annual reports · December 31, 2015

Annual Report of the Federal Reserve Board, 2016

103rd Annual Report 2016 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/files/orderform.pdf) or contact: Printing and Fulfillment Mail Stop K1-120 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. June 2017 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 103rd annual report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar-year 2016. 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 2017 ....................................................................................... 5 Monetary Policy Report June 2016 ........................................................................................... 20 3 Financial Stability ........................................................................................................... 33 Monitoring Risks to Financial Stability ....................................................................................... 33 Financial Stability and the Supervision and Regulation of Large, Complex Financial Institutions ....................................................................................................................... 40 Domestic and International Cooperation and Coordination ......................................................... 42 4 Supervision and Regulation ......................................................................................... 45 2016 Developments ................................................................................................................. 45 Supervision ............................................................................................................................. 47 Regulation ............................................................................................................................... 73 5 Consumer and Community Affairs ........................................................................... 79 Supervision and Examinations .................................................................................................. 79 Consumer Laws and Regulations .............................................................................................. 91 Consumer Research and Emerging-Issues and Policy Analysis .................................................. 92 Community Development ......................................................................................................... 93 6 Federal Reserve Banks ................................................................................................... 97 Federal Reserve Priced Services ............................................................................................... 97 Currency and Coin ................................................................................................................. 101 Fiscal Agency and Government Depository Services ................................................................ 102 Use of Federal Reserve Intraday Credit ................................................................................... 105 FedLine Access to Reserve Bank Services .............................................................................. 105 Information Technology .......................................................................................................... 106 Examinations of the Federal Reserve Banks ............................................................................ 106 Income and Expenses ............................................................................................................ 107 SOMA Holdings and Loans ..................................................................................................... 108 Federal Reserve Bank Premises .............................................................................................. 110 Pro Forma Financial Statements for Federal Reserve Priced Services ....................................... 111

vi 7 Other Federal Reserve Operations ........................................................................... 117 Regulatory Developments ....................................................................................................... 117 The Board of Governors and the Government Performance and Results Act ............................. 121 8 Record of Policy Actions of the Board of Governors ...................................... 123 Rules and Regulations ............................................................................................................ 123 Policy Statements and Other Actions ...................................................................................... 127 Discount Rates for Depository Institutions in 2016 ................................................................... 129 9 Minutes of Federal Open Market Committee Meetings .................................. 131 Meeting Held on January 26–27, 2016 ..................................................................................... 132 Meeting Held on March 15–16, 2016 ....................................................................................... 154 Meeting Held on April 26–27, 2016 .......................................................................................... 179 Meeting Held on June 14–15, 2016 ......................................................................................... 193 Meeting Held on July 26–27, 2016 .......................................................................................... 217 Meeting Held on September 20–21, 2016 ................................................................................ 232 Meeting Held on November 1–2, 2016 ..................................................................................... 261 Meeting Held on December 13–14, 2016 ................................................................................. 275 10 Litigation .......................................................................................................................... 301 Pending ................................................................................................................................. 301 Resolved ............................................................................................................................... 301 11 Statistical Tables ............................................................................................................. 303 12 Federal Reserve System Audits ................................................................................. 333 Board of Governors Financial Statements ................................................................................ 334 Federal Reserve Banks Combined Financial Statements .......................................................... 358 Office of Inspector General Activities ....................................................................................... 408 Government Accountability Office Reviews .............................................................................. 409 13 Federal Reserve System Budgets .............................................................................. 411 System Budgets Overview ...................................................................................................... 411 Board of Governors Budget .................................................................................................... 414 Federal Reserve Banks Budgets ............................................................................................. 418 Currency Budget .................................................................................................................... 423 14 Federal Reserve System Organization .................................................................... 427 Board of Governors ................................................................................................................ 427 Federal Open Market Committee ............................................................................................ 433 Board of Governors Advisory Councils .................................................................................... 435 Federal Reserve Banks and Branches ..................................................................................... 439 15 Index .................................................................................................................................. 455

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. 2,919-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 2016, 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 2016. 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 2016 budget performance of in consumer and community affairs; and section 6, the Board and Reserve Banks, as well as their 2016 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 2016 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 103rd Annual Report | 2016 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, Consumer price inflation moved higher last year but the Federal Reserve Board submits written reports to remained below the FOMC’s longer-run objective of the Congress that contain discussions of “the con- 2 percent. The price index for personal consumption duct of monetary policy and economic developments expenditures (PCE) increased 1.6 percent over the and prospects for the future.” The Monetary Policy 12 months ending in December, 1 percentage point Report, submitted semiannually to the Senate Com- more than in 2015, importantly reflecting that energy mittee on Banking, Housing, and Urban Affairs and prices have turned back up and declines in non-oil to the House Committee on Banking and Financial import prices have waned. The PCE price index Services, is delivered concurrently with testimony excluding food and energy items, which provides a from the Federal Reserve Board Chair. better indication than the headline index of where overall inflation will be in the future, rose 1.7 percent over the 12 months ending in December, about The following discussion is a review of U.S. monetary ¼ percentage point more than its increase in 2015. policy and economic developments in 2016, excerpted Meanwhile, survey-based measures of longer-run from the Monetary Policy Report published in Febru- inflation expectations have remained generally stable, ary 2017 and June 2016. Those complete reports though some are at relatively low levels; marketare available on the Board’s website at www based measures of inflation compensation have .federalreserve.gov/monetarypolicy/files/20170214_ moved up in recent months but also are at low levels. mprfullreport.pdf (February 2017) and www .federalreserve.gov/monetarypolicy/files/20160621_ Real gross domestic product is estimated to have mprfullreport.pdf (June 2016). increased at an annual rate of 2¾ percent in the second half of the year after rising only 1 percent in the first half. Consumer spending has been expanding at Monetary Policy Report a moderate pace, supported by solid income gains February 2017 and the ongoing effects of increases in wealth. The housing market has continued its gradual recovery, Summary and fiscal policy at all levels of government has provided a modest boost to economic activity. Business Labor market conditions continued to strengthen investment had been weak for much of 2016 but over the second half of 2016. Payroll employment posted larger gains toward the end of the year. Nothas continued to post solid gains, averaging 200,000 withstanding a transitory surge of exports in the per month since last June, a touch higher than the third quarter, the underlying pace of exports has pace in the first half of 2016, though down modestly remained weak, a reflection of the appreciation of from its 225,000-per-month pace in 2015. The unem- the dollar in recent years and the subdued pace of ployment rate has declined slightly since mid-2016; foreign economic growth. the 4.8 percent reading in January of this year was in line with the median of Federal Open Market Com- Domestic financial conditions have generally been mittee (FOMC) participants’ estimates of its longer- supportive of economic growth since mid-2016 and run normal level. The labor force participation rate remain so despite increases in interest rates in recent has edged higher, on net, since midyear despite a months. Long-term Treasury yields and mortgage structural trend that is moving down as a result of rates moved up from their low levels earlier last year changing demographics of the population. In addi- but are still quite low by historical standards. Broad tion, wage growth seems to have picked up somewhat measures of stock prices rose, and the financial secrelative to its pace of a few years ago. tor outperformed the broader equity market. Spreads

6 103rd Annual Report | 2016 of yields of both speculative- and investment-grade and 2 percent inflation. The Committee has expected corporate bonds over yields of comparable-maturity that economic conditions will evolve in a manner that Treasury securities declined from levels that were will warrant only gradual increases in the federal somewhat elevated relative to the past several years. funds rate, and that the federal funds rate will likely Even with an ongoing easing in mortgage credit stan- remain, for some time, below levels that are expected dards, mortgage credit is still relatively difficult to to prevail in the longer run. Consistent with this outaccess for borrowers with low credit scores, undocu- look, in the most recent Summary of Economic Promented income, or high debt-to-income ratios. Stu- jections (SEP), which was compiled at the time of the dent and auto loans are broadly available, including December meeting of the FOMC, most participants to borrowers with nonprime credit scores, and the projected that the appropriate level of the federal availability of credit card loans for such borrowers funds rate would be below its longer-run level appears to have expanded somewhat over the past through 2018. (The December SEP is included as several quarters. In foreign financial markets, mean- Part 3 of the February 2017 Monetary Policy Report while, equities, bond yields, and the exchange value of on pages 33–45; it is also included in section 9 of this the U.S. dollar have all risen, and risk spreads have annual report.) generally declined since June. With respect to its securities holdings, the Committee Financial vulnerabilities in the U.S. financial system has stated that it will continue to reinvest principal overall have continued to be moderate since mid- payments from its securities portfolio, and that it 2016. U.S. banks are well capitalized and have sizable expects to maintain this policy until normalization of liquidity buffers. Funding markets functioned the level of the federal funds rate is well under way. smoothly as money market mutual fund reforms This policy of keeping the Committee’s holdings of took effect in October. The ratio of household debt longer-term securities at sizable levels should help to income has changed little in recent quarters and is sustain accommodative financial conditions. still far below the peak level it reached about a decade ago. Nonfinancial corporate business leverage Part 1: Recent Economic and Financial has remained elevated by historical standards even Developments though outstanding riskier corporate debt declined slightly last year. In addition, valuation pressures in Labor market conditions continued to improve dursome asset classes increased, particularly late last ing the second half of last year and early this year. year. The Federal Reserve has continued to take steps Payroll employment has increased 200,000 per to strengthen the financial system, including finaliz- month, on average, since June, and the unemploying a rule that imposes total loss-absorbing capacity ment rate has declined slightly further, reaching and long-term debt requirements on the largest inter- 4.8 percent in January, in line with the median of nationally active bank holding companies as well as Federal Open Market Committee (FOMC) particiconcluding an extensive review of its stress-testing pants’ estimates of its longer-run normal level. The and capital planning programs. labor force participation rate has edged higher, on net, which is all the more notable given a demo- In December, the FOMC raised the target for the graphically induced downward trend. federal funds rate to a range of ½ to ¾ percent after maintaining it at ¼ to ½ percent for a year. The deci- The 12-month change in the price index for overall sion to increase the federal funds rate reflected real- personal consumption expenditures (PCE) was ized and expected labor market conditions and infla- 1.6 percent in December—still below the Committion. With the stance of monetary policy remaining tee’s 2 percent objective but up noticeably from 2015, accommodative, the Committee has anticipated some when the increase in top-line prices was held down by further strengthening in labor market conditions and declines in energy prices. The 12-month change in the a return of inflation to the Committee’s 2 percent index excluding food and energy prices (the core PCE objective. price index) was 1.7 percent last year. Measures of longer-term inflation expectations have been gener- The Committee has continued to emphasize that, in ally stable, though some survey-based measures determining the timing and size of future adjust- remain lower than a few years ago; market-based ments to the target range for the federal funds rate, it measures of inflation compensation moved higher in will assess realized and expected economic conditions recent months but also remain below their levels from relative to its objectives of maximum employment a few years ago.

Monetary Policy and Economic Developments 7 Real gross domestic product (GDP) is estimated to and other longer-run structural changes in the labor have increased at an annual rate of 2¾ percent over market likely have continued to put downward presthe second half of 2016 after increasing just 1 percent sure on the participation rate. A flat or increasing in the first half. The economic expansion continues to trajectory of the participation rate should therefore be supported by accommodative financial condi- be viewed as a cyclical improvement relative to that tions—including the still-low cost of borrowing for downward trend. Reflecting the slightly higher parmany households and businesses—and gains in ticipation rate and the small drop in the unemployhousehold net wealth, which has been boosted fur- ment rate, the employment-to-population ratio has ther by a rise in the stock market in recent months moved up about ¼ percentage point since mid-2016. and by increases in households’ real income spurred (For additional historical context on the economic by continuing job gains. However, net exports were a recovery, see the box “The Recovery from the Great moderate drag on GDP growth in the second half, as Recession and Remaining Challenges” on pages 6–8 imports picked up and the rise in the exchange value of the February 2017 Monetary Policy Report.) of the dollar in recent years remained a drag on export demand. . . . and is close to full employment Other indicators are also consistent with a healthy Domestic Developments labor market. Layoffs as a share of private employment, as measured in the Job Openings and Labor The labor market has continued to tighten Turnover Survey (JOLTS), remained at a low level gradually . . . through December, and recent readings on initial Labor market conditions strengthened over the sec- claims for unemployment insurance, a more timely ond half of 2016 and early this year. Payroll employ- measure, point to a very low pace of involuntary ment has continued to post solid gains, averaging separations. The JOLTS quits rate has generally con- 200,000 per month since last June (figure 1). This rate tinued to trend up and is now close to pre-crisis levof job gains is a bit higher than that seen during the els, indicating that workers feel increasingly confident first half of 2016, though it is a little slower than the about their employment opportunities. In addition, 225,000 monthly pace in 2015. The unemployment the rate of job openings as a share of private employrate has declined slightly further, on net, since the ment has remained near record-high levels. The share middle of last year. After dipping as low as 4.6 per- of workers who are employed part time but would cent in November, the unemployment rate stood at like to work full time—which is part of the U-6 4.8 percent in January, in line with the median of measure of underutilization from the Bureau of FOMC participants’ estimates of its longer-run nor- Labor Statistics (BLS)—is still somewhat elevated, mal level. however, even though it has declined further; as a result, the gap between U-6 and the headline unem- The labor force participation rate, at 62.9 percent, is ployment rate is somewhat wider than it was in the up slightly since June 2016. Changing demographics years before the Great Recession (figure 2). The jobless rate for African Americans also contin- Figure 1. Net change in payroll employment ued to edge lower in the second half of 2016, while the rate for Hispanics remained flat; as with the over- 3-month moving averages Thousands of jobs all unemployment rate, these rates are near levels seen 400 leading into the recession. Despite these gains, the Private average unemployment rates for these groups of 200 Americans have remained high relative to the aggre- + 0_ gate, and those gaps have not narrowed over the past Total nonfarm 200 decade. 400 Labor compensation growth is picking up . . . The improving labor market appears to be contribut- 600 ing to somewhat larger gains in labor compensation. 800 Major BLS measures of hourly compensation posted larger increases last year. Of these, the measures that 2009 2010 2011 2012 2013 2014 2015 2016 2017 include the costs of benefits have posted smaller Source: Department of Labor, Bureau of Labor Statistics. gains than wage-only measures because of a slow-

8 103rd Annual Report | 2016 Figure 2. Measures of labor underutilization Monthly Percent 18 U-6 16 U-4 14 U-5 12 10 8 Unemployment rate 6 4 2005 2007 2009 2011 2013 2015 2017 Note: Unemployment rate measures total unemployed as a percentage of the labor force. U-4 measures total unemployed plus discouraged workers, as a percentage 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 percentage 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 percentage 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. down in the growth of employer health-care costs. exchange value of the dollar since mid-2014 have led A compensation measure computed by the Federal to sharp declines in energy prices and relatively weak Reserve Bank of Atlanta, which tracks only the non-energy import prices. The effects of these earlier wages of workers who were employed at two points developments have been waning, however, and overall in time spaced 12 months apart, shows even more inflation has been moving up toward the FOMC’s pickup than these BLS measures. 2 percent target; the 12-month change in overall PCE prices reached 1.6 percent in December, compared . . . amid persistently slow productivity growth with only 0.6 percent over 2015. The PCE price index As in the previous several years, gains in labor com- excluding food and energy items, which provides a pensation last year occurred against a backdrop of better indication than the headline figure of where persistently slow productivity growth. Since 2008, overall inflation will be in the future, rose 1.7 percent labor productivity gains have averaged around 1 per- over the 12 months ending in December, somewhat cent per year, well below the pace that prevailed from greater than the 1.4 percent increase in the prior year, the mid-1990s to 2007 and somewhat below the as prices for a wide range of core goods and services 1974–95 average of 1½ percent per year. Since 2011, accelerated. Nonetheless, the rate of inflation for output per hour has averaged only a little more than both total and core PCE prices remains below the ½ percent per year. The relatively slow pace of pro- Committee’s target (figure 3). ductivity growth in recent years is in part a consequence of the slower pace of capital accumulation; . . . as oil and other commodity prices moved up diminishing gains in technological innovations and moderately downward trends in business formation also may The similar readings for headline and core PCE inflahave played a role. tion last year partly reflect an upturn in crude oil in 2016 following the sharp decline in the prior two Price inflation has picked up over the past year . . . years. Since July, oil prices traded mostly in the In recent years inflation has been persistently low, in $45 to $50 per barrel range until the November part because the drop in oil prices and the rise in the OPEC agreement regarding production cuts in 2017

Monetary Policy and Economic Developments 9 ever, factors holding non-oil import prices down Figure 3. Change in the price index for personal include dollar appreciation in the second half of 2016 consumption expenditures and lower prices of agricultural goods last fall, as Monthly 12-month percent change U.S. harvests hit record-high levels for many crops. Total 3.0 Survey measures of longer-term inflation expectations have been generally stable . . . 2.5 Wage- and price-setting decisions are likely influ- Excluding food and energy 2.0 enced by expectations for inflation. Surveys of professional forecasters outside the Federal Reserve 1.5 System indicate that their longer-term inflation 1.0 expectations have remained stable and consistent .5 with the FOMC’s 2 percent objective for PCE infla- + tion. In contrast, the median inflation expectation 0_ over the next 5 to 10 years as reported by the University of Michigan Surveys of Consumers has generally 2010 2011 2012 2013 2014 2015 2016 trended downward over the past few years, though it Note: The data extend through December 2016; changes are from one year earlier. is little changed from a year ago; this measure was at Source: Department of Commerce, Bureau of Economic Analysis. 2.5 percent in early February (figure 5). It is unclear how best to interpret that downtrend; this measure of inflation expectations has been above actual inflation (figure 4). In the wake of that agreement, prices for much of the past 20 years. moved up to about $55, roughly $15 per barrel higher since late 2015. Retail gasoline prices also rose after . . . and market-based measures of inflation the November OPEC agreement, but that increase compensation have moved up notably in recent has partially reversed in recent weeks. months but also remain relatively low TIPS-based inflation compensation (5 to 10 years After falling during 2014 and 2015, non-oil import forward), after declining to very low levels through prices stabilized in late 2016, supported by the rise in the middle of 2016, has risen to nearly 2 percent and nonfuel commodity prices as well as by an uptick in is about 20 basis points higher than it was at the end foreign inflation. In particular, prices of metals have of 2015. However, this level is still below the 2½ to increased in the past few months, boosted by production cuts combined with improved prospects for demand both in the United States and abroad. How- Figure 5. Median inflation expectations Figure 4. Brent spot and futures prices Percent Weekly Dollars per barrel Michigan survey expectations 4 130 for next 5 to 10 years Spot price 120 110 3 100 90 2 Dec. 2018 futures contracts 80 SPF expectations 70 for next 10 years 60 1 50 40 30 2003 2005 2007 2009 2011 2013 2015 2017 20 Note: The Michigan survey data are monthly and extend through February; the February data are preliminary. The SPF data for inflation expectations for personal 2012 2013 2014 2015 2016 2017 consumption expenditures are quarterly and extend from 2007:Q1 through Note: The data are weekly averages of daily data and extend through February 9, 2017:Q1. 2017. Source: University of Michigan Surveys of Consumers; Federal Reserve Bank of Source: NYMEX via Bloomberg. Philadelphia, Survey of Professional Forecasters (SPF).

10 103rd Annual Report | 2016 3 percent range that persisted for most of the after taxes and adjusted for price changes. Real DPI 10 years prior to 2014. increased 2¼ percent in 2016 following a gain of 3 percent in 2015, when purchasing power was Real GDP growth picked up in the second half of boosted by falling energy prices (figure 7). 2016 Real GDP is reported to have increased at an annual Consumer spending has also been supported by furrate of 2¾ percent in the second half of 2016 after ther increases in household net worth. Broad measincreasing just 1 percent in the first half (figure 6). ures of U.S. equity prices rose solidly over the past Much of the step-up reflects the stabilization of year, and house prices continued to move up. (In inventory investment, which held down GDP growth nominal terms, national house prices are approaching considerably in the first half of last year, as well as a their peaks of the mid-2000s, though relative to rents pickup in government purchases of goods and ser- or income, house price valuations are much lower vices. Private domestic final purchases—that is, final than a decade ago. Buoyed by these cumulative purchases by U.S. households and businesses—grew increases in home and equity prices, aggregate housemore steadily than GDP last year and posted a fairly hold net worth has risen appreciably from its level solid gain in the second half. PCE growth was bol- during the recession, and the ratio of household net stered by rising incomes and wealth, while private worth to income remains well above its historical fixed investment was weak despite the low costs of average. The benefits of homeownership have not borrowing for many households and businesses. been distributed evenly; see the box “Homeownership Although the FOMC has increased the federal funds by Race and Ethnicity” on pages 14–15 of the Februrate twice as this expansion has progressed—once in ary 2017 Monetary Policy Report. December 2015 and again in December 2016—in ¼ percentage point steps, overall financial conditions . . . as does credit availability have been sufficiently accommodative to support Consumer credit has continued to expand somewhat somewhat-faster-than-trend growth in real activity. faster than income amid stable delinquencies on consumer debt. Auto and student loans remain widely Gains in income and wealth have continued to available even to borrowers with lower credit scores, support consumer spending . . . and outstanding balances on these types of loans Real consumer spending rose at an annual rate of continued to expand at a robust pace. Credit card 2¾ percent in the second half of 2016, a solid pace balances continued to grow and were 6 percent similar to the one seen in the first half. Consumption higher than one year earlier in December. That said, has been supported by the ongoing improvement in credit card standards have remained tight for the labor market and the associated increases in real nonprime borrowers. As a result, delinquencies on disposable personal income (DPI)—that is, income credit cards are still near low historical levels. Figure 6. Change in real GDP and GDI Figure 7. Change in real personal consumption expenditures and disposable personal income Percent, annual rate Gross domestic product Percent, annual rate Gross domestic income 5 Personal consumption expenditures 6 Disposable personal income 5 4 4 H1 H2 3 H2* 3 2 1 2 + H1 0_ 1 1 2 3 2010 2011 2012 2013 2014 2015 2016 *Gross domestic income is not yet available for 2016:H2. 2010 2011 2012 2013 2014 2015 2016 Source: Department of Commerce, Bureau of Economic Analysis. Source: Department of Commerce, Bureau of Economic Analysis.

Monetary Policy and Economic Developments 11 Consumer confidence is strong Figure 9. Change in real private nonresidential fixed Household spending has also been supported by investment favorable consumer sentiment. In 2015 and through most of 2016, readings from the overall index of con- Percent, annual rate sumer sentiment from the Michigan survey were Structures solid, likely reflecting rising incomes and job gains. Equipment and intangible capital 15 Sentiment has improved further in the past couple of months. The share of households expecting real 10 income gains over the next year or two is now close H2 5 to its pre-recession level despite having lagged H1 + improvements in the headline sentiment measure ear- 0_ lier in the recovery. 5 Housing construction has been sluggish despite 10 rising home demand Residential investment spending appears to have only 2010 2011 2012 2013 2014 2015 2016 edged higher in 2016 following a larger gain in the Source: Department of Commerce, Bureau of Economic Analysis. previous year. Single-family housing starts registered a moderate increase in 2016, while multifamily housing starts flattened out on balance (figure 8). The eased standards on several categories of residential pace of construction activity in 2016 remained slug- home purchase loans.1 Even so, mortgage credit is gish despite solid gains in house prices and ongoing still relatively difficult to access for borrowers with improvements in demand for both new and existing low credit scores, harder-to-document income, or homes. As a result, the months’ supply of inventories high debt-to-income ratios. Although mortgage rates of homes for sale dropped to low levels, and the moved up from their all-time low levels over the secaggregate vacancy rate moved to its lowest level since ond half of last year, they remain quite low by his- 2005. Reportedly, tight supplies of skilled labor and torical standards, and, consequently, housing afforddeveloped lots have been restraining home ability remains favorable. construction. Business investment may be turning up after a Homebuying and residential construction have been period of surprising weakness supported by low interest rates and ongoing easing of Real outlays for business investment—that is, private credit standards for mortgages. Banks indicated in nonresidential fixed investment—were generally weak the October 2016 Senior Loan Officer Opinion Sur- in 2016 but posted larger gains toward the end of the vey on Bank Lending Practices (SLOOS) that they year (figure 9). Last year’s weakness occurred despite moderate increases in aggregate demand and generally favorable financing conditions, and it was wide- Figure 8. Private housing starts and permits spread across categories of equipment investment. Investment in equipment and intangibles moved Monthly Millions of units, annual rate down over most of the year, likely reflecting the effects of the combination of low oil prices, weak Single-family starts 1.8 export demand, and a muted longer-run demand outlook among businesses. Although such declines 1.4 are unusual outside of a recession, spending on these items did turn up in the fourth quarter. Investment in 1.0 Single-family permits drilling and mining structures, which had been falling sharply since the drop in oil prices in 2014, fell fur- .6 ther through most of 2016 but seems to be bottoming out. Outside of the energy sector, investment in Multifamily starts .2 nonresidential structures increased moderately in 2016. Finally, after having been subdued for much of 2004 2006 2008 2010 2012 2014 2016 Note: The data extend through December 2016. 1 The SLOOS is available on the Board’s website at https://www Source: Department of Commerce, Bureau of the Census. .federalreserve.gov/boarddocs/snloansurvey.

12 103rd Annual Report | 2016 2016, a widespread set of business sentiment indica- ment demand for imported equipment was very tors improved notably near the end of last year. weak. Overall, real net exports were a moderate drag on real GDP growth in the second half of 2016. Financing conditions for nonfinancial firms have Although the trade balance and current account defigenerally remained favorable cit narrowed slightly in the second and third quarters Nonfinancial businesses have continued to raise of 2016, the trade balance widened in the fourth funds through bond issuance and bank loans, albeit quarter, as imports significantly outpaced exports. at a somewhat slower pace than in the first half of 2016. The pace of such borrowing was supported in Federal fiscal policy was a roughly neutral part by continued low interest rates: Corporate bond influence on GDP growth in 2016 . . . yields for speculative-grade borrowers have declined After being a drag on aggregate demand during since last June, and those for investment-grade bor- much of the expansion, discretionary changes in fedrowers have increased but a fair bit less than those on eral fiscal policy have had a more neutral influence comparable-maturity Treasury securities. Banks indi- over the past two years. During 2016, policy actions cated in the October 2016 and January 2017 SLOOS had little effect on taxes and transfers, and federal that they eased lending terms on commercial and purchases of goods and services are little changed industrial loans in the second half of the year, but over this period (figure 11). The federal budget deficit that standards on such loans remained unchanged increased in fiscal year 2016 to 3.2 percent of GDP relative to earlier in 2016; banks continued to tighten from 2.4 percent in fiscal 2015. Revenues rose only standards on commercial real estate loans over the 1 percent last year in nominal terms and fell as a second half of last year. share of GDP because of soft personal income tax revenues and a decline in corporate income tax col- Net exports held down second-half real GDP lections. Outlays rose 5 percent, edging up as a share growth of GDP, owing to increases in mandatory spending The rise in the dollar since mid-2014 and subdued and interest payments as well as a shift in the timing foreign economic growth have continued to weigh on of some payments that ordinarily would have been U.S. exports (figure 10). Nevertheless, exports made in fiscal 2017. The Congressional Budget Office increased at a moderate pace in the second half of forecasts the deficit to be about the same size (as a 2016, but with much of the increase a result of rising share of GDP) in fiscal 2017 and in the next couple agricultural exports. In particular, soybean exports of years before rising thereafter. Consequently, the surged in the third quarter before falling back toward ratio of debt held by the public to nominal GDP is a more normal level in the fourth quarter. Consistent projected to remain near its current level of 77 perwith the stronger exchange value of the dollar, cent of GDP for the next couple of years and then imports jumped in the second half of the year after begin to rise. having been about flat in the first half, when invest- Figure 10. Change in real imports and exports of goods and Figure 11. Change in real government expenditures on services consumption and investment Percent, annual rate Percent, annual rate Imports Federal Exports 12 State and local 6 Q3 Q4 9 4 H1 H2 2 6 + 0_ 3 H1 + 2 0_ 4 3 6 6 8 2011 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014 2015 2016 Source: Department of Commerce, Bureau of Economic Analysis. Source: Department of Commerce, Bureau of Economic Analysis.

Monetary Policy and Economic Developments 13 . . . and real purchases at the state and local level rebounded strongly in the second half of last year, continue to increase, albeit at a tepid pace with a substantial rise following the U.S. elections The fiscal conditions of most state and local govern- (figure 12). Market participants have attributed the ments have continued to improve, though the pace of increase in yields following the elections primarily to improvement has been slower in recent quarters than expectations of a more expansionary fiscal policy. it had been previously. The ongoing improvement The boost in longer-term nominal yields in recent facilitated a step-up in the average pace of employ- months reflects roughly equal increases in real yields ment gain in the sector to the strongest rate since and inflation compensation. Consistent with the 2008. At the same time, however, real investment in changes in Treasury yields, yields on 30-year agency structures by state and local governments has mortgage-backed securities (MBS)––an important declined, on net, since the first quarter of 2016 after determinant of mortgage interest rates––increased trending up during the prior two years. All told, total significantly over the second half of the year. Howreal state and local purchases rose anemically in 2016. ever, Treasury and MBS yields remain quite low by On the other side of the ledger, revenue growth was historical standards. subdued overall, with little growth in tax collections at the state level but moderate gains at the local level. Broad equity price indexes increased notably . . . U.S. equity markets were volatile around the Brexit Financial Developments vote in the United Kingdom but operated without disruptions. Broad equity price indexes have The expected path for the federal funds rate over increased notably since late June, with a sizable porthe next several years steepened tion of the gain occurring after the U.S. elections in Against the backdrop of continued strengthening in November (figure 13). Reportedly, equity prices have the labor market and an increase in inflation over the been supported in part by the perception that corpocourse of 2016, the path of the federal funds rate rate tax rates may be reduced. Stock prices of banks, implied by market quotes on interest rate derivatives which tend to benefit from a steepening in the yield has moved up, on net, since the middle of last year. curve, outperformed the broader market. Moreover, Following the U.S. elections in November, the market participants pointed to expectations of expected policy path in the United States steepened changes in the regulatory environment as a factor significantly, apparently reflecting investors’ expecta- contributing to the outperformance of bank stocks. tions of a more expansionary fiscal policy. Mean- By contrast, stock prices of firms that tend to benefit while, market-based measures of uncertainty about from lower interest rates, such as utilities, declined the policy rate approximately one to two years ahead moderately on net. The implied volatility of the S&P also increased, on balance, suggesting that some of 500 index—the VIX— fell, ending the period close to the firming in market rates may reflect a rise in term the bottom of its historical range. (For a discussion premiums. Survey-based measures of the expected path of Figure 12. Yields on nominal Treasury securities policy also moved up in recent months. In the Survey of Primary Dealers that was conducted by the Fed- Daily Percent eral Reserve Bank of New York just prior to the 7 January 2017 FOMC meeting, the median dealer expected two rate hikes in 2017 and three rate hikes 6 10-year 30-year in 2018 as the most likely outcome.2 5 4 U.S. nominal Treasury yields increased considerably 3 After dropping significantly during the first half of 2 5-year 2016 and reaching near-historical lows in the after- 1 math of the U.K. referendum on exit from the Euro- 0 pean Union, or Brexit, in June, yields on mediumand longer-term nominal Treasury securities 2001 2003 2005 2007 2009 2011 2013 2015 2017 Note: The Treasury ceased publication of the 30-year constant maturity series on 2 The Federal Reserve Bank of New York’s Survey of Primary February 18, 2002, and resumed that series on February 9, 2006. Dealers is available at https://www.newyorkfed.org/markets/ Source: Department of the Treasury. primarydealer_survey_questions.html.

14 103rd Annual Report | 2016 comply with a variety of regulatory reforms, shifts in Figure 13. Equity prices investments from prime to government MMFs were substantial. However, the transition was smooth and Daily December 31, 2007 = 100 without any market disruptions. Overnight Eurodol- 160 lar deposit volumes fell significantly and have remained low as prime funds pulled back from lend- 140 Dow Jones bank index ing in this market. Meanwhile, the rise in total assets 120 of government funds appeared to contribute to mod- 100 estly higher levels of take-up at the overnight reverse 80 repurchase agreement (ON RRP) facility through late 2016. Overnight money market rates were little 60 affected, although the spread between the three- S&P 500 index 40 month LIBOR (London interbank offered rate) and 20 the OIS (overnight index swap) rate has remained elevated, likely reflecting MMFs’ reduced appetite for 1996 1999 2002 2005 2008 2011 2014 2017 term lending. Source: Standard & Poor's Dow Jones Indices via Bloomberg. (For Dow Jones Indices licensing information, see the note on the Contents page in the full report.) Bank credit continued to expand, and bank profitability improved of financial stability issues over this same period, see Aggregate credit provided by commercial banks conthe box “Developments Related to Financial Stabil- tinued to grow at a solid pace in the second half of ity” on pages 22–23 of the February 2017 Monetary 2016 (figure 14). The expansion in bank credit was Policy Report.) driven by strong growth in core loans coupled with an increase in banks’ holdings of securities. Measures . . . while risk spreads on corporate bonds of bank profitability improved since the middle of narrowed last year but remained below their historical averages. Bond spreads in the nonfinancial corporate sector declined significantly across the credit spectrum, sug- Municipal bond markets continued to function smoothly gesting increased investor confidence in the outlook for the corporate sector since the middle of last year. Credit conditions in municipal bond markets have Declines in spreads were particularly large for firms generally remained stable since late June. Over that in the energy sector, likely reflecting improved pros- period, the MCDX—an index of credit default swap pects for U.S. producers as they continue to increase spreads for a broad portfolio of municipal bonds— efficiency and benefit from higher prices. decreased moderately, while yield spreads on 20-year Treasury market functioning and liquidity conditions in the mortgage-backed securities Figure 14. Ratio of total bank credit to nominal GDP market were generally stable Indicators of Treasury market functioning remained Quarterly Percent broadly stable over the second half of 2016 and early 2017. A variety of liquidity metrics––including bid- 75 asked spreads and bid sizes––have displayed minimal signs of liquidity pressures overall, with a modest 70 reduction in liquidity following the U.S. elections. In addition, Treasury auctions generally continued to be 65 well received by investors. Liquidity conditions in the agency MBS market were also generally stable. 60 The compliance deadline for money market 55 mutual fund reform passed in mid-October with no market disruption 2006 2008 2010 2012 2014 2016 In the weeks leading up to the October 14, 2016, Source: Federal Reserve Board, Statistical Release H.8, "Assets and Liabilities of deadline for money market mutual funds (also Commercial Banks in the United States"; Department of Commerce, Bureau of Economic Analysis. referred to as money market funds, or MMFs) to

Monetary Policy and Economic Developments 15 general obligation municipal bonds over comparable- the steepening of yield curves was expected to boost maturity Treasury securities were little changed on profits going forward. Despite some widening of balance. The Puerto Rico Oversight, Management, euro-area corporate spreads in the last months of and Economic Stability Act was passed into law in 2016, corporate credit conditions in the advanced late June, providing the commonwealth with a clearer foreign economies have remained accommodative, path toward debt restructuring. Although Puerto with the continuation of corporate asset purchase Rico missed a small amount of debt payments on programs by several AFE central banks and with low general obligation bonds in August, this default corporate spreads. appeared to have had no significant effect on the broader municipal bond market. In EMEs, equities have risen significantly and sovereign yield spreads have narrowed since June, sup- International Developments ported in part by higher commodity prices. Financial conditions did tighten briefly following the U.S. elec- Foreign financial market conditions improved tions, with increased capital outflows and wider sovdespite global political uncertainties ereign spreads, on concerns that higher global inter- Financial market conditions in both the advanced est rates, as well as the possibility of more protectionforeign economies (AFEs) and the emerging market ist trade policies, would weigh on EME growth. economies (EMEs) have generally improved since However, the favorable risk sentiment seen in the June. In the AFEs, increasing distance from the summer and early fall of 2016 resumed by the end of Brexit vote, better-than-expected economic data for the year for most EMEs. Europe, and the continuation of accommodative monetary policies by advanced-economy central After depreciating slightly in the first half of last banks have contributed to improved risk sentiment. year, the dollar strengthened in the second half Advanced-economy bond yields reversed their down- The dollar has strengthened since June, with the ward trend seen in the first half of the year and broad dollar index—a measure of the trade-weighted increased notably following the U.S. elections, in part value of the dollar against foreign currencies—rising on expectations of a more expansionary U.S. fiscal about 4 percent on balance (figure 16). Much of this policy (figure 15). strengthening of the U.S. dollar reflects the combined influences of the large depreciation of the Equity prices in the AFEs have generally risen since Mexican peso, expectations of fiscal and trade policy June, with financial stocks outperforming broader changes after the U.S. elections, and market expectastock indexes as third-quarter earnings largely beat tions of tighter Federal Reserve monetary policy. The expectations, several major risk events passed, and Chinese renminbi also weakened notably against the Figure 15. 10-year nominal benchmark yields in selected Figure 16. U.S. dollar exchange rate indexes advanced economies Weekly Week ending January 9, 2014 = 100 Weekly Percent 3.0 170 United States 2.5 British pound 160 150 2.0 Germany 1.5 Mexican peso 140 United Kingdom 130 1.0 Japan 120 .5 + 110 0_ Chinese renminbi Broad dollar 100 .5 2014 2015 2016 2017 2014 2015 2016 2017 Note: The data, which are in foreign currency units per dollar, are weekly averages Note: The data are weekly averages of daily data and extend through February 9, of daily data and extend through February 9, 2017. 2017. Source: Federal Reserve Board, Statistical Release H.10, “Foreign Exchange Source: Bloomberg. Rates.”

16 103rd Annual Report | 2016 dollar, on net, as capital outflows from China picked Elsewhere in emerging Asia, growth held steady in up; Chinese authorities tightened capital controls in the third quarter but stepped down in some countries response. in the fourth, even though exports and manufacturing improved. And in India, a surprise mandatory In general, AFE economic growth was moderate exchange of large-denomination bank notes—a move and inflation remained subdued aimed at battling tax evasion and corruption—has In Canada, economic growth picked up sharply in disrupted activity. the third quarter, following a contraction in the previous quarter, as oil extraction recovered from the . . . but many Latin American economies disruptions caused by wildfires in May. In contrast, continued to struggle economic growth in Japan in the second and third In Mexico, after considerable weakness in the first quarters slowed after a strong first quarter, returning half of 2016, growth surged in the third quarter, supto a more typical moderate pace. Euro-area growth ported in part by a recovery in exports to the United firmed in the second half, and, in the United King- States. However, activity weakened again in the dom, economic activity was resilient in the aftermath fourth quarter, as consumer and business confidence of the Brexit referendum in June. Available indicators dropped. Furthermore, inflation in Mexico jumped suggest that growth in most AFEs was moderate near over the second half of the year, pressured in part by the end of 2016 and early this year. the peso’s sizable depreciation, prompting the Bank of Mexico to hike its policy rate sharply. Brazil’s Headline inflation in most AFEs increased over the recession deepened in the third quarter, reflecting in second half of 2016, in part driven by higher oil part tight macroeconomic policies, although the cenprices. In the United Kingdom, the substantial ster- tral bank began to ease monetary policy as inflation ling depreciation after the Brexit referendum also dropped in response to the weak economy. Elsewhere exerted upward pressure on consumer prices. Even in the region, activity in the third quarter was mixed; so, core inflation readings in AFEs remained gener- Chile’s economy rebounded, but Argentina’s GDP ally subdued, and headline inflation stayed below contracted and the crisis in Venezuela deepened. central bank targets in Canada, the euro area, Japan, and the United Kingdom. Part 2: Monetary Policy AFE central banks maintained highly accommodative monetary policies In December, the Federal Open Market Committee In August, the Bank of England cut its policy rate (FOMC) raised the target for the federal funds rate 25 basis points, announced additional purchases of by ¼ percentage point to a range of ½ to ¾ percent. government and corporate bonds, and introduced a The FOMC’s decision reflected realized and expected term funding scheme. In September, the Bank of labor market conditions and inflation. Moreover, the Japan committed to expanding the monetary base decision to raise the target range was consistent with until inflation exceeds 2 percent in a stable manner the Committee’s expectation that, with gradual and adopted a new policy framework aimed at con- adjustments in the stance of monetary policy, ecotrolling the yield curve by targeting short- and long- nomic activity would expand at a moderate pace, term interest rates. In December, the European Cen- labor market conditions would strengthen somewhat tral Bank announced an extension of the intended further, and inflation would rise to the FOMC’s duration of its asset purchases through at least 2 percent objective over the medium term. The Com- December 2017, albeit with a slight reduction in mittee expects that economic conditions will evolve those purchases beginning in April 2017. in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is In EMEs, Asian growth was solid . . . likely to remain, for some time, below levels that are Chinese economic activity remained robust in the expected to prevail in the longer run. However, the second half of 2016, as earlier policy easing sup- actual path of the federal funds rate will depend on ported stable manufacturing growth and a strong the economic outlook as informed by incoming data. property market. However, the property market In addition, the Committee anticipates reinvesting cooled somewhat toward the end of the year follow- principal payments of its securities holdings until ing the introduction of new macroprudential meas- normalization of the level of the federal funds rate is ures aimed at curbing rapidly rising house prices. well under way.

Monetary Policy and Economic Developments 17 Figure 17. 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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Note: The 2-year and 10-year Treasury rates are the constant-maturity yields based on the most actively traded securities. Source: Department of the Treasury; Federal Reserve Board. The FOMC raised the federal funds rate target ditions will strengthen somewhat further, and inflarange in December tion will rise to 2 percent over the medium term. About a year ago, in December 2015, the FOMC raised the target range for the federal funds rate after Consistent with this outlook, in the most recent Sumholding the range at near zero since late 2008 to sup- mary of Economic Projections (included as Part 3 of port economic activity and stem disinflationary pres- the February 2017 Monetary Policy Report on pages sures in the wake of the Great Recession. At that 33–45; also included in section 9 of this annual time, the Committee judged that it had seen sufficient report), which was compiled at the time of the improvement in the labor market and was reasonably December 2016 meeting, most participants projected confident that inflation would move back to its 2 per- that the appropriate level of the federal funds rate cent objective, which would warrant an initial would be below its longer-run level through 2018. increase in the federal funds rate. Through most of 2016, the Committee maintained the target range of Future changes in the federal funds rate will ¼ to ½ percent, pending further evidence of contin- depend on the economic outlook as informed by ued progress toward its objectives. In December, in incoming data view of realized and expected labor market condi- Although the Committee has expected that economic tions and inflation, the FOMC raised the target conditions will evolve in a manner that will warrant range for the federal funds rate another ¼ percentage only gradual increases in the federal funds rate, the point, to a range of ½ to ¾ percent (figure 17).3 The Committee has continued to emphasize that the Committee kept that same target range at its most actual path of monetary policy will depend on the recent meeting, which concluded on February 1. evolution of the economic outlook. In determining the timing and size of future adjustments to the tar- Monetary policy continues to support the get range for the federal funds rate, the Committee economic expansion will assess realized and expected economic conditions The Committee has continued to see the federal relative to its objectives of maximum employment funds rate as likely to remain, for some time, below and 2 percent inflation. This assessment will take into the levels that are expected to prevail in the longer account a wide range of information, including run. With gradual adjustments in the stance of mon- measures of labor market conditions, indicators of etary policy, the FOMC expects that economic activ- inflation pressures and inflation expectations, and ity will expand at a moderate pace, labor market con- readings on financial and international developments. In light of the current shortfall of inflation from 3 See Board of Governors of the Federal Reserve System (2016), 2 percent, the Committee has indicated that it will “Federal Reserve Issues FOMC Statement,” press release, carefully monitor actual and expected progress December 14, https://www.federalreserve.gov/newsevents/press/ monetary/20161214a.htm. toward its inflation goal.

18 103rd Annual Report | 2016 Figure 18. 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 2017 Note: “Credit and liquidity facilities” consists of primary, secondary, and seasonal credit; term auction credit; central bank liquidity swaps; support for MaidenLane, 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 8, 2017. Source: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.” The size of the Federal Reserve’s balance sheet The Federal Reserve’s implementation of has remained stable monetary policy has continued smoothly To help maintain accommodative financial condi- As in December 2015, the Federal Reserve successtions, the Committee has continued its existing policy fully raised the effective federal funds rate in Decemof rolling over maturing Treasury securities at auc- ber 2016 using the interest rate paid on reserve baltion and reinvesting principal payments on all agency ances, together with an overnight reverse repurchase debt and agency mortgage-backed securities in agreement (ON RRP) facility.5 Specifically, the Fedagency mortgage-backed securities. The Federal eral Reserve raised the interest rate paid on required Reserve’s total assets have held steady at around and excess reserve balances to ¾ percent and the ON $4.5 trillion, with holdings of U.S. Treasury securities RRP offering rate to ½ percent. In addition, the at $2.5 trillion and holdings of agency debt and Board of Governors approved an increase in the disagency mortgage-backed securities at approximately count rate (the primary credit rate) to 1.25 percent. $1.8 trillion (figure 18). The Committee has for some The effective federal funds rate rose into the new time stated that it anticipates maintaining this policy range amid orderly trading conditions in money maruntil normalization of the level of the federal funds kets. Increases in interest rates in other money marrate is well under way. kets were similar to the rise in the federal funds rate following the December meeting. Interest income on the System Open Market Account, or SOMA, portfolio has continued to support sub- The total take-up at the ON RRP facility increased stantial remittances to the U.S. Treasury. Preliminary modestly in the second half of 2016 as a result of results indicate that the Reserve Banks provided for higher demand by government money market mutual payments of $92 billion of their estimated 2016 net funds in the wake of money fund reform that took income to the Treasury. The Federal Reserve’s remit- effect in mid-October. tances to the Treasury have averaged about $80 billion a year since 2008, compared with about $25 billion a year over the decade prior to 2008.4 Annual Financial Statements,” press release, March 18, https:// www.federalreserve.gov/newsevents/press/other/20160317a.htm. 4 Total remittances include a one-time transfer of $19.3 billion in 5 See Board of Governors of the Federal Reserve System (2014), December 2015 to reduce the aggregate Reserve Bank capital “Federal Reserve Issues FOMC Statement on Policy Normalizasurplus to $10 billion, as required by the Fixing America’s Sur- tion Principles and Plans,” press release, September 17, https:// face Transportation Act. See Board of Governors of the Federal www.federalreserve.gov/newsevents/press/monetary/20140917c Reserve System (2016), “Federal Reserve System Publishes .htm.

Monetary Policy and Economic Developments 19 Although the implementation of monetary policy operations with a floating rate of 1 basis point over has been smooth, the Federal Reserve has continued the interest rate on excess reserves. In addition, the to test the operational readiness of other policy tools Open Market Desk conducted several small-value as part of prudent planning. Two operations of the exercises solely for the purpose of maintaining opera- Term Deposit Facility were conducted in the second tional readiness. half of 2016; seven-day deposits were offered at both

20 103rd Annual Report | 2016 Monetary Policy Report June 2016 after exerting a considerable drag in recent years. One area of concern, however, is the softening in business fixed investment in recent quarters even beyond those Summary sectors most directly affected by the plunge in energy Labor market conditions clearly continued to prices. In addition, the weakness of exports—followstrengthen during the early months of this year: Pay- ing the significant appreciation of the dollar over the rolls expanded at a solid pace of almost 200,000 per past two years and the subdued pace of foreign ecomonth in the first quarter, and while the unemploy- nomic growth—continues to hold back overall outment rate flattened out at close to 5 percent, the labor put growth. force participation rate moved up strongly. More recently, the signals regarding labor market improve- On balance, household and business credit conditions ment have become more mixed: Payroll gains are in the United States have remained accommodative reported to have slowed to an average of 80,000 per so far this year. Following a period of heightened month in April and May (or about 100,000 after global financial market volatility earlier this year in adjustment for the effects of a strike). The unemploy- which risk spreads for U.S. corporate bonds rose, ment rate dropped in May to 4.7 percent, its lowest financial conditions have eased somewhat in recent level since late 2007; however, the labor force partici- months, and corporate bond yields have returned to pation rate fell back again and was little changed historically low levels. Mortgage rates once again from its year-ago level. All told, the latest readings have approached their all-time lows, and mortgage suggest that labor markets are tighter than they were credit appears widely available to borrowers with at the end of last year but that the pace of improve- solid credit profiles, though less so to would-be borment has slowed. Whether those signs of slowing will rowers with imperfect credit histories. Student and be confirmed by subsequent data, and how persistent auto loans are broadly available, including to borrowany such slowing will be, remains to be seen. ers with nonprime credit scores, and the availability of credit card loans for such borrowers appears to Consumer price inflation has continued to be held have expanded somewhat over the past several quardown by lower prices for energy and imports, and the ters. Broad measures of U.S. equity prices have price index for personal consumption expenditures increased slightly, on net, since the beginning of the (PCE) increased only about 1 percent over the year. Meanwhile, foreign financial markets appear to 12 months ending in April. Changes in the PCE price have stabilized following the period of volatility earindex excluding food and energy items, which provide lier this year, with foreign equity prices higher and a better indication than the headline figure of where risk spreads lower. That said, the potential remains overall inflation will be in the future, also remained for spillovers to the U.S. economy from shocks to formodest; this index, which rose 1½ percent over the eign economic activity and financial markets, includ- 12 months ending in April, was partly restrained by ing possible reverberations from the U.K. referendum lower prices for non-oil imported goods. However, this week on membership in the European Union. both the headline and core inflation measures have picked up somewhat from a year earlier. Meanwhile, Turning to the stability of the U.S. financial system, some survey-based measures of longer-run inflation financial vulnerabilities have remained at a moderate expectations have remained relatively stable, while level this year. Domestic financial institutions and others have moved down; market-based measures of markets functioned well during the period of heightinflation compensation also are at low levels. ened volatility early in the year. Large banking firms have kept their capital and liquidity ratios at high lev- Although real gross domestic product is reported to els relative to historical standards, capital at other have increased at a sluggish rate in the first quarter of financial firms also appears to be elevated, and finan- 2016, the available data for the second quarter point cial firms’ use of short-term wholesale funding to a noticeable step-up in the pace of growth. On remains subdued. Debt growth in the household secaverage, consumer spending so far this year appears tor has been modest. However, leverage of nonfinanto be expanding at a moderate pace, supported by cial corporations is elevated by historical standards, solid income gains and the ongoing effects of the and lower-rated firms are potentially vulnerable to increases in wealth and the declines in oil prices of adverse developments. In particular, the performance the past two years. The housing market continues its of firms in the energy sector has been especially weak gradual recovery, and fiscal policy at all levels of gov- due to the prolonged period of low oil prices. In ernment is now modestly boosting economic activity equity markets, valuation pressures have increased

Monetary Policy and Economic Developments 21 somewhat as expectations for corporate earnings The Federal Reserve continued to use interest paid have been revised downward; valuation pressures on reserve balances and employ an overnight reverse have remained notable in the commercial real estate repurchase agreement facility to manage the federal sector, to which some small banks have substantial funds rate, and these tools were effective in keeping exposures. the federal funds rate within its target range. The Federal Reserve also continued to test the operational After having raised the target range for the federal readiness of other policy implementation tools. funds rate to between ¼ and ½ percent last December, the Committee maintained that target range over the first half of the year. The Committee’s decisions to leave the stance of policy unchanged were sup- Part 1: Recent Economic and Financial ported by its assessments earlier in the year that Developments global economic and financial developments posed risks to the economic outlook and that growth in Labor market conditions have improved this year, economic activity appeared to have slowed. In June, though recent data suggest there has been a loss of the Committee noted that recent information indi- momentum. Payroll gains averaged about 200,000 cated that the pace of improvement in the labor mar- per month in the first quarter but then only 80,000 ket had slowed, while growth in economic activity per month in April and May. The unemployment appeared to have picked up. In addition, the Com- rate has edged down to 4¾ percent, a level that is mittee’s policy stance so far this year reflected its near the midpoint of the Federal Open Market expectation that inflation would remain low in the Committee (FOMC) participants’ estimates of its near term, in part due to earlier declines in energy longer-run rate. That said, a few indicators suggest prices and in the prices of non-energy imports. The that some slack in the labor market remains. Despite Committee stated that its accommodative stance of persistently weak productivity growth, measures of policy is intended to support further improvements in labor compensation show some tentative signs of labor market conditions and a return to 2 percent acceleration. Overall consumer price inflation has inflation. continued to be held down by lower prices for energy and imports, but both overall inflation and inflation The Committee continued to emphasize that, in excluding food and energy items, a useful gauge of determining the timing and size of future adjust- where overall inflation will be in the future, have ments to the target range for the federal funds rate, it picked up a bit over the past year. Some surveywill assess realized and expected economic conditions based measures of longer-run inflation expectations relative to its objectives of maximum employment have moved down; market-based measures of inflaand 2 percent inflation. These judgments will take tion compensation have declined noticeably since into account a wide range of information, including last summer. measures of labor market conditions, indicators of inflation pressures and inflation expectations, and Real gross domestic product (GDP) is estimated to readings on financial and international developments. have increased at a sluggish rate in the first quarter, The Committee expects that economic conditions but more recent data point to a noticeable step-up in will evolve in a manner that will warrant only gradual the pace of growth in the second quarter. Consumer future increases in the federal funds rate, and that the spending appears to be expanding at a moderate pace federal funds rate will likely remain, for some time, so far this year, while the housing market continues below levels that are expected to prevail in the longer its gradual recovery, and fiscal policy at all levels of run. Consistent with this outlook, in the most recent government is now modestly boosting economic Summary of Economic Projections (SEP), which was activity after exerting a considerable drag in recent compiled at the time of the June meeting of the Fed- years. An area of concern, however, is the softening eral Open Market Committee (FOMC), FOMC par- in business fixed investment in recent quarters, even ticipants projected that the appropriate level of the beyond those sectors most directly affected by the federal funds rate would be below its longer-run level plunge in energy prices. In addition, weak exports are through 2018. (The June SEP is discussed in more providing little boost to overall output growth. detail in Part 3 of the June 2016 Monetary Policy Heightened global financial market volatility early Report on pages 33–36; it is also included in section 9 this year damped confidence both domestically and of this annual report.) abroad, but financial conditions have generally eased

22 103rd Annual Report | 2016 somewhat in recent months; in the United States, fairly high, the latter measure indicating that workers credit conditions for both households and businesses feel increasingly confident about their employment have remained generally accommodative. opportunities. Domestic Developments . . . and a few signs of labor underutilization remain Early this year, the labor market continued to Although the May level of the unemployment rate is improve . . . near the midpoint of the FOMC participants’ esti- The labor market continued to improve in the first mates of its longer-run rate, a few indicators suggest few months of this year. Payrolls expanded at an that some slack in labor resource utilization remains. average rate of around 200,000 per month from Janu- Most notably, the share of workers who are ary through March, modestly below the average of employed part time but would like to work full time 230,000 jobs per month last year but still well above is still elevated; accordingly, the more comprehensive the number needed to absorb the trend number of U-6 measure of labor underutilization, which new entrants into the workforce. The unemployment includes these underemployed individuals, has rate held at about 5 percent, where it had been since remained well above its pre-recession level. Meanthe fall, but both labor force participation and the while, jobless rates for African Americans and Hisemployment-to-population ratio rose noticeably. The panics are high relative to the aggregate, though these rise in the labor force participation rate was encour- rates have also improved during the economic recovaging because it seemed to suggest that labor supply ery. (For additional discussion, see the box “Have the was responding significantly to the strengthening Gains of the Economic Expansion Been Widely labor market. Shared?” on pages 6–7 of the June 2016 Monetary Policy Report.) . . . but recently there may have been a loss of momentum . . . Compensation growth has shown tentative signs The data for April and May, however, suggest that of a pickup . . . the pace of labor market improvement has slowed. By most measures, the growth of labor compensation Payroll growth is reported to have averaged a pace of has remained modest, though recently there have only 80,000 per month (about 100,000 after adjust- been some signs of faster increases. The employment ment for the effects of a strike).1 And although the cost index (ECI) for private-industry workers, which unemployment rate fell to 4.7 percent in May, that includes the cost of employer-provided benefits as decline occurred as both labor force participation well as wages, registered a rise of only 1¾ percent and the employment-to-population ratio fell back over the 12 months ending in March. However, two somewhat from their levels in March. On net, the other prominent measures of labor compensation— participation rate in May was little changed from a average hourly earnings for all private-sector year earlier (a position that should nonetheless be employees and business-sector compensation per viewed as a strengthening relative to a trend that is hour—recorded larger increases than the ECI over probably declining because of demographic changes, the past year, and the increases in both series were especially the aging of the baby-boom generation). above their corresponding averages over the preceding several years. In addition, according to the Fed- Despite these disappointing data, other labor market eral Reserve Bank of Atlanta’s Wage Growth indicators are consistent with a job market that has Tracker, the median of 12-month changes in indicontinued to strengthen. In particular, initial claims viduals’ hourly wages (from the monthly survey of for unemployment insurance, now available through households) has been gradually trending higher, early June, remain very low—and therefore at odds reaching 3½ percent in May. with the weaker tenor of the recent payroll figures. In addition, according to the Job Openings and Labor . . . amid persistently weak productivity growth Turnover Survey, the rate of job openings as a share The relatively slow gains in labor compensation in of private employment remains at a very high level; recent years have occurred against a backdrop of the quits rate has continued to trend up and is now persistently weak productivity growth. Since 2008, labor productivity gains have averaged around 1 per- 1 According to the Labor Department, payroll employment in cent per year, far below the pace that prevailed before May was reduced by about 35,000 because of workers on strike the recession. Indeed, in the past five years, producat Verizon. These employees have returned to work and are expected to be included in payroll figures for June. tivity growth has averaged only ½ percent per year.

Monetary Policy and Economic Developments 23 The relatively slow pace of productivity growth is at prices rose about 1½ percent over the 12 months endleast in part a consequence of the sustained weakness ing in April, up about ¼ percentage point from its in capital investment over the recession and early year-earlier pace.2 The increase in the trimmed mean recovery period. Productivity gains may improve in PCE price index, an alternative indicator of underlythe future as investment in productivity-enhancing ing inflation, has also picked up a bit over the past capital equipment and in research and development year; as is typically the case, this measure has run strengthens. somewhat above core inflation over this period. Because the slack in labor and product markets Falling energy prices have held down consumer appears to have been mostly taken up, and given price inflation the recent upward movements in oil prices and non- Overall consumer price inflation has moved up from oil import prices—after months of declines—the the lows recorded last year, but it remains well below downward pressure on inflation from these factors is the FOMC’s longer-run objective of 2 percent. In likely waning. April, the 12-month change in the price index for personal consumption expenditures (PCE) was around Some survey-based measures of expected 1 percent, higher than the ¼ percent rate recorded in inflation have drifted downward . . . April 2015. The pickup over this period was largely The FOMC devotes careful attention to indicators of due to a slower rate of decline in both energy prices long-run inflation expectations, as these expectations and non-energy import prices. are believed to be an important factor underlying many wage- and price-setting decisions. The latest Low oil prices have reduced global investment in the readings from surveys of longer-term inflation expecoil sector and have led to some cutbacks in produc- tations have sent mixed signals. In the Survey of Protion, particularly in the United States. These declines, fessional Forecasters, conducted by the Federal firming global demand, and some temporary supply Reserve Bank of Philadelphia, the median seconddisruptions—including in Canada due to wildfires— quarter reading on expected annual PCE price inflahave recently pushed crude oil prices higher after tion over the next 10 years was again 2 percent. The they reached a 12-year low in mid-January. Nonethe- distribution of inflation expectations 5 to 10 years less, at a bit below $50 per barrel, the spot price of ahead derived from surveys of primary dealers has Brent crude oil remains less than half its mid-2014 remained similarly stable. But in the University of peak. Moreover, the continued low level of oil futures Michigan Surveys of Consumers, the median reading prices suggests that market participants expect only a on inflation expectations over the next 5 to 10 years modest increase in oil prices over the next couple of has drifted down over the past two years and years, given the historically high global inventories of recorded a new low in early June. To the extent that crude oil. The large cumulative drop in crude oil this downward drift is a reaction to energy-driven prices had mostly passed through to lower retail declines in overall inflation, it could reverse over time prices for gasoline and other energy products by early as energy prices stop declining. this year; despite some increases thereafter, prices at the pump remain at levels substantially below those . . . and market-based measures of inflation of last summer. compensation have remained low Market-based measures of longer-term inflation Similar to the price of crude oil, prices of metals and compensation—derived either from differences agricultural goods have moved higher since early this between yields on nominal Treasury securities and year. The rise in the prices of agricultural goods fol- Treasury Inflation-Protected Securities or from inflalowed several quarters of declines that have held tion swaps—have continued to decline and now stand down retail food prices for consumers so far this at very low levels. Deducing the sources of changes in year. The rise in many nonfuel commodities prices, inflation compensation is challenging because such together with a weaker dollar, helped push non-oil movements reflect not only expected inflation, but import prices higher in May—the first increase also an inflation risk premium—the compensation since 2014. that holders of nominal securities demand for bearing inflation risk—and other factors. Nevertheless, Outside of the energy and food categories, inflation has picked up a little bit 2 Data from the consumer price index and the producer price Inflation for items other than food and energy (soindex point to a similar reading for the 12-month change in core called core inflation) has picked up a little. Core PCE PCE prices in May.

24 103rd Annual Report | 2016 one cannot rule out a decline in inflation expecta- the first four months of this year, just a touch below tions among market participants since last summer. the pace in 2015. Economic activity has been expanding at a Ongoing gains in household net worth likely have moderate pace also supported growth in consumer spending. House Real GDP is currently reported to have increased at prices, which are of particular importance for the an annual rate of just ¾ percent in the first quarter, balance sheet positions of a broad set of households, but with several signs of faster growth in the current have continued to move higher, with the CoreLogic quarter, real GDP appears on track to record a mod- national index showing a rise of about 6 percent over erate overall gain in the first half of this year.3 Con- the 12 months ending in April. Elsewhere, although sumer spending is advancing further, and housing equity prices have only increased slightly, on net, so activity continues to strengthen gradually. Mean- far this year, the prior gains of the past few years while, government expenditures have maintained have helped improve households’ financial positions. momentum. Although inventory investment exerted In the first quarter of this year, the ratio of aggregate a sizable drag on GDP growth in the latter half of household net worth to disposable income, which last year, it has been less of an influence in the first had previously returned to its pre-recession highs, half of this year. ticked down slightly but remained far above its longrun historical average. Nevertheless, several of the headwinds that were apparent last year have continued to restrain growth Consumers are upbeat about their economic prospects . . . in activity this year. In particular, a substantial appreciation of the dollar over the past couple of years, The solid pace of income growth over the past year along with continued sluggish foreign growth, is has helped households retain fairly upbeat percepweighing on the demand for U.S. exports. In addi- tions about their economic prospects. The Michigan tion, the sizable drop in oil prices since 2014—not- survey’s composite index of consumer sentiment— withstanding the substantial benefit to households— which incorporates households’ views about their has led to marked cutbacks in production and invest- own financial situations as well as economic condiment in the energy sector of our economy. These tions more broadly—has improved again recently folnegative factors have had particularly pronounced lowing a moderate deterioration earlier in the year, effects on activity in the industrial sector. and the latest readings were near the upper end of the range of values recorded during the previous eco- Gains in income and wealth continue to support nomic expansion. After having lagged behind consumer spending improvements in headline sentiment earlier in the Consumption growth was lackluster early in 2016, recovery, the survey measures of households’ expecbut data on retail sales and motor vehicle sales sug- tations for real income changes over the next year or gest that spending has picked up appreciably so far two have also improved noticeably and now stand this quarter. Smoothing through the monthly fluc- close to their pre-recession levels. tuations, consumer spending is reported to have . . . and household credit availability is generally increased at an annual rate of nearly 3 percent over favorable the first four months of this year, only a little slower than the pace in 2015. The improvement in the labor Consumer credit has continued to expand this year market has continued to support income growth, amid stable credit performance. Auto and student and low energy prices are boosting households’ loans remain widely available, even to borrowers with purchasing power. As a result, real disposable per- lower credit scores, and outstanding balances of sonal income—that is, income after taxes and these types of loans expanded at a robust pace. adjusted for inflation—was reported to have Credit card borrowing has also accelerated a bit, on advanced at an annual rate of about 3¼ percent over balance, and the outstanding balance in April was 5½ percent above its level a year earlier. Although there have been some tentative signs of easing overall, credit card standards have remained tight for 3 While it appears likely that residual seasonality—a predictable seasonal pattern remaining in data that have already been sea- nonprime borrowers. sonally adjusted—in some components of GDP held down measured GDP growth in the first quarter, this factor would Low interest rates and rising incomes have enabled imply an offsetting boost in measured GDP growth over the remainder of the year. many households to lower their debt payment bur-

Monetary Policy and Economic Developments 25 dens. The household debt service ratio—that is, the Business fixed investment has declined . . . ratio of required principal and interest payments on A worrisome development in recent quarters has outstanding household debt to disposable personal been the weakening in business fixed investment (priincome—has remained at a very low level by histori- vate nonresidential fixed investment). Over the past cal standards. Interest rates on 30-year fixed-rate year, real outlays in the nonresidential structures catmortgages are down about ½ percentage point from egory—which constitutes roughly one-fourth of total the level at the December liftoff date, and rates on business fixed investment—have fallen sharply, as auto loans, on net, have been little changed since investment in oil wells and other drilling and mining then. Going forward, the effect of any policy rate structures has followed the steep drop in oil prices. tightening on mortgage rates and, in turn, on house- The decline in the number of drilling rigs in operaholds’ debt burdens will likely show through only tion has been so pronounced that investment in drillgradually, as the current stock of household debt is ing and mining structures has shrunk to less than disproportionately held in loan products with fixed one-third its peak in 2014, and the ongoing contracinterest rates. tion has subtracted nearly ½ percentage point from real GDP growth over the past four quarters. Outside Residential construction activity has improved at of the energy sector, business outlays for structures a gradual pace recorded relatively modest increases following the siz- The recovery in residential construction activity has able gains observed in the first half of 2015. Meanmaintained a moderate pace. Single-family starts while, business spending on equipment and intelleccontinued to edge up slowly over the past year, while tual property products moved down in the fourth multifamily starts receded a little from their elevated quarter of last year and the first quarter of 2016, and levels in the middle of 2015. Looking further back, the available indicators, such as orders and shipments the rise in multifamily starts over the past five years of capital goods and surveys of business conditions, has been substantial and has far exceeded the percent point to continued softness in the current quarter. gain in single-family housing starts. The relative strength in multifamily construction partly reflects a Although investment spending continues to be supshift in demand away from owner-occupied housing ported by low interest rates and generally accommotoward rental housing since the recession. Elsewhere, dative financial conditions, spending is likely being outlays for improvements to existing homes increased restrained by a slowing in actual and expected busimore than 10 percent over the past year, and commis- ness output growth. Weak foreign demand and the sions and fees paid on the sale of residential real stronger dollar are already having an adverse effect estate rose moderately, in line with the uptrend in on domestic businesses, and analysts’ forecasts for sales of existing homes and contracts for new homes. year-ahead corporate earnings have been revised In all, residential investment rose almost 10 percent in down considerably, even outside of the energy sector. 2015 and appears on track to maintain a similar pace Meanwhile, as reported by the Bureau of Economic in the first half of this year. Analysis, corporate profits recorded only a slight increase in the first quarter after falling sharply at the Low interest rates and an ongoing easing in mort- end of last year, although here, too, the weakness was gage credit standards have continued to support the heavily concentrated in the energy sector. expansions in housing demand and construction activity. In the April Senior Loan Officer Opinion . . . while corporate financing conditions have Survey on Bank Lending Practices (SLOOS), banks remained generally accommodative reported having eased lending standards and experi- Corporate financing conditions remained generally enced stronger demand for most types of residential accommodative in the first half of this year, although real estate loans in the first quarter.4 Even so, for ongoing oil market developments and episodes of individuals with relatively low credit scores, mort- global financial stress led to sporadic periods of gages remain difficult to obtain. With mortgage heightened perceptions of risk. In particular, corpointerest rates having again moved down close to their rate bond markets showed strains early in the year, all-time lows, housing affordability has remained especially for those firms most affected by the low favorable despite the moderate growth in house prices energy prices. In recent months, however, pressures in over the past year. bond markets have eased somewhat, and corporate bond yields overall have returned to historically low levels. In the April SLOOS, banks indicated that they 4 The SLOOS is available on the Board’s website at www .federalreserve.gov/boarddocs/snloansurvey. had tightened their standards on commercial and

26 103rd Annual Report | 2016 industrial (C&I) loans to large and middle-market would likely be mildly supportive of GDP growth firms in the first quarter, but even so, such financing over 2016 and 2017. remained broadly available. For the first quarter as a whole, corporate bond issuance and the growth of After narrowing significantly over the past several C&I loans on banks’ balance sheets were quite years, the federal unified budget deficit has recently strong. Firms’ equity issuance was also generally widened slightly. At 18 percent of GDP, receipts have solid, though initial public offerings have been weak. remained high relative to the recession and early Meanwhile, the growth of small business loans recovery period. At 21 percent, expenditures as a was subdued. share of GDP are above the levels that prevailed before the start of the most recent recession. Financing conditions in the commercial real estate Although the ratio of federal debt held by the public (CRE) sector have remained accommodative overall, to nominal GDP is already quite elevated, the deficit but here, too, there have been some signs of tighten- currently remains small enough to roughly stabilize ing. Growth of CRE loans at banks remained strong this ratio at around 75 percent. during the first half of the year. However, banks indicated that they had further tightened their lending . . . and state and local government expenditures standards on CRE loans in the first quarter of 2016, are rising according to the April SLOOS. In addition, spreads The expansion of economic activity and further on interest rates for CRE loans relative to 10-year gains in house prices continue to support a gradual swap rates and to yields on commercial mortgage- improvement in the fiscal position of most state and backed securities rose sharply further early this year, local governments. Consistent with their improving and although they have retreated significantly since finances, states and localities significantly expanded then, these measures remain well above their histori- real construction spending in 2015 and in the early cal average levels. part of this year. By contrast, employment growth in the state and local sector was muted last year, but the Exports and imports have both been weak this pace has stepped up somewhat so far in 2016. year Based on recently released trade prices and the nomi- Financial Developments nal census trade data, it appears that real exports were roughly flat in the first quarter of 2016, held Financial conditions tightened early in the year back by slow foreign growth and the considerable but then eased appreciation of the dollar over the past two years. Early in 2016, domestic financial conditions tight- Despite the appreciation of the dollar, real imports ened, as uncertainty about the outlook for the Chilooked to have declined in the first quarter, with nese economy, lower oil prices, and weak data on weakness in both capital- and consumer-goods cat- economic activity in several economies contributed to egories. Overall, the net export contribution to GDP concerns about the prospects for global economic growth was about neutral. While the nominal trade growth and to a pullback from risky assets. At that deficit narrowed a little in the first quarter, the cur- time, Treasury yields declined across maturities, rent account deficit widened a touch to 2.7 percent of equity prices fell steeply, equity price volatility rose, nominal GDP. The April trade data suggest that net and risk spreads on corporate bonds widened notaexports will be a small drag on GDP growth in the bly. In addition, investors came to expect a more current quarter, as the trade deficit increased, with gradual increase in the target range for the federal imports rebounding from a very weak March level. funds rate than they had previously anticipated. However, investors’ concerns appeared to diminish The drag from federal fiscal policy has ended . . . beginning in mid-February, and since then, amid Fiscal policy at the federal level had a roughly neutral mixed U.S. economic data, domestic financial condiinfluence on GDP growth in 2015, as the substantial tions have generally eased on balance: Stock prices contractionary effects of earlier fiscal consolidation rose notably, equity price volatility declined, and have abated. Policy actions had little effect on taxes, credit spreads on corporate bonds narrowed. (For a while transfers and federal purchases of goods and discussion of financial stability developments over services merely edged up. Going forward, if the this same period, see the box “Developments Related increased spending authority enacted in last year’s to Financial Stability” on pages 20–21 of the budget agreement is fully utilized, federal fiscal policy June 2016 Monetary Policy Report.)

Monetary Policy and Economic Developments 27 On balance to date this year, the expected path . . . while risk spreads on corporate bonds for the federal funds rate over the next several narrowed years declined . . . Similar to the movements in equity markets, spreads The path of the federal funds rate implied by market on corporate bonds over comparable-maturity Treasquotes on interest rate derivatives flattened, on net, ury securities widened early in the year but later since December. The turbulence in global financial retraced those moves, leaving spreads generally little markets early in the year, the FOMC’s communica- changed, on net, over the first half of the year. tions, and some indications of a slowing in the pace Spreads on the lowest-rated speculative-grade issues of improvement in the labor market of late contrib- declined appreciably. Nonetheless, corporate bond uted to market participants’ expectation that U.S. spreads stayed notably above their historical median monetary policy would be more accommodative than levels, consistent with some deterioration in credit they had anticipated late last year. quality in the corporate sector. Survey-based measures of the expected path of Bank credit continued to expand, but profitability policy also moved down this year. Respondents to declined the Survey of Primary Dealers and to the Survey of Aggregate credit provided by commercial banks Market Participants in June expected fewer 25 basis increased at a solid pace through May. The expanpoint increases in the FOMC’s target range for the sion in bank credit reflected strong loan growth federal funds rate this year than they projected in coupled with a modest increase in banks’ holdings of December. Market-based measures of uncertainty securities. The growth of loans on banks’ books was about the policy rate approximately one to two years generally consistent with banks’ reports in the April ahead declined, on balance, from their year-end SLOOS of stronger demand for most loan categories levels. and easier lending standards for loans to households. . . . longer-term nominal Treasury yields Measures of bank profitability remained below their decreased . . . historical averages and declined in the first quarter of Yields on 5-, 10-, and 30-year nominal Treasury secu- 2016, pressured by higher provisioning for losses on rities declined in the first half of the year on balance. loans to borrowers in the oil and gas sectors, reduced Treasury yields decreased most notably in the early trading and investment banking revenues, and conpart of the year amid an increase in safe-haven tinued low net interest margins. However, with the demands and a pullback from risky assets. Yields exception of C&I loans, loan delinquency and changed little since then, on net, as risk sentiment charge-off rates continued to decline across most generally improved but concerns about longer-term major loan types and remained near or at their loweconomic growth remained. Consistent with the est levels since the financial crisis. Stock prices of change in yields on Treasury securities, yields on large bank holding companies decreased over the 30-year agency mortgage-backed securities first half of the year, while banks’ credit default swap (MBS)—an important determinant of mortgage spreads increased and stayed above their average level interest rates—decreased, on balance, in the first half over the past two years. of 2016. Measures of liquidity conditions and functioning . . . broad equity price indexes increased slightly, in financing markets were generally stable and those of companies linked to energy sectors Available indicators of Treasury market functioning rose substantially . . . have remained broadly stable over the first half of After incurring sharp declines early in the year, broad 2016. A variety of liquidity metrics—including bidequity price indexes rebounded as risk sentiment asked spreads and bid sizes in secondary markets for improved, resulting in levels that were slightly higher, Treasury securities—have displayed no notable signs on net, than at year-end. In addition, reflecting the of liquidity pressures over the same period. In addirebound in oil prices since the turn of the year, stock tion, Treasury auctions generally continued to be well prices of companies in the energy sector outper- received by investors. formed broad equity market indexes over the first half of 2016. Meanwhile, implied volatility of the Liquidity conditions in the agency MBS market also S&P 500 index increased through mid-February appeared to be generally stable. Dollar-roll-implied and then declined, ending the period above its financing rates for production coupon MBS—an year-end level. indicator of the scarcity of agency MBS for settle-

28 103rd Annual Report | 2016 ment—suggested limited settlement pressures over The dollar depreciated early in the year but has the first half of 2016. In addition, measures of cor- risen, on balance, more recently porate bond market liquidity, such as gauges of the After increasing more than 20 percent from mid-2014 effect of trades on market prices, stayed at levels through its recent peak in January of this year, the comparable with those seen prior to the financial cri- broad dollar index—a measure of the trade-weighted sis. However, accurately measuring liquidity in fixed- value of the dollar against foreign currencies—has income markets can be challenging, and liquidity declined about 4 percent on balance. The exchange conditions may vary in certain segments of the mar- value of the dollar fluctuated importantly over the ket or during times of stress. first half of this year in response to shifting views about the path of U.S. monetary policy—falling early Short-term dollar funding markets also continued to on, rising starting in May, and declining again more function smoothly during the first half of 2016. recently. On net, the dollar declined significantly There were generally no signs of stress in either against currencies of some commodity exporters, secured or unsecured money markets, including at including Canada, as higher oil prices provided sup- March quarter-end. port for those currencies. In contrast, the British pound appreciated less against the dollar than other Municipal bond markets functioned smoothly currencies, likely reflecting investor concerns about despite recent developments on Puerto Rico’s the upcoming referendum on whether the United debt Kingdom should leave the European Union. The Credit conditions in municipal bond markets contin- Chinese renminbi was under considerable depreciaued to be stable even as the situation facing Puerto tion pressure late last year and very early in 2016 but Rico and its creditors deteriorated further. Gross stabilized as fears that Chinese policymakers would issuance of municipal bonds remained solid in the allow the renminbi to fall considerably further were first quarter, and yield spreads on general obligation allayed by reassuring statements of Chinese authori- (GO) municipal bonds over comparable-maturity ties, positive macroeconomic data, and decreased Treasury securities increased a bit on net. Puerto capital outflows. Rico’s Government Development Bank missed a substantial debt payment due in early May, and Economic growth remained modest in most investors remained focused on the next sizable pay- advanced foreign economies ment of GO bonds due in July. In the euro area, Canada, and Japan, economic growth picked up in the first quarter of 2016. The International Developments euro-area economy was supported by the European Central Bank’s highly accommodative monetary Foreign financial market conditions improved policies, and the Canadian economy continued to after tightening early in the year recover from a brief recession in early 2015, with past Foreign financial market conditions tightened early depreciation of the Canadian dollar providing some in the year, with bond spreads rising and equity mar- support. However, GDP growth in the second quarkets falling in most countries as investor concerns ter is likely to be hampered in Japan (as a result of an about global economic growth increased, particularly earthquake in April) and in Canada (on account of with regard to China. Since mid-February, in massive wildfires that have disrupted oil production). response to the release of some positive foreign data, In addition, uncertainty related to the forthcoming reassuring moves by Chinese policymakers, and a U.K. referendum appears to have contributed to a market perception that U.S. monetary policy would step-down in U.K. growth this year. be somewhat more accommodative than previously expected, financial conditions generally improved. A Inflation also remained low . . . rebound in oil prices also seemed to reassure inves- In most advanced foreign economies (AFEs), core tors, possibly by diminishing financial stability con- inflation remained subdued, reflecting continued ecocerns around oil-producing firms and oil-exporting nomic slack in some countries and generally subdued economies. Bond yields, however, have generally wage growth. As a result, despite the recent rebound moved lower since February, both because of low in oil prices and the inflationary effects of past sizreadings on inflation and in response to the U.S. able depreciations of some currencies, headline inflaemployment report in June. tion remained well below central bank targets in

Monetary Policy and Economic Developments 29 Canada, the euro area, Japan, and the United other factors, by the FOMC’s assessments in the first Kingdom. months of the year that global economic and financial developments posed risks to the economic out- . . . leading AFE central banks to maintain highly look, and in June that recent information indicated accommodative monetary policies that the pace of improvement in the labor market In late January of this year, the Bank of Japan had slowed. In addition, the Committee’s policy adopted a negative policy rate, and in March, the stance reflected its expectation that inflation would European Central Bank reduced its deposit rate fur- remain low in the near term. Looking ahead, the ther into negative territory, increased the pace and FOMC expects that economic conditions will warscope of its asset purchases, and announced a new rant only gradual increases in the federal funds rate. program of four-year loans—potentially at slightly In determining future adjustments to the federal negative rates—to euro-area banks. Meanwhile, the funds rate, the Committee will take into account a Bank of Canada, the Bank of England, and many wide range of information, including measures of other AFE central banks maintained their policy labor market conditions, indicators of inflation presrates at historically low levels. sures and inflation expectations, and readings on financial and international developments. In emerging markets, economic growth picked up from late last year but remains subpar The FOMC maintained the federal funds rate The Chinese economy slowed in the first quarter. target range at ¼ to ½ percent in the first half of However, recent indicators suggest that more accom- the year . . . modative fiscal and monetary policies are providing a After raising the target range for the federal funds lift to economic activity, particularly in the property rate last December to between ¼ and ½ percent, the market, where easier credit conditions have fueled a Committee has maintained that range over the first sharp turnaround. Elsewhere in emerging Asia, weak half of the year. This unchanged policy stance was external demand from both the advanced economies supported initially by the Committee’s assessment and China weighed on growth in the first quarter, but that global economic and financial developments exports and manufacturing have improved more posed risks to the economic outlook, as expressed in recently. its March 2016 statement, and by its judgment in April that growth in domestic economic activity Mexico’s economy was a bright spot in Latin appeared to have slowed.5 In June, the Committee America in the first quarter, as GDP growth picked noted that recent information indicated that the pace up despite lackluster exports to the United States; of improvement in the labor market had slowed, however, it appears economic activity decelerated in while growth in domestic economic activity appeared the second quarter. In Brazil, the recession continued to have picked up in the spring.6 The decision to in the first quarter, reflecting long-standing structural maintain the target range for the federal funds rate problems, low commodity prices, and a political cri- also reflected the Committee’s expectation that inflasis, subsequently resulting in a change in government. tion would stay low in the near term, partly because However, the contraction was smaller than in previ- of earlier declines in energy prices and in the prices ous quarters, as commodity prices recovered some- of non-energy imports, as well as recently elevated what and the sharp depreciation of the currency last uncertainty about the possible consequences of the year helped boost exports. Growth was mixed in the U.K. referendum on European Union membership rest of South America, with Chilean GDP rebound- for the U.S. economic outlook. ing sharply while Venezuela’s economy continued to experience a deep recession. Part 2: Monetary Policy 5 See Board of Governors of the Federal Reserve System (2016), “Federal Reserve Issues FOMC Statement,” press release, Over the first half of the year, monetary policy March 16, https://www.federalreserve.gov/newsevents/press/ monetary/20160316a.htm; and Board of Governors of the Fedremained accommodative to support further eral Reserve System (2016), “Federal Reserve Issues FOMC improvement in labor market conditions and a return Statement,” press release, April 27, https://www.federalreserve to 2 percent inflation. In particular, the Federal Open .gov/newsevents/press/monetary/20160427a.htm. Market Committee (FOMC) maintained the target 6 See Board of Governors of the Federal Reserve System (2016), “Federal Reserve Issues FOMC Statement,” press release, range for the federal funds rate at ¼ to ½ percent. June 15, https://federalreserve.gov/newsevents/press/monetary/ This unchanged policy stance was supported, among 20160615a.htm.

30 103rd Annual Report | 2016 Over the first half of 2016, the Committee remained would likely call for faster increases in the federal particularly attentive to risks to the U.S. economic funds rate; conversely, if conditions prove weaker, a outlook posed by global economic and financial lower path of the federal funds rate would likely be developments. The Committee noted earlier in the appropriate. year that it was closely monitoring such developments and assessing their implications for the labor The size of the Federal Reserve’s balance sheet market and inflation and for the balance of risks to has remained stable the outlook. The Committee subsequently indicated To help maintain accommodative financial condithat these concerns had attenuated, but that it would tions, the Federal Reserve kept its holdings of longercontinue to closely monitor inflation indicators and term securities at sizable levels over the first half of global economic and financial developments. the year. In particular, the Committee maintained its existing policy of reinvesting principal payments . . . indicated that the stance of monetary policy from its holdings of agency debt and agency was likely to remain accommodative . . . mortgage-backed securities in agency mortgage- The Committee continued to expect that the federal backed securities and of rolling over maturing Treasfunds rate was likely to remain, for some time, below ury securities at auction, and it anticipates doing so levels that were expected to prevail in the longer run, until normalization of the level of the federal funds and that with gradual adjustments in the stance of rate is well under way. monetary policy, economic activity would expand at a moderate pace and labor market indicators would With the continuation of the Committee’s reinvestcontinue to strengthen. The Committee also contin- ment policy, the Federal Reserve’s total assets have ued to expect inflation to remain low in the near term held steady at around $4.5 trillion. Holdings of U.S. but to rise to 2 percent over the medium term as the Treasury securities in the System Open Market transitory effects of past declines in energy and Account (SOMA) have remained at $2.5 trillion, and import prices dissipate and the labor market holdings of agency debt and agency mortgagestrengthens further. backed securities at approximately $1.8 trillion. Consequently, total liabilities on the Federal Reserve’s Consistent with this outlook, in the most recent Sum- balance sheet were mostly unchanged. mary of Economic Projections, which was compiled at the time of the June FOMC meeting, FOMC par- Interest income on the SOMA portfolio has continticipants projected that the appropriate level of the ued to support substantial remittances to the U.S. federal funds rate would be below its longer-run level Treasury Department. The Federal Reserve provided through 2018. $117.1 billion of such distributions to the Treasury in 2015, which included a one-time transfer of . . . and stressed that future changes in the target $19.3 billion made in December 2015 to reduce range for the federal funds rate will depend on aggregate Reserve Bank capital surplus to $10 billion, the economic outlook as informed by incoming as required by the Fixing America’s Surface Transdata portation Act, and a transfer of $24.8 billion during The FOMC continued to emphasize that, in deter- the first quarter of 2016.7 The Federal Reserve’s mining the timing and size of future adjustments to remittances to the Treasury have totaled over the target range for the federal funds rate, the Com- $600 billion on a cumulative basis since 2008. mittee would assess realized and expected economic conditions, as informed by incoming data, relative to The Federal Reserve’s implementation of its objectives of maximum employment and 2 percent monetary policy has continued smoothly inflation. This assessment would take into account a Consistent with the FOMC’s Policy Normalization wide range of information, including measures of Principles and Plans published on September 17, labor market conditions, indicators of inflation pressures and inflation expectations, and readings on 7 See Board of Governors of the Federal Reserve System (2016), financial and international developments. In light of “Federal Reserve System Publishes Annual Financial Statements,” press release, March 18, https://www.federalreserve.gov/ the current shortfall of inflation from 2 percent, the newsevents/press/other/20160317a.htm; and Board of Gover- Committee indicated that it would carefully monitor nors of the Federal Reserve System (2016), Quarterly Report on actual and expected progress toward its inflation Federal Reserve Balance Sheet Developments (Washington: Board of Governors, May), https://www.federalreserve.gov/ goal. Stronger growth or a more rapid increase in monetarypolicy/files/quarterly_balance_sheet_developments_ inflation than the Committee currently anticipates report_201605.pdf.

Monetary Policy and Economic Developments 31 2014, and augmented with additional operational undertaken in amounts limited only by the value of information at the March 2015 FOMC meeting, the Treasury securities held outright in the SOMA that Federal Reserve continued to use interest paid on are available for such operations and by a perreserve balances and employ an overnight reverse counterparty limit of $30 billion per day. The total repurchase agreement (ON RRP) facility to manage take-up at ON RRP operations with the Federal the federal funds rate, and the effective federal funds Reserve generally decreased in the first half of the rate has remained in its target range.8 Specifically, the year and remained at levels below those observed Board of Governors left the interest rate paid on prior to the increase in the target range for the federal required and excess reserve balances unchanged at funds rate in December. The Committee has stated ½ percent, while the FOMC continued to authorize that it intends to phase out the ON RRP facility daily ON RRP operations at an offering rate of when it is no longer needed to help control the fed- ¼ percent. In addition, the Board of Governors took eral funds rate. no action to change the discount rate (the primary credit rate), which remained at 1 percent. The Federal Reserve also continued to test the operational readiness of other policy tools. In particular, The FOMC also continued to indicate that the Fed- two Term Deposit Facility operations were coneral Reserve’s daily ON RRP operations would be ducted in the first half of 2016; seven-day deposits were offered at both operations at a floating rate of 8 See Board of Governors of the Federal Reserve System (2014), 1 basis point over the interest rate on excess reserves. “Federal Reserve Issues FOMC Statement on Policy Normaliza- In these operations, term deposit volumes were tion Principles and Plans,” press release, September 17, www .federalreserve.gov/newsevents/press/monetary/20140917c.htm; broadly in line with those in previous tests with simiand Board of Governors of the Federal Reserve System (2015), lar parameters. In addition, the Open Market Desk “Minutes of the Federal Open Market Committee, March 17– conducted several small–dollar value exercises solely 18, 2015,” press release, April 8, www.federalreserve.gov/ newsevents/press/monetary/20150408a.htm. for the purpose of maintaining operational readiness.

33 3 Financial Stability A stable financial system promotes economic welfare Furthermore, the evolving nature of risks and flucthrough many channels: It facilitates household sav- tuations in financial markets and the broader ings to purchase a home, finance a college education, economy require timely monitoring of conditions in and smooth consumption in response to job loss and domestic and international financial markets, among other adverse developments; it promotes responsible financial institutions, and in the nonfinancial sector risk-taking and economic growth by channeling sav- in order to identify the buildup and propagation of ings to firms to start new businesses and expand vulnerabilities that might require further study or existing businesses; and it spreads risk across inves- policy action. tors. Therefore, the Federal Reserve’s responsibilities for promoting financial stability strongly complement This section discusses key financial stability activities the goals of price stability and full employment. undertaken by the Federal Reserve over 2016, which include monitoring risks to financial stability; pro- The Federal Reserve promotes financial stability moting a perspective on the supervision and regulathrough its supervision and regulation of financial tion of large, complex financial institutions that institutions; cooperation and coordination of activiaccounts for the potential spillovers from distress at ties with domestic agencies directly and through the such institutions to the financial system and broader Financial Stability Oversight Council (FSOC); and economy; and engaging in domestic and international engagement with the global community in monitorcooperation and coordination. Each of these activiing, supervision, and regulation that mitigate the ties is informed by research into financial stability risks and consequences of financial instability domesissues (see box 1 for a summary of some recent tically and abroad. research by Federal Reserve Board staff on financial stability topics). A central tenet of the Federal Reserve’s efforts in promoting financial stability is the adoption of an Some of these activities are also discussed elsewhere approach to supervision and regulation that accounts in this annual report. A broader set of economic and for the stability of the financial system as a whole, in financial developments are discussed in section 2, addition to a traditional, microprudential approach, “Monetary Policy and Economic Developments,” which focuses on the safety and soundness of indiwith the discussion that follows concerning surveilvidual institutions. In particular, the first approach lance of economic and financial developments informs the supervision of systemically important focused on financial stability. The full range of activifinancial institutions (SIFIs), including large bank ties associated with supervision of SIFIs, designated holding companies (BHCs), the U.S. operations of nonbank companies, and designated FMUs is discertain foreign banking organizations (FBOs), and cussed in section 4, “Supervision and Regulation.” financial market utilities (FMUs). In addition, the Federal Reserve serves as a “consolidated supervisor” of nonbank financial companies designated by the Monitoring Risks to FSOC as institutions whose distress or failure could Financial Stability pose a threat to the stability of the U.S. financial system as a whole (see “Financial Stability Oversight Council Activities” later in this section). Enhanced Financial institutions are linked together through a standards for the largest, most systemic firms pro- complex set of relationships, and their condition mote the safety of the overall system and minimize depends on the economic condition of the nonfinanthe regulatory burden on smaller, less systemic cial sector. In turn, the condition of the nonfinancial institutions. sector hinges on the strength of financial institutions’

34 103rd Annual Report | 2016 Box 1. 2016 Research on Financial Stability TheFederalReserve’sapproachtopromotingfinan- —Apaperfindsthatliquidityrequirementscomplecialstabilitybuildsonasubstantialandgrowing mentcapitalregulations,therebyimproving bodyofresearchonthefactorsthatcreatevulner- financialstabilityandpromotinggreaterriskabilitiesinthefinancialsystemandhowprudential takinginproductiveinvestments.2 policiescanmitigatesuchvulnerabilities. • Theinterplayoffinancialstabilityandthemac- Understandingofthearrayoffactorsaffectingfinan- roeconomy cialstabilityisincompleteandevolving.Consequently,FederalReservestaffparticipateactivelyin —Aworkingpaperandajournalarticlestudythe researchonfinancialstabilityandrelatedissues. effectoffinancialvulnerabilitiesandshockson Thisresearchengagesthebroaderresearchcomfuturemacroeconomicperformance.3 munityinpolicyissuesandofteninvolvescollabora- —Aworkingpaperdocumentstheeffectofbanks’ tionwithacademiaandresearchersatotherdomescapitalandliquiditypositionsoncreditgrowth.4 ticandinternationalinstitutions. TheresearcheffortsbyFederalReservestaffreflect States,” International Finance Discussion Papers 1180 (Washtheirattemptstoidentifyandaddressthetopicsof ington: Board of Governors of the Federal Reserve System, concerntotheFederalReserve,andtheviews September 2016), https://www.federalreserve.gov/econresdata/ expressedarethoseoftheindividualauthorsand ifdp/2016/files/ifdp1180.pdf; and William F. Bassett and W. Blake Marsh, “Assessing Targeted Macroprudential Financial RegulanotthoseoftheFederalReserve.Examplesofstaff tion: The Case of the 2006 Commercial Real Estate Guidance researchonfinancialstabilityin2016includethe for Banks,” Journal of Financial Stability (forthcoming). following: 2 SeeGaziI.KaraandS.MehmetOzsoy,“BankRegulationunder Fire Sale Externalities,” Finance and Economics Discussion • Identifyingtheeffectofbankregulation Series 2016-026 (Washington: Board of Governors of the Federal Reserve System, April 2016), https://www.federalreserve —Twoworkingpapersandaforthcomingjournal .gov/econresdata/feds/2016/files/2016026pap.pdf. articledocumenttheeffectofmacroprudential 3 SeeDavidAikman,AndreasLehnert,NellieLiang,andMichele policiesoncreditsupplyintheUnitedStates Modugno, “Financial Vulnerabilities, Macroeconomic Dynamics, and Monetary Policy,” Finance and Economics Discussion andexaminethespilloversofdomesticpruden- Series 2016-055 (Washington: Board of Governors of the Fedtialregulationacrossborders.1 eral Reserve System, July 2016), https://www.federalreserve .gov/econresdata/feds/2016/files/2016055pap.pdf; and Sirio Aramonte, Samuel Rosen, and John W. Schindler, “Assessing 1 SeePaulCalem,RicardoCorrea,andSeungJungLee,“Pru- and Combining Financial Conditions Indexes,” International Jourdential Policies and Their Impact on Credit in the United States,” nal of Central Banking 13 (February 2017): 1–52. International Finance Discussion Papers 1186 (Washington: 4 SeeDavidE.Rappoport,“TheEffectofBanks’FinancialPosi- Board of Governors of the Federal Reserve System, December tion on Credit Growth: Evidence from OECD Countries,” Finance 2016), https://www.federalreserve.gov/econresdata/ifdp/2016/ and Economics Discussion Series 2016-101 (Washington: Board files/ifdp1186.pdf; Jose Berrospide, Ricardo Correa, Linda Gold- of Governors of the Federal Reserve System, December 2016), berg, and Friederike Niepmann, “International Banking and https://www.federalreserve.gov/econresdata/feds/2016/files/ Cross-Border Effects of Regulation: Lessons from the United 2016101pap.pdf. (continuedonnextpage) balance sheets because the nonfinancial sector Each quarter, Federal Reserve Board staff assess a set obtains funding through the financial sector. Moni- of vulnerabilities relevant for financial stability, toring risks to financial stability is aimed at better including but not limited to asset valuations and risk understanding these complex linkages and has been appetite, leverage in the financial system, liquidity an important part of Federal Reserve efforts in pur- risks and maturity transformation by the financial suit of overall economic stability. system, and borrowing by the nonfinancial sector (households and nonfinancial businesses). These In order to understand the interaction between the monitoring efforts inform internal discussions confinancial and nonfinancial sectors and develop cerning policies to promote financial stability, such as appropriate policy responses, the Federal Reserve supervision and regulatory policies as well as monmaintains a flexible, forward-looking financial stabil- etary policy. They also inform Federal Reserve interity monitoring program to help inform policymakers actions with broader monitoring efforts, like those by of the financial system’s vulnerabilities to a wide the FSOC and the Financial Stability Board (FSB). range of potential adverse shocks. Such a monitoring program is a critical part of a broader program in the Asset Valuations and Risk Appetite Federal Reserve System to assess and address vulner- Overvalued assets constitute a source of fundamental abilities in the U.S. financial system. vulnerability because the unwinding of high prices

Financial Stability 35 Box 1. 2016 Research on Financial Stability—continued —Ajournalarticleexaminesthenegativeeffectof —Ajournalarticleandaworkingpaperdevelop therecentfinancialcrisisonconsumercredit newmethodsformeasuringandmonitoringsyssupplyandtherealeconomy.5 temicrisk.9 —Anarticlereviewstheprogressinmacroeco- • Assetmanagers,financialstability,andmarket nomicmodelingformacroprudentialpolicy liquidity analysis.6 —Tworesearchpapersdocumenttheeffectof • Measuringspilloversandsystemicrisk institutionalinvestorbehavioronpricesofcorporatebonds.10 —Ajournalarticledocumentshowlocaleconomic shocksspillovertotheotherregionsofthe —Aworkingpapershowsthatmarketliquidityof economythroughbanks’internalcapitalmar- corporatebondsthatweredowngradeddeteriokets.7 ratedinrecentyears.11 —Aworkingpapershowsempiricallyhowlow volatilityinducesrisk-taking,whichinturn increasestheprobabilityofabankingcrisis.8 9 SeeLamontBlack,RicardoCorrea,XinHuang,andHaoZhou, “The Systemic Risk of European Banks during the Financial and Sovereign Debt Crises,” Journal of Banking and Finance 63 (February 2016): 107–25; and Juan M. Londono, “Bad Bad Con- 5 SeeRodneyRamcharan,StéphaneVerani,andSkanderJ.Van tagion,” International Finance Discussion Papers 1178 (Washdenheuvel,“FromWallStreettoMainStreet:TheImpactofthe ington: Board of Governors of the Federal Reserve System, FinancialCrisisonConsumerCreditSupply,”JournalofFinance September 2016), https://www.federalreserve.gov/econresdata/ 71(June2016):1323–56. ifdp/2016/files/ifdp1178.pdf. 6 SeeMichaelT.Kiley,“MacroeconomicModelingofFinancial 10SeeAyelenBanegas,GabrielMontes-Rojas,andLucasSiga, Frictions for Macroprudential Policymaking: A Review of “Mutual Fund Flows, Monetary Policy and Financial Stability,” Pressing Challenges,” FEDS Notes (Washington: Board of Finance and Economics Discussion Series 2016-071 Governors of the Federal Reserve System, May 26, 2016), (Washington: Board of Governors of the Federal Reserve https://www.federalreserve.gov/econresdata/notes/feds-notes/ System, September 2016), https://www.federalreserve.gov/ 2016/macroeconomic-modeling-of-financial-frictions-for- econresdata/feds/2016/files/2016071pap.pdf; and Fang Cai, macroprudential-policymaking-a-review-of-pressing-challenges- Song Han, Dan Li, and Yi Li, “Institutional Herding and Its 20160526.html. Price Impact: Evidence from the Corporate Bond Market,” 7 SeeJoseM.Berrospide,LamontK.Black,andWilliamR. Finance and Economics Discussion Series 2016-091 Keeton,“TheCross-MarketSpilloverofEconomicShocks (Washington: Board of Governors of the Federal Reserve throughMultimarketBanks,”JournalofMoney,CreditandBank- System, November 2016), https://www.federalreserve.gov/ ing48(August2016):957–88. econresdata/feds/2016/files/2016091pap.pdf. 8 SeeJonDanielsson,MarcelaValenzuela,andIlknurZer, 11SeeJackBao,MaureenO’Hara,andAlexZhou,“TheVolcker “Learning from History: Volatility and Financial Crises,” Finance Rule and Market-Making in Times of Stress,” Finance and Ecoand Economics Discussion Series 2016-093 (Washington: Board nomics Discussion Series 2016-102 (Washington: Board of Govof Governors of the Federal Reserve System, November 2016), ernors of the Federal Reserve System, December 2016), https:// https://www.federalreserve.gov/econresdata/feds/2016/files/ www.federalreserve.gov/econresdata/feds/2016/files/2016102pap 2016093pap.pdf. .pdf. can be destabilizing, especially if the assets are widely tite. In equity markets, valuations rose, especially near held and the values are supported by excessive lever- year-end. The forward price-to-earnings ratio widage, maturity transformation, or risk opacity. More- ened considerably, particularly for small firms (figover, stretched asset valuations may be an indicator ure 1). At the same time, estimates of the equity risk of a broader buildup in risk-taking. Nonetheless, it is premium—for example, the gap between the expected very difficult to judge whether an asset price is over- return on equity and the long-term Treasury yield valued relative to fundamentals. As a result, analysis (adjusted for inflation expectations)—declined, and typically includes a broad range of possible valuation such measures no longer suggest that investors are metrics and tracks developments in areas in which demanding an unusually high premium to bear the asset prices are rising particularly rapidly, into which risk of holding equities, in contrast to the picture investor flows have been considerable, or where vola- seen almost continuously since the financial crisis. tility has been at unusually low or high levels. Moreover, both realized and expected volatility in equity markets fell to low levels over the course of Across markets, valuation pressures were moderate 2016, and the implied volatility of the S&P 500 most of the year but moved up somewhat near the index—the VIX—fell to the lower end of its historiend of the year, when pressure increased in some cal range by year-end (figure 2). The low level of areas and in several indicators of investors’ risk appe- expected volatility in financial markets in late 2016

36 103rd Annual Report | 2016 the corporate bond market, spreads of high-yield and Figure 1. Forward price-to-earnings ratio, 1983–2016 investment-grade bonds relative to comparablematurity Treasury yields, a gauge of the compensa- Ratio (log scale) 40 tion that investors demand for exposure to the credit Monthly Small-cap 2000 firms 35 risk of corporate borrowers, narrowed over the year, S&P 500 firms 30 ending near the lowest level since 2013 (figure 3). 25 Dec. 20 Historical median Issuance of high-yield corporate bonds edged down 15 in the second half of 2016, and gross issuance of lev- Historical median eraged loans was strong most of the year but declined in the last quarter (figure 4). As a result, 10 growth in risky debt outstanding in the fourth quarter of the year was close to the lowest level in recent years. However, the notable decrease in speculativegrade spreads in November and December suggests 5 1986 1991 1996 2001 2006 2011 2016 that the decline in issuance likely does not reflect a tightening of financial conditions. Note: The data extend through December 2016. The data for small-cap 2000 firms start in October 1984. Based on expected earnings for 12 months ahead. Source: Staff calculations using data from Thomson Reuters IBES. An area of growing valuation pressures over the past year was commercial real estate (CRE), with property prices continuing to outpace rents and with capital- Figure 2. Implied volatility index and BBD economic policy ization rates decreasing to historically low levels (figuncertainty index, 2000–16 ure 5). While CRE debt remained modest relative to the overall size of the economy and the tightening in Percent Index 80 350 bank lending standards for CRE loans in the second Monthly average BBD index (right scale) 70 Implied volatility index (VIX) (left scale) 300 half of 2016 may result in some reduction in CRE lending, some smaller banks may be vulnerable to a 60 250 sizable decline in CRE prices. In addition, residential 50 home prices continued to rise briskly in 2016, 200 40 although price increases nationally in 2016 were not 150 outsized relative to improvements in fundamentals or 30 100 20 10 Dec. 50 Figure 3. Corporate bond spreads to similar-maturity Treasury securities, 1998–2017 0 0 2001 2004 2007 2010 2013 2016 Percentage points Percentage points 15 22 Note: The data extend through December 2016. The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research. Monthly average 20 S R o . u B r a c k e e : r C , N hi i c c a h g o o la s B o B a lo rd o m Op , a ti n o d n s S E te x v c e h n a n J g . e D a d v a i t s a , “ v M ia e B a l s o u o r m in b g e E rg c o P n e o r m S i e c c P u o ri l t i y c ; y S cott 12 1 1 0 0 - - y y e e a a r r t h r i i g p h le - - y B ie ( ld le f ( t r i s g c h a t l s e c ) ale) 18 Uncertainty,” Quarterly Journal of Economics 131 (November 2016): 1593–1636. 16 14 9 12 contrasted with some other measures of economic 10 uncertainty late in the year, such as the Baker, 6 8 Bloom, and Davis economic policy uncertainty Feb. index, which remained elevated in late 2016.1 6 3 4 2 Throughout 2016, yields on Treasury securities as well as term premiums remained below historical 0 0 1999 2002 2005 2008 2011 2014 2017 averages, although both rose near year-end as market Note: The data extend through February 2017. Spreads over 10-year Treasury expectations about future growth shifted higher. In yield. Source: Staff estimates based on corporate bond data from BofA Merrill Lynch 1 See Scott R. Baker, Nicholas Bloom, and Steven J. Davis, “Mea- Global Research (used with permission), computed using Nelson-Siegel yield curve model; semiannually compounded 10-year Treasury yield (par) estimated by suring Economic Policy Uncertainty,” Quarterly Journal of Eco- Svensson term structure model. nomics 131 (November 2016): 1593–1636.

Financial Stability 37 Figure 4. Leveraged loan and high-yield bond issuance, Figure 6. Median price-to-rent ratio, 2000–16 2005–16 Jan. 2010 = 100 200 Four-quarter percent change Billions of dollars (annualized) Monthly 35 1600 Total outstanding (left scale) United States 180 30 High-yield bonds (right scale) 1400 Median 160 25 Leveraged loans (right scale) 1200 Interquartile range 20 Q2Q3 1000 140 Dec. 15 800 120 Q1 Q4 10 600 100 5 400 80 0 200 -5 0 60 2001 2004 2007 2010 2013 2016 2007 2010 2013 2016 Note: The data extend through December 2016. Percentiles are based on 25 Note: Total outstanding is quarterly data, which start in 2005:Q1. Data include metropolitan statistical areas. bonds and loans to both financial and nonfinancial companies, as well as unrated bonds and loans. For LCD, S&P and its third-party information providers expressly Source: For house prices, CoreLogic; for rent data, Bureau of Labor Statistics. 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 information. Further, the information provided herein does not constitute, and should not be used Leverage in the Financial System as, advice regarding the suitability of securities for investment purposes or any other type of investment advice. Source: Standard & Poor’s Leveraged Commentary & Data (LCD); Mergent Corpo- The financial strength of the banking sector continrate Fixed Income. ued to improve in 2016, and stronger capital positions at domestic banking organizations have contributed to the improved resilience of the U.S. finanearlier periods of rapid price gains. For example, cial system. Regulatory capital remained at house prices relative to rents—one measure of valuahistorically high levels for most large domestic banks. tions—rose moderately in 2016, and they remained The ratio of Tier 1 common equity to risk-weighted well within a typical range and far below the levels assets stayed near 12 percent, on average, for BHCs seen in the past decade across much of the country in 2016 (figure 7). Moreover, the leverage ratio, which (figure 6). looks at common equity relative to total assets without adjusting for risk, also remained at levels substantially above pre-crisis norms. Finally, all 33 firms Figure 5. CRE capitalization rate at origin, 2002–16 participating in the Federal Reserve’s supervisory stress tests for 2016 were able to maintain capital Percentage points 11 ratios above required minimums to absorb losses 3-month moving average Industrial from a severe macroeconomic shock.2 10 Office Retail In addition, bank equity prices increased signifi- 9 Multifamily cantly in late 2016. However, the equity prices of 8 many of the largest foreign banks remained Dec. depressed, reflecting investors’ heightened concerns 7 about the need for those firms to raise outside equity, meet unresolved legal exposures, and adapt their 6 business models to the post-crisis environment. On 5 December 23, the Department of Justice (DOJ) announced settlement agreements with Deutsche 4 2004 2007 2010 2013 2016 2 The 2016 supervisory stress-test methodology and results are Note: The data extend through December 2016. CRE is commercial real estate. available on the Board’s website at https://www.federalreserve .gov/bankinforeg/stress-tests/2016-supervisory-stress-test-results Source: Real Capital Analytics. .htm.

38 103rd Annual Report | 2016 Figure 7. Regulatory capital ratios, all BHCs, 1998–2016 Figure 8. Money market mutual funds, AUM, 2015–16 Percent Billions of dollars 22 4000 Quarterly, s.a. Total (Tier 1 + Tier 2) Weekly Treasury Common equity Tier 1 ratio 20 Govt./agency 3500 Leverage ratio 18 Municipal Prime 3000 16 Dec. 2500 14 Q4 12 2000 10 1500 8 1000 6 500 4 1998 2001 2004 2007 2010 2013 2016 0 Dec. Apr. Aug. Dec. Note: The data extend through 2016:Q4. Prior to 2014:Q1, the numerator of the common equity Tier 1 ratio is Tier 1 common capital. Beginning in 2014:Q1 for 2015 2016 advanced-approaches bank holding companies (BHCs) and in 2015:Q1 for all Note: The data extend through December 2016. AUM is assets under other BHCs, the numerator is common equity Tier 1 capital. The data for the commanagement. mon equity Tier 1 ratio start in 2001:Q1. An advanced-approaches BHC is defined as a large internationally active banking organization, generally with at least Source: iMoneyNet. $250 billion in total consolidated assets or at least $10 billion in total on-balancesheet foreign exposure. The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research. Source: Federal Reserve Board, FR Y-9C, Consolidated Financial Statements for money market mutual funds (also referred to as Holding Companies. money market funds, or MMFs). In October 2016, regulations from the Securities and Exchange Commission (SEC) that required prime institutional Bank and Credit Suisse over the mis-selling of residential mortgage-backed securities.3 The DOJ still MMFs to adopt a floating net asset value (NAV), along with other changes, came into effect.4 Investors has pending cases with Barclays and the Royal Bank in such prime funds appear to have placed a high of Scotland. value on the funds’ previous feature of maintaining the NAV at par, and the prospect of the regulatory Moreover, financial institutions outside the banking changes led to a large decline of about $1 trillion in sector also do not appear to have taken on additional assets under management (AUM) at prime MMFs leverage in recent years. Insurance companies appear through October of last year, with most of the assets adequately capitalized relative to prudential stanshifting to MMFs that invest in governmentdards. Available indicators of gross leverage at hedge guaranteed assets. Money markets functioned funds, such as gross notional leverage, were little smoothly ahead of the mid-October 2016 reform changed in 2016. implementation deadline, and AUM stabilized in the last couple of months of the year (figure 8). Liquidity Risks and Maturity Transformation by the Financial System The new SEC regulations’ floating NAV feature has likely reduced the first-mover advantage inherent in Vulnerabilities associated with liquidity risks and these funds, lowering their run risk. That said, the maturity transformation continued to fall in 2016. configuration of short-term funding markets is still The most significant shifts over the year occurred at evolving. For example, total commercial paper (CP) and certificates of deposit (CDs) held by MMFs fell 3 For more details, see Deutsche Bank, “Deutsche Bank Agrees more than the outstanding levels of CP and CDs, on Settlement in Principle with the DOJ regarding RMBS,” press release, December 23, 2016, https://www.db.com/ indicating that other investors now hold these assets. newsroom_news/2016/medien/deutsche-bank-agrees-onsettlement-in-principle-with-the-doj-regarding-rmbs-en-11790 .htm. See also Credit Suisse, “Credit Suisse Reaches Settlement in Principle with U.S. Department of Justice regarding Legacy 4 For additional information, see Securities and Exchange Com- Residential Mortgage-Backed Securities Matter,” press release, mission, “Money Market Reform; Amendments to Form PF,” December 23, 2016, https://www.credit-suisse.com/us/en/about- final rule (Release No. 33-9616), July 23, 2014, https://www.sec us/media/news/articles/media-releases/2016/12/en/us-issue.html. .gov/rules/final/2014/33-9616.pdf.

Financial Stability 39 Apart from developments at prime funds, the stock tail spending, which could amplify the effects of of private, short-term, money-like instruments— financial shocks. In turn, losses among households which form funding intermediation chains that are and businesses can lead to mounting losses at finanvulnerable to runs and include prime MMFs, cial institutions, creating an adverse feedback loop in government-only MMFs, and other short-term which weakness among households, nonfinancial instruments—has continued to trend down relative to businesses, and financial institutions causes further gross domestic product (GDP) and total nonfinancial declines in income and accelerated financial losses, debt, maintaining a tendency toward less reliance on potentially leading to financial instability and a sharp short-term funding across the financial system. contraction in economic activity. Within the banking sector, the reliance of large BHCs on short-term funding remained subdued, and Vulnerabilities associated with nonfinancial-sector their holdings of liquid assets continued to be high leverage remained moderate in 2016. Nominal private by historical standards. In addition, securitization, nonfinancial-sector credit grew about 4½ percent which was associated with maturity transformation over 2016, a shade faster than nominal GDP, leaving as well as lax lending standards and rapid credit the private nonfinancial-sector credit-to-GDP ratio growth in the few years prior to the financial crisis, elevated but stable at approximately 150 percent, a stayed relatively stable by historical standards and level similar to that in the mid-2000s (figure 9). did not appear to be funding rapid credit growth in Household debt growth was modest through the 2016. fourth quarter, and the debt-to-income ratio for households continued to inch down over the past few Finally, for open-end mutual funds that hold less- years. Aggregate borrowing relative to income in the liquid assets and that could face elevated redemp- household sector has declined significantly from its tions, liquidity transformation continued to pose a peak, and recent borrowing remains skewed toward moderate financial stability risk, as large outflows low-risk households. from these funds in market downturns could exacerbate volatility in financial markets. Leverage among the riskier corporate borrowers, however, has stayed near or at multidecade highs, Borrowing by the Nonfinancial Sector particularly for speculative-grade and unrated firms, although the growth of risky corporate debt has Excessive borrowing by the private nonfinancial sec- decelerated considerably over recent quarters (figtor has been an important contributor to past finan- ure 10). Despite high leverage, interest expense ratios cial crises. Highly indebted households and nonfinan- were low by historical standards, even among highercial businesses may be vulnerable to negative shocks risk firms, as were measures of expected default to incomes or asset values and may be forced to cur- based on accounting and stock return data, especially Figure 9. Nonfinancial-sector credit-to-GDP ratio, 1981–2016 Percent change Ratio 20 2.0 Quarterly Year-over-year percent change (left scale) Business (right scale) 15 Household (right scale) 1.5 10 5 1.0 Q4 0 0.5 -5 -10 0.0 1986 1992 1998 2004 2010 2016 Note: The data extend through 2016:Q4. The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research. GDP is gross domestic product. Source: Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States”; Bureau of Economic Analysis, national income and product accounts; Board staff calculations.

40 103rd Annual Report | 2016 • examining the loss-absorbing capacity of institu- Figure 10. Gross leverage for speculative-grade and tions under a common macroeconomic scenario investment-grade firms, 2000–16 that has features similar to the strains experienced Percent of assets in a severe recession and which includes, as appro- 50 Quarterly priate, identified salient risks Speculative-grade 45 Investment-grade • conducting a simultaneous exercise across large 40 institutions to understand the potential for correlated exposures 35 Q4 • considering the effects of counterparty distress on 30 the largest, most interconnected firms 25 The results from the 2016 supervisory stress tests 20 conducted as part of the Dodd-Frank Act stress tests 15 (DFAST) and CCAR were released in June 2016.6 2001 2004 2007 2010 2013 2016 The DFAST and CCAR results suggest that all of Note: The data extend through 2016:Q4. Gross leverage is the ratio of the book the firms evaluated have sufficient capital to remain value of total debt to the book value of total assets. above minimum requirements through a severely Source: Standard & Poor’s Compustat. adverse macroeconomic scenario. In addition, they continue to build capital. The severely adverse sceoutside the oil sector. Nonetheless, high leverage nario featured a more severe downturn in the U.S. could leave some parts of the corporate sector vul- economy relative to the CCAR 2015 scenario, includnerable to difficulties should adverse shocks ing short-term U.S. Treasury rates that fell below zero materialize. and a larger increase in unemployment. This increase in severity reflected the Board’s scenario design framework for stress testing, which includes counter- Financial Stability and the cyclical elements. The international part of the sce- Supervision and Regulation of nario featured severe recessions in the euro area, the Large, Complex Financial Institutions United Kingdom, and Japan and a mild recession in developing Asia. Large, complex financial institutions interact with In addition, the Federal Reserve Board completed an financial markets and the broader economy in a extensive review of its statutory stress-test and manner that may—during times of stress and in the CCAR programs and made some related modificaabsence of an appropriate regulatory framework and tions to the rules associated with those programs for effective supervision—lead to financial instability.5 the 2017 cycle.7 Among other changes, the Board removed certain large, noncomplex firms from the Key Supervisory Activities qualitative assessment of the CCAR, reducing significant burden on these firms and focusing the One essential element of enhanced supervision of large banking organizations is the stress-testing process, which includes the stress tests mandated by the Dodd-Frank Wall Street Reform and Consumer Pro- 6 For additional information on DFAST, see Board of Governors tection Act of 2010 (Dodd-Frank Act) and the Comof the Federal Reserve System, “Federal Reserve Releases prehensive Capital Analysis and Review (CCAR). In Results of Supervisory Bank Stress Tests,” press release, addition to fostering the safety and soundness of the June 23, 2016, https://www.federalreserve.gov/newsevents/ pressreleases/bcreg20160623a.htm. For more details on CCAR, participating institutions, stress tests embed elements see Board of Governors of the Federal Reserve System, “Fedfocused on the stability of the financial system as a eral Reserve Releases Results of Comprehensive Capital whole by incorporating the following: Analysis and Review (CCAR),” press release, June 29, 2016, https://www.federalreserve.gov/newsevents/pressreleases/ bcreg20160629a.htm. 5 For more on the Federal Reserve’s supervision and regulation of 7 See Daniel K. Tarullo, “Next Steps in the Evolution of Stress large institutions, especially related to the integration of the Testing,” speech delivered at the Yale University School of microprudential objective of safety and soundness of individual Management Leaders Forum, New Haven, Conn., Septeminstitutions with the macroprudential efforts outlined later in ber 26, 2016, https://www.federalreserve.gov/newsevents/speech/ this section, see section 4, “Supervision and Regulation.” tarullo20160926a.htm.

Financial Stability 41 qualitative review in CCAR on the largest, most financial-sector leverage were at the lower ends of complex financial institutions.8 their historical ranges. Moreover, the Board, together with the other federal Second, the Board also took several further regulabanking agencies, issued an advance notice of pro- tory steps as part of its effort to improve the resilposed rulemaking inviting public comment on a ience of financial institutions and overall financial set of potential enhanced cybersecurity risk- stability. For example, the Board finalized a rule that management and resilience standards that would would impose total loss-absorbing capacity and longapply not only to depository institutions and regu- term debt requirements on U.S. global systemically lated holding companies with over $50 billion in important bank holding companies (G-SIBs) and on assets, but also to certain financial market infrastruc- the U.S. operations of certain foreign G-SIBs.11 The ture companies.9 The standards would be tiered, with final rule would require each covered firm to mainan additional set of higher standards for systems of tain a minimum amount of unsecured long-term debt covered entities that provide key functionality to the that could be converted into equity in a possible resofinancial sector. lution of the firm, thereby both recapitalizing the firm without putting public money at risk and dimin- Key Regulatory Activities ishing the threat that its failure would pose to financial stability. The rule is an important step in address- Over the course of 2016, the Federal Reserve took a ing the perception that certain institutions are “too number of steps to continue improving the resilience big to fail.” Under the final rule, U.S. G-SIBs would of financial institutions and the overall financial need to raise an additional $70 billion by Janusystem. This section summarizes steps that bear most ary 2019. directly on financial stability. First, last fall, the Federal Reserve Board finalized its framework for setting Third, the Board and the Federal Deposit Insurance the countercyclical capital buffer (CCyB) and later Corporation (FDIC) continued to actively engage in voted to affirm the CCyB amount at 0 percent.10 The the resolution-planning process with the largest buffer is designed to increase the resilience of the banks. As part of that process, the Board and the financial system by raising capital requirements on FDIC announced that Bank of America, BNY Melinternationally active banking organizations when lon, JPMorgan Chase, and State Street adequately there is an elevated risk of above-normal losses in the remediated deficiencies in their 2015 resolution plans. future. In forming its view about the appropriate size The two agencies also announced that Wells Fargo of the U.S. CCyB, the Board intends to monitor a did not adequately remedy all of its deficiencies and wide range of financial and economic indicators and will be subject to restrictions on certain activities consider their implications for financial system vul- until the deficiencies are remedied.12 nerabilities, including but not limited to asset valuation pressures, risk appetite, leverage in the financial The enhanced prudential standards, together with and nonfinancial sectors, and maturity and liquidity stress testing and other regulatory safeguards, help transformation in the financial sector. The decision ensure that large U.S. BHCs and FBOs operating in to maintain the CCyB at 0 percent in part reflected the United States have robust levels of capital and an assessment that vulnerabilities associated with liquidity as well as strong risk management. Together, these efforts not only help make certain 8 See Board of Governors of the Federal Reserve System, “Fed- that these firms are financially sound individually, eral Reserve Board Announces Finalized Stress Testing Rules but also limit the risk that financial distress at these Removing Noncomplex Firms from Qualitative Aspect of firms could cause negative spillovers to the financial CCAR Effective for 2017,” press release, January 30, 2017, https://www.federalreserve.gov/newsevents/press/bcreg/ 20170130a.htm. 11 See Board of Governors of the Federal Reserve System, “Fed- 9 See Board of Governors of the Federal Reserve System, Office eral Reserve Board Adopts Final Rule to Strengthen the Ability of the Comptroller of the Currency, and Federal Deposit Insur- of Government Authorities to Resolve in Orderly Way Largest ance Corporation, “Agencies Issue Advanced Notice of Pro- Domestic and Foreign Banks Operating in the United States,” posed Rulemaking on Enhanced Cyber Risk Management Stan- press release, December 15, 2016, https://www.federalreserve dards,” joint press release, October 19, 2016, https://www .gov/newsevents/press/bcreg/20161215a.htm. .federalreserve.gov/newsevents/press/bcreg/20161019a.htm. 12 See Board of Governors of the Federal Reserve System and 10 See Board of Governors of the Federal Reserve System, “Fed- Federal Deposit Insurance Corporation, “Agencies Announce eral Reserve Board Announces It Has Voted to Affirm Counter- Determinations on October Resolution Plan Submissions of cyclical Capital Buffer (CCyB) at Current Level of 0 Percent,” Five Systemically Important Domestic Banking Institutions,” press release, October 24, 2016, https://www.federalreserve.gov/ joint press release, December 13, 2016, https://www newsevents/press/bcreg/20161024a.htm. .federalreserve.gov/newsevents/press/bcreg/20161213a.htm.

42 103rd Annual Report | 2016 sector and the broader economy. Improvements in lyzes the implications of those risks for financial staresolvability will mitigate adverse effects from percep- bility, and identifies steps that can be taken to mititions of “too big to fail” and contribute to more gate those risks. In addition, when an institution is orderly conditions in the financial system if institu- designated by the FSOC as systemically important, tions face strains. For more information on recovery the Federal Reserve assumes responsibility for superand resolution-planning activity, see section 4, vising that institution. “Supervision and Regulation.” In 2016, the Federal Reserve worked, in conjunction with other FSOC participants, on the following Domestic and International major initiatives: Cooperation and Coordination • Review of asset management products and activities. After reviewing comment letters in response to its The Federal Reserve cooperated and coordinated request for public comments on asset management with both domestic and international institutions in industry risks, the FSOC released a public state- 2016 to promote financial stability. ment on April 18, 2016, providing an update on its review of potential risks to U.S. financial stability Financial Stability Oversight Council that may arise from asset management products Activities and activities.13 The statement detailed the FSOC’s views regarding potential financial stability risks As mandated by the Dodd-Frank Act, the FSOC was and next steps to respond to these potential risks. created in 2010 and is chaired by the Treasury Secre- The evaluation of risks focused on the following tary (box 2). It establishes an institutional framework areas: (1) liquidity and redemption, (2) leverage, for identifying and responding to sources of systemic (3) operational functions, (4) securities lending, and risk. The Federal Reserve Chairman is a member of (5) resolvability and transition planning. the FSOC. Through collaborative participation in the FSOC, U.S. financial regulators monitor not only • Creation of a hedge fund working group. The April institutions, but also the financial system as a whole. statement’s review of the use of leverage in the The Federal Reserve, in conjunction with other par- hedge fund industry suggested a need for further ticipants, assists in monitoring financial risks, ana- analysis of hedge fund activities, and, as a result, the FSOC established a working group to gather and analyze regulatory and supervisory data on Box 2. Regular Reporting on hedge funds. As a working group member, the Fed- Financial Stability Oversight Council eral Reserve has continued to participate in the Activities ongoing analysis of potential risks to the financial system posed by the hedge fund industry. The Federal Reserve cooperated and coordinated with domestic agencies in 2016 to promote finan- • Nonbank designations process. On June 29, 2016, cial stability, including through the activities of the the FSOC voted to rescind its determination that Financial Stability Oversight Council (FSOC). material financial distress at GE Capital Global Meeting minutes. In 2016, the FSOC met on a Holdings could pose a threat to U.S. financial stanearly monthly basis, and the minutes for each bility, and that the company should be subject to meeting are available on the U.S. Treasury website supervision by the Federal Reserve and enhanced (https://www.treasury.gov/initiatives/fsoc/council- prudential standards.14 The FSOC made the decimeetings/Pages/meeting-minutes.aspx). sion that GE Capital’s potential to pose material FSOC annual report. On June 21, 2016, the FSOC financial distress to U.S. financial stability was subreleased its sixth annual report (https://www stantially reduced after the company had executed .treasury.gov/initiatives/fsoc/studies-reports/ Documents/FSOC%202016%20Annual%20Report .pdf), which includes a review of key developments 13 For more details, see U.S. Department of the Treasury, “Finanthrough the beginning of 2016 and a set of recom- cial Stability Oversight Council Releases Statement on Review mended actions that could be taken to ensure of Asset Management Products and Activities,” press release, financial stability and to mitigate systemic risks that April 18, 2016, https://www.treasury.gov/press-center/pressreleases/Pages/jl0431.aspx. affect the economy. 14 See U.S. Department of the Treasury, “Financial Stability For more on the FSOC, see https://www.treasury Oversight Council Announces Rescission of Nonbank Financial .gov/initiatives/fsoc/Pages/home.aspx. Company Designation,” press release, June 29, 2016, https:// www.treasury.gov/press-center/press-releases/Pages/jl0503.aspx.

Financial Stability 43 significant divestitures, transformed its funding In 2016, the Federal Reserve continued its active parmodel, and implemented a corporate reorganiza- ticipation in the FSB. The FSB is engaged in several tion since the FSOC’s determination in July 2013. issues, including monitoring of shadow banking activities, coordination of regulatory standards for Financial Stability Board Activities global systemically important financial institutions, asset management, fintech (emerging financial tech- The Federal Reserve participates in international nologies), evaluating the effects of reforms, and bodies, such as the FSB, given the interconnected development of effective resolution regimes for large global financial system and the global activities of financial institutions. In June, the FSB released for large U.S. financial institutions. The FSB is an inter- consultation a set of proposed policy recommendanational body that monitors the global financial tions to address vulnerabilities from asset managesystem and promotes financial stability through the ment activities. adoption of sound policies across countries. The Federal Reserve participates in the FSB, along with the SEC and the U.S. Treasury.

45 4 Supervision and Regulation The Federal Reserve has supervisory and regulatory unprofitable BHCs was 2 percent, the same as 2015. authority over a variety of financial institutions and However, assets from unprofitable BHCs increased to activities with the goal of promoting a safe, sound, 3.1 percent in 2016, up from 2.9 percent in 2015. Proand stable financial system that supports the growth visions increased to 0.26 percent of average assets, up and stability of the U.S. economy. As described in from 0.23 percent in 2015. They remained in line with this report, the Federal Reserve carries out its super- historical lows. Nonperforming assets continued to visory and regulatory responsibilities and supporting decline, but remained elevated relative to historical functions primarily by levels at 2.4 percent of loans and foreclosed assets, down from 2.8 percent as of year-end 2015. (See • promoting the safety and soundness of individual “Bank Holding Companies” later in this section.) financial institutions supervised by the Federal Reserve; Performance of state member banks. The perfor- • taking a macroprudential approach to the supervi- mance at state member banks in 2016 improved from sion of the largest, most systemically important 2015. In aggregate, state member banks reported financial institutions (SIFIs);1 profits of $24.4 billion for 2016, up 11.7 percent from $21.8 billion in 2015. Return-on-assets improved • developing supervisory policy (rulemakings, superwhile return-on-equity dipped slightly, but both vision and regulation letters (SR letters), policy measures continue to lag pre-crisis levels. The percent statements, and guidance); of profitable state member banks decreased slightly • identifying requirements and setting priorities for but remains well above pre-crisis levels as 2.7 percent supervisory information technology initiatives; of firms reported a loss for the year, up from 2.4 percent in 2015. Problem loans stayed flat in 2016 at • ensuring ongoing staff development to meet evolv- 1.6 percent, in line with pre-crisis levels, ending a sixing supervisory responsibilities; year declining trend. However, problem loans • regulating the U.S. banking and financial structure increased sharply in state member bank commercial by acting on a variety of proposals; and & industrial and agricultural loan portfolios due to increases in nonaccrual loans. Provisions (as a per- • enforcing other laws and regulations. cent of revenue) increased for a second consecutive year to 3.5 percent after falling five consecutive years 2016 Developments from a high of 32.4 percent in 2009 to a low of 2.2 percent in 2014. The risk-based capital ratios for state member banks increased very slightly from During 2016, the U.S. banking system and financial 14.51 percent in 2015 to 14.52 percent in 2016, markets continued to improve following their recovmatching a similar increase in the percent of banks ery from the financial crisis that started in mid-2007. deemed well capitalized under prompt corrective action standards to 99.6 percent. In 2016, one state Performance of bank holding companies. An improvemember bank, with $66.3 million in assets, failed. ment in bank holding companies’ (BHCs) perfor- (See “State Member Banks” later in this section.) mance was evident during 2016. U.S. BHCs, in aggregate, reported earnings reaching an all-time high of Enhanced prudential standards. The Dodd-Frank $162 billion for 2016, up from $158 billion for the Wall Street Reform and Consumer Protection Act of year ending December 31, 2015. The proportion of 2010 (Dodd-Frank Act) directs the Board, in part, to establish prudential standards in order to prevent or 1 For a detailed discussion of macroprudential supervision and regulation, refer to section 3, “Financial Stability.” mitigate risks to U.S. financial stability that could

46 103rd Annual Report | 2016 Box 1. Regulation of Global Systemically Important Banking Institutions In 2016, the Board continued to advance its regula- proceeding. The TLAC final rule constitutes an importory and supervisory program for G-SIBs, the bank- tant step forward in addressing the “too big to fail” ing firms whose failure would cause the most harm to problem by substantially reducing the harm a G-SIB’s the U.S. financial system and the broader economy. failure would do to U.S. financial stability. The Board’s rules for G-SIBs pursue two complementary goals: reducing the probability that a G-SIB Resolution planning will fail, and reducing the harm that a G-SIB’s failure The Federal Reserve, in collaboration with the FDIC, would cause the financial system and economy. The has continued to work with large financial institutions Board had two significant accomplishments in 2016 to develop a range of recovery and resolution stratein furtherance of that latter goal. First, the Board gies in the event of their distress or failure. In finalized its long-term debt and TLAC rule. Second, April 2016, the FDIC and the Board jointly determined together with the Federal Deposit Insurance Corporathat the 2015 resolution plans of five G-SIBs were not tion (FDIC), the Board issued public feedback to credible or would not facilitate an orderly resolution domestic G-SIBs on their resolution plans, as well as under the U.S. Bankruptcy Code, and issued notices guidance for incorporation into the next full plan of deficiencies detailing the actions needed by Octosubmission. ber 1, 2016, to avoid restrictions on activities. Simultaneously, the agencies issued a white paper, Resolu- TLAC final rule tion Plan Assessment Framework and Firm Determi- In December 2016, the Board issued a final rule to nations (2016), explaining the determinations and require the top-tier BHCs of U.S. G-SIBs and the processes for reviewing the plans as well as new U.S. intermediate holding companies of foreign guidance for the July 2017 submissions of all firms G-SIBs to maintain minimum levels of unsecured, (www.federalreserve.gov/newsevents/ long-term debt and TLAC, which is made up of both pressreleases/files/bcreg20160413a2.pdf and www capital and long-term debt. The final rule also prohib- .federalreserve.gov/newsevents/pressreleases/files/ its covered holding companies (but not their operat- bcreg20160413a1.pdf). The guidance sets forth a ing subsidiaries) from engaging in certain financial number of key vulnerabilities in resolution (for activities, such as short-term debt issuance and example, capital, liquidity, governance mechanisms, derivatives contracts with third parties, which would operational continuity, legal entity rationalization and pose a substantial risk to financial stability if the hold- separability, and derivatives and trading activities), ing company were to fail. and each G-SIB is expected to satisfactorily address these vulnerabilities in its 2017 submission. If a covered holding company were to fail and enter resolution under bankruptcy or under the Dodd- In December 2016, the agencies announced determi- Frank Act’s Orderly Liquidation Authority, its unse- nations on the October 2016 submissions (www cured, long-term debt could be converted into equity .federalreserve.gov/newsevents/pressreleases/ to recapitalize the firm’s critical operations. The TLAC bcreg20161213a.htm). Four of the five firms were final rule would particularly improve a G-SIB’s resolv- found to have adequately remediated deficiencies in ability under a “single-point-of-entry” strategy, pursu- their 2015 resolution plans, while the fifth is subject ant to which the failed firm’s recapitalized subsidiar- to restrictions on the growth of international and nonies would continue to operate normally—limiting dis- bank activities. This latter firm is expected to file a ruption to the financial system—while only the top- revised submission by March 31, 2017. The deadline tier holding company would enter a resolution for the next full plan submission for all eight G-SIBs is July 1, 2017. arise from the material financial distress or failure, or broader economy. For example, in 2016 the Board ongoing activities of, large, interconnected financial issued a final rule to require the top-tier BHCs of institutions. In 2016, the Board established or pro- U.S. G-SIBs and the U.S. intermediate holding composed to establish a variety of enhanced prudential panies of foreign G-SIBs to maintain minimum levels standards. (See “Enhanced Prudential Standards” of unsecured, long-term debt and “total losslater in this section for details.) absorbing capacity” (TLAC), which is made up of both capital and long-term debt. The Board also Regulation of global systemically important banking finalized and issued for comment several other ruleinstitutions (G-SIBs). The Board continued to makings that would apply to the largest and most advance its macroprudential regulatory program for systemically important institutions, as described fur- G-SIBs, the banking firms whose failure would cause ther below in the “Supervisory Policy” section. (See the most harm to the U.S. financial system and the box 1 for more information on G-SIBs.)

Supervision and Regulation 47 Box 2. Easing Regulatory Burden for Community Banking Organizations The Federal Reserve continually seeks to minimize ments sought to reduce the amount of financial data regulatory burden for community banks. To accom- that community banks must report while preserving plish this, the Federal Reserve tailors its regulations, data needed by the Federal Reserve for safety and guidance, and supervisory programs to an institu- soundness purposes. For financial institutions with tion’s asset size, risk profile, and complexity. Over the total assets of $1 billion or greater, the Federal past year, the Federal Reserve took a number of Reserve, in conjunction with the other banking agensteps to reduce burden on community banks and to cies represented on the Federal Financial Institutions advance a more efficient and effective supervisory Examination Council (FFIEC), made burden-reducing program. Some of these actions were taken in the changes to the Call Report in 2016 by deleting a context of the decennial review required by the Eco- number of data items and increasing the reporting nomic Growth and Regulatory Paperwork Reduction threshold for certain other items. Act of 1996 (EGRPRA). Key examples of burden reduction efforts undertaken in 2016 include For small, non-complex financial institutions with fewer than $1 billion in total assets, the Federal • Expanding the number of banks eligible for an Reserve, in conjunction with the FFIEC, implemented 18-month examination cycle. The total asset a new streamlined Call Report effective for the threshold for banks that may qualify for an March 31, 2017 report date with approximately 18-month versus 12-month examination cycle was 40 percent less data items than the existing Call increased from $500 million to $1 billion. As a Report. Approximately 90 percent of all institutions result, 82 percent of state member banks may that are required to file the existing Call Report will now qualify for the longer examination cycle com- qualify to file the streamlined Call Report as of the pared to 68 percent previously. March 2017 report date. Moreover, the agencies continue to evaluate the burden associated with • Completing more examination work off-site. In regulatory reports and are considering further reducresponse to banker concerns about the disruption tions to the Call Report. caused by large examination teams at community banks, the Federal Reserve issued new examina- • Simplifying and streamlining regulations. The tion procedures in April 2016 encouraging examin- Federal Reserve is working independently and with ers to conduct a greater portion of their examina- the other federal banking agencies to address contion work off-site whenever possible, including cerns about regulatory burden. For example, the review of a bank’s loan files, which is typically the agencies reviewed the burden associated with elemost labor-intensive portion of the examination. ments of regulatory capital regulations and are considering options to simplify capital requirements for • Making better use of off-site monitoring tools community banks. Similarly, the agencies are reviewto tailor examination work. The Federal Reserve ing the current thresholds for when an institution is continued to improve the rigor and accuracy of its required to obtain an appraisal and are considering off-site analysis, resulting in more efficient on-site options to adjust the appraisal requirements, includexaminations and reducing the amount of time ing in rural markets, to reduce burden in a manner spent reviewing well-managed activities at comconsistent with safety and soundness. Additional munity banks that present lower risks. regulatory burden reduction efforts are underway for • Reducing regulatory reporting requirements. A community banks as described in the EGRPRA number of changes to regulatory filing require- report. Community bank burden reduction. The Federal threat to specific institutions and to the broader Reserve continually seeks to minimize regulatory bur- financial system. In 2016, the Federal Reserve worked den for community banks by tailoring its regulations, independently and in collaboration with other agenguidance, and supervisory programs to an institu- cies, public/private partnerships, and international tion’s size, risk, and complexity. The Federal Reserve authorities to strengthen risk-management practices took a number of steps in 2016, including conducting and reduce cyber risk to the financial system. (See more supervisory work offsite and reducing regula- box 3 for more information on cyber guidance.) tory reporting requirements, to reduce burden on community banks and make the supervisory program Supervision for these institutions more efficient and effective. (See box 2 for more information on easing regulatory burden.) The Federal Reserve is the federal supervisor and regulator of all U.S. BHCs, including financial hold- Cybersecurity. Cybercrime has been identified by ing companies (FHCs), savings and loan holding financial institutions and supervisors as a significant companies (SLHCs), and state-chartered commercial

48 103rd Annual Report | 2016 Box 3. Cybersecurity Guidance Financial institutions consistently identify cybercrime ensuring that an FMI’s cyber resilience measures as one of the top threats to the safety and soundness continue to be effective. of their firms. In 2016, well publicized cyber incidents • FMIs should pursue strong collaboration with conin the financial sector underscored the growing nected entities to achieve collective resilience. sophistication of cyber attackers and the importance of recognizing the highly interconnected nature of the Enhanced Cyber Risk Management Standards sector in developing and implementing cyber resilience strategies. The Federal Reserve, FDIC, and Office of the Comptroller of the Currency (OCC) in October 2016 released an It is against this backdrop that the Federal Reserve advance notice of proposed rulemaking (ANPR) on recognizes the risk that ineffective cybersecurity enhanced cyber risk management standards to poses to individual firms, the financial sector, and increase the cybersecurity resilience of the largest and financial stability more broadly. In 2016, the Federal most interconnected entities under the agencies’ super- Reserve worked independently and in collaboration vision. By targeting the firms and systems at which a with other agencies, public/private partnerships, and cyber event could most likely impact other firms, the international authorities to strengthen risk- potential standards would increase the resiliency of the management practices and reduce cyber risk to the financial sector more broadly. financial system. The proposed standards would apply to the activities of banking organizations with total assets of $50 billion or Guidance on Cyber Resilience for Financial more, FMIs, and nonbank financial companies super- Market Infrastructures vised by the Federal Reserve and their third-party service providers. A key aspect of the standards is that In June 2016, the Committee on Payments and they are tiered. While the potential standards would Market Infrastructures (CPMI) and the International apply broadly to all of the firms within scope, a subset Organization of Securities Commissions (IOSCO) of higher standards would apply to the sector-critical published Guidance on Cyber Resilience for Financial systems operated by those firms, such as systems Market Infrastructures (guidance), which supplements supporting payment, clearing, and settlement the risk-management expectations set out in the operations. CPMI-IOSCO Principles for Financial Market Infrastructures. Although the guidance is not mandatory, The proposed standards would require covered firms to financial market infrastructures (FMIs) supervised by the Board are expected to apply the guidance as • demonstrate effective, enterprise-wide cyber risk they strive to meet established standards. The guid- management and governance; ance calls for FMIs to immediately take necessary • continuously monitor and manage cyber risks within steps, in concert with relevant stakeholders, to the risk appetite and tolerance levels approved by improve their cyber resilience and develop concrete their boards of directors; plans to improve their capabilities to meet resumption time objectives by mid-2017. The following are • establish and implement strategies for cyber resilkey messages in the guidance: ience and business continuity in the event of a disruption; • An FMI’s board and its senior management should • establish protocols for secure, trustworthy storage of proactively address cyber risks within the context critical records; and of managing an FMI’s enterprise wide risks. • maintain continuing situational awareness of their • FMIs should be prepared for the eventuality of operational status and cybersecurity posture on an successful attacks, and make preparations to enterprise-wide basis. respond and recover key services safely and promptly–the resumption objective is within two The potential standards for sector-critical systems hours of a disruption. include minimizing cyber risk by implementing the most effective, commercially-available controls and estab- • Effective use of high-quality threat intelligence as lishing a two-hour time objective to recover from a well as a rigorous testing regime are critical for cyber event. banks that are members of the Federal Reserve thermore, through the Dodd-Frank Act, the Federal System. The Federal Reserve also has responsibility Reserve has been assigned responsibilities for nonfor supervising the operations of all Edge Act and bank financial firms and financial market utilities agreement corporations, the international operations (FMUs) designated by the by the Financial Stability of state member banks and U.S. BHCs, and the U.S. Oversight Council (FSOC) as systemically important. operations of foreign banking organizations. Fur-

Supervision and Regulation 49 In overseeing the institutions under its authority, the and their nonbank subsidiaries. Whether an exami- Federal Reserve seeks primarily to promote safety nation or an inspection is being conducted, the and soundness, including compliance with laws and review of operations entails regulations. • an evaluation of the adequacy of governance provided by the board and senior management, Safety and Soundness including an assessment of internal policies, procedures, controls, and operations; The Federal Reserve uses a range of supervisory activities to promote the safety and soundness of • an assessment of the quality of the riskfinancial institutions and maintain a comprehensive management and internal control processes in understanding and assessment of each firm. These place to identify, measure, monitor, and control activities include horizontal reviews, firm-specific risks; examinations and inspections, continuous monitor- • an assessment of the key financial factors of capiing and surveillance activities, and implementation of tal, asset quality, earnings, and liquidity; and enforcement or other supervisory actions as necessary. The Federal Reserve also provides training and • a review for compliance with applicable laws and technical assistance to foreign supervisors and regulations. minority-owned and de novo depository institutions. Table 1 provides information on examinations and Examinations and Inspections inspections conducted by the Federal Reserve during The Federal Reserve conducts examinations of state the past five years. member banks, FMUs, the U.S. branches and agencies of foreign banks, and Edge Act and agreement Consolidated Supervision corporations. In a process distinct from examina- Consolidated supervision, a method of supervision tions, it conducts inspections of holding companies that encompasses the parent company and its subsid- Table 1. State member banks and bank holding companies, 2012–16 Entity/item 2016 2015 2014 2013 2012 State member banks Total number 829 839 858 850 843 Total assets (billions of dollars) 2,577 2,356 2,233 2,060 2,005 Number of examinations 663 698 723 745 769 By Federal Reserve System 406 392 438 459 487 By state banking agency 257 306 285 286 282 Top-tier bank holding companies Large (assets of more than $1 billion) Total number 569 547 522 505 508 Total assets (billions of dollars) 17,593 16,961 16,642 16,269 16,112 Number of inspections 659 709 738 716 712 By Federal Reserve System1 646 669 706 695 691 On site 438 458 501 509 514 Off site 208 211 205 186 177 By state banking agency 13 40 32 21 21 Small (assets of $1 billion or less) Total number 3,682 3,719 3,902 4,036 4,124 Total assets (billions of dollars) 914 938 953 953 983 Number of inspections 2,597 2,783 2,824 3,131 3,329 By Federal Reserve System 2,525 2,709 2,737 2,962 3,150 On site 126 123 142 148 200 Off site 2,399 2,586 2,595 2,814 2,950 By state banking agency 72 74 87 169 179 Financial holding companies Domestic 473 442 426 420 408 Foreign 42 40 40 39 38 1 For large bank holding companies subject to continuous, risk-focused supervision, includes multiple targeted reviews.

