Annual Report of the Federal Reserve Board, 2017

104th Annual Report 2017 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

104th Annual Report 2017 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 (email) Publications-BOG@frb.gov

Letter of Transmittal Board of Governors of the Federal Reserve System Washington, D.C. June 2018 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 104th annual report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar-year 2017. Sincerely, Jerome H. Powell Chairman

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 2018 ....................................................................................... 5 Monetary Policy Report July 2017 ............................................................................................. 21 3 Financial Stability ........................................................................................................... 33 Monitoring Risks to Financial Stability ....................................................................................... 34 Financial Stability and the Supervision and Regulation of Large, Complex Financial Institutions ....................................................................................................................... 39 Domestic and International Cooperation and Coordination ......................................................... 41 4 Supervision and Regulation ......................................................................................... 43 2017 Developments ................................................................................................................. 43 Supervision ............................................................................................................................. 45 Regulation ............................................................................................................................... 69 5 Consumer and Community Affairs ........................................................................... 75 Supervision and Examinations .................................................................................................. 75 Consumer Laws and Regulations .............................................................................................. 85 Consumer Research and Analysis of Emerging Issues and Policy ............................................... 87 Community Development ......................................................................................................... 89 6 Federal Reserve Banks ................................................................................................... 91 Federal Reserve Priced Services ............................................................................................... 91 Currency and Coin ................................................................................................................... 93 Fiscal Agency and Government Depository Services .................................................................. 96 Use of Federal Reserve Intraday Credit ..................................................................................... 99 FedLine Access to Reserve Bank Services ................................................................................ 99 Information Technology .......................................................................................................... 100 Examinations of the Federal Reserve Banks ............................................................................ 100 Income and Expenses ............................................................................................................ 101 SOMA Holdings and Loans ..................................................................................................... 102 Federal Reserve Bank Premises .............................................................................................. 103 Pro Forma Financial Statements for Federal Reserve Priced Services ....................................... 104

vi 7 Other Federal Reserve Operations ........................................................................... 109 Regulatory Developments ....................................................................................................... 109 The Board of Governors and the Government Performance and Results Act ............................. 111 8 Record of Policy Actions of the Board of Governors ...................................... 113 Rules and Regulations ............................................................................................................ 113 Policy Statements and Other Actions ...................................................................................... 116 Discount Rates for Depository Institutions in 2017 ................................................................... 118 9 Minutes of Federal Open Market Committee Meetings .................................. 121 Meeting Held on January 31–February 1, 2017 ........................................................................ 122 Meeting Held on March 14–15, 2017 ....................................................................................... 142 Meeting Held on May 2–3, 2017 .............................................................................................. 172 Meeting Held on June 13–14, 2017 ......................................................................................... 185 Meeting Held on July 25–26, 2017 .......................................................................................... 215 Meeting Held on September 19–20, 2017 ................................................................................ 226 Meeting Held on October 31–November 1, 2017 ...................................................................... 256 Meeting Held on December 12–13, 2017 ................................................................................. 267 10 Litigation .......................................................................................................................... 295 Pending ................................................................................................................................. 295 Resolved ............................................................................................................................... 295 11 Statistical Tables ............................................................................................................. 297 12 Federal Reserve System Audits ................................................................................. 327 Board of Governors Financial Statements ................................................................................ 328 Federal Reserve Banks Combined Financial Statements .......................................................... 352 Office of Inspector General Activities ....................................................................................... 400 Government Accountability Office Reviews .............................................................................. 401 13 Federal Reserve System Budgets .............................................................................. 403 System Budgets Overview ...................................................................................................... 403 Board of Governors Budgets .................................................................................................. 406 Federal Reserve Banks Budgets ............................................................................................. 410 Currency Budget .................................................................................................................... 414 14 Federal Reserve System Organization .................................................................... 419 Board of Governors ................................................................................................................ 419 Federal Open Market Committee ............................................................................................ 425 Board of Governors Advisory Councils .................................................................................... 427 Federal Reserve Banks and Branches ..................................................................................... 431 15 Index .................................................................................................................................. 447

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. 2,979-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 2017, 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 2017. 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 2017 budget performance of in consumer and community affairs; and section 6, the Board and Reserve Banks, as well as their 2017 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 2017 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 104th Annual Report | 2017 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, Economic and Financial Developments the Federal Reserve Board submits written reports to The labor market. The labor market has continued to the Congress that contain discussions of “the con- strengthen since the middle of last year. Payroll duct of monetary policy and economic developments employment has posted solid gains, averaging and prospects for the future.” The Monetary Policy 182,000 per month in the seven months starting in Report, submitted semiannually to the Senate Com- July 2017, about the same as the average pace in the mittee on Banking, Housing, and Urban Affairs and first half of 2017. Although net job creation last year to the House Committee on Banking and Financial was slightly slower than in 2016, it has remained con- Services, is delivered concurrently with testimony siderably faster than what is needed, on average, to from the Federal Reserve Board Chair. absorb new entrants into the labor force. The unemployment rate declined from 4.3 percent in June to 4.1 percent in January—somewhat below the median The following discussion is a review of U.S. monetary of FOMC participants’ estimates of its longer-run policy and economic developments in 2017, excerpted normal level. Other measures of labor utilization also from the Monetary Policy Report published in Februsuggest that the labor market has tightened since last ary 2018 and July 2017. Those complete reports summer. Nonetheless, wage growth has been moderare available on the Board’s website at www ate, likely held down in part by the weak pace of pro- .federalreserve.gov/monetarypolicy/files/20180223_ ductivity growth in recent years. mprfullreport.pdf (February 2018) and www .federalreserve.gov/monetarypolicy/files/20170707_ Inflation. Consumer price inflation has remained mprfullreport.pdf (July 2017). below the FOMC’s longer-run objective of 2 percent. The price index for personal consumption expenditures increased 1.7 percent over the 12 months ending Monetary Policy Report in December 2017, about the same as in 2016. The February 2018 12-month measure of inflation that excludes food and energy items (so-called core inflation), which his- Summary torically has been a better indicator of where overall inflation will be in the future than the headline figure, Economic activity increased at a solid pace over the was 1.5 percent in December—0.4 percentage point second half of 2017, and the labor market continued lower than it had been one year earlier. However, to strengthen. Measured on a 12-month basis, infla- monthly readings on core inflation were somewhat tion has remained below the Federal Open Market higher during the last few months of 2017 than ear- Committee’s (FOMC) longer-run objective of 2 per- lier in the year. Measures of longer-run inflation cent. The FOMC raised the target range for the fed- expectations have, on balance, been generally stable, eral funds rate twice in the first half of 2017, result- although some measures remain low by historical ing in a range of 1 to 1¼ percent by the end of its standards. June meeting. With the federal funds rate rising toward more normal levels, at its September meeting, Economic growth. Real gross domestic product the FOMC decided to initiate a program of gradually (GDP) is reported to have increased at an annual rate and predictably reducing the size of its balance sheet. of nearly 3 percent in the second half of 2017 after At its meeting in December, the Committee judged rising slightly more than 2 percent in the first half. that current and prospective economic conditions Consumer spending expanded at a solid rate in the called for a further increase in the target range for the second half, supported by job gains, rising household federal funds rate, to 1¼ to 1½ percent. wealth, and favorable consumer sentiment. Business

6 104th Annual Report | 2017 investment growth was robust, and indicators of labor market conditions and a sustained return to business sentiment have been strong. The housing 2 percent inflation. market has continued to improve slowly. Foreign activity remained solid and the dollar depreciated The FOMC expects that, with further gradual adjustfurther in the second half, but net exports subtracted ments in the stance of monetary policy, economic from real U.S. GDP growth as imports of consumer activity will expand at a moderate pace and labor and capital goods surged late in the year. market conditions will remain strong. Inflation on a 12-month basis is expected to move up this year and Financial conditions. Financial conditions for busi- to stabilize around the Committee’s 2 percent objecnesses and households have eased on balance since tive over the next few years. The federal funds rate is the middle of 2017 amid an improving global growth likely to remain, for some time, below levels that are outlook. Notwithstanding financial market develop- expected to prevail in the longer run. Consistent with ments in recent weeks, broad measures of equity this outlook, in the most recent Summary of Ecoprices are higher, and spreads of yields on corporate nomic Projections (SEP), which was compiled at the bonds over those of comparable-maturity Treasury time of the December FOMC meeting, the median of securities have narrowed. Most types of consumer participants’ assessments for the appropriate level of loans remained widely available, though credit was the federal funds rate through the end of 2019 still difficult to access in credit card and mortgage remains below the median projection for its longermarkets for borrowers with low credit scores or run level. (The December SEP is included as Part 3 of harder-to-document incomes. Longer-term nominal the February 2018 Monetary Policy Report on pages Treasury yields and mortgage rates have moved up 39–54; it is also included in section 9 of this annual on net. The dollar depreciated, on average, against report.) However, as the Committee has continued to the currencies of our trading partners. In foreign emphasize, the actual path of the federal funds rate financial markets, equity prices generally increased in will depend on the economic outlook as informed by the second half of 2017, and most of those indexes incoming data. In particular, with inflation having remain higher, on net, despite recent declines. Most persistently run below the 2 percent longer-run objeclonger-term yields rose noticeably. tive, the Committee will carefully monitor actual and expected inflation developments relative to its sym- Financial stability. Vulnerabilities in the U.S. financial metric inflation goal. system are judged to be moderate on balance. Valuation pressures continue to be elevated across a range Balance sheet policy. In the second half of 2017, the of asset classes even after taking into account the Committee initiated the balance sheet normalization current level of Treasury yields and the expectation program that is described in the Addendum to the that the reduction in corporate tax rates should gen- Policy Normalization Principles and Plans the Comerate an increase in after-tax earnings. Leverage in mittee issued in June.1 Specifically, since October, the the nonfinancial business sector has remained high, Federal Reserve has been gradually reducing its holdand net issuance of risky debt has climbed in recent ings of Treasury and agency securities by decreasing months. In contrast, leverage in the household sector the reinvestment of principal payments it receives has remained at a relatively low level, and household from these securities. debt in recent years has expanded only about in line with nominal income. Moreover, U.S. banks are well Special Topics capitalized and have significant liquidity buffers. How tight is the labor market? Although there is no way to know with precision, the labor market appears Monetary Policy to be near or a little beyond full employment at pres- Interest rate policy. The FOMC continued to gradu- ent. The unemployment rate is somewhat below most ally increase the target range for the federal funds estimates of its longer-run normal rate, and the labor rate. After having raised it twice in the first half of force participation rate is relatively close to many esti- 2017, the Committee raised the target range for the mates of its trend. Although employers report having federal funds rate again in December, bringing it to more difficulties finding qualified workers, hiring conthe current range of 1¼ to 1½ percent. The decision tinues apace, and serious labor shortages would likely to increase the target range for the federal funds rate reflected the solid performance of the economy. Even 1 The June addendum is available on the Board’s website at with this rate increase, the stance of monetary policy https://www.federalreserve.gov/monetarypolicy/files/FOMC_ remains accommodative, thereby supporting strong PolicyNormalization.20170613.pdf.

Monetary Policy and Economic Developments 7 have brought about larger wage increases than have months starting in July 2017, about the same pace as been evident to date. (See the box “How Tight Is the in the first half of 2017.2 Although net job creation Labor Market?” on pages 8–9 of the February 2018 last year was slightly slower than in 2016, it has Monetary Policy Report.) remained considerably faster than what is needed, on average, to absorb new entrants to the labor force Low global inflation. Inflation has generally come in and is therefore consistent with the view that the below central banks’ targets in the advanced econo- labor market has strengthened further (figure 1). The mies for several years now. Resource slack and com- strength of the labor market is also evident in the modity prices—as well as, for the United States, decline in the unemployment rate to 4.1 percent in movements in the U.S. dollar—appear to explain January, ¼ percentage point below its level in inflation’s behavior fairly well. But our understand- June 2017 and about ½ percentage point below the ing is imperfect, and other, possibly more persistent, median of Federal Open Market Committee factors may be at work. Resource slack at home and (FOMC) participants’ estimates of its longer-run abroad might be greater than it appears to be, or normal level (figure 2). inflation expectations could be lower than suggested by the available indicators. Moreover, some observers Other indicators also suggest that labor market conhave pointed to increased competition from online ditions have continued to tighten. The labor force retailers or international developments—such as participation rate (LFPR)—that is, the share of global economic slack or the integration of emerging adults either working or actively looking for work— economies into the world economy—as contributing was 62.7 percent in January. The LFPR is little to lower inflation. Policymakers remain attentive to changed, on net, since early 2014. However, the averthe possibility of such forces leading to continued age age of the population is continuing to increase. low inflation; they also are watchful regarding the In particular, the members of the baby-boom cohort opposite risk of inflation moving undesirably high. increasingly are moving into their retirement years, a (See the box “Low Inflation in the Advanced Econo- time when labor force participation typically is low. mies” on pages 14–15 of the February 2018 Mon- That development implies that a sustained period in etary Policy Report.) which the demand for and supply of labor were in balance would be associated with a downward trend Monetary policy rules. Monetary policymakers con- in the overall participation rate. Accordingly, the flat sider a wide range of information on current economic conditions and the outlook before deciding on 2 The hurricanes that struck the United States during the second a policy stance they deem most likely to foster the half of last year caused substantial variation in the month-to- FOMC’s statutory mandate of maximum employ- month pattern of job gains, but the average performance over ment and stable prices. They also routinely consult the period as a whole was probably substantially unaffected. monetary policy rules that connect prescriptions for the policy interest rate with variables associated with the dual mandate. The use of such rules requires Figure 1. Net change in payroll employment careful judgments about the choice and measurement of the inputs into these rules as well as the implications of the many considerations these rules do not 3-month moving averages Thousands of jobs take into account. (See the box “Monetary Policy Rules and Their Role in the Federal Reserve’s Policy Pro- 400 Private cess” on pages 35–38 of the February 2018 Monetary 200 Policy Report.) + _0 Part 1: Recent Economic and Financial Total nonfarm 200 Developments 400 Domestic Developments 600 800 The labor market strengthened further during the second half of 2017 and early this year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Payroll employment has continued to post solid Source: Bureau of Labor Statistics via Haver Analytics. gains, averaging 182,000 per month in the seven

8 104th Annual Report | 2017 Figure 2. Measures of labor underutilization Monthly Percent 18 U-6 16 U-4 14 U-5 12 10 8 Unemployment rate 6 4 2006 2008 2010 2012 2014 2016 2018 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: Bureau of Labor Statistics via Haver Analytics. profile of the LFPR during the past few years is con- high, an indication that workers are able to obtain a sistent with an overall picture of improving labor new job when they seek one. market conditions. In line with this perspective, the LFPR for individuals aged 25 to 54—which is much Unemployment rates have declined across less sensitive to population aging—has been rising demographic groups, but unemployment remains high for some groups since 2015. The employment-to-population ratio for individuals 16 and older—that is, the share of people Unemployment rates have trended downward across who are working—was 60.1 percent in January and racial and ethnic groups. The decline in the unemhas been increasing since 2011; this gain primarily ployment rate for blacks or African Americans over reflects the decline in the unemployment rate. (The the past few years has been particularly notable. This box “How Tight Is the Labor Market?” on pages 8–9 broad pattern is typical: The unemployment rates for of the February 2018 Monetary Policy Report blacks and Hispanics tend to rise considerably more describes the available measures of labor market than the rates for whites and Asians during recesslack in more detail.) sions, and then they decline more rapidly during expansions. Yet even with the recent narrowing, the Other indicators are also consistent with continuing disparities in unemployment rates across demostrong labor demand. The number of people filing graphic groups remain substantial and largely the initial claims for unemployment insurance has same as before the recession. The unemployment rate remained near its lowest level in decades.3 As for whites has averaged 3.7 percent since the middle reported in the Job Openings and Labor Turnover of 2017 and the rate for Asians has been about Survey, the rate of job openings remained elevated in 3.3 percent, while the unemployment rates for Histhe second half of 2017, while the rate of layoffs panics or Latinos (5.0 percent) and blacks (7.3 perremained low. In addition, the rate of quits stayed cent) have been substantially higher. In addition, the labor force participation rates for blacks, Hispanics, and Asians have generally been lower than those for 3 Initial claims jumped in the fall of 2017 as a consequence of disruptions from the hurricanes and then returned to a low level. whites of the same age group. As the labor market

Monetary Policy and Economic Developments 9 has strengthened over the past few years, the partici- of modest growth in investment that followed, but a pation rates for prime-age individuals in each of reduced pace of capital deepening can explain only a these groups have risen. portion of the step-down. Beyond that, some economists think that more recent technological advances, Growth of labor compensation has been such as information technology, have been less revomoderate . . . lutionary than earlier general-purpose technologies, Despite the strong labor market, the available indica- such as electricity and internal combustion. Others tors generally suggest that the growth of hourly have pointed to a slowdown in the speed at which compensation has been moderate. Growth of com- capital and labor are reallocated toward their most pensation per hour in the business sector—a broad- productive uses, which is reflected in fewer business based measure of wages, salaries, and benefits that is start-ups and a reduced pace of hiring and investquite volatile—was 2¼ percent over the four quarters ment by the most innovative firms. Still others argue ending in 2017:Q4, well above the low reading in that there have been important innovations in many 2016 but about in line with the average annual fields in recent years, from energy to medicine, often increase from 2010 to 2015.4 The employment cost underpinned by ongoing advances in information index—which also measures both wages and the cost technology, which augurs well for productivity to employers of providing benefits—was up about growth going forward. However, those economists 2½ percent in the fourth quarter of 2017 relative to note that such productivity gains may appear only its year-ago level, roughly ½ percentage point faster slowly as new firms emerge to exploit the new techthan its gain a year earlier. Among measures that do nologies and as incumbent firms invest in new vinnot take account of benefits, average hourly earnings tages of capital and restructure their businesses. rose slightly less than 3 percent through January of this year, a gain that was somewhat faster than the Price inflation remains below 2 percent, but the average increase in the preceding few years. Similarly, monthly readings picked up toward the end of 2017 the measure of wage growth computed by the Federal Reserve Bank of Atlanta that tracks median Consumer price inflation, as measured by the 12-month wage growth of individuals reporting to 12-month change in the price index for personal conthe Current Population Survey showed an increase of sumption expenditures (PCE), remained below the about 3 percent in January, similar to its readings FOMC’s longer-run objective of 2 percent during from the past three years and above the average most of 2017. The PCE price index increased 1.7 perincrease in the preceding few years.5 cent over the 12 months ending in December 2017, about the same as in 2016 (figure 3). Core inflation, . . . and likely was restrained by slow growth of which typically provides a better indication than the labor productivity headline measure of where overall inflation will be in These moderate rates of compensation gain likely the future, was 1.5 percent over the 12 months ending reflect the offsetting influences of a tightening labor in December 2017—0.4 percentage point lower than market and persistently weak productivity growth. it had been one year earlier. Since 2008, labor productivity has increased only a little more than 1 percent per year, on average, well Both measures of inflation reflected some weak readbelow the average pace from 1996 through 2007 and ings in the spring and summer of 2017. A portion of also below the gains in the 1974–95 period. Consider- those weak readings seemed attributable to idiosynable debate remains about the reasons for the general cratic events, such as a steep 1-month decline in the slowdown in productivity growth and whether it will price index for wireless telephone services. However, persist. The slowdown may be partly attributable to the monthly readings on core inflation were somethe sharp pullback in capital investment during the what higher during the last few months of 2017, in most recent recession and the relatively long period contrast to the more typical pattern that has prevailed in recent years in which readings around the end of the year have tended to be slightly below aver- 4 The compensation per hour measure of wages and salaries declined at the end of 2016, possibly reflecting the shifting of age. Moreover, the 12-month change in the trimmed bonuses or other types of income into 2017 in anticipation of a mean PCE price index—an alternative indicator of possible cut in personal income tax rates. underlying inflation produced by the Federal Reserve 5 The Atlanta Fed’s measure differs from others in that it meas- Bank of Dallas that may be less sensitive to idiosynures the wage growth only of workers who were employed both in the current survey month and 12 months earlier. cratic price movements—was 1.7 percent in Decem-

10 104th Annual Report | 2017 Figure 3. Change in the price index for personal Figure 4. Brent spot and futures prices consumption expenditures Weekly Dollars per barrel Monthly 12-month percent change 130 Total Spot price 120 3.0 110 Trimmed mean 2.5 100 Excluding food and energy 24-month-ahead 90 2.0 futures contracts 80 70 1.5 60 1.0 50 40 .5 30 + 20 _0 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 Note: The data are weekly averages of daily data and extend through February 21, Note: The data extend through December 2017; changes are from one year 2018. earlier. Source: ICE Brent Futures via Bloomberg. Source: For trimmed mean, Federal Reserve Bank of Dallas; for all else, Bureau of Economic Analysis; all via Haver Analytics. the price of industrial metals. Despite recent volatilber 2017 and has slowed by less than core PCE price ity, metals prices remain higher, on net, boosted priinflation over the past 12 months.6 (For more discus- marily by improved prospects for global demand and sion of inflation both in the United States and also by government policies that restrained producabroad, see the box “Low Inflation in the Advanced tion in China. Economies” on pages 14–15 of the February 2018 Monetary Policy Report.) In contrast, headline inflation has been held down by consumer food prices, which increased only about Oil and metals prices increased notably ½ percent in 2017 after having declined in 2016. Headline inflation was a little higher than core infla- Food prices have been restrained by softness in the tion last year, which reflected a rise in consumer prices of farm commodities, which in turn has energy prices. The price of crude oil rose from $48 per reflected robust supply in the United States and barrel at the end of June to a peak of about $70 per abroad. Although the harvests for many crops in the barrel early in the year and, even after recent declines, United States declined in 2017, they were larger than remains more than 30 percent above its mid-2017 level had been expected earlier in the year. (figure 4). The upswing in oil prices appears to have been driven primarily by strengthening global Survey-based measures of inflation expectations demand as well as OPEC’s decision to further extend have been generally stable . . . its November 2016 production cuts through the end Expectations of inflation likely influence actual inflaof 2018. The higher oil prices fed through to moder- tion by affecting wage- and price-setting decisions. ate increases in the cost of gasoline and heating oil. Survey-based measures of inflation expectations at medium- and longer-term horizons have remained Inflation momentum was also supported by nonfuel generally stable. In the Survey of Professional Foreimport prices, which rose throughout 2017 in part casters conducted by the Federal Reserve Bank of because of dollar depreciation. That development Philadelphia, the median expectation for the annual marked a turn from the past several years, during rate of increase in the PCE price index over the next which nonfuel import prices declined or held flat. In 10 years has been around 2 percent for the past sevaddition to the decline in the dollar, nonfuel import eral years (figure 5). In the University of Michigan prices were driven higher by a substantial increase in Surveys of Consumers, the median value for inflation expectations over the next 5 to 10 years—which had 6 The trimmed mean index excludes whatever prices showed the drifted downward starting in 2014—has held about largest increases or decreases in a given month; for example, the flat since the end of 2016 at a level that is a few sharp decline in prices for wireless telephone services in March 2017 was excluded from this index. tenths lower than had prevailed through 2014.

Monetary Policy and Economic Developments 11 than 2¼ percent and 2½ percent, respectively, with Figure 5. Median inflation expectations both measures below the ranges that persisted for most of the 10 years before the start of the notable Percent declines in mid-2014. Michigan survey expectations 4 Real gross domestic product growth picked up in for next 5 to 10 years the second half of 2017 3 Real gross domestic product (GDP) is reported to have risen at an annual rate of nearly 3 percent in the 2 SPF expectations second half of 2017 after increasing slightly more for next 10 years than 2 percent in the first half of 2017 (figure 6). 1 Much of that faster growth reflects the stabilization of inventory investment, which had slowed considerably in the first half of last year. Private domestic 2006 2008 2010 2012 2014 2016 2018 final purchases—that is, final purchases by U.S. Note: The Michigan survey data are monthly and extend through February; the households and businesses, which tend to provide a February data are preliminary. The SPF data for inflation expectations for personal consumption expenditures are quarterly and extend from 2007:Q1 through better indication of future GDP growth than most 2018:Q1. other components of overall spending—rose at a Source: University of Michigan Surveys of Consumers; Federal Reserve Bank of solid annual rate of about 3½ percent in the second Philadelphia, Survey of Professional Forecasters (SPF). half of the year, similar to the first-half pace. . . . and market-based measures of inflation compensation have increased in recent months The economic expansion continues to be supported by but remain relatively low steady job gains, rising household wealth, favorable consumer sentiment, strong economic growth abroad, Inflation expectations can also be gauged by market- and accommodative financial conditions, including the based measures of inflation compensation, though still low cost of borrowing and easy access to credit for the inference is not straightforward because market- many households and businesses. In addition to these based measures can be importantly affected by factors, very upbeat business sentiment appears to changes in premiums that provide compensation for have supported solid growth over the past year. bearing inflation and liquidity risks. Measures of longer-term inflation compensation—derived either from differences between yields on nominal Treasury securities and those on comparable Treasury Inflation-Protected Securities (TIPS) or from infla- Figure 6. Change in real gross domestic product and gross domestic income tion swaps—have increased since June, returning to levels seen in early 2017, but nevertheless remain relatively low.7 The TIPS-based measure of 5-to-10-year- Percent, annual rate forward inflation compensation and the analogous Gross domestic product measure of inflation swaps are now slightly lower Gross domestic income 5 4 H2* 3 7 Inflation compensation implied by the TIPS breakeven inflation H1 rate is based on the difference, at comparable maturities, between yields on nominal Treasury securities and yields on 2 TIPS, which are indexed to the headline consumer price index (CPI). Inflation swaps are contracts in which one party makes 1 payments of certain fixed nominal amounts in exchange for cash flows that are indexed to cumulative CPI inflation over some horizon. Focusing on inflation compensation 5 to 10 years 2011 2012 2013 2014 2015 2016 2017 ahead is useful, particularly for monetary policy, because such forward measures encompass market participants’ views about *Gross domestic income is not yet available for 2017:H2. where inflation will settle in the long term after developments Source: Bureau of Economic Analysis via Haver Analytics. influencing inflation in the short term have run their course.

12 104th Annual Report | 2017 Ongoing improvement in the labor market and card and auto loans for borrowers with low credit gains in wealth continue to support consumer scores, possibly in response to some upward drift in spending . . . delinquency rates for those borrowers. Mortgage Supported by ongoing improvement in the labor credit has remained readily available for households market, real consumer spending rose at a solid annual with solid credit profiles, but it was still difficult to rate of 3 percent in the second half of 2017, a some- access for households with low credit scores or what faster pace than in the first half. Real disposable harder-to-document incomes. personal income—that is, income after taxes and adjusted for price changes—increased at a modest Although household borrowing continued to increase average rate of 1 percent in 2016 and 2017, as real last year, the household debt service burden—the wages changed little over this period (figure 7). With ratio of required principal and interest payments on spending growth estimated to have outpaced income outstanding household debt to disposable income, growth, the personal saving rate has declined consid- measured for the household sector as a whole—reerably since the end of 2015. mained low by historical standards. . . . and consumer confidence is strong Consumer spending has also been supported by further increases in household net wealth. Broad meas- Consumers have remained optimistic about their ecoures of U.S. equity prices rose robustly last year, nomic situation. As measured by the Michigan surthough markets have been volatile in recent weeks; vey, consumer sentiment was solid throughout 2017, house prices have also continued to climb, strength- likely reflecting rising income, job gains, and low ening the wealth of homeowners. As a result of the inflation. Furthermore, the share of households increases in home and equity prices, aggregate house- expecting real income to rise over the next year or hold net worth rose appreciably in 2017. In fact, at two has continued to strengthen and now exceeds its the end of the third quarter of 2017, household net pre-recession level. worth was 6.7 times the value of disposable income, Activity in the housing sector has improved the highest-ever reading for that ratio, which dates modestly back to 1947. Real residential investment spending increased . . . borrowing conditions for consumers remain around 2 percent in 2017, about the same modest generally favorable . . . gain that was seen in 2016. Housing activity was soft Consumer credit expanded in 2017 at about the same in the spring and summer, possibly reflecting the rise pace as in 2016. Financing conditions for most types in mortgage interest rates early in the year, and then of consumer loans are generally favorable. However, picked up toward the end of the year. For the year as banks have continued to tighten standards on credit a whole, sales of new and existing homes gained, and single-family housing starts increased (figure 8). In Figure 7. Change in real personal consumption expenditures and disposable personal income Figure 8. Private housing starts and permits Percent, annual rate Monthly Millions of units, annual rate Personal consumption expenditures 6 Disposable personal income 2.0 5 Single-family starts H1 H2 4 1.6 3 1.2 2 1 Single-family permits + .8 _0 1 .4 2 Multifamily starts 0 3 2011 2012 2013 2014 2015 2016 2017 2006 2008 2010 2012 2014 2016 2018 Source: Bureau of Economic Analysis via Haver Analytics. Source: U.S. Census Bureau via Haver Analytics.

Monetary Policy and Economic Developments 13 contrast, multifamily housing starts continued to grade and high-yield corporate bonds remained low edge down from the solid pace seen in 2016. Going by historical standards. forward, lean inventories are likely to support further gains in homebuilding activity, as the months’ supply Despite solid growth in business investment, outof homes for sale has remained near low levels. standing commercial and industrial (C&I) loans on banks’ books continued to rise only modestly in the Business investment has continued to third quarter of 2017. Respondents to the Senior rebound . . . Loan Officer Opinion Survey on Bank Lending Prac- Real outlays for business investment—that is, private tices, or SLOOS, reported that demand for C&I loans nonresidential fixed investment—rose at an annual declined in the third quarter and was little changed in rate of about 6 percent in the second half of 2017, a the fourth quarter even as lending standards and bit below the gain in the first half but still notably terms on such loans eased.8 Respondents attributed faster than the unusually weak pace recorded in 2016 this decline in demand in part to firms drawing on (figure 9). Business spending on equipment and internally generated funds or using alternative intangibles (such as research and development) sources of financing. Financing conditions for small advanced at a solid pace in the second half of the businesses appear to have remained favorable, and year, and forward-looking indicators of business although credit growth has remained sluggish, survey spending are generally favorable: Orders and ship- data suggest this sluggishness is largely due to continments of capital goods have posted net gains in ued weak demand for credit by small businesses. recent months, and indicators of business sentiment and activity remain very upbeat. That said, business Net exports subtracted from GDP growth in the outlays on structures turned down in the second half fourth quarter after providing a modest addition of 2017, as investment growth in drilling and mining during the rest of the year structures retreated from a very rapid pace in the first U.S. real exports expanded at a moderate pace in the half and investment in other nonresidential structures second half of last year after having increased more declined. rapidly in the first half, supported by solid foreign growth (figure 10). At the same time, real imports . . . while corporate financing conditions have surged in the fourth quarter following a slight conremained accommodative traction in the third quarter. As a result, real net Aggregate flows of credit to large nonfinancial firms exports moved from modestly lifting U.S. real GDP remained solid through the third quarter, supported growth during the first three quarters of 2017 to subin part by continued low interest rates. The gross tracting more than 1 percentage point in the fourth issuance of corporate bonds stayed robust during the quarter. Although the nominal trade and current second half of 2017, and yields on both investment- account deficits narrowed in the third quarter of 2017, the trade deficit widened in the fourth quarter. Figure 9. Change in real private nonresidential fixed Federal fiscal policy actions had a roughly neutral investment effect on economic growth in 2017 . . . Federal government purchases rose 1 percent in 2017, Percent, annual rate and policy actions had little effect on federal taxes or transfers (figure 11). Under currently enacted legisla- Structures Equipment and intangible capital 15 tion, which includes the Tax Cuts and Jobs Act H1 (TCJA) and the Bipartisan Budget Act, federal fiscal H2 10 policy will likely provide a moderate boost to GDP growth this year.9 5 + _0 5 8 The SLOOS is available on the Board’s website at https://www 10 .federalreserve.gov/data/sloos/sloos.htm. 9 The Joint Committee on Taxation estimates that the TCJA will reduce average annual tax revenue by a little more than 1 percent 2010 2011 2012 2013 2014 2015 2016 2017 of GDP over the next few years. This revenue estimate does not account for the potential macroeconomic effects of the Source: Bureau of Economic Analysis via Haver Analytics. legislation.

14 104th Annual Report | 2017 governments are experiencing lackluster revenue Figure 10. Change in real imports and exports of goods and growth, as income tax collections have only edged up, services on average, in recent quarters. In contrast, house price gains have continued to push up property tax Percent, annual rate revenues at the local level. Employment in the state Imports and local government sector only inched up in 2017, Exports Q4 15 while outlays for construction by these governments 12 continued to decline on net. 9 Financial Developments H1 6 The expected path of the federal funds rate has Q3 3 moved up + _0 The path of the expected federal funds rate implied 3 by market quotes on interest rate derivatives has moved up on net since the middle of last year amid 2014 2015 2016 2017 an improving global growth outlook. Part of the upward shift occurred around FOMC communica- Source: Bureau of Economic Analysis via Haver Analytics. tions in the fall that were interpreted as implying a somewhat quicker pace of policy rate increases than The federal unified deficit continued to widen in fiscal had been previously anticipated. The expected policy year 2017, reaching 3½ percent of nominal GDP. path also moved higher around the time when the Although expenditures as a share of GDP were rela- U.S. tax legislation was finalized. tively stable at a little under 21 percent, receipts moved lower in 2017 to roughly 17 percent of GDP. The ratio Survey-based measures of the expected path of the of federal debt held by the public to nominal GDP was policy rate have been generally little changed on net, 75¼ percent at the end of fiscal year 2017 and remains suggesting that part of the rise in the market-implied quite elevated relative to historical norms. path reflected higher term premiums. In the Federal Reserve Bank of New York’s Survey of Primary . . . and the fiscal position of most state and local Dealers and Survey of Market Participants, which governments is stable were conducted just before the January 2018 FOMC The fiscal position of most state and local govern- meeting, the median respondents expected three ments is stable, although there is a range of 25 basis point increases in the FOMC’s target range experiences across these governments. Many state for the federal funds rate as the most likely outcome for this year, unchanged from what they had expected in surveys conducted before the June FOMC meet- Figure 11. Change in real government expenditures on ing. Market-based measures of uncertainty about the consumption and investment policy rate approximately one to two years ahead have, on balance, edged up from their levels in the Percent, annual rate middle of 2017. Federal State and local 6 The nominal Treasury yield curve has shifted up 4 The nominal Treasury yield curve has shifted up on H2 net since the middle of 2017, owing to greater opti- 2 H1 + mism about the global growth outlook and investors’ _0 perceptions of higher odds for the removal of mon- 2 etary policy accommodation (figure 12). Yields on 4 shorter-term nominal Treasury securities increased relatively more than those on longer-term nominal 6 Treasury securities, thus resulting in some flattening 8 of the yield curve. According to market participants, among the factors contributing to this outcome has 2009 2010 2011 2012 2013 2014 2015 2016 2017 been the Treasury Department’s stated intention to Source: Bureau of Economic Analysis via Haver Analytics. increase its reliance on issuance of short-dated secu-

Monetary Policy and Economic Developments 15 Figure 12. Yields on nominal Treasury securities Figure 13. Equity prices Daily Percent Daily December 31, 1999 = 100 7 200 Dow Jones bank index 6 175 10-year 30-year 5 S&P 500 index 150 4 125 3 100 2 75 5-year 1 50 0 25 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Note: The Treasury ceased publication of the 30-year constant maturity series on Source: Standard & Poor's Dow Jones Indices via Bloomberg. (For Dow Jones February 18, 2002, and resumed that series on February 9, 2006. Indices licensing information, see the note on the Contents page.) Source: Department of the Treasury. middle of last year, with spreads for high-yield bonds rities, as discussed in the two most recent releases of moving closer to the bottom of their historical the Treasury’s quarterly financing statement. ranges. The narrowing of the spreads since the middle of 2017 appears to reflect both an anticipa- Consistent with the changes in Treasury yields, yields tion that the losses from defaults on these bonds will on 30-year agency mortgage-backed securities be smaller and a lower compensation being charged (MBS)—an important determinant of mortgage for bearing the risk of such losses. (For a discussion interest rates—increased but remain quite low by his- of financial stability issues, see the box “Developments torical standards. Related to Financial Stability” on pages 24–26 of the February 2018 Monetary Policy Report.) Broad equity price indexes have increased further . . . Markets for Treasury securities, Broad U.S. equity indexes, despite some declines seen mortgage-backed securities, municipal bonds, in recent weeks, have, on balance, increased further and short-term funding have functioned well since June 2017, with most of the net gains occurring Available indicators of Treasury market functioning during the final quarter of last year (figure 13). have generally remained stable over the second half Equity prices were reportedly supported in part by an of 2017 and early 2018, with a variety of liquidity increase in investors’ confidence that changes to the metrics—including bid-ask spreads, bid sizes, and federal tax law will boost corporate earnings. Stock estimates of transaction costs—mostly unchanged prices generally increased across industries outside over the period. Liquidity conditions in the agency utilities and real estate, two sectors for which the MBS market have also been generally stable. In increases in interest rates described earlier are likely recent months, the functioning of Treasury and to have weighed more heavily on stock prices; stock agency MBS markets has not been notably affected prices of banks rose more than the broader market. by the implementation of the Federal Reserve’s bal- Implied volatility for the S&P 500 index, as calcu- ance sheet normalization program and the resulting lated from options prices, increased notably in early reduction in reinvestment of principal payments from February, ending the period close to the median of the Federal Reserve’s securities holdings. In early its historical distribution. February, amid financial market volatility, liquidity conditions in the Treasury market deteriorated but . . . while risk spreads on corporate bonds have have recovered somewhat since. Credit conditions in continued to decrease municipal bond markets have also remained generally Spreads on both high-yield and investment-grade stable since June 2017. Over that period, yield corporate bond yields over comparable-maturity spreads on 20-year general obligation municipal Treasury yields have decreased further since the bonds over comparable-maturity Treasury securities

16 104th Annual Report | 2017 have narrowed on balance. Nevertheless, significant Growth in advanced foreign economies was financial strains were still evident for some issuers. In solid, and unemployment fell to multidecade particular, prices for Puerto Rico general obligation lows . . . bonds fell notably after Hurricane Maria hit the In the advanced foreign economies (AFEs), the ecoisland and its economic outlook deteriorated even nomic recovery has continued to firm. Real GDP in further. However, these developments left little the euro area and the United Kingdom expanded at a imprint in broader municipal bond markets. Condi- solid pace in the second half of the year. Economic tions in domestic short-term funding markets have activity also continued to expand in Japan, though remained stable since the middle of last year. real GDP growth slowed sharply in the fourth quarter. In Canada, data through November indicate that Bank credit continued to expand and bank economic growth moderated somewhat in the second profitability remained stable half following a very rapid expansion earlier in the Aggregate credit provided by commercial banks con- year. Unemployment declined further as well, reachtinued to expand in the second half of 2017 at a pace ing 40-year lows in Canada and the United Kingsimilar to the one seen earlier in the year but more dom, while growth in labor compensation ticked up slowly than in 2016. Its pace was also slower than only modestly. that of nominal GDP, thus leaving the ratio of total commercial bank credit to current-dollar GDP . . . but inflation remained subdued . . . slightly lower than earlier in 2017 (figure 14). Meas- Consumer price inflation rose somewhat in most ures of bank profitability were little changed at levels AFEs, boosted by the rise in commodity prices. below their historical averages. However, headline and especially core inflation remained below the central banks’ targets in the euro International Developments area and Japan. In contrast, U.K. inflation rose further above the Bank of England’s (BOE) 2 percent Economic activity in most foreign economies target as the substantial sterling depreciation continued at a healthy pace in the second half observed since the June 2016 Brexit referendum conof 2017 tinued to provide some uplift to import prices. (For Foreign real GDP appears to have expanded notably more discussion of inflation both in the United in the second half of 2017, extending the period since States and abroad, see the box “Low Inflation in the mid-2016 when the pace of economic growth picked Advanced Economies” on pages 14–15 of the Februup broadly around the world. ary 2018 Monetary Policy Report.) . . . leading AFE central banks to maintain accommodative monetary policies Figure 14. Ratio of total bank credit to nominal gross The Bank of Japan kept its policy rates at historically domestic product low levels, with the target for 10-year government bond yields around zero. In October, the European Quarterly Percent Central Bank extended its asset purchase program until September 2018, albeit at a reduced pace. The Bank of Canada and the BOE both raised their 75 policy rates but also indicated that they intend to proceed gradually with further removal of policy 70 accommodation. 65 In emerging Asia, growth remained solid . . . 60 Economic growth in China remained relatively strong in the second half of 2017 even as the authorities 55 enacted policies to limit production in heavily polluting industries, tighten financial regulations, and curb 2001 2003 2005 2007 2009 2011 2013 2015 2017 house price growth. Most other emerging Asian economies registered very strong growth in the third Source: Federal Reserve Board, Statistical Release H.8, "Assets and Liabilities of Commercial Banks in the United States"; Bureau of Economic Analysis via Haver quarter of 2017, fueled by solid external demand, but Analytics. slowed in the fourth quarter.

Monetary Policy and Economic Developments 17 . . . while the largest Latin American economies Figure 15. 10-year nominal benchmark yields in selected continued to struggle advanced economies In Mexico, real GDP declined in the third quarter as two major earthquakes and a hurricane significantly Weekly Percent disrupted economic activity, but rebounded in the fourth quarter. Following a prolonged period of con- 3.0 traction, the Brazilian economy continues to recover, United States 2.5 but only at a weak pace. Private investment has 2.0 remained sluggish amid corporate deleveraging and Canada continued uncertainty about government policies, 1.5 although it turned positive in the third quarter for the 1.0 Germany United Kingdom first time in nearly four years. .5 + _0 Foreign equity prices rose further on net . . . .5 Solid macroeconomic data and robust corporate earn- 2014 2015 2016 2017 2018 ings helped broad AFE and emerging market economies (EMEs) equity indexes extend their 2016 gains Note: The data are weekly averages of daily benchmark yields and extend through February 21, 2018. through the start of this year. Declines since the end of Source: Bloomberg. January have erased some of these gains, and volatility in foreign stock markets increased. On balance, most AFE stock prices are higher, and EME equity markets significantly outperformed those of AFEs. Capital weighed on the British pound at times during the secflows into emerging market mutual funds generally ond half of 2017, but progress regarding the terms of remained robust as higher commodity prices added to the U.K. separation from the European Union optimism about the economic outlook. boosted the currency later in the year. In contrast, the dollar appreciated against the Mexican peso, on net, amid uncertainty around North American Free . . . and government bond yields increased Trade Agreement negotiations. Longer-term government bond yields in most AFEs were noticeably higher than their mid-2017 levels, reflecting strengthening growth and mounting pros- Figure 16. U.S. dollar exchange rate indexes pects for the normalization of monetary policies (figure 15). In Canada, where the central bank has raised its policy interest rate 75 basis points since Weekly Week ending January 8, 2014 = 100 June, the rise in longer-term yields was particularly notable. On balance, spreads of dollar-denominated Dollar appreciation 170 emerging market sovereign bonds over U.S. Treasury Mexican peso 160 securities were stable around the levels observed in 150 mid-2017. 140 130 Euro The dollar depreciated on net 120 Broad dollar The broad dollar index––a measure of the trade- 110 weighted value of the dollar against foreign British pound 100 currencies––fell roughly 5 percent in the first half of 90 2017. Notwithstanding some appreciation in early February, the currency has depreciated further since 2014 2015 2016 2017 2018 the end of June, partially reversing substantial appre- Note: The data, which are in foreign currency units per dollar, are weekly averages ciation realized over the period from 2014 to 2016 of daily data and extend through February 21, 2018. As indicated by the arrow, increases in the data represent U.S. dollar appreciation, and decreases represent (figure 16). The weakness in the dollar mostly reflects U.S. dollar depreciation. a broad-based improvement in the outlook for for- Source: Federal Reserve Board, Statistical Release H.10, “Foreign Exchange Rates.” eign economic growth. Brexit-related headlines

18 104th Annual Report | 2017 Part 2: Monetary Policy Monetary policy continues to support economic growth The Federal Open Market Committee raised the Even with the gradual increases in the federal funds federal funds rate target range in December rate to date, the Committee judges that the stance of For more than two years, the Federal Open Market monetary policy remains accommodative, thereby Committee (FOMC) has been gradually increasing supporting strong labor market conditions and a susits target range for the federal funds rate as the labor tained return to 2 percent inflation. The federal funds market strengthened and headwinds in the aftermath rate remains somewhat below most estimates of its of the recession continued to abate. After having neutral rate—that is, the level of the federal funds raised the target range for the federal funds rate twice rate that is neither expansionary nor contractionary. in the first half of 2017, the Committee raised it again in December, bringing the target range to In evaluating the stance of monetary policy, policy- 1¼ to 1½ percent (figure 17).10 As on previous occa- makers routinely consult prescriptions from a variety sions, the decision to increase the federal funds rate of policy rules, which can serve as useful benchin December reflected realized and expected labor marks. However, the use and interpretation of such market conditions and inflation relative to the prescriptions require careful judgments about the FOMC’s objectives. Information available at that choice and measurement of the inputs to these rules time indicated that economic activity had been rising as well as the implications of the many considerat a solid rate and the labor market had continued to ations these rules do not take into account. (See the strengthen. In addition, although inflation had con- box “Monetary Policy Rules and Their Role in the tinued to run below the FOMC’s 2 percent longer- Federal Reserve’s Policy Process” on pages 35–38 of run objective, the Committee expected that it would the February 2018 Monetary Policy Report.) stabilize around that target over the medium term. At its most recent meeting, which concluded on Janu- Future changes in the federal funds rate will depend on the economic outlook as informed by ary 31, the Committee kept the target range for the federal funds rate unchanged.11 incoming data The Committee has continued to emphasize that, in determining the timing and size of future adjust- 10 See Board of Governors of the Federal Reserve System (2017), ments to the target range for the federal funds rate, it “Federal Reserve Issues FOMC Statement,” press release, will assess realized and expected economic conditions December 13, https://www.federalreserve.gov/newsevents/ pressreleases/monetary20171213a.htm. relative to its objectives of maximum employment 11 See Board of Governors of the Federal Reserve System (2018), and 2 percent inflation. This assessment will take into “Federal Reserve Issues FOMC Statement,” press release, Janu- account a wide range of information, including ary 31, https://www.federalreserve.gov/newsevents/pressreleases/ measures of labor market conditions, indicators of monetary20180131a.htm. 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 2018 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.

Monetary Policy and Economic Developments 19 inflation pressures and inflation expectations, and each calendar month in excess of $4 billion. Since readings on financial and international developments. January, payments of principal from maturing Treas- The FOMC has emphasized that it will carefully ury securities and from the Federal Reserve’s holdmonitor actual and expected inflation developments ings of agency debt and agency MBS have been relative to its symmetric inflation goal, as inflation reinvested to the extent that they have exceeded has been running persistently below the 2 percent $12 billion and $8 billion, respectively. The Commitlonger-run objective. tee has indicated that the cap for Treasury securities will continue to increase in steps of $6 billion at The Committee expects that the ongoing strength in three-month intervals until it reaches $30 billion per the economy will warrant further gradual increases in month, and that the cap for agency debt and agency the federal funds rate, and that the federal funds rate MBS will continue to increase in steps of $4 billion at will likely remain, for some time, below the levels that three-month intervals until it reaches $20 billion per the Committee expects to prevail in the longer run. month. These caps will remain in place until the Consistent with this outlook, in the most recent Sum- Committee judges that the Federal Reserve is holding mary of Economic Projections, which was compiled no more securities than necessary to implement monat the time of the December FOMC meeting, the etary policy efficiently and effectively. median of participants’ assessments for the appropriate level of the midpoint of the target range for the The initiation of the balance sheet normalization federal funds rate at year-end rises gradually over the program was widely anticipated and therefore did period from 2018 to 2020, remaining below the not elicit a notable reaction in financial markets. Submedian projection for its longer-run level through the sequently, the implementation of the program has end of 2019.12 proceeded smoothly without materially affecting Treasury and MBS markets. With the caps having The size of the Federal Reserve’s balance sheet been set thus far at relatively low levels, the reduction has begun to decrease in SOMA securities has represented a small fraction The Committee had communicated for some time of the SOMA securities holdings. Consequently, the that it intended to reduce the size of the Federal Federal Reserve’s total assets have declined somewhat Reserve’s balance sheet once normalization of the to about $4.4 trillion, with holdings of Treasury seculevel of the federal funds rate was well under way. At rities at approximately $2.4 trillion and holdings of its meeting in September, the FOMC decided to initi- agency debt and agency MBS at approximately ate the balance sheet normalization program $1.8 trillion (figure 18). described in the June 2017 Addendum to the Policy Normalization Principles and Plans. This program is Interest income on the SOMA portfolio has contingradually and predictably reducing the Federal ued to support substantial remittances to the U.S. Reserve’s securities holdings by decreasing the rein- Treasury. Preliminary financial statement results indivestment of the principal payments it receives from cate that the Federal Reserve remitted about securities held in the System Open Market Account $80.2 billion of its estimated 2017 net income to the (SOMA). Since October, such payments have been Treasury. reinvested only to the extent that they exceeded gradually rising caps. The Federal Reserve’s implementation of monetary policy has continued smoothly In the fourth quarter, the Open Market Desk at the In December 2017, the Federal Reserve raised the Federal Reserve Bank of New York, as directed by effective federal funds rate by increasing the interest the Committee, reinvested principal payments from rate paid on reserve balances along with the interest the Federal Reserve’s holdings of Treasury securities rate offered on overnight reverse repurchase agreematuring during each calendar month in excess of ments (ON RRPs). Specifically, the Federal Reserve $6 billion. The Desk also reinvested in agency increased the interest rate paid on required and mortgage-backed securities (MBS) the amount of excess reserve balances to 1½ percent and the ON principal payments from the Federal Reserve’s hold- RRP offering rate to 1¼ percent. In addition, the ings of agency debt and agency MBS received during Board of Governors approved an increase in the discount rate (the so-called primary credit rate) to 12 See the December Summary of Economic Projections, which 2 percent. Yields on a broad set of money market appeared as an addendum to the minutes of the December 12– instruments moved higher in response to the 13, 2017, meeting of the FOMC and is included as Part 3 of the February 2018 Monetary Policy Report. FOMC’s policy action in December. The effective

20 104th Annual Report | 2017 Figure 18. Federal Reserve assets and liabilities Weekly Trillions of dollars 5.0 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 5.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Note: “Credit and liquidity facilities” consists of primary, secondary, and seasonal credit; term auction credit; central bank liquidity swaps; support for Maiden Lane, Bear Stearns, and AIG; and other credit facilities, including the Primary Dealer Credit Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, and the Term Asset-Backed Securities Loan Facility. “Other assets” includes unamortized premiums and discounts on securities held outright. “Capital and other liabilities” includes reverse repurchase agreements, the U.S. Treasury General Account, and the U.S. Treasury Supplementary Financing Account. The data extend through February 14, 2018. Source: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.” federal funds rate rose in line with the increase in the has continued to test the operational readiness of FOMC’s target range and generally traded near the other policy tools as part of prudent planning. Two middle of the new target range amid orderly trading operations of the Term Deposit Facility were conconditions in money markets. Usage of the ON RRP ducted in the second half of 2017; seven-day deposits facility has declined on net since the middle of 2017, were offered at both operations with a floating rate of reflecting relatively attractive yields on alternative 1 basis point over the interest rate on excess reserves. investments. In addition, the Desk conducted several small-value exercises solely for the purpose of maintaining opera- Although the normalization of the monetary policy tional readiness. stance has proceeded smoothly, the Federal Reserve

Monetary Policy and Economic Developments 21 Monetary Policy Report July 2017 Economic growth. Real gross domestic product (GDP) is reported to have risen at an annual rate of about 1½ percent in the first quarter of 2017, but Summary more recent data suggest growth stepped back up in Economic activity increased at a moderate pace over the second quarter. Consumer spending was sluggish the first half of the year, and the jobs market contin- in the early part of the year but appears to have ued to strengthen. Measured on a 12-month basis, rebounded recently, supported by job gains, rising inflation has softened some in the past few months. household wealth, and favorable consumer senti- The Federal Open Market Committee (FOMC) ment. Business investment has turned up this year judged that, on balance, current and prospective eco- after having been weak for much of 2016, and indicanomic conditions called for a further gradual removal tors of business sentiment have been strong. The of policy accommodation. At its most recent meeting housing market continues its gradual recovery. Ecoin June, the Committee boosted the target range for nomic growth has also been supported by recent the federal funds rate to 1 to 1¼ percent. The Com- strength in foreign activity. mittee also issued additional information regarding its plans for reducing the size of its balance sheet in a Financial conditions. On balance, domestic financial gradual and predictable manner. conditions for businesses and households have continued to support economic growth. Long-term Economic and Financial Developments nominal Treasury yields and mortgage rates have Labor markets. The labor market has strengthened decreased so far in 2017, although yields remain further so far this year. Over the first five months of somewhat above levels that prevailed last summer. 2017, payroll employment increased 162,000 per Broad measures of equity prices increased further month, on average, somewhat slower than the aver- during the first half of the year. Spreads of yields on age monthly increase for 2016 but still more than corporate bonds over comparable-maturity Treasury enough to absorb new entrants into the labor force. securities decreased. Most types of consumer loans The unemployment rate fell from 4.7 percent in remained widely available, while mortgage credit December to 4.3 percent in May—modestly below stayed readily available for households with solid the median of FOMC participants’ estimates of its credit profiles but was still difficult to access for longer-run normal level. Other measures of labor uti- households with low credit scores or harder-tolization are also consistent with a relatively tight document incomes. In foreign financial markets, labor market. However, despite the broad-based equity prices increased and risk spreads decreased strength in measures of employment, wage growth amid generally firming economic growth and robust has been only modest, possibly held down by the corporate earnings. The broad U.S. dollar index weak pace of productivity growth in recent years. depreciated modestly against foreign currencies. Inflation. Consumer price inflation, as measured by Financial stability. Vulnerabilities in the U.S. financial the 12-month change in the price index for personal system remained, on balance, moderate. Contributing consumption expenditures, briefly reached the to the financial system’s improved resilience, U.S. FOMC’s 2 percent objective earlier this year, but it banks have substantial amounts of capital and more recently has softened. The latest reading, for liquidity. Valuation pressures across a range of assets May, was 1.4 percent—still up from a year earlier and several indicators of investor risk appetite have when falling energy prices restrained overall con- increased further since mid-February. However, these sumer prices. The 12-month measure of inflation that developments in asset markets have not been accomexcludes food and energy items (so-called core infla- panied by increased leverage in the financial sector, tion), which historically has been a better indicator according to available metrics, or increased borrowthan the headline figure of where overall inflation ing in the nonfinancial sector. Household debt as a will be in the future, was also 1.4 percent over the share of GDP continues to be subdued, and debt year ending in May; this reading was a bit lower than owed by nonfinancial businesses, although elevated, it had been one year earlier. Measures of longer-run has been either flat or falling in the past two years. inflation expectations have been relatively stable, on (See the box “Developments Related to Financial balance, though some measures remain low by his- Stability” on pages 24 –25 of the July 2017 Monetary torical standards. Policy Report.)

22 104th Annual Report | 2017 Monetary Policy gram this year provided that the economy evolves Interest rate policy. Over the first half of 2017, the broadly as anticipated. (See the box “Addendum to FOMC continued to gradually reduce the amount of the Policy Normalization Principles and Plans” on monetary policy accommodation. Specifically, the page 40 of the July 2017 Monetary Policy Report.) Committee decided to raise the target range for the Special Topics federal funds rate in March and in June, bringing it to the current range of 1 to 1¼ percent. Even with Education and climbing the economic ladder. Educathese rate increases, the stance of monetary policy tion, particularly a college degree, is often seen as a remains accommodative, supporting some further path to improved economic opportunities. However, strengthening in labor market conditions and a sus- despite the fact that young blacks and Hispanics have tained return to 2 percent inflation. increased their educational attainment over the past quarter-century, their representation in the top The FOMC continues to expect that, with gradual 25 percent of the income distribution for young adjustments in the stance of monetary policy, eco- people has not materially increased. In part, this outnomic activity will expand at a moderate pace and come has occurred because educational attainment labor market conditions will strengthen somewhat has increased for young non-Hispanic whites and further. Inflation on a 12-month basis is expected to Asians as well. While education continues to be an remain somewhat below 2 percent in the near term important determinant of whether one can climb the but to stabilize around the Committee’s 2 percent economic ladder, sizable differences in economic outobjective over the medium term. The federal funds comes across race and ethnicity remain even after rate is likely to remain, for some time, below levels controlling for educational attainment. (See the box that are expected to prevail in the longer run. Consis- “Does Education Determine Who Climbs the Economic tent with this outlook, in the most recent Summary Ladder?” on pages 8–9 of the July 2017 Monetary of Economic Projections (SEP), compiled at the time Policy Report.) of the June FOMC meeting, most participants projected that the appropriate level of the federal funds The global productivity slowdown. Over the past rate would be below its longer-run level through decade, labor productivity growth both in the United 2018. (The June SEP is presented in Part 3 on pages States and in other advanced economies has slowed 41–57 of the July 2017 Monetary Policy Report; it is markedly. This slowdown may reflect a waning of the also included in section 9 of this report.) However, as effects from advances in information technology in the Committee has continued to emphasize, mon- the 1990s and early 2000s. Productivity growth may etary policy is not on a preset course; the actual path also be low because of the severity of the Global of the federal funds rate will depend on the evolution Financial Crisis, in part because spending for of the economic outlook as informed by incoming research and development was muted. Some of the data. In particular, the Committee is monitoring factors restraining productivity growth may eventuinflation developments closely. ally fade, but it is difficult to ascertain whether the recent subdued performance of productivity repre- Balance sheet policy. To help maintain accommo- sents a new normal. (See the box “Productivity dative financial conditions, the Committee has Developments in the Advanced Economies” on pages continued its existing policy of reinvesting principal 12–13 of the July 2017 Monetary Policy Report.) payments from its holdings of agency debt and agency mortgage-backed securities in agency Liquidity in the corporate bond market. A series of mortgage-backed securities and rolling over maturing changes, including regulatory reforms, since the Treasury securities at auction. In June, the FOMC Global Financial Crisis have likely altered financial issued an Addendum to the Policy Normalization institutions’ incentives to provide liquidity. Many Principles and Plans that provides additional details market participants are particularly concerned with regarding the approach the FOMC intends to follow liquidity in markets for corporate bonds. However, to reduce the Federal Reserve’s holdings of Treasury the available evidence suggests that financial markets and agency securities in a gradual and predictable have performed well in recent years, with minimal manner. The Committee currently expects to begin impairment in liquidity, either in the market for corimplementing the balance sheet normalization pro- porate bonds or in markets for other assets. (See the

Monetary Policy and Economic Developments 23 box “Recent Developments in Corporate Bond Mar- 60 percent in May and has been increasing for the ket Liquidity” on pages 26–28 of the July 2017 Mon- past couple of years, reflecting the combination of etary Policy Report.) the declining unemployment rate and the flat LFPR. Monetary policy rules. Monetary policymakers con- The strengthening condition of the labor market is sider a wide range of information on current eco- evident in other measures as well. The number of nomic conditions and the outlook before deciding on people filing initial claims for unemployment insura policy stance they deem most likely to foster the ance has fallen to the lowest level in decades. In addi- FOMC’s statutory mandate of maximum employ- tion, as reported in the Job Openings and Labor ment and stable prices. They also routinely consult Turnover Survey, the rate of job openings remained monetary policy rules that connect prescriptions for elevated in the first part of the year, while the rate of the policy interest rate with variables associated with layoffs remained low; both are signs that firms’ the dual mandate. The use of such rules requires demand for labor is still solid. In addition, the rate of careful judgments about the choice and measurement quits stayed high, an indication that workers are conof the inputs into these rules as well as the implica- fident in their ability to obtain a new job. Another tions of the many considerations these rules do not measure, the share of workers who are working part take into account. (See the box “Monetary Policy Rules time but would prefer to be employed full time— and Their Role in the Federal Reserve’s Policy Pro- which is part of the U-6 measure of underutilization cess” on pages 36–39 of the July 2017 Monetary from the Bureau of Labor Statistics—fell noticeably Policy Report.) further in the first five months of 2017. Part 1: Recent Economic and Financial . . . though unemployment rates remain elevated for some demographic groups Developments Although the aggregate unemployment rate was at a Domestic Developments 16-year low in May, there are substantial disparities across demographic groups. Notably, the unemploy- The labor market tightened further during the ment rate for whites averaged 4 percent during the first half of the year . . . first five months of the year, and the rate for Asians Labor market conditions continued to strengthen in was about 3½ percent. However, the unemployment the first five months of this year. On average, payrolls rates for Hispanics (5.4 percent) and African Ameriexpanded 162,000 per month between January and cans (7.8 percent) were substantially higher. The dif- May, a little slower than the average monthly ferences in the unemployment rates across racial and employment gain in 2016 but still more than enough ethnic groups are long-standing, and they also vary to absorb new entrants to the labor force and there- over the business cycle. Indeed, the unemployment fore consistent with a further tightening of the labor rates for blacks and Hispanics both rose considerably market. The unemployment rate has declined 0.4 per- more than the rates for whites and Asians during the centage point since December 2016, and in May it Great Recession, and their subsequent declines have stood at 4.3 percent, its lowest level since late 2000 been more rapid. On balance, however, the differand modestly below the median of Federal Open ences in unemployment rates across the groups have Market Committee (FOMC) participants’ estimates not narrowed relative to the pre-recession period. of its longer-run normal level. (For additional discussion on differences in economic outcomes by race and ethnicity, see the box “Does The labor force participation rate (LFPR)—that is, Education Determine Who Climbs the Ecothe share of adults either working or actively looking nomic Ladder?” on pages 8–9 of the July 2017 Monfor work—was 62.7 percent in May and is little etary Policy Report.) changed, on net, since early 2014. Along with other factors, the aging of the population implies a down- Growth of labor compensation has been ward trend in participation, so the flattening out of modest . . . the LFPR during the past few years is consistent with Indicators of hourly compensation suggest that wage an overall picture of improving labor market condi- growth has remained modest. Growth of compensations. The employment-to-population ratio—that is, tion per hour in the business sector—a broad-based the share of the population that is working—was measure of wages, salaries, and benefits—has slowed

24 104th Annual Report | 2017 in recent quarters and was 2¼ percent over the price index for personal consumption expenditures four quarters ending in 2017:Q1.13 This measure (PCE), continued its climb from the very low levels can be quite volatile even at annual frequencies that prevailed in 2015 and early 2016 when it was (and a smoothed version is shown in figure 5 for that held down by falling oil and import prices. Indeed, reason). The employment cost index—which also consumer price inflation briefly reached the FOMC’s measures both wages and the cost to employers of 2 percent objective earlier this year before falling providing benefits—also was up 2¼ percent in the back to 1.4 percent in May. Core inflation, which first quarter relative to its year-ago level, about typically provides a better indication than the head- ½ percentage point faster than its gain of a year ear- line measure of where overall inflation will be in the lier. Among measures limited to wages, average future, also was 1.4 percent over the 12 months endhourly earnings growth—at 2½ percent through ing in May, a slightly slower rate than a year earlier. May—was little changed from a year ago, and a com- As is the case with headline inflation, the 12-month pensation measure computed by the Federal Reserve measure of core inflation had been higher earlier this Bank of Atlanta that tracks median 12-month wage year, reaching 1.8 percent. Both measures of inflation growth of individuals reporting to the Current Popu- have recently been held down by steep and likely idiolation Survey was about 3½ percent in May, also syncratic price declines for a few specific categories, similar to its reading from a year earlier. including wireless telephone services and prescription drugs, which do not appear to be related to the over- . . . and likely restrained by slow growth of labor all trends in consumer prices. The 12-month change productivity in the trimmed mean PCE price index—an alterna- These modest rates of compensation gain likely tive indicator of underlying inflation produced by the reflect the offsetting influences of a tightening labor Federal Reserve Bank of Dallas—slowed by less than market and persistently weak productivity growth. overall or core PCE price inflation over the past sev- Since 2008, labor productivity has increased only eral months. about 1 percent per year, on average, well below the average pace from 1996 through 2007 and also below Oil prices declined somewhat but remain well the gains in the 1974–95 period. For most of the above their early 2016 lows . . . period since 2011, labor productivity growth has After rebounding from their early 2016 lows, oil been particularly weak, although it has turned up in prices leveled off early this year. Since then they have recent quarters. The longer-term softness in produc- declined somewhat, despite OPEC’s decision in late tivity growth may be partly attributable to the sharp May to renew its November 2016 agreement to pullback in capital investment during the most recent reduce its oil production, thereby extending the recession and the relatively modest rebound that fol- November production cuts through early 2018. lowed. But there may be other explanations, too, and Reflecting lower crude oil prices as well as smaller considerable debate remains about the reasons for the retail margins, seasonally adjusted retail gasoline general slowdown in productivity growth. (For a prices have also declined since the beginning of the more comprehensive discussion of productivity, see year. Nevertheless, prices of both crude oil and retail the box “Productivity Developments in the Advanced gasoline remain above their early 2016 lows, and Economies” on pages 12 –13 of the July 2017 Mon- futures prices suggest that market participants expect etary Policy Report.) oil prices to rise gradually in coming years. Price inflation moved up but softened in the . . . while prices of imports other than energy spring and remains below 2 percent have been bolstered by higher commodity prices In the early months of 2017, consumer price infla- Throughout 2015, nonfuel import prices declined tion, as measured by the 12-month change in the because of appreciation of the dollar and declines in nonfuel commodity prices. Nonfuel import prices 13 The recent data on compensation per hour reflect a decline in stabilized last year and have risen since then, as the wages and salaries at the end of 2016, which might be the result of a shifting of bonuses or other types of income into 2017 in dollar stopped appreciating and supply disruptions anticipation of a possible cut in personal income tax rates. If boosted world prices of some nonfuel commodities, that is the case, the current estimate of compensation growth in especially industrial supplies and metals. In recent the first quarter might be revised up once full data become available later this summer. months, depreciation of the dollar has further

Monetary Policy and Economic Developments 25 pushed up non-oil import prices, which are now Real gross domestic product growth slowed in slightly higher than in mid-2016. the first quarter, but spending by households and businesses appears to have picked up in recent Survey-based measures of inflation expectations months are little changed this year . . . After having moved up at an annual rate of 2¾ per- Expectations of inflation likely influence actual infla- cent in the second half of 2016, real gross domestic tion by affecting wage- and price-setting decisions. product (GDP) is reported to have increased about Survey-based measures of inflation expectations at 1½ percent in the first quarter of this year.15 The medium- and longer-term horizons have remained step-down in first-quarter growth was largely attribrelatively stable so far in 2017. In the second-quarter utable to soft inventory investment and a lull in the Survey of Professional Forecasters conducted by the growth of consumer spending; in contrast, net Federal Reserve Bank of Philadelphia, the median exports increased a bit, residential investment grew expectation for the annual rate of increase in the PCE robustly, and spending by businesses surged. Indeed, price index over the next 10 years was 2.1 percent, the business investment was strong enough that overall same as in the first quarter and little changed from private domestic final purchases—that is, final purthe readings during 2016. In the University of Michi- chases by U.S. households and businesses, which tend gan Surveys of Consumers, the median value for to carry more signal for future GDP growth than inflation expectations over the next 5 to 10 years— most other components of overall spending—moved which has been drifting downward for the past few up at an annual rate of about 3 percent in the first years—has held about flat at a low level since late quarter. For more recent months, indicators of last year. spending by consumers and businesses have been strong and suggest that growth of economic activity . . . while market-based measures of inflation rebounded in the second quarter; thus, overall activcompensation fell back somewhat ity appears to have expanded moderately, on average, Inflation expectations can also be gauged by market- over the first half of the year. based measures of inflation compensation, though the inference is not straightforward because inflation The economic expansion continues to be supported compensation can be importantly affected by by accommodative financial conditions, including the changes in premiums associated with risk and liquid- low cost of borrowing and easy access to credit for ity. Measures of longer-term inflation compensa- many households and businesses, continuing job tion—derived either from differences between yields gains, rising household wealth, and favorable conon nominal Treasury securities and those on compa- sumer and business sentiment. rable Treasury Inflation-Protected Securities (TIPS) or from inflation swaps—have fallen back somewhat Gains in income and wealth continue to support this year after having moved up in late 2016.14 The consumer spending . . . TIPS-based measure of 5-to-10-year-forward infla- After increasing strongly in the second half of 2016, tion compensation is now 1¾ percent, and the consumer spending in the first quarter of this year analogous measure of inflation swaps is now about was tepid. Unseasonably warm weather depressed 2 percent. Both measures are well below the 2½ to spending on energy services, and purchases of motor 3 percent range that persisted for most of the vehicles slowed from an unusually high pace late last 10 years before 2014. year. However, household spending seems to have picked up in more recent months, as purchases of energy services returned to seasonal norms and retail sales firmed. All told, consumer spending increased at an annual rate of 2 percent over the first five 14 Inflation compensation implied by the TIPS breakeven inflation months of this year, only a bit slower than in the past rate is based on the difference, at comparable maturities, between yields on nominal Treasury securities and yields on couple of years. TIPS, which are indexed to the headline consumer price index (CPI). Inflation swaps are contracts in which one party makes payments of certain fixed nominal amounts in exchange for cash flows that are indexed to cumulative CPI inflation over some 15 Real gross domestic income (GDI), which is conceptually the horizon. Focusing on inflation compensation 5 to 10 years same as GDP but is constructed from different source data, had ahead is useful, particularly for monetary policy, because such been rising at roughly the same rate as real GDP for most of forward measures encompass market participants’ views about 2016. However, real GDI was held down by the very weak readwhere inflation will settle in the long term after developments ing for personal income in the fourth quarter of last year, which influencing inflation in the short term have run their course. may prove to have been transitory.

26 104th Annual Report | 2017 Beyond spending, other indicators of consumers’ Consumer confidence is strong economic well-being have been strong in the aggre- Consumers have remained optimistic about their gate. The ongoing improvement in the labor market financial situation. As measured by the Michigan has supported further gains in real disposable per- survey, consumer sentiment was solid through most sonal income (DPI), a measure of income after of 2016, likely reflecting rising income and job accounting for taxes and adjusting for inflation. Real gains. Sentiment moved up appreciably after the DPI increased at a solid annual rate of 3 percent over presidential election last November and has remained the first five months of this year. at a high level so far this year. Furthermore, the share of households expecting real income to rise Gains in the stock market and in house prices over over the next year or two has gone up markedly in the first half of the year have boosted household net the past few months and is now in line with its prewealth. Broad measures of U.S. equity prices have recession level. continued to increase in recent months after moving up considerably late last year and in the first quarter. Activity in the housing sector has improved House prices have also continued to climb, adding to modestly the balance sheet strength of homeowners. Indeed, Several indicators of housing activity have continued nominal house price indexes are close to their peaks to strengthen gradually this year. Sales of existing of the mid-2000s. However, while the ratio of house homes have gained, on net, while house prices have prices to rents has edged higher, it remains well below continued to rise and mortgage rates have remained its previous peak. As a result of the increases in home low, even though they are up from last year. In addiand equity prices, aggregate household net worth has tion, single-family housing starts registered a slight risen appreciably. In fact, at the end of the first quar- increase, on average, in the first five months of the ter of 2017, household net worth was more than six year, although multifamily housing starts have times the value of disposable income, the highest-ever slipped. Despite the modest increase in construction reading for that ratio. activity, the months’ supply of homes for sale has remained near the low levels seen in 2016, and the Consumer spending has also been supported by low aggregate vacancy rate has fallen back to levels burdens from debt service payments. The household observed in the mid-2000s. Lean inventories are likely debt service burden—the ratio of required principal to support further gains in homebuilding activity and interest payments on outstanding household going forward. debt to disposable income, measured for the household sector as a whole—has remained at a very low Business investment has turned up after a period level by historical standards. As interest rates rise, the of weakness . . . debt burden will move up only gradually, as most Led by a surge in spending on drilling and mining household debt is in fixed-interest products. structures, real outlays for business investment—that is, private nonresidential fixed investment—rose . . . as does credit availability robustly at the beginning of the year after having Consumer credit has continued to expand this year been about flat for 2016 as a whole. The sharp gains but more moderately than in 2016. Financing condi- in drilling and mining in the first quarter mark a tions are generally favorable, with auto and student turnaround for the sector; energy-sector investment loans remaining widely available and outstanding had declined noticeably following the drop in oil balances continuing to expand at a robust, albeit prices that began in mid-2014 and ran through early somewhat reduced, pace. Even though delinquency 2016. More recently, rapid increases in the number of rates on most types of consumer debt have remained drilling rigs in operation suggest that investment in low by historical standards, credit card and auto loan this area remained strong in the second quarter of delinquencies among subprime borrowers have this year. drifted up some. Possibly in response to this deteriorating credit performance, banks have tightened stan- Moreover, business spending on equipment and dards for credit cards and auto lending. Mortgage intangibles (such as research and development) credit has remained readily available for households advanced solidly at the beginning of the year after with solid credit profiles, but it was still difficult to having been roughly flat in 2016. Furthermore, indiaccess for households with low credit scores or cators of business spending are generally upbeat: harder-to-document incomes. Orders and shipments of capital goods have posted

Monetary Policy and Economic Developments 27 net gains in recent months, and indexes of business added a touch to U.S. real GDP growth and that the sentiment and activity remain elevated after having nominal trade deficit widened slightly relative improved significantly late last year. to GDP. . . . while corporate financing conditions have Federal fiscal policy had a roughly neutral effect remained accommodative on economic growth . . . Aggregate flows of credit to large nonfinancial firms Federal purchases moved sideways in 2016, and have remained solid, supported in part by continued policy actions had little effect on federal taxes or low interest rates. The gross issuance of corporate transfers. Under currently enacted legislation, federal bonds was robust during the first half of 2017, and fiscal policy will likely again have a roughly neutral yields on both speculative- and investment-grade cor- influence on the growth in real GDP this year. porate bonds remained low by historical standards. Gross equity issuance by nonfinancial firms stayed After narrowing significantly for several years, the solid, on average, as seasoned equity offerings contin- federal unified deficit has widened from about ued at a robust pace and the pace of initial public 2½ percent of GDP in fiscal year 2015 to 3¼ percent offerings picked up from the low levels seen in 2016. currently. Although expenditures as a share of GDP have been relatively stable over this period at a little Despite the pickup in business investment, demand under 21 percent, receipts moved lower in 2016 and for business loans was subdued early this year, and have edged down further so far this year to roughly outstanding commercial and industrial (C&I) loans 17½ percent of GDP. The ratio of federal debt held on banks’ books contracted in the first quarter. In by the public to nominal GDP is quite elevated relathe April Senior Loan Officer Opinion Survey on tive to historical norms. Nevertheless, the deficit Bank Lending Practices (SLOOS), banks reported a remains small enough to roughly stabilize this ratio in broad-based decline in demand for C&I loans during the neighborhood of 75 percent. the first quarter of 2017 even as lending standards on such loans were reported to be basically . . . and the fiscal position of most state and local unchanged.16 Banks also reported weaker demand governments is stable for commercial real estate loans as well as a contin- The fiscal position of most state and local governued tightening of standards on such loans. However, ments is stable, although there is a range of experiences lending to large nonfinancial firms appeared to be across these governments. Many state governments strengthening somewhat during the second quarter. are experiencing lackluster revenue growth, as income Meanwhile, measures of small business credit tax collections have been only edging up, on average, demand remained weak amid stable supply. in recent quarters. In contrast, house price gains have continued to push up property tax revenues at the U.S. exports grew at a faster pace local level. Employment growth in the state and local In the first quarter of 2017, U.S. real exports government sector has been anemic so far this year increased briskly and broadly following moderate following a pace of hiring in 2016 that was the strongrowth in the second half of last year that was driven gest since 2008. Outlays for construction by these by a surge in agricultural exports. At the same time, governments have been declining. real import growth declined somewhat from its strong pace in the second half of last year. As a Financial Developments result, real net exports contributed slightly to U.S. The expected path for the federal funds rate real GDP growth in the first quarter. Available trade flattened data through May suggest that the growth of real exports slowed to a modest pace in the second quar- The path for the expected federal funds rate implied ter. Nevertheless, the average pace of export growth by market quotes on interest rate derivatives has flatappears to have stepped up in the first half of 2017 tened, on net, since the end of December, moving compared with last year, partly reflecting stronger higher for 2017 but slightly lower further out. The growth abroad and a diminishing drag from earlier expected policy path moved up at the beginning of dollar appreciation. All told, the available data for the year, reportedly reflecting investor perceptions the first half of this year suggest that net exports that expansionary fiscal policy would likely be forthcoming over the near term, but subsequently fell amid some waning of these expectations as well as 16 The SLOOS is available on the Board’s website at https://www .federalreserve.gov/data/sloos/sloos.htm. FOMC communications that were interpreted as sig-

28 104th Annual Report | 2017 naling a somewhat slower pace of policy rate . . . and risk spreads on corporate bonds increases than had been anticipated. decreased Bond spreads for investment- and speculative-grade Survey-based measures of the expected path of firms decreased, and spreads for speculative-grade policy also moved up for 2017. Most of the respon- firms now stand near the bottom of their historical dents to the Federal Reserve Bank of New York’s ranges. Survey of Primary Dealers and Survey of Market Participants—which were conducted just before the Treasury and mortgage securities markets have June FOMC meeting—projected an additional functioned well 25 basis point increase in the FOMC’s target range Available indicators of Treasury market functioning for the federal funds rate, relative to what they proremained stable over the first half of 2017. A variety jected in surveys conducted before the December of liquidity metrics—including bid-ask spreads, bid FOMC meeting, as the most likely outcome for this sizes, and estimates of transaction costs—either year. Expectations for the number of rate hikes in improved or remained unchanged over the period, 2018 were about unchanged. Market-based measures displaying no notable signs of liquidity pressures. of uncertainty about the policy rate approximately The agency MBS market also continued to function one to two years ahead decreased slightly, on balance, well. (For a detailed discussion of corporate bond from their year-end levels. market functioning, see the box “Recent Developments in Corporate Bond Market Liquidity” on pages Longer-term nominal Treasury yields remain low 26–28 of the July 2017 Monetary Policy Report.) After rising significantly during the second half of 2016, yields on medium- and longer-term nominal Money market rates have moved up in line with Treasury securities have decreased 5 to 25 basis increases in the FOMC’s target range points, on net, so far in 2017. The decrease in longer- Conditions in domestic short-term funding markets term nominal yields since the beginning of the year have remained stable so far in 2017. Yields on a largely reflects declines in inflation compensation due broad set of money market instruments moved in part to soft incoming data on inflation, with real higher in response to the FOMC’s policy actions in yields little changed on net. Consistent with the March and June. The effective federal funds rate genchanges in Treasury yields, yields on 30-year agency erally traded near the middle of the target range and mortgage-backed securities (MBS)—an important was closely tracked by the overnight Eurodollar rate. determinant of mortgage interest rates—decreased The spread between the three-month LIBOR (Lonslightly over the first half of the year. Treasury and don interbank offered rate) and the OIS (overnight MBS yields picked up somewhat in late June, driven index swap) rate has returned to historical norms in part by increases in government yields overseas. over the first half of 2017, declining from the However, yields remain quite low by historical elevated levels that prevailed at the end of last year standards. around the implementation of the Securities and Broad equity price indexes increased further . . . Exchange Commission money market fund reform. Broad U.S. equity indexes continued to increase during the period. Equity prices were reportedly sup- Bank credit continued to expand, though at a ported by lower interest rates and increased optimism slower pace than in 2016, and bank profitability that corporate earnings will continue to strengthen improved this year. Stock prices of companies in the technol- Aggregate credit provided by commercial banks conogy sector increased notably on net. After rising sig- tinued to increase through the first quarter of 2017, nificantly toward the end of last year, stock prices of though at a slower pace than in 2016, leaving the banks performed about in line with the broader mar- ratio of total commercial bank credit to nominal ket during the first half of 2017. The implied volatil- GDP slightly lower. The expansion of core loans ity of the S&P 500 index one month ahead—the slowed during 2017, consistent with banks’ reports in VIX—decreased, on net, ending the period close to the April SLOOS of weakened demand for most loan the bottom of its historical range. (For a discussion categories and tighter lending standards for commerof financial stability issues, see the box “Developments cial real estate loans. However, the growth of core Related to Financial Stability” on pages 24–25 of the loans appeared to be picking up somewhat during the July 2017 Monetary Policy Report.) second quarter. Measures of bank profitability have

Monetary Policy and Economic Developments 29 continued to improve so far this year but remained cent between mid-2014 and late 2016. The weakening below their historical averages. since the start of the year partly reflected growing uncertainty about prospects for more expansionary Credit conditions in municipal bond markets U.S. fiscal policy as well as mounting confidence in have generally been stable the foreign economic outlook. The euro rose against Credit conditions in municipal bond markets have the dollar following the French presidential election, generally remained stable since year-end. Over that and the Mexican peso appreciated substantially as period, yield spreads on 20-year general obligation the Mexican central bank tightened monetary policy municipal bonds over comparable-maturity Treasury and as investor concerns about the potential for subsecurities were little changed on balance. Puerto Rico stantial disruptions of U.S.–Mexico trade appeared filed to enter a court-supervised process to restruc- to ease. ture its debt after it failed to reach an agreement with bondholders, and several credit rating agencies down- Economic activity in the AFEs grew at a solid graded the bond ratings of the state of Illinois. How- pace ever, these events have had no noticeable effect on In the first quarter, real GDP grew at a solid pace in broader municipal bond markets. Canada, the euro area, and Japan, partly reflecting robust growth in fixed investment in all three econo- International Developments mies. In contrast, economic growth slowed to a tepid pace in the United Kingdom, reflecting weaker con- Foreign financial market conditions eased sumption growth and a decline in exports. In most Financial market conditions in both the advanced AFEs, economic survey indicators, such as purchasforeign economies (AFEs) and the emerging market ing manager surveys, generally remained consistent economies (EMEs) have generally eased since Janu- with continued economic growth at a solid pace durary. Better-than-expected data releases, robust corpo- ing the second quarter. rate earnings, and the passage of risk events—such as national elections in some European countries— Inflation leveled off in most AFEs... boosted investor confidence. Broad equity indexes in In late 2016, consumer price inflation (measured as a advanced and emerging foreign economies rose fur- 12-month percent change) rose substantially in most ther. In addition, spreads of emerging market sover- AFEs, partly reflecting increases in energy prices. eign bonds over U.S. Treasury securities narrowed, Since then, inflation has leveled off in Japan and and capital flows into emerging market mutual funds declined somewhat in the euro area as upward prespicked up. Government bond yields in the AFEs gen- sure from energy prices eased, core inflation stayed erally remained very low, partly reflecting investor low, and wage growth was subdued even as unemexpectations that substantial monetary policy accom- ployment rates declined further in both economies. In modation would be required for some time. In the contrast, in the United Kingdom, headline inflation United Kingdom, softer macroeconomic data and rose well above the Bank of England’s (BOE) 2 peruncertainty about future policies and growth as the cent target, largely reflecting upward pressure from country begins the process of exiting the European the substantial sterling depreciation since the Brexit Union also weighed on yields. However, AFE govern- referendum in June 2016. ment bond yields picked up somewhat in late June, partly reflecting investors’ focus on remarks by offi- . . . and AFE central banks maintained highly cials from some AFE central banks suggesting pos- accommodative monetary policies sible shifts toward less accommodative policy stances. AFE central banks kept their policy rates at histori- In the euro area, bank supervisors intervened to pre- cally low levels, and the Bank of Japan kept its target vent the disorderly failure of a few small to medium- range for 10-year government bond yields near zero. sized lenders in Italy and Spain; business disruptions The European Central Bank (ECB) maintained its were minimal, and spillovers to other European asset purchase program, though it slightly reduced banks were limited. the pace of purchases, and the BOE completed the bond purchase program it announced last August. The dollar depreciated somewhat However, the Bank of Canada, BOE, and ECB have Since the start of the year, the broad dollar index—a recently suggested that if growth continues to reduce measure of the trade-weighted value of the dollar resource slack, some policy accommodation could be against foreign currencies—has depreciated about withdrawn. The ECB remarked that the forces hold- 5 percent, on balance, after rising more than 20 per- ing down inflation could be temporary. The BOE

30 104th Annual Report | 2017 indicated that some monetary accommodation might March and in June, bringing it to 1 to 1¼ percent.17 need to be removed if the tradeoff between support- The FOMC’s decisions reflected the progress the ing employment and expediting the return of infla- economy has made, and is expected to make, toward tion to its target is reduced. the Committee’s objectives. In EMEs, Asian growth was solid . . . When the Committee met in March, it decided to Chinese economic activity was robust in the first raise the target range for the federal funds rate to quarter of 2017 as a result of solid domestic and ¾ to 1 percent. Available information suggested that external demand. More recent indicators suggest that the labor market had continued to strengthen even as growth moderated in the second quarter as Chinese growth in economic activity slowed during the first authorities tightened financial conditions and as quarter. Inflation measured on a 12-month basis had export growth slowed. In some other emerging Asian moved up appreciably and was close to the Commiteconomies, growth picked up in early 2017 as a result tee’s 2 percent longer-run objective. Core inflation, of stronger external demand and manufacturing which excludes volatile energy and food prices, conactivity. However, growth of the region’s exports, tinued to run somewhat below 2 percent. especially to China, slowed so far in the second quarter. The data available at the time of the June FOMC meeting suggested a rebound in economic activity in . . . and many Latin American economies the second quarter, leaving the projected average pace continue their tepid recovery of growth over the first half of the year at a moder- In Mexico, growth decelerated a touch in the first ate level. The labor market had continued to quarter of 2017, partly reflecting a slowdown in pri- strengthen, with the unemployment rate falling vate consumption following sharp hikes in domestic nearly ½ percentage point since the beginning of the fuel prices. These price hikes, together with the effects year to 4.3 percent in May, a low level by historical of earlier peso depreciation on import prices, con- standards and modestly below the median of FOMC tributed to a sharp rise in Mexican inflation, which participants’ estimates of its longer-run normal level. prompted the Bank of Mexico to further tighten Inflation measured on a 12-month basis had declined monetary policy. Following a prolonged period of over the previous few months but was still up significontraction, the Brazilian economy posted solid cantly since last summer. Like the headline inflation growth in the first quarter of 2017, partly reflecting a measure, core inflation was running somewhat below surge in exports and a strong harvest. However, 2 percent. With employment expected to remain near domestic demand has remained very weak amid high its maximum sustainable level, the Committee conunemployment and heightened political tensions, and tinued to expect that inflation would move up and indicators of economic activity have stepped down stabilize around 2 percent over the next couple of recently. In Brazil and some other South American years, in line with the Committee’s longer-run objececonomies, declining inflation has led central banks tive. In view of realized and expected labor market to reduce their policy interest rates. conditions and inflation, the Committee decided to raise the target another ¼ percentage point to a range of 1 to 1¼ percent. Part 2: Monetary Policy Monetary policy continues to support economic The Federal Open Market Committee raised growth the federal funds rate target range in March Even with the gradual reductions in the amount of and June policy accommodation to date, the Committee judges Over the past year and a half, the Federal Open Mar- that the stance of monetary policy remains accomket Committee (FOMC) has been gradually increasing its target range for the federal funds rate as the 17 See Board of Governors of the Federal Reserve System (2017), “Federal Reserve Issues FOMC Statement,” press release, economy continued to make progress toward the March 15, https://www.federalreserve.gov/newsevents/ Committee’s objectives of maximum employment pressreleases/monetary20170315a.htm; and Board of Governors and price stability. After having raised the target of the Federal Reserve System (2017), “Federal Reserve Issues FOMC Statement,” press release, June 14, https://www range for the federal funds rate last December, the .federalreserve.gov/newsevents/pressreleases/monetary20170614a Committee decided to raise the target range again in .htm.

Monetary Policy and Economic Developments 31 modative, thereby supporting some further strength- The size of the Federal Reserve’s balance sheet ening in labor market conditions and a sustained has remained stable so far this year return to 2 percent inflation. In particular, the federal To help maintain accommodative financial condifunds rate appears to remain somewhat below its tions, the Committee has continued its existing policy neutral level—that is, the level of the federal funds of reinvesting principal payments from its holdings of rate that is neither expansionary nor contractionary. agency debt and agency mortgage-backed securities in agency mortgage-backed securities and rolling In evaluating the stance of monetary policy, policy- over maturing Treasury securities at auction. Consemakers routinely consult prescriptions from a variety quently, the Federal Reserve’s total assets have held of policy rules, which can serve as useful bench- steady at around $4.5 trillion, with holdings of U.S. marks. However, the use and interpretation of such Treasury securities at $2.5 trillion and holdings of prescriptions require careful judgments about the agency debt and agency mortgage-backed securities choice and measurement of the inputs to these rules at approximately $1.8 trillion. Total liabilities on the as well as the implications of the many consider- Federal Reserve’s balance sheet were also mostly ations these rules do not take into account. (See the unchanged over the first half of 2017. box “Monetary Policy Rules and Their Role in the Federal Reserve’s Policy Process” on pages 36–39 of The Committee intends to implement a balance the July 2017 Monetary Policy Report.) sheet normalization program In June, policymakers augmented the Committee’s Future changes in the federal funds rate will Policy Normalization Principles and Plans issued in depend on the economic outlook as informed by September 2014 by providing additional details incoming data regarding the approach the FOMC intends to use to The FOMC has continued to emphasize that, in reduce the Federal Reserve’s holdings of Treasury determining the timing and size of future adjust- and agency securities once normalization of the fedments to the target range for the federal funds rate, it eral funds rate is well under way.19 The Committee will assess realized and expected economic conditions intends to gradually reduce the Federal Reserve’s relative to its objectives of maximum employment securities holdings by decreasing its reinvestment of and 2 percent inflation. This assessment will take into the principal payments it receives from the securities account a wide range of information, including held in the System Open Market Account. Specifimeasures of labor market conditions, indicators of cally, such payments will be reinvested only to the inflation pressures and inflation expectations, and extent that they exceed gradually rising caps. Initially, readings on financial and international developments. these caps will be set at relatively low levels to limit The Committee will carefully monitor actual and the volume of securities that private investors will expected inflation developments relative to its sym- have to absorb. The Committee currently expects metric inflation goal. that, provided the economy evolves broadly as anticipated, it would likely begin to implement the pro- The Committee currently expects that the ongoing gram this year. In addition, the Committee affirmed strength in the economy will warrant gradual that changing the target range for the federal funds increases in the federal funds rate, and that the fed- rate remains its primary means of adjusting the eral funds rate will likely remain, for some time, stance of monetary policy. (See the box “Addendum below the levels that the Committee expects to prevail to the Policy Normalization Principles and Plans” on in the longer run. Consistent with this outlook, in the page 40 of the July 2017 Monetary Policy Report.) most recent Summary of Economic Projections, which was compiled at the time of the June FOMC The Federal Reserve’s implementation of meeting, most FOMC participants projected that the monetary policy has continued smoothly appropriate level of the federal funds rate would be The Federal Reserve successfully raised the effective below its longer-run level through 2018.18 federal funds rate in March and June of 2017 by increasing the interest rate paid on reserve balances along with the interest rate offered on overnight 19 See Board of Governors of the Federal Reserve System (2017), 18 See the June 2017 Summary of Economic Projections, which “FOMC Issues Addendum to the Policy Normalization Prinappeared as an addendum to the minutes of the June 13–14, ciples and Plans,” press release, June 14, https://www 2017, meeting of the Federal Open Market Committee and is .federalreserve.gov/newsevents/pressreleases/monetary20170614c included as Part 3 of the July 2017 Monetary Policy Report. .htm.

32 104th Annual Report | 2017 reverse repurchase agreements (ON RRPs). Specifi- new target range amid orderly trading conditions in cally, the Federal Reserve increased the interest rate money markets, closely tracked by most other overpaid on required and excess reserve balances to night money market rates. 1.00 percent in March and 1.25 percent in June while increasing the ON RRP offering rate to 0.75 percent Usage of the ON RRP facility, which had increased in March and 1.00 percent in June. In addition, the late last year as a result of higher demand by govern- Board of Governors approved ¼ percentage point ment money market funds in the wake of last Octoincreases in the discount rate (the primary credit rate) ber’s money fund reform, has declined some, on in March and June. In both March and June, the average, in recent months. However, usage has effective federal funds rate rose near the middle of its remained somewhat above its levels of one year ago.

33 3 Financial Stability A stable financial system promotes economic welfare tion that accounts for the stability of the financial through many channels: It facilitates household sav- system as a whole, in addition to a traditional, microings to purchase a home, finance a college education, prudential approach, which focuses on the safety and and smooth consumption in response to job loss and soundness of individual institutions. In particular, the other adverse developments; it promotes responsible first approach informs the supervision of systemically risk-taking and economic growth by channeling sav- important financial institutions (SIFIs), including ings to firms to start new businesses and expand large bank holding companies (BHCs), the U.S. existing businesses; and it spreads risk across operations of certain foreign banking organizations, investors. and financial market utilities (FMUs). In addition, the Federal Reserve serves as a “consolidated supervi- A financial system is considered stable when financial sor” of nonbank financial companies designated by institutions—banks, savings and loans, and other the FSOC as institutions whose distress or failure financial product and service providers—and finan- could pose a threat to the stability of the U.S. financial markets are able to provide households, commu- cial system as a whole (see “Financial Stability Overnities, and businesses with the resources, services, and sight Council Activities” later in this section). products they need to invest, grow, and participate in Enhanced standards for the largest, most systemic a well-functioning economy. Disruptions to these firms promote the safety of the overall system and activities of the financial system have arisen during, minimize the regulatory burden on smaller, less sysand contributed to, stressed macroeconomic environ- temic institutions. ments, and financial stability in its most basic form could be thought of as a condition in which financial This section discusses key financial stability activities institutions and markets are able to support consum- undertaken by the Federal Reserve over 2017, which ers, communities, and businesses during such stressed include monitoring risks to financial stability; proconditions. Accordingly, the Federal Reserve’s objec- moting a perspective on the supervision and regulative to promote financial stability strongly comple- tion of large, complex financial institutions that ments the goals of price stability and full employ- accounts for the potential spillovers from distress at ment. In pursuit of continued financial stability, the such institutions to the financial system and broader Federal Reserve monitors the potential buildup of economy; and engaging in domestic and international risks to financial stability; uses such analyses to cooperation and coordination. Each of these activiinform Federal Reserve responses, including the ties is informed by research into financial stability design of stress-test scenarios and decisions regarding issues (see box 1 for a summary of some recent other policy tools such as the countercyclical capital research by Federal Reserve Board staff on financial buffer (CCyB); works with other domestic agencies stability topics). directly and through the Financial Stability Oversight Council (FSOC); and engages with the global com- Some of these activities are also discussed elsewhere munity in monitoring, supervision, and regulation in this annual report. A broader set of economic and that mitigate the risks and consequences of financial financial developments are discussed in section 2, instability domestically and abroad. “Monetary Policy and Economic Developments,” with the discussion that follows concerning surveil- Moreover, the Federal Reserve promotes financial lance of economic and financial developments stability through its supervision and regulation of focused on financial stability. The full range of activifinancial institutions. A central tenet of the Federal ties associated with supervision of SIFIs, designated Reserve’s efforts in promoting financial stability is the nonbank companies, and designated FMUs is disadoption of an approach to supervision and regula- cussed in section 4, “Supervision and Regulation.”

34 104th Annual Report | 2017 Box 1. 2017 Research on Financial Stability Box 1. 2017 Research on Financial Stability—continued TheFederalReserve’sapproachtopromotingfinan- —Aworkingpaperstudiesoptimalregulationin —Apublishedpaperdiscussesthecoordinationof —AworkingpaperstudiestheeffectoftheFed’s cialstabilitybuildsonasubstantialandgrowingbody primarycreditmarketsandsecondaryover-the- monetaryandmacroprudentialpolicymaking.6 TreasuryportfoliocompositiononTreasury ofresearchonthefactorsthatcreatevulnerabilitiesin countermarkets.2 yields.11 —Apublishedpaperexaminestheeffectsofcredit thefinancialsystemandhowprudentialpoliciescan mitigatesuchvulnerabilities. —Anotepresentsanempiricalframeworkto defaultswapsonfirmdebtissuanceandinvest- • Banklendingbehavior evaluatestress-testscenarios.3 mentdecisions.7 Understandingofthearrayoffactorsaffectingfinan- —Aworkingpaperanalyzestheeffectsofquanticialstabilityisincompleteandevolving.Conse- • Thefinancialsectorandthemacroeconomy • Financialmarketsandfinancialstability tativeeasingonbanklendingstandards.12 quently,FederalReservestaffparticipateactivelyin —Aworkingpaperprovidesamacromodelincor- —Apublishedpaperanalyzesthetradingactivities —Aworkingpaperusesamacromodeltoanalyze researchonfinancialstabilityandrelatedissues.This poratingbankrunsandpanics.4 ofhigh-frequencytraders.8 theriskchannelofmonetarypolicy.13 researchengagesthebroaderresearchcommunityin policyissuesandofteninvolvescollaborationwith —Apublishedpaperdocumentstheimportanceof —Anessaydiscussestheadventoffintech —Aworkingpaperdocumentsthatbanksmore academiaandresearchersatotherdomesticand occasionallybindingfinancialfrictionsinunder- (emergingfinancialtechnologies)anditscon- exposedtoregionswithhighhouse-price-tointernationalinstitutions. standingthenonlinearbehaviorofmacroeco- nectionswithfinancialstability.9 incomeratiosbeforetheGreatRecessionhad nomicaggregates.5 highermortgagedelinquencyandcharge-off TheresearcheffortsbyFederalReservestaffreflect —Aworkingpaperlooksatreversalsinglobal ratesduringtherecession.14 theirattemptstoidentifyandaddressthetopicsof financialintegrationthroughthefundingliquidity concerntotheFederalReserve,andtheviews lens.10 expressedarethoseoftheindividualauthorsandnot thoseoftheFederalReserve.Examplesofstaff 11SeeJeffreyHuther,JaneIhrig,andElizabethKlee(2017),“The 6 SeeBiancaDePaoliandMatthiasPaustian(2017),“Coordinat- FederalReserve’sPortfolioandItsEffectonInterestRates,” researchonfinancialstabilityin2017includethe ingMonetaryandMacroprudentialPolicies,”JournalofMoney, FinanceandEconomicsDiscussionSeries2017-075(Washingfollowing: 2 See David M. Arseneau, David E. Rappoport, and Alexandros P. CreditandBanking,vol.49(March–April),pp.319–49. ton:BoardofGovernorsoftheFederalReserveSystem,July), Vardoulakis (2017), “Private and Public Liquidity Provision in 7 SeeMatthewDarstandEhrazRefayet(forthcoming),“Credit https://dx.doi.org/10.17016/FEDS.2017.075. • Theoreticalandempiricalstudiesonfinancial Over-the-Counter Markets,” Finance and Economics Discussion DefaultSwapsinGeneralEquilibrium:EndogenousDefaultand 12SeeRobertKurtzman,StephanLuck,andTomZimmermann regulationdesign Series 2017-033 (Washington: Board of Governors of the Federal CreditSpreadSpillovers,”JournalofMoney,CreditandBanking. (2017),“DidQELeadBankstoRelaxTheirLendingStandards? Reserve System, March), https://dx.doi.org/10.17016/FEDS 8 SeeEvangelosBenos,JamesBrugler,ErikHjalmarsson,and EvidencefromtheFederalReserve’sLSAPs,”FinanceandEco- —Aworkingpaperanalyzesoptimalbankregula- .2017.033. FilipZikes(2017),“InteractionsamongHigh-FrequencyTraders,” nomicsDiscussionSeries2017-093(Washington:BoardofGovtioninthepresenceofcreditandrunrisk.1 3 SeeBoraDurdu,RochelleEdge,andDanielSchwindt(2017), JournalofFinancialandQuantitativeAnalysis,vol.52(August), ernorsoftheFederalReserveSystem,September),https://dx “Measuring the Severity of Stress-Test Scenarios,” FEDS Notes pp.1375–1402. .doi.org/10.17016/FEDS.2017.093. (Washington: Board of Governors of the Federal Reserve 9 SeeJohnSchindler(2017),“FinTechandFinancialInnovation: 13SeeElenaAfanasyevaandJochenGüntner(2018),“BankMar- System, May 5), https://dx.doi.org/10.17016/2380-7172.1970. DriversandDepth,”FinanceandEconomicsDiscussionSeries ketPowerandtheRiskChannelofMonetaryPolicy,”Finance 4 SeeMarkGertler,NobuhiroKiyotaki,andAndreaPrestipino 2017-081(Washington:BoardofGovernorsoftheFederal andEconomicsDiscussionSeries2018-006(Washington:Board (2017), “A Macroeconomic Model with Financial Panics,” Inter- ReserveSystem,August),https://dx.doi.org/10.17016/FEDS ofGovernorsoftheFederalReserveSystem,January),https:// 1 See Anil K. Kashyap, Dimitrios P. Tsomocos, and Alexandros P. national Finance Discussion Papers 1219 (Washington: Board of .2017.081. www.federalreserve.gov/econres/feds/files/2018006pap.pdf. Vardoulakis (2017), “Optimal Bank Regulation in the Presence of Governors of the Federal Reserve System, December), 10SeeAmirAkbari,FrancescaCarrieri,andAytekMalkhozov 14SeeGaziI.KaraandCindyM.Vojtech(2017),“BankFailures, Credit and Run Risk,” Finance and Economics Discussion Series https://dx.doi.org/10.17016/IFDP.2017.1219. (2017),“ReversalsinGlobalMarketIntegrationandFunding CapitalBuffers,andExposuretotheHousingMarketBubble,” 2017-097 (Washington: Board of Governors of the Federal 5 SeeLucaGuerrieriandMatteoIacoviello(2017),“CollateralCon- Liquidity,”InternationalFinanceDiscussionPapers1202(Wash- FinanceandEconomicsDiscussionSeries2017-115(Washing- Reserve System, September), https://dx.doi.org/10.17016/FEDS straintsandMacroeconomicAsymmetries,”JournalofMonetary ington:BoardofGovernorsoftheFederalReserveSystem, ton:BoardofGovernorsoftheFederalReserveSystem,Novem- .2017.097. Economics,vol.90(October),pp.28–49. March),https://dx.doi.org/10.17016/IFDP.2017.1202. ber),https://dx.doi.org/10.17016/FEDS.2017.115. (continuedonnextpage) Monitoring Risks to Financial appropriate policy responses, the Federal Reserve maintains a flexible, forward-looking financial stabil- Stability ity monitoring program to help inform policymakers of the financial system’s vulnerabilities to a wide Financial institutions are linked together through a range of potential adverse shocks. Such a monitoring complex set of relationships, and their condition program is a critical part of a broader program in the depends on the economic condition of the nonfinan- Federal Reserve System to assess and address vulnercial sector. In turn, the condition of the nonfinancial abilities in the U.S. financial system. sector hinges on the strength of financial institutions’ balance sheets, as the nonfinancial sector obtains Each quarter, Federal Reserve Board staff assess a set funding through the financial sector. Monitoring of vulnerabilities relevant for financial stability, risks to financial stability is aimed at better underincluding but not limited to asset valuations and risk standing these complex linkages and has been an appetite, leverage in the financial system, liquidity important part of Federal Reserve efforts in pursuit risks and maturity transformation by the financial 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

Financial Stability 35 Box 1. 2017 Research on Financial Stability Box 1. 2017 Research on Financial Stability—continued TheFederalReserve’sapproachtopromotingfinan- —Aworkingpaperstudiesoptimalregulationin —Apublishedpaperdiscussesthecoordinationof —AworkingpaperstudiestheeffectoftheFed’s cialstabilitybuildsonasubstantialandgrowingbody primarycreditmarketsandsecondaryover-the- monetaryandmacroprudentialpolicymaking.6 TreasuryportfoliocompositiononTreasury ofresearchonthefactorsthatcreatevulnerabilitiesin countermarkets.2 yields.11 —Apublishedpaperexaminestheeffectsofcredit thefinancialsystemandhowprudentialpoliciescan mitigatesuchvulnerabilities. —Anotepresentsanempiricalframeworkto defaultswapsonfirmdebtissuanceandinvest- • Banklendingbehavior evaluatestress-testscenarios.3 mentdecisions.7 Understandingofthearrayoffactorsaffectingfinan- —Aworkingpaperanalyzestheeffectsofquanticialstabilityisincompleteandevolving.Conse- • Thefinancialsectorandthemacroeconomy • Financialmarketsandfinancialstability tativeeasingonbanklendingstandards.12 quently,FederalReservestaffparticipateactivelyin —Aworkingpaperprovidesamacromodelincor- —Apublishedpaperanalyzesthetradingactivities —Aworkingpaperusesamacromodeltoanalyze researchonfinancialstabilityandrelatedissues.This poratingbankrunsandpanics.4 ofhigh-frequencytraders.8 theriskchannelofmonetarypolicy.13 researchengagesthebroaderresearchcommunityin policyissuesandofteninvolvescollaborationwith —Apublishedpaperdocumentstheimportanceof —Anessaydiscussestheadventoffintech —Aworkingpaperdocumentsthatbanksmore academiaandresearchersatotherdomesticand occasionallybindingfinancialfrictionsinunder- (emergingfinancialtechnologies)anditscon- exposedtoregionswithhighhouse-price-tointernationalinstitutions. standingthenonlinearbehaviorofmacroeco- nectionswithfinancialstability.9 incomeratiosbeforetheGreatRecessionhad nomicaggregates.5 highermortgagedelinquencyandcharge-off TheresearcheffortsbyFederalReservestaffreflect —Aworkingpaperlooksatreversalsinglobal ratesduringtherecession.14 theirattemptstoidentifyandaddressthetopicsof financialintegrationthroughthefundingliquidity concerntotheFederalReserve,andtheviews lens.10 expressedarethoseoftheindividualauthorsandnot thoseoftheFederalReserve.Examplesofstaff 11SeeJeffreyHuther,JaneIhrig,andElizabethKlee(2017),“The researchonfinancialstabilityin2017includethe 6 S in e g e M B o ia n n e c ta a r D y e an P d ao M li a a c n ro d p M ru a d t e th n i t a ia s l P P a o u li s c t i i e a s n ,” (2 J 0 o 1 u 7 r ) n , a “ l C o o f o M rd o i n n e a y t- , F F e in d a e n r c a e l R a e n s d e E rv c e o ’s n o P m or ic tf s o l D io is a c n u d s s It io s n E S ffe e c ri t e o s n 2 0 In 1 t 7 e re 0 s 7 t 5 R (W at a e s s h ,” i ngfollowing: 2 SeeDavidM.Arseneau,DavidE.Rappoport,andAlexandrosP. CreditandBanking,vol.49(March–April),pp.319–49. ton: Board of Governors of the Federal Reserve System, July), Vardoulakis(2017),“PrivateandPublicLiquidityProvisionin 7 SeeMatthewDarstandEhrazRefayet(forthcoming),“Credit https://dx.doi.org/10.17016/FEDS.2017.075. • Theoreticalandempiricalstudiesonfinancial Over-the-CounterMarkets,”FinanceandEconomicsDiscussion DefaultSwapsinGeneralEquilibrium:EndogenousDefaultand 12SeeRobertKurtzman,StephanLuck,andTomZimmermann regulationdesign Series2017-033(Washington:BoardofGovernorsoftheFederal CreditSpreadSpillovers,”JournalofMoney,CreditandBanking. (2017), “Did QE Lead Banks to Relax Their Lending Standards? ReserveSystem,March),https://dx.doi.org/10.17016/FEDS 8 SeeEvangelosBenos,JamesBrugler,ErikHjalmarsson,and Evidence from the Federal Reserve’s LSAPs,” Finance and Eco- —Aworkingpaperanalyzesoptimalbankregula- .2017.033. FilipZikes(2017),“InteractionsamongHigh-FrequencyTraders,” nomics Discussion Series 2017-093 (Washington: Board of Govtioninthepresenceofcreditandrunrisk.1 3 SeeBoraDurdu,RochelleEdge,andDanielSchwindt(2017), JournalofFinancialandQuantitativeAnalysis,vol.52(August), ernors of the Federal Reserve System, September), https://dx “MeasuringtheSeverityofStress-TestScenarios,”FEDSNotes pp.1375–1402. .doi.org/10.17016/FEDS.2017.093. (Washington:BoardofGovernorsoftheFederalReserve 9 SeeJohnSchindler(2017),“FinTechandFinancialInnovation: 13SeeElenaAfanasyevaandJochenGüntner(2018),“BankMar- System,May5),https://dx.doi.org/10.17016/2380-7172.1970. Drivers and Depth,” Finance and Economics Discussion Series ket Power and the Risk Channel of Monetary Policy,” Finance 4 SeeMarkGertler,NobuhiroKiyotaki,andAndreaPrestipino 2017-081 (Washington: Board of Governors of the Federal and Economics Discussion Series 2018-006 (Washington: Board (2017),“AMacroeconomicModelwithFinancialPanics,”Inter- Reserve System, August), https://dx.doi.org/10.17016/FEDS of Governors of the Federal Reserve System, January), https:// 1 SeeAnilK.Kashyap,DimitriosP.Tsomocos,andAlexandrosP. nationalFinanceDiscussionPapers1219(Washington:Boardof .2017.081. www.federalreserve.gov/econres/feds/files/2018006pap.pdf. Vardoulakis(2017),“OptimalBankRegulationinthePresenceof GovernorsoftheFederalReserveSystem,December), 10SeeAmirAkbari,FrancescaCarrieri,andAytekMalkhozov 14SeeGaziI.KaraandCindyM.Vojtech(2017),“BankFailures, CreditandRunRisk,”FinanceandEconomicsDiscussionSeries https://dx.doi.org/10.17016/IFDP.2017.1219. (2017), “Reversals in Global Market Integration and Funding Capital Buffers, and Exposure to the Housing Market Bubble,” 2017-097(Washington:BoardofGovernorsoftheFederal 5 SeeLucaGuerrieriandMatteoIacoviello(2017),“CollateralCon- Liquidity,” International Finance Discussion Papers 1202 (Wash- Finance and Economics Discussion Series 2017-115 (Washing- ReserveSystem,September),https://dx.doi.org/10.17016/FEDS straintsandMacroeconomicAsymmetries,”JournalofMonetary ington: Board of Governors of the Federal Reserve System, ton: Board of Governors of the Federal Reserve System, Novem- .2017.097. Economics,vol.90(October),pp.28–49. March), https://dx.doi.org/10.17016/IFDP.2017.1202. ber), https://dx.doi.org/10.17016/FEDS.2017.115. (continuedonnextpage) cerning policies to promote financial stability, such as result, analysis typically includes a broad range of supervision and regulatory policies as well as mon- possible valuation metrics and tracks developments etary policy. They also inform Federal Reserve inter- in areas in which asset prices are rising particularly actions with broader monitoring efforts, such as rapidly, into which investor flows have been considerthose by the FSOC and the Financial Stability Board able, or where volatility has been at unusually low or (FSB). high levels. Asset Valuations and Risk Appetite Across markets, valuation pressures remained elevated and continued to edge up. In equity markets, Overvalued assets are a fundamental source of vul- the forward price-to-earnings ratio increased noticenerability because the unwinding of high prices can ably, in particular for large firms (figure 1). At the be destabilizing, especially if the assets are widely same time, estimates of the equity risk premium—for held and the values are supported by excessive lever- example, the gap between the expected return on age, maturity transformation, or risk opacity. More- equity and the long-term Treasury yield—declined, over, stretched asset valuations are likely to be an and such measures suggest that investors demanded a indicator of a broader buildup in risk-taking. None- relatively low premium to bear the risk of holding theless, it is very difficult to judge whether an asset equities. Moreover, both realized and expected volaprice is overvalued relative to fundamentals. As a tility in equity markets declined over 2017 to very low

36 104th Annual Report | 2017 Figure 1. Forward price-to-earnings ratio, 1983–2017 Figure 2. S&P 500 volatility, 2000–17 Ratio (log scale) Percent (log scale) Monthly 40 Monthly average 100 35 S&P 500 volatility 30 index (VIX) 50 Dec. 25 Realized volatility 20 Historical median 15 20 Historical median 10 10 S&P 500 firms Dec. Small-cap 2000 firms 5 5 1987 1997 2007 2017 2002 2005 2008 2011 2014 2017 Note: The data extend through December 2017. The data for small-cap 2000 firms Note: The data extend through December 2017. For realized volatility, five-minute start in October 1984. Based on expected earnings for 12 months ahead. returns used in an exponentially weighted moving average, with 75 percent of the weight distributed over the last 20 days. Source: Staff calculations using data from Thomson Reuters IBES. Source: Bloomberg. levels by historical standards, although realized vola- lite” loans. Such loans continue to account for a high tility picked up late in the year (figure 2). fraction of market volume (figure 4). Throughout 2017, yields on Treasury securities An area of ongoing valuation pressures over the past remained below historical averages; however, they year was commercial real estate (CRE), with prices were higher than in 2016. In the corporate bond mar- increasing faster than the historical trend and, for ket, spreads of high-yield and investment-grade industrial and multifamily properties, with net operbonds relative to comparable-maturity Treasury ating income relative to property prices (capitalizayields, a gauge of the compensation that investors tion rates) continuing to decline from already low levdemand for exposure to corporate credit risk, nar- els. Residential home prices also continued to rise in rowed over the year (figure 3). Strong demand for 2017, although price increases nationally in that year exposure to corporate credit risk was also apparent in were not outsized relative to improvements in fundathe further increase in leveraged lending with limited mentals. For example, house prices relative to rents— degrees of investor protection—termed “covenant one measure of valuations—rose moderately in 2017, Figure 3. Corporate bond spreads to similar-maturity Treasury securities, 1998–2017 Percent 20 Monthly average 10-year high-yield yield 10-year triple-B yield 15 10-year Treasury yield 10 5 Dec. 0 1999 2002 2005 2008 2011 2014 2017 Note: The data extend through December 2017. Source: Staff estimates based on corporate bond data from ICE Data Indices LLC: BofAML Bond Indices (used with permission), computed using Nelson-Siegel yield curve model; semiannually compounded 10-year Treasury yield (par) estimated by Svensson term structure model.

Financial Stability 37 Figure 4. Volume of covenant-lite loans and share of such Figure 5. Nonfinancial-sector credit-to-GDP ratio, loans in the leveraged lending market, 2004–17 1981–2017 Percent Billions of dollars (annualized) Ratio 80 400 2.0 Quarterly 70 Market share (left scale) 350 Volume (right scale) 60 300 Q4 1.5 50 250 40 200 30 150 Business 1.0 20 100 10 50 0.5 0 0 Household 2005 2008 2011 2014 2017 Note: The data extend through 2017. 0.0 Source: S&P Global, Leveraged Commentary and Data. 1981 1987 1993 1999 2005 2011 2017 Note: The data extend through 2017:Q4. The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research. GDP is with an increase similar to annual changes over the gross domestic product. previous five years. 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. Borrowing by the Nonfinancial Sector Excessive borrowing by the private nonfinancial sec- expected default based on accounting and stock tor has been an important contributor to past finan- return data, especially outside the oil sector. Nonecial crises. Highly indebted households and nonfinan- theless, high leverage could leave some parts of the cial businesses may be vulnerable to negative shocks corporate sector vulnerable to difficulties should to incomes or asset values and may be forced to cur- adverse shocks materialize. tail spending, which could amplify the effects of financial shocks. In turn, losses among households Gross issuance of high-yield corporate bonds was and businesses can lead to mounting losses at finanstrong throughout 2017, and gross issuance of levercial institutions, creating an adverse feedback loop in aged loans was the strongest over the past decade which weakness among households, nonfinancial (figure 7). A sizable fraction of leveraged loan issubusinesses, and financial institutions causes further ance, however, was used for refinancing purposes. declines in income and accelerated financial losses, potentially leading to financial instability and a sharp contraction in economic activity. Figure 6. Gross leverage for speculative-grade and investment-grade firms, 2000–17 Vulnerabilities associated with nonfinancial-sector Percent of assets leverage remained moderate overall in 2017. Nominal 50 Quarterly private nonfinancial-sector credit grew a bit less than Speculative-grade 45 5 percent over 2017 and a shade faster than nominal Investment-grade gross domestic product (GDP), leaving the private 40 nonfinancial-sector credit-to-GDP ratio elevated but Q4 35 stable at approximately 150 percent, a level similar to that in the mid-2000s (figure 5). 30 25 While borrowing by the total nonfinancial private sector remained moderate, leverage among riskier 20 corporate borrowers has stayed at or near multide- 15 cade highs, particularly for speculative-grade and 2002 2005 2008 2011 2014 2017 unrated firms (figure 6). Despite high leverage, inter- Note: The data extend through 2017:Q4. Gross leverage is the ratio of the book est expense ratios were low by historical standards, value of total debt to the book value of total assets. Source: S&P Global, Compustat. even among higher-risk firms, as were measures of

38 104th Annual Report | 2017 Household debt growth continued to be modest over Figure 7. Leveraged loan and high-yield bond issuance, the past year, and the debt-to-income ratio for house- 2005–17 holds continued to inch down. Aggregate borrowing relative to income in the household sector declined Four-quarter percent change Billions of dollars (annualized) 35 1600 significantly from its peak, and recent borrowing Total outstanding (left scale) 30 High-yield bonds (right scale) 1400 remained skewed toward low-risk households. 25 Leveraged loans (right scale) 1200 Leverage in the Financial System 20 1000 15 800 Vulnerabilities related to financial-sector leverage 10 600 appear low. The financial strength of the banking 5 400 sector continued to improve in 2017, and stronger 0 200 capital positions at domestic banking organizations -5 0 contributed to the improved resilience of the U.S. 2005 2008 2011 2014 2017 financial system. Regulatory capital remained at his- Note: Total outstanding is quarterly data, starting in 2005:Q1. It includes bonds torically high levels for most large domestic banks. and loans to financial and nonfinancial companies, as well as unrated bonds and loans. The ratio of Tier 1 common equity to risk-weighted Source: S&P Global, Leveraged Commentary and Data; Mergent Corporate Fixed assets stayed near 12 percent, on average, for BHCs Income. in 2017 (figure 9). Moreover, the leverage ratio, which looks at common equity relative to total assets without adjusting for risk, also remained at levels sub- The four-quarter percent change in net issuance of stantially above pre-crisis norms. Finally, all 34 firms risky debt increased throughout the year. participating in the Federal Reserve’s supervisory stress tests for 2017 were able to maintain capital CRE loan growth remained strong over the past year ratios above required minimums to absorb losses (figure 8). CRE-related loan growth at banks also from a severe macroeconomic shock.1 continued to be strong but began to decline from its peak in 2016. This decline in bank loan growth rates was likely due to a tightening of CRE lending stan- 1 The 2017 supervisory stress-test methodology and results are dards. Issuance of commercial mortgage-backed available on the Board’s website at https://www.federalreserve.gov/ publications/2017-june-dodd-frank-act-stress-test-preface.htm. securities, however, remained robust through the fourth quarter. Figure 9. Regulatory capital ratios, all BHCs, 1998–2017 Figure 8. Total holdings of CRE debt, by holder, 1981–2017 Percent 22 Quarterly, s.a. Four-quarter percent change 20 35 Total (Tier 1 + Tier 2) 18 30 Common equity Tier 1 ratio Traditional banks Leverage ratio 16 25 Total 20 14 15 Q4 12 10 10 Q4 5 8 0 6 -5 4 -10 1999 2002 2005 2008 2011 2014 2017 -15 Note: The data extend through 2017:Q4. Prior to 2014:Q1, the numerator of the 1981 1987 1993 1999 2005 2011 2017 common equity Tier 1 ratio is Tier 1 common capital. Beginning in 2014:Q1 for Note: The data extend through 2017:Q4. Total consists of insurance companies, advanced-approaches bank holding companies (BHCs) and in 2015:Q1 for all asset-backed securities issuers, real estate investment trusts, government- other BHCs, the numerator is common equity Tier 1 capital. The data for the comsponsored enterprises, finance companies, pension funds, and the rest of the mon equity Tier 1 ratio start in 2001:Q1. An advanced-approaches BHC is defined world (all entities not residing in the United States that engage in transactions as a large internationally active banking organization, generally with at least with U.S. residents). The shaded bars indicate periods of business recession as $250 billion in total consolidated assets or at least $10 billion in total on-balancedefined by the National Bureau of Economic Research. sheet foreign exposure. The shaded bars indicate periods of business recession as Source: Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the defined by the National Bureau of Economic Research. United States”; Bureau of Economic Analysis, national income and product Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements accounts. for Holding Companies.

Financial Stability 39 Overall, leverage at nonbank financial firms remains edged up only modestly.2 The weighted-average significant. While, in the aggregate, dealers continue maturity of assets held by government and agency to shrink their on-balance-sheet leverage to levels far MMFs declined noticeably throughout 2017, resultbelow those seen leading up to and during the finan- ing in lower maturity transformation. cial crisis, there are signs that nonbank financial leverage has been increasing in some areas. For Overall issuance of securitized products remained example, the provision of margin credit to equity below pre-crisis levels for most asset classes, although investors such as hedge funds has risen substantially. the issuance of asset-backed securities (ABS) was Insurance companies’ capital levels are robust, and strong. ABS issuance partly reflected the securitizaoverall risk exposures are generally lower than those tion of assets that were not typically securitized in typical of commercial banks. previous years, including aircraft leases and mobile phone contracts. Currently, securitized products Liquidity Risks and Maturity incorporate less maturity transformation than before Transformation by the Financial System the financial crisis, with volumes of asset-backed commercial paper being particularly low. Nontradi- Vulnerabilities associated with liquidity risks and matu- tional liabilities of insurance companies, including rity transformation remained low in 2017, partly reflect- funding-agreement-backed securities, grew signifiing regulations introduced since the 2008 financial crisis. cantly in 2017 even if outstanding amounts remained In the banking sector, the largest banks hold high levels relatively small. of high-quality liquid assets (figure 10). The reliance of global systemically important banks (G-SIBs) on Liquidity transformation at open-end funds that hold short-term wholesale funding is near post-crisis lows. less-liquid assets continues to pose a moderate ampli- At the same time, the share of core deposits in total fication risk, because investors can typically redeem liabilities for G-SIBs is historically high. shares daily while the underlying assets may trade in less-liquid markets. Liquidity-transformation risk is In the nonbanking sector, the amount of assets man- also pronounced at exchange-traded funds that invest aged by money market mutual funds (also referred to in certain asset classes, including bank loans, and as money market funds, or MMFs) increased mar- that provide leveraged and inverse payoffs relative to ginally throughout 2017, with little change to portfo- benchmark indexes. While the limited size of these lio composition. More than one year after the MMF products suggests that their behavior may not have reform, assets under management at prime MMFs long-lasting effects on asset prices, their leverage and reliance on markets in which liquidity may be limited during stress periods entail that such products could Figure 10. High-quality liquid assets, by BHC type, 2010–17 amplify price swings across markets for short periods. Percent of assets 26 Quarterly Financial Stability and the 24 Standard LCR 22 Supervision and Regulation of Large, Modified LCR 20 Other Complex Financial Institutions 18 16 14 Large, complex financial institutions interact with 12 financial markets and the broader economy in a 10 manner that may—during times of stress and in the Q4 8 absence of an appropriate regulatory framework and 6 effective supervision—lead to financial instability.3 4 2011 2013 2015 2017 Note: The data extend through 2017:Q4. High-quality liquid assets (HQLA) are esti- 2 For additional information, see Securities and Exchange Commated by adding excess reserves to an estimate of securities that qualify for mission (2014), “Money Market Fund Reform; Amendments to HQLA. Securities are estimated from Form FR Y-9C. Haircuts and Level 2 asset Form PF,” final rule (Release No. 33-9616), July 23, https://www limitations are incorporated into the estimate (Level 2 assets can represent only a .sec.gov/rules/final/2014/33-9616.pdf. limited share of the HQLA stock). LCR is liquidity coverage ratio; BHC is bank hold- 3 For more on the Federal Reserve’s supervision and regulation of ing company. Other is defined as BHCs not subject to the LCR. large institutions, especially related to the integration of the Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements microprudential objective of safety and soundness of individual for Holding Companies, and Form FR 2900, Report of Transaction Accounts, Other institutions with the macroprudential efforts outlined later in Deposits, and Vault Cash. this section, see section 4, “Supervision and Regulation.”

40 104th Annual Report | 2017 Key Supervisory Activities Key Regulatory Activities One essential element of enhanced supervision of Over the course of 2017, the Federal Reserve took a large banking organizations is the stress-testing pro- number of steps to continue improving the resilience cess, which includes the stress tests mandated by the of financial institutions and the overall financial Dodd-Frank Wall Street Reform and Consumer Pro- system. This section summarizes steps that bear most tection Act of 2010 (Dodd-Frank Act) and the Com- directly on financial stability. prehensive Capital Analysis and Review (CCAR). In addition to fostering the safety and soundness of the In December 2017, the Federal Reserve Board voted participating institutions, stress tests embed elements to reaffirm the CCyB at the current level of 0 perfocused on the stability of the financial system as a cent.5 The CCyB is a tool that the Board can use to whole by incorporating the following: increase the resilience of the financial system by raising capital requirements on internationally active • Examining the loss-absorbing capacity of institubanking organizations when there is an elevated risk tions under a common macroeconomic scenario of above-normal losses in the future. In evaluating that has features similar to the strains experienced the appropriate size of the U.S. CCyB, the Board in a severe recession and which includes, as appromonitors a wide range of financial and economic priate, identified salient risks indicators and considers their implications for finan- • Conducting a simultaneous exercise across large cial system vulnerabilities, including but not limited institutions to understand the potential for corre- to asset valuation pressures, risk appetite, leverage in lated exposures the financial and nonfinancial sectors, and maturity and liquidity transformation in the financial sector. • Considering the effects of counterparty distress on the largest, most interconnected firms The Board also issued a final rule that improved the resolvability and resilience of systemically important The results from the 2017 supervisory stress tests U.S. banking organizations and systemically imporconducted as part of the Dodd-Frank Act stress tests tant foreign banking organizations. Covered entities (DFAST) and CCAR were released in June 2017.4 would be subject to restrictions related to the terms Thirteen of the largest and most complex banks were of their noncleared qualified financial contracts. required, for the first time, to meet the minimum supplementary leverage ratio of 3 percent as part of In order to increase the transparency of its stressthe quantitative assessment. The DFAST and CCAR testing program while maintaining its ability to test results suggest that all of the firms evaluated have the resilience of the nation’s largest and most comsufficient capital to remain above minimum requireplex banking organizations, the Board requested ments through a severely adverse macroeconomic comments on a set of proposals that relate to the disscenario. The severely adverse scenario featured a closure of details about supervisory stress-test modsevere global recession that was accompanied by a els; to the Board’s approach to model development, period of heightened stress in corporate loan and validation, and use; and to the framework for the CRE markets. The level of severity reflected the design of the annual hypothetical economic Board’s scenario design framework for stress testing, scenarios. which includes countercyclical elements. The international part of the scenario featured severe recessions The proposals on which the Board requested comin the euro area, the United Kingdom, and Japan ments included expanding the descriptions of superand a marked growth slowdown in developing Asia. visory models and communicating the loss rates that supervisory models assign to subgroups of loans.6 In 4 For additional information on DFAST, see Board of Governors 5 See Board of Governors of the Federal Reserve System (2017), of the Federal Reserve System (2017), “Federal Reserve Board “Federal Reserve Board Announces It Has Voted to Affirm Releases Results of Supervisory Bank Stress Tests,” press Countercyclical Capital Buffer (CCyB) at Current Level of release, June 22, https://www.federalreserve.gov/newsevents/ 0 Percent,” press release, December 1, https://www.federalreserve pressreleases/bcreg20170622a.htm. For more details on CCAR, .gov/newsevents/pressreleases/bcreg20171201a.htm. see Board of Governors of the Federal Reserve System (2017), 6 For the notice of enhanced model disclosure, see Board of Gov- “Federal Reserve Releases Results of Comprehensive Capital ernors of the Federal Reserve System (2017), “Enhanced Disclo- Analysis and Review (CCAR),” press release, June 28, https:// sure of the Models Used in the Federal Reserve’s Supervisory www.federalreserve.gov/newsevents/pressreleases/ Stress Test,” notification with request for public comment bcreg20170628a.htm. (Docket No. OP-1586), Federal Register, vol. 82 (December 15),

Financial Stability 41 addition, the Board built on previous disclosures and Box 2. Regular Reporting on detailed the principles and policies that underpin the development of its stress-testing models.7 Finally, the Financial Stability Oversight Council Board proposed to enhance the transparency of the Activities stress-testing economic scenarios by providing a The Federal Reserve cooperated and coordinated quantitative discussion of the hypothetical path of with domestic agencies in 2017 to promote finanhouse prices and by providing notice that the Board cial stability, including through the activities of the is considering incorporating variables related to fund- Financial Stability Oversight Council (FSOC). ing risks into the hypothetical scenarios. Meeting minutes. In 2017, the FSOC met eight times, including at least once a quarter. The min- For more information on the Board’s regulatory utes for each meeting are available on the U.S. activities, see section 4, “Supervision and Treasury website (https://www.treasury.gov/ initiatives/fsoc/council-meetings/Pages/ Regulation.” meeting-minutes.aspx). FSOC annual report. On December 14, 2017, the Domestic and International FSOC released its seventh annual report (https:// www.treasury.gov/initiatives/fsoc/studies-reports/ Cooperation and Coordination Documents/FSOC_2017_Annual_Report.pdf), which includes a review of key developments in 2017 and The Federal Reserve cooperated and coordinated a set of recommended actions that could be taken to ensure financial stability and to mitigate systemic with both domestic and international institutions in risks that affect the economy. 2017 to promote financial stability. For more on the FSOC, see https://www.treasury .gov/initiatives/fsoc/Pages/home.aspx. Financial Stability Oversight Council Activities April 18, 2016, that provided an update on the As mandated by the Dodd-Frank Act, the FSOC was FSOC’s review of potential risks to U.S. financial created in 2010 and is chaired by the Treasury Secrestability that may arise from asset management tary (box 2). It establishes an institutional framework products and activities, the FSOC continued its for identifying and responding to sources of systemic work to assess the potential for financial stability risk. The Federal Reserve Chairman is a member of risks to arise from certain asset management prodthe FSOC. Through collaborative participation in the ucts and activities.8 The FSOC’s discussion on FSOC, U.S. financial regulators monitor not only liquidity and redemption risks resulted in several institutions, but also the financial system as a whole. suggestions being passed to the Securities and The Federal Reserve, in conjunction with other par- Exchange Commission (SEC) for consideration on ticipants, assists in monitoring financial risks, anathe risk-management and disclosure practices of lyzes the implications of those risks for financial stamutual funds. The council further conducted analybility, and identifies steps that can be taken to mitisis on the use of leverage in investment vehicles; gate those risks. In addition, when an institution is specifically, the analysis focused on the potential designated by the FSOC as systemically important, vulnerability of assets purchased with borrowed the Federal Reserve assumes responsibility for supershort-term funds to selling pressures in stress convising that institution. ditions, as well as the exposures to other market participants created by leverage. In 2017, the Federal Reserve worked, in conjunction with other FSOC participants, on the following • Nonbank designations process. On September 29, major initiatives: 2017, the FSOC voted to rescind its determination that material financial distress at American Inter- • Review of asset management products and activities. national Group, Inc. (AIG), could pose a threat to Following the release of a public statement on U.S. financial stability, and that the company should be subject to supervision by the Federal pp. 59547-55, https://www.gpo.gov/fdsys/pkg/FR-2017-12-15/ pdf/2017-26856.pdf. 7 For the proposed statement of stress-testing policy, see Board of 8 For more details, see U.S. Department of the Treasury (2016), Governors of the Federal Reserve System (2017), “Stress Testing “Financial Stability Oversight Council Releases Statement on Policy Statement,” proposed rule (Docket No. OP-1587), Fed- Review of Asset Management Products and Activities,” press eral Register, vol. 82 (December 15), pp. 59528-33, https://www release, April 18, https://www.treasury.gov/press-center/press- .gpo.gov/fdsys/pkg/FR-2017-12-15/pdf/2017-26857.pdf. releases/Pages/jl0431.aspx.

