1,003 41 39 91 93 63 18 10 22 53 190 Net expenses 11,139,956 354,537 6,139,654 342,776 283,354 735,637 537,767 565,694 173,388 1 87,119 256,398 316,906 1,246,724 Current net income 103,093,7202,378,46962,598,487 2,457,867 2,382,5155,508,1836,071,0213,881,3441,074,667 567,129 1,257,1013,294,62011,622,317 Additions to (+) and deductions from (-) current net income Profit on sales of federal agency and government-sponsored enterprise mortgage-backed securities 43,295 930 26,431 1,047 968 2,403 2,404 1,730 514 265 568 1,338 4,697 Foreign currency translation gains (losses) -1,382,100 -62,766 -444,913 -90,524 -108,832 -302,758 -79,056 -37,642 -12,248 -5,823 -14,543 -21,505 -201,490 Net income from consolidated variable interest entities7 36,383 n/a 36,383 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Other additions 183 0 121 1 1 3 7 2 0 1 0 45 2 Other deductions -3,274 0 -2,861 4 -3 -192 -45 89 -68 6 -10 71 -267 Net deductions to (-) current net income -1,305,513 -61,836 -384,839 -89,472 -107,866 -300,544 -76,690 -35,821 -11,802 -5,551 -13,985 -20,051 -197,058 Cost of unreimbursed Treasury services 2 n/a 2 n/a n/a n/a n/a n/a n/a n/a n/a n/a n /a Assessments by Board Board expenditures8 705,000 31,717 228,891 39,996 54,599 160,345 39,896 19,030 6,702 3,020 7,424 10,285 103,095 Cost of currency 689,288 29,535 128,174 31,953 40,936 64,790 101,412 60,977 20,792 14,230 21,843 61,691 112,955 Consumer Financial Protection Bureau9 489,700 21,907 159,647 27,356 37,773 110,845 27,693 13,242 4,692 2,093 5,165 7,192 72,095 Assessments by the Board of Governors 1,883,988 83,159 516,712 99,305 133,308 335,980 169,001 93,249 32,186 19,343 34,432 79,168 288,145 Net income before providing for remittances to the Treasury 99,904,2172,233,47461,696,936 2,269,090 2,141,3414,871,6595,825,3303,752,2741,030,679 5 42,235 1,208,6843,195,40111,137,114 Earnings remittances to the Treasury Interest on Federal Reserve notes 91,143,4931,988,61056,984,653 1,993,390 1,831,7494,112,0245,329,2273,465,831 919,199 4 94,433 1,105,5542,941,276 9,977,548 Required by the Federal Reserve Act, as amended by the FAST Act 25,955,9211,021,33010,316,180 1,234,149 1,658,5344,714,8181,487,676 759,602 257,786 124,893 291,866 503,856 3,585,232 Total earnings remittances to the Treasury 117,099,4143,009,94067,300,833 3,227,539 3,490,2838,826,8426,816,9034,225,4331,176,985 6 19,326 1,397,4203,445,13213,562,780 (continued on next page)

Statistical Tables 303 Table 10.—continued Item Total Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas Dallas San City Francisco Net loss after providing for remittances to the Treasury -17,195,197 -776,466-5,603,897 -958,449-1,348,942-3,955,183 -991,573 -473,159 -146,306 -77,091 -188,736 -249,731-2,425,666 Other comprehensive income (loss) 366,145 873 264,319 9,396 17,541 22,886 19,402 20,852 -338 7,392 6,297 -9,536 7,061 Comprehensive income -16,829,052 -775,593-5,339,578 -949,053-1,331,401-3,932,297 -972,171 -452,307 -146,644 -69,699 -182,439 -259,267-2,418,605 Distribution of comprehensive income Dividends on capital stock 1,742,745 77,944 569,237 97,352 134,435 394,256 98,408 47,076 16,884 7,498 18,291 25,616 255,748 Transferred to/from surplus and change in accumulated other comprehensive income -18,571,798 -853,537-5,908,815 -1,046,406-1,465,837-4,326,553-1,070,577 -499,381 -163,528 -77,198 -200,729 -284,884-2,674,353 Earnings remittances to the Treasury 117,099,4143,009,94067,300,833 3,227,539 3,490,283 8,826,842 6,816,9034,225,4331,176,985 6 19,326 1,397,4203,445,13213,562,780 Total distribution of net income 100,270,3612,234,34761,961,255 2,278,485 2,158,881 4,894,545 5,844,7343,773,1281,030,341 549,626 1,214,9823,185,86411,144,175 Note: Components may not sum to totals because of rounding. 1 Represents interest income recognized on swap agreements with foreign central banks. 2 The Federal Reserve Bank of Atlanta (FRBA) has overall responsibility for managing the Reserve Banks’ provision of check and automated clearinghouse (ACH) services and recognizes total System revenue for these services. The Federal Reserve Bank of New York (FRBNY) has overall responsibility for managing the Reserve Banks’ provision of Fedwire funds transfer and securities transfer services, and recognizes the total System revenue for these services. The Federal Reserve Bank of Chicago (FRBC) has overall responsibility for managing the Reserve Banks’ provision of electronic access services to depository institutions, and recognizes the total System revenue for these services. The FRBA, the FRBNY, and the FRBC compensate the other Reserve Banks for the costs incurred in providing these services. 3 Includes expenses for labor and materials capitalized and depreciated or amortized as charges to activities in the periods benefited. 4 Reflects the effect of the Financial Accounting Standards Board’s Codification Topic (ASC 715) Compensation-Retirement Benefits. Net pension expense for the System Retirement Plan of $522,925 thousand is recorded on behalf of the System in the books of the FRBNY. The Retirement Benefit Equalization Plan and the Supplemental Employee Retirement Plan are recorded by each Federal Reserve Bank. 5 In October 2008, the Reserve Banks began to pay interest to depository institutions on qualifying balances held at the Federal Reserve Banks. 6 In April 2010, the Reserve Banks began to pay interest on term deposits under the Term Deposit Facility. 7 Represents the portion of the consolidated variable interest entities’ net income recorded by the FRBNY. The amount includes interest income, interest expenses, realized and unrealized gains and losses, and professional fees. 8 For additional details, see the “Board of Governors Financial Statements” in section 12. 9 The Board of Governors assesses the Reserve Banks to fund the operations of the Consumer Financial Protection Bureau. These assessments are allocated to each Reserve Bank based on each Reserve Bank’s capital and surplus balances as of the most recent quarter. n/a Not applicable.

304 102nd Annual Report | 2015 Table 11. Income and expenses of the Federal Reserve Banks, 1914–2015 Thousands of dollars Distributions A ssess o m f e G n o ts v e b r y n o th rs e Board to the T ransferred 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 s es dedu ( o - c ) r 1 t ions exp B en o d a i r t d u res 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 t i 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 r a st l s t u f o e r / r p fr r l o e u m d s 4 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 e d Office of Reserve hensive Financial notes income5 Research2 All banks 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 1 66,690 n /a 18,523 1949 316,537 67,931 -12,122 3,243 6,304 n/a n/a 12,329 n/a 1 93,146 n /a 21,462 1950 275,839 69,822 36,294 3,434 7,316 n/a n/a 13,083 n/a 1 96,629 n/a 21,849 1951 394,656 83,793 -2,128 4,095 7,581 n/a n/a 13,865 n/a 2 54,874 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 3 42,568 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 5 24,059 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 6 87,393 n /a 70,892 (continued on next page)

Statistical Tables 305 Table 11.—continued Distributions A ssess o m f e G n o ts v e b r y n o th rs e Board to the T ransferred U.S. Treasury to/from Federal Net Other surplus 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 s es dedu ( o - c ) r 1 t ions exp B en o d a i r t d u res 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 t i 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 r a st l s t u f o e r / r p fr r l o e u m d s 4 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 e d Office of 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 1 5,204,591 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 2 0,777,552 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 2 3,389,367 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 2 5,343,892 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 2 7,089,222 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 1 8,078,003 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 2 1,467,545 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 3 1,688,688 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 (continued on next page)

306 102nd Annual Report | 2015 Table 11.—continued Distributions A ssess o m f e G n o ts v e b r y n o th rs e Board to the T ransferred U.S. Treasury to/from Federal Net Other surplus 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 s es dedu ( o - c ) r 1 t ions exp B en o d a i r t d u res 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 t i 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 r a st l s t u f o e r / r p fr r l o e u m d s 4 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 e d Office of 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 2015 114,233,676 11,139,956 -1,305,513 705,000 689,288 489,700 366,145 1,742,745 25,955,921 91,143,493 n/a -18,571,798 Total, 1914–20151,417,047,916120,081,531 37,489,887 8,999,117 14,506,295 2,327,177-1,952,705 22,224,809 70,069,879 1 ,198,433,402 -4 15,942,3896 A ggregate for each Bank, 1914–2015 Boston 56,552,363 5,507,426 287,115 386,945 798,011 103,910 12,644 976,247 3,600,834 44,842,511 135 636,102 New York 608,881,173408,937,687725,937,128 2,459,753 3,949,734 741,668-2,106,581 6,236,539 27,623,341 545,077,826 -433 5,729,512 Philadelphia 46,673,746 4,849,202 736,052 570,919 669,534 174,117 7,963 1,583,110 2,546,267 36,308,189 291 716,126 Cleveland 62,926,686 5,064,531 611,548 666,177 821,313 180,704 19,098 1,656,251 4,485,577 49,612,575 -10 1,070,211 Richmond 107,823,476 9,621,863 2,041,871 1,659,803 1,242,798 492,107 43,270 4,486,666 7,798,746 81,295,580 -72 3,311,130 Atlanta 95,153,663 12,451,705 1,666,154 618,315 1,484,229 132,820 10,621 1,450,225 4,200,906 75,616,315 5 875,917 Chicago 127,994,393 10,439,949 1,860,519 659,401 1,525,919 63,758 26,274 1,345,169 5,353,413 109,806,844 12 686,725 St. Louis 37,953,861 3,920,631 424,880 153,968 506,405 20,289 19,935 329,674 2,091,623 31,149,772 -27 226,346 Minneapolis 20,660,131 3,978,472 424,534 195,886 281,295 15,118 -2,042 433,785 541,120 15,436,029 65 200,861 Kansas City 42,173,398 5,390,019 578,233 189,796 523,182 23,766 -2,757 381,605 1,541,569 34,476,668 -9 222,271 Dallas 58,599,215 5,764,024 1,079,514 284,379 847,351 36,921 9,251 556,018 2,014,658 49,889,286 55 294,797 San Francisco 151,655,816 12,199,936 1,842,345 1,153,778 1,856,523 342,001 9,617 2,789,521 8,271,826 124,921,807 -17 1,972,394 Total 1,417,047,916120,081,531 37,489,887 8,999,117 14,506,295 2,327,177-1,952,705 22,224,809 70,069,879 1 ,198,433,402 -4 15,942,389 Note: Components may not sum to totals because of rounding. 1 For 1987 and subsequent years, includes the cost of services provided to the Treasury by Federal Reserve Banks for which reimbursement was not received. 2 Starting in 2010, as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Board of Governors began assessing the Reserve Banks to fund the operations of the Consumer Financial Protection Bureau and, for a two-year period beginning July 21, 2010, the Office of Financial Research. These assessments are allocated to the Reserve Banks based on each Reserve Bank’s capital and surplus balances as of the most recent quarter. 3 Represents transfers made as a franchise tax from 1917 through 1932; transfers made under section 13b of the Federal Reserve Act from 1935 through 1947; transfers made under section 7 of the Federal Reserve Act for 1996, 1997, and 2015. 4 Transfers are made under section 13b of the Federal Reserve Act. 5 Transfers are made under section 7 of the Federal Reserve Act. Beginning in 2006, accumulated other comprehensive income is reported as a component of surplus. 6 The $15,942,389 thousand transferred to surplus was reduced by direct charges of $500 thousand for charge-off on Bank premises (1927); $139,300 thousand for contributions to capital of the Federal Deposit Insurance Corporation (1934); $4 thousand net upon elimination of section 13b surplus (1958); $106,000 thousand (1996), $107,000 thousand (1997), $3,752,000 thousand (2000) transferred to the Treasury as statutorily required; and $1,848,716 thousand related to the implementation of SFAS No. 158 (2006) and was increased by a transfer of $11,131 thousand from reserves for contingencies (1955), leaving a balance of $10,000,000 thousand on December 31, 2015. 7 This amount is reduced by $6,707,578 thousand for expenses of the System Retirement Plan. See note 4, “Table 10. Income and expenses of the Federal Reserve Banks, by Bank, 2015.” n/a Not applicable.

Statistical Tables 307 Table 12. Operations in principal departments of the Federal Reserve Banks, 2012–15 Operation 2015 2014 2013 2012 Millions of pieces Currency processed 32,596 33,372 33,219 31,703 Currency destroyed 5,212 5,622 5,564 4,614 Coin received 55,921 55,401 56,806 58,669 Checks handled U.S. government checks1 60 63 83 121 Postal money orders 92 95 101 108 Commercial 5,452 5,741 5,987 6,622 Securities transfers2 17 17 19 18 Funds transfers3 143 135 134 132 Automated clearinghouse transactions Commercial 12,298 11,620 11,143 10,665 Government 1,558 1,516 1,467 1,382 Millions of dollars Currency processed 604,391 638,245 638,237 581,382 Currency destroyed 139,833 198,525 206,998 105,464 Coin received 5,394 5,363 5,481 5,700 Checks handled U.S. government checks1 143,764 141,396 154,584 199,251 Postal money orders 20,761 20,902 22,262 21,927 Commercial 8,109,457 8,108,895r 7,960,028 8,125,424 Securities transfers2 295,755,612 287,104,205 295,186,170 284,401,670 Funds transfers3 832,630,440 884,551,876 713,310,354 599,200,625 Automated clearinghouse transactions Commercial 20,564,724 19,891,274 19,689,431 19,293,857 Government 5,054,219 4,872,536 4,714,428 4,609,914 1 Includes government checks handled electronically (electronic checks). 2 Data on securities transfers do not include reversals. 3 Data on funds transfers do not include non-value transfers. r Revised.

308 102nd Annual Report | 2015 Table 13. Number and annual salaries of officers and employees of the Federal Reserve Banks, December 31, 2015 President1 O ther officers1 Employees Total Federal Reserve Bank (including branches) Annual salary Annual salaries Number Annual salaries A nnual salaries (dollars)2 Number (dollars)2 (dollars)2 Number (dollars)2 F ull time Part time Boston 383,500 69 16,094,616 966 28 99,733,396 1,064 116,211,513 New York 466,500 595 143,062,252 2,532 36 297,653,504 3,164 441,182,256 Philadelphia 375,300 62 12,346,445 767 17 68,373,766 847 81,095,511 Cleveland 369,600 64 12,710,513 860 22 72,967,361 947 86,047,474 Richmond 373,500 86 16,791,379 1,376 18 121,195,943 1,481 138,360,822 Atlanta 346,600 90 18,422,090 1,445 16 125,281,732 1,552 144,050,422 Chicago 382,400 117 24,872,095 1,345 45 129,175,182 1,508 154,429,677 St. Louis 339,700 102 20,206,600 1,087 33 92,623,437 1,223 113,169,737 Minneapolis 368,800 58 11,751,750 966 39 80,241,086 1,064 92,361,636 Kansas City 345,900 91 16,865,400 1,501 12 112,167,581 1,605 129,378,881 Dallas 380,200 68 13,138,600 1,113 9 86,841,329 1,191 100,360,129 San Francisco 422,900 92 20,778,286 1,553 20 156,710,649 1,666 177,911,835 Federal Reserve Information Technology n/a 71 14,575,185 1,139 2 126,952,368 1,212 141,527,553 Office of Employee Benefits n/a 13 3,268,105 36 1 4,169,660 50 7,437,765 Total 4,554,900 1,578 344,883,317 16,686 298 1,574,086,995 18,574 1,923,525,211 Note: Components may not sum to totals because of rounding. 1 In January 2014, the Board implemented a new compensation policy for Reserve Bank presidents and officer salary ranges for each Reserve Bank reflecting the cost of labor in each head-office city. The Board reviews Reserve Bank officer salary ranges annually and may adjust those ranges based on market information. Total cash compensation for all Reserve Bank officers is limited by compensation caps established for each Reserve Bank. The 2015 compensation caps were $469,500 for Boston, New York, and San Francisco; $435,500 for Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Dallas; and $419,900 for Kansas City. Under the Board’s policy, a president’s initial appointment salary normally will be set at 95 percent of the salary-range midpoint (a 95 compa-ratio), with the exception of the president of the New York Reserve Bank, whose appointment salary normally will be set at 105 compa-ratio, reflecting that position’s additional responsibilities and broader scope. The Board has discretion to approve an appointment salary greater than those noted above at the request of a Reserve Bank’s board of directors. Under the policy, all presidents will normally receive annual salary increases on January 1, based upon the Board-approved average Reserve Bank officer merit percentage for that year. In addition, presidents, as applicable, received an adjustment to their 2015 compensation to reflect the transition from the previous president compensation policy, in which each president received an annual salary increase to maintain his or her compa-ratio and an additional increase triennially to his or her compa-ratio. The previous policy was suspended from 2011 through 2013 due to the Board’s application of the pay freeze to Reserve Bank officers. The adjustments, which take into consideration tenure as president and position within the relevant salary range, will be phased in through 2016. 2 Annualized salary liability (excluding outside agency costs) based on salaries in effect on December 31, 2015. n/a Not applicable.

Statistical Tables 309 Table 14. Acquisition costs and net book value of the premises of the Federal Reserve Banks and Branches, December 31, 2015 Thousands of dollars Acquisition costs Federal Reserve Bank Net Other real estate or Branch Land Buildings Building machinery Total2 book value (including vaults)1 and equipment B oston 27,293 192,151 44,335 263,779 124,571 n/a New York 68,183 550,581 105,911 724,675 438,349 n/a Philadelphia 8,146 120,879 32,323 161,348 75,317 n/a Cleveland 4,219 133,709 26,207 164,135 89,862 n/a Cincinnati 3,075 29,553 16,269 48,897 15,914 n/a Richmond 32,044 165,889 59,555 257,488 142,995 n/a Baltimore 7,917 40,319 13,862 62,098 31,168 n/a Charlotte 7,884 45,632 14,000 67,516 37,476 n/a Atlanta 22,995 160,360 20,810 204,165 142,064 n/a Birmingham 5,347 13,056 1,465 19,868 9,902 n/a Jacksonville 1,897 24,326 6,400 32,623 16,697 n/a New Orleans 3,785 14,660 7,267 25,712 11,779 n/a Miami 4,254 33,446 9,220 46,920 26,140 n/a Chicago 5,904 241,621 31,887 279,412 127,536 n/a Detroit 12,329 74,431 12,823 99,583 77,120 n/a St. Louis 9,377 144,320 16,468 170,165 109,538 n/a Memphis 2,472 16,196 5,188 23,856 8,543 n/a Minneapolis 15,522 109,710 17,304 142,536 83,728 n/a Helena 2,900 10,327 1,516 14,743 8,090 n/a Kansas City 38,691 206,934 25,699 271,324 226,825 n/a Denver 3,694 9,873 5,698 19,265 7,129 n/a Omaha 3,559 7,596 1,833 12,988 5,620 n/a Dallas 38,100 129,871 32,760 200,731 112,821 n/a El Paso 262 4,753 2,050 7,065 1,569 n/a Houston 32,323 104,169 9,209 145,701 112,264 n/a San Francisco 20,988 129,738 30,967 181,693 87,363 n/a Los Angeles 6,306 80,515 19,023 105,844 50,879 n/a Salt Lake City 1,294 5,613 1,628 8,535 2,536 n/a Seattle 13,101 49,970 6,849 69,920 56,541 n/a Total 403,861 2,850,198 578,526 3,832,585 2,240,336 n/a 1 Includes expenditures for construction at some offices, pending allocation to appropriate accounts. 2 Excludes charge-offs of $17,699 thousand before 1952. n/a Not applicable.

311 12 Federal Reserve System Audits The Board of Governors, the Federal Reserve Banks, and the Federal Reserve System as a whole are all subject to several levels of audit and review. The Board’s financial statements and internal controls over financial reporting are audited annually by an independent outside auditor retained by the Board’s Office of Inspector General (OIG). The outside auditor also tests the Board’s compliance with certain provisions of laws, regulations, and contracts affecting those statements. The Reserve Banks’ financial statements are audited annually by an independent outside auditor retained by the Board of Governors. In addition, the Reserve Banks are subject to annual examination by the Board. As discussed in section 6, “Federal Reserve Banks,” the Board’s examination includes a wide range of ongoing oversight activities conducted on site and off site by staff of the Board’s Division of Reserve Bank Operations and Payment Systems. In addition, the OIG conducts audits, investigations, and other reviews relating to the Board’s programs and operations as well as to Board functions delegated to the Reserve Banks. Certain aspects of Federal Reserve operations are also subject to review by the Government Accountability Office.

312 102nd Annual Report | 2015 Board of Governors Financial Statements The financial statements of the Board of Governors were audited by KPMG LLP, independent auditors, for the year ended December 31, 2015, and by Deloitte & Touche LLP, independent auditors, for the year ended December 31, 2014. March 7, 2016 Management’s Report on Internal Control over Financial Reporting To the Committee on Board Affairs: The management of the Board of Governors of the Federal Reserve System (the Board) is responsible for the preparation and fair presentation of the balance sheet as of December 31, 2015 and 2014, and the statement of operations and cash flows for the years then ended (the financial statements). The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, and, as such, include some amounts that are based on management judgments and estimates. To our knowledge, the financial statements are, in all material respects, fairly presented in conformity with generally accepted accounting principles and include all disclosures necessary for such fair presentation. The management of the Board is responsible for establishing and maintaining effective internal control over financial reporting as it relates to the financial statements. The Board’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. The Board’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Board’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Board’s receipts and expenditures are being made only in accordance with authorizations of its management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Board’s assets that could have a material effect on its financial statements. Even effective internal control, no matter how well designed, has inherent limitations, including the possibility of human error, and therefore can provide only reasonable assurance with respect to the preparation of reliable financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The management of the Board assessed its internal control over financial reporting based upon the criteria established in the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, we believe that the Board maintained effective internal control over financial reporting. Donald V. Hammond William L. Mitchell Chief Operating Officer Chief Financial Officer

Federal Reserve System Audits 313 INDEPENDENT AUDITORS’ REPORT To the Board of Governors of the Federal Reserve System: We have audited the accompanying balance sheet of the Board of Governors of the Federal Reserve System (the “Board”) as of December 31, 2015, and the related statements of operations and cash flows for the year then ended. We also have audited the Board’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Board’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Board’s internal control over financial reporting based on our audit. The accompanying financial statements of the Board as of December 31, 2014 and for the year then ended were audited by other auditors whose report thereon dated March 12, 2015, expressed an unmodified opinion on those statements. We conducted our audit of the financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), in accordance with auditing standards generally accepted in the United States of America, and in accordance with the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. We conducted our audit of internal control over financial reporting in accordance with the auditing standards of the PCAOB and in accordance with attestation standards established by the American Institute of Certified Public Accountants. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Board as of December 31, 2015, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Board maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

314 102nd Annual Report | 2015 In accordance with Government Auditing Standards, we have also issued a report dated March 7, 2016 on our tests of the Board’s compliance with certain provisions of laws, regulations, contracts, and other matters. The purpose of that report is to describe the scope of our testing of compliance and the results of that testing, and not to provide an opinion on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Board’s compliance. Washington, DC March 7, 2016

Federal Reserve System Audits 315 Board of Governors of the Federal Reserve System Balance Sheets As of December 31, 2015 2014 Assets Current assets: Cash $121,678,242 $ 69,243,271 Accounts receivable – net 3,032,839 4,800,677 Prepaid expenses and other assets 5,261,594 7,043,863 Total current assets 129,972,675 81,087,811 Noncurrent assets: Property, equipment, and software – net 259,267,021 256,324,432 Other assets 1,184,136 1,484,570 Total noncurrent assets 260,451,157 257,809,002 Total $390,423,832 $ 338,896,813 L iabilities and cumulative results of operations Current liabilities: Accounts payable and accrued liabilities $ 16,314,721 $ 27,455,677 Accrued payroll and related taxes 29,000,736 22,699,129 Accrued annual leave 36,796,477 34,266,939 Capital lease payable 155,241 323,306 Unearned revenues and other liabilities 2,477,966 1,977,674 Total current liabilities 84,745,141 86,722,725 Long-term liabilities: Capital lease payable – 92,204 Retirement benefit obligation 54,691,940 45,461,450 Postretirement benefit obligation 13,291,034 12,969,115 Postemployment benefit obligation 8,620,208 8,850,310 Deferred rent 40,315,439 40,151,309 Other liabilities – 253,938 Total long-term liabilities 116,918,621 107,778,326 Total liabilities 201,663,762 194,501,051 Cumulative results of operations: Fund balance 209,353,299 163,920,431 Accumulated other comprehensive loss (20,593,229) (19,524,669) Total cumulative results of operations 188,760,070 144,395,762 Total $390,423,832 $338,896,813 See notes to financial statements.

316 102nd Annual Report | 2015 Board of Governors of the Federal Reserve System Statements of Operations For the years ended December 31, 2015 2014 Board operating revenues: Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $705,000,000 $590,000,000 O ther revenues 19,139,153 17,757,157 Total operating revenues 724,139,153 607,757,157 Board operating expenses: Salaries 385,055,415 351,495,519 Retirement, insurance, and benefits 88,462,323 78,111,357 Contractual services and professional fees 49,570,438 45,252,522 Depreciation, amortization, and net gains or losses on disposals 41,343,515 25,411,096 Travel 16,793,617 15,467,118 Non-capital furniture and equipment, postage, supplies 12,458,662 12,010,066 Data, news, and research 16,839,166 12,755,928 Utilities 10,232,994 10,511,203 Software 14,606,064 13,532,082 Rentals of space 25,227,322 16,518,231 Repairs and maintenance 6,923,745 6,504,496 Other expenses 11,193,024 9,883,686 Total operating expenses 678,706,285 597,453,304 Net income 45,432,868 10,303,853 Currency costs: Assessments levied or to be levied on Federal Reserve Banks for currency costs 689,198,549 707,402,059 Expenses for costs related to currency 689,198,549 707,402,059 Currency assessments over (under) expenses – – Bureau of Consumer Financial Protection (Bureau): Assessments levied on the Federal Reserve Banks for the Bureau 489,700,000 563,000,000 Transfers to the Bureau 489,700,000 563,000,000 Bureau assessments over (under) transfers – – Office of Financial Research (Office): Assessments transferred to the Federal Reserve Banks for the Office – 1,512,822 Transfers from the Office – 1,512,822 Office assessments over (under) transfers – – Total net income 45,432,868 10,303,853 Other comprehensive income: Pension and other postretirement benefit plans: Amortization of prior service cost 605,483 605,483 Amortization of net actuarial loss 2,046,251 481,850 Net actuarial loss arising during the year (3,720,294) (13,361,050) Total other comprehensive loss (1,068,560) (12,273,717) Comprehensive income (loss) 44,364,308 (1,969,864) Cumulative results of operations – beginning of year 144,395,762 146,365,626 Cumulative results of operations – end of year $188,760,070 $144,395,762 See notes to financial statements.

Federal Reserve System Audits 317 Board of Governors of the Federal Reserve System Statements of Cash Flows For the years ended December 31, 2015 2014 Cash flows from operating activities: Net income $ 45,432,868 $10,303,853 Adjustments to reconcile results of operations to net cash provided by (used in) operating activities: Depreciation and amortization 34,688,752 25,132,858 Net loss on disposal of property and equipment 6,654,763 278,238 Other additional non-cash adjustments to results of operations (237,927) (308,326) (Increase) decrease in assets: Accounts receivable 1,767,837 3,110,335 Prepaid expenses 1,782,269 (2,446,206) Other assets 300,434 498,795 Increase (decrease) in liabilities: Accounts payable and accrued liabilities (3,089,920) (770,233) Accrued payroll and related taxes 6,301,607 (2,406,461) Accrued annual leave 2,529,538 2,978,502 Unearned revenues and other liabilities 500,292 (531,528) Net retirement benefit obligation 8,292,457 4,326,019 Net postretirement benefit obligation 191,392 406,819 Net postemployment benefit obligation (230,102) 359,389 Deferred rent (1,316,365) 539,410 Other long-term liabilities (253,938) (24,045) Net cash provided by operating activities 103,313,957 41,447,419 C ash flows from investing activities: Capital expenditures (50,591,423) (62,703,485) Net cash used in investing activities (50,591,423) (62,703,485) Cash flows from financing activities: Capital lease payments (287,563) (351,980) Net cash used in financing activities (287,563) (351,980) Net increase (decrease) in cash 52,434,971 (21,608,046) Cash balance – beginning of year 69,243,271 90,851,317 Cash balance – end of year $121,678,242 $69,243,271 See notes to financial statements.

318 102nd Annual Report | 2015 Board of Governors of the Federal Reserve System Notes to Financial Statements as of and for the Years Ended December 31, 2015 and 2014 (1) Structure The Federal Reserve System (the System) was established by Congress in 1913 and consists of the Board of Governors (the Board), the Federal Open Market Committee, the twelve regional Federal Reserve Banks (Reserve Banks), the Federal Advisory Council, and the private commercial banks that are members of the System. The Board, unlike the Reserve Banks, was established as a federal government agency and is located in Washington, D.C. The Board has established two other committees that directly provide perspectives and input from various sectors of the economy: the Community Advisory Council and the Community Depository Institutions Advisory Council. The Board is required by the Federal Reserve Act (the Act) to report its operations to the Speaker of the House of Representatives. The Act also requires the Board, each year, to order a financial audit of each Reserve Bank and to publish each week a statement of the financial condition of each Reserve Bank and a combined statement for all of the Reserve Banks. Accordingly, the Board believes that the best financial disclosure consistent with law is achieved by issuing separate financial statements for the Board and for the Reserve Banks. Therefore, the accompanying financial statements include only the results of operations and activities of the Board. Combined financial statements for the Reserve Banks are included in the Board’s annual report to the Speaker of the House of Representatives and weekly statements are available on the Board’s public website. The Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 (Dodd-Frank Act) established the Bureau of Consumer Financial Protection (Bureau) as an independent bureau within the System and designated the Board’s Office of Inspector General (OIG) as the OIG for the Bureau. As required by the Dodd-Frank Act, the Board transferred certain responsibilities to the Bureau. The Dodd-Frank Act requires the Board to fund the Bureau from the combined earnings of the System. The Dodd-Frank Act also created the Financial Stability Oversight Council (FSOC), of which the Chairman of the Board is a member, as well as the Office of Financial Research (Office) within the U.S. Department of Treasury (Treasury) to provide support to the FSOC and the member agencies. The Dodd-Frank Act required that the Board provide funding for the FSOC and the Office until July 2012. Section 1017 of the Dodd-Frank Act provides that the financial statements of the Bureau are not to be consolidated with those of the Board or the System; the Board has also determined that neither the FSOC nor the Office should be consolidated in the Board’s financial statements. Accordingly, the Board’s financial statements do not include financial data of the Bureau, the FSOC, or the Office other than the funding that the Board is required by the Dodd-Frank Act to provide. (2) Operations and Services The Board’s responsibilities require thorough analysis of domestic and international financial and economic developments. The Board carries out those responsibilities in conjunction with the Reserve Banks and the Federal Open Market Committee. The Board also exercises general oversight of the operations of the Reserve Banks and exercises broad responsibility in the nation’s payments system. Policy regarding open market operations is established by the Federal Open Market

Federal Reserve System Audits 319 Committee. However, the Board has sole authority over changes in reserve requirements, and it must approve any change in the discount rate initiated by a Reserve Bank. The Board also plays a major role in the supervision and regulation of the U.S. financial system. It has supervisory responsibilities for state-chartered banks that are members of the System, bank holding companies, savings and loan holding companies, foreign activities of member banks, U.S. activities of foreign banks, and any nonbank financial companies the FSOC has determined should be supervised by the Board. Although the Dodd-Frank Act gave the Bureau general rulewriting responsibility for federal consumer financial laws, the Board retains rulewriting responsibility under the Community Reinvestment Act and other specific statutory provisions. The Board also enforces the requirements of federal consumer financial laws for state member banks with assets of $10 billion or less. In addition, the Board enforces certain other consumer laws at all state member banks, regardless of size. (3) Significant Accounting Policies Basis of Accounting — The Board prepares its financial statements in accordance with accounting principles generally accepted in the United States (GAAP). Revenues — The Federal Reserve Act authorizes the Board to levy an assessment on the Reserve Banks to fund its operations. The Board allocates the assessment to each Reserve Bank based on the Reserve Bank’s capital and surplus balances. The Board recognizes the assessment in the period in which it is assessed. Assessments to Fund the Bureau — The Board assesses the Reserve Banks for the funds transferred to the Bureau based on each Reserve Bank’s capital and surplus balances. The Board recognizes the assessment in the period in which it is assessed. These assessments and transfers are reported separately from the Board’s operating activities in the Board’s Statements of Operations. Assessments for Supervision and Regulation (S&R) — The Dodd-Frank Act directs the Board to collect assessments, fees, or other charges equal to the total expenses the Board estimates are necessary or appropriate to carry out the supervisory and regulatory responsibilities of the Board for bank holding companies and savings and loan holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated for Board supervision by the FSOC. As a collecting entity, the Board does not recognize the S&R assessments as revenue nor does the Board use the collections to fund Board expenses; the funds are transferred to the Treasury. System Earning Remittances to the Treasury — Beginning in December 2015, the Fixing America’s Surface Transportation Act (FAST Act) requires that any amount of surplus funds of the Reserve Banks that exceed or would exceed $10 billion be transferred to the United States Treasury (Treasury) via the Board. As an intermediary transfer agent, the Board does not recognize the remittances as revenue nor does the Board use the remittances to fund Board expenses. Additional information and disclosures regarding these remittances to the Treasury can be found in the combined financial statements of the Federal Reserve Banks. Civil Money Penalties — The Board has enforcement authority over the financial institutions it supervises and their affiliated parties, including the authority to assess civil money penalties. As directed by statute, all civil money penalties that are assessed and collected by the Board are remitted to either the Treasury or Federal Emergency Management Agency (FEMA). As a collecting entity, the Board

320 102nd Annual Report | 2015 does not recognize civil money penalties as revenue nor does the Board use civil money penalties to fund Board expenses. Civil money penalties whose collection is contingent upon fulfillment of certain conditions in the enforcement action are not recorded in the Board’s financial records. Checks for civil money penalties made payable to the National Flood Insurance Program are forwarded to FEMA and are not recorded in the Board’s financial records. Currency Costs — The Board issues the nation’s currency (in the form of Federal Reserve notes), and the Reserve Banks distribute currency through depository institutions. The Board incurs expenses and assesses the Reserve Banks for the expenses related to producing, issuing, and retiring Federal Reserve notes as well as providing educational services. The assessment is allocated based on each Reserve Bank’s share of the number of notes comprising the System’s net liability for Federal Reserve notes on December 31 of the prior year. The Board recognizes the assessment in the period in which it is assessed. These expenses and assessments are reported separately from the Board’s operating activities in the Board’s Statements of Operations. Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable are recorded when amounts are billed but not yet received and are shown net of the allowance for doubtful accounts. Accounts receivable considered uncollectible are charged against the allowance account in the year they are deemed uncollectible. The allowance for doubtful accounts is adjusted monthly, based upon a review of outstanding receivables. Prepaid Expenses — The Board books expenses as prepaid for costs paid in advance that will be expensed with the passage of time or upon the occurrence of a triggering event in future periods. Property, Equipment, and Software — The Board’s property, equipment, and software are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the assets, which range from three to ten years for furniture and equipment, ten to fifty years for building equipment and structures, and two to five years for software. Upon the sale or other disposition of a depreciable asset, the cost and related accumulated depreciation or amortization are removed and any gain or loss is recognized. Construction in process includes costs incurred for short-term and long-term projects that have not been placed into service; the majority of the balance represents long-term building enhancement projects. Art Collections — The Board has collections of works of art, historical treasures, and similar assets. These collections are maintained and held for public exhibition in furtherance of public service. Proceeds from any sales of collections are used to acquire other items for collections. The cost of collections purchased by the Board is charged to expense in the year purchased and donated collection items are not recorded. The value of the Board’s collections has not been determined. Deferred Rent — Leases for certain space contain scheduled rent increases over the term of the lease. Rent abatements, lease incentives, and scheduled rent increases must be considered in determining the annual rent expense to be recognized. The deferred rent represents the difference between the actual lease payments and the rent expense recognized. Lease incentives impact deferred rent and are non-cash transactions.

Federal Reserve System Audits 321 Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates include useful lives of property, equipment, and software; allowance for doubtful accounts receivable; accounts payable; retirement benefit obligation; postretirement benefit obligation; postemployment obligation; and commitments and contingencies. Benefit Obligations — The Board records annual amounts relating to its pension, postretirement, and postemployment plans based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, compensation increases, and health-care cost trends rates. The Board reviews the assumptions on an annual basis and makes modifications to the assumptions based on a variety of factors. The effect of the modifications to the assumptions is recorded in accumulated other comprehensive income and amortized to net periodic cost over future periods, which is presented in the accumulated other comprehensive income (loss) footnote. Commitments and Contingencies — Liabilities for loss contingencies arising from claims, assessments, litigation, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Tax Exempt Status — The Board, as a federal government entity, is not subject to state or local income taxes. Federal income tax on corporations does not apply to the Board. Recently Issued Accounting Standards — In April 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-05, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This update is effective for the Board for the year ending December 31, 2016, and is not expected to have a material effect on the Board’s financial statements. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance is applicable to all contracts for the transfer of goods or services regardless of industry or type of transaction. This update requires recognition of revenue in a manner that reflects the consideration that the entity expects to receive in return for the transfer of goods or services to customers. In August 2015, the FASB issued 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This update is effective for the Board for the year ending December 31, 2019, and is not expected to have a material effect on the Board’s financial statements since the Board reports annually and satisfies all material performance obligations prior to year-end.

322 102nd Annual Report | 2015 In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update revises the model to assess how a lease should be classified and provides guidance for lessees, requiring lessees to present right-of-use assets and lease liabilities on the balance sheet. The update is effective no later than the year ended December 31, 2020, although earlier adoption is permitted. The Board is continuing to evaluate the effect of this new guidance on its consolidated financial statements. (4) Property, Equipment, and Software The following is a summary of the components of the Board’s property, equipment, and software, at cost, less accumulated depreciation and amortization as of December 31, 2015 and 2014: As of December 31, 2015 2014 Land $ 18,640,314 $ 18,640,314 Buildings and improvements 300,166,433 282,596,215 Construction in process 10,920,879 12,225,222 Furniture and equipment 82,888,372 79,542,184 Software in use 40,987,546 38,309,794 Software in process 5,275,429 1,040,801 Vehicles 2,098,155 1,835,191 Subtotal 460,977,128 434,189,721 Less accumulated depreciation and amortization (201,710,107) (177,865,292) Property, equipment, and software – net $259,267,021 $256,324,429 Construction in process include costs incurred in the current or prior years for long-term projects and building enhancements. In 2015, the Board recognized a loss of $6 million related to changes in an ongoing capital project; the loss is reflected on the Statements of Operations and the Statements of Cash Flows. (5) Leases Capital Leases — The Board entered into capital leases for copier equipment in 2012; the lease terms extend through 2016. In 2014, the Board terminated a portion of those leases of $313,000, which is a non-cash event excluded from the Statements of Cash Flows. Furniture and equipment includes capitalized leases of $1,258,000 as of 2015 and 2014. Accumulated depreciation includes $1,170,000 and $855,000 related to assets under capital leases as of 2015 and 2014, respectively. The depreciation expense for leased equipment is $315,000 and $339,000 for 2015 and 2014, respectively. The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of December 31, 2015, are as follows: Year Ended December 31, Amount 2016 197,004 Total minimum lease payments 197,004 Less amount representing maintenance (41,428) Net minimum lease payments 155,576 Less amount representing interest (335) Present value of net minimum lease payments 155,241 Less current maturities of capital lease payments (155,241) Long-term capital lease obligations $ –

Federal Reserve System Audits 323 Operating Leases — The Board has entered into operating leases to secure office, training, data center, and warehouse space. Several of the leases are with Reserve Banks and other governmental agencies. Minimum annual payments under the multiyear operating leases having an initial or remaining noncancelable lease term in excess of one year at December 31, 2015, are as follows: Years Ended December 31, 2016 $ 27,324,938 2017 28,323,075 2018 29,002,059 2019 28,358,534 After 2019 95,014,040 $208,022,646 Rental expenses under the multiyear operating leases were $24,291,000 and $15,854,000 for the years ended December 31, 2015 and 2014, respectively. Deferred Rent — The Board recorded non-cash lease incentives of $1,480,000 and $17,829,000 for the years ended December 31, 2015 and 2014, respectively. (6) Retirement Benefits Substantially all of the Board’s employees participate in the Retirement Plan for Employees of the Federal Reserve System (the System Plan). The System Plan provides retirement benefits to employees of the Board, the Reserve Banks, the Office of Employee Benefits of the Federal Reserve System (OEB), and certain employees of the Bureau. The Federal Reserve Bank of New York (FRBNY), on behalf of the System, recognizes the net assets and costs associated with the System Plan in its financial statements. Costs associated with the System Plan were not redistributed to the Board during the years ended December 31, 2015 and 2014. Employees of the Board who became employed prior to 1984 are covered by a contributory defined benefits program under the System Plan. Employees of the Board who became employed after 1983 are covered by a non-contributory defined benefits program under the System Plan. FRBNY, on behalf of the System, funded $480 million during each of the years ended December 31, 2015 and 2014. The Board was not assessed a contribution for 2015 or 2014. In October 2014, the Society of Actuaries released new mortality tables (RP-2014) and in October 2015 and 2014 released new mortality projection scales (MP-2015 and MP-2014, respectively) for use in valuations of benefits liabilities. The Board adopted the new RP-2014 mortality tables and MP-2014 mortality projection scales, adjusted based on the System’s recent mortality experience and retirement rates of System retirees, which included the Board’s workforce. Benefits Equalization Plan — Board employees covered under the System Plan are also covered under a Benefits Equalization Plan (BEP). Benefits paid under the BEP are limited to those benefits that cannot be paid from the System Plan due to

324 102nd Annual Report | 2015 limitations imposed by the Internal Revenue Code. Activity for the BEP as of December 31, 2015 and 2014, is summarized in the following tables: 2015 2014 Change in projected benefit obligation: Benefit obligation – beginning of year $20,727,400 $12,673,892 Service cost 2,409,059 1,125,134 Interest cost 1,245,933 705,339 Plan participants’ contributions – – Actuarial loss 3,653,624 6,238,231 Gross benefits paid (40,388) (15,196) Benefit obligation – end of year $27,995,628 $ 20,727,400 Accumulated benefit obligation – end of year $ 3,651,148 $ 2,327,825 Weighted-average assumptions used to determine benefit obligation as of December 31: Discount rate 4.67% 4.25% Rate of compensation increase 4.00% 4.00% C hange in plan assets: Fair value of plan assets – beginning of year $ – $ – Employer contributions 40,388 15,196 Plan participants’ contributions – – Gross benefits paid (40,388) (15,196) Fair value of plan assets – end of year $ – $ – Funded status: Reconciliation of funded status – end of year: Fair value of plan assets $ – $ – Benefit obligation (current) 55,947 31,281 Benefit obligation (noncurrent) 27,939,681 20,696,119 Funded status (27,995,628) (20,727,400) Amount recognized – end of year $(27,995,628) $ (20,727,400) Amounts recognized in the balance sheets consist of: Asset $ – $ – Liability – current (55,947) (31,281) Liability – noncurrent (27,939,681) (20,696,119) Net amount recognized $(27,995,628) $ (20,727,400) Amounts recognized in accumulated other comprehensive income consist of: Net actuarial loss $ 7,727,778 $ 4,769,469 Prior service cost 322,032 421,610 Net amount recognized $ 8,049,810 $ 5,191,079 Expected cash flows: Expected employer contributions – 2016 $ 55,947 Expected benefit payments:* 2016 $ 55,947 2017 $ 147,044 2018 $ 175,007 2019 $ 206,773 2020 $ 245,437 2021–2025 $2,215,387 * Expected benefit payments to be made by the Board.