50 103rd Annual Report | 2016 iaries, allows the Federal Reserve to understand the operational resilience by maintaining effective organization’s structure, activities, resources, risks, corporate governance, risk management, and and financial and operational resilience. Working recovery planning. with other relevant supervisors and regulators, the 2. Reducing the impact on the financial system and Federal Reserve seeks to ensure that financial, operathe broader economy in the event of a firm’s failure tional, or other deficiencies are addressed before they or material weakness. Each firm is expected to pose a danger to the consolidated organization, its ensure the sustainability of its critical operations banking offices, or to the broader economy.2 and banking offices under a broad range of internal or external stresses. This requires, among Large financial institutions increasingly operate and other things, effective resolution planning that manage their integrated businesses across corporate addresses the complexity and the interconnectivboundaries. Financial trouble in one part of a finanity of the firm’s operations. cial institution can spread rapidly to other parts of the institution. Risks that cross legal entities or that The framework is designed to support a tailored are managed on a consolidated basis cannot be supervisory approach that accounts for the unique monitored properly through supervision that is risk characteristics of each firm, including the nature directed at only one of the legal entity subsidiaries and degree of potential systemic risk inherent in a within the overall organization. firm’s activities and operations, and is being implemented in a multi-stage approach. To strengthen its supervision of the largest, most complex financial institutions, the Federal Reserve The Federal Reserve uses a range of supervisory created a centralized, multidisciplinary body called activities to maintain a comprehensive understanding the Large Institution Supervision Coordinating and assessment of each large financial institution: Committee (LISCC). The LISCC coordinates the Federal Reserve’s supervision of domestic bank hold- • Coordinated horizontal reviews. These reviews ing companies and foreign banking organizations involve examining several institutions simultanethat pose elevated risk to U.S. financial stability as ously and encompass firm-specific supervision and well as other nonbank financial institutions desig- the development of cross-firm perspectives. In nated as systemically important by the FSOC. addition, the Federal Reserve uses a multidisciplinary approach to draw on a wide range of per- The framework for the consolidated supervision of spectives, including those from supervisors, exam- LISCC firms and other large financial institutions iners, economists, financial experts, payments syswas issued in December 2012.3 This framework tems analysts, and other specialists. Examples strengthens traditional microprudential supervision include analysis of capital adequacy and planning and regulation to enhance the safety and soundness through the Comprehensive Capital Analysis and of individual firms and incorporates macroprudential Review (CCAR) as well as horizontal evaluations considerations to reduce potential threats to the sta- of resolution plans and incentive compensation bility of the financial system. The framework has two practices. primary objectives: • Firm-specific examinations and/or inspections and 1. Enhancing resiliency of a firm to lower the prob- continuous monitoring activities. These activities are ability of its failure or inability to serve as a finan- designed to maintain an understanding and assesscial intermediary. Each firm is expected to ensure ment across the core areas of supervisory focus. that the consolidated organization (or the com- These activities include review and assessment of bined U.S. operations in the case of foreign bank- changes in strategy, inherent risks, control proing organizations) and its core business lines can cesses, and key personnel, and follow-up on previsurvive under a broad range of internal or exter- ously identified concerns (for example, areas subnal stresses. This requires financial resilience by ject to enforcement actions) or emerging maintaining sufficient capital and liquidity, and vulnerabilities. 2 “Banking offices” are defined as U.S. depository institution sub- • Interagency information sharing and coordination. sidiaries as well as the U.S. branches and agencies of foreign In developing and executing a detailed supervisory banking organizations. plan for each firm, the Federal Reserve generally 3 For more information about the supervisory framework, see the relies to the fullest extent possible on the informa- Board’s press release and SR letter 12-17/CA 12-14 at www .federalreserve.gov/newsevents/press/bcreg/20121217a.htm. tion and assessments provided by other relevant

Supervision and Regulation 51 supervisors and functional regulators. The Federal intermediaries. Capital is central to a BHC’s ability Reserve actively participates in interagency infor- to absorb losses and continue to lend to creditworthy mation sharing and coordination, consistent with businesses and consumers. Through CCAR, a BHC’s applicable laws, to promote comprehensive and capital adequacy is evaluated on a forward-looking, effective supervision and limit unnecessary duplica- post-stress basis as the BHC is required to demontion of information requests. Supervisory agencies strate in its capital plan how it will maintain, continue to enhance formal and informal discus- throughout a very stressful period, capital above sions to jointly identify and address key vulner- minimum regulatory capital requirements. From a abilities and to coordinate supervisory strategies microprudential perspective, CCAR provides a strucfor large financial institutions. tured means for supervisors to assess not only whether these BHCs hold enough capital, but also • Internal audit and control functions. In certain whether they are able to rapidly and accurately deterinstances, supervisors may be able to rely on a mine their risk exposures, including how those might firm’s internal audit or internal control functions in evolve under stress, which is an essential element of developing a comprehensive understanding and effective risk management. From a macroprudential assessment or for validating the remediation of perspective, the use of a common scenario allows the previously identified control weaknesses and simi- Federal Reserve to assess not just individual institular concerns. tions, but also how a particular risk or combination of risks might affect the banking system as a whole The Federal Reserve uses a risk-focused approach to under stressful conditions. The 2016 CCAR results supervision, with activities directed toward identifyare available at www.federalreserve.gov/newsevents/ ing the areas of greatest risk to financial institutions press/bcreg/bcreg20160629a1.pdf. and assessing the ability of institutions’ management processes to identify, measure, monitor, and control DFAST is a supervisory stress test conducted by the those risks. For medium- and small-sized financial Federal Reserve to evaluate whether large BHCs have institutions, the risk-focused, consolidated supervisufficient capital to absorb losses resulting from sion program provides that examination and inspecstressful economic and financial market conditions. tion procedures are tailored to each organization’s The Dodd-Frank Act also requires BHCs and other size, complexity, risk profile, and condition. The financial companies supervised by the Federal supervisory program for an institution, regardless of Reserve to conduct their own stress tests. Together, its asset size, entails both off-site and on-site work, the Dodd-Frank Act supervisory stress tests and the including development of supervisory plans, precompany-run stress tests are intended to provide examination visits, detailed documentation, and company management and boards of directors, the preparation of examination reports tailored to the public, and supervisors with forward-looking inforscope and findings of the review. mation to help gauge the potential effect of stressful Capital Planning and Stress Tests conditions on the capital adequacy of these large banking organizations. The 2016 DFAST results are Since the financial crisis, the Board has led a series of available at www.federalreserve.gov/newsevents/press/ initiatives to strengthen the capital positions of the bcreg/bcreg20160623a1.pdf. largest banking organizations. Two related initiatives are the CCAR and the Dodd-Frank Act stress tests (DFAST). State Member Banks At the end of 2016, a total of 1,750 banks (excluding CCAR is a supervisory exercise to evaluate capital nondepository trust companies and private banks) adequacy, internal capital planning processes, and were members of the Federal Reserve System, of planned capital distributions simultaneously at all which 829 were state chartered. Federal Reserve large and complex BHCs. In CCAR, the Federal System member banks operated 55,301 branches, and Reserve assesses whether these BHCs have sufficient accounted for 34 percent of all commercial banks in capital to withstand highly stressful operating envi- the United States and for 70 percent of all commerronments and be able to continue operations, main- cial banking offices. State-chartered commercial tain ready access to funding, meet obligations to banks that are members of the Federal Reserve, comcreditors and counterparties, and serve as credit monly referred to as state member banks, represented

52 103rd Annual Report | 2016 approximately 16 percent of all insured U.S. commer- to mirror the primary supervisor’s rating of the subcial banks and held approximately 16 percent of all sidiary depository institution.6 Noncomplex BHCs insured commercial bank assets in the United States. with consolidated assets of $1 billion or less are subject to a special supervisory program that permits a Under section 10 of the Federal Deposit Insurance more flexible approach.7 In 2016, the Federal Reserve Act, as amended by section 111 of the Federal conducted 646 inspections of large BHCs and Deposit Insurance Corporation Improvement Act of 2,525 inspections of small, noncomplex BHCs. 1991 and by the Riegle Community Development and Regulatory Improvement Act of 1994, the Fed- Financial Holding Companies eral Reserve must conduct a full-scope, on-site exami- Under the Gramm-Leach-Bliley Act, BHCs that nation of state member banks at least once a year.4 meet certain capital, managerial, and other require- However, qualifying well-capitalized, well-managed ments may elect to become FHCs and thereby engage state member banks with less than $1 billion in total in a wider range of financial activities, including fullassets are eligible for an 18-month examination scope securities underwriting, merchant banking, cycle.5 The Federal Reserve conducted 406 examina- and insurance underwriting and sales. As of year-end tions of state member banks in 2016. 2016, a total of 473 domestic BHCs and 42 foreign banking organizations had FHC status. Of the Bank Holding Companies domestic FHCs, 25 had consolidated assets of At year-end 2016, a total of 4,614 U.S. BHCs were in $50 billion or more; 35, between $10 billion and operation, of which 4,115 were top-tier BHCs. These $50 billion; 146, between $1 billion and $10 billion; organizations controlled 4,373 insured commercial and 267, less than $1 billion. banks and held approximately 97 percent of all insured commercial bank assets in the United States. Savings and Loan Holding Companies The Dodd-Frank Act transferred responsibility for Federal Reserve guidelines call for annual inspections supervision and regulation of SLHCs from the forof large BHCs and complex smaller companies. In mer Office of Thrift Supervision (OTS) to the to the judging the financial condition of the subsidiary Federal Reserve in July 2011. At year-end 2016, a banks owned by holding companies, Federal Reserve total of 436 SLHCs were in operation, of which 238 examiners consult examination reports prepared by were top tier SLHCs. These SLHCs control 243 thrift the federal and state banking authorities that have institutions and include 21 companies engaged priprimary responsibility for the supervision of those marily in nonbanking activities, such as insurance banks, thereby minimizing duplication of effort and underwriting (12 SLHCs), securities brokerage (4 reducing the supervisory burden on banking SLHCs), and commercial activities (5 SLHCs). organizations. Excluding nonbank SIFI SLHCs, the 25 largest SLHCs accounted for more than $1.5 trillion of total Inspections of BHCs, including FHCs, are built combined assets. Approximately 90 percent of around a rating system introduced in 2005. The SLHCs engage primarily in depository activities. system reflects the shift in supervisory practices away These firms hold approximately 16 percent ($256 bilfrom a historical analysis of financial condition lion) of the total combined assets of all SLHCs. The toward a more dynamic, forward-looking assessment Office of the Comptroller of the Currency (OCC) is of risk-management practices and financial factors. the primary regulator for most of the subsidiary sav- Under the system, known as RFI but more fully ings associations of the firms engaged primarily in termed RFI/C(D), holding companies are assigned a depository activities. Table 2 provides information on composite rating (C) that is based on assessments of examinations of SLHCs for the past five years. three components: Risk Management (R), Financial Condition (F), and the potential Impact (I) of the 6 Each of the first two components has four subcomponents: parent company and its nondepository subsidiaries Risk Management—(1) Board and Senior Management Overon the subsidiary depository institution. The fourth sight; (2) Policies, Procedures, and Limits; (3) Risk Monitoring and Management Information Systems; and (4) Internal Concomponent, Depository Institution (D), is intended trols. Financial Condition—(1) Capital, (2) Asset Quality, (3) Earnings, and (4) Liquidity. 4 The Office of the Comptroller of the Currency examines nation- 7 The special supervisory program was implemented in 1997, most ally chartered banks, and the Federal Deposit Insurance Corpo- recently modified in 2013. See SR letter 13-21 for a discussion of ration examines state-chartered banks that are not members of the factors considered in determining whether a BHC is comthe Federal Reserve. plex or noncomplex (www.federalreserve.gov/bankinforeg/ 5 81 Fed. Reg. 90,949 (December 16, 2016). srletters/sr1321.htm).

Supervision and Regulation 53 Table 2. Savings and loan holding companies, 2012–16 Entity/item 2016 2015 2014 2013 2012 Top-tier savings and loan holding companies Large (assets of more than $1 billion)1 Total number 67 67 76 81 94 Total assets (billions of dollars) 1,664 1,525 1,493 1,500 1,715 Number of inspections 54 58 83 72 82 By Federal Reserve System2 54 57 82 71 80 On site 34 31 45 58 53 Off site 20 26 37 13 27 Small (assets of $1 billion or less) Total number 171 194 221 251 272 Total assets (billions of dollars) 50 55 65 76 82 Number of inspections 181 187 212 258 229 By Federal Reserve System 181 187 212 258 229 On site 9 13 10 21 46 Off site 172 174 202 237 183 1 Excludes SIFI SLHCs (AIG and GE). 2 For large savings and loan holding companies subject to continuous, risk-focused supervision, includes multiple targeted reviews. Several complex policy issues continue to be activities on the depository institution. The Federal addressed by the Board, including those related to Reserve focuses supervisory attention on legal entities consolidated capital requirements for insurance and activities that are not directly supervised or regu- SLHCs, issues pertaining to intermediate holding lated by state insurance regulators, including intercompanies for commercial SLHCs, and the adoption company transactions between the depository instituof formal rating systems. A request for public com- tion and its affiliates. The Federal Reserve relies to ment on the adoption of the formal rating system for the fullest extent possible on the work of state insurcertain SLHCs was issued on December 9, 2016. The ance regulators as part of the overall supervisory proposal would not apply the formal rating system to assessment of ISLHCs. The Federal Reserve has been SLHCs engaged in significant insurance or commer- active in engaging with the state departments of cial activities. insurance and the National Association of Insurance Commissioners (NAIC) on general insurance super- Savings and loan holding companies primarily engaged vision matters. in insurance underwriting activities. The Federal Reserve supervises twelve non-SIFI insurance Financial Market Utilities SLHCs (ISLHCs), with $1.015 trillion in estimated FMUs manage or operate multilateral systems for total combined assets, and $118 billion in thrift the purpose of transferring, clearing, or settling payassets. Of the twelve, four firms have total assets ments, securities, or other financial transactions greater than $50 billion, four firms have total assets among financial institutions or between financial between $10 billion and $50 billion, and four firms institutions and the FMU. Under the Federal have total assets less than $10 billion. With the excep- Reserve Act, the Federal Reserve supervises FMUs tion of one ISLHC, which owns a thrift subsidiary that are chartered as member banks or Edge Act corthat comprises more than half of the firm’s total porations and coordinates with other federal banking assets, thrift subsidiary assets for most ISLHCs rep- supervisors to supervise FMUs considered bank serresent less than 25 percent of total assets. Since vice providers under the Bank Service Company Act. ISLHCs were transferred to the Federal Reserve from the former OTS in 2011, seventeen have deregistered In July 2012, the FSOC voted to designate eight as SLHCs. FMUs as systemically important under title VIII of the Dodd-Frank Act. As a result of these designa- As the consolidated supervisor of ISLHCs, the Fed- tions, the Board assumed an expanded set of responeral Reserve evaluates the organization’s risk- sibilities related to these designated FMUs that management practices, the financial condition of the include promoting uniform risk-management stanoverall organization, and the impact of the nonbank dards, playing an enhanced role in the supervision of

54 103rd Annual Report | 2016 designated FMUs, reducing systemic risk, and sup- ration, Inc. (GECC)9 and three companies with sigporting the stability of the broader financial system. nificant insurance activities: American International For certain designated FMUs, the Board established Group, Inc.; Prudential Financial, Inc.; and MetLife, risk-management standards and expectations that are Inc.10 articulated in the Board’s Regulation HH. In addition to setting minimum risk-management standards, The Federal Reserve’s supervisory approach for des- Regulation HH establishes requirements for the ignated companies is tailored to account for different advance notice of proposed material changes to the material characteristics of each firm. The Doddrules, procedures, or operations of a designated Frank Act requires the Board to apply enhanced pru- FMU for which the Board is the supervisory agency dential standards to the nonbank financial compaunder title VIII. Finally, Regulation HH also estab- nies designated by the FSOC for supervision by the lishes minimum conditions and requirements for a Board. The act authorizes the Board to tailor the Federal Reserve Bank to establish and maintain an application of these standards and requirements to account for, and provide services to, a designated different companies on an individual basis or by cat- FMU.8 egory. In June 2016, the Board issued an advance notice of proposed rulemaking (ANPR) inviting The Federal Reserve’s risk-based supervision pro- comment on conceptual frameworks for capital stangram for FMUs is administered by the FMU Super- dards that could apply to companies with significant vision Committee (FMU-SC). The FMU-SC is a insurance activities. The Board also issued a promultidisciplinary committee of senior supervision, posed rule to apply enhanced prudential standards payment policy, and legal staff at the Board of Gov- relating to corporate governance, risk-management, ernors and Reserve Banks who are responsible for, and liquidity risk-management standards to such and knowledgeable about, supervisory issues for companies. Additionally, the Federal Reserve moni- FMUs. The FMU-SC’s primary objective is to pro- tors developments at the designated nonbank finanvide senior-level oversight, consistency, and direction cial companies and exercises its supervisory authority to the Federal Reserve’s supervisory process for to foster safe and sound practices and to promote FMUs. The FMU-SC coordinates with the LISCC financial stability. on issues related to the roles of LISCC firms in International Activities FMUs as well as the payment, clearing, and settlement activities of LISCC firms and the FMU activi- The Federal Reserve supervises the foreign branches ties and implications for financial institutions in the and overseas investments of state member banks, LISCC portfolio. Edge Act and agreement corporations, and BHCs (including the investments by BHCs in export trading companies). In addition, it supervises the activities In an effort to promote greater financial market stathat foreign banking organizations conduct through bility and mitigate systemic risk, the Board works entities in the United States, including branches, closely with the Securities and Exchange Commission agencies, representative offices, and subsidiaries. (SEC) and the Commodity Futures Trading Commission (CFTC), both of which also have supervisory Foreign operations of U.S. banking organizations. In authority for certain FMUs. The Federal Reserve’s supervising the international operations of state work with these agencies under title VIII, including member banks, Edge Act and agreement corporathe sharing of appropriate information and particitions, and BHCs, the Federal Reserve generally conpation in designated FMU examinations, aims to ducts its examinations or inspections at the U.S. head improve consistency in FMU supervision, promote offices of these organizations, where the ultimate robust FMU risk management, and improve regularesponsibility for the foreign offices resides. Examintors’ ability to monitor and mitigate systemic risks. ers also visit the overseas offices of U.S. banking Designated Nonbank Financial Companies organizations to obtain financial and operating infor- Since 2013, the FSOC has designated four nonbank 9 In June 2016, the FSOC rescinded the designation of GECC as financial companies for supervision by the Board. systemically important. As a result, GECC is no longer super- These companies are General Electric Capital Corpo- vised by the Federal Reserve. 10 In March 2016, the U.S. District Court in Washington, D.C., rescinded the FSOC’s designation of MetLife as a systemically important firm subject to Federal Reserve supervision. The 8 The Federal Reserve Banks maintain accounts for and provide effect of the court’s action is that MetLife is no longer subject to services to several designated FMUs. supervision by the Federal Reserve.

Supervision and Regulation 55 mation and, in some instances, to test their adherence mately 20 percent of U.S. commercial banking assets. to safe and sound banking practices and compliance These 148 foreign banks also operated 87 representawith rules and regulations. Examinations abroad are tive offices; an additional 42 foreign banks operated conducted with the cooperation of the supervisory in the United States through a representative office. authorities of the countries in which they take place; The Federal Reserve—in coordination with approprifor national banks, the examinations are coordinated ate state regulatory authorities—examines statewith the OCC. licensed, non-FDIC-insured branches and agencies of foreign banks on-site at least once every At the end of 2016, a total of 33 member banks were 18 months.11 In most cases, on-site examinations are operating 404 branches in foreign countries and conducted at least once every 12 months, but the overseas areas of the United States; 18 national period may be extended to 18 months if the branch banks were operating 354 of these branches, and or agency meets certain criteria. As part of the super- 15 state member banks were operating the remaining visory process, a review of the financial and opera- 50. In addition, 7 nonmember banks were operating tional profile of each organization is conducted to 15 branches in foreign countries and overseas areas assess the organization’s ability to support its U.S. of the United States. operations and to determine what risks, if any, the organization poses to the banking system through its Edge Act and agreement corporations. Edge Act cor- U.S. operations. The Federal Reserve conducted or porations are international banking organizations participated with state and federal regulatory chartered by the Board to provide all segments of the authorities in 647 examinations of foreign banks in U.S. economy with a means of financing interna- 2016. tional business, especially exports. Agreement corporations are similar organizations, state or federally Compliance with Regulatory Requirements chartered, that enter into agreements with the Board The Federal Reserve examines institutions for comto refrain from exercising any power that is not per- pliance with a broad range of legal requirements, missible for an Edge Act corporation. Sections 25 including anti-money-laundering (AML) and conand 25A of the Federal Reserve Act grant Edge Act sumer protection laws and regulations, and other and agreement corporations permission to engage in laws pertaining to certain banking and financial international banking and foreign financial transac- activities. Most compliance supervision is conducted tions. These corporations, most of which are subsid- under the oversight of the Board’s Division of iaries of member banks, may (1) conduct a deposit Supervision and Regulation (S&R), but consumer and loan business in states other than that of the par- compliance supervision is conducted under the overent, provided that the business is strictly related to sight of the Division of Consumer and Community international transactions, and (2) make foreign Affairs (DCCA).12 The two divisions coordinate their investments that are broader than those permissible efforts with each other and also with the Board’s for member banks. Legal Division to ensure consistent and comprehensive Federal Reserve supervision for compliance with At year-end 2016, out of 42 banking organizations legal requirements. chartered as Edge Act or agreement corporations, 3 operated 7 Edge Act and agreement branches. These Anti-Money-Laundering Examinations corporations are examined annually. The Treasury regulations implementing the Bank Secrecy Act (BSA) generally require banks and other U.S. activities of foreign banks. Foreign banks con- types of financial institutions to file certain reports tinue to be significant participants in the U.S. bank- and maintain certain records that are useful in crimiing system. As of year-end 2016, a total of 148 for- nal, tax, or regulatory proceedings. The BSA and eign banks from 48 countries operated 174 state- separate Board regulations require banking organizalicensed branches and agencies, of which 6 were tions supervised by the Board to file reports on suspiinsured by the FDIC, and 49 OCC-licensed branches cious activity related to possible violations of federal and agencies, of which 4 were insured by the FDIC. law, including money laundering, terrorism financ- These foreign banks also owned 9 Edge Act and agreement corporations and 1 commercial lending 11 The OCC examines federally licensed branches and agencies, and the FDIC examines state-licensed FDIC-insured branches company. In addition, they held a controlling interest in coordination with the appropriate state regulatory authority. in 45 U.S. commercial banks. Altogether, the U.S. 12 For a detailed discussion of consumer compliance supervision, offices of these foreign banks controlled approxi- refer to section 5, “Consumer and Community Affairs.”

56 103rd Annual Report | 2016 ing, and other financial crimes. In addition, BSA and tive threat identification, assessment, and monitoring Board regulations require that banks develop written as well as incident identification, assessment, and BSA compliance programs and that the programs be response. In addition, the Retail Payment Systems formally approved by bank boards of directors. The booklet was updated with the addition of a new Federal Reserve is responsible for examining institu- appendix on Mobile Financial Services. The appentions for compliance with applicable AML laws and dix focuses on the unique risks associated with regulations and conducts such examinations in accor- mobile financial services and emphasizes an dance with the Federal Financial Institutions Exami- enterprise-wide risk-management approach to effecnation Council’s (FFIEC) Bank Secrecy Act/Anti- tively manage and mitigate those risks. Money Laundering Examination Manual.13 Fiduciary Activities Specialized Examinations The Federal Reserve has supervisory responsibility The Federal Reserve conducts specialized examina- for state member banks and state member nondetions of supervised financial institutions in the areas pository trust companies, which hold assets in variof information technology, fiduciary activities, trans- ous fiduciary and custodial capacities. On-site examifer agent activities, and government and municipal nations of fiduciary and custodial activities are risksecurities dealing and brokering. The Federal Reserve focused and entail the review of an organization’s also conducts specialized examinations of certain compliance with laws, regulations, and general fidunonbank entities that extend credit subject to the ciary principles, including effective management of Board’s margin regulations. conflicts of interest; management of legal, operational, and compliance risk exposures; the quality Information Technology Activities and level of earnings; the management of fiduciary In recognition of the importance of information assets; and audit and control procedures. In 2016, technology to safe and sound operations in the finan- Federal Reserve examiners conducted 103 fiduciary cial industry, the Federal Reserve reviews the infor- examinations—excluding transfer agent examinamation technology activities of supervised financial tions—of state member banks. institutions as well as certain service providers that provide information technology services to these Transfer Agents organizations. All safety-and-soundness examina- As directed by the Securities Exchange Act of 1934, tions conducted by the Federal Reserve include a the Federal Reserve conducts specialized examinarisk-focused review of information technology risk- tions of those state member banks and BHCs that management activities. During 2016, the Federal are registered with the Board as transfer agents. Reserve continued as the lead supervisory agency for Among other things, transfer agents countersign and 6 of the 16 large, multiregional data processing ser- monitor the issuance of securities, register the transvicers recognized on an interagency basis. fer of securities, and exchange or convert securities. On-site examinations focus on the effectiveness of an During 2016, the Federal Reserve contributed to organization’s operations and its compliance with updates to the FFIEC Information Technology relevant securities regulations. During 2016, the Fed- Examination Handbook, which provides guidance to eral Reserve conducted transfer agent examinations examiners, financial institutions, and technology ser- at five state member banks that were registered as vice providers. The revised Information Security transfer agents. booklet addresses the factors necessary to assess the level of security risks to a financial institution’s infor- Government and Municipal Securities Dealers mation systems. The booklet describes effective infor- and Brokers mation security program management and provides The Federal Reserve is responsible for examining an overview of information security operations. state member banks and foreign banks for compli- Some of these operations include the need for effec- ance with the Government Securities Act of 1986 and with the Treasury regulations governing dealing 13 The FFIEC is an interagency body of financial regulatory agen- and brokering in government securities. Fourteen cies established to prescribe uniform principles, standards, and state member banks and six state branches of foreign report forms and to promote uniformity in the supervision of financial institutions. The council has six voting members: the banks have notified the Board that they are govern- Board of Governors of the Federal Reserve System, the FDIC, ment securities dealers or brokers not exempt from the National Credit Union Administration, the OCC, the Conthe Treasury’s regulations. During 2016, the Federal sumer Financial Protection Bureau, and the chair of the State Liaison Committee. Reserve conducted five examinations of broker-

Supervision and Regulation 57 dealer activities in government securities at these infrastructure companies and nonbank financial organizations. These examinations are generally con- companies supervised by the Board. The standards ducted concurrently with the Federal Reserve’s would also apply to the services provided to these examination of the state member bank or branch. firms by third parties. The ANPR is available at www .federalregister.gov/documents/2016/10/26/2016- The Federal Reserve is also responsible for ensuring 25871/enhanced-cyber-risk-management-standards. that state member banks and BHCs that act as municipal securities dealers comply with the Securi- The Federal Reserve is an active participant in the ties Act Amendments of 1975. Municipal securities Group of Seven (G7) initiatives on cyber resilience. dealers are examined, pursuant to the Municipal In 2016, the Federal Reserve played a leadership role Securities Rulemaking Board’s rule G-16, at least in the development of cyber resilience guidance for once every two calendar years. Four entities super- FMIs by the Committee on Payments and Market vised by the Federal Reserve that dealt in municipal Infrastructures (CPMI) and International Organizasecurities were examined during 2016. tion of Securities Commissions (IOSCO). The CPMI-IOSCO Guidance on Cyber Resilience for Securities Credit Lenders FMIs outlines an expectation that FMIs must be pre- Under the Securities Exchange Act of 1934, the pared for the eventuality of successful attacks and Board is responsible for regulating credit in certain make preparations to respond and recover critical transactions involving the purchasing or carrying of services safely and promptly. The Federal Reserve securities. As part of its general examination pro- also participated in a G7 initiative to identify a core gram, the Federal Reserve examines the banks under set of cyber resilience measures expected across the its jurisdiction for compliance with the Board’s global financial sector, which led to the publication of Regulation U. In addition, the Federal Reserve main- the G7 Fundamental Elements of Cybersecurity for the tains a registry of persons other than banks, brokers, Financial Sector. The publication identifies eight key and dealers who extend credit subject to Regula- elements as the building blocks upon which an entity tion U. The Federal Reserve may conduct specialized can design and implement its cybersecurity strategy examinations of these lenders if they are not already and operating framework: 1) cybersecurity strategy subject to supervision by the Farm Credit Adminis- and framework, 2) governance, 3) risk and control tration (FCA) or the National Credit Union Admin- assessment, 4) monitoring, 5) response, 6) recovery, istration (NCUA). 7) information sharing, and 8) continuous learning. (See box 3 on cyber guidance.) Cybersecurity and Critical Infrastructure The Federal Reserve is actively engaged in raising The Federal Reserve, FDIC, and state banking agenfinancial institution awareness of supervisory expec- cies collaborated to develop the Information Techtations relative to cybersecurity risk assessment and nology Risk Examination program (InTREx). In mitigation. In 2016, Federal Reserve examiners con- general, InTREx applies to state member and nontinued to conduct targeted cybersecurity assessments member banks with less than $50 billion in total of the largest, most systemically important financial assets. The Federal Reserve also applies InTREx to institutions, FMUs, and technology service providers. foreign banking organizations’ U.S. branches and The Federal Reserve also implemented a new risk- agencies with less than $50 billion in assets, as well as focused information technology examination pro- certain bank holding companies and savings and gram that enhances the identification and assessment loan holding companies with less than $50 billion in of technology and cybersecurity risks, as described total consolidated assets. InTREx provides supervibelow. sory staff with risk-focused and efficient examination procedures for conducting information technology In October 2016, the Federal Reserve Board, FDIC, reviews and assessing information technology and and OCC issued an ANPR and invited comment on cybersecurity risks at supervised institutions. a set of potential enhanced cybersecurity riskmanagement and resilience standards. The standards The Federal Reserve continued to contribute to interwould apply to depository institutions and deposi- agency groups such as the Financial and Banking tory institution holding companies with total consoli- Information Infrastructure Committee (FBIIC), the dated assets of $50 billion or more, the U.S. opera- Cybersecurity Forum for Independent and Executive tions of foreign banking organizations with total U.S. Branch Regulators, and the FFIEC’s Cybersecurity assets of $50 billion or more, and financial market and Critical Infrastructure Working Group

58 103rd Annual Report | 2016 (CCIWG) to share information and collaborate on directives, which are issued by the Board, and written cyber- and critical infrastructure-related issues agreements, which are executed by the Reserve impacting the financial services sector. Through par- Banks, are made public and are posted on the ticipation in the FBIIC, the Federal Reserve collabo- Board’s website (www.federalreserve.gov/apps/ rated with the U.S. Treasury to plan and execute sev- enforcementactions/search.aspx). eral financial services sector-wide tabletop exercises in 2016. The exercises focused on strategic, opera- In 2016, the Reserve Banks completed 94 informal tional, financial stability, and tactical considerations enforcement actions. Informal enforcement actions that tested both government and private sector pro- include memoranda of understanding (MOU), comcesses and capabilities for addressing cyber incidents mitment letters, and board of directors’ resolutions. across the financial services sector. In light of the findings from the 2016 exercises, the FBIIC formed Surveillance and Off-Site Monitoring new initiatives with Federal Reserve participation to The Federal Reserve uses automated screening sysstrengthen cooperation and information sharing tems to monitor the financial condition and perforamong sector-specific agencies and private-sector mance of state member banks and BHCs in the financial firms. period between on-site examinations. Such monitoring and analysis helps direct examination resources to The Federal Reserve also contributed to FFIEC institutions that have higher risk profiles. Screening cybersecurity and critical infrastructure efforts, systems also assist in the planning of examinations including a joint statement highlighting the threat of by identifying companies that are engaging in new or cyber attacks targeting interbank messaging and complex activities. wholesale payment functions at institutions. The joint statement stressed that financial institutions should The primary off-site monitoring tool used by the review risk-management practices and controls Federal Reserve is the Supervision and Regularelated to information technology systems and tion Statistical Assessment of Bank Risk model (SRwholesale payment networks, including risk assess- SABR). Drawing mainly on the financial data that ment; authentication, authorization, and access con- banks report on their Reports of Condition and trols; monitoring and mitigation; fraud detection; Income (Call Reports), SR-SABR uses econometric and incident response. This statement and other techniques to identify banks that report financial resources are available on the FFIEC cybersecurity characteristics weaker than those of other banks awareness website, which is a central repository for assigned similar supervisory ratings. To supplement FFIEC-related materials on cybersecurity (www.ffiec the SR-SABR screening, the Federal Reserve also .gov/cybersecurity.htm). monitors various market data, including equity prices, debt spreads, agency ratings, and measures of Enforcement Actions expected default frequency, to gauge market percep- The Federal Reserve has enforcement authority over tions of the risk in banking organizations. In addithe financial institutions it supervises and their affili- tion, the Federal Reserve prepares quarterly Bank ated parties. Enforcement actions may be taken to Holding Company Performance Reports (BHCPRs) address unsafe and unsound practices or violations for use in monitoring and inspecting supervised of any law or regulation. Formal enforcement actions banking organizations. The BHCPRs, which are include cease and desist orders, written agreements, compiled from data provided by large BHCs in quarprompt corrective action directives, removal and pro- terly regulatory reports (FR Y-9C and FR Y-9LP), hibition orders, and civil money penalties.14 In 2016, contain, for individual companies, financial statistics the Federal Reserve completed 72 formal enforce- and comparisons with peer companies. BHCPRs are ment actions. Civil money penalties totaling made available to the public on the National Infor- $257,263,485 were assessed. As directed by statute, all mation Center (NIC) website, which can be accessed civil money penalties are remitted to either the Treas- at www.ffiec.gov. ury or the Federal Emergency Management Agency. Enforcement orders and prompt corrective action Federal Reserve analysts use Performance Report Information and Surveillance Monitoring (PRISM), 14 On July 20, 2016, the Board issued an interim final rule modify- a querying tool, to access and display financial, suring its Rules of Practice for Hearings, 12 CFR part 263, to veillance, and examination data. In the analytical adjust the maximum levels of its civil money penalties as module, users can customize the presentation of required by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. institutional financial information drawn from Call

Supervision and Regulation 59 Reports, Uniform Bank Performance Reports, management and to its training and technical assis- FR Y-9 statements, BHCPRs, and other regulatory tance activities. ASBA, which is headquartered in reports. In the surveillance module, users can gener- Mexico, coordinates training programs throughout ate reports summarizing the results of surveillance the region while promoting communication and screening for banks and BHCs. During 2016, two cooperation among its members. major and two minor upgrades to the web-based PRISM application were completed to enhance the Efforts to Support Minority-Owned Depository user’s experience and provide the latest technology. Institutions The Federal Reserve System implements its responsi- The Federal Reserve works through the FFIEC Task bilities under section 367 of the Dodd-Frank Act pri- Force on Surveillance Systems to coordinate surveil- marily through its Partnership for Progress (PFP) lance activities with the other federal banking program. Established in 2008, this program promotes agencies. the viability of minority depository institutions (MDIs) by facilitating activities designed to Training and Technical Assistance strengthen their business strategies, maximize their The Federal Reserve provides training and technical resources, and increase their awareness and underassistance to foreign supervisors and minority-owned standing of regulatory topics. In addition, the Feddepository institutions. eral Reserve continues to maintain the PFP website, which supports MDIs by providing them with techni- International Training and Technical Assistance cal information and links to useful resources (www In 2016, the Federal Reserve continued to provide .fedpartnership.gov). Representatives from each of training and technical assistance on bank supervisory the 12 Federal Reserve Districts, along with staff matters to foreign central banks and supervisory from the S&R and DCCA divisions at the Board of authorities. Technical assistance involves visits by Governors, continue to offer technical assistance tai- Federal Reserve staff members to foreign authorities lored to MDIs by providing targeted supervisory as well as consultations with foreign supervisors who guidance, identifying additional resources, and fostervisit the Board of Governors or the Reserve Banks. ing mutually beneficial partnerships between MDIs and community organizations. As of year-end 2016, The Federal Reserve offered a number of training the Federal Reserve’s MDI portfolio included courses exclusively for the benefit of foreign supervi- 16 state member banks. sory authorities, which were held both in the United States and in many foreign jurisdictions. Federal Throughout 2016, the Federal Reserve System con- Reserve staff took part in technical assistance and tinued to support MDIs through the following training assignments led by the International Mon- activities: etary Fund, the World Bank, and the Financial Sta- • Co-organized the biannual Interagency Minority bility Institute. The Federal Reserve also contributed Depository Institutions and Community Developto the regional training provided under the Asiament Financial Institutions (CDFI) Bank Confer- Pacific Economic Cooperation Financial Regulators ence to take place April 5-6, 2017 in Los Angeles, Training Initiative. Other training partners that col- California. PFP staff at the Board of Governors laborated with the Federal Reserve during 2016 to and Reserve Banks will co-host this conference organize regional training programs included The with staff from the OCC and FDIC. The theme is South East Asian Central Banks Research and Train- “Expanding the Impact: Increasing Capacity & ing Centre, the Caribbean Group of Banking Super- Influence,” and attendance is expected to be over visors, the Banque de France, and the Central Bank 175 people, most of whom will be MDI bank of the United Arab Emirates. leadership; Additionally, the Federal Reserve is an associate • Formalized and implemented a partnership member of the Association of Supervisors of Banks between the Board’s DCCA and S&R divisions to of the Americas (ASBA), an umbrella group of bank share management of the PFP program and diversupervisors from countries in North and South sify the resources and programing available to America and the Caribbean. The Federal Reserve MDIs. The Federal Reserve System also worked to contributes significantly to ASBA’s organizational encourage partnership between examiner and com-

60 103rd Annual Report | 2016 munity development staff at the Federal Reserve ing Supervision (BCBS), the Financial Stability Banks to bring additional resources to MDIs Board (FSB), the CPMI, and the International Assoaround the country; ciation of Insurance Supervisors (IAIS). • Participated in the annual National Bankers Asso- Consistent with the Federal Reserve’s risk-focused ciation (NBA) convention by hosting an exhibit approach to supervision and as provided by law, the table and speaking on a regulators panel; Federal Reserve tailors supervisory rules and guid- • Provided technical assistance to MDIs on a wide ance in a way that applies the most stringent requirevariety of topics, including improving regulatory ments to the largest, most complex banking organiratings, navigating the regulatory applications pro- zations that pose the greatest risk to the financial cess, understanding changes to the Community system. Reinvestment Act, and refining capital-planning practices; Enhanced Prudential Standards The Board is responsible for issuing a number of • Conducted outreach efforts through an internal rules and guidance statements under the Doddteleconference session in October 2016 to educate Frank Act, sometimes in conjunction with other Federal Reserve examiners and community develagencies. Listed below are the initiatives undertaken opment staff on the PFP program and related by the Board in 2016. supervisory topics; • In March, the Board re-proposed a rule that would • Participated in an interagency task force to conaddress the risk associated with excessive credit sider and address supervisory challenges facing exposures of large banking organizations to a MDIs; single counterparty. As demonstrated during the • Facilitated in-person meetings between Federal financial crisis, large credit exposures, particularly Reserve and MDI leaders to better understand the between financial institutions, can spread financial challenges and opportunities facing Federal distress and undermine financial stability. The pro- Reserve-regulated MDIs; and posal would apply single-counterparty credit limits to bank holding companies with total consolidated • Commissioned research on MDIs that will be preassets of $50 billion or more and to certain foreign sented in 2017. banks operating in the United States. The proposed limits are tailored to increase in stringency as the Throughout 2016, PFP representatives hosted and systemic footprint of a firm increases. The proparticipated in numerous banking workshops and posed rule would implement part of the Doddseminars aimed at promoting and preserving MDIs, Frank Act and promote global consistency by genincluding the NBA’s Legislative and Regulatory Conerally reflecting the international large exposures ference. Further, Reserve Bank program representaframework released by the BCBS in 2014. The protives continued to collaborate with community leadposal is available at www.gpo.gov/fdsys/pkg/ ers, trade groups, the CDFI Fund, and other organi- FR-2016-03-16/pdf/2016-05386.pdf. The Board zations to seek support for MDIs. also released a white paper associated with the proposal, available at www.gpo.gov/fdsys/pkg/ Supervisory Policy FR-2016-03-16/pdf/2016-05386.pdf. The Federal Reserve’s supervisory policy function, • In June, the Board approved an ANPR inviting carried out by the Board, is responsible for develop- comment on two tailored conceptual frameworks ing regulations and guidance for financial institutions for capital standards that could apply to insurance under the Federal Reserve’s supervision as well as companies. The ANPR contemplates that for nonguidance for examiners. The Board, often in concert bank financial companies that have significant with the OCC and the FDIC (together, the federal insurance activities (systemically important insurbanking agencies), issues rulemakings, public SR let- ance companies), which have been designated by ters, and other policy statements and guidance in the FSOC for supervision by the Board, the Board order to carry out its supervisory policies. Federal would determine minimum capital requirements at Reserve staff also take part in supervisory and regu- a consolidated level. For insurance companies that latory forums, provide support for the work of the own a bank or thrift, the Board would aggregate FFIEC, and participate in international policymak- capital resources and requirements for each legal ing forums, including the Basel Committee on Bank- entity as computed under existing regulatory

Supervision and Regulation 61 requirements, with some adjustments to determine parent holding company of a domestic G-SIB to a combined, group-level requirement. The avoid entering into certain financial arrangements approaches described in the ANPR reflect differ- that would create obstacles to an orderly resoluences between insurance companies and banks, and tion. The final rule is available at www would use insurance-focused risk weights and for- .federalreserve.gov/newsevents/press/bcreg/ mulas. The ANPR is available at www.gpo.gov/ bcreg20161215a1.pdf. fdsys/pkg/FR-2016-06-14/pdf/2016-14004.pdf. • In December, the Board finalized technical amend- • In June, the Board proposed a rule that would ments to the rule that identifies G-SIBs and apply enhanced prudential standards relating to requires such firms to hold additional amounts of liquidity, corporate governance, and risk- risk-based capital to avoid restrictions on capital management standards to systemically important distributions and discretionary bonus payments. insurance companies. These firms would also be The changes do not materially alter the underlying required to conduct periodic liquidity stress testing rule approved by the Board in July 2015. The final and hold a buffer of highly liquid assets sufficient rule is available at www.federalreserve.gov/ to meet 90 days of stressed cash-flow needs. The newsevents/press/bcreg/bcreg20161209b2.pdf. The proposal is available at www.gpo.gov/fdsys/pkg/ Board also invited comment on an interim final FR-2016-06-14/pdf/2016-14005.pdf. rule extending the initial implementation of certain reporting requirements related to the G-SIB rule • In September, the Board proposed a rule to modify for firms that have $50 billion or more in total conits capital plan and stress testing rules for the 2017 solidated assets and are not currently identified as capital planning cycle.15 Among other changes, G-SIBs in order to align these requirements with the proposal would effectively remove large and other reporting requirements. The interim final rule noncomplex firms from the qualitative component is available at www.federalreserve.gov/newsevents/ of the Federal Reserve’s CCAR assessment. The press/bcreg/bcreg20161209b1.pdf. proposed rule would define large and noncomplex firms as firms with total consolidated assets Other Rulemakings between $50 billion and $250 billion, on-balance In 2016, the Board issued several other rulemakings sheet foreign exposure of less than $10 billion, and and guidance documents related to liquidity and total consolidated nonbank assets of less than $75 regulatory capital, as listed below. billion. These firms would continue to be subject to the quantitative requirements of CCAR as well as • In April, the Board finalized a rule to include cernormal supervision by the Federal Reserve regard- tain U.S. general obligation state and municipal ing their capital planning. The proposed rule would securities in the range of assets that large banking also reduce certain reporting requirements for these organizations may use to satisfy regulatory requirefirms. The proposal is available at www.gpo.gov/ ments designed to ensure that these banking orgafdsys/pkg/FR-2016-09-30/pdf/2016-23629.pdf. nizations have the capacity to meet their liquidity needs during a period of financial stress. The • In December, the Board issued a final rule that is liquidity coverage ratio (LCR) requirement designed to strengthen the ability of government adopted by the federal banking agencies in Septemauthorities to resolve in an orderly way the largest ber 2014 requires large banking organizations to domestic and foreign banks operating in the hold a minimum amount of high-quality liquid United States without support from taxpayerassets (HQLA) that can be readily converted into provided capital. The final rule applies to domestic cash during a 30-day period of financial stress. firms identified by the Board as G-SIBs and to the While the LCR requirement did not initially U.S. operations of foreign G-SIBs, requiring these include U.S. municipal securities as HQLA, subsefirms to meet a new long-term debt requirement quent analysis by the Federal Reserve suggested and a new TLAC requirement. The final rule bolthat certain U.S. municipal securities should qualify sters financial stability by improving the ability of as HQLA because they have liquidity characterisbanking organizations covered by the rule to withtics similar to other HQLA classes, such as corpostand financial stress and failure without imposing rate debt securities. The final rule allows losses on taxpayers. The final rule also requires the investment-grade, U.S. general obligation state and municipal securities to be counted as HQLA up to 15 The rule was finalized in early 2017 and is effective for the 2017 certain levels if they meet the same liquidity criteria capital planning cycle. For further information see www .federalreserve.gov/newsevents/press/bcreg/20170130a.htm. that currently apply to corporate debt securities.

62 103rd Annual Report | 2016 The final rule is available at www.gpo.gov/fdsys/ elevated risk—either directly or indirectly. The pkg/FR-2016-04-11/pdf/2016-07716.pdf. Board consulted with the FDIC and the OCC in making this determination. The Board’s announce- • In May, the federal banking agencies proposed a ment on the countercyclical capital buffer is availnet stable funding ratio rule to strengthen the resilable at www.federalreserve.gov/newsevents/ ience of large banking organizations by requiring press/bcreg/20161024a.htm and the final policy them to maintain a minimum level of stable fundstatement is available at www.gpo.gov/fdsys/pkg/ ing relative to the liquidity of their assets, deriva- FR-2016-02-03/pdf/2016-01934.pdf. tives, and commitments over a one-year period. The proposal is designed to reduce the likelihood • In December, the Board issued a final rule requirthat disruptions to a banking organization’s ing large banking organizations to disclose publicly sources of funding will compromise its liquidity certain quantitative liquidity risk metrics. The disposition. The proposal would require institutions closures will provide market participants and the subject to the rule to maintain sufficient levels of public with reliable and timely information for stable funding, thereby reducing liquidity risk in evaluating the financial strength and resiliency of the banking system. By requiring firms to have the nation’s largest banking organizations. The more stable funding profiles, the proposal would final rule requires large banking organizations to also enhance financial stability. The proposal is disclose their consolidated LCRs each quarter available at www.federalreserve.gov/newsevents/ based on averages over the prior quarter as well as press/bcreg/bcreg20160503a1.pdf. several other LCR-related metrics. Compliance dates would range from April 2017 through Octo- • In September, the Board proposed a rule that ber 2018. The final rule is available at www would strengthen existing requirements and limita- .federalreserve.gov/newsevents/press/bcreg/ tions on the physical commodity activities of bcreg20161219a1.pdf. FHCs. The proposal would help reduce the catastrophic, legal, reputational, and financial risks that International Coordination on Supervisory physical commodity activities pose to FHCs. Spe- Policies cifically, the proposal would require firms to hold As a member of several international financial additional capital in connection with activities standard-setting bodies, the Federal Reserve actively involving physical commodities for which existing participates in efforts to advance sound supervisory laws would impose liability for such commodities’ policies for internationally active financial organizaunauthorized release into the environment. In additions and to enhance the strength and stability of the tion, the proposal would rescind authorizations international financial system. By participating in the that permit FHCs to engage in energy tolling and development of international regulatory standards, energy management activities and establish new the Federal Reserve can influence these standards in public reporting requirements. The proposal is ways to promote the financial stability of the United available at www.gpo.gov/fdsys/pkg/FR-2016-09-30/ States and the competitiveness of U.S. firms. pdf/2016-23349.pdf. • In October, the Board voted to affirm the counter- Basel Committee on Banking Supervision cyclical capital buffer in the United States at its cur- During 2016, the Federal Reserve participated in rent level of 0 percent. The Board made this deter- ongoing international initiatives to track the progress mination in accordance with the Board’s policy of implementation of the BCBS framework in memstatement adopted in September 2016 for setting ber countries. the countercyclical capital buffer for private-sector credit exposures located in the United States. The The Federal Reserve contributed to supervisory countercyclical capital buffer is a macroprudential policy recommendations, reports, and papers issued tool that can be used to increase the resilience of for consultative purposes or finalized by the BCBS the financial system by raising capital requirements that are designed to improve the supervision of on internationally active banking organizations banking organizations’ practices and to address spewhen there is an elevated risk of above-normal cific issues that emerged during the financial crisis. future losses and when the banking organizations The list below includes key final and consultative for which capital requirements would be raised by papers issued in 2016. the buffer are exposed to or are contributing to this

Supervision and Regulation 63 Final papers: • Regulatory treatment of accounting provisions - discussion document (issued in October and available • Fundamental review of the trading book – Minimum at www.bis.org/bcbs/publ/d385.pdf). capital requirements for market risk (issued in January and available at www.bis.org/bcbs/publ/ • Regulatory treatment of accounting provisions – d352.pdf). interim approach and transitional arrangements (issued in October and available at www.bis.org/ • Frequently asked questions on the Basel III leverage bcbs/publ/d386.htm). ratio framework (issued in April and available at www.bis.org/bcbs/publ/d365.pdf). Financial Stability Board • Interest rate risk in the banking book (issued in In 2016, the Federal Reserve continued its participa- April and available at www.bis.org/bcbs/publ/ tion in the activities of the FSB, an international d368.pdf). group that helps coordinate the work of national financial authorities and international standard- • Revisions to the securitisation framework (issued in setting bodies, and develops and promotes the imple- July and available at www.bis.org/bcbs/publ/ mentation of financial sector policies in the interest d374.pdf). of financial stability. Several key publications are • Basel III – The Net Stable Funding Ratio: fre- listed below. quently asked questions (issued in July and available • Proposed Policy Recommendations to Address at www.bis.org/bcbs/publ/d375.pdf). Structural Vulnerabilities from Asset Management • Frequently asked questions on the revised Pillar 3 Activities (issued in June and available at www.fsb disclosure requirements (issued in August and avail- .org/wp-content/uploads/FSB-Asset-Managementable at www.bis.org/bcbs/publ/d376.pdf). Consultative-Document.pdf). • Frequently asked questions on the supervisory frame- • Guiding principles on the temporary funding needed work for measuring and controlling large exposures to support the orderly resolution of a global systemi- (issued in September and available at www.bis.org/ cally important bank (“G-SIB”) (issued in August bcbs/publ/d384.pdf) and available at www.fsb.org/wp-content/uploads/ Guiding-principles-on-the-temporary-funding- • TLAC holdings standard (issued in October and needed-to-support-the-orderly-resolution-of-aavailable at www.bis.org/bcbs/publ/d387.pdf). global-systemically-important-bank-“G-SIB”.pdf). Consultative papers: • Guiding Principles on the Internal Total Lossabsorbing Capacity of G-SIBs (“Internal TLAC”) • Standardised Measurement Approach for opera- (issued in December and available at www.fsb.org/ tional risk (issued in March and available at wp-content/uploads/Guiding-Principles-on-thewww.bis.org/bcbs/publ/d355.htm). Internal-Total-Loss-absorbing-Capacity-of- • Pillar 3 disclosure requirements – consolidated and G-SIBs.pdf). enhanced framework (issued in March and available Committee on Payments and Market at www.bis.org/bcbs/publ/d356.htm). Infrastructures • Reducing variation in credit risk-weighted assets – In 2016, the Federal Reserve continued its active parconstraints on the use of internal model approaches ticipation in the activities of the CPMI, a forum in (issued in March and available at www.bis.org/bcbs/ which central banks promote the safety and effipubl/d362.htm). ciency of payment, clearing, settlement, and related arrangements. In conducting its work on financial • Prudential treatment of problem assets - definitions market infrastructures and market-related reforms, of non-performing exposures and forbearance the CPMI often coordinates with IOSCO. Over the (issued in April and available at www.bis.org/bcbs/ course of 2016, CPMI-IOSCO continued to monitor publ/d367.pdf). implementation of the Principles for financial market • Revisions to the Basel III leverage ratio framework infrastructures published in 2012 and produce further (issued in April and available at www.bis.org/bcbs/ guidance on these principles in order to enhance the publ/d365.htm). resilience of central counterparties. In addition, the

64 103rd Annual Report | 2016 CPMI-IOSCO advanced work on the harmonization The Financial Accounting Standards Board (FASB) of data elements reported to trade repositories. The issued a new expected credit losses standard CPMI and CPMI-IOSCO issued several final and (Accounting Standards Update (ASU) 2016-13, consultative reports as well as research reports in Financial Instruments—Credit Losses (Topic 326): 2016. Additional information is available at Measurement of Credit Losses on Financial Instruwww.bis.org. ments), commonly referred to as the current expected credit losses (CECL) methodology, in June 2016.16 International Association of Insurance The new accounting standard introduced a single Supervisors measurement objective to be applied to all financial The Federal Reserve continued its participation in assets carried at amortized cost, including held-for- 2016 in the development of international supervisory investment loans and held-to-maturity debt securistandards and guidance to ensure that they best meet ties. During 2016, the Federal Reserve together with the needs of the U.S. insurance market. The Federal the other federal banking agencies spent significant Reserve continues to participate actively in standard time monitoring developments and providing comsetting at the IAIS in consultation and collaboration ments on significant interpretations and potential with state insurance regulators, the NAIC, and the changes in the proposed standard as members of the Federal Insurance Office to present a coordinated FASB’s Transition Resource Group and through U.S. voice in these processes. The Federal Reserve’s other routine discussions with standard setters, as participation focuses on those aspects most relevant described above. to the supervision of FSOC-designated insurance firms and in research and analysis related to financial In addition to monitoring developments and the stability topics. implementation of the new accounting standard on credit losses, Federal Reserve staff addressed numer- The IAIS issued several final and consultative reports ous issues including accounting for transfers of as well as research reports in 2016. Additional infor- financial instruments, troubled debt restructurings, mation is available at www.iaisweb.org. accounting alternatives for private companies, financial instrument accounting and reporting, consolida- Accounting Policy tion of structured entities, securitizations, securities The Federal Reserve supports sound corporate gover- financing transactions, revenue recognition, accountnance and effective accounting and auditing practices ing for incentive compensation, and external and for all regulated financial institutions. Accordingly, internal audit processes. the Federal Reserve’s accounting policy function is responsible for providing expertise in policy develop- Federal Reserve staff also participated in meetings of ment and implementation efforts, both within and the BCBS Accounting Experts Group and the IAIS outside the Federal Reserve System, on issues affect- Accounting and Auditing Working Group. These ing the banking and insurance industries in the areas groups represent their respective organizations at of accounting, auditing, internal controls over finan- international meetings on accounting, auditing, and cial reporting, financial disclosure, and supervisory disclosure issues affecting global banking and insurfinancial reporting. ance organizations. Working with international bank supervisors, Federal Reserve staff contributed to the Federal Reserve staff regularly consult with key con- development of publications that were issued by the stituents in the accounting and auditing professions, BCBS, including publications on the regulatory treatincluding domestic and international standard- ment of expected credit losses in light of pending setters, accounting firms, accounting and financial changes to accounting standards. In collaboration sector trade groups, and other financial sector regula- with international insurance supervisors, Federal tors to facilitate the Board’s understanding of domestic and international practices; proposed 16 The ASU on credit losses will take effect for SEC filers for fiscal accounting, auditing, and regulatory standards; and years, and interim periods within those fiscal years, beginning after December 15, 2019. For public companies that are not the interactions between accounting standards and SEC filers, the ASU on credit losses will take effect for fiscal regulatory reform efforts. The Federal Reserve also years beginning after December 15, 2020, and interim periods participates in various accounting, auditing, and within those fiscal years. For all other organizations, the ASU on credit losses will take effect for fiscal years beginning after regulatory forums in order to both formulate and December 15, 2020, and for interim periods within fiscal years communicate its views. beginning after December 15, 2021.

Supervision and Regulation 65 Reserve staff also made contributions to work related year. These activities included supporting Doddto enhancing IAIS standards on valuation, disclo- Frank Act initiatives related to stress testing of banks sures, and expectations for external audit-related as well as various regulatory capital-related issues. matters. Credit-Risk Management In 2016, the Federal Reserve issued supervisory guid- The Federal Reserve works with the other federal ance to financial institutions and supervisory staff on banking agencies to develop guidance on the manaccounting matters, as appropriate, and participated agement of credit risk; to coordinate the assessment in a number of supervisory-related activities. For of regulated institutions’ credit-risk management example, Federal Reserve staff practices; and to ensure that institutions properly identify, measure, and manage credit risk. • participated in a banking supervision interagency steering committee established by the federal bank- Shared National Credit Program ing agencies. This steering committee is focused on The Shared National Credit (SNC) program is a key CECL and has developed an overall project plan supervisory program employed by the Federal for the implementation period and has begun issu- Reserve and the other federal banking agencies to ing interagency frequently asked questions to aid in ensure the safety and soundness of the financial the implementation of CECL. The day after the system. SNC is a long-standing program used to FASB issued the new accounting standard on assess credit risk and trends as well as underwriting credit losses in June, the federal banking agencies and risk-management practices associated with the and the NCUA issued the “Joint Statement on the largest and most complex loans shared by multiple New Accounting Standard on Financial Instruregulated financial institutions. After four decades of ments—Credit Losses” that provides initial superannual reviews, in 2016 the federal banking agencies visory views regarding the implementation of the transitioned to twice-annual SNC examinations to new accounting standard (the Federal Reserve increase the ability to react to changing market conissued this as SR letter 16-12, “Interagency Guidditions and to increase the frequency of feedback to ance on the New Accounting Standard on Finaninstitutions on supervisory assessments. cial Instruments—Credit Losses,” which is available at www.federalreserve.gov/bankinforeg/srletters/ A SNC is any loan or formal loan commitment—and sr1612.htm). In December, the federal banking any asset, such as other real estate, stocks, notes, agencies and the NCUA also issued a supervisory bonds, and debentures taken as debts previously conguidance statement, published by the Federal tracted—extended to borrowers by a supervised insti- Reserve as SR letter 16-19, “Frequently Asked tution, its subsidiaries, and affiliates, which has the Questions on the Current Expected Credit Losses following characteristics: an original loan amount Methodology (CECL),” to further aid institutions that aggregates to $20 million or more and either in their implementation of CECL. The guidance is (1) is shared by three or more unaffiliated supervised available at www.federalreserve.gov/bankinforeg/ institutions under a formal lending agreement, or srletters/sr1619.htm; (2) a portion of which is sold to two or more unaffili- • developed and participated in a number of domes- ated supervised institutions with the purchasing institic and international supervisory training programs tutions assuming their pro rata share of the credit and sessions to educate supervisors and bankers risk. about new and emerging accounting and reporting The 2016 SNC review was prepared in the first quartopics affecting financial institutions; and ter of 2016 using data as of September 30, 2015. The • supported the efforts of the Reserve Banks in 2016 SNC portfolio totaled $4.1 trillion, with 10,837 financial institution supervisory activities through credit facilities to 6,676 borrowers. participation in examinations and provision of expert guidance on specific questions related to The SNC examination found that the volume of financial accounting, auditing, reporting, and non-pass criticized assets increased 11.5 percent to disclosures. $421.4 billion. As a percentage of total commitments, the overall criticized asset rate remained elevated at Federal Reserve System staff also provided their 10.3 percent. The level of adversely rated assets in the accounting and business expertise through participa- SNC portfolio continued to be higher than observed tion in other supervisory activities during the past in previous periods of economic expansion, such that

66 103rd Annual Report | 2016 losses could rise considerably in the event of an eco- caused reductions in operating cash flow and lower nomic downturn. The level of credit risk stemmed valuations of reserve assets used to secure financing from a large share of leveraged finance loans under- for further development. Many energy companies written based on weak practices, and the significant responded by taking actions to reduce operating decline in oil prices since mid-2014 that reduced the costs and overhead, while preserving liquidity repayment capacity of obligors in the oil and gas sec- through asset sales, issuance of additional debt and tor. The agencies noted improved underwriting and equity instruments, and drawing on remaining senior risk-management practices related to the most recent bank commitments. leveraged loan originations in 2015 as underwriters continued to better align practices with regulatory Generally, banks were found to have shown flexibility expectations, and as investor risk appetite moderated in working with borrowers by relaxing financial covaway from transactions at the lower end of the credit enants to allow borrowers time to develop strategies spectrum. to curtail borrowing base over-advances, reduce leverage, and reestablish profitable operations. None- Leveraged lending, which accounts for approximately theless, the reductions in liquidity and unsustainable one quarter of the SNC portfolio, remained a focus debt burdens from excessive accumulation of second of the agencies as they continue to evaluate the safety lien and unsecured debt resulted in a significant and soundness of bank underwriting and risk- increase in borrower defaults and bankruptcy filings. management practices relative to expectations articu- Bank commitments to these borrowers were primarlated in the 2013 Interagency Guidance on Leveraged ily in a senior secured position with the lowest risk of Lending (guidance) and subsequent Frequently loss. Asked Questions (FAQs) documents. The 2016 SNC reviews found the incidence of non-pass loan origina- For more information on the 2016 SNC review, visit tions was low. the Board’s website at www.federalreserve.gov/ newsevents/press/bcreg/20160729a.htm. The review noted that banks had made continued progress in aligning their underwriting and risk- Compliance Risk Management management practices with expectations set forth in The Federal Reserve works with international and the 2013 leveraged lending guidance and FAQs. How- domestic supervisors to develop guidance that proever, some gaps between industry practices and motes compliance with Bank Secrecy Act and antisupervisory expectations for safe and sound banking money-laundering compliance (BSA/AML) and remained, which require continued supervisory atten- counter-terrorism laws. tion. Examiners again raised concerns about borrowers’ capacity to repay certain new originations—both Bank Secrecy Act and Anti-Money-Laundering underwritten and refinanced loans—if economic Compliance conditions deteriorated, or if interest rates rose to In 2016, the Federal Reserve continued to actively historical norms. Any downturn in the economy promote the development and maintenance of effeccould result in a significant increase in the already tive BSA/AML compliance risk-management proconsiderable adversely–rated, leveraged lending expo- grams, including developing supervisory strategies sures, especially considering the limited financial flex- and providing guidance to the industry on trends in ibility present in many of the credits that were not BSA/AML compliance. For example, the Federal currently adversely rated. Reserve supervisory staff participated in a number of industry conferences to continue to communicate The severe and prolonged decline in energy prices regulatory expectations and policy interpretations for since 2014 caused financial stress to many energy financial institutions. companies, particularly non-investment grade and unrated exploration and production (E&P) and The Federal Reserve is a member of the Treasury-led energy service companies. Increasing credit risk from BSA Advisory Group, which includes representatives reduced revenue was exacerbated by the high leverage of regulatory agencies, law enforcement, and the of some E&P companies, primarily resulting from financial services industry and covers all aspects of debt-funded acquisitions during recent drilling the BSA. The Federal Reserve also participated in a expansion activity, and corresponding reductions in host of Treasury-led private/public sector dialogues liquidity. The low commodity price environment and with financial institutions, regulators, and supervideclining hedging programs of many companies sors from Mexico, the United Kingdom, Central

Supervision and Regulation 67 America, and the Gulf States, to name a few. These financing framework against the FATF recommendadialogues are designed to promote information shar- tions and included a review of the U.S. legal, law ing and understanding of BSA/AML issues between enforcement, and supervisory structures. U.S. and country-specific financial sectors. In addition, the Federal Reserve participated in meetings The Federal Reserve also continues to participate in during the year to discuss BSA/AML issues with del- committees and subcommittees through the Bank for egations from Kyrgyzstan, Belize, the Marshall International Settlements. Specifically, the Federal Islands, Jamaica, St. Maarten, and Curaçao, primar- Reserve actively participates in the AML Experts ily regarding foreign correspondent banking. Group under the BCBS that focuses on AML and counter-terrorism financing issues as well as the The Federal Reserve also participates in the FFIEC CPMI. With respect to the AML Experts Group, the BSA/AML working group, a monthly forum for the Federal Reserve contributed to developing the annex discussion of pending BSA policy and regulatory to the General Guide to Account Opening, issued by matters. In addition to the FFIEC agencies, the BSA/ the BCBS in February 2016, which supplements pre- AML working group includes the Financial Crimes vious guidance on the sound management of risks Enforcement Network (FinCEN) and, on a quarterly related to money laundering and financing of terrorbasis, the SEC, the CFTC, the Internal Revenue Ser- ism. In addition, the Federal Reserve participated in vice, and the Office of Foreign Assets Control developing a consultative document on foreign corre- (OFAC). The chairmanship rotates among its mem- spondent banking issued in November 2016, which is bers, and the Federal Reserve continued to chair the another annex to the same sound management of working group throughout 2016. The FFIEC BSA/ risks guidance referred to above. In addition, the AML working group is responsible for updating the Federal Reserve participated in drafting a report on FFIEC Bank Secrecy Act/Anti-Money Laundering Correspondent Banking issued in July 2016 by the Examination Manual. The FFIEC developed this CPMI Correspondent Banking Working Group. The manual as part of its ongoing commitment to pro- report made recommendations which could potenvide current and consistent interagency guidance on tially alleviate some of the costs and concerns associrisk-based policies, procedures, and processes for ated with the reduction of foreign correspondent financial institutions to comply with the BSA and banking services. safeguard their operations from money laundering and terrorist financing. Incentive Compensation To foster improved incentive compensation practices Throughout 2016, the Federal Reserve continued to in the financial industry, the Federal Reserve along regularly share examination findings and enforce- with the other federal banking agencies has adopted ment proceedings with FinCEN as well as with interagency guidance oriented to the risk-taking OFAC under the interagency MOUs finalized in 2004 incentives created by incentive compensation and 2006. arrangements.17 The guidance is principles-based, recognizing that the methods used to achieve appro- International Coordination on Sanctions, priately risk-sensitive compensation arrangements Anti-Money-Laundering, and Counter-Terrorism likely will differ significantly across and within firms. Financing Three principles are at the core of the guidance: The Federal Reserve participates in a number of • Incentive compensation arrangements should balinternational coordination initiatives related to sancance risk and financial results in a manner that tions, money laundering, and terrorism financing. does not encourage employees to expose their orga- The Federal Reserve has a long-standing role in the nizations to imprudent risks. U.S. delegation to the intergovernmental Financial Action Task Force (FATF) and its working groups, • A banking organization’s risk-management procontributing a banking supervisory perspective to cesses and internal controls should reinforce and formulation of international standards. Throughout support the development and maintenance of bal- 2016, the Federal Reserve also participated in extenanced incentive compensation arrangements, and sive collaboration with the federal banking and other incentive compensation should not hinder risk agencies in order to develop a coordinated U.S. govmanagement and controls. ernment response for the 2016 FATF mutual evaluation of the United States. The FATF mutual evalua- 17 See “Guidance on Sound Incentive Compensation Policies,” tion assessed the U.S. AML and counter-terrorist 75 Fed. Reg. 36,395–36,414 (June 25, 2010).

68 103rd Annual Report | 2016 • Banking organizations should have strong and between $10 billion and $50 billion. The guidance effective corporate governance of incentive is available at www.federalreserve.gov/bankinforeg/ compensation. srletters/sr1604.htm. • In December, the Board issued SR letter 16-18, Section 956 of the Dodd-Frank Act requires the Fed- “Procedures for a Banking Entity to Request an eral Reserve Board, OCC, FDIC, SEC, NCUA, and Extended Transition Period for Illiquid Funds,” Federal Housing Finance Agency to prohibit which provides guidance on how banking entities incentive-based arrangements which the agencies may seek an extension to conform their investdetermine to encourage inappropriate risks by covments in a narrow class of funds that qualify as ered institutions. The agencies published a notice of “illiquid funds” to the requirements of section 619 proposed rulemaking in the Federal Register on of the Dodd-Frank Act, commonly known as the June 10, 2016, and are continuing to consider the Volcker rule. In particular, the supervisory guidcomments received. Additionally, through ongoing ance provides banking entities with information on supervision, the Federal Reserve continues to help the procedures for submitting a request for an improve incentive compensation practices at the largextended transition period to conform investments est firms. in a limited class of hedge funds and private equity Other Policymaking Initiatives funds (covered funds) that qualify as an illiquid fund pursuant to section 13 of the Bank Holding • In March, the federal banking agencies issued SR Company Act of 1956. The supervisory guidance is letter 16-3, “Interagency Guidance on Funds available at www.federalreserve.gov/bankinforeg/ Transfer Pricing Related to Funding and Contin- srletters/sr1618.htm. gent Liquidity Risks,” which seeks to address weaknesses observed in large financial institutions’ • In December, the federal banking agencies finalized funds transfer pricing practices related to funding an interim final rule issued in February that risk (including interest rate and liquidity compo- increases the number of small banks and savings nents) and contingent liquidity risk. The guidance associations eligible for an 18-month examination builds on the principles of sound liquidity risk cycle rather than a 12-month cycle. The final rule is management described in previous supervisory intended to reduce regulatory compliance costs for guidance letters and it applies to large financial smaller institutions, while maintaining safety and institutions that are domestic BHCs, SLHCs, and soundness protections. Under the final rule, qualistate member banks with consolidated assets of fying well-capitalized and well-managed banks and $250 billion or more or foreign exposure of savings associations with less than $1 billion in $10 billion or more, and to the U.S. operations of total assets are eligible for an 18-month examinaforeign banking organizations with combined U.S. tion cycle. Previously, only firms with less than assets of $250 billion or more. The guidance is $500 million in total assets were eligible for the available at www.federalreserve.gov/bankinforeg/ extended examination cycle. Qualifying wellsrletters/sr1603.htm. capitalized and well-managed U.S. branches and agencies of foreign banks with less than $1 billion • In March, the Board issued SR letter 16-4, “Relyin total assets are also eligible. The final rule ing on the Work of the Regulators of the Subsidincreases the number of institutions that may iary Insured Depository Institution(s) of Bank qualify for an 18-month examination cycle by more Holding Companies and Savings and Loan Holdthan 600 to approximately 4,800 banks and savings ing Companies with Total Consolidated Assets of associations. In addition, the final rule increases the Less than $50 Billion,” which explains the Board’s number of U.S. branches and agencies of foreign expectations for its examiners’ reliance on the work banks that may qualify for an 18-month examinaof the regulators of insured depository institution tion cycle by 30 branches and agencies to a total of subsidiaries in the supervision of BHCs and 89. The final rule is available at www.gpo.gov/fdsys/ SLHCs. The letter presents separate tailored superpkg/FR-2016-12-16/pdf/2016-30133.pdf. The visory approaches for community banking organi- Board also issued a supervisory guidance statement zations, which are defined as companies with total providing updates on the expanded examination consolidated assets of $10 billion or less, and for cycle of 18 months for certain state member banks regional banking organizations, which are defined and U.S. branches and agencies of foreign banking as companies with total consolidated assets

Supervision and Regulation 69 organizations, which was subsequently updated in —add one new threshold for reinsurance recover- January 2017. ables; and Regulatory Reports —eliminate the concept of extraordinary items and revise affected data items. The Federal Reserve’s data collections, reporting, and governance function is responsible for develop- • FR Y-6, FR Y-7, and FR Y-10—to modify the coning, coordinating, and implementing regulatory fidentiality questions on the reporting forms and reporting requirements for various financial report- instructions, require foreign banking organizations ing forms filed by domestic and foreign financial to report their interest in an IHC on the FR Y-7 institutions subject to Federal Reserve supervision. organization chart, expand the FR Y-10 reporting Federal Reserve staff members interact with other form and instructions to include IHC reporting federal agencies and relevant state supervisors, guidance in the instructions, provide the option of including foreign bank supervisors as needed, to rec- electronically submitting the FR Y-6, and clarify ommend and implement appropriate and timely revi- several items in the FR Y-6, FR Y-7, and FR Y-10 sions to the reporting forms and the attendant reporting instructions. instructions. • FR Y-7Q—to collect 12 new data items to monitor Holding Company Regulatory Reports compliance with enhanced prudential standards for foreign banking organizations adopted pursuant to The Federal Reserve requires that U.S. holding com- Subparts N and O of Regulation YY. The new data panies (HCs) periodically submit reports that provide items allow the Federal Reserve to determine information about their financial condition and whether a foreign banking organizations with total structure.18 This information is essential to formulatconsolidated assets of $50 billion or more meets ing and conducting financial institution regulation capital adequacy standards at the consolidated and supervision. It is also used in responding to level that are consistent with the Basel Capital requests by Congress and the public for information Framework, as defined in Regulation YY. about HCs and their nonbank subsidiaries. Foreign banking organizations also are required to periodi- • FR Y-14—to add a phased-in requirement for cally submit reports to the Federal Reserve. For more LISCC BHC respondents to attest to the material information on the various reporting forms, see www correctness and conformance to instructions of, .federalreserve.gov/apps/reportforms/default.aspx. and internal controls around, the data reported on the FR Y-14A/Q/M (effective beginning Decem- During 2016, the following reporting forms were ber 31, 2016) and add a similar phased-in attestarevised: tion requirement for LISCC IHCs (effective beginning December 31, 2017). Also, the Federal • FR Y-9C—to direct institutions using the advanced Reserve modified other elements of the report risk-based capital adequacy standards to report the schedules to improve consistency of reported data supplementary leverage ratio (SLR) and implement across firms, address industry concerns, and a number of revisions, most of which were consisimprove supervisory modeling. tent with changes to the FFIEC Consolidated Reports of Condition and Income (Call Reports) • FR Y-15—to extend the amount of time that cer- (FFIEC 031 & 041; OMB No. 7100-0036). The tain firms have to complete Schedule G, which cap- FR Y-9C was revised (effective September 2016 tures short-term wholesale funding (effective and March 2017) to December 31, 2016). The Federal Reserve also increased the reporting frequency from annual to —delete certain existing data items pertaining to quarterly (effective June 30, 2016). The Federal troubled debt restructurings, FDIC loss share Reserve uses the data to monitor the systemic risk agreements and unused commitments to assetprofile of the institutions which are subject to backed commercial paper conduits; enhanced prudential standards under section 165 —increase existing reporting thresholds for certain of the Dodd-Frank Act. data items; • Form TA-1—to require respondents to submit the forms and attachments to a designated Federal 18 HCs are defined as BHCs, intermediate holding companies (IHCs), SLHCs, and securities holding companies. Reserve Board e-mail address, make instructional

70 103rd Annual Report | 2016 clarifications, and reduce the number of copies reg- (LEI) if the organization already has a currently istrants are required to file with the Federal valid LEI. Reserve Board. • FFIEC 102, FFIEC 009, and FFIEC 009a were revised to collect the LEI if the organization Also during 2016, the Federal Reserve implemented already has a currently valid LEI. reporting requirements for U.S. IHCs to require designated IHCs to file regulatory reports applicable to • FFIEC 031 and FFIEC 041 (Call Reports) were holding companies, and comply with the information revised effective September 30, 2016, to collection requirements associated with regulatory —delete certain existing data items pertaining to capital requirements beginning in 2016.19 In addition, troubled debt restructurings and unused commitseparate final notices were published for IHCs to ments to asset-backed commercial paper begin filing several FFIEC reporting forms in 2016.20 conduits; The information collected on these reports provides the Board with information regarding the financial —increase existing reporting thresholds for certain condition of the IHC, foreign and domestic legal data items; entities, and intercompany transactions between legal —add contact information for the reporting instientities. In addition, the Federal Reserve required an tution’s chief executive officer; IHC to provide U.S. financial information in support of the Federal Reserve’s supervisory programs, —report the LEI for the reporting institution (if including its capital assessment and stress testing the institution already has a currently valid LEI); programs. —eliminate the concept of extraordinary items and revise affected data items; FFIEC Regulatory Reports —add a new item on “dually payable” deposits in The law establishing the FFIEC and defining its foreign branches of U.S. banks (FFIEC 031 functions requires the FFIEC to develop uniform only); and reporting systems for federally supervised financial institutions. The Federal Reserve, along with the —revise the information reported about the SLR other member FFIEC agencies, requires financial by institutions using the advanced risk-based institutions to submit various uniform regulatory capital adequacy standards. reports. This information is essential to formulating and conducting supervision and regulation and for Call Report Burden Reduction Initiative for the ongoing assessment of the overall soundness of Community Institutions the nation’s financial system. During 2016, the fol- In September 2015, the FFIEC announced detailed lowing FFIEC reporting forms were implemented or steps regulators are taking to streamline and simrevised. plify regulatory reporting requirements for community banks and reduce their reporting burden. The • FFIEC 101 was revised to include the addition of objectives of the community bank burdentwo new tables to collect information related to the reduction initiative are consistent with the early SLR disclosures required in section 173 of the feedback the FFIEC received as part of the regulaagencies’ advanced approaches risk-based capital tory review currently being conducted as required rule and to generally align with the international by the Economic Growth and Regulatory Paperleverage ratio common disclosure template adopted work Reduction Act of 1996. Work on this initiaby the BCBS. The two new SLR tables ensure tive continued throughout 2016. transparency and comparability of reporting of regulatory capital elements among internationally As an initial step to streamline some reporting active banking organizations. The FFIEC 101 was requirements, the federal banking agencies, under also revised to collect the Legal Entity Identifier the auspices of the FFIEC, sought comment on proposals to, in part, eliminate or revise several Call Report data items. These changes would simplify 19 81 Fed. Reg. 35,016 (June 1, 2016): FR 2314, FR 2314S, FR 4200, FR 4201, FR Y-6, FR Y-9C, FR Y-9LP, FR Y-9SP, FR the reporting requirements for banks and savings Y-9ES, FR Y-9CS, FR Y-11, FR Y-11S, FR Y-12, FR Y-12A, associations. FR Y-14A, FR Y-14Q, FR Y-14M, and FR Y-15. 20 81 Fed. Reg. 47,237 (July 20, 2016): FFIEC 009 and FFIEC In evaluating changes to the Call Reports, the 009a, 81 Fed. Reg. 55,260 (September 19, 2016): FFIEC 101, and 81 Fed. Reg. 70,739 (October 13, 2016): FFIEC 102. FFIEC sought to balance reporting burden against

Supervision and Regulation 71 regulators’ need for reliable data to ensure banks • The data items serve a long-term regulatory or and savings associations operate in a safe and public policy purpose by assisting the FFIEC’s sound manner and are able to meet the financial member entities in fulfilling their missions of needs of the communities they serve. ensuring the safety and soundness of financial institutions and the financial system and protect- In addition to the reporting changes proposed, the ing consumers as well as entity-specific missions FFIEC also focused on four other areas: affecting national and state-chartered institutions; • accelerating the start of a statutorily required review of the continued appropriateness of the • The data items maximize practical utility and data items collected in the Call Reports, which minimize, to the extent practicable and appropriwas scheduled to commence in 2017;21 ate, burden on financial institutions; and • evaluating the feasibility and merits of creating a • Equivalent data items are not readily available streamlined version of the quarterly Call Report through other means. for community institutions; Other Burden Reduction Initiatives • continuing dialogue with community institutions To reduce reporting burden and respond to industo identify additional opportunities to reduce try comments, the Federal Reserve developed a reporting burden by revising or redefining Call mapping document (Appendix VII to the FR Report data items; and 2052a instructions) to assist firms required to sub- • reaching out to banks and savings associations mit both the FR 2052a (liquidity monitoring through teleconferences and webinars to explain report) and the FR Y-15 (systemic risk report). The upcoming reporting changes and clarify technical document maps specific tables of the FR 2052a to reporting requirements. specific line items on Schedule G (Short-Term Wholesale Funding) of the FR Y-15. Progress made during 2016 by the FFIEC on this Supervisory Information Technology multiyear initiative included implementing previously proposed burden-reducing changes to the The Federal Reserve’s supervisory information Call Reports, effective September 2016, and technology function (SIT), under the governance of announcing further burden-reducing changes to the Subcommittee on Supervisory Administration the Call Reports to be implemented in March 2017. and Technology, works to deliver information tech- In addition, the FFIEC finalized a new and nology solutions within the supervision and regulastreamlined “Call Report” for small financial instition function. Working collaboratively with the tutions (FFIEC 051) effective March 2017. Finan- Federal Reserve System supervision and regulation cial institutions with domestic offices only and less business sponsors, the services provided to the busithan $1 billion in total assets would qualify for this ness line include the development and maintenance new report, representing approximately 90 percent of software applications and tools to assist with the of all institutions required to file Call Reports. The examination of supervised institutions, data collecstreamlined Call Report would reduce the existing tions, collaboration, provisioning and review of Call Report from 85 to 61 pages resulting from the user-access, quantitative analysis and data visualremoval of approximately 950—or about 40 perization software, and information security. SIT also cent of the nearly 2,400—data items in the Call provides information technology project manage- Report. ment support to several critical national business applications supporting supervision and regulation. As a foundation for the actions it is undertaking, the FFIEC is using the guiding principles devel- Supervisory and support tools. To support examinoped in 2015 for use in evaluating potential addiers and other supervisory staff, SIT deployed tools tions and deletions of Call Report data items and to support the collection, use, and storage of other revisions to the Call Reports. In general, any supervisory data. SIT integrated supervisory plan- Call Report changes must meet three guiding prinning and collection tools with a task and resource ciples for the data items to be collected: management program allowing management to better track and align resources. SIT deployed 21 This review is mandated by section 604 of the Financial Services Regulatory Relief Act of 2006 (12 USC 1817(a)(11)). advanced quantitative analysis and data visualiza-

72 103rd Annual Report | 2016 tion software to allow supervisory analysts to glean between programs cannot always be matched and insights from supervisory data. requires alignment for cross-portfolio purposes. The NIC continues to ensure that the underlying Streamlined data access and improved security. SIT data is consistent, readily available, and easily streamlined data access for the supervision func- accessible for authorized use. The NIC also works tion, while enhancing overall information security. to ensure that all NIC data is easily understood SIT provides access to data through a central and integrated in a flexible manner. access management tool to support data, applications, and research access-related responsibilities, Data collections. The NIC provides program budand establishes effective prevention and detection getary oversight along with ensuring that informacontrols to limit information security threats. In tion technology solutions for data collections meet addition to data access provisioning, the tool sup- architectural standards. Increased emphasis on ports information security measures through rou- data governance, security, and awareness prompted tine procedures to verify users’ access to data and the build-out of a data collection management information to confirm whether there is a contin- system that provides intake on data requests, playued need for this access. book and tracking of the regulatory process as well as overall status reporting. The National Information Center The National Information Center (NIC) is the Fed- Staff Development eral Reserve’s authoritative source for supervisory, The Federal Reserve’s staff development program financial, and banking structure data as well as supports the ongoing development of nearly 3,000 supervisory documents. The NIC includes (1) data professional supervisory staff, ensuring that they on banking structure throughout the United States have the requisite skills necessary to meet their and foreign banking concerns, (2) national applicaevolving supervisory responsibilities. The Federal tions supporting the various supervisory programs Reserve also provides course offerings to staff at and the data they capture, (3) data collection prostate banking agencies. Training activities in 2016 cesses, and (4) the sharing of the information with are summarized in table 3. external agencies. Examiner Commissioning Program Information sharing and external collaboration. In The Federal Reserve System’s Examiner Commis- 2016, in support of increasing requests for data sioning Program for assistant examiners is set forth from other regulatory agencies, the NIC developed in SR letter 98-2, “New Training Program Leading a standard process to ensure that the appropriate to Commissioned Examiner Status.”22 Examiners prioritization and conditions were determined by choose from one of two specialty tracks: (1) safety the corresponding business areas for each data and soundness or (2) consumer compliance. In request received. NIC also began working with the 2016, 98 examiners passed the proficiency examibusiness areas to identify gaps in business capabilination (69 in safety and soundness and 29 in conties for collaboration between the agencies. sumer compliance). Document management. A high priority for the On average, individuals move through a combina- NIC was to improve document tracking, storage, tion of classroom offerings, self-paced learning, and access through the implementation of docuvirtual instruction, and on-the-job training over a ment management software. The newly deployed period of three years. Achievement is measured by software eliminates point-to-point interfaces completing the required course content, demonbetween document management systems and sysstrating adequate on-the-job knowledge, and passtems uploading or referencing documents. The ing a professionally validated proficiency software also moves and tracks documents between examination. management systems as the documents progress through their life cycle. In 2016, the Federal Reserve completed a major redesign of the community banking organization Data quality and usability. Efforts continue to meet proficiency examination. In addition, further learnthe demand of the increasing amount of data being collected and shared. Much of the data is collected 22 SR letter 98-2 is available at www.federalreserve.gov/boarddocs/ under revised supervisory programs. Similar data srletters/1998/sr9802.htm.

Supervision and Regulation 73 Table 3. Training for banking supervision and regulation, 2016 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 1,243 190 650 130 FFIEC 778 474 412 103 Rapid Response2 14,545 3,212 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. ing units were released for the Large Financial In administering these statutes, the Federal Reserve Institutions Examiner Commissioning Program, acts on a variety of applications and notices that which will continue to be developed and deployed directly or indirectly affect the structure of the U.S. in 2017. banking system at the local, regional, and national levels; the international operations of domestic Continuing Professional Development banking organizations; or the U.S. banking opera- Throughout 2016, the Federal Reserve System con- tions of foreign banks. The applications and tinued to enhance its continuing professional devel- notices concern BHC and SLHC formations and opment program. Rapid Response sessions evolved acquisitions, bank mergers, and other transactions to incorporate interactive elements into the sessions involving banks and savings associations or nonas well as provide continuing professional educa- bank firms. In 2016, the Federal Reserve acted on tion credits for select archived sessions. 1,073 applications filed under the six statutes. In 2016, the Federal Reserve published its Semian- Regulation nual Report on Banking Applications Activity, which provides aggregate information on proposals The Federal Reserve exercises important regulatory filed by banking organizations and reviewed by the influence over entry into the U.S. banking system Federal Reserve. The report includes statistics on structure through its administration of several fed- the number of proposals that have been approved, eral statutes. The Federal Reserve is also respon- denied, withdrawn, mooted, or returned as well as sible for imposing margin requirements on securi- general information about the length of time taken ties transactions. In carrying out its responsibilities, to process proposals and common reasons for prothe Federal Reserve coordinates supervisory activi- posals to be withdrawn from consideration. The ties with the other federal banking agencies, state reports are available at www.federalreserve.gov/ agencies, functional regulators (that is, regulators bankinforeg/semiannual-reports-bankingfor insurance, securities, and commodities firms), applications-activity.htm. and foreign bank regulatory agencies. Bank Holding Company Act Applications Regulation of the U.S. Banking Structure Under the BHC Act, a corporation or similar legal entity must obtain the Federal Reserve’s approval The Federal Reserve administers six federal statutes before forming a BHC through the acquisition of that apply to BHCs, FHCs, member banks, one or more banks in the United States. Once SLHCs, and foreign banking organizations: the formed, a BHC must receive Federal Reserve BHC Act, the Bank Merger Act, the Change in approval before acquiring or establishing additional Bank Control Act, the Federal Reserve Act, sec- banks. Also, BHCs generally may engage in only tion 10 of the Home Owners’ Loan Act (HOLA), those nonbanking activities that the Board has preand the International Banking Act. viously determined to be closely related to banking

74 103rd Annual Report | 2016 under section 4(c)(8) of the BHC Act. Depending Bank Merger Act Applications on the circumstances, these activities may or may The Bank Merger Act requires that all applications not require Federal Reserve approval in advance of involving the merger of insured depository institutheir commencement.23 tions be acted on by the relevant federal banking agency. The Federal Reserve has primary jurisdic- When reviewing a BHC application or notice that tion if the institution surviving the merger is a state requires approval, the Federal Reserve considers member bank. In acting on a merger application, the financial and managerial resources of the appli- the Federal Reserve considers the financial and cant, the future prospects of both the applicant managerial resources of the applicant, the future and the firm to be acquired, financial stability fac- prospects of the existing and combined organizators, the convenience and needs of the community tions, financial stability factors, the convenience to be served, the potential public benefits, the com- and needs of the communities to be served, and the petitive effects of the application, and the appli- competitive effects of the proposed merger. The cant’s ability to make available to the Federal Federal Reserve also must consider the views of the Reserve information deemed necessary to ensure U.S. Department of Justice regarding the competicompliance with applicable law. The Federal tive aspects of any proposed bank merger involving Reserve also must consider the views of the U.S. unaffiliated insured depository institutions. In Department of Justice regarding the competitive 2016, the Federal Reserve approved 55 merger aspects of any proposed BHC acquisition involving applications under the Bank Merger Act. unaffiliated insured depository institutions. In the case of a foreign banking organization seeking to Change in Bank Control Act Applications acquire control of a U.S. bank, the Federal Reserve The Change in Bank Control Act requires indialso considers whether the foreign bank is subject viduals and certain other parties that seek control to comprehensive supervision or regulation on a of a U.S. bank, BHC, or SLHC to obtain approval consolidated basis by its home-country supervisor. from the relevant federal banking agency before In 2016, the Federal Reserve acted on 269 applicacompleting the transaction. The Federal Reserve is tions and notices filed by BHCs to acquire a bank responsible for reviewing changes in the control of or a nonbank firm, or to otherwise expand their state member banks, BHCs, and SLHCs. In its activities. review, the Federal Reserve considers the financial position, competence, experience, and integrity of A BHC may repurchase its own shares from its the acquiring person; the effect of the proposed shareholders. Certain stock redemptions require change on the financial condition of the bank, prior Federal Reserve approval. The Federal BHC, or SLHC being acquired; the future pros- Reserve may object to stock repurchases by holdpects of the institution to be acquired; the effect of ing companies that fail to meet certain standards, the proposed change on competition in any relincluding the Board’s capital adequacy guidelines. evant market; the completeness of the information In 2016, the Federal Reserve acted on seven stock submitted by the acquiring person; and whether repurchase applications by BHCs. the proposed change would have an adverse effect on the Deposit Insurance Fund. A proposed trans- The Federal Reserve also reviews elections submitaction should not jeopardize the stability of the ted by BHCs seeking FHC status under the authorinstitution or the interests of depositors. During its ity granted by the Gramm-Leach-Bliley Act. BHCs review of a proposed transaction, the Federal seeking FHC status must file a written declaration Reserve also may contact other regulatory or law with the Federal Reserve. In 2016, 48 domestic and enforcement agencies for information about rel- 2 foreign FHC declarations were approved. evant individuals. In 2016, the Federal Reserve approved 163 change in control notices. Federal Reserve Act Applications 23 Since 1996, the BHC Act has provided an expedited prior notice Under the Federal Reserve Act, a bank must seek procedure for certain permissible nonbank activities and for acquisitions of small banks and nonbank entities. Since that Federal Reserve approval to become a member time, the BHC Act has also permitted well-run BHCs that sat- bank. A member bank may be required to seek isfy certain criteria to commence certain other nonbank activi- Federal Reserve approval before expanding its ties on a de novo basis without first obtaining Federal Reserve approval. operations domestically or internationally. State

Supervision and Regulation 75 member banks must obtain Federal Reserve Reserve approval before waiving dividends declared approval to establish domestic branches, and all by the MHC’s subsidiary. In 2016, the Federal member banks (including national banks) must Reserve acted on one MHC reorganization applicaobtain Federal Reserve approval to establish for- tion. In 2016, the Federal Reserve acted on four eign branches. When reviewing applications for applications filed by MHCs to convert to stock membership, the Federal Reserve considers, among form, and six applications to waive dividends. other things, the bank’s financial condition and its record of compliance with banking laws and regu- When reviewing an SLHC application or notice lations. When reviewing applications to establish that requires approval, the Federal Reserve considdomestic branches, the Federal Reserve considers, ers the financial and managerial resources of the among other things, the scope and nature of the applicant, the future prospects of both the applibanking activities to be conducted. When reviewing cant and the firm to be acquired, the convenience applications for foreign branches, the Federal and needs of the community to be served, the Reserve considers, among other things, the condi- potential public benefits, the competitive effects of tion of the bank and the bank’s experience in inter- the application, and the applicant’s ability to make national banking. In 2016, the Federal Reserve available to the Federal Reserve information acted on 27 membership applications, 451 new and deemed necessary to ensure compliance with applimerger-related domestic branch applications, and cable law. The Federal Reserve also must consider one foreign branch application. the views of the U.S. Department of Justice regarding the competitive aspects of any SLHC proposal State member banks also must obtain Federal involving the acquisition or merger of unaffiliated Reserve approval to establish financial subsidiaries. insured depository institutions. These subsidiaries may engage in activities that are financial in nature or incidental to financial activi- The Federal Reserve also reviews elections submitties, including securities-related and insurance ted by SLHCs seeking status as FHCs under the agency-related activities. In 2016, two financial sub- authority granted by the Dodd-Frank Act. SLHCs sidiary applications were approved. seeking FHC status must file a written declaration with the Federal Reserve. In 2016, no SLHC FHC Home Owners’ Loan Act Applications declarations were received. Under HOLA, a corporation or similar legal entity must obtain the Federal Reserve’s approval before Overseas Investment Applications by U.S. forming an SLHC through the acquisition of one Banking Organizations or more savings associations in the United States. U.S. banking organizations may engage in a broad Once formed, an SLHC must receive Federal range of activities overseas. Many of the activities Reserve approval before acquiring or establishing are conducted indirectly through Edge Act and additional savings associations. Also, SLHCs genagreement corporation subsidiaries. Although most erally may engage in only those nonbanking activiforeign investments are made under general conties that are specifically enumerated in HOLA or sent procedures that involve only after-the-fact that the Board has previously determined to be notification to the Federal Reserve, large and other closely related to banking under section 4(c)(8) of significant investments require prior approval. In the BHC Act. Depending on the circumstances, 2016, the Federal Reserve approved 17 applications these activities may or may not require Federal and notices for overseas investments by U.S. bank- Reserve approval in advance of their commenceing organizations, many of which represented ment. In 2016, the Federal Reserve acted on investments through an Edge Act or agreement 15 applications filed by SLHCs to acquire a savings corporation. association or a nonbank firm, or to otherwise expand their activities. International Banking Act Applications Under HOLA, a savings association reorganizing The International Banking Act, as amended by the to a mutual holding company (MHC) structure Foreign Bank Supervision Enhancement Act of must receive Federal Reserve approval prior to its 1991, requires foreign banks to obtain Federal reorganization. In addition, an MHC must receive Reserve approval before establishing branches, Federal Reserve approval before converting to agencies, commercial lending company subsidiaries, stock form, and MHCs must receive Federal or representative offices in the United States.

76 103rd Annual Report | 2016 In reviewing applications, the Federal Reserve gen- Enforcement of Other Laws and erally considers whether the foreign bank is subject Regulations to comprehensive supervision or regulation on a consolidated basis by its home-country supervisor. The Federal Reserve’s enforcement responsibilities It also considers whether the home-country super- also extend to the disclosure of financial informavisor has consented to the establishment of the tion by state member banks and the use of credit to U.S. office; the financial condition and resources of purchase and carry securities. the foreign bank and its existing U.S. operations; the managerial resources of the foreign bank; Financial Disclosures by State Member whether the home-country supervisor shares infor- Banks mation regarding the operations of the foreign Under the Securities Exchange Act of 1934 and the bank with other supervisory authorities; whether Federal Reserve’s Regulation H, certain state memthe foreign bank has provided adequate assurances ber banks are required to make financial disclothat information concerning its operations and sures to the Federal Reserve using the same reportactivities will be made available to the Federal ing forms (such as Form 10K—annual report and Reserve, if deemed necessary to determine and Schedule 14A—proxy statement) that are normally enforce compliance with applicable law; whether used by publicly held entities to submit information the foreign bank has adopted and implemented to the SEC.24 As most of the publicly held banking procedures to combat money laundering and organizations are BHCs and the reporting threshwhether the home country of the foreign bank is old was recently raised, only two state member developing a legal regime to address money laun- banks were required to submit data to the Federal dering or is participating in multilateral efforts to Reserve in 2016. The information submitted by combat money laundering; and the record of the these two small state member banks is available to foreign bank with respect to compliance with U.S. the public upon request and is primarily used for law. In 2016, the Federal Reserve approved five disclosure to the bank’s shareholders and public applications by foreign banks to establish branches, investors. agencies, or representative offices in the United States. Assessments for Supervision and Regulation The Dodd-Frank Act directs the Board to collect Public Notice of Federal Reserve Decisions assessments, fees, or other charges equal to the Certain decisions by the Federal Reserve that total expenses the Board estimates are necessary or involve an acquisition by a BHC, a bank merger, a appropriate to carry out the supervisory and reguchange in control, or the establishment of a new latory responsibilities of the Board for BHCs and U.S. banking presence by a foreign bank are made SLHCs with total consolidated assets of $50 billion known to the public by an order or an announce- or more and nonbank financial companies desigment. Orders state the decision, the essential facts nated for Board supervision by the FSOC. As a of the application or notice, and the basis for the collecting entity, the Board does not recognize the decision; announcements state only the decision. supervision and regulation assessments as revenue All orders and announcements are made public nor does the Board use the collections to fund immediately and are subsequently reported in the Board expenses; the funds are transferred to the Board’s weekly H.2 statistical release. The H.2 Treasury. The Board collected and transferred release also contains announcements of applications and notices received by the Federal Reserve upon which action has not yet been taken. For each 24 Under section 12(g) of the Securities Exchange Act, certain pending application and notice, the related H.2A companies that have issued securities are subject to SEC regisrelease gives the deadline for comments. The tration and filing requirements that are similar to those imposed Board’s website provides information on orders on public companies. Per section 12(i) of the Securities Exchange Act, the powers of the SEC over banking entities that and announcements (www.federalreserve.gov/ fall under section 12(g) are vested with the appropriate banking newsevents/press/orders/2017orders.htm) as well as regulator. Specifically, state member banks with 2,000 or more a guide for U.S. and foreign banking organizations shareholders and more than $10 million in total assets are required to register with, and submit data to, the Federal that wish to submit applications (www Reserve. These thresholds reflect the recent amendments by the .federalreserve.gov/bankinforeg/afi/afi.htm). Jumpstart Our Business Startups Act (JOBS Act).

Supervision and Regulation 77 $464,929,002 in 2016 for the 2015 supervision and The Board’s Regulation X applies these credit limiregulation assessment. tations, or margin requirements, to certain borrowers and to certain credit extensions, such as credit Securities Credit obtained from foreign lenders by U.S. citizens. Under the Securities Exchange Act of 1934, the Board is responsible for regulating credit in certain Several regulatory agencies enforce the Board’s transactions involving the purchasing or carrying securities credit regulations. The SEC, the Finanof securities. The Board’s Regulation T limits the cial Industry Regulatory Authority, and the Chiamount of credit that may be provided by securi- cago Board Options Exchange examine brokers ties brokers and dealers when the credit is used to and dealers for compliance with Regulation T. purchase debt and equity securities. The Board’s With respect to compliance with Regulation U, the Regulation U limits the amount of credit that may federal banking agencies examine banks under be provided by lenders other than brokers and their respective jurisdictions; the FCA and the dealers when the credit is used to purchase or carry NCUA examine lenders under their respective publicly held equity securities if the loan is secured jurisdictions; and the Federal Reserve examines by those or other publicly held equity securities. other Regulation U lenders.

79 5 Consumer and Community Affairs The Division of Consumer and Community Affairs economic development issues and opportunities. The (DCCA) has primary responsibility for carrying out division analyzed ongoing and emerging consumer the Board of Governors’ role in consumer financial financial services and community risks, practices, protection and community development. DCCA con- issues, and opportunities in order to understand ducts consumer supervision and oversight of com- and act on their implications for supervisory polimunity development programs, research, and policy cies, as well as to gain insight into consumer decianalysis, as well as implements relevant statutory sionmaking related to financial services, implicarequirements for community reinvestment. Through tions of the financial crisis on young workers, and these efforts, the division works to ensure that con- access to credit for small businesses. sumer and community perspectives inform Federal • Engaging and convening key stakeholders to identify Reserve policy, research, and actions that advance emerging issues and advance what works in commu- DCCA’s mission to promote a fair and transparent nity reinvestment and consumer protection. The diviconsumer financial services marketplace and effective sion continued to promote fair and informed access community reinvestment. to financial markets for all consumers, particularly underserved populations, by engaging lenders, Throughout 2016, the division engaged in numerous government officials, and community leaders. consumer and community-related functions and Throughout the year, DCCA convened programs policy activities in the following areas: to share information on the financial and economic • Formulating consumer-focused supervision and needs in low- and moderate-income (LMI) commuexamination policy to ensure that financial institu- nities and research on effective community develtions for which the Federal Reserve has authority opment policies 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 2016, DCCA participated in drafting intertraining, and supervision oversight programs. This agency regulations, interpretations, and compliance involves policy setting and oversight of state memguidance for the industry and the Reserve Banks. ber banks’ performance under the Community Reinvestment Act (CRA); assessment of compliance with and enforcement of a wide range of con- Supervision and Examinations sumer protection laws and regulations including those related to fair lending, unfair or deceptive DCCA develops supervisory policy and examination acts or practices (UDAP), and flood insurance; procedures for consumer protection laws and regulaanalysis of bank and BHC applications in regard tions, as well as for the CRA, as part of its supervito consumer protection, convenience, and needs sion of the organizations for which the Board has and the CRA; and processing of consumer authority, including holding companies, state memcomplaints. ber banks,1 and foreign banking organizations. The • Conducting research, analysis, and data collection to inform Federal Reserve and other policymakers 1 The Federal Reserve has examination and enforcement authorabout consumer protection risks and community ity for federal consumer financial laws and regulations for

80 103rd Annual Report | 2016 division also administers the Federal Reserve Bank Holding Company System’s risk-focused program for assessing con- Consolidated Supervision sumer compliance risk at the largest bank and financial holding companies in the System, with division During 2016, staff reviewed 121 bank and financial staff ensuring that consumer compliance risk is effec- holding companies to ensure consumer compliance tively integrated into the consolidated supervision of risk was appropriately incorporated into the consolithe holding company. dated risk-management program of the organization. Division staff participated with staff from the The division oversees the efforts of the 12 Reserve Board’s Division of Supervision and Regulation on Banks to ensure that consumer protection laws and numerous projects related to ongoing implementation regulations are rigorously and consistently enforced of the Dodd-Frank Act, including standards for for the approximately 829 state member banks that assessing corporate governance and continued intethe Federal Reserve supervises for compliance with gration of savings and loan holding companies consumer protection and community reinvestment (SLHCs) under Federal Reserve supervision.3 laws and regulations. Division staff provide guidance and expertise to the Reserve Banks on consumer pro- Mortgage Servicing and Foreclosure tection laws and regulations, bank and BHC application analysis and processing, examination and Payment Agreement Status enforcement techniques and policy matters, examiner Throughout 2016, Board staff continued to work to training, and emerging issues. Finally, staff members oversee and implement the enforcement actions that participate in interagency activities that promote con- were issued by the Federal Reserve and the Office of sistency in examination principles, standards, and the Comptroller of the Currency (OCC) against 16 processes. mortgage loan servicers between April 2011 and April 2012. At the time of the enforcement actions, Examinations are one of the Federal Reserve’s meth- along with other requirements, the two regulators ods of ensuring compliance with consumer protec- directed servicers to retain independent consultants tion laws and assessing the adequacy of consumer to conduct comprehensive reviews of foreclosure compliance risk-management systems within regu- activity to determine whether eligible4 borrowers suflated entities. During 2016, the Reserve Banks com- fered financial injury because of servicer errors, mispleted 209 consumer compliance examinations of representations, or other deficiencies. The file review state member banks and 48 examinations of foreign initiated by the independent consultants, combined banking organizations, 2 examinations of Edge Act with a significant borrower outreach process, was corporations, and 2 examinations of agreement cor- referred to as the Independent Foreclosure Review porations.2 (IFR). insured depository institutions with assets of $10 billion or less In 2013, the regulators entered into agreements with that are state member banks and not affiliates of covered institutions, as well as for conducting CRA examinations for all state 15 of the mortgage loan servicers to replace the IFR member banks regardless of size. The Federal Reserve Board with direct cash payments to all eligible borrowers also has examination and enforcement authority for certain fed- and other assistance (the Payment Agreement).5 The eral consumer financial laws and regulations for insured depository institutions that are state member banks with over $10 bil- participating servicers agreed to pay an estimated lion in assets, while the Consumer Financial Protection Bureau has examination and enforcement authority for many federal tions, U.S. banks are able to gain portfolio exposure to financial consumer 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 (Dodd-Frank of Federal Reserve supervisory guidance documents that are 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 81 $3.9 billion to 4.4 million borrowers whose primary related to mortgage servicers supervised by the Fedresidence was in a foreclosure process in 2009 or eral Reserve and was consistent with the Federal 2010. The Payment Agreement also required the ser- Reserve’s intention to distribute the maximum vicers to contribute an additional $5.8 billion in other amount of funds to borrowers potentially affected by foreclosure prevention assistance, such as loan modi- deficient servicing and foreclosure practices. The fications and forgiveness of deficiency judgments. redistribution of remaining funds occurred in For the participating servicers, fulfillment of the August, with Rust mailing checks totaling just over agreement satisfied the foreclosure review require- $80 million to nearly 650,000 borrowers of servicers ments of the enforcement actions issued by the regu- supervised by the Federal Reserve. Under the redistrilators in 2011 and 2012. The Payment Agreement did bution, every eligible loan received a payment of not affect the servicers’ continuing obligations under $124.30. Borrowers cashed approximately $59 million the enforcement actions to address deficiencies in of the $80 million prior to the December 31, 2016, their mortgage servicing and foreclosure policies and expiration date for the redistribution checks, resulting procedures. in a cash rate of nearly 73 percent. A paying agent, Rust Consulting, Inc., (Rust) was Foreclosure Prevention Actions retained to administer payments to borrowers on The Payment Agreement also required servicers to behalf of the participating servicers. Beginning in undertake well-structured loss-mitigation efforts April 2013, a letter with an enclosed check was sent focused on foreclosure prevention, with preference to borrowers who had a foreclosure action initiated, given to activities designed to keep borrowers in their pending, or completed in 2009 or 2010 with any of homes through affordable, sustainable, and meaningthe participating servicers. Letters with checks were ful home preservation actions within two years from mailed to eligible borrowers through 2016. During the date the agreement in principle was reached. The this timeframe, checks were reissued upon the bor- foreclosure prevention actions are expected to prorower’s request due to expiration, a request for a vide significant and meaningful relief or assistance to change in payee, or a request by borrowers to split qualified borrowers and, as stated in the agreement, the check amongst the borrowers on the loan. For “should not disfavor a specific geography within or checks that have not been cashed or were returned among states, nor disfavor low and/or moderate undeliverable, the agencies directed Rust to expand income borrowers, and not discriminate against any its efforts to locate more-current address information protected class.” for the unpaid borrowers. For nearly all borrowers, at least two, and in most cases, three attempts were Servicers could fulfill their obligations through three made to reach each borrower. specific consumer-relief activities set forth in the National Mortgage Settlement, including first-lien As of March 31, 2016, all outstanding checks from loan modifications, second-lien loan modifications, the initial distribution of funds expired, with $3.5 bil- and short sales or deeds-in-lieu of foreclosure. Serlion distributed through 3.9 million checks, repre- vicers were given the option, subject to non-objection senting nearly 91 percent of the total value of the from their regulator, to meet their foreclosure prevenfunds. Receiving a payment under the agreement did tion assistance requirements by paying additional not prevent borrowers from taking any action they cash into the qualified settlement funds to be used for may wish to pursue related to their foreclosure. Ser- direct payments to consumers or by providing cash vicers were not permitted to ask borrowers to sign a or other resource commitments to borrower counselwaiver of any legal claims they may have against their ing or education. Several of the participating serservicer in connection with receiving payment.6 vicers chose this option and have met their foreclosure prevention obligations. In November 2015, the Federal Reserve announced it would direct Rust to redistribute any funds remaining All servicers were required to submit reports detailafter all outstanding checks expired on March 31, ing the consumer-relief actions they had taken to sat- 2016, to eligible borrowers of Federal Reserve superisfy these requirements. The foreclosure prevention vised servicers who had cashed or deposited their iniassistance actions reported included loan modificatial checks. This direction applied only to funds tions, short sales, deeds-in-lieu of foreclosure, debt cancellation, and lien extinguishment. In order to 6 For more information, see www.federalreserve.gov/ receive credit toward the servicer’s total foreclosure consumerinfo/independent-foreclosure-review-paymentagreement.htm. prevention obligation, the actions submitted must be

82 103rd Annual Report | 2016 validated by the regulators. A third party completed gram or has exercised, in good faith, any right under this validation to ensure that the foreclosure preven- the Consumer Credit Protection Act. The FHA protion assistance amounts met the requirements of the hibits discrimination in residential real estate related amendments to the enforcement actions. As stated in transactions, including the making and purchasing of the Independent Foreclosure Review Report mortgage loans, on the basis of race, color, religion, (July 2014),7 the Federal Reserve expects to publish sex, handicap, familial status, or national origin. data in 2017 regarding the final status of the cash payments and the foreclosure prevention assistance The Board supervises all state member banks for focused primarily on servicers regulated by the Fed- compliance with the FHA. The Board and the CFPB eral Reserve. both have supervisory authority for compliance with the Equal Credit Opportunity Act (ECOA). For state Servicer Efforts to Address Deficiencies member banks with assets of $10 billion or less, the In addition to the foreclosure review requirements, Board has the authority to enforce the ECOA. For the enforcement actions required mortgage servicers state member banks with assets over $10 billion, the to submit acceptable written plans to address various CFPB has this authority. mortgage loan servicing and foreclosure processing deficiencies. In the time since the enforcement actions With respect to the Federal Trade Commission Act were issued, the banking organizations have been (FTC Act), which prohibits unfair or deceptive acts implementing the action plans, including enhanced or practices (UDAP), the Board has supervisory and controls, and improving systems and processes. To enforcement authority over all state member banks, date, the supervisory review of the mortgage ser- regardless of asset size. The Board is committed to vicers’ action plans has shown that the banking orga- ensuring that the institutions it supervises comply nizations under the enforcement actions have imple- fully with the prohibition on unfair or deceptive acts mented significant corrective actions with regard to or practices as outlined in the FTC Act. An act or their mortgage servicing and foreclosure processes, practice may be found to be unfair where it causes or and for most servicers, those corrective actions is likely to cause substantial injury to consumers appear to be sustainable. For some servicers, addi- which is not reasonably avoidable by consumers tional actions need to be taken and those actions are themselves and not outweighed by countervailing currently in process. Federal Reserve supervisory benefits to consumers or to competition. A representeams will continue to monitor and evaluate the ser- tation, omission, or practice is deceptive if it is likely vicers’ progress on implementing the action plans to to mislead a consumer acting reasonably under the address unsafe and unsound mortgage servicing and circumstances and is likely to affect a consumer’s foreclosure practices as required by the enforcement conduct or decision regarding a product or service. actions. Fair lending and UDAP reviews are conducted regu- Supervisory Matters larly within the supervisory cycle. Additionally, examiners may conduct fair lending and UDAP Enforcement Activities reviews outside of the usual supervisory cycle, if warranted by fair lending and UDAP risk. When exam- Fair Lending and UDAP Enforcement iners find evidence of potential discrimination or Through its supervision and enforcement teams, potential UDAP violations, they work closely with DCCA is committed to ensuring that the institutions DCCA’s Fair Lending and UDAP Enforcement secit supervises comply fully with the federal fair lending tions, which provide additional legal and statistical laws—the Equal Credit Opportunity Act (ECOA) expertise and ensure that fair lending and UDAP and the Fair Housing Act (FHA). The ECOA pro- laws are enforced consistently and rigorously hibits creditors from discriminating against any throughout the Federal Reserve System. applicant, in any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, With respect to fair lending, pursuant to the ECOA, marital status, or age. In addition, creditors may not if the Board has reason to believe that a creditor has discriminate against an applicant because the appli- engaged in a pattern or practice of discrimination in cant receives income from a public assistance pro- violation of the ECOA, the matter must be referred to the Department of Justice (DOJ). The DOJ reviews the referral and determines whether further 7 For the report, see www.federalreserve.gov/publications/otherreports/files/independent-foreclosure-review-2014.pdf. investigation is warranted. A DOJ investigation may

Consumer and Community Affairs 83 result in a public civil enforcement action or settle- and fees.8 Specifically, the website and marketing ment. Alternatively, the DOJ may decide to return materials associated with the deposit product omitted the matter to the Board for administrative enforce- material information about the fees, features, and ment. When a matter is returned to the Board, staff limitations of the product. The enrollment process ensure that the institution takes all appropriate cor- also omitted information relating to the location and rective action. availability of fee-free ATMs where students could access their financial aid disbursements without addi- During 2016, the Federal Reserve referred the follow- tional cost. The bank’s agent was subject to an ing seven matters to the DOJ: enforcement action in 2015 and undertook corrective action to address these and other violations prior to • Two referrals involved redlining, or discrimination the entry of the order against the bank in 2016.9 against potential borrowers based upon the racial composition of their neighborhoods, in violation Given the complexity of this area of supervision, the of the ECOA and the FHA. Based on an analysis Federal Reserve seeks to provide transparency on its of each bank’s lending practices, its marketing, the perspectives and processes to the industry and the location of its branches, and its delineated assesspublic. Fair Lending and UDAP Enforcement staff ment area under the CRA, the Board determined meet regularly with consumer advocates, supervised that the banks avoided lending in minority institutions, and industry representatives to discuss neighborhoods. fair lending and UDAP issues and receive feedback. • One referral involved discrimination on the basis of Through this outreach, the Board is able to address national origin, in violation of the ECOA. The emerging fair lending and UDAP issues and promote lender charged Hispanic borrowers higher interest sound fair lending and UDAP compliance. For rates than non-Hispanic borrowers for unsecured example, in 2016, the Board sponsored a free interconsumer loans. Legitimate pricing factors failed to agency webinar on fair lending supervision through explain the pricing disparities. Compliance Outlook Live, which was attended by almost 6,000 registrants, most of which were commu- • Four referrals involved discrimination on the basis nity banks.10 In addition, DCCA staff participate in of marital status, in violation of the ECOA. The numerous meetings, conferences, and trainings sponbanks improperly required spousal guarantees on sored by consumer advocates, industry representaloans, in violation of Regulation B. tives, and interagency groups. If there is a fair lending violation that does not con- Flood Insurance stitute a pattern or practice under ECOA or a UDAP The National Flood Insurance Act imposes certain violation, the Federal Reserve takes action to ensure requirements on loans secured by buildings or mobile that the violation is remedied by the bank. Most homes located in, or to be located in, areas deterlenders readily agree to correct fair lending and mined to have special flood hazards. Under the Fed- UDAP violations, often taking corrective action as eral Reserve’s Regulation H, which implements the soon as they become aware of a problem. Thus, the act, state member banks are generally prohibited Federal Reserve frequently uses informal supervisory from making, extending, increasing, or renewing any tools (such as memoranda of understanding between such loan unless the building or mobile home, as well banks’ boards of directors and the Reserve Banks, or as any personal property securing the loan, are covboard resolutions) to ensure that violations are corered by flood insurance for the term of the loan. The rected. When necessary, the Board can bring public law requires the Board and other federal financial enforcement actions. institution regulatory agencies to impose civil money In 2016, the Board issued a consent order to cease and desist and assessed a civil money penalty of $960,000 for deceptive practices associated with 8 For more information, see www.federalreserve.gov/newsevents/ deposit accounts that were in violation of the FTC press/enforcement/20151223a.htm. Act. The actions addressed in this order involved sev- 9 For more information, see www.federalreserve.gov/newsevents/ press/enforcement/20161206b.htm. eral practices that, at various points in the financial 10 For more information and to obtain the webcast, see https:// aid refund selection process, misled students about consumercomplianceoutlook.org/outlook-live/2015/interagencysignificant aspects of the account, including terms fair-lending-hot-topics/.

84 103rd Annual Report | 2016 penalties when they find a pattern or practice of vio- ment” (Q&As) in July 2016.11 The document prolations of the regulation. vides additional guidance to financial institutions and the public on the agencies’ CRA regulations. The In 2016, the Federal Reserve issued two formal con- revisions to the Q&As primarily consist of nine revisent orders and assessed $33,485 in civil money pen- sions to existing Q&As and seven newly added Q&As alties against state member banks to address viola- dealing with community development-related issues, tions of the flood regulations. These statutorily man- the availability and effectiveness of retail banking dated penalties were forwarded to the National Flood services, innovative or flexible lending practices, and Mitigation Fund held by the Department of the other definitional issues. Treasury for the benefit of the Federal Emergency Management Agency. Mergers and Acquisitions The Federal Reserve analyzes expansionary applica- The Board and four other federal agencies issued a tions by banks or BHCs, taking into account the proposal in November 2016 to implement provisions likely effects of the acquisition on competition, the relating to lenders’ acceptance of private flood insur- convenience and needs of the communities to be ance policies, as stipulated under the Biggert-Waters served, the financial and managerial resources and Flood Insurance Reform Act of 2012 (see “Con- future prospects of the companies and banks sumer Laws and Regulations” later in this section). involved, and the effectiveness of the company’s policies to combat money laundering. As part of this Community Reinvestment Act process, DCCA evaluates whether the institutions are The CRA requires that the Federal Reserve and other currently meeting the convenience and needs of their federal banking and thrift regulatory agencies communities and the effectiveness of existing manaencourage financial institutions to help meet the gerial resources, as well as the institutions’ ability to credit needs of the local communities in which they meet the convenience and needs of their communities do business, consistent with safe and sound operaand the adequacy of their managerial resources after tions. To carry out this mandate, the Federal Reserve the proposed transaction. • examines state member banks to assess their performance under the CRA; The depository institution’s CRA record is a critical component of this analysis. The CRA requires the • considers state member banks’ and bank holding Federal Reserve to consider a depository institution’s companies’ CRA performance in context with record of helping to meet the credit needs of its local other supervisory information when analyzing communities in evaluating applications for mergers, applications for mergers and acquisitions; and acquisitions, and branches. An institution’s most • disseminates information about community devel- recent CRA performance evaluation is a particularly opment techniques to bankers and the public important, and often controlling, consideration in through Community Development offices at the the applications process because it represents a Reserve Banks. detailed on-site evaluation of the institution’s performance under the CRA by its federal supervisor. The Federal Reserve assesses and rates the CRA performance of state member banks in the course of As part of the analysis of managerial resources, the examinations conducted by staff at the 12 Reserve Federal Reserve reviews the institution’s record of Banks. During the 2016 reporting period, the Reserve compliance with consumer protection laws and regu- Banks completed 206 CRA examinations of state lations. The institution’s most recent consumer commember banks. Of those banks examined, 12 were pliance rating is central to this review because, like rated “Outstanding,” 188 were rated “Satisfactory,” 6 the CRA performance evaluation, it represents the were rated “Needs to Improve,” and none were rated detailed findings of the institution’s supervisory “Substantial Non-Compliance.” agency. During the 2016 review period, the Board, the Fed- Less-than-satisfactory CRA or consumer compliance eral Deposit Insurance Corporation (FDIC), and the ratings or other significant consumer compliance Office of the Comptroller of the Currency (OCC) issues can pose an impediment to the processing and published in the Federal Register “Interagency Questions and Answers Regarding Community Reinvest- 11 See www.federalreserve.gov/newsevents/press/bcreg/20160715a .htm.

Consumer and Community Affairs 85 approval of the application. Federal Reserve staff consumer protection laws and regulations, and congather additional information about CRA and con- fers with other regulators, as appropriate, for their sumer compliance performance in many circum- supervisory views. If warranted, the Federal Reserve stances, such as when the financial institu- will also conduct pre-membership exams for a transtion(s) involved in an application have less-than- action in which an insured depository institution will satisfactory CRA or compliance ratings or recently become a state member bank or in which the survividentified consumer compliance issues, or when the ing entity of a merger would be a state member Federal Reserve receives comments from interested bank.15 parties that raise CRA or consumer compliance issues. To further enhance transparency about this During 2016, the Board considered over 100 applicaprocess, the Board issued guidance to the public in tions, with topics ranging from change in control 2014 describing the Federal Reserve’s approach to notices, to branching requests, to mergers and acquiapplications and notices, highlighting those that may sitions. DCCA staff analyzed the following 14 unrenot satisfy statutory requirements for approval of a lated notices and applications for transactions involvproposal or that otherwise raise supervisory or regu- ing bank mergers and branching that involved latory concerns.12 adverse public comments on CRA issues or consumer compliance issues, such as fair lending, which The Board provides information on its actions asso- the Board considered and approved:16 ciated with these merger and acquisition transactions, • Frost Bank, San Antonio, Texas, to establish issuing press releases and Board Orders for each.13 branches at 314 South WW White Road, San The Federal Reserve also publishes semiannual Antonio, and 2421 East Seventh Street, Austin, reports that provide pertinent information on appli- Texas, was approved in March. cations and notices filed with the Federal Reserve.14 The reports include statistics on the number of pro- • Goldman Sachs Bank USA, New York, New York, posals that had been approved, denied, and with- to assume certain deposits of, and acquire certain drawn as well as general information about the length assets from, GE Capital Bank, Holladay, Utah, was of time taken to process proposals. Additionally, the approved in March. reports discuss common reasons that proposals have been withdrawn from consideration. • Republic Bancorp, Inc., Louisville, Kentucky, to merge with Cornerstone Bancorp, Inc., and thereby indirectly acquire Cornerstone Community Bank, Because these applications are of interest to the pubboth of St. Petersburg, Florida, was approved lic, they often generate comments that raise various in May. issues for Board staff to consider in their analyses of the supervisory and lending records of the appli- • Origin Bank, Choudrant, Louisiana, to establish a cants. With respect to consumer compliance and branch at 2049 West Gray Street, Houston, Texas, community reinvestment, one of the more common and a mobile branch in Harris County, Texas, was allegations is that either or both the target and the approved in May. acquirer fail to make credit available to certain minority groups and to LMI individuals. Comment- • BNC Bancorp, High Point, North Carolina, to ers also often express concerns about branch closures acquire Southcoast Financial Corporation and or the banks’ record of lending to small businesses in thereby indirectly acquire Southcoast Community LMI geographies. Bank, both of Mt. Pleasant, South Carolina, was approved in June. In evaluating the applications and the merits of pub- • Compass Bank, Birmingham, Alabama, to establic comments, the Board considers information prolish a branch at 5900 Quebec Street, Fort Worth, vided by applicants and analyzes supervisory infor- Texas, was approved in June. mation, including examination reports with evaluations of compliance with fair lending and other 15 In October 2015, the Federal Reserve issued guidance providing further explanation on its criteria for waiving or conducting 12 For more information, see www.federalreserve.gov/bankinforeg/ such pre-merger or pre-membership examinations. For more srletters/sr1402.htm. information, see www.federalreserve.gov/bankinforeg/srletters/ 13 To access the Board’s Orders on Banking Applications, see www SR1511.htm. .federalreserve.gov/newsevents/press/orders/2016orders.htm. 16 Related notices and applications for which a single Board Order 14 For these reports, see www.federalreserve.gov/bankinforeg/ was issued were counted as a single notice or application in this semiannual-reports-banking-applications-activity.htm. total.

86 103rd Annual Report | 2016 • Bank of the Ozarks, Inc., Little Rock, Arkansas, to Coordination with the Consumer Financial merge with Community & Southern Holdings, Inc., Protection Bureau and thereby indirectly acquire Community & During 2016, staff continued to coordinate on super- Southern Bank, both of Atlanta, Georgia, was visory matters with the CFPB in accordance with the approved in June. Interagency Memorandum of Understanding on Supervision Coordination with the CFPB. The agree- • KeyCorp, Cleveland, Ohio, to acquire First ment is intended to establish arrangements for coor- Niagara Financial Group, Inc., and thereby indidination and cooperation among the CFPB and the rectly acquire First Niagara Bank, National Asso- OCC, the FDIC, the National Credit Union Associaciation, both of Buffalo, New York, was approved tion (NCUA), and the Board of Governors. The in July. agreement strives to minimize unnecessary regulatory • Huntington Bancshares Incorporated, Columbus, burden and to avoid unnecessary duplication of Ohio, to merge with FirstMerit Corporation and effort and conflicting supervisory directives amongst thereby indirectly acquire its wholly owned subsid- the prudential regulators. The regulators work coopiary, FirstMerit Bank, N.A., both of Akron, Ohio, eratively to share exam schedules for covered instituwas approved in July. tions and covered activities to plan simultaneous exams, provide final drafts of examination reports for • Chemical Financial Corporation, Midland, Michicomment, and share supervisory information. gan, to merge with Talmer Bancorp, Inc., and thereby indirectly acquire Talmer Bank and Trust Coordination with Other Federal (“Talmer Bank”), both of Troy, Michigan; and Banking Agencies Chemical Bank, Midland, Michigan, to merge with The Board regularly coordinates with other federal Talmer Bank and to establish and operate branches banking agencies, including through the development at the locations of Talmer Bank’s main office and of interagency guidance, in order to clearly commubranches, were approved in August. nicate supervisory expectations. The Federal Reserve • BNC Bancorp to merge with High Point Bank also works with the other member agencies of the Corporation and thereby indirectly acquire High Federal Financial Institutions Examination Council Point Bank and Trust Company, all of High Point, (FFIEC) to develop consistent examination prin- North Carolina, was approved in October. ciples, standards, procedures, and report formats.17 In 2016, the banking agencies continued to work • Wintrust Financial Corporation, Rosemont, Illitogether on various initiatives. nois, to merge with First Community Financial Corporation and thereby indirectly acquire First Updating Examination Procedures Community Bank, both of Elgin, Illinois; and St. In April, the FFIEC developed examination proce- Charles Bank & Trust Company, St. Charles, Illidures reflecting a July 2015 interagency rulemaking nois, to merge with First Community Bank and to addressing force placement of flood insurance, establish and operate a branch at the main office escrow of flood insurance premiums and fees, and and at a branch of First Community Bank, were the exemption to the mandatory purchase of flood approved in October. insurance requirement for certain detached • First Midwest Bancorp, Inc., Itasca, Illinois, to structures. merge with Standard Bancshares, Inc. and thereby indirectly acquire Standard Bank and Trust Com- In June, the FFIEC developed revised interagency pany (“SB&T”), both of Hickory Hills, Illinois; examination procedures for Regulation P. The revised and First Midwest Bank, Itasca, Illinois, to merge examination procedures incorporate amendments with SB&T and to establish and operate branches made by section 75001 of the Fixing America’s Surat the locations of SB&T’s main office and face Transportation Act (FAST Act) to section 503 of branches, were approved in November. the Gramm-Leach-Bliley Act (GLBA). GLBA section 503, which is implemented by Regulation P, gen- • BOK Financial Corporation, Tulsa, Oklahoma, to erally requires a financial institution to provide acquire MBT Bancshares, Inc., and thereby indi- annual notice to its customers of its policies and rectly acquire Missouri Bank and Trust Company practices with respect to disclosing and protecting of Kansas City, both of Kansas City, Missouri, was approved in November. 17 For more information, see www.ffiec.gov.