42 104th Annual Report | 2017 Reserve and enhanced prudential standards.9 The system and promotes financial stability through the FSOC made the decision that AIG’s potential to adoption of sound policies across countries. The pose material financial distress to U.S. financial sta- Federal Reserve participates in the FSB, along with bility was substantially reduced after the company the SEC and the U.S. Treasury. had decreased its overall exposures to capital markets, and the FSOC reevaluated the potential for In 2017, the Federal Reserve continued its active parthe liquidation of certain products to disrupt mar- ticipation in the FSB. The FSB is engaged in several ket functioning since its determination in issues, including monitoring of shadow banking June 2013. activities, coordination of regulatory standards for global systemically important financial institutions, Financial Stability Board Activities asset management, fintech (emerging financial technologies), evaluating the effects of reforms, and The Federal Reserve participates in international development of effective resolution regimes for large bodies, such as the FSB, given the interconnected financial institutions. In January, the FSB released global financial system and the global activities of for consultation proposed guidance for central counlarge U.S. financial institutions. The FSB is an inter- terparty resolution and resolution planning.10 national body that monitors the global financial 9 See U.S. Department of the Treasury (2017), “Financial Stabil- 10 See Financial Stability Board (2017), “FSB Consults on Guidity Oversight Council Announces Rescission of Nonbank ance for CCP Resolution and Resolution Planning,” press Financial Company Designation,” press release, September 29, release, February 1, www.fsb.org/2017/02/fsb-consults-onhttps://home.treasury.gov/news/press-releases/sm0169. guidance-for-ccp-resolution-and-resolution-planning.

43 4 Supervision and Regulation The Federal Reserve has supervisory and regulatory gate, reported net income of $140 billion for 2017, authority over a variety of financial institutions and down from $162 billion for the year ending Decemactivities with the goal of promoting a safe, sound, ber 31, 2016. The proportion of unprofitable BHCs and efficient financial system that supports the was 2.7 percent, up slightly from 2.3 percent in 2016. growth and stability of the U.S. economy. As Assets from unprofitable BHCs increased to 12.3 perdescribed in this report, the Federal Reserve carries cent in 2017, up from 3.1 percent in 2016. Provisions out its supervisory and regulatory responsibilities and were 0.26 percent of average assets, unchanged from supporting functions primarily by 2016 and near historic lows. Nonperforming assets continued to decline, falling to 2.0 percent of loans • promoting the safety and soundness of individual and foreclosed assets from 2.4 percent as of year-end financial institutions supervised by the Federal 2016. (See “Bank Holding Companies” later in this Reserve; section.) • taking a macroprudential approach to the supervision of the largest, most systemically important Performance of state member banks. The perforfinancial institutions (SIFIs);1 mance of state member banks improved from 2016 to 2017. In aggregate, state member banks reported • developing supervisory policy (rulemakings, superprofits of $27.5 billion for 2017, up 12.7 percent from vision and regulation letters (SR letters), policy $24.4 billion in 2016. Return-on-assets and returnstatements, and guidance); on-equity both improved year-over-year, but both • identifying requirements and setting priorities for measures continue to lag pre-crisis levels. The persupervisory information technology initiatives; centage of unprofitable state member banks remained flat, as 2.7 percent of firms reported a loss • ensuring ongoing staff development to meet evolvfor the year. Problem loans declined in 2017 to ing supervisory responsibilities; 1.3 percent, but problem loans increased in state • regulating the U.S. banking and financial structure member bank commercial and industrial and agriculby acting on a variety of proposals; and tural loan portfolios. Provisions as a share of average loans were unchanged at 0.28 percent. The total risk- • enforcing other laws and regulations. based capital ratio for state members decreased slightly from 14.5 percent in 2016 to 14.4 percent in 2017 Developments 2017. In 2017, one state member bank, with $34.4 million in assets, failed. (See “State Member Banks” later in this section.) During 2017, the U.S. banking system and financial markets continued to improve following their recov- Enhanced prudential standards. The Dodd-Frank ery from the financial crisis that started in mid-2007. Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) directs the Board, in part, to Performance of bank holding companies. Bank holdestablish prudential standards in order to prevent or ing company (BHC) earnings declined in 2017, mitigate risks to U.S. financial stability that could largely due to the one-time effect of the 2017 Tax arise from the material financial distress or failure, or Cuts and Jobs Act, which resulted in certain BHCs ongoing activities of, large, interconnected financial paying taxes on overseas profits and writing down institutions. In January 2017, the Board issued a final the value of deferred tax assets. U.S. BHCs, in aggrerule that modified its capital plan and stress testing rules for the 2017 capital planning cycle, which 1 For a detailed discussion of macroprudential supervision and regulation, refer to section 3, “Financial Stability.” reduces significant burden on large and noncomplex

44 104th Annual Report | 2017 firms by eliminating the qualitative element of the across community, regional, and large banking orga- Comprehensive Capital Analysis and Review nizations, including continuing to apply the most (CCAR) of such firms. In addition, while the Federal stringent requirements to the most systemically Reserve publicly discloses a significant amount of important firms, implementing a new risk-focused information regarding its supervisory stress tests, in supervisory program for certain smaller institutions, December 2017, the Board requested comment on a tailoring capital planning and stress testing requirepackage that would increase the transparency of its ments, and reducing regulatory reporting requirestress testing program while maintaining the Board’s ments for smaller financial institutions. (See box 2 for ability to test the resilience of the nation’s largest and more information on tailoring.) most complex banking organizations. (See “Enhanced Prudential Standards” later in this sec- Completion of the Basel III Post-Crisis Reforms. In tion and see box 1 for details.) 2017, the Federal Reserve contributed to the finalization of the international Basel III reform package, Tailoring of supervision and regulation. The Federal which establishes a framework that increases the Reserve seeks to tailor its regulations, guidance, and robustness and reliability of the regulatory capital supervisory programs to an institution’s size, risk, requirements for banking organizations. This reform and complexity. The Federal Reserve took a number package is intended to improve risk sensitivity, of steps in 2017 to tailor regulation and supervision reduce regulatory capital variability, and level the Box 1. Transparency of the Supervisory Stress Test ThroughtheDodd-FrankActsupervisorystresstest December2017,theFederalReserveBoardinvited exercise,amongothersupervisoryprograms,the commentonaproposaldesignedtoincreasethe FederalReservepromotessoundnessandstabilityin transparencyofthesupervisorystresstestwhile thefinancialsystemandtheU.S.economy.Regular, maintainingtheFederalReserve'sabilitytotestthe publicdisclosureofthesupervisorystresstestmod- resilienceofthenation'slargestandmostcomplex els,methodologies,andresultsenhancesthecred- banks.1 ibilityofthestresstest.Inaddition,moretranspar- Theproposalhasthreeelements.First,theproposed encyaroundtheresultsandprocessescanleadto enhancedmodeldisclosurewouldincludethe improvementsintheFederalReserve’sapproaches releaseofmoredetailedinformationaboutsuperviandprovideinformationtothepublicthatfurthersthe sorymodels,includingthepublicationofportfoliosof goalofmaintainingmarketandpublicconfidencein hypotheticalloansandlossratesforthoseportfolios. thefinancialsystem.Forthesereasons,theFederal Second,aproposedStressTestingPolicyStatement Reservepublishesdetailedinformationaboutits describestheBoard’sapproachtothedevelopment, stresstestseveryyear.Thosedisclosuresincludethe implementation,use,andvalidationofthesupervi- FederalReserve’sprojectionsofrevenue,expenses, sorystresstestmodelsandmethodologies.Third, losses,pre-taxnetincome,andcapitalratiosestiproposedamendmentstotheScenarioDesignPolicy matedtoresultundertwosetsofadverseeconomic Statement(originallypublishedinNovember2013) conditions,aswellasdetailsaboutthesupervisory wouldincreasecountercyclicalityinscenariodesign, modelsusedtomakethoseprojections. clarifytheBoard’sapproachtosettingthepathofthe Theannualdisclosuresofthestresstestresultsand unemploymentrateandhousepricesinthemacrodescriptionofsupervisorymodelsrepresentasignifi- economicscenario,andprovidenoticethattheFedcantincreaseinthepublictransparencyoflargebank eralReserveisexploringthepossibilityofincorporatsupervisionintheUnitedStatesascomparedtothe ingstresstothecostofwholesalefundinginthe pre-crisisperiod.Inadditiontothosepublicdisclo- supervisorystresstestscenarios.Together,these sures,theFederalReservehasalsopublishedinfor- threeelementsoftheproposalrepresentanotable mationaboutitsscenariodesignframeworkand increaseinthetransparencyoftheFederalReserve’s annuallettersdetailingmaterialmodelchanges,and stresstest. hostsanannualsymposiuminwhichsupervisorsand TheBoardreceivedcommentsontheproposalinthe financialindustrypractitionerssharebestpracticesin firstquarterof2018,andiscurrentlyreviewingcommodeling,modelriskmanagement,andgovernance. mentsandconsideringwaystoamendtheproposals TheFederalReserveiscommittedtofindingaddi- toberesponsivetothosecomments. tionalwaystoincreasethetransparencyofitsstress testtohelpthepublicbetterunderstandtheworkingsofthestresstestandtherebyincreasethecred- 1 See www.federalreserve.gov/newsevents/pressreleases/ ibilityofthestresstestingprocessandoutput.In bcreg20171207a.htm.

Supervision and Regulation 45 Box 2. Tailoring of Supervision Buildinguponitsrisk-focusedapproachtosupervi- higher-risk activities where they are most needed in sion,theFederalReservecontinuesitsongoingwork order to contain the risks that can result from aggrestotailoritsregulations,supervisoryguidance,and sive banking strategies. supervisoryprogramstoaninstitution’sassetsize, riskprofile,andcomplexity.Furthertailoringtosize, Tailoring of Capital Planning and Stress Testing risk,andcomplexitywasdonein2017intheFederal Reserve’sexaminationprograms,capitalplanning In 2017, the Federal Reserve significantly tailored its andstresstesting,andregulatoryreporting capital planning and stress testing requirements.2 requirements. Large firms that are noncomplex were exempted from the qualitative assessment of their capital plans TailoringofExaminationPrograms through the Comprehensive Capital Analysis and Review (CCAR) program, reducing significant burden TheFederalReserveapproachtosupervisingsmaller, on these firms. This subset of firms undergo instead less-complexbanksisdistinctfromthatforlarge a narrower-scope horizontal review of specific capital banks.Thelargest,mostsystemicallyimportantfirms planning areas, referred to as the Horizontal Capital aresupervisedthroughtheFederalReserve’sLarge Review program. As a result of this tailoring, the InstitutionSupervisionCoordinatingCommittee number of firms fully subject to CCAR in 2017 fell (LISCC)programandaresubjecttothemoststrin- from 33 to 13. gentsupervisoryexpectations.Bankholdingcompaniesandforeignbankingorganizationswithassetsof For firms with consolidated assets between $10 bil- $50billionormorearesupervisedthroughtheFedlion and $50 billion, the Federal Reserve has reduced eralReserve’slargeandforeignbankingorganization to once every three years the frequency of full-scope program.Thesefirmsareheldtosupervisoryexpecassessments of these firms’ Dodd-Frank Act tationsthatarehigherthanthoseappliedtocommu- Company-Run Stress Test submissions, with only nityandregionalbankingorganizations,butexaminalimited-scope assessments in the intervening years. tionsaremoretargetedandlessfrequentthanthose appliedtoLISCCfirms. Tailoring of Regulatory Reporting Requirements Forcommunityandregionalstatememberbanks Continuing efforts to reduce data reporting and other thataresmallerandlesscomplex,theFederal burdens for small financial institutions, the Federal Reservemakesaparticularefforttotailorits Reserve discontinued the collection of the Liquidity approach.1TheFederalReservehasimplementeda Monitoring Report (FR 2052b) for firms with consolinewrisk-focusedsupervisoryprogram—theBank dated assets between $10 billion and $50 billion ExamsTailoredtoRisk(BETR)program.BETRaims effective December 18, 2017. In addition, the Federal to(1)identifylow-riskactivitieswithinstatemember Reserve, in conjunction with the other banking agenbanksandapplyappropriatelystreamlinedexaminacies represented on the Federal Financial Institutions tionworkprogramstotheseactivities,and(2)target Examination Council, implemented a new and high-riskactivitieswithinstatememberbanksfor streamlined Call Report for small financial institupromptsupervisoryattention.Thisenhancedtailoring tions. Specifically, for firms with less than $1 billion in ofsupervisionminimizesregulatoryburdenforthe total assets (which represents approximately 90 permanycommunityandregionalbanksthatarewellcent of all institutions required to file Call Reports), managedanddirectssupervisoryresourcesto the Call Report was reduced from 85 to 61 pages due to the removal of approximately 40 percent of the nearly 2,400 data items. 1 Forsupervisorypurposes,theFederalReservegenerallydefines communitybankingorganizationsasthosewith$10billionorless intotalassets,andregionalbankingorganizationsasthosewith 2 See www.gpo.gov/fdsys/pkg/FR-2017-02-03/pdf/2017-02257 totalassetsbetween$10billionand$50billion. .pdf. playing field among internationally active banks. (See companies (SLHCs), and state-chartered commercial box 3 for more information on the Basel III post- banks that are members of the Federal Reserve crisis reforms.) System. The Federal Reserve also has responsibility for supervising the operations of all Edge Act and Supervision agreement corporations, the international operations of state member banks and U.S. BHCs, and the U.S. operations of foreign banking organizations. Fur- The Federal Reserve is the federal supervisor and thermore, through the Dodd-Frank Act, the Federal regulator of all U.S. BHCs, including financial hold- Reserve has been assigned responsibilities for noning companies (FHCs), savings and loan holding

46 104th Annual Report | 2017 Box 3. Completion of the Basel III Post-Crisis Reforms In2010,theBaselCommitteeonBankingSupervi- atensuringthatbankshavesufficientliquiditytofund sion(BCBS)issuedthefirstsetofreformstothe themselvesduringa30-daystressperiod.Thegoal globalprudentialframeworkinresponsetotheglobal ofthesecondliquiditymeasure,thenetstablefundfinancialcrisis.Itssuiteofpost-crisisreformswere ingratio(NSFR),whichwasproposedintheUnited completedinDecember2017.TheFederalReserve StatesinMay2016buthasnotyetbeenfinalized,is BoardisamemberoftheBCBS,astandard-setting forbankstohaveabalancesheetthatissoundly bodyforinternationallyactivebanksthatincludes structuredtoprovideadequateliquidityfortheir supervisorsandcentralbankersfrom27countries. activitiesoveraone-yearhorizon. Theearliestpost-crisisreformswerefocusedonrais- ThefinalpackageofBaselIIIreformsthatwascomingthelevelandqualityofcapitalthatbankshold. pletedin2017isintendedtoimproverisksensitivity, Capitalpositionsofbanksacrosstheworld,including reduceexcessivevariabilityofrisk-weightedassets intheUnitedStates,havestrengthenedmeaningfully (RWAs),andleveltheplayingfieldamonginternationintheinterim,makingtheglobalfinancialsystemsig- allyactivebanks.StudiesbytheBCBShaveidentinificantlymoreresilient.Theintroductionofalever- fiedwidevariabilityacrossbanksthatuseinternal agecapitalratiointotheglobalcapitalframeworkhas modelsratherthanastandardizedapproachtomeaprovidedacrediblebackstoptotherisk-basedcapi- suringRWAs.InthefinalBaselIIIpackage,limits talregime.Aglobalsystemicallyimportantbank wereplacedoninputsusedininternalmodels,as (G-SIB)isnowsubjecttoarisk-basedcapitalsur- wellasonthescopeofportfoliosthatcouldbemodchargebasedonitssystemicriskprofile.Asofyear- eled.ThestandardizedapproachtocreditRWAswas end2017,therewere30G-SIBs,includingeightU.S. revisedtointroducegreaterrisksensitivity.Inaddibanks,whicharesubjecttorisk-basedcapitalsur- tion,theinternalmodelsapproachtomeasuring chargesrangingfrom100to250basispoints, operationalriskwaseliminatedandreplacedwitha dependingonthedegreeoftheG-SIB’smeasured newstandardizedapproach.Further,banksthatuse systemicfootprint.1UnderthefinalBaselIIIreforms, internalmodelstomeasurecreditormarketrisk thesebanksalsowillbesubjecttoaleveragecapital RWAswillbesubjecttoastandardizedflooronits ratiosurcharge. RWAs. AnimportantinnovationoftheBaselIIIreformswas TheFederalReserveandtheotherU.S.banking theintroductionofastandardforbankliquidity.One agencieswillconsiderhowtoappropriatelyapplythe measure,theliquiditycoverageratio(LCR),isaimed finalpackageofBaselIIIreformsintheUnited States.Anyproposedchangeswillbemadethrough 1 The list of G-SIBs is available at www.fsb.org/wp-content/ thestandardnotice-and-commentrulemaking uploads/P211117-1.pdf. process. bank financial firms and financial market utilities sary. The Federal Reserve also provides training and (FMUs) designated by the Financial Stability Over- technical assistance to foreign supervisors and sight Council (FSOC) as systemically important. minority-owned and de novo depository institutions. In overseeing the institutions under its authority, the Examinations and Inspections Federal Reserve seeks primarily to promote safety, The Federal Reserve conducts examinations of state soundness, and efficiency, including compliance with member banks, FMUs, the U.S. branches and agenlaws and regulations. cies of foreign banks, and Edge Act and agreement corporations. In a process distinct from examina- Safety and Soundness tions, it conducts inspections of holding companies and their nonbank subsidiaries. Whether an exami- The Federal Reserve uses a range of supervisory nation or an inspection is being conducted, the activities to promote the safety and soundness of review of financial performance and operations financial institutions and maintain a comprehensive entails understanding and assessment of each firm. These activities include horizontal reviews, firm-specific • an evaluation of the adequacy of governance proexaminations and inspections, continuous monitor- vided by the board and senior management, ing and surveillance activities, and implementation of including an assessment of internal policies, proceenforcement or other supervisory actions as neces- dures, risk limits, and controls;

Supervision and Regulation 47 • an assessment of the risk-management and internal pose a danger to the consolidated organization, its control processes in place to identify, measure, banking offices, or to the broader economy.2 monitor, and control risks; Large financial institutions increasingly operate and • analysis of the key financial factors of capital, asset manage their integrated businesses across corporate quality, earnings, and liquidity; and boundaries. Financial trouble in one part of a finan- • a review for compliance with applicable laws and cial institution can spread rapidly to other parts of regulations. the institution. Risks that cross legal entities or that are managed on a consolidated basis cannot be Table 1 provides information on examinations and monitored properly through supervision that is inspections conducted by the Federal Reserve during directed at only one of the legal entity subsidiaries the past five years. within the overall organization. Consolidated Supervision To strengthen its supervision of the largest, most complex financial institutions, the Federal Reserve Consolidated supervision, a method of supervision created a centralized, multidisciplinary body called that encompasses the parent company and its subsidthe Large Institution Supervision Coordinating iaries, allows the Federal Reserve to understand the Committee (LISCC). The LISCC coordinates the organization’s structure, activities, resources, risks, Federal Reserve’s supervision of domestic bank holdand financial and operational resilience. Working with other relevant supervisors and regulators, the 2 “Banking offices” are defined as U.S. depository institution sub- Federal Reserve seeks to ensure that financial, operasidiaries as well as the U.S. branches and agencies of foreign tional, or other deficiencies are addressed before they banking organizations. Table 1. State member banks and bank holding companies, 2013–17 Entity/item 2017 2016 2015 2014 2013 State member banks Total number 815 829 839 858 850 Total assets (billions of dollars) 2,729 2,577 2,356 2,233 2,060 Number of examinations 643 663 698 723 745 By Federal Reserve System 354 406 392 438 459 By state banking agency 289 257 306 285 286 Top-tier bank holding companies Large (assets of more than $1 billion) Total number 583 569 547 522 505 Total assets (billions of dollars) 18,762 17,593 16,961 16,642 16,269 Number of inspections 597 659 709 738 716 By Federal Reserve System11 574 646 669 706 695 On site 394 438 458 501 509 Off site 180 208 211 205 186 By state banking agency 23 13 40 32 21 Small (assets of $1 billion or less) Total number 3,448 3,682 3,719 3,902 4,036 Total assets (billions of dollars) 931 914 938 953 953 Number of inspections 2,318 2,597 2,783 2,824 3,131 By Federal Reserve System 2,252 2,525 2,709 2,737 2,962 On site 101 126 123 142 148 Off site 2,151 2,399 2,586 2,595 2,814 By state banking agency 66 72 74 87 169 Financial holding companies Domestic 492 473 442 426 420 Foreign 42 42 40 40 39 1 For large bank holding companies subject to continuous, risk-focused supervision, includes multiple targeted reviews.

48 104th Annual Report | 2017 ing companies and foreign banking organizations the development of cross-firm perspectives. In that pose elevated risk to U.S. financial stability as addition, the Federal Reserve uses a multidisciwell as other nonbank financial institutions desig- plinary approach to draw on a wide range of pernated as systemically important by the FSOC. spectives, including those from supervisors, examiners, economists, financial experts, payments sys- The framework for the consolidated supervision of tems analysts, and other specialists. Examples LISCC firms and other large financial institutions include analysis of capital adequacy and planning was issued in December 2012.3 This framework through CCAR as well as horizontal evaluations of strengthens traditional microprudential supervision resolution plans and incentive compensation and regulation to enhance the safety and soundness practices. of individual firms and incorporates macroprudential • Firm-specific examinations and/or inspections and considerations to reduce potential threats to the stacontinuous monitoring activities. These activities are bility of the financial system. The framework has two designed to maintain an understanding and assessprimary objectives: ment across the core areas of supervisory focus. 1. Enhancing resiliency of a firm to lower the prob- These activities include review and assessment of ability of its failure or inability to serve as a finan- changes in strategy, inherent risks, control procial intermediary. Each firm is expected to ensure cesses, and key personnel, and follow-up on previthat the consolidated organization (or the com- ously identified concerns (for example, areas subbined U.S. operations in the case of foreign bank- ject to enforcement actions) or emerging ing organizations) and its core business lines can vulnerabilities. survive under a broad range of internal or exter- • Interagency information sharing and coordination. nal stresses. This requires financial resilience by In developing and executing a detailed supervisory maintaining sufficient capital and liquidity, and plan for each firm, the Federal Reserve generally operational resilience by maintaining effective relies to the fullest extent possible on the informacorporate governance, risk management, and tion and assessments provided by other relevant recovery planning. supervisors and functional regulators. The Federal 2. Reducing the impact on the financial system and Reserve actively participates in interagency inforthe broader economy in the event of a firm’s failure mation sharing and coordination, consistent with or material weakness. Each firm is expected to applicable laws, to promote comprehensive and ensure the sustainability of its critical operations effective supervision and limit unnecessary duplicaand banking offices under a broad range of inter- tion of information requests. Supervisory agencies nal or external stresses. This requires, among continue to enhance formal and informal discusother things, effective resolution planning that sions to jointly identify and address key vulneraddresses the complexity and the interconnectiv- abilities and to coordinate supervisory strategies ity of the firm’s operations. for large financial institutions. • Internal audit and control functions. In certain The framework is designed to support a tailored instances, supervisors may be able to rely on a supervisory approach that accounts for the unique firm’s internal audit or internal control functions in risk characteristics of each firm, including the nature developing a comprehensive understanding and and degree of potential systemic risk inherent in a assessment. firm’s activities and operations, and is being implemented in a multi-stage approach. The Federal Reserve uses a risk-focused approach to supervision, with activities directed toward identify- The Federal Reserve uses a range of supervisory ing the areas of greatest risk to financial institutions activities to maintain a comprehensive understanding and assessing the ability of institutions’ management and assessment of each large financial institution: processes to identify, measure, monitor, and control those risks. For medium- and small-sized financial • Coordinated horizontal reviews. These reviews institutions, the risk-focused, consolidated superviinvolve examining several institutions simultanesion program provides that examination and inspecously and encompass firm-specific supervision and tion procedures are tailored to each organization’s size, complexity, risk profile, and condition. The 3 For more information about the supervisory framework, see the supervisory program for an institution, regardless of Board’s press release and SR letter 12-17/CA 12-14 at www .federalreserve.gov/newsevents/press/bcreg/20121217a.htm. its asset size, entails both off-site and on-site work,

Supervision and Regulation 49 including development of supervisory plans, pre- company management and boards of directors, the examination visits, detailed documentation of the public, and supervisors with forward-looking inforexamination process, and preparation of examination mation to help gauge the potential effect of stressful reports tailored to the scope and findings of the conditions on the capital adequacy of these large review. banking organizations. The 2017 DFAST results are available at www.federalreserve.gov/publications/files/ Capital Planning and Stress Tests 2017-dfast-methodology-results-20170622.pdf. Since the financial crisis, the Board has led a series of initiatives to strengthen the capital positions of the State Member Banks largest banking organizations. Two related initiatives At the end of 2017, a total of 1,688 banks (excluding are the CCAR and the Dodd-Frank Act stress tests nondepository trust companies and private banks) (DFAST). were members of the Federal Reserve System, of which 815 were state chartered. Federal Reserve CCAR is a supervisory exercise to evaluate capital System member banks operated 54,344 branches, and adequacy, internal capital planning processes, and accounted for 34 percent of all commercial banks in planned capital distributions simultaneously at all the United States and for 70 percent of all commerlarge and complex BHCs. In CCAR, the Federal cial banking offices. State-chartered commercial Reserve assesses whether these BHCs have sufficient banks that are members of the Federal Reserve, comcapital to withstand highly stressful operating envimonly referred to as state member banks, represented ronments and be able to continue operations, mainapproximately 16 percent of all insured U.S. commertain ready access to funding, meet obligations to cial banks and held approximately 17 percent of all creditors and counterparties, and serve as credit insured commercial bank assets in the United States. intermediaries. Capital is central to a BHC’s ability to absorb losses and continue to lend to creditworthy Under section 10 of the Federal Deposit Insurance businesses and consumers. Through CCAR, a BHC’s Act, as amended by section 111 of the Federal capital adequacy is evaluated on a forward-looking, Deposit Insurance Corporation Improvement Act of post-stress basis as the BHC is required to demon- 1991 and by the Riegle Community Development strate in its capital plan how it will maintain, and Regulatory Improvement Act of 1994, the Fedthroughout a very stressful period, capital above eral Reserve must conduct a full-scope, on-site examiminimum regulatory capital requirements. From a nation of state member banks at least once a year.4 microprudential perspective, CCAR provides a struc- However, qualifying well-capitalized, well-managed tured means for supervisors to assess not only state member banks with less than $1 billion in total whether these BHCs hold enough capital, but also assets are eligible for an 18-month examination whether they are able to rapidly and accurately deter- cycle.5 The Federal Reserve conducted 354 examinamine their risk exposures, including how those might tions of state member banks in 2017. evolve under stress, which is an essential element of effective risk management. From a macroprudential Bank Holding Companies perspective, the use of a common scenario allows the At year-end 2017, a total of 4,470 U.S. BHCs were in Federal Reserve to assess not just individual institu- operation, of which 3,984 were top-tier BHCs. These tions, but also how a particular risk or combination organizations controlled 4,223 insured commercial of risks might affect the banking system as a whole banks and held approximately 97 percent of all under stressful conditions. The 2017 CCAR results insured commercial bank assets in the United States. are available at www.federalreserve.gov/publications/ files/2017-ccar-assessment-framework-results- Federal Reserve guidelines call for annual inspections 20170628.pdf. of large BHCs and complex smaller companies. In judging the financial condition of the subsidiary DFAST is a supervisory stress test conducted by the banks owned by holding companies, Federal Reserve Federal Reserve to evaluate whether large BHCs have examiners consult examination reports prepared by sufficient capital to absorb losses resulting from the federal and state banking authorities that have stressful economic and financial market conditions. The Dodd-Frank Act also requires BHCs and other financial companies supervised by the Federal 4 The Office of the Comptroller of the Currency examines nationally chartered banks, and the Federal Deposit Insurance Corpo- Reserve to conduct their own stress tests. Together, ration examines state-chartered banks that are not members of the Dodd-Frank Act supervisory stress tests and the the Federal Reserve. company-run stress tests are intended to provide 5 81 Fed. Reg. 90,949 (December 16, 2016).

50 104th Annual Report | 2017 primary responsibility for the supervision of those Savings and Loan Holding Companies banks, thereby minimizing duplication of effort and The Dodd-Frank Act transferred responsibility for reducing the supervisory burden on banking supervision and regulation of SLHCs from the fororganizations. mer Office of Thrift Supervision to the Federal Reserve in July 2011. At year-end 2017, a total of 414 Inspections of BHCs, including FHCs, are built SLHCs were in operation, of which 223 were top-tier around a rating system introduced in 2005. The SLHCs. These SLHCs control 227 thrift institutions system reflects the shift in supervisory practices away and include 18 companies engaged primarily in nonfrom a historical analysis of financial condition banking activities, such as insurance underwriting (11 toward a more dynamic, forward-looking assessment SLHCs), securities brokerage (3 SLHCs), and comof risk-management practices and financial factors. mercial activities (4 SLHCs). The 25 largest SLHCs Under the system, known as RFI but more fully accounted for more than $1.5 trillion of total comtermed RFI/C(D), holding companies are assigned a bined assets. Approximately 90 percent of SLHCs composite rating (C) that is based on assessments of engage primarily in depository activities. These firms three components: Risk Management (R), Financial hold approximately 14 percent ($251 billion) of the Condition (F), and the potential Impact (I) of the total combined assets of all SLHCs. The Office of parent company and its nondepository subsidiaries the Comptroller of the Currency (OCC) is the prion the subsidiary depository institution. The fourth mary regulator for most of the subsidiary savings component, Depository Institution (D), is intended associations of the firms engaged primarily in to mirror the primary supervisor’s rating of the sub- depository activities. Table 2 provides information on sidiary depository institution.6 Noncomplex BHCs examinations of SLHCs for the past five years. with consolidated assets of $1 billion or less are subject to a special supervisory program that permits a Several complex policy issues continue to be more flexible approach.7 See the “Other Rulemak- addressed by the Board, including those related to ings” section for proposed changes to the rating consolidated capital requirements for insurance system for firms with $50 billion or more in total SLHCs, issues pertaining to intermediate holding assets. In 2017, the Federal Reserve conducted 574 companies for commercial SLHCs, and the adoption inspections of large BHCs and 2,252 inspections of of formal rating systems.8 A request for public comsmall, noncomplex BHCs. ment on the adoption of the formal rating system for certain SLHCs closed on February 13, 2017. The Financial Holding Companies proposal would not apply the formal rating system to Under the Gramm-Leach-Bliley Act, BHCs that SLHCs engaged in significant insurance or commermeet certain capital, managerial, and other require- cial activities. ments may elect to become FHCs and thereby engage in a wider range of financial activities, including full- Savings and loan holding companies primarily engaged scope securities underwriting, merchant banking, in insurance underwriting activities. The Federal and insurance underwriting and sales. As of year-end Reserve supervises 11 insurance SLHCs (ISLHCs), 2017, a total of 492 domestic BHCs and 42 foreign with $1.04 trillion in estimated total combined assets, banking organizations had FHC status. Of the and $151 billion in thrift assets. Of the eleven, four domestic FHCs, 27 had consolidated assets of firms have total assets greater than $50 billion, three $50 billion or more; 44, between $10 billion and firms have total assets between $10 billion and $50 billion; 149, between $1 billion and $10 billion; $50 billion, and four firms have total assets less than and 272, less than $1 billion. $10 billion. With the exception of one ISLHC, which owns a thrift subsidiary that comprises more than half of the firm’s total assets, thrift subsidiary assets 6 Each of the first two components has four subcomponents: for most ISLHCs represent less than 25 percent of Risk Management—(1) Board and Senior Management Over- total assets. sight; (2) Policies, Procedures, and Limits; (3) Risk Monitoring and Management Information Systems; and (4) Internal Controls. Financial Condition—(1) Capital, (2) Asset Quality, As the consolidated supervisor of ISLHCs, the Fed- (3) Earnings, and (4) Liquidity. eral Reserve evaluates the organization’s risk- 7 The special supervisory program was implemented in 1997, most recently modified in 2013. See SR letter 13-21 for a discussion of the factors considered in determining whether a BHC is com- 8 A request for comment on consolidated capital requirements for plex or noncomplex (www.federalreserve.gov/bankinforeg/ Insurance Savings and Loan Holding Companies (ISLHCs) srletters/sr1321.htm). closed on September 16, 2016.

Supervision and Regulation 51 management practices, the financial condition of the porting the stability of the broader financial system. overall organization, and the impact of the nonbank For certain designated FMUs, the Board established activities on the depository institution. The Federal risk-management standards and expectations that are Reserve focuses supervisory attention on legal entities articulated in the Board’s Regulation HH. In addiand activities that are not directly supervised or regu- tion to setting minimum risk-management standards, lated by state insurance regulators, including inter- Regulation HH establishes requirements for the company transactions between the depository institu- advance notice of proposed material changes to the tion and its affiliates. The Federal Reserve relies to rules, procedures, or operations of a designated the fullest extent possible on the work of state insur- FMU for which the Board is the supervisory agency ance regulators as part of the overall supervisory under title VIII. Finally, Regulation HH also estabassessment of ISLHCs. The Federal Reserve has been lishes minimum conditions and requirements for a active in engaging with the state departments of Federal Reserve Bank to establish and maintain an insurance and the National Association of Insurance account for, and provide services to, a designated Commissioners (NAIC) on general insurance super- FMU.9 vision matters. The Federal Reserve’s risk-based supervision pro- Financial Market Utilities gram for FMUs is administered by the FMU Super- FMUs manage or operate multilateral systems for vision Committee (FMU-SC). The FMU-SC is a the purpose of transferring, clearing, or settling pay- multidisciplinary committee of senior supervision, ments, securities, or other financial transactions payment policy, and legal staff at the Board of Govamong financial institutions or between financial ernors and Reserve Banks who are responsible for, institutions and the FMU. Under the Federal and knowledgeable about, supervisory issues for Reserve Act, the Federal Reserve supervises FMUs FMUs. The FMU-SC’s primary objective is to prothat are chartered as member banks or Edge Act cor- vide senior-level oversight, consistency, and direction porations and coordinates with other federal banking to the Federal Reserve’s supervisory process for supervisors to supervise FMUs considered bank ser- FMUs. The FMU-SC coordinates with the LISCC vice providers under the Bank Service Company Act. on issues related to the roles of LISCC firms in FMUs as well as the payment, clearing, and settle- In July 2012, the FSOC voted to designate eight ment activities of LISCC firms and the FMU activi- FMUs as systemically important under title VIII of ties and implications for financial institutions in the the Dodd-Frank Act. As a result of these designa- LISCC portfolio. tions, the Board assumed an expanded set of responsibilities related to these designated FMUs that include promoting uniform risk-management standards, playing an enhanced role in the supervision of 9 The Federal Reserve Banks maintain accounts for and provide designated FMUs, reducing systemic risk, and sup- services to several designated FMUs. Table 2. Savings and loan holding companies, 2013–17 Entity/item 2017 2016 2015 2014 2013 Top-tier savings and loan holding companies Large (assets of more than $1 billion) Total number 59 67 67 76 81 Total assets (billions of dollars) 1,696 1,664 1,525 1,493 1,500 Number of inspections 46 54 58 83 72 By Federal Reserve System 52 54 57 82 71 On site 31 34 31 45 58 Off site 21 20 26 37 13 Small (assets of $1 billion or less) Total number 164 171 194 221 251 Total assets (billions of dollars) 47 50 55 65 76 Number of inspections 165 181 187 212 258 By Federal Reserve System 165 181 187 212 258 On site 9 9 13 10 21 Off site 156 172 174 202 237

52 104th Annual Report | 2017 In an effort to promote greater financial market sta- member banks, Edge Act and agreement corporability and mitigate systemic risk, the Board works tions, and BHCs, the Federal Reserve generally conclosely with the Securities and Exchange Commission ducts its examinations or inspections at the U.S. head (SEC) and the Commodity Futures Trading Com- offices of these organizations, where the ultimate mission (CFTC), both of which also have supervisory responsibility for the foreign offices resides. Examinauthority for certain FMUs. The Federal Reserve’s ers also visit the overseas offices of U.S. banking work with these agencies under title VIII, including organizations to obtain financial and operating inforthe sharing of appropriate information and partici- mation and, in some instances, to test their adherence pation in designated FMU examinations, aims to to safe and sound banking practices and compliance improve consistency in FMU supervision, promote with rules and regulations. Examinations abroad are robust FMU risk management, and improve regula- conducted with the cooperation of the supervisory tors’ ability to monitor and mitigate systemic risks. authorities of the countries in which they take place; for national banks, the examinations are coordinated Designated Nonbank Financial Companies with the OCC. The Federal Reserve’s supervisory approach for designated companies is tailored to account for different At the end of 2017, a total of 31 member banks were material characteristics of a firm. The Dodd-Frank operating 329 branches in foreign countries and over- Act requires the Board to apply enhanced prudential seas areas of the United States; 16 national banks standards to the nonbank financial companies desig- were operating 278 of these branches, and 15 state nated by the FSOC for supervision by the Board. member banks were operating the remaining 51. In The act authorizes the Board to tailor the application addition, 7 nonmember banks were operating 15 of these standards and requirements to different branches in foreign countries and overseas areas of companies on an individual basis or by category. the United States. In June 2016, the Board issued an advance notice of Edge Act and agreement corporations. Edge Act corproposed rulemaking (ANPR) inviting comment on porations are international banking organizations conceptual frameworks for capital standards that chartered by the Board to provide all segments of the could apply to companies with significant insurance U.S. economy with a means of financing internaactivities.10 The Board also issued a proposed rule to tional business, especially exports. Agreement corpoapply enhanced prudential standards relating to cor- rations are similar organizations, state or federally porate governance, risk management, and liquidity chartered, that enter into agreements with the Board risk-management standards to such companies. to refrain from exercising any power that is not per- Additionally, the Federal Reserve monitors develop- missible for an Edge Act corporation. Sections 25 ments of a designated nonbank financial company and 25A of the Federal Reserve Act grant Edge Act and exercises its supervisory authority to foster safe and agreement corporations permission to engage in and sound practices and to promote financial stabil- international banking and foreign financial transacity. Currently only Prudential Financial, Inc., is sub- tions. These corporations, most of which are subsidject to Federal Reserve supervision. iaries of member banks, may (1) conduct a deposit and loan business in states other than that of the par- International Activities ent, provided that the business is strictly related to The Federal Reserve supervises the foreign branches international transactions, and (2) make foreign and overseas investments of state member banks, investments that are broader than those permissible Edge Act and agreement corporations, and BHCs for member banks. (including the investments by BHCs in export trading companies). In addition, it supervises the activities At year-end 2017, out of 36 banking organizations that foreign banking organizations conduct through chartered as Edge Act or agreement corporations, entities in the United States, including branches, 3 operated 7 Edge Act and agreement branches. agencies, representative offices, and subsidiaries. These corporations are examined annually. Foreign operations of U.S. banking organizations. In U.S. activities of foreign banks. Foreign banks consupervising the international operations of state tinue to be significant participants in the U.S. banking system. As of year-end 2017, a total of 144 foreign banks from 48 countries operated 157 state- 10 The ANPR is available at www.gpo.gov/fdsys/pkg/FR-2016-06- 14/pdf/2016-14004.pdf. licensed branches and agencies, of which 6 were

Supervision and Regulation 53 insured by the FDIC, and 57 OCC-licensed branches and maintain certain records that are useful in crimiand agencies, of which 4 were insured by the FDIC. nal, tax, or regulatory proceedings. The BSA and These foreign banks also owned 7 Edge Act and separate Board regulations require banking organizaagreement corporations. In addition, they held a con- tions supervised by the Board to file reports on suspitrolling interest in 42 U.S. commercial banks. Alto- cious activity related to possible violations of federal gether, the U.S. offices of these foreign banks con- law, including money laundering, terrorism financtrolled approximately 21 percent of U.S. commercial ing, and other financial crimes. In addition, BSA and banking assets. These 144 foreign banks also oper- Board regulations require that banks develop written ated 86 representative offices; an additional 37 for- BSA compliance programs and that the programs be eign banks operated in the United States through a formally approved by bank boards of directors. The representative office. The Federal Reserve—in coor- Federal Reserve is responsible for examining institudination with appropriate state regulatory authori- tions for compliance with applicable AML laws and ties—examines state-licensed, non-FDIC-insured regulations and conducts such examinations in accorbranches and agencies of foreign banks on-site at dance with the Federal Financial Institutions Examileast once every 18 months.11 In most cases, on-site nation Council’s (FFIEC’s) Bank Secrecy Act/Antiexaminations are conducted at least once every Money Laundering Examination Manual.13 12 months, but the period may be extended to 18 months if the branch or agency meets certain cri- Specialized Examinations teria. As part of the supervisory process, a review of The Federal Reserve conducts specialized examinathe financial and operational profile of each organi- tions of supervised financial institutions in the areas zation is conducted to assess the organization’s abil- of information technology, fiduciary activities, transity to support its U.S. operations and to determine fer agent activities, and government and municipal what risks, if any, the organization poses to the bank- securities dealing and brokering. The Federal Reserve ing system through its U.S. operations. The Federal also conducts specialized examinations of certain Reserve conducted or participated with state and fed- nonbank entities that extend credit subject to the eral regulatory authorities in 590 examinations of Board’s margin regulations. foreign banks in 2017. Information Technology Activities Compliance with Regulatory Requirements As part of its role in ensuring the safe and sound The Federal Reserve examines institutions for com- operations of financial institutions, the Federal pliance with a broad range of legal requirements, Reserve conducted reviews of the information techincluding anti-money-laundering (AML) and con- nology activities of supervised financial institutions sumer protection laws and regulations, and other and their technology service providers (TSPs). In laws pertaining to certain banking and financial February 2017, the Federal Reserve released the activities. Most compliance supervision is conducted Information Technology Risk Examination Program under the oversight of the Board’s Division of (InTREx). In general, InTREx applies to state mem- Supervision and Regulation (S&R), but consumer ber and non-member banks with less than $50 billion compliance supervision is conducted under the over- in total consolidated assets. The Federal Reserve also sight of the Division of Consumer and Community applies InTREx to foreign banking organizations’ Affairs (DCCA).12 The two divisions coordinate their U.S. branches and agencies with less than $50 billion efforts with each other and also with the Board’s in assets as well as certain BHCs and SLHCs with Legal Division to ensure consistent and comprehen- less than $50 billion in total consolidated assets. sive Federal Reserve supervision for compliance with InTREx was developed in collaboration with the legal requirements. FDIC and state banking agencies, and provides Federal Reserve examiners risk-focused and tailored Anti-Money-Laundering Examinations examination procedures for conducting information The Treasury regulations implementing the Bank Secrecy Act (BSA) generally require banks and other types of financial institutions to file certain reports 13 The FFIEC is an interagency body of financial regulatory agencies established to prescribe uniform principles, standards, and report forms and to promote uniformity in the supervision of 11 The OCC examines federally licensed branches and agencies, financial institutions. The council has six voting members: the and the FDIC examines state-licensed FDIC-insured branches Board of Governors of the Federal Reserve System, the FDIC, in coordination with the appropriate state regulatory authority. the National Credit Union Administration, the OCC, the Con- 12 For a detailed discussion of consumer compliance supervision, sumer Financial Protection Bureau, and the chair of the State refer to section 5, “Consumer and Community Affairs.” Liaison Committee.

54 104th Annual Report | 2017 technology reviews and assessing information tech- are registered with the Board as transfer agents. nology risks at supervised institutions. Among other things, transfer agents countersign and monitor the issuance of securities, register the trans- The Federal Reserve also contributed to FFIEC fer of securities, and exchange or convert securities. information technology supervisory matters, emerg- On-site examinations focus on the effectiveness of an ing technology issues, and updates to the FFIEC’s IT organization’s operations and its compliance with Examination Handbook. The Federal Reserve relevant securities regulations. During 2017, the Fedchaired the FFIEC’s IT Subcommittee, the primary eral Reserve conducted transfer agent examinations interagency group responsible for coordination at four state member banks that were registered as across member agencies on information technology transfer agents. activities. The IT Subcommittee conducted a conference for IT examiners from all of the FFIEC member Government and Municipal Securities Dealers agencies, which highlighted current and emerging and Brokers technology issues affecting supervised institutions The Federal Reserve is responsible for examining and their service providers. Additionally, the Federal state member banks and foreign banks for compli- Reserve contributed to handbook updates to incorance with the Government Securities Act of 1986 porate a more enterprise-wide risk-management and with the Treasury regulations governing dealing approach to the assessment of information technoland brokering in government securities. Fourteen ogy risks at supervised institutions. state member banks and six state branches of foreign banks have notified the Board that they are govern- In July 2017, the IT Subcommittee and Cybersecurity ment securities dealers or brokers not exempt from and Critical Infrastructure Working Group the Treasury’s regulations. During 2017, the Federal (CCIWG) hosted an FFIEC Industry Outreach webi- Reserve conducted four examinations of brokernar to provide information on the update to the dealer activities in government securities at these handbook and the Cybersecurity Assessment Tool. organizations. These examinations are generally con- The webinar also provided financial institutions the ducted concurrently with the Federal Reserve’s opportunity to ask clarifying questions about other examination of the state member bank or branch. information technology-related matters. In addition, the FFIEC hosted an Examiner Exchange webinar to The Federal Reserve is also responsible for ensuring provide supervisory staff the opportunity to address that state member banks and BHCs that act as specific questions on emerging issues in a peer-tomunicipal securities dealers comply with the Securipeer learning environment. ties Act Amendments of 1975. Municipal securities dealers are examined, pursuant to the Municipal Fiduciary Activities Securities Rulemaking Board’s rule G-16, at least The Federal Reserve has supervisory responsibility once every two calendar years. Three entities superfor state member banks and state member nondevised by the Federal Reserve that dealt in municipal pository trust companies, which hold assets in varisecurities were examined during 2017. ous fiduciary and custodial capacities. On-site examinations of fiduciary and custodial activities are risk- Securities Credit Lenders focused and entail the review of an organization’s compliance with laws, regulations, and general fidu- Under the Securities Exchange Act of 1934, the ciary principles, including effective management of Board is responsible for regulating credit in certain conflicts of interest; management of legal, opera- transactions involving the purchasing or carrying of tional, and compliance risk exposures; the quality securities. As part of its general examination proand level of earnings; the management of fiduciary gram, the Federal Reserve examines the banks under assets; and audit and control procedures. In 2017, its jurisdiction for compliance with the Board’s Federal Reserve examiners conducted 115 fiduciary Regulation U. In addition, the Federal Reserve mainexaminations—excluding transfer agent examina- tains a registry of persons other than banks, brokers, tions—of state member banks. and dealers who extend credit subject to Regulation U. The Federal Reserve may conduct specialized Transfer Agents examinations of these lenders if they are not already As directed by the Securities Exchange Act of 1934, subject to supervision by the Farm Credit Administhe Federal Reserve conducts specialized examina- tration (FCA) or the National Credit Union Admintions of those state member banks and BHCs that istration (NCUA).

Supervision and Regulation 55 Cybersecurity and Critical Infrastructure the FFIEC IT Examination Handbook by providing The Federal Reserve collaborated with other finan- a revised mapping to the updated Information Secucial regulators, the U.S. Treasury, private industry, rity and Management booklets. The updated tool and international partners to promote appropriate also provided additional response options, allowing and cost-effective safeguards against cyber threats to financial institution management to include supplethe financial services sector and to bolster the sec- mentary or complementary behaviors, practices, and tor’s cyber resiliency. Federal Reserve examiners con- processes that represent current practices of an institinued to conduct targeted cybersecurity assessments tution in supporting its cybersecurity activity assessof the largest, most systemically important financial ment (www.ffiec.gov/press/pr053117.htm). In Octoinstitutions, FMUs, and TSPs. The Federal Reserve ber 2017, the Federal Reserve participated in an worked with the OCC and FDIC to develop and FFIEC Examiner Exchange webinar to provide implement common examination procedures for the examiners an opportunity to collaborate with induscybersecurity assessments of TSPs. Federal Reserve try professionals on cyber-related risks. examiners also continued to conduct cybersecurity assessments at community and regional banking In addition, the Federal Reserve was actively involved organizations that were tailored to their specific risk in international policy coordination on approaches to profiles. As part of these efforts, the Federal Reserve address cyber-related risks and efforts to bolster coordinated with other financial regulators to cyber resiliency. The Federal Reserve supported the align supervisory expectations and examination Group of Seven (G-7) Fundamental Elements of approaches with the National Institute for Standards Cybersecurity for the Financial Sector and other and Technology’s Cybersecurity Framework and activities to enhance international coordination and other best practices in the financial sector. knowledge sharing. The Federal Reserve also supported the Financial Stability Board’s (FSB’s) stock- In 2017, the Federal Reserve contributed to inter- take of regulations, guidance, and supervisory activiagency groups such as the FFIEC’s CCIWG, the ties in order to explore the degree of uniformity and Financial and Banking Information Infrastructure gaps that exist across jurisdictions (www.fsb.org/ Committee (FBIIC), and the Cybersecurity Forum 2017/10/fsb-publishes-stocktake-on-cybersecurityfor Independent and Executive Branch Regulators to regulatory-and-supervisory-practices/). share information and collaborate on cybersecurity and critical infrastructure issues impacting the finan- Enforcement Actions cial sector. In coordination with FBIIC members, the Federal Reserve collaborated with government and The Federal Reserve has enforcement authority over industry partners to plan and execute sector-wide the financial institutions it supervises and their affiliand regional tabletop exercises focused on identifying ated parties. Enforcement actions may be taken to areas where sector resiliency, information sharing, address unsafe and unsound practices or violations and public-private collaboration can be enhanced of any law or regulation. Formal enforcement actions with respect to potential cybersecurity incidents. The include cease and desist orders, written agreements, exercises focused on tactical, strategic, operational, prompt corrective action directives, removal and proand financial stability considerations that tested both hibition orders, and civil money penalties. In 2017, government and private sector processes and capa- the Federal Reserve completed 83 formal enforcebilities for addressing cyber incidents across the ment actions. Civil money penalties totaling financial services sector. $690,320,000 were assessed. As directed by statute, all civil money penalties are remitted to either the Treas- The Federal Reserve also contributed to key cyberse- ury or the Federal Emergency Management Agency. curity areas that were identified during the FFIEC’s Enforcement orders and prompt corrective action 2014 pilot assessment of cybersecurity readiness, directives, which are issued by the Board, and written including risk management and oversight, threat agreements, which are executed by the Reserve intelligence and collaboration, cybersecurity controls, Banks, are made public and are posted on the external dependency management, and cyber inci- Board’s website (www.federalreserve.gov/apps/ dent management and resilience. Through participa- enforcementactions/search.aspx). tion in the CCIWG, the Federal Reserve also contributed to a May 2017 update of the Cybersecurity In 2017, the Reserve Banks completed 89 informal Assessment Tool. The update addressed changes to enforcement actions. Informal enforcement actions

56 104th Annual Report | 2017 include memoranda of understanding (MOU), com- The Federal Reserve works through the FFIEC Task mitment letters, and board of directors’ resolutions. Force on Surveillance Systems to coordinate surveillance activities with the other federal banking Surveillance and Off-Site Monitoring agencies. The Federal Reserve uses automated screening systems to monitor the financial condition and perfor- Training and Technical Assistance mance of state member banks and BHCs in the The Federal Reserve provides training and technical period between on-site examinations. Such monitor- assistance to foreign supervisors and minority-owned ing and analysis helps direct examination resources to depository institutions. institutions that have higher risk profiles. Screening systems also assist in the planning of examinations International Training and Technical Assistance by identifying companies that are engaging in new or In 2017, the Federal Reserve continued to provide complex activities. training and technical assistance on supervisory matters to foreign central banks and supervisory authori- The primary off-site monitoring tool used by the ties. Technical assistance involves visits by Federal Federal Reserve is the Supervision and Regula- Reserve staff members to foreign authorities as well tion Statistical Assessment of Bank Risk (SR-SABR) as consultations with foreign supervisors who visit model. Drawing mainly on the financial data that the Board of Governors or the Reserve Banks. banks report on their Reports of Condition and Income (Call Reports), SR-SABR uses econometric The Federal Reserve offered a number of training techniques to identify banks that report financial programs for the benefit of foreign supervisory characteristics weaker than those of other banks authorities, which were held both in the United assigned similar supervisory ratings. To supplement States and in many foreign jurisdictions. Federal the SR-SABR screening, the Federal Reserve also Reserve staff took part in technical assistance and monitors various market data, including equity training assignments led by the International Monprices, debt spreads, agency ratings, and measures of etary Fund, the World Bank, and the Financial Staexpected default frequency, to gauge market percep- bility Institute. The Federal Reserve also contributed tions of the risk in banking organizations. In addi- to the regional training provided under the Asiation, the Federal Reserve prepares quarterly Bank Pacific Economic Cooperation Financial Regulators Holding Company Performance Reports (BHCPRs) Training Initiative. Other training partners that colfor use in monitoring and inspecting supervised laborated with the Federal Reserve during 2017 to banking organizations. The BHCPRs, which are organize regional training programs included the compiled from data provided by large BHCs in quar- South East Asian Central Banks Research and Trainterly regulatory reports (FR Y-9C and FR Y-9LP), ing Centre, the Caribbean Group of Banking Supercontain, for individual companies, financial statistics visors, the Banque de France, the Reserve Bank of and comparisons with peer companies. BHCPRs are India, the Central Bank of the United Arab Emirmade available to the public on the National Infor- ates, and the Association of Supervisors of Banks of mation Center (NIC) website, which can be accessed the Americas. at www.ffiec.gov. Efforts to Support Minority-Owned Federal Reserve analysts use Performance Report Depository Institutions Information and Surveillance Monitoring (PRISM), The Federal Reserve System implements its responsia querying tool, to access and display financial, sur- bilities under section 367 of the Dodd-Frank Act priveillance, and examination data. In the analytical marily through its Partnership for Progress (PFP) module, users can customize the presentation of program. Established in 2008, this program promotes institutional financial information drawn from Call the viability of minority depository institutions Reports, Uniform Bank Performance Reports, FR Y-9 (MDIs) by facilitating activities designed to statements, BHCPRs, and other regulatory reports. strengthen their business strategies, maximize their In the surveillance module, users can generate reports resources, and increase their awareness and undersummarizing the results of surveillance screening for standing of supervisory expectations. In addition, the banks and BHCs. During 2017, one major and five Federal Reserve continues to maintain the PFP webminor upgrades to the web-based PRISM application site, which supports MDIs by providing them with were completed to enhance the user’s experience and technical information and links to useful resources provide the latest technology. (www.fedpartnership.gov). Representatives from each

Supervision and Regulation 57 of the 12 Federal Reserve Districts, along with staff knowledge and professional development and was from the S&R and DCCA divisions at the Board of held in September 2017 in Kansas City, Missouri. Governors, continue to offer technical assistance tai- • Facilitated in-person meetings between Federal lored to MDIs by providing targeted supervisory Reserve and MDI leaders to better understand the guidance, identifying additional resources, and fosterchallenges and opportunities facing Federal ing mutually beneficial partnerships between MDIs Reserve-regulated MDIs. and community organizations. As of year-end 2017, the Federal Reserve’s MDI portfolio included • Presented Federal Reserve-commissioned research 16 state member banks. on MDIs at the biannual interagency conference in Los Angeles (see above). The Federal Reserve has Throughout 2017, the Federal Reserve System con- commissioned additional studies for 2018 to tinued to support MDIs through the following broaden the body of research material available to activities: MDIs. • Co-organized the biannual Interagency Minority Depository Institutions and Community Develop- Supervisory Policy ment Financial Institutions (CDFI) Bank Confer- The Federal Reserve’s supervisory policy function, ence that took place April 5-6, 2017, in Los Angecarried out by the Board, is responsible for developles, California. The meeting was hosted at the Los ing regulations and guidance for financial institutions Angeles branch of the Federal Reserve Bank of under the Federal Reserve’s supervision as well as San Francisco, and all planning was done in conguidance for examiners. The Board, often in concert junction with staff from the OCC and FDIC. The with the OCC and the FDIC (together, the federal theme of the conference was “Expanding the banking agencies), issues rulemakings, public SR let- Impact: Increasing Capacity & Influence,” and ters, and other policy statements and guidance in attendance included over 175 people, mostly conorder to carry out its supervisory policies. Federal sisting of MDI bank leadership. Reserve staff also take part in supervisory and regu- • Co-organized a post-conference workshop with the latory forums, provide support for the work of the CDFI Fund to educate non-CDFI MDIs about the FFIEC, and participate in international policymakbenefits of and application process for CDFI ing forums, including the Basel Committee on Bankcertification. ing Supervision (BCBS), the Financial Stability • Strengthened the partnership between the Board’s Board (FSB), the Committee on Payments and Market Infrastructures (CPMI), and the International DCCA and S&R divisions to share management of Association of Insurance Supervisors (IAIS). the PFP program and diversify the resources and programing available to MDIs. The Federal Reserve System also worked to encourage partner- Consistent with the Federal Reserve’s risk-focused ship between examination and community develop- approach to supervision and as provided by law, the ment staff at the Federal Reserve Banks to bring Federal Reserve tailors supervisory rules and guidadditional resources to MDIs around the country. ance in a way that applies the most stringent requirements to the largest, most complex banking organi- • Attended the annual National Bankers Association zations that pose the greatest risk to the financial meeting in Washington, D.C., and hosted an system. exhibit table. Enhanced Prudential Standards • Provided technical assistance to MDIs on a wide variety of topics, including improving regulatory The Board, sometimes in conjunction with other fedratings, navigating the regulatory applications pro- eral agencies, is responsible for issuing a number of cess, understanding changes to the Community rules and guidance statements under the Dodd- Reinvestment Act, and refining capital planning Frank Act. Listed below are the initiatives underpractices. taken by the Board in 2017. • Co-sponsored the “Forum for Minority Bankers” • In January, the Board issued a final rule that modiwith the Federal Reserve Banks of Kansas City fied its capital plan and stress testing rules for the (lead sponsor), Atlanta, Richmond, Philadelphia, 2017 capital planning cycle. Among other changes, and St. Louis. The forum is a national program the final rule removed large and noncomplex firms that provides minority bank leaders with industry from the qualitative component of the Federal

58 104th Annual Report | 2017 Reserve’s CCAR assessment, reducing significant rates assigned to these hypothetical portfolios. burden on these firms. The final rule defines large The notice of enhanced model disclosure and noncomplex firms as firms that have total con- includes an example of these proposals for the solidated assets of at least $50 billion but less than corporate loan supervisory model. The notice of $250 billion, have total consolidated nonbank enhanced model disclosure is available at www assets of less than $75 billion, and are not identi- .gpo.gov/fdsys/pkg/FR-2017-12-15/pdf/2017fied as global systemically important banks 26856.pdf. (G-SIBs). These firms continue to be subject to the —A proposed Stress Testing Policy Statement quantitative requirements of CCAR as well as nordescribing the Board’s approach to model develmal supervision by the Federal Reserve regarding opment, implementation, use, and validation. their capital planning. The final rule also reduces This statement elaborates on prior disclosures certain reporting requirements for these firms. The and provides details on the principles and polifinal rule is available at www.gpo.gov/fdsys/pkg/ cies that guide the Board’s development of its FR-2017-02-03/pdf/2017-02257.pdf. stress testing models. The proposed statement is • In September, the Board issued a final rule that available at www.gpo.gov/fdsys/pkg/FR-2017-12improved the resolvability and resilience of sys- 15/pdf/2017-26857.pdf. temically important U.S. banking organizations —A proposal to modify the Board’s framework for and systemically important foreign banking organithe design of the annual hypothetical economic zations. Under the final rule, any U.S. top-tier BHC scenarios. The modifications aim to enhance identified by the Board as a G-SIB, the subsidiaries transparency and to further promote the resilof any U.S. G-SIB (other than national banks, fedience of the banking system throughout the ecoeral savings associations, state nonmember banks, nomic cycle. In particular, the revisions include a and state savings associations), and the U.S. operaquantitative guide for the hypothetical path of tions of any foreign G-SIB (other than national house prices, as well as notice that the Board is banks, federal savings associations, state nonmemexploring the addition of variables to test for ber banks, and state savings associations) would be funding risks in the hypothetical scenarios. The subject to restrictions regarding the terms of their proposal is available at www.gpo.gov/fdsys/pkg/ non-cleared qualified financial contracts (QFCs). FR-2017-12-15/pdf/2017-26858.pdf. The final rule also amends certain definitions in the Board’s capital and liquidity rules; these amendments are intended to ensure that the regulatory Other Rulemakings capital and liquidity treatment of QFCs to which a In 2017, the Board issued several other rulemakings covered entity is party is not affected by the final and guidance documents related to liquidity and rule’s restrictions on such QFCs. The final rule is regulatory capital, as listed below. available at www.gpo.gov/fdsys/pkg/FR-2017-09- • In July, the federal banking agencies issued a pro- 12/pdf/2017-19053.pdf. posed rule that would raise the threshold for • In December, the Board requested comment on a commercial real estate transactions requiring an package that would increase the transparency of its appraisal from $250,000 to $400,000. Instead of stress testing program while maintaining the an appraisal, the proposal would require that a Board’s ability to test the resilience of the nation’s commercial real estate transaction at or below the largest and most complex banking organizations. threshold receive an evaluation that provides a The package includes the following three elements: market value estimate of the real estate pledged as collateral, which is less detailed than an —A notice of enhanced model disclosure that appraisal and does not require completion by a describes three proposals to disclose additional state licensed or certified appraiser. The proposal detail about supervisory stress test models and is available at www.gpo.gov/fdsys/pkg/FR-2017how they function. The Board proposed to 07-31/pdf/2017-15748.pdf. expand and standardize descriptions of supervisory models; to publish loss rates assigned by • In August, the Board issued proposed guidance supervisory models to subgroups of loans and that addresses supervisory expectations of summary statistics associated with the loans in boards of directors at institutions that are regueach subgroup; and to publish portfolios of lated by the Board. The proposal would refocus hypothetical loans along with estimated loss the Board’s supervisory expectations for the larg-

Supervision and Regulation 59 est firms’ boards of directors on their core agency Frequently Asked Questions on Impleresponsibilities, which include overseeing the mentation of the Liquidity Coverage Ratio types and levels of risk a firm may take and Rule.” The purpose of the FAQs is to clarify ceraligning the firm’s business strategy with deci- tain aspects of the existing LCR and modified sions on how to address such risk. Additionally, LCR rules based on questions received since the the proposal would reduce unnecessary burden rules were published. The FAQs do not represent for the boards of smaller institutions. The pro- new rules or regulations, nor do they amend any posed guidance is available at www.gpo.gov/ of the existing requirements of the rules. The fdsys/pkg/FR-2017-08-09/pdf/2017-16735.pdf. FAQs are available at www.federalreserve.gov/ supervisionreg/srletters/sr1711.htm. • In August, the Board issued a proposed rule to better align the Board’s rating system for large • In November, the federal banking agencies issued financial institutions with the post-crisis supervi- a final rule that extended for certain banking sory program for these firms. The proposed organizations the transitional capital requirechanges to the rating system would incorporate ments applicable during 2017 for certain items recent changes related to capital and liquidity (e.g., mortgage servicing assets, certain deferred requirements, and to expectations regarding the tax assets, and minority interest). The final rule effectiveness of governance and controls, includ- prevents certain requirements from taking full ing firms’ compliance with laws and regulations. effect for these items while the agencies consider The proposed rating system would only apply to broader simplifications of the capital rules. The large financial institutions, such as domestic final rule is available at www.gpo.gov/fdsys/pkg/ BHCs and SLHCs with $50 billion or more in FR-2017-11-21/pdf/2017-25172.pdf. total consolidated assets as well as intermediate International Coordination on holding companies of foreign banking organiza- Supervisory Policies tions. The proposed rule is available at www.gpo .gov/fdsys/pkg/FR-2017-08-17/pdf/2017-16736 As a member of several international financial .pdf. standard-setting bodies, the Federal Reserve actively participates in efforts to advance sound • In September, the federal banking agencies prosupervisory policies for internationally active finanposed a rule intended to reduce regulatory burcial organizations and to enhance the strength and den by simplifying several requirements in the stability of the international financial system. agencies’ regulatory capital rule. Specifically, the proposed rule would simplify the capital treat- Basel Committee on Banking Supervision ment for certain acquisition, development, and During 2017, the Federal Reserve contributed to construction loans; mortgage servicing assets; supervisory policy recommendations, reports, and certain deferred tax assets; investments in the papers issued for consultative purposes or finalized capital of unconsolidated financial institutions; by the BCBS that are designed to improve the and minority interest. The proposed rule is con- supervision of banking organizations’ practices sistent with the Economic Growth and Regula- and to address specific issues that emerged during tory Paperwork Reduction Act (EGRPRA) the financial crisis. Of note, the Federal Reserve report issued by the agencies in 2017 whereby the contributed to the finalization of the Basel III federal banking agencies committed to meaning- reform package—a central element of the BCBS’s fully reduce regulatory burden, especially on response to the financial crisis—which establishes a community banking organizations, while at the framework that increases the robustness and relisame time maintaining safety and soundness and ability of the regulatory capital requirements for the quality and quantity of regulatory capital in banking organizations. The Federal Reserve also the banking system. The proposed rule is avail- participated in ongoing international initiatives to able at www.federalreserve.gov/newsevents/ track the progress of implementation of the BCBS pressreleases/files/bcreg20170927a1.pdf. framework in member countries. • In October, the federal banking agencies issued Final BCBS documents issued in 2017 include guidance regarding frequently asked questions (FAQs) on implementation of the liquidity cover- • Frequently asked questions on market risk capital age ratio (LCR) and modified LCR rules, pub- requirements (issued in January and available at lished by the Board in SR letter 17-11, “Inter- www.bis.org/bcbs/publ/d395.pdf).

60 104th Annual Report | 2017 • Basel III — The Net Stable Funding Ratio: fre- • Stress testing principles (issued in December and quently asked questions (issued in February and available at www.bis.org/bcbs/publ/d428.pdf). available at www.bis.org/bcbs/publ/d396.pdf). Financial Stability Board • Pillar 3 disclosure requirements — consolidated In 2017, the Federal Reserve continued its particiand enhanced framework (issued in March and pation in the activities of the FSB, an international available at www.bis.org/bcbs/publ/d400.pdf). group that helps coordinate the work of national • Regulatory treatment of accounting provisions— financial authorities and international standardinterim approach and transitional arrangements setting bodies, and develops and promotes the (issued in March and available at www.bis.org/ implementation of financial sector policies in the bcbs/publ/d401.pdf). interest of financial stability. • Basel III — The Liquidity Coverage Ratio frame- FSB publications issued in 2017 include work: frequently asked questions (issued in June and available at www.bis.org/bcbs/publ/d406 • Guidance on Central Counterparty Resolution and .pdf). Resolution Planning (issued in July and available at www.fsb.org/wp-content/uploads/P050717-1 • Implementation of Basel standards (issued in July .pdf). and available at www.bis.org/bcbs/publ/d412 .pdf). • Analysis of Central Clearing Interdependencies (issued in July jointly with the BCBS, CPMI, and • Basel III definition of capital — Frequently asked IOSCO and available at www.fsb.org/wp-content/ questions (issued in September and available at uploads/P050717-2.pdf). www.bis.org/bcbs/publ/d417.pdf). • Guiding Principles on the Internal Total Loss- • Basel III: Finalizing post-crisis reforms (issued in absorbing Capacity of G-SIBs (“Internal December and available at www.bis.org/bcbs/ TLAC”) (issued in July and available at www.fsb publ/d424.pdf). .org/wp-content/uploads/P060717-1.pdf). • Supervisory and bank stress testing: range of practices (issued in December and available at www Committee on Payments and Market .bis.org/bcbs/publ/d427.pdf). Infrastructures In 2017, the Federal Reserve continued its active Consultative BCBS documents issued in 2017 participation in the activities of the CPMI, a forum include in which central banks promote the safety and efficiency of payment, clearing, settlement, and related • Global systemically important banks — revised arrangements. In conducting its work on financial assessment framework (issued in March and availmarket infrastructures and market-related reforms, able at www.bis.org/bcbs/publ/d402.pdf). the CPMI often coordinates with the International • Simplified alternative to the standardised approach Organization of Securities Commissions (IOSCO). to market risk capital requirements (issued in June Over the course of 2017, CPMI-IOSCO continued and available at www.bis.org/bcbs/publ/d408 to monitor implementation of the Principles for .pdf). Financial Market Infrastructures and published further guidance on these principles to enhance the • Capital treatment for simple, transparent and com- resilience of central counterparties and strengthen parable short-term securitisations (issued in July recovery arrangements for financial market infraand available at www.bis.org/bcbs/publ/d413 structures. Additionally, CPMI-IOSCO produced a .pdf). consultative framework for supervisory stress testing of central counterparties. This framework is • Sound Practices: Implications of fintech developdesigned to support supervisory stress tests that ments for banks and bank supervisors (issued in examine the potential macro-level impact of a com- August and available at www.bis.org/bcbs/publ/ mon stress event affecting multiple central counterd415.pdf). parties. The CPMI also produced a consultative • The regulatory treatment of sovereign exposures note in 2017 outlining a strategy to help focus (issued in December and available at www.bis industry efforts in addressing the increasing threat .org/bcbs/publ/d425.pdf). of wholesale payments fraud related to endpoint

Supervision and Regulation 61 security. Additional information is available at .iaisweb.org/page/supervisory-material/ www.bis.org. application-papers/file/69940/application-paperon-group-corporate-governance). International Association of Insurance • Application Paper on Product Oversight in Inclu- Supervisors sive Insurance (issued in November and available The Federal Reserve continued its participation in at www.iaisweb.org/page/supervisory-material/ 2017 in the development of international superviapplication-papers/file/70163/application-papersory standards and guidance to ensure that they on-product-oversight-in-inclusive-insurance). are appropriate for the U.S. insurance market. The Federal Reserve continues to participate actively in Consultative papers: standard setting at the IAIS in consultation and • Issues Paper on Index Based Insurances (issued in collaboration with state insurance regulators, the December and available at www.iaisweb.org/page/ NAIC, and the Federal Insurance Office to present consultations/closed-consultations/2018/drafta coordinated U.S. voice in these processes. The issues-paper-on-index-based-insurances). Federal Reserve’s participation focuses on those aspects most relevant to the supervision of FSOC- • Activities-Based Approach to Systemic Risk designated insurance firms and in research and (issued in December and available at https://www analysis related to capital frameworks and financial .iaisweb.org/page/consultations/closedstability topics. consultations/2018/activities-based-approach-tosystemic-risk/file/70440/interim-aba-cp-final-for- In 2017, the IAIS issued for public consultation the launch). revised text of 14 Insurance Core Principles (ICPs) Accounting Policy as well as certain associated standards and guidance specific to the supervision of internationally The Federal Reserve supports sound corporate active insurance groups.14 governance and effective accounting and auditing practices for all regulated financial institutions. The IAIS also issued a version of its developing Accordingly, the Federal Reserve’s accounting Insurance Capital Standard for extended field test- policy function is responsible for providing expering in August 2017. In addition, the IAIS issued tise in policy development and implementation several final and consultative reports as well as efforts, both within and outside the Federal research reports in 2017.15 Reserve System, on issues affecting the banking and insurance industries in the areas of account- Final papers and reports: ing, auditing, internal controls over financial reporting, financial disclosure, and supervisory • FinTech Developments in the Insurance Industry financial reporting. (issued in March and available at www.iaisweb .org/page/news/other-papers-and-reports/file/ Federal Reserve staff regularly consult with key 65625/report-on-fintech-developments-in-theconstituents in the accounting and auditing profesinsurance-industry). sions, including domestic and international • Application Paper on the Regulation and Supervi- standard-setters, accounting firms, accounting and sion of Mutuals, Cooperatives and Community- financial sector trade groups, and other financial Based Organizations in Increasing Access to sector regulators to facilitate the Board’s under- Insurance Markets (issued in September and standing of domestic and international practices; available at www.iaisweb.org/page/supervisory- proposed accounting, auditing, and regulatory material/application-papers/file/68822/ standards; and the interactions between accounting application-paper-on-mutuals-cooperatives-and- standards and regulatory reform efforts. The Fedcommunity-based-organisations-september- eral Reserve also participates in various account- 2017). ing, auditing, and regulatory forums in order to both formulate and communicate its views. • Application Paper on Group Corporate Governance (issued in November and available at www The Financial Accounting Standards Board (FASB) issued an accounting standard in 2016 that 14 In this revision, two additional ICPs were removed after their subject matter was integrated into other ICPs. overhauls the accounting for credit losses with a 15 Additional information is available at www.iaisweb.org. new impairment model based on “expected credit

62 104th Annual Report | 2017 losses methodology” (CECL). CECL’s implemen- of banks as well as various regulatory capitaltation will affect a broad range of supervisory related issues. activities, including regulatory reports, examinations, and examiner training. During 2017, the Credit-Risk Management Federal Reserve together with the other federal The Federal Reserve works with the other federal banking agencies continued to monitor the indus- banking agencies to develop guidance on the mantry’s implementation efforts, and provided com- agement of credit risk; to coordinate the assessments on significant interpretations as observers of ment of regulated institutions’ credit-risk managethe FASB’s Transition Resource Group and ment practices; and to ensure that institutions through outreach and routine discussions with properly identify, measure, and manage credit risk. standard setters and other stakeholders, as described above. In September, the Federal Reserve Real Estate Appraisals issued the third supervisory guidance related to In May 2017, the federal banking agencies and the CECL, SR letter 17-8, “Frequently Asked Ques- NCUA issued joint guidance concerning real estate tions on the Current Expected Credit Losses Meth- appraisals in response to concerns raised by instituodology (CECL),” on an interagency basis to fur- tions in rural areas about appraiser availability. ther aid institutions in their implementation of “The Interagency Advisory on the Availability of CECL.16 Appraisers” highlighted two existing options that could help insured depository institutions experi- During 2017, the Federal Reserve together with the encing appraiser shortages by increasing the unifederal banking agencies issued comment letters on verse of individuals eligible to prepare appraisals the Public Accounting Oversight Board’s proposed and facilitating the timely consideration of loan amendments to auditing standards for auditor’s applications. The advisory discusses temporary use of the work of specialists and on proposed practice permits, which are issued by state auditing standard on auditing accounting estimates appraiser regulatory agencies and allow states to were issued during the past year. recognize appraiser credentials issued by another state on a temporary basis for federally related Federal Reserve staff continued to participate in transactions. Institutions may also request tempomeetings of the BCBS Accounting Experts Group rary waivers, which can set aside certain or all and the IAIS Accounting and Auditing Working requirements relating to the certification or licens- Group. These groups represent their respective ing of individuals to perform appraisals under title organizations at international meetings on account- XI of the Financial Institutions Reform, Recovery, ing, auditing, and disclosure issues affecting global and Enforcement Act of 1989 in states or geobanking and insurance organizations. Working graphic or political subdivisions where certain conwith international bank supervisors, Federal ditions are met. The advisory can be found at www Reserve staff contributed to the development of .federalreserve.gov/supervisionreg/srletters/sr1704 publications that were issued by the BCBS, includ- .htm. ing guidelines on identification and management of Shared National Credit Program step-in risk and frequently asked questions on changes to lease accounting. In collaboration with The Shared National Credit (SNC) program is a international insurance supervisors, Federal key supervisory program employed by the Federal Reserve staff also made contributions to work Reserve and the other federal banking agencies to related to enhancing IAIS standards on valuation, ensure the safety and soundness of the financial disclosures, and expectations for external audit- system. SNC is a long-standing program used to related matters. assess credit risk and trends as well as underwriting and risk-management practices associated with the largest and most complex loans shared by multiple Additionally, Federal Reserve staff provided their regulated financial institutions. The program also accounting and business expertise through participrovides for uniform treatment and increased effipation in other supervisory activities during the ciency in shared credit risk analysis and past year. These activities included supporting classification. Dodd-Frank Act initiatives related to stress testing A SNC is any loan or formal loan commitment— 16 The guidance is available at www.federalreserve.gov/ supervisionreg/srletters/sr1708.htm. and any asset, such as other real estate, stocks,

Supervision and Regulation 63 notes, bonds, and debentures taken as debts previ- assess borrower repayment capacity and enterprise ously contracted—extended to borrowers by a valuations, resulting in better alignment with basic supervised institution, its subsidiaries, and affili- safety and soundness principles. Despite this progates, which has the following characteristics: an ress, the frequent use of incremental debt facility original loan amount that aggregates to $20 million provisions in loan agreements, which rarely limit or more17 and either (1) is shared by three or more use of proceeds, often resulted in increased credit unaffiliated supervised institutions under a formal risk when utilized for non-cash generating purlending agreement, or (2) a portion of which is sold poses such as dividends. Leveraged loan transacto two or more unaffiliated supervised institutions tions typically exhibited limited financial flexibility with the purchasing institutions assuming their pro due to a combination of elevated financial risk and rata share of the credit risk. weak loan structure regardless of risk rating. Any downturn in the economy could result in a signifi- At the 2017 first quarter examination, the SNC cant increase in the already considerable adversely portfolio totaled $4.3 trillion, with 11,350 credit rated leveraged lending exposures. facilities to 6,902 borrowers. Summary examination findings showed the percentages of non-pass The severe and prolonged decline in energy prices (aggregate special mention and classified) assets since 2014 caused financial stress to many energy decreased slightly from 2016.18 Despite the companies, particularly non-investment-grade and improvement in the percentage of non-pass com- unrated exploration and production (E&P) and mitments, the overall level of criticized assets energy service companies. Increasing credit risk remained elevated and continued to be higher than from reduced revenue was exacerbated by the high observed in previous periods of economic expan- leverage of some E&P companies, primarily resultsion, such that losses could rise considerably in the ing from debt-funded acquisitions during recent event of an economic downturn. The high level of drilling expansion activity, and corresponding credit risk in the portfolio stemmed primarily from reductions in liquidity. Many energy companies distressed borrowers in the oil and gas sector and responded by taking actions to reduce operating other industry sector borrowers exhibiting exces- costs and overhead, while preserving liquidity sive leverage. During prior cycles, non-investment- through asset sales, issuance of additional debt and grade borrowers relied more heavily on the high- equity instruments, and drawing on remaining yield bond market to finance operations. Today, senior bank commitments. The U.S. oil and gas those borrowers, especially when controlled by industry experienced a slow, albeit volatile, recovery financial sponsors, tend to favor the syndicated in late 2016 and into the first quarter of 2017. U.S. loan market for their financing needs. As a result, E&P companies increased capital spending for the current portfolio reflects a larger volume of 2017, a reversal of the production declines in 2016. riskier paper in aggregate. The industry also reduced operating costs and experienced increased merger and acquisition activ- Leveraged lending accounts for a substantial por- ity, as companies continued to rationalize and optition of the SNC portfolio and remains a key focus mize their operations. Risk in the energy portfolio in the agencies’ broader effort to evaluate overall is concentrated in non-investment-grade and safety and soundness of bank underwriting and unrated E&P and energy service companies and is risk-management practices. As observed in the first predominantly held by regulated entities, though 2017 examination, agent bank underwriting and banks are primarily in a senior secured position risk-management processes to reduce and manage with the lowest risk of loss. the risk of leveraged lending exposures continued to improve. In particular, most agent banks were For more information on the 2017 SNC review, better equipped to project future cash flows to visit the Board’s website at www.federalreserve.gov/ newsevents/pressreleases/bcreg20170802a.htm. 17 In December 2017, the agencies issued a press release and Compliance Risk Management amended the SNC definition to raise the qualifying threshold from $20 million to $100 million from 2018 onwards. See www The Federal Reserve works with international and .federalreserve.gov/newsevents/pressreleases/bcreg20171221c domestic supervisors to develop guidance that pro- .htm. motes compliance with Bank Secrecy Act and anti- 18 Results discussed here are based on examinations conducted in money-laundering compliance (BSA/AML) and the third quarter of 2016 and first quarter of 2017, and reflect data submitted by all reporting banks as of September 30, 2016. counter-terrorism (CFT) laws.

64 104th Annual Report | 2017 Bank Secrecy Act and Anti-Money-Laundering International Coordination on Sanctions, Compliance Anti-Money-Laundering, and In 2017, the Federal Reserve continued to actively Counter-Terrorism Financing promote the development and maintenance of The Federal Reserve participates in a number of effective BSA/AML compliance risk-management international coordination initiatives related to programs, including developing supervisory strate- sanctions, money laundering, and terrorism financgies and providing guidance to the industry on ing. The Federal Reserve has a long-standing role trends in BSA/AML compliance. For example, the in the U.S. delegation to the intergovernmental Federal Reserve supervisory staff participated in a Financial Action Task Force (FATF) and its worknumber of industry conferences to continue to ing groups, contributing a banking supervisory percommunicate regulatory expectations and policy spective to the formulation of international staninterpretations for financial institutions. dards. The Federal Reserve participated in the development of FATF Guidance on Private Sector The Federal Reserve is a member of the Treasury- Information Sharing issued in November 2017. In led BSA Advisory Group, which includes represen- addition, the Federal Reserve participated in the tatives of regulatory agencies, law enforcement, development of FATF Guidance on Customer Due and the financial services industry and covers all Diligence and Financial Inclusion issued in aspects of the BSA. The Federal Reserve also par- November 2017, as a supplement to the 2013 ticipated in Treasury-led private/public sector dia- FATF Guidance on AML/CFT Measures and logues with financial institutions, regulators, and Financial Inclusion. supervisors from Mexico, the United Kingdom, and the People’s Republic of China. These dia- The Federal Reserve also continues to participate logues were designed to promote information shar- in committees and subcommittees through the ing and understanding of BSA/AML issues Bank for International Settlements. Specifically, the between U.S. and country-specific financial sectors. Federal Reserve actively participates in the AML In addition, the Federal Reserve participated in Experts Group under the BCBS that focuses on meetings during the year to discuss BSA/AML AML and CFT issues, as well as the CPMI. With issues with delegations from Estonia, Singapore, respect to the AML Experts Group, the Federal and the Seychelles. Reserve contributed to updating the Correspondent Banking annex issued in June 2017, which supple- The Federal Reserve also participates in the FFIEC ments previous guidance on the sound manage- BSA/AML working group, a monthly forum for ment of risks related to money laundering and the discussion of pending BSA policy and regula- financing of terrorism. tory matters. In addition to the FFIEC agencies, the BSA/AML working group includes the Finan- Incentive Compensation cial Crimes Enforcement Network (FinCEN) and, To foster improved incentive compensation pracon a quarterly basis, the SEC, the CFTC, the Inter- tices in the financial industry, the Federal Reserve nal Revenue Service, and the Office of Foreign along with the other federal banking agencies Assets Control (OFAC). The FFIEC BSA/AML adopted interagency guidance oriented to the riskworking group is responsible for updating the taking incentives created by incentive compensa- FFIEC Bank Secrecy Act/Anti-Money Laundering tion arrangements in June 2010. The guidance is Examination Manual. The FFIEC developed this based on the principles that incentive compensamanual as part of its ongoing commitment to pro- tion arrangements at a banking organization vide current and consistent interagency guidance should provide employees incentives that approprion risk-based policies, procedures, and processes ately balance risk and financial results; be compatfor financial institutions to comply with the BSA ible with effective controls and risk management; and safeguard their operations from money laun- and be supported by strong corporate governance. dering and terrorist financing. The guidance recognizes that the methods used to achieve appropriately risk-sensitive compensation Throughout 2017, the Federal Reserve continued arrangements likely will differ significantly across to regularly share examination findings and and within firms. enforcement proceedings with FinCEN as well as with OFAC under the interagency MOUs finalized To implement the guidance, the Board developed a in 2004 and 2006. robust supervisory program focusing on the largest

Supervision and Regulation 65 banking organizations because they are significant investment in the covered fund to an amount that users of incentive compensation. Based in part on is not more than 3 percent of the total outstandour supervisory efforts, these institutions have ing ownership interests in the fund (referred to as made progress in developing programs and policies the “per-fund limitation”). A banking entity may and procedures that incorporate these three core request the Board’s approval for an extension of principles. time beyond the one-year period, for up to two additional years, to conform an investment to the Section 956 of the Dodd-Frank Act requires the per-fund limitation. The supervisory guidance is Board, OCC, FDIC, SEC, NCUA, and FHFA to available at www.federalreserve.gov/ jointly develop regulations or guidelines imple- supervisionreg/srletters/sr1705.htm. menting disclosures and prohibitions concerning • In August, the Board and the other federal bankincentive-based compensation at covered financial ing agencies issued guidance on the regulatory institutions with at least $1 billion in assets. The capital treatment of certain centrally cleared agencies published a revised proposed rule in derivative contracts in light of changes to the June 2016. The agencies received over 100 comrulebooks of certain central counterparties. Spements on the 2016 proposed rule and are considercifically, the agencies provided guidance on the ing the comments. treatment of cleared settled-to-market contracts under the federal banking agencies’ regulatory Other Policymaking Initiatives capital rules. The supervisory guidance is avail- • In July, the Board, along with four other finan- able at www.federalreserve.gov/supervisionreg/ cial regulatory agencies, issued a policy statement srletters/sr1707.htm. announcing that they are coordinating their • In September, the Board, along with the other respective reviews of the treatment of certain forfederal banking agencies and the NCUA, issued eign funds under section 619 of the Dodd-Frank “Frequently Asked Questions on the Current Act, commonly known as the Volcker rule, and Expected Credit Loss Methodology (CECL),” the agencies’ implementing regulations. These which provides guidance to institutions as they foreign funds are investment funds organized and implement the new accounting standard for offered outside of the United States and genercredit losses recently issued by the FASB. These ally are not subject to the Volcker rule (“foreign FAQs expand upon the agencies’ June 2016 Joint excluded funds”). However, complexities in the Statement on the New Accounting Standard on Volcker rule and the implementing regulations Financial Instruments—Credit Losses. The letter may result in certain foreign excluded funds also announces that the agencies plan to issue a becoming subject to regulation. The federal series of FAQs until the implementation date of banking agencies, which generally oversee foreign the new standard to address questions on the banks, would not take action under the Volcker implementation of CECL. The supervisory guidrule for qualifying foreign excluded funds, subject ance is available at www.federalreserve.gov/ to certain conditions, for a period of one year. supervisionreg/srletters/sr1708.htm. The statement is available at www.federalreserve .gov/newsevents/pressreleases/files/ Regulatory Reports bcreg20170721a1.pdf. The Federal Reserve and the other U.S. federal • In July, the Board issued SR letter 17-5, “Proce- banking agencies have the authority to require dures for a Banking Entity to Request an Exten- banks and holding companies to submit informasion of the One-Year Seeding Period for a Cov- tion, on both a solo and a consolidated basis, on ered Fund,” which provides guidance on how their financial condition, performance, and risks, at banking entities may seek an extension to con- regular intervals. The Federal Reserve’s data collecform an investment to the Volcker rule. Under tions, reporting, and governance function is the Volcker rule, a banking entity is permitted to responsible for developing, coordinating, and acquire and retain an ownership interest in a cov- implementing regulatory reporting requirements ered fund in connection with organizing and for various financial reporting forms filed by offering the covered fund as long as certain domestic and foreign financial institutions subject requirements are met. The Volcker rule also to Federal Reserve supervision. Federal Reserve requires a banking entity to actively seek unaffili- staff members interact with other federal agencies, ated investors to reduce within one year its state supervisors, and, as needed, foreign bank

66 104th Annual Report | 2017 supervisors, to recommend and implement appro- and to eliminate two schedules from the FR priate and timely revisions to the reporting forms Y-14A to reduce reporting burden. and the attendant instructions. FFIEC Regulatory Reports Holding Company Regulatory Reports The law establishing the FFIEC and defining its The Federal Reserve requires that U.S. holding functions requires the FFIEC to develop uniform companies (HCs) periodically submit reports that reporting systems for federally supervised financial provide information about their financial condition institutions. The Federal Reserve, along with the and structure.19 This information is essential to for- other member FFIEC agencies, requires financial mulating and conducting financial institution regu- institutions to submit various uniform regulatory lation and supervision. It is also used to respond to reports. This information is essential to formulating information requests by Congress and the public and conducting supervision and regulation and for about HCs and their nonbank subsidiaries. Foreign the ongoing assessment of the overall soundness of banking organizations also are required to periodi- the nation’s financial system. During 2017, the folcally submit reports to the Federal Reserve. For lowing FFIEC reporting forms were implemented more information on the various reporting forms, or revised: see www.federalreserve.gov/apps/reportforms/ • FFIEC 101—to remove two credit valuation default.aspx. adjustment items. During 2017, the following reporting forms were • FFIEC 031, 041, and 051—to implement a new revised: streamlined version of the Call Report (FFIEC 051) for eligible small institutions and to make • FR Y-9C—to implement a number of revisions, certain burden-reducing revisions to the FFIEC which were consistent with changes to the 031 and FFIEC 041 Call Reports (filed by larger FFIEC Call Reports. The revisions, effective institutions). See section below on the Call March 2017, included deleting certain existing Report Burden Reduction Initiative for more data items, increasing the existing reporting details. threshold for time deposits, and clarifying the reporting of certain data items. Call Report Burden Reduction Initiative for • FR Y-9LP—to add a new line item, effective Community Institutions March 2017, for total nonbank assets of a hold- In September 2015, the FFIEC announced detailed ing company subject to the Federal Reserve steps regulators are taking to streamline and sim- Board’s capital plan rule for purposes of identi- plify regulatory reporting requirements for commufying large and noncomplex firms. This new line nity banks and reduce their reporting burden. The item was related to amendments to the capital objectives of the community bank burdenplan and stress test rules (Regulations Y and YY) reduction initiative are consistent with feedback the published in February 2017. FFIEC received as part of the regulatory review conducted as required by the EGRPRA of 1996. • FR Y-14—to modify the scope of the global market shock component of the Federal Reserve’s Progress made during 2017 by the FFIEC on this stress tests in a manner that would include cermultiyear initiative included implementing a new tain U.S. IHCs of foreign banking organizations, and streamlined Call Report for small financial which are subject to the same capital and stress institutions (FFIEC 051) effective March 2017. testing standards that apply to domestic BHCs. Financial institutions with domestic offices only U.S. IHCs that will become subject to the global and less than $1 billion in total assets, which repremarket shock in CCAR 2019 as a result of the sent approximately 90 percent of all institutions modified threshold will be subject to an interim required to file Call Reports, qualify for this new market risk component in CCAR 2018. Also, the report. The streamlined Call Report reduced the Federal Reserve modified report forms and existing FFIEC 041 Call Report form from 85 to instructions to clarify certain data definitions 61 pages, resulting from the removal of approxiand improve alignment with certain data items mately 40 percent of the nearly 2,400 data items in reported on other report schedules or reports, the Call Report. In addition, the frequency of reporting was reduced for over 4 percent of the 19 HCs are defined as BHCs, intermediate holding companies (IHCs), SLHCs, and securities holding companies. remaining data items. Table 3 summarizes the over-

Supervision and Regulation 67 Table 3. Data items revised as of March 30, 2018 Finalized Call Report revisions FFIEC 051 FFIEC 041 FFIEC 031 Items removed, net 967 6 0 68 Change in item frequency to semiannual 96 Change in item frequency to annual 10 Items with a new or increased reporting threshold 7 13 * “Items Removed, Net” reflects the effects of consolidating existing items, adding control totals, and, for the FFIEC 051, relocating individual items from other schedules to a new supplemental schedule. In addition, included in this number for the FFIEC 051, approximately 300 items were items that institutions with less than $1 billion in total assets were exempt from reporting due to existing reporting thresholds in the FFIEC 041. all number of changes finalized and implemented Supervisory and support tools. To support examinby Call Report form. ers and other supervisory staff, SIT deployed tools to support the collection, use, and storage of Other Burden Reduction Initiatives supervisory data. SIT integrated supervisory plan- To reduce burden, the Federal Reserve discontin- ning and collection tools with a task and resource ued the Liquidity Monitoring Report (FR 2052b), management program allowing management to with the final data collection as of the Septem- better track and align resources. SIT deployed ber 30, 2017, report date. The FR 2052b report was advanced quantitative analysis and data visualizafiled by HCs with total consolidated assets of tion software to allow supervisory analysts to glean greater than $10 billion, excluding firms designated insights from supervisory data. as G-SIBs and affiliates of foreign banking organizations with less than $50 billion in total consoli- Streamlined data access and improved security. SIT dated assets. The report collected quantitative streamlined data access for the supervision funcinformation on selected assets, liabilities, funding tion while enhancing overall information security. activities, and contingent liabilities on a consoli- SIT provides access to data through a central dated basis and by material subsidiary entity. This access management tool to support data, applicadata was used to monitor the overall liquidity pro- tions, and research access-related responsibilities, file of certain institutions supervised by the Federal and establishes effective prevention and detection Reserve. In place of the FR 2052b, the Federal controls to limit information security threats. In Reserve will monitor and assess liquidity risks of addition to data access provisioning, the tool supprevious FR 2052b filers using the recently imple- ports information security measures through roumented Liquidity Focus Report (LFR). The LFR tine procedures to verify users’ access to data and provides a consistent method for benchmarking information to confirm whether there is a continliquidity risk for individual regional banks based ued need for this access. on information derived from the Call Report. As mentioned above, there were also burden reducing National Information Center changes to the FR Y-14 report in 2017. The National Information Center (NIC) is the Federal Reserve’s authoritative source for supervisory, Supervisory Information Technology financial, and banking structure data as well as supervisory documents. The NIC includes (1) data The Federal Reserve’s supervisory information on banking structure throughout the United States technology (SIT) function, under the governance of and foreign banking concerns, (2) national applicathe Subcommittee for Data and Technology, works tions supporting the various supervisory programs to deliver information technology solutions within and the data they capture, (3) data collection prothe supervision and regulation function. Working cesses, and (4) a platform for sharing of the inforcollaboratively with the Federal Reserve System mation with external agencies. supervision and regulation business sponsors, SIT provides services to the business lines as well as Information sharing and external collaboration. The information technology project management sup- NIC oversees the implementation of approved port to several critical national business applica- regulatory interagency information exchanges, tions supporting supervision and regulation. including a continually increasing number of new

68 104th Annual Report | 2017 requests. The NIC represents the Federal Reserve ing of the regulatory process, as well as overall staon the FFIEC Task Force on Information Sharing, tus reporting. and leads a subgroup, The Path Forward, focusing on improving collaboration, examination file Staff Development exchange, and big data sharing between the regulatory agencies. Efforts continue to work with the The Federal Reserve’s staff development program business areas to increase capabilities for collabora- supports the ongoing development of nearly 3,000 tion between the agencies. professional supervisory staff, ensuring that they have the requisite skills necessary to meet their evolving supervisory responsibilities. The Federal Document management. A high priority for the Reserve also provides course offerings to staff at NIC was to improve document tracking, storage, state banking agencies. Training activities in 2017 and access through the implementation of docuare summarized in table 4. ment management software. The software eliminates point-to-point interfaces between document Examiner Commissioning Program management systems and systems uploading or ref- An overview of the Federal Reserve System’s erencing documents. The software also moves and Examiner Commissioning Program for assistant tracks documents between management systems as examiners is set forth in SR letter 17-6, “Overview the documents progress through their life cycle. of the Federal Reserve’s Supervisory Education Programs.”20 Data quality and usability. Efforts continue to meet the demands resulting from the increasing amount Examiners choose from one of three specialty of data being collected and shared. Much of the tracks: (1) safety and soundness, (2) consumer data is collected under revised supervisory procompliance, or (3) large financial institutions. On grams. Similar data between programs cannot average, individuals move through a combination always be matched and requires alignment for of classroom offerings, self-paced learning, virtual cross-portfolio purposes. The NIC continues to instruction, and on-the-job training over a period ensure that the underlying data is consistent, readof two to three years. Achievement is measured by ily available, and easily accessible for authorized completing the required course content, demonuse. The NIC also works to ensure that all NIC strating adequate on-the-job knowledge, and passdata is easily understood by the various stakeholding a professionally validated proficiency examinaers and integrated in a flexible manner. tion. In 2017, 59 examiners passed the proficiency examination (16 in safety and soundness and 43 in Data collections. The NIC coordinates budgetary consumer compliance). activities and ensures that information technology solutions for data collections meet architectural In 2017, the Board released a new enhanced profistandards. Increased emphasis on data governance, ciency examination containing application-based security, and awareness prompted the build-out of a data collection management system that provides 20 SR letter 17-6 is available at www.federalreserve.gov/ intake on data requests, a playbook for and track- supervisionreg/srletters/sr1706.htm. Table 4. Training for banking supervision and regulation, 2017 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 al (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 1,062 157 515 103 FFIEC 961 581 420 105 Rapid Response2 14,159 1,591 7 61 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.

Supervision and Regulation 69 questions designed to measure performance reflect- bank firms. In 2017, the Federal Reserve acted on ing the level of knowledge and skills needed to 1,259 applications filed under the six statutes. effectively perform in an examiner-in-charge role. In addition, further learning units were released for In 2017, the Federal Reserve published its Semianthe Large Financial Institutions Examiner Com- nual Report on Banking Applications Activity, missioning Program, which will continue to be which provides aggregate information on proposals developed and deployed in 2018. filed by banking organizations and reviewed by the Federal Reserve. The report includes statistics on Continuing Professional Development the number of proposals that have been approved, Throughout 2017, the Federal Reserve System con- denied, withdrawn, mooted, or returned as well as tinued to enhance its continuing professional devel- general information about the length of time taken opment program. Learning bundles, which orga- to process proposals and common reasons for pronize various types of learning into a cohesive, eas- posals to be withdrawn from consideration. The ily accessible format that often includes reference reports are available at www.federalreserve.gov/ materials and application opportunities, were a new bankinforeg/semiannual-reports-bankingproduct designed to meet the need of training on applications-activity.htm. specific risks or common supervisory topics, such as cybersecurity. Bank Holding Company Act Applications Under the BHC Act, a corporation or similar legal entity must obtain the Federal Reserve’s approval Regulation before forming a BHC through the acquisition of one or more banks in the United States. Once The Federal Reserve exercises important regulatory formed, a BHC must receive Federal Reserve influence over entry into the U.S. banking system approval before acquiring or establishing additional structure through its administration of several fed- banks. Also, BHCs generally may engage in only eral statutes. The Federal Reserve is also respon- those nonbanking activities that the Board has presible for imposing margin requirements on securi- viously determined to be closely related to banking ties transactions. In carrying out its responsibilities, under section 4(c)(8) of the BHC Act. Depending the Federal Reserve coordinates supervisory activi- on the circumstances, these activities may or may ties with the other federal banking agencies, state not require Federal Reserve approval in advance of agencies, functional regulators (that is, regulators their commencement.21 for insurance, securities, and commodities firms), and foreign bank regulatory agencies. When reviewing a BHC application or notice that requires approval, the Federal Reserve considers Regulation of the U.S. Banking Structure the financial and managerial resources of the applicant, the future prospects of both the applicant The Federal Reserve administers six federal statutes and the firm to be acquired, financial stability facthat apply to BHCs, FHCs, member banks, tors, the convenience and needs of the community SLHCs, and foreign banking organizations: the to be served, the potential public benefits, the com- BHC Act, the Bank Merger Act, the Change in petitive effects of the proposal, the applicant’s Bank Control Act, the Federal Reserve Act, seccompliance with laws and regulations, and the tion 10 of the Home Owners’ Loan Act (HOLA), applicant’s ability to make available to the Federal and the International Banking Act. Reserve information deemed necessary to ensure compliance with applicable law. The Federal In administering these statutes, the Federal Reserve Reserve also must consider the views of the DOJ acts on a variety of applications and notices that regarding the competitive aspects of any proposed directly or indirectly affect the structure of the U.S. BHC acquisition involving unaffiliated insured banking system at the local, regional, and national levels; the international operations of domestic 21 Since 1996, the BHC Act has provided an expedited prior notice banking organizations; or the U.S. banking operaprocedure for certain permissible nonbank activities and for tions of foreign banks. The applications and acquisitions of small banks and nonbank entities. Since that notices concern BHC and SLHC formations and time, the BHC Act has also permitted well-run BHCs that satisfy certain criteria to commence certain other nonbank activiacquisitions, bank mergers, and other transactions ties on a de novo basis without first obtaining Federal Reserve involving banks and savings associations or non- approval.

70 104th Annual Report | 2017 depository institutions. In the case of a foreign completing the transaction. The Federal Reserve is banking organization seeking to acquire control of responsible for reviewing changes in the control of a U.S. bank, the Federal Reserve also considers state member banks, BHCs, and SLHCs. In its whether the foreign bank is subject to comprehen- review, the Federal Reserve considers the financial sive supervision or regulation on a consolidated position, competence, experience, and integrity of basis by its home-country supervisor. In 2017, the the acquiring person; the effect of the proposed Federal Reserve acted on 264 applications and change on the financial condition of the bank, notices filed by BHCs to acquire a bank or a non- BHC, or SLHC being acquired; the future prosbank firm, or to otherwise expand their activities. pects of the institution to be acquired; the effect of the proposed change on competition in any rel- A BHC may repurchase its own shares from its evant market; the completeness of the information shareholders. Certain stock redemptions require submitted by the acquiring person; and whether prior Federal Reserve approval. The Federal the proposed change would have an adverse effect Reserve may object to stock repurchases by hold- on the Deposit Insurance Fund. A proposed transing companies that fail to meet certain standards, action should not jeopardize the stability of the including the Board’s capital adequacy guidelines. institution or the interests of depositors. During its In 2017, the Federal Reserve acted on five stock review of a proposed transaction, the Federal repurchase applications by BHCs. Reserve also may contact other regulatory or law enforcement agencies for information about rel- The Federal Reserve also reviews elections submit- evant individuals. In 2017, the Federal Reserve ted by BHCs seeking FHC status under the author- approved 134 change in control notices. ity granted by the Gramm-Leach-Bliley Act. BHCs seeking FHC status must file a written declaration Federal Reserve Act Applications with the Federal Reserve. In 2017, 36 domestic Under the Federal Reserve Act, a bank must seek FHC declarations and one foreign FHC declara- Federal Reserve approval to become a member tion were received. bank. A member bank may be required to seek Federal Reserve approval before expanding its Bank Merger Act Applications operations domestically or internationally. State The Bank Merger Act requires that all applications member banks must obtain Federal Reserve involving the merger of insured depository institu- approval to establish domestic branches, and all tions be acted on by the relevant federal banking member banks (including national banks) must agency. The Federal Reserve has primary jurisdic- obtain Federal Reserve approval to establish fortion if the institution surviving the merger is a state eign branches. When reviewing applications for member bank. In acting on a merger application, membership, the Federal Reserve considers, among the Federal Reserve considers the financial and other things, the bank’s financial condition and its managerial resources of the applicant, the future record of compliance with banking laws and reguprospects of the existing and combined organiza- lations. When reviewing applications to establish tions, financial stability factors, the convenience domestic branches, the Federal Reserve considers, and needs of the communities to be served, and the among other things, the scope and nature of the competitive effects of the proposed merger. The banking activities to be conducted. When reviewing Federal Reserve also must consider the views of the applications for foreign branches, the Federal U.S. Department of Justice regarding the competi- Reserve considers, among other things, the conditive aspects of any proposed bank merger involving tion of the bank and the bank’s experience in interunaffiliated insured depository institutions. In national banking. In 2017, the Federal Reserve 2017, the Federal Reserve approved 63 merger acted on 19 membership applications, 686 new and applications under the Bank Merger Act. merger-related domestic branch applications, and two foreign branch application. Change in Bank Control Act Applications The Change in Bank Control Act requires indi- State member banks also must obtain Federal viduals and certain other parties that seek control Reserve approval to establish financial subsidiaries. of a U.S. bank, BHC, or SLHC to obtain approval These subsidiaries may engage in activities that are from the relevant federal banking agency before financial in nature or incidental to financial activi-

Supervision and Regulation 71 ties, including limited securities-related and insur- The Federal Reserve also reviews elections submitance agency-related activities. In 2017, no financial ted by SLHCs seeking status as FHCs under the subsidiary applications were approved. authority granted by the Dodd-Frank Act. SLHCs seeking FHC status must file a written declaration Home Owners’ Loan Act Applications with the Federal Reserve. In 2017, no SLHC FHC Under HOLA, a corporation or similar legal entity declarations were received. must obtain the Federal Reserve’s approval before forming an SLHC through the acquisition of one Overseas Investment Applications by or more savings associations in the United States. U.S. Banking Organizations Once formed, an SLHC must receive Federal U.S. banking organizations may engage in a broad Reserve approval before acquiring or establishing range of activities overseas. Many of the activities additional savings associations. Also, SLHCs gen- are conducted indirectly through Edge Act and erally may engage in only those nonbanking activi- agreement corporation subsidiaries. Although most ties that are specifically enumerated in HOLA or foreign investments are made under general conthat the Board has previously determined to be sent procedures that involve only after-the-fact closely related to banking under section 4(c)(8) of notification to the Federal Reserve, large and other the BHC Act. Depending on the circumstances, significant investments require prior approval. In these activities may or may not require Federal 2017, the Federal Reserve approved 18 applications Reserve approval in advance of their commence- and notices for overseas investments by U.S. bankment. In 2017, the Federal Reserve acted on 15 ing organizations, many of which represented applications filed by SLHCs to acquire a savings investments through an Edge Act or agreement association or a nonbank firm, or to otherwise corporation. expand their activities. International Banking Act Applications Under HOLA, a mutual savings association reor- The International Banking Act, as amended by the ganizing to a mutual holding company (MHC) Foreign Bank Supervision Enhancement Act of structure must receive Federal Reserve approval 1991, requires foreign banks to obtain Federal prior to its reorganization. In addition, an MHC Reserve approval before establishing branches, must receive Federal Reserve approval before con- agencies, commercial lending company subsidiaries, verting to stock form, and MHCs must receive or representative offices in the United States. Federal Reserve approval before waiving dividends declared by the MHC’s subsidiary. In 2017, the In reviewing applications, the Federal Reserve gen- Federal Reserve acted on five MHC reorganization erally considers whether the foreign bank is subject applications and eight applications to waive divi- to comprehensive supervision or regulation on a dends. There were no applications approved for consolidated basis by its home-country supervisor. MHCs to convert to stock form. It also considers whether the home-country supervisor has consented to the establishment of the When reviewing an SLHC application or notice U.S. office; the financial condition and resources of that requires approval, the Federal Reserve consid- the foreign bank and its existing U.S. operations; ers the financial and managerial resources of the the managerial resources of the foreign bank; applicant, the future prospects of both the appli- whether the home-country supervisor shares inforcant and the firm to be acquired, the convenience mation regarding the operations of the foreign and needs of the community to be served, the bank with other supervisory authorities; whether potential public benefits, the competitive effects of the foreign bank has provided adequate assurances the proposal, and the applicant’s ability to make that information concerning its operations and available to the Federal Reserve information activities will be made available to the Federal deemed necessary to ensure compliance with appli- Reserve, if deemed necessary to determine and cable law. The Federal Reserve also must consider enforce compliance with applicable law; whether the views of the DOJ regarding the competitive the foreign bank has adopted and implemented aspects of any SLHC proposal involving the acqui- procedures to combat money laundering and sition or merger of unaffiliated insured depository whether the home country of the foreign bank is institutions. developing a legal regime to address money laun-

72 104th Annual Report | 2017 dering or is participating in multilateral efforts to organizations are BHCs and the reporting threshcombat money laundering; and the record of the old was recently raised, only two state member foreign bank with respect to compliance with U.S. banks were required to submit data to the Federal law. In 2017, the Federal Reserve approved three Reserve in 2017. The information submitted by applications by foreign banks to establish branches, these two small state member banks is available to agencies, or representative offices in the United the public upon request and is primarily used for States. disclosure to the bank’s shareholders and public investors. Public Notice of Federal Reserve Decisions and Filings Received Assessments for Supervision and Regulation Certain decisions by the Federal Reserve that The Dodd-Frank Act directs the Board to collect involve a BHC, SLHC, a bank merger, a change in assessments, fees, or other charges equal to the control, or the establishment of a new U.S. bank- total expenses the Board estimates are necessary or ing presence by a foreign bank are made known to appropriate to carry out the supervisory and reguthe public by an order or an announcement. Orders latory responsibilities of the Board for BHCs and state the decision, the essential facts of the applica- SLHCs with total consolidated assets of $50 billion tion or notice, and the basis for the decision; or more and nonbank financial companies desigannouncements state only the decision. All orders nated for Board supervision by the FSOC. As a are made public immediately and are subsequently collecting entity, the Board does not recognize the reported in the Board’s weekly H.2 statistical supervision and regulation assessments as revenue release. The H.2 release also contains announce- nor does the Board use the collections to fund ments of applications and notices received by the Board expenses; the funds are transferred to the Federal Reserve upon which action has not yet Treasury. The Board collected and transferred been taken. For each pending application and $507,914,174 in 2017 for the 2016 supervision and notice, the related H.2A release gives the deadline regulation assessment. for comments. The Board’s website provides information on orders and announcements (www Securities Credit .federalreserve.gov/newsevents/press/orders/ Under the Securities Exchange Act of 1934, the 2017orders.htm) as well as a guide for U.S. and for- Board is responsible for regulating credit in certain eign banking organizations that wish to submit transactions involving the purchasing or carrying applications (www.federalreserve.gov/bankinforeg/ of securities. The Board’s Regulation T limits the afi/afi.htm). amount of credit that may be provided by securities brokers and dealers when the credit is used to Enforcement of Other Laws and purchase debt and equity securities. The Board’s Regulations Regulation U limits the amount of credit that may be provided by lenders other than brokers and The Federal Reserve’s enforcement responsibilities dealers when the credit is used to purchase or carry also extend to the disclosure of financial informa- publicly held equity securities if the loan is secured tion by state member banks and the use of credit to by those or other publicly held equity securities. purchase and carry securities. The Board’s Regulation X applies these credit limitations, or margin requirements, to certain borrow- Financial Disclosures by State Member ers and to certain credit extensions, such as credit Banks obtained from foreign lenders by U.S. citizens. Under the Securities Exchange Act of 1934 and the Federal Reserve’s Regulation H, certain state mem- Several regulatory agencies enforce the Board’s ber banks are required to make financial disclo- securities credit regulations. The SEC, the Finansures to the Federal Reserve using the same reporting forms (such as Form 10K—annual report and tration and filing requirements that are similar to those imposed on public companies. Per section 12(i) of the Securities Schedule 14A—proxy statement) that are normally Exchange Act, the powers of the SEC over banking entities that used by publicly held entities to submit information fall under section 12(g) are vested with the appropriate banking to the SEC.22 As most of the publicly held banking regulator. Specifically, state member banks with 2,000 or more shareholders and more than $10 million in total assets are required to register with, and submit data to, the Federal 22 Under section 12(g) of the Securities Exchange Act, certain Reserve. These thresholds reflect the recent amendments by the companies that have issued securities are subject to SEC regis- Jumpstart Our Business Startups Act (JOBS Act).

Supervision and Regulation 73 cial Industry Regulatory Authority, and the Chi- their respective jurisdictions; the FCA and the cago Board Options Exchange examine brokers NCUA examine lenders under their respective and dealers for compliance with Regulation T. jurisdictions; and the Federal Reserve examines With respect to compliance with Regulation U, the other Regulation U lenders. federal banking agencies examine banks under

75 5 Consumer and Community Affairs The Division of Consumer and Community Affairs about consumer protection risks and community eco- (DCCA) has primary responsibility for carrying out nomic development issues and opportunities. The the Board of Governors’ core activity of consumer division analyzed ongoing and emerging consumer protection and community development to promote financial services and community risks, practices, fair and transparent financial service markets, protect issues, and opportunities to understand and act on consumers’ rights, and ensure that its policies and their implications for supervisory policy as well as research take into account consumer and community to gain insight into consumer decisionmaking perspectives. This charge includes assessing and tak- related to financial services and access to credit for ing corrective actions to address consumer risks small businesses. among financial institutions it supervises while also • Engaging and convening key stakeholders to identify fostering proven programs in consumer compliance emerging issues and advance what works in commuand community investment. nity reinvestment and consumer protection. The division continued to promote fair and informed access Throughout 2017, the division engaged in numerous to financial markets for all consumers, particularly consumer and community-related functions and underserved populations, by engaging lenders, govpolicy activities in the following areas: ernment officials, and community leaders. Throughout • Formulating consumer-focused supervision and the year, DCCA convened programs to share inforexamination policy to ensure that financial institu- mation on the financial and economic needs in tions for which the Federal Reserve has authority low- and moderate-income (LMI) communities, comply with consumer protection laws and regula- research on effective community development politions and meet requirements of community reinvest- cies and strategies, and best practices in the manment laws and regulations. The division provided agement and control of consumer compliance risks. oversight for the Reserve Bank consumer compli- • Writing and reviewing regulations that effectively ance supervision and examination of state member implement consumer protection and community reinbanks and bank holding companies (BHCs) vestment laws. The division manages the Board’s through its policy development, examiner training, regulatory responsibilities with respect to certain and supervision oversight programs. This includes entities and specific statutory provisions of the policy setting and oversight of state member consumer financial services and fair lending laws. banks’ performance under the Community Rein- In 2017, DCCA participated in drafting intervestment Act (CRA); conducting oversight of and agency regulations and compliance guidance for providing guidance to Reserve Bank staff on conthe industry and the Reserve Banks. sumer compliance in BHC matters; assessment of compliance with and enforcement of a wide range of consumer protection laws and regulations, Supervision and Examinations including those related to fair lending, unfair or deceptive acts or practices (UDAP), and flood DCCA develops supervisory policy and examination insurance; analysis of bank and BHC applications procedures for consumer protection laws and regulain regard to consumer protection, convenience and tions, as well as for the CRA, as part of its supervineeds, and the CRA; and processing of consumer sion of the organizations for which the Board has complaints. authority, including bank and financial holding com- • Conducting research, analysis, and data collection to panies, state member banks, foreign banking organiinform Federal Reserve and other policymakers zations, Edge Act corporations, and agreement cor-

76 104th Annual Report | 2017 porations.1 The division also administers the Federal BHC application analysis and processing, examina- Reserve System’s risk-focused program for assessing tion and enforcement techniques and policy matters, consumer compliance risk at the largest banks and examiner training, and emerging issues. Finally, staff financial holding companies in the System, with divi- members participate in interagency activities that sion staff ensuring that consumer compliance risk is promote consistency in examination principles, staneffectively integrated into the consolidated supervi- dards, and processes. sion of the holding company. DCCA staff monitor trends in consumer products to inform the risk-based Examinations are the Federal Reserve’s primary supervisory planning process. Quantitative risk met- method of ensuring compliance with consumer prorics and screening systems use data to assess market tection laws and assessing the adequacy of consumer activity, consumer complaints, and supervisory find- compliance risk-management systems within reguings to assist with the determination of risk levels at lated entities. During 2017, the Reserve Banks comfirms. pleted 225 consumer compliance examinations of state member banks, 193 CRA examinations of state The division oversees the efforts of the 12 Reserve member banks, 52 examinations of foreign banking Banks to ensure that the Federal Reserve’s consumer organizations, 4 examinations of Edge Act corporacompliance supervisory program reflects its commit- tions, and no examinations of agreement ment to promoting financial inclusion and compli- corporations. ance with applicable federal consumer protection laws and regulations in the 815 state member banks it Mortgage Servicing and Foreclosure supervises. Division staff coordinate with the prudential regulators and the Consumer Financial Protec- Payment Agreement Status tion Bureau (CFPB) as part of the supervisory coor- Throughout 2017, Board staff continued to oversee dination requirements under the Dodd-Frank Wall and implement the enforcement actions that were Street Reform and Consumer Protection Act (Dodd- issued by the Federal Reserve and the Office of the Frank Act), and ensure that consumer compliance Comptroller of the Currency (OCC) against 16 mortrisk is appropriately incorporated into the consoli- gage loan servicers between April 2011 and dated risk-management program of the approxi- April 2012. At the time of the enforcement actions, mately 135 bank and financial holding companies along with other requirements, the two regulators with assets over $10 billion. Division staff provide directed servicers to retain independent consultants guidance and expertise to the Reserve Banks on con- to conduct comprehensive reviews of foreclosure sumer protection laws and regulations, bank and activity to determine whether eligible2 borrowers suffered financial injury because of servicer errors, 1 The Federal Reserve has examination and enforcement author- misrepresentations, or other deficiencies. The file ity for federal consumer financial laws and regulations for review initiated by the independent consultants, cominsured depository institutions with assets of $10 billion or less bined with a significant borrower outreach process, that are state member banks and not affiliates of covered institutions, as well as for conducting CRA examinations for all state was referred to as the Independent Foreclosure member banks regardless of size. The Federal Reserve Board Review (IFR). also has examination and enforcement authority for certain federal consumer financial laws and regulations for insured depository institutions that are state member banks with over $10 bil- In 2013, the regulators entered into agreements with lion in assets, while the Consumer Financial Protection Bureau 15 of the mortgage loan servicers to replace the IFR has examination and enforcement authority for many federal with direct cash payments to all eligible borrowers consumer financial laws and regulations for insured depository institutions with over $10 billion in assets and their affiliates and other assistance (the Payment Agreement).3 The (covered institutions), as mandated by the Dodd-Frank Act. participating servicers agreed to pay an estimated Agency and branch offices of foreign banking organizations, $3.9 billion to 4.4 million borrowers whose primary Edge Act corporations, and agreement corporations fall under residence was in a foreclosure process in 2009 or the Federal Reserve’s purview for consumer compliance activities. An agreement corporation is a type of bank chartered by a 2010. The Payment Agreement also required the serstate to engage in international banking. The bank agrees with vicers to contribute an additional $5.8 billion in other the Federal Reserve Board to limit its activities to those allowed by an Edge Act corporation. An Edge Act corporation is a banking institution with a special charter from the Federal 2 Borrowers were eligible if their primary residence was in a fore- Reserve to conduct international banking operations and certain closure action with one of the sixteen mortgage loan servicers at other forms of business without complying with state-by-state any time in 2009 or 2010. banking laws. By setting up or investing in Edge Act corpora- 3 One OCC-regulated servicer elected to complete the Indepentions, U.S. banks are able to gain portfolio exposure to financial dent Foreclosure Review, and did not, therefore, enter into the investing operations not available under standard banking laws. Payment Agreement.

Consumer and Community Affairs 77 foreclosure prevention assistance, such as loan modi- 2016. Once the audit of the final reconciliation of the fications and forgiveness of deficiency judgments. payment funds has been completed, any funds For the participating servicers, fulfillment of the remaining that were provided by servicers supervised agreement satisfied the foreclosure review require- by the Federal Reserve as part of the Payment Agreements of the enforcement actions issued by the regu- ment will be remitted to the U.S. Treasury. lators in 2011 and 2012. The Payment Agreement did not affect the servicers’ continuing obligations under Foreclosure Prevention Actions the enforcement actions to address deficiencies in The Payment Agreement also required servicers to their mortgage servicing and foreclosure policies and undertake well-structured loss-mitigation efforts procedures. focused on foreclosure prevention, with preference given to activities designed to keep borrowers in their A paying agent, Rust Consulting, Inc. (Rust), was homes through affordable, sustainable, and meaningretained to administer payments to borrowers on ful home preservation actions within two years from behalf of the participating servicers. Beginning in the date the agreement in principle was reached. The April 2013, a letter with an enclosed check was sent foreclosure prevention actions were expected to proto borrowers who had a foreclosure action initiated, vide significant and meaningful relief or assistance to pending, or completed in 2009 or 2010 with any of qualified borrowers and, as stated in the agreement, the participating servicers. Letters with checks were “should not disfavor a specific geography within or mailed to eligible borrowers through 2016. For among states, nor disfavor low and/or moderate checks that had not been cashed or were returned income borrowers, and not discriminate against any undeliverable, the agencies directed Rust to expand protected class.” its efforts to locate more-current address information for the unpaid borrowers. For nearly all borrowers, at All servicers were required to submit reports detailleast two, and in most cases, three attempts were ing the consumer-relief actions they had taken to satmade to reach each borrower. isfy these requirements. The foreclosure prevention assistance actions reported included loan modifica- More than $3.5 billion was distributed to eligible tions, short sales, deeds-in-lieu of foreclosure, debt borrowers through 3.9 million checks, representing cancellation, and lien extinguishment. In order to nearly 91 percent of the total value of the funds. receive credit toward the servicer’s total foreclosure Receiving a payment under the agreement did not prevention obligation, the actions submitted must be prevent borrowers from taking any action they may validated by the regulators. A third party completed wish to pursue related to their foreclosure. Servicers this validation to ensure that the foreclosure prevenwere not permitted to ask borrowers to sign a waiver tion assistance amounts met the requirements of the of any legal claims they may have against their seramendments to the enforcement actions. As stated vicer in connection with receiving payment.4 in the Independent Foreclosure Review Report (July 2014),5 the Federal Reserve expects to publish At the direction of the Federal Reserve, in data in 2018 regarding the final status of the cash August 2016, Rust redistributed any funds remaining payments and the foreclosure prevention assistance after all outstanding initial checks expired, to eligible focused primarily on servicers regulated by the borrowers of Federal Reserve-supervised servicers Federal Reserve. who had cashed or deposited their initial checks. This direction applied only to funds related to mortgage Servicer Efforts to Address Deficiencies servicers supervised by the Federal Reserve and was In addition to the foreclosure review requirements, consistent with the Federal Reserve’s intention to disthe enforcement actions required mortgage servicers tribute the maximum amount of funds to borrowers to submit acceptable written plans to address various potentially affected by deficient servicing and foreclomortgage loan servicing and foreclosure processing sure practices. The redistribution of approximately deficiencies. In the time since the enforcement actions $80 million in remaining funds resulted in nearly were issued, the banking organizations have been $59 million being cashed or deposited by borrowers implementing the action plans, including enhanced of servicers supervised by the Federal Reserve. The controls, and improving systems and processes. The borrower payment process concluded at the end of supervisory review of the mortgage servicers’ action 4 For more information, see www.federalreserve.gov/ consumerinfo/independent-foreclosure-review-payment- 5 For the report, see www.federalreserve.gov/publications/otheragreement.htm. reports/files/independent-foreclosure-review-2014.pdf.

78 104th Annual Report | 2017 plans has shown that the banking organizations that the institutions it supervises comply fully with under the enforcement actions have implemented sig- the prohibition on unfair or deceptive acts or pracnificant corrective actions with regard to their mort- tices as outlined in the FTC Act. An act or practice gage servicing and foreclosure processes, and for may be found to be unfair if it causes or is likely to most servicers, those corrective actions appear to be cause substantial injury to consumers that is not reasustainable. As a result, the majority of the enforce- sonably avoidable by consumers and not outweighed ment actions were terminated on January 12, 2018.6 by countervailing benefits to consumers or to compe- For the remaining servicers, Federal Reserve supervi- tition. A representation, omission, or practice is sory teams continue to monitor and evaluate the ser- deceptive if it is likely to mislead a consumer acting vicers’ progress on implementing the action plans to reasonably under the circumstances and is likely to address unsafe and unsound mortgage servicing and affect a consumer’s conduct or decision regarding a foreclosure practices as required by the enforcement 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 gram or has exercised, in good faith, any right under to the Department of Justice (DOJ). The DOJ the Consumer Credit Protection Act. The FHA pro- reviews the referral and determines whether further hibits discrimination in residential real-estate-related investigation is warranted. A DOJ investigation may transactions—including the making and purchasing result in a public civil enforcement action. Alternaof mortgage loans—on the basis of race, color, reli- tively, the DOJ may decide to return the matter to the gion, sex, handicap, familial status, or national Board for administrative enforcement. When a matorigin. ter is returned to the Board, staff ensure that the institution takes all appropriate corrective action. The Board supervises all state member banks for compliance with the FHA. The Board and the CFPB During 2017, the Federal Reserve referred to the both have supervisory authority for compliance with DOJ three matters that involved discrimination on the ECOA. For state member banks with assets of the basis of marital status, in violation of the ECOA. $10 billion or less, the Board has the authority to The banks improperly required spousal signatures on enforce the ECOA. For state member banks with commercial and consumer loans, in violation of assets over $10 billion, the CFPB has this authority. Regulation B. With respect to the Federal Trade Commission Act If there is a fair lending violation that does not con- (FTC Act), which prohibits unfair or deceptive acts stitute a pattern or practice under the ECOA or a or practices, the Board has supervisory and enforce- UDAP violation, the Federal Reserve takes action to ment authority over all state member banks, regard- ensure that the violation is remedied by the bank. less of asset size. The Board is committed to ensuring Most lenders readily agree to correct fair lending and UDAP violations, often taking corrective action as soon as they become aware of a problem. Thus, the 6 For the press release, see www.federalreserve.gov/newsevents/ pressreleases/enforcement20180112a.htm. Federal Reserve frequently uses informal supervisory

Consumer and Community Affairs 79 tools (such as memoranda of understanding between mined to have special flood hazards. Under the Fedbanks’ boards of directors and the Reserve Banks, or eral Reserve’s Regulation H, which implements the board resolutions) to ensure that violations are cor- act, state member banks are generally prohibited rected. When necessary, the Board can bring public from making, extending, increasing, or renewing any enforcement actions. such loan unless the building or mobile home, as well as any personal property securing the loan, are cov- The Board brought two public enforcement actions ered by flood insurance for the term of the loan. The for UDAP violations in 2017. In October, the Board law requires the Board and other federal financial issued a consent order against a bank for deceptive institution regulatory agencies to impose civil money practices related to balance transfer credit cards penalties when they find a pattern or practice of vioissued to consumers through third parties. The order lations of the regulation. required the bank to pay approximately $5 million in restitution to nearly 21,000 consumers and take other In 2017, the Federal Reserve issued seven formal concorrective actions.7 In November, the Board issued sent orders and assessed more than $1.6 million in another consent order against a bank for deceptive civil money penalties against state member banks to residential mortgage origination practices. The insti- address violations of the flood regulations. An action tution told certain borrowers that they were paying against one bank accounted for the majority of the an additional amount for discount points that would civil money penalties issued.10 These statutorily manlower the borrowers’ interest rate. However, many dated penalties were forwarded to the National Flood borrowers did not receive a reduced rate. The Mitigation Fund held by the Department of the enforcement action required the bank to pay approxi- Treasury for the benefit of the Federal Emergency mately $2.8 million into an account to provide resti- Management Agency. tution to these borrowers.8 Community Reinvestment Act Given the complexity of this area of supervision, the The CRA requires that the Federal Reserve and other Federal Reserve seeks to provide transparency on its federal banking regulatory agencies encourage finanperspectives and processes to the industry and the cial institutions to help meet the credit needs of the public. Fair Lending and UDAP Enforcement staff local communities in which they do business, consismeet regularly with consumer advocates, supervised tent with safe and sound operations. To carry out this institutions, and industry representatives to discuss mandate, the Federal Reserve fair lending and UDAP issues and receive feedback. • examines state member banks to assess their per- Through this outreach, the Board is able to address formance under the CRA; emerging fair lending and UDAP issues and promote sound fair lending and UDAP compliance. For • considers banks’ CRA performance in context with example, in 2017, the Board sponsored a free inter- other supervisory information when analyzing agency webinar on fair lending supervision through applications for mergers and acquisitions; and Compliance Outlook Live, which had approximately • disseminates information about community devel- 6,000 registrants, most of which were community banks.9 In addition, DCCA staff participate in opment techniques to bankers and the public through Community Development offices at the numerous meetings, conferences, and trainings spon- Reserve Banks.11 sored by consumer advocates, industry representatives, and interagency groups. The Federal Reserve assesses and rates the CRA Flood Insurance performance of state member banks in the course of The National Flood Insurance Act imposes certain examinations conducted by staff at the 12 Reserve requirements on loans secured by buildings or mobile Banks. During the 2017 reporting period, the Reserve homes located in, or to be located in, areas deter- Banks completed 193 CRA examinations of state member banks. Of those banks examined, 22 were 7 For more information, see www.federalreserve.gov/newsevents/ rated “Outstanding,” 165 were rated “Satisfactory,” pressreleases/enforcement20171026a.htm. 8 For more information, see www.federalreserve.gov/newsevents/ 10 For more information, see www.federalreserve.gov/newsevents/ pressreleases/enforcement20171128a.htm. pressreleases/enforcement20170525b.htm. 9 For more information and to obtain the webcast, see www 11 For more information on various community development .consumercomplianceoutlook.org/outlook-live/2017/ activities of the Federal Reserve System, see www interagency-fair-lending-hot-topics/. .fedcommunities.org.

80 104th Annual Report | 2017 6 were rated “Needs to Improve,” and none were As part of the analysis of managerial resources, the rated “Substantial Non-Compliance.” Federal Reserve reviews the institution’s record of compliance with consumer protection laws and regu- During the 2017 review period, the Board, the Fed- lations. The institution’s most recent consumer comeral Deposit Insurance Corporation (FDIC), and the pliance rating is central to this review because, like OCC published in the Federal Register a final rule the CRA performance evaluation, it represents the amending their respective CRA regulations primarily detailed findings of the institution’s supervisory to conform to changes made by the CFPB to Regula- agency. tion C, which implements HMDA. Since 1995, certain definitions in the CRA regulations have con- Less-than-satisfactory CRA or consumer compliance formed to the scope of loans reported under Regula- ratings or other significant consumer compliance tion C, and the three agencies believe that continuing issues can pose an impediment to the processing and to do so results in a less burdensome CRA perfor- approval of the application. Federal Reserve staff mance evaluation process. In addition to these con- gather additional information about CRA and forming changes, the final rule contained technical consumer compliance performance in many circumcorrections and removed obsolete references to the stances, such as when the financial institu- Neighborhood Stabilization Program.12 The three tion(s) involved in an application has less-thanagencies are also working on a long-term project to satisfactory CRA or compliance ratings or recently evaluate the interagency examination procedures to identified consumer compliance issues, or when the determine where meaningful updates and guidance Federal Reserve receives comments from interested can be incorporated. parties that raise CRA or consumer compliance issues. To further enhance transparency about this Mergers and Acquisitions process, the Board issued guidance to the public in The Federal Reserve analyzes expansionary applica- 2014 describing the Federal Reserve’s approach to tions by banks or BHCs, taking into account the applications and notices, highlighting those that may likely effects of the acquisition on competition, the not satisfy statutory requirements for approval of a convenience and needs of the communities to be proposal or that otherwise raise supervisory or reguserved, the financial and managerial resources and latory concerns.13 future prospects of the companies and banks involved, and the effectiveness of the company’s poli- Because these applications are of interest to the pubcies to combat money laundering. As part of this lic, they often generate comments that raise various process, DCCA evaluates whether the institutions are issues for Board staff to consider in their analyses of currently meeting the convenience and needs of their the supervisory and lending records of the applicommunities and the effectiveness of existing mana- cants. With respect to consumer compliance and gerial resources, as well as the institutions’ ability to community reinvestment, one of the more common meet the convenience and needs of their communities allegations is that either or both the target and the and the adequacy of their managerial resources after acquirer fail to make credit available to certain the proposed transaction. minority groups and to LMI individuals and communities. Commenters also often express concerns about The depository institution’s CRA record is a critical branch closures or the banks’ record of lending to component of this analysis. The CRA requires the small businesses in LMI geographies. Federal Reserve to consider a bank’s record of helping to meet the credit needs of its local communities In evaluating the applications and the merits of pubin evaluating applications for mergers, acquisitions, lic comments, the Board considers information proand branches. An institution’s most recent CRA per- vided by applicants and analyzes supervisory inforformance evaluation is a particularly important, and mation, including examination reports with evaluaoften controlling, consideration in the applications tions of compliance with fair lending and other process because it represents a detailed on-site evalu- consumer protection laws and regulations, and conation of the institution’s performance under the fers with other regulators, as appropriate, for their CRA by its federal supervisor. supervisory views. If warranted, the Federal Reserve will also conduct pre-membership exams for a trans- 12 See www.federalreserve.gov/newsevents/pressreleases/ 13 For more information, see www.federalreserve.gov/ bcreg20171120a.htm. supervisionreg/srletters/sr1402.htm.