Federal Reserve System Audits 325 2015 2014 Components of net periodic benefit cost: Service cost $2,409,059 $ 1,125,134 Interest cost 1,245,933 705,339 Expected return on plan assets – – Amortization: Actuarial (gain) loss $ 695,315 $ (65,534) Prior service cost 99,578 99,578 Net periodic benefit cost $4,449,885 $ 1,864,517 Weighted-average assumptions used to determine net periodic benefit cost: Discount rate 4.25% 5.26% Rate of compensation increase 4.00% 4.50% O ther changes in plan assets and benefit obligations recognized in other comprehensive income: Current year actuarial loss $3,653,624 $ 6,238,231 Amortization of prior service cost (99,578) (99,578) Amortization of actuarial gain (loss) (695,315) 65,534 Total recognized in other comprehensive loss $2,858,731 $6,204,187 Total recognized in net periodic benefit cost and other comprehensive income $7,308,616 $8,068,704 Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2016 are shown below: Net actuarial loss $382,763 Prior service cost 99,578 Total $482,341 Pension Enhancement Plan — The Board also provides another non-qualified plan for officers of the Board. The retirement benefits covered under the Pension Enhancement Plan (PEP) increase the pension benefit calculation from 1.8 percent

326 102nd Annual Report | 2015 above the Social Security integration level to 2.0 percent. Activity for the PEP as of December 31, 2015 and 2014, is summarized in the following tables: 2015 2014 Change in projected benefit obligation: Benefit obligation – beginning of year $24,857,488 $ 17,593,667 Service cost 1,037,235 676,722 Interest cost 1,178,955 961,720 Plan participants’ contributions – – Actuarial loss 22,672 5,824,802 Gross benefits paid (220,089) (199,423) Benefit obligation – end of year $26,876,261 $ 24,857,488 Accumulated benefit obligation – end of year $21,116,567 $20,463,136 Weighted-average assumptions used to determine benefit obligation as of December 31: Discount rate 4.52% 4.12% Rate of compensation increase 4.00% 4.00% C hange in plan assets: Fair value of plan assets – beginning of year $ – $ – Employer contributions 220,089 199,423 Plan participants’ contributions – – Gross benefits paid (220,089) (199,423) Fair value of plan assets – end of year $ – $ – Funded status: Reconciliation of funded status – end of year: Fair value of plan assets $ – $ – Benefit obligation – current 316,841 279,260 Benefit obligation – noncurrent 26,559,420 24,578,228 Funded status (26,876,261) (24,857,488) Amount recognized – end of year $(26,876,261) $ (24,857,488) Amounts recognized in the balance sheets consist of: Asset $ – $ – Liability – current (316,841) (279,260) Liability – noncurrent (26,559,420) (24,578,228) Net amount recognized $(26,876,261) $ (24,857,488) Amounts recognized in accumulated other comprehensive income consist of: Net actuarial loss $ 9,519,292 $ 10,647,540 Prior service cost 586,303 1,117,698 Net amount recognized $10,105,595 $ 11,765,238 Expected cash flows: Expected employer contributions – 2016 $ 316,841 Expected benefit payments:* 2016 $ 316,841 2017 $ 400,581 2018 $ 501,407 2019 $ 617,820 2020 $ 741,206 2021–2025 $5,793,388 * Expected benefit payments to be made by the Board.

Federal Reserve System Audits 327 2015 2014 Components of net periodic benefit cost: Service cost $1,037,235 $ 676,722 Interest cost 1,178,955 961,720 Expected return on plan assets – – Amortization: Actuarial loss 1,150,920 491,730 Prior service cost 531,395 531,395 Net periodic benefit cost $3,898,505 $ 2,661,567 Weighted-average assumptions used to determine net periodic benefit cost: Discount rate 4.12% 5.06% Rate of compensation increase 4.00% 4.50% O ther changes in plan assets and benefit obligations recognized in other comprehensive income: Current year actuarial loss $ 22,672 $ 5,824,802 Amortization of prior service cost (531,395) (531,395) Amortization of actuarial loss (1,150,920) (491,730) Total recognized in other comprehensive (income) loss $(1,659,643) $4,801,677 Total recognized in net periodic benefit cost and other comprehensive income $2,238,862 $7,463,244 Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2016 are shown below: Net actuarial loss $ 710,100 Prior service cost 531,395 Total $1,241,495 The total accumulated retirement benefit obligation includes a liability for a supplemental retirement agreement and a benefits equalization plan under the System’s Thrift Plan. The total obligation as of December 31, 2015 and 2014, is summarized in the following table: 2015 2014 Retirement benefit obligation: Benefit obligation – BEP $27,995,628 $ 20,727,400 Benefit obligation – PEP 26,876,261 24,857,488 Additional benefit obligations 192,839 187,103 Total accumulated retirement benefit obligation $55,064,728 $45,771,991 A relatively small number of Board employees participate in the Civil Service Retirement System or the Federal Employees’ Retirement System. These defined benefit plans are administered by the U.S. Office of Personnel Management, which determines the required employer contribution levels. The Board’s contributions to these plans totaled $913,000 and $891,000 in 2015 and 2014, respectively. The Board has no liability for future payments to retirees under these programs and is not accountable for the assets of the plans. Employees of the Board may also participate in the System’s Thrift Plan or Roth 401(k). Board contributions to members’ accounts were $24,170,000 and $21,982,000 in 2015 and 2014, respectively.

328 102nd Annual Report | 2015 (7) Postretirement Benefits The Board provides certain life insurance programs for its active employees and retirees. Activity as of December 31, 2015 and 2014, is summarized in the following tables: 2015 2014 Change in benefit obligation: Benefit obligation – beginning of year $13,384,294 $11,693,311 Service cost 177,332 163,420 Interest cost 549,919 582,779 Plan participants’ contributions – – Actuarial loss 43,998 1,298,018 Gross benefits paid (377,997) (353,234) Benefit obligation – end of year $13,777,546 $ 13,384,294 Weighted-average assumptions used to determine benefit obligation as of December 31 – discount rate 4.41% 4.05% Change in plan assets: Fair value of plan assets – beginning of year $ – $ – E mployer contributions 377,977 353,234 Gross benefits paid (377,997) (353,234) Fair value of plan assets – end of year $ – $ – Funded status: Reconciliation of funded status – end of year: Fair value of plan assets $ – $ – Benefit obligation – current 486,512 415,179 Benefit obligation – noncurrent 13,291,034 12,969,115 Funded status (13,777,546) (13,384,294) Amount recognized – end of year $(13,777,546) $ (13,384,294) Amounts recognized in the balance sheets consist of: Asset $ – $ – Liability – current (486,512) (415,179) Liability – noncurrent (13,291,034) (12,969,115) Net amount recognized $(13,777,546) $ (13,384,294) Amounts recognized in accumulated other comprehensive income consist of: Net actuarial loss $ 2,586,908 $ 2,742,925 Prior service credit (149,084) (174,574) Net amount recognized $ 2,437,824 $ 2,568,351 Expected cash flows: Expected employer contributions – 2016 $ 486,512 Expected benefit payments:* 2016 $ 486,512 2017 $ 515,391 2018 $ 540,539 2019 $ 560,776 2020 $ 585,513 2021–2025 $3,381,199 * Expected benefit payments to be made by the Board.

Federal Reserve System Audits 329 2015 2014 Components of net periodic benefit cost: Service cost $177,332 $ 163,420 Interest cost 549,919 582,779 Expected return on plan assets – – Amortization: Actuarial loss 200,016 55,654 Prior service credit (25,490) (25,490) Net periodic benefit cost $901,777 $ 776,363 Weighted-average assumptions used to determine net periodic benefit cost – discount rate 4.05% 4.97% Other changes in plan assets and benefit obligations recognized in other comprehensive income: Current year actuarial loss $ 43,998 $ 1,298,017 Amortization of prior service credit 25,490 25,490 Amortization of actuarial loss (200,016) (55,654) Total recognized in other comprehensive (income) loss $(130,528) $1,267,853 Total recognized in net periodic benefit cost and other comprehensive income $771,249 $2,044,216 Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2016 are shown below: Net actuarial loss $164,632 Prior service credit (25,490) Total $139,142 (8) Postemployment Benefits The Board provides certain postemployment benefits to eligible former or inactive employees and their dependents during the period subsequent to employment but prior to retirement. Postemployment costs were actuarially determined using a December 31 measurement date and discount rates of 2.70 percent and 2.47 percent as of December 31, 2015 and 2014, respectively. The net periodic postemployment benefit cost recognized by the Board as of December 31, 2015 and 2014, was $740,000 and $1,448,000, respectively.

330 102nd Annual Report | 2015 (9) Accumulated Other Comprehensive Income (Loss) A reconciliation of beginning and ending balances of accumulated other comprehensive income (loss) for the years ended December 31, 2015 and 2014, is as follows: Amount Related to Amount Related to Total Accumulated Defined Benefit Postretirement Other Benefits Other Comprehensive Retirement Plans Than Pensions Income (Loss) Balance – January 1, 2014 $ (5,950,453) $(1,300,499) $ (7,250,952) Change in accumulated other comprehensive income (loss): Net actuarial loss arising during the year (12,063,033) (1,298,017) (13,361,050) Other comprehensive income before reclassifications (12,063,033) (1,298,017) (13,361,050) Amortization of prior service (credit) costs(a)(b) 630,973 (25,490) 605,483 Amortization of net actuarial loss(a)(b) 426,196 55,654 481,850 Amounts reclassified from accumulated other comprehensive income 1,057,169 30,164 1,087,333 Change in accumulated other comprehensive loss (11,005,864) (1,267,853) (12,273,717) Balance – December 31, 2014 (16,956,317) (2,568,352) (19,524,669) Change in accumulated other comprehensive income (loss): Net actuarial loss arising during the year(a) (3,676,296) (43,998) (3,720,294) Other comprehensive income before reclassifications (3,676,296) (43,998) (3,720,294) Amortization of prior service (credit) costs(a)(b) 630,973 (25,490) 605,483 Amortization of net actuarial loss(a)(b) 1,846,235 200,016 2,046,251 Amounts reclassified from accumulated other comprehensive income 2,477,208 174,526 2,651,734 Change in accumulated other comprehensive income (loss) (1,199,088) 130,528 (1,068,560) Balance – December 31, 2015 $(18,155,405) $(2,437,824) $(20,593,229) ( a)These components of accumulated other comprehensive income are included in the computation of net periodic pension cost (see Notes 6 and 7 for additional details). ( b)These components of accumulated other comprehensive income are reflected in the “Retirement, insurance, and benefits” line on the Statements of Operations.

Federal Reserve System Audits 331 (10) Selected Transactions with the Reserve Banks The Board performs certain functions for the Reserve Banks in conjunction with its responsibilities for the System, and the Reserve Banks provide certain administrative functions for the Board. The Board assesses the Reserve Banks for its operations, to include expenses related to its currency responsibilities, as well as for the funding the Board is required to provide to the Bureau and the Office. Activity related to the Board and Reserve Banks is summarized in the following table: 2015 2014 For the years ended December 31: Assessments levied or to be levied on Reserve Banks for: Currency expenses $ 689,198,549 $ 707,402,059 Board operations 705,000,000 590,000,000 Transfers of funds to the Bureau 489,700,000 563,000,000 Total assessments levied or to be levied on Reserve Banks $1,883,898,549 $1,860,402,059 Funds returned from the Office and transferred to the Reserve Banks $ – $ 1,512,822 Board expenses charged to the Reserve Banks for data processing and office space $ 326,953 $ 364,165 Reserve Bank expenses charged to the Board: Data processing and communication $ 1,226,875 $ 1,250,884 Data center 858,985 $ 412,365 Office space 206,167 468,463 Contingency site 1,281,688 1,247,766 Total Reserve Bank expenses charged to the Board $ 3,573,715 $ 3,379,478 As of December 31: Accounts receivable due from the Reserve Banks $ 283,072 $ 495,018 Accounts payable due to the Reserve Banks $ 356,937 $ 415,314 The Board contracted for audit services on behalf of entities that are included in the combined financial statements of the Reserve Banks. The entities reimburse the Board for the cost of the audit services. The Board accrued liabilities of $39,000 in audit services and recorded net receivables of $39,000 December 31, 2014. The Board did not have accrued liabilities in audit services or recorded net receivables as of December 31, 2015. The OEB administers certain System benefit plans on behalf of the Board and the Reserve Banks, and costs associated with the OEB’s activities are assessed to the Board and Reserve Banks. The Board was assessed $2,615,000 and $2,503,000 for the years ended December 31, 2015 and 2014, respectively. Activity related to the Board and the OEB is summarized in the following table: 2015 2014 As of December 31: Accounts receivable due from the Office of Employee Benefits $1,068,126 $1,338,349 Accounts payable due to the Office of Employee Benefits $ 110,659 $ 79,528

332 102nd Annual Report | 2015 (11) Federal Financial Institutions Examination Council The Board is one of the five member agencies of the Federal Financial Institutions Examination Council (the Council), and currently performs certain administrative functions for the Council. The five agencies that are represented on the Council are the Board, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and the Bureau. The Board’s financial statements do not include financial data for the Council. Activity related to the Board and Council is summarized in the following table: 2015 2014 For the years ended December 31: Council expenses charged to the Board: Assessments for operating expenses $ 163,987 $ 154,633 Assessments for examiner education 1,228,101 1,047,803 Central Data Repository 1,049,087 1,197,920 Home Mortgage Disclosure Act/Community Reinvestment Act 874,584 882,464 Uniform Bank Performance Report 211,247 224,797 Total Council expenses charged to the Board $3,527,006 $3,507,617 Board expenses charged to the Council: Data processing related services $3,997,421 $ 4,611,282 Other administrative services 303,000 245,000 Total Board expenses charged to the Council $4,300,421 $4,856,282 As of December 31: Accounts receivable due from the Council $ 223,553 $ 221,749 Accounts payable due to the Council $ 297,539 $ 132,125 (12) The Bureau of Consumer Financial Protection Beginning July 2011, section 1017 of the Dodd-Frank Act requires the Board to fund the Bureau from the combined earnings of the System, in an amount determined by the Director of the Bureau to be reasonably necessary to carry out the authorities of the Bureau under federal consumer financial law, taking into account such other sums made available to the Bureau from the preceding year (or quarter of such year). The Dodd-Frank Act limits the amount to be transferred each fiscal year to a fixed percentage of the System’s total operating expenses. The Bureau, in turn, transfers funds to the Board to fund their share of OIG operations. These transactions resulted in net amounts to the Bureau of $12,900,000 and $11,000,000 during calendar years 2015 and 2014, respectively. (13) The Office of Financial Research Section 155(c) of the Dodd-Frank Act requires the Board to provide an amount sufficient to cover the expenses of the Office for the two-year period following the date of the enactment (July 21, 2010). The expenses of the FSOC are included in the expenses of the Office. Over the two-year period, the Board provided $91,515,944 to cover the Office’s expenses. In 2012, based on its review of actual expenditures and accruals through the end of the two-year period, the Office determined that $39,921,702 should be returned to the Board; the Board subsequently received and returned that amount to the Reserve Banks. At that time, the Office noted that an additional adjustment may be needed based upon the actual expenses incurred for work under the Dodd-Frank Act. In 2014, the Office performed its final review and determined that an additional $1,512,822 should be returned to the Board. That amount was returned to the Board and transferred to the Reserve Banks in September 2014 and no further financial activity is expected.

Federal Reserve System Audits 333 (14) Currency Costs The Bureau of Engraving and Printing (BEP) is the sole supplier for currency printing and also provides currency retirement and meaningful access services. The Board provides or contracts for other services associated with currency, such as shipping, education, and quality assurance. The currency costs incurred by the Board for the years ended December 31, 2015 and 2014, are reflected in the following table: 2015 2014 Expenses related to BEP services: Printing $ 637,346,480 $ 656,810,224 Retirement 3,922,414 3,500,408 Meaningful access program 2,679,698 808,017 Subtotal related to BEP services $643,948,592 $ 661,118,649 Other currency expenses: Shipping $ 23,357,229 $ 27,460,180 Research and development 4,988,654 5,096,781 Quality assurance services 14,575,554 11,690,796 Education services 2,328,520 2,035,653 Subtotal other currency expenses $ 45,249,957 $ 46,283,410 Total currency expenses $689,198,549 $ 707,402,059 (15) Commitments and Contingencies Commitments — The Board has entered into an agreement with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, through the Council, to fund a portion of the enhancements and maintenance fees for a central data repository project that requires maintenance through 2019 and one two-year option period. The estimated Board expense to support this effort is $5 million. Litigation and Contingent Liabilities — The Board is subject to contingent liabilities which arise from litigation cases and various business contracts. These contingent liabilities arise in the normal course of operations and their ultimate disposition is unknown. Based on information currently available to management, it is management’s opinion that the expected outcome of these matters, in the aggregate, will not have a material adverse effect on the financial statements. (16) Subsequent Events There were no subsequent events that require adjustments to or disclosures in the financial statements as of December 31, 2015. Subsequent events were evaluated through March 7, 2016, which is the date the financial statements were available to be issued.

334 102nd Annual Report | 2015 INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Governors of the Federal Reserve System: We have audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), auditing standards generally accepted in the United States of America, and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the Board of Governors of the Federal Reserve System (the “Board”), which comprise the balance sheet as of December 31, 2015, and the related statements of operations and cash flows for the year then ended, and the related notes to the financial statements. We have issued our report thereon dated March 7, 2016. As part of obtaining reasonable assurance about whether the Board’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, and contracts, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of the Board of Governors of the Federal Reserve System and is not intended to be and should not be used by anyone other than those specified parties. Washington, DC March 7, 2016

Federal Reserve System Audits 335 Federal Reserve Banks Combined Financial Statements The combined financial statements of the Federal Reserve Banks were audited by KPMG LLP, independent auditors, for the year ended December 31, 2015, and by Deloitte & Touche LLP, independent auditors, for the year ended December 31, 2014. INDEPENDENT AUDITORS’ REPORT To the Board of Governors of the Federal Reserve System and the Boards of Directors of the Federal Reserve Banks: We have audited the accompanying combined statement of condition of the Federal Reserve Banks (the “Reserve Banks”) as of December 31, 2015, and the related combined statements of income and comprehensive income and changes in capital for the year then ended. These combined financial statements are the responsibility of the Division of Reserve Bank Operations and Payment Systems’ management. Our responsibility is to express an opinion on these combined financial statements based on our audit. The accompanying combined financial statements of the Reserve Banks as of December 31, 2014 and for the year then ended were audited by other auditors whose report thereon dated March 11, 2015, expressed an unmodified opinion on those combined financial statements and contained an emphasis of matter paragraph that described the Reserve Banks’ basis of accounting discussed in Note 3 to the 2014 combined financial statements. We conducted our audit in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As described in Note 3 to the combined financial statements, the Division of Reserve Bank Operations and Payment Systems has prepared these combined financial statements in conformity with the accounting principles established by the Board of Governors of the Federal Reserve System (the “Board”), as set forth in the Financial Accounting Manual for Federal Reserve Banks, which is a basis of accounting other than U.S. generally accepted accounting principles. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Reserve Banks as of December 31, 2015, and the results of its operations for the year then, on the basis of accounting described in Note 3. Washington, DC March 8, 2016

336 102nd Annual Report | 2015 Federal Reserve Banks Abbreviations ABS Asset-backed securities A CH Automated clearinghouse A IG American International Group, Inc. A IGFP American International Group, Inc. Financial Products Corp. A SC Accounting Standards Codification A SU Accounting Standards Update B EP Benefit Equalization Retirement Plan B ureau Bureau of Consumer Financial Protection C DO Collateralized debt obligation C DS Credit default swaps C FE Collateralized financing entity C IP Committee on Investment Performance (related to System Retirement Plan) C MBS Commercial mortgage-backed securities F AM Financial Accounting Manual for Federal Reserve Banks FASB Financial Accounting Standards Board F AST Act Fixing America’s Surface Transportation Act F OMC Federal Open Market Committee F RBC Federal Reserve Bank of Cleveland F RBKC Federal Reserve Bank of Kansas City F RBNY Federal Reserve Bank of New York F RBSL Federal Reserve Bank of St. Louis G AAP Accounting principles generally accepted in the United States of America G SE Government-sponsored enterprise I MF International Monetary Fund J PMC JPMorgan Chase & Co. L LC Limited liability company M BS Mortgage-backed securities M L Maiden Lane LLC M L II Maiden Lane II LLC M L III Maiden Lane III LLC M TM Mark-to-market R MBS Residential mortgage-backed securities O EB Office of Employee Benefits of the Federal Reserve System S BA Small Business Administration S DR Special drawing rights S ERP Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks S OMA System Open Market Account S TRIPS Separate Trading of Registered Interest and Principal of Securities T ALF Term Asset-Backed Securities Loan Facility

Federal Reserve System Audits 337 TBA To be announced TDF Term Deposit Facility TRS Total return swap V IE Variable interest entity

338 102nd Annual Report | 2015 Combined Statements of Condition As of December 31, 2015 and December 31, 2014 (in millions) 2015 2014 ASSETS Gold certificates $ 11,037 $ 11,037 Special drawing rights certificates 5,200 5,200 Coin 1,890 1,873 Loans Note 4 115 145 System Open Market Account: Note 5 Treasury securities, net (of which $18,960 and $11,144 is lent as of December 31, 2015 and 2014, respectively) 2,580,676 2,596,241 Government-sponsored enterprise debt securities, net (of which $146 and $633 is lent as of December 31, 2015 and 2014, respectively) 33,748 39,990 Federal agency and government-sponsored enterprise mortgage-backed securities, net 1,800,449 1,789,083 Foreign currency denominated investments, net 19,567 20,900 Central bank liquidity swaps 997 1,528 Accrued interest receivable 25,418 25,644 Other assets 14 29 Investments held by consolidated variable interest entities (of which $1,778 and $1,808 is measured at fair value as of December 31, 2015 and 2014, respectively) Note 6 1,778 1,811 Bank premises and equipment, net Note 7 2,603 2,630 Items in process of collection 210 86 Deferred asset - remittances to the Treasury - 667 Other assets 1,063 910 Total assets $4,484,765 $4,497,774 LIABILITIES AND CAPITAL Federal Reserve notes outstanding, net $1,379,551 $1,298,725 System Open Market Account: Note 5 Securities sold under agreements to repurchase 712,401 509,837 Other liabilities 508 830 Liabilities of consolidated variable interest entities (of which $21 and $41 is measured at fair value as of December 31, 2015 and 2014, respectively) Note 6 57 127 Deposits: Depository institutions 1,977,166 2,377,996 Treasury, general account 333,447 223,452 Other deposits 36,532 25,560 Interest payable to depository institutions 252 124 Accrued benefit costs Notes 9 and 10 2,892 3,089 Deferred credit items 246 641 Accrued remittances to the Treasury 1,953 - Other liabilities 252 249 Total liabilities 4,445,257 4,440,630 Capital paid-in 29,508 28,572 Surplus (including accumulated other comprehensive loss of $3,802 and $4,168 at December 31, 2015 and 2014, respectively) 10,000 28,572 Total capital 39,508 57,144 Total liabilities and capital $4,484,765 $4,497,774 The accompanying notes are an integral part of these combined financial statements.

Federal Reserve System Audits 339 Combined Statements of Income and Comprehensive Income For the years ended December 31, 2015 and December 31, 2014 (in millions) 2015 2014 INTEREST INCOME Loans Note 4 $ - 2 System Open Market Account: Note 5 Treasury securities, net 63,317 63,011 Government-sponsored enterprise debt securities, net 1,330 1,579 Federal agency and government-sponsored enterprise mortgage-backed securities, net 48,931 51,264 Foreign currency denominated investments, net 31 78 Central bank liquidity swaps 1 1 Investments held by consolidated variable interest entities Note 6 4 77 Total interest income 113,614 116,012 INTEREST EXPENSE System Open Market Account: Note 5 Securities sold under agreements to repurchase 248 112 Other 2 2 Deposits: Depository institutions 6,846 6,705 Term Deposit Facility 89 156 Total interest expense 7,185 6,975 Net interest income 106,429 109,037 NON-INTEREST INCOME (LOSS) System Open Market Account: Note 5 Federal agency and government-sponsored enterprise mortgage-backed securities gains, net 43 81 Foreign currency translation losses, net (1,382) (2,907) Other 16 14 Investments held by consolidated variable interest entities gains, net Note 6 35 37 Income from services 429 433 Reimbursable services to government agencies 650 570 Other 63 59 Total non-interest loss (146) (1,713) O PERATING EXPENSES Salaries and benefits 2,847 2,721 Occupancy 326 314 Equipment 182 175 Net periodic pension expense Note 9 563 383 Other 577 602 Assessments: Board of Governors operating expenses and currency costs 1,394 1,301 Bureau of Consumer Financial Protection 490 563 Total operating expenses 6,379 6,059 Net income before providing for remittances to the Treasury 99,904 101,265 Earnings remittances to the Treasury: Note 13 Interest on Federal Reserve notes 91,143 96,902 Required by the Federal Reserve Act, as amended by the FAST Act Note 3o 25,956 - Total earnings remittances to the Treasury 117,099 96,902 Net (loss) income after providing for remittances to the Treasury (17,195) 4,363 Change in prior service costs related to benefit plans Note 10 86 97 Change in actuarial (losses) gains related to benefit plans Note 10 280 (1,709) Total other comprehensive income (loss) 366 (1,612) Comprehensive (loss) income $(16,829) $ 2,751 The accompanying notes are an integral part of these combined financial statements.

340 102nd Annual Report | 2015 Combined Statements of Changes in Capital For the years ended December 31, 2015 and December 31, 2014 (in millions, except share data) Surplus Capital Accumulated Total paid-in Net income other Total capital retained comprehensive surplus ( loss) Balance at December 31, 2013 (550,136,936 shares) $27,507 $30,063 $(2,556) $27,507 $55,014 Net change in capital stock issued (21,299,030 shares) 1,065 - - - 1,065 Comprehensive income: Net income - 4,363 - 4,363 4,363 Other comprehensive loss - - (1,612) (1,612) (1,612) Dividends on capital stock - (1,686) - (1,686) (1,686) Net change in capital 1,065 2,677 (1,612) 1,065 2,130 Balance at December 31, 2014 (571,435,966 shares) $28,572 $32,740 $(4,168) $28,572 $57,144 Net change in capital stock issued (18,730,089 shares) 936 - - - 936 Comprehensive income: Net income (loss) - (17,195) - (17,195) (17,195) Other comprehensive income - - 366 366 366 Dividends on capital stock - (1,743) - (1,743) (1,743) Net change in capital 936 (18,938) 366 (18,572) (17,636) Balance at December 31, 2015 (590,166,055 shares) $29,508 $13,802 $(3,802) $10,000 $39,508 The accompanying notes are an integral part of these combined financial statements.

Federal Reserve System Audits 341 (1) Structure The Federal Reserve Banks (Reserve Banks) are part of the Federal Reserve System (System) created by Congress under the Federal Reserve Act of 1913 (Federal Reserve Act), which established the central bank of the United States. The Reserve Banks are chartered by the federal government and possess a unique set of governmental, corporate, and central bank characteristics. In accordance with the Federal Reserve Act, supervision and control of each Reserve Bank is exercised by a board of directors. The Federal Reserve Act specifies the composition of the board of directors for each of the Reserve Banks. Each board is composed of nine members serving three-year terms: three directors, including those designated as chairman and deputy chairman, are appointed by the Board of Governors of the Federal Reserve System (Board of Governors) to represent the public, and six directors are elected by member banks. Banks that are members of the System include all nationally-chartered banks and any statechartered banks that apply and are approved for membership. Member banks are divided into three classes according to size. Member banks in each class elect one director representing member banks and one representing the public. In any election of directors, each member bank receives one vote, regardless of the number of shares of Reserve Bank stock it holds. In addition to the 12 Reserve Banks, the System also consists, in part, of the Board of Governors and the Federal Open Market Committee (FOMC). The Board of Governors, an independent federal agency, is charged by the Federal Reserve Act with a number of specific duties, including general supervision over the Reserve Banks. The FOMC is composed of members of the Board of Governors, the president of the Federal Reserve Bank of New York (FRBNY), and, on a rotating basis, four other Reserve Bank presidents. (2) Operations and Services The Reserve Banks perform a variety of services and operations. These functions include participating in formulating and conducting monetary policy; participating in the payment system, including transfers of funds, automated clearinghouse (ACH) operations, and check collection; distributing coin and currency; performing fiscal agency functions for the U.S. Department of the Treasury (Treasury), certain federal agencies, and other entities; serving as the federal government’s bank; providing short-term loans to depository institutions; providing loans to participants in programs or facilities with broad-based eligibility in unusual and exigent circumstances; serving consumers and communities by providing educational materials and information regarding financial consumer protection rights and laws and information on community development programs and activities; and supervising bank holding companies, state member banks, savings and loan holding companies, U.S. offices of foreign banking organizations, and designated financial market utilities pursuant to authority delegated by the Board of Governors. Certain services are provided to foreign and international monetary authorities, primarily by the FRBNY. The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations, oversees these operations, and issues authorizations and directives to the FRBNY to execute transactions. The FOMC authorizes and directs the FRBNY to conduct operations in domestic markets, including the direct purchase and sale of Treasury securities, government-sponsored enterprise (GSE) debt securities, and federal agency and GSE mortgage-backed securities

342 102nd Annual Report | 2015 (MBS); the purchase of these securities under agreements to resell; and the sale of these securities under agreements to repurchase. The FRBNY holds the resulting securities and agreements in a portfolio known as the System Open Market Account (SOMA). The FRBNY is authorized and directed to lend the Treasury securities and GSE debt securities that are held in the SOMA. To be prepared to counter disorderly conditions in foreign exchange markets or to meet other needs specified by the FOMC to carry out the System’s central bank responsibilities, the FOMC has authorized and directed the FRBNY to execute spot and forward foreign exchange transactions in 14 foreign currencies, to hold balances in those currencies, and to invest such foreign currency holdings, while maintaining adequate liquidity. The FRBNY holds these securities and obligations in the SOMA. The FOMC has also authorized the FRBNY to maintain reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico in the maximum amounts of $2 billion and $3 billion, respectively, and to warehouse foreign currencies for the Treasury and the Exchange Stabilization Fund in the maximum amount of $5 billion. Because of the global character of bank funding markets, the System has at times coordinated with other central banks to provide liquidity. The FOMC authorized and directed the FRBNY to establish U.S. dollar liquidity and reciprocal foreign currency liquidity swap lines with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. The FRBNY holds amounts outstanding under these swap lines in the SOMA. These swap lines, which were originally established as temporary arrangements, were converted to standing arrangements on October 31, 2013, and will remain in place until further notice. Although the Reserve Banks are separate legal entities, they collaborate on the delivery of certain services to achieve greater efficiency and effectiveness. This collaboration takes the form of centralized operations and product or function offices that have responsibility for the delivery of certain services on behalf of the Reserve Banks. Various operational and management models are used and are supported by service agreements between the Reserve Banks. In some cases, costs incurred by a Reserve Bank for services provided to other Reserve Banks are not shared; in other cases, the Reserve Banks are reimbursed for costs incurred in providing services to other Reserve Banks. (3) Significant Accounting Policies Accounting principles for entities with the unique powers and responsibilities of the nation’s central bank have not been formulated by accounting standard-setting bodies. The Board of Governors has developed specialized accounting principles and practices that it considers to be appropriate for the nature and function of a central bank. These accounting principles and practices are documented in the Financial Accounting Manual for Federal Reserve Banks (FAM), which is issued by the Board of Governors. The Reserve Banks are required to adopt and apply accounting policies and practices that are consistent with the FAM. The combined financial statements and associated disclosures have been prepared in accordance with the FAM. Limited differences exist between the accounting principles and practices in the FAM and accounting principles generally accepted in the United States of America (GAAP), due to the unique nature of the Reserve Banks’ powers and responsibilities as part of the nation’s central bank and given the System’s unique

Federal Reserve System Audits 343 responsibility to conduct monetary policy. The primary differences are the presentation of all SOMA securities holdings at amortized cost, adjusted for credit impairment, if any, the recording of all SOMA securities on a settlement-date basis, and the use of straight-line amortization for Treasury securities, GSE debt securities, and foreign currency denominated investments. Amortized cost, rather than the fair value presentation, more appropriately reflects the financial position associated with the Reserve Banks’ securities holdings given the System’s unique responsibility to conduct monetary policy. Although the application of fair value measurements to the securities holdings may result in values substantially greater or less than their carrying values, these unrealized changes in value have no direct effect on the quantity of reserves available to the banking system or on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and responsibilities. Both the domestic and foreign components of the SOMA portfolio may involve transactions that result in gains or losses when holdings are sold before maturity. Decisions regarding securities and foreign currency transactions, including their purchase and sale, are motivated by monetary policy objectives rather than profit. Accordingly, fair values, earnings, and gains or losses resulting from the sale of such securities and currencies are incidental to open market operations and do not motivate decisions related to policy or open market activities. Accounting for these securities on a settlement-date basis, rather than the tradedate basis required by GAAP, better reflects the timing of the transaction’s effect on the quantity of reserves in the banking system. The cost bases of Treasury securities, GSE debt securities, and foreign government debt instruments are adjusted for amortization of premiums or accretion of discounts on a straight-line basis, rather than using the interest method required by GAAP. In addition, the Reserve Banks do not present a Combined Statement of Cash Flows as required by GAAP because the liquidity and cash position of the Reserve Banks are not a primary concern given the Reserve Banks’ unique powers and responsibilities as a central bank. Other information regarding the Reserve Banks’ activities is provided in, or may be derived from, the Combined Statements of Condition, Income and Comprehensive Income, and Changes in Capital, and the accompanying notes to the combined financial statements. Other than those described above, there are no significant differences between the policies outlined in the FAM and GAAP. Preparing the combined financial statements in conformity with the FAM requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the combined financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts relating to the prior year have been reclassified in the Combined Statements of Income and Comprehensive Income to conform to current year presentation. An amount, $383 million, previously reported for the year ended December 31, 2014 as a component of “Operating Expense: Salaries and benefits” has been reclassified into a new line titled “Operating Expense: Net periodic pension expense.” Significant accounts and accounting policies are explained below.

344 102nd Annual Report | 2015 a. Consolidation The combined financial statements include the accounts and results of operations of the Reserve Banks as well as several variable interest entities (VIEs), which include Maiden Lane Limited Liability Company (LLC) (ML), Maiden Lane II LLC (ML II), Maiden Lane III LLC (ML III), and Term Asset-Backed Securities Loan Facility (TALF) LLC. The consolidation of the VIEs was assessed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810 (ASC 810), Consolidation, which requires a VIE to be consolidated by its controlling financial interest holder. Intercompany balances and transactions have been eliminated in consolidation. See Note 6 for additional information on the VIEs. The combined financial statements of the Reserve Banks also include accounts and results of operations of Maiden and Nassau LLC, a Delaware limited liability company (LLC) wholly-owned by the FRBNY, which was formed to own and operate the FRBNY-owned 33 Maiden Lane building. A Reserve Bank consolidates a VIE if it has a controlling financial interest, which is defined as the power to direct the significant economic activities of the entity and the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the VIE. To determine whether it is the controlling financial interest holder of a VIE, the Reserve Bank evaluates the VIE’s design, capital structure, and relationships with the variable interest holders. The Reserve Bank reconsiders whether it has a controlling financial interest in a VIE, as required by ASC 810, at each reporting date or if there is an event that requires consideration. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the Bureau of Consumer Financial Protection (Bureau) as an independent bureau within the System that has supervisory authority over some institutions previously supervised by the Reserve Banks in connection with those institutions’ compliance with consumer protection statutes. Section 1017 of the Dodd-Frank Act provides that the financial statements of the Bureau are not to be consolidated with those of the Board of Governors or the System. The Board of Governors funds the Bureau through assessments on the Reserve Banks as required by the Dodd-Frank Act. The Reserve Banks reviewed the law and evaluated the design of and their relationship to the Bureau and determined that it should not be consolidated in the Banks’ combined financial statements. b. Gold and Special Drawing Rights Certificates The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks. Upon authorization, the Reserve Banks acquire gold certificates by crediting equivalent amounts in dollars to the account established for the Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold owned by the Treasury. The Treasury may reacquire the gold certificates at any time, and the Reserve Banks must deliver them to the Treasury. At such time, the Treasury’s account is charged, and the Reserve Banks’ gold certificate accounts are reduced. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 per fine troy ounce. Gold certificates are recorded by the Banks at original cost. The Board of Governors allocates the gold certificates among the Reserve Banks once a year based on each Reserve Bank’s average Federal Reserve notes outstanding during the preceding 12 months.

Federal Reserve System Audits 345 Special drawing rights (SDR) are issued by the International Monetary Fund (IMF) to its members in proportion to each member’s quota in the IMF at the time of issuance. SDRs serve as a supplement to international monetary reserves and may be transferred from one national monetary authority to another. Under the law providing for U.S. participation in the SDR system, the Secretary of the Treasury is authorized to issue SDR certificates to the Reserve Banks. When SDR certificates are issued to the Reserve Banks, equivalent amounts in U.S. dollars are credited to the account established for the Treasury and the Reserve Banks’ SDR certificate accounts are increased. The Reserve Banks are required to purchase SDR certificates, at the direction of the Treasury, for the purpose of financing SDR acquisitions or for financing exchange-stabilization operations. At the time SDR certificate transactions occur, the Board of Governors allocates the SDR certificates among the Reserve Banks based upon each Reserve Bank’s Federal Reserve notes outstanding at the end of the preceding calendar year. SDR certificates are recorded by the Banks at original cost. c. Coin The amount reported as coin in the Combined Statements of Condition represents the face value of all United States coin held by the Reserve Banks. The Reserve Banks buy coin at face value from the U.S. Mint in order to fill depository institution orders. d. Loans Loans to depository institutions are reported at their outstanding principal balances and interest income is recognized on an accrual basis. The interest income on TALF loans was recognized based on the contracted rate and is reported as a component of “Interest Income: Loans” in the Combined Statements of Income and Comprehensive Income. Loans are impaired when current information and events indicate that it is probable that the Reserve Bank will not receive the principal and interest that are due in accordance with the contractual terms of the loan agreement. Impaired loans are evaluated to determine whether an allowance for loan loss is required. The Reserve Banks have developed procedures for assessing the adequacy of any allowance for loan losses using all available information to identify incurred losses. This assessment includes monitoring information obtained from banking supervisors, borrowers, and other sources to assess the credit condition of the borrowers and, as appropriate, evaluating collateral values. Generally, the Reserve Banks would discontinue recognizing interest income on impaired loans until the borrower’s repayment performance demonstrates principal and interest would be received in accordance with the terms of the loan agreement. If the Reserve Banks discontinue recording interest on an impaired loan, cash payments are first applied to principal until the loan balance is reduced to zero; subsequent payments are applied as recoveries of amounts previously deemed uncollectible, if any, and then as interest income. e. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase, and Securities Lending The FRBNY may engage in purchases of securities with primary dealers under agreements to resell (repurchase transactions). These repurchase transactions are typically settled through a tri-party arrangement. In the United States, there are two commercial custodial banks that provide these services. In a tri-party arrangement, a commercial custodial bank manages the collateral clearing, settlement,

346 102nd Annual Report | 2015 pricing, and pledging, and provides cash and securities custodial services for and on behalf of the FRBNY and counterparty. The collateral pledged must exceed the principal amount of the transaction by a margin determined by the FRBNY for each class and maturity of acceptable collateral. Collateral designated by the FRBNY as acceptable under repurchase transactions primarily includes Treasury securities (including Treasury Inflation-Protected Securities, Separate Trading of Registered Interest and Principal of Securities (STRIPS) Treasury securities, and Treasury Floating Rate Notes); direct obligations of several federal and GSErelated agencies, including Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal Home Loan Banks; and pass-through federal agency and GSE MBS. The repurchase transactions are accounted for as financing transactions with the associated interest income recognized over the life of the transaction. These transactions are reported at their contractual amounts as “System Open Market Account: Securities purchased under agreements to resell” and the related accrued interest receivable is reported as a component of “System Open Market Account: Accrued interest receivable” in the Combined Statements of Condition. The FRBNY may engage in sales of securities under agreements to repurchase with primary dealers and with a set of expanded counterparties that includes banks, savings associations, GSEs, and domestic money market funds (Primary dealer and expanded counterparties reverse repurchase agreements). These reverse repurchase transactions are designed to have a margin of zero and are settled through a tri-party arrangement, similar to repurchase transactions. Reverse repurchase transactions may also be executed with foreign official and international account holders as part of a service offering. Reverse repurchase agreements are collateralized by a pledge of an amount of Treasury securities, GSE debt securities, or federal agency and GSE MBS that are held in the SOMA. Reverse repurchase transactions are accounted for as financing transactions, and the associated interest expense is recognized over the life of the transaction. These transactions are reported at their contractual amounts as “System Open Market Account: Securities sold under agreements to repurchase” and the related accrued interest payable is reported as a component of “System Open Market Account: Other liabilities” in the Combined Statements of Condition. Treasury securities and GSE debt securities held in the SOMA may be lent to primary dealers, typically overnight, to facilitate the effective functioning of the domestic securities markets. The amortized cost basis of securities lent continues to be reported as “System Open Market Account: Treasury securities, net” and “System Open Market Account: Government-sponsored enterprise debt securities, net,” as appropriate, in the Combined Statements of Condition. Securities lending transactions are fully collateralized by Treasury securities based on the fair values of the securities lent increased by a margin determined by the FRBNY. The FRBNY charges the primary dealer a fee for borrowing securities, and these fees are reported as a component of “Non-interest income (loss): System Open Market Account: Other” in the Combined Statements of Income and Comprehensive Income. Activity related to securities purchased under agreements to resell, securities sold under agreements to repurchase, and securities lending is allocated to each of the Reserve Banks on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in the second quarter of each year.