Consumer and Community Affairs 87 nonpublic personal information. Section 75001 of tions and their adoption will represent no additional the FAST Act was effective upon enactment on regulatory burden. For more on the new system, see December 4, 2015, and establishes an exception to box 1. this annual privacy notice requirement. Guidance on Deposit Reconciliation Practices In September, the FFIEC also developed revised In May, the Board, CFPB, FDIC, NCUA, and OCC interagency examination procedures for the Military issued guidance to explain the agencies’ supervisory Lending Act (MLA). The revised procedures reflect expectations regarding institutions’ account deposit amendments to the MLA implementing regulation reconciliation practices. Among other things, the made by the U.S. Department of Defense (DOD) in guidance highlights the requirement in the Expedited a final rule issued in July 2015. Among a range of Funds Availability Act, as implemented by Regulaother amendments, the DOD amended the regulation tion CC, 12 CFR part 229, that financial institutions to extend the protections of the MLA to a wider make funds that have been deposited in a transaction range of closed-end and open-end credit products, account available for withdrawal within prescribed including credit cards. time limits, as well as the FTC Act’s prohibition against unfair or deceptive acts or practices. Coordinating Transfer of Regulation C (HMDA) Data Operations Examiner Training Also in 2016, the FFIEC continued to implement its Ensuring that financial institutions comply with laws plan for the transfer of Regulation C (Home Mort- that protect consumers and encourage community gage Disclosure Act (HMDA)) data operations to the reinvestment is a fundamental aspect of the bank CFPB in January 2018. The Board will administer examination and supervision process. As the comand maintain the current HMDA data operations plexity of both consumer financial transactions and system and continue to collect and process HMDA the regulatory landscape has increased, timely and data through December 2017. responsive training for consumer compliance examiners is vitally important. The examiner staff develop- Uniform Interagency Consumer Compliance ment function is responsible for the ongoing develop- Ratings System ment of the professional consumer compliance super- In November 2016, the FFIEC announced the issu- visory staff, from an initial introduction to the ance of an updated Uniform Interagency Consumer Federal Reserve System through the development of Compliance Rating System (CC Rating System).18 proficiency in consumer compliance topics sufficient The CC Rating System is a supervisory policy for to earn an examiner’s commission. DCCA’s role is to evaluating financial institutions’ adherence to con- ensure that examiners have the skills necessary to sumer compliance requirements. The CC Rating meet their supervisory responsibilities now and in the System provides a general framework for assessing future. risks during the supervisory process using certain compliance factors and assigning an overall con- Consumer Compliance Examiner Training Curriculum sumer compliance rating to each federally regulated financial institution. The primary purpose of the CC Currently, the consumer compliance examiner train- Rating System is to ensure that regulated financial ing curriculum consists of five courses focused on institutions are evaluated in a comprehensive and consumer protection laws, regulations, and examinconsistent manner, and that supervisory resources are ing concepts. In 2016, these courses were offered in appropriately focused on areas exhibiting risk of 10 sessions, and training was delivered to a total of consumer harm and on institutions that warrant 198 Federal Reserve consumer compliance examiners elevated supervisory attention. The new CC Rating and staff members and 7 state banking agency exam- System is designed to better reflect current consumer iners. These courses are principally conducted by tracompliance supervisory approaches and to more fully ditional classroom method. Board and Reserve Bank align the CC Rating System with current risk-based, staff regularly review the core curriculum for examtailored examination processes. The revisions to the iner training, updating subject matter and adding CC Rating System were not developed to set new or new elements as appropriate. higher supervisory expectations for financial institu- Throughout 2016, DCCA continued its partnership with Reserve Bank personnel to design and develop a 18 For more information, see www.federalreserve.gov/bankinforeg/ caletters/caltr1608.htm. modernized consumer compliance examiner training

88 103rd Annual Report | 2016 Box 1. New Rating System Enhances Consumer Compliance Supervision InNovember2016,theFederalFinancialInstitutions PrinciplesoftheInteragencyCCRatingSystem ExaminationCouncil(FFIEC)issueditsupdated AkeyadvancementofthenewCCRatingSystemis UniformInteragencyConsumerComplianceRating System(CCRatingSystem).1Therevisionsinthis itsfocusontheeffectivenessofafinancialinstitution’sCMS,ratherthanprimarilyontechnicalregularatingsystemreflecttheregulatory,examination, torycompliance.Withtheincreasingcomplexityof technological,andmarketchangesthathave consumerfinancialservices,astrongandresponoccurredsincethereleaseoftheoriginalrating siveCMSisvitallyimporttoensureongoingadhersystemin1980.ItisimportanttonotethattheCC encetoconsumerprotectionlawsandregulations RatingSystemdoesnotsetneworhighersuperviandtopreventconsumerharm.Withthispriorityin soryexpectationsforfinancialinstitutionsorcreate mind,theagenciesdevelopedthefollowingfoundamoreburden,butratherprovidesaconsumercomtionalprinciplesoftheCCRatingSystem. plianceratingschemethatmorefullycomplements arisk-focusedexaminationapproach. • Risk-based:Recognizeandcommunicateclearly thatCMSvarybasedonthesize,complexity,and TheFFIECmemberagenciespromotecompliance riskprofileofsupervisedinstitutions. withfederalconsumerprotectionlawsandregulationsthroughtheirsupervisoryandoutreachpro- • Transparent:Providecleardistinctionsbetween grams.Theseagenciesconductregularconsumer ratingcategoriestosupportconsistentapplication complianceexaminationstoassesstheeffective- bytheagenciesacrosssupervisedinstitutions. nessofafinancialinstitution’scompliancewith Reflectthescopeofthereviewthatformedthe theserequirements.TheCCRatingSystempro- basisoftheoverallrating. videsexaminerswiththemechanismforconveying • Actionable:Identifyareasofstrengthanddirect conclusionsregardingtheeffectivenessofaninstituappropriateattentiontospecificareasofweaktion’scompliancemanagementsystem(CMS)to ness,reflectingarisk-basedsupervisory identifyandmanagecomplianceriskintheinstituapproach.Conveyexaminers’assessmentofthe tion’sproductsandservicesandtopreventviolaeffectivenessofaninstitution’sCMS,includingits tionsoflawandconsumerharm. abilitytopreventconsumerharmandensurecom- AvaluableaspectoftheCCRatingSystemisthatit pliancewithconsumerprotectionlawsand providesaframeworkforassessingrisksidentified regulations. inthesupervisoryprocesstoensurethatregulated • Incentivizescompliance:Incenttheinstitutionto financialinstitutionsareevaluatedinacomprehenestablishaneffectiveconsumercompliance siveandconsistentmanner.Italsohelpstofocus systemacrosstheinstitutionandtoidentifyand theagencies’supervisoryresourcesonareasofrisk addressissuespromptly,includingselfofconsumerharmandoninstitutionsthatwarrant identificationandcorrectionofconsumercomplielevatedsupervisoryattention. anceweaknesses.Reflectthepotentialimpactof anyconsumerharmidentifiedinexamination findings. Theupdatedratingsystemwillbeappliedtocon- 1 See 81 Fed. Reg. 79,473, November 14, 2016, www sumercomplianceexaminationsthatbeginonor .federalregister.gov/documents/2016/11/14/2016-27226/uniforminteragency-consumer-compliance-rating-system. afterMarch31,2017. program. Modeled after existing programs in Divi- be captured, as well as the formulation of design sion of Supervision & Regulation, the modernization documents. They are now involved in the developeffort was launched in 2015 with the assembly of a ment of storyboards, which serve as the curriculum development team of dedicated examiners and narrative. As the modernization is fully implemented instructional design experts. A multiyear effort slated over the next three calendar years, continuing profesfor completion in late 2020, the goal of the modern- sional development and on-the-job training will be ization is to transition from traditional classroom- incorporated into the program. based training to virtual, self-directed, and blended delivery methods, designed by experts in adult learn- Ongoing Training Opportunities ing and directed by System subject-matter experts, In addition to providing core examiner training, the with additional oversight direction provided by examiner staff development function emphasizes the Board staff. Thus far, the modernization teams have importance of continuing, lifelong learning. Opporcompleted their analyses of the examination tasks to tunities for continuing learning include special proj-

Consumer and Community Affairs 89 ects and assignments, self-study programs, rotational • Interagency Fair Lending Hot Topics (October) assignments, the opportunity to instruct at System • Interagency Discussion of Overdraft Services schools, mentoring programs, and a consumer com- (November) pliance examiner forum held every 18 months where senior consumer compliance examiners receive infor- • Military Lending Act Compliance (December) mation on emerging compliance issues and are able to share best practices from across the System. To Responding to Consumer Complaints accommodate those individuals unable to attend the and Inquiries forum in-person, a live-stream option was also The Federal Reserve investigates complaints against added. state member banks and selected nonbank subsidiaries of BHCs (Federal Reserve regulated entities), and In 2016, the System continued to offer Rapid forwards complaints against other creditors and busi- Response sessions. Introduced in 2008, Rapid nesses to the appropriate enforcement agency. Each Response sessions offer examiners one-hour telecon- Reserve Bank investigates complaints against Federal ference webinars on emerging issues or urgent train- Reserve regulated entities in its District. The Federal ing needs that result from the implementation of new Reserve also responds to consumer inquiries on a laws, regulations or supervisory guidance as well as broad range of banking topics, including consumer case studies. Eight consumer compliance Rapid protection questions. Response sessions were designed, developed, and presented to System staff during 2016. The topics cov- In late 2007, the Federal Reserve established Federal ered the following: Reserve Consumer Help (FRCH) to centralize the processing of consumer complaints and inquiries. In • Fair Lending 2016, FRCH processed 34,350 cases. Of these cases, —Fair Lending Tool 6.0: Portfolio Analysis 24,724 were inquiries and the remainder (9,626) were complaints, with most cases received directly from —2015 Year-End Review consumers. Approximately 7 percent of cases were —Risk Assessment: Overview referred to the Federal Reserve from other federal and state agencies. —Risk Assessment: Mortgage Pricing While consumers can contact FRCH by a variety of —Risk Assessment: Redlining different channels, most FRCH consumer contacts • Risk Focused Supervision Program Horizontal occurred by telephone (66 percent). Nevertheless, Review 31 percent (10,762) of complaint and inquiry submissions were made electronically (via e-mail, online • Consumer Complaints submissions, and fax), and the online form page • Community Reinvestment – Interagency Q&A received 20,355 visits during the year. Outreach and Training to Agency and Consumer Complaints Industry Stakeholders Complaints against Federal Reserve regulated entities During 2016, the Federal Reserve System collabo- totaled 2,805 in 2016. Approximately 5 percent (134) rated with its supervisory agency partners to offer of these complaints were closed without investigaseven Outlook Live and FFIEC Examiner Exchange tion, pending the receipt of additional information webinars focused on delivering timely, relevant com- from consumers. Nine percent of the total compliance information to the banking industry as well plaints were still under investigation in Decemas to experienced examiners and other regulatory ber 2016. Sixty-two percent (1,750) involved unregupersonnel. In 2016, Outlook Live webinars addressed lated practices and 22 percent (621) involved reguthe following topics: lated practices. (Table 1 shows the breakdown of complaints about regulated practices by regulation or • Community Reinvestment-Related Issues (Februact; table 2 shows complaints by product type.) ary and November) • “Know Before You Owe” Mortgage Disclosure Complaints about Regulated Practices Rule – Lessons Learned Post-Implementation The majority of regulated practices complaints con- (March and April) cerned checking accounts (27.7 percent), credit card

90 103rd Annual Report | 2016 (12 percent), account opening or closing (11 percent), Table 1. Complaints against state member banks and and payment errors/delays (11 percent). The most selected nonbank subsidiaries of bank holding companies about regulated practices, by regulation/act, 2016 common real estate complaints by problem code related to debt collection/foreclosure concerns Regulation/act Number (15 percent), escrow problems (14 percent), payment errors/delays (12 percent), and disputed rates, terms, Regulation AA (Unfair or Deceptive Acts or Practices) 26 Regulation B (Equal Credit Opportunity) 24 and fees (9 percent). Regulation BB (Community Reinvestment) 1 Regulation C (Home Mortgage Disclosure Act) 1 Eleven regulated practices complaints alleging dis- Regulation CC (Expedited Funds Availability) 71 crimination based on prohibited borrower traits or Regulation D (Reserve Requirements) 2 rights were received in 2016. Seven discrimination Regulation DD (Truth in Savings) 55 complaints were related to the race, color, national Regulation E (Electronic Funds Transfers) 99 Regulation H (National Flood Insurance Act/Insurance Sales) 5 origin, or ethnicity of the applicant or borrower. Regulation P (Privacy of Consumer Financial Information) 23 Four discrimination complaints were related to either Regulation V (Fair and Accurate Credit Transactions) 60 the age, handicap, familial status, or religion of the Regulation Z (Truth in Lending) 115 applicant or borrower. Of the closed complaints Check21 1 alleging discrimination based on a prohibited basis in Garnishment Rule 3 Fair Credit Reporting Act 71 2016, there was one violation related to illegal credit Fair Debt Collection Practices Act 20 discrimination. Fair Housing Act 9 HOPA (Homeowners Protection Act) 2 In 83 percent of investigated complaints against Fed- Real Estate Settlement Procedures Act 31 eral Reserve regulated entities, evidence revealed that Servicemembers Civil Relief Act (SCRA) 2 institutions correctly handled the situation. Of the Total 621 remaining 17 percent of investigated complaints, 7 percent were identified errors which were corrected accounts (27.1 percent), and real estate (10.6 per- by the bank, 6 percent were deemed violations of law, cent).19 The most common checking account com- and the remainder included matters involving litigaplaints related to funds availability not as expected tion or factual disputes, withdrawn complaints, inter- (33 percent), insufficient funds/overdraft charges and nally referred complaints, or information was proprocedures (16 percent), disputed withdrawal of vided to the consumer. funds (12 percent), and alleged forgery/fraud/ embezzlement/theft (6 percent). The most common Complaints about Unregulated Practices credit card complaints related to inaccurate credit The Board continued to monitor complaints about reporting (32 percent), billing error resolution banking practices not subject to existing regulations. For example, a consumer complaint about poor ser- 19 Real estate loans include adjustable-rate mortgages, residential vice received at a bank is not subject to a regulation, construction loans, open-end home equity lines of credit, home and therefore is considered a complaint about an improvement loans, home purchase loans, home refinance/ closed-end loans, and reverse mortgages. unregulated practice. In 2016, the Board received Table 2. Complaints against state member banks and selected nonbank subsidiaries of bank holding companies about regulated practices, by product type, 2016 All complaints C omplaints involving violations Subject of complaint/product type Number Percent Number Percent Total 621 100.00 38 6.1 Discrimination alleged Real estate loans 6 1.0 0 0.0 Credit Cards 3 0.4 1 0.1 Other loans 2 0.3 0 0.0 Nondiscrimination complaints Checking accounts 172 27.7 1 9 3 .1 Real estate loans 66 10.6 9 1.5 Credit cards 168 27.1 4 0.6 Other 204 32.9 5 0.8

Consumer and Community Affairs 91 1,750 complaints against Federal Reserve regulated National Flood Insurance Act. The November 2016 entities that involved these unregulated practices. The proposal would implement provisions of the Biggertmajority of the complaints were related to electronic Waters Flood Insurance Reform Act of 2012 transactions/prepaid products (44 percent), credit (Biggert-Waters Act) relating to lenders’ acceptance cards (24 percent), checking account activity (11 per- of private flood insurance policies. cent), and real estate loans (5 percent). Consistent with the Biggert-Waters Act, the proposal Complaint Referrals would require regulated lending institutions to accept In 2016, the Federal Reserve forwarded 6,868 com- private flood insurance policies that meet the criteria plaints to other regulatory agencies and government set forth in the statute (mandatory acceptance). The offices for investigation. To minimize the time proposal also would establish a compliance aid to required to re-route complaints to these agencies, help regulated lending institutions determine which referrals were transmitted electronically. private insurance policies they would be required to accept under the mandatory acceptance provision. The Federal Reserve forwarded 15 complaints to the Department of Housing and Urban Development Under the proposal, regulated lending institutions (HUD) that alleged violations of the Fair Housing would retain the ability to accept, at their discretion, Act20 and were closed in 2016. The Federal Reserve’s other flood insurance policies issued by private insurinvestigation of these complaints revealed no ers (discretionary acceptance), provided the policies instances of illegal credit discrimination. meet a subset of the criteria for mandatory acceptance as specified in the rules. Regulated lending Consumer Inquiries institutions would also be permitted under the pro- The Federal Reserve received 24,724 consumer inqui- posal to accept policies issued by mutual aid societies, ries in 2016 covering a wide range of topics. Consum- which typically do not meet all of the discretionary ers were typically directed to other resources, includ- acceptance criteria, if, among other things, the ing other federal agencies or written materials, to appropriate supervisory agency determines that the address their inquiries. policy qualifies as flood insurance for purposes of the Federal flood insurance statutes. Consumer Laws and Regulations Threshold Adjustment Calculation In November 2016, the Board and the CFPB issued Throughout 2016, DCCA continued to administer final revisions to Official Staff Interpretations detailthe Board’s regulatory responsibilities with respect to ing the method for calculating annual inflation certain entities and specific statutory provisions of adjustments to the dollar thresholds for exempting the consumer financial services and fair lending laws. certain consumer credit transactions under the Truth This included drafting regulations and issuing interin Lending Act and certain consumer leasing transacpretations and compliance guidance for the industry tions under the Consumer Leasing Act.22 Similarly, and the Reserve Banks. the Board, the CFPB, and the OCC issued final revisions to Official Staff Interpretations detailing the Flood Insurance Proposal method for calculating annual inflation adjustments In November 2016, the Board, along with the Farm to the dollar threshold for exempting small loans Credit Administration, the FDIC, the NCUA, and from special appraisal requirements.23 the OCC jointly issued a proposed rule to amend regulations applicable to loans secured by improved The revised Official Staff Interpretations provide that real estate or mobile homes located in special flood the existing dollar thresholds will remain unchanged hazard areas.21 Regulated lending institutions must if the Consumer Price Index for Urban Wage Earners ensure that flood insurance is purchased for such and Clerical Workers (CPI-W) decreases or stays the loans, consistent with the requirements of the same. The revised Official Staff Interpretations also explain the method for making adjustments in years 20 A memorandum of understanding between HUD and the federal bank regulatory agencies requires that complaints alleging a 22 For more information, see www.federalreserve.gov/newsevents/ violation of the Fair Housing Act be forwarded to HUD. press/bcreg/20161123b.htm. 21 For more information, see www.federalreserve.gov/newsevents/ 23 For more information, see www.federalreserve.gov/newsevents/ press/bcreg/20161031a.htm. press/bcreg/20161123c.htm.

92 103rd Annual Report | 2016 following a year in which the exemption threshold additional precision regarding findings among these was not adjusted because the CPI-W did not increase populations. from the previous year. In that case, the annual percentage increase in the CPI-W will not be added to Among its key findings, the survey found that overall the existing dollar threshold (which was unchanged in 2015, individuals and their families continued to as a result of the decrease in the CPI-W). Instead, the express mild improvements in their overall well-being dollar threshold will be calculated by applying the relative to that seen in 2013 and 2014. However, a annual percentage increase in the CPI-W to the dol- number of adults still said they were experiencing lar amount that would have resulted if the decreases financial challenges, and optimism about the future and any subsequent increases in the CPI-W had been tempered in 2015. Sixty-nine percent of adults taken into account. This calculation method ensures reported that they were either “living comfortably” that the thresholds keep pace with the CPI-W. or “doing okay,” compared to 65 percent in 2014 and 62 percent in 2013. However approximately 76 million adults in 2015 were either “struggling to get by” Consumer Research and or are “just getting by.” Emerging-Issues and Policy Analysis The survey also asked respondents about specific Throughout 2016, DCCA analyzed emerging issues aspects of their financial lives, including the followin consumer financial services policies and practices ing areas: in order to understand their implications for the • income and savings market-risk surveillance and supervisory policies that are core to the Federal Reserve’s functions, as • economic preparedness well as to gain insight into consumer financial • banking and credit decisionmaking. • housing and living arrangements Researching Issues Affecting Consumers • car purchasing and auto lending and Communities • education and human capital In 2016, DCCA explored various issues related to • education debt and student loans consumers and communities by convening experts, conducting original research, and fielding new and • retirement ongoing surveys. The information gleaned from these undertakings provided insights into the factors affect- For a fuller discussion of survey results, see the ing consumers and households. report at www.federalreserve.gov/2015-reporteconomic-well-being-us-households-201605.pdf. Household Economics and Decisionmaking In order to better understand consumer decision- Emerging-Issues Analysis making in the rapidly evolving financial services sector, DCCA periodically conducts Internet panel sur- The Policy Analysis function of DCCA provides key veys to gather data on consumers’ experiences and insights, information, and analysis on emerging perspectives on various issues of interest. financial services issues that affect the well-being of consumers and communities. To this end, Policy Results of DCCA’s Survey of Household Economics Analysis staff analyze and anticipate trends, lead and Decisionmaking (SHED) were published in the division-wide issues working groups, and organize Report on the Economic Well-Being of U.S. House- expert roundtables to identify emerging consumer holds in 2015, released in May 2016. DCCA launched risks and inform policy recommendations. the survey to better understand consumer decisionmaking in the wake of the Great Recession, with the In 2016, the Policy Analysis team developed analyses aim to capture a snapshot of the financial and eco- on a broad range of issues in financial service marnomic well-being of U.S. households. In doing so, the kets that potentially pose risks to consumers. Among SHED collects information on households that is not the priority issue areas were subprime auto lending, readily available from other sources or is not available small-dollar lending, bank and alternative-lender in combination with other variables of interest. It provision of small business credit, and disparities in also oversamples LMI households in order to obtain households’ income and wealth by race. In addition,

Consumer and Community Affairs 93 the team conducted a suite of activities focused on Community Development trends in student lending. The Federal Reserve System’s Community Develop- Student Lending ment function promotes economic growth and finan- Lifetime returns on investments in higher education cial stability—particularly for underserved houseare generally positive and substantial, but depend holds and communities—by informing research, largely upon the institution the student attends, their policy, and action. As a decentralized function, the field of study, and whether they graduate. The Community Affairs Officers at each of the 12 financing of higher education poses a daunting chal- Reserve Banks design activities to respond to the spelenge for many students. While counseling can help cific needs of the communities they serve, with overstudents make the financial and educational choices sight from Board staff to promote and coordinate that are best for them, many students lack access to Systemwide priorities. quality financial advice. To gain a general understanding of how financial aid counselors work with Exploring Economic Vitality of Rural students and how students make decisions about pay- Communities and Housing Markets ing for their education, especially with student loans, the Policy Analysis team, in partnership with the The Federal Reserve’s mission is to promote a National Association of Student Financial Aid healthy economy and strong financial system. The Administrators (NASFAA) and the Texas Guaranfinancial crisis and the Great Recession demonteed Student Loan Corporation, conducted focus strated, in an unmistakable manner, the vulnerability group research with several financial aid administraof a significant portion of American families and tor members of NASFAA. communities. Clearly, those who struggled before the crisis—those with insufficient education, incomes, A Board report, Student Loan Counseling Challenges and assets—were disproportionately affected. Simiand Opportunities, was released in November.24 larly, a protracted and uneven recovery meant that Among the findings, participants noted that resource, these families and communities did not share equally administrative, regulatory, and legal constraints limit in the economic gains. This is particularly true for their ability to provide effective counseling to stu- rural areas such as the Mississippi Delta, Appalachia, dents. The counselors also indicated that offering colonias,25 and native communities that face chalgeneral financial education to students in primary lenges associated with persistent, generational and secondary grades could help make financial aid poverty. counseling at the college level more effective. In response, Community Development staff at the The Policy Analysis team also hosted a public confer- Federal Reserve hosted “The Future of Rural Comence on the theme of the financial risks of pursuing munities: Implications for Housing,” a national postsecondary education, featuring researchers and policy forum in partnership with the U.S. Departuniversity administrators from across the country. ment of Agriculture’s Rural Development. Forum Presenters noted that certain groups—including stu- participants explored changing demographic and dents of color and those that do not complete their economic trends that exacerbate the misalignment of degrees—are at higher risk of low or negative returns existing housing and community development policy to their investments in postsecondary education. Par- in rural communities as well as promising models for ticipants also offered proposals that they believe addressing community needs resulting from collabowould reduce these risks. These include government- ration between policymakers and practitioners. Given matched savings accounts for children, income-share the lack of data on rural consumers and housing agreements, and deferred tuition models. Researchers markets—particularly as to how their characteristics also described ongoing experiments that explore how and needs differ from urban America—the forum insights from behavioral economics can be leveraged surfaced unanswered research and policy questions to empower students to make informed financial decisions. The networks and information generated 25 Colonias are residential areas, typically found in U.S. states borfrom this conference will help inform the Board’s dering Mexico, that lack some of the most basic living necessiongoing monitoring of the student loan market. ties such as potable water, septic or sewer systems, electricity, paved roads or safe and sanitary housing. Most colonias do not have formal local government and the services that local govern- 24 See www.federalreserve.gov/communitydev/files/student-loan- ment provides. See also www.dallasfed.org/~/media/microsites/ counseling-challenges-and-opportunities-2016.pdf. cd/colonias/index.html.

94 103rd Annual Report | 2016 that could contribute to developing evidence-based innovation while still protecting borrowers, and anasolutions for improving access to credit and financial lyze the impact of new business models and the comstability in rural America. petitive landscape on financial institutions and consumers. Community Development staff will continue to convene national thought leaders to frame future Exploring Experiences and Expectations in research and policy considerations that would facili- the Labor Market tate the flow of capital and economic investment in rural communities in 2017. Many individuals (entrant, current, and former workers) search for ways to earn supplemental or self- Informing the Board on the Evolving employment incomes and stop-gap measures to gen- Financial Services Marketplace erate income to make ends meet. The Federal Reserve seeks to better understand the experiences and expec- In 2016, the Federal Reserve undertook efforts to tations of these individuals in order to identify potenbetter understand the intersections of banking and tial implications for the labor market. In 2016, Comemerging financial technology (fintech) including munity Development staff published the findings marketplace lending to consumers and small busi- from a survey that examined the extent to which indinesses. Marketplace lenders have demonstrated the viduals are increasingly acting as their own agents of potential to increase the access to credit and financial employment rather than as employees of a particular services by providing more efficient ways for borrow- firm to supplement or supplant income. See box 2 for ers to find, apply for, and secure financing. The more details. In addition, staff published a report on growth in the fintech sector naturally raises questions findings from the Survey of Young Workers, which about the risks that marketplace lenders present to examined the perceptions and experiences of adults consumers and small businesses. In response, the ages 18 to 30 in the labor market.26 That survey DCCA held a roundtable discussion with a broad attempted to better understand the connection range of industry experts to explore the evolving between educational choices and employment landscape of marketplace lending; the changing opportunities. financial behavior of borrowers, particularly of traditionally underserved households; and the evolving role of traditional financial institutions and nonbank 26 The report is available at www.federalreserve.gov/econresdata/ partners. Moving forward, DCCA will continue to 2015-experiences-and-perspectives-of-young-workers-201612 assess supervisory policies that can foster financial .pdf.

Consumer and Community Affairs 95 Box 2. The “Gig” Economy: The Who and Why of Alternative Work Arrangements for Income The prevalence of alternative work arrangements has that E&I qualified respondents were concentrated in grown rapidly as the evolution of digital platforms has the South and West, and over 60 percent had transformed local and global markets. While tradi- attended college (30 percent had some college and tional (offline) informal paid work has always been a 31 percent had a bachelor’s degree or higher). And part of the labor sector, the rise of online-enabled E&I qualified respondents who are traditionally paid work activities requires new approaches to assumed to be non-working participate in online and measure this growing trend. Economists and com- offline informal paid work activities to varying munity development professionals in the Division of degrees—for example, students (7 percent), retirees Consumer and Community Affairs (DCCA) conducted (12 percent), and homemakers (8 percent). Perhaps the Enterprising and Informal Work Activity (EIWA) most relevant to policy exploration is that the main survey in late 2015 to explore why individuals under- reason 65 percent of the E&I qualified survey respontake alternative work arrangements. Survey ques- dents are engaged in online and offline informal paid tions aimed to capture participant motivations and work is to earn extra money for themselves, either as attitudes toward informal offline and online paid work their main income source (26 percent) or as a means activities. to supplement current employment wages/retirement income (29 percent) and to help their extended fami- The EIWA survey was given to a nationally represenlies (10 percent). Further, 25 percent of respondents tative pool of adults ages 18 and older to track online reported that income from informal paid work activiand offline income-generating activities as well as ties is “very much” and “somewhat” a regular/ their employment status during the previous six consistent source of their monthly income. months. With analysis of the survey data conducted in the first half of 2016, the survey results were pub- As DCCA considers how to build on the first EIWA lished in the November 2016 FEDS working paper, survey, it’s clear that another area of alternative work “Exploring Online and Offline Informal Work: Findings arrangements that requires thoughtful study is the from the Enterprising and Informal Work Activities digital literacy requirement that lowers the barriers to (EIWA) Survey” (available at www.federalreserve.gov/ entry in new digital infrastructures while minimizing econresdata/feds/2016/files/2016089pap.pdf). transactions costs (such as managing work schedules and tasks) and maximizing convenience and The results showed that 36 percent of the adult U.S. time-at-task. In addition, as technology-driven work population participates in offline and online informal modes become more commonplace, the divide paid work activities. Among this group, termed “E&I between urban and rural/isolated locales as well as qualified respondents,” participation in E&I work varclass/income inequality considerations may grow. ies by demographic characteristics, such as income, Differences in digital channels as well as infrastrucsex, education, region, and race and ethnicity. The ture affordability, access, and quality variation across survey results revealed that a higher percentage of geographical regions require further study and policy women (56 percent) than men (44 percent) participate prescriptions. in the informal paid workspace. Results also showed

97 6 Federal Reserve Banks The Federal Reserve Banks provide payment services new SameDay ACH service enhances the existing to depository and certain other institutions, distribute Reserve Bank SameDay ACH product by enabling the nation’s currency and coin to depository institu- time-critical payments via the ACH network and tions, and serve as fiscal agents and depositories for improving the availability of funds to end users. The the U.S. government and other entities. The Reserve first phase enables same-day ACH credits, and the Banks also contribute to setting national monetary second phase, which is expected to be implemented in policy and supervision of banks and other financial the second half of 2017, will enable same-day ACH entities operating in the United States (discussed in debits.2 sections 2 through 4 of this annual report). Cost Recovery Federal Reserve Priced Services The Monetary Control Act of 1980 requires that the Federal Reserve establish fees for priced services to Reserve Banks provide a range of payment and recover, over the long run, all direct and indirect costs related services to depository and certain other insti- actually incurred as well as the imputed costs that tutions; these “priced services” include collecting would have been incurred—including financing costs, checks, operating an automated clearinghouse taxes, and certain other expenses—and the return on (ACH) service, transferring funds and securities, and equity (profit) that would have been earned if a priproviding a multilateral settlement service.1 vate business firm had provided the services.3 The imputed costs and imputed profit are collectively The Reserve Banks have been engaged in a number referred to as the private-sector adjustment factor of multiyear technology initiatives that will modern- (PSAF). From 2007 through 2016, the Reserve Banks ize their priced-services processing platforms. These recovered 101.8 percent of the total priced services investments are expected to enhance efficiency, the costs, including the PSAF (see table 1).4 overall quality of operations, and the Reserve Banks’ ability to offer additional services, consistent with the In 2016 specifically, Reserve Banks recovered longstanding principles of fostering efficiency and 104.7 percent of the total priced services costs, safety, to depository institutions. The Reserve Banks continued to enhance the resiliency and information security posture of the Fedwire Funds, National 2 Direct deposit of payroll, social security benefits, and tax Settlement Service, and Fedwire Securities Service refunds are typical examples of ACH credit transfers. Direct through the Fedwire Resiliency Program, a multiyear debit for mortgage payments and utility bills are typical initiative to respond to environmental threats and examples of ACH debit transfers. cyberthreats. The Reserve Banks are also developing 3 Depository Institutions Deregulation and Monetary Control Act, Pub. L. No. 96–221, 94 Stat. 132 (1980). Financial data and planning to implement a new FedACHreported throughout this section—including revenue, other processing platform to improve the efficiency and income, costs, income before taxes, and net income—will referreliability of their current FedACH operations. In ence the “Pro Forma Financial Statements for Federal Reserve Priced Services” at the end of this section. September 2016, the Reserve Banks implemented the 4 According to the Accounting Standards Codification (ASC) first of three phases of the SameDay ACH service in Topic 715 (ASC 715), Compensation–Retirement Benefits, the support of a National Automated Clearing House Reserve Banks recognized a $12.9 million reduction in equity related to the priced services’ benefit plans through 2016. Association (NACHA) operating rule change; the Including this reduction in equity, which represents a decline in economic value, results in cost recovery of 95.6 percent for the 1 The ACH enables depository institutions and their customers to 10-year period. For details on how implementing ASC 715 process large volumes of payments through electronic batch affected the pro forma financial statements, refer to note 3 to the processes. pro forma financial statements at the end of this section.

98 103rd Annual Report | 2016 Table 1. Priced services cost recovery, 2007–16 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 2 007 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 2016 434.1 410.5 4.1 414.7 104.7 2007–16 5,802.3 5,477.4 225.0 5,702.4 101.8 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 $5,545.4 million and other income and expense (net) of $256.9 million. 2 For the 10-year period, includes operating expenses of $5,308.8 million, imputed costs of $21.2 million, and imputed income taxes of $147.4 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 95.6 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 AOCI 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. including the PSAF.5 The Reserve Banks’ operating 3.9 percent from 2015 (see table 2). The average daily expenses and imputed costs totaled $410.6 million. value of checks collected by the Reserve Banks in Revenue from operations totaled $434.2 million, 2016 was approximately $32.2 billion, a decrease of resulting in net income from priced services of 0.3 percent from the previous year. $23.7 million. The commercial check-collection service and the Fedwire Funds and National Settlement Commercial Automated Clearinghouse Service achieved full cost recovery; however, the Service FedACH Service and the Fedwire Securities Service did not achieve full cost recovery because of invest- The commercial ACH service provides domestic and ment costs associated with the multiyear technology cross-border batched payment options for same-day initiatives discussed above. Greater-than-expected and next-day settlement. In 2016, the Reserve Banks check volume processed by the Reserve Banks has recovered 98.8 percent of the total costs of their combeen the single most significant factor in greater than mercial ACH services, including the related PSAF. full cost recovery overall. Revenue from operations totaled $131.0 million, resulting in net loss of $0.3 million. The Reserve Commercial Check-Collection Service Banks’ operating expenses and imputed costs totaled $131.4 million. The Reserve Banks processed The commercial check-collection service provides a 13.0 billion commercial ACH transactions in 2016, suite of electronic and paper processing options for an increase of 5.4 percent from 2015 (see table 2). forward and return collections. In 2016, the Reserve The average daily value of FedACH transfers in 2016 Banks recovered 112.7 percent of the total costs of was approximately $86.7 billion, an increase of their commercial check-collection service, including 5.9 percent from the previous year. the related PSAF. Revenue from operations totaled $154.2 million, resulting in net income of $18.6 mil- Fedwire Funds and National Settlement lion. The Reserve Banks’ operating expenses and Services imputed costs totaled $135.6 million. Reserve Banks handled 5.2 billion checks in 2016, a decrease of In 2016, the Reserve Banks recovered 103.3 percent of the costs of their Fedwire Funds and National 5 Total cost is the sum of operating expenses, imputed costs Settlement Services, including the related PSAF. Rev- (income taxes, interest on debt, interest on float, and sales taxes), and the targeted return on equity. enue from operations totaled $123.0 million, resulting

Federal Reserve Banks 99 Box 1. Improving the U.S. Payment System The Federal Reserve plays many roles in the payment The FPTF released the first part of its final report in system, including payment system operator, supervi- January 2017. The second part of the final report will sor of financial institutions and systemically important be released in mid-2017 and will reflect the FPTF’s financial market utilities, regulator, researcher, and perspectives on challenges and opportunities with catalyst for improvement. Acting primarily in its cata- implementing faster payments, outline its recommenlyst role, the Federal Reserve encouraged payments dations for next steps, and include the proposals and stakeholders to join together to improve the payment assessments for those proposers that opted to be system in the United States in its “Strategies for included in the final report. Improving the U.S. Payment System” paper, issued in January 2015. The strategies outlined in the paper Over the course of the year, the SPTF launched work included the creation of task forces focused on faster to address the industry’s most pressing payment payments and payment security, both of which have system security issues: identity management, data provided a forum for a diverse group of industry par- protection, and fraud and risk information-sharing. ticipants to collaborate on an ongoing basis since The SPTF also mapped existing identity managethey were established in mid-2015. ment practices in end-to-end payment flows in order At the beginning of 2016, a professional services firm to identify opportunities for improvements, as well as was selected to act as the Qualified Independent defined the guiding principles for protecting sensitive Assessment Team (QIAT) tasked with assessing data associated with payments. In addition, the Faster Payments Task Force (FPTF) members’ pro- SPTF inventoried current industry efforts to share posals for implementing faster payment capabilities information for fraud and risk protection and in the United States. Such proposals were solicited mitigation. by the FPTF as an important component of its work. During the middle of the year, the QIAT conducted its The Federal Reserve’s FedPayments Improvement initial assessment of the proposals. FPTF and Secure website (https://fedpaymentsimprovement.org/) Payments Task Force (SPTF) members then had an hosts a FedPayments Improvement Community that opportunity to provide commentary on the 19 pro- enables interested parties to stay informed and to posals and assessments that proposers opted to engage in an exchange of information pertaining to carry through the assessment process. In mid-2016, the Federal Reserve’s efforts to improve the U.S. the FTPF established a work group to analyze chal- payment system. lenges and opportunities related to implementing faster payment capabilities. in a net income of $5.3 million. The Reserve Banks’ their balances at Reserve Banks to transfer funds in operating expenses and imputed costs totaled real time. From 2015 to 2016, the number of Fedwire $117.8 million in 2016. funds transfers originated by depository institutions increased 4.0 percent, to approximately 152 million Fedwire Funds Service (see table 2). The average daily value of Fedwire The Fedwire Funds Service allows its participants to funds transfers in 2016 was $3.1 trillion, a decrease of send or receive domestic time-critical payments using 7.7 percent from the previous year. Table 2. Activity in Federal Reserve priced services, 2014–16 Thousands of items, except as noted Percent change Service 2016 2015 2014 2015 to 2016 2014 to 2015 Commercial check 5,241,286 5,452,369 5,741,527 -3.9 -5.0 Commercial ACH 12,960,346 12,298,307 11,620,376 5.4 5.8 Fedwire funds transfer 151,899 146,006 138,133 4.0 5.7 National settlement 501 508 597 -1.4 -14.9 Fedwire securities 3,881 4,218 4,578 -8.0 -7.9 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.

100 103rd Annual Report | 2016 Box 2. Distributed Ledger Technology As part of its core objective to foster the safety and be used in the area of payments, clearing, and settleefficiency of the payment system and to promote ment and identifies both the opportunities and chalfinancial stability, the Federal Reserve has a public lenges facing its practical implementation and pospolicy interest in understanding and monitoring the sible long-term adoption. development of innovations that could affect the As noted in the working paper, the industry believes structural design and functioning of financial mar- DLT has the potential to transform several areas in kets. Distributed ledger technology (DLT) is one such financial markets, including cross-border payments; payment system innovation and has been cited by post-trade processing of securities, commodities, the financial industry as a means of transforming and derivatives; and areas that are heavily paperpayment, clearing, and settlement (PCS) processes, based, such as syndicated loans and trade finance. which are critical to the proper functioning of the At the same time, however, a number of challenges financial markets and to financial stability more to development and adoption remain, including techbroadly. nological hurdles, governance issues, and risk- As a preliminary step to understanding the implica- management considerations. tions of DLT developments in PCS, a Federal Reserve The paper notes that the industry’s understanding staff research team held discussions with a broad and application of DLT to financial market structures range of parties that are interested in, participate in, is still in its infancy, and stakeholders are taking a or are otherwise contributing to the evolution of DLT. variety of approaches towards its development. At The team conducted interviews and conversations this stage, it is difficult to predict how DLT will figure with approximately 30 key industry stakeholders, into the future of payments as the industry continues including market infrastructures, financial institutions, to explore a range of possible uses. The Federal other government agencies, technology start-ups, Reserve staff research team continues to engage the more-established technology firms, and industry conindustry in order to follow developments and better sortia. The research team presented its findings in a understand the potential range of DLT adoption and December 2016 working paper (https://www how it may affect financial market structures. .federalreserve.gov/econresdata/feds/2016/files/ 2016095pap.pdf) titled “Distributed ledger technology in payments, clearing, and settlement.” The working paper examines how DLT might National Settlement Service 99.2 percent of the costs of their Fedwire Securities The National Settlement Service is a multilateral Service, including the related PSAF. Revenue from settlement system that allows participants in private- operations totaled $25.9 million, resulting in a net sector clearing arrangements to settle transactions income of $0.0 million. The Reserve Banks’ operatusing their balances at Reserve Banks. In 2016, the ing expenses and imputed costs totaled $25.8 million service processed settlement files for 17 local and in 2016. In 2016, the number of non-Treasury securinational private-sector arrangements. The Reserve ties transfers processed via the service decreased Banks processed 8,329 files that contained about 8.0 percent from 2015, to approximately 3.9 million 501,000 settlement entries for these arrangements in (see table 2). The average daily value of Fedwire 2016 (see table 2). Settlement file activity in 2016 was Securities transfers in 2016 was $1.1 trillion, a roughly the same as in 2015, and settlement entries decrease of 2.7 percent from the previous year. decreased 1.4 percent. Float Fedwire Securities Service In 2016, the Reserve Banks had daily average credit The Fedwire Securities Service allows its participants float of $334.4 million, compared with daily average to transfer electronically to other service participants credit float of $193.2 million in 2015.7 certain securities issued by the U.S. Treasury Department, federal government agencies, governmentsponsored enterprises, and certain international orga- organizations. Reserve Banks provide Treasury securities sernizations.6 In 2016, the Reserve Banks recovered vices in their role as Treasury’s fiscal agent. These services are not considered priced services. For details, see “Treasury Securities Services” later in this section. 6 The expenses, revenues, volumes, and fees reported here are for 7 Credit float occurs when the Reserve Banks debit the paying transfers of securities issued by federal government agencies, bank for checks and other items prior to providing credit to the government-sponsored enterprises, and certain international depositing bank.

Federal Reserve Banks 101 Currency and Coin Education and training includes conducting domestic and international training seminars for staff at the Federal Reserve Banks, financial institutions, law The Federal Reserve Board issues the nation’s curenforcement agencies, the gaming industry, and govrency (in the form of Federal Reserve notes) to ernment entities. During 2016, the CEP conducted 28 Federal Reserve Bank offices. The Reserve Banks, outreach in the United States, Thailand, Cambodia, in turn, distribute Federal Reserve notes to deposi- Guatemala, and Argentina, which included training tory institutions in response to public demand. The for more than 600 key stakeholders. The CEP Reserve Banks also distribute the nation’s coin to launched two new hard-copy materials in 2016, “Doldepository institutions on behalf of the U.S. Departlars in Detail” and “Know the $20,” which are availment of the Treasury.8 Together, the Board and able on the educational website www.uscurrency.gov. Reserve Banks work to maintain the integrity of and confidence in Federal Reserve notes. In 2016, the Board paid Treasury’s Bureau of Engraving and Other Improvements and Efforts Printing (BEP) $660.0 million for costs associated with the production of nearly 7.3 billion Federal During 2016, the Reserve Banks began implementa- Reserve notes. tion of a new cash automation platform (Cash- Forward) to replace legacy software applications, In 2016, the Reserve Banks distributed 36.3 billion automate business concepts, and processes, and to Federal Reserve notes into circulation, a 1.4 percent employ technologies to meet the cash business’s curdecrease from 2015, and received 34.7 billion Federal rent and future needs more cost effectively. The new Reserve notes from circulation, a 1.2 percent decrease cash platform also will facilitate business continuity from 2015. In 2016, the Reserve Banks also distriband contingency planning and enhance the support uted 73.4 billion coins into circulation, a 2.8 percent provided to Reserve Bank customers. Deployment of increase from 2015, and received 58.2 billion coins CashForward began in June 2016, with 10 offices from circulation, a 4.1 percent increase from 2015. successfully deploying the platform by year-end. Implementation for the remaining 18 offices will be The value of Federal Reserve notes in circulation completed in 2017. increased nearly 6.0 percent in 2016, to $1,463 billion at year-end. The Board estimates that as much as The Federal Reserve also has initiated a program to two-thirds of the value of Federal Reserve notes in replace the aging high-speed currency-processing circulation is held abroad, mainly as a store of value. equipment at all Reserve Banks by 2026. In 2016, the The 2016 increase in value is attributable largely to Federal Reserve issued a request for proposal for new increased demand for $100 notes; however, demand equipment and related maintenance services and used for transactional denominations also increased. The a comprehensive scoring process to evaluate the provolume of $1 and $20 notes in circulation increased posals. The Federal Reserve expects to negotiate 3.3 percent in 2016, compared with 6.7 percent terms for contract award in 2017. growth in the volume of $100 notes in circulation. During 2016, the Board and the BEP continued to U.S. Currency Education Program build on the improved quality assurance processes established to date at the BEP. The Board and BEP The U.S. Currency Education Program (CEP) is an continued to reclaim $100 notes using single note interagency program managed by the Board in partinspection equipment, which allowed the Board to nership with the United States Secret Service and the avoid nearly $25.4 million in variable production BEP. The CEP is responsible for ensuring that users costs. During 2017, the Board and BEP will develop of U.S. currency around the world have access to and implement processes and procedures to reclaim education, training, and information about all additional denominations using single-note inspecdesigns of Federal Reserve notes, from 1914 to the tion equipment, which will reduce overall spoilage present. and variable printing costs. In addition, the Board and BEP agreed on a long-term capital equipment replacement strategy to modernize and replace aging 8 Whereas the Federal Reserve Board is the issuing authority for production equipment at the BEP that has exceeded Federal Reserve notes, the United States Mint, a bureau of the its useful life; the replacement will improve produc- U.S. Department of the Treasury, is the issuing authority for the nation’s coin. tion efficiency and reduce spoilage.

102 103rd Annual Report | 2016 Fiscal Agency and Government reimbursed by Treasury and other entities.9 Support for Treasury programs accounted for 94.0 percent of Depository Services expenses, and support for other entities accounted for 6.0 percent. As fiscal agents and depositories for the federal government, the Reserve Banks auction Treasury securi- In April 2014, as part of the federal government’s ties, process electronic and check payments for Treaseffort to increase operational efficiency and effectiveury, collect funds owed to the federal government, ness, Treasury announced the consolidation of the maintain Treasury’s bank account, and develop, fiscal agency services provided by the Reserve Banks. operate, and maintain a number of automated sys- Although Treasury expects long-term savings by tems to support Treasury’s mission. The Reserve reducing the number of Reserve Banks that provide Banks also provide certain fiscal agency and deposifiscal agency services, the Reserve Banks are experitory services to other entities, typically other governencing an increase in expenses during the consolidament instrumentalities at the request of Treasury; tion process, which will continue over the next several these services are primarily related to book-entry securities. Treasury and other entities fully reimburse 9 Board policy requires the Reserve Banks to seek reimbursement the Reserve Banks for the expense of providing fiscal for the costs to provide fiscal agency services. Historically, the agency and depository services. Reserve Banks did not seek reimbursement for pension benefits to Reserve Bank employees who support fiscal agency services. The Reserve Banks began to seek reimbursement for the one- In 2016, fiscal agency expenses increased to time pension costs that resulted from consolidation activities in $677.0 million (see table 3), primarily as a result of 2014 and to seek full reimbursement for all fiscal agency-related pension costs beginning in 2015. Pension costs are shown in the requests from Treasury’s Bureau of the Fiscal Service aggregate across programs in table 3 rather than by each and an increase in Reserve Bank pension costs to be program. Table 3. Expenses of the Federal Reserve Banks for fiscal agency and depository services, 2014–16 Thousands of dollars Agency and service 2016 2 015 2014r D epartment of the Treasury Treasury securities services Treasury retail securities 50,203 52,945 54,958 Treasury auction 42,472 35,701 29,491 Treasury securities safekeeping and transfer 22,890 21,254 16,568 Technology infrastructure development and support1 6,909 6,371 5,792 Other services 3,213 2,194 853 Total 125,687 118,465 107,662 Payment, collection, and cash-management services Payment services 159,296 161,681 157,869 Collection services 66,425 59,513 52,878 Cash-management services 82,165 79,161 74,428 Technology infrastructure development and support1 96,931 89,069 79,289 Other services 10,358 10,998 11,465 Total 415,175 400,422 375,928 Other Treasury Total 39,293 41,971 44,756 Total, Treasury 580,155 560,857 528,346 Other entities Total, other entities 37,333 35,140 34,588 Pension costs Total, Treasury and other entities 59,493 54,586 6,704 Total reimbursable expenses 676,981 650,583 569,638 Note: In 2015, “Pension costs” were added as a new category in this table. The 2015 restatement of 2014 figures is reflected here. 1 Formerly labeled “Computer infrastructure development and support.” r Revised.

Federal Reserve Banks 103 years. In 2016, total consolidation expenses Treasury securities auctions in 2016. Of the 266 aucamounted to $20.9 million as a result of the eight tions, 12 auctions were for Floating Rate Notes.12 Reserve Bank business lines that transitioned and preparations for the upcoming transitions.10 Consoli- In 2016, Reserve Bank operating expenses to support dation expenses are included in the line items for Pay- Treasury securities auctions increased to $42.5 milment, Collection, and Cash-management services in lion. Operating expenses were driven by upgrades to table 3. the auction application, which receives and processes bids submitted primarily by wholesale securities auc- Treasury Securities Services tion participants, and by modernization of the application infrastructure. The Reserve Banks work closely with Treasury’s Fiscal Service in support of the borrowing needs of the Operating expenses associated with Treasury securifederal government. The Reserve Banks auction, ties safekeeping and transfer activities increased to issue, maintain, and redeem securities; provide cus- $22.9 million in 2016 as a result of the Reserve tomer service; and operate the automated systems Banks’ effort to migrate the securities services from a supporting U.S. savings bonds and marketable Treas- mainframe system to a distributed computing enviury securities (bills, notes, and bonds). Treasury secu- ronment.13 rities services consist of retail securities programs, which primarily serve individual investors, and Payment Services wholesale securities programs, which serve institutional customers. The Reserve Banks work closely with Treasury’s Fiscal Service and other government agencies to process Retail Securities Programs payments to individuals and companies. The Reserve Banks process federal payroll payments, Social Secu- Reserve Bank operating expenses for the retail securi- rity and veterans’ benefits, income tax refunds, venties program decreased to $50.2 million in 2016, dor payments, and other types of payments. largely because of the shift in telephony infrastructure costs to the Fiscal Service. Program expense Reserve Bank operating expenses for paymentsdrivers included the Reserve Banks’ operation of a related activity decreased to $159.3 million in 2016, virtual case-file system and a virtual contact center to primarily because consolidation activities ended for support retail securities services, as well as increased International Treasury Services (ITS) and Automated staffing to manage the savings-bond transaction Standard Application for Payments (ASAP). These workload. decreases were partially offset by increased consolidation expenses and increased program expenses associ- The Reserve Banks also provided support to Trea- ated with Post Payment System (PPS), Invoice Prosury’s Retail Program Review initiative, which may cessing Platform (IPP), and Stored Value Card shape the retail securities program’s future mission, (SVC). vision, and operating model. Operating expenses to support this effort were $2.3 million in 2016. The Reserve Banks operate the ITS application, which provides cross-border payment and collection Wholesale Securities Programs services as well as cash-management functions on behalf of Treasury. U.S. government agencies use ITS The Reserve Banks support wholesale securities proto issue international benefit, payroll, and vendor grams through the sale, issuance, safekeeping, and payments in 100 currencies to recipients in estabtransfer of marketable Treasury securities for institulished and emerging markets. ITS expenses in 2016 tional investors.11 The Reserve Banks conducted 266 decreased to $15.5 million primarily because consolidation activities came to an end. 12 Introduced in 2014, Floating Rate Notes are a marketable Treas- 10 The four remaining business lines are scheduled to transition ury security with a floating rate interest payment. Floating Rate over the next four years. Notes were the first new Treasury security issued since the intro- 11 Wholesale securities auction participants include depository duction of Treasury Inflation-Protected Securities almost two institutions, dealers and brokers, investment funds, pension and decades ago. retirement funds, foreign and international entities, and indi- 13 For details, see “Fedwire Securities Service” earlier in this vidual investors. section.

104 103rd Annual Report | 2016 The ASAP application enables federal agencies to The Reserve Banks operate Pay.gov, an application electronically disburse funds to recipient organiza- that allows the public to use the Internet to authorize tions. Expenses for ASAP decreased 35.5 percent and initiate payments to federal agencies. During the from 2015, to $9.1 million in 2016, because of the year, the Pay.gov program expanded to include more completion of consolidation activities. than 140 new agency programs and processed more than 177 million online payments totaling $152 bil- The Reserve Banks continued work on the PPS ini- lion. Pay.gov expenses increased to $20.1 million in tiative, a multiyear effort to modernize several of 2016, primarily because of software amortization Treasury’s legacy post-payment processing systems expenses. into a single application to enhance operations, reduce expenses, improve data analytics capabilities, The Reserve Banks also continued supporting Treaand provide a centralized and standardized set of sury’s electronic commerce initiative (eCommerce) to payment data. In 2016, program expenses for PPS expand ways for agencies and the public to do busiincreased to $18.8 million as the result of greater ness with Treasury through online banking solutions, system development expenses and $2.6 million in mobile technologies, and other payment methods. consolidation expenses. Program expenses for eCommerce increased to $5.3 million in 2016 because of expenses associated The IPP is part of Treasury’s all-electronic initia- with developing a new mobile payment platform that tive—an electronic invoicing and payment informa- will facilitate more-efficient federal revenue collection system that allows vendors to enter invoice data tions and because of increased vendor fees for the electronically, through either a web-based portal or program. electronic submission. The IPP accepts, processes, and presents data from supplier systems related to all In 2016, the Reserve Banks transitioned the CIR stages of a payment transaction, including the pur- application from a third-party financial agent. The chase order, invoice, and other payment information. CIR application enables the Fiscal Service to stan- In 2016, the Reserve Banks’ IPP expenses increased dardize the availability of financial information, furto $24.5 million, primarily because of increased staff- thering transparency goals and enabling federal agening to support consolidation efforts. cies to improve cash-management decisions and performance. Expenses for CIR totaled $7.7 million in The SVC program comprises three military cash- 2016 and were primarily attributable to transition management programs: EagleCash, EZPay, and expenses and application development. Navy Cash. These programs provide electronic payment methods for goods and services on military Treasury Cash-Management Services bases and Navy ships, both domestic and overseas, to reduce costs and increase convenience for the military The Reserve Banks maintain Treasury’s operating and service members. The Reserve Banks, as fiscal cash account and provide collateral-management and agent, currently operate EagleCash and EZpay and collateral-monitoring services for those Treasury prowill assume responsibility for Navy Cash in 2017. In grams that have collateral requirements. The Reserve 2016, Reserve Bank operating expenses for Treasury’s Banks also support Treasury’s efforts to modernize SVC business increased to $24.4 million, largely its financial management processes by developing because of $10.8 million in expenses associated with software, operating help desks, and managing projthe transition of the Navy Cash program from a ects on behalf of the Fiscal Service. third-party financial agent. In 2016, Reserve Bank operating expenses related to Collection Services Treasury cash-management services increased to $82.2 million, of which $5.1 million was attributable The Reserve Banks also work closely with the Fiscal to the consolidation. The increase was primarily due Service to collect funds owed to the federal govern- to significant application development efforts for ment, including various taxes, fees for goods and ser- Bank Management System and the G-invoicing vices, and delinquent debts. In 2016, Reserve Bank system. The Bank Management System application operating expenses related to collection services determines commercial bank compensation for increased to $66.4 million, largely because of greater depository services provided to Treasury, and operating expenses for Pay.gov, eCommerce, and the G-invoicing provides electronic intragovernmental Collections Information Repository (CIR). invoicing processing. These increased expenses were

Federal Reserve Banks 105 partially offset by decreased expenses associated with mortgage-backed securities. These measures tended the end of consolidation activities for the Treasury to increase balances institutions held at the Banks, Cash Management System and Direct Voucher Sub- which decreased the demand for intraday credit. In mission applications. 2007, for example, institutions held, on average, less than $20 billion in overnight balances, and total aver- Services Provided to Other Entities age daylight overdrafts were around $60 billion. In contrast, institutions held historically high levels of When permitted by federal statute or when required overnight balances at the Reserve Banks in 2016, by the Secretary of the Treasury, the Reserve Banks while daylight overdrafts remained historically low, provide fiscal agency and depository services to other as shown in figure 1. domestic and international entities. Daylight overdraft fees are also at historically low Reserve Bank operating expenses for services pro- levels. In 2016, institutions paid about $48,100 in vided to other entities increased to $37.3 million in daylight overdraft fees; in contrast, fees totaled more 2016. Book-entry securities issuance and mainte- than $50 million in 2008. The decrease in fees is nance activities account for a significant amount of largely attributable to the elevated level of reserve the work performed for other entities, with the balances that began to accumulate in late 2008 and to majority performed for the Federal Home Loan the 2011 policy revision that eliminated fees for day- Mortgage Association (Freddie Mac), the Federal light overdrafts that are collateralized. National Mortgage Association (Fannie Mae), and the Government National Mortgage Association FedLine Access to Reserve (Ginnie Mae). Bank Services Use of Federal Reserve The Reserve Banks’ FedLine access solutions provide Intraday Credit financial institutions with a variety of alternatives for electronically accessing the Banks’ payment and The Board’s Payment System Risk policy governs the information services. For priced services, the Reserve use of Federal Reserve Bank intraday credit, also Banks charge fees for these electronic connections known as daylight overdrafts. A daylight overdraft and allocate the associated costs and revenue to the occurs when an institution’s account activity creates various services. There are currently five FedLine a negative balance in the institution’s Federal Reserve channels through which customers can access the account at any time in the operating day. Daylight overdrafts enable an institution to send payments more freely throughout the day than if it were limited Figure 1. Aggregate daylight overdrafts, 2007–16 strictly by its available intraday funds balance, increasing efficiency and reducing payment system Billions of dollars risk. The Payment System Risk policy recognizes 200 Peak daylight overdrafts Average daylight overdrafts explicitly the role of the central bank in providing intraday balances and credit to healthy institutions; under the policy, the Reserve Banks provide collater- 150 alized intraday credit at no cost. Before the 2007–09 financial crisis, overnight balances were much lower and daylight overdrafts sig- 100 nificantly higher than levels observed since late 2008. The use of daylight overdrafts spiked amid the market turmoil near the end of 2008 but dropped sharply as various liquidity programs initiated by the Federal 50 Reserve, all since terminated, took effect. During this period, the Federal Reserve also began paying interest on balances held at the Reserve Banks, increased its lending under the Term Auction Facility, and 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 began purchasing government-sponsored enterprise

106 103rd Annual Report | 2016 Reserve Banks’ priced services: FedMail, FedLine The Reserve Banks remained vigilant about their Web, FedLine Advantage, FedLine Command, and cybersecurity posture, investing in risk-mitigation ini- FedLine Direct. These FedLine channels are tiatives and programs and continuously monitoring designed to meet the individual connectivity, security, and assessing cybersecurity risks to its operations. and contingency requirements of depository institu- The Federal Reserve implemented several cybersecution customers. rity initiatives that enable threat-driven analysis; increase the ability to respond to evolving cybersecu- Between 2007 and 2016, Reserve Bank priced Fed- rity threats with agility, decisiveness, and speed by Line connections decreased nearly 18 percent, and streamlining decisionmaking during a cybersecurity the number of depository institutions in the United incident; and continue to improve its continuous States declined 30 percent.14 During this same monitoring capabilities of key systems. period, the number of employees within depository institutions who have FedLine credentials increased Examinations of the Federal Reserve 23 percent, reflecting in part the expansion of valueadded services provided and use of the network for Banks central bank applications. As of December 2016, more than 45,000 individuals had access to value- The combined financial statements of the Reserve added services (Accounting Management Informa- Banks as well as the financial statements of each of tion, FedTransaction Analyzer, and ACH Risk Ser- the 12 Reserve Banks are audited annually by an vices) and more than 35,000 individuals had access to independent public accountant retained by the Board central bank applications for regulatory reporting of Governors.15 In addition, the Reserve Banks are purposes. subject to oversight by the Board of Governors, which performs its own reviews. The Reserve Banks continue to maintain their focus on security and resiliency by upgrading critical ele- The Reserve Banks use the 2013 framework estabments of the FedLine solutions. Enhancements lished by the Committee of Sponsoring Organizato the FedLine Advantage and FedLine Command tions of the Treadway Commission (COSO) to assess access solutions were deployed to approximately their internal controls over financial reporting, 4,500 financial institutions, and enhancements to the including the safeguarding of assets. Within this FedLine Direct solution, used by approximately 210 framework, the management of each Reserve Bank of the largest financial institutions, were completed annually provides an assertion letter to its board of in 2016. directors that confirms adherence to COSO standards. Information Technology The Federal Reserve Board engaged KPMG LLP (KPMG) to audit the 2016 combined and individual The improvement of efficiency, effectiveness, and financial statements of the Reserve Banks.16 security of information technology (IT) services and operations continued to be a focus for the Reserve In 2016, KPMG also conducted audits of the inter- Banks in 2016. Led by the Federal Reserve System’s nal controls associated with financial reporting for National IT organization, the Reserve Banks each of the Reserve Banks. Fees for KPMG’s services approved the System IT Strategic Plan to reduce the totaled $6.7 million. To ensure auditor independence, complexity and risk involved in the delivery of techthe Board requires that KPMG be independent in all nology services. The plan focuses on IT productivity, simplicity, accountability, and stewardship across the 15 See “Federal Reserve Banks Combined Financial Statements” in System. National IT is guiding the plan’s implemen- section 12 of this report. tation and tracking progress toward the plan’s goals. 16 In addition, KPMG audited the Office of Employee Benefits of the Federal Reserve System (OEB), the Retirement Plan for This effort is scheduled to be completed in 2020. Employees of the Federal Reserve System (System Plan), and the Thrift Plan for Employees of the Federal Reserve System 14 See the Federal Deposit Insurance Corporation (FDIC), https:// (Thrift Plan). The System Plan and the Thrift Plan provide www.fdic.gov/bank/statistical/stats/, and the National Credit retirement benefits to employees of the Board, the Federal Union Administration (NCUA), https://www.ncua.gov/analysis/ Reserve Banks, the OEB, and the Consumer Financial Protec- Pages/industry.aspx, for depository institution data. tion Bureau.

Federal Reserve Banks 107 matters relating to the audits. Specifically, KPMG Expenses totaled $19,269 million: may not perform services for the Reserve Banks or 1. $12,044 million in interest paid to depository others that would place it in a position of auditing its institutions on reserve balances and term own work, making management decisions on behalf deposits; of the Reserve Banks, or in any other way impairing its audit independence. In 2016, the Reserve Banks 2. $4,205 million in Reserve Bank operating did not engage KPMG for significant non-audit expenses; services. 3. $1,122 million in interest expense on securities sold under agreements to repurchase; The Board’s reviews of the Reserve Banks include a wide range of offsite and onsite oversight activities, 4. $565 million in net periodic pension expense; conducted primarily by its Division of Reserve Bank 5. $709 million in assessments for Board of Gover- Operations and Payment Systems. Division personnel nors expenditures; monitor on an ongoing basis the activities of each Reserve Bank, National IT, and the System’s Office 6. $701 million for the cost of producing, issuing, of Employee Benefits (OEB). They conduct a comand retiring currency; prehensive onsite review of each Reserve Bank and OEB at least once every three years and review 7. $596 million for Consumer Financial Protection National IT, the System Open Market Account Bureau costs; and (SOMA), and Fedwire annually. 8. $4 million in other costs. The comprehensive onsite reviews include an assess- The expenses were reduced by $677 million in reimment of the internal audit function’s effectiveness bursements for services provided to government and its conformance to the Institute of Internal agencies. Net deductions from current net income Auditors’ (IIA) International Standards for the Prototaled $114 million, which includes $103 million in fessional Practice of Internal Auditing, applicable unrealized losses on foreign currency denominated policies and guidance, and the IIA’s code of ethics. investments revalued to reflect current market exchange rates, $15 million in realized losses on The Board also reviews SOMA and foreign currency Treasury securities, and $19 million in realized gains holdings to on federal agency and government-sponsored enter- 1. determine whether the New York Reserve Bank, prise mortgage-backed securities (GSE MBS). Diviwhile conducting the related transactions and dends paid to member banks for 2016 totaled associated controls, complies with the policies $711 million. Effective January 1, 2016, the Fixing established by the Federal Open Market Commit- America’s Surface Transportation Act (FAST Act) tee (FOMC); and changed the dividend rate for member banks with more than $10 billion of consolidated assets to the 2. assess SOMA-related IT project management and smaller of 6 percent or the rate equal to the high yield application development, vendor management, of the 10-year Treasury note auctioned at the last and system resiliency and contingency plans. auction held prior to the payment of the dividend. The FAST Act did not change the 6 percent dividend In addition, KPMG audits the year-end schedule of rate for member banks with $10 billion or less of participated asset and liability accounts and the total consolidated assets. related schedule of participated income accounts. The FOMC is provided with the external audit Net income before remittances to Treasury totaled reports and a report on the Board review. $92,178 million in 2016 (net income of $92,361 million, decreased by other comprehensive loss of Income and Expenses $183 million). Earnings remittances to the Treasury totaled $91,467 million in 2016. The FAST Act, which amended section 7(a) of the Federal Reserve Table 4 summarizes the income, expenses, and distri- Act, requires that any Reserve Bank capital surplus butions of net earnings of the Reserve Banks for in excess of $10 billion be transferred to Treasury.17 2016 and 2015. Income in 2016 was $111.7 billion, compared with $114.2 billion in 2015. 17 The FAST Act, Pub. L. No. 114-94, 129 Stat. 1312 (2015), was enacted on December 4, 2015. Before the enactment of the

108 103rd Annual Report | 2016 Table 4. Income, expenses, and distribution of net earnings of the Federal Reserve Banks, 2016 and 2015 Millions of dollars Item 2016 2 015 Current income 111,744 1 14,234 Loan interest income 1 * SOMA interest income 111,105 1 13,610 Other current income1 638 624 Net expenses 17,263 11,140 Operating expenses 4,205 4,042 Reimbursements -677 -650 Net periodic pension expense 565 563 Interest paid on depository institutions deposits and term deposits 12,044 6,935 Interest expense on securities sold under agreements to repurchase 1,122 248 Other expenses 4 2 Current net income 94,481 103,094 Net additions to (deductions from) current net income -114 -1,306 Treasury securities losses -15 0 Federal agency and government-sponsored enterprise mortgage-backed securities 19 43 Foreign currency translation losses -103 -1,382 Net income (loss) from consolidated VIEs -12 36 Other deductions -3 -3 Assessments by the Board of Governors 2,006 1,884 For Board expenditures 709 705 For currency costs 701 689 For Consumer Financial Protection Bureau costs2 596 490 Net income before providing for remittances to the Treasury 92,361 99,904 Earnings remittances to the Treasury 91,467 117,099 Interest on Federal Reserve notes 0 91,143 Required by the Federal Reserve Act, as amended by the FAST Act 91,467 25,956 Net income (loss) after providing for remittances to the Treasury 894 -17,195 Other comprehensive (loss) gain -183 366 Comprehensive income (loss) 711 -16,829 Total distribution of net income 92,178 100,270 Dividends on capital stock 711 1,743 Transfer to surplus and change in accumulated other comprehensive income 0 -18,572 Earnings remittances to the Treasury 91,467 117,099 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. The Reserve Banks reported comprehensive income Reserve Bank; table 10 details the income and of $711 million in 2016 after providing for remit- expenses of each Reserve Bank for 2016; table 11 tances to Treasury. shows a condensed statement for each Reserve Bank for the years 1914 through 2016; and table 13 gives Section 11 of this report, “Statistical Tables,” pro- the number and annual salaries of officers and vides more detailed information on the Reserve employees for each Reserve Bank. A detailed account Banks. Table 9 is a statement of condition for each of the assessments and expenditures of the Board of Governors appears in the Board of Governors FAST Act, the Board of Governors required the Reserve Banks Financial Statements (see section 12, “Federal to maintain a surplus equal to the amount of capital paid-in. Reserve System Audits”). 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 2016 amounted to $4,071 billion, a FAST Act did not change the 6 percent dividend rate for member banks with $10 billion or less of total consolidated assets. decrease of $83 billion from 2015 (see table 5).

Federal Reserve Banks 109 Table 5. System Open Market Account (SOMA) holdings of the Federal Reserve Banks, 2016 and 2015 Millions of dollars, except as noted Average daily assets (+)/liabilities (–) Current income (+)/expense (–) Average interest rate (percent) Item 2016 2015 2016 2015 2016 2015 U.S. Treasury securities1 2,570,106 2,588,099 63,845 63,317 2.48 2.45 Government-sponsored enterprise debt (GSE) securities1 25,298 36,630 959 1,330 3.79 3.63 Federal agency and GSE mortgage-backed securities2 1,802,439 1,793,787 46,299 48,931 2.57 2.73 Foreign currency denominated investments3 20,713 19,846 -7 31 - 0.03 0.15 Central bank liquidity swaps4 933 209 9 1 0.96 0.68 Other SOMA assets5 13 30 * * 0.16 0.01 Total SOMA assets 4,419,502 4,438,601 111,105 113,610 2.51 2.56 Securities sold under agreements to repurchase: Primary dealers and expanded counterparties -105,648 -125,656 -303 -84 0.29 0.07 Securities sold under agreements to repurchase: Foreign official and international accounts -241,848 -157,929 -819 -164 0.34 0.10 Total securities sold under agreements to repurchase -347,496 -283,585 -1,122 -248 0.32 0.09 Other SOMA liabilities6 -1,010 -1,116 n/a n/a n/a n/a Total SOMA liabilities -348,506 -284,701 -1,122 -248 0.32 0.09 Total SOMA holdings 4,070,996 4,153,900 109,983 113,362 2.70 2.73 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. SOMA Securities Holdings $933 million in 2016 and $209 million in 2015. The average daily balance of securities sold under agree- The average daily holdings of Treasury securities ments to repurchase was $347,496 million, an decreased by $18 billion, to an average daily amount increase of $63,911 million from 2015. of $2,570 billion. The average daily holdings of GSE debt securities decreased by $11 billion, to an average The average rates of interest earned on the Reserve daily amount of $25 billion. The average daily hold- Banks’ holdings of Treasury securities increased to ings of federal agency and GSE MBS increased by 2.48 percent, and the average rates on GSE debt $9 billion, to an average daily amount of securities increased to 3.79 percent in 2016. The aver- $1,802 billion. age rate of interest earned on federal agency and GSE MBS decreased to 2.57 percent in 2016. The The increases in average daily holdings of federal average interest rates for securities sold under agreeagency and GSE MBS are due to reinvestment of ments to repurchase increased to 0.32 percent in principal payments from other SOMA holdings in 2016. The average rate of interest earned on foreign federal agency and GSE MBS. The average daily currency denominated investments decreased to holdings of GSE debt securities decreased as a result –0.03 percent, while the average rate of interest of maturities. earned on central bank liquidity swaps increased to 0.96 percent in 2016. There were no significant holdings of securities purchased under agreements to resell in 2016 or 2015. Lending Average daily holdings of foreign currency denominated investments in 2016 were $20,713 million, com- In 2016, the average daily primary, secondary, and pared with $19,846 million in 2015. The average daily seasonal credit extended by the Reserve Banks to balance of central bank liquidity swap drawings was depository institutions decreased by $24 million, to

110 103rd Annual Report | 2016 $101 million. The average rate of interest earned on renovation programs at the New York, Richmond, primary, secondary, and seasonal credit increased to Kansas City, and San Francisco Reserve Banks’ 0.62 percent in 2016, from 0.28 percent in 2015. headquarters and Los Angeles Branch building continued. All Reserve Banks continued to implement ML is a lending facility established in 2008 under projects to maintain building systems to ensure effiauthority of FRA section 13(3) in response to the cient and reliable operations. The New York Reserve 2007–09 financial crisis. Net portfolio assets of ML Bank continued repairs and renovations to the 33 decreased from $1,778 million in 2015 to $1,742 mil- Maiden Lane building. In 2016, the St. Louis Reserve lion in 2016, and liabilities decreased from $57 mil- Bank expanded its leased office space to accommolion to $33 million. ML net loss of $12 million in date increased Treasury services. 2016 comprised interest income of $9 million, loss on investments of $19 million, and operating expenses For more information on the acquisition costs and of $2 million. net book value of the Reserve Banks and Branches, see table 14 in section 11 (“Statistical Tables”) of this annual report. Federal Reserve Bank Premises Several Reserve Banks took action in 2016 to maintain and renovate their facilities. The multiyear

Federal Reserve Banks 111 Pro Forma Financial Statements for Federal Reserve Priced Services Table 6. Pro forma balance sheet for Federal Reserve priced services, December 31, 2016 and 2015 Millions of dollars Item 2016 2 015 S hort-term assets (note 1) Imputed investments 812.2 1 32.8 Receivables 36.6 37.2 Materials and supplies 0.5 0.6 Prepaid expenses 11.5 10.6 Items in process of collection 117.7 209.9 Total short-term assets 978.4 391.1 Long-term assets (note 2) Premises 120.4 1 23.8 Furniture and equipment 36.9 37.6 Leases, leasehold improvements, and long-term prepayments 112.2 110.5 Deferred tax asset 184.7 189.8 Total long-term assets 454.1 461.7 Total assets 1,432.5 852.8 Short-term liabilities Deferred-availability items 921.5 3 42.7 Short-term debt 0 8.2 Short-term payables 20.8 20.8 Total short-term liabilities 942.3 371.7 Long-term liabilities Long-term debt 0 Accrued benefit costs 418.6 4 26.2 Total long-term liabilities 418.6 426.2 Total liabilities 1,360.9 797.9 Equity (including accumulated other comprehensive loss of $670.4 million and $657.5 million at December 31, 2016 and 2015, respectively) 71.6 54.9 Total liabilities and equity (note 3) 1,432.5 852.8 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.

112 103rd Annual Report | 2016 Table 7. Pro forma income statement for Federal Reserve priced services, 2016 and 2015 Millions of dollars Item 2016 2 015 Revenue from services provided to depository institutions (note 4) 434.1 429.1 Operating expenses (note 5) 401.5 381.2 Income from operations 32.5 47.9 Imputed costs (note 6) Interest on debt -1.4 4.2 Interest on float 0.1 -0.2 Sales taxes 3.8 2.5 3.6 7.5 Income from operations after imputed costs 30.0 Other income and expenses (note 7) Investment income 0.2 Income before income taxes 30.2 40.4 Imputed income taxes (note 6) 6.5 9.0 Net income 23.7 31.3 Memo: Targeted return on equity (note 6) 4.1 5.6 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. Table 8. Pro forma income statement for Federal Reserve priced services, by service, 2016 Millions of dollars Commercial check Item Total Commercial ACH Fedwire funds F edwire securities collection Revenue from services (note 4) 434.1 154.2 131.0 123.0 25.9 Operating expenses (note 5)1 401.5 129.1 131.7 115.2 25.6 Income from operations 32.5 25.1 -0.6 7.8 0.3 Imputed costs (note 6) 2.5 1.4 -0.2 1.1 0.2 Income from operations after imputed costs 30.0 23.7 -0.4 6.7 0.0 Other income and expenses, net (note 8) 0.2 0.0 0.0 0.1 0.0 Income before income taxes 30.2 23.8 -0.4 6.7 0.0 Imputed income taxes (note 6) 6.5 5.1 -0.1 1.5 0.0 Net income 23.7 18.6 -0.3 5.3 0.0 Memo: Targeted return on equity (note 6) 4.1 1.3 1.3 1.3 0.2 Cost recovery (percent) (note 7) 104.7 112.7 98.8 103.3 99.2 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.

Federal Reserve Banks 113 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 21.6 percent and 22.4 percent for 2016 and 2015, 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 2016 equity is imputed at 5.0 percent of total assets and 10.9 percent of risk-weighted assets, and in 2015 equity is imputed at 6.4 percent of total assets and 10.0 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, 2015, 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

114 103rd Annual Report | 2016 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 $33.2 million in 2016 and $26.2 million in 2015. The change in the funded status of the pension and other benefit plans resulted in a corresponding increase in accumulated other comprehensive loss of $12.9 million in 2016. (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 $5.0 million in 2016 and $3.3 million in 2015. In accordance with ASC 715, the Reserve Bank priced services recognized qualified pension-plan operating expenses of $34.4 million in 2016 and $33.7 million in 2015. Operating expenses also include the nonqualified net pension expense of $4.9 million in 2016 and $3.2 million in 2015. 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 21.6 percent and 22.4 percent for 2016 and 2015, 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 2016 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.18 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. 18 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.

Federal Reserve Banks 115 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 2016, in millions of dollars: Total float -334.4 Float not related to priced services1 0.1 Float subject to recovery through per-item fees - 334.3 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 2016 and 2015. (7) Other Income and Expenses Other income consists of income on imputed investments. Excess financing resulting from additional equity imputed to meet the FDIC well-capitalized requirements is assumed to be invested and earning interest at the 3-month Treasury bill rate. (8) 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.

117 7 Other Federal Reserve Operations Regulatory Developments could also help moderate fluctuations in the supply of credit. Dodd-Frank Implementation The policy statement provides background on the range of financial system vulnerabilities and other Throughout 2016, the Federal Reserve continued to factors the Board may take into account as it evaluimplement the Dodd-Frank Wall Street Reform and ates settings for the buffer, including but not limited Consumer Protection Act (Dodd-Frank Act) (Pub. to leverage in the nonfinancial sector, leverage in the L. No. 111-203), which gives the Federal Reserve financial sector, maturity and liquidity transformaimportant responsibilities to issue rules and supervise tion in the financial sector, and asset valuation presfinancial companies to enhance financial stability sures. The policy statement also provides that the and preserve the safety and soundness of the banking Board expects that the CCyB will be activated when system. The Board also continued to implement systemic vulnerabilities are meaningfully above norother regulatory reforms to increase the resiliency of mal and that the Board generally would expect to banking organizations and help to ensure that they provide notice to the public and seek comment on the are operating in a safe and sound manner. proposed level of the CCyB as part of making any final determination to change the CCyB. The policy The following is a summary of the key regulatory ini- statement became effective on October 14, 2016. tiatives that were completed during 2016. Long-Term Debt and Total Loss-Absorbing The Board’s Framework for Implementing the Capacity Requirement (Regulation YY) Countercyclical Capital Buffer (Appendix A to In December 2016, the Board issued a final rule to Regulation Q) strengthen the ability of government authorities to In September 2016, the Board issued a policy state- resolve in an orderly way the largest domestic and ment detailing the framework the Board will follow foreign banks operating in the United States without to set the U.S. Countercyclical Capital Buffer (CCyB) any support from taxpayer-provided capital. for private-sector credit exposures located in the United States. The CCyB is a macroprudential tool The final rule requires the parent holding companies in the Board’s regulatory capital rule that can be used of U.S. global systemically important banking orgato increase the resilience of the financial system by nizations and the top-tier U.S. intermediate holding raising capital requirements on internationally active companies of foreign global systemically important banking organizations when the risk of above- banking organizations (collectively known as covered normal losses is elevated. In particular, the CCyB companies) to maintain outstanding a minimum increases the size of the capital conservation buffer amount of long-term unsecured debt, as well as a for these banking organizations. Banking organiza- minimum amount of total loss-absorbing capacity tions that hold an amount of capital that is less than and related buffers. The final rule also subjects the the amount of the capital conservation buffer face covered companies to “clean holding company” limirestrictions on capital distributions and discretionary tations at the top-tier holding company level that bonus payments to senior executives. In this regard, would prohibit or limit those companies from enterthe CCyB would be available to help the banking ing into certain financial arrangements that could organizations absorb shocks associated with declin- impair their resolvability and the resiliency of their ing credit conditions. Implementation of the buffer operating subsidiaries. Covered companies are

118 103rd Annual Report | 2016 required to comply with the final rule by Janu- Single-Counterparty Credit Limits ary 1, 2019. (Regulation YY) In March 2016, the Board proposed a rule that Liquidity Standards would apply single-counterparty credit limits to bank holding companies with total consolidated assets of Liquidity Risk Measurement Standards $50 billion or more for public comment, as required (Regulation WW) by section 165(e) of the Dodd-Frank Act. The pro- In April 2016, the Board issued a final rule that posed rule addresses the risk associated with excesamends the liquidity coverage ratio (LCR) rule to sive credit exposures of large banking organizations include certain U.S. general obligation municipal to a single counterparty and included limits that are securities as high-quality liquid assets (HQLA). The tailored to increase in stringency as the systemic footfinal rule applies only to entities supervised by the print of a bank holding company increases, as well as Board that are subject to the LCR. The final rule per- similarly tailored requirements for foreign banks mits companies to include as level 2B liquid assets operating in the United States. The public comment U.S. general obligation municipal securities that meet period for the proposed rule ended on June 3, 2016. the same criteria as corporate debt securities that are included as level 2B liquid assets. To ensure appropri- Restrictions on Qualified Financial Contracts ate diversification of the assets included in the total (Regulations Q, WW, and YY) HQLA amount and address the liquidity structure of In May 2016, the Board proposed a rule to support the U.S. municipal securities market, the final rule U.S. financial stability by enhancing the resolvability also limits the amount of U.S. general obligation of very large and complex financial firms. The promunicipal securities that may be included in a composed rule would require U.S. global systemically pany’s total HQLA amount. The final rule became important banking institutions (G-SIBs) and the U.S. effective on July 1, 2016. operations of foreign G-SIBs (collectively, covered Liquidity Coverage Ratio Rule Disclosures entities) to amend their derivative, securities financ- (Regulation WW) ing, and other qualified financial contracts (QFCs) to prevent the disorderly unwind of the contracts if the In December 2016, the Board issued a final rule that parent or another entity within the firm enters bankamends the liquidity coverage ratio (LCR) rule to ruptcy or a resolution process. Given the large volimplement public disclosure requirements for certain ume of QFCs to which these entities are a party, the companies subject to the LCR rule. The final rule exercise of default rights en masse as a result of the applies to bank holding companies and certain savfailure of one of the firms could lead to a disorderly ings and loan holding companies with total consoliresolution if the failed firm were forced to sell off dated assets of $50 billion or more or total assets, which could spread contagion by increasing on-balance sheet foreign exposure of $10 billion or volatility and lowering the value of similar assets held more, and to nonbank financial companies desigby other firms, or to withdraw liquidity that it had nated by the Financial Stability Oversight Council provided to other firms. The proposed rule would for Board supervision to which the Board has applied require these entities to make clear in their QFCs that the LCR rule. These companies are required to disthe U.S. resolution regimes for financial companies close information about certain components of their and institutions (i.e., title II of the Dodd-Frank Act LCR calculations on a quarterly basis in a standardand the Federal Deposit Insurance Act) apply to the ized format and to discuss certain features of their contracts, which should reduce the risk of a foreign LCR results. In addition, the Board simultaneously court disregarding provisions of those acts that amended the modified LCR rule to provide one full would temporarily stay the termination of QFCs. year for bank holding companies and certain savings The proposed rule also would require these entities to and loan holding companies to come into compliensure that their QFCs restrict the ability of their ance with the rule. The final rule will become effeccounterparties to terminate the contract, liquidate tive on April 1, 2017. collateral, or exercise other default rights based on the resolution or liquidation of an affiliate in bank- Key Regulatory Initiatives Proposed ruptcy or in a resolution. The proposed rule states in 2016 that QFCs amended by the International Swaps and Derivatives Association 2015 Universal Resolution The following is a summary of additional regulatory Stay Protocol would comply with the proposed rule. initiatives that the Board proposed in 2016.

Other Federal Reserve Operations 119 The proposed rule also would make technical, con- above (Level 1); institutions with assets of $50 billion forming amendments to the Board’s capital and to $250 billion (Level 2); and institutions with assets liquidity rules. The public comment period for the of $1 billion to $50 billion (Level 3). This proposal proposed rule ended on August 5, 2016. sought comments on revisions to a previous proposal made by the agencies in 2011. Net Stable Funding Ratio (Regulation WW) In May 2016, the Board, the Office of the Comptrol- The proposed rule primarily addresses heightened ler of the Currency (OCC), and the Federal Deposit requirements for senior executive officers and Insurance Corporation (FDIC) jointly proposed a employees who are significant risk-takers at Level 1 rule that would implement the net stable funding and Level 2 institutions. These requirements include ratio (NSFR), a stable funding requirement for large mandatory deferral of incentive-based compensation, and internationally active banking organizations. The mandatory consideration of forfeiture and down- NSFR is designed to reduce the likelihood that dis- ward adjustment if certain adverse outcomes occur, ruptions to a firm’s regular sources of funding will and the inclusion of clawback provisions in incentivecompromise its liquidity position. The NSFR would based compensation arrangements. Boards of direcbe the second quantitative liquidity requirement for tors of covered institutions would be required to con- U.S. banking firms and would be established as an duct oversight of incentive-based compensation proenhanced prudential liquidity standard under sec- grams. All covered institutions would be subject to tion 165 of the Dodd-Frank Act. general prohibitions on incentive-based compensation arrangements that could encourage inappropri- The proposed rule, which would complement the ate risk-taking by providing excessive compensation liquidity coverage ratio, would require covered com- or that could lead to a material financial loss. The panies to maintain a minimum level of stable funding public comment period for the proposed rule ended based on the liquidity characteristics of the covered on July 22, 2016. company’s assets, funding commitments, and derivative exposures over a one-year time horizon. The Capital Standards for Supervised Institutions most stringent NSFR requirements would apply to Significantly Engaged in Insurance Activities banking organizations with total consolidated assets In June 2016, the Board sought comment on an of $250 billion or more or total consolidated advance notice of proposed rulemaking (ANPR) on-balance-sheet foreign exposure of $10 billion or regarding conceptual frameworks for capital stanmore, and their subsidiary insured depository institu- dards that could apply to certain nonbank financial tions with $10 billion or more of total consolidated companies with significant insurance activities that assets. The proposed rule would apply a less stringent the Financial Stability Oversight Council has deter- NSFR requirement to certain smaller depository mined should be supervised by the Board (otherwise institution holding companies with $50 billion or known as systemically important insurance compamore in total consolidated assets that are not other- nies), insurance companies that own a bank or savwise covered by the rule. The public comment period ings association, and holding companies with signififor the proposed rule ended on August 5, 2016. cant insurance activities. The ANPR presents one approach that would apply to systemically important Incentive Compensation (Regulation JJ) insurance companies (the consolidated approach), In May 2016, the Board, the OCC, the FDIC, the and a second approach for less complex insurance Securities and Exchange Commission, the Federal companies that also own a bank or thrift (the build- Housing Finance Agency, and the National Credit ing block approach). Union Administration jointly reproposed a rule that would prohibit incentive-based compensation The consolidated approach would classify the total arrangements that encourage inappropriate risks at consolidated assets and insurance liabilities of a comcovered financial institutions as required by sec- pany that is significantly engaged in insurance activition 956 of the Dodd-Frank Act. The proposed rule ties into risk segments, apply appropriate risk factors would apply to covered financial institutions with to each segment at the consolidated level, and then total assets of $1 billion or more. The requirements set a minimum ratio of required capital. The building are tailored based on total consolidated asset size. block approach would aggregate existing capital Covered institutions would be divided into three cat- requirements across a firm’s different legal entities to egories: institutions with assets of $250 billion and arrive at a combined, group-level capital requirement,

120 103rd Annual Report | 2016 subject to adjustments to reflect the Board’s supervi- assets between $50 billion and $250 billion, sory objectives. The public comment period for the on-balance-sheet foreign exposure of less than ANPR ended on August 17, 2016. $10 billion, and total consolidated nonbank assets of less than $75 billion would be considered large and Enhanced Prudential Standards for noncomplex firms and would be removed from the Systemically Important Insurance Companies qualitative assessment of CCAR. Large and non- (Regulation YY) complex firms would remain subject to the quantita- In June 2016, the Board proposed a rule that would tive review in the capital plan rule and CCAR. apply enhanced prudential standards to systemically important insurance companies. The proposed rule The proposed rule would also reduce reporting and would require systemically important insurance com- supporting documentation requirements for large panies to comply with certain corporate governance, and noncomplex firms. In addition, the proposed risk-management, and liquidity risk-management rule would decrease the amount of capital any firm standards that are tailored to the business models, subject to CCAR can distribute to shareholders outcapital structures, risk profiles, and systemic foot- side of an approved capital plan without seeking prints of those companies. The public comment prior approval from the Board (from 1 percent of tier period for the proposed rule ended on September 16, 1 capital to .25 percent of tier 1 capital) and would 2016. implement a one-quarter blackout period for such requests while the Federal Reserve is conducting Capital Planning and Stress Testing CCAR. The proposed rule would simplify the initial Requirements (Regulations Y and YY) applicability provisions of the capital plan and stress In September 2016, the Board proposed a rule that test rules for all firms and would require all firms to would modify its capital plan and stress testing rules report total nonbank assets. Finally, the proposed to remove certain large and noncomplex firms from rule would extend the range of potential as-of dates the qualitative assessment in the capital plans rule for the trading and counterparty scenario compoand from the Federal Reserve’s Comprehensive Capi- nents used in the stress test rules and make other nectal Analysis and Review (CCAR). Through CCAR, essary technical changes to the capital plan and stress the Federal Reserve evaluates the capital planning test rules. The public comment period for the proprocesses and capital adequacy of bank holding com- posed rule ended on November 25, 2016. The Board panies with $50 billion or more in total consolidated adopted a final rule in January 2017. assets. Under the proposed rule, bank holding companies and intermediate holding companies of foreign banking organizations with total consolidated

Other Federal Reserve Operations 121 The Board of Governors and the gic priorities of the Board. In addition to investing in ongoing operations, the Board identified and priori- Government Performance and tized investments and dedicated sufficient resources Results Act to six pillars over the 2016–19 period, which will allow the Board to advance its mission and respond Overview to continuing and evolving challenges. The Government Performance and Results Act The annual performance plan outlines the planned (GPRA) of 1993 requires federal agencies to prepare initiatives and activities that support the framework’s a strategic plan covering a multiyear period and long-term objectives and resources necessary to requires each agency to submit an annual perforachieve those objectives. The annual performance mance plan and an annual performance report. report summarizes the Board’s accomplishments that Although the Board is not covered by GPRA, the contributed toward achieving the strategic goals and Board follows the spirit of the act and, like other fedobjectives identified in the annual plan. eral agencies, prepares an annual performance plan and an annual performance report. The strategic plan, performance plan, and performance report are available on the Federal Reserve Strategic Plan, Performance Plan, and Board’s website at www.federalreserve.gov/ Performance Report publications/gpra.htm. On July 7, 2015, the Board approved the Strategic Plan 2016–19, which identifies and frames the strate-

123 8 Record of Policy Actions of the Board of Governors Policy actions of the Board of Governors are pre- lion in total assets were eligible for the extended sented pursuant to section 10 of the Federal Reserve examination cycle. The interim final rule, issued Act. That section provides that the Board shall keep jointly with the Federal Deposit Insurance Corporaa record of all questions of policy determined by the tion and Office of the Comptroller of the Currency, Board and shall include in its annual report to Con- also makes parallel changes to the Board’s regulation gress a full account of such actions. This section pro- governing the on-site examination cycle for U.S. vides a summary of policy actions in 2016, as imple- branches and agencies of foreign banks. The interim mented through (1) rules and regulations, (2) policy final rule, which implements provisions of the Fixing statements and other actions, and (3) discount rates America’s Surface Transportation Act (FAST Act), is for depository institutions. Policy actions were effective February 29, 2016. approved by all Board members in office. More information on the actions is available from the relevant Voting for this action: Chair Yellen, Vice Chair- Federal Register notices or other documents (see man Fischer, and Governors Tarullo, Powell, links in footnotes) or on request from the Board’s and Brainard. Freedom of Information Office. On November 29, 2016, the Board approved a final For information on the Federal Open Market Com- rule (Docket No. R-1531), published jointly with the mittee’s policy actions relating to open market opera- other agencies, that adopts, without change, the tions, see section 9, “Minutes of Federal Open Mar- interim final rule establishing an 18-month examinaket Committee Meetings.” tion cycle for insured depository institutions that have total assets of less than $1 billion.2 The final rule is effective January 17, 2017. Rules and Regulations Voting for this action: Chair Yellen, Vice Chair- Regulations H (Membership of State man Fischer, and Governors Tarullo, Powell, Banking Institutions in the Federal and Brainard. Reserve System) and K (International Banking Operations) Regulation I (Issue and Cancellation of Federal Reserve Bank Capital Stock) On February 4, 2016, the Board approved a joint On February 17, 2016, the Board approved an interim final rule with request for comment (Docket interim final rule with request for comment (Docket No. R-1531) to increase the number of insured No. R-1533) to change the rates paid on dividends to depository institutions eligible for an 18-month (rather than a 12-month) on-site examination cycle.1 Federal Reserve Bank stockholders with total consolidated assets greater than $10 billion (large mem- Under the interim final rule, insured depository instiber banks) to the lesser of 6 percent or the most tutions that have total assets of less than $1 billion recent 10-year Treasury auction rate prior to the diviand are well capitalized and well managed (generally, dend payment.3 The dividend rate for member banks institutions that have a composite rating of 1 or 2 with $10 billion or less in total consolidated assets under the Uniform Financial Institutions Rating remains at 6 percent. The interim final rule imple- System) are eligible for an extended examination cycle. Previously, only firms with less than $500 mil- 2 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 12-16/html/2016-30133.htm. 1 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 3 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 02-29/html/2016-03877.htm. 02-24/html/2016-03747.htm.

124 103rd Annual Report | 2016 ments provisions of the FAST Act. In addition, the Voting for this action: Chair Yellen, Vice Chairinterim final rule requires the Board to annually man Fischer, and Governors Tarullo, Powell, adjust the $10 billion threshold to reflect inflation, and Brainard. and the rule adjusts the treatment of accrued dividends when a Reserve Bank issues or cancels capital On December 6, 2016, the Board approved an stock owned by a large member bank. The interim interim final rule with request for comment (Docket final rule is effective February 24, 2016. No. R-1535) to extend the filing deadline for certain firms to complete Schedule G of the Banking Orga- Voting for this action: Chair Yellen, Vice Chair- nization Systemic Risk Report (FR Y-15), which is man Fischer, and Governors Tarullo, Powell, related to the G-SIB surcharge rule.6 The adjusted and Brainard. timeline applies to firms with $50 billion or more in total consolidated assets that are not currently identi- On November 3, 2016, the Board approved a final fied as G-SIBs. The reporting requirements are being rule (Docket No. R-1533) to implement the FAST harmonized with similar reporting requirements Act provisions regarding payment of dividends to from other rules. The interim final rule is effective Reserve Bank stockholders that adopts, without immediately. change, the interim final rule that the Board approved on February 17, 2016.4 The final rule is Voting for this action: Chair Yellen, Vice Chaireffective January 1, 2017. man Fischer, and Governors Tarullo, Powell, and Brainard. Voting for this action: Chair Yellen, Vice Chairman Fischer, and Governors Tarullo, Powell, Regulation Z (Truth in Lending) and Brainard. On November 7, 2016, the Board approved a final Regulation Q (Capital Adequacy of Bank rule (Docket No. R-1443) amending official staff interpretations to Regulation Z to clarify the method Holding Companies, Savings and Loan for making annual inflation adjustments to the dollar Holding Companies, and State Member threshold for exempting small loans from the special Banks) appraisal requirements for higher-priced mortgage loans.7 Regulation Z exempts higher-priced mortgage On December 6, 2016, the Board approved a final loans of $25,000 or less from the special appraisal rule (Docket No. R-1535) regarding risk-based capirequirements created under the Dodd-Frank Wall tal surcharges for U.S.-based global systemically Street Reform and Consumer Protection Act (Doddimportant bank holding companies (G-SIBs).5 The Frank Act) and requires the exemption threshold to final rule requires G-SIBs to continue calculating be adjusted annually to reflect increases, but not their potential surcharges under two methods and use decreases, in the consumer price index. The final rule, the higher of the two surcharges. The final rule speciissued jointly with the Office of the Comptroller of fies that G-SIBs must continue to calculate their the Currency and Consumer Financial Protection method 1 and method 2 scores annually using year- Bureau, also describes how adjustments to the end data, while reporting underlying data on a quarthreshold are made in the years following a year in terly basis. In addition, the final rule clarifies that which the dollar values were not adjusted because G-SIBs must calculate their method 2 scores using there was no increase in the consumer price index. systemic indicator amounts expressed in billions of Based on the consumer price index in effect as of dollars. The final rule is effective January 17, 2017. June 1, 2016, the exemption threshold will remain at (The surcharges are being phased in beginning on $25,500 through 2017. The final rule is effective Janu- January 1, 2016, and become fully effective on January 1, 2017. ary 1, 2019.) Voting for this action: Chair Yellen, Vice Chairman Fischer, and Governors Tarullo, Powell, and Brainard. 4 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 6 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 11-23/html/2016-28231.htm. 12-16/html/2016-29967.htm. 5 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 7 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 12-16/html/2016-29966.htm. 11-30/html/2016-28699.htm.

Record of Policy Actions of the Board of Governors 125 Regulation Z (Truth in Lending) and own rules on this subject. In August 2014, the Board, Regulation M (Consumer Leasing) jointly with the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, On November 7, 2016, the Board approved final National Credit Union Administration, and the amendments (Docket Nos. R-1546 and R-1545) to bureau, issued interagency guidance to clarify that official staff interpretations to Regulations Z and M the unfair or deceptive practices described in the to clarify the method for making annual inflation Board’s credit practices rule could violate the FTC adjustments to the dollar thresholds for exempt con- Act’s prohibitions. In addition, Regulation AA consumer credit and consumer lease transactions, respec- tained the Board’s procedures for processing contively.8 The Dodd-Frank Act requires the exemption sumer complaints, which are currently provided on thresholds to be adjusted annually for inflation, the Board’s website.10 The final rule is effective based on changes in the consumer price index. The March 21, 2016. final rules, issued jointly with the Consumer Financial Protection Bureau, clarify that if there is no Voting for this action: Chair Yellen, Vice Chairannual increase in the consumer price index, the man Fischer, and Governors Tarullo, Powell, agencies will not adjust the exemption thresholds and Brainard. from the prior year. The final rules also describe how adjustments to the thresholds are made in years fol- Regulation KK (Margin and Capital lowing a year in which the dollar values were not Requirements for Covered Swap Entities) adjusted because there was no increase in the consumer price index. Based on the consumer price On July 18, 2016, the Board approved a final rule index in effect as of June 1, 2016, the thresholds will (Docket No. R-1415) to exempt certain commercial remain at $54,600 through 2017. Although consumer and financial end users from initial and variation credit and consumer lease transactions above the margin requirements for certain swaps not cleared thresholds are generally exempt from the regulations’ through a clearinghouse, as required by title III of coverage, loans secured by real property or by per- the Terrorism Risk Insurance Program Reauthorizasonal property used or expected to be used as the tion Act of 2015.11 The final rule, issued jointly with principal dwelling of a consumer and private educa- the Federal Deposit Insurance Corporation, Office of tion loans are covered by the Truth in Lending Act the Comptroller of the Currency, Farm Credit regardless of the loan amount. The final rules are Administration, and Federal Housing Finance effective January 1, 2017. Agency, exempts from margin requirements certain non-cleared swaps and non-cleared security-based Voting for these actions: Chair Yellen, Vice swaps between covered swap entities and certain Chairman Fischer, and Governors Tarullo, Pow- commercial end users, captive finance companies, ell, and Brainard. and small banks, savings associations, Farm Credit System institutions, and credit unions with $10 bil- Regulation AA (Unfair or Deceptive Acts lion or less in total assets. The exemption from maror Practices) gin requirements would also apply to non-cleared swaps and security-based swaps between covered On January 13, 2016, the Board approved a final rule swap entities and certain treasury affiliates and finan- (Docket No. R-1490) repealing Regulation AA, in cial cooperatives. In all cases, these entities must view of the Dodd-Frank Act’s repeal of the Board’s qualify for a clearing exemption or exception and be authority to issue rules under the Federal Trade using the transactions to hedge or mitigate commer- Commission Act (FTC Act) regarding unfair or cial risk. The final rule, effective October 1, 2016, is deceptive acts or practices by banks.9 Regulation AA unchanged from an interim final rule published by included the Board’s credit practices rule. While the the agencies in November 2015. Dodd-Frank Act did not specifically transfer authority for the Board’s Regulation AA to the Consumer Financial Protection Bureau, the bureau can issue its 8 See Federal Register notices at www.gpo.gov/fdsys/pkg/FR- 2016-11-30/html/2016-28718.htm and www.gpo.gov/fdsys/pkg/ 10 See consumer complaint information at www FR-2016-11-30/html/2016-28710.htm. .federalreserveconsumerhelp.gov/. 9 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 11 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 02-18/html/2016-03228.htm. 08-02/html/2016-18193.htm.

126 103rd Annual Report | 2016 Voting for this action: Chair Yellen, Vice Chair- Regulation YY (Enhanced Prudential man Fischer, and Governors Tarullo, Powell, Standards) and Brainard. On December 15, 2016, the Board approved a final Regulation WW (Liquidity Risk rule (Docket No. R-1523) to improve the prospects Measurement Standards) for the orderly resolution of U.S. firms identified as global systemically important banks (G-SIBs) and On March 28, 2016, the Board approved a final rule the U.S. operations of foreign G-SIBs (collectively, (Docket No. R-1514) that amends the liquidity cover- covered companies) as well as to strengthen the resilage ratio (LCR) rule to include certain U.S. general iency of all G-SIBs.14 The final rule requires covered obligation state and municipal securities in the range companies to maintain outstanding a minimum of assets that large banking organizations may hold amount of long-term unsecured debt, as well as a to meet liquidity needs that could arise during a minimum amount of total loss-absorbing capacity period of financial stress.12 The LCR requires cov- and related buffers. In addition, the final rule applies ered companies to hold a minimum amount of high- “clean holding company” requirements that restrict quality liquid assets (HQLA) sufficient to meet their financial arrangements that could impair the resolvnet cash outflows during a short-term period of ability and the resiliency of a covered company or an financial stress. Under the final rule, investment- operating subsidiary of a covered company. The final grade U.S. general obligation state and municipal rule is effective March 27, 2017. securities qualify as HQLA, provided the assets meet certain other criteria similar to those applied to cor- Voting for this action: Chair Yellen, Vice Chairporate debt securities that are included as HQLA. man Fischer, and Governors Tarullo, Powell, The final rule, which also limits the amount of U.S. and Brainard. general obligation state and municipal securities that may be included in a covered company’s HQLA Rules of Practice for Hearings amount to address the structure of the U.S. municipal securities market, is effective July 1, 2016. On July 5, 2016, the Board approved an interim final rule with request for comment (Docket No. R-1543) Voting for this action: Chair Yellen, Vice Chair- amending its rules of practice and procedure to man Fischer, and Governors Tarullo, Powell, adjust the amounts of its civil monetary penalties to and Brainard. account for inflation, as required by the Federal Civil Penalties Inflation Adjustment Act Improvements On December 18, 2016, the Board approved a final Act of 2015.15 The act requires this adjustment to be rule (Docket No. R-1525) to implement public dis- made annually rather than every four years, preclosure requirements for the liquidity coverage ratio scribes the formula for inflation adjustment, and (LCR) rule.13 The final rule requires firms subject to directs the federal agencies to make a “catch-up” these requirements to publicly disclose, on a quar- adjustment (the first inflation adjustment after enactterly basis, quantitative information about their LCR ment of the law). The interim final rule, effective and also provide a qualitative discussion of the fac- August 1, 2016, sets the new civil monetary penalty tors that have a significant effect on their LCR. The levels pursuant to the required catch-up adjustment. final rule, which applies to depository institution holding companies and covered nonbank financial Voting for this action: Chair Yellen, Vice Chaircompanies subject to the LCR, is effective April 1, man Fischer, and Governors Tarullo, Powell, 2017. and Brainard. Voting for this action: Chair Yellen, Vice Chair- Rules Regarding Availability of Information man Fischer, and Governors Tarullo, Powell, On December 8, 2016, the Board approved an and Brainard. interim final rule with request for comment (Docket No. R-1556) to amend its regulations for processing 12 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 14 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2017- 04-11/html/2016-07716.htm. 01-24/html/2017-00431.htm. 13 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 15 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 12-27/html/2016-30859.htm. 07-20/html/2016-16969.htm.

Record of Policy Actions of the Board of Governors 127 requests under the Freedom of Information Act bank is holding real estate in good faith for the busi- (FOIA), pursuant to the FOIA Improvement Act of ness of banking and not for impermissible real estate 2016.16 The amendments clarify and update proce- speculation. The Board will analyze the facts and cirdures for the disclosure of records to the public, cumstances in each case, including the financial sigextend the deadline for administrative appeals, and nificance of the branch housed by the property, the add information on dispute resolution services. The state member bank’s expected long-term plans for interim final rule is effective December 27, 2016. the property, and whether the bank has occupied the premises for a long period of time. The standard for Voting for this action: Chair Yellen, Vice Chair- permissible bank premises held by bank holding man Fischer, and Governors Tarullo, Powell, companies has not changed—generally at least and Brainard. 50 percent of the property must be used for banking purposes within five years of acquisition of the property. The revised policy is effective immediately. Policy Statements and Other Actions Voting for this action: Chair Yellen, Vice Chair- Community Reinvestment Act man Fischer, and Governors Tarullo, Powell, and Brainard. On July 5, 2016, the Board approved final new and revised Interagency Questions and Answers Regard- Supervisory Rating System for Financial ing Community Reinvestment (Docket No. Market Infrastructures OP-1497), issued jointly with the Federal Deposit Insurance Corporation and Office of the Comptrol- On August 22, 2016, the Board approved a notice ler of the Currency, to provide additional guidance to (Docket No. OP-1521) adopting a new supervisory financial institutions and the public on the agencies’ rating system for financial market infrastructures Community Reinvestment Act regulations.17 The (FMIs) subject to Federal Reserve supervision.18 interagency questions and answers address topics FMIs are multilateral systems that transfer, clear, such as the types of activities that promote economic settle, or record payments, securities, derivatives, or development and address community development other financial transactions among market particineeds; how examiners evaluate the availability and pants or between participants and the FMI operator. effectiveness of retail banking services; innovative or FMIs include payment systems, central securities flexible lending practices; the evaluation of retail and depositories, securities settlement systems, central community development services; and responsiveness counterparties, and trade repositories. The Federal and innovativeness considerations. The interagency Reserve supervises certain FMIs that provide payquestions and answers are effective July 25, 2016. ment, clearing, and settlement services for critical U.S. financial markets. The ORSOM (Organization; Voting for this action: Chair Yellen, Vice Chair- Risk Management; Settlement; Operational Risk and man Fischer, and Governors Tarullo, Powell, Information Technology; and Market Support, and Brainard. Access, and Transparency) rating system is designed to link supervisory assessments and messages to Investments in Bank Premises supervised entities to the regulations and guidance that form the foundation of the supervisory program. On June 2, 2016, the Board approved a revision to its The policy is effective October 27, 2016. policy on investments in bank premises, which conforms its approach to that of the other federal bank- Voting for this action: Chair Yellen, Vice Chairing agencies. The previous standard for permissible man Fischer, and Governors Tarullo, Powell, bank premises held by state member banks generally and Brainard. required that at least 50 percent of the property must be used for banking purposes within five years of Countercyclical Capital Buffer acquisition of the property. Under the revised policy, the Board will determine whether a state member On September 6, 2016, the Board approved a policy statement (Docket No. R-1529) describing the frame- 16 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 12-27/html/2016-30670.htm. 17 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 18 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 07-25/html/2016-16693.htm. 08-26/html/2016-20517.htm.

128 103rd Annual Report | 2016 work the Board will follow in setting the amount of leaders. The restriction on former officers is effective the U.S. countercyclical capital buffer (CCyB) for on December 5, 2016, and the revised senior examadvanced approaches bank holding companies, sav- iner policy is effective on January 2, 2017. ings and loan holding companies, and state member banks.19 The CCyB is a macroprudential policy tool Voting for this action: Chair Yellen, Vice Chairthat can be increased during periods of rising vulner- man Fischer, and Governors Tarullo, Powell, abilities in the financial system and reduced when and Brainard. vulnerabilities recede. The policy statement provides background on the range of financial-system vulner- Interagency Consumer Compliance abilities and other factors the Board may take into Rating System account as it evaluates the appropriate level of the CCyB. The policy statement states that (1) the Board On November 2, 2016, the Board approved final expects to activate the CCyB when systemic vulner- guidance (Docket No. FFIEC-2016-0003) to revise abilities are meaningfully above normal and that the the Uniform Interagency Consumer Compliance Board generally intends to increase the CCyB gradu- Rating System (CC Rating System) to better reflect ally, and (2) the Board expects to remove or reduce current consumer compliance supervisory the CCyB when the conditions that led to its activa- approaches toward financial institutions and to more tion abate or lessen and when the release of CCyB fully align the CC Rating System with the financial capital would promote financial stability. The CCyB regulatory agencies’ current risk-based, tailored supplements the minimum capital requirements and examination processes.21 The revisions reflect the other capital buffers included in Regulation Q, which regulatory, examination, supervisory, technological, are designed to provide resilience to unexpected and market changes that have occurred in the years losses created by normal fluctuations in economic since the original rating system was established in and financial conditions. The policy statement (desig- 1980. The Federal Financial Institutions Examinanated as Appendix A to Regulation Q) is effective tion Council, on behalf of its member agencies, October 14, 2016. issued the guidance on November 7, 2016. The guidance is effective March 31, 2017. Voting for this action: Chair Yellen, Vice Chairman Fischer, and Governors Tarullo, Powell, Voting for this action: Chair Yellen, Vice Chairand Brainard. man Fischer, and Governors Tarullo, Powell, and Brainard. Post-Employment Restrictions for Officers and Senior Examiners Volcker Rule Conformance Period On October 21, 2016, the Board approved amend- On July 5, 2016, the Board approved an order ments to its policies regarding post-employment extending until July 21, 2017, the conformance restrictions for officers and Reserve Bank senior period for banking entities to divest ownership in cerexaminers.20 The Reserve Banks’ Code of Conduct tain legacy covered fund activities and investments was revised to add new provisions to prohibit former under section 619 of the Dodd-Frank Act, the Reserve Bank officers from representing financial so-called Volcker rule.22 Section 619 generally prohibinstitutions and other third parties before current its banking entities from engaging in proprietary Federal Reserve System employees for one year fol- trading and from acquiring or retaining an ownerlowing their departure from the System. Also, a ship interest in, sponsoring, or having certain relarevised policy in the Federal Reserve Administrative tionships with a hedge fund or private equity fund Manual expands the definition of “senior examiners” (covered fund). Under the statute, banking entities subject to a one-year, post-employment restriction to were provided a grace period until July 2014 to coninclude central points of contact (CPCs), deputy form their investments in and relationships with cov- CPCs, senior supervisory officers (SSOs), deputy ered funds and foreign funds that were in place SSOs, enterprise risk officers, and supervisory team before December 31, 2013 (legacy covered funds). The act also authorized the Board to extend the con- 19 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 21 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2016- 09-16/html/2016-21970.htm. 11-14/html/2016-27226.htm. 20 See press release at www.federalreserve.gov/newsevents/press/ 22 See press release at www.federalreserve.gov/newsevents/press/ bcreg/20161118a.htm. bcreg/20160707a.htm.

Record of Policy Actions of the Board of Governors 129 formance period for one year at a time, for a total of rates on discount window loans to depository institunot more than three years. (The Board has approved tions at least every 14 days, subject to review and two previous one-year extensions of the conformance determination by the Board of Governors. Periodiperiod.) cally, the Board considers proposals by the 12 Reserve Banks to establish the primary credit rate Voting for this action: Chair Yellen, Vice Chair- and approves proposals to maintain the formulas for man Fischer, and Governors Tarullo, Powell, computing the secondary and seasonal credit rates. and Brainard. Primary, Secondary, and Seasonal Credit On December 7, 2016, the Board approved a policy statement with additional details regarding how Primary credit, the Federal Reserve’s main lending banking entities may seek an additional five years to program for depository institutions, is extended at conform their investments in a narrow class of funds the primary credit rate, which is set above the usual that qualify as “illiquid funds” to the requirements of level of short-term market interest rates. It is made section 619 of the Dodd-Frank Act (Volcker rule).23 available, with minimal administration and for very Banking entities seeking such an extension should short terms, as a backup source of liquidity to submit information including details about the funds depository institutions that, in the judgment of the for which an extension is requested, a certification lending Federal Reserve Bank, are in generally sound that each fund meets the definition of illiquid fund, a financial condition. During 2016, the Board description of the specific efforts made to divest or approved one change to the primary credit rate, an conform the illiquid funds, the length of the increase from 1 percent to 1¼ percent, effective requested extension, and the plan to divest or con- December 15, 2016. The Board reached this determiform each illiquid fund within the requested exten- nation on the primary credit rate recommendations sion period. of the Reserve Bank boards of directors. The Board’s action was taken in conjunction with the FOMC’s Voting for this action: Chair Yellen, Vice Chair- decision to raise the target range for the federal funds man Fischer, and Governors Tarullo, Powell, rate by 25 basis points, to ½ percent to ¾ percent. and Brainard. Monetary policy developments are reviewed more fully in other parts of this report (see section 2, Interest on Reserves “Monetary Policy and Economic Developments”). On December 14, 2016, the Board approved raising Secondary credit is available in appropriate circumthe interest rate paid on required and excess reserve stances to depository institutions that do not qualify balances from ½ percent to ¾ percent, effective for primary credit. The secondary credit rate is set at December 15, 2016.24 This action was taken to sup- a spread above the primary credit rate. Throughout port the Federal Open Market Committee’s decision 2016, the spread was set at 50 basis points. At yearon December 14 to raise the target range for the fed- end, the secondary credit rate was 1¾ percent. eral funds rate by 25 basis points, to a range of ½ percent to ¾ percent. Seasonal credit is available to smaller depository institutions to meet liquidity needs that arise from Voting for this action: Chair Yellen, Vice Chair- regular swings in their loans and deposits. The rate man Fischer, and Governors Tarullo, Powell, on seasonal credit is calculated every two weeks as an and Brainard. average of selected money market yields, typically resulting in a rate close to the target range for the federal funds rate. At year-end, the seasonal credit Discount Rates for Depository rate was 0.70 percent.25 Institutions in 2016 Votes on Changes to Discount Rates for Under the Federal Reserve Act, the boards of direc- Depository Institutions tors of the Federal Reserve Banks must establish Details on the action by the Board to approve a 23 See press release at www.federalreserve.gov/newsevents/press/ change to the primary credit rate are provided below. bcreg/20161212b.htm. 24 See press release at www.federalreserve.gov/newsevents/ 25 For current and historical discount rates, see www pressreleases/20161214a1.htm. .frbdiscountwindow.org/.

130 103rd Annual Report | 2016 December 14, 2016. Effective December 15, 2016, the Board approved an identical action subsequently Board approved actions taken by the boards of direc- taken by the board of directors of the Federal tors of the Federal Reserve Banks of Boston, New Reserve Bank of Minneapolis, effective immediately. York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Voting for this action: Chair Yellen, Vice Chair- Francisco to increase the primary credit rate from man Fischer, and Governors Tarullo, Powell, 1 percent to 1¼ percent. On December 15, 2016, the and Brainard.

131 Minutes of 9 Federal Open Market Committee Meetings The policy actions of the Federal Open Market Com- Policy directives of the Federal Open Market Committee, recorded in the minutes of its meetings, are mittee are issued to the Federal Reserve Bank of New presented in the Annual Report of the Board of Gov- York as the Bank selected by the Committee to ernors pursuant to the requirements of section 10 of execute transactions for the System Open Market the Federal Reserve Act. That section provides that Account. In the area of domestic open market operathe Board shall keep a complete record of the actions tions, the Federal Reserve Bank of New York opertaken by the Board and by the Federal Open Market ates under instructions from the Federal Open Mar- Committee on all questions of policy relating to open ket Committee that take the form of an Authorizamarket operations, that it shall record therein the tion for Domestic Open Market Operations and a votes taken in connection with the determination of Domestic Policy Directive. (A new Domestic Policy open market policies and the reasons underlying each Directive is adopted at each regularly scheduled policy action, and that it shall include in its annual meeting.) In the foreign currency area, the Federal report to Congress a full account of such actions. Reserve Bank of New York operates under an Authorization for Foreign Currency Operations and a For- The minutes of the meetings contain the votes on the eign Currency Directive. The Federal Reserve Bank policy decisions made at those meetings, as well as a of New York also operated under Procedural Instrucsummary of the information and discussions that led tions with Respect to Foreign Currency Operations to the decisions. In addition, four times a year, a until September 2016. Changes in the instruments Summary of Economic Projections is published as an during the year are reported in the minutes for the addendum to the minutes. The descriptions of eco- 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 Committee at the time of the meetings. 1 As of January 1, 2016, the Federal Reserve Bank of New York Members of the Committee voting for a particular was operating under the Domestic Policy Directive approved at the December 15–16, 2015, Committee meeting. The other action may differ among themselves as to the reasons policy instruments (the Authorization for Domestic Open Marfor their votes; in such cases, the range of their views ket Operations, the Authorization for Foreign Currency Operais noted in the minutes. When members dissent from tions, the Foreign Currency Directive, and Procedural Instructions with Respect to Foreign Currency Operations) in effect as a decision, they are identified in the minutes and a of January 1, 2016, were approved at the January 27–28, 2015, summary of the reasons for their dissent is provided. meeting.

132 103rd Annual Report | 2016 Meeting Held Thomas C. Baxter Deputy General Counsel on January 26–27, 2016 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, January 26, 2016, at 12:00 p.m. and continued on David W. Wilcox Wednesday, January 27, 2016, at 9:00 a.m.1 Economist Thomas A. Connors, Troy Davig, Michael P. Leahy, Present Jonathan P. McCarthy, Stephen A. Meyer, Janet L. Yellen Ellis W. Tallman, 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 James Bullard Robert deV. Frierson Stanley Fischer Secretary of the Board, Office of the Secretary, Board of Governors Esther L. George Michael S. Gibson Loretta J. Mester Director, Division of Banking Supervision and Jerome H. Powell Regulation, Board of Governors Eric Rosengren Nellie Liang Director, Office of Financial Stability Policy and Daniel K. Tarullo Research, Board of Governors Charles L. Evans, Patrick Harker, James A. Clouse and William R. Nelson Robert S. Kaplan, and Neel Kashkari Deputy Directors, Division of Monetary Affairs, Alternate Members of the Federal Open Market Board of Governors Committee Daniel M. Covitz Jeffrey M. Lacker, Dennis P. Lockhart, Deputy Director, Division of Research and Statistics, and John C. Williams Board of Governors Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively William B. English Senior Special Adviser to the Board, Office of Board Brian F. Madigan Members, Board of Governors Secretary Andrew Figura, Ann McKeehan,2 Matthew M. Luecke David Reifschneider, and Stacey Tevlin Deputy Secretary Special Advisers to the Board, Office of Board David W. Skidmore Members, Board of Governors Assistant Secretary Trevor A. Reeve Michelle A. Smith Special Adviser to the Chair, Office of Board Assistant Secretary Members, Board of Governors Scott G. Alvarez Linda Robertson General Counsel Assistant to the Board, Office of Board Members, Board of Governors 1 The Federal Open Market Committee is referenced as the “FOMC” and the “Committee” in these minutes. 2 Attended Wednesday session only.

Minutes of Federal Open Market Committee Meetings | January 133 Eric M. Engen Jonathan E. Goldberg Senior Associate Director, Division of Research and Senior Economist, Division of Monetary Affairs, Statistics, Board of Governors Board of Governors Beth Anne Wilson Achilles Sangster II Senior Associate Director, Division of International Information Management Analyst, Division of Finance, Board of Governors Monetary Affairs, Board of Governors Michael T. Kiley David Altig, Jeff Fuhrer, Glenn D. Rudebusch, Senior Adviser, Division of Research and Statistics, and Daniel G. Sullivan and Executive Vice Presidents, Federal Reserve Banks of Senior Associate Director, Office of Financial Atlanta, Boston, San Francisco, and Chicago, Stability Policy and Research, respectively Board of Governors Samuel Schulhofer-Wohl Ellen E. Meade and Joyce K. Zickler Senior Vice President, Federal Reserve Bank of Senior Advisers, Division of Monetary Affairs, Minneapolis Board of Governors Todd E. Clark,4 Deborah L. Leonard, Jeremy B. Rudd Keith Sill, and Mark A. Wynne Senior Adviser, Division of Research and Statistics, Vice Presidents, Federal Reserve Banks of Cleveland, Board of Governors New York, Philadelphia, and Dallas, respectively Gretchen C. Weinbach William Dupor Associate Director, Division of Monetary Affairs, Assistant Vice President, Federal Reserve Bank of Board of Governors St. Louis Min Wei Robert L. Hetzel Deputy Associate Director, Division of Monetary Senior Economist, Federal Reserve Bank of Affairs, Board of Governors Richmond Glenn Follette Annual Organizational Matters5 Assistant Director, Division of Research and Statistics, Board of Governors In the agenda for this meeting, it was reported that Eric C. Engstrom advices of the election of the following members and Adviser, Division of Research and Statistics, alternate members of the Federal Open Market Com- Board of Governors mittee for a term beginning January 26, 2016, had been received and that these individuals had executed Penelope A. Beattie2 their oaths of office. Assistant to the Secretary, Office of the Secretary, Board of Governors The elected members and alternate members were as Etienne Gagnon follows: Section Chief, Division of Monetary Affairs, William C. Dudley Board of Governors President of the Federal Reserve Bank of New York, Katie Ross3 with Manager, Office of the Secretary, Michael Strine Board of Governors First Vice President of the Federal Reserve Bank of New York, as alternate. David H. Small Project Manager, Division of Monetary Affairs, Eric Rosengren Board of Governors President of the Federal Reserve Bank of Boston, with Deepa Datta Senior Economist, Division of International Finance, 4 Attended the discussion of potential enhancements to the Board of Governors Summary of Economic Projections. 5 Committee organizational documents are available at www 3 Attended Tuesday session only. .federalreserve.gov/monetarypolicy/rules_authorizations.htm.

134 103rd Annual Report | 2016 Patrick Harker Thomas Laubach President of the Federal Reserve Bank of Economist Philadelphia, as alternate. David W. Wilcox Loretta J. Mester Economist President of the Federal Reserve Bank of Cleveland, Thomas A. Connors with Troy Davig Charles L. Evans President of the Federal Reserve Bank of Chicago, Michael P. Leahy as alternate. David E. Lebow James Bullard Jonathan P. McCarthy President of the Federal Reserve Bank of St. Louis, Stephen A. Meyer with Ellis W. Tallman Robert S. Kaplan Geoffrey Tootell President of the Federal Reserve Bank of Dallas, as alternate. Christopher J. Waller Esther L. George William Wascher President of the Federal Reserve Bank of Associate Economists Kansas City, with By unanimous vote, the Federal Reserve Bank of Neel Kashkari New York was selected to execute transactions for President of the Federal Reserve Bank of the System Open Market Account (SOMA). Minneapolis, as alternate. By unanimous vote, the Committee selected Simon By unanimous vote, the following officers of the Potter and Lorie K. Logan to serve at the pleasure of Committee were selected to serve until the selection the Committee as manager and deputy manager of of their successors at the first regularly scheduled the SOMA, respectively, on the understanding that meeting of the Committee in 2017: these selections were subject to their being satisfac- Janet L. Yellen tory to the Federal Reserve Bank of New York. Chairman Secretary’s note: Advice subsequently was William C. Dudley received that the manager and deputy manager Vice Chairman selections indicated above were satisfactory to the Brian F. Madigan Federal Reserve Bank of New York. Secretary By unanimous vote, the Authorization for Domestic Matthew M. Luecke Open Market Operations was approved with a non- Deputy Secretary substantive amendment that changed terminology David W. Skidmore used in paragraph 4.B.ii, related to the provision of Assistant Secretary intraday credit to Foreign Accounts in exchange for securities. The Guidelines for the Conduct of System Michelle A. Smith Open Market Operations in Federal-Agency Issues Assistant Secretary remained suspended. Scott G. Alvarez Authorization for Domestic Open Market General Counsel Operations (As Amended Effective Thomas C. Baxter January 26, 2016) Deputy General Counsel 1. The Federal Open Market Committee (the “Com- Richard M. Ashton mittee”) authorizes and directs the Federal Assistant General Counsel Reserve Bank selected by the Committee to Steven B. Kamin execute open market transactions (the “Selected Economist Bank”), to the extent necessary to carry out the

Minutes of Federal Open Market Committee Meetings | January 135 most recent domestic policy directive adopted by agency or that are fully guaranteed as to the Committee: principal and interest by that agency. A. To buy or sell in the open market securities 2. The Committee authorizes the Selected Bank to that are direct obligations of, or fully guaran- undertake transactions of the type described in teed as to principal and interest by, the paragraph 1 from time to time for the purpose of United States, and securities that are direct testing operational readiness, subject to the folobligations of, or fully guaranteed as to prin- lowing limitations: cipal and interest by, any agency of the United States, that are eligible for purchase A. All transactions authorized in this paragraph or sale under Section 14(b) of the Federal 2 shall be conducted with prior notice to the Reserve Act (“Eligible Securities”) for the Committee; System Open Market Account (“SOMA”): B. The aggregate par value of the transactions i. As an outright operation with securities authorized in this paragraph 2 that are of the dealers and foreign and international type described in paragraph 1.A.i shall not accounts maintained at the Selected exceed $5 billion per calendar year; and Bank: on a same-day or deferred delivery basis (including such transactions as are C. The outstanding amount of the transactions commonly referred to as dollar rolls and described in paragraph 1.A.ii shall not exceed coupon swaps) at market prices; or $5 billion at any given time. ii. As a temporary operation: on a same-day or deferred delivery basis, to purchase 3. In order to ensure the effective conduct of open such Eligible Securities subject to an market operations, the Committee authorizes the agreement to resell (“repo transactions”) Selected Bank to operate a program to lend Elior to sell such Eligible Securities subject gible Securities held in the SOMA to dealers on to an agreement to repurchase (“reverse an overnight basis (except that the Selected Bank repo transactions”) for a term of 65 busi- may lend Eligible Securities for longer than an ness days or less, at rates that, unless oth- overnight term to accommodate weekend, holierwise authorized by the Committee, are day, and similar trading conventions). determined by competitive bidding, after applying reasonable limitations on the A. Such securities lending must be: volume of agreements with individual i. At rates determined by competitive counterparties; bidding; B. To allow Eligible Securities in the SOMA to ii. At a minimum lending fee consistent with the objectives of the program; mature without replacement; iii. Subject to reasonable limitations on the C. To exchange, at market prices, in connection total amount of a specific issue of Eliwith a Treasury auction, maturing Eligible gible Securities that may be auc- Securities in the SOMA with the Treasury, in tioned; and the case of Eligible Securities that are direct iv. Subject to reasonable limitations on the obligations of the United States or that are amount of Eligible Securities that each fully guaranteed as to principal and interest borrower may borrow. by the United States; and B. The Selected Bank may: D. To exchange, at market prices, maturing Eligible Securities in the SOMA with an agency i. Reject bids that, as determined in its sole of the United States, in the case of Eligible discretion, could facilitate a bidder’s abil- Securities that are direct obligations of that ity to control a single issue;

136 103rd Annual Report | 2016 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 under- ing 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 Cus- and 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 manager noted that the staff was in the process als, to: of evaluating the current framework for foreign reserves management and considering a possible i. Undertake repo transactions in Eligible restructuring of the documents governing the frame- Securities with dealers with a correspondwork for foreign operations. He recommended that ing reverse repo transaction in such Eliany changes to these documents be postponed until gible Securities with the Customer that process was complete. The Committee voted Accounts; and unanimously to reaffirm without change the Authoii. Undertake intra-day repo transactions in rization for Foreign Currency Operations, the For- Eligible Securities with Foreign Accounts. eign Currency Directive, and the Procedural Instructions with Respect to Foreign Currency Operations Transactions undertaken with Customer as shown below. The votes to reaffirm these docu- Accounts under the provisions of this paragraph ments included approval of the System’s warehous- 4 may provide for a service fee when appropriate. ing agreement with the U.S. Treasury. Transactions undertaken with Customer Accounts are also subject to the authorization or Authorization for Foreign Currency Operations approval of other entities, including the Board of (As Reaffirmed Effective January 26, 2016) Governors of the Federal Reserve System and, when involving accounts maintained at a Federal 1. The Federal Open Market Committee (the “Com- Reserve Bank as fiscal agent of the United States, mittee”) authorizes and directs the Federal the United States Department of the Treasury. Reserve Bank selected by the Committee to

Minutes of Federal Open Market Committee Meetings | January 137 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 Mexican pesos Bank of Japan New Zealand dollars European Central Bank Norwegian kroner Swiss National Bank Pounds sterling Singapore dollars C. Standing foreign currency liquidity swap Swedish kronor arrangements with the following foreign Swiss francs banks: B. To hold balances of, and to have outstanding Bank of Canada forward contracts to receive or to deliver, the Bank of England foreign currencies listed in paragraph A Bank of Japan above. European Central Bank Swiss National Bank C. To draw foreign currencies and to permit foreign banks to draw dollars under the Dollar and foreign currency liquidity swap arrangements listed in paragraph 2 below, in arrangements have no pre-set size limits. Any new accordance with the Procedural Instructions swap arrangements shall be referred for review with Respect to Foreign Currency and approval to the Committee. All swap Operations. arrangements are subject to annual review and approval by the Committee. D. To maintain an overall open position in all foreign currencies not exceeding $25.0 billion. 3. All transactions in foreign currencies undertaken For this purpose, the overall open position in under paragraph 1.A above shall, unless otherall foreign currencies is defined as the sum wise expressly authorized by the Committee, be at (disregarding signs) of net positions in indi- prevailing market rates. For the purpose of providual currencies, excluding changes in dollar viding an investment return on System holdings value due to foreign exchange rate move- of foreign currencies or for the purpose of adjustments and interest accruals. The net position ing interest rates paid or received in connection

138 103rd Annual Report | 2016 with swap drawings, transactions with foreign any member, or at the request of the manager, central banks may be undertaken at non-market System Open Market Account (“manager”), for exchange rates. the purposes of reviewing recent or contemplated operations and of consulting with the manager 4. It shall be the normal practice to arrange with on other matters relating to the manager’s foreign central banks for the coordination of for- responsibilities. At the request of any member of eign currency transactions. In making operating the Subcommittee, questions arising from such arrangements with foreign central banks on reviews and consultations shall be referred for System holdings of foreign currencies, the determination to the Committee. Selected Bank shall not commit itself to maintain any specific balance, unless authorized by the 7. The Chairman is authorized: Committee. Any agreements or understandings concerning the administration of the accounts A. With the approval of the Committee, to enter maintained by the Selected Bank with the foreign into any needed agreement or understanding banks designated by the Board of Governors with the Secretary of the Treasury about the under section 214.5 of Regulation N shall be division of responsibility for foreign currency referred for review and approval to the operations between the System and the Committee. Treasury; 5. Foreign currency holdings shall be invested to B. To keep the Secretary of the Treasury fully ensure that adequate liquidity is maintained to advised concerning System foreign currency meet anticipated needs and so that each currency operations, and to consult with the Secretary portfolio shall generally have an average duration on policy matters relating to foreign currency of no more than 24 months (calculated as operations; Macaulay duration). Such investments may include buying or selling outright obligations of, C. From time to time, to transmit appropriate or fully guaranteed as to principal and interest by, reports and information to the National a foreign government or agency thereof; buying Advisory Council on International Monetary such securities under agreements for repurchase and Financial Policies. of such securities; selling such securities under agreements for the resale of such securities; and 8. All Federal Reserve Banks shall participate in the holding various time and other deposit accounts foreign currency operations for System Account at foreign institutions. In addition, when appro- in accordance with paragraph 3G(1) of the Board priate in connection with arrangements to pro- of Governors’ Statement of Procedure with vide investment facilities for foreign currency Respect to Foreign Relationships of Federal holdings, U.S. government securities may be pur- Reserve Banks dated January 1, 1944. chased from foreign central banks under agreements for repurchase of such securities within 30 9. The Committee authorizes the Selected Bank to calendar days. undertake transactions of the type described in paragraphs 1, 2, and 5, and foreign exchange and 6. All operations undertaken pursuant to the pre- investment transactions that it may be otherwise ceding paragraphs shall be reported promptly to authorized to undertake from time to time for the the Foreign Currency Subcommittee (the “Sub- purpose of testing operational readiness. The committee”) and the Committee. The Subcom- aggregate amount of such transactions shall not mittee consists of the Chairman and Vice Chair- exceed $2.5 billion per calendar year. These transman of the Committee, the Vice Chairman of the actions shall be conducted with prior notice to Board of Governors, and such other member of the Committee. the Board as the Chairman may designate (or in the absence of members of the Board serving on Foreign Currency Directive (As Reaffirmed the Subcommittee, other Board members desig- Effective January 26, 2016) nated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee, 1. System operations in foreign currencies shall genthe Vice Chairman’s alternate). Meetings of the erally be directed at countering disorderly market Subcommittee shall be called at the request of conditions, provided that market exchange rates

Minutes of Federal Open Market Committee Meetings | January 139 for the U.S. dollar reflect actions and behavior Monetary Fund regarding exchange arrangeconsistent with IMF Article IV, Section 1. ments under IMF Article IV. 2. To achieve this end the System shall: Procedural Instructions with Respect to Foreign Currency Operations (As Reaffirmed A. Undertake spot and forward purchases and Effective January 26, 2016) sales of foreign exchange. In conducting operations pursuant to the authorization and direction of the Federal Open Market Com- B. Maintain reciprocal currency arrangements mittee (the “Committee”) as set forth in the Authoriwith foreign central banks in accordance with zation for Foreign Currency Operations and the Forthe Authorization for Foreign Currency eign Currency Directive, the Federal Reserve Bank Operations. selected by the Committee to execute open market transactions (the “Selected Bank”), through the man- C. Maintain standing dollar liquidity swap ager, System Open Market Account (“manager”), arrangements with foreign banks in accor- shall be guided by the following procedural underdance with the Authorization for Foreign standings with respect to consultations and clear- Currency Operations. ances with the Committee, the Foreign Currency Subcommittee (the “Subcommittee”), and the Chair- D. Maintain standing foreign currency liquidity man of the Committee, unless otherwise directed by swap arrangements with foreign banks in the Committee. All operations undertaken pursuant accordance with the Authorization for For- to such clearances shall be reported promptly to the eign Currency Operations. Committee. E. Cooperate in other respects with central 1. For the reciprocal currency arrangements authorbanks of other countries and with interna- ized in paragraphs 2.A of the Authorization for tional monetary institutions. Foreign Currency Operations: 3. Transactions may also be undertaken: A. Drawings must be approved by the Subcommittee (or by the Chairman, if the Chairman A. To adjust System balances in light of prob- believes that consultation with the Subcomable future needs for currencies. mittee is not feasible in the time available) if the swap drawing proposed by a foreign bank B. To provide means for meeting System and does not exceed the larger of (i) $200 million Treasury commitments in particular curren- or (ii) 15 percent of the size of the swap cies, and to facilitate operations of the arrangement. Exchange Stabilization Fund. B. Drawings must be approved by the Commit- C. For such other purposes as may be expressly tee (or by the Subcommittee, if the Subcomauthorized by the Committee. mittee believes that consultation with the full Committee is not feasible in the time avail- 4. System foreign currency operations shall be able, or by the Chairman, if the Chairman conducted: believes that consultation with the Subcommittee is not feasible in the time available) if A. In close and continuous consultation and the swap drawing proposed by a foreign bank cooperation with the United States Treasury; exceeds the larger of (i) $200 million or (ii) 15 percent of the size of the swap B. In cooperation, as appropriate, with foreign arrangement. monetary authorities; and C. The manager shall also consult with the Sub- C. In a manner consistent with the obligations committee or the Chairman about proposed of the United States in the International swap drawings by the System.