Consumer and Community Affairs 81 action in which an insured depository institution will conflicting supervisory directives amongst the prubecome a state member bank or in which the surviv- dential regulators. The regulators work cooperatively ing entity of a merger would be a state member to share exam schedules for covered institutions and bank.14 covered activities to plan simultaneous exams, provide final drafts of examination reports for comment, The Board provides information on its actions asso- and share supervisory information. ciated with these merger and acquisition transactions, issuing press releases and Board Orders for each.15 Coordination with Other Federal Banking The Federal Reserve also publishes semiannual Agencies reports that provide pertinent information on appli- The Board regularly coordinates with other federal cations and notices filed with the Federal Reserve.16 banking agencies, including through the development The reports include statistics on the number of pro- of interagency guidance, in order to clearly commuposals that had been approved, denied, and with- nicate supervisory expectations. The Federal Reserve drawn as well as general information about the length also works with the other member agencies of the of time taken to process proposals. Additionally, the Federal Financial Institutions Examination Council reports discuss common reasons that proposals have (FFIEC) to develop consistent examination prinbeen withdrawn from consideration. ciples, standards, procedures, and report formats.18 In 2017, the banking agencies continued to work During 2017, the Board considered over 100 applica- together on various initiatives. tions, with topics ranging from change in control notices, to branching requests, to mergers and acqui- Updating Examination Procedures sitions. DCCA staff analyzed 23 notices and applica- In August, the FFIEC developed HMDA Examiner tions for transactions involving bank mergers and Transaction Testing Guidelines that include sambranching that involved adverse public comments on pling, verification, and resubmission procedures for CRA issues or consumer compliance issues, such as use in connection with HMDA data collected beginfair lending, which the Board considered and ning on January 1, 2018, pursuant to the CFPB’s approved.17 amendments to Regulation C. The guidelines describe how to validate the accuracy of such Coordination with the Consumer Financial HMDA data and the circumstances in which examin- Protection Bureau ers may direct institutions to correct and resubmit data. During 2017, staff continued to coordinate on supervisory matters with the CFPB in accordance with the In October, the Board, the FDIC, and the OCC Interagency Memorandum of Understanding on developed a revised list of HMDA key data fields for Supervision Coordination with the CFPB. The agree- examiners to use in connection with validating the ment is intended to establish arrangements for coor- accuracy of HMDA data collected beginning on dination and cooperation among the CFPB and the January 1, 2018, pursuant to the CFPB’s amend- OCC, the FDIC, the National Credit Union Associa- ments to Regulation C. These HMDA key fields are tion, and the Board of Governors. The agreement those that the Federal Reserve, the FDIC, and the strives to minimize unnecessary regulatory burden OCC collectively determined to be most critical to and to avoid unnecessary duplication of effort and the integrity of analyses of overall HMDA data. Coordinating Transfer of HMDA Data Operations Also in 2017, the FFIEC continued to implement its plan for the transfer of HMDA data operations to 14 In October 2015, the Federal Reserve issued guidance providing further explanation on its criteria for waiving or conducting the CFPB in January 2018. The Board collected and such pre-merger or pre-membership examinations. For more processed submissions of HMDA data through information, see www.federalreserve.gov/supervisionreg/ December 2017 and will administer the legacy srletters/SR1511.htm. 15 To access the Board’s Orders on Banking Applications, see www HMDA data operations system, including collecting .federalreserve.gov/newsevents/pressreleases.htm. and processing any resubmissions of HMDA data 16 For these reports, see www.federalreserve.gov/supervisionreg/ that were originally submitted prior to January 2018. semiannual-reports-banking-applications-activity.htm. 17 Another application on which adverse public comments were received was withdrawn by the applicant. Related notices and applications for which a single Board Order was issued were counted as a single notice or application in this total. 18 For more information, see www.ffiec.gov.

82 104th Annual Report | 2017 Uniform Interagency Consumer Compliance subject to their supervision and issued a statement Ratings System encouraging institutions in the affected areas to meet In November 2016, the FFIEC announced the issu- the financial services needs of their communities. The ance of an updated Uniform Interagency Consumer agencies’ statements included guidance on the follow- Compliance Rating System (CC Rating System).19 ing areas. The CC Rating System is a supervisory policy for • Lending. Bankers should work constructively with evaluating financial institutions’ adherence to conborrowers in communities affected by Hurricanes sumer compliance requirements. The CC Rating Harvey and Irma. Understanding the transitory System provides a general framework for assessing nature of the circumstances, the agencies indicated risks during the supervisory process using certain they would consider the unusual circumstances compliance factors and assigning an overall conthey face and recognized that efforts to work with sumer compliance rating to each federally regulated borrowers in communities under stress can be confinancial institution. sistent with safe-and-sound banking practices as well as in the public interest. Federal Reserve examiners began applying the updated rating system to consumer compliance • Community Reinvestment Act. Financial instituexaminations of state member banks that started on tions may receive CRA consideration for commuor after March 31, 2017. To ensure that examiners nity development loans, investments, or services were prepared to consistently apply the new rating that revitalize or stabilize federally designated system, consumer compliance examiners attended a disaster areas in their assessment areas or in the mandatory web-based training session, followed by states or regions that include their assessment areas. in-person case study training. Additionally, the Fed- • Investments. Bankers should monitor municipal eral Reserve published an article entitled “Implesecurities and loans affected by the hurricanes, as menting the New Uniform Interagency Consumer the agencies realize local government projects may Compliance Rating System” in the first 2017 issue of be negatively affected. its Consumer Compliance Outlook newsletter.20 To assist financial institution management teams in Examiner Training understanding the new rating system, this article Ensuring that financial institutions comply with laws highlighted the foundational principles of the CC that protect consumers and encourage community Rating System, discussed the framework on which reinvestment is a fundamental aspect of the bank the CC Rating System is based, and explained how examination and supervision process. As the comexaminers will apply the CC Rating System in evaluplexity of both consumer financial transactions and ating a financial institution’s consumer compliance the regulatory landscape has increased, timely and management system. responsive training for consumer compliance examin- Supporting Financial Institutions and Borrowers ers is vitally important. The examiner staff develop- Affected by Hurricanes Harvey and Irma ment function is responsible for the ongoing development of the professional consumer compliance super- The Federal Reserve, along with the OCC, FDIC, visory staff, from an initial introduction to the and state bank regulators recognized the serious Federal Reserve System through the development of impact of Hurricanes Harvey and Irma on the cusproficiency in consumer compliance topics sufficient tomers and operations of many financial institutions on August 26 and September 6, 2017, respectively.21 to earn an examiner’s commission. DCCA’s role is to ensure that examiners have the skills necessary to meet The agencies issued the statements on supervisory their supervisory responsibilities now and in the future. practices regarding institutions and borrowers affected by the hurricanes. The agencies offered to Consumer Compliance Examiner Training provide regulatory assistance to affected institutions Curriculum The consumer compliance examiner training curricu- 19 For more information, see www.federalreserve.gov/bankinforeg/ lum has historically consisted of five courses focused caletters/caltr1608.htm. 20 See https://consumercomplianceoutlook.org/2017/first-issue/ on consumer protection laws, regulations, and examimplementing-the-new-uniform-interagency-consumer- ining concepts. In 2017, these courses were offered in compliance-rating-system/. 10 sessions, and training was delivered to a total of 21 For more information, see www.federalreserve.gov/newsevents/ 94 Federal Reserve consumer compliance examiners pressreleases/bcreg20170826a.htm and www.federalreserve.gov/ newsevents/pressreleases/bcreg20170906a.htm. and staff members and 11 state banking agency

Consumer and Community Affairs 83 examiners. These courses have been conducted prin- Ongoing Training Opportunities cipally by traditional classroom delivery method. In addition to providing core examiner training, the Board and Reserve Bank staff have played an active examiner staff development function emphasizes the role in regularly reviewing the core curriculum, importance of continuing, lifelong learning. Opporupdating subject matter, and adding new elements as tunities for continuing learning include special projappropriate. ects and assignments, self-study programs, rotational assignments, the opportunity to instruct at System While the examiner training program has consistently schools, mentoring programs, and a consumer comexhibited strengths, the Federal Reserve began efforts pliance examiner forum held every 18 months, most in 2015 to institute elements of curriculum modern- recently in September 2017, where senior consumer ization. Other business lines within Supervision compliance examiners receive information on emerg- Learning had completed, or were in the process of, ing compliance issues and are able to share best pracconverting their curriculum into self-directed, online, tices from across the System. To accommodate those and blended delivery methods. These modernized individuals unable to attend the forum in-person, a features offered learners and Reserve Banks an abil- live-stream option is also offered. ity to customize and to meet training demands more individually and cost effectively. This flexibility sig- In 2017, the System continued to offer Rapid nificantly enhances the Consumer Compliance train- Response sessions. Introduced in 2008, Rapid ing program. Response sessions offer examiners webinars on emerging issues or urgent training needs that result Following the establishment of a dedicated modernfrom the implementation of new laws, regulations, or ization program in early 2016, the project has continsupervisory guidance as well as case studies. Six conued throughout 2017 and is slated for completion in sumer compliance Rapid Response sessions were late 2020. Throughout 2016 and 2017, DCCA contindesigned, developed, and presented to System staff ued its partnership with Reserve Bank personnel, during 2017. In addition, examiner training is also both subject-matter experts and professional instrucdeveloped and presented through the FFIEC Examtional designers, who together are assessing and iner Exchange program, a partnership with the Fedexcerpting the critical elements from the existing cureral Reserve Bank of St. Louis to provide FFIECriculum and adapting the material for incorporation sponsored interagency webinars and calls through its into the modernized format. Center for Learning Innovation. During calendar-year 2017, the development team Outreach and Training to Agency and focused its efforts on the components of the first Industry Stakeholders regulation-based course in the traditional curriculum, During 2017, the Federal Reserve System collabo- Introduction to Consumer Compliance (CA I). The rated with its supervisory agency partners to offer an team completed its analysis of the examination tasks Outlook Live session entitled “2017 Interagency Fair to be captured, sub-dividing the first week of the Lending Topics.”22 These specialty sessions are two-week course into three broad areas: Examination focused on delivering timely, relevant compliance Overview, Deposits, and the Basics of Operations. information to the banking industry as well as to For the section Examination Overview, the team experienced examiners and other regulatory developed design documents; drafted narrative storypersonnel. boards; beta-tested; and during the fourth quarter of 2017, launched the section as an independent “learn- Additionally, in 2017 two volumes of Consumer ing unit” available to potential learners through the Compliance Outlook were issued. Consumer Compli- Banking Supervision Learning Center. The two ance Outlook discusses consumer compliance issues remaining components are slated to be launched in of interest to compliance professionals. This publicaearly 2018. The team will next turn its attention to tion, managed by the Federal Reserve Bank of Philathe broad regulatory area of lending and creditdelphia, is distributed to state member banks and related regulations that, together, will replace the remaining portion of the CA I course and the Real 22 For more information, see www.consumercomplianceoutlook Estate Lending Examination Techniques course. .org/.

84 104th Annual Report | 2017 bank and savings and loan holding companies super- Table 1. Complaints against state member banks and vised by the Federal Reserve. selected nonbank subsidiaries of bank holding companies about regulated practices, by regulation/act, 2017 Responding to Consumer Complaints and Inquiries Regulation/act Number The Federal Reserve investigates complaints against R egulation AA (Unfair or Deceptive Acts or Practices) 40 state member banks and selected nonbank subsidiar- Regulation B (Equal Credit Opportunity) 23 ies of BHCs (Federal Reserve regulated entities), and Regulation BB (Community Reinvestment) 2 forwards complaints against other creditors and busi- Regulation CC (Expedited Funds Availability) 78 Regulation D (Reserve Requirements) 1 nesses to the appropriate enforcement agency. Each Regulation DD (Truth in Savings) 75 Reserve Bank investigates complaints against Federal Regulation E (Electronic Funds Transfers) 141 Reserve regulated entities in its District. The Federal Regulation H (National Flood Insurance Act/Insurance Sales) 7 Reserve also responds to consumer inquiries on a Regulation M (Consumer Leasing Provisions of TILA) 1 broad range of banking topics, including consumer Regulation P (Privacy of Consumer Financial Information) 30 Regulation V (Fair and Accurate Credit Transactions) 114 protection questions. Regulation Z (Truth in Lending) 152 Garnishment Rule 3 The Federal Reserve Consumer Help (FRCH) cen- Fair Credit Reporting Act 472 tralizes the processing of consumer complaints and Fair Debt Collection Practices Act 47 inquiries that come to the Federal Reserve. In 2017, Fair Housing Act 21 Real Estate Settlement Procedures Act 20 FRCH processed 30,180 cases. Of these cases, 20,153 Servicemembers Civil Relief Act (SCRA) 2 were inquiries and the remainder (10,027) were com- Total 1,229 plaints, with most cases received directly from consumers. Approximately 8 percent of cases were referred to the Federal Reserve from other federal The most common credit card complaints related to and state agencies. inaccurate credit reporting (57 percent), forgery/ fraud (9 percent), payment errors/delays (6 percent), While consumers can contact FRCH by a variety of and billing error resolution (5 percent). The most different channels, most FRCH consumer contacts common checking account complaints related to occurred by telephone (63 percent). Nevertheless, funds availability not as expected (26 percent), 33 percent (10,104) of complaint and inquiry submisdeposit error resolution (17 percent), insufficient sions were made electronically (via email, online subfunds/overdraft charges and procedures (11 percent), missions, and fax), and the online form page received and disputed withdrawal of funds (9 percent). The 17,019 visits during the year. most common real estate complaints by problem code related to escrow problems (18 percent), inaccu- Consumer Complaints rate credit reporting (16 percent), debt collection/ Complaints against Federal Reserve regulated entities foreclosure concerns (12 percent), and payment totaled 2,624 in 2017. Approximately 2 percent errors/delays (12 percent). (49) of these complaints were closed without investigation, pending the receipt of additional information Twenty-three regulated practices complaints alleging from consumers. One percent of the total complaints credit discrimination on the basis of prohibited borwere still under investigation in December 2017. rower traits or rights were received in 2017. Thirteen Fifty-two percent (1,376) involved unregulated pracdiscrimination complaints were related to the race, tices, and 47 percent (1,229) involved regulated praccolor, national origin, or ethnicity of the applicant or tices. (Table 1 shows the breakdown of complaints borrower. Eight discrimination complaints were about regulated practices by regulation or act; table 2 related to either the age, handicap, familial status, or shows complaints by product type.) religion of the applicant or borrower. Of the closed complaints alleging credit discrimination based on a Complaints about Regulated Practices prohibited basis in 2017, there were no violations The majority of regulated practices complaints conrelated to illegal credit discrimination. cerned credit card accounts (53.2 percent), checking accounts (19.8 percent), and real estate (6 percent).23 23 Real estate loans include adjustable-rate mortgages, residential improvement loans, home purchase loans, home refinance/ construction loans, open-end home equity lines of credit, home closed-end loans, and reverse mortgages.

Consumer and Community Affairs 85 Table 2. Complaints against state member banks and selected nonbank subsidiaries of bank holding companies about regulated practices, by product type, 2017 All complaints C omplaints involving violations Subject of complaint/product type Number Percent Number Percent Total 1,229 100 30 2.4 Discrimination alleged Real estate loans 18 1.4 2 0.2 Credit cards 1 0.1 0 0.0 Other loans 7 0.6 0 0.0 Nondiscrimination complaints Checking accounts 243 19.8 1 2 0 .9 Real estate loans 74 6.0 5 0.4 Credit cards 654 53.2 3 0.2 Other 232 18.9 8 0.7 In 77 percent of investigated complaints against Fed- investigation of these complaints revealed no eral Reserve regulated entities, evidence revealed that instances of illegal credit discrimination. institutions correctly handled the situation. Of the remaining 23 percent of investigated complaints, Consumer Inquiries 4 percent were identified errors that were corrected The Federal Reserve received 20,153 consumer inquiby the bank, 2 percent were deemed violations of law, ries in 2017 covering a wide range of topics. Consumand the remainder included matters involving litiga- ers were typically directed to other resources, includtion or factual disputes, withdrawn complaints, inter- ing other federal agencies or written materials, to nally referred complaints, or information was pro- address their inquiries. vided to the consumer. Complaints about Unregulated Practices Consumer Laws and Regulations The Board continued to monitor complaints about banking practices not subject to existing regulations. In 2017, the Board received 1,376 complaints against Throughout 2017, DCCA continued to administer Federal Reserve regulated entities that involved these the Board’s regulatory responsibilities with respect to unregulated practices. The majority of the com- certain entities and specific statutory provisions of plaints were related to electronic transactions/prepaid the consumer financial services and fair lending laws. products (33 percent), checking account activity This included drafting regulations and issuing com- (21 percent), credit cards (17 percent), and real estate pliance guidance for the industry and the Reserve loans (3 percent). Banks and fulfilling the division’s role in consulting with the CFPB on consumer financial services and Complaint Referrals fair lending regulations for which it has rulemaking In 2017, the Federal Reserve forwarded 7,290 com- responsibility. plaints to other regulatory agencies and government offices for investigation. To minimize the time Conforming CRA Regulations to required to re-route complaints to these agencies, HMDA Regulation referrals were transmitted electronically. In December, the federal bank regulatory agencies The Federal Reserve forwarded 19 complaints to the amended their respective CRA regulations primarily Department of Housing and Urban Development to conform to changes made by the CFPB to Regula- (HUD) that alleged violations of the Fair Housing tion C, which implements the Home Mortgage Dis- Act24 and were closed in 2017. The Federal Reserve’s closure Act. In addition, the final rule contains technical correc- 24 A memorandum of understanding between HUD and the fedtions and removed obsolete references to the Neigheral bank regulatory agencies requires that complaints alleging a violation of the Fair Housing Act be forwarded to HUD. borhood Stabilization Program.

86 104th Annual Report | 2017 The agencies’ CRA regulations specify the type of Annual Indexing of Exempt Consumer lending and other activities that examiners evaluate Credit and Lease Transactions to assess a financial institution’s CRA performance. The regulations provide several categories of loans In November 2017, the Board and the CFPB that may be evaluated to determine an institution’s announced the revised dollar thresholds in Regulaperformance under the retail lending test, one of tion Z (Truth in Lending) and Regulation M (Conwhich is home mortgage loans. sumer Leasing) that will apply in 2018 for determining exempt consumer credit and lease transactions. Since 1995, the Board, the FDIC, and the OCC have These thresholds are set pursuant to statutory conformed certain definitions in their respective changes enacted by the Dodd-Frank Wall Street CRA regulations to the scope of loans reported Reform and Consumer Protection Act that require under the HMDA rules. The agencies believe that adjusting these thresholds annually based on the continuing to do so produces a less burdensome annual percentage increase in the Consumer Price CRA performance evaluation process. Accordingly, Index for Urban Wage Earners and Clerical Workers based on changes the CFPB recently made to the (CPI-W). Transactions at or below the thresholds are HMDA rules, the agencies amended their CRA regu- subject to the protections of the regulations.26 lations to revise the definitions of “home mortgage loan” and “consumer loan” as well as the public file Threshold for Small Loan Exemption from content requirements.25 These revisions maintain Appraisal Requirements for Higher-Priced consistency between the agencies’ CRA regulations Mortgage Loans and the CFPB’s amendments that become effective on January 1, 2018. In November, the Board, the CFPB, and the OCC announced that the threshold for exempting loans Previously, the CRA regulations defined a “home from special appraisal requirements for higher-priced mortgage loan” to mean a “home improvement mortgage loans would increase for 2018.27 The loan,” “home purchase loan,” or a “refinancing” as Dodd-Frank Act amended the Truth in Lending Act those terms are currently defined in the HMDA regu- to add special appraisal requirements for higherlation. The CFPB’s revisions to Regulation C revise priced mortgage loans, including a requirement that the scope of loans reportable under HMDA. In some creditors obtain a written appraisal based on a physicases, the revised scope of loans reported under cal visit to the home’s interior before making a Regulation C is broader, and in other cases more lim- higher-priced mortgage loan. The rules implementing ited. For example, the revised HMDA rules now these requirements contain an exemption for loans of require covered financial institutions to report appli- $25,000 or less and also provide that the exemption cations for, and originations and purchases of, an threshold will be adjusted annually to reflect open-end line of credit secured by a dwelling. How- increases in the CPI-W. ever, home improvement loans that are not secured by a dwelling, which were previously required to be Annual Adjustment to CRA Asset-Size reported under HMDA, are no longer reportable Threshold for Small and Intermediate transactions under the revised Regulation C. Small Institutions To conform the CRA definition of “home mortgage In addition, in December the Board and other federal loan” to the revisions in Regulation C that became bank regulatory agencies announced the annual effective on January 1, 2018, the agencies revised the adjustment to the asset-size thresholds used to define current definition of “home mortgage loan” in their small bank, small savings association, intermediate CRA regulations to mean a “closed-end mortgage small bank, and intermediate small savings associaloan” or an “open-end line of credit,” as those terms tion under the CRA regulations.28 are defined under the new HMDA regulation. As a result of the revisions to the “home mortgage loan” definition, the manner in which some loan transactions are considered under CRA will be affected. 26 For more information, see www.federalreserve.gov/newsevents/ pressreleases/bcreg20171108a.htm. 27 For more information, see www.federalreserve.gov/newsevents/ pressreleases/bcreg20171120b.htm. 25 For more information, see www.federalreserve.gov/newsevents/ 28 For more information , see www.federalreserve.gov/newsevents/ pressreleases/bcreg20171120a.htm. pressreleases/bcreg20171221a.htm.

Consumer and Community Affairs 87 Financial institutions are evaluated under different the CFPB, with the exception of rules applicable to CRA examination procedures based upon their asset- certain motor vehicle dealers. The proposed amendsize classification. Those meeting the small and inter- ments to the Board’s Regulation M would clarify the mediate small institution asset-size thresholds are not scope of the Board’s rule, which applies only to lessubject to the reporting requirements applicable to sors that are excluded under the Dodd-Frank Act large banks and savings associations unless they from coverage by the CFPB’s leasing regulation. choose to be evaluated as a large institution. Consumer Research and Analysis of Annual adjustments to these asset-size thresholds are based on the change in the average of the CPI-W, not Emerging Issues and Policy seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million. Throughout 2017, DCCA analyzed emerging issues in consumer financial services policies and practices As a result of the 2.11 percent increase in the CPI-W in order to understand their implications for the for the period ending in November 2017, the definimarket-risk surveillance and supervisory policies that tions of small and intermediate small institutions for are core to the Federal Reserve’s functions as well as CRA examinations were changed as follows: to gain insight into consumer financial • “Small bank” or “small savings association” means decisionmaking. an institution that, as of December 31 of either of the prior two calendar years, had assets of less than Researching Issues Affecting Consumers $1.252 billion. and Communities • “Intermediate small bank” or “intermediate small In 2017, DCCA explored various issues related to savings association” means a small institution with consumers and communities by convening experts, assets of at least $313 million as of December 31 of conducting original research, and fielding surveys. both of the prior two calendar years and less than The information gleaned from these undertakings $1.252 billion as of December 31 of either of the provided insights into the factors affecting consumers prior two calendar years. and households. These asset-size threshold adjustments took effect Household Economics and Decisionmaking January 1, 2018. In order to better understand consumer decisionmaking in the rapidly evolving financial services sec- Updates to Consumer Compliance tor, DCCA periodically conducts internet panel sur- Regulations veys to gather data on consumers’ experiences and perspectives on various issues of interest. In December, the Board announced the repeal of one regulation and the revision of a second to reflect the transfer of certain consumer protection rulemaking Results of DCCA’s Survey of Household Economics authority to the CFPB.29 and Decisionmaking (SHED) were published in the Report on the Economic Well-Being of U.S. House- With the CFPB issuing final rules to implement the holds in 2016, released in May 2017.30 DCCA Home Mortgage Disclosure Act, the Board pub- launched the survey to better understand consumer lished a final rule to repeal its Regulation C. In addi- decisionmaking in the wake of the Great Recession, tion, the Board published a proposal to revise its with the aim to capture a snapshot of the financial Regulation M, which implements the Consumer and economic well-being of U.S. households. In Leasing Act (CLA), to reflect changes in the coverage doing so, the SHED collects information on houseof the Board’s rule under the Dodd-Frank Act. holds that is not readily available from other sources or is not available in combination with other vari- Prior to enactment of the Dodd-Frank Act, the CLA ables of interest. It also oversamples LMI households was implemented solely by the Board’s Regula- in order to obtain additional precision regarding tion M, which applied to all types of lessors. Rule- findings among these populations. making authority for the CLA currently rests with 29 For more information, see www.federalreserve.gov/newsevents/ 30 For more information, see www.federalreserve.gov/ pressreleases/bcreg20171218a.htm. consumerscommunities/shed.htm.

88 104th Annual Report | 2017 The survey also asked respondents about specific staff as well as external researchers. The presentaaspects of their financial lives, including the follow- tions and discussion examined disparities in uneming areas: ployment, earnings, and other labor market outcomes by race/ethnicity, gender, culture, and geogra- • employment and informal work phy and provided insights on factors contributing to • income and savings these gaps. • economic preparedness Analysis of Emerging Issues • banking and credit The Policy Analysis function of DCCA provides key • housing and living arrangements insights, information, and analysis on emerging • education and human capital financial services issues that affect the well-being of consumers and communities. To this end, staff ana- • education debt and student loans lyze and anticipate trends, form working groups, and • retirement organize expert roundtables to identify emerging consumer risks and inform supervision, research, and Among its key findings, the survey found that overall policy. in 2016, individuals and their families continued to express modest improvements in their overall well- In 2017, staff developed analyses on a broad range of being relative to that seen in recent years. However, issues in financial services markets that potentially those with more education appear to have driven pose risks to consumers. most of the observed gains in well-being relative to • Auto lending. Staff have continued explorations of the previous year. Seventy percent of adults reported developments in the auto finance market and their that they were either “living comfortably” or “doing impact on consumers, especially subprime auto okay,” compared to 69 percent in 2015 and 62 perborrowers. Topics of particular focus in 2017 cent in 2013. However, approximately 73 million included trends in loan terms, such as loan-to-value adults in 2016 were either “finding it difficult to get ratios and loan maturities, and their relationship to by” or are “just getting by financially.” Income volaloan performance among various categories of tility remains a concern for individuals, especially borrowers. those with less education and among racial and ethnic minorities. Forty-four percent of adults said they • Gender wealth gap. DCCA’s ongoing efforts to betcould not cover an emergency expense costing $400, ter understand household financial stresses and or would cover it by selling something or borrowing well-being was augmented in 2017 through the money. This metric has continued to improve from exploration of gender wealth disparities with the 50 percent who were ill-prepared for this magni- researchers and practitioners in the field. This tude of expense when first asked in 2013. work, which will continue in the coming year, aims to shed light on economic factors contributing to Understanding Disparities in the Labor Market gaps in income and wealth levels by gender. Labor market outcomes vary widely across demo- • Retail banking. Policy Analysis team members have graphic groups, including those defined by race/ been collaborating with colleagues throughout the ethnicity, gender, and geography. Accordingly, ecodivision to monitor trends in retail banking, such nomic analyses that focus exclusively on aggregate as rising numbers of branch closures and increasoutcomes may overlook important disparities in how ing adoption of online and mobile technologies by various groups experience the labor market. In Sepconsumers for their banking needs. As part of an tember 2017, the Board hosted a conference that ongoing effort, over the past year, the team has brought together diverse networks of researchers and organized listening sessions with consumer groups policy analysts to examine the causes of these disto better understand how branch closures are parities, to explore the implications for aggregate ecoaffecting consumers and communities. nomic performance, and to brainstorm new directions for research and policy.31 The papers presented • Small business lending. Smaller firms’ access to included research from both Federal Reserve System affordable credit is of particular interest to DCCA because the finances of these businesses and their 31 For more information, see www.federalreserve.gov/conferences/ disparities-in-the-labor-market-about-2017.htm. For remarks www.federalreserve.gov/newsevents/speech/brainard20170927a provided by Federal Reserve Board Governor Lael Brainard, see .htm.

Consumer and Community Affairs 89 owners frequently are intertwined. They often lack holds and communities—by informing research, both the financing options available to larger firms policy, and action. As a decentralized function, and in-house financial expertise to guide their the Community Affairs Officers at each of the credit decisions. DCCA has been exploring how 12 Reserve Banks design activities to respond to the changes in the small business credit landscape specific needs of the communities they serve. Board affect these smaller firms. Issues analyzed by the staff provide oversight for alignment with Board team range from trends in commercial credit pro- objectives and coordinate System priorities. The vided by large and small banks, to new online System’s Community Development functions roucredit products offered by nonbanks, and to finan- tinely collaborate to leverage expertise and resources cial challenges facing certain segments of potential to support research and best practices that advance borrowers, including minority- and women-owned community economic development—most notably, small businesses. The team also conducts extensive the biennial research conference. For more informaoutreach with banks, online lenders, and borrower tion, see box 1. advocates to stay abreast of developments and emerging issues in both traditional and online small Exploring Opportunities for Economic business small-dollar credit. Growth through Regional Food Systems Investments • Student lending. In 2017, the team collaborated with the Trellis Company (formerly Texas Student Building on its efforts to better understand the eco- Loan Guarantee Corporation) and the National nomic and financial conditions in rural communities, Association of Student Financial Aid Administra- Community Development staff across the Federal tors to conduct an in-depth survey of and report Reserve explored the connection between the about financial aid administrators’ experiences strength of regional food systems and a community’s with student loan counseling and the challenges economic, social, and physical vitality. In partnership they encounter.32 This work expanded on findings with the U.S. Department of Agriculture, the Federal from a 2016 report based on focus groups con- Reserve published Harvesting Opportunity: The ducted with financial aid counselors.33 Key find- Power of Regional Food System Investments to Transings from both reports include that counselors genform Communities. The book highlights ways in erally perceive low levels of financial literacy which regionally focused food systems promote ecoamong the majority of their students; that aid nomic opportunity and security as well as how capiadministrators overwhelmingly rely on the U.S. tal providers and other partners are working together Department of Education’s online counseling tool to invest in the sector. Additionally, the Federal to provide mandatory entrance and exit loan coun- Reserve collaborated with stakeholders from across seling; and that better-resourced financial aid the country to further conversations in their commuoffices are more likely to proactively reach out to nities about how the findings in Harvesting Opportutargeted groups of students that they believe are at nity can advance local efforts to promote regional highest risk of struggling to repay their student food systems. loans. Community Development staff will continue to Community Development convene national thought leaders to frame future research and policy considerations that would facilitate the flow of capital and economic investment in The Federal Reserve System’s Community Developrural communities in 2018. ment function promotes economic growth and financial stability—particularly for underserved house- Supporting Rising Community Leaders 32 Jeff Webster, Chris Fernandez, Carla Fletcher, and Kasey Klepfer, Engaging Student Borrowers: Results of a Survey of A key purpose of the Community Development Financial Aid Professionals (Round Rock, TX: Trellis Company, function at the Federal Reserve is to ensure that the October 2017), www.trelliscompany.org/wp-content/uploads/ voices and concerns of consumers and communities 2017/11/Engaging-Student-Borrowers.pdf. are represented at the U.S. central bank. An impor- 33 Board of Governors of the Federal Reserve System, Student Loan Counseling Challenges and Opportunities: Findings from tant part of achieving the function’s mission is ensur- Focus Groups with Financial Aid Counselors (Washington: Board ing that the Federal Reserve hears the perspectives of of Governors, November 2016), www.federalreserve.gov/ representatives from both new and well-established consumerscommunities/files/student-loan-counselingchallenges-and-opportunities-2016.pdf. organizations. To that end, the Community Develop-

90 104th Annual Report | 2017 Box 1. Supporting Strong Foundations for Kids and Communities Everytwoyears,theBoardandthe12Federal Theeventexploredtheinterplaybetweenthedevel- ReserveBankscollaboratetohosttheFederal opmentofkidsandtheircommunities,withan ReserveSystemCommunityDevelopmentResearch understandingthatfactorssuchassafe,affordable Conference.Thegoalofthismultidisciplinaryevent housing;communityfacilities;andjobopportunities istoadvanceresearchthatexploresimportant profoundlyaffectkeyeconomicandsocialaspects socioeconomicissues.Theseconferencesconvene ofkids’livesandtheirfutureeconomicsuccess.In researchers,policymakers,andpractitionersacross dialoguewithpolicymakersandcommunitypractitiosectorstoconsiderimportantissuesthatlow-to ners,researchersfromaroundthecountrypremoderate-incomepeopleandcommunitiesface, sentedtheirworkonearlychildhooddevelopment exploringthelatestresearchtoinformeffectivestrat- andcommunityconditionsthatinfluencesocialand egiestoadvanceopportunityforeconomicallyvul- economicoutcomeslaterinlife,includingeducanerablehouseholdsandareas. tionalandworkforceoutcomes.Discussionsdelved intotherelationshipbetweenthedevelopmentof In2017,theSystemhostedthe10thconferenceof childrenandcommunityconditionsandtheeffectof thisbiennialevent,“StrongFoundations:TheEcoinvestmentsinearlychildhoodeducationandother nomicFuturesofKidsandCommunities,”whichwas keycommunitydevelopmentareasontheeconomy. basedonevidencethatshowskidswithstrongcog- Theresearchsharedexpandedthebaseofstudies nitiveandsocialfoundationsarebetter-equippedto intendingtoinformquestionsaboutkeydriversto succeedinlifeandcontributetosocietyatlarge.1 success,differencesacrosssubpopulations,scal- Recognizingthatnotallchildrenhavethesame ableinterventionstrategies,andpolicy opportunitiestogrowanddevelop,theconference considerations. organizerssoughttocreateaforumtosparkadialogueamongresearchers,policymakers,andcom- FeaturedspeakersincludedFederalReserveChair munitypractitionersonhowtosetyoungpeopleon JanetYellen,3FederalReserveBankofMinneapolis astrongcourse.2 PresidentNeelKashkari,FederalReserveBankof ChicagoPresidentCharlesEvans,andHarlemChildren’sZonefounderGeoffreyCanada. 1 Formoreinformation,includingagenda,researchpapers,and media coverage, see https://minneapolisfed.org/community/tenthbiennial-federal-reserve-system-community-developmentresearch-conference. 2 See www.federalreserve.gov/newsevents/pressreleases/ 3 See www.federalreserve.gov/newsevents/speech/ other20170321a.htm. yellen20170323a.htm. ment units at the Board and the 12 Reserve Banks reunited the six cohorts of community leaders from have hosted nearly 100 rising community leaders all 12 Reserve Banks. The main goal of the meeting since 2013 as part of the Community Leaders Forum was to support CLF members to increase their influ- (CLF). The goals of the forum are to (1) strengthen ence and impact in local communities. For example, the community development field through peer-to- the Federal Reserve Bank of Dallas hosted a workpeer learning that promotes applied research and shop entitled “Casting a Vision and Aligning Your innovative community strategies and (2) from those Priorities.” Though most of the participants had not directly involved, improve the Federal Reserve’s met prior to Dallas, by the end of two days together, understanding of and response to emerging trends they set in motion a virtual network that intends to and their impact on consumers and communities, collectively address complex community problems particularly those that are traditionally underserved. across Reserve Bank districts. In November 2017, the Board and the Federal Reserve Bank of Dallas hosted a CLF meeting that

91 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 most recent phase enabled same-day ACH debits for Banks also contribute to setting national monetary payments such as mortgage and utility payments.2 policy and supervision of banks and other financial entities operating in the United States (discussed in Cost Recovery sections 2 through 4 of this annual report). The Monetary Control Act of 1980 requires that the Federal Reserve establish fees for priced services to Federal Reserve Priced Services recover, over the long run, all direct and indirect costs actually incurred as well as the imputed costs that Reserve Banks provide a range of payment and would have been incurred—including financing costs, related services to depository and certain other insti- taxes, and certain other expenses—and the return on tutions; these “priced services” include collecting equity (profit) that would have been earned if a prichecks, operating an automated clearinghouse vate business firm had provided the services.3 The (ACH) service, transferring funds and securities, and imputed costs and imputed profit are collectively providing a multilateral settlement service.1 referred to as the private-sector adjustment factor (PSAF). From 2008 through 2017, the Reserve Banks The Reserve Banks have been engaged in a number recovered 101.9 percent of the total priced services of multiyear technology initiatives that will modern- costs, including the PSAF (see table 1).4 ize their priced-services processing platforms. These investments are expected to enhance efficiency, the In 2017, Reserve Banks recovered 104.1 percent of overall quality of operations, and the Reserve Banks’ the total priced services costs, including the PSAF.5 ability to offer additional services, consistent with the longstanding principles of fostering efficiency and safety, to depository institutions. The Reserve Banks 2 The first phase of same-day ACH was implemented in Septemcontinued to enhance the resiliency and information ber 2016 and enabled same-day ACH credits for payments, such as direct deposit of payroll, social security benefits, and tax security posture of the Fedwire Funds, National refunds. Settlement Service, and Fedwire Securities Service 3 Depository Institutions Deregulation and Monetary Control through the Fedwire Resiliency Program, a multiyear Act, Pub. L. No. 96-221, 94 Stat. 132 (1980). Financial data initiative to respond to environmental threats and reported throughout this section—including revenue, other income, costs, income before taxes, and net income—will refercyberthreats. The Reserve Banks are also developing ence the “Pro Forma Financial Statements for Federal Reserve and planning to implement a new FedACH- Priced Services” at the end of this section. processing platform to improve the efficiency and 4 According to the Accounting Standards Codification (ASC) reliability of their current FedACH operations. In Topic 715 (ASC 715), Compensation–Retirement Benefits, the Reserve Banks recognized a $628.1 million reduction in equity September 2017, the Reserve Banks implemented the related to the priced services’ benefit plans through 2017. second of three phases of the SameDay ACH service Including this reduction in equity, which represents a decline in in support of a National Automated Clearing House economic value, results in cost recovery of 94.7 percent for the 10-year period. For details on how implementing ASC 715 Association (NACHA) operating rule change; the affected the pro forma financial statements, refer to note 3 to the pro forma financial statements at the end of this section. 1 The ACH enables depository institutions and their customers to 5 Total cost is the sum of operating expenses, imputed costs process large volumes of payments through electronic batch (income taxes, interest on debt, interest on float, and sales processes. taxes), and the targeted return on equity.

92 104th Annual Report | 2017 Table 1. Priced services cost recovery, 2008–17 Millions of dollars, except as noted Year Revenue from services1 Oper 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 2 008 873.8 820.4 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 2017 441.6 419.4 4.6 424.0 104.1 2008–17 5,231.6 4,983.9 149.2 5,133.2 101.9 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 $5,108.6 million and other income and expense (net) of $123.0 million. 2 For the 10-year period, includes operating expenses of $4,831.7 million, imputed costs of $43.8 million, and imputed income taxes of $108.4 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 94.7 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. The Reserve Banks’ operating expenses and imputed Commercial Automated Clearinghouse costs totaled $419.4 million. Revenue from opera- Service tions totaled $441.6 million, resulting in net income from priced services of $22.2 million. The commer- The commercial ACH service provides domestic and cial check-collection service, the Fedwire Funds and cross-border batched payment options for same-day National Settlement Services, and the Fedwire Securi- and next-day settlement. In 2017, the Reserve Banks ties Service achieved full cost recovery; however, the recovered 99.8 percent of the total costs of their com- FedACH Service did not achieve full cost recovery mercial ACH services, including the related PSAF. because of investment costs associated with the Revenue from operations totaled $141.3 million, multiyear technology initiative to modernize its pro- resulting in a net income of $1.3 million. The Reserve cessing platform. Banks’ operating expenses and imputed costs totaled $140.0 million. The Reserve Banks processed Commercial Check-Collection Service 13.7 billion commercial ACH transactions in 2017, an increase of 6.1 percent from 2016 (see table 2). The commercial check-collection service provides a The average daily value of FedACH transfers in 2017 suite of electronic and paper processing options for was approximately $93.6 billion, an increase of forward and return collections. In 2017, the Reserve 8.0 percent from the previous year. Banks recovered 107.0 percent of the total costs of their commercial check-collection service, including Fedwire Funds and National Settlement the related PSAF. Revenue from operations totaled Services $142.0 million, resulting in net income of $10.7 million. The Reserve Banks’ operating expenses and In 2017, the Reserve Banks recovered 106.2 percent imputed costs totaled $131.3 million. Reserve Banks of the costs of their Fedwire Funds and National handled 5.2 billion checks in 2017, a decrease of Settlement Services, including the related PSAF. Rev- 1.7 percent from 2016 (see table 2). The average daily enue from operations totaled $129.7 million, resulting value of checks collected by the Reserve Banks in in a net income of $8.9 million. The Reserve Banks’ 2017 was approximately $33.8 billion, a decrease of operating expenses and imputed costs totaled 5.0 percent from the previous year. $120.8 million in 2017.

Federal Reserve Banks 93 Table 2. Activity in Federal Reserve priced services, 2015–17 Thousands of items, except as noted Percent change Service 2017 2016 2015 2016 to 2017 2015 to 2016 Commercial check 5,152,521 5,241,286 5,452,369 -1.7 -3.9 Commercial ACH 13,749,249 12,960,346 12,298,307 6.1 5.4 Fedwire funds transfer 156,788 151,899 146,006 3.1 4 National settlement 517 501 508 3.3 -1.4 Fedwire securities 3,465 3,881 4,218 -10.7 -8 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. Fedwire Funds Service Service, including the related PSAF. Revenue from The Fedwire Funds Service allows its participants to operations totaled $28.6 million, resulting in a net send or receive domestic time-critical payments using income of $1.3 million. The Reserve Banks’ operattheir balances at Reserve Banks to transfer funds in ing expenses and imputed costs totaled $27.3 million real time. From 2016 to 2017, the number of Fedwire in 2017. In 2017, the number of non-Treasury securifunds transfers originated by depository institutions ties transfers processed via the service decreased increased 3.1 percent, to approximately 157 million 10.7 percent from 2016, to approximately 3.5 million (see table 2). The average daily value of Fedwire (see table 2). The average daily value of Fedwire funds transfers in 2017 was $2.9 trillion, a decrease of Securities transfers in 2017 was approximately 3.5 percent from the previous year. $1.2 trillion, an increase of 4.4 percent from the previous year. National Settlement Service The National Settlement Service is a multilateral Float settlement system that allows participants in privatesector clearing arrangements to settle transactions In 2017, the Reserve Banks had daily average credit using their balances at Reserve Banks. In 2017, the float of $379.3 million, compared with daily average service processed settlement files for 12 local and credit float of $334.4 million in 2016.7 national private-sector arrangements. The Reserve Banks processed 8,243 files that contained about Currency and Coin 517,000 settlement entries for these arrangements in 2017 (see table 2). Settlement file activity in 2017 The Federal Reserve Board issues the nation’s curdecreased 1.0 percent, and settlement entries rency (in the form of Federal Reserve notes) to increased 3.3 percent. 28 Federal Reserve Bank offices. The Reserve Banks, in turn, distribute Federal Reserve notes to deposi- Fedwire Securities Service tory institutions in response to public demand. The The Fedwire Securities Service allows its participants Reserve Banks also distribute coin to depository to transfer electronically to other service participants institutions on behalf of the U.S. Department of the certain securities issued by the U.S. Treasury Depart- Treasury’s Mint.8 Together, the Board and Reserve ment, federal government agencies, governmentsponsored enterprises, and certain international organot considered priced services. For details, see “Treasury Securinizations.6 In 2017, the Reserve Banks recovered ties Services” later in this section. 103.6 percent of the costs of their Fedwire Securities 7 Credit float occurs when the Reserve Banks debit the paying bank for checks and other items prior to providing credit to the 6 The expenses, revenues, volumes, and fees reported here are for depositing bank. transfers of securities issued by federal government agencies, 8 The Federal Reserve Board is the issuing authority for Federal government-sponsored enterprises, and certain international Reserve notes, whereas the United States Mint, a bureau of the organizations. Reserve Banks provide Treasury securities ser- U.S. Department of the Treasury, is the issuing authority for vices in their role as Treasury’s fiscal agent. These services are coin.

94 104th Annual Report | 2017 Box 1. Improving the U.S. Payment System TheFederalReserveplaysmanyrolesinthepay- tacticsforimprovingthespeed,safety,andeffimentsystem,includingpaymentsystemoperator, ciencyoftheU.S.paymentsystemincollaboration supervisoroffinancialinstitutionsandsystemically withpaymentsystemstakeholders.Manyofthese importantfinancialmarketutilities,regulator, refreshedstrategiesarecurrentlybeingimpleresearcher,andcatalystforimprovement.Actingpri- mented.ConsistentwiththeFPTF’srecommendamarilyinitscatalystrole,theFederalReserve tions,theindustry’sfasterpaymentsGovernance encouragedpaymentstakeholderstojointogether FrameworkFormationTeamwasestablishedinthe toimprovethepaymentsystemintheUnitedStates summerof2017,withFederalReservesupport.At initsStrategiesforImprovingtheU.S.Payment theendof2017,theFederalReserveinitiateda System(Strategies)paper,issuedinJanuary2015. strategicassessmentofitssettlementservicesfor Thestrategiesoutlinedinthepaperincludedthe thelong-termbenefitoftheU.S.paymentsystem. creationofataskforcefocusedonfasterpayments Aspartofthisassessment,theFederalReserveis andanotheronpaymentsecurity,bothofwhichpro- exploringoptionstosupportinterbanksettlementof videdforumsforadiversegroupofindustrypartici- real-timeretailpayments,including24x7x365realpantstocollaborate. timesettlementfunctionality.TheFederalReserve hasalsobeguntoexploreandassesstheneed,if ThestrategiesandtacticsincludedintheStrategies any,forFederalReserveengagementasaservice paperrepresentedthefirststepsinthepayment provider,beyondprovidingsettlementservices,in improvementjourney.Manyaresubstantiallyunder thefasterpaymentecosystem.Withrespecttopaywayornearingcompletion,andsomehavebeen mentsecurity,theFederalReservetookinitialsteps completed.In2017,theFasterPaymentsTask towardconductingastudythatisdesignedtoinform Force(FPTF)releasedatwo-partfinalreportoutlin- industrysecurity-improvementefforts.1 ingrecommendedindustryactionstosupportthe goalofallendusers’beingabletoreceivefaster TheFederalReserve’sFedPaymentsImprovement paymentsby2020.Thereportalsoprovidesan website(https://fedpaymentsimprovement.org/)hosts overviewof16proposalsdevelopedbyFPTFmem- aFedPaymentsImprovementCommunitythat bersforimplementingfasterpaymentsintheUnited enablesinterestedpartiestostayinformedandto States,includingtheresultsofanindependent engageinanexchangeofinformationpertainingto assessmentofthoseproposals.Overthecourseof theFederalReserve’seffortstoimprovetheU.S. theyear,theSecurePaymentsTaskForcecontin- paymentsystem. uedtoaddresstheindustry’smostpressingpaymentsystemsecurityissues:identitymanagement, 1 TheFederalReserveannouncedplansinearly2018totransidataprotection,andfraudandriskinformation tionitsindustryengagementfromthetaskforcemodeltoan sharing. approachthatwillprovidegreaterflexibilityforstakeholdersto engageintheongoingpaymentsecurityinitiatives.Aspartof Followingupontheworkofthetaskforcesand thistransition,theSecurePaymentsTaskForceconcludedits othereffortsoutlinedintheStrategiespaper,the effortsinMarch2018,followingpublicationofitsfinaldeliverables.Laterin2018,theFederalReserveexpectstoinitiatenew FederalReservepublishedapaperinSeptemcollaborativeindustryworkgroups,informedbyitsplanned ber2017thatpresentedrefreshedstrategiesand securitystudy. Banks work to maintain the integrity of and confi- Reserve notes from circulation, a 1.4 percent increase dence in Federal Reserve notes. In 2017, the Board from 2016. paid Treasury’s Bureau of Engraving and Printing (BEP) $673.9 million for costs associated with the The value of Federal Reserve notes in circulation at production of 6.6 billion Federal Reserve notes. year-end 2017 totaled $1,571 billion, a 7.4 percent increase from 2016. The year-over-year increase is The volume of Federal Reserve notes in circulation at attributable largely to increased demand for $100 year-end 2017 totaled 41.6 billion pieces, a 4.7 per- notes. The Board estimates that at least one-half of cent increase from 2016. More than half of this the value of Federal Reserve notes in circulation is growth was attributable to growth in demand for held abroad, mainly as a store of value. $100 notes, and an additional 34 percent was attributable to growth in demand for $1 and $20 notes. In In addition, the Reserve Banks distributed 73.4 bil- 2017, the Reserve Banks distributed 37.0 billion Fed- lion coins into circulation and received 58.2 billion eral Reserve notes into circulation, a 2.0 percent coins from circulation, which is relatively unchanged increase from 2016, and received 35.2 billion Federal from 2016.

Federal Reserve Banks 95 U.S. Currency Education Program Other Improvements and Efforts The U.S. Currency Education Program (CEP) is an During 2017, the Reserve Banks completed impleinteragency program managed by the Board in part- mentation of a new cash automation platform (Cashnership with the United States Secret Service and the Forward) to replace legacy software applications, BEP. The CEP is responsible for providing users of automate business concepts and processes, and U.S. currency around the world with access to educa- employ technologies to meet the cash business’s curtion, training, and information about all designs of rent and future needs more cost effectively. The new Federal Reserve notes. cash platform will facilitate business continuity and contingency planning and enhance the support pro- In 2017, the CEP introduced three new educational vided to Reserve Bank customers. The Federal materials in hard copy and added two new animated Reserve also has initiated a program to replace the videos and one podcast series to the resources avail- aging high-speed currency processing equipment at able to the global public on uscurrency.gov. The CEP all Reserve Banks by 2026. In 2017, the Federal also carried out training and outreach programs in Reserve engaged with two vendors to build prototype the United States, Vietnam, and Malaysia, helping to machines by 2020, at which point one vendor will be educate cash handlers on how to authenticate genu- selected for the development and implementation of ine U.S. currency and how to report suspected coun- the new production machine. terfeit notes. The Board and the BEP continued to build on the improved quality assurance processes established to Box 2. Developments in Financial Technology Aspartofitscoreobjectivetofosterthesafetyand ondistributedledgertechnologythatprovidesan efficiencyofthepaymentsystemandtopromote analyticalframeworkforcentralbanksasthey financialstability,theFederalReservehasapublic reviewandanalyzetheuseofdistributedledger policyinterestinunderstandingandmonitoringthe technologyforpayment,clearing,andsettlement.1 developmentofinnovationsthatcouldaffectthe Inaddition,Boardmembershavespokenrepeatedly structuraldesignandfunctioningoffinancialmar- andpubliclyoninnovationinthepaymentsystem kets.Ingeneral,theFederalReserveviewsdevel- andthewaysthefinancialindustrymayusedistribopmentsinfinancialtechnologythroughthelensof utedledgertechnologyanddigitalcurrencies, ourlong-standingpublicpolicygoalsof(1)safety amongothertechnologies.Theyalsodiscussedthe andsoundnessoffinancialinstitutions,(2)safety hurdlestobroadadoptionofnewfinancialtechnoloandefficiencyforthepaymentsystem,(3)financial giesandemphasizedtheimportanceofmaintaining stabilityandmonetarypolicymorebroadly,and confidenceinthepaymentsystemduringaperiodof (4)aninnovativefinancialsystemthatprovides rapidchange.2 widelysharedbenefitstothepublicovertime. Overall,theFederalReserve’sworkoverthepast Overthepastseveralyears,FederalReservestaff yearhighlightedtheimportanceofbeingopento hasworkedtofulfillthesepublicpolicygoalsby innovativetechnologiesand,whereappropriate,fosmonitoringtechnologicaldevelopmentsandconduct- teringtheirdevelopmentwhileatthesametime ingresearchandcommunicatingwiththeindustryin remainingfocusedontheBoard’straditionalpublic anefforttounderstandbetterthetechnologies policyobjectiveswithrespecttothepayment behindtheinnovations,potentialusecases,ben- system. efits,andrelevantrisks.In2017,theFederal Reserveengagedwiththeindustryandothercentral 1 CommitteeonPaymentsandMarketInfrastructures,“Distributed banksondevelopmentsinfinancialtechnology, ledger technology in payment, clearing and settlement,” Bank for suchasdistributedledgeranddigitalcurrencies. International Settlements, February 2017, available at: https:// www.bis.org/cpmi/publ/d157.pdf. Specifically,FederalReservestaffparticipatedin 2 See, for example: https://www.federalreserve.gov/newsevents/ internationaleffortstounderstandtheimplicationsof speech/powell20170303a.htm, https://www.federalreserve.gov/ distributedledgertechnologyinpayments,clearing, newsevents/speech/powell20171018a.htm, https://www .federalreserve.gov/newsevents/speech/brainard20171116a.htm, andsettlement.InFebruary2017,theCommitteeon https://www.federalreserve.gov/newsevents/speech/ PaymentsandMarketInfrastructuresissuedareport quarles20171130a.htm.

96 104th Annual Report | 2017 date at the BEP. The BEP continued to reclaim $100 In April 2014, as part of the federal government’s notes using single-note inspection equipment and effort to increase operational efficiency and effectivealso began to reclaim $20 notes.9 In addition, the ness, Treasury announced the consolidation of the Board and BEP continued to implement a long-term fiscal agency services provided by the Reserve Banks. capital equipment replacement strategy to modernize Although Treasury expects long-term savings by and replace aging production equipment at the BEP reducing the number of Reserve Banks that provide that has exceeded its useful life, and thus to improve fiscal agency services, the Reserve Banks are experiproduction efficiency and reduce spoilage. As part of encing an increase in expenses during the consolidathis plan, the BEP purchased six new intaglio print- tion process, which will continue over the next several ing presses and three finishing presses, which it years. In 2017, total consolidation expenses expects will be installed and operational in 2018 and amounted to $12.2 million as a result of the two 2019, respectively. Reserve Bank business lines that transitioned and preparations for the two remaining business line tran- The Board also engaged in a range of work to sup- sitions. Consolidation expenses are included in the port its role as issuing authority. This included line items for Payment, Collection, and Cashresearch and development to improve potential new management services in table 3. security features and optical inspection for Federal Reserve notes. The Board also began efforts to con- Treasury Securities Services duct cognitive and perception studies to better understand how users authenticate and handle notes and The Reserve Banks work closely with Treasury’s Fisbuilt an in-house laboratory to facilitate adversarial cal Service in support of the borrowing needs of the analysis to better understand counterfeiting threats. federal government. The Reserve Banks auction, In addition, the Board worked with the BEP and issue, maintain, and redeem securities; provide cusdesign consultants to accelerate the next family of tomer service; and operate the automated systems Federal Reserve notes. supporting U.S. savings bonds and marketable Treasury securities (bills, notes, and bonds). Treasury securities services consist of retail securities programs, Fiscal Agency and Government which primarily serve individual investors, and Depository Services wholesale securities programs, which serve institutional customers. As fiscal agents and depositories for the federal government, the Reserve Banks auction Treasury securi- Retail Securities Programs ties, process electronic and check payments for Treasury, collect funds owed to the federal government, Reserve Bank operating expenses for the retail securimaintain Treasury’s bank account, and develop, ties program, which provides services to nonoperate, and maintain a number of automated sys- institutional holders of Treasury and related securitems to support Treasury’s mission. The Reserve ties, decreased to $44.0 million in 2017, largely Banks also provide certain fiscal agency and deposi- because of Treasury’s decision to phase out the tory services to other entities; these services are pri- myRA retirement savings program. Program expense marily related to book-entry securities. Treasury and drivers included the Reserve Banks’ operation of a other entities fully reimburse the Reserve Banks for virtual case-file system and a virtual contact center to the expense of providing fiscal agency and depository support retail securities services as well as increased services. staffing to manage the savings-bond processing workload. In 2017, fiscal agency expenses increased to $698.3 million (see table 3), primarily as a result of Wholesale Securities Programs requests from Treasury’s Bureau of the Fiscal Service. Support for Treasury programs accounted for The Reserve Banks support wholesale securities pro- 95.0 percent of expenses, and support for other enti- grams through the sale, issuance, safekeeping, and ties accounted for 5.0 percent. transfer of marketable Treasury securities for institutional investors. The Reserve Banks conducted 9 The reclamation program uses single-note inspection equip- 277 Treasury securities auctions in 2017. Of the ment, which recovers good notes from bad sheets and results in 277 auctions, 12 auctions were for Floating Rate reduced spoilage, cost savings, and more-consistent quality of notes delivered to the Board. Notes.

Federal Reserve Banks 97 Table 3. Expenses of the Federal Reserve Banks for fiscal agency and depository services, 2015–17 Thousands of dollars Agency and service 2017 2 016 2015 D epartment of the Treasury Treasury securities services Treasury retail securities 46,244 50,203 52,945 Treasury auction 43,709 42,472 35,701 Treasury securities safekeeping and transfer 25,171 22,890 21,254 Technology infrastructure development and support1 7,442 6,909 6,371 Other services 1,406 3,213 2,194 Total 123,973 125,687 118,465 Payment, collection, and cash-management services Payment services 177,127 159,296 161,681 Collection services 68,550 66,425 59,513 Cash-management services 73,514 82,165 79,161 Technology infrastructure development and support* 116,931 96,931 89,069 Other services 10,817 10,358 10,998 Total 446,938 415,175 400,422 Other Treasury services Total 41,943 39,293 41,971 Total, Treasury 6 12,854 580,155 560,857 Other entities Total, other entities 34,580 37,333 35,140 Pension Costs2 Total, Treasury and other entities 50,837 59,493 54,586 Total reimbursable expenses 698,271 676,981 650,583 1 Labeled “Computer infrastructure development and support” in 2015. 2 Board policy requires the Reserve Banks to seek reimbursement for the costs to provide fiscal agency services. Historically, the 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-time pension costs that resulted from consolidation activities in 2014 and to seek full reimbursement for all fiscal agency–related pension costs beginning in 2015. Pension costs are shown in the aggregate across programs in table 3 rather than by each program. In 2017, Reserve Bank operating expenses to support Reserve Bank operating expenses for payments- Treasury securities auctions increased to $43.7 mil- related activity increased to $177.1 million in 2017, lion. Operating expenses were driven by upgrades to primarily because of increased expenses for the the auction application, which receives and processes Stored Value Card (SVC) program, the Invoice Probids submitted primarily by wholesale securities auc- cessing Platform (IPP), the U.S. Electronic Payment tion participants, and by modernization of the appli- Solution Center, and the Post Payment System (PPS). cation infrastructure. These increases were partially offset by decreased program expenses for International Treasury Services Operating expenses associated with Treasury securi- (ITS) and Automated Standard Application for Payties safekeeping and transfer activities increased to ments (ASAP). $25.2 million in 2017 as a result of the Reserve Banks’ effort to migrate the securities services from a The SVC program comprises three military cashmainframe system to a distributed computing management programs: EagleCash, EZPay, and environment. Navy Cash. These programs provide electronic payment methods for goods and services on military Payment Services bases and Navy ships, both domestic and overseas. The Reserve Banks, as fiscal agent, have operated The Reserve Banks work closely with Treasury’s Fis- EagleCash and EZpay and assumed responsibility for cal Service and other government agencies to process Navy Cash in 2017. In 2017, Reserve Bank operating payments to individuals and companies. The Reserve expenses for Treasury’s SVC business increased to Banks process federal payroll payments, Social Secu- $36.0 million, including $2.6 million associated with rity and veterans’ benefits, income tax refunds, ven- the upcoming transition of the overall SVC program dor payments, and other types of payments. as part of the fiscal agent consolidation.

98 104th Annual Report | 2017 The IPP is part of Treasury’s all-electronic initia- to the federal government. In 2017, Reserve Bank tive—an electronic invoicing and payment informa- operating expenses related to collection services tion system that allows vendors to enter invoice data increased to $68.6 million, largely because of greater electronically, through either a web-based portal or operating expenses for Pay.gov and the Collections electronic submission. The IPP accepts, processes, Information Repository (CIR). and presents data from supplier systems related to various stages of a payment transaction, such as the The Reserve Banks operate Pay.gov, an application purchase order and invoice. In 2017, the Reserve that allows the public to use the Internet to authorize Banks’ IPP expenses increased to $27.8 million, and initiate payments to federal agencies. During the including $7.2 million associated with the recently year, the Pay.gov program expanded to include more completed IPP transition in support of than 168 new agency programs and processed more consolidation. than 189 million online payments totaling nearly $155 billion. Pay.gov expenses increased to $21.5 mil- The U.S. Treasury Electronic Payment Solution Suplion in 2017, primarily because of increased staffing port Center provides broad support for Treasury iniand software amortization expenses. tiatives aimed at eliminating paper check payments and increasing electronic payments to individuals. As The CIR application enables the Fiscal Service to of November 2017, 98.4 percent of all federal benefit standardize the availability of financial information, recipients received their payments electronically. In furthering transparency goals and enabling federal 2017, expenses for the U.S. Treasury Electronic Payagencies to improve cash-management decisions and ment Solution Support Center increased 17.8 perperformance. In 2017, CIR expenses increased cent, to $17.9 million, because of increased staffing 19.6 percent to $9.2 million, primarily because of and increased support costs. software amortization costs. The Reserve Banks continued work on the PPS initiative, a multiyear effort to modernize several of Treasury Cash-Management Services Treasury’s legacy post-payment processing systems into a single application to enhance operations, The Reserve Banks maintain Treasury’s operating reduce expenses, improve data analytics capabilities, cash account and provide collateral-management and and provide a centralized and standardized set of collateral-monitoring services for those Treasury propayment data. In 2017, program expenses for PPS grams that have collateral requirements. The Reserve increased to $20.7 million, including $1.9 million Banks also support Treasury’s efforts to modernize associated with system development expenses. its financial management processes by developing The Reserve Banks operate the ITS application, software and operating help desks. which provides cross-border payment and collection services as well as cash-management functions on In 2017, Reserve Bank operating expenses related to behalf of Treasury. U.S. government agencies use ITS Treasury cash-management services decreased to issue international benefit, payroll, and vendor 10.5 percent, to $73.5 million. The decrease was pripayments in 100 currencies to recipients in estab- marily due to completion of the Straight-Through lished and emerging markets. ITS expenses in 2017 Processing initiative, which resulted in decreased decreased to $12.6 million primarily because of development costs for the Direct Voucher System and decreased staffing costs and location-based cost sav- the decommissioning of FRB CA$HLINK. Addiings following the consolidation. tionally, the Bank Management System had lower development costs in 2017. The Bank Management The ASAP application enables federal agencies to System application reports and compensates comelectronically disburse funds to recipient organizamercial banks for providing depository services to tions. Expenses for ASAP decreased 19.8 percent Treasury. from 2016, to $7.3 million in 2017, because of the completion of consolidation activities. Services Provided to Other Entities Collection Services When permitted by federal statute or when required The Reserve Banks also work closely with the Fiscal by the Secretary of the Treasury, the Reserve Banks Service to collect funds—including various taxes, fees provide fiscal agency and depository services to other for goods and services, and delinquent debts—owed domestic and international entities.

Federal Reserve Banks 99 Reserve Bank operating expenses for services pro- daylight overdraft fees; in contrast, fees totaled more vided to other entities decreased to $34.6 million in than $50 million in 2008. The decrease in fees is 2017. Debt servicing activities account for a signifi- largely attributable to the elevated level of reserve cant amount of the work performed for other enti- balances that began to accumulate in late 2008 and to ties, with the majority performed for the Federal the 2011 policy revision that eliminated fees for day- Home Loan Mortgage Association (Freddie Mac), light overdrafts that are collateralized. the Federal National Mortgage Association (Fannie Mae), and the Government National Mortgage FedLine Access to Reserve Bank Association (Ginnie Mae). Services Use of Federal Reserve Intraday The Reserve Banks’ FedLine access solutions provide 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 six 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 Reserve Banks’ priced services: FedMail, FedLine overdrafts enable an institution to send payments Web, FedLine Exchange, FedLine Advantage, Fedmore freely throughout the day than if it were limited Line Command, and FedLine Direct. These FedLine strictly by its available intraday funds balance, channels are designed to meet the individual connecincreasing efficiency and reducing payment system tivity, security, and contingency requirements of risk. The Payment System Risk policy recognizes depository institution customers. explicitly the role of the central bank in providing intraday balances and credit to healthy institutions; Between 2008 and 2017, Reserve Bank priced Fedunder the policy, the Reserve Banks provide collater- Line connections and number of depository institualized intraday credit at no cost. tions in the United States continued to decline, though the number of depository institution employ- Before the 2007–09 financial crisis, overnight balees with FedLine credentials increased 11 percent. As ances were much lower and daylight overdrafts sigof December 2017, more than 54,000 individuals had 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 Figure 1. Aggregate daylight overdrafts, 2007–17 as various liquidity programs initiated by the Federal Reserve, all since terminated, took effect. During this Billions of dollars period, the Federal Reserve also began paying inter- 200 Peak daylight overdrafts Average daylight overdrafts est on balances held at the Reserve Banks, increased its lending under the Term Auction Facility, and began purchasing government-sponsored enterprise 150 mortgage-backed securities. These measures tended to increase balances institutions held at the Banks, which decreased the demand for intraday credit. In 2007, for example, institutions held, on average, less 100 than $20 billion in overnight balances, and total average daylight overdrafts were around $60 billion. In contrast, institutions held historically high levels of overnight balances at the Reserve Banks in 2017, 50 while daylight overdrafts remained historically low, as shown in figure 1. Daylight overdraft fees are also at historically low 0 20072008200920102011201220132014201520162017 levels. In 2017, institutions paid about $73,796 in

100 104th Annual Report | 2017 access to value-added services (Accounting Manage- Banks are subject to oversight by the Board of Govment Information, FedTransaction Analyzer, and ernors, which performs its own reviews. ACH Risk Services) and more than 52,000 individu- The Reserve Banks use the 2013 framework estabals had access to central bank applications for regulalished by the Committee of Sponsoring Organizatory reporting purposes. tions of the Treadway Commission (COSO) to assess their internal controls over financial reporting, The Reserve Banks continue to advance the safety including the safeguarding of assets. Within this and security of the FedLine network with key infraframework, the management of each Reserve Bank structure upgrades, proactive monitoring of an evolvannually provides an assertion letter to its board of ing threat environment, strengthened endpoint secudirectors that confirms adherence to COSO rity policies, and dedicated customer communication standards. and education programs. The Federal Reserve Board engaged KPMG LLP Information Technology (KPMG) to audit the 2017 combined and individual financial statements of the Reserve Banks.11 The Federal Reserve Banks continued to improve the efficiency, effectiveness, and security of information In 2017, KPMG also conducted audits of the intertechnology (IT) services and operations in 2017. Led nal controls associated with financial reporting for by the Federal Reserve’s National IT organization, each of the Reserve Banks. Fees for KPMG’s services the System made significant progress in addressing totaled $6.8 million. To ensure auditor independence, the challenges outlined in its IT Strategic Plan. Ele- the Board requires that KPMG be independent in all ments of the plan focus on IT productivity, simplic- matters relating to the audits. Specifically, KPMG ity, accountability, and stewardship across the may not perform services for the Reserve Banks or System. Several specific initiatives under the plan also others that would place it in a position of auditing its strengthened information security. National IT con- own work, making management decisions on behalf tinues to guide the plan’s implementation and tracks of the Reserve Banks, or in any other way impairing progress toward the plan’s goals. This effort is sched- its audit independence. In 2017, the Reserve Banks uled to be completed in 2020. did not engage KPMG for significant non-audit services. Under the direction of the Office of the Chief Information Security Officer, the Reserve Banks remained The Board’s reviews of the Reserve Banks include a wide range of off-site and on-site oversight activities, vigilant about their cybersecurity posture, investing conducted primarily by its Division of Reserve Bank in risk-mitigation initiatives and programs and con- Operations and Payment Systems. Division personnel tinuously monitoring and safeguarding their operamonitor on an ongoing basis the activities of each tions against cybersecurity risks. The Federal Reserve Reserve Bank, National IT, and the System’s Office implemented several cybersecurity initiatives that of Employee Benefits (OEB). They conduct a comstrengthen identity access management, enhance its prehensive on-site review of each Reserve Bank and abilities to detect and respond to cyber incidents, OEB at least once every three years and review reduce the risk of insider threats, and continue to National IT, the System Open Market Account improve its continuous monitoring capabilities for (SOMA), and Fedwire annually. critical assets. Examinations of the Federal Reserve The comprehensive on-site reviews include an assessment of the internal audit function’s effectiveness Banks and its conformance to the Institute of Internal Auditors’ (IIA) International Standards for the Pro- The combined financial statements of the Reserve Banks as well as the financial statements of each of the 12 Reserve Banks are audited annually by an 11 In addition, KPMG audited the Office of Employee Benefits of independent public accounting firm retained by the the Federal Reserve System (OEB), the Retirement Plan for Employees of the Federal Reserve System (System Plan), and Board of Governors.10 In addition, the Reserve the Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The System Plan and the Thrift Plan provide retirement benefits to employees of the Board, the Federal 10 See “Federal Reserve Banks Combined Financial Statements” in Reserve Banks, the OEB, and the Consumer Financial Protecsection 12 of this report. tion Bureau.

Federal Reserve Banks 101 fessional Practice of Internal Auditing, applicable The FOMC is provided with the external audit policies and guidance, and the IIA’s code of ethics. reports and a report on the Board review. The Board also reviews SOMA and foreign currency Income and Expenses holdings to • determine whether the New York Reserve Bank, Table 4 summarizes the income, expenses, and distriwhile conducting the related transactions and asso- butions of net earnings of the Reserve Banks for ciated controls, complies with the policies estab- 2017 and 2016. Income in 2017 was $114.2 billion, lished by the Federal Open Market Committee compared with $111.7 billion in 2016. (FOMC); and Expenses totaled $35,435 million: • assess SOMA-related IT project management and application development, vendor management, and • $25,862 million in interest paid to depository instisystem resiliency and contingency plans. tutions on reserve balances and term deposits; • $4,337 million in Reserve Bank operating expenses; In addition, KPMG audits the year-end schedule of participated asset and liability accounts and the • $3,365 million in interest expense on securities sold related schedule of participated income accounts. under agreements to repurchase; Table 4. Income, expenses, and distribution of net earnings of the Federal Reserve Banks, 2017 and 2016 Millions of dollars Item 2017 2 016 Current income 114,194 1 11,744 Loan interest income 1 1 SOMA interest income 113,592 1 11,105 Other current income1 601 638 Net expenses 33,398 17,263 Operating expenses 4,337 4,205 Reimbursements -698 -677 Net periodic pension expense 525 565 Interest paid on depository institutions deposits and term deposits 25,862 12,044 Interest expense on securities sold under agreements to repurchase 3,365 1,122 Other expenses 7 4 Current net income 80,796 94,481 Net additions to (deductions from) current net income 1,933 -114 Treasury securities gains (losses) 28 -15 Federal agency and government-sponsored enterprise mortgage-backed securities 8 19 Foreign currency translation gains (losses) 1,894 -103 Net income (loss) from consolidated VIE 4 -12 Other deductions -1 -3 Assessments by the Board of Governors 2,037 2,006 For Board expenditures 740 709 For currency costs 724 701 For Consumer Financial Protection Bureau costs2 573 596 Net income before providing for remittances to the Treasury 80,692 92,361 Earnings remittances to the Treasury 80,559 91,467 Net income after providing for remittances to the Treasury 133 894 Other comprehensive gain (loss) 651 -183 Comprehensive income (loss) 784 711 Total distribution of net income 81,343 92,178 Dividends on capital stock 784 711 Transfer to surplus and change in accumulated other comprehensive income 0 0 Earnings remittances to the Treasury 80,559 91,467 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.

102 104th Annual Report | 2017 • $525 million in net periodic pension expense; SOMA Securities Holdings • $740 million in assessments for Board of Gover- The average daily holdings of Treasury securities nors expenditures; decreased by $9 billion, to an average daily amount • $724 million for the cost of producing, issuing, and of $2,561 billion. The average daily holdings of GSE retiring currency; debt securities decreased by $15 billion, to an average daily amount of $10 billion. The average daily hold- • $573 million for Consumer Financial Protection ings of federal agency and GSE MBS increased by Bureau costs; and $20 billion, to an average daily amount of $1,823 billion. • $7 million in other costs. Through September 2017, FRBNY continued to The expenses were reduced by $698 million in reimreinvest all principal payments from SOMA holdings bursements for services provided to government of GSE debt securities and federal agency and GSE agencies. Net additions to current net income totaled MBS into federal agency and GSE MBS and to roll $1,933 million, which includes $1,894 million in unreover maturing Treasury securities at auction. Beginalized gains on foreign currency denominated investning in October 2017, the FOMC initiated a balance ments revalued to reflect current market exchange sheet normalization program intended to reduce rates, $28 million in realized gains on Treasury securigradually the SOMA holdings by decreasing the reinties, and $8 million in realized gains on federal vestment of principal payments received from securiagency and government-sponsored enterprise ties held in the SOMA through the implementation mortgage-backed securities (GSE MBS). of monthly caps. Such principal payments will be reinvested only to the extent that they exceed gradu- Net income before remittances to Treasury totaled ally rising caps. $81,343 million in 2017 (net income of $80,692 million, increased by other comprehensive gain of There were no significant holdings of securities pur- $651 million). Dividends paid to member banks for chased under agreements to resell in 2017 or 2016. 2017 totaled $784 million. Earnings remittances to Average daily holdings of foreign currency denomithe Treasury totaled $80,559 million in 2017. The nated investments in 2017 were $20,673 million, com- Reserve Banks reported comprehensive income of pared with $20,713 million in 2016. The average daily $784 million in 2017 after providing for remittances balance of central bank liquidity swap drawings was to Treasury. $858 million in 2017 and $933 million in 2016. The average daily balance of securities sold under agree- Section 11 of this report, “Statistical Tables,” proments to repurchase was $387,540 million, an vides more detailed information on the Reserve increase of $40,044 million from 2016. Banks. Table 9 is a statement of condition for each Reserve Bank; table 10 details the income and The average rates of interest earned on the Reserve expenses of each Reserve Bank for 2017; table 11 Banks’ holdings of Treasury securities increased to shows a condensed statement for each Reserve Bank 2.51 percent, and the average rates on GSE debt secufor the years 1914 through 2017; and table 13 gives rities increased to 4.19 percent in 2017. The average the number and annual salaries of officers and rate of interest earned on federal agency and GSE employees for each Reserve Bank. A detailed account MBS increased to 2.68 percent in 2017. The average of the assessments and expenditures of the Board of interest rates paid for securities sold under agree- Governors appears in the Board of Governors ments to repurchase increased to 0.87 percent in Financial Statements (see section 12, “Federal 2017. The average rate of interest earned on foreign Reserve System Audits”). currency denominated investments decreased to -0.08 percent, while the average rate of interest earned on central bank liquidity swaps increased to 1.63 percent in 2017. SOMA Holdings and Loans Lending The Reserve Banks’ average net daily SOMA holdings during 2017 amounted to $4,026 billion, a In 2017, the average daily primary, secondary, and decrease of $45 billion from 2016 (see table 5). seasonal credit extended by the Reserve Banks to

Federal Reserve Banks 103 Table 5. System Open Market Account (SOMA) holdings of the Federal Reserve Banks, 2017 and 2016 Millions of dollars, except as noted Average daily assets (+)/liabilities (–) Current income (+)/expense (–)* Average interest rate (percent) Item 2017 2016 2017 2016 2017 2016 U.S. Treasury securities1 2,560,796 2,570,106 64,267 63,845 2.51 2.48 Government-sponsored enterprise debt (GSE) securities1 9,932 25,298 416 959 4.19 3.79 Federal agency and GSE mortgage-backed securities2 1,822,543 1,802,439 48,912 46,299 2.68 2.57 Foreign currency denominated investments3 20,673 20,713 -17 -7 -0.08 -0.03 Central bank liquidity swaps4 858 933 14 9 1.63 0.96 Other SOMA assets5 12 13 * * 0.68 0.16 Total SOMA assets 4,414,814 4,419,502 113,592 111,105 2.57 2.51 Securities sold under agreements to repurchase: Primary dealers and expanded counterparties -145,959 -105,648 -1,224 -303 0.84 0.29 Securities sold under agreements to repurchase: Foreign official and international accounts -241,581 -241,848 -2,141 -819 0.89 0.34 Total securities sold under agreements to repurchase -387,540 -347,496 -3,365 -1,122 0.87 0.32 Other SOMA liabilities6 -878 -1,010 n/a n/a n/a n/a Total SOMA liabilities -338,418 -348,506 -3,365 -1,122 0.87 0.32 Total SOMA holdings 4,026,396 4,070,996 110,227 1 09,983 2.74 2.70 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. depository institutions increased by $2 million, to facilities. Multiyear renovation programs at the New $103 million. The average rate of interest earned on York, Richmond, Kansas City, and San Francisco primary, secondary, and seasonal credit increased to Reserve Banks’ headquarters and Los Angeles 1.16 percent in 2017, from 0.62 percent in 2016. Branch building continued. All Reserve Banks continued to implement projects to maintain building Maiden Lane LLC (ML) is a lending facility estab- systems to ensure efficient and reliable operations. lished in 2008 under authority of FRA sec- The New York Reserve Bank continued repairs and tion 13(3) in response to the 2007–09 financial crisis. renovations to the 33 Maiden Lane building and the Net portfolio assets of ML decreased from Philadelphia Bank initiated the design of improve- $1,742 million in 2016 to $1,722 million in 2017, and ments to its building’s infrastructure systems. liabilities decreased from $33 million to $9 million. ML net income of $4 million in 2017 comprised For more information on the acquisition costs and interest income of $15 million, loss on investments of net book value of the Reserve Banks and Branches, $9 million, and operating expenses of $2 million. see table 14 in section 11 (“Statistical Tables”) of this annual report. Federal Reserve Bank Premises Several Reserve Banks initiated or continued in 2017 significant renovation programs for their physical

104 104th Annual Report | 2017 Pro Forma Financial Statements for Federal Reserve Priced Services Table 6. Pro forma balance sheet for Federal Reserve priced services, December 31, 2017 and 2016 Millions of dollars Item 2017 2 016 S hort-term assets (note 1) Imputed investments 920.1 8 12.2 Receivables 36.4 36.6 Materials and supplies 0.6 0.5 Prepaid expenses 12.4 11.5 Items in process of collection 80.8 117.7 Total short-term assets 1,050.3 978.4 Long-term assets (note 2) Premises 139.3 1 20.4 Furniture and equipment 39.4 36.9 Leases, leasehold improvements, and long-term prepayments 105.2 112.2 Deferred tax asset 184.4 184.7 Total long-term assets 468.4 454.1 Total assets 1,518.7 1,432.5 Short-term liabilities Deferred-availability items 1 ,000.9 9 21.5 Short-term debt 23.3 0 Short-term payables 26.1 20.8 Total short-term liabilities 1,050.3 942.3 Long-term liabilities Long-term debt 44.7 Accrued benefit costs 347.7 418.6 Total long-term liabilities 392.4 418.6 Total liabilities 1,442.8 1,360.9 Equity (including accumulated other comprehensive loss of $628.1 million and $670.4 million at December 31, 2017 and 2016, respectively) 75.9 71.6 Total liabilities and equity (note 3) 1,518.7 1,432.5 Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.

Federal Reserve Banks 105 Table 7. Pro forma income statement for Federal Reserve priced services, 2017 and 2016 Millions of dollars Item 2017 2 016 Revenue from services provided to depository institutions (note 4) 441.6 434.1 Operating expenses (note 5) 410.7 401.5 Income from operations 30.9 32.5 Imputed costs (note 6) Interest on debt -3.8 -1.4 Interest on float 2.0 0.1 Sales taxes 4.0 2.2 3.8 2.5 Income from operations after imputed costs 28.7 30 Other income and expenses (note 7) Investment income 0.2 Income before income taxes 28.7 30.2 Imputed income taxes (note 6) 6.5 6.5 Net income 22.2 23.7 Memo: Targeted return on equity (note 6) 4.6 4.1 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, 2017 Millions of dollars Commercial check Item Total Commercial ACH Fedwire funds F edwire securities collection Revenue from services (note 4) 441.6 142.0 141.3 129.7 28.6 Operating expenses (note 5)1 410.7 126.3 141.3 116.5 26.5 Income from operations 30.9 15.7 0.0 13.2 2.1 Imputed costs (note 6) 2.2 1.9 -1.7 1.7 0.4 Income from operations after imputed costs 28.7 13.8 1.7 11.5 1.7 Other income and expenses, net (note 8) 0.0 0.0 0.0 0.0 0.0 Income before income taxes 28.7 13.8 1.7 11.5 1.7 Imputed income taxes (note 6) 6.5 3.1 0.4 2.6 0.4 Net income 22.2 10.7 1.3 8.9 1.3 Memo: Targeted return on equity (note 6) 4.6 1.4 1.6 1.3 0.3 Cost recovery (percent) (note 7) 104.1 107.0 99.8 106.2 103.6 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. 1 Operating expenses include pension costs, Board expenses, and reimbursements for certain nonpriced services.

106 104th Annual Report | 2017 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 rates associated with the deferred tax asset were 22.7 percent and 21.6 percent for 2017 and 2016, 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 2017 equity is imputed at 5.0 percent of total assets and 11.0 percent of risk-weighted assets, and 2016 equity is imputed at 5.0 percent of total assets and 10.9 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. The Reserve Banks’ priced services will hold six months of the Fedwire Funds Service’s current operating expenses as liquid net financial assets and equity on the pro forma balance sheet and, if necessary, impute additional assets and equity to meet the requirement. 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 2017, there was sufficient assets and equity such that additional imputed balances were not required. In accordance with Accounting Standards Codification (ASC) Topic 715 (ASC 715), Compensation–Retirement Benefits, the Reserve Banks record the funded

Federal Reserve Banks 107 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 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 asset, which is a component of accrued benefit costs, of $32.0 million in 2017 and a pension liability of $33.2 million in 2016. The change in the funded status of the pension and other benefit plans resulted in a corresponding decrease in accumulated other comprehensive loss of $42.2 million in 2017. (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 $5.4 million in 2017 and $5.0 million in 2016. In accordance with ASC 715, the Reserve Bank priced services recognized qualified pension-plan operating expenses of $31.9 million in 2017 and $34.4 million in 2016. Operating expenses also include the nonqualified net pension expense of $3.3 million in 2017 and $4.9 million in 2016. 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 rates associated with imputed taxes were 22.7 percent and 21.6 percent for 2017 and 2016, 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 2017 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.12 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 12 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.

108 104th Annual Report | 2017 operating expenses, less shipping expenses, for each service to the total expenses, less the total shipping expenses, for all services. 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 2017, in millions of dollars: Total float -379.3 Float not related to priced services1 -0.3 Float subject to recovery through per-item fees - 379.0 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 2017 and 2016. (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.

109 7 Other Federal Reserve Operations Regulatory Developments evaluates the strength of each firm’s capital planning process, whereas the quantitative assessment evaluates each firm’s capital adequacy based on hypotheti- Dodd-Frank Implementation cal scenarios of severe economic and financial mar- Throughout 2017, the Federal Reserve continued to ket stress. Under the previous capital plan rule, the implement the Dodd-Frank Wall Street Reform and Board could object to the annual capital plan of any Consumer Protection Act (Dodd-Frank Act) (Pub. CCAR firm based on the quantitative or qualitative L. No. 111-203), which gives the Federal Reserve findings of the CCAR exercise. important responsibilities to issue rules and supervise financial companies to enhance financial stability Under the final rule, a large and noncomplex firm is and preserve the safety and soundness of the banking defined as a financial institution (1) with total consystem. The Board also continued to implement solidated assets between $50 billion and $250 billion, other regulatory reforms to increase the resiliency of (2) with total consolidated nonbank assets of less banking organizations and help to ensure that they than $75 billion, and (3) that has not been identified are operating in a safe and sound manner. as a global systemically important bank (G-SIB) under the Board’s capital rules. Large and noncom- The following is a summary of the key regulatory ini- plex firms will be required to continue meeting capitiatives that were completed during 2017. tal requirements under stress as part of CCAR’s quantitative assessment, and the Federal Reserve will Capital Planning and Stress Testing examine the capital planning processes of large and Requirements (Regulations Y and YY) noncomplex firms through regular supervisory assessments outside of the CCAR exercise. Under In January 2017, the Board adopted a final rule amending its capital plan and stress testing rules;1 the the final rule, the Board may object to the capital plans of large and noncomplex firms on quantitative changes took effect for purposes of the 2017 Comgrounds, and may object to the capital plans of the prehensive Capital Analysis and Review (CCAR) largest and most complex firms on both qualitative cycle. The final rule removed large and noncomplex and quantitative grounds. firms from the qualitative assessment and qualitative objection criteria in the Board’s capital plan rule in Restrictions on Qualified Financial Contracts order to reduce burden on these firms and focus the (Regulations Q, WW, and YY) qualitative review in CCAR on the largest and most complex financial institutions. In September 2017, the Board adopted a final rule to support U.S. financial stability by enhancing the resolvability of very large and complex financial Through CCAR, the Federal Reserve evaluates the firms.3 The rule requires global systemically imporcapital planning processes and capital adequacy of tant bank holding companies and the U.S. operations large financial institutions through quantitative and qualitative assessments.2 The qualitative assessment the transition provisions under the capital plan rule and subpart O of the Board’s Regulation YY (12 CFR part 252). Currently, 1 82 Fed. Reg. 9308 (February 3, 2017). no nonbank financial companies supervised by the Board are 2 Large institutions subject to the Board’s capital plan and stress subject to the capital planning or stress test requirements. A testing rules include (1) bank holding companies with total con- U.S. intermediate holding company that was required to be solidated assets of $50 billion or more, (2) any nonbank finan- established by July 1, 2016, and that was not previously subject cial company supervised by the Board that becomes subject to to the Board’s capital plan rule was required to submit its first the capital planning and stress test requirements pursuant to a capital plan in 2017 and will become subject to the Board’s rule or order of the Board, and (3) U.S. intermediate holding stress test rules beginning in 2018. companies of foreign banking organizations in accordance with 3 82 Fed. Reg. 42,882 (September 12, 2017).

110 104th Annual Report | 2017 of foreign G-SIBs (collectively, covered entities) to Policy Statement,5 and amendments to the Board’s amend their derivative, securities financing, and Policy Statement on the Scenario Design Framework other qualified financial contracts (QFCs) to prevent for Stress Testing6 (together, the transparency the disorderly unwind of the contracts if the parent proposals). or another entity within the firm enters bankruptcy or a resolution process. Given the large volume of The proposed enhanced model disclosures would QFCs to which these entities are a party, the exercise provide greater information about the models the of default rights en masse as a result of the failure of Federal Reserve uses to estimate the hypothetical one of the firms could lead to a disorderly resolution. losses in the Board’s supervisory stress tests. In particular, the following information would be made The final rule requires covered entities to make clear public for the first time: a range of loss rates, estiin their QFCs that both of the U.S. resolution mated using the Board’s models, for loans held by regimes for financial companies and institutions (i.e., CCAR firms; portfolios of hypothetical loans with title II of the Dodd-Frank Act and the Federal loss rates estimated by the Board’s models; and more Deposit Insurance Act) apply to the contracts. This detailed descriptions of the Board’s models, such as requirement should reduce the risk of a foreign court certain equations and key variables that influence the disregarding provisions of title II of the Dodd-Frank results of those models. Act and the Federal Deposit Insurance Act that temporarily stay the termination of QFCs. The rule also The Stress Testing Policy Statement would describe requires covered entities to ensure that their QFCs the Board’s approach to model development, implerestrict the ability of their counterparties to termi- mentation, use, and validation. The Stress Testing nate the contract, liquidate collateral, or exercise Policy Statement would elaborate on prior discloother default rights based on the resolution or liqui- sures and would provide details on the principles and dation of an affiliate of the G-SIB in bankruptcy or policies that guide the Board’s development of its in a resolution. The rule identifies protocols, includ- stress testing models. ing the International Swaps and Derivatives Association 2015 Universal Resolution Stay Protocol, that The amendments to the Scenario Design Policy comply with the rule. The final rule also makes tech- Statement would modify the Board’s framework for nical, conforming amendments to the Board’s capital the design of the annual hypothetical economic sceand liquidity rules. narios used in the supervisory and company-run stress tests required under the Dodd-Frank Act. The Key Regulatory Initiatives Proposed modifications aim to enhance transparency and to in 2017 further promote the resilience of the banking system throughout the economic cycle. In particular, the The following is a summary of additional regulatory revisions would include more information on the initiatives that the Board proposed in 2017. hypothetical path of house prices and provide notice that the Board is exploring the addition of variables Stress Testing Transparency (Regulation YY) to test for funding risks in the hypothetical scenarios. In December 2017, the Board requested comment on a package of proposals that would increase the trans- The comment period for the transparency proposals parency of its stress testing program through ended on January 22, 2018. enhanced model disclosures regarding the Federal Reserve’s supervisory stress testing,4 a Stress Testing 5 82 Fed. Reg. 59,528 (December 15, 2017). 4 82 Fed. Reg. 59,547 (December 15, 2017). 6 82 Fed. Reg. 59,533 (December 15, 2017).

Other Federal Reserve Operations 111 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-

113 8 Record of Policy Actions of the Board of Governors Policy actions of the Board of Governors are pre- rate on secondary credit increased by formula as a sented pursuant to section 10 of the Federal Reserve result of the primary credit rate change. The Regula- Act. That section provides that the Board shall keep tion D action reflects an increase to ¾ percent, effeca record of all questions of policy determined by the tive December 15, 2016, in the rates of interest paid Board and shall include in its annual report to Con- on balances maintained to satisfy reserve balance gress a full account of such actions. This section pro- requirements and on excess balances maintained at vides a summary of policy actions in 2017, as imple- the Federal Reserve Banks by or on behalf of eligible mented through (1) rules and regulations, (2) policy institutions.2 (Note: Similar amendments to Regulastatements and other actions, and (3) discount rates tions A and D were approved by the Board on for depository institutions. Policy actions were March 15,3 June 14,4 and December 13, 2017,5 to approved by all Board members in office, unless indi- implement the Board’s interest rate actions taken on cated otherwise.1 More information on the actions is those dates in conjunction with the FOMC’s actions available from the relevant Federal Register notices or taken on those same dates to increase the target other documents (see links in footnotes) or on range for the federal funds rate. See “Interest on request from the Board’s Freedom of Information Reserves” and “Discount Rates for Depository Insti- Office. tutions in 2017” later in this section for more information, including the Board votes for each action.) For information on the Federal Open Market Committee’s policy actions relating to open market opera- Voting for the January 3, 2017, actions: Chair tions, see section 9, “Minutes of Federal Open Mar- Yellen, Vice Chairman Fischer, and Governors ket Committee Meetings.” Tarullo, Powell, and Brainard. Regulation C (Home Mortgage Disclosure) Rules and Regulations On December 13, 2017, the Board approved a final Regulations A (Extensions of Credit by rule (Docket No. R-1590) repealing the Board’s Federal Reserve Banks) and D (Reserve Regulation C, which was superseded by the interim Requirements of Depository Institutions) final rule from the Consumer Financial Protection Bureau (CFPB) to implement the Home Mortgage On January 3, 2017, the Board approved amend- Disclosure Act pursuant to the transfer of rulemakments to Regulations A and D (Docket Nos. R-1558 ing authority to the CFPB under the Dodd-Frank and R-1559) to implement its interest rate actions on Wall Street Reform and Consumer Protection Act December 14, 2016, in conjunction with the action by the Federal Open Market Committee (FOMC) on the same date to increase the target range for the fed- 2 See Federal Register notices at www.gpo.gov/fdsys/pkg/FReral funds rate by 25 basis points, to a range of 2017-01-23/html/2017-00612.htm and www.gpo.gov/fdsys/pkg/ ½ percent to ¾ percent. The Regulation A action FR-2017-01-23/html/2017-00613.htm. reflects the Board’s approval of an increase in the 3 See Federal Register notices at www.gpo.gov/fdsys/pkg/FR- 2017-04-18/html/2017-07742.htm and www.gpo.gov/fdsys/pkg/ interest rate charged by the Federal Reserve Banks on FR-2017-04-18/html/2017-07743.htm. primary credit from 1 percent to 1¼ percent, with the 4 See Federal Register notices at www.gpo.gov/fdsys/pkg/FR- 2017-06-26/html/2017-13106.htm and www.gpo.gov/fdsys/pkg/ 1 Governor Tarullo resigned on April 5, and Randal Quarles FR-2017-06-26/html/2017-13107.htm. joined the Board as a member and as Vice Chairman for Super- 5 See Federal Register notices at www.gpo.gov/fdsys/pkg/FRvision on October 13, 2017. Vice Chairman Fischer resigned on 2017-12-20/html/2017-27392.htm and www.gpo.gov/fdsys/pkg/ October 16, 2017. FR-2017-12-20/html/2017-27393.htm.

114 104th Annual Report | 2017 (Dodd-Frank Act).6 The CFPB issued a revised final mortgage-servicing assets and certain other items in rule in April 2016. The Board’s final rule repealing its order to prevent different rules from taking effect Regulation C is effective January 22, 2018. while all three agencies consider a broader simplification of the capital rules.9 The final rule applies only Voting for this action: Chair Yellen, Vice Chair- to banking organizations not subject to the agencies’ man for Supervision Quarles, and Governors “advanced approaches” capital rules, generally firms Powell and Brainard. that have less than $250 billion in total consolidated assets and less than $10 billion in total foreign expo- Regulation I (Issue and Cancellation of sure. The final rule is effective January 1, 2018. Federal Reserve Bank Capital Stock) Voting for this action: Chair Yellen, Vice Chair- On January 5, 2017, the Board approved a final rule man for Supervision Quarles, and Governors (Docket No. R-1560) to apply an inflation adjust- Powell and Brainard. ment to the asset threshold at which member banks are subject to a different dividend rate on their Fed- Regulations Q (Capital Adequacy of Bank eral Reserve Bank stock.7 In January 2016, the Fixing Holding Companies, Savings and Loan America’s Surface Transportation Act set the divi- Holding Companies, and State Member dend rate that member banks with more than $10 bil- Banks), WW (Liquidity Risk Measurement lion in total consolidated assets earn on their Federal Standards), and YY (Enhanced Prudential Reserve Bank stock at the lesser of 6 percent or the Standards) most recent 10-year Treasury auction rate prior to the dividend payment. (Member banks below the On September 1, 2017, the Board approved a final asset threshold will continue to earn a dividend of rule (Docket No. R-1538) to enhance financial stabil- 6 percent on their Reserve Bank stock.) The act also ity by establishing restrictions on qualified financial requires the Board to adjust the $10 billion threshold contracts (QFCs) of global systemically important annually for inflation. Based on this adjustment, banking organizations (G-SIBs).10 The final rule, the total consolidated asset threshold will be issued under section 165 of the Dodd-Frank Act, $10,122,000,000 through December 31, 2017. The would require U.S. G-SIBs and the U.S. operations of final rule is effective March 27, 2017. (Note: On foreign G-SIBs to amend the terms of QFCs to pre- November 13, 2017, the Board published a final rule vent the immediate termination of these contracts if to establish a total consolidated asset threshold, as a firm enters bankruptcy or another resolution proadjusted for inflation, of $10,283,000,000 through cess. QFCs include derivatives and securities financ- December 31, 2018.8) ing transactions, such as repurchase agreements and securities lending transactions. Because G-SIBs con- Voting for this action: Chair Yellen, Vice Chairduct a large volume of transactions through QFCs, man Fischer, and Governors Tarullo, Powell, the mass termination of these contracts as a result of and Brainard. a G-SIB resolution might lead to the disorderly failure of the G-SIB, generate asset fire sales, and trans- Regulation Q (Capital Adequacy of Bank mit financial risk across the U.S. financial system. Holding Companies, Savings and Loan The final rule contains two key requirements: Holding Companies, and State Member (1) QFCs of G-SIBs, including those with foreign Banks) counterparties, are required to clarify that U.S. resolution laws providing for a temporary stay to prevent On November 9, 2017, the Board approved a final mass terminations apply to the contracts, and rule (Docket No. R-1571), published jointly with the (2) QFCs of G-SIBs are prohibited from allowing the Federal Deposit Insurance Corporation (FDIC) and exercise of default rights that could spread the bank- Office of the Comptroller of the Currency (OCC), to ruptcy of one G-SIB entity to its solvent affiliates. extend the existing regulatory capital treatment for The final rule also amends certain definitions in the Board’s capital and liquidity rules to ensure that the 6 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2017- 12-22/html/2017-27491.htm. 7 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2017- 9 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2017- 02-24/html/2017-03568.htm. 11-21/html/2017-25172.htm. 8 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2017- 10 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2017- 11-13/html/2017-24553.htm. 09-12/html/2017-19053.htm.

Record of Policy Actions of the Board of Governors 115 regulatory capital and liquidity treatment of QFCs to other provisions in its Community Reinvestment Act which a covered entity is a party is not affected by the regulation to recent revisions the CFPB made to its final rule’s restrictions on such QFCs. The final rule Regulation C.12 In particular, the final rule revised is effective on November 13, 2017, with phased-in the definitions of “home mortgage loan” and “concompliance beginning on January 1, 2019. sumer loan,” as well as the public-file content requirements. The final rule, which also removed Voting for this action: Chair Yellen, Vice obsolete references to the Neighborhood Stabiliza- Chairman Fischer, and Governors Powell and tion Program, is effective January 1, 2018. Brainard. Voting for this action: Chair Yellen, Vice Chair- Regulations Y (Bank Holding Companies man for Supervision Quarles, and Governors and Change in Bank Control) and YY Powell and Brainard. (Enhanced Prudential Standards) Regulation CC (Availability of Funds and On January 23, 2017, the Board approved a final rule Collection of Checks) (Docket No. R-1548) that revises the capital plan and stress test rules, effective for the 2017 Comprehensive On May 16, 2017, the Board approved a final rule Capital and Analysis Review (CCAR) cycle.11 The (Docket No. R-1409) to create a default framework final rule provides that large and noncomplex firms for electronic check collection and return, reflecting will no longer be subject to the qualitative compo- the evolution of the U.S. check collection system nent of the CCAR assessment or the provisions of from a paper-based to virtually all-electronic the capital plan rule whereby the Board may object to system.13 Among other provisions, the final rule the firm’s capital plan on the basis of qualitative defi- amends existing check-return requirements to create ciencies in the firm’s capital planning process. Under incentives for banks still using paper to accept electhe final rule, large and noncomplex firms are bank tronic presentment and return, creates legal protecholding companies and U.S. intermediate holding tions for electronic checks to ensure that a bank companies of foreign banking organizations that receives similar protections regardless of whether a (1) have total consolidated assets of at least $50 bil- check is in paper or electronic form, creates proteclion but less than $250 billion, (2) have nonbank tions for banks that receive electronic items that are assets of less than $75 billion, and (3) are not identi- not checks but are cleared through the check collecfied as global systemically important banks. The final tion system, and retains the existing same-day settlerule also modifies certain reporting requirements, ment rule for paper checks. The final rule is effective simplifies the initial applicability provisions of both July 1, 2018. the capital plan and stress test rules, reduces the amount of additional capital distributions such firms Voting for this action: Chair Yellen, Vice may make during a capital plan cycle without seeking Chairman Fischer, and Governors Powell and the Board’s prior approval, and extends the range of Brainard. potential as-of dates the Board may use for the trading and counterparty scenario component used in the Rules of Organization and Rules stress test rules. The final rule is effective March 6, Regarding Delegation of Authority 2017. On October 25, 2017, the Board approved an amend- Voting for this action: Chair Yellen, Vice Chair- ment (Docket No. OP-1578) to the definition of a man Fischer, and Governors Tarullo, Powell, quorum of the Board in the Rules of Organization to and Brainard. facilitate the Board’s ability to function efficiently during periods of substantial vacancies on the Regulation BB (Community Reinvestment) Board.14 The amendment provides that four Board members constitute a quorum, unless there are three On November 8, 2017, the Board approved a final rule (Docket No. R-1574), issued jointly with the 12 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2017- FDIC and OCC, to conform certain definitions and 12-27/html/2017-27813.htm. 13 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2017- 06-15/html/2017-11379.htm. 11 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2017- 14 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2017- 02-03/html/2017-02257.htm. 11-22/html/2017-25122.htm.

116 104th Annual Report | 2017 or fewer Board members in office, in which case a account for inflation, as required by the Federal Civil quorum would be all Board members in office. The Penalties Inflation Adjustment Act Improvements amendment does not alter the definition of a quorum Act of 2015.17 The final rule is effective January 10, in normal operating conditions (that is, when five or 2018. more members are in office, four members would still constitute a quorum). In addition, the amendment Voting for this action: Chair Yellen, Vice Chairprovides that (1) recused or disqualified Board mem- man for Supervision Quarles, and Governors bers are excluded from calculations of the quorum Powell and Brainard. requirement and (2) in exigent circumstances, a quorum would be defined as a majority of Board mem- Rules Regarding Availability of Information bers in office. In connection with the Rules of Organization amendment, the Board also approved a final On October 19, 2017, the Board approved a final rule rule (Docket No. R-1578) amending its Rules (Docket No. R-1556) to amend its regulations for Regarding Delegation of Authority to provide for a processing requests under the Freedom of Informamodified quorum procedure during exigent circum- tion Act (FOIA), pursuant to the FOIA Improvestances.15 The Rules of Organization amendment is ment Act of 2016.18 The amendments clarify and effective October 25, and the delegation of authority update procedures for the disclosure of records to the final rule is effective November 22, 2017. public, extend the deadline for administrative appeals, and add information on dispute resolution Voting for these actions: Chair Yellen, Vice services. The final rule, effective November 24, 2017, Chairman for Supervision Quarles, and Gover- finalizes an interim final rule published in Decemnors Powell and Brainard. ber 2016. Rules of Practice for Hearings Voting for this action: Chair Yellen, Vice Chairman for Supervision Quarles, and Governors On January 6, 2017, the Board approved a final rule Powell and Brainard. (Docket No. R-1543) amending its rules of practice and procedure to implement an annual adjustment to Policy Statements and Other Actions its maximum civil money penalty (CMP) amounts to account for inflation, as required by the Federal Civil Penalties Inflation Adjustment Act Improvements Covered Fund Seeding-Period Extensions Act of 2015.16 The act required this adjustment to be made annually rather than every four years, pre- On July 17, 2017, the Board approved an order delscribed the formula for inflation adjustment, and egating authority to the Federal Reserve Banks, in directed federal agencies to make a “catch-up” consultation with Board staff, to approve (but not adjustment (the first inflation adjustment after enact- deny) an application by a banking entity for an ment of the law). An interim final rule issued by the extension of time to conform certain “seeding” Board in July 2016 incorporated the catch-up adjust- investments in hedge funds or private equity funds ment in the CMP levels. The final rule, effective Janu- (covered funds) to the requirements of section 165 of ary 15, 2017, set the CMP levels pursuant to the the Dodd-Frank Act, commonly known as the required annual adjustment for 2017. Volcker rule.19 “Seeding” refers to the period of time during which a banking entity provides a new fund Voting for this action: Chair Yellen, Vice Chair- with initial equity to permit the fund to attract invesman Fischer, and Governors Tarullo, Powell, tors. The Volcker rule requires that a banking entity and Brainard. actively seek unaffiliated investors to reduce its investment in the covered fund, no later than one On December 26, 2017, the Board approved a final year after the date of establishment of the fund, to rule (Docket No. R-1595) amending its rules of prac- an amount that is not more than 3 percent of the tice and procedure to implement an annual adjustment for 2018 to its maximum CMP amounts to 17 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2018- 01-10/html/2018-00227.htm. 15 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2017- 18 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2017- 11-22/html/2017-24052.htm. 10-25/html/2017-23095.htm. 16 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2017- 19 See press release at www.federalreserve.gov/newsevents/ 01-25/html/2017-00595.htm. pressreleases/bcreg20170724a.htm.

Record of Policy Actions of the Board of Governors 117 total outstanding ownership interests in the fund. A Voting for this action: Chair Yellen, Vice banking entity may request the Board’s approval for Chairman Fischer, and Governors Brainard and an extension of time for up to two additional years to Powell. conform its investment. Under the order, a Federal Reserve Bank may approve a banking entity’s request Disaster-Related Appraisal Exceptions for an extension of the seeding period, provided certain criteria are met. The order is effective July 24, On October 10, 2017, the Board approved a state- 2017. ment and order (Docket No. OP-1577), published jointly with the FDIC, National Credit Union Voting for this action: Chair Yellen, Vice Administration, and OCC, granting temporary Chairman Fischer, and Governors Powell and exceptions to the regulatory appraisal requirements Brainard. for federally related transactions in designated disaster areas of Florida, Georgia, Puerto Rico, Texas, Joint Accounts at Reserve Banks and the U.S. Virgin Islands, provided the transactions meet certain criteria.22 The exceptions were intended On August 3, 2017, the Board approved final guide- to facilitate disaster recovery from Hurricanes Harlines (Docket No. OP-1557) for evaluating requests vey, Irma, and Maria and will expire three years after for joint accounts at Federal Reserve Banks to facili- the date of the disaster declaration for each area. tate settlement between and among depository institutions participating in private-sector payment sys- Voting for this action: Chair Yellen, Vice tems.20 While the Reserve Banks routinely open and Chairman Fischer, and Governors Brainard and maintain accounts for eligible depository institutions, Powell. joint accounts, in which the rights and liabilities are shared among multiple depository institution Interest on Reserves account holders, have not generally been available. The guidelines broadly outline factors that will be On March 15, 2017, the Board approved raising the considered, but all requests for joint accounts will be interest rate paid on required and excess reserve balevaluated on a case-by-case basis. The final guidelines ances from ¾ percent to 1 percent, effective are effective September 5, 2017. March 16, 2017.23 This action was taken to support the FOMC’s decision on March 15 to raise the target Voting for this action: Chair Yellen, Vice range for the federal funds rate by 25 basis points, to Chairman Fischer, and Governors Powell and a range of ¾ percent to 1 percent. Brainard. Voting for this action: Chair Yellen, Vice Chair- Payment System Improvement Strategies man Fischer, and Governors Tarullo, Powell, and Brainard. On August 29, 2017, the Board approved the publication of Strategies for Improving the U.S. Payments On June 14, 2017, the Board approved raising the System: Federal Reserve Next Steps in the Payments interest rate paid on required and excess reserve bal- Improvement Journey.21 The paper, published jointly ances from 1 percent to 1¼ percent, effective June 15, with the Federal Reserve Banks, follows up on the 2017.24 This action was taken to support the strategic vision articulated in the Federal Reserve’s FOMC’s decision on June 14 to raise the target range January 2015 paper on payment system improve- for the federal funds rate by 25 basis points, to a ment. The new paper puts forward a series of range of 1 percent to 1¼ percent. refreshed strategies and new tactics to achieve the desired outcomes of speed, security, efficiency, inter- Voting for this action: Chair Yellen, Vice national payments, and industry collaboration. Chairman Fischer, and Governors Powell and Brainard. 22 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2017- 10-24/html/2017-22957.htm. 20 See Federal Register notice at www.gpo.gov/fdsys/pkg/FR-2017- 23 See press release at www.federalreserve.gov/newsevents/ 09-05/html/2017-18705.htm. pressreleases/monetary20170315a1.htm. 21 See press release at www.federalreserve.gov/newsevents/ 24 See press release at www.federalreserve.gov/newsevents/ pressreleases/other20170906a.htm. pressreleases/monetary20170614a1.htm.

118 104th Annual Report | 2017 On December 13, 2017, the Board approved raising for primary credit. The secondary credit rate is set at the interest rate paid on required and excess reserve a spread above the primary credit rate. Throughout balances from 1¼ percent to 1½ percent, effective 2017, the spread was set at 50 basis points. At year- December 14, 2017.25 This action was taken to sup- end, the secondary credit rate was 2½ percent. port the FOMC’s decision on December 13 to raise the target range for the federal funds rate by 25 basis Seasonal credit is available to smaller depository points, to a range of 1¼ percent to 1½ percent. institutions to meet liquidity needs that arise from regular swings in their loans and deposits. The rate Voting for this action: Chair Yellen, Vice Chair- on seasonal credit is calculated every two weeks as an man for Supervision Quarles, and Governors average of selected money market yields, typically Powell and Brainard. resulting in a rate close to the target range for the federal funds rate. At year-end, the seasonal credit rate was 1.40 percent.26 Discount Rates for Depository Institutions in 2017 Votes on Changes to Discount Rates for Depository Institutions Under the Federal Reserve Act, the boards of directors of the Federal Reserve Banks must establish Details on the three actions by the Board to approve rates on discount window loans to depository institu- increases in the primary credit rate are provided tions at least every 14 days, subject to review and below. determination by the Board of Governors. Periodically, the Board considers proposals by the 12 March 15, 2017. Effective March 16, 2017, the Board Reserve Banks to establish the primary credit rate approved actions taken by the boards of directors of and approves proposals to maintain the formulas for the Federal Reserve Banks of Boston, New York, computing the secondary and seasonal credit rates. Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Fran- Primary, Secondary, and Seasonal Credit cisco to increase the primary credit rate from 1¼ percent to 1½ percent. On March 16, 2017, the Board Primary credit, the Federal Reserve’s main lending approved an identical action subsequently taken by program for depository institutions, is extended at the board of directors of the Federal Reserve Bank the primary credit rate, which is set above the usual of Minneapolis, effective immediately. level of short-term market interest rates. It is made available, with minimal administration and for very Voting for this action: Chair Yellen, Vice Chairshort terms, as a backup source of liquidity to man Fischer, and Governors Tarullo, Powell, depository institutions that, in the judgment of the and Brainard. lending Federal Reserve Bank, are in generally sound financial condition. During 2017, the Board June 14, 2017. Effective June 15, 2017, the Board approved three increases in the primary credit rate, approved actions taken by the boards of directors of bringing the rate from 1¼ percent to 2 percent. The the Federal Reserve Banks of Boston, Philadelphia, Board reached these determinations on the primary Cleveland, Richmond, Atlanta, Chicago, Kansas credit rate recommendations of the Reserve Bank City, Dallas, and San Francisco to increase the priboards of directors. The Board’s actions were taken mary credit rate from 1½ percent to 1¾ percent. On in conjunction with the FOMC’s decisions to raise June 15, 2017, the Board approved identical actions the target range for the federal funds rate by 75 basis subsequently taken by the boards of directors of the points, to 1¼ percent to 1½ percent. Monetary policy Federal Reserve Banks of New York, St. Louis, and developments are reviewed more fully in other parts Minneapolis, effective immediately. of this report (see section 2, “Monetary Policy and Economic Developments”). Voting for this action: Chair Yellen, Vice Chairman Fischer, and Governors Powell and Secondary credit is available in appropriate circum- Brainard. stances to depository institutions that do not qualify 25 See press release at www.federalreserve.gov/newsevents/ 26 For current and historical discount rates, see www pressreleases/monetary20171213a1.htm. .frbdiscountwindow.org/.

Record of Policy Actions of the Board of Governors 119 December 13, 2017. Effective December 14, 2017, the actions subsequently taken by the boards of directors Board approved actions taken by the boards of direc- of the Federal Reserve Banks of Chicago, St. Louis, tors of the Federal Reserve Banks of Boston, New and Minneapolis, effective immediately. York, Philadelphia, Cleveland, Richmond, Atlanta, Kansas City, Dallas, and San Francisco to increase Voting for this action: Chair Yellen, Vice Chairthe primary credit rate from 1¾ percent to 2 percent. man for Supervision Quarles, and Governors On December 14, 2017, the Board approved identical Powell and Brainard.

121 Minutes of 9 Federal Open Market Committee Meetings The policy actions of the Federal Open Market Com- a decision, they are identified in the minutes and a mittee, recorded in the minutes of its meetings, are summary of the reasons for their dissent is provided. presented in the Annual Report of the Board of Governors pursuant to the requirements of section 10 of Policy directives of the Federal Open Market Comthe Federal Reserve Act. That section provides that mittee are issued to the Federal Reserve Bank of New the Board shall keep a complete record of the actions York as the Bank selected by the Committee to taken by the Board and by the Federal Open Market execute transactions for the System Open Market Committee on all questions of policy relating to open Account. In the area of domestic open market operamarket operations, that it shall record therein the tions, the Federal Reserve Bank of New York opervotes taken in connection with the determination of ates under instructions from the Federal Open Maropen market policies and the reasons underlying each ket Committee that take the form of an Authorizapolicy action, and that it shall include in its annual tion for Domestic Open Market Operations and a report to Congress a full account of such actions. Domestic Policy Directive. (A new Domestic Policy Directive is adopted at each regularly scheduled The minutes of the meetings contain the votes on the meeting.) In the foreign currency area, the Federal policy decisions made at those meetings, as well as a Reserve Bank of New York operates under an Authosummary of the information and discussions that led rization for Foreign Currency Operations and a Forto the decisions. In addition, four times a year, a eign Currency Directive. 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 Commit- 1 As of January 1, 2017, the Federal Reserve Bank of New York tee at the time of the meetings. was operating under the Domestic Policy Directive approved at the December 13–14, 2016, Committee meeting. The Authorization for Domestic Open Market Operations in effect as of Janu- Members of the Committee voting for a particular ary 1, 2017, was approved at the January 26–27, 2016, meeting. action may differ among themselves as to the reasons The other policy instruments (the Authorization for Foreign Currency Operations and the Foreign Currency Directive) in for their votes; in such cases, the range of their views effect as of January 1, 2017, were approved at the Septemis noted in the minutes. When members dissent from ber 20–21, 2016, meeting.

122 104th Annual Report | 2017 Meeting Held Michael Held Deputy General Counsel on January 31–February 1, 2017 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 31, 2017, at 1:00 p.m. and continued on David W. Wilcox Wednesday, February 1, 2017, at 9:00 a.m.1 Economist James A. Clouse, Thomas A. Connors, Present Michael Dotsey, Eric M. Engen, Evan F. Koenig, Janet L. Yellen Jonathan P. McCarthy, Daniel G. Sullivan, Chair William Wascher, and Beth Anne Wilson Associate Economists William C. Dudley Vice Chairman Simon Potter Manager, System Open Market Account Lael Brainard Lorie K. Logan Charles L. Evans Deputy Manager, System Open Market Account Stanley Fischer Robert deV. Frierson Patrick Harker Secretary, Office of the Secretary, Board of Governors Robert S. Kaplan Matthew J. Eichner3 Neel Kashkari Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Jerome H. Powell Michael S. Gibson4 Daniel K. Tarullo Director, Division of Supervision and Regulation, Marie Gooding, Jeffrey M. Lacker, Loretta J. Mester, Board of Governors Michael Strine,2 and John C. Williams Andreas Lehnert Alternate Members of the Federal Open Market Director, Division of Financial Stability, Committee Board of Governors James Bullard, Esther L. George, and Eric Rosengren Presidents of the Federal Reserve Banks of St. Louis, Michael T. Kiley Kansas City, and Boston, respectively Deputy Director, Division of Financial Stability, Board of Governors Brian F. Madigan Secretary Stephen A. Meyer Deputy Director, Division of Monetary Affairs, Matthew M. Luecke Board of Governors Deputy Secretary Trevor A. Reeve David W. Skidmore Senior Special Adviser to the Chair, Office of Board Assistant Secretary Members, Board of Governors Michelle A. Smith Andrew Figura, Joseph W. Gruber, Ann McKeehan, Assistant Secretary and David Reifschneider Special Advisers to the Board, Office of Board Scott G. Alvarez Members, Board of Governors General Counsel 1 The Federal Open Market Committee is referenced as the 3 Attended through the discussion of financial developments and “FOMC” and the “Committee” in these minutes. open market operations. 2 Attended Tuesday session only. 4 Attended Wednesday session only.

Minutes of Federal Open Market Committee Meetings | January–February 123 Linda Robertson Anna Orlik Assistant to the Board, Office of Board Members, Senior Economist, Division of Monetary Affairs, Board of Governors Board of Governors Antulio N. Bomfim, Ellen E. Meade, Kenneth C. Montgomery and Joyce K. Zickler First Vice President, Federal Reserve Bank of Boston Senior Advisers, Division of Monetary Affairs, David Altig, Ron Feldman, and Christopher J. Waller Board of Governors Executive Vice Presidents, Federal Reserve Banks of Jeremy B. Rudd Atlanta, Minneapolis, and St. Louis, respectively Senior Adviser, Division of Research and Statistics, Troy Davig and John A. Weinberg Board of Governors Senior Vice Presidents, Federal Reserve Banks of Shaghil Ahmed2 Kansas City and Richmond, respectively Associate Director, Division of International Finance, Bruce Fallick, Giovanni Olivei, and Robert G. Valletta Board of Governors Vice Presidents, Federal Reserve Banks of Cleveland, Jane E. Ihrig Boston, and San Francisco, respectively Associate Director, Division of Monetary Affairs, Board of Governors Annual Organization Matters5 Min Wei In the agenda for this meeting, it was reported that Deputy Associate Director, Division of Monetary advices of the election of the following members and Affairs, Board of Governors alternate members of the Federal Open Market Com- Glenn Follette, John M. Roberts, and Paul A. Smith2 mittee for a term beginning January 31, 2017, had Assistant Directors, Division of Research and been received and that these individuals had executed Statistics, Board of Governors their oaths of office. Eric C. Engstrom The elected members and alternate members were as Adviser, Division of Monetary Affairs, follows: and Adviser, Division of Research and Statistics, William C. Dudley Board of Governors President of the Federal Reserve Bank of New York, Penelope A. Beattie2 with Assistant to the Secretary, Office of the Secretary, Michael Strine Board of Governors First Vice President of the Federal Reserve Bank of New York, as alternate. Dana L. Burnett Section Chief, Division of Monetary Affairs, Patrick Harker Board of Governors President of the Federal Reserve Bank of Philadelphia, with David H. Small Project Manager, Division of Monetary Affairs, Jeffrey M. Lacker Board of Governors President of the Federal Reserve Bank of Richmond, as alternate. Laurie DeMarco Principal Economist, Division of International Charles L. Evans Finance, Board of Governors President of the Federal Reserve Bank of Chicago, with Naomi Feldman Principal Economist, Division of Research and Loretta J. Mester Statistics, Board of Governors President of the Federal Reserve Bank of Cleveland, as alternate. Yuriy Kitsul and Zeynep Senyuz Principal Economists, Division of Monetary Affairs, 5 Committee organizational documents are available at www Board of Governors .federalreserve.gov/monetarypolicy/rules_authorizations.htm.

124 104th Annual Report | 2017 Robert S. Kaplan Jonathan P. McCarthy President of the Federal Reserve Bank of Dallas, Daniel G. Sullivan with William Wascher Marie Gooding Beth Anne Wilson First Vice President of the Federal Reserve Bank of Atlanta, as alternate. Associate Economists Neel Kashkari Secretary’s note: It was noted that President President of the Federal Reserve Bank of Kashkari intends to nominate an associate econo- Minneapolis, with mist from the Federal Reserve Bank of Minne- John C. Williams apolis when the recently named research director President of the Federal Reserve Bank of officially joins that Bank. San Francisco, as alternate. By unanimous vote, the Federal Reserve Bank of By unanimous vote, the following officers of the New York was selected to execute transactions for Committee were selected to serve until the selection the System Open Market Account (SOMA). of their successors at the first regularly scheduled meeting of the Committee in 2018: By unanimous vote, the Committee selected Simon Potter and Lorie K. Logan to serve at the pleasure of Janet L. Yellen the Committee as manager and deputy manager of Chairman the SOMA, respectively, on the understanding that William C. Dudley these selections were subject to their being satisfac- Vice Chairman tory to the Federal Reserve Bank of New York. Brian F. Madigan Secretary Secretary’s note: Advice subsequently was received that the manager and deputy manager Matthew M. Luecke selections indicated above were satisfactory to the Deputy Secretary Federal Reserve Bank of New York. David W. Skidmore Assistant Secretary By unanimous vote, the Committee voted to reaffirm without change the Authorization for Domestic Michelle A. Smith Open Market Operations, the Authorization for For- Assistant Secretary eign Currency Operations, and the Foreign Currency Scott G. Alvarez Directive as shown below. The Guidelines for the General Counsel Conduct of System Open Market Operations in Federal-Agency Issues remained suspended. Michael Held Deputy General Counsel Authorization for Domestic Open Market Richard M. Ashton Operations (As Reaffirmed Effective Assistant General Counsel January 31, 2017) Steven B. Kamin 1. The Federal Open Market Committee (the “Com- Economist mittee”) authorizes and directs the Federal Thomas Laubach Reserve Bank selected by the Committee to Economist execute open market transactions (the “Selected Bank”), to the extent necessary to carry out the David W. Wilcox most recent domestic policy directive adopted by Economist the Committee: James A. Clouse Thomas A. Connors A. To buy or sell in the open market securities that are direct obligations of, or fully guaran- Michael Dotsey teed as to principal and interest by, the Eric M. Engen United States, and securities that are direct Evan F. Koenig obligations of, or fully guaranteed as to prin-

Minutes of Federal Open Market Committee Meetings | January–February 125 cipal and interest by, any agency of the B. The aggregate par value of the transactions United States, that are eligible for purchase authorized in this paragraph 2 that are of the or sale under Section 14(b) of the Federal type described in paragraph 1.A.i shall not Reserve Act (“Eligible Securities”) for the exceed $5 billion per calendar year; and System Open Market Account (“SOMA”): C. The outstanding amount of the transactions i. As an outright operation with securities described in paragraph 1.A.ii shall not exceed dealers and foreign and international $5 billion at any given time. accounts maintained at the Selected Bank: on a same-day or deferred delivery 3. In order to ensure the effective conduct of open basis (including such transactions as are market operations, the Committee authorizes the commonly referred to as dollar rolls and Selected Bank to operate a program to lend Elicoupon swaps) at market prices; or gible Securities held in the SOMA to dealers on ii. As a temporary operation: on a same-day an overnight basis (except that the Selected Bank or deferred delivery basis, to purchase may lend Eligible Securities for longer than an such Eligible Securities subject to an overnight term to accommodate weekend, holiagreement to resell (“repo transactions”) day, and similar trading conventions). or to sell such Eligible Securities subject to an agreement to repurchase (“reverse A. Such securities lending must be: repo transactions”) for a term of 65 busii. At rates determined by competitive ness days or less, at rates that, unless othbidding; erwise authorized by the Committee, are determined by competitive bidding, after ii. At a minimum lending fee consistent with applying reasonable limitations on the the objectives of the program; volume of agreements with individual iii. Subject to reasonable limitations on the counterparties; total amount of a specific issue of Eligible Securities that may be auc- B. To allow Eligible Securities in the SOMA to tioned; and mature without replacement; iv. Subject to reasonable limitations on the C. To exchange, at market prices, in connection amount of Eligible Securities that each with a Treasury auction, maturing Eligible borrower may borrow. Securities in the SOMA with the Treasury, in the case of Eligible Securities that are direct B. The Selected Bank may: obligations of the United States or that are fully guaranteed as to principal and interest i. Reject bids that, as determined in its sole by the United States; and discretion, could facilitate a bidder’s ability to control a single issue; D. To exchange, at market prices, maturing Eliii. Accept Treasury securities or cash as colgible Securities in the SOMA with an agency lateral for any loan of securities authorof the United States, in the case of Eligible ized in this paragraph 3; and Securities that are direct obligations of that agency or that are fully guaranteed as to iii. Accept agency securities as collateral only principal and interest by that agency. for a loan of agency securities authorized in this paragraph 3. 2. The Committee authorizes the Selected Bank to undertake transactions of the type described in 4. In order to ensure the effective conduct of open paragraph 1 from time to time for the purpose of market operations, while assisting in the provision testing operational readiness, subject to the fol- of short-term investments or other authorized lowing limitations: services for foreign central bank and international accounts maintained at a Federal Reserve Bank A. All transactions authorized in this paragraph (the “Foreign Accounts”) and accounts main- 2 shall be conducted with prior notice to the tained at a Federal Reserve Bank as fiscal agent Committee; of the United States pursuant to section 15 of the

126 104th Annual Report | 2017 Federal Reserve Act (together with the Foreign Any such adjustment described in subparagraph Accounts, the “Customer Accounts”), the Com- A of this paragraph 5 shall be made in the conmittee authorizes the following when undertaken text of the Committee’s discussion and decision on terms comparable to those available in the about the stance of policy at its most recent meetopen market: ing and the Committee’s long-run objectives to foster maximum employment and price stability, A. The Selected Bank, for the SOMA, to under- and shall be based on economic, financial, and take reverse repo transactions in Eligible monetary developments since the most recent Securities held in the SOMA with the Cus- meeting of the Committee. The Chairman, tomer Accounts for a term of 65 business whenever feasible, will consult with the Commitdays or less; and tee before making any instruction under this paragraph 5. B. Any Federal Reserve Bank that maintains Customer Accounts, for any such Customer Authorization for Foreign Currency Operations Account, when appropriate and subject to all (As Reaffirmed Effective January 31, 2017) other necessary authorization and approvals, to: i. Undertake repo transactions in Eligible In General Securities with dealers with a corresponding reverse repo transaction in such Eli- 1. The Federal Open Market Committee (the “Comgible Securities with the Customer mittee”) authorizes the Federal Reserve Bank Accounts; and selected by the Committee (the “Selected Bank”) to execute open market transactions for the ii. Undertake intra-day repo transactions in System Open Market Account as provided in this Eligible Securities with Foreign Accounts. Authorization, to the extent necessary to carry out any foreign currency directive of the Transactions undertaken with Customer Committee: Accounts under the provisions of this paragraph 4 may provide for a service fee when appropriate. A. To purchase and sell foreign currencies (also Transactions undertaken with Customer known as cable transfers) at home and Accounts are also subject to the authorization or abroad in the open market, including with approval of other entities, including the Board of the United States Treasury, with foreign mon- Governors of the Federal Reserve System and, etary authorities, with the Bank for Internawhen involving accounts maintained at a Federal tional Settlements, and with other entities in Reserve Bank as fiscal agent of the United States, the open market. This authorization to purthe United States Department of the Treasury. chase and sell foreign currencies encompasses purchases and sales through standalone spot 5. The Committee authorizes the Chairman of the or forward transactions and through foreign Committee, in fostering the Committee’s objecexchange swap transactions. For purposes of tives during any period between meetings of the this Authorization, foreign exchange swap Committee, to instruct the Selected Bank to act transactions are: swap transactions with the on behalf of the Committee to: United States Treasury (also known as warehousing transactions), swap transactions with A. Adjust somewhat in exceptional circumother central banks under reciprocal currency stances the stance of monetary policy and to arrangements, swap transactions with other take actions that may result in material central banks under standing dollar liquidity changes in the composition and size of the and foreign currency liquidity swap arrangeassets in the SOMA; or ments, and swap transactions with other entities in the open market. B. Undertake transactions with respect to Eligible Securities in order to appropriately address temporary disruptions of an opera- B. To hold balances of, and to have outstanding tional or highly unusual nature in U.S. dollar forward contracts to receive or to deliver, forfunding markets. eign currencies.

Minutes of Federal Open Market Committee Meetings | January–February 127 2. All transactions in foreign currencies undertaken the overall volume of standalone spot and pursuant to paragraph 1 above shall, unless other- forward transactions in foreign currencies, wise authorized by the Committee, be conducted: as defined in paragraph 3.C of this Authorization, totaling $5 billion or less since the A. In a manner consistent with the obligations close of the most recent regular meeting of regarding exchange arrangements under the Committee. Article IV of the Articles of Agreement of the International Monetary Fund (IMF).6 B. Such an operation also shall be: i. Generally directed at countering disor- B. In close and continuous cooperation and derly market conditions; or consultation, as appropriate, with the United States Treasury. ii. Undertaken to adjust System balances in light of probable future needs for curren- C. In consultation, as appropriate, with foreign cies; or monetary authorities, foreign central banks, iii. Conducted for such other purposes as and international monetary institutions. may be determined by the Committee. D. At prevailing market rates. C. For purposes of this Authorization, the overall volume of standalone spot and forward Standalone Spot and Forward Transactions transactions in foreign currencies is defined as the sum (disregarding signs) of the dollar 3. For any operation that involves standalone spot values of individual foreign currencies puror forward transactions in foreign currencies: chased and sold, valued at the time of the transaction. A. Approval of such operation is required as follows: Warehousing i. The Committee must direct the Selected Bank in advance to execute the operation 4. The Committee authorizes the Selected Bank, if it would result in the overall volume of with the prior approval of the Subcommittee and standalone spot and forward transactions at the request of the United States Treasury, to in foreign currencies, as defined in para- conduct swap transactions with the United States graph 3.C of this Authorization, exceed- Exchange Stabilization Fund established by secing $5 billion since the close of the most tion 10 of the Gold Reserve Act of 1934 under recent regular meeting of the Committee. agreements in which the Selected Bank purchases The Foreign Currency Subcommittee (the foreign currencies from the Exchange Stabiliza- “Subcommittee”) must direct the Selected tion Fund and the Exchange Stabilization Fund Bank in advance to execute the operation repurchases the foreign currencies from the if the Subcommittee believes that consul- Selected Bank at a later date (such purchases and tation with the Committee is not feasible sales also known as warehousing). in the time available. Reciprocal Currency Arrangements, and ii. The Committee authorizes the Subcommit- Standing Dollar and Foreign Currency tee to direct the Selected Bank in advance to Liquidity Swaps execute the operation if it would result in 5. The Committee authorizes the Selected Bank to 6 In general, as specified in Article IV, each member of the IMF maintain reciprocal currency arrangements estabundertakes to collaborate with the IMF and other members to assure orderly exchange arrangements and to promote a stable lished under the North American Framework system of exchange rates. These obligations include seeking to Agreement, standing dollar liquidity swap direct the member’s economic and financial policies toward the arrangements, and standing foreign currency objective of fostering orderly economic growth with reasonable price stability. These obligations also include avoiding manipu- liquidity swap arrangements as provided in this lating exchange rates or the international monetary system in Authorization and to the extent necessary to such a way that would impede effective balance of payments carry out any foreign currency directive of the adjustment or to give an unfair competitive advantage over other members. Committee.

128 104th Annual Report | 2017 A. For reciprocal currency arrangements all Other Operations in Foreign Currencies drawings must be approved in advance by the Committee (or by the Subcommittee, if the 6. Any other operations in foreign currencies for Subcommittee believes that consultation with which governance is not otherwise specified in the Committee is not feasible in the time this Authorization (such as foreign exchange swap available). transactions with private-sector counterparties) must be authorized and directed in advance by B. For standing dollar liquidity swap arrange- the Committee. ments all drawings must be approved in advance by the Chairman. The Chairman Foreign Currency Holdings may approve a schedule of potential drawings, and may delegate to the manager, 7. The Committee authorizes the Selected Bank to System Open Market Account, the authority hold foreign currencies for the System Open Marto approve individual drawings that occur ket Account in accounts maintained at foreign according to the schedule approved by the central banks, the Bank for International Settle- Chairman. ments, and such other foreign institutions as approved by the Board of Governors under Sec- C. For standing foreign currency liquidity swap tion 214.5 of Regulation N, to the extent necesarrangements all drawings must be approved sary to carry out any foreign currency directive of in advance by the Committee (or by the Subthe Committee. committee, if the Subcommittee believes that consultation with the Committee is not fea- A. The Selected Bank shall manage all holdings sible in the time available). of foreign currencies for the System Open Market Account: D. Operations involving standing dollar liquidity swap arrangements and standing foreign i. Primarily, to ensure sufficient liquidity to currency liquidity swap arrangements shall enable the Selected Bank to conduct forgenerally be directed at countering strains in eign currency operations as directed by financial markets in the United States or the Committee; abroad, or reducing the risk that they could ii. Secondarily, to maintain a high degree of emerge, so as to mitigate their effects on ecosafety; nomic and financial conditions in the United States. iii. Subject to paragraphs 7.A.i and 7.A.ii, to provide the highest rate of return possible E. For reciprocal currency arrangements, stand- in each currency; and ing dollar liquidity swap arrangements, and iv. To achieve such other objectives as may standing foreign currency liquidity swap be authorized by the Committee. arrangements: i. All arrangements are subject to annual B. The Selected Bank may manage such foreign review and approval by the Committee; currency holdings by: ii. Any new arrangements must be approved i. Purchasing and selling obligations of, or by the Committee; and fully guaranteed as to principal and interiii. Any changes in the terms of existing est by, a foreign government or agency arrangements must be approved in thereof (“Permitted Foreign Securities”) advance by the Chairman. The Chairman through outright purchases and sales; shall keep the Committee informed of any ii. Purchasing Permitted Foreign Securities changes in terms, and the terms shall be under agreements for repurchase of such consistent with principles discussed with Permitted Foreign Securities and selling and guidance provided by the Committee.