Federal Reserve System Audits 347 f. Treasury Securities, Government-Sponsored Enterprise Debt Securities, Federal Agency and Government-Sponsored Enterprise Mortgage-Backed Securities, and Foreign Currency Denominated Investments Interest income on Treasury securities, GSE debt securities, and foreign currency denominated investments included in the SOMA is accrued using the straight-line method. Interest income on federal agency and GSE MBS is accrued using the interest method and includes amortization of premiums, accretion of discounts, and gains or losses associated with principal paydowns. Premiums and discounts related to federal agency and GSE MBS are amortized or accreted over the term of the security to stated maturity, and the amortization of premiums and accretion of discounts are accelerated when principal payments are received. Gains and losses resulting from sales of securities are determined by specific issue based on average cost. Treasury securities, GSE debt securities, and federal agency and GSE MBS are reported net of premiums and discounts in the Combined Statements of Condition and interest income on those securities is reported net of the amortization of premiums and accretion of discounts in the Combined Statements of Income and Comprehensive Income. In addition to outright purchases of federal agency and GSE MBS that are held in the SOMA, the FRBNY enters into dollar roll transactions (dollar rolls), which primarily involve an initial transaction to purchase or sell “to be announced” (TBA) MBS for delivery in the current month combined with a simultaneous agreement to sell or purchase TBA MBS on a specified future date. During the years ended December 31, 2015 and 2014, the FRBNY executed dollar rolls to facilitate settlement of outstanding purchases of federal agency and GSE MBS. The FRBNY accounts for dollar rolls as individual purchases and sales, on a settlement-date basis. Accounting for these transactions as purchases and sales, rather than as financing transactions, is appropriate because the purchase or sale component of the MBS TBA dollar roll is paired off or assigned prior to settlement and, as a result, there is no transfer and return of securities. The FRBNY also conducts small-value exercises from time to time for the purpose of testing operational readiness. Small-value exercises may include sales of federal agency and GSE MBS. Net gains (losses) resulting from MBS transactions are reported as a component of “Non-interest income (loss): System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Combined Statements of Income and Comprehensive Income. Foreign currency denominated investments, which can include foreign currency deposits, securities purchased under agreements to resell, and government debt instruments, are revalued daily at current foreign currency market exchange rates in order to report these assets in U.S. dollars. Foreign currency translation gains and losses that result from the daily revaluation of foreign currency denominated investments are reported as “Non-interest income (loss): System Open Market Account: Foreign currency translation losses, net” in the Combined Statements of Income and Comprehensive Income. Because the FRBNY enters into commitments to buy Treasury securities, federal agency and GSE MBS, and foreign government debt instruments and records the related securities on a settlement-date basis in accordance with the FAM, the related outstanding commitments are not reflected in the Combined Statements of Condition.

348 102nd Annual Report | 2015 Activity related to Treasury securities, GSE debt securities, and federal agency and GSE MBS, including the premiums, discounts, and realized gains and losses, is allocated to each Reserve Bank on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in the second quarter of each year. Activity related to foreign currency denominated investments, including the premiums, discounts, and realized and unrealized gains and losses, is allocated in the first quarter of each year to each Reserve Bank based on the ratio of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding December 31. The FRBNY is authorized to hold foreign currency working balances and execute foreign exchange contracts to facilitate international payments and currency transactions it makes on behalf of foreign central bank and U.S. official institution customers. These foreign currency working balances and contracts are not related to FRBNY’s monetary policy operations. Foreign currency working balances are reported as a component of “Other assets” in the Combined Statements of Condition and the related foreign currency translation gains and losses that result from the daily revaluation of the foreign currency working balances and contracts are reported as a component of “Non-interest income (loss): Other” in the Combined Statements of Income and Comprehensive Income. g. Central Bank Liquidity Swaps Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, can be structured as either U.S. dollar or foreign currency liquidity swap arrangements. Central bank liquidity swaps activity, including the related income and expense, is allocated in the first quarter of each year to each Reserve Bank based on the ratio of each Reserve Bank’s capital and surplus to aggregate capital and surplus at the preceding December 31. The foreign currency amounts associated with these central bank liquidity swap arrangements are revalued daily at current foreign currency market exchange rates. U.S. dollar liquidity swaps At the initiation of each U.S. dollar liquidity swap transaction, the foreign central bank transfers a specified amount of its currency to a restricted account for the FRBNY in exchange for U.S. dollars at the prevailing market exchange rate. Concurrent with this transaction, the FRBNY and the foreign central bank agree to a second transaction that obligates the foreign central bank to return the U.S. dollars and the FRBNY to return the foreign currency on a specified future date at the same exchange rate as the initial transaction. The foreign currency amounts that the FRBNY acquires are reported as “System Open Market Account: Central bank liquidity swaps” in the Combined Statements of Condition. Because the swap transaction will be unwound at the same U.S. dollar amount and exchange rate that were used in the initial transaction, the recorded value of the foreign currency amounts is not affected by changes in the market exchange rate. The foreign central bank compensates the FRBNY based on the amount outstanding and the rate under the swap agreement. The FRBNY recognizes compensation during the term of the swap transaction, which is reported as “Interest income: System Open Market Account: Central bank liquidity swaps” in the Combined Statements of Income and Comprehensive Income.

Federal Reserve System Audits 349 Foreign currency liquidity swaps Foreign currency liquidity swap transactions involve the transfer by the FRBNY, at the prevailing market exchange rate, of a specified amount of U.S. dollars to an account for the foreign central bank in exchange for its currency. The foreign currency amounts that the FRBNY receives are recorded as a liability. h. Consolidated VIEs – Investments and Liabilities The investments held by consolidated VIEs consist primarily of short-term investments with maturities of greater than three months and less than one year, cash and cash equivalents, and swap contracts. Swap contracts consist of credit default swaps (CDS). Investments are reported as “Investments held by consolidated variable interest entities” in the Combined Statements of Condition. Changes in fair value of the investments are recorded in “Non-interest income (loss): Investments held by consolidated variable interest entities gains, net” in the Combined Statements of Income and Comprehensive Income. Investments in debt securities are accounted for in accordance with FASB ASC Topic 320, Investments – Debt and Equity Securities, and the VIEs elected the fair value option for all eligible assets and liabilities in accordance with FASB ASC Topic 825 (ASC 825), Financial Instruments. Other financial instruments, including swap contracts, are recorded at fair value in accordance with FASB ASC Topic 815 (ASC 815), Derivatives and Hedging. The liabilities of consolidated VIEs consist primarily of swap contracts, cash collateral on swap contracts, and accruals for operating expenses. Swap contracts are recorded at fair value in accordance with ASC 815. Liabilities are reported as “Liabilities of consolidated variable interest entities” in the Combined Statements of Condition. Changes in fair value of the liabilities are recorded in “Non-interest income (loss): Investments held by consolidated variable interest entities gains, net” in the Combined Statements of Income and Comprehensive Income. i. Bank Premises, Equipment, and Software Reserve Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, which range from 2 to 50 years. Major alterations, renovations, and improvements are capitalized at cost as additions to the asset accounts and are depreciated over the remaining useful life of the asset or, if appropriate, over the unique useful life of the alteration, renovation, or improvement. Maintenance, repairs, and minor replacements are charged to operating expense in the year incurred. Reserve Banks may transfer assets to other Reserve Banks or may lease property of other Reserve Banks. Costs incurred to acquire software are capitalized based on the purchase price. Costs incurred during the application development stage to develop internal-use software are capitalized based on the cost of direct services and materials associated with designing, coding, installing, and testing the software. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the software applications, which generally range from two to five years. Maintenance costs and minor replacements related to software are charged to operating expense in the year incurred. Leased assets that meet the criteria of ASC 840, Leases are capitalized and amortized over the shorter of the useful life of the asset or the term of the lease.

350 102nd Annual Report | 2015 Capitalized assets, including software, buildings, leasehold improvements, furniture, and equipment, are impaired and an adjustment is recorded when events or changes in circumstances indicate that the carrying amount of assets or asset groups is not recoverable and significantly exceeds the assets’ fair value. j. Federal Reserve Notes Federal Reserve notes are the circulating currency of the United States. These notes, which are identified as issued to a specific Reserve Bank, must be fully collateralized. All of the Reserve Banks’ assets are eligible to be pledged as collateral. The collateral value is equal to the book value of the collateral tendered with the exception of securities, for which the collateral value is equal to the par value of the securities tendered. The par value of securities sold under agreements to repurchase is deducted from the eligible collateral value. The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize outstanding Federal Reserve notes. To satisfy the obligation to provide sufficient collateral for outstanding Federal Reserve notes, the Reserve Banks have entered into an agreement that provides for certain assets of the Reserve Banks to be jointly pledged as collateral for the Federal Reserve notes issued to all Reserve Banks. In the event that this collateral is insufficient, the Federal Reserve Act provides that Federal Reserve notes become a first and paramount lien on all the assets of the Reserve Banks. Finally, Federal Reserve notes are obligations of the United States government. “Federal Reserve notes outstanding, net” in the Combined Statements of Condition represents the Reserve Banks’ Federal Reserve notes outstanding, reduced by the Reserve Banks’ currency holdings of $170 billion and $171 billion at December 31, 2015 and 2014, respectively. At December 31, 2015 and 2014, all Federal Reserve notes outstanding, reduced by the Reserve Bank’s currency holdings, were fully collateralized. At December 31, 2015, all gold certificates, all special drawing rights certificates, and $1,363 billion of domestic securities held in the SOMA were pledged as collateral. At December 31, 2015, no investments denominated in foreign currencies were pledged as collateral. k. Deposits Depository Institutions Depository institutions’ deposits represent the reserve and service-related balances in the accounts that depository institutions hold at the Reserve Banks. Required reserve balances are those that a depository institution must hold to satisfy its reserve requirement. Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Excess reserves are those held by the depository institutions in excess of their required reserve balances. The interest rates paid on required reserve balances and excess balances are determined by the Board of Governors, based on an FOMCestablished target range for the federal funds rate. Interest expense on depository institutions’ deposits is accrued daily at the appropriate rate. Interest payable is reported as a component of “Interest payable to depository institutions” in the Combined Statements of Condition. The Term Deposit Facility (TDF) consists of deposits with specific maturities held by eligible institutions at the Reserve Banks. The Reserve Banks pay interest on

Federal Reserve System Audits 351 these deposits at interest rates determined by auction. Interest expense on depository institutions’ deposits is accrued daily at the appropriate rate. Interest payable is reported as a component of “Interest payable to depository institutions” in the Combined Statements of Condition. There were no deposits held by the Reserve Bank under the TDF at December 31, 2015 and 2014. Treasury The Treasury general account is the primary operational account of the Treasury and is held at the FRBNY. Other Other deposits include foreign central bank and foreign government deposits held at the FRBNY. Other deposits also include cash collateral, deposits of designated financial market utilities, and GSE deposits held by the Reserve Banks. l. Items in Process of Collection and Deferred Credit Items Items in process of collection primarily represents amounts attributable to checks that have been deposited for collection and that, as of the balance sheet date, have not yet been presented to the paying bank. Deferred credit items represents the counterpart liability to items in process of collection. The amounts in this account arise from deferring credit for deposited items until the amounts are collected. m. Capital Paid-in The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount equal to 6 percent of the capital and surplus of the member bank. These shares are nonvoting, with a par value of $100, and may not be transferred or hypothecated. As a member bank’s capital and surplus changes, its holdings of Reserve Bank stock must be adjusted. Currently, only one-half of the subscription is paid in, and the remainder is subject to call. A member bank is liable for Reserve Bank liabilities up to twice the par value of stock subscribed by it. By law, each Reserve Bank is required to pay each member bank an annual dividend of 6 percent on the paid-in capital stock. This cumulative dividend is paid semiannually. The Fixing America’s Surface Transportation Act (FAST Act), which was enacted on December 4, 2015, amended section 7 of the Federal Reserve Act related to Reserve Bank surplus and the payment of dividends to member banks. The FAST Act changed the dividend rate for member banks with more than $10 billion of consolidated assets, effective January 1, 2016, to the smaller of 6 percent or the rate equal to the high yield of the 10-year Treasury note auctioned at the last auction held prior to the payment of the dividend. The FAST Act did not change the 6 percent dividend rate for member banks with $10 billion or less of total consolidated assets. The provisions of the FAST Act related to dividend payments did not affect the amounts reported by the Bank for the year ended December 31, 2015, but are expected to reduce the amount of dividend payments made to member banks in future years. n. Surplus Before the enactment of the FAST Act, the Board of Governors required the Reserve Banks to maintain a surplus equal to the amount of capital paid-in. On a daily basis, surplus was adjusted to equate the balance to capital paid-in. Effective December 4, 2015, the FAST Act limits aggregate Reserve Bank surplus to $10 bil-

352 102nd Annual Report | 2015 lion. Reserve Bank surplus is allocated among Reserve Banks based on the ratio of each Bank’s capital paid-in to total Reserve Bank capital paid-in as of December 31 of each year. Accumulated other comprehensive income is reported as a component of “Surplus” in the Combined Statements of Condition and the Combined Statements of Changes in Capital. Additional information regarding the classifications of accumulated other comprehensive income is provided in Notes 9, 10, and 11. o. Earnings Remittances to the Treasury Before the enactment of the FAST Act, the Board of Governors required the Reserve Banks to transfer excess earnings to the Treasury as interest on Federal Reserve notes after providing for the costs of operations, payment of dividends, and reservation of an amount necessary to equate surplus with capital paid-in. The Federal Reserve Act, as amended by the FAST Act effective December 4, 2015, now requires that any amounts of the surplus funds of the Reserve Banks that exceed, or would exceed, the aggregate limitation of $10 billion shall be transferred to the Board of Governors for transfer to the Treasury. The Reserve Banks remit excess earnings to the Treasury after providing for the cost of operations, payment of dividends, and reservation of an amount necessary to maintain surplus at the Bank’s allocated portion of the $10 billion aggregate surplus limitation. Remittances to the Treasury are made on a weekly basis. The amount of the remittances to the Treasury that were required under the Board of Governor’s policy is reported as “Earnings remittances to the Treasury: Interest on Federal Reserve notes” in the Combined Statements of Income and Comprehensive Income. The amount of remittances to the Treasury that are required by the FAST Act is reported as “Earnings remittances to the Treasury: Required by the Federal Reserve Act, as amended by the FAST Act” in the Combined Statements of Income and Comprehensive Income. See Note 13 for additional information on earnings remittances to the Treasury. Under the previous Board of Governor’s policy, if earnings during the year were not sufficient to provide for the costs of operations, payment of dividends, and equating surplus and capital paid-in, remittances to the Treasury were suspended, and under the FAST Act, if earnings during the year are not sufficient to provide for the costs of operations, payment of dividends, and maintaining surplus at an amount equal to the Bank’s allocated portion of the $10 billion aggregate surplus limitation, remittances to the Treasury are suspended. A deferred asset is recorded that represents the amount of net earnings a Reserve Bank will need to realize before remittances to the Treasury resume. As of December 31, 2014, such adjustments resulted in recording a deferred asset in the amount of $667 million, which is reported as “Deferred asset – remittances to the Treasury” in the Combined Statements of Condition. This deferred asset is periodically reviewed for impairment, and as of December 31, 2014, no impairment existed. p. Income and Costs Related to Treasury Services When directed by the Secretary of the Treasury, the Reserve Banks are required by the Federal Reserve Act to serve as fiscal agent and depositary of the United States Government. By statute, the Treasury has appropriations to pay for these services. During the years ended December 31, 2015 and 2014, the Reserve Banks were reimbursed for all services provided to the Treasury as its fiscal agent.

Federal Reserve System Audits 353 q. Assessments The Board of Governors assesses the Reserve Banks to fund its operations and the operations of the Bureau. These assessments are allocated to each Reserve Bank based on each Reserve Bank’s capital and surplus balances. The Board of Governors also assesses each Reserve Bank for expenses related to producing, issuing, and retiring Federal Reserve notes based on each Reserve Bank’s share of the number of notes comprising the System’s net liability for Federal Reserve notes on December 31 of the prior year. The Dodd-Frank Act requires that, after the transfer of its responsibilities to the Bureau on July 21, 2011, the Board of Governors fund the Bureau in an amount not to exceed a fixed percentage of the total operating expenses of the System as reported in the Board of Governors’ 2009 annual report, which totaled $4.98 billion. After 2013, the amount will be adjusted annually in accordance with the provisions of the Dodd-Frank Act. The percentage of total operating expenses of the System for the years ended December 31, 2015 and 2014 was 12.42 percent ($618.7 million) and 12.22 percent ($608.4 million), respectively. The Reserve Banks’ assessment for Bureau funding is reported as “Assessments: Bureau of Consumer Financial Protection” in the Combined Statements of Income and Comprehensive Income. r. Fair Value Investments and liabilities of the one remaining consolidated VIE and assets of the Retirement Plan for Employees of the System are measured at fair value in accordance with FASB ASC Topic 820 (ASC 820), Fair Value Measurement. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level fair value hierarchy that distinguishes between assumptions developed using market data obtained from independent sources (observable inputs) and the Reserve Banks’ assumptions developed using the best information available in the circumstances (unobservable inputs). The three levels established by ASC 820 are described as follows: • Level 1 – Valuation is based on quoted prices for identical instruments traded in active markets. • Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. • Level 3 – Valuation is based on model-based techniques that use significant inputs and assumptions not observable in the market. These unobservable inputs and assumptions reflect the Reserve Banks’ estimates of inputs and assumptions that market participants would use in pricing the assets and liabilities. Valuation techniques include the use of option pricing models, discounted cash flow models, and similar techniques. The inputs or methodology used for valuing assets and liabilities are not necessarily an indication of the risk associated with those assets and liabilities. s. Taxes The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property. The Reserve Banks’ real property taxes were $51 million and $48 million for the years ended December 31, 2015 and 2014, respectively, and are

354 102nd Annual Report | 2015 reported as a component of “Operating expenses: Occupancy” in the Combined Statements of Income and Comprehensive Income. t. Restructuring Charges The Reserve Banks recognize restructuring charges for exit or disposal costs incurred as part of the closure of business activities in a particular location, the relocation of business activities from one location to another, or a fundamental reorganization that affects the nature of operations. Restructuring charges may include costs associated with employee separations, contract terminations, and asset impairments. Expenses are recognized in the period in which the Reserve Banks commit to a formalized restructuring plan or executes the specific actions contemplated in the plan and all criteria for financial statement recognition have been met. In 2014, the Treasury announced plans to consolidate the provision of substantially all fiscal agent services for the U.S. Treasury at the Federal Reserve Bank of Cleveland (FRBC), the Federal Reserve Bank of Kansas City (FRBKC), the FRBNY, and the Federal Reserve Bank of St. Louis (FRBSL). The implementation plan associated with this consolidation is expected to be completed in 2018. Note 12 describes the Reserve Banks’ restructuring initiatives and provides information about the costs and liabilities associated with employee separations and contract terminations. The costs associated with the impairment of certain Reserve Bank assets are discussed in Note 7. Costs and liabilities associated with enhanced pension benefits in connection with the restructuring activities for all of the Reserve Banks are recorded on the books of the FRBNY and discussed in Note 9. Costs and liabilities associated with enhanced postretirement benefits are discussed in Note 10. u. Recently Issued Accounting Standards In April 2014, the FASB issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update changes the requirements for reporting discontinued operations, which may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. This update is effective for the Reserve Banks for the year ended December 31, 2015, and did not have a material effect on the Reserve Banks’ combined financial statements. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update was issued to create common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. The guidance is applicable to all contracts for the transfer of goods or services regardless of industry or type of transaction. This update requires recognition of revenue in a manner that reflects the consideration that the entity expects to receive in return for the transfer of goods or services to customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date that delayed the required effective date of this accounting by one year. This revenue recognition accounting guidance is effective for the Reserve Banks for the year ending December 31, 2019, although the Reserve Banks may elect to adopt guidance earlier. The Reserve Banks are continuing to evaluate the effect of this new guidance on the combined financial statements.

Federal Reserve System Audits 355 In June 2014, the FASB issued ASU 2014-11, Transfer and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This update requires certain changes in the accounting for repurchase-to-maturity transactions and repurchase financing transactions. Additionally, this update provides guidance for the disclosures for certain transfers of financial assets accounted for as sales, where the transferor retains substantially all of the exposure to economic return on the transferred financial asset; and repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. This update is effective for the Reserve Banks for the year ended December 31, 2015. The update did not have any effect on the Reserve Banks’ accounting for these transactions. The relevant required disclosures have been included in the Note 3e and Note 5 to the Reserve Banks’ combined financial statements. In August 2014, the FASB issued ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. This update provides guidance for the measurement of the financial assets and financial liabilities of a collateralized financing entity (CFE). A reporting entity that consolidates a CFE may elect to measure the financial assets and financial liabilities of that CFE using either the fair value or a measurement alternative as prescribed in the accounting pronouncement. This update is effective for the Reserve Banks for the year ending December 31, 2016, and is not expected to have a material effect on the Reserve Banks’ combined financial statements. In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This update revised the consolidation model for reporting entities that are required to evaluate whether they should consolidate certain legal entities. More specifically, the update modified the evaluation of whether limited liability companies are VIEs or voting interest entities, and revised the consolidation analysis of reporting entities involved with VIEs, particularly those with fee arrangements and related party relationships. This update is effective for the Reserve Banks for the year ending December 31, 2016, and is not expected to have a material effect on the Reserve Banks’ combined financial statements. In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40). The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. Consequently, all software licenses within the scope of subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. This update is effective for the Reserve Banks for the year ending December 31, 2016, and is not expected to have a material effect on the Reserve Banks’ combined financial statements. In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This update removes the requirement to categorize investments that are measured using net asset value within the fair value hierarchy. The update also changes disclosure requirements for investments measured using

356 102nd Annual Report | 2015 net asset value. Some of the investments held in the defined benefit retirement plans (Note 9) are currently measured using net asset value. This update is effective for the Reserve Banks for the year ending December 31, 2017, although early adoption is permitted. The Reserve Banks are continuing to evaluate the effect of this new guidance on the combined financial statements. In July 2015, the FASB issued ASU 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient (consensuses of the FASB Emerging Issues Task Force). Previously, plans were required to disclose (1) individual investments representing 5 percent or more of net assets available for benefits and (2) net appreciation or depreciation for investments by general type. The amendments in Part II of this update (1) eliminate the required disclosure related to individual investments and (2) removes the requirement to disaggregate net appreciation or depreciation for investments by general type. This update is effective for the Reserve Banks for the year ending December 31, 2016, and is not expected to have a material effect on the Reserve Banks’ combined financial statements. In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update eliminate the requirement to disclose methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. This update is effective for the Reserve Banks for the year ending December 31, 2019. The Reserve Banks are continuing to evaluate the effect of this new guidance on the combined financial statements. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update revises the model to assess how a lease should be classified and provides guidance for lessees, requiring lessees to present right-of-use assets and lease liabilities on the balance sheet. The update is effective for the Reserve Banks for the year ended December 31, 2020, although earlier adoption is permitted. The Reserve Banks are continuing to evaluate the effect of this new guidance on their combined financial statements. (4) Loans Loans to Depository Institutions The Reserve Banks offer primary, secondary, and seasonal loans to eligible borrowers (depository institutions that maintain reservable transaction accounts or nonpersonal time deposits and have established discount window borrowing privileges). Each program has its own interest rate and interest is accrued using the applicable interest rate established at least every 14 days by the Reserve Banks’ board of directors, subject to review and determination by the Board of Governors. Primary and secondary loans are extended on a short-term basis, typically overnight, whereas seasonal loans may be extended for a period of up to nine months. Primary, secondary, and seasonal loans are collateralized to the satisfaction of each Reserve Bank to reduce credit risk. Assets eligible to collateralize these loans include consumer, business, and real estate loans; Treasury securities; GSE debt securities; foreign sovereign debt; municipal, corporate, and state and local govern-

Federal Reserve System Audits 357 ment obligations; asset-backed securities (ABS); corporate bonds; commercial paper; and bank-issued assets, such as certificates of deposit, bank notes, and deposit notes. Collateral is assigned a lending value that is deemed appropriate by the Reserve Bank, which is typically fair value reduced by a margin. Loans to depository institutions are monitored daily to ensure that borrowers continue to meet eligibility requirements for these programs. If a borrower no longer qualifies for these programs, the Reserve Bank will generally request full repayment of the outstanding loan or, for primary or seasonal loans, may convert the loan to a secondary credit loan. Collateral levels are reviewed daily against outstanding obligations, and borrowers that no longer have sufficient collateral to support outstanding loans are required to provide additional collateral or to make partial or full repayment. The remaining maturity distribution of loans to depository institutions outstanding as of December 31, 2015 and 2014, was as follows (in millions): Within 16 days Total 15 days to 90 days December 31, 2015 $104 $11 $115 December 31, 2014 $140 $ 5 $145 At December 31, 2015 and 2014, the Reserve Banks did not have any loans that were impaired, restructured, past due, or on non-accrual status, and no allowance for loan losses was required. There were no impaired loans during the years ended December 31, 2015 and 2014. Interest income attributable to loans to depository institutions was immaterial during the years ended December 31, 2015 and 2014. TALF The TALF assisted financial markets in accommodating the credit needs of consumers and businesses of all sizes by facilitating the issuance of ABS collateralized by a variety of consumer and business loans. Each TALF loan had an original maturity of three years, except loans secured by Small Business Administration (SBA) Pool Certificates, loans secured by SBA Development Company Participation Certificates, or ABS backed by student loans or commercial mortgage loans, which had an original maturity of five years if the borrower so elected. The loans were secured by eligible collateral, with the FRBNY having lent an amount equal to the value of the collateral, as determined by the FRBNY, less a margin. The TALF loans were extended on a nonrecourse basis. If the borrower did not repay the loan, the FRBNY would have enforced its rights in the collateral and might have sold the collateral to TALF LLC, a Delaware LLC, established for the purpose of purchasing such assets. Pursuant to a put agreement with the FRBNY, TALF LLC had committed to purchase assets that secure a TALF loan at a price equal to the principal amount outstanding plus accrued but unpaid interest, regardless of the fair value of the collateral. On October 29, 2014, the final outstanding TALF loan was repaid in full. Over the life of the program, all TALF loans were repaid in full at or before their respective maturity dates, and as such, the FRBNY did not incur a loss on any TALF loan. Subsequent to the repayment of the final outstanding TALF loan, the FRBNY terminated the put agreement with TALF LLC. Refer to Note 6 for additional information related to TALF LLC.

358 102nd Annual Report | 2015 TALF had no loans outstanding as of December 31, 2015 and 2014. Interest income attributable to TALF loans was $2 million during the year ended December 31, 2014. (5) System Open Market Account a. Domestic Securities Holdings The FRBNY conducts domestic open market operations and, on behalf of the Reserve Banks, holds the resulting securities in the SOMA. During the year ended December 31, 2014, the FRBNY continued the purchase of Treasury securities and federal agency and GSE MBS under the large-scale asset purchase programs as directed by the FOMC, although at a reduced pace than in previous years. In October 2014, the FOMC concluded its asset purchase program while maintaining its existing policy of reinvesting principal payments from its holdings of GSE debt securities and federal agency and GSE MBS and of rolling over maturing Treasury securities at auction. During the year ended December 31, 2015, the FRBNY continued the reinvestments. The total of Treasury securities, GSE debt securities, and federal agency and GSE MBS, net, excluding accrued interest, held in the SOMA at December 31 was as follows (in millions): 2015 T otal Unamortized Unaccreted Par amortized premiums discounts cost Treasury securities Notes $1,634,772 $ 20,937 $ (6,481) $1,649,228 Bonds 826,780 114,015 (9,347) 931,448 Total Treasury securities $2,461,552 $134,952 $(15,828) $ 2,580,676 GSE debt securities $ 32,944 $ 804 $ - $ 33,748 Federal agency and GSE MBS $1,747,461 $ 53,730 $ (742) $1,800,449 2014 T otal Unamortized Unaccreted Par amortized premiums discounts cost Treasury securities Notes $1,634,949 $ 27,670 $ (7,718) $1,654,901 Bonds 826,414 124,621 (9,695) 941,340 Total Treasury securities $2,461,363 $152,291 $(17,413) $ 2,596,241 GSE debt securities $ 38,677 $ 1,313 $ - $ 39,990 Federal agency and GSE MBS $1,736,833 $ 53,231 $ (981) $1,789,083 The FRBNY enters into transactions for the purchase of securities under agreements to resell and transactions to sell securities under agreements to repurchase as part of its monetary policy activities. Prior to December 17, 2015, these operations were for the purpose of further assessing the appropriate structure of such operations in supporting the implementation of monetary policy during normalization. From December 17, 2015, these operations have been undertaken as necessary to maintain the federal funds rate in a target range. In addition, transactions to sell securities under agreements to repurchase are entered into as part of a service offering to foreign official and international account holders.

Federal Reserve System Audits 359 There were no material transactions related to securities purchased under agreements to resell during the years ended December 31, 2015 and 2014. Financial information related to securities sold under agreements to repurchase for the years ended December 31 was as follows (in millions): 2015 2014 Primary dealers and expanded counterparties: Contract amount outstanding, end of year $474,592 $396,705 Average daily amount outstanding, during the year 125,656 130,281 Maximum balance outstanding, during the year 474,592 396,705 Securities pledged (par value), end of year 437,961 365,235 Securities pledged (market value), end of year 475,422 398,540 Foreign official and international accounts: Contract amount outstanding, end of year $237,809 $113,132 Average daily amount outstanding, during the year 157,929 102,968 Maximum balance outstanding, during the year 237,809 122,232 Securities pledged (par value), end of year 230,333 108,355 Securities pledged (market value), end of year 237,825 113,132 Total contract amount outstanding, end of year $712,401 $509,837 Supplemental information - interest expense: Primary dealers and expanded counterparties $ 84 $ 68 Foreign official and international accounts 164 44 Total interest expense - securities sold under agreements to repurchase $ 248 $ 112 Securities pledged as collateral, at December 31, 2015 and 2014, consisted solely of Treasury securities. The contract amount outstanding as of December 31, 2015 of securities sold under agreements to repurchase that were transacted with primary dealers and expanded counterparties had a term of one business day and matured on January 4, 2016. The contract amount outstanding as of December 31, 2015 of securities sold under agreements to repurchase that were transacted with foreign official and international accounts had a term of one business day and matured on January 4, 2016.

360 102nd Annual Report | 2015 The remaining maturity distribution of Treasury securities, GSE debt securities, federal agency and GSE MBS bought outright, and securities sold under agreements to repurchase at December 31, 2015 and 2014 was as follows (in millions): Within 16 days 91 days 1 O y v e e a r r 5 O y v e e a r r s Over Total 15 days to 90 days to 1 year 10 years to 5 years to 10 years December 31, 2015: Treasury securities (par value) $ - $38,619 $177,496 $1,118,349 $489,226 $ 637,862 $2,461,552 GSE debt securities (par value) - 3,687 13,077 13,833 - 2,347 32,944 Federal agency and GSE MBS (par value)1 - - - 467 9,014 1,737,980 1,747,461 Securities sold under agreements to repurchase (contract amount) 712,401 - - - - - 712,401 December 31, 2014: Treasury securities (par value) $ - $ 4 $ 3,516 $1,112,927 $686,627 $ 658,289 $2,461,363 GSE debt securities (par value) 1,089 711 3,933 30,597 - 2,347 38,677 Federal agency and GSE MBS (par value)1 - - - 13 6,453 1,730,367 1,736,833 Securities sold under agreements to repurchase (contract amount) 509,837 - - - - - 509,837 1 The part amount shown for federal agency and GSE MBS is the remaining principal balance of the securities. Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted average life of these securities, which differs from the stated maturity primarily because it factors in scheduled payments and prepayment assumptions, was approximately 6.5 and 5.7 years as of December 31, 2015 and 2014, respectively. The amortized cost and par value of Treasury securities and GSE debt securities that were loaned from the SOMA under securities lending agreements, at December 31 were as follows (in millions): 2015 2014 Treasury securities (amortized costs) $18,960 $11,144 Treasury securities (par value) 18,055 10,105 GSE debt securities (amortized cost) 146 633 GSE debt securities (par value) 137 616 Securities pledged as collateral by the counterparties in the securities lending arrangements at December 31, 2015 and 2014, consisted solely of Treasury securities. The securities lending agreements outstanding as of December 31, 2015 had a term of one business day and matured on January 4, 2016. The FRBNY enters into commitments to buy and sell Treasury securities and records the related securities on a settlement-date basis. As of December 31, 2015, there were no outstanding commitments. The FRBNY enters into commitments to buy and sell federal agency and GSE MBS and records the related securities on a settlement-date basis. As of December 31, 2015, the total purchase price of the federal agency and GSE MBS under

Federal Reserve System Audits 361 outstanding purchase commitments was $22,187 million, none of which was related to dollar rolls. MBS commitments, which had contractual settlement dates extending through January 2016, are principally for the purchase of TBA MBS for which the number and identity of the pools that will be delivered to fulfill the commitment are unknown at the time of the trade. As of December 31, 2015, there were no outstanding sales commitments for federal agency and GSE MBS. These commitments are subject to varying degrees of off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The FRBNY requires the posting of cash collateral for MBS commitments as part of its risk management practices used to mitigate the counterparty credit risk. Other assets consists primarily of cash and short-term investments related to the federal agency and GSE MBS portfolio. Other liabilities, which are primarily related to federal agency and GSE MBS purchases and sales, includes the FRBNY’s obligation to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE MBS. In addition, other liabilities includes obligations that arise from the failure of a seller to deliver MBS to the FRBNY on the settlement date. Although the FRBNY has ownership of and records its investments in the MBS as of the contractual settlement date, it is not obligated to make payment until the securities are delivered, and the amount included in other liabilities represents FRBNY’s obligation to pay for the securities when delivered. The amount of other assets and other liabilities held in the SOMA at December 31 was as follows (in millions): 2015 2014 Other assets: MBS portfolio related cash and short term investments $ 13 $ 28 Other 1 1 Total other assets $ 14 $ 29 Other liabilities: Cash margin $486 $793 Obligations from MBS transaction fails 16 30 Other 6 7 Total other liabilities $508 $830 Accrued interest receivable on domestic securities holdings was $25,354 million and $25,561 million as of December 31, 2015 and 2014, respectively. These amounts are reported as a component of “System Open Market Account: Accrued interest receivable” in the Combined Statements of Condition.

362 102nd Annual Report | 2015 Information about transactions related to Treasury securities, GSE debt securities, and federal agency and GSE MBS during the years ended December 31, 2015 and 2014, is summarized as follows (in millions): Total Federal Notes Bonds Treasury GSE debt agency and securities securities GSE MBS Balance December 31, 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) Realized gains, net2 - - - - - Principal payments and maturities (475) - (475) (18,544) (203,933) Amortization of premiums and accretion of discounts, net (5,545) (10,132) (15,677) (588) (7,199) Inflation adjustment on inflation-indexed securities 500 1,327 1,827 - - Balance at December 31, 2014 $1,654,901 $941,340 $2,596,241 $39,990 $1,789,083 Purchases1 2,736 761 3,497 - 356,976 Sales1 - - - - (464) Realized gains, net2 - - - - 16 Principal payments and maturities (2,977) (543) (3,520) (5,733) (333,441) Amortization of premiums and accretion of discounts, net (5,485) (10,253) (15,738) (509) (11,721) Inflation adjustment on inflation-indexed securities 53 143 196 - - Balance at December 31, 2015 $1,649,228 $931,448 $2,580,676 $33,748 $1,800,449 Year-ended December 31, 2014 Supplemental information—par value of transactions: Purchases3 $ 167,497 $ 83,739 $ 251,236 $ - $ 450,633 Sales - - - - (29) Year-ended December 31, 2015 Supplemental information—par value of transactions: Purchases3 $ 2,747 $ 766 $ 3,513 $ - $ 344,505 Sales - - - - (435) 1 Purchases and sales may include payments and receipts related to principal, premiums, discounts, and inflation compensation adjustments to the basis of inflation-indexed securities. The amount reported as sales includes the realized gains and losses on such transactions. Purchases and sales exclude MBS TBA transactions that are settled on a net basis. 2 Realized gains, net offset the amount of realized gains and losses included in the reported sales amount. 3 Includes inflation compensation. b. Foreign Currency Denominated Investments The FRBNY conducts foreign currency operations and, on behalf of the Reserve Banks, holds the resulting foreign currency denominated investments in the SOMA. The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests in foreign government debt instruments of Germany, France, and Japan. These foreign government debt instruments are backed by the full faith and credit of the issuing foreign governments. In addition, the FRBNY may enter into transactions to purchase Euro-denominated government debt securities under agreements to resell for which the accepted collateral is the debt instruments issued by the governments of Belgium, France, Germany, Italy, the Netherlands, and Spain, which are backed by the full faith and credit of those issuing governments.

Federal Reserve System Audits 363 At December 31, 2015 and 2014, there were no securities purchased under agreements to resell outstanding and, consequently, no related foreign securities held as collateral. Information about foreign currency denominated investments valued at amortized cost and at foreign currency market exchange rates at December 31 was as follows (in millions): 2015 2014 Euro: Foreign currency deposits $ 6,218 $ 6,936 German government debt instruments 2,261 2,494 French government debt instruments 3,325 3,687 Japanese yen: Foreign currency deposits 2,568 2,576 Japanese government debt instruments 5,195 5,207 Total $19,567 $20,900 Accrued interest receivable on foreign currency denominated investments was $64 million and $83 million as of December 31, 2015 and 2014, respectively. These amounts are reported as a component of “System Open Market Account: Accrued interest receivable” in the Combined Statements of Condition. The remaining maturity distribution of foreign currency denominated investments at December 31, 2015 and 2014, was as follows (in millions): Within 16 days 91 days Over 1 year Over 5 years Total 15 days to 90 days to 1 year to 5 years to 10 years December 31, 2015: Euro $2,136 $4,440 $1,051 $3,824 $353 $11,804 Japanese yen 2,734 350 1,604 3,075 - 7,763 Total $4,870 $4,790 $2,655 $6,899 $ 353 $ 19,567 December 31, 2014: Euro $3,635 $2,809 $1,644 $5,029 $ - $ 13,117 J apanese yen 2,755 392 1,540 3,096 - 7,783 Total $6,390 $3,201 $3,184 $8,125 $ - $20,900 There were no foreign exchange contracts related to foreign currency operations outstanding as of December 31, 2015. The FRBNY enters into commitments to buy foreign government debt instruments and records the related securities on a settlement-date basis. As of December 31, 2015, there were no outstanding commitments to purchase foreign government debt instruments. During 2015, there were purchases and maturities of foreign government debt instruments of $3,288 million and $3,155 million, respectively. There were no sales of foreign government debt instruments in 2015. In connection with its foreign currency activities, the FRBNY may enter into transactions that are subject to varying degrees of off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The FRBNY controls these risks by obtaining credit approvals, establishing transaction limits, receiving collateral in some cases, and performing monitoring procedures. Foreign currency working balances held and foreign exchange contracts executed by the Bank to facilitate international payments and currency transactions made

364 102nd Annual Report | 2015 on behalf of foreign central banks and U.S. official institution customers were not material as of December 31, 2015 and 2014. c. Central Bank Liquidity Swaps U.S. Dollar Liquidity Swaps The total foreign currency held under U.S. dollar liquidity swaps in the SOMA at December 31, 2015 and 2014, was $997 million and $1,528 million, respectively. The remaining maturity distribution of U.S. dollar liquidity swaps that were allocated to the Reserve Banks at December 31 was as follows (in millions): 2015 2014 Within Within 15 days 15 days Euro $925 $ - Japanese yen 72 1,528 Total $997 $1,528 Foreign Currency Liquidity Swaps At December 31, 2015 and 2014, there was no balance outstanding related to foreign currency liquidity swaps. d. Fair Value of SOMA Assets and Liabilities The fair value amounts below are presented solely for informational purposes and are not intended to comply with the fair value disclosures required by ASC 820. Although the fair value of SOMA security holdings can be substantially greater than or less than the recorded value at any point in time, these unrealized gains or losses have no effect on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and responsibilities. Because SOMA securities are recorded at amortized cost, cumulative unrealized gains (losses) are not recognized in the Combined Statements of Condition and the changes in cumulative unrealized gains (losses) are not recognized in the Combined Statements of Income and Comprehensive Income. The fair value of the Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign government debt instruments held in the SOMA is subject to market risk, arising from movements in market variables such as interest rates and credit risk. The fair value of federal agency and GSE MBS is also affected by the expected rate of prepayments of mortgage loans underlying the securities. The fair value of foreign government debt instruments is also affected by currency risk. Based on evaluations performed as of December 31, 2015 and 2014, there are no credit impairments of SOMA securities holdings.

Federal Reserve System Audits 365 The following table presents the amortized cost, fair value, and cumulative unrealized gains (losses) on the Treasury securities, GSE debt securities, and federal agency and GSE MBS held in the SOMA at December 31 (in millions): 2015 2014 Cumulative Cumulative unrealized Amortized Amortized unrealized Fair value gains Fair value cost cost gains (losses) Treasury securities: Notes $1,649,228 $1,669,395 $ 20,167 $1,654,901 $1,683,377 $ 28,476 Bonds 931,448 1,006,514 75,066 941,340 1,052,916 111,576 Total Treasury securities $2,580,676 $2,675,909 $ 95,233 $2,596,241 $2,736,293 $140,052 GSE debt securities 33,748 35,165 1,417 39,990 42,499 2,509 Federal agency and GSE MBS 1,800,449 1,810,256 9,807 1,789,083 1,820,544 31,461 Total domestic SOMA portfolio securities holdings $4,414,873 $4,521,330 $106,457 $4,425,314 $4,599,336 $174,022 Memorandum–Commitments for: Purchases of Treasury securities $ - $ - $ - $ - $ - $ - Purchases of federal agency and GSE MBS 22,187 22,170 (17) 28,692 28,803 111 Sales of federal agency and GSE MBS - - - - - - The fair value of Treasury securities and GSE debt securities was determined using pricing services that provide market consensus prices based on indicative quotes from various market participants. The fair value of federal agency and GSE MBS was determined using a pricing service that utilizes a model-based approach that considers observable inputs for similar securities. The cost bases of securities purchased under agreements to resell, securities sold under agreements to repurchase, central bank liquidity swaps and other investments held in the SOMA domestic portfolio approximate fair value. Due to the short-term nature of these agreements and the defined amount that will be received upon settlement, the cost basis is estimated to approximate fair value. At December 31, 2015 and 2014, the fair value of foreign currency denominated investments was $19,630 million and $20,996 million, respectively. The fair value of foreign government debt instruments was determined using pricing services that provide market consensus prices based on indicative quotes from various market participants. The fair value of foreign currency deposits and securities purchased under agreements to resell was determined by reference to market interest rates.