140 103rd Annual Report | 2016 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 to time for the purpose of testing operational B. Any changes in the terms of existing swap readiness. The aggregate amount of such transacarrangements shall be referred for review and tions shall not exceed $2.5 billion per calendar approval to the Chairman. The Chairman year. These transactions shall be conducted with shall keep the Committee informed of any prior notice to the Committee. changes in terms, and the terms shall be consistent with principles discussed with and By unanimous vote, the Committee amended its Proguidance provided by the Committee. gram for Security of FOMC Information (Program) with four sets of changes. These changes consisted of 3. Any operation must be approved by: (1) a clarification that all Federal Reserve persons, which includes FOMC participants as well as staff members, must receive, review, and agree to abide by A. The Subcommittee (or by the Chairman, if the Program before gaining access to confidential the Chairman believes that consultation with FOMC information, and annually thereafter; the Subcommittee is not feasible in the time (2) a change to provide the Chairman flexibility to available) if it: designate Board staff members to make decisions i. Would result in a change in the System’s regarding access to FOMC information by Board overall open position in foreign currencies staff; (3) technical changes to improve the consistency exceeding $300 million on any day or and accuracy of Program language; and (4) changes $600 million since the most recent regular to the Program’s provisions for handling potential meeting of the Committee. breaches of the Committee’s information security rules. This final set of changes codifies the approach ii. Would result in a change on any day in used in recent years of promptly referring material the System’s net position in a single forpotential breaches to the Board’s inspector general eign currency exceeding $150 million, or (IG). In addition, it incorporates revised language $300 million when the operation is associthat states that the prompt referral to the IG, which ated with repayment of swap drawings. would include a request for an investigation, would iii. Might generate a substantial volume of be made by the secretary or the Committee’s general trading in a particular currency by the counsel, with appropriate consultation with the System, even though the change in the Chairman, thereby vesting the referral responsibility

Minutes of Federal Open Market Committee Meetings | January 141 in more than one person and thus reducing the possi- mittee’s policy decisions were based on expected bility of any apparent conflict of interest in making a future inflation. A couple of others agreed that there referral determination. were reasons for concerns about deviations above or below the 2 percent objective, but noted that the rea- At the end of the Committee’s annual disposition of sons for, and degree of, those concerns could differ organizational matters, participants considered a depending upon the direction of the deviation or revised Statement on Longer-Run Goals and Mon- broader macroeconomic conditions. etary Policy Strategy. The proposed revisions would clarify that the Committee viewed its 2 percent infla- All participants but one supported adopting the protion goal as symmetric. In presenting the revised posed amendments. Participants agreed that it was statement on behalf of the subcommittee on commu- appropriate to release the amended statement, which nications, Governor Fischer pointed out that, in a is reproduced below, in advance of the Monetary discussion of the statement in October 2014, partici- Policy Report and testimony, which were scheduled pants had expressed widespread agreement that infla- for mid-February. tion moderately above the Committee’s 2 percent goal and inflation the same amount below that level Statement on Longer-Run Goals and Monetary were equally costly. He noted that the proposed lan- Policy Strategy (As Amended Effective guage was intended to encompass situations in which January 26, 2016) deviations from the Committee’s inflation objective “The Federal Open Market Committee (FOMC) were expected to continue for a time and had the is firmly committed to fulfilling its statutory potential to affect longer-term inflation expectations. mandate from the Congress of promoting maxi- In addition to the explicit indication that the Com- mum employment, stable prices, and moderate mittee viewed its inflation objective as symmetric, the long-term interest rates. The Committee seeks to revised statement would update the reference to par- explain its monetary policy decisions to the pubticipants’ estimates of the longer-run normal rate of lic as clearly as possible. Such clarity facilitates unemployment from the most recent Summary of well-informed decisionmaking by households Economic Projections (SEP), using the median of and businesses, reduces economic and financial those projections rather than the central tendency. uncertainty, increases the effectiveness of monetary policy, and enhances transparency and Participants noted that the statement reflects an accountability, which are essential in a demoexceptionally high degree of consensus and that the cratic society. threshold for amendments should be high; they judged that the revisions were important because Inflation, employment, and long-term interest they would clarify the symmetry of the Committee’s rates fluctuate over time in response to economic 2 percent inflation objective and communicate to the and financial disturbances. Moreover, monetary public that the objective was not a ceiling. Partici- policy actions tend to influence economic activpants also noted that the proposed new language ity and prices with a lag. Therefore, the Commitindicating that the Committee would “be concerned tee’s policy decisions reflect its longer-run goals, if inflation were running persistently above or below” its medium-term outlook, and its assessments of its 2 percent objective would not require that partici- the balance of risks, including risks to the finanpants hold similar views about inflation dynamics; in cial system that could impede the attainment of addition, the proposed language would not specify the Committee’s goals. the stance of monetary policy in such circumstances but would afford the Committee appropriate flexibil- The inflation rate over the longer run is primarity in tailoring a policy response to persistent devia- ily determined by monetary policy, and hence tions from the inflation objective. Moreover, partici- the Committee has the ability to specify a pants generally agreed that the proposed new lan- longer-run goal for inflation. The Committee guage should be interpreted as applying to situations reaffirms its judgment that inflation at the rate in which inflation was seen as likely to remain below of 2 percent, as measured by the annual change or above 2 percent for a sustained period. However, in the price index for personal consumption one participant judged that the proposed language expenditures, is most consistent over the longer could be read as referring to current and past devia- run with the Federal Reserve’s statutory mantions from the inflation objective, and argued that the date. The Committee would be concerned if statement should more clearly indicate that the Com- inflation were running persistently above or

142 103rd Annual Report | 2016 below this objective. Communicating this sym- tions of inflation from the 2 percent objective. In metric inflation goal clearly to the public helps addition, because the Committee’s past behavior had keep longer-term inflation expectations firmly demonstrated the emphasis it places on expected anchored, thereby fostering price stability and future inflation, Mr. Bullard viewed the amended moderate long-term interest rates and enhancing language as potentially confusing to the public. the Committee’s ability to promote maximum employment in the face of significant economic Developments in Financial Markets, disturbances. The maximum level of employ- Open Market Operations, and Policy ment is largely determined by nonmonetary fac- Normalization tors that affect the structure and dynamics of the labor market. These factors may change over The SOMA manager reported on developments in time and may not be directly measurable. Conse- domestic and foreign financial markets, including quently, it would not be appropriate to specify a changes in the expectations of market participants fixed goal for employment; rather, the Commit- for the trajectory of monetary policy. The deputy tee’s policy decisions must be informed by manager followed with a briefing on money market assessments of the maximum level of employ- developments and System open market operations ment, recognizing that such assessments are nec- conducted by the Open Market Desk during the essarily uncertain and subject to revision. The period since the Committee met on December 15–16, Committee considers a wide range of indicators 2015. The report included an assessment of the in making these assessments. Information about response of money market interest rates to the Committee participants’ estimates of the longer- increase in the target range for the federal funds rate run normal rates of output growth and unem- announced following the December meeting. Overall, ployment is published four times per year in the the rate increase was implemented smoothly and FOMC’s Summary of Economic Projections. money markets responded as anticipated. Take-up of For example, in the most recent projections, the overnight reverse repurchase agreement (ON RRP) median of FOMC participants’ estimates of the operations over this period was consistent with that longer-run normal rate of unemployment was observed in the testing phase of operations over the 4.9 percent. second half of last year. The deputy manager also reviewed plans for reinvestment of the proceeds of In setting monetary policy, the Committee seeks upcoming maturations of SOMA holdings of Treasto mitigate deviations of inflation from its ury securities, for small-value tests of various System longer-run goal and deviations of employment operations and facilities during 2016, and for quarfrom the Committee’s assessments of its maxi- terly tests of the Term Deposit Facility. mum level. These objectives are generally complementary. However, under circumstances The Committee then resumed its consideration of in which the Committee judges that the objec- matters related to the System’s reverse repurchase tives are not complementary, it follows a bal- agreement (RRP) facilities, focusing in particular on anced approach in promoting them, taking into the appropriate aggregate capacity of the ON RRP account the magnitude of the deviations and the facility going forward. Previous communications had potentially different time horizons over which indicated that the Committee intended to allow employment and inflation are projected to aggregate capacity of the ON RRP facility to be temreturn to levels judged consistent with its porarily elevated after policy firming had commandate. menced to support monetary policy implementation and expected that it would be appropriate to reduce The Committee intends to reaffirm these prin- capacity fairly soon thereafter. A staff presentation at ciples and to make adjustments as appropriate at this meeting reviewed broad strategies for reintroducits annual organizational meeting each January.” ing an aggregate cap on ON RRP operations and managing the cap subsequently. In the discussion All Committee members but one voted to adopt the that followed, participants reiterated that the Comrevised statement. Although Mr. Bullard supported mittee expects to phase out the facility when it is no the statement without the changes and agreed that longer needed to help control the federal funds rate, the Committee’s inflation goal is symmetric, he dis- and they unanimously expressed the view that it sented because he judged that the amended language would be appropriate to reintroduce an aggregate cap was not sufficiently focused on expected future devia- on ON RRP operations at some point. Regarding

Minutes of Federal Open Market Committee Meetings | January 143 when to do so, participants held varied views, but even though growth in real gross domestic product nearly all indicated a preference for waiting a couple (GDP) appeared to slow. Consumer price inflation of months or longer before making operational was still running below the Committee’s longer-run adjustments to the facility, in part so that the Federal objective of 2 percent, restrained in part by decreases Reserve could gain additional experience with its in both energy prices and the prices of non-energy policy implementation tools. Concerning the strategy imports. Recent survey-based measures of longer-run that would be used to cap the ON RRP facility when inflation expectations were little changed, on balance, the time came, most policymakers favored an while market-based measures of inflation compensaapproach in which a relatively high cap level would tion declined further. be imposed initially—though one that nonetheless would significantly reduce capacity relative to the Total nonfarm payroll employment increased subcurrent situation—with the intention of periodically stantially in December, and the monthly pace of job making further reductions in the level of the cap as gains in the fourth quarter as a whole was faster than appropriate. Other participants indicated a prefer- in the third quarter. The unemployment rate ence for initially imposing a somewhat lower cap. remained at 5.0 percent in December, while both the Some noted that the demand for ON RRPs could be labor force participation rate and the employment-toreduced by widening the spread between the interest population ratio increased a little. The share of rate on reserves and the offering rate on ON RRPs. workers employed part time for economic reasons In making these judgments, most policymakers moved down a bit in December. The rates of privateemphasized the primacy of maintaining monetary sector job openings, hires, and quits were little control in setting the appropriate capacity of the ON changed in November. The four-week moving aver- RRP facility for the time being; participants indi- age of initial claims for unemployment insurance cated that the Committee’s future decisions regarding benefits was somewhat higher in early January than the size and ultimate longevity of the facility should its very low level late last year. Average hourly earnbe largely driven by considerations of monetary con- ings for all employees increased 2½ percent over the trol, although other factors, such as financial stabil- 12 months ending in December, about ½ percentage ity, should also be taken into account. Finally, policy- point more than over the same period a year earlier. makers also discussed the appropriate management of the Federal Reserve’s RRP operations over Industrial production decreased in November and quarter-ends, when private-sector cash investment December, primarily reflecting the ongoing effects of options temporarily and predictably decline and the appreciation of the foreign exchange value of the result in temporary downward pressure on some dollar and the declines in crude oil prices since the money market rates, including the federal funds rate. middle of 2014. Manufacturing output declined, with Several participants indicated a preference for con- a step-down in the production of motor vehicles and tinuing to take account of such calendar effects in parts from the high levels seen earlier last year, while conducting RRPs; some policymakers emphasized, production outside of the motor vehicle sector was however, that they do not view such temporary roughly flat. Production in the mining sector contindeclines in the federal funds rate as a materially ued to fall, and the output of utilities declined, as the adverse factor for monetary control. Overall, partici- weather was unseasonably warm. Automakers’ pants agreed that, for some time at least, the Com- assembly schedules and broader indicators of manumittee would continue to provide ample RRPs in facturing production, such as the readings on new some form over quarter-ends, including in March. orders from national and regional manufacturing surveys, mostly pointed to a slow pace of gains in fac- By unanimous vote, the Committee ratified the tory output early this year. Information on drilling Desk’s domestic transactions over the intermeeting activity for crude oil and natural gas in early January period. There were no intervention operations in for- was consistent with further declines in mining eign currencies for the System’s account over the output. intermeeting period. Real personal consumption expenditures (PCE) Staff Review of the Economic Situation appeared to have increased at a slower rate in the fourth quarter than in the previous quarter. The information reviewed for the January 26–27 Although real PCE rose solidly in November, spendmeeting indicated that labor market conditions con- ing had been flat in October. Moreover, in December tinued to improve in the fourth quarter of last year the components of the nominal retail sales data used

144 103rd Annual Report | 2016 by the Bureau of Economic Analysis to construct its the fourth quarter, while nominal construction estimate of PCE edged down, and the rate of sales of spending by these governments declined in October light motor vehicles, while remaining at a high level, and November. declined. However, recent readings on key factors that influence consumer spending were generally The U.S. international trade deficit narrowed in favorable. Growth in real disposable income contin- November, as imports fell more than exports. The ued to be solid in November. Households’ net worth value of exports declined to its lowest level since the was supported by further strong gains in home values beginning of 2012. The decrease in imports was through November, although equity prices declined widespread across categories, with a particularly in recent months. Also, consumer sentiment in the large decline in the imports of consumer goods. The University of Michigan Surveys of Consumers available trade data suggested that net exports conremained at an elevated level in early January. tinued to weigh on real GDP growth in the fourth quarter. Recent information on housing activity was consistent with a continued gradual recovery in this sector. Total U.S. consumer prices, as measured by the PCE Both starts and building permits for new single- price index, increased about ½ percent over the family homes moved higher, on balance, in Novem- 12 months ending in November, partly restrained by ber and December, and starts of multifamily units substantial declines in consumer energy prices. Core also stepped up. New home sales increased modestly PCE price inflation, which excludes changes in food in November. Sales of existing homes rose strongly in and energy prices, was 1¼ percent over the same December, more than offsetting an outsized decline 12-month period, held down in part by decreases in in November, which likely reflected a change in mort- the prices of non-energy imports and the passgage regulations that temporarily held down existing through of declines in energy prices. Over the home sales. 12 months ending in December, total consumer prices as measured by the consumer price index Growth in real private expenditures for business (CPI) rose ¾ percent, while core CPI inflation was equipment and intellectual property products looked around 2 percent. Recent survey measures of longerto be slower in the fourth quarter than in the third run inflation expectations were little changed on balquarter. Nominal shipments of nondefense capital ance. In early January, the Michigan survey measure goods excluding aircraft moved down in November. of median inflation expectations over the next 5 to Forward-looking indicators of equipment spending, 10 years ticked up but continued to run near the low such as new orders for nondefense capital goods end of its typical range of the past 15 years. The Suralong with recent readings from national and regional vey of Primary Dealers and the Survey of Market surveys of business conditions, generally pointed to Participants indicated that the median expectation of soft business equipment spending in the coming CPI inflation 5 to 10 years ahead was essentially months. Firms’ nominal spending for nonresidential unchanged in January. structures excluding drilling and mining declined somewhat in November. Indicators of spending for In many foreign economies, real GDP growth in the structures in the drilling and mining sector, such as fourth quarter appeared to continue at a pace the number of oil and gas rigs in operation, contin- roughly similar to that in the third quarter. In conued to fall through early January. The available infor- trast, economic growth weakened in Canada, in part mation indicated that inventory investment decreased because investment spending continued to be again in the fourth quarter, although there was little weighed down by the effects of the sharp decline in evidence that inventory-to-sales ratios were uncom- oil prices since the middle of 2014. Lower oil prices fortably high outside of the energy sector. and the slowing in U.S. manufacturing activity contributed to a step-down in the rate of economic Total real government purchases appeared to be growth in Mexico. Economic growth slowed slightly about flat in the fourth quarter. Federal government in China but remained robust, supported by a modspending for defense moved roughly sideways. State est pickup in growth of Chinese manufacturing outand local government payrolls increased somewhat in put. Further declines in energy prices pulled down

Minutes of Federal Open Market Committee Meetings | January 145 inflation in many foreign economies in the fourth corporate bonds over comparable-maturity Treasury quarter, with inflation falling to near zero in several securities widened over the intermeeting period, advanced economies. reportedly reflecting increased concerns about corporate credit quality, particularly in the energy sector, Staff Review of the Financial Situation and a decline in investors’ willingness to assume risk. Domestic financial conditions tightened over the Financing conditions for nonfinancial businesses intermeeting period, as turmoil in Chinese financial remained accommodative for firms of higher credit markets and lower oil prices contributed to concerns quality but tightened somewhat for riskier firms. about prospects for global economic growth and a Investment-grade bond issuance stayed robust, while pullback from risky assets. The increased reluctance speculative-grade bond issuance was weak. The to hold risky assets was associated with a sharp growth of commercial and industrial (C&I) loans on decline in equity prices and a notable widening in banks’ books continued to be strong, although a risk spreads on corporate bonds. Treasury yields modest net percentage of banks reported tightening declined across maturities, reflecting a downward standards for C&I loans to large and middle-market revision in the expected path of the federal funds rate firms during the fourth quarter in the most recent and likely some increase in safe-haven demands amid Senior Loan Officer Opinion Survey (SLOOS). Issuthe market turbulence. The dollar appreciated against ance of syndicated leveraged loans decreased in the most foreign currencies. fourth quarter amid higher spreads, with the most pronounced slowing in relatively risky loans such as The Committee’s decision to raise the target range those earmarked for leveraged buyouts. for the federal funds rate to ¼ to ½ percent at the December meeting was widely anticipated in finan- Credit continued to be broadly available in the comcial markets and elicited little reaction in Treasury mercial real estate (CRE) sector. The growth of CRE and interest rate futures markets. The expected path loans on banks’ balance sheets remained strong in of the federal funds rate implied by market quotes on the fourth quarter, and issuance of commercial interest-rate derivatives moved down notably after mortgage-backed securities (CMBS) continued at a year-end; the turbulence in global financial markets robust pace in December. However, a moderate evidently led investors to expect a more gradual net percentage of banks reported in the most recent increase in the target range for the federal funds rate SLOOS that they had tightened standards on CRE than they had previously anticipated. In line with loans during the fourth quarter, and credit spreads in that interpretation, results from the Desk’s January CMBS markets continued to widen over the inter- Survey of Primary Dealers and Survey of Market meeting period. Participants indicated that, on average, respondents expected fewer increases in the target range this year Credit conditions for residential mortgages were little than they had projected in December. changed over the intermeeting period. Credit remained tight for borrowers with low credit scores, Consistent with the decline in the expected path of hard-to-document income, or high debt-to-income the federal funds rate, yields on nominal Treasury ratios. According to the January SLOOS, moderate securities moved lower over the intermeeting period. net fractions of banks eased standards on several Part of the decline likely also reflected an increase in types of home mortgages over the past three months safe-haven demands for low-risk and highly liquid and expected to ease standards this year. assets amid the turbulence in financial markets. Measures of forward inflation compensation based Financing conditions in consumer credit markets on Treasury Inflation-Protected Securities and infla- were little changed over the intermeeting period and tion swaps fell further. remained accommodative on balance. Consumer loan balances continued to rise at a robust pace in the Broad U.S. equity price indexes declined sharply over fourth quarter, reflecting further expansions in credit the intermeeting period, exhibiting a high correlation card, auto, and student loan balances. Student and with movements in crude oil prices and foreign equity auto loans remained broadly available, even to borindexes. Domestic equity indexes were quite volatile rowers with subprime credit histories, but the availin January, and one-month-ahead option-implied ability of credit card loans to subprime borrowers volatility on the S&P 500 index climbed to the upper was still tight. Respondents to the January SLOOS end of its range of the past few years. Spreads on indicated that, over the past three months, they had

146 103rd Annual Report | 2016 eased standards and terms on auto loans but tight- unexpectedly included both a multiyear extension of ened standards and terms on credit card loans. the bonus depreciation tax credit for business investment and a delay in the introduction of several tax Global financial market conditions deteriorated increases related to the Affordable Care Act. The sharply in January, as recent developments in Chinese staff continued to project that real GDP would financial markets and the further decrease in crude expand at a somewhat faster pace than potential outoil prices appeared to increase concerns about global put in 2016 through 2018, supported primarily by economic growth. Equity prices in emerging market increases in consumer spending. The unemployment economies (EMEs) and in advanced foreign econo- rate was expected to gradually decline further and to mies (AFEs) fell sharply, and 10-year sovereign yields run somewhat below the staff’s estimate of its longerin the AFEs decreased substantially. Market expecta- run natural rate over this period. tions for the policy rates of major foreign central banks, which had risen somewhat after the December The staff’s forecast for inflation in the near term was FOMC meeting, ended the period lower. Credit revised down slightly, reflecting recent data for conspreads in the EMEs widened. The foreign exchange sumer prices and the further declines in the price of value of the U.S. dollar appreciated further against crude oil; the projection for inflation over the most currencies, with larger increases relative to the medium term was little revised. Energy prices and the currencies of commodity-exporting countries. prices of non-energy imported goods were expected to begin steadily rising later this year. The staff con- The staff provided its latest report on potential risks tinued to project that inflation would increase graduto financial stability and judged the financial vulner- ally over the next several years and reach the Comabilities of the U.S. financial system as moderate on mittee’s longer-run objective of 2 percent by the end balance. Their assessment reflected strong capital and of 2018. liquidity positions at banks, moderate leverage in the nonbank financial sector, and subdued borrowing by The staff viewed the uncertainty around its January households. Risk premiums had increased as spreads projections for real GDP growth, the unemployment widened by more than was estimated to be necessary rate, and inflation as similar to the average of the to compensate for expected losses, suggesting a past 20 years. The risks to the forecast for real GDP decline in the willingness of investors to bear credit were seen as tilted to the downside, reflecting the risk. However, leverage continued to increase in the staff’s assessment that neither monetary nor fiscal nonfinancial business sector, particularly among policy was well positioned to help the economy withenergy-related and other relatively risky firms. The stand substantial adverse shocks; the downside risks high leverage of nonfinancial corporations and the to the forecast of economic activity were seen as liquidity mismatch at high-yield bond mutual funds more pronounced than in December, mainly reflectsuggested some elevated risks for bond investors and ing the greater uncertainty about global economic lower-rated borrowers. prospects and the financial market turbulence in the United States and abroad. Consistent with the down- Staff Economic Outlook side risk to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as In the economic projection prepared by the staff for skewed to the upside. The risks to the projection for the January FOMC meeting, real GDP growth in the inflation were seen as weighted to the downside, fourth quarter of last year was estimated to have reflecting the possibility that longer-term inflation been markedly slower than in the forecast for the expectations may have edged down and that the for- December meeting. However, the medium-term pro- eign exchange value of the dollar could rise substanjection for real GDP growth was only slightly lower, tially further, which would put downward pressure on on balance, than the previous forecast. The staff esti- inflation. mated that the negative effects of a lower projected path for equity prices and a higher assumed trajec- Participants’ Views on Current Conditions tory for the foreign exchange value of the dollar and the Economic Outlook would be mostly offset by the positive effects of a lower path for crude oil prices and slightly more In their discussion of the economic situation and the stimulus to aggregate demand from changes in fiscal outlook, meeting participants saw the information policy than was assumed in the previous forecast. In received over the intermeeting period as suggesting particular, federal legislation enacted in December that labor market conditions had improved further in

Minutes of Federal Open Market Committee Meetings | January 147 late 2015 even as economic growth slowed. House- ments and of assessing their implications for the hold and business spending had been increasing at labor market and inflation, and for the balance of moderate rates; however, net exports had been soft risks to the outlook. and inventory investment had slowed. A range of labor market indicators pointed to some additional Growth of consumer spending appeared to have decline in underutilization of labor resources. Infla- slowed in the fourth quarter, with the December data tion continued to run below the Committee’s 2 per- showing a decline in nominal retail sales and a stepcent longer-run objective, partly reflecting declines in down in purchases of new motor vehicles from the energy prices and in prices of non-energy imports. elevated level of the preceding three months. More- Market-based measures of inflation compensation over, households’ spending on energy services was declined further over the intermeeting period; survey- evidently held down by unseasonably warm weather based measures of longer-term inflation expectations in many parts of the country. Although participants were little changed, on balance, in recent months. received mixed reports from their District contacts on consumer spending, some heard that retail activ- In considering the outlook for economic activity, par- ity had been generally positive at year-end, and a ticipants weighed the divergent signals from recent number of participants relayed indications that strength in the labor market and the modest increase spending on services in their Districts remained solid. in real GDP suggested by the available data on Regarding the outlook for consumer spending, a spending and production. In part, the projected slow number of participants noted that the recent modgrowth of real GDP in the fourth quarter of 2015 eration in spending seemed inconsistent with continappeared to be caused by reduced inventory invest- ued strong gains in households’ real income from risment and a weather-related slowing in consumer ing employment and falling energy prices and with spending on energy services—developments that the relatively elevated level of consumer sentiment. would likely be reversed in the current quarter. More- Because of these favorable fundamentals, many parover, some participants noted that the preliminary ticipants indicated that they still expected consumer spending data and initial estimates of GDP are often spending to contribute importantly to economic revised substantially, and they judged that labor mar- growth in the coming year. However, several were ket indicators tended to provide a more reliable early concerned that the rise in the saving rate since the reading on the economy’s underlying strength. middle of 2015 might suggest an elevated degree of caution about the economic outlook or that the In assessing the medium-term outlook, participants recent retreat in equity values, if sustained, might discussed the extent to which the recent turbulence in damp spending. Nonetheless, a couple of others global financial markets might restrain U.S. eco- pointed out that information from surveys of connomic activity. While acknowledging the possible sumer sentiment suggested that households, to date, adverse effects of the tightening of financial condi- had not appeared to be particularly sensitive to tions that had occurred, most policymakers thought changes in financial market conditions. that the extent to which tighter conditions would persist and what that might imply for the outlook were Housing sales and construction continued to trend unclear, and they therefore judged that it was prema- up though the end of 2015, extending the gradual ture to alter appreciably their assessment of the recovery in the housing sector. In participants’ medium-term economic outlook. They continued to reports on economic conditions in their Districts, anticipate that economic activity would expand at a some highlighted the sector as one in which activity moderate pace over the medium term and that the had improved or about which contacts were upbeat. labor market would continue to strengthen. Inflation A couple of participants noted that new mortgage was expected to remain low in the near term, in part lending regulations appeared to have slowed the because of the further decline in energy prices. How- mortgage origination process and temporarily ever, most participants continued to anticipate that reduced home sales. inflation would rise to 2 percent over the medium term as the transitory effects of declines in energy Manufacturing activity continued to weaken in late and import prices dissipated and the labor market 2015. Production continued to contract in indusstrengthened further. Given their increased uncer- tries—such as steel and heavy machinery—in which tainty about how global economic and financial demand had been negatively affected, either directly developments might evolve, participants emphasized or indirectly, by the appreciation of the dollar, slow the importance of closely monitoring these develop- economic growth abroad, and declining oil prices.

148 103rd Annual Report | 2016 Participants from those Reserve Banks that conduct various industries, or firming in wage increases. Most surveys of manufacturing activity reported that the anticipated that employment would expand at a solid weakness extended into January. Nonetheless, several rate over the year ahead, although several saw the participants pointed to aerospace, autos, and con- prospect of some moderation in employment gains sumer products as areas of strength in the manufac- from the particularly large increases in the fourth turing sector, and a few commented that manufactur- quarter of 2015. ers surveyed in their Districts were still relatively optimistic about the outlook for 2016. Information Participants discussed the implications of the further on business activity outside of the manufacturing decline in the prices of oil and other commodities sector was mixed. Commercial construction was and the additional appreciation of the dollar since reported to be strong in a couple of Districts, and a the previous FOMC meeting for the outlook for few participants commented that government spend- inflation. They agreed that these developments would ing was likely to provide a boost to business activity keep inflation low in the near term but offered a in the coming year. Several participants reported range of views on the effects on the medium-term moderate growth in services industries, but a couple outlook and the risks attending the outlook. Most noted some slowing of activity. Some participants continued to anticipate that once the price of energy reported a deterioration in business sentiment among and the exchange value of the dollar stabilized, the their contacts in the wake of recent global economic effects of those factors on inflation would fade. Sevand financial developments, which could result in eral saw that outlook as depending importantly on more-cautious capital spending plans. continued strengthening of the labor market or on an above-trend pace of economic activity. Moreover, Downward pressure on domestic energy activity some emphasized the need for longer-run inflation intensified over the intermeeting period as oil prices expectations to remain well anchored. In that regard, dropped further. The imbalance of the supply of while some participants interpreted the recent readcrude oil relative to demand remained very high and ings on survey-based measures of inflation expectaappeared unlikely to be resolved quickly, as was evi- tions and market-based measures of inflation comdenced by a further downshift in oil futures prices. pensation as suggesting that long-term inflation Participants’ contacts in the energy sector reported expectations were still relatively well anchored, some that firms were still adjusting to lower prices and the others expressed concern about the further decline in contraction in their businesses, and some firms inflation compensation recently and the historically expected that they would need to cut investment and low levels of some survey measures of longer-run employment further. In addition, it was noted that inflation expectations. Some noted the difficulty of energy firms continued to face tightening financial distinguishing declines in expected inflation embedconditions and that financial stress was building for ded in those market-based measures from changes in those with high levels of debt. In agriculture, risk and liquidity premiums or of interpreting the depressed levels of crop prices and weak global current high correlation of far-forward measures of demand continued to weaken farm income. inflation compensation and oil prices. Although most participants continued to expect that inflation would A broad range of indicators showed ongoing rise to the Committee’s 2 percent objective over the improvement in labor market conditions. Most nota- medium term, a number of participants indicated bly, increases in nonfarm payroll employment were that, in light of recent developments, they viewed the quite strong during the final three months of 2015. outlook for inflation as somewhat more uncertain or Although the unemployment rate, at 5.0 percent, was saw the risks as being to the downside. Several parunchanged over that period, it was at a level close to ticipants reiterated the importance of monitoring or below most participants’ estimates of its longer- inflation developments closely to confirm that inflarun normal rate. Moreover, the labor force participa- tion was evolving along the path anticipated by the tion rate and the employment-to-population rate Committee. moved up toward year-end. Many viewed labor market underutilization as having been substantially Regarding the foreign economic outlook, it was reduced over the past year, and a few saw slack as noted that the slowdown in China’s industrial sector having been largely eliminated. In their comments on and the decline in global commodity prices could labor market conditions, participants cited strong restrain economic activity in the EMEs and other employment gains, low levels of unemployment in commodity-producing countries for some time. Partheir Districts, reports of shortages of workers in ticipants discussed recent developments in China,

Minutes of Federal Open Market Committee Meetings | January 149 including the possibility that structural changes and outlook warranted either increasing the target range financial imbalances in the Chinese economy might for the federal funds rate at this meeting or altering lead to a sharper deceleration in economic growth in their earlier views of the appropriate path for the tarthat country than was generally anticipated. Such a get range for the federal funds rate. Participants downshift, if it occurred, could increase the eco- agreed that incoming indicators regarding labor marnomic and financial stresses on other EMEs and on ket developments had been encouraging, but also commodity producers, including Canada and that data releases since the December meeting on Mexico. Moreover, global financial markets could spending and production had been disappointing. continue to be affected by uncertainty about China’s Furthermore, developments in commodity and finanexchange rate regime. While the exposure of the cial markets as well as the possibility of a significant United States to the Chinese economy through direct weakening of some foreign economies had the potentrade ties was limited, a number of participants were tial to further restrain domestic economic activity, concerned about the potential drag on the U.S. partly because the large cumulative declines in energy economy from the broader effects of a greater-than- and other commodity prices could have pronounced expected slowdown in China and other EMEs. adverse effects on some firms and countries that are important producers of such commodities. However, Participants also discussed a range of issues related a few noted that the potential positive effects of to financial market developments. Almost all partici- lower energy costs on economic activity were a mitipants cited a number of recent events as indicative of gating factor. Participants judged that the overall tighter financial conditions in the United States; implication of these developments for the outlook for these events included declines in equity prices, a wid- domestic economic activity was unclear, but they ening in credit spreads, a further rise in the exchange agreed that uncertainty had increased, and many saw value of the dollar, and an increase in financial mar- these developments as increasing the downside risks ket volatility. Some participants also pointed to sig- to the outlook. nificantly tighter financing conditions for speculative-grade firms and small businesses, and to As expected, inflation had continued to run below reports of tighter standards at banks for C&I and 2 percent, but the further decline in energy prices and CRE loans. The effects of these financial develop- the additional appreciation of the dollar likely ments, if they were to persist, may be roughly equiva- implied that inflation would take somewhat longer lent to those from further firming in monetary policy. than previously anticipated to rise to the Commit- Participants mentioned several apparent factors tee’s objective. It was noted that although it was genunderlying the recent financial market turbulence, erally appropriate for monetary policy not to respond including economic and financial developments in substantially to temporary shocks to inflation, that China and other foreign countries, spillovers in prescription depended in part on the assumption that financial markets from stresses at firms and in coun- longer-term inflation expectations remained well tries that are producers of energy and other com- anchored. Participants pointed out that some modities, and an increase in concerns among market market-based measures of longer-term inflation comparticipants regarding the prospects for domestic pensation had declined to historically low levels, economic growth. However, a number of participants which increased concerns about whether inflation noted that the large magnitude of changes in domes- expectations could be moving lower. Other particitic financial market conditions was difficult to recon- pants, however, noted that survey-based measures of cile with incoming information on U.S. economic longer-term inflation expectations had remained developments. A couple of participants pointed out fairly steady, and a few participants characterized that the recent decline in equity prices could be measures of underlying inflation rates, such as core viewed as bringing equity valuations more in line and trimmed mean PCE inflation, as having stayed with historical norms. Additionally, a few partici- relatively stable. Most participants still expected pants cautioned that valuations in CRE markets inflation to increase gradually once energy prices and should be closely monitored. The effects of a rela- the prices of non-energy imports stabilized and as the tively flat yield curve and low interest rates in reduc- labor market strengthened further. However, a few ing banks’ net interest margins were also noted. participants noted that direct evidence that inflation was rising toward 2 percent would be an important Participants discussed whether their current assess- element of their assessment of the outlook and of ments of economic conditions and the medium-term the appropriate path for policy.

150 103rd Annual Report | 2016 Participants expressed a range of views regarding the objective, partly reflecting declines in energy prices balance of risks to the medium-term economic out- and in prices of non-energy imports. Market-based look and its implications for the conduct of mon- measures of inflation compensation had declined furetary policy. Most participants indicated that it was ther; survey-based measures of longer-term inflation difficult to judge at this point whether the outlook expectations were little changed, on balance, in recent for inflation and economic growth had changed months. Members expected that, with gradual adjustmaterially, but they thought that uncertainty sur- ments in the stance of monetary policy, economic rounding the outlook had increased as a result of activity would expand at a moderate pace and labor recent financial and economic developments. Most market conditions would continue to strengthen. participants were of the view that there was not yet enough evidence to indicate whether the balance of In assessing whether economic conditions had risks to the medium-term outlook had changed mate- improved sufficiently to warrant a further increase in rially, but others judged that recent developments had the target range for the federal funds rate at this increased the level of downside risks or that the risks meeting, members agreed that labor market data had were no longer balanced. generally been stronger than anticipated at the time of the December meeting, and some members noted Several participants noted that monetary policy was that wage growth had picked up. However, the spendless well positioned to respond effectively to shocks ing and production data generally had been disapthat reduce inflation or real activity than to upside pointing—in particular, information regarding indishocks, and that waiting for additional information cators of manufacturing activity, consumption regarding the underlying strength of economic activ- expenditures, and inventory investment. Regarding ity and prospects for inflation before taking the next the outlook for inflation, the additional sharp step to reduce policy accommodation would be pru- declines in energy prices and strengthening of the dent. While participants continued to expect that exchange value of the dollar since the December gradual adjustments in the stance of monetary policy meeting were likely to hold down inflation for longer would be appropriate, they emphasized that the tim- than previously anticipated, but inflation was ing and pace of adjustments will depend on future expected to increase gradually as energy prices and economic and financial market developments and the prices of non-energy imports stabilized and the their implications for the medium-term economic labor market strengthened further. A couple of memoutlook. A couple of participants questioned bers emphasized that direct evidence that inflation whether some financial market participants fully was rising toward 2 percent would be an important appreciated that monetary policy is data dependent, element of their assessments of the appropriate timand a number of participants emphasized the impor- ing of further policy firming. tance of continuing to communicate this aspect of monetary policy. In discussing the appropriate path for the target range for the federal funds rate over the medium Committee Policy Action term, members agreed that it would be important to closely monitor global economic and financial devel- In their discussion of monetary policy for the period opments and to continue to assess their implications ahead, members judged that information received for the labor market and inflation, and for the balsince the Committee met in December suggested that ance of risks to the outlook. Members expressed a labor market conditions had improved further even range of views regarding the implications of recent as economic growth slowed late last year. Members economic and financial developments for the degree noted that a range of recent labor market indicators, of uncertainty about the medium-term outlook, with including strong job gains, pointed to some addi- many members judging that uncertainty had tional decline in the underutilization of labor increased. Members generally agreed that the impliresources. Members also agreed that household cations of the available information were not suffispending and business fixed investment had been ciently clear to allow members to assess the balance increasing at moderate rates in recent months, and of risks to the economic outlook in the Committee’s the housing sector had improved further; however, postmeeting statement. However, members observed net exports had been soft and inventory investment that if the recent tightening of global financial condihad slowed. Members noted that inflation continued tions was sustained, it could be a factor amplifying to run below the Committee’s 2 percent longer-run downside risks.

Minutes of Federal Open Market Committee Meetings | January 151 After assessing the outlook for economic activity, the that labor market conditions improved further labor market, and inflation, and after weighing the even as economic growth slowed late last year. uncertainties associated with the outlook, members Household spending and business fixed investagreed to leave the target range for the federal funds ment have been increasing at moderate rates in rate unchanged at ¼ to ½ percent. The Committee recent months, and the housing sector has also maintained its policy of reinvesting principal improved further; however, net exports have payments from agency debt and agency mortgage- been soft and inventory investment slowed. A backed securities and of rolling over maturing Treas- range of recent labor market indicators, includury securities at auction, and it anticipated that it ing strong job gains, points to some additional would be appropriate to continue this reinvestment decline in underutilization of labor resources. policy until normalization of the level of the federal Inflation has continued to run below the Comfunds rate was well under way. This policy, by keep- mittee’s 2 percent longer-run objective, partly ing the Committee’s holdings of longer-term securi- reflecting declines in energy prices and in prices ties at sizable levels, should help maintain accommo- of non-energy imports. Market-based measures dative financial conditions. of inflation compensation declined further; survey-based measures of longer-term inflation At the conclusion of the discussion, the Committee expectations are little changed, on balance, in voted to authorize and direct the Federal Reserve recent months. Bank of New York, until it was instructed otherwise, to execute transactions in the SOMA in accordance Consistent with its statutory mandate, the Comwith the following domestic policy directive, to be mittee seeks to foster maximum employment released at 2:00 p.m.: and price stability. The Committee currently expects that, with gradual adjustments in the “Effective January 28, 2016, the Federal Open stance of monetary policy, economic activity Market Committee directs the Desk to under- will expand at a moderate pace and labor martake open market operations as necessary to ket indicators will continue to strengthen. Inflamaintain the federal funds rate in a target range tion is expected to remain low in the near term, of ¼ to ½ percent, including overnight reverse in part because of the further declines in energy repurchase operations (and reverse repurchase prices, but to rise to 2 percent over the medium operations with maturities of more than one day term as the transitory effects of declines in when necessary to accommodate weekend, holi- energy and import prices dissipate and the labor day, or similar trading conventions) at an offer- market strengthens further. The Committee is ing rate of 0.25 percent, in amounts limited only closely monitoring global economic and finanby the value of Treasury securities held outright cial developments and is assessing their implicain the System Open Market Account that are tions for the labor market and inflation, and for available for such operations and by a per- the balance of risks to the outlook. counterparty limit of $30 billion per day. Given the economic outlook, the Committee The Committee directs the Desk to continue decided to maintain the target range for the fedrolling over maturing Treasury securities at auc- eral funds rate at ¼ to ½ percent. The stance of tion and to continue reinvesting principal pay- monetary policy remains accommodative, ments on all agency debt and agency mortgage- thereby supporting further improvement in backed securities in agency mortgage-backed labor market conditions and a return to 2 persecurities. The Committee also directs the Desk cent inflation. to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of In determining the timing and size of future the Federal Reserve’s agency mortgage-backed adjustments to the target range for the federal securities transactions.” funds rate, the Committee will assess realized and expected economic conditions relative to its The vote also encompassed approval of the statement objectives of maximum employment and 2 perbelow to be released at 2:00 p.m.: cent inflation. This assessment will take into account a wide range of information, including “Information received since the Federal Open measures of labor market conditions, indicators Market Committee met in December suggests of inflation pressures and inflation expectations,

152 103rd Annual Report | 2016 and readings on financial and international on economic and financial developments. The subdevelopments. In light of the current shortfall of committee had considered other approaches but inflation from 2 percent, the Committee will opted to recommend a simple method similar to that carefully monitor actual and expected progress followed by some foreign central banks. toward its inflation goal. The Committee expects that economic conditions will evolve in a man- Participants expressed a range of views regarding the ner that will warrant only gradual increases in advantages and disadvantages of including fan charts the federal funds rate; the federal funds rate is in the SEP. On the one hand, these charts would likely to remain, for some time, below levels that enhance the Committee’s communications by providare expected to prevail in the longer run. How- ing a visual representation of the uncertainty surever, the actual path of the federal funds rate will rounding the median projections for each variable, depend on the economic outlook as informed by although it was noted that the meeting minutes and incoming data. the SEP already provide information about participants’ assessments of the uncertainty regarding the The Committee is maintaining its existing policy economic outlook. In addition, fan charts would help of reinvesting principal payments from its hold- illustrate that the dispersion of participants’ projecings of agency debt and agency mortgage- tions was usually modest relative to the uncertainty backed securities in agency mortgage-backed that attends macroeconomic forecasts. Moreover, a securities and of rolling over maturing Treasury number of participants noted that the simple securities at auction, and it anticipates doing so approach that the subcommittee was recommending until normalization of the level of the federal would be more straightforward to explain to the pubfunds rate is well under way. This policy, by lic than the other options considered by the subcomkeeping the Committee’s holdings of longer- mittee and could be modified over time to incorpoterm securities at sizable levels, should help rate greater complexity—for instance, by showing maintain accommodative financial conditions.” that the magnitude of uncertainty above the median projection was not necessarily equal to the magnitude Voting for this action: Janet L. Yellen, William C. of uncertainty below it. On the other hand, some Dudley, Lael Brainard, James Bullard, Stanley participants thought that the proposed fan charts still Fischer, Esther L. George, Loretta J. Mester, Jerome could be challenging for the general public to inter- H. Powell, Eric Rosengren, and Daniel K. Tarullo. pret. It was also noted that other central banks that employ fan charts typically display uncertainty Voting against this action: None. around a staff forecast or policymakers’ consensus forecast, but that the median SEP projections do not Consistent with the Committee’s decision to leave the necessarily represent the Committee’s collective view. target range for the federal funds rate unchanged, the Moreover, the typical magnitude of the historical Board of Governors took no action to change the forecast errors used to construct the proposed fan interest rates on reserves or discount rates. charts could well differ from participants’ judgments about uncertainty going forward—information that Potential Enhancements to the Summary is already included in the SEP—and this difference of Economic Projections could be difficult to explain. Next, participants considered a proposal by the sub- With regard to including a fan chart to illustrate the committee on communications to add to the SEP uncertainty surrounding the path of the policy interseveral charts that would illustrate the uncertainty est rate, a fan chart for the federal funds rate might that attends participants’ macroeconomic projec- be helpful in explaining that future monetary policy tions. A staff briefing reviewed the subcommittee’s is necessarily uncertain and will depend upon ecoproposal, noting that these so-called fan charts could nomic and financial developments. However, particibe constructed largely from information on historical pants raised several questions, including whether the errors from government and private-sector forecasts band around the federal funds rate path should that is already provided in the SEP, thereby making it extend below zero, how any future forward guidance easy to explain the new charts to the public; in addi- would be represented in this framework, and whether tion, the inclusion of a fan chart for the federal funds it would be appropriate to include a fan chart for the rate could help convey to the public that the future federal funds rate in light of the Committee’s role in path of monetary policy is uncertain and will depend setting the policy target.

Minutes of Federal Open Market Committee Meetings | January 153 At the end of the discussion, the Chair noted that Notation Vote further work might be helpful to address participants’ concerns and asked the subcommittee on com- By notation vote completed on January 5, 2016, the munications to continue to investigate the possibility Committee unanimously approved the minutes of the of incorporating a graphical depiction of uncertainty Committee meeting held on December 16–17, 2015. into the SEP. Brian F. Madigan It was agreed that the next meeting of the Committee Secretary would be held on Tuesday–Wednesday, March 15–16, 2016. The meeting adjourned at 12:25 p.m. on January 27, 2016.

154 103rd Annual Report | 2016 Meeting Held on March 15–16, 2016 Thomas Laubach Economist A joint meeting of the Federal Open Market Com- David W. Wilcox mittee and the Board of Governors was held in the Economist offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, Thomas A. Connors, Michael P. Leahy, March 15, 2016, at 1:00 p.m. and continued on David E. Lebow, Stephen A. Meyer, Wednesday, March 16, 2016, at 9:00 a.m.1 Christopher J. Waller, and William Wascher Associate Economists Present Simon Potter Janet L. Yellen Manager, System Open Market Account Chair Lorie K. Logan William C. Dudley Deputy Manager, System Open Market Account Vice Chairman Robert deV. Frierson Lael Brainard Secretary of the Board, Office of the Secretary, Board of Governors James Bullard Michael S. Gibson Stanley Fischer Director, Division of Banking Supervision and Esther L. George Regulation, Board of Governors Loretta J. Mester Nellie Liang Director, Office of Financial Stability Policy and Jerome H. Powell Research, Board of Governors Eric Rosengren James A. Clouse Daniel K. Tarullo Deputy Director, Division of Monetary Affairs, Charles L. Evans, Patrick Harker, Robert S. Kaplan, Board of Governors Neel Kashkari, and Michael Strine William B. English Alternate Members of the Federal Open Market Senior Special Adviser to the Board, Office of Board Committee Members, Board of Governors Jeffrey M. Lacker, Dennis P. Lockhart, Andrew Figura, Ann McKeehan, David Reifschneider, and John C. Williams and Stacey Tevlin2 Presidents of the Federal Reserve Banks of Special Advisers to the Board, Office of Board Richmond, Atlanta, and San Francisco, respectively 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 Diana Hancock and Michael G. Palumbo Assistant Secretary Senior Associate Directors, Division of Research and Statistics, Board of Governors Scott G. Alvarez General Counsel Beth Anne Wilson Senior Associate Director, Division of International Steven B. Kamin Finance, Board of Governors Economist 1 The Federal Open Market Committee is referenced as the 2 Attended the discussion of the economic and financial situation “FOMC” and the “Committee” in these minutes. through the close of the meeting.

Minutes of Federal Open Market Committee Meetings | March 155 Ellen E. Meade and Robert J. Tetlow U.S. monetary policy. The deputy manager followed Senior Advisers, Division of Monetary Affairs, with a briefing on money market developments and Board of Governors System open market operations conducted by the Open Market Desk during the period since the Com- Jane E. Ihrig and David López-Salido mittee met on January 26–27, 2016. Experience dur- Associate Directors, Division of Monetary Affairs, ing the intermeeting period continued to suggest that Board of Governors the operational framework for monetary policy Stephanie R. Aaronson and Glenn Follette3 implementation was effective in maintaining control Assistant Directors, Division of Research and over the federal funds rate. Also, the transitions in Statistics, Board of Governors early March to the FR 2420 reporting form (Report of Selected Money Market Rates) as the underlying Penelope A. Beattie4 source of data for computing the effective federal Assistant to the Secretary, Office of the Secretary, funds rate, and to a volume-weighted median as the Board of Governors calculation method, proceeded smoothly. In addition, David H. Small the deputy manager reviewed recent and projected Project Manager, Division of Monetary Affairs, trends in foreign portfolio income of the SOMA, Board of Governors including the implications for portfolio income of foreign nominal interest rates that were very low, even Kurt F. Lewis negative. Principal Economist, Division of Monetary Affairs, Board of Governors The deputy manager also outlined factors that the Randall A. Williams Committee might consider in determining whether to Information Manager, Division of Monetary Affairs, offer term reverse repurchase agreements (RRPs) Board of Governors over the end of the first quarter. In the ensuing discussion of this question among Committee partici- Kenneth C. Montgomery pants, it was noted that, in view of the very elevated First Vice President, Federal Reserve Bank of Boston capacity of the overnight (ON) RRP facility that David Altig, Ron Feldman, Alberto G. Musalem, would remain available for the time being, offering Glenn D. Rudebusch, and Daniel G. Sullivan term RRPs in addition to ON RRPs would be Executive Vice Presidents, Federal Reserve Banks of unlikely to enhance control of the federal funds rate Atlanta, Minneapolis, New York, San Francisco, and over quarter-end, and offering term RRPs at an Chicago, respectively interest rate spread over ON RRPs could marginally increase the Federal Reserve’s interest costs. For Michael Dotsey, Evan F. Koenig, Paolo A. Pesenti, these reasons, Committee participants generally preand John A. Weinberg ferred not to offer term RRPs over the end of the Senior Vice Presidents, Federal Reserve Banks of first quarter. Participants noted that it may be appro- Philadelphia, Dallas, New York, and Richmond, priate to offer term RRPs at some point in the future respectively after the Committee reintroduces an aggregate cap on ON RRP operations, and the Committee’s deci- Edward S. Knotek II, Giovanni Olivei, sions regarding term RRPs over quarter-ends had no and Jonathan L. Willis implications for the FOMC’s plan to phase out the Vice Presidents, Federal Reserve Banks of Cleveland, ON RRP facility when it was no longer needed to Boston, and Kansas City, respectively help control the federal funds rate. Developments in Financial Markets and Open Market Operations By unanimous vote, the Committee ratified the Desk’s domestic transactions over the intermeeting The manager of the System Open Market Account period. There were no intervention operations in for- (SOMA) reported on developments in domestic and eign currencies for the System’s account over the foreign financial markets, including recent monetary intermeeting period. policy actions of foreign central banks and the expectations of market participants for the trajectory of Staff Review of the Economic Situation 3 Attended Wednesday session only. The information reviewed for the March 15–16 meet- 4 Attended Tuesday session only. ing suggested that labor market conditions were con-

156 103rd Annual Report | 2016 tinuing to improve in the first quarter, and that the Growth in real personal consumption expenditures pace of expansion in real gross domestic product (PCE) appeared to pick up some in the first quarter. (GDP) was picking up somewhat from the previous The components of the nominal retail sales data used quarter. Consumer price inflation was still running by the Bureau of Economic Analysis to construct its below the Committee’s longer-run objective of 2 per- estimate of PCE were little changed, on net, in Janucent, restrained in part by decreases in both con- ary and February, but spending on energy services sumer energy prices and the prices of non-energy appeared likely to increase somewhat and the rate of imports. Survey-based measures of longer-run infla- sales of new light motor vehicles stepped up followtion expectations were little changed, on balance, in ing a decline in December. Recent readings on key recent months, while market-based measures of factors that influence consumer spending generally inflation compensation remained low. pointed toward solid growth in real PCE over the first half of the year. Gains in real disposable income Total nonfarm payroll employment increased in picked up in December and January. Households’ net January and February at a solid average monthly worth was supported both by a rebound in equity pace. The unemployment rate declined to 4.9 percent prices following declines earlier in the year and by in January and remained at that level in February, further increases in home values through January. while both the labor force participation rate and the Also, consumer sentiment in the University of employment-to-population ratio increased over these Michigan Surveys of Consumers remained at an months. The share of workers employed part time for elevated level in February. economic reasons edged down in January and February. The rates of private-sector job openings, hires, Recent information on housing activity was consisand quits rose a little in December. The four-week tent with a continued gradual recovery in this sector. moving average of initial claims for unemployment Starts for new single-family homes moved higher, on insurance benefits moved down in February and balance, in January and February, and building perearly March after increasing a little in January. Labor mits were little changed. Starts of multifamily units compensation continued to rise at a modest pace. declined on net. New home sales fell in January, more Compensation per hour in the nonfarm business sec- than reversing an increase in December. Sales of tor increased 2½ percent over the four quarters of existing homes increased further in January following 2015, and the employment cost index rose nearly a strong gain in December. 2 percent over the 12 months ending in December; both increases were similar to their averages in recent Real private expenditures for business equipment and years. Average hourly earnings for all employees intellectual property products appeared to be increasincreased 2¼ percent over the 12 months ending in ing only modestly in the first quarter. Nominal ship- February, about ¼ percentage point more than over ments of nondefense capital goods excluding aircraft the preceding 12 months. declined in January, and forward-looking indicators of equipment spending, such as new orders for non- Industrial production increased in January. Manufac- defense capital goods along with recent readings from turing output rose, reversing the declines seen in the national and regional surveys of business conditions, two previous months, and the output of utilities were generally soft. Firms’ nominal spending for moved up sharply as the demand for heating nonresidential structures excluding drilling and minrebounded after having been held down by unseason- ing increased somewhat in January after having ably warm weather in December. Mining output was declined for two months. Indicators of spending for unchanged following four months of sizable declines structures in the drilling and mining sector, such as that resulted from decreases in drilling activity. Auto- the number of oil and gas rigs in operation, continmakers’ assembly schedules and broader indicators of ued to fall through early March. The limited available manufacturing production, such as the readings on data suggested that inventory investment continued new orders from national and regional manufactur- to decline in the early part of the year. Nonetheless, ing surveys, mostly pointed to a modest pace of gains with the exception of the energy sector, inventories in factory output over the next few months. Informa- generally seemed well aligned with the pace of sales. tion on drilling activity for crude oil and natural gas through early March was consistent with further Growth in total real government purchases appeared declines in mining output. to be modest in the first quarter. Federal government

Minutes of Federal Open Market Committee Meetings | March 157 spending for defense was soft in January and Febru- mies in the current quarter but to a further softening ary, while nondefense spending seemed likely to be of growth in China. Inflation in the advanced foreign slightly boosted early in the year by the effect of the economies remained low. In contrast, inflation rose 2015 Bipartisan Budget Act. Nominal construction in China because of a rebound in local food prices, spending by state and local governments increased while inflation in much of South America remained sharply in January, but the payrolls of these govern- elevated, reflecting weaker currencies. Concerns ments were little changed, on net, over the first two about persistently low inflation spurred further monmonths of the year. etary policy accommodation by the Bank of Japan (BOJ) and the European Central Bank (ECB). The U.S. international trade deficit widened in both December and January, as exports declined in both Staff Review of the Financial Situation months, continuing a downward trend that began in late 2014, with particular weakness in exports of Financial markets were turbulent over the first capital goods. Imports rose slightly in December month and a half of the year, apparently reflecting before falling back in January. Net exports subtracted investors’ concerns about global growth prospects from real GDP growth in the fourth quarter, and the and associated risks to the U.S. outlook. However, January trade data suggested that net exports would these concerns appeared to diminish beginning in continue to weigh on growth in the first quarter. mid-February, and domestic financial conditions generally eased, on balance, since the January FOMC Total U.S. consumer prices as measured by the PCE meeting: Stock prices rose, equity price volatility price index increased 1¼ percent over the 12 months declined, and credit spreads on corporate bonds narending in January, partly restrained by declines in rowed. The dollar depreciated against most foreign consumer energy prices. Core PCE price inflation, currencies, and long-term sovereign bond yields which excludes changes in food and energy prices, declined amid easing by central banks in advanced was 1¾ percent over the same 12-month period, held foreign economies. down in part by decreases in the prices of non-energy imports and the pass-through of declines in energy Yields on 5- and 10-year nominal Treasury securities prices. Over the 12 months ending in February, total declined at the outset of the intermeeting period, consumer prices as measured by the consumer price reflecting the continued pullback from risky assets index (CPI) rose 1 percent, while core CPI inflation that began early in the year on concerns about proswas around 2¼ percent. Both readings on core infla- pects for global economic growth. These yields subsetion were boosted, in part, by movements in prices quently increased as market sentiment improved and for some categories of goods and services whose were little changed, on balance, over the intermeeting prices tend to be volatile. Survey measures of longer- period. Measures of inflation compensation over the run inflation expectations—including those from the next 5 years rose, on net, consistent with increases in Michigan survey, Blue Chip Economic Indicators, oil prices, while inflation compensation 5 to 10 years Survey of Professional Forecasters, Survey of Pri- ahead was little changed on the period and remained mary Dealers, and Survey of Market Participants— at the lower end of its historical range. were generally little changed on balance. In February, the Michigan survey measure of median inflation After becoming considerably flatter early in the interexpectations over the next 5 to 10 years was below its meeting period, the path of the federal funds rate typical range of the past 15 years, likely reflect- implied by market quotes on interest rate derivatives ing—at least in part—decreases in energy prices over steepened subsequently as financial market condithe past year and a half. tions improved and was little changed, on balance, over the intermeeting period. However, the median Foreign real GDP growth slowed in the fourth quar- respondent to the Desk’s March Survey of Primary ter, with Canadian activity restrained by declines in Dealers and to the Survey of Market Participants oil-related investment and the Japanese economy expected only two increases in the FOMC’s target contracting amid weakness in consumption. Eco- range for the federal funds rate this year, one fewer nomic growth continued to be steady but modest in than they had projected in January. the euro area and the United Kingdom, while Brazil remained in recession. In contrast, some economies Broad equity market indexes increased, on balance, in emerging Asia recorded robust growth. Indicators over the intermeeting period and continued to exhibit pointed to a pickup in growth in most foreign econo- a high correlation with crude oil prices. Reflecting the

158 103rd Annual Report | 2016 improvement in investor sentiment that started in bounced back and credit spreads on emerging market mid-February, corporate bond spreads narrowed, bonds narrowed, in both cases returning to Decemwith spreads on investment-grade issues finishing the ber levels in most countries. Since the January period slightly lower while spreads on speculative- FOMC meeting, the dollar depreciated, on net, grade issues—particularly those for the lowest-rated against most foreign currencies. Long-term sovereign bonds—declined appreciably. bond yields declined notably in the advanced economies, in part as foreign central banks announced Financing conditions for investment-grade nonfinan- additional monetary policy easing measures. The cial firms continued to be relatively accommodative. BOJ introduced a negative deposit rate. The ECB Corporate bond issuance by these firms was robust in announced a comprehensive package of easing meas- January and February, while speculative-grade bond ures, including a further cut in benchmark policy issuance stayed subdued. Commercial and industrial rates, accelerated and more expansive asset purloan growth at banks was also strong, mostly driven chases, and a new round of targeted long-term refiby the origination of large loans to investment-grade nancing operations. borrowers. Refinancings of institutional leveraged loans were near zero in February, as was equity issu- Over the period since mid-December, when the Comance through initial public offerings. mittee raised the target range for the federal funds rate ¼ percentage point, U.S. financial market condi- The credit quality of speculative-grade nonfinancial tions had registered relatively small changes, on balcorporations continued to show signs of deteriora- ance, amid significant volatility. Financial derivatives tion. Market analysts’ earnings forecasts for suggested that market participants had revised down speculative-grade companies, including those outside their expected trajectory of the federal funds rate the energy sector, were revised down for the first somewhat, and yields on medium- and longer-term quarter of 2016 amid concerns about a deterioration Treasury securities declined 20 to 30 basis points. in the global economic outlook. In the broader cor- Yields on investment- and speculative-grade corpoporate bond market, the volume of downgrades of rate bonds were down slightly less, leaving spreads ratings outpaced that of upgrades, even for over Treasury securities little changed over the period investment-grade securities, in January and February, between mid-December and mid-March. Similarly, with energy firms accounting for most of the down- broad equity price indexes ended this interval only a grades in February. The default rate on nonfinancial bit lower, and one-month-ahead option-implied volabonds remained somewhat elevated compared with tility on the S&P 500 index, the VIX, declined on baltypical levels outside recession periods. ance. The broad index of the foreign exchange value of the dollar was also roughly unchanged, on net, Financing conditions for commercial real estate since the December meeting. (CRE) tightened somewhat over the intermeeting period but remained accommodative. Spreads on Staff Economic Outlook commercial mortgage-backed securities (CMBS) continued to widen, on net, despite the narrowing of In the U.S. economic forecast prepared by the staff spreads in broader bond markets. Reportedly in for the March FOMC meeting, real GDP in the first response, CMBS issuance was down somewhat over half of the year was projected to increase a little the first two months of the year, although CRE loans more slowly than in the forecast prepared for the on banks’ balance sheets continued to increase at a January meeting, although estimated real GDP robust pace through February. growth in the fourth quarter of last year was revised up. Beyond the near term, real GDP was expected to Lending conditions in residential real estate markets increase slightly faster than in the previous forecast, were little changed, on balance, over the intermeeting largely reflecting a somewhat higher projected path period. Financing conditions in consumer credit for equity prices and a lower assumed trajectory for markets generally remained accommodative, and out- the foreign exchange value of the dollar. The staff standing student and auto debt continued to grow at continued to project that real GDP would expand at a robust pace. a somewhat faster pace than potential output in 2016 through 2018, supported primarily by increases in During the intermeeting period, foreign financial consumer spending. The unemployment rate was conditions improved on net. After deteriorating fur- expected to gradually decline further and to run ther early in the period, foreign equity prices somewhat below the staff’s estimate of its longer-run

Minutes of Federal Open Market Committee Meetings | March 159 natural rate over this period; the staff’s estimate of the absence of further shocks to the economy. These the natural rate was revised down slightly in this projections and policy assessments are described in forecast. the Summary of Economic Projections, which is an addendum to these minutes. The staff’s forecast for inflation over the first half of the year was revised up somewhat, reflecting recent In their discussion of the economic situation and the increases in the price of crude oil as well as stronger- outlook, meeting participants viewed the information than-expected data on core consumer prices early in received over the intermeeting period as suggesting the year. The staff continued to project that inflation that economic activity had been expanding moderwould increase gradually over the next several years, ately despite the global economic and financial develas energy prices and the prices of non-energy opments of recent months. Household spending had imported goods were expected to begin steadily rising been increasing at a moderate rate, and the housing later this year. Beyond 2016, the forecast was a bit sector had improved further; however, business fixed lower than the previous projection, primarily reflect- investment and net exports had been soft. A range of ing a flatter expected path for crude oil prices. As a labor market indicators, including strong employresult, inflation was projected still to be slightly ment growth and rising labor force participation, below the Committee’s longer-run objective of 2 per- pointed to a further strengthening of the labor marcent in 2018. ket. Participants generally saw the data on economic activity and labor market conditions as broadly con- The staff viewed the uncertainty around its March sistent with their earlier expectations. Inflation projections for real GDP growth, the unemployment picked up in recent months, but it continued to run rate, and inflation as similar to the average of the below the Committee’s 2 percent longer-run objecpast 20 years. The risks to the forecast for real GDP tive. Market-based measures of inflation compensawere seen as tilted to the downside, reflecting the tion remained low, while survey-based measures of staff’s assessment that neither monetary nor fiscal longer-term inflation expectations were little policy was well positioned to help the economy with- changed, on balance, in recent months. Early in the stand substantial adverse shocks; in addition, global intermeeting period, concerns among investors about economic prospects were still seen as an important the global economic outlook appeared to trigger a downside risk to the forecast. Consistent with the sharp reduction in their risk-taking. Financial condidownside risk to aggregate demand, the staff viewed tions deteriorated, with equity prices falling and the risks to its outlook for the unemployment rate as credit spreads on riskier corporate bonds widening. skewed to the upside. The risks to the projection for Subsequently, investor sentiment rebounded, and inflation were still seen as weighted to the downside, domestic and global financial conditions eased on net reflecting the possibility that longer-term inflation over the intermeeting period. expectations may have edged down, and that the foreign exchange value of the dollar could rise substan- With respect to the outlook for economic activity tially, which would put additional downward pressure and the labor market, participants shared the assesson inflation. ment that, with gradual adjustments in the stance of monetary policy, real GDP would continue to Participants’ Views on Current Conditions increase at a moderate rate over the medium term and the Economic Outlook and labor market indicators would continue to strengthen. Participants observed that strong job In conjunction with this FOMC meeting, members gains in recent months had reduced concerns about a of the Board of Governors and Federal Reserve possible slowing of progress in the labor market. Bank presidents submitted their projections of the Many participants, however, anticipated that relative most likely outcomes for real GDP growth, the strength in household spending would be partially unemployment rate, inflation, and the federal funds offset by weakness in net exports associated with rate for each year from 2016 through 2018 and over lackluster foreign growth and the appreciation of the the longer run. Each participant’s projections were dollar since mid-2014. In addition, business fixed conditioned on his or her judgment of appropriate investment seemed likely to remain sluggish. Furthermonetary policy. The longer-run projections repre- more, participants generally saw global economic and sent each participant’s assessment of the rate to financial developments as continuing to pose risks to which each variable would be expected to converge, the outlook for economic activity and the labor marover time, under appropriate monetary policy and in ket in the United States. In particular, several partici-

160 103rd Annual Report | 2016 pants expressed the view that the underlying factors With regard to the external sector, a number of parabroad that led to a sharp, though temporary, dete- ticipants said that they expected declines in net rioration in global financial conditions earlier this exports to continue to subtract from real GDP year had not been fully resolved and thus posed growth, reflecting weak foreign activity as well as the ongoing downside risks. Several participants also earlier appreciation of the dollar. The outlook for noted the possibility that economic activity or labor growth abroad had dimmed in recent months, sugmarket conditions could turn out to be stronger than gesting a more persistent drag on growth of U.S. anticipated. For example, strong expansion of house- exports. A couple of participants commented that hold demand could result in rapid employment emerging market economies faced an extended growth and overly tight resource utilization, particu- period of less rapid export growth, reflecting slower larly if productivity gains remained sluggish. economic growth in many advanced foreign economies and in China. It also was noted that weak Notwithstanding the downward revisions to recent growth abroad could lead to further appreciation of retail sales data, participants were encouraged by the the dollar. moderate average growth of consumer spending over recent quarters. Continued increases in household In discussing domestic business conditions, several spending had buoyed growth of overall aggregate participants noted that their contacts saw rising sales demand despite the volatility in financial markets. in the retail sector and that reports from firms in the Among the various categories of household spend- services sector were mostly strong. In some Districts, ing, participants noted that motor vehicle sales surveys suggested that manufacturing activity had remained particularly strong, albeit with some sup- bottomed out. However, a number of participants port from price discounting and other incentives. commented that previous declines in commodity and Looking ahead, participants generally expected con- energy prices, along with the earlier appreciation of sumer spending to continue to rise moderately. Solid the dollar and weak foreign activity, continued to gains in employment and income, the relatively high weigh on manufacturing activity. A few participants ratio of household wealth to income, low gasoline also noted that such factors were reducing farm prices, and a high level of consumer confidence were incomes in their Districts. seen as factors that should contribute to moderate growth in consumer spending. During the intermeeting period, the labor market strengthened further. In their comments on labor Reports on the housing sector were mixed, with some market conditions, participants cited strong payroll participants noting a weakening of housing activity gains and a further tick down in the civilian unemin regions adversely affected by the decline in energy ployment rate. Broader measures of labor force prices. Nonetheless, fundamentals for housing activ- underutilization had also shown progress, including ity were seen as strong except for a reported shortage an increase in labor force participation. The quits of buildable lots in some areas. Some participants rate had returned to its prerecession level, as had reported that contacts were generally upbeat about households’ perceptions of job availability and firms’ the outlook for housing construction in their Dis- assessments of the difficulty of filling jobs, providing tricts, and participants anticipated that activity in the further evidence of improved labor market condihousing sector would continue to expand this year. tions. Some participants judged that current labor market conditions were at or near those consistent In contrast, several participants noted recent softness with maximum sustainable employment, noting that in business fixed investment and signs that the slug- the unemployment rate was at or below their estigish growth would continue. Orders and shipments mates of its longer-run normal level and citing anecfor nondefense capital goods had been about flat. dotal reports of labor shortages or increased wage Capital expenditures continued to be depressed by pressures. In contrast, some other participants the contraction in the energy sector. Capital spending judged that the economy had not yet reached maxiplans appeared to remain soft. The possible adverse mum employment. They noted several indicators effects on investment spending of concerns about other than the unemployment rate that pointed to global growth and the associated volatility in finan- remaining underutilization of labor resources; these cial markets were also noted. District reports on com- indicators included the still-high rate of involuntary mercial construction activity, however, were generally part-time employment and the low level of the positive. employment-to-population ratio for prime-age work-

Minutes of Federal Open Market Committee Meetings | March 161 ers. The surprisingly limited extent to which aggre- Many participants expressed a view that the global gate data indicated upward pressure on wage growth economic and financial situation still posed apprealso suggested some remaining slack in labor ciable downside risks to the domestic economic outmarkets. look. Some noted that recent financial market turbulence provided an important reminder that the ability Participants commented on the recent increase in of central banks to offset the effects of adverse ecoinflation. Some participants saw the increase as con- nomic shocks might be limited, particularly by the sistent with a firming trend in inflation. Some others, low level of policy interest rates in most advanced however, expressed the view that the increase was economies. In contrast, a few noted that the actions unlikely to be sustained, in part because it appeared taken by several foreign central banks in recent weeks to reflect, to an appreciable degree, increases in prices to increase monetary accommodation likely had that had been relatively volatile in the past. Partici- helped mitigate downside risks to the global outlook. pants continued to anticipate that inflation would Nonetheless, many participants indicated that the run below the Committee’s 2 percent objective in the heightened global risks and the asymmetric ability of near term but that, as the transitory effects of earlier monetary policy to respond to them warranted caudeclines in energy and import prices dissipated and tion in making adjustments to the stance of U.S. the labor market strengthened further, inflation monetary policy. would rise to 2 percent over the medium term. Several participants indicated that the persistence of Participants generally agreed that the incoming inforglobal disinflationary pressures or the possibility that mation indicated that the U.S. economy had been inflation expectations were moving lower continued resilient to recent global economic and financial to pose downside risks to the inflation outlook. A developments, and that the domestic economic indifew others expressed the view that there were also cators that had become available in recent weeks had risks that could lead to inflation running higher than been mostly consistent with their expectations. Moreanticipated; for example, overly tight resource utiliza- over, the sharp asset price movements that occurred tion could push inflation above the Committee’s earlier in the year had been reversed to a large extent, 2 percent goal, particularly if productivity gains but longer-term interest rates and market particiremained sluggish. pants’ expectations for the future path of the federal funds rate remained lower. Taking these develop- Participants discussed readings from various market- ments into account, participants generally judged and survey-based measures of longer-run inflation that the medium-term outlook for domestic demand expectations. Some survey-based measures had edged was not appreciably different than it had been when down, while others had remained stable and one had the Committee met in December. However, most paredged up; such measures were little changed, on bal- ticipants, while recognizing the likely positive effects ance, in recent months. The market-based measures of recent policy actions abroad, saw foreign ecoof inflation compensation that had declined earlier nomic growth as likely to run at a somewhat slower were still at low levels. Several participants noted that pace than previously expected, a development that some of the softness in the market-based measures probably would further restrain growth in U.S. likely reflected changes in risk and liquidity premi- exports and tend to damp overall aggregate demand. ums, and that some of the survey-based measures Several participants also cited wider credit spreads as appeared to be excessively sensitive to movements in a factor that was likely to restrain growth in demand. gasoline prices. Some participants concluded that Accordingly, many participants expressed the view longer-run inflation expectations remained reason- that a somewhat lower path for the federal funds rate ably stable, but some others expressed concern that than they had projected in December now seemed longer-run inflation expectations may have already most likely to be appropriate for achieving the Commoved lower, or that they might do so if inflation mittee’s dual mandate. Many participants also noted was to persist for much longer at a rate below the that a somewhat lower projected interest rate path Committee’s objective. was one reason for the relatively small revisions in their medium-term projections for economic activity, Participants discussed the implications of the global unemployment, and inflation. economic and financial developments of the past few months for the medium-term outlook, and they Several participants also argued for proceeding cauoffered different characterizations of the risks to the tiously in reducing policy accommodation because U.S. economy stemming from these developments. they saw the risks to the U.S. economy stemming

162 103rd Annual Report | 2016 from developments abroad as tilted to the downside ment of the risks to the economic outlook, several or because they were concerned that longer-term expressed the view that a cautious approach to raisinflation expectations might be slipping lower, skew- ing rates would be prudent or noted their concern ing the risks to the outlook for inflation to the down- that raising the target range as soon as April would side. Many participants noted that, with the target signal a sense of urgency they did not think approprirange for the federal funds rate only slightly above ate. In contrast, some other participants indicated zero, the FOMC continued to have little room to ease that an increase in the target range at the Commitmonetary policy through conventional means if eco- tee’s next meeting might well be warranted if the nomic activity or inflation turned out to be materially incoming economic data remained consistent with weaker than anticipated, but could raise rates quickly their expectations for moderate growth in output, if the economy appeared to be overheating or if further strengthening of the labor market, and inflainflation was to increase significantly more rapidly tion rising to 2 percent over the medium term. than anticipated. In their view, this asymmetry made it prudent to wait for additional information regard- Committee Policy Action ing the underlying strength of economic activity and prospects for inflation before taking another step to In their discussion of monetary policy for the period reduce policy accommodation. ahead, members judged that information received since the Committee met in January suggested that For all of these reasons, most participants judged it economic activity had been expanding at a moderate appropriate to maintain the target range for the fed- pace despite the global economic and financial develeral funds rate at ¼ to ½ percent at this meeting opments of recent months. They also agreed that while noting that global economic and financial household spending had been increasing at a moderdevelopments continued to pose risks. These partici- ate rate, and that the housing sector had improved pants saw their judgment as consistent with the Com- further; however, business fixed investment and net mittee’s data-dependent approach to setting mon- exports had been soft. Members saw a range of etary policy; it was noted that, in this context, the rel- recent indicators, including strong job gains, as evant data include not only domestic economic pointing to additional strengthening of the labor releases, but also information about developments market. Members noted that inflation had picked up abroad and changes in financial conditions that bear in recent months; however, they also noted that inflaon the economic outlook. A couple of participants, tion had continued to run below the Committee’s however, saw an increase in the target range to ½ to 2 percent longer-run objective, partly reflecting ¾ percent as appropriate at this meeting, citing evi- declines in energy prices and in prices of non-energy dence that the economy was continuing to expand at imports. Market-based measures of inflation coma moderate rate despite developments abroad and pensation remained low. Survey-based measures of earlier volatility in financial conditions, continued longer-term inflation expectations were little improvement in labor market conditions, the firming changed, on balance, in recent months. of inflation over recent months, and the apparent leveling-off of oil prices. In their judgment, increas- With respect to the economic outlook and its impliing the target range for the federal funds rate too cations for monetary policy, members continued to gradually in the near term risked having to raise it expect that, with gradual adjustments in the stance of quickly later, which could cause economic and finan- monetary policy, economic activity would expand at cial strains at that time. a moderate pace and labor market indicators would continue to strengthen. However, they saw global Participants agreed that their ongoing assessments of economic and financial developments as continuing the data and the implications for the outlook, rather to pose risks. Members also continued to expect than calendar dates, would determine the timing and inflation to remain low in the near term, in part pace of future adjustments to the stance of monetary because of earlier declines in energy prices, but to rise policy. They expressed a range of views about the to 2 percent over the medium term as the transitory likelihood that incoming information would make an effects of declines in energy and import prices dissiadjustment appropriate at the time of their next pated and the labor market strengthened further. meeting. A number of participants judged that the Members noted the increase in inflation reported in headwinds restraining growth and holding down the recent months but expressed a range of views about neutral rate of interest were likely to subside only the extent to which the increase would prove persisslowly. In light of this expectation and their assess- tent. Several members expressed concern that longer-

Minutes of Federal Open Market Committee Meetings | March 163 run inflation expectations may have declined. Mem- at auction, and it anticipated doing so until normalbers agreed they would continue to monitor inflation ization of the level of the federal funds rate is well developments closely. under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, Against the backdrop of its discussion of current should help maintain accommodative financial conditions, the economic outlook, and the risks and conditions. uncertainties surrounding the outlook, the Committee decided to maintain the target range for the fed- At the conclusion of the discussion, the Committee eral funds rate at ¼ to ½ percent at this meeting. This voted to authorize and direct the Federal Reserve accommodative stance of monetary policy was Bank of New York, until it was instructed otherwise, expected to support further improvement in labor to execute transactions in the SOMA in accordance market conditions and a return to 2 percent inflation. with the following domestic policy directive, to be One member, however, preferred to raise the target released at 2:00 p.m.: range for the federal funds rate, indicating that the current low level of real interest rates was not appro- “Effective March 17, 2016, the Federal Open priate in the context of current economic conditions Market Committee directs the Desk to underand the progress that had been achieved toward the take open market operations as necessary to Committee’s objectives. maintain the federal funds rate in a target range of ¼ to ½ percent, including overnight reverse Members again agreed that, in determining the tim- repurchase operations (and reverse repurchase ing and size of future adjustments to the target range operations with maturities of more than one day for the federal funds rate, the Committee would when necessary to accommodate weekend, holiassess realized and expected economic conditions day, or similar trading conventions) at an offerrelative to its objectives of maximum employment ing rate of 0.25 percent, in amounts limited only and 2 percent inflation. This assessment would take by the value of Treasury securities held outright into account a wide range of information, including in the System Open Market Account that are measures of labor market conditions, indicators of available for such operations and by a perinflation pressures and inflation expectations, and counterparty limit of $30 billion per day. readings on financial and international developments. In light of the current shortfall of inflation from The Committee directs the Desk to continue 2 percent, the Committee agreed that it would care- rolling over maturing Treasury securities at aucfully monitor actual and expected progress toward its tion and to continue reinvesting principal payinflation goal. The Committee expected that eco- ments on all agency debt and agency mortgagenomic conditions would evolve in a manner that backed securities in agency mortgage-backed would warrant only gradual increases in the federal securities. The Committee also directs the Desk funds rate, and that the federal funds rate was likely to engage in dollar roll and coupon swap transto remain, for some time, below levels that were actions as necessary to facilitate settlement of expected to prevail in the longer run. Indeed, several the Federal Reserve’s agency mortgage-backed members noted that their current projections of the securities transactions.” path for the federal funds rate that would likely be appropriate this year and next were lower than they The vote also encompassed approval of the statement had projected in December. However, members below to be released at 2:00 p.m.: agreed that future data and developments could lead to changes in the economic outlook and in their pro- “Information received since the Federal Open jections of appropriate monetary policy, and that the Market Committee met in January suggests that actual path of the federal funds rate would depend economic activity has been expanding at a modon the economic outlook as informed by incoming erate pace despite the global economic and data. financial developments of recent months. Household spending has been increasing at a The Committee also decided to maintain its existing moderate rate, and the housing sector has policy of reinvesting principal payments from its improved further; however, business fixed investholdings of agency debt and agency mortgage- ment and net exports have been soft. A range of backed securities in agency mortgage-backed securi- recent indicators, including strong job gains, ties and of rolling over maturing Treasury securities points to additional strengthening of the labor

164 103rd Annual Report | 2016 market. Inflation picked up in recent months; the federal funds rate; the federal funds rate is however, it continued to run below the Commit- likely to remain, for some time, below levels that tee’s 2 percent longer-run objective, partly are expected to prevail in the longer run. Howreflecting declines in energy prices and in prices ever, the actual path of the federal funds rate will of non-energy imports. Market-based measures depend on the economic outlook as informed by of inflation compensation remain low; survey- incoming data. based measures of longer-term inflation expectations are little changed, on balance, in recent The Committee is maintaining its existing policy months. of reinvesting principal payments from its holdings of agency debt and agency mortgage- Consistent with its statutory mandate, the Com- backed securities in agency mortgage-backed mittee seeks to foster maximum employment securities and of rolling over maturing Treasury and price stability. The Committee currently securities at auction, and it anticipates doing so expects that, with gradual adjustments in the until normalization of the level of the federal stance of monetary policy, economic activity funds rate is well under way. This policy, by will expand at a moderate pace and labor mar- keeping the Committee’s holdings of longerket indicators will continue to strengthen. How- term securities at sizable levels, should help ever, global economic and financial develop- maintain accommodative financial conditions.” ments continue to pose risks. Inflation is expected to remain low in the near term, in part Voting for this action: Janet L. Yellen, William C. because of earlier declines in energy prices, but Dudley, Lael Brainard, James Bullard, Stanley to rise to 2 percent over the medium term as the Fischer, Loretta J. Mester, Jerome H. Powell, Eric transitory effects of declines in energy and Rosengren, and Daniel K. Tarullo. import prices dissipate and the labor market strengthens further. The Committee continues to Voting against this action: Esther L. George. monitor inflation developments closely. Ms. George dissented because she believed that a Against this backdrop, the Committee decided 25 basis point increase in the target range for the fedto maintain the target range for the federal funds eral funds rate was warranted at this meeting. rate at ¼ to ½ percent. The stance of monetary Although risks to the global economy had increased policy remains accommodative, thereby support- in recent months and financial markets were unusuing further improvement in labor market condi- ally volatile at times, she believed that monetary tions and a return to 2 percent inflation. policy should focus primarily on progress toward the Committee’s longer-run objectives. Recently, labor In determining the timing and size of future market conditions had continued to strengthen, with adjustments to the target range for the federal the economy apparently near full employment, and funds rate, the Committee will assess realized some data had suggested a firming of underlying and expected economic conditions relative to its inflation trends. She believed that monetary policy objectives of maximum employment and 2 per- should respond to these developments by gradually cent inflation. This assessment will take into removing accommodation. She noted that, in such account a wide range of information, including circumstances, postponing the removal of accommomeasures of labor market conditions, indicators dation could increase financial distortions and risks of inflation pressures and inflation expectations, to the economy and undermine the achievement of and readings on financial and international the Committee’s longer-run objectives. developments. In light of the current shortfall of inflation from 2 percent, the Committee will Consistent with the Committee’s decision to leave the carefully monitor actual and expected progress target range for the federal funds rate unchanged, the toward its inflation goal. The Committee expects Board of Governors took no action to change the that economic conditions will evolve in a man- interest rates on reserves or discount rates. ner that will warrant only gradual increases in

Minutes of Federal Open Market Committee Meetings | March 165 It was agreed that the next meeting of the Committee Notation Vote would be held on Tuesday–Wednesday, April 26–27, 2016. The meeting adjourned at 10:40 a.m. on By notation vote completed on February 16, 2016, March 16, 2016. the Committee unanimously approved the minutes of the Committee meeting held on January 26–27, 2016. Brian F. Madigan Secretary

166 103rd Annual Report | 2016 Addendum: as the future path of policy that each participant deems most likely to foster outcomes for economic Summary of Economic Projections activity and inflation that best satisfy his or her individual interpretation of the Federal Reserve’s objec- In conjunction with the Federal Open Market Comtives of maximum employment and stable prices. mittee (FOMC) meeting held on March 15–16, 2016, meeting participants submitted their projections of FOMC participants generally expected that, under the most likely outcomes for real output growth, the appropriate monetary policy, growth in real gross unemployment rate, inflation, and the federal funds domestic product (GDP) would be at or somewhat rate for each year from 2016 to 2018 and over the above their individual estimates of the longer-run longer run. Each participant’s projection was based growth rate in 2016 and 2017 and would converge on information available at the time of the meeting, toward the longer-run rate in 2018 (table 1 and figtogether with his or her assessment of appropriate ure 1). All participants projected that by the end of monetary policy and assumptions about the factors the current year, the unemployment rate would likely to affect economic outcomes. The longer-run decline to, or fall below, their individual estimates of projections represent each participant’s assessment of the longer-run normal unemployment rate—that is, the value to which each variable would be expected to their projected unemployment gaps would be zero or converge, over time, under appropriate monetary negative—and that these zero or negative gaps would policy and in the absence of further shocks to the persist through 2018, even though many participants economy. “Appropriate monetary policy” is defined Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, March 2016 Percent Median1 Central tendency2 Range3 Variable Longer Longer L onger 2 016 2017 2018 run 2016 2017 2018 run 2 016 2 017 2 018 run Change in real GDP 2.2 2.1 2.0 2.0 2.1–2.3 2.0–2.3 1.8–2.1 1.8–2.1 1 .9–2.5 1 .7–2.3 1 .8–2.3 1 .8–2.4 December projection 2.4 2.2 2.0 2.0 2.3–2.5 2.0–2.3 1.8–2.2 1.8–2.2 2 .0–2.7 1 .8–2.5 1 .7–2.4 1 .8–2.3 Unemployment rate 4.7 4.6 4.5 4.8 4.6–4.8 4.5–4.7 4.5–5.0 4.7–5.0 4.5–4.9 4.3–4.9 4.3–5.0 4.7–5.8 December projection 4.7 4.7 4.7 4.9 4.6–4.8 4.6–4.8 4.6–5.0 4.8–5.0 4 .3–4.9 4 .5–5.0 4 .5–5.3 4 .7–5.8 PCE inflation 1.2 1.9 2.0 2.0 1.0–1.6 1.7–2.0 1.9–2.0 2.0 1.0–1.6 1.6–2.0 1.8–2.0 2 .0 December projection 1.6 1.9 2.0 2.0 1.2–1.7 1.8–2.0 1.9–2.0 2.0 1.2–2.1 1.7–2.0 1.7–2.1 2 .0 Core PCE inflation4 1.6 1.8 2.0 1.4–1.7 1.7–2.0 1.9–2.0 1.4–2.1 1.6–2.0 1.8–2.0 December projection 1.6 1.9 2.0 1.5–1.7 1.7–2.0 1.9–2.0 1.4–2.1 1 .6–2.0 1 .7–2.1 Memo: Projected appropriate policy path Federal funds rate 0.9 1.9 3.0 3.3 0.9–1.4 1.6–2.4 2.5–3.3 3.0–3.5 0 .6–1.4 1 .6–2.8 2 .1–3.9 3 .0–4.0 December projection 1.4 2.4 3.3 3.5 0.9–1.4 1.9–3.0 2.9–3.5 3.3–3.5 0.9–2.1 1.9–3.4 2.1–3.9 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 December projections were made in conjunction with the meeting of the Federal Open Market Committee on December 15–16, 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 | March 167 Figure 1. Medians, central tendencies, and ranges of economic projections, 2016–18 and over the long run Percent Change in real GDP Median of projections 4 Central tendency of projections Range of projections 3 2 Actual 1 2011 2012 2013 2014 2015 2016 2017 2018 Longer run Percent Unemployment rate 9 8 7 6 5 4 2011 2012 2013 2014 2015 2016 2017 2018 Longer run Percent PCE inflation 3 2 1 2011 2012 2013 2014 2015 2016 2017 2018 Longer run Percent Core PCE inflation 3 2 1 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.

168 103rd Annual Report | 2016 reduced their estimates of the longer-run normal rate. The Outlook for Economic Activity All participants projected that inflation, as measured by the four-quarter change in the price index for per- A substantial majority of participants expected that, sonal consumption expenditures (PCE), would pick conditional on their individual assumptions about up in 2016 and 2017 from the very low rate seen in appropriate monetary policy, real GDP in 2016 and 2015. Participants generally projected inflation to be 2017 would increase at a rate above their individual either at or just slightly below the Committee’s 2 per- estimates of the longer-run normal growth rate cent objective by the end of 2018. before decelerating to a pace at or near their individual estimates of the longer-run normal rate. A As shown in figure 2, participants expected that it number of participants indicated that they expected would be appropriate to raise the target range for the domestic factors—including improving labor market federal funds rate gradually over the projection conditions, stronger household and business balance period as headwinds to economic growth dissipate sheets, lower consumer energy prices, and a stillslowly over time and as inflation rises toward the accommodative stance of monetary policy—to con- Committee’s goal of 2 percent. Consistent with this tribute to strength in aggregate expenditures, while outlook, nearly all participants projected that the foreign conditions were projected to be a source of appropriate level of the federal funds rate would be weakness for some time. below their individual estimates of its longer-run level through 2018. Compared with their forecasts prepared for the Summary of Economic Projections (SEP) in December, Almost all participants regarded the levels of uncer- most participants marked down their projections of tainty associated with their forecasts for economic real GDP growth in 2016, and several did so for 2017. growth and the unemployment rate as broadly simi- Overall, the median value of participants’ projections lar to the norms of the previous 20 years and shared for real GDP growth in 2016 was revised down a little a similar view regarding the uncertainty surrounding to 2.2 percent, and that for 2017 was revised down their inflation projections. Participants were about slightly to 2.1 percent. evenly divided as to whether they judged the risks to their forecasts for real GDP growth to be weighted to The median forecast for the unemployment rate was the downside or broadly balanced; no participant saw a bit lower in 2017 and 2018 than in December and risks to real GDP growth as weighted to the upside. showed a modest downward tilt over the three years Participants who thought that risks to their outlook of the forecast. Participants cited stronger-thanfor real GDP growth were skewed to the downside expected labor market data in recent months as a factended to cite developments in foreign economies, tor explaining these revisions. Moreover, many parrecent volatility in financial markets, or the limited ticipants also reduced their estimates of the longercapacity of policy to respond to adverse develop- run normal rate of unemployment, resulting in a ments as contributing to that view. Risk perceptions modest reduction in the median of the longer-run regarding the unemployment rate were more dis- rate. Thus, while a majority expected the unemploypersed. Most participants regarded risks to their ment rate gap to turn negative by the end of this year, unemployment rate forecasts as broadly balanced, fewer participants projected a negative gap at that but four participants considered risks as skewed time than was the case in December. For 2017, all toward a higher unemployment rate, and two viewed participants projected a negative unemployment rate risks as weighted toward a lower unemployment rate. gap, and a substantial majority did so for 2018 as A majority of participants thought that the risks well. All told, however, the medians of the unemployattending their projections for PCE price inflation ment rate gaps for the three years of the projection were weighted to the downside; almost all of these were essentially unchanged from the December SEP. participants also saw risks to core PCE inflation as tilted in the same direction. Among the reasons cited Figures 3.A and 3.B show the distribution of particiby participants for perceptions of downside risk to pants’ views regarding the likely outcomes for real their inflation projections were ongoing develop- GDP growth and the unemployment rate through ments in overseas economies and their possible impli- 2018 and in the longer run. The distribution of the cations for U.S. import prices, declines in energy projections of GDP growth shifted toward lower valprices since December, and low readings for some ues for 2016; differences from December for 2017 and indicators of long-term inflation expectations. 2018 were less noteworthy, but there was a modest

Minutes of Federal Open Market Committee Meetings | March 169 Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate Percent 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 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.

170 103rd Annual Report | 2016 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2016–18 and over the longer run Number of participants 2016 March projections 18 December projections 16 14 12 10 8 6 4 2 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 2.6 - 1.7 1.9 2.1 2.3 2.5 2.7 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 - 1.7 1.9 2.1 2.3 2.5 2.7 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 - 1.7 1.9 2.1 2.3 2.5 2.7 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 - 1.7 1.9 2.1 2.3 2.5 2.7 Percent range Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | March 171 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2016–18 and over the longer run Number of participants 2016 March projections 18 December 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 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.

172 103rd Annual Report | 2016 narrowing of the distribution for 2018. The distribu- to December, the projections of the appropriate levtions of projections for the unemployment rate in els of the federal funds rate over the next three years 2017 and beyond shifted modestly toward lower val- shifted notably toward lower values. The median proues, relative to the December SEP, on the basis of jections for the federal funds rate at the end of 2016 strong labor market indicators in recent months. and 2017 both declined 0.50 percentage point, to levels of 0.88 percent and 1.88 percent, respectively, The Outlook for Inflation while the median for the end of 2018 fell 0.25 percentage point, to 3.0 percent. The median for the fed- All participants projected PCE price inflation to pick eral funds rate in the longer run was also reduced up in 2016 and to rise further in 2017. For 2018, 0.25 percentage point, to 3.25 percent. The view that nearly all expected PCE price inflation to be at or a lower path of the federal funds rate relative to very close to the Committee’s 2 percent longer-run December would be appropriate for achieving the objective. However, relative to the December SEP, Committee’s objectives was broadly shared across almost all participants marked down their projections participants, especially for the first two years of their for PCE price inflation in 2016, observing that forecasts. Given their expectations that certain facdeclines in energy prices since the end of last year tors would continue to restrain economic growth for and continued strength in the dollar were expected to a time, that inflation will increase only gradually to impart additional downward pressure on inflation 2 percent, and that the economic and policy outlook this year. Many participants also lowered their pro- entails asymmetric risks over the next few years, parjections for inflation in 2017, although the median ticipants generally projected that a gradual rise in the value for that year was unchanged. Inflation projec- federal funds rate over that period would be approtions in 2018 were little changed from December. priate; almost all participants judged it advisable for Regarding core PCE price inflation, some partici- the federal funds rate to remain below their indipants marked down their projections for 2016, vidual estimates of its longer-run normal level although almost all still expected core inflation to rise through the end of 2018. gradually over the projection period and to be at or very close to 2 percent by the end of 2018. Factors Although the median of participants’ projections of cited by participants as contributing to their expecta- the federal funds rate in the longer run moved lower, tion that inflation will rise over the medium term the range of estimates for the longer-run rate was included recent readings for core inflation, an antici- unchanged from December. Hence, with all participation that improvements in labor markets will con- pants anticipating that inflation would eventually tinue, the fading effects of recent dollar appreciation reach the Committee’s objective of 2 percent, the and declines in oil prices, and an assessment that range of participants’ judgments of the longer-run long-term inflation expectations will remain at levels level of the real federal funds rate was also consistent with the FOMC’s 2 percent objective, all unchanged from December, at 1 to 2 percent; the supported by a stance of monetary policy that par- median value for the longer-run real rate was ticipants generally described as accommodative. 1.25 percent, down 0.25 percentage point from December. Figures 3.C and 3.D provide information on the distribution of participants’ views about the outlook for Participants’ views of the appropriate path for moninflation. The distribution for PCE price inflation in etary policy were informed by their judgments about 2016 shifted notably to the left compared with the the outlook for economic activity, labor markets, and December SEP, while changes in the distributions of inflation as well as the risks and uncertainties associprojections for 2017 and 2018 were small. The distri- ated with that outlook. One important consideration butions of participants’ projections for core PCE for many participants was their assessment that sevprice inflation shifted only a touch toward lower val- eral factors—including weak foreign economic condiues for 2017 and 2018 as compared with December. tions, a persistently high exchange value of the dollar, and tighter financial conditions—will continue to Appropriate Monetary Policy restrain economic growth for a time and thus collectively imply a temporarily low level for the neutral Figure 3.E provides the distribution of participants’ rate of interest. These forces, combined with the curjudgments regarding the appropriate level of the tar- rent proximity of short-term interest rates to their get federal funds rate at the end of each calendar year effective lower bound and the related asymmetry of from 2016 to 2018 and over the longer run. Relative risks around the outlook for real GDP growth and

Minutes of Federal Open Market Committee Meetings | March 173 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2016–18 and over the longer run Number of participants 2016 March projections 18 December projections 16 14 12 10 8 6 4 2 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 1.0 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 1.0 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 1.0 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 1.0 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Note: Definitions of variables are in the general note to table 1.

174 103rd Annual Report | 2016 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2016–18 Number of participants 2016 March projections 18 December projections 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 1.4 1.6 1.8 2.0 2.2 Percent range Note: Definitions of variables are in the general note to table 1.

Minutes of Federal Open Market Committee Meetings | March 175 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, 2016–18 and over the long run Number of participants 2016 March projections 18 December projections 16 14 12 10 8 6 4 2 0.63 - 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 - 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 0.63 - 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 - 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 0.63 - 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 - 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 0.63 - 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 - 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.

176 103rd Annual Report | 2016 tions for real GDP growth, the unemployment rate, Table 2. Average historical projection error ranges and both headline and core PCE price inflation as Percentage points broadly similar to the average levels of the past Variable 2016 2017 2018 20 years (as shown in the left-hand column of figure 4).5 In contrast, participants revised appreciably Change in real GDP1 ±1.6 ±2.1 ±2.1 their assessments of the risks to real GDP growth, Unemployment rate1 ±0.5 ±1.2 ±1.7 the unemployment rate, and both headline and core Total consumer prices2 ±0.9 ±1.1 ±1.1 inflation since December (as shown in the right-hand Note: Error ranges shown are measured as plus or minus the root mean squared column). Eight participants saw the risks to real error of projections for 1996 through 2015 that were released in the spring by various private and government forecasters. As described in the box “Forecast GDP growth as weighted to the downside—up from Uncertainty,” under certain assumptions, there is about a 70 percent probability three in December. Four participants saw risks to 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 unemployment rate as skewed toward higher uneminformation, see David Reifschneider and Peter Tulip (2007), “Gauging the ployment—two more than in December—while two Uncertainty of the Economic Outlook from Historical Forecasting Errors,” Finance and Economics Discussion Series 2007-60 (Washington: Board of Governors of continued to see risks weighted toward lower unemthe Federal Reserve System, November), available at www.federalreserve.gov/ ployment. Explanations for the less marked shift in 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 the outlook for the unemployment rate ver- Forecast Errors,” memorandum, April 9, www.federalreserve.gov/foia/files/ sus the outlook for real GDP growth included favor- 20140409-historical-forecast-errors.pdf. 1 Definitions of variables are in the general note to table 1. able labor market news over the past three months. 2 Measure is the overall consumer price index, the price measure that has been More generally, participants cited financial market most widely used in government and private economic forecasts. Projection and global economic conditions, either on their own is percent change, fourth quarter of the previous year to the fourth quarter of the year indicated. or coupled with the limited capacity of policymakers to respond to possible adverse economic conditions, as reasons for the downward tilt to their perceptions inflation, were noted as reasons why a gradual of the risks to growth. Turning to inflation, 11 parapproach to raising the federal funds rate would be ticipants indicated that the risks to their headline appropriate, provided that the outlook for the inflation forecasts were skewed to the downside, up economy unfolded about as expected. Another confrom 7 in December, and nearly all of these particisideration underlying the anticipated gradual removal pants saw the same tilt to the risks for core inflation. of policy accommodation involved the prospects for Many participants noted some recent evidence of a inflation to return to the Committee’s objective of deterioration, or an absence of improvement, in indi- 2 percent. In assessing those prospects, participants cators of long-term inflation expectations as contribweighed the implications of a range of factors, uting to increased downside risks for inflation, while including indicators of longer-run inflation expectasome pointed to the further declines in energy prices. tions and the magnitude and persistence of the effects of both low energy prices and the earlier appreciation of the dollar. Judgments regarding the likely future strength of the labor market and future wage gains also figured into participants’ forecasts for inflation. 5 Table 2 provides estimates of the forecast uncertainty for the change in real GDP, the unemployment rate, and total con- Uncertainty and Risks sumer price inflation over the period from 1996 through 2015. At the end of this summary, the box “Forecast Uncertainty” discusses the sources and interpretation of uncertainty in the As in the December SEP, nearly all participants economic forecasts and explains the approach used to assess the judged the levels of uncertainty around their projec- uncertainty and risks attending the participants’ projections.

Minutes of Federal Open Market Committee Meetings | March 177 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.

178 103rd Annual Report | 2016 Forecast Uncertainty The economic projections provided by the members corresponding 70 percent confidence intervals for of the Board of Governors and the presidents of the overall inflation would be 1.1 to 2.9 percent in the Federal Reserve Banks inform discussions of mon- current year and 0.9 to 3.1 percent in the second and etary policy among policymakers and can aid public 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 and 0.9 to 5.1 percent in the second and third years. The

Minutes of Federal Open Market Committee Meetings | April 179 Meeting Held on April 26–27, 2016 Steven B. Kamin Economist A joint meeting of the Federal Open Market Com- Thomas Laubach mittee and the Board of Governors was held in the Economist offices of the Board of Governors of the Federal David W. Wilcox Reserve System in Washington, D.C., on Tuesday, Economist April 26, 2016, at 10:30 a.m. and continued on Wednesday, April 27, 2016, at 9:00 a.m.1 Thomas A. Connors, Troy Davig, Michael P. Leahy, David E. Lebow, Stephen A. Meyer, Geoffrey Tootell, Present and William Wascher Associate Economists Janet L. Yellen Chair Simon Potter Manager, System Open Market Account William C. Dudley Vice Chairman Lorie K. Logan Deputy Manager, System Open Market Account Lael Brainard Robert deV. Frierson James Bullard Secretary of the Board, Office of the Secretary, Stanley Fischer Board of Governors Esther L. George Michael S. Gibson Director, Division of Banking Supervision and Loretta J. Mester Regulation, Board of Governors Jerome H. Powell Nellie Liang Eric Rosengren Director, Office of Financial Stability Policy and Research, Board of Governors Daniel K. Tarullo James A. Clouse Charles L. Evans, Patrick Harker, Robert S. Kaplan, Deputy Director, Division of Monetary Affairs, Neel Kashkari, and Michael Strine Board of Governors Alternate Members of the Federal Open Market Committee William B. English Senior Special Adviser to the Board, Office of Board Jeffrey M. Lacker, Dennis P. Lockhart, Members, Board of Governors and John C. Williams Presidents of the Federal Reserve Banks of Andrew Figura, Ann McKeehan, David Reifschneider, Richmond, Atlanta, and San Francisco, respectively and Stacey Tevlin 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 Eric M. Engen Scott G. Alvarez Senior Associate Director, Division of Research and General Counsel Statistics, Board of Governors Thomas C. Baxter Fabio M. Natalucci Deputy General Counsel Senior Associate Director, Division of Monetary Affairs, Board of Governors 1 The Federal Open Market Committee is referenced as the “FOMC” and the “Committee” in these minutes.

180 103rd Annual Report | 2016 Antulio N. Bomfim, Egon Zakrajšek,2 Kelly J. Dubbert and Joyce K. Zickler First Vice President, Federal Reserve Bank of Senior Advisers, Division of Monetary Affairs, Kansas City Board of Governors David Altig, Kartik B. Athreya, Jeff Fuhrer,2 Jeremy B. Rudd and Glenn D. Rudebusch Senior Adviser, Division of Research and Statistics, Executive Vice Presidents, Federal Reserve Banks of Board of Governors Atlanta, Richmond, Boston, and San Francisco, respectively Mark Carey2 Associate Director, Division of International Finance, Tobias Adrian,2 Michael Dotsey, Board of Governors and Samuel Schulhofer-Wohl Senior Vice Presidents, Federal Reserve Banks of Joshua Gallin New York, Philadelphia, and Minneapolis, Associate Director, Division of Research and respectively Statistics, Board of Governors Joseph G. Haubrich, Anna Paulson, Shaghil Ahmed and David C. Wheelock Deputy Associate Director, Division of International Vice Presidents, Federal Reserve Banks of Cleveland, Finance, Board of Governors Chicago, and St. Louis, respectively Rochelle M. Edge Richard K. Crump2 and Marco Del Negro Deputy Associate Director, Office of Financial Assistant Vice Presidents, Federal Reserve Bank of Stability Policy and Research, Board of Governors New York Glenn Follette and John M. Roberts Jim Dolmas Assistant Directors, Division of Research and Senior Research Economist, Federal Reserve Bank of Statistics, Board of Governors Dallas Christopher J. Gust Nina Boyarchenko2 Assistant Director, Division of Monetary Affairs, Financial Economist, Federal Reserve Bank of Board of Governors New York Burcu Duygan-Bump The Relationship between Monetary Policy Adviser, Division of Monetary Affairs, and Financial Stability Board of Governors Penelope A. Beattie3 The staff presented several briefings on a special Assistant to the Secretary, Office of the Secretary, topic, the relationship between monetary policy and Board of Governors financial stability. The presentations began with an overview of the possible linkages among monetary Dana L. Burnett policy, macroprudential tools, and financial stability, Section Chief, Division of Monetary Affairs, drawing on both academic research and experience Board of Governors with such tools in various countries. The staff then reviewed empirical literature on the linkages between Bora Durdu2 the stance of monetary policy and financial stability. Section Chief, Office of Financial Stability Policy and Lastly, the staff presented illustrative simulation Research, Board of Governors results from a specific macroeconomic model to Jae Sim2 explore whether and how monetary policy should Principal Economist, Division of Research and react to financial imbalances as well as the extent to Statistics, Board of Governors which monetary and macroprudential policies should be coordinated to best achieve macroeconomic goals Andrea Ajello and financial stability goals. Senior Economist, Division of Monetary Affairs, Board of Governors In their comments on the briefings and in their discussion of the relationship between monetary policy 2 Attended the discussion of the relationship between monetary policy and financial stability. and financial stability, FOMC participants noted 3 Attended Tuesday session only. that more stringent regulatory and supervisory poli-

Minutes of Federal Open Market Committee Meetings | April 181 cies implemented since the financial crisis, including quarter-end, the daily effective federal funds rate had enhanced capital and liquidity requirements for some again remained very close to the center of the Comtypes of financial institutions, had significantly mittee’s ¼ to ½ percent target range over the interincreased the resilience of the financial system to meeting period. The manager then briefed the Comshocks. Participants emphasized the importance of mittee on a routine review by the staff of the process macroprudential tools in promoting financial stabil- for managing foreign currency reserves and a resultity, and they generally expressed the view that such ing proposal for an enhanced analytical framework tools should be the primary means to address finan- for the management of those reserves. cial stability risks. However, it was noted that relatively few macroprudential tools are available to The Committee voted unanimously to renew the financial regulators in the United States and that, for reciprocal currency arrangements with the Bank of the most part, such tools are untested. Moreover, a Canada and the Bank of Mexico; these arrangements number of institutional factors, including the disper- are associated with the Federal Reserve’s participasion of responsibilities across regulatory agencies, tion in the North American Framework Agreement differences in mandates among those agencies, and of 1994. In addition, the Committee voted unaniresulting coordination challenges, may make it diffi- mously to renew the dollar and foreign currency cult to deploy macroprudential tools expeditiously in liquidity swap arrangements with the Bank of the United States and may lessen their effectiveness. Canada, the Bank of England, the Bank of Japan, Some participants noted that these considerations the European Central Bank, and the Swiss National would be less significant for tools that were likely to Bank. The votes to renew the Federal Reserve’s parbe adjusted only infrequently. Most participants ticipation in these standing arrangements are taken judged that the benefits of using monetary policy to annually at the April FOMC meeting. address threats to financial stability would typically be outweighed by the costs associated with deviations By unanimous vote, the Committee ratified the from the Committee’s employment and price- Desk’s domestic transactions over the intermeeting stability objectives induced by such actions; some period. There were no intervention operations in foralso noted that the benefits are highly uncertain. eign currencies for the System’s account during the Nonetheless, participants generally agreed that the intermeeting period. Committee should not completely rule out the possibility of using monetary policy to address financial Staff Review of the Economic Situation stability risks, particularly in circumstances in which such risks significantly threatened the achievement of The information reviewed for the April 26–27 FOMC its dual mandate and when macroprudential tools meeting indicated that labor market conditions had been or were likely to be ineffective at mitigating improved further in the first quarter even though those risks. Finally, participants stressed the need for growth in real gross domestic product (GDP) further research and analysis to advance understand- appeared to have slowed. Consumer price inflation ing of the relationship between monetary policy and continued to run below the Committee’s longer-run financial stability and to help identify situations in objective of 2 percent, restrained in part by earlier which it might be desirable to incorporate financial decreases in energy prices and declining prices of stability considerations in the design of monetary non-energy imports. Survey-based measures of policy. longer-run inflation expectations were little changed, on balance, in recent months, while market-based Developments in Financial Markets and measures of inflation compensation were still low. Open Market Operations Total nonfarm payroll employment expanded at a The manager of the System Open Market Account solid pace in March, and labor market conditions (SOMA) reported on developments in domestic and generally continued to strengthen. Although the foreign financial markets, including changes in mar- unemployment rate edged up to 5.0 percent, both the ket participants’ expectations for the course of U.S. labor force participation rate and the employment-tomonetary policy. The deputy manager provided a population ratio continued to increase. The share of briefing on money market developments and System workers employed part time for economic reasons open market operations conducted by the Open Mar- rose slightly but had been about flat, on balance, over ket Desk during the period since the Committee met recent months. The rates of private-sector hires and on March 15–16, 2016. Except for the March quits moved up in February, while the rate of job

182 103rd Annual Report | 2016 openings declined a little but was still at an elevated existing homes rose in March after decreasing in Feblevel. In late March and early April, the four-week ruary, while new home sales moved lower in both moving average of initial claims for unemployment months; nonetheless, sales of both new and existing insurance benefits was essentially unchanged, on net, homes in the first quarter as a whole were above at a low level. Labor productivity growth appeared to those in the fourth quarter. have remained slow over the four quarters ending in the first quarter of this year. Measures of labor com- Real private expenditures for business equipment and pensation continued to rise at a modest pace, as aver- intellectual property appeared to decline further in age hourly earnings for all employees increased the first quarter. Nominal shipments of nondefense 2¼ percent over the 12 months ending in March. capital goods excluding aircraft decreased, on net, in February and March. Forward-looking indicators of Total industrial production declined in February and equipment spending, such as new orders for nonde- March. Manufacturing output decreased, partly fense capital goods along with recent readings from reflecting the effects on export demand of earlier national and regional surveys of business conditions, appreciation of the foreign exchange value of the dol- continued to be soft. Firms’ nominal spending for lar. Meanwhile, mining output continued to contract nonresidential structures excluding drilling and minas a result of further declines in drilling activity associ- ing decreased in February. Indicators of spending for ated with low crude oil prices. Moreover, unseasonably structures in the drilling and mining sector, such as warm weather in February and March held down the the number of oil and gas rigs in operation, continoutput of utilities. Automakers’ assembly schedules ued to fall through early April. The available data and broader indicators of manufacturing production, suggested that inventory investment moved down in such as the readings on new orders from national and the first quarter. regional manufacturing surveys, mostly pointed to only modest gains in factory output over the next few Total real government purchases seemed to have risen months. Information on extraction and drilling activity modestly in the first quarter. Federal government for crude oil and natural gas in early April was consis- spending for defense appeared to have declined. tent with further declines in mining output. However, the payrolls of state and local governments increased in the first quarter, and nominal construc- Growth in real personal consumption expenditures tion spending by these governments rose, on net, in (PCE) appeared to have slowed in the first quarter. the first two months of the quarter. Real PCE rose moderately in February after being flat in January. The components of the nominal retail The U.S. international trade deficit widened in Febsales data used by the Bureau of Economic Analysis ruary, as imports rose more than exports; however, to construct its estimate of PCE moved sideways in preliminary data on trade in goods suggested that the March, and the rate of sales of new light motor deficit narrowed substantially in March, with imports vehicles decreased markedly. Nevertheless, recent falling back sharply even as exports declined. Large readings on key factors that influence consumer increases in both exports and imports of consumer spending were consistent with a pickup in real PCE goods in February were more than reversed in growth in the coming months. Gains in real dispos- March. Also, imports of capital goods dropped able income continued to be solid in February. sharply in March after increasing in February. In all, Households’ net worth was boosted by the rise in the recent data indicated that net exports probably equity prices over the intermeeting period and by fur- continued to be a moderate drag on real GDP growth ther strong increases in home values through Febru- in the first quarter. ary. Also, consumer sentiment as measured by the University of Michigan Surveys of Consumers Total U.S. consumer prices, as measured by the PCE remained upbeat in early April. price index, increased 1 percent over the 12 months ending in February, partly restrained by declines in Recent information on housing activity was broadly consumer energy prices. Core PCE price inflation, consistent with a continued slow recovery in this sec- which excludes changes in food and energy prices, tor. Starts and building permits for new single-family was 1¾ percent over the same 12-month period, held homes declined in March, but both measures were down in part by falling prices of non-energy imports higher in the first quarter as a whole than in the and the pass-through of declines in energy prices to fourth quarter of 2015. However, starts of multifam- prices of other goods and services. Over the ily units continued to decrease in March. Sales of 12 months ending in March, total consumer prices as

Minutes of Federal Open Market Committee Meetings | April 183 measured by the consumer price index (CPI) rose of the federal funds rate in the FOMC’s Summary of 1 percent, while core CPI inflation was 2¼ percent. Economic Projections as well as to references in the In light of the CPI data, both total and core PCE March FOMC statement and the Chair’s prepared price inflation on a 12-month basis appeared to slow remarks at the press conference to risks to the U.S. a bit in March. Survey measures of longer-run infla- economic outlook stemming from global economic tion expectations—including those from the Michi- and financial developments. Meanwhile, domestic gan survey along with the Desk’s Survey of Primary data releases were mixed and elicited only modest Dealers and Survey of Market Participants—were market reactions. On net, financial market quotes generally little changed, on balance, in recent months, implied that the federal funds rate path expected by although the reading from the Michigan survey in investors flattened notably, and that their estimated early April was at the low end of its historical range. probability of a rate hike by the June FOMC meeting declined significantly. In the Survey of Market Par- Recent indicators suggested that foreign real GDP ticipants, the median investor’s modal path for the growth had picked up in the first quarter after a lack- federal funds rate also moved down substantially, luster performance last year. Economic growth in while in the Survey of Primary Dealers, the median Canada appeared to have rebounded from a very weak dealer’s modal path was little changed. fourth quarter. Recent data on industrial production and retail sales pointed to a pickup in economic Consistent with the flatter path for the federal funds growth in the euro area. Although weak economic per- rate implied by market quotes, yields on nominal formance persisted in Japan and South America, the Treasury securities with maturities up to 10 years weakness appeared to have abated somewhat. In con- declined slightly over the period since the March trast, economic growth in China moderated in the first FOMC meeting. Measures of inflation compensation quarter, although economic indicators in March were based on Treasury Inflation-Protected Securities more upbeat than in the earlier months of the year. In increased somewhat but remained at low levels. the advanced foreign economies (AFEs), headline Credit conditions in municipal bond markets contininflation remained low, held down by earlier declines in ued to be stable even as the situation facing Puerto energy prices. With inflation generally running below Rico and its creditors deteriorated further. the target rates in these economies, monetary policies remained very accommodative. By contrast, overall Over the intermeeting period, broad U.S. equity price inflation in emerging market economies (EMEs) rose indexes moved up, on net, likely because of investors’ in the first quarter, largely reflecting increases in infla- views that monetary policy would be more accomtion in much of Latin America along with an increase modative than previously expected along with an in inflation in China that was driven by higher food improvement in risk sentiment. Stock prices prices. increased broadly across industries, including the energy sector. One-month-ahead implied volatility on Staff Review of the Financial Situation the S&P 500 index—the VIX—moved down and ended the period below its historical median. Spreads Financial market conditions improved further, on on 10-year corporate bond yields over yields on balance, over the intermeeting period, with investors comparable-maturity Treasury securities for both appearing to respond to Federal Reserve communica- triple-B-rated and speculative-grade issuers declined, tions that were viewed as more accommodative than on balance, but remained at levels near the high end anticipated and to somewhat better-than-expected of their ranges since 2012, as the outlook for corpoincoming data on foreign economic activity. Risk rate earnings deteriorated somewhat over the period. sentiment also appeared to improve further, on net, In light of available earnings reports of some compaaccompanied by a decline in financial market volatil- nies in the S&P 500 index along with equity analysts’ ity and higher oil prices. Domestic economic data forecasts for companies that had not yet issued releases over the period had, on balance, a limited reports, corporate earnings in the first quarter effect on asset prices. appeared to have decreased markedly relative to the previous quarter. Federal Reserve communications following the March FOMC meeting were interpreted by market Financing conditions for U.S. nonfinancial busiparticipants as more accommodative than expected. nesses remained generally accommodative for In particular, investors were attentive to the larger- investment-grade issuers, and those for speculativethan-expected downward revisions to the projections grade firms improved somewhat after showing strains

184 103rd Annual Report | 2016 earlier in the year. Corporate bond issuance by lending conditions were still relatively tight, particuspeculative-grade firms rebounded in March from larly for borrowers with subprime credit scores. the sluggish pace in January and February. Growth Responses to the SLOOS indicated that during the of commercial and industrial (C&I) loans on banks’ first quarter, while credit card lending standards were books remained strong and continued to be driven by little changed, a modest number of banks eased stanlending to investment-grade borrowers by large dards on auto and other consumer loans. Over the banks. Nonetheless, according to the most recent same period, demand for auto loans reportedly Senior Loan Officer Opinion Survey on Bank Lend- strengthened further at many banks. Consumer loan ing Practices (SLOOS), on balance, banks further balances continued to increase at a robust pace tightened their lending standards on C&I loans to through February, and data on bank lending activilarge and middle-market firms in the first quarter, ties suggested further growth through March. Issuwhile demand for such loans weakened. The SLOOS ance of asset-backed securities continued to be indicated that banks expected an increase this year in strong in the first quarter. Spreads on such securities delinquencies and charge-offs on existing loans to remained at levels that were a bit higher than usual. firms in the energy sector; banks also noted some deterioration in credit quality of loans to non-energy Since the March FOMC meeting, foreign financial businesses located in U.S. regions that were depen- market conditions eased, on net, and overall risk sendent on the energy sector. timent appeared to have improved. A number of factors likely contributed to the improvement, including A significant number of SLOOS respondents expectations of more accommodative monetary reported tightening their lending standards on all policy in the United States. Sentiment was also likely major categories of commercial real estate (CRE) boosted by the release of generally favorable foreign loans during the first quarter. However, demand for economic data. Against this backdrop, stock prices CRE loans reportedly strengthened, and CRE loans rose in most countries, with the equity indexes of the on banks’ books continued to grow at a robust pace EMEs outperforming those of the AFEs. Changes in over the first quarter. In response to wider and more longer-term yields in the AFEs were mixed: Ten-year volatile spreads on commercial mortgage-backed sovereign yields decreased slightly in Germany and securities (CMBS) since the summer of 2015, CMBS Japan but increased in Canada and in the United issuance was subdued in the first quarter, consistent Kingdom. The foreign exchange value of the dollar with reports from banks in the SLOOS. Over the depreciated against most currencies, in part because intermeeting period, CMBS spreads narrowed mark- higher oil prices supported the currencies of oil edly but remained elevated. exporters. Growth of residential real estate (RRE) loans on In its latest report on potential risks to the stability of banks’ books continued to be low through the first the U.S. financial system, the staff continued to judge quarter, and credit conditions stayed tight for mort- that vulnerabilities were moderate overall. In particugage borrowers with low credit scores, hard-to- lar, leverage and maturity transformation in the finandocument income, or relatively high debt-to-income cial sector were subdued relative to historical levels, ratios. A significant number of SLOOS respondents and growth of aggregate private nonfinancial-sector reportedly eased lending standards on residential credit was modest. These indicators suggested that the mortgages eligible for purchase by the government- financial system was fairly resilient, as did the absence sponsored enterprises, and a significant number also of a significant increase in funding stresses or margin experienced stronger demand overall for RRE loans calls earlier this year when prices of risky assets fell in the first quarter. Over the intermeeting period, and volatility rose sharply. Since then, prices of risky rates on 30-year fixed-rate mortgages for well- assets rebounded notably, and valuation pressures rose qualified borrowers edged down in line with yields on somewhat. Term premiums remained very low, and mortgage-backed securities and comparable-duration CRE valuations were elevated. In addition, corporate Treasury securities and were near their all-time lows debt positions were high, although the issuance of at the end of the period. low-rated debt had slowed. Financing conditions in consumer credit markets Staff Economic Outlook were little changed and remained largely accommodative in the first quarter, with student and auto In the U.S. economic forecast prepared by the staff loans continuing to be broadly available. Credit card for the April FOMC meeting, real GDP growth in

Minutes of Federal Open Market Committee Meetings | April 185 the first quarter of this year was estimated to have slowed. Growth in household spending had moderbeen much slower than in the forecast prepared for ated, although households’ real income had risen at a the March meeting, although projected real GDP solid rate and consumer sentiment remained high. growth in the second quarter was revised up a little. Since the beginning of the year, the housing sector Beyond the near term, real GDP was expected to had improved further, but business fixed investment increase slightly faster than in the previous forecast, and net exports had been soft. A range of indicators, largely reflecting a somewhat higher projected trajec- including strong job gains, pointed to additional tory for equity prices and lower assumed paths for strengthening of the labor market. Inflation had conboth longer-term interest rates and the foreign tinued to run below the Committee’s 2 percent exchange value of the dollar. The staff continued to longer-run objective, partly reflecting earlier declines project that real GDP would expand at a modestly in energy prices and falling prices of non-energy faster pace than potential output in 2016 through imports. Market-based measures of inflation com- 2018, supported primarily by increases in consumer pensation remained low; survey-based measures of spending. The unemployment rate was expected to longer-run inflation expectations were little changed, gradually decline further and to run somewhat below on balance, in recent months. Domestic and global the staff’s estimate of its longer-run natural rate over financial conditions eased over the intermeeting this period. period, the incoming news on the foreign economic outlook was generally positive, and investor senti- The staff’s forecast for inflation was little changed ment improved. from the previous projection. The staff continued to project that inflation would increase over the next Although the incoming data suggested that aggregate several years, as energy prices and the prices of non- spending in the first quarter had been weaker than energy imports were expected to begin steadily rising expected, participants continued to anticipate that this year, but inflation was still projected to be economic activity would expand at a moderate pace slightly below the Committee’s longer-run objective over the medium term and that labor market indicaof 2 percent in 2018. tors would continue to strengthen. Inflation was expected to remain low in the near term, in part The staff viewed the uncertainty around its April because of earlier declines in energy prices, but to rise projections for real GDP growth, the unemployment to 2 percent over the medium term as the transitory rate, and inflation as similar to the average of the effects of the declines in energy and import prices past 20 years. The risks to the forecast for real GDP dissipated and the labor market strengthened further. were seen as tilted to the downside, reflecting the Participants generally saw the risks stemming from staff’s assessment that neither monetary nor fiscal global economic and financial developments as havpolicy was well positioned to help the economy with- ing diminished over the intermeeting period but as stand substantial adverse shocks. In addition, while continuing to warrant close monitoring. there had been recent improvements in global financial and economic conditions, downside risks to the Participants indicated that their assessments of the forecast from developments abroad, though smaller, medium-term economic outlook had not changed remained. Consistent with the downside risk to materially since March and discussed a number of aggregate demand, the staff viewed the risks to its factors suggesting that the apparent softness in outlook for the unemployment rate as skewed to the spending in the first quarter was unlikely to persist. upside. The risks to the projection for inflation were Most pointed to the steady improvement in the labor still judged as weighted to the downside, reflecting market as an indicator that the underlying pace of the possibility that longer-term inflation expectations economic activity had likely not deteriorated as much may have edged down. as was suggested by the recent data on spending and production. Notably, solid job gains and real income Participants’ Views on Current Conditions growth, along with a high level of household wealth and the Economic Outlook and relatively upbeat consumer sentiment, were expected to support a pickup in consumer spending In their discussion of the economic situation and the after its slowdown in the first quarter. In addition, outlook, meeting participants agreed that the infor- the easing of financial conditions in recent months mation received over the intermeeting period indi- was anticipated to provide some support for concated that labor market conditions improved further sumer spending and business investment going foreven as growth in economic activity appeared to have ward. Many also thought that, as had apparently

186 103rd Annual Report | 2016 been the case in recent years, a low reading on sea- cial market turmoil in the first two months of this sonally adjusted first-quarter GDP growth could year, they and others observed that financial condipartly reflect measurement problems and, if so, tions had since improved and that consumer confiwould likely be followed by stronger GDP growth in dence remained at a relatively high level. Reports subsequent quarters. However, some participants from District contacts on consumer spending were were concerned that transitory factors may not fully generally positive. explain the softness in consumer spending or the broad-based declines in business investment in recent In the housing sector, indicators of sales and starts of months. They saw a risk that a more persistent slow- new single-family homes were up, on balance, from down in economic growth might be under way, which their fourth-quarter levels. Activity in the multifamily could hinder further improvement in labor market sector appeared to have slowed during the first quarconditions. ter, although demographic trends should continue to support this sector going forward. Business contacts Participants generally agreed that the risks to the eco- in a number of Districts noted an improvement in nomic outlook posed by global economic and finan- housing activity and a continued rise in house prices, cial developments had receded over the intermeeting although their reports showed that the pace of sales period. The public appeared to have interpreted Fed- and construction varied across regions. eral Reserve communications following the March FOMC meeting as indicating that achieving the Participants summarized survey readings and anec- Committee’s economic objectives would likely dotal reports on business conditions that were, on require a somewhat more gradual pace of increases in balance, mixed. According to several District surveys, the federal funds rate than anticipated earlier. The activity in services industries continued to expand, shift in policy expectations, along with incoming data and in some Districts, surveys and reports from busishowing that economic growth abroad picked up dur- ness contacts indicated that manufacturing activity ing the first quarter of the year, seemed to contribute had strengthened or stabilized. Motor vehicle proto the improved tone in global financial markets. Sev- duction remained at a high level. Nonetheless, manueral FOMC participants judged that the risks to the facturing industries dependent on exports or the economic outlook were now roughly balanced. How- energy sector were still experiencing weak demand. ever, many others indicated that they continued to see The low level of oil prices continued to depress activdownside risks to the outlook either because of con- ity in the domestic energy sector, and a couple of cerns that the recent slowdown in domestic spending participants suggested that, even with the ongoing might persist or because of remaining concerns cutbacks in production and potential increases in about the global economic and financial outlook. global demand, the imbalance of supply of crude oil Some participants noted that global financial mar- relative to demand could last into 2017 and lead to kets could be sensitive to the upcoming British refer- further reductions in capital investment by energy endum on membership in the European Union or to firms. One participant noted that bankruptcies were unanticipated developments associated with China’s rising among natural gas and coal producers as well management of its exchange rate. as among firms engaged in oil exploration and extraction. A few participants also reported that low While the recent data suggested markedly slower prices for agricultural commodities continued to growth in consumer spending in the first quarter strain the profitability of farming operations in their than seen in 2015, most participants expected to see a Districts. pickup in the growth rate of consumer spending in coming months in light of the still-solid fundamental Business fixed investment declined in the fourth determinants of household spending. Ongoing quarter of 2015 and appeared to have dropped furstrong gains in employment and low energy prices ther in early 2016. As noted by a number of particiwere boosting aggregate household real income, and pants, the weakness in capital spending in recent the level of household wealth was relatively high. It quarters was in part due to the ongoing contraction was noted that the slowdown in consumer spending in drilling activity and weak demand from abroad for early this year was primarily due to weaker expendi- goods manufactured in the United States. More tures for goods while outlays for services continued broadly, several participants commented that their to increase in line with recent trends. Although a business contacts had expressed considerable caution couple of participants noted that consumers’ caution about the economic outlook or had indicated that in recent months might have been the result of finan- their firms were focused on cost-cutting measures

Minutes of Federal Open Market Committee Meetings | April 187 that included delaying major expenditures, despite might decline more quickly and inflation might rise a relatively favorable financial conditions. However, bit more rapidly than expected if productivity growth some other participants were more positive about the continued to disappoint in coming quarters while hiroutlook for business spending, pointing to the opti- ing remained strong. In that case, monetary policy mism reported in a number of business surveys or to accommodation might need to be removed more rising business investment in both equipment and quickly than currently anticipated. Alternatively, concommercial structures in their Districts. tinued low productivity growth for a time might instead lead to slower-than-anticipated growth in Labor market conditions strengthened further in household income and business sales, thereby resultrecent months. Increases in nonfarm payroll employ- ing in paths for the unemployment rate and the fedment averaged almost 210,000 per month over the eral funds rate little different than currently expected. first three months of 2016. Although the unemploy- Moreover, several participants noted that if trend ment rate changed little over that period, the labor productivity growth remained permanently lower—a force participation rate moved up and the pool of development that could be quite difficult to identify potential workers, which includes the unemployed as in only a few quarters—the likely implication for well as those who would like a job but are not monetary policy would be a reduction in the longeractively looking, continued to shrink. Many partici- run equilibrium federal funds rate. pants judged that labor market conditions had reached or were quite close to those consistent with The incoming information on inflation over the intertheir interpretation of the Committee’s objective of meeting period showed that the earlier declines in maximum employment. Several of them reported energy prices and falling prices of non-energy that businesses in their Districts had seen a pickup in imports were still contributing importantly to low wages, shortages of workers in selected occupations, headline inflation. The 12-month change in core PCE or pressures to retain or train workers for hard-to-fill prices also continued to run below 2 percent, but it jobs. Many other participants continued to see scope moved up to 1.7 percent in January and February for reducing labor market slack as labor demand con- from 1.4 percent at the end of 2015. Despite the tinued to expand. In that regard, a number of par- recent rise in core inflation, some participants continticipants indicated that the recent rise in the partici- ued to see progress toward the Committee’s 2 percent pation rate was a positive development, suggesting inflation objective as likely to be gradual. They noted that a tighter labor market could potentially draw that, as they had expected, the March CPI data more individuals back into the workforce on a sus- showed that the high monthly readings on some comtained basis without adding to inflationary pressures ponents of core prices in January and February were and thus increase the productive capacity of the transitory, and that the March CPI data suggested economy. It was also noted that businesses might sat- that the 12-month change in core PCE prices likely isfy increases in labor demand in part by converting moved down in March. Several commented that the involuntary part-time jobs to full-time positions. stronger labor market still appeared to be exerting little upward pressure on wage or price inflation. Over the past five years, employment and hours Moreover, several continued to see important downworked rose relatively strongly while the pace of the side risks to inflation in light of the still-low readings expansion in output was moderate, resulting in meas- on market-based measures of inflation compensation ured productivity growth of slightly less than ½ per- and the slippage in the past couple of years in some cent per year on average. It was noted that partici- survey measures of expected longer-run inflation. pants’ projections of the longer-run growth rate of However, for many other participants, the recent real GDP, shown in the Summary of Economic Pro- developments provided greater confidence that inflajections, appeared to assume that productivity tion would rise to 2 percent over the medium term. growth would strengthen. While acknowledging Some viewed the recent firming in core inflation as uncertainty about the reasons for the slowdown in broadly based and unlikely to unwind, with several productivity growth in recent years and whether it noting recent increases in alternative measures of the would persist, many participants commented on a trend in inflation, such as the trimmed mean PCE range of possible outcomes that could result from and the median CPI, or citing evidence that wage slower-than-expected productivity growth. Some saw growth was picking up. In addition to the ongoing the possibility that, even with real GDP growth tightening of resource utilization, the recent depreremaining relatively slow, the unemployment rate ciation of the dollar and the firming in oil prices sug-

188 103rd Annual Report | 2016 gested that the downward pressures on both core and domestic demand had been disappointing, but most headline inflation from declining prices of non-oil participants judged that the slowdown in growth of imports and energy should begin to subside. domestic spending would be temporary, citing possible measurement problems and other transitory fac- U.S. and global financial conditions improved signifi- tors. Financial market conditions continued to cantly over the intermeeting period, marked by a rise improve, providing support to aggregate demand and in equity indexes, more positive risk sentiment, and a suggesting that market participants saw some reducdecline in financial market volatility. During their tion in downside risks to the outlook: Equity prices discussion of these developments, participants cited rose further, credit spreads declined somewhat, and several factors that likely contributed to the easing in the dollar depreciated over the intermeeting period. financial conditions. In the view of many FOMC Taking these developments into account, participants participants, Federal Reserve communications after generally judged that the medium-term outlook for the March FOMC meeting led financial market par- economic activity and the labor market had not ticipants to shift down their expectations concerning changed appreciably since the previous meeting. Furthe likely path of the Committee’s target for the fed- thermore, most participants continued to expect that, eral funds rate. In addition, the recent depreciation of with labor markets continuing to strengthen, the dolthe dollar and indications of a rebound of economic lar no longer appreciating, and energy prices appargrowth in China appeared to reduce pressures on the ently having bottomed out, inflation would move up renminbi. More broadly, signs of a pickup in growth to the Committee’s 2 percent objective in the in economic activity in some AFEs and emerging medium run. Asian economies other than China also appeared to contribute to the improvement in sentiment in finan- Still, with 12-month PCE inflation continuing to run cial markets. Participants generally agreed that the below the Committee’s 2 percent objective, a number easing in financial conditions in the United States of participants judged that it would be appropriate to would provide some support for consumer spending proceed cautiously in removing policy accommodaand business investment going forward and had tion. Some participants pointed to the risk that the reduced the downside risks to the outlook. Moreover, recent weak data on domestic spending could reflect a number of participants cited reports from business a loss of momentum in the economy that might hincontacts in their Districts of favorable credit condi- der further gains in the labor market and raise the tions for household and business borrowers. likelihood that inflation could fail to increase as expected. Accordingly, these participants believed Several participants pointed out that U.S. firms and that it would be important to evaluate whether financial markets had come through the period of incoming information was consistent with their elevated financial market volatility earlier in the year expectation that economic growth would pick up and looking relatively resilient. However, several noted thus support continued improvement in the labor the ongoing need to remain alert to vulnerabilities in market. In addition, a number of participants judged the financial system. In that regard, a few cited con- that the risks to the outlook for inflation remained cerns about rapidly rising prices of CRE, including tilted to the downside in light of low readings on multifamily properties, or about illiquidity of the measures of inflation compensation and the fall over assets of some mutual funds. It was also noted that the past year in some survey measures of longer-term the debt situation in Puerto Rico had deteriorated inflation expectations. Also, many participants noted further over the intermeeting period and remained that downside risks emanating from developments unresolved. To date, the situation had not led to abroad, while reduced, still warranted close monitorstrains in broader financial markets and was not ing. For these reasons, participants generally saw expected to do so. maintaining the target range for the federal funds rate at ¼ to ½ percent at this meeting and continuing Participants discussed whether their current assess- to assess developments carefully as consistent with ments of economic conditions and the medium-term setting policy in a data-dependent manner and as outlook warranted increasing the target range for the leaving open the possibility of an increase in the fedfederal funds rate at this meeting. Participants agreed eral funds rate at the June FOMC meeting. that incoming indicators regarding labor market developments continued to be encouraging. They Some participants saw limited costs to maintaining a generally concurred that data releases during the patient posture at this meeting but noted the risks— intermeeting period on components of private including potential risks to financial stability—of

Minutes of Federal Open Market Committee Meetings | April 189 waiting too long to resume the process of removing range for the federal funds rate would be warranted. policy accommodation, especially given the lags with Some participants expressed more confidence that which monetary policy affects the economy. A couple incoming data would prove broadly consistent with of participants were concerned that further post- economic conditions that would make an increase in ponement of action to raise the federal funds rate the target range in June appropriate. Some particimight confuse the public about the economic consid- pants were concerned that market participants may erations that influence the Committee’s policy deci- not have properly assessed the likelihood of an sions and potentially erode the Committee’s increase in the target range at the June meeting, and credibility. they emphasized the importance of communicating clearly over the intermeeting period how the Com- A few participants judged it appropriate to increase mittee intends to respond to economic and financial the target range for the federal funds rate at this developments. meeting, citing their assessments that downside risks associated with global economic and financial devel- Committee Policy Action opments had diminished substantially since early this year, that labor market conditions were consistent In their discussion of monetary policy for the period with the Committee’s maximum-employment objec- ahead, members judged that information received tive, and that inflation was likely to rise this year since the FOMC met in March indicated that labor toward the Committee’s 2 percent objective. Two par- market conditions had improved further even as ticipants noted that several standard policy bench- growth in economic activity had appeared to slow. marks, such as a number of interest rate rules and They noted that growth in household spending had some measures of the equilibrium real interest rate, moderated, although households’ real income had continued to imply values for the federal funds rate risen at a solid rate and consumer sentiment had well above the current target range. Such large and remained high. They also agreed that since the beginpersistent deviations of the federal funds rate from ning of the year, the housing sector had improved these benchmarks, in their view, posed a risk that the further, but business fixed investment and net exports removal of policy accommodation was proceeding had been soft. Members saw a range of recent indicatoo slowly and that the Committee might, in the tors, including strong job gains, as pointing to addifuture, find it necessary to raise the federal funds rate tional strengthening of the labor market. Members quickly to combat inflation pressures, potentially noted that inflation had continued to run below the unduly disrupting economic or financial activity. Committee’s 2 percent longer-run objective, partly Overly accommodative policy could also induce reflecting earlier declines in energy prices and falling imprudent risk-taking in financial markets, posing prices of non-energy imports. Market-based measadditional risks to achieving the Committee’s goals in ures of inflation compensation remained low. Surveythe future. based measures of longer-term inflation expectations were little changed, on balance, in recent months. Participants agreed that their ongoing assessments of the data and other incoming information, as well as With respect to the economic outlook and its implithe implications for the outlook, would determine the cations for monetary policy, members continued to timing and pace of future adjustments to the stance expect that, with gradual adjustments in the stance of of monetary policy. Most participants judged that if monetary policy, economic activity would expand at incoming data were consistent with economic growth a moderate pace and labor market indicators would picking up in the second quarter, labor market condi- continue to strengthen. Although the recent spending tions continuing to strengthen, and inflation making and production data had been disappointing, memprogress toward the Committee’s 2 percent objective, bers generally judged this weakness to be temporary, then it likely would be appropriate for the Committee though some members noted the risk that it might to increase the target range for the federal funds rate persist, potentially undermining further improvement in June. Participants expressed a range of views in the labor market. Members also continued to about the likelihood that incoming information expect inflation to remain low in the near term, in would make it appropriate to adjust the stance of part because of earlier declines in energy prices, but policy at the time of the next meeting. Several partici- to rise to 2 percent over the medium term as the tranpants were concerned that the incoming information sitory effects of declines in energy and import prices might not provide sufficiently clear signals to deter- dissipated and the labor market strengthened further. mine by mid-June whether an increase in the target In its postmeeting statement, rather than stating that

190 103rd Annual Report | 2016 global economic and financial developments contin- around that outlook. It was noted that communicaued to pose risks, the Committee decided to indicate tions could help the public understand how the Comthat it would continue to closely monitor inflation mittee might respond to incoming data and developindicators and global economic and financial devel- ments over the upcoming intermeeting period. Some opments. This change in language was intended to members expressed concern that the likelihood convey the Committee’s sense that the risks associ- implied by market pricing that the Committee would ated with global developments had diminished some- increase the target range for the federal funds rate at what since the March FOMC meeting without char- the June meeting might be unduly low. acterizing the overall balance of risks. The Committee also decided to maintain its existing Against the backdrop of its discussion of current policy of reinvesting principal payments from its conditions, the economic outlook, and the risks and holdings of agency debt and agency mortgageuncertainties surrounding the outlook, the Commit- backed securities in agency mortgage-backed securitee decided to maintain the target range for the fed- ties and of rolling over maturing Treasury securities eral funds rate at ¼ to ½ percent at this meeting. at auction, and it anticipated doing so until normal- Members generally agreed that, in light of the recent ization of the level of the federal funds rate is well weak readings on spending and production, and with under way. This policy, by keeping the Committee’s inflation below the Committee’s objective, it would holdings of longer-term securities at sizable levels, be prudent to wait for additional information bearing should help maintain accommodative financial on the medium-term outlook before deciding conditions. whether to raise the target range for the federal funds rate. One member, however, preferred to raise the tar- At the conclusion of the discussion, the Committee get range for the federal funds rate at this meeting, voted to authorize and direct the Federal Reserve noting that downside risks to the outlook had dimin- Bank of New York, until it was instructed otherwise, ished and that the outlook was for outcomes consis- to execute transactions in the SOMA in accordance tent with the Committee’s objectives. with the following domestic policy directive, to be released at 2:00 p.m.: Members again agreed that, in determining the timing and size of future adjustments to the target range “Effective April 28, 2016, the Federal Open for the federal funds rate, the Committee would Market Committee directs the Desk to underassess realized and expected economic conditions take open market operations as necessary to relative to its objectives of maximum employment maintain the federal funds rate in a target range and 2 percent inflation. This assessment would take of ¼ to ½ percent, including overnight reverse into account a wide range of information, including repurchase operations (and reverse repurchase measures of labor market conditions, indicators of operations with maturities of more than one day inflation pressures and inflation expectations, and when necessary to accommodate weekend, holireadings on financial and international developments. day, or similar trading conventions) at an offer- In light of the current shortfall of inflation from ing rate of 0.25 percent, in amounts limited only 2 percent, the Committee agreed that it would care- by the value of Treasury securities held outright fully monitor actual and expected progress toward its in the System Open Market Account that are inflation goal. The Committee expected that eco- available for such operations and by a pernomic conditions would evolve in a manner that counterparty limit of $30 billion per day. would warrant only gradual increases in the federal funds rate, and that the federal funds rate was likely The Committee directs the Desk to continue to remain, for some time, below levels that were rolling over maturing Treasury securities at aucexpected to prevail in the longer run. Regarding the tion and to continue reinvesting principal paypossibility of adjustments in the stance of policy at ments on all agency debt and agency mortgagethe next meeting, members generally judged it appro- backed securities in agency mortgage-backed priate to leave their policy options open and maintain securities. The Committee also directs the Desk the flexibility to make this decision based on how the to engage in dollar roll and coupon swap transincoming data and developments shaped their out- actions as necessary to facilitate settlement of look for the labor market and inflation as well as the Federal Reserve’s agency mortgage-backed their evolving assessments of the balance of risks securities transactions.”

Minutes of Federal Open Market Committee Meetings | April 191 The vote also encompassed approval of the statement cent inflation. This assessment will take into below to be released at 2:00 p.m.: account a wide range of information, including measures of labor market conditions, indicators “Information received since the Federal Open of inflation pressures and inflation expectations, Market Committee met in March indicates that and readings on financial and international labor market conditions have improved further developments. In light of the current shortfall of even as growth in economic activity appears to inflation from 2 percent, the Committee will have slowed. Growth in household spending has carefully monitor actual and expected progress moderated, although households’ real income toward its inflation goal. The Committee expects has risen at a solid rate and consumer sentiment that economic conditions will evolve in a manremains high. Since the beginning of the year, ner that will warrant only gradual increases in the housing sector has improved further but the federal funds rate; the federal funds rate is business fixed investment and net exports have likely to remain, for some time, below levels that been soft. A range of recent indicators, includ- are expected to prevail in the longer run. Howing strong job gains, points to additional ever, the actual path of the federal funds rate will strengthening of the labor market. Inflation has depend on the economic outlook as informed by continued to run below the Committee’s 2 per- incoming data. cent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of The Committee is maintaining its existing policy non-energy imports. Market-based measures of of reinvesting principal payments from its holdinflation compensation remain low; survey- ings of agency debt and agency mortgagebased measures of longer-term inflation expec- backed securities in agency mortgage-backed tations are little changed, on balance, in recent securities and of rolling over maturing Treasury months. securities at auction, and it anticipates doing so until normalization of the level of the federal Consistent with its statutory mandate, the Com- funds rate is well under way. This policy, by mittee seeks to foster maximum employment keeping the Committee’s holdings of longerand price stability. The Committee currently term securities at sizable levels, should help expects that, with gradual adjustments in the maintain accommodative financial conditions.” stance of monetary policy, economic activity will expand at a moderate pace and labor mar- Voting for this action: Janet L. Yellen, William C. ket indicators will continue to strengthen. Infla- Dudley, Lael Brainard, James Bullard, Stanley tion is expected to remain low in the near term, Fischer, Loretta J. Mester, Jerome H. Powell, Eric in part because of earlier declines in energy Rosengren, and Daniel K. Tarullo. prices, but to rise to 2 percent over the medium term as the transitory effects of declines in Voting against this action: Esther L. George. energy and import prices dissipate and the labor market strengthens further. The Committee con- Ms. George dissented because she believed that a tinues to closely monitor inflation indicators and 25 basis point increase in the target range for the fedglobal economic and financial developments. eral funds rate was appropriate at this meeting. Potential downside risks to the economic outlook Against this backdrop, the Committee decided had diminished since the March FOMC meeting, to maintain the target range for the federal funds and the modal outlook was for economic growth, rate at ¼ to ½ percent. The stance of monetary employment, and inflation outcomes consistent with policy remains accommodative, thereby support- the Committee’s statutory objectives. She believed ing further improvement in labor market condi- that monetary policy should respond to these develtions and a return to 2 percent inflation. opments by gradually removing accommodation and noted that several frameworks for assessing the In determining the timing and size of future appropriate stance of monetary policy, such as preadjustments to the target range for the federal scriptions from various policy rules and some estifunds rate, the Committee will assess realized mates of equilibrium interest rates, also suggested and expected economic conditions relative to its that a reduction in monetary policy accommodation objectives of maximum employment and 2 per- would be appropriate.

192 103rd Annual Report | 2016 Consistent with the Committee’s decision to leave the Notation Vote target range for the federal funds rate unchanged, the Board of Governors took no action to change the By notation vote completed on April 5, 2016, the interest rates on reserves or discount rates. Committee unanimously approved the minutes of the Committee meeting held on March 15–16, 2016. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, June 14–15, Brian F. Madigan 2016. The meeting adjourned at 10:05 a.m. on Secretary April 27, 2016.

Minutes of Federal Open Market Committee Meetings | June 193 Meeting Held on June 14–15, 2016 Thomas Laubach Economist A joint meeting of the Federal Open Market Com- David W. Wilcox mittee and the Board of Governors was held in the Economist offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, Thomas A. Connors, Michael P. Leahy, June 14, 2016, at 1:00 p.m. and continued on David E. Lebow, Jonathan P. McCarthy, Wednesday, June 15, 2016, at 9:00 a.m.1 Stephen A. Meyer, Ellis W. Tallman, Christopher J. Waller, 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. Frierson Secretary of the Board, Office of the Secretary, James Bullard Board of Governors Stanley Fischer Michael S. Gibson Esther L. George Director, Division of Banking Supervision and Regulation, Board of Governors Loretta J. Mester James A. Clouse Jerome H. Powell Deputy Director, Division of Monetary Affairs, Eric Rosengren Board of Governors Daniel K. Tarullo Andreas Lehnert Deputy Director, Division of Financial Stability, Charles L. Evans, Patrick Harker, Board of Governors Robert S. Kaplan, and Neel Kashkari Alternate Members of the Federal Open Market David Bowman, Andrew Figura, Ann McKeehan, Committee David Reifschneider, and Stacey Tevlin Special Advisers to the Board, Office of Board Jeffrey M. Lacker, Dennis P. Lockhart, Members, Board of Governors and John C. Williams Presidents of the Federal Reserve Banks of Trevor A. Reeve Richmond, Atlanta, and San Francisco, 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 Fabio M. Natalucci Assistant Secretary Senior Associate Director, Division of Monetary Affairs, Board of Governors Michelle A. Smith Assistant Secretary Beth Anne Wilson Senior Associate Director, Division of International Scott G. Alvarez Finance, Board of Governors General Counsel Michael T. Kiley Steven B. Kamin Senior Adviser, Division of Research and Statistics, Economist and Senior Associate Director, Division of Financial 1 The Federal Open Market Committee is referenced as the “FOMC” and the “Committee” in these minutes. Stability, Board of Governors

194 103rd Annual Report | 2016 Antulio N. Bomfim, Ellen E. Meade, David Altig, Kartik B. Athreya, and Jeff Fuhrer and Joyce K. Zickler Executive Vice Presidents, Federal Reserve Banks of Senior Advisers, Division of Monetary Affairs, Atlanta, Richmond, and Boston, respectively Board of Governors Stephanie Heller, Evan F. Koenig, and Spencer Krane Jeremy B. Rudd Senior Vice Presidents, Federal Reserve Banks of Senior Adviser, Division of Research and Statistics, New York, Dallas, and Chicago, respectively Board of Governors Roc Armenter, Sarah K. Bell, Òscar Jordà, Shaghil Ahmed and George A. Kahn Deputy Associate Director, Division of International Vice Presidents, Federal Reserve Banks of Finance, Board of Governors Philadelphia, New York, San Francisco, and Kansas City, respectively Christopher J. Gust2 and Jason Wu Cristina Arellano Assistant Directors, Division of Monetary Affairs, Senior Research Economist, Federal Reserve Bank of Board of Governors Minneapolis Paul A. Smith Assistant Director, Division of Research and Developments in Financial Markets and Statistics, Board of Governors Open Market Operations Eric C. Engstrom and Patrick E. McCabe The manager of the System Open Market Account Advisers, Division of Research and Statistics, (SOMA) reported on developments in domestic and Board of Governors foreign financial markets during the period since the Committee met on April 26–27, 2016. Market partici- Penelope A. Beattie3 pants’ expectations for a firming of monetary policy Assistant to the Secretary, Office of the Secretary, at the June FOMC meeting rose considerably in the Board of Governors middle of the period, largely in response to monetary Brett Berger policy communications, but those expectations subse- Senior Economic Project Manager, Division of quently fell sharply following the release of labor mar- International Finance, Board of Governors ket data for May. Nominal yields on Treasury securities declined over the period. Forward measures of David H. Small inflation compensation derived from yields on nomi- Project Manager, Division of Monetary Affairs, nal and inflation-indexed Treasury securities fell Board of Governors despite an appreciable increase in crude oil prices, a Wendy E. Dunn development that contrasted with the positive correla- Principal Economist, Division of Research and tion between these variables that had been evident for Statistics, Board of Governors some time. The manager also noted that bond yields globally had declined to very low levels and discussed Marcelo Rezende some of the possible reasons for the drop. Actions by Principal Economist, Division of Monetary Affairs, investors to shift their portfolios away from very low- Board of Governors yielding foreign sovereign debt were cited as adding to the downward pressure on U.S. yields. The manager Edward Herbst and Hiroatsu Tanaka also reviewed the apparent effects on financial markets Senior Economists, Division of Monetary Affairs, of changes in the perceived odds that the United Board of Governors Kingdom would vote in a referendum on June 23 to Randall A. Williams leave the European Union. Information Manager, Division of Monetary Affairs, Board of Governors In domestic money markets, the effective federal funds rate once again stayed close to the middle of David Sapenaro the FOMC’s ¼ to ½ percent target range over the First Vice President, Federal Reserve Bank of intermeeting period except on month-ends. Usage of St. Louis the System’s overnight reverse repurchase agreement facility remained low. Market participants antici- 2 Attended Wednesday session only. pated that changes to the regulation of money mar- 3 Attended Tuesday session only. ket mutual funds that will take effect later in the year

Minutes of Federal Open Market Committee Meetings | June 195 could lead to some increase in usage of the facility. The unemployment rates for African Americans and Finally, the manager briefed the Committee on vari- for Hispanics stayed above the rate for whites, ous efforts, including small-value tests of System although the differentials in jobless rates across the facilities, to enhance operational readiness. different groups were similar to those before the most recent recession. The share of African American and By unanimous vote, the Committee ratified the Hispanic workers employed part time for economic Desk’s domestic transactions over the intermeeting reasons remained higher than for whites, and the gap period. There were no intervention operations in for- in these rates was wider than in the years just before eign currencies for the System’s account during the the most recent recession. intermeeting period. Total industrial production (IP) rose in April, principally reflecting a rebound in the output of utilities Staff Review of the Economic Situation following a couple of unseasonably warm winter months as well as a moderate increase in manufactur- The information reviewed for the June 14–15 meeting ing production. Meanwhile, mining output continued indicated that the pace of improvement in labor mar- to contract as a result of further declines in drilling ket conditions slowed in April and May but that real activity, a slower pace of crude oil extraction, and a gross domestic product (GDP) appeared to be rising continued pullback in coal production. A variety of faster than in the first quarter. Consumer price infla- indicators—including manufacturing production tion continued to run below the Committee’s longer- worker hours, motor vehicle assemblies, and oil and run objective of 2 percent, restrained in part by ear- gas extraction and drilling activity—suggested that lier decreases in energy prices and in prices of non- IP likely declined in May. Automakers’ assembly energy imports. Survey-based measures of longer-run schedules and mixed readings on other indicators of inflation expectations were mixed in recent months, manufacturing production, such as new orders from while market-based measures of inflation compensa- national and regional manufacturing surveys, pointed tion declined from levels that were already low. to only subdued gains in factory output over the next few months. Total nonfarm payroll employment gains slowed in April and May, even after adjusting for the effects of Growth in real personal consumption expenditures a strike at a large telecommunications company. The (PCE) appeared to be picking up in the second quarunemployment rate dropped to 4.7 percent in May, ter. The components of the nominal retail sales data partly reflecting an unusually large number of unem- used by the Bureau of Economic Analysis to conployed persons exiting the labor force. Over the first struct its estimate of PCE rose at a solid pace in two months of the second quarter, both the labor April and May, and sales of light motor vehicles force participation rate and the employment-to- rebounded after dipping in March. The apparent population ratio moved down on net. The share of pickup in real PCE growth was consistent with recent workers employed part time for economic reasons readings on key factors that influence consumer rose noticeably in May. Although the rate of private- spending. Gains in real disposable personal income sector job openings remained elevated, the rate of continued to be solid in March and April, and househires declined in both March and April and the rate holds’ net worth was boosted by further strong of quits was unchanged. The four-week moving aver- increases in home values through April. Also, conage of initial claims for unemployment insurance sumer sentiment as measured by the University of benefits moved up a little, on net, from late April to Michigan Surveys of Consumers remained upbeat in early June but was still at a low level. Labor produc- early June. tivity growth remained slow over the four quarters ending in the first quarter of 2016. Measures of labor Recent information on housing activity was broadly compensation continued to rise at a moderate pace consistent with a continued gradual recovery in this on balance: Compensation per hour in the nonfarm sector. Starts for new single-family homes increased business sector increased 3¾ percent over the four in April but were below the average pace in the first quarters ending in the first quarter, the employment quarter, and building permit issuance remained cost index for private workers rose 1¾ percent over essentially flat at the level that prevailed since late last the 12 months ending in March, and average hourly year. The pace of starts for multifamily units moved earnings for all employees increased 2½ percent over up in April and was faster than in the first quarter. the 12 months ending in May. Sales of both new and existing homes rose in April.