Minutes of Federal Open Market Committee Meetings | January–February 129 such securities under agreements for the 10.All Federal Reserve banks shall participate in the resale of such securities; and foreign currency operations for System Open Market Account in accordance with paragraph iii. Managing balances in various time and 3G(1) of the Board of Governors’ Statement of other deposit accounts at foreign institu- Procedure with Respect to Foreign Relationships tions approved by the Board of Goverof Federal Reserve Banks dated January 1, 1944. nors under Regulation N. 11.Any authority of the Subcommittee pursuant to C. The Subcommittee, in consultation with the this Authorization may be exercised by the Chair- Committee, may provide additional instrucman if the Chairman believes that consultation tions to the Selected Bank regarding holdings with the Subcommittee is not feasible in the time of foreign currencies. available. The Chairman shall promptly report to Additional Matters the Subcommittee any action approved by the Chairman pursuant to this paragraph. 8. The Committee authorizes the Chairman: 12.The Committee authorizes the Chairman, in A. With the prior approval of the Committee, to exceptional circumstances where it would not be enter into any needed agreement or under- feasible to convene the Committee, to foster the standing with the Secretary of the United Committee’s objectives by instructing the States Treasury about the division of respon- Selected Bank to engage in foreign currency sibility for foreign currency operations operations not otherwise authorized pursuant to between the System and the United States this Authorization. Any such action shall be made Treasury; in the context of the Committee’s discussion and decisions regarding foreign currency operations. B. To advise the Secretary of the United States The Chairman, whenever feasible, will consult Treasury concerning System foreign currency with the Committee before making any instrucoperations, and to consult with the Secretary tion under this paragraph. on policy matters relating to foreign currency Foreign Currency Directive (As Reaffirmed operations; Effective January 31, 2017) C. To designate Federal Reserve System persons authorized to communicate with the United 1. The Committee directs the Federal Reserve Bank States Treasury concerning System Open selected by the Committee (the “Selected Bank”) Market Account foreign currency opera- to execute open market transactions, for the tions; and System Open Market Account, in accordance with the provisions of the Authorization for For- D. From time to time, to transmit appropriate eign Currency Operations (the “Authorization”) reports and information to the National and subject to the limits in this Directive. Advisory Council on International Monetary and Financial Policies. 2. The Committee directs the Selected Bank to execute warehousing transactions, if so requested 9. The Committee authorizes the Selected Bank to by the United States Treasury and if approved by undertake transactions of the type described in the Foreign Currency Subcommittee (the “Subthis Authorization, and foreign exchange and committee”), subject to the limitation that the investment transactions that it may be otherwise outstanding balance of United States dollars proauthorized to undertake, from time to time for vided to the United States Treasury as a result of the purpose of testing operational readiness. The these transactions not at any time exceed $5 bilaggregate amount of such transactions shall not lion. exceed $2.5 billion per calendar year. These transactions shall be conducted with prior notice to 3. The Committee directs the Selected Bank to the Committee. maintain, for the System Open Market Account:

130 104th Annual Report | 2017 A. Reciprocal currency arrangements with the guage was inserted into the Authorization for Forfollowing foreign central banks: eign Currency Operations in September 2016. Foreign central bank M aximum amount In the Committee’s annual reconsideration of the (millions of dollars or equivalent) Statement on Longer-Run Goals and Monetary Bank of Canada 2,000 Policy Strategy, participants agreed that only a minor Bank of Mexico 3,000 revision was required at this meeting, which was to update the reference to participants’ estimates of the B. Standing dollar liquidity swap arrangements longer-run normal rate of unemployment from with the following foreign central banks: 4.9 percent to 4.8 percent. All participants supported the statement with the revision, and the Committee Bank of Canada voted unanimously to approve the updated Bank of England statement. Bank of Japan European Central Bank Statement on Longer-Run Goals and Monetary Swiss National Bank Policy Strategy (As Amended Effective January 31, 2017) C. Standing foreign currency liquidity swap “The Federal Open Market Committee (FOMC) is arrangements with the following foreign cen- firmly committed to fulfilling its statutory mandate tral banks: from the Congress of promoting maximum employment, stable prices, and moderate long-term interest Bank of Canada rates. The Committee seeks to explain its monetary Bank of England policy decisions to the public as clearly as possible. Bank of Japan Such clarity facilitates well-informed decisionmaking European Central Bank by households and businesses, reduces economic and Swiss National Bank financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and 4. The Committee directs the Selected Bank to hold accountability, which are essential in a democratic and to invest foreign currencies in the portfolio in society. accordance with the provisions of paragraph 7 of the Authorization. Inflation, employment, and long-term interest rates fluctuate over time in response to economic and 5. The Committee directs the Selected Bank to financial disturbances. Moreover, monetary policy report to the Committee, at each regular meeting actions tend to influence economic activity and of the Committee, on transactions undertaken prices with a lag. Therefore, the Committee’s policy pursuant to paragraphs 1 and 6 of the Authoriza- decisions reflect its longer-run goals, its medium-term tion. The Selected Bank is also directed to provide outlook, and its assessments of the balance of risks, quarterly reports to the Committee regarding the including risks to the financial system that could management of the foreign currency holdings impede the attainment of the Committee’s goals. pursuant to paragraph 7 of the Authorization. The inflation rate over the longer run is primarily 6. The Committee directs the Selected Bank to con- determined by monetary policy, and hence the Comduct testing of transactions for the purpose of mittee has the ability to specify a longer-run goal for operational readiness in accordance with the pro- inflation. The Committee reaffirms its judgment that visions of paragraph 9 of the Authorization. inflation at the rate of 2 percent, as measured by the annual change in the price index for personal con- By unanimous vote, the Committee amended its Pro- sumption expenditures, is most consistent over the gram for Security of FOMC Information (Program) longer run with the Federal Reserve’s statutory manwith (1) minor changes that provide some additional date. The Committee would be concerned if inflation flexibility in the classification of FOMC information were running persistently above or below this objecand (2) the removal of language concerning commu- tive. Communicating this symmetric inflation goal nication with the Treasury Department regarding clearly to the public helps keep longer-term inflation SOMA foreign currency operations that was no lon- expectations firmly anchored, thereby fostering price ger necessary in the Program because similar lan- stability and moderate long-term interest rates and

Minutes of Federal Open Market Committee Meetings | January–February 131 enhancing the Committee’s ability to promote maxi- poses; and (5) making several miscellaneous changes, mum employment in the face of significant economic generally to improve clarity. disturbances. The maximum level of employment is largely determined by nonmonetary factors that All participants supported the revisions, and the affect the structure and dynamics of the labor mar- Committee voted unanimously to approve the revised ket. These factors may change over time and may not policies. be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; Illustration of Uncertainty in the Summary rather, the Committee’s policy decisions must be of Economic Projections informed by assessments of the maximum level of employment, recognizing that such assessments are Participants considered a revised proposal from the necessarily uncertain and subject to revision. The subcommittee on communications to add to the Committee considers a wide range of indicators in Summary of Economic Projections (SEP) a number making these assessments. Information about Com- of charts (sometimes called fan charts) that would mittee participants’ estimates of the longer-run nor- illustrate the uncertainty that attends participants’ mal rates of output growth and unemployment is macroeconomic projections. The revised proposal published four times per year in the FOMC’s Sum- was based on further analysis and consultations folmary of Economic Projections. For example, in the lowing Committee discussion of a proposal at the most recent projections, the median of FOMC par- January 2016 meeting. Participants generally supticipants’ estimates of the longer-run normal rate of ported the revised approach and agreed that fan unemployment was 4.8 percent. charts would be incorporated in the SEP to be released with the minutes of the March 14–15, 2017, In setting monetary policy, the Committee seeks to FOMC meeting. The Chair noted that a staff paper mitigate deviations of inflation from its longer-run on measures of forecast uncertainty in the SEP, goal and deviations of employment from the Com- including those that would be used as the basis for mittee’s assessments of its maximum level. These fan charts in the SEP, would be made available to the objectives are generally complementary. However, public soon after the minutes of the current meeting under circumstances in which the Committee judges were published, and that examples of the new charts that the objectives are not complementary, it follows using previously published data would be released in a balanced approach in promoting them, taking into advance of the March meeting. account the magnitude of the deviations and the potentially different time horizons over which Developments in Financial Markets and employment and inflation are projected to return to Open Market Operations levels judged consistent with its mandate. The SOMA manager reported on developments in The Committee intends to reaffirm these principles U.S. and global financial markets during the period and to make adjustments as appropriate at its annual since the Committee met on December 13–14, 2016. organizational meeting each January.” Financial asset prices were little changed since the December meeting. Market participants continued to The Committee considered amendments to its Policy report substantial uncertainty about potential on External Communications of Committee Partici- changes in fiscal, regulatory, and other government pants and its Policy on External Communications of policies. Nonetheless, measures of implied volatility Federal Reserve System Staff. The amendments con- of various asset prices remained low. Emerging marsisted of (1) starting the communication blackout ket currencies were generally resilient in recent weeks, earlier (the second Saturday before Committee meet- reportedly benefiting from investors’ anticipation of ings); (2) revising the treatment of staff presentations stronger global economic growth, after depreciating during the blackout period; (3) revising provisions significantly against the dollar during the previous regarding regularly published System releases of intermeeting period. Market expectations for the data, survey results, statistical indexes, and model path of the federal funds rate were little changed over results during the blackout period; (4) explicitly rec- the intermeeting period. ognizing the need for ongoing communications with the public by staff members during the blackout The deputy manager followed with a briefing on period for operational or information-gathering pur- developments in money markets, market expectations

132 104th Annual Report | 2017 for the System’s balance sheet, and open market ployment insurance benefits was still low in Decemoperations. In money markets, interest rates ber and early January. Measures of labor compensasmoothly shifted higher following the Committee’s tion continued to rise at a moderate rate. The decision at its December meeting to increase the tar- employment cost index for private industry workers get range for the federal funds rate by 25 basis points, rose 2¼ percent over the 12 months ending in and federal funds subsequently traded near the center December, and average hourly earnings for all of the new range except on yearend. Although year- employees increased almost 3 percent over the same end pressures in U.S. money markets were similar to 12-month period. The unemployment rates for Afripast quarter-ends, some notable, albeit temporary, can Americans, for Hispanics, and for whites were strains appeared over the turn of the year in foreign close to the levels seen just before the most recent exchange swap markets and European markets for recession, but the unemployment rates for African repurchase agreements. The Open Market Desk’s Americans and for Hispanics remained above the surveys of dealers and market participants pointed to rate for whites. some change in expectations for FOMC reinvestment policy, with more respondents than in previous sur- Total industrial production edged down in the fourth veys anticipating a change in policy when the federal quarter as a whole. Mining output expanded markfunds rate reaches 1 to 1½ percent. The higher level edly, but manufacturing production advanced only of take-up at the System’s overnight reverse repur- modestly. The output of utilities declined, as the chase agreement facility that developed following the weather was unseasonably warm, on average, during implementation of money market fund reform last the fourth quarter. Automakers’ assembly schedules fall generally persisted. The staff also briefed the suggested that motor vehicle production would be a Committee on plans for small-value tests of various little lower early this year, but broader indicators of System operations and facilities during 2017 and for manufacturing production, such as the new orders quarterly tests of the Term Deposit Facility. indexes from national and regional manufacturing surveys, were consistent with modest gains in factory By unanimous vote, the Committee ratified the output in the near term. Desk’s domestic transactions over the intermeeting period. There were no intervention operations in for- Real personal consumption expenditures (PCE) rose eign currencies for the System’s account during the at a moderate pace in the fourth quarter. Consumer intermeeting period. expenditures for durable goods, particularly motor vehicles, increased considerably. However, consumer Staff Review of the Economic Situation spending for energy services declined markedly, reflecting unseasonably warm weather. Recent read- The information reviewed for the January 31– ings on some key factors that influence consumer February 1 meeting indicated that real gross domestic spending—including further gains in employment, product (GDP) expanded at a moderate rate in the real disposable personal income, and households’ net fourth quarter of last year and that labor market worth—were consistent with moderate increases in conditions continued to strengthen. Consumer price real PCE in early 2017. In addition, consumer sentiinflation rose further above the slow pace seen during ment, as measured by the University of Michigan the first half of last year, but it was still running Surveys of Consumers, moved up to an elevated level below the Committee’s longer-run objective of in December and January. 2 percent. Real residential investment spending rose at a brisk Recent indicators generally showed that labor market pace in the fourth quarter after decreasing in the preconditions continued to improve in late 2016. Total vious two quarters. Building permit issuance for new nonfarm payroll employment increased at a solid single-family homes—which tends to be a reliable pace in December. The unemployment rate edged up indicator of the underlying trend in construction— to 4.7 percent but remained near its recent low, while advanced solidly. Sales of existing homes increased the labor force participation rate rose slightly. The modestly in the fourth quarter, although new home share of workers employed part time for economic sales declined. reasons decreased further. The rates of private-sector job openings and of hiring were unchanged in Real private expenditures for business equipment and November, while the rate of quits edged up. The intellectual property (E&I) expanded at a moderate four-week moving average of initial claims for unem- pace in the fourth quarter after declining, on net,

Minutes of Federal Open Market Committee Meetings | January–February 133 over the preceding three quarters. Recent increases in and Survey of Market Participants—were nominal new orders of nondefense capital goods unchanged, on net, over December and January. excluding aircraft, along with improvements in indicators of business sentiment, pointed to further mod- Foreign real GDP growth appeared to slow someerate increases in real E&I spending in the near term. what in the fourth quarter from its relatively strong Real business expenditures for nonresidential struc- third-quarter pace. Nevertheless, recent data on fortures declined in the fourth quarter after rising in the eign industrial production and trade seemed to be previous quarter. The number of crude oil and natu- stronger than private analysts had anticipated and ral gas rigs in operation, an indicator of spending for were consistent with moderate economic growth structures in the drilling and mining sector, continued abroad. Economic growth in both the euro area and to increase through late January. The change in real the United Kingdom continued at relatively solid inventory investment was estimated to have made an rates. In the emerging market economies (EMEs), appreciable positive contribution to real GDP growth GDP growth remained robust in China but slowed in the fourth quarter. elsewhere in the Asian EMEs and in Mexico, while the pace of economic contraction appeared to lessen Real total government purchases rose somewhat in in South America. Inflation in the advanced foreign the fourth quarter. Federal government purchases for economies (AFEs) continued to rise, largely reflecting defense decreased while nondefense expenditures the pass-through of earlier increases in crude oil increased. State and local government purchases prices into retail energy prices. Inflation also rose in increased modestly, as the payrolls of these govern- many EMEs, in part because of rising food and fuel ments expanded slightly and their construction prices; however, inflation fell notably in much of spending advanced somewhat. South America. The U.S. international trade deficit widened in Staff Review of the Financial Situation November for the second consecutive month. After declining in October, nominal exports fell again in Domestic financial conditions were mostly little November as decreases in exports of capital goods changed, on balance, since the December FOMC more than offset increases in exports of industrial meeting. Broad equity price indexes fluctuated in a supplies. Nominal imports in November rose to their relatively narrow range and ended the intermeeting highest level of the year, led by imports of industrial period about unchanged. Nominal Treasury yields supplies and materials. The Census Bureau’s advance moved up across most maturities in the days followtrade estimates for December suggested a narrowing ing the December FOMC meeting but subsequently of the trade deficit in goods, as imports increased less reversed and ended the period little changed on net. than exports. Altogether, the change in real net Measures of inflation compensation based on Treasexports was estimated to have made a substantial ury Inflation-Protected Securities (TIPS) rose somenegative contribution to real GDP growth in the what on balance. Amid notable volatility, the broad fourth quarter. dollar index declined slightly on net. Meanwhile, financing conditions for nonfinancial businesses and Total U.S. consumer prices, as measured by the PCE households remained generally accommodative. price index, increased a little more than 1½ percent over the 12 months ending in December, partly Although the FOMC’s decision to raise the target restrained by decreases in consumer food prices last range for the federal funds rate to ½ to ¾ percent at year. Core PCE price inflation, which excludes the December meeting was widely anticipated in changes in food and energy prices, was 1¾ percent financial markets, contacts generally characterized over those same 12 months, held down in part by some of the communications associated with the decreases in the prices of non-energy imports over FOMC meeting as less accommodative than part of this period. Over the same 12-month period, expected. In particular, market commentaries hightotal consumer prices as measured by the consumer lighted the upward revision of 25 basis points to the price index (CPI) rose a bit more than 2 percent, median projection for the federal funds rate at the while core CPI inflation was 2¼ percent. Survey- end of 2017 in the SEP. Nonetheless, the expected based measures of median longer-run inflation path of the federal funds rate implied by futures expectations—such as those from the Michigan sur- quotes was little changed, on net, since the December vey and from the Desk’s Survey of Primary Dealers meeting. Market-based estimates indicated that

134 104th Annual Report | 2017 investors saw the probability of an increase in the tar- bond issuance by nonfinancial firms rebounded in get range for the federal funds rate at the January 31– December to about its robust average pace of the February 1 FOMC meeting as very low, and the esti- past few years, and issuance of syndicated leveraged mated probability of an increase in the target range loans was strong. Gross equity issuance was solid in at or before the March meeting was about 25 percent. November and December. Meanwhile, after a slow- Consistent with readings based on market quotes, down in the third quarter, the growth of commercial results from the Desk’s January Survey of Primary and industrial (C&I) loans on banks’ books picked Dealers and Survey of Market Participants indicated up in the fourth quarter, although the pace remained that the median respondent assigned a probability of slower than earlier in the year. The January Senior about 25 percent to the next increase in the target Loan Officer Opinion Survey on Bank Lending Pracrange occurring at or before the March FOMC meet- tices (SLOOS) indicated that banks left C&I lending ing. Market-based estimates of the probability of an standards for large and middle-market firms and for increase in the target range at or before the June small firms unchanged, on balance, in the fourth meeting were about 70 percent. quarter. On net, banks expected to ease their standards for C&I loans somewhat in 2017. Yields on nominal Treasury securities increased across most maturities following the December Credit continued to be broadly available in the com- FOMC meeting, but they fell, on balance, over the mercial real estate (CRE) sector, although results remainder of the intermeeting period. While market from the January SLOOS indicated that banks concommentary suggested that a number of factors con- tinued to tighten their lending standards in the fourth tributed to the decline, a clear catalyst was difficult to quarter and expected to tighten them somewhat furidentify. Treasury yields ended the period about ther in 2017. CRE loans on banks’ balance sheets unchanged and remained significantly higher than continued to grow in the fourth quarter, although at a just before the U.S. elections in November. TIPS- somewhat slower rate than earlier in the year, while based measures of inflation compensation edged up issuance of commercial mortgage-backed securities over the intermeeting period. (CMBS) was solid over the period, in part because issuers tried to complete deals before the implemen- Broad U.S. equity price indexes fluctuated in a rela- tation of new risk retention rules in late December. tively narrow range and were little changed, on net, The delinquency rate on CMBS moved up further in over the intermeeting period. However, equity prices November and December; the increase largely remained notably higher than just before the Novem- reflected delinquencies on loans originated before the ber elections, apparently reflecting investors’ expecta- financial crisis. tions that fiscal and other policy changes would boost corporate profits and economic activity in the medium Credit conditions for residential mortgages were little term. Implied volatility on the S&P 500 index edged changed, on net, over the intermeeting period. Mortdown since the December meeting and remained rela- gage credit was broadly available to households with tively low. Corporate bond spreads for both average to high credit scores, while credit remained investment- and speculative-grade firms continued to tight for borrowers with low credit scores, hard-tonarrow over the intermeeting period and were near the document income, or high debt-to-income ratios. bottom of their ranges of the past several years. According to the January SLOOS, banks reportedly left lending standards unchanged, on net, on most cat- Money market rates responded as expected to the egories of home-purchase loans. The interest rate on change in the target range for the federal funds rate. 30-year fixed-rate mortgages moved about in line with The effective federal funds rate was 66 basis points— rates on comparable-maturity Treasury securities, ris- 25 basis points higher than previously—every day ing notably after the November elections but retracing following the change, except at year-end. Conditions part of that increase since mid-December. The pace of in other domestic short-term funding markets were purchase originations was little changed in recent generally stable over the intermeeting period. Assets months despite higher mortgage rates, while refinance under management by money market funds changed originations fell sharply. Bank lending for residential little, with government funds experiencing modest net mortgages was solid in the fourth quarter, and the outflows and prime fund assets remaining about flat. issuance of mortgage-backed securities was robust. Financing conditions for nonfinancial businesses Financing conditions in consumer credit markets continued to be accommodative overall. Corporate remained generally accommodative, although lending

Minutes of Federal Open Market Committee Meetings | January–February 135 standards for credit cards continued to be tight for growth in the first half of this year was projected to subprime borrowers. Respondents to the January be essentially the same as in the fourth quarter. The SLOOS indicated that, over the previous three staff’s forecast for real GDP growth over the next months, they had tightened standards and terms on several years was little changed. The staff continued auto and credit card loans, and that they expected to to project that real GDP would expand at a modestly tighten standards further in 2017. Consumer loan faster pace than potential output in 2017 through balances increased at a robust rate through Novem- 2019. The unemployment rate was forecast to edge ber, with credit card loans, student loans, and auto down gradually through the end of 2019 and to run loans all expanding at a similar pace. Measures of below the staff’s estimate of its longer-run natural consumer credit quality were little changed, on net, in rate; the path for the unemployment rate was little the fourth quarter. changed from the previous projection. Foreign economic data that were better than The staff’s forecast for consumer price inflation was expected and perceptions of an ebbing of some unchanged on balance. The staff continued to project potential downside risks in Europe appeared to con- that inflation would increase over the next several tribute to an improvement in investor sentiment in years, as food and energy prices, along with the prices global financial markets. Importantly, a large euro- of non-energy imports, were expected to begin area bank reached a settlement with the U.S. Depart- steadily rising either this year or next. However, inflament of Justice on issues related to mortgage-backed tion was projected to be marginally below the Comsecurities, and the Italian government approved a mittee’s longer-run objective of 2 percent in 2019. funding package and other measures to support struggling banks. Reflecting the improved sentiment The staff viewed the uncertainty around its projecand positive economic news, global equity prices and tions for real GDP growth, the unemployment rate, longer-term sovereign yields in most AFEs increased and inflation as similar to the average of the past moderately over the period. Yield spreads on EME 20 years. The risks to the forecast for real GDP were sovereign bonds narrowed somewhat, and flows into seen as tilted to the downside, primarily reflecting the EME mutual funds turned positive. The broad dollar staff’s assessment that monetary policy appeared to index increased immediately after the December be better positioned to offset large positive shocks FOMC meeting but subsequently retraced its gains than substantial adverse ones. However, the staff and ended the period slightly lower. In contrast, the viewed the risks to the forecast from developments dollar strengthened further against the Mexican peso abroad as less pronounced than in the recent past. over the intermeeting period. Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for The staff provided its latest report on potential risks the unemployment rate as tilted to the upside. The to financial stability, indicating that it continued to risks to the projection for inflation were seen as judge the vulnerabilities of the U.S. financial system roughly balanced. The downside risks from the possias moderate on balance. The staff’s assessment took bility that longer-term inflation expectations may into account the increase in asset valuation pressures have edged down or that the dollar could appreciate since the November elections, the overall low level of substantially further were seen as roughly counterbalfinancial leverage, the strong capital positions at anced by the upside risk that inflation could increase banks, and the subdued growth of debt among more than expected in an economy that was prohouseholds and businesses. In addition, with money jected to continue operating above its longer-run market fund reforms in place, the vulnerabilities from potential. maturity and liquidity transformation were viewed as being somewhat below their longer-run average. Participants’ Views on Current Conditions and the Economic Outlook Staff Economic Outlook In their discussion of the economic situation and the In the U.S. economic projection prepared by the staff outlook, meeting participants agreed that informafor this FOMC meeting, the near-term forecast was tion received over the intermeeting period indicated little changed from the December meeting. Real that the labor market had continued to strengthen GDP growth in the fourth quarter of last year was and that economic activity had continued to expand estimated to have been a little faster than the staff at a moderate pace. Job gains had remained solid, had expected in December, and the pace of economic and the unemployment rate had stayed near its recent

136 104th Annual Report | 2017 low. Household spending had continued to rise mod- participants generally anticipated that further gains erately, while business fixed investment had remained in consumer spending would contribute importantly soft. Measures of consumer and business sentiment to economic growth in 2017. They expected that, had improved of late. Inflation had increased in although interest rates had moved higher, household recent quarters but was still below the Committee’s spending would continue to be supported by rising 2 percent longer-run objective. Market-based meas- employment and income as well as high levels of ures of inflation compensation remained low; most household wealth. The recent improvement in consurvey-based measures of inflation compensation sumer sentiment was also viewed as a potentially were little changed on balance. positive factor in the outlook for spending, although several participants cautioned that an elevated level Participants generally indicated that their economic of sentiment, even if it was sustained, was likely to forecasts had changed little since the December make only a small contribution to household spend- FOMC meeting. They continued to anticipate that, ing beyond those from income, wealth, and credit with gradual adjustments in the stance of monetary conditions. policy, economic activity would expand at a moderate pace, labor market conditions would strengthen Recent indicators of activity in the housing sector somewhat further, and inflation would rise to 2 per- were generally positive. Starts and permits for singlecent over the medium term. They also judged that family housing and sales of existing homes rose modnear-term risks to the economic outlook appeared erately in the fourth quarter, and real residential roughly balanced. Participants again emphasized investment bounced back after two quarterly their considerable uncertainty about the prospects for declines. A couple of participants commented that changes in fiscal and other government policies as supply constraints might be holding back new homewell as about the timing and magnitude of the net building. In addition, a few participants noted that effects of such changes on economic activity. In dis- prospects for residential investment would also cussing the risks to the economic outlook, partici- depend on whether household formation picked up pants continued to view the possibility of more and how housing market activity responded to the expansionary fiscal policy as having increased the recent rise in mortgage interest rates. upside risks to their economic forecasts, although some noted that several potential changes in govern- The outlook for the business sector improved further ment policies could pose downside risks. In addition, over the intermeeting period. Business investment in several viewed the downside risks from weaker eco- E&I, which had been contracting earlier in 2016, nomic activity abroad as having diminished some- increased at a moderate rate in the fourth quarter. In what. But several indicated that they continued to be addition, new orders for nondefense capital goods concerned about the downside risks to economic posted widespread gains in recent months. The availactivity associated with the possibility of additional able reports from District surveys of activity and revappreciation of the foreign exchange value of the dol- enues in the manufacturing and services industries lar or financial vulnerabilities in some foreign econo- were very positive. Moreover, a number of national mies, together with the proximity of the federal funds surveys of sentiment among corporate executives and rate to the effective lower bound. Regarding the out- small business owners as well as information from look for inflation, some participants continued to be participants’ District contacts indicated a high level concerned that faster-than-expected economic of optimism about the economic outlook. Many pargrowth or a substantial undershooting of the longer- ticipants indicated that their business contacts attribrun normal unemployment rate posed upside risks to uted the improvement in business sentiment to the inflation. However, several others continued to see expectation that firms would benefit from possible downside risks to the inflation outlook, citing still- changes in federal spending, tax, and regulatory polilow measures of inflation compensation and inflation cies. A few participants indicated that some of their expectations or the possibility of further appreciation contacts had already increased their planned capital of the dollar. Participants generally agreed that the expenditures. However, participants’ contacts in Committee should continue to closely monitor infla- some Districts, while optimistic, intended to wait for tion indicators and global economic and financial more clarity about federal policy initiatives before developments. adjusting their capital spending and hiring. In addition, contacts in some industries remained concerned Regarding the household sector, consumer spending that their businesses might be adversely affected by posted a moderate increase in the fourth quarter, and some of the government policy changes being consid-

Minutes of Federal Open Market Committee Meetings | January–February 137 ered. Activity in the energy sector continued to that other measures provided additional evidence improve, with District contacts reporting an increase that inflation was approaching the Committee’s in capital spending, better access to credit, and a objective; for example, the 12-month changes in the pickup in hiring. However, reports from a couple of headline and core CPI, the median CPI, and the Districts indicated that the agricultural sector was trimmed mean PCE price index had also moved up still weak, with low commodity prices continuing to from year-earlier levels. The available information on put financial pressure on farm-related businesses. pricing from District business contacts varied, with a couple of participants reporting that firms were The labor market continued to strengthen in recent experiencing rising cost pressures from input costs or months. Monthly gains in nonfarm payroll employ- had been able to raise their prices, while a few other ment averaged 165,000 over the period from October participants said that firms in their Districts were not to December, a pace that, if it continued, would be experiencing price pressures or that the appreciation expected to increase labor utilization over time. At of the dollar was continuing to hold down import 4.7 percent in December, the unemployment rate prices. Most survey-based measures of longer-term remained close to levels that most participants judged inflation expectations had been little changed in to be consistent with the Committee’s maximum- recent months. The median response to the Michigan employment objective. Some participants cited other survey of longer-run inflation expectations moved indicators confirming the strengthening in the labor back up to 2.6 percent in January, in line with the market, such as a decline in the broader measures of average of readings during 2016, and the measure at labor underutilization that include workers margin- the three-year horizon from the Federal Reserve ally attached to the labor force, the rise in the quits Bank of New York’s survey rose slightly in Decemrate, and faster increases in some measures of labor ber; the measures calculated by the Federal Reserve compensation. Moreover, several participants’ busi- Bank of Cleveland had been stable over the precedness contacts reported shortages of workers in some ing three months. Some market-based measures of occupations or the need for training programs to inflation compensation had turned up noticeably in expand the supply of skilled workers. Several other late 2016, but a number of participants noted that participants thought that some margins of labor they remained relatively low. Most participants conunderutilization remained, citing the still-high rate of tinued to expect that inflation would rise to the Comprime-age workers outside the labor force, the mittee’s 2 percent objective over the medium term. elevated share of workers who were employed part Some saw a risk that inflationary pressures might time for economic reasons, or the potential for fur- develop more rapidly than currently anticipated as ther firming in labor force participation. However, a resource utilization tightened, while several others couple of participants pointed out that the uncer- thought that progress in achieving the Committee’s tainty attending estimates of longer-run trends in inflation objective might lag if further appreciation part-time employment and labor force participation of the dollar continued to depress non-energy commade it difficult to assess the scope for additional modity prices or if inflation was slow to respond to increases in labor utilization. Most participants still tighter resource utilization. expected that if economic growth remained moderate, labor markets would continue to tighten gradu- Financial conditions appeared to have changed little, ally, with the unemployment rate running only mod- on net, in recent months: Equity prices had risen and estly below their estimates of the longer-run normal credit spreads had narrowed, but longer-term interest rate. However, several participants projected a more rates had increased and the dollar had appreciated substantial undershooting. further. In their discussion, participants considered how recent developments had affected their assess- Information on inflation received over the intermeet- ment of the stability of the U.S. financial system. ing period was broadly in line with participants’ Overall, valuation pressures appeared to have risen expectations and was consistent with a view that PCE for some types of assets, while financial-sector leverinflation was moving closer to the Committee’s 2 per- age remained low and risks associated with maturity cent objective. The 12-month change in headline and liquidity transformation had declined. A few PCE prices increased further, to 1.6 percent in participants commented that the recent increase in December, as the effects of the earlier declines in equity prices might in part reflect investors’ anticipaconsumer energy prices waned. The 12-month tion of a boost to earnings from a cut in corporate change in core PCE prices stayed near 1.7 percent for taxes or more expansionary fiscal policy, which might a fifth consecutive month. A few participants noted not materialize. They also expressed concern that the

138 104th Annual Report | 2017 low level of implied volatility in equity markets is neither expansionary nor contractionary when the appeared inconsistent with the considerable uncer- economy is operating at or near its potential—was tainty attending the outlook for such policy currently quite low and was likely to rise only slowly initiatives. over time. Recent reforms had diminished the risk of runs on or Participants emphasized that the Committee might by prime money market funds. However, it was noted need to change its communications regarding the that other risks to financial stability might arise as anticipated path for the policy rate if economic conthe structure of funding markets evolved or if real ditions evolved differently than the Committee estate asset values declined sharply. More broadly, it expected or if the economic outlook changed. They was pointed out that an environment of low interest pointed to a number of risks that, if realized, might rates and a relatively flat yield curve, if it persisted, call for a different policy trajectory than they curhad the potential to boost incentives to take on lever- rently thought most likely to be appropriate. These age and risk. Several participants emphasized that included upside risks such as appreciably more the increased resilience of the financial system since expansionary fiscal policy or a more rapid buildup of the financial crisis had importantly been the result of inflationary pressures, as well as downside risks assothe key safety and soundness reforms put in place in ciated with a possible further appreciation of the dolrecent years. However, having additional macropru- lar or financial vulnerabilities in some foreign econodential tools could prove useful in addressing prob- mies, together with the proximity of the federal funds lems that could arise in real estate financing or in the rate to the effective lower bound. Moreover, most shadow banking sector. participants continued to see heightened uncertainty regarding the size, composition, and timing of pos- Participants discussed whether their current assess- sible changes to fiscal and other government policies, ments of economic conditions and the medium-term and about their net effects on the economy and inflaoutlook warranted altering their earlier views of the tion over the medium term, and they thought some appropriate path for the target range for the federal time would likely be required for the outlook to funds rate. Participants generally characterized their become clearer. A couple of participants argued that economic forecasts and their judgments about mon- such uncertainty should not deter the Committee etary policy as little changed since the December from taking further steps in the near term to remove meeting. Against this backdrop, they thought it monetary policy accommodation, because fiscal and appropriate to maintain the target range for the fed- other policies were only some of the many factors eral funds rate at ½ to ¾ percent at this meeting. that were likely to influence progress toward the Committee’s dual-mandate objectives and thus the Most participants continued to judge that, while the appropriate course of monetary policy. However, outlook was subject to considerable uncertainty, a other participants cautioned against adjusting mongradual pace of rate increases over time was likely to etary policy in anticipation of policy proposals that be appropriate to promote the Committee’s objec- might not be enacted or that, if enacted, might turn tives of maximum employment and 2 percent infla- out to have different consequences for economic tion. Some participants viewed a gradual pace as activity and inflation than currently anticipated. likely to be warranted because inflation was still running below the Committee’s objective or because the In discussing the outlook for monetary policy over proximity of the federal funds rate to the effective the period ahead, many participants expressed the lower bound placed constraints on the ability of view that it might be appropriate to raise the federal monetary policy to respond to adverse shocks to the funds rate again fairly soon if incoming information aggregate demand for goods and services. In addi- on the labor market and inflation was in line with or tion, it was noted that the downward pressure on stronger than their current expectations or if the longer-term interest rates exerted by the Federal risks of overshooting the Committee’s maximum- Reserve’s asset holdings was expected to diminish in employment and inflation objectives increased. A few the years ahead in light of an anticipated gradual participants noted that continuing to remove policy reduction in the size and duration of the Federal accommodation in a timely manner, potentially at an Reserve’s balance sheet. Finally, the view that gradual upcoming meeting, would allow the Committee increases in the federal funds rate were likely to be greater flexibility in responding to subsequent appropriate also reflected the assessment that the changes in economic conditions. Several judged that neutral real rate—defined as the real interest rate that the risk of a sizable undershooting of the longer-run

Minutes of Federal Open Market Committee Meetings | January–February 139 normal unemployment rate was high, particularly if look appeared roughly balanced. Many members economic growth was faster than currently expected. continued to see only a modest risk of a scenario in If that situation developed, the Committee might which the unemployment rate would substantially need to raise the federal funds rate more quickly than undershoot its longer-run normal level and inflation most participants currently anticipated to limit the pressures would increase significantly. These membuildup of inflationary pressures. However, with bers expressed the view that inflation was likely to inflation still short of the Committee’s objective and rise toward 2 percent gradually, and that policymakinflation expectations remaining low, a few others ers would likely have ample time to respond if signs continued to see downside risks to inflation or antici- of rising inflationary pressures did begin to emerge. pated only a gradual return of inflation to the 2 per- Other members indicated that if the labor market cent objective as the labor market strengthened fur- appeared to be tightening significantly more than ther. A couple of participants expressed concern that anticipated or if inflation pressures appeared to be the Committee’s communications about a gradual developing more rapidly than expected as resource pace of policy firming might be misunderstood as a utilization tightened, it might become necessary to commitment to only one or two rate hikes per year adjust the Committee’s communications about the and stressed the importance of communicating that expected path of the federal funds rate. One member policy will respond to the evolving economic outlook noted that, even if incoming data on the economy as appropriate to achieve the Committee’s objectives. and inflation were consistent with expectations, tak- Participants also generally agreed that the Committee ing the next step in reducing policy accommodation should begin discussions at upcoming meetings about relatively soon would give the Committee greater the economic conditions that could warrant changes flexibility in calibrating policy to evolving economic in the existing policy of reinvesting proceeds from conditions. maturing Treasury securities and principal payments from agency debt and mortgage-backed securities, as At this meeting, members continued to expect that, well as how those changes would be implemented with gradual adjustments in the stance of monetary and communicated. policy, inflation would rise to the Committee’s 2 percent objective over the medium term. This view was Committee Policy Action reinforced by the rise in inflation and increases in inflation compensation in recent months. Against In their discussion of monetary policy for the period this backdrop and in light of the current shortfall in ahead, members judged that the information received inflation from 2 percent, members agreed that they since the Committee met in December indicated that would continue to closely monitor actual and the labor market had continued to strengthen and expected progress toward the Committee’s inflation that economic activity had continued to expand at a goal. moderate pace. Job gains had remained solid, and the unemployment rate had stayed near its recent low. After assessing current conditions and the outlook Household spending had continued to rise moderfor economic activity, the labor market, and inflation, ately, while business fixed investment had remained members agreed to maintain the target range for the soft. Measures of consumer and business sentiment federal funds rate at ½ to ¾ percent. They judged had improved of late. Inflation had increased in that the stance of monetary policy remained accomrecent quarters but was still below the Committee’s modative, thereby supporting some further strength- 2 percent longer-run objective. Market-based measening in labor market conditions and a return to ures of inflation compensation remained low; most 2 percent inflation. survey-based measures of longer-term inflation expectations were little changed on balance. The Committee agreed that, in determining the tim- With respect to the economic outlook and its impli- ing and size of future adjustments to the target range cations for monetary policy, members continued to for the federal funds rate, it would assess realized and expect that, with gradual adjustments in the stance of expected economic conditions relative to its objecmonetary policy, economic activity would expand at tives of maximum employment and 2 percent inflaa moderate pace and labor market conditions would tion. This assessment would take into account a wide strengthen somewhat further. Members agreed that range of information, including measures of labor there was heightened uncertainty about the effects of market conditions, indicators of inflation pressures possible changes in fiscal and other government poli- and inflation expectations, and readings on financial cies, but that near-term risks to the economic out- and international developments. The Committee

140 104th Annual Report | 2017 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 “Information received since the Federal Open expected to prevail in the longer run. However, mem- Market Committee met in December indicates bers emphasized that the actual path of the federal that the labor market has continued to funds rate would depend on the evolution of the eco- strengthen and that economic activity has connomic outlook as informed by incoming data. tinued to expand at a moderate pace. Job gains remained solid and the unemployment rate The Committee also decided to maintain its existing stayed near its recent low. Household spending policy of reinvesting principal payments from its has continued to rise moderately while business holdings of agency debt and agency mortgage- fixed investment has remained soft. Measures of backed securities in agency mortgage-backed securi- consumer and business sentiment have improved ties and of rolling over maturing Treasury securities of late. Inflation increased in recent quarters but at auction, and it anticipated doing so until normal- is still below the Committee’s 2 percent longerization of the level of the federal funds rate is well run objective. Market-based measures of inflaunder way. Members noted that this policy, by keep- tion compensation remain low; most surveying the Committee’s holdings of longer-term securi- based measures of longer-term inflation expecties at sizable levels, should help maintain accommo- tations are little changed, on balance. dative financial conditions. Consistent with its statutory mandate, the Com- At the conclusion of the discussion, the Committee mittee seeks to foster maximum employment voted to authorize and direct the Federal Reserve and price stability. The Committee expects that, Bank of New York, until it was instructed otherwise, with gradual adjustments in the stance of monto execute transactions in the SOMA in accordance etary policy, economic activity will expand at a with the following domestic policy directive, to be moderate pace, labor market conditions will released at 2:00 p.m.: strengthen somewhat further, and inflation will rise to 2 percent over the medium term. Near- “Effective February 2, 2017, the Federal Open term risks to the economic outlook appear Market Committee directs the Desk to under- roughly balanced. The Committee continues to take open market operations as necessary to closely monitor inflation indicators and global maintain the federal funds rate in a target range economic and financial developments. of ½ to ¾ percent, including overnight reverse repurchase operations (and reverse repurchase In view of realized and expected labor market operations with maturities of more than one day conditions and inflation, the Committee decided when necessary to accommodate weekend, holi- to maintain the target range for the federal funds day, or similar trading conventions) at an offer- rate at ½ to ¾ percent. The stance of monetary ing rate of 0.50 percent, in amounts limited only policy remains accommodative, thereby supportby the value of Treasury securities held outright ing some further strengthening in labor market in the System Open Market Account that are conditions and a return to 2 percent inflation. available for such operations and by a percounterparty limit of $30 billion per day. In determining the timing and size of future adjustments to the target range for the federal The Committee directs the Desk to continue funds rate, the Committee will assess realized rolling over maturing Treasury securities at auc- and expected economic conditions relative to its tion and to continue reinvesting principal pay- objectives of maximum employment and 2 perments on all agency debt and agency mortgage- cent inflation. This assessment will take into backed securities in agency mortgage-backed account a wide range of information, including securities. The Committee also directs the Desk measures of labor market conditions, indicators to engage in dollar roll and coupon swap trans- of inflation pressures and inflation expectations, actions as necessary to facilitate settlement of and readings on financial and international the Federal Reserve’s agency mortgage-backed developments. In light of the current shortfall of securities transactions.” inflation from 2 percent, the Committee will

Minutes of Federal Open Market Committee Meetings | January–February 141 carefully monitor actual and expected progress Voting against this action: None. toward its inflation goal. The Committee expects that economic conditions will evolve in a man- Consistent with the Committee’s decision to leave the ner that will warrant only gradual increases in target range for the federal funds rate unchanged, the the federal funds rate; the federal funds rate is Board of Governors voted unanimously to leave the likely to remain, for some time, below levels that interest rates on required and excess reserve balances are expected to prevail in the longer run. How- unchanged at 0.75 percent and voted unanimously to ever, the actual path of the federal funds rate will approve establishment of the primary credit rate (disdepend on the economic outlook as informed by count rate) at the existing level of 1.25 percent.7 incoming data. It was agreed that the next meeting of the Committee The Committee is maintaining its existing policy would be held on Tuesday–Wednesday, March 14–15, of reinvesting principal payments from its hold- 2017. The meeting adjourned at 10:05 a.m. on Februings of agency debt and agency mortgage- ary 1, 2017. backed securities in agency mortgage-backed securities and of rolling over maturing Treasury Notation Vote securities at auction, and it anticipates doing so until normalization of the level of the federal By notation vote completed on January 3, 2017, the funds rate is well under way. This policy, by Committee unanimously approved the minutes of the keeping the Committee’s holdings of longer- Committee meeting held on December 13–14, 2016. term securities at sizable levels, should help maintain accommodative financial conditions.” Brian F. Madigan Secretary Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley 7 The second vote of the Board also encompassed approval of the Fischer, Patrick Harker, Robert S. Kaplan, Neel establishment of the interest rates for secondary and seasonal Kashkari, Jerome H. Powell, and Daniel K. Tarullo. credit under the existing formulas for computing such rates.

142 104th Annual Report | 2017 Meeting Held on March 14–15, 2017 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 March 14, 2017, at 10:00 a.m. and continued on Wednesday, March 15, 2017, at 9:00 a.m.1 James A. Clouse, Michael Dotsey, Evan F. Koenig, Daniel G. Sullivan, and William Wascher Present Associate Economists Janet L. Yellen Simon Potter Chair Manager, System Open Market Account William C. Dudley Lorie K. Logan Vice Chairman Deputy Manager, System Open Market Account Lael Brainard Robert deV. Frierson Secretary, Office of the Secretary, Charles L. Evans Board of Governors Stanley Fischer Matthew J. Eichner3 Patrick Harker Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Robert S. Kaplan Michael S. Gibson Neel Kashkari Director, Division of Supervision and Regulation, Jerome H. Powell Board of Governors Daniel K. Tarullo Andreas Lehnert Director, Division of Financial Stability, Marie Gooding, Jeffrey M. Lacker, Loretta J. Mester, Board of Governors and John C. Williams Alternate Members of the Federal Open Market Daniel M. Covitz Committee Deputy Director, Division of Research and Statistics, Board of Governors James Bullard, Esther L. George, and Eric Rosengren Presidents of the Federal Reserve Banks of St. Louis, Michael T. Kiley Kansas City, and Boston, respectively Deputy Director, Division of Financial Stability, Board of Governors Brian F. Madigan Secretary Stephen A. Meyer Deputy Director, Division of Monetary Affairs, Matthew M. Luecke Board of Governors Deputy Secretary Trevor A. Reeve David W. Skidmore Senior Special Adviser to the Chair, Office of Board Assistant Secretary Members, Board of Governors Michelle A. Smith David Bowman, Andrew Figura, Joseph W. Gruber, Assistant Secretary and David Reifschneider Scott G. Alvarez Special Advisers to the Board, Office of Board General Counsel Members, Board of Governors Michael Held2 Linda Robertson Deputy 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. 3 Attended through the discussion of System Open Market 2 Attended Tuesday session only. Account reinvestment policy.

Minutes of Federal Open Market Committee Meetings | March 143 David E. Lebow and Michael G. Palumbo Paolo A. Pesenti, Julie Ann Remache, Senior Associate Directors, Division of Research and and Ellis W. Tallman Statistics, Board of Governors Senior Vice Presidents, Federal Reserve Banks of New York, New York, and Cleveland, respectively Antulio N. Bomfim and Ellen E. Meade Senior Advisers, Division of Monetary Affairs, George A. Kahn Board of Governors Vice President, Federal Reserve Bank of Kansas City Brian M. Doyle William Dupor Associate Director, Division of International Finance, Assistant Vice President, Federal Reserve Bank of Board of Governors St. Louis Jane E. Ihrig and David López-Salido Roy H. Webb Associate Directors, Division of Monetary Affairs, Senior Economist, Federal Reserve Bank of Board of Governors Richmond Stacey Tevlin Developments in Financial Markets and Associate Director, Division of Research and Open Market Operations Statistics, Board of Governors Min Wei The manager of the System Open Market Account Deputy Associate Director, Division of Monetary (SOMA) reported on developments in U.S. and Affairs, Board of Governors global financial markets during the period since the Committee met on January 31 and February 1, 2017. Christopher J. Gust and Jason Wu Global equity prices generally increased further, Assistant Directors, Division of Monetary Affairs, credit spreads on corporate debt and emerging mar- Board of Governors ket bonds narrowed, and yields on Treasury securities Paul R. Wood rose somewhat. In survey responses, market partici- Assistant Director, Division of International Finance, pants again reported elevated uncertainty about the Board of Governors outlook for U.S. economic policies and about financial asset prices, but various measures of implied Penelope A. Beattie3 volatility nonetheless declined further. The monetary Assistant to the Secretary, Office of the Secretary, policies of other advanced-economy central banks Board of Governors remained quite accommodative, and some signs of progress on central banks’ inflation mandates were Michele Cavallo and Jeffrey Huther evident. Late in the intermeeting period, market par- Section Chiefs, Division of Monetary Affairs, ticipants came to interpret U.S. monetary policy Board of Governors communications as implying high odds of a firming David H. Small of monetary policy at this meeting, and changes in Project Manager, Division of Monetary Affairs, market prices suggested a slightly steeper path for the Board of Governors federal funds rate over the next few years than was previously anticipated. Survey results indicated that Andrea Ajello market participants saw a change in the FOMC’s Principal Economist, Division of Monetary Affairs, policy of reinvesting principal payments on its securi- Board of Governors ties holdings as most likely to be announced in late Randall A. Williams 2017 or the first half of 2018. Most market partici- Information Manager, Division of Monetary Affairs, pants anticipated that, once a change to reinvestment Board of Governors policy was announced, reinvestments would most likely be phased out rather than stopped all at once. James M. Lyon and Mark L. Mullinix First Vice Presidents, Federal Reserve Banks of The deputy manager followed with a briefing on Minneapolis and Richmond, respectively developments in money markets and open market David Altig, Jeff Fuhrer, and Glenn D. Rudebusch operations. Over the intermeeting period, federal Executive Vice Presidents, Federal Reserve Banks of funds continued to trade near the center of the Com- Atlanta, Boston, and San Francisco, respectively mittee’s ½ to ¾ percent target range except on

144 104th Annual Report | 2017 month-ends. Spreads of rates on market repurchase policy of maintaining reinvestments until normalizaagreements (repos) over the rate at the System’s over- tion of the level of the federal funds rate was well night reverse repurchase agreement (ON RRP) facil- under way had supported the smooth and effective ity remained relatively low. Market participants conduct of monetary policy and had helped maintain attributed some of the recent decline in market repo accommodative financial conditions. rates to a reduction in the supply of Treasury bills in advance of the reinstatement of the statutory debt Consistent with the Policy Normalization Principles limit on March 16. The lower market repo rates had and Plans, nearly all participants preferred that the led to moderately higher take-up at the ON RRP timing of a change in reinvestment policy depend on facility in recent weeks. an assessment of economic and financial conditions. Several participants indicated that the timing should By unanimous vote, the Committee ratified the Open be based on a quantitative threshold or trigger tied to Market Desk’s domestic transactions over the inter- the target range for the federal funds rate. Some other meeting period. There were no intervention opera- participants expressed the view that the timing tions in foreign currencies for the System’s account should depend on a qualitative judgment about ecoduring the intermeeting period. nomic and financial conditions. Such a judgment would importantly encompass an assessment by the System Open Market Account Committee of the risks to the outlook, including the Reinvestment Policy degree of confidence that evolving circumstances would not soon require a reversal in the direction of The staff provided several briefings that summarized policy. Taking these considerations into account, issues related to potential changes to the Committee’s policymakers discussed the likely level of the federal policy of reinvesting principal payments from securi- funds rate when a change in the Committee’s reinties held in the SOMA. These briefings discussed the vestment policy would be appropriate. Provided that macroeconomic implications of alternative strategies the economy continued to perform about as the Committee could employ with respect to reinvest- expected, most participants anticipated that gradual ments, including making the timing of an end to rein- increases in the federal funds rate would continue vestments either date dependent or dependent on and judged that a change to the Committee’s reineconomic conditions. The briefings also considered vestment policy would likely be appropriate later this the advantages and disadvantages of phasing out year. Many participants emphasized that reducing reinvestments or ending them all at once as well as the size of the balance sheet should be conducted in a whether using the same approach would be appropri- passive and predictable manner. Some participants ate for both Treasury securities and agency expressed the view that it might be appropriate for mortgage-backed securities (MBS). the Committee to restart reinvestments if the economy encountered significant adverse shocks that In their discussion, policymakers reaffirmed the required a reduction in the target range for the fedapproach to balance sheet normalization articulated eral funds rate. in the Committee’s Policy Normalization Principles and Plans announced in September 2014. In particu- When the time comes to implement a change to reinlar, participants agreed that reductions in the Federal vestment policy, participants generally preferred to Reserve’s securities holdings should be gradual and phase out or cease reinvestments of both Treasury predictable, and accomplished primarily by phasing securities and agency MBS. Policymakers also disout reinvestments of principal received from those cussed the potential benefits and costs of approaches holdings. Most participants expressed the view that that would either phase out or cease all at once reinchanges in the target range for the federal funds rate vestments of principal from these securities. An should be the primary means for adjusting the stance approach that phased out reinvestments was seen as of monetary policy when the federal funds rate was reducing the risks of triggering financial market volaabove its effective lower bound. A number of partici- tility or of potentially sending misleading signals pants indicated that the Committee should resume about the Committee’s policy intentions while only asset purchases only if substantially adverse eco- modestly slowing reductions in the Committee’s nomic circumstances warranted greater monetary securities holdings. An approach that ended reinvestpolicy accommodation than could be provided by ments all at once, however, was generally viewed as lowering the federal funds rate to the effective lower easier to communicate while allowing for somewhat bound. Moreover, it was noted that the Committee’s swifter normalization of the size of the balance sheet.

Minutes of Federal Open Market Committee Meetings | March 145 To promote rapid normalization of the size and com- Americans, for Hispanics, and for whites were close position of the balance sheet, one participant pre- to the levels seen just before the most recent recesferred to set a minimum pace for reductions in MBS sion, but the unemployment rates for African Ameriholdings and, if and when necessary, to sell MBS to cans and for Hispanics remained above the rate for maintain such a pace. whites. Over the past year or so, the jobless rate for African Americans moved lower, while the rates for Nearly all participants agreed that the Committee’s Hispanics and for whites moved roughly sideways. intentions regarding reinvestment policy should be communicated to the public well in advance of an Total industrial production declined in January, as actual change. It was noted that the Committee unseasonably warm weather reduced the demand for would continue its deliberations on reinvestment heating, which held down the output of utilities. policy during upcoming meetings and would release Mining output expanded further following a large additional information as it becomes available. In gain in the fourth quarter, and manufacturing prothat context, several participants indicated that, when duction continued to rise at a modest pace. Autothe Committee announces its plans for a change to makers’ assembly schedules suggested that motor its reinvestment policy, it would be desirable to also vehicle production would remain near its January provide more information to the public about the pace, on average, over the next few months, while Committee’s expectations for the size and composi- broader indicators of manufacturing production, tion of the Federal Reserve’s assets and liabilities in such as the new orders indexes from national and the longer run. regional manufacturing surveys, pointed to further modest gains in factory output over the near term. Staff Review of the Economic Situation Real personal consumption expenditures (PCE) The information reviewed for the March 14–15 meetappeared to be rising at a slower pace in the first ing suggested that the labor market strengthened furquarter than in the fourth quarter. Motor vehicle ther in January and February and that real gross sales stepped down in January and February from domestic product (GDP) was continuing to expand their brisk year-end pace, and unseasonably warm in the first quarter, albeit at a slower pace than in the weather prompted a further decline in consumer fourth quarter, with some of the slowing likely spending for energy services. Taken together, the reflecting transitory factors. The 12-month change in components of the nominal retail sales data used by consumer prices moved up in recent months and was the Bureau of Economic Analysis to construct its close to the Committee’s longer-run objective of estimate of PCE were unchanged in February after a 2 percent; excluding food and energy prices, inflation robust gain in January. Recent readings on some key was little changed and continued to run somewhat factors that influence consumer spending—including below 2 percent. further gains in employment, real disposable personal income, and households’ net worth—were consistent Total nonfarm payroll employment increased at a with moderate increases in real PCE in early 2017. In brisk pace in January and February. The unemployaddition, consumer sentiment, as measured by the ment rate edged back down to 4.7 percent in Febru- University of Michigan Surveys of Consumers, ary, and the labor force participation rate rose over remained at an elevated level in February. the first two months of the year. The share of workers employed part time for economic reasons was Recent information on housing activity suggested little changed on net. The rate of private-sector job that residential investment increased at a solid pace openings was unchanged at a high level in December, early in the year. Starts for both new single-family while the rate of hiring edged up and the rate of quits homes and multifamily units strengthened in the edged down. The four-week moving average of initial fourth quarter and remained near those levels in claims for unemployment insurance benefits was at a January. Issuance of building permits for new singlevery low level in early March. Measures of labor family homes—which tends to be a reliable indicator compensation continued to rise at a moderate rate. of the underlying trend in construction—also moved Compensation per hour in the nonfarm business secup in the fourth quarter and remained near that level tor increased 3¼ percent over the four quarters of in January. Sales of existing homes rose in January, 2016, and average hourly earnings for all employees while new home sales maintained their fourth-quarter increased 2¾ percent over the 12 months ending in pace. February. The unemployment rates for African

146 104th Annual Report | 2017 Real private expenditures for business equipment and Foreign real GDP growth slowed a bit in the fourth intellectual property appeared to be rising in the first quarter from a relatively strong rate in the third quarquarter after a moderate gain in the fourth quarter. ter, but it was still somewhat higher than its average Nominal new orders of nondefense capital goods pace over the past two years. In much of the world, excluding aircraft recorded a solid net gain over the including Europe, Japan, and most of emerging Asia, three months ending in January, and indicators of economic activity continued to grow at a moderate business sentiment were upbeat. Firms’ nominal pace. In Canada and Mexico—two important tradspending for nonresidential structures excluding drill- ing partners of the United States—growth stepped ing and mining was fairly flat in recent months, but down from unusually strong third-quarter rates to a the number of crude oil and natural gas rigs in opera- still-solid pace in the fourth quarter, and Brazil’s tion, an indicator of spending for structures in the recession deepened. Recently released purchasing drilling and mining sector, continued to increase managers indexes and confidence indicators from through early March. The limited available data sug- abroad were generally upbeat and pointed to contingested that inventory investment was likely to make a ued moderate foreign growth in early 2017, although smaller contribution to real GDP growth in the early indicators from Mexico suggested a further slowing. part of the year than it did in the fourth quarter. Inflation in the advanced foreign economies (AFEs) continued to rise, largely reflecting increases in retail Total real government purchases appeared to be mov- energy prices and currency depreciation. Among the ing sideways in the first quarter after having been emerging market economies (EMEs), inflation rose in little changed in the fourth quarter. Nominal outlays Mexico, in part reflecting a substantial hike in fuel for defense in January and February pointed to an prices, but fell in China and parts of South America. increase in real federal purchases. Although state and local government payrolls expanded in January and Staff Review of the Financial Situation February, nominal construction spending by these governments fell sharply in January. Financial markets were generally quiet over the intermeeting period. The Committee’s decision to keep Net exports exerted a significant drag on real GDP the target range for the federal funds rate unchanged growth in the fourth quarter of 2016, and the Janu- at the January–February FOMC meeting was well ary trade data suggested that net exports would con- anticipated. Broad equity price indexes rose further, tinue to weigh on growth in the first quarter of this leaving some standard measures of valuations above year. The U.S. international trade deficit widened in historical norms. Treasury yields rose late in the inter- January in nominal terms, with imports—led by con- meeting period, following monetary policy communisumer goods—rising more than exports. Over the cations by several Federal Reserve officials. The past six months, nominal imports grew at a much broad dollar index was about unchanged. Financing faster pace than nominal exports. conditions for nonfinancial businesses, households, and state and local governments remained generally Total U.S. consumer prices, as measured by the PCE accommodative in recent months. Federal Reserve price index, increased a little less than 2 percent over communications over the intermeeting period conthe 12 months ending in January. Core PCE price tributed to increased expectations of a decision to inflation, which excludes changes in food and energy raise the target range for the federal funds rate at the prices, was 1¾ percent over those same 12 months, March meeting. The Chair’s semiannual monetary held down in part by decreases in the prices of non- policy testimony reportedly led market participants energy imports over part of this period. Over the to price in a slightly higher probability of a monetary 12 months ending in February, total consumer prices policy firming in the near term. Subsequently, invesas measured by the consumer price index (CPI) rose tors took note of the mention in the minutes of the 2¾ percent, while core CPI inflation was 2¼ percent. January–February FOMC meeting that many partici- The medians of survey-based measures of longer-run pants expressed the view that it might be appropriate inflation expectations—such as those from the to raise the federal funds rate again fairly soon if Michigan survey, the Survey of Professional Fore- incoming information on the labor market and inflacasters, and the Desk’s Survey of Primary Dealers tion was in line with or stronger than their current and Survey of Market Participants—were little expectations or if the risks of overshooting the Comchanged, on balance, in recent months. mittee’s maximum-employment and inflation objec-

Minutes of Federal Open Market Committee Meetings | March 147 tives increased. Late in the period, communications degree of slack in the labor market. As expected by from several Federal Reserve officials led to an market participants, the European Central Bank, at increase in market-based measures of the probability its meeting in early March, kept its policy rate and that the target range for the federal funds rate would the pace of its asset purchases unchanged. rise at the March meeting. In U.S. financial markets, credit flows to large firms Nominal Treasury yields increased over the inter- remained solid in recent months, with strong bond meeting period, particularly for shorter maturities. issuance by investment-grade corporations and brisk Treasury yields reacted only modestly over most of originations of leveraged loans. Bank loans continthe period to domestic economic data releases that ued to be largely available for small businesses, were reportedly seen as a little stronger than expected although small business credit demand reportedly on balance. Yields on longer-dated Treasury securi- remained subdued. ties rose late in the period following comments by Federal Reserve officials. Measures of inflation com- In the municipal bond market, issuance was strong in pensation based on Treasury Inflation-Protected January but decreased somewhat in February. Yields Securities were little changed, on net, since the Feb- increased a little, about in line with the rise in Treasruary FOMC meeting. ury yields. The number of ratings upgrades notably outpaced the number of downgrades in January and Broad U.S. equity price indexes increased over the February. intermeeting period, and some measures of valuations, such as price-to-earnings ratios, rose further Commercial real estate loans on banks’ books conabove historical norms. A standard measure of the tinued to grow in January and February. Spreads on equity risk premium edged lower, declining into the highly rated commercial mortgage-backed securities lower quartile of its historical distribution of the pre- (CMBS) over Treasury securities were little changed. vious three decades. Stock prices rose across most However, the volumes of CMBS issuance and of industries, and equity prices for financial firms out- deals in the pipeline were lower in the first two performed broader indexes. Meanwhile, spreads of months of the year than in each of the previous two yields on bonds issued by nonfinancial corporations years. Market commentators attributed some of the over those on comparable-maturity Treasury securi- slowdown to the response of issuers to risk retention ties were little changed. rules that took effect in late 2016. The delinquency rate on loans in CMBS pools had risen since the Since the previous FOMC meeting, better-than- spring of 2016, reflecting increased delinquencies on expected economic data and earnings releases abroad loans originated before the financial crisis. also supported risk sentiment: Foreign equity prices increased, flows to emerging market mutual funds Mortgage credit continued to be readily available for picked up, and emerging market bond spreads nar- households with strong credit scores and documented rowed. Consistent with improved sentiment toward incomes. Despite the increase in Treasury yields, the the EMEs, the dollar depreciated against EME cur- interest rate on 30-year fixed-rate mortgages was rencies. The Mexican peso appreciated substantially little changed over the intermeeting period. Closedagainst the dollar, although it remained weaker than end residential mortgage loans on banks’ books were just before the U.S. elections. In contrast, the dollar about flat in January and February, while banks’ appreciated against the AFE currencies, reflecting holdings of home equity lines of credit continued continued divergence in monetary policy expecta- their long contraction. Financing conditions in the tions for the United States and AFEs as well as market for asset-backed securities remained favorpolitical uncertainty in Europe. The broad dollar able. Consumer credit continued to increase at a index was little changed over the period. Sovereign steady pace, with similar growth rates across credit yields in AFEs generally increased slightly. In the card, automobile, and student loans. The growth of United Kingdom, however, gilt yields declined and consumer lending at banks continued in January and the pound weakened against the dollar in response to February, albeit at a slower pace than in the fourth weaker-than-expected inflation data and to an quarter of 2016. Financing conditions for consumers upward revision by the Bank of England, at its early remained accommodative except in the market for February policy meeting, of its assessment of the subprime credit card loans.

148 104th Annual Report | 2017 Staff Economic Outlook tent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unem- In the U.S. economic projection prepared by the staff ployment rate as tilted to the upside. The risks to the for the March FOMC meeting, the near-term fore- projection for inflation were seen as roughly balcast for real GDP growth was a little weaker, on net, anced. The downside risks from the possibility that than in the previous projection. Real GDP was longer-term inflation expectations may have edged expected to expand at a slower rate in the first quar- down or that the dollar could appreciate substantially ter than in the fourth quarter, reflecting some data further were seen as roughly counterbalanced by the for January that were judged to be transitorily weak, upside risk that inflation could increase more than but growth was projected to move back up in the sec- expected in an economy that was projected to conond quarter. The staff maintained its assumption— tinue operating above its longer-run potential. provisionally included starting with the December 2016 forecast—of a more expansionary fiscal Participants’ Views on Current Conditions policy in the coming years, but it pushed back the and the Economic Outlook timing of when those policy changes were anticipated to take effect. The negative effect of this timing In conjunction with this FOMC meeting, members change on projected real GDP growth through 2019 of the Board of Governors and Federal Reserve was offset by a higher assumed path for equity prices Bank presidents submitted their projections of the and by a lower assumed path for the exchange value most likely outcomes for real output growth, the of the dollar. All told, the staff’s forecast for the level unemployment rate, and inflation for each year from of real GDP at the end of 2019 was essentially unre- 2017 through 2019 and over the longer run, based on vised from the previous forecast, and the staff con- their individual assessments of the appropriate path tinued to project that real GDP would expand at a for the federal funds rate.4 The longer-run projections modestly faster pace than potential output in 2017 represented each participant’s assessment of the rate through 2019. The unemployment rate was forecast to which each variable would be expected to conto edge down gradually through the end of 2019 and verge, over time, under appropriate monetary policy to run below the staff’s estimate of its longer-run and in the absence of further shocks to the economy.5 natural rate; the path for the unemployment rate was These projections and policy assessments are little changed from the previous projection. described in the Summary of Economic Projections (SEP), which is an addendum to these minutes. The staff’s forecast for consumer price inflation, as measured by changes in the PCE price index, was In their discussion of the economic situation and the unchanged for 2017 as a whole and over the next outlook, meeting participants agreed that informacouple of years. The staff continued to project that tion received over the intermeeting period indicated inflation would increase gradually over this period, as that the labor market had continued to strengthen food and energy prices, along with the prices of non- and that economic activity had continued to expand energy imports, were expected to begin steadily rising at a moderate pace. Job gains had remained solid and this year. However, inflation was projected to be the unemployment rate was little changed in recent slightly below the Committee’s longer-run objective months. Household spending had continued to rise of 2 percent in 2019. moderately while business fixed investment appeared to have firmed somewhat. Inflation had increased in The staff viewed the uncertainty around its projec- recent quarters and moved close to the Committee’s tions for real GDP growth, the unemployment rate, 2 percent longer-run objective; excluding energy and and inflation as similar to the average of the past food prices, inflation was little changed and had con- 20 years. The risks to the forecast for real GDP were tinued to run somewhat below 2 percent. Marketseen as tilted to the downside, primarily reflecting the based measures of inflation compensation had staff’s assessment that monetary policy appeared to be better positioned to respond to large positive 4 The office of the president of the Federal Reserve Bank of Atlanta was vacant at the time of this FOMC meeting; the shocks to the economic outlook than substantial incoming president of the Federal Reserve Bank of Atlanta is adverse ones. However, the staff viewed the risks to scheduled to assume office on June 5, 2017. Marie Gooding, the forecast as less pronounced than in the recent First Vice President of the Federal Reserve Bank of Atlanta, submitted economic projections. past, reflecting both somewhat diminished risks to 5 One participant did not submit longer-run projections for real the foreign outlook and an increase in U.S. consumer output growth, the unemployment rate, or the federal funds and business confidence over recent months. Consis- rate.

Minutes of Federal Open Market Committee Meetings | March 149 remained low; survey-based measures of inflation ened further. In contrast, some other participants compensation were little changed on balance. continued to express concern that a substantial undershooting of the longer-run normal rate of Participants generally saw the incoming economic unemployment, if it was to occur, posed a significant information as consistent, overall, with their expecta- upside risk to inflation, in part because of the possitions and indicated that their views about the eco- bility that the behavior of inflation could differ from nomic outlook had changed little since the January– that in recent decades. Participants generally agreed February FOMC meeting. Although GDP appeared that it would be appropriate to continue to closely to be expanding relatively slowly in the current quar- monitor inflation indicators and global economic ter, that development seemed primarily to reflect tem- and financial developments. porary factors, possibly including residual seasonality. Participants continued to anticipate that, with In their discussion of developments in the household gradual adjustments in the stance of monetary sector, participants agreed that consumer spending policy, economic activity would expand at a moder- was likely to contribute significantly to economic ate pace, labor market conditions would strengthen growth this year. Although motor vehicle sales had somewhat further, and inflation would stabilize fallen early in the year and some other components around 2 percent over the medium term. of PCE had also declined, many participants suggested that the slowdown in consumer spending in Participants generally judged that risks to the eco- January would likely be temporary. The slowing nomic outlook remained roughly balanced overall, appeared to mainly reflect transitory factors like although they saw some of the considerations under- lower energy consumption induced by warm weather lying that assessment as having changed modestly. or delays in processing income tax refunds. In addi- Participants continued to underscore the consider- tion, conditions conducive to growth in consumer able uncertainty about the timing and nature of spending, such as a strong labor market or higher potential changes to fiscal policies as well as the size levels of household wealth, were expected to persist. of the effects of such changes on economic activity. A number of participants also cited buoyant con- However, several participants now anticipated that sumer confidence as potentially supporting housemeaningful fiscal stimulus would likely not begin hold expenditures, although some also mentioned until 2018. In view of the substantial uncertainty, that improved sentiment did not appear to have about half of the participants did not incorporate appreciably altered the trajectory of consumer spendexplicit assumptions about fiscal policy in their pro- ing so far. In the housing market, access to mortgage jections. Nonetheless, most participants continued to credit that was still restricted for some borrowers, view the prospect of more expansionary fiscal poli- constraints on buildable land in some regions, and cies as an upside risk to their economic forecasts. At rising interest rates were cited as having continued to the same time, some participants and their business restrain the recovery in housing. contacts saw downside risks to labor force and economic growth from possible changes to other govern- Participants generally agreed that recent momentum ment policies, such as those affecting immigration in the business sector had been sustained over the and trade. Participants generally viewed the downside intermeeting period. Many reported that manufacrisks associated with the global economic outlook, turing activity in their Districts had strengthened furparticularly those related to the economic situation in ther, and reports from the service sector were posi- China and Europe, as having diminished over recent tive. Business optimism remained elevated in a nummonths. At the same time, several participants cau- ber of Districts. A few participants reported tioned that upcoming elections in EU countries increased capital expenditures by businesses in their posed both near-term and longer-term risks. Districts, but business contacts in several other Districts said they were waiting for more clarity about Regarding the outlook for inflation, several partici- government policy initiatives before implementing pants noted that the apparently modest response of capital expansion plans. Investment in oil drilling, inflation to measures of resource slack in recent and particularly extraction from shale, was described years, along with inflation expectations that appeared as increasing in a couple of Districts, and demand for to have remained well anchored, limited the risk of a related production inputs was also said to be expandmarked pickup in inflation as the labor market tight- ing. Nonetheless, slower economic growth, ample

150 104th Annual Report | 2017 existing capacity, and modest returns in the energy medium term. The 12-month change in headline sector were noted as factors that were continuing to PCE prices increased from 1.7 percent in December restrain overall capital spending. to 1.9 percent in January, as the effects of firmer consumer energy prices were registered. Core PCE prices Labor market conditions had continued to improve. rose at a relatively quick pace of 0.3 percent for the Monthly increases in nonfarm payroll employment month of January, although it was noted that averaged nearly 210,000 over the three months end- residual seasonality might have exaggerated the ing in February, the unemployment rate edged down, increase. The Federal Reserve Bank of Dallas’s and the labor force participation rate ticked up. Some 12-month trimmed mean PCE inflation rate had participants cited anecdotal evidence of a tightening gradually increased over the past couple of years, of labor markets. Business contacts in many Districts reaching 1.9 percent in January. Although marketreported difficulty recruiting qualified workers and based measures of inflation compensation had indicated that they had to either offer higher wages remained low, they were somewhat above the levels or hire workers with lower qualifications than seen last year. In addition, longer-term inflation desired. A couple of participants reported that the expectations in the Michigan survey had been relaongoing mismatch between the skill requirements of tively stable since the beginning of the year, while available jobs and the qualifications of job applicants other survey measures of inflation expectations, such was a factor boosting the number of unfilled posi- as the three-year-ahead measure from the Federal tions. Tight labor markets were said to increasingly Reserve Bank of New York’s Survey of Consumer be a factor in businesses’ planning. More employers Expectations, had increased in recent months. Notreportedly were addressing the scarcity of labor by withstanding these developments, some participants expanding vocational programs, but contacts empha- cautioned that progress toward the Committee’s sized that, to be effective, such efforts needed to be inflation objective should not be overstated; they complemented by other programs such as assistance noted that inflation had been persistently below with child care and transportation. Shortages of pro- 2 percent during the current economic expansion and duction crews were said to have restricted oil drilling that core inflation on a 12-month basis was little in a couple of Districts. In contrast, several other changed in recent months at a level below 2 percent. participants cited evidence that some slack remained In contrast, a few other participants commented that in the labor market, such as still-modest aggregate recent inflation data were stronger than they had wage growth and the unevenness of wage gains expected and that they anticipated that inflation across industries, an elevated share of employees would reach the Committee’s objective of 2 percent working part time for economic reasons, or other this year. broad measures of labor underutilization. Participants noted the continued stability of the labor force In their discussion of recent developments in finanparticipation rate in the face of its demographically cial markets, participants noted that financial condidriven downward trend. A few participants inter- tions remained accommodative despite the rise in preted that development as suggesting that slack in longer-term interest rates in recent months and conthe labor market was minimal. A few others saw it as tinued to support the expansion of economic activity. an indication that labor force participation could Many participants discussed the implications of the increase a bit more relative to trend and thus that rise in equity prices over the past few months, with some further reduction in labor market slack could several of them citing it as contributing to an easing occur. Most participants still expected that if eco- of financial conditions. A few participants attributed nomic growth stayed moderate, as they projected, the the recent equity price appreciation to expectations unemployment rate would remain only modestly for corporate tax cuts or to increased risk tolerance below their estimates of the longer-run normal rate among investors rather than to expectations of of unemployment over the next few years. Some stronger economic growth. Some participants viewed other participants, however, anticipated a more sub- equity prices as quite high relative to standard valuastantial undershoot. tion measures. It was observed that prices of other risk assets, such as emerging market stocks, high- Participants generally viewed the information yield corporate bonds, and commercial real estate, received over the intermeeting period as reinforcing had also risen significantly in recent months. In contheir expectation that inflation would stabilize trast, prices of farmland reportedly had edged lower, around the Committee’s 2 percent objective over the in part because low commodity prices continued to

Minutes of Federal Open Market Committee Meetings | March 151 weigh on farm income. Still, farmland valuations pointed to several risks that, if realized, could lead were said to remain quite high as gauged by standard them to reassess their views of the appropriate policy benchmarks such as rent-to-price ratios. path. These risks included the possibility of stronger spending by businesses and households as a result of In their consideration of monetary policy, partici- improved sentiment, appreciably more expansionary pants generally agreed that the data over the inter- fiscal policy, or a more rapid buildup of inflationary meeting period were broadly in line with their expec- pressures than anticipated. In addition, a number of tations, providing evidence of further strengthening participants remarked that recent and prospective of labor market conditions and ongoing progress changes in financial conditions posed upside risks to toward the Committee’s objective of 2 percent infla- their economic projections, to the extent that finantion. Participants noted that their views of the eco- cial developments provided greater stimulus to spendnomic outlook were essentially unchanged from ing than currently anticipated, as well as downside those of the past couple of meetings. Almost all par- risks to their economic projections if, for example, ticipants saw the incoming data as consistent with an financial markets were to experience a significant increase of 25 basis points in the target range for the correction. Participants also mentioned potential federal funds rate at this meeting. They judged that, developments abroad that could have adverse implieven after an increase in the target range, the stance cations for the U.S. economy. of monetary policy would remain accommodative, supporting some additional strengthening in labor Nearly all participants judged that the U.S. economy market conditions and a sustained return to 2 per- was operating at or near maximum employment. In cent inflation. contrast, participants held different views regarding prospects for the attainment of the Committee’s With their views of the outlook for the economy little inflation goal. A number of participants noted that changed, participants generally continued to judge core inflation was a useful indicator of future headthat a gradual pace of rate increases was likely to be line inflation, and the latest reading on 12-month appropriate to promote the Committee’s objectives core inflation suggested that it could still be some of maximum employment and 2 percent inflation. time before headline inflation reached 2 percent on a Participants pointed to several reasons for their sustained basis. Moreover, several participants assessment that a gradual removal of policy accom- remarked that even though inflation was currently modation likely would be appropriate. A few noted not that far below the Committee’s 2 percent objecthat it could take some time for inflation to rise to tive, it was important for the Committee to remove 2 percent on a sustained basis, and thus monetary accommodation gradually to help ensure that inflapolicy would likely need to remain accommodative tion would stabilize around that objective over the for a while longer in order to support the economic medium term. These participants emphasized that a conditions that would foster such an increase. Several sustained return to 2 percent inflation was particuparticipants remarked that risk-management consid- larly important in light of the persistent shortfall of erations still argued for a gradual removal of accom- inflation from its objective over the past several years. modation because the proximity of the federal funds However, several other participants judged that— rate to the effective lower bound placed constraints with the headline PCE price index rising nearly 2 peron the ability of monetary policy to respond to cent and the core PCE index increasing close to adverse shocks. Moreover, the neutral real rate—de- 1¾ percent over the 12-month period ending in Janufined as the real interest rate that is neither expan- ary—the Committee essentially had met its inflation sionary nor contractionary when the economy is goal or was poised to meet it later this year. In the operating at or near its potential—still appeared to view of these participants, such circumstances could be low by historical standards. Furthermore, uncer- warrant a faster pace of scaling back accommodatainty about current and prospective values of the tion than implied by the medians of participants’ neutral real rate reinforced the argument for a assessments in the SEP. gradual approach to removing monetary policy accommodation over the next few years. Committee Policy Action Participants emphasized that they stood ready to In their discussion of monetary policy for the period change their assessments of, and communications ahead, members judged that the information received about, the appropriate path for the federal funds rate since the Committee’s previous meeting indicated in response to unanticipated developments. They that the labor market had continued to strengthen

152 104th Annual Report | 2017 and that economic activity had continued to expand increase in the target range did not reflect changes in at a moderate pace. Job gains had remained solid, their assessments of the economic outlook or the and the unemployment rate had changed little in appropriate path of the federal funds rate, adding recent months. Household spending had continued to that the increase was consistent with the gradual pace rise moderately, while business fixed investment of removal of accommodation that was anticipated appeared to have firmed somewhat. in December, when the Committee last raised the target range. Inflation had increased in recent quarters, with the 12-month change in the headline PCE price index ris- In the view of one member, it was premature to raise ing to nearly 2 percent in January, close to the Com- the target range for the federal funds rate at this mittee’s longer-run objective. However, nearly all meeting. That member preferred to await additional members judged that the Committee had not yet information on the amount of slack remaining in the achieved its objective for headline inflation on a sus- labor market and increased evidence that inflation tained basis. Members generally viewed it as impor- would stabilize at the Committee’s objective before tant to highlight that core inflation—which excludes taking another step to remove monetary policy volatile energy and food prices and historically has accommodation. tended to be a good indicator of future headline inflation—was little changed and continued to run Members agreed that, in determining the timing and somewhat below 2 percent. Moreover, market-based size of future adjustments to the target range for the measures of inflation compensation had federal funds rate, the Committee would assess realremained low. ized and expected economic conditions relative to its objectives of maximum employment and 2 percent With respect to the economic outlook and its impli- inflation. This assessment would take into account a cations for monetary policy, members continued to wide range of information, including measures of expect that, with gradual adjustments in the stance of labor market conditions, indicators of inflation presmonetary policy, economic activity would expand at sures and inflation expectations, and readings on a moderate pace and labor market conditions would financial and international developments. Partly in strengthen somewhat further. It was noted that recent light of the likelihood that the recent higher readings increases in consumer energy prices could cause on headline inflation had mostly reflected the tempoinflation to temporarily reach or even rise a bit above rary effect of increases in consumer energy prices, 2 percent in the near term. Members anticipated that members agreed that the Committee would continue inflation would stabilize around 2 percent over the to carefully monitor actual and expected inflation medium term and commented that transitory devia- developments relative to its inflation goal. A few tions above and below 2 percent were to be expected. members expressed the view that the Committee Members continued to judge that there was signifi- should avoid policy actions or communications that cant uncertainty about the effects of possible changes might be interpreted as suggesting that the Commitin fiscal and other government policies but that near- tee’s 2 percent inflation objective was actually a ceilterm risks to the economic outlook appeared roughly ing. Several members observed that an explicit recogbalanced. A few members noted that domestic upside nition in the statement that the Committee’s inflation risks may have increased somewhat in recent months, goal was symmetric could help support inflation partly reflecting potential changes in fiscal policy, expectations at a level consistent with that goal, and while some downside risks from abroad appeared to it was noted that a symmetric inflation objective have diminished. Members agreed that they would implied that the Committee would adjust the stance continue to closely monitor inflation indicators and of monetary policy in response to inflation that was global economic and financial developments. either persistently above or persistently below 2 percent. Members also reiterated that they expected that After assessing current conditions and the outlook economic conditions would evolve in a manner that for economic activity, the labor market, and inflation, would warrant gradual increases in the federal funds all but one member agreed to raise the target range rate. They agreed that the federal funds rate was for the federal funds rate to ¾ to 1 percent. This likely to remain, for some time, below levels expected increase was viewed as appropriate in light of the fur- to prevail in the longer run. However, they noted that ther progress that had been made toward the Com- the actual path of the federal funds rate would mittee’s objectives of maximum employment and depend on the economic outlook as informed by 2 percent inflation. Members generally noted that the incoming data.

Minutes of Federal Open Market Committee Meetings | March 153 The Committee decided to maintain its existing little changed in recent months. Household policy of reinvesting principal payments from its spending has continued to rise moderately while holdings of agency debt and agency mortgage- business fixed investment appears to have firmed backed securities in agency mortgage-backed securi- somewhat. Inflation has increased in recent ties and of rolling over maturing Treasury securities quarters, moving close to the Committee’s 2 perat auction. Members anticipated doing so until nor- cent longer-run objective; excluding energy and malization of the level of the federal funds rate was food prices, inflation was little changed and conwell under way. They noted that this policy, by keep- tinued to run somewhat below 2 percent. ing the Committee’s holdings of longer-term securi- Market-based measures of inflation compensaties at sizable levels, should help maintain accommo- tion remain low; survey-based measures of dative financial conditions. longer-term inflation expectations are little changed, on balance. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Consistent with its statutory mandate, the Com- Bank of New York, until it was instructed otherwise, mittee seeks to foster maximum employment to execute transactions in the SOMA in accordance and price stability. The Committee expects that, with the following domestic policy directive, to be with gradual adjustments in the stance of monreleased at 2:00 p.m.: etary policy, economic activity will expand at a moderate pace, labor market conditions will “Effective March 16, 2017, the Federal Open strengthen somewhat further, and inflation will Market Committee directs the Desk to under- stabilize around 2 percent over the medium take open market operations as necessary to term. Near-term risks to the economic outlook maintain the federal funds rate in a target range appear roughly balanced. The Committee conof ¾ to 1 percent, including overnight reverse tinues to closely monitor inflation indicators and repurchase operations (and reverse repurchase global economic and financial developments. operations with maturities of more than one day when necessary to accommodate weekend, holi- In view of realized and expected labor market day, or similar trading conventions) at an offer- conditions and inflation, the Committee decided ing rate of 0.75 percent, in amounts limited only to raise the target range for the federal funds by the value of Treasury securities held outright rate to ¾ to 1 percent. The stance of monetary in the System Open Market Account that are policy remains accommodative, thereby supportavailable for such operations and by a per- ing some further strengthening in labor market counterparty limit of $30 billion per day. conditions and a sustained return to 2 percent inflation. The Committee directs the Desk to continue rolling over maturing Treasury securities at auc- In determining the timing and size of future tion and to continue reinvesting principal pay- adjustments to the target range for the federal ments on all agency debt and agency mortgage- funds rate, the Committee will assess realized backed securities in agency mortgage-backed and expected economic conditions relative to its securities. The Committee also directs the Desk objectives of maximum employment and 2 perto engage in dollar roll and coupon swap trans- cent inflation. This assessment will take into actions as necessary to facilitate settlement of account a wide range of information, including the Federal Reserve’s agency mortgage-backed measures of labor market conditions, indicators securities transactions.” of inflation pressures and inflation expectations, and readings on financial and international The vote also encompassed approval of the statement developments. The Committee will carefully below to be released at 2:00 p.m.: monitor actual and expected inflation developments relative to its symmetric inflation goal. “Information received since the Federal Open The Committee expects that economic condi- Market Committee met in February indicates tions will evolve in a manner that will warrant that the labor market has continued to gradual increases in the federal funds rate; the strengthen and that economic activity has con- federal funds rate is likely to remain, for some tinued to expand at a moderate pace. Job gains time, below levels that are expected to prevail in remained solid and the unemployment rate was the longer run. However, the actual path of the

154 104th Annual Report | 2017 federal funds rate will depend on the economic To support the Committee’s decision to raise the taroutlook as informed by incoming data. get range for the federal funds rate, the Board of Governors voted unanimously to raise the interest The Committee is maintaining its existing policy rates on required and excess reserve balances ¼ perof reinvesting principal payments from its hold- centage point, to 1 percent, effective March 16, 2017. ings of agency debt and agency mortgage- The Board of Governors also voted unanimously to backed securities in agency mortgage-backed approve a ¼ percentage point increase in the primary securities and of rolling over maturing Treasury credit rate (discount rate) to 1½ percent, effective securities at auction, and it anticipates doing so March 16, 2017.6 until normalization of the level of the federal funds rate is well under way. This policy, by It was agreed that the next meeting of the Committee keeping the Committee’s holdings of longer- would be held on Tuesday–Wednesday, May 2–3, term securities at sizable levels, should help 2017. The meeting adjourned at 10:40 a.m. on maintain accommodative financial conditions.” March 15, 2017. Voting for this action: Janet L. Yellen, William C. Notation Vote Dudley, Lael Brainard, Charles L. Evans, Stanley Fischer, Patrick Harker, Robert S. Kaplan, Jerome H. By notation vote completed on February 21, 2017, Powell, and Daniel K. Tarullo. the Committee unanimously approved the minutes of the Committee meeting held on January 31– Voting against this action: Neel Kashkari. February 1, 2017. Mr. Kashkari dissented because he preferred to Brian F. Madigan maintain the existing target range for the federal Secretary funds rate at this meeting. In his view, recent data had not pointed to further progress on the Committee’s dual objectives and thus had not provided a compelling case to firm monetary policy at this meet- 6 In taking this action, the Board approved requests submitted by the boards of directors of the Federal Reserve Banks of Boston, ing. He preferred to await additional information on Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Kansas the amount of slack remaining in the labor market City, Dallas, and San Francisco. This vote also encompassed and increased evidence that inflation would stabilize approval by the Board of Governors of the establishment of a 1½ percent primary credit rate by the remaining Federal at the Committee’s symmetric 2 percent inflation Reserve Banks, effective on the later of March 16, 2017, and the objective before taking another step to remove mon- date such Reserve Banks informed the Secretary of the Board etary policy accommodation. Mr. Kashkari also pre- of such a request. (Secretary’s note: Subsequently, the Federal Reserve Banks of New York, St. Louis, and Minneapolis were ferred that when data do support a removal of moninformed by the Secretary of the Board of the Board’s approval etary policy accommodation, the FOMC first pub- of their establishment of a primary credit rate of 1½ percent, lish a detailed plan to normalize its balance sheet effective March 16, 2017.) The second vote of the Board also encompassed approval of the establishment of the interest rates before proceeding with further increases in the fedfor secondary and seasonal credit under the existing formulas eral funds rate. for computing such rates.

Minutes of Federal Open Market Committee Meetings | March 155 Addendum: nomic projections were generally quite similar to those submitted in December. Table 1 and figure 1 Summary of Economic Projections provide summary statistics for the projections. In conjunction with the Federal Open Market Com- As shown in figure 2, all but one participant expected mittee (FOMC) meeting held on March 14–15, 2017, that the evolution of economic conditions would meeting participants submitted their projections of likely warrant gradual increases in the federal funds the most likely outcomes for real output growth, the rate to achieve and sustain maximum employment unemployment rate, and inflation for each year from and 2 percent inflation. The medians of projections 2017 to 2019 and over the longer run.7 Each particifor the federal funds rate in 2017, 2018, and 2019 pant’s projection was based on information available were essentially the same as those in the December at the time of the meeting, together with his or her Summary of Economic Projections (SEP). The assessment of appropriate monetary policy, including median for 2019 was equal to the median of the a path for the federal funds rate and its longer-run longer-run projections. However, the economic outvalue, and assumptions about other factors likely to look is uncertain, and participants noted that their affect economic outcomes. The longer-run projececonomic projections and assessments of appropriate tions represent each participant’s assessment of the monetary policy could change in response to incomvalue to which each variable would be expected to ing information. converge, over time, under appropriate monetary policy and in the absence of further shocks to the Most participants viewed the uncertainty attached to economy.8 “Appropriate monetary policy” is defined their projections as broadly similar to the average of as the future path of policy that each participant the past 20 years, although some participants saw the deems most likely to foster outcomes for economic uncertainty associated with their forecasts as higher activity and inflation that best satisfy his or her indithan average. Most participants also judged the risks vidual interpretation of the Federal Reserve’s objecaround their projections for economic growth, the tives of maximum employment and stable prices. unemployment rate, and inflation as broadly balanced, while several participants saw the risks to their Most FOMC participants expected that, under forecasts of real GDP growth and inflation as appropriate monetary policy, growth in real gross weighted to the upside and several participants domestic product (GDP) would run somewhat above viewed the risks to their unemployment rate forecasts their individual estimates of its longer-run rate this as tilted to the downside. year and in 2018, while about half of the participants projected that economic growth would slow in 2019 Figures 4.A, 4.B, and 4.C for real GDP growth, the and run at or slightly below their individual longer- unemployment rate, and inflation, respectively, presrun estimates. A substantial majority of participants ent for the first time “fan charts” as well as charts of projected that the unemployment rate would run participants’ current qualitative assessments of the below their estimates of its longer-run normal level in uncertainty and risks surrounding their economic 2017 and remain below that level through 2019. A projections. The fan charts (the panels at the top of large majority of participants projected that infla- these three figures) show the medians of participants’ tion, as measured by the four-quarter percentage projections surrounded by confidence intervals that change in the price index for personal consumption are computed from the forecast errors of various priexpenditures (PCE), would increase over the next two vate and government projections made over the past years; a majority of participants projected that infla- 20 years. The width of the confidence interval for tion would be at the Committee’s 2 percent objective each variable at a given point provides a measure of in 2019, and all participants projected that inflation forecast uncertainty at that horizon. For all three would be within a couple of tenths of a percentage macroeconomic variables, these charts illustrate that point of the objective in that year. Participants’ eco- forecast uncertainty is substantial and generally increases as the forecast horizon lengthens. Reflecting 7 The office of the president of the Federal Reserve Bank of in part the uncertainty about the future evolution of Atlanta was vacant at the time of this FOMC meeting; the incoming president is scheduled to assume office on June 5, GDP growth, the unemployment rate, and inflation, 2017. Marie Gooding, First Vice President of the Federal participants’ assessments of appropriate monetary Reserve Bank of Atlanta, submitted economic projections. policy are also subject to considerable uncertainty. To 8 One participant did not submit longer-run projections for real illustrate the uncertainty regarding the appropriate output growth, the unemployment rate, or the federal funds rate. path for monetary policy, figure 5 shows a compa-

156 104th Annual Report | 2017 Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, March 2017 Percent Median1 Central tendency2 Range3 Variable Longer Longer L onger 2 017 2018 2019 run 2017 2018 2019 run 2 017 2 018 2019 run Change in real GDP 2.1 2.1 1.9 1.8 2.0–2.2 1.8–2.3 1.8–2.0 1.8–2.0 1.7–2.3 1.7–2.4 1.5–2.2 1.6–2.2 December projection 2.1 2.0 1.9 1.8 1.9–2.3 1.8–2.2 1.8–2.0 1.8–2.0 1.7–2.4 1.7–2.3 1.5–2.2 1.6–2.2 Unemployment rate 4.5 4.5 4.5 4.7 4.5–4.6 4.3–4.6 4.3–4.7 4.7–5.0 4.4–4.7 4.2–4.7 4.1–4.8 4.5–5.0 December projection 4.5 4.5 4.5 4.8 4.5–4.6 4.3–4.7 4.3–4.8 4.7–5.0 4.4–4.7 4.2–4.7 4.1–4.8 4.5–5.0 PCE inflation 1.9 2.0 2.0 2.0 1.8–2.0 1.9–2.0 2.0–2.1 2.0 1 .7–2.1 1.8–2.1 1.8–2.2 2.0 December projection 1.9 2.0 2.0 2.0 1.7–2.0 1.9–2.0 2.0–2.1 2.0 1.7–2.0 1.8–2.2 1.8–2.2 2.0 Core PCE inflation4 1.9 2 .0 2.0 1.8–1.9 1.9–2.0 2.0–2.1 1.7–2.0 1 .8–2.1 1.8–2.2 December projection 1.8 2.0 2.0 1.8–1.9 1.9–2.0 2.0 1.7–2.0 1.8–2.2 1 .8–2.2 Memo: Projected appropriate policy path Federal funds rate 1.4 2.1 3.0 3.0 1.4–1.6 2.1–2.9 2.6–3.3 2.8–3.0 0.9–2.1 0.9–3.4 0.9–3.9 2.5–3.8 December projection 1.4 2.1 2.9 3.0 1.1–1.6 1.9–2.6 2.4–3.3 2.8–3.0 0.9–2.1 0.9–3.4 0.9–3.9 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 December projections were made in conjunction with the meeting of the Federal Open Market Committee on December 13–14, 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 December 13–14, 2016, meeting, and one participant did not submit such projections in conjunction with the March 14–15, 2017, 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 | March 157 Figure 1. Medians, central tendencies, and ranges of economic projections, 2017–19 and over the longer run Percent Change in real GDP Median of projections Central tendency of projections Range of projections 3 2 Actual 1 2012 2013 2014 2015 2016 2017 2018 2019 Longer run Percent Unemployment rate 8 7 6 5 4 2012 2013 2014 2015 2016 2017 2018 2019 Longer run Percent PCE inflation 3 2 1 2012 2013 2014 2015 2016 2017 2018 2019 Longer run Percent Core PCE inflation 3 2 1 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.

158 104th Annual Report | 2017 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 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 | March 159 rable fan chart around the medians of participants’ The Outlook for Inflation assessments for the federal funds rate.9 As with the macroeconomic variables, forecast uncertainty for The medians of projections for headline PCE price short-term interest rates is substantial and increases inflation were 1.9 percent in 2017 and 2.0 percent in as the horizon lengthens. 2018 and 2019; these medians were unchanged from December. Only a few participants saw inflation con- The Outlook for Economic Activity tinuing to run below 2 percent in 2019, while several participants projected that inflation would run mod- The median of participants’ projections for the estly above the Committee’s objective in that year. growth rate of real GDP, conditional on their indi- The medians of projections for core inflation were vidual assumptions about appropriate monetary 1.9 percent in 2017 and 2.0 percent in 2018 and 2019, policy, was 2.1 percent in 2017 and 2018 and 1.9 per- very similar to the contour in December. cent in 2019; the median of projections for the longer-run normal rate of real GDP growth was Figures 3.C and 3.D provide information on the dis- 1.8 percent. Compared with the December SEP, the tributions of participants’ views about the outlook medians of the forecasts for real GDP growth over for inflation. The distributions of projections for the period from 2017 to 2019, as well as the median headline PCE price inflation were largely unchanged assessment of the longer-run growth rate, were from December, while the distributions for core PCE mostly unchanged. As in December, about half of price inflation shifted up slightly. Some participants the participants incorporated expectations of fiscal attributed the upward shift in their projections for stimulus into their projections; almost all in this core inflation to recent data that were somewhat group projected slightly higher real GDP growth next above expectations. year relative to their December projections. Appropriate Monetary Policy The median of projections for the unemployment rate in the fourth quarter of 2017 was 4.5 percent, Figure 3.E provides the distribution of participants’ unchanged from December and 0.2 percentage point judgments regarding the appropriate target or midbelow the median assessment of its longer-run nor- point of the target range for the federal funds rate at mal level. Almost all participants projected that the the end of each year from 2017 to 2019 and over the unemployment rate would not change much over the longer run.10 The distributions for 2017 through 2019 subsequent two years. Based on the median projec- shifted up modestly. The median projections of the tions, the anticipated path of the unemployment rate federal funds rate continued to show gradual for coming years was also unchanged from the previ- increases, with the median assessment for 2017 standous forecast. The median estimate of the longer-run ing at 1.38 percent, consistent with three 25 basis normal rate of unemployment was 4.7 percent, point rate increases this year. Thereafter, the medians slightly lower than in December. of the projections were 2.13 percent at the end of 2018 and 3.00 percent at the end of 2019; the median Figures 3.A and 3.B show the distributions of par- of the longer-run projections of the federal funds ticipants’ projections for real GDP growth and the rate was 3.00 percent. Compared with the December unemployment rate from 2017 to 2019 and in the lon- SEP, the median of the projections for the federal ger run. The distribution of individual projections of funds rate rose only for 2019, and in that case just real GDP growth for this year was less dispersed rela- slightly. tive to the distribution of the December projections, while the distribution for 2018 shifted up slightly. The In discussing their March forecasts, many particidistributions of projections for the unemployment pants continued to express the view that the approrate were unchanged for 2017 and 2018, while they priate upward trajectory of the federal funds rate shifted slightly lower for 2019 and for the longer-run 10 One participant’s projections for the federal funds rate, real normal rate. GDP growth, the unemployment rate, and inflation were informed by the view that there are multiple possible medium- 9 The fan chart for the federal funds rate provides a depiction of term regimes for the U.S. economy, that these regimes are perthe uncertainty around the median assessment of the future sistent, and that the economy shifts between regimes in a way path of appropriate monetary policy and is closely connected that cannot be forecast. Under this view, the economy currently with the uncertainty about the future value of economic vari- is in a regime characterized by expansion of economic activity ables. In contrast, the dot plot shown in figure 2 displays the with low productivity growth and a low short-term real interest dispersion of views across individual participants about the rate, but longer-term outcomes for variables other than inflation appropriate level of the federal funds rate. cannot be usefully projected.

160 104th Annual Report | 2017 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2017–19 and over the longer run Number of participants 2017 March projections 18 December 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 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 | March 161 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2017–19 and over the longer run Number of participants 2017 March projections 18 December 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 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.

162 104th Annual Report | 2017 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2017–19 and over the longer run Number of participants 2017 March projections 18 December projections 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 1.8 2.0 2.2 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 1.8 2.0 2.2 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 1.8 2.0 2.2 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 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 | March 163 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2017–19 Number of participants 2017 March projections 18 December projections 16 14 12 10 8 6 4 2 1.7– 1.9– 2.1– 1.8 2.0 2.2 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.7– 1.9– 2.1– 1.8 2.0 2.2 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.7– 1.9– 2.1– 1.8 2.0 2.2 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

164 104th Annual Report | 2017 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, 2017–19 and over the longer run Number of participants 2017 March projections 18 December projections 16 14 12 10 8 6 4 2 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– 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 0.88– 1.13– 1.38– 1.63– 1.88– 2.13– 2.38– 2.63– 2.88– 3.13– 3.38– 3.63– 3.88– 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 0.88– 1.13– 1.38– 1.63– 1.88– 2.13– 2.38– 2.63– 2.88– 3.13– 3.38– 3.63– 3.88– 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 0.88– 1.13– 1.38– 1.63– 1.88– 2.13– 2.38– 2.63– 2.88– 3.13– 3.38– 3.63– 3.88– 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 | March 165 (RMSE) for forecasts made over the past 20 years. Table 2. Average historical projection error ranges This measure of forecast uncertainty is incorporated Percentage points graphically in the top panels of figures 4.A, 4.B, and Variable 2017 2018 2019 4.C, which display fan charts plotting the medians of participants’ projections for real GDP growth, the Change in real GDP1 ±1.6 ±2.1 ±2.1 unemployment rate, and PCE price inflation sur- Unemployment rate1 ±0.5 ±1.3 ±1.8 rounded by symmetric confidence intervals derived Total consumer prices2 ±0.9 ±1.1 ±1.1 Short-term interest rates3 ±0.9 ±2.0 ±2.4 from the RMSEs presented in table 2. If the degree of uncertainty attending these projections is similar Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 1997 through 2016 that were released in the spring by to the typical magnitude of past forecast errors and if various private and government forecasters. As described in the box “Forecast the risks around the projections are broadly bal- Uncertainty,” under certain assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, consumer prices, and the anced, then future outcomes of these variables would federal funds rate will be in ranges implied by the average size of projection have about a 70 percent probability of occurring errors made in the past. For more information, see David Reifschneider and Peter Tulip (2017), “Gauging the Uncertainty of the Economic Outlook Using Historical within these confidence intervals. For all three vari- Forecasting Errors: The Federal Reserve’s Approach,” Finance and Economics ables, this measure of forecast uncertainty is substan- Discussion Series 2017-020 (Washington: Board of Governors of the Federal Reserve System, February), available at www.federalreserve.gov/econresdata/ tial and generally increases as the forecast horizon feds/2017/files/2017020pap.pdf. lengthens. 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 most widely used in government and private economic forecasts. Projection FOMC participants may judge that the widths of the is percent change, fourth quarter of the previous year to the fourth quarter of confidence intervals in the historical fan charts the year indicated. shown in figures 4.A through 4.C do not adequately 3 For Federal Reserve staff forecasts, measure is the federal funds rate. For other forecasts, measure is the rate on 3-month Treasury bills. Historical projections capture their current assessments of the degree of are the average level, in percent, in the fourth quarter of the year indicated. uncertainty that surrounds their economic projections. Participants’ assessments of the current level of over the next few years would likely be gradual. That uncertainty surrounding their economic projections anticipated pace reflected a few factors, such as a are shown in the bottom-left panels of figures 4.A, short-term neutral real interest rate that was currently 4.B, and 4.C. Most participants continued to view low and was expected to move up only slowly as well the uncertainty attached to their economic projecas a gradual return of inflation to the Committee’s tions as broadly similar to the average of the past 2 percent objective. A few participants indicated that 20 years, with one fewer participant than in Decempositive news on inflation and the continued ber seeing uncertainty about GDP growth, the unemstrengthening of labor market conditions in recent ployment rate, and headline inflation as higher than months had increased their confidence that inflation its historical average.11 In their discussion of the would move toward or to the 2 percent objective. uncertainty attached to their current projections rela- Some participants judged that a slightly firmer path tive to levels of uncertainty over the past 20 years, of monetary policy than in their previous projections as in December, about half of the participants would likely be appropriate. Most of the participants expressed the view that, at this point, uncertainty surwho commented on the Committee’s reinvestment rounding prospective changes in fiscal and other polipolicy anticipated that a change in that policy would cies is very large or that there is not yet enough inforbe appropriate before the end of this year if the eco- mation to make reasonable assumptions about the nomic outlook evolved as projected. timing, nature, and magnitude of the changes. Uncertainty and Risks The fan charts—which are symmetric around the median projections by assumption—also do not nec- The economic projections of FOMC participants are essarily reflect participants’ assessments of the balgenerally subject to considerable uncertainty and ance of risks to their economic projections. Particirisks, and, in assessing the path of appropriate mon- pants’ assessments of the balance of risks to their etary policy, FOMC participants take account of the economic projections are shown in the bottom-right range of possible outcomes, the likelihood of their panels of figures 4.A, 4.B, and 4.C. As in December, occurring, and the potential benefits and costs to the most participants judged the risks to their projections economy should they occur. Table 2 provides one measure of the forecast uncertainty for the change in 11 At the end of this summary, the box “Forecast Uncertainty” discusses the sources and interpretation of uncertainty in the real GDP, the unemployment rate, and total coneconomic forecasts and explains the approach used to assess the sumer price inflation—the root mean squared error uncertainty and risks attending the participants’ projections.

166 104th Annual Report | 2017 Figure 4.A. Uncertainty and risks in projections of GDP growth Median projection and confidence interval based on histrorical forecast errors Percent Change in real GDP Median of projections 70% confidence interval 4 3 2 Actual 1 0 2012 2013 2014 2015 2016 2017 2018 2019 FOMC participants’ assessments of uncertainty and risks around their 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 Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in real gross domestic product (GDP) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

Minutes of Federal Open Market Committee Meetings | March 167 Figure 4.B. Uncertainty and risks in projections of the unemployment rate Median projection and confidence interval based on historical forecast errors Percent Unemployment rate Median of projections 10 70% confidence interval 9 8 7 6 Actual 5 4 3 2 1 2012 2013 2014 2015 2016 2017 2018 2019 FOMC participants’ assessments of uncertainty and risks around their economic projections Number of participants Number of participants Uncertainty about the unemployment rate Risks to the unemployment rate 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 Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the average civilian unemployment rate in the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

168 104th Annual Report | 2017 Figure 4.C. Uncertainty and risks in projections of PCE inflation Median projection and confidence interval based on historical forecast errors Percent PCE inflation Median of projections 70% Confidence interval 3 2 1 Actual 0 2012 2013 2014 2015 2016 2017 2018 2019 FOMC participants’ assessments of uncertainty and risks around their economic projections Number of participants Number of participants Uncertainty about PCE inflation Risks to PCE inflation 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 core PCE inflation Risks to core PCE inflation 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 Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in the price index for personal consumption expenditures (PCE) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

Minutes of Federal Open Market Committee Meetings | March 169 of real GDP growth, the unemployment rate, head- projections of the federal funds rate, in part because line inflation, and core inflation as broadly bal- these assessments are not forecasts of the likeliest anced—in other words, as broadly consistent with a outcomes but rather reflect each participant’s indisymmetric fan chart. One more participant saw the vidual judgment of appropriate monetary policy. risks to unemployment as weighted to the downside However, the associated confidence intervals may than in December (the bottom-right panel of fig- provide a sense of the likely uncertainty around the ure 4.B). The balance of risks to the inflation projec- future path of the federal funds rate generated by the tion shifted up slightly relative to December, as one uncertainty about the macroeconomic variables as fewer participant judged the risks to both headline well as additional adjustments to monetary policy and core inflation as weighted to the downside and that may be appropriate to offset the effects of one more participant viewed the risks as weighted to shocks to the economy. the upside (the lower-right panels of figure 4.C). In discussing the balance of risks around their projec- Figure 5 shows a fan chart plotting the medians of tions, some participants mentioned improvements in participants’ assessments of the appropriate path of recent readings of household and business confi- the federal funds rate surrounded by confidence dence as well as somewhat reduced risks from intervals derived from the results presented in table 2. abroad. Moreover, a number of participants noted As with the macroeconomic variables, forecast uncerthat the possibility of a more expansionary U.S. fis- tainty is substantial and increases at longer horizons. cal policy might present upside risks to real GDP If at some point in the future the confidence interval growth and inflation and downside risks to around the federal funds rate were to extend below unemployment. zero, it would be truncated at zero for purposes of the chart shown in figure 5; zero is the bottom of the Participants’ assessments of the future path of the lowest target range for the federal funds rate that has federal funds rate consistent with appropriate policy been adopted by the Committee in the past. This are generally subject to considerable uncertainty, approach to the construction of the federal funds reflecting in part uncertainty about the evolution of rate fan chart would be merely a convention and GDP growth, the unemployment rate, and inflation would not have any implication for possible future over time. The final line in table 2 shows the RMSEs policy decisions regarding the use of negative interest for forecasts of short-term interest rates. These rates to provide additional monetary policy accom- RMSEs are not strictly consistent with participants’ modation if doing so were appropriate.

170 104th Annual Report | 2017 Figure 5. Uncertainty in projections of the federal funds rate Median projection and confidence interval based on historical forecast errors Percent Federal funds rate Midpoint of target range 6 Median of projections 70% confidence interval* 5 4 3 2 Actual 1 0 2012 2013 2014 2015 2016 2017 2018 2019 Note: The blue and red lines are based on actual values and median projected values, respectively, of the Committee’s target for the federal funds rate at the end of the year indicated. The actual values are the midpoint of the target range; the median projected values are based on either the midpoint of the target range or the target level. The confidence interval around the median projected values is based on root mean squared errors of various private and government forecasts made over the previous 20 years. The confidence interval is not strictly consistent with the projections for the federal funds rate, primarily because these projections are not forecasts of the likeliest outcomes for the federal funds rate, but rather projections of participants’ individual assessments of appropriate monetary policy. Still, historical forecast errors provide a broad sense of the uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary policy that may be appropriate to offset the effects of shocks to the economy. The confidence interval is assumed to be symmetric except when it is truncated at zero—the bottom of the lowest target range for the federal funds rate that has been adopted in the past by the Committee. This truncation would not be intended to indicate the likelihood of the use of negative interest rates to provide additional monetary policy accommodation if doing so was judged appropriate. In such situations, the Committee could also employ other tools, including forward guidance and large-scale asset purchases, to provide additional accommodation. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections. * The confidence interval is derived from forecasts of the average level of short-term interest rates in the fourth quarter of the year indicated; more information about these data is available in table 2. The shaded area encompasses less than a 70 percent confidence interval if the confidence interval has been truncated at zero.

Minutes of Federal Open Market Committee Meetings | March 171 Forecast Uncertainty The economic projections provided by the members panels of those figures. Participants also provide of the Board of Governors and the presidents of the judgments as to whether the risks to their projections Federal Reserve Banks inform discussions of mon- are weighted to the upside, are weighted to the etary policy among policymakers and can aid public downside, or are broadly balanced. That is, while the understanding of the basis for policy actions. Con- symmetric historical fan charts shown in the top pansiderable uncertainty attends these projections, how- els of figures 4.A through 4.C imply that the risks to ever. The economic and statistical models and rela- participants’ projections are balanced, participants tionships used to help produce economic forecasts may judge that there is a greater risk that a given are necessarily imperfect descriptions of the real variable will be above rather than below their projecworld, and the future path of the economy can be tions. These judgments are summarized in the loweraffected by myriad unforeseen developments and right panels of figures 4.A through 4.C. events. Thus, in setting the stance of monetary As with real activity and inflation, the outlook for the policy, participants consider not only what appears to future path of the federal funds rate is subject to conbe the most likely economic outcome as embodied in siderable uncertainty. This uncertainty arises primarily their projections, but also the range of alternative because each participant’s assessment of the appropossibilities, the likelihood of their occurring, and the priate stance of monetary policy depends importantly potential costs to the economy should they occur. on the evolution of real activity and inflation over Table 2 summarizes the average historical accuracy time. If economic conditions evolve in an unexpected of a range of forecasts, including those reported in manner, then assessments of the appropriate setting past Monetary Policy Reports and those prepared by of the federal funds rate would change from that the Federal Reserve Board’s staff in advance of point forward. The final line in table 2 shows the error meetings of the Federal Open Market Committee ranges for forecasts of short-term interest rates. They (FOMC). The projection error ranges shown in the suggest that the historical confidence intervals assotable illustrate the considerable uncertainty associ- ciated with projections of the federal funds rate are ated with economic forecasts. For example, suppose quite wide. It should be noted, however, that these a participant projects that real gross domestic prod- confidence intervals are not strictly consistent with uct (GDP) and total consumer prices will rise steadily the projections for the federal funds rate, as these at annual rates of, respectively, 3 percent and 2 per- projections are not forecasts of the most likely quarcent. If the uncertainty attending those projections is terly outcomes but rather are projections of particisimilar to that experienced in the past and the risks pants’ individual assessments of appropriate monaround the projections are broadly balanced, the etary policy and are on an end-of-year basis. Hownumbers reported in table 2 would imply a probability ever, the forecast errors should provide a sense of of about 70 percent that actual GDP would expand the uncertainty around the future path of the federal within a range of 1.4 to 4.6 percent in the current funds rate generated by the uncertainty about the year, and 0.9 to 5.1 percent in the second and third macroeconomic variables as well as additional years. The corresponding 70 percent confidence adjustments to monetary policy that would be approintervals for overall inflation would be 1.1 to 2.9 per- priate to offset the effects of shocks to the economy. cent in the current year, and 0.9 to 3.1 percent in the If at some point in the future the confidence interval second and third years. Figures 4.A through 4.C illusaround the federal funds rate were to extend below trate these confidence bounds in “fan charts” that zero, it would be truncated at zero for purposes of are symmetric and centered on the medians of the fan chart shown in figure 5; zero is the bottom of FOMC participants’ projections for GDP growth, the the lowest target range for the federal funds rate that unemployment rate, and inflation. However, in some has been adopted by the Committee in the past. This instances, the risks around the projections may not approach to the construction of the federal funds rate be symmetric. In particular, the unemployment rate fan chart would be merely a convention; it would not cannot be negative; furthermore, the risks around a have any implications for possible future policy deciparticular projection might be tilted to either the sions regarding the use of negative interest rates to upside or the downside, in which case the correprovide additional monetary policy accommodation if sponding fan chart would be asymmetrically posidoing so were appropriate. In such situations, the tioned around the median projection. Committee could also employ other tools, including Because current conditions may differ from those forward guidance and asset purchases, to provide that prevailed, on average, over history, participants additional accommodation. provide judgments as to whether the uncertainty While figures 4.A through 4.C provide information on attached to their projections of each economic varithe uncertainty around the economic projections, figable is greater than, smaller than, or broadly similar ure 1 provides information on the range of views to typical levels of forecast uncertainty seen in the across FOMC participants. A comparison of figure 1 past 20 years, as presented in table 2 and reflected with figures 4.A through 4.C shows that the disperin the widths of the confidence intervals shown in the sion of the projections across participants is much top panels of figures 4.A through 4.C. Participants’ smaller than the average forecast errors over the past current assessments of the uncertainty surrounding 20 years. their projections are summarized in the bottom-left

172 104th Annual Report | 2017 Meeting Held Steven B. Kamin Economist on May 2–3, 2017 Thomas Laubach A joint meeting of the Federal Open Market Com- Economist mittee and the Board of Governors was held in the David W. Wilcox offices of the Board of Governors of the Federal Economist Reserve System in Washington, D.C., on Tuesday, May 2, 2017, at 1:00 p.m. and continued on Wednes- James A. Clouse, Thomas A. Connors, day, May 3, 2017, at 9:00 a.m.1 Michael Dotsey, Evan F. Koenig, Daniel G. Sullivan, William Wascher, and Beth Anne Wilson 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 Ann E. Misback Secretary, Office of the Secretary, Charles L. Evans Board of Governors Stanley Fischer Matthew J. Eichner3 Patrick Harker Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Robert S. Kaplan Neel Kashkari Michael S. Gibson Director, Division of Supervision and Regulation, Jerome H. Powell Board of Governors Marie Gooding, Loretta J. Mester, Mark L. Mullinix, Andreas Lehnert Michael Strine, and John C. Williams Director, Division of Financial Stability, Board of Alternate Members of the Federal Open Market Governors Committee Stephen A. Meyer James Bullard, Esther L. George, and Eric Rosengren Deputy Director, Division of Monetary Affairs, Presidents of the Federal Reserve Banks of St. Louis, Board of Governors Kansas City, and Boston, respectively Trevor A. Reeve Brian F. Madigan Senior Special Adviser to the Chair, Office of Board Secretary Members, Board of Governors Matthew M. Luecke Joseph W. Gruber, David Reifschneider, Deputy Secretary and John M. Roberts 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 Christopher J. Erceg Senior Associate Director, Division of International Michael Held2 Finance, Board of Governors Deputy General Counsel 1 The Federal Open Market Committee is referenced as the “FOMC” and the “Committee” in these minutes. 3 Attended the discussions on developments in financial markets 2 Attended Tuesday session only. and System Open Market Account reinvestment policy.

Minutes of Federal Open Market Committee Meetings | May 173 Diana Hancock and David E. Lebow David Altig, Kartik B. Athreya, Geoffrey Tootell, Senior Associate Directors, Division of Research and and Christopher J. Waller Statistics, Board of Governors Executive Vice Presidents, Federal Reserve Banks of Atlanta, Richmond, Boston, and St. Louis, Gretchen C. Weinbach respectively Senior Associate Director, Division of Monetary Affairs, Board of Governors Troy Davig, Julie Ann Remache,4 and Nathaniel Wuerffel5 Antulio N. Bomfim, Ellen E. Meade, Edward Nelson, Senior Vice Presidents, Federal Reserve Banks of and Joyce K. Zickler Kansas City, New York, and New York, respectively Senior Advisers, Division of Monetary Affairs, Board of Governors Todd E. Clark, Terry Fitzgerald, and Òscar Jordà Vice Presidents, Federal Reserve Banks of Cleveland, Rochelle M. Edge Minneapolis, and San Francisco, respectively Associate Director, Division of Financial Stability, Board of Governors Rania Perry5 Assistant Vice President, Federal Reserve Bank of Jane E. Ihrig4 and David López-Salido New York Associate Directors, Division of Monetary Affairs, David Lucca Board of Governors Research Officer, Federal Reserve Bank of New York John J. Stevens Associate Director, Division of Research and Developments in Financial Markets and Statistics, Board of Governors Open Market Operations Glenn Follette The manager of the System Open Market Account Assistant Director, Division of Research and (SOMA) reported on developments in domestic and Statistics, Board of Governors foreign financial markets over the period since the Patrick E. McCabe March FOMC meeting. Yields on U.S. Treasury Adviser, Division of Research and Statistics, securities declined, and the broad index of the for- Board of Governors eign exchange value of the dollar fell modestly. These changes reportedly reflected revisions to investors’ Penelope A. Beattie2 expectations for fiscal and other economic policies; Assistant to the Secretary, Office of the Secretary, some increase in geopolitical tensions; economic and Board of Governors inflation indicators that, on balance, were weaker Dana L. Burnett, Michele Cavallo,5 and Dan Li than anticipated; and monetary policy communications. In response to political developments abroad, Section Chiefs, Division of Monetary Affairs, spreads on some European sovereign debt securities Board of Governors narrowed noticeably. Measures of implied volatility Benjamin K. Johannsen in equity markets declined, on net, to levels that were Senior Economist, Division of Monetary Affairs, historically very low. Market pricing and survey evi- Board of Governors dence indicated that investors anticipated no change in the target range for the federal funds rate at this Arsenios Skaperdas5 meeting but saw a substantial probability of an Economist, Division of Monetary Affairs, increase at the June FOMC meeting; market expecta- Board of Governors tions for the path of the federal funds rate further Ellen J. Bromagen ahead fell somewhat. Federal funds continued to First Vice President, Federal Reserve Bank of trade well within the FOMC’s target range. Reinvest- Chicago ment of principal payments from Treasury and mortgage-backed securities held in the SOMA proceeded smoothly. The manager updated the Committee on various small-value tests of System operations. 4 Attended the discussions on monetary policy and System Open The manager also briefed the Committee on develop- Market Account reinvestment policy. ments regarding certain reference interest rates. 5 Attended the discussion on System Open Market Account reinvestment policy. Changes in the practices of some domestic and for-

174 104th Annual Report | 2017 eign banks for booking certain types of liabilities, as somewhat below 2 percent. Survey-based measures of well as the effects of recent changes in the regulation inflation expectations were little changed on balance. of money market funds, had resulted in a reduction in the volume of Eurodollar transactions reported on Total nonfarm payroll employment rose in March, the Federal Reserve’s Report of Selected Money but the gain was smaller than in recent months, likely Market Rates (FR 2420). The staff was in the process reflecting both warmer-than-usual temperatures in of analyzing possible revisions to the report that February that probably caused some hiring to be would guard against a further erosion of reported moved forward and a major winter storm in the transactions and support the robustness of the over- Northeast in March that probably held down hiring night bank funding rate calculated by the Federal somewhat; nevertheless, the increase in employment Reserve Bank of New York. Such revisions might be for the first quarter as a whole was solid. The unemimplemented in conjunction with the periodic ployment rate decreased to 4.5 percent in March, and renewal of authorization for the report, which is the labor force participation rate was unchanged. The expected to be completed by the third quarter of share of workers employed part time for economic 2018. The manager also noted that aspects of plans reasons declined. The rates of private-sector job to publish reference interest rates for market repur- openings, hiring, and quits were all little changed in chase agreements (repos) were being modified to January and February. The four-week moving averincorporate a newly available source of data on age of initial claims for unemployment insurance cleared bilateral repo transactions; the modifications benefits remained at a very low level through midwere expected to extend the time frame for publica- April. Measures of labor compensation accelerated tion of the new rates by several months. modestly. The employment cost index for private workers increased 2¼ percent over the 12 months The Committee voted unanimously to renew the ending in March, and average hourly earnings for all reciprocal currency arrangements with the Bank of employees increased 2¾ percent over the same Canada and the Bank of Mexico; these arrangements period; both increases were somewhat larger than are associated with the Federal Reserve’s participa- those over the 12 months ending in March 2016. tion in the North American Framework Agreement of 1994. In addition, the Committee voted unani- The average unemployment rate for whites in the first mously to renew the dollar and foreign currency quarter of this year was ½ percentage point lower liquidity swap arrangements with the Bank of than its annual average for 2015, while the unemploy- Canada, the Bank of England, the Bank of Japan, ment rates for Hispanics and for African Americans the European Central Bank, and the Swiss National were about 1 percentage point and 1¾ percentage Bank. The votes to renew the Federal Reserve’s par- points lower, respectively. The larger improvements in ticipation in these standing arrangements are taken the rates for Hispanics and for African Americans annually at the April or May FOMC meeting. mirrored the larger increases in those rates during the most recent recession. As of the first quarter, the By unanimous vote, the Committee ratified the unemployment rates for African Americans and for Desk’s domestic transactions over the intermeeting Hispanics remained above the rate for whites both period. There were no intervention operations in for- overall and for people with similar educational backeign currencies for the System’s account during the grounds. Unemployment rates for Asians remained intermeeting period. below those for whites. Staff Review of the Economic Situation Total industrial production rose in February and March, primarily reflecting a further expansion of The information reviewed for the May 2–3 meeting mining output as well as a net increase in the output indicated that the labor market strengthened further of utilities. Manufacturing production declined in in March but that growth of real gross domestic March after advancing in each of the previous six product (GDP) slowed in the first quarter, with the months; about half of the decline in March was due slowing likely reflecting transitory factors. The to a decrease in the output of motor vehicles and 12-month change in overall consumer prices was parts. Automakers’ assembly schedules suggested that close to the Committee’s longer-run objective of motor vehicle production would increase in the sec- 2 percent in recent months; excluding food and ond quarter despite somewhat elevated levels of energy, consumer prices declined in March, and the vehicle inventories. Broader indicators of manufac- 12-month change in core consumer prices remained turing production, such as the new orders indexes

Minutes of Federal Open Market Committee Meetings | May 175 from national and regional manufacturing surveys, spending rose at a slower pace than in the final quarpointed to modest gains in factory output over the ter of 2016. Real state and local government purnear term. chases also declined in the first quarter, with a sharp decrease in real construction spending by these gov- Real personal consumption expenditures (PCE) rose ernments more than offsetting a modest expansion in only modestly in the first quarter, although monthly state and local government payrolls. data indicated some improvement late in the quarter. Indeed, after declining in January and February, real The U.S. international trade deficit narrowed in Feb- PCE increased in March, partly reflecting a rebound ruary. Exports rose and imports fell sharply, with in spending on energy services, which had been held imports of automotive products and consumer goods down by unseasonably warm weather through Febru- declining after robust increases in January. Prelimiary, as well as an increase in outlays for a variety of nary data on trade in goods suggested that the trade consumer goods. Motor vehicle sales picked up in deficit was about unchanged in March. The Bureau April after declining in March, although sales of Economic Analysis estimated that real net exports remained somewhat below their average pace in the added slightly to growth of real GDP in the first first quarter and noticeably below the high levels seen quarter. in the fourth quarter. Recent readings on key factors that influence consumer spending pointed to solid Total U.S. consumer prices, as measured by the PCE growth in real PCE in coming quarters, including fur- price index, increased 1¾ percent over the 12 months ther gains in employment, real disposable personal ending in March. Core PCE price inflation, which income, and households’ net worth. Moreover, con- excludes changes in food and energy prices, was sumer sentiment, as measured by the University of about 1½ percent over those same 12 months. Over Michigan Surveys of Consumers, remained upbeat in the 12 months ending in March, total consumer March and April. prices as measured by the consumer price index (CPI) rose 2½ percent, while core CPI inflation was Residential investment increased at a brisk pace in 2 percent. On a month-over-month basis, both the the first quarter. Starts for both new single-family PCE price index and the CPI decreased in March, homes and multifamily units moved up, and issuance partly reflecting declines in some categories of prices of building permits for new single-family homes— that appeared unlikely to be repeated. The median of which tends to be a reliable indicator of the underly- longer-run inflation expectations from the Michigan ing trend in residential construction—also rose. Sales survey edged down a bit, on balance, in recent of both new and existing homes in the first quarter months, while the medians from the Desk’s Survey of were above their levels in the previous quarter. Primary Dealers and Survey of Market Participants were little changed. Real private expenditures for business equipment and intellectual property increased at a solid pace in the Foreign real GDP growth appeared to have strengthfirst quarter after a moderate gain in the fourth quar- ened in the first quarter after slowing somewhat in ter. Nominal shipments and new orders of nonde- the fourth quarter. In the advanced foreign econofense capital goods excluding aircraft both rose over mies (AFEs), indicators for the first quarter pointed the three months ending in March, and the level of to faster economic growth in Canada and solid new orders remained higher than that of shipments, growth in the euro area and Japan. By contrast, real pointing to further near-term gains in shipments. In GDP growth in the United Kingdom slowed signifiaddition, indicators of business sentiment were cantly. More recent indicators were consistent with upbeat in recent months. Real business expenditures moderate economic growth in most AFEs. In the for nonresidential structures increased briskly in the emerging market economies (EMEs), growth picked first quarter, and the number of oil and gas rigs in up in China and some Asian economies in the first operation, an indicator of spending for structures in quarter but slowed moderately in Mexico. Recent the drilling and mining sector, continued to rise data also suggested that economic activity improved through mid-April. Business inventory investment in parts of South America, most notably in Brazil slowed sharply last quarter and held down real GDP where positive growth likely resumed in the first growth significantly. quarter. Inflation in the AFEs continued to rise, largely because of the pass-through of earlier Real federal purchases declined in the first quarter, as increases in crude oil prices into retail energy prices. defense expenditures decreased and nondefense In the EMEs, inflation fell in China in the first quar-

176 104th Annual Report | 2017 ter, reflecting a sharp drop in food prices, but was two-thirds to a lower term premium. While inflation pushed up in Mexico by fuel price hikes and pass- compensation based on Treasury Inflation-Protected through from past currency depreciation. Securities decreased at near-term horizons, partly reflecting the lower-than-expected March CPI release, far-term inflation compensation was little Staff Review of the Financial Situation changed on net. Domestic financial market conditions remained gen- Broad U.S. equity price indexes increased slightly, on erally accommodative over the intermeeting period. net, since the March FOMC meeting. One-month- Prices of risky assets increased a bit on net, Treasury ahead option-implied volatility on the S&P 500 yields declined, and the dollar depreciated. The index—the VIX—rose appreciably in mid-April, decline in Treasury yields reportedly was driven in reflecting in part increased investor concerns about part by investor expectations of a somewhat slower geopolitical factors and foreign political developpace of policy rate increases following FOMC com- ments, but ended the period slightly lower, as investor munications after the March meeting and some wan- concerns appeared to ease after the first round of the ing of investor optimism about prospects for more French presidential election. Over the intermeeting expansionary fiscal policies. period, spreads of yields on investment- and speculative-grade nonfinancial corporate bonds over FOMC communications over the intermeeting comparable-maturity Treasury securities narrowed a period reportedly were interpreted as indicating a bit on net. Private-sector analysts continued to projsomewhat slower pace of policy rate increases than ect robust profit growth for S&P 500 firms over 2017 previously expected but an earlier change to the even as first-quarter earnings, on a seasonally Committee’s reinvestment policy. Although the Com- adjusted basis, were estimated to be a bit lower than mittee’s decision to raise the target range for the fed- in the fourth quarter. eral funds rate at the March meeting was widely anticipated, some of the accompanying communica- Conditions in short-term funding markets were tions were viewed as more accommodative than stable over the intermeeting period. Reflecting the expected. Investors reportedly also took note of the FOMC’s policy action in March, yields on a broad discussion in the March FOMC minutes of the Com- set of money market instruments moved higher. mittee’s reinvestment policy as well as statements Treasury bills outstanding, which had declined before from some FOMC participants and appeared to pull the reimposition of the federal debt ceiling on forward their expectations for when the FOMC will March 15, moved higher thereafter, partly in conneceither announce or start to implement a change to tion with the Treasury’s steps to rebuild its cash balthat policy. Overall, however, the market reaction to ance. Take-up at the System’s overnight reverse news related to potential changes in reinvestment repurchase agreement facility, which had risen ahead policy appeared to be fairly limited. Quotes on over- of the debt ceiling date, remained high through night index swap (OIS) rates pointed to a flattening March and then fell to relatively low levels after of the expected path of the federal funds rate quarter-end. through 2020, but a staff model suggested that a reduction in term premiums accounted for about half Financing conditions for large nonfinancial firms the decline in OIS rates. stayed accommodative. Gross issuance of corporate bonds and leveraged loans remained strong in Yields on intermediate- and longer-term nominal March, with a large share of lower-rated debt issued Treasury securities decreased 20 to 35 basis points for refinancing purposes. Net debt financing by nonover the intermeeting period. Investors’ interpreta- financial businesses increased in the first quarter but tions of FOMC communications, market perceptions remained noticeably below the pace of the same time of a reduced likelihood of domestic fiscal and regula- last year. According to the April Senior Loan Officer tory policy changes, weaker-than-expected domestic Opinion Survey on Bank Lending Practices economic data releases, and geopolitical factors and (SLOOS), a modest share of domestic banks foreign political developments all reportedly placed reported weaker demand for commercial and indusdownward pressure on yields. A staff term structure trial (C&I) loans, on net, in the first quarter, mainly model attributed about one-third of the decline in the citing several factors that pertained to customers’ 10-year Treasury yield to a decrease in the average reduced needs for financing. C&I lending continued expected future short-term rate and the remaining to be soft early in the second quarter.

Minutes of Federal Open Market Committee Meetings | May 177 Financing conditions for commercial real estate Over the intermeeting period, movements in foreign (CRE) were broadly unchanged on net. Spreads on financial markets were driven by central bank comcommercial mortgage-backed securities (CMBS) wid- munications in the United States and abroad, geopoened slightly over the period since the March FOMC litical risks, and changes in investors’ perceptions meeting but remained near the lower end of the about future U.S. fiscal and other government polirange seen since the financial crisis. CMBS issuance cies. Concerns about the outcome of the French picked up in March, reportedly reflecting a return to presidential election and tensions in the Korean pena more normal pace after the adoption of a credit insula pushed down 10-year sovereign yields in the risk retention rule in late December caused some advanced economies for several weeks. Sentiment issuance to be shifted from January and February improved following the outcome of the first round of into the fourth quarter. Growth of CRE loans on the French presidential election on April 23, which banks’ books slowed in the first quarter but contin- led to a partial retracement in yields. At their meetued to be robust overall. Domestic respondents to the ings on April 27, the European Central Bank and the April SLOOS generally reported tightening their Bank of Japan each left their policy stance lending standards and experiencing weaker loan unchanged. On net, foreign yields declined somewhat demand across all major CRE loan categories during less than U.S. yields, contributing to a modest deprethe first quarter. ciation of the dollar against both the AFE and EME currencies. Equity indexes in most advanced and Financing conditions in the residential mortgage emerging economies rose. Flows to emerging market market were little changed over the intermeeting mutual funds remained strong, and spreads on period. Credit availability continued to be relatively emerging market debt were little changed. tight for households with low credit scores or harderto-document incomes but relatively accommodative The staff provided its latest report on the potential for other households. Mortgage rates declined in line risks to financial stability; it continued to characterwith yields on longer-term Treasury securities and ize the financial vulnerabilities of the U.S. financial mortgage-backed securities, but they remained system as moderate on balance. This overall assesselevated compared with the very low levels of the ment reflected the staff’s judgment that leverage as third quarter of 2016. Consistent with these develop- well as vulnerabilities from maturity and liquidity ments, refinance originations slowed considerably transformation in the financial sector were low, that since the third quarter. In the April SLOOS, banks leverage in the nonfinancial sector was moderate, and reported roughly unchanged standards on residential that asset valuation pressures in some markets were real estate (RRE) loans on average. Banks also notable. Although these assessments were unchanged reported that demand for some categories of RRE from January’s assessment, vulnerabilities appeared loans weakened during the first quarter, including to have increased for asset valuation pressures, those insured or guaranteed by government agencies. though not by enough to warrant raising the assess- In line with lower reported demand, growth in RRE ment of these vulnerabilities to elevated. loans on banks’ balance sheets declined. Staff Economic Outlook Financing conditions in consumer credit markets remained accommodative, on balance, in early 2017. In the U.S. economic forecast prepared by the staff for Consumer credit appeared to be broadly available the May FOMC meeting, real GDP growth was proeven as interest rates charged on credit card balances jected to bounce back in the second quarter from its and new auto loans drifted up in line with their weak first-quarter reading. The staff judged that the benchmark shorter-term interest rates. Growth in weakness in first-quarter real GDP was probably not consumer loan balances moderated a bit further from attributable to residual seasonality and that it instead the relatively strong pace seen during the past few reflected transitorily soft consumer expenditures and years, although year-over-year growth in credit card inventory investment. Importantly, PCE growth was balances, student loans, and auto loans stayed in the expected to pick up to a stronger pace in the spring, 6 to 7 percent range through February. In the April which would be more consistent with ongoing gains in SLOOS, banks reported tightening standards on employment, real disposable personal income, and auto loans and easing standards on credit card loans; households’ net worth. In addition, the sharp decrease banks also reported facing weaker demand for both in the contribution to GDP growth from the change in auto and credit card loans. inventory investment in the first quarter was not

178 104th Annual Report | 2017 expected to be repeated. Beyond the near term, the Participants’ Views on Current Conditions forecast for real GDP growth was a little stronger, on and the Economic Outlook net, than in the previous projection, mostly due to the effect of a somewhat lower assumed path for the In their discussion of the economic situation and the exchange value of the dollar. The staff continued to outlook, meeting participants agreed that the inforproject that real GDP would expand at a modestly mation received over the intermeeting period indifaster pace than potential output in 2017 through cated that the labor market had continued to 2019, supported in part by the staff’s maintained strengthen even as growth in economic activity assumption that fiscal policy would become more slowed in the first quarter. Job gains remained solid, expansionary in the coming years. The unemployment on average, in recent months, and the unemployment rate was projected to decline gradually over the next rate declined. Household spending rose only modcouple of years and to run somewhat below the staff’s estly, but the fundamentals underpinning the continestimate of its longer-run natural rate over this period; ued growth of consumption remained solid. Business the staff’s estimate of the natural rate was revised fixed investment firmed in the first quarter after down slightly in this forecast. increasing only slowly over the previous two years. Inflation measured on a 12-month basis recently had The staff’s forecast for consumer price inflation, as been running close to the Committee’s 2 percent measured by changes in the PCE price index, was longer-run objective; consumer prices, both including revised down marginally for 2017 as a whole after and excluding prices of energy and food items, incorporating the soft data on consumer prices for declined in March, and core inflation continued to March, but it was essentially unrevised thereafter. run somewhat below 2 percent. Market-based meas- Inflation was still expected to be somewhat higher ures of inflation compensation remained low; surveythis year than last year, reflecting an upturn in the based measures of longer-term inflation expectations prices for food and non-energy imports as well as a were little changed on balance. slightly faster increase in energy prices. The staff continued to project that inflation would increase Although the incoming data showed that aggregate gradually in 2018 and 2019 and that it would be mar- spending in the first quarter had been weaker than ginally below the Committee’s longer-run objective participants had expected, they viewed the slowing as of 2 percent in 2019. likely to be transitory. They continued to expect that, with further gradual adjustments in the stance of The staff viewed the uncertainty around its projec- monetary policy, economic activity would expand at tions for real GDP growth, the unemployment rate, a moderate pace, labor market conditions would and inflation as similar to the average of the past strengthen somewhat further, and inflation would 20 years. The risks to the forecast for real GDP were stabilize around 2 percent over the medium term. seen as tilted to the downside, primarily reflecting the staff’s assessment that monetary policy appeared to Participants generally indicated that their assessbe better positioned to respond to large positive ments of the medium-term economic outlook had shocks to the economic outlook than to substantial changed little since the March meeting, and they disadverse ones. However, the staff viewed the risks to cussed various reasons why the softness in consumer the forecast as less pronounced than late last year, spending in the first quarter was likely to be transiwith both somewhat diminished risks to the foreign tory. Some participants judged that the low reading outlook and an increase in U.S. consumer and busi- on GDP growth also could partly reflect residual seaness confidence. Consistent with the downside risks sonality and so would likely be followed by stronger to aggregate demand, the staff viewed the risks to its GDP growth in subsequent quarters, repeating a patoutlook for the unemployment rate as tilted to the tern evidenced in recent years. A few emphasized the upside. The risks to the projection for inflation were uncertainty with regard to the reasons for the unexjudged to be roughly balanced. The downside risks pected weakness in consumer spending but considfrom the possibility that longer-term inflation expec- ered it too early to judge the implications for the outtations may have edged down or that the dollar could look. Many pointed to the recent firming of the appreciate substantially were seen as roughly coun- housing market and business fixed investment as welterbalanced by the upside risk that inflation could come developments. increase more than expected in an economy that was projected to continue operating above its longer-run Overall, participants continued to see the near-term potential. risks to the economic outlook as roughly balanced.