366 102nd Annual Report | 2015 The following table provides additional information on the amortized cost and fair values of the federal agency and GSE MBS portfolio at December 31 (in millions): Distribution 2015 2014 of MBS holdings by coupon rate Amortized Fair value Amortized Fair value cost cost Total SOMA: 2.0% $ 11,198 $ 10,993 $ 12,788 $ 12,618 2.5% 116,527 115,018 114,609 113,468 3.0% 554,430 543,270 513,289 506,280 3.5% 579,403 581,940 481,305 489,390 4.0% 361,149 368,576 428,047 441,204 4.5% 115,914 124,043 155,867 167,844 5.0% 48,931 52,523 65,544 70,719 5.5% 11,138 11,989 15,232 16,414 6.0% 1,542 1,666 2,110 2,287 6.5% 217 238 292 320 Total $1,800,449 $1,810,256 $1,789,083 $1,820,544 The following table presents the realized gains and the change in the cumulative unrealized gains (losses) related to SOMA domestic securities holdings during the years ended December 31, 2015 and 2014 (in millions): 2015 2014 Change in Change in Realized cumulative Realized cumulative gains1 unrealized gains gains1 unrealized (losses)2 gains2 T reasury securities $ - $(44,819) $ - $158,150 GSE debt securities - (1,092) - (605) Federal agency and GSE MBS 43 (21,654) 81 69,749 Total $43 $(67,565) $81 $227,294 1 Realized gains are reported in “Non-interest income: System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Combined Statements of Income and Comprehensive Income. 2 Because SOMA securities are recorded at amortized cost, the change in the cumulative unrealized gains (losses) is not reported in the Combined Statements of Income and Comprehensive Income. The amount of change in cumulative unrealized gains (losses) position, net, related to foreign currency denominated investments was a loss of $33 million and a gain of $18 million for the years ended December 31, 2015 and 2014, respectively. Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign government debt instruments are classified as Level 2 within the ASC 820 hierarchy because the fair values are based on indicative quotes and other observable inputs obtained from independent pricing services. The fair value hierarchy level of SOMA financial assets is not necessarily an indication of the risk associated with those assets. (6) Consolidated Variable Interest Entities a. Description of Consolidated VIEs i. Maiden Lane LLC To facilitate the merger of The Bear Stearns Companies, Inc. (Bear Stearns) and JPMorgan Chase & Co. (JPMC), the FRBNY extended credit to ML in

Federal Reserve System Audits 367 June 2008. ML is a Delaware LLC formed by the FRBNY to acquire certain assets of Bear Stearns and to manage those assets. The assets acquired by ML were valued at $29.9 billion as of March 14, 2008, the date that the FRBNY committed to the transaction, and largely consisted of federal agency and GSE MBS, nonagency residential mortgage-back securities (RMBS), commercial and residential mortgage loans, and derivatives and associated hedges. The FRBNY extended a senior loan of approximately $28.8 billion and JPMC extended a subordinated loan of $1.15 billion to finance the acquisition of the assets, both of which were repaid in full plus interest in 2012. The FRBNY has continued and will continue to sell the remaining assets from the ML portfolio as market conditions warrant and if the sales represent good value for the public. In accordance with the ML agreements, proceeds from future asset sales will be distributed to the FRBNY as contingent interest after all derivative instruments in ML have been terminated and paid or sold from the portfolio. ii. Maiden Lane II LLC The FRBNY extended credit to ML II, a Delaware LLC formed to purchase nonagency RMBS from the reinvestment pool of the securities lending portfolios of several regulated U.S. insurance subsidiaries of American International Group, Inc. (AIG). ML II purchased from the AIG subsidiaries non-agency RMBS with an approximate fair value of $20.8 billion as of October 31, 2008. ML II financed this purchase by borrowing $19.5 billion from the FRBNY and through the deferral of $1.0 billion of the purchase price payable to the AIG subsidiaries. Both the loan and the fixed deferred purchase price were paid in full plus interest in 2012. On March 19, 2012, ML II was dissolved and the FRBNY began the process of winding up in accordance with and as required by Delaware law and the agreements governing ML II. As part of that process, during the year ended December 31, 2014, after paying expenses, ML II distributed its remaining assets to the FRBNY and to AIG and its subsidiaries in accordance with the agreement. Distributions were made to the FRBNY in the form of contingent interest totaling $53 million and to AIG and its subsidiaries in the form of variable deferred purchase price totaling $11 million during the year ended December 31, 2014. On November 12, 2014, a certificate of cancellation was filed in the office of the Delaware Secretary of State, thereby terminating the legal existence of ML II. iii. Maiden Lane III LLC The FRBNY extended credit to ML III, a Delaware LLC formed to purchase ABS collateralized debt obligations (CDOs) from certain third-party counterparties of AIG Financial Products Corp (AIGFP). ML III borrowed approximately $24.3 billion from the FRBNY, and AIG provided an equity contribution of $5.0 billion to ML III. The proceeds were used to purchase ABS CDOs with a fair value of $29.6 billion as of October 31, 2008. The counterparties received $26.8 billion net of principal and interest received and finance charges paid on the ABS CDOs. The LLC also made a payment to AIGFP of $2.5 billion representing the over collateralization previously posted by AIGFP and retained by counterparties in respect of terminated CDS as compared to the LLC’s fair value acquisition prices calculated as of October 31, 2008. The aggregate amount of principal and interest proceeds from CDOs received after the announcement date, but prior to the settlement dates, net of financing costs, amounted to approximately $0.3 billion and therefore reduced the amount of funding required at settlement by $0.3 billion, from $29.6 billion to $29.3 billion. Both the loan and the equity contribution were repaid in full plus interest in 2012.

368 102nd Annual Report | 2015 On September 10, 2012, ML III was dissolved, and the FRBNY began the process of winding up in accordance with and as required by Delaware law and the agreements governing ML III. As part of that process, during the year ended December 31, 2014, after paying expenses, ML III distributed its remaining assets to the FRBNY and to AIG in accordance with the agreement. Distributions were made to the FRBNY in the form of contingent interest totaling $14 million and to AIG in the form of excess amounts totaling $7 million during the year ended December 31, 2014. On November 12, 2014, a certificate of cancellation was filed in the office of the Delaware Secretary of State, thereby terminating the legal existence of ML III. iv. TALF LLC As discussed in Note 4, TALF LLC was formed in connection with the implementation of the TALF. TALF LLC was established for the limited purpose of purchasing any ABS that might be surrendered to the FRBNY by borrowers under the TALF or, in certain limited circumstances, TALF loans. Funding for TALF LLC’s purchases of these securities was derived first through the fees received by TALF LLC from the FRBNY for this commitment and any interest earned on its investments. If that funding had proved insufficient for the purchases TALF LLC had committed to make under the put agreement, the Treasury and the FRBNY had committed to lend to TALF LLC. On March 25, 2009, the Treasury provided initial funding to TALF LLC of $100 million. On January 15, 2013, the Treasury and the FRBNY agreed to eliminate their funding commitments to TALF LLC. Pursuant to this agreement on February 6, 2013, TALF LLC repaid in full the outstanding principal and accrued interest on the Treasury loan. On October 31, 2014, TALF LLC was dissolved and the FRBNY began the process of winding up in accordance with and as required by Delaware law and the agreements governing TALF LLC. As part of that process, during the year ended December 31, 2014, after paying expenses, TALF LLC distributed its remaining assets to the Treasury and to the FRBNY in accordance with the agreement. Distributions were made in the form of contingent interest to the Treasury totaling $98 million and to the FRBNY totaling $11 million during the year ended December 31, 2014. On November 26, 2014, a certificate of cancellation was filed in the office of the Delaware Secretary of State, thereby terminating the legal existence of TALF LLC.

Federal Reserve System Audits 369 b. Summary Information for Consolidated VIEs The classification of significant assets and liabilities of ML at December 31, 2015 and 2014 is summarized in the following table (in millions): ML 2015 2 014 Assets: Short-term investments $1,496 $1,399 Swap contracts 56 124 Other investments 13 11 Subtotal 1,565 1,534 Cash, cash equivalents, accrued interest receivable, and other receivables 213 277 Total investments held by consolidated VIEs $1,778 $1,811 Liabilities: Swap contracts $ 21 $ 41 Cash collateral on swap contracts 36 85 Other liabilities - 1 Total liabilities of consolidated VIEs $ 57 $ 127 There were no assets and liabilities remaining in the ML II, ML III, and TALF LLC at December 31, 2015 and 2014. The FRBNY’s approximate maximum exposure to loss at December 31, 2015 and 2014, was $1,565 million and $1,534 million, respectively. These estimates incorporate potential losses associated with the investments recorded on the Bank’s balance sheet. Additionally, information concerning the notional exposure on swap contracts is contained in the derivatives credit risk section of this Note. The net income attributable to ML for the year ended December 31, 2015 and 2014, was as follows (in millions): ML 2015 2 014 Interest income: Investments held by consolidated VIEs $ 4 $ 77 Non-interest income: Realized portfolio holdings gains, net 32 1 Unrealized portfolio holdings gains, net 3 36 Non-interest income: Consolidated VIEs gains, net 35 37 Total net interest income and non-interest income 39 114 Less: Professional fees 3 4 Net income attributable to consolidated VIEs $ 36 $110 i. Debt Securities ML has investments in short-term instruments with maturities of greater than three months and less than one year when acquired. As of December 31, 2015 and 2014, ML’s short-term instruments consisted of U.S. Treasury bills. Other investments primarily consist of non-agency RMBS and commercial mortgage-backed securities (CMBS).

370 102nd Annual Report | 2015 ii. Derivative Instruments Derivative contracts are instruments, such as swap contracts, that derive their value from underlying assets, indexes, reference rates, or a combination of these factors. The ML portfolio is composed of derivative financial instruments included in a total return swap (TRS) agreement with JPMC. ML and JPMC entered into the TRS with reference obligations representing CDS primarily on CMBS and RMBS, with various market participants, including JPMC. On an ongoing basis, ML pledges collateral for credit or liquidity related shortfalls. Separately, ML and JPMC engage in bilateral posting of collateral to cover the net mark-to-market (MTM) variations in the swap portfolio. ML only nets the collateral received from JPMC from the bilateral MTM posting for the reference obligations for which JPMC is the counterparty. The values of ML’s cash and cash equivalents include cash collateral associated with the TRS of $72 million and $128 million as of December 31, 2015 and 2014, respectively. In addition, ML has pledged $52 million and $87 million of U.S. Treasury bills to JPMC as of December 31, 2015 and 2014, respectively. ML has entered into an International Swaps and Derivatives Association, Inc. master netting agreement with JPMC in connection with the TRS. This agreement provides ML with the right to liquidate securities held as collateral and to offset receivables and payables with JPMC in the event of default. This agreement also establishes the method for determining the net amount of receivables and payables that ML is entitled to receive from or owes to each counterparty to the swaps that underlie the TRS based upon the fair value of the relevant CDS. For the derivative balances reported in the Combined Statements of Condition, ML offsets its asset and liability positions held with the same counterparty. In addition, ML offsets the cash collateral held with JPMC against any net liabilities of JPMC with ML under the TRS. As of December 31, 2015 and 2014, there were no amounts subject to an enforceable master netting agreement that were not offset in the Combined Statements of Condition. The maximum potential amount of future payments the seller of credit protection could be required to make to the buyer of credit protection under a CDS is equal to the notional amount of the contract. For ML, the maximum potential payout (notional) associated with credit protection sold was $162 million and $219 million as of December 31, 2015 and 2014, respectively, and the maximum potential recovery (notional) associated with credit protection bought was $195 million and $413 million as of December 31, 2015 and 2014, respectively. The change in notional amounts is representative of the volume of activity for the year ended December 31, 2015. There were 128 and 210 CDS contracts outstanding in the ML portfolio as of December 31, 2015 and 2014, respectively. The majority of the CDS held by ML had remaining maturities of greater than five years and reference obligations with non-investment grade (BB+ or lower) credit ratings as of December 31, 2015 and 2014. c. Fair Value Measurement ML has adopted ASC 820 and ASC 825 and has elected the fair value option for all holdings. The accounting and classification of these investments appropriately

Federal Reserve System Audits 371 reflect the ML’s and the FRBNY’s intent with respect to the purpose of the investments and most closely reflect the amount of the assets available to liquidate the entity’s obligations. Determination of Fair Value ML values its investments and cash equivalents on the basis of last available bid prices or current market quotations provided by dealers or pricing services selected under the supervision of the FRBNY’s designated investment manager. To determine the value of a particular investment, pricing services may use certain information with respect to market transactions in such investments or comparable investments, various relationships observed in the market between investments, quotations from dealers, and pricing metrics and calculated yield measures based on valuation methodologies commonly employed in the market for such investments. The fair value of swap contracts is provided by JPMC as calculation agent and is reviewed by the investment manager. Market quotations may not represent fair value in certain instances in which the investment manager and the VIEs believe that facts and circumstances applicable to an issuer, a seller, a purchaser, or the market for a particular investment cause such market quotations to not reflect the fair value of an investment. In such cases or when market quotations are unavailable, the investment manager applies proprietary valuation models that use collateral performance scenarios and pricing metrics derived from the reported performance of investments with similar characteristics as well as available market data to determine fair value. Due to the uncertainty inherent in determining the fair value of investments that do not have a readily available fair value, the fair value of these investments may differ from the values that may ultimately be realized and paid. The following tables present the financial instruments recorded in VIEs at fair value as of December 31, 2015 by ASC 820 hierarchy (in millions): Level 11 Level 21 Level 3 Netting2 fai T r o v t a a l l u e Assets: Short-term investments $1,496 $ - $ - $ - $1,496 Cash equivalents 3 213 - - - 213 Swap contracts - - 130 (74) 56 Other investments - 12 1 - 13 Total assets $1,709 $12 $131 $(74) $1,778 Liabilities: Swap contracts $ - $ - $ 59 $ (38) $ 21 1 There were no transfers between Level 1 and Level 2 and no material transfers between Levels 2 and 3 during the year ended December 31, 2015. 2 Derivative receivables and payables and the related cash collateral received and paid are shown net when a master netting agreement exists. 3 Cash equivalents consist primarily of money market funds.

372 102nd Annual Report | 2015 The following tables present the financial instruments recorded in VIEs at fair value as of December 31, 2014 by ASC 820 hierarchy (in millions): Level 11 Level 21 Level 3 Netting2 fai T r o v t a a l l u e Assets: Short-term investments $1,399 $- $ - $ - $ 1,399 Cash equivalents 3 274 - - - 274 Swap contracts - - 240 (116) 124 Other investments - 6 5 - 11 Total assets $1,673 $6 $245 $(116) $ 1,808 Liabilities: Swap contracts $ - $- $115 $ (74) $ 41 1 There were no transfers between Level 1 and Level 2 during the year ended December 31, 2014. 2 Derivative receivables and payables and the related cash collateral received and paid are shown net when a master netting agreement exists. 3 Cash equivalents consist primarily of money market funds. As of December 31, 2015, both the Level 3 assets and liabilities held in the Combined Statements of Condition as “Investments held by consolidated variable interest entities” and “Liabilities of consolidated variable interest entities,” respectively, and the associated unrealized gains and losses related to those assets and liabilities are immaterial. The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2014 (in millions). Unrealized gains and losses related to those assets and liabilities still held at December 31, 2014 are reported as a component of “Investments held by consolidated variable interest entities” and “Liabilities of consolidated variable interest entities,” respectively, in the Combined Statements of Condition. C hange in unrealized Purchases, Net gains (losses) De F c a e i m r v b a e lu r e 3 1, iss s u a a l n es c , e s, u r n e r a e l a iz l e iz d e / d tra G n ro s s fe s r s tra G n ro s s fe s r s De F c a e i m r v b a e lu r e 3 1, r f e in la a t n e c d i a to l and 2013 gains in1,2 out1,2 2014 instruments settlements, (losses) held at net December 31, 2014 Assets: Commercial mortgage loans $507 $(523) $16 $- $ - $ - $ - Other investments 8 4 (4) - (3) 5 (4) Total assets $515 $(519) $12 $- $(3) $ 5 $(4) Swap contracts, net $152 $ (48) $21 $- $ - $125 $ 13 1 The amount of transfers is based on the fair values of the transferred assets at the beginning of the reporting period. 2 Other investments, with a December 31, 2013 fair value of $3 million, were transferred from Level 2 to Level 3 because they are valued at December 31, 2014 based on non-observable inputs (Level 3). These investments were valued in the prior year based on quoted prices for identical or similar assets in non-active markets or model-based techniques for which all significant inputs are observable (Level 2).

Federal Reserve System Audits 373 The following table presents the gross components of purchases, sales, issuances, and settlements, net, shown for the year ended December 31, 2014 (in millions): Purchases, sales, Purchases Sales Issuances Settlements1 issuances, and settlements, net Assets: Commercial mortgage loans $- $ - $- $(523) $(523) Other investments 1 - - 3 4 Total assets $1 $ - $- $(520) $(519) Swap contracts, net $- $(24) $- $ (24) $ (48) 1 Includes paydowns. As of December 31, 2014, the only material Level 3 assets or liabilities for the VIEs were the swap contracts held by ML. For the swap contracts, there are various valuation methodologies, but in each case, the fair value of the instrument underlying the swap is a significant input used to derive the fair value of the swap. The key unobservable inputs used to value those underlying instruments are credit spreads when the underlying instrument is a market index or performance data (i.e. discount rates, prepayment rates, default rates, and loss severity) when the underlying instrument is a debt security. (7) Bank Premises, Equipment, and Software Bank premises and equipment at December 31 were as follows (in millions): 2015 2014 Bank premises and equipment: Land and land improvements $ 404 $ 397 Buildings 2,811 2,748 Building machinery and equipment 578 564 Construction in progress 39 33 Furniture and equipment 1,048 1,032 Subtotal 4,880 4,774 Accumulated depreciation (2,277) (2,144) Bank premises and equipment, net 2,603 2,630 Depreciation expense, for the years ended December 31 $ 217 $ 206 Bank premises and equipment at December 31 included the following amounts for capitalized leases (in millions): 2015 2014 Leased premises and equipment under capital leases $25 $26 Accumulated depreciation (21) (20) Leased premises and equipment under capital leases, net $ 4 $ 6 Depreciation expense related to leased premises and equipment under capital leases, for the years ended December 31 $ 4 $ 6

374 102nd Annual Report | 2015 The Reserve Banks lease space to outside tenants with remaining lease terms ranging from 1 to 12 years. Rental income from such leases was $39 million and $37 million for the years ended December 31, 2015 and 2014, respectively, and is reported as a component of “Non-interest income: Other” in the Combined Statements of Income and Comprehensive Income. Future minimum lease payments that the Reserve Banks will receive under non-cancelable lease agreements in existence at December 31, 2015, are as follows (in millions): 2016 $ 34 2017 30 2018 27 2019 25 2020 21 Thereafter 63 Total $200 The Reserve Banks had capitalized software assets, net of amortization, of $416 million and $376 million at December 31, 2015 and 2014, respectively. Amortization expense was $95 million and $117 million for the years ended December 31, 2015 and 2014, respectively. Capitalized software assets are reported as a component of “Other assets” in the Combined Statements of Condition and the related amortization is reported as a component of “Operating expenses: Other” in the Combined Statements of Income and Comprehensive Income. The Reserve Banks had no material impairment losses in 2015. In 2014, software assets related to a multiyear ACH technology initiative were impaired and written off due to the suspension of development efforts. The resulting asset impairment loss of $23 million for the year ended December 31, 2014 is reported as a component of “Operating expenses: Other” in the Combined Statement of Income and Comprehensive Income. (8) Commitments and Contingencies In conducting its operations, the Reserve Banks enter into contractual commitments, normally with fixed expiration dates or termination provisions, at specific rates and for specific purposes. At December 31, 2015, the Reserve Banks were obligated under non-cancelable leases for premises and equipment with remaining terms ranging from 1 to approximately 14 years. These leases provide for increased lease payments based upon increases in real estate taxes, operating costs, or selected price indexes. Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office equipment (including taxes, insurance, and maintenance when included in rent), net of sublease rentals, was $15 million and $13 million for the years ended December 31, 2015 and 2014, respectively.

Federal Reserve System Audits 375 Future minimum lease payments under non-cancelable operating leases, net of sublease rentals, with remaining terms of one year or more, at December 31, 2015, are as follows (in millions): Operating Leases 2016 $ 5 2017 5 2018 5 2019 4 2020 2 Thereafter 11 Future minimum lease payments $32 At December 31, 2015, the Reserve Banks had unrecorded unconditional purchase commitments and long-term obligations extending through the year 2022 with a remaining fixed commitment of $150 million. Purchases of $31 million and $44 million were made against these commitments during 2015 and 2014, respectively. These commitments are for maintenance of currency processing machines and have variable and/or fixed components. The variable portion of the commitments is for additional services above the fixed contractual service limits. The fixed payments for the next five years under these commitments are as follows (in millions): 2016 $ - 2017 24 2018 24 2019 25 2020 25 The Reserve Banks are involved in certain legal actions and claims arising in the ordinary course of business. Although it is difficult to predict the ultimate outcome of these actions, in management’s opinion, based on discussions with counsel, the legal actions and claims will be resolved without material adverse effect on the financial position or results of operations of the Reserve Banks. (9) Retirement and Thrift Plans Retirement Plans The Reserve Banks currently offer three defined benefit retirement plans to its employees, based on length of service and level of compensation. Substantially all of the employees of the Reserve Banks, Board of Governors, and Office of Employee Benefits of the Federal Reserve System (OEB) participate in the Retirement Plan for Employees of the Federal Reserve System (System Plan).1 Under the Dodd-Frank Act, newly hired Bureau employees are eligible to participate in the System Plan and, during the years ended December 31, 2015 and 2014, certain costs associated with the System Plan were reimbursed by the Bureau. In addition, employees at certain compensation levels participate in the Benefit Equalization Retirement Plan (BEP) and certain Reserve Bank officers participate in the Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks (SERP). The FRBNY, on behalf of the System, recognizes the net asset or net liability and costs associated with the System Plan in its consolidated financial statements. The net costs related to the System Plan, as well as the costs related to the BEP and 1 The OEB was established by the System to administer selected System benefit plans.

376 102nd Annual Report | 2015 SERP, are reported as a component of “Operating Expenses: Net periodic pension expense” in the Combined Statements of Income and Comprehensive Income. Accrued pension benefit costs are reported as a component of “Prepaid pension benefit costs” if the funded status is a net asset or “Accrued benefit costs” if the funded status is a net liability in the Combined Statements of Condition. Following is a reconciliation of the beginning and ending balances of the System Plan benefit obligation (in millions): 2015 2014 Estimated actuarial present value of projected benefit obligation at January 1 $13,641 $10,476 Service cost-benefits earned during the period 487 355 Interest cost on projected benefit obligation 571 530 Actuarial loss (gain) (1,044) 2,630 Contributions by plan participants 5 5 Special termination benefits 6 15 Benefits paid (396) (370) Estimated actuarial present value of projected benefit obligation at December 31 $13,270 $13,641 In October 2014, the Society of Actuaries released new mortality tables (RP-2014) and in October 2015 and 2014 new mortality projection scales (MP-2015 and MP 2014, respectively) for use in the valuation of benefits liabilities. The adoption of these new mortality tables and new mortality projection scales, adjusted for the System’s recent mortality experience and the retirement rates of System retirees, resulted in an estimated net decrease of the System Plan projected benefit obligation of approximately $471 million and an increase of $935 million in 2015 and 2014, respectively. Following is a reconciliation showing the beginning and ending balance of the System Plan assets, the funded status, and the accrued pension benefit costs (in millions): 2015 2014 Estimated plan assets at January 1 (of which $12,608 and $10,687 is measured at fair value as of January 1, 2015 and 2014, respectively) $12,669 $10,808 Actual return on plan assets (258) 1,734 Contributions by the employer 480 492 Contributions by plan participants 5 5 Benefits paid (396) (370) Estimated plan assets at December 31 (of which $12,477 and $12,608 is measured at fair value as of December 31, 2015 and 2014, respectively) $12,500 $12,669 Funded status and accrued pension benefit costs $ (770) $ (972) Amounts included in accumulated other comprehensive loss are shown below: Prior service cost $ (263) $ (356) Net actuarial loss (3,333) (3,484) Total accumulated other comprehensive loss $(3,596) $(3,840) The FRBNY, on behalf of the System, funded $480 million for each of the years ended December 31, 2015 and 2014. The Bureau is required by the Dodd-Frank Act to fund the System plan for each Bureau employee based on an established formula. During the year ended December 31, 2015, the FRBNY provided for contributions from the Bureau of $26 million, which was received by FRBNY in February 2016. During the year ended December 31, 2014, the Bank provided for and received contributions of $12 million.

Federal Reserve System Audits 377 The accumulated benefit obligation for the System Plan, which differs from the estimated actuarial present value of projected benefit obligation because it is based on current rather than future compensation levels, was $11,727 million and $11,985 million at December 31, 2015 and 2014, respectively. The weighted-average assumptions used in developing the accumulated pension benefit obligation for the System Plan as of December 31 were as follows: 2015 2014 Discount rate 4.42% 4.05% Rate of compensation increase 4.00% 4.00% Net periodic benefit expenses for the years ended December 31, 2015 and 2014, were actuarially determined using a January 1 measurement date. The weightedaverage assumptions used in developing net periodic benefit expenses for the System Plan for the years were as follows: 2015 2014 Discount rate 4.05% 4.92% Expected asset return 6.75% 7.00% Rate of compensation increase 4.00% 4.50% Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the System Plan’s benefits when due. The expected long-term rate of return on assets is an estimate that is based on a combination of factors, including the System Plan’s asset allocation strategy and historical returns; surveys of expected rates of return for other entities’ plans and for various asset classes; a projected return for equities and fixed income investments based on real interest rates, inflation expectations, and equity risk premiums; and surveys of expected returns in equity and fixed income markets. The components of net periodic pension benefit expense (credit) for the System Plan for the years ended December 31 are shown below (in millions): 2015 2014 Service cost-benefits earned during the period $487 $355 Interest cost on projected benefit obligation 571 530 Amortization of prior service cost 93 100 Amortization of net loss 223 101 Expected return on plan assets (857) (759) Net periodic pension benefit expense 517 327 Special termination benefits 6 15 Bureau of Consumer Financial Protection contributions - (12) Total periodic pension benefit expense $523 $330 Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic pension benefit expense in 2016 are shown below (in millions): Prior service cost $ 93 Net actuarial loss 200 Total $293

378 102nd Annual Report | 2015 The recognition of special termination losses is primarily the result of enhanced retirement benefits provided to employees during the restructuring described in Note 12. Following is a summary of expected benefit payments, excluding enhanced retirement benefits (in millions): 2016 $ 444 2017 475 2018 508 2019 540 2020 574 2021–2025 3,395 Total $5,936 The System’s Committee on Plan Administration is responsible for oversight of the operations of the Retirement Plan, which includes the Retirement Plan trust and for determining the amounts necessary to maintain the Retirement Plan on an actuarially sound basis and the amounts that employers must contribute to pay the expenses of OEB and the Retirement Plan. The System’s Committee on Investment Performance (CIP) is responsible for establishing investment policies, selecting investment managers, and monitoring the investment managers’ compliance with its policies. At December 31, 2015, the System Plan’s assets were held in 14 investment vehicles: 3 actively-managed longduration fixed income portfolios, a passively-managed long-duration fixed income portfolio, an indexed U.S. equity fund, an indexed non-U.S. developed-markets equity fund, an indexed emerging-markets equity fund, 2 private equity limited partnerships, a private equity separate account, 2 core real estate funds, a real estate limited partnership, and a money market fund. The diversification of the System Plan’s investments is designed to limit concentration of risk and the risk of loss related to an individual asset class. The three actively-managed long-duration fixed income portfolios are separate accounts benchmarked to a custom benchmark of 55 percent Barclays Long Credit Index and 45 percent Citigroup 15+ years U.S. Treasury STRIPS Index. This custom benchmark was selected as a proxy to match the liabilities of the Plan and the guidelines for these portfolios are designed to limit portfolio deviations from the benchmark. The passively-managed long-duration fixed-income portfolio is invested in 2 commingled funds and is benchmarked to 55 percent Barclays Long Credit Index and 45 percent Barclays 20+ STRIPS Index. The indexed U.S. equity fund is intended to track the overall U.S. equity market across market capitalizations and is benchmarked to the Dow Jones U.S. Total Stock Market Index. The indexed non-U.S. developed-markets equity fund is intended to track the Morgan Stanley Capital International (MSCI) World ex-US Investible Markets Index (IMI), which includes stocks from 23 markets deemed by MSCI to be “developed markets.” The indexed emerging-markets equity fund is intended to track the MSCI Emerging Markets IMI Index, which includes stocks from 21 markets deemed by MSCI to be “emerging markets.” The 3 indexed equity funds include stocks from across the market capitalization spectrum (i.e., large-, mid- and smallcap stocks). The 2 private equity limited partnership invest globally across various private equity strategies and the private equity separate account invests in various private equity investments globally across various strategies. The private equity separate account invests in various private equity funds and coinvestment opportunities globally in private companies and targets returns in excess of public markets over a complete market cycle. The two U.S. core real estate funds invest in high

Federal Reserve System Audits 379 quality, well leased, low leverage commercial real estate throughout the U.S. The Real estate limited partnership invests in non-core U.S. commercial real estate including development and repositioning of assets. Finally, the money market fund, which invests in short term Treasury and agency debt and repurchase agreements backed by Treasury and agency debt, is the repository for cash balances and adheres to a constant dollar methodology. Permitted and prohibited investments, including the use of derivatives, are defined in either the trust agreement (for the passively-managed long-duration fixed income portfolio) or the investment guidelines (for the remaining investments). The CIP reviews the trust agreement and approves all investment guidelines as part of the selection of each investment to ensure that they are consistent with the CIP’s investment objectives for the System Plan’s assets. The System Plan’s policy weight and actual asset allocations at December 31, by asset category, are as follows: 2015 Actual asset allocations Policy weight 2015 2014 Fixed income 50.0% 48.6% 51.2% U.S. equities 24.7% 25.4% 25.8% International equities 17.4% 17.8% 17.6% Emerging markets equities 4.5% 4.5% 4.9% Private equity 1.7% 1.3% 0.0% Real estate 1.7% 1.7% 0.0% Cash 0.0% 0.7% 0.5% Total 100.0% 100.0% 100.0% Employer contributions to the System Plan may be determined using different assumptions than those required for financial reporting. The System Plan’s anticipated funding level for 2016 is $480 million. In 2016, the Reserve Banks plan to make monthly contributions of $40 million and will reevaluate the monthly contributions upon completion of the 2016 actuarial valuation. The Reserve Banks’ projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31, 2015 and 2014, and for the years then ended, were not material. Determination of Fair Value The System Plan’s publicly available investments are valued on the basis of the last available bid prices or current market quotations provided by dealers, or pricing services. To determine the value of a particular investment, pricing services may use information on transactions in such investments, quotations from dealers, pricing metrics, market transactions in comparable investments, relationships observed in the market between investments, and calculated yield measures based on valuation methodologies commonly employed in the market for such investments. Commingled funds are valued using the net asset value as a practical expedient, as determined by the respective issuer of the fund based on the fair value of the underlying investments. Private equity and real estate investments are valued using the net asset value, as a practical expedient, which is based on the fair value of the underlying investments. The net asset value is adjusted for contributions, distributions, and both realized and unrealized gains and losses incurred during the period. The realized and unrealized gains and losses are based on reported valuation changes.

380 102nd Annual Report | 2015 Because of the uncertainty inherent in determining the fair value of investments that do not have a readily available fair value, the fair value of these investments may differ significantly from the values that would have been reported if a readily available fair value had existed for these investments and may differ materially from the values that may ultimately be realized. The following tables present the financial instruments recorded at fair value as of December 31 by ASC 820 hierarchy (in millions): 2015 Description Level 11 Level 21 Level 3 Total Short-term investments2 $34 $ 118 $ - $ 152 Treasury and federal agency securities 64 2,182 - 2,246 Corporate bonds - 2,130 - 2,130 Other fixed income securities - 373 - 373 Commingled funds - 7,205 - 7,205 Private Equity - - 157 157 Real Estate - - 214 214 Total $98 $12,008 $371 $ 12,477 1 There were no transfers between Level 1 and Level 2 during the year. 2 Short-term investments include cash equivalents of $88 million. 2014 Description Level 11 Level 21 Level 3 Total Short-term investments2 $ 27 $ 94 $ - $ 121 Treasury and federal agency securities 111 2,179 - 2,290 Corporate bonds - 2,109 - 2,109 Other fixed income securities - 443 - 443 Commingled funds - 7,598 - 7,598 Private Equity - - 47 47 Real Estate - - - - Total $138 $12,423 $47 $12,608 1 There were no transfers between Level 1 and Level 2 during the year. 2 Short-term investments include cash equivalents of $63 million. The System Plan enters into futures contracts, traded on regulated exchanges, to manage certain risks and to maintain appropriate market exposure in meeting the investment objectives of the System Plan. The System Plan bears the market risk that arises from any unfavorable changes in the value of the securities or indexes underlying these futures contracts. The use of futures contracts involves, to varying degrees, elements of market risk in excess of the amount recorded in the Combined Statements of Condition. The guidelines established by the CIP further reduce risk by limiting the net futures positions, for most fund managers, to 15 percent of the market value of the advisor’s portfolio. At December 31, 2015 and 2014, a portion of short-term investments was available for futures trading. There were $3 million and $1 million of Treasury securities pledged as collateral for the years ended December 31, 2015 and 2014, respectively.

Federal Reserve System Audits 381 Thrift Plan Employees of the Reserve Banks participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The Reserve Banks match 100 percent of the first 6 percent of employee contributions from the date of hire and provide an automatic employer contribution of 1 percent of eligible pay. The Reserve Banks’ Thrift Plan contributions totaled $121 million and $113 million for the years ended December 31, 2015 and 2014, respectively, and are reported as a component of “Operating expenses: Salaries and benefits” in the Combined Statements of Income and Comprehensive Income. (10) Postretirement Benefits Other Than Retirement Plans and Postemployment Benefits Postretirement Benefits Other Than Retirement Plans In addition to the Reserve Banks’ retirement plans, employees who have met certain age and length-of-service requirements are eligible for both medical and life insurance benefits during retirement. The Reserve Bank and plan participants fund benefits payable under the medical and life insurance plans as due and the plans have no assets. Following is a reconciliation of the beginning and ending balances of the benefit obligation (in millions): 2015 2014 Accumulated postretirement benefit obligation at January 1 $1,769 $1,538 Service cost-benefits earned during the period 76 63 Interest cost on accumulated benefit obligation 72 75 Net actuarial loss (gain) (105) 164 Curtailment loss (gain) - (2) Contributions by plan participants 23 25 Benefits paid (93) (92) Medicare Part D subsidies 5 5 Plan amendments (3) (7) Accumulated postretirement benefit obligation at December 31 $1,744 $1,769 At December 31, 2015 and 2014, the weighted-average discount rate assumptions used in developing the postretirement benefit obligation were 4.31 percent and 3.96 percent, respectively. Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the plan’s benefits when due. The System Plan discount rate assumption setting convention uses an unrounded rate.

382 102nd Annual Report | 2015 Following is a reconciliation of the beginning and ending balance of the plan assets, and the unfunded postretirement benefit obligation and accrued postretirement benefit costs (in millions): 2015 2014 Fair value of plan assets at January 1 $ - $ - Contributions by the employer 65 62 Contributions by plan participants 23 25 Benefits paid (93) (92) Medicare Part D subsidies 5 5 Fair value of plan assets at December 31 $ - $ - Unfunded obligation and accrued postretirement benefit cost $1,744 $1,769 Amounts included in accumulated other comprehensive loss are shown below: Prior service cost $ 20 $ 26 Net actuarial loss (227) (355) Deferred curtailment gain 1 1 Total accumulated other comprehensive loss $ (206) $ (328) Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs” in the Combined Statements of Condition. For measurement purposes, the assumed health-care cost trend rates at December 31 are provided in the table below. The current health-care cost trend rate for next year is expected to decline ratably each year until achieving the ultimate trend rate in 2022: 2015 2014 Health-care cost trend rate assumed for next year 7.00% 6.60% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 4.75% 4.75% Year that the rate reaches the ultimate trend rate 2022 2019 Assumed health-care cost trend rates have a significant effect on the amounts reported for health-care plans. A one percentage point change in assumed healthcare cost trend rates would have the following effects for the year ended December 31, 2015 (in millions): One percentage One percentage point increase point decrease Effect on aggregate of service and interest cost components of net periodic postretirement benefit costs $ 26 $ (21) Effect on accumulated postretirement benefit obligation 218 (187) The following is a summary of the components of net periodic postretirement benefit expense for the years ended December 31 (in millions): 2015 2014 Service cost-benefits earned during the period $ 76 $ 63 Interest cost on accumulated benefit obligation 72 75 Amortization of prior service cost (10) (10) Amortization of net actuarial loss 24 10 Net periodic postretirement benefit expense $162 $138

Federal Reserve System Audits 383 Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit expense in 2016 are shown below: Prior service cost $(9) Net actuarial loss 8 Total $(1) Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2015 and 2014, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 3.96 percent and 4.79 percent, respectively. Net periodic postretirement benefit expense is reported as a component of “Operating expenses: Salaries and benefits” in the Combined Statements of Income and Comprehensive Income. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health-care benefit plans that provide benefits that are at least actuarially equivalent to Medicare Part D. The benefits provided under the Reserve Banks’ plan to certain participants are at least actuarially equivalent to the Medicare Part D prescription drug benefit. The estimated effects of the subsidy are reflected in actuarial (gain)/loss in the accumulated postretirement benefit obligation and net periodic postretirement benefit expense. Federal Medicare Part D subsidy receipts were $4 million and $5 million in the years ended December 31, 2015 and 2014, respectively. Expected receipts in 2016, related to benefits paid in the years ended December 31, 2015 and 2014, are $3 million. Following is a summary of expected postretirement benefit payments (in millions): Without subsidy With subsidy 2016 $ 79 $ 74 2017 84 78 2018 89 83 2019 94 87 2020 98 91 2021–2025 574 528 Total $1,018 $941 Postemployment Benefits The Reserve Banks offers benefits to former qualifying or inactive employees. Postemployment benefit costs are actuarially determined using a December 31 measurement date and include the cost of providing disability; medical, dental, and vision insurance; and survivor income benefits. The accrued postemployment benefit costs recognized by the Reserve Banks at December 31, 2015 and 2014, were $148 million and $156 million, respectively. This cost is included as a component of “Accrued benefit costs” in the Combined Statements of Condition. Net periodic postemployment benefit expense (credit) included in 2015 and 2014 operating expenses were $12 million and $29 million, respectively, and are recorded as a component of “Operating expenses: Salaries and benefits” in the Combined Statements of Income and Comprehensive Income.

384 102nd Annual Report | 2015 (11) Accumulated Other Comprehensive Income and Other Comprehensive Income Following is a reconciliation of beginning and ending balances of accumulated other comprehensive income (loss) as of December 31 (in millions): 2015 2014 Amount related Amount related Total T otal Amount related to Amount related to accumulated accumulated to defined postretirement to defined postretirement other other benefit benefits other benefit benefits other comprehensive comprehensive retirement plan than retirement retirement plan than retirement income (loss) income (loss) plans plans Balance at January 1 $(3,840) $(328) $(4,168) $(2,384) $(172) $(2,556) Change in funded status of benefit plans: Prior service costs arising during the year - 3 3 - 7 7 Amortization of prior service cost 931 (10)2 83 1001 (10)2 90 Change in prior service costs related to benefit plans 93 (7) 86 100 (3) 97 Net actuarial (loss) gain arising during the year (72) 105 33 (1,657) (164) (1,821) Deferred curtailment gain - - - - 1 1 Amortization of net actuarial loss 2231 242 247 1011 102 111 Change in actuarial (losses) gains related to benefit plans 151 129 280 (1,556) (153) (1,709) Change in funded status of benefit plans— other comprehensive income (loss) 244 122 366 (1,456) (156) (1,612) Balance at December 31 $(3,596) $(206) $(3,802) $(3,840) $(328) $(4,168) 1 Reclassification is reported as a component of “Operating Expenses: Net periodic pension expense” in the Combined Statements of Income and Comprehensive Income. 2 Reclassification is reported as a component of “Operating Expenses: Salaries and benefits” in the Combined Statements of Income and Comprehensive Income. Additional detail regarding the classification of accumulated other comprehensive loss is included in Note 9 and 10. (12) Business Restructuring Charges In 2014, the Treasury announced a plan to consolidate the number of Reserve Banks providing fiscal agent services to the Treasury from ten to four. The new infrastructure will involve consolidation of substantially all operations to the FRBC, the FRBKC, the FRBNY, and the FRBSL.

Federal Reserve System Audits 385 Following is a summary of financial information related to the restructuring plans (in millions): 2015 2 014 restructuring restructuring plans plans Total Information related to restructuring plans as of December 31, 2015: Total expected costs related to restructuring activity $ 1 $ 22 $ 23 E stimated future costs related to restructuring activity - 3 3 Expected completion date 2017 2018 Reconciliation of liability balances: Balance at December 31, 2013 $ - $ - $ - Employee separation costs - 14 14 Other costs - 1 1 Adjustments - 1 1 Payments - - - Balance at December 31, 2014 $ - $ 16 $ 16 Employee separation costs 1 3 4 Other costs - 2 2 Adjustments - (3) (3) Payments - (2) (2) Balance at December 31, 2015 $ 1 $ 16 $ 17 Employee separation costs are primarily severance costs for identified staff reductions associated with the announced restructuring plans. Separation costs that are provided under terms of ongoing benefit arrangements are recorded based on the accumulated benefit earned by the employee. Separation costs that are provided under the terms of one-time benefit arrangements are generally measured based on the expected benefit as of the termination date and recorded ratably over the period to termination. Restructuring costs related to employee separations are reported as a component of “Operating expenses: Salaries and benefits” in the Combined Statements of Income and Comprehensive Income. Other costs include retention pay and are shown as a component of “Operating Expenses: Salaries and benefits” in the Combined Statements of Income and Comprehensive Income. Adjustments to the accrued liability are primarily due to changes in the estimated restructuring costs and are shown as a component of the appropriate expense category in the Combined Statements of Income and Comprehensive Income. Restructuring costs associated with the impairment of certain Reserve Bank assets, including software, buildings, leasehold improvements, furniture, and equipment, are discussed in Note 7. Costs associated with enhanced pension benefits for all Reserve Banks are recorded on the books of the FRBNY as discussed in Note 9. Costs associated with enhanced postretirement benefits are disclosed in Note 10.