196 103rd Annual Report | 2016 Real private expenditures for business equipment and fell to its lowest level on record in early June, but intellectual property appeared to be relatively flat other measures of such expectations—including early in the second quarter after declining sharply in those from the Survey of Professional Forecasters the previous quarter. Nominal shipments of nonde- and from the Desk’s Survey of Primary Dealers and fense capital goods excluding aircraft edged up in Survey of Market Participants—were generally little April, and forward-looking indicators, such as new changed, on balance, in recent months. orders for these capital goods and recent readings from national and regional surveys of business condi- Foreign real GDP growth picked up in the first quartions, suggested little change in business equipment ter, supported by relatively robust increases in spending in the near term. Firms’ nominal spending Canada, the euro area, Japan, and Mexico. However, for nonresidential structures excluding drilling and the pace of growth appeared to slow in many foreign mining was little changed, on net, in March and economies in the second quarter, although in some April. The number of oil and gas rigs in operation, cases as a result of what were likely to be temporary an indicator of spending for structures in the drilling disruptions, including wildfires in Canada and an and mining sector, fell through late May but edged earthquake in Japan. In the United Kingdom, uncerup in early June. tainty about the outcome of the referendum on exit from the European Union seemed to be holding Total real government purchases rose modestly in the down investment. In contrast, indicators for emergfirst quarter and appeared to be increasing at about ing Asia, including China, suggested that economic the same pace in the second quarter. Nominal outlays growth picked up in the second quarter. Inflation for defense in April and May pointed to an increase remained low in the advanced foreign economies in real federal purchases in the second quarter, after (AFEs), in part reflecting previous declines in energy such purchases had declined in the first quarter. In prices. Inflation also continued to be subdued in most contrast, real state and local government purchases emerging market economies (EMEs). seemed to be edging down in the second quarter; the payrolls of these governments were little changed, on Staff Review of the Financial Situation net, in April and May, and their nominal spending for construction declined in April. Domestic financial market conditions remained accommodative over the intermeeting period. Equity The U.S. international trade deficit narrowed sub- price indexes and corporate bond spreads were little stantially in March, with a sharp decline in imports changed, on net, and, in aggregate, corporations conmore than offsetting a fall in exports. The March tinued to tap credit markets at a solid pace. Credit data, together with revised estimates for earlier also remained broadly available to households, except months, suggested that real exports were about flat in for higher-risk borrowers in some markets. The the first quarter while imports fell slightly. In April, expected near-term path of the federal funds rate the deficit widened as imports recovered somewhat, implied by market quotes varied notably over the but it remained narrower than its first-quarter intermeeting period. On balance, it flattened, largely average. in response to the disappointing May employment report and growing concerns among investors about Total U.S. consumer prices, as measured by the PCE the British referendum on membership in the Europrice index, increased about 1 percent over the pean Union. The flatter expected path of the federal 12 months ending in April, partly restrained by ear- funds rate, along with an apparent decline in global lier declines in consumer energy prices. Core PCE risk sentiment early in the period, contributed to an price inflation, which excludes changes in food and appreciable reduction in longer-term Treasury yields. energy prices, was a little above 1½ percent over the same 12-month period, held down in part by Market-based estimates of the probability of a hike decreases in the prices of non-energy imports over in the federal funds rate at the June FOMC meeting much of this period and the pass-through of the were variable during the intermeeting period. The declines in energy prices to prices of other goods and probability of an increase in June fell to near zero in services. Over the 12 months ending in April, total early May in response to incoming economic data, consumer prices as measured by the consumer price jumped to about 30 percent after the release of the index (CPI) also rose about 1 percent, while core CPI April FOMC minutes and other Federal Reserve inflation was a little above 2 percent. The Michigan communications, and dropped again to near zero survey measure of longer-run inflation expectations after the May employment report. The expected path

Minutes of Federal Open Market Committee Meetings | June 197 of the federal funds rate for the medium term implied (C&I) loans on banks’ books remained strong in by market quotes declined somewhat on net. The April and May, particularly at large banks. Following average probability assigned by respondents to the significant declines in the first quarter of 2016, gross Desk’s June Survey of Primary Dealers and Survey issuance of leveraged loans increased slightly in April of Market Participants was near zero for a rate hike and May, as refinancing was reportedly boosted by in June and around 20 percent for a rate increase in lower loan spreads. Equity issuance by nonfinancial July. The median respondent in each survey indicated firms through initial public offerings remained subthat the most likely outcome was only one hike in dued over the intermeeting period. Meanwhile, non- 2016, down from two in the April surveys. financial firms continued to repurchase their shares at a brisk pace in the first quarter, and dividends The nominal Treasury yield curve flattened, on net, stayed near record levels. over the intermeeting period, mainly reflecting declines in longer-term rates; the flattening left the Recent developments pointed to some decline in the spread between yields on 2- and 10-year Treasury credit quality of nonfinancial firms. The percentage securities near its lowest level since 2007. Although a of C&I loans entering delinquency or being charged significant portion of the declines in yields occurred off increased further in the first quarter, the default following the release of the May employment report, rate of corporate bonds moved up in April, and yields at longer maturities had begun drifting down downgrades of nonfinancial bonds significantly outearlier in the period, consistent with an apparent dete- paced upgrades in May. Expected year-ahead default rioration in global risk sentiment. Yields moved lower rates for nonfinancial firms remained moderately late in the period amid growing concerns about the elevated relative to previous expansions, while those upcoming British referendum. Some market partici- for oil companies continued to be high. pants attributed the decline in Treasury yields in part to heavy demand from foreign investors faced with Financing conditions for commercial real estate extraordinarily low yields on foreign sovereign securi- remained fairly accommodative. All major categories ties. Inflation compensation based on Treasury of commercial real estate loans on banks’ books Inflation-Protected Securities (TIPS) decreased, par- increased briskly during April and May. However, ticularly at longer tenors. Measures of inflation com- spreads on commercial mortgage-backed securities pensation based on inflation swaps also declined, but (CMBS) stayed elevated, continuing to depress less than TIPS-based measures, consistent with anec- CMBS issuance. dotal reports suggesting that a portion of the declines in TIPS-based measures might have been driven by On balance, credit conditions in municipal bond marelevated demand for longer-term nominal Treasury kets continued to be stable. Yield spreads on general securities. obligation municipal bonds were little changed, and gross issuance remained solid. The default by Puerto Broad stock price indexes moved within narrow Rico’s Government Development Bank on debt payranges but were modestly lower, on net, over the ments due in early May was widely expected and elicintermeeting period. However, one-month-ahead ited limited reaction in broader municipal bond option-implied volatility on the S&P 500 index—the markets. VIX—rose notably from fairly low levels and ended the period close to its historical median level. Spreads Conditions in consumer credit markets were little of 10-year triple-B-rated corporate bond yields over changed and generally remained accommodative. those on comparable-maturity Treasury securities Consumer loan balances continued to increase at a were little changed on balance. High-yield spreads robust pace in recent months, with year-over-year widened, mainly for firms outside of the energy sec- growth in credit card balances outstanding continuing tor; spreads on bonds for firms in the energy sector to trend upward. Credit in mortgage markets stayed narrowed, likely in response to rising oil prices. tight for borrowers with low credit scores, hard-todocument income, or high debt-to-income ratios. Overall financing conditions for nonfinancial firms Interest rates on 30-year fixed-rate mortgages declined improved a bit over the intermeeting period, remain- and continued to be low by historical standards. ing accommodative. Amid still-low yields, bond issuance by investment-grade corporations rose to a Over the intermeeting period, developments in global robust pace in May, and speculative-grade issuance financial markets were driven in large part by shifting also picked up. Growth of commercial and industrial views on the expected path of U.S. monetary policy

198 103rd Annual Report | 2016 and by fluctuating expectations about the outcome of this year. However, inflation was still projected to be the U.K. vote on membership in the European slightly below the Committee’s longer-run objective Union. The exchange value of the U.S. dollar rose in of 2 percent in 2018. the middle of the intermeeting period along with expectations for less accommodative Federal Reserve The staff viewed the uncertainty around its April monetary policy. However, the dollar partially projections for real GDP growth, the unemployment retraced these increases following the much weaker- rate, and inflation as similar to the average of the than-expected U.S. employment report for May, fin- past 20 years. The risks to the forecast for real GDP ishing the period a bit stronger against the currencies were seen as tilted to the downside, reflecting the of the AFEs and about 3 percent higher against staff’s assessment that neither monetary nor fiscal EME currencies. In contrast to its changes against policy was well positioned to help the economy withmost currencies, the dollar depreciated against the stand substantial adverse shocks. In addition, the Japanese yen, in large part because of the unexpected staff continued to see the risks to the forecast from decision by the Bank of Japan not to ease policy fur- developments abroad as skewed to the downside. ther at its April meeting. AFE sovereign yields Consistent with the downside risks to aggregate declined, with U.K. yields in particular being demand, the staff viewed the risks to its outlook for weighed down following polls showing an increase in the unemployment rate as tilted to the upside. The support for the “leave” vote in the upcoming referen- risks to the projection for inflation were still judged dum. Decreases in equity indexes in the AFEs, par- as weighted to the downside, reflecting the possibility ticularly in Europe, also reportedly reflected concerns that longer-term inflation expectations may have about the possibility of a successful “leave” vote. edged down. Most EME equity markets also edged lower. Participants’ Views on Current Conditions Staff Economic Outlook and the Economic Outlook In the U.S. economic forecast prepared by the staff In conjunction with this FOMC meeting, members for the June FOMC meeting, real GDP growth was of the Board of Governors and Federal Reserve estimated to have been faster in the first quarter than Bank presidents submitted their projections of the in the April forecast, and the incoming information most likely outcomes for real GDP growth, the was consistent with a moderate pickup in GDP unemployment rate, inflation, and the federal funds growth in the second quarter. Real GDP was pro- rate for each year from 2016 through 2018 and over jected to rise a little slower in the second half of this the longer run.4 Each participant’s projections were year than in the previous forecast and to increase at conditioned on his or her judgment of appropriate about the same pace thereafter; the small boosts to monetary policy. The longer-run projections reprereal GDP growth implied by a lower assumed path sented each participant’s assessment of the rate to for interest rates and by a slightly stronger trajectory which each variable would be expected to converge, for home values were essentially offset by restraint over time, under appropriate monetary policy and in from higher projected paths for the foreign exchange the absence of further shocks to the economy. These value of the dollar and for oil prices. The staff con- projections and policy assessments are described in tinued to forecast that real GDP would expand at a the Summary of Economic Projections, which is an modestly faster pace than potential output in 2016 addendum to these minutes. through 2018, supported primarily by increases in consumer spending. The unemployment rate was In their discussion of the economic situation and the expected to remain relatively flat over the second half outlook, meeting participants agreed that informaof the year and then to gradually decline further; tion received over the intermeeting period indicated over this period, the unemployment rate was pro- that the pace of improvement in the labor market jected to run somewhat below the staff’s estimate of had slowed while growth in economic activity its longer-run natural rate. appeared to have picked up. Although the unemployment rate had declined, job gains had diminished. The staff’s forecast for inflation was little changed Growth in household spending had strengthened. from the previous projection. The staff continued to Since the beginning of the year, the housing sector project that inflation would increase over the next several years, as energy prices and the prices of non- 4 One participant did not submit longer-run projections in conenergy imports were expected to begin steadily rising junction with the June 2016 FOMC meeting.

Minutes of Federal Open Market Committee Meetings | June 199 had continued to improve and the drag from net Those indicators were mixed regarding the pace of exports appeared to have lessened, but business fixed economic activity within the manufacturing sector. investment had been soft. Inflation had continued to Some of the weakness in manufacturing activity was run below the Committee’s 2 percent longer-run linked to the effects of earlier declines in oil prices on objective, partly reflecting earlier declines in energy firms in the energy sector and to previous increases in prices and in prices of non-energy imports. Market- the exchange value of the dollar, which had adversely based measures of inflation compensation declined; affected exporters. But manufacturing activity was most survey-based measures of longer-term inflation judged to have stabilized in a couple of Districts, and expectations were little changed, on balance, in recent contacts there were optimistic about further improvemonths. ment in the months ahead. It was noted that the recent increase in crude oil prices had improved the Participants generally expected that, with gradual outlook for the energy sector. However, a couple of adjustments in the stance of monetary policy, eco- participants observed that financial strains caused by nomic activity would expand at a moderate pace and previous declines in energy prices had continued for labor market indicators would strengthen. Inflation firms or financial institutions in their Districts, and was expected to remain low in the near term, in part such difficulties were seen as likely to persist absent because of earlier declines in energy prices, but to rise further increases in energy prices. Regarding the serto 2 percent over the medium term as the transitory vice sector, a few participants commented that activeffects of past declines in energy and import prices ity and hiring continued to expand in their Districts. dissipated and the labor market strengthened further. The near-term outlook for farm income remained Participants generally agreed that the Committee weak despite recent increases in the futures prices of should continue to closely monitor inflation indica- some agricultural commodities. tors and global economic and financial developments. Available indicators suggested that the softness in business fixed investment since late last year persisted Growth of consumer spending appeared to have early in the second quarter. While weakness in the picked up from its slow pace in the first quarter. drilling and mining sector was attributable to the ear- Retail sales posted strong gains in April and May, lier declines in oil prices, participants identified a and sales of light motor vehicles moved back up. At variety of potential causes of the broader weakness the time of the April meeting, most participants had in investment spending, including a slowdown in coranticipated a rebound in consumer spending in light porate profits, concern about prospects for economic of the still-solid fundamental determinants of house- growth, heightened uncertainty regarding the future hold spending. Some participants indicated that con- course of domestic regulatory and fiscal policies, and sumption was likely to continue being supported by a persistent reluctance on the part of firms to underthese factors, which included ongoing gains in take new projects in the wake of the financial crisis. income, robust household balance sheets, and the Some participants mentioned that the sluggishness in positive assessment of current economic conditions business investment could portend a broader ecothat was evident in recent surveys of consumers. nomic slowdown. A couple of participants also noted However, a few participants expressed caution about that elevated inventory levels could be a drag on ecothe outlook for consumer expenditures, noting that nomic growth in the near term. However, particislower increases in employment and higher energy pants also cited factors that could lead to a pickup in prices could restrain spending. business spending, including the recent turnaround in energy prices and the greater optimism on the part of The housing sector continued to improve since the firms indicated by surveys of businesses and anecbeginning of the year. Reports from a number of dotal reports in some Districts. participants indicated that single-family construction was strengthening and house prices were rising in The employment report for May showed considermost parts of their Districts. However, some areas ably weaker growth in payrolls than had been that were affected by the slowdown in the energy sec- expected, and gains in previous months were revised tor experienced house price declines or increases in down. Although the unemployment rate fell in May, mortgage delinquency rates. a drop in labor force participation accounted for the decline. Participants discussed a range of interpreta- Participants summarized survey readings and anec- tions of these data. Many participants observed that, dotal reports on business conditions in their Districts. because of transitory factors, such as statistical noise

200 103rd Annual Report | 2016 and the effects of a strike in the telecommunications moved up notably. Most participants expected to see industry, the reported rate of payroll job growth continued progress toward the Committee’s 2 percent likely understated its underlying pace; however, many inflation objective. They viewed the firming in some participants thought that the underlying pace had measures of core inflation, the evidence that wage slowed some from that of previous months. Some growth was picking up, the ongoing tightening of noted that other indicators did not corroborate a resource utilization, the recent firming in oil prices, material weakening of labor market conditions. and the stabilization of the foreign exchange value of These indicators included a number of regional sur- the dollar this year as factors likely to boost inflation veys of labor market conditions, relatively low levels over time. However, other participants were less conof initial claims for unemployment insurance, surveys fident that inflation would return to its target level of business hiring plans, and positive views of labor over the medium term. They thought that progress market conditions in recent consumer surveys. In could be very slow, particularly in light of the likeliaddition, a few participants commented that the hood that tighter resource utilization may impart movements in labor force participation in recent only modest upward pressure on prices. They also months were, on balance, consistent with its secular saw important downside risks, including persistent downtrend. In contrast, some noted that the lower disinflationary pressures from very low inflation and rate of payroll gains could instead be indicative of a weak economic growth abroad as well as the softenbroader slowdown in growth of economic activity ing in some survey-based measures of longer-term that was also evidenced by other downbeat labor inflation expectations and market-based measures of market indicators, such as a decline in the diffusion inflation compensation. indexes of industry payrolls, an increase in the number of workers reporting that they were working part Global financial conditions had improved since eartime for economic reasons, or the recent sharp drop lier in the year, and recent data on net exports sugin labor force participation. Finally, a few partici- gested that the drag on domestic economic activity pants suggested that the weak employment growth from the external sector had abated somewhat. Still, may instead reflect supply constraints associated with participants generally agreed that global economic a general tightening of labor market conditions. and financial developments should continue to be These participants saw the rising trend in wages, busi- monitored closely. Some participants indicated that ness reports of reduced worker availability, and high prospects for economic activity in many foreign rate of job openings as supporting this interpreta- economies appeared to be subdued, that global inflation. Others thought it unlikely that such constraints tion and interest rates remained very low by historical would have become evident so abruptly. standards, and that recurring bouts of global financial market instability remained a risk. Most partici- Almost all participants judged that the surprisingly pants noted that the upcoming British referendum on weak May employment report increased their uncer- membership in the European Union could generate tainty about the outlook for the labor market. Even financial market turbulence that could adversely so, many remarked that they were reluctant to change affect domestic economic performance. Some also their outlook materially based on one economic data noted that continued uncertainty regarding the outrelease. Participants generally expected to see a look for China’s foreign exchange policy and the resumption of monthly gains in payroll employment relatively high levels of debt in China and some other that would be sufficient to promote continued EMEs represented appreciable risks to global finanstrengthening of the labor market. However, some cial stability and economic performance. noted that with labor market conditions at or near those consistent with maximum employment, it In light of participants’ updates to their economic would be reasonable to anticipate that gains in pay- projections, they discussed their current assessments roll employment would soon moderate from the pace of the appropriate trajectory of monetary policy over seen over the past few years. the medium term. Most still expected that the appropriate target range for the federal funds rate associ- Inflation continued to run below the Committee’s ated with their projections of further progress toward 2 percent longer-run objective, partly reflecting ear- the Committee’s statutory objectives would rise lier declines in energy prices and in prices of non- gradually in coming years. However, some noted that energy imports. Core PCE price inflation registered their forecasts were now consistent with a shallower an increase of 1.6 percent for the 12 months ending path than they had expected at the time of the March in April, while recent readings on retail energy prices meeting. Many participants commented that the level

Minutes of Federal Open Market Committee Meetings | June 201 of the federal funds rate consistent with maintaining labor utilization. They also pointed out that core trend economic growth—the so-called neutral rate— inflation had begun to move up and that the transiappeared to be lower currently or was likely to be tory factors that had been holding down headline lower in the longer run than they had estimated ear- inflation were receding. Several of these participants lier. While recognizing that the longer-run neutral expressed concern that a delay in resuming further rate was highly uncertain, many judged that it would gradual increases in the federal funds rate would likely remain low relative to historical standards, held increase the risks to financial stability or would raise down by factors such as slow productivity growth the potential for overshooting the Committee’s objecand demographic trends. Several noted that in the tives; such an overshooting might require a rapid prevailing circumstances of considerable uncertainty removal of policy accommodation at some point in about the neutral federal funds rate, the Committee the future, which could entail significant risks for U.S. could better gauge the effects of increases in the fed- financial markets and the economy. eral funds rate on the economy if it proceeded gradually in adjusting policy. However, some other participants were uncertain whether economic conditions would soon warrant an Participants weighed a number of considerations in increase in the target range for the federal funds rate. assessing the conditions under which it would be Several of them noted downside risks to the outlook appropriate to increase the target range for the federal for growth in economic activity and for further funds rate. Most participants indicated that they made improvement in labor market conditions, including only small changes to their forecasts for achieving and the possibility that the sharp slowdown in employmaintaining the Committee’s objectives of maximum ment gains and the continued weakness in business employment and 2 percent inflation over the medium fixed investment signaled a downshift in economic term. Several noted that the fundamentals underlying growth, as well as the potential for global economic their forecasts remained solid, with several mention- or financial shocks. Moreover, several of them woring, in particular, that financial conditions were ried about the declines in measures of inflation comaccommodative and household balance sheets had pensation and in some survey-based measures of improved. In evaluating recent economic information, inflation expectations and suggested that monetary participants generally agreed that it was advisable to policy may need to remain accommodative for some avoid overreacting to one or two labor market reports; time in order to move inflation closer to 2 percent on however, the implications of the recent data on labor a sustained basis. A few pointed out that with inflamarket conditions for the economic outlook were tion likely to remain low for some time and to rise uncertain. Most judged that they would need to accu- only gradually, maintaining an accommodative mulate additional information on the labor market, stance of policy could extend the strengthening of production, and spending to help clarify how the the labor market. In addition, several participants economy was evolving in order to evaluate whether observed that because short-term interest rates were the stance of monetary policy should be adjusted. In still near zero, monetary policy could, if necessary, addition, participants generally thought that it would respond more effectively to surprisingly strong inflabe prudent to wait for the outcome of the upcoming tionary pressures in the future than to a weakening in referendum in the United Kingdom on membership in the labor market and falling inflation. the European Union in order to assess the consequences of the vote for global financial market condi- A number of participants emphasized that the Comtions and the U.S. economic outlook. mittee’s approach to policy-setting was necessarily data dependent given the uncertainties associated Most participants judged that, in the absence of sig- with medium-term forecasts of economic activity nificant economic or financial shocks, raising the tar- and, accordingly, with the appropriate policy path get range for the federal funds rate would be appropri- over the medium term. It was noted that their expecate if incoming information confirmed that economic tations for the federal funds rate did not represent a growth had picked up, that job gains were continuing preset plan and could change as incoming informaat a pace sufficient to sustain progress toward the tion influenced their views of the economic outlook Committee’s maximum-employment objective, and and the risks associated with it. Several participants that inflation was likely to rise to 2 percent over the expressed concern that the Committee’s communicamedium term. Some participants viewed a broad tions had not been fully effective in informing the range of labor market indicators as well as the recent public how incoming information affected the Comfirming in wages as consistent with a high level of mittee’s view of the economic outlook, its degree of

202 103rd Annual Report | 2016 confidence in the outlook, or the implications for the number of individuals who were working part time trajectory of monetary policy. for economic reasons in recent months suggested a possible downshift in the pace of improvement in the Committee Policy Action labor market. In their consideration of monetary policy for the An additional factor in the Committee’s policy delibperiod ahead, members judged that the information erations was the upcoming U.K. referendum on received since the Committee met in April indicated membership in the European Union. Members noted that the pace of improvement in labor market condi- the considerable uncertainty about the outcome of tions had slowed in recent months while growth in the vote and its potential economic and financial economic activity appeared to have picked up from market consequences. They indicated that they would the low rates recorded in the fourth quarter of 2015 closely monitor developments associated with the refand the first quarter of 2016. Although the unemploy- erendum as well as other global economic and finanment rate had declined over the intermeeting period, cial developments that could affect the U.S. outlook. job gains had diminished. After only a modest increase early in the year, growth in household spend- Members expected inflation to remain low in the ing had strengthened in recent months. Since the near term, in part because of earlier declines in beginning of the year, the housing sector had contin- energy prices, but most anticipated that inflation ued to improve and the drag from net exports had would rise to 2 percent over the medium term as the lessened, but business fixed investment had been soft. transitory effects of past declines in energy and Inflation continued to run below the Committee’s import prices dissipated and the labor market 2 percent objective, partly reflecting declines in energy strengthened further. Although headline inflation prices and in prices of non-energy imports. Market- continued to run below the Committee’s objective, based measures of inflation compensation declined some members observed that core inflation had risen, over the intermeeting period; most survey-based and one member noted that the annual rate of measures of inflation expectations were little changed. increase in core PCE inflation in the first quarter had exceeded 2 percent. However, several others contin- With respect to the economic outlook and its impli- ued to see downside risks to inflation, citing the cations for monetary policy, members continued to decline in inflation expectations and the risk of expect that, with gradual adjustments in the stance of adverse shocks to U.S. economic activity from develmonetary policy, economic activity would expand at opments abroad. In light of the current shortfall of a moderate pace and labor market indicators would inflation from 2 percent, the Committee agreed to strengthen. Most members made only small changes continue carefully monitoring actual and expected to their forecasts for economic activity and the labor progress toward its inflation goal. market. Most judged it appropriate to avoid overweighting one or two labor market reports in their After assessing the outlook for economic activity, the consideration of the economic outlook, but they labor market, and inflation, and after weighing the indicated that the recent slowing in payroll employ- uncertainties associated with the outlook, members ment gains had increased their uncertainty about the agreed to leave the target range for the federal funds likely pace of improvements in the labor market rate unchanged at ¼ to ½ percent at this meeting. going forward. Many noted that the slowdown could Members generally agreed that, before assessing be a temporary aberration and that other labor mar- whether another step in removing monetary accomket indicators—such as new claims for unemploy- modation was warranted, it was prudent to wait for ment insurance, the rate of job openings, and read- additional data regarding labor market conditions as ings on consumers’ perceptions of the labor mar- well as information that would allow them to assess ket—remained positive. Some of them judged that the consequences of the U.K. vote for global finanlabor market conditions were now at or close to the cial conditions and the U.S. economic outlook. They Committee’s objectives and pointed out that some judged that their decisions about the appropriate moderation in employment gains was to be expected level of the federal funds rate in coming months when such conditions were near those consistent with would depend importantly on whether incoming maximum employment. However, other members information corroborated the Committee’s expectaobserved that the recent soft readings on payroll jobs tions for economic activity, the labor market, and as well as the decline in the labor force participation inflation. Some of them emphasized that, with labor rate and the absence of further reductions in the market conditions and inflation at or close to the

Minutes of Federal Open Market Committee Meetings | June 203 Committee’s objectives, taking another step in open market operations as necessary to mainremoving monetary accommodation should not be tain the federal funds rate in a target range of ¼ delayed too long. However, a couple of members to ½ percent, including overnight reverse repurunderscored that they would need to accumulate suf- chase operations (and reverse repurchase operaficient evidence to increase their confidence that eco- tions with maturities of more than one day when nomic growth was strong enough to withstand a pos- necessary to accommodate weekend, holiday, or sible downward shock to demand and that inflation similar trading conventions) at an offering rate was moving closer to 2 percent on a sustained basis. of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the Members reiterated that, in determining the timing System Open Market Account that are available and size of future adjustments to the target range for for such operations and by a per-counterparty the federal funds rate, the Committee would assess limit of $30 billion per day. realized and expected economic conditions relative to its objectives of maximum employment and 2 percent The Committee directs the Desk to continue inflation. This assessment would take into account a rolling over maturing Treasury securities at aucwide range of information, including measures of tion and to continue reinvesting principal paylabor market conditions, indicators of inflation pres- ments on all agency debt and agency mortgagesures and inflation expectations, and readings on backed securities in agency mortgage-backed financial and international developments. The Com- securities. The Committee also directs the Desk mittee expected that economic conditions would to engage in dollar roll and coupon swap transevolve in a manner that would warrant only gradual actions as necessary to facilitate settlement of increases in the federal funds rate, and the federal the Federal Reserve’s agency mortgage-backed funds rate was likely to remain, for some time, below securities transactions.” levels that were expected to prevail in the longer run. Members emphasized that the actual path of the fed- The vote also encompassed approval of the statement eral funds rate would depend on the economic out- below to be released at 2:00 p.m.: look as informed by incoming data. In that regard, they judged it appropriate to continue to leave their “Information received since the Federal Open policy options open and maintain the flexibility to Market Committee met in April indicates that adjust the stance of policy based on how incoming the pace of improvement in the labor market has information affected the Committee’s assessment of slowed while growth in economic activity the outlook for economic activity, the labor market, appears to have picked up. Although the unemand inflation as well as the risks to the outlook. ployment rate has declined, job gains have diminished. Growth in household spending has The Committee also decided to maintain its existing strengthened. Since the beginning of the year, policy of reinvesting principal payments from its the housing sector has continued to improve and holdings of agency debt and agency mortgage- the drag from net exports appears to have lessbacked securities in agency mortgage-backed securi- ened, but business fixed investment has been ties and of rolling over maturing Treasury securities soft. Inflation has continued to run below the at auction, and it anticipated doing so until normal- Committee’s 2 percent longer-run objective, ization of the federal funds rate is well under way. partly reflecting earlier declines in energy prices This policy, by keeping the Committee’s holdings of and in prices of non-energy imports. Marketlonger-term securities at sizable levels, should help based measures of inflation compensation maintain accommodative financial conditions. declined; most survey-based measures of longerterm inflation expectations are little changed, on At the conclusion of the discussion, the Committee balance, in recent months. 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, to be and price stability. The Committee currently released at 2:00 p.m.: expects that, with gradual adjustments in the stance of monetary policy, economic activity “Effective June 16, 2016, the Federal Open Mar- will expand at a moderate pace and labor market Committee directs the Desk to undertake ket indicators will strengthen. Inflation is

204 103rd Annual Report | 2016 expected to remain low in the near term, in part Jerome H. Powell, Eric Rosengren, and Daniel K. because of earlier declines in energy prices, but Tarullo. to rise to 2 percent over the medium term as the transitory effects of past declines in energy and Voting against this action: None. import prices dissipate and the labor market strengthens further. The Committee continues to It was agreed that the next meeting of the Committee closely monitor inflation indicators and global would be held on Tuesday–Wednesday, July 26–27, economic and financial developments. 2016. The meeting adjourned at 10:30 a.m. on June 15, 2016. Against this backdrop, the Committee decided to maintain the target range for the federal funds Notation Vote rate at ¼ to ½ percent. The stance of monetary By notation vote completed on May 17, 2016, the policy remains accommodative, thereby support- Committee unanimously approved the minutes of the ing further improvement in labor market condi- Committee meeting held on April 26–27, 2016. tions and a return to 2 percent inflation. Brian F. Madigan In determining the timing and size of future Secretary adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its Addendum: objectives of maximum employment and 2 per- Summary of Economic Projections cent inflation. This assessment will take into account a wide range of information, including In conjunction with the Federal Open Market Commeasures of labor market conditions, indicators mittee (FOMC) meeting held on June 14–15, 2016, of inflation pressures and inflation expectations, meeting participants submitted their projections of and readings on financial and international the most likely outcomes for real output growth, the developments. In light of the current shortfall of unemployment rate, inflation, and the federal funds inflation from 2 percent, the Committee will rate for each year from 2016 to 2018 and over the carefully monitor actual and expected progress longer run.5 Each participant’s projection was based toward its inflation goal. The Committee expects on information available at the time of the meeting, that economic conditions will evolve in a mantogether with his or her assessment of appropriate ner that will warrant only gradual increases in monetary policy and assumptions about the factors the federal funds rate; the federal funds rate is likely to affect economic outcomes. The longer-run likely to remain, for some time, below levels that projections represent each participant’s assessment of are expected to prevail in the longer run. Howthe value to which each variable would be expected to ever, the actual path of the federal funds rate will converge, over time, under appropriate monetary depend on the economic outlook as informed by policy and in the absence of further shocks to the incoming data. economy. “Appropriate monetary policy” is defined as the future path of policy that each participant The Committee is maintaining its existing policy deems most likely to foster outcomes for economic of reinvesting principal payments from its holdactivity and inflation that best satisfy his or her indiings of agency debt and agency mortgagevidual interpretation of the Federal Reserve’s objecbacked securities in agency mortgage-backed tives of maximum employment and stable prices. securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so FOMC participants generally expected that, under until normalization of the level of the federal appropriate monetary policy, growth in real gross funds rate is well under way. This policy, by domestic product (GDP) this year, next year, and in keeping the Committee’s holdings of longer- 2018 would be at or quite close to their individual term securities at sizable levels, should help estimates of GDP growth over the longer run. All maintain accommodative financial conditions.” but a few participants projected that the unemployment rate at the end of this year will be at or below Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, James Bullard, Stanley 5 One participant did not submit longer-run projections in con- Fischer, Esther L. George, Loretta J. Mester, junction with the June 2016 FOMC meeting.

Minutes of Federal Open Market Committee Meetings | June 205 its longer-run normal rate and expected it to edge policy were also uncertain and likely would change in lower next year. For 2018, nearly all participants response to revisions to their economic outlooks and expected the unemployment rate to be at or a bit associated risks. below its longer-run level. Almost all participants projected that inflation, as measured by the four- Participants generally viewed the level of uncertainty quarter percentage change in the price index for per- associated with their individual forecasts for ecosonal consumption expenditures (PCE), would nomic growth, unemployment, and inflation as increase this year and over the next two years, and broadly similar to the norms of the previous most expected inflation to have converged to the 20 years. Most participants also judged the risks Committee’s objective of 2 percent by 2018. Table 1 around their projections for economic activity and and figure 1 provide summary statistics for the inflation as broadly balanced, although many participrojections. pants saw the risks to their GDP growth and inflation forecasts as weighted to the downside. In addi- As shown in figure 2, almost all participants expected tion, some participants viewed the risks to their forethat it would be appropriate for the target range for casts of the unemployment rate as tilted to the the federal funds rate to rise gradually as the upside. economy steadily progresses toward the Committee’s longer-run goals of maximum employment and The Outlook for Economic Activity 2 percent inflation. Indeed, participants generally judged that the federal funds rate in 2018 would still The median of participants’ projections for the be below their estimates of its longer-run rate. How- growth rate of real GDP, conditional on their indiever, because the economic outlook is inherently vidual assumptions about appropriate monetary uncertain, participants’ assessments of appropriate policy, was 2 percent for each year from 2016 Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, June 2016 Percent Median1 Central tendency2 Range3 Variable Longer Longer L onger 2 016 2017 2018 run 2016 2017 2018 run 2 016 2 017 2018 run Change in real GDP 2.0 2.0 2.0 2.0 1 .9–2.0 1.9–2.2 1.8–2.1 1.8–2.0 1.8–2.2 1.6–2.4 1.5–2.2 1 .6–2.4 March projection 2.2 2.1 2.0 2.0 2.1–2.3 2.0–2.3 1.8–2.1 1.8–2.1 1.9–2.5 1.7–2.3 1.8–2.3 1.8–2.4 Unemployment rate 4.7 4.6 4.6 4.8 4.6–4.8 4.5–4.7 4.4–4.8 4.7–5.0 4.5–4.9 4.3–4.8 4.3–5.0 4.6–5.0 March projection 4.7 4.6 4.5 4.8 4.6–4.8 4.5–4.7 4.5–5.0 4.7–5.0 4.5–4.9 4.3–4.9 4.3–5.0 4.7–5.8 PCE inflation 1.4 1.9 2.0 2.0 1.3–1.7 1.7–2.0 1.9–2.0 2.0 1 .3–2.0 1.6–2.0 1.8–2.1 2.0 March projection 1.2 1.9 2.0 2.0 1.0–1.6 1.7–2.0 1.9–2.0 2.0 1.0–1.6 1.6–2.0 1.8–2.0 2.0 Core PCE inflation4 1.7 1 .9 2.0 1.6–1.8 1.7–2.0 1.9–2.0 1.3–2.0 1 .6–2.0 1.8–2.1 March projection 1.6 1.8 2.0 1.4–1.7 1.7–2.0 1.9–2.0 1.4–2.1 1 .6–2.0 1.8–2.0 Memo: Projected appropriate policy path Federal funds rate 0.9 1.6 2.4 3.0 0.6–0.9 1.4–1.9 2.1–2.9 3.0–3.3 0.6–1.4 0.6–2.4 0.6–3.4 2.8–3.8 March projection 0.9 1.9 3.0 3.3 0.9–1.4 1.6–2.4 2.5–3.3 3.0–3.5 0.6–1.4 1.6–2.8 2.1–3.9 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 March projections were made in conjunction with the meeting of the Federal Open Market Committee on March 15–16, 2016. One participant did not submit longer-run projections in conjunction with the June 14–15, 2016 meeting. 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.

206 103rd Annual Report | 2016 Figure 1. Medians, central tendencies, and ranges of economic projections, 2016–18 and over the longer run Percent Change in real GDP Median of projections 3 Central tendency of projections Range of projections 2 Actual 1 2011 2012 2013 2014 2015 2016 2017 2018 Longer run Percent Unemployment rate 9 8 7 6 5 4 2011 2012 2013 2014 2015 2016 2017 2018 Longer run Percent PCE inflation 3 2 1 2011 2012 2013 2014 2015 2016 2017 2018 Longer run Percent Core PCE inflation 3 2 1 2011 2012 2013 2014 2015 2016 2017 2018 Longer run Note: Definitions of variables and other explanations are in the notes to table 1. The data for the actual values of the variables are annual.

Minutes of Federal Open Market Committee Meetings | June 207 Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate Percent 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 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. One participant did not submit longer-run projections.

208 103rd Annual Report | 2016 through 2018, the same as the median of their projec- stronger-than-expected readings on inflation early tions of the longer-run GDP growth rate. However, a this year, as well as to the recent stabilization of oil majority of participants expected that real GDP prices, as factors contributing to the upward revision growth would pick up a bit in 2017 from this year’s to their inflation projections. The projections for pace, and most expected it to remain at or above their headline PCE price inflation over the next two years estimates of its longer-run pace in 2018. Participants and in the longer run were little changed since pointed to a number of factors that they expected March, with the median inflation projection still riswould contribute to moderate output growth over the ing to 1.9 percent in 2017 and to the Committee’s next few years, including a diminution of the drag on objective of 2 percent in 2018. Almost all particinet exports from a strong dollar, the continued pants projected that inflation will be within 0.1 perimprovements in household and business balance centage point of the Committee’s objective by 2018. sheets, accommodative financial conditions, and The median of individual projections for core PCE somewhat more supportive fiscal policy. price inflation also increases gradually over the next two years. Participants’ median projections for real GDP growth in 2016 and 2017 were slightly lower than the Figures 3.C and 3.D provide information on the dismedians shown in the March 2016 Summary of Eco- tribution of participants’ views about the outlook for nomic Projections (SEP). Participants who lowered inflation. The distribution of projections for headline their projections for near-term GDP growth generally PCE price inflation for this year shifted up relative to attributed their revisions to weaker-than-expected projections for the March meeting. The distribution growth in the first quarter and soft readings on eco- of projections for core PCE price inflation this year nomic activity in recent months, particularly those on also moved to the right on balance. For 2017 and business spending. Although several participants also 2018, the distributions of projections for both total reduced their forecasts for real GDP growth in 2018 and core PCE price inflation were nearly unchanged. and in the longer run, those downward revisions did not alter the median forecasts. Appropriate Monetary Policy The median of projections for the unemployment Figure 3.E provides the distribution of participants’ rate edged down from 4.7 percent at the end of judgments regarding the appropriate level of the tar- 2016 to 4.6 percent in 2017 and remained at that level get federal funds rate at the end of each year from in 2018, modestly below the median assessment of 2016 to 2018 and over the longer run.6 The distributhe longer-run normal unemployment rate of 4.8 per- tions for 2016 to 2018 and for the longer run shifted cent. The medians and ranges of the unemployment to the left. The median projection for the federal rate projections for 2016 to 2018 were nearly funds rate rises gradually from 0.88 percent at the unchanged from March. end of 2016 to 1.63 percent at the end of 2017 and 2.38 percent at the end of 2018; the median for the Figures 3.A and 3.B show the distributions of par- longer-run projections of the federal funds rate is ticipants’ projections for real GDP growth and the 3 percent. Although the median federal funds rate at unemployment rate from 2016 through 2018 and in the end of 2016 was unchanged from the March prothe longer run. The distribution of individual projec- jection, a majority of participants revised down their tions of GDP growth for 2016 shifted lower relative projections for that year, most by 0.25 percentage to the distribution of the March projections. The dis- point. For 2017 and 2018, the median projections tributions of projections for GDP growth over the were 0.25 percentage point and 0.62 percentage point next two years and in the longer run also shifted lower, respectively, than in March. down. For this year and next, the distributions of projections for the unemployment rate were little changed, while the distribution for 2018 became less dispersed. 6 One participant’s projections for the federal funds rate, GDP growth, the unemployment rate, and inflation were informed by the view that there are multiple possible medium-term regimes The Outlook for Inflation for the U.S. economy, that these regimes are persistent, and that the economy shifts between regimes in a way that cannot be In the June SEP, the median of projections for head- forecast. Under this view, the economy currently is in a regime characterized by expansion of economic activity with low proline PCE price inflation in 2016 was 1.4 percent, a bit ductivity growth and a low short-term real interest rate, but higher than in March. Many participants pointed to longer-term outcomes cannot be usefully projected.

Minutes of Federal Open Market Committee Meetings | June 209 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2016–18 and over the longer run Number of participants 2016 June projections 18 March projections 16 14 12 10 8 6 4 2 1.4 - 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 1.5 1.7 1.9 2.1 2.3 2.5 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.4 - 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 1.5 1.7 1.9 2.1 2.3 2.5 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.4 - 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 1.5 1.7 1.9 2.1 2.3 2.5 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.4 - 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 1.5 1.7 1.9 2.1 2.3 2.5 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

210 103rd Annual Report | 2016 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2016–18 and over the longer run Number of participants 2016 June projections 18 March 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 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 and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | June 211 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2016–18 and over the longer run Number of participants 2016 June projections 18 March projections 16 14 12 10 8 6 4 2 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 1.0 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 1.0 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 1.0 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 0.9 - 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 1.0 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

212 103rd Annual Report | 2016 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2016–18 Number of participants 2016 June projections 18 March projections 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 1.4 1.6 1.8 2.0 2.2 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | June 213 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, 2016–18 and over the longer run Number of participants 2016 June projections 18 March projections 16 14 12 10 8 6 4 2 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 - 0.87 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 0.63 - 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 - 0.87 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 0.63 - 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 - 0.87 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 0.63 - 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 - 0.87 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. One participant did not submit longer-run projections.

214 103rd Annual Report | 2016 Uncertainty and Risks Table 2. Average historical projection error ranges Percentage points The left-hand column of figure 4 shows that all but a few participants judged the levels of uncertainty Variable 2016 2017 2018 around their June projections for real GDP growth, Change in real GDP1 ±1.4 ±2.0 ±2.2 the unemployment rate, and headline and core PCE Unemployment rate1 ±0.4 ±1.2 ±1.8 price inflation to be broadly similar to the average Total consumer prices2 ±0.8 ±1.0 ±1.0 levels of the past 20 years.7 A few participants saw Note: Error ranges shown are measured as plus or minus the root mean squared the uncertainty about GDP growth as higher than its error of projections for 1996 through 2015 that were released in the summer by various private and government forecasters. As described in the box “Forecast historical average, up from only one in March. These Uncertainty,” under certain assumptions, there is about a 70 percent probability participants cited the surprisingly weak productivity 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 growth of recent years or the continuing fragile information, see David Reifschneider and Peter Tulip (2007), “Gauging the nature of the global economic environment as sup- Uncertainty of the Economic Outlook from Historical Forecasting Errors,” Finance and Economics Discussion Series 2007-60 (Washington: Board of Governors of porting such a view. Most participants’ assessments the Federal Reserve System, November), available at www.federalreserve.gov/ of the level of uncertainty surrounding their ecopubs/feds/2007/200760/200760abs.html; and Board of Governors of the Federal Reserve System, Division of Research and Statistics (2014), “Updated Historical nomic projections did not change materially from Forecast Errors,” memorandum, April 9, www.federalreserve.gov/foia/files/ March. 20140409-historical-forecast-errors.pdf. 1 Definitions of variables are in the general note to table 1. 2 Measure is the overall consumer price index, the price measure that has been As in March, most participants judged the risks to most widely used in government and private economic forecasts. Projection their projections of GDP growth and the unemployis percent change, fourth quarter of the previous year to the fourth quarter of the year indicated. ment rate to be broadly balanced, although many still assessed the risks to GDP growth as weighted to the downside and some saw the risks to the unemploy- Compared with the March SEP, the median of parment rate as tilted to the upside (top two panels in ticipants’ projections for the federal funds rate in the the right-hand column of figure 4). Participants who longer run moved down 0.25 percentage point. This saw the risks to growth as tilted to the downside change reflected downward revisions by about half of attributed this assessment to the weaker-thanthe participants. expected May employment report; recent softness in business fixed investment; concerns about the global Participants’ projections for the path of the federal economic environment, including possible economic funds rate represented their individual assessments of and financial consequences of the upcoming British appropriate monetary policy consistent with their referendum on European Union membership; or the projections of economic growth, employment, inflaproximity of short-term nominal interest rates to the tion, and other factors. In discussing their June foreeffective lower bound. A majority of participants casts, many participants expressed a view that judged the risks to their inflation projections to be increases in the federal funds rate over the next sevbroadly balanced. However, many viewed the risks to eral years would need to be gradual in light of a inflation as skewed to the downside, although fewer short-term neutral interest rate that was currently than in March. A couple of participants pointed to low—a phenomenon that several participants attribthe firming of some measures of inflation in recent uted to the persistence of factors that restrained months as contributing to the change in their risk spending over recent years—and that was likely to assessment. Among those who continued to judge rise only slowly as the effects of those factors faded that the risks to inflation were weighted to the downover time. Some participants noted the proximity of side, almost all cited recent declines in measures of short-term nominal interest rates to the effective inflation compensation and some survey-based measlower bound as limiting the Committee’s ability to ures of longer-run inflation expectations as reasons increase monetary accommodation to counter for that assessment. adverse shocks to the economy should they occur. They judged that, as a result, the Committee should take a cautious approach to monetary policy normal- 7 Table 2 provides estimates of the forecast uncertainty for the ization. Participants cited a number of factors that change in real GDP, the unemployment rate, and total conpushed down their projections of the longer-run rate, sumer price inflation over the period from 1996 through 2015. including domestic and global demographic trends At the end of this summary, the box “Forecast Uncertainty” discusses the sources and interpretation of uncertainty in the and weak productivity growth, which together imply economic forecasts and explains the approach used to assess the a slower pace of trend output growth. uncertainty and risks attending the participants’ projections.

Minutes of Federal Open Market Committee Meetings | June 215 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 notes to table 1.

216 103rd Annual Report | 2016 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 0.8 to 5.2 percent

Minutes of Federal Open Market Committee Meetings | July 217 Meeting Held on July 26–27, 2016 Thomas Laubach Economist A joint meeting of the Federal Open Market Com- David W. Wilcox mittee and the Board of Governors was held in the Economist offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, Thomas A. Connors, Troy Davig, July 26, 2016, at 10:00 a.m. and continued on Michael P. Leahy, David E. Lebow, Wednesday, July 27, 2016, at 9:00 a.m.1 Stephen A. Meyer, Ellis W. Tallman, Christopher J. Waller, 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. Frierson James Bullard Secretary of the Board, Office of the Secretary, Board of Governors Stanley Fischer Matthew J. Eichner2 Esther L. George Director, Division of Reserve Bank Operations and Loretta J. Mester Payment Systems, Board of Governors Jerome H. Powell Michael S. Gibson Director, Division of Banking Supervision and Eric Rosengren Regulation, Board of Governors Daniel K. Tarullo Nellie Liang Charles L. Evans, Patrick Harker, Director, Division of Financial Stability, Robert S. Kaplan, Neel Kashkari, Board of Governors and Michael Strine Alternate Members of the Federal Open Market James A. Clouse Committee Deputy Director, Division of Monetary Affairs, Board of Governors Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams Daniel M. Covitz Presidents of the Federal Reserve Banks of Deputy Director, Division of Research and Statistics, Richmond, Atlanta, and San Francisco, respectively Board of Governors Brian F. Madigan Andrew Figura, David Reifschneider, Secretary and Stacey Tevlin Matthew M. Luecke Special Advisers to the Board, Office of Board Members, Board of Governors Deputy Secretary David W. Skidmore Trevor A. Reeve Assistant Secretary Special Adviser to the Chair, Office of Board Members, Board of Governors Michelle A. Smith Assistant Secretary Linda Robertson Assistant to the Board, Office of Board Members, Scott G. Alvarez Board of Governors General Counsel Steven B. Kamin Economist 1 The Federal Open Market Committee is referenced as the 2 Attended the discussions of the long-run monetary policy “FOMC” and the “Committee” in these minutes. implementation framework and financial developments.

218 103rd Annual Report | 2016 Fabio M. Natalucci and Gretchen C. Weinbach3 David Altig and Ron Feldman Senior Associate Directors, Division of Monetary Executive Vice Presidents, Federal Reserve Banks of Affairs, Board of Governors Atlanta and Minneapolis, respectively Michael G. Palumbo Tobias Adrian, Michael Dotsey, Senior Associate Director, Division of Research and Stephanie Heller, Susan McLaughlin,3 Statistics, Board of Governors Julie Ann Remache,3 and John A. Weinberg Senior Vice Presidents, Federal Reserve Banks of Beth Anne Wilson New York, Philadelphia, New York, New York, Senior Associate Director, Division of International New York, and Richmond, respectively Finance, Board of Governors John Duca, Jonas D. M. Fisher, Michael T. Kiley Deborah L. Leonard,3 Antoine Martin,3 Senior Adviser, Division of Research and Statistics, Ed Nosal,3 Anna Paulson,3 and Joe Peek, and Patricia Zobel3 Senior Associate Director, Division of Financial Vice Presidents, Federal Reserve Banks of Dallas, Stability, Board of Governors Chicago, New York, New York, Chicago, Chicago, Antulio N. Bomfim and Joyce K. Zickler Boston, and New York, respectively Senior Advisers, Division of Monetary Affairs, John Fernald Board of Governors Senior Research Advisor, Federal Reserve Bank of Brian M. Doyle3 San Francisco Senior Adviser, Division of International Finance, Board of Governors Long-Run Monetary Policy Implementation Framework Jane E. Ihrig3 Associate Director, Division of Monetary Affairs, The staff provided several briefings that reviewed Board of Governors progress on a long-term effort begun in July 2015 to John J. Stevens evaluate potential long-run frameworks for monetary Deputy Associate Director, Division of Research and policy implementation. The briefings highlighted Statistics, Board of Governors some foundational considerations that are relevant for such an evaluation. The staff described the recent Glenn Follette and Steven A. Sharpe experience of several central banks of advanced for- Assistant Directors, Division of Research and eign economies (AFEs) in implementing monetary Statistics, Board of Governors policy, noting that they use a wide variety of frame- Elizabeth Klee3 works to control short-term interest rates and that Assistant Director, Division of Monetary Affairs, their approaches have evolved over time. For Board of Governors example, foreign central banks vary in their choice of the interest rate used to communicate monetary David H. Small policy; in their approach to the provision of reserve Project Manager, Division of Monetary Affairs, balances; and in their use of policies, such as large- Board of Governors scale asset purchases, various funding programs, and negative interest rates, to supplement more tradi- Elmar Mertens tional means of policy implementation. The staff Principal Economist, Division of Monetary Affairs, also described the Federal Reserve’s experience in Board of Governors implementing monetary policy during the recent Valerie Hinojosa financial crisis. Before the financial crisis, traditional Information Manager, Division of Monetary Affairs, implementation tools—relatively small-sized open Board of Governors market operations and discount window lending— were adequate for interest rate control even during Marie Gooding periods of stress. But the evidence from the period of First Vice President, Federal Reserve Bank of Atlanta the crisis and its aftermath suggested that the Federal Reserve’s pre-crisis framework did not enable close control over the federal funds rate when liquidity 3 Attended the discussion of the long-run monetary policy implementation framework. programs were expanded significantly and subse-

Minutes of Federal Open Market Committee Meetings | July 219 quently was unable to generate sufficiently accommo- works—such as the selection of counterparties or dative financial conditions to support economic types of collateral to accept, and the overall size and recovery without the use of new policy tools. Finally, composition of the Federal Reserve’s balance sheet— the staff noted that various aspects of U.S. money may both be influenced by, and themselves influence, markets, which determine short-term interest rates incentives and activity in financial markets. Moreand are important for transmitting monetary policy, over, they indicated that the implications of the have changed since the financial crisis. The differ- implementation framework for the efficiency of the ences include changes the Federal Reserve has made financial system needed to be taken into account. to its policy tools and balance sheet, changes in market participants’ business practices, and the regula- Meeting participants commented on several other tory changes made around the globe to strengthen considerations that they saw as being relevant for the financial system. Taken together, these factors evaluating possible implementation frameworks. may, for example, raise the long-run demand for safe Other major central banks have successfully assets, including reserve balances, and they should employed a range of policy rates, including both help make U.S. money markets more stable than they administered rates and market rates, suggesting that were before and during the financial crisis. either type of rate can be effective in communicating and implementing policy. However, the factors affect- In the discussion that followed the staff presenta- ing market rates, as well as the relationships between tions, policymakers agreed that decisions regarding the policy interest rate and other short-term interest an appropriate long-run implementation framework rates, would need to be well understood in deciding would not be necessary for some time. Furthermore, on a particular policy rate. The potential benefits of their judgments regarding a future framework would improving the functioning of certain policy tools benefit from accruing additional experience with were noted; for example, approaches to reducing the recently developed policy tools, such as the payment perceived stigma associated with borrowing at the of interest on reserves, and accumulating more infor- discount window, particularly in periods of financial mation about some important considerations that are strain, would need further careful consideration. In still evolving, including financial regulations and addition, it was noted that the dollar is a principal market participants’ responses to them. reserve currency and that monetary transmission in the United States occurs through funding markets One key consideration discussed by policymakers was that are quite globally connected. At the conclusion the appropriate amount of flexibility that an imple- of the discussion, the Chair asked the staff to conmentation framework might have—for example, the tinue its work and noted that policymakers would extent to which a framework could readily enable review further analysis at a future meeting. interest rate control under a wide range of economic and financial circumstances. With neutral interest Developments in Financial Markets and rates potentially remaining quite low, policymakers Open Market Operations also observed that, in order to promote the Federal Reserve’s policy objectives, the framework should The deputy manager of the System Open Market have the capacity to supplement conventional policy Account (SOMA) reported on developments in accommodation with other measures when short- financial markets and open market operations during term nominal interest rates are near zero. Policymak- the period since the Committee met on June 14–15, ers emphasized that the relationship between the 2016. Following the outcome of the June 23 referenmonetary policy implementation framework and dum in the United Kingdom in which a majority financial stability considerations would require care- indicated a preference to leave the European Union ful attention. Importantly, the policy implementation (EU), yields on U.S. Treasury securities fell sharply, framework would need to be consistent with recent U.S. equity prices declined, and the foreign exchange changes in regulation designed to enhance the stabil- value of the dollar increased. However, these changes ity of the financial system. Also, because episodes of generally reversed in subsequent weeks. On balance, financial stress can arise with little warning, policy- Treasury yields were down only slightly over the makers noted the advantage of being operationally intermeeting period, equity prices were higher, and ready for such situations; however, they also recog- the foreign exchange value of the dollar was little nized that such operational readiness could entail changed. Although the expected path of the federal some costs. Participants observed that various funds rate implied by market prices was about choices associated with policy implementation frame- unchanged on net, the Open Market Desk’s Survey

220 103rd Annual Report | 2016 of Primary Dealers and Survey of Market Partici- level, and the rates of hires and of quits were both pants indicated that the median responses for the unchanged. The four-week moving average of initial most likely path of the federal funds rate over coming claims for unemployment insurance benefits quarters had declined. remained low through mid-July. Average hourly earnings for all employees increased 2½ percent over the During the intermeeting period, federal funds contin- 12 months ending in June. ued to trade at rates well within the FOMC’s ¼ to ½ percent target range. However, the average effective The unemployment rates for African Americans and federal funds rate was modestly higher than in the for Hispanics stayed above the rate for whites, previous intermeeting period. The slightly firmer although the differentials in jobless rates across the conditions in the federal funds market were sup- different groups were similar to those before the most ported by higher rates in money markets for secured recent recession. A similar pattern among demotransactions, which appeared to reflect at least in part graphic groups held for a broader measure of labor more cautious liquidity management by some money underutilization that also includes persons who were market participants in the wake of the U.K. referen- marginally attached to the labor force and those who dum. Take-up at the System’s overnight reverse were employed part time for economic reasons. repurchase agreement facility rose somewhat. The increase seemed to be in part the result of shifts in Total industrial production rose modestly, on net, in investments by money market funds in advance of May and June, primarily reflecting an increase in the the scheduled implementation in October of changes output of utilities in June related to unseasonably to the regulation of the money market fund industry. warm weather during that month. Manufacturing production was little changed, on balance, in May By unanimous vote, the Committee ratified the and June, and mining output edged up following a Desk’s domestic transactions over the intermeeting string of steep declines. Automakers’ assembly schedperiod. There were no intervention operations in for- ules pointed to an increase in motor vehicle produceign currencies for the System’s account during the tion during the third quarter, but other indicators of intermeeting period. manufacturing production, such as new orders diffusion indexes from national and regional manufactur- Staff Review of the Economic Situation ing surveys, suggested only modest gains in factory output over the next few months. The information reviewed for the July 26–27 meeting indicated that labor market conditions generally Growth in real personal consumption expenditures improved in June and that growth in real gross (PCE) appeared to have picked up in the second domestic product (GDP) was moderate in the second quarter. The components of the nominal retail sales quarter. Consumer price inflation continued to run data used by the Bureau of Economic Analysis to below the Committee’s longer-run objective of 2 per- construct its estimate of PCE continued to rise at a cent, restrained in part by earlier decreases in energy solid pace in June. Although sales of light motor prices and in prices of non-energy imports. Most vehicles declined in June, the average pace for the secsurvey-based measures of longer-run inflation expec- ond quarter as a whole was essentially the same as in tations were little changed, on balance, while market- the first quarter. The apparent pickup in real PCE based measures of inflation compensation growth was consistent with recent readings on key remained low. factors that influence consumer spending, including continued gains in real disposable personal income Total nonfarm payroll employment increased briskly and in households’ net worth. Also, consumer sentiin June, but the increase for the second quarter as a ment as measured by the University of Michigan whole was noticeably slower than in the first quarter. Surveys of Consumers remained reasonably upbeat The unemployment rate rose to 4.9 percent in June, in the second quarter and in early July. partly reversing its decline in the previous month. The labor force participation rate edged up in June, Recent information on housing activity suggested while the employment-to-population ratio edged that the pace of the gradual recovery in the sector down. The share of workers employed part time for had slowed in recent months. Starts for new singleeconomic reasons declined in June after a similarly family homes were little changed, on average, in May sized increase in May. The rate of private-sector job and June at a level below that in the first quarter, openings declined in May, albeit from an elevated while starts for multifamily units moved up, on net,

Minutes of Federal Open Market Committee Meetings | July 221 and were above their first-quarter average. Building 1 percent, while core CPI inflation was about 2¼ perpermit issuance for both single-family and multifam- cent. The Michigan survey measure of longer-run ily units remained essentially flat in the second quar- inflation expectations edged up in June and was ter and pointed to little improvement in the rate of unchanged in early July. Other measures of longerstarts over the next few months. Sales of new and run inflation expectations—including those from the existing homes both increased, on net, in May and Desk’s Survey of Primary Dealers and Survey of June. Market Participants—were generally little changed, on balance, in recent months. Real private expenditures for business equipment and intellectual property appeared to have declined for a The pace of foreign real GDP growth appeared to third consecutive quarter. Nominal shipments of slow in the second quarter, driven in large part by nondefense capital goods excluding aircraft temporary factors such as wildfires in Canada and, decreased in May and June, and orders for these to a lesser extent, by a deceleration of activity in the goods also declined on balance. However, recent euro area. In the emerging market economies readings from national and regional surveys of busi- (EMEs), a pickup in growth in China in the second ness conditions suggested some pickup in business quarter, supported by policy stimulus, appeared to be equipment spending in the near term. Firms’ nomi- more than offset by slower growth in Latin America. nal spending for nonresidential structures excluding In the United Kingdom, early indicators following drilling and mining declined in May. The number of the June 23 referendum on exit from the EU oil and gas rigs in operation, an indicator of spend- (“Brexit”) pointed to a slowdown in economic ing for structures in the drilling and mining sector, growth. Inflation in the AFEs picked up in the secfell through late May but edged up through mid-July. ond quarter, largely reflecting some increase in energy prices, but generally remained low. Inflation Nominal outlays for defense through June pointed to also remained subdued in the EMEs. a decline in real federal government purchases in the second quarter. Real state and local government pur- Staff Review of the Financial Situation chases also appeared to have declined. Although payrolls for state and local governments expanded over Domestic financial conditions remained accommothe quarter, nominal construction spending by these dative over the intermeeting period. Equity price governments declined noticeably in April and May. indexes increased, on net, despite an initial sharp decline following the Brexit vote, and corporate bond The U.S. international trade deficit widened in May, spreads declined on balance. Conditions in business as imports rose and exports declined slightly. The and consumer credit markets were about unchanged. export decline was led by decreased exports of capital The expected policy path of the federal funds rate goods and automotive products. For imports, implied by market quotes was little changed, on net, increased imports of industrial supplies and con- but fluctuated notably over the intermeeting period. sumer goods more than offset decreased imports of capital goods. These recent indicators, combined with In the days immediately following the Brexit vote, data from earlier in the year, suggested that net asset prices were volatile, and some financial markets, exports made a near-neutral contribution to the particularly certain foreign exchange markets, experigrowth of real GDP in the first half of 2016. enced brief periods of strained liquidity. Global stock indexes fell notably, credit spreads widened, Total U.S. consumer prices, as measured by the PCE and safe-haven assets appreciated substantially. Howprice index, increased about 1 percent over the ever, broad-based market dislocations did not 12 months ending in May, partly restrained by earlier develop, apparently because market participants had declines in consumer energy prices. Core PCE price prepared for a significant risk event. Market analysts inflation, which excludes changes in food and energy also pointed to the communications and actions by prices, was a little above 1½ percent over the same advanced-economy authorities both before and after 12-month period, held down in part by decreases in the vote as helping to reassure investors. Overall, the prices of non-energy imports over much of this negative sentiment surrounding the Brexit outcome period and the pass-through of the declines in energy early in the intermeeting period was subsequently prices to the prices of other goods and services. Over alleviated by expectations for greater policy accomthe 12 months ending in June, total consumer prices modation in some AFEs, some resolution of nearas measured by the consumer price index (CPI) rose term political uncertainty in the United Kingdom,

222 103rd Annual Report | 2016 and positive U.S. economic data releases. Neverthe- reports from some of the largest domestic banks. less, several longer-term global risks related to Brexit Declines in European bank stock prices following the remained. Brexit vote also reversed later in the intermeeting period. Spreads of yields on investment-grade corpo- Federal Reserve communications released in conjunc- rate bonds over those on comparable-maturity Treastion with the June FOMC meeting were interpreted ury securities ended the period somewhat lower, on by market participants as more accommodative than net, and spreads on speculative-grade corporate expected. The expected path of the federal funds rate bonds declined notably. Near-term forward spreads implied by market quotes declined in response to the on speculative-grade issues dropped substantially release of forecasts collected for the June Summary more than their far-term forward counterparts, sugof Economic Projections, which showed larger-than- gesting that the overall decline in speculative-grade expected downward revisions to projections of the spreads was due in part to a less negative credit outfederal funds rate. The expected policy path implied look and not just an increase in investors’ risk by market quotes fell further in the aftermath of the appetite. Brexit vote, but it later retraced most of the earlier declines, supported by better-than-expected domestic Overall financing conditions for nonfinancial firms data releases—particularly the employment and retail remained accommodative. Gross issuance of corposales reports for June—as well as improved sentiment rate bonds stayed robust in June, particularly in the regarding the possible near-term implications of investment-grade sector. Issuance slowed signifi- Brexit. The median respondents to the Desk’s Survey cantly in early July for both investment- and of Primary Dealers and Survey of Market Partici- speculative-grade bonds, in part reflecting seasonal pants saw one rate hike in 2016 as most likely, the factors. The growth of commercial and industrial same as in the June surveys. (C&I) lending on banks’ books slowed in June, but expansion of such loans continued through early The nominal Treasury yield curve flattened slightly, July. This pattern was consistent with the responses on net, over the intermeeting period. Longer-term to the July 2016 Senior Loan Officer Opinion Survey nominal Treasury yields fell sharply in the two weeks on Bank Lending Practices (SLOOS), in which modfollowing the Brexit vote. Market participants attrib- est net fractions of respondents indicated that they uted the decline in Treasury yields to a variety of fac- had tightened their C&I lending standards and expetors, including expectations for a more accommoda- rienced weaker demand for such loans during the sective stance of monetary policy by major central ond quarter. banks; an intensification of demand for safe-haven assets immediately following the Brexit vote; and On balance, the credit quality of nonfinancial corpostrong demand by global institutional investors for rations continued to weaken in recent months, higher-yielding U.S. fixed-income assets following although some indicators suggested that the pace of decreases in sovereign yields in Europe and Japan, in deterioration was subsiding. The net volume of some cases further into negative territory. Most of bonds downgraded in the second quarter was notably the decline in nominal Treasury yields was reversed smaller than in the previous quarter. Even so, default later in the period. The small net decline in longer- rates on bonds issued by nonfinancial corporations term nominal Treasury yields over the period was and expected year-ahead default rates for nonfinanattributable to a comparable drop in real yields, as cial firms both remained elevated relative to the longer-term inflation compensation measures based ranges that typically prevail during expansions. on Treasury Inflation-Protected Securities and inflation swaps were little changed on net. Spreads of Financing conditions for commercial real estate yields on agency mortgage-backed securities over (CRE) stayed fairly accommodative, on balance, and yields on Treasury securities narrowed slightly. bank lending in all major CRE categories was strong through June. Spreads on U.S. commercial mortgage- Broad stock price indexes increased, on net, over the backed securities (CMBS) did not appear to have intermeeting period. One-month-ahead option- been affected by the Brexit vote. They remained implied volatility on the S&P 500 index—the VIX— elevated, however, a factor that likely contributed to fell, returning to the lower end of its distribution of depressed CMBS issuance so far this year. Meanthe past few years. U.S. bank stock prices dropped while, CMBS delinquency rates edged up for the sharply after the Brexit vote but then retraced that third consecutive month. A significant net fraction of decrease, buoyed by better-than-expected earnings respondents to the July SLOOS indicated that, dur-

Minutes of Federal Open Market Committee Meetings | July 223 ing the second quarter, they had tightened their CRE and the Japanese yen strengthened on what appeared lending standards for construction and land develop- to be safe-haven flows. Prices of risky assets and ment loans and loans secured by multifamily residen- advanced-economy bond yields also fell in response tial properties, and a moderate net fraction of to the heightened uncertainty and expectations of respondents reported tightening their lending stan- slower economic growth. Later in the period, howdards for loans secured by nonfarm nonresidential ever, investors’ concerns eased substantially on the properties. resolution of some of the near-term political uncertainty in the United Kingdom, increased expectations Credit conditions in municipal bond markets for additional policy stimulus in Europe and Japan, remained solid. Gross issuance of municipal bonds in and U.S. data on employment and retail sales in June June was strong, credit quality continued to be stable that exceeded market expectations. Some AFE soveroverall, and the ratio of yields on general obligation eign yields recovered partially from their post-Brexit bonds to those on comparable-maturity Treasury lows, but U.K. long-term yields remained low on securities was little changed on net. The default by expectations of slower growth there and further mon- Puerto Rico and the downgrade of the general obli- etary policy accommodation. Global equity indexes gation bonds of Illinois both appeared to have only a ended higher, on net, over the intermeeting period. limited effect on the broader municipal bond market. However, European bank equities, especially those of Italian banks, underperformed, reflecting investor Financing conditions in the residential mortgage fears that lower interest rates will continue to weigh market became more accommodative, on balance, on profitability. Emerging market asset prices were since the June FOMC meeting. Interest rates on generally resilient over the intermeeting period; the 30-year fixed-rate mortgages decreased further, partly dollar was weaker against most emerging market curreflecting the declines in yields on Treasury securities. rencies, and flows into emerging market assets A number of large banks noted in the July SLOOS surged. Although the Chinese renminbi depreciated an easing of standards for home-purchase loans eli- against both the U.S. dollar and the broader currency gible for purchase by the government-sponsored basket referenced by the Chinese government, this enterprises (GSEs). Banks also reported a broad- development elicited little market reaction. The based pickup in demand across most major catego- unsuccessful coup attempt in Turkey on July 15 left ries of home-purchase loans. Indicators suggested a little imprint on global financial markets. pickup in refinancing activity in response to the drop in mortgage rates. In its latest report on potential risks to the stability of the U.S. financial system, the staff continued to judge Financing conditions in consumer credit markets that vulnerabilities overall remained at a moderate were little changed and remained largely accommo- level and noted that the financial system had been dative against a backdrop of stable credit perfor- resilient to the Brexit vote. While vulnerabilities stemmance across debt categories. Growth of auto loans ming from financial-sector leverage were assessed as remained robust even though a modest net fraction still low, those from maturity and liquidity transforof respondents to the July SLOOS indicated that mation were judged by the staff to be somewhat they had tightened their standards for such loans. higher in the near term than in the previous assess- Credit card balances continued to grow moderately ment. Although upcoming regulatory changes were on balance. Yield spreads for securities backed by expected to improve the stability of money market credit card and auto loans over Treasury securities funds in the longer run, the staff noted the potential remained largely stable, and market participants for large withdrawals by investors in anticipation of reportedly expected asset-backed security issuance to those changes to lead to some disruptions in the pick up in the coming weeks. short run. Vulnerabilities emanating from leverage in the nonfinancial private sector remained moderate: As in the United States, global financial market While business debt ratios stayed elevated, household developments during the intermeeting period were debt-to-income ratios continued to inch down. Valudriven, in large part, by reactions to the U.K. referen- ation pressures also remained at a moderate level. dum on EU membership on June 23 and to the Although term premiums on Treasury securities release of U.S. economic data. Immediately after the became more deeply negative and CRE valuation Brexit vote, the British pound depreciated sharply pressures remained appreciable, corporate bond and against other major currencies, while the U.S. dollar equity risk premiums were unchanged on net.

224 103rd Annual Report | 2016 Staff Economic Outlook the unemployment rate as tilted to the upside. The risks to the projection for inflation were still judged In the U.S. economic projection prepared by the staff as weighted to the downside, reflecting the possibility for the July FOMC meeting, real GDP growth was that longer-term inflation expectations may have estimated to have picked up in the second quarter, edged lower. consistent with the forecast in June. However, the projected step-up in real GDP growth over the sec- Participants’ Views on Current Conditions ond half of this year was marked down a little, partly and the Economic Outlook reflecting softer news on construction. The forecast for real GDP growth in 2017 and 2018 was little In their discussion of the economic situation and the revised, as the positive effects of a slightly lower outlook, meeting participants agreed that the inforassumed path for interest rates and a stronger trajec- mation received over the intermeeting period inditory for household wealth were mostly offset by the cated that the labor market had strengthened and restraint from a weaker outlook for foreign GDP that economic activity had been expanding at a modgrowth and a slightly stronger path for the foreign erate rate. Job gains were strong in June following exchange value of the dollar. The staff continued to weak growth in May. On balance, payrolls and other forecast that real GDP would expand at a modestly labor market indicators pointed to some increase in faster pace than potential output in 2016 through labor utilization in recent months. Household spend- 2018, supported primarily by increases in consumer ing had been growing strongly, but business fixed spending and, to a lesser degree, by a projected investment had been soft. Inflation had continued to pickup in business and residential investment. The run below the Committee’s 2 percent longer-run unemployment rate was expected to remain flat over objective, partly reflecting earlier declines in energy the second half of this year and then to gradually prices and in prices of non-energy imports. Marketdecline through the end of 2018. Over this period, based measures of inflation compensation remained the unemployment rate was projected to run some- low; most survey-based measures of longer-run inflawhat below the staff’s estimate of its longer-run tion expectations were little changed, on balance, in natural rate. recent months. Domestic and global asset prices were volatile early in the intermeeting period following the The staff’s forecast for consumer price inflation over vote by the United Kingdom to leave the EU, but the second half of 2016 was a little lower than in the they subsequently recovered their earlier declines, previous projection, as recent declines in crude oil and, on net, U.S. financial conditions eased over the prices were expected to hold down consumer energy intermeeting period. prices. Thereafter, the forecast for inflation was essentially unrevised. The staff continued to project that Participants generally indicated that their economic inflation would increase over the next several years, forecasts had changed little over the intermeeting as energy prices and the prices of non-energy imports period. They continued to anticipate that, with were expected to begin steadily rising this year and as gradual adjustments in the stance of monetary resource utilization was expected to tighten further. policy, economic activity would expand at a moder- However, inflation was still projected to be slightly ate pace and labor market indicators would below the Committee’s longer-run objective of 2 per- strengthen. Inflation was expected to remain low in cent in 2018. the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the The staff viewed the uncertainty around its July pro- medium term as the transitory effects of past declines jections for real GDP growth, the unemployment in energy and import prices dissipated and the labor rate, and inflation as similar to the average of the market strengthened further. Participants viewed the past 20 years. The risks to the forecast for real GDP near-term risks to the U.S. economic outlook as havwere seen as tilted to the downside, reflecting the ing diminished. However, some noted that the Brexit staff’s assessment that both monetary and fiscal vote had created uncertainty about the medium- to policy appeared to be better positioned to offset large longer-run outlook for foreign economies that could positive shocks than adverse ones. In addition, the affect economic and financial conditions in the staff continued to see the risks to the forecast from United States. Participants generally agreed that the developments abroad as skewed to the downside. Committee should continue to closely monitor infla- Consistent with the downside risks to aggregate tion indicators and global economic and financial demand, the staff viewed the risks to its outlook for developments.

Minutes of Federal Open Market Committee Meetings | July 225 Growth in consumer spending was estimated to have may have been contributing to businesses’ cautious rebounded in the second quarter from the slow pace approach to investment spending, including concern in the first quarter, as monthly gains in retail sales about the likelihood of an extended period of slow were strong through June. Sales of new motor economic growth, both in the United States and vehicles remained at a high level, on average, in the abroad; narrowing profit margins; and uncertainty second quarter, although sales appeared to be sup- about prospects for government policies. ported by substantial incentives for consumers and by business fleet purchases. With the second-quarter In their discussion of business conditions in their pickup in spending, real PCE appeared to have risen Districts, many participants reported that their conover the first half of the year at a rate consistent with tacts anticipated that the U.K. referendum would the positive trends in fundamental determinants of have little effect on their businesses. Activity in the household spending. Participants cited a number of manufacturing sector continued to be mixed: Several factors that had likely been supporting household participants indicated that manufacturing in their spending, including solid real income growth, gains Districts was still quite weak, while several others in house and equity values, low gasoline prices, and reported that their Banks’ June surveys showed that favorable levels of consumer confidence. manufacturing activity had picked up or stabilized. The available surveys indicated that service-sector Residential investment posted a strong increase in the activity continued to expand. However, economic first quarter of the year, but data on starts of new activity continued to be depressed in areas affected single-family homes indicated that outlays likely by the downturn in the energy sector and falling agriedged down in the second quarter. Data on permit cultural commodity prices, although several particiissuance through June suggested that new-home pants noted that the recent firming in crude oil prices building activity might rise only slowly in the near had led to a modest increase in drilling activity. Busiterm. However, participants commented on a number nesses in the energy industry were reported to be of factors suggesting that the housing sector was highly leveraged, and additional restructurings and likely to continue to improve, albeit gradually: Rising bankruptcies were seen as likely. Farm loans continsales of existing homes, responses to the July SLOOS ued to increase, and banks had seen some rise in pointing to stronger demand for residential mortgage delinquencies on such credits. loans, and the steady increase in house prices were seen as evidence of rising demand. In addition, credit The labor market report for June appeared to conconditions remained favorable: Mortgage rates had firm participants’ earlier assessments that the small fallen further, and the SLOOS reported easier terms gain in payroll employment in May likely had subfor loans eligible for purchase by the GSEs. More- stantially understated its underlying pace. The sharp over, several participants noted positive reports on rebound in payroll employment gains put the average residential construction activity from business con- monthly increase in jobs over the three months endtacts in their Districts, with a few suggesting that ing in June at about 150,000. Although this pace was shortages of lots and skilled labor, rather than low noticeably slower than the average rate during 2015 demand, might be contributing to the recent slowing. and the first quarter of 2016, many participants viewed it as consistent with continued strengthening Business fixed investment appeared to have declined in labor market conditions and with a further gradual further during the second quarter, with broad-based decline in the unemployment rate. The unemployweakness in equipment and another steep drop in ment rate rose in June after having declined in May, drilling and mining structures. Participants noted but the labor force participation rate ticked up, the that the recent rise in energy prices had spurred an rate of involuntary part-time employment more than uptick in drilling activity, suggesting that if energy reversed its increase in May, and the broader U-6 prices firm over time as expected, the drag on invest- measure of labor underutilization continued to move ment from declining energy-sector activity should down. Some participants noted that recent signs of a diminish. In addition, it was pointed out that the moderate step-up in wage increases provided further upward trend in investment in intellectual property evidence of improving labor market conditions. products was a positive in the outlook for invest- Although most participants judged that labor market ment. Several participants commented on favorable conditions were at or approaching those consistent reports from their business contacts on commercial with maximum employment, their views on the impliconstruction. Based on conversations with their con- cations for progress on the Committee’s policy objectacts, participants discussed a number of factors that tives varied. Some of them believed that a conver-

226 103rd Annual Report | 2016 gence to a more moderate, sustainable pace of job functioning of markets. Overall, U.S. financial condigains would soon be necessary to prevent an tions eased during the intermeeting period: Major unwanted increase in inflationary pressures. Other equity indexes rose, longer-term interest rates fell, participants continued to judge that labor utilization credit spreads narrowed, and the broad index of the remained below that consistent with the Committee’s foreign exchange value of the dollar was little maximum-employment objective. These participants changed. noted that progress in reducing slack in the labor market had slowed, citing relatively little change, on In the discussion of developments related to financial net, since the beginning of the year in the unemploy- stability, it was noted that while the capital and ment rate, the number of persons working part time liquidity positions of U.S. banks remained strong, for economic reasons, the employment-to-population European banks, particularly Italian banks, were ratio, labor force participation, or rates of job open- under pressure—as evidenced by the sharp declines ings and quits. in their equity prices—from a weaker economic outlook for that region, thin interest margins, and con- Available information on inflation suggested that the cerns about the quality of their loan portfolios. In change in headline PCE prices for the 12 months U.S. markets, overall financial vulnerabilities were ending in June continued to run well below the Com- judged to remain moderate, as nonfinancial debt had mittee’s longer-run objective and that the 12-month continued to increase roughly in line with nominal change in core PCE prices likely remained near its GDP and valuation pressures were not widespread. May level of 1.6 percent. On a 12-month-change However, during the discussion, several participants basis, core PCE inflation had risen from 1.3 percent a commented on a few developments, including potenyear earlier, but it continued to be held down by the tial overvaluation in the market for CRE, the elevated pass-through of earlier declines in energy prices and level of equity values relative to expected earnings, by soft prices of imports. Core PCE inflation over and the incentives for investors to reach for yield in the first half of 2016 was expected to have been close an environment of continued low interest rates. to an annual rate of 2 percent, but it was noted that Regarding CRE, it was noted that the recent SLOOS some of the increase likely reflected transitory effects reported that a significant fraction of banks tightthat would be in part reversed during the second half ened lending standards in the first and second quarof the year. Longer-run inflation expectations, as ters of the year and that overvaluation did not reported in the Michigan survey, were little changed appear to be widespread across markets. It was also in June and early July. The reading from the Federal pointed out that investors potentially were becoming Reserve Bank of New York’s Survey of Consumer more comfortable locking in current yields in an envi- Expectations for inflation three years ahead moved ronment in which low interest rates were expected to up further in June, returning to near its level of a persist, rather than engaging in the type of speculayear earlier. Most market-based measures of longer- tive behavior that could pose financial stability run inflation compensation remained low. concerns. Participants also discussed recent developments in Participants discussed the implications of recent ecofinancial markets and issues related to financial sta- nomic and financial developments for the economic bility. The vote by the United Kingdom to leave the outlook and the risks attending the outlook. They EU led to sharp declines in risk asset prices and a indicated that their forecasts for economic growth, spike in volatility in financial markets early in the the labor market, and inflation had changed little intermeeting period. But those price moves were sub- over the intermeeting period. Regarding the nearsequently reversed, likely in response to expectations term outlook, participants generally agreed that the for policy actions by some major central banks, the prompt recovery in financial markets following the resolution of some of the political uncertainty in the Brexit vote and the pickup in job gains in June had United Kingdom, and better-than-expected data on alleviated two key uncertainties about the outlook U.S. economic activity. Financial markets and institu- that they had faced at the June meeting. Brexit now tions were generally resilient in the aftermath of the appeared likely to have little effect on the U.S. ecovote, apparently reflecting in part advance prepara- nomic outlook in the near term. Moreover, the tions by key market participants and communica- employment report for June, along with other recent tions from advanced-economy central banks before information that suggested that real GDP rose at a and after the vote that they would take the steps nec- moderate rate in the second quarter, provided some essary to provide liquidity to support the orderly reassurance that a sharp slowdown in employment

Minutes of Federal Open Market Committee Meetings | July 227 and economic activity was not under way. Partici- unwanted increase in inflationary pressures. Neverpants judged that the incoming information, on the theless, a few participants continued to caution about whole, had lowered the downside risks to the near- the risks to the inflation outlook from overshooting term economic outlook. Most participants antici- the natural rate of unemployment. Some indicated pated that economic growth would move up to a rate that a step-down in monthly job gains seemed approsomewhat above its longer-run trend during the sec- priate as labor market conditions approached those ond half of 2016 and that the labor market would consistent with the Committee’s maximumstrengthen further. However, several noted that while employment objective and that a more moderate the outlook for consumer spending remained posi- pace of hiring could still be consistent with further tive, continued weakness in business investment and increases in labor utilization. However, several others the possibility of slower improvement in the housing were concerned that if labor market slack diminished sector posed some downside risks to their forecasts. more slowly than they had previously anticipated, progress on the Committee’s maximum-employment Although the near-term risks to the outlook associ- and inflation objectives could be delayed. ated with Brexit had diminished over the intermeeting period, participants generally agreed that they Regarding the outlook for inflation, incoming inforshould continue to closely monitor economic and mation appeared to be broadly in line with most parfinancial developments abroad. As a consequence of ticipants’ earlier expectations that inflation would Brexit, economic growth in the United Kingdom gradually rise to 2 percent over the medium term. and, to a lesser extent, in the euro area would likely Most noted that the firming in various indicators of be slower than previously anticipated. Moreover, the core inflation over the past year, together with signs exit process was expected to entail an extended that the direct and indirect effects of earlier declines period of negotiations that, in the view of most par- in energy prices and prices of non-oil imports had ticipants, had the potential to increase the political begun to fade, provided support for their forecasts. and economic uncertainties in that region; several Several added that recent indications of a pickup in also saw the possibility that complications during the wage increases were evidence of the effect of tightenexit process could result in spells of elevated volatility ing resource utilization. However, other participants in global financial markets. Some participants noted expressed greater uncertainty about the trajectory of that the weak capital positions and high levels of inflation. They saw little evidence that inflation was nonperforming loans at some European banks could responding much to higher levels of resource utilizaalso weigh on economic growth in the region. In tion and suggested that the natural rate of unemployaddition to the situation in Europe, some partici- ment, and the responsiveness of inflation to labor pants continued to see a number of other downside market conditions, may be lower than most current risks to the medium-term economic and financial estimates. Several viewed the risks to their inflation outlook from abroad, including weakness in the forecasts as weighted to the downside, particularly in global economy more broadly, uncertainty about the light of the still-low level of measures of longer-run outlook for China’s foreign exchange policy, and the inflation expectations and inflation compensation implications of China’s run-up in debt to support its and the likelihood that disinflationary pressures from economy. A few others noted uncertainty about the abroad would persist. strength of domestic economic activity going forward. However, some other participants indicated Against the backdrop of their views of the economic that they did not view the uncertainties attending the outlook, participants discussed the conditions that outlook to be unusually elevated and continued to see could warrant taking another step in removing monthe risks to their economic forecasts as balanced. etary policy accommodation. With inflation continuing to run below the Committee’s 2 percent objective, In discussing the outlook for the labor market, most many judged that it was appropriate to wait for addiparticipants viewed some further strengthening in tional information that would allow them to evaluate labor market indicators as consistent with achieving the underlying momentum in economic activity and the Committee’s maximum-employment objective. the labor market and whether inflation was continu- With inflation still below the Committee’s longer-run ing to rise gradually to 2 percent as expected. Several objective and likely to continue to respond only suggested that the Committee would likely have slowly to somewhat tighter labor markets, most also ample time to react if inflation rose more quickly saw relatively low risk that a further gradual strength- than they currently anticipated, and they preferred to ening of the labor market would generate an defer another increase in the federal funds rate until

228 103rd Annual Report | 2016 they were more confident that inflation was moving mittee’s 2 percent longer-run objective, partly reflectcloser to 2 percent on a sustained basis. In addition, ing earlier declines in energy prices and in prices of although near-term downside risks to the outlook non-energy imports. Market-based measures of had diminished over the intermeeting period, some inflation compensation remained low over the interparticipants stressed that the Committee needed to meeting period, and most survey-based measures of consider the constraints on the conduct of monetary longer-term inflation expectations were, on balance, policy associated with proximity to the effective lower little changed. bound on short-term interest rates. These participants concluded that the Committee should wait to With respect to the economic outlook and its implitake another step in removing accommodation until cations for monetary policy, members continued to the data on economic activity provided a greater level expect that, with gradual adjustments in the stance of of confidence that economic growth was strong monetary policy, economic activity would expand at enough to withstand a possible downward shock to a moderate pace and labor market indicators would demand. However, some other participants viewed strengthen. Members saw developments during the recent economic developments as indicating that intermeeting period as reducing near-term uncerlabor market conditions were at or close to those tainty along two dimensions discussed at the June consistent with maximum employment and expected meeting. The first was about the outlook for the that the recent progress in reaching the Committee’s labor market. They agreed that the strong rebound in inflation objective would continue, even with further job gains in June—together with a rise in the labor steps to gradually remove monetary policy accommo- force participation rate and a decline in the number dation. Given their economic outlook, they judged of individuals who were working part time for ecothat another increase in the federal funds rate was or nomic reasons—suggested that, despite the very soft would soon be warranted, with a couple of them employment report for May, labor market conditions advocating an increase at this meeting. A few partici- remained solid and slack had continued to diminish. pants pointed out that various benchmarks for Many members commented on the somewhat slower assessing the appropriate stance of monetary policy average pace of improvement in labor market condisupported taking another step in removing policy tions in recent months. Several of these members accommodation. A few also emphasized the risk to observed that the recent pace of job gains remained the economic expansion that would be associated well above that consistent with stable rates of labor with allowing labor market conditions to tighten to utilization. A couple of members indicated that, in an extent that could lead to an unwanted buildup of light of their judgment that labor market conditions inflation pressures and thus eventually require a were at or close to the Committee’s objectives, some rapid increase in the federal funds rate. In addition, moderation in employment gains was to be expected. several expressed concern that an extended period of In contrast, several other members expressed concern low interest rates risked intensifying incentives for about the likelihood of a further reduction in the investors to reach for yield and could lead to the mis- pace of job gains, and it was noted that if that slowallocation of capital and mispricing of risk, with pos- ing turned out to be persistent, the case for increasing sible adverse consequences for financial stability. the target range for the federal funds rate in the near term would be less compelling. Committee Policy Action A second source of near-term uncertainty that mem- In their discussion of monetary policy for the period bers had discussed at the June meeting pertained to ahead, members judged that the information received the potential economic and financial market consesince the Committee met in June indicated that the quences of the U.K. referendum on membership in labor market had strengthened and that economic the EU. At the current meeting, most members activity had been expanding at a moderate rate. They pointed to the quick recovery of financial market noted that the most recent employment report conditions since the “leave” vote as an encouraging showed that job gains had been strong in June fol- sign of resilience in global financial markets that lowing weak growth in May, and, on balance, pay- helped reduce near-term uncertainty about the outrolls and other labor market indicators pointed to look for the U.S. economy. some increase in labor utilization in recent months. Members agreed that household spending had been While members judged that near-term risks to the growing strongly but business fixed investment had domestic outlook had diminished, some noted that been soft. Inflation continued to run below the Com- the U.K. vote, along with other developments

Minutes of Federal Open Market Committee Meetings | July 229 abroad, still imparted significant uncertainty to the expected to prevail in the longer run. However, memmedium- to longer-term outlook for foreign econo- bers emphasized that the actual path of the federal mies, with possible consequences for the U.S. out- funds rate would depend on the economic outlook as look. As a result, members agreed to indicate that informed by incoming data. In that regard, members they would continue to closely monitor global eco- judged it appropriate to continue to leave their policy nomic and financial developments. options open and maintain the flexibility to adjust the stance of policy based on incoming information Members continued to expect inflation to remain low and its implications for the Committee’s assessment in the near term, in part because of earlier declines in of the outlook for economic activity, the labor marenergy prices, but most anticipated that inflation ket, and inflation, as well as the risks to the outlook. would rise to 2 percent over the medium term as the Most members noted that effective communications transitory effects of past declines in energy and from the Committee would help the public underimport prices dissipated and the labor market stand how monetary policy might respond to incomstrengthened further. Nonetheless, in light of the cur- ing data and developments. rent shortfall of inflation from 2 percent, members agreed that they would continue to carefully monitor The Committee also decided to maintain its existing actual and expected progress toward the Committee’s policy of reinvesting principal payments from its inflation goal. holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed securi- After assessing the outlook for economic activity, the ties and of rolling over maturing Treasury securities labor market, and inflation, as well as the risks at auction, and it anticipated doing so until normalaround that outlook, members decided to maintain ization of the level of the federal funds rate is well the target range for the federal funds rate at ¼ to under way. Members noted that this policy, by keep- ½ percent at this meeting. Members generally agreed ing the Committee’s holdings of longer-term securithat, before taking another step in removing mon- ties at sizable levels, should help maintain accommoetary accommodation, it was prudent to accumulate dative financial conditions. more data in order to gauge the underlying momentum in the labor market and economic activity. A At the conclusion of the discussion, the Committee couple of members preferred also to wait for more voted to authorize and direct the Federal Reserve evidence that inflation would rise to 2 percent on a Bank of New York, until it was instructed otherwise, sustained basis. Some other members anticipated that to execute transactions in the SOMA in accordance economic conditions would soon warrant taking with the following domestic policy directive, to be another step in removing policy accommodation. released at 2:00 p.m.: One member preferred to raise the target range for the federal funds rate at the current meeting, citing “Effective July 28, 2016, the Federal Open Marthe easing of financial conditions since the U.K. ref- ket Committee directs the Desk to undertake erendum, the return to trend economic growth, solid open market operations as necessary to mainjob growth, and inflation moving toward 2 percent. tain the federal funds rate in a target range of ¼ to ½ percent, including overnight reverse repur- Members again agreed that, in determining the tim- chase operations (and reverse repurchase operaing and size of future adjustments to the target range tions with maturities of more than one day when for the federal funds rate, the Committee would necessary to accommodate weekend, holiday, or assess realized and expected economic conditions similar trading conventions) at an offering rate relative to its objectives of maximum employment of 0.25 percent, in amounts limited only by the and 2 percent inflation. They noted that this assess- value of Treasury securities held outright in the ment would take into account a wide range of infor- System Open Market Account that are available mation, including measures of labor market condi- for such operations and by a per-counterparty tions, indicators of inflation pressures and inflation limit of $30 billion per day. expectations, and readings on financial and international developments. The Committee expected that The Committee directs the Desk to continue economic conditions would evolve in a manner that rolling over maturing Treasury securities at aucwould warrant only gradual increases in the federal tion and to continue reinvesting principal payfunds rate, and that the federal funds rate was likely ments on all agency debt and agency mortgageto remain, for some time, below levels that are backed securities in agency mortgage-backed

230 103rd Annual Report | 2016 securities. The Committee also directs the Desk In determining the timing and size of future to engage in dollar roll and coupon swap trans- adjustments to the target range for the federal actions as necessary to facilitate settlement of funds rate, the Committee will assess realized the Federal Reserve’s agency mortgage-backed and expected economic conditions relative to its securities transactions.” objectives of maximum employment and 2 percent inflation. This assessment will take into The vote also encompassed approval of the statement account a wide range of information, including below to be released at 2:00 p.m.: measures of labor market conditions, indicators of inflation pressures and inflation expectations, “Information received since the Federal Open and readings on financial and international Market Committee met in June indicates that developments. In light of the current shortfall of the labor market strengthened and that eco- inflation from 2 percent, the Committee will nomic activity has been expanding at a moderate carefully monitor actual and expected progress rate. Job gains were strong in June following toward its inflation goal. The Committee expects weak growth in May. On balance, payrolls and that economic conditions will evolve in a manother labor market indicators point to some ner that will warrant only gradual increases in increase in labor utilization in recent months. the federal funds rate; the federal funds rate is Household spending has been growing strongly likely to remain, for some time, below levels that but business fixed investment has been soft. are expected to prevail in the longer run. How- Inflation has continued to run below the Com- ever, the actual path of the federal funds rate will mittee’s 2 percent longer-run objective, partly depend on the economic outlook as informed by reflecting earlier declines in energy prices and in incoming data. prices of non-energy imports. Market-based measures of inflation compensation remain low; The Committee is maintaining its existing policy most survey-based measures of longer-term of reinvesting principal payments from its holdinflation expectations are little changed, on bal- ings of agency debt and agency mortgageance, in recent months. backed securities in agency mortgage-backed securities and of rolling over maturing Treasury Consistent with its statutory mandate, the Com- securities at auction, and it anticipates doing so mittee seeks to foster maximum employment until normalization of the level of the federal and price stability. The Committee currently funds rate is well under way. This policy, by expects that, with gradual adjustments in the keeping the Committee’s holdings of longerstance of monetary policy, economic activity term securities at sizable levels, should help will expand at a moderate pace and labor mar- maintain accommodative financial conditions.” ket indicators will strengthen. Inflation is expected to remain low in the near term, in part Voting for this action: Janet L. Yellen, William C. because of earlier declines in energy prices, but Dudley, Lael Brainard, James Bullard, Stanley to rise to 2 percent over the medium term as the Fischer, Loretta J. Mester, Jerome H. Powell, Eric transitory effects of past declines in energy and Rosengren, and Daniel K. Tarullo. import prices dissipate and the labor market strengthens further. Near-term risks to the eco- Voting against this action: Esther L. George. nomic outlook have diminished. The Committee continues to closely monitor inflation indicators Ms. George dissented because she believed that a and global economic and financial 25 basis point increase in the target range for the feddevelopments. eral funds rate was appropriate at this meeting. Information available since the June FOMC meeting Against this backdrop, the Committee decided showed solid employment growth, economic growth to maintain the target range for the federal funds near its trend, and inflation outcomes aligning with rate at ¼ to ½ percent. The stance of monetary the Committee’s objective. Domestic financial condipolicy remains accommodative, thereby support- tions had eased since the U.K. referendum. She ing further improvement in labor market condi- believed that monetary policy should respond to tions and a return to 2 percent inflation. these developments by gradually removing accommo-

Minutes of Federal Open Market Committee Meetings | July 231 dation, consistent with the prescriptions of several funds rate unchanged, the Board of Governors frameworks for assessing the appropriate stance of took no action to change the interest rates on monetary policy. She believed that by waiting longer reserves or discount rates.” to adjust the policy stance and deviating from the appropriate path to policy normalization, the Com- It was agreed that the next meeting of the Committee mittee risked eroding the credibility of its policy would be held on Tuesday–Wednesday, Septemcommunications. ber 20–21, 2016. The meeting adjourned at 10:30 a.m. on July 27, 2016. Consistent with the Committee’s decision to leave the target range for the federal funds rate unchanged, the Notation Vote Board of Governors took no action to change the interest rates on reserves or discount rates. By notation vote completed on July 5, 2016, the Committee unanimously approved the minutes of the Secretary’s note: The following statement Committee meeting held on June 14–15, 2016. regarding the June 14–15, 2016, FOMC meeting was inadvertently omitted from minutes of that Brian F. Madigan meeting: “Consistent with the Committee’s deci- Secretary sion to leave the target range for the federal

232 103rd Annual Report | 2016 Meeting Held Richard M. Ashton Assistant General Counsel on September 20–21, 2016 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, September 20, 2016, at 1:00 p.m. and continued on David W. Wilcox Wednesday, September 21, 2016, at 9:00 a.m.1 Economist Thomas A. Connors, Troy Davig, Michael P. Leahy, Present Stephen A. Meyer, Ellis W. Tallman, Janet L. Yellen Geoffrey Tootell, 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 James Bullard Robert deV. Frierson Stanley Fischer Secretary of the Board, Office of the Secretary, Esther L. George Board of Governors Loretta J. Mester Matthew J. Eichner2 Director, Division of Reserve Bank Operations and Jerome H. Powell Payment Systems, Board of Governors Eric Rosengren James A. Clouse Daniel K. Tarullo Deputy Director, Division of Monetary Affairs, Board of Governors Charles L. Evans, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Michael Strine Maryann F. Hunter Alternate Members of the Federal Open Market Deputy Director, Division of Banking Supervision Committee and Regulation, Board of Governors Jeffrey M. Lacker, Dennis P. Lockhart, David Bowman, Andrew Figura, Joseph W. Gruber, and John C. Williams Ann McKeehan, and David Reifschneider Presidents of the Federal Reserve Banks of Special Advisers to the Board, Office of Board Richmond, Atlanta, and San Francisco, respectively Members, Board of Governors Brian F. Madigan Trevor A. Reeve Secretary Special Adviser to the Chair, Office of Board Members, Board of Governors Matthew M. Luecke Deputy Secretary Linda Robertson Assistant to the Board, Office of Board Members, David W. Skidmore Board of Governors Assistant Secretary Eric M. Engen, Joshua Gallin, Michelle A. Smith and Michael G. Palumbo Assistant Secretary Senior Associate Directors, Division of Research and Statistics, Board of Governors Michael Held Deputy General Counsel 1 The Federal Open Market Committee is referenced as the 2 Attended through the discussion on financial developments and “FOMC” and the “Committee” in these minutes. open market operations.

Minutes of Federal Open Market Committee Meetings | September 233 Michael T. Kiley Mary Daly, Evan F. Koenig, Susan McLaughlin,2 Senior Associate Director, Division of Financial and Paolo A. Pesenti Stability, and Senior Vice Presidents, Federal Reserve Banks of Senior Adviser, Division of Research and Statistics, San Francisco, Dallas, New York, and New York, Board of Governors respectively Antulio N. Bomfim, Ellen E. Meade, David Andolfatto and Joyce K. Zickler Vice President, Federal Reserve Bank of St. Louis Senior Advisers, Division of Monetary Affairs, Thomas D. Tallarini, Jr. Board of Governors Assistant Vice President, Federal Reserve Bank of David López-Salido Minneapolis Associate Director, Division of Monetary Affairs, Satyajit Chatterjee Board of Governors Senior Economic Advisor, Federal Reserve Bank of Elizabeth Klee and Jason Wu Philadelphia Assistant Directors, Division of Monetary Affairs, Cindy Hull2 Board of Governors Markets Officer, Federal Reserve Bank of New York Shane M. Sherlund Assistant Director, Division of Research and Selection of Committee Officer Statistics, Board of Governors By unanimous vote, the Committee selected Michael Paul R. Wood Held to serve as deputy general counsel, effective Assistant Director, Division of International Finance, September 20, 2016, until the selection of his succes- Board of Governors sor at the first regularly scheduled meeting of the Committee in 2017. Penelope A. Beattie3 Assistant to the Secretary, Office of the Secretary, Revisions to Documents Governing Board of Governors Foreign Currency Operations David H. Small Project Manager, Division of Monetary Affairs, The manager of the System Open Market Account Board of Governors (SOMA) briefed the Committee on a staff proposal to revise the documents governing the System’s for- Sophia H. Allison2 eign currency operations, including the Authorization Special Counsel, Legal Division, Board of Governors for Foreign Currency Operations (Foreign Authori- Jonathan E. Goldberg and Francisco Vazquez-Grande zation), the Foreign Currency Directive (Foreign Senior Economists, Division of Monetary Affairs, Directive), and the Procedural Instructions with Board of Governors Respect to Foreign Currency Operations (Procedural Instructions). The objectives of the proposal were to Paul Dozier2 simplify the organization of the documents, to better Senior Financial Analyst, Division of International reflect the current operating environment, and to Finance, Board of Governors clarify guidance provided to the Federal Reserve Bank selected by the Committee to execute open Randall A. Williams market transactions (Selected Bank). The staff pro- Information Manager, Division of Monetary Affairs, posed incorporating the material in the Foreign Board of Governors Authorization, Foreign Directive, and Procedural Mark A. Gould Instructions into a new authorization and directive First Vice President, Federal Reserve Bank of that would parallel the domestic authorization and San Francisco directive; the Procedural Instructions document would no longer be necessary. The proposed Foreign David Altig, Kartik B. Athreya, and Daniel G. Sullivan Authorization was structured by operation type, Executive Vice Presidents, Federal Reserve Banks of including standalone spot and forward transactions; Atlanta, Richmond, and Chicago, respectively warehousing of funds for the Exchange Stabilization Fund; reciprocal currency arrangements, and stand- 3 Attended Tuesday session only. ing dollar and foreign currency liquidity swaps; and

234 103rd Annual Report | 2016 foreign currency holdings. Proposed substantive housing transactions), swap transactions with changes to procedures and governance included the other central banks under reciprocal currency removal of the Selected Bank’s ability to indepen- arrangements, swap transactions with other dently decide, within limits, to enter into standalone central banks under standing dollar liquidity spot and forward transactions, the addition of a pro- and foreign currency liquidity swap arrangevision for the Foreign Currency Subcommittee (Sub- ments, and swap transactions with other enticommittee) to give additional guidance to the ties in the open market. Selected Bank regarding management of SOMA foreign currency holdings, and the incorporation of B. To hold balances of, and to have outstanding procedures that would allow decisions to be made forward contracts to receive or to deliver, forpromptly under circumstances in which the normal eign currencies. procedures would not be feasible. Additionally, the definition of and provisions governing the Subcom- 2. All transactions in foreign currencies undertaken mittee were removed from the Foreign Authorization pursuant to paragraph 1 above shall, unless otherand incorporated into the Committee’s Rules of Pro- wise authorized by the Committee, be conducted: cedure and Rules of Organization, as appropriate. By unanimous vote, the proposed Foreign Authoriza- A. In a manner consistent with the obligations tion, Foreign Directive, Rules of Organization, and regarding exchange arrangements under Rules of Procedure were approved, and the Proce- Article IV of the Articles of Agreement of dural Instructions were rescinded.4 the International Monetary Fund (IMF).5 Authorization for Foreign Currency Operations B. In close and continuous cooperation and (As Amended Effective September 20, 2016) consultation, as appropriate, with the United States Treasury. In General C. In consultation, as appropriate, with foreign 1. The Federal Open Market Committee (the “Commonetary authorities, foreign central banks, mittee”) authorizes the Federal Reserve Bank and international monetary institutions. selected by the Committee (the “Selected Bank”) to execute open market transactions for the D. At prevailing market rates. System Open Market Account as provided in this Authorization, to the extent necessary to carry Standalone Spot and Forward Transactions out any foreign currency directive of the Committee: 3. For any operation that involves standalone spot or forward transactions in foreign currencies: A. To purchase and sell foreign currencies (also known as cable transfers) at home and A. Approval of such operation is required as abroad in the open market, including with follows: the United States Treasury, with foreign monetary authorities, with the Bank for Interna- i. The Committee must direct the Selected tional Settlements, and with other entities in Bank in advance to execute the operation the open market. This authorization to pur- if it would result in the overall volume of chase and sell foreign currencies encompasses standalone spot and forward transactions purchases and sales through standalone spot in foreign currencies, as defined in paraor forward transactions and through foreign graph 3.C of this Authorization, exceedexchange swap transactions. For purposes of this Authorization, foreign exchange swap 5 In general, as specified in Article IV, each member of the IMF undertakes to collaborate with the IMF and other members to transactions are: swap transactions with the assure orderly exchange arrangements and to promote a stable United States Treasury (also known as ware- system of exchange rates. These obligations include seeking to direct the member’s economic and financial policies toward the objective of fostering orderly economic growth with reasonable 4 The approved Foreign Authorization and Foreign Directive are price stability. These obligations also include avoiding manipuincluded in these minutes. The approved Rules of Organization lating exchange rates or the international monetary system in and Rules of Procedure, as well as other Committee organiza- such a way that would impede effective balance of payments tional documents, are available at www.federalreserve.gov/ adjustment or to give an unfair competitive advantage over monetarypolicy/rules_authorizations.htm. other members.

Minutes of Federal Open Market Committee Meetings | September 235 ing $5 billion since the close of the most Reciprocal Currency Arrangements, recent regular meeting of the Committee. and Standing Dollar and Foreign The Foreign Currency Subcommittee (the Currency Liquidity Swaps “Subcommittee”) must direct the Selected Bank in advance to execute the operation 5. The Committee authorizes the Selected Bank to if the Subcommittee believes that consul- maintain reciprocal currency arrangements estabtation with the Committee is not feasible lished under the North American Framework in the time available. Agreement, standing dollar liquidity swap arrangements, and standing foreign currency ii. The Committee authorizes the Subcomliquidity swap arrangements as provided in this mittee to direct the Selected Bank in Authorization and to the extent necessary to advance to execute the operation if it carry out any foreign currency directive of the would result in the overall volume of Committee. standalone spot and forward transactions in foreign currencies, as defined in para- A. For reciprocal currency arrangements all graph 3.C of this Authorization, totaling drawings must be approved in advance by the $5 billion or less since the close of the Committee (or by the Subcommittee, if the most recent regular meeting of the Subcommittee believes that consultation with Committee. the Committee is not feasible in the time available). B. Such an operation also shall be: i. Generally directed at countering disor- B. For standing dollar liquidity swap arrangederly market conditions; or ments all drawings must be approved in advance by the Chairman. The Chairman ii. Undertaken to adjust System balances in may approve a schedule of potential drawlight of probable future needs for currenings, and may delegate to the manager, cies; or System Open Market Account, the authority iii. Conducted for such other purposes as to approve individual drawings that occur may be determined by the Committee. according to the schedule approved by the Chairman. C. For purposes of this Authorization, the overall volume of standalone spot and forward C. For standing foreign currency liquidity swap transactions in foreign currencies is defined arrangements all drawings must be approved as the sum (disregarding signs) of the dollar in advance by the Committee (or by the Subvalues of individual foreign currencies purcommittee, if the Subcommittee believes that chased and sold, valued at the time of the consultation with the Committee is not featransaction. sible in the time available). Warehousing D. Operations involving standing dollar liquidity swap arrangements and standing foreign 4. The Committee authorizes the Selected Bank, currency liquidity swap arrangements shall with the prior approval of the Subcommittee and generally be directed at countering strains in at the request of the United States Treasury, to financial markets in the United States or conduct swap transactions with the United States abroad, or reducing the risk that they could Exchange Stabilization Fund established by secemerge, so as to mitigate their effects on ecotion 10 of the Gold Reserve Act of 1934 under nomic and financial conditions in the United agreements in which the Selected Bank purchases States. foreign currencies from the Exchange Stabilization Fund and the Exchange Stabilization Fund E. For reciprocal currency arrangements, standrepurchases the foreign currencies from the ing dollar liquidity swap arrangements, and Selected Bank at a later date (such purchases and sales also known as warehousing).

236 103rd Annual Report | 2016 standing foreign currency liquidity swap B. The Selected Bank may manage such foreign arrangements: currency holdings by: i. All arrangements are subject to annual i. Purchasing and selling obligations of, or review and approval by the Committee; fully guaranteed as to principal and interest by, a foreign government or agency ii. Any new arrangements must be approved thereof (“Permitted Foreign Securities”) by the Committee; and through outright purchases and sales; iii. Any changes in the terms of existing ii. Purchasing Permitted Foreign Securities arrangements must be approved in under agreements for repurchase of such advance by the Chairman. The Chairman Permitted Foreign Securities and selling shall keep the Committee informed of any such securities under agreements for the changes in terms, and the terms shall be resale of such securities; and consistent with principles discussed with and guidance provided by the Committee. iii. Managing balances in various time and other deposit accounts at foreign institu- Other Operations in Foreign Currencies tions approved by the Board of Governors under Regulation N. 6. Any other operations in foreign currencies for which governance is not otherwise specified in C. The Subcommittee, in consultation with the this Authorization (such as foreign exchange swap Committee, may provide additional instructransactions with private-sector counterparties) tions to the Selected Bank regarding holdings must be authorized and directed in advance by of foreign currencies. the Committee. Additional Matters Foreign Currency Holdings 8. The Committee authorizes the Chairman: 7. The Committee authorizes the Selected Bank to hold foreign currencies for the System Open Mar- A. With the prior approval of the Committee, to ket Account in accounts maintained at foreign enter into any needed agreement or undercentral banks, the Bank for International Settlestanding with the Secretary of the United ments, and such other foreign institutions as States Treasury about the division of responapproved by the Board of Governors under Secsibility for foreign currency operations tion 214.5 of Regulation N, to the extent necesbetween the System and the United States sary to carry out any foreign currency directive of Treasury; the Committee. A. The Selected Bank shall manage all holdings B. To advise the Secretary of the United States of foreign currencies for the System Open Treasury concerning System foreign currency Market Account: operations, and to consult with the Secretary on policy matters relating to foreign currency i. Primarily, to ensure sufficient liquidity to operations; enable the Selected Bank to conduct foreign currency operations as directed by C. To designate Federal Reserve System persons the Committee; authorized to communicate with the United ii. Secondarily, to maintain a high degree of States Treasury concerning System Open safety; Market Account foreign currency operations; and iii. Subject to paragraphs 7.A.i and 7.A.ii, to provide the highest rate of return possible D. From time to time, to transmit appropriate in each currency; and reports and information to the National iv. To achieve such other objectives as may Advisory Council on International Monetary be authorized by the Committee. and Financial Policies.

Minutes of Federal Open Market Committee Meetings | September 237 9. The Committee authorizes the Selected Bank to committee”), subject to the limitation that the undertake transactions of the type described in outstanding balance of United States dollars prothis Authorization, and foreign exchange and vided to the United States Treasury as a result of investment transactions that it may be otherwise these transactions not at any time exceed $5 bilauthorized to undertake, from time to time for lion. the purpose of testing operational readiness. The aggregate amount of such transactions shall not 3. The Committee directs the Selected Bank to exceed $2.5 billion per calendar year. These trans- maintain, for the System Open Market Account: actions shall be conducted with prior notice to the Committee. A. Reciprocal currency arrangements with the following foreign central banks: 10.All Federal Reserve banks shall participate in the foreign currency operations for System Open Maximum amount Market Account in accordance with paragraph Foreign central bank (millions of dollars or equivalent) 3G(1) of the Board of Governors’ Statement of Procedure with Respect to Foreign Relationships Bank of Canada 2,000 of Federal Reserve Banks dated January 1, 1944. Bank of Mexico 3,000 11.Any authority of the Subcommittee pursuant to B. Standing dollar liquidity swap arrangements this Authorization may be exercised by the Chair- with the following foreign central banks: man if the Chairman believes that consultation with the Subcommittee is not feasible in the time Bank of Canada available. The Chairman shall promptly report to Bank of England the Subcommittee any action approved by the Bank of Japan Chairman pursuant to this paragraph. European Central Bank Swiss National Bank 12.The Committee authorizes the Chairman, in exceptional circumstances where it would not be C. Standing foreign currency liquidity swap feasible to convene the Committee, to foster the arrangements with the following foreign cen- Committee’s objectives by instructing the tral banks: Selected Bank to engage in foreign currency operations not otherwise authorized pursuant to Bank of Canada this Authorization. Any such action shall be made Bank of England in the context of the Committee’s discussion and Bank of Japan decisions regarding foreign currency operations. European Central Bank The Chairman, whenever feasible, will consult Swiss National Bank with the Committee before making any instruction under this paragraph. 4. The Committee directs the Selected Bank to hold Foreign Currency Directive (As Amended and to invest foreign currencies in the portfolio in Effective September 20, 2016) accordance with the provisions of paragraph 7 of the Authorization. 1. The Committee directs the Federal Reserve Bank selected by the Committee (the “Selected Bank”) 5. The Committee directs the Selected Bank to to execute open market transactions, for the report to the Committee, at each regular meeting System Open Market Account, in accordance of the Committee, on transactions undertaken with the provisions of the Authorization for For- pursuant to paragraphs 1 and 6 of the Authorizaeign Currency Operations (the “Authorization”) tion. The Selected Bank is also directed to provide and subject to the limits in this Directive. quarterly reports to the Committee regarding the management of the foreign currency holdings 2. The Committee directs the Selected Bank to pursuant to paragraph 7 of the Authorization. execute warehousing transactions, if so requested by the United States Treasury and if approved by 6. The Committee directs the Selected Bank to conthe Foreign Currency Subcommittee (the “Sub- duct testing of transactions for the purpose of

238 103rd Annual Report | 2016 operational readiness in accordance with the pro- based measures of longer-run inflation expectations visions of paragraph 9 of the Authorization. were little changed, on balance, while market-based measures of inflation compensation remained low. Developments in Financial Markets and Open Market Operations Total nonfarm payroll employment expanded strongly, on average, in July and August. The unem- The manager reported on developments in financial ployment rate remained at 4.9 percent in recent markets during the period since the Committee met months. Both the labor force participation rate and on July 26–27, 2016. Over much of the period, finan- the employment-to-population ratio had edged up cial market volatility was relatively low, but volatility since June. The share of workers employed part time increased somewhat in the last couple of weeks of for economic reasons was little changed on balance. the period amid shifting views among market partici- The rates of private-sector job openings and of hires pants about potential monetary policy actions by the increased over June and July, and the rate of quits Federal Reserve and foreign central banks. The was unchanged. The four-week moving average of deputy manager followed with a briefing on open initial claims for unemployment insurance benefits market operations and developments in money mar- continued to be low. Labor productivity in the busikets, including investment flows and changes in mar- ness sector declined slightly over the four quarters ket interest rates in anticipation of the upcoming ending in the second quarter of 2016. Measures of implementation of reforms to the money market labor compensation continued to rise at a moderate fund (MMF) industry. Usage of the System’s over- pace. Compensation per hour in the business sector night reverse repurchase agreement facility increased rose 2 percent over the four quarters ending in the modestly in the most recent intermeeting period. second quarter, the employment cost index for pri- Federal funds generally continued to trade close to vate workers increased 2½ percent over the the middle of the FOMC’s target range of ¼ to 12 months ending in June, and average hourly earn- ½ percent. ings for all employees increased 2½ percent over the 12 months ending in August. The Committee was also briefed on planned revisions to the policies of the Open Market Desk on counter- The unemployment rates for African Americans and parties for domestic and foreign open market opera- for Hispanics remained above the rate for whites, tions. The proposal was intended in part to create a although the differentials in jobless rates across these single unified framework for the management of groups were similar to those before the most recent counterparties and to increase the transparency of recession. The employment-to-population ratio for the Desk’s counterparty policies. The Committee individuals aged 25 to 64 continued to be higher for indicated its general support for the proposal. Desk whites than for African Americans and for Hispanics. staff anticipated that the revisions would be published later this year. Total industrial production rose slightly, on net, in July and August. The output of the mining sector By unanimous vote, the Committee ratified the increased since April after having trended down from Desk’s domestic transactions over the intermeeting late 2014. Manufacturing production was period. There were no intervention operations in for- unchanged, on balance, since June and had generally eign currencies for the System’s account during the been moving sideways since the end of 2014, as weak intermeeting period. export demand and spillovers from the decline in crude oil and natural gas drilling weighed on indus- Staff Review of the Economic Situation trial activity. Although automakers’ assembly schedules pointed to some increase in motor vehicle pro- The information reviewed for the September 20–21 duction in the near term, broader indicators of meeting indicated that labor market conditions manufacturing production, such as new orders diffustrengthened in recent months and that real gross sion indexes from national and regional manufacturdomestic product (GDP) was increasing at a faster ing surveys, suggested that factory output would pace in the third quarter than in the first half of the remain on a flat trajectory in the coming months. year. Consumer price inflation continued to run below the Committee’s longer-run objective of 2 per- Real personal consumption expenditures (PCE) cent, restrained in part by earlier decreases in energy appeared to be increasing solidly, on net, in the third prices and in prices of non-energy imports. Survey- quarter. Real PCE rose strongly in July, but the com-

Minutes of Federal Open Market Committee Meetings | September 239 ponents of the nominal retail sales data used by the The U.S. international trade deficit widened in June Bureau of Economic Analysis to construct its esti- before narrowing substantially in July. Exports mate of PCE were flat in August and the pace of increased in both months, with strong growth in July light motor vehicle sales softened. Recent readings on driven by higher agricultural exports. After rising in key factors that influence consumer spending were June, imports retraced some of this gain in July, consistent with solid real PCE growth for the third driven by lower imports of consumer goods and quarter as a whole, including continued gains in capital goods. employment, real disposable personal income, and households’ net worth. In addition, consumer senti- Total U.S. consumer prices, as measured by the PCE ment as measured by the University of Michigan price index, increased about ¾ percent over the Surveys of Consumers remained relatively upbeat 12 months ending in July, partly restrained by recent through early September. decreases in consumer food prices and earlier declines in consumer energy prices. Core PCE price Recent information on housing activity suggested inflation, which excludes changes in food and energy that real residential investment spending continued to prices, was a little above 1½ percent over those same be soft in the third quarter. Starts for new single- 12 months, held down in part by decreases in the family homes declined, on net, in July and August, as prices of non-energy imports over much of this did starts for multifamily units. Building permit issu- period and the pass-through of earlier declines in ance for new single-family homes—which tends to be energy prices into the prices of other goods and sera good indicator of the underlying trend in construc- vices. Over the 12 months ending in August, total tion—was little changed, on balance, in recent consumer prices as measured by the consumer price months and was essentially flat since late last year. index (CPI) rose about 1 percent, while core CPI Sales of new homes increased strongly in July, but inflation was around 2¼ percent. The Michigan sursales of existing homes decreased modestly. vey measure of median longer-run inflation expectations edged down in August and was unchanged in Real private expenditures for business equipment and early September. The measure of longer-run inflation intellectual property appeared to be rising slowly in expectations for PCE prices from the Survey of Prothe third quarter. Nominal shipments of nondefense fessional Forecasters was unchanged in the third capital goods excluding aircraft declined in July. quarter. Other measures of longer-run inflation However, new orders for these capital goods rose sub- expectations from the Desk’s Survey of Primary stantially in July and were notably above the level of Dealers and Survey of Market Participants were also shipments, suggesting a pickup in business spending unchanged in September. for equipment in the near term. Firms’ nominal spending for nonresidential structures excluding drill- Foreign real GDP growth slowed noticeably in the ing and mining increased in June and July. The num- second quarter, primarily owing to contractions in ber of oil and gas rigs in operation, an indicator of Canada and Mexico; economic growth in other forspending for structures in the drilling and mining sec- eign economies fell only slightly on average. Wildfires tor, continued to edge up through early September. disrupted oil production in Canada, and a second- The limited information available suggested that the quarter decline in U.S. manufacturing production change in inventory investment would be positive in weighed on Mexican exports. Aggregate foreign ecothe third quarter after subtracting substantially from nomic growth appeared to pick up in the third quarreal GDP growth in the second quarter. Except in the ter amid signs of recovery of oil production in energy sector, inventories generally seemed well Canada and of improved manufacturing production aligned with the pace of sales. in Mexico. However, weaker investment readings pointed to a slight moderation of economic activity Nominal outlays for defense through August pointed in China in the third quarter. The outcome of the to flat real federal government purchases in the third U.K. referendum on exit from the European Union quarter. Real state and local government purchases (Brexit) apparently exerted less drag on economic also appeared to be little changed, on net, relative to activity than previously anticipated by many analysts. their level in the previous quarter. Although payrolls Nonetheless, recent data suggested that economic for state and local governments expanded in July and growth in Europe remained modest. Inflation was August, nominal construction spending by these gov- generally subdued in recent months in both the ernments declined in July.

240 103rd Annual Report | 2016 advanced foreign economies (AFEs) and the emerg- federal funds rate and a rise in global bond yields ing market economies (EMEs). that was apparently spurred by an increased impression among investors that monetary policy in other Staff Review of Financial Situation advanced economies might be less accommodative than previously expected. Measures of forward infla- Domestic financial conditions remained accommo- tion compensation based on Treasury Inflationdative since the July FOMC meeting. Asset prices Protected Securities rose slightly but remained near moved within a fairly narrow range for much of the the lower end of their historical range. intermeeting period, although volatility increased somewhat in the last few days of the period as mar- Broad stock price indexes moved down, on net, since ket participants focused on central bank communica- the July FOMC meeting. Realized and implied volations in the United States and abroad. Market expec- tilities in various asset markets were relatively low tations for a policy rate increase by the end of this during most of the intermeeting period but increased year rose a bit since the July FOMC meeting, report- somewhat in the last few days before the meeting as edly reflecting comments of Federal Reserve officials market participants reacted to global central bank that were viewed, on balance, as suggesting that the communications. Spreads on yields of both case for policy firming had strengthened over recent investment-grade and high-yield nonfinancial corpomonths. Nominal Treasury yields across the curve rate bonds over those on comparable-maturity Treasedged up. Anticipation of the impending deadline for ury securities declined somewhat to levels fairly close compliance with MMF reform measures continued to their historical norms. to prompt net outflows from prime MMFs and put upward pressure on some term money market rates. MMF reform continued to affect several short-term funding markets in advance of the October 14, 2016, Comments by a number of Federal Reserve officials compliance date. While total assets under the manover the intermeeting period were interpreted by agement of MMFs changed little over the intermeetmarket participants as raising the odds on policy ing period, investors continued to shift from prime firming by the end of this year. However, domestic funds to government funds. As a result, MMF holdeconomic data releases appeared to be a little softer, ings of commercial paper (CP) and certificates of on balance, than investors had expected; the August deposit continued to decline, and prime institutional employment report and manufacturing surveys, in funds further reduced their weighted-average maturiparticular, were below expectations. Market-based ties to historically low levels. Reflecting MMFs’ estimates of the probability of a rate hike at the Sep- reduced appetite for term lending, spreads of threetember FOMC meeting were volatile but ended the month money market rates over rates on comparableperiod slightly lower, on balance, at roughly 15 per- maturity overnight index swap contracts rose during cent, while the probability of an increase by the end the intermeeting period. Rates on short-term municiof the year rose slightly to around 50 percent. The pal securities and net yields on tax-exempt MMFs medium-term federal funds rate path implied by mar- also increased sharply, primarily because of outflows ket quotes edged up on net. Consistent with market- from these funds. based estimates, respondents to the Desk’s September surveys of primary dealers and market partici- Financing conditions for nonfinancial firms pants assigned a probability of about 15 percent to a remained generally accommodative. While outstandrate hike at the September meeting. The median ing commercial and industrial loans and CP both respondent in each survey continued to expect one declined somewhat in August, gross issuance of corpolicy firming in 2016, with respondents generally porate bonds was quite large. The overall credit qualexpecting the rate increase to occur at the December ity of the nonfinancial corporate sector, which had meeting. Based on the median responses, the most deteriorated a bit over the past few quarters, showed likely path of the target federal funds rate in 2017 signs of stabilizing over the intermeeting period. and 2018 was little changed. Financing conditions in commercial real estate (CRE) markets also remained accommodative. Com- Nominal Treasury yields increased moderately, on mercial mortgage-backed securities (CMBS) issuance net, since the July FOMC meeting, reflecting the picked up in August, likely reflecting the narrowing slight upward revision in the expected path for the of CMBS spreads—albeit to levels that were still

Minutes of Federal Open Market Committee Meetings | September 241 wider than typical—over the past few months. Japan. At its early August meeting, the Bank of Eng- Growth in CRE loans at banks continued to be land announced a rate cut, a resumption of its asset strong. purchase program, and a new bank funding program. Longer-term U.K. yields and the pound fell immedi- Gross issuance of municipal bonds in July and ately following the announcement but retraced these August was strong, credit quality remained stable, declines following better-than-expected economic and yields on municipal bonds edged down. data later in the period. The Bank of England main- Although Puerto Rico missed a small debt payment tained its policy stance at the September meeting, in due on August 1, prices of Puerto Rico’s benchmark line with market expectations. general obligation bonds were roughly unchanged over the intermeeting period. Staff Economic Outlook Financing conditions for households generally con- In the U.S. economic projection prepared by the staff tinued to be accommodative; however, mortgage for the September FOMC meeting, the forecast for markets remained relatively tight for borrowers with real GDP growth in 2016 through 2019 was little low credit scores. Interest rates on 30-year fixed-rate changed from the one presented in July. The pace of mortgages moved higher, in line with comparable- real GDP growth was forecast to be faster over the maturity Treasury yields, but remained at a low level. second half of this year than in the first half, primar- Mortgage refinancing activity in August was the ily reflecting a modest increase in the rate of growth highest in three years, reflecting lower mortgage rates of private domestic final purchases and a sizable during June and July. Consumer loan balances con- turnaround in inventory investment. The staff continued to increase, with credit card balances expand- tinued to project that real GDP would expand at a ing at a robust pace. modestly faster pace than potential output in 2016 through 2019, supported primarily by increases in Global risk asset prices broadly increased amid consumer spending and, to a lesser degree, by someimproving sentiment among investors and low vola- what faster growth in business investment beginning tility. Capital flows to EMEs continued, and sover- next year. (The staff slightly lowered its assumption eign debt spreads in these economies and corporate for potential output growth over the medium term bond spreads in both EMEs and AFEs narrowed fur- and in the longer run.) The unemployment rate was ther. European financial markets remained resilient forecast to remain flat over the remainder of this year following the Brexit vote, and European bank equity and then to gradually decline through the end of prices increased on net. 2019; over this period, the unemployment rate was projected to run below the staff’s estimate of its Announcements by foreign central banks garnered longer-run natural rate. investor attention and contributed to somewhat higher asset price volatility later in the period. The The forecast for consumer price inflation was essen- European Central Bank left its policy rates and asset tially unchanged from the previous projection. The purchase program unchanged at its September meet- staff continued to project that inflation would ing. Global yields moved higher and the euro increase over the next several years, as food and strengthened following the meeting, as some market energy prices along with the prices of non-energy participants had expected an extension of the pro- imports were expected to begin steadily rising this gram. The Bank of Japan (BOJ) left its policy rates year. However, inflation was projected to be marginunchanged at its July meeting and instead expanded ally below the Committee’s longer-run objective of its purchases of exchange-traded stock funds and 2 percent in 2019. introduced additional measures to facilitate dollar funding. Japanese bond yields increased notably and The staff viewed the uncertainty around its projecthe yen appreciated in the aftermath of the tions for real GDP growth, the unemployment rate, announcement. At its September meeting, the BOJ and inflation as similar to the average of the past introduced a new monetary policy framework, which 20 years. The risks to the forecast for real GDP were includes yield curve control and a commitment to seen as tilted to the downside, reflecting the staff’s expand the monetary base until inflation exceeds assessment that both monetary and fiscal policy 2 percent and stays above that target in a stable man- appeared to be better positioned to offset large posiner. The introduction of the BOJ’s new framework tive shocks than adverse ones. In addition, the staff elicited little immediate market reaction outside of continued to see the risks to the forecast from devel-

242 103rd Annual Report | 2016 opments abroad as skewed to the downside. Consis- Participants generally expected that, with gradual tent with the downside risks to aggregate demand, adjustments in the stance of monetary policy, ecothe staff viewed the risks to its outlook for the unem- nomic activity would expand at a moderate pace and ployment rate as tilted to the upside. The risks to the labor market conditions would strengthen somewhat projection for inflation were still judged as weighted further. Inflation was expected to remain low in the somewhat to the downside, partly reflecting the pos- near term, in part because of earlier declines in sibility that longer-term inflation expectations may energy prices, but to rise to 2 percent over the have edged down. medium term as the transitory effects of past declines in energy and import prices dissipated and the labor Participants’ Views on Current Conditions market strengthened further. A number of particiand the Economic Outlook pants indicated that there had been little change in their economic outlooks over recent months. A sub- In conjunction with this FOMC meeting, members stantial majority now viewed the near-term risks to of the Board of Governors and Federal Reserve the economic outlook as roughly balanced, with sev- Bank presidents submitted their projections of the eral of them indicating the risks from Brexit had most likely outcomes for real GDP growth, the receded. However, a few still judged that overall risks unemployment rate, inflation, and the federal funds were weighted to the downside, citing various factors rate for each year from 2016 through 2019 and over that included the possibility of weaker-than-expected the longer run.6 Each participant’s projections were growth in foreign economies, continued uncertainty conditioned on his or her judgment of appropriate associated with Brexit, the proximity of policy intermonetary policy. The longer-run projections repre- est rates to the effective lower bound, or persistent sented each participant’s assessment of the rate to headwinds to economic growth. Participants agreed which each variable would be expected to converge, that the Committee should continue to closely moniover time, under appropriate monetary policy and in tor inflation indicators and global economic and the absence of further shocks to the economy. These financial developments. projections and policy assessments are described in the Summary of Economic Projections, which is an Growth in consumer spending appeared to have addendum to these minutes. moderated somewhat in the third quarter from its rapid second-quarter pace, reflecting a softening in In their discussion of the economic situation and the retail sales since June. District contacts provided outlook, participants agreed that information mixed reports, consistent with some easing in growth received over the intermeeting period suggested that of sales. Nevertheless, incoming data pointed to stillthe labor market had continued to strengthen and solid growth in consumption expenditures overall. growth of economic activity had picked up from the Many participants noted that they expected housemodest pace seen in the first half of the year. hold spending to be a primary contributor to eco- Although the unemployment rate was little changed nomic growth going forward. They saw consumer in recent months, job gains had been solid, on aver- spending as likely to be supported by a number of age. Household spending had been growing strongly factors, including ongoing job gains, rising household but business fixed investment had remained soft. income and wealth, improved household balance Inflation had continued to run below the Commit- sheets, and buoyant consumer sentiment. tee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non- Economic activity in the second half of the year was energy imports. Market-based measures of inflation expected to be buoyed in part by a pickup in business compensation remained low; most survey-based fixed investment and some rebuilding of inventories. measures of longer-term inflation expectations were A recent increase in oil drilling rigs in operation was little changed, on balance, in recent months. Volatil- seen as a positive sign for business investment, ity in domestic and global asset markets was rela- although the continued low level of oil prices was still tively low over most of the intermeeting period, and weighing on capital investment in the energy industry. U.S. financial conditions were broadly Contacts in some Districts suggested that businesses accommodative. were taking a cautious approach to capital spending even outside of the energy sector—for instance, preferring to modernize existing manufacturing facilities 6 One participant did not submit longer-run projections for the rather than increase capacity by investing in new change in real GDP, the unemployment rate, or the federal funds rate. facilities—in light of continuing sluggish global

Minutes of Federal Open Market Committee Meetings | September 243 demand, shorter investment time horizons for busi- normal rate over the next couple of years, but they nesses, and uncertainty about prospects for govern- offered differing views about the extent of slack that ment policy and regulation. Nonresidential construc- currently remained in the labor market. Some particition was reported to be strong in a few Districts. pants pointed to the slowing in payroll gains and However, the sluggishness in the housing sector modest pickup in wages this year and judged that the appeared to have continued into the third quarter. A labor market had little or no remaining slack. Some couple of participants pointed to limited availability others noted that still-muted wage growth, a level of of lots and a shortage of skilled labor as restraining involuntary part-time employment that remained residential construction activity in their Districts; in elevated, and recent increases in labor force participaone District, constraints on the supply of new homes tion indicated that slack remained in resource utilizafor sale were expected to boost spending on home tion, or expressed the view that the longer-run norimprovements and offset some of the drag from the mal rate of unemployment was uncertain and could slowing in new construction. be lower than current estimates. Participants commented on a staff analysis showing differential pat- Participants’ reports on the manufacturing sector terns of unemployment across racial and ethnic indicated varying conditions across Districts, but, on groups that remained after taking education into the whole, manufacturing activity remained flat. The account; it was suggested that it might be worthwhile most recent survey evidence was downbeat, although to examine such issues further. smoothing through the past several months provided a more neutral signal. A couple of participants noted Recent readings on headline and core PCE price that the firming in crude oil prices had led to a stabi- inflation had come in about as expected, and particilization in drilling activity. In the agricultural sector, pants continued to anticipate that headline inflation lower crop prices continued to weigh on profit mar- would rise over the medium term to the Committee’s gins, farm income was expected to fall, and loan 2 percent objective. It was noted, however, that repayment rates had declined. 12-month core PCE price inflation had been running at a steady rate below 2 percent, and several partici- Global financial conditions had improved somewhat pants commented on factors that might be expected in recent months. However, participants noted that to restrain increases in inflation. Such factors economic growth in many foreign economies included the limited evidence of rising cost or price remained subdued, and inflation rates abroad gener- pressures, the apparent low responsiveness of inflaally continued to be quite low. Some participants tion to the rate of labor utilization, a possible downcontinued to see important downside risks from ward shift in inflation expectations, and remaining abroad. economic slack. The median expectation for inflation over the next 5 to 10 years from the Michigan survey Participants generally agreed that labor market con- dropped to its historical low of 2.5 percent in August ditions had improved appreciably over the course of and held steady in September. However, a couple of the year, with monthly payroll gains averaging about participants indicated that the drop in some survey- 180,000. Reports from several Districts indicated based measures of inflation expectations could be widespread increases in employment over the inter- explained by a decline in the number of respondents meeting period. Although job gains had slowed from who had previously expected relatively high inflation their pace in 2015, average monthly increases so far outcomes. Overall, survey-based measures of longerthis year had exceeded most estimates discussed by term expectations were judged to have been reasonparticipants of monthly payroll increases that could ably stable in recent months. Many participants be expected to prevail with economic growth pro- observed that core CPI inflation had been running ceeding at its longer-run trend rate. In addition, sev- appreciably above core PCE inflation; it was noted eral participants cited the rise in the labor force par- that different weights on rents and medical prices as ticipation rate since late 2015 or the increase in the well as different measurement of health-care inflation employment-to-population ratio—series with down- in the two indexes largely accounted for the disparity. ward structural trends—as welcome developments. However, it was noted that the unemployment rate In their discussion of the outlook, participants conand broader measures of unemployment had sidered the likelihood of, and the potential benefits changed little since the beginning of the year. Partici- and costs associated with, a more pronounced underpants generally expected the unemployment rate to shooting of the longer-run normal rate of unemployrun somewhat below their estimates of its longer-run ment than envisioned in their modal forecasts. A

244 103rd Annual Report | 2016 number of participants noted that they expected the Participants discussed reasons for the apparent fall unemployment rate to run somewhat below its over recent years in the neutral real rate of interlonger-run normal rate and saw a firming of mon- est—or r*— including lower productivity growth, etary policy over the next few years as likely to be demographic shifts, and an excess of saving around appropriate. A few participants referred to historical the world. Although several participants indicated episodes when the unemployment rate appeared to that there was uncertainty as to how long the low have fallen well below its estimated longer-run nor- level of r* would persist, one pointed to a growing mal level. They observed that monetary tightening in consensus that the long period of slow productivity those episodes typically had been followed by reces- growth and recent evidence that the neutral rate had sion and a large increase in the unemployment rate. fallen across countries suggested that r* was likely to Several participants viewed this historical experience remain low for some time. A number of participants as relevant for the Committee’s current decisionmak- noted that they had revised down their estimates of ing and saw it as providing evidence that waiting too longer-run r* in their contributions to the Summary long to resume the process of policy firming could of Economic Projections for this meeting. Participose risks to the economic expansion, or noted that a pants discussed the implications of a fall in longersignificant increase in unemployment would have dis- run r* for monetary policy, including the possibility proportionate effects on low-skilled workers and that policy interest rates might be closer to the effecminority groups. Some others judged this historical tive lower bound more frequently and for a long experience to be of limited applicability in the pres- period, or that monetary policy was ill equipped to ent environment because the economy was growing address structural factors such as the decline in proonly modestly above trend, inflation was below the ductivity growth. A couple of participants noted that Committee’s 2 percent objective, and inflation expec- a lower estimated value for r* over the near term tations were low—circumstances that differed mark- implied that monetary policy was providing less edly from those earlier episodes. Moreover, the accommodation than previously thought. increase in labor force participation over the past year suggested that there could be greater scope for Against the backdrop of their economic projections, economic growth without putting undue pressure on participants discussed whether available information labor markets; it was also noted that the longer-run warranted taking another step to reduce policy normal rate of unemployment could be lower than accommodation at this meeting. Participants generpreviously thought, with a similar implication. Par- ally agreed that the case for increasing the target ticipants agreed that it would be useful to continue to range for the federal funds rate had strengthened in analyze and discuss the dynamics of the adjustment recent months. Many of them, however, expressed of the economy and labor markets in circumstances the view that recent evidence suggested that some when unemployment falls well below its estimated slack remained in the labor market. With inflation longer-run normal rate. continuing to run below the Committee’s 2 percent objective and few signs of increased pressure on With regard to recent financial developments, it was wages and prices, most of these participants thought noted that regulatory changes and impending MMF it would be appropriate to await further evidence of reforms likely had led to an increase in certain short- continued progress toward the Committee’s statutory term interest rates, but these developments were objectives. In contrast, some other participants expected to have only a small effect on the borrowing believed that the economy was at or near full employcosts of nonfinancial corporations and little adverse ment and inflation was moving toward 2 percent. influence on overall financial market conditions. A They maintained that a further delay in raising the few participants expressed concern that the pro- target range would unduly increase the risk of the tracted period of very low interest rates might be unemployment rate falling markedly below its longerencouraging excessive borrowing and increased lever- run normal level, necessitating a more rapid removal age in the nonfinancial corporate sector. Finally, one of monetary policy accommodation that could participant expressed the view that prolonged periods shorten the economic expansion. In addition, several of low interest rates could encourage pension funds, participants expressed concern that continuing to endowments, and investors with fixed future payout delay an increase in the target range implied a further obligations to save more, depressing economic divergence from policy benchmarks based on the growth and adding to downward pressure on the Committee’s past behavior or risked eroding its credneutral real interest rate. ibility, especially given that recent economic data had

Minutes of Federal Open Market Committee Meetings | September 245 largely corroborated the Committee’s economic tended that the slower progress seen this year in other outlook. labor market indicators—such as the unemployment rate, broader measures of labor utilization, job open- Among the participants who supported awaiting fur- ings and quits, and wage growth—indicated that ther evidence of continued progress toward the Com- slack was being taken up at only a modest pace. This mittee’s objectives, several stated that the decision at view suggested that proceeding cautiously with this meeting was a close call. Some participants reducing monetary policy accommodation could probelieved that it would be appropriate to raise the tar- mote further labor market improvement. In contrast, get range for the federal funds rate relatively soon if a few other members were concerned that, without a the labor market continued to improve and economic prompt resumption of gradual increases in the target activity strengthened, while some others preferred to range for the federal funds rate, labor market condiwait for more convincing evidence that inflation was tions could tighten well beyond normal levels over moving toward the Committee’s 2 percent objective. the next few years, potentially necessitating a subse- Some participants noted the importance of clearly quent sharp tightening of monetary policy that could communicating to the public the conditions that shorten the economic expansion. would warrant an increase in the policy rate. Members continued to expect inflation to remain low Committee Policy Action in the near term, but most anticipated that, with gradual adjustments in the stance of monetary In their discussion of monetary policy for the period policy, it would rise gradually to the Committee’s ahead, members judged that the information received 2 percent objective over the medium term. Many since the Committee met in July indicated that the members remarked that there were few signs of labor market had continued to strengthen and emerging inflationary pressures or that progress on growth of economic activity had picked up from the inflation had been slow. A couple of other members modest pace seen in the first half of this year. pointed to recent readings on core CPI inflation as Although the unemployment rate was little changed suggesting that PCE price inflation was close to in recent months, job gains had been solid, on aver- meeting the Committee’s 2 percent inflation objecage. Household spending had been growing strongly tive. Nonetheless, in light of the current shortfall of but business fixed investment had remained soft. inflation from 2 percent, members agreed that they Inflation had continued to run below the Commit- would continue to carefully monitor actual and tee’s 2 percent longer-run objective, partly reflecting expected progress toward the Committee’s inflation earlier declines in energy prices and in prices of non- goal. energy imports. Market-based measures of inflation compensation remained low; most survey-based After assessing the outlook for economic activity, the measures of longer-term inflation expectations were labor market, and inflation, as well as the risks little changed, on balance, in recent months. In addi- around that outlook, the Committee decided to tion, financial conditions remained accommodative. maintain the target range for the federal funds rate at ¼ to ½ percent at this meeting. Members generally With respect to the economic outlook and its impli- agreed that the case for an increase in the policy rate cations for monetary policy, members continued to had strengthened. But, with some slack likely remainexpect that, with gradual adjustments in the stance of ing in the labor market and inflation continuing to monetary policy, economic activity would expand at run below the Committee’s objective, a majority of a moderate pace and labor market indicators would members judged that the Committee should, for the strengthen somewhat further. They judged that near- time being, await further evidence of progress toward term risks to the economic outlook now appeared its objectives of maximum employment and 2 percent roughly balanced. inflation before increasing the target range for the federal funds rate. It was noted that a reasonable Members generally acknowledged that labor market argument could be made either for an increase at this conditions had improved appreciably over the past meeting or for waiting for some additional informayear, evidenced in particular by the solid pace of tion on the labor market and inflation. A couple of monthly payroll employment gains. Some of them members emphasized that a cautious approach to noted that the increase in the labor force participa- removing accommodation was warranted given the tion rate this year suggested more room for labor proximity of policy rates to the effective lower supply to expand than previously expected, or con- bound, as the Committee had more scope to increase

246 103rd Annual Report | 2016 policy rates, if necessary, than to reduce them. Three ties and of rolling over maturing Treasury securities members preferred to raise the target range for the at auction, and it anticipated doing so until normalfederal funds rate by 25 basis points at this meeting. ization of the level of the federal funds rate is well They cautioned that postponing policy firming for under way. Members noted that this policy, by keeptoo long could push the unemployment rate mark- ing the Committee’s holdings of longer-term securiedly below its longer-run normal rate over the next ties at sizable levels, should help maintain accommofew years. If so, the Committee might then need to dative financial conditions. tighten policy more rapidly, thereby posing risks to continued economic expansion. A couple of these At the conclusion of the discussion, the Committee members expressed concern about the potential voted to authorize and direct the Federal Reserve adverse effects on the credibility of the Committee’s Bank of New York, until it was instructed otherwise, policy communications if the next step in the gradual to execute transactions in the SOMA in accordance removal of accommodation was further postponed. with the following domestic policy directive, to be released at 2:00 p.m.: The Committee agreed that, in determining the timing and size of future adjustments to the target range “Effective September 22, 2016, the Federal Open for the federal funds rate, it would assess realized and Market Committee directs the Desk to underexpected economic conditions relative to its objec- take open market operations as necessary to tives of maximum employment and 2 percent infla- maintain the federal funds rate in a target range tion. This assessment would take into account a wide of ¼ to ½ percent, including overnight reverse range of information, including measures of labor repurchase operations (and reverse repurchase market conditions, indicators of inflation pressures operations with maturities of more than one day and inflation expectations, and readings on financial when necessary to accommodate weekend, holiand international developments. The Committee day, or similar trading conventions) at an offerexpected that economic conditions would evolve in a ing rate of 0.25 percent, in amounts limited only manner that would warrant only gradual increases in by the value of Treasury securities held outright the federal funds rate, and that the federal funds rate in the System Open Market Account that are was likely to remain, for some time, below levels that available for such operations and by a perare expected to prevail in the longer run. However, counterparty limit of $30 billion per day. members emphasized that the actual path of the federal funds rate would depend on the economic out- The Committee directs the Desk to continue look as informed by incoming data. Several members rolling over maturing Treasury securities at aucjudged that it would be appropriate to increase the tion and to continue reinvesting principal paytarget range for the federal funds rate relatively soon ments on all agency debt and agency mortgageif economic developments unfolded about as the backed securities in agency mortgage-backed Committee expected; they saw the new sentence in securities. The Committee also directs the Desk the third paragraph of the Committee’s statement—a to engage in dollar roll and coupon swap transsentence indicating that the case for an increase in the actions as necessary to facilitate settlement of federal funds rate had strengthened but that the the Federal Reserve’s agency mortgage-backed Committee had decided, for the time being, to wait securities transactions.” for further evidence of continued progress toward its objectives—as reflecting this view. A few others, how- The vote also encompassed approval of the statement ever, emphasized that decisions regarding near-term below to be released at 2:00 p.m.: adjustments in the stance of monetary policy would appropriately remain data dependent and expressed “Information received since the Federal Open some concern that the new sentence might be misread Market Committee met in July indicates that the as indicating that the passage of time rather than the labor market has continued to strengthen and accumulation of evidence would be the key factor in growth of economic activity has picked up from the Committee’s decisions at future meetings. the modest pace seen in the first half of this year. Although the unemployment rate is little The Committee also decided to maintain its existing changed in recent months, job gains have been policy of reinvesting principal payments from its solid, on average. Household spending has been holdings of agency debt and agency mortgage- growing strongly but business fixed investment backed securities in agency mortgage-backed securi- has remained soft. Inflation has continued to

Minutes of Federal Open Market Committee Meetings | September 247 run below the Committee’s 2 percent longer-run the federal funds rate; the federal funds rate is objective, partly reflecting earlier declines in likely to remain, for some time, below levels that energy prices and in prices of non-energy are expected to prevail in the longer run. Howimports. Market-based measures of inflation ever, the actual path of the federal funds rate will compensation remain low; most survey-based depend on the economic outlook as informed by measures of longer-term inflation expectations incoming data. are little changed, on balance, in recent months. The Committee is maintaining its existing policy Consistent with its statutory mandate, the Com- of reinvesting principal payments from its holdmittee seeks to foster maximum employment ings of agency debt and agency mortgageand price stability. The Committee expects that, backed securities in agency mortgage-backed with gradual adjustments in the stance of mon- securities and of rolling over maturing Treasury etary policy, economic activity will expand at a securities at auction, and it anticipates doing so moderate pace and labor market conditions will until normalization of the level of the federal strengthen somewhat further. Inflation is funds rate is well under way. This policy, by expected to remain low in the near term, in part keeping the Committee’s holdings of longerbecause of earlier declines in energy prices, but term securities at sizable levels, should help to rise to 2 percent over the medium term as the maintain accommodative financial conditions.” transitory effects of past declines in energy and import prices dissipate and the labor market Voting for this action: Janet L. Yellen, William C. strengthens further. Near-term risks to the eco- Dudley, Lael Brainard, James Bullard, Stanley nomic outlook appear roughly balanced. The Fischer, Jerome H. Powell, and Daniel K. Tarullo. Committee continues to closely monitor inflation indicators and global economic and finan- Voting against this action: Esther L. George, Loretta cial developments. J. Mester, and Eric Rosengren. Against this backdrop, the Committee decided Mses. George and Mester and Mr. Rosengren disto maintain the target range for the federal funds sented because they preferred to increase the target rate at ¼ to ½ percent. The Committee judges range for the federal funds rate by 25 basis points at that the case for an increase in the federal funds this meeting. rate has strengthened but decided, for the time being, to wait for further evidence of continued Ms. George judged that with the unemployment rate progress toward its objectives. The stance of and inflation at or near their longer-run levels, monetary policy remains accommodative, removing some accommodation was warranted and thereby supporting further improvement in would be consistent with the prescriptions of several labor market conditions and a return to 2 per- frameworks for assessing the appropriate stance of cent inflation. monetary policy. She was concerned that the Committee’s recent policy choices had incorporated too In determining the timing and size of future much discretion, and her assessment was that by adjustments to the target range for the federal waiting longer to adjust the policy stance and deviatfunds rate, the Committee will assess realized ing from the appropriate path to policy normalizaand expected economic conditions relative to its tion, the Committee risked eroding the credibility of objectives of maximum employment and 2 per- its policy communications. cent inflation. This assessment will take into account a wide range of information, including Ms. Mester noted that the economy had made conmeasures of labor market conditions, indicators siderable progress on the Committee’s statutory of inflation pressures and inflation expectations, goals, the outlook for continued progress had been and readings on financial and international corroborated by recent economic developments, and developments. In light of the current shortfall of risks around that outlook had diminished. In these inflation from 2 percent, the Committee will circumstances, she believed it appropriate to graducarefully monitor actual and expected progress ally increase the target range for the federal funds toward its inflation goal. The Committee expects rate, consistent with the Committee’s recent commuthat economic conditions will evolve in a man- nications. A gradual path would give the Committee ner that will warrant only gradual increases in a better chance of recalibrating the policy path over

248 103rd Annual Report | 2016 time as it gains more insights into the underlying and over the longer run.7 Each participant’s projecstructure of the economy. Further delays in taking tion was based on information available at the time the next step on the gradual path might require the of the meeting, together with his or her assessment of Committee to subsequently steepen the policy path appropriate monetary policy and assumptions about to foster its goals, which would be inconsistent with the factors likely to affect economic outcomes. The the Committee’s recent communications, thereby longer-run projections represent each participant’s posing risks to the Committee’s credibility. assessment of the value to which each variable would be expected to converge, over time, under appropriate Mr. Rosengren noted that, since the Committee’s monetary policy and in the absence of further shocks most recent policy action in late 2015, significant to the economy. “Appropriate monetary policy” is progress had been made toward the Committee’s defined as the future path of policy that each particidual mandate. He believed that with inflation gradu- pant deems most likely to foster outcomes for ecoally rising and robust employment growth moving the nomic activity and inflation that best satisfy his or economy very close to full employment, it was appro- her individual interpretation of the Federal Reserve’s priate to continue the gradual normalization of mon- objectives of maximum employment and stable etary policy at this meeting. He believed that a failure prices. to do so could require the Committee to raise policy interest rates faster and more aggressively later on, Most FOMC participants expected that, under which could shorten, rather than lengthen, the dura- appropriate monetary policy, growth in real gross tion of the economic expansion. domestic product (GDP) would pick up a bit next year and run at or a little above their individual esti- Consistent with the Committee’s decision to leave the mates of its longer-run rate in 2017 and 2018, and a target range for the federal funds rate unchanged, the majority of participants expected real GDP growth Board of Governors took no action to change the to be at its longer-run trend rate in 2019. A large interest rates on reserves or discount rates. majority of participants projected that the unemployment rate will fall to or modestly below their estimates of its longer-run normal level over the next two It was agreed that the next meeting of the Committee years. Many participants expected the unemployment would be held on Tuesday–Wednesday, Novemrate to edge up to or toward their individual estiber 1–2, 2016. The meeting adjourned at 10:45 a.m. mates of its longer-run level in 2019. All participants on September 21, 2016. projected that inflation, as measured by the fourquarter percentage change in the price index for per- Notation Vote sonal consumption expenditures (PCE), would By notation vote completed on August 16, 2016, the increase over the next two years, and all but one Committee unanimously approved the minutes of the expected inflation to be within 0.1 percentage point Committee meeting held on July 26–27, 2016. of the Committee’s objective in 2019. Table 1 and figure 1 provide summary statistics for the projections. Brian F. Madigan Secretary As shown in figure 2, almost all participants expected that the evolution of the economy would warrant only gradual increases in the federal funds rate to Addendum: achieve and maintain the Committee’s objectives Summary of Economic Projections over time. Participants generally judged that the appropriate level of the federal funds rate in 2019 would still be at or below their estimates of its In conjunction with the Federal Open Market Comlonger-run rate. However, because the economic outmittee (FOMC) meeting held on September 20–21, look is inherently uncertain, participants’ assess- 2016, meeting participants submitted their projections of the most likely outcomes for real output 7 One participant did not submit longer-run projections for the growth, the unemployment rate, inflation, and the change in real GDP, the unemployment rate, or the federal federal funds rate for each year from 2016 to 2019 funds rate.