Minutes of Federal Open Market Committee Meetings | May 179 Many participants saw the risks stemming from Several participants discussed the pickup in residenglobal economic and financial developments as hav- tial investment in the first quarter. Starts and permits ing receded further over the intermeeting period. for single-family housing continued to post moderate They pointed to the encouraging tone of recent data increases, while sales of new homes rose strongly on economic growth abroad, which suggested some from their level in the fourth quarter of 2016. Busiupside risks to foreign economic activity. However, ness contacts in some Districts reported that residenseveral noted that downside risks to the global out- tial construction activity had not kept pace with look remained, either because of geopolitical devel- demand, resulting in shortages in housing supply and opments and foreign political factors or because upward pressure on prices. monetary policy normalization in the United States could lead to financial strains in EMEs. Many par- Business fixed investment increased at a solid pace in ticipants continued to view the possibility of expan- the first quarter, led by a rebound in drilling for oil sionary fiscal policy changes in the United States as and natural gas. Several participants noted that rising posing upside risks to their forecasts for U.S. eco- orders for capital goods suggested further gains in nomic growth, although they also noted that pros- business equipment investment over coming quarters. pects for enactment of a more expansionary fiscal Business contacts reported increases in activity in the program, as well as its size, composition, and timing, manufacturing and energy sectors. Contacts in many remained highly uncertain. Regarding the outlook Districts were said to be generally optimistic about for inflation, a couple of participants expressed con- business prospects. Several participants noted that cern that a substantial undershooting of the longer- surveys of business conditions in their Districts conrun normal rate of unemployment could pose an tinued to indicate expanding activity. A few particiappreciable upside risk to inflation. However, several pants commented that firms engaged in international others continued to see downside risks to the infla- trade were benefiting from improvements in global tion outlook, particularly given the low readings on demand conditions. Several participants reported inflation over the intermeeting period and the still- that firms in their Districts planned to increase capilow measures of inflation compensation and inflation tal expenditures, although in another District, uncerexpectations. Participants agreed that the Committee tainty about changes in trade and regulatory policies should continue to closely monitor inflation indica- was said to be weighing on capital spending. Conditors and global economic and financial tions in the agricultural sector remained weak, partly developments. as a result of low commodity prices. While recent data suggested a significant slowdown Labor market conditions strengthened further in of growth in consumption spending early in the year, recent months. At 4.5 percent, the unemployment participants expected to see a rebound in consumer rate had reached or fallen below levels that particispending in coming months in light of the solid fun- pants judged likely to be normal over the longer run. damentals underpinning household spending, includ- Increases in nonfarm payroll employment averaged ing ongoing job gains, rising household income and almost 180,000 per month during the first quarter, a wealth, improved household balance sheets, and pace that, if maintained, would be expected to result buoyant consumer sentiment. It was noted that much in further increases in labor utilization over time. of the recent slowing likely reflected transitory fac- Labor market conditions in many Districts were tors, such as low consumer spending for energy ser- reported to have continued to improve. Contacts in vices induced by an unusually mild winter and a several Districts reported a pickup in wage increases, decline in motor vehicle sales from an unsustainably shortages of workers in selected occupations, or preshigh fourth-quarter pace. Nevertheless, contacts sures to train workers for hard-to-fill jobs. Even so, expected that demand for motor vehicles would be several other participants suggested some margins well maintained. District reports on the service sector may remain along which labor market utilization were generally positive, although one District’s con- could increase further without giving rise to inflatacts in the tourism industry reported a falloff in tionary pressures. In that regard, they noted that the international visitors. One participant noted that recent rise in the labor force participation rate in the retail contacts reported upbeat projections for online face of a downward trend from demographic factors sales and associated package delivery services, in part was a positive development. However, a couple of reflecting structural shifts in the retail industry. participants pointed out that uncertainty about both

180 104th Annual Report | 2017 the longer-run normal rate of unemployment and A few participants, however, expressed uncertainty labor force trends made it difficult to assess the scope about the reasons for the recent unexpected weakness for additional sustainable increases in labor utiliza- in inflation measures and about its implications for tion. Generally, participants continued to expect that the inflation outlook. if economic growth stayed moderate, as they projected, the unemployment rate would remain, for the In their discussion of recent developments in finannext few years, below their estimates of its longer-run cial markets, some participants commented on normal level. A few participants continued to antici- changes in financial conditions in the wake of the pate a substantial undershooting of the longer-run Committee’s decision to increase the target range for normal level of the unemployment rate. the federal funds rate in March. They noted variously that the decline in longer-term interest rates and the Readings on headline and core PCE price inflation in modest depreciation of the dollar over the intermeet- March had come in lower than expected. On a ing period would provide some stimulus to aggregate 12-month basis, headline PCE price inflation had demand, that the Committee’s recent policy actions edged above the Committee’s 2 percent objective in had not resulted in a tightening of financial condi- February, but this measure dropped back to 1.8 per- tions, or that some of the decline in longer-term cent in March, in part reflecting the effects of lower yields reflected investors’ perceptions of diminished energy prices on the headline index. Core PCE price odds of significant fiscal stimulus and an increase in inflation, which historically has been a good predic- some geopolitical and foreign political risks. tor of future headline inflation, moved down to 1.6 percent over the 12 months ending in March. With regard to financial stability, several participants However, it was noted that some of this slowing emphasized that higher requirements for capital and reflected idiosyncratic factors such as a large drop in liquidity in the banking system and other prudential the measure of quality-adjusted prices for wireless standards had contributed to increased resilience in telephone services. Several participants emphasized the financial system since the financial crisis. Howthat inflation measured on a 12-month basis had ever, they expressed concerns that a possible easing of been running very close to the Committee’s 2 percent regulatory standards could increase risks to financial target. Overall, most participants viewed the recent stability. In addition, it was noted that real estate valsofter inflation data as primarily reflecting transitory ues were elevated in some sectors of the CRE market, factors, but a few expressed concern that progress that a sharp decline in such valuations could pose toward the Committee’s objective may have slowed. risks to financial stability, and that potential reforms Market-based measures of longer-term inflation in the housing finance sector could have implications compensation remained low, with five-year, five-year- for such valuations. forward CPI inflation compensation a bit below 2 percent—unchanged from the time of the March In their consideration of monetary policy, partici- FOMC meeting but somewhat above levels registered pants judged that it was appropriate to leave the tarlast year. In addition, the median measure of infla- get range for the federal funds rate unchanged at this tion expectations over the next 5 to 10 years in the meeting. Although the data on aggregate spending Michigan survey edged down from 2.5 percent in and inflation received over the intermeeting period February to 2.4 percent in March and April. The were, on balance, weaker than participants expected, three-year-ahead measure of inflation expectations they generally saw the outlook for the economy and from the Federal Reserve Bank of New York’s Sur- inflation as little changed and judged that a continvey of Consumer Expectations decreased from ued gradual removal of monetary policy accommo- 3.0 percent to 2.7 percent in March and rose to dation remained appropriate. A couple of partici- 2.9 percent in April. pants indicated that increasing the target range for the federal funds rate at the current meeting would be In light of these developments, participants generally warranted by their economic outlook, but they also continued to expect that inflation would stabilize noted that maintaining the current stance of policy around the Committee’s 2 percent objective over the for now would be consistent with the Committee’s medium run as the effects of transitory factors gradual approach or that the Committee’s recent waned and conditions in the labor market and the communications had not pointed to an increase at overall economy improved further. Participants noted this meeting. Most participants judged that if ecothat import prices had begun to increase, supporting nomic information came in about in line with their their expectation that inflation would gradually rise. expectations, it would soon be appropriate for the

Minutes of Federal Open Market Committee Meetings | May 181 Committee to take another step in removing some since the Committee met in March indicated that the policy accommodation. A number of participants labor market had continued to strengthen even as pointed out that clarification of prospective fiscal growth in economic activity had slowed. Job gains and other policy changes would remove one source had remained solid, on average, in recent months, of uncertainty for the economic outlook. Partici- and the unemployment rate had declined. Household pants generally agreed that the current stance of spending had risen only modestly, but the fundamenmonetary policy remained accommodative, support- tals underpinning the continued growth of consumping some additional strengthening in labor market tion remained solid, while business fixed investment conditions and a sustained return to 2 percent had firmed. inflation. Inflation, measured as the 12-month change in the Participants generally reiterated their support for a headline PCE price index, had been running close to continued gradual approach to raising the federal the Committee’s 2 percent longer-run objective. Core funds rate. Some participants noted that core PCE inflation continued to run somewhat below 2 percent. price inflation had been running below the Commit- Both headline and core consumer price indexes fell in tee’s objective for overall inflation for the past eight March. Market-based measures of inflation compenyears and that it was important to return inflation to sation had remained low, while survey-based meas- 2 percent, or that the public’s longer-term inflation ures of longer-term inflation expectations had expectations may have fallen somewhat, and that a changed little on balance. gradual approach to tightening could help return expectations and inflation to 2 percent. One partici- With respect to the economic outlook and its implipant cited results of a District survey of businesses cations for monetary policy, members agreed that the indicating that more than one-third of respondents slowing in growth during the first quarter was likely saw the Federal Reserve as more likely to accept to be transitory and continued to expect that, with inflation below its 2 percent objective than above; gradual adjustments in the stance of monetary that participant interpreted the survey results as sug- policy, economic activity would expand at a modergesting that the Committee’s communications about ate pace, labor market conditions would strengthen the symmetry of its inflation objective had not com- somewhat further, and inflation would stabilize pletely taken hold, a concern also mentioned by a around 2 percent over the medium term. Members couple of other participants. Another participant continued to judge that there was significant uncerobserved that a gradual approach was appropriate tainty about the effects of possible changes in fiscal because the neutral rate of interest had declined and and other government policies but that near-term considerable uncertainty prevailed about its longer- risks to the economic outlook appeared roughly balrun level. Several participants, however, pointed to anced. A couple of members noted that the outlook conditions under which the Committee might need to for global growth appeared to have brightened and consider a somewhat more rapid removal of mon- that downside risks from abroad had waned. Memetary accommodation—for instance, if the unem- bers agreed that they would continue to closely moniployment rate fell appreciably further than currently tor inflation indicators and global economic and projected, if wages increased more rapidly than financial developments. expected, or if highly stimulative fiscal policy changes were to be enacted. In contrast, a couple of After assessing current conditions and the outlook others judged that the Committee could withdraw for economic activity, the labor market, and inflation, monetary accommodation even more gradually than members agreed to maintain the target range for the reflected in the medians of forecasts in the March federal funds rate at ¾ to 1 percent. They noted that Summary of Economic Projections, noting that slack the stance of monetary policy remained accommodamight remain in the labor market or that inflation tive, thereby supporting some further strengthening was not very sensitive to declines in the unemploy- in labor market conditions and a sustained return to ment rate below its estimated longer-run normal 2 percent inflation. level. Members generally judged that it would be prudent Committee Policy Action to await additional evidence indicating that the recent slowing in the pace of economic activity had been In their discussion of monetary policy for the period transitory before taking another step in removing ahead, members judged that information received accommodation. Members agreed that, in determin-

182 104th Annual Report | 2017 ing the timing and size of future adjustments to the of 0.75 percent, in amounts limited only by the target range for the federal funds rate, the Committee value of Treasury securities held outright in the would assess realized and expected economic condi- System Open Market Account that are available tions relative to its objectives of maximum employ- for such operations and by a per-counterparty ment and 2 percent inflation. This assessment would limit of $30 billion per day. take into account a wide range of information, including measures of labor market conditions, indi- The Committee directs the Desk to continue cators of inflation pressures and inflation expecta- rolling over maturing Treasury securities at auctions, and readings on financial and international tion and to continue reinvesting principal paydevelopments. Members also agreed to continue to ments on all agency debt and agency mortgagecarefully monitor actual and expected inflation devel- backed securities in agency mortgage-backed opments relative to the Committee’s symmetric infla- securities. The Committee also directs the Desk tion goal, with one member viewing further progress to engage in dollar roll and coupon swap transof inflation toward the 2 percent objective as neces- actions as necessary to facilitate settlement of sary before taking another step to remove policy the Federal Reserve’s agency mortgage-backed accommodation. Members expected that economic securities transactions.” conditions would evolve in a manner that would warrant gradual increases in the federal funds rate. Mem- The vote also encompassed approval of the statement bers agreed that the federal funds rate was likely to below to be released at 2:00 p.m.: remain, for some time, below levels that they expected to prevail in the longer run. However, they “Information received since the Federal Open noted that the actual path of the federal funds rate Market Committee met in March indicates that would depend on the economic outlook as informed the labor market has continued to strengthen by incoming data. even as growth in economic activity slowed. Job gains were solid, on average, in recent months, The Committee also decided to maintain its existing and the unemployment rate declined. Household policy of reinvesting all principal payments from its spending rose only modestly, but the fundamenholdings of agency debt and agency mortgage- tals underpinning the continued growth of conbacked securities in agency mortgage-backed securi- sumption remained solid. Business fixed investties and of rolling over maturing Treasury securities ment firmed. Inflation measured on a 12-month at auction. Members anticipated doing so until nor- basis recently has been running close to the malization of the level of the federal funds rate was Committee’s 2 percent longer-run objective. well under way, and they noted that this policy, by Excluding energy and food, consumer prices keeping the Committee’s holdings of longer-term declined in March and inflation continued to securities at sizable levels, should help maintain run somewhat below 2 percent. Market-based accommodative financial conditions. measures of inflation compensation remain low; survey-based measures of longer-term inflation At the conclusion of the discussion, the Committee expectations are little changed, on balance. 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 views the released at 2:00 p.m.: slowing in growth during the first quarter as likely to be transitory and continues to expect “Effective May 4, 2017, the Federal Open Mar- that, with gradual adjustments in the stance of ket Committee directs the Desk to undertake monetary policy, economic activity will expand open market operations as necessary to main- at a moderate pace, labor market conditions will tain the federal funds rate in a target range of ¾ strengthen somewhat further, and inflation will to 1 percent, including overnight reverse repur- stabilize around 2 percent over the medium chase operations (and reverse repurchase opera- term. Near-term risks to the economic outlook tions with maturities of more than one day when appear roughly balanced. The Committee connecessary to accommodate weekend, holiday, or tinues to closely monitor inflation indicators and similar trading conventions) at an offering rate global economic and financial developments.

Minutes of Federal Open Market Committee Meetings | May 183 In view of realized and expected labor market unchanged at 1 percent and voted unanimously to conditions and inflation, the Committee decided approve establishment of the primary credit rate (disto maintain the target range for the federal funds count rate) at the existing level of 1½ percent.6 rate at ¾ to 1 percent. The stance of monetary policy remains accommodative, thereby support- System Open Market Account ing some further strengthening in labor market Reinvestment Policy conditions and a sustained return to 2 percent inflation. Participants continued their discussion of issues related to potential changes to the Committee’s In determining the timing and size of future policy of reinvesting principal payments from securiadjustments to the target range for the federal ties held in the SOMA. The staff provided a briefing funds rate, the Committee will assess realized that summarized a possible operational approach to and expected economic conditions relative to its reducing the System’s securities holdings in a gradual objectives of maximum employment and 2 per- and predictable manner. Under the proposed cent inflation. This assessment will take into approach, the Committee would announce a set of account a wide range of information, including gradually increasing caps, or limits, on the dollar measures of labor market conditions, indicators amounts of Treasury and agency securities that of inflation pressures and inflation expectations, would be allowed to run off each month, and only and readings on financial and international the amounts of securities repayments that exceeded developments. The Committee will carefully the caps would be reinvested each month. As the caps monitor actual and expected inflation develop- increased, reinvestments would decline, and the ments relative to its symmetric inflation goal. monthly reductions in the Federal Reserve’s securities The Committee expects that economic condi- holdings would become larger. The caps would initions will evolve in a manner that will warrant tially be set at low levels and then be raised every gradual increases in the federal funds rate; the three months, over a set period of time, to their fully federal funds rate is likely to remain, for some phased-in levels. The final values of the caps would time, below levels that are expected to prevail in then be maintained until the size of the balance sheet the longer run. However, the actual path of the was normalized. federal funds rate will depend on the economic outlook as informed by incoming data. Nearly all policymakers expressed a favorable view of this general approach. Policymakers noted that pre- The Committee is maintaining its existing policy announcing a schedule of gradually increasing caps of reinvesting principal payments from its hold- to limit the amounts of securities that could run off ings of agency debt and agency mortgage- in any given month was consistent with the Commitbacked securities in agency mortgage-backed tee’s intention to reduce the Federal Reserve’s securisecurities and of rolling over maturing Treasury ties holdings in a gradual and predictable manner as securities at auction, and it anticipates doing so stated in the Committee’s Policy Normalization Prinuntil normalization of the level of the federal ciples and Plans. Limiting the magnitude of the funds rate is well under way. This policy, by monthly reductions in the Federal Reserve’s securities keeping the Committee’s holdings of longer- holdings on an ongoing basis could help mitigate the term securities at sizable levels, should help risk of adverse effects on market functioning or outmaintain accommodative financial conditions.” sized effects on interest rates. The approach would also likely be fairly straightforward to communicate. Voting for this action: Janet L. Yellen, William C. Moreover, under this approach, the process of reduc- Dudley, Lael Brainard, Charles L. Evans, Stanley ing the Federal Reserve’s securities holdings, once Fischer, Patrick Harker, Robert S. Kaplan, Neel begun, could likely proceed without a need for the Kashkari, and Jerome H. Powell. Committee to make adjustments as long as there was no material deterioration in the economic outlook. Voting against this action: None. Policymakers agreed that the Committee’s Policy Normalization Principles and Plans should be aug- Consistent with the Committee’s decision to leave the target range for the federal funds rate unchanged, the 6 The second vote of the Board also encompassed approval of the Board of Governors voted unanimously to leave the establishment of the interest rates for secondary and seasonal interest rates on required and excess reserve balances credit under the existing formulas for computing such rates.

184 104th Annual Report | 2017 mented soon to provide additional details about the 2017. The meeting adjourned at 11:45 a.m. on operational plan to reduce the Federal Reserve’s May 3, 2017. securities holdings over time. Nearly all policymakers indicated that as long as the economy and the path of the federal funds rate evolved as currently expected, it Notation Vote likely would be appropriate to begin reducing the Federal Reserve’s securities holdings this year. Policy- By notation vote completed on April 4, 2017, the makers agreed to continue in June their discussion of Committee unanimously approved the minutes of the plans for a change to the Committee’s reinvestment Committee meeting held on March 14–15, 2017. policy. Brian F. Madigan It was agreed that the next meeting of the Committee Secretary would be held on Tuesday–Wednesday, June 13–14,

Minutes of Federal Open Market Committee Meetings | June 185 Meeting Held on June 13–14, 2017 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, Beth Anne Wilson, James A. Clouse, June 13, 2017, at 1:00 p.m. and continued on Thomas A. Connors, Eric M. Engen, Wednesday, June 14, 2017, at 9:00 a.m.1 Evan F. Koenig, Jonathan P. McCarthy, William Wascher, and Mark L. J. Wright 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 Ann E. Misback Secretary, Office of the Secretary, Charles L. Evans Board of Governors Stanley Fischer Matthew J. Eichner2 Patrick Harker Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Robert S. Kaplan Neel Kashkari Michael S. Gibson Director, Division of Supervision and Regulation, Jerome H. Powell Board of Governors Raphael W. Bostic, Loretta J. Mester, Michael T. Kiley Mark L. Mullinix, Michael Strine, Deputy Director, Division of Financial Stability, and John C. Williams Board of Governors Alternate Members of the Federal Open Market Committee Stephen A. Meyer Deputy Director, Division of Monetary Affairs, James Bullard, Esther L. George, and Eric Rosengren Board of Governors Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively William B. English Senior Special Adviser to the Board, Office of Board Brian F. Madigan Members, Board of Governors Secretary Trevor A. Reeve Matthew M. Luecke Senior Special Adviser to the Chair, Office of Board Deputy Secretary Members, Board of Governors David W. Skidmore David Bowman, Joseph W. Gruber, Assistant Secretary David Reifschneider, and John M. Roberts Michelle A. Smith Special Advisers to the Board, Office of Board Assistant Secretary Members, Board of Governors Scott G. Alvarez Linda Robertson General Counsel Assistant to the Board, Office of Board Members, Michael Held Board of Governors Deputy General Counsel Christopher J. Erceg Steven B. Kamin Senior Associate Director, Division of International Economist Finance, Board of Governors 1 The Federal Open Market Committee is referenced as the 2 Attended through the discussion of System Open Market “FOMC” and the “Committee” in these minutes. Account reinvestment policy.

186 104th Annual Report | 2017 Joshua Gallin Stephen Lin Senior Associate Director, Division of Research and Principal Economist, Division of International Statistics, Board of Governors Finance, Board of Governors Gretchen C. Weinbach2 Lubomir Petrasek Senior Associate Director, Division of Monetary Principal Economist, Division of Monetary Affairs, Affairs, Board of Governors Board of Governors Antulio N. Bomfim, Ellen E. Meade, Achilles Sangster II and Edward Nelson Information Management Analyst, Division of Senior Advisers, Division of Monetary Affairs, Monetary Affairs, Board of Governors Board of Governors Marie Gooding Jeremy B. Rudd First Vice President, Federal Reserve Bank of Atlanta Senior Adviser, Division of Research and Statistics, David Altig, Kartik B. Athreya, Mary Daly, Board of Governors Jeff Fuhrer, and Christopher J. Waller Rochelle M. Edge Executive Vice Presidents, Federal Reserve Banks of Associate Director, Division of Financial Stability, Atlanta, Richmond, San Francisco, Boston, and Board of Governors St. Louis, respectively Jane E. Ihrig Spencer Krane and Ellis W. Tallman Associate Director, Division of Monetary Affairs, Senior Vice Presidents, Federal Reserve Banks of Board of Governors Chicago and Cleveland, respectively Roc Armenter and Kathryn B. Chen3 Stacey Tevlin Vice Presidents, Federal Reserve Banks of Associate Director, Division of Research and Philadelphia and New York, respectively Statistics, Board of Governors Andrew T. Foerster Min Wei Senior Economist, Federal Reserve Bank of Deputy Associate Director, Division of Monetary Kansas City Affairs, Board of Governors Christopher J. Gust Selection of Committee Officer Assistant Director, Division of Monetary Affairs, Board of Governors By unanimous vote, the Committee selected Mark L. J. Wright to serve as Associate Economist, effective Norman J. Morin and Karen M. Pence June 13, 2017, until the selection of his successor at Assistant Directors, Division of Research and the first regularly scheduled meeting of the Commit- Statistics, Board of Governors tee in 2018. Don Kim Adviser, Division of Monetary Affairs, Developments in Financial Markets and Board of Governors Open Market Operations Penelope A. Beattie The manager of the System Open Market Account Assistant to the Secretary, Office of the Secretary, (SOMA) reported on developments in domestic and Board of Governors foreign financial markets over the period since the May FOMC meeting. Yields on Treasury securities Giovanni Favara and Rebecca Zarutskie and the foreign exchange value of the dollar had Section Chiefs, Division of Monetary Affairs, declined modestly, while equity prices had continued Board of Governors to rise, contributing to a further easing of financial David H. Small conditions according to some measures. Moreover, Project Manager, Division of Monetary Affairs, realized and implied volatility in financial markets Board of Governors remained low. Meanwhile, inflation compensation edged lower. Survey results and market pricing sug- Kimberly Bayard Group Manager, Division of Research and Statistics, 3 Attended through the staff report on the economic and finan- Board of Governors cial situation.

Minutes of Federal Open Market Committee Meetings | June 187 gested that market participants saw a high probabil- through the Committee’s postmeeting statement. ity of an increase in the FOMC’s target range for the Participants unanimously supported the proposal. federal funds rate at this meeting. Policy Normalization Principles and Plans (Addendum Adopted June 13, 2017) The deputy manager reviewed survey results on market expectations for SOMA reinvestment policy and All participants agreed to augment the Committee’s for the evolution of the System’s balance sheet over Policy Normalization Principles and Plans by providcoming years. The deputy manager also commented ing the following additional details regarding the on money market developments. Over the intermeet- approach the FOMC intends to use to reduce the ing period, the federal funds rate remained well Federal Reserve’s holdings of Treasury and agency within the FOMC’s target range, and take-up at the securities once normalization of the level of the fed- System’s overnight reverse repurchase agreement eral funds rate is well under way.4 facility was little changed from the previous period. • The Committee intends to gradually reduce the The spread between the three-month London inter- Federal Reserve’s securities holdings by decreasing bank offered rate and the overnight index swap (OIS) its reinvestment of the principal payments it rate had narrowed markedly in recent months after receives from securities held in the System Open rising noticeably in advance of the implementation of Market Account. Specifically, such payments will money market fund reform in the fall of 2016. The be reinvested only to the extent that they exceed deputy manager also summarized details of the gradually rising caps. operational approach that the Open Market Desk planned to follow if the Committee adopted the pro- —For payments of principal that the Federal posal for SOMA reinvestment policy to be consid- Reserve receives from maturing Treasury securiered at this meeting. ties, the Committee anticipates that the cap will be $6 billion per month initially and will increase By unanimous vote, the Committee ratified the in steps of $6 billion at three-month intervals Desk’s domestic transactions over the intermeeting over 12 months until it reaches $30 billion per period. There were no intervention operations in for- month. eign currencies for the System’s account during the —For payments of principal that the Federal intermeeting period. Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee System Open Market Account anticipates that the cap will be $4 billion per Reinvestment Policy month initially and will increase in steps of $4 billion at three-month intervals over The Chair observed that, starting with the 12 months until it reaches $20 billion per month. March 2017 FOMC meeting, Committee partici- —The Committee also anticipates that the caps will pants had been discussing approaches to reducing the remain in place once they reach their respective Federal Reserve’s securities holdings in a gradual and maximums so that the Federal Reserve’s securipredictable manner. She noted that participants ties holdings will continue to decline in a gradual appeared to have reached a consensus on an and predictable manner until the Committee approach that involved specifying caps on the judges that the Federal Reserve is holding no monthly amount of principal payments from securimore securities than necessary to implement ties holdings that would not be reinvested; these caps monetary policy efficiently and effectively. would rise over the period of a year, after which they would remain constant. Given this consensus, the • Gradually reducing the Federal Reserve’s securi- Chair proposed that participants approve the plan ties holdings will result in a declining supply of and that it be published as an addendum to the Com- reserve balances. The Committee currently anticimittee’s Policy Normalization Principles and Plans; the addendum would be released at the conclusion of 4 The Committee’s Policy Normalization Principles and Plans were adopted on September 16, 2014, and are available at www this meeting so as to inform the public well in .federalreserve.gov/monetarypolicy/files/FOMC_ advance of implementing the reinvestment policy. It PolicyNormalization.pdf. On March 18, 2015, the Committee was anticipated that when the Committee determined adopted an addendum to the Policy Normalization Principles and Plans, which is available at www.federalreserve.gov/ that economic conditions warranted implementation monetarypolicy/files/FOMC_PolicyNormalization.20150318 of the program, that step would be communicated .pdf.

188 104th Annual Report | 2017 pates reducing the quantity of reserve balances, time for economic reasons decreased a little. The rate over time, to a level appreciably below that seen of private-sector job openings increased in March in recent years but larger than before the finan- and April, while the quits rate was little changed and cial crisis; the level will reflect the banking the hiring rate moved down. The four-week moving system’s demand for reserve balances and the average of initial claims for unemployment insurance Committee’s decisions about how to implement benefits remained at a very low level through early monetary policy most efficiently and effectively June. Measures of labor compensation continued to in the future. The Committee expects to learn rise at moderate rates. Compensation per hour in the more about the underlying demand for reserves nonfarm business sector increased 2¼ percent over during the process of balance sheet the four quarters ending in the first quarter, a bit normalization. slower than over the same period a year earlier. Average hourly earnings for all employees increased • The Committee affirms that changing the target 2½ percent over the 12 months ending in May, about range for the federal funds rate is its primary the same as over the comparable period a year means of adjusting the stance of monetary earlier. policy. However, the Committee would be prepared to resume reinvestment of principal pay- Total industrial production rose considerably in ments received on securities held by the Federal April, reflecting gains in manufacturing, mining, and Reserve if a material deterioration in the ecoutilities output. Automakers’ assembly schedules sugnomic outlook were to warrant a sizable reducgested that motor vehicle production would slow in tion in the Committee’s target for the federal subsequent months, but broader indicators of manufunds rate. Moreover, the Committee would be facturing production, such as the new orders indexes prepared to use its full range of tools, including from national and regional manufacturing surveys, altering the size and composition of its balance pointed to modest gains in factory output over the sheet, if future economic conditions were to warnear term. rant a more accommodative monetary policy than can be achieved solely by reducing the fed- Real PCE rose solidly in April after increasing only eral funds rate. modestly in the first quarter. Light motor vehicle sales picked up in April but then moved down some- Staff Review of the Economic Situation what in May. The components of the nominal retail sales data used by the Bureau of Economic Analysis The information reviewed for the June 13–14 meeting to construct its estimate of PCE were flat in May, but showed that labor market conditions continued to estimated increases in these components of sales for strengthen in recent months and suggested that real the previous two months were revised up. In addigross domestic product (GDP) was expanding at a tion, recent readings on key factors that influence faster pace in the second quarter than in the first consumer spending pointed to further solid growth in quarter. The 12-month change in overall consumer total real PCE in the near term, including continued prices, as measured by the price index for personal gains in employment, real disposable personal consumption expenditures (PCE), slowed a bit fur- income, and households’ net worth. Moreover, conther in April; total consumer price inflation and core sumer sentiment, as measured by the University of inflation, which excludes consumer food and energy Michigan Surveys of Consumers, remained upbeat prices, were both running somewhat below 2 percent. in May. Survey-based measures of longer-run inflation expectations were little changed on balance. Residential investment appeared to be slowing after increasing briskly in the first quarter. The first- Total nonfarm payroll employment expanded further quarter strength may have reflected housing activity in April and May, and the average pace of job gains shifting earlier in response to unseasonably warm over the first five months of the year was solid. The weather last quarter, to an anticipation of higher unemployment rate moved down to 4.3 percent in future interest rates, or to both. Starts of new single- May; the unemployment rates for African Americans family homes edged up in April, but the issuance of and for Hispanics stepped down but remained above building permits for these homes declined somewhat. the unemployment rates for Asians and for whites. Meanwhile, starts of multifamily units fell. Moreover, The overall labor force participation rate declined sales of both new and existing homes decreased in somewhat, and the share of workers employed part April.

Minutes of Federal Open Market Committee Meetings | June 189 Real private expenditures for business equipment and The economic expansions in Canada and the euro intellectual property seemed to be increasing further area as well as in China and many other emerging after rising at a solid pace in the first quarter. Both market economies (EMEs) continued to firm in the nominal shipments and new orders of nondefense first quarter. In contrast, economic growth in the capital goods excluding aircraft rose in April, and United Kingdom slowed sharply. Recent indicators new orders continued to exceed shipments, pointing suggested that real GDP growth in most foreign to further gains in shipments in the near term. In economies remained solid in the second quarter. addition, indicators of business sentiment were Headline inflation across the advanced foreign upbeat in recent months. Although firms’ nominal economies (AFEs) generally appeared to moderate spending for nonresidential structures excluding drill- from the pace registered over the first quarter, as the ing and mining declined in April, the number of oil effects of earlier increases in energy prices started to and gas rigs in operation, an indicator of spending fade; core inflation continued to be subdued in many for structures in the drilling and mining sector, con- AFEs. Among the EMEs, inflation in China rose tinued to rise through early June. while inflation in Latin America fell. In Mexico, the effects of fuel price hikes in January and the pass- Nominal federal government spending data for April through from earlier currency depreciation to prices and May pointed to essentially flat real federal pur- started to wane, but inflation remained above the chases in the second quarter. Real state and local gov- central bank’s target. ernment purchases appeared to be moving down, as state and local government payrolls declined, on net, in April and May, and nominal construction expendi- Staff Review of the Financial Situation tures by these governments decreased in April. Domestic financial market conditions remained gen- The nominal U.S. international trade deficit widened erally accommodative over the intermeeting period. slightly in March, with a small decline in exports and a U.S. equity prices increased over the period, longersmall increase in imports. The March data, together term Treasury yields declined, and the dollar depreciwith revised estimates for earlier months, indicated ated. A decline in the perceived likelihood of a sigthat real exports grew briskly in the first quarter and at nificant fiscal expansion and the below-expectations a faster pace than in the second half of 2016. Real reading on the April CPI reportedly contributed to imports also increased in the first quarter but at a lower yields on longer-tenor Treasury securities. Marslower pace than in the second half of 2016. In April, ket participants’ perceptions of an improved global the nominal trade deficit widened, as imports picked economic outlook appeared to provide some support up while exports declined slightly. Net exports were to prices of risk assets. estimated to have made a small positive contribution to real GDP growth in the first quarter. However, the FOMC communications over the intermeeting April trade data suggested that net exports might be a period were viewed as broadly in line with investors’ slight drag on real GDP growth in the second quarter. expectations that the Committee would continue to remove policy accommodation at a gradual pace. Total U.S. consumer prices, as measured by the PCE Market participants interpreted the May FOMC price index, increased 1¾ percent over the 12 months statement and the meeting minutes as indicating that ending in April. Core PCE price inflation was the Committee had not materially changed its eco- 1½ percent over those same 12 months. Over the nomic outlook. In response to the discussion of 12 months ending in May, the consumer price index SOMA reinvestment policy in the minutes, a number (CPI) rose a little less than 2 percent, while core CPI of market participants reportedly pulled forward inflation was 1¾ percent. The median of inflation their expectations for the most likely timing of a expectations over the next 5 to 10 years from the change to the Committee’s reinvestment policy, a Michigan survey was unchanged in May, and the shift that was evident in the responses to the Desk’s median expectation for PCE price inflation over the Survey of Primary Dealers and Survey of Market next 10 years from the Survey of Professional Fore- Participants. However, investors also reportedly casters also held steady in the second quarter. Like- viewed the Committee’s planning as mitigating the wise, the medians of longer-run inflation expecta- risk that the process of reducing the size of the Fedtions from the Desk’s Survey of Primary Dealers and eral Reserve’s balance sheet would lead to outsized Survey of Market Participants were essentially movements in interest rates or have adverse effects on unchanged in June. market functioning.

190 104th Annual Report | 2017 The probability of an increase in the target range for rities (CMBS) through the first five months of this the federal funds rate occurring at the June meeting, year was similar to the issuance over the same period as implied by quotes on federal funds futures con- a year earlier. While delinquency rates on CRE loans tracts, rose to a high level. However, the expected fed- held by banks edged down further in the first quarter, eral funds rate from late 2018 to the end of 2020 the delinquency rates on loans in CMBS pools conimplied by OIS quotes declined slightly. Immediately tinued to increase. The rise in CMBS delinquency following the May FOMC meeting, nominal Treas- rates was mostly confined to loans that were origiury yields rose at short and intermediate maturities, nated during the period of weak underwriting before reportedly reflecting the response of investors to a the financial crisis. The increase in those delinquenpassage in the postmeeting statement indicating the cies had generally been expected by market partici- Committee’s view that the slowing in real GDP pants and was not anticipated to have a material growth during the first quarter was likely to be tran- effect on credit availability or market conditions. sitory. Later in the intermeeting period, yields declined in reaction to the release of weaker-than- Residential mortgage rates declined slightly, in line expected April CPI data and the somewhat disap- with yields on longer-term Treasury and mortgagepointing May employment report. On balance, the backed securities, but remained elevated relative to Treasury yield curve flattened, with short-term yields the third quarter of 2016. Despite the higher level of rising modestly and the 10-year yield declining. Both mortgage rates, growth in mortgage lending for home 5-year and 5-to-10-year-forward TIPS-based infla- purchases remained near the upper end of its recent tion compensation declined, in part reflecting the range during the first quarter. Delinquency rates on below-expectations inflation data. residential mortgage loans continued to edge down amid robust house price growth and still-tight lend- Broad U.S. equity price indexes increased. One- ing standards for households with low credit scores month-ahead option-implied volatility on the S&P and hard-to-document incomes. 500 index—the VIX—was little changed, on net, and remained near the lower end of its historical range. Financing conditions in consumer credit markets remained generally accommodative, although some Conditions in short-term funding markets were indicators pointed to modest reductions in credit stable over the intermeeting period. Yields on a availability in recent months. Tighter conditions for broad set of money market instruments remained in credit card borrowing were especially apparent within the ranges observed since the FOMC increased the the subprime segment, where there had been some target range for the federal funds rate in March. further deterioration of credit performance. On a Term OIS rates rose as expectations firmed for an year-over-year basis, overall credit card balances conincrease in the federal funds rate target at this tinued to grow in April at a robust rate, although the meeting. pace had moderated a bit from that of 2016. Financing conditions for nonfinancial businesses Growth in auto loans remained solid through the continued to be accommodative. Commercial and first quarter. Overall delinquency rates on auto loans industrial loans outstanding increased in April and continued to be relatively low, but the delinquency May after being weak in the first quarter, although rate among subprime borrowers remained elevated, the growth of these loans remained well below the reflecting easier lending standards in 2015 and 2016. pace seen a year ago. Issuance of both corporate debt Recent evidence suggested that these lending stanand equity was strong. Gross issuance of institu- dards had tightened; the credit rating of the average tional leveraged loans was solid in April and May, borrower had trended higher, and new extensions of although it receded from the near-record levels seen subprime auto loans had declined. over the previous two months. Over the period since the May FOMC meeting, for- Commercial real estate (CRE) loans on banks’ books eign financial markets were influenced by incoming grew robustly in April and May, with nonfarm non- economic data and by political developments both residential loans leading the expansion. However, abroad and in the United States. Most AFE and recent CRE loan growth was a bit slower than that EME equity indexes edged higher, supported by during the first quarter, in part reflecting a slowdown robust first-quarter earnings reports and generally in lending for both construction and multifamily positive data releases overseas. The broad U.S. dollar units. Issuance of commercial mortgage-backed secu- depreciated about 1¾ percent over the intermeeting

Minutes of Federal Open Market Committee Meetings | June 191 period, weakening against both AFE and EME cur- this year than last year, largely reflecting an upturn in rencies. In particular, the dollar depreciated against the prices for food and non-energy imports. The staff the Canadian dollar following communications by projected that inflation would increase further in the the Bank of Canada suggesting that the removal of next couple of years, and that it would be close to the policy accommodation could occur sooner than pre- Committee’s longer-run objective in 2018 and at viously expected by market participants. The dollar 2 percent in 2019. also depreciated against the euro, which was supported by the results of the French presidential elec- The staff viewed the uncertainty around its projection and by stronger-than-expected macroeconomic tions for real GDP growth, the unemployment rate, releases. Those data releases prompted the European and inflation as similar to the average of the past Central Bank at its June 8 meeting to change its 20 years. Many financial market indicators of uncerassessment of risks to the economic outlook from tainty were subdued, and the uncertainty associated “tilted to the downside” to “balanced.” U.S. develop- with the foreign outlook appeared to have subsided ments, including mixed economic data reports, also further, on balance, since late last year; these developweighed on the dollar. In contrast, the dollar ments were judged as counterweights to elevated strengthened against sterling following the U.K. par- measures of economic policy uncertainty. The staff liamentary election. Changes in longer-dated AFE saw the risks to the forecasts for real GDP and the sovereign bond yields were mixed, while shorter- unemployment rate as balanced; the staff’s assessdated yields moved slightly higher. EME sovereign ment was that the downside risks associated with spreads were little changed, while flows into EME monetary policy not being well positioned to respond mutual funds remained robust. However, Brazilian to adverse shocks had diminished since its previous sovereign spreads widened and the Brazilian real forecast. The risks to the projection for inflation also depreciated notably amid increased political were seen as roughly balanced. The downside risks uncertainty. from the possibility that longer-term inflation expectations may have edged down or that the dollar could Staff Economic Outlook appreciate substantially were seen as essentially counterbalanced by the upside risk that inflation could In the U.S. economic projection prepared by the staff increase more than expected in an economy that was for the June FOMC meeting, real GDP growth was projected to continue operating above its longer-run forecast to step up to a solid pace in the second quar- potential. ter following its weak reading in the first quarter, primarily reflecting faster real PCE growth. On balance, Participants’ Views on Current Conditions the incoming data on aggregate spending were a little and the Economic Outlook stronger than the staff had expected, and the forecast of real GDP growth for the current year was a bit In conjunction with this FOMC meeting, members higher than in the previous projection. Beyond this of the Board of Governors and Federal Reserve year, the projection for real GDP growth was essen- Bank presidents submitted their projections of the tially unchanged. The staff continued to project that most likely outcomes for real output growth, the real GDP would expand at a modestly faster pace unemployment rate, and inflation for each year from than potential output in 2017 through 2019, sup- 2017 through 2019 and over the longer run, based on ported in part by the staff’s maintained assumption their individual assessments of the appropriate path that fiscal policy would become more expansionary for the federal funds rate.5 The longer-run projections in the coming years. The unemployment rate was represented each participant’s assessment of the rate projected to decline gradually over the next couple of to which each variable would be expected to conyears and to continue running below the staff’s esti- verge, over time, under appropriate monetary policy mate of its longer-run natural rate over this period. and in the absence of further shocks to the economy.6 The staff’s forecast for consumer price inflation, as 5 Four members of the Board of Governors, one fewer than in March 2017, were in office at the time of the June 2017 meeting measured by the change in the PCE price index, was and submitted economic projections. The office of the president revised down slightly for 2017 because of the weaker- of the Federal Reserve Bank of Richmond was vacant at the than-expected incoming data for inflation. However, time of this FOMC meeting; First Vice President Mark L. Mullinix submitted economic projections. the projection was little changed thereafter, as the 6 One participant did not submit longer-run projections for real recent weakness in inflation was viewed as transitory. output growth, the unemployment rate, or the federal funds Inflation was still expected to be somewhat higher rate.

192 104th Annual Report | 2017 These projections and policy assessments are months, supported in particular by a rebound in the described in the Summary of Economic Projections energy sector. District contacts suggested that an (SEP), which is an addendum to these minutes. expansion in oil production capacity was likely to continue in the near term, though the longer-term In their discussion of the economic situation and the outlook was more uncertain. Conditions in the outlook, meeting participants agreed that the infor- manufacturing sector in several Districts were reportmation received over the intermeeting period indi- edly strong, but activity in a couple of them had cated that the labor market had continued to slowed in recent months from a high level, and some strengthen and that economic activity had been rising contacts in the automobile industry reported declines moderately, on average, so far this year. Job gains had in production that they expected to continue in the moderated since the beginning of the year but had near term. District reports regarding the service secremained solid, on average, and the unemployment tor were generally positive. In contrast, contacts in a rate had declined. Household spending had picked couple of Districts indicated that conditions in the up in recent months, and business fixed investment agricultural sector remained weak. Contacts in many had continued to expand. Inflation measured on a Districts remained optimistic about business pros- 12-month basis had declined recently and, like the pects, which were supported in part by improving measure excluding food and energy prices, had been global conditions. However, this optimism appeared running somewhat below 2 percent. Market-based to have recently abated somewhat, partly because measures of inflation compensation remained low; contacts viewed the likelihood of significant fiscal survey-based measures of longer-term inflation stimulus as having diminished. Contacts at some expectations were little changed on balance. large firms indicated that they had curtailed their capital spending, in part because of uncertainty Participants generally saw the incoming information about changes in fiscal and other government polion spending and labor market indicators as consis- cies; some contacts at smaller firms, however, inditent, overall, with their expectations and indicated cated that their capital spending plans had not been that their views of the outlook for economic growth appreciably affected by news about government and the labor market had changed only slightly since policy. Reports regarding housing construction from the May FOMC meeting. As anticipated, growth in District contacts were mixed. consumer spending seemed to have bounced back from a weak first quarter, and participants continued Labor market conditions continued to strengthen in to expect that, with further gradual adjustments in recent months. The unemployment rate fell from the stance of monetary policy, economic activity 4.5 percent in March to 4.3 percent in May and was would expand at a moderate pace and labor market below levels that participants judged likely to be norconditions would strengthen somewhat further. In mal over the longer run. Monthly increases in nonlight of surprisingly low recent readings on inflation, farm payrolls averaged 160,000 since the beginning of participants expected that inflation on a 12-month the year, down from 187,000 per month in 2016 but basis would remain somewhat below 2 percent in the still well above estimates of the pace necessary to near term. However, participants judged that infla- absorb new entrants in the labor force. A few particition would stabilize around the Committee’s 2 per- pants interpreted this slowing in payroll growth as an cent objective over the medium term. expected development that reflected a tight labor market. Other labor market indicators, such as the Growth in consumer spending appeared to be number of job openings and broader measures of rebounding after slowing in the first quarter of this unemployment, were also seen as consistent with year. Participants generally continued to expect that labor market conditions having strengthened in ongoing job gains, rising household income and recent months. Moreover, contacts in several Districts wealth, and improved household balance sheets reported shortages of workers in selected occupations would support moderate growth in household spend- and in some cases indicated that firms were signifiing over the medium term. However, District con- cantly increasing salaries and benefits in order to tacts reported that automobile sales had slowed attract or keep workers. However, other contacts recently; some contacts expected sales to slow further, reported only modest wage gains, and participants while others believed that sales were leveling out. observed that measures of labor compensation for the overall economy continued to rise only moder- Participants generally agreed that business fixed ately despite strengthening labor market conditions. investment had continued to expand in recent A couple of participants saw the restrained increases

Minutes of Federal Open Market Committee Meetings | June 193 in labor compensation as consistent with the low pro- participants, pointing to improved prospects for forductivity growth and moderate inflation experienced eign economic growth, viewed the downside risks to in recent years. In light of the recent behavior of the U.S. economic outlook stemming from internalabor compensation and consumer prices as well as tional developments as having receded further over demographic trends, a number of participants low- the intermeeting period. With regard to the outlook ered their estimate of the longer-run normal level of for inflation, some participants emphasized downside the unemployment rate. risks, particularly in light of the recent low readings on inflation along with measures of inflation com- Recent readings on headline and core PCE price pensation and some survey measures of inflation inflation had come in lower than participants had expectations that were still low. However, a couple of expected. On a 12-month basis, headline PCE price participants expressed concern that a substantial inflation was running somewhat below the Commit- undershooting of the longer-run normal rate of tee’s 2 percent objective in April, partly because of unemployment could pose an appreciable upside risk factors that appeared to be transitory. Core PCE to inflation or give rise to macroeconomic or finanprice inflation—which historically has been a more cial imbalances that eventually could lead to a signifiuseful predictor of future inflation, although it, too, cant economic downturn. Participants agreed that can be affected by transitory factors—moved down the Committee should continue to monitor inflation from 1.8 percent in March to 1.5 percent in April. In developments closely. addition, CPI inflation in May came in lower than expected. Most participants viewed the recent soft- In their discussion of recent developments in finanness in these price data as largely reflecting idiosyn- cial markets, participants observed that, over the cratic factors, including sharp declines in prices of intermeeting period, equity prices rose, longer-term wireless telephone services and prescription drugs, interest rates declined, and volatility in financial marand expected these developments to have little bear- kets was generally low. They also noted that, according on inflation over the medium run. Participants ing to some measures, financial conditions had eased continued to expect that, as the effects of transitory even as the Committee reduced policy accommodafactors waned and labor market conditions strength- tion and market participants continued to expect furened further, inflation would stabilize around the ther steps to tighten monetary policy. Participants Committee’s 2 percent objective over the medium discussed possible reasons why financial conditions term. Several participants suggested that recent had not tightened. Corporate earnings growth had increases in import prices were consistent with this been robust; nevertheless, in the assessment of a few expectation. However, several participants expressed participants, equity prices were high when judged concern that progress toward the Committee’s 2 per- against standard valuation measures. Longer-term cent longer-run inflation objective might have slowed Treasury yields had declined since earlier in the year and that the recent softness in inflation might persist. and remained low. Participants offered various expla- Such persistence might occur in part because upward nations for low bond yields, including the prospect of pressure on inflation from resource utilization may sluggish longer-term economic growth as well as the be limited, as the relationship between these two vari- elevated level of the Federal Reserve’s longer-term ables appeared to be weaker than in previous asset holdings. Some participants suggested that decades. However, a couple of other participants increased risk tolerance among investors might be raised the concern that a tighter relationship between contributing to elevated asset prices more broadly; a inflation and resource utilization could reemerge if few participants expressed concern that subdued the unemployment rate ran significantly below its market volatility, coupled with a low equity prelonger-run normal level, which could result in infla- mium, could lead to a buildup of risks to financial tion running persistently above the Committee’s stability. 2 percent objective. In their discussion of monetary policy, participants Overall, participants continued to see the near-term generally saw the outlook for economic activity and risks to the economic outlook as roughly balanced. the medium-term outlook for inflation as little Participants again noted the uncertainty regarding changed and viewed a continued gradual removal of the possible enactment, timing, and nature of monetary policy accommodation as being approprichanges to fiscal and other government policies and ate. Based on this assessment, almost all participants saw both upside and downside risks to the economic expressed the view that it would be appropriate for outlook associated with such changes. A number of the Committee to raise the target range for the fed-

194 104th Annual Report | 2017 eral funds rate 25 basis points at this meeting. These eral funds rate would follow a less steep path than it participants agreed that, even after an increase in the otherwise would. However, some other participants target range for the federal funds rate at this meeting, suggested that they did not see the balance sheet northe stance of monetary policy would remain accom- malization program as a factor likely to figure heavily modative, supporting additional strengthening in in decisions about the target range for the federal labor market conditions and a sustained return to funds rate. A few of these participants judged that 2 percent inflation. A few participants also judged the degree of additional policy firming that would that the case for a policy rate increase at this meeting result from the balance sheet normalization program was strengthened by the easing, by some measures, in was modest. overall financial conditions over the previous six months. One participant did not believe it was appro- Participants generally reiterated their support for priate to raise the federal funds rate target range at continuing a gradual approach to raising the federal this meeting; this participant suggested that the funds rate. Several participants expressed confidence Committee should maintain the target range for the that a series of further increases in the federal funds federal funds rate at ¾ to 1 percent until the inflation rate in coming years, along the lines implied by the rate was actually moving toward the Committee’s medians of the projections for the federal funds rate 2 percent longer-run objective. in the June SEP, would contribute to a stabilization, over the medium term, of the inflation rate around Participants noted that, with the process of normal- the Committee’s 2 percent objective, especially as this ization of the level of the federal funds rate continu- tightening of monetary policy would affect the ing, it would likely become appropriate this year for economy only with a lag and would start from a the Committee to announce and implement a specific point at which policy was still accommodative. Howtimetable for its program of reducing reinvestment of ever, a few participants who supported an increase in the Federal Reserve’s securities holdings. It was the target range at the present meeting indicated that observed that the ensuing reduction in securities they were less comfortable with the degree of addiholdings would be gradual and would follow an tional policy tightening through the end of 2018 extended period of Committee communications on implied by the June SEP median federal funds rate balance sheet normalization policy, including the projections. These participants expressed concern information that would be released at the conclusion that such a path of increases in the policy rate, while of this meeting. Consequently, the effect on financial gradual, might prove inconsistent with a sustained market conditions of the eventual announcement of return of inflation to 2 percent. the beginning of the Federal Reserve’s balance sheet normalization was expected to be limited. Several participants endorsed a policy approach, such as that embedded in many participants’ projec- Participants expressed a range of views about the tions, in which the unemployment rate would underappropriate timing of a change in reinvestment shoot their current estimates of the longer-term norpolicy. Several preferred to announce a start to the mal rate for a sustained period. They noted that the process within a couple of months; in support of this longer-run normal rate of unemployment is difficult approach, it was noted that the Committee’s commu- to measure and that recent evidence suggested nications had helped prepare the public for such a resource pressures generated only modest responses step. However, some others emphasized that defer- of nominal wage growth and inflation. Against this ring the decision until later in the year would permit backdrop, possible benefits cited by policymakers of additional time to assess the outlook for economic a period of tight labor markets included a further rise activity and inflation. A few of these participants in nominal wage growth that would bolster inflation also suggested that a near-term change to reinvest- expectations and help push the inflation rate closer to ment policy could be misinterpreted as signifying the Committee’s 2 percent longer-run goal, as well as that the Committee had shifted toward a less gradual a stimulus to labor market participation and business approach to overall policy normalization. fixed investment. It was also suggested that the symmetry of the Committee’s inflation goal might be Several participants indicated that the reduction in underscored if inflation modestly exceeded 2 percent policy accommodation arising from the commence- for a time, as such an outcome would follow a long ment of balance sheet normalization was one basis period in which inflation had undershot the 2 percent for believing that, if economic conditions evolved longer-term objective. Several participants expressed broadly as anticipated, the target range for the fed- concern that a substantial and sustained unemploy-

Minutes of Federal Open Market Committee Meetings | June 195 ment undershooting might make the economy more nomic outlook appeared roughly balanced, especially likely to experience financial instability or could lead as risks related to foreign economic and financial to a sharp rise in inflation that would require a rapid developments had diminished. policy tightening that, in turn, could raise the risk of an economic downturn. However, other participants After assessing current conditions and the outlook noted that if a sharp rise in inflation or inflation for economic activity, the labor market, and inflation, expectations did occur, the Committee could readily all but one member agreed to raise the target range respond using conventional monetary policy tools. for the federal funds rate to 1 to 1¼ percent. They With regard to financial stability, one participant noted that the stance of monetary policy remained emphasized the importance of remaining vigilant accommodative, thereby supporting some further about financial developments but observed that pre- strengthening in labor market conditions and a susvious episodes of elevated financial imbalances and tained return to 2 percent inflation. low unemployment had limited relevance for the present situation, as the current system of financial Members agreed that, in determining the timing and regulation was likely more robust than that prevailing size of future adjustments to the target range for the before the financial crisis. federal funds rate, the Committee would assess realized and expected economic conditions relative to its Committee Policy Action objectives of maximum employment and 2 percent inflation. This assessment would take into account a In their discussion of monetary policy for the period wide range of information, including measures of ahead, members judged that information received labor market conditions, indicators of inflation pressince the Federal Open Market Committee met in sures and inflation expectations, and readings on May indicated that the labor market had continued financial and international developments. Members to strengthen and that economic activity had been also agreed that they would carefully monitor actual rising moderately so far this year. Job gains had mod- and expected developments in inflation in relation to erated but had been solid, on average, since the the Committee’s symmetric inflation goal. They beginning of the year, and the unemployment rate expected that economic conditions would evolve in a had declined. Household spending had picked up in manner that would warrant gradual increases in the recent months, and business fixed investment had federal funds rate, and they agreed that the federal continued to expand. funds rate was likely to remain, for some time, below levels that are expected to prevail in the longer run. Inflation on a 12-month basis had declined recently However, the actual path of the federal funds rate and was running somewhat below 2 percent. The would depend on the economic outlook as informed measure of inflation excluding food and energy by incoming data. prices was likewise running somewhat below 2 percent. Market-based measures of inflation compensa- The Committee also decided to maintain its existing tion remained low; survey-based measures of longer- policy of reinvesting principal payments from its term inflation expectations had changed little on holdings of agency debt and agency mortgagebalance. backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities With respect to the economic outlook and its impli- at auction. The Committee expected to begin implecations for monetary policy, members continued to menting a balance sheet normalization program in expect that, with gradual adjustments in the stance of 2017, provided that the economy evolves broadly as monetary policy, economic activity would expand at anticipated. This program, which would gradually a moderate pace, and labor market conditions would reduce the Federal Reserve’s securities holdings by strengthen somewhat further. Inflation on a decreasing reinvestment of principal payments from 12-month basis was expected to remain somewhat those securities, was described in an addendum to the below 2 percent in the near term, but almost all mem- Committee’s Policy Normalization Principles and bers expected it to stabilize around 2 percent over the Plans to be released after this meeting. medium term, although they were monitoring inflation developments closely. Members continued to At the conclusion of the discussion, the Committee judge that there was significant uncertainty about the voted to authorize and direct the Federal Reserve effects of possible changes in fiscal and other govern- Bank of New York, until it was instructed otherwise, ment policies but that near-term risks to the eco- to execute transactions in the SOMA in accordance

196 104th Annual Report | 2017 with the following domestic policy directive, to be stance of monetary policy, economic activity released at 2:00 p.m.: will expand at a moderate pace, and labor market conditions will strengthen somewhat further. “Effective June 15, 2017, the Federal Open Mar- Inflation on a 12-month basis is expected to ket Committee directs the Desk to undertake remain somewhat below 2 percent in the near open market operations as necessary to main- term but to stabilize around the Committee’s tain the federal funds rate in a target range of 2 percent objective over the medium term. Near- 1 to 1¼ percent, including overnight reverse term risks to the economic outlook appear repurchase operations (and reverse repurchase roughly balanced, but the Committee is monioperations with maturities of more than one day toring inflation developments closely. when necessary to accommodate weekend, holiday, or similar trading conventions) at an offer- In view of realized and expected labor market ing rate of 1.00 percent, in amounts limited only conditions and inflation, the Committee decided by the value of Treasury securities held outright to raise the target range for the federal funds in the System Open Market Account that are rate to 1 to 1¼ percent. The stance of monetary available for such operations and by a per- policy remains accommodative, thereby supportcounterparty limit of $30 billion per day. ing some further strengthening in labor market conditions and a sustained return to 2 percent The Committee directs the Desk to continue inflation. rolling over maturing Treasury securities at auction and to continue reinvesting principal pay- In determining the timing and size of future ments on all agency debt and agency mortgage- adjustments to the target range for the federal backed securities in agency mortgage-backed funds rate, the Committee will assess realized securities. The Committee also directs the Desk and expected economic conditions relative to its to engage in dollar roll and coupon swap trans- objectives of maximum employment and 2 peractions as necessary to facilitate settlement of cent inflation. This assessment will take into the Federal Reserve’s agency mortgage-backed account a wide range of information, including securities transactions.” measures of labor market conditions, indicators of inflation pressures and inflation expectations, The vote also encompassed approval of the statement and readings on financial and international below to be released at 2:00 p.m.: developments. The Committee will carefully monitor actual and expected inflation develop- “Information received since the Federal Open ments relative to its symmetric inflation goal. Market Committee met in May indicates that The Committee expects that economic condithe labor market has continued to strengthen tions will evolve in a manner that will warrant and that economic activity has been rising mod- gradual increases in the federal funds rate; the erately so far this year. Job gains have moder- federal funds rate is likely to remain, for some ated but have been solid, on average, since the time, below levels that are expected to prevail in beginning of the year, and the unemployment the longer run. However, the actual path of the rate has declined. Household spending has federal funds rate will depend on the economic picked up in recent months, and business fixed outlook as informed by incoming data. investment has continued to expand. On a 12-month basis, inflation has declined recently The Committee is maintaining its existing policy and, like the measure excluding food and energy of reinvesting principal payments from its holdprices, is running somewhat below 2 percent. ings of agency debt and agency mortgage- Market-based measures of inflation compensa- backed securities in agency mortgage-backed tion remain low; survey-based measures of securities and of rolling over maturing Treasury longer-term inflation expectations are little securities at auction. The Committee currently changed, on balance. expects to begin implementing a balance sheet normalization program this year, provided that Consistent with its statutory mandate, the Com- the economy evolves broadly as anticipated. mittee seeks to foster maximum employment This program, which would gradually reduce the and price stability. The Committee continues to Federal Reserve’s securities holdings by decreasexpect that, with gradual adjustments in the ing reinvestment of principal payments from

Minutes of Federal Open Market Committee Meetings | June 197 those securities, is described in the accompany- The Board of Governors also voted unanimously to ing addendum to the Committee’s Policy Nor- approve a ¼ percentage point increase in the primary malization Principles and Plans.” credit rate (discount rate) to 1¾ percent, effective June 15, 2017.7 Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley It was agreed that the next meeting of the Committee Fischer, Patrick Harker, Robert S. Kaplan, and would be held on Tuesday–Wednesday, July 25–26, Jerome H. Powell. 2017. The meeting adjourned at 10:35 a.m. on June 14, 2017. Voting against this action: Neel Kashkari. Notation Vote Mr. Kashkari dissented because he preferred to maintain the existing target range for the federal By notation vote completed on May 23, 2017, the funds rate at this meeting. In his view, recent data, Committee unanimously approved the minutes of the while suggesting that the labor market had improved Committee meeting held on May 2–3, 2017. further, had increased doubts about achievement of the Committee’s 2 percent longer-run inflation objec- Brian F. Madigan tive and thus had not provided a compelling basis on Secretary which to firm monetary policy at this meeting. He preferred to await additional evidence that the recent decline in inflation was temporary and that inflation was moving toward the Committee’s symmetric 7 In taking this action, the Board approved requests submitted by the boards of directors of the Federal Reserve Banks of Boston, 2 percent inflation objective. He was concerned that Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Kansas raising the federal funds rate target range too soon City, Dallas, and San Francisco. This vote also encompassed increased the likelihood that inflation expectations approval by the Board of Governors of the establishment of a 1¾ percent primary credit rate by the remaining Federal would decline and that inflation would continue to Reserve Banks, effective on the later of June 15, 2017, and the run below 2 percent. date such Reserve Banks informed the Secretary of the Board of such a request. (Secretary’s note: Subsequently, the Federal Reserve Banks of New York, St. Louis, and Minneapolis were To support the Committee’s decision to raise the tarinformed by the Secretary of the Board of the Board’s approval get range for the federal funds rate, the Board of of their establishment of a primary credit rate of 1¾ percent, Governors voted unanimously to raise the interest effective June 15, 2017.) The second vote of the Board also encompassed approval of the establishment of the interest rates rates on required and excess reserve balances ¼ perfor secondary and seasonal credit under the existing formulas centage point, to 1¼ percent, effective June 15, 2017. for computing such rates.

198 104th Annual Report | 2017 Addendum: by the four-quarter percentage change in the price index for personal consumption expenditures (PCE), Summary of Economic Projections would run below 2 percent in 2017 and then step up in the next two years; over half of them projected In conjunction with the Federal Open Market Comthat inflation would be at the Committee’s 2 percent mittee (FOMC) meeting held on June 13–14, 2017, objective in 2019, and all judged that inflation would meeting participants submitted their projections of be within a couple of tenths of a percentage point of the most likely outcomes for real output growth, the the objective in that year. Table 1 and figure 1 prounemployment rate, and inflation for each year from vide summary statistics for the projections. 2017 to 2019 and over the longer run.8 Each participant’s projection was based on information available As shown in figure 2, participants generally expected at the time of the meeting, together with his or her that evolving economic conditions would likely warassessment of appropriate monetary policy, including rant further gradual increases in the federal funds a path for the federal funds rate and its longer-run rate to achieve and sustain maximum employment value, and assumptions about other factors likely to and 2 percent inflation. Although some participants affect economic outcomes.9 The longer-run projecraised or lowered their federal funds rate projections tions represent each participant’s assessment of the since March, the median projections for the federal value to which each variable would be expected to funds rate in 2017 and 2018 were essentially converge, over time, under appropriate monetary unchanged, and the median projection in 2019 was policy and in the absence of further shocks to the slightly lower; the median projection for the longereconomy.10 “Appropriate monetary policy” is run federal funds rate was unchanged. However, the defined as the future path of policy that each particieconomic outlook is uncertain, and participants pant deems most likely to foster outcomes for econoted that their economic projections and assessnomic activity and inflation that best satisfy his or ments of appropriate monetary policy could change her individual interpretation of the Federal Reserve’s in response to incoming information. objectives of maximum employment and stable prices. In general, participants viewed the uncertainty attached to their projections as broadly similar to the All participants who submitted longer-run projecaverage of the past 20 years, although a couple of tions expected that, under appropriate monetary participants saw the uncertainty associated with their policy, growth in real gross domestic product (GDP) real GDP growth forecasts as higher than average. this year would run somewhat above their individual Most participants judged the risks around their proestimates of its longer-run rate. Over half of these jections for economic growth, the unemployment participants expected that economic growth would rate, and inflation as broadly balanced. slow a bit in 2018, and almost all of them expected that in 2019 economic growth would run at or near Figures 4.A through 4.C for real GDP growth, the its longer-run level. All participants who submitted unemployment rate, and inflation, respectively, preslonger-run projections expected that the unemployent “fan charts” as well as charts of participants’ curment rate would run below their estimates of its rent assessments of the uncertainty and risks surlonger-run normal level in 2017 and remain below rounding the economic projections. The fan charts that level through 2019. The majority of participants (the panels at the top of these three figures) show the also lowered their estimates of the longer-run normal median projections surrounded by confidence interrate of unemployment by 0.1 to 0.2 percentage point. vals that are computed from the forecast errors of All participants projected that inflation, as measured various private and government projections made over the past 20 years. The width of the confidence 8 Four members of the Board of Governors, one fewer than in interval for each variable at a given point is a measure March 2017, were in office at the time of the June 2017 meeting and submitted economic projections. The office of the president of forecast uncertainty at that horizon. For all three of the Federal Reserve Bank of Richmond was vacant at the macroeconomic variables, these charts illustrate that time of this FOMC meeting; First Vice President Mark L. forecast uncertainty is substantial and generally Mullinix submitted economic projections. 9 All participants submitted their projections in advance of the increases as the forecast horizon lengthens. Reflect- FOMC meeting; no projections were revised following the ing, in part, the uncertainty about the future evolurelease of economic data on the morning of June 14. tion of GDP growth, the unemployment rate, and 10 One participant did not submit longer-run projections for real inflation, participants’ assessments of appropriate output growth, the unemployment rate, or the federal funds rate. monetary policy are also subject to considerable

Minutes of Federal Open Market Committee Meetings | June 199 Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, June 2017 Percent Median1 Central tendency2 Range3 Variable Longer Longer L onger 2 017 2018 2019 run 2017 2018 2019 run 2 017 2 018 2019 run Change in real GDP 2.2 2.1 1.9 1.8 2 .1–2.2 1.8–2.2 1.8–2.0 1.8–2.0 2.0–2.5 1.7–2.3 1.4–2.3 1 .5–2.2 March projection 2.1 2.1 1.9 1.8 2.0–2.2 1.8–2.3 1.8–2.0 1.8–2.0 1.7–2.3 1.7–2.4 1.5–2.2 1.6–2.2 Unemployment rate 4.3 4.2 4.2 4.6 4.2–4.3 4.0–4.3 4.1–4.4 4.5–4.8 4.1–4.5 3.9–4.5 3.8–4.5 4.5–5.0 March projection 4.5 4.5 4.5 4.7 4.5–4.6 4.3–4.6 4.3–4.7 4.7–5.0 4.4–4.7 4.2–4.7 4.1–4.8 4.5–5.0 PCE inflation 1.6 2.0 2.0 2.0 1.6–1.7 1.8–2.0 2.0–2.1 2.0 1 .5–1.8 1.7–2.1 1.8–2.2 2.0 March projection 1.9 2.0 2.0 2.0 1.8–2.0 1.9–2.0 2.0–2.1 2.0 1.7–2.1 1.8–2.1 1.8–2.2 2.0 Core PCE inflation4 1.7 2 .0 2.0 1.6–1.7 1.8–2.0 2.0–2.1 1.6–1.8 1 .7–2.1 1.8–2.2 March projection 1.9 2.0 2.0 1.8–1.9 1.9–2.0 2.0–2.1 1.7–2.0 1 .8–2.1 1.8–2.2 Memo: Projected appropriate policy path Federal funds rate 1.4 2.1 2.9 3.0 1.1–1.6 1.9–2.6 2.6–3.1 2.8–3.0 1.1–1.6 1.1–3.1 1.1–4.1 2.5–3.5 March projection 1.4 2.1 3.0 3.0 1.4–1.6 2.1–2.9 2.6–3.3 2.8–3.0 0.9–2.1 0.9–3.4 0.9–3.9 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 March projections were made in conjunction with the meeting of the Federal Open Market Committee on March 14–15, 2017. 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 March 14–15, 2017, meeting, and one participant did not submit such projections in conjunction with the June 13–14, 2017, 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.

200 104th Annual Report | 2017 Figure 1. Medians, central tendencies, and ranges of economic projections, 2017–19 and over the longer run Percent Change in real GDP Median of projections Central tendency of projections Range of projections 3 2 Actual 1 2012 2013 2014 2015 2016 2017 2018 2019 Longer run Percent Unemployment rate 8 7 6 5 4 2012 2013 2014 2015 2016 2017 2018 2019 Longer run Percent PCE inflation 3 2 1 2012 2013 2014 2015 2016 2017 2018 2019 Longer run Percent Core PCE inflation 3 2 1 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 | June 201 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 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.

202 104th Annual Report | 2017 uncertainty. To illustrate the uncertainty regarding participants now expecting real GDP growth between the appropriate path for monetary policy, figure 5 2.4 and 2.5 percent and none seeing it below 2 pershows a comparable fan chart around the median cent. The distributions of projected real GDP growth projections for the federal funds rate.11 As with the in 2018, 2019, and in the longer run were broadly macroeconomic variables, forecast uncertainty for the similar to the distributions of the March projections. federal funds rate is substantial and increases at lon- The distributions of individual projections for the ger horizons. unemployment rate shifted down noticeably for 2017 and 2018. Most participants projected an unemploy- The Outlook for Economic Activity ment rate of 4.2 or 4.3 percent at the end of this year, and the majority anticipated an unemployment rate The median of participants’ projections for the between 4.0 and 4.3 percent at the end of 2018. Pargrowth rate of real GDP, conditional on their indi- ticipants’ projections also shifted down in 2019 but vidual assumptions about appropriate monetary were more dispersed than the distributions of their policy, was 2.2 percent in 2017, 2.1 percent in 2018, projected unemployment rates in the two earlier and 1.9 percent in 2019; the median of projections years. The distribution of projections for the longerfor the longer-run normal rate of real GDP growth run normal unemployment rate shifted down was 1.8 percent. Compared with the March Sum- modestly. mary of Economic Projections (SEP), the medians of the forecasts for real GDP growth over the period The Outlook for Inflation from 2017 to 2019, as well as the median assessment of the longer-run growth rate, were mostly The median of projections for headline PCE price unchanged. Fewer than half of the participants inflation this year was 1.6 percent, down 0.3 percentincorporated expectations of fiscal stimulus into their age point from March. As in March, median proprojections, and a couple indicated that they had jected inflation was 2.0 percent in 2018 and 2019. marked down the magnitude of expected fiscal stimu- About half of the participants anticipated that inflalus relative to March. tion would continue to run a bit below 2 percent in 2018, while only one participant expected inflation All participants revised down their projections for the above 2 percent in that year—and, in that case, just unemployment rate in the fourth quarter of 2017 and modestly so. More than half projected that inflation of 2018, and almost all also revised down their pro- would be equal to the Committee’s objective in 2019. jections for the unemployment rate in the fourth A few participants projected that inflation would run quarter of 2019. Many who did so cited recent lower- slightly below 2 percent in that year, while several than-expected readings on unemployment. The projected that it would run a little above 2 percent. median of the projections for the unemployment rate The median of projections for core PCE price inflawas 4.3 percent in 2017 and 4.2 percent in each of tion was 1.7 percent in 2017, a decline of 0.2 percent- 2018 and 2019, 0.2 percentage point and 0.3 percent- age point from March; the median projection for age point lower than in the March projections, 2018 and 2019 was 2.0 percent, as in the March respectively. The majority of participants also revised projections. down their estimates of the longer-run normal rate of unemployment by 0.1 or 0.2 percentage point, and Figures 3.C and 3.D provide information on the disthe median longer-run level was 4.6 percent, down tributions of participants’ views about the outlook 0.1 percentage point from March. for inflation. The distributions of projections for headline PCE price inflation and for core PCE price Figures 3.A and 3.B show the distributions of par- inflation in 2017 shifted down noticeably from ticipants’ projections for real GDP growth and the March, while the distributions for both measures of unemployment rate from 2017 to 2019 and in the lon- inflation in 2018 shifted down slightly. Many particiger run. The distribution of individual projections for pants cited recent surprisingly low readings on inflareal GDP growth for this year shifted up, with some tion as a factor contributing to the revisions in their inflation forecasts. 11 The fan chart for the federal funds rate depicts the uncertainty about the future path of appropriate monetary policy and is Appropriate Monetary Policy closely connected with the uncertainty about the future value of economic variables. In contrast, the dot plot shown in figure 2 Figure 3.E provides the distribution of participants’ displays the dispersion of views across individual participants about the appropriate level of the federal funds rate. judgments regarding the appropriate target or mid-

Minutes of Federal Open Market Committee Meetings | June 203 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2017–19 and over the longer run Number of participants 2017 June projections 18 March projections 16 14 12 10 8 6 4 2 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 1.3 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 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 1.3 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 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 1.3 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 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 1.3 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.

204 104th Annual Report | 2017 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2017–19 and over the longer run Number of participants 2017 June projections 18 March projections 16 14 12 10 8 6 4 2 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.7 3.9 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 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.7 3.9 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 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.7 3.9 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 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.7 3.9 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.

Minutes of Federal Open Market Committee Meetings | June 205 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2017–19 and over the longer run Number of participants 2017 June projections 18 March 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 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 Number of participants Longer run 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.

206 104th Annual Report | 2017 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2017–19 Number of participants 2017 June projections 18 March 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 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.

Minutes of Federal Open Market Committee Meetings | June 207 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, 2017–19 and over the longer run Number of participants 2017 June projections 18 March projections 16 14 12 10 8 6 4 2 0.8 8 – 1.1 3 – 1.3 8 – 1.6 3 – 1.8 8 – 2.1 3 – 2.3 8 – 2.6 3 – 2.8 8 – 3.1 3 – 3.3 8 – 3.6 3 – 3.8 8 – 4.1 3 – 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 0.8 8 – 1.1 3 – 1.3 8 – 1.6 3 – 1.8 8 – 2.1 3 – 2.3 8 – 2.6 3 – 2.8 8 – 3.1 3 – 3.3 8 – 3.6 3 – 3.8 8 – 4.1 3 – 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 0.8 8 – 1.1 3 – 1.3 8 – 1.6 3 – 1.8 8 – 2.1 3 – 2.3 8 – 2.6 3 – 2.8 8 – 3.1 3 – 3.3 8 – 3.6 3 – 3.8 8 – 4.1 3 – 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 0.8 8 – 1.1 3 – 1.3 8 – 1.6 3 – 1.8 8 – 2.1 3 – 2.3 8 – 2.6 3 – 2.8 8 – 3.1 3 – 3.3 8 – 3.6 3 – 3.8 8 – 4.1 3 – 1.12 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

208 104th Annual Report | 2017 point of the target range for the federal funds rate at Table 2. Average historical projection error ranges the end of each year from 2017 to 2019 and over the Percentage points longer run.12 The distribution for 2017 was less dispersed than that in March, while the distribution for Variable 2017 2 018 2019 2018 was slightly less dispersed. The distributions in 2019 and in the longer run were broadly similar to C hange in real GDP1 ±1.4 ±2.0 ±2.2 Unemployment rate1 ±0.4 ±1.2 ±1.8 those in March. The median projections of the fed- Total consumer prices2 ±0.8 ±1.0 ±1.0 eral funds rate continued to show gradual increases, Short-term interest rates3 ±0.7 ±2.0 ±2.2 with the median assessment for 2017 standing at Note: Error ranges shown are measured as plus or minus the root mean squared 1.38 percent, consistent with three 25 basis point error of projections for 1997 through 2016 that were released in the summer by increases this year. Thereafter, the medians of the various private and government forecasters. As described in the box “Forecast Uncertainty,” under certain assumptions, there is about a 70 percent probability projections were 2.13 percent at the end of 2018 and that actual outcomes for real GDP, unemployment, consumer prices, and the 2.94 percent at the end of 2019; the median of the federal funds rate will be in ranges implied by the average size of projection errors made in the past. For more information, see David Reifschneider and Peter longer-run projections of the federal funds rate was Tulip (2017), “Gauging the Uncertainty of the Economic Outlook Using Historical 3.00 percent. Forecasting Errors: The Federal Reserve’s Approach,” Finance and Economics Discussion Series 2017-020 (Washington: Board of Governors of the Federal Reserve System, February), available at www.federalreserve.gov/econresdata/ In discussing their June projections, many partici- feds/2017/files/2017020pap.pdf. pants continued to express the view that the appro- 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 priate upward trajectory of the federal funds rate most widely used in government and private economic forecasts. Projection over the next few years would likely be gradual. That is percent change, fourth quarter of the previous year to the fourth quarter of the year indicated. anticipated pace reflected a few factors, such as a 3 For Federal Reserve staff forecasts, measure is the federal funds rate. For other neutral real interest rate that was currently low and forecasts, measure is the rate on 3-month Treasury bills. Historical projections are the average level, in percent, in the fourth quarter of the year indicated. was expected to move up only slowly as well as a gradual return of inflation to the Committee’s 2 percent objective. Several participants judged that a slightly more accommodative path of monetary GDP, the unemployment rate, and total consumer policy than in their previous projections would likely price inflation—the root mean squared error be appropriate, citing an apparently slower rate of (RMSE) for forecasts made over the past 20 years. progress toward the Committee’s 2 percent inflation This measure of forecast uncertainty is incorporated objective. In their discussions of appropriate mon- graphically in the top panels of figures 4.A, 4.B, and etary policy, half of the participants commented on 4.C, which display fan charts plotting the median the Committee’s reinvestment policy; all of those SEP projections for the three variables surrounded by who did so expected a change in reinvestment policy symmetric confidence intervals derived from the before the end of this year. RMSEs presented in table 2. If the degree of uncertainty attending these projections is similar to the Uncertainty and Risks typical magnitude of past forecast errors and if the risks around the projections are broadly balanced, Projections of economic variables are subject to con- future outcomes of these variables would have about siderable uncertainty. In assessing the path of mon- a 70 percent probability of occurring within these etary policy that, in their view, is likely to be most confidence intervals. For all three variables, this appropriate, FOMC participants take account of the measure of forecast uncertainty is substantial and range of possible outcomes, the likelihood of those generally increases as the forecast horizon lengthens. outcomes, and the potential benefits and costs to the economy should they occur. Table 2 provides one FOMC participants may judge that the width of the measure of forecast uncertainty for the change in real historical fan charts shown in figures 4.A through 4.C does not adequately capture their current assessments of the degree of uncertainty that surrounds 12 One participant’s projections for the federal funds rate, real GDP growth, the unemployment rate, and inflation were their economic projections. Participants’ assessments informed by the view that there are multiple possible medium- of the current level of uncertainty surrounding their term regimes for the U.S. economy, that these regimes are pereconomic projections are shown in the bottom-left sistent, and that the economy shifts between regimes in a way that cannot be forecast. Under this view, the economy currently panels of figures 4.A, 4.B, and 4.C. All or nearly all is in a regime characterized by expansion of economic activity participants viewed the uncertainty attached to their with low productivity growth and a low short-term real interest economic projections as broadly similar to the averrate, but longer-term outcomes for variables other than inflation cannot be usefully projected. age of the past 20 years, with three fewer participants

Minutes of Federal Open Market Committee Meetings | June 209 Figure 4.A. Uncertainty and risks in projections of GDP growth Median projection and confidence interval based on historical forecast errors Percent Change in real GDP Median of projections 70% confidence interval 4 3 2 Actual 1 0 2012 2013 2014 2015 2016 2017 2018 2019 FOMC participants’ assessments of uncertainty and risks around their economic projections Number of participants Number of participants Uncertainty about GDP growth Risks to GDP growth June projections June projections March projections 18 March projections 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in real gross domestic product (GDP) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

210 104th Annual Report | 2017 Figure 4.B. Uncertainty and risks in projections of the unemployment rate Median projection and confidence interval based on historical forecast errors Percent Unemployment rate Median of projections 10 70% confidence interval 9 8 7 Actual 6 5 4 3 2 1 2012 2013 2014 2015 2016 2017 2018 2019 FOMC participants’ assessments of uncertainty and risks around their economic projections Number of participants Number of participants Uncertainty about the unemployment rate Risks to the unemployment rate June projections June projections March projections 18 March projections 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the average civilian unemployment rate in the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

Minutes of Federal Open Market Committee Meetings | June 211 Figure 4.C. Uncertainty and risks in projections of PCE inflation Median projection and confidence interval based on historical forecast errors Percent PCE inflation Median of projections 70% confidence interval 3 2 1 Actual 0 2012 2013 2014 2015 2016 2017 2018 2019 FOMC participants’ assessments of uncertainty and risks around their economic projections Number of participants Number of participants Uncertainty about PCE inflation Risks to PCE inflation 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 core PCE inflation Risks to core PCE inflation 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 Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in the price index for personal consumption expenditures (PCE) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

212 104th Annual Report | 2017 than in March seeing uncertainty about GDP two more viewed the risks as weighted to the growth, the unemployment rate, and inflation as downside. higher than its historical average.13 In their discussion of the uncertainty attached to their current projec- Participants’ assessments of the future path of the tions, most participants again expressed the view federal funds rate consistent with appropriate policy that, at this point, uncertainty surrounding prospec- are also subject to considerable uncertainty, reflecting tive changes in fiscal and other government policies is in part uncertainty about the evolution of GDP very large or that there is not yet enough information growth, the unemployment rate, and inflation over to make reasonable assumptions about the timing, time. The final line in table 2 shows the RMSEs for nature, and magnitude of the changes. forecasts of short-term interest rates. These RMSEs are not strictly consistent with the SEP projections The fan charts—which are constructed so as to be for the federal funds rate, in part because the SEP symmetric around the median projections—also may projections are not forecasts of the likeliest outcomes not fully reflect participants’ current assessments of but rather reflect each participant’s individual assessthe balance of risks to their economic projections. ment of appropriate monetary policy. However, the Participants’ assessments of the balance of risks to associated confidence intervals provide a sense of the their economic projections are shown in the bottom- likely uncertainty around the future path of the fedright panels of figures 4.A, 4.B, and 4.C. As in eral funds rate generated by the uncertainty about the March, most participants judged the risks to their macroeconomic variables and additional adjustments projections of real GDP growth, the unemployment to monetary policy that may be appropriate to offset rate, headline inflation, and core inflation as broadly the effects of shocks to the economy. balanced—in other words, as broadly consistent with Figure 5 shows a fan chart plotting the median SEP a symmetric fan chart. Three participants judged the projections for the appropriate path of the federal risks to the unemployment rate as weighted to the funds rate surrounded by confidence intervals downside, and one participant judged the risks as derived from the results presented in table 2. As with weighted to the upside (as shown in the lower-right the macroeconomic variables, forecast uncertainty is panel of figure 4.B). In addition, the balance of risks substantial and increases at longer horizons.14 to participants’ inflation projections shifted down slightly from March (shown in the lower-right panels 14 If at some point in the future the confidence interval around the of figure 4.C), as two fewer participants judged the federal funds rate were to extend below zero, it would be trunrisks to inflation to be weighted to the upside and cated at zero for purposes of the chart shown in figure 5; zero is the bottom of the lowest target range for the federal funds rate that has been adopted by the Committee in the past. This approach to the construction of the federal funds rate fan chart 13 At the end of this summary, the box “Forecast Uncertainty” would be merely a convention and would not have any implicadiscusses the sources and interpretation of uncertainty in the tion for possible future policy decisions regarding the use of economic forecasts and explains the approach used to assess the negative interest rates to provide additional monetary policy uncertainty and risks attending the participants’ projections. accommodation if doing so were appropriate.

Minutes of Federal Open Market Committee Meetings | June 213 Figure 5. Uncertainty in projections of the federal funds rate Median projection and confidence interval based on historical forecast errors Percent Federal funds rate Midpoint of target range 6 Median of projections 70% confidence interval* 5 4 3 2 Actual 1 0 2012 2013 2014 2015 2016 2017 2018 2019 Note: The blue and red lines are based on actual values and median projected values, respectively, of the Committee’s target for the federal funds rate at the end of the year indicated. The actual values are the midpoint of the target range; the median projected values are based on either the midpoint of the target range or the target level. The confidence interval around the median projected values is based on root mean squared errors of various private and government forecasts made over the previous 20 years. The confidence interval is not strictly consistent with the projections for the federal funds rate, primarily because these projections are not forecasts of the likeliest outcomes for the federal funds rate, but rather projections of participants’ individual assessments of appropriate monetary policy. Still, historical forecast errors provide a broad sense of the uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary policy that may be appropriate to offset the effects of shocks to the economy. The confidence interval is assumed to be symmetric except when it is truncated at zero—the bottom of the lowest target range for the federal funds rate that has been adopted in the past by the Committee. This truncation would not be intended to indicate the likelihood of the use of negative interest rates to provide additional monetary policy accommodation if doing so was judged appropriate. In such situations, the Committee could also employ other tools, including forward guidance and large-scale asset purchases, to provide additional accommodation. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections. * The confidence interval is derived from forecasts of the average level of short-term interest rates in the fourth quarter of the year indicated; more information about these data is available in table 2. The shaded area encompasses less than a 70 percent confidence interval if the confidence interval has been truncated at zero.

214 104th Annual Report | 2017 Forecast Uncertainty The economic projections provided by the members panels of those figures. Participants also provide of the Board of Governors and the presidents of the judgments as to whether the risks to their projections Federal Reserve Banks inform discussions of mon- are weighted to the upside, are weighted to the etary policy among policymakers and can aid public downside, or are broadly balanced. That is, while the understanding of the basis for policy actions. Con- symmetric historical fan charts shown in the top pansiderable uncertainty attends these projections, how- els of figures 4.A through 4.C imply that the risks to ever. The economic and statistical models and rela- participants’ projections are balanced, participants tionships used to help produce economic forecasts may judge that there is a greater risk that a given are necessarily imperfect descriptions of the real variable will be above rather than below their projecworld, and the future path of the economy can be tions. These judgments are summarized in the loweraffected by myriad unforeseen developments and right panels of figures 4.A through 4.C. events. Thus, in setting the stance of monetary As with real activity and inflation, the outlook for the policy, participants consider not only what appears to future path of the federal funds rate is subject to conbe the most likely economic outcome as embodied in siderable uncertainty. This uncertainty arises primarily their projections, but also the range of alternative because each participant’s assessment of the appropossibilities, the likelihood of their occurring, and the priate stance of monetary policy depends importantly potential costs to the economy should they occur. on the evolution of real activity and inflation over Table 2 summarizes the average historical accuracy time. If economic conditions evolve in an unexpected of a range of forecasts, including those reported in manner, then assessments of the appropriate setting past Monetary Policy Reports and those prepared by of the federal funds rate would change from that the Federal Reserve Board’s staff in advance of point forward. The final line in table 2 shows the error meetings of the Federal Open Market Committee ranges for forecasts of short-term interest rates. They (FOMC). The projection error ranges shown in the suggest that the historical confidence intervals assotable illustrate the considerable uncertainty associ- ciated with projections of the federal funds rate are ated with economic forecasts. For example, suppose quite wide. It should be noted, however, that these a participant projects that real gross domestic prod- confidence intervals are not strictly consistent with uct (GDP) and total consumer prices will rise steadily the projections for the federal funds rate, as these at annual rates of, respectively, 3 percent and 2 per- projections are not forecasts of the most likely quarcent. If the uncertainty attending those projections is terly outcomes but rather are projections of particisimilar to that experienced in the past and the risks pants’ individual assessments of appropriate monaround the projections are broadly balanced, the etary policy and are on an end-of-year basis. Hownumbers reported in table 2 would imply a probability ever, the forecast errors should provide a sense of of about 70 percent that actual GDP would expand the uncertainty around the future path of the federal within a range of 1.6 to 4.4 percent in the current funds rate generated by the uncertainty about the year, 1.0 to 5.0 percent in the second year, and 0.8 to macroeconomic variables as well as additional 5.2 percent in the third year. The corresponding adjustments to monetary policy that would be appro- 70 percent confidence intervals for overall inflation priate to offset the effects of shocks to the economy. would be 1.2 to 2.8 percent in the current year, and If at some point in the future the confidence interval 1.0 to 3.0 percent in the second and third years. Figaround the federal funds rate were to extend below ures 4.A through 4.C illustrate these confidence zero, it would be truncated at zero for purposes of bounds in “fan charts” that are symmetric and centhe fan chart shown in figure 5; zero is the bottom of tered on the medians of FOMC participants’ projecthe lowest target range for the federal funds rate that tions for GDP growth, the unemployment rate, and has been adopted by the Committee in the past. This inflation. However, in some instances, the risks approach to the construction of the federal funds rate around the projections may not be symmetric. In parfan chart would be merely a convention; it would not ticular, the unemployment rate cannot be negative; have any implications for possible future policy decifurthermore, the risks around a particular projection sions regarding the use of negative interest rates to might be tilted to either the upside or the downside, provide additional monetary policy accommodation if in which case the corresponding fan chart would be doing so were appropriate. In such situations, the asymmetrically positioned around the median Committee could also employ other tools, including projection. forward guidance and asset purchases, to provide Because current conditions may differ from those additional accommodation. that prevailed, on average, over history, participants While figures 4.A through 4.C provide information on provide judgments as to whether the uncertainty the uncertainty around the economic projections, figattached to their projections of each economic variure 1 provides information on the range of views able is greater than, smaller than, or broadly similar across FOMC participants. A comparison of figure 1 to typical levels of forecast uncertainty seen in the with figures 4.A through 4.C shows that the disperpast 20 years, as presented in table 2 and reflected sion of the projections across participants is much in the widths of the confidence intervals shown in the smaller than the average forecast errors over the past top panels of figures 4.A through 4.C. Participants’ 20 years. current assessments of the uncertainty surrounding their projections are summarized in the bottom-left

Minutes of Federal Open Market Committee Meetings | July 215 Meeting Held on July 25–26, 2017 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, James A. Clouse, Thomas A. Connors, July 25, 2017, at 1:00 p.m. and continued on Michael Dotsey, Eric M. Engen, Evan F. Koenig, Wednesday, July 26, 2017, at 9:00 a.m.1 Beth Anne Wilson, and Mark L. J. Wright 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 Ann E. Misback2 Lael Brainard Secretary, Office of the Secretary, Board of Governors Charles L. Evans Michael S. Gibson Stanley Fischer Director, Division of Supervision and Regulation, Patrick Harker Board of Governors Robert S. Kaplan Andreas Lehnert Director, Division of Financial Stability, Neel Kashkari Board of Governors Jerome H. Powell Margie Shanks3 Raphael W. Bostic, Loretta J. Mester, Deputy Secretary, Office of the Secretary, Mark L. Mullinix, Michael Strine, Board of Governors and John C. Williams Alternate Members of the Federal Open Market Stephen A. Meyer Committee Deputy Director, Division of Monetary Affairs, Board of Governors James Bullard, Esther L. George, and Eric Rosengren Presidents of the Federal Reserve Banks of St. Louis, Mark E. Van Der Weide Kansas City, and Boston, respectively Deputy Director, Division of Supervision and Regulation, Board of Governors Brian F. Madigan Secretary Trevor A. Reeve Senior Special Adviser to the Chair, Office of Board Matthew M. Luecke Members, Board of Governors Deputy Secretary Joseph W. Gruber, David Reifschneider, David W. Skidmore and John M. Roberts Assistant Secretary Special Advisers to the Board, Office of Board Scott G. Alvarez Members, Board of Governors General Counsel Linda Robertson2 Michael Held Assistant to the Board, Office of Board Members, Deputy General Counsel Board of Governors Steven B. Kamin Joshua Gallin and David E. Lebow Economist Senior Associate Directors, Division of Research and Statistics, Board of Governors 1 The Federal Open Market Committee is referenced as the 2 Attended Tuesday session only. “FOMC” and the “Committee” in these minutes. 3 Attended Wednesday session only.

216 104th Annual Report | 2017 Fabio M. Natalucci first regularly scheduled meeting of the Committee in Senior Associate Director, Division of Monetary 2018. Affairs, Board of Governors Antulio N. Bomfim, Ellen E. Meade, Edward Nelson, Developments in Financial Markets and Robert J. Tetlow, and Joyce K. Zickler Open Market Operations Senior Advisers, Division of Monetary Affairs, Board of Governors The manager of the System Open Market Account Jeremy B. Rudd (SOMA) reported on developments in domestic and Senior Adviser, Division of Research and Statistics, foreign financial markets over the period since the Board of Governors June FOMC meeting. The intermeeting period was relatively uneventful. Bond yields in advanced econo- Stephanie R. Aaronson and Glenn Follette mies increased moderately, in part reflecting evolving Assistant Directors, Division of Research and market perceptions of prospects for foreign monetary Statistics, Board of Governors policies. U.S. bond yields rose to a smaller degree, Elizabeth Klee and the value of the dollar on foreign exchange mar- Assistant Director, Division of Monetary Affairs, kets decreased. Implied volatility in fixed-income Board of Governors markets remained low. Equity prices rose further, with notable advances in indexes for emerging Penelope A. Beattie2 markets. Assistant to the Secretary, Office of the Secretary, Board of Governors The increase in the FOMC’s target range for the fed- Dana L. Burnett eral funds rate at the June meeting was reflected in Section Chief, Division of Monetary Affairs, other money market interest rates, and the effective Board of Governors federal funds rate was near the middle of the new target range over the intermeeting period except on John Kandrac quarter-end. Take-up at the System’s overnight Senior Economist, Division of Monetary Affairs, reverse repurchase agreement facility averaged about Board of Governors $200 billion. Conditions in foreign exchange swap Mark Libell3 markets were fairly stable, and demand at central Assistant Congressional Liaison, Office of Board bank dollar auctions was relatively low. The manager Members, Board of Governors also reported on small-value tests of open market operations, which are conducted routinely to pro- Gregory L. Stefani mote operational readiness. First Vice President, Federal Reserve Bank of Cleveland Market expectations for the path of the federal funds David Altig, Kartik B. Athreya, Beverly Hirtle, rate were little changed. Survey evidence suggested Glenn D. Rudebusch, Ellis W. Tallman, that most market participants now anticipated that and Christopher J. Waller the FOMC would announce at its September meeting Executive Vice Presidents, Federal Reserve Banks of a date for implementation of a change in reinvest- Atlanta, Richmond, New York, San Francisco, ment policy, although a couple of survey respondents Cleveland, and St. Louis, respectively expressed the view that the timing could be affected by developments regarding the federal debt ceiling. Daniel Aaronson, Joe Peek, and Jonathan L. Willis The survey results also suggested that, while views Vice Presidents, Federal Reserve Banks of Chicago, were somewhat dispersed, respondents typically Boston, and Kansas City, respectively expected effects on bond yields and spreads on mortgage-backed securities from the change in rein- Selection of Committee Officer vestment policy to be modest. By unanimous vote, the Committee selected Mark E. Van Der Weide to serve as general counsel, effective By unanimous vote, the Committee ratified the Open at the time he becomes the Board of Governors’ gen- Market Desk’s domestic transactions over the intereral counsel, until the selection of his successor at the meeting period. There were no intervention opera-

Minutes of Federal Open Market Committee Meetings | July 217 tions in foreign currencies for the System’s account schedules indicated that motor vehicle production during the intermeeting period. would edge down again in the third quarter, likely reflecting a somewhat elevated level of dealers’ inven- Staff Review of the Economic Situation tories and a slowing in the pace of vehicle sales last quarter. However, broader indicators of manufactur- The information reviewed for the July 25–26 meeting ing production, such as the new orders indexes from showed that labor market conditions continued to national and regional manufacturing surveys, pointed strengthen in June and that real gross domestic prod- to moderate gains in factory output over the near uct (GDP) likely expanded at a faster pace in the sec- term. ond quarter than in the first quarter. The 12-month change in overall consumer prices, as measured by Real PCE appeared to have rebounded in the second the price index for personal consumption expendi- quarter after increasing only modestly in the first tures (PCE), slowed again in May; both total con- quarter. Much of the rebound looked to have been sumer price inflation and core inflation, which concentrated in spending on energy services and excludes consumer food and energy prices, were run- energy goods, which was held down by unseasonably ning below 2 percent. Data from the consumer and warm weather earlier in the year. The components of producer price indexes for June suggested that both the nominal retail sales data used by the Bureau of total and core PCE price inflation (on a 12-month Economic Analysis to construct its estimate of PCE change basis) remained at a pace similar to that seen declined in June but rose, on net, in the second quarin the previous month. Survey-based measures of ter. Light motor vehicle sales edged down further in longer-run inflation expectations were little changed June. However, recent readings on key factors that on balance. influence consumer spending—including continued gains in employment, real disposable personal Total nonfarm payroll employment expanded solidly income, and households’ net worth—pointed to solid in June, and the average monthly pace of private- growth in total real PCE in the near term. Consumer sector job gains over the first half of the year was sentiment, as measured by the University of Michiessentially the same as last year. The unemployment gan Surveys of Consumers, remained upbeat despite rate edged up to 4.4 percent in June; the unemploy- having moved down in early July. ment rates for African Americans and for Hispanics declined slightly but remained above the unemploy- Residential investment seemed to have declined in the ment rates for Asians and for whites. In addition, the second quarter. Starts of both new single-family median length of time that unemployed African homes and multifamily units rose in June but still Americans had been out of work exceeded the com- decreased for the second quarter as a whole. The parable figures for whites and for Hispanics, a pat- issuance of building permits for both types of houstern that has prevailed for at least the past two ing was lower in the second quarter than in the first decades. The overall labor force participation rate quarter. Sales of existing homes decreased, on net, in edged up in June, and the share of workers employed May and June, and new home sales in May partly part time for economic reasons rose a bit. The rate of reversed the previous month’s decline. private-sector job openings decreased in May after having risen for a couple of months, while the quits Real private expenditures for business equipment and rate and the hiring rate both increased. The four- intellectual property appeared to have increased modweek moving average of initial claims for unemploy- erately in the second quarter after a solid gain in the ment insurance benefits remained at a very low level first quarter. Nominal shipments of nondefense capithrough mid-July. Average hourly earnings for all tal goods excluding aircraft rose again in May, and employees increased 2½ percent over the 12 months new orders of these goods continued to exceed shipending in June, about the same as over the compa- ments, pointing to further gains in shipments in the rable period a year earlier but a little slower than the near term. In addition, indicators of business sentirate of increase in late 2016. ment remained upbeat. Investment in nonresidential structures appeared to have risen at a markedly Total industrial production rose moderately, on bal- slower pace in the second quarter than in the first. ance, in May and June, as an increase in the output Firms’ nominal spending for nonresidential strucof mines and utilities more than offset a net decline tures excluding drilling and mining declined further in manufacturing production. Automakers’ assembly in May, and the number of oil and gas rigs in opera-

218 104th Annual Report | 2017 tion, an indicator of spending for structures in the Staff Review of the Financial Situation drilling and mining sector, leveled out in recent weeks after increasing steadily for the past year. Domestic financial market conditions remained generally accommodative over the intermeeting period. U.S. equity prices rose, longer-term Treasury yields Nominal outlays for defense through June pointed to increased slightly, and the dollar depreciated. The an increase in real federal government purchases in Committee’s decision to raise the target range for the the second quarter. However, real purchases by state federal funds rate to 1 to 1¼ percent at the June and local governments appeared to have declined. meeting was widely anticipated in financial markets, Payrolls for state and local governments expanded and market participants reportedly viewed FOMC during the second quarter, but nominal construction communications as largely in line with expectations. spending by these governments decreased, on net, in Financing conditions for nonfinancial businesses and April and May. households generally remained supportive of growth in spending. The nominal U.S. international trade deficit narrowed in May, with an increase in exports and a small FOMC communications over the intermeeting decline in imports. Export growth was led by conperiod were viewed as broadly in line with investors’ sumer goods, automotive products, and services. The expectations that the Committee would continue to import decline was driven by consumer goods and remove policy accommodation at a gradual pace. automotive products. The available data suggested Market participants generally interpreted the inforthat net exports were a slight drag on real GDP mation on reinvestment policy provided in June in growth in the second quarter. the Committee’s postmeeting statement and its Addendum to the Policy Normalization Principles Total U.S. consumer prices, as measured by the PCE and Plans as consistent with their expectation that a price index, increased 1½ percent over the 12 months change to reinvestment policy was likely to occur this ending in May. Core PCE price inflation was also year. Market participants also took note of the sum- 1½ percent over that same period. Over the mary in the June minutes of the Committee’s discus- 12 months ending in June, the consumer price index sion of the progress toward the Committee’s 2 per- (CPI) rose 1½ percent, while core CPI inflation was cent longer-run inflation objective and the extent to 1¾ percent. The median of inflation expectations which recent softness in price data reflected idiosynover the next 5 to 10 years from the Michigan survey cratic factors. Overnight index swap rates pointed to edged up both in June and in the preliminary reading little change in the expected path of the federal funds for July. Other measures of longer-run inflation rate on net. expectations were generally little changed, on balance, in recent months, although those from the Yields on intermediate- and longer-term nominal Desk’s Survey of Primary Dealers and Survey of Treasury securities increased slightly over the inter- Market Participants had ticked down recently. meeting period. Although yields fell following the publication of lower-than-expected CPI data, yields Incoming data suggested that economic growth conwere boosted by comments from foreign central bank tinued to firm abroad, especially among advanced officials that investors read as pointing to less accomforeign economies (AFEs). The pickup in advancedmodative monetary policies abroad than previously economy demand also contributed to relatively expected. Measures of inflation compensation based strong growth in China and emerging Asia, but on Treasury Inflation-Protected Securities ticked up growth in Latin America remained relatively weak, since the June FOMC meeting. Despite their interpartly reflecting tight monetary and fiscal policies. meeting period gains, longer-term real and nominal Despite the stronger momentum of economic activity Treasury yields remained very low by historical stanin the AFEs, headline inflation declined sharply in dards, apparently weighed down by accommodative the second quarter, largely reflecting lower retail monetary policies abroad and possibly by declines in energy prices, and core inflation stayed subdued in the long-term neutral real interest rate over recent many AFEs. Although inflation was also low in most years. emerging market economies (EMEs), it remained elevated in Mexico because of rising food inflation Broad U.S. equity price indexes rose. One-monthand earlier peso depreciation. ahead option-implied volatility of the S&P 500

Minutes of Federal Open Market Committee Meetings | July 219 index—the VIX—remained at historically low levels. net, reported that standards on most residential Spreads of yields on investment- and speculative- mortgage loan categories eased slightly. grade nonfinancial corporate bonds over comparable-maturity Treasury securities narrowed a Consumer credit continued to grow on a year-overbit on net. year basis, but the expansion of credit card and auto loan balances appeared to slow from the rapid pace Conditions in short-term funding markets were that was evident through the end of last year. In the stable over the intermeeting period. Reflecting the July SLOOS, banks reported having tightened stan- FOMC’s policy action in June, yields on a broad set dards and widened spreads for credit card and auto of money market instruments moved about 25 basis loans on net. Standards for the subprime segments of points higher. However, over much of the period, the these loan types were particularly tight compared net increase in rates on shorter-dated Treasury bills with their historical ranges. Reflecting in part continwas smaller, reportedly reflecting a reduction in ued tightening of lending standards, consumer loan Treasury bill supply. growth at banks moderated further in the second quarter; however, that weakness was partially offset Financing for large nonfinancial firms remained by more robust lending by credit unions. readily available, although debt issuance moderated. Gross issuance of corporate bonds stepped down in Since the June FOMC meeting, the broad dollar June from a strong pace in May, while issuance of depreciated 2 percent, weakening more against AFE institutional leveraged loans continued to be robust. currencies than against EME currencies. The dollar’s Commercial and industrial lending by banks depreciation was driven in part by policy communiremained quite weak in the second quarter. cations from the central banks of several AFEs that Responses from the July Senior Loan Officer Opinmarket participants viewed as less accommodative ion Survey on Bank Lending Practices (SLOOS) than expected as well as by weaker-than-expected indicated that depressed demand was largely respon- CPI data in the United States. The Bank of Canada sible, and that banks’ lending standards were little raised its policy rate in July. Sovereign yields changed in recent months. The most cited reason for increased notably in Canada, Germany, and the the lackluster loan demand was subdued investment United Kingdom. Changes in foreign equity indexes spending by nonfinancial businesses, but banks also were mixed over the intermeeting period: European reported that some borrowers had shifted to other equities edged lower, Japanese equities were little sources of external financing or to internally generchanged, and EME equities increased. European ated funds. peripheral sovereign bond spreads narrowed over the period, reflecting in part positive sentiment related to Financing conditions for commercial real estate the outcomes of the French parliamentary election, (CRE) remained accommodative, although the Greek debt negotiations, and bank resolutions in growth of CRE loans on banks’ books slowed some- Italy. EME sovereign spreads were little changed what. Respondents to the July SLOOS reported on net. tightening credit standards for these loans. SLOOS respondents also reported that standards on CRE The staff provided its latest report on potential risks loans were tight relative to their historical range, and to financial stability, indicating that it continued to that, on net, demand for CRE loans weakened in judge the vulnerabilities of the U.S financial system recent months. The pace of issuance of commercial as moderate on balance. This overall assessment mortgage-backed securities (CMBS) through the first incorporated the staff’s judgment that, since the half of the year was similar to that seen last year. April assessment, vulnerabilities associated with asset Delinquency rates on loans in CMBS pools origivaluation pressures had edged up from notable to nated before the financial crisis continued to increase. elevated, as asset prices remained high or climbed further, risk spreads narrowed, and expected and Financing conditions in the residential mortgage actual volatility remained muted in a range of finanmarket were little changed, and flows of new credit cial markets. However, the staff continued to view continued at a moderate pace. However, growth of vulnerabilities stemming from financial leverage as mortgage loans on banks’ books slowed somewhat in well as maturity and liquidity transformation as low, the first half of this year. SLOOS respondents, on

220 104th Annual Report | 2017 and vulnerabilities from leverage in the nonfinancial balanced. Downside risks included the possibilities sector appeared to remain moderate. that longer-term inflation expectations may have edged down, that the dollar could appreciate sub- Staff Economic Outlook stantially, or that the recent run of soft inflation readings could prove to be more persistent than the The U.S. economic projection prepared by the staff staff expected. These downside risks were seen as for the July FOMC meeting was broadly similar to essentially counterbalanced by the upside risk that the previous forecast. In particular, real GDP growth, inflation could increase more than expected in an which was modest in the first quarter, was still economy that was projected to continue operating expected to have stepped up to a solid pace in the sec- above its longer-run potential. ond quarter and to maintain roughly the same rate of increase in the second half of the year. In this projec- Participants’ Views on Current Conditions tion, the staff scaled back its assumptions regarding and the Economic Outlook the magnitude and duration of fiscal policy expansion in the coming years. However, the effect of this In their discussion of the economic situation and the change on the projection for real GDP over the next outlook, meeting participants agreed that informacouple of years was largely offset by lower assumed tion received over the intermeeting period indicated paths for the exchange value of the dollar and for that the labor market had continued to strengthen longer-term interest rates. Thus, as in the June projec- and that economic activity had been rising modertion, the staff projected that real GDP would expand ately so far this year. Job gains had been solid, on at a modestly faster pace than potential output in average, since the beginning of the year, and the 2017 through 2019. The unemployment rate was pro- unemployment rate had declined, on net, over the jected to decline gradually over the next couple of same period. Household spending and business fixed years and to continue running below the staff’s esti- investment had continued to expand. On a 12-month mate of its longer-run natural rate over this period. basis, both overall inflation and the measure excluding food and energy prices had declined and were The staff’s forecast for consumer price inflation, as running below 2 percent. Market-based measures of measured by the change in the PCE price index, was inflation compensation remained low; survey-based revised down slightly for 2017 in response to weaker- measures of longer-term inflation expectations were than-expected incoming data for inflation. As a little changed on balance. result, inflation this year was expected to be similar in magnitude to last year, with an upturn in the prices Participants generally saw the incoming information for food and non-energy imports offset by a slower on spending and labor market indicators as consisincrease in core PCE prices and weaker energy prices. tent, overall, with their expectations and indicated Beyond 2017, the forecast was little revised from the that their views of the outlook for economic growth previous projection, as the recent weakness in infla- and the labor market were little changed, on balance, tion was viewed as transitory. The staff continued to since the June FOMC meeting. Participants continproject that inflation would increase in the next ued to expect that, with gradual adjustments in the couple of years and that it would be close to the stance of monetary policy, economic activity would Committee’s longer-run objective in 2018 and at expand at a moderate pace and labor market condi- 2 percent in 2019. tions would strengthen somewhat further. In light of continued low recent readings on inflation, partici- The staff viewed the uncertainty around its projec- pants expected that inflation on a 12-month basis tions for real GDP growth, the unemployment rate, would remain somewhat below 2 percent in the near and inflation as similar to the average of the past term. However, most participants judged that infla- 20 years. On the one hand, many financial market tion would stabilize around the Committee’s 2 perindicators of uncertainty remained subdued, and the cent objective over the medium term. uncertainty associated with the foreign outlook still appeared to be less than late last year; on the other Data received over the intermeeting period reinforced hand, uncertainty about the direction of some eco- earlier indications that real GDP growth had turned nomic policies was judged to have remained elevated. up after having been slow in the first quarter of this The staff saw the risks to the forecasts for real GDP year. As anticipated, growth in household spending growth and the unemployment rate as balanced. The appeared to have been stronger in the second quarter risks to the projection for inflation also were seen as after its first-quarter weakness. Reports from District

Minutes of Federal Open Market Committee Meetings | July 221 contacts on consumer spending were generally posi- dence of wage pressures, although some firms were tive. However, sales of motor vehicles had softened, reportedly attempting to attract workers with a variand automakers were reportedly adjusting produc- ety of nonwage benefits. The absence of sizable wage tion and assessing whether the underlying demand pressures also seemed to be confirmed by most for automobiles had declined. Participants noted that aggregate wage measures. However, a few particithe fundamentals underpinning consumption growth, pants suggested that, in a tight labor market, measincluding increases in payrolls, remained solid. How- ured aggregate wage growth was being held down by ever, the weakness in retail sales in June offered a compositional changes in employment associated note of caution. with the hiring of less experienced workers at lower wages than those of established workers. In addition, Reports from District contacts on both manufactur- a number of participants suggested that the rate of ing and services were also generally consistent with increase in nominal wages was not low in relation to moderate growth in economic activity overall. the rate of productivity growth and the modest rate Construction-sector contacts were generally upbeat. of inflation. Reports on the energy sector indicated that activity was continuing to expand, albeit more slowly than Participants discussed the softness in inflation in previously; survey evidence suggested that oil drilling recent months. Many participants noted that much of remained profitable in some locations at current oil the recent decline in inflation had probably reflected prices. The agricultural sector remained weak, and idiosyncratic factors. Nonetheless, PCE price inflasome regions were experiencing drought conditions. tion on a 12-month basis would likely continue to be A couple of participants had received indications held down over the second half of the year by the from contacts that business investment spending in effects of those factors, and the monthly readings their Districts might strengthen. might be depressed by possible residual seasonality in measured PCE inflation. Still, most participants indi- Nevertheless, several participants noted that uncer- cated that they expected inflation to pick up over the tainty about the course of federal government policy, next couple of years from its current low level and to including in the areas of fiscal policy, trade, and stabilize around the Committee’s 2 percent objective health care, was tending to weigh down firms’ spend- over the medium term. Many participants, however, ing and hiring plans. In addition, a few participants saw some likelihood that inflation might remain suggested that the likelihood of near-term enactment below 2 percent for longer than they currently of a fiscal stimulus program had declined further or expected, and several indicated that the risks to the that the fiscal stimulus likely would be smaller than inflation outlook could be tilted to the downside. they previously expected. It was also observed that Participants agreed that a fall in longer-term inflation the budgets of some state and local governments expectations would be undesirable, but they differed were under strain, limiting growth in their expendi- in their assessments of whether inflation expectations tures. In contrast, the prospects for U.S. exports had were well anchored. One participant pointed to the been boosted by a brighter international economic stability of a number of measures of inflation expecoutlook. tations in recent months, but a few others suggested that continuing low inflation expectations may have Participants noted that labor market conditions had been a factor putting downward pressure on inflation strengthened further over the intermeeting period. or that inflation expectations might need to be bol- The unemployment rate rose slightly to 4.4 percent in stered in order to ensure their consistency with the June but remained low by historical standards. Pay- Committee’s longer-term inflation objective. roll gains picked up substantially in June. In addition, the employment-to-population ratio increased. Par- A number of participants noted that much of the ticipants observed that the unemployment rate was analysis of inflation used in policymaking rested on a likely close to or below its longer-run normal rate framework in which, for a given rate of expected and could decline further if, as expected, growth in inflation, the degree of upward pressures on prices output remained somewhat in excess of the potential and wages rose as aggregate demand for goods and growth rate. A few participants expressed concerns services and employment of resources increased about the possibility of substantially overshooting above long-run sustainable levels. A few participants full employment, with one citing past difficulties in cited evidence suggesting that this framework was achieving a soft landing. District contacts confirmed not particularly useful in forecasting inflation. Howtightness in the labor market but relayed little evi- ever, most participants thought that the framework

222 104th Annual Report | 2017 remained valid, notwithstanding the recent absence ing a lower neutral real interest rate, and, therefore, of a pickup in inflation in the face of a tightening the recent equity price increases might not provide labor market and real GDP growth in excess of their much additional impetus to aggregate spending on estimates of its potential rate. Participants discussed goods and services. possible reasons for the coexistence of low inflation and low unemployment. These included a diminished Participants also considered equity valuations in their responsiveness of prices to resource pressures, a discussion of financial stability. A couple of particilower natural rate of unemployment, the possibility pants noted that favorable macroeconomic factors that slack may be better measured by labor market provided backing for current equity valuations; in indicators other than unemployment, lags in the reac- addition, as recent equity price increases did not tion of nominal wage growth and inflation to labor seem to stem importantly from greater use of levermarket tightening, and restraints on pricing power age by investors, these increases might not pose from global developments and from innovations to appreciable risks to financial stability. Several particibusiness models spurred by advances in technology. pants observed that the banking system was well A couple of participants argued that the response of capitalized and had ample liquidity, reducing the risk inflation to resource utilization could become of financial instability. It was noted that financial stastronger if output and employment appreciably over- bility assessments were based on current capital levels shot their full employment levels, although other par- within the banking sector, and that such assessments ticipants pointed out that this hypothesized nonlinear would likely be adjusted should these measures of response had little empirical support. loss-absorbing capacity change. Participants underscored the need to monitor financial institutions for In assessing recent developments in financial market shifts in behavior—such as an erosion of lending conditions, participants referred to the continued low standards or increased reliance on unstable sources level of longer-term interest rates, in particular those of funding—that could lead to subsequent problems. on U.S. Treasury securities. The level of such yields In addition, participants judged that it was important appeared to reflect both low expected future short- to look for signs that either declining market volatilterm interest rates and depressed term premiums. ity or heavy concentration by investors in particular Asset purchases by foreign central banks and the assets might create financial imbalances. A couple of Federal Reserve’s securities holdings were also likely participants expressed concern that smaller banks contributing to currently low term premiums, could be assuming significant risks in efforts to although the exact size of these contributions was expand their CRE lending. Furthermore, a couple of uncertain. A number of participants pointed to participants saw, as possible sources of financial potential concerns about low longer-term interest instability, the pace of increase in real estate prices in rates, including the possibility that inflation expecta- the multifamily segment and the pattern of the lendtions were too low, that yields could rise abruptly, or ing and borrowing activities of certain governmentthat low yields were inducing investors to take on sponsored enterprises. excessive risk in a search for higher returns. Participants agreed that the regulatory and supervi- Several participants noted that the further increases sory tools developed since the financial crisis had in equity prices, together with continued low longer- played an important role in fostering financial stabilterm interest rates, had led to an easing of financial ity. Changes in regulation had likely helped in making conditions. However, different assessments were the banking system more resilient to major shocks, in expressed about the implications of this development promoting more prudent balance sheet management for the outlook for aggregate demand and, conse- strategies on the part of nonbank financial instituquently, appropriate monetary policy. According to tions, and in reducing the degree to which variations one view, the easing of financial conditions meant in lending to the private sector intensify cycles in outthat the economic effects of the Committee’s actions put and in asset prices. Participants agreed that it in gradually removing policy accommodation had would not be desirable for the current regulatory been largely offset by other factors influencing finan- framework to be changed in ways that allowed a cial markets, and that a tighter monetary policy than reemergence of the types of risky practices that conotherwise was warranted. According to another view, tributed to the crisis. recent rises in equity prices might be part of a broadbased adjustment of asset prices to changes in In their discussion of monetary policy, participants longer-term financial conditions, importantly includ- reaffirmed their view that a gradual approach to

Minutes of Federal Open Market Committee Meetings | July 223 removing policy accommodation was likely to remain degree of persistence of other domestic and global appropriate to promote the Committee’s objectives factors that had contributed to the easing of financial of maximum employment and 2 percent inflation. conditions and elevated asset prices, and whether and Participants commented on a number of factors that how much the neutral rate of interest would rise as would influence their ongoing assessments of the the economy continued to expand. appropriate path for the federal funds rate. Most saw the outlook for economic activity and the labor mar- Participants also discussed the appropriate time to ket as little changed from their earlier projections and implement the plan for reducing the Federal continued to anticipate that inflation would stabilize Reserve’s securities holdings that was announced in around the Committee’s 2 percent objective over the June in the Committee’s postmeeting statement and medium term. However, some participants expressed its Addendum to the Policy Normalization Principles concern about the recent decline in inflation, which and Plans. Participants generally agreed that, in light had occurred even as resource utilization had tight- of their current assessment of economic conditions ened, and noted their increased uncertainty about the and the outlook, it was appropriate to signal that outlook for inflation. They observed that the Com- implementation of the program likely would begin mittee could afford to be patient under current cir- relatively soon, absent significant adverse developcumstances in deciding when to increase the federal ments in the economy or in financial markets. Many funds rate further and argued against additional noted that the program was expected to contribute adjustments until incoming information confirmed only modestly to the reduction in policy accommodathat the recent low readings on inflation were not tion. Several reiterated that, once the program was likely to persist and that inflation was more clearly under way, further adjustments to the stance of monon a path toward the Committee’s symmetric 2 per- etary policy in response to economic developments cent objective over the medium term. In contrast, would be centered on changes in the target range for some other participants were more worried about the federal funds rate. Although several participants risks arising from a labor market that had already were prepared to announce a starting date for the reached full employment and was projected to program at the current meeting, most preferred to tighten further or from the easing in financial condi- defer that decision until an upcoming meeting while tions that had developed since the Committee’s accumulating additional information on the ecopolicy normalization process was initiated in Decem- nomic outlook and developments potentially affectber 2015. They cautioned that a delay in gradually ing financial markets. removing policy accommodation could result in an overshooting of the Committee’s inflation objective Committee Policy Action that would likely be costly to reverse, or that a delay could lead to an intensification of financial stability In their discussion of monetary policy for the period risks or to other imbalances that might prove difficult ahead, members judged that information received to unwind. One participant stressed that the risks since the Committee met in June indicated that the both to the Committee’s inflation objective and to labor market had continued to strengthen and that financial stability would require careful monitoring. economic activity had been rising moderately so far This participant expressed the view that a gradual this year. Job gains had been solid, on average, since approach to removing policy accommodation would the beginning of the year, and the unemployment likely strike the appropriate balance between promot- rate had declined. Household spending and business ing the Committee’s inflation and full employment fixed investment had continued to expand. objectives and mitigating financial stability concerns. On a 12-month basis, overall inflation and the meas- A number of participants also commented that the ure excluding food and energy prices had declined appropriate pace of normalization of the federal and were running below 2 percent. Market-based funds rate would depend on how financial conditions measures of inflation compensation remained low; evolved and on the implications of those develop- survey-based measures of longer-term inflation ments for the pace of economic activity. Among the expectations were little changed on balance. considerations mentioned were the extent of current downward pressure on longer-term yields arising With respect to the economic outlook and its implifrom the Federal Reserve’s asset holdings and how cations for monetary policy, members continued to this pressure would diminish over time as balance expect that, with gradual adjustments in the stance of sheet normalization proceeded, the strength and monetary policy, economic activity would expand at

224 104th Annual Report | 2017 a moderate pace, and labor market conditions would implementing the balance sheet normalization prostrengthen somewhat further. Inflation on a gram relatively soon, provided that the economy 12-month basis was expected to remain somewhat evolved broadly as anticipated. Several members below 2 percent in the near term but to stabilize observed that, in part because of the Committee’s around the Committee’s 2 percent objective over the various communications regarding the change, any medium term. Members saw the near-term risks to reaction in financial markets to such a change would the economic outlook as roughly balanced, but, in likely be limited. light of their concern about the recent slowing in inflation, they agreed to continue to monitor infla- At the conclusion of the discussion, the Committee tion developments closely. voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, After assessing current conditions and the outlook to execute transactions in the SOMA in accordance for economic activity, the labor market, and inflation, with the following domestic policy directive, to be members decided to maintain the target range for the released at 2:00 p.m.: federal funds rate at 1 to 1¼ percent. They noted that the stance of monetary policy remained accommoda- “Effective July 27, 2017, the Federal Open Martive, thereby supporting some further strengthening ket Committee directs the Desk to undertake in labor market conditions and a sustained return to open market operations as necessary to main- 2 percent inflation. tain the federal funds rate in a target range of 1 to 1¼ percent, including overnight reverse Members agreed that the timing and size of future repurchase operations (and reverse repurchase adjustments to the target range for the federal funds operations with maturities of more than one day rate would depend on their assessment of realized when necessary to accommodate weekend, holiand expected economic conditions relative to the day, or similar trading conventions) at an offer- Committee’s objectives of maximum employment ing rate of 1.00 percent, in amounts limited only and 2 percent inflation. They expected that economic by the value of Treasury securities held outright conditions would evolve in a manner that would war- in the System Open Market Account that are rant gradual increases in the federal funds rate, and available for such operations and by a perthat the federal funds rate was likely to remain, for counterparty limit of $30 billion per day. some time, below levels that are expected to prevail in the longer run. They also again stated that the actual The Committee directs the Desk to continue path of the federal funds rate would depend on the rolling over maturing Treasury securities at auceconomic outlook as informed by incoming data. In tion and to continue reinvesting principal payparticular, they reaffirmed that they would carefully ments on all agency debt and agency mortgagemonitor actual and expected inflation developments backed securities in agency mortgage-backed relative to the Committee’s symmetric inflation goal. securities. The Committee also directs the Desk Some members stressed the importance of under- to engage in dollar roll and coupon swap transscoring the Committee’s commitment to its inflation actions as necessary to facilitate settlement of objective. These members emphasized that, in consid- the Federal Reserve’s agency mortgage-backed ering the timing of further adjustments in the federal securities transactions.” funds rate, they would be evaluating incoming information to assess the likelihood that recent low read- The vote also encompassed approval of the statement ings on inflation were transitory and that inflation below to be released at 2:00 p.m.: was again on a trajectory consistent with achieving the Committee’s 2 percent objective over the medium “Information received since the Federal Open term. Market Committee met in June indicates that the labor market has continued to strengthen Members agreed that, at this meeting, the Committee and that economic activity has been rising modshould further clarify the time at which it expected to erately so far this year. Job gains have been solid, begin its program for reducing its securities holdings on average, since the beginning of the year, and in a gradual and predictable manner. They updated the unemployment rate has declined. Household the postmeeting statement to indicate that while the spending and business fixed investment have Committee was, for the time being, maintaining its continued to expand. On a 12-month basis, overexisting reinvestment policy, it intended to begin all inflation and the measure excluding food and

Minutes of Federal Open Market Committee Meetings | July 225 energy prices have declined and are running federal funds rate will depend on the economic below 2 percent. Market-based measures of outlook as informed by incoming data. inflation compensation remain low; surveybased measures of longer-term inflation expec- For the time being, the Committee is maintaintations are little changed, on balance. ing its existing policy of reinvesting principal payments from its holdings of agency debt and Consistent with its statutory mandate, the Com- agency mortgage-backed securities in agency mittee seeks to foster maximum employment mortgage-backed securities and of rolling over and price stability. The Committee continues to maturing Treasury securities at auction. The expect that, with gradual adjustments in the Committee expects to begin implementing its stance of monetary policy, economic activity balance sheet normalization program relatively will expand at a moderate pace, and labor mar- soon, provided that the economy evolves ket conditions will strengthen somewhat further. broadly as anticipated; this program is described Inflation on a 12-month basis is expected to in the June 2017 Addendum to the Committee’s remain somewhat below 2 percent in the near Policy Normalization Principles and Plans.” term but to stabilize around the Committee’s 2 percent objective over the medium term. Near- Voting for this action: Janet L. Yellen, William C. term risks to the economic outlook appear Dudley, Lael Brainard, Charles L. Evans, Stanley roughly balanced, but the Committee is moni- Fischer, Patrick Harker, Robert S. Kaplan, Neel toring inflation developments closely. Kashkari, and Jerome H. Powell. In view of realized and expected labor market Voting against this action: None. conditions and inflation, the Committee decided to maintain the target range for the federal funds Consistent with the Committee’s decision to leave the rate at 1 to 1¼ percent. The stance of monetary target range for the federal funds rate unchanged, the policy remains accommodative, thereby support- Board of Governors voted unanimously to leave the ing some further strengthening in labor market interest rates on required and excess reserve balances conditions and a sustained return to 2 percent unchanged at 1¼ percent and voted unanimously to inflation. approve establishment of the primary credit rate (discount rate) at the existing level of 1¾ percent.4 In determining the timing and size of future adjustments to the target range for the federal It was agreed that the next meeting of the Committee funds rate, the Committee will assess realized would be held on Tuesday–Wednesday, Septemand expected economic conditions relative to its ber 19–20, 2017. The meeting adjourned at objectives of maximum employment and 2 per- 10:00 a.m. on July 26, 2017. cent inflation. This assessment will take into account a wide range of information, including Notation Vote measures of labor market conditions, indicators of inflation pressures and inflation expectations, By notation vote completed on July 3, 2017, the and readings on financial and international Committee unanimously approved the minutes of the developments. The Committee will carefully Committee meeting held on June 13–14, 2017. monitor actual and expected inflation developments relative to its symmetric inflation goal. Brian F. Madigan The Committee expects that economic condi- Secretary tions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some 4 The second vote of the Board also encompassed approval of the time, below levels that are expected to prevail in establishment of the interest rates for secondary and seasonal the longer run. However, the actual path of the credit under the existing formulas for computing such rates.

226 104th Annual Report | 2017 Meeting Held Steven B. Kamin Economist on September 19–20, 2017 Thomas Laubach A joint meeting of the Federal Open Market Com- Economist mittee and the Board of Governors was held in the David W. Wilcox offices of the Board of Governors of the Federal Economist Reserve System in Washington, D.C., on Tuesday, September 19, 2017, at 1:00 p.m. and continued on James A. Clouse, Thomas A. Connors, Wednesday, September 20, 2017, at 9:00 a.m.1 Evan F. Koenig, William Wascher, Beth Anne Wilson, and Mark L. J. Wright 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 Ann E. Misback Secretary, Office of the Secretary, Charles L. Evans Board of Governors Stanley Fischer Matthew J. Eichner2 Patrick Harker Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Robert S. Kaplan Michael S. Gibson Neel Kashkari Director, Division of Supervision and Regulation, Jerome H. Powell Board of Governors Raphael W. Bostic, Loretta J. Mester, Andreas Lehnert Mark L. Mullinix, and John C. Williams Director, Division of Financial Stability, Alternate Members of the Federal Open Market Board of Governors Committee Michael T. Kiley James Bullard, Esther L. George, and Eric Rosengren Deputy Director, Division of Financial Stability, Presidents of the Federal Reserve Banks of St. Louis, Board of Governors Kansas City, and Boston, respectively Stephen A. Meyer Brian F. Madigan Deputy Director, Division of Monetary Affairs, Secretary Board of Governors Matthew M. Luecke Trevor A. Reeve Deputy Secretary Senior Special Adviser to the Chair, Office of Board Members, Board of Governors David W. Skidmore Assistant Secretary David Bowman, Joseph W. Gruber, David Reifschneider, and John M. Roberts Michelle A. Smith Special Advisers to the Board, Office of Board Assistant Secretary Members, Board of Governors Mark E. Van Der Weide Linda Robertson General Counsel Assistant to the Board, Office of Board Members, Board of Governors Michael Held Deputy General Counsel 2 Attended the discussions of the proposed changes to Rules 1 The Federal Open Market Committee is referenced as the Regarding Availability of Information and developments in “FOMC” and the “Committee” in these minutes. financial markets and open market operations.