386 102nd Annual Report | 2015 (13) Distribution of Comprehensive Income The following table presents the distribution of the Bank’s comprehensive income for the years ended December 31 (in millions): 2015 2014 Dividends on capital stock $ 1,743 $ 1,686 Transfer to (from) surplus (18,572) 1,065 Earnings remittances to the Treasury Interest on Federal Reserve notes 91,143 96,902 Required by the Federal Reserve Act, as amended by the FAST Act 25,956 - Total distribution $100,270 $99,653 Before the enactment of the FAST Act, the amount reported as transfer to (from) surplus represented the amount necessary to equate surplus with capital paid-in, in accordance with the Board of Governor’s policy. Subsequent to the enactment of the FAST Act, the amount reported as transfer to (from) surplus represents the amount necessary to maintain surplus at an amount equal to the Reserve Banks’ allocated portion of the aggregate surplus limitation. On December 28, 2015, the Reserve Banks reduced the aggregate surplus to the $10 billion limit in the FAST Act by remitting $19.3 billion to the Treasury, which is reported as a component of “Earnings remittances to the Treasury: Required by the Federal Reserve Act, as amended by the FAST Act” in the Reserve Banks’ Combined Statements of Income and Comprehensive Income, and in the table above. (14) Subsequent Events The FAST Act includes provisions that, effective on January 1, 2016, will change the rate of dividends paid to member banks by the Reserve Banks. See Note 3m for additional information on these FAST Act provisions. There were no other subsequent events that require adjustments to or disclosures in the combined financial statements as of December 31, 2015. Subsequent events were evaluated through March 8, 2016, which is the date that the combined financial statements were available to be issued.

Federal Reserve System Audits 387 Office of Inspector General Activities During 2015, the OIG issued 23 audit, inspection, and evaluation reports (table 1) and conducted a number of follow-up reviews to evaluate action taken The Office of Inspector General (OIG) for the Fedon prior recommendations. Due to the sensitive eral Reserve Board, which is also the OIG for the nature of some of the material, certain reports were Consumer Financial Protection Bureau (CFPB), only issued internally to the Board, as indicated. OIG operates in accordance with the Inspector General investigative work resulted in 26 arrests, 30 indict- Act of 1978, as amended. The OIG conducts activiments, and 17 convictions, as well as $1,003,607,154 ties and makes recommendations to promote in criminal fines and restitution. Twenty-seven inveseconomy and efficiency; enhance policies and procetigations were opened and 32 investigations were dures; and prevent and detect waste, fraud, and abuse closed during the year. The OIG also issued its listin Board programs and operations, including funcings of major management challenges facing the tions that the Board has delegated to the Federal Board and the CFPB. Further, the OIG issued two Reserve Banks. Accordingly, the OIG plans and con- Semiannual Reports to Congress and performed ducts audits, inspections, evaluations, investigations, approximately 51 reviews of legislation and regulaand other reviews relating to Board and Boardtions related to the operations of the Board, the delegated programs and operations. It also retains an CFPB, or the OIG. independent public accounting firm to annually audit the Board’s and the Federal Financial Institutions For more information and to view OIG reports, visit Examination Council’s financial statements. In addi- the OIG’s website at http://oig.federalreserve.gov. tion, the OIG keeps the Congress and the Board of Specific details about the OIG’s body of work also Governors fully informed about serious abuses and may be found in the OIG’s Work Plan and Semiandeficiencies. nual Reports to Congress. Table 1. OIG audit, inspection, and evaluation reports issued in 2015 Report title Month issued Audit of Planned Physical and Environmental Controls for the Board’s Data Center Relocation January The CFPB Can Enhance Its Diversity and Inclusion Efforts March Board of Governors of the Federal Reserve System Financial Statements as of and for the Years Ended December 31, 2014 and 2013, and Independent Auditors’ Reports March Federal Financial Institutions Examination Council Financial Statements as of and for the Years Ended December 31, 2014 and 2013, and Independent Auditors’ Reports March Review of the Failure of Waccamaw Bank March Security Control Review of the CFPB’s Tableau System (internal report) March The Board Can Enhance Its Diversity and Inclusion Efforts March The CFPB Is in Compliance With IPIA, as Amended May Coordination of Responsibilities Among the Consumer Financial Protection Bureau and the Prudential Regulators—Limited Scope Review June The CFPB Can Enhance Its Process for Notifying Prudential Regulators of Potential Material Violations June Security Control Review of the CFPB’s Data Team Complaint Database (internal report) July CFPB Headquarters Construction Costs Appear Reasonable and Controls Are Designed Appropriately July The CFPB Can Further Enhance Internal Controls for Certain Hiring Processes August The CFPB Can Enhance Its Contract Management Processes and Related Controls September Security Control Review of the Board’s Consolidated Supervision Comparative Analysis, Planning and Execution System (internal report) September Opportunities Exist to Enhance Management Controls Over the CFPB’s Consumer Complaint Database September The Board Continues to Follow a Structured Approach to Planning and Executing the Relocation of the Data Center September Congressional Request Related to the In-Scope Borrower Population of the Independent Foreclosure Review and the Subsequent Payment Agreement September The Board Identified Areas of Improvement for Its Supervisory Stress Testing Model Validation Activities, and Opportunities Exist for Further Enhancement October 2015 Audit of the Board’s Information Security Program November 2015 Audit of the CFPB’s Information Security Program November Fiscal Year 2015 Risk Assessment of the CFPB’s Purchase Card Program December Security Control Review of the Board’s Statistics and Reserves System (internal report) December

388 102nd Annual Report | 2015 Government Accountability eral Reserve System operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of Office Reviews 2010 (Dodd-Frank Act) directs the GAO to conduct additional audits with respect to these operations. In The Federal Banking Agency Audit Act (Pub. L. 2015, the GAO completed 12 projects that involved No. 95–320) authorizes the Government Account- the Federal Reserve (table 1). Sixteen projects were ability Office (GAO) to audit certain aspects of Fed- ongoing as of December 31, 2015 (table 2). Table 1. Reports completed during 2015 Report title Report number M onth issued (2015) Dodd-Frank Regulations: Impacts on Community Banks, Credit Unions and Systemically Important Institutions GAO-16-169 December Financial Audit: Bureau of the Fiscal Service’s Fiscal Years 2015 and 2014 Schedules of Federal Debt GAO-16-160 November Lender-Placed Insurance: More Robust Data Could Improve Oversight GAO-15-631 September International Insurance Capital Standards: Collaboration among U.S. Stakeholders Has Improved but Could Be Enhanced GAO-15-534 July Mortgage Reforms: Actions Needed to Help Assess Effects of New Regulations GAO-15-185 July Debt Limit: Market Response to Recent Impasses Underscores Need to Consider Alternative Approaches GAO-15-476 July Cybersecurity: Bank and Other Depository Regulators Need Better Data Analytics and Depository Institutions Want More Usable Threat Information GAO-15-509 July Bank Regulation: Lessons Learned and a Framework for Monitoring Emerging Risks and Regulatory Response GAO-15-365 June Community Development Capital Initiative: Status of the Program Investments and Participants GAO-15-542 May Securities Regulation: SEC Can Further Enhance Its Oversight Program of FINRA GAO-15-376 April Management Report: Areas for Improvement in the Federal Reserve Banks’ Information Systems Controls GAO-15-413R April Financial Company Bankruptcies: Information on Legislative Proposals and International Coordination GAO-15-299 March Note: In February 2015, the GAO removed the Federal Reserve as an agency participant for an engagement concerning student loan repayment programs. Table 2. Projects active at year-end 2015 Subject of project Month initiated Status Duplication in the U.S. financial regulatory system February 2014 Open Federal Reserve’s payments system operations October 2014 Open Remittance service providers October 2014 Closed 2/16/2016 International remittances update November 2014 Closed 2/16/2016 Resolution plans for large financial institutions November 2014 Open Federal Reserve stress tests December 2014 Open Office of Financial Research March 2015 Open Implementation of Regulation D April 2015 Open Mortgage servicing rights May 2015 Open Section 302 of the Riegle Community Development and Regulatory Improvement Act of 1994 June 2015 Closed 1/27/2016 National Flood Insurance Program July 2015 Open Accounting and disbursement of funds related to payments from financial institutions associated with fines, penalties, and forfeitures for BSA/AML violations, U.S. sanctions programs, and the Foreign Corrupt Practices Act requirements August 2015 Open Accounting and disbursement of funds related to payments from financial institutions to the federal government associated with fines, penalties, and forfeitures for various violations August 2015 Open Independent leasing authority September 2015 Open Community Reinvestment Act September 2015 Open Self-directed retirement savings arrangements November 2015 Open

389 13 Federal Reserve System Budgets The Federal Reserve Board of Governors and the System Budgets Overview Federal Reserve Banks prepare annual budgets as part of their efforts to ensure appropriate stewardship Tables 1 and 2 summarize the Federal Reserve Board and accountability.1 This section presents informaof Governors’ and Federal Reserve Banks’ 2015 budtion on the 2015 budget performance of the Board geted and actual and 2016 budgeted operating and Reserve Banks, and on their 2016 budgets, budexpenses and employment.2 geting processes, and trends in expenses and employment. This section also presents information on the costs of new currency. 2 Substantially all employees of the Board and Reserve Banks participate in the Retirement Plan for Employees of the Federal Reserve System (System Plan). Reserve Bank employees at certain compensation levels participate in the Benefit Equalization Plan, and certain Reserve Bank officers participate in the Supplemental Retirement Plan for Select Officers of the Reserve 1 Before 2013, information about the budgeted expenses of the Banks. The operating expenses of the Reserve Banks presented Board and Reserve Banks was presented in a separate report in this section do not include expenses related to the retirement titled Annual Report: Budget Review. Copies of that report are plans; additional information about these expenses can be found available at www.federalreserve.gov/publications/budget-review/ in section 11, “Statistical Tables” (see “Table 10. Income and default.htm. expenses of the Federal Reserve Banks, by Bank”). Each budget covers one calendar year. Table 1. Total operating expenses of the Federal Reserve System, net of receipts and claims for reimbursement, 2015–16 Millions of dollars, except as noted V ariance V ariance 2015 actual to 2015 budget 2016 budget to 2015 actual Item 2015 budget 2015 actual 2016 budget Amount Percent A mount P ercent Board 629.3 643.5 14.2 2.3 709.5 66.0 10.3 OIG 29.0 28.9 -0.1 -0.3 31.8 2.9 9.9 Reserve Banks1 3,968.7 3,875.3 -93.4 -2.4 4,116.6 241.3 6.2 Currency 717.9 689.2 -28.7 -4.0 737.4 48.2 7.0 Total System operating expenses 5,344.9 5,236.9 -108.0 -2.0 5,595.3 358.3 6.8 Revenue from priced services 414.4 429.1 14.7 3.5 426.9 -2.2 -0.5 Claims for reimbursement2 626.1 650.5 24.4 3.9 652.6 2.1 0.3 Other income3 2.9 2.9 * 0.5 2.5 -0.4 - 13.8 Revenue and claims for reimbursement4 1,043.4 1,082.5 39.1 3.7 1,082.0 -0.5 0.0 Total System operating expenses, net of revenue and claims for reimbursement 4,301.5 4,154.4 -147.1 -3.4 4,513.3 358.8 8.6 Note: Here and in subsequent tables, components may not sum to totals and may not yield percentages shown because of rounding. 1 Excludes Reserve Bank capital outlays as well as assessments by the Board of Governors for costs related to currency and the operations of the Board of Governors and the Consumer Financial Protection Bureau (CFPB). 2 Reimbursable claims include the expenses of fiscal agency and depository services provided to the U.S. Treasury, other government agencies, and other fiscal principals. 3 Fees that depository institutions pay for the settlement component of the Fedwire Securities Service transactions for Treasury securities transfers. 4 Excludes annual assessments for the supervision of large financial companies pursuant to Regulation TT, which are not recognized as revenue or used to fund Board expenses. (See section 4, “Supervision and Regulation,” for more information.) * Less than $50,000.

390 102nd Annual Report | 2015 Table 2. Employment in the Federal Reserve System, 2015–16 V ariance V ariance 2015 actual to 2015 budget 2016 budget to 2015 actual Item 2015 budget 2015 actual 2016 budget Amount Percent A mount P ercent Board1 2,673 2,700 27 1.0 2,789 89 3.3 OIG1 125 125 0 0.0 130 5 4.0 Reserve Banks2 19,295 18,986 -310 -1.6 19,424 438 2.3 Total System employment 22,093 21,811 -283 -1.3 22,343 532 2.4 Note: Employment numbers presented include authorized position counts for the Board and OIG and average number of personnel (ANP) for the Reserve Banks. ANP is the average number of employees expressed in terms of full-time positions for the period and includes outside agency help. 1 Budget represents authorized position count at the beginning of the year, and actual represents authorized position count at year-end. 2 Includes employment of the Federal Reserve Information Technology (FRIT) support function and the Office of Employee Benefits (OEB). 2015 Budget Performance efficiency improvements in cash and support functions. Staffing has subsequently increased because of In carrying out its responsibilities in 2015, the Fed- requirements of the Dodd-Frank Wall Street Reform eral Reserve System incurred $4.2 billion in net and Consumer Protection Act of 2010 (Dodd-Frank expenses. Total System operating expenses of Act) and other responses to the financial crisis $5,236.9 million were offset by $1,082.5 million in (figure 4). revenue from priced services, claims for reimbursement, and other income. Total 2015 System operating Growth in supervision expenses over the past expenses were $108.0 million, or 2.0 percent, less 10 years has been driven by additional supervisory than the amount budgeted for 2015. resources needed to respond to the financial crisis, to continue to implement expanded supervisory respon- 2016 Operating Expense Budget sibilities mandated by the Dodd-Frank Act, and to maintain appropriate coverage following growth in Budgeted 2016 operating expenses, net of revenue the number of supervised state member banks. and reimbursements, are $358.8 million, or 8.6 per- Expense growth in the monetary policy area during cent, higher than 2015 actual expenses. The Reserve the financial crisis has been followed by a focus on Bank budgets comprise almost three-quarters of the enhancing financial stability monitoring and dedicat- System budget (figure 1). Budgeted 2016 revenue ing additional resources to regional economic from priced services and claims for reimbursements research. are expected to remain stable in 2016. Trends in Expenses and Employment Figure 1. Distribution of budgeted expenses of the Federal Reserve System, 2016 From the actual 2006 level to the budgeted 2016 amount, the total expenses of the Federal Reserve Board of Governors and OIG, 13.2% Reserve Banks, 73.6% System have increased an average of 4.6 percent per year (figure 2). Over the same period, nondefense discretionary spending by the federal government has increased an average of 1.3 percent per year (fig- Currency, 13.2% ure 3). Federal Reserve System employment declined from 2006 through 2010 because of continued efforts to reduce the size of the System’s check service and Board employees also participate in the Benefit Equalization Plan, and Board officers participate in the Pension Enhancement Plan for Officers of the Board of Governors of the Federal Reserve System (PEP). The operating expenses of the Board presented in this section include expenses related to Board participants in the Benefit Equalization Plan and PEP but do not include expenses related to the System Plan.

Federal Reserve System Budgets 391 Figure 2. Total expenses of the Federal Reserve System, Figure 4. Employment in the Federal Reserve System, 2006–16 2006–16 Billions of dollars Thousands of persons 6 23 Current dollars 5 2009 dollars1 4 22 3 2 21 1 20 2006 2008 2010 2012 2014 2016 Note: For 2016, budgeted. 19 1 Calculated with the GDP price deflator. 2006 2008 2010 2012 2014 2016 Note: For 2016, budgeted. Employment numbers presented include position Federal Reserve Bank expenses in the cash area have counts for the Board and OIG and average number of personnel (ANP) for the increased as a result of a multiyear effort to modern- Reserve Banks. ize the cash-processing and inventory-tracking infrastructure. Expenses for services provided to the or to organizational changes in electronic check- Treasury have grown to meet that agency’s evolving processing, fiscal agency, cash, and support funcneeds, including the development of enhanced autotions. They have also been partially offset by expense mated tools for the Treasury’s collection and payreductions resulting from the continued decline in ment services, the addition of Treasury applications paper check volume. to the Treasury Web Application Infrastructure (TWAI), and other requested projects. These 2016 Capital Budgets increases have been partially offset by substantial expense and staffing decreases related to efficiencies The capital budgets for the Board and Reserve Banks total $69.8 million and $403.8 million, respectively.3 As in previous years, the capital budgets in 2016 Figure 3. Cumulative change in Federal Reserve System include funding for projects that support the strategic expenses and federal government expenses, 2006–16 direction outlined by the Board and each Reserve Bank. These strategic goals emphasize investments Percent 60 that continue to improve operational efficiencies, enhance services to Bank customers, and ensure a 50 Federal Reserve System safe and productive work environment. 40 Board of Governors Budgets 30 20 The Board’s budget is grounded in the direction 10 Federal government1 set by its Strategic Framework 2012–15 (www .federalreserve.gov/publications/gpra/files/2012-2015- 0 strategic-framework.pdf) and Strategic Plan 2016–19 -10 (www.federalreserve.gov/publications/gpra/files/2016- 2006 2008 2010 2012 2014 2016 Note: For 2016, budgeted. Federal government expenses are reported on a fiscal- 3 The capital budget reported for the Board includes single-year year basis beginning October 1; the Federal Reserve System expenses are outlays and 2016 outlays from multiyear projects of the Board reported on a calendar-year basis. and the Office of Inspector General (OIG). The capital budget 1 Discretionary spending less expenditures on defense. Source: Budget of the reported for the Reserve Banks includes the amounts budgeted United States Government, Fiscal Year 2016: Historical Tables, Table 8.1. Outlays for the Federal Reserve Information Technology (FRIT) supby Budget Enforcement Act Category, 1962–2020. port function and the Office of Employee Benefits (OEB).

392 102nd Annual Report | 2015 2019-gpra-strategic-plan.pdf).4 The budget is struc- The Board’s Office of Inspector General (OIG), in tured by division, office, or special account. keeping with its statutory independence, prepares its proposed budget apart from the Board’s budget. The The Board’s budget process is as follows: OIG presents its budget directly to the Board for approval; thus, information on the OIG’s budget is • At the start of the budget process, the chief operatalso provided in the discussion that follows. ing officer (COO) and chief financial officer (CFO) meet with the Committee on Board Affairs (CBA) Tables 3 and 4 summarize the Board’s 2015 budgeted and recommend a specific growth target for the and actual expenditures and its 2016 budgeted expen- Board’s operating budget. The recommendation is ditures by division, office, or special account and by based on a growth projection that includes known account classification, respectively. Table 5 summachanges in the Board’s base budget (personnel rizes the Board’s budgeted and actual authorized expenses as well as goods and services), funding position count for 2015 and 2016. Each table also clearly defined in the strategic plan, and additional includes a line item for the OIG. initiatives. The growth projection also incorporates the full-year impact of positions added during the 2015 Budget Performance prior year as well as proposed changes to the Board’s compensation and benefit programs, along Board of Governors with historic spending trends in goods and services. Total expenses for Board operations were $643.5 mil- • Staff reviews initial budget requests submitted by lion, which was $14.2 million, or 2.3 percent, more divisions and offices, including proposed initiatives than the approved 2015 budget of $629.3 million. and potential savings, and works collaboratively The Board’s 2015 single-year capital spending was with all divisions and offices to refine budget sub- less than budgeted by $3.0 million, or 26.9 percent, missions and bring the proposed operating budget and multiyear capital projects remained within their in line with the growth target. project budgets with actual spending in 2015 less than budgeted by $34.6 million, or 53.8 percent. • The COO and CFO subsequently meet with the Executive Committee, which comprises the direc- The 2015 operational overrun was primarily driven tors of each division, and the CBA to further by overruns in personnel services and by significant review and refine the budget submissions. timing-related adjustments and one-time accounting • Staff submits the proposed budget to the CBA for entries in goods and services. Personnel services were review. $9.8 million more than the 2015 budget primarily because of the ability of divisions to hire faster than • The administrative governor submits the budget to projected, compensation adjustments, and additional the full Board for review and final action. benefit costs resulting from updated pension cost • Expenses are monitored throughout the year. Vari- assumptions. Goods and services were $4.4 million ances are analyzed and reported.5 more than the budget primarily because of a timingrelated adjustment for furniture and equipment purchases that were planned in the prior year’s budget 4 The Strategic Framework 2012–15 identified and framed six overarching themes for the Board to address over the four-year and a one-time accounting entry associated with the planning horizon, along with recommended resource invest- ongoing building renovation project. In Septemments in terms of personnel and facilities. The six themes are: ber 2015, the Board authorized the overexpenditure supervision, regulation, and financial stability; data governance; facilities infrastructure; maximizing the value of human capital; of the 2015 operating budget, excluding specific management processes; and cost reduction and budgetary building-related accounting entries, by 1.5 percent. growth. The Strategic Plan 2016–19, which was approved by the Board in July 2015, continues the work of the Strategic Frame- Office of Inspector General work 2012–15. In addition to investing in ongoing operations, the Board will prioritize investments and dedicate sufficient Total expenses for OIG operations were $28.9 milresources to six pillars over the 2016–19 period, which will allow lion, which was $0.1 million, or 0.3 percent less than the Board to advance its mission and respond to continuing and evolving challenges. The six pillars identified for 2016–19 are: the approved 2015 operating budget. Personnel serproject development and resource allocation, workforce, physical vices were $0.7 million more than budgeted largely infrastructure, technology, data, and public engagement and because hiring occurred earlier than anticipated. accountability. 5 The Division of Financial Management implemented a multiyear budget development and forecasting automated system, information, and allow for greater comparability in reporting to which will help inform budget development, provide forecast Federal Reserve Bank information.

Federal Reserve System Budgets 393 Table 3. Operating expenses of the Board of Governors, by division, office, or special account, 2015–16 Millions of dollars, except as noted Variance V ariance 2015 actual to 2015 budget 2016 budget to 2015 actual Division, office, or special account 2015 budget1 2015 actual 2016 budget Amount Percent A mount P ercent Board Members 27.3 26.2 -1.1 -4.1 27.9 1.7 6.6 Secretary 10.0 10.1 0.1 1.0 10.6 0.4 4.3 Research and Statistics 66.2 67.2 1.0 1.5 72.4 5.2 7.7 International Finance 28.6 27.4 -1.2 -4.2 31.3 4.0 1 4.5 Monetary Affairs 34.0 34.2 0.2 0.5 37.9 3.7 1 0.8 Financial Stability Policy and Research 7.6 8.0 0.4 4.9 9.5 1.5 18.5 Banking Supervision and Regulation 122.4 128.8 6.4 5.2 1 39.6 10.8 8.4 Consumer and Community Affairs 27.3 27.5 0.2 0.7 31.8 4.3 15.7 Legal 25.9 25.7 -0.2 -0.8 28.7 3.1 11.9 Chief Operating Officer 14.0 11.9 -2.1 -14.7 15.9 4.0 33.7 Financial Management 11.1 11.4 0.3 2.4 12.2 0.8 6.6 Reserve Bank Operations and Payment Systems 39.6 40.9 1.3 3.4 41.2 0.3 0.7 Information Technology 94.8 95.4 0.6 0.6 102.5 7.1 7.4 IT income2 -44.0 -44.2 -0.2 0.4 -45.0 -0.8 1.8 Management 114.0 111.9 -2.0 -1.8 121.6 9.6 8.6 Centrally-managed benefits3 9.8 13.4 3.6 37.2 14.1 0.6 4.8 Special projects 14.7 13.4 -1.3 -8.9 17.0 3.6 2 7.1 Extraordinary items 26.0 34.2 8.2 31.5 40.3 6.1 1 7.9 Total, Board operations 629.3 643.5 14.2 2.3 709.5 66.0 10.3 Office of Inspector General 29.0 28.9 -0.1 -0.3 31.8 2.9 9.9 1 The 2015 budget figures do not reflect internal transfers among divisions and accounts during the year. 2 Previously, this special account was reported as “Data processing income.” 3 Previously, this special account was reported as “Residual retirement.” Goods and services were $0.8 million less than bud- the strategic plan, and as in past years, positions were geted because of less-than-anticipated spending for added in divisions that are focused on monetary policy, tuition, contractual professional services, software, financial stability and supervisory mandates under the and travel. The OIG’s single-year capital spending Dodd-Frank Act, and new regulatory responsibilities. was less than budgeted by $19.0 thousand, or Positions were also allocated to the support divisions 11.9 percent, and multiyear capital projects remained to meet demands, such as legal work related to enforcewithin their project budgets. ment and litigation cases, technology projects to support the Board’s enterprise data strategy, and other 2016 Operating Expense Budget information technology work. Board of Governors Office of Inspector General The 2016 budget for Board operations is $709.5 mil- The 2016 budget for the OIG operations is $31.8 million, which is $66.0 million, or 10.3 percent, higher lion, which is $2.9 million, or 9.9 percent, higher than than 2015 actual expenses. The operating budget 2015 actual expenses. For 2016, authorized positions includes amounts to fund the Board’s ongoing opera- for the OIG total 130, an increase of 5 positions, or tions and the triannual Survey of Consumer 4.0 percent, from 2015 actual levels. The additional Finances and to support the six overarching pillars funding and positions will assist the OIG in impleidentified in the Board’s 2016–19 strategic plan. menting the goals, objectives, and activities identified in the OIG’s strategic plan, which includes delivering For 2016, authorized positions for Board operations high-quality products and services that promote total 2,789, an increase of 89 positions, or 3.3 percent, agency improvement, increasing employee engagefrom 2015 actual levels. The positions are aligned with ment, cultivating leadership, fostering a skilled and

394 102nd Annual Report | 2015 Table 4. Operating expenses of the Board of Governors, by account classification, 2015–16 Millions of dollars, except as noted Variance V ariance 2015 actual to 2015 budget 2016 budget to 2015 actual Account classification 2015 budget1 2015 actual 2016 budget Amount Percent A mount P ercent P ersonnel services Salaries 362.5 367.3 4.8 1.3 401.0 33.7 9.2 Retirement/Thrift plans2 44.8 49.9 5.2 11.5 52.3 2.3 4.6 Employee insurance 31.3 31.1 -0.2 -0.5 39.4 8.3 26.8 Subtotal, personnel services 438.5 448.4 9.8 2.2 4 92.7 44.3 9.9 Goods and services Postage and shipping 0.8 0.5 -0.3 -39.0 0.4 -0.1 -18.0 Travel 14.7 16.1 1.4 9.6 16.4 0.3 1.8 Telecommunications 6.8 7.1 0.4 5.2 7.2 0.1 0.9 Printing and binding 1.8 1.6 -0.2 -13.3 2.2 0.7 41.7 Publications 0.5 0.6 0.1 11.5 0.6 * 1.3 Stationery and supplies 1.5 1.5 * -0.4 1.4 -0.1 -3.9 Software 15.3 14.3 -1.0 -6.4 16.6 2.3 15.9 Furniture and equipment (F&E) 7.5 10.1 2.6 35.0 6.6 -3.6 -35.2 Rentals 22.9 23.2 0.3 1.4 27.0 3.8 16.4 News, data, and research3 15.0 16.6 1.6 10.6 32.9 16.3 98.4 Utilities 2.9 3.0 0.1 3.9 3.3 0.4 12.1 Repairs and alterations building 2.9 1.7 -1.1 -39.7 2.2 0.5 29.2 Repairs and maintenance F&E 5.2 5.1 -0.1 -1.7 5.6 0.5 9.3 Contingency processing center (CPC)4 1.3 1.3 -0.1 -4.7 0.0 -1.3 - 100.0 Contractual professional services 51.6 49.3 -2.2 -4.3 53.6 4.2 8.6 Interest * * * -2.2 * * -49.1 Tuition/registration/memberships 4.6 4.4 -0.2 -4.1 3.1 -1.3 -28.7 Subsidies and contributions 0.8 0.8 * -3.8 0.9 0.1 13.1 All other 7.7 4.5 -3.2 -41.4 3.3 -1.2 -26.5 Depreciation 36.9 40.2 3.3 9.0 40.3 0.1 0.3 IT user charge 40.8 43.7 2.9 7.1 44.7 1.0 2.3 IT income -41.1 -44.2 -3.1 7.7 -45.0 -0.8 1.8 Income -9.6 -6.3 3.3 -34.6 -6.5 -0.2 3.9 Subtotal, goods and services 190.8 195.2 4.4 2.3 2 16.9 21.7 11.1 Total, Board operations 629.3 643.5 14.2 2.3 709.5 66.0 10.3 Office of Inspector General Personnel services 21.1 21.8 0.7 3.5 23.9 2.1 9.6 Goods and services 7.9 7.1 -0.8 -10.3 7.9 0.8 11.1 Total, OIG operations 29.0 28.9 -0.1 -0.3 31.8 2.9 9.9 1 The 2015 budget figures do not reflect internal transfers among divisions and accounts during the year. 2 Includes expenses related to Board participants in the Benefit Equalization Retirement Plan and Pension Enhancement Plan. 3 Account name changed from “books and subscriptions” to “news, data, and research.” The 2016 budget for data, news, and research is significantly higher due to the Survey of Consumer Finances, which occurs every three years. 4 For the 2016 budget, this account has been combined with rentals. * Less than $50,000. knowledgeable workforce, optimizing external stake- terns, while ensuring the funding of the Board’s highholder engagement, and enhancing the capacity and est priority needs. Meeting the approved growth tarimproving the operational effectiveness of the OIG. gets required all divisions to make difficult choices and prioritize their greatest needs for 2016. During Risks in the 2016 Budget the budget process, many divisions noted the poten- The 2016 operating budget is built on the initial steps tial impact that reducing their budget requests would taken in 2014 and 2015 to better align budget have on meeting workload demands. Staff from the requests with historic hiring trends and spending pat- Division of Financial Management will work closely

Federal Reserve System Budgets 395 Table 5. Positions authorized by the Board of Governors, by division, office, or special account, 2015–16 Variance V ariance 2015 actual to 2015 budget 2016 budget to 2015 actual Division, office, or special account 2015 budget 2015 actual 2016 budget Amount Percent A mount P ercent Board Members 118 120 2 1.7 121 1 0.8 Secretary 53 53 0 0.0 53 0 0.0 Research and Statistics 343 344 1 0.3 346 2 0.6 International Finance 150 150 0 0.0 152 2 1.3 Monetary Affairs 157 156 -1 -0.6 167 11 7.1 Financial Stability Policy and Research 42 42 0 0.0 50 8 19.0 Banking Supervision and Regulation 441 456 15 3.4 486 30 6.6 Consumer and Community Affairs 107 110 3 2.8 123 13 11.8 Legal 115 115 0 0.0 123 8 7.0 Chief Operating Officer 59 59 0 0.0 65 6 10.2 Financial Management 69 66 -3 -4.3 66 0 0.0 Reserve Bank Operations and Payment Systems 170 171 1 0.6 176 5 2.9 Information Technology 409 409 0 0.0 412 3 0.7 Management 440 449 9 2.0 449 0 0.0 Total, Board operations1 2,673 2,700 27 1.0 2,789 89 3.3 Office of Inspector General 125 125 0 0.0 130 5 4.0 1 Budget represents authorized position count at the beginning of the year, and actual represents authorized position count at year-end. with all divisions throughout the year to mitigate budget provides funding for routine equipment purpotential budget overruns by closely monitoring chases and life-cycle replacements, as well as new inispending. tiatives for technology and automation projects, such as network infrastructure upgrades. Several divisions have indicated they will need additional staff in the coming years beyond the positions The Board’s multiyear capital budget totals approved in the 2016 budget. Continued increases in $468.5 million, which includes 2016 expected cash staffing will affect support functions and place addi- outlays of $60.5 million. The proposed budget is tional demands on available office space. Developing largely a continuation of projects already in progress, a facilities master plan, as outlined in the new strate- including the Martin Building renovation and gic plan, will be critical to meeting future space upgrades to the Eccles Building (the amounts for requirements. The Martin Building renovation will which are unchanged). New initiatives approved for continue to be an area of focus, from both a budget the 2016 budget cycle include information technology and project management perspective, given the size, projects supporting the statistics function, enhancing complexity, and strategic importance of the project. data analytical capabilities for banking regulation Other budget risks stem from uncertainty about the and supervision, automation projects supporting the rising expenses associated with the Board’s data Board’s data strategy, and the build-out of additional needs and the infrastructure necessary to support leased space to accommodate position growth. One effective data management. of the key projects during the 2012–15 strategic planning period was the relocation of the existing Data 2016 Capital Budgets Center, which was completed at the end of 2015. In addition, the New York Avenue Building reconfigu- Table 6 summarizes the Board’s and the OIG’s bud- ration project will be completed in early 2016 and is geted and actual capital outlays for 2015 and 2016. expected to be within budget. Board of Governors Office of Inspector General The Board’s 2016 single-year capital budget totals The OIG’s 2016 capital budget totals $0.3 million for $9.0 million, which represents a decrease of $2.2 mil- multiyear capital outlays, which includes the continlion over the 2015 single-cycle capital budget. The ued build out of its San Francisco regional office.

396 102nd Annual Report | 2015 Table 6. Capital outlays of the Board of Governors, by capital type, 2015–16 Millions of dollars, except as noted V ariance V ariance 2015 actual to 2015 budget 2016 budget to 2015 actual Item 2015 budget 2015 actual 2016 budget Amount Percent A mount P ercent B oard Single-year capital outlays 11.1 8.1 -3.0 -26.9 9.0 0.8 10.2 Multiyear capital outlays 64.3 29.7 -34.6 -53.8 60.5 30.8 103.6 Total capital outlays 75.4 37.9 -37.6 -49.8 69.5 31.6 83.5 OIG Single-year capital outlays 0.2 0.1 * -11.9 0 -0.1 -100.0 Multiyear capital outlays 1.0 * -1.0 - 101.3 0.3 0.3 n/a Total capital outlays 1.2 0.1 -1.1 -89.3 0.3 0.2 128.1 Combined total capital outlays 76.6 38.0 -38.7 -50.4 69.8 31.8 83.7 Note: The amount reported for the multiyear capital budget represents the expected expenditure for the budget year. * Less than $50,000. n/a Not applicable. Federal Reserve Banks Budgets budgets to Board members for review and final action. Each Reserve Bank establishes major operating goals • Throughout the year, Reserve Bank and Board for the coming year, devises strategies for attaining staffs monitor actual performance and compare it those goals, estimates required resources, and moni- with approved budgets and forecasts. tors results. The Reserve Banks’ budgets are structured by functional area, with attributable support Tables 7, 8, and 9 summarize the Reserve Banks’ and overhead charged to each area. In addition to 2015 budgeted and actual expenses and 2016 budthe budget approval process, the Reserve Banks must geted expenses by Reserve Bank, functional area, and submit proposals for certain capital expenditures to account classification.6 In addition, table 10 shows the Board for further review and approval. the Reserve Banks’ budgeted and actual employment for 2015 and budgeted employment for 2016. The Reserve Bank budget process is as follows: 2015 Budget Performance • Reserve Bank and Board governance bodies provide budget guidance for major functional areas for Total 2015 operating expenses for the Reserve Banks the upcoming budget year. were $3,875.3 million, which is $93.4 million, or • The Reserve Banks develop budgets that incorpo- 2.4 percent, less than the approved 2015 budget of rate this guidance, which are reviewed by senior $3,968.7 million. The actual average number of perleadership in the Reserve Banks for alignment with sonnel (ANP) was less than the 2015 budget, largely Reserve Bank and System priorities. because of changes in project plans, turnover, and hiring delays. The Reserve Banks’ 2015 capital spend- • The Reserve Banks submit preliminary budget ing was less than budgeted by $127.1 million, or information to the Board for review, including 28.0 percent, because of changes in timing and scope documentation to support the budget request. for numerous initiatives. • Board staff analyzes the Banks’ budgets, both individually and in the context of System initiatives. The 2015 budget underrun was primarily driven by program changes for several multiyear initiatives, • The Board’s Committee on Federal Reserve Bank Affairs (BAC) reviews the Bank budgets. 6 Additional information about the operating expenses of each of the Reserve Banks can be found in section 11, “Statistical • The Reserve Banks make any requested or needed Tables” (see “Table 10. Income and expenses of the Federal changes, and the BAC chair submits the revised Reserve Banks, by Bank”).

Federal Reserve System Budgets 397 Table 7. Operating expenses of the Federal Reserve Banks, by District, 2015–16 Millions of dollars, except as noted V ariance V ariance 2015 actual to 2015 budget 2016 budget to 2015 actual District 2015 budget 2015 actual 2016 budget Amount Percent A mount P ercent Boston 231.6 227.1 -4.5 -1.9 236.5 9.4 4.1 New York 938.3 918.5 -19.8 -2.1 969.2 50.7 5.5 Philadelphia 200.8 196.1 -4.7 -2.3 194.0 -2.1 -1.1 Cleveland 173.5 170.2 -3.3 -1.9 183.9 13.7 8.0 Richmond 359.7 360.2 0.6 0.2 352.3 -7.9 -2.2 Atlanta 323.0 314.0 -9.0 -2.8 335.8 21.8 7.0 Chicago 356.6 354.0 -2.6 -0.7 369.5 15.5 4.4 St. Louis 335.4 321.4 -14.0 -4.2 374.2 52.8 16.4 Minneapolis 214.5 199.4 -15.2 -7.1 214.1 14.7 7.4 Kansas City 255.3 245.0 -10.3 -4.0 277.3 32.4 13.2 Dallas 223.3 219.4 -3.9 -1.7 231.1 11.7 5.3 San Francisco 356.7 350.0 -6.7 -1.9 378.6 28.6 8.2 Total Reserve Bank operating expenses 3,968.7 3,875.3 -93.4 -2.4 4,116.6 241.3 6.2 Note: Includes expenses of the FRIT support function and the OEB and reflects all redistributions for support and allocation for overhead. Excludes Reserve Bank capital outlays as well as assessments by the Board of Governors for costs related to currency and the operations of the Board of Governors and the CFPB. including those related to the TWAI, the fiscal agent lower as a result of continued efficiencies gained consolidation, Fedwire modernization, and the Cash- from the check server platform migration, the Fed- Forward project.7 Reserve Bank expenses were also Line application conversion, and the implementation of the cash operations efficiency initiative. In addition, check services experienced greater volume 7 In April 2014, the Treasury announced the consolidation of the fiscal agent services provided by the Federal Reserve Banks as declines than anticipated. Higher-than-expected part of its effort to increase operational efficiency and effective- recoveries for currency cross-shipping also contribness. The Treasury anticipates long-term savings, once services uted to the underrun. are transitioned from 10 sites to 4 consolidated sites. Select business lines began transitioning in 2014. The Fedwire modernization initiative involves the transition of Total 2015 actual employment for the Reserve Banks, the Fedwire Funds and Fedwire Securities applications from the FRIT, and OEB was 18,986 ANP, an underrun of legacy mainframe environment to a distributed platform. 310 ANP, or 1.6 percent, from 2015 budgeted staffing The CashForward initiative will replace legacy software applications, automate some additional business processes, and employ technologies to meet current and future needs for the cash func- pleted in July 2012. The project’s planned completion date is in tion. Phase 1 was completed in 2010, and Phase 2 was com- 2017. Table 8. Operating expenses of the Federal Reserve Banks, by operating area, 2015–16 Millions of dollars, except as noted Variance V ariance 2015 actual to 2015 budget 2016 budget to 2015 actual Operating area 2015 budget 2015 actual 2016 budget Amount Percent A mount P ercent Monetary and economic policy 636.8 631.9 -4.9 -0.8 663.8 31.9 5.0 Services to the U.S. Treasury and other government agencies 579.9 550.5 -29.4 -5.1 605.6 55.1 10.0 Services to financial institutions and the public 1,073.6 1,050.9 -22.7 -2.1 1 ,112.3 61.4 5.8 Supervision and regulation 1,260.2 1,252.1 -8.0 -0.6 1,311.6 59.5 4.8 Fee-based services to financial institutions 418.2 389.9 -28.4 -6.8 423.3 33.4 8.6 Total Reserve Bank operating expenses1 3,968.7 3,875.3 -93.4 -2.4 4,116.6 241.3 6.2 1 Operating expenses exclude pension costs, reimbursements, and operating expenses of the Board of Governors (see table 4).