Minutes of Federal Open Market Committee Meetings | September 249 ments of appropriate policy are subject to change in policy, was 1.8 percent in 2016, 2 percent in 2017 and response to revisions to their economic outlooks and 2018, and 1.8 percent in 2019; the median of projecassociated risks. tions for the longer-run normal GDP growth rate was 1.8 percent. Most participants projected that Participants generally viewed the level of uncertainty economic growth will pick up a bit next year and run associated with their individual forecasts for eco- at or slightly above their individual estimates of its nomic growth, unemployment, and inflation as longer-run rate in 2017 and 2018, and a majority of broadly similar to the norms of the previous participants expected real GDP growth to be at its 20 years. Most participants also judged the risks longer-run trend rate in 2019. Participants pointed to around their projections for economic activity and a number of factors that they expected would confor the unemployment rate as broadly balanced, tribute to above-trend output growth over the next while several participants saw the risks to their GDP few years, including some firming in business investgrowth forecasts as weighted to the downside. In ment, diminution of the drag on net exports from a addition, most participants saw the risks to their strong dollar, continued improvements in household forecasts for inflation as broadly balanced, although and business balance sheets, and accommodative some viewed the risks to their inflation forecasts as financial conditions. tilted to the downside. The median of participants’ projections for real GDP The Outlook for Economic Activity growth in 2016 was lower than the median shown in the June 2016 Summary of Economic Projections The median of participants’ projections for the (SEP). Many participants who lowered their projecgrowth rate of real GDP, conditional on their indi- tions for GDP growth this year attributed their revividual assumptions about appropriate monetary sions to weaker-than-expected GDP growth in the Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, September 2016 Percent Median1 Central tendency2 Range3 Variable Longer Longer L onger 2 016 2017 2018 2019 run 2016 2017 2018 2019 run 2 016 2 017 2 018 2019 run Change in real GDP 1.8 2.0 2.0 1.8 1.8 1.7– 1.9 1.9 – 2.2 1.8 – 2.1 1.7 – 2.0 1.7 – 2.0 1.7 –2 .0 1 .6– 2 .5 1 .5– 2 .3 1 .6 – 2.2 1 .6– 2 .2 June projection 2.0 2.0 2.0 n.a. 2.0 1.9 – 2.0 1.9 – 2.2 1.8 – 2.1 n.a. 1.8 – 2.0 1 .8– 2 .2 1 .6– 2 .4 1 .5– 2.2 n.a. 1.6 – 2.4 Unemployment rate 4.8 4.6 4.5 4.6 4.8 4.7 – 4.9 4.5 – 4.7 4.4 – 4.7 4.4 – 4.8 4.7 – 5.0 4.7 –4 .9 4 .4– 4.8 4 .3 – 4.9 4.2 – 5.0 4.5 –5 .0 June projection 4.7 4.6 4.6 n.a. 4.8 4.6 – 4.8 4.5 – 4.7 4.4 – 4.8 n.a. 4.7 – 5.0 4 .5– 4 .9 4 .3– 4 .8 4 .3– 5.0 n.a. 4.6 – 5.0 PCE inflation 1.3 1.9 2.0 2.0 2.0 1.2 – 1.4 1.7 – 1.9 1.8 – 2.0 1.9 – 2.0 2.0 1.1– 1 .7 1 .5– 2 .0 1 .8– 2.0 1.8 –2 .1 2 .0 June projection 1.4 1.9 2.0 n.a. 2.0 1.3 – 1.7 1.7 – 2.0 1.9 – 2.0 n.a. 2.0 1 .3– 2 .0 1 .6– 2.0 1 .8 – 2.1 n.a. 2.0 Core PCE inflation4 1.7 1.8 2.0 2.0 1.6 – 1.8 1.7 – 1.9 1.9 – 2.0 2.0 1.5 – 2.0 1 .6 – 2.0 1 .8 – 2.0 1.8 – 2.1 June projection 1.7 1.9 2.0 n.a. 1.6 – 1.8 1.7 – 2.0 1.9 – 2.0 n.a. 1.3– 2.0 1.6 –2 .0 1.8 –2 .1 n.a. Memo: Projected appropriate policy path Federal funds rate 0.6 1.1 1.9 2.6 2.9 0.6 – 0.9 1.1 – 1.8 1.9 – 2.8 2.4 – 3.0 2.8 – 3.0 0.4 – 1.1 0.6– 2 .1 0 .6– 3 .1 0 .6 – 3.8 2 .5 – 3.8 June projection 0.9 1.6 2.4 n.a. 3.0 0.6 – 0.9 1.4 – 1.9 2.1 – 2.9 n.a. 3.0 – 3.3 0.6 – 1.4 0.6 – 2.4 0.6 – 3.4 n .a. 2.8 – 3.8 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 June projections were made in conjunction with the meeting of the Federal Open Market Committee on June 14–15, 2016. One participant did not submit longer-run projections in conjunction with the June 14–15, 2016, meeting. For the September 20–21, 2016, meeting, one participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the federal funds rate. 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.

250 103rd Annual Report | 2016 Figure 1. Medians, central tendencies, and ranges of economic projections, 2016–19 and over the longer run Percent Change in real GDP Median of projections Central tendency of projections 3 Range of projections 2 Actual 1 2011 2012 2013 2014 2015 2016 2017 2018 2019 Longer run Percent Unemployment rate 9 8 7 6 5 4 2011 2012 2013 2014 2015 2016 2017 2018 2019 Longer run Percent PCE inflation 3 2 1 2011 2012 2013 2014 2015 2016 2017 2018 2019 Longer run Percent Core PCE inflation 3 2 1 2011 2012 2013 2014 2015 2016 2017 2018 2019 Longer run Note: Definitions of variables and other explanations are in the notes to table 1. The data for the actual values of the variables are annual.

Minutes of Federal Open Market Committee Meetings | September 251 Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate Percent 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2016 2017 2018 2019 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. One participant did not submit longer-run projections for the federal funds rate.

252 103rd Annual Report | 2016 first half of the year. The medians of participants’ weaker-than-expected incoming data, while the distriprojections for real GDP growth in 2017 and 2018 bution of projections for core PCE price inflation were unchanged from June at 2 percent. This pace this year narrowed. For 2017 and 2018, the distribuwas slightly above the median projection of the tions of projections for both total and core PCE longer-run growth rate of GDP, which was revised price inflation shifted down slightly. down to 1.8 percent. Appropriate Monetary Policy The median of projections for the unemployment rate at the end of 2016 was 4.8 percent, slightly Figure 3.E provides the distribution of participants’ higher than in June. Based on the median projections, judgments regarding the appropriate level of the tarthe unemployment rate was anticipated to decline to get federal funds rate at the end of each year from 4.6 percent in 2017 and to 4.5 percent in 2018 before 2016 to 2019 and over the longer run.8 The distribumoving up slightly to 4.6 percent in 2019. The tions for 2016 to 2018 shifted down. The median promedian for 2019 remained below the 4.8 percent jections of the federal funds rate continued to show median assessment of the longer-run normal unem- gradual increases, from 0.63 percent at the end of ployment rate, with a majority of participants pro- 2016 to 1.13 percent at the end of 2017, 1.88 percent jecting the unemployment rate in 2019 to be 0.2 per- at the end of 2018, and 2.63 percent at the end of centage point or more below their individual esti- 2019; the median of the longer-run projections of the mates of the longer-run normal rate. federal funds rate was 2.88 percent. Relative to the June projections, the median of the projections for Figures 3.A and 3.B show the distributions of par- the federal funds rate at the end of 2016 was 0.25 perticipants’ projections for real GDP growth and the centage point lower, and for 2017 and 2018, the unemployment rate from 2016 to 2019 and in the lon- median projections were each 0.50 percentage point ger run. The distribution of individual projections of lower. Compared with the June SEP, most partici- GDP growth for 2016 shifted lower relative to the pants reduced their projection for the federal funds distribution of the June projections, while the distri- rate in the longer run; the median moved down butions for 2017 and 2018 were little changed. The 0.13 percentage point, to 2.88 percent. distribution of projections for GDP growth in the longer run shifted down slightly. The distributions of In discussing their September forecasts, many participrojections for the unemployment rate were little pants expressed a view that increases in the federal changed except for a shift upward for 2016. funds rate over the next several years would need to be gradual in light of a short-term neutral interest The Outlook for Inflation rate that was currently low and likely to rise only slowly. A number of participants attributed the low In the September SEP, the median of projections for level of the short-term neutral rate to the persistence headline PCE price inflation in 2016 was 1.3 percent, of low productivity growth, continued strength of a bit lower than in June. The projections for headline the dollar, a weak outlook for economic growth PCE price inflation over the next two years and in abroad, demand for safe longer-term assets, and the longer run were little changed since June, with the other factors, and they anticipated that the effects of median inflation projection still rising to 1.9 percent these factors would fade gradually over time. Some in 2017 and to the Committee’s objective of 2 percent participants noted the proximity of short-term nomiin 2018, then remaining there in 2019. All partici- nal interest rates to the effective lower bound as limitpants but one projected that inflation will be within ing the Committee’s ability to increase monetary 0.1 percentage point of the Committee’s objective in accommodation to counter adverse shocks to the 2019. The median of individual projections for core economy. These participants judged that, as a result, PCE price inflation increases gradually over the next two years. 8 One participant’s projections for the federal funds rate, GDP growth, the unemployment rate, and inflation were informed by Figures 3.C and 3.D provide information on the dis- the view that there are multiple possible medium-term regimes for the U.S. economy, that these regimes are persistent, and that tribution of participants’ views about the outlook for the economy shifts between regimes in a way that cannot be inflation. The distribution of projections for headline forecast. Under this view, the economy currently is in a regime PCE price inflation for this year shifted down relative characterized by expansion of economic activity with low productivity growth and a low short-term real interest rate, but to projections for the June meeting, with some parlonger-term outcomes for variables other than inflation cannot ticipants attributing their forecast revisions to be usefully projected.

Minutes of Federal Open Market Committee Meetings | September 253 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2016–19 and over the longer run Number of participants 2016 September projections 18 June projections 16 14 12 10 8 6 4 2 1.4 - 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 1.5 1.7 1.9 2.1 2.3 2.5 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.4 - 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 1.5 1.7 1.9 2.1 2.3 2.5 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.4 - 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 1.5 1.7 1.9 2.1 2.3 2.5 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.4 - 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 1.5 1.7 1.9 2.1 2.3 2.5 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.4 - 1.6 - 1.8 - 2.0 - 2.2 - 2.4 - 1.5 1.7 1.9 2.1 2.3 2.5 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

254 103rd Annual Report | 2016 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2016–19 and over the longer run Number of participants 2016 September projections 18 June projections 16 14 12 10 8 6 4 2 4.2- 4.4- 4.6- 4.8- 5.0- 4.3 4.5 4.7 4.9 5.1 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- 4.3 4.5 4.7 4.9 5.1 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- 4.3 4.5 4.7 4.9 5.1 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 4.2- 4.4- 4.6- 4.8- 5.0- 4.3 4.5 4.7 4.9 5.1 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- 4.3 4.5 4.7 4.9 5.1 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | September 255 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2016–19 and over the longer run Number of participants 2016 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 - 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 11..11 -- 11..33 -- 11..55 -- 11..77 -- 11..99 -- 22..11 -- 11..22 11..44 11..66 11..88 22..00 22..22 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 11..11 -- 11..33 -- 11..55 -- 11..77 -- 11..99 -- 22..11 -- 11..22 11..44 11..66 11..88 22..00 22..22 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 11..11 -- 11..33 -- 11..55 -- 11..77 -- 11..99 -- 22..11 -- 11..22 11..44 11..66 11..88 22..00 22..22 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.1 - 1.3 - 1.5 - 1.7 - 1.9 - 2.1 - 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

256 103rd Annual Report | 2016 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2016–19 Number of participants 2016 September projections 18 June projections 16 14 12 10 8 6 4 2 1.3- 1.5- 1.7- 1.9- 2.1- 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.3- 1.5- 1.7- 1.9- 2.1- 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.3- 1.5- 1.7- 1.9- 2.1- 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.3- 1.5- 1.7- 1.9- 2.1- 1.4 1.6 1.8 2.0 2.2 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | September 257 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, 2016–19 and over the longer run Number of participants 2016 September projections 18 June projections 16 14 12 10 8 6 4 2 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 - 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 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 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 - 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 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 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 - 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 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 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 - 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 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 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 - 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 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. One participant did not submit longer-run projections for the federal funds rate in conjunction with the June 14–15, 2016, meeting. One participant did not submit longer-run projections for the federal funds rate in conjunction with the September 20–21, 2016, meeting.

258 103rd Annual Report | 2016 the Committee should take a cautious approach to Table 2. Average historical projection error ranges removing policy accommodation. Participants cited a Percentage points number of factors that pushed down their projections of the longer-run federal funds rate, including Variable 2016 2 017 2018 2019 domestic and global demographic trends and weak productivity growth, which together imply a slower Change in real GDP1 ±1.3 ± 1.9 ±2.1 ±2.2 Unemployment rate1 ±0.3 ± 1.0 ±1.7 ±2.0 pace of trend output growth. Total consumer prices2 ±0.8 ± 1.1 ±1.1 ±1.1 Uncertainty and Risks Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 1995 through 2015 that were released in the fall by various private and government forecasters. As described in the box “Forecast The left-hand column of figure 4 shows that, for each Uncertainty,” under certain assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, and consumer prices will be in variable, all but a few participants judged the levels of ranges implied by the average size of projection errors made in the past. For more uncertainty associated with their September projec- information, see David Reifschneider and Peter Tulip (2007), “Gauging the Uncertainty of the Economic Outlook from Historical Forecasting Errors,” Finance tions for real GDP growth, the unemployment rate, and Economics Discussion Series 2007-60 (Washington: Board of Governors of and headline inflation to be broadly similar to the the Federal Reserve System, November), available at www.federalreserve.gov/ pubs/feds/2007/200760/200760abs.html; and Board of Governors of the Federal average of the past 20 years, and all but one partici- Reserve System, Division of Research and Statistics (2014), “Updated Historical pant viewed uncertainty around core inflation to be Forecast Errors,” memorandum, April 9, www.federalreserve.gov/foia/files/ 20140409-historical-forecast-errors.pdf. broadly similar to its average historical level.9 One 1 Definitions of variables are in the general note to table 1. participant saw uncertainty surrounding real GDP 2 Measure is the overall consumer price index, the price measure that has been growth as higher than average, down from three par- most widely used in government and private economic forecasts. Projection is percent change, fourth quarter of the previous year to the fourth quarter of ticipants in June. Participants noted that continued the year indicated. uncertainty about the rate of productivity growth and concerns about international developments were sources of uncertainty attending their forecasts of real GDP growth. Most participants’ assessments of assessment to some signs that the momentum of the level of uncertainty surrounding their economic growth in domestic demand may be slowing, busiprojections did not change materially since June. nesses’ caution regarding investment and hiring decisions, the risk of adverse shocks to U.S. economic For each variable, the number of participants viewing activity from developments abroad, or potential limthe risks as balanced increased since June, and fewer its to the ability of monetary policy to respond to participants assessed the risks to economic growth as adverse shocks near the effective lower bound on weighted to the downside or viewed the risks to short-term interest rates. As indicated in the two unemployment as weighted to the upside (figure 4, bottom-right figures, the number of participants who top two panels in the right-hand column). Particisaw the risks to their inflation projections as broadly pants who revised their view from an assessment that balanced increased; those who revised their view the risks to GDP growth were to the downside to a from an assessment that the risks to inflation were view that the risks were broadly balanced cited reatilted downward pointed to an easing of concerns sons such as an easing of concerns regarding the about global financial developments or accumulating potential for global economic and financial condievidence that inflation expectations were remaining tions to deteriorate. Participants who saw the risks to anchored at policy-consistent levels. Those who con- GDP growth as tilted to the downside attributed this tinued to judge that the risks to inflation were weighted to the downside cited the risks associated 9 Table 2 provides estimates of the forecast uncertainty for the with encountering negative economic shocks when change in real GDP, the unemployment rate, and total consumer price inflation over the period from 1996 through 2015. the policy rate is close to the effective lower bound or At the end of this summary, the box “Forecast Uncertainty” with continued low readings on survey-based measdiscusses the sources and interpretation of uncertainty in the ures of inflation expectations and financial-market economic forecasts and explains the approach used to assess the uncertainty and risks attending the participants’ projections. measures of inflation compensation.

Minutes of Federal Open Market Committee Meetings | September 259 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 notes to table 1.

260 103rd Annual Report | 2016 Forecast Uncertainty The economic projections provided by the members the third year, and 0.8 to 5.2 percent in the fourth of the Board of Governors and the presidents of the year. The corresponding 70 percent confidence inter- Federal Reserve Banks inform discussions of mon- vals for overall inflation would be 1.2 to 2.8 percent in etary policy among policymakers and can aid public the current year and 0.9 to 3.1 percent in the second, understanding of the basis for policy actions. Con- third, and fourth 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 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

Minutes of Federal Open Market Committee Meetings | November 261 Meeting Held Michael Held Deputy General Counsel on November 1–2, 2016 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, November 1, 2016, at 10:00 a.m. and continued on David W. Wilcox Wednesday, November 2, 2016, at 9:00 a.m.1 Economist Thomas A. Connors, Troy Davig, Present Michael P. Leahy, Stephen A. Meyer, Janet L. Yellen Ellis W. Tallman, Christopher J. Waller, Chair and William Wascher Associate Economists William C. Dudley Vice Chairman Simon Potter Manager, System Open Market Account Lael Brainard Lorie K. Logan James Bullard Deputy Manager, System Open Market Account Stanley Fischer Matthew J. Eichner2 Esther L. George Director, Division of Reserve Bank Operations and Loretta J. Mester Payment Systems, Board of Governors Jerome H. Powell Michael S. Gibson Director, Division of Banking Supervision and Eric Rosengren Regulation, Board of Governors Daniel K. Tarullo Nellie Liang Charles L. Evans, Patrick Harker, Director, Division of Financial Stability, Robert S. Kaplan, Neel Kashkari, Board of Governors and Michael Strine Margie Shanks Alternate Members of the Federal Open Market Deputy Secretary, Office of the Secretary, Committee Board of Governors Jeffrey M. Lacker, Dennis P. Lockhart, James A. Clouse and John C. Williams Deputy Director, Division of Monetary Affairs, Presidents of the Federal Reserve Banks of Board of Governors Richmond, Atlanta, and San Francisco, respectively Trevor A. Reeve Brian F. Madigan Senior Special Adviser to the Chair, Office of Board Secretary Members, Board of Governors Matthew M. Luecke Andrew Figura, Joseph W. Gruber, Deputy Secretary and Ann McKeehan David W. Skidmore Special Advisers to the Board, 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 The Federal Open Market Committee is referenced as the 2 Attended the discussions of the long-run monetary policy “FOMC” and the “Committee” in these minutes. implementation framework and financial developments.

262 103rd Annual Report | 2016 Eric M. Engen and Michael G. Palumbo David H. Small Senior Associate Directors, Division of Research and Project Manager, Division of Monetary Affairs, Statistics, Board of Governors Board of Governors Gretchen C. Weinbach3 Kurt F. Lewis3 Senior Associate Director, Division of Monetary Principal Economist, Division of Monetary Affairs, Affairs, Board of Governors Board of Governors Beth Anne Wilson James M. Lyon Senior Associate Director, Division of International First Vice President, Federal Reserve Bank of Finance, Board of Governors Minneapolis Antulio N. Bomfim, Ellen E. Meade, David Altig, Ron Feldman,3 Jeff Fuhrer, Robert J. Tetlow, and Joyce K. Zickler Beverly Hirtle, Glenn D. Rudebusch, Senior Advisers, Division of Monetary Affairs, and Daniel G. Sullivan Board of Governors Executive Vice Presidents, Federal Reserve Banks of Atlanta, Minneapolis, Boston, New York, Brian M. Doyle San Francisco, and Chicago, respectively Senior Adviser, Division of International Finance, Board of Governors Michael Dotsey, Antoine Martin,3 Susan McLaughlin,3 and Julie Ann Remache3 Jeremy B. Rudd Senior Vice Presidents, Federal Reserve Banks of Senior Adviser, Division of Research and Statistics, Philadelphia, New York, New York, and New York, Board of Governors respectively Jane E. Ihrig3and David López-Salido3 Deborah L. Leonard,3 Ed Nosal,3 and Anna Paulson3 Associate Directors, Division of Monetary Affairs, Vice Presidents, Federal Reserve Banks of New York, Board of Governors Chicago, and Chicago, respectively John J. Stevens Patrick Dwyer3 Associate Director, Division of Research and Assistant Vice President, Federal Reserve Bank of Statistics, Board of Governors New York Min Wei Andreas L. Hornstein Deputy Associate Director, Division of Monetary Senior Advisor, Federal Reserve Bank of Richmond Affairs, Board of Governors Anthony Murphy Stephanie R. Aaronson and Glenn Follette Economic Policy Advisor, Federal Reserve Bank of Assistant Directors, Division of Research and Dallas Statistics, Board of Governors Jonathan Heathcote Elizabeth Klee Monetary Advisor, Federal Reserve Bank of Assistant Director, Division of Monetary Affairs, Minneapolis Board of Governors Long-Run Monetary Policy Implementation Eric C. Engstrom Framework Adviser, Division of Monetary Affairs, and Adviser, Division of Research and Statistics, Committee participants continued their discussion of Board of Governors potential long-run frameworks for monetary policy Penelope A. Beattie4 implementation, a topic last discussed at the Assistant to the Secretary, Office of the Secretary, July 2016 FOMC meeting. The staff provided brief- Board of Governors ings that summarized considerations regarding potential choices of policy rates, operating regimes, Dana L. Burnett and balance sheet policies and highlighted tradeoffs Section Chief, Division of Monetary Affairs, associated with these choices. Board of Governors The staff noted that if the long-run implementation 3 Attended the discussion of the long-run monetary policy implementation framework. framework was such that the supply of reserve bal- 4 Attended Tuesday session only. ances was quite abundant, then operational tools that

Minutes of Federal Open Market Committee Meetings | November 263 help establish a floor under short-term interest rates, bility of using balance sheet policies to promote such as the payment of interest on reserves and the financial stability. overnight reverse repurchase agreement (ON RRP) facility, would remain important elements of the In the discussion that followed the staff presentaoperating regime. Reserve requirements would prob- tions, policymakers agreed that decisions regarding ably not be necessary in this case, and the Federal the long-run implementation framework were not Reserve could likely maintain control of short-term necessary at this time. They indicated that the current interest rates without needing to conduct frequent framework was working well and that, with the supopen market operations to adjust the supply of ply of reserve balances expected to remain large for a reserves. Such an approach could also be effective while, the present approach to policy implementation with an appreciably smaller balance sheet and supply would likely remain appropriate for some time. of reserves than at present. In contrast, if in the long Moreover, policymakers expected to benefit from run the supply of reserves was quite small, such as accruing additional information before making judgwas the situation before the financial crisis, either ments about a future implementation framework. reserve requirements or voluntary reserve targets For example, they acknowledged that recent changes would probably be needed to help stabilize the in financial regulations were likely to continue to be demand for reserves and increase its predictability. an important factor in the ongoing evolution of The Federal Reserve would likely need to conduct financial markets. Policymakers also underscored the frequent open market operations in this case to main- importance of taking account of the possibility that tain adequate control of short-term interest rates, neutral short-term interest rates could remain quite and banks would probably trade actively in the fed- low. For these reasons, policymakers emphasized that eral funds market. Some short-term interest rates their current views regarding the long-run policy could display greater volatility under this approach implementation framework were preliminary and than one in which the level of reserve balances was they expected that further deliberations would be relatively high, and operational tools to limit both appropriate before decisions were made. downward and upward pressure on such rates would probably be needed. Regardless of the level of Meeting participants commented on the advantages reserves, the policy rate in either of these cases could of using an approach to policy implementation in be an unsecured overnight market rate or an interest which active management of the supply of reserves rate administered by the Federal Reserve. The would not be required. Such an approach could be FOMC might instead target an overnight Treasury compatible with a balance sheet that was much repurchase agreement rate and use standing facilities smaller than at present, though likely at least someto keep repurchase agreement rates close to the target what larger than in the years before the financial crilevel. sis, reflecting trend growth of balance sheet items such as currency as well as a larger supply of The staff noted the importance of having effective reserves. In addition, such an approach was seen as arrangements to provide liquidity in times of stress. likely to be relatively simple and efficient to adminis- Stigma associated with borrowing from the discount ter, relatively straightforward to communicate, and window has likely prevented it from effectively effective in enabling interest rate control across a enhancing control of short-term interest rates and wide range of circumstances. A number of policyimproving liquidity conditions in various situations. makers stated that they continued to view expansion Possible options to provide appropriate liquidity of the balance sheet through large-scale asset purwhen necessary while mitigating such stigma were chases as an important tool to provide macroecomentioned. nomic stimulus in situations in which short-term interest rates were at their effective lower bound. The staff discussed the possibility that changes in the Most participants did not indicate support for using size and composition of the Federal Reserve’s bal- the balance sheet as an active tool in other situations ance sheet, including the duration of its securities or for other purposes, although a few expressed supholdings, could be used to help achieve policymakers’ port for undertaking further study of this possibility. macroeconomic goals when short-term interest rates Policymakers noted the merits of relying on a policy had declined to their effective lower bound—and rate that would be robust to shifts in financial market conceivably when short-term interest rates were structure, practices, and regulations as well as to above that bound. The staff also described the possi- changes in premiums for credit risk. Other important

264 103rd Annual Report | 2016 considerations for the choice of policy rate included Staff Review of the Economic Situation the volatility of the rate, the breadth of the set of Federal Reserve counterparties that would be The information reviewed for the November 1–2 required to ensure adequate control of short-term meeting indicated that real gross domestic product interest rates, and the role of the policy rate in (GDP) expanded at a faster pace in the third quarter FOMC communications. than in the first half of the year and that labor market conditions continued to strengthen in recent At the end of the discussion, the Chair reiterated that months. Consumer price inflation increased further additional experience with the Federal Reserve’s cur- above its pace early in the year but was still running rent monetary policy implementation framework below the Committee’s longer-run objective of 2 perwould help inform policymakers’ future deliberation cent, restrained in part by earlier decreases in energy of issues related to a long-run framework and that prices and in prices of non-energy imports. Most decisions regarding these issues would not be survey-based measures of longer-run inflation expecrequired for some time. The Chair also noted that the tations were little changed, on balance, while market- Federal Reserve would proceed cautiously and would based measures of inflation compensation moved up communicate any intended changes to its approach but remained low. to implementing monetary policy well in advance of making the changes. Total nonfarm payroll employment expanded at a solid pace in September, and the unemployment rate was little changed at 5.0 percent. The labor force par- Developments in Financial Markets and ticipation rate and the employment-to-population Open Market Operations ratio both edged up in September. The share of workers employed part time for economic reasons The manager of the System Open Market Account was still slightly elevated relative to its level before the (SOMA) reported on developments in financial mar- recession. The rate of private-sector job openings kets during the period since the Committee met on edged down in August, and the rates of hiring and of September 20–21, 2016, including changes in market quits were unchanged. The four-week moving average expectations for U.S. monetary policy, adjustments to of initial claims for unemployment insurance benefits foreign central bank monetary policies, and the evo- remained low. Measures of labor compensation conlution of investors’ views about risk factors in global tinued to rise at a moderate pace. The employment financial markets. The deputy manager followed with cost index for private industry workers increased a briefing on open market operations and develop- 2¼ percent over the 12 months ending in September, ments in money markets. The implementation on and average hourly earnings for all employees October 14 of reforms to the money market fund increased 2½ percent over the same 12-month period. (MMF) industry generally proceeded smoothly, although the shift in investments from prime to The unemployment rates for African Americans and government-only money funds had been substantial for Hispanics remained above the rate for whites but and left an imprint on levels of some money market were close to the levels seen just prior to the most interest rates. Largely reflecting this shift, usage of recent recession. The labor force participation rate the System’s ON RRP facility rose somewhat further for white individuals aged 25 to 54 continued to be in the most recent intermeeting period. Federal funds higher than for African Americans and for Hispangenerally continued to trade close to the middle of ics, but the rates for all three groups appeared to have the FOMC’s target range of ¼ to ½ percent. The either moved sideways or edged up recently. deputy manager also updated the Committee on implementation of the new framework for investment Total industrial production increased slightly in Sepof foreign currency reserves and on a proposal to tember after little change, on net, in July and August. publish data series on interest rates in the market for Mining output continued to rise, on balance, in general collateral repurchase agreements. recent months, but manufacturing production was little changed. Over the previous two years, manufac- By unanimous vote, the Committee ratified the turing output was relatively flat, reflecting the effects Desk’s domestic transactions over the intermeeting of weak export demand, spillovers from the earlier period. There were no intervention operations in for- declines in crude oil and natural gas drilling, and eign currencies for the System’s account during the slow domestic capital investment more generally. intermeeting period. Automakers’ assembly schedules suggested that

Minutes of Federal Open Market Committee Meetings | November 265 motor vehicle production would be about unchanged ernment purchases decreased, reflecting a decline in in the near term, and broader indicators of manufac- real construction spending by these governments that turing production, such as the new orders indexes more than offset a net expansion in state and local from national and regional manufacturing surveys, government payrolls during the third quarter. pointed toward only tepid gains, at best, in factory output in the coming months. Net exports contributed positively to real GDP growth in the third quarter, largely because of the Real personal consumption expenditures (PCE) strength of soybean exports. The nominal U.S. interincreased at a moderate pace in the third quarter, national trade deficit widened in August relative to supported by continued gains in employment, real July, as imports rose more than exports. Import disposable personal income, and households’ net growth was driven by higher imports of capital goods worth. Consumer spending increased in September, and services, while export growth was led in part by partly because of an increase in outlays for motor higher exports of industrial supplies and automotive vehicles. Indeed, unit sales of light motor vehicles products. The Census Bureau’s advance trade estirose sharply in September and moved higher in Octo- mates for September suggested a narrowing of the ber, supported in part by sizable sales incentives. In trade deficit, with further growth in exports and a addition, consumer sentiment as measured by the decline in imports relative to August. University of Michigan Surveys of Consumers remained relatively upbeat in October. Total U.S. consumer prices, as measured by the PCE price index, increased about 1¼ percent over the Housing market activity was weak in the third quar- 12 months ending in September, partly restrained by ter. Real residential investment spending decreased, recent decreases in consumer food prices and earlier partly reflecting a decline in total housing starts. The declines in consumer energy prices. Core PCE price most recent construction data were mixed, with starts inflation, which excludes changes in food and energy for new single-family homes increasing in September prices, was about 1¾ percent over those same and starts for multifamily units declining sharply. 12 months, held down in part by decreases in the Building permit issuance for new single-family prices of non-energy imports over part of this period homes—which tends to be a good indicator of the and by the pass-through of earlier declines in energy underlying trend in construction—was little changed, prices into the prices of other goods and services. on balance, in recent months and had remained Over the 12 months ending in September, total conessentially flat since late last year. Sales of new homes sumer prices as measured by the consumer price decreased, on net, in August and September, but sales index (CPI) rose 1½ percent, while core CPI inflation of existing homes increased modestly. was around 2¼ percent. The Michigan survey measure of median longer-run inflation expectations Real private expenditures for business equipment and moved down in October to a new historical low, and intellectual property were about flat in the third quar- the longer-run measure from the Blue Chip Ecoter. New orders for nondefense capital goods exclud- nomic Indicators also declined slightly. Measures of ing aircraft were little changed over August and Sep- longer-run inflation expectations from the Desk’s tember, but orders were somewhat above the level of Survey of Primary Dealers and Survey of Market shipments, suggesting a modest pickup in business Participants were unchanged in October. spending for equipment in the near term. Real business expenditures for nonresidential structures Foreign real GDP growth appeared to pick up sigincreased in the third quarter, and the number of oil nificantly in the third quarter following weak growth and gas rigs in operation, an indicator of spending in the second quarter that primarily reflected confor structures in the drilling and mining sector, con- tractions in Canada and Mexico. The recovery of oil tinued to edge up in October. Real inventory invest- production in Canada boosted economic activity ment was positive in the third quarter after subtract- there, and a pickup in U.S. economic activity and ing substantially from real GDP growth in the second strong household spending in Mexico supported a quarter. Except in the energy sector, inventories gen- sharp rebound in Mexican GDP growth. The erally seemed well aligned with the pace of sales. improvements in these economies more than offset some moderation of growth in China. In the euro Real federal purchases increased in the third quarter, area and Japan, economic growth continued at a as defense expenditures turned up and nondefense modest pace. Inflation generally remained subdued in spending continued to rise. Real state and local gov- both the emerging market economies and the

266 103rd Annual Report | 2016 advanced foreign economies (AFEs). A notable including the recent rise in oil prices and a decline in exception was the United Kingdom, where inflation- investors’ concerns about the risk of very low inflaary pressures increased, partly as a result of a sub- tion outcomes, as implied by quotes on inflation caps stantial depreciation of the pound in recent months. and floors. Staff Review of the Financial Situation Broad stock price indexes were little changed, on net, since the September FOMC meeting. Realized and Domestic financial markets were relatively calm over implied volatility in equity markets remained relathe period since the September FOMC meeting. tively low. Spreads of yields on nonfinancial Asset prices were little changed, and volatility was investment-grade and speculative-grade corporate mostly low. Market expectations for an increase in bonds over those of comparable-maturity Treasury the target range for the federal funds rate before the securities declined a bit, with both spreads finishing end of the year rose modestly. Nominal Treasury the period at levels close to their medians during the yields edged up on net. No significant market disrup- economic expansions of the past two decades. Based tions were observed around the October 14 compli- on available reports and analysts’ estimates, aggregate ance deadline for MMF reform. Financing condi- corporate earnings per share appeared to continue to tions for nonfinancial firms and households rebound in the third quarter, reflecting improvements remained accommodative, on balance, and the credit across a wide range of industries, including the quality of nonfinancial corporations continued to energy sector. show signs of stabilization after having deteriorated in earlier quarters. Foreign equity indexes broadly increased over the intermeeting period. Nonetheless, foreign financial Federal Reserve communications immediately follow- markets were sensitive to news about upcoming negoing the September meeting, notably the Summary of tiations between the United Kingdom and the Euro- Economic Projections, were interpreted by market pean Union (EU) over the U.K. exit from the EU as participants as slightly more accommodative than well as to ongoing developments in the European expected. Subsequent Federal Reserve communica- banking sector. Over the period, the dollar apprecitions and U.S. economic data releases over the inter- ated against most AFE currencies; the appreciation meeting period were generally interpreted as in line against the pound was particularly pronounced, with market expectations. The expected path for the reflecting increased concerns that negotiations federal funds rate implied by quotes on overnight between U.K. and European officials would result in index swap rates steepened slightly, on net, over the an outcome featuring less economic integration than intermeeting period. Market-based estimates of the anticipated earlier. Concerns about U.K.–EU negoprobability of a rate increase before the end of the tiations and higher U.K. inflation compensation also year rose modestly to about 65 percent. Consistent drove up 10-year gilt yields. In contrast, the dollar with market-based estimates, respondents to the depreciated against the currencies of most Desk’s November surveys of primary dealers and commodity-exporting countries, including the Meximarket participants on average assigned a probability can peso and Russian ruble, consistent with the of about 60 percent to a rate increase by the end of increase in oil prices. this year. Based on the median responses, the most likely path of the target federal funds rate in 2017 Money market reform continued to affect several and 2018 was little changed from that reported in the short-term funding markets in the weeks leading up September surveys. to the October 14, 2016, compliance deadline, as investors continued to shift from prime funds to gov- Nominal Treasury yields edged up, on net, since the ernment funds. However, these flows slowed signifi- September FOMC meeting. Yields declined early in cantly in the days just before October 14 and the period following the September FOMC commu- remained subdued afterward. Measures of the liquidnications and amid concerns about developments ity of institutional prime funds, which had increased potentially affecting profitability in the European substantially ahead of the compliance deadline, subbanking sector, but they subsequently rose. Although sequently declined. The rise in total assets of governthose market concerns ebbed somewhat, they ment funds over the intermeeting period appeared to remained significant. Nominal yields were pushed up contribute to moderately elevated take-up at the by an increase in inflation compensation, which System’s ON RRP facility. Overnight Eurodollar appeared attributable to a combination of factors, deposit volumes fell substantially in the weeks pre-

Minutes of Federal Open Market Committee Meetings | November 267 ceding the MMF reform compliance deadline and government-sponsored enterprises. Indicators sugremained low as prime funds pulled back from lend- gested that refinancing activity continued to increase ing in this market. Despite these volume changes, and reached its highest level since 2013 in response to there was little effect on overnight money market the low level of mortgage rates. rates, although the spread between the three-month London interbank offered rate and the overnight Conditions in consumer credit markets were little index swap rate remained elevated. changed, on balance, against a backdrop of largely stable credit quality. Growth in both revolving and Financing conditions for nonfinancial firms nonrevolving loans remained robust. While auto remained generally accommodative. Gross issuance credit standards were broadly unchanged, responof corporate bonds was robust in September amid dents to the October SLOOS indicated that they had strong global demand for bonds and low yields. tightened credit card standards for subprime custom- Growth of commercial and industrial (C&I) loans ers. Yield spreads for securities backed by credit card slowed overall in the third quarter but picked up in and auto loans over Treasury securities of compa- September. Demand and lending standards for C&I rable maturities were little changed on balance. Issuloans remained unchanged, on net, in the third quar- ance of consumer asset-backed securities picked up ter, according to the October Senior Loan Officer somewhat in the third quarter from the levels seen Opinion Survey on Bank Lending Practices earlier this year. (SLOOS). In its latest report on potential risks to the stability of The credit quality of nonfinancial corporations, the U.S. financial system, the staff continued to judge which had deteriorated somewhat over the past few that overall vulnerabilities remained moderate. Vulquarters, continued to show signs of stabilization. nerabilities associated with maturity and liquidity The volume of bond downgrades only slightly out- transformation appeared to have been reduced, paced that of upgrades in September. Default rates reflecting the effects of newly implemented rules for and expected year-ahead default rates for nonfinan- prime MMFs. Vulnerabilities emanating from levercial firms both edged down, although they remained age in the financial sector remained low, as the largest elevated compared with their ranges in recent years. U.S. banks had strong regulatory capital and liquidity positions. Valuation pressures across major asset Financing conditions for commercial real estate categories remained at a moderate level: Although (CRE) also remained largely accommodative but some metrics for CRE transactions indicated notable showed some signs of tightening. Growth of CRE valuation pressures, CRE lending standards had loans on banks’ books continued to be strong in the tightened somewhat over the previous year, and valuthird quarter, even though a significant number of ations for domestic corporate equity and bonds were, banks reported in the October SLOOS that they had on balance, in the middle of their historical ranges in tightened lending standards on CRE loans. Issuance relation to still-low Treasury yields. Vulnerabilities of commercial mortgage-backed securities (CMBS) from leverage in the private nonfinancial sector were picked up in the third quarter relative to its pace in seen as moderate overall, reflecting the combination the first half of the year. Spreads on CMBS were of relatively high aggregate leverage in the corporate little changed over the intermeeting period. sector, a sharp slowdown in the expansion of the riskiest forms of corporate debt, and a continued In the municipal bond market, gross issuance of modest rise in aggregate household debt that accrued bonds was brisk and yields on general obligation almost exclusively to borrowers with very high credit bonds, on balance, edged up. The credit quality of scores. state and local governments was generally stable. Monetary policy announcements by foreign central Financing conditions in the residential mortgage banks had limited effects on asset prices. At its Sepmarket were little changed since the September tember monetary policy meeting, the Bank of Japan FOMC meeting, and credit remained readily avail- (BOJ) announced that it will purchase Japanese govable for most borrowers. Interest rates on 30-year ernment bonds (JGBs) to keep the yield on 10-year fixed-rate mortgages edged up but stayed at a low JGBs around zero; the BOJ also announced that it level. In the October SLOOS, several large banks will continue to expand the monetary base until connoted a continued easing of standards for home- sumer price inflation exceeds the 2 percent target and purchase loans eligible for purchase by the stays above the target in a stable manner. No further

268 103rd Annual Report | 2016 changes were announced following the BOJ’s Octo- tive shocks than adverse ones. In addition, the staff ber meeting. The European Central Bank kept its continued to see the risks to the forecast from develpolicy stance unchanged at its October meeting while opments abroad as skewed to the downside. Consissignaling that further changes to its asset purchase tent with the downside risks to aggregate demand, program could be announced at its next meeting. the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the Staff Economic Outlook projection for inflation were seen as roughly balanced. The possibility that longer-term inflation In the U.S. economic projection prepared by the staff expectations may have edged down was roughly for the November FOMC meeting, the pace of real counterbalanced by the risks that somewhat firmer GDP growth was forecast to be faster over the sec- inflation this year could be more persistent than ond half of this year than in the first half, as business expected, particularly in an economy that was proinvestment was anticipated to turn up and the drag jected to continue operating above its long-run from inventory investment was expected to end. potential. However, the forecast for the second half was lower than in the September projection, primarily reflecting Participants’ Views on Current Conditions softer-than-expected data on consumer spending. and the Economic Outlook The staff’s forecast for real GDP growth over the next couple of years was also slightly lower than in In their discussion of the economic situation and the the previous projection, primarily reflecting the outlook, meeting participants agreed that informaeffects of higher assumed paths for the dollar and for tion received over the intermeeting period indicated crude oil prices. Nonetheless, the staff projected that that the labor market had continued to strengthen real GDP would expand at a modestly faster pace and that growth of economic activity had picked up than potential output in 2017 and 2018, supported by from the modest pace seen in the first half of the solid gains in consumer spending and, to a lesser year. Job gains had been solid in recent months, degree, by pickups in both residential and business although the unemployment rate was little changed. investment; in 2019, GDP was projected to expand at Household spending had been rising moderately, but the same rate as its potential. The unemployment rate business fixed investment had remained soft. Inflawas forecast to edge down gradually through the end tion had increased somewhat since earlier this year of 2018 and then flatten out in 2019; the path for the but remained below the Committee’s 2 percent unemployment rate was a little higher than in the longer-run objective, partly reflecting earlier declines previous projection but was still projected to run in energy prices and in prices of non-energy imports. below the staff’s estimate of its longer-run natural Market-based measures of inflation compensation rate. had moved up but remained low; most survey-based measures of longer-term inflation expectations had The near-term forecast for consumer price inflation changed little, on balance, in recent months. Domeswas somewhat higher than in the previous projection, tic and global asset markets remained relatively calm reflecting incoming data on core prices and energy over the intermeeting period, and U.S. financial conprices. Beyond the near term, the inflation forecast ditions continued to be broadly accommodative. was generally little revised. The staff continued to project that inflation would increase over the next Participants generally indicated that their economic several years, as food and energy prices along with forecasts had changed little over the intermeeting the prices of non-energy imports were expected to period. They continued to anticipate that, with begin rising steadily this year. However, inflation was gradual adjustments in the stance of monetary projected to be marginally below the Committee’s policy, economic activity would expand at a moderlonger-run objective of 2 percent in 2019. ate pace and labor market conditions would strengthen somewhat further. Inflation was expected The staff viewed the uncertainty around its projec- to rise to 2 percent over the medium term, as the tions for real GDP growth, the unemployment rate, transitory effects of past declines in energy and and inflation as similar to the average of the past import prices continued to dissipate and the labor 20 years. The risks to the forecast for real GDP were market strengthened further. A substantial majority seen as tilted to the downside, reflecting the staff’s viewed the near-term risks to the economic outlook assessment that both monetary and fiscal policy as roughly balanced, although a few participants appeared to be better positioned to offset large posi- judged that significant downside risks remained, cit-

Minutes of Federal Open Market Committee Meetings | November 269 ing various factors including the low value of the modest pickup in output. In the agricultural sector, neutral federal funds rate and its proximity to the low crop prices were said to continue to weigh on effective lower bound, the possibility of weaker-than- farm income and farm spending. expected growth in foreign economies, the continued uncertainty associated with the United Kingdom’s Participants noted that economic growth in many exit from the EU, or financial fragilities in some foreign economies remained subdued, and that inflacountries. Participants agreed that the Committee tion rates abroad generally were still quite low. Some should continue to closely monitor inflation indica- participants observed that important international tors and global economic and financial downside risks remained, including constraints on developments. monetary policies in the low interest rate environments of some countries; investors’ concerns about Participants noted that although real GDP growth in developments potentially affecting profitability in the the third quarter was appreciably above the slow pace European banking sector; the possible consequences of the first half, it had been boosted in part by transi- of upcoming negotiations and eventual terms of the tory factors, including a surge in agricultural exports United Kingdom’s exit from the EU; potential deland a bounceback in inventory investment. Exclud- eterious effects from rapid credit growth in China; ing these factors, underlying economic growth had and the potential for further dollar appreciation, been relatively modest: Growth of consumer spend- which could restrain U.S. inflation for a considerable ing had slowed from its brisk pace earlier in the year, time. residential investment had fallen again, and business fixed investment had remained soft. Retailers in a few Participants generally agreed that labor market con- Districts reported weak to moderate activity, ditions had continued to improve over the intermeetalthough some contacts thought that holiday sales ing period. Reports from some Districts pointed to a were likely to peak late in the season. Real economic tightening in labor markets, evidenced by shortages activity was expected to advance at a moderate pace of qualified workers in some occupations, increases in coming quarters, primarily reflecting solid growth in overtime hours, or a pickup in wage inflation. In in consumer spending, consistent with ongoing several of these Districts, business contacts had employment gains, increases in household wealth, undertaken workforce development and worker trainand low interest rates. ing to address a shortage of labor with the necessary skills. Participants continued to expect economic activity in the coming quarters to be supported by a pickup in Many participants commented on the rise in the business investment. Recent increases in oil and gas labor force participation rate since late 2015. A few drilling activity in response to higher energy prices of them noted that the increase had largely reflected were seen as a positive development for the invest- a diminution in the flow of individuals leaving the ment outlook; however, a few participants reported workforce rather than an increase of new entrants that uncertainty about prospects for government into the labor force and had been more prevalent policy, shorter investment time horizons for busi- among workers with relatively less education. Particinesses, or the potential for advances in technology to pants expressed uncertainty about how long the pardisrupt existing business models were likely weighing ticipation rate could be expected to continue rising, on capital spending plans. A few participants noted particularly in light of the downward structural trend weakness in nonresidential construction. District in this series. On the one hand, the participation rate reports on residential construction activity were for prime-age males remained significantly below its mixed. One participant reported generally strong level before the financial crisis, suggesting that it conditions in the District’s housing markets but also could rise further over time. In addition, there was cited various factors that were restraining residential some uncertainty around estimates of the longer-run construction in some locales, including constraints on trend rate of labor force participation and it could be builder financing, limitations on the supply of build- higher than previously thought, reflecting, for able lots, and shortages of skilled labor. example, a shift toward later retirement. On the other hand, from a business cycle perspective, the increase In their discussion of business activity in their Dis- in the participation rate in recent months was consistricts, participants provided mixed reports on manu- tent with a tightening labor market and an economy facturing, with a few areas that had been adversely nearing full employment; furthermore, it was not affected by the downturn in energy prices reporting a clear that output growth above the economy’s poten-

270 103rd Annual Report | 2016 tial growth rate would succeed in drawing new tributed to a sizable reduction of risk in the shadow entrants permanently into the labor force. Overall, banking system. Participants also discussed some while some participants expressed the view that the causes of the low yields on longer-term Treasury economy was close to or at full employment, several securities and their embedded term premiums, which others judged that appreciable slack could remain in were below historical average levels. Among the facthe labor market. Some participants characterized tors cited were a persistent decline in the neutral fedwage pressures as only moderate, although one noted eral funds rate, and depressed term premiums likely that wage growth was similar to its pace at the peak owing to the elevated size of the Federal Reserve’s of the previous economic expansion. balance sheet as well as the reduced likelihood of high inflation relative to several decades ago. Some of Readings on headline and core PCE price inflation these factors could endure for some time. had come in somewhat higher than expected in recent months. Participants generally regarded this as a In connection with the participants’ discussion of the positive development, consistent with headline infla- long-run monetary policy implementation frametion rising over the medium term to the Committee’s work, many participants noted that the Committee’s objective of 2 percent. A few participants observed broader monetary policy strategy needed both to be that it was difficult to judge how much of the uptick considered in conjunction with the design of such a in core PCE price inflation reflected transitory fac- framework and to receive careful further considertors, while a couple of others saw the incoming data ation in its own right. In particular, accumulating evias suggesting that inflation could move up to the dence of slow trend productivity and output growth Committee’s objective more rapidly than previously and associated persistently low levels of neutral interexpected. Participants discussed possible policy est rates, both in the United States and abroad, had implications of the risks surrounding the outlook for potential implications for the most effective policy inflation, including the possibility that achieving the implementation framework for the Federal Reserve in Committee’s inflation objective sooner than previ- coming years as well as the monetary policy strategy ously anticipated could cause a revision in market that would best promote the Committee’s macroecoexpectations of the path for policy rates and a sharp nomic objectives. Among other factors that needed rise in longer-term interest rates, or the possibility to be taken into account, it was observed that neutral that a further appreciation of the dollar stemming real short-term interest rates could decline further if from developments abroad could renew disinflation- central bank balance sheets contracted or the positive ary pressures and postpone the need for policy firm- effects of quantitative easing on economic activity ing. Some participants regarded the uptick in waned over time. Participants agreed that issues assomarket-based measures of inflation compensation ciated with monetary policy implementation should over the intermeeting period as a welcome suggestion be discussed within the context of the current and of further progress toward the Committee’s inflation potential future economic and financial environment goal. However, several cautioned that these measures and the Committee’s strategy for monetary policy. remained low or that the measures still appeared to embed a significant weight on undesirably low infla- Against the backdrop of their views of the economic tion outcomes. The median expectation for inflation outlook, participants discussed whether the available over the next 5 to 10 years from the Michigan survey information warranted taking another step to reduce edged down in October to a new historical low, policy accommodation at this meeting. Based on the although it was noted that this drop could be relatively limited information received since the Sepexplained by a reduction in the number of respon- tember FOMC meeting, participants generally agreed dents who had previously expected relatively high that the case for increasing the target range for the inflation outcomes. Overall, participants judged that federal funds rate had continued to strengthen. Parsurvey-based measures of inflation expectations had ticipants saw recent information as indicating that been fairly stable in recent months. labor market conditions had improved further and considered the firming in inflation and inflation com- Participants discussed a range of issues related to pensation to be positive developments, consistent recent developments in financial markets and finan- with continued progress toward the Committee’s cial stability. MMF reforms that became effective in 2 percent inflation objective. However, a number of mid-October had resulted in a substantial shift of participants expressed the view that some modest assets out of prime funds and into government-only slack remained in the labor market or noted that funds. It was observed that these reforms had con- readings on inflation compensation and inflation

Minutes of Federal Open Market Committee Meetings | November 271 expectations remained low. Moreover, some partici- the labor market had continued to strengthen and pants suggested that current conditions did not point that growth of economic activity had picked up from to an immediate need to tighten policy or that some the modest pace seen in the first half of this year. further evidence of continued progress toward the Although the unemployment rate was little changed Committee’s objectives would provide greater sup- in recent months, job gains had been solid. Houseport for policy firming. hold spending had been rising moderately but business fixed investment had remained soft. Inflation Most participants expressed a view that it could well had increased somewhat since earlier this year but become appropriate to raise the target range for the was still below the Committee’s 2 percent longer-run federal funds rate relatively soon, so long as incoming objective, partly reflecting earlier declines in energy data provided some further evidence of continued prices and in prices of non-energy imports. Marketprogress toward the Committee’s objectives. Some based measures of inflation compensation had participants noted that recent Committee communi- moved up but remained low; most survey-based cations were consistent with an increase in the target measures of longer-term inflation expectations were range for the federal funds rate in the near term or little changed, on balance, in recent months. argued that to preserve credibility, such an increase should occur at the next meeting. A few participants With respect to the economic outlook and its impliadvocated an increase at this meeting; they viewed cations for monetary policy, members continued to recent economic developments as indicating that expect that, with gradual adjustments in the stance of labor market conditions were at or close to those monetary policy, economic activity would expand at consistent with maximum employment and expected a moderate pace and labor market conditions would that recent progress toward the Committee’s inflation strengthen somewhat further. Almost all of them objective would continue, even with further gradual continued to judge that near-term risks to the ecosteps to remove monetary policy accommodation. In nomic outlook were roughly balanced. Members genaddition, many judged that risks to economic and erally observed that labor market conditions had financial stability could increase over time if the improved appreciably over the past year, a developlabor market overheated appreciably, or expressed ment that was particularly evident in the solid pace concern that an extended period of low interest rates of monthly payroll employment gains and the risked intensifying incentives for investors to reach increase in the labor force participation rate. It was for yield, potentially leading to a mispricing of risk noted that allowing the unemployment rate to modand misallocation of capital. In contrast, some others estly undershoot its longer-run normal level could judged that allowing the unemployment rate to fall foster the return of inflation to the FOMC’s 2 perbelow its longer-run normal level for a time could cent objective over the medium term. A few memresult in favorable supply-side effects or help hasten bers, however, were concerned that a sizable underthe return of inflation to the Committee’s 2 percent shooting of the longer-run normal unemployment objective; noted that proximity of the federal funds rate could necessitate a steep subsequent rise in rate to the effective lower bound places potential con- policy rates, undermining the Committee’s prior straints on monetary policy; or stressed that global communications about its expectations for a gradudevelopments could pose risks to U.S. economic ally rising policy rate or even posing risks to the ecoactivity. More generally, it was emphasized that deci- nomic expansion. sions regarding near-term adjustments of the stance of monetary policy would appropriately remain Members continued to expect inflation to remain low dependent on the outlook as informed by incoming in the near term, but most anticipated that, with data, and participants expected that economic condi- gradual adjustments in the stance of monetary tions would evolve in a manner that would warrant policy, inflation would rise to the Committee’s 2 peronly gradual increases in the federal funds rate. cent objective over the medium term. Some members observed that the increases in inflation and inflation Committee Policy Action compensation in recent months were welcome, although a couple of them noted that inflation was In their discussion of monetary policy for the period still running below the Committee’s objective. ahead, members judged that the information received Against this backdrop and in light of the current since the Committee met in September indicated that shortfall of inflation from 2 percent, members agreed

272 103rd Annual Report | 2016 that they would continue to carefully monitor actual ties and of rolling over maturing Treasury securities and expected progress toward the Committee’s infla- at auction, and it anticipated doing so until normaltion goal. ization of the level of the federal funds rate is well under way. Members noted that this policy, by keep- After assessing the outlook for economic activity, the ing the Committee’s holdings of longer-term securilabor market, and inflation, as well as the risks ties at sizable levels, should help maintain accommoaround that outlook, the Committee decided to dative financial conditions. maintain the target range for the federal funds rate at ¼ to ½ percent at this meeting. Members generally At the conclusion of the discussion, the Committee agreed that the case for an increase in the policy rate voted to authorize and direct the Federal Reserve had continued to strengthen. But a majority of mem- Bank of New York, until it was instructed otherwise, bers judged that the Committee should, for the time to execute transactions in the SOMA in accordance being, await some further evidence of progress with the following domestic policy directive, to be toward its objectives of maximum employment and released at 2:00 p.m.: 2 percent inflation before increasing the target range for the federal funds rate. A few members empha- “Effective November 3, 2016, the Federal Open sized that a cautious approach to removing accom- Market Committee directs the Desk to undermodation was warranted given the proximity of take open market operations as necessary to policy rates to the effective lower bound, as the Com- maintain the federal funds rate in a target range mittee had more scope to increase policy rates, if of ¼ to ½ percent, including overnight reverse necessary, than to reduce them. Two members pre- repurchase operations (and reverse repurchase ferred to raise the target range for the federal funds operations with maturities of more than one day rate by 25 basis points at this meeting. They saw when necessary to accommodate weekend, holiinflation as close to the 2 percent objective and day, or similar trading conventions) at an offerviewed an increase in the federal funds rate as appro- ing rate of 0.25 percent, in amounts limited only priate at this meeting because they judged that the by the value of Treasury securities held outright economy was essentially at maximum employment in the System Open Market Account that are and that monetary policy was unable to contribute to available for such operations and by a pera permanent further improvement in labor market counterparty limit of $30 billion per day. conditions in these circumstances. The Committee directs the Desk to continue The Committee agreed that, in determining the tim- rolling over maturing Treasury securities at aucing and size of future adjustments to the target range tion and to continue reinvesting principal payfor the federal funds rate, it would assess realized and ments on all agency debt and agency mortgageexpected economic conditions relative to its objec- backed securities in agency mortgage-backed tives of maximum employment and 2 percent infla- securities. The Committee also directs the Desk tion. This assessment would take into account a wide to engage in dollar roll and coupon swap transrange of information, including measures of labor actions as necessary to facilitate settlement of market conditions, indicators of inflation pressures the Federal Reserve’s agency mortgage-backed and inflation expectations, and readings on financial securities transactions.” and international developments. The Committee expected that economic conditions would evolve in a The vote also encompassed approval of the statement manner that would warrant only gradual increases in below to be released at 2:00 p.m.: the federal funds rate and that the federal funds rate was likely to remain, for some time, below levels that “Information received since the Federal Open are expected to prevail in the longer run. However, Market Committee met in September indicates members emphasized that the actual path of the fed- that the labor market has continued to eral funds rate would depend on the economic out- strengthen and growth of economic activity has look as informed by incoming data. picked up from the modest pace seen in the first half of this year. Although the unemployment The Committee also decided to maintain its existing rate is little changed in recent months, job gains policy of reinvesting principal payments from its have been solid. Household spending has been holdings of agency debt and agency mortgage- rising moderately but business fixed investment backed securities in agency mortgage-backed securi- has remained soft. Inflation has increased some-

Minutes of Federal Open Market Committee Meetings | November 273 what since earlier this year but is still below the are expected to prevail in the longer run. How- Committee’s 2 percent longer-run objective, ever, the actual path of the federal funds rate will partly reflecting earlier declines in energy prices depend on the economic outlook as informed by and in prices of non-energy imports. Market- incoming data. based measures of inflation compensation have moved up but remain low; most survey-based The Committee is maintaining its existing policy measures of longer-term inflation expectations of reinvesting principal payments from its holdare little changed, on balance, in recent months. ings of agency debt and agency mortgage- Consistent with its statutory mandate, the Com- backed securities in agency mortgage-backed mittee seeks to foster maximum employment securities and of rolling over maturing Treasury and price stability. The Committee expects that, securities at auction, and it anticipates doing so with gradual adjustments in the stance of mon- until normalization of the level of the federal etary policy, economic activity will expand at a funds rate is well under way. This policy, by moderate pace and labor market conditions will keeping the Committee’s holdings of longerstrengthen somewhat further. Inflation is term securities at sizable levels, should help expected to rise to 2 percent over the medium maintain accommodative financial conditions.” term as the transitory effects of past declines in energy and import prices dissipate and the labor Voting for this action: Janet L. Yellen, William C. market strengthens further. Near-term risks to Dudley, Lael Brainard, James Bullard, Stanley the economic outlook appear roughly balanced. Fischer, Jerome H. Powell, Eric Rosengren, and The Committee continues to closely monitor Daniel K. Tarullo. inflation indicators and global economic and financial developments. Voting against this action: Esther L. George and Loretta J. Mester. Against this backdrop, the Committee decided to maintain the target range for the federal funds Mses. George and Mester dissented because they prerate at ¼ to ½ percent. The Committee judges ferred to increase the target range for the federal that the case for an increase in the federal funds funds rate by 25 basis points at this meeting. rate has continued to strengthen but decided, for the time being, to wait for some further evidence Ms. George judged that, with the labor market near of continued progress toward its objectives. The full employment and inflation approaching the Comstance of monetary policy remains accommoda- mittee’s 2 percent objective, another step in the tive, thereby supporting further improvement in gradual adjustment of monetary policy was approlabor market conditions and a return to 2 per- priate. While a low level of the target range for the cent inflation. federal funds rate had supported achieving the Committee’s objectives, such low levels were no longer In determining the timing and size of future warranted and, if maintained, could pose a risk to adjustments to the target range for the federal the sustainability of the economic expansion with funds rate, the Committee will assess realized stable inflation. In particular, she viewed the supplyand expected economic conditions relative to its side benefits of allowing labor utilization to rise objectives of maximum employment and 2 per- above its neutral level as temporary, and noted that cent inflation. This assessment will take into monetary policy was unable to affect the longer-run account a wide range of information, including growth potential of the economy. measures of labor market conditions, indicators of inflation pressures and inflation expectations, Ms. Mester judged that the economy was essentially and readings on financial and international at full employment in terms of what can be achieved developments. In light of the current shortfall of through monetary policy. The unemployment rate inflation from 2 percent, the Committee will was at her estimate of its longer-run normal level, carefully monitor actual and expected progress and labor market conditions were projected to toward its inflation goal. The Committee expects tighten further. In addition, she noted that inflation that economic conditions will evolve in a man- was moving up and was close to the Committee’s ner that will warrant only gradual increases in 2 percent objective. In these circumstances, she the federal funds rate; the federal funds rate is believed it appropriate to gradually increase the tarlikely to remain, for some time, below levels that get range for the federal funds rate from its current

274 103rd Annual Report | 2016 low level, which would allow monetary policy to con- It was agreed that the next meeting of the Committee tinue to lend support to the economic expansion. A would be held on Tuesday–Wednesday, Decemgradual path would allow the Committee to better ber 13–14, 2016. The meeting adjourned at 10:00 calibrate policy over time as it learns more about the a.m. on November 2, 2016. underlying structural aspects of the economy. Ms. Mester saw taking the next step in removing policy Notation Vote accommodation as consistent with the Committee’s communications about the appropriate path for mon- By notation vote completed on October 11, 2016, the etary policy. Committee unanimously approved the minutes of the Committee meeting held on September 20–21, 2016. Consistent with the Committee’s decision to leave the target range for the federal funds rate unchanged, the Brian F. Madigan Board of Governors took no action to change the Secretary interest rates on reserves or discount rates.

Minutes of Federal Open Market Committee Meetings | December 275 Meeting Held Michael Held Deputy General Counsel on December 13–14, 2016 Steven B. Kamin Economist A joint meeting of the Federal Open Market Committee 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, David W. Wilcox December 13, 2016, at 1:00 p.m. and continued on Wednesday, December 14, 2016, at 9:00 a.m.1 Economist Thomas A. Connors, David E. Lebow, Stephen A. Present Meyer, Christopher J. Waller, and William Wascher Associate Economists Janet L. Yellen Chair Simon Potter Manager, System Open Market Account William C. Dudley Vice Chairman Lorie K. Logan Deputy Manager, System Open Market Account Lael Brainard Robert deV. Frierson James Bullard Secretary, Office of the Secretary, Board of Governors Stanley Fischer Matthew J. Eichner2 Esther L. George Director, Division of Reserve Bank Operations and Loretta J. Mester Payment Systems, Board of Governors Jerome H. Powell Michael S. Gibson Director, Division of Banking Supervision and Eric Rosengren Regulation, Board of Governors Daniel K. Tarullo Margie Shanks3 Deputy Secretary, Office of the Secretary, Board of Charles L. Evans, Patrick Harker, Robert S. Kaplan, Governors Neel Kashkari, and Michael Strine Alternate Members of the Federal Open Market James A. Clouse Committee Deputy Director, Division of Monetary Affairs, Board of Governors Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams Andreas Lehnert Presidents of the Federal Reserve Banks of Deputy Director, Division of Financial Stability, Richmond, Atlanta, and San Francisco, respectively Board of Governors Beth Anne Wilson Brian F. Madigan Deputy Director, Division of International Finance, Secretary Board of Governors Matthew M. Luecke Trevor A. Reeve Deputy Secretary Senior Special Adviser to the Chair, Office of Board David W. Skidmore Members, Board of Governors Assistant Secretary David Bowman, Andrew Figura, Joseph W. Gruber, Michelle A. Smith Ann McKeehan, and David Reifschneider Assistant Secretary Special Advisers to the Board, Office of Board Members, Board of Governors Scott G. Alvarez General Counsel 2 Attended the discussions of the Rules Regarding Availability of Information and developments in financial markets and open 1 The Federal Open Market Committee is referenced as the market operations. “FOMC” and the “Committee” in these minutes. 3 Attended Wednesday session only.

276 103rd Annual Report | 2016 Linda Robertson David Altig Assistant to the Board, Office of Board Members, Executive Vice President, Federal Reserve Bank of Board of Governors Atlanta Antulio N. Bomfim, Robert J. Tetlow, Michael Dotsey, Evan F. Koenig, Spencer Krane, and Joyce K. Zickler and Mark E. Schweitzer Senior Advisers, Division of Monetary Affairs, Senior Vice Presidents, Federal Reserve Banks of Board of Governors Philadelphia, Dallas, Chicago, and Cleveland, respectively Wayne Passmore Senior Adviser, Division of Research and Statistics, Terry Fitzgerald, Giovanni Olivei, Argia M. Sbordone, Board of Governors Mark Spiegel, and Alexander L. Wolman Vice Presidents, Federal Reserve Banks of Brian M. Doyle Minneapolis, Boston, New York, San Francisco, and Associate Director, Division of International Finance, Richmond, respectively Board of Governors Willem Van Zandweghe Stacey Tevlin Assistant Vice President, Federal Reserve Bank of Associate Director, Division of Research and Kansas City Statistics, Board of Governors Stephanie R. Aaronson Rules Regarding Availability of Information Assistant Director, Division of Research and Statistics, Board of Governors The Committee unanimously voted to amend its Rules Regarding Availability of Information (Rules) Christopher J. Gust in order to comply with the FOIA Improvement Act Assistant Director, Division of Monetary Affairs, of 2016 and to make a number of other technical Board of Governors changes.5 The amended Rules would be published in the Federal Register as an interim final rule, which Don Kim would become effective immediately on publication. Adviser, Division of Monetary Affairs, The Committee anticipated finalization of the Rules Board of Governors after any appropriate changes were incorporated Karen M. Pence based on comments received from the public during Adviser, Division of Research and Statistics, the 60-day comment period following the Federal Board of Governors Register notice. Penelope A. Beattie4 Secretary’s note: The amended Rules were pub- Assistant to the Secretary, Office of the Secretary, lished in the Federal Register on December 27, Board of Governors 2016. David H. Small Project Manager, Division of Monetary Affairs, Developments in Financial Markets and Board of Governors Open Market Operations Edward Herbst and Lubomir Petrasek The manager of the System Open Market Account Principal Economists, Division of Monetary Affairs, (SOMA) reported on developments in U.S. and Board of Governors global financial markets during the period since the Committee met on November 1–2, 2016. Nominal Achilles Sangster II yields on longer-term U.S. Treasury securities rose Information Management Analyst, Division of substantially over the period, reflecting both higher Monetary Affairs, Board of Governors real yields and an increase in inflation compensation. Mark L. Mullinix The value of the dollar on foreign exchange markets First Vice President, Federal Reserve Bank of rose, U.S. equity indexes increased considerably, and Richmond credit spreads on U.S. corporate bonds narrowed. 5 The approved Rules Regarding Availability of Information are available at www.federalreserve.gov/monetarypolicy/rules_ 4 Attended Tuesday session only. authorizations.htm.

Minutes of Federal Open Market Committee Meetings | December 277 Market pricing and survey results indicated that mar- Taken together, a range of recent indicators showed ket participants had come to see a high probability of that labor market conditions had tightened further. an increase of 25 basis points in the FOMC’s target Total nonfarm payroll employment increased at a range for the federal funds rate at this meeting, and solid pace in October and November, and the unemthat the path of the federal funds rate anticipated by ployment rate declined, reaching 4.6 percent in market participants for coming years had steepened. November. The share of workers employed part time Surveys of market participants indicated that revised for economic reasons decreased; however, both the expectations for government spending and tax policy labor force participation rate and the employment-tofollowing the U.S. elections in early November were population ratio edged down on net. The rates of seen as the most important reasons, among several private-sector job openings, of hiring, and of quits factors, for the increase in longer-term Treasury were generally little changed in September and Octoyields, the climb in equity valuations, and the rise in ber at levels above those seen during much of the curthe dollar. rent economic expansion. The four-week moving average of initial claims for unemployment insurance The manager also reported on developments in benefits remained low. Labor productivity in the money markets and open market operations. Market business sector was flat over the four quarters ending interest rates on overnight repurchase agreements in the third quarter. Measures of labor compensation (repos) fell during the intermeeting period. Market continued to rise at a moderate rate. Compensation participants pointed to a number of factors contrib- per hour in the business sector rose 3 percent over the uting to the decline, including lower demands for four quarters ending in the third quarter, and average funding by securities dealers and the ample availabil- hourly earnings for all employees increased 2½ perity of financing from government-only money mar- cent over the 12 months ending in November. The ket funds (MMFs). The decline in repo rates, unemployment rates for African Americans, for Histogether with the shift of MMF assets toward panics, and for whites all declined in recent months. government-only funds, had likely boosted usage of The unemployment rates for African Americans and the System’s overnight reverse repurchase agreement for Hispanics remained above the rate for whites but (ON RRP) facility over the period. In contrast to the were close to the levels seen just before the most decline in interest rates for secured money market recent recession. transactions, the effective federal funds rate generally remained near the middle of the FOMC’s ¼ to Total industrial production was flat in October. Both ½ percent target range. The manager also reported manufacturing production and mining output on the Open Market Desk’s regular review of opera- increased, but the output of utilities declined marktional readiness for a range of open market edly because of unseasonably warm weather in Octooperations. ber. Automakers’ assembly schedules suggested that motor vehicle production would be roughly flat in the By unanimous vote, the Committee ratified the near term, and broader indicators of manufacturing Desk’s domestic transactions over the intermeeting production, such as the new orders indexes from period. There were no intervention operations in for- national and regional manufacturing surveys, pointed eign currencies for the System’s account during the toward only modest gains in factory output in the intermeeting period. coming months. Real personal consumption expenditures (PCE) Staff Review of the Economic Situation appeared to be rising at a moderate pace in the fourth quarter. Consumer expenditures increased modestly The information reviewed for the December 13–14 in October but were restrained by a decline in spendmeeting indicated that real gross domestic product ing for energy services that reflected unseasonably (GDP) was expanding at a moderate pace over the warm weather in that month. Unit sales of light second half of the year and that labor market condi- motor vehicles were higher in October and Novemtions had continued to strengthen in recent months. ber than average monthly sales in the third quarter. Consumer price inflation increased further above its The components of the nominal retail sales data used pace early in the year but was still running below the by the Bureau of Economic Analysis to construct its Committee’s longer-run objective of 2 percent, estimate of PCE rose moderately in November. restrained in part by earlier declines in energy prices Recent readings on key factors that influence conand in prices of non-energy imports. sumer spending—such as continued gains in employ-

278 103rd Annual Report | 2016 ment, real disposable personal income, and house- recent decreases in consumer food prices and earlier holds’ net worth—were consistent with moderate real declines in consumer energy prices. Core PCE prices, PCE growth for the fourth quarter as a whole. In which exclude food and energy prices, rose about addition, consumer sentiment as measured by the 1¾ percent over the same period, held down in part University of Michigan Surveys of Consumers by decreases in the prices of non-energy imports over moved higher in November and early December. a portion of this period and by the pass-through of earlier declines in energy prices into the prices of Recent information on housing market activity sug- other goods and services. Over the same 12-month gested that real residential investment was picking up period, total consumer prices as measured by the in the fourth quarter after decreasing in the previous consumer price index (CPI) rose a bit more than two quarters. Starts for both new single-family homes 1½ percent, while core CPI inflation was around and multifamily units rose substantially in October. 2 percent. The Michigan survey measure of median Building permit issuance for new single-family longer-run inflation expectations edged up, on net, in homes—which tends to be a good indicator of the November and early December. The measure of underlying trend in construction—also increased. longer-run inflation expectations for PCE prices from Sales of existing homes advanced, although new the Survey of Professional Forecasters was home sales dipped. unchanged in the fourth quarter, and measures of longer-run inflation expectations from the Desk’s Real private expenditures for business equipment and Survey of Primary Dealers and Survey of Market intellectual property seemed to be soft early in the Participants were also unchanged in December. fourth quarter. Nominal shipments of nondefense capital goods excluding aircraft edged down in Octo- Foreign real GDP growth rebounded in the third ber. However, new orders of these capital goods rose quarter from an unusually subdued pace in the secand were running above the level of shipments, sug- ond quarter. This bounceback was driven primarily gesting a pickup in business spending for equipment by stronger economic growth in Canada and Mexico, in the near term. Nominal business expenditures for two countries where the second-quarter weakness nonresidential structures declined in October, but the was most pronounced. In the advanced foreign number of oil and gas rigs in operation, an indicator economies (AFEs), recent indicators were consistent of spending for structures in the drilling and mining with a more moderate pace of economic activity in sector, continued to edge up through early December. the fourth quarter. Economic growth also appeared to slow after its uptick in the third quarter in the Real government purchases looked to be rising mod- emerging market economies (EMEs), as indicators estly in the fourth quarter. Nominal federal govern- for Mexico suggested a return to a more sustainable ment spending in October and November pointed to pace of economic growth and as investment decelerincreases in real defense purchases in the fourth quar- ated in China. Inflation increased in most AFEs in ter. The payrolls of state and local governments recent months but remained significantly below cenexpanded, on balance, in October and November, tral bank targets. Inflation in the EMEs also moved and nominal construction spending by these govern- up, driven largely by a rebound in Chinese food ments rose in October. prices and, in some countries, by the effects of currency depreciation. The U.S. international trade deficit widened in October after narrowing in September. After increasing in Staff Review of the Financial Situation September, exports fell substantially in October, reflecting declines in exports of agricultural products, Over the intermeeting period, incoming U.S. ecoconsumer goods, and industrial supplies. Imports in nomic data and Federal Reserve communications October retraced their September decline, as imports reinforced market participants’ expectations for an of consumer goods and capital goods rose. The avail- increase in the target range for the federal funds rate able trade data suggested that real net exports would at the December meeting. Asset price movements as make a negative contribution to real U.S. GDP well as changes in the expected path for U.S. mongrowth in the fourth quarter. etary policy beyond December appeared to be driven largely by expectations of more expansionary fiscal Total U.S. consumer prices, as measured by the PCE policy in the aftermath of U.S. elections. Nominal price index, increased almost 1½ percent over the Treasury yields rose across the maturity spectrum, 12 months ending in October, partly restrained by and measures of inflation compensation based on

Minutes of Federal Open Market Committee Meetings | December 279 Treasury Inflation-Protected Securities continued to lower interest rates, such as utilities, underperformed. move up. Meanwhile, broad equity price indexes Implied volatility in equity markets decreased, and increased, and credit spreads on corporate bonds yield spreads of nonfinancial corporate bonds over narrowed. Most private borrowing rates increased those of comparable-maturity Treasury securities somewhat, but financing conditions for nonfinancial narrowed for both investment- and speculative-grade firms and households remained broadly firms. Available reports suggested that earnings for accommodative. firms in the S&P 500 index increased in the third quarter on a seasonally adjusted basis, and the Market expectations for an increase in the target improvement in earnings was broad based across range for the federal funds rate at the December sectors. meeting rose over the intermeeting period. By the end of the period, quotes on federal funds futures con- Money market flows continued to stabilize over the tracts, without adjustment for term premiums, sug- intermeeting period following outsized movements in gested that market participants saw a nearly 95 per- the period before implementation of MMF reforms cent probability of a rate hike. In addition, the in mid-October. Assets under management at governexpected federal funds rate path over the next few ment MMFs rose modestly, while assets at prime years implied by quotes on overnight index swap MMFs were about unchanged. In addition, out- (OIS) rates steepened. Most of the steepening of the standing levels of commercial paper (CP) and negoexpected policy path occurred following the U.S. elec- tiable certificates of deposit were stable. The effective tions, reportedly in part reflecting investors’ percep- federal funds rate remained well within the FOMC’s tion that the incoming Congress and Administration target range. Rates on overnight Eurodollar deposits, would enact significant fiscal stimulus measures. CP, and other short-term unsecured instruments were Market-based measures of uncertainty regarding close to the federal funds rate. Overnight Treasury monetary policy at horizons beyond one year moved repo rates declined in mid-November but stayed up, suggesting that some of the firming in OIS rates above the ON RRP offering rate. Rates on term could reflect a rise in term premiums. Consistent with money market instruments increased, consistent with market-based estimates, respondents to the Desk’s firming expectations for a December rate hike. December surveys of primary dealers and market participants assigned a probability near 90 percent to Financing conditions for nonfinancial firms a rate hike in December. remained generally accommodative. Although gross issuance of corporate bonds slowed notably in Octo- Nominal Treasury yields moved up considerably ber and November from the brisk pace in the third since the November FOMC meeting. Intermediate- quarter, the decrease in corporate bond spreads after and longer-term yields were boosted by roughly equal the U.S. elections suggests that the lower issuance did increases in real yields and inflation compensation. not reflect a tightening of financial conditions. In Measures of inflation compensation extended an addition, growth in commercial and industrial loans upward trajectory that began around midyear. from banks picked up after having dipped some dur- Changes in market quotes for inflation caps and ing the third quarter, issuance of leveraged loans by floors suggested that the rise in inflation compensa- nonbanks was robust, and CP outstanding at nonfition reflected in part higher costs of protection nancial firms increased on balance. against above-target inflation outcomes. The rise in inflation compensation appeared to be spurred in The credit quality of nonfinancial corporations part by the recent climb in oil prices, with a notable remained solid. The volume of corporate bond rating jump after OPEC’s agreement at its November 30 downgrades in October and November outpaced that meeting to cut production. of upgrades but was moderate compared with rates seen in the first half of the year. Default rates and Broad U.S. equity price indexes rose over the inter- expected year-ahead default rates for nonfinancial meeting period, apparently boosted by investors’ firms declined modestly over the intermeeting period, expectations of stronger earnings growth and although both remained somewhat elevated comimproved risk sentiment, with much of the rally com- pared with their ranges in recent years. Indicators of ing after the U.S. elections. Share prices for the finan- supply and demand conditions for small business cial sector outperformed the broader market, while credit were generally unchanged over the past quarstock prices in sectors that typically benefit from ter, with demand appearing to remain weak.

280 103rd Annual Report | 2016 Gross issuance of municipal bonds remained solid in banks, such as the Bank of Mexico and the Central October, and the credit quality of state and local gov- Bank of the Republic of Turkey, to tighten monetary ernments was stable, as the number of ratings down- policy. However, the Central Bank of Brazil eased grades only moderately outpaced the number of monetary policy to support economic growth. upgrades in October and November. Yields on general obligation bonds rose somewhat more than those In the euro area, investors were attentive to the conon comparable-maturity Treasury securities over the stitutional referendum in Italy and the December intermeeting period, reportedly reflecting expected meeting of the European Central Bank (ECB). In reductions in the tax benefit of municipal bonds. Italy, the “No” vote on constitutional reform and the subsequent resignation of the prime minister raised Financing conditions for commercial real estate concerns that recapitalization of the country’s bank- (CRE) also remained largely accommodative. The ing sector would become more difficult. However, average rate of growth of CRE loans at banks con- these developments left little imprint on financial tinued to be strong in October and November. markets on net. At its December meeting, the ECB Spreads on commercial mortgage-backed securities extended its asset purchase program for a longer narrowed a little over the intermeeting period, and period of time than market participants anticipated issuance of such securities continued to outpace that while reducing the pace of asset purchases. In addiof the first half of 2016. tion, the minimum maturity for eligible securities was lowered, and the limitation on purchases of securities The interest rate on 30-year fixed-rate residential with a yield below the deposit facility rate was mortgages moved up in line with Treasury yields, relaxed. As a result, sovereign yield curves in the euro although the rate remained low by historical stan- area steepened somewhat. dards and mortgage availability appeared little changed. Likely in part because of the increase in Staff Economic Outlook mortgage rates, refinance originations decreased in November, but purchase originations were little In the U.S. economic projection prepared by the staff changed. for the December FOMC meeting, the near-term forecast was little changed from the projection pre- Consumer credit continued to be readily available for pared for the November meeting. Real GDP growth most borrowers, and overall loan balances increased in the second half of 2016 was still expected to be about 6 percent over the 12 months ending in Sep- faster than in the first half. The staff’s forecast for tember. In the subprime sector, credit card lending real GDP growth over the next several years was standards appeared to remain tight, and extensions slightly higher, on balance, largely reflecting the of new credit to subprime auto loan borrowers edged effects of the staff’s provisional assumption that fisdown in the third quarter. Measures of consumer cal policy would be more expansionary in the coming credit quality were little changed in the third quarter. years. These effects were substantially counterbalanced by the restraint from the higher assumed paths Foreign financial markets responded primarily to for longer-term interest rates and the foreign U.S. developments over the intermeeting period, as exchange value of the dollar. The staff projected that market participants assessed the effects of potential real GDP would expand at a modestly faster pace policy changes resulting from the U.S. elections on than potential output in 2017 through 2019. The foreign economies. Spillovers from U.S. markets unemployment rate was forecast to edge down gradulifted yields and equity prices in most AFEs, but ally, on net, and to continue to run below the staff’s higher yields in the United States seemed to weigh on estimate of its longer-run natural rate through the investor sentiment toward EMEs, where prices of end of 2019; the path for the unemployment rate was risky assets declined. On a trade-weighted basis, the a little lower than in the previous projection. dollar appreciated notably against both AFE and EME currencies. In particular, the dollar strength- The near-term forecast for consumer price inflation ened about 10 percent against the Japanese yen and was somewhat higher than in the previous projection, 5 percent against the Mexican peso. The declines in reflecting recent increases in energy prices. Beyond EME currencies and risky asset prices were report- the near term, the inflation forecast was little revised. edly driven by higher U.S. yields as well as by uncer- The staff continued to project that inflation would tainty about possible changes in U.S. trade policies. edge up over the next several years, as food and Currency weakness prompted some EME central energy prices along with the prices of non-energy

Minutes of Federal Open Market Committee Meetings | December 281 imports were expected to begin steadily rising in erate pace since midyear. Job gains had been solid in 2017. However, inflation was projected to be margin- recent months, and the unemployment rate had ally below the Committee’s longer-run objective of declined. Household spending had been rising mod- 2 percent in 2019. erately, but business fixed investment remained soft. Inflation had increased since earlier in the year but The staff viewed the uncertainty around its projec- was still below the Committee’s 2 percent longer-run tions for real GDP growth, the unemployment rate, objective, partly reflecting earlier declines in energy and inflation as similar to the average of the past prices and in prices of non-energy imports. Market- 20 years. The risks to the forecast for real GDP were based measures of inflation compensation had seen as tilted to the downside, reflecting the staff’s moved up considerably but still were low; most assessment that monetary policy appeared to be bet- survey-based measures of longer-term inflation ter positioned to offset large positive shocks than expectations were little changed, on balance, in recent substantial adverse ones. In addition, the staff con- months. tinued to see the risks to the forecast from developments abroad as skewed to the downside. Consistent Participants expected that, with gradual adjustments with the downside risks to aggregate demand, the in the stance of monetary policy, economic activity staff viewed the risks to its outlook for the unem- would expand at a moderate pace and labor market ployment rate as tilted to the upside. The risks to the conditions would strengthen somewhat further. Inflaprojection for inflation were seen as roughly bal- tion was expected to rise to 2 percent over the anced. The downside risks from the possibility that medium term as the transitory effects of past declines longer-term inflation expectations may have edged in energy prices and non-energy import prices dissilower or that the dollar could appreciate more than pated and the labor market strengthened further. Paranticipated were seen as roughly counterbalanced by ticipants indicated that recently available economic the upside risk that inflation could increase more data had been broadly in line with their expectations, than expected in an economy that was projected to and they judged that near-term risks to the economic continue operating above its long-run potential. outlook appeared roughly balanced. Moreover, participants generally made only modest changes to their Participants’ Views on Current Conditions forecasts for real GDP growth, the unemployment and the Economic Outlook rate, and inflation. About half of the participants incorporated an assumption of more expansionary In conjunction with this FOMC meeting, members fiscal policy in their forecasts. of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the In their discussion of their economic forecasts, parmost likely outcomes for real output growth, the ticipants emphasized their considerable uncertainty unemployment rate, and inflation for each year from about the timing, size, and composition of any future 2016 through 2019 and over the longer run, based on fiscal and other economic policy initiatives as well as their individual assessments of the appropriate path about how those policies might affect aggregate for the federal funds rate.6 The longer-run projections demand and supply. Several participants pointed out represented each participant’s assessment of the rate that, depending on the mix of tax, spending, regulato which each variable would be expected to con- tory, and other possible policy changes, economic verge, over time, under appropriate monetary policy growth might turn out to be faster or slower than and in the absence of further shocks to the economy. they currently anticipated. However, almost all also These projections and policy assessments are indicated that the upside risks to their forecasts for described in the Summary of Economic Projections, economic growth had increased as a result of proswhich is an addendum to these minutes. pects for more expansionary fiscal policies in coming years. Many participants underscored the need to In their discussion of the economic situation and the continue to weigh other risks and uncertainties outlook, participants agreed that information attending the economic outlook. In that regard, sevreceived over the intermeeting period indicated that eral noted upside risks to U.S. economic activity from the labor market had continued to strengthen and the potential for better-than-expected economic that economic activity had been expanding at a modgrowth abroad or an acceleration of domestic business investment. Among the downside risks cited 6 One participant did not submit longer-run projections for real were the possibility of additional appreciation of the output growth, the unemployment rate, or the federal funds rate. foreign exchange value of the dollar, financial vulner-

282 103rd Annual Report | 2016 abilities in some foreign economies, and the proxim- some service-sector industries. More generally, parity of the federal funds rate to the effective lower ticipants reported that many of their District busibound. Several participants also commented on the ness contacts expressed greater optimism about the uncertainty about the outlook for productivity economic outlook, and several participants comgrowth or about the potential effects of tight labor mented that the improved sentiment could spur markets on labor supply and inflation. For some par- stronger investment spending. Some contacts ticipants, the greater upside risks to economic thought that their businesses could benefit from posgrowth, the upward movement in inflation compen- sible changes in federal spending, tax, and regulatory sation over recent months, or the possibility of fur- policies, while others were uncertain about the outther increases in oil prices had increased the upside look for significant government policy changes or risks to their inflation forecasts. However, several were concerned that their businesses might be others pointed out that a further rise in the dollar adversely affected by some of the proposals under might continue to hold down inflation. Participants discussion. generally agreed that they should continue to closely monitor inflation indicators and global economic Labor market conditions continued to improve over and financial developments. the intermeeting period. Monthly increases in nonfarm payroll employment averaged nearly 180,000 Regarding the household sector, the available infor- over the three months ending in November, in line mation indicated that consumer spending had been with the average pace of job creation over the past rising at a moderate rate, on balance, since midyear. year. The unemployment rate dropped markedly to Participants cited a number of factors likely to sup- 4.6 percent in November; a few participants sugport continued moderate gains in consumer spend- gested that part of the decline might be reversed in ing. Consumer confidence remained positive. The coming months. Most participants viewed the cumuoutlook was for further solid gains in jobs and lative progress in the labor market as having brought income, and household balance sheets had improved. labor market conditions to or close to those consis- The personal saving rate was still relatively high, and tent with the Committee’s maximum-employment household wealth had been boosted by ongoing gains objective. Over the past year, broad measures of in housing and equity prices. In the housing market, labor underutilization that include both the unemrecent data on starts and permits for new residential ployed and workers marginally attached to the labor construction suggested a firming in residential invest- force had trended lower, the labor force participation ment after two quarters of decline. Several partici- rate had been relatively steady despite downward pants commented that housing activity appeared to pressure from demographic trends, and layoffs had be gaining momentum in their Districts, and it was fallen to low levels. National surveys reported that noted that the rate of new construction still appeared job availability was high and that firms were increasto be low relative to levels that would be expected ingly finding their job openings hard to fill. Some based on the longer-run rate of household formation. participants commented that some businesses in their Districts were experiencing shortages of skilled work- The outlook for the business sector improved over ers in some occupations or were needing to offer the intermeeting period. Although nonresidential higher wages to fill positions. However, some others investment was still weak and equipment spending noted that aggregate measures of wages were still rishad been flat in the third quarter, orders for nonde- ing at a subdued pace, suggesting that upward presfense capital goods and the number of drilling rigs in sure on wages had not become widespread. operation had both turned up recently. A couple of participants reported plans for a pickup in capital Participants expected the labor market to strengthen spending by businesses in their Districts, driven by somewhat further over the medium run, with almost stronger demand and increasing revenues. Surveys all anticipating that the unemployment rate over the and information gathered from contacts in several next couple of years would run below their estimates Districts indicated an improvement in manufacturing of its longer-run normal level. Some participants saw activity as well as expectations for further gains in the possibility that an extended period during which factory production in the near term. And the recent labor markets remained relatively tight could confirming in oil prices, if sustained, was anticipated to tinue to shrink remaining margins of underutilizaboost domestic energy production. In contrast, con- tion, including the still-high level of prime-age workditions in the agricultural sector remained depressed, ers outside the labor force and elevated levels of and a couple of reports highlighted softer activity in involuntary part-time employment and long-duration

Minutes of Federal Open Market Committee Meetings | December 283 unemployment. A few added that continued gradual objective. A couple of participants noted that the strengthening in labor markets would help return recent firming in oil prices might have contributed to inflation to the Committee’s 2 percent objective. But the changes in these market-based measures. Several, some other participants were uncertain that a period however, pointed out that market-based measures of of tight labor utilization would yield lasting labor inflation compensation were still low or that downmarket benefits or were concerned that it risked a side risks to inflation remained, given the recent furbuildup of inflationary pressures. Most participants ther appreciation of the dollar. expected that if economic growth remained moderate, as they projected, the unemployment rate would Most participants attributed the substantial changes be only modestly below their estimates of the longer- in financial market conditions over the intermeeting run normal rate of unemployment over the next few period—including the increase in longer-term interest years, but several anticipated a more substantial rates, the strengthening of the dollar, the rise in undershoot. A few participants noted the uncertainty equity prices, and the narrowing of credit surrounding real-time estimates of the longer-run spreads—to expectations for more expansionary fisnormal rate of unemployment, and it was pointed cal policies in coming years or to possible reductions out that geographic variation in labor market condi- in corporate tax rates. Many participants expressed tions contributed to that uncertainty. In discussing the need for caution in evaluating the implications of the possible implications of a more significant under- recent financial market developments for the ecoshooting of the longer-run normal rate, many partici- nomic outlook, in light of the uncertainty about how pants emphasized that, as the economic outlook federal spending, tax, and regulatory policies might evolved, timely adjustments to monetary policy could unfold and how global economic and financial condibe required to achieve and maintain both the Com- tions will evolve. mittee’s maximum-employment and inflation objectives. In their consideration of economic conditions and monetary policy, participants agreed that sufficient Participants generally viewed the information on evidence had accumulated of continued progress inflation received over the intermeeting period as toward the Committee’s objectives of maximum reinforcing their expectation that inflation would rise employment and 2 percent inflation to warrant an to the Committee’s 2 percent objective over the increase of 25 basis points in the target range for the medium term. The 12-month change in the headline federal funds rate at this meeting. Participants judged PCE price index moved up further to 1.4 percent in that, even after the increase in the target range, the October, as the rise in energy prices since the spring stance of policy would remain accommodative, conoffset much of the decline earlier in the year. sistent with some further strengthening in labor mar- Although the headline measure was still below 2 per- ket conditions and a return of inflation to 2 percent cent, it had increased more than 1 percentage point over the medium term. over the past year. Core PCE price inflation had also moved up moderately over the past year, and, over Participants discussed the implications of the ecothe 12 months ending in October, it was 1.7 percent nomic outlook for the likely future path of the target for a third consecutive month. Median 5-to-10-year range for the federal funds rate. Most participants inflation expectations in the Michigan survey were, judged that a gradual pace of rate increases was likely on balance, stable in November and early December, to be appropriate to promote the Committee’s objecjust above the low recorded in October. Market- tives of maximum employment and 2 percent inflabased measures of inflation compensation had tion. A gradual pace was also viewed by some particimoved up considerably over the intermeeting period. pants as likely to be warranted because the proximity A few participants added that other readings from of the federal funds rate to the effective lower bound financial markets, such as implied probabilities of placed constraints on the ability of monetary policy various inflation outcomes derived from inflation to respond to adverse shocks to the aggregate derivatives, pricing in the inflation swaps market, and demand for goods and services. In addition, the neuthe apparent upward shift of the estimated term pre- tral real rate—defined as the real interest rate that is mium in the 10-year Treasury yield, suggested that neither expansionary nor contractionary when the the risks to the inflation outlook had become more economy is operating at or near its potential—still balanced around the Committee’s 2 percent inflation appeared to be low by historical standards, and it was

284 103rd Annual Report | 2016 noted that gradual increases in the federal funds rate Committee Policy Action over the next few years probably would be sufficient to return to a neutral policy stance. In their discussion of monetary policy for the period ahead, members judged that the information received While viewing a gradual approach to policy firming since the Committee met in November indicated that as likely to be appropriate, participants emphasized the labor market had continued to strengthen and the need to adjust the policy path as economic condi- that economic activity had been expanding at a modtions evolved. They pointed to a number of risks erate pace since midyear. Job gains had been solid in that, if realized, might call for a different path of recent months, and the unemployment rate had policy than they currently expected. Moreover, uncer- declined. Household spending had been rising modtainty regarding fiscal and other economic policies erately, but business fixed investment had remained had increased. Participants agreed that it was too soft. Inflation had increased since earlier this year early to know what changes in these policies would but was still below the Committee’s 2 percent longerbe implemented and how such changes might alter run objective, partly reflecting earlier declines in the economic outlook. It was also noted that fiscal energy prices and in prices of non-energy imports. and other policies were only some of the many fac- Market-based measures of inflation compensation tors that could influence the economic outlook and had moved up considerably but still were low; most thus the appropriate course of monetary policy. survey-based measures of longer-term inflation Moreover, many participants emphasized that the expectations were little changed on balance. greater uncertainty about these policies made it more challenging to communicate to the public about the With respect to the economic outlook and its implilikely path of the federal funds rate. Participants cations for monetary policy, members continued to noted that, in the circumstances of heightened uncer- expect that, with gradual adjustments in the stance of tainty, it was especially important that the Committee monetary policy, economic activity would expand at continue to underscore in its communications that a moderate pace and labor market conditions would monetary policy would continue to be set to promote strengthen somewhat further. They generally attainment of the Committee’s statutory objectives observed that labor market conditions had improved of maximum employment and price stability. appreciably over the past year and that labor market slack had declined. Members agreed that there was Many participants judged that the risk of a sizable heightened uncertainty about possible changes in fisundershooting of the longer-run normal unemploy- cal and other economic policies as well as their ment rate had increased somewhat and that the Com- effects. However, members also agreed that near-term mittee might need to raise the federal funds rate more risks to the economic outlook appeared roughly balquickly than currently anticipated to limit the degree anced. Some members saw, with gradual adjustments of undershooting and stem a potential buildup of of the stance of monetary policy, only modest risk of inflationary pressures. However, with inflation still a scenario in which an undershooting of the longerbelow the Committee’s 2 percent objective, it was run normal rate of unemployment would create a noted that downside risks to inflation remained and sharp acceleration in prices. These members observed that a moderate undershooting of the longer-run that inflation continued to run below the Commitnormal unemployment rate could help return infla- tee’s 2 percent objective and that wage gains had tion to 2 percent. A couple of participants expressed been subdued, and they expressed the view that inflaconcern that the Committee’s communications about tion was likely to rise gradually, giving monetary a gradual pace of policy firming might be misunder- policy time to respond if necessary. Several members stood as a commitment to only one or two rate hikes noted that if the labor market appeared to be tightper year; participants agreed that policy would need ening significantly more than expected, it might to respond appropriately to the evolving outlook. become necessary to adjust the Committee’s commu- Several participants noted circumstances that might nications about the expected path of the federal warrant changes to the path for the federal funds rate funds rate, consistent with the possibility that a less could also have implications for the reinvestment of gradual pace of increases could become appropriate. proceeds from maturing Treasury securities and principal payments from agency debt and mortgage- At this meeting, members continued to expect that, backed securities. with gradual adjustments in the stance of monetary

Minutes of Federal Open Market Committee Meetings | December 285 policy, inflation would rise to the Committee’s 2 per- ing the Committee’s holdings of longer-term securicent objective over the medium term as the transitory ties at sizable levels, should help maintain accommoeffects of past declines in energy prices and non- dative financial conditions. energy import prices dissipated and the labor market strengthened further. This view was reinforced by the At the conclusion of the discussion, the Committee rise in inflation in recent months and by recent voted to authorize and direct the Federal Reserve increases in inflation compensation. Against this Bank of New York, until it was instructed otherwise, backdrop and in light of the current shortfall in infla- to execute transactions in the SOMA in accordance tion from 2 percent, members agreed that they would with the following domestic policy directive, to be continue to closely monitor actual and expected released at 2:00 p.m.: progress toward the Committee’s inflation goal. “Effective December 15, 2016, the Federal Open After assessing the outlook for economic activity, the Market Committee directs the Desk to underlabor market, and inflation, members agreed to raise take open market operations as necessary to the target range for the federal funds rate to ½ to maintain the federal funds rate in a target range ¾ percent. This increase in the target range was of ½ to ¾ percent, including overnight reverse viewed as appropriate in light of the considerable repurchase operations (and reverse repurchase progress that had been made toward the Committee’s operations with maturities of more than one day objective of maximum employment and, in view of when necessary to accommodate weekend, holithe rise in inflation since earlier in the year, the Com- day, or similar trading conventions) at an offermittee’s confidence that inflation would rise to 2 per- ing rate of 0.50 percent, in amounts limited only cent in the medium term. Members judged that, even by the value of Treasury securities held outright after this increase in the target range, the stance of in the System Open Market Account that are monetary policy remained accommodative, thereby available for such operations and by a persupporting some further strengthening in labor mar- counterparty limit of $30 billion per day. ket conditions and a return to 2 percent inflation. The Committee directs the Desk to continue The Committee agreed that, in determining the tim- rolling over maturing Treasury securities at aucing and size of future adjustments to the target range tion and to continue reinvesting principal payfor the federal funds rate, it would assess realized and ments on all agency debt and agency mortgageexpected economic conditions relative to its objec- backed securities in agency mortgage-backed tives of maximum employment and 2 percent infla- securities. The Committee also directs the Desk tion. This assessment would take into account a wide to engage in dollar roll and coupon swap transrange of information, including measures of labor actions as necessary to facilitate settlement of market conditions, indicators of inflation pressures the Federal Reserve’s agency mortgage-backed and inflation expectations, and readings on financial securities transactions.” and international developments. The Committee expected that economic conditions would evolve in a The vote also encompassed approval of the statement manner that would warrant only gradual increases in below to be released at 2:00 p.m.: the federal funds rate and that the federal funds rate was likely to remain, for some time, below levels that “Information received since the Federal Open are expected to prevail in the longer run. However, Market Committee met in November indicates members emphasized that the actual path of the fed- that the labor market has continued to eral funds rate would depend on the economic out- strengthen and that economic activity has been look as informed by incoming data. expanding at a moderate pace since mid-year. Job gains have been solid in recent months and The Committee also decided to maintain its existing the unemployment rate has declined. Household policy of reinvesting principal payments from its spending has been rising moderately but busiholdings of agency debt and agency mortgage- ness fixed investment has remained soft. Inflabacked securities in agency mortgage-backed securi- tion has increased since earlier this year but is ties and of rolling over maturing Treasury securities still below the Committee’s 2 percent longer-run at auction, and it anticipated doing so until normal- objective, partly reflecting earlier declines in ization of the level of the federal funds rate is well energy prices and in prices of non-energy under way. Members noted that this policy, by keep- imports. Market-based measures of inflation

286 103rd Annual Report | 2016 compensation have moved up considerably but ings of agency debt and agency mortgagestill are low; most survey-based measures of backed securities in agency mortgage-backed longer-term inflation expectations are little securities and of rolling over maturing Treasury changed, on balance, in recent months. securities at auction, and it anticipates doing so until normalization of the level of the federal Consistent with its statutory mandate, the Com- funds rate is well under way. This policy, by mittee seeks to foster maximum employment keeping the Committee’s holdings of longerand price stability. The Committee expects that, term securities at sizable levels, should help with gradual adjustments in the stance of mon- maintain accommodative financial conditions.” etary policy, economic activity will expand at a moderate pace and labor market conditions will Voting for this action: Janet L. Yellen, William strengthen somewhat further. Inflation is C. Dudley, Lael Brainard, James Bullard, Stanley expected to rise to 2 percent over the medium Fischer, Esther L. George, Loretta J. Mester, Jerome term as the transitory effects of past declines in H. Powell, Eric Rosengren, and Daniel K. Tarullo. energy and import prices dissipate and the labor market strengthens further. Near-term risks to Voting against this action: None. the economic outlook appear roughly balanced. The Committee continues to closely monitor To support the Committee’s decision to raise the tarinflation indicators and global economic and get range for the federal funds rate, the Board of financial developments. Governors voted unanimously to raise the interest rates on required and excess reserve balances ¼ per- In view of realized and expected labor market centage point, to ¾ percent, effective December 15, conditions and inflation, the Committee decided 2016. The Board of Governors also voted unanito raise the target range for the federal funds mously to approve a ¼ percentage point increase in rate to ½ to ¾ percent. The stance of monetary the primary credit rate (discount rate) to 1¼ percent, policy remains accommodative, thereby support- effective December 15, 2016.7 ing some further strengthening in labor market conditions and a return to 2 percent inflation. It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, January 31– In determining the timing and size of future February 1, 2017. The meeting adjourned at 10:05 adjustments to the target range for the federal a.m. on December 14, 2016. funds rate, the Committee will assess realized and expected economic conditions relative to its Notation Vote objectives of maximum employment and 2 percent inflation. This assessment will take into By notation vote completed on November 22, 2016, account a wide range of information, including the Committee unanimously approved the minutes of measures of labor market conditions, indicators the Committee meeting held on November 1–2, 2016. of inflation pressures and inflation expectations, and readings on financial and international Brian F. Madigan developments. In light of the current shortfall of Secretary inflation from 2 percent, the Committee will carefully monitor actual and expected progress 7 In taking this action, the Board approved requests submitted by toward its inflation goal. The Committee expects the boards of directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chithat economic conditions will evolve in a mancago, St. Louis, Kansas City, Dallas, and San Francisco. This ner that will warrant only gradual increases in vote also encompassed approval by the Board of Governors of the federal funds rate; the federal funds rate is the establishment of a 1¼ percent primary credit rate by the remaining Federal Reserve Bank, effective on the later of likely to remain, for some time, below levels that December 15, 2016, and the date such Reserve Bank informed are expected to prevail in the longer run. How- the Secretary of the Board of such a request. ever, the actual path of the federal funds rate will (Secretary’s note: Subsequently, the Federal Reserve Bank of Minneapolis was informed by the Secretary of the Board of the depend on the economic outlook as informed by Board’s approval of its establishment of a primary credit rate of incoming data. 1¼ percent, effective December 15, 2016.) This vote of the Board of Governors also encompassed approval of the renewal by all 12 Federal Reserve Banks of the existing formulas for cal- The Committee is maintaining its existing policy culating the rates applicable to discounts and advances under of reinvesting principal payments from its hold- the secondary and seasonal credit programs.

Minutes of Federal Open Market Committee Meetings | December 287 Addendum: 2019 would be close to their estimates of its longerrun normal level. However, the economic outlook is Summary of Economic Projections uncertain, and participants noted that their economic projections and assessments of appropriate monetary In conjunction with the Federal Open Market Compolicy may change in response to incoming mittee (FOMC) meeting held on December 13–14, information. 2016, meeting participants submitted their projections of the most likely outcomes for real output A majority of participants viewed the level of uncergrowth, the unemployment rate, and inflation for tainty associated with their individual forecasts for each year from 2016 to 2019 and over the longer economic growth, unemployment, and inflation as run.8 Each participant’s projection was based on broadly similar to the norms of the previous information available at the time of the meeting, 20 years, though some participants saw uncertainty together with his or her assessment of appropriate associated with their forecasts as higher than average. monetary policy, including a path for the federal Most participants also judged the risks around their funds rate and its longer-run value, and assumptions projections for economic activity, the unemployment about other factors likely to affect economic outrate, and inflation as broadly balanced, while several comes. The longer-run projections represent each participants saw the risks to their forecasts of real participant’s assessment of the value to which each GDP growth as weighted to the upside and the risks variable would be expected to converge, over time, to their unemployment rate forecasts as tilted to the under appropriate monetary policy and in the downside. absence of further shocks to the economy. “Appropriate monetary policy” is defined as the future path The Outlook for Economic Activity of policy that each participant deems most likely to foster outcomes for economic activity and inflation The median of participants’ projections for the that best satisfy his or her individual interpretation of growth rate of real GDP, conditional on their indithe Federal Reserve’s objectives of maximum vidual assumptions about appropriate monetary employment and stable prices. policy, was 1.9 percent in 2016, 2.1 percent in 2017, 2.0 percent in 2018, and 1.9 percent in 2019; the Most FOMC participants expected that, under median of projections for the longer-run normal rate appropriate monetary policy, growth in real gross of real GDP growth was 1.8 percent. Most particidomestic product (GDP) would pick up a bit next pants projected that economic growth would pick up year and run at or slightly above their individual esti- a bit in 2017 from the current year’s pace and run at mates of its longer-run rate through 2019. Almost all or slightly above their individual estimates of its participants projected that the unemployment rate longer-run rate through 2019. Compared with the would run below their estimates of its longer-run September Summary of Economic Projections normal level in 2017 and remain below that level (SEP), the medians of the projections for real GDP through 2019. All participants projected that infla- growth were slightly higher over the period from tion, as measured by the four-quarter percentage 2017 to 2019, while the median assessment of the change in the price index for personal consumption longer-run growth rate was unchanged. Since Sepexpenditures (PCE), would increase over the next two tember, almost half of the participants revised up years, and several expected inflation to slightly exceed their projections for real GDP growth in 2018 or the Committee’s 2 percent objective in 2018 or 2019. 2019, generally only slightly. Those increasing their Table 1 and figure 1 provide summary statistics for projections for output growth in those years cited the projections. expected changes in fiscal, regulatory, or other policies as factors contributing to their revisions. How- As shown in figure 2, almost all participants expected ever, many participants noted that the effects on the that the evolution of economic conditions would economy of such policy changes, if implemented, warrant only gradual increases in the federal funds would likely be partially offset by tighter financial rate to achieve and sustain maximum employment conditions, including higher longer-term interest and 2 percent inflation. Many participants judged rates and a strengthening of the dollar. that the appropriate level of the federal funds rate in The median of projections for the unemployment 8 One participant did not submit longer-run projections for real rate in the fourth quarter of 2016 was 4.7 percent, output growth, the unemployment rate, or the federal funds rate. slightly lower than in September. Based on the

288 103rd Annual Report | 2016 Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, December 2016 Percent Median1 Central tendency2 Range3 Variable Longer Longer L onger 2 016 2017 2018 2019 run 2016 2017 2018 2019 run 2 016 2 017 2018 2019 run Change in real GDP 1.9 2.1 2.0 1.9 1.8 1.8– 1.9 1.9 – 2.3 1.8 – 2.2 1.8 – 2.0 1.8 – 2.0 1.8 – 2.0 1.7 – 2.4 1.7 – 2.3 1.5 –2 .2 1.6 –2 .2 September projection 1.8 2.0 2.0 1.8 1.8 1.7 – 1.9 1.9 – 2.2 1.8 – 2.1 1.7 – 2.0 1.7 – 2.0 1.7 – 2.0 1.6 – 2.5 1.5 – 2.3 1.6 – 2.2 1.6 – 2.2 Unemployment rate 4.7 4.5 4.5 4.5 4.8 4.7 – 4.8 4.5 – 4.6 4.3 – 4.7 4.3 – 4.8 4.7 – 5.0 4.7 –4 .8 4.4 –4 .7 4.2– 4.7 4.1– 4.8 4.5 – 5.0 September projection 4.8 4.6 4.5 4.6 4.8 4.7 – 4.9 4.5 – 4.7 4.4 – 4.7 4.4 – 4.8 4.7 – 5.0 4.7 – 4.9 4.4 – 4.8 4.3 – 4.9 4.2 – 5.0 4.5 – 5.0 PCE inflation 1.5 1.9 2.0 2.0 2.0 1.5 1.7 – 2.0 1.9 – 2.0 2.0 – 2.1 2.0 1.5 – 1.6 1.7 – 2.0 1.8 – 2.2 1.8 – 2.2 2.0 September projection 1.3 1.9 2.0 2.0 2.0 1.2 – 1.4 1.7 – 1.9 1.8 – 2.0 1.9 – 2.0 2.0 1.1 – 1.7 1.5 – 2.0 1.8 – 2.0 1.8 – 2.1 2.0 Core PCE inflation4 1.7 1.8 2.0 2.0 1.7 – 1.8 1.8 – 1.9 1.9 – 2.0 2.0 1.6 –1 .8 1.7– 2.0 1.8– 2.2 1.8– 2.2 September projection 1.7 1.8 2.0 2.0 1.6 – 1.8 1.7 – 1.9 1.9 – 2.0 2.0 1.5 – 2.0 1.6– 2.0 1.8 –2 .0 1 .8– 2 .1 Memo: Projected appropriate policy path Federal funds rate 0.6 1.4 2.1 2.9 3.0 0.6 1.1 – 1.6 1.9 – 2.6 2.4 – 3.3 2.8 – 3.0 0 .6 0.9 – 2.1 0.9 – 3.4 0.9 – 3.9 2.5 – 3.8 September projection 0.6 1.1 1.9 2.6 2.9 0.6 – 0.9 1.1 – 1.8 1.9 – 2.8 2.4 – 3.0 2.8 – 3.0 0.4 – 1.1 0.6 – 2.1 0.6 – 3.1 0.6 – 3.8 2.5 – 3.8 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 20–21, 2016. One participant did not submit longer-run projections for the change in real GDP, the unemployment rate, or the federal funds rate in conjunction with the September 20–21, 2016, meeting, and one participant did not submit such projections in conjunction with the December 13–14, 2016, meeting. 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 289 Figure 1. Medians, central tendencies, and ranges of economic projections, 2016–19 and over the longer run Percent Change in real GDP Median of projections Central tendency of projections 3 Range of projections 2 Actual 1 2011 2012 2013 2014 2015 2016 2017 2018 2019 Longer run Percent Unemployment rate 9 8 7 6 5 4 2011 2012 2013 2014 2015 2016 2017 2018 2019 Longer run Percent PCE inflation 3 2 1 2011 2012 2013 2014 2015 2016 2017 2018 2019 Longer run Percent Core PCE inflation 3 2 1 2011 2012 2013 2014 2015 2016 2017 2018 2019 Longer run Note: Definitions of variables and other explanations are in the notes to table 1. The data for the actual values of the variables are annual.

290 103rd Annual Report | 2016 Figure 2. FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate Percent 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2016 2017 2018 2019 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. One participant did not submit longer-run projections for the federal funds rate.

Minutes of Federal Open Market Committee Meetings | December 291 median projections, the anticipated path of the 2016 to 2019 and over the longer run.9 All particiunemployment rate for coming years also shifted pants saw an increase of 25 basis points in the federal down a bit, with the median for the end of 2019 at funds rate at the December meeting as appropriate. 4.5 percent, 0.3 percentage point below the median The distributions for 2017 through 2019 shifted up assessment of the longer-run normal rate of unem- modestly. The median projections of the federal ployment, which was unchanged from September. funds rate continued to show gradual increases, to 1.4 percent at the end of 2017, 2.1 percent at the end Figures 3.A and 3.B show the distributions of par- of 2018, and 2.9 percent at the end of 2019; the ticipants’ projections for real GDP growth and the median of the longer-run projections of the federal unemployment rate from 2016 to 2019 and in the lon- funds rate was 3.0 percent. The medians of the proger run. The distributions of individual projections of jections for the level of the federal funds rate for 2017 real GDP growth shifted slightly higher relative to the through 2019 were all 25 basis points higher than in distribution of the September projections for 2017 the September projections. A few participants revised through 2019. The distributions of projections for up their assessments of the longer-run federal funds the unemployment rate shifted modestly lower for rate 25 basis points, resulting in an increase in the 2016 through 2019, while the distribution of projec- median of 13 basis points. tions for the longer-run normal rate of unemployment was unchanged. In discussing their December forecasts, many participants expressed a view that increases in the federal funds rate over the next few years would likely be The Outlook for Inflation gradual in light of a short-term neutral real interest rate that currently was low—a phenomenon that a In the December SEP, the median of projections for number of participants attributed to the persistence headline PCE price inflation in 2016 was 1.5 percent, of low productivity growth, continued strength of a bit higher than in September. The median of prothe dollar, a weak outlook for economic growth jections for headline PCE price inflation was 1.9 perabroad, strong demand for safe longer-term assets, or cent in 2017 and 2.0 percent in 2018 and 2019, other factors—and that was likely to rise only slowly unchanged from September. Several participants proas the effects of these factors faded over time. Some jected that inflation will slightly exceed the Commitparticipants noted the continued proximity of shorttee’s objective in 2018 or 2019. The medians of proterm nominal interest rates to the effective lower jections for core PCE price inflation were the same as bound, even with an increase at this meeting, as limin September, rising from 1.7 percent in 2016 to iting the Committee’s ability to increase monetary 1.8 percent in 2017 and 2.0 percent in 2018 and 2019. accommodation to counter possible adverse shocks to the economy. These participants judged that, as a Figures 3.C and 3.D provide information on the disresult, the Committee should take a cautious tribution of participants’ views about the outlook for approach to removing policy accommodation. Many inflation. The distributions of projections for headparticipants noted that there was currently substanline and core PCE price inflation shifted up slightly tial uncertainty about the size, composition, and timrelative to projections for the September meeting. ing of prospective fiscal policy changes, but they also Some participants attributed the upward shift in procommented that a more expansionary fiscal policy jected inflation this year and next to recent data that might raise aggregate demand above sustainable levshowed somewhat higher inflation than they had els, potentially necessitating somewhat tighter monexpected. A few saw higher inflation in 2019 in conetary policy than currently anticipated. Furthermore, junction with somewhat greater undershooting of the unemployment rate below its longer-run normal 9 One participant’s projections for the federal funds rate, real level. GDP growth, the unemployment rate, and inflation were informed by the view that there are multiple possible mediumterm regimes for the U.S. economy, that these regimes are per- Appropriate Monetary Policy sistent, and that the economy shifts between regimes in a way that cannot be forecast. Under this view, the economy currently Figure 3.E provides the distribution of participants’ is in a regime characterized by expansion of economic activity with low productivity growth and a low short-term real interest judgments regarding the appropriate target for the rate, but longer-term outcomes for variables other than inflation federal funds rate at the end of each year from cannot be usefully projected.

292 103rd Annual Report | 2016 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2016–19 and over the longer run Number of participants 2016 December projections 18 September projections 16 14 12 10 8 6 4 2 1.4- 1.6- 1.8- 2.0- 2.2- 2.4- 1.5 1.7 1.9 2.1 2.3 2.5 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.4- 1.6- 1.8- 2.0- 2.2- 2.4- 1.5 1.7 1.9 2.1 2.3 2.5 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.4- 1.6- 1.8- 2.0- 2.2- 2.4- 1.5 1.7 1.9 2.1 2.3 2.5 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.4- 1.6- 1.8- 2.0- 2.2- 2.4- 1.5 1.7 1.9 2.1 2.3 2.5 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.4- 1.6- 1.8- 2.0- 2.2- 2.4- 1.5 1.7 1.9 2.1 2.3 2.5 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | December 293 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2016–19 and over the longer run Number of participants 2016 December projections 18 September projections 16 14 12 10 8 6 4 2 4.0- 4.2- 4.4- 4.6- 4.8- 5.0- 4.1 4.3 4.5 4.7 4.9 5.1 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 4.0- 4.2- 4.4- 4.6- 4.8- 5.0- 4.1 4.3 4.5 4.7 4.9 5.1 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 4.0- 4.2- 4.4- 4.6- 4.8- 5.0- 4.1 4.3 4.5 4.7 4.9 5.1 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 4.0- 4.2- 4.4- 4.6- 4.8- 5.0- 4.1 4.3 4.5 4.7 4.9 5.1 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 4.0- 4.2- 4.4- 4.6- 4.8- 5.0- 4.1 4.3 4.5 4.7 4.9 5.1 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

294 103rd Annual Report | 2016 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2016–19 and over the longer run Number of participants 2016 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- 1.2 1.4 1.6 1.8 2.0 2.2 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- 1.2 1.4 1.6 1.8 2.0 2.2 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- 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.1- 1.3- 1.5- 1.7- 1.9- 2.1- 1.2 1.4 1.6 1.8 2.0 2.2 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | December 295 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2016–19 Number of participants 2016 December projections 18 September projections 16 14 12 10 8 6 4 2 1.5- 1.7- 1.9- 2.1- 1.6 1.8 2.0 2.2 Percent range Number of participants 2017 18 16 14 12 10 8 6 4 2 1.5- 1.7- 1.9- 2.1- 1.6 1.8 2.0 2.2 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.5- 1.7- 1.9- 2.1- 1.6 1.8 2.0 2.2 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.5- 1.7- 1.9- 2.1- 1.6 1.8 2.0 2.2 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

296 103rd Annual Report | 2016 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, 2016–19 and over the longer run Number of participants 2016 December projections 18 September projections 16 14 12 10 8 6 4 2 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- 0.62 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 0.38- 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- 0.62 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 0.38- 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- 0.62 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 2019 18 16 14 12 10 8 6 4 2 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- 0.62 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 0.38- 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- 0.62 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: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | December 297 several participants indicated that recent inflation Table 2. Average historical projection error ranges data and the continued strengthening in labor market Percentage points conditions increased their confidence that inflation would move toward the 2 percent objective, making a Variable 2016 2 017 2018 2019 slightly firmer path of monetary policy appropriate. Change in real GDP1 ±0.9 ± 1.7 ±2.1 ±2.1 Unemployment rate1 ±0.1 ± 0.8 ±1.4 ±1.9 Uncertainty and Risks Total consumer prices2 ±0.2 ± 1.0 ±1.1 ±1.1 The left-hand column of figure 4 shows that, for each Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 1996 through 2015 that were released in the winter by variable, a majority of participants judged the levels various private and government forecasters. (The note to this table that was of uncertainty associated with their December pro- included in the Summary of Economic Projections for the meeting of September 20–21, 2016, incorrectly stated that the error ranges were based on jections for real GDP growth, the unemployment projections for 1995 through 2015. The correct time period was 1996 through rate, headline inflation, and core inflation to be 2015.) As described in the box “Forecast Uncertainty,” under certain assumptions, there is about a 70 percent probability that actual outcomes for real GDP, broadly similar to the average of the past 20 years.10 unemployment, and consumer prices will be in ranges implied by the average size However, more participants than in September saw of projection errors made in the past. For more information, see David Reifschneider and Peter Tulip (2007), “Gauging the Uncertainty of the Economic uncertainty surrounding real GDP growth, the unem- Outlook from Historical Forecasting Errors,” Finance and Economics Discussion ployment rate, or inflation as higher than average. Series 2007-60 (Washington: Board of Governors of the Federal Reserve System, November), available at www.federalreserve.gov/pubs/feds/2007/200760/ Many participants mentioned an increase in uncer- 200760abs.html; and Board of Governors of the Federal Reserve System, Division tainty associated with fiscal, trade, immigration, or of Research and Statistics (2014), “Updated Historical Forecast Errors,” memorandum, April 9, www.federalreserve.gov/foia/files/20140409-historicalregulatory policies as a factor influencing their judg- forecast-errors.pdf. ments about the degree of uncertainty surrounding 1 Definitions of variables are in the general note to table 1. their projections. Participants cited the difficulty of 2 Measure is the overall consumer price index, the price measure that has been most widely used in government and private economic forecasts. Projection predicting the size, composition, and timing of these is percent change, fourth quarter of the previous year to the fourth quarter of policy changes as well as the magnitude and timing the year indicated. of their effects on the economy. ity of a reduction in regulation as posing upside risks As can be seen in the right-hand column of figure 4, to their forecasts of economic activity. Moreover, a majority of participants continued to see the risks some participants judged that the recent rise in to real GDP growth, the unemployment rate, headmarket-based measures of inflation compensation line inflation, and core inflation as broadly balanced; suggested that downside risks to inflation had however, fewer participants saw risks to economic declined. However, many also pointed to various growth and inflation as weighted to the downside or sources of downside risk to economic activity, such saw risks to the unemployment rate as weighted to as the limited potential for monetary policy to the upside than in September. A number of particirespond to adverse shocks when the federal funds pants noted that the prospect of expansionary fiscal rate is near the effective lower bound, downside risks policy had increased the upside risks to economic in Europe and China, a possible increase in trade activity and inflation, and a few assessed the possibilbarriers, and the possibility of a sharp rise in financial market volatility in the event that fiscal and other 10 Table 2 provides estimates of the forecast uncertainty for the policy changes diverged from market expectations. In change in real GDP, the unemployment rate, and total consumer price inflation over the period from 1996 through 2015. addition, some participants pointed to factors such At the end of this summary, the box “Forecast Uncertainty” as global disinflationary trends and downward presdiscusses the sources and interpretation of uncertainty in the sure on import prices from further strengthening of economic forecasts and explains the approach used to assess the uncertainty and risks attending the participants’ projections. the dollar as sources of downside risk to inflation.

298 103rd Annual Report | 2016 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 notes to table 1.

Minutes of Federal Open Market Committee Meetings | December 299 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, 1.0 to etary policy among policymakers and can aid public 3.0 in the second year, and 0.9 to 3.1 percent in the understanding of the basis for policy actions. Con- third and fourth 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, 1.3 to point forward. 4.7 percent in the second year, and 0.9 to 5.1 percent

301 10 Litigation During 2016, the Board of Governors was a party in and Consumer Protection Act of 2010. On 6 lawsuits filed that year and was a party in 10 other March 18, 2016, the Court of Appeals transferred the cases pending from previous years, for a total of 16 case to the U.S. District Court for the District of cases. The Board intervened in or initiated one addi- Columbia, No. 16-652. On December 22, 2016, the tional case relating to privileged documents or testi- Court granted the Board’s and Security and mony. In 2015, the Board had been a party in a total Exchange Commission’s motion for summary judgof 17 cases. As of December 31, 2016, 13 cases were ment. On January 5, 2017, the plaintiff filed its notice pending. of appeal. Richardson v. Yellen, No. 14-cv-01673 (D. District of Pending Columbia, filed October 8, 2014), is an employment discrimination claim. Rodriguez v. Bank of America, et al., No. 16-cv-8197 (D. New Jersey, filed November 3, 2016), is an action In re Wilmington Trust Securities Litigation, No. 10relating to a mortgage loan foreclosure. cv-990 (D. Delaware, motion to intervene filed August 20, 2014), is a securities class action against Center for Popular Democracy v. Board of Governors, Wilmington Trust Corporation and related entities. No. 16-cv-5829 (E.D. New York, filed October 19, On August 22, 2014, the court granted the Board’s 2016), is an action under the Freedom of Informa- motion to intervene for the limited purpose of asserttion Act. ing the bank examination privilege. On September 12, 2016, the court adopted the Magistrate’s Hardy v. Yellen, No. 16-cv-1572 (D. District of Report and Recommendation granting in part plain- Columbia, filed August 2, 2016), is an employment tiffs’ motion to compel. discrimination action. Community Financial Services Association of Richardson v. Board of Governors, No. 16-cv-867 (D. America, Ltd., v. Board of Governors, No. 14-cv- District of Columbia, filed May 9, 2016), is a case 00853 (D. District of Columbia, filed June 11, 2014), under the Federal Tort Claims Act, Privacy Act, and is a challenge to actions of the Board, the Federal Freedom of Information Act, among other claims. Deposit Insurance Corporation, and the Office of the Comptroller of the Currency that allegedly disad- The Colonial BancGroup, Inc. v. PricewaterhouseCoo- vantage payday lenders. pers LLP, No. 16-cv-653 (N.D. Georgia, filed February 12, 2016), is an action to quash a deposition sub- Crisman v. Board of Governors et al., No. 12-cv-1871 poena to a Federal Reserve Bank examiner. (D. District of Columbia, filed November 19, 2012), is a Freedom of Information Act case. Burford v. Yellen, No. 15-cv-02074 (D. District of Columbia, filed December 1, 2015), is an employ- Resolved ment discrimination claim. The Loan Syndications and Trading Association v. Perry v. Board of Governors, et al., No. 16-cv-1661 (D. Board of Governors, No. 14-1240 (D.C. Circuit, peti- District of Columbia, filed August 16, 2016), was an tion for review filed November 10, 2014), was a chal- action by a Board employee relating to long-term dislenge to the credit risk retention rules issued under ability benefits. On December 1, 2016, the plaintiff section 941 of the Dodd-Frank Wall Street Reform voluntarily dismissed the Board as a defendant.

302 103rd Annual Report | 2016 Haase v. Bank of America, et al., No. 16-cv-1567 ruary 15, 2017, the district court granted the Board’s (S.D. Texas, filed April 25, 2016, removed to federal motion to dismiss all claims. court June 3, 2016), was an action against 69 defendants including individual Governors, Federal Artis v. Greenspan, No. 15-5260 (D.C. Circuit, notice Reserve Banks, and the Federal Reserve System of appeal filed September 19, 2015), was an appeal of under the Texas Constitution, among other claims. the dismissal of plaintiffs’ Equal Employment On February 8, 2017, the court dismissed the action. Opportunity claims. On December 21, 2015, the Court of Appeals summarily affirmed the district Ruiz v. Board of Governors, et al., No. 15-cv-547 (D. court’s dismissal. On March 21, 2016, the Court of Rhode Island, filed December 22, 2015), was an Appeals denied plaintiffs’ petition for rehearing en action seeking a writ of mandamus and declaratory banc. On October 3, 2016, the Supreme Court denied judgment that the Board failed to perform certain plaintiffs’ petition for a writ of certiorari. duties under golden parachute regulations. On April 5, 2016, the court entered the plaintiff’s notice Ferrer v. Bernanke, No. 14-15325 (Eleventh Circuit, of voluntary dismissal. appeal filed November 25, 2014), was an appeal of the dismissal of an action alleging that plaintiffs WMI Liquidating Trust v. Board of Governors, received improper relief under the Board’s and the No. 13-cv-01706 (W.D. Washington, filed Septem- Office of the Comptroller of the Currency’s financial ber 20, 2013), is an action for a declaratory judgment remediation orders regarding deficient mortgage serregarding golden parachute payments. On July 3, vicing and foreclosure practices. On August 12, 2016, 2014, the action was transferred to the United States the Court of Appeals affirmed the district court’s dis- Bankruptcy Court for the District of Delaware (Adv. missal of the action. Pro. No. 14-50435-MFW (Bankr. D. Del.)). On Feb-

303 11 Statistical Tables Table 1. Federal Reserve open market transactions, 2016 Millions of dollars Type of security Jan. Feb. Mar. Apr. May June July Aug. Sept. O ct. Nov. Dec. Total and transaction U.S. Treasury securities1 O utright transactions2 Treasury 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 -1,911 -36,707 - 23,587 -27,738 -39,269 -13,567 -10,266 -13,326 - 6,827 -6,529 -24,110 -11,702 -215,539 Redemptions 0 0 0 0 0 0 0 0 0 0 0 0 0 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 1,383 21,993 14,296 20,099 20,730 8,753 6,801 7,518 4,450 4,534 11,640 7,978 130,175 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 528 11,190 9,292 7,582 15,147 4,085 3,258 4,271 2,378 1,693 9,186 3,723 72,333 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 3,524 0 84 3,392 729 782 1,536 0 302 3,284 0 13,633 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 0 0 0 0 0 0 0 0 0 0 0 0 0 Net change in U.S. Treasury securities 0 0 0 0 0 0 0 0 0 0 0 0 0 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 1,626 0 2,061 2,161 2,000 0 2,604 0 2,000 1,999 0 2,313 16,764 Net change in federal agency obligations -1,626 0 -2,061 -2,161 -2,000 0 -2,604 0 -2,000 - 1,999 0 -2,313 -16,764 M ortgage-backed securities3 N et settlements2 Net change in mortgage-backed securities -3,282 7,648 1,260 -8,261 -1,751 466 -2,439 2,880 -7,105 -1,036 4,833 717 6,071 T otal net change in securities holdings4 -4,908 7,648 -801 -10,422 -3,751 466 -5,043 2,880 -9,105 -3,035 4,833 -1,596 -10,693 (continued on next page)

304 103rd Annual Report | 2016 Table 1.—continued Type of security Jan. Feb. Mar. Apr. May June July Aug. Sept. O ct. Nov. Dec. Total and transaction Temporary transactions Repurchase agreements5 0 0 0 0 29 0 0 0 0 0 0 3 n/a Reverse repurchase agreements5 321,472 297,221 306,863 274,381 288,951 322,951 319,996 3 26,186 393,250 430,396 373,944 491,391 n/a Foreign official and international accounts 2 19,980 241,735 239,542 239,905 244,119 2 45,524 250,166 243,605 2 45,017 238,654 2 42,630 2 48,639 n/a Others 101,492 55,487 67,322 34,476 44,832 77,427 69,829 82,581 148,232 191,742 131,314 242,752 n/a 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. Please see table 2 of the H.4.1 release (https://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 Averages of daily business cash value of agreements, which are collateralized by U.S. Treasury securities, federal agency debt securities, and mortgage-backed securities. For additional details on temporary transactions, see the temporary open market operations historical search available at https://apps.newyorkfed.org/markets/autorates/ tomo-search-page. n/a Not applicable.