Minutes of Federal Open Market Committee Meetings | September 227 David E. Lebow and Michael G. Palumbo David C. Wheelock and Jonathan L. Willis Senior Associate Directors, Division of Research and Vice Presidents, Federal Reserve Banks of St. Louis Statistics, Board of Governors and Kansas City, respectively Antulio N. Bomfim, Edward Nelson, Stefano M. Eusepi and Joyce K. Zickler Assistant Vice President, Federal Reserve Bank of Senior Advisers, Division of Monetary Affairs, New York Board of Governors Edward S. Prescott Jane E. Ihrig Senior Professional Economist, Federal Reserve Bank Associate Director, Division of Monetary Affairs, of Cleveland Board of Governors Proposed Changes to Rules Regarding John J. Stevens and Stacey Tevlin Availability of Information Associate Directors, Division of Research and Statistics, Board of Governors The Committee unanimously voted to further amend Steven A. Sharpe its Rules Regarding Availability of Information Deputy Associate Director, Division of Research and (Rules) in order to incorporate input received during Statistics, Board of Governors the public commenting process that followed the December 2016 publication in the Federal Register of Min Wei an earlier version of the Rules.4 The amendment Deputy Associate Director, Division of Monetary approved at this meeting indicated that if, in the Affairs, Board of Governors course of processing a Freedom of Information Act Penelope A. Beattie3 request, “an adverse determination is upheld on Assistant to the Secretary, Office of the Secretary, appeal, in whole or in part,” the requester will be Board of Governors informed “of the availability of dispute resolution services from the Office of Government Information Michiel De Pooter Services as a nonexclusive alternative to litigation.” Section Chief, Division of Monetary Affairs, This notice will be provided in addition to the ongo- Board of Governors ing practice of informing the requester of the right to David H. Small seek judicial review. Project Manager, Division of Monetary Affairs, Board of Governors Secretary’s note: The amended Rules adopted at this meeting were published in the Federal Regis- Martin Bodenstein ter as a final rule on October 2, 2017, and will go Principal Economist, Division of Monetary Affairs, into effect 30 days following publication. Board of Governors Developments in Financial Markets and Randall A. Williams Open Market Operations Information Manager, Division of Monetary Affairs, Board of Governors The manager of the System Open Market Account Mark A. Gould (SOMA) reported on developments in domestic and First Vice President, Federal Reserve Bank of foreign financial markets over the period since the San Francisco July FOMC meeting. Yields on longer-term Treasury securities had fallen modestly, the foreign exchange David Altig, Kartik B. Athreya, value of the dollar had declined, and broad equity Glenn D. Rudebusch, and Geoffrey Tootell price indexes had increased. Survey responses sug- Executive Vice Presidents, Federal Reserve Banks of gested that the vast majority of market participants Atlanta, Richmond, San Francisco, and Boston, expected the FOMC to announce a change in SOMA respectively reinvestment policy at this meeting and that nearly all Spencer Krane and Keith Sill market participants anticipated that the FOMC Senior Vice Presidents, Federal Reserve Banks of Chicago and Philadelphia, respectively 4 In compliance with the FOIA Improvement Act of 2016, the earlier version of the Rules was published in the Federal Regis- 3 Attended Tuesday session only. ter as an interim final rule on December 27, 2016.

228 104th Annual Report | 2017 would also leave the target range for the federal funds restrain national economic activity only in the near rate unchanged. term.5 Total consumer price inflation, as measured by the 12-month change in the price index for personal The deputy manager followed with a report on devel- consumption expenditures (PCE), continued to run opments in money markets and open market opera- below 2 percent in July and was lower than at the tions over the intermeeting period. The effective fed- start of the year. Survey-based measures of longereral funds rate remained near the center of the run inflation expectations were little changed on FOMC’s target range except on month-ends. Take-up balance. at the System’s overnight reverse repurchase agreement facility averaged somewhat less than in the pre- Total nonfarm payroll employment rose solidly in vious period. The deputy manager provided updates July and August, with strong gains in private-sector on developments with respect to reference interest jobs and declines in government employment. The rates and on small-value tests of open market opera- unemployment rate dipped to 4.3 percent in July and tions, which are conducted routinely to promote edged back up to 4.4 percent in August. The unemoperational readiness. The deputy manager also sum- ployment rates for African Americans, for Hispanics, marized the results of the staff’s annual review of and for whites were lower, on average, in recent foreign reserves investment and its recommendations months than around the start of the year, whereas to the Foreign Currency Subcommittee for key the unemployment rate for Asians was a little higher. parameters for foreign reserves investment for the The overall labor force participation rate edged up in forthcoming year, and the deputy manager noted that July and was unchanged in August, and the share of the Subcommittee would welcome any input from the workers employed part time for economic reasons Committee regarding those parameters. was little changed on net. The rate of private-sector job openings increased in June and July, the hiring Secretary’s note: On September 27, 2017, the rate ticked up, and the quits rate edged down. Initial Foreign Currency Subcommittee provided to the claims for unemployment insurance benefits jumped Federal Reserve Bank selected to conduct open in early September from a very low level, and the market operations instructions that incorpo- Department of Labor noted that Hurricane Harvey rated the staff recommendations for key param- had an effect on claims. Changes in measures of eters for foreign reserves investment. labor compensation were mixed. Compensation per hour rose just 1¼ percent over the four quarters end- Finally, the manager reviewed details of the opera- ing in the second quarter of 2017 (partly reflecting a tional approach that the Open Market Desk planned significant downward revision to compensation per to follow if the Committee decided at this meeting to hour in the second half of 2016), the employment initiate the proposal for SOMA reinvestment policy cost index for private workers increased 2½ percent described in the Committee’s June 2017 Addendum over the 12 months ending in June, and average to the Policy Normalization Principles and Plans. hourly earnings for all employees rose 2½ percent over the 12 months ending in August. By unanimous vote, the Committee ratified the Desk’s domestic transactions over the intermeeting Total industrial production (IP) increased for a sixth period. There were no intervention operations in for- consecutive month in July but then declined sharply eign currencies for the System’s account during the in August. The decrease in August largely reflected intermeeting period. the temporary effects of Hurricane Harvey on drilling, servicing, and extraction activity for oil and Staff Review of the Economic Situation natural gas and on output in several manufacturing industries that are concentrated in the Gulf Coast The information reviewed for the September 19–20 region, including petroleum refining, organic chemimeeting showed that labor market conditions contin- cals, and plastics materials and resins. Production disued to strengthen in July and August and that real ruptions from Hurricane Harvey continued into Sepgross domestic product (GDP) appeared to be rising tember, and the effects of Hurricane Irma were at a moderate pace in the third quarter before the anticipated to hold down IP in that month as well. landfall of Hurricanes Harvey and Irma. Only limited data pertaining to the economic effects of these 5 The background materials prepared by the staff for this meeting hurricanes were available at the time of the meeting, were completed before the full effects of Hurricane Maria were but it appeared likely that the negative effects would evident.

Minutes of Federal Open Market Committee Meetings | September 229 Even so, anecdotal reports from the hurricane- number of oil and gas rigs in operation, an indicator affected regions, as well as daily data on capacity out- of spending for structures in the drilling and mining ages in selected Gulf Coast industries, indicated that sector, leveled out in the past couple of months after production had already started to recover. Mean- increasing steadily for the past year. while, automakers’ assembly schedules suggested that motor vehicle production would move up, on bal- Total real government purchases looked to be ance, over the remainder of the year despite a some- roughly flat, on balance, in the third quarter. Nomiwhat elevated level of dealers’ inventories and a slow- nal outlays for defense in July and August pointed to ing in the pace of vehicle sales in recent months. a small increase in real federal government purchases Broader indicators of manufacturing production, in the third quarter. However, payrolls for state and such as the new orders indexes from national and local governments declined in July and August, and regional manufacturing surveys, continued to point nominal construction spending by these governments to moderate gains in factory output over the near decreased in July. term. The nominal U.S. international trade deficit nar- Several pieces of information suggested that real PCE rowed substantially in June and was about was likely increasing at a slower rate in the third unchanged in July. After increasing in June, exports quarter than in the second. First, the components of retraced a bit of this gain in July, with lower exports the nominal retail sales data used by the Bureau of of consumer goods, automotive products, and ser- Economic Analysis to construct its estimate of PCE vices. Imports decreased a little in both months. The declined in August and were revised down in June available data suggested that net exports contributed and July. Second, the pace of light motor vehicle positively to real GDP growth in the third quarter. sales moved lower, on net, in July and August. Third, Hurricanes Harvey and Irma appeared likely to tem- Total U.S. consumer prices, as measured by the PCE porarily reduce consumer spending. However, recent price index, increased nearly 1½ percent over the readings on key factors that influence consumer 12 months ending in July. Core PCE price inflation, spending—including continued gains in employment, which excludes consumer food and energy prices, also real disposable personal income, and households’ net was about 1½ percent over that same period. Over worth—remained supportive of solid growth in real the 12 months ending in August, the consumer price PCE. Consumer sentiment, as measured by the Uni- index (CPI) increased almost 2 percent, while core versity of Michigan Surveys of Consumers, was CPI inflation was 1¾ percent. Retail gasoline prices upbeat through early September. moved up sharply following the landfall of Hurricane Harvey and appeared likely to put temporary upward Recent information on housing activity suggested pressure on the 12-month change in total PCE prices. that real residential investment spending was decreas- The median of inflation expectations over the next ing in the third quarter after declining in the second 5 to 10 years from the Michigan survey edged back quarter. Starts for new single-family homes edged up in the preliminary reading for September, and the down, on net, in July and August, and starts for mul- median expectation for PCE price inflation over the tifamily units moved lower in both months. Building next 10 years from the Survey of Professional Forepermit issuance for new single-family homes—which casters edged down. The medians of longer-run inflatends to be a good indicator of the underlying trend tion expectations from the Desk’s Survey of Primary in construction—declined in July and August. Sales Dealers and Survey of Market Participants were relaof both new and existing homes decreased in July. tively little changed in September. Real private expenditures for business equipment and Foreign economic activity continued to expand at a intellectual property appeared to be increasing at a solid pace. Economic growth picked up in the solid rate in the third quarter. Nominal orders and advanced foreign economies (AFEs) in the second shipments of nondefense capital goods excluding air- quarter, especially in Canada, and incoming indicacraft rose over the two months ending in July, and tors suggested that growth slowed in the third quarter readings on business sentiment remained upbeat. In but remained firm. Recent indicators from the emergcontrast, investment in nonresidential structures was ing market economies (EMEs) also pointed to conpoised to decline in the third quarter. Firms’ nominal tinued strong economic growth, notwithstanding spending for nonresidential structures excluding drill- some slowing in the rate of expansion of activity in ing and mining fell sharply in June and July, and the China. Headline inflation in most AFEs remained

230 104th Annual Report | 2017 subdued, held down in part by falling retail energy FOMC meeting, reflecting the response of investors prices, but data through August suggested that the to the postmeeting statement, and then dropped furdrag from energy prices was diminishing. Inflation ther amid rising geopolitical tensions related to also remained low in most EMEs, although food North Korea and market perceptions of reduced prices continued to put upward pressure on inflation prospects for enactment of a fiscal stimulus program. in Mexico. Economic data releases appeared to have little net effect on Treasury yields over most of the period. A Staff Review of the Financial Situation staff term structure model attributed about half of the decline in the 10-year Treasury yield to a decrease Domestic financial market conditions remained gen- in the average expected future short-term rate and the erally accommodative over the intermeeting period. remaining half to a lower term premium. Measures U.S. equity prices increased, longer-term Treasury of inflation compensation over the next 5 years rose yields declined, and the dollar depreciated. Investors’ modestly, on net, partly in response to the release of interpretations of FOMC communications, market higher-than-expected CPI data for August, while perceptions of a reduced likelihood of U.S. fiscal inflation compensation 5 to 10 years ahead was little policy changes, and heightened geopolitical risks all changed. reportedly placed downward pressure on longer-term yields. At the same time, financing conditions for Broad U.S. equity price indexes increased over the households and nonfinancial businesses continued to intermeeting period. One-month-ahead optionprovide support for growth in spending and implied volatility of the S&P 500 index—the VIX— investment. remained at historically low levels despite brief spikes associated with increased investor concerns about FOMC communications over the intermeeting geopolitical tensions and political uncertainties. Over period reportedly were interpreted as indicating a the intermeeting period, spreads of yields on somewhat slower pace of increases in the target range investment- and speculative-grade nonfinancial corfor the federal funds rate than previously expected. porate bonds over those on comparable-maturity Market participants were attentive to the Commit- Treasury securities widened a bit. tee’s assessment of recent below-expectations inflation data and the acknowledgment in the July Short-dated Treasury bill yields were elevated for a FOMC minutes that inflation might continue to run time, reflecting concerns about potential delays in below the Committee’s 2 percent objective for longer raising the federal debt limit. However, following than anticipated. Investors also took note of the news of an agreement to extend the debt ceiling by Committee’s guidance in the July FOMC statement three months, rates on Treasury bills maturing in that it expected to begin implementing its balance October retraced their entire increase from early in sheet normalization program relatively soon. By the the intermeeting period. Conditions in other domesend of the intermeeting period, market participants tic short-term funding markets were stable. Yields on appeared nearly certain that the Committee would a broad set of money market instruments remained announce the implementation of its balance sheet in the ranges observed since the FOMC increased the normalization plan at the September meeting. The target range for the federal funds rate in June. Daily probability of an increase in the target range for the take-up at the System’s overnight reverse repurchase federal funds rate occurring at either the September agreement facility ran somewhat lower than in the or the November meeting, as implied by quotes on previous intermeeting period. federal funds futures contracts, fell to essentially zero, while the probability of a 25 basis point increase by Since the July FOMC meeting, asset price movethe end of the year stood near 50 percent and was ments in global financial markets were driven by geolittle changed since the July meeting. Quotes on over- political tensions in the Korean peninsula, improving night index swaps (OIS) pointed to a slight flattening economic prospects abroad, communications from of the expected path of the federal funds rate AFE central banks, and changes in prospects for fisthrough 2020, with a staff model attributing most of cal policy legislation in the United States. The broad the declines in OIS rates to lower expected rates. index of the foreign exchange value of the dollar decreased 1½ percent; the decline was widespread, Yields on intermediate- and longer-term nominal led by the strengthening of the euro and the Chinese Treasury securities decreased modestly over the inter- renminbi. The Canadian dollar appreciated following meeting period. Treasury yields fell following the July a rate hike by the Bank of Canada at its September

Minutes of Federal Open Market Committee Meetings | September 231 meeting that came sooner than market participants year earlier. Spreads on CMBS over Treasury securiexpected. Similarly, sterling appreciated after the ties narrowed a little over the intermeeting period Bank of England signaled a potential rate hike in the and were near the bottom of their ranges of the past coming months. Against this backdrop, longer-term several years. Delinquency rates on loans in CMBS yields rose slightly in Canada and the United King- pools declined slightly but remained elevated for dom. In contrast, longer-term German yields loans that were originated before the financial crisis. declined moderately, despite better-than-expected economic data releases for the euro area, as market Interest rates on 30-year fixed-rate residential mortexpectations shifted toward a more gradual with- gages moved lower over the intermeeting period, in drawal of stimulus by the European Central Bank line with comparable-maturity Treasury yields. (ECB) even though the ECB kept its policy stance Growth in mortgage lending for home purchases unchanged. picked up in July and August compared with its pace over the second quarter. However, credit conditions Despite generally better-than-expected earnings remained tight for borrowers with low credit scores releases, AFE equity prices were mixed over the or hard-to-document incomes. period, with bank stocks underperforming broader indexes. Outside South Korea, most emerging market Consumer credit continued to be readily available for asset prices were little affected by the recent escala- most borrowers, and overall loan balances rose at a tion of geopolitical concerns. Net flows to emerging moderate pace in the second quarter, reflecting furmarket mutual funds briefly turned negative in early ther expansions in credit card, auto, and student loan August, but they quickly returned to near the high balances. Issuance of asset-backed securities levels seen since early this year. Yield spreads on remained robust over the year to date and outpaced EME sovereign bonds edged down. that of the previous year, providing support for consumer lending. However, standards and terms on Financing conditions for U.S. nonfinancial busi- auto and credit card loans were tighter for subprime nesses continued to be accommodative. Issuance of borrowers, likely in response to rising delinquencies corporate debt and equity was strong in July and on such loans. Subprime auto loan balances have August. Gross issuance of institutional leveraged declined so far this year, partly reflecting the tighter loans continued its robust pace in June but slowed lending standards, and the average credit score of all notably in July, as is typical during the summer. borrowers who obtained an auto loan in the second Meanwhile, the growth of commercial and industrial quarter remained near the upper end of its range of (C&I) loans on banks’ books ticked up in July and the past few years. August compared with its pace over the first half of the year; however, C&I loan growth from the fourth Staff Economic Outlook quarter of last year through August remained significantly lower than over recent years. The U.S. economic projection prepared by the staff for the September FOMC meeting was broadly simi- Gross issuance of municipal bonds was strong in lar to the previous forecast. Real GDP was expected August, and spreads of yields on municipal bonds to rise at a solid pace, on net, in the second half of over those on comparable-maturity Treasury securi- the year, and by a little more than previously proties increased a bit over the intermeeting period. The jected, reflecting data on spending that were stronger credit quality of state and local governments than expected on balance. The short-term disruptions improved overall, as the number of ratings upgrades to spending and production associated with Hurrinotably outpaced the number of downgrades in canes Harvey and Irma were expected to reduce real August. GDP growth in the third quarter and to boost it in the fourth quarter as production returned to its pre- The growth of commercial real estate (CRE) loans on hurricane path and as a portion of the lost spending banks’ books continued to moderate in July and was made up. The hurricanes were also expected to August, reflecting a slowdown in lending both for depress payroll employment in September, with a nonfarm nonresidential units and for construction reversal over the next few months. Beyond 2017, the and land development; nonetheless, CRE financing forecast for real GDP growth was little revised. In appeared to remain broadly available. Issuance of particular, the staff continued to project that real commercial mortgage-backed securities (CMBS) so GDP would expand at a modestly faster pace than far this year was similar to that in the same period a potential output through 2019. The unemployment

232 104th Annual Report | 2017 rate was projected to decline gradually over the next most likely outcomes for real output growth, the couple of years and to continue running below the unemployment rate, and inflation for each year from staff’s estimate of its longer-run natural rate over this 2017 through 2020 and over the longer run, based on period. Because of continued subdued inflation read- their individual assessments of the appropriate path ings and, given real GDP growth, a larger-than- for the federal funds rate.6 The longer-run projections expected decline in the unemployment rate over represented each participant’s assessment of the rate much of the past year, the staff revised down slightly to which each variable would be expected to conits estimate of the longer-run natural rate of unem- verge, over time, under appropriate monetary policy ployment in this projection. and in the absence of further shocks to the economy. These projections and policy assessments are The staff’s forecast for consumer price inflation, as described in the Summary of Economic Projections, measured by the change in the PCE price index, was which is an addendum to these minutes. revised up somewhat for 2017 in response to hurricane-related effects on gasoline prices. The near- In their discussion of the economic situation and the term forecast for core PCE price inflation was essen- outlook, meeting participants agreed that informatially unrevised. Total PCE price inflation this year tion received over the intermeeting period indicated was expected to run at the same pace as last year, that the labor market had continued to strengthen with a slower increase in core PCE prices offset by a and that economic activity had been rising moderslightly larger increase in energy prices and an upturn ately so far this year. Job gains had remained solid in in the prices for food and non-energy imports. recent months, and the unemployment rate had Beyond 2017, the inflation forecast was little revised stayed low. Household spending had been expanding from the previous projection. The staff continued to at a moderate rate, and growth in business fixed project that inflation would edge higher in the next investment had picked up in recent quarters. On a couple of years and that it would reach the Commit- 12-month basis, overall inflation and the measure tee’s longer-run objective in 2019. excluding food and energy prices had declined this year and were running below 2 percent. Market- The staff viewed the uncertainty around its projec- based measures of inflation compensation remained tions for real GDP growth, the unemployment rate, low; survey-based measures of longer-term inflation and inflation as similar to the average of the past expectations were little changed on balance. 20 years. On the one hand, many financial market indicators of uncertainty remained subdued, and the Participants acknowledged that Hurricanes Harvey, uncertainty associated with the foreign outlook still Irma, and Maria would affect economic activity in appeared to be less than last year; on the other hand, the near term. They expected growth of real GDP in uncertainty about the direction of some economic the third quarter to be held down by the severe dispolicies was judged to have remained elevated. The ruptions caused by the storms but to rebound beginstaff saw the risks to the forecasts for real GDP ning in the fourth quarter as rebuilding got under growth and the unemployment rate as balanced. The way and economic activity in the affected areas risks to the projection for inflation were also seen as resumed. Similarly, employment would be temporarbalanced. Downside risks included the possibilities ily depressed by the hurricanes, but, abstracting from that longer-term inflation expectations may have those effects, employment gains were anticipated to edged down or that the recent run of soft inflation remain solid, and the unemployment rate was readings could prove to be more persistent than the expected to decline a bit further by year-end. staff expected. These downside risks were seen as essentially counterbalanced by the upside risk that Based on the estimated effects of past major hurriinflation could increase more than expected in an canes that made landfall in the United States, particieconomy that was projected to continue operating pants judged that the recent storms were unlikely to above its longer-run potential. materially alter the course of the national economy Participants’ Views on Current Conditions 6 Four members of the Board of Governors, the same number as in June 2017, were in office at the time of the September 2017 and the Economic Outlook meeting. The office of the president of the Federal Reserve Bank of Richmond was vacant at the time of both FOMC In conjunction with this FOMC meeting, members meetings; First Vice President Mark L. Mullinix submitted economic projections. One participant did not submit longer-run of the Board of Governors and Federal Reserve projections for real output growth, the unemployment rate, or Bank presidents submitted their projections of the the federal funds rate.

Minutes of Federal Open Market Committee Meetings | September 233 over the medium term. Moreover, they generally to substitute capital for labor or to invest in informaviewed the information on spending, production, and tion technology. In contrast, reports on the strength labor market activity that became available over the of nonresidential construction were mixed. And in intermeeting period, which was mostly not affected energy-producing regions, the count of drilling rigs in by the hurricanes, as suggesting little change in the operation had begun to level off before the onset of outlook for economic growth and the labor market Hurricane Harvey. over the medium term. Consequently, they continued to expect that, with gradual adjustments in the stance Participants generally indicated that, before the of monetary policy, economic activity would expand recent hurricanes, business activity in their Districts at a moderate pace and labor market conditions was expanding at a moderate pace. Although induswould strengthen somewhat further. In the aftermath trial production in areas affected by the storms was of the hurricanes, higher prices for gasoline and some estimated to have declined in August, a number of other items were likely to boost inflation temporarily. participants from other areas reported further solid Apart from that effect, inflation on a 12-month basis gains in manufacturing activity in their Districts. Parwas expected to remain somewhat below 2 percent in ticipants from the regions affected by the hurricanes the near term but to stabilize around the Commit- reported that businesses in their Districts anticipated tee’s 2 percent objective over the medium term. Near- that the disruptions to business and sales would be term risks to the economic outlook appeared roughly relatively short lived. In the energy sector, Hurricane balanced, but participants agreed to continue to Harvey had shut down drilling and refining activity, monitor inflation developments closely. but by the time of the meeting, these operations had substantially resumed. And many business contacts Consumer spending had been expanding at a moder- in the affected areas reported that they expected their ate rate through the summer, and reports on retail operations to return to normal before the end of the activity from participants’ contacts were generally year. Farming in some parts of the country had been positive. Participants expected some fluctuations in affected by drought, and income in the agricultural consumer spending to result from the hurricanes, but sector was under downward pressure because of low they generally judged that consumption growth crop prices. would continue to be supported by still-solid fundamental determinants of household spending, includ- Overall, the available information suggested that, ing the income generated by the ongoing strength in although the storms would likely affect the quarterly the labor market, improved household balance sheets, pattern of changes in real GDP at least through the and high levels of consumer confidence. Sales of second half of the year, economic activity would conautos and light trucks had softened over the summer, tinue to expand at a moderate rate over the medium leading producers to slow production to address a term, supported by further gains in consumer spendbuildup of inventories, but a couple of participants ing and the pickup in business investment. In addinoted that automakers expected to see a temporary tion, improving global economic conditions and the increase in demand as households and businesses depreciation of the dollar in recent months were replaced vehicles damaged during the storms. anticipated to result in a modest positive contribution to domestic economic activity from net exports. Incoming data on business spending showed that In contrast, most participants had not assumed equipment investment had picked up during 2017 enactment of a fiscal stimulus package in their ecoafter having been weak during much of 2016. Ship- nomic projections or had marked down the expected ments and orders of nondefense capital goods had magnitude of any stimulus. been on a steady uptrend over the first eight months of 2017. A number of participants reported that their Labor market conditions strengthened further in business contacts appeared to have become more recent months. The increases in nonfarm payroll confident about the economic outlook, and it was employment in July and August remained well above noted that the National Federation of Independent the pace likely to be sustainable in the longer run. Business reported that greater optimism among small Although the unemployment rate was little changed businesses had contributed to a sharp increase in the from March to August, it remained below participroportion of small firms planning increases in their pants’ estimates of its longer-run normal level. Other capital expenditures. A couple of participants com- indicators suggested that labor market conditions mented that competitive pressures and tight labor had continued to tighten over recent quarters. The markets were increasing the incentives for businesses labor force participation rate had been moving side-

234 104th Annual Report | 2017 ways despite factors, such as demographic changes, or an economy operating above its potential were that were contributing to a declining longer-run likely to show through to higher inflation over the trend. In addition, the number of individuals work- medium term. In addition, many judged that at least ing part time for economic reasons, as a share of part of the softening in inflation this year was the household employment, had moved lower. The job result of idiosyncratic or one-time factors, and, thus, openings rate, the quits rate, households’ assessments their effects were likely to fade over time. However, of job availability, and the labor market conditions other developments, such as the effects of earlier index prepared by the Federal Reserve Bank of Kan- changes to government health-care programs that sas City had returned to pre-recession levels. How- had been holding down health-care costs, might conever, some participants still saw room for further tinue to do so for some time. Some participants disincreases in labor utilization, with a couple of them cussed the possibility that secular trends, such as the noting that the employment-to-population ratio and influence of technological innovations on competithe participation rate for prime-age workers had not tion and business pricing, also might have been mutfully recovered to pre-recession levels. ing inflationary pressures and could be intensifying. It was noted that other advanced economies were Against the backdrop of the continued strengthening also experiencing low inflation, which might suggest in labor market conditions, participants discussed that common global factors could be contributing to recent wage developments. Increases in most aggre- persistence of below-target inflation in the United gate measures of hourly wages and labor compensa- States and abroad. Several participants commented tion remained subdued, and several participants on the importance of longer-run inflation expectacommented that the absence of broad-based upward tions to the outlook for a return of inflation to 2 perwage pressures suggested that the sustainable rate of cent. A number of indicators of inflation expectaunemployment might be lower than they currently tions, including survey statistics and estimates estimated. Other factors that may have been contrib- derived from financial market data, were generally uting to the subdued pace of wage increases reported viewed as indicating that longer-run inflation expecin the national data included low productivity tations remained reasonably stable, although a few growth, changes in the composition of the workforce, participants saw some of these measures as low or and competitive pressure on employers to hold down slipping. their costs. However, reports from business contacts in several Districts indicated that employers in labor Participants raised a number of important considermarkets in which demand was high or in which work- ations about the implications of persistently low ers in some occupations were in short supply were inflation for the path of the federal funds rate over raising wages noticeably to compete for workers and the medium run. Several expressed concern that the limit turnover. It was noted that the expected increase persistence of low rates of inflation might imply that in demand for skilled construction workers for recon- the underlying trend was running below 2 percent, struction in hurricane-affected areas would likely risking a decline in inflation expectations. If so, the exacerbate existing shortages. Most participants appropriate policy path should take into account the expected wage increases to pick up over time as the need to bolster inflation expectations in order to labor market strengthened further; a couple of par- ensure that inflation returned to 2 percent and to preticipants cautioned that a broader acceleration in vent erosion in the credibility of the Committee’s wages may already have begun, consistent with objective. It was also noted that the persistence of already-tight labor market conditions. low inflation might result in the federal funds rate staying uncomfortably close to its effective lower Based on the available data, PCE price inflation over bound. However, a few others pointed out the need the 12 months ending in August was estimated to be to consider the lags in the response of inflation to about 1½ percent, remaining below the Committee’s tightening resource utilization and, thus, increasing longer-run objective. In their review of the recent upside risks to inflation as the labor market tightened data and the outlook for inflation, participants dis- further. cussed a number of factors that could be contributing to the low readings on consumer prices this year On balance, participants continued to forecast that and weighed the extent to which those factors might PCE price inflation would stabilize around the Combe transitory or could prove more persistent. Many mittee’s 2 percent objective over the medium term. participants continued to believe that the cyclical However, several noted that in preparing their projecpressures associated with a tightening labor market tions for this meeting, they had taken on board the

Minutes of Federal Open Market Committee Meetings | September 235 likelihood that convergence to the Committee’s sym- estimated to be quite low, all participants thought it metric 2 percent inflation objective might take some- would be appropriate for the Committee to maintain what longer than they anticipated earlier. Partici- the current target range for the federal funds rate at pants generally agreed it would be important to this meeting, and nearly all supported again indicatmonitor inflation developments closely. Several of ing in the postmeeting statement that a gradual them noted that interpreting the next few inflation approach to increasing the federal funds rate will reports would likely be complicated by the temporary likely be warranted. Nevertheless, many participants run-up in energy costs and in the prices of other expressed concern that the low inflation readings this items affected by storm-related disruptions and year might reflect not only transitory factors, but also rebuilding. the influence of developments that could prove more persistent, and it was noted that some patience in In financial markets, longer-term interest rates and removing policy accommodation while assessing the foreign exchange value of the dollar declined over trends in inflation was warranted. A few of these parthe intermeeting period, and equity prices increased. ticipants thought that no further increases in the fed- It was noted that U.S. financial conditions recently eral funds rate were called for in the near term or that appeared to be responding as much or more to eco- the upward trajectory of the federal funds rate might nomic and financial news from abroad as to domestic appropriately be quite shallow. Some other particidevelopments. Many participants viewed accommo- pants, however, were more worried about upside risks dative financial conditions, which had prevailed even to inflation arising from a labor market that had as the Committee raised the federal funds rate, as already reached full employment and was projected likely to provide support for the economic expansion. to tighten further. Their concerns were heightened by However, a couple of those participants expressed the apparent easing in financial conditions that had concern that the persistence of highly accommoda- developed since the Committee’s policy normalizative financial conditions could, over time, pose risks tion process was initiated in December 2015. These to financial stability. In contrast, a few participants participants cautioned that an unduly slow pace in cautioned that these financial market conditions removing policy accommodation could result in an might not deliver much impetus to aggregate demand overshoot of the Committee’s inflation objective in if they instead reflected a more pessimistic assess- the medium term that would likely be costly to ment of prospects for longer-run economic growth reverse or could lead to an intensification of financial and, accordingly, a view that the longer-run neutral stability risks or to other imbalances that might prove rate of interest in the United States would difficult to unwind. remain low. Consistent with the expectation that a gradual rise in In their discussion of monetary policy, all partici- the federal funds rate would be appropriate, many pants agreed that the economy had evolved broadly participants thought that another increase in the taras they had anticipated at the time of the June meet- get range later this year was likely to be warranted if ing and that the incoming data had not materially the medium-term outlook remained broadly altered the medium-term economic outlook. Consis- unchanged. Several others noted that, in light of the tent with those assessments, participants saw it as uncertainty around their outlook for inflation, their appropriate, at this meeting, to announce implemen- decision on whether to take such a policy action tation of the plan for reducing the Federal Reserve’s would depend importantly on whether the economic securities holdings that the Committee released in data in coming months increased their confidence June. Many underscored that the reduction in securi- that inflation was moving up toward the Committee’s ties holdings would be gradual and that financial objective. A few participants thought that additional market participants appeared to have a clear under- increases in the federal funds rate should be deferred standing of the Committee’s planned approach for a until incoming information confirmed that the low gradual normalization of the size of the Federal readings on inflation this year were not likely to per- Reserve’s balance sheet. Consequently, participants sist and that inflation was clearly on a path toward generally expected that any reaction in financial mar- the Committee’s symmetric 2 percent objective over kets to the start of balance sheet normalization the medium term. All agreed that they would closely would likely be limited. monitor and assess incoming data before making any further adjustment to the federal funds rate. With the medium-term outlook little changed, inflation below 2 percent, and the neutral rate of interest

236 104th Annual Report | 2017 Committee Policy Action rate would depend on their assessment of realized and expected economic conditions relative to the In their discussion of monetary policy for the period Committee’s objectives of maximum employment ahead, members judged that information received and 2 percent inflation. They expected that economic since the Committee met in July indicated that the conditions would evolve in a manner that would warlabor market had continued to strengthen and that rant gradual increases in the federal funds rate and economic activity had been rising moderately so far that the federal funds rate was likely to remain, for this year. Job gains had remained solid in recent some time, below levels that were expected to prevail months, and the unemployment rate had stayed low. in the longer run. Members also again stated that the Household spending had been expanding at a moder- actual path of the federal funds rate would depend ate rate, and growth in business fixed investment had on the economic outlook as informed by incoming picked up in recent quarters. On a 12-month basis, data. In particular, they reaffirmed that they would overall inflation and the measure excluding food and carefully monitor actual and expected inflation develenergy prices had declined this year and were running opments relative to the Committee’s symmetric inflabelow 2 percent. Market-based measures of inflation tion goal. Some members emphasized that, in considcompensation remained low; survey-based measures ering the timing of further adjustments in the federal of longer-term inflation expectations were little funds rate, they would be evaluating incoming inforchanged on balance. mation to assess the likelihood that recent low readings on inflation were transitory and that inflation Members noted that Hurricanes Harvey, Irma, and was again on a trajectory consistent with achieving Maria had devastated many communities, inflicting the Committee’s 2 percent objective over the medium severe hardship. Members judged that storm-related term. disruptions and rebuilding would affect economic activity in the near term, but past experience sug- Members agreed that, in October, the Committee gested that the hurricanes were unlikely to materially would initiate the balance sheet normalization proalter the course of the national economy over the gram described in the June 2017 Addendum to the medium term. Consequently, the Committee contin- Policy Normalization Principles and Plans. Several ued to expect that, with gradual adjustments in the members observed that, in part because financial stance of monetary policy, economic activity would market participants appeared to have a clear underexpand at a moderate pace, and labor market condi- standing of the Committee’s plan for gradually tions would strengthen somewhat further. Higher reducing the Federal Reserve’s securities holdings, prices for gasoline and some other items in the after- any reaction in financial markets to the announcemath of the hurricanes would likely boost inflation ment and implementation of the program would temporarily; apart from that effect, inflation on a likely be limited. 12-month basis was expected to remain somewhat below 2 percent in the near term but to stabilize At the conclusion of the discussion, the Committee around the Committee’s 2 percent objective over the voted to authorize and direct the Federal Reserve medium term. Members saw near-term risks to the Bank of New York, until it was instructed otherwise, economic outlook as roughly balanced, but they to execute transactions in the SOMA in accordance agreed to continue to monitor inflation developments with the following domestic policy directive, to be closely. released at 2:00 p.m.: After assessing current conditions and the outlook “Effective September 21, 2017, the Federal Open for economic activity, the labor market, and inflation, Market Committee directs the Desk to undermembers decided to maintain the target range for the take open market operations as necessary to federal funds rate at 1 to 1¼ percent. They noted that maintain the federal funds rate in a target range the stance of monetary policy remained accommoda- of 1 to 1¼ percent, including overnight reverse tive, thereby supporting some further strengthening repurchase operations (and reverse repurchase in labor market conditions and a sustained return to operations with maturities of more than one day 2 percent inflation. when necessary to accommodate weekend, holiday, or similar trading conventions) at an offer- Members agreed that the timing and size of future ing rate of 1.00 percent, in amounts limited only adjustments to the target range for the federal funds by the value of Treasury securities held outright

Minutes of Federal Open Market Committee Meetings | September 237 in the System Open Market Account that are and Maria have devastated many communities, available for such operations and by a per- inflicting severe hardship. Storm-related disrupcounterparty limit of $30 billion per day. tions and rebuilding will affect economic activity in the near term, but past experience suggests The Committee directs the Desk to continue that the storms are unlikely to materially alter rolling over at auction Treasury securities matur- the course of the national economy over the ing during September, and to continue reinvest- medium term. Consequently, the Committee ing in agency mortgage-backed securities the continues to expect that, with gradual adjustprincipal payments received through September ments in the stance of monetary policy, ecofrom the Federal Reserve’s holdings of agency nomic activity will expand at a moderate pace, debt and agency mortgage-backed securities. and labor market conditions will strengthen somewhat further. Higher prices for gasoline Effective in October 2017, the Committee directs and some other items in the aftermath of the the Desk to roll over at auction the amount of hurricanes will likely boost inflation temporarprincipal payments from the Federal Reserve’s ily; apart from that effect, inflation on a holdings of Treasury securities maturing during 12-month basis is expected to remain somewhat each calendar month that exceeds $6 billion, and below 2 percent in the near term but to stabilize to reinvest in agency mortgage-backed securities around the Committee’s 2 percent objective over the amount of principal payments from the Fed- the medium term. Near-term risks to the ecoeral Reserve’s holdings of agency debt and nomic outlook appear roughly balanced, but the agency mortgage-backed securities received dur- Committee is monitoring inflation developments ing each calendar month that exceeds $4 billion. closely. Small deviations from these amounts for operational reasons are acceptable. In view of realized and expected labor market conditions and inflation, the Committee decided The Committee also directs the Desk to engage to maintain the target range for the federal funds in dollar roll and coupon swap transactions as rate at 1 to 1¼ percent. The stance of monetary necessary to facilitate settlement of the Federal policy remains accommodative, thereby support- Reserve’s agency mortgage-backed securities ing some further strengthening in labor market transactions.” conditions and a sustained return to 2 percent inflation. The vote also encompassed approval of the statement below to be released at 2:00 p.m.: In determining the timing and size of future adjustments to the target range for the federal “Information received since the Federal Open funds rate, the Committee will assess realized Market Committee met in July indicates that the and expected economic conditions relative to its labor market has continued to strengthen and objectives of maximum employment and 2 perthat economic activity has been rising modercent inflation. This assessment will take into ately so far this year. Job gains have remained account a wide range of information, including solid in recent months, and the unemployment measures of labor market conditions, indicators rate has stayed low. Household spending has of inflation pressures and inflation expectations, been expanding at a moderate rate, and growth and readings on financial and international in business fixed investment has picked up in developments. The Committee will carefully recent quarters. On a 12-month basis, overall monitor actual and expected inflation developinflation and the measure excluding food and ments relative to its symmetric inflation goal. energy prices have declined this year and are The Committee expects that economic condirunning below 2 percent. Market-based meastions will evolve in a manner that will warrant ures of inflation compensation remain low; gradual increases in the federal funds rate; the survey-based measures of longer-term inflation federal funds rate is likely to remain, for some expectations are little changed, on balance. time, below levels that are expected to prevail in the longer run. However, the actual path of the Consistent with its statutory mandate, the Comfederal funds rate will depend on the economic mittee seeks to foster maximum employment outlook as informed by incoming data. and price stability. Hurricanes Harvey, Irma,

238 104th Annual Report | 2017 In October, the Committee will initiate the bal- It was agreed that the next meeting of the Committee ance sheet normalization program described in would be held on Tuesday–Wednesday, October 31– the June 2017 Addendum to the Committee’s November 1, 2017. The meeting adjourned at 10:05 Policy Normalization Principles and Plans.” a.m. on September 20, 2017. Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Charles L. Evans, Stanley Notation Vote Fischer, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Jerome H. Powell. By notation vote completed on August 15, 2017, the Committee unanimously approved the minutes of the Voting against this action: None. Committee meeting held on July 25–26, 2017. Consistent with the Committee’s decision to leave the Brian F. Madigan target range for the federal funds rate unchanged, the Secretary Board of Governors voted unanimously to leave the interest rates on required and excess reserve balances unchanged at 1¼ percent and voted unanimously to approve establishment of the primary credit rate (discount rate) at the existing level of 1¾ percent.7 7 The second vote of the Board also encompassed approval of the establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates.

Minutes of Federal Open Market Committee Meetings | September 239 Addendum: almost all projected that the unemployment rate would remain below their estimates of its longer-run Summary of Economic Projections level through 2020. All participants projected that inflation, as measured by the four-quarter percentage In conjunction with the Federal Open Market Comchange in the price index for personal consumption mittee (FOMC) meeting held on September 19–20, expenditures (PCE), would run below 2 percent in 2017, meeting participants submitted their projec- 2017 and then step up in the next three years; about tions of the most likely outcomes for real output half of them projected that inflation would be at the growth, the unemployment rate, and inflation for Committee’s 2 percent objective in 2019 and 2020, each year from 2017 to 2020 and over the longer and all judged that inflation would be within a couple run.8 Each participant’s projections were based on of tenths of a percentage point of the objective in information available at the time of the meeting, those years. Most participants commented on the together with his or her assessment of appropriate effects of Hurricanes Harvey and Irma and judged monetary policy—including a path for the federal that there would likely be some effect on national funds rate and its longer-run value—and assumpeconomic activity and inflation in the near term but tions about other factors likely to affect economic little effect in the medium term.10 Table 1 and figoutcomes. The longer-run projections represent each ure 1 provide summary statistics for the projections. participant’s assessment of the value to which each variable would be expected to converge, over time, As shown in figure 2, participants generally expected under appropriate monetary policy and in the that evolving economic conditions would likely warabsence of further shocks to the economy.9 “Appro- rant further gradual increases in the federal funds priate monetary policy” is defined as the future path rate to achieve and sustain maximum employment of policy that each participant deems most likely to and 2 percent inflation. Although some participants foster outcomes for economic activity and inflation lowered their federal funds rate projections since that best satisfy his or her individual interpretation of June, the median projections for the federal funds the Federal Reserve’s objectives of maximum rate in 2017 and 2018 were unchanged; the median employment and stable prices. projection for 2019 was slightly lower, and the median projection for the longer-run normal level of All participants who submitted longer-run projec- the federal funds rate edged down. However, because tions expected that, under appropriate monetary of considerable uncertainty about how the economy policy, growth in real gross domestic product (GDP) will evolve, the actual path of short-term interest this year would run somewhat above their individual rates, including the federal funds rate, can differ subestimates of its longer-run rate. Almost all partici- stantially from projections. pants projected that economic growth would moderate over the next three years, and almost all projected In general, participants viewed the uncertainty that real GDP growth in 2019 and 2020 would be at attached to their economic projections as broadly or close to their individual estimates of the econo- similar to the average of the past 20 years, and all my’s longer-run potential growth rate. All partici- participants saw the uncertainty associated with their pants who submitted longer-run projections expected forecasts for real GDP growth, the unemployment that the unemployment rate would run below their rate, and inflation as unchanged from June. Most estimates of its longer-run normal level in 2017, and participants judged the risks around their projections for economic growth, the unemployment rate, and 8 Four members of the Board of Governors, the same number as inflation as broadly balanced. in June 2017, were in office at the time of the September 2017 meeting. As in June 2017, the office of the president of the Federal Reserve Bank of Richmond was vacant at the time of this The Outlook for Economic Activity FOMC meeting; First Vice President Mark L. Mullinix again submitted economic projections. The median of participants’ projections for the 9 One participant did not submit longer-run projections for real growth rate of real GDP, conditional on their indioutput growth, the unemployment rate, or the federal funds rate. This participant’s projections over the next several years vidual assumptions about appropriate monetary were informed by the view that the U.S. economy is character- policy, was 2.4 percent in 2017, about 2 percent in ized by multiple medium-term regimes, that these regimes are 2018 and 2019, and 1.8 percent in 2020; the median persistent, and that optimal monetary policy is regime dependent. Because switches between regimes are difficult to predict and affect the longer-run outlook, this participant’s forecast did 10 Participants had completed their submissions for the Summary not incorporate convergence to longer-term outcomes for vari- of Economic Projections before the full effects of Hurricane ables other than inflation. Maria were evident.

240 104th Annual Report | 2017 Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, September 2017 Percent Median1 Central tendency2 Range3 Variable Longer Longer L onger 2 017 2018 2019 2020 run 2017 2018 2019 2020 run 2 017 2 018 2 019 2020 run Change in real GDP 2.4 2.1 2.0 1.8 1.8 2 .2–2.5 2.0–2.3 1.7–2.1 1.6–2.0 1.8–2.0 2.2–2.7 1.7–2.6 1.4–2.3 1 .4–2.0 1.5–2.2 June projection 2.2 2.1 1.9 n.a. 1.8 2.1–2.2 1.8–2.2 1.8–2.0 n.a. 1.8–2.0 2 .0–2.5 1 .7–2.3 1 .4–2.3 n .a. 1.5–2.2 Unemployment rate 4.3 4.1 4.1 4.2 4.6 4.2–4.3 4.0–4.2 3.9–4.4 4.0–4.5 4.5–4.8 4 .2–4.5 3.9–4.5 3.8–4.5 3.8–4.8 4 .4–5.0 June projection 4.3 4.2 4.2 n.a. 4.6 4.2–4.3 4.0–4.3 4.1–4.4 n.a. 4.5–4.8 4 .1–4.5 3 .9–4.5 3 .8–4.5 n .a. 4.5–5.0 PCE inflation 1.6 1.9 2.0 2.0 2.0 1.5–1.6 1.8–2.0 2.0 2.0–2.1 2.0 1 .5–1.7 1.7–2.0 1.8–2.2 1 .9–2.2 2.0 June projection 1.6 2.0 2.0 n.a. 2.0 1.6–1.7 1.8–2.0 2.0–2.1 n.a. 2.0 1 .5–1.8 1.7–2.1 1.8–2.2 n.a. 2.0 Core PCE inflation4 1.5 1.9 2.0 2.0 1.5–1.6 1.8–2.0 2.0 2.0–2.1 1.4–1.7 1.7–2.0 1.8–2.2 1.9–2.2 June projection 1.7 2.0 2.0 n.a. 1.6–1.7 1.8–2.0 2.0–2.1 n.a. 1.6–1.8 1 .7–2.1 1.8–2.2 n .a. Memo: Projected appropriate policy path Federal funds rate 1.4 2.1 2.7 2.9 2.8 1.1–1.4 1.9–2.4 2.4–3.1 2.5–3.5 2.5–3.0 1.1–1.6 1.1–2.6 1.1–3.4 1 .1–3.9 2.3–3.5 June projection 1.4 2.1 2.9 n.a. 3.0 1.1–1.6 1.9–2.6 2.6–3.1 n.a. 2.8–3.0 1.1–1.6 1 .1–3.1 1 .1–4.1 n.a. 2.5–3.5 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 13–14, 2017. 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 June 13–14, 2017, meeting, and one participant did not submit such projections in conjunction with the September 19–20, 2017, 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 | September 241 Figure 1. Medians, central tendencies, and ranges of economic projections, 2017–20 and over the longer run Percent Change in real GDP Median of projections Central tendency of projections Range of projections 3 2 Actual 1 2012 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent Unemployment rate 8 7 6 5 4 2012 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent PCE inflation 3 2 1 2012 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent Core PCE inflation 3 2 1 2012 2013 2014 2015 2016 2017 2018 2019 2020 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.

242 104th Annual Report | 2017 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 2017 2018 2019 2020 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 | September 243 of projections for the longer-run normal rate of real respectively. The median projection for core PCE GDP growth was 1.8 percent. Compared with the inflation in 2019 and 2020 was 2.0 percent. June Summary of Economic Projections (SEP), the median of the forecasts for real GDP growth for 2017 Figures 3.C and 3.D provide information on the diswas a bit higher, while the medians for 2018 and tributions of participants’ views about the outlook 2019, as well as the median assessment of the longer- for inflation. The distributions of projections for run growth rate, were mostly unchanged. Most par- headline PCE inflation and for core PCE inflation in ticipants did not incorporate expectations of fiscal 2017 moved down somewhat from June, and the disstimulus in their projections. Several participants who tributions for both measures in 2018 shifted down included some fiscal stimulus indicated that they had slightly. Most participants indicated that the soft marked down its expected magnitude relative to their readings on inflation so far this year were a factor June projections. contributing to the revisions in their inflation forecasts. The median of projections for the unemployment rate in the fourth quarter of 2017 was 4.3 percent, Appropriate Monetary Policy unchanged from June and 0.3 percentage point below the median assessment of its longer-run normal level. Figure 3.E provides the distribution of participants’ The medians of the unemployment rate projections judgments regarding the appropriate target or midfor 2018 through 2020 were a little above 4 percent. point of the target range for the federal funds rate at The median estimate of the longer-run normal rate the end of each year from 2017 to 2020 and over the of unemployment was 4.6 percent, unchanged from longer run. The distributions for 2017 and 2018 June. became somewhat less dispersed compared with those in June. Even though the range of the distribu- Figures 3.A and 3.B show the distributions of par- tion in 2019 was narrower than in June, other measticipants’ projections for real GDP growth and the ures of dispersion were roughly unchanged. The unemployment rate from 2017 to 2020 and in the lon- median projections of the federal funds rate continger run. The distribution of individual projections for ued to show gradual increases, with the median real GDP growth for this year shifted up, with half of assessment for 2017 standing at 1.38 percent, consisthe participants now expecting real GDP growth of tent with three 25 basis point increases this year. 2.4 or 2.5 percent and none seeing it below 2.2 per- Thereafter, the medians of the projections were cent. The distribution of projected real GDP growth 2.13 percent at the end of 2018, 2.69 percent at the in 2018 also shifted up a bit, while the distributions in end of 2019, and 2.88 percent at the end of 2020. 2019 and in the longer run were broadly similar to Compared with their projections prepared for the the distributions of the June projections. The distri- June SEP, some participants reduced their projection butions of individual projections for the unemploy- for the federal funds rate in the longer run; the ment rate in 2018 and 2019 shifted down slightly. median declined 0.25 percentage point, to 2.75 percent. The Outlook for Inflation In discussing their September projections, many participants again expressed the view that the appropri- The median of projections for headline PCE inflation ate upward trajectory of the federal funds rate over was 1.6 percent this year, 1.9 percent next year, and the next few years would likely be gradual. That 2 percent in 2019 and 2020, about unchanged from anticipated pace reflected a few factors, including a June. Most participants anticipated that inflation neutral real interest rate that was currently low and would continue to run slightly below 2 percent in was expected to move up only slowly as well as a 2018, while no participants expected inflation above gradual return of inflation to the Committee’s 2 per- 2 percent in that year. About half projected that cent objective. Some participants judged that a inflation would be equal to the Committee’s objective slightly lower path of the federal funds rate than in in 2019 and 2020; others projected that inflation their previous projections would likely be appropriwould run a little above or below the Committee’s ate, with a few citing a slower rate of progress toward objective in one or both of those years. The median the Committee’s 2 percent inflation objective than of projections for core PCE inflation was 1.5 percent previously expected or reduced prospects for fiscal in 2017 and 1.9 percent in 2018, a decline of 0.2 per- stimulus. In their discussions of appropriate moncentage point and 0.1 percentage point from June, etary policy, some of the participants mentioned

244 104th Annual Report | 2017 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2017–20 and over the longer run Number of participants 2017 September projections 18 June projections 16 14 12 10 8 6 4 2 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 1.3 1.5 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 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 1.3 1.5 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 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | September 245 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2017–20 and over the longer run Number of participants 2017 18 September projections 16 June projections 14 12 10 8 6 4 2 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.7 3.9 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 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.7 3.9 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 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.7 3.9 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 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.7 3.9 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.

246 104th Annual Report | 2017 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2017–20 and over the longer run Number of participants 2017 18 September projections 16 June projections 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 Number of participants 2020 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 Longer run 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.

Minutes of Federal Open Market Committee Meetings | September 247 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2017–20 Number of participants 2017 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 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 Number of participants 2020 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.

248 104th Annual Report | 2017 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, 2017–20 and over the longer run Number of participants 2017 September projections 18 June projections 16 14 12 10 8 6 4 2 1.13 – 1.3 8 – 1.6 3 – 1.8 8 – 2.1 3 – 2.3 8 – 2.6 3 – 2.8 8 – 3.1 3 – 3.3 8 – 3.6 3 – 3.8 8 – 4.1 3 – 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.13 – 1.3 8 – 1.6 3 – 1.8 8 – 2.1 3 – 2.3 8 – 2.6 3 – 2.8 8 – 3.1 3 – 3.3 8 – 3.6 3 – 3.8 8 – 4.1 3 – 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.13 – 1.3 8 – 1.6 3 – 1.8 8 – 2.1 3 – 2.3 8 – 2.6 3 – 2.8 8 – 3.1 3 – 3.3 8 – 3.6 3 – 3.8 8 – 4.1 3 – 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.13 – 1.3 8 – 1.6 3 – 1.8 8 – 2.1 3 – 2.3 8 – 2.6 3 – 2.8 8 – 3.1 3 – 3.3 8 – 3.6 3 – 3.8 8 – 4.1 3 – 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.13 – 1.3 8 – 1.6 3 – 1.8 8 – 2.1 3 – 2.3 8 – 2.6 3 – 2.8 8 – 3.1 3 – 3.3 8 – 3.6 3 – 3.8 8 – 4.1 3 – 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | September 249 is similar to the typical magnitude of past forecast Table 2. Average historical projection error ranges errors and the risks around the projections are Percentage points broadly balanced, future outcomes of these variables Variable 2017 2018 2019 2020 would have about a 70 percent probability of occurring within these confidence intervals. For all three Change in real GDP1 ±1.2 ±1.9 ±2.0 ±2.1 variables, this measure of forecast uncertainty is sub- Unemployment rate1 ±0.3 ±1.1 ±1.6 ±2.0 stantial and generally increases as the forecast hori- Total consumer prices2 ±0.8 ±1.1 ±1.2 ±1.1 Short-term interest rates3 ±0.5 ±1.7 ±2.3 ±2.7 zon lengthens. Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 1997 through 2016 that were released in the summer by FOMC participants may judge that the width of the various private and government forecasters. As described in the box “Forecast historical fan charts shown in figures 4.A through Uncertainty,” under certain assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, consumer prices, and the 4.C does not adequately capture their current assessfederal funds rate will be in ranges implied by the average size of projection ments of the degree of uncertainty that surrounds errors made in the past. For more information, see David Reifschneider and Peter Tulip (2017), “Gauging the Uncertainty of the Economic Outlook Using Historical their economic projections. Participants’ assessments Forecasting Errors: The Federal Reserve’s Approach,” Finance and Economics of the current level of uncertainty surrounding their Discussion Series 2017-020 (Washington: Board of Governors of the Federal Reserve System, February), available at www.federalreserve.gov/econresdata/ economic projections are shown in the bottom-left feds/2017/files/2017020pap.pdf. panels of figures 4.A, 4.B, and 4.C. All or nearly all 1 Definitions of variables are in the general note to table 1. participants viewed the degree of uncertainty 2 Measure is the overall consumer price index, the price measure that has been most widely used in government and private economic forecasts. Projections attached to their economic projections about GDP are percent changes on a fourth quarter to fourth quarter basis. growth, the unemployment rate, and inflation as 3 For Federal Reserve staff forecasts, measure is the federal funds rate. For other broadly similar to the average of the past 20 years, forecasts, measure is the rate on 3-month Treasury bills. Projection errors are calculated using average levels, in percent, in the fourth quarter. and all participants saw the degree of uncertainty as unchanged from June.11 In their discussion of the uncertainty attached to their current projections, a their assumptions for the Committee’s reinvestment few participants judged that near-term uncertainty policy; all of those who did so anticipated that the for economic activity and inflation had increased as a Committee would begin its program of balance sheet result of the effects of Hurricanes Harvey and Irma normalization, described in the Addendum to the but commented that their assessment of medium- Policy Normalization Principles and Plans released in term prospects was unaffected. June, before the end of this year. The fan charts, which are constructed so as to be Uncertainty and Risks symmetric around the median projections, also may not fully reflect participants’ current assessments of The future outcomes of economic variables are sub- the balance of risks to their economic projections. ject to considerable uncertainty. In assessing the path Participants’ assessments of the balance of risks to of monetary policy that, in their view, is likely to be their economic projections are shown in the bottommost appropriate, FOMC participants take account right panels of figures 4.A, 4.B, and 4.C. As in June, of the range of possible economic outcomes, the like- most participants judged the risks to their projections lihood of those outcomes, and the potential benefits of real GDP growth, the unemployment rate, headand costs should they occur. Table 2 provides one line inflation, and core inflation as broadly balmeasure of forecast uncertainty for the change in real anced—in other words, as broadly consistent with a GDP, the unemployment rate, and total consumer symmetric fan chart. One fewer participant than in price inflation—the root mean squared error June judged the risks to GDP growth as weighted to (RMSE) from forecast errors of various private and the upside, and one fewer participant judged the risks government projections made over the past 20 years. to the unemployment rate as weighted to the down- This measure of forecast uncertainty is incorporated side. Also, one fewer participant judged the risks to graphically in the top panels of figures 4.A, 4.B, and inflation to be weighted to the upside, and one more 4.C, which display “fan charts” plotting the median viewed the risks as weighted to the downside. SEP projections for the three variables surrounded by symmetric confidence intervals derived from the RMSEs presented in table 2. The width of the confidence interval for each variable at a given point is a 11 At the end of this summary, the box “Forecast Uncertainty” discusses the sources and interpretation of uncertainty in the measure of forecast uncertainty at that horizon. If economic forecasts and explains the approach used to assess the the degree of uncertainty attending these projections uncertainty and risks attending the participants’ projections.

250 104th Annual Report | 2017 Figure 4.A. Uncertainty and risks in projections of GDP growth Median projection and confidence interval based on historical forecast errors Percent Change in real GDP Median of projections 70% confidence interval 4 3 2 Actual 1 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 FOMC participants’ assessments of uncertainty and risks around their economic projections Number of participants Number of participants Uncertainty about GDP growth Risks to GDP growth September projections September projections June projections 18 June projections 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in real gross domestic product (GDP) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

Minutes of Federal Open Market Committee Meetings | September 251 Figure 4.B. Uncertainty and risks in projections of the unemployment rate Median projection and confidence interval based on historical forecast errors Percent Unemployment rate Median of projections 10 70% confidence interval 9 8 7 6 Actual 5 4 3 2 1 2012 2013 2014 2015 2016 2017 2018 2019 2020 FOMC participants’ assessments of uncertainty and risks around their economic projections Number of participants Number of participants Uncertainty about the unemployment rate Risks to the unemployment rate September projections September projections June projections 18 June projections 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the average civilian unemployment rate in the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

252 104th Annual Report | 2017 Figure 4.C. Uncertainty and risks in projections of PCE inflation Median projection and confidence interval based on historical forecast errors Percent PCE inflation Median of projections 70% confidence interval 3 2 1 Actual 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 FOMC participants’ assessments of uncertainty and risks around their economic projections Number of participants Number of participants Uncertainty about PCE inflation Risks to PCE inflation 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 core PCE inflation Risks to core PCE inflation 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 Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in the price index for personal consumption expenditures (PCE) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

Minutes of Federal Open Market Committee Meetings | September 253 Participants’ assessments of the future path of the the likely uncertainty around the future path of the federal funds rate consistent with appropriate policy federal funds rate generated by the uncertainty about are also subject to considerable uncertainty, reflecting the macroeconomic variables and additional adjustin part uncertainty about the evolution of GDP ments to monetary policy that may be appropriate to growth, the unemployment rate, and inflation over offset the effects of shocks to the economy. To illustime. The final line in table 2 shows the RMSEs for trate the uncertainty regarding the appropriate path forecasts of short-term interest rates. These RMSEs for monetary policy, figure 5 shows a fan chart plotare not strictly consistent with the SEP projections ting the median SEP projections for the federal funds for the federal funds rate, in part because the SEP rate surrounded by confidence intervals derived from projections are not forecasts of the most likely out- the results presented in table 2. As with the macrocomes but rather reflect each participant’s individual economic variables, forecast uncertainty is substanassessment of appropriate monetary policy. However, tial and increases at longer horizons. the associated confidence intervals provide a sense of

254 104th Annual Report | 2017 Figure 5. Uncertainty in projections of the federal funds rate Median projection and confidence interval based on historical forecast errors Percent Federal funds rate Midpoint of target range 6 Median of projections 70% confidence interval* 5 4 3 2 Actual 1 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 Note: The blue and red lines are based on actual values and median projected values, respectively, of the Committee’s target for the federal funds rate at the end of the year indicated. The actual values are the midpoint of the target range; the median projected values are based on either the midpoint of the target range or the target level. The confidence interval around the median projected values is based on root mean squared errors of various private and government forecasts made over the previous 20 years. The confidence interval is not strictly consistent with the projections for the federal funds rate, primarily because these projections are not forecasts of the likeliest outcomes for the federal funds rate, but rather projections of participants’ individual assessments of appropriate monetary policy. Still, historical forecast errors provide a broad sense of the uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary policy that may be appropriate to offset the effects of shocks to the economy. The confidence interval is assumed to be symmetric except when it is truncated at zero—the bottom of the lowest target range for the federal funds rate that has been adopted in the past by the Committee. This truncation would not be intended to indicate the likelihood of the use of negative interest rates to provide additional monetary policy accommodation if doing so was judged appropriate. In such situations, the Committee could also employ other tools, including forward guidance and large-scale asset purchases, to provide additional accommodation. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections. * The confidence interval is derived from forecasts of the average level of short-term interest rates in the fourth quarter of the year indicated; more information about these data is available in table 2. The shaded area encompasses less than a 70 percent confidence interval if the confidence interval has been truncated at zero.

Minutes of Federal Open Market Committee Meetings | September 255 Forecast Uncertainty The economic projections provided by the members their projections are summarized in the bottom-left of the Board of Governors and the presidents of the panels of those figures. Participants also provide Federal Reserve Banks inform discussions of mon- judgments as to whether the risks to their projections etary policy among policymakers and can aid public are weighted to the upside, are weighted to the understanding of the basis for policy actions. Con- downside, or are broadly balanced. That is, while the siderable uncertainty attends these projections, how- symmetric historical fan charts shown in the top panever. The economic and statistical models and rela- els of figures 4.A through 4.C imply that the risks to tionships used to help produce economic forecasts participants’ projections are balanced, participants are necessarily imperfect descriptions of the real may judge that there is a greater risk that a given world, and the future path of the economy can be variable will be above rather than below their projecaffected by myriad unforeseen developments and tions. These judgments are summarized in the lowerevents. Thus, in setting the stance of monetary right panels of figures 4.A through 4.C. policy, participants consider not only what appears to As with real activity and inflation, the outlook for the be the most likely economic outcome as embodied in future path of the federal funds rate is subject to contheir projections, but also the range of alternative siderable uncertainty. This uncertainty arises primarily possibilities, the likelihood of their occurring, and the because each participant’s assessment of the appropotential costs to the economy should they occur. priate stance of monetary policy depends importantly Table 2 summarizes the average historical accuracy on the evolution of real activity and inflation over of a range of forecasts, including those reported in time. If economic conditions evolve in an unexpected past Monetary Policy Reports and those prepared by manner, then assessments of the appropriate setting the Federal Reserve Board’s staff in advance of of the federal funds rate would change from that meetings of the Federal Open Market Committee point forward. The final line in table 2 shows the error (FOMC). The projection error ranges shown in the ranges for forecasts of short-term interest rates. They table illustrate the considerable uncertainty associ- suggest that the historical confidence intervals assoated with economic forecasts. For example, suppose ciated with projections of the federal funds rate are a participant projects that real gross domestic prod- quite wide. It should be noted, however, that these uct (GDP) and total consumer prices will rise steadily confidence intervals are not strictly consistent with at annual rates of, respectively, 3 percent and 2 per- the projections for the federal funds rate, as these cent. If the uncertainty attending those projections is projections are not forecasts of the most likely quarsimilar to that experienced in the past and the risks terly outcomes but rather are projections of particiaround the projections are broadly balanced, the pants’ individual assessments of appropriate monnumbers reported in table 2 would imply a probability etary policy and are on an end-of-year basis. Howof about 70 percent that actual GDP would expand ever, the forecast errors should provide a sense of within a range of 1.8 to 4.2 percent in the current the uncertainty around the future path of the federal year, 1.1 to 4.9 percent in the second year, 1.0 to funds rate generated by the uncertainty about the 5.0 percent in the third year, and 0.9 to 5.1 percent in macroeconomic variables as well as additional the fourth year. The corresponding 70 percent confi- adjustments to monetary policy that would be approdence intervals for overall inflation would be 1.2 to priate to offset the effects of shocks to the economy. 2.8 percent in the current year, 0.9 to 3.1 percent in If at some point in the future the confidence interval the second year, 0.8 to 3.2 percent in the third year, around the federal funds rate were to extend below and 0.9 to 3.1 percent in the fourth year. Figures 4.A zero, it would be truncated at zero for purposes of through 4.C illustrate these confidence bounds in the fan chart shown in figure 5; zero is the bottom of “fan charts” that are symmetric and centered on the the lowest target range for the federal funds rate that medians of FOMC participants’ projections for GDP has been adopted by the Committee in the past. This growth, the unemployment rate, and inflation. Howapproach to the construction of the federal funds rate ever, in some instances, the risks around the projecfan chart would be merely a convention; it would not tions may not be symmetric. In particular, the unemhave any implications for possible future policy deciployment rate cannot be negative; furthermore, the sions regarding the use of negative interest rates to risks around a particular projection might be tilted to provide additional monetary policy accommodation if either the upside or the downside, in which case the doing so were appropriate. In such situations, the corresponding fan chart would be asymmetrically Committee could also employ other tools, including positioned around the median projection. forward guidance and asset purchases, to provide Because current conditions may differ from those additional accommodation. that prevailed, on average, over history, participants While figures 4.A through 4.C provide information on provide judgments as to whether the uncertainty the uncertainty around the economic projections, figattached to their projections of each economic variure 1 provides information on the range of views able is greater than, smaller than, or broadly similar across FOMC participants. A comparison of figure 1 to typical levels of forecast uncertainty seen in the with figures 4.A through 4.C shows that the disperpast 20 years, as presented in table 2 and reflected sion of the projections across participants is much in the widths of the confidence intervals shown in the smaller than the average forecast errors over the past top panels of figures 4.A through 4.C. Participants’ 20 years. current assessments of the uncertainty surrounding

256 104th Annual Report | 2017 Meeting Held Steven B. Kamin Economist on October 31–November 1, 2017 Thomas Laubach A joint meeting of the Federal Open Market Com- Economist mittee and the Board of Governors was held in the David W. Wilcox offices of the Board of Governors of the Federal Economist Reserve System in Washington, D.C., on Tuesday, October 31, 2017, at 1:30 p.m. and continued on James A. Clouse, Thomas A. Connors, Wednesday, November 1, 2017, at 9:00 a.m.1 Daniel G. Sullivan, William Wascher, Beth Anne Wilson, and Mark L. J. Wright Present Associate Economists 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 Ann E. Misback Lael Brainard Secretary, Office of the Secretary, Charles L. Evans Board of Governors Patrick Harker Matthew J. Eichner2 Director, Division of Reserve Bank Operations and Robert S. Kaplan Payment Systems, Board of Governors Neel Kashkari Michael S. Gibson Director, Division of Supervision and Regulation, Jerome H. Powell Board of Governors Randal K. Quarles Andreas Lehnert Raphael W. Bostic, Loretta J. Mester, Director, Division of Financial Stability, Mark L. Mullinix, and John C. Williams Board of Governors Alternate Members of the Federal Open Market Daniel M. Covitz Committee Deputy Director, Division of Research and Statistics, James Bullard, Esther L. George, and Eric Rosengren Board of Governors Presidents of the Federal Reserve Banks of St. Louis, Rochelle M. Edge and Stephen A. Meyer Kansas City, and Boston, respectively Deputy Directors, Division of Monetary Affairs, Brian F. Madigan Board of Governors Secretary Trevor A. Reeve Matthew M. Luecke Senior Special Adviser to the Chair, Office of Board Deputy Secretary Members, Board of Governors John M. Roberts David W. Skidmore Special Adviser 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, Mark E. Van Der Weide Board of Governors General Counsel David E. Lebow Michael Held Senior Associate Director, Division of Research and Deputy General Counsel Statistics, Board of Governors 1 The Federal Open Market Committee is referenced as the 2 Attended through the discussion of developments in financial “FOMC” and the “Committee” in these minutes. markets and open market operations.

Minutes of Federal Open Market Committee Meetings | October–November 257 Antulio N. Bomfim and Ellen E. Meade Selection of Committee Officer Senior Advisers, Division of Monetary Affairs, Board of Governors By unanimous vote, the Committee selected James A. Clouse to serve as secretary, effective on Novem- Shaghil Ahmed and Joseph W. Gruber ber 26, 2017. This selection is effective until the selec- Associate Directors, Division of International tion of a successor at the Committee’s first regularly Finance, Board of Governors scheduled meeting in 2018. David López-Salido Associate Director, Division of Monetary Affairs, Developments in Financial Markets and Board of Governors Open Market Operations Stephanie R. Aaronson, Burcu Duygan-Bump, The manager of the System Open Market Account and Glenn Follette (SOMA) reported on developments in domestic and Assistant Directors, Division of Research and foreign financial markets since the September FOMC Statistics, Board of Governors meeting. Broad equity price indexes extended earlier Christopher J. Gust increases, yields on longer-term Treasury securities Assistant Director, Division of Monetary Affairs, rose, yield spreads on corporate bonds declined, and Board of Governors the foreign exchange value of the dollar increased. Money market interest rates suggested that market Penelope A. Beattie3 participants did not anticipate a change in the Com- Assistant to the Secretary, Office of the Secretary, mittee’s target range for the federal funds rate at this Board of Governors meeting but saw a high probability of a 25 basis David H. Small point increase at the Committee’s December meeting. Project Manager, Division of Monetary Affairs, Board of Governors The deputy manager followed with a briefing on money market developments and open market opera- Youngsuk Yook tions. Over the intermeeting period, federal funds Principal Economist, Division of Research and continued to trade near the center of the FOMC’s Statistics, Board of Governors target range except on quarter-end. Implementation Jonathan E. Goldberg of the Committee’s balance sheet normalization pro- Senior Economist, Division of Monetary Affairs, gram, which began in October, had proceeded Board of Governors smoothly so far. Take-up at the System’s overnight reverse repurchase agreement facility averaged Randall A. Williams slightly more than in the previous period. A rebalanc- Senior Information Manager, Division of Monetary ing of the SOMA’s holdings of euro reserves, which Affairs, Board of Governors reflected instructions provided by the Foreign Cur- James Narron rency Subcommittee in September, was completed in First Vice President, Federal Reserve Bank of October. Philadelphia David Altig, Kartik B. Athreya, Mary Daly, Jeff By unanimous vote, the Committee ratified the Open Fuhrer, Ellis W. Tallman, and Christopher J. Waller Market Desk’s domestic transactions over the inter- Executive Vice Presidents, Federal Reserve Banks of meeting period. There were no intervention opera- Atlanta, Richmond, San Francisco, Boston, tions in foreign currencies for the System’s account Cleveland, and St. Louis, respectively during the intermeeting period. Marc Giannoni and Paolo A. Pesenti Staff Review of the Economic Situation Senior Vice Presidents, Federal Reserve Banks of Dallas and New York, respectively The information reviewed for the October 31– Sarah K. Bell, Satyajit Chatterjee, November 1 meeting indicated that labor market and Jonathan L. Willis conditions generally continued to strengthen and that Vice Presidents, Federal Reserve Banks of New York, real gross domestic product (GDP) expanded at a Philadelphia, and Kansas City, respectively solid pace in the third quarter despite hurricanerelated disruptions. Although the effects of the recent 3 Attended Tuesday session only. hurricanes led to a reported decline in payroll

258 104th Annual Report | 2017 employment in September, the unemployment rate Real PCE growth slowed in the third quarter, likely decreased further. Retail gasoline prices jumped in reflecting in part temporary effects of the hurricanes. the aftermath of the hurricanes, but total consumer Recent readings on key factors that influence conprice inflation, as measured by the 12-month percent- sumer spending—including gains in real disposable age change in the price index for personal consump- personal income and households’ net worth—retion expenditures (PCE), remained below 2 percent in mained supportive of solid increases in real PCE in September and was lower than early in the year. the near term. Consumer sentiment in October, as Survey-based measures of longer-run inflation expec- measured by the University of Michigan Surveys of tations were little changed on balance. Consumers, was at its highest level since before the most recent recession. Total nonfarm payroll employment was reported to have decreased in September, consistent with a sub- Real residential investment declined further in the stantial increase in the number of people who third quarter. Starts of both new single-family homes reported themselves as being absent from work due and multifamily units moved down in September. to bad weather and with payroll declines in the However, building permit issuance for new singlehurricane-affected states of Texas and Florida. How- family homes—which tends to be a good indicator of ever, the national unemployment rate moved down to the underlying trend in construction of such 4.2 percent in September, and the labor force partici- homes—edged up in September. Sales of new homes pation rate rose. The unemployment rates for African increased notably over the two months ending in Sep- Americans, for Hispanics, and for whites were lower tember, although sales of existing homes decreased in September than around the start of the year, while somewhat over that period. the rate for Asians was roughly flat this year; the unemployment rates for each of these groups were Real private expenditures for business equipment and close to the levels seen just before the most recent intellectual property continued to rise at a brisk pace recession. The overall share of workers employed in the third quarter. Nominal orders and shipments part time for economic reasons edged down in Sep- of nondefense capital goods excluding aircraft rose tember, and the rates of private-sector job openings further over the two months ending in September, and quits were unchanged in August. The four-week and readings on business sentiment remained upbeat. moving average of initial claims for unemployment In contrast, real investment spending for nonresideninsurance benefits moved back down to a low level tial structures declined in the third quarter, as a furby late October after rising in September following ther increase in the drilling and mining sector was the hurricanes. Recent readings showed a modest more than offset by a decline in other sectors, parpickup in growth of labor compensation. The ticularly manufacturing. employment cost index for private workers increased 2½ percent over the 12 months ending in September, Total real government purchases were about flat in a little faster than in the 12-month period ending a the third quarter. Real federal purchases rose someyear earlier. Increases in average hourly earnings for what, mostly reflecting increased defense expendiall employees stepped up to a rate of almost 3 percent tures. In contrast, real purchases by state and local over the 12 months ending in September; however, a governments declined a little, as construction spendportion of that acceleration possibly reflected a ing by these governments fell. hurricane-related reduction in the number of lowerwage workers reported as having been paid during The nominal U.S. international trade deficit narthe reference week in September. rowed in August, as exports rose and imports fell. Export growth was driven by higher exports of capi- Total industrial production (IP) increased somewhat tal goods and consumer goods, while the import in September, reflecting output gains in manufacturdecline was led by lower imports of industrial suping, in mining, and in utilities; the effects of the hurplies and capital goods. Advance estimates for Sepricanes appeared to hold IP down less in September tember suggested that goods imports grew more than than in August. Automakers’ schedules indicated that exports, pointing to a widening of the monthly trade light motor vehicle assemblies would increase in the deficit. Despite this widening, net exports were fourth quarter. Broader indicators of manufacturing reported to have contributed positively to real GDP production, such as the new orders indexes from growth for the third quarter as a whole. national and regional manufacturing surveys, pointed to an expansion in factory output in the near term.

Minutes of Federal Open Market Committee Meetings | October–November 259 Total U.S. consumer prices, as measured by the PCE FOMC communications over the intermeeting price index, increased a bit more than 1½ percent period were reportedly viewed by investors as slightly over the 12 months ending in September. Core PCE less accommodative than expected. The Committee’s price inflation, which excludes changes in consumer decisions at the September FOMC meeting to leave food and energy prices, was about 1¼ percent over the target range for the federal funds rate unchanged that same period. Retail gasoline prices moved up and to announce the start of its balance sheet norsharply following the hurricanes and put upward malization program in October had been widely pressure on total PCE prices in August and Septem- anticipated by the public. However, market particiber; gasoline prices subsequently moved down some- pants noted that the medians of projections for the what through late October. The consumer price index federal funds rate in the September Summary of (CPI) rose 2¼ percent over the 12 months ending in Economic Projections (SEP) were unchanged, September, while core CPI inflation was 1¾ percent. whereas some investors had expected slight down- Recent readings on survey-based measures of longer- ward revisions. In addition, market commentaries run inflation expectations—including those from the observed that, despite low inflation readings in recent Michigan survey, the Blue Chip Economic Indica- months, the characterization of the inflation outlook tors, and the Desk’s Survey of Primary Dealers and in the September policy statement was little changed Survey of Market Participants—were little changed and the SEP showed only modest downward revion balance. sions to FOMC participants’ near-term inflation projections. Communications by FOMC participants Foreign economic activity continued to expand at a were also seen as reinforcing expectations for continsolid pace. Incoming data suggested that in most ued gradual removal of policy accommodation. The advanced foreign economies (AFEs), economic probability of an increase in the target range for the growth slowed in the third quarter but remained federal funds rate occurring at the October– firm. Economic activity in the emerging market November meeting, as implied by quotes on federal economies (EMEs) also continued to grow briskly for funds futures contracts, remained essentially zero; the the most part, especially in Asia. The Mexican probability of an increase at the December meeting economy, however, contracted in the third quarter, in rose to about 85 percent by the end of the intermeetpart because hurricanes and earthquakes disrupted ing period. Levels of the federal funds rate at the end economic activity. Headline inflation in the AFEs of 2018 and 2019 implied by overnight index swap generally remained subdued, but U.K. inflation rates moved up moderately. stayed above the Bank of England’s 2 percent target. Low inflation persisted in most EMEs as well, The nominal Treasury yield curve shifted up and flatalthough rising food prices continued to put upward tened somewhat over the intermeeting period. Yields pressure on inflation in Mexico. increased following the September FOMC meeting and in response to news regarding proposals for tax Staff Review of the Financial Situation reform. They also rose, on net, following domestic economic data releases, which generally came in Movements in domestic financial asset prices over above investors’ expectations. Option-adjusted the intermeeting period reflected FOMC communi- spreads on current-coupon mortgage-backed securications that were read as slightly less accommodative ties (MBS) over Treasury yields were little changed. than expected, economic data releases that were gen- The FOMC’s September announcement that it erally better than anticipated, and market percep- would begin implementing in October its plan for tions that U.S. tax reform was becoming more likely. normalizing the Federal Reserve’s balance sheet was On net, Treasury yields increased modestly, U.S. widely anticipated and appeared to have had little equity prices moved up, and the dollar appreciated. effect on either Treasury yields or MBS spreads. There was no discernible reaction in financial mar- Near-term measures of option-implied volatility on kets to the widely anticipated announcement of the 10-year swap rates remained near historically low lev- FOMC’s change to its balance sheet policy. Mean- els. Measures of inflation compensation based on while, domestic financing conditions generally Treasury Inflation-Protected Securities declined remained accommodative. Corporate bond spreads somewhat following the slightly lower-than-expected narrowed modestly, and corporations continued to September CPI data but were little changed on net. tap credit markets at a solid pace. Credit also remained readily available to households, except for Broad equity price indexes rose notably, reportedly higher-risk borrowers in some markets. reflecting in part investors’ perceptions that tax

260 104th Annual Report | 2017 reform was becoming more likely. One-month-ahead net, over the third quarter and that lending standards option-implied volatility on the S&P 500 index—the continued to be somewhat tight. VIX—remained near historically low levels. Spreads of yields on both investment- and speculative-grade Credit conditions in the residential mortgage market corporate bonds over comparable-maturity Treasury stayed accommodative in the third quarter for most securities narrowed modestly. borrowers. However, credit standards continued to be tight for borrowers with low credit scores or hard-to- Conditions in short-term funding markets remained document incomes. The October SLOOS suggested stable over the intermeeting period. The effective fed- that the recent slowdown in mortgage originations eral funds rate held steady, and rates and volumes in for home purchases was partly attributable to weaker other unsecured and secured overnight and term demand. funding markets continued to be stable aside from quarter-end. At the end of September, changes in Consumer credit continued to expand at a moderate money market rates and volumes were short lived pace in the third quarter. However, the October and in line with previous quarter-ends. SLOOS indicated that banks continued to tighten their credit policies for auto and credit card loans. Financing conditions for large nonfinancial firms Credit bureau data on loan originations and credit remained accommodative. In September, the pace of limits suggested that this tightening was most progross equity issuance was about in line with that nounced in the subprime segment of the market. observed in recent months, gross issuance of corporate bonds dipped somewhat but stayed high by his- The broad index of the foreign exchange value of the torical standards, and originations of institutional dollar rose nearly 3 percent over the intermeeting leveraged loans that raised new funds were robust. period amid the rise in U.S. interest rates, market The credit performance of bonds issued by, and expectations that U.S. tax reform was becoming more loans extended to, nonfinancial corporations also likely, and foreign central bank actions and commuremained strong over the intermeeting period. Mean- nications. The Canadian dollar depreciated signifiwhile, growth of banks’ commercial and industrial cantly over the period and Canadian yields declined (C&I) loans continued to be sluggish, although it as the Bank of Canada left its policy rate unchanged picked up a bit in the third quarter. Responses to the and comments by the bank’s governor were inter- October Senior Loan Officer Opinion Survey on preted as more accommodative than expected. The Bank Lending Practices (SLOOS) suggested that euro also depreciated, despite the European Central lackluster demand among banks’ business customers Bank’s (ECB’s) announcement of a step-down in was a key factor in this subdued growth. The survey asset purchases next year, reflecting slight declines in also reported a notable increase in the share of banks investors’ expectations for ECB policy rates and in that narrowed loan spreads for C&I loans over the German long-term sovereign yields. EME currencies previous three months, with many respondents citing generally depreciated as well, most notably the Turkmore aggressive competition from other bank or ish lira and the Mexican peso, the latter of which was nonbank lenders as an important reason for held down in part by uncertainty about negotiations doing so. on the North American Free Trade Agreement. Most foreign equity indexes increased. In Japan, equity Financing flows for commercial real estate (CRE) indexes rose notably in advance of parliamentary were more robust in the commercial mortgage- elections that resulted in a strong victory for Prime backed securities (CMBS) market than from banks in Minister Abe’s ruling coalition, a development seen the third quarter. Issuance of CMBS continued to be by market participants as signaling a continuation of robust and in line with last year’s pace. Spreads on stimulative economic policies. lower-rated CMBS over Treasury securities widened slightly over the intermeeting period but remained The staff provided its latest report on vulnerabilities near the lower end of the range seen since the finan- of the U.S. financial system. The staff continued to cial crisis. Delinquency rates on loans in CMBS pools judge that the overall vulnerabilities were moderate: continued to decline in September. Meanwhile, CRE Asset valuation pressures across markets were judged loan growth at banks slowed, especially for nonfarm to have increased slightly, on balance, since the previnonresidential loans. In the October SLOOS, banks ous assessment in July and to have remained elevated; reported that demand for CRE loans weakened, on leverage in the nonfinancial sector stayed moderate;

Minutes of Federal Open Market Committee Meetings | October–November 261 and, in the financial sector, leverage and vulnerabili- and inflation as similar to the average of the past ties from maturity and liquidity transformation con- 20 years. On the one hand, many indicators of uncertinued to be low. In addition, the staff assessed over- tainty about the macroeconomic outlook continued all vulnerabilities to foreign financial stability as to be subdued; on the other hand, considerable moderate. The staff highlighted specific vulnerabili- uncertainty remained about a number of federal govties in some foreign economies, including—depend- ernment policies. The staff saw the risks to the foreing on the country—still-weak banks, heavy indebt- casts for real GDP growth and the unemployment edness in the corporate or household sector or both, rate as balanced. The risks to the projection for inflarising property prices, overhangs of sovereign debt, tion also were seen as balanced. Downside risks and significant susceptibility to various political included the possibilities that longer-term inflation developments. expectations may have edged lower or that the run of soft readings on core inflation this year could prove Staff Economic Outlook to be more persistent than the staff expected. These downside risks were seen as essentially counterbal- The U.S. economic projection prepared by the staff anced by the upside risk that inflation could increase for this FOMC meeting was broadly similar to the more than expected in an economy that was proprevious forecast. Real GDP was expected to rise at a jected to move further above its longer-run potential. solid pace in the fourth quarter of this year, boosted in part by a rebound in spending and production Participants’ Views on Current Conditions after the negative effects of the hurricanes in the and the Economic Outlook third quarter. Payroll employment was also expected to rebound during the fourth quarter. Beyond 2017, In their discussion of the economic situation and the the forecast for real GDP growth was essentially outlook, meeting participants agreed that informaunrevised. In particular, the staff continued to proj- tion received since the FOMC met in September indiect that real GDP would expand at a modestly faster cated that the labor market had continued to pace than potential output through 2019. The unem- strengthen and that economic activity had been rising ployment rate was projected to decline gradually over at a solid rate despite hurricane-related disruptions. the next couple of years and to continue running Although the hurricanes depressed payroll employbelow the staff’s estimate of its longer-run natural ment in September, the unemployment rate, which rate over this period. was less affected by the storms, declined further. Household spending had been expanding at a moder- The staff’s forecast for total PCE price inflation was ate rate, and growth in business fixed investment had little changed for 2017, as a somewhat higher forecast picked up in recent quarters. Gasoline prices rose in for consumer energy prices was mostly offset by a the aftermath of the hurricanes, boosting overall slightly lower forecast for core PCE prices. Although inflation in September; however, inflation for items total PCE price inflation was forecast to be about the other than food and energy remained soft. On a same in 2017 as it was last year, core PCE price infla- 12-month basis, both inflation measures had declined tion was anticipated to be a little lower than in 2016, this year and were running below 2 percent. Marketand consumer food and energy price inflation was based measures of inflation compensation remained expected to be a little higher. Total PCE price infla- low; survey-based measures of longer-term inflation tion was projected to pick up in 2018, as most of the expectations were little changed, on balance. softness in core PCE price inflation this year was expected to be transitory. However, the staff’s fore- Participants acknowledged that hurricane-related discasts for core inflation and, thus, for total inflation ruptions and rebuilding would continue to affect ecowere revised down slightly for next year, reflecting the nomic activity in the near term, and they noted that, judgment that a bit of the unexplained weakness in in October, wildfires in California had displaced core inflation this year may carry over into next year. many households. Past experience, however, sug- Beyond 2018, the inflation forecast was unchanged gested that the economic effects of the hurricanes from the previous projection. The staff continued to and other natural disasters would be mostly tempoproject that inflation would reach the Committee’s rary and unlikely to materially alter the course of the 2 percent objective in 2019. national economy over the medium term. Participants saw the incoming information on spending and The staff viewed the uncertainty around its projec- the labor market as consistent with continued abovetions for real GDP growth, the unemployment rate, trend economic growth and a further strengthening

262 104th Annual Report | 2017 in labor market conditions, although the hurricanes, rary. However, some homebuilders were reporting in particular, made it more difficult than usual to shortages of certain building materials in the afterinterpret some of this information. They continued math of the hurricanes. Farm incomes in some to expect that, with gradual adjustments in the stance regions were said to remain under downward presof monetary policy, economic activity would expand sure because of declining crop and livestock prices. at a moderate pace and labor market conditions would strengthen somewhat further. Inflation on a Participants judged that increases in nonfarm payroll 12-month basis was expected to remain somewhat employment, apart from the temporary effects of the below 2 percent in the near term but to stabilize hurricanes, remained well above the pace likely to be around the Committee’s 2 percent objective over the sustainable in the longer run and that labor market medium term. Near-term risks to the economic out- conditions had strengthened further in recent look appeared to be roughly balanced, but partici- months. Changes in payrolls, as measured by the pants agreed that it would be important to continue establishment survey, had been temporarily depressed to monitor inflation developments closely. by the storms in September but were expected to bounce back in later months. Data from the house- Participants expected solid growth in consumer hold survey, which generally were viewed as not spending in the near term, supported by ongoing materially affected by the hurricanes, indicated that strength in the labor market, improved household bal- the unemployment rate ticked down to 4.2 percent in ance sheets, and a high level of consumer sentiment. September, falling further below participants’ esti- Robust gains in consumer spending in September mates of its longer-run normal level. Participants also were viewed as consistent with that outlook. Light cited other indicators suggesting that labor market motor vehicle sales had rebounded in September, and conditions continued to strengthen, including District contacts generally expected sales to remain increases in the labor force participation rates of strong in the near term, boosted in part by demand to both prime-age and all individuals. Reports from replace vehicles destroyed by the hurricanes. some Districts pointed to difficulty attracting and retaining labor, but anecdotal information from other Reports on business spending from District contacts Districts suggested that workers with the requisite were generally upbeat. Participants anticipated skills remained reasonably available. Many particiappreciable increases in business fixed investment. pants judged that the economy was operating at or Improved demand from abroad, rising business prof- above full employment and anticipated that the labor its, and the substitution of capital for labor in market would tighten somewhat further in the near response to tightening labor markets were viewed as term, as GDP was expected to grow at a pace exceedfactors supporting growth in investment. Several par- ing that of potential output. ticipants reported that business contacts appeared to be more confident about the economic outlook and Participants discussed wage developments in light of thus more inclined to undertake capital expansion the continued strengthening in labor market condiplans. In that context, it was noted that the expan- tions. A few participants interpreted recent data on sion in business fixed investment could be given addi- aggregate wage and labor compensation as indicating tional impetus if legislation involving tax reductions some firming in wage growth; a few others, however, was enacted; a few participants judged that the pros- judged wage growth to have been little changed over pects for significant tax cuts had risen recently. Some the past year. Overall, wage increases were generally firms, especially those operating in industries in seen as modest. A couple of participants expressed which technological advances were spurring competi- the view that, when the rate of labor productivity tion, were reportedly planning to expand capacity growth was taken into account, the pace of recent through mergers and acquisitions rather than wage gains was consistent with an economy operatthrough investment in new plant and equipment. ing near full employment. Reports from District contacts indicated that some businesses facing tight labor Reports from District contacts about both manufac- markets found it more effective to expand their workturing and services were generally positive. District forces by using a variety of nonpecuniary means, contacts in regions affected by the hurricanes including offering greater job flexibility and training, reported that the disruptions to production and sales rather than by increasing wages. Other District conwere mostly short lived, including in the energy sec- tacts, however, reported some increased wage prestor where drilling and refining outages were tempo- sure as a result of tightening labor market conditions.

Minutes of Federal Open Market Committee Meetings | October–November 263 Gasoline prices rose in the aftermath of the hurri- In their comments regarding financial markets, parcanes, boosting overall inflation in September. Still, ticipants generally judged that financial conditions on a 12-month basis, PCE price inflation in Septem- remained accommodative despite the recent increases ber, at 1.6 percent, remained below the Committee’s in the exchange value of the dollar and Treasury longer-run objective; core PCE price inflation, which yields. In light of elevated asset valuations and low excludes consumer food and energy prices, was only financial market volatility, several participants 1.3 percent. Many participants judged that much of expressed concerns about a potential buildup of the recent softness in core inflation reflected tempo- financial imbalances. They worried that a sharp rary or idiosyncratic factors and that inflation would reversal in asset prices could have damaging effects begin to rise once the influence of these factors on the economy. It was noted, however, that elevated began to wane. Most participants continued to think asset prices could be partly explained by a low neuthat the cyclical pressures associated with a tighten- tral rate of interest. It was also observed that regulaing labor market were likely to show through to tory changes had contributed to an appreciable higher inflation over the medium term. strengthening of capital and liquidity positions in the financial sector over recent years, increasing the resil- With core inflation readings continuing to surprise ience of the financial system to potential reversals in on the downside, however, many participants valuations. observed that there was some likelihood that inflation might remain below 2 percent for longer than A few participants mentioned the limited reaction in they currently expected, and they discussed possible financial markets to the announcement and initial reasons for the recent shortfall. Several participants implementation of the Committee’s plan for gradupointed to a diminished responsiveness of inflation ally reducing the Federal Reserve’s securities holdto resource utilization, to the possibility that the ings. It was noted that, consistent with that limited degree of labor market tightness was less than cur- response, market participants had characterized the rently estimated, or to lags in the response of infla- Committee’s communications regarding the balance tion to greater resource utilization as plausible expla- sheet normalization program as clear and effective. nations for the continued soft readings on inflation. A few noted that secular influences, such as the effect In their discussion of monetary policy, all particiof technological innovation in disrupting existing pants thought that it would be appropriate to mainbusiness models, were likely offsetting cyclical tain the current target range for the federal funds rate upward pressure on inflation and contributing to at this meeting. Nearly all participants reaffirmed the below-target inflation. view that a gradual approach to increasing the target range was likely to promote the Committee’s objec- In discussing the implications of these developments, tives of maximum employment and price stability. several participants expressed concern that the persis- Participants commented on several factors that tently weak inflation data could lead to a decline in informed their assessments of the appropriate path longer-term inflation expectations or may have done of the federal funds rate. Several participants noted so already; they pointed to low market-based meas- that the neutral level of the federal funds rate ures of inflation compensation, declines in some sur- appeared to be quite low by historical standards. vey measures of inflation expectations, or evidence Most saw the outlook for economic activity and the from statistical models suggesting that the underlying labor market as little changed since the September trend in inflation had fallen in recent years. In addi- meeting, and participants expected increasing tighttion, the possibility was raised that monetary policy ness in the labor market to put only gradual upward actions or communications over the past couple of pressure on inflation. Still, with an accommodative years, while inflation was below the Committee’s stance of policy, most participants continued to 2 percent objective, may have contributed to a decline anticipate that inflation would stabilize around in longer-run inflation expectations below a level the Committee’s 2 percent objective over the consistent with that objective. Some other partici- medium term. pants, however, noted that measures of inflation expectations had remained stable this year despite the Many participants observed, however, that continued low readings on inflation and judged that this stabil- low readings on inflation, which had occurred even ity should support the return of inflation to the as the labor market tightened, might reflect not only Committee’s objective. transitory factors, but also the influence of develop-

264 104th Annual Report | 2017 ments that could prove more persistent. A number of In view of the persistent shortfall of inflation from these participants were worried that a decline in the Committee’s 2 percent objective and questions longer-term inflation expectations would make it about whether longer-term inflation expectations more challenging for the Committee to promote a were consistent with achievement of that objective, a return of inflation to 2 percent over the medium couple of participants discussed the possibility that term. These participants’ concerns were sharpened potential alternative frameworks for the conduct of by the apparently weak responsiveness of inflation to monetary policy could be helpful in fulfilling the resource utilization and the low level of the neutral Committee’s statutory mandate. One question, for interest rate, and such considerations suggested that example, was whether a framework that generally the removal of policy accommodation should be sought to keep the price level close to a gradually risquite gradual. In contrast, some other participants ing path—rather than the current approach in which were concerned about upside risks to inflation in an the Committee does not seek to make up for past environment in which the economy had reached full deviations of inflation from the 2 percent goal— employment and the labor market was projected to might be more effective in fostering the Committee’s tighten further, or about still very accommodative objectives if the neutral level of the federal funds rate financial conditions. They cautioned that waiting too remains low. long to remove accommodation, or removing accommodation too slowly, could result in a substantial Committee Policy Action overshoot of the maximum sustainable level of employment that would likely be costly to reverse or In their discussion of monetary policy for the period could lead to increased risks to financial stability. A ahead, members judged that information received few of these participants emphasized that the lags in since the Committee met in September indicated that the response of inflation to tightening resource utili- the labor market had continued to strengthen and zation implied that there could be increasing upside that economic activity had been rising at a solid rate risks to inflation as the labor market tightened despite hurricane-related disruptions. Although the further. hurricanes depressed payroll employment in September, the unemployment rate declined further. House- Participants agreed that they would continue to hold spending had been expanding at a moderate monitor closely and assess incoming data before rate, and growth in business fixed investment had making any further adjustment to the target range picked up in recent quarters. Gasoline prices rose in for the federal funds rate. Consistent with their the aftermath of the hurricanes, boosting overall expectation that a gradual removal of monetary inflation in September; however, inflation for items policy accommodation would be appropriate, many other than food and energy remained soft. On a participants thought that another increase in the tar- 12-month basis, both inflation measures had declined get range for the federal funds rate was likely to be this year and were running below 2 percent. Marketwarranted in the near term if incoming information based measures of inflation compensation remained left the medium-term outlook broadly unchanged. low; survey-based measures of longer-term inflation Several participants indicated that their decision expectations were little changed, on balance. about whether to increase the target range in the near term would depend importantly on whether the Members acknowledged that hurricane-related disupcoming economic data boosted their confidence ruptions and rebuilding would continue to affect ecothat inflation was headed toward the Committee’s nomic activity, employment, and inflation in the near objective. A few other participants thought that addi- term. They noted, however, that past experience sugtional policy firming should be deferred until incom- gested that the storm-related disruptions were ing information confirmed that inflation was clearly unlikely to materially alter the course of the national on a path toward the Committee’s symmetric 2 per- economy over the medium term. Consequently, the cent objective. A few participants cautioned that fur- Committee continued to expect that, with gradual ther increases in the target range for the federal funds adjustments in the stance of monetary policy, ecorate while inflation remained persistently below nomic activity would expand at a moderate pace, and 2 percent could unduly depress inflation expectations labor market conditions would strengthen somewhat or lead the public to question the Committee’s com- further. Inflation on a 12-month basis was expected mitment to its longer-run inflation objective. to remain somewhat below 2 percent in the near term

Minutes of Federal Open Market Committee Meetings | October–November 265 but to stabilize around the Committee’s 2 percent response to incoming information in the years ahead, objective over the medium term. Members saw the members generally agreed that the statement follownear-term risks to the economic outlook as roughly ing this meeting needed to contain only a brief referbalanced, but, in light of their concern about the ence to the program and that subsequent statements ongoing softness in inflation, they agreed to continue might not need to mention the program. Balance to monitor inflation developments closely. sheet normalization was expected to proceed gradually, following the plan described in the Addendum to After assessing current conditions and the outlook the Policy Normalization Principles and Plans that for economic activity, the labor market, and inflation, the Committee released in June. members decided to maintain the target range for the federal funds rate at 1 to 1¼ percent. They noted that At the conclusion of the discussion, the Committee the stance of monetary policy remained accommoda- voted to authorize and direct the Federal Reserve tive, thereby supporting some further strengthening Bank of New York, until it was instructed otherwise, in labor market conditions and a sustained return to to execute transactions in the SOMA in accordance 2 percent inflation. with the following domestic policy directive, to be released at 2:00 p.m.: Members agreed that the timing and size of future adjustments to the target range for the federal funds “Effective November 2, 2017, the Federal Open rate would depend on their assessments of realized Market Committee directs the Desk to underand expected economic conditions relative to the take open market operations as necessary to Committee’s objectives of maximum employment maintain the federal funds rate in a target range and 2 percent inflation. They noted that their assess- of 1 to 1¼ percent, including overnight reverse ments would take into account a wide range of infor- repurchase operations (and reverse repurchase mation, including measures of labor market condi- operations with maturities of more than one day tions, indicators of inflation pressures and inflation when necessary to accommodate weekend, holiexpectations, and readings on financial and interna- day, or similar trading conventions) at an offertional developments. Members reaffirmed their ing rate of 1.00 percent, in amounts limited only expectation that economic conditions would evolve by the value of Treasury securities held outright in a manner that would warrant gradual increases in in the System Open Market Account that are the federal funds rate, and that the federal funds rate available for such operations and by a perwas likely to remain, for some time, below levels that counterparty limit of $30 billion per day. are expected to prevail in the longer run. Nonetheless, they reiterated that the actual path of the federal The Committee directs the Desk to continue funds rate would depend on the economic outlook as rolling over at auction the amount of principal informed by incoming data. In particular, members payments from the Federal Reserve’s holdings of noted that they would carefully monitor actual and Treasury securities maturing during each calenexpected inflation developments relative to the Com- dar month that exceeds $6 billion, and to conmittee’s symmetric inflation goal. Some members tinue reinvesting in agency mortgage-backed expressed concerns about the outlook for inflation securities the amount of principal payments expectations and inflation; they emphasized that, in from the Federal Reserve’s holdings of agency considering the timing of further adjustments in the debt and agency mortgage-backed securities federal funds rate, they would be evaluating incoming received during each calendar month that information to assess the likelihood that recent low exceeds $4 billion. Small deviations from these readings on inflation were transitory and that infla- amounts for operational reasons are acceptable. tion was on a trajectory consistent with achieving the Committee’s 2 percent objective over the medium The Committee also directs the Desk to engage term. Several other members, however, were reasonin dollar roll and coupon swap transactions as ably confident that the economy and inflation would necessary to facilitate settlement of the Federal evolve in coming months such that an additional Reserve’s agency mortgage-backed securities firming would likely be appropriate in the near term. transactions.” With the balance sheet normalization program under The vote also encompassed approval of the statement way and with the balance sheet not anticipated to be below to be released at 2:00 p.m.: used to adjust the stance of monetary policy in

266 104th Annual Report | 2017 “Information received since the Federal Open and expected economic conditions relative to its Market Committee met in September indicates objectives of maximum employment and 2 perthat the labor market has continued to cent inflation. This assessment will take into strengthen and that economic activity has been account a wide range of information, including rising at a solid rate despite hurricane-related measures of labor market conditions, indicators disruptions. Although the hurricanes caused a of inflation pressures and inflation expectations, drop in payroll employment in September, the and readings on financial and international unemployment rate declined further. Household developments. The Committee will carefully spending has been expanding at a moderate rate, monitor actual and expected inflation developand growth in business fixed investment has ments relative to its symmetric inflation goal. picked up in recent quarters. Gasoline prices The Committee expects that economic condirose in the aftermath of the hurricanes, boosting tions will evolve in a manner that will warrant overall inflation in September; however, inflation gradual increases in the federal funds rate; the for items other than food and energy remained federal funds rate is likely to remain, for some soft. On a 12-month basis, both inflation meas- time, below levels that are expected to prevail in ures have declined this year and are running the longer run. However, the actual path of the below 2 percent. Market-based measures of federal funds rate will depend on the economic inflation compensation remain low; survey- outlook as informed by incoming data. based measures of longer-term inflation expectations are little changed, on balance. The balance sheet normalization program initiated in October 2017 is proceeding.” Consistent with its statutory mandate, the Committee seeks to foster maximum employment Voting for this action: Janet L. Yellen, William C. and price stability. Hurricane-related disruptions Dudley, Lael Brainard, Charles L. Evans, Patrick and rebuilding will continue to affect economic Harker, Robert S. Kaplan, Neel Kashkari, Jerome H. activity, employment, and inflation in the near Powell, and Randal K. Quarles. term, but past experience suggests that the storms are unlikely to materially alter the course Voting against this action: None. of the national economy over the medium term. Consequently, the Committee continues to Consistent with the Committee’s decision to leave the expect that, with gradual adjustments in the target range for the federal funds rate unchanged, the stance of monetary policy, economic activity Board of Governors voted unanimously to leave the will expand at a moderate pace, and labor mar- interest rates on required and excess reserve balances ket conditions will strengthen somewhat further. unchanged at 1¼ percent and voted unanimously to Inflation on a 12-month basis is expected to approve establishment of the primary credit rate (disremain somewhat below 2 percent in the near count rate) at the existing level of 1¾ percent.4 term but to stabilize around the Committee’s 2 percent objective over the medium term. Near- It was agreed that the next meeting of the Committee term risks to the economic outlook appear would be held on Tuesday–Wednesday, Decemroughly balanced, but the Committee is moni- ber 12–13, 2017. The meeting adjourned at 10:30 toring inflation developments closely. a.m. on November 1, 2017. In view of realized and expected labor market Notation Vote conditions and inflation, the Committee decided By notation vote completed on October 10, 2017, the to maintain the target range for the federal funds Committee unanimously approved the minutes of the rate at 1 to 1¼ percent. The stance of monetary Committee meeting held on September 19–20, 2017. policy remains accommodative, thereby supporting some further strengthening in labor market Brian F. Madigan conditions and a sustained return to 2 percent Secretary inflation. In determining the timing and size of future 4 The second vote of the Board also encompassed approval of the adjustments to the target range for the federal establishment of the interest rates for secondary and seasonal funds rate, the Committee will assess realized credit under the existing formulas for computing such rates.

Minutes of Federal Open Market Committee Meetings | December 267 Meeting Held Steven B. Kamin Economist on December 12–13, 2017 Thomas Laubach A joint meeting of the Federal Open Market Com- Economist mittee and the Board of Governors was held in the David W. Wilcox offices of the Board of Governors of the Federal Economist Reserve System in Washington, D.C., on Tuesday, December 12, 2017, at 1:00 p.m. and continued on Thomas A. Connors, Michael Dotsey, Wednesday, December 13, 2017, at 9:00 a.m.1 Eric M. Engen, Evan F. Koenig, Daniel G. Sullivan, William Wascher, Present and Beth Anne Wilson 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 Ann E. Misback Charles L. Evans Secretary, Office of the Secretary, Patrick Harker Board of Governors Robert S. Kaplan Matthew J. Eichner2 Neel Kashkari Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Jerome H. Powell Andreas Lehnert Randal K. Quarles Director, Division of Financial Stability, Raphael W. Bostic, Loretta J. Mester, Board of Governors Mark L. Mullinix, Michael Strine, Jennifer Burns and John C. Williams Deputy Director, Division of Supervision and Alternate Members of the Federal Open Market Regulation, Board of Governors Committee Rochelle M. Edge and Stephen A. Meyer James Bullard, Esther L. George, and Eric Rosengren Deputy Directors, Division of Monetary Affairs, Presidents of the Federal Reserve Banks of St. Louis, Board of Governors Kansas City, and Boston, respectively Michael T. Kiley James A. Clouse Deputy Director, Division of Financial Stability, 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 Joseph W. Gruber, David Reifschneider, Michelle A. Smith and John M. Roberts Assistant Secretary Special Advisers to the Board, Office of Board Members, Board of Governors Mark E. Van Der Weide General Counsel Linda Robertson Assistant to the Board, Office of Board Members, Michael Held Board of Governors Deputy General Counsel 1 The Federal Open Market Committee is referenced as the 2 Attended through the discussion of developments in financial “FOMC” and the “Committee” in these minutes. markets and open market operations.

268 104th Annual Report | 2017 Antulio N. Bomfim, Edward Nelson, Todd E. Clark and Marc Giannoni Ellen E. Meade, and Robert J. Tetlow Senior Vice Presidents, Federal Reserve Banks of Senior Advisers, Division of Monetary Affairs, Cleveland and Dallas, respectively Board of Governors Jonathan L. Willis Shaghil Ahmed Vice President, Federal Reserve Bank of Kansas City Associate Directors, Division of International Benjamin Malin Finance, Board of Governors Senior Research Economist, Federal Reserve Bank of Elizabeth Kiser, John J. Stevens, Minneapolis and Stacey Tevlin Associate Directors, Division of Research and Developments in Financial Markets and Statistics, Board of Governors Open Market Operations David López-Salido The manager of the System Open Market Account Associate Director, Division of Monetary Affairs, (SOMA) reported on developments in domestic and Board of Governors international financial markets over the intermeeting period. Equity prices moved higher over the period, Norman J. Morin and Shane M. Sherlund with market participants pointing to the likely pas- Assistant Directors, Division of Research and sage of tax reform legislation as an important factor Statistics, Board of Governors contributing to the rise. The narrowing of the spread Eric C. Engstrom between long- and short-term Treasury yields over Adviser, Division of Monetary Affairs, recent months had been a focus of market attention. and Market participants cited a range of factors as con- Adviser, Division of Research and Statistics, tributing to this narrowing, including the gradual Board of Governors firming in the stance of monetary policy as well as an increasing expectation among investors that the Penelope A. Beattie3 Treasury Department would issue substantial vol- Assistant to the Secretary, Office of the Secretary, umes of shorter-term securities in meeting its financ- Board of Governors ing needs over coming years. David H. Small Project Manager, Division of Monetary Affairs, The deputy manager discussed open market opera- Board of Governors tions over the period. Take-up at the System’s overnight reverse repurchase (ON RRP) agreement facil- Cynthia L. Doniger ity dropped to relatively low levels over the period. In Senior Economist, Division of Monetary Affairs, part, the decline appeared to reflect an increase in Board of Governors yields on alternative investments; Treasury bill yields, Randall A. Williams for example, had moved higher over recent weeks as Senior Information Manager, Division of Monetary the Treasury boosted net issuance of Treasury bills. Affairs, Board of Governors The Open Market Desk continued to execute reinvestment operations for Treasury and agency securi- Kelly J. Dubbert ties in the SOMA in accordance with the procedure First Vice President, Federal Reserve Bank of specified in the Committee’s directive to the Desk. Kansas City The deputy manager also provided an update on David Altig, Kartik B. Athreya, Mary Daly, plans for the Federal Reserve Bank of New York, in Beverly Hirtle, Geoffrey Tootell, conjunction with the Treasury’s Office of Financial and Christopher J. Waller Research, to begin publishing reference interest rates Executive Vice Presidents, Federal Reserve Banks of for repurchase agreements involving Treasury securi- Atlanta, Richmond, San Francisco, New York, ties by the middle of next year. Boston, and St. Louis, respectively By unanimous vote, the Committee ratified the 3 Attended Tuesday session only. Desk’s domestic transactions over the intermeeting

Minutes of Federal Open Market Committee Meetings | December 269 period. There were no intervention operations in for- in the coming months. Broader indicators of manueign currencies for the System’s account during the facturing production, such as the new orders indexes intermeeting period. from national and regional manufacturing surveys, pointed to further increases in factory output in the Staff Review of the Economic Situation near term. The information reviewed for the December 12–13 Real PCE increased modestly in October after meeting indicated that labor market conditions con- expanding strongly in September. The pace of light tinued to strengthen through November and sug- motor vehicle sales slowed in November from the gested that real gross domestic product (GDP) was elevated rate in the preceding two months but continrising at a solid pace in the second half of 2017. Total ued to be above levels seen earlier in the year. Recent consumer price inflation, as measured by the readings on key factors that influence consumer 12-month percentage change in the price index for spending—including gains in employment, real dispersonal consumption expenditures (PCE), remained posable personal income, and households’ net below 2 percent in October and was lower than early worth—continued to be supportive of moderate real in the year. Survey-based measures of longer-run PCE growth in the fourth quarter. Consumer sentiinflation expectations were little changed on balance. ment in early December, as measured by the University of Michigan Surveys of Consumers, remained at Total nonfarm payroll employment increased a high level. strongly in October and November, likely reflecting in part a rebound from the negative effects of the Recent information on housing activity suggested hurricanes in September. The national unemploy- that real residential investment spending was edging ment rate declined to 4.1 percent in October and up in the fourth quarter after declining in the previremained at that level in November. The unemploy- ous two quarters. Both starts and building permit ment rates for Hispanics, for Asians, and for whites issuance for new single-family homes increased somewere lower in November than two months earlier, what in October, and starts for multifamily units while the rate for African Americans was a little moved up considerably. Sales of both new and existhigher; the unemployment rates for each of these ing homes rose moderately in October. groups were close to the levels seen just before the most recent recession. The national labor force par- Real private expenditures for business equipment and ticipation rate was lower in November than it had intellectual property appeared to be rising further in been in September but remained in the range seen the fourth quarter. Nominal shipments of nondeover the past several years. The share of workers fense capital goods excluding aircraft increased in employed part time for economic reasons declined in October, and new orders of these goods continued to October and was about unchanged in November. exceed shipments, which pointed to further gains in The rates of private-sector job openings and quits shipments in the near term. In addition, readings on were little changed at relatively high levels in Septem- business sentiment remained upbeat. Firms’ nominal ber and October, and the four-week moving average spending for nonresidential structures excluding drillof initial claims for unemployment insurance benefits ing and mining rose in October, and the number of continued to be at a low level in early December. oil and gas rigs in operation—an indicator of spend- Recent readings showed that wage gains remained ing for structures in the drilling and mining sector— modest. Compensation per hour in the nonfarm started to edge up in late November after declining business sector increased 1 percent over the four earlier in the fourth quarter. quarters ending in the third quarter, and average hourly earnings for all employees rose 2½ percent Total real government purchases looked to be rising over the 12 months ending in November. in the fourth quarter. Nominal defense expenditures in October and November pointed to a flattening in Total industrial production increased briskly in Octo- real federal government purchases. However, real purber, boosted in part by a continued return to more- chases by state and local governments appeared to be normal operations that reflected the waning of the moving up, as these governments expanded their paynegative effects of recent hurricanes in the previous rolls modestly over the two months ending in two months. Automakers’ schedules indicated that November and their nominal construction spending light motor vehicle assemblies would likely move up increased in October.

270 104th Annual Report | 2017 The nominal U.S. international trade deficit widened Federal Reserve communications and economic data slightly in September and sharply in October. releases over the intermeeting period were character- Exports picked up in September, led by exports of ized by market participants as reinforcing percepindustrial supplies, but were flat in October. Imports tions of a likely increase in the target range for the grew significantly in both months, reflecting strength federal funds rate at the December meeting. The in most categories, although imports of automobiles probability of an increase as implied by quotes on declined. The available trade data suggested that the federal funds futures contracts edged up to around change in real net exports would make a neutral con- 95 percent, roughly consistent with the average probtribution to real U.S. GDP growth in the fourth ability indicated by responses to the Desk’s surveys quarter. of primary dealers and market participants in December. Total U.S. consumer prices, as measured by the PCE price index, increased slightly more than 1½ percent The nominal Treasury yield curve flattened over the over the 12 months ending in October. Core PCE intermeeting period, as short-dated Treasury yields price inflation, which excludes changes in consumer rose and the 10-year Treasury yield moved up only food and energy prices, was nearly 1½ percent over slightly. Market participants pointed to the Novemthat same period. The consumer price index (CPI) ber 1 release of the Treasury’s quarterly financing rose 2¼ percent over the 12 months ending in statement and accompanying analysis by the Treas- November, while core CPI inflation was 1¾ percent. ury Borrowing Advisory Committee that highlighted Recent readings on survey-based measures of longer- some advantages of increasing issuance of relatively run inflation expectations—including those from the short-dated Treasury securities as factors contribut- Michigan survey, the Survey of Professional Fore- ing to the flattening of the yield curve over the casters, and the Desk’s Survey of Primary Dealers period. Measures of inflation compensation based on and Survey of Market Participants—were little Treasury Inflation-Protected Securities were little changed on balance. changed, on net, over the intermeeting period. Option-adjusted spreads of yields on current-coupon Economic activity expanded at a solid pace in most mortgage-backed securities (MBS) over Treasury foreign economies in the third quarter. In several yields also were little changed. Overall, market paradvanced foreign economies (AFEs), economic ticipants did not attribute any price changes in Treasgrowth slowed but remained firm. Economic activity ury and agency MBS markets to the implementation in the emerging market economies (EMEs) continued of reductions in reinvestments of the SOMA to grow briskly for the most part, especially in Asia. portfolio. However, the Mexican economy contracted in the third quarter, as hurricanes and earthquakes dis- Broad equity price indexes rose over the intermeeting rupted economic activity. Despite a boost from period, likely reflecting in part investors’ perceptions recent increases in oil prices, inflation remained rela- of increased odds for the passage of federal tax legistively subdued in most AFEs and moderate in EMEs. lation and an associated potential boost to corporate earnings. One-month-ahead option-implied volatility Staff Review of the Financial Situation on the S&P 500 index—the VIX—was little changed, on net, at levels close to historical lows. Spreads on Movements in domestic financial asset prices over both investment- and speculative-grade corporate the intermeeting period reflected slightly stronger- bond yields over comparable-maturity Treasury than-expected economic data releases, announce- yields were about flat on net. ments related to Treasury debt issuance, and an increase in the perceived probability that the Con- Conditions in short-term funding markets remained gress would enact tax legislation. On net, the Treas- stable over the intermeeting period. The effective fedury yield curve flattened, U.S. equity prices moved eral funds rate held steady, and rates and volumes in up, and the foreign exchange value of the dollar was other overnight markets were little changed. Take-up little changed. Financing conditions for businesses of ON RRPs declined notably as Treasury bill supply and households remained broadly supportive of con- continued to increase, and short-dated bill yields rose tinued growth in household spending and business to levels significantly above the ON RRP offering investment. rate. On December 11, the Treasury declared a debt

Minutes of Federal Open Market Committee Meetings | December 271 issuance suspension period to keep outstanding fed- associated with the North American Free Trade eral debt below the debt ceiling and began to use Agreement, but both currencies ended the period extraordinary measures to allow continued financing little changed. Following missed interest payments on of government operations. its sovereign bonds, Venezuela was assigned selective default status by two credit rating agencies in early Financing conditions for large nonfinancial corpora- November, which precipitated a “credit event” ruling tions continued to be accommodative on balance. by the International Swaps and Derivatives Associa- Gross issuance of corporate bonds and gross equity tion. However, developments related to Venezuela issuance remained robust. Institutional leveraged generated little spillover to global financial markets. loan issuance in November was brisk. Growth of bank-intermediated credit to nonfinancial firms, Staff Economic Outlook however, was tepid. On balance, the credit quality of nonfinancial corporations was little changed over the The U.S. economic projection prepared by the staff intermeeting period and appeared to remain solid. for the December FOMC meeting was generally Financing conditions for small businesses also comparable with the staff’s previous forecast. Real appeared to have remained favorable. In municipal GDP was forecast to have increased at a solid pace in bond markets, gross issuance was strong and credit the second half of 2017. Beyond 2017, the forecast quality remained stable. for real GDP growth was revised up modestly, reflecting the staff’s updated assumption that the reduction In commercial real estate (CRE) markets, spreads of in federal income taxes expected to begin next year commercial mortgage-backed securities (CMBS) would be larger than assumed in the previous projecyields over comparable-maturity Treasury yields tion. The staff projected that real GDP would remained near the lower end of the range seen since increase at a modestly faster pace than potential outthe financial crisis, and delinquency rates on loans in put through 2019. The unemployment rate was pro- CMBS pools continued to decrease. The growth of jected to decline further over the next few years and CRE loans held by the largest banks continued to to continue running below the staff’s slightly slow, while CRE loan growth at smaller banks downward-revised estimate of the longer-run natural remained strong overall and even picked up a bit in rate over this period. October. The staff’s forecast for total PCE price inflation was In the residential mortgage market, although credit revised up a little for 2017, as somewhat higher forestandards had loosened gradually for borrowers with casts for core PCE prices and for consumer energy low credit scores, they continued to be tight for bor- prices were offset only partially by a lower forecast rowers with low credit scores and hard-to-document for consumer food prices. Total PCE price inflation incomes. Mortgage credit remained readily available in 2018 was projected to be about the same as in for borrowers with strong credit scores. Similarly, 2017, despite projected declines in consumer energy consumer credit remained readily available to bor- prices; core PCE prices were forecast to rise faster in rowers with strong credit histories, but conditions for 2018, reflecting the expected waning of transitory subprime borrowers stayed tight in credit card mar- factors that held down those prices in 2017. Beyond kets and continued to tighten for auto loans. Issuance 2018, the inflation forecast was little changed from of asset-backed securities (ABS) funding consumer the previous projection. The staff projected that loans was robust in recent months, and ABS spreads inflation would be very close to the Committee’s were about unchanged over the intermeeting period. 2 percent objective in 2019 and at that objective in 2020. On balance, the broad index of the foreign exchange value of the dollar was little changed, longer-term The staff viewed the uncertainty around its projecsovereign bond yields in AFEs declined modestly, tions for real GDP growth, the unemployment rate, and most foreign equity indexes moved lower over and inflation as similar to the average of the past the intermeeting period. The euro appreciated mod- 20 years. On the one hand, many indicators of uncerestly against the U.S. dollar, in part because of strong tainty about the macroeconomic outlook continued economic data for the euro area early in the inter- to be subdued; on the other hand, considerable meeting period. The British pound was somewhat uncertainty remained about a number of federal govvolatile amid Brexit-related developments, and the ernment policies relevant for the economic outlook. Mexican peso fluctuated on news about negotiations The staff saw the risks to the forecasts for real GDP

272 104th Annual Report | 2017 growth and the unemployment rate as balanced. The Real economic activity appeared to be growing at a risks to the projection for inflation also were seen as solid pace, buttressed by gains in consumer and busibalanced. Downside risks to inflation included the ness spending, supportive financial conditions, and possibility that longer-term inflation expectations an improving global economy. Participants judged may move lower or that the run of soft core inflation that hurricane-related disruptions and rebuilding had readings this year could prove to be more persistent affected economic activity, employment, and inflathan the staff expected. These downside risks were tion in recent months but had not materially altered seen as essentially counterbalanced by the upside risk the outlook for the national economy. They saw the that inflation could increase more than expected in incoming information on spending and the labor an economy that was projected to move further market as consistent with continued above-trend above its potential. growth and a further strengthening in labor market conditions. Consequently, participants continued to Participants’ Views on Current Conditions expect that, with gradual adjustments in the stance of and the Economic Outlook monetary policy, economic activity would expand at a moderate pace and labor market conditions would In conjunction with this FOMC meeting, members remain strong. Inflation on a 12-month basis was of the Board of Governors and Federal Reserve expected to remain somewhat below 2 percent in the Bank presidents submitted their projections of the near term but to stabilize around the Committee’s most likely outcomes for real GDP growth, the 2 percent objective over the medium term. Near-term unemployment rate, and inflation for each year from risks to the economic outlook appeared to be roughly 2017 through 2020 and over the longer run, based on balanced, but participants agreed that it would be their individual assessments of the appropriate path important to continue to monitor inflation developfor the federal funds rate.4 The longer-run projections ments closely. represented each participant’s assessment of the rate to which each variable would be expected to con- Participants expected moderate growth in consumer verge, over time, under appropriate monetary policy spending in the near term, underpinned by ongoing and in the absence of further shocks to the economy. strength in the labor market, further improvements in These projections and policy assessments are households’ net worth, and buoyant consumer sentidescribed in the Summary of Economic Projections ment. Business contacts in a few Districts reported (SEP), which is an addendum to these minutes. strong pre-holiday sales. Many participants expected the proposed cuts in personal taxes to provide some In their discussion of economic conditions and the boost to consumer spending. A few participants outlook, meeting participants agreed that informa- noted that expectations of tax reform may have tion received since the FOMC met in November indi- already raised consumer spending somewhat to the cated that economic activity had been rising at a solid extent that those expectations had spurred increases rate and that the labor market had continued to in asset valuations and household net worth. A numstrengthen. Averaging through fluctuations associ- ber of participants expressed uncertainty about the ated with the recent hurricanes, job gains had been magnitude of the effects of tax reform on consumer solid and the unemployment rate had declined fur- spending. ther. Household spending had been expanding at a moderate rate, and growth in business fixed invest- District contacts were optimistic, and their reports ment had picked up in recent quarters. On a were generally consistent with continued steady 12-month basis, both overall inflation and inflation growth in business spending. Reports from District for items other than food and energy had declined contacts about both the manufacturing and service this year and were running below 2 percent. Market- sectors were generally positive. In contrast, reports based measures of inflation compensation remained on housing and nonresidential construction were low; survey-based measures of longer-term inflation mixed. Activity in the energy sector continued to expectations were little changed, on balance. firm, with transportation bottlenecks and residual effects of the hurricanes putting some upward pressure on gasoline prices. In the agricultural sector, 4 The incoming president of the Federal Reserve Bank of Richmond is scheduled to assume office on January 1, 2018; First farm income was under downward pressure due to Vice President Mark L. Mullinix submitted economic projec- low crop prices, and contacts expressed concern tions for this meeting. One participant did not submit longerabout the effects of the possible renegotiation of run projections for real output growth, the unemployment rate, or the federal funds rate. trade agreements on exports.

Minutes of Federal Open Market Committee Meetings | December 273 Many participants judged that the proposed changes PCE price inflation over the 12 months ending in in business taxes, if enacted, would likely provide a October, at 1.6 percent, continued to run below the modest boost to capital spending, although the mag- Committee’s longer-run objective of 2 percent; core nitude of the effects was uncertain. The resulting PCE price inflation for items other than consumer increase in the capital stock could contribute to posi- food and energy prices was only 1.4 percent over the tive supply-side effects, including an expansion of same period. It was noted that recent readings on potential output over the next few years. However, monthly inflation had edged up, and a couple of parsome business contacts and respondents to business ticipants observed that core inflation on a year-oversurveys suggested that firms were cautious about year basis appeared to be stabilizing. Many indicated expanding capital spending in response to the pro- that they expected cyclical pressures associated with a posed tax changes or noted that the increase in cash tightening labor market to show through to higher flow that would result from corporate tax cuts was inflation over the medium term. These participants more likely to be used for mergers and acquisitions or generally judged that much of the softness in core for debt reduction and stock buybacks. inflation this year reflected transitory factors and that inflation would begin to rise as the influence of Labor market conditions continued to strengthen in these factors waned. However, one of them noted recent months, with the unemployment rate declining that secular trends, such as technological innovation further and payroll gains well above a pace consistent or globalization, could be affecting competition and with maintaining a stable unemployment rate over business pricing, and muting inflationary pressures. time. Other indicators, such as consumer and busi- With core inflation readings having moved down this ness surveys of job availability and job openings, also year and remaining well below 2 percent, some parpointed to a further tightening in labor market condi- ticipants observed that there was a possibility that tions. A couple of participants noted that broad inflation might stay below the objective for longer improvements in labor market conditions over the than they currently expected. Several of them past several years were evident across demographic expressed concern that persistently weak inflation groups. In several Districts, reports from business may have led to a decline in longer-term inflation contacts or evidence from surveys pointed to some expectations; they pointed to low market-based difficulty in finding qualified workers; in some cases, measures of inflation compensation, declines in some labor shortages were making it hard to fill customer survey measures of inflation expectations, or evidemand or expand business. A few participants noted dence from statistical models suggesting that the that a reduction in personal tax rates could poten- underlying trend in inflation had fallen in recent tially increase labor supply, but the magnitude of years. A few participants, however, noted that meassuch effects was quite uncertain. ures of inflation expectations had remained broadly stable this year despite the low readings on inflation Against the backdrop of the continued strengthening and judged that this stability should support the in labor market conditions, participants discussed return of inflation to the Committee’s 2 percent recent wage developments. Overall, the pace of wage objective. increases had generally been modest and in line with inflation and productivity growth. In some Districts, With regard to financial markets, some participants reports from business contacts or evidence from sur- observed that financial conditions remained accomveys pointed to a pickup in wage gains, particularly modative, citing a range of indicators including low for unskilled or entry-level workers. In a couple of interest rates, narrow credit spreads, high equity valregions, businesses facing tight labor market condi- ues, a lower dollar, and some evidence of easier terms tions were said to be offering more flexible work for lending to risky borrowers. In light of elevated arrangements or taking advantage of technology to asset valuations and low financial market volatility, a use employees more efficiently, rather than raising couple of participants expressed concern that the wages. A few participants judged that the tightness in persistence of highly accommodative financial condilabor markets was likely to translate into an accelera- tions could, over time, pose risks to financial stability. tion in wages; however, another observed that the Participants also noted that term premiums on absence of broad-based upward wage pressures sug- longer-term nominal Treasury securities remained gested that there might be scope for further improve- low. A number of factors were seen as possibly conment in labor market conditions. tributing to the low levels of term premiums, includ-

274 104th Annual Report | 2017 ing large holdings of longer-term assets by major holding down inflation, which would present chalcentral banks, persistently low global inflation, and lenges for the Committee in promoting a return of substantial global demand for assets with long inflation to 2 percent over the medium term. durations. Based on their current assessments, almost all partici- Meeting participants also discussed the recent nar- pants expressed the view that it would be appropriate rowing of the gap between the yields on long- and for the Committee to raise the target range for the short-maturity nominal Treasury securities, which federal funds rate 25 basis points at this meeting. had resulted in a flatter profile of the term structure These participants agreed that, even after an increase of interest rates. Among the factors contributing to in the target range at this meeting, the stance of the flattening, participants pointed to recent monetary policy would remain accommodative, supincreases in the target range for the federal funds rate, porting strong labor market conditions and a susreductions in investors’ estimates of the longer-run tained return to 2 percent inflation. A couple of parneutral real interest rate, lower longer-term inflation ticipants did not believe it was appropriate to raise expectations, and lower term premiums. They gener- the target range for the federal funds rate at this ally agreed that the current degree of flatness of the meeting; these participants suggested that the Comyield curve was not unusual by historical standards. mittee should maintain the target range at 1 to However, several participants thought that it would 1¼ percent until the actual rate of inflation had be important to continue to monitor the slope of the moved further toward the Committee’s 2 percent yield curve. Some expressed concern that a possible longer-run objective or inflation expectations had future inversion of the yield curve, with short-term increased. They judged that leaving the target range yields rising above those on longer-term Treasury at its current level would better support an increase in securities, could portend an economic slowdown, inflation expectations and thereby increase the likelinoting that inversions have preceded recessions over hood that inflation will rise to 2 percent. the past several decades, or that a protracted yield curve inversion could adversely affect the financial Regarding the determination of the appropriate timcondition of banks and other financial institutions ing and size of future adjustments to the target range and pose risks to financial stability. A couple of other for the federal funds rate, participants reaffirmed the participants viewed the flattening of the yield curve need to continue to assess realized and expected ecoas an expected consequence of increases in the Com- nomic conditions. Most participants reiterated their mittee’s target range for the federal funds rate, and support for continuing a gradual approach to raising judged that a yield curve inversion under such cir- the target range, noting that this approach helped to cumstances would not necessarily foreshadow or balance risks to the outlook for economic activity cause an economic downturn. It was also noted that and inflation. Participants discussed several risks contacts in the financial sector generally did not that, if realized, could necessitate a steeper path of express concern about the recent flattening of the increases in the target range; these risks included the term structure. possibility that inflation pressures could build unduly if output expanded well beyond its maximum sus- In their discussion of monetary policy, participants tainable level, perhaps owing to fiscal stimulus or saw the outlook for economic activity and the labor accommodative financial market conditions. Particimarket as having remained strong or having strength- pants also discussed risks that could lead to a flatter ened since their previous meeting, in part reflecting a trajectory for the federal funds rate in the medium modest boost from the expected passage of the tax term, including a failure of actual or expected inflalegislation under consideration. Regarding inflation, tion to move up to the Committee’s 2 percent objecparticipants generally viewed the medium-term out- tive. While participants generally saw the risks to the look as little changed, and a majority commented economic outlook as roughly balanced, they agreed that they continued to expect inflation to gradually that inflation developments should be monitored return to the Committee’s 2 percent longer-run closely. A few participants indicated that they were objective. A few participants again noted that transi- not comfortable with the degree of additional policy tory factors had likely held down inflation earlier this tightening through the end of 2018 implied by the year. However, several participants observed that median projections for the federal funds rate in the survey-based measures of inflation expectations or December SEP. They expressed concern that such a market-based measures of inflation compensation path of increases in the policy rate, while gradual, remained low, or that other persistent factors may be might prove inconsistent with a sustained return of

Minutes of Federal Open Market Committee Meetings | December 275 inflation to 2 percent, or that the level of the federal basis to remain somewhat below 2 percent in the near funds rate might already be near its current neutral term. They also expected inflation to stabilize around value. A few other participants mentioned that they the Committee’s 2 percent objective over the medium saw as appropriate a pace of additional policy tight- term, but a couple of members expressed concern ening through the end of 2018 that was somewhat about whether inflation would return to 2 percent on faster than that implied by the December SEP a sustained basis in the medium term if the Commitmedian forecast. They noted that financial conditions tee increased the target range for the federal funds had not materially tightened since the removal of rate at the pace that is implied by the medians of the monetary policy accommodation began, that contin- projections from the December SEP. Members saw ued low interest rates risked financial instability in the near-term risks to the economic outlook as the future, or that the labor market was increasingly roughly balanced, but they agreed to monitor inflatight. A couple of participants noted the need to con- tion developments closely. tinue to monitor and evaluate the effects of balance sheet normalization on long-term interest rates and After assessing current conditions and the outlook economic performance. for economic activity, the labor market, and inflation, nearly all members agreed to raise the target range Due to the persistent shortfall of inflation from the for the federal funds rate to 1¼ to 1½ percent. These Committee’s 2 percent objective, or the risk that members noted that the stance of monetary policy monetary policy could again become constrained by remains accommodative, thereby supporting strong the zero lower bound, a few participants suggested labor market conditions and a sustained return to that further study of potential alternative frameworks 2 percent inflation. Two members preferred to leave for the conduct of monetary policy such as price- the target range at 1 to 1¼ percent, suggesting that level targeting or nominal GDP targeting could be the Committee should wait to raise the target range useful. until inflation moves up closer to 2 percent on a sustained basis or inflation expectations increase. Committee Policy Action Members agreed that the timing and size of future In their discussion of monetary policy for the period adjustments to the target range for the federal funds ahead, members judged that information received rate would depend on their assessments of realized since the Committee met in November indicated that and expected economic conditions relative to the the labor market had continued to strengthen and Committee’s objectives of maximum employment that economic activity had been rising at a solid rate. and 2 percent inflation. They noted that their assess- Averaging through hurricane-related fluctuations, job ments would take into account a wide range of inforgains had been solid, and the unemployment rate had mation, including measures of labor market condideclined further. Household spending had been tions, indicators of inflation pressures and inflation expanding at a moderate rate, and growth in business expectations, and readings on financial and internafixed investment had picked up in recent quarters. On tional developments. Members agreed that their a 12-month basis, both overall inflation and inflation assessments would also take into account actual and for items other than food and energy had declined for expected inflation developments relative to the Comthe year to date and were running below 2 percent. mittee’s symmetric inflation goal. Almost all mem- Market-based measures of inflation compensation bers reaffirmed their expectation that economic conhad remained low; survey-based measures of longer- ditions would evolve in a manner that would warrant term inflation expectations had changed little, on gradual increases in the federal funds rate, and that balance. the federal funds rate would be likely to remain, for some time, below levels that were expected to prevail Members acknowledged that hurricane-related dis- in the longer run. Nonetheless, members reiterated ruptions and rebuilding had affected economic activ- that the actual path of the federal funds rate would ity, employment, and inflation in recent months but depend on the economic outlook as informed by had not materially altered the outlook for the incoming data. national economy. They continued to expect that, with gradual adjustments in the stance of monetary At the conclusion of the discussion, the Committee policy, economic activity would expand at a moder- voted to authorize and direct the Federal Reserve ate pace and labor market conditions would remain Bank of New York, until it was instructed otherwise, strong. Members expected inflation on a 12-month to execute transactions in the SOMA in accordance

276 104th Annual Report | 2017 with the following domestic policy directive, to be rising at a solid rate. Averaging through released at 2:00 p.m.: hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined “Effective December 14, 2017, the Federal Open further. Household spending has been expand- Market Committee directs the Desk to under- ing at a moderate rate, and growth in business take open market operations as necessary to fixed investment has picked up in recent quarmaintain the federal funds rate in a target range ters. On a 12-month basis, both overall inflation of 1¼ to 1½ percent, including overnight reverse and inflation for items other than food and repurchase operations (and reverse repurchase energy have declined this year and are running operations with maturities of more than one day below 2 percent. Market-based measures of when necessary to accommodate weekend, holi- inflation compensation remain low; surveyday, or similar trading conventions) at an offer- based measures of longer-term inflation expecing rate of 1.25 percent, in amounts limited only tations are little changed, on balance. by the value of Treasury securities held outright in the System Open Market Account that are Consistent with its statutory mandate, the Comavailable for such operations and by a per- mittee seeks to foster maximum employment counterparty limit of $30 billion per day. and price stability. Hurricane-related disruptions and rebuilding have affected economic activity, The Committee directs the Desk to continue employment, and inflation in recent months but rolling over at auction the amount of principal have not materially altered the outlook for the payments from the Federal Reserve’s holdings of national economy. Consequently, the Committee Treasury securities maturing during December continues to expect that, with gradual adjustthat exceeds $6 billion, and to continue reinvest- ments in the stance of monetary policy, ecoing in agency mortgage-backed securities the nomic activity will expand at a moderate pace amount of principal payments from the Federal and labor market conditions will remain strong. Reserve’s holdings of agency debt and agency Inflation on a 12{month basis is expected to mortgage-backed securities received during remain somewhat below 2 percent in the near December that exceeds $4 billion. Effective in term but to stabilize around the Committee’s January, the Committee directs the Desk to roll 2 percent objective over the medium term. Nearover at auction the amount of principal pay- term risks to the economic outlook appear ments from the Federal Reserve’s holdings of roughly balanced, but the Committee is moni- Treasury securities maturing during each calen- toring inflation developments closely. dar month that exceeds $12 billion, and to reinvest in agency mortgage-backed securities the In view of realized and expected labor market amount of principal payments from the Federal conditions and inflation, the Committee decided Reserve’s holdings of agency debt and agency to raise the target range for the federal funds mortgage-backed securities received during each rate to 1¼ to 1½ percent. The stance of moncalendar month that exceeds $8 billion. Small etary policy remains accommodative, thereby deviations from these amounts for operational supporting strong labor market conditions and a reasons are acceptable. sustained return to 2 percent inflation. The Committee also directs the Desk to engage In determining the timing and size of future in dollar roll and coupon swap transactions as adjustments to the target range for the federal necessary to facilitate settlement of the Federal funds rate, the Committee will assess realized Reserve’s agency mortgage-backed securities and expected economic conditions relative to its 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 November indicates developments. The Committee will carefully that the labor market has continued to monitor actual and expected inflation developstrengthen and that economic activity has been ments relative to its symmetric inflation goal.