398 102nd Annual Report | 2015 Table 9. Operating expenses of the Federal Reserve Banks, by account classification, 2015–16 Millions of dollars, except as noted V ariance V ariance 2015 actual to 2015 budget 2016 budget to 2015 actual Account classification 2015 budget 2015 actual 2016 budget Amount Percent A mount P ercent Personnel1 2,938.8 2,912.0 -26.8 -0.9 3,085.8 173.8 6.0 Building 326.6 327.5 0.8 0.3 329.2 1.8 0.5 Software costs 224.8 205.7 -19.1 -8.5 239.6 33.9 16.5 Equipment 195.8 181.8 -14.0 -7.1 187.6 5.7 3.2 Recoveries2 -167.8 -182.7 -14.9 8.9 -172.0 10.7 -5.8 Expenses capitalized -104.6 -97.0 7.6 -7.3 -106.2 -9.2 9.5 All other3 555.1 528.0 27.1 -4.9 552.6 24.6 4.7 Total Reserve Bank operating expenses 3,968.7 3,875.3 -93.4 -2.4 4,116.6 241.3 6.2 1 Includes manI think mlaries, other personnel expense, and retirement and other employment benefit expenses. It does not include pension expenses related to all the participants in the Retirement Plan for Employees of the Federal Reserve System and the Reserve Bank participants in the Benefit Equalization Plan and the Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks. These expenses are recorded as a separate line item in the financial statements; see “Table 10. Income and expenses of the Federal Reserve Banks, by Bank” in section 11, “Statistical Tables.” 2 Includes tenant rent recoveries. 3 Includes fees, materials and supplies, travel, communications, and shipping. levels. The underruns were primarily in Treasury, 2016 Operating Expense Budget cash, and support services. In the Treasury function, resource reductions were in response to revised pro- The 2016 operating budgets of the Reserve Banks gram plans and to accelerated attrition related to the total $4,116.6 million, which is $241.3 million, or fiscal agent consolidation. The cash resource reduc- 6.2 percent, higher than 2015 actual expenses. The tions reflect the implementation of the evolving increase is primarily to fill staffing needs for supervioperations efficiency initiative. Support services and sion, Treasury, and monetary policy and for large all other areas reflect turnover and hiring delays. development projects that support the cash and the Table 10. Employment at the Federal Reserve Banks, by District, and at FRIT and OEB, 2015–16 V ariance V ariance 2015 actual to 2015 budget 2016 budget to 2015 actual District 2015 budget 2015 actual 2016 budget Amount Percent A mount P ercent Boston 1,109 1,083 -26 -2.3 1,130 47 4.4 New York 3,294 3,235 -59 -1.8 3,311 76 2.4 Philadelphia 921 895 -26 -2.8 892 -3 -0.3 Cleveland 990 964 -26 -2.6 1,010 46 4.8 Richmond 1,546 1,546 0 0.0 1,475 -71 -4.6 Atlanta 1,594 1,569 -25 -1.6 1,573 4 0.2 Chicago 1,529 1,508 -21 -1.4 1,551 43 2.9 St. Louis 1,246 1,242 -4 -0.3 1,356 115 9.2 Minneapolis 1,114 1,068 -46 -4.2 1,105 37 3.5 Kansas City 1,688 1,603 -85 -5.0 1,722 119 7.4 Dallas 1,267 1,245 -23 -1.8 1,280 35 2.8 San Francisco 1,700 1,695 -5 -0.3 1,695 0 0.0 Total, all Districts 17,998 17,652 -346 -1.9 18,101 449 2.5 Federal Reserve Information Technology (FRIT) 1,244 1,281 37 3.0 1,268 -14 -1.1 Office of Employee Benefits (OEB) 53 52 -1 -1.3 55 3 5.5 Total 19,295 18,986 -310 -1.6 19,424 438 2.3

Federal Reserve System Budgets 399 priced services functions. The growth in supervision national supervision initiatives. The support and continues to be driven by expanded supervisory overhead functions include additional ANP for inforresponsibilities, primarily for large financial institu- mation technology, facilities, internal audit, corpotions, and national supervision initiatives. rate planning, and the SIPS program. Budgeted expenses for services to the Treasury, which Reserve Bank officer and staff personnel expenses for are fully reimbursable, are increasing primarily to 2016 total $3,085.8 million, an increase of support the full implementation of NavyCash $173.8 million, or 6.0 percent, from 2015 actual ($10.6 million), the TWAI ($7.7 million), the myRA expenses. The increase reflects expenses associated and Retail Securities Program Review initiatives with additional staff and budgeted salary adjust- ($6.0 million), the assumption of the Collections ments, including merit increases, equity adjustments, Information Repository ($5.3 million), and the promotions, and funding for variable pay. expansion of the Financial Information Repository to accommodate the requirements of the Digital The 2016 Reserve Bank budgets include a 3.0 percent Accountability and Transparency Act (DATA) merit program for eligible officers, senior profession- ($3.2 million). Additional growth budgeted in 2016 als, and staff totaling $56.7 million and a variable pay related to application development and technology program totaling $184.4 million. Budgeted equity modernization for several Treasury initiatives is par- adjustments and promotions total $6.4 million for tially offset by anticipated operational efficiencies. officers and senior professionals and $22.9 million for staff. In the monetary policy and public programs areas, Risks in the 2016 Budget several Reserve Banks are increasing their research, policy, and outreach staff positions. Expenses for The most-significant risks in the 2016 budget are open market operations are also projected to related to personnel costs. Changes in benefit increase, largely for automation efforts and the pro- assumptions related to the discount rate and updated jected increase in allocated costs for law enforcement. demographic information would affect the personnel Increases in cash expenses are related to the imple- expenses that are reflected in Reserve Bank budgets. mentation of the CashForward project, as well as the Additionally, Banks are concerned about their ability allocated law enforcement and facilities support. to retain, hire, and replace staff, and some Banks Priced services expenses are expected to increase for may experience difficulty meeting schedules for hirthe ACH platform modernization project and invest- ing staff with specialized skills and experience, parments in development efforts for Fedwire. Other ticularly in supervision and IT. The primary operatincreases include the System’s continued investment ing risks in supervision relate to the implementation in the Strategies for Improving the U.S. Payment of key supervisory responsibilities under the Dodd- System (SIPS) program.8 Frank Act that still require final rulemaking and changing supervisory programs. Increased focus on Total 2016 budgeted employment for the Reserve cybersecurity and application modernization may Banks, FRIT, and OEB is 19,424 ANP, an increase of affect IT spending decisions. The Treasury’s fiscal 438 ANP, or 2.3 percent, from 2015 actual employ- agent consolidation effort will continue to affect projment levels. The increase is primarily driven by the ects in 2016 and over a longer-term planning hori- Treasury, supervision, and the support and overhead zon, as project decision requirements are refined. functions. The Treasury authorized ANP increases related to the Reserve Banks’ assumption of services 2016 Capital Budgets formerly provided by commercial banks and updated Table 11 shows the Reserve Banks’ budgeted and requirements for ongoing projects. Supervision ANP actual capital outlays for 2015 and budgeted capital is increasing as resources are added for expanded for 2016. responsibilities and associated new supervisory programs for the largest supervisory portfolios and for The 2016 capital budgets for the Reserve Banks, FRIT, and OEB total $403.8 million. The increase in 8 The System’s payment strategies call for a new U.S. payment infrastructure to support a safer, faster payment capability that the 2016 capital budget is $76.9 million, or 23.5 perpromotes efficient commerce, facilitates innovation, reduces cent, more than the 2015 actual levels of $326.9 milfraud, and improves public confidence as well as accelerated lion, largely reflecting ongoing multiyear building development and adoption of enhanced payment security standards. and information technology projects. Initiatives in

400 102nd Annual Report | 2015 Table 11. Capital outlays of the Federal Reserve Banks, by District, and of FRIT and OEB, 2015–16 Millions of dollars, except as noted V ariance V ariance 2015 actual to 2015 budget 2016 budget to 2015 actual District 2015 budget 2015 actual 2016 budget Amount Percent A mount P ercent Boston 28.5 23.7 -4.8 -16.8 21.6 -2.1 -9.0 New York 115.9 72.5 -43.4 -37.5 81.1 8.7 12.0 Philadelphia 20.5 13.3 -7.2 -35.0 22.2 8.9 66.8 Cleveland 17.0 9.2 -7.8 -45.6 18.1 8.9 96.3 Richmond 15.2 10.1 -5.1 -33.3 15.6 5.5 54.1 Atlanta 16.1 8.3 -7.9 -48.8 33.8 2 5.6 309.0 Chicago 26.5 27.0 0.5 1.7 26.1 -0.9 -3.4 St. Louis 14.3 15.0 0.7 4.9 10.2 -4.8 -32.0 Minneapolis 4.7 2.2 -2.4 -52.1 4.4 2.1 95.5 Kansas City 25.8 21.4 -4.4 -17.0 29.7 8.3 38.7 Dallas 17.3 11.2 -6.1 -35.4 18.1 6.8 61.1 San Francisco 60.5 51.5 -9.0 -14.8 57.5 6.0 11.6 Total, all Districts 362.4 265.5 -96.8 -26.7 338.4 7 2.9 27.5 Federal Reserve Information Technology (FRIT) 91.1 60.5 -30.6 -33.6 65.4 4.9 8.0 Office of Employee Benefits (OEB) 0.6 0.9 0.3 55.7 * -0.9 -99.4 Total 454.0 326.9 -127.1 -28.0 4 03.8 76.9 23.5 * Less than $50,000. the 2016 capital budget support the ACH moderniza- and future years.10 Additionally, cash automation inition efforts, security enhancements, and application tiatives include $23.6 million for the CashForward upgrades and releases primarily for cash, supervision, project. Other expenditures include large-scale build- Treasury and monetary policy. The BAC chair desig- ing projects to optimize office space, renovate confernated projects with an aggregate cost of $125.3 mil- ence center and cafeteria space, and upgrade lion in 2016 as strategic or sensitive, requiring addi- mechanical and electrical infrastructure. tional review and approval by the Board’s director of the Division of Reserve Bank Operations and Pay- Other Capital Expenditures ments Systems.9 Significant capital expenditures (expenditures exceeding $1 million) that are not designated strategic or Capital Expenditures Designated as Strategic sensitive include total multiyear budgeted expendior Sensitive tures of $305.0 million for 2016 and future years. The The expenditures designated as strategic or sensitive single-year component for budgeted 2016 expendiby the chair of the BAC include projects to migrate tures is $166.8 million. Expenditures in this category major applications off the mainframe, with budgeted include investments in analytical, technological, and 2016 expenditures of $18.4 million and total multi- operational tools for monetary policy, support for year budgeted expenditures of $32.5 million for 2016 supervisory responsibilities, and IT support for Treasury initiatives. Building expenditures include office space renovations, security enhancements, and 9 Board policy states that Reserve Bank management may com- elevator upgrades. mit funding for capital commitments included in the Reserve Banks’ capital budgets approved by the Board, unless the acqui- Capital initiatives that are individually of lesser sition is designated as strategic or sensitive by the BAC chair. Generally, strategic capital initiatives include District expendi- amounts (less than $1 million) are budgeted at tures that substantially affect or influence future System direction, significant research and development efforts or building projects, and certain large-dollar initiatives. Sensitive acquisi- 10 The Reserve Bank migration strategy involves moving a majortions may include commitments that may be inconsistent with ity of applications from the mainframe to alternate processing System direction or vary from previously negotiated purchasing environments. Budgeted projects for 2016 include the migration agreements, or local initiatives that may duplicate national of the statistics and reserves applications and the ACH processefforts. ing platform.

Federal Reserve System Budgets 401 $111.8 million for 2016 and include building expendi- Figure 5. Federal Reserve costs for currency, 2006–16 tures, equipment and furniture replacements, and scheduled software and equipment upgrades. Millions of dollars 800 700 Currency Budget 600 500 Board staff monitors payments of currency to and receipts of currency from circulation and the number 400 of unfit notes destroyed at the Reserve Banks. Staff 300 estimates the number of notes the Board will order 200 from the Bureau of Engraving and Printing (BEP) to 100 meet demand based on monthly monitoring, forecasts of growth rates for payments of currency to cir- 0 2006 2008 2010 2012 2014 2016 culation and receipts of currency from circulation, Note: For 2016, budgeted. operational factors, and other policy considerations. The Board reimburses the BEP for all costs related to the production of currency.11 Historically, more than 2015 Budget Performance 90 percent of the notes that the Board orders each year replace unfit currency that Reserve Banks The Board’s total 2015 actual expenses for new curreceive from circulation. rency were $689.2 million, which represents an underrun of $28.7 million, or 4.0 percent, from the The annual currency budget process is as follows: 2015 budget. About half of the budget underrun is attributable to the BEP purchasing fewer currency • Each August, based on Board staff’s assessment of readers for use by blind and visually-impaired indicurrency demand, the director of the Board’s Divividuals than budgeted.13 The remainder of the budsion of Reserve Bank Operations and Payments get underrun is primarily attributable to lower-than- Systems submits a fiscal year (FY) print order for projected costs for transporting new and fit notes, as currency to the director of the BEP. well as lower printing costs resulting from lower- • Each December, Board staff estimates expenses for than-projected deliveries from the BEP of Federal the calendar-year currency budget, including print- Reserve notes.14 ing expenses (based on estimated production costs provided by the BEP); certain other BEP costs; and 2016 Budget expenses for the currency education program, currency transportation, and counterfeit-deterrence The 2016 new currency budget of $737.4 million is research.12 $48.2 million, or 7.0 percent, higher than 2015 actual expenditures (figure 5). Printing costs for Federal • The BAC reviews the proposed currency budget. Reserve notes constitute about 90 percent of the currency budget. Expenses for currency transportation, • The BAC chair submits the proposed currency the currency quality assurance (CQA) and budget to the Board for final action. counterfeit-deterrence programs, the new BEP facility, the currency reader program, other costs to reim- 11 The BEP does not receive federal appropriations; all operations 13 The BEP implemented the currency reader program in 2014 to of the BEP are financed by a revolving fund that is reimbursed comply with a court order that required the Treasury Departthrough product sales, virtually all of which are sales of Federal ment to provide meaningful access to individuals who are blind Reserve notes to the Board to fulfill its annual print order. Cus- or visually impaired in denominating U.S. currency. The 2015 tomer billings are the BEP’s only means of recovering costs of budget reflected the BEP’s estimate that it would procure and operations and generating funds necessary for capital invest- distribute 250,000 readers in 2015; however, the BEP only proment. Section 16 of the Federal Reserve Act requires all costs cured and distributed about 27,000 readers. The difference is incurred for the issuing of notes to be paid for by the Board and partly because the BEP conducted less outreach than it planned included in its assessments to Reserve Banks. to promote the availability of the reader. Also, some potential 12 Other BEP expenses include costs to reimburse the BEP for users are using the BEP’s smartphone currency reader applicaexpenses incurred by its Destruction Standards and Compliance tion instead of ordering a currency reader. Division of the Office of Compliance and Mutilated Currency 14 The Board provides the BEP with a fiscal year print order, Division of the Office of Financial Management and for work which it fulfilled; however, it delivered fewer notes in calendarexpected in 2016 toward a new production facility. year 2015 than Board staff estimated.

402 102nd Annual Report | 2015 Table 12. Federal Reserve currency budget, 2015 and 2016 Thousands of dollars, except as noted V ariance V ariance 2015 actual to 2015 budget 2016 budget to 2015 actual Item 2015 budget 2015 actual 2016 budget Amount Percent A mount P ercent B EP-related expenses Printing Federal Reserve notes 642,527 637,346 -5,180 -0.8 670,422 33,075 5.2 Currency reader 17,120 2,680 -14,440 -84.3 8,478 5,798 216.4 Other 3,674 3,922 248 6.8 4,232 310 7.9 New BEP facility n/a n/a n/a n/a 5,000 5,000 0.0 Board expenses Currency transportation 29,235 23,357 -5,878 -20.1 26,400 3,043 13.0 Currency quality assurance and counterfeit deterrence 20,993 19,564 -1,429 -6.8 19,445 -119 -0.6 Currency education program 4,390 2,329 -2,061 -47.0 3,400 1,071 46.0 Total cost of new currency 717,939 689,199 -28,740 -4.0 737,377 4 8,179 7.0 BEP Bureau of Engraving and Printing. n/a Not applicable. burse the BEP, and the currency education program Standards and Compliance Division of the Office of (CEP) make up the remaining 10.0 percent (table 12). Compliance (OC) and Mutilated Currency Division (MCD) of the Office of Financial Management. The Printing of Federal Reserve Notes OC develops standards for cancellation and destruc- The currency budget includes $670.4 million in print- tion of unfit currency and for note accountability at ing costs for 2016, which represents an increase of the Reserve Banks, and reviews Reserve Banks’ cash 4.3 percent from the 2015 budget and 5.2 percent operations for compliance with its standards. As a from 2015 actual expenditures. The increase is pri- public service, the MCD also processes claims for the marily attributable to the BEP’s inclusion of addi- redemption of damaged or mutilated currency. tional funding for 2016 research and development efforts associated with security and tactile feature The BEP’s New Facility development for the next-design family of notes. The 2016 budget includes $5.0 million for estimated contractual expenses related to initial work for the Currency Reader Program BEP’s new facility. In 2015, the BEP received The 2016 currency reader budget is $8.5 million, approval from the Treasury to pursue a new building which is approximately $5.8 million higher than 2015 in the metropolitan Washington, D.C. area. The actual expenditures and $8.6 million lower than the General Services Administration has considered and 2015 budget. The budget includes $6.5 million to evaluated several sites, and in 2016 the BEP expects purchase and distribute more than 130,000 currency to select a site and begin design work. readers to qualified blind or visually-impaired individuals at no cost to the user. The BEP expects to dis- Currency Transportation tribute more readers in 2016 than in 2015 because it plans to promote the reader program more. In addi- The 2016 currency transportation budget is tion, the budget includes $1.5 million to reimburse $26.4 million, which is nearly $3.0 million, or the Library of Congress for administering the pro- 13.0 percent, higher than 2015 expenditures. The gram through the existing infrastructure of its book budget includes the cost of shipping new currency reader program, which is managed by the National from the BEP to Reserve Banks, of intra-System Library Service. shipments of fit and unprocessed currency, and of returning currency pallets from the Reserve Banks to Other Reimbursements to the Bureau of the BEP. More notes are projected to be shipped in Engraving and Printing 2016 than in 2015 because the 2016 budget includes The 2016 budget includes $4.2 million to reimburse nearly 11.0 percent more notes than the BEP delivthe BEP for expenses incurred by its Destruction ered during 2015.

Federal Reserve System Budgets 403 Currency Quality Assurance opment activities, contract with national laboratories The 2016 budget for the CQA program is $9.2 mil- to perform adversarial analysis on security features lion. The budget will allow the CQA consultants to under development at the BEP, conduct additional continue facilitating the implementation of the new research on potential security features for the nextquality system at the BEP; support the research, tech- design family of notes, and conduct a perception nology, and product development required for the study to assess how consumers use security features, next-design family of Federal Reserve notes; and with the study results used to inform the effective continue providing temporary resources to the BEP placement and design of security features in the nextto sustain critical programs that have been imple- design family of notes. mented for the quality system. Currency Education Program Counterfeit Deterrence The 2016 CEP budget is $3.4 million. The CEP pro- The 2016 budget for counterfeit-deterrence research gram is designed to protect and maintain confidence is $10.2 million. The budget includes about $5.1 mil- in U.S. currency worldwide by providing information lion for membership in the Central Bank Counterfeit on all circulating designs of Federal Reserve notes to Deterrence Group (CBCDG). The CBCDG operates the global public and key stakeholder groups. The under the auspices of the G-10 central bank gover- major expense drivers for the 2016 budget are outnors to combat digital counterfeiting and includes 34 reach to domestic and international businesses and central banks. Additionally, the budget includes retailers and developing and maintaining the about $5.0 million to conduct security feature devel- uscurrency.gov educational website.

405 14 Federal Reserve System Organization Congress designed the Federal Reserve System to give it a broad perspective on the economy and on economic activity in all parts of the nation. As such, the System is composed of a central, governmental agency—the Board of Governors—in Washington, D.C., and 12 regional Federal Reserve Banks. This section lists key officials across the System, including the Board of Governors, its officers, Federal Open Market Committee members, several System councils, and Federal Reserve Bank and Branch directors and officers. BOARD OF GOVERNORS Members The Board of Governors of the Federal Reserve System is composed of seven members, who are nominated by the President and confirmed by the Senate. The Chair and the Vice Chairman of the Board are also named by the President from among the members and are confirmed by the Senate. This section lists Board members who served in 2015. For a full listing of Board members from 1914 through the present, visit www.federalreserve.gov/ aboutthefed/bios/board/boardmembership.htm. Janet L. Yellen Daniel K. Tarullo Lael Brainard Chair Jerome H. Powell Stanley Fischer Vice Chairman Divisions and Officers Fifteen divisions support and carry out the mission of the Board of Governors, which is based in Washington, D.C. Office of Board Members Michelle A. Smith Jennifer Gallagher Director Special Assistant to the Board for Linda L. Robertson Congressional Liaison Assistant to the Board William B. English Lucretia M. Boyer Senior Special Adviser to the Assistant to the Board Board David W. Skidmore Trevor A. Reeve Assistant to the Board Special Adviser to the Chair

406 102nd Annual Report | 2015 Legal Division Scott G. Alvarez Laurie S. Schaffer Alison M. Thro General Counsel Associate General Counsel Assistant General Counsel Richard M. Ashton Katherine H. Wheatley Cary K. Williams Deputy General Counsel Associate General Counsel Assistant General Counsel Kathleen M. O’Day Jean C. Anderson Deputy General Counsel Assistant General Counsel Stephanie Martin Patrick M. Bryan Associate General Counsel Assistant General Counsel Office of the Secretary Robert deV. Frierson Michael J. Lewandowski Secretary Associate Secretary Margaret M. Shanks Michele T. Fennell Deputy Secretary Assistant Secretary Division of International Finance Steven B. Kamin Mark S. Carey Paul R. Wood Director Associate Director Assistant Director Thomas A. Connors Charles P. Thomas Constantijn A. Claessens Deputy Director Associate Director Senior Adviser Michael P. Leahy Shaghil Ahmed Sally M. Davies Deputy Director Deputy Assistant Director Senior Adviser Christopher J. Erceg Joseph W. Gruber Brian M. Doyle Senior Associate Director Deputy Assistant Director Senior Adviser Beth Anne Wilson Carol C. Bertaut Jane Haltmaier Senior Associate Director Assistant Director Senior Adviser David H. Bowman James A. Dahl John H. Rogers Associate Director Assistant Director Senior Adviser Office of Financial Stability Policy and Research J. Nellie Liang Rochelle M. Edge John W. Schindler Director Deputy Associate Director Assistant Director Andreas W. Lehnert Luca Guerrieri Skander J. Van Den Heuvel Deputy Director Assistant Director Assistant Director Michael T. Kiley Jennifer E. Roush Senior Associate Director Assistant Director Division of Monetary Affairs Heinrich T. Laubach Stephen A. Meyer Gretchen C. Weinbach Director Deputy Director Associate Director James A. Clouse William R. Nelson Egon Zakrajsek Deputy Director Deputy Director Associate Director Brian F. Madigan Fabio M. Natalucci William F. Bassett Deputy Director Associate Director Deputy Associate Director

Federal Reserve System Organization 407 Margaret G. DeBoer Christopher J. Gust Joyce K. Zickler Deputy Associate Director Assistant Director Senior Adviser Jane E. Ihrig Don H. Kim Burcu Duygan-Bump Deputy Associate Director Assistant Director Adviser J. David Lopez-Salido Elizabeth C. Klee Mary T. Hoffman Deputy Associate Director Assistant Director Adviser Min Wei Matthew M. Luecke Robert J. Tetlow Deputy Associate Director Assistant Director Adviser Francisco B. Covas Ellen E. Meade Assistant Director Senior Adviser Division of Research and Statistics David W. Wilcox John J. Stevens Paul A. Smith Director Deputy Associate Director Assistant Director Daniel M. Covitz Stacey Tevlin Kristin M. Vajs Deputy Director Deputy Associate Director Assistant Director William L. Wascher III Stephanie R. Aaronson Wayne Passmore Deputy Director Assistant Director Senior Adviser Eric M. Engen Glenn R. Follette Robin A. Prager Senior Associate Director Assistant Director Senior Adviser Diana Hancock Erik A. Heitfield Jeremy Rudd Senior Associate Director Assistant Director Senior Adviser David E. Lebow Timothy A. Mullen Eric C. Engstrom Senior Associate Director Assistant Director Adviser Michael G. Palumbo John M. Roberts John A. Figura Senior Associate Director Assistant Director Adviser Jeffrey C. Campione John E. Sabelhaus Arthur B. Kennickell Senior Associate Director Assistant Director Adviser Joshua H. Gallin Steven A. Sharpe Patrick C. McCabe Associate Director Assistant Director Adviser Elizabeth K. Kiser Shane M. Sherlund Karen M. Pence Deputy Associate Director Assistant Director Adviser Division of Banking Supervision and Regulation Michael S. Gibson Arthur W. Lindo Christopher Finger Director Senior Associate Director Associate Director Maryann F. Hunter Peter J. Purcell Steven P. Merriett Deputy Director Senior Associate Director Associate Director Mark E. Van Der Weide Todd A. Vermilyea Ann Misback Deputy Director Senior Associate Director Associate Director Barbara J. Bouchard Kevin M. Bertsch Richard A. Naylor II Senior Associate Director Associate Director Associate Director Timothy P. Clark Sean D. Campbell Lisa H. Ryu Senior Associate Director Associate Director Associate Director Jack P. Jennings II Nida Davis Michael J. Sexton Senior Associate Director Associate Director Associate Director

408 102nd Annual Report | 2015 Michael D. Solomon Gwendolyn A. Collins David S. Jones Associate Director Assistant Director Senior Adviser Thomas R. Sullivan Constance Horsley John Beebe Associate Director Assistant Director Adviser Mary L. Aiken Ryan P. Lordos Du Fang Deputy Associate Director Assistant Director Adviser Jeffery W. Gunther David K. Lynch Keith A. Ligon Deputy Associate Director Assistant Director Adviser Anna L. Hewko Thomas K. Odegard Molly E. Mahar Deputy Associate Director Assistant Director Adviser Michael J. Hsu Catherine A. Piche Deputy Associate Director Assistant Director William F. Treacy Adviser Nancy J. Perkins Laurie F. Priest Deputy Associate Director Assistant Director Sarkis D. Yoghourtdjian Richard C. Watkins Suzanne L. Williams Adviser Deputy Associate Director Assistant Director Robert T. Ashman Norah M. Barger Assistant Director Senior Adviser Division of Consumer and Community Affairs Eric S. Belsky James A. Michaels Phyllis L. Harwell Director Associate Director Assistant Director Anna Alvarez Boyd Joseph A. Firschein Marisa A. Reid Senior Associate Director Deputy Associate Director Assistant Director Suzanne G. Killian David E. Buchholz Senior Associate Director Assistant Director Allen J. Fishbein Carol A. Evans Associate Director Assistant Director Division of Reserve Bank Operations and Payment Systems Louise L. Roseman Bajinder N. Paul Timothy W. Maas Director Associate Director Assistant Director Matthew J. Eichner Michael J. Lambert David C. Mills Deputy Director Associate Director Assistant Director Jeffrey C. Marquardt Jennifer A. Lucier Lorelei W. Pagano Deputy Director Deputy Associate Director Assistant Director David Sidari Lawrence E. Mize Jeffrey D. Walker Deputy Director Deputy Associate Director Assistant Director Susan V. Foley Stuart E. Sperry Lisa K. Hoskins Senior Associate Director Deputy Associate Director Senior Adviser Gregory L. Evans Jennifer K. Chang Senior Associate Director Assistant Director Marta E. Chaffee Adviser Paul W. Bettge Shaun E. Ferrari Associate Director Assistant Director

Federal Reserve System Organization 409 Office of the Chief Operating Officer Donald V. Hammond Sheila Clark Todd A. Glissman Chief Operating Officer Diversity and Inclusion Programs Senior Adviser Director Michael Kraemer Deputy Chief Data Officer Jeff Monica Assistant Director Division of Financial Management William L. Mitchell Patrick J. McClanahan Karen L. Vassallo Director and Chief Financial Deputy Director and Controller Deputy Associate Director Officer Christine M. Fields Christopher J. Suma Stephen J. Bernard Associate Director Assistant Director Deputy Director Jeffrey R. Peirce Deputy Associate Director Management Division Michell C. Clark Tameika L. Pope Jeffrey A. Martin Director Associate Director Assistant Director David J. Capp Keith F. Bates Reginald V. Roach Deputy Director Assistant Director Assistant Director Marie S. Savoy Patricia Ann Buckingham Carol A. Sanders Senior Associate Director Assistant Director Assistant Director Tara Tinsley-Pelitere Curtis B. Eldridge Theresa A. Trimble Associate Director Assistant Director and Chief Assistant Director Division of Information Technology Sharon L. Mowry Sheryl Lynn Warren Deborah Prespare Director Associate Director Assistant Director Wayne A. Edmondson Rajasekhar R. Yelisetty Jonathan F. Shrier Deputy Director Associate Director Assistant Director Lisa M. Bell William Dennison Eric C. Turner Senior Associate Director Deputy Associate Director Assistant Director Raymond Romero Marietta Murphy Virginia M. Wall Senior Associate Director Deputy Associate Director Assistant Director Kofi A. Sapong Theresa C. Palya Edgar Wang Senior Associate Director Deputy Associate Director Assistant Director Glenn S. Eskow Charles B. Young II Ivan K. Wun Associate Director Deputy Associate Director Assistant Director Kassandra Arana Quimby Can Xuan Nguyen Tillena G. Clark Associate Director Assistant Director Adviser

410 102nd Annual Report | 2015 Office of Inspector General Mark Bialek Alberto Rivera-Fournier Peter J. Sheridan Inspector General Associate Inspector General Assistant Inspector General James A. Ogden Melissa M. Heist Deputy Inspector General Associate Inspector General Jacqueline M. Becker Lawrence K. Valett Associate Inspector General Associate Inspector General

Federal Reserve System Organization 411 FEDERAL OPEN MARKET COMMITTEE The Federal Open Market Committee is made up of the seven members of the Board of Governors; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Federal Reserve Bank presidents, who serve one-year terms on a rotating basis. During 2015, the Federal Open Market Committee held eight regularly scheduled meetings and one unscheduled meeting (see section 9, “Minutes of Federal Open Market Committee Meetings”). Members Janet L. Yellen Stanley Fischer Daniel K. Tarullo Chair, Board of Governors Member, Board of Governors Member, Board of Governors William C. Dudley Jeffrey M. Lacker John C. Williams Vice Chairman, President, Federal President, Federal Reserve Bank President, Federal Reserve Bank Reserve Bank of New York of Richmond of Boston Lael Brainard Dennis P. Lockhart Member, Board of Governors President, Federal Reserve Bank of Atlanta Charles L. Evans President, Federal Reserve Bank Jerome H. Powell of Chicago Member, Board of Governors Alternate Members James Bullard Esther L. George Michael Strine President, Federal Reserve Bank President, Federal Reserve Bank First Vice President, Federal of St. Louis of Kansas City Reserve Bank of New York (as of July 28, 2015) Christine M. Cumming Loretta J. Mester First Vice President, Federal President, Federal Reserve Bank Reserve Bank of New York of Cleveland (resigned April 29, 2015) Eric Rosengren President, Federal Reserve Bank of Boston Officers Brian F. Madigan Richard M. Ashton Eric M. Engen Secretary Assistant General Counsel Associate Economist Matthew M. Luecke Steven B. Kamin Michael P. Leahy Deputy Secretary Economist Associate Economist David W. Skidmore Heinrich T. Laubach Jonathan P. McCarthy Assistant Secretary Economist Associate Economist (as of February 2, 2015) David W. Wilcox William R. Nelson Michelle A. Smith Economist Associate Economist Assistant Secretary David Altig Glenn D. Rudebusch Scott G. Alvarez Associate Economist Associate Economist General Counsel Thomas C. Baxter Thomas A. Connors Daniel G. Sullivan Deputy General Counsel Associate Economist Associate Economist

412 102nd Annual Report | 2015 John A. Weinberg Simon Potter Lorie K. Logan Associate Economist Manager, System Open Market Deputy Manager, System Open Account Market Account William Wascher Associate Economist

Federal Reserve System Organization 413 BOARD OF GOVERNORS ADVISORY COUNCILS The Federal Reserve Board uses advisory committees in carrying out its varied responsibilities. To learn more, visit www.federalreserve.gov/aboutthefed/advisorydefault.htm. Federal Advisory Council The Federal Advisory Council—a statutory body established under the Federal Reserve Act—consults with and advises the Board of Governors on all matters within the Board’s jurisdiction. It is composed of one representative from each Federal Reserve District, chosen by the Reserve Bank in that District. Two members of the council serve as its president and vice president. The Federal Reserve Act requires the council to meet in Washington, D.C., at least four times a year. In 2015, the council met on February 5–6, May 7–8, September 3–4, and December 3–4. The council met with the Board on February 6, May 8, September 4, and December 4, 2015. Members District 1 District 5 District 9 Richard E. Holbrook Kelly S. King Patrick J. Donovan Chairman and Chief Executive Chairman and Chief Executive President and Chief Executive Officer, Eastern Bank Officer, BB&T Officer, Bremer Financial Corporation, Boston, MA Corporation,Winston-Salem, NC Corporation, St. Paul, MN District 2 District 6 District 10 O.B. Grayson Hall Jr. James P. Gorman Jonathan M. Kemper Chairman, President, and Chief Chairman and Chief Executive Chairman and Chief Executive Executive Officer, Regions Officer, Morgan Stanley, New Officer, Commerce Bank, N.A. Financial Corporation, York, NY (Kansas City), Kansas City, MO Birmingham, AL District 3 District 11 District 7 Scott V. Fainor Ralph W. Babb Jr. Frederick H. Waddell President and Chief Executive Chairman and Chief Executive Chairman and Chief Executive Officer, National Penn Officer, Comerica Inc. and Officer, Northern Trust Bancshares, Inc., Allentown, PA Comerica Bank, Dallas, TX Corporation and The Northern Trust Company, Chicago, IL District 4 District 12 Paul G. Greig John G. Stumpf District 8 Chairman, President, and Chief Chairman, President, and CEO, Ronald J. Kruszewski Executive Officer, FirstMerit Wells Fargo & Company, Chairman, President, and Chief Corporation, Akron, OH San Francisco, CA Executive Officer, Stifel Financial Corp., St. Louis, MO Officers James P. Gorman Kelly S. King Herb Taylor President Vice President Secretary

414 102nd Annual Report | 2015 Community Depository Institutions Advisory Council The Community Depository Institutions Advisory Council advises the Board of Governors on the economy, lending conditions, and other issues of interest to community depository institutions. Members are selected from among representatives of banks, thrift institutions, and credit unions who are serving on local advisory councils at the 12 Federal Reserve Banks. One member of each of the Reserve Bank councils serves on the Community Depository Institutions Advisory Council. Two members of the council serve as its president and vice president. The council usually meets with the Board twice a year in Washington, D.C. In 2015, the council met on April 10 and November 6. Members District 1 District 5 District 9 Chandler J. Howard Jan Roche Brian L. Johnson President and Chief Executive President and Chief Executive Chief Executive Officer, Choice Officer, Liberty Bank, Officer, State Department FCU, Financial Group, Middletown, CT Alexandria, VA Grand Forks, ND District 2 District 6 District 10 Michael J. Castellana Douglas L. Williams John B. Dicus President and Chief Executive President and Chief Executive Chairman, President, and Chief Officer, SEFCU, Albany, NY Officer, Atlantic Capital Bank, Executive Officer, Capitol Federal Atlanta, GA Savings Bank, Topeka, KS District 3 Thomas M. Petro District 7 District 11 President and Chief Executive Jeffrey Plagge S. Boyce Brown Officer, Fox Chase Bank, President and Chief Executive Chairman, President and Chief Hatboro, PA Officer, Northwest Financial Executive Officer, Extraco Corp., Arnolds Park, IA Corporation, Waco, TX District 4 Eddie L. Steiner District 8 District 12 President and Chief Executive Glenn D. Barks Janet Garufis Officer, The Commercial and President and Chief Executive President and Chief Executive Savings Bank of Millersburg, Officer, First Community Credit Officer, Montecito Bank & Trust, Ohio, Millersburg, OH Union, Chesterfield, MO Santa Barbara, CA Officers John B. Dicus Michael J. Castellana President Vice President

Federal Reserve System Organization 415 Community Advisory Council The Community Advisory Council was formed in 2015 to advise the Board of Governors on the economic circumstances and financial services needs of consumers and communities, with a particular focus on the concerns of low- and moderate-income populations. The 15 members of the council are selected from submissions received through a public process, and comprise a diverse group of experts and representatives of consumer and community development organizations and interests, including affordable housing, community and economic development, small business, and asset and wealth building. One member of the council serves as its chair. The council met with the Board on November 2015, and is expected to meet with the Board twice each year in future years. Members Roberto Barragan Rodrick Miller Sue Taoka President and Chief Executive President and Chief Executive Executive Vice President, Craft3, Officer, VEDC, Van Nuys, CA Officer, Detroit Economic Seattle, WA Growth Corporation, Detroit, MI Angela Glover Blackwell Mary Tingerthal Founder and Chief Executive Noel Poyo Commissioner, Minnesota Officer, PolicyLink, Oakland, CA Executive Director, National Housing Finance Agency, Association for Latino St. Paul, MN Patrick Dujakovich Community Asset Builders, President, Greater Kansas City Raul Vazquez San Antonio, TX AFL-CIO, Kansas City, MO Chief Executive Officer, Oportun, Michael Rubinger Redwood City, CA Benjamin Dulchin President and Chief Executive Executive Director, Association Catherine Wilson Officer, Local Initiatives Support for Neighborhood & Housing Professor, University of Corporation (LISC), Development, New York, NY Nebraska–Lincoln College of New York, NY Law, Lincoln, NE Brian Fogle Arden Shank President and Chief Executive President and Chief Executive Officer, Community Foundation Officer, Neighborhood Housing of the Ozarks, Springfield, MO Services of South Florida, Ben Mangan Miami, FL Executive Director and Lecturer, Adrienne Smith Haas School of Business, U.C. President and Chief Executive Berkeley, Center for Social Sector Officer, New Mexico Direct Leadership, Berkeley, CA Caregivers Coalition, Placitas, NM Officer Michael Rubinger Chair

416 102nd Annual Report | 2015 Model Validation Council The Model Validation Council was established in 2012 by the Board of Governors to provide expert and independent advice on its process to rigorously assess the models used in stress tests of banking institutions. The Dodd-Frank Wall Street Reform and Consumer Protection Act required the Federal Reserve to conduct annual stress tests of large bank holding companies and systemically important, nonbank financial institutions supervised by the Board. The Model Validation Council provides input on the Board’s efforts to assess the effectiveness of the models used in the stress tests. The council is intended to improve the quality of the Federal Reserve’s model assessment program and to strengthen the confidence in the integrity and independence of the program. Members Allan Timmermann, Chair Manju Puri Nancy Wallace Professor, University of Professor, Duke University Professor, University of California at San Diego California at Berkeley Philip Strahan Peter Christoffersen Professor, Boston College Professor, University of Toronto

Federal Reserve System Organization 417 FEDERAL RESERVE BANKS AND BRANCHES To carry out the day-to-day operations of the Federal Reserve System, the nation has been divided into 12 Federal Reserve Districts, each with a Reserve Bank. The majority of Reserve Banks also have at least one Branch. Reserve Bank and Branch Directors As required by the Federal Reserve Act, each Federal Reserve Bank is supervised by a nine-member board with three different classes of three directors each: Class A directors, who are nominated and elected by the member banks in that District to represent the stockholding banks; Class B directors, who are nominated and elected by the member banks to represent the public; and Class C directors, who are appointed by the Board of Governors to represent the public. Class B and Class C directors are selected with due, but not exclusive, consideration to the interests of agriculture, commerce, industry, services, labor, and consumers. Each Federal Reserve Bank Branch also has a board with either five or seven directors. A majority of the directors on each Branch board are appointed by the Federal Reserve Bank, with the remaining directors appointed by the Board of Governors. For more information on Reserve Bank and Branch directors, see www.federalreserve.gov/aboutthefed/ directors/about.htm. Reserve Bank and Branch directors are listed below. For each director, the class of directorship, the director’s principal place of business, and the expiration date of the director’s current term are shown. District 1–Boston Class A Class B Class C Peter L. Judkins, 2015 Roger S. Berkowitz, 2015 Catherine D’Amato, 2015 President and Chief Executive President and Chief Executive President and Chief Executive Officer, Franklin Savings Bank, Officer, Legal Sea Foods, LLC, Officer, The Greater Boston Food Farmington, ME Boston, MA Bank, Boston, MA Joseph L. Hooley, 2016 Laura J. Sen, 2016 John F. Fish, 2016 Chairman and Chief Executive President and Chief Executive Chairman and Chief Executive Officer, State Street Corporation, Officer, BJ’s Wholesale Club, Officer, Suffolk Construction Boston, MA Inc., Westborough, MA Company, Inc., Boston, MA Michael E. Tucker, 2017 Gary L. Gottlieb, MD, 2017 William D. Nordhaus, 2017 President and Chief Executive President and Chief Executive Sterling Professor of Economics, Officer, Greenfield Co-operative Officer, Partners In Health, Yale University, New Haven, CT Bank, Greenfield, MA Boston, MA District 2–New York Class A Paul P. Mello, 2017 David M. Cote, 2016 President and Chief Executive Chairman and Chief Executive Richard L. Carrión, 2015 Officer, Solvay Bank, Solvay, NY Officer, Honeywell International Chairman and Chief Executive Inc., Morristown, NJ Officer, Popular, Inc., Class B San Juan, PR Terry J. Lundgren, 2017 Glenn H. Hutchins, 2015 Chairman and Chief Executive Gerald H. Lipkin, 2016 Co-Founder, Silver Lake, Officer, Macy’s, Inc., Chairman, President, and Chief New York, NY New York, NY Executive Officer, Valley National Bank, Wayne, NJ

418 102nd Annual Report | 2015 Class C Marc Tessier-Lavigne, 2016 Emily K. Rafferty, 2017 President, The Rockefeller President Emerita, The Sara Horowitz, 2015 University, New York, NY Metropolitan Museum of Art, Executive Director, Freelancers New York, NY Union, Brooklyn, NY District 3–Philadelphia Class A Class B Class C David R. Hunsicker, 2015 Carol J. Johnson, 2015 James E. Nevels, 2015 Chairman, President, and Chief President and Chief Operating Founder and Chairman, Executive Officer, New Tripoli Officer, AlliedBarton Security The Swarthmore Group, Bank, New Tripoli, PA Services, Conshohocken, PA Philadelphia, PA Brian McNeill, 2016 William S. Aichele, 2016 Edward J. Graham, 2016 President and Chief Executive Chairman, Univest Corporation Retired Chairman and Chief Officer, TouchPoint, Inc., of Pennsylvania, Souderton, PA Executive Officer, South Jersey Concordville, PA Industries, Folsom, NJ Jon Evans, 2017 Michael J. Angelakis, 2017 President and Chief Executive Vacancy, 2017 Senior Advisor to the Executive Officer, Atlantic Community Management Committee, Bankers Bank, Camp Hill, PA Comcast Corporation, Philadelphia, PA

Federal Reserve System Organization 419 District 4–Cleveland Class A Cincinnati Branch Pittsburgh Branch Claude E. Davis, 2015 Appointed by the Federal Reserve Bank Appointed by the Federal Reserve Bank Chief Executive Officer, First Donald E. Bloomer, 2015 Grant Oliphant, 2015 Financial Bancorp, President and Chief Executive President, The Heinz Cincinnati, OH Officer, Citizens National Bank, Endowments, Pittsburgh, PA Kevin T. Kabat, 2016 Somerset, KY Robert P. Oeler, 2016 Vice Chairman, Fifth Third Austin W. Keyser, 2016 President and Chief Executive Bancorp, Cincinnati, OH Midwest Regional Director, Officer, Dollar Bank, Todd A. Mason, 2017 AFL-CIO, Columbus, OH Pittsburgh, PA President and Chief Executive Officer, First National Bank of Amos L. Otis, 2017 Audrey Dunning, 2017 Pandora, Pandora, OH Founder, President, and Chief Chief Executive Officer, Summa Executive Officer, SoBran, Inc., Technologies, Inc., Pittsburgh, PA Class B Dayton, OH Robert I. Glimcher, 2017 Susan Tomasky, 2015 Dwight E. Smith, 2017 President, Glimcher Group, Inc. Energy Consultant and Former President and Chief Executive Pittsburgh, PA President, AEP Transmission, Officer, Sophisticated Systems, Appointed by the Board of Governors Columbus, OH Inc., Columbus, OH Dawne S. Hickton, 2015 Hal Keller, 2016 Appointed by the Board of Governors Former President and Chief President, Ohio Capital Christopher C. Cole, 2015 Executive Officer, RTI Corporation for Housing, Chief Executive Officer, International Metals, Inc., Columbus, OH Intelligrated, Inc., Mason, OH Pittsburgh, PA Charles H. Brown, 2017 Valarie L. Sheppard, 2016 Doris Carson Williams, 2016 Vice President and Secretary, Senior Vice President, President and Chief Executive Toyota Motor Engineering & Comptroller, and Treasurer, The Officer, African American Manufacturing N.A., Procter & Gamble Company, Chamber of Commerce, Western Erlanger, KY Cincinnati, OH Pennsylvania, Pittsburgh, PA Class C Deborah A. Feldman, 2017 Charles L. Hammel III, 2017 Richard K. Smucker, 2015 President and Chief Executive President, PITT OHIO, Chief Executive Officer, The J.M. Officer, Dayton Children’s Pittsburgh, PA Smucker Company, Orrville, OH Hospital, Dayton, OH Christopher M. Connor, 2016 Chairman and Chief Executive Officer, The Sherwin-Williams Company, Cleveland, OH John P. Surma, 2017 Retired Chairman and Chief Executive Officer, United States Steel Corporation, Pittsburgh, PA