Statistical Tables 305 Table 2. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities, December 31, 2014–16 Millions of dollars December 31 C hange Description 2016 2015 2014 2015 to 2016 2014 to 2015 U.S. Treasury securities Held outright1 2,463,616 2,461,552 2,461,363 2,064 189 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 206,822 216,115 3,520 -9,293 212,595 More than 1 year through 5 years 1,224,348 1,118,349 1,112,927 105,999 5,422 More than 5 years through 10 years 399,277 489,226 686,627 -89,949 -197,401 More than 10 years 633,169 637,862 658,289 -4,693 -20,427 By type Bills 0 0 0 0 0 Notes 1,638,172 1,634,772 1,634,949 3,400 -177 Bonds 825,444 826,780 826,414 -1,336 366 Federal agency securities Held outright1 16,180 32,944 38,677 -16,764 -5,733 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 11,789 16,764 5,733 -4,975 11,031 More than 1 year through 5 years 2,044 13,833 30,597 -11,789 -16,764 More than 5 years though 10 years 0 0 0 0 0 More than 10 years 2,347 2,347 2,347 0 0 By type Discount notes 0 0 0 0 0 Coupons 16,180 32,944 38,677 -16,764 -5,733 By issuer Federal Home Loan Mortgage Corporation 8,356 15,711 19,515 -7,355 -3,804 Federal National Mortgage Association 5,401 11,541 13,470 -6,140 -1,929 Federal Home Loan Banks 2,423 5,692 5,692 -3,269 0 Mortgage-backed securities2 H eld outright1 1,741,391 1,747,461 1,736,833 -6,070 10,628 By remaining maturity 1 year or less 0 0 0 0 0 More than 1 year through 5 years 77 467 13 -390 454 More than 5 years though 10 years 10,584 9,014 6,453 1,570 2,561 More than 10 years 1,730,730 1,737,980 1,730,367 -7,250 7,613 By issuer Federal Home Loan Mortgage Corporation 506,931 510,463 501,914 -3,532 8,549 Federal National Mortgage Association 836,558 872,113 886,716 -35,555 -14,603 Government National Mortgage Association 397,901 364,885 348,203 33,016 16,682 Temporary transactions Repurchase agreements3 0 0 0 0 0 Reverse repurchase agreements3 725,210 712,401 509,837 12,809 202,564 Foreign official and international accounts 256,855 237,809 113,132 19,046 124,677 Primary dealers and expanded counterparties 468,355 474,592 396,705 -6,237 77,887 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.

306 103rd Annual Report | 2016 Table 3. Federal Reserve Bank interest rates on loans to Table 4. Reserve requirements of depository institutions, depository institutions, December 31, 2016 December 31, 2016 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 1.25 1.75 0.70 Net transaction accounts1 Note: For details on rate changes over the course of 2016, see the section on $ 0 million–$15.5 million2 0 1/18/2017 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 $15.5 million–$115.1 million3 3 1/18/2017 source of liquidity to depository institutions that are in generally sound financial More than $115.1 million 10 1/18/2017 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 307 Table 5. Banking offices and banks affiliated with bank holding companies in the United States, December 31, 2015 and 2016 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, 2015 5,622 5,342 1,797 982 815 3,545 280 Changes during 2016 New banks 12 10 4 2 2 6 2 Banks converted into branches -206 -200 -63 -37 -26 -137 -6 Ceased banking operations2 -39 -36 -10 -4 -6 -26 -3 Other3 0 1 -8 -29 21 9 -1 Net change -233 -225 -77 -68 -9 -148 -8 Number, Dec. 31, 2016 5,389 5,117 1,720 914 806 3,397 272 Branches and additional offices Number, Dec. 31, 2015 83,126 80,292 56,603 42,386 14,217 23,689 2,834 Changes during 2016 New branches 952 881 464 322 142 417 71 Banks converted to branches 206 201 75 35 40 126 5 Discontinued2 -2,429 -2,362 -1,746 -1,283 -463 -616 -67 Other3 0 -27 -95 -768 673 68 27 Net change -1,271 -1,307 -1,302 -1,694 392 -5 36 Number, Dec. 31, 2016 81,855 78,985 55,301 40,692 14,609 23,684 2,870 Banks affiliated with bank holding companies Banks Number, Dec. 31, 2015 4,652 4,523 1,602 864 738 2,921 129 Changes during 2016 BHC-affiliated new banks 57 51 15 6 9 36 6 Banks converted into branches -160 -158 -55 -30 -25 -103 -2 Ceased banking operations2 -33 -31 -10 -4 -6 -21 -2 Other3 0 1 -9 -28 19 10 -1 Net change -136 -137 -59 -56 -3 -78 1 Number, Dec. 31, 2016 4,516 4,386 1,543 808 735 2,843 130 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.

308 103rd Annual Report | 2016 Table 6A. Reserves of depository institutions, Federal Reserve Bank credit, and related items, year-end 1984–2016 and month-end 2016 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 2014 4,236,873 0 3,351 -555 239,238 4,478,908 11,041 5,200 46,301 2015r 4,241,958 0 2,830 -36 221,448 4,466,199 11,041 5,200 47,567 2016 4,221,187 0 7,325 -804 206,551 4,434,259 11,041 5,200 48,536 (continued on next page)

Statistical Tables 309 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 2 016, month-end Jan 4,236,807 0 1,929 -128 226,144 4,464,752 11,041 5,200 47,616 Feb 4,244,285 0 1,840 -672 213,330 4,458,783 11,041 5,200 47,651 Mar 4,243,669 0 1,926 -1,178 217,970 4,462,387 11,041 5,200 47,726 Apr 4,233,345 0 2,970 -498 222,705 4,458,523 11,041 5,200 47,815 May 4,229,914 0 2,601 -719 210,106 4,441,902 11,041 5,200 47,923 Jun 4,230,967 0 4,906 -1,287 214,213 4,448,799 11,041 5,200 48,043 Jul 4,226,420 0 2,823 -937 219,199 4,447,504 11,041 5,200 48,184 Aug 4,230,119 0 3,265 -1,149 206,137 4,438,373 11,041 5,200 48,279 Sep 4,220,825 0 8,908 -735 210,151 4,439,149 11,041 5,200 48,370 Oct 4,217,900 0 2,785 -972 213,124 4,432,837 11,041 5,200 48,435 Nov 4,223,028 0 3,087 -1,379 202,067 4,426,803 11,041 5,200 48,478 Dec 4,221,187 0 7,325 -804 206,551 4,434,259 11,041 5,200 48,536 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.

310 103rd Annual Report | 2016 Table 6A. Reserves of depository institutions, Federal Reserve Bank credit, and related items, year-end 1984–2016 and month-end 2016—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 2014 1,342,957 509,837 2 01 0 223,452 0 5,242 20,320 n/a 61,447 2 ,377,995 2015r 1,424,967 712,401 266 0 333,447 0 5,231 31,212 n/a 45,320 1,977,163 2016 1,509,440 725,210 166 0 399,190 0 5,165 53,248 n/a 46,943 1 ,759,675 (continued on next page)

Statistical Tables 311 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 2 016, month-end Jan 1,412,851 349,749 267 0 370,182 0 5,232 14,789 n/a 46,226 2,329,313 Feb 1,430,504 340,488 240 0 272,359 0 5,240 19,686 n /a 46,787 2,407,370 Mar 1,443,115 550,546 213 0 313,835 0 5,185 41,546 n/a 46,550 2,125,364 Apr 1,447,751 308,240 1 47 0 339,091 0 5,174 32,662 n/a 47,108 2,342,407 May 1,458,825 347,295 1 12 0 298,416 0 5,182 31,734 n/a 47,380 2,317,121 Jun 1,464,010 543,850 71 0 363,662 0 5,195 51,549 n/a 46,478 2 ,038,268 Jul 1,462,142 351,139 73 0 333,748 0 5,197 37,251 n/a 47,832 2 ,274,548 Aug 1,468,858 422,530 112 0 288,946 0 5,167 40,740 n/a 45,932 2,230,607 Sep 1,470,436 665,045 141 0 353,312 0 5,166 40,099 n/a 46,538 1,923,023 Oct 1,479,891 462,193 1 81 0 421,567 0 5,169 39,628 n/a 4 6,656 2,042,227 Nov 1,495,121 462,691 162 0 422,034 0 5,169 45,454 n /a 45,579 2,015,312 Dec 1,509,440 725,210 166 0 399,190 0 5,165 53,248 n/a 46,943 1,759,675 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.

312 103rd Annual Report | 2016 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 313 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.

314 103rd Annual Report | 2016 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 315 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.

316 103rd Annual Report | 2016 Table 7. Principal assets and liabilities of insured commercial banks, by class of bank, June 30, 2016 and 2015 Millions of dollars, except as noted Member banks Item Total Nonmember banks Total National State 2 016 Assets L oans & Investments 11,016,953 8,965,690 7,179,154 1,786,536 2,051,263 Loans, Gross 7,914,584 6,284,631 5,053,250 1,231,381 1,629,953 Net 7,912,801 6,283,468 5,052,321 1,231,147 1,629,332 Investments 3,102,369 2,681,059 2,125,904 555,155 421,310 U.S. Treasury and federal agency securities 568,133 492,132 375,346 116,786 76,000 Other 2,534,236 2,188,926 1,750,557 438,369 345,310 Cash assets, total 1,412,451 1,264,391 991,940 272,451 148,059 Liabilities Deposits, total 10,286,750 8,443,807 6,760,151 1,683,655 1,842,943 Interbank 217,855 194,207 152,745 41,461 23,648 Other transactions 1,720,901 1,397,657 1,065,984 331,673 323,244 Other nontransactions 8,347,994 6,851,943 5,541,422 1,310,521 1,496,051 Equity capital 1,732,414 1,453,059 1,173,461 279,598 279,355 Number of banks 5,227 1,755 962 793 3,472 2015 Assets Loans and investments 10,309,367 8,304,925 6,712,153 1,592,771 2,004,443 Loans, gross 7,327,046 5,749,025 4,686,548 1,062,478 1,578,020 Net 7,325,433 5,748,000 4,685,756 1,062,245 1,577,433 Investments 2,982,322 2,555,899 2,025,605 530,294 426,422 U.S. Treasury and federal agency securities 566,996 474,893 367,158 107,735 92,104 Other 2,415,325 2,081,007 1,658,448 422,559 334,319 Cash assets, total 1,470,968 1,323,091 1,025,952 297,139 147,877 Liabilities Deposits, total 9,715,921 7,917,606 6,366,937 1,550,669 1,798,314 Interbank 185,331 162,344 119,479 42,865 22,987 Other transactions 1,665,842 1,361,518 998,155 363,363 304,324 Other nontransactions 7,864,747 6,393,744 5,249,303 1,144,441 1,471,003 Equity capital 1,638,288 1,360,457 1,117,295 243,162 277,831 Number of banks 5,463 1,843 1,026 817 3,620 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 2015 have been revised.

Statistical Tables 317 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.

318 103rd Annual Report | 2016 Table 9A. Statement of condition of the Federal Reserve Banks, by Bank, December 31, 2016 and 2015 Millions of dollars Total Boston New York Philadelphia Cleveland Richmond Item 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Assets Gold certificates 11,037 11,037 355 347 3,588 3,709 359 340 586 505 760 783 S pecial drawing rights certificates 5,200 5,200 196 196 1,818 1,818 210 210 237 237 412 412 Coin 1,873 1,890 47 45 65 72 159 129 139 135 306 301 Loans and securities Primary, secondary, and seasonal loans 63 115 - - - - - - - - 2 - Treasury securities, bought outright1 2,463,616 2,461,552 60,519 62,399 1,401,963 1,477,698 66,892 61,222 73,781 59,182 150,561 133,696 Government-sponsored enterprise debt securities, bought outright1 16,180 32,944 397 835 9,207 19,777 439 819 485 792 989 1,789 Federal agency and governmentsponsored enterprise mortgage-backed securities, bought outright2 1,741,391 1,747,461 42,778 44,297 990,968 1,049,022 47,283 43,462 52,152 42,013 106,423 94,911 Unamortized premiums on securities held outright3 172,964 189,486 4,249 4,804 98,428 113,752 4,696 4,713 5,180 4,556 10,570 10,292 Unamortized discounts on securities held outright3 -15,078 -16,570 -370 -420 -8,580 -9,947 -409 -411 -452 -399 -922 -900 Total loans and securities 4,379,136 4,414,988 1 07,573 111,915 2,491,986 2,650,302 118,901 109,805 131,146 106,144 267,623 239,788 Accrued interest receivable - System Open Market Account 25,598 25,418 630 646 14,547 15,241 697 634 770 615 1,577 1,392 Net portfolio holdings of consolidated variable interest entities4 1,742 1,778 n/a n/a 1,742 1,778 n/a n/a n/a n/a n /a n/a Foreign currency denominated investments5 19,442 19,567 859 887 6,413 6,306 1,070 1,093 1,481 1,525 4,336 4,490 Central bank liquidity swaps6 5,563 997 246 45 1,835 321 306 56 424 78 1,241 229 Other SOMA assets 8 14 - - 5 9 - - - - 1 1 Other assets Items in process of collection 118 210 - - - - - - - - - - Bank premises 2,213 2,240 118 125 443 438 72 75 108 106 203 212 Deferred asset (accrued liability) remittances to the Treasury - - - - - - - - - - - - All other assets7 1,407 1,426 68 68 413 304 44 41 49 45 251 245 Interdistrict settlement account - - -3,195 -3,804 -135,654 -265,063 -1,824 17,050 6,880 37,004 1,928 29,869 Total assets 4,453,337 4,484,765 106,897 110,470 2,387,201 2,415,235 119,994 129,433 141,820 146,394 278,638 277,722 (continued on next page)

Statistical Tables 319 Table 9A.—continued Total Boston New York Philadelphia Cleveland Richmond Item 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Liabilities Federal Reserve notes outstanding 1,637,993 1,549,750 52,607 49,477 534,619 498,609 51,798 49,312 80,022 82,794 117,238 106,647 Less: Notes held by Federal Reserve Bank 175,054 170,199 5,499 4,871 50,774 64,415 6,254 5,358 8,332 8,137 12,549 10,988 Federal Reserve notes outstanding, net 1,462,939 1,379,551 47,108 44,606 483,845 434,194 45,544 43,954 71,690 74,657 104,689 95,659 Securities sold under agreements to repurchase8 725,210 712,401 17,815 18,059 412,693 427,663 19,691 17,719 21,719 17,128 44,320 38,693 Deposits Depository institutions 1,759,675 1,977,166 40,012 45,875 1,032,881 1,175,023 52,334 65,374 44,908 51,363 120,052 133,840 Treasury, general account 399,190 333,447 n/a n/a 399,190 333,447 n/a n/a n/a n/a n /a n/a Foreign, official accounts 5,165 5,231 2 2 5,138 5,204 2 2 3 3 9 9 Other9 53,248 31,301 6 2 37,248 23,738 - 2 - - 155 131 Total deposits 2,217,278 2,347,145 40,020 45,879 1,474,457 1,537,412 52,336 65,378 44,911 51,366 1 20,216 1 33,980 Other liabilities Accrued remittances to the Treasury10 1,725 1,953 51 56 832 1,023 75 56 23 80 236 183 Deferred credit items 922 246 - - - 2 - - - - - - Consolidated variable interest entities 33 57 n/a n/a 33 57 n/a n/a n/a n/a n/a n/a All other liabilities11 4,788 3,904 150 124 2,391 1,851 173 152 182 153 437 395 Total liabilities 4,412,895 4,445,257 105,144 108,724 2,374,251 2,402,202 117,819 127,259 138,525 143,384 269,898 268,910 Capital accounts Capital paid-in 30,442 29,508 1,320 1,304 9,748 9,734 1,637 1,624 2,480 2,248 6,579 6,582 Surplus (including accumulated other comprehensive loss) 10,000 10,000 433 442 3,202 3,299 538 550 815 762 2,161 2,230 Total liabilities and capital accounts 4,453,337 4,484,765 106,897 110,470 2,387,201 2,415,235 119,994 129,433 141,820 146,394 278,638 277,722 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 the 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.

320 103rd Annual Report | 2016 Table 9A. Statement of condition of the Federal Reserve Banks, by Bank, December 31, 2016 and 2015—continued Millions of dollars Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Item 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2 016 2015 2 016 2015 Assets Gold certificates 1,541 1,600 753 734 360 299 193 171 296 288 875 891 1,371 1,370 Special drawing rights certificates 654 654 424 424 150 150 90 90 153 153 282 282 574 574 Coin 186 184 279 282 29 31 51 49 113 149 190 196 310 316 Loans and securities Primary, secondary, and seasonal loans 2 31 44 9 - 35 9 38 5 2 - - - - Treasury securities, bought outright1 137,887 138,615 98,163 91,458 31,093 25,670 18,163 14,970 34,287 31,977 87,692 79,295 302,615 285,369 Government-sponsored enterprise debt securities, bought outright1 906 1,855 645 1,224 204 344 119 200 225 428 576 1,061 1,987 3,819 Federal agency and governmentsponsored enterprise mortgage-backed securities, bought outright2 97,464 98,403 69,386 64,926 21,978 18,223 12,839 10,627 24,236 22,701 61,984 56,291 213,902 202,584 Unamortized premiums on securities held outright3 9,681 10,670 6,892 7,040 2,183 1,967 1,275 1,153 2,408 2,461 6,157 6,104 21,246 21,967 Unamortized discounts on securities held outright3 -844 -933 -602 -615 -191 -172 -111 -100 -210 -216 -537 -534 -1,852 -1,921 Total loans and securities 245,096 248,641 174,528 164,042 55,267 46,076 32,294 26,888 60,951 57,353 1 55,872 142,217 537,898 5 11,818 Accrued interest receivable - System Open Market Account 1,433 1,431 1,019 944 323 265 188 154 356 330 909 818 3,147 2,949 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 1,080 1,113 521 526 199 182 83 82 194 206 247 282 2,958 2,873 Central bank liquidity swaps6 309 57 149 27 57 9 24 4 55 11 71 14 846 146 Other SOMA assets - 1 - 1 - - - - - - - - 1 2 Other assets Items in process of collection 118 210 - - - - - - - - - - - - Bank premises 206 207 202 205 114 118 89 92 239 240 223 227 196 197 Deferred asset (accrued liability) remittances to the Treasury - - 91 - - - - - - - - - - - All other assets7 95 91 60 63 101 97 31 33 70 62 57 56 173 321 Interdistrict settlement account 35,779 27,634 28,502 21,637 5,681 15,633 4,507 8,418 2,811 5,535 31,215 32,425 23,369 73,661 Total assets 286,497 281,823 206,528 188,885 62,281 62,860 37,550 35,981 65,238 64,327 1 89,941 1 77,408 5 70,843 5 94,227 (continued on next page)

Statistical Tables 321 Table 9A.—continued Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Item 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2 016 2015 2 016 2015 Liabilities Federal Reserve notes outstanding 225,352 218,998 108,782 103,023 49,409 51,721 28,238 26,791 44,307 40,705 135,738 125,620 209,882 1 96,054 Less: Notes held by Federal Reserve Bank 24,868 20,469 10,672 9,480 5,135 4,449 2,892 2,512 5,577 4,366 16,288 12,739 26,212 22,417 Federal Reserve notes outstanding, net 200,484 198,529 98,110 93,543 44,274 47,272 25,346 24,279 38,730 36,339 119,450 112,881 183,670 173,637 Securities sold under agreements to repurchase8 40,589 40,117 28,896 26,469 9,153 7,429 5,347 4,333 10,093 9,254 25,814 22,949 89,081 82,589 Deposits Depository institutions 41,735 40,417 61,763 60,295 8,237 7,506 6,542 6,982 15,865 18,185 43,874 40,767 2 91,471 3 31,540 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 - - - - - - - 1 6 6 Other9 7 7 15,805 7,225 20 97 - 1 4 12 1 65 2 24 Total deposits 41,744 40,426 77,569 67,521 8,257 7,603 6,542 6,983 15,869 18,197 43,875 40,833 2 91,479 331,570 Other liabilities Acrued remittances to the Treasury10 115 150 - 75 24 32 20 18 38 41 84 67 320 172 Deferred credit items 921 163 - - - - - 82 - - - - - - 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 285 244 260 218 131 118 124 117 115 101 201 177 338 248 Total liabilities 284,138 279,629 204,835 187,826 61,839 62,454 37,379 35,812 64,845 63,932 1 89,424 176,907 564,888 5 88,216 Capital accounts Capital paid-in 1,776 1,639 1,274 791 333 303 129 126 296 295 389 374 4,483 4,490 Surplus (including accumulated other comprehensive loss) 583 555 419 268 109 103 42 43 97 100 128 127 1,472 1,521 Total liabilities and capital accounts 286,497 281,823 206,528 188,885 62,281 62,860 37,550 35,981 65,238 64,327 1 89,941 177,408 5 70,843 594,227 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 the 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.

322 103rd Annual Report | 2016 Table 9B. Statement of condition of the Federal Reserve Banks, December 31, 2016 and 2015 Supplemental information—collateral held against Federal Reserve notes: Federal Reserve agents’ accounts Millions of dollars Item 2016 2015 F ederal Reserve notes outstanding 1,637,993 1,549,750 Less: Notes held by Federal Reserve Banks not subject to collateralization 175,054 170,199 Collateralized Federal Reserve notes 1,462,939 1,379,551 Collateral for Federal Reserve notes Gold certificates 11,037 11,037 Special drawing rights certificates 5,200 5,200 U.S. Treasury securities1 1,446,702 1,363,314 Total collateral 1,462,939 1,379,551 1 Face value. Includes compensation to adjust for the effect of inflation on the original face value of inflation-indexed securities.

Statistical Tables 323 Table 10. Income and expenses of the Federal Reserve Banks, by Bank, 2016 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 628 4 6 2 4 2 33 77 140 186 57 21 96 Treasury securities 63,844,8431,582,10736,879,518 1,693,565 1,808,5533,782,6343,579,3522,496,745 767,356 4 48,078 872,3122,213,286 7,721,338 Government-sponsored enterprise debt securities, net 958,708 23,816 556,142 25,259 26,713 56,289 53,774 37,289 11,358 6,631 13,029 32,981 115,426 Federal agency and government-sponsored enterprise mortgage-backed securities, net 46,299,4691,149,08926,814,895 1,223,018 1,298,2442,727,8092,596,4731,804,551 551,542 322,034 630,5031,597,434 5,583,876 Foreign currency denominated investments, net -6,764 -297 -2,245 -371 -512 -1,497 -373 -181 -71 -29 -67 -83 -1,039 Central bank liquidity swaps1 8,932 395 2,944 492 681 1,994 496 239 91 38 89 114 1,357 Total interest income 111,105,8152,755,11564,251,259 2,941,965 3,133,6846,567,2326,229,7564,338,7211,330,416 776,938 1,515,9233,843,75313,421,055 Income from priced services 434,082 n/a 109,201 n/a n/a n/a 242,534 82,347 n/a n/a n/a n/a n/a Compensation received for services provided2 166,174 13,726 1,695 2,028 1,752 15,525 703 25,578 2,543 50,595 36,953 7,319 7,757 Securities lending fees 31,822 786 18,262 853 924 1,911 1,783 1,255 391 228 438 1,116 3,875 Other income 6,104 79 4,595 92 100 205 197 147 77 27 53 126 406 Total other income 638,182 14,591 133,752 2,973 2,776 17,642 245,217 109,327 3,012 50,850 37,444 8,562 12,038 Total current income 111,743,9982,769,70664,385,011 2,944,938 3,136,4606,584,8736,474,9734,448,0481,333,427 827,787 1,553,3673,852,31413,433,092 Net expenses Personnel Salaries and other personnel expenses 2,330,028 140,868 532,672 100,938 103,266 336,068 182,562 186,346 143,200 1 01,018 167,282 119,559 216,248 Retirement and other benefits 719,414 36,900 161,174 30,142 32,032 102,488 65,206 55,165 43,074 34,135 47,488 45,930 65,682 Administrative Fees 212,555 4,306 41,041 10,259 4,533 89,567 17,532 14,728 12,794 3,025 3,582 2,245 8,943 Travel 94,771 4,665 12,112 3,563 5,433 12,209 9,151 11,021 6,047 3,485 8,318 5,578 13,190 Postage and other shipping costs 12,499 232 1,121 147 1,221 419 2,309 156 637 263 970 2,365 2,658 Communications 41,709 1,075 5,474 610 570 26,126 1,351 2,139 1,096 360 928 847 1,134 Materials and supplies 68,895 4,080 24,123 6,599 2,879 5,480 4,731 5,453 2,748 1,567 3,499 3,446 4,290 Building Taxes on real estate 51,033 7,288 16,155 1,044 1,817 2,524 3,223 3,989 772 3,572 3,265 2,972 4,412 Property depreciation 142,635 13,443 30,728 7,291 7,181 14,904 10,453 15,553 8,249 4,461 8,761 9,149 12,463 Utilities 37,175 4,111 9,270 1,628 1,472 4,022 2,967 2,317 1,662 1,809 2,361 2,777 2,779 Rent 31,737 390 2,135 888 981 21,239 294 1,025 2,781 193 760 835 216 Other building 64,836 6,277 12,964 4,500 4,362 6,045 4,224 8,335 2,198 2,885 2,274 5,246 5,527 Equipment/software Purchases 27,690 1,496 3,946 1,135 1,248 6,693 1,811 2,025 1,387 1,508 2,576 1,536 2,328 Rentals 3,630 315 1,359 189 362 413 234 585 37 70 14 39 13 Depreciation 76,979 4,362 6,600 2,060 2,282 41,537 3,622 3,352 1,726 1,366 2,419 2,928 4,725 Repairs and maintenance 66,573 5,434 5,855 1,892 2,186 27,497 5,369 3,621 1,517 1,300 2,091 3,444 6,368 Software 226,702 8,879 47,556 8,648 7,344 71,213 15,819 7,071 10,334 7,563 16,220 10,720 15,334 Other expenses Compensation paid for service costs incurred2 166,174 n/a 43,104 n/a n/a n/a 113,260 9,810 n/a n/a n/a n/a n /a Other expenses 85,209 11,010 78,367 17,587 8,810 -366,248 29,537 65,345 130,100 31,658 19,544 26,194 33,306 Recoveries -180,790 -19,104 -22,729 -6,083 -6,195 -51,514 -15,837 -10,854 -4,537 -2,906 -12,524 -15,456 -13,052 (continued on next page)

324 103rd Annual Report | 2016 Table 10.—continued Item Total Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas Dallas San City Francisco Expenses capitalized3 -75,179 -6,058 -22,296 -6,554 -6,101 -158 -949 -4,264 -2,388 -1,191 -11,131 -2,856 -11,234 Total operating expenses before pension expense and reimbursements 4,204,276 229,968 990,728 186,482 175,683 350,525 456,871 382,920 363,434 196,142 268,696 227,498 375,330 Net periodic pension expense4 565,053 3,859 529,112 1,884 1,118 4,995 2,631 5,472 3,311 1,585 2,361 3,782 4,944 Reimbursements -676,891 -45,762 -166,862 -23,750 -37,062 -30,277 -25,146 -5,995 -208,818 -34,085 -60,863 -18,758 -19,513 Operating expenses 4,092,438 188,065 1,352,978 164,615 139,739 325,243 434,355 382,397 157,926 1 63,642 210,194 212,522 360,761 Interest expense on securities sold under agreements to repurchase 1,122,457 27,790 647,399 29,846 31,981 66,716 62,918 43,980 13,560 7,918 15,365 39,018 135,966 Interest on reserves5 12,019,878 179,468 7,828,922 313,882 226,474 710,612 220,182 359,679 45,452 31,643 103,749 217,528 1,782,285 Interest on term deposits6 23,594 15 10,438 6,505 151 2 61 2,107 2 - 1,044 14 3,253 Other expenses 4,253 105 2,448 113 122 254 238 167 52 30 58 148 516 Net expenses 17,262,620 395,444 9,842,185 514,962 398,4671,102,828 717,754 788,331 216,993 203,233 330,412 469,230 2,282,781 Current net income 94,481,378 2,374,26254,542,826 2,429,976 2,737,9935,482,0465,757,2193,659,7171,116,435 6 24,554 1,222,9553,383,08411,150,312 Additions to (+) and deductions from (-) current net income Loss on sales of Treasury securities -15,224 -374 -8,664 -413 -456 -930 -852 -607 -192 -112 -212 -542 -1,870 Profit on sales of federal agency and government-sponsored enterprise mortgage-backed securities 19,012 472 11,010 502 533 1,120 1,066 741 227 132 259 656 2,293 Foreign currency translation gains (losses) -103,228 -3,278 -42,604 -4,716 -5,855 -15,791 -4,185 -2,706 -2,121 -529 -430 632 -21,646 Net income from consolidated variable interest entities7 -11,679 n/a -11,679 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Other additions 61 - -105 39 - 4 11 - - - 80 26 4 Other deductions -3,194 6 -2,154 39 -7 -825 -49 85 -68 6 -2 -64 -161 Net deductions to (-) current net income -114,252 -3,173 -54,196 -4,549 -5,783 -16,422 -4,010 -2,486 -2,153 -503 -305 707 -21,380 Cost of unreimbursed Treasury services -3 n/a -3 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 709,000 31,107 233,183 38,618 53,853 156,937 39,297 22,613 7,329 3,024 7,008 8,998 107,035 Cost of currency 700,728 31,966 136,476 30,697 44,743 59,367 105,900 61,850 22,614 14,691 21,205 60,544 110,674 Consumer Financial Protection Bureau9 596,200 26,064 195,722 32,417 45,196 131,422 32,962 20,547 6,280 2,528 5,872 7,573 89,618 Assessments by the Board of Governors 2,005,928 89,135 565,381 101,732 143,792 347,726 178,158 105,011 36,223 20,244 34,085 77,114 307,327 Net income before providing for remittances to the Treasury 92,361,199 2,281,95353,923,252 2,323,696 2,588,4175,117,8985,575,0513,552,2211,078,059 6 03,807 1,188,5653,306,67710,821,605 Earnings remittances to the Treasury, as required by the Federal Reserve Act 91,466,545 2,252,65153,595,287 2,300,414 2,480,5275,050,9355,508,6293,369,0521,058,281 6 04,229 1,176,1463,300,12910,770,267 Net loss after providing for remittances to the Treasury 894,654 29,302 327,965 23,282 107,890 66,963 66,422 183,168 19,778 -421 12,420 6,548 51,338 Other comprehensive income (loss) -183,232 -7,870 -210,978 2,190 -3,413 9,095 7,085 -354 1,005 5,547 -2,358 11,678 5,143 (continued on next page)

Statistical Tables 325 Table 10.—continued Item Total Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas Dallas San City Francisco Comprehensive income 711,423 21,432 116,986 25,472 104,477 76,058 73,507 182,815 20,783 5,125 10,062 18,225 56,481 Distribution of comprehensive income Dividends on capital stock 711,423 29,870 213,767 38,032 51,614 145,449 45,428 32,269 14,011 5,650 12,801 17,182 105,350 Transferred to/from surplus and change in accumulated other comprehensive income - -8,438 -96,781 -12,560 52,863 -69,391 28,079 150,546 6,772 -525 -2,739 1,043 -48,869 Earnings remittances to the Treasury 91,466,545 2,252,65153,595,287 2,300,414 2,480,5275,050,9355,508,6293,369,0521,058,281 604,229 1,176,1463,300,12910,770,267 Total distribution of net income 92,177,968 2,274,08253,712,273 2,325,886 2,585,0045,126,9935,582,1363,551,8671,079,063 609,354 1,186,2083,318,35410,826,748 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 $504,879 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.

326 103rd Annual Report | 2016 Table 11. Income and expenses of the Federal Reserve Banks, 1914–2016 Thousands of dollars Distributions Assess 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 u o o a m m t n h g u p e e l r r a e t i - 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 196,629 n /a 21,849 1951 394,656 83,793 -2,128 4,095 7,581 n/a n/a 13,865 n/a 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 2 91,935 n /a 46,334 1953 513,037 98,493 -1,059 4,100 10,922 n/a n/a 15,558 n/a 342,568 n /a 40,337 1954 438,486 99,068 -134 4,175 6,490 n/a n/a 16,442 n/a 276,289 n /a 35,888 1955 412,488 101,159 -265 4,194 4,707 n/a n/a 17,712 n/a 251,741 n /a 32,710 1956 595,649 110,240 -23 5,340 5,603 n/a n/a 18,905 n/a 401,556 n/a 53,983 1957 763,348 117,932 -7,141 7,508 6,374 n/a n/a 20,081 n/a 542,708 n /a 61,604 1958 742,068 125,831 124 5,917 5,973 n/a n/a 21,197 n/a 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 687,393 n/a 70,892 (continued on next page)

Statistical Tables 327 Table 11.—continued Distributions Assess 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 u o o a m m t n h g u p e e l r r a e t i - 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 15,204,591 n/a 78,320 1983 16,068,362 1,023,678 -400,366 71,551 152,135 n/a n/a 85,152 n/a 14,228,816 n /a 106,663 1984 18,068,821 1,102,444 -412,943 82,116 162,606 n/a n/a 92,620 n/a 16,054,095 n /a 161,996 1985 18,131,983 1,127,744 1,301,624 77,378 173,739 n/a n/a 103,029 n/a 17,796,464 n/a 155,253 1986 17,464,528 1,156,868 1,975,893 97,338 180,780 n/a n/a 109,588 n/a 17,803,895 n/a 91,954 1987 17,633,012 1,146,911 1,796,594 81,870 170,675 n/a n/a 117,499 n/a 17,738,880 n/a 173,771 1988 19,526,431 1,205,960 -516,910 84,411 164,245 n/a n/a 125,616 n/a 1 7,364,319 n/a 64,971 1989 22,249,276 1,332,161 1,254,613 89,580 175,044 n/a n/a 129,885 n/a 21,646,417 n/a 130,802 1990 23,476,604 1,349,726 2,099,328 103,752 193,007 n/a n/a 140,758 n/a 23,608,398 n/a 180,292 1991 22,553,002 1,429,322 405,729 109,631 261,316 n/a n/a 152,553 n/a 20,777,552 n/a 228,356 1992 20,235,028 1,474,531 -987,788 128,955 295,401 n/a n/a 171,763 n/a 16,774,477 n /a 402,114 1993 18,914,251 1,657,800 -230,268 140,466 355,947 n/a n/a 195,422 n/a 15,986,765 n /a 347,583 1994 20,910,742 1,795,328 2,363,862 146,866 368,187 n/a n/a 212,090 n/a 20,470,011 n/a 282,122 1995 25,395,148 1,818,416 857,788 161,348 370,203 n/a n/a 230,527 n/a 23,389,367 n/a 283,075 1996 25,164,303 1,947,861 -1,676,716 162,642 402,517 n/a n/a 255,884 5,517,716 14,565,624 n/a 635,343 1997 26,917,213 1,976,453 -2,611,570 174,407 364,454 n/a n/a 299,652 20,658,972 0 n /a 831,705 1998 28,149,477 1,833,436 1,906,037 178,009 408,544 n/a n/a 343,014 17,785,942 8,774,994 n /a 731,575 1999 29,346,836 1,852,162 -533,557 213,790 484,959 n/a n/a 373,579 n/a 25,409,736 n /a 479,053 2000 33,963,992 1,971,688 -1,500,027 188,067 435,838 n/a n/a 409,614 n/a 25,343,892 n/a 4 ,114,865 2001 31,870,721 2,084,708 -1,117,435 295,056 338,537 n/a n/a 428,183 n/a 27,089,222 n/a 517,580 2002 26,760,113 2,227,078 2,149,328 205,111 429,568 n/a n/a 483,596 n/a 24,495,490 n/a 1,068,598 2003 23,792,725 2,462,658 2,481,127 297,020 508,144 n/a n/a 517,705 n/a 22,021,528 n/a 466,796 2004 23,539,942 2,238,705 917,870 272,331 503,784 n/a n/a 582,402 n/a 18,078,003 n/a 2,782,587 2005 30,729,357 2,889,544 -3,576,903 265,742 477,087 n/a n/a 780,863 n/a 21,467,545 n/a 1 ,271,672 2006 38,410,427 3,263,844 -158,846 301,014 491,962 n/a n/a 871,255 n/a 29,051,678 n /a 4,271,828 2007 42,576,025 3,510,206 198,417 296,125 576,306 n/a 324,481 992,353 n/a 34,598,401 n/a 3 ,125,533 2008 41,045,582 4,870,374 3,340,628 352,291 500,372 n/a -3,158,808 1,189,626 n/a 31,688,688 n /a 2,626,053 2009 54,463,121 5,978,795 4,820,204 386,400 502,044 n/a 1,006,813 1,428,202 n/a 4 7,430,237 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)

328 103rd Annual Report | 2016 Table 11.—continued Distributions Assess 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 u o o a m m t n h g u p e e l r r a e t i - 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 2016 111,743,998 17,262,620 -114,255 709,000 700,728 596,200 -183,232 711,423 91,466,545 n/a n/a 0 Total 1914–20161,528,791,914137,344,151 37,375,632 9,708,117 15,207,023 2,923,377-2,135,937 22,936,232161,536,424 1,198,433,402 -4 15,942,3896 A ggregate for each Bank, 1914–2016 Boston 59,322,069 5,902,870 283,942 418,052 829,977 129,974 4,774 1,006,117 5,853,485 44,842,511 135 627,664 New York 673,266,184 50,735,953725,882,929 2,692,936 4,086,210 937,390-2,317,559 6,450,306 81,218,628 545,077,826 -433 5,632,731 Philadelphia 49,618,684 5,364,164 731,503 609,537 700,231 206,534 10,153 1,621,142 4,846,681 36,308,189 291 703,566 Cleveland 66,063,146 5,462,998 605,765 720,030 866,056 225,900 15,685 1,707,865 6,966,104 49,612,575 -10 1,123,074 Richmond 114,408,349 10,724,691 2,025,449 1,816,740 1,302,165 623,529 52,365 4,632,115 12,849,681 81,295,580 -72 3,241,739 Atlanta 101,628,636 13,169,459 1,662,144 657,612 1,590,129 165,782 17,706 1,495,653 9,709,535 75,616,315 5 903,996 Chicago 132,442,441 11,228,280 1,858,033 682,014 1,587,769 84,305 25,920 1,377,438 8,722,465 109,806,844 12 837,271 St. Louis 39,287,288 4,137,624 422,727 161,297 529,019 26,569 20,940 343,685 3,149,904 31,149,772 -27 233,118 Minneapolis 21,487,918 4,181,705 424,031 198,910 295,986 17,646 3,505 439,435 1,145,349 15,436,029 65 200,336 Kansas City 43,726,765 5,720,431 577,928 196,804 544,387 29,638 -5,115 394,406 2,717,715 34,476,668 -9 219,532 Dallas 62,451,529 6,233,254 1,080,221 293,377 907,895 44,494 20,929 573,200 5,314,787 49,889,286 55 295,840 San Francisco 165,088,908 14,482,717 1,820,965 1,260,813 1,967,197 431,619 14,760 2,894,871 19,042,093 124,921,807 -17 1,923,525 Total 1,528,791,914137,344,151 37,375,632 9,708,117 15,207,023 2,923,377-2,135,937 22,936,232161,536,424 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, 2015, and 2016. 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, 2016. 7 This amount is reduced by $7,212,457 thousand for expenses of the System Retirement Plan. See note 4, “Table 10. Income and expenses of the Federal Reserve Banks, by Bank, 2016.” n/a Not applicable.

Statistical Tables 329 Table 12. Operations in principal departments of the Federal Reserve Banks, 2013–16 Operation 2016 2015 2014 2013 M illions of pieces Currency processed 31,504 32,596 33,372 33,219 Currency destroyed 4,837 5,212 5,622 5,564 Coin received 58,223 55,921 55,401 56,806 Checks handled U.S. government checks1 58 60 63 83 Postal money orders 88 92 95 101 Commercial 5,241 5,452 5,741 5,987 Securities transfers2 17 17 17 19 Funds transfers3 148 143 135 134 Automated clearinghouse transactions Commercial 12,960 12,298 11,620 11,143 Government 1,594 1,558 1,516 1,467 Millions of dollars Currency processed 596,053 604,391 638,245 638,237 Currency destroyed 118,199 139,833 198,525 206,998 Coin received 5,563 5,394 5,363 5,481 Checks handled U.S. government checks1 152,392 143,764 141,396 154,584 Postal money orders 20,672 20,761 20,902 22,262 Commercial 8,088,569 8,109,457 8,108,895 7,960,028 Securities transfers2 286,671,689 295,755,612 287,104,205 295,186,170 Funds transfers3 766,961,537 834,630,440r 884,551,876 713,310,354 Automated clearinghouse transactions Commercial 21,772,168 20,564,724 19,891,274 19,689,431 Government 5,192,786 5,054,219 4,872,536 4,714,428 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.

330 103rd Annual Report | 2016 Table 13. Number and annual salaries of officers and employees of the Federal Reserve Banks, December 31, 2016 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 400,300 73 17,622,794 978 24 104,564,395 1,076 122,587,489 New York 469,500 592 145,881,956 2,528 35 308,570,268 3,156 454,921,724 Philadelphia 386,600 62 12,777,990 801 19 73,669,839 883 86,834,429 Cleveland 380,700 65 13,189,000 852 21 75,386,406 939 88,956,106 Richmond 384,700 83 16,854,658 1,360 18 124,036,714 1,462 141,276,072 Atlanta 359,400 94 20,057,540 1,579 24 143,972,586 1,698 164,389,526 Chicago 400,300 125 27,830,010 1,370 45 140,690,640 1,541 168,920,950 St. Louis 359,100 99 20,611,400 1,186 32 104,587,640 1,318 125,558,140 Minneapolis 386,700 63 13,066,800 903 34 73,560,927 1,001 87,014,427 Kansas City 359,300 97 18,665,800 1,653 13 127,938,685 1,764 146,963,785 Dallas 391,600 72 14,478,670 1,140 11 92,084,829 1,224 106,955,099 San Francisco 468,600 98 22,474,983 1,588 17 166,594,714 1,704 189,538,297 Federal Reserve Information Technology n/a 73 16,089,285 1,134 1 131,004,046 1,208 147,093,331 Office of Employee Benefits n/a 11 2,941,185 38 0 4,454,840 49 7,396,025 Total 4,746,800 1,607 362,542,071 17,110 294 1,671,116,529 19,023 2,038,405,400 Note: Components may not sum to totals because of rounding. 1 In 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 2016 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 2016 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 take into consideration tenure as president and position within the relevant salary range. 2 Annualized salary liability (excluding outside agency costs) based on salaries in effect on December 31, 2016. n/a Not applicable.

Statistical Tables 331 Table 14. Acquisition costs and net book value of the premises of the Federal Reserve Banks and Branches, December 31, 2016 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 27,293 192,438 46,277 266,008 117,839 n/a New York 68,209 568,098 120,727 757,034 442,854 n/a Philadelphia 8,146 116,847 28,746 153,739 72,215 n/a Cleveland 4,219 140,639 27,111 171,969 92,683 n/a Cincinnati 3,075 29,511 16,779 49,365 15,486 n/a Richmond 32,044 169,490 59,844 261,378 137,484 n/a Baltimore 7,916 41,382 13,963 63,262 30,330 n/a Charlotte 7,884 45,633 13,861 67,378 35,477 n/a Atlanta 23,159 160,435 21,520 205,114 137,866 n/a Birmingham 5,347 13,056 1,465 19,868 9,685 n/a Jacksonville 1,848 25,677 7,440 34,965 18,119 n/a New Orleans 3,785 15,396 6,732 25,913 11,943 n/a Miami 4,507 34,190 12,223 50,920 28,148 n/a Chicago 7,357 247,396 33,421 288,174 126,462 n/a Detroit 12,328 74,655 13,101 100,085 75,130 n/a St. Louis 9,377 146,125 16,765 172,267 105,854 n/a Memphis 2,472 16,375 5,308 24,155 7,782 n/a Minneapolis 15,037 110,807 17,739 143,583 81,561 n/a Helena 2,906 10,327 1,584 14,817 7,861 n/a Kansas City 38,691 212,103 26,033 276,827 226,043 n/a Denver 3,694 9,873 5,890 19,457 6,748 n/a Omaha 3,605 7,753 1,896 13,254 5,720 n/a Dallas 38,100 132,336 33,021 203,457 111,956 n/a El Paso 262 4,753 2,377 7,392 2,040 n/a Houston 32,323 104,169 9,209 145,701 109,121 n/a San Francisco 20,988 131,797 31,501 184,286 83,894 n/a Los Angeles 6,306 80,866 25,586 112,758 55,027 n/a Salt Lake City 1,294 5,570 1,700 8,564 2,485 n/a Seattle 13,101 49,970 6,849 69,920 54,862 n/a Total 405,273 2,897,667 608,668 3,911,610 2,212,675 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.

333 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.

334 103rd Annual Report | 2016 Board of Governors Financial Statements The financial statements of the Board of Governors were audited by KPMG LLP, independent auditors, for the years ended December 31, 2016 and 2015. March 6, 2017 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, 2016 and 2015, 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 335 INDEPENDENT AUDITORS’ REPORT To the Board of Governors of the Federal Reserve System: We have audited the accompanying balance sheets of the Board of Governors of the Federal Reserve System (the “Board”) as of December 31, 2016 and 2015, and the related statements of operations and cash flows for the years then ended. We also have audited the Board’s internal control over financial reporting as of December 31, 2016, 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 audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States), 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. Those standards require that we plan and perform the audits 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 audits 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 audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 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, 2016 and 2015, and the results of its operations and its cash flows for the years, 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, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

336 103rd Annual Report | 2016 In accordance with Government Auditing Standards, we have also issued a report dated March 6, 2017, 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 6, 2017

Federal Reserve System Audits 337 Board of Governors of the Federal Reserve System Balance Sheets As of December 31, 2016 2015 Assets Current assets: Cash $148,254,554 $ 121,678,242 Accounts receivable – net 3,668,675 3,032,839 Prepaid expenses and other assets 6,439,080 5,261,594 Total current assets 158,362,309 129,972,675 Noncurrent assets: Property, equipment, and software – net 249,778,925 259,267,021 Other assets 886,914 1,184,136 Total noncurrent assets 250,665,839 260,451,157 Total $409,028,148 $ 390,423,832 L iabilities and cumulative results of operations Current liabilities: Accounts payable and accrued liabilities $ 16,758,668 $ 16,314,721 Accrued payroll and related taxes 34,327,731 29,000,736 Accrued annual leave 39,291,409 36,796,477 Capital lease payable 53,892 155,241 Unearned revenues and other liabilities 3,047,005 2,477,966 Total current liabilities 93,478,705 84,745,141 Long-term liabilities: Capital lease payable 114,041 – Retirement benefit obligation 73,943,482 54,691,940 Postretirement benefit obligation 14,202,446 13,291,034 Postemployment benefit obligation 7,215,147 8,620,208 Deferred rent 39,311,002 40,315,439 Other liabilities 688,047 – Total long-term liabilities 135,474,165 116,918,621 Total liabilities 228,952,870 201,663,762 Cumulative results of operations: Fund balance 211,493,395 209,353,299 Accumulated other comprehensive loss (31,418,117) (20,593,229) Total cumulative results of operations 180,075,278 188,760,070 Total $409,028,148 $390,423,832 See notes to financial statements.

338 103rd Annual Report | 2016 Board of Governors of the Federal Reserve System Statements of Operations For the years ended December 31, 2016 2015 Board operating revenues: Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $709,000,000 $705,000,000 Other revenues 18,468,177 19,139,153 Total operating revenues 727,468,177 724,139,153 Board operating expenses: Salaries 416,636,315 385,055,415 Retirement, insurance, and benefits 94,826,495 88,462,323 Contractual services and professional fees 49,176,932 49,570,438 Depreciation, amortization, and net gains or losses on disposals 39,487,196 41,343,515 Travel 15,338,072 16,793,617 Non-capital furniture, equipment, postage, and supplies 7,268,471 12,458,662 Data, news, and research 30,607,031 16,839,166 Utilities 9,174,260 10,232,994 Software 14,838,146 14,606,064 Rentals of space 28,852,005 25,227,322 Repairs and maintenance 8,100,370 6,923,745 Other expenses 11,022,788 11,193,024 Total operating expenses 725,328,081 678,706,285 Net income 2,140,096 45,432,868 Currency costs: Assessments levied or to be levied on Federal Reserve Banks for currency costs 700,713,295 689,198,549 Expenses for costs related to currency 700,713,295 689,198,549 Currency assessments over (under) expenses – – Bureau of Consumer Financial Protection (Bureau): Assessments levied on the Federal Reserve Banks for the Bureau 596,200,000 489,700,000 Transfers to the Bureau 596,200,000 489,700,000 Bureau assessments over (under) transfers – – Total net income 2,140,096 45,432,868 Other comprehensive income: Pension and other postretirement benefit plans: Amortization of prior service cost $ 605,483 605,483 Amortization of net actuarial loss 1,832,267 2,046,251 Net actuarial loss arising during the year (13,262,638) (3,720,294) Total other comprehensive loss (10,824,888) (1,068,560) Comprehensive income (loss) (8,684,792) 44,364,308 Cumulative results of operations – beginning of year 188,760,070 144,395,762 Cumulative results of operations – end of year $180,075,278 $188,760,070 See notes to financial statements.

Federal Reserve System Audits 339 Board of Governors of the Federal Reserve System Statements of Cash Flows For the years ended December 31, 2016 2015 Cash flows from operating activities: Net income $ 2,140,096 $ 45,432,868 Adjustments to reconcile results of operations to net cash provided by (used in) operating activities: Depreciation and amortization 38,082,839 34,688,752 Net loss on disposal of property and equipment 1,404,357 6,654,763 Other additional non-cash adjustments to results of operations (207,215) (237,927) (Increase) decrease in assets: Accounts receivable (635,836) 1,767,837 Prepaid expenses (1,177,486) 1,782,269 Other assets 297,222 300,434 Increase (decrease) in liabilities: Accounts payable and accrued liabilities 1,788,402 (3,089,920) Accrued payroll and related taxes 5,326,995 6,301,607 Accrued annual leave 2,494,932 2,529,538 Unearned revenues and other liabilities 40,574 500,292 Net retirement benefit obligation 8,799,235 8,292,457 Net postretirement benefit obligation 538,831 191,392 Net postemployment benefit obligation (1,405,061) (230,102) Deferred rent (2,013,269) (1,316,365) Other long-term liabilities – (253,938) Net cash provided by operating activities 55,474,616 103,313,957 C ash flows from investing activities: Capital expenditures (28,723,996) (50,591,423) Net cash used in investing activities (28,723,996) (50,591,423) Cash flows from financing activities: Capital lease payments (174,308) (287,563) Net cash used in financing activities (174,308) (287,563) Net increase (decrease) in cash 26,576,312 52,434,971 Cash balance – beginning of year 121,678,242 69,243,271 Cash balance – end of year $148,254,554 $121,678,242 See notes to financial statements.

340 103rd Annual Report | 2016 Board of Governors of the Federal Reserve System Notes to Financial Statements as of and for the Years Ended December 31, 2016 and 2015 (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 (FOMC), 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. 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. Accordingly, the Board’s financial statements do not include financial data of the Bureau 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 FOMC. 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 FOMC. 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 Financial Stability Oversight Council (FSOC) has determined should be super-

Federal Reserve System Audits 341 vised 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. 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 an agent, the Board does not recognize the supervision and regulation assessments as revenue nor does the Board use the collections to fund Board expenses; the funds are transferred to the United States Treasury (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 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. (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) on an accrual basis of accounting. Assessments to Fund the Board — 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 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 year in which the associated expenses are incurred. These expenses and assessments are reported separately from the Board’s operating activities in the Board’s Statements of Operations.

342 103rd Annual Report | 2016 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 the Federal Emergency Management Agency (FEMA). As an agent, the Board 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. 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 recognizes 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. Along with rent abatements and lease incentives, the scheduled rent increases are spread on a straight-line basis over the term of the lease 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 noncash transactions. Benefit Obligations — The Board records annual amounts relating to its nonqualified retirement, 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. 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 is

Federal Reserve System Audits 343 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. 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; benefit obligations; and commitments and contingencies. 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 Accounting Standards Update (ASU) 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). 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. 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 Board for the year ended December 31, 2016, and did not have a material effect on the Board’s 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 no later than the year ended December 31, 2020, although earlier adoption is permitted. The Board will evaluate the effect of this new guidance on its 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, which delayed the required effective date of this accounting by one year. In March 2016, the FASB issued ASU 2016-08, Revenue

344 103rd Annual Report | 2016 from Contracts with Customers (Topic 606): Principle versus Agent Considerations (Reporting Revenue Gross versus Net), which provided clarity regarding what constitutes the transfer of a good or service. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This update provides further criteria to help identify whether goods or services within a contract are separately identifiable and, consequently, should be deemed distinct revenue streams. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow- Scope Improvements and Practical Expedients, which provides guidance on assessing collectibility, noncash consideration, and how contract modifications and completed contracts should be treated during the transition to new accounting guidance. This revenue recognition accounting guidance 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. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The update unifies in practice how certain cash receipts and cash payments are presented and classified in the statement of cash flows by requiring eight specific cash flow rule-based changes that need to be considered and applied. This Statement of Cash Flows guidance is effective for the Board for the year ending December 31, 2017. This update is not expected to have a material effect on the Board’s financial statements since the Board is rarely involved with the eight specific cash flow classification changes. (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, 2016 and 2015: As of December 31, 2016 2015 Land $ 18,640,314 $ 18,640,314 Buildings and improvements 309,910,316 300,166,433 Construction in process 12,106,227 10,920,879 Furniture and equipment 76,735,612 82,888,372 Software in use 47,862,713 40,987,546 Software in process 6,686,732 5,275,429 Vehicles 2,337,638 2,098,155 Subtotal 474,279,552 460,977,128 Less accumulated depreciation and amortization (224,500,627) (201,710,107) Property, equipment, and software – net $249,778,925 $259,267,021

Federal Reserve System Audits 345 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 that terminated in May 2016. The Board entered into new capital leases in 2016 with lease terms that extend through 2020. Furniture and equipment includes capitalized leases of $187,000 and $1,258,000 as of 2016 and 2015, respectively. Accumulated depreciation includes $27,000 and $1,170,000 related to assets under capital leases as of 2016 and 2015, respectively. The depreciation expense for leased equipment is $116,000 and $315,000 for 2016 and 2015, 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, 2016, are as follows: Years Ended December 31, Amount 2017 $ 47,895 2018 47,895 2019 47,895 2020 19,956 Total minimum lease payments 163,641 Less amount representing maintenance – Net minimum lease payments 163,641 Less amount representing interest (3,360) Present value of net minimum lease payments 160,281 Less current maturities of capital lease payments (46,239) Long-term capital lease obligations $114,042 Operating Leases — The Board has entered into operating leases for copier equipment and 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, 2016, are as follows: Years Ended December 31, 2017 $ 30,277,070 2018 30,575,985 2019 35,514,573 2020 35,833,891 After 2020 133,117,267 $265,318,786 Space rental expenses under the multiyear operating leases were $27,765,000 and $24,291,000 for the years ended December 31, 2016 and 2015, respectively. Copier equipment rental expenses under the multiyear operating leases were $1,235,000 and $985,000 for the years ended December 31, 2016 and 2015, respectively. Deferred Rent — The Board recorded noncash lease incentives of $1,009,000 and $1,480,000 for the years ended December 31, 2016 and 2015, respectively.

346 103rd Annual Report | 2016 (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 are not redistributed to the Board. 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 $580 million and $480 million during each of the years ended December 31, 2016 and 2015, respectively. The Board was not assessed a contribution for 2016 or 2015. In October 2014, the Society of Actuaries released new mortality tables (RP-2014) and in 2016, 2015, and 2014 new mortality projection scales (MP-2016, MP-2015, and MP-2014, respectively) for use in the valuation of benefits liabilities. The System analyzed each of these updates to the mortality tables and compared them to the System’s actual mortality experience, which includes the Board’s population. Based on these analyses, the System adopted the RP-2014 mortality tables and MP-2014 mortality projection scales. 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

Federal Reserve System Audits 347 limitations imposed by the Internal Revenue Code. Activity for the BEP as of December 31, 2016 and 2015, is summarized in the following tables: 2016 2015 Change in projected benefit obligation: Benefit obligation – beginning of year $27,995,628 $ 20,727,400 Service cost 2,844,118 2,409,059 Interest cost 1,652,323 1,245,933 Plan participants’ contributions – – Actuarial loss 9,371,473 3,653,624 Gross benefits paid (30,638) (40,388) Benefit obligation – end of year $41,832,904 $ 27,995,628 Accumulated benefit obligation – end of year $ 6,436,909 $ 3,651,148 Weighted-average assumptions used to determine benefit obligation as of December 31: Discount rate 4.32 % 4 .67 % Rate of compensation increase 4.00 % 4 .00 % Change in plan assets: Fair value of plan assets – beginning of year $ – $ – Employer contributions 30,638 40,388 Plan participants’ contributions – – Gross benefits paid (30,638) (40,388) 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) 114,021 55,947 Benefit obligation (noncurrent) 41,718,883 27,939,681 Funded status (41,832,904) (27,995,628) Amount recognized – end of year $(41,832,904) $ (27,995,628) Amounts recognized in the balance sheets consist of: Asset $ – $ – Liability – current (114,021) (55,947) Liability – noncurrent (41,718,883) (27,939,681) Net amount recognized $(41,832,904) $ (27,995,628) Amounts recognized in accumulated other comprehensive income consist of: Net actuarial loss $16,312,103 $ 7,727,778 Prior service cost 222,454 322,032 Net amount recognized $16,534,557 $ 8,049,810 Expected cash flows: Expected employer contributions – 2017 $ 114,021 Expected benefit payments:* 2 017 $ 114,021 2018 $ 151,058 2019 $ 191,161 2020 $ 238,388 2021 $ 314,870 2022–2026 $3,089,877 * Expected benefit payments to be made by the Board.

348 103rd Annual Report | 2016 2016 2015 Components of net periodic benefit cost: Service cost $ 2,844,118 $ 2,409,059 Interest cost 1,652,323 1,245,933 Expected return on plan assets – – Amortization: Actuarial (gain) loss $ 787,148 $ 695,315 Prior service cost 99,578 99,578 Net periodic benefit cost $ 5,383,167 $ 4,449,885 Weighted-average assumptions used to determine net periodic benefit cost: Discount rate 4.67 % 4 .25 % Rate of compensation increase 4.00 % 4 .00 % Other changes in plan assets and benefit obligations recognized in other comprehensive income: Current year actuarial loss $ 9,371,473 $ 3,653,624 Amortization of prior service cost (99,578) (99,578) Amortization of actuarial gain (loss) (787,148) (695,315) Total recognized in other comprehensive loss $ 8,484,747 $2,858,731 Total recognized in net periodic benefit cost and other comprehensive income $13,867,914 $7,308,616 Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2017 are shown below: Net actuarial loss $1,040,451 Prior service cost 99,578 Total $1,140,029 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

Federal Reserve System Audits 349 above the Social Security integration level to 2.0 percent. Activity for the PEP as of December 31, 2016 and 2015, is summarized in the following tables: 2016 2015 Change in projected benefit obligation: Benefit obligation – beginning of year $26,876,261 $ 24,857,488 Service cost 1,063,168 1,037,235 Interest cost 1,326,009 1,178,955 Plan participants’ contributions – – Actuarial loss 3,371,408 22,672 Gross benefits paid (258,042) (220,089) Benefit obligation – end of year $32,378,804 $ 26,876,261 Accumulated benefit obligation – end of year $25,242,076 $21,116,567 Weighted-average assumptions used to determine benefit obligation as of December 31: Discount rate 4.22% 4.52% Rate of compensation increase 4.00% 4.00% C hange in plan assets: Fair value of plan assets – beginning of year $ – $ – Employer contributions 258,042 220,089 Plan participants’ contributions – – Gross benefits paid (258,042) (220,089) 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 363,216 316,841 Benefit obligation – noncurrent 32,015,588 26,559,420 Funded status (32,378,804) (26,876,261) Amount recognized – end of year $(32,378,804) $ (26,876,261) Amounts recognized in the balance sheets consist of: Asset $ – $ – Liability – current (363,216) (316,841) Liability – noncurrent (32,015,588) (26,559,420) Net amount recognized $(32,378,804) $ (26,876,261) Amounts recognized in accumulated other comprehensive income consist of: Net actuarial loss $12,018,247 $ 9,519,292 Prior service cost 54,908 586,303 Net amount recognized $12,073,155 $ 10,105,595 Expected cash flows: Expected employer contributions – 2017 $ 363,216 Expected benefit payments:* 2 017 $ 363,216 2018 $ 482,975 2019 $ 618,930 2020 $ 760,606 2021 $ 909,204 2022–2026 $7,049,926 * Expected benefit payments to be made by the Board.

350 103rd Annual Report | 2016 2016 2015 Components of net periodic benefit cost: Service cost $1,063,168 $ 1,037,235 Interest cost 1,326,009 1,178,955 Expected return on plan assets – – Amortization: Actuarial loss 872,453 1,150,920 Prior service cost 531,395 531,395 Net periodic benefit cost $3,793,025 $3,898,505 Weighted-average assumptions used to determine net periodic benefit cost: Discount rate 4.52 % 4 .12 % Rate of compensation increase 4.00 % 4 .00 % Other changes in plan assets and benefit obligations recognized in other comprehensive income: Current year actuarial loss $3,371,408 $ 22,672 Amortization of prior service cost (531,395) (531,395) Amortization of actuarial loss (872,453) (1,150,920) Total recognized in other comprehensive (income) loss $1,967,560 $(1,659,643) Total recognized in net periodic benefit cost and other comprehensive income $5,760,585 $2,238,862 Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2017 are shown below: Net actuarial loss $923,668 Prior service cost 54,908 Total $978,576 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, 2016 and 2015, is summarized in the following table: 2016 2015 Retirement benefit obligation: Benefit obligation – BEP $41,832,904 $ 27,995,628 Benefit obligation – PEP 32,378,804 26,876,261 Additional benefit obligations 209,011 192,839 Total accumulated retirement benefit obligation $74,420,719 $55,064,728 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 $939,000 and $913,000 in 2016 and 2015, 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 $25,985,000 and $24,170,000 in 2016 and 2015, respectively.

Federal Reserve System Audits 351 (7) Postretirement Benefits The Board provides certain life insurance programs for its active employees and retirees. Activity as of December 31, 2016 and 2015, is summarized in the following tables: 2016 2015 Change in benefit obligation: Benefit obligation – beginning of year $13,777,546 $ 13,384,294 Service cost 167,045 177,332 Interest cost 605,975 549,919 Plan participants’ contributions – – Actuarial loss 519,758 43,998 Gross benefits paid (359,339) (377,997) Benefit obligation – end of year $14,710,985 $ 13,777,546 Weighted-average assumptions used to determine benefit obligation as of December 31 – discount rate 4.14 % 4.41 % Change in plan assets: Fair value of plan assets – beginning of year $ – $ – Employer contributions 359,339 377,997 Gross benefits paid (359,339) (377,997) 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 508,539 486,512 Benefit obligation – noncurrent 14,202,446 13,291,034 Funded status (14,710,985) (13,777,546) Amount recognized – end of year $(14,710,985) $ (13,777,546) Amounts recognized in the balance sheets consist of: Asset $ – $ – Liability – current (508,539) (486,512) Liability – noncurrent (14,202,446) (13,291,034) Net amount recognized $(14,710,985) $ (13,777,546) Amounts recognized in accumulated other comprehensive income consist of: Net actuarial loss $ 2,934,000 $ 2,586,908 Prior service credit (123,594) (149,084) Net amount recognized $ 2,810,406 $ 2,437,824 Expected cash flows: Expected employer contributions – 2017 $ 508,539 Expected benefit payments:* 2017 $ 508,539 2018 $ 536,151 2019 $ 559,495 2020 $ 584,913 2021 $ 625,880 2022–2026 $ 3,532,025 * Expected benefit payments to be made by the Board.

352 103rd Annual Report | 2016 2016 2015 Components of net periodic benefit cost: Service cost $ 167,045 $ 177,332 Interest cost 605,975 549,919 Expected return on plan assets – – Amortization: Actuarial loss 172,666 200,016 Prior service credit (25,490) (25,490) Net periodic benefit cost $ 920,196 $901,777 Weighted-average assumptions used to determine net periodic benefit cost – discount rate 4.41 % 4.05 % Other changes in plan assets and benefit obligations recognized in other comprehensive income: Current year actuarial loss $ 519,758 $ 43,998 Amortization of prior service credit 25,490 25,490 Amortization of actuarial loss (172,666) (200,016) Total recognized in other comprehensive (income) loss $ 372,582 $(130,528) Total recognized in net periodic benefit cost and other comprehensive income $1,292,778 $771,249 Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2017 are shown below: Net actuarial loss $204,275 Prior service credit (15,877) Total $188,398 (8) Postemployment Benefits The Board provides certain postemployment benefits to eligible former or inactive employees and their dependents. Postemployment costs were actuarially determined using a December 31 measurement date and discount rates of 2.78 percent and 2.70 percent as of December 31, 2016 and 2015, respectively. The net periodic postemployment benefit cost recognized by the Board as of December 31, 2016 and 2015, was ($569,000) and $740,000, respectively.

Federal Reserve System Audits 353 (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, 2016 and 2015, 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, 2015 $(16,956,317) $(2,568,352) $(19,524,669) Change in accumulated other comprehensive income (loss): Net actuarial loss arising during the year (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 loss (1,199,088) 130,528 (1,068,560) Balance – December 31, 2015 (18,155,405) (2,437,824) (20,593,229) Change in accumulated other comprehensive income (loss): Net actuarial loss arising during the year(a) (12,742,881) (519,757) (13,262,638) Other comprehensive income before reclassifications (12,742,881) (519,757) (13,262,638) Amortization of prior service (credit) costs(a)(b) 630,973 (25,490) 605,483 Amortization of net actuarial loss(a)(b) 1,659,601 172,666 1,832,267 Amounts reclassified from accumulated other comprehensive income 2,290,574 147,176 2,437,750 Change in accumulated other comprehensive income (loss) (10,452,307) (372,581) (10,824,888) Balance – December 31, 2016 $(28,607,712) $(2,810,405) $(31,418,117) ( 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.

354 103rd Annual Report | 2016 (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. Activity related to the Board and Reserve Banks is summarized in the following table: 2016 2015 For the years ended December 31: Assessments levied or to be levied on Reserve Banks for: Currency expenses $ 700,713,295 $ 689,198,549 Board operations 709,000,000 705,000,000 Transfers of funds to the Bureau 596,200,000 489,700,000 Total assessments levied or to be levied on Reserve Banks $2,005,913,295 $1,883,898,549 Board expenses charged to the Reserve Banks for data processing $ 226,699 $ 326,953 Reserve Bank costs charged to the Board: Data processing and communication $ 643,975 $ 1,226,875 Data center 841,574 858,985 Office space 1,348,018 206,167 Contingency site 1,475,701 1,281,688 Total Reserve Bank costs charged to the Board $ 4,309,268 $ 3,573,715 As of December 31: Accounts receivable due from the Reserve Banks $ 343,483 $ 283,072 Accounts payable due to the Reserve Banks $ 1,169,205 $ 356,937 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 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 $2,471,000 and $2,615,000 for the years ended December 31, 2016 and 2015, respectively. Activity related to the Board and the OEB is summarized in the following table: 2016 2015 As of December 31: Accounts receivable due from the Office of Employee Benefits $897,363 $1,068,126 Accounts payable due to the Office of Employee Benefits $ – $ 110,659

Federal Reserve System Audits 355 (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 performs certain administrative functions for the Council. The five agencies that are represented on the Council are the Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the 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: 2016 2015 For the years ended December 31: Council expenses charged to the Board: Assessments for operating expenses $ 212,600 $ 163,987 Examiner education expenses 1,466,842 1,228,101 Central Data Repository 1,028,560 1,049,087 Home Mortgage Disclosure Act/Community Reinvestment Act 613,524 874,584 Uniform Bank Performance Report 177,662 211,247 Total Council expenses charged to the Board $3,499,188 $3,527,006 Board expenses charged to the Council: Data processing related services $3,249,186 $ 3,997,421 Other administrative services 552,000 303,000 Total Board expenses charged to the Council $3,801,186 $4,300,421 As of December 31: Accounts receivable due from the Council $ 185,341 $ 223,553 Accounts payable due to the Council $ 98,233 $ 297,539 (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 transfers funds to the Board to fund their share of OIG operations. The Board recorded revenue of $12,900,000 during calendar years 2016 and 2015 related to OIG funding.

356 103rd Annual Report | 2016 (13) 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 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, 2016 and 2015, are reflected in the following table: 2016 2015 Expenses related to BEP: Printing $ 659,958,550 $ 637,346,480 Retirement 3,819,263 3,922,414 Meaningful access program 1,685,269 2,679,698 New facility 63,025 – Subtotal related to BEP $665,526,107 $ 643,948,592 Other currency expenses: Shipping $ 20,404,946 $ 23,357,229 Research and development 5,215,244 4,988,654 Quality assurance services 8,630,562 14,575,554 Education services 936,436 2,328,520 Subtotal other currency expenses $ 35,187,188 $ 45,249,957 Total currency expenses $700,713,295 $ 689,198,549 (14) 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 2020 which includes option periods. In late 2015, the Board entered into an agreement with the other Council members to fund the development of a new Home Mortgage Disclosure Act processing system by the Bureau. 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. (15) Subsequent Events There were no subsequent events that require adjustments to or disclosures in the financial statements as of December 31, 2016. Subsequent events were evaluated through March 6, 2017, which is the date the financial statements were available to be issued.

Federal Reserve System Audits 357 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 the 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, 2016, 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 6, 2017. Compliance and Other Matters 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, contracts, and grant agreements, 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. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of compliance and the results of that testing, and not to provide an opinion on the Board’s compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Board’s compliance. Accordingly, this communication is not suitable for any other purpose. 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 this specified party. Washington, DC March 6, 2017

358 103rd Annual Report | 2016 Federal Reserve Banks Combined Financial Statements The combined financial statements of the Federal Reserve Banks were audited by KPMG LLP, independent auditors, for the years ended December 31, 2016 and 2015. 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 statements of condition of the Federal Reserve Banks (the “Reserve Banks”) as of December 31, 2016 and 2015, and the related combined statements of operations and changes in capital for the years 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 audits. We conducted our audits 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 audits provide 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, 2016 and 2015, and the results of its operations for the years then ended, on the basis of accounting described in Note 3. Washington, DC March 8, 2017

Federal Reserve System Audits 359 Federal Reserve Banks Abbreviations ASC Accounting Standards Codification B EP Benefit Equalization Retirement Plan B ureau Bureau of Consumer Financial Protection 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 D FMU Designated financial market utility 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 APD Medicare Advantage and Prescription Drug M BS Mortgage-backed securities M L Maiden Lane LLC M TM Mark-to-market R MBS Residential mortgage-backed securities O EB Office of Employee Benefits of the Federal Reserve System 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 BA To be announced T DF Term Deposit Facility T RS Total return swap V IE Variable interest entity

360 103rd Annual Report | 2016 Combined Statements of Condition As of December 31, 2016 and December 31, 2015 (in millions) 2016 2015 ASSETS Gold certificates $ 11,037 $ 11,037 Special drawing rights certificates 5,200 5,200 Coin 1,873 1,890 Loans Note 4 63 115 System Open Market Account: Note 5 Treasury securities, net (of which $25,195 and $18,960 is lent as of December 31, 2016 and 2015, respectively) 2,567,422 2,580,676 Government-sponsored enterprise debt securities, net (of which $44 and $146 is lent as of December 31, 2016 and 2015, respectively) 16,648 33,748 Federal agency and government-sponsored enterprise mortgage-backed securities, net 1,795,003 1,800,449 Foreign currency denominated investments, net 19,442 19,567 Central bank liquidity swaps 5,563 997 Accrued interest receivable 25,598 25,418 Other assets 8 14 Investments held by consolidated variable interest entity (of which $1,742 and $1,778 is measured at fair value as of December 31, 2016 and 2015, respectively) Note 6 1,742 1,778 Bank premises and equipment, net Note 7 2,564 2,603 Items in process of collection 118 210 Other assets 1,056 1,063 Total assets $4,453,337 $4,484,765 LIABILITIES AND CAPITAL Federal Reserve notes outstanding, net $1,462,939 $1,379,551 System Open Market Account: Note 5 Securities sold under agreements to repurchase 725,210 712,401 Other liabilities 1,012 508 Liabilities of consolidated variable interest entity (of which $32 and $21 is measured at fair value as of December 31, 2016 and 2015, respectively) Note 6 33 57 Deposits: Depository institutions 1,759,675 1,977,166 Treasury, general account 399,190 333,447 Other deposits 58,413 36,532 Interest payable to depository institutions and others 403 252 Accrued benefit costs Notes 9 and 10 3,118 2,892 Deferred credit items 922 246 Accrued remittances to the Treasury 1,725 1,953 Other liabilities 255 252 Total liabilities 4,412,895 4,445,257 Capital paid-in 30,442 29,508 Surplus (including accumulated other comprehensive loss of $3,985 and $3,802 at December 31, 2016 and 2015, respectively) 10,000 10,000 Total capital 40,442 39,508 Total liabilities and capital $4,453,337 $4,484,765 The accompanying notes are an integral part of these combined financial statements.

Federal Reserve System Audits 361 Combined Statements of Operations For the years ended December 31, 2016 and December 31, 2015 (in millions) 2016 2015 INTEREST INCOME Loans Note 4 $ 1 $ - System Open Market Account: Note 5 Treasury securities, net 63,845 63,317 Government-sponsored enterprise debt securities, net 959 1,330 Federal agency and government-sponsored enterprise mortgage-backed securities, net 46,299 48,931 Foreign currency denominated investments, net (7) 31 Central bank liquidity swaps 9 1 Investments held by consolidated variable interest entity Note 6 9 4 Total interest income 111,115 113,614 INTEREST EXPENSE System Open Market Account: Note 5 Securities sold under agreements to repurchase 1,122 248 Other 4 2 Deposits: Depository institutions and others 12,020 6,846 Term Deposit Facility 24 89 Total interest expense 13,170 7,185 Net interest income 97,945 106,429 NON-INTEREST INCOME (LOSS) System Open Market Account: Note 5 Treasury securities losses, net (15) - Federal agency and government-sponsored enterprise mortgage-backed securities gains, net 19 43 Foreign currency translation losses, net (103) (1,382) Other 35 16 Investments held by consolidated variable interest entity (losses) gains, net Note 6 (19) 35 Income from services 434 429 Reimbursable services to government agencies 677 650 Other 64 63 Total non-interest income (loss) 1,092 (146) O PERATING EXPENSES Salaries and benefits 2,979 2,847 Occupancy 327 326 Equipment 175 182 Net periodic pension expense Note 9 565 563 Other 624 577 Assessments: Board of Governors operating expenses and currency costs 1,410 1,394 Bureau of Consumer Financial Protection 596 490 Total operating expenses 6,676 6,379 Net income before providing for remittances to the Treasury 92,361 99,904 Earnings remittances to the Treasury: Note 13 Interest on Federal Reserve notes - 91,143 Required by the Federal Reserve Act Note 3o 91,467 25,956 Total earnings remittances to the Treasury 91,467 117,099 Net income (loss) after providing for remittances to the Treasury 894 (17,195) Change in prior service costs related to benefit plans Note 9 and 10 231 86 Change in actuarial (losses) gains related to benefit plans Note 9 and 10 (414) 280 Total other comprehensive (loss) income (183) 366 Comprehensive income (loss) $ 711 $(16,829) The accompanying notes are an integral part of these combined financial statements.

362 103rd Annual Report | 2016 Combined Statements of Changes in Capital For the years ended December 31, 2016 and December 31, 2015 (in millions, except share data) Surplus Capital Accumulated Total paid-in Net income other Total capital retained comprehensive surplus income (loss) 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 (redeemed) (18,730,089 shares) 936 - - - 936 Comprehensive income: Net 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 Net change in capital stock issued (redeemed) (18,682,206 shares) 934 - - - 934 Comprehensive income: Net income - 894 - 894 894 Other comprehensive loss - - (183) (183) (183) Dividends on capital stock - (711) - (711) (711) Net change in capital 934 183 (183) - 934 Balance at December 31, 2016 (608,848,261 shares) $30,442 $13,985 $(3,985) $10,000 $40,442 The accompanying notes are an integral part of these combined financial statements.

Federal Reserve System Audits 363 (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 director 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 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, edge and agreement corporations, and certain financial market utilities that have been designated as systemically important. Certain services are provided to foreign official and international account holders, primarily by the FRBNY. The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations and oversees these operations. The FOMC has selected the FRBNY to execute open market transactions for the System Open Market Account (SOMA) as provided in its annual authorization. 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

364 103rd Annual Report | 2016 (GSE) debt securities, and federal agency and GSE mortgage-backed securities (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 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 meet the needs specified by the FOMC to carry out the System’s central bank responsibilities, the FOMC has authorized and directed the FRBNY to execute standalone spot and forward foreign exchange transactions in the resultant 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 agreements in the SOMA. The FOMC has also authorized and directed 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 maintain standing U.S. dollar liquidity swap arrangements and standing foreign currency liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, 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. The FOMC has authorized and directed the FRBNY to conduct small-value exercises periodically for the purpose of testing operational readiness. 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.

Federal Reserve System Audits 365 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 responsibility to conduct monetary policy, the Board has adopted accounting principles and practices in the FAM that differ from accounting principles generally accepted in the United States of America (GAAP). The more significant 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 of premiums and discounts 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 primarily motivated by monetary policy and financial stability 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 trade-date 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, Operations, and Changes in Capital, and the accompanying notes to the combined financial statements. Other than those described above, the accounting policies described in the FAM are generally consistent with those in GAAP and the references to GAAP in the notes to the combined financial statements highlight those areas where the FAM is consistent with 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 assets and 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. The Combined Statements of Operations have been renamed to better reflect the underlying nature of the activity reported and, in the prior year, had been titled the Combined Statements of Income and Comprehensive Income. Certain amounts relating to the prior year have been reclassified to conform to the current year presentation.

366 103rd Annual Report | 2016 Significant accounts and accounting policies are explained below. a. Consolidation The combined financial statements include the accounts and results of operations of the Reserve Banks as well as a variable interest entity (VIE), Maiden Lane Limited Liability Company (LLC) (ML). The consolidation of the VIE 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 VIE. The combined financial statements of the Reserve Banks also include accounts and results of operations of Maiden and Nassau LLC, a Delaware 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 Reserve 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 Reserve 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. 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

Federal Reserve System Audits 367 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 Reserve 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. 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 under agreements to resell (repurchase agreements) with primary dealers. Transactions under these repurchase agreements are typically settled through a tri-party arrangement. In the United States, there are currently two commercial custodial banks that provide these services. In a tri-party arrangement, a commercial custodial bank manages the collateral clearing, settlement, 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 agreements primarily includes Treasury securities (including Treasury Inflation-

368 103rd Annual Report | 2016 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 GSE-related 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 agreements are accounted for as financing transactions with the associated interest income recognized over the life of the transaction. These repurchase agreements 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 (reverse repurchase agreements) with primary dealers and with a set of expanded counterparties that includes banks, savings associations, GSEs, and domestic money market funds. Transactions under these reverse repurchase agreements are designed to have a margin of zero and are settled through a tri-party arrangement, similar to repurchase agreements. Reverse repurchase agreements 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 agreements are accounted for as financing transactions, and the associated interest expense is recognized over the life of the transaction. These reverse repurchase agreements 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 Operations. Activity related to repurchase agreements, reverse repurchase agreements, 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. 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 recorded when earned and includes amortization of premiums and discounts on 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

Federal Reserve System Audits 369 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 Operations. 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, 2016 and 2015, 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. Net gains (losses) resulting from MBS transactions are reported as a component of “Noninterest income (loss): System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains (losses), net” in the Combined Statements of Operations. Foreign currency denominated investments, which can include foreign currency deposits, repurchase agreements, and government debt instruments, are revalued daily at current foreign currency market exchange rates in order to report these assets in U.S. dollars. Any negative interest associated with these foreign currency denominated investments is included as a component of “Interest income: System Open Market Account: Foreign currency denominated investments, net” in the Combined Statements of Operations. 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 Operations. 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. 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 to each Reserve Bank based on the ratio, generally updated in the first quarter of the year, of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding December 31.

370 103rd Annual Report | 2016 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 the 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 Operations. 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 generally allocated in the first quarter of each year to each Reserve Bank based on the ratio, updated in the first quarter of the year, of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding December 31. 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 Reserve Banks recognize 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 Operations. 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 VIE – Investments and Liabilities The investments held by the consolidated VIE 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 entity” in the Combined Statements of Condition. Changes

Federal Reserve System Audits 371 in fair value of the investments are recorded in “Non-interest income (loss): Investments held by consolidated variable interest entity (losses) gains, net” in the Combined Statements of Operations. Investments in debt securities are accounted for in accordance with FASB ASC Topic 320, Investments – Debt and Equity Securities, and the VIE 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 the consolidated VIE 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 entity” 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 entity (losses) gains, net” in the Combined Statements of Operations. 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 FASB ASC Topic 840, Leases are capitalized and amortized over the shorter of the useful life of the asset or the term of the lease. 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 reverse repurchase agreements is deducted from the eligible collateral value.

372 103rd Annual Report | 2016 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 $175 billion and $170 billion at December 31, 2016 and 2015, respectively. At December 31, 2016 and 2015, all Federal Reserve notes outstanding, net, were fully collateralized. At December 31, 2016, all gold certificates, all SDR certificates, and $1,447 billion of domestic securities held in the SOMA were pledged as collateral. At December 31, 2016, 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 and others” 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 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 and others” in the Combined Statements of Condition. There were no deposits held by the Reserve Bank under the TDF at December 31, 2016 and 2015. 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 (DFMUs), and GSE deposits held by the Reserve Banks. The Reserve Banks pay interest on deposits held by DFMUs at the rate paid on

Federal Reserve System Audits 373 balances maintained by depository institutions or another rate determined by the Board from time to time, not to exceed the general level of short term interest rates. Interest payable is reported as a component of “Interest payable to depository institutions and others” in the Combined Statements of Condition. 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. 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. Until January 1, 2016, each Reserve Bank was required by law to pay each member bank an annual dividend of 6 percent on the paid-in capital stock. Effective January 1, 2016, the FAST Act changed the dividend rate for member banks with more than $10 billion of consolidated assets 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 dividend is paid semiannually and is cumulative. 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 billion. Reserve Bank surplus is allocated among the 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. The amount reported as surplus by the Reserve Bank as of December 31, 2016 and 2015 represents the Reserve Bank’s allocated portion of surplus. 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,

374 103rd Annual Report | 2016 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, requires that any amounts of the surplus funds of the Reserve Banks that exceed, or would exceed, the aggregate surplus 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 Operations. The amount of the 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” in the Combined Statements of Operations. The amount due to the Treasury is reported as “Accrued remittances to the Treasury” in the Combined Statements of Condition. 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. This decrease in earnings remittances to the Treasury results in recording a deferred asset that represents the amount of net earnings a Reserve Bank will need to realize before remittances to the Treasury resume. 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, 2016 and 2015, the Reserve Banks were reimbursed for all services provided to the Treasury as its fiscal agent. 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 Governor’s 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, 2016 and 2015 was 12.68 percent ($631.7 million) and 12.42 percent ($618.7 million), respectively. The Reserve

Federal Reserve System Audits 375 Banks’ assessment for Bureau funding is reported as “Assessments: Bureau of Consumer Financial Protection” in the Combined Statements of Operations. r. Fair Value Investments and liabilities of the 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 for the years ended December 31, 2016 and 2015, respectively, and are reported as a component of “Operating expenses: Occupancy” in the Combined Statements of Operations. 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 execute 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

376 103rd Annual Report | 2016 FRBNY, and the Federal Reserve Bank of St. Louis (FRBSL). The consolidation is expected to be completed in future years. Note 12 describes the Reserve Banks’ restructuring initiatives and provides information about the costs and liabilities associated with employee separations and contract terminations. 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. Accounting Policy Change and Recently Issued Accounting Standards The Board of Governors approved, effective January 2017, accounting for Treasury securities, GSE debt securities, and foreign government debt instruments held in the SOMA using the effective interest method. Previously the cost bases of these securities were adjusted for amortization of premiums or accretion of discounts on a straight-line basis. This change will be applied prospectively. This update is not expected to have a material effect on the Reserve Banks’ combined financial statements for the year ended December 31, 2017. Other than the significant differences described in Note 3, the accounting policies described in the FAM are generally consistent with those in GAAP. The following items represent recent GAAP accounting standards and describe how the FAM was or will be revised to be consistent with these standards. In May 2014, the FASB issued Accounting Standards Update (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, which delayed the required effective date of this accounting by one year. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which provided clarity regarding what constitutes the transfer of a good or service. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This update provides further criteria to help identify whether goods or services within a contract are separately identifiable and, consequently, should be deemed distinct revenue streams. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides guidance on assessing collectability, noncash consideration, and how contract modifications and completed contracts should be treated during the transition to new accounting guidance. 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 the guidance earlier. The Reserve Banks are continuing to evaluate the effect of this new guidance on the 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

Federal Reserve System Audits 377 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 ended December 31, 2016, and did not 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 LLCs 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 ended December 31, 2016, and did not 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 prospectively for the Reserve Banks for the year ended December 31, 2016, and did not 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): Disclosure 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. This update also changes disclosure requirements for investments measured using 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, 2016, and did not have a material effect on the Reserve Banks’ combined financial statements. In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. This update covers a wide range of topics in the accounting standard codification and addresses differences between original guidance and the codification. It provides clarification of certain guidance including reference corrections and makes minor improvements to accounting standards. As part of ASU 2015-10 the disclosures for the Retirement Plan’s investments in collective trusts and certain real estate investments were reclassified in the fair value hierarchy in Note 9 of the financial statements. This update is effective for the Reserve Banks for the year ended December 31, 2016. This reclassification did not have an impact on Retirement Plan assets and did not have a material effect on the Reserve Banks’ combined financial statements. The relevant disclosures have been included in Note 9. In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial

378 103rd Annual Report | 2016 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 Reserve Banks’ 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 the Reserve Banks’ combined financial statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update revises the methodology for assessing expected credit losses and requires consideration of reasonable and supportable information to inform credit loss estimates. The update is effective for the Reserve Banks for the year ending December 31, 2021, although earlier adoption is permitted. The Reserve Banks are continuing to evaluate the effect of this new guidance on the Reserve Banks’ 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 government obligations; asset-backed securities; 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.

Federal Reserve System Audits 379 The remaining maturity distribution of loans to depository institutions outstanding as of December 31, 2016 and 2015 was as follows (in millions): Within 16 days Total 15 days to 90 days December 31, 2016 $ 58 $ 5 $ 63 December 31, 2015 $104 $11 $115 At December 31, 2016 and 2015, 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, 2016 and 2015. Interest income attributable to loans to depository institutions was $1 million during the year ended December 31, 2016. Interest income attributable to loans to depository institutions was immaterial during the year ended December 31, 2015. (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. Pursuant to FOMC directives, the FRBNY has continued to reinvest principal payments from its holdings of GSE debt securities and federal agency and GSE MBS in federal agency and GSE MBS and to roll over maturing Treasury securities at auction. During the years ended December 31, 2016 and 2015, the FRBNY continued the reinvestments and rollovers.

380 103rd Annual Report | 2016 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, 2016 and 2015 was as follows (in millions): 2016 Total Unamortized Unaccreted Par amortized premiums discounts cost Treasury securities Notes $1,638,172 $ 14,782 $ (5,615) $1,647,339 Bonds 825,444 103,708 (9,069) 920,083 Total Treasury securities $2,463,616 $118,490 $(14,684) $ 2,567,422 GSE debt securities $ 16,180 $ 468 $ - $ 16,648 Federal agency and GSE MBS $1,741,391 $ 54,006 $ (394) $1,795,003 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 There were no material transactions related to repurchase agreements during the years ended December 31, 2016 and 2015. During the years ended December 31, 2015 and 2016, the FRBNY entered into reverse repurchase agreements as part of its monetary policy activities. From September 23, 2013 through December 16, 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. Since then these operations have been undertaken as necessary to maintain the federal funds rate in a target range. In addition, reverse repurchase agreements are entered into as part of a service offering to foreign official and international account holders. Financial

Federal Reserve System Audits 381 information related to reverse repurchase agreements for the years ended December 31, 2016 and 2015 was as follows (in millions): 2016 2015 Primary dealers and expanded counterparties: Contract amount outstanding, end of year $468,355 $474,592 Average daily amount outstanding, during the year 105,648 125,656 Maximum balance outstanding, during the year 474,592 474,592 Securities pledged (par value), end of year 443,799 437,961 Securities pledged (fair value), end of year 469,282 475,422 Foreign official and international accounts: Contract amount outstanding, end of year $256,855 $237,809 Average daily amount outstanding, during the year 241,848 157,929 Maximum balance outstanding, during the year 265,041 237,809 Securities pledged (par value), end of year 249,417 230,333 Securities pledged (fair value), end of year 256,897 237,825 Total contract amount outstanding, end of year $725,210 $712,401 Supplemental information - interest expense: Primary dealers and expanded counterparties $ 303 $ 84 Foreign official and international accounts 819 164 Total interest expense - securities sold under agreements to repurchase $ 1,122 $ 248 Securities pledged as collateral, at December 31, 2016 and 2015, consisted solely of Treasury securities. The contract amount outstanding as of December 31, 2016 of reverse repurchase agreements that were transacted with primary dealers and expanded counterparties had a term of one business day and matured on January 3, 2017. The contract amount outstanding as of December 31, 2016 of reverse repurchase agreements that were transacted with foreign official and international account holders had a term of one business day and matured on January 3, 2017.

382 103rd Annual Report | 2016 The remaining maturity distribution of Treasury securities, GSE debt securities, federal agency and GSE MBS bought outright, and reverse repurchase agreements at December 31, 2016 and 2015 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, 2016: Treasury securities (par value) $ 14,807 $41,249 $150,766 $1,224,348 $399,277 $ 633,169 $2,463,616 GSE debt securities (par value) - 2,851 8,938 2,044 - 2,347 16,180 Federal agency and GSE MBS (par value)1 - - - 77 10,584 1,730,730 1,741,391 Securities sold under agreements to repurchase (contract amount) 725,210 - - - - - 725,210 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 1 The par 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 7.2 and 6.5 years as of December 31, 2016 and 2015, 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, 2016 and 2015 were as follows (in millions): 2016 2015 Treasury securities (amortized costs) $25,195 $18,960 Treasury securities (par value) 24,698 18,055 GSE debt securities (amortized cost) 44 146 GSE debt securities (par value) 44 137 Securities pledged as collateral by the counterparties in the securities lending arrangements at December 31, 2016 and 2015 consisted solely of Treasury securities. The securities lending agreements outstanding as of December 31, 2016 had a term of one business day and matured on January 3, 2017. 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, 2016, the total purchase price of the Treasury securities under outstanding commitments was $11,679 million. These commitments had contractual settlement dates extending through January 3, 2017.

Federal Reserve System Audits 383 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, 2016, the total purchase price of the federal agency and GSE MBS under outstanding purchase commitments was $35,787 million, none of which was related to dollar rolls. These commitments, which had contractual settlement dates extending through January 2017, are 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, 2016, there were no outstanding sales commitments for federal agency and GSE MBS. MBS 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 the 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, 2016 and 2015 was as follows (in millions): 2016 2015 Other assets: MBS portfolio related cash and short term investments $ 7 $ 13 Other 1 1 Total other assets $ 8 $ 14 Other liabilities: Cash margin $ 983 $486 Obligations from MBS transaction fails 9 16 Other 20 6 Total other liabilities $1,012 $508 Accrued interest receivable on domestic securities holdings held in the SOMA was $25,517 million and $25,354 million as of December 31, 2016 and 2015, respectively. These amounts are reported as a component of “System Open Market Account: Accrued interest receivable” in the Combined Statements of Condition.

384 103rd Annual Report | 2016 Information about transactions related to Treasury securities, GSE debt securities, and federal agency and GSE MBS held in the SOMA during the years ended December 31, 2016 and 2015, is summarized as follows (in millions): Total Federal Notes Bonds Treasury GSE debt agency and securities securities GSE MBS Balance 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 (losses), 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 Purchases1 190,992 13,882 204,874 - 387,210 Sales1 (534) (62) (596) - (213) Realized gains (losses), net2 (22) 7 (15) - 6 Principal payments and maturities (187,843) (16,597) (204,440) (16,764) (379,065) Amortization of premiums and accretion of discounts, net (5,049) (10,033) (15,082) (336) (13,384) Inflation adjustment on inflation-indexed securities 567 1,438 2,005 - - Balance at December 31, 2016 $1,647,339 $920,083 $2,567,422 $16,648 $1,795,003 Year-ended December 31, 2015 Supplemental information—par value of transactions: Purchases3 $ 2,747 $ 766 $ 3,513 $ - $ 344,505 Sales - - - - (435) Year-ended December 31, 2016 Supplemental information—par value of transactions: Purchases3 $ 191,231 $ 13,868 $ 205,099 $ - $ 373,197 Sales (555) (45) (600) - (203) 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 (losses), net is the offset of 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 France, Germany, the Netherlands, 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 repurchase agreements to purchase government debt securities for which the accepted collateral is the debt instruments issued by a foreign government. At December 31, 2016 and 2015, there were no repurchase agreements outstanding and, consequently, no related foreign securities held as collateral.

Federal Reserve System Audits 385 Information about foreign currency denominated investments recorded at amortized cost and valued at foreign currency market exchange rates held in the SOMA at December 31, 2016 and 2015 was as follows (in millions): 2016 2015 Euro: Foreign currency deposits $ 4,205 $ 6,218 French government debt instruments 3,892 3,325 German government debt instruments 1,884 2,261 Dutch government debt instruments 1,462 - Japanese yen: Foreign currency deposits 4,668 2,568 Japanese government debt instruments 3,331 5,195 Total $19,442 $19,567 Net interest income earned on foreign currency denominated investments held in the SOMA for the years ended December 31, 2016 and 2015 was as follows (in millions): 2016 2015 Net interest income:1 Euro $(11) $24 Japanese yen 4 7 Total net interest income $ (7) $ 31 1 As a result of negative interest rates in certain foreign currency denominated investments held in the SOMA, interest income on foreign currency denominated investments, net contains negative interest of $32 million and $13 million for the years ended December 31, 2016 and 2015, respectively. Accrued interest receivable on foreign currency denominated investments, net was $79 million and $64 million as of December 31, 2016 and 2015. 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, 2016 and 2015 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, 2016: Euro $4,253 $ 334 $1,170 $3,174 $2,512 $11,443 Japanese yen 4,840 342 1,341 1,476 - 7,999 Total $9,093 $ 676 $2,511 $4,650 $2,512 $19,442 December 31, 2015: Euro $2,136 $4,440 $1,051 $3,824 $ 353 $11,804 J apanese yen 2,734 350 1,604 3,075 - 7,763 Total $4,870 $4,790 $2,655 $6,899 $ 353 $19,567 There were no foreign exchange contracts related to foreign currency operations outstanding as of December 31, 2016. 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, 2016, there were no outstanding commitments to purchase foreign government debt instruments. During 2016, there were purchases and maturities of for-

386 103rd Annual Report | 2016 eign government debt instruments of $3,524 million, and $3,767 million, respectively. There were no sales of foreign government debt instruments in 2016. 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 Reserve Banks to facilitate international payments and currency transactions made on behalf of foreign central banks and U.S. official institution customers were immaterial as of December 31, 2016 and 2015. c. Central Bank Liquidity Swaps U.S. Dollar Liquidity Swaps The total foreign currency held under U.S. dollar liquidity swaps held in the SOMA at December 31, 2016 and 2015 was $5,563 million and $997 million, respectively. The remaining maturity distribution of U.S. dollar liquidity swaps that were allocated to the Reserve Banks at December 31, 2016 and 2015 was as follows (in millions): 2016 2015 Within Within 15 days 15 days Euro $4,340 $925 Japanese yen 1,223 72 Total $5,563 $997 Foreign Currency Liquidity Swaps At December 31, 2016 and 2015, 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 Operations. 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.

Federal Reserve System Audits 387 Based on evaluations performed as of December 31, 2016 and 2015, there are no credit impairments of SOMA securities holdings. 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, 2016 and 2015 (in millions): 2016 2015 Cumulative Cumulative unrealized unrealized Amortized Amortized Fair value gains Fair value gains cost cost (losses), (losses), net net Treasury securities: Notes $ 1,647,339 $ 1,657,026$ 9,687 $1,649,228 $1,669,395 $ 20,167 Bonds 920,083 983,680 63,597 931,448 1,006,514 75,066 Total Treasury securities 2,567,422 2,640,706 73,284 2,580,676 2,675,909 95,233 GSE debt securities 16,648 17,442 794 33,748 35,165 1,417 Federal agency and GSE MBS 1,795,003 1,787,484 (7,519) 1,800,449 1,810,256 9,807 Total domestic SOMA portfolio securities holdings $ 4,379,073 $ 4,445,632$ 66,559 $4,414,873 $4,521,330 $106,457 Memorandum–Commitments for: Purchases of Treasury securities $ 11,679 $ 11,719$ 40 $ - $ - $ - Purchases of federal agency and GSE MBS 35,787 35,974 187 22,187 22,170 (17) 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 repurchase agreements, reverse repurchase agreements, central bank liquidity swaps, and other investments held in the SOMA 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, 2016 and 2015, the fair value of foreign currency denominated investments held in the SOMA was $19,510 million and $19,630 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 was determined by reference to market interest rates.

388 103rd Annual Report | 2016 The following table provides additional information on the amortized cost and fair values of the federal agency and GSE MBS portfolio held in the SOMA at December 31, 2016 and 2015 (in millions): Distribution 2016 2015 of MBS holdings by coupon rate Amortized Fair value Amortized Fair value cost cost Total SOMA: 2.0% $ 10,556 $ 10,243 $ 11,198 $ 10,993 2.5% 121,326 118,641 116,527 115,018 3.0% 693,524 676,572 554,430 543,270 3.5% 561,271 560,510 579,403 581,940 4.0% 275,650 279,877 361,149 368,576 4.5% 86,351 92,111 115,914 124,043 5.0% 36,708 39,159 48,931 52,523 5.5% 8,298 8,939 11,138 11,989 6.0% 1,155 1,253 1,542 1,666 6.5% 164 179 217 238 Total $1,795,003 $1,787,484 $1,800,449 $1,810,256 The following table presents the realized gains (losses) and the change in the cumulative unrealized gains (losses) related to SOMA domestic securities holdings during the years ended December 31, 2016 and 2015 (in millions): 2016 2015 Change in Change in Realized gains cumulative Realized gains cumulative (losses), net1 2 unrealized gains (losses), net1, 2 unrealized gains (losses)3 (losses)3 T reasury securities $(15) $(21,949) $ - $(44,819) GSE debt securities - (623) - (1,092) Federal agency and GSE MBS 19 (17,326) 43 (21,654) Total $ 4 $(39,898) $43 $(67,565) 1 Realized losses for Treasury securities are reported in “Non-interest income (loss): System Open Market Account: Treasury Securities losses, net” in the Combined Statements of Operations. 2 Realized gains for federal agency and GSE MBS are reported in “Non-interest income (loss): System Open Market Account: Federal Agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Combined Statements of Operations. 3 Because SOMA securities are recorded at amortized cost, the change in the cumulative unrealized gains (losses) is not reported in the Combined Statements of Operations. The amount of change in cumulative unrealized gains (losses) position, net related to foreign currency denominated investments was a gain of $5 million and a loss of $33 million for the years ended December 31, 2016 and 2015, 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.

Federal Reserve System Audits 389 (6) Consolidated Variable Interest Entity a. Description of Consolidated VIE To facilitate the merger of The Bear Stearns Companies, Inc. (Bear Stearns) and JPMorgan Chase & Co. (JPMC), the FRBNY extended credit to ML in 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 Bank 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. b. Summary Information for Consolidated VIE The classification of significant assets and liabilities of ML at December 31, 2016 and 2015 is summarized in the following table (in millions): 2016 2015 Assets: Short-term investments $1,618 $1,496 Swap contracts 28 56 Other investments 17 13 Subtotal 1,663 1,565 Cash, cash equivalents, accrued interest receivable, and other receivables 79 213 Total investments held by consolidated VIE $1,742 $1,778 Liabilities: Swap contracts $ 32 $ 21 Cash collateral on swap contracts 1 36 Total liabilities of consolidated VIE $ 33 $ 57 The FRBNY’s approximate maximum exposure to loss at December 31, 2016 and 2015 was $1,663 million and $1,565 million, respectively. These estimates incorporate potential losses associated with the investments recorded on the FRBNY’s balance sheet. Additionally, information concerning the notional exposure on swap contracts is contained in the derivatives instruments section of this Note.

390 103rd Annual Report | 2016 The net income (loss) attributable to ML for the year ended December 31, 2016 and 2015 was as follows (in millions): 2016 2015 Interest income: Investments held by consolidated VIEs $ 9 $ 4 Non-interest income: Realized portfolio holdings gains, net 13 32 Unrealized portfolio holdings (losses) gains, net (32) 3 Non-interest income (loss): Consolidated VIEs (losses) gains, net (19) 35 Total net interest income and non-interest (loss) income (10) 39 Less: Professional fees 2 3 Net (loss) income attributable to consolidated VIEs $ (12) $ 36 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, 2016 and 2015, 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). 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 $12 million and $72 million as of December 31, 2016 and 2015, respectively. In addition, ML has pledged $46 million and $52 million of U.S. Treasury bills to JPMC as of December 31, 2016 and 2015, 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 and required to pay to the counterparties of 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, 2016 and 2015, there were

Federal Reserve System Audits 391 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 $143 million and $162 million as of December 31, 2016 and 2015, respectively, and the maximum potential recovery (notional) associated with credit protection bought was $124 million and $195 million as of December 31, 2016 and 2015, respectively. The change in notional amounts is representative of the volume of activity for the year ended December 31, 2016. There were 98 and 128 CDS contracts outstanding in the ML portfolio as of December 31, 2016 and 2015, respectively. Substantially all 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, 2016 and 2015. 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 reflect 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 VIE 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.

392 103rd Annual Report | 2016 The following tables present the financial instruments recorded in the VIE at fair value as of December 31, 2016 by ASC 820 hierarchy (in millions): Level 11 Level 21 Level 31 Netting2 fai T r o v t a a l l u e Assets: Short-term investments $1,618 $ - $ - $ - $1,618 Cash equivalents 3 79 - - - 79 Swap contracts - - 72 (44) 28 Other investments - 11 6 - 17 Total assets $1,697 $11 $78 $(44) $1,742 Liabilities: Swap contracts $ - $ - $64 $(32) $ 32 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, 2016 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. The following tables present the financial instruments recorded in the VIE at fair value as of December 31, 2015 by ASC 820 hierarchy (in millions): Level 11 Level 21 Level 31 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. As of December 31, 2016 and 2015, both the Level 3 assets and liabilities held in the Combined Statements of Condition as “Investments held by consolidated variable interest entity” and “Liabilities of consolidated variable interest entity,” respectively, and the associated unrealized gains and losses related to those assets and liabilities are immaterial.

Federal Reserve System Audits 393 (7) Bank Premises, Equipment, and Software Bank premises and equipment at December 31, 2016 and 2015 were as follows (in millions): 2016 2015 Bank premises and equipment: Land and land improvements $ 405 $ 404 Buildings 2,861 2,811 Building machinery and equipment 609 578 Construction in progress 37 39 Furniture and equipment 1,053 1,048 Subtotal 4,965 4,880 Accumulated depreciation (2,401) (2,277) Bank premises and equipment, net $2,564 $2,603 Depreciation expense, for the years ended December 31 $ 220 $ 217 Bank premises and equipment at December 31, 2016 and 2015 included the following amounts for capitalized leases (in millions): 2016 2015 Leased premises and equipment under capital leases $31 $25 Accumulated depreciation (24) (21) Leased premises and equipment under capital leases, net $ 7 $ 4 Depreciation expense related to leased premises and equipment under capital leases, for the years ended December 31 $ 3 $ 4 The Reserve Banks lease space to outside tenants with remaining lease terms ranging from 1 to 11 years. Rental income from such leases was $40 million and $39 million for the years ended December 31, 2016 and 2015, respectively, and is reported as a component of “Non-interest income: Other” in the Combined Statements of Operations. Future minimum lease payments that the Reserve Banks will receive under non-cancelable lease agreements in existence at December 31, 2016, are as follows (in millions): 2017 $ 34 2018 30 2019 27 2020 24 2021 19 Thereafter 54 Total $188 The Reserve Banks had capitalized software assets, net of amortization, of $440 million and $416 million at December 31, 2016 and 2015, respectively. Amortization expense was $110 million and $95 million for the years ended December 31, 2016 and 2015, 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 Operations. (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.

394 103rd Annual Report | 2016 At December 31, 2016, the Reserve Banks were obligated under non-cancelable leases for premises and equipment with remaining terms ranging from 1 to approximately 13 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 $14 million and $15 million for the years ended December 31, 2016 and 2015, respectively. Future minimum lease payments under non-cancelable operating leases , net of sublease rentals, with remaining terms of one year or more, at December 31, 2016, are as follows (in millions): Operating Leases 2017 $ 5 2018 5 2019 5 2020 3 2021 3 Thereafter 11 Future minimum lease payments $32 At December 31, 2016, the Reserve Banks, had unrecorded unconditional purchase commitments and long-term obligations extending through the year 2022 with a remaining fixed commitment of $126 million. Purchases of $26 million and $31 million were made against these commitments during 2016 and 2015, 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): 2017 $ - 2018 24 2019 25 2020 25 2021 26 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 1 The OEB was established by the System to administer selected System benefit plans.

Federal Reserve System Audits 395 Dodd-Frank Act, newly hired Bureau employees are eligible to participate in the System Plan and, during the years ended December 31, 2016 and 2015, 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 SERP, are reported as a component of “Operating expenses: Net periodic pension expense” in its Consolidated Statements of Operations. 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 for the years ended December 31, 2016 and 2015 (in millions): 2016 2015 Estimated actuarial present value of projected benefit obligation at January 1 $13,270 $13,641 Service cost-benefits earned during the period 475 487 Interest cost on projected benefit obligation 604 571 Actuarial loss (gain) 698 (1,044) Contributions by plan participants 3 5 Special termination benefits 4 6 Benefits paid (412) (396) Estimated actuarial present value of projected benefit obligation at December 31 $14,642 $13,270 In October 2014, the Society of Actuaries released new mortality tables (RP-2014) and in 2016, 2015, and 2014 new mortality projection scales (MP-2016, MP-2015, and MP-2014, respectively) for use in the valuation of benefits liabilities. The System analyzed each of these updates to the mortality tables and compared them to the System’s actual mortality experience. Based on these analyses, the System adopted the RP-2014 mortality tables and MP-2014 mortality projection scales, adjusted for the System’s recent mortality experience and the retirement rates of System retirees in 2015. The adjusted tables and scales resulted in an estimated net decrease of the System Plan projected benefit obligation of approximately $471 million in 2015. The System’s most recent mortality and retirement experience was also reviewed and no adjustments were made in 2016.

396 103rd Annual Report | 2016 Following is a reconciliation showing the beginning and ending balance of the System Plan assets, the funded status, and the accrued pension benefit costs for the years ended December 31, 2016 and 2015 (in millions): 2016 2015 Estimated plan assets at January 1 (of which $12,477 and $12,608 is measured at fair value as of January 1, 2016 and 2015, respectively) $12,500 $12,669 Actual return on plan assets 992 (258) Contributions by the employer 616 480 Contributions by plan participants 3 5 Benefits paid (412) (396) Estimated plan assets at December 31 (of which $13,671 and $12,477 is measured at fair value as of December 31, 2016 and 2015, respectively) $13,699 $12,500 Funded status and accrued pension benefit costs $ (943) $ (770) Amounts included in accumulated other comprehensive loss are shown below: Prior service cost $ (170) $ (263) Net actuarial loss (3,674) (3,333) Total accumulated other comprehensive loss $(3,844) $(3,596) The FRBNY on behalf of the System, funded $580 million and $480 million during the years ended December 31, 2016 and 2015, respectively. 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, 2016, the FRBNY received contributions from the Bureau of $36 million, which were related to service costs for the years ended December 31, 2016 and 2015. 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 $12,869 million and $11,727 million at December 31, 2016 and 2015, respectively. The weighted-average assumptions used in developing the accumulated pension benefit obligation for the System Plan as of December 31 were as follows: 2016 2015 Discount rate 4.15% 4.42% Rate of compensation increase 4.00% 4.00% Net periodic benefit expenses for the years ended December 31, 2016 and 2015 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: 2016 2015 Discount rate 4.42% 4.05% Expected asset return 6.75% 6.75% Rate of compensation increase 4.00% 4.00% 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

Federal Reserve System Audits 397 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, 2016 and 2015 are shown below (in millions): 2016 2015 Service cost - benefits earned during the period $475 $487 Interest cost on projected benefit obligation 604 571 Amortization of prior service cost 93 93 Amortization of net loss 211 223 Expected return on plan assets (847) (857) Net periodic pension benefit expense 536 517 Special termination benefits 4 6 Bureau of Consumer Financial Protection contributions (36) - Total periodic pension benefit expense $504 $523 Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic pension benefit expense in 2017 are shown below (in millions): Prior service cost $ 88 Net actuarial loss 217 Total $305 The recognition of special termination benefits 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): 2017 $ 468 2018 503 2019 536 2020 571 2021 607 2022–2026 3,589 Total $6,274 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, 2016, the System Plan’s assets were held in 20 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, 4 private equity limited partnerships, a private equity separate account, 3 core real estate funds, 4 real estate limited partnerships, and a money market fund.

398 103rd Annual Report | 2016 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 CRSP U.S. Total 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 small-cap stocks). The 4 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 (both primary and secondary interest) and co-investment opportunities globally in private companies and targets returns in excess of public markets over a complete market cycle. The 3 core real estate funds invest in high quality, well leased, low leverage commercial real estate throughout the U.S. The 4 real estate limited partnership invests in non-core U.S. and international 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.

Federal Reserve System Audits 399 The System Plan’s policy weight and actual asset allocations at December 31, 2016 and 2015 by asset category, are as follows: 2016 Actual asset allocations Policy weight 2016 2015 Fixed income 50.0% 48.9% 48.6% U.S. equities 24.0% 24.6% 25.4% International equities 16.0% 16.3% 17.8% Emerging markets equities 4.6% 4.7% 4.5% Private equity 2.7% 2.4% 1.3% Real estate 2.7% 2.6% 1.7% Cash 0.0% 0.5% 0.7% 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 2017 is $720 million. In 2017, the FRBNY plans to make monthly contributions of $60 million and will reevaluate the monthly contributions upon completion of the 2017 actuarial valuation. The Reserve Banks’ projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31, 2016 and 2015, and for the years then ended, were immaterial. 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. Collective trust funds are valued using the net asset value, calculated daily, based on the fair value of the underlying investments. Private equity and certain 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. 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.

400 103rd Annual Report | 2016 The following tables present the financial instruments recorded at fair value as of December 31, 2016 and 2015 by ASC 820 hierarchy (in millions) 2016 Description Level 1 Level 2 Level 3 T otal 1 Short-term investments $ 101 $ - $ - $ 101 Treasury and Federal agency securities 40 2,232 - 2,272 Corporate bonds - 2,469 - 2,469 Other fixed income securities - 353 - 353 Collective trusts 7,749 - - 7,749 Investments measured at net asset value2 - - - 724 Total investments at fair value3 $7,890 $5,054 $ - $13,668 1 There were no transfers between Level 1 and Level 2 and no material transfers between Level 2 and 3 during the year ended December 31, 2016. 2 Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. 3 In addition to the total investments at fair value, the System Plan holds future margin receivable of $1 million and future margin payables of $2 million at December 31, 2016. 2015 Description Level 1 Level 2 Level 3 T otal 1 Short-term investments2 $ 152 $ - $- $ 152 Treasury and Federal agency securities 64 2,182 - 2,246 Corporate bonds - 2,130 - 2,130 Other fixed income securities - 373 - 373 Collective trusts 7,205 - - 7,205 Investments measured at net asset value2,3 - - - 371 Total investments at fair value4 $7,421 $4,685 $- $12,477 1 There were no transfers between Level 1 and Level 2 and no material transfers between Level 2 and 3 during the year ended December 31, 2015. 2 Certain short-term investments, collective trusts, private equity, and real estate investments have been reclassified to conform with current year presentation, in accordance with the adoption of ASU 2015-07 and ASU 2015-10. 3 Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. Commingled funds have been renamed to collective trusts for current year presentation. 4 In addition to the total investments at fair value, the System Plan holds future margin receivable of $1 million at December 31, 2015. 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, 2016 and 2015, a portion of short-term investments was available for futures trading. There were $7 million and $3 million of Treasury securities pledged as collateral for the years ended December 31, 2016 and 2015, respectively.

Federal Reserve System Audits 401 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 provides an automatic employer contribution of 1 percent of eligible pay. The Reserve Banks’ Thrift Plan contributions totaled $129 million and $121 million for the years ended December 31, 2016 and 2015, respectively, and are reported as a component of “Operating expenses: Salaries and benefits” in the Combined Statements of Operations. (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 Banks 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 for the years ended December 31, 2016 and 2015 (in millions): 2016 2015 Accumulated postretirement benefit obligation at January 1 $1,744 $1,769 Service cost benefits earned during the period 72 76 Interest cost on accumulated benefit obligation 75 72 Net actuarial loss (gain) 86 (105) Curtailment (gain) (8) - Special termination benefits 1 - Contributions by plan participants 27 23 Benefits paid (104) (93) Medicare Part D subsidies 5 5 Plan amendments (147) (3) Accumulated postretirement benefit obligation at December 31 $1,751 $1,744 At December 31, 2016 and 2015, the weighted-average discount rate assumptions used in developing the postretirement benefit obligation were 4.07 percent and 4.31 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.

402 103rd Annual Report | 2016 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 for the years ended December 31, 2016 and 2015 (in millions): 2016 2015 Fair value of plan assets at January 1 $ - $ - Contributions by the employer 72 65 Contributions by plan participants 27 23 Benefits paid (104) (93) Medicare Part D subsidies 5 5 Fair value of plan assets at December 31 $ - $ - Unfunded obligation and accrued postretirement benefit cost $1,751 $1,744 Amounts included in accumulated other comprehensive loss are shown below: Prior service cost $ 158 $ 20 Net actuarial (loss) (300) (227) Deferred curtailment gain 1 1 Total accumulated other comprehensive loss $ (141) $ (206) 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, 2016 and 2015 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: 2016 2015 Health-care cost trend rate assumed for next year 6.60% 7.00% 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 2022 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, 2016 (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 $ 27 $ (22) Effect on accumulated postretirement benefit obligation 234 (199) The following is a summary of the components of net periodic postretirement benefit expense for the years ended December 31, 2016 and 2015 (in millions): 2016 2015 Service cost-benefits earned during the period $ 72 $ 76 Interest cost on accumulated benefit obligation 75 72 Amortization of prior service cost (9) (10) Amortization of net actuarial loss 5 24 Total periodic expense 143 162 Special termination benefits loss 1 - Net periodic postretirement benefit expense $144 $162

Federal Reserve System Audits 403 Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit expense in 2017 are shown below: Prior service credit $(33) Net actuarial loss 17 Total $(16) Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2016 and 2015, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 4.31 percent and 3.96 percent, respectively. Net periodic postretirement benefit expense is reported as a component of “Operating expenses: Salaries and benefits” in the Combined Statements of Operations. A curtailment gain was recorded in 2016 related to the employees who transferred employment from the Federal Reserve Bank of Minneapolis to the Federal Reserve Bank of Atlanta. This curtailment gain is recorded to accumulated other comprehensive loss and offsets previously recorded actuarial losses. 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 Bank’s 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. During 2016, the Reserve Banks adopted an amendment to their health benefits program that added a Medicare Advantage and Prescription Drug (MAPD) plan to the program effective January 1, 2017. The MAPD plan is a fully insured product that combines into one integrated benefit Medicare and Medicare Supplement coverages, as well as prescription drug coverage. The plan amendment resulted in a decrease in the Bank’s accumulated postretirement benefit obligation in the amount of $155 million as of December 31, 2016, with an equivalent change in the prior service component of accumulated other comprehensive income. Federal Medicare Part D subsidy receipts were $5 million and $4 million in the years ended December 31, 2016 and 2015, respectively. Expected receipts in 2017, related to benefits paid in the years ended December 31, 2016 and 2015, are $2 million and $3 million, respectively.

404 103rd Annual Report | 2016 Following is a summary of expected postretirement benefit payments (in millions): Without subsidy With subsidy 2017 $ 74 $ 72 2018 81 80 2019 86 84 2020 90 88 2021 94 92 2022 - 2026 540 529 Total $965 $945 Postemployment Benefits The Reserve Banks offer 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, 2016 and 2015 were $136 million and $148 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 2016 and 2015 operating expenses were $9 million and $12 million, respectively, and are recorded as a component of “Operating expenses: Salaries and benefits” in the Combined Statements of Operations.

Federal Reserve System Audits 405 (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, 2016 and 2015 (in millions): 2016 2015 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 $(3,596) $(206) $(3,802) $(3,840) $(328) $(4,168) Change in funded status of benefit plans: Prior service costs arising during the year - 147 147 - 3 3 Amortization of prior service cost 931 (9)2 84 931 (10)2 83 Change in prior service costs related to benefit plans 93 138 231 93 (7) 86 Net actuarial gain (loss) arising during the year (552) (86) (638) (72) 105 33 Curtailment effect actuarial gain - 8 8 - - - Amortization of net actuarial (loss) gain 2111 52 216 2231 242 247 Change in actuarial (losses) gains related to benefit plans (341) (73) (414) 151 129 280 Change in funded status of benefit plans— other comprehensive (loss) income (248) 65 (183) 244 122 366 Balance at December 31 $(3,844) $(141) $(3,985) $(3,596) $(206) $(3,802) 1 Reclassification is reported as a component of “Operating expenses: Net periodic pension expense” in the Combined Statements of Operations. 2 Reclassification is reported as a component of “Operating expenses: Salaries and benefits” in the Combined Statements of Operations. Additional detail regarding the classification of accumulated other comprehensive loss is included in Notes 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 10 to 4. The new infrastructure will involve consolidation of substantially all operations to the FRBC, the FRBKC, the FRBNY, and the FRBSL.

406 103rd Annual Report | 2016 Following is a summary of financial information related to the restructuring plans (in millions): 2014 and prior restructuring Total plans Information related to restructuring plans as of December 31, 2016: Total expected costs related to restructuring activity $ 19 $19 Estimated future costs related to restructuring activity 1 1 Expected completion date 2020 Reconciliation of liability balances: Balance at December 31, 2014 $ 16 $16 Employee separation costs 3 3 Other costs 2 2 Adjustments (3) (3) Payments (2) (2) Balance at December 31, 2015 $ 16 $16 Employee separation costs 1 1 Other costs 1 1 Adjustments (3) (3) Payments (3) (3) Balance at December 31, 2016 $ 12 $12 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 Operations. Other costs include retention pay and are shown as a component of “Operating Expenses: Salaries and benefits” in the Combined Statements of Operations. Adjustments to the accrued liability are primarily due to changes of the appropriate expense category in the Combined Statements of Operations. Costs associated with enhanced pension benefits for all Reserve Banks are recorded on the books of the as discussed in Note 9. Costs associated with enhanced postretirement benefits are disclosed in Note 10.

Federal Reserve System Audits 407 (13) Distribution of Comprehensive Income The following table presents the distribution of the Bank’s comprehensive income for the years ended December 31, 2016 and 2015 (in millions): 2016 2015 Dividends on capital stock $ 711 $ 1,743 Transfer to (from) surplus - (18,572) Earnings remittances to the Treasury: Interest on Federal Reserve notes - 91,143 Required by the Federal Reserve Act 91,467 25,956 Total distribution $92,178 $100,270 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 each Reserve Bank’s 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” in the Reserve Banks’ Combined Statements of Operations, and in the table above. (14) Subsequent Events There were no subsequent events that require adjustments to or disclosures in the combined financial statements as of December 31, 2016. Subsequent events were evaluated through March 8, 2017, which is the date that the combined financial statements were available to be issued.

408 103rd Annual Report | 2016 Office of Inspector General Activities CFPB and conducted a number of follow-up reviews to evaluate action taken on prior recommendations. Due to the sensitive nature of some of the material, The Office of Inspector General (OIG) for the Fedone of the reports was only issued internally to the eral Reserve Board, which is also the OIG for the Board, as indicated. Regarding the OIG’s investiga- Consumer Financial Protection Bureau (CFPB), tive work related to the Board and the CFPB, 32 operates in accordance with the Inspector General investigations were opened and 26 investigations were Act of 1978, as amended. The OIG conducts activiclosed during the year. OIG investigative work ties and makes recommendations to promote resulted in 4 arrests, 7 indictments, and 12 conviceconomy and efficiency; enhance policies and procetions, as well as $2,228,116 in criminal fines and restidures; and prevent and detect waste, fraud, and abuse tution. The OIG also issued its listings of major manin Board programs and operations, including funcagement challenges facing the Board and the CFPB. tions that the Board has delegated to the Federal Further, the OIG issued two Semiannual Reports to Reserve Banks. Accordingly, the OIG plans and con- Congress and performed approximately 50 reviews of ducts audits, inspections, evaluations, investigations, legislation and regulations related to the operations and other reviews relating to Board and Boardof the Board, the CFPB, or the OIG. delegated programs and operations. It also retains an 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 https://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. During 2016, the OIG issued 18 audit, inspection, and evaluation reports (table 1) to the Board and the Table 1. OIG audit, inspection, and evaluation reports issued in 2016 Report title Month issued The CFPB’s Civil Penalty Fund Victim Identification Process Is Generally Effective but Can Be Enhanced January Collecting Additional Information Can Help the CFPB Manage Its Future Space-Planning Activities February Federal Financial Institutions Examination Council Financial Statements as of and for the Years Ended December 31, 2015 and 2014, and Independent Auditors’ Reports March Board of Governors of the Federal Reserve System Financial Statements as of and for the Years Ended December 31, 2015 and 2014, and Independent Auditors’ Reports March Review of the Failure of NBRS Financial March The Board Should Strengthen Controls to Safeguard Embargoed Sensitive Economic Information Provided to News Organizations April The CFPB’s Civil Penalty Fund Is in Compliance With the Improper Payments Information Act of 2002, as Amended May Security Control Review of the Board’s Active Directory Implementation (internal report) May The CFPB Should Continue to Enhance Controls for Its Government Travel Card Program June The Board’s Protective Services Unit Is Operating Effectively and Efficiently July The CFPB’s Coordination for Targeted Consumer Financial Education Aligns With Best Practices and Can Benefit From Federal Partner Insights July OIG Report on the CFPB’s Information Security Management Practices Pursuant to Section 406 of the Cybersecurity Act of 2015 August OIG Report on the Board’s Information Security Management Practices Pursuant to Section 406 of the Cybersecurity Act of 2015 August 2016 Audit of the Board’s Information Security Program November 2016 Audit of the CFPB’s Information Security Program November Opportunities Exist to Increase Employees’ Willingness to Share Their Views About Large Financial Institution Supervision Activities November Evaluation of the CFPB’s Implementation of the Digital Accountability and Transparency Act of 2014 November The CFPB’s Advisory Committees Help Inform Agency Activities, but Advisory Committees’ Administration Should Be Enhanced November

Federal Reserve System Audits 409 Government Accountability Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) directs the GAO to conduct Office Reviews additional audits with respect to these operations. In 2016, the GAO completed 17 projects that involved the Federal Reserve (table 1). Sixteen projects were The Federal Banking Agency Audit Act (Pub. L. ongoing as of December 31, 2016 (table 2). No. 95–320) authorizes the Government Accountability Office (GAO) to audit certain aspects of Federal Reserve System operations. The Dodd-Frank Table 1. Reports completed during 2016 Report title Report number M onth issued (2016) Dodd-Frank Regulations: Agencies’ Efforts to Analyze and Coordinate Their Recent Final Rules GAO-17-188 December Permanent Funding Authorities: Some Selected Entities Should Review Financial Management, Oversight, and Transparency Policies GAO-17-59 December Federal Reserve: Additional Actions Could Help Ensure the Achievement of Stress Test Goals GAO-17-48 November Financial Institutions: Penalty and Settlement Payments for Mortgage-Related Violations in Selected Cases GAO-17-11R November Financial Audit: Bureau of the Fiscal Service’s Fiscal Years 2016 and 2015 Schedules of Federal Debt GAO-17-104 November Federal Reserve: Observations on Regulation D and the Use of Reserve Requirements GAO-17-117 October Payment Services: Federal Reserve’s Competition with Other Providers Benefits Customers, but Additional Reviews Could Increase Assurance of Cost Accuracy GAO-16-614 September Mortgage Servicing: Community Lenders Remain Active under New Rules, but CFPB Needs More Complete Plans for Reviewing Rules GAO-16-448 July Flood Insurance: Potential Barriers Cited to Increased Use of Private Insurance GAO-16-611 July Federal Real Property: Actions Needed to Enhance Information on and Coordination among Federal Entities with Leasing Authority GAO-16-648 July Management Report: Areas for Improvement in the Federal Reserve Banks’ Information Systems Controls GAO-16-601R June Financial Institutions: Fines, Penalties, and Forfeitures for Violations of Financial Crimes and Sanctions Requirements GAO-16-297 April Resolution Plans: Regulators Have Refined Their Review Processes but Could Improve Transparency and Timeliness GAO-16-341 April Financial Regulation: Complex and Fragmented Structure Could Be Streamlined to Improve Effectiveness GAO-16-175 March International Remittances: Actions Needed to Address Unreliable Official U.S. Estimate GAO-16-60 February International Remittances: Money Laundering Risks and Views on Enhanced Customer Verification and Recordkeeping Requirements GAO-16-65 February Banking: Federal Agencies’ Compliance with Section 302 of the Riegle Community Development and Regulatory Improvement Act GAO-16-213R January Table 2. Projects active at year-end 2016 Subject of project Month initiated Status Office of Financial Research March 2015 Open Community Reinvestment Act September 2015 Open Self-directed retirement savings arrangements November 2015 Closed 1/9/2017 Federal Reserve Bank stock purchases February 2016 Closed 2/24/2017 Regulatory capture in financial supervision February 2016 Open Swaps restrictions April 2016 Open Impact of regulations on community banks and credit unions April 2016 Open Branch closings along the Southwest border May 2016 Open Narcotics-related money laundering June 2016 Open Use of minority and women-owned asset management firms in federal retirement plans and endowments July 2016 Open Impact of de-risking on U.S. remittances to fragile countries September 2016 Open Financial technology and marketplace lending September 2016 Open Federal Housing Administration’s mutual mortgage insurance fund September 2016 Open Alternative payment technologies October 2016 Open Impact of de-risking on money transmitters October 2016 Open Effect of regulations on community banks and credit unions December 2016 Open

411 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’ 2016 budtion on the 2016 budget performance of the Board geted and actual and 2017 budgeted operating and Reserve Banks, and on their 2017 budgets, budexpenses and employment.2 geting processes, and trends in expenses and employment. This section also presents information on the 2 Substantially all employees of the Board and Reserve Banks costs of new currency. 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 1 Before 2013, information about the budgeted expenses of the Supplemental Retirement Plan for Select Officers of the Reserve Board and Reserve Banks was presented in a separate report Banks. The operating expenses of the Reserve Banks presented titled Annual Report: Budget Review. Copies of that report are in this section do not include expenses related to the retirement available at www.federalreserve.gov/publications/budget-review/ plans; however, the 2016 claims for reimbursement include the default.htm. allocated portion of the pension. Additional information about these expenses can be found in section 11, “Statistical Tables” Each budget covers one calendar year. Table 1. Total operating expenses of the Federal Reserve System, net of receipts and claims for reimbursement, 2016–17 Millions of dollars, except as noted V ariance V ariance 2016 actual to 2016 budget 2017 budget to 2016 actual Item 2016 budget 2016 actual 2017 budget Amount Percent A mount P ercent Board 709.5 688.6 -20.9 -2.9 744.6 55.9 8.1 Office of Inspector General 31.8 31.2 -0.6 -1.9 34.3 3.1 9.9 Reserve Banks1 4,116.6 4,032.1 -84.5 -2.1 4,312.4 280.4 7.0 Currency 737.4 700.7 -36.7 -5.0 726.0 25.3 3.6 Total System operating expenses2 5,595.3 5,452.6 -142.7 -2.6 5,817.3 364.7 6.7 Revenue from priced services 426.9 434.2 7.3 1.7 439.4 5.1 1.2 Claims for reimbursement3 652.6 676.9 24.3 3.7 677.3 0.5 0.1 Other income4 2.5 2.8 0.3 12.7 2.5 -0.3 - 10.1 Revenue and claims for reimbursement5 1,082.0 1,113.9 32.0 3.0 1,119.2 5.3 0.5 Total System operating expenses, net of revenue and claims for reimbursement 4,513.3 4,338.6 -174.7 -3.9 4,698.1 359.4 8.3 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, Office of Inspector General, and the Consumer Financial Protection Bureau (CFPB). 2 Includes total operating expenses of the Federal Reserve Information Technology (FRIT) support function and the System’s Office of Employee Benefits (OEB), the majority of which are in the Reserve Banks. 3 Reimbursable claims include the expenses of fiscal agency. In 2016 actual, the fiscal agency allocated portion of the pension is also included but is not included for the budget. 4 Fees that depository institutions pay for the settlement component of the Fedwire Securities Service transactions for Treasury securities transfers. 5 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.)

412 103rd Annual Report | 2016 Table 2. Employment in the Federal Reserve System, 2016–17 V ariance V ariance 2016 actual to 2016 budget 2017 budget to 2016 actual Item 2016 budget 2016 actual 2017 budget Amount Percent A mount P ercent Board1 2,789 2,789 0 0.0 2,847 58 2.1 Office of Inspector General1 130 130 0 0.0 132 2 1.5 Reserve Banks2 19,424 19,330 -94 -0.5 19,822 492 2.5 Total System employment 22,343 22,249 -94 -0.4 22,801 552 2.5 Note: Employment numbers presented include authorized position counts for the Board 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 FRIT support function and the OEB. 2016 Budget Performance declined from 2007 through 2010 because of continued efforts to reduce the size of the System’s check In carrying out its responsibilities in 2016, the Fed- service and because of efficiency improvements in eral Reserve System incurred $4,338.6 million in net cash and support functions. Staffing has subseexpenses. Total System operating expenses of quently increased in information technology (IT) to $5,452.6 million were offset by $1,113.9 million in support large application-development projects, revenue from priced services, claims for reimburse- information security efforts, end user services, and ment, and other income. Total 2016 System operating the central computing environment. Supervision expenses were $142.7 million, or 2.6 percent, less resource levels were augmented to meet requirements than the amount budgeted for 2016. of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and to sup- 2017 Operating Expense Budget port portfolio growth (figure 4). Budgeted 2017 System operating expenses, net of Growth in supervision expenses over the past revenue and reimbursements, are $359.4 million, or 10 years has been driven by additional supervisory 8.3 percent, higher than 2016 actual expenses. The resources needed to respond to the financial crisis, to Reserve Bank budgets comprise almost three- continue to implement expanded responsibilities quarters of the System budget (figure 1). Budgeted mandated by the Dodd-Frank Act, to build out the 2017 revenue from priced services and claims for cybersecurity supervision program, and to support reimbursements are expected to remain relatively stable in 2017. Figure 1. Distribution of budgeted expenses of the Trends in Expenses and Employment Federal Reserve System, 2017 From the actual 2007 level to the budgeted 2017 Board of Governors and OIG Reserve Banks 13.4% amount, the total operating expenses of the Federal 74.1% Reserve System have increased an average of 4.1 percent per year (figure 2). Over the same period, nondefense discretionary spending by the federal govern- Currency ment has increased an average of 2.4 percent per year 12.5% (figure 3). Federal Reserve System employment (see “Table 10. Income and expenses of the Federal Reserve Banks, by Bank”). 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 OIG Office of Inspector General. include expenses related to the System Plan.

Federal Reserve System Budgets 413 Figure 2. Total expenses of the Federal Reserve System, Figure 4. Employment in the Federal Reserve System, 2007–17 2007–17 Billions of dollars Thousands of persons 6 23 Current dollars 5 22 2009 dollars1 4 21 3 2 20 1 19 2007 2009 2011 2013 2015 2017 18 Note: For 2017, budgeted. 1Calculated with the GDP price deflator. 17 2007 2009 2011 2013 2015 2017 other strategic national initiatives. Expense growth in Note: For 2017, budgeted. Employment numbers presented include position counts for the Board and average number of personnel (ANP) for the Reserve the monetary policy area during the financial crisis Banks. has been followed by a focus on enhancing financial stability monitoring and dedicating additional resources to regional economic research. ments in cash operations. Treasury services expenses have increased to meet evolving needs, including the automation of the Treasury’s collection and payment Federal Reserve Bank expenses in the cash area have services, the addition of Treasury applications to the increased as a result of a multiyear effort to modern- Treasury Web Application Infrastructure (TWAI), ize the cash-processing and inventory-tracking infraand other requested projects.3 structure. These increases have been partially offset by lower expenses because of efficiency improve- 2017 Capital Budgets Figure 3. Cumulative change in Federal Reserve System The capital budgets for the Board and Reserve Banks expenses and federal government expenses, 2007–17 total $72.5 million and $416.6 million, respectively.4 As in previous years, the capital budgets in 2017 Percent include funding for projects that support the strategic 60 direction outlined by the Board and each Reserve 50 Bank. These strategic goals emphasize investments that continue to improve operational efficiencies, 40 Federal Reserve System2 enhance services to Bank customers, and ensure a 30 safe and productive work environment. 20 3 TWAI is a dedicated, distributed computing environment that Federal government1 10 houses multiple Treasury applications. In April 2014, the Treasury announced the consolidation of the 0 fiscal agent services provided by the Federal Reserve Banks as part of its effort to increase operational efficiency and effective- -10 ness. The Treasury anticipates long-term savings, once services 2007 2009 2011 2013 2015 2017 are transitioned from 10 sites to four consolidated sites. As of year-end 2016, 11 of the 15 business line transitions had been Note: For 2017, budgeted. Federal government expenses are reported on a fiscalcompleted. year basis beginning October 1; the Federal Reserve System expenses are reported on a calendar-year basis. 4 The capital budget reported for the Board includes single-year 1 Discretionary spending less expenditures on defense. Source: Budget of the outlays and 2017 outlays from multiyear projects of the Board United States Government, Fiscal Year 2017: Historical Tables, Table 8.1. Outlays and the Office of Inspector General. The capital budget by Budget Enforcement Act Category, 1962–2021. reported for the Reserve Banks includes the amounts budgeted 2 Includes expenses of the Office of Inspector General. for the Federal Reserve Information Technology (FRIT) support function and the Office of Employee Benefits (OEB).