Minutes of Federal Open Market Committee Meetings | December 277 The Committee expects that economic condi- interest. He preferred to wait for inflation to move tions will evolve in a manner that will warrant closer to 2 percent on a sustained basis or for inflagradual increases in the federal funds rate; the tion expectations to move up before further raising federal funds rate is likely to remain, for some the target range for the federal funds rate. time, below levels that are expected to prevail in the longer run. However, the actual path of the To support the Committee’s decision to raise the tarfederal funds rate will depend on the economic get range for the federal funds rate, the Board of outlook as informed by incoming data.” Governors voted unanimously to raise the interest rates on required and excess reserve balances ¼ per- Voting for this action: Janet L. Yellen, William C. centage point, to 1½ percent, effective December 14, Dudley, Lael Brainard, Patrick Harker, Robert S. 2017. The Board of Governors also voted unani- Kaplan, Jerome H. Powell, and Randal K. Quarles. mously to approve a ¼ percentage point increase in the primary credit rate (discount rate) to 2 percent, Voting against this action: Charles L. Evans and Neel effective December 14, 2017.5 Kashkari. It was agreed that the next meeting of the Committee Messrs. Evans and Kashkari dissented because they would be held on Tuesday–Wednesday, January 30– preferred to maintain the existing target range for the 31, 2018. The meeting adjourned at 10:15 a.m. on federal funds rate at this meeting. December 13, 2017. In Mr. Evans’s view, with inflation continuing to run Notation Vote substantially below 2 percent and measures of inflation expectations lower than he believed to be consis- By notation vote completed on November 21, 2017, tent with a symmetric 2 percent inflation objective, it the Committee unanimously approved the minutes of was important to pause in the process of policy nor- the Committee meeting held on October 31– malization. Leaving the target range at 1 to 1¼ per- November 1, 2017. cent for a time would better support an increase in inflation expectations, increase the likelihood that James A. Clouse inflation will rise to 2 percent and perhaps modestly Secretary beyond, and thus provide more support for the symmetry of the Committee’s inflation objective. Such a pause also would better allow the Committee time to assess the degree to which earlier soft readings on 5 In taking this action, the Board approved requests submitted by the boards of directors of the Federal Reserve Banks of Boston, inflation were transitory or more persistent. New York, Philadelphia, Cleveland, Richmond, Atlanta, Kansas City, Dallas, and San Francisco. This vote also encompassed In Mr. Kashkari’s view, while employment growth approval by the Board of Governors of the establishment of a 2 percent primary credit rate by the remaining Federal Reserve remained strong, wage growth had not picked up and Banks, effective on the later of December 14, 2017, and the date inflation remained notably below the Committee’s such Reserve Banks informed the Secretary of the Board of 2 percent target. In addition, the yield curve had flat- such a request. (Secretary’s note: Subsequently, the Federal Reserve Banks of Chicago, St. Louis, and Minneapolis were tened as long-term rates had not moved higher even informed by the Secretary of the Board of the Board’s approval though the Committee raised the federal funds rate of their establishment of a primary credit rate of 2 percent, target range. He was concerned that the flattening effective December 14, 2017.) The second vote of the Board also encompassed approval of the establishment of the interest rates yield curve was partly due to falling longer-term for secondary and seasonal credit under the existing formulas inflation expectations or a lower neutral real rate of for computing such rates.

278 104th Annual Report | 2017 Addendum: up toward the Committee’s 2 percent objective in 2018 and be at or close to that objective by 2019. Summary of Economic Projections Most participants indicated that prospective changes in federal tax policy were a factor that led them to In conjunction with the Federal Open Market Com- boost their projections of real GDP growth over the mittee (FOMC) meeting held on December 12–13, next couple of years; some participants, however, 2017, meeting participants submitted their projec- noted that they had already incorporated at least tions of the most likely outcomes for real gross some effects of future tax cuts in their September domestic product (GDP) growth, the unemployment projections. Several also noted the possibility that rate, and inflation for each year from 2017 to 2020 changes to tax policy could raise the level of potenand over the longer run.6 Each participant’s projec- tial GDP in the longer run.8 Table 1 and figure 1 protion was based on information available at the time vide summary statistics for the projections. of the meeting, together with his or her assessment of appropriate monetary policy—including a path for As shown in figure 2, participants generally expected the federal funds rate and its longer-run value—and that the evolution of the economy relative to their assumptions about other factors likely to affect eco- objectives of maximum employment and 2 percent nomic outcomes. The longer-run projections repre- inflation would likely warrant further gradual sent each participant’s assessment of the value to increases in the federal funds rate. Compared with which each variable would be expected to converge, the projections they submitted in September, some over time, under appropriate monetary policy and in participants raised their federal funds rate projections the absence of further shocks to the economy.7 for 2018 and 2019, while several others lowered their “Appropriate monetary policy” is defined as the projections, leaving the median projection for the fedfuture path of policy that each participant deems eral funds rate in those years unchanged; the median most likely to foster outcomes for economic activity projection for 2020 was slightly higher, and the and inflation that best satisfy his or her individual median projection for the longer-run normal level of interpretation of the statutory mandate to promote the federal funds rate was unchanged. Nearly all parmaximum employment and price stability. ticipants saw it as likely to be appropriate for the federal funds rate to rise above their estimates of its All participants who submitted longer-run projec- longer-run normal level at some point during the tions expected that, under appropriate monetary forecast period. Participants generally noted several policy, growth in real GDP in 2018 would be some- sources of uncertainty about the future course of the what stronger than their individual estimates of its federal funds rate, including the details of potential longer-run rate. All participants projected that real changes in tax policy, how those changes would GDP growth would moderate in 2019, and nearly all affect the economy, and the range of factors influencpredicted that it would ease further in 2020; a solid ing inflation over the medium term. majority of participants thought that growth in real GDP would be at or close to their individual esti- In general, participants viewed the uncertainty mates of the economy’s longer-run growth rate by attached to their economic projections as broadly 2020. All participants who submitted longer-run pro- similar to the average of the past 20 years, and all jections expected that the unemployment rate would participants saw the uncertainty associated with their run below their estimates of its longer-run normal projections for real GDP growth, the unemployment level through 2020. Participants generally projected rate, and inflation as essentially unchanged from Septhat inflation, as measured by the four- tember. As in September, most participants judged quarter percentage change in the price index for per- the risks around their projections for economic sonal consumption expenditures (PCE), would step growth, the unemployment rate, and inflation as broadly balanced. 6 Four members of the Board of Governors were in office at the time of the December 2017 meeting, the same number as in Sep- The Outlook for Economic Activity tember 2017. However, since the September meeting, one member, Stanley Fischer, resigned from the Board and another, Randal K. The median of participants’ projections for the growth Quarles, joined. The incoming president of the Federal Reserve rate of real GDP for 2018, conditional on their indi- Bank of Richmond is scheduled to assume office on January 1, 2018; First Vice President Mark L. Mullinix submitted economic projections at this meeting as he did in September. 8 Participants completed their submissions for the Summary of 7 One participant did not submit longer-run projections for real Economic Projections before the reconciliation of the House output growth, the unemployment rate, or the federal funds rate. and Senate tax bills in the Congress.

Minutes of Federal Open Market Committee Meetings | December 279 Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, December 2017 Percent Median1 Central tendency2 Range3 Variable Longer Longer L onger 2 017 2018 2019 2020 run 2017 2018 2019 2020 run 2 017 2 018 2019 2020 run Change in real GDP 2.5 2.5 2.1 2.0 1.8 2 .4–2.5 2.2–2.6 1.9–2.3 1.7–2.0 1.8–1.9 2.4–2.6 2.2–2.8 1.7–2.4 1.1–2.2 1 .7–2.2 September projection 2.4 2.1 2.0 1.8 1.8 2.2–2.5 2.0–2.3 1.7–2.1 1.6–2.0 1.8–2.0 2.2–2.7 1.7–2.6 1.4–2.3 1.4–2.0 1 .5–2.2 Unemployment rate 4.1 3.9 3.9 4.0 4.6 4.1 3.7–4.0 3.6–4.0 3.6–4.2 4.4–4.7 4 .1 3.6–4.0 3 .5–4.2 3.5–4.5 4.3–5.0 September projection 4.3 4.1 4.1 4.2 4.6 4.2–4.3 4.0–4.2 3.9–4.4 4.0–4.5 4.5–4.8 4.2–4.5 3.9–4.5 3.8–4.5 3.8–4.8 4 .4–5.0 PCE inflation 1.7 1.9 2.0 2.0 2.0 1.6–1.7 1.7–1.9 2.0 2.0–2.1 2.0 1 .5–1.7 1.7–2.1 1.8–2.3 1.9–2.2 2.0 September projection 1.6 1.9 2.0 2.0 2.0 1.5–1.6 1.8–2.0 2.0 2.0–2.1 2.0 1.5–1.7 1.7–2.0 1 .8–2.2 1.9–2.2 2.0 Core PCE inflation4 1.5 1.9 2.0 2.0 1 .5 1.7–1.9 2.0 2.0–2.1 1.4–1.5 1.7–2.0 1.8–2.3 1 .9–2.3 September projection 1.5 1.9 2.0 2.0 1.5–1.6 1.8–2.0 2.0 2.0–2.1 1.4–1.7 1.7–2.0 1 .8–2.2 1.9–2.2 Memo: Projected appropriate policy path Federal funds rate 1.4 2.1 2.7 3.1 2.8 1.4 1.9–2.4 2.4–3.1 2.6–3.1 2.8–3.0 1.1–1.4 1.1–2.6 1.4–3.6 1.4–4.1 2.3–3.0 September projection 1.4 2.1 2.7 2.9 2.8 1.1–1.4 1.9–2.4 2.4–3.1 2.5–3.5 2.5–3.0 1.1–1.6 1.1–2.6 1.1–3.4 1.1–3.9 2 .3–3.5 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 19–20, 2017. 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 19–20, 2017, meeting, and one participant did not submit such projections in conjunction with the December 12–13, 2017, 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.

280 104th Annual Report | 2017 Figure 1. Medians, central tendencies, and ranges of economic projections, 2017–20 and over the longer run Percent Change in real GDP Median of projections Central tendency of projections Range of projections 3 2 Actual 1 2012 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent Unemployment rate 8 7 6 5 4 2012 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent PCE inflation 3 2 1 2012 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent Core PCE inflation 3 2 1 2012 2013 2014 2015 2016 2017 2018 2019 2020 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 | December 281 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 2017 2018 2019 2020 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.

282 104th Annual Report | 2017 vidual assessments of appropriate monetary policy, objective in 2019 and 2020. Several participants prowas 2.5 percent, the same as for 2017. The median pro- jected that inflation would slightly exceed 2 percent jections for GDP growth in 2019 and 2020 were in 2019 or 2020. The medians of projections for core slightly lower, at 2.1 and 2.0 percent, respectively. PCE price inflation over the 2018–20 period were the Compared with the Summary of Economic Projec- same as those for headline inflation. tions (SEP) from September, the median of the projections for real GDP growth for 2018 was notably higher, Figures 3.C and 3.D provide information on the diswhile the medians for real GDP growth for 2019 and tributions of participants’ views about the outlook 2020 were modestly higher. The median of projections for inflation. On the whole, the distributions of profor the longer-run normal rate of real GDP growth jections for headline PCE price inflation and core remained at 1.8 percent. Most participants pointed to PCE price inflation beyond 2017 were little changed changes in tax policy as likely to provide some boost from September. to real GDP growth over the forecast period; in September, fewer than half of the participants incorpo- Appropriate Monetary Policy rated prospective tax policy changes in their projections. Several participants indicated that they had Figure 3.E provides the distribution of participants’ marked up their estimates of the magnitude of tax judgments regarding the appropriate target—or midcuts, relative to their assumptions in September. point of the target range—for the federal funds rate at the end of each year from 2017 to 2020 and in the The medians of projections for the unemployment longer run. Overall, the distributions differed in only rate in the fourth quarter of both 2018 and 2019 were small ways from those reported in the September 3.9 percent, 0.2 percentage point below the medians SEP. There was a moderate reduction in the disperfrom September and about ¾ percentage point below sion of the distribution for 2020 and for the longer the median assessment of its longer-run normal level. run; some of the lower-end projections for those The median projection for the unemployment rate horizons from the September SEP were revised up in ticked up slightly to 4.0 percent in 2020. the current projections. Figures 3.A and 3.B show the distributions of par- The median projection of the year-end federal funds ticipants’ projections for real GDP growth and the rate continued to rise gradually over the 2018–20 unemployment rate from 2017 to 2020 and in the lon- period. The median projection for the end of 2018 ger run. The distribution of individual projections for was 2.13 percent; the medians of the projections were real GDP growth for 2018 shifted up, with more than 2.69 percent at the end of 2019 and 3.07 percent at half of the participants now expecting real GDP the end of 2020. Nearly all participants projected growth of 2.5 percent or more and none seeing it that it would likely be appropriate for the federal below 2.2 percent. The distribution of projected real funds rate to rise above their individual estimates of GDP growth in 2019 and 2020 also shifted up, albeit the longer-run normal rate at some point over the only slightly. The distribution for the longer-run nor- forecast period. Compared with their projections premal rate of GDP growth was little changed from Sep- pared for the September SEP, a few participants tember. The distributions of individual projections raised their projections for the federal funds rate in for the unemployment rate in 2018 and 2019 shifted the longer run and one lowered it; the median was down relative to those in September, broadly consis- unchanged at 2.75 percent. tent with the changes in the distributions for real GDP growth. In discussing their projections, many participants once again expressed the view that the appropriate The Outlook for Inflation trajectory of the federal funds rate over the next few years would likely involve gradual increases. This The median of projections for headline PCE price view was predicated on several factors, including a inflation was 1.9 percent in 2018 and 2 percent in judgment that the neutral real interest rate was cur- 2019 and 2020, the same as in the September SEP. rently low and would move up only slowly, as well as Most participants anticipated that inflation would the balancing of risks associated with, among other continue to run a bit below 2 percent in 2018, and things, the possibility that inflation pressures could only one participant expected inflation above 2 per- build if the economy expands well beyond its longcent that year. A majority of participants projected run sustainable level, and the possibility that the that inflation would be equal to the Committee’s forces depressing inflation could prove to be more

Minutes of Federal Open Market Committee Meetings | December 283 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2017–20 and over the longer run Number of participants 2017 December projections 18 September projections 16 14 12 10 8 6 4 2 1.0 – 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 2.8 – 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 Percent range NNuummber of participants 2018 18 16 14 12 10 8 6 4 2 1.0 – 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 2.8 – 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.0 – 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 2.8 – 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.0 – 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 2.8 – 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.0 – 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 2.8 – 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

284 104th Annual Report | 2017 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2017–20 and over the longer run Number of participants 2017 December projections 18 September projections 16 14 12 10 8 6 4 2 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.3 3.5 3.7 3.9 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 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.3 3.5 3.7 3.9 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 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.3 3.5 3.7 3.9 4.1 4.3 4.5 4.7 4.9 5.1 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.3 3.5 3.7 3.9 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 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.3 3.5 3.7 3.9 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.

Minutes of Federal Open Market Committee Meetings | December 285 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2017–20 and over the longer run Number of participants 2017 December projections 18 September projections 16 14 12 10 8 6 4 2 1.5 – 1.7 – 1.9 – 2.1 – 2.3 – 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.5 – 1.7 – 1.9 – 2.1 – 2.3 – 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.5 – 1.7 – 1.9 – 2.1 – 2.3 – 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.5 – 1.7 – 1.9 – 2.1 – 2.3 – 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.5 – 1.7 – 1.9 – 2.1 – 2.3 – 1.6 1.8 2.0 2.2 2.4 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

286 104th Annual Report | 2017 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2017–20 Number of participants 2017 December projections 18 September projections 16 14 12 10 8 6 4 2 1.3 – 1.5 – 1.7 – 1.9 – 2.1 – 2.3 – 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.3 – 1.5 – 1.7 – 1.9 – 2.1 – 2.3 – 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.3 – 1.5 – 1.7 – 1.9 – 2.1 – 2.3 – 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.3 – 1.5 – 1.7 – 1.9 – 2.1 – 2.3 – 1.4 1.6 1.8 2.0 2.2 2.4 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | December 287 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, 2017–20 and over the longer run Number of participants 2017 December projections 18 September projections 16 14 12 10 8 6 4 2 1.13 – 1.38 – 1.63 – 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Number of participants 2018 18 16 14 12 10 8 6 4 2 1.13 – 1.38 – 1.63 – 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.13 – 1.38 – 1.63 – 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.13 – 1.38 – 1.63 – 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.13 – 1.38 – 1.63 – 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 1.37 1.62 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

288 104th Annual Report | 2017 Participants’ assessments of the level of uncertainty Table 2. Average historical projection error ranges surrounding their economic projections are shown in Percentage points the bottom-left panels of figures 4.A, 4.B, and 4.C. Nearly all participants viewed the degree of uncer- Variable 2017 2018 2019 2020 tainty attached to their economic projections about Change in real GDP1 ±0.8 ±1.7 ±2.1 ±2.2 GDP growth, the unemployment rate, and inflation as Unemployment rate1 ±0.1 ±0.8 ±1.5 ±1.9 broadly similar to the average of the past 20 years, a Total consumer prices2 ±0.2 ±1.0 ±1.1 ±1.0 view that was essentially unchanged from September.9 Short-term interest rates3 ±0.1 ±1.4 ±1.9 ±2.4 About half of the participants who commented on Note: Error ranges shown are measured as plus or minus the root mean squared this topic suggested that uncertainties about the details error of projections for 1997 through 2016 that were released in the winter by of the pending tax legislation had raised their assessvarious private and government forecasters. As described in the box “Forecast Uncertainty,” under certain assumptions, there is about a 70 percent probability ment of uncertainty for GDP growth, albeit not by that actual outcomes for real GDP, unemployment, consumer prices, and the enough to tip their assessments into the higher-thanfederal funds rate will be in ranges implied by the average size of projection errors made in the past. For more information, see David Reifschneider and Peter average category. Tulip (2017), “Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting Errors: The Federal Reserve’s Approach,” Finance and Economics Discussion Series 2017-020 (Washington: Board of Governors of the Federal Because the fan charts are constructed to be symmet- Reserve System, February), www.federalreserve.gov/econresdata/feds/2017/files/ ric around the median projection, they do not reflect 2017020pap.pdf. 1 Definitions of variables are in the general note to table 1. any asymmetries in the balance of risks that partici- 2 Measure is the overall consumer price index, the price measure that has been pants may see in their economic projections. Accordmost widely used in government and private economic forecasts. Projections ingly, participants’ assessments of the balance of risks are percent changes on a fourth quarter to fourth quarter basis. to their economic projections are shown in the 3 For Federal Reserve staff forecasts, measure is the federal funds rate. For other forecasts, measure is the rate on 3-month Treasury bills. Projection errors are bottom-right panels of figures 4.A, 4.B, and 4.C. As in calculated using average levels, in percent, in the fourth quarter. September, most participants judged the risks to their projections of real GDP growth, the unemployment rate, headline inflation and core inflation as broadly persistent than currently anticipated. As always, the balanced—in other words, as broadly consistent with a actual path of the federal funds rate will depend on symmetric fan chart. The balance of risks to the ecoevolving economic conditions and their implications nomic outlook shifted slightly in the direction of for the economic outlook. strength, with two more participants seeing upside risks to growth in real GDP than in September and Uncertainty and Risks one more seeing risks to the unemployment rate as weighted to the downside. In addition, one more par- In assessing the path for the federal funds rate that, in ticipant than before saw risks to inflation as weighted their view, is likely to be appropriate, FOMC particito the upside. pants take account of the range of possible economic outcomes, the likelihood of those outcomes, and the Participants’ assessments of the future path of the fedpotential benefits and costs should they occur. As a eral funds rate consistent with appropriate policy are reference, table 2 provides a measure of forecast also subject to considerable uncertainty. Because the uncertainty, based on the forecast errors of various Committee adjusts the federal funds rate in response private and government forecasts over the past to actual and prospective developments over time in 20 years, for real GDP growth, the unemployment real GDP growth, unemployment, and inflation, rate, and total consumer price inflation. That measuncertainty surrounding the projected path for the ure is incorporated graphically in the top panels of funds rate importantly reflects the uncertainties about figures 4.A, 4.B, and 4.C, which display “fan charts” the path for those key economic variables. Figure 5 plotting the median SEP projections for the three provides a graphical representation of this uncervariables surrounded by symmetric confidence intertainty, plotting the median SEP projection for the vals derived from the forecast errors presented in federal funds rate surrounded by confidence intervals table 2. If the degree of uncertainty attending these derived from the results presented in table 2. As with projections is similar to the typical magnitude of past the macroeconomic variables, forecast uncertainty is forecast errors and the risks around the projections substantial and increases for longer horizons. are broadly balanced, future outcomes of these variables would have about a 70 percent probability of occurring within these confidence intervals. For all three variables, this measure of projection uncer- 9 At the end of this summary, the box “Forecast Uncertainty” discusses the sources and interpretation of uncertainty in the tainty is substantial and generally increases as the economic forecasts and explains the approach used to assess the forecast horizon lengthens. uncertainty and risks attending the participants’ projections.

Minutes of Federal Open Market Committee Meetings | December 289 Figure 4.A. Uncertainty and risks in projections of GDP growth Median projection and confidence interval based on historical forecast errors Percent Change in real GDP Median of projections 70% confidence interval 4 3 2 Actual 1 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 FOMC participants’ assessments of uncertainty and risks around their 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 Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in real gross domestic product (GDP) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

290 104th Annual Report | 2017 Figure 4.B. Uncertainty and risks in projections of the unemployment rate Median projection and confidence interval based on historical forecast errors Percent Unemployment rate Median of projections 10 70% confidence interval 9 8 7 6 Actual 5 4 3 2 1 2012 2013 2014 2015 2016 2017 2018 2019 2020 FOMC participants’ assessments of uncertainty and risks around their economic projections Number of participants Number of participants Uncertainty about the unemployment rate Risks to the unemployment rate 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 Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the average civilian unemployment rate in the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

Minutes of Federal Open Market Committee Meetings | December 291 Figure 4.C. Uncertainty and risks in projections of PCE inflation Median projection and confidence interval based on historical forecast errors Percent PCE inflation Median of projections 70% confidence interval 3 2 1 Actual 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 FOMC participants’ assessments of uncertainty and risks around their economic projections Number of participants Number of participants Uncertainty about PCE inflation Risks to PCE inflation 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 core PCE inflation Risks to core PCE inflation 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 Note: The blue and red lines in the top panel show actual values and median projected values, respectively, of the percent change in the price index for personal consumption expenditures (PCE) from the fourth quarter of the previous year to the fourth quarter of the year indicated. The confidence interval around the median projected values is assumed to be symmetric and is based on root mean squared errors of various private and government forecasts made over the previous 20 years; more information about these data is available in table 2. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections; these current assessments are summarized in the lower panels. Generally speaking, participants who judge the uncertainty about their projections as “broadly similar” to the average levels of the past 20 years would view the width of the confidence interval shown in the historical fan chart as largely consistent with their assessments of the uncertainty about their projections. Likewise, participants who judge the risks to their projections as “broadly balanced” would view the confidence interval around their projections as approximately symmetric. For definitions of uncertainty and risks in economic projections, see the box “Forecast Uncertainty.”

292 104th Annual Report | 2017 Figure 5. Uncertainty in projections of the federal funds rate Median projection and confidence interval based on historical forecast errors Percent Federal funds rate Midpoint of target range 6 Median of projections 70% confidence interval* 5 4 3 2 Actual 1 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 Note: The blue and red lines are based on actual values and median projected values, respectively, of the Committee’s target for the federal funds rate at the end of the year indicated. The actual values are the midpoint of the target range; the median projected values are based on either the midpoint of the target range or the target level. The confidence interval around the median projected values is based on root mean squared errors of various private and government forecasts made over the previous 20 years. The confidence interval is not strictly consistent with the projections for the federal funds rate, primarily because these projections are not forecasts of the likeliest outcomes for the federal funds rate, but rather projections of participants’ individual assessments of appropriate monetary policy. Still, historical forecast errors provide a broad sense of the uncertainty around the future path of the federal funds rate generated by the uncertainty about the macroeconomic variables as well as additional adjustments to monetary policy that may be appropriate to offset the effects of shocks to the economy. The confidence interval is assumed to be symmetric except when it is truncated at zero—the bottom of the lowest target range for the federal funds rate that has been adopted in the past by the Committee. This truncation would not be intended to indicate the likelihood of the use of negative interest rates to provide additional monetary policy accommodation if doing so was judged appropriate. In such situations, the Committee could also employ other tools, including forward guidance and large-scale asset purchases, to provide additional accommodation. Because current conditions may differ from those that prevailed, on average, over the previous 20 years, the width and shape of the confidence interval estimated on the basis of the historical forecast errors may not reflect FOMC participants’ current assessments of the uncertainty and risks around their projections. * The confidence interval is derived from forecasts of the average level of short-term interest rates in the fourth quarter of the year indicated; more information about these data is available in table 2. The shaded area encompasses less than a 70 percent confidence interval if the confidence interval has been truncated at zero.

Minutes of Federal Open Market Committee Meetings | December 293 Forecast Uncertainty The economic projections provided by the members their projections are summarized in the bottom-left of the Board of Governors and the presidents of the panels of those figures. Participants also provide Federal Reserve Banks inform discussions of mon- judgments as to whether the risks to their projections etary policy among policymakers and can aid public are weighted to the upside, are weighted to the understanding of the basis for policy actions. Con- downside, or are broadly balanced. That is, while the siderable uncertainty attends these projections, how- symmetric historical fan charts shown in the top panever. The economic and statistical models and rela- els of figures 4.A through 4.C imply that the risks to tionships used to help produce economic forecasts participants’ projections are balanced, participants are necessarily imperfect descriptions of the real may judge that there is a greater risk that a given world, and the future path of the economy can be variable will be above rather than below their projecaffected by myriad unforeseen developments and tions. These judgments are summarized in the lowerevents. Thus, in setting the stance of monetary right panels of figures 4.A through 4.C. policy, participants consider not only what appears to As with real activity and inflation, the outlook for the be the most likely economic outcome as embodied in future path of the federal funds rate is subject to contheir projections, but also the range of alternative siderable uncertainty. This uncertainty arises primarily possibilities, the likelihood of their occurring, and the because each participant’s assessment of the appropotential costs to the economy should they occur. priate stance of monetary policy depends importantly Table 2 summarizes the average historical accuracy on the evolution of real activity and inflation over of a range of forecasts, including those reported in time. If economic conditions evolve in an unexpected past Monetary Policy Reports and those prepared by manner, then assessments of the appropriate setting the Federal Reserve Board’s staff in advance of of the federal funds rate would change from that meetings of the Federal Open Market Committee point forward. The final line in table 2 shows the error (FOMC). The projection error ranges shown in the ranges for forecasts of short-term interest rates. They table illustrate the considerable uncertainty associ- suggest that the historical confidence intervals assoated with economic forecasts. For example, suppose ciated with projections of the federal funds rate are a participant projects that real gross domestic prod- quite wide. It should be noted, however, that these uct (GDP) and total consumer prices will rise steadily confidence intervals are not strictly consistent with at annual rates of, respectively, 3 percent and 2 per- the projections for the federal funds rate, as these cent. If the uncertainty attending those projections is projections are not forecasts of the most likely quarsimilar to that experienced in the past and the risks terly outcomes but rather are projections of particiaround the projections are broadly balanced, the pants’ individual assessments of appropriate monnumbers reported in table 2 would imply a probability etary policy and are on an end-of-year basis. Howof about 70 percent that actual GDP would expand ever, the forecast errors should provide a sense of within a range of 2.2 to 3.8 percent in the current the uncertainty around the future path of the federal year, 1.3 to 4.7 percent in the second year, 0.9 to funds rate generated by the uncertainty about the 5.1 percent in the third year, and 0.8 to 5.2 percent in macroeconomic variables as well as additional the fourth year. The corresponding 70 percent confi- adjustments to monetary policy that would be approdence intervals for overall inflation would be 1.8 to priate to offset the effects of shocks to the economy. 2.2 percent in the current year, 1.0 to 3.0 percent in If at some point in the future the confidence interval the second year, 0.9 to 3.1 percent in the third year, around the federal funds rate were to extend below and 1.0 to 3.0 percent in the fourth year. Figures 4.A zero, it would be truncated at zero for purposes of through 4.C illustrate these confidence bounds in the fan chart shown in figure 5; zero is the bottom of “fan charts” that are symmetric and centered on the the lowest target range for the federal funds rate that medians of FOMC participants’ projections for GDP has been adopted by the Committee in the past. This growth, the unemployment rate, and inflation. Howapproach to the construction of the federal funds rate ever, in some instances, the risks around the projecfan chart would be merely a convention; it would not tions may not be symmetric. In particular, the unemhave any implications for possible future policy deciployment rate cannot be negative; furthermore, the sions regarding the use of negative interest rates to risks around a particular projection might be tilted to provide additional monetary policy accommodation if either the upside or the downside, in which case the doing so were appropriate. In such situations, the corresponding fan chart would be asymmetrically Committee could also employ other tools, including positioned around the median projection. forward guidance and asset purchases, to provide Because current conditions may differ from those additional accommodation. that prevailed, on average, over history, participants While figures 4.A through 4.C provide information on provide judgments as to whether the uncertainty the uncertainty around the economic projections, figattached to their projections of each economic variure 1 provides information on the range of views able is greater than, smaller than, or broadly similar across FOMC participants. A comparison of figure 1 to typical levels of forecast uncertainty seen in the with figures 4.A through 4.C shows that the disperpast 20 years, as presented in table 2 and reflected sion of the projections across participants is much in the widths of the confidence intervals shown in the smaller than the average forecast errors over the past top panels of figures 4.A through 4.C. Participants’ 20 years. current assessments of the uncertainty surrounding

295 10 Litigation During 2017, the Board of Governors was a party in Richardson v. Board of Governors, No. 16-cv-867 (D. 6 lawsuits or appeals filed that year and was a party District of Columbia, filed May 9, 2016), is a case in 11 other cases pending from previous years, for a under the Federal Tort Claims Act, Privacy Act, and total of 17 cases. In 2016, the Board had been a party Freedom of Information Act, among other claims. in a total of 17 cases. As of December 31, 2017, 13 cases were pending. Hardy v. Yellen, No. 16-cv-1572 (D. District of Columbia, filed August 2, 2016), is an employment discrimination action. Pending Burford v. Yellen, No. 15-cv-02074 (D. District of Handy v. Johnson & Johnson, et al., 18-1008 (4th Cir- Columbia, filed December 1, 2015), is an employcuit, notice of appeal filed December 29, 2017), is an ment discrimination claim. appeal of the dismissal of an action arising out of employment at a Federal Reserve Bank. Richardson v. Yellen, No. 14-cv-01673 (D. District of Columbia, filed October 8, 2014), is an employment Baylor v. Yellen, No. 17-cv-02647 (D. District of discrimination claim. Columbia, filed December 11, 2017), is an employment discrimination case. Community Financial Services Association of America, Ltd., v. Board of Governors, No. 14-cv- BBX Capital Corporation v. FDIC, No. 17-cv-62317 00853 (D. District of Columbia, filed June 11, 2014), (S.D. Florida, filed November 22, 2017), is an action is a challenge to actions of the Board, the Federal relating to golden parachute payments. Deposit Insurance Corporation, and the Office of the Comptroller of the Currency that allegedly disad- Board of Governors v. Afnani, No. 17-cv-00503 (E.D. vantage payday lenders. Virginia, filed May 1, 2017), is a claim for recovery of disability benefits. Crisman v. Board of Governors et al., No. 12-cv-1871 The Loan Syndications and Trading Association v. (D. District of Columbia, filed November 19, 2012), Board of Governors, No. 17-5004 (D.C. Circuit, is a Freedom of Information Act case. appeal docketed February 10, 2017), is an appeal of a district court decision (223 F. Supp. 3d 37) upholding Resolved the credit risk retention rules issued under Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Mullins v. Board of Governors et al., No. 16-cv-00046 (W.D. Virginia, filed December 15, 2016), was an Mitchell v. Yellen, No. 17-cv-00182 (D. District of action relating to golden parachute payments. On Columbia, filed January 27, 2017), is an employment May 17, 2017, the district court dismissed the Board discrimination case. as a party to the action. Center for Popular Democracy v. Board of Governors, Rodriguez v. Bank of America, et al., No. 16-cv-8197 No. 16-cv-5829 (E.D. New York, filed October 19, (D. New Jersey, filed November 3, 2016), was an 2016), is an action under the Freedom of Informa- action relating to a mortgage loan foreclosure. On tion Act. July 20, 2017, the district court dismissed the action.

296 104th Annual Report | 2017 Haase v. Bank of America, et al., No. 16-cv-1567 ber 20, 2013), is an action for a declaratory judgment (S.D. Texas, filed April 25, 2016, removed to federal regarding golden parachute payments. On July 3, court June 3, 2016), was an action against 69 defen- 2014, the action was transferred to the United States dants, including individual governors, Federal Bankruptcy Court for the District of Delaware (Adv. Reserve Banks, and the Federal Reserve System Pro. No. 14-50435-MFW (Bankr. D. Del.)). On Febunder the Texas Constitution, among other claims. ruary 15, 2017, the district court granted the Board’s On February 8, 2017, the court dismissed the action. motion to dismiss all claims. WMI Liquidating Trust v. Board of Governors, No. 13-cv-01706 (W.D. Washington, filed Septem-

297 11 Statistical Tables Table 1. Federal Reserve open market transactions, 2017 Millions of dollars Type of security Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total and transaction U.S. Treasury securities1 O utright transactions2 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 -10,459 -20,334 -13,559 - 14,518 - 32,393 -12,885 -13,072 -21,852 - 10,947 - 2,701 -12,911 -11,504 -177,136 Redemptions 0 0 0 0 0 0 0 0 0 6,000 6,000 6,000 18,000 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 55 0 0 0 0 0 0 0 55 Exchanges 6,086 11,092 8,838 10,434 15,147 8,873 8,173 9,541 7,464 1,876 6,174 7,843 101,542 O ver 5 to 10 years Gross purchases 0 0 0 0 0 0 0 0 200 0 0 0 200 Gross sales 0 0 0 0 145 0 0 0 0 0 0 0 145 Exchanges 3,708 6,539 4,722 3,986 12,291 3,404 4,625 7,798 3,483 700 4,913 3,660 59,829 M ore than 10 years Gross purchases 0 0 200 0 0 0 0 0 0 0 0 0 200 Gross sales 0 0 0 0 0 0 0 0 0 0 0 200 200 Exchanges 665 2,703 0 99 4,956 608 274 4,513 0 125 1,824 0 15,766 A ll maturities Gross purchases 0 0 200 0 0 0 0 0 200 0 0 0 400 Gross sales 0 0 0 0 200 0 0 0 0 0 0 200 400 Redemptions 0 0 0 0 0 0 0 0 0 6,000 6,000 6,000 18,000 Net change in U.S. Treasury securities 0 0 200 0 -200 0 0 0 200 - 6,000 -6,000 -6,200 -18,000 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 0 2,851 0 1,500 2,995 737 0 1,340 0 0 2,366 0 11,789 Net change in federal agency obligations 0 -2,851 0 -1,500 -2,995 -737 0 -1,340 0 0 -2,366 0 -11,789 M ortgage-backed securities3 N et settlements2 Net change in mortgage-backed securities 3,241 18,550 5,940 -107 1,942 -677 -1,263 -1,464 607 2,469 -3,535 -2,166 23,538 T otal net change in securities holdings4 3,241 15,699 6,140 -1,607 -1,253 -1,414 -1,263 -2,804 807 -3,531 -11,901 -8,366 -6,251 (continued on next page)

298 104th Annual Report | 2017 Table 1.—continued Type of security Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Total and transaction Temporary transactions Repurchase agreements5 0 0 0 0 8 0 0 0 0 0 12 0 n/a Reverse repurchase agreements5 410,722 383,946 4 69,797 372,160 417,381 429,851 397,673 358,017 395,544 354,447 279,947 345,540 n/a Foreign official and international accounts 254,142 252,833 246,683 247,124 2 42,172 239,208 2 44,084 2 41,284 241,859 232,855 228,108 229,850 n/a Others 156,579 131,113 223,114 1 25,037 175,209 190,643 1 53,590 116,732 153,686 121,592 51,838 115,689 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. See table 2 of the H.4.1 release (www.federalreserve.gov/releases/h41/) for the maturity distribution of the securities. 1 Transactions exclude changes in compensation for the effects of inflation on the principal of inflation-indexed securities. Transactions include the rollover of inflation compensation into new securities. The maturity distributions of exchanged Treasury securities are based on the announced maturity of new securities rather than actual day counts. 2 Excludes the effect of temporary transactions—repurchase agreements and reverse repurchase agreements. 3 Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Monthly net change in the remaining principal balance of the securities, reported at face value. 4 The net change in securities holdings reflects the settlements of purchases, reinvestments, sales, and maturities of portfolio securities. 5 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 299 Table 2. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities, December 31, 2015–17 Millions of dollars December 31 C hange Description 2017 2016 2015 2016 to 2017 2015 to 2016 U.S. Treasury securities Held outright1 2,454,208 2,463,616 2,461,552 -9,408 2,064 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 443,679 206,822 216,115 236,857 -9,293 More than 1 year through 5 years 1,077,270 1,224,348 1,118,349 -147,078 105,999 More than 5 years through 10 years 310,375 399,277 489,226 -88,902 -89,949 More than 10 years 622,884 633,169 637,862 -10,285 -4,693 By type Bills 0 0 0 0 0 Notes 1,624,620 1,638,172 1,634,772 -13,552 3,400 Bonds 829,588 825,444 826,780 4,144 -1,336 Federal agency securities Held outright1 4,391 16,180 32,944 -11,789 -16,764 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 1,982 11,789 16,764 -9,807 -4,975 More than 1 year through 5 years 62 2,044 13,833 -1,982 -11,789 More than 5 years through 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 4,391 16,180 32,944 -11,789 -16,764 By issuer Federal Home Loan Mortgage Corporation 2,573 8,356 15,711 -5,783 -7,355 Federal National Mortgage Association 1,818 5,401 11,541 -3,583 -6,140 Federal Home Loan Banks 0 2,423 5,692 -2,423 -3,269 Mortgage-backed securities2 H eld outright1 1,764,929 1,741,391 1,747,461 23,538 -6,070 By remaining maturity 1 year or less 1 0 0 1 0 More than 1 year through 5 years 173 77 467 96 -390 More than 5 years through 10 years 20,013 10,584 9,014 9,429 1,570 More than 10 years 1,744,742 1,730,730 1,737,980 14,012 -7,250 By issuer Federal Home Loan Mortgage Corporation 515,025 506,931 510,463 8,094 -3,532 Federal National Mortgage Association 826,306 836,558 872,113 -10,252 -35,555 Government National Mortgage Association 423,598 397,901 364,885 25,697 33,016 Temporary transactions Repurchase agreements3 0 0 0 0 0 Reverse repurchase agreements3 563,958 725,210 712,401 -161,252 12,809 Foreign official and international accounts 244,363 256,855 237,809 -12,492 19,046 Primary dealers and expanded counterparties 319,595 468,355 474,592 -148,760 -6,237 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.

300 104th Annual Report | 2017 Table 3. Federal Reserve Bank interest rates on loans to Table 4. Reserve requirements of depository institutions, depository institutions, December 31, 2017 December 31, 2017 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 Liability Type Percentage Effective of liabilities date All banks 2.00 2.50 1.40 Net transaction accounts1 Note: For details on rate changes over the course of 2017, see “Discount Rates for $ 0 million–$15.5 million2 0 1/19/2017 Depository Institutions in 2017” in section 8 of this annual report (“Record of More than Policy Actions of the Board of Governors”). Primary credit is available for very $15.5 million–$115.1 million3 3 1/19/2017 short terms as a backup source of liquidity to depository institutions that are in generally sound financial condition in the judgment of the lending Federal Reserve More than $115.1 million 10 1/19/2017 Bank. Secondary credit is available in appropriate circumstances to depository institutions that do not qualify for primary credit. Seasonal credit is available to Nonpersonal time deposits 0 12/27/1990 help relatively small depository institutions meet regular seasonal needs for funds that arise from a clear pattern of intra-yearly movements in their deposits and Eurocurrency liabilities 0 12/27/1990 loans. The discount rate on seasonal credit takes into account rates charged by market sources of funds and is reestablished on the first business day of each Note: The table reflects the liability types and percentages of those liabilities two-week reserve maintenance period. subject to requirements for the maintenance period that contains the year end. Required reserves must be held in the form of vault cash and, if vault cash is insufficient, also in the form of a deposit with a Federal Reserve Bank. An institution must hold that deposit directly with a Reserve Bank or with another 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 301 Table 5. Banking offices and banks affiliated with bank holding companies in the United States, December 31, 2016 and 2017 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, 2016 5,389 5,117 1,720 914 806 3,397 272 Changes during 2017 New banks 18 13 4 2 2 9 5 Banks converted into branches -203 -193 -51 -23 -28 -142 -10 Ceased banking operations2 -24 -23 -3 -1 -2 -20 -1 Other3 0 2 -14 -26 12 16 -2 Net change -209 -201 -64 -48 -16 -137 -8 Number, Dec. 31, 2017 5,180 4,916 1,656 866 790 3,260 264 Branches and additional offices Number, Dec. 31, 2016 81,658 78,792 55,167 40,582 14,585 23,625 2,866 Changes during 2017 New branches 1,066 963 523 361 162 440 103 Banks converted to branches 203 194 76 36 40 118 9 Discontinued2 -2,408 -2,378 -1,809 -1,289 -520 -569 -30 Other3 0 22 387 124 263 -365 -22 Net change -1,139 -1,199 -823 -768 -55 -376 60 Number, Dec. 31, 2017 80,519 77,593 54,344 39,814 14,530 23,249 2,926 Banks affiliated with bank holding companies Banks Number, Dec. 31, 2016 4,517 4,387 1,543 808 735 2,844 130 Changes during 2017 BHC-affiliated new banks 52 44 11 3 8 33 8 Banks converted into branches -171 -165 -43 -20 -23 -122 -6 Ceased banking operations2 -24 -24 -5 -3 -2 -19 0 Other3 0 2 -12 -24 12 14 -2 Net change -143 -143 -49 -44 -5 -94 0 Number, Dec. 31, 2017 4,374 4,244 1,494 764 730 2,750 130 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.

302 104th Annual Report | 2017 Table 6A. Reserves of depository institutions, Federal Reserve Bank credit, and related items, year-end 1984–2017 and month-end 2017 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 ties a R g e r p e u e r m ch en as ts e 2 o L t o h a e n r s c r a e n d d it Float Oth R e e r s F e e r d ve eral Total4 stock c a e c rt c if o ic u a n t t e ou c ts u t r a re n n d c in y g5 outright1 extensions3 assets4 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 2017 4,223,528 0 13,914 -920 194,288 4,430,809 11,041 5,200 49,381 (continued on next page)

Statistical Tables 303 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 ties a R g e r p e u e r m ch en as ts e 2 o L t o h a e n r s c r a e n d d it Float Oth R e e r s F e e r d ve eral Total4 stock c a e c rt c if o ic u a n t t e ou c ts u t r a re n n d c in y g5 outright1 extensions3 assets4 2 017, month-end Jan 4,224,236 0 2,154 -1,025 209,031 4,434,396 11,041 5,200 48,614 Feb 4,239,975 0 2,842 -866 196,779 4,438,730 11,041 5,200 48,683 Mar 4,246,840 0 6,792 -567 201,108 4,454,173 1 1,041 5,200 48,781 Apr 4,245,626 0 1,791 -997 205,858 4,452,278 11,041 5,200 48,848 May 4,244,487 0 1,811 -1,041 195,489 4,440,746 11,041 5,200 48,916 Jun 4,243,456 0 4,922 -636 199,299 4,447,041 11,041 5,200 48,986 Jul 4,242,302 0 1,970 -905 203,671 4,447,038 1 1,041 5,200 49,050 Aug 4,239,617 0 1,976 -1,255 191,748 4,432,086 11,041 5,200 49,104 Sep 4,240,335 0 5,524 -743 196,244 4,441,360 1 1,041 5,200 49,175 Oct 4,237,190 0 1,879 -863 198,509 4,436,715 1 1,041 5,200 49,248 Nov 4,225,975 0 1,806 -1,325 189,445 4,415,902 11,041 5,200 49,326 Dec 4,223,528 0 13,914 -920 194,288 4,430,809 11,041 5 ,200 49,381 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.

304 104th Annual Report | 2017 Table 6A. Reserves of depository institutions, Federal Reserve Bank credit, and related items, year-end 1984–2017 and month-end 2017—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 ts 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 sits T g r e e n a e su ra r l y sup f T i p n r l e a e a n m s c u e in r n y g tary Foreign Other8 b 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 ral 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 2017 1,618,006 563,958 214 0 228,933 0 5,257 77,762 n/a 47,876 1 ,954,426 (continued on next page)

Statistical Tables 305 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 ts 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 sits T g r e e n a e su ra r l y sup f T i p n r l e a e a n m s c u e in r n y g tary Foreign Other8 b 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 ral account account 2 017, month-end Jan 1,499,197 443,462 216 0 372,728 0 5,166 46,644 n/a 47,540 2,084,299 Feb 1,518,973 468,941 252 16,625 189,287 0 5,165 51,683 n/a 48,867 2,203,862 Mar 1,535,999 600,291 267 0 92,205 0 5,165 86,456 n /a 46,831 2,151,981 Apr 1,542,296 422,650 2 58 0 272,585 0 5,167 90,601 n/a 47,518 2,136,292 May 1,556,524 502,159 2 31 0 189,831 0 5,178 75,317 n/a 47,057 2,129,606 Jun 1,561,879 649,997 1 87 0 181,117 0 5,166 80,560 n/a 47,478 1,985,884 Jul 1,562,548 455,830 163 0 189,023 0 5,165 75,809 n/a 48,226 2,175,565 Aug 1,572,083 459,702 168 0 55,401 0 5,168 81,173 n/a 46,580 2,277,155 Sep 1,579,267 556,792 197 0 159,322 0 5,165 86,142 n/a 47,047 2,072,844 Oct 1,587,770 415,067 2 15 0 176,855 0 5,169 77,467 n/a 4 7,860 2,191,801 Nov 1,598,801 335,820 202 0 183,157 0 5,167 80,103 n /a 47,344 2,230,874 Dec 1,618,006 563,958 214 0 228,933 0 5,257 77,762 n/a 47,876 1,954,426 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.

306 104th Annual Report | 2017 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 ie 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 g7 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 307 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 ie 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 g7 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.

308 104th Annual Report | 2017 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 lation ho c ld a i s n h gs8 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 ncy 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 309 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 lation ho c ld a i s n h gs8 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 ncy 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.

310 104th Annual Report | 2017 Table 7. Principal assets and liabilities of insured commercial banks, by class of bank, June 30, 2017 and 2016 Millions of dollars, except as noted Member banks Item Total Nonmember banks Total National State 2 017 Assets L oans and investments 3,209,713 2,779,238 2,200,102 579,136 430,475 Loans, gross Net 8,220,620 6,509,962 5,189,028 1,320,934 1,710,658 Investments 3,209,713 2,779,238 2,200,102 579,136 430,475 U.S. Treasury and federal agency securities 579,392 499,918 391,752 108,166 79,474 Other 2,630,320 2,279,320 1,808,349 470,970 351,001 Cash assets, total 1,421,976 1,269,913 1,054,249 215,665 152,062 Liabilities Deposits, total 10,797,646 8,872,820 7,124,247 1,748,573 1,924,826 Interbank 267,840 244,799 208,143 36,656 23,042 Other transactions 1,880,660 1,541,240 1,192,240 349,000 339,420 Other nontransactions 8,649,146 7,086,781 5,723,864 1,362,917 1,562,365 Equity capital 1,795,758 1,500,282 1,202,780 297,502 295,476 Number of banks 5,000 1,678 897 781 3,322 2016 Assets Loans and investments 11,016,940 8,965,679 7,179,143 1,786,536 2,051,260 Loans, gross 7,914,571 6,284,621 5,053,240 1,231,381 1,629,950 Net 7,912,788 6,283,458 5,052,311 1,231,147 1,629,330 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 10,286,774 8,443,830 6,760,175 1,683,656 1,842,943 Interbank 217,461 193,812 152,350 41,461 23,649 Other transactions 1,721,539 1,398,296 1,066,623 331,673 323,243 Other nontransactions 8,347,774 6,851,723 5,541,202 1,310,521 1,496,051 Equity capital 1,732,274 1,452,927 1,173,329 279,598 279,347 Number of banks 5,227 1,755 962 793 3,472 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 2016 have been revised.

Statistical Tables 311 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.

312 104th Annual Report | 2017 Table 9A. Statement of condition of the Federal Reserve Banks, by Bank, December 31, 2017 and 2016 Millions of dollars Total Boston New York Philadelphia Cleveland Richmond Item 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Assets Gold certificates 11,037 11,037 349 355 3,592 3,588 348 359 553 586 776 760 S pecial drawing rights certificates 5,200 5,200 196 196 1,818 1,818 210 210 237 237 412 412 Coin 1,892 1,873 47 47 47 65 187 159 145 139 270 306 Loans and securities Primary, secondary, and seasonal loans 134 63 - - 70 - - - - - - 2 Treasury securities, bought outright1 2,454,208 2,463,616 47,817 60,519 1,381,944 1,401,963 63,367 66,892 71,170 73,781 143,793 150,561 Government-sponsored enterprise debt securities, bought outright1 4,391 16,180 86 397 2,473 9,207 113 439 127 485 257 989 Federal agency and governmentsponsored enterprise mortgage-backed securities, bought outright2 1,764,929 1,741,391 34,387 42,778 993,817 990,968 45,570 47,283 51,181 52,152 103,408 106,423 Unamortized premiums on securities held outright3 158,760 172,964 3,093 4,249 89,396 98,428 4,099 4,696 4,604 5,180 9,302 10,570 Unamortized discounts on securities held outright3 -14,103 -15,078 -275 -370 -7,941 -8,580 -364 -409 -409 -452 -826 -922 Total loans and securities 4,368,319 4,379,136 85,108 107,573 2,459,759 2,491,986 112,785 118,901 1 26,673 131,146 255,934 267,623 Accrued interest receivable - System Open Market Account 24,744 25,598 484 630 13,912 14,547 641 697 722 770 1,464 1,577 Net portfolio holdings of consolidated variable interest entities4 1,722 1,742 n/a n/a 1,722 1,742 n/a n/a n/a n/a n /a n/a Foreign currency denominated investments5 21,316 19,442 924 859 6,825 6,413 1,146 1,070 1,736 1,481 4,607 4,336 Central bank liquidity swaps6 12,067 5,563 523 246 3,864 1,835 649 306 983 424 2,608 1,241 Other SOMA assets 13 8 - - 7 5 - - - - 1 1 Other assets Items in process of collection 81 118 - - - - - - - - - - Bank premises 2,217 2,213 114 118 455 443 73 72 121 108 197 203 Deferred asset (accrued liability) remittances to the Treasury - - - - - - - - - - - - All other assets7 1,369 1,407 66 68 355 413 29 44 55 49 270 251 Interdistrict settlement account - - 12,789 -3,195 -166,593 -135,654 5,003 -1,824 12,153 6,880 26,896 1,928 Total assets 4,449,977 4,453,337 100,600 106,897 2,325,763 2,387,201 121,071 119,994 143,378 141,820 293,435 278,638 (continued on next page)

Statistical Tables 313 Table 9A.—continued Total Boston New York Philadelphia Cleveland Richmond Item 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Liabilities Federal Reserve notes outstanding 1,745,775 1,637,993 57,138 52,607 577,769 534,619 54,181 51,798 83,646 80,022 119,325 117,238 Less: Notes held by Federal Reserve Bank 175,048 175,054 6,032 5,499 49,106 50,774 6,451 6,254 8,699 8,332 13,343 12,549 Federal Reserve notes outstanding, net 1,570,727 1,462,939 51,106 47,108 528,663 483,845 47,730 45,544 74,947 71,690 105,982 104,689 Securities sold under agreements to repurchase8 563,958 725,210 10,988 17,815 317,560 412,693 14,561 19,691 16,354 21,719 33,043 44,320 Deposits Depository institutions 1,954,431 1,759,675 36,543 40,012 1,206,638 1,032,881 56,228 52,334 48,464 44,908 144,662 120,052 Treasury, general account 228,933 399,190 n/a n/a 228,933 399,190 n/a n/a n/a n/a n /a n/a Foreign, official accounts 5,257 5,165 2 2 5,230 5,138 2 2 3 3 9 9 Other9 77,761 53,248 4 6 22,586 37,248 - - - - 185 155 Total deposits 2,266,382 2,217,278 36,549 40,020 1,463,387 1,474,457 56,230 52,336 48,467 44,911 1 44,856 1 20,216 Other liabilities Accrued remittances to the Treasury10 2,337 1,725 42 51 1,448 832 21 75 79 23 143 236 Deferred credit items 1,001 922 - - 0 - - - - - - - Consolidated variable interest entities 9 33 n/a n/a 9 33 n/a n/a n/a n/a n/a n/a All other liabilities11 4,174 4,788 154 150 1,650 2,391 178 173 190 182 470 437 Total liabilities 4,408,588 4,412,895 98,839 105,144 2,312,717 2,374,251 118,720 117,819 1 40,037 1 38,525 284,494 269,898 Capital accounts Capital paid-in 31,389 30,442 1,336 1,320 9,894 9,748 1,783 1,637 2,534 2,480 6,781 6,579 Surplus (including accumulated other comprehensive loss) 10,000 10,000 425 433 3,152 3,202 568 538 807 815 2,160 2,161 Total liabilities and capital accounts 4,449,977 4,453,337 100,600 106,897 2,325,763 2,387,201 121,071 119,994 143,378 141,820 293,435 278,638 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 was on a straight-line basis prior to 2017 and is now on an effective-interest basis. For mortgage-backed securities (MBS), amortization is on an effective-interest basis for both years. 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.

314 104th Annual Report | 2017 Table 9A. Statement of condition of the Federal Reserve Banks, by Bank, December 31, 2017 and 2016—continued Millions of dollars Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Item 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2 017 2016 2 017 2016 Assets Gold certificates 1,520 1,541 737 753 341 360 191 193 292 296 916 875 1,422 1,371 Special drawing rights certificates 654 654 424 424 150 150 90 90 153 153 282 282 574 574 Coin 198 186 299 279 37 29 52 51 108 113 193 190 308 310 Loans and securities Primary, secondary, and seasonal loans 26 2 23 44 2 - 12 9 1 5 - - - - Treasury securities, bought outright1 144,464 137,887 103,221 98,163 32,726 31,093 19,134 18,163 34,806 34,287 98,249 87,692 313,516 302,615 Government-sponsored enterprise debt securities, bought outright1 259 906 185 645 58 204 34 119 62 225 176 576 561 1,987 Federal agency and governmentsponsored enterprise mortgage-backed securities, bought outright2 103,890 97,464 74,231 69,386 23,535 21,978 13,760 12,839 25,031 24,236 70,655 61,984 2 25,463 213,902 Unamortized premiums on securities held outright3 9,345 9,681 6,677 6,892 2,118 2,183 1,238 1,275 2,252 2,408 6,355 6,157 20,281 21,246 Unamortized discounts on securities held outright3 -831 -844 -593 -602 -188 -191 -110 -111 -200 -210 -564 -537 -1,802 -1,852 Total loans and securities 257,153 245,096 183,744 174,528 58,251 55,267 34,068 32,294 61,952 60,951 1 74,871 1 55,872 5 58,019 5 37,898 Accrued interest receivable - System Open Market Account 1,456 1,433 1,041 1,019 330 323 193 188 351 356 988 909 3,163 3,147 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 1,243 1,080 892 521 233 199 90 83 207 194 273 247 3,139 2,958 Central bank liquidity swaps6 704 309 505 149 132 57 51 24 117 55 154 71 1,777 846 Other SOMA assets 1 - 1 - - - - - - - 1 - 2 1 Other assets Items in process of collection 81 118 - - - - - - - - - - - - Bank premises 203 206 204 202 110 114 88 89 236 239 221 223 193 196 Deferred asset (accrued liability) remittances to the Treasury - - - 91 - - - - - - - - - - All other assets7 106 95 61 60 109 101 26 31 89 70 58 57 151 173 Interdistrict settlement account 32,445 35,779 56,756 28,502 3,353 5,681 5,162 4,507 5,258 2,811 13,909 31,215 -7,132 23,369 Total assets 295,764 286,497 244,664 206,528 63,046 62,281 40,011 37,550 68,763 65,238 1 91,866 1 89,941 5 61,616 5 70,843 (continued on next page)

Statistical Tables 315 Table 9A.—continued Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Item 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2 017 2016 2 017 2016 Liabilities Federal Reserve notes outstanding 244,418 225,352 115,902 108,782 52,041 49,409 31,010 28,238 47,902 44,307 140,794 135,738 221,648 2 09,882 Less: Notes held by Federal Reserve Bank 24,170 24,868 10,707 10,672 5,167 5,135 2,898 2,892 5,711 5,577 16,336 16,288 26,428 26,212 Federal Reserve notes outstanding, net 220,248 200,484 105,195 98,110 46,874 44,274 28,112 25,346 42,191 38,730 124,458 119,450 195,220 183,670 Securities sold under agreements to repurchase8 33,197 40,589 23,719 28,896 7,520 9,153 4,397 5,347 7,998 10,093 22,577 25,814 72,044 89,081 Deposits Depository institutions 38,462 41,735 58,686 61,763 7,920 8,237 7,170 6,542 18,008 15,865 44,018 43,874 2 87,632 2 91,471 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 2 1 - - - - - - 1 - 6 6 Other9 7 7 54,971 15,805 3 20 0 - 4 4 0 1 1 2 Total deposits 38,471 41,744 113,659 77,569 7,923 8,257 7,170 6,542 18,012 15,869 44,019 43,875 2 87,639 291,479 Other liabilities Acrued remittances to the Treasury10 173 115 51 - 5 24 11 20 25 38 88 84 252 320 Deferred credit items 1,001 921 - - - - 0 - - - - - - - Consolidated variable interest entities n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n /a n/a All other liabilities11 282 285 285 260 127 131 131 124 127 115 212 201 368 338 Total liabilities 293,372 284,138 242,909 204,835 62,449 61,839 39,821 37,379 68,353 64,845 1 91,354 189,424 555,524 5 64,888 Capital accounts Capital paid-in 1,814 1,776 1,331 1,274 453 333 144 129 311 296 388 389 4,620 4,483 Surplus (including accumulated other comprehensive loss) 578 583 424 419 144 109 46 42 99 97 124 128 1,472 1,472 Total liabilities and capital accounts 295,764 286,497 244,664 206,528 63,046 62,281 40,011 37,550 68,763 65,238 1 91,866 189,941 5 61,616 570,843 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 was on a straight-line basis prior to 2017 and is now on an effective-interest basis. For mortgage-backed securities (MBS), amortization is on an effective-interest basis for both years. 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.

316 104th Annual Report | 2017 Table 9B. Statement of condition of the Federal Reserve Banks, December 31, 2017 and 2016 Supplemental information—collateral held against Federal Reserve notes: Federal Reserve agents’ accounts Millions of dollars Item 2017 2016 F ederal Reserve notes outstanding 1,745,775 1,637,993 Less: Notes held by Federal Reserve Banks not subject to collateralization 175,048 175,054 Collateralized Federal Reserve notes 1,570,727 1,462,939 Collateral for Federal Reserve notes Gold certificates 11,037 11,037 Special drawing rights certificates 5,200 5,200 U.S. Treasury securities1 1,554,490 1,446,702 Total collateral 1,570,727 1,462,939 1 Face value. Includes compensation to adjust for the effect of inflation on the original face value of inflation-indexed securities.

Statistical Tables 317 Table 10. Income and expenses of the Federal Reserve Banks, by Bank, 2017 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 1,194 11 26 1 4 6 41 209 203 448 113 30 101 Treasury securities 64,267,2941,345,74836,298,431 1,683,896 1,881,1743,811,9243,729,7032,662,229 843,841 4 93,253 906,5802,491,076 8,119,438 Government-sponsored enterprise debt securities, net 415,654 8,973 235,079 10,961 12,217 24,788 23,969 17,101 5,420 3,168 5,849 15,876 52,253 Federal agency and government-sponsored enterprise mortgage-backed securities, net 48,912,2011,027,99327,630,254 1,282,561 1,432,4202,903,0342,836,4302,024,509 641,695 375,087 689,7781,892,594 6,175,845 Foreign currency denominated investments, net -17,036 -740 -5,476 -919 -1,376 -3,697 -988 -680 -185 -72 -166 -218 -2,519 Central bank liquidity swaps1 13,752 599 4,435 744 1,103 2,995 793 526 148 58 134 175 2,041 Total interest income 113,593,0592,382,58464,162,749 2,977,244 3,325,5426,739,0506,589,9484,703,8941,491,122 871,942 1,602,2884,399,53314,347,159 Income from priced services 441,588 n/a 116,507 n/a n/a n/a 237,224 87,857 n/a n/a n/a n/a n/a Compensation received for services provided2 129,035 12,147 563 410 1,595 23,447 969 25,552 946 14,950 37,825 5,625 5,006 Securities lending fees 24,806 511 14,000 648 724 1,467 1,445 1,031 327 191 350 969 3,143 Other income 5,085 52 3,814 69 106 197 192 119 62 29 43 100 302 Total other income 600,514 12,710 134,884 1,127 2,425 25,111 239,830 114,559 1,335 15,170 38,218 6,694 8,451 Total current income 114,193,5732,395,29464,297,633 2,978,371 3,327,9676,764,1616,829,7784,818,4531,492,457 887,112 1,640,5064,406,22714,355,610 Net expenses Personnel Salaries and other personnel expenses 2,414,896 143,836 545,072 104,090 106,141 342,372 199,491 196,920 151,302 99,618 180,912 125,027 220,116 Retirement and other benefits 732,470 40,547 159,309 33,624 34,760 102,356 61,493 55,261 42,618 34,086 54,422 44,328 69,666 Administrative Fees 232,038 7,747 44,494 11,454 4,363 107,496 18,585 11,467 5,563 4,166 4,690 2,206 9,810 Travel 96,344 4,720 12,524 3,409 5,601 12,945 9,394 10,949 6,112 3,423 8,310 5,427 13,531 Postage and other shipping costs 13,613 238 1,692 160 1,331 406 2,600 172 486 249 964 2,301 3,014 Communications 39,347 892 4,815 568 561 24,993 1,340 2,085 1,034 402 785 859 1,012 Materials and supplies 76,734 4,299 24,287 10,538 3,671 6,151 5,078 6,015 2,819 1,695 3,821 3,516 4,843 Building Taxes on real estate 48,583 7,773 10,770 1,044 1,910 2,479 3,588 4,732 797 3,687 3,409 3,676 4,720 Property depreciation 138,083 13,041 27,115 6,672 7,343 14,027 10,809 15,716 8,152 4,236 9,155 9,126 12,692 Utilities 35,863 3,951 8,054 1,591 1,398 4,092 2,777 2,278 1,664 1,815 2,539 2,451 3,253 Rent 32,135 428 2,216 1,996 1,009 19,561 301 1,190 3,443 196 729 854 211 Other building 69,682 6,808 15,111 4,633 4,856 6,761 4,305 8,061 2,394 3,140 2,595 5,210 5,809 Equipment/software Purchases 33,175 3,350 5,851 1,051 1,549 5,933 2,662 2,486 1,767 1,482 2,862 2,156 2,027 Rentals 3,660 325 1,285 178 350 579 254 567 18 57 22 12 12 Depreciation 79,135 3,292 7,123 2,158 1,968 43,797 3,664 3,503 1,780 1,210 2,541 3,321 4,777 Repairs and maintenance 68,519 5,244 6,341 2,051 2,193 28,412 5,568 3,883 1,622 1,205 1,957 3,492 6,551 Software 254,084 9,321 47,376 6,866 8,375 90,649 11,308 8,383 10,307 6,049 21,468 7,187 26,795 Other expenses Compensation paid for service costs incurred2 129,035 n/a 41,601 n/a n/a n/a 77,234 10,199 n/a n /a n/a n/a n/a Other expenses 90,968 19,717 114,490 18,499 16,360 -513,270 67,803 78,091 166,558 15,016 32,062 29,018 46,626 Recoveries -186,224 -21,291 -20,820 -9,944 -5,774 -50,263 -15,255 -10,649 -4,278 -1,936 -14,009 -16,322 -15,682 (continued on next page)

318 104th Annual Report | 2017 Table 10.—continued Item Total Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas Dallas San City Francisco Expenses capitalized3 -65,195 -36,865 -48,932 -19,301 -8,805 185,585 -3,845 -19,968 -8,953 -17,659 -36,903 -14,203 -35,345 Total operating expenses before pension expense and reimbursements 4,336,945 217,373 1,009,774 181,337 189,160 435,061 469,154 391,341 395,205 162,137 282,331 219,642 384,438 Net periodic pension expense4 524,601 3,171 497,937 2,264 1,495 3,770 2,804 4,862 2,146 992 1,571 265 3,323 Reimbursements -698,192 -46,799 -147,299 -16,402 -41,773 -33,253 -23,866 -5,038 -244,156 -36,093 -73,229 -18,422 -11,862 Operating expenses 4,163,354 173,745 1,360,412 167,199 148,882 405,578 448,092 391,165 153,195 1 27,036 210,673 201,485 375,899 Interest expense on securities sold under agreements to repurchase 3,364,580 69,131 1,898,772 87,810 98,238 198,908 196,014 139,952 44,363 25,934 47,531 131,571 426,355 Interest on reserves5 25,849,433 307,01617,049,570 612,810 439,3581,413,567 432,1581,212,547 91,889 65,891 239,390 494,097 3,491,142 Interest on term deposits6 12,741 37 4,550 2,650 446 59 25 1,590 - - 1,321 250 1,814 Other expenses 7,030 144 3,968 183 205 416 410 292 93 54 99 275 891 Net expenses 33,397,138 550,07320,317,272 870,652 687,1292,018,5281,076,6991,745,546 289,540 2 18,915 499,014 827,678 4,296,101 Current net income 80,796,435 1,845,22143,980,361 2,107,719 2,640,8384,745,6335,753,0793,072,9071,202,917 6 68,197 1,141,4923,578,54910,059,509 Additions to (+) and deductions from (-) current net income Profit on sales of Treasury securities 28,246 550 15,905 729 819 1,655 1,663 1,188 377 220 401 1,131 3,608 Profit on sales of federal agency and government-sponsored enterprise mortgage-backed securities 8,256 152 4,639 211 238 479 491 351 111 65 118 338 1,063 Foreign currency translation gains (losses) 1,894,380 82,589 611,860 102,538 151,437 413,175 108,976 71,094 20,350 8,031 18,546 24,162 281,622 Net income from consolidated variable interest entity7 4,331 n/a 4,331 n/a n/a n/a n/a n/a n/a n/a n /a n/a n/a Other additions 963 29 897 - - 9 18 1 - - - 1 1 Other deductions -3,597 -3 -3,103 25 -111 -264 74 -4 -113 -11 -1 31 -118 Net additions to current net income 1,932,579 83,317 634,529 103,503 152,383 415,054 111,222 72,630 20,725 8,305 19,064 25,663 286,176 Cost of unreimbursed Treasury services - n/a - 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 740,000 31,924 236,688 39,919 60,494 160,182 42,920 31,336 8,159 3,115 7,238 9,370 108,656 Cost of currency 723,534 30,598 144,985 32,515 43,809 64,593 106,615 63,284 24,260 14,827 24,372 59,066 114,609 Consumer Financial Protection Bureau9 573,000 24,702 182,930 31,394 46,657 123,684 33,164 24,278 6,390 2,488 5,605 7,259 84,450 Assessments by the Board of Governors 2,036,534 87,224 564,603 103,828 150,960 348,459 182,699 118,898 38,809 20,430 37,215 75,695 307,715 Net income before providing for remittances to the Treasury 80,692,480 1,841,31444,050,287 2,107,394 2,642,2614,812,2285,681,6023,026,6391,184,833 6 56,072 1,123,3413,528,51710,037,970 Earnings remittances to the Treasury, as required by the Federal Reserve Act 80,559,689 1,810,23644,552,515 2,037,606 2,580,3464,646,6505,633,9682,985,1941,137,678 6 44,347 1,104,3323,505,037 9,921,780 Net income after providing for remittances to the Treasury 132,791 31,078 -502,228 69,788 61,915 165,578 47,634 41,445 47,155 11,725 19,009 23,480 116,190 Other comprehensive income (loss) 650,808 -5,921 686,422 2,996 -8,616 -7,117 -2,005 1,902 1,648 -2,381 -3,451 -9,761 -2,907 (continued on next page)

Statistical Tables 319 Table 10.—continued Item Total Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas Dallas San City Francisco Comprehensive income 783,599 25,157 184,194 72,784 53,299 158,461 45,629 43,347 48,803 9,344 15,558 13,719 113,283 Distribution of comprehensive income Dividends on capital stock 783,599 33,153 234,152 42,439 60,740 159,198 51,093 38,003 13,858 5,691 13,578 17,777 113,916 Transferred to/from surplus and change in accumulated other comprehensive income - -7,992 -49,954 30,347 -7,438 -735 -5,462 5,349 34,945 3,650 1,982 -4,059 -633 Earnings remittances to the Treasury 80,559,689 1,810,23644,552,515 2,037,606 2,580,3464,646,6505,633,9682,985,1941,137,678 644,347 1,104,3323,505,037 9,921,780 Total distribution of net income 81,343,288 1,835,39744,736,713 2,110,392 2,633,6484,805,1135,679,5993,028,5461,186,481 653,688 1,119,8923,518,75510,035,063 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 $478,589 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 entity’s 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.

320 104th Annual Report | 2017 Table 11. Income and expenses of the Federal Reserve Banks, 1914–2017 Thousands of dollars Distributions Assessments by the Board to the T ransferred of Governors U.S. Treasury to/from surplus Federal Net Other and Reserve additions Consumer compre- Trans- change in p B e a a r n n i d o k d C in u c r o r m en e t exp N e e n t ses dedu ( o - c ) r 1 tions e B xp o e a n rd d- Costs of P F r B i o n u t a e r n e c c a ti i u o a n l h in ( e l c o n o s s m s iv ) e e Div p id a e id nds Statutory I F n e t d e o e r n e ra st l s t u f o e r / r p fr r l o e u m d s4 m a o u c t l h c a e u te r - d itures currency and transfers3 Reserve compre- Office of notes hensive Financial 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 166,690 n/a 18,523 1949 316,537 67,931 -12,122 3,243 6,304 n/a n/a 12,329 n/a 193,146 n/a 21,462 1950 275,839 69,822 36,294 3,434 7,316 n/a n/a 13,083 n /a 1 96,629 n/a 21,849 1951 394,656 83,793 -2,128 4,095 7,581 n/a n/a 13,865 n /a 254,874 n/a 28,321 1952 456,060 92,051 1,584 4,122 8,521 n/a n/a 14,682 n /a 291,935 n /a 46,334 1953 513,037 98,493 -1,059 4,100 10,922 n/a n/a 15,558 n/a 3 42,568 n /a 40,337 1954 438,486 99,068 -134 4,175 6,490 n/a n/a 16,442 n/a 276,289 n /a 35,888 1955 412,488 101,159 -265 4,194 4,707 n/a n/a 17,712 n /a 251,741 n/a 32,710 1956 595,649 110,240 -23 5,340 5,603 n/a n/a 18,905 n/a 401,556 n /a 53,983 1957 763,348 117,932 -7,141 7,508 6,374 n/a n/a 20,081 n/a 5 42,708 n /a 61,604 1958 742,068 125,831 124 5,917 5,973 n/a n/a 21,197 n /a 524,059 n/a 59,215 1959 886,226 131,848 98,247 6,471 6,384 n/a n/a 22,722 n /a 9 10,650 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 321 Table 11.—continued Distributions Assessments by the Board to the T ransferred of Governors U.S. Treasury to/from surplus Federal Net Other and Reserve additions Consumer compre- Trans- change in p B e a a r n n i d o k d C in u c r o r m en e t exp N e e n t ses dedu ( o - c ) r 1 tions e B xp o e a n rd d- Costs of P F r B i o n u t a e r n e c c a ti i u o a n l h in ( e l c o n o s s m s iv ) e e Div p id a e id nds Statutory I F n e t d e o e r n e ra st l s t u f o e r / r p fr r l o e u m d s4 m a o u c t l h c a e u te r - d itures currency and transfers3 Reserve compre- Office of notes hensive Financial 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 1 4,228,816 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 1 6,054,095 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 2 0,777,552 n/a 228,356 1992 20,235,028 1,474,531 -987,788 128,955 295,401 n/a n/a 171,763 n /a 1 6,774,477 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 1 5,986,765 n/a 347,583 1994 20,910,742 1,795,328 2,363,862 146,866 368,187 n/a n/a 212,090 n/a 20,470,011 n/a 282,122 1995 25,395,148 1,818,416 857,788 161,348 370,203 n/a n/a 230,527 n/a 2 3,389,367 n/a 283,075 1996 25,164,303 1,947,861 -1,676,716 162,642 402,517 n/a n/a 255,884 5,517,716 14,565,624 n/a 635,343 1997 26,917,213 1,976,453 -2,611,570 174,407 364,454 n/a n/a 299,652 20,658,972 0 n /a 831,705 1998 28,149,477 1,833,436 1,906,037 178,009 408,544 n/a n/a 343,014 17,785,942 8,774,994 n/a 731,575 1999 29,346,836 1,852,162 -533,557 213,790 484,959 n/a n/a 373,579 n /a 2 5,409,736 n/a 479,053 2000 33,963,992 1,971,688 -1,500,027 188,067 435,838 n/a n/a 409,614 n /a 2 5,343,892 n/a 4,114,865 2001 31,870,721 2,084,708 -1,117,435 295,056 338,537 n/a n/a 428,183 n /a 2 7,089,222 n/a 517,580 2002 26,760,113 2,227,078 2,149,328 205,111 429,568 n/a n/a 483,596 n/a 24,495,490 n/a 1,068,598 2003 23,792,725 2,462,658 2,481,127 297,020 508,144 n/a n/a 517,705 n/a 22,021,528 n/a 466,796 2004 23,539,942 2,238,705 917,870 272,331 503,784 n/a n/a 582,402 n/a 1 8,078,003 n/a 2,782,587 2005 30,729,357 2,889,544 -3,576,903 265,742 477,087 n/a n/a 780,863 n /a 2 1,467,545 n/a 1,271,672 2006 38,410,427 3,263,844 -158,846 301,014 491,962 n/a n/a 871,255 n /a 2 9,051,678 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 3 4,598,401 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 7 9,268,124 n/a 883,724 (continued on next page)

322 104th Annual Report | 2017 Table 11.—continued Distributions Assessments by the Board to the T ransferred of Governors U.S. Treasury to/from surplus Federal Net Other and Reserve additions Consumer compre- Trans- change in p B e a a r n n i d o k d C in u c r o r m en e t exp N e e n t ses dedu ( o - c ) r 1 tions e B xp o e a n rd d- Costs of P F r B i o n u t a e r n e c c a ti i u o a n l h in ( e l c o n o s s m s iv ) e e Div p id a e id nds Statutory I F n e t d e o e r n e ra st l s t u f o e r / r p fr r l o e u m d s4 m a o u c t l h c a e u te r - d itures currency and transfers3 Reserve compre- Office of notes hensive Financial 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 2017 114,193,573 33,397,138 1,932,579 740,000 723,534 573,000 650,808 783,599 80,559,689 n /a n /a 0 Total 1914–2017 1,642,985,487 170,741,289 39,308,211 10,448,117 15,930,557 3,496,377 -1,485,129 23,719,831242,096,1131,198,433,402 -4 15,942,3896 A ggregate for each Bank, 1914–2017 Boston 61,717,363 6,452,943 367,259 449,976 860,575 154,676 -1,147 1,039,270 7,663,721 44,842,511 135 619,672 New York 737,563,817 71,053,2257 26,517,458 2,929,624 4,231,195 1,120,320 -1,631,137 6,684,458125,771,143 545,077,826 -433 5,582,777 Philadelphia 52,597,055 6,234,816 835,006 649,456 732,746 237,928 13,149 1,663,581 6,884,287 36,308,189 291 733,913 Cleveland 69,391,113 6,150,127 758,148 780,524 909,865 272,557 7,069 1,768,605 9,546,450 49,612,575 -10 1,115,636 Richmond 121,172,510 12,743,219 2,440,503 1,976,922 1,366,758 747,213 45,248 4,791,313 17,496,331 81,295,580 -72 3,241,004 Atlanta 108,458,414 14,246,158 1,773,366 700,532 1,696,744 198,946 15,701 1,546,746 15,343,503 75,616,315 5 898,534 Chicago 137,260,894 12,973,826 1,930,663 713,350 1,651,053 108,583 27,822 1,415,441 11,707,659 109,806,844 12 842,620 St. Louis 40,779,745 4,427,164 443,452 169,456 553,279 32,959 22,588 357,543 4,287,582 31,149,772 -27 268,063 Minneapolis 22,375,030 4,400,620 432,336 202,025 310,813 20,134 1,124 445,126 1,789,696 15,436,029 65 203,986 Kansas City 45,367,271 6,219,445 596,992 204,042 568,759 35,243 -8,566 407,984 3,822,047 34,476,668 -9 221,514 Dallas 66,857,756 7,060,932 1,105,884 302,747 966,961 51,753 11,168 590,977 8,819,824 49,889,286 55 291,781 San Francisco 179,444,518 18,778,818 2,107,141 1,369,469 2,081,806 516,069 11,853 3,008,787 28,963,873 124,921,807 -17 1,922,892 Total 1 ,642,985,487 170,741,289 39,308,211 10,448,117 15,930,557 3,496,377 -1,485,129 23,719,831242,096,1131,198,433,402 -4 15,942,389 Note: Components may not sum to totals because of rounding. 1 For 1987 and subsequent years, includes the cost of services provided to the Treasury by Federal Reserve Banks for which reimbursement was not received. 2 Starting in 2010, as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Board of Governors began assessing the Reserve Banks to fund the operations of the Consumer Financial Protection Bureau and, for a two-year period beginning July 21, 2010, the Office of Financial Research. These assessments are allocated to the Reserve Banks based on each Reserve Bank’s capital and surplus balances as of the most recent quarter. 3 Represents transfers made as a franchise tax from 1917 through 1932; transfers made under section 13b of the Federal Reserve Act from 1935 through 1947; transfers made under section 7 of the Federal Reserve Act for 1996, 1997, and 2015–2017. 4 Transfers made under section 13b of the Federal Reserve Act. 5 Transfers 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, 2017. 7 This amount is reduced by $7,591,046 thousand for expenses of the System Retirement Plan. See note 4, “Table 10. Income and expenses of the Federal Reserve Banks, by Bank, 2017.” n/a Not applicable.

Statistical Tables 323 Table 12. Operations in principal departments of the Federal Reserve Banks, 2014–17 Operation 2017 2016 2015 2014 Millions of pieces Currency processed 32,942 31,504 32,596 33,372 Currency destroyed 4,571 4,837 5,212 5,622 Coin received 58,221 58,223 55,921 55,401 Checks handled U.S. government checks1 56 58 60 63 Postal money orders 85 88 92 95 Commercial 5,153 5,241 5,452 5,741 Securities transfers2 16 17 17 17 Funds transfers3 153 148 143 135 Automated clearinghouse transactions Commercial 13,749 12,960 12,298 11,620 Government 1,629 1,594 1,558 1,516 Millions of dollars Currency processed 644,395 596,053 604,391 638,245 Currency destroyed 112,202 118,199 139,833 198,525 Coin received 5,585 5,563 5,394 5,363 Checks handled U.S. government checks1 145,599 152,392 143,764 141,396 Postal money orders 20,682 20,672 20,761 20,902 Commercial 8,438,008 8,088,569 8,109,457 8,108,895 Securities transfers2 299,334,719 286,671,689 295,755,612 287,104,205 Funds transfers3 740,096,838 766,961,537 834,630,440 884,551,876 Automated clearinghouse transactions Commercial 23,398,576 21,772,168 20,564,724 19,891,274 Government 5,370,695 5,192,786 5,054,219 4,872,536 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.

324 104th Annual Report | 2017 Table 13. Number and annual salaries of officers and employees of the Federal Reserve Banks, December 31, 2017 President Other officers Employees Total F ( e in d c e l r u a d l in R g e s b e r r a v n e c B he a s n ) k Annual Annual Number A nnual A nnual (d s o a ll l a a r r s y )1 Number ( s d a o l l a la r r ie s s )1 F ull time Part time Te H m o p u o r r ly a 2 ry/ ( s d a o l l a la r r ie s s )1 N umber ( s d a o l l a la r r ie s s )1 B oston 412,300 72 18,259,014 966 24 9 107,704,887 1,072 126,376,201 New York 476,100 594 149,298,166 2,479 31 1 311,289,828 3,106 461,064,094 Philadelphia 398,200 62 13,472,114 788 17 16 77,106,418 884 90,976,732 Cleveland 392,100 66 14,076,900 885 18 15 79,960,368 985 94,429,368 Richmond3 0 82 17,229,830 1,354 3 11 126,115,763 1,450 143,345,593 Atlanta 382,280 100 21,918,470 1,559 27 16 146,767,499 1,703 169,068,249 Chicago 412,300 128 29,695,052 1,354 41 0 145,141,480 1,524 175,248,832 St. Louis 369,900 99 21,430,100 1,239 20 14 113,567,804 1,373 135,367,804 Minneapolis 398,300 62 13,404,300 908 38 13 77,511,405 1,022 91,314,005 Kansas City 370,100 106 20,724,300 1,730 15 5 138,288,409 1,857 159,382,809 Dallas 403,300 76 16,449,047 1,132 14 5 94,713,181 1,228 111,565,528 San Francisco 476,100 99 24,127,265 1,568 19 20 170,885,539 1,707 195,488,904 Federal Reserve Information Technology n/a 72 16,521,069 1,110 2 8 132,745,162 1,192 149,266,231 Office of Employee Benefits n/a 12 3,347,055 43 1 2 5,555,376 58 8,902,431 Total 4,490,980 1,630 379,952,682 17,115 270 135 1,727,353,119 1 9,161 2,111,796,781 Note: Components may not sum to totals because of rounding. 1 Annualized salary liability (excluding outside agency costs) based on salaries in effect on December 31, 2017. 2 Temporary/hourly employees are paid by the Bank, generally work less than 780 hours, and are employed on a temporary basis (such as interns). Count previously recorded under employees. 3 The Federal Reserve Bank of Richmond president resigned in April 2017. n/a Not applicable.

Statistical Tables 325 Table 14. Acquisition costs and net book value of the premises of the Federal Reserve Banks and Branches, December 31, 2017 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 27,293 199,665 46,248 273,206 114,207 n/a New York 68,755 596,280 126,968 792,003 454,833 n/a Philadelphia 8,146 122,667 27,842 158,655 73,307 n/a Cleveland 4,219 150,423 34,944 189,586 106,780 n/a Cincinnati 3,085 30,555 15,882 49,522 14,690 n/a Richmond 32,044 173,848 60,674 266,566 134,091 n/a Baltimore 7,916 41,888 14,109 63,913 29,310 n/a Charlotte 7,884 45,969 13,993 67,846 33,919 n/a Atlanta 23,344 162,147 21,850 207,341 134,872 n/a Birmingham 5,347 13,105 1,506 19,958 10,123 n/a Jacksonville 1,848 25,873 9,231 36,952 19,038 n/a New Orleans 3,785 16,298 6,870 26,953 12,130 n/a Miami 4,509 33,972 13,419 51,900 27,197 n/a Chicago 7,459 258,778 36,782 303,019 130,794 n/a Detroit 13,219 74,658 13,101 100,978 73,494 n/a St. Louis 9,377 146,650 17,021 173,048 101,023 n/a Memphis 2,472 17,076 6,561 26,109 8,711 n/a Minneapolis 15,084 111,278 18,825 145,187 79,611 n/a Helena 3,316 10,327 1,609 15,252 7,970 n/a Kansas City 38,691 212,722 25,990 277,403 220,131 n/a Denver 3,694 11,090 6,169 20,953 7,819 n/a Omaha 4,300 9,479 2,052 15,831 8,322 n/a Dallas 38,100 135,798 33,176 207,074 110,649 n/a El Paso 262 5,843 3,165 9,270 3,887 n/a Houston 32,323 104,562 9,209 146,094 106,674 n/a San Francisco 20,988 134,182 31,501 186,671 80,335 n/a Los Angeles 6,306 86,266 25,629 118,201 57,243 n/a Salt Lake City 1,294 5,576 1,855 8,725 2,421 n/a Seattle 13,101 49,970 6,631 69,702 53,096 n/a Total 408,161 2,986,945 632,812 4,027,918 2,216,677 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.

327 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, evaluations, 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.

328 104th Annual Report | 2017 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, 2017 and 2016. March 5, 2018 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, 2017 and 2016, 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 Ricardo A. Aguilera Chief Operating Officer Chief Financial Officer

Federal Reserve System Audits 329 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Governors of the Federal Reserve System: Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying balance sheets of the Board of Governors of the Federal Reserve System (the Board) as of December 31, 2017 and 2016, the related statements of operations and cash flows for the years then ended, and the related notes (collectively, the financial statements). We also have audited the Board’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Board maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basis for Opinions 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 and Financial Reporting. Our responsibility is to express an opinion on the Board’s financial statements and an opinion on the Board’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Board in accordance with the relevant requirements relating to our audit. We conducted our audits in accordance with the standards of the PCAOB, in accordance with auditing standards generally accepted in the United States of America, and in accordance with the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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.

330 104th Annual Report | 2017 Definition and Limitations of Internal Control over Financial Reporting 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. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued a report dated March 5, 2018 on our tests of the Board’s compliance with certain provisions of laws, regulations, and contracts and other matters. The purpose of that 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 compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Board’s compliance. We have served as the Board’s auditor since 2015. Washington, District of Columbia March 5, 2018

Federal Reserve System Audits 331 Board of Governors of the Federal Reserve System Balance Sheets As of December 31, 2017 2016 Assets Current assets: Cash $177,529,448 $ 148,254,554 Accounts receivable – net 2,183,803 3,668,675 Prepaid expenses and other assets 7,335,702 6,439,080 Total current assets 187,048,953 158,362,309 Noncurrent assets: Property, equipment, and software – net 266,484,427 249,778,925 Other assets 941,190 886,914 Total noncurrent assets 267,425,617 250,665,839 Total $454,474,570 $ 409,028,148 L iabilities and cumulative results of operations Current liabilities: Accounts payable and accrued liabilities $ 27,203,026 $ 16,758,668 Accrued payroll and related taxes 37,953,047 34,327,731 Accrued annual leave 40,857,846 39,291,409 Capital lease payable 77,744 53,892 Unearned revenues and other liabilities 4,455,970 3,047,005 Total current liabilities 110,547,633 93,478,705 Long-term liabilities: Capital lease payable 140,342 114,041 Retirement benefit obligation 102,881,136 73,943,482 Postretirement benefit obligation 15,915,271 14,202,446 Postemployment benefit obligation 7,055,281 7,215,147 Deferred rent 45,418,714 39,311,002 Other liabilities – 688,047 Total long-term liabilities 171,410,744 135,474,165 Total liabilities 281,958,377 228,952,870 Cumulative results of operations: Fund balance 222,621,531 211,493,395 Accumulated other comprehensive loss (50,105,338) (31,418,117) Total cumulative results of operations 172,516,193 180,075,278 Total $454,474,570 $409,028,148 See notes to financial statements.

332 104th Annual Report | 2017 Board of Governors of the Federal Reserve System Statements of Operations For the years ended December 31, 2017 2016 Board operating revenues: Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $740,000,000 $709,000,000 Assessments levied on Federal Reserve Banks for currency-related operating expenses and capital expenditures 44,008,726 – Other revenues 17,141,918 18,468,177 Total operating revenues 801,150,644 727,468,177 Board operating expenses: Salaries 437,179,633 416,636,315 Retirement, insurance, and benefits 97,442,384 88,804,438 Other components of net periodic pension and postretirement costs 7,330,010 6,022,057 Contractual services and professional fees 55,430,150 49,176,932 Depreciation, amortization, and net gains or losses on disposals 40,023,558 39,487,196 Travel 14,020,574 15,338,072 Non-capital furniture, equipment, postage, and supplies 34,372,697 7,268,471 Data, news, and research 13,372,175 30,607,031 Utilities 8,353,654 9,174,260 Software 16,010,063 14,838,146 Rentals of space 31,325,898 28,852,005 Repairs and maintenance 8,304,501 8,100,370 Other expenses 26,857,211 11,022,788 Total operating expenses 790,022,508 725,328,081 Net income 11,128,136 2,140,096 Currency costs: Assessments levied or to be levied on Federal Reserve Banks for currency costs 679,613,935 700,713,295 Expenses for costs related to currency 679,613,935 700,713,295 Currency assessments over (under) expenses – – Bureau of Consumer Financial Protection (Bureau): Assessments levied on the Federal Reserve Banks for the Bureau 573,000,000 596,200,000 Transfers to the Bureau 573,000,000 596,200,000 Bureau assessments over (under) transfers – – Total net income $ 11,128,136 $ 2,140,096 Other comprehensive income: Pension and other postretirement benefit plans: Amortization of prior service cost $ 138,609 605,483 Amortization of net actuarial loss 2,856,656 1,832,267 Net actuarial loss arising during the year (21,682,486) (13,262,638) Total other comprehensive loss (18,687,221) (10,824,888) Comprehensive income (loss) (7,559,085) (8,684,792) Cumulative results of operations – beginning of year 180,075,278 188,760,070 Cumulative results of operations – end of year $172,516,193 $180,075,278 See notes to financial statements.

Federal Reserve System Audits 333 Board of Governors of the Federal Reserve System Statements of Cash Flows For the years ended December 31, 2017 2016 Cash flows from operating activities: Net income $ 11,128,136 $ 2,140,096 Adjustments to reconcile results of operations to net cash provided by (used in) operating activities: Depreciation and amortization 38,904,644 38,082,839 Net loss on disposal of property and equipment 1,118,914 1,404,357 Other additional noncash adjustments to results of operations 324,078 (207,215) (Increase) decrease in assets: Accounts receivable 1,484,872 (635,836) Prepaid expenses (896,622) (1,177,486) Other assets (54,276) 297,222 Increase (decrease) in liabilities: Accounts payable and accrued liabilities 4,498,215 1,788,402 Accrued payroll and related taxes 3,625,316 5,326,995 Accrued annual leave 1,566,437 2,494,932 Unearned revenues and other liabilities (360,536) 40,574 Net retirement benefit obligation 11,398,148 8,799,235 Net postretirement benefit obligation 565,113 538,831 Net postemployment benefit obligation (159,866) (1,405,061) Deferred rent (1,625,988) (2,013,269) Other long-term liabilities – – Net cash provided by operating activities 71,516,585 55,474,616 C ash flows from investing activities: Capital expenditures (42,195,544) (28,723,996) Net cash used in investing activities (42,195,544) (28,723,996) Cash flows from financing activities: Capital lease payments (46,147) (174,308) Net cash used in financing activities (46,147) (174,308) Net increase (decrease) in cash 29,274,894 26,576,312 Cash balance – beginning of year 148,254,554 121,678,242 Cash balance – end of year $177,529,448 $148,254,554 See notes to financial statements.

334 104th Annual Report | 2017 Board of Governors of the Federal Reserve System Notes to Financial Statements as of and for the Years Ended December 31, 2017 and 2016 (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 335 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. Subsequent to the balance sheet date the Bipartisan Budget Act of 2018 was signed into law, effective February 9, 2018, reducing the statutory limit on aggregate Reserve Bank surplus from $10 billion to $7.5 billion. 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 costs and assesses the Reserve Banks for these costs related to producing, issuing, and retiring Federal Reserve notes as well as providing other 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 costs are incurred. In 2017, the

336 104th Annual Report | 2017 Board has started undertaking a greater role in the currency program including the areas of research and development, and quality assurance. This expanded role is reflected in the reclassification of certain revenue and expense transactions when compared to prior years. The Board’s Statements of Operations include costs and assessments reported within Board operating activities, as it relates to the 2017 activity, and certain costs and assessments are reported separately from the Board’s operating activities. See the currency footnote disclosures for more detail on these costs. 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. 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. 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. 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.

Federal Reserve System Audits 337 Operating Leases and 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 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 U.S. 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 February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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-ofuse 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. Subsequently, the FASB issued a number of related ASUs, including ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date; ASU 2016-08, Revenue

338 104th Annual Report | 2017 from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. 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 March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). This update requires an employer to disaggregate the service cost component from the other components of net benefit cost. It also provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. This update is effective for the Board for the year ended December 31, 2019, although early adoption is permitted. The Board has decided to adopt this guidance in 2017. See changes reflected in the Statements of Operations. (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, 2017 and 2016: As of December 31, 2017 2016 Land $ 18,640,314 $ 18,640,314 Buildings and improvements 310,235,261 309,910,316 Construction in process 31,670,962 12,106,227 Furniture and equipment 77,682,539 76,548,612 Software in use 59,373,571 47,862,713 Software in process 3,462,045 6,686,732 Vehicles 2,297,985 2,337,638 Lease – office equipment 283,300 187,000 Subtotal 503,645,977 474,279,552 Less accumulated depreciation and amortization (237,161,550) (224,500,627) Property, equipment, and software – net $266,484,427 $249,778,925

Federal Reserve System Audits 339 Construction in process include costs incurred in the current or prior years for long-term projects and building enhancements. The Board recorded noncash capital assets of goods received or services performed of $5,946,000 for the year ended December 31, 2017. (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 $283,000 and $187,000 as of 2017 and 2016, respectively. Accumulated depreciation includes $77,000 and $27,000 related to assets under capital leases as of 2017 and 2016, respectively. The depreciation expense for leased equipment is $50,000 and $116,000 for 2017 and 2016, 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, 2017, are as follows: Years Ended December 31, Amount 2018 $ 72,389 2019 77,636 2020 49,698 2021 29,742 2022 22,306 Total minimum lease payments 251,771 Less amount representing maintenance (39,957) Net minimum lease payments 211,814 Less amount representing interest (6,069) Present value of net minimum lease payments 205,745 Less current maturities of capital lease payments (65,403) Long-term capital lease obligations $140,342 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 other governmental agencies and Reserve Banks. Minimum annual payments under the multiyear operating leases having an initial or remaining noncancelable lease term in excess of one year at December 31, 2017, are as follows: Years Ended December 31, 2018 $ 33,654,956 2019 37,173,221 2020 36,187,966 2021 36,697,577 After 2021 94,424,344 $238,138,064 Deferred Rent — The Board recorded noncash lease incentives of $7,734,000 and $1,009,000 for the years ended December 31, 2017 and 2016, respectively.

340 104th Annual Report | 2017 (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 $720 million and $580 million during each of the years ended December 31, 2017 and 2016, respectively. The Board was not assessed a contribution for 2017 or 2016. In October 2017, the Society of Actuaries released new mortality tables (RP-2017) and mortality projection scales (MP-2017). The System analyzed each of these updates to the mortality tables and compared them to the System’s actual retiree mortality experience. Based on these analyses, the System adopted modified RP-2017 mortality tables and adjusted MP-2017 projection scales reflecting the System’s recent mortality experience of System retirees through 2016. The adjusted tables and scales included the Board and resulted in an estimated gain of the BEP and PEP (see below) projected benefit obligations of approximately $250,000 and $140,000, respectively in 2017 and with no adjustments made in 2016. 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 341 limitations imposed by the Internal Revenue Code. Activity for the BEP as of December 31, 2017 and 2016, is summarized in the following tables: 2017 2016 Change in projected benefit obligation: Benefit obligation – beginning of year $41,832,904 $ 27,995,628 Service cost 4,359,375 2,844,118 Interest cost 2,365,386 1,652,323 Plan participants’ contributions – – Actuarial loss 18,158,332 9,371,473 Gross benefits paid (61,229) (30,638) Benefit obligation – end of year $66,654,768 $ 41,832,904 Accumulated benefit obligation – end of year $11,854,561 $ 6,436,909 Weighted-average assumptions used to determine benefit obligation as of December 31: Discount rate 3.75 % 4 .32 % Rate of compensation increase 4.00 % 4 .00 % Change in plan assets: Fair value of plan assets – beginning of year $ – $ – Employer contributions 61,229 30,638 Plan participants’ contributions – – Gross benefits paid (61,229) (30,638) 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) 145,694 114,021 Benefit obligation (noncurrent) 66,509,074 41,718,883 Funded status (66,654,768) (41,832,904) Amount recognized – end of year $(66,654,768) $ (41,832,904) Amounts recognized in the balance sheets consist of: Asset $ – $ – Liability – current (145,694) (114,021) Liability – noncurrent (66,509,074) (41,718,883) Net amount recognized $(66,654,768) $ (41,832,904) Amounts recognized in accumulated other comprehensive income consist of: Net actuarial loss $32,673,765 $ 16,312,103 Prior service cost 122,876 222,454 Net amount recognized $32,796,641 $ 16,534,557 Expected cash flows: Expected employer contributions – 2018 $ 145,694 Expected benefit payments:* 2 018 $ 145,694 2019 $ 203,527 2020 $ 266,382 2021 $ 365,449 2022 $ 456,336 2023–2027 $4,621,973 * Expected benefit payments to be made by the Board.

342 104th Annual Report | 2017 2017 2016 Components of net periodic benefit cost: Service cost $ 4,359,375 $ 2,844,118 Interest cost 2,365,386 1,652,323 Expected return on plan assets – – Amortization: Actuarial (gain) loss $ 1,796,670 $ 787,148 Prior service cost 99,578 99,578 Net periodic benefit cost $ 8,621,009 $ 5,383,167 Weighted-average assumptions used to determine net periodic benefit cost: Discount rate 4.32 % 4 .67 % 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 $18,158,332 $ 9,371,473 Amortization of prior service cost (99,578) (99,578) Amortization of actuarial gain (loss) (1,796,670) (787,148) Total recognized in other comprehensive loss $16,262,084 $ 8,484,747 Total recognized in net periodic benefit cost and other comprehensive income $24,883,093 $13,867,914 Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2018 are shown below: Net actuarial loss $2,352,810 Prior service cost 83,187 Total $2,435,997 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 343 above the Social Security integration level to 2.0 percent. Activity for the PEP as of December 31, 2017 and 2016, is summarized in the following tables: 2017 2016 Change in projected benefit obligation: Benefit obligation – beginning of year $32,378,804 $ 26,876,261 Service cost 1,094,459 1,063,168 Interest cost 1,358,925 1,326,009 Plan participants’ contributions – – Actuarial loss 2,164,636 3,371,408 Gross benefits paid (406,149) (258,042) Benefit obligation – end of year $36,590,675 $ 32,378,804 Accumulated benefit obligation – end of year $31,462,483 $25,242,076 Weighted-average assumptions used to determine benefit obligation as of December 31: Discount rate 3.69 % 4 .22 % Rate of compensation increase 4.00 % 4 .00 % Change in plan assets: Fair value of plan assets – beginning of year $ – $ – Employer contributions 406,149 258,042 Plan participants’ contributions – – Gross benefits paid (406,149) (258,042) 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 456,157 363,216 Benefit obligation – noncurrent 36,134,518 32,015,588 Funded status (36,590,675) (32,378,804) Amount recognized – end of year $(36,590,675) $ (32,378,804) Amounts recognized in the balance sheets consist of: Asset $ – $ – Liability – current (456,157) (363,216) Liability – noncurrent (36,134,518) (32,015,588) Net amount recognized $(36,590,675) $ (32,378,804) Amounts recognized in accumulated other comprehensive income consist of: Net actuarial loss $13,350,579 $ 12,018,247 Prior service cost – 54,908 Net amount recognized $13,350,579 $ 12,073,155 Expected cash flows: Expected employer contributions – 2018 $ 456,157 Expected benefit payments:* 2 018 $ 456,157 2019 $ 599,410 2020 $ 742,705 2021 $ 894,316 2022 $1,060,766 2023–2027 $7,969,124 * Expected benefit payments to be made by the Board.

344 104th Annual Report | 2017 2017 2016 Components of net periodic benefit cost: Service cost $1,094,459 $ 1,063,168 Interest cost 1,358,925 1,326,009 Expected return on plan assets – – Amortization: Actuarial loss 832,304 872,453 Prior service cost 54,908 531,395 Net periodic benefit cost $3,340,596 $3,793,025 Weighted-average assumptions used to determine net periodic benefit cost: Discount rate 4.22 % 4 .52 % 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 $2,164,636 $ 3,371,408 Amortization of prior service cost (54,908) (531,395) Amortization of actuarial loss (832,304) (872,453) Total recognized in other comprehensive (income) loss $1,277,424 $1,967,560 Total recognized in net periodic benefit cost and other comprehensive income $4,618,020 $5,760,585 Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2018 are shown below: Net actuarial loss $1,065,514 Prior service cost – Total $1,065,514 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, 2017 and 2016, is summarized in the following table: 2017 2016 Retirement benefit obligation: Benefit obligation – BEP $ 66,654,768 $ 41,832,904 Benefit obligation – PEP 36,590,675 32,378,804 Additional benefit obligations 237,544 209,011 Total accumulated retirement benefit obligation $103,482,987 $74,420,719 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 $1,080,000 and $939,000 in 2017 and 2016, 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 $27,320,000 and $25,985,000 in 2017 and 2016, respectively.

Federal Reserve System Audits 345 (7) Postretirement Benefits The Board provides certain life insurance programs for its active employees and retirees. Activity as of December 31, 2017 and 2016, is summarized in the following tables: 2017 2016 Change in benefit obligation: Benefit obligation – beginning of year $14,710,985 $ 13,777,546 Service cost 164,069 167,045 Interest cost 610,434 605,975 Plan participants’ contributions – – Actuarial loss 1,359,518 519,758 Gross benefits paid (377,971) (359,339) Benefit obligation – end of year $16,467,035 $ 14,710,985 Weighted-average assumptions used to determine benefit obligation as of December 31 – discount rate 3.64 % 4.14 % Change in plan assets: Fair value of plan assets – beginning of year $ – $ – Employer contributions 377,971 359,339 Gross benefits paid (377,971) (359,339) 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 551,764 508,539 Benefit obligation – noncurrent 15,915,271 14,202,446 Funded status (16,467,035) (14,710,985) Amount recognized – end of year $(16,467,035) $ (14,710,985) Amounts recognized in the balance sheets consist of: Asset $ – $ – Liability – current (551,764) (508,539) Liability – noncurrent (15,915,271) (14,202,446) Net amount recognized $(16,467,035) $ (14,710,985) Amounts recognized in accumulated other comprehensive income consist of: Net actuarial loss $ 4,065,836 $ 2,934,000 Prior service credit (107,717) (123,594) Net amount recognized $ 3,958,119 $ 2,810,406 Expected cash flows: Expected employer contributions – 2018 $ 551,764 Expected benefit payments:* 2018 $ 551,764 2019 $ 579,169 2020 $ 607,237 2021 $ 649,663 2022 $ 674,285 2023–2027 $ 3,787,242 * Expected benefit payments to be made by the Board.

346 104th Annual Report | 2017 2017 2016 Components of net periodic benefit cost: Service cost $ 164,069 $ 167,045 Interest cost 610,434 605,975 Expected return on plan assets – – Amortization: Actuarial loss 227,682 172,666 Prior service credit (15,877) (25,490) Net periodic benefit cost $ 986,308 $ 920,196 Weighted-average assumptions used to determine net periodic benefit cost – discount rate 4.14 % 4.41 % Other changes in plan assets and benefit obligations recognized in other comprehensive income: Current year actuarial loss $1,359,518 $ 519,758 Amortization of prior service credit 15,877 25,490 Amortization of actuarial loss (227,682) (172,666) Total recognized in other comprehensive (income) loss $1,147,713 $ 372,582 Total recognized in net periodic benefit cost and other comprehensive income $2,134,021 $1,292,778 Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2018 are shown below: Net actuarial loss $348,950 Prior service credit (9,599) Total $339,351 (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 2.59 percent and 2.78 percent as of December 31, 2017 and 2016, respectively. The net periodic postemployment benefit cost (credit) recognized by the Board as of December 31, 2017 and 2016, was $1,017,000 and ($569,000), respectively.

Federal Reserve System Audits 347 (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, 2017 and 2016, 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, 2016 $(18,155,405) $(2,437,824) $(20,593,229) Change in accumulated other comprehensive income (loss): Net actuarial loss arising during the year (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 loss (10,452,307) (372,581) (10,824,888) Balance – December 31, 2016 (28,607,712) (2,810,405) (31,418,117) Change in accumulated other comprehensive income (loss): Net actuarial loss arising during the year(a) (20,322,968) (1,359,518) (21,682,486) Other comprehensive income before reclassifications (20,322,968) (1,359,518) (21,682,486) Amortization of prior service (credit) costs(a)(b) 154,486 (15,877) 138,609 Amortization of net actuarial loss(a)(b) 2,628,974 227,682 2,856,656 Amounts reclassified from accumulated other comprehensive income 2,783,460 211,805 2,995,265 Change in accumulated other comprehensive income (loss) (17,539,508) (1,147,713) (18,687,221) Balance – December 31, 2017 $(46,147,220) $(3,958,118) $(50,105,338) ( 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.

348 104th Annual Report | 2017 (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: 2017 2016 For the years ended December 31: Assessments levied or to be levied on Reserve Banks for: Currency expenses $ 723,622,661 $ 700,713,295 Board operations 740,000,000 709,000,000 Transfers of funds to the Bureau 573,000,000 596,200,000 Total assessments levied or to be levied on Reserve Banks $2,036,622,661 $2,005,913,295 Reserve Bank costs charged to the Board: Data processing and communication $ 442,644 $ 643,975 Data center 1,009,016 841,574 Office space 405,680 1,348,018 Contingency site 1,387,850 1,475,701 Total Reserve Bank costs charged to the Board $ 3,245,190 $ 4,309,268 As of December 31: Accounts receivable due from the Reserve Banks $ 451,615 $ 343,483 Accounts payable due to the Reserve Banks $ 250,896 $ 1,169,205 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 $2,733,000 and $2,471,000 for the years ended December 31, 2017 and 2016, respectively. Activity related to the Board and the OEB is summarized in the following table: 2017 2016 As of December 31: Accounts receivable due from the Office of Employee Benefits $603,452 $897,363 Accounts payable due to the Office of Employee Benefits $121,184 $ –

Federal Reserve System Audits 349 (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: 2017 2016 For the years ended December 31: Council expenses charged to the Board: Assessments for operating expenses $ 227,699 $ 212,600 Examiner education expenses 1,498,404 1,466,842 Central Data Repository 1,026,645 1,028,560 Home Mortgage Disclosure Act/Community Reinvestment Act 1,214,328 613,524 Uniform Bank Performance Report 212,501 177,662 Total Council expenses charged to the Board $4,179,577 $3,499,188 Board expenses charged to the Council: Data processing related services $2,383,378 $ 3,249,186 Other administrative services 607,200 552,000 Total Board expenses charged to the Council $2,990,578 $3,801,186 As of December 31: Accounts receivable due from the Council $ 499,302 $ 185,341 Accounts payable due to the Council $ 184,197 $ 98,233 (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 $12,500,000 and $12,900,000 during calendar years 2017 and 2016 related to OIG funding.

350 104th Annual Report | 2017 (13) Currency Costs The Bureau of Engraving and Printing (BEP) is the sole supplier for currency printing and also provides currency retirement, new BEP facility, 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, 2017 and 2016, are reflected in the following table: 2017 2016 Costs related to BEP: Printing $ 673,936,234 $ 659,958,550 Retirement 3,568,867 3,819,263 Meaningful access program 1,425,853 1,685,269 New facility 682,981 63,025 Subtotal related to BEP $679,613,935 $ 665,526,107 Other currency costs: Shipping $ 21,710,886 $ 20,404,946 Research and development 6,831,283 5,215,244 Quality assurance services 13,117,081 8,630,562 Education services 2,349,476 936,436 Subtotal of other currency costs $ 44,008,726 $ 35,187,188 Total currency costs $723,622,661 $ 700,713,295 (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, 2017. Subsequent events were evaluated through March 5, 2018, which is the date the financial statements were available to be issued.

Federal Reserve System Audits 351 INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND 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, 2017, 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 5, 2018. 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, and contracts, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Board’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Board’s internal control and 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, District of Columbia March 5, 2018

352 104th Annual Report | 2017 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, 2017 and 2016. 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, 2017 and 2016, 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, 2017 and 2016, and the results of its operations for the years then ended, on the basis of accounting described in Note 3. Washington, DC March 8, 2018

Federal Reserve System Audits 353 Federal Reserve Banks Abbreviations ASC Accounting Standards Codification A SU Accounting Standards Update B EP Benefit Equalization Retirement Plan B ureau Bureau of Consumer Financial Protection C DS Credit default swaps C IP Committee on Investment Performance (related to System Retirement Plan) D FMU Designated financial market utility F AM Financial Accounting Manual for Federal Reserve Banks FASB Financial Accounting Standards Board F OMC Federal Open Market Committee F RBNY Federal Reserve Bank of New York 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

354 104th Annual Report | 2017 Combined Statements of Condition As of December 31, 2017 and December 31, 2016 (in millions) 2017 2016 ASSETS Gold certificates $ 11,037 $ 11,037 Special drawing rights certificates 5,200 5,200 Coin 1,892 1,873 Loans Note 4 134 63 System Open Market Account: Note 5 Treasury securities, net (of which $28,053 and $25,195 is lent as of December 31, 2017 and 2016, respectively) 2,545,733 2,567,422 Government-sponsored enterprise debt securities, net (of which $0 and $44 is lent as of December 31, 2017 and 2016, respectively) 4,752 16,648 Federal agency and government-sponsored enterprise mortgage-backed securities, net 1,817,700 1,795,003 Foreign currency denominated investments, net 21,316 19,442 Central bank liquidity swaps 12,067 5,563 Accrued interest receivable 24,744 25,598 Other assets 13 8 Investments held by consolidated variable interest entity (of which $1,720 and $1,742 is measured at fair value as of December 31, 2017 and 2016, respectively) Note 6 1,722 1,742 Prepaid pension benefit costs Note 9 14 - Bank premises and equipment, net Note 7 2,571 2,564 Items in process of collection 81 118 Other assets 1,001 1,056 Total assets $4,449,977 $4,453,337 LIABILITIES AND CAPITAL Federal Reserve notes outstanding, net $1,570,727 $1,462,939 System Open Market Account: Note 5 Securities sold under agreements to repurchase 563,958 725,210 Other liabilities 558 1,012 Liabilities of consolidated variable interest entity (of which $8 and $32 is measured at fair value as of December 31, 2017 and 2016, respectively) Note 6 9 33 Deposits: Depository institutions 1,954,431 1,759,675 Treasury, general account 228,933 399,190 Other deposits 83,018 58,413 Interest payable to depository institutions and others 1,006 403 Accrued benefit costs Notes 9 and 10 2,332 3,118 Deferred credit items 1,001 922 Accrued remittances to the Treasury 2,337 1,725 Other liabilities 278 255 Total liabilities 4,408,588 4,412,895 Capital paid-in 31,389 30,442 Surplus (including accumulated other comprehensive loss of $3,334 and $3,985 at December 31, 2017 and 2016, respectively) 10,000 10,000 Total capital 41,389 40,442 Total liabilities and capital $4,449,977 $4,453,337 The accompanying notes are an integral part of these combined financial statements.

Federal Reserve System Audits 355 Combined Statements of Operations For the years ended December 31, 2017 and December 31, 2016 (in millions) 2017 2016 INTEREST INCOME Loans Note 4 $ 1 $ 1 System Open Market Account: Note 5 Treasury securities, net 64,267 63,845 Government-sponsored enterprise debt securities, net 416 959 Federal agency and government-sponsored enterprise mortgage-backed securities, net 48,912 46,299 Foreign currency denominated investments, net (17) (7) Central bank liquidity swaps 14 9 Investments held by consolidated variable interest entity Note 6 15 9 Total interest income 113,608 111,115 INTEREST EXPENSE System Open Market Account: Note 5 Securities sold under agreements to repurchase 3,365 1,122 Other 7 4 Deposits: Depository institutions and others 25,849 12,020 Term Deposit Facility 13 24 Total interest expense 29,234 13,170 Net interest income 84,374 97,945 NON-INTEREST INCOME System Open Market Account: Note 5 Treasury securities gains (losses), net 28 (15) Federal agency and government-sponsored enterprise mortgage-backed securities gains, net 8 19 Foreign currency translation gains (losses), net 1,894 (103) Other 27 35 Investments held by consolidated variable interest entity losses, net Note 6 (9) (19) Income from services 442 434 Reimbursable services to government agencies 698 677 Other 68 64 Total non-interest income 3,156 1,092 O PERATING EXPENSES Salaries and benefits 3,085 2,979 Occupancy 325 327 Equipment 184 175 Net periodic pension expense Note 9 525 565 Other 682 624 Assessments: Board of Governors operating expenses and currency costs 1,464 1,410 Bureau of Consumer Financial Protection 573 596 Total operating expenses 6,838 6,676 Net income before providing for remittances to the Treasury 80,692 92,361 Earnings remittances to the Treasury: Note 3o 80,559 91,467 Net income after providing for remittances to the Treasury 133 894 Change in prior service costs related to benefit plans Note 9 and 10 59 231 Change in actuarial gains (losses) related to benefit plans Note 9 and 10 592 (414) Total other comprehensive income (loss) 651 (183) Comprehensive income $ 784 $ 711 The accompanying notes are an integral part of these combined financial statements.

356 104th Annual Report | 2017 Combined Statements of Changes in Capital For the years ended December 31, 2017 and December 31, 2016 (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, 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 Net change in capital stock issued (redeemed) (18,923,950 shares) 947 - - - 947 Comprehensive income: Net income - 133 - 133 133 Other comprehensive loss - - 651 651 651 Dividends on capital stock - (784) - (784) (784) Net change in capital 947 (651) 651 - 947 Balance at December 31, 2017 (627,772,211 shares) $31,389 $13,334 $(3,334) $10,000 $41,389 The accompanying notes are an integral part of these combined financial statements.

Federal Reserve System Audits 357 (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 (ACH) operations, and check collection; distributing coin and currency; performing fiscal agency functions for the U.S. Department of the Treasury (Treasury), certain federal agencies, and other entities; serving as the federal government’s bank; providing short-term loans to depository institutions; providing loans to participants in programs or facilities with broad-based eligibility in unusual and exigent circumstances; serving consumers and communities by providing educational materials and information regarding financial consumer protection rights and laws and information on community development programs and activities; and supervising bank holding companies, state member banks, savings and loan holding companies, U.S. offices of foreign banking organizations, 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

358 104th Annual Report | 2017 (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 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 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 at the request of the Treasury to conduct swap transactions with the United States Exchange Stabilization Fund in the maximum amount of $5 billion, also known as warehousing. 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 liquidity swap lines in the SOMA. These liquidity swap lines, which were originally established as temporary arrangements, were converted to standing arrangements on October 31, 2013, and are subject to annual review and approval by the FOMC. 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 among 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 359 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, and the recording of all SOMA securities on a settlement-date basis. 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. 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 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 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. Significant accounts and accounting policies are explained below. a. Consolidation The consolidated 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.

360 104th Annual Report | 2017 See Note 6 for additional information on the VIE. The consolidated 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 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 cer-

Federal Reserve System Audits 361 tificates 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- 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:

362 104th Annual Report | 2017 Accrued interest receivable” in the Combined Statements of Condition. Interest income is reported as a component of “System Open Market Account: Securities purchased under agreements to resell” in the Combined Statements of Operations. 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. Interest expense is reported as a component of “System Open Market Account: Securities sold under agreements to repurchase” in the Combined Statements of Operations. 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: 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 accretion of discounts. The Board of Governors approved, effective January 1, 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 was applied prospectively and did not have a material effect on the combined financial statements for the year ended December 31, 2017.

Federal Reserve System Audits 363 Interest income on federal agency and GSE MBS is accrued using the effective interest method and includes amortization of premiums, accretion of discounts, and gains or losses associated with principal paydowns. Premiums and discounts related to federal agency and GSE MBS are amortized or accreted over the term of the security to stated maturity, and the amortization of premiums and accretion of discounts are accelerated when principal payments are received. Gains and losses resulting from sales of securities are determined by specific issue based on average cost. Treasury securities, GSE debt securities, and federal agency and GSE MBS are reported net of premiums and discounts in the Combined Statements of Condition and interest income on those securities is reported net of the amortization of premiums and accretion of discounts in the Combined Statements of 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, 2017 and 2016, 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: System Open Market Account: Federal agency and governmentsponsored 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: System Open Market Account: Foreign currency translation gains (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 allo-

364 104th Annual Report | 2017 cated to each Reserve Bank on a percentage basis, adjusted annually in the second quarter of each year, calculated as the ratio of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding December 31. The FRBNY is authorized to hold foreign currency working balances and execute foreign exchange contracts to facilitate international payments and currency transactions it makes on behalf of foreign central bank and U.S. official institution customers. These foreign currency working balances and contracts are not related to 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: 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 allocated to each Reserve Bank based on a percentage basis, adjusted annually in the second quarter of each year, calculated as the ratio 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 received 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.

Federal Reserve System Audits 365 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 in fair value of the investments are recorded in “Non-interest income: Investments held by consolidated variable interest entity gains (losses), 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: Investments held by consolidated variable interest entity losses, 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.

366 104th Annual Report | 2017 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. 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 for both years ended December 31, 2017 and 2016, respectively. At December 31, 2017 and 2016, all Federal Reserve notes outstanding, net, were fully collateralized. At December 31, 2017, all gold certificates, all SDR certificates, and $1,554 billion of domestic securities held in the SOMA were pledged as collateral. At December 31, 2017, 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 Banks under the TDF at December 31, 2017 and 2016.

Federal Reserve System Audits 367 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 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 Federal Reserve Act requires each Reserve Bank to pay each member bank an annual dividend based on the amount of the member bank’s paid-in capital stock and a rate determined by the member bank’s total consolidated assets. Member banks with total consolidated assets in excess of a threshold established in the Federal Reserve Act receive a dividend equal 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. Member banks with total consolidated assets equal to or less than the threshold receive a dividend of 6 percent. The threshold for total consolidated assets was $10.1 billion and $10.0 billion for the years ended December 31, 2017 and 2016, respectively. This threshold is adjusted annually based on the Gross Domestic Product Price Index, which is published by the Bureau of Economic Analysis. The dividend is paid semiannually and is cumulative. n. Surplus The Federal Reserve Act limits aggregate Reserve Bank surplus to $10 billion, which is allocated among the Reserve Banks based on the ratio of each Reserve Bank’s capital paid-in to total Reserve Bank capital paid-in as of December 31 of each year. Accumulated other comprehensive loss is reported as a component of “Surplus” in the Combined Statements of Condition and the Combined Statements of Changes

368 104th Annual Report | 2017 in Capital. Additional information regarding the classifications of accumulated other comprehensive loss is provided in Notes 9, 10, and 11. o. Earnings Remittances to the Treasury The Federal Reserve Act 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 Reserve 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 is reported as “Earnings remittances to the Treasury” 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 12 for additional information on earnings remittances to the Treasury. 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 Reserve 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 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, 2017 and 2016, 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, 2017 and 2016 was 12.98 percent ($646.2 million) and 12.68 percent ($631.7 million), respectively. The Reserve Banks’ assessment for Bureau funding is reported as “Operating expenses: Assessments: Bureau of Consumer Financial Protection” in the Combined Statements of Operations.

Federal Reserve System Audits 369 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 $49 million and $51 million for the years ended December 31, 2017 and 2016, 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 executes the specific actions contemplated in the plan and all criteria for financial statement recognition have been met. In 2014, the Treasury announced plans to consolidate the provision of substantially all fiscal agent services for the U.S. Treasury at the Federal Reserve Bank of Cleveland, the Federal Reserve Bank of Kansas City, the FRBNY, and the Federal Reserve Bank of St. Louis. The consolidation is expected to be completed in future years. The Reserve Banks had no significant restructuring activities in 2017 and 2016.

370 104th Annual Report | 2017 u. Recently Issued Accounting Standards 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. Subsequently, the FASB issued a number of related ASUs including ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date; ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. 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 Reserve Banks’ combined financial statements. In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update eliminate the requirement to disclose methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. This update is effective for the Reserve Banks for the year ending December 31, 2019 and is not expected to have a material effect 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 ending 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.

Federal Reserve System Audits 371 In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interest Held through Related Parties That Are under Common Control. This update clarifies the revised consolidation model from ASU 2015-02 for a reporting entity that is a single decision maker and primary beneficiary of a VIE. The reporting entity should consolidate all direct variable interests and a proportional share of indirect variable interests in the entity held through related parties. This update was effective for the Reserve Banks for the year ended December 31, 2017 and did not have an effect on the Reserve Banks’ combined financial statements. In December 2016, the FASB issued ASU 2016-19, 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. This update was effective for the Reserve Banks for the year ended December 31, 2016 and did not have an effect on the Reserve Banks’ combined financial statements. In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update requires an employer to disaggregate the service cost component from the other components of net benefit cost. It also provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. This update is effective for the Reserve Banks for the year ending December 31, 2019, and the Reserve Banks are continuing to evaluate the effect of this new guidance on the Reserve Banks’ combined financial statements. In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20) –Premium Amortization on Purchased Callable Debt Securities. This update shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. 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. (4) Loans Loans to Depository Institutions The Reserve Banks offers 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

372 104th Annual Report | 2017 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. The remaining maturity distribution of loans to depository institutions outstanding as of December 31, 2017 and 2016 was as follows (in millions): Within 16 days Total 15 days to 90 days December 31, 2017 $133 $1 $134 December 31, 2016 $ 58 $5 $ 63 At December 31, 2017 and 2016, 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, 2017 and 2016. Interest income attributable to loans to depository institutions was immaterial during the years ended December 31, 2017 and 2016. (5) System Open Market Account a. Domestic Securities Holdings The FRBNY executes domestic open market operations and, on behalf of the Reserve Banks, holds the resulting securities in the SOMA. Pursuant to FOMC directives, during the year ended December 31, 2016 and through September 30, 2017, the FRBNY continued to reinvest all principal payments from the SOMA’s 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. In October 2017, the FOMC initiated a balance sheet normalization program intended to reduce gradually the SOMA holdings by decreasing reinvestment of the principal payments received from securities held in the SOMA through the implementation of monthly caps. Effective from October 2017 and through December 2017, the FOMC directed the FRBNY to roll over principal payments from the SOMA holdings of Treasury securities maturing during each calendar month that exceeded a $6 billion cap, and to reinvest in federal agency and GSE MBS the amount of principal payments from the SOMA holdings of GSE debt securities and federal agency and GSE MBS received during each calendar month that exceeded a $4 billion cap. According to the balance sheet normalization plan, the FOMC anticipates that it will increase the monthly cap on Treasury redemptions in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month, and that it will increase the monthly cap on GSE debt securities and federal agency and GSE MBS paydowns in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month. The FOMC also anticipates that the caps will remain in place once they reach their respective maximums so that the SOMA holdings will

Federal Reserve System Audits 373 continue to decline in a gradual and predictable manner until the FOMC judges that the SOMA is holding no more securities than necessary to implement monetary policy efficiently and effectively. 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, 2017 and 2016 was as follows (in millions): 2017 Total Unamortized Unaccreted P ar amortized premiums discounts cost Treasury securities Notes $1,624,620 $ 9,665 $ (4,714) $1,629,571 Bonds 829,588 95,574 (9,000) 916,162 Total Treasury securities $2,454,208 $105,239 $(13,714) $2,545,733 GSE debt securities $ 4,391 $ 361 $ - $ 4,752 Federal agency and GSE MBS $1,764,929 $ 53,160 $ (389) $1,817,700 2016 T otal 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 There were no material transactions related to repurchase agreements during the years ended December 31, 2017 and 2016. During the years ended December 31, 2017 and 2016, the FRBNY entered into reverse repurchase agreements as part of its monetary policy activities. 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

374 104th Annual Report | 2017 information related to reverse repurchase agreements for the years ended December 31, 2017 and 2016 was as follows (in millions): 2017 2016 Primary dealers and expanded counterparties: Contract amount outstanding, end of year $319,595 $468,355 Average daily amount outstanding, during the year 145,959 105,648 Maximum balance outstanding, during the year 468,355 474,592 Securities pledged (par value), end of year 302,690 443,799 Securities pledged (fair value), end of year 320,048 469,282 Foreign official and international accounts: Contract amount outstanding, end of year $244,363 $256,855 Average daily amount outstanding, during the year 241,581 241,848 Maximum balance outstanding, during the year 264,290 265,041 Securities pledged (par value), end of year 240,660 249,417 Securities pledged (fair value), end of year 244,417 256,897 Total contract amount outstanding, end of year $563,958 $725,210 Supplemental information - interest expense: Primary dealers and expanded counterparties $ 1,224 $ 303 Foreign official and international accounts 2,141 819 Total interest expense - securities sold under agreements to repurchase $ 3,365 $ 1,122 Securities pledged as collateral, at December 31, 2017 and 2016, consisted solely of Treasury securities. The contract amount outstanding as of December 31, 2017 of reverse repurchase agreements that were transacted with primary dealers and expanded counterparties had a term of one business day and matured on January 2, 2018. The contract amount outstanding as of December 31, 2017 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 2, 2018.

Federal Reserve System Audits 375 The remaining maturity distribution of Treasury securities, GSE debt securities, federal agency and GSE MBS bought outright, and reverse repurchase agreements at December 31, 2017 and 2016 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 rs Over Total 15 days to 90 days to 1 year 10 years to 5 years to 10 years December 31, 2017: Treasury securities (par value) $ 20,601 $107,658 $315,420 $1,077,270 $310,375 $ 622,884$2,454,208 GSE debt securities (par value) - - 1,982 62 - 2,347 4,391 Federal agency and GSE MBS (par value)1 - - 1 173 20,013 1,744,742 1,764,929 Securities sold under agreements to repurchase (contract amount) 563,958 - - - - - 563,958 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 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 6.9 and 7.2 years as of December 31, 2017 and 2016, 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, 2017 and 2016 were as follows (in millions): 2017 2016 Treasury securities (amortized cost) $28,053 $25,195 Treasury securities (par value) 26,990 24,698 GSE debt securities (amortized cost) - 44 GSE debt securities (par value) - 44 Securities pledged as collateral by the counterparties in the securities lending arrangements at December 31, 2017 and 2016 consisted solely of Treasury securities. The securities lending agreements outstanding as of December 31, 2017 had a term of one business day and matured on January 2, 2018. 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, 2017, the total purchase price of the Treasury securities under outstanding commitments was $11,447 million. These commitments had contractual settlement dates extending through January 2, 2018.

376 104th Annual Report | 2017 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, 2017, the total purchase price of the federal agency and GSE MBS under outstanding purchase commitments was $19,257 million, none of which was related to dollar rolls. These commitments, which had contractual settlement dates extending through January 2018, 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, 2017, 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 consist 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, include 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 include 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, 2017 and 2016 was as follows (in millions): 2017 2016 Other assets: MBS portfolio related cash and short term investments $ 13 $ 7 Other - 1 Total other assets $ 13 $ 8 Other liabilities: Cash margin $481 $ 983 Obligations from MBS transaction fails 14 9 Other 63 20 Total other liabilities $558 $1,012 Accrued interest receivable on domestic securities holdings held in the SOMA was $24,655 million and $25,517 million as of December 31, 2017 and 2016, respectively. These amounts are reported as a component of “System Open Market Account: Accrued interest receivable” in the Combined Statements of Condition.

Federal Reserve System Audits 377 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, 2017 and 2016, is summarized as follows (in millions): Total Federal Notes Bonds Treasury GSE debt agency and securities securities GSE MBS 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 Purchases1 161,378 15,849 177,227 - 324,524 Sales1 (124) (326) (450) - (331) Realized gains (losses), net2 (2) 30 28 - 2 Principal payments and maturities (175,933) (13,402) (189,335) (11,789) (290,939) Amortization of premiums and accretion of discounts, net (3,796) (7,917) (11,713) (107) (10,559) Inflation adjustment on inflation-indexed securities 709 1,845 2,554 - - Balance at December 31, 2017 $1,629,571 $916,162 $2,545,733 $ 4,752 $1,817,700 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) Year-ended December 31, 2017 Supplemental information - par value of transactions: Purchases3 $ 61,796 $ 5,976 $ 177,772 $ - $ 314,797 Sales (125) (275) (400) - (320) 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, 2017 and 2016, there were no repurchase agreements outstanding and, consequently, no related foreign securities held as collateral.