420 102nd Annual Report | 2015 District 5–Richmond Class A Baltimore Branch Charlotte Branch Brad E. Schwartz, 2015 Appointed by the Federal Reserve Bank Appointed by the Federal Reserve Bank Chief Executive Officer, Monarch Anita G. Newcomb, 2015 Lucia Z. Griffith, 2015 Bank and Monarch Financial President, A.G. Newcomb & Co., Chief Executive Officer and Holdings, Inc., Chesapeake, VA Columbia, MD Principal, METRO Landmarks, C. Richard Miller Jr., 2016 Charlotte, NC Christopher J. Estes, 2015 President and Chief Executive President and Chief Executive Mark L. Williamson, 2015 Officer, Woodsboro Bank, Officer, National Housing President and Chief Executive Woodsboro, MD Conference, Washington, DC Officer, High Point Bank and Robert R. Hill, Jr., 2017 Trust, High Point, NC Chief Executive Officer, South Mary Ann Scully, 2016 State Corporation and South Chairman, President, and Chief Michael C. Crapps, 2016 State Bank, Columbia, SC Executive Officer, Howard President, First Community Bancorp, Ellicott City, MD Bank, Lexington, SC Class B Austin J. Slater, Jr., 2017 Paul E. Szurek, 2017 Wilbur E. Johnson, 2015 President and Chief Executive Chief Financial Officer, Biltmore Managing Partner, Young Officer, Southern Maryland Farms, LLC, Asheville, NC Clement Rivers, LLP, Electric Cooperative, Inc., Appointed by the Board of Governors Charleston, SC Hughesville, MD Laura Y. Clark, 2015 Charles R. Patton, 2016 Appointed by the Board of Governors Executive Director, Renaissance President and Chief Operating Vacancy, 2015 West Community Initiative, Officer, Appalachian Power Charlotte, NC Company, Charleston, WV Samuel L. Ross, 2016 Chief Executive Officer, Bon Elizabeth A. Fleming, 2016 Thomas C. Nelson, 2017 Secours Baltimore Health System, President, Converse College, Chairman, President and Chief Baltimore, MD Spartanburg, SC Executive Officer, National Gypsum Company, Susan J. Ganz, 2017 Claude Z. Demby, 2017 Charlotte, NC Chief Executive Officer, Lion Vice President of Business Brothers Company, Inc., Development, Cree, Inc., Class C Owings Mills, MD Durham, NC Russell C. Lindner, 2015 Executive Chairman and Chief Executive Officer, The Forge Company, Washington, DC Mark L. Williamson, 2015 President and Chief Executive Officer, High Point Bank and Trust, High Point, NC Margaret G. Lewis, 2016 Retired President, HCA Capital Division, Richmond, VA Kathy J. Warden, 2017 Corporate Vice President and President, Information Systems Northrop Grumman Corporation, McLean, VA

Federal Reserve System Organization 421 District 6–Atlanta Class A Birmingham Branch Michael J. Grebe, 2016 Chief Executive Officer, Interline Gerard R. Host, 2015 Appointed by the Federal Reserve Bank Brands Division, Senior Vice President and Chief Executive John A. Langloh, 2015 President, The Home Depot, Officer, Trustmark Corporation, President and Chief Executive Jacksonville, FL Jackson, MS Officer, United Way of Central T. Anthony Humphries, 2016 Alabama, Birmingham, AL Dana S. Kilborne, 2017 President and Chief Executive President and Chief Executive James K. Lyons, 2015 Officer, Florida Bank of Officer, NobleBank & Trust, Director and Chief Executive Commerce, Orlando, FL Anniston, AL Officer, Alabama State Port William H. Rogers, Jr., 2017 Authority, Mobile, AL Appointed by the Board of Governors Chairman and Chief Executive Robert W. Dumas, 2016 Harold Mills, 2015 Officer, SunTrust Banks, President and Chief Executive Chief Executive Officer, Atlanta, GA Officer, AuburnBank, ZeroChaos, Orlando, FL Auburn, AL Carolyn M. Fennell, 2016 Class B Herschell L. Hamilton, 2017 Chairman and Director of Public Clarence Otis Jr., 2015 Managing Partner, BLOC Global Affairs and Community Relations, Former Chairman and Chief Group, Birmingham, AL Greater Orlando Aviation Executive Officer, Darden Authority, Orlando International Restaurants, Inc., Orlando, FL Appointed by the Board of Governors Airport, Orlando, FL Pamela B. Hudson, MD, 2015 José S. Suquet, 2016 David L. Brown, 2017 Chief Executive Officer, Chairman, President, and Chief President, Chairman, and Chief Crestwood Medical Center, Executive Officer, Pan-American Executive Officer, Web.com, Huntsville, AL Life Insurance Group, Jacksonville, FL New Orleans, LA Brandon W. Bishop, 2016 Jonathan T.M. Reckford, 2017 International Representative, Miami Branch Southern Region, International Chief Executive Officer, Habitat Union of Operating Engineers, Appointed by the Federal Reserve Bank for Humanity International, Birmingham, AL Millar Wilson, 2015 Atlanta, GA Vice Chairman and Chief Nancy C. Goedecke, 2017 Executive Officer, Mercantil Class C Chairman and Chief Executive Commercebank, Officer, Mayer Electric Supply Thomas A. Fanning, 2015 Coral Gables, FL Company, Inc., Birmingham, AL Chairman, President, and Chief Executive Officer, Southern Gary L. Tice, 2016 Company, Atlanta, GA Jacksonville Branch Chairman and Chief Executive Officer, First Florida Integrity Michael J. Jackson, 2016 Appointed by the Federal Reserve Bank Bank, Naples, FL Chairman, Chief Executive Oscar J. Horton, 2015 Officer, and President, President and Chief Executive Victoria E. Villalba, 2017 AutoNation, Inc., Officer, Sun State International President and Chief Executive Ft. Lauderdale, FL Trucks, LLC, Tampa, FL Officer, Victoria & Associates Career Services, Inc., Miami, FL Myron A. Gray, 2017 D. Kevin Jones, 2015 President, U.S. Operations, President and Chief Executive Carol C. Lang, 2017 United Parcel Service, Officer, MIDFLORIDA Credit President, HealthLink Atlanta, GA Union, Lakeland, FL Enterprises, Inc., Miami, FL

422 102nd Annual Report | 2015 Appointed by the Board of Governors R. Craig Holley, 2017 Elizabeth A. Ardoin, 2016 Alberto Dosal, 2015 Chattanooga Chairman, Senior Executive Vice President – Chairman and Chief Executive CapitalMark Bank & Trust, Director of Communications, Officer, Dosal Capital, LLC, Chattanooga, TN IBERIABANK, Lafayette, LA Doral, FL Appointed by the Board of Governors Lampkin Butts, 2017 Rolando Montoya, 2016 William J. Krueger, 2015 President and Chief Operating Provost, Miami Dade College, Executive Vice President, JATCO Officer, Sanderson Farms, Inc., Miami, FL USA, Inc., Franklin, TN Laurel, MS Thomas W. Hurley, 2017 Kathleen Calligan, 2016 Appointed by the Board of Governors Chairman and Chief Executive Chief Executive Officer, Better Art E. Favre, 2015 Officer, Becker Holding Business Bureau Middle President and Chief Executive Corporation, Vero Beach, FL Tennessee, Nashville, TN Officer, Performance Contractors, Scott McWilliams, 2017 Inc., Baton Rouge, LA Nashville Branch Executive Chairman and Chief Terrie P. Sterling, 2016 Appointed by the Federal Reserve Bank Customer Officer, OHL, Executive Vice President and Kent M. Adams, 2015 Brentwood, TN Chief Operating Officer, Our President and Chief Executive Lady of the Lake Regional Officer, Caterpillar Financial New Orleans Branch Medical Center, Baton Rouge, LA Services Corporation, Vice Appointed by the Federal Reserve Bank President, Caterpillar Inc., Fred T. Stimpson III, 2017 Suzanne T. Mestayer, 2015 Nashville, TN President, U.S. South Operations, Managing Principal, ThirtyNorth Canfor Scotch Gulf, Mobile, AL Jennifer S. Banner, 2015 Investments, LLC, Chief Executive Officer, Schaad New Orleans, LA Companies, LLC, Knoxville, TN Phillip R. May, 2015 William Y. Carroll Jr., 2016 President and Chief Executive President and Chief Executive Officer, Entergy Louisiana, LLC Officer, SmartBank, and Entergy Gulf States Pigeon Forge, TN Louisiana, LLC, Jefferson, LA District 7–Chicago Class A Class B Class C William M. Farrow III, 2015 Terry Mazany, 2015 Greg Brown, 2015 President and Chief Executive President and Chief Executive Chairman and Chief Executive Officer, Urban Partnership Bank, Officer, The Chicago Community Officer, Motorola Solutions, Inc., Chicago, IL Trust, Chicago, IL Schaumburg, IL Abram A. Tubbs, 2016 Jorge Ramirez, 2016 Jeffrey A. Joerres, 2015 Chairman and Chief Executive President, Chicago Federation of Executive Chairman, Officer, Ohnward Bank & Trust, Labor, Chicago, IL ManpowerGroup, Milwaukee, WI Cascade, IA Nelda J. Connors, 2017 Anne R. Pramaggiore, 2016 David W. Nelms, 2017 Chief Executive Officer, Pine President and Chief Executive Chairman and Chief Executive Grove Holdings, LLC, Officer, ComEd, Chicago, IL Officer, Discover Financial Chicago, IL Services, Riverwoods, IL

Federal Reserve System Organization 423 Detroit Branch Susan M. Collins, 2017 Douglas W. Stotlar, 2016 Joan and Sanford Weill Dean of President and Chief Executive Appointed by the Federal Reserve Bank Public Policy, University of Officer, Con-way Inc., Sheilah P. Clay, 2015 Michigan, Ann Arbor, MI Ann Arbor, MI President and Chief Executive Fernando Ruiz, 2017 Michael L. Seneski, 2017 Officer, Neighborhood Service Corporate Vice President and Director, Corporate Strategy, Organization, Detroit, MI Treasurer, The Dow Chemical Ford Motor Company, Nancy M. Schlichting, 2016 Company, Midland, MI Dearborn, MI Chief Executive Officer, Henry Appointed by the Board of Governors Ford Health System, Detroit, MI Lou Anna K. Simon, 2015 President, Michigan State University, East Lansing, MI District 8–St. Louis Class A Class B Class C William E. Chappel, 2015 Sonja Yates Hubbard, 2015 George Paz, 2015 Vice Chairman, The First Chief Executive Officer, E-Z Mart Chairman and Chief Executive National Bank, Vandalia, IL Stores, Inc., Texarkana, TX Officer, Express Scripts, St. Louis, MO D. Bryan Jordan, 2016 Cal McCastlain, 2016 Chairman, President, and Chief Partner, Dover Dixon Horne Kathleen M. Mazzarella, 2016 Executive Officer, First Horizon PLLC, Little Rock, AR Chairman, President and Chief National Corporation, Executive Officer, Graybar John N. Roberts III, 2017 Memphis, TN Electric Company, Inc., President and Chief Executive St. Louis, MO Susan S. Stephenson, 2017 Officer, J.B. Hunt Transport Co-Chairman and President, Services, Inc., Lowell, AR Rakesh Sachdev, 2017 Independent Bank, Memphis, TN President and Chief Executive Officer, Sigma-Aldrich Corp., St. Louis, MO

424 102nd Annual Report | 2015 Little Rock Branch Louisville Branch Memphis Branch Appointed by the Federal Reserve Bank Appointed by the Federal Reserve Bank Appointed by the Federal Reserve Bank Ronald B. Jackson, 2015 Jon A. Lawson, 2015 Lisa McDaniel Hawkins, 2015 Community Chairman, Simmons President, Chief Executive Officer, President, Room to Room Inc., First National Bank of Pine and Chairman, Bank of Ohio Tupelo, MS Bluff, Russellville, AR County, Beaver Dam, KY J. Brice Fletcher, 2016 Chairman and Chief Executive Michael A. Cook, 2016 David P. Heintzman, 2016 Officer, First National Bank of Senior Vice President and Chairman and Chief Executive Eastern Arkansas, Assistant Treasurer, Wal-Mart Officer, Stock Yards Bank & Forrest City, AR Stores, Inc., Bentonville, AR Trust Company, Louisville, KY Michael E. Cary, 2017 Karama Neal, 2017 Mary K. Moseley, 2017 President and Chief Executive Chief Operating Officer, Southern Presidentand Chief Executive Officer, Carroll Bank and Trust, Bancorp Community Partners, Officer, Al J. Schneider Co., Huntingdon, TN Little Rock, AR Louisville, KY R. Molitor Ford Jr., 2017 Keith Glover, 2017 Malcolm Bryant, 2017 Vice Chairman and Chief President and Chief Executive President, The Malcolm Bryant Executive Officer, Commercial Officer, Producers Rice Mill, Inc., Corporation, Owensboro, KY Bank and Trust Company, Stuttgart, AR Memphis, TN Appointed by the Board of Governors Appointed by the Board of Governors Susan E. Parsons, 2015 Appointed by the Board of Governors Robert Martinez, 2015 Chief Financial Officer, Secretary, Charlie E. Thomas III, 2015 Owner, Rancho La Esperanza, and Treasurer, Koch Enterprises, Regional Director of External & DeQueen, AR Inc., Evansville, IN Legislative Affairs, AT&T Tennessee, Memphis, TN P. Mark White, 2016 Randy W. Schumaker, 2016 President and Chief Executive President and Chief Management Carolyn Chism Hardy, 2016 Officer, Arkansas Blue Cross and Officer, Logan Aluminum, Inc., President and Chief Executive Blue Shield, Little Rock, AR Russellville, KY Officer, Chism Hardy Investments, LLC, Ray C. Dillon, 2017 Alice K. Houston, 2017 Collierville, TN President and Chief Executive President, Houston-Johnson, Inc., David T. Cochran, Jr., 2017 Officer, Deltic Timber Louisville, KY Partner, CoCo Planting Co., Corporation, El Dorado, AR Avon, MS District 9–Minneapolis Class A Class B Class C Randy L. Newman, 2015 Christine Hamilton, 2015 Randall J. Hogan, 2015 Chairman and Chief Executive Managing Partner, Christiansen Chairman and Chief Executive Officer, Alerus Financial, NA and Land and Cattle, Ltd, Officer, Pentair, Alerus Financial Corp., Kimball, SD Minneapolis, MN Grand Forks, ND Lawrence R. Simkins, 2016 Kendall J. Powell, 2016 President and Chief Executive Chairman and Chief Executive Catherine T. Kelly, 2016 Officer, The Washington Officer, General Mills, President and Chief Executive Companies, Missoula, MT Minneapolis, MN Officer, Minnesota Bank & Trust, Edina, MN Kathleen Neset, 2017 MayKao Y. Hang, 2017 President, Neset Consulting President and Chief Executive Thomas W. Armstrong, 2017 Service, Tioga, ND Officer, Amherst H. Wilder President, The First National Foundation, St. Paul, MN Bank of Park Falls, Park Falls, WI

Federal Reserve System Organization 425 Helena Branch Duane Kurokawa, 2017 Sarah Walsh, 2017 President, Western Bank of Wolf Chief Operating Officer, Appointed by the Federal Reserve Bank Point, Wolf Point, MT PayneWest Insurance, Barbara Stiffarm, 2015 Helena, MT Executive Director, Opportunity Appointed by the Board of Governors Link, Inc., Havre, MT Marsha Goetting, 2015 Thomas R. Swenson, 2016 Professor and Extension Family President and Chief Executive Economics Specialist, Montana Officer, Bank of Montana and State University, Bozeman, MT Bancorp of Montana Holding Company, Missoula, MT District 10–Kansas City Class A James C. Farrell, 2017 Oklahoma City Branch President and Chief Executive David W. Brownback, 2015 Appointed by the Federal Reserve Bank Officer, Farmers National President and Chief Executive Company, Omaha, NE Michael C. Coffman, 2015 Officer, Citizens State Bank & President and Chief Executive Trust Co., Ellsworth, KS Denver Branch Officer, Panhandle Oil and Gas, Max T. Wake, 2016 Inc., Oklahoma City, OK President, Jones National Bank & Appointed by the Federal Reserve Bank Jane Haskin, 2016 Trust Co., Seward, NE Edmond Johnson, 2015 President and Chief Executive President and Owner, Permier Paul J. Thompson, 2017 Officer, First Bethany Bank & Manufacturing Inc., President and Chief Executive Trust, Bethany, OK Frederick, CO Officer, Country Club Bank, Kansas City, MO Anne Haines Yatskowitz, 2015 Charles R. Hall, 2016 Chairman and Chief Executive President and Chief Executive Class B Officer, ACCION New Officer, Exchange Bank and Trust Company, Perry, OK John T. Stout Jr., 2015 Mexico–Arizona–Colorado–Nevada, Chief Executive Officer, Plaza Albuquerque, NM Tina Patel, 2017 Belmont Management Group Mark A. Zaback, 2016 Chief Financial Officer, Promise LLC, Shawnee Mission, KS Hotels, Inc., Tulsa, OK President and Chief Executive Len C. Rodman, 2016 Officer, Jonah Bank of Wyoming, Appointed by the Board of Governors Former Chairman, President, and Casper, WY Peter B. Delaney, 2015 Chief Executive Officer, Black & Ashley J. Burt, 2017 Former Chairman and Veatch, Olathe, KS President, The Gunnison Bank Chief Executive Officer, Lilly Marks, 2017 and Trust Company, OGE Energy Corp., Vice President for Health Affairs, Gunnison, CO Oklahoma City, OK University of Colorado and Appointed by the Board of Governors Clint D. Abernathy, 2016 Anschutz Medical Campus, Aurora, CO Richard L. Lewis, 2015 President, Abernathy Farms, Inc., President and Chief Executive Altus, OK Class C Officer, RTL Networks Inc., Douglas J. Stussi, 2017 Denver, CO Steve Maestas, 2015 Executive Vice President and Chief Executive Officer, Maestas Margaret M. Kelly, 2016 Chief Financial Officer, Love’s Development Group, Former Chief Executive Officer, Travel Stops & Country Store, Albuquerque, NM RE/MAX, LLC, Denver, CO Oklahoma City, OK Rose Washington, 2016 Gary DeFrange, 2017 Executive Director, Tulsa President and Chief Operating Economic Development Officer, Winter Park Resort, Corporation, Tulsa, OK Winter Park, CO

426 102nd Annual Report | 2015 Omaha Branch Anne Hindery, 2016 John F. Bourne, 2016 Chief Executive Officer, International Representative, Appointed by the Federal Reserve Bank Nonprofit Association of the International Brotherhood of Brian D. Esch, 2015 Midlands, Omaha, NE Electrical Workers, Omaha, NE President and Chief Executive Jeff W. Krejci, 2017 Eric L. Butler, 2017 Officer, McCook National Bank, President and Director, Executive Vice President, Union McCook, NE Cornerstone Bank, York, NE Pacific Railroad, Omaha, NE James L. Thom, 2015 Appointed by the Board of Governors Vice President, T-L Irrigation Co., G. Richard Russell, 2015 Hastings, NE President and Chief Executive Officer, Millard Lumber Inc., Omaha, NE District 11–Dallas Class A Class C Teresa O. Molina, 2017 President, First Next Mexico Allan James “Jimmy” Rasmussen, Greg L. Armstrong, 2015 Bank, Deming, NM 2015 Chairman and Chief Executive President and Chief Executive Officer, Plains All American Appointed by the Board of Governors Officer, HomeTown Bank, N.A., Pipeline, Houston, TX Renard U. Johnson, 2015 Galveston, TX Matthew K. Rose, 2016 President and Chief Executive J. Russell Shannon, 2016 Executive Chairman, BNSF Officer, Management & Chief Executive Officer, National Railway Company, Engineering Technologies Bank of Andrews, Andrews, TX Fort Worth, TX International Inc. (METI), Renu Khator, 2017 El Paso, TX Christopher C. Doyle, 2017 Chancellor and President, President and Chief Executive J. Eric Evans, 2016 University of Houston, Officer, Texas First Bank, Chief Executive Officer, Houston, TX Texas City, TX Providence Memorial Hospital and Sierra Medical Center, El Paso Branch Class B El Paso, TX Appointed by the Federal Reserve Bank Ann B. Stern, 2015 Richard D. Folger, 2017 President and Chief Executive Robert Nachtmann, 2015 Managing General Partner, Officer, Houston Endowment, Dean and Professor of Finance, Colbridge Partners Ltd., Inc., Houston, TX College of Business Midland, TX Administration, The University Curtis V. Anastasio, 2016 of Texas at El Paso, El Paso, TX Houston Branch Executive Chairman, GasLog Paul L. Foster, 2016 Partners LP, New York, NY Appointed by the Federal Reserve Bank Executive Chairman, Western Jorge A. Bermudez, 2017 Refining, Inc., El Paso, TX Paul B. Murphy Jr., 2015 President and Chief Executive President and Chief Executive Jerry Pacheco, 2017 Officer, Cadence Bank, Officer, Byebrook Group, President, Global Perspectives Houston, TX College Station, TX Integrated, Inc., Santa Teresa, NM

Federal Reserve System Organization 427 Gerald B. Smith, 2016 Marcus A. Watts, 2016 Robert L. Lozano, 2017 Chairman and Chief Executive President, The Friedkin Group, Franchise Owner and Operator, Officer, Smith, Graham & Houston, TX Dairy Queen, Pharr, TX Company Investment Advisors, Robert C. Robbins, MD, 2017 Appointed by the Board of Governors L.P., Houston, TX President and Chief Executive Catherine M. Burzik, 2015 Albert Chao, 2017 Officer, Texas Medical Center, President and Chief Executive President and Chief Executive Houston, TX Officer, CFB Interests, LLC, Officer, Westlake Chemical Corp, San Antonio, TX Houston, TX San Antonio Branch James “Rad” Conrad Weaver, R.A. “Al” Walker, 2017 Appointed by the Federal Reserve Bank 2016 Chairman, President, and Chief Alfred B. Jones, 2015 Chief Executive Officer, Executive Officer, Anadarko President and Director, American McCombs Partners, Petroleum Corporation, Bank Holding Co., San Antonio, TX Houston, TX Corpus Christi, TX Manoj Saxena, 2017 Appointed by the Board of Governors Vacancy, 2016 Managing Director, The Ellen Ochoa, 2015 Janie Barrera, 2017 Entrepreneurs’ Fund, Government Executive and President and Chief Executive San Antonio, TX Director, NASA Johnson Space Officer, LiftFund Texas, Inc., Center, Houston, TX San Antonio, TX District 12–San Francisco Class A Richard A. Galanti, 2017 John C. Molina, 2015 Executive Vice President and Chief Financial Officer, Molina Peter S. Ho, 2015 Chief Financial Officer, Costco Healthcare, Inc., Long Beach, CA Chairman, President, and Chief Wholesale Corporation, Executive Officer, Bank of David I. Rainer, 2016 Issaquah, WA Hawaii and Bank of Hawaii Chairman and Chief Executive Corporation, Honolulu, HI Officer, California United Bank, Class C Steven R. Gardner, 2016 Encino, CA President and Chief Executive Alexander R. Mehran, 2015 Peggy Tsiang Cherng, 2017 Officer, Pacific Premier Bank, Chairman and Chief Executive Co-Chair of the Board and Irvine, CA Officer, Sunset Development Co-Chief Executive Officer, Company, San Ramon, CA Megan F. Clubb, 2017 Panda Restaurant Group, Inc., Chief Executive Officer and Barry M. Meyer, 2016 Rosemead, CA Chairman of the Board, Baker Chairman and Founder, Appointed by the Board of Governors Boyer National Bank, North Ten Mile Associates, Walla Walla, WA Burbank, CA Gina Marie Lindsey, 2015 Retired Executive Director, Roy A. Vallee, 2017 Class B Los Angeles World Airports, Retired Executive Chairman and Los Angeles, CA Steven E. Bochner, 2015 Chief Executive Officer, Avnet, Partner, Wilson, Sonsini, Inc., Phoenix, AZ Goodrich, & Rosati, P.C., Palo Alto, CA Los Angeles Branch Nicole C. Taylor, 2016 Appointed by the Federal Reserve Bank Associate Vice Provost for Student Ilyanne Morden Kichaven, 2015 Affairs and Dean of Community Executive Director Los Angeles, Engagement and Diversity, SAG-AFTRA, Los Angeles, CA Stanford University, Stanford, CA

428 102nd Annual Report | 2015 James A. Hughes, 2016 Salt Lake City Branch Seattle Branch Chief Executive Officer, First Appointed by the Federal Reserve Bank Appointed by the Federal Reserve Bank Solar, Inc., Tempe, AZ Susan D. Mooney Johnson, 2015 Greg C. Leeds, 2015 Robert H. Gleason, 2017 President, Futura Industries, President and Chief Executive President and Chief Executive Clearfield, UT Officer, Wizards of the Coast, Officer, Evan Hotels, Hasbro, Inc., Renton, WA San Diego, CA Albert T. Wada, 2016 Chairman, Wada Farms, Inc., Nicole W. Piasecki, 2016 Portland Branch Pingree, ID Vice President and General Manager, Propulsion Systems Appointed by the Federal Reserve Bank Josh England, 2017 Division, Boeing Commercial S. Randolph Compton, 2015 President, C.R. England, Inc. Airplanes, Seattle, WA President, Chief Executive Officer, Salt Lake City, UT and Co-Chairperson of the Board, Craig Dawson, 2017 Park Price, 2017 Pioneer Trust Bank, N.A., President and Chief Executive Chief Executive Officer Emeritus Salem, OR Officer, Retail Lockbox, Inc., and Chairman, Bank of Idaho, Seattle, WA Steven J. Zika, 2016 Idaho Falls, ID Chief Executive Officer, Hampton Carol K. Nelson, 2017 Appointed by the Board of Governors Affiliates, Portland, OR Pacific Region Sales Executive and Robert C. Hale, 2017 Bradley J. Wiskirchen, 2015 Seattle Market President, Chief Executive Officer, Hale Chief Executive Officer, KeyBank, Seattle, WA Keynetics, Inc., Boise, ID Companies, Hermiston, OR Appointed by the Board of Governors Charles A. Wilhoite, 2017 Peter R. Metcalf, 2016 Mary O. McWilliams, 2015 Managing Director, Willamette Lead Founder and Chief Executive Retired Executive Director, Management Associates, Officer, Black Diamond, Inc., Washington Health Alliance, Portland, OR Salt Lake City, UT Seattle, WA Patricia R. Richards, 2017 Appointed by the Board of Governors Sophie Minich, 2016 President and Chief Executive Román D. Hernández, 2015 President and Chief Executive Officer, SelectHealth, Inc., Partner, Schwabe, K&L Gates Officer, Cook Inlet Region, Inc., Murray, UT LLP, Portland, OR Anchorage, AK Joseph E. Robertson Jr., MD, Scott L. Morris, 2017 2016 Chairman, President and Chief President, Oregon Health & Executive Officer, Avista Science University, Portland, OR Corporation, Spokane, WA Tamara L. Lundgren, 2017 President and Chief Executive Officer, Schnitzer Steel Industries, Inc., Portland, OR

Federal Reserve System Organization 429 Reserve Bank and Branch Leadership Each year, the Board of Governors designates one Class C director to serve as chair, and one Class C director to serve as deputy chair, of each Reserve Bank board. Reserve Banks also have a president and first vice president who are appointed by the Bank’s Class C, and certain Class B, directors, subject to approval by the Board of Governors. Each Reserve Bank selects a chair for every Branch in its District from among the directors on the Branch board who were appointed by the Board of Governors. For each Branch, an officer from its Reserve Bank is also charged with the oversight of Branch operations. Cincinnati Birmingham Boston Valerie L. Sheppard, Chair Pamela B. Hudson, MD, Chair William D. Nordhaus, Chair LaVaughn M. Henry, Senior Lesley McClure, Vice President John F. Fish, Deputy Chair Regional Officer and Regional Executive Eric S. Rosengren, President and Chief Executive Officer Pittsburgh Jacksonville Kenneth C. Montgomery, First Dawne S. Hickton, Chair Harold Mills, Chair Vice President and Chief Operating Officer Guhan Venkatu, Senior Regional Christopher L. Oakley, Vice Officer President and Regional Executive New York Miami Richmond Emily K. Rafferty, Chair Alberto Dosal, Chair Russell C. Lindner, Deputy Chair Sara Horowitz, Deputy Chair Karen Gilmore, Vice President and Margaret G. Lewis, Deputy Chair William C. Dudley, President Regional Executive Jeffrey M. Lacker, President Michael Strine, First Vice President Mark L. Mullinix, First Vice Nashville President William J. Krueger, Chair Additional office at East Rutherford, NJ Baltimore Lee C. Jones, Vice President and Philadelphia Regional Executive Samuel L. Ross, Chair James E. Nevels, Chair David E. Beck, Senior Vice New Orleans Michael J. Angelakis, Deputy President and Baltimore Regional Terrie P. Sterling, Chair Chair Executive Adrienne C. Slack, Vice President Patrick T. Harker, President Charlotte and Regional Executive D. Blake Prichard, First Vice President Elizabeth A. Fleming, Chair Chicago Matthew A. Martin, Senior Vice Cleveland President and Charlotte Regional Greg Brown, Chair Executive Anne R. Pramaggiore, Deputy Christopher M. Connor, Deputy Chair Chair Atlanta Charles L. Evans, President John P. Surma, Deputy Chair Ellen J. Bromagen, First Vice Loretta J. Mester, President Thomas A. Fanning, Chair President Gregory Stefani, First Vice Michael J. Jackson, Deputy Chair President Dennis P. Lockhart, President Additional office at Des Moines, IA Marie C. Gooding, First Vice Detroit President Lou Anna K. Simon, Chair Robert Wiley, Officer in Charge

430 102nd Annual Report | 2015 Houston St. Louis Kansas City Ellen Ochoa, Chair George Paz, Chair Steve Maestas, Chair Daron D. Peschel, Officer in Rakesh Sachdev, Deputy Chair Rose Washington, Deputy Chair Charge James Bullard, President Esther L. George, President San Antonio David A. Sapenaro, First Vice Kelly J. Dubbert, First Vice President President Catherine M. Burzik, Chair Blake Hastings, Officer in Charge Little Rock Denver Ray C. Dillon, Chair Margaret M. Kelly, Chair San Francisco Robert A. Hopkins, Regional Alison Felix, Officer in Charge Roy A. Vallee, Chair Executive Alexander R. Mehran, Deputy Oklahoma City Chair Louisville Peter B. Delaney, Chair John C. Williams, President Susan E. Parsons, Chair Mark A. Gould, First Vice Chad R. Wilkerson, Officer in President Maria Gerwing Hampton, Charge Regional Executive Additional office at Phoenix, AZ Omaha Memphis Los Angeles John F. Bourne, Chair Carolyn Chism Hardy, Chair James A. Hughes, Chair Nathan Kauffman, Officer in Roger W. Replogle, Officer in Martha Perine Beard, Regional Charge Charge Executive Dallas Portland Minneapolis Renu Khator, Chair Joseph E. Robertson, Jr., Chair Randall J. Hogan, Chair Steven H. Walker, Officer in Matthew K. Rose, Deputy Chair Charge MayKao Y. Hang, Deputy Chair Robert S. Kaplan, President Narayana R. Kocherlakota, Helen E. Holcomb, First Vice Salt Lake City President President Bradley J. Wiskirchen, Chair James M. Lyon, First Vice Robin A. Rockwood, Officer in President El Paso Charge Renard U. Johnson, Chair Helena Seattle Roberto A. Coronado, Officer in Marsha Goetting, Chair Charge Scott L. Morris, Chair Susan Woodrow, Assistant Vice Susan A. Sutherland, Officer in President and Branch Executive Charge

Federal Reserve System Organization 431 Leadership Conferences Conference of Chairs The chairs of the Federal Reserve Banks are organized into the Conference of Chairs, which meets to consider matters of common interest and to consult with and advise the Board of Governors. Such meetings, also attended by the deputy chairs, were held in Washington, D.C., on May 19–20 and November 3–4, 2015. The conference’s executive committee members for 2015 are listed below.1 Conference of Chairs Roy A. Vallee, Vice Chair, Executive Committee—2015 Federal Reserve Bank of San Francisco Emily K. Rafferty, Chair, Federal Reserve Bank Thomas A. Fanning, Member, of New York Federal Reserve Bank of Atlanta Conference of Presidents The presidents of the Federal Reserve Banks are organized into the Conference of Presidents, which meets periodically to identify, define, and deliberate issues of strategic significance to the Federal Reserve System; to consider matters of common interest; and to consult with and advise the Board of Governors. The chief executive officer of each Reserve Bank was originally labeled governor and did not receive the title of president until the passage of the Banking Act of 1935. Consequently, when the Conference was first established in 1914 it was known as the Conference of Governors. Conference officers for 2015 are listed below. Conference of Presidents—2015 Dennis P. Lockhart, Chair, Federal Reserve Bank of Atlanta Eric S. Rosengren, Vice Chair, Federal Reserve Bank of Boston Maria R. Smith, Secretary, Federal Reserve Bank of Atlanta 1 On November 4, 2015, the Conference of Chairs elected Roy A. Vallee, chair of the Federal Reserve Bank of San Francisco, as chair of the conference’s executive committee for 2016. The conference also elected Thomas A. Fanning, chair of the Federal Reserve Bank of Atlanta for 2016 as vice chair, and Steve Maestas, chair of the Federal Reserve Bank of Kansas City for 2016, as the executive committee’s third member.

432 102nd Annual Report | 2015 Conference of First Vice Presidents The Conference of First Vice Presidents of the Federal Reserve Banks was organized in 1969 to meet periodically for the consideration of operations and other matters. Conference officers for 2015 are listed below.2 Conference of First Vice Jeanne MacNevin, Secretary, Presidents—2015 Federal Reserve Bank of Boston Kenneth C. Montgomery, Chair, Terri Bialowas, Assistant Federal Reserve Bank of Boston Secretary, Federal Reserve Bank Gregory Stefani, Vice Chair, of Cleveland Federal Reserve Bank of Cleveland 2 On November 4, 2015, the conference elected Gregory Stefani as chair for 2016–17 and Kelly Dubbert, Federal Reserve Bank of Kansas City, as vice chair. The conference also elected Terri Bialowas as secretary and Erika Ramirez, Federal Reserve Bank of Kansas City, as assistant secretary.

433 15 Index A Federal Reserve Banks, 20, 106–110, 286–293, 352–353 Valuations, 36–39 Abbreviations, 336–337 Association of Supervisors of Banks of the Americas ABS. See Asset-backed securities (ASBA), 58 Accounting and Auditing Working Group, 62 Audits Accounting Experts Group, 62 Board of Governors, 312–334 Accounting policies, 62, 342–356 Federal Reserve Banks, 335–386 Accounting Standards Codification (ASC), 344 by Government Accountability Office, 388 Accounting Standards Update, 354–356 by Office of the Inspector General, 387 Accumulated other comprehensive income, 330 Auto loans, 41, 89 ACH. See Automated clearinghouse services Automated clearinghouse (ACH) services, 93, 94–95, Acquisitions, 80–82 119–120 Advanced foreign economies (AFEs), 16–18, 30, 31 Average number of personnel Advisory Councils Federal Reserve Banks, 396–397, 399 Community Advisory Council, 415 Community Depository Institutions Advisory Council, 414 B Federal Advisory Council, 413 Balance sheets AFEs. See Advanced foreign economies Board of Governors, 315 Affordable Care Act, 28 Federal Reserve Banks, 20, 32, 132, 145, 170–171, Agreement corporations, 54 181–182 AIG. See American International Group, Inc. Bank for International Settlements, 64 Alternative lenders, 89 Bank holding companies (BHCs) Alternative Lending through the Eyes of Mom & Pop Small Banks affiliated with, 285 Business Owners, 89 Capital planning, 50 American International Group, Inc. (AIG), 48, 53 Complaints against, 84–85 AML. See Anti-money laundering Consolidated supervision, 76 ANP. See Average number of personnel Consumer protection regulations, 75 Anti-money laundering (AML) Developments in 2015, 45 Bank Secrecy Act/Anti-Money Laundering Examination Enhanced prudential standards, 59–60 Manual, 55, 64 Equity prices, 16, 29 Compliance risk management, 63–64 International activities, 53–54 Compliance with regulatory requirements, 54–55 Liquidity requirements, 40 Examinations, 55 Number of, 49, 51 Experts Group, 64 Regulation of, 70–73 International coordination, 64 Regulatory assessment fees, 73 Appraisal management companies, 116 Regulatory capital ratios, 39 Appropriate monetary policy, 158, 162–166, 194, 198, 202, Regulatory reports, 66 231, 235, 239, 272–276 RFI/C(D) system, 51 ASBA. See Association of Supervisors of Banks of the Stress testing, 42, 50–51 Americas Supervision of, 46–48, 51–52, 65 ASC. See Accounting Standards Codification Supervisory assessment fees, 73 Asia Surveillance and off-site monitoring, 57 Economy of, 17 Bank Holding Companies and Change in Bank Control Asia Pacific Economic Cooperation, 58 (Regulation Y), 111, 116, 117–118 Asset-backed securities (ABSs), 39–40 Bank Holding Company Act, 48, 70–71 Assets and liabilities Bank Holding Company Performance Reports (BHCPRs), Commercial banks, 294 57

434 102nd Annual Report | 2015 Bank Merger Act, 70, 71 Financial statements, 312–334 Bank of Canada Functions for Reserve Banks, 331 Monetary policies, 18 Government Performance and Results Act requirements, Bank of England 114 Cybersecurity, 56 Leases, 322–323 Monetary policies, 18 Litigation, 279–280 Bank Secrecy Act (BSA), 55, 63–64 Members, 405 Bank Secrecy Act/Anti-Money Laundering Examination Model Validation Council, 416 Manual, 55, 64 Officers, 405–410 Bank Service Company Act, 53 Operations and services, 318–319 Banking offices, 47 Operations statements, 316 Banking Organization National Desktop, 69 Policy actions, 115–120 Postemployment benefits, 329 Banking organizations, U.S. See also Bank holding Postretirement benefits, 328–329 companies; Commercial banks Primary credit rate, 20 Affiliation with bank holding companies, 285 Property, equipment, and software, 322 Capital adequacy standards, 60–61 Retirement benefits, 323–327 Community banking organizations, 67–68 Structure, 318 Credit default swaps, 16, 29 Website, 1, 5, 57, 63, 73, 114 Enhanced prudential standards, 59–60 Financial stability monitoring, 35–44 Bonds International activities, 54 Corporate, 12–13, 15, 27–28, 29, 38 Offices, 285 Foreign, 16, 30 Overseas investments by, 72 High-yield, 37, 38, 40 Profitability, 15–16, 29–30 Municipal, 16, 30 Regulation of, 42–43, 70–73 Borrowing. See Debt Supervision of, 42, 47–58, 68 Branches. See Federal Reserve Banks Brazil Basel Committee on Banking Supervision Economy of, 17, 31 Website, 62 BSA. See Bank Secrecy Act Basel Committee on Banking Supervision (BCBS) BS&R. See Banking Supervision and Regulation Accounting Experts Group, 62 Budget deficit, 13 AML Experts Group, 64 Budgets, Federal Reserve System Capital adequacy standards, 60 Board of Governors, 389, 391–396 Enhanced prudential standards, 59 Budget performance, 2015, 390, 392–393, 396–398, 401 Supervisory policies, 61 Capital budgets, 2015, 391, 395–396, 399–401 Basel III, 39–40 Currency, 401–403 BCBS. See Basel Committee on Banking Supervision Federal Reserve Banks, 396–401 Bear Stearns Companies, Inc., 366–367 Operating expense budget, 2015, 389, 390, 393–395, Benefits Equalization Plan (BEP), 323–325, 375 398–399 BEP. See Benefits Equalization Plan; Bureau of Engraving Trends in expenses and employment, 390–391 and Printing Bureau of Economic Analysis (BEA), 27 BHCPRs. See Bank Holding Company Performance Bureau of Engraving and Printing (BEP), 96, 333, 401–402 Reports Business Continuity Planning Booklet, 55 BHCs. See Bank holding companies Business sector, 12, 24, 27, 41 Biggert-Waters Flood Insurance Reform Act, 79, 86 Board of Governors Accounting policies, 319–322 C Accumulated other comprehensive income, 330 Advisory councils, 413–416 C-SCAPE. See Consolidated Supervision Comparative Audits, 312–334 Analysis, Planning and Execution program Balance sheets, 315 CAC. See Community Advisory Council Budget, 389, 391–396 Call Reports, 57, 67–68 Cash flows, 317 Canada Commitments and contingencies, 333 Economy of, 17–18, 31 Community Advisory Council, 90–91, 118–119, 415 Capital Community Depository Institutions Advisory Council, Countercyclical capital buffer, 42–43, 60–61, 113 414 Federal Reserve Banks, 340, 351 Divisions, 405–410 Regulatory capital rule, 60, 65 Federal Advisory Council, 413 Requirements, 111–112