414 103rd Annual Report | 2016 Board of Governors Budget • Expenses are monitored throughout the year. Quarterly financial forecasts provide insights into budgetary pressures. Variances are analyzed and Board of Governors reported to senior management. The Board’s budget is grounded in the principles established by the Strategic Plan 2016–19 (www Tables 3 and 4 summarize the Board’s 2016 budgeted .federalreserve.gov/publications/gpra/files/2016-2019- and actual expenses and its 2017 budgeted expenses gpra-strategic-plan.pdf) and provides funding to by division, office, or special account and by account advance the plan’s goals, objectives, and initiatives.5 classification, respectively. Table 5 summarizes the The budget is structured by division, office, or special Board’s budgeted and actual authorized position account. count for 2016 and 2017. Table 6 summarizes the Board’s budgeted and actual capital outlays for 2016 and 2017. Each table includes a line item for the The Board’s budget process is as follows: Office of Inspector General (OIG), which is dis- • At the start of the budget process, the chief operat- cussed later in this section. ing officer and chief financial officer meet with the Committee on Board Affairs (CBA) to recommend 2016 Budget Performance a specific growth target for the Board’s operating Total expenses for Board operations were $688.6 milbudget. The recommended growth target includes lion, which was $20.9 million, or 2.9 percent, less known changes in the run-rate of the Board’s than the approved 2016 budget of $709.5 million. ongoing operations, constraining growth for addi- The Board’s 2016 single-year capital spending was tional positions, and targeted increases in select less than budgeted by $2.3 million, or 25.5 percent, goods and services accounts. Board members and and multiyear capital projects remained within their the Executive Committee, comprising directors of project budgets, with actual spending in 2016 less each division, were briefed on the targets. than budgeted by $39.2 million, or 64.8 percent, driven by less-than-planned spending for building • To achieve the CBA’s growth target, divisions improvement projects. review their resource requirements, reallocate funding to support mission-critical activities and strate- Personnel services expenses were $4.6 million less gic priorities, and submit initial budget requests, than the budget primarily due to higher-thanincluding proposed initiatives and potential savings. planned labor capitalization for software projects and • Division of Financial Management staff review ini- reimbursements from other agencies; amount and tial budget requests submitted by divisions and col- timing of compensation actions; lower-than-expected laborate with all divisions to achieve the growth health insurance premiums; and lower costs for target. In addition, division directors collaborate centrally-managed benefits, which fluctuate because and adjust their requested positions to align with of changes in actuarial and demographic assumpthe CBA’s guidance. tions. Goods and services expenses were $16.3 million less than the budget primarily due to lower use • The chief operating officer and chief financial offiof contractual services; lower-than-expected expenses cer subsequently meet with the Executive Commitfor data purchases, software renewals, and travel; and tee and the CBA to further review and refine the lower depreciation expenses due to delays in several budget submissions. Once the budget has been capital projects. finalized, the administrative governor submits the budget to the full Board for review and final 2017 Operating Expense Budget approval. The 2017 budget for Board operations is $744.6 million, which is $55.9 million, or 8.1 percent, higher than 2016 actual expenses and 4.9 percent higher 5 The Strategic Plan 2016–19, which was approved by the Board than the 2016 budget. The operating budget includes in July 2015, continues the work of the Strategic Framework amounts to fund the Board’s ongoing operations and 2012–15. In addition to investing in ongoing operations, the to support the six overarching pillars identified in the Board is prioritizing investments and dedicating resources to six pillars over 2016–19 so that the Board can advance its mission Board’s Strategic Plan 2016–19. and respond to continuing and evolving challenges. The six pillars are project development and resource allocation, workforce, For 2017, authorized positions for Board operations physical infrastructure, technology, data, and public engagement and accountability. total 2,847, an increase of 58 positions, or 2.1 per-

Federal Reserve System Budgets 415 Table 3. Operating expenses of the Board of Governors, by division, office, or special account, 2016–17 Millions of dollars, except as noted Variance V ariance 2016 actual to 2016 budget 2017 budget to 2016 actual Division, office, or special account 2016 budget1 2016 actual 2017 budget Amount Percent A mount P ercent Research and Statistics 72.4 73.3 0.9 1.2 80.1 6.8 9.3 International Finance 31.3 30.6 -0.8 -2.4 33.4 2.8 9.2 Monetary Affairs 37.9 37.2 -0.7 -1.9 41.1 3.9 10.4 Financial Stability 9.5 10.2 0.8 7.9 12.7 2.5 24.1 Supervision and Regulation 139.6 135.2 -4.4 -3.2 143.4 8.2 6.1 Consumer and Community Affairs 31.8 31.1 -0.7 -2.1 35.3 4.1 13.2 Reserve Bank Operations and Payment Systems 41.2 42.2 1.0 2.5 44.7 2.5 5.9 Board Members 27.9 26.0 -2.0 -7.0 28.4 2.4 9.3 Secretary 10.6 10.7 0.1 0.9 11.3 0.7 6.3 Legal 28.7 27.6 -1.1 -3.9 32.1 4.5 16.2 Chief Operating Officer 15.9 14.0 -1.9 -12.1 17.7 3.7 26.1 Financial Management 12.2 11.9 -0.3 -2.1 12.8 0.9 7.8 Information Technology 102.5 101.5 -1.0 -0.9 116.0 14.4 14.2 IT income -45.0 -45.5 -0.5 1.2 -48.3 -2.8 6.1 Management 121.6 119.0 -2.5 -2.1 137.0 18.0 15.1 Centrally managed benefits 14.1 12.6 -1.4 -10.3 13.9 1.3 10.0 Special projects 17.0 13.5 -3.6 -21.0 16.4 2.9 21.5 Savings and reallocations 0.0 0.0 0.0 562.0 0.0 0.0 - 100.0 Extraordinary items2 40.3 37.5 -2.7 -6.8 16.7 -20.8 -55.5 Total, Board operations 709.5 688.6 -20.9 -2.9 744.6 55.9 8.1 Office of Inspector General 31.8 31.2 -0.6 -1.9 34.3 3.1 9.9 1 The 2016 budget figures do not reflect internal transfers among divisions and accounts during the year. 2 Ongoing operational costs related to the data center relocation project have been reallocated to Research and Statistics, Information Technology, and Management as part of the 2017 budget. cent, from 2016 actual levels. The increase is in line Division of Financial Management will work closely with the overall position growth target set by the with all divisions throughout the year to mitigate CBA and provides additional resources to advance potential budget overruns by closely monitoring initiatives that support the Strategic Plan’s pillars spending. Building improvements projects will conrelated to project development and resource allo- tinue to be an area of focus, from both a budget and cation, data, and technology. The positions are project management perspective, given their size, aligned with the Strategic Plan, and over 80 percent complexity, and strategic importance. of the new positions support the monetary policy, public programs, and supervision and regulation 2017 Capital Budgets functions. The Board’s 2017 single-year capital budget totals $14.0 million, which represents an increase of Risks in the 2017 Budget $5.0 million from the 2016 budget. The increase is The 2017 operating budget follows the steps taken in driven primarily by the reclassification of data center recent years to better align budget requests with his- funding from the multiyear capital budget to the toric hiring trends and spending patterns, while single-year capital budget. The change reflects ensuring the funding of the Board’s highest priori- completion of the data center’s relocation and the ties. Meeting the approved growth targets required all move to steady-state operation of the new facility. divisions to make tradeoffs and prioritize resources to fund mission-critical activities for 2017. The Board’s multiyear capital budget totals $412.2 million, which includes 2017 expected outlays During the budget process, many divisions noted the of $58.3 million. The budget includes increases to the potential impact that reducing their budget requests Martin Building renovation project due to updated would have on meeting demands. Staff from the construction cost estimates, additional improvements

416 103rd Annual Report | 2016 Table 4. Operating expenses of the Board of Governors, by account classification, 2016–17 Millions of dollars, except as noted Variance V ariance 2016 actual to 2016 budget 2017 budget to 2016 actual Account classification 2016 budget1 2016 actual 2017 budget Amount Percent A mount P ercent P ersonnel services Salaries 401.0 397.8 -3.2 -0.8 4 33.9 36.2 9.1 Retirement/Thrift plans2 52.3 53.2 1.0 1.9 56.5 3.2 6.1 Employee insurance and other benefits 39.4 37.1 -2.3 -5.9 42.3 5.2 14.0 Subtotal, personnel services 492.7 488.1 -4.6 -0.9 532.7 44.6 9.1 Goods and services Postage and shipping 0.4 0.3 -0.1 -35.8 0.4 0.1 54.4 Travel 16.4 14.6 -1.8 -11.0 17.5 2.9 19.7 Telecommunications 7.2 6.1 -1.0 -14.5 8.3 2.2 35.4 Printing and binding 2.2 1.8 -0.4 -18.9 2.2 0.4 19.3 Publications 0.6 0.5 0.0 -2.8 0.6 0.1 11.2 Stationery and supplies 1.4 1.3 -0.2 -12.5 1.7 0.4 31.5 Software 16.6 14.6 -2.0 -12.3 17.1 2.5 17.4 Furniture and equipment (F&E) 6.6 5.5 -1.0 -15.8 11.1 5.6 100.7 Rentals 27.0 26.9 -0.2 -0.7 30.6 3.7 13.8 News, data, and research3 32.9 30.5 -2.3 -7.1 14.7 -15.8 -51.7 Utilities 3.3 2.9 -0.4 -12.8 2.8 -0.1 -2.5 Repairs and alterations—building 2.2 3.2 0.9 42.0 2.7 -0.5 -16.0 Repairs and maintenance—F&E 5.6 4.5 -1.1 -19.5 5.4 0.9 19.2 Contractual professional services 53.6 48.6 -5.0 -9.3 53.9 5.3 10.9 Interest * * * -48.2 * * 13.0 Tuition/registration/memberships 3.1 2.7 -0.5 -15.7 4.8 2.2 82.6 Subsidies and contributions 0.9 0.9 * -2.9 0.9 * 5.6 All other 3.3 3.5 0.1 4.3 3.6 0.2 5.4 Depreciation 40.3 38.2 -2.1 -5.2 40.3 2.1 5.5 IT user charge 44.7 45.1 0.5 1.1 47.5 2.3 5.2 IT income -45.0 -45.5 -0.5 1.2 -48.3 -2.8 6.1 Income -6.5 -5.5 1.0 -15.4 -5.9 -0.3 6.3 Subtotal, goods and services 216.9 200.5 -16.3 -7.5 211.9 11.3 5.7 Total, Board operations 709.5 688.6 -20.9 -2.9 744.6 55.9 8.1 Office of Inspector General Personnel services 23.9 23.4 -0.5 -2.2 25.8 2.4 10.3 Goods and services 7.9 7.8 -0.1 -1.0 8.5 0.7 8.8 Total, Office of Inspector General operations 31.8 31.2 -0.6 -1.9 34.3 3.1 9.9 1 Budget figures for 2016 do not reflect internal transfers among divisions and accounts during the year. 2 Includes expenses related to Board participants in the Benefit Equalization Plan and Pension Enhancement Plan. 3 The Survey of Consumer Finances occurred in 2016; therefore, the news, data, and research budget for 2017 has been significantly reduced. * Less than $50,000. at the New York Avenue Building, modernization of .federalreserve.gov/strategic-plan.htm) to enhance its the financial data repository application, and addi- oversight of the Board and the Consumer Financial tional automation funding for a supervision and Protection Bureau (CFPB). The OIG’s Strategic Plan regulation data architecture used throughout the 2017–20 includes goals and objectives to deliver Federal Reserve System. results that promote agency excellence; promote a diverse, skilled, and engaged workforce and foster an Office of Inspector General inclusive, collaborative environment; optimize external stakeholder engagement; and advance organiza- The budget for the OIG is grounded in its Strategic Plan 2013–16 and Strategic Plan 2017–20 (https://oig

Federal Reserve System Budgets 417 Table 5. Positions authorized by the Board of Governors, by division, office, or special account, 2016–17 Variance V ariance 2016 actual to 2016 budget 2017 budget to 2016 actual Division, office, or special account 2016 budget 2016 actual 2017 budget Amount Percent A mount P ercent Research and Statistics 346 346 0 0.0 356 10 2.9 International Finance 152 152 0 0.0 154 2 1.3 Monetary Affairs 167 168 1 0.6 172 4 2.4 Financial Stability 50 50 0 0.0 55 5 10.0 Supervision and Regulation 486 480 -6 -1.2 493 13 2.7 Consumer and Community Affairs 123 123 0 0.0 131 8 6.5 Reserve Bank Operations and Payment Systems 176 176 0 0.0 183 7 4.0 Board Members 121 121 0 0.0 121 0 0.0 Secretary 53 53 0 0.0 53 0 0.0 Legal 123 123 0 0.0 125 2 1.6 Chief Operating Officer 65 64 -1 -1.5 68 4 6.3 Financial Management 66 66 0 0.0 68 2 3.0 Information Technology 412 412 0 0.0 413 1 0.2 Management 449 455 6 1.3 455 0 0.0 Total, Board operations1 2,789 2,789 0 0.0 2,847 58 2.1 Office of Inspector General 130 130 0 0.0 132 2 1.5 1 Budget represents authorized position count at the beginning of the year, and actual represents authorized position count at year-end. tional effectiveness and model a culture of continu- 2016 Budget Performance ous improvement. Total expenses for OIG operations were $31.2 million, which was $0.6 million, or 1.9 percent, less than In keeping with its statutory independence, the OIG the approved 2016 operating budget. Personnel serprepares its proposed budget apart from the Board’s vices expenses were $0.5 million less than budgeted budget. The OIG presents its budget directly to the because of higher-than-budgeted vacancy rates. Board for approval. Table 6. Capital outlays of the Board of Governors, by capital type, 2016–17 Millions of dollars, except as noted V ariance V ariance 2016 actual to 2016 budget 2017 budget to 2016 actual Item 2016 budget 2016 actual 2017 budget Amount Percent A mount P ercent B oard Single-year capital outlays 9.0 6.7 -2.3 -25.5 14.0 7.3 109.4 Multiyear capital outlays 60.5 21.3 -39.2 -64.8 58.3 37.0 1 73.9 Total capital outlays 69.5 28.0 -41.5 -59.8 72.3 44.3 158.5 Office of Inspector General Single-year capital outlays 0.0 0.0 0.0 n/a 0.0 0.0 n/a Multiyear capital outlays 0.3 1.0 0.7 229.6 0.2 -0.8 -78.5 Total capital outlays 0.3 1.0 0.7 229.6 0.2 -0.8 -78.5 Board and Office of Inspector General total capital outlays 69.8 28.9 -40.8 -58.6 72.5 43.5 1 50.6 Note: The amount reported for the multiyear capital budget represents the expected expenditure for the budget year. n/a Not applicable.

418 103rd Annual Report | 2016 Goods and services expenses were $0.1 million less • The Reserve Banks develop budgets that incorpothan budgeted because of less-than-anticipated rate this guidance, and senior leadership in the spending in several areas, partially offset by an office Reserve Banks reviews the budgets for alignment space reconfiguration. The OIG did not have single- with Reserve Bank and System priorities. year capital spending in 2016. Multiyear capital proj- • The Reserve Banks submit preliminary budget ects remained within their project budgets, with information to the Board for review, including actual spending in 2016 higher than planned because documentation to support the budget request. of the buildout of the OIG’s New York regional office. • Board staff analyzes the Banks’ budgets, both individually and in the context of System initiatives. 2017 Operating Expense Budget • The Board’s Committee on Federal Reserve Bank The 2017 budget for OIG operations is $34.3 million, Affairs (BAC) reviews the Bank budgets. which is $3.1 million, or 9.9 percent, higher than 2016 actual expenses and 7.8 percent higher than the • The Reserve Banks make any needed changes, and OIG’s 2016 budget. For 2017, authorized positions the BAC chair submits the revised budgets to for the OIG total 132, an increase of 2 positions, or Board members for review and final action. 1.5 percent, from 2016 actual levels. The additional • Throughout the year, Reserve Bank and Board funding and positions will assist the OIG in implestaffs monitor actual performance and compare it menting the goals, objectives, and activities identified to approved budgets and forecasts. in its strategic plan. In addition to the budget approval process, the 2017 Capital Budget Reserve Banks must submit proposals for certain The OIG’s multiyear capital budget totals $3.2 milcapital expenditures to the Board for further review lion, which includes 2017 expected cash outlays of and approval. $0.2 million for the continued buildout of the San Francisco regional office. Tables 7, 8, and 9 summarize the Reserve Banks’ 2016 budgeted and actual expenses and 2017 bud- Federal Reserve Banks Budgets geted expenses by Reserve Bank, functional area, and account classification.6 Table 10 shows the Reserve Banks’ budgeted and actual employment for 2016 Each Reserve Bank establishes major operating goals and budgeted employment for 2017. In addition, for the coming year, devises strategies for attaining table 11 shows the Reserve Banks’ budgeted and those goals, estimates required resources, and moniactual capital outlays for 2016 and budgeted capital tors results. The Reserve Banks’ budgets are strucfor 2017. tured by functional area, with attributable support and overhead charged to each area. The budgets are 2016 Budget Performance formulated to ensure alignment with each Reserve Bank’s and the System’s strategic priorities, including Total 2016 operating expenses for the Reserve Banks • promoting financial stability through effective were $4,032.1 million, which is $84.5 million, or monitoring, analysis, and policy development 2.1 percent, less than the approved 2016 budget of $4,116.6 million. The actual average number of per- • promoting safety and soundness of financial instisonnel (ANP) was less than the 2016 budget, largely tutions through effective supervision because of changes in project plans, turnover, and • contributing to the formulation of monetary policy hiring delays. The Reserve Banks’ 2016 capital spendand enhancing monetary policy implementation to ing was less than budgeted by $86.5 million, or become more effective, flexible, and resilient 21.4 percent, because of changes in timing and scope for numerous initiatives. • leading efforts to enhance the security, resiliency, functionality, and efficiency of financial services The 2016 operating budget underrun was primarily driven by updated benefits assumptions and revised The Reserve Bank budget process is as follows: • Reserve Bank and Board governance bodies pro- 6 Additional information about the operating expenses of each of the Reserve Banks can be found in section 11, “Statistical vide budget guidance for major functional areas for Tables” (see “Table 10. Income and expenses of the Federal the upcoming budget year. Reserve Banks, by Bank”).

Federal Reserve System Budgets 419 Table 7. Operating expenses of the Federal Reserve Banks, by District, 2016–17 Millions of dollars, except as noted V ariance V ariance 2016 actual to 2016 budget 2017 budget to 2016 actual District 2016 budget 2016 actual 2017 budget Amount Percent A mount P ercent Boston 236.5 230.0 -6.5 -2.8 230.5 0.5 0.2 New York 969.2 947.6 -21.6 -2.2 992.1 44.5 4.7 Philadelphia 194.0 186.4 -7.6 -3.9 191.4 5.0 2.7 Cleveland 183.9 175.7 -8.2 -4.5 196.8 21.1 12.0 Richmond 352.3 351.3 -1.1 -0.3 450.6 99.4 28.3 Atlanta 335.8 343.7 7.8 2.3 407.4 63.7 18.5 Chicago 369.5 373.0 3.5 0.9 383.3 10.2 2.7 St. Louis 374.2 363.5 -10.7 -2.9 399.1 35.6 9.8 Minneapolis 214.1 196.1 -17.9 -8.4 165.1 -31.0 -15.8 Kansas City 277.3 268.7 -8.6 -3.1 285.0 16.3 6.1 Dallas 231.1 227.6 -3.5 -1.5 229.1 1.6 0.7 San Francisco 378.6 368.5 -10.1 -2.7 381.9 13.5 3.7 Total Reserve Bank operating expenses 4,116.6 4,032.1 -84.5 -2.1 4,312.4 280.4 7.0 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. An accounting change implemented in 2017 results in cost shifts in all Districts. In 2016, the Retail Payments Office transferred 129 ANP from Minneapolis to Atlanta, resulting in a significant expense shift between the two Banks. project plans in the Treasury, cash, and fee-based ser- increased expenses for the TWAI and increased vices functions. Revised project plans include evolv- expenses for the automated clearinghouse (ACH) ing Treasury requests, the implementation of the modernization project.8 evolving operations procedural changes and lowerthan-expected costs for the CashForward initiative, Total 2016 actual employment for the Reserve Banks, and delays in development efforts for Fedwire the Federal Reserve Information Technology (FRIT), enhancements.7 The underrun was partially offset by and the Office of Employee Benefits (OEB) was 19,330 ANP, an underrun of 94 ANP, or 0.5 percent, 7 The CashForward initiative will replace legacy software applica- from 2016 budgeted staffing levels. The underruns tions, automate some additional business processes, and employ technologies to meet current and future needs for the cash function. Phase 1 was completed in 2010, and Phase 2 was com- 8 The ACH Modernization initiative involves the transition of the pleted in July 2012. The project’s planned completion date is in ACH application from the legacy mainframe environment to a 2017. distributed platform. Table 8. Operating expenses of the Federal Reserve Banks, by operating area, 2016–17 Millions of dollars, except as noted Variance V ariance 2016 actual to 2016 budget 2017 budget to 2016 actual Operating area 2016 budget 2016 actual 2017 budget Amount Percent A mount P ercent Monetary and economic policy 663.8 655.1 -8.6 -1.3 697.7 42.6 6.5 Services to the U.S. Treasury and other government agencies 605.6 569.9 -35.7 -5.9 625.7 55.8 9 .8 Services to financial institutions and the public 1,112.3 1,088.8 -23.5 -2.1 1 ,151.2 62.4 5.7 Supervision and regulation 1,311.6 1,309.9 -1.7 -0.1 1,389.6 79.7 6.1 Fee-based services to financial institutions 423.3 408.3 -14.9 -3.5 448.2 39.9 9 .8 Total Reserve Bank operating expenses1 4,116.6 4,032.1 -84.5 -2.1 4,312.4 280.4 7.0 1 Operating expenses exclude pension costs, reimbursements, and operating expense of the Board of Governors (see table 4).

420 103rd Annual Report | 2016 Table 9. Operating expenses of the Federal Reserve Banks, by account classification, 2016–17 Millions of dollars, except as noted V ariance V ariance 2016 actual to 2016 budget 2017 budget to 2016 actual Account classification 2016 budget 2016 actual 2017 budget Amount Percent A mount P ercent Salaries and other benefits1 3,085.8 3,037.2 -48.7 -1.6 3,238.4 201.2 6.6 Building 329.2 329.1 -0.1 0.0 330.6 1.5 0.5 Software costs 239.6 227.0 -12.6 -5.2 250.8 23.7 1 0.5 Equipment 187.6 175.5 -12.1 -6.4 189.1 13.6 7.8 Recoveries2 -172.0 -184.6 -12.6 7.3 -183.5 1.1 -0.6 Expenses capitalized -106.2 -87.7 18.5 -17.4 -93.0 -5.3 6.1 All other3 552.6 535.5 -17.0 -3.1 580.1 44.5 8.3 Total Reserve Bank operating expenses 4,116.6 4,032.1 -84.5 -2.1 4 ,312.4 2 80.4 7.0 1 Includes salaries, 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. are primarily in the Treasury and cash business lines plans, turnover, and hiring delays across most other and in support services, reflecting operational effi- areas. ciencies, hiring delays, and updated project plans. These underruns are partially offset by lower-than- 2017 Operating Expense Budget budgeted turnover and lag in supervision and by unbudgeted resource needs for national programs in The 2017 operating budgets of the Reserve Banks supervision, for IT, and for the ACH modernization total $4,312.4 million, which is $280.4 million, or initiative. Other adjustments reflect updated project 7.0 percent, higher than 2016 actual expenses. The Table 10. Employment at the Federal Reserve Banks, by District, and at FRIT and OEB, 2016–17 V ariance V ariance 2016 actual to 2016 budget 2017 budget to 2016 actual District 2016 budget 2016 actual 2017 budget Amount Percent A mount P ercent Boston 1,130 1,108 -22 -2.0 1,131 23 2.1 New York 3,311 3,248 -63 -1.9 3,319 71 2.2 Philadelphia 892 897 4 0.5 914 18 2.0 Cleveland 1,010 958 -52 -5.2 995 37 3.9 Richmond 1,475 1,491 16 1.1 1,499 8 0.6 Atlanta 1,573 1,674 101 6.4 1,762 88 5.3 Chicago 1,551 1,537 -14 -0.9 1,600 63 4.1 St. Louis 1,356 1,327 -29 -2.1 1,416 89 6.7 Minneapolis 1,105 1,032 -72 -6.6 1,008 -24 -2.3 Kansas City 1,722 1,754 32 1.9 1,850 96 5.5 Dallas 1,280 1,256 -23 -1.8 1,294 38 3.0 San Francisco 1,695 1,706 11 0.6 1,697 -9 -0.5 Total, all Districts 18,101 17,988 -113 -0.6 18,487 499 2.8 Federal Reserve Information Technology 1,268 1,291 24 1.9 1,277 -14 -1.1 Office of Employee Benefits 55 50 -5 -8.4 58 7 14.3 Total 19,424 19,330 -94 -0.5 19,822 492 2.5 Note: In 2016, the Retail Payments Office transferred 129 ANP from Minneapolis to Atlanta.

Federal Reserve System Budgets 421 Table 11. Capital outlays of the Federal Reserve Banks, by District, and of FRIT and OEB, 2016–17 Millions of dollars, except as noted V ariance V ariance 2016 actual to 2016 budget 2017 budget to 2016 actual District 2016 budget 2016 actual 2017 budget Amount Percent A mount P ercent Boston 21.6 14.2 -7.4 -34.1 26.6 12.4 87.2 New York 81.1 69.3 -11.8 -14.6 1 00.8 3 1.5 45.5 Philadelphia 22.2 14.9 -7.3 -33.0 20.9 6.0 40.5 Cleveland 18.1 18.5 0.3 1.9 32.8 14.3 77.6 Richmond 15.6 9.2 -6.4 -41.0 21.3 1 2.0 130.7 Atlanta 33.8 23.8 -10.0 -29.7 25.8 2.0 8.5 Chicago 26.1 22.0 -4.1 -15.7 29.2 7.2 33.0 St. Louis 10.2 9.8 -0.4 -3.9 6.8 -3.0 -31.0 Minneapolis 4.4 4.4 * 0.3 4.4 * 0.9 Kansas City 29.7 21.9 -7.8 -26.3 25.3 3.4 15.5 Dallas 18.1 13.0 -5.0 -27.9 19.3 6.2 48.0 San Francisco 57.5 30.2 -27.3 -47.5 36.2 6.0 20.0 Total, all Districts 338.4 251.2 -87.3 -25.8 349.4 98.3 39.1 Federal Reserve Information Technology 65.4 66.1 0.8 1.2 67.2 1.0 1.5 Office of Employee Benefits * * * 678.0 * * -10.0 Total 403.8 317.3 -86.5 -21.4 416.6 99.3 31.3 * Less than $50,000. largest increase is in the supervision function to sup- CashForward initiative and program planning port the cybersecurity supervision program, the con- expenses of the next-generation currency-processing tinued buildout to meet the requirements of the machines, as well as increases in allocated support Dodd-Frank Act, and other strategic national initia- and overhead expenses. Expenses related to fee-based tives. In the monetary policy and public programs services are increasing to fund the ACH platform areas, several Reserve Banks plan to fill research and modernization initiative and development efforts for policy positions. Allocated expenses to monetary Fedwire enhancements. policy for law enforcement and expenses in the open market function for automation efforts are also pro- Total 2017 budgeted employment for the Reserve jected to increase. Banks, FRIT, and OEB is 19,822 ANP, an increase of 492 ANP, or 2.5 percent, from 2016 actual employ- Budgeted expenses for services to the Treasury, which ment levels. The increase is primarily driven by supare fully reimbursable, are increasing primarily to port and overhead, Treasury services, IT, fee-based support the full implementation of Navy Cash, the services, and monetary policy functions. Support and TWAI, the Invoice Processing Platform (IPP), and overhead is increasing as Reserve Banks strengthen the Post Payment System initiative.9 Increases in cash human resources capabilities; expand enterprise riskexpenses are related to the implementation of the management capabilities; enhance facilities maintenance; and address a need for increased resources in 9 Navy Cash is a cash-management tool designed to support the multimedia, corporate planning, and internal audit. Navy and Marine Corps personnel assigned to ships in the Navy In the Treasury services function, ANP increases are fleet. due to updated requirements for ongoing projects, The IPP is part of the Treasury’s all-electronic initiative—an including Stored Value Card efforts, retail securities, electronic invoicing and payment information system that allows collection services, and fiscal collateral monitoring vendors to enter invoice data electronically, through either a web-based portal or electronic submission. The IPP accepts, processes, and presents data from supplier systems related to all stages of a payment transaction, including the purchase order, invoice, and other payment information. The Post Payment System initiative is a multiyear effort to modernize several of the Treasury’s legacy post-payment processing expenses, improve data analytics capabilities, and provide a censystems into a single application to enhance operations, reduce tralized and standardized set of payment data.

422 103rd Annual Report | 2016 services.10 IT staff is increasing to support applica- 2017 Capital Budgets tion development projects, primarily for the national supervision initiatives and Treasury programs. Staff The 2017 capital budgets for the Reserve Banks, is also increasing in the fee-based services for the FRIT, and OEB total $416.6 million. The increase in ACH platform modernization initiative and Fedwire the 2017 capital budget is $99.3 million, or 31.3 perenhancements and in monetary policy to support cent, more than the 2016 actual levels of $317.3 milregional economic research. lion, largely reflecting ongoing multiyear building and information technology projects. Initiatives in Reserve Bank officer and staff personnel expenses for the 2017 capital budget include supporting work- 2017 total $3,238.4 million, an increase of space renovations, addressing aging building infra- $201.2 million, or 6.6 percent, from 2016 actual structure, replacing the Treasury auction system, and expenses. The increase reflects expenses associated providing application upgrades and releases. with additional staff and budgeted salary adjust- Capital Expenditures Designated for ments, including merit increases, equity adjustments, Conditional Approval promotions, and funding for variable pay. The BAC chair designated projects with an aggregate The 2017 Reserve Bank budgets include a 3.0 percent cost of $85.6 million in 2017 for conditional merit program for eligible officers, senior profession- approval, requiring additional review and approval by als, and staff totaling $62.2 million and a variable pay the Board’s director of the Division of Reserve Bank program totaling $196.5 million. Budgeted equity Operations and Payment Systems.11 The expendiadjustments and promotions total $7.1 million for tures designated for conditional approval by the chair officers and senior professionals and $25.0 million of the BAC include large-scale building projects to for staff. renovate conference centers, cafeteria spaces, cash vault, and executive office spaces; mechanical and Risks in the 2017 Budget electrical infrastructure upgrades; and the migration of major applications off of the mainframe.12 The most significant risks in the 2017 budget are related to personnel costs. Changes in assumptions Other Capital Expenditures and updated demographic information that are used Significant capital expenditures (typically expendito determine benefit expense affect Reserve Bank tures exceeding $1 million) that are not designated budgets. Reserve Banks are concerned about their for conditional approval include total multiyear budability to retain, hire, and replace staff, particularly geted expenditures of $571.1 million for 2017 and those with specialized skills and experience in mon- future years, of which the single-year 2017 budgeted etary policy, supervision, or IT. The increased focus expenditures are $252.3 million. Expenditures in this on cybersecurity and application modernization may category include IT support for Treasury, superviaffect IT spending decisions. Mergers and acquisi- sion, and monetary policy initiatives and building tions in the banking industry and potential changes expenditures for office space renovations, security in regulations with the new administration could shift enhancements, and elevator upgrades. supervisory responsibilities and influence Reserve Bank resource levels. The Bureau of the Fiscal Ser- Capital initiatives that are individually of less than vice’s Fiscal Agent Consolidation effort will continue $1 million are budgeted at an aggregate amount of to affect projects in 2017 and over a longer-term $78.7 million for 2017 and include building mainteplanning horizon as business-line transition timelines nance expenditures, equipment and furniture replaceare refined. 11 Generally, capital expenditures that are designated for conditional approval include certain building projects, District expenditures that substantially affect or influence future System direction or the manner in which significant services are performed, 10 The Stored Valued Card program comprises three military cash- expenditures that may be inconsistent with System direction or management programs: EagleCash, EZPay, and Navy Cash. vary from previously negotiated purchasing agreements, and These programs provide electronic payment methods for goods local expenditures that duplicate national efforts. and services on military bases and Navy ships, both domestic 12 The Reserve Bank migration strategy involves moving a majorand overseas, to reduce costs and increase convenience for the ity of applications from the mainframe to alternate processing military and service members. The Reserve Banks, as fiscal environments. Budgeted projects for 2017 include the migration agent, currently operate EagleCash and EZpay and will assume of the statistics and reserves application and the ACH processresponsibility for Navy Cash in 2017. ing platform.

Federal Reserve System Budgets 423 ments, and scheduled software and equipment 2016 Budget Performance upgrades. The Board’s 2016 actual expenses for new currency were $700.7 million, a decrease of $36.7 million, or Currency Budget 5.0 percent, from the 2016 budget. More than half of the budget underrun is attributable to lower-than- On an annual basis, Board staff develops a print budgeted BEP expenses because the BEP purchased order for the Bureau of Engraving and Printing fewer currency readers than budgeted, encountered (BEP) based on staff’s assessment of currency significant delays with the new building project, and demand and other factors. Staff estimates the num- delivered fewer notes than budgeted.15 The remainber of Federal Reserve notes the Board will order der of the budget underrun is attributable to lowerfrom the BEP to meet demand based on monthly than-projected costs for transporting new and fit monitoring of payments to and receipts of currency notes from the BEP to Reserve Banks and among the from circulation, forecasts of growth rates for pay- Reserve Banks, and delays in awarding contracts for ments to and receipts of currency from circulation, activities related to counterfeit deterrence and curoperational factors, and other policy considerations. rency education. The Board reimburses the BEP for all costs related to the production of currency.13 Historically, about 2017 Operating Expense Budget 90 percent of the notes that the Board orders each year replace unfit currency that Reserve Banks The 2017 operating budget for currency is $726.0 milreceive from circulation and destroy. lion, which is $25.3 million, or 3.6 percent, higher than 2016 actual expenses (figure 5). Printing costs The annual currency budget process is as follows: for notes are about 93 percent of the operating bud- • Each August, based on Board staff’s assessment of get. Expenses for currency transportation; quality assurance; counterfeit deterrence and analysis; curcurrency demand and other factors, the Board’s rency education, outreach, and research; other BEP director of the Division of Reserve Bank Operainitiatives; and depreciation make up the remaining tions and Payment Systems submits a fiscal year 7 percent (table 12). print order for currency to the director of the BEP. • Each December, Board staff estimates expenses for Printing of Federal Reserve Notes the calendar-year currency budget, including print- The currency budget includes $673.8 million in printing expenses (based on estimated production costs ing costs for calendar-year 2017, an increase of provided by the BEP); certain other BEP initia- 2.1 percent from 2016 actual expenses. The increase is tives; and expenses for currency transportation, primarily attributable to the BEP’s additional fundquality assurance, counterfeit-deterrence and ing to support the acceleration of the next-design analysis, education, outreach, research, and deprefamily of notes. ciation.14 • The BAC reviews the proposed currency budget. • The BAC chair submits the proposed currency 15 The 2016 budget reflected the BEP’s estimate that it would procure and distribute 130,000 readers in 2016; however, the BEP budget to Board members for review and final procured and distributed only about 10,000 readers to meet action. demand. The difference is partly because some potential users downloaded the BEP’s smartphone currency-reader application, instead of ordering a currency reader. 13 The BEP does not receive federal appropriations; all operations of the BEP are financed by a revolving fund that is reimbursed In 2016, the BEP entered into an interagency agreement with through product sales, virtually all of which are sales of Federal the General Services Administration to evaluate potential sites Reserve notes to the Board to fulfill its annual print order. Sec- for a new facility but made significantly less progress on this tion 16 of the Federal Reserve Act requires that all costs project than it expected. incurred for the issuing of notes shall be paid for by the Board The BEP operates on a fiscal year that begins on October 1 and and included in its assessments to Reserve Banks. Customer bill- ends September 30, and the Board operates on a calendar year ings are the BEP’s only means of recovering costs of operations that begins on January 1. This difference in timing requires that and generating funds necessary for capital investment. staff estimates the Board’s calendar-year budget for new cur- 14 Other BEP expenses include costs to reimburse the BEP for rency by eliminating the estimated volume and associated printexpenses incurred by its Destruction Standards and Compliance ing costs of notes that the BEP will produce in the first quarter Division of the Office of Compliance and Mutilated Currency of its fiscal year and estimating the volume and associated print- Division of the Office of Financial Management and for work ing costs of notes staff projects the BEP will produce in the performed in 2016 toward a new facility to replace the existing fourth quarter of the calendar year. The BEP, however, fulfilled facility in Washington, D.C. the Board’s fiscal year 2016 print order.

424 103rd Annual Report | 2016 the Library of Congress for administering the cur- Figure 5. Federal Reserve costs for currency, 2007–17 rency reader program through the existing infrastructure of its book reader program, which is managed Millions of dollars 800 by the National Library Service, and other adminis- 700 trative and outreach expenses. 600 Other Reimbursements to the Bureau of 500 Engraving and Printing 400 The 2017 budget includes $4.0 million to reimburse 300 the BEP for expenses incurred by its Destruction Standards and Compliance Division of the Office of 200 Compliance (OC) and Mutilated Currency Division 100 (MCD) of the Office of Financial Management. The 0 OC develops standards for cancellation and destruc- 2007 2009 2011 2013 2015 2017 tion of unfit currency and for note accountability at Note: For 2017, budgeted. the Reserve Banks, and reviews Reserve Banks’ cash operations for compliance with its standards. As a Currency Reader Program public service, the MCD also processes claims for the redemption of damaged or mutilated currency. The 2017 currency reader budget is approximately $1.7 million, which is $30,000 higher than 2016 Currency Transportation actual expenses. The budget includes $0.5 million to purchase and distribute nearly 8,500 currency readers The 2017 currency transportation budget is to qualified blind or visually impaired individuals at $21.2 million, which is nearly $0.8 million, or 3.9 perno cost to the user. The BEP expects to distribute cent, higher than 2016 actual expenses. The budget fewer readers in 2017 than it did in 2016 because it includes the cost of shipping new currency from the believes that a majority of qualified individuals have BEP to Reserve Banks, of intra-System shipments of either received a reader or downloaded the BEP’s fit and unprocessed currency, and of returning cursmartphone currency reader application. In addition, rency pallets from the Reserve Banks to the BEP. The the budget includes nearly $1.2 million to reimburse majority of the increase is attributable to a growth in Table 12. Federal Reserve currency budget, 2016 and 2017 Thousands of dollars, except as noted V ariance V ariance 2016 actual to 2016 budget 2017 budget to 2016 actual Item 2016 budget 2016 actual 2017 budget Amount Percent A mount P ercent B EP-related expenses Printing Federal Reserve notes 670,422 659,959 -10,463 -1.6 673,799 1 3,840 2.1 Currency reader 8,478 1,685 -6,793 -80.1 1,715 30 1.8 Other 4,232 3,819 -413 -9.8 4,000 181 4.7 New BEP facility 5,000 63 n/a n/a 0 -63 -100.0 Board expenses Currency transportation 26,400 20,405 -5,995 -22.7 21,200 795 3.9 Currency quality assurance 9,200 8,631 -569 -6.2 12,500 3,869 44.8 Currency counterfeit deterrence and analysis 9,995 5,215 -4,780 -47.8 8,100 2,884 55.3 Currency education, outreach, and research 3,650 936 -2,714 -74.4 4,645 3,709 396.4 Depreciation 0 0 n/a n/a 71 71 n/a Total expenses 737,377 700,713 -36,665 -5.0 726,030 25,317 3.6 Capital expenses Single cycle capital 0 0 n/a n/a 600 600 n/a BEP Bureau of Engraving and Printing. n/a Not applicable.

Federal Reserve System Budgets 425 armored carrier rates between 2016 and 2017, rates 2017 Capital Budget that are associated with new contracts. The 2017 capital budget includes $0.6 million to pur- Quality Assurance chase commercial evaluation tools and equipment The 2017 budget for the quality assurance program is similar to those used by the casual counterfeiter, $12.5 million, which is about $3.9 million, or which staff will use to assess the threat to potential 44.8 percent, higher than 2016 actual expenses. The security features using less-sophisticated techniques. budget will allow the currency quality assurance con- This work will facilitate more advanced adversarial sultants to continue facilitating the implementation analysis at a shared laboratory funded and used by of the new quality system at the BEP; support the 14 participating central banks. This initiative involves research, technology, and product development the purchase of commercial evaluation tools, equiprequired for the next-design family of notes; and con- ment, and materials similar to those used by the tinue providing temporary resources to the BEP to casual counterfeiter to assess the threat to potential sustain critical programs that have been implemented new security features using less-sophisticated for the quality system. The budget also includes fund- techniques. ing for the Board to contract for the research and development necessary to develop a new optical cur- 2017 Budget Risks rency sensor. Test equipment Counterfeit Deterrence and Analysis In order to support its role as issuing authority and The 2017 budget for counterfeit deterrence and to facilitate the Treasury Department’s and BEP’s analysis is $8.1 million, which is nearly $2.9 million, plan to accelerate a new-design family of notes, the or 55.3 percent, higher than 2016 actual expenses. Board is assessing with the BEP the need to equip an The budget includes about $5.9 million for member- adversarial analysis test facility to assess the countership in the Central Bank Counterfeit Deterrence feiting threat from the professional counterfeiter Group (CBCDG). The CBCDG operates under the using commercial printing equipment. The test facilauspices of the G-10 central bank governors to com- ity would be located at the BEP and use specialized, bat digital counterfeiting and includes 35 central scientific staff from the Board and BEP to conduct banks. The budget also includes nearly $2.2 million the analysis. To advance this initiative, the Board and to contract with commercial vendors and national BEP may require additional test equipment to analabs to research, develop, test, and evaluate new or lyze potential new security features and ensure that existing security features. security features can be integrated effectively into the new-design family of notes. This capability would Currency Education, Outreach, and Research provide more comprehensive information about The 2017 budget for currency education, outreach, threats to our notes and support the acceleration of and research is $4.6 million, which is $3.7 million, or the new-design family of notes. The BEP has devel- 396.4 percent, higher than 2016 actual expenses. The oped requests for proposals for this additional test budget includes nearly $3.1 million to fund the equipment and has included the associated capital Board’s currency education program (CEP), costs in its billing rates. If, however, the BEP is $1.0 million to contract for research in support of the unable to acquire this equipment in 2017, it may next-design family of notes, and $0.5 million to con- request that the Board purchase this equipment, duct cognitive and perception studies. which could cost between $7 million and $14 million. The CEP is designed to protect and maintain confi- New BEP Facility dence in U.S. currency worldwide by providing infor- The BEP received Treasury approval in 2015 to purmation on all circulating designs of Federal Reserve sue a new building in the metropolitan Washington, notes to the global public and key stakeholder D.C., area. The BEP continues to pursue strategies groups. In 2017, the CEP will continue to conduct with the Government Services Administration that outreach to domestic and international businesses will facilitate necessary approvals to move the project and retailers and to maintain the uscurrency.gov edu- forward. There is, however, no impact on the curcational website. rency budget for 2017.

427 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 2016. 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 C. Gallagher Trevor A. Reeve Director Special Assistant to the Board for Senior Special Adviser to the Linda L. Robertson Congressional Liaison Chair Assistant to the Board William B. English Lucretia M. Boyer Senior Special Adviser to the Assistant to the Board Board David W. Skidmore Assistant to the Board

428 103rd Annual Report | 2016 Legal Division Scott G. Alvarez Katherine H. Wheatley Benjamin W. McDonough General Counsel Associate General Counsel Assistant General Counsel Richard M. Ashton Jean C. Anderson Alison M. Thro Deputy General Counsel Assistant General Counsel Assistant General Counsel Stephanie Martin Patrick M. Bryan Cary K. Williams Associate General Counsel Assistant General Counsel Assistant General Counsel Laurie S. Schaffer Alicia S. Foster Associate General Counsel Assistant General Counsel Office of the Secretary Robert deV. Frierson Yao-Chin Chao Secretary Assistant Secretary Margaret M. Shanks Michele T. Fennell Deputy Secretary Assistant Secretary Division of International Finance Steven B. Kamin David H. Bowman Carol C. Bertaut Director Associate Director Assistant Director Thomas A. Connors Mark S. Carey Paul R. Wood Deputy Director Associate Director Assistant Director Michael P. Leahy Brian M. Doyle Constantijn A. Claessens Deputy Director Associate Director Senior Adviser Beth Anne Wilson Joseph W. Gruber Sally M. Davies Deputy Director Associate Director Senior Adviser Christopher J. Erceg Charles P. Thomas John H. Rogers Senior Associate Director Associate Director Senior Adviser Shaghil Ahmed James A. Dahl Associate Director Deputy Associate Director Office of Financial Stability Policy and Research Andreas W. Lehnert Rochelle M. Edge John W. Schindler Director Deputy Associate Director Assistant Director Michael T. Kiley Luca Guerrieri Skander J. Van den Heuvel Senior Associate Director Assistant Director Assistant Director William F. Bassett Jennifer E. Roush J. Nellie Liang Deputy Associate Director Assistant Director Senior Adviser Division of Monetary Affairs Heinrich T. Laubach Stephen A. Meyer Margaret G. DeBoer Director Deputy Director Associate Director James A. Clouse Fabio M. Natalucci Jane E. Ihrig Deputy Director Senior Associate Director Associate Director Brian F. Madigan Gretchen C. Weinbach J. David Lopez-Salido Deputy Director Senior Associate Director Associate Director

Federal Reserve System Organization 429 Mary T. Hoffman Elizabeth C. Klee Robert J. Tetlow Deputy Associate Director Assistant Director Senior Adviser Matthew M. Luecke Jason J. Wu Egon Zakrajsek Deputy Associate Director Assistant Director Senior Adviser Min Wei Antulio Bomfim Joyce K. Zickler Deputy Associate Director Senior Adviser Senior Adviser Christopher J. Gust Ellen E. Meade Don H. Kim Assistant Director Senior Adviser Adviser Division of Research and Statistics David W. Wilcox Timothy A. Mullen Lillian Shewmaker Director Deputy Associate Director Assistant Director Jeffrey C. Campione Steven A. Sharpe Paul A. Smith Deputy Director Deputy Associate Director Assistant Director Daniel M. Covitz Stephanie R. Aaronson Kristin M. Vajs Deputy Director Assistant Director Assistant Director William L. Wascher III Andrew M. Cohen S. Wayne Passmore Deputy Director Assistant Director Senior Adviser Eric M. Engen Burcu Duygan-Bump Robin A. Prager Senior Associate Director Assistant Director Senior Adviser Joshua H. Gallin Glenn R. Follette Senior Associate Director Assistant Director Jeremy Rudd Senior Adviser Diana Hancock Song Han Senior Associate Director Assistant Director Eric C. Engstrom David E. Lebow Erik A. Heitfield Adviser Senior Associate Director Assistant Director John A. Figura Michael G. Palumbo Norman J. Morin Adviser Senior Associate Director Assistant Director Arthur B. Kennickell Elizabeth K. Kiser John M. Roberts Adviser Associate Director Assistant Director Patrick C. McCabe John J. Stevens John E. Sabelhaus Adviser Associate Director Assistant Director Karen M. Pence Stacey Tevlin Shane M. Sherlund Adviser Associate Director Assistant Director Division of Banking Supervision and Regulation Michael S. Gibson Jack P. Jennings II Sean D. Campbell Director Senior Associate Director Associate Director Timothy P. Clark Arthur W. Lindo Nida Davis Deputy Director Senior Associate Director Associate Director Maryann F. Hunter Todd A. Vermilyea Christopher Finger Deputy Director Senior Associate Director Associate Director Mark E. Van Der Weide Mary L. Aiken Anna L. Hewko Deputy Director Associate Director Associate Director Barbara J. Bouchard Kevin M. Bertsch Michael J. Hsu Senior Associate Director Associate Director Associate Director

430 103rd Annual Report | 2016 Steven P. Merriett Catherine A. Piche Steven M. Spurry Associate Director Deputy Associate Director Assistant Director Ann E. Misback Richard C. Watkins Catherine Ann Tilford Associate Director Deputy Associate Director Assistant Director Richard A. Naylor II Suzanne L. Williams Joanne Wakim Associate Director Deputy Associate Director Assistant Director Lisa H. Ryu Robert T. Ashman Donna Webb Associate Director Assistant Director Assistant Director Michael J. Sexton James Ray Diggs Norah M. Barger Associate Director Assistant Director Senior Adviser Michael D. Solomon Constance M. Horsley Associate Director Assistant Director John Beebe Adviser Thomas R. Sullivan Kathleen W. Johnson Associate Director Assistant Director Fang Du Jeffery W. Gunther Keith A. Ligon Adviser Deputy Associate Director Assistant Director William F. Treacy Ryan P. Lordos Susan E. Motyka Adviser Deputy Associate Director Assistant Director Sarkis D. Yoghourtdjian David K. Lynch Thomas K. Odegard Adviser Deputy Associate Director Assistant Director Molly E. Mahar Laurie F. Priest Deputy Associate Director Assistant Director Division of Consumer and Community Affairs Eric S. Belsky Carol A. Evans David E. Buchholz Director Associate Director Deputy Associate Director V. Nicole Bynum Allen J. Fishbein Joseph A. Firschein Deputy Director Associate Director Deputy Associate Director Anna Alvarez Boyd Phyllis L. Harwell Marisa A. Reid Senior Associate Director Associate Director Deputy Associate Director Suzanne G. Killian James A. Michaels Senior Associate Director Associate Director Division of Reserve Bank Operations and Payment Systems Matthew J. Eichner Michael J. Lambert Stuart E. Sperry Director Associate Director Deputy Associate Director Jeffrey C. Marquardt Lawrence E. Mize Timothy W. Maas Deputy Director Associate Director Assistant Director David Sidari Bajinder N. Paul Travis D. Nesmith Deputy Director Associate Director Assistant Director Marta E. Chaffee Jennifer K. Chang Lorelei W. Pagano Senior Associate Director Deputy Associate Director Assistant Director Gregory L. Evans Jennifer A. Lucier Jeffrey D. Walker Senior Associate Director Deputy Associate Director Assistant Director Susan V. Foley David C. Mills Paul W. Bettge Senior Associate Director Deputy Associate Director Senior Adviser

Federal Reserve System Organization 431 Office of the Chief Operating Officer Donald V. Hammond Sheila Clark Jeffrey A. Monica Chief Operating Officer Diversity and Inclusion Programs Assistant Director Director Michael J. Kraemer Todd A. Glissman Chief Data Officer Philip C. Daher Senior Adviser Assistant Director Division of Financial Management William L. Mitchell Christine M. Fields Karen L. Vassallo Director and Chief Financial Associate Director Deputy Associate Director Officer Jeffrey R. Peirce Christopher J. Suma Stephen J. Bernard Deputy Associate Director Assistant Director Deputy Director Management Division Michell C. Clark Tameika L. Pope Jeffrey A. Martin Director Associate Director Assistant Director David J. Capp Keith F. Bates Stephen E. Pearson Deputy Director Assistant Director Assistant Director Steven A. Miranda Patricia Ann Buckingham Reginald V. Roach Deputy Director Assistant Director Assistant Director Marie S. Savoy Curtis B. Eldridge Carol A. Sanders Senior Associate Director Assistant Director and Chief Assistant Director Tara Tinsley-Pelitere Timothy E. Markey Theresa A. Trimble Associate Director Assistant Director 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

432 103rd Annual Report | 2016 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 433 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 2016, the Federal Open Market Committee held eight regularly scheduled meetings (see section 9, “Minutes of Federal Open Market Committee Meetings”). Members Janet L. Yellen Stanley Fischer Eric Rosengren Chair, Board of Governors Member, Board of Governors President, Federal Reserve Bank of Boston William C. Dudley Esther L. George Vice Chairman, President, Federal President, Federal Reserve Bank Daniel K. Tarullo Reserve Bank of New York of Kansas City Member, Board of Governors Lael Brainard Loretta J. Mester Member, Board of Governors President, Federal Reserve Bank of Cleveland James Bullard President, Federal Reserve Bank Jerome H. Powell of St. Louis Member, Board of Governors Alternate Members Charles L. Evans Robert S. Kaplan Michael Strine First Vice President, Federal President, Federal Reserve Bank First Vice President, Federal Reserve Bank of Chicago of Dallas Reserve Bank of New York Patrick Harker Neel Kashkari President, Federal Reserve Bank President, Federal Reserve Bank of Philadelphia of Minneapolis Officers Brian F. Madigan Richard M. Ashton Michael P. Leahy Secretary Assistant General Counsel Associate Economist Matthew M. Luecke Steven B. Kamin David E. Lebow Deputy Secretary Economist Associate Economist David W. Skidmore Heinrich T. Laubach Jonathan P. McCarthy Assistant Secretary Economist Associate Economist Michelle A. Smith David W. Wilcox Stephen A. Meyer Assistant Secretary Economist Associate Economist Scott G. Alvarez David Altig Ellis W. Tallman General Counsel Associate Economist Associate Economist Thomas C. Baxter Thomas A. Connors Geoffrey Tootell Deputy General Counsel (through Associate Economist Associate Economist July 1, 2016) Troy Davig Christopher J. Waller Michael Held Associate Economist Associate Economist Deputy General Counsel (as of September 20, 2016)

434 103rd Annual Report | 2016 William Wascher Simon Potter Lorie K. Logan Associate Economist Manager, System Open Market Deputy Manager, System Open Account Market Account

Federal Reserve System Organization 435 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. The president and vice president of the council are selected from amongst council members. The Federal Reserve Act requires the council to meet in Washington, D.C., at least four times a year. In 2016, the council met on February 2–3, May 3–4, September 6–7, and November 29–30. The council met with the Board on February 3, May 4, September 7, and November 30, 2016. Members District 1 District 6 District 10 Richard E. Holbrook O.B. Grayson Hall Jr. Leslie R. Andersen Chairman and Chief Executive Chairman, President, and Chief President and Chief Executive Officer, Eastern Bank Executive Officer, Regions Officer, Bank of Bennington, Corporation, Boston, MA Financial Corporation, Bennington, NE Birmingham, AL District 2 District 11 Michael L. Corbat District 7 Ralph W. Babb Jr. Chief Executive Officer, Frederick H. Waddell Chairman and Chief Executive Citigroup, New York, NY Chairman and Chief Executive Officer, Comerica Inc. and Officer, Northern Trust Comerica Bank, Dallas, TX District 3 Corporation and The Northern Mark A. Turner Trust Company, Chicago, IL District 12 President and Chief Executive John G. Stumpf Officer, WSFS Bank, District 8 Chairman, President, and CEO, Wilmington, DEA Ronald J. Kruszewski Wells Fargo & Company, Chairman, President, and Chief San Francisco, CA (resigned District 4 Executive Officer, Stifel Financial September 22, 2016) Paul G. Greig Corp., St. Louis, MO Chairman, President, and Chief Executive Officer, FirstMerit District 9 Corporation, Akron, OH Kenneth J. Karels President and Chief Executive District 5 Officer, Great Western Bank, Kelly S. King Sioux Falls, SD Chairman and Chief Executive Officer, BB&T Corporation,Winston-Salem, NC Officers Kelly S. King Paul G. Grieg Herb Taylor President Vice President Secretary

436 103rd Annual Report | 2016 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. The president and vice president are selected from amongst council members. The council usually meets with the Board twice a year in Washington, D.C. In 2016, the council met on April 8 and November 18. Members District 1 District 5 District 9 Gilda M. Nogueira Robert A. DeAlmeida Brian L. Johnson President and Chief Executive President and Chief Executive Chief Executive Officer, Choice Officer, East Cambridge Savings Officer, Hamilton Bank, Financial Group, Bank, Cambridge, MA Baltimore, MD Grand Forks, ND District 2 District 6 District 10 Michael J. Castellana Douglas L. Williams Kyle Heckman President and Chief Executive President and Chief Executive President and Chairman of the Officer, SEFCU, Albany, NY Officer, Atlantic Capital Bank, Board, Flatirons Bank, Atlanta, GA Boulder, CO District 3 Christopher D. Maher District 7 District 11 President and Chief Executive Jeffrey Plagge S. Boyce Brown Officer, OceanFirst Financial President and Chief Executive Chairman, President and Chief Corporation and OceanFirst Officer, Northwest Financial Executive Officer, Extraco Bank, Toms River, NJ Corp., Arnolds Park, IA Corporation, Waco, TX District 4 District 8 District 12 Robert J. Seiffert Glenn D. Barks Janet Garufis President and Chief Executive President and Chief Executive President and Chief Executive Officer, DCB Financial Officer, First Community Credit Officer, Montecito Bank & Trust, Corporation and The Delaware Union, Chesterfield, MO Santa Barbara, CA County Bank and Trust Company, Lewis Center, OH Officers Michael J. Castellana Janet A. Garufis President Vice President

Federal Reserve System Organization 437 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 council is composed of a diverse group of experts and representatives of consumer and community development organizations and interests, including from such fields as affordable housing, community and economic development, employment and labor, financial services and technology, small business, and asset and wealth building. One member of the council serves as its chair. The council first met with the Board on November 2015, and meets with the Board twice each year. In 2016, the council met with the Board on May 13 and October 21. Members Roberto Barragan Rodrick Miller Sue Taoka Senior Managing Director, President and Chief Executive Executive Vice President, Craft3, Manhattan West Asset Officer, Detroit Economic Seattle, WA Management, Manhattan Growth Corporation, Detroit, MI Mary Tingerthal Beach, CA Noel Poyo Commissioner, Minnesota Angela Glover Blackwell Executive Director, National Housing Finance Agency, Founder and Chief Executive Association for Latino St. Paul, MN Officer, PolicyLink, Oakland, CA Community Asset Builders, Raul Vazquez Patrick Dujakovich San Antonio, TX Chief Executive Officer, Oportun, President, Greater Kansas City Michael Rubinger Redwood City, CA AFL-CIO, Kansas City, MO President and Chief Executive Catherine Wilson Benjamin Dulchin Officer, Local Initiatives Support Professor, University of Executive Director, Association Corporation (LISC), Nebraska–Lincoln College of for Neighborhood & Housing New York, NY Law, Lincoln, NE Development, New York, NY Arden Shank Brian Fogle President and Chief Executive President and Chief Executive Officer, Neighborhood Housing Officer, Community Foundation Services of South Florida, of the Ozarks, Springfield, MO Miami, FL Ben Mangan Adrienne Smith Executive Director and Lecturer, President and Chief Executive Haas School of Business, U.C. Officer, New Mexico Direct Berkeley, Center for Social Sector Caregivers Coalition, Leadership, Berkeley, CA Placitas, NM Officer Michael Rubinger Roberto Barragan Chair (through July 2016) Vice Chair (as of August 2016) Raul Vazquez Chair (as of August 2016)

438 103rd Annual Report | 2016 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 Philip Strahan, Chair Monika Piazzesi Robert Stine Professor, Boston College Professor, Stanford University Professor, University of Pennsylvania Gregory Duffee Jennie Bai Professor, John Hopkins Assistant Professor, Georgetown University University M. Suresh Sundaresan Professor, Columbia University

Federal Reserve System Organization 439 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 Joseph L. Hooley, 2016 Laura J. Sen, 2016 John F. Fish, 2016 Chairman and Chief Executive Chairman, BJ’s Wholesale Club, Chairman and Chief Executive Officer, State Street Corporation, Inc., Westborough, MA Officer, Suffolk Construction Boston, MA Company, Inc., Boston, MA Christina Hull Paxson, 2017 Michael E. Tucker, 2017 President, Brown University, Gary L. Gottlieb, MD, 2017 President and Chief Executive Providence, RI Chief Executive Officer, Partners Officer, Greenfield Co-operative In Health, Boston, MA Bank, Greenfield, MA Roger S. Berkowitz, 2018 President and Chief Executive Phillip L. Clay, 2018 Peter L. Judkins, 2018 Officer, Legal Sea Foods, LLC, Professor, Massachusetts Institute President and Chief Executive Boston, MA of Technology (MIT), Officer, Franklin Savings Bank, Cambridge, MA Farmington, ME

440 103rd Annual Report | 2016 District 2–New York Class A Class B Class C Gerald H. Lipkin, 2016 David M. Cote, 2016 Denise Scott, 2016 Chairman, President, and Chief Chairman and Chief Executive Executive Vice President, Local Executive Officer, Valley National Officer, Honeywell International Initiatives Support Corporation, Bank, Wayne, NJ Inc., Morristown, NJ New York, NY Paul P. Mello, 2017 Terry J. Lundgren, 2017 Emily K. Rafferty, 2017 President and Chief Executive Chairman and Chief Executive President Emerita, The Officer, Solvay Bank, Solvay, NY Officer, Macy’s, Inc., Metropolitan Museum of Art, New York, NY New York, NY James P. Gorman, 2018 Chairman and Chief Executive Glenn H. Hutchins, 2018 Sara Horowitz, 2018 Officer, Morgan Stanley, New Co-Founder, Silver Lake, Executive Director, Freelancers York, NY New York, NY Union, Brooklyn, NY District 3–Philadelphia Class A Class B Class C William S. Aichele, 2016 Edward J. Graham, 2016 Brian McNeill, 2016 Chairman, Univest Corporation Retired Chairman and Chief President and Chief Executive of Pennsylvania, Souderton, PA Executive Officer, South Jersey Officer, TouchPoint, Inc., Industries, Folsom, NJ Concordville, PA Jon Evans, 2017 Patricia Hasson, 2017 President and Chief Executive Michael J. Angelakis, 2017 President and Executive Director, Officer, Atlantic Community Chairman and Chief Executive Clarifi, Philadelphia, PA Bankers Bank, Camp Hill, PA Officer, Atairos, Bryn Mawr, PA Carol J. Johnson, 2018 David R. Hunsicker, 2018 Phoebe Haddon, 2018 Retired President and Chief Chairman, President, and Chief Chancellor, Rutgers Operating Officer, AlliedBarton Executive Officer, New Tripoli University–Camden, Camden, Security Services, Bank, New Tripoli, PA NJ Conshohocken, PA

Federal Reserve System Organization 441 District 4–Cleveland Class A Cincinnati Branch Pittsburgh Branch Beth E. Mooney, 2016 Appointed by the Federal Reserve Bank Appointed by the Federal Reserve Bank Chairman and Chief Executive Austin W. Keyser, 2016 Robert P. Oeler, 2016 Officer, KeyCorp, Cleveland, OH Midwest Regional Director, Chairman, Dollar Bank, Todd A. Mason, 2017 AFL-CIO, McDermott, OH Pittsburgh, PA President and Chief Executive Amos L. Otis, 2017 Audrey Dunning, 2017 Officer, First National Bank of Founder, President, and Chief Chief Executive Officer, Summa, Pandora, Pandora, OH Executive Officer, SoBran, Inc., Pittsburgh, PA Claude E. Davis, 2018 Dayton, OH Chief Executive Officer, First Robert I. Glimcher, 2017 Financial Bancorp, Dwight Eric Smith, 2017 President, Glimcher Group, Inc., Cincinnati, OH President and Chief Executive Pittsburgh, PA Officer, Sophisticated Systems, Dmitri D. Shiry, 2018 Class B Inc., Columbus, OH Managing Partner, Deloitte LLP, Hal Keller, 2016 Tucker Ballinger, 2018 Pittsburgh, PA President, Ohio Capital President and Chief Executive Appointed by the Board of Governors Corporation for Housing, Officer, Forcht Bank, N.A., Columbus, OH Lexington, KY Doris Carson Williams, 2016 President and Chief Executive Charles H. Brown, 2017 Appointed by the Board of Governors Officer, African American Vice President and Secretary, Valarie L. Sheppard, 2016 Chamber of Commerce of Toyota Motor Engineering & Senior Vice President, Western Pennsylvania, Manufacturing North America, Comptroller, and Treasurer, The Pittsburgh, PA Erlanger, KY Procter & Gamble Company, Charles L. Hammel III, 2017 George S. Barrett, 2018 Cincinnati, OH President, PITT OHIO, Chairman and Chief Executive Deborah A. Feldman, 2017 Pittsburgh, PA Officer, Cardinal Health, Inc., President and Chief Executive Dublin, OH Stefani Pashman, 2018 Officer, Dayton Children’s Chief Executive Officer, Three Hospital, Dayton, OH Class C Rivers Workforce Investment Christopher M. Connor, 2016 Christopher C. Cole, 2018 Board, Pittsburgh, PA Executive Chairman, The Chairman and General Manager, Sherwin-Williams Company, Intelligrated, Inc., Mason, OH Cleveland, OH John P. Surma, 2017 Retired Chairman and Chief Executive Officer, United States Steel Corporation, Pittsburgh, PA Dawne S. Hickton, 2018 President and Founding Partner, Cumberland Highstreet Partners, Sewickley, PA

442 103rd Annual Report | 2016 District 5–Richmond Class A Baltimore Branch Charlotte Branch C. Richard Miller, Jr., 2016 Appointed by the Federal Reserve Bank Appointed by the Federal Reserve Bank President and Chief Executive Mary Ann Scully, 2016 Michael C. Crapps, 2016 Officer, Woodsboro Bank, Chairman, President, and Chief President and Chief Executive Woodsboro, MD Executive Officer, Howard Officer, First Community Bank, Robert R. Hill, Jr., 2017 Bancorp, Ellicott City, MD Lexington, SC Chief Executive Officer, South Austin J. Slater, Jr., 2017 Vacancy, 2017 State Corporation and South President and Chief Executive State Bank, Columbia, SC Jerry L. Ocheltree, 2018 Officer, Southern Maryland Susan K. Still, 2018 President and Chief Executive Electric Cooperative, Inc., President and Chief Executive Officer, Carolina Trust Bank, Hughesville, MD Officer, HomeTown Bankshares Lincolnton, NC Corporation and HomeTown Christopher J. Estes, 2018 Vacancy, 2018 Bank, Roanoke, VA President and Chief Executive Officer, National Housing Appointed by the Board of Governors Class B Conference, Washington, DC Elizabeth A. Fleming, 2016 Charles R. Patton, 2016 Laura L. Gamble, 2018 Past President, Converse College, President and Chief Operating Regional President Greater Spartanburg, SC Officer, Appalachian Power Maryland, PNC, Baltimore, MD Claude Z. Demby, 2017 Company, Charleston, WV Vice President Business Appointed by the Board of Governors Thomas C. Nelson, 2017 Development, Cree, Inc., Samuel L. Ross, MD, 2016 Chairman, President and Chief Durham, NC Chief Executive Officer, Bon Executive Officer, National Secours Baltimore Health System, Laura Y. Clark, 2018 Gypsum Company, Baltimore, MD Executive Director, Renaissance Charlotte, NC West Community Initiative, Susan J. Ganz, 2017 Catherine A. Meloy, 2018 Charlotte, NC Chief Executive Officer, Lion President and Chief Executive Brothers Company, Inc., Officer, Goodwill of Greater Owings Mills, MD Washington/Goodwill Excel Center, Washington, DC Kenneth R. Banks, 2018 President and Chief Executive Class C Officer, Banks Contracting Margaret G. Lewis, 2016 Company, Greenbelt, MD Retired President, HCA Capital Division, Richmond, VA Kathy J. Warden, 2017 Corporate Vice President and President, Mission Systems, Northrop Grumman Corporation, Linthicum, MD Russell C. Lindner, 2018 Executive Chairman and Chief Executive Officer, The Forge Company, Washington, DC

Federal Reserve System Organization 443 District 6–Atlanta Class A Birmingham Branch John Hirabayashi, 2018 President and Chief Executive T. Anthony Humphries, 2016 Appointed by the Federal Reserve Bank Officer, Community First Credit President and Chief Executive Robert W. Dumas, 2016 Union of Florida, Officer, NobleBank & Trust, President and Chief Executive Jacksonville, FL Anniston, AL Officer, AuburnBank, Dawn Lockhart, 2018 William H. Rogers, Jr., 2017 Auburn, AL Director of Strategic Partnerships, Chairman and Chief Executive Herschell L. Hamilton, 2017 City of Jacksonville, Officer, SunTrust Banks, Inc., Managing Partner, BLOC Global Jacksonville, FL Atlanta, GA Group, Birmingham, AL Gerard R. Host, 2018 Appointed by the Board of Governors President and Chief Executive David M. Benck, 2018 Carolyn M. Fennell, 2016 Officer, Trustmark Corporation, Vice President and General Senior Director of Public Affairs Jackson, MS Counsel, Hibbett Sports, and Community Relations, Birmingham, AL Greater Orlando Aviation Class B Michael Case, 2018 Authority, Orlando International Airport, Orlando, FL José S. Suquet, 2016 President and Chief Executive Chairman, President, and Chief Officer, The Westervelt Company, David L. Brown, 2017 Executive Officer, Pan-American Tuscaloosa, AL Chairman, Chief Executive Life Insurance Group, Officer, and President, Web.com, Appointed by the Board of Governors New Orleans, LA Jacksonville, FL Brandon W. Bishop, 2016 Jonathan T.M. Reckford, 2017 Harold Mills, 2018 International Representative, Chief Executive Officer, Habitat Southern Region, International Vice Chairman, ZeroChaos, for Humanity International, Union of Operating Engineers, Orlando, FL Atlanta, GA Birmingham, AL Miami Branch Elizabeth A. Smith, 2018 Nancy C. Goedecke, 2017 Chairman and Chief Executive Appointed by the Federal Reserve Bank Chairman and Chief Executive Officer, Bloomin’ Brands, Inc., Officer, Mayer Electric Supply Gary L. Tice, 2016 Tampa, FL Company, Inc., Birmingham, AL Chairman and Chief Executive Officer, First Florida Integrity Class C Pamela B. Hudson, MD, 2018 Bank, Naples, FL Chief Executive Officer, Michael J. Jackson, 2016 Victoria E. Villalba, 2017 Crestwood Medical Center, Chairman, Chief Executive President and Chief Executive Huntsville, AL Officer, and President, Officer, Victoria & Associates AutoNation, Inc., Career Services, Inc., Miami, FL Jacksonville Branch Ft. Lauderdale, FL Carol C. Lang, 2017 Appointed by the Federal Reserve Bank Myron A. Gray, 2017 President, HealthLink President, U.S. Operations, Michael J. Grebe, 2016 Enterprises, Inc., Miami United Parcel Service, Advisory Director, Berkshire Beach, FL Atlanta, GA Partners, Jacksonville, FL Millar Wilson, 2018 Thomas A. Fanning, 2018 Dana S. Kilborne, 2017 Vice Chairman and Chief Chairman, President, and Chief Co-President and Chief Executive Officer, Mercantil Executive Officer, Southern Commercial Officer, Sunshine Commercebank, Company, Atlanta, GA Bank, Orlando, FL Coral Gables, FL

444 103rd Annual Report | 2016 Appointed by the Board of Governors Kent M. Adams, 2018 Phillip R. May, 2018 Rolando Montoya, 2016 President and Chief Executive President and Chief Executive Provost, Miami Dade College, Officer, Caterpillar Financial Officer, Entergy Louisiana, LLC Miami, FL Services Corporation, and Entergy Gulf States Nashville, TN Louisiana, L.L.C., New Thomas W. Hurley, 2017 Orleans, LA Chairman and Chief Executive Appointed by the Board of Governors Officer, Becker Holding Kathleen Calligan, 2016 Suzanne T. Mestayer, 2018 Corporation, Vero Beach, FL Chief Executive Officer, Better Managing Principal, ThirtyNorth Business Bureau Middle Investments, LLC, New Michael A. Wynn, 2018 Tennessee, Nashville, TN Orleans, LA Board Chairman and President, Sunshine Ace Hardware, Bonita Scott McWilliams, 2017 Appointed by the Board of Governors Executive Vice President of Springs, FL Terrie P. Sterling, 2016 Strategic Development, GEODIS, Executive Vice President and Brentwood, TN Nashville Branch Chief Operating Officer, Our Richard D. Holder, 2018 Lady of the Lake Regional Appointed by the Federal Reserve Bank President and Chief Executive Medical Center, Baton Rouge, LA William Y. Carroll Jr., 2016 Officer, NN, Inc., Johnson Fred T. Stimpson III, 2017 President and Chief Executive City, TN Officer, SmartBank, President, U.S. South Operations, Pigeon Forge, TN New Orleans Branch Canfor Scotch Gulf, Mobile, AL R. Craig Holley, 2017 Appointed by the Federal Reserve Bank Art E. Favre, 2018 Chattanooga Chairman, Pinnacle Elizabeth A. Ardoin, 2016 President and Chief Executive Financial Partners, Officer, Performance Contractors, Senior Executive Vice President – Chattanooga, TN Director of Communications, Inc., Baton Rouge, LA Beth R. Chase, 2018 IBERIABANK, Lafayette, LA Chief Executive Officer, Lampkin Butts, 2017 c3/Consulting, Nashville, TN President and Chief Operating Officer, Sanderson Farms, Inc., Laurel, MS District 7–Chicago Class A Class B Class C Abram A. Tubbs, 2016 Jorge Ramirez, 2016 Anne R. Pramaggiore, 2016 Chairman and Chief Executive President, Chicago Federation of President and Chief Executive Officer, Ohnward Bank & Trust, Labor, Chicago, IL Officer, ComEd, Chicago, IL Cascade, IA Nelda J. Connors, 2017 E. Scott Santi, 2017 David W. Nelms, 2017 Chairwoman and Chief Executive Chairman and Chief Executive Chairman and Chief Executive Officer, Pine Grove Holdings, Officer, Illinois Tool Works Inc., Officer, Discover Financial LLC, Chicago, IL Glenview, IL Services, Riverwoods, IL Susan M. Collins, 2018 Greg Brown, 2018 William M. Farrow III, 2018 Joan and Sanford Weill Dean of Chairman and Chief Executive President and Chief Executive Public Policy, University of Officer, Motorola Solutions, Inc., Officer, Urban Partnership Bank, Michigan, Ann Arbor, MI Schaumburg, IL Chicago, IL

Federal Reserve System Organization 445 Detroit Branch Fernando Ruiz, 2017 Michael L. Seneski, 2017 Corporate Vice President and Director, Corporate Strategy, Appointed by the Federal Reserve Bank Treasurer, The Dow Chemical Ford Motor Company, Joseph B. Anderson, Jr., 2016 Company, Midland, MI Dearborn, MI Chairman and Chief Executive Rip Rapson, 2018 Wright L. Lassiter III, 2018 Officer, TAG Holdings, LLC, President and Chief Executive President, Henry Ford Health Wixom, MI Officer, The Kresge Foundation, System, Detroit, MI Sandra Pierce, 2017 Troy, MI Chairman and Senior Vice Appointed by the Board of Governors President, Private Client Group Douglas W. Stotlar, 2016 and Regional Banking Director, Former President and Chief Huntington Michigan, Executive Officer, Con-way Inc., Southfield, MI Ann Arbor, MI District 8–St. Louis Class A Class B Class C D. Bryan Jordan, 2016 Cal McCastlain, 2016 Kathleen M. Mazzarella, 2016 Chairman, President, and Chief Partner, Dover Dixon Horne Chairman, President and Chief Executive Officer, First Horizon PLLC, Little Rock, AR Executive Officer, Graybar National Corporation, Electric Company, Inc., John N. Roberts III, 2017 Memphis, TN St. Louis, MO President and Chief Executive Susan S. Stephenson, 2017 Officer, J.B. Hunt Transport Vacancy, 2017 Co-Chairman and President, Services, Inc., Lowell, AR Suzanne Sitherwood, 2018 Independent Bank, Memphis, TN Daniel J. Ludeman, 2018 President and Chief Executive Patricia L. Clarke, 2018 President and Chief Executive Officer, Spire Inc., St. Louis, MO President and Chief Executive Officer, Concordance Academy of Officer, First National Bank of Leadership, St. Louis, MO Raymond, Raymond, IL

446 103rd Annual Report | 2016 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 Michael A. Cook, 2016 David P. Heintzman, 2016 J. Brice Fletcher, 2016 Senior Vice President and Chairman and Chief Executive Chairman and Chief Executive Assistant Treasurer, Wal-Mart Officer, Stock Yards Bank & Officer, First National Bank of Stores, Inc., Bentonville, AR Trust Company, Louisville, KY Eastern Arkansas, Forrest City, AR Karama Neal, 2017 Mary K. Moseley, 2017 Chief Operating Officer, Southern President and Chief Executive Michael E. Cary, 2017 Bancorp Community Partners, Officer, Al J. Schneider Company, President and Chief Executive Little Rock, AR Louisville, KY Officer, Carroll Bank and Trust, Huntingdon, TN Keith Glover, 2017 Malcolm Bryant, 2017 R. Molitor Ford, Jr., 2017 President and Chief Executive President, The Malcolm Bryant Vice Chairman and Chief Officer, Producers Rice Mill, Inc., Corporation, Owensboro, KY Executive Officer, Commercial Stuttgart, AR Ben Reno-Weber, 2018 Bank and Trust Company, Charles G. Morgan, Jr., 2018 Project Director, The Greater Memphis, TN President and Chief Executive Louisville Project, Louisville, KY Julianne Goodwin, 2018 Officer, Relyance Bank, N.A., Owner, Express Employment Pine Bluff, AR Appointed by the Board of Governors Professionals, Tupelo, MS Randy W. Schumaker, 2016 Appointed by the Board of Governors President and Chief Management Appointed by the Board of Governors P. Mark White, 2016 Officer, Logan Aluminum, Inc., Carolyn Chism Hardy, 2016 President and Chief Executive Russellville, KY President and Chief Executive Officer, Arkansas Blue Cross and Officer, Chism Hardy Blue Shield, Little Rock, AR Alice K. Houston, 2017 Investments, LLC, President, Houston-Johnson, Inc., Ray C. Dillon, 2017 Collierville, TN Louisville, KY President and Chief Executive David T. Cochran, Jr., 2017 Officer, Deltic Timber Susan E. Parsons, 2018 Partner, CoCo Planting Co., Corporation, El Dorado, AR Chief Financial Officer, Secretary, Avon, MS and Treasurer, Koch Enterprises, Robert Martinez, 2018 Eric D. Robertson, 2018 Inc., Evansville, IN Owner, Rancho La Esperanza, President, Community LIFT, DeQueen, AR Memphis, TN District 9–Minneapolis Class A Class B Class C Catherine T. Kelly, 2016 Lawrence R. Simkins, 2016 Kendall J. Powell, 2016 President and Chief Executive President and Chief Executive Chairman and Chief Executive Officer, Minnesota Bank & Trust, Officer, The Washington Officer, General Mills, Inc., Edina, MN Companies, Missoula, MT Minneapolis, MN Kathleen Neset, 2017 MayKao Y. Hang, 2017 Thomas W. Armstrong, 2017 President, Neset Consulting President and Chief Executive President, The First National Service, Tioga, ND Officer, Amherst H. Wilder Bank of Park Falls, Foundation, St. Paul, MN Park Falls, WI Christine Hamilton, 2018 Managing Partner, Christiansen Harry Melander, 2018 Randy L. Newman, 2018 Land and Cattle, Ltd., President, Minnesota Building Chairman and Chief Executive Kimball, SD and Construction Trades Council, Officer, Alerus Financial, NA and St. Paul, MN Alerus Financial Corporation, Grand Forks, ND

Federal Reserve System Organization 447 Helena Branch Barbara Stiffarm, 2018 Marsha Goetting, 2018 Executive Director, Opportunity Professor and Extension Family Appointed by the Federal Reserve Bank Link, Inc., Havre, MT Economics Specialist, Montana Thomas R. Swenson, 2016 State University, Bozeman, MT President and Chief Executive Appointed by the Board of Governors Officer, Bank of Montana and Sarah Walsh, 2017 Bancorp of Montana Holding Chair, PayneWest Insurance, Company, Missoula, MT Helena, MT Duane Kurokawa, 2017 President, Western Bank of Wolf Point, Wolf Point, MT District 10–Kansas City Class A James C. Farrell, 2017 Gary DeFrange, 2017 President and Chief Executive President and Chief Operating Max T. Wake, 2016 Officer, Farmers National Officer, Winter Park Resort, President, Jones National Bank & Company, Omaha, NE Winter Park, CO Trust Co., Seward, NE Paul J. Thompson, 2017 Steve Maestas, 2018 Richard L. Lewis, 2018 President and Chief Executive Chief Executive Officer, Maestas President and Chief Executive Officer, Country Club Bank, Development Group, Officer, RTL Networks Inc., Kansas City, MO Albuquerque, NM Denver, CO Mark A. Zaback, 2018 Denver Branch Oklahoma City Branch President and Chief Executive Officer, Jonah Bank of Wyoming, Appointed by the Federal Reserve Bank Appointed by the Federal Reserve Bank Casper, WY Jeffrey C. Wallace, 2016 Jane Haskin, 2016 Chief Executive Officer, Wyoming President and Chief Executive Class B Bank & Trust, Cheyenne, WY Officer, First Bethany Bank & Len C. Rodman, 2016 Trust, Bethany, OK Ashley J. Burt, 2017 Former Chairman, President, and President, The Gunnison Bank Charles R. Hall, 2016 Chief Executive Officer, Black & and Trust Company, Chairman and Chief Executive Veatch, Overland Park, KS Gunnison, CO Officer, Exchange Bank and Trust Lilly Marks, 2017 Company, Perry, OK Edmond Johnson, 2018 Vice President for Health Affairs, President and Owner, Premier Tina Patel, 2017 University of Colorado and Manufacturing Inc., Chief Financial Officer, Promise Anschutz Medical Campus, Frederick, CO Hotels, Inc., Tulsa, OK Aurora, CO Brent A. Stewart, Sr., 2018 Katharine W. Winograd, 2018 Michael C. Coffman, 2018 President and Chief Executive President, Central New Mexico President and Chief Executive Officer, United Way of Greater Community College, Officer, Panhandle Oil and Gas, Kansas City, Kansas City, MO Albuquerque, NM Inc., Oklahoma City, OK Appointed by the Board of Governors Appointed by the Board of Governors Class C Margaret M. Kelly, 2016 Clint D. Abernathy, 2016 Rose Washington, 2016 Former Chief Executive Officer, President, Abernathy Farms, Inc., Executive Director, Tulsa RE/MAX, LLC, Denver, CO Altus, OK Economic Development Corporation, Tulsa, OK

448 103rd Annual Report | 2016 Douglas J. Stussi, 2017 Jeff W. Krejci, 2017 Eric L. Butler, 2017 Executive Vice President and President and Director, Executive Vice Chief Financial Officer, Love’s Cornerstone Bank, York, NE President-Marketing and Sales, Travel Stops & Country Stores, Union Pacific Railroad, Brian D. Esch, 2018 Oklahoma City, OK Omaha, NE President and Chief Executive Peter B. Delaney, 2018 Officer, McCook National Bank, Kimberly A. Russel, 2018 Former Chairman and McCook, NE President and Chief Executive Chief Executive Officer, Officer, Bryan Health, Thomas J. Henning, 2018 OGE Energy Corporation, Lincoln, NE President and Chief Executive Oklahoma City, OK Officer, Cash-Wa Distributing Co., Kearney, NE Omaha Branch Appointed by the Federal Reserve Bank Appointed by the Board of Governors Anne Hindery, 2016 John F. Bourne, 2016 Chief Executive Officer, International Representative, Nonprofit Association of the International Brotherhood of Midlands, Omaha, NE Electrical Workers, Omaha, NE District 11–Dallas Class A Ann B. Stern, 2018 Jerry Pacheco, 2017 President and Chief Executive President, Global Perspectives J. Russell Shannon, 2016 Officer, Houston Endowment, Integrated, Inc., President and Chief Executive Inc., Houston, TX Santa Teresa, NM Officer, National Bank of Andrews, Andrews, TX Teresa O. Molina, 2017 Class C President, First New Mexico Christopher C. Doyle, 2017 Matthew K. Rose, 2016 Bank, Deming, NM President and Chief Executive Executive Chairman, BNSF Mary E. Kipp, 2018 Officer, Texas First Bank, Railway Company, Chief Executive Officer, El Paso Texas City, TX Fort Worth, TX Electric Company, El Paso, TX Allan James “Jimmy” Rasmussen, Renu Khator, 2017 Appointed by the Board of Governors 2018 Chancellor, University of J. Eric Evans, 2016 President and Chief Executive Houston System, President, Officer, HomeTown Bank, N.A., President of Hospital Operations, University of Houston, Galveston, TX Tenet Healthcare Corp., Texas Houston, TX Region, Dallas, TX Class B Greg L. Armstrong, 2018 Richard D. Folger, 2017 Chairman and Chief Executive Managing General Partner, Curtis V. Anastasio, 2016 Officer, Plains All American Colbridge Partners Ltd., Executive Chairman, GasLog Pipeline L.P., Houston, TX Midland, TX Partners L.P., New York, NY Renard U. Johnson, 2018 El Paso Branch Jorge A. Bermudez, 2017 President and Chief Executive President and Chief Executive Appointed by the Federal Reserve Bank Officer, Management & Officer, The Byebrook Group, Paul L. Foster, 2016 Engineering Technologies LLC, College Station, TX Executive Chairman, Western International Inc. (METI), Refining, Inc., El Paso, TX El Paso, TX

Federal Reserve System Organization 449 Houston Branch Robert C. Robbins, MD, 2017 Alfred B. Jones, 2018 President and Chief Executive President and Director, American Appointed by the Federal Reserve Bank Officer, Texas Medical Center, Bank Holding Corp., Gerald B. Smith, 2016 Houston, TX Corpus Christi, TX Chairman and Chief Executive Officer, Smith, Graham & Ellen Ochoa, 2018 Appointed by the Board of Governors Company Investment Advisors, Government Executive, Director, James “Rad” Conrad Weaver, L.P., Houston, TX NASA Johnson Space Center, 2016 Houston, TX Albert Chao, 2017 Chief Executive Officer, President and Chief Executive McCombs Partners, San Antonio Branch Officer, Westlake Chemical Corp., San Antonio, TX Houston, TX Appointed by the Federal Reserve Bank Manoj Saxena, 2017 R.A. “Al” Walker, 2017 Charles E. Amato, 2016 Managing Director, The Chairman, President, and Chief Chairman and Co-founder, Entrepreneurs’ Fund, Executive Officer, Anadarko Southwest Business Corp. Austin, TX Petroleum Corporation, (SWBC), San Antonio, TX Jesús Garza, 2018 Houston, TX Janie Barrera, 2017 President and Chief Executive David Zalman, 2018 President and Chief Executive Officer, Seton Healthcare Family, Chairman and Chief Executive Officer, LiftFund, Austin, TX Officer, Prosperity Bancshares, San Antonio, TX Houston, TX Robert L. Lozano, 2017 Appointed by the Board of Governors Franchisee Owner and Operator, Marcus A. Watts, 2016 Dairy Queen, Pharr, TX President, The Friedkin Group, Houston, TX District 12–San Francisco Class A Richard A. Galanti, 2017 Alexander R. Mehran, 2018 Executive Vice President and Chairman and Chief Executive Steven R. Gardner, 2016 Chief Financial Officer, Costco Officer, Sunset Development President and Chief Executive Wholesale Corporation, Company, San Ramon, CA Officer, Pacific Premier Bank, Issaquah, WA Irvine, CA Los Angeles Branch Steven E. Bochner, 2018 Megan F. Clubb, 2017 Partner, Wilson, Sonsini, Appointed by the Federal Reserve Bank Chairman of the Board, Baker Goodrich, & Rosati, P.C., Boyer National Bank, David I. Rainer, 2016 Palo Alto, CA Walla Walla, WA Chairman and Chief Executive Officer, California United Bank, Peter S. Ho, 2018 Class C Encino, CA Chairman, President, and Chief Barry M. Meyer, 2016 Executive Officer, Bank of Retired Chairman and Chief Peggy Tsiang Cherng, 2017 Hawaii and Bank of Hawaii Executive Officer, Warner Co-Chair and Co-Chief Executive Corporation, Honolulu, HI Brothers Entertainment, Officer, Panda Restaurant Group, Inc., Rosemead, CA Burbank, CA Class B Chairman and Founder, North Ilyanne Morden Kichaven, 2018 Nicole C. Taylor, 2016 Ten Mile Associates, Executive Director, Los Angeles, Associate Vice Provost for Student Burbank, CA SAG-AFTRA, Los Angeles, CA Affairs and Dean of Community Roy A. Vallee, 2017 Luis Faura, 2018 Engagement and Diversity, Retired Chairman and Chief President and Chief Executive Stanford University, Executive Officer, Avnet, Inc., Officer, C&F Foods, Inc., City of Stanford, CA Phoenix, AZ Industry, CA

450 103rd Annual Report | 2016 Appointed by the Board of Governors Salt Lake City Branch Seattle Branch James A. Hughes, 2016 Appointed by the Federal Reserve Bank Appointed by the Federal Reserve Bank Former Director and Chief Executive Officer, First Solar, Albert T. Wada, 2016 Nicole W. Piasecki, 2016 Inc., Tempe, AZ Chairman, Wada Farms, Inc., Vice President and General Pingree, ID Manager, Propulsion Systems Robert H. Gleason, 2017 Division, Boeing Commercial President and Chief Executive Josh England, 2017 Airplanes, Seattle, WA Officer, Evan Hotels, President, C.R. England, Inc., San Diego, CA Salt Lake City, UT Craig Dawson, 2017 President and Chief Executive Anita V. Pramoda, 2018 Park Price, 2017 Officer, Retail Lockbox, Inc., Chief Executive Officer, Owned Chief Executive Officer Emeritus Seattle, WA Outcomes, Las Vegas, NV and Chairman, Bank of Idaho, Idaho Falls, ID Carol K. Nelson, 2017 Portland Branch Pacific Region Sales Executive and Susan D. Mooney Johnson, 2018 Seattle Market President, Appointed by the Federal Reserve Bank President, Futura Industries, KeyBank, Seattle, WA Steven J. Zika, 2016 Clearfield, UT Chief Executive Officer, Hampton West Mathison, 2018 Appointed by the Board of Governors Affiliates, Portland, OR President, Stemilt Growers, LLC, Peter R. Metcalf, 2016 Wenatchee, WA Robert C. Hale, 2017 Founder, Brand Advocate and Chief Executive Officer, Hale CEO Emeritus, Black Diamond, Appointed by the Board of Governors Companies, Hermiston, OR Inc., Salt Lake City, UT Sophie Minich, 2016 Charles A. Wilhoite, 2017 President and Chief Executive Patricia R. Richards, 2017 Managing Director, Willamette Officer, Cook Inlet Region, Inc., President and Chief Executive Management Associates, Anchorage, AK Officer, SelectHealth, Inc., Portland, OR Murray, UT Scott L. Morris, 2017 S. Randolph Compton, 2018 Chairman, President and Chief President, Chief Executive Officer, Arthur F. (Skip) Oppenheimer, Executive Officer, Avista and Co-Chairperson of the Board, 2018 Corporation, Spokane, WA Pioneer Trust Bank, N.A., Chairman and Chief Executive Salem, OR Officer, Oppenheimer Companies, Greg C. Leeds, 2018 Inc., Boise, ID President and Chief Executive Appointed by the Board of Governors Officer, Wizards of the Coast, Joseph E. Robertson Jr., MD, Hasbro, Inc., Renton, WA 2016 President, Oregon Health & Science University, Portland, OR Tamara L. Lundgren, 2017 President and Chief Executive Officer, Schnitzer Steel Industries, Inc., Portland, OR Román D. Hernández, 2018 Partner, K&L Gates, Portland, OR

Federal Reserve System Organization 451 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 Valarie L. Sheppard, Chair Pamela B. Hudson, MD, Chair John F. Fish, Chair Toby Trocchio, Senior Regional Lesley McClure, Vice President Gary L. Gottlieb, MD, Deputy Officer and Regional Executive Chair Eric S. Rosengren, President and Pittsburgh Jacksonville Chief Executive Officer Doris Carson Williams, Chair Carolyn M. Fennell, Chair Kenneth C. Montgomery, First Vice President and Chief Guhan Venkatu, Senior Regional Christopher L. Oakley, Vice Operating Officer Officer President and Regional Executive Miami New York Richmond Rolando Montoya, Chair Emily K. Rafferty, Chair Russell C. Lindner, Chair Karen Gilmore, Vice President and Sara Horowitz, Deputy Chair Margaret G. Lewis, Deputy Chair Regional Executive William C. Dudley, President Jeffrey M. Lacker, President Michael Strine, First Vice Mark L. Mullinix, First Vice Nashville President President Kathleen Calligan, Chair Additional office at East Rutherford, NJ Baltimore Lee Jones, Vice President and Regional Executive Samuel L. Ross, MD, Chair Philadelphia David E. Beck, Senior Vice New Orleans Michael J. Angelakis, Chair President and Baltimore Regional Art E. Favre, Chair Brian McNeill, Deputy Chair Executive Adrienne C. Slack, Vice President Patrick T. Harker, President Charlotte and Regional Executive James D. Narron, First Vice President Laura Y. Clark, Chair Chicago Matthew A. Martin, Senior Vice Cleveland President and Charlotte Regional Greg Brown, Chair Executive Anne R. Pramaggiore, Deputy Christopher M. Connor, Chair Chair John P. Surma, Deputy Chair Atlanta Charles L. Evans, President Loretta J. Mester, President Ellen J. Bromagen, First Vice Thomas A. Fanning, Chair Gregory Stefani, First Vice President and Chief Operating President Michael J. Jackson, Deputy Chair Officer Dennis P. Lockhart, President Additional office at Des Moines, IA Marie C. Gooding, First Vice President

452 103rd Annual Report | 2016 Detroit Helena Houston Douglas W. Stotlar, Chair Sarah Walsh, Chair Ellen Ochoa, Chair Robert Wiley, Senior Vice Susan Woodrow, Assistant Vice Daron D. Peschel, Officer in President, Chief Information President and Branch Executive Charge Officer, District Operations and Detroit Branch Manager Kansas City San Antonio Manoj Saxena, Chair Steve Maestas, Chair St. Louis Blake Hastings, Officer in Charge Rose Washington, Deputy Chair Kathleen M. Mazzarella, Chair Esther L. George, President San Francisco Suzanne Sitherwood, Deputy Kelly J. Dubbert, First Vice Chair President Roy A. Vallee, Chair James B. Bullard, President Alexander R. Mehran, Deputy Denver David A. Sapenaro, First Vice Chair President and Chief Operating Margaret M. Kelly, Chair John C. Williams, President Officer Alison Felix, Vice President and Mark A. Gould, First Vice Branch Executive President Little Rock Oklahoma City Additional office at Phoenix, AZ Ray C. Dillon, Chair Robert A. Hopkins, Regional Peter B. Delaney, Chair Los Angeles Executive and Vice President Chad R. Wilkerson, Vice President James A. Hughes, Chair and Branch Executive Roger W. Replogle, Regional Louisville Executive Omaha Susan E. Parsons, Chair John F. Bourne, Chair Portland Nikki R. Jackson, Regional Executive and Vice President Nathan Kauffman, Assistant Vice Joseph E. Robertson, Jr., MD, President and Branch Executive Chair Memphis Lynn Jorgensen, Regional Dallas Carolyn Chism Hardy, Chair Executive Douglas G. Scarboro, Regional Renu Khator, Chair Salt Lake City Executive and Vice President Matthew K. Rose, Deputy Chair Robert S. Kaplan, President Peter R. Metcalf, Chair Minneapolis Helen E. Holcomb, First Vice Robin A. Rockwood, Officer in President Charge MayKao Y. Hang, Chair Kendall J. Powell, Deputy Chair El Paso Seattle Neel T. Kashkari, President Richard D. Folger, Chair Scott L. Morris, Chair James M. Lyon, First Vice Roberto A. Coronado, Officer in Darlene Wilczynski, Regional President Charge Executive

Federal Reserve System Organization 453 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 17–18 and November 15–16, 2016. The conference’s executive committee members for 2016 are listed below.1 Conference of Chairs Thomas A. Fanning, Vice Chair, Executive Committee—2016 Federal Reserve Bank of Atlanta Roy A. Vallee, Chair, Steve Maestas, Member, Federal Reserve Bank Federal Reserve Bank of of San Francisco Kansas City 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 2016 are listed below. Conference of Presidents—2016 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 Joel W. Werkema, Assistant Secretary, Federal Reserve Bank of Boston 1 On November 16, 2016, the Conference of Chairs elected Thomas A. Fanning, chair of the Federal Reserve Bank of Atlanta, as chair of the conference’s executive committee for 2017. The conference also elected Rose Washington, deputy chair of the Federal Reserve Bank of Kansas City for 2017 as vice chair, and Margaret G. Lewis, deputy chair of the Federal Reserve Bank of Richmond for 2017, as the executive committee’s third member.

454 103rd Annual Report | 2016 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 2016 are listed below.2 Conference of First Vice Terri Bialowas, Secretary, Presidents—2016 Federal Reserve Bank of Cleveland Gregory Stefani, Chair, Federal Reserve Bank Erika Ramirez, Assistant of Cleveland Secretary, Federal Reserve Bank Kelly J. Dubbert, Vice Chair, of Kansas City Federal Reserve Bank of Kansas City 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.

455 15 Index A Federal Reserve Banks, 358–407 by Government Accountability Office, 409 Abbreviations, 359 by Office of Inspector General, 408 Accounting and Auditing Working Group, 64 AUM. See Assets under management Accounting Experts Group, 64 Automated clearinghouse (ACH) services, 97, 98 Accounting policies, 64–65, 341–344, 364–366, 376–378 Automated Standard Application for Payments (ASAP), Accumulated other comprehensive income, 353 103–104 ACH. See Automated clearinghouse services Acquisitions, 84–86 Advanced foreign economies (AFEs), 15–16, 28–29 B Advisory Councils Baker, Bloom, and Davis index, 36 Community Advisory Council, 437 Balance sheets Community Depository Institutions Advisory Council, Board of Governors, 337 436 Federal Reserve Banks, 18, 30 Federal Advisory Council, 435 Bank for International Settlements, 67 Model Validation Council, 438 Bank holding companies (BHCs) AFEs. See Advanced foreign economies Banks affiliated with, 307 Agreement corporations, 54–55 Capital planning, 51 Agriculture, U.S. Department of, 93 Complaints against, 89–90 AIG. See American International Group, Inc. Consolidated supervision, 80 Alternative work arrangements, 95 Consumer protection regulations, 79 American International Group, Inc. (AIG), 54 Developments in 2016, 45 AML. See Anti-money laundering International activities, 54–55 Anti-money laundering (AML) Number of, 49, 52 Bank Secrecy Act/Anti-Money Laundering Examination Regulation of, 73–76 Manual, 67 Regulatory assessment fees, 76–77 Compliance risk management, 66–67 Regulatory capital ratios, 37–38 Compliance with regulatory requirements, 55–56 Regulatory reports, 69–70 Examinations, 55–56 RFI/C(D) system, 52 Experts Group, 67 Stress testing, 41, 51 International coordination, 67 Supervision of, 47–49, 52, 68 Appropriate monetary policy, 172, 176, 208, 214, 252–258, Supervisory assessment fees, 76–77 291, 297 Surveillance and off-site monitoring, 58–59 Argentina, Economy of, 16 Bank Holding Companies and Change in Bank Control ASAP. See Automated Standard Application for Payments (Regulation Y), 120 ASBA. See Association of Supervisors of Banks of the Bank Holding Company Act, 68, 73–74 Americas Bank Holding Company Performance Reports (BHCPRs), Asia, Economy of, 16 58, 59 Asia-Pacific Economic Cooperation, 59 Bank Management System, 104 Assets and liabilities Bank Merger Act, 73, 74 Commercial banks, 316 Bank of America, 41 Federal Reserve Banks, 18, 111–114, 308–309 Bank of Canada, Monetary policies, 29 Valuations, 34–37 Bank of England, Monetary policies, 16, 29 Assets under management, 38 Bank of Japan, Monetary policies, 16, 29 Association of Supervisors of Banks of the Americas Bank Secrecy Act (BSA), 55–56, 66–67 (ASBA), 59 Bank Secrecy Act/Anti-Money Laundering Examination Audits Manual, 56, 67 Board of Governors, 334–357 Banking offices, 50

456 103rd Annual Report | 2016 Banking organizations, U.S. See also Bank holding Bonds companies; Commercial banks Corporate, 12, 14, 20, 25–26, 27, 36 Affiliation with bank holding companies, 307 General obligation, 28 Enhanced prudential standards, 60–61 High-yield, 36–37 Equity prices, 37 Municipal, 14–15, 28 Financial stability monitoring, 33–40 Borrowing. See Debt International activities, 55 Branches. See Federal Reserve Banks Overseas investments by, 75 Brazil, Economy of, 16, 29 Regulation of, 41–42, 73–76 BSA. See Bank Secrecy Act Supervision of, 40–41, 47–60, 68 Budgets, Federal Reserve System Banque de France, 59 Board of Governors, 414–416 Barclays, 38 Budget performance, 2016, 412, 414, 417–420, 423 Basel Committee on Banking Supervision (BCBS) Capital budgets, 2016, 413, 415–416, 418, 422–423, 425 Accounting Experts Group, 64 Currency, 423–425 AML Experts Group, 67 Federal Reserve Banks, 418–423 Supervisory policies, 62–63 Office of Inspector General, 416–418 Website, 63 Operating expense budget, 2016, 412–413, 414–415, 418, Basel III, 63 420–421, 423 BCBS. See Basel Committee on Banking Supervision Overview, 411 Benefits Equalization Plan, 346–348 Trends in expenses and employment, 412–413 BEP. See Bureau of Engraving and Printing Burden reduction initiatives, 70–71 BHCPRs. See Bank Holding Company Performance Bureau of Economic Analysis (BEA), 25 Reports Bureau of Engraving and Printing (BEP), 101, 356, BHCs. See Bank holding companies 423–424 Biggert-Waters Flood Insurance Reform Act, 91 Bureau of Labor Statistics, 7 BLS. See Bureau of Labor Statistics Business sector, 11–12, 20, 25, 40–41 BNY Mellon, 41 Board of Governors C Accounting policies, 341–344 Accumulated other comprehensive income, 353 Call Reports, 47, 58–59, 69, 70–71 Advisory councils, 435–438 Canada, Economy of, 16, 28 Audits, 334–357 Capital Balance sheets, 337 Countercyclical capital buffer, 41 Budget, 414–416 Federal Reserve Banks, 362, 373 Cash flows, 339 Capital Adequacy of Bank Holding Companies, Savings Commitments and contingencies, 356 and Loan Holding Companies, and State Member Division of Supervision and Regulation, 55 Banks (Regulation Q), 117, 118–119, 124 Divisions, 427–431 Capital leases, 345 Financial statements, 334–357 Capital planning, 51, 120 Functions for Reserve Banks, 354 Caribbean Group of Banking Supervisors, 59 Government Performance and Results Act requirements, Cash flows, Board of Governors, 339 121 Cash-management services, 104–105 H.2 statistical release, 76 Cash Management System, 105 Leases, 345 CashForward, 101 Litigation, 301–302, 356 CC Rating System. See Uniform Interagency Consumer Members, 427 Compliance Rating System Officers, 427–431 CCAR. See Comprehensive Capital Analysis and Review Operations and services, 340–341 CCIWG. See Cybersecurity and Critical Infrastructure Operations statements, 338 Working Group Policy actions, 123–130 CCyB. See Countercyclical capital buffer Postemployment benefits, 352 CDFI. See Community Development Financial Postemployment restrictions, 128 Institutions Postretirement benefits, 351–352 CECL. See Current expected credit losses Primary credit rate, 18 Central Bank of the Unite Arab Emirates, 59 Property, equipment, and software, 344–345 CEP. See Currency Education Program Retirement benefits, 346–352 Certificates of deposit, 38 Structure, 340 CFTC. See Commodities Futures Trading Commission Website, 1, 5, 76, 121 Change in Bank Control Act, 73, 74

Index 457 Chicago Board Options Exchange, 77 Coordination with Consumer Financial Protection Chile, economy of, 29 Bureau, 86 China, Economy of, 15–16, 26, 28, 29 Coordination with Federal banking agencies, 86–87 C&I loans. See Commercial and industrial loans Emerging-issues analysis, 92–93 Civil money penalties, 58, 126, 342 Enforcement activities, 82–84 Coin. See Currency and coin operations Examinations, 86–87 Collection Information Repository, 104 Examiner training, 87–89 Collection services, Federal Reserve Banks, 104, 373 Flood insurance, 83–84, 91 Commercial and industrial (C&I) loans, 25–26, 27 Mergers and acquisitions, 84–86 Commercial automated clearinghouse service, 98 Mortgage servicing and foreclosure, 80–82 Commercial banks Policy Analysis, 92–93 Assets and liabilities, 316 Supervision, 79–91 Credit availability, 14 Threshold adjustment calculation, 91–92 Commercial check-collection service, 98 Consumer complaints, 89–91 Commercial paper, 38 Consumer compliance examiner training, 87–89 Commercial real estate (CRE) loans, 26, 36–37 Consumer Compliance Rating System, 87–88, 128 Committee of Sponsoring Organizations of the Treadway Consumer Credit Protection Act, 82 Commission (COSO), 106 Consumer Financial Protection Bureau (CFPB), 82, 86, 91 Committee on Payments and Market Infrastructures Consumer inquiries, 91 (CPMI), 48, 57, 63–64, 67 Consumer Leasing (Regulation M), 125 Commodities Futures Trading Commission (CFTC), 54, 67 Consumer Leasing Act, 91 Community Advisory Council, 437 Consumer Price Index for Urban Wage Earners and Community affairs. See Consumer and community affairs Clerical Workers (CPI-W), 91–92 Community Affairs Officers, 93 Consumer prices, 20, 23, 176, 258, 297 Community banks, 47 Consumer spending, 24 Community Depository Institutions Advisory Council, 436 Continuing professional development, 73 Community development, 93–95 Core inflation, 20, 166, 172, 205–206, 215, 249–250, 259, Community Development Financial Institutions (CDFI), 288–289 59 Corporate bonds, 12, 14, 20, 25–26, 27, 36 Community Reinvestment Act (CRA) Corporate debt, 6 Consumer protection regulations, 79 Correspondent Banking Working Group, 67 Mergers and acquisitions in relation to, 84–85 COSO. See Committee of Sponsoring Organizations of the Minority-owned depository institutions regulations, 60 Treadway Commission Policy statements, 127 Cost recovery, 97–98, 115 Requirements of, 84 Countercyclical capital buffer, 41, 62, 117, 127–128 Complaint referrals, 91 Counterfeit deterrence, 425 Compliance management system, 88 Counterterrorism activities, 66–67 Compliance Outlook Live, 83 CPI-W. See Consumer Price Index for Urban Wage Compliance risk management, 66–67 Earners and Clerical Workers Comprehensive Capital Analysis and Review (CCAR), 40, CPMI. See Committee on Payments and Market 50, 51, 61, 120 Infrastructures Comptroller of the Currency, Office of the (OCC), 52, 55, CRA. See Community Reinvestment Act 80, 84 CRE. See Commercial real estate loans Condition statements, Federal Reserve Banks, 318–322, 360 Credit Conferences, Federal Reserve Banks Officers, 453–454 Availability, 6, 10, 14, 20, 24–25, 27 Congress. See Monetary policy reports to Congress; Nonfinancial sector, 39 specific legislation by name Primary, 129, 306 Congressional Budget Office (CBO), 12 Risk management, 65–66 Consolidated supervision, 49–55 Seasonal, 129, 306 Consolidation, 366 Secondary, 129, 306 Consumer and community affairs Securities credit, 57, 77 Bank holding company consolidated supervision, 80 Credit by Banks and Persons other than Brokers or Dealers Community development, 93–95 for the Purpose of Purchasing or Carrying Margin Community Reinvestment Act requirements, 84 Stock (Regulation U), 77, 317 Consumer complaints and inquiries, 89–91 Credit by Brokers and Dealers (Regulation T), 77, 317 Consumer laws and regulations, 91–92 Credit float, 100 Consumer research, 92 Credit-risk management, 65–66

458 103rd Annual Report | 2016 Credit Suisse, 37–38 Regulatory developments in 2016, 117–121 Critical Infrastructure, 57–58 Savings and loan holding companies authority, 52 Currency and coin operations, 101, 310–311, 314–315, 356, Stress testing, 40, 51, 65 367, 423–425 Supervisory assessment fees, 76–77 Currency Education Program (CEP), 101, 425 Volcker rule, 68, 128–129 Currency reader program, 424 DOJ. See Justice, U.S. Department of Current expected credit losses (CECL), 64, 65 Dollar exchange rate, 15, 28 Cybersecurity, 41, 47, 48, 57–58 Dollar-roll-implied rates, 27 Cybersecurity and Critical Infrastructure Working Group Dow Jones bank index, 14 (CCIWG), 57–58 DPI. See Disposable personal income D E Daylight overdrafts, 105 EagleCash, 104 DCCA. See Division of Consumer and Community ECB. See European Central Bank Affairs ECI. See Employment cost index Debt ECOA. See Equal Credit Opportunity Act Business, 40–41 Economic Growth and Regulatory Paperwork Reduction Corporate, 6, 40–41 Act, 47, 70 Household, 6, 24–25, 39 Economy, U.S. Long-term debt requirement, 117–118 Activity review, 143–146, 155–158, 181–184, 195–198, Nonfinancial sector, 39 220–223, 238–241, 264–268, 277–280 Defense, U.S. Department of (DOD), 87 Business sector, 11–12, 25, 40–41 Deferred credit items, 373 Financial markets, 13–15, 26–28, 142–143, 155, 181, Deposit Insurance Fund, 74 194–195, 219–220, 238, 264, 276–277 Depository institutions Forecast uncertainty, 178, 216, 260, 299 Discount rates in 2016, 129–130 Government sector, 12, 13, 26 Interest rates on loans, 306 Household sector, 11, 20, 24–25, 39, 92 Reserve requirements, 306 Housing sector, 11, 25, 36–37, 93–94 Reserves of, 308–311, 312–315 Interest rates, 5, 17, 18, 24–25, 129, 306 Deposits Labor market, 5, 6, 7–8, 20, 21–22, 94–95 Federal Reserve Banks, 310–311, 372–373 Outlook and projections, 146–150, 158–162, 168–172, Reconciliation practices, 87 184–189, 198–202, 205–208, 224–228, 241–245, Derivative instruments, 390–391 249–252, 268–271, 280–284, 287–291 Designated Financial Market Utilities (Regulation HH), 54 Policy actions, 16–19, 29–31, 123–130, 150–152, Designated nonfinancial companies, 54 162–165, 189–192, 202–204, 228–231, 245–248, Deutsche Bank, 37–38 271–274, 284–286 DFAST. See Dodd-Frank Act stress tests Prices, 5, 8–9, 11, 20, 23, 27 Direct Voucher Submission, 105 Recent economic and financial developments, 7–16, Discount rates, 18, 129–130 21–29 Disposable personal income (DPI), 10, 25 State and local governments, 13, 26 Distributed ledger technology (DLT), 100 Uncertainty and risk, 176–177, 214–215, 258–259, Division of Consumer and Community Affairs (DCCA), 297–298 55, 59, 79, 82–84, 87, 91–92, 94–95 Edge Act, 48, 49, 53, 54–55, 80 Division of Supervision and Regulation, 55, 59, 88 EGRPRA. See Economic Growth and Regulatory DLT. See Distributed ledger technology Paperwork Reduction Act DOD. See Defense, U.S. Department of EIWA. See Enterprising and Informal Work Activity Dodd-Frank Wall Street Reform and Consumer survey Protection Act Electronic commerce, 104 Designated nonfinancial companies regulations, 54 Emerging market economies (EMEs), 15–16, 29 Enhanced prudential standards implementation, 45–46, EMEs. See Emerging market economies 60 Employment, 5, 7, 20, 22. See also Labor markets; Financial market utilities regulations, 53 Unemployment Financial Stability Oversight Council activities, 42–43 Employment cost index (ECI), 22 Incentive compensation regulation, 68 Energy prices, 5, 8–9, 11, 20, 23, 27 Orderly Liquidation Authority, 46 Enforcement actions Partnership for Progress program, 59 Consumer and community affairs, 82–84 Regulatory assessment fees, 76–77 Federal Reserve System, 58, 76–77

Index 459 Enhanced prudential standards, 41, 45–46, 60–61 Federal Deposit Insurance Corporation (FDIC), 41, 46, 55, Enhanced Prudential Standards (Regulation YY), 117–119, 69, 84 120, 126 Federal Deposit Insurance Corporation Improvement Act, Enterprising and Informal Work Activity (EIWA) survey, 52 95 Federal Emergency Management Agency (FEMA), 58, 84 Equal Credit Opportunity Act (ECOA), 82–83 Federal Financial Institutions Examination Council Equipment and software, 344–345, 371, 393 (FFIEC) Equity markets and prices, 13–14, 15, 20–21, 27, 37 Bank Secrecy Act/Anti-Money Laundering Examination Equity risk premium, 35 Manual, 56, 67 European Central Bank (ECB), Monetary policies, 16, 28, Board responsibilities, 355 29 BSA/AML working group, 67 European Union, United Kingdom exit from, 13, 28 Call reports, 47, 69, 70–71 Examinations and inspections Coordination with other banking agencies, 86–87 Anti-money laundering, 55–57 Cybersecurity, 57–58 Consumer and community affairs, 86–87 Examiner Exchange webinars, 89 Critical infrastructure, 57–58 Information Technology Examination Handbook, 56 Cybersecurity, 57–58 Regulatory reports, 47, 70–71 Examiner training, 87–89 Task Force on Surveillance Systems, 59 Federal Reserve Banks, 49, 106–107 Uniform Interagency Consumer Compliance Rating Fiduciary activities, 56 System, 87–88 Information technology activities, 56 Website, 58 Securities credit lenders, 57 Federal funds rate, 6, 13, 16–17, 21, 27, 29–30, 166, 169, Securities dealers and brokers, government and 175, 207, 213, 251, 257, 290, 296 municipal, 56–57 Federal government, Fiscal policy, 26 Specialized, 56–58 Federal Home Loan Mortgage Association, Federal Transfer agents, 56 Reserve Bank services to, 105 Updating FFIEC procedures, 86–87 Federal National Mortgage Association, Federal Reserve Examiner Commissioning Program, 72–73 Bank services to, 105 Expedited Funds Availability Act, 87 Federal Open Market Committee (FOMC). See also Open Expenses. See Income and expenses market operations Exports, 12, 26 Annual organizational matters, 133–142 EZPay, 104 Appropriate monetary policy, 172, 176, 208, 214, 252–258, 291, 297 Domestic open market operations, 134–136 F Economic outlook, 146–150, 158–162, 168, 172, Fair Housing Act, 82–83, 91 184–189, 198–202, 205–208, 224–228, 241–245, Fair lending enforcement, 82–83 249–252, 268–271, 280–284, 287–291 Fair value measurement, 375, 391–392 Economic review, 143–146, 155–158, 181–184, 195–198, Farm Credit Administration (FCA), 57, 77 220–223, 238–241, 264–268, 277–280 FASB. See Financial Accounting Standards Board Financial market developments, 142–143, 155, 181, FAST Act. See Fixing America’s Surface Transportation 194–195, 219–220, 238, 264, 276–277 Act of 2015 Financial review, 145–146 Faster Payments Task Force, 99 Forecast uncertainty, 178, 216, 260, 299 FATF. See Financial Action Task Force Foreign currency operations and directives, 136–141, FBIIC. See Financial and Banking Information 233–238 Infrastructure Committee Inflation outlook, 166–167, 172–174, 177 FCA. See Farm Credit Administration Meeting minutes, 131–299 FDIC. See Federal Deposit Insurance Corporation Members, 433 FedACH, 97–98 Monetary policy strategies and communications, 16–19, Federal Advisory Council, 435 29–31, 141–142, 218–219, 262–264 Federal agency securities and obligations Notation votes, 153, 165, 192, 204, 231, 248, 274, 286 Federal Reserve Bank holdings, 305, 308–309, 312–313, Officers, 433–434 367–370 Policy actions, 16–19, 28–31, 150–152, 162–165, Open market transactions, 303–304 189–192, 202–204, 228–231, 245–248, 271–274, Federal Civil Penalties Inflation Adjustment Act 284–286 Improvements Act, 58, 126 Policy Normalization Principles and Plans, 30–31, Federal Deposit Insurance Act, 52 142–143

460 103rd Annual Report | 2016 Relationship between monetary policy and financial Investments held by consolidated VIEs, 389–392 stability, 180–181 Loans and other credit extensions, 109–110, 378–379 Summary of Economic Projections, 6, 20, 21, 152–153, National Settlement Service, 100 166–178, 204–216, 248–260, 286–299 Notes, 371–372 Uncertainty and risks, 176–177, 214–215, 258–259, Open market transactions, 303–304 297–298 Operating expenses, 114 Federal Reserve Act, 53, 55, 73, 74–75 Operations, volume of, 329 Federal Reserve Bank of Atlanta, 22, 320–321, 323–325 Operations and services, 363–364 Federal Reserve Bank of Boston, 318–319, 323–325 Operations statements, 361 Federal Reserve Bank of Chicago, 320–321, 323–325 Payment services, 103–104 Federal Reserve Bank of Cleveland, 318–319, 323–325 Payment system, 99 Federal Reserve Bank of Dallas, 320–321, 323–325 Postemployment benefits, 404 Federal Reserve Bank of Kansas City, 320–321, 323–325 Postretirement benefits, 401–404 Federal Reserve Bank of Minneapolis, 320–321, 323–325 Premises, 110, 127, 331, 371, 393 Federal Reserve Bank of New York, 13, 318–319, 323–325 Priced services, 97–100, 111–115 Federal Reserve Bank of Philadelphia, 23, 318–319, Restructuring charges, 375–376, 405–406 323–325 Retail securities programs, 103 Federal Reserve Bank of Richmond, 318–319, 323–325 Retirement plans, 394–401 Federal Reserve Bank of San Francisco, 320–321, 323–325 Salaries of officers and employees, 330 Federal Reserve Bank of St. Louis, 320–321, 323–325 Securities holdings, 109, 305 Federal Reserve Banks Services provided to other entities, 105 Accounting policies, 364–366, 376–378 Structure, 363 Assessments, 374–375 Surplus, 373 Assets and liabilities, 18, 111–113, 310–311, 312–315 System Open Market Account holdings and loans, Audits, 358–407 108–110, 379–388 Automated clearinghouse (ACH) services, 97, 98 Taxes, 375 Balance sheets, 18, 30 Thrift plans, 401 Branches, 439–452 Treasury securities services, 103, 374 Budget, 418–423 Wholesale securities programs, 103 Capital, 362, 373 Federal Reserve Consumer Help (FRCH), 89 Cash-management services, 104–105 Federal Reserve System. See also Board of Governors; Collection services, 104 Federal Reserve Banks Commercial check-collection service, 98 Accounting policies, 64–65 Commitments and contingencies, 393–394 Budget, 411–425 Condition statements, 318–322, 360 Compliance risk management, 66–67 Consolidated variable interest entity, 389–392 Compliance with regulatory requirements, 55–56 Cost recovery, 97–98, 115 Consolidated supervision, 49–55 Credit outstanding, 308–309, 312–315 Credit-risk management, 65–66 Currency and coin operations, 101 Developments in 2016, 41–43, 45–47 Deposits, 372–373 Enforcement actions, 58, 76–77 Directors, 439–452 Enhanced prudential standards, 60–61 Earnings remittances, 373–374 Examinations and inspections, 49 Equipment and software, 371, 393 Financial stability activities, 33–44 Examinations, 49, 106–107 Incentive compensation, 67–68 Fair value, 375 International activities, 62–64 FedLine access to services, 105–106 Maps, 2–3 Fedwire Funds Service, 98–100 Overview, 1–2 Fedwire Securities Service, 100 Public notice of decisions, 76 Financial statements, 111–115, 358–407 Regulatory developments in 2016, 117–121 Fiscal agency services, 102–105 Regulatory reports, 69–71 Float, 100 Regulatory responsibilities, 41–42, 73–76 Government depository services, 102–105 Safety and soundness responsibilities, 49–60 Income and expenses, 107–108, 111–115, 323–328, 405, Specialized examinations, 56–58 407 Staff development, 72–73 Information technology, 106 Supervision responsibilities, 40–41, 47–60 Interest rates on depository institutions loans, 306 Supervisory information technology, 71–72 Intraday credit, 105 Supervisory policy, 60–71

Index 461 Surveillance and off-site monitoring, 58–59 Governing documents revision, 233–238 Training and technical assistance, 59–60 Liquidity swaps, 235–236 Website, 51, 57, 61 Procedural instructions, 139–141 Federal Trade Commission Act, 82, 83 Foreign economies, 15–16. See also Advanced foreign FedLine, 105–106 economies; Emerging market economies; specific FedPayments Improvement website, 99 countries by name Fedwire Funds Service, 98–100 FRBNY. See Federal Reserve Bank of New York Fedwire Securities Service, 98, 100 FRCH. See Federal Reserve Consumer Help FEMA. See Federal Emergency Management Agency Freedom of Information Act regulations, 126–127, 276 FFIEC. See Federal Financial Institutions Examination FSB. See Financial Stability Board Council FSOC. See Financial Stability Oversight Council FHCs. See Financial holding companies Funds transfer pricing, 68 Financial Accounting Standards Board (FASB), 64, 65 Futures prices, 9 Financial Action Task Force (FATF), 67 Financial and Banking Information Infrastructure G Committee (FBIIC), 57–58 G-invoicing system, 104 Financial Crimes Enforcement Network (FinCEN), 67 GAO. See Government Accountability Office, U.S. Financial holding companies (FHCs) GDI. See Gross domestic income Regulation of, 73–76 GDP. See Gross domestic product Supervision of, 52, 62 GE Capital Global Holdings, 42–43 Financial Industry Regulatory Authority, 77 GECC. See General Electric Capital Corporation, Inc. Financial market infrastructures (FMIs), 48, 57, 127 General Electric Capital Corporation, Inc., 54 Financial market utilities (FMUs), 53–54 General obligation bonds, 28 Financial Market Utilities Supervision Committee “Gig” economy, 95 (FMU-SC), 54 GLBA. See Gramm-Leach Bliley Act Financial markets, 13–15, 20, 26–28, 142–143, 155, 181, Global systemically important banking institution (G-SIB), 194–195, 219–220, 238, 264, 276–277 41, 46, 61, 63, 118 Financial Stability Board (FSB), 43, 63 Gold stock, 308–309, 312–313, 366–367 Financial Stability Institute, 59 Government Accountability Office, U.S. (GAO), 409 Financial Stability Oversight Council (FSOC), 33, 42–43, Government depository services, 102–105 48, 54, 64, 76 Government Development Bank, 28 Financial statements Government National Mortgage Association, Federal Board of Governors, 334–357 Reserve Bank services to, 105 Federal Reserve Banks, 111–115, 358–407 Government Performance and Results Act (GPRA), 121 FinCEN. See Financial Crimes Enforcement Network Government sector, 12, 13, 26. See also Federal Fiscal agency services, 102–105 government; State and local governments Fiscal Service, 103 Government Securities Act, 56 Fixing America’s Surface Transportation Act of 2015, 18, Government securities dealers and brokers, Federal Reserve 30, 86–87, 107 examination, 56–57 Float, Federal Reserve Banks, 100, 308–309, 312–313 Government-sponsored enterprises (GSEs), 107, 109, Floating Rate Note, 103 368–370 Flood insurance, 83–84, 91 GPRA. See Government Performance and Results Act FMIs. See Financial market infrastructures Gramm-Leach Bliley Act, 52, 74, 86 FMUs. See Financial market utilities Gross domestic income, 10 FOMC. See Federal Open Market Committee Gross domestic product, 5, 7, 10, 12, 14, 20, 21, 24, 26, 39, Food prices, 20 166–167, 170, 176–177, 205–206, 209, 214–215, Forecast uncertainty, 178, 260, 299 249–250, 253, 258–259, 288–289, 292, 297–298 Foreclosures, Prevention actions, 81–82 GSEs. See Government-sponsored enterprises Foreign Assets Control, Office of (OFAC), 67 G-SIB. See Global systemically important banking Foreign Bank Supervision Enhancement Act, 75 institution Foreign banks. See also specific banks by name Deposits, 310–311, 314–315 H Regulation of, 73–76 Supervision of, 46–47, 54–55 H.2 statistical release, 76 U.S. activities, 55, 75–76 HCs. See Holding companies Foreign currency operations Hedge funds, 42 Authorization, 136–138, 234 High-quality liquid assets (HQLA), 61, 118 Directives, 138–139, 237–238 High-yield bonds, 36–37

462 103rd Annual Report | 2016 HMDA. See Home Mortgage Disclosure Act International Organization of Securities Commissions HOLA. See Home Owners’ Loan Act (IOSCO), 48, 57, 63–64 Holding companies (HCs), Regulatory reports, 69–70 International Swaps and Derivatives Association, Inc., 118 Home Mortgage Disclosure Act (Regulation C), 87 International training and technical assistance, 59 Home Owners’ Loan Act (HOLA), 73, 75 International Treasury Services, 103 Household sector, 6, 11, 20, 24–25, 39, 92 Intraday credit, 105 Housing activity, 11, 20, 25, 36–37, 93–94 InTREx. See Information Technology Risk Examination Housing and Urban Development, Department of (HUD), program 91 Investment-grade firms, 40 HQLA. See High-quality liquid assets (HQLA) Investments, Business sector, 11, 20, 25 HUD. See Housing and Urban Development, Invoice Processing Platform (IPP), 103, 104 Department of IOSCO. See International Organization of Securities Commissions IPP. See Invoice Processing Platform I IRS. See Internal Revenue Service IAIS. See International Association of Insurance ISLHCs. See Insurance savings and loan holding Supervisors companies IHCs. See Intermediate holding companies Issue and Cancellation of Federal Reserve Bank Capital Illiquid funds, 68, 129 Stock (Regulation I), 123–124 IMF. See International Monetary Fund IT. See Information technology Implied volatility index, 35–36 Imports, 12, 26 Imputed costs, 114–115 J Incentive compensation, 67–68 Japan, Economy of, 16, 28 Incentive compensation (Regulation JJ), 119 Job losses. See Unemployment Income and expenses, Federal Reserve Banks, 107–108, Job Openings and Labor Turnover Survey, 7, 22 111–115, 323–328, 405, 407 JOLTS. See Job Openings and Labor Turnover Survey Independent Foreclosure Review, 80 JPMorgan Chase & Co., 41 India, economy of, 16 Justice, U.S. Department of (DOJ) Inflation, 5, 8–9, 20, 21, 23–24, 28–30, 166–167, 172–174, Fair lending laws enforcement, 82–83 177, 205–206, 208, 211–212, 215, 249–250, 252, Settlement actions, 37–38 255–256, 259, 288–289, 291, 294–295, 298 Informal work arrangements, 95 Information technology (IT) K Examinations, 56 KPMG LLP, 106–107, 334–336, 357, 358 Federal Reserve Bank developments, 106 FFIEC Information Technology Examination Handbook, 56 L Security practices, 72 Supervisory activities, 71–72 Labor markets, 5, 6, 7–8, 20, 21–22, 94–95 Information Technology Risk Examination program, 57 Labor productivity, 8 Inspections. See Examinations and inspections Large bank supervision, 62, 68 Inspector General, Office of (OIG), 408, 416–418, 432 Large Institution Supervision Coordinating Committee Institute of Internal Auditors, 107 (LISCC), 50, 54 Insurance companies, Supervision of, 119–120 Latin America, Economy of, 16 Insurance savings and loan holding companies (ISLHCs), LCR. See Liquidity coverage ratio 53 Leadership Conferences, 453–454 Insured commercial banks. See Commercial banks Legal Entity Identifier (LEI), 70 Interagency Minority Depository Institutions, 59 LEI. See Legal Entity Identifier Interest rates, 5, 17, 18, 24–25, 129, 306 Leveraged loans, 36–37 Intermediate holding companies (IHCs), 69–70 Liabilities. See Assets and liabilities Internal Revenue Service (IRS), 67 LIBOR. See London interbank offered rate International Association of Insurance Supervisors (IAIS), Liquidity coverage ratio (LCR), 61, 62, 118 64–65 Liquidity Risk Measurement Standards (Regulation WW), International Banking Act, 73, 75–76 118–119, 126 International Banking Operations (Regulation K), 123 Liquidity swap arrangements, 370 International financial markets, 20, 28–29, 46–47, 54–55 LISCC. See Large Institution Supervision Coordinating International Monetary Fund (IMF), 59 Committee

Index 463 Litigation involving Board of Governors Model Validation Council, 438 Artis, 302 Monetary Control Act, 97 Bank of America, et al., 301, 302 Monetary policy Bernanke, 302 Appropriate monetary policy, 172, 176, 208, 214, 252, Burford, 301 258, 291, 297 Center for Popular Democracy, 301 Developments, 16–19, 29–31 Colonial BancGroup, Inc., 301 Long-run goals and strategy, 218–219, 262–264 Community Financial Services Association of America, Overview, 5–7, 20–21 Ltd., 301 Relationship with financial stability, 180–181 Crisman, 301 Monetary policy reports to Congress Ferrer, 302 February 2017, 5–19 Haase, 302 June 2016, 20–31 Hardy, 301 Money laundering prevention. See Anti-money laundering Loan Syndications and Trading Association, 301 Money market funds, 14, 38–39 Perry, 301 Mortgage-backed securities (MBS), 13, 14, 18, 26, 27–28, PricewaterhouseCoopers LLP, 301 30, 107, 109 In re Wilmington Trust Securities Litigation, 301 Mortgage rates, 5, 20, 25 Richardson, 301 Mortgage regulations Rodriguez, 301 Foreclosure prevention actions, 81–82 Ruiz, 302 Payment agreement status, 80–81 WMI Liquidating Trust, 302 Servicer efforts to address deficiencies, 82 Yellen, 301 MOU. See Memoranda of understanding LMI consumers. See Low- and moderate-income Municipal bonds, 14–15, 28 consumers Municipal securities dealers and brokers, Federal Reserve Loans. See also specific types of loans examination, 56–57 Commercial and industrial, 25–26 Municipal Securities Rulemaking Board, 57 Federal Reserve Bank holdings, 308–309, 312–313, 367, Mutual holding company (MHC), 75 378–379 Student loans, 93 N System Open Market Account, 109–110 Local governments. See State and local governments NACHA. See National Automated Clearing House London interbank offered rate, 14 Association Low- and moderate-income consumers (LMI), 79, 85, 92 NAIC. See National Association of Insurance Commissioners NASFAA. See National Association of Student Financial M Aid Administrators Macroprudential supervision, 34, 35, 45, 62 National Association of Insurance Commissioners Maps, Federal Reserve System, 2–3 (NAIC), 53, 64 Margin and Capital Requirements for Covered Swap National Association of Student Financial Aid Entities (Regulation KK), 125 Administrators (NASFAA), 93 Margin requirements, 317 National Automated Clearing House Association MBS. See Mortgage-backed securities (NACHA), 97 MCDX, 14 National Bankers Association (NBA), 60 MDIs. See Minority depository institutions National Credit Union Administration (NCUA), 57, 65, 77 Membership of State Banking Institutions in the Federal National Flood Insurance Act, 83, 91 Reserve System (Regulation H), 76, 83, 123 National Flood Mitigation Fund, 84 Memoranda of understanding, 58, 67, 86 National Information Center (NIC), 58, 72 Mergers and acquisitions, 84–86 National Mortgage Settlement, 81 MetLife, Inc., 54 National Settlement Service, 98, 100 Mexico, Economy of, 15, 16, 29 NAV. See Net asset value MHC. See Mutual holding company Navy Cash, 104 Michigan Survey. See University of Michigan Surveys of NBA. See National Bankers Association Consumers NCUA. See National Credit Union Administration Military Lending Act (MLA), 87 Net asset value, 38 Minority depository institutions (MDIs), 59–60 Net stable funding ratio, 119 MLA. See Military Lending Act NIC. See National Information Center MMFs. See Money market funds Nonbank financial companies, 119–120 Mobile Financial Services, 56 Nonfinancial sector, 12, 20, 39–40

464 103rd Annual Report | 2016 O Priced services, 97–100, 111–115 Prices OCC. See Comptroller of the Currency, Office of the Consumer, 20, 23, 176, 258, 297 OFAC. See Foreign Assets Control, Office of Energy, 5, 8–9, 11, 20, 23, 27 Off-site monitoring, 58–59 Food, 20 Official Staff Interpretations, 91–92 Primary credit, 129 OIG. See Inspector General, Office of Primary credit rate, 18, 306 Oil prices. See Energy prices PRISM. See Performance Report Information and OIS. See Overnight index swap Surveillance Monitoring ON RRP. See Overnight reverse repurchase agreements Privacy of Consumer Information (Regulation P), 86 Open Market Desk, 31 Private-sector adjustment factor (PSAF), 97–98, 100 Open market operations. See also Federal Open Market Prudential Financial, Inc., 54 Committee PSAF. See Private-sector adjustment factor Developments in 2016, 142–143, 155, 181, 194–195, Puerto Rico 219–220, 238, 264, 276–277 Debt, 28 Volume of transactions, 303–304 Government Development Bank, 28 Operating expenses, Federal Reserve Banks, 114 Puerto Rico Oversight, Management, and Economic Operating leases, 345 Stability Act, 15 Orderly Liquidation Authority, 46 OTS. See Thrift Supervision, Office of Outlook Live, 89 Q Overdraft services, 105 QFCs. See Qualified financial contracts Overnight index swap, 14 Qualified financial contracts (QFCs), 118–119 Overnight reverse repurchase agreements (ON RRP), 14, Qualified Independent Assessment Team, 99 18, 31, 142–143 R P Rapid Response sessions, 89 Partnership for Progress (PFP), 59 Real Estate Settlement Procedures (Regulation X), 317 Pay.gov, 104 Regulations Payment Agreement, 80–81 AA, Unfair or Deceptive Acts or Practices, 125 Payment system, 99 C, Home Mortgage Disclosure Act, 87 Payment System Risk, 105 H, Membership of State Banking Institutions in the Payments services, Federal Reserve Banks, 103–104 Federal Reserve System, 76, 83, 123 PCEs. See Personal consumption expenditures HH, Designated Financial Market Utilities, 54 Penalties. See Civil money penalties I, Issue and Cancellation of Federal Reserve Bank Pension Enhancement Plan, 348–350 Capital Stock, 123–124 PEP. See Pension Enhancement Plan JJ, Incentive Compensation, 119 Performance plan, 121 K, International Banking Operations, 123 Performance report, 121 KK, Margin and Capital Requirements for Covered Performance Report Information and Surveillance Swap Entities, 125 Monitoring (PRISM), 58, 59 M, Consumer Leasing, 125 Personal consumption expenditures (PCEs), 5, 6, 8–10, 20, P, Privacy of Consumer Financial Information, 86 23, 166–167, 172–174, 177, 205–206, 208, 211–212, Q, Capital Adequacy of Bank Holding Companies, 215, 249–250, 252, 255–256, 259, 288–289, 291, Savings and Loan Holding Companies, and State 294–295, 298 Member Banks, 117, 118–119, 124 PFP. See Partnership for Progress T, Credit by Brokers and Dealers, 77, 317 Policy actions U, Credit by Banks and Persons other than Brokers or Board of Governors, 123–130 Dealers for the Purpose of Purchasing or Carrying Federal Open Market Committee, 16–19, 28–31, Margin Stock, 77, 317 150–152, 162–165, 189–192, 202–204, 228–231, WW, Liquidity Risk Measurement Standards, 118–119, 245–248, 271–274, 284–286 126 Policy Normalization Principles and Plans, 30–31, 142–143 X, Real Estate Settlement Procedures, 317 Post Payment System (PPS), 103, 104 Y, Bank Holding Companies and Change in Bank Postemployment benefits, 352, 404 Control, 120 Postretirement benefits, 351–352, 401–404 YY, Enhanced Prudential Standards, 117–119, 120, 126 PPS. See Post Payment System Z, Truth in Lending, 124–125 Premises, Federal Reserve Banks, 110, 127, 331, 371, 393 Regulatory assessment fees, 76–77 Price-to-rent ratio, 37 Regulatory capital ratios, 37–38

Index 465 Regulatory reports, 69–71 Short-term funding markets, 28 Report on the Economic Well-Being of U.S. Households in SIFI. See Systemically important financial institution 2015, 92 Single-counterparty credit limits, 118 Reports of Condition and Income (Call Reports), 58–59 SIT. See Supervisory information technology Repurchase agreements, 308–309, 312–313 SLHCs. See Savings and loan holding companies Reserve Bank SameDay ACH services, 97 SLOOS. See Senior Loan Officer Opinion Survey on Bank Retail Payment Systems, 56 Lending Practices Retail securities program, 103 SLR. See Supplementary leverage ratio Retirement plans, 346–352, 394–401 SNC. See Shared National Credit program Revenue. See Income and expenses Software. See Equipment and software Reverse repurchase agreements, 310–311 SOMA. See System Open Market Account RFI/C(D) system, 52 South East Asian Central Banks Research and Training Riegle Community Development and Regulatory Centre, 59 Improvement Act, 52 S&P. See Standard and Poor’s 500 Risk management, 65–66 Special drawing rights certificate account, 308–309, Risks. See Uncertainty and risk 312–313 Royal Bank of Scotland, 38 Special drawing rights certificates, 366–367 Rural communities, 93–94 Specialized examinations, 56–58 Rust Consulting, Inc., 81 Speculative-grade firms, 40 Spot price, 9 S&R. See Supervision and Regulation, Division of S SR-SABR. See Supervision and Regulation Statistical SameDay ACH services, 97 Assessment of Bank Risk Savings and loan holding companies (SLHCs) Staff development, 72–73 Insurance underwriting activities, 53 Standard and Poor’s 500 (S&P 500), 13, 14, 27, 35 Number of, 52–53 State and local governments, 13, 26 Regulation of, 73–76 State member banks Regulatory assessment fees, 76–77 Complaints against, 89–90 Regulatory reports, 69–70 Developments in 2016, 45 Supervision of, 47–49, 52–53, 68 Financial disclosures, 76 Supervisory assessment fees, 76–77 International activities, 54–55 Seasonal credit, 129, 306 Number of, 49, 51 SEC. See Securities and Exchange Commission Regulation of, 73–76 Secondary credit, 129, 306 Supervision of, 47–49, 51–52, 68 Secure Payments Task Force, 99 Surveillance and off-site monitoring, 58–59 Securities. See also Federal agency securities; Treasury State Street, 41 securities; specific types of securities Statements of Condition, Federal Reserve Banks, 318–322, Resell and repurchase agreements, 367–368 360 Securities Act Amendments of 1975, 57 Statements of operations, 338, 361 Securities and Exchange Commission (SEC), 38, 54, 67, 77 Stored Value Card (SVC) program, 103, 104 Securities credit, 77 Strategic Plan 2016–19, 121, 414–415 Securities credit lenders, 57 Stress testing, 40, 41, 50, 120 Securities dealers and brokers, 56–57 Student loans, 93 Securities Exchange Act, 56, 57, 76, 77 Subcommittee on Supervisory Administration and Securities holding companies, 69–70 Technology, 71 Security Summary of Economic Projections, 6, 21, 152–153, Counter-terrorism activities, 66–67 166–178, 204–216, 248–260, 287–299 Cybersecurity, 41, 47, 48, 57–58 Supervision and Regulation, Division of, 55, 59 Cybersecurity and Critical Infrastructure Working Supervision and Regulation Statistical Assessment of Bank Group, 57–58 Risk (SR-SABR), 58 Information technology, 72 Supervisory assessment fees, 76–77 Semiannual Report on Banking Applications Activity, 73 Supervisory information technology (SIT), 71–72 Senior Loan Officer Opinion Survey on Bank Lending Supervisory policy Practices (SLOOS), 11, 12, 25–26, 27 Accounting policy, 64–65 SEP. See Summary of Economic Projections Burden reduction initiatives, 71 Shared National Credit program, 65–66 Compliance risk management, 66–67 SHED. See Survey of Household Economics and Consumer and community affairs, 79–91 Decisionmaking Credit-risk management, 65–66

466 103rd Annual Report | 2016 Enhanced prudential standards, 60–61 Truth in Lending (Regulation Z), 124–125 Incentive compensation, 67–68 Truth in Lending Act, 91 Information technology, 71–72 International coordination, 62–64 U Policymaking initiatives, 68–69 Regulatory reports, 69–71 UDAP. See Unfair or deceptive acts or practices Staff development, 72–73 Uncertainty and risk, 176–177, 214–215, 258–259, 297–298 Supplementary leverage ratio (SLR), 69, 70 Uncertainty index, 36 Surveillance, 58–59 Unemployment, 5, 7–8, 20, 22, 166–167, 171, 176–177, Survey of Household Economics and Decisionmaking 205–206, 210, 214–215, 249–250, 254, 258–259, (SHED), 92 288–289, 293, 297–298 Survey of Market Participants, 27 Unfair or Deceptive Acts or Practices ( Regulation AA), Survey of Primary Dealers, 13, 27 125 Survey of Professional Forecasters, 23 Unfair or deceptive acts or practices (UDAP), 79, 82–83 Survey of Young Workers, 94 Uniform Bank Performance Reports, 59 SVC. See Stored Value Card program Uniform Interagency Consumer Compliance Rating System Open Market Account (SOMA), 18, 30, 31, System, 87–88, 128 108–110, 379–388 United Kingdom Systemically important financial institution, 45, 52, 120 Economy of, 15–16, 28 Exit from European Union, 13 Universal Resolution Stay Protocol, 118 T University of Michigan Surveys of Consumers, 9, 23, 24 Task Force on Surveillance Systems, 59 U.S. Congress. See Monetary policy reports to Congress; TDF. See Term Deposit Facility specific legislation by name Technical assistance, 59–60 U.S. Currency Education Program, 101 Term Auction Facility, 105 Term Deposit Facility (TDF), 19, 31 V Terrorism. See Counter-terrorism activities Texas Guaranteed Student Loan Corporation, 93 Variable interest entities (VIEs), 370–371, 389–392 Threshold adjustment calculation, 91–92 Venezuela, Economy of, 16, 29 Thrift plans, 401 VIEs. See Variable interest entities Thrift Supervision, Office of (OTS), 52, 53 VIX, 13, 35 TIPS. See Treasury Inflation-Protected Securities Volcker rule, 68, 128–129 TLAC. See Total loss-absorbing capacity Total loss-absorbing capacity (TLAC), 46, 63 W Training programs, 59–60, 72–73, 87–89 Transfer agents, 56 Wage Growth Tracker, 22 Transition Resource Group, 64 Websites Treasury, U.S. Department of the Basel Committee on Banking Supervision, 63 Bureau of Engraving and Printing, 101 Board of Governors, 1, 5, 76, 121 Cash holdings, 310–311, 314–315 Federal Reserve, 51, 57, 61 Cash management services, 104–105 FedPayments Improvement, 99 Currency in circulation and outstanding, 308–309, FFIEC cybersecurity awareness, 58 312–313 Financial Stability Oversight Council annual report, 42 Deposits, 310–311, 314–315 Partnership for Progress, 59 Website, 42 U.S. Treasury, 42 Treasury Inflation-Protected Securities, 9, 23 Wells Fargo, 41 Treasury securities Wholesale securities program, 103 Federal Reserve Bank holdings, 305, 308–309, 312–313, World Bank, 59 368–370, 374 FOMC holdings, 18, 30 Y Open market transactions, 303–304 Services, 103 Young workers surveys, 94 Yields, 5–6, 12, 13, 23, 27, 36

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Cite this document

APA

Federal Reserve (2015, December 31). Annual Report of the Federal Reserve Board, 2016. Annual Reports, Federal Reserve. https://whenthefedspeaks.com/doc/annual_report_2016

BibTeX

@misc{wtfs_annual_report_2016,
  author = {Federal Reserve},
  title = {Annual Report of the Federal Reserve Board, 2016},
  year = {2015},
  month = {Dec},
  howpublished = {Annual Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/annual_report_2016},
  note = {Retrieved via When the Fed Speaks corpus}
}