378 104th Annual Report | 2017 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, 2017 and 2016 was as follows (in millions): 2017 2016 Euro: Foreign currency deposits $ 6,070 $ 4,205 French government debt instruments 3,089 3,892 German government debt instruments 2,239 1,884 Dutch government debt instruments 1,626 1,462 Japanese yen: Foreign currency deposits 6,765 4,668 Japanese government debt instruments 1,527 3,331 Total $21,316 $ 19,442 Net interest income earned on foreign currency denominated investments for the years ended December 31, 2017 and 2016 held in the SOMA as follows (in millions): 2017 2016 Net interest income:1 Euro $(19) $ (11) Japanese yen 2 4 Total net interest income $(17) $ (7) 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 $36 million and $32 million for the years ended December 31, 2017 and 2016, respectively. Accrued interest receivable on foreign currency denominated investments, net was $82 million and $79 million as of December 31, 2017 and 2016, respectively. These amounts are reported as a component of “System Open Market Account: Accrued interest receivable” in the Combined Statements of Condition. The remaining maturity distribution of foreign currency denominated investments at December 31, 2017 and 2016 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, 2017: Euro $ 6,162 $102 $1,228 $3,134 $2,398 $ 13,024 Japanese yen 6,765 62 263 1,202 - 8,292 Total $12,927 $164 $1,491 $4,336 $2,398 $21,316 December 31, 2016: Euro $ 4,253 $334 $1,170 $3,174 $2,512 $ 11,443 J apanese yen 4,840 342 1,341 1,476 - 7,999 Total $ 9,093 $676 $2,511 $4,650 $2,512 $19,442 There were no foreign exchange contracts related to foreign currency operations outstanding as of December 31, 2017. 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, 2017, there were no outstanding commitments to purchase foreign government debt instruments. During 2017, there were purchases and maturities of for-

Federal Reserve System Audits 379 eign government debt instruments of $576 million and $3,567 million, respectively. There were immaterial sales of foreign government debt instruments in 2017. 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 FRBNY 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, 2017 and 2016. c. Central Bank Liquidity Swaps U.S. Dollar Liquidity Swaps The total foreign currency held in the SOMA under U.S. dollar liquidity swaps at December 31, 2017 and 2016 was $12,067 million and $5,563 million, respectively. The remaining maturity distribution of U.S. dollar liquidity swaps at December 31, 2017 and 2016 was as follows (in millions): 2017 2016 Within Within 15 days 15 days Euro $11,907 $4,340 Japanese yen 160 1,223 Total $12,067 $5,563 Foreign Currency Liquidity Swaps At December 31, 2017 and 2016, 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 or losses are not recognized in the Combined Statements of Condition and the changes in cumulative unrealized gains or 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. Based on evaluations performed as of December 31, 2017 and 2016, there are no credit impairments of SOMA securities holdings.

380 104th Annual Report | 2017 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, 2017 and 2016 (in millions): 2017 2016 Cumulative Cumulative unrealized unrealized Amortized Amortized Fair value gains Fair value gains cost cost (losses), (losses), net net Treasury securities: Notes $1,629,571 $1,624,540 $(5,031) $1,647,339 $1,657,026 $ 9,687 Bonds 916,162 1,008,468 92,306 920,083 983,680 63,597 Total Treasury securities 2,545,733 2,633,008 87,275 2,567,422 2,640,706 73,284 GSE debt securities 4,752 5,383 631 16,648 17,442 794 Federal agency and GSE MBS 1,817,700 1,809,918 (7,782) 1,795,003 1,787,484 (7,519) Total domestic SOMA portfolio securities holdings $4,368,185 $4,448,309 $80,124 $4,379,073 $4,445,632 $66,559 Memorandum - Commitments for: Purchases of Treasury securities $ 11,447 $ 11,467 $ 20 $ 11,679 $ 11,719 $ 40 Purchases of Federal agency and GSE MBS 19,257 19,285 28 35,787 35,974 187 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, 2017 and 2016, the fair value of foreign currency denominated investments held in the SOMA was $21,348 million and $19,510 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.

Federal Reserve System Audits 381 The following table provides additional information on the amortized cost and fair value of the federal agency and GSE MBS portfolio held in the SOMA at December 31, 2017 and 2016 (in millions): Distribution 2017 2016 of MBS holdings by coupon rate Amortized Fair value Amortized Fair value cost cost Total SOMA: 2.0% $ 8,968 $ 8,739 $ 10,556 $ 10,243 2.5% 110,452 108,371 121,326 118,641 3.0% 674,138 660,939 693,524 676,572 3.5% 630,590 630,245 561,271 560,510 4.0% 289,819 291,868 275,650 279,877 4.5% 68,069 71,896 86,351 92,111 5.0% 28,352 30,048 36,708 39,159 5.5% 6,318 6,739 8,298 8,939 6.0% 870 939 1,155 1,253 6.5% 124 134 164 179 Total $1,817,700 $1,809,918 $1,795,003 $1,787,484 The following tables present the realized gains (losses) and the change in the cumulative unrealized gains (losses) related to SOMA domestic securities holdings held in the SOMA during the years ended December 31, 2017 and 2016 (in millions): 2017 2016 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 $28 $13,991 $(15) $(21,949) GSE debt securities - (163) - (623) Federal agency and GSE MBS 8 (263) 19 (17,326) Total $36 $13,565 $ 4 $(39,898) 1 Realized losses for Treasury securities are reported in “Non-interest income: System Open Market Account: Treasury securities gains (losses), net” in the Combined Statements of Operations. 2 Realized gains (losses) for federal agency and GSE MBS are reported in “Non-interest income: System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Combined Statements of 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 loss of $36 million and a gain of $5 million for the years ended December 31, 2017 and 2016, respectively. Realized gains, net related to foreign currency denominated investments was immaterial at December 31, 2017 and zero at December 31, 2016, 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.

382 104th Annual Report | 2017 (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 FRBNY extended a senior loan of approximately $28.8 billion and JPMC extended a subordinated loan of $1.15 billion to finance the acquisition of the assets, both of which were repaid in full plus interest in 2012. The FRBNY has continued and will continue to sell the remaining assets from the ML portfolio as market conditions warrant and if the sales represent good value for the public. In accordance with the ML agreements, proceeds from future asset sales will be distributed to the FRBNY as contingent interest after all derivative instruments in ML have been terminated and paid or sold from the portfolio. b. Summary Information for Consolidated VIE The classification of significant assets and liabilities of ML at December 31, 2017 and 2016 is summarized in the following table (in millions): 2017 2016 Assets: Short-term investments $ 998 $1,618 Swap contracts 5 28 Other investments 1 17 Subtotal 1,004 1,663 Cash, cash equivalents, accrued interest receivable, and other receivables 716 79 Cash collateral on swap contracts 2 - Total investments held by consolidated VIE $1,722 $1,742 Liabilities: Swap contracts $ 8 $ 32 Cash collateral on swap contracts - 1 Other liabilities 1 - Total liabilities of consolidated VIE $ 9 $ 33 The FRBNY’s approximate maximum exposure to loss at December 31, 2017 and 2016 was $1,004 million and $1,663 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 derivative instruments section of this Note.

Federal Reserve System Audits 383 The net income (loss) attributable to ML for the year ended December 31, 2017 and 2016 was as follows (in millions): 2017 2016 Interest income: Investments held by consolidated VIE $15 $ 9 Non-interest loss: Realized portfolio holdings gains (losses), net (6) 13 Unrealized portfolio holdings losses, net (3) (32) Non-interest loss: Consolidated VIE losses, net (9) (19) Total net interest income and non-interest loss 6 (10) Less: Professional fees 2 2 Net income (loss) attributable to consolidated VIE $ 4 $(12) 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, 2017 and 2016, ML’s short-term instruments consisted of U.S. Treasury bills. Other investments primarily consist of non-agency RMBS. 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 commercial mortgage-backed securities 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 posted to or received from JPMC from the bilateral MTM posting for the reference obligations for which JPMC is the counterparty. As of December 31, 2017, ML has posted cash collateral associated with the TRS of $7 million. As of December 31, 2016, ML has received cash collateral associated with the TRS of $12 million, which is recorded a component of ML’s cash and cash equivalents. In addition, ML has pledged $10 million and $46 million of U.S. Treasury bills to JPMC as of December 31, 2017 and 2016, 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 posted to or received from JPMC against any net assets or liabilities of JPMC with ML under the TRS. As of December 31,

384 104th Annual Report | 2017 2017 and 2016, there were no amounts subject to an enforceable master netting agreement that were not offset in the Combined Statements of Condition. The maximum potential amount of future payments the seller of credit protection could be required to make to the buyer of credit protection under a CDS is equal to the notional amount of the contract. For ML, the maximum potential payout (notional) associated with credit protection sold was $37 million and $143 million as of December 31, 2017 and 2016, respectively, and the maximum potential recovery (notional) associated with credit protection bought was $15 million and $124 million as of December 31, 2017 and 2016, respectively. The change in notional amounts is representative of the volume of activity for the year ended December 31, 2017. There were 27 and 98 CDS contracts outstanding in the ML portfolio as of December 31, 2017 and 2016, 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, 2017 and 2016. 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.

Federal Reserve System Audits 385 The following tables present the financial instruments recorded in the VIE at fair value as of December 31, 2017 by ASC 820 hierarchy (in millions): Level 11 Level 21 Level 31 Netting2 fai T r o v t a a l l ue Assets: Short-term investments $ 716 $- $ - $ - $ 716 Cash equivalents3 998 - - - 998 Swap contracts - - 6 (1) 5 Other investments - 1 - - 1 Total assets $1,714 $1 $ 6 $(1) $1,720 Liabilities: Swap contracts $ - $- $14 $ (6) $ 8 1 There were no transfers between Levels during the year ended December 31, 2017. 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, 2016 by ASC 820 hierarchy (in millions): Level 11 Level 21 Level 31 Netting2 fai T r o v t a a l l ue Assets: Short-term investments $1,618 $ - $ - $ - $1,618 Cash equivalents3 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 Level 2 and Level 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. As of December 31, 2017 and 2016, 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 were immaterial.

386 104th Annual Report | 2017 (7) Bank Premises, Equipment, and Software Reserve Bank premises and equipment at December 31, 2017 and 2016 were as follows (in millions): 2017 2016 Bank premises and equipment: Land and land improvements $ 408 $ 405 Buildings 2,923 2,861 Building machinery and equipment 633 609 Construction in progress 64 37 Furniture and equipment 1,077 1,053 Subtotal 5,105 4,965 Accumulated depreciation (2,534) (2,401) Bank premises and equipment, net $2,571 $2,564 Depreciation expense, for the years ended December 31 $ 217 $ 220 Reserve Bank premises and equipment at December 31, 2017 and 2016 included the following amounts for capitalized leases (in millions): 2017 2016 Leased premises and equipment under capital leases $29 $31 Accumulated depreciation (23) (24) Leased premises and equipment under capital leases, net $ 6 $ 7 Depreciation expense related to leased premises and equipment under capital leases, for the years ended December 31 $ 3 $ 3 The Reserve Banks leases space to outside tenants with remaining lease terms ranging from 1 to 10 years. Rental income from such leases was $40 million for the years ended December 31, 2017 and 2016, 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, 2017, are as follows (in millions): 2018 $ 36 2019 33 2020 30 2021 26 2022 23 Thereafter 54 Total $202 The Reserve Banks had capitalized software assets, net of amortization, of $438 million and $440 million at December 31, 2017 and 2016, respectively. Amortization expense was $122 million and $110 million for the years ended December 31, 2017 and 2016, 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 enters into contractual commitments, normally with fixed expiration dates or termination provisions, at specific rates and for specific purposes.

Federal Reserve System Audits 387 At December 31, 2017, the Reserve Banks were obligated under non-cancelable leases for premises and equipment with remaining terms ranging from 1 to approximately 12 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 $16 million and $14 million for the years ended December 31, 2017 and 2016, 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, 2017, are as follows (in millions): Operating leases 2018 $ 6 2019 5 2020 3 2021 3 2022 3 Thereafter 8 Future minimum lease payments $28 At December 31, 2017, the Reserve Banks had unrecorded unconditional purchase commitments and long-term obligations extending through the year 2022 with a remaining fixed commitment of $143 million. Purchases of $37 million and $26 million were made against these commitments during 2017 and 2016, respectively. These commitments represent 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): 2018 $ 6 2019 43 2020 40 2021 27 2022 27 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 offers 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.

388 104th Annual Report | 2017 Dodd-Frank Act, newly hired Bureau employees are eligible to participate in the System Plan and, during the years ended December 31, 2017 and 2016, 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 the Combined 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, 2017 and 2016 (in millions): 2017 2016 Estimated actuarial present value of projected benefit obligation at January 1 $14,642 $13,270 Service cost-benefits earned during the period 486 475 Interest cost on projected benefit obligation 614 604 Actuarial loss 1,179 698 Contributions by plan participants 4 3 Special termination benefits 11 4 Benefits paid (435) (412) Estimated actuarial present value of projected benefit obligation at December 31 $16,501 $14,642 In October 2017, the Society of Actuaries released new mortality tables (RP-2017), and mortality projection scales (MP-2017). The System analyzed each of these updates to the mortality tables and compared them to the System’s actual retiree mortality experience. Based on these analyses, the System adopted modified RP-2017 mortality tables and adjusted MP-2017 projection scales reflecting the System’s recent mortality experience of System retirees through 2016. The adjusted tables and scales resulted in an estimated net decrease of the System Plan projected benefit obligation of approximately $70 million in 2017 and no mortality assumptions adjustments were made in 2016.

Federal Reserve System Audits 389 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, 2017 and 2016 (in millions): 2017 2016 Estimated plan assets at January 1 (of which $13,671 and $12,477 is measured at fair value as of January 1, 2017 and 2016, respectively) $13,699 $12,500 Actual return on plan assets 2,497 992 Contributions by the employer 750 616 Contributions by plan participants 4 3 Benefits paid (435) (412) Estimated plan assets at December 31 (of which $16,454 and $13,671 is measured at fair value as of December 31, 2017 and 2016, respectively) $16,515 $13,699 Funded status and accrued pension benefit costs $ 14 $ (943) Amounts included in accumulated other comprehensive loss are shown below: Prior service cost $ (82) $ (170) Net actuarial loss (3,045) (3,674) Total accumulated other comprehensive loss $(3,127) $(3,844) The FRBNY, on behalf of the System, funded $720 million and $580 million during the years ended December 31, 2017 and 2016, 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 years ended December 31, 2017 and 2016, the FRBNY received contributions from the Bureau of $30 million and $36 million, respectively. 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 $14,376 million and $12,869 million at December 31, 2017 and 2016, respectively. The weighted-average assumptions used in developing the accumulated pension benefit obligation for the System Plan as of December 31 were as follows: 2017 2016 Discount rate 3.65% 4.15% Rate of compensation increase 4.00% 4.00% Net periodic benefit expenses for the years ended December 31, 2017 and 2016 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: 2017 2016 Discount rate 4.15% 4.42% Expected asset return 6.50% 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 various asset classes; and a pro-

390 104th Annual Report | 2017 jected return for equities and fixed income investments based on real interest rates, inflation expectations, and equity risk premiums. The components of net periodic pension benefit expense (credit) for the System Plan for the years ended December 31, 2017 and 2016 are shown below (in millions): 2017 2016 Service cost - benefits earned during the period $486 $475 Interest cost on projected benefit obligation 614 604 Amortization of prior service cost 88 93 Amortization of net loss 209 211 Expected return on plan assets (899) (847) Net periodic pension benefit expense 498 536 Special termination benefits 11 4 Bureau of Consumer Financial Protection contributions (30) (36) Total periodic pension benefit expense $479 $504 Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic pension benefit expense in 2018 are shown below (in millions): Prior service cost $ 62 Net actuarial loss 138 Total $200 The recognition of special termination benefits is primarily the result of enhanced retirement benefits provided to employees in the normal course of business. Following is a summary of expected benefit payments, excluding enhanced retirement benefits (in millions): 2018 $ 504 2019 538 2020 576 2021 612 2022 651 2023 - 2027 3,831 Total $6,712 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, 2017, the System Plan’s assets were held in 25 investment vehicles: 5 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, 4 core real estate funds, 6 real estate limited partnerships, and a money market fund.

Federal Reserve System Audits 391 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 of either Bloomberg, Barclays, or 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 22 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 24 markets deemed by MSCI to be “emerging markets.” The 3 indexed equity funds include stocks from across the market capitalization spectrum (i.e., large-, midand small-cap stocks). The 4 private equity limited partnerships 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 interests) and coinvestment opportunities globally in private companies and targets returns in excess of public markets over a complete market cycle. The 4 core real estate funds invest in high quality, well leased, low leverage commercial real estate throughout the U.S. The 6 real estate limited partnerships invest 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.

392 104th Annual Report | 2017 The System Plan’s policy weight and actual asset allocations at December 31, 2017 and 2016 by asset category, are as follows: 2017 Actual asset allocations Policy weight 2017 2016 Fixed income 50.0% 48.6% 48.9% U.S. equities 22.0% 22.8% 24.6% International equities 15.6% 16.0% 16.3% Emerging markets equities 5.0% 5.1% 4.7% Private equity 3.7% 3.6% 2.4% Real estate 3.7% 2.9% 2.6% Cash 0.0% 1.0% 0.5% Total 100.0% 100.0% 100.0% Employer contributions to the System Plan may be determined using different assumptions than those required for financial reporting. The System Plan’s anticipated funding level for 2018 is $240 million. In 2018, the FRBNY plans to make monthly contributions of $20 million and will reevaluate the monthly contributions upon completion of the 2018 actuarial valuation. The Reserve Banks’ projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31, 2017 and 2016, 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 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.

Federal Reserve System Audits 393 The following tables present the financial instruments recorded at fair value as of December 31, 2017 and 2016 by ASC 820 hierarchy (in millions): 2017 Description Level 1 Level 2 Level 3 T otal 1 Short-term investments $ 226 $ - $ - $ 226 Treasury and Federal agency securities 87 2,785 - 2,872 Corporate bonds - 3,072 - 3,072 Other fixed income securities - 381 - 381 Collective trusts 8,838 - - 8,838 Investments measured at net asset value2 - - - 1,062 Total investments at fair value3 $9,151 $6,238 $ - $16,451 1 There were no transfers between Levels during the year ended December 31, 2017. 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 total investments, the System Plan holds future margin receivable of $4 million and future margin payable of $1 million at December 31, 2017. 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 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. 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, 2017 and 2016, a portion of short-term investments was available for futures trading. There were $7 million of Treasury securities pledged as collateral for both years ended December 31, 2017 and 2016. 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

394 104th Annual Report | 2017 date of hire and provides an automatic employer contribution of 1 percent of eligible pay. The Reserve Banks’ Thrift Plan contributions totaled $136 million and $129 million for the years ended December 31, 2017 and 2016, 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, 2017 and 2016 (in millions): 2017 2016 Accumulated postretirement benefit obligation at January 1 $1,751 $1,744 Service cost benefits earned during the period 75 72 Interest cost on accumulated benefit obligation 70 75 Net actuarial loss 48 86 Curtailment gain - (8) Special termination benefits loss - 1 Contributions by plan participants 26 27 Benefits paid (103) (104) Medicare Part D subsidies 2 5 Plan amendments (4) (147) Accumulated postretirement benefit obligation at December 31 $1,865 $1,751 At December 31, 2017 and 2016, the weighted-average discount rate assumptions used in developing the postretirement benefit obligation were 3.59 percent and 4.07 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.

Federal Reserve System Audits 395 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, 2017 and 2016 (in millions): 2017 2016 Fair value of plan assets at January 1 $ - $ - Contributions by the employer 75 72 Contributions by plan participants 26 27 Benefits paid (103) (104) Medicare Part D subsidies 2 5 Fair value of plan assets at December 31 $ - $ - Unfunded obligation and accrued postretirement benefit cost $1,865 $1,751 Amounts included in accumulated other comprehensive loss are shown below: Prior service cost $ 128 $ 158 Net actuarial loss (336) (300) Deferred curtailment gain 1 1 Total accumulated other comprehensive loss $ (207) $ (141) 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, 2017 and 2016 are provided in the table below: 2017 2016 Health-care cost trend rate assumed for next year 6.20% 6.60% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 4.75% 4.75% Year that the rate reaches the ultimate trend rate 2022 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, 2017 (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 $ 29 $ (24) Effect on accumulated postretirement benefit obligation 257 (216) The following is a summary of the components of net periodic postretirement benefit expense for the years ended December 31, 2017 and 2016 (in millions): 2017 2016 Service cost-benefits earned during the period $ 75 $ 72 Interest cost on accumulated benefit obligation 70 75 Amortization of prior service cost (33) (9) Amortization of net actuarial loss 11 5 Total periodic expense 123 143 Special termination benefits loss - 1 Net periodic postretirement benefit expense $123 $144

396 104th Annual Report | 2017 Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit expense in 2018 are shown below: Prior service cost $(32) Net actuarial loss 19 Total $(13) Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2017 and 2016, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 4.07 percent and 4.31 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 Reserve Banks’ plan to certain participants are at least actuarially equivalent to the Medicare Part D prescription drug benefit. The estimated effects of the subsidy are reflected in the actuarial 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 change in the Reserve Banks’ 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 $2 million and $5 million in the years ended December 31, 2017 and 2016, respectively. Expected receipts in 2018, related to benefits paid in both the years ended December 31, 2017 and 2016, are $0.3 million, respectively.

Federal Reserve System Audits 397 Following is a summary of expected postretirement benefit payments (in millions): Without subsidy With subsidy 2018 $ 78 $ 77 2019 83 81 2020 87 85 2021 91 89 2022 95 93 2023 - 2027 549 537 Total $983 $962 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, 2017 and 2016 were $131 million and $136 million, respectively. This cost is included as a component of “Accrued benefit costs” in the Combined Statements of Condition. Net periodic postemployment benefit expense included in 2017 and 2016 operating expenses were $13 million and $9 million, respectively, and are recorded as a component of “Operating expenses: Salaries and benefits” in the Combined Statements of Operations.

398 104th Annual Report | 2017 (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, 2017 and 2016 (in millions): 2017 2016 Amount Amount Total T otal Amount related related to Amount related 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 $(3,844) $(141) $(3,985) $(3,596) $(206) $(3,802) Change in funded status of benefit plans: Prior service costs arising during the year - 4 4 - 147 147 Amortization of prior service cost 881 (33)2 55 931 (9)2 84 Change in prior service costs related to benefit plans 88 (29) 59 93 138 231 Net actuarial gain (loss) arising during the year 420 (48) 372 (552) (86) (638) Curtailment effect actuarial gain - - - 8 8 Amortization of net actuarial loss 2091 112 220 2111 52 216 Change in actuarial gain (loss) related to benefit plans 629 (37) 592 (341) (73) (414) Change in funded status of benefit plans— other comprehensive income (loss) 717 (66) 651 (248) 65 (183) Balance at December 31 $(3,127) $(207) $(3,334) $(3,844) $(141) $(3,985) 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 Note 9 and 10. (12) Reconciliation of Total Distribution of Comprehensive Income In accordance with the Federal Reserve Act, 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 $10 billion aggregate surplus limitation. The following table presents the distribution of

Federal Reserve System Audits 399 the System total comprehensive income for the years ended December 31, 2017 and 2016 (in millions): 2017 2016 Net income before providing for remittances to Treasury $80,692 $92,361 Other comprehensive income (loss) 651 (183) Comprehensive income - available for distribution $81,343 $92,178 Distribution of comprehensive income (loss): Dividends 784 711 Earnings remittances to the Treasury 80,559 91,467 Total distribution of comprehensive income $81,343 $ 92,178 (13) Subsequent Events The following subsequent event took place after the balance sheet date but was not present at the balance sheet date. In accordance with FASB ASC Topic 855 Subsequent Events, the Reserve Banks’ 2017 financial statements were not updated for the impact of this event. Effective February 9, 2018, the Bipartisan Budget Act of 2018 (Budget Act) reduced the statutory limit on aggregate Reserve Bank surplus from $10 billion to $7.5 billion, which required the Reserve Banks to make a lump-sum payment to the Treasury in the amount of $2.5 billion. The payment was remitted to the Treasury on February 22, 2018. Reserve Bank surplus is allocated among Reserve Banks as described in Note 3(o). There were no other subsequent events that required adjustments to or disclosures in the consolidated financial statements as of December 31, 2017. Subsequent events were evaluated through March 8, 2018, which is the date that the consolidated financial statements were available to be issued.

400 104th Annual Report | 2017 Office of Inspector General Activities follow-up reviews to evaluate action taken on prior recommendations. Due to the sensitive nature of some of the material, two of the reports were only The Office of Inspector General (OIG) for the Fedissued internally to the CFPB, as indicated. Regarderal Reserve Board, which is also the OIG for the ing the OIG’s investigative work related to the Board Consumer Financial Protection Bureau (CFPB), and the CFPB, 32 investigations were opened and 43 operates in accordance with the Inspector General investigations were closed during the year. OIG inves- Act of 1978, as amended. The OIG conducts activitigative work resulted in 8 arrests, 11 indictments, and ties and makes recommendations to promote 13 convictions, as well as $17,086,288 in criminal economy and efficiency; enhance policies and procefines, restitution, and special assessments. The OIG dures; and prevent and detect waste, fraud, and abuse also issued its listings of major management chalin Board programs and operations, including funclenges facing the Board and the CFPB. Further, the tions that the Board has delegated to the Federal OIG issued two semiannual reports to Congress and Reserve Banks. Accordingly, the OIG plans and conperformed approximately 35 reviews of legislation ducts audits, inspections, evaluations, investigations, and regulations related to the operations of the and other reviews relating to Board and Board- 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 Examination Council’s financial statements. In addi- For more information and to view OIG reports, visit tion, the OIG keeps the Congress and the Board of the OIG’s website at https://oig.federalreserve.gov. Governors fully informed about serious abuses and Specific details about the OIG’s body of work also deficiencies. may be found in the OIG’s Work Plan and semiannual reports to Congress. During 2017, the OIG issued 23 reports (table 1) to the Board and the CFPB and conducted a number of Table 1. OIG reports issued in 2017 Report title Month issued Fiscal Year 2016 Risk Assessment of the CFPB’s Purchase Card Program February Fiscal Year 2016 Risk Assessment of the CFPB’s Travel Card Program February Federal Financial Institutions Examination Council Financial Statements as of and for the Years Ended December 31, 2016 and 2015, and Independent Auditors’ Reports March Board of Governors of the Federal Reserve System Financial Statements as of and for the Years Ended December 31, 2016 and 2015, and Independent Auditors’ Reports March The Board Can Improve Documentation of Office of Foreign Assets Control Examinations March The CFPB Can Strengthen Its Controls for Identifying and Avoiding Conflicts of Interest Related to Vendor Activities March The Board Can Improve the Effectiveness of Continuous Monitoring as a Supervisory Tool March The CFPB’s Civil Penalty Fund Is in Compliance with the Improper Payments Information Act of 2002, as Amended March The CFPB Can Strengthen Contract Award Controls and Administrative Processes March Security Control Review of the CFPB’s Active Directory Implementation (internal report) April The Board Can Enhance Its Cybersecurity Supervision Approach in the Areas of Third-Party Service Provider Oversight, Resource Management, and Information Sharing April The CFPB Can Improve Its Practices to Safeguard the Office of Enforcement’s Confidential Investigative Information May Security Control Review of the CFPB’s Public Website (internal report) May The Board Can Improve Communication and Documentation Regarding the Martin Building Project May The Board Can Strengthen Its Guidance and Planning Efforts for Future Evaluations of the Law Enforcement Unit August The CFPB Can Enhance the Effectiveness of Its Examiner Commissioning Program and On-the-Job Training Program September The CFPB Generally Complies with Requirements for Issuing Civil Investigative Demands but Can Improve Certain Guidance and Centralize Recordkeeping September The CFPB Can Improve Its Examination Workpaper Documentation Practices September The CFPB Met DATA Act Submission Requirements October 2017 Audit of the Board’s Information Security Program October 2017 Audit of the CFPB’s Information Security Program October Leadership and Management Best Practices to Increase Employee Willingness to Share Views November The Board’s Organizational Governance System Can Be Strengthened December

Federal Reserve System Audits 401 Government Accountability eral Reserve System operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of Office Reviews 2010 (Dodd-Frank Act) directs the GAO to conduct additional audits with respect to these operations. In 2017, the GAO completed 10 projects that involved The Federal Banking Agency Audit Act (Pub. L. the Federal Reserve (table 1). Eighteen projects were No. 95–320) authorizes the Government Accountongoing as of December 31, 2017 (table 2). ability Office (GAO) to audit certain aspects of Fed- Table 1. Reports completed during 2017 Report title Report number M onth issued (2017) Federal Housing Administration: Capital Requirements and Stress Testing Practices Need Strengthening GAO-18-92 December Large Bank Supervision: Improved Implementation of Federal Reserve Policies Could Help Mitigate Threats to Independence GAO-18-118 December Financial Audit: Bureau of the Fiscal Service’s Fiscal Years 2017 and 2016 Schedules of Federal Debt GAO-18-134 November Financial Regulation: Perspectives on the Swaps Push-Out Rule GAO-17-607 September Investment Management: Key Practices Could Provide More Options for Federal Entities and Opportunities for Minority- and Women-Owned Asset Managers GAO-17-726 September Anti-Money Laundering: U.S. Efforts to Combat Narcotics-Related Money Laundering in the Western Hemisphere GAO-17-684 September Management Report: Areas for Improvement in the Federal Reserve Banks’ Information Systems Controls GAO-17-537R May Financial Technology: Information on Subsectors and Regulatory Oversight GAO-17-361 April Federal Reserve System: Potential Implications of Modifying the Capital Surplus Account and Stock Ownership Requirement GAO-17-243 February Retirement Security: Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets GAO-17-102 January Table 2. Projects active at year-end 2017 Subject of project Month initiated Status Community Reinvestment Act September 2015 Closed 3/16/2018 Impact of regulations on community banks and credit unions April 2016 Closed 2/27/2018 Branch closings along the Southwest border May 2016 Closed 2/26/2018 Impact of de-risking on U.S. remittances to fragile countries September 2016 Closed 3/8/2018 Alternative payment technologies October 2016 Closed 3/22/2018 Impact of de-risking on money transmitters October 2016 Open Effect of regulations on community banks and credit unions December 2016 Open Dodd-Frank mandated report on financial services regulations February 2017 Closed 1/30/2018 Heightened risk in commercial real estate lending March 2017 Closed 3/15/2018 Puerto Rico debt March 2017 Open Bank regulatory oversight April 2017 Open Bureau of Engraving and Printing facility planning May 2017 Open FOIA compliance June 2017 Open Bankruptcy resolution of large bank holding companies August 2017 Open SBA 7(a) Loan Program Credit Unavailable Elsewhere Requirement August 2017 Open Tax-time financial products August 2017 Open Equity-building in homeownership September 2017 Open Financial technology and marketplace lending October 2017 Open

403 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’ 2017 budtion on the 2017 budget performance of the Board geted and actual and 2018 budgeted operating and Reserve Banks and on their 2018 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 2017 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, 2017–18 Millions of dollars, except as noted V ariance V ariance 2017 actual to 2017 budget 2018 budget to 2017 actual Item 2017 budget 2017 actual 2018 budget Amount Percent A mount P ercent Board 744.6 707.8 -36.7 -4.9 766.7 58.9 8.3 Office of Inspector General 34.3 33.8 -0.4 -1.2 35.9 2.1 6.2 Reserve Banks1 4,312.4 4,209.0 -103.5 -2.4 4,451.3 242.4 5.8 Currency 726.0 723.3 -2.7 -0.4 861.7 138.5 1 9.1 Total System operating expenses2 5,817.3 5,673.9 -143.4 -2.5 6,115.7 441.8 7.8 Revenue from priced services 439.4 441.6 2.2 0.5 441.7 0.1 0.0 Claims for reimbursement3 677.3 698.2 20.9 3.1 668.2 -30.0 -4.3 Other income4 2.5 2.6 0.1 3.7 2.5 -0.1 -3.5 Revenue and claims for reimbursement5 1,119.2 1,142.4 23.2 2.1 1,112.4 -30.0 -2.6 Total System operating expenses, net of revenue and claims for reimbursement 4,698.1 4,531.5 -166.6 -3.5 5,003.3 471.7 1 0.4 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 expenditures 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 2017 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.)

404 104th Annual Report | 2017 Table 2. Employment in the Federal Reserve System, 2017–18 V ariance V ariance 2017 actual to 2017 budget 2018 budget to 2017 actual Item 2017 budget 2017 actual 2018 budget Amount Percent A mount P ercent Board1 2,847 2,847 0 0.0 2,847 0 0.0 Office of Inspector General1 132 132 0 0.0 132 0 0.0 Reserve Banks2 19,822 19,393 -429 -2.2 19,878 485 2.5 Total System employment 22,801 22,372 -429 -1.9 22,857 485 2.2 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. 2017 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 2017, the Fed- service and because of efficiency improvements in eral Reserve System incurred $4,531.5 million in net cash. Staffing has subsequently increased in informaexpenses. Total System operating expenses of tion technology (IT) to support large application- $5,673.9 million were offset by $1,142.4 million in development projects, information security efforts, revenue from priced services, claims for reimburse- end-user services, and the central computing environment, and other income. Total 2017 System operating ment. Supervision resource levels were augmented to expenses were $143.4 million, or 2.5 percent, less meet requirements of the Dodd-Frank Wall Street than the amount budgeted for 2017. Reform and Consumer Protection Act (Dodd-Frank Act) and to support portfolio growth (figure 4). 2018 Operating Expense Budget Growth in supervision expenses over the past Budgeted 2018 System operating expenses of 10 years has been driven by additional supervisory $5,003.3 million, net of revenue and reimbursements, resources needed to respond to the financial crisis are $471.7 million, or 10.4 percent, higher than 2017 and a growth in the state member bank portfolio, to actual expenses. The Reserve Bank budgets comprise continue to implement expanded responsibilities almost three-quarters of the System budget mandated by the Dodd-Frank Act, to build out the (figure 1). Budgeted 2018 revenue from priced ser- cybersecurity supervision program, and to support vices and claims for reimbursements are expected to slightly decrease in 2018. Figure 1. Distribution of budgeted expenses of the Federal Trends in Expenses and Employment Reserve System, 2018 From the actual 2008 level to the budgeted 2018 Board of Governors and OIG amount, the total operating expenses of the Federal 13.1% Reserve System have increased an average of 4.7 per- Reserve Banks cent per year (figure 2). Over the same period, non- 72.8% defense discretionary spending by the federal govern- Currency ment has increased an average of 1.4 percent per year 14.1% (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 405 Figure 2. Total expenses of the Federal Reserve System, Figure 4. Employment in the Federal Reserve System, 2008–18 2008–18 7 Billions of dollars 23 Thousands of persons Current dollars 6 22 5 2009 dollars1 4 21 3 20 2 1 19 2008 2010 2012 2014 2016 2018 18 Note: For 2018, budgeted. 1. Calculated with the GDP price deflator. 17 2008 2010 2012 2014 2016 2018 Note: For 2018, budgeted. Employment numbers presented include position other strategic national initiatives. Expense growth in counts for the Board and average number of personnel (ANP) for the Reserve Banks. the monetary policy area during the financial crisis has been followed by a focus on enhancing financial stability monitoring and dedicating additional have increased to meet evolving needs, including the resources to regional economic research. automation of the Treasury’s collection and payment services, the addition of Treasury applications to the Federal Reserve Bank expenses in the cash area have Treasury Web Application Infrastructure (TWAI), increased as a result of a multiyear effort to modern- and other requested projects.3 ize the cash-processing and inventory-tracking infrastructure. These increases have been partially offset 2018 Capital Budgets by lower expenses because of efficiency improvements in cash operations. Treasury services expenses The capital budgets for the Board and Reserve Banks total $158.0 million and $406.6 million, respectively.4 As in previous years, the capital budgets in 2018 Figure 3. Cumulative change in Federal Reserve System include funding for projects that support the strategic expenses and federal government expenses, 2008–18 direction outlined by the Board and each Reserve Bank. These strategic goals emphasize investments 60 Percent Federal Reserve System2 that continue to improve operational efficiencies, enhance services to Bank customers, and ensure a 50 safe and productive work environment. 40 30 20 Federal government1 3 TWAI is a dedicated, distributed computing environment that houses multiple Treasury applications. In April 2014, the Treasury announced the consolidation of the 10 fiscal agent services provided by the Federal Reserve Banks as part of its effort to increase operational efficiency and effective- 0 ness. The Treasury anticipates long-term savings, once services are 2008 2010 2012 2014 2016 2018 transitioned from 10 sites to 4 consolidated sites. As of year-end 2017, 12 of the 15 business line transitions had been completed. Note: For 2018, budgeted. Federal government expenses are reported on a fiscalyear basis beginning October 1; the Federal Reserve System expenses are 4 The capital budget reported for the Board includes single-year reported on a calendar-year basis. capital expenditures and 2018 expected capital expenditures from multiyear projects of the Board and the Office of Inspec- 1. Discretionary spending less expenditures on defense. Source: Budget of the United States Government, Fiscal Year 2018: Historical Tables, Table 8.1. Outlays tor General. The capital budget reported for the Reserve Banks by Budget Enforcement Act Category, 1962–2021. includes the amounts budgeted for the Federal Reserve Information Technology support function and the Office of Employee 2. Includes expenses of the OIG. Benefits.

406 104th Annual Report | 2017 Board of Governors Budgets tee and the CBA to further review and refine the budget submissions. Once the budget has been finalized, the administrative governor submits the Board of Governors budget to the full Board for review and final The Board’s budget is grounded in the principles approval. established by the Strategic Plan 2016–19 (www • Expenses are monitored throughout the year. .federalreserve.gov/publications/gpra/files/2016-2019- Quarterly financial forecasts provide insights into gpra-strategic-plan.pdf)5 and provides funding to budgetary pressures. Variances are analyzed and advance the Plan’s goals, objectives, and initiatives. reported to senior management.6 The budget is structured by division, office, or special account. Tables 3 and 4 summarize the Board’s 2017 budgeted and actual expenses and its 2018 budgeted expenses The Board’s budget process is as follows: by division, office, or special account and by account • At the start of the budget process, the chief operat- classification, respectively. Table 5 summarizes the ing officer and chief financial officer meet with the Board’s budgeted and actual authorized position Committee on Board Affairs (CBA) to recommend count for 2017 and 2018. Table 6 summarizes the a specific growth target for the Board’s operating Board’s budgeted and actual capital expenditures for budget. For 2018, the recommended growth target 2017 and 2018. Each table includes a line item for the included known changes in the run-rate of the Office of Inspector General (OIG), which is dis- Board’s ongoing operations, such as funding for cussed later in this section. the Board’s compensation and benefit programs; no net growth in authorized position count; pro- 2017 Budget Performance jected increases to centrally managed benefits, such Total expenses for Board operations were $707.8 milas retirement and post-retirement benefits; and tar- lion, which was $36.7 million, or 4.9 percent, less geted increases in select goods and services than the approved 2017 budget of $744.6 million. accounts. After endorsement by the CBA, the tar- The Board’s 2017 single-year capital spending was get is briefed to the Board members, and to the less than budgeted by $2.7 million, or 19.6 percent, Executive Committee, which comprises the direc- and multiyear capital projects remained within their tors of each division. project budgets with actual spending in 2017 less than budgeted by $14.5 million, or 24.9 percent. • To achieve the CBA’s growth target, divisions review their resource requirements, reallocate fund- Personnel services expenses were $16.4 million less ing to support mission-critical activities and stratethan budgeted because of the hiring freeze, which gic priorities, and submit initial budget requests, caused higher-than-budgeted vacancy rates.7 The including proposed initiatives and potential savings. underrun in personnel services was partially offset by Since the growth target for 2018 did not include an overrun in centrally managed benefits (e.g., retireany new authorized positions, divisions prioritized ment and post-retirement benefits), which was driven vacancies to their most critical needs. by changes in actuarial assumptions, including lower- • Division of Financial Management staff review ini- than-planned discount rates and changes in other key tial budget requests submitted by divisions and actuarial assumptions. work collaboratively with all divisions to achieve the growth target. • The chief operating officer and chief financial officer subsequently meet with the Executive Commit- 6 The Division of Financial Management has implemented an automated, multiyear budget development and forecasting system, which helps inform budget development, provides forecast information, and allows for greater comparability with Fed- 5 The Strategic Plan 2016–19, which was approved by the Board eral Reserve Bank information. in July 2015, continues the work of the Strategic Framework 7 On January 23, 2017, President Trump issued a memorandum 2012–15. In addition to investing in ongoing operations, the ordering a freeze on the hiring of federal civilian employees Board is prioritizing investments and dedicating resources to six “across the board in the executive branch,” with only limited pillars over the 2016–19 period, which will allow the Board to exceptions for national security and public safety. In keeping advance its mission and respond to continuing and evolving with past practice, the System complied with the spirit of the challenges. The six pillars are: project development and resource memorandum’s provisions while allowing for the continued allocation, workforce, physical infrastructure, technology, data, advancement of critical strategic priorities and the ability to and public engagement and accountability. meet the System's public service mission.

Federal Reserve System Budgets 407 Table 3. Operating expenses of the Board of Governors, by division, office, or special account, 2017–18 Millions of dollars, except as noted Variance V ariance 2017 actual to 2017 budget 2018 budget to 2017 actual Division, office, or special account 2017 budget 2017 actual 2018 budget Amount Percent A mount P ercent Research and Statistics 80.1 77.3 -2.8 -3.5 85.0 7.7 9.9 International Finance 33.4 31.6 -1.8 -5.5 34.7 3.1 9.9 Monetary Affairs 41.1 39.2 -1.9 -4.6 43.4 4.2 10.8 Financial Stability 12.7 11.8 -0.9 -7.1 13.1 1.3 11.2 Supervision and Regulation 143.4 133.8 -9.6 -6.7 144.8 1 1.0 8.2 Consumer and Community Affairs 35.3 34.1 -1.1 -3.2 37.6 3.5 10.2 Reserve Bank Operations and Payment Systems 44.7 41.7 -3.0 -6.8 46.3 4.6 11.1 Board Members 28.4 26.3 -2.1 -7.2 28.5 2.2 8.3 Secretary 11.3 11.2 -0.1 -0.7 12.0 0.7 6.3 Legal 32.1 29.5 -2.6 -8.0 32.0 2.5 8.3 Chief Operating Officer 17.7 16.6 -1.1 -6.1 19.2 2.6 15.4 Financial Management 12.8 12.4 -0.4 -3.5 13.1 0.7 5.8 Information Technology 116.0 111.1 -4.9 -4.2 118.2 7.1 6.4 IT income -48.3 -48.4 -0.1 0.1 -52.8 -4.4 9.1 Management 137.0 133.7 -3.3 -2.4 137.7 4.0 3.0 Special projects1 16.4 12.4 -4.0 -24.4 14.5 2.1 17.1 Extraordinary items: strategic projects2 16.1 15.2 -0.8 -5.3 20.9 5.6 37.0 Survey of Consumer Finances3 0.6 0.7 0.1 10.3 1.2 0.5 74.1 Centrally managed benefits4 13.9 17.5 3.7 26.4 17.4 -0.2 -0.9 Total, Board operations 744.6 707.8 -36.7 -4.9 766.7 5 8.9 8.3 Office of Inspector General 34.3 33.8 -0.4 -1.2 35.9 2.1 6.2 1 Includes centralized Boardwide benefit programs. 2 Includes several strategic projects, including the Martin Building renovation. 3 Previously, the Survey of Consumer Finances was reported with extraordinary items. 4 Includes retirement and post-retirement benefits, which fluctuate due to changes in actuarial assumptions and demographics. Goods and services expenses were $20.3 million less The 2018 budget includes employment growth as hirthan the budget. Lower-than-expected employment ing activities are expected to continue to normalize in levels in 2017 contributed to underruns in several 2018, funding for the Board’s compensation and benareas, particularly travel and relocation. In addition, efit programs, projected increases to centrally manunderruns in goods and services were driven by lower aged benefits (e.g., retirement and post-retirement utilization of contractual professional services, benefits), and expenses related to preparing for the reduced telecommunications expenses and less pro- 2019 Survey of Consumer Finances. The budget fessional service support for supervision projects, allows for continued investments in strategic, highlower rentals and depreciation expenses because of priority projects in support of the Plan’s pillars: projdelays in several major projects, and fewer data and ect development and resource allocation, workforce, software purchases. physical infrastructure, technology, data, and public engagement and accountability. 2018 Operating Expense Budget The 2018 budget for Board operations is $766.7 mil- The Board’s total authorized position count for 2018 lion, which is $58.9 million, or 8.3 percent, higher remains unchanged at 2,847. than 2017 actual expenses and 3.0 percent higher than the 2017 budget. The operating budget includes Risks in the 2018 Budget funding for the Board’s ongoing operations and sup- The 2018 operating budget is built on the steps taken port for the six overarching pillars identified in the in recent years to better align budget requests with Board’s Strategic Plan 2016–19. historic hiring trends and spending patterns, while

408 104th Annual Report | 2017 Table 4. Operating expenses of the Board of Governors, by account classification, 2017–18 Millions of dollars, except as noted V ariance V ariance 2017 actual to 2017 budget 2018 budget to 2017 actual Account classification 2017 budget 2017 actual 2018 budget Amount Percent A mount P ercent P ersonnel services Salaries 433.9 416.6 -17.4 -4.0 4 49.8 3 3.2 8.0 Retirement/Thrift plans 56.5 52.3 -4.1 -7.3 61.7 9.4 17.9 Employee insurance and other benefits 42.3 40.0 -2.2 -5.3 42.8 2.8 6.9 Net periodic benefits costs1 0.0 7.3 7.3 n/a n/a n/a n/a Subtotal, personnel services 532.7 516.3 -16.4 -3.1 554.3 3 8.0 7.4 Goods and services Postage and shipping 0.4 0.2 -0.1 -37.6 0.3 0.0 9.4 T ravel 17.5 13.3 -4.2 -24.0 17.1 3.8 28.7 Telecommunications 8.3 6.0 -2.3 -28.3 7.2 1.2 20.7 Printing and binding 2.2 1.8 -0.4 -18.4 1.8 0.0 1.7 Publications 0.6 0.5 -0.1 -15.4 0.6 0.0 7.4 Stationery and supplies 1.7 1.1 -0.5 -31.3 1.4 0.3 25.0 Software 17.1 15.8 -1.3 -7.9 17.0 1.2 7.6 Furniture and equipment (F&E) 11.1 10.9 -0.1 -1.2 6.3 -4.6 -42.0 Rentals 30.6 29.2 -1.3 -4.3 32.5 3.3 11.3 Data, news, and research 14.7 13.3 -1.4 -9.7 14.8 1.5 11.1 Utilities 2.8 2.3 -0.6 -20.1 2.3 0.0 0.9 Repairs and alterations—building 2.7 3.7 1.0 38.4 2.5 -1.2 -31.4 Repairs and maintenance—F&E 5.4 4.5 -0.9 -16.0 4.7 0.2 4.2 Contractual professional services 53.9 48.1 -5.8 - 10.7 54.2 6.1 12.7 Interest 0.0 0.0 0.0 -3.9 0.0 0.0 -40.8 Training and dues 4.8 3.6 -1.2 -25.6 4.7 1.1 31.3 Subsidies and contributions 0.9 0.9 0.0 0.8 2.1 1.2 126.5 All other 3.6 3.1 -0.6 -16.1 4.0 0.9 30.6 Depreciation/amortization 40.3 38.7 -1.6 -3.9 43.2 4.5 11.6 IT user charge 47.5 47.6 0.1 0.2 52.2 4.7 9.8 IT income -48.3 -48.4 -0.1 0.2 -52.8 -4.4 9.0 Income -5.9 -4.7 1.2 -20.2 -3.8 0.9 -19.1 Subtotal, goods and services 211.9 191.5 -20.3 -9.6 212.4 2 0.9 10.9 Total, Board operations 744.6 707.8 -36.7 -4.9 766.7 5 8.9 8.3 Office of Inspector General Personnel services 25.8 25.7 -0.1 -0.4% 27.7 2.0 7.8 Goods and services 8.5 8.2 -0.3 -3.8% 8.3 0.1 1.0 Total, OIG operations 34.3 33.8 -0.4 -1.2% 35.9 2.1 6.2 n/a Not applicable. 1 Account was established after the approval of the 2018 budget to track net periodic benefits costs other than services costs related to pension and post-retirement benefits. ensuring the funding of the Board’s highest priori- ects will continue to be an area of focus, from both a ties. Meeting the approved growth targets required all budget and project management perspective, given divisions to make tradeoffs and prioritize resources their size, complexity, and strategic importance. to fund mission-critical activities for 2018. 2018 Capital Budgets Staff from the Division of Financial Management The Board’s 2018 single-year capital budget totals will work closely with all divisions throughout the $17.3 million, which is $6.1 million higher than 2017 year to mitigate potential budget overruns by closely actual capital expenditures and $3.3 million higher monitoring spending. Building improvements proj- than the 2017 budget. The increase is primarily

Federal Reserve System Budgets 409 Table 5. Positions authorized by the Board of Governors, by division, office, or special account, 2017–18 Variance V ariance 2017 actual to 2017 budget 2018 budget to 2017 actual Division, office, or special account 2017 budget1 2017 actual 2018 budget Amount Percent A mount P ercent Research and Statistics 356 356 0 0.0 356 0 0.0 International Finance 154 155 1 0.6 155 0 0.0 Monetary Affairs 172 172 0 0.0 172 0 0.0 Financial Stability 55 55 0 0.0 55 0 0.0 Supervision and Regulation 493 493 0 0.0 493 0 0.0 Consumer and Community Affairs 131 131 0 0.0 131 0 0.0 Reserve Bank Operations and Payment Systems 183 183 0 0.0 183 0 0.0 Board Members 121 121 0 0.0 121 0 0.0 Secretary 53 53 0 0.0 53 0 0.0 Legal 125 125 0 0.0 125 0 0.0 Chief Operating Officer 68 67 -1 -1.5 67 0 0.0 Financial Management 68 69 1 1.5 69 0 0.0 Information Technology 413 412 -1 -0.2 413 1 0.2 Management 455 455 0 0.0 454 -1 -0.2 Total, Board operations 2,847 2,847 0 0.0 2,847 0 0.0 Office of Inspector General 132 132 0 0.0 132 0 0.0 1 Budget represents authorized position count at the beginning of the year, and actual represents authorized position count at year-end. driven by planned equipment replacements in the potential renovation of the Eccles Building will data center and the continuation of pre-design efforts improve compliance with modern building codes and for the Eccles Building. allow for efficient space utilization with today’s technology capabilities. Other funding increases are The Board’s multiyear capital budget totals driven by: continued enhancements of supervision $452.8 million, which includes 2018 expected capital and regulation data capabilities; automation initiaexpenditures of $140.6 million. The budget includes tives, including Federal Open Market Committee increases to building improvement projects, such as (FOMC) system enhancements; and security furniture purchases and renovation funding for enhancements. Expected capital expenditures in 2018 design phases services in the Eccles Building. The are primarily driven by the Martin Building renova- Table 6. Capital expenditures of the Board of Governors, by capital type, 2017–18 Millions of dollars, except as noted V ariance V ariance 2017 actual to 2017 budget 2018 budget to 2017 actual Item 2017 budget 2017 actual 2018 budget Amount Percent A mount P ercent B oard Single-year capital expenditures 14.0 11.2 -2.7 -19.6 17.3 6.1 53.9 Multiyear capital expenditures 58.3 43.8 -14.5 -24.9 140.6 96.8 221.0 Total capital expenditures 72.3 55.0 -17.2 -23.8 157.8 102.8 186.9 Office of Inspector General Single-year capital expenditures 0.0 0.0 0.0 n/a 0.1 0.1 n/a Multiyear capital expenditures 0.2 0.3 0.1 29.0 0.0 -0.3 -100.0 Total capital expenditures 0.2 0.3 0.1 29.0 0.1 -0.1 -54.8 Board and OIG total capital expenditures 72.5 55.3 -17.2 -23.7 158.0 1 02.7 185.7 Note: The amount reported for the multiyear capital budget represents the expected expenditures for the budget year. n/a Not applicable.

410 104th Annual Report | 2017 tion project. Table 6 summarizes the Board’s bud- tal budget, which funded the construction of tempogeted and actual capital expenditures for 2017 and rary and permanent regional offices. 2018. Federal Reserve Banks Budgets Office of Inspector General Each Reserve Bank establishes major operating goals The budget for the Board’s OIG is grounded in the for the coming year, devises strategies for attaining values established by its strategic plan (https://oig those goals, estimates required resources, and moni- .federalreserve.gov/strategic-plan.htm), which include tors results. The Reserve Banks’ budgets are strucdelivering high-quality products and services that tured by functional area, with attributable support promote agency excellence and a diverse, skilled, and and overhead charged to each area. The budgets are engaged workforce; cultivating leadership; fostering formulated to ensure alignment with each Reserve an inclusive and collaborative environment; optimiz- Bank’s and the System’s strategic priorities, including ing external stakeholder engagement; and enhancing • contributing to the formulation of monetary policy the capacity and improving the operational effectiveand enhancing monetary policy implementation to ness of the OIG. become more effective, flexible, and resilient In keeping with its statutory independence, the OIG • promoting financial stability through effective prepares its proposed budget apart from the Board’s monitoring, analysis, and policy development budget. The OIG presents its budget directly to the • promoting safety and soundness of financial insti- Board for approval. tutions through effective supervision 2017 Budget Performance • leading efforts to enhance the security, resiliency, Total expenses for OIG operations were $33.8 mil- functionality, and efficiency of services provided to lion, which was $0.4 million, or 1.2 percent, less than financial institutions and the public the approved 2017 operating budget. Personnel services expenses were $0.1 million less than budgeted. The Reserve Bank budget process is as follows: Goods and services expenses were $0.3 million less • Reserve Bank and Board governance bodies prothan budgeted because of lower-than-planned rental vide an aggregate System-level growth expectation expenses and contractual professional services usage, for the upcoming budget year. and fewer furniture and equipment purchases. The OIG did not have single-year capital spending in • The Reserve Banks develop budgets that incorpo- 2017. Multiyear capital projects remained within rate this guidance, and senior leadership in the their project budgets with actual spending in 2017 Reserve Banks reviews the budgets for alignment higher than planned because of the buildout of addi- with Reserve Bank and System priorities. tional office space at the San Francisco regional • The Reserve Banks submit preliminary budget office. Table 6 summarizes the OIG’s budgeted and information to the Board for review, including actual capital expenditures for 2017 and 2018. documentation to support the budget request. 2018 Operating Expense Budget • Board staff analyzes the Banks’ budgets, both individually and in the context of System initiatives. The 2018 budget for OIG operations is $35.9 million, which is $2.1 million, or 6.2 percent, higher than • The Board’s Committee on Federal Reserve Bank 2017 actual expenses and 4.8 percent higher than the Affairs (BAC) reviews the Bank budgets. 2017 budget. The OIG’s total authorized position • The Reserve Banks make any needed changes, and count for 2018 remains unchanged at 132. The addithe BAC chair submits the revised budgets to tional funding assists the OIG in implementing the Board members for review and final action. goals, objectives, and activities identified in its strategic plan. • Throughout the year, Reserve Bank and Board staffs monitor actual performance and compare it 2018 Capital Budget to approved budgets and forecasts. The OIG’s 2018 single-year capital budget totals $0.1 million for vehicle lifecycle replacements. For In addition to the budget approval process, the 2018, the OIG closed its $3.2 million multiyear capi- Reserve Banks must submit proposals for certain

Federal Reserve System Budgets 411 Table 7. Operating expenses of the Federal Reserve Banks, by District, 2017–18 Millions of dollars, except as noted V ariance V ariance 2017 actual to 2017 budget 2018 budget to 2017 actual District 2017 budget 2017 actual 2018 budget Amount Percent A mount P ercent Boston 230.5 217.4 -13.1 -5.7 233.0 15.6 7.2 New York 992.1 968.7 -23.4 -2.4 1 ,006.7 37.9 3.9 Philadelphia 191.4 181.3 -10.1 -5.3 191.8 10.5 5.8 Cleveland 196.8 189.3 -7.6 -3.8 203.3 14.0 7.4 Richmond 450.6 435.3 -15.3 -3.4 479.8 44.5 10.2 Atlanta 407.4 391.8 -15.5 -3.8 420.3 28.5 7.3 Chicago 383.3 381.1 -2.1 -0.6 397.8 16.6 4.4 St. Louis 399.1 395.3 -3.8 -1.0 412.0 16.7 4.2 Minneapolis 165.1 162.2 -2.9 -1.8 174.0 11.8 7.3 Kansas City 285.0 282.3 -2.7 -1.0 307.3 25.0 8.9 Dallas 229.1 219.6 -9.5 -4.2 238.6 19.0 8.6 San Francisco 381.9 384.6 2.6 0.7 386.8 2.3 0.6 Total Reserve Bank operating expenses 4,312.4 4,209.0 -103.5 -2.4 4 ,451.3 242.4 5.8 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 expenditures 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. capital expenditures to the Board for further review table 11 shows the Reserve Banks’ budgeted and and approval. actual capital expenditures for 2017 and budgeted capital for 2018. Tables 7, 8, and 9 summarize the Reserve Banks’ 2017 budgeted and actual expenses and 2018 bud- 2017 Budget Performance geted expenses by Reserve Bank, functional area, and account classification.8 Table 10 shows the Reserve Total 2017 operating expenses for the Reserve Banks Banks’ budgeted and actual employment for 2017 were $4,209.0 million, which is $103.5 million, or and budgeted employment for 2018. In addition, 2.4 percent, less than the approved 2017 budget of $4,312.4 million. The actual average number of per- 8 Additional information about the operating expenses of each of sonnel (ANP) was less than the 2017 budget, largely the Reserve Banks can be found in section 11, “Statistical because of delays in hiring as a result of the hiring Tables” (see “Table 10. Income and expenses of the Federal Reserve Banks, by Bank”). freeze. The Reserve Banks’ 2017 capital expenditures Table 8. Operating expenses of the Federal Reserve Banks, by operating area, 2017–18 Millions of dollars, except as noted Variance V ariance 2017 actual to 2017 budget 2018 budget to 2017 actual Operating area 2017 budget 2017 actual 2018 budget Amount Percent A mount P ercent Monetary and economic policy 697.7 693.4 -4.4 -0.6 721.5 28.2 4 .1 Services to the U.S. Treasury and other government agencies 625.7 597.6 -28.0 -4.5 616.1 18.4 3 .1 Services to financial institutions and the public 1,151.2 1,127.0 -24.2 -2.1 1,211.6 84.6 7 .5 Supervision and regulation 1,389.6 1,366.0 -23.6 -1.7 1,449.3 83.3 6.1 Fee-based services to financial institutions 448.2 425.0 -23.2 -5.2 452.9 27.9 6.6 Total Reserve Bank operating expenses1 4,312.4 4,209.0 -103.5 -2.4 4,451.3 242.4 5.8 1 Operating expenses exclude pension costs, reimbursements, and operating expense of the Board of Governors (see table 4).

412 104th Annual Report | 2017 Table 9. Operating expenses of the Federal Reserve Banks, by account classification, 2017–18 Millions of dollars, except as noted V ariance V ariance 2017 actual to 2017 budget 2018 budget to 2017 actual Account classification 2017 budget 2017 actual 2018 budget Amount Percent A mount P ercent Salaries and other benefits1 3,238.4 3,135.0 -103.4 -3.2 3,330.2 195.2 6.2 Building 330.6 326.2 -4.4 -1.3 335.2 9.0 2.7 Software costs 250.8 254.3 3.5 1.4 264.6 10.3 4.0 Equipment 189.1 185.0 -4.2 -2.2 192.4 7.4 4.0 Recoveries2 -183.5 -190.7 -7.2 3.9 -394.4 -203.7 106.8 Expenses capitalized -93.0 -68.9 24.1 -25.9 -76.5 -7.5 10.9 All other3 580.1 568.1 -12.0 -2.1 799.8 231.7 40.8 Total Reserve Bank operating expenses 4,312.4 4,209.0 -103.5 -2.4 4,451.3 242.4 5.8 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. were less than budgeted by $68.4 million, or 16.4 per- and automated clearinghouse (ACH) enhancements cent, because of changes in timing and scope for and check-related projects, and the completion of numerous initiatives. software development and testing following the implementation of the CashForward initiative.9 The Revised project plans, benefits assumptions, and increased cash recoveries from depository institutions 9 The ACH Modernization initiative involves the transition of the contributed to the 2017 operating expense budget ACH application from the legacy mainframe environment to a underrun. Project plan changes include updated distributed platform. The CashForward initiative replaced legacy software applications, automated business processes, and business-line transition plans for ongoing Treasury employed technologies to meet current and future needs for the services, delays in development efforts for Fedwire cash function. The project was completed in November 2017. Table 10. Employment at the Federal Reserve Banks, by District, and at FRIT and OEB, 2017–18 V ariance V ariance 2017 actual to 2017 budget 2018 budget to 2017 actual District 2017 budget 2017 actual 2018 budget Amount Percent A mount P ercent Boston 1,131 1,090 -41 -3.6 1,086 -4 -0.4 New York 3,319 3,200 -119 -3.6 3,277 78 2.4 Philadelphia 914 894 -20 -2.2 876 -18 -2.0 Cleveland 995 963 -31 -3.2 999 35 3.6 Richmond 1,499 1,471 -29 -1.9 1,498 27 1.9 Atlanta 1,762 1,745 -18 -1.0 1,774 29 1.7 Chicago 1,600 1,546 -54 -3.4 1,605 59 3.8 St. Louis 1,416 1,368 -47 -3.4 1,442 74 5.4 Minneapolis 1,008 997 -11 -1.1 1,030 33 3.3 Kansas City 1,850 1,848 -2 -0.1 1,910 62 3.3 Dallas 1,294 1,257 -37 -2.9 1,320 64 5.1 San Francisco 1,697 1,701 4 0.2 1,732 31 1.8 Total, all Districts 18,487 18,080 -407 -2.2 18,550 470 2.6 Federal Reserve Information Technology 1,277 1,260 -18 -1.4 1,270 10 0.8 Office of Employee Benefits 58 53 -4 -7.7 58 5 9.3 Total 19,822 19,393 -429 -2.2 19,878 485 2.5

Federal Reserve System Budgets 413 Table 11. Capital expenditures of the Federal Reserve Banks, by District, and of FRIT and OEB, 2017–18 Millions of dollars, except as noted V ariance V ariance 2017 actual to 2017 budget 2018 budget to 2017 actual District 2017 budget 2017 actual 2018 budget Amount Percent A mount P ercent Boston 26.6 16.7 -9.9 -37.1 20.5 3.7 22.1 New York 100.8 92.9 -7.9 -7.8 92.0 -0.9 -1.0 Philadelphia 20.9 13.6 -7.3 -34.9 34.6 21.0 153.9 Cleveland 32.8 31.4 -1.4 -4.3 13.7 -17.7 -56.5 Richmond 21.3 11.1 -10.1 -47.6 20.4 9.3 83.5 Atlanta 25.8 24.2 -1.6 -6.2 21.1 -3.1 -12.9 Chicago 29.2 26.0 -3.2 -11.0 22.3 -3.7 -14.1 St. Louis 6.8 6.5 -0.3 -4.0 6.6 0.1 1.4 Minneapolis 4.4 3.7 -0.7 -15.5 19.3 15.6 4 17.2 Kansas City 25.3 26.7 1.4 5.7 23.4 -3.3 -12.3 Dallas 19.3 15.2 -4.0 -20.9 20.1 4.9 32.2 San Francisco 36.2 15.5 -20.7 -57.2 30.9 15.4 99.1 Total, all Districts 349.4 283.8 -65.7 -18.8 324.9 41.1 14.5 Federal Reserve Information Technology 67.2 64.4 -2.8 -4.2 81.6 17.3 26.9 Office of Employee Benefits * * * 6.0 0.1 * 34.8 Total 416.6 348.2 -68.4 -16.4 406.6 58.4 16.8 * Less than $50,000. underrun is partially offset by increased expenses for Fixing America’s Surface Transportation the TWAI. (FAST) Act. Total 2017 actual employment for the Reserve Banks, Increases in services to financial institutions and the the Federal Reserve Information Technology (FRIT), public include expenses for cash related to the first and the Office of Employee Benefits (OEB) was phase of the next-generation currency-processing 19,393 ANP, an underrun of 429 ANP, or 2.2 per- program (NextGen) as well as staffing to address the cent, from 2017 budgeted staffing levels. The impact increase in the volume of currency received from cirof the hiring freeze affected all functional areas with culation. Expenses related to fee-based services are the largest underruns in support services and the increasing to fund continuing technology investments monetary policy business lines. Additionally, pro- for ACH and Fedwire enhancements. Budgeted gram delays in several Treasury business lines and expenses for services to the Treasury, which are fully changes in the cash environment contributed to the reimbursable, are increasing primarily for the Stored underrun. Value Card (SVC) program, expanded Do Not Pay (DNP) analytics, and Pay.gov initiatives.10 2018 Operating Expense Budget Total 2018 budgeted employment for the Reserve The 2018 operating budgets of the Reserve Banks Banks, FRIT, and OEB is 19,878 ANP, an increase of total $4,451.3 million, which is $242.4 million, or 485 ANP, or 2.5 percent, from 2017 actual employ- 5.8 percent, higher than 2017 actual expenses. The ment levels. The increase is largely due to 2017 hiring increase in the supervision function is primarily for the ongoing support of the supervision portfolio and 10 The SVC program comprises three military cash-management national and horizontal review initiatives and for the programs: EagleCash, EZpay, and NavyCash. These programs provide electronic payment methods for goods and services on continued development and implementation of the military bases and Navy ships, both domestic and overseas, to cybersecurity supervision program. The increase is reduce costs and increase convenience for the military and serpartially offset by operational efficiencies and the vice members. DNP helps agencies mitigate and eliminate improper payments. Pay.gov is an application that allows the extension of the exam cycle for qualifying depository public to use the internet to authorize and initiate payments to institutions because of the implementation of the federal agencies.

414 104th Annual Report | 2017 delays as a result of the hiring freeze. Support and ment of funds.11 The expenditures designated for overhead functions plan to add resources to conditional approval by the chair of the BAC include strengthen facilities maintenance, strategic planning, large-scale building projects to renovate office and enterprise risk management, internal audit, and cafeteria spaces, increase parking, and upgrade human resources capabilities. In information technol- mechanical and electrical infrastructure. Technology ogy, ANP increases are for information security ini- projects include current and future Fedwire initiatiatives and application development projects, pri- tives, Treasury applications, and the migration of marily for Treasury programs. In the Treasury ser- major applications off the mainframe.12 vices function, ANP increases are due to updated requirements for ongoing programs, including SVC Other Capital Expenditures and DNP. Staff is also increasing in cash to address Significant capital expenditures (typically expendilocal cash-processing volume increases and to sup- tures exceeding $1 million) that are not designated port phase I of the NextGen program. Supervision for conditional approval include total multiyear bud- ANP are increasing to support the cybersecurity pro- geted expenditures of $496.7 million for 2018 and gram and the growth in the number of state member future years, of which the single-year 2018 budgeted banks. expenditures are $232.2 million. This category includes building expenditures for office space reno- Reserve Bank officer and staff personnel expenses for vations, infrastructure upgrades, and security 2018 total $2,565.6 million, an increase of enhancements. IT projects include ongoing IT infra- $141.1 million, or 5.8 percent, from 2017 actual structure investments and Treasury, monetary policy, expenses. The increase reflects expenses associated and supervision initiatives. with additional staff and budgeted salary adjustments, including merit increases, equity adjustments, Capital initiatives that are individually less than promotions, and funding for variable pay. $1 million are budgeted at an aggregate amount of $90.8 million for 2018 and include building mainte- The 2018 Reserve Bank budgets include a 3.0 percent nance expenditures, equipment and furniture replacemerit program for eligible officers, senior profession- ments, and scheduled software and equipment als, and staff totaling $64.8 million and a variable pay upgrades. program totaling $206.4 million. Budgeted equity adjustments and promotions total $7.3 million for Currency Budget officers and senior professionals and $26.4 million for staff. The Board is the issuing authority for Federal Reserve notes. As the issuing authority, the Board 2018 Capital Budgets has a wide range of responsibilities, from ensuring an adequate supply of notes in circulation, to protecting The 2018 capital budgets for the Reserve Banks, and maintaining confidence. To protect the integrity FRIT, and OEB total $406.6 million. The increase in of the notes it issues, the Board works with the the 2018 capital budget is $58.4 million, or 16.8 per- Reserve Banks, the Treasury Department, the Treacent, more than the 2017 actual levels of $348.2 mil- sury’s Bureau of Engraving and Printing (BEP), and lion, largely reflecting ongoing multiyear building the United States Secret Service to ensure that the and information technology projects. Initiatives in notes meet quality standards from production the 2018 capital budget include supporting workspace renovations, addressing aging building infrastructure, and providing application upgrades and releases. 11 Generally, capital expenditures that are designated for conditional approval include certain building projects, District expenditures that substantially affect or influence future System direc- Capital Expenditures Designated for tion or the manner in which significant services are performed, Conditional Approval expenditures that may be inconsistent with System direction or vary from previously negotiated purchasing agreements, and The BAC chair designated projects with an aggregate local expenditures that duplicate national efforts. cost of $83.6 million in 2018 for conditional 12 The Reserve Bank migration strategy involves moving a majorapproval, requiring additional review and approval by ity of applications from the mainframe to alternative processing environments. Budgeted projects for 2018 include the migration the Board’s director of the Division of Reserve Bank of the statistics and reserves application and the ACH process- Operations and Payment Systems before the commit- ing platform.

Federal Reserve System Budgets 415 through destruction, monitors counterfeiting threats versions, and by using in-house web development for each denomination, and conducts adversarial resources instead of more-expensive contracted analysis on existing and new security features to resources. The counterfeit-deterrence program was ensure they are robust to counterfeiting. The cur- unable to conduct all planned research and developrency budget funds the Board’s and BEP’s activities ment efforts in 2017. related to note production and issuance.13 2018 Budget The annual currency budget process is as follows: The 2018 operating budget for currency is $861.7 mil- • Each August, based on Board staff’s assessment of lion, which is $138.5 million, or 19.1 percent, higher currency demand and other factors, the Board’s than 2017 actual expenses (figure 5). Printing costs director of the Division of Reserve Bank Operafor notes are 93 percent of the operating budget. tions and Payment Systems submits a fiscal year Expenses for currency transportation, quality assurprint order for notes to the director of the BEP. ance, research and development, counterfeit deter- • Each December, Board staff estimates expenses for rence, other BEP initiatives, currency education, and the calendar-year currency budget, including print- depreciation make up the remaining 7 percent ing expenses (based on estimated production costs (table 12). provided by the BEP); certain other BEP initia- Printing and Transportation of Federal Reserve tives; and expenses for currency transportation, Notes quality assurance, research and development, counterfeit deterrence, currency education, and depre- The currency budget includes $801.0 million in printciation.14 ing costs for 2018, an increase of $127.1 million, or 18.9 percent from 2017 actual expenses. The increase • The BAC reviews the proposed currency budget. is attributable to continued strong demand for bank- • The BAC chair submits the proposed currency notes, which resulted in the Board’s request for budget to Board members for review and final 20.6 percent more notes in 2018 from the prior year, action. with a 61.8 percent increase in the share of moreexpensive $100 notes. 2017 Budget Performance The 2018 currency transportation budget is The Board’s 2017 actual operating expenses for new $24.3 million, an increase of $2.5 million, or currency were $723.3 million, a decrease of $2.7 mil- 11.7 percent, from 2017 actual expenses. The budget lion, or 0.4 percent, from the 2017 budget. This bud- includes the cost of shipping new notes from the BEP get underrun is primarily attributable to lower-than- to Reserve Banks, of intra-System shipments of fit budgeted expenses for currency education and coun- and unprocessed notes, and of returning pallets from terfeit deterrence. The currency education program the Reserve Banks to the BEP. The majority of the delivered educational content more cost-effectively by increase is attributable to the BEP shipping a larger encouraging the public to download electronic versions of resources rather than ordering hard copy Figure 5. Federal Reserve costs for currency, 2008–18 1,000 13 The Board reimburses the BEP for all costs related to the pro- Millions of dollars duction of currency because the BEP does not receive federal appropriations. All operations of the BEP are financed by a 800 revolving fund that is reimbursed through product sales, virtually all of which are sales of Federal Reserve notes to the Board to fulfill its annual print order. Section 16 of the Federal Reserve 600 Act requires that all costs incurred for the issuing of notes shall be paid for by the Board and included in its assessments to the 400 Reserve Banks. Customer billings are the BEP’s only means of recovering costs of operations and generating funds necessary for capital investment. 200 14 Other BEP expenses include costs to reimburse the BEP for expenses incurred by its Destruction Standards and Compliance Division of the Office of Compliance and Mutilated Currency 0 Division of the Office of Financial Management and for work 2008 2010 2012 2014 2016 2018 performed in 2017 toward a new facility to replace the existing Note: For 2018, budgeted. Data for 2008–16 have been revised. facility in Washington, D.C.

416 104th Annual Report | 2017 Table 12. Federal Reserve currency budget, 2017 and 2018 Thousands of dollars, except as noted V ariance V ariance 2017 actual to 2017 budget 2018 budget to 2017 actual Item 2017 budget 2017 actual 2018 budget Amount Percent A mount P ercent B EP-related expenses Printing Federal Reserve notes 673,799 673,936 137 0.0 800,995 1 27,059 18.9 Currency reader 1,715 1,426 -289 -16.9 1,286 -140 -9.8 Other 4,000 3,569 -431 -10.8 3,697 128 3.6 New BEP facility 0 683 n/a n/a 0 -683 - 100.0 Board expenses Currency transportation 21,200 21,711 511 2.4 24,260 2,549 11.7 Currency quality assurance 12,500 13,117 617 4.9 14,000 883 6.7 Research and development1 n/a n/a n/a n/a 7,740 n/a n/a Currency counterfeit deterrence and analysis 8,100 6,103 -1,997 -24.7 7,145 1,042 17.1 Currency education, outreach, and research 4,645 2,714 -1,931 -41.6 2,531 -183 -6.7 Depreciation 71 25 -46 -64.8 80 55 220.0 Total expenses 726,030 723,284 -2,746 -0.4 861,734 1 38,450 19.1 C apital expenses Single cycle capital 600 364 -236 -39.3 0 -364 n/a BEP Bureau of Engraving and Printing. n/a Not applicable. 1 The Board established the research and development budget category in 2018 to distinguish between research and development efforts and ongoing project work. Previously, these expenses were included in quality assurance, counterfeit deterrence, and currency education. volume of new notes to the Reserve Banks in 2018 its standards. As a public service, the MCD also prothan it did in 2017. cesses claims for the redemption of damaged or mutilated currency. Currency Reader Program Quality Assurance The 2018 currency reader budget is $1.3 million, which is $0.1 million, or 9.8 percent, lower than 2017 The 2018 budget for quality assurance initiatives is actual expenses. The budget allows the BEP to dis- $14.0 million, which is $0.9 million, or 6.7 percent, tribute currency readers to qualified blind or visually- higher than 2017 actual expenses. The currency qualimpaired individuals at no cost to the user; to reim- ity assurance consultants, in consultation with staff burse the Library of Congress for administering the from the Board and BEP, will develop operational currency reader program through the existing infra- performance metrics to monitor and assess the BEP’s structure of its book reader program, which is man- efficiency and effectiveness. In addition, the consulaged by the National Library Service; and other tants will establish process roadmaps that will faciliadministrative and outreach expenses. tate the transition of responsibility for quality-related processes to the BEP. The budget also includes fund- Other Reimbursements to the Bureau of ing for the Board to continue working with a design Engraving and Printing consultant to assist with the accelerated development The 2018 budget for other reimbursements to the of a new family of notes. BEP is $3.7 million, which is an increase of $0.1 mil- Research and Development lion, or 3.6 percent, from 2017 actual expenses. This funding reimburses the BEP for expenses incurred by The 2018 budget includes $7.7 million to fund ongoits Destruction Standards and Compliance Division ing initiatives related to research and development of of the Office of Compliance (OC) and Mutilated security features and optical-inspection technology.15 Currency Division (MCD) of the Office of Financial Previously, these expenses were included in quality Management. The OC develops standards for cancellation and destruction of unfit currency and for note 15 The Board established the research and development budget cataccountability at the Reserve Banks and reviews egory in 2018 to distinguish between research and development Reserve Banks’ cash operations for compliance with efforts and ongoing project work.

Federal Reserve System Budgets 417 assurance, counterfeit deterrence, and currency edu- feiting and funds the Reproduction Research Center cation. The Board will develop, test, and evaluate to perform adversarial analysis on design concepts new and existing security features in support of the and potential security features. new family of notes, continue development work on optical-inspection technology, and develop an auto- Currency Education Program mated system for identification and analysis of coun- The 2018 budget for the currency education program terfeit notes. In addition, the Board will continue to (CEP) is $2.5 million, which is $0.2 million, or work on cognitive and perception studies to help 6.7 percent, lower than 2017 actual expenses. The inform security feature and banknote design CEP is designed to protect and maintain confidence decisions. in U.S. currency worldwide by providing information on all circulating designs of notes to the global public Counterfeit Deterrence and key stakeholder groups. In 2018, the CEP will The 2018 budget for counterfeit deterrence and continue to conduct outreach to domestic and interanalysis is $7.1 million, which is $1.0 million, or national businesses and retailers, maintain the uscur- 17.1 percent, higher than 2017 actual expenses. The rency.gov educational website, and launch new initiabudget funds membership in the Central Bank Coun- tives such as an educational app and a suite of terfeit Deterrence Group to combat digital counter- youth-focused digital learning tools.

419 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 2017. For a full listing of Board members from 1914 through the present, visit www.federalreserve.gov/ aboutthefed/bios/board/boardmembership.htm. Janet L. Yellen Randal K. Quarles Jerome H. Powell Chair Vice Chairman for Supervision (as Lael Brainard of October 13, 2017) Stanley Fischer Vice Chairman (through Daniel K. Tarullo (through October 13, 2017) April 5, 2017) 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 Lucretia M. Boyer Jennifer C. Gallagher Director and Assistant to the Assistant to the Board Special Assistant to the Board for Board Congressional Liaison David W. Skidmore Linda L. Robertson Assistant to the Board Assistant to the Board

420 104th Annual Report | 2017 Legal Division Mark E. Van Der Weide 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 Ann Misback Yao-Chin Chao Secretary of the Board Assistant Secretary Margaret M. Shanks Michele T. Fennell Deputy Secretary Assistant Secretary Division of International Finance Steven B. Kamin Mark S. Carey Carol C. Bertaut Director Associate Director Assistant Director Thomas A. Connors Brian M. Doyle Stephanie E. Curcuru Deputy Director Associate Director Assistant Director Beth Anne Wilson Joseph W. Gruber Matteo Iacoviello Deputy Director Associate Director Assistant Director Christopher J. Erceg Charles P. Thomas Paul R. Wood Senior Associate Director Associate Director Assistant Director Shaghil Ahmed James A. Dahl John H. Rogers Associate Director Deputy Associate Director Senior Adviser David H. Bowman Sally M. Davies Associate Director Deputy Associate Director Division of Financial Stability Andreas W. Lehnert John W. Schindler Skander J. Van den Heuvel Director Associate Director Assistant Director Michael T. Kiley Luca Guerrieri Jennifer E. Roush Deputy Director Deputy Associate Director Adviser William F. Bassett Andrew M. Cohen Associate Director Assistant Director Division of Monetary Affairs Heinrich T. Laubach Stephen A. Meyer Margaret G. DeBoer Director Deputy Director Associate Director James A. Clouse Trevor A. Reeve Mary T. Hoffman Deputy Director Deputy Director Associate Director Rochelle M. Edge Gretchen C. Weinbach Jane E. Ihrig Deputy Director Senior Associate Director Associate Director

Federal Reserve System Organization 421 J. David Lopez-Salido Jason J. Wu Robert J. Tetlow Associate Director Assistant Director Senior Adviser Matthew M. Luecke Antulio Bomfim Egon Zakrajsek Associate Director Senior Adviser Senior Adviser Min Wei Brian F. Madigan Joyce K. Zickler Deputy Associate Director Senior Adviser Senior Adviser Christopher J. Gust Ellen E. Meade Don H. Kim Assistant Director Senior Adviser Adviser Elizabeth C. Klee Edward M. Nelson Assistant Director Senior Adviser Division of Research and Statistics David W. Wilcox Stacey Tevlin John E. Sabelhaus Director Associate Director Assistant Director Jeffrey C. Campione Timothy A. Mullen Shane M. Sherlund Deputy Director Deputy Associate Director Assistant Director Daniel M. Covitz Steven A. Sharpe Lillian Shewmaker Deputy Director Deputy Associate Director Assistant Director William L. Wascher III Stephanie R. Aaronson Paul A. Smith Deputy Director Assistant Director Assistant Director Eric M. Engen Burcu Duygan-Bump S. Wayne Passmore Senior Associate Director Assistant Director Senior Adviser Joshua H. Gallin John A. Figura Senior Associate Director Assistant Director Robin A. Prager Senior Adviser Diana Hancock Glenn R. Follette Senior Associate Director Assistant Director Jeremy Rudd David E. Lebow Erik A. Heitfield Senior Adviser Senior Associate Director Assistant Director Eric C. Engstrom Michael G. Palumbo Patrick E. McCabe Adviser Senior Associate Director Assistant Director John M. Roberts Elizabeth K. Kiser Norman J. Morin Adviser Associate Director Assistant Director John J. Stevens Karen M. Pence Associate Director Assistant Director Division of Supervision and Regulation Michael S. Gibson Arthur W. Lindo Sean D. Campbell Director Senior Associate Director Associate Director Jennifer Burns Steven P. Merriett Nida Davis Deputy Director Senior Associate Director Associate Director Maryann F. Hunter Richard Ragan Christopher Finger Deputy Director Senior Associate Director Associate Director Mary L. Aiken Todd A. Vermilyea Jeffery W. Gunther Senior Associate Director Senior Associate Director Associate Director Barbara J. Bouchard Kevin M. Bertsch Anna L. Hewko Senior Associate Director Associate Director Associate Director

422 104th Annual Report | 2017 Michael J. Hsu Thomas Odegard Vaishali Sack Associate Director Deputy Associate Director Assistant Director John Kolb Catherine A. Piche Steven M. Spurry Associate Director Deputy Associate Director Assistant Director Richard A. Naylor II Laurie Priest Catherine Ann Tilford Associate Director Deputy Associate Director Assistant Director Lisa H. Ryu Suzanne L. Williams Joanne Wakim Associate Director Deputy Associate Director Assistant Director and Chief Michael D. Solomon Karen Caplan Accountant Associate Director Assistant Director Donna Webb Thomas R. Sullivan Keith Coughlin Assistant Director Associate Director Assistant Director Norah M. Barger John Beebe James Ray Diggs Senior Adviser Deputy Associate Director Assistant Director Robert Ashman Constance Horsley Constance M. Horsley Adviser Deputy Associate Director Assistant Director Fang Du Ryan P. Lordos Kathleen W. Johnson Adviser Deputy Associate Director Assistant Director David K. Lynch Keith A. Ligon Ann McKeehan Deputy Associate Director Assistant Director Adviser Molly E. Mahar Susan E. Motyka William F. Treacy Deputy Associate Director Assistant Director Adviser 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 Minh-Duc T. Le Senior Associate Director Associate Director Assistant Director Division of Reserve Bank Operations and Payment Systems Matthew J. Eichner Lawrence E. Mize Travis D. Nesmith Director Associate Director Assistant Director Jeffrey C. Marquardt Jennifer K. Chang Mark J. Olechowski Deputy Director Deputy Associate Director Assistant Director Marta E. Chaffee Jennifer A. Lucier Rebecca L. Royer Senior Associate Director Deputy Associate Director Assistant Director Gregory L. Evans David C. Mills Jeffrey D. Walker Senior Associate Director Deputy Associate Director Assistant Director Susan V. Foley Stuart E. Sperry Senior Associate Director Deputy Associate Director Michael J. Lambert Timothy W. Maas Associate Director Assistant Director

Federal Reserve System Organization 423 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 Ricardo Aguilera Christine M. Fields Karen L. Vassallo Director and Chief Financial Associate Director Deputy Associate Director Officer Jeffrey R. Peirce Andrew Leonard Stephen J. Bernard Deputy Associate Director Senior Adviser Deputy Director Management Division Michell C. Clark Tara Tinsley-Pelitere Timothy E. Markey Director Associate Director Assistant Director Winona Varnon Reginald V. Roach Jeffrey A. Martin Deputy Director Deputy Associate Director Assistant Director Steven A. Miranda Keith F. Bates Stephen E. Pearson Deputy Director Assistant Director Assistant Director Tameika L. Pope Patricia Ann Buckingham Katherine A. Perez Senior Associate Director Assistant Director Assistant Director Marie S. Savoy Curtis B. Eldridge Daniela S. Wegmann Senior Associate Director Assistant Director and Chief Assistant Director Curtis B. Eldridge Catherine A. Jack Associate Director and Chief Assistant Director Division of Information Technology Sharon L. Mowry William Dennison Eric C. Turner Director Deputy Associate Director Assistant Director Lisa M. Bell Marietta Murphy Virginia M. Wall Deputy Director Deputy Associate Director Assistant Director Raymond Romero Theresa C. Palya Edgar Wang Deputy Director Deputy Associate Director Assistant Director Kofi A. Sapong Charles B. Young II Ivan K. Wun Deputy Director Deputy Associate Director Assistant Director Glenn S. Eskow Can Xuan Nguyen Tillena G. Clark Associate Director Assistant Director Adviser Sheryl Lynn Warren Deborah Prespare Associate Director Assistant Director Rajasekhar R. Yelisetty Jonathan F. Shrier Associate Director Assistant Director

424 104th Annual Report | 2017 Office of Inspector General Mark Bialek Alberto Rivera-Fournier Gerald L. Maye Inspector General Associate Inspector General Assistant Inspector General James A. Ogden Melissa M. Heist Deputy Inspector General Associate Inspector General Jacqueline M. Becker Peter J. Sheridan Associate Inspector General Assistant Inspector General

Federal Reserve System Organization 425 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 2017, 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 Jerome H. Powell Chair, Board of Governors Member, Board of Governors Member, Board of Governors (through October 13, 2017) William C. Dudley Randal K. Quarles Vice Chairman, President, Federal Patrick Harker Member, Board of Governors (as Reserve Bank of New York President, Federal Reserve Bank of October 13, 2017) of Philadelphia Lael Brainard Daniel K. Tarullo Robert S. Kaplan Member, Board of Governors Member, Board of Governors President, Federal Reserve Bank (through April 5, 2017) Charles L. Evans of Dallas President, Federal Reserve Bank Neel Kashkari of Chicago President, Federal Reserve Bank of Minneapolis Alternate Members Raphael W. Bostic Loretta J. Mester John C. Williams President, Federal Reserve Bank President, Federal Reserve Bank President, Federal Reserve Bank of Atlanta (as of June 5, 2017) of Cleveland of San Francisco Marie Gooding Mark L. Mullinix First Vice President, Federal First Vice President, Federal Reserve Bank of Atlanta (through Reserve Bank of Richmond (as June 4, 2017) of April 24, 2017) Jeffrey M. Lacker Michael Strine President, Federal Reserve Bank First Vice President, Federal of Atlanta (through April 4, Reserve Bank of New York 2017) Officers Brian F. Madigan Michelle A. Smith Richard M. Ashton Secretary (through November 25, Assistant Secretary Assistant General Counsel 2017) Scott G. Alvarez Steven B. Kamin James A. Clouse General Counsel (through Economist Secretary (as of November 26, August 19, 2017) Heinrich T. Laubach 2017) Mark E. Van Der Weide Economist Matthew M. Luecke General Counsel (as of August 20, David W. Wilcox Deputy Secretary 2017) Economist David W. Skidmore Michael Held Assistant Secretary Deputy General Counsel

426 104th Annual Report | 2017 James A. Clouse Evan F. Koenig Beth Anne Wilson Associate Economist (through Associate Economist Associate Economist November 25, 2017) Jonathan P. McCarthy Simon Potter Thomas A. Connors Associate Economist Manager, System Open Market Associate Economist Account Daniel G. Sullivan Michael Dotsey Associate Economist Lorie K. Logan Associate Economist Deputy Manager, System Open William Wascher Eric M. Engen Market Account Associate Economist Associate Economist

Federal Reserve System Organization 427 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 2017, the council met on February 9–10, May 11–12, September 7–8, and November 29–30. The council met with the Board on February 10, May 12, September 8, and November 30, 2017. Members District 1 District 6 District 10 Bruce Van Saun William H. Rogers, Jr. Leslie R. Andersen Chairman and Chief Executive Chairman and Chief Executive President and Chief Executive Officer, Citizens Financial Group, Officer, SunTrust Banks, Inc., Officer, Bank of Bennington, Inc., Stamford, CT Atlanta, GA Bennington, NE District 2 District 7 District 11 Michael L. Corbat Frederick H. Waddell Ralph W. Babb Jr. Chief Executive Officer, Chairman and Chief Executive Chairman and Chief Executive Citigroup, New York, NY Officer, Northern Trust Officer, Comerica Inc. and Corporation and The Northern Comerica Bank, Dallas, TX District 3 Trust Company, Chicago, IL Mark A. Turner District 12 President and Chief Executive District 8 Robert G. Sarver Officer, WSFS Bank, Ronald J. Kruszewski Chairman and CEO, Western Wilmington, DE Chairman and Chief Executive Alliance Bancorporation, Officer, Stifel Financial Corp., St. Phoenix, AZ District 4 Louis, MO Beth Mooney Chairman and Chief Executive District 9 Officer, KeyCorp, Cleveland, OH Kenneth J. Karels President and Chief Executive District 5 Officer, Great Western Bank, Brian T. Moynihan Sioux Falls, SD Chairman and Chief Executive Officer, Bank of America, Charlotte, NC Officers Ralph W. Babb, Jr. Michael L. Corbat Herb Taylor President Vice President Secretary

428 104th Annual Report | 2017 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 2017, the council met on April 14 and November 17. Members District 1 District 5 District 9 Gilda M. Nogueira Robert A. DeAlmeida Lora Benrud President and Chief Executive President and Chief Executive Chief Executive Officer, Officer, East Cambridge Savings Officer, Hamilton Bank, WESTconsin Credit Union Bank, Cambridge, MA Baltimore, MD Menomonie, WI District 2 District 6 District 10 Tyrone E. Muse Alvin J. Cowans Kyle Heckman President and Chief Executive President and Chief Executive President and Chairman of the Officer, Visions Federal Credit Officer, McCoy Federal Credit Board, Flatirons Bank, Union, Endicott, NY Union, Orlando, FL Boulder, CO District 3 District 7 District 11 Christopher D. Maher Jeffrey Plagge S. Boyce Brown President and Chief Executive President and Chief Executive Chairman, President and Chief Officer, OceanFirst Financial Officer, Northwest Financial Executive Officer, Extraco Corporation and OceanFirst Corp., Arnolds Park, IA Corporation, Waco, TX Bank, Toms River, NJ District 8 District 12 District 4 Elizabeth G. McCoy Janet Garufis Thomas J. Fraser President and Chief Executive President and Chief Executive President and Chief Executive Officer, Planters Bank, Officer, Montecito Bank & Trust, Officer, First Federal Lakewood, Hopkinsville, KY Santa Barbara, CA Lakewood, OH Officers Janet A. Garufis Gilda M. Nogueira President Vice President

Federal Reserve System Organization 429 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 in November 2015, and meets with the Board twice each year. In 2017, the council met with the Board on May 26 and November 3. Members Roberto Barragan Ben Mangan Sue Taoka Principal, Aquaria Funding Executive Director and Lecturer, Executive Vice President, Craft3, Solutions, Los Angeles, CA Haas School of Business, U.C. Seattle, WA Berkeley, Center for Social Sector Angela Glover Blackwell Mary Tingerthal Leadership, Berkeley, CA Founder and Chief Executive Commissioner, Minnesota Officer, PolicyLink, Oakland, CA Rodrick Miller Housing Finance Agency, Founder & CEO, Ascendant St. Paul, MN Barrett Burns Global, Detroit, MI President and CEO, VantageScore Raul Vazquez Noel Poyo Solutions LLC, Stamford, CT Chief Executive Officer, Oportun, Executive Director, National Redwood City, CA Vanessa Calderon-Rosado Association for Latino CEO, IBA (Inquilinos Boricuas Catherine Wilson Community Asset Builders, en Accion), Boston, MA Professor, University of San Antonio, TX Nebraska–Lincoln College of Patrick Dujakovich Gerry Roll Law, Lincoln, NE President, Greater Kansas City Executive Director, Foundation AFL-CIO, Kansas City, MO for Appalachian Kentucky, Andrea Levere Chavies, KY President, Prosperity Now, Arden Shank Washington, DC President and Chief Executive Officer, Neighborhood Housing Services of South Florida, Miami, FL Officer Raul Vazquez Roberto Barragan Chair Vice Chair

430 104th Annual Report | 2017 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 Professor, Boston College Professor, Stanford University Gregory Duffee Jennie Bai Professor, John Hopkins Assistant Professor, Georgetown University University M. Suresh Sundaresan Robert Stine Professor, Columbia University Professor, University of (through September 2017) Pennsylvania

Federal Reserve System Organization 431 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 Michael E. Tucker, 2017 Kathleen E. Walsh, 2017 Gary L. Gottlieb, MD, 2017 President and Chief Executive President and Chief Executive Chief Executive Officer, Partners Officer, Greenfield Co-operative Officer, Boston Medical Center, In Health, Boston, MA Bank, Greenfield, MA Boston, MA Phillip L. Clay, 2018 Peter L. Judkins, 2018 Roger S. Berkowitz, 2018 Professor – Department of Urban President and Chief Executive President and Chief Executive Studies & Planning, Officer, Franklin Savings Bank, Officer, Legal Sea Foods, LLC, Massachusetts Institute of Farmington, ME Boston, MA Technology (MIT), Joseph L. Hooley, 2019 Niraj Shah, 2019 Cambridge, MA Chairman and Chief Executive Chief Executive Officer, Christina Hull Paxson, 2019 Officer, State Street Corporation, Co-founder, and Co-Chairman, President, Brown University, Boston, MA Wayfair, Boston, MA Providence, RI

432 104th Annual Report | 2017 District 2–New York Class A Class B Class C Paul P. Mello, 2017 Terry J. Lundgren, 2017 Emily K. Rafferty, 2017 President and Chief Executive Executive Chairman and President Emerita, The Officer, Solvay Bank, Solvay, NY Chairman of the Board, Metropolitan Museum of Art, Macy’s, Inc., 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, Founder and Executive Director, York, NY New York, NY Freelancers Union, Brooklyn, NY Gerald H. Lipkin, 2019 David M. Cote, 2019 Denise Scott, 2019 Chairman and Chief Executive Executive Chairman, Honeywell Executive Vice President, Local Officer, Valley National Bank, International Inc., Morris Initiatives Support Corporation, Wayne, NJ Plains, NJ New York, NY District 3–Philadelphia Class A Class B Class C Jon S. Evans, 2017 Patricia Hasson, 2017 Michael J. Angelakis, 2017 President and Chief Executive President and Executive Director, Chairman and Chief Executive Officer, Atlantic Community Clarifi, Philadelphia, PA Officer, Atairos, Bryn Mawr, PA Bankers Bank, Camp Hill, PA Carol J. Johnson, 2018 Phoebe Haddon, 2018 Retired President and Chief David R. Hunsicker, 2018 Chancellor, Rutgers Operating Officer, AlliedBarton Chairman, President, and Chief University–Camden, Camden, Security Services, Executive Officer, New Tripoli NJ Conshohocken, PA Bank, New Tripoli, PA Brian M. McNeill, 2019 Edward J. Graham, 2019 William S. Aichele, 2019 President and Chief Executive Retired Chairman and Chief Chairman, Univest Corporation Officer, TouchPoint, Inc., Executive Officer, South Jersey of Pennsylvania, Souderton, PA Concordville, PA Industries, Folsom, NJ

Federal Reserve System Organization 433 District 4–Cleveland Class A Cincinnati Branch Pittsburgh Branch Todd A. Mason, 2017 Appointed by the Federal Reserve Bank Appointed by the Federal Reserve Bank President and Chief Executive Amos L. Otis, 2017 Audrey Dunning, 2017 Officer, First National Bank of Founder, President, and Chief Senior Vice President, CGI Pandora, Pandora, OH Executive Officer, SoBran, Inc., Group, Pittsburgh, PA Claude E. Davis, 2018 Dayton, OH Robert I. Glimcher, 2017 Chief Executive Officer, First Alfonso Cornejo, 2017 President, Glimcher Group Inc., Financial Bancorp, President, Hispanic Chamber Pittsburgh, PA Cincinnati, OH Cincinnati USA, Cincinnati, OH Stephen D. Steinour, 2019 Dmitri D. Shiry, 2018 Chairman, President and Chief Tucker Ballinger, 2018 Managing Partner, Deloitte LLP, Executive Officer, Huntington President and Chief Executive Pittsburgh, PA Bancshares Incorporated, Officer, Forcht Bank, N.A., Shelley L. Fant, 2019 Columbus, OH Lexington, KY President and Chief Executive Darin C. Hall, 2019 Officer, FCG Solutions, Inc., Class B Executive Vice President, Greater Pittsburgh, PA Charles H. Brown, 2017 Cincinnati Redevelopment Appointed by the Board of Governors Executive Adviser and Chair Authority, Cincinnati, OH Compliance Advisory Council, Charles L. Hammel III, 2017 Toyota Motor North America, Appointed by the Board of Governors President, PITT OHIO, Erlanger, KY Deborah A. Feldman, 2017 Pittsburgh, PA President and Chief Executive George S. Barrett, 2018 Stefani Pashman, 2018 Officer, Dayton Children’s Chairman and Chief Executive Chief Executive Officer, Hospital, Dayton, OH Officer, Cardinal Health, Inc., Allegheny Conference on Dublin, OH Christopher C. Cole, 2018 Community Development, Founder, Intelligrated Inc., Pittsburgh, PA David Megenhardt, 2019 Mason, OH Executive Director, United Labor Doris Carson Williams, 2019 Agency, Cleveland, OH Valarie L. Sheppard, 2019 President and Chief Executive Senior Vice President, Officer, African American Class C Comptroller, and Treasurer, The Chamber of Commerce of John P. Surma, 2017 Procter & Gamble Company, Western Pennsylvania, Retired Chairman and Chief Cincinnati, OH Pittsburgh, PA Executive Officer, United States Steel Corporation, Pittsburgh, PA Dawne S. Hickton, 2018 President and Founding Partner, Cumberland Highstreet Partners, Sewickley, PA Dwight Eric Smith, 2019 President and Chief Executive Officer, Sophisticated Systems, Inc., Columbus, OH

434 104th Annual Report | 2017 District 5–Richmond Class A Baltimore Branch Charlotte Branch Robert R. Hill, Jr., 2017 Appointed by the Federal Reserve Bank Appointed by the Federal Reserve Bank Chief Executive Officer, South Austin J. Slater, Jr., 2017 R. Glenn Sherrill, Jr., 2017 State Corporation, Columbia, SC President and Chief Executive President and Chief Operating Susan K. Still, 2018 Officer, Southern Maryland Officer, SteelFab Inc., President and Chief Executive Electric Cooperative, Inc., Charlotte, NC Officer, HomeTown Bankshares Hughesville, MD Jerry L. Ocheltree, 2018 Corporation and HomeTown Christopher J. Estes, 2018 President and Chief Executive Bank, Roanoke, VA Consultant on Business Officer, Carolina Trust Bank, William A. Loving, Jr., 2019 Development and Advocacy, Lincolnton, NC President and Chief Executive Rebuilding Together of Officer, Pendleton Community Michael D. Garcia, 2018 Washington, DC, Bank, Franklin, WV President, Pulp and Paper Washington, DC Division, Domtar Corporation, Class B Laura L. Gamble, 2018 Ft. Mill, SC Regional President Greater Thomas C. Nelson, 2017 Michael C. Crapps, 2019 Maryland, PNC, Baltimore, MD Chairman, President and Chief President and Chief Executive Executive Officer, National Mary Ann Scully, 2019 Officer, First Community Bank, Gypsum Company, Chairman, President, and Chief Lexington, SC Charlotte, NC Executive Officer, Howard Appointed by the Board of Governors Bancorp, Ellicott City, MD Catherine A. Meloy, 2018 Claude Z. Demby, 2017 President and Chief Executive Appointed by the Board of Governors Vice President and General Officer, Goodwill of Greater Susan J. Ganz, 2017 Manager, Cree, Inc., Washington/Goodwill Excel Chief Executive Officer, Lion Durham, NC Center, Washington, DC Brothers Company, Inc., Laura Y. Clark, 2018 Ángel Cabrera, 2019 Owings Mills, MD Chief Impact Officer, United Way President, George Mason Kenneth R. Banks, 2018 of Central Carolinas, University, Fairfax, VA President and Chief Executive Charlotte, NC Officer, Banks Contracting Class C Michelle A. Mapp, 2019 Company, Pikesville, MD Kathy J. Warden, 2017 Chief Executive Officer, South Corporate Vice President and Wayne A. I. Frederick, MD, 2019 Carolina Community Loan Fund, President, Mission Systems, President, Howard University, Charleston SC Northrop Grumman Washington, DC Corporation, Linthicum, MD Calvin G. Butler, Jr., 2018 Chief Executive Officer, Baltimore Gas and Electric Company, Baltimore, MD Margaret G. Lewis, 2019 Retired President, HCA Capital Division, Richmond, VA

Federal Reserve System Organization 435 District 6–Atlanta Class A Birmingham Branch Dawn Lockhart, 2018 Director of Strategic Partnerships, O.B. Grayson Hall, Jr., 2017 Appointed by the Federal Reserve Bank Office of the Mayor, City of Chairman and Chief Executive Herschell L. Hamilton, 2017 Jacksonville, Jacksonville, FL Officer, Regions Financial Chief Strategic Officer, BLOC Corporation, Birmingham, AL Global Group, Birmingham, AL Paul G. Boynton, 2019 Gerard R. Host, 2018 Chairman, President, and Chief David M. Benck, 2018 President and Chief Executive Executive Officer, Rayonier Vice President and General Officer, Trustmark Corporation, Advanced Materials, Inc., Counsel, Hibbett Sports, Jackson, MS Jacksonville, FL Birmingham, AL Robert W. Dumas, 2019 Appointed by the Board of Governors Michael Case, 2018 President and Chief Executive David L. Brown, 2017 Retired President and Chief Officer, AuburnBank, Chairman, Chief Executive Executive Officer, The Westervelt Auburn, AL Officer, and President, Web.com, Company, Tuscaloosa, AL Jacksonville, FL Class B Vacancy, 2019 Harold Mills, 2018 Jonathan T.M. Reckford, 2017 Appointed by the Board of Governors Owner, Wired Technologies Chief Executive Officer, Habitat Nancy C. Goedecke, 2017 Group, Windermere, FL for Humanity International, Chairman and Chief Executive Atlanta, GA Cynthia A. Bioteau, 2019 Officer, Mayer Electric Supply Chief Executive Officer and Elizabeth A. Smith, 2018 Company, Inc., Birmingham, AL College President, Florida State Chairman and Chief Executive Pamela B. Hudson, MD, 2018 College at Jacksonville, Officer, Bloomin’ Brands, Inc., Chief Executive Officer, Jacksonville, FL Tampa, FL Crestwood Medical Center, Mary A. Laschinger, 2019 Huntsville, AL Miami Branch Chairman and Chief Executive Officer, Veritiv Corporation, Brandon W. Bishop, 2019 Appointed by the Federal Reserve Bank Atlanta, GA International Representative, Carol C. Lang, 2017 Southern Region, International President, HealthLink Class C Union of Operating Engineers, Enterprises, Inc., Miami Birmingham, AL Myron A. Gray, 2017 Beach, FL President, U.S. Operations, Jacksonville Branch Victoria E. Villalba, 2017 United Parcel Service, President and Chief Executive Atlanta, GA Appointed by the Federal Reserve Bank Officer, Victoria & Associates Thomas A. Fanning, 2018 Dana S. Kilborne, 2017 Career Services, Inc., Miami, FL Chairman, President, and Chief Co-President and Chief Executive Officer, Southern Commercial Officer, Sunshine Company, Atlanta, GA Bank, Orlando, FL Mike J. Jackson, 2019 John Hirabayashi, 2018 Chairman, Chief Executive President and Chief Executive Officer, and President, Officer, Community First Credit AutoNation, Inc., Fort Union of Florida, Lauderdale, FL Jacksonville, FL

436 104th Annual Report | 2017 Millar Wilson, 2018 Beth R. Chase, 2018 Suzanne T. Mestayer, 2018 Vice Chairman and Chief Chief Executive Officer, Managing Principal, ThirtyNorth Executive Officer, Mercantil c3/Consulting, Nashville, TN Investments, LLC, New Bank, N.A., Orleans, LA Claire W. Tucker, 2019 Coral Gables, FL President and Chief Executive Elizabeth A. Ardoin, 2019 Eduardo Arriola, 2019 Officer, CapStar Financial Senior Executive Vice President – Chairman and Chief Executive Holdings, Inc., Nashville, TN Director of Communications, Officer, Apollo Bank, Miami, FL IBERIABANK, Lafayette, LA Appointed by the Board of Governors Appointed by the Board of Governors Scott McWilliams, 2017 Appointed by the Board of Governors Keith T. Koenig, 2017 Executive Vice President of Fred T. Stimpson III, 2017 President, City Furniture, Strategic Development, GEODIS, President, U.S. South Operations, Tamarac, FL Brentwood, TN Canfor Scotch Gulf, Mobile, AL Michael A. Wynn, 2018 Richard D. Holder, 2018 Art E. Favre, 2018 Board Chairman and President, President and Chief Executive President and Chief Executive Sunshine Ace Hardware, Bonita Officer, NN, Inc., Johnson Officer, Performance Contractors, Springs, FL City, TN Inc., Baton Rouge, LA Ana M. Menendez, 2019 Matthew S. Bourlakas, 2019 G. Janelle Frost, 2019 Chief Financial Officer and Treasurer, Watsco, Inc., Coconut President and Chief Executive President and Chief Executive Grove, FL Officer, Goodwill Industries of Officer, AMERISAFE, Inc., Middle Tennessee, Inc., DeRidder, LA Nashville, TN Nashville Branch Appointed by the Federal Reserve Bank New Orleans Branch W. Michael Madden, 2017 Appointed by the Federal Reserve Bank President and Chief Executive Officer, Kirkland’s, Inc., Lampkin Butts, 2017 Brentwood, TN President and Chief Operating Officer, Sanderson Farms, Inc., Kent M. Adams, 2018 Laurel, MS Former President and Chief Executive Officer, Caterpillar Phillip R. May, 2018 Financial Services Corp., Former President and Chief Executive Vice President, Caterpillar, Inc., Officer, Entergy Louisiana, LLC, Nashville, TN Jefferson, LA District 7–Chicago Class A Class B Class C David W. Nelms, 2017 Nelda J. Connors, 2017 E. Scott Santi, 2017 Chairman and Chief Executive Chairwoman and Chief Executive Chairman and Chief Executive Officer, Discover Financial Officer, Pine Grove Holdings, Officer, Illinois Tool Works Inc., Services, Riverwoods, IL LLC, Chicago, IL Glenview, IL William M. Farrow, 2018 Susan M. Collins, 2018 Greg Brown, 2018 President and Chief Executive Joan and Sanford Weill Dean of Chairman and Chief Executive Officer, Urban Partnership Bank, Public Policy, University of Officer, Motorola Solutions, Inc., Chicago, IL Michigan, Ann Arbor, MI Chicago, IL Abram A. Tubbs, 2019 Jorge Ramirez, 2019 Anne R. Pramaggiore, 2019 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

Federal Reserve System Organization 437 Detroit Branch Sandy K. Baruah, 2017 Appointed by the Board of Governors President and Chief Executive Michael L. Seneski, 2017 Appointed by the Federal Reserve Bank Officer, Detroit Regional Former Director of Mobility, Ford Sandra E. Pierce, 2017 Chamber, Detroit, MI Motor Company, Dearborn, MI Chairman & Senior Executive Vice Rip Rapson, 2018 Wright L. Lassiter III, 2018 President, Private Client Group President and Chief Executive President and Chief Executive and Regional Banking Director, Officer, The Kresge Foundation, Officer, Henry Ford Health Huntington Michigan, Troy, MI System, Detroit, MI Southfield, MI Joseph B. Anderson, Jr., 2019 Linda P. Hubbard, 2019 Chairman and Chief Executive President and Chief Operating Officer, TAG Holdings, LLC, Officer, Carhartt, Inc., Wixom, MI Dearborn, MI District 8–St. Louis Class A Class B Class C Susan S. Stephenson, 2017 John N. Roberts III, 2017 James M. McKelvey, Jr., 2017 Co-Chairman and President, President and Chief Executive Founder and Chief Executive Independent Bank, Memphis, TN Officer, J.B. Hunt Transport Officer, Invisibly, St. Louis, MO Services, Inc., Lowell, AR Patricia L. Clarke, 2018 Suzanne Sitherwood, 2018 President and Chief Executive Daniel J. Ludeman, 2018 President and Chief Executive Officer, First National Bank of President and Chief Executive Officer, Spire Inc., St. Louis, MO Raymond, Raymond, IL Officer, Concordance Academy of Kathleen M. Mazzarella, 2019 Leadership, St. Louis, MO D. Bryan Jordan, 2019 Chairman, President and Chief Chairman, President, and Chief Alice K. Houston, 2019 Executive Officer, Graybar Executive Officer, First Horizon Chief Executive Officer, HJI Electric Company, Inc., St. National Corporation, Supply Chain Solutions, Louis, MO Memphis, TN Louisville, KY

438 104th Annual Report | 2017 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 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 Bank and Trust Company, Mary K. Moseley, 2017 Memphis, TN Karama Neal, 2017 Partner Owner, Al J. Schneider Michael E. Cary, 2017 Chief Operating Officer, Southern Company, Louisville, KY President and Chief Executive Bancorp Community Partners, Ben Reno-Weber, 2018 Officer, Carroll Bank and Trust, Little Rock, AR Co-Founder, MobileServe, Huntingdon, TN Vacancy, 2018 Louisville, KY Julianne Goodwin, 2018 R. Andrew Clyde, 2019 Patrick J. Glotzbach, 2019 Owner, Express Employment President and Chief Executive Chief Executive Officer, The New Professionals, Tupelo, MS Officer, Murphy USA Inc., El Washington State Bank, J. Brice Fletcher, 2019 Dorado, AR Charlestown, IN Chairman, First National Bank of Eastern Arkansas, Forrest Appointed by the Board of Governors Appointed by the Board of Governors City, AR Ray C. Dillon, 2017 Sadiqa N. Reynolds, 2017 Former President and Chief President and Chief Executive Appointed by the Board of Governors Executive Officer, Deltic Timber Officer, Louisville Urban League, David T. Cochran, Jr., 2017 Corporation, El Dorado, AR Louisville, KY Partner, CoCo Planting Co., Avon, MS Robert Martinez, 2018 Susan E. Parsons, 2018 Owner, Rancho La Esperanza, Chief Financial Officer, Secretary, Eric D. Robertson, 2018 DeQueen, AR and Treasurer, Koch Enterprises, President, Community LIFT Inc., Evansville, IN Corporation, Memphis, TN Millie A. Ward, 2019 Carolyn Chism Hardy, 2019 President, Stone Ward, Little Randy W. Schumaker, 2019 President and Chief Executive Rock, AR Former President and Chief Officer, Chism Hardy Management Officer, Logan Investments, LLC, Aluminum, Inc., Russellville, KY Collierville, TN District 9–Minneapolis Class A Class B Class C Thomas W. Armstrong, 2017 Kathleen Neset, 2017 MayKao Y. Hang, 2017 President, First National Bank of President, Neset Consulting President and Chief Executive Park Falls, Park Falls, WI Service, Tioga, ND Officer, Amherst H. Wilder Foundation, St. Paul, MN Christine E. Hamilton, 2018 Randy L. Newman, 2018 Managing Partner, Christiansen Harry D. Melander, 2018 Chairman and Chief Executive Land and Cattle, Ltd., President, Minnesota Building Officer, Alerus Financial, NA & Kimball, SD and Construction Trades Council, Alerus Financial Corp., St. Paul, MN Grand Forks, ND Srilata Zaheer, 2019 Dean, Carlson School of Kendall J. Powell, 2019 Catherine T. Kelly, 2019 Management, University of Chairman, General Mills, Inc., Regional President, PNC Bank, Minnesota, Minneapolis, MN Minneapolis, MN Minneapolis-St. Paul, Minneapolis, MN

Federal Reserve System Organization 439 Helena Branch Norma Nickerson, 2019 Marsha Goetting, 2018 Director, Institute for Tourism & Professor and Extension Family Appointed by the Federal Reserve Bank Recreation Research, University Economics Specialist, Montana Duane Kurokawa, 2017 of Montana, Missoula, MT State University, Bozeman, MT President, Western Bank of Wolf Appointed by the Board of Governors Point, Wolf Point, MT Sarah Walsh, 2017 Barbara Stiffarm, 2018 Chief Operating Officer, Executive Director, Opportunity PayneWest Insurance, Link, Inc., Havre, MT Helena, MT District 10–Kansas City Class A Steve Maestas, 2018 Taryn Edwards, 2019 Chief Executive Officer, Maestas Senior Vice President, Saunders Paul J. Thompson, 2017 Development Group, Construction, Englewood, CO Chairman, President, and Chief Albuquerque, NM Executive Officer, Country Club Oklahoma City Branch Bank, Kansas City, MO Rose M. Washington, 2019 Executive Director, Tulsa Appointed by the Federal Reserve Bank Mark A. Zaback, 2018 Economic Development President and Chief Executive Tina Patel, 2017 Corporation, Tulsa, OK Officer, Jonah Bank of Wyoming, Chief Financial Officer, Promise Casper, WY Hotels, Inc., Tulsa, OK Denver Branch Gregory Hohl, 2019 Michael C. Coffman, 2018 Appointed by the Federal Reserve Bank Chairman and President, Wahoo Retired President and Chief Ashley J. Burt, 2017 State Bank, Wahoo, NE Executive Officer, Panhandle Oil President and Chief Executive and Gas, Inc., Oklahoma Officer, The Gunnison Bank and Class B City, OK Trust Company, Gunnison, CO Lilly Marks, 2017 Edmond Johnson, 2018 Susan Chapman Plumb, 2019 Vice President for Health Affairs, President and Owner, Premier Chief Operating Officer and University of Colorado and Manufacturing Inc., Counsel, Bank of Cherokee Anschutz Medical Campus, Frederick, CO County, Tahlequah, OK Aurora, CO Katharine W. Winograd, 2018 Vacancy, 2019 Brent A. Stewart, Sr., 2018 President, Central New Mexico Appointed by the Board of Governors President and Chief Executive Community College, Katrina Washington, 2017 Officer, United Way of Greater Albuquerque, NM Owner, Stratos Realty Group Kansas City, Kansas City, MO Jeffrey C. Wallace, 2019 LLC, Oklahoma City, OK Douglas J. Stussi, 2019 Chief Executive Officer, Wyoming Executive Vice President - Chief Bank & Trust, Cheyenne, WY Peter B. Delaney, 2018 Retired Chairman and Chief Financial Officer, Love’s Travel Appointed by the Board of Governors Executive Officer, OGE Energy Stops & Country Stores, Gary DeFrange, 2017 Corp., Oklahoma City, OK Oklahoma City, OK Retired President and Chief Clint D. Abernathy, 2019 Operating Officer, Winter Park Class C President, Abernathy Farms, Inc., Resort, Winter Park, CO Altus, OK James C. Farrell, 2017 Richard L. Lewis, 2018 President and Chief Executive President and Chief Executive Officer, Farmers National Officer, RTL Networks, Inc., Company, Omaha, NE Denver, CO

440 104th Annual Report | 2017 Omaha Branch Thomas J. Henning, 2018 Kimberly A. Russel, 2018 President and Chief Executive President and Chief Executive Appointed by the Federal Reserve Bank Officer, Cash-Wa Distributing Officer, Bryan Health, Jeff W. Krejci, 2017 Co., Kearney, NE Lincoln, NE President and Director, Annette Hamilton, 2019 John F. Bourne, 2019 Cornerstone Bank, York, NE Chief Operating Officer, Retired International Brian D. Esch, 2018 Ho-Chunk, Inc. Winnebago, NE Representative, International President and Chief Executive Brotherhood of Electrical Appointed by the Board of Governors Officer, McCook National Bank, Workers, Omaha, NE Eric L. Butler, 2017 McCook, NE Retired Executive Vice President and Chief Administrative Officer, Union Pacific Railroad, Omaha, NE District 11–Dallas Class A Class C Appointed by the Board of Governors Christopher C. Doyle, 2017 Ellen Ochoa, 2017 Richard D. Folger, 2017 President and Chief Executive Government Executive, Managing General Partner, Officer, Texas First Bank, Houston, TX Colbridge Partners Ltd., Texas City, TX Greg L. Armstrong, 2018 Midland, TX Allan James Rasmussen, 2018 Chairman and Chief Executive Renard U. Johnson, 2018 President and Chief Executive Officer, Plains All American President and Chief Executive Officer, HomeTown Bank, N.A., Pipeline L.P., Houston, TX Officer, Management & Galveston, TX Matthew K. Rose, 2019 Engineering Technologies Executive Chairman, BNSF International, Inc. (METI, Inc.), J. Russell Shannon, 2019 Railway Company, Fort El Paso, TX President and Chief Executive Officer, National Bank of Worth, TX Julio Chiu, 2019 Andrews, Andrews, TX Founder and Chief Executive El Paso Branch Officer, SEISA Medical, Inc., El Class B Appointed by the Federal Reserve Bank Paso, TX Jerry Pacheco, 2017 Jorge A. Bermudez, 2017 Houston Branch President, Global Perspectives President and Chief Executive Integrated, Inc., Officer, The Byebrook Group, Appointed by the Federal Reserve Bank Santa Teresa, NM LLC, College Station, TX Albert Chao, 2017 Teresa O. Molina, 2017 President and Chief Executive Ann B. Stern, 2018 President, First New Mexico Officer, Westlake Chemical Corp., President and Chief Executive Bank, Deming, NM Houston, TX Officer, Houston Endowment Inc., Houston, TX Mary E. Kipp, 2018 R.A. Walker, 2017 Chief Executive Officer, El Paso Chairman, President, and Chief Curtis V. Anastasio, 2019 Electric Company, El Paso, TX Executive Officer, Anadarko Chairman, GasLog Partners L.P., Paul L. Foster, 2019 Petroleum Corporation, San Antonio, TX Director, Andeavor, El Paso, TX Houston, TX

Federal Reserve System Organization 441 David Zalman, 2018 San Antonio Branch Appointed by the Board of Governors Chairman and Chief Executive Manoj Saxena, 2017 Appointed by the Federal Reserve Bank Officer, Prosperity Bancshares, Managing Director, The Janie Barrera, 2017 Houston, TX Entrepreneurs’ Fund, President and Chief Executive Darryl L. Wilson, 2019 Officer, LiftFund, Austin, TX Vice President and Chief San Antonio, TX Jesús Garza, 2018 Commercial Officer, General Robert L. Lozano, 2017 Retired President and Chief Electric Company, Houston, TX President/Owner, Lynn Lee Inc., Executive Officer, Seton Appointed by the Board of Governors Dairy Queen, Pharr, TX Healthcare Family, Austin, TX Vacancy, 2017 Alfred B. Jones, 2018 James Conrad Weaver, 2019 President and Director, American Chief Executive Officer, Vacancy, 2018 Bank Holding Corp., McCombs Partners, San Marcus A. Watts, 2019 Corpus Christi, TX Antonio, TX President, The Friedkin Group, Charles E. Amato, 2019 Houston, TX Chairman and Co-founder, Southwest Business Corp. (SWBC), San Antonio, TX District 12–San Francisco Class A Sanford L. Michelman, 2019 Ilyanne Morden Kichaven, 2018 Chairman, Michelman & Executive Director, Los Angeles, Megan F. Clubb, 2017 Robinson, LLP, Los Angeles, CA SAG-AFTRA, Los Angeles, CA Chairman of the Board, Baker Boyer National Bank, Luis Faura, 2018 Class C Walla Walla, WA President and Chief Executive Peter S. Ho, 2018 Rosemary Turner, 2017 Officer, C&F Foods, Inc., City of Chairman, President, and Chief President, UPS North California Industry, CA District, Oakland, CA Executive Officer, Bank of Steven W. Streit, 2019 Hawaii and Bank of Hawaii Alexander R. Mehran, 2018 Founder, President, and Chief Corporation, Honolulu, HI Chairman and Chief Executive Executive Officer, Green Dot Steven R. Gardner, 2019 Officer, Sunset Development Bank and Green Dot President and Chief Executive Company, San Ramon, CA Corporation, Pasadena, CA Officer, Pacific Premier Bank, Barry M. Meyer, 2019 Appointed by the Board of Governors Irvine, CA Retired Chairman and Chief Robert H. Gleason, 2017 Executive Officer, Warner Bros. Class B Entertainment, Chairman and President and Chief Executive Officer, Evans Hotels, Richard A. Galanti, 2017 Founder, North Ten Mile San Diego, CA Associates, Los Angeles, CA Executive Vice President and Chief Financial Officer, Costco Anita V. Pramoda, 2018 Wholesale Corporation, Los Angeles Branch Chief Executive Officer, Owned Issaquah, WA Outcomes, Las Vegas, NV Appointed by the Federal Reserve Bank Steven E. Bochner, 2018 Peggy Tsiang Cherng, 2017 James A. Hughes, 2019 Partner, Wilson, Sonsini, Co-Chair and Co-Chief Executive Former Director and Chief Goodrich, & Rosati, P.C., Officer, Panda Restaurant Group, Executive Officer, First Solar, Palo Alto, CA Inc., Rosemead, CA Inc., Tempe, AZ

442 104th Annual Report | 2017 Portland Branch Salt Lake City Branch Seattle Branch Appointed by the Federal Reserve Bank Appointed by the Federal Reserve Bank Appointed by the Federal Reserve Bank Robert C. Hale, 2017 Josh England, 2017 Craig Dawson, 2017 Chief Executive Officer, Hale President, C.R. England, Inc., President and Chief Executive Companies, Hermiston, OR Salt Lake City, UT Officer, Retail Lockbox, Inc., Seattle, WA Charles A. Wilhoite, 2017 Park Price, 2017 Carol K. Nelson, 2017 Managing Director, Willamette Chief Executive Officer Emeritus Pacific Region Sales Executive and Management Associates, and Chairman, Bank of Idaho, Seattle Market President, Portland, OR Idaho Falls, ID KeyBank, Seattle, WA S. Randolph Compton, 2018 Susan D. Mooney Johnson, 2018 Cheryl B. Fambles, 2018 Chief Executive Officer and President Emeritus, Futura Chief Executive Officer, Pacific Co-Chair of the Board, Pioneer Industries, Clearfield, UT Mountain Workforce Trust Bank, N.A., Salem, OR Peter R. Metcalf, 2019 Development Council, Steven J. Zika, 2019 Founder, Brand Advocate, and Tumwater, WA Chief Executive Officer, Hampton Chief Executive Officer Emeritus, Andrew Wolff, 2019 Lumber, Portland, OR Black Diamond, Inc., Salt Lake Chief Financial Officer, City, UT International and Channel Appointed by the Board of Governors Development, Starbucks Coffee Tamara L. Lundgren, 2017 Appointed by the Board of Governors Company, Seattle, WA President and Chief Executive Patricia R. Richards, 2017 Officer, Schnitzer Steel Industries, President and Chief Executive Appointed by the Board of Governors Inc., Portland, OR Officer, SelectHealth, Inc., Scott L. Morris, 2017 Murray, UT Chairman, President and Chief Román D. Hernández, 2018 Executive Officer, Avista Partner, K&L Gates, Arthur F. Oppenheimer, 2018 Corporation, Spokane, WA Portland, OR Chairman and Chief Executive Officer, Oppenheimer Companies, West Mathison, 2018 Anne C. Kubisch, 2019 Inc., Boise, ID President, Stemilt Growers, LLC, President and Chief Executive Wenatchee, WA Officer, The Ford Family David B. Smith, 2019 Sophie Minich, 2019 Foundation, Roseburg, OR Chief Operating Officer, Larry H. President and Chief Executive Miller Management Corporation, Officer, Cook Inlet Region, Inc., Sandy, UT Anchorage, AK

Federal Reserve System Organization 443 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 Gary L. Gottlieb, MD, Chair Gary Wagner, Senior Regional Lesley McClure, Vice President Phillip L. Clay, Deputy Chair Officer and Regional Executive Eric S. Rosengren, President and Chief Executive Officer Pittsburgh Jacksonville Kenneth C. Montgomery, First Doris Carson Williams, Chair David L. Brown, Chair Vice President and Chief Operating Officer Guhan Venkatu, Senior Regional Christopher L. Oakley, Vice Officer President and Regional Executive New York Miami Richmond Sara Horowitz, Chair Michael A. Wynn, Chair Margaret G. Lewis, Chair Denise Scott, Deputy Chair Karen Gilmore, Vice President and Kathy J. Warden, Deputy Chair William C. Dudley, President Regional Executive Mark L. Mullinix, Interim Michael Strine, First Vice President and Chief Executive President Nashville Officer Scott McWilliams, Chair Additional office at East Rutherford, NJ Baltimore Lee C. Jones, Vice President and Philadelphia Susan J. Ganz, Chair Regional Executive Michael J. Angelakis, Chair David E. Beck, Senior Vice New Orleans Brian M. McNeill, Deputy Chair President and Baltimore Regional Art E. Favre, Chair Executive Patrick T. Harker, President Adrienne C. Slack, Vice President James D. Narron, First Vice Charlotte and Regional Executive President Laura Y. Clark, Chair Chicago Matthew A. Martin, Senior Vice Cleveland President and Charlotte Regional Anne R. Pramaggiore, Chair John P. Surma, Chair Executive E. Scott Santi, Deputy Chair Dawne S. Hickton, Deputy Chair Charles L. Evans, President Loretta J. Mester, President Atlanta Ellen J. Bromagen, First Vice Gregory Stefani, First Vice Thomas A. Fanning, Chair President and Chief Operating President Officer Mike J. Jackson, Deputy Chair Raphael W. Bostic, President Additional office at Des Moines, IA Marie C. Gooding, First Vice President

444 104th Annual Report | 2017 Detroit Helena Houston Michael L. Seneski, Chair Marsha Goetting, Chair Marcus A. Watts, Chair Major Robinson, Assistant Vice Robert Wiley, Senior Vice Daron D. Peschel, Officer in President and Branch Executive President, Chief Information Charge Officer, District Operations and Detroit Branch Manager Kansas City San Antonio Rose M. Washington, Chair Manoj Saxena, Chair St. Louis Steve Maestas, Deputy Chair Blake Hastings, Officer in Charge Kathleen M. Mazzarella, Chair Esther L. George, President Suzanne Sitherwood, Deputy Kelly J. Dubbert, First Vice San Francisco Chair President Alexander R. Mehran, Chair James Bullard, President Denver Barry M. Meyer, Deputy Chair David A. Sapenaro, First Vice Richard L. Lewis, Chair John C. Williams, President President and Chief Operating Alison Felix, Vice President and Officer Mark A. Gould, First Vice Branch Executive President Little Rock Oklahoma City Additional office at Phoenix, AZ Ray C. Dillon, Chair Peter B. Delaney, Chair Los Angeles Robert A. Hopkins, Senior Vice Chad R. Wilkerson, Vice President President and Regional Executive James A. Hughes, Chair and Branch Executive Roger W. Replogle, Regional Louisville Omaha Executive Susan E. Parsons, Chair John F. Bourne, Chair Portland Nikki R. Jackson, Senior Vice Nathan Kauffman, Assistant Vice President and Regional Executive President and Branch Executive Tamara L. Lundgren, Chair Lynn Jorgensen, Regional Memphis Dallas Executive David T. Cochran, Jr., Chair Matthew K. Rose, Chair Salt Lake City Douglas G. Scarboro, Senior Vice Greg L. Armstrong, Deputy Chair President and Regional Executive Patricia R. Richards, Chair Robert S. Kaplan, President Robin A. Rockwood, Regional Meredith N. Black, First Vice Minneapolis President Executive MayKao Y. Hang, Chair Seattle El Paso Kendall J. Powell, Deputy Chair Richard D. Folger, Chair Scott L. Morris, Chair Neel T. Kashkari, President Roberto A. Coronado, Officer in Darlene Wilczynski, Regional Ron Feldman, First Vice President Charge Executive

Federal Reserve System Organization 445 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 23–24 and November 7–8, 2017. The conference’s executive committee members for 2017 are listed below.1 Conference of Chairs Rose M. Washington, Vice Chair, Margaret G. Lewis, Member, Executive Committee—2017 Federal Reserve Bank of Federal Reserve Bank of Kansas City Richmond Thomas A. Fanning, Chair, Federal Reserve Bank of Atlanta Conference of Presidents The presidents of the Federal Reserve Banks are organized into the Conference of Presidents, which meets periodically to identify, define, and deliberate issues of strategic significance to the Federal Reserve System; to consider matters of common interest; and to consult with and advise the Board of Governors. The chief executive officer of each Reserve Bank was originally labeled governor and did not receive the title of president until the passage of the Banking Act of 1935. Consequently, when the Conference was first established in 1914 it was known as the Conference of Governors. Conference officers for 2017 are listed below. Conference of Presidents—2017 Eric S. Rosengren, Chair, Federal Reserve Bank of Boston Charles L. Evans, Vice Chair, Federal Reserve Bank of Chicago Joel W. Werkema, Secretary, Federal Reserve Bank of Boston Keri Trolson, Assistant Secretary, Federal Reserve Bank of Chicago 1 On November 8, 2017, the Conference of Chairs elected Rose M. Washington, chair of the Federal Reserve Bank of Kansas City, as chair of the conference’s executive committee for 2018. The conference also elected Kendall J. Powell, deputy chair of the Federal Reserve Bank of Minneapolis for 2017 as vice chair, and Dawne S. Hickton, deputy chair of the Federal Reserve Bank of Cleveland for 2017, as the executive committee’s third member.

446 104th Annual Report | 2017 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 2017 are listed below.2 Conference of First Vice Terri Bialowas, Secretary, Presidents—2017 Federal Reserve Bank of Cleveland Gregory Stefani, Chair, Federal Reserve Bank of Erika Hamilton, Assistant Cleveland Secretary, Kelly J. Dubbert, Vice Chair, Federal Reserve Bank of Federal Reserve Bank of Kansas City 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 Hamilton, Federal Reserve Bank of Kansas City, as assistant secretary.

447 15 Index A Automobile lending, 88 Availability of Funds and Collection of Checks Abbreviations, 353 (Regulation CC), 115 ABS. See Asset-backed securities Accounting and Auditing Working Group, 62 Accounting Experts Group, 62 B Accounting policies, 61–62, 335–338, 358–371, 370–371 Balance sheets Accounting Standards Codification, 106 Board of Governors, 331 Accumulated other comprehensive income, 107, 347, 398 Federal Reserve Banks, 19, 22, 31 ACH. See Automated clearinghouse services Normalization program, 6, 31 Acquisitions, 80–81 Priced services, 104–108 Advanced foreign economies (AFEs), 16–17, 29–30, 175 Bank Exams Tailored to Risk, 45 Advisory Councils Bank for International Settlements, 64 Community Advisory Council, 429 Bank holding companies (BHCs) Community Depository Institutions Advisory Council, Banks affiliated with, 301 428 Complaints against, 84–85 Federal Advisory Council, 427 Developments in 2017, 43 Model Validation Council, 430 High-quality liquid assets, 39 AFEs. See Advanced foreign economies International activities, 52 Agriculture, U.S. Department of, 89 Number of, 47 AIG. See American International Group, Inc. Regulation of, 69–70 American International Group, Inc. (AIG), 41–42 Regulatory assessment fees, 72 AML. See Anti-money laundering Regulatory capital ratios, 38 Anti-money laundering (AML) Regulatory reports, 65–67 Bank Secrecy Act/Anti-Money Laundering Examination RFI/C(D) system, 50 Manual, 53, 64 Stress testing, 41 Compliance risk management, 63–64 Supervision of, 47–50, 58 Compliance with regulatory requirements, 53 Supervisory assessment fees, 72 Examinations, 53 Surveillance and off-site monitoring, 56 Experts Group, 64 Bank Holding Companies and Change in Bank Control International coordination, 64 (Regulation Y), 109, 115 Appropriate monetary policy, 156, 158, 159, 165, 199, 201, Bank Holding Company Act, 69–70 202, 208, 240, 242, 243, 249, 279, 282, 288 Bank Holding Company Performance Reports (BHCPRs), ASAP. See Automated Standard