Index 435 Capital Adequacy of Bank Holding Companies, Savings Community Advisory Council (CAC), 90–91, 118–119, 415 and Loan Holding Companies, and State Member Community affairs. See Consumer and community affairs Banks (Regulation Q), 111–113, 116–117 Community Affairs Officers, 89 Capital adequacy standards, 39, 60–61 Community Bank Examiner Commissioning Program, 69 Capital leases, 322 Community banks, 67–68 Capital Markets Specialty Track, 70 Community Depository Institutions Advisory Council, Capital planning, 50–51, 111 90–91, 414 CARS. See Central Accounting Reporting System Community Development, 89–91 Cash flows, Board of Governors, 317 Community Development Research Conference, 88 Cash items in process of collection, 108 Community Reinvestment Act (CRA) Cash-management services, 100 Consumer protection regulations, 75 CashForward, 97, 399 Mergers and acquisitions in relation to, 80–82 CBO. See Congressional Budget Office Requirements of, 79–80 CCAR. See Comprehensive Capital Analysis and Review Complaint referrals, 86 CCIWG. See Cybersecurity and Critical Infrastructure Compliance, Office of, 402 Working Group Compliance Outlook Live, 79 CCyB. See Countercyclical capital buffer Compliance risk management, 63–64 CDSs. See Credit default swaps Comprehensive Capital Analysis and Review (CCAR), 42, CDTR. See Central Document and Text Repository 50–51 Central Accounting Reporting System (CARS), 100 Comptroller of the Currency, Office of the (OCC), 43, 52, Central Bank Counterfeit Deterrence Group, 403 60, 76 Central Document and Text Repository (CDTR), 69 Condition statements CFPB. See Consumer Financial Protection Bureau Federal Reserve Banks, 296–300, 338 CFTC. See Commodities Futures Trading Commission Conference of State Banking Supervisors, 68 Chairs, Conference of, Federal Reserve Banks, 431 Conferences, Federal Reserve Banks Officers, 431–432 Change in Bank Control Act, 70, 71 Congress. See Monetary policy reports to Congress; Chicago Board Options Exchange, 74 specific legislation by name Chile, economy of, 17 Congressional Budget Office (CBO), 13 China Consolidated supervision, 47, 49–54 Economic policies, 30 Consolidated Supervision Comparative Analysis, Planning Economy of, 17, 31 and Execution program (C-SCAPE), 68 People’s Bank of China, 16, 17, 30 Consolidation, 344 Stock prices, 17 Consumer and community affairs Civil money penalties, 57, 79, 319–320 Bank Holding Company Consolidated Supervision, 76 Civil Service Retirement System, 327 Community Advisory Council, 90–91 CMBSs. See Commercial mortgage-backed securities Community development, 89–91 Coin. See Currency and coin operations Community Reinvestment Act requirements, 79–80 Collection Information Repository, 99–100 Consumer behavior research surveys, 87–88 Collection of Checks and Other Items by Federal Reserve Consumer complaints and inquiries, 84–86 Banks and Funds Transfers Through Fedwire Consumer laws and regulations, 86–87 (Regulation J), 93 Consumer research, 87–89 Collection services, Federal Reserve Banks, 99–100 Coordination with Consumer Financial Protection Colombia, economy of, 17 Bureau, 82 Commercial automated clearinghouse (ACH) services, Coordination with Federal banking agencies, 82–83 94–95 Emerging-issues analysis, 88–89 Commercial banks Enforcement activities, 78–79 Assets and liabilities, 294 Examinations, 75–86 Credit availability, 15 Examiner training, 83–84 Commercial check-collection service, 94 Flood insurance, 75, 79, 86–87 Commercial mortgage-backed securities (CMBSs), 13, 28 Laws and regulations, 86–87 Commercial real estate (CRE) loans, 13, 27–28, 38, 65 Mergers and acquisitions, 80–82 Committee of Sponsoring Organizations of the Treadway Mortgage servicing and foreclosure, 76–78 Commission (COSO), 102 Policy analysis, 88–89 Committee on Investment Performance, 378–379 Supervision, 75–86 Committee on Payments and Market Infrastructures System research conference, 88 (CPMI), 64 Consumer behavior research surveys, 87–88 Commodities Futures Trading Commission (CFTC), 53, 64 Consumer complaints, 84–86 Commodity prices, 17 Consumer compliance examiner training, 83–84

436 102nd Annual Report | 2015 Consumer Financial Protection Bureau (CFPB), 78, 82, Debt 387 Business, 41 Consumer inquiries, 86 Corporate, 40 Consumer prices, 9, 22, 24 Federal government, 13, 28 Consumer Protection Act of 2010, 39, 44 Household, 26, 40–41 Consumer spending, 11, 26 Long-term debt requirement, 112 Consumers and Mobile Financial Services, 87 Nonfinancial sector, 40–41 Continuing professional development (CPD), 70 Debt securities, 347–348, 369 Core inflation, 10, 25 Deferred credit items, 351 Corporate bonds, 12–13, 15, 27–28, 29, 38 Deposit Insurance Fund, 71 Corporate debt, 40 Depository institutions Correspondent Banking Working Group, 64 Deposits, 350–351 COSO. See Committee of Sponsoring Organizations of the Discount rates in 2015, 120 Treadway Commission Loans to, 356–357 Cost recovery, 93–94, 110 Reserve requirements, 115–116, 284 Countercyclical capital buffer, 42–43, 60–61, 113 Reserves of, 286–293 Counterfeit deterrence, 401, 403 Deposits Counterterrorism activities, 63–64 Depository institutions, 350–351 CPD. See Continuing professional development Federal Reserve Banks, 288–289, 292–293 CPMI. See Committee on Payments and Market Foreign banks, 288–289 Infrastructures (CPMI) Treasury, 351 CRA. See Community Reinvestment Act Derivative instruments, 370 CRE. See Commercial real estate loans Designated Financial Market Utilities (Regulation HH), 53 Credit Designated nonfinancial companies, 53 Availability, 11, 15–16, 22, 26, 29–30 Destruction Standards and Compliance Division, 402 Discount rate, 20 DFAST. See Dodd-Frank Act stress tests Primary, 20, 120 Digital Accountability and Transparency Act, 399 Risk management, 62–63 Directors, Federal Reserve Banks, 417–430 Seasonal, 120 Discount rates, 20, 120 Secondary, 120 Disposable personal income (DPI), 11 Securities credit, 73–74 Diversity policies and practices, 119 Credit by Banks and Persons other than Brokers or Dealers Division of Consumer and Community Affairs (DCCA), for the Purpose of Purchasing or Carrying Margin 54, 58, 75, 80–81, 86–88, 90 Stock (Regulation U), 56, 74, 295 DNP. See Do Not Pay program Credit by Brokers and Dealers (Regulation T), 73–74, 295 Do Not Pay (DNP) program, 99 Credit default swaps (CDSs), 16, 29, 349, 370 Dodd-Frank Act stress tests, 42, 50–51 Credit risk management, 62–63 Dodd-Frank Wall Street Reform and Consumer Critical Infrastructure, 56–57 Protection Act Currency and coin operations, 96–97, 286–293, 333, 345, Capital adequacy standards, 39 401–403 Consumer financial protection, 332 Currency education program, 402, 403 Designated nonfinancial companies regulations, 53 Currency quality assurance, 401, 403 Emergency lending authority, 115 Currency reader program, 402 Enhanced prudential standards implementation, 48, 59 Cybersecurity and Critical Infrastructure Working Group Financial market utilities regulations, 53 (CCIWG), 56 Financial Stability Oversight Council activities, 43–44 Cybersecurity Assessment Tool, 56 Incentive compensation reporting, 65 Cybersecurity Forum for Independent and Executive Outreach and training, 84 Branch Regulators, 56 Partnership for Progress program, 58 Regulatory assessment fees, 73 Regulatory developments in 2015, 111–112 Regulatory reports, 67 D Savings and loan holding companies authority, 52 Daylight overdrafts, 100–101 Stress testing, 42, 50–51, 62 DCCA. See Division of Community and Consumer Supervisory assessment fees, 73 Affairs Supervisory authorization, 48 Debit Card Interchange Fees and Routing (Regulation II), DOJ. See Justice, U.S. Department of 118 Dollar exchange rate, 10, 16, 30

Index 437 Dollar liquidity swaps, 348, 364 Equal Credit Opportunity Act (ECOA), 78–79 Dollar roll markets, 15 Equilibrium real interest rates, 243–244 DPI. See Disposable personal income Equipment and software (E&S), 322, 349–350, 373–374 Equity markets and prices, 12, 14, 16–17, 22, 29 E&S. See Equipment and software E Europe. See also specific countries by name Equity performance, 30 ECB. See European Central Bank European Central Bank (ECB) ECI. See Employment cost index Monetary policies, 18, 30 ECOA. See Equal Credit Opportunity Act European Union Economic Growth and Regulatory Paperwork Reduction Economy of, 17 Act, 67 Examinations and inspections Economic mobility, 88 Anti-money laundering, 55 Economy, U.S. Consumer and community affairs, 75–86 Activity review, 134–137, 140–150, 171–172, 182–185, Critical infrastructure, 56–57 208–210, 220–222, 245–247, 256–258 Cybersecurity, 56–57 Business sector, 12, 24, 27, 41 Examiner training, 83–84 Financial markets, 14–16, 28–30, 132–134, 145, 170–171, Federal Reserve Banks, 47, 102 181–182, 206–207, 219, 244–245, 255–256 FFIEC procedures, 82–83 Forecast uncertainty, 168, 204, 241, 278 Fiduciary activities, 55 Government sector, 13, 28 Information technology activities, 55 Household sector, 11, 22–23, 40–41, 87 Securities credit lenders, 56 Housing sector, 11–14, 26–27, 39 Securities dealers and brokers, government and Interest rates, 6, 20, 22, 33, 115, 120, 243–244 municipal, 56 Labor market, 5, 7–8, 14, 22, 23–24, 89–90 Specialized, 55 M2 monetary aggregates, 16, 30 Transfer agents, 55–56 Outlook and projections, 137–140, 150–153, 159–162, Examiner Commissioning Program, 69 174–177, 185–188, 195, 198, 210–214, 222–226, Expenses. See Income and expenses 247–250, 258–262, 268–272 Exports, 13–14, 26 Policy actions, 18–21, 31–33, 115–120, 141–143, Extensions of Credit by Federal Reserve Banks 177–179, 188–191, 214–217, 226–228, 250–253, (Regulation A), 115 262–265 Prices, 5, 9–10, 17, 22, 24–25, 39 Recent economic and financial developments, 7–18, 23–31 F State and local governments, 13, 28 Uncertainty and risk, 166–167, 202–203, 239–240, Fair Housing Act, 78 276–277 Fair lending enforcement, 78–79 ECS. See Emergency Communications System Fair value measurement, 353, 364–366, 370–373, 379–380 Edge Act, 53, 54, 72 FAM. See Financial Accounting Manual for Federal Reserve EFTA. See Electronic Fund Transfer Act Banks E&I. See Equipment and intellectual property Farm Credit Administration (FCA), 56, 65, 74 Electronic commerce, 100 FASB. See Financial Accounting Standards Board Electronic Payment Solution Center, 99 FAST Act. See Fixing America’s Surface Transportation Emergency Communications System (ECS), 56–57 Act of 2015 Emergency lending, 115 Faster Payments Task Force, 96 Emerging market economies (EMEs), 16–17, 30, 31 FATF. See Financial Action Task Force EMEs. See Emerging market economies FCA. See Farm Credit Administration Employee Benefits, Office of, 102, 323, 375 FDIC. See Federal Deposit Insurance Corporation Employment, 5, 7, 22, 23–24. See also Labor markets; Federal Advisory Council, 90–91, 413 Unemployment Federal agency securities and obligations Employment cost index (ECI), 24 Federal Reserve Bank holdings, 281–282, 286–287, Energy prices, 5, 9–10, 12, 22, 24–25 290–291, 347–348 Enforcement actions Open market transactions, 281–282 Consumer and community affairs, 78–86 Federal Banking Agency Audit Act, 388 Federal Reserve System, 57, 73–74 Federal Deposit Insurance Corporation (FDIC), 43, 54, 80 Enhanced prudential standards, 46, 48, 59–60 Federal Deposit Insurance Corporation Improvement Act, Enhanced Prudential Standards (Regulation YY), 59, 51 111–112, 117–118 Federal Emergency Management Agency (FEMA), 57, 79

438 102nd Annual Report | 2015 Federal Financial Institutions Examination Council Federal Register, 68 (FFIEC) Federal Reserve Act, 20, 53, 54, 70, 71–72 Bank Secrecy Act/Anti-Money Laundering Examination Federal Reserve Bank of Atlanta, 298–299, 301–303 Manual, 55, 64 Federal Reserve Bank of Boston, 296–297, 301–303 Board responsibilities, 332 Federal Reserve Bank of Chicago, 298–299, 301–303 BSA/AML working group, 64 Federal Reserve Bank of Cleveland, 296–297, 301–303 Coordination with other banking agencies, 82–83 Federal Reserve Bank of Dallas, 298–299, 301–303 Cybersecurity, 56 Federal Reserve Bank of Kansas City, 298–299, 301–303 Information Technology Examination Handbook, 55 Federal Reserve Bank of Minneapolis, 298–299, 301–303 Regulatory reports, 67–68 Federal Reserve Bank of New York, 14, 25, 296–297, 323, Task Force on Surveillance Systems, 57 341–342, 345–348, 358–369 Federal funds rate, 6, 14, 18–19, 23, 28, 31–32, 165, 194, Federal Reserve Bank of Philadelphia, 10, 25, 296–297, 201, 231, 238, 269, 275 301–303 Federal government Federal Reserve Bank of Richmond, 296–297, 301–303 Budget deficit, 13 Federal Reserve Bank of San Francisco, 298–299, 301–303 Debt, 28 Federal Reserve Bank of St. Louis, 88, 298–299, 301–303 Federal Home Loan Mortgage Association Federal Reserve Banks Federal Reserve Bank services to, 100 Accounting policies, 342–356 Federal Housing Finance Agency (FHFA), 65 Assessments, 353 Federal Open Market Committee (FOMC). See also Open Assets and liabilities, 20, 286–287, 290–291, 352–353 market operations Audits, 335–386 Annual organizational matters, 123–132 Automated clearinghouse (ACH) services, 94–95 Appropriate monetary policy, 158, 162–166, 198–202, Balance sheets, 20, 32, 132, 145, 170–171, 181–182 235–239, 272–276 Branches, 289, 417–430 Domestic open market operations, 125–127 Budget, 396–401 Economic outlook, 137–140, 150–153, 159–161, Capital, 340, 351 174–177, 185–188, 195, 210–214, 222–226, 232, Cash-management services, 100 247–250, 258–262, 268–271 Collection services, 99–100 Economic review, 134–136, 171–172, 182–183, 208–209, Commercial check-collection service, 94 220–221, 245–246, 256–257 Commitments and contingencies, 374–375 Equilibrium real interest rates, 243–244 Condition statements, 296–300, 338 Financial market developments, 132–134, 145, 170–171, Conferences, 431–432 181–182, 206–207, 219, 244–245, 255–256 Cost recovery, 93–94 Financial review, 136–137, 149–150, 172–174, 183–185, Credit outstanding, 286–287, 290–291 209–210, 221–222, 246–247, 257–258 Currency and coin operations and developments, 96–97 Forecast uncertainty, 168, 204, 241, 278 Deposits, 288–289, 351 Foreign currency operations and directives, 127–131 Directors, 417–430 Inflation outlook, 162, 195–198, 232–235, 272 Earnings remittances, 352 Meeting minutes, 121–278 Efficiency improvement, 97 Members, 411 Equipment and software, 349–350 Monetary policy strategies and communications, 18–21, Examinations, 47, 102 31–33, 131–132 Fair value, 353 Notation votes, 143, 156, 179, 199, 217, 228, 253, 265 FedLine access to services, 101 Officers, 411–412 Fedwire Funds Service, 95 Policy actions, 18–21, 31–33, 141–143, 153–155, Fedwire Securities Service, 95–96 177–179, 188–191, 214–217, 226–228, 250–253, Financial statements, 106–110, 335–386 262–265 Fiscal agency services, 97–100 Policy normalization principles and plans, 20, 145–49, Float, 96, 286–287, 290–291 171, 206–207, 219, 244–245 Government depository services, 97–100 Policy planning, 140–141 Income and expenses, 102–104, 301–306, 339, 384, 386 Summary of Economic Projections, 6, 22, 23, 32, Information technology, 101–102 156–159, 156–168, 192–204, 207–208, 228–241, Interest rates on depository institutions loans, 284 266–278 Intraday credit, 100–101 System Open Market Account, 244–245, 255–256 Investments held by consolidated VIEs, 349, 366–373 System Open Market Account reinvestment policy, 207, Liquidity swaps, 348 219–220 Loans and other credit extensions, 105, 286–287, Uncertainty and risks, 166–167, 202–203, 239, 276–277 290–291, 345, 356–357

Index 439 Officers, 308 Supervision responsibilities, 42, 47–58 Open market transactions, 281–282 Supervisory information technology, 68–69 Operating expenses, 397–399 Supervisory policy, 59–68 Operations, volume of, 307 Surveillance and off-site monitoring, 57 Operations and services, 341–342 Training and technical assistance, 57–58 Payment services, 99–100 Website, 51, 57 Payment system, 96 Federal Trade Commission Act, 78 Postemployment benefits, 383 FedLine, 101 Postretirement benefits, 381–383 Fedwire Funds Service, 95 Premises, 105, 309, 349–350, 373–374 Fedwire Modernization Program, 93 Priced services, 93–97 Fedwire Securities Service, 93, 95–96 Restructuring charges, 354, 384–385 FEMA. See Federal Emergency Management Agency Retail securities programs, 97–98 FFIEC. See Federal Financial Institutions Examination Retirement plans, 375–381 Council Risk management, 97 FHFA. See Federal Housing Finance Agency Salaries of officers and employees, 308 Finance Securities holdings, 105, 286–287, 290–291, 347–348 Business, 12, 25, 29, 30 Services provided to other entities, 100 Household, 11, 28–29 Structure, 341 Housing, 11–14, 26–27, 39 Surplus, 351–352 Financial Accounting Foundation, 62 System Open Market Account holdings and loans, Financial Accounting Manual for Federal Reserve Banks 104–105, 358–366, 364–366 (FAM), 342–343 Taxes, 353–354 Financial Accounting Standards Board (FASB), 321–322, Thrift plans, 381 353, 354–356 Treasury securities services, 97 Financial Action Task Force (FATF), 64 Wholesale securities programs, 98 Financial and Banking Information Infrastructure Federal Reserve Consumer Help (FRCH), 84 Committee, 56 Federal Reserve System. See also Board of Governors; Financial Crimes Enforcement Network (FinCEN), 64 Federal Reserve Banks Financial holding companies Accounting policies, 62 Supervision of, 52 Budget, 389–391, 396–401 Financial Industry Regulatory Authority, 74 Capital adequacy standards, 60–61 Financial Information Repository, 399 Community Development Research Conference, 88 Financial Institutions Reform, Recovery, and Enforcement Compliance risk management, 63–64 Act, 116 Compliance with regulatory requirements, 54–55 Financial market utilities (FMUs), 52–53 Consolidated supervision, 47, 49–54 Financial Market Utilities Supervision Committee Credit-risk management, 62–63 (FMU-SC), 53 Developments in 2015, 42–43, 45–47 Financial markets, 14–16, 28–30, 132–134, 145, 170–171, Enforcement actions, 57, 73–74 181–182, 206–207, 219, 243–244, 255–256 Enhanced prudential standards, 59–60 Financial Regulator’s Training Initiative, 58 Examinations and inspections, 47 Financial Research, Office of (OFR), 332 Financial stability activities, 35–44 Financial Stability Board (FSB), 44, 61 Incentive compensation, 64–65 Financial Stability Institute, 58 International activities, 61–62 Financial Stability Oversight Council (FSOC), 43–44, 59, Joint Forum, 59, 61–62 73 Macroprudential supervision, 41–43 Financial statements Maps, 2–3 Board of Governors, 312–334 Operating expenses, 389–392 Federal Reserve Banks, 106–110, 335–386 Organization, 405–432 FinCEN. See Financial Crimes Enforcement Network Overview, 1–2 First Vice Presidents, Conference of, Federal Reserve Public notice of decisions, 73 Banks, 432 Regulatory reports, 66–68 Fiscal agency services, 97–100 Regulatory responsibilities, 42–43, 70–73 Fixing America’s Surface Transportation Act of 2015, 20, Retirement benefits, 327 104, 351–352, 386 Safety and soundness responsibilities, 47–58 Float, Federal Reserve Banks, 96, 286–287, 290–291 Specialized examinations, 55–57 Floating Rate Note (FRN), 98 Staff development, 69–70 Floating rates, 21

440 102nd Annual Report | 2015 Flood insurance, 75, 79, 86–87 Greece FMU-SC. See Financial Market Utilities Supervision Bond yields, 30 Committee Economy of, 17, 31 FMUs. See Financial market utilities Gross domestic product, 5, 7, 10–11, 13–15, 22, 23, 25–27, FOMC. See Federal Open Market Committee 40–41, 156–160, 192–193, 196, 229–230, 233, 266–267, Food prices, 9–10, 22, 25 270 Forecast uncertainty, 168, 204, 241, 278 GSEs. See Government-sponsored enterprises Foreclosures G-SIB. See Global systemically important banking Prevention actions, 77–78 organization Foreign Assets Control, Office of (OFAC), 64 Foreign Bank Supervision Enhancement Act, 72 Foreign banks. See also specific banks by name H Deposits, 288–289, 292–293 H.2 release, 73 Supervision of, 46–48, 53–54, 65, 68 HCs. See Holding companies (HCs) U.S. activities, 54, 70 Hedge funds, 60 Foreign bonds, 16, 30 HFIAA. See Homeowner Flood Insurance Foreign currency operations Affordability Act Authorization, 127–129 High-yield bonds, 37, 38, 40 Denominated assets, 347–348, 362–364 HOLA. See Home Owners’ Loan Act Directives, 129 Holding companies (HCs) Liquidity swaps, 349 Intermediate holding companies, 112 Procedural instructions, 129–131 Regulatory reports, 66–67 Foreign economies, 16–18. See also Advanced foreign Home Mortgage Disclosure Act (Regulation C), 83 economies; Emerging market economies; specific Home Owners’ Loan Act (HOLA), 48, 70, 72 countries by name Homeowner Flood Insurance Affordability Act (HFIAA), Foreign exchange value, 10, 16, 30 79, 86 FRBNY. See Federal Reserve Bank of New York Household sector, 11, 22–23, 26, 40–41, 87 FRCH. See Federal Reserve Consumer Help Housing activity, 11–14, 26–27, 39 FRN. See Floating Rate Note FSB. See Financial Stability Board FSOC. See Financial Stability Oversight Council I Futures prices, 9 IAIS. See International Association of Insurance Supervisors IMF. See International Monetary Fund G Imports, 9–10, 13–14 GAAP. See Generally accepted accounting principles Imputed costs, 109 GAO. See Government Accountability Office, U.S. Incentive compensation, 64–65 GDP. See Gross domestic product Income and expenses GECC. See General Electric Capital Corporation, Inc. Board of Governors, 319 General Electric Capital Corporation, Inc., 53, 59 Federal Reserve Banks, 102–104, 106–110, 301–306, 339, Generally accepted accounting principles, 319, 342–456 384, 386 Germany National income and product accounts, 8 Bond yields, 30 Independent Foreclosure Review, 76 GLBA. See Gramm-Leach Bliley Act India, economy of, 17 Global systemically important banking organization Inflation, 5, 9–10, 22, 24–25, 31, 157, 162, 193, 195, (G-SIB), 39, 42–43, 46, 59 198–200, 230, 232, 235–237, 267, 272, 273–274 Gold stock, 286–287, 290–291, 344–345 Information technology (IT) Government Accountability Office, U.S. (GAO), 388 Examinations, 55 Government Performance and Results Act (GPRA), 114 Federal Reserve Bank developments, 101–102 Government sector, 13, 28. See also Federal government; FFIEC Information Technology Examination State and local governments Handbook, 55 Government Securities Act, 56 Security practices, 69 Government securities dealers and brokers, Federal Reserve Supervisory activities, 68–69 examination, 56 Inspections. See Examinations and inspections Government-sponsored enterprises (GSEs), 105, 346–348, Inspector General, Office of (OIG), 387, 393–394, 395 358–362 Institute of Internal Auditors, 102 GPRA. See Government Performance and Results Act Insurance companies Gramm-Leach Bliley Act, 52, 71 Supervision of, 46–48

Index 441 Insurance savings and loan holding companies (ISLHCs), L 48 Labor markets, 5, 7–8, 14, 22, 23–24, 89–90 Insured commercial banks. See Commercial banks Labor productivity, 8–9 Integrated Disclosures Rule, 82, 84 Large bank supervision, 41–43, 68 Intellectual property. See Equipment and intellectual Large Financial Institutions Examiner Commissioning property Program (LFI ECP), 69 Interagency Guidance on Leveraged Lending, 63 Large Institution Supervision Coordinating Committee Interagency Memorandum of Understanding on (LISCC), 47, 49, 53, 65 Supervision Coordination, 82 Latin America Interagency Policy Statement Establishing Joint Standards Economy of, 17 for Assessing Diversity Policies and Practices, 119 LCR. See Liquidity coverage ratio Interagency Questions and Answers Regarding Leadership Conferences, 431–432 Community Reinvestment, 80 Legal Entity Identifier (LEI), 66 Interest on excess reserves (IOER), 33, 115, 120 LEI. See Legal Entity Identifier Interest rates, 6, 20, 22, 243–244 Leveraged loans, 38, 63 Intermediate holding companies, 112 LFI ECP. See Large Financial Institutions Examiner Internal Revenue Service (IRS), 64 Commissioning Program International Association of Insurance Supervisors (IAIS), Liabilities. See Assets and liabilities 48, 59, 62 Liquidity coverage ratio (LCR), 40, 112–113 International Banking Act, 48, 70, 72–73 Liquidity Risk Measurement Standards (Regulation WW), International financial markets, 46–48, 53–54 59, 112–113 International Monetary Fund (IMF), 30, 58, 345 Liquidity swap arrangements, 348, 364 International Organization of Securities Commissions, 62 LISCC. See Large Institution Supervision Coordinating International Swaps and Derivatives Association, Inc., 370 Committee International technical assistance, 57–58 Litigation involving Board of Governors International training, 57–58 Artis, 279 International Treasury Services, 99 Ball, 280 Intraday credit, 100–101 Burford, 279 Investment-grade firms, 41 Colonial BancGroup, Inc., 279 Investments Community Financial Services Association of America, Business sector, 12, 27 Ltd., 280 Invoice Processing Platform (IPP), 99 Crisman, 280 IOER. See Interest on excess reserves Ferrer, 279 IPP. See Invoice Processing Platform Johnson, 280 IRS. See Internal Revenue Service Loan Syndications and Trading Association, 279 ISLHCs. See Insurance savings and loan holding Love, 279 companies NACS et al., 280 IT. See Information technology Ramey, 279 Richardson, 279 Ruiz, 279 J SBAV, 279 Japan State National Bank of Big Spring, 280 Economy of, 17–18, 31 White Arnold & Dowd, P.C., 279 Equity performance, 30 Wilmington Trust Securities, 279 Wise, 280 Job losses. See Unemployment WMI Liquidating Trust, 280 Joint Forum, 59, 61–62 JPMorgan Chase & Co., 366, 370 LMI consumers. See Low- and moderate-income consumers Justice, U.S. Department of (DOJ) Fair lending laws enforcement, 78 Loans. See also specific types of loans Alternative lenders, 89 Federal Reserve Bank holdings, 286–287, 290–291, 345, 356–357 K Small businesses, 89 Korea System Open Market Account, 105 Economy of, 17 Local governments. See State and local governments KPMG, 102 Low- and moderate-income consumers (LMI), 81, 91

442 102nd Annual Report | 2015 M Municipal securities dealers and brokers, Federal Reserve examination, 56 M2 monetary aggregates. See Monetary aggregates Mutilated Currency Division, 402 Macroprudential supervision, 36–37, 41–43 Mutual holding companies (MHC), 72 Maiden Lane II LLC, 102, 340, 367 myRA, 399 Maiden Lane III LLC, 102, 340, 367–368 Maiden Lane LLC, 102, 340, 366–367 Maps, Federal Reserve System, 2–3 Margin and Capital Requirements for Covered Swap N Entities (Regulation KK), 111–112, 118 Margin requirements, 295 NACHA, 95, 119–120 Martin Building, 395 National Association of Insurance Commissioners, 48 MBSs. See Mortgage-backed securities National Automated Clearing House Association, 95, MCDX, 16, 30 119–120 MDIs. See Minority depository institutions National Bankers Association (NBA), 58 Medicare Prescription Drug, Improvement and National Credit Union Administration (NCUA), 56, 74 Modernization Act, 383 National Examination Data (NED), 69 Members National Flood Insurance Act, 79 Board of Governors, 405 National Flood Mitigation Fund, 79 Federal Advisory Council, 413 National income and product accounts (NIPAs), 8 Federal Open Market Committee, 412 National Information Center (NIC), 57, 69 Membership of State Banking Institutions in the Federal National Mortgage Settlement, 77 Reserve System (Regulation H), 73, 79, 116 National Settlement Service, 95 Memoranda of understanding, 64 NavyCash, 399 Mergers and acquisitions, 80–82 NBA. See National Bankers Association MERS. See Middle East Respiratory Syndrome NCUA. See National Credit Union Administration MetLife, Inc., 48, 53 NED. See National Examination Data Mexico NIC. See National Information Center Association of Supervisors of Banks of the Americas, Nikkei, 30 58 Nonbank financial companies, 46–48, 51, 53 Economy of, 17, 31 Nonfinancial sector, 35, 38, 40–41 MHC. See Mutual holding companies Normalization procedures, 145–147, 171, 244–245 Michigan Survey. See Thomson Reuters/University of Michigan Surveys of Consumers Middle East Respiratory Syndrome, 17 Minority depository institutions (MDIs), 58 O Model Validation Council, 416 OCC. See Comptroller of the Currency, Office of the Monetary aggregates (M2), 16, 30 Monetary Control Act, 93 OFAC. See Foreign Assets Control, Office of Monetary policy Off-site monitoring, 57 Appropriate monetary policy, 158, 162–166, 194, 198, Officers 202, 231, 235, 239, 272–276 Board of Governors, 405–410 Developments, 18–21, 31–33 Community Advisory Council, 415 Normalization procedures, 145–147, 171, 244–245 Conferences of, 431–432 Overview, 5–7, 22–33 Federal Advisory Council, 413 Statement on longer-run goals and strategy, 131–132 Federal Open Market Committee, 411–412 Monetary policy reports to Congress Federal Reserve Banks, 308 February 2016, 5–21 OIG. See Inspector General, Office of July 2015, 22–33 Oil prices. See Energy prices Money laundering prevention. See Anti-money laundering ON RRP. See Overnight reverse repurchase agreements Moody’s Investors Service, 38 Open market operations. See also Federal Open Market Mortgage-backed securities (MBSs), 14, 15, 29, 32, 105, Committee 347–348, 358–366 Developments in 2015, 206–207, 219 Mortgage regulations Volume of transactions, 281–282 Foreclosure prevention actions, 77–78 Operating leases, 323 Payment agreement status, 76–77 Outlook Live, 84 Servicer efforts to address deficiencies, 78 Overdraft services, 100–101 MOU. See Memoranda of understanding Overnight reverse repurchase agreements (ON RRP), Municipal bonds, 16, 30 20–21, 29, 33, 132–133, 145–147, 170

Index 443 P Real Estate Settlement Procedures (Regulation X), 74, 82, 295 Partnership for Progress (PFP), 58 Real Estate Settlement Procedures Act (RESPA), 82–83 Pay.gov, 99 Receiving depository financial institutions, 95, 119 Payment Agreement, 76–77 Regional banks Payments services, Federal Reserve Banks, 99–100 Supervision of, 68 Payments system, 96 Regulations PBOC. See People’s Bank of China A, Extensions of Credit by Federal Reserve Banks, 115 PCEs, Personal consumption expenditures C, Home Mortgage Disclosure Act, 83 Penalties. See Civil money penalties Pension Enhancement Plan (PEP), 325–327 D, Reserve Requirements of Depository Institutions, People’s Bank of China, 16, 17, 30 115–116 PEP. See Pension Enhancement Plan H, Membership of State Banking Institutions in the Performance plan, 114 Federal Reserve System, 73, 79, 116 Performance report, 114 HH, Designated Financial Market Utilities, 53 Performance Report Information and Surveillance II, Debit Card Interchange Fees and Routing, 118 Monitoring (PRISM), 57 J, Collection of Checks and Other Items by Federal Personal consumption expenditures (PCEs), 5, 7, 9, 10, 11, Reserve Bank and Funds Transfers Through Fedwire, 22, 23, 24, 25, 135, 157, 163–164, 193, 199–200, 230, 93 236–237, 267, 273, 274 KK, Margin and Capital Requirements for Covered Personnel Management, Office of, 327 Swap Entities, 111–112, 118 PFP. See Partnership for Progress P, Privacy of Consumer Information, 82 Policy actions Q, Capital Adequacy of Bank Holding Companies, Board of Governors, 115–120 Savings and Loan Holding Companies, and State Federal Open Market Committee, 18–21, 31–33, Member Banks, 111–113, 116–117 141–143, 153–155, 177–179, 188–191, 214–217, T, Credit by Brokers and Dealers, 73–74, 295 226–228, 250–253, 262–265 U, Credit by Banks and Persons other than Brokers or Policy normalization principles and plans, 20, 206–207, 219 Dealers for the Purpose of Purchasing or Carrying Post Payment System (PPS), 99 Margin Stock, 56, 74, 295 Postemployment benefits, 329, 383 WW, Liquidity Risk Measurement Standards, 59, Postretirement benefits, 328–329, 381–383 112–113 PPS. See Post Payment System X, Real Estate Settlement Procedures, 74, 82, 295 Premises, Federal Reserve Banks, 105, 309, 349–350 Y, Bank Holding Companies and Change in Bank Presidents, Conference of, Federal Reserve Banks, 431 Control, 111, 116, 117–118 Priced services, 93–96, 106–110 YY, Enhanced Prudential Standards, 59, 111–112, Prices 117–118 Commodity, 17 Z, Truth in Lending, 82 Consumer, 9, 22, 24 Regulatory assessment fees, 73 Energy, 5, 9–10, 22, 24–25 Regulatory capital ratios, 39 Food, 9–10, 22, 25 Regulatory capital rule, 60, 65 Housing, 39 Regulatory Improvement Act, 51 Primary credit, 120 Regulatory reports, 66–68 Primary credit rate, 20 Reinvestment policy, 207, 219 PRISM. See Performance Report Information and Report on the Economic Well-Being of U.S. Households in Surveillance Monitoring 2014, 87 Privacy of Consumer Information (Regulation P), 82 Reporting burden reduction, 67–68 Private Company Council, 62 Reports of Condition and Income (Call Reports), 57 Private equity funds, 60 Repurchase agreements, 15, 286–287, 290–291, 345–346. Private nonresidential fixed investment, 12 See also Overnight reverse repurchase agreements; Private sector adjustment factor (PSAF), 93–94 Reverse repurchase agreements Prudential Financial, Inc., 48, 53 Reserve Requirements of Depository Institutions PSAF. See Private sector adjustment factor (Regulation D), 115–116 Puerto Rico Residual seasonality, 25 Economy of, 16 Resilient Shield, 56 RESPA. See Real Estate Settlement Procedures Act Retail securities program, 97–98 R Retail Securities Program Review, 399 Rapid Response program, 84 Retirement plans, 327, 375–381 Real estate loans. See Commercial real estate (CRE) loans Return on assets, 45

444 102nd Annual Report | 2015 Return on equity, 45 Senior Loan Officer Opinion Survey on Bank Lending Revenue. See Income and expenses Practices (SLOOS), 12, 13, 27, 29 Reverse repurchase agreements, 288–289. See also SEP. See Summary of Economic Projections Overnight reverse repurchase agreements Separate Trading of Registered Interest and Principal of RFI/C(D) system, 51 Securities, 346, 378 Riegle Community Development and Regulatory Shanghai Composite index, 30 Improvement Act, 51 SHED. See Survey of Household Economics and Risk-Based Capital Surcharge for Global Systemically Decisionmaking Important Bank Holding Companies, 111 Short-term funding markets, 15, 29 Risk management, 62–64, 97 SIFI. See Systemically important financial institutions Risks. See Uncertainty and risk Simplified Supervisory Formula Approach, 65 ROA. See Return on assets SIT. See Supervisory information technology ROE. See Return on equity SLHCs. See Savings and loan holding companies Roth 401(k), 327 SLOOS. See Senior Loan Officer Opinion Survey on Bank Rust Consulting, Inc., 77 Lending Practices Small Bank Holding Company Policy Statement, 60, 66, 119 Small Business Administration (SBA), 357 S Small businesses SAFE Act. See Secure and Fair Enforcement for Mortgage Borrowing and alternative lending, 89 Licensing Act SNC. See Shared National Credit program Same-day automated clearinghouse services, 119–120 Software. See Equipment and software Savings and loan holding companies (SLHCs) SOMA. See System Open Market Account Capital adequacy standards, 60 South Korea Enhanced prudential standards, 59 Middle East Respiratory Syndrome, 17 Number of, 52 S&P. See Standard and Poor’s 500 Regulation of, 70–73 Special drawing rights certificate account, 286–287, Regulatory assessment fees, 73 290–291 Regulatory reports, 66–67 Special drawing rights certificates (SDR), 344–345 Supervision and regulation of, 46–48, 52 Specialized examinations, 55 Supervisory assessment fees, 73 Speculative-grade firms, 41 Savings programs, 83 Spot price, 9 SCOOS. See Senior Credit Officer Opinion Survey on SR-SABR. See Supervision and Regulation Statistical Dealer Financing Terms Assessment of Bank Risk Seasonal credit, 120 Staff development, 69–70 SEC. See Securities and Exchange Commission Standard and Poor’s 500 (S&P 500), 14, 29 Secondary credit, 120 State and local governments, 13, 28 Secure and Fair Enforcement for Mortgage Licensing Act, State member banks 84 Complaints against, 84–85 Secure Payments Task Force, 96 Developments in 2015, 45 Securities. See also Federal agency securities; Treasury Financial disclosures, 73 securities; specific types of securities Number of, 49, 51 Resell and repurchase agreements, 345–346 Supervision of, 46–48, 51 Securities Act Amendments of 1975, 56 Surveillance and off-site monitoring, 57 Securities and Exchange Commission (SEC), 53, 64, 73 Statements of Condition Securities credit, 73–74 Federal Reserve Banks, 296–300, 338 Securities credit lenders, 56 Statements of operations, 316 Securities Exchange Act, 55, 56, 73 Stored Value Card (SVC) program, 99 Security Strategic Framework, 114 Counterterrorism activities, 63–64 Strategic Plan 2016–19, 114 Cybersecurity and Critical Infrastructure Working Strategies for Improving U.S. Payment System, 399 Group, 56 Stress testing, 42, 50–51, 111 Emergency Communications System, 56–57 STRIPS. See Separate Trading of Registered Interest and Information technology, 69, 101–102 Principal of Securities Security Assurance, 102 Student loans, 83, 89 Semiannual Report on Banking Applications Activity, 70 Subcommittee on Supervisory Administration and Senior Credit Officer Opinion Survey on Dealer Financing Technology, 68 Terms (SCOOS), 15, 40 Subprime borrowing, 41

Index 445 Summary of Economic Projections, 6, 22, 23, 32, 156–159, TLACS. See Total loss-absorbing capacity 192–204, 207–208, 228–241, 266–278 Total loss-absorbing capacity, 46, 59 Supervision and Regulation Statistical Assessment of Bank Total return swap, 370 Risk (SR-SABR), 57 Training programs, 57–58, 69–70, 83–84 Supervisory assessment fees, 73 Transfer agents, 55–56 Supervisory information technology (SIT), 68–69 Treasury, U.S. Department of the Supervisory policy Bureau of Engraving and Printing, 96, 333, 401–402 Accounting policy, 62 Cash holdings, 288–289, 292–293 Capital adequacy standards, 39, 60–61 Cash management services, 100 Compliance risk management, 63–64 Currency in circulation and outstanding, 286–293 Consumer and community affairs, 75–86 Deposits, 351 Credit-risk management, 62–63 Electronic Payment Solution Center, 99 Enhanced prudential standards, 59–60 Website, 44 Incentive compensation, 64–65 Treasury Inflation-Protected Securities, 10, 25 Information technology, 68–69 Treasury securities International coordination, 61–62 Federal Reserve Bank holdings, 283, 347–348 Policymaking initiatives, 65–66 FOMC holdings, 20 Regulatory reports, 66–68 Liquidity, 29 Staff development, 69–70 Open market transactions, 281–282 Supervisory guidance statements, 65–66 Retail securities program, 97–98 Supplemental Retirement Plan for Select Officers of the Services, 97 Federal Reserve Banks, 375–376 Wholesale securities program, 98 Surveillance, 57 Yields, 10, 14, 28–29, 38 Survey of Enterprising and Informal Work Activity, 90 Treasury Web Application Infrastructure, 391, 397, 399 Survey of Household Economics and Decisionmaking, 87 Truth in Lending (Regulation Z), 82 Survey of Market Participants, 28 Truth in Lending Act (TILA), 82–83 Survey of Primary Dealers, 14, 25, 28 Survey of Professional Forecasters, 10, 25 Survey of Young Workers, 90 U Swap margins, 111–112 UDAP. See Unfair or Deceptive Acts or Practices System Open Market Account (SOMA), 20–21, 32, 102, Uncertainty and risk, 166–167, 202–203, 239–240, 276–277 104–105, 125–127, 207, 219–220, 244–245, 255–256, Unemployment, 5, 7–8, 22, 23–24, 157, 161, 193, 197, 230, 346–347, 358–366 234, 267, 271 Systemically important financial institutions, 45, 52, 111 Unfair or Deceptive Acts or Practices (UDAP), 75, 78–79 Uniform Bank Performance Reports, 57 T United Kingdom Cybersecurity, 56 TALF. See Term Asset-Backed Securities Loan Facility Economy of, 17–18, 31 Task Force on Surveillance Systems, 57 University of Michigan Surveys. See Thomson TDF. See Term Deposit Facility Reuters/University of Michigan Surveys of Technical assistance, 57–58 Consumers Term Asset-Backed Securities Loan Facility (TALF), 345, U.S. Congress. See Monetary policy reports to Congress; 357–358, 368 specific legislation by name Term Deposit Facility (TDF), 21, 33, 350–351 U.S. Federal Insurance Office, 48 Terrorism. See Counterterrorism activities Terrorism Risk Insurance Program Reauthorization Act, 118 V Thomson Reuters/University of Michigan Surveys of Consumers, 10, 11, 25, 26 Variable interest entities (VIEs), 349, 366–373 Thrift plans, 327, 381 Vice-Presidents, Conference of, Federal Reserve Banks, 432 TILA. See Truth in Lending Act VIEs. See Variable interest entities TIPS. See Treasury Inflation-Protected Securities Volcker rule, 60

446 102nd Annual Report | 2015 W Y Websites Young workers surveys, 90 Basel Committee on Banking Supervision, 62 Youth savings programs, 83 Board of Governors, 1, 5, 57, 63, 73, 114 FFIEC cybersecurity awareness, 56 Financial Stability Oversight Council annual report, 44 Partnership for Progress, 58 U.S. Treasury, 44 Wholesale securities program, 98 World Bank, 58

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Cite this document

APA

Federal Reserve (2014, December 31). Annual Report of the Federal Reserve Board, 2015. Annual Reports, Federal Reserve. https://whenthefedspeaks.com/doc/annual_report_2015

BibTeX

@misc{wtfs_annual_report_2015,
  author = {Federal Reserve},
  title = {Annual Report of the Federal Reserve Board, 2015},
  year = {2014},
  month = {Dec},
  howpublished = {Annual Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/annual_report_2015},
  note = {Retrieved via When the Fed Speaks corpus}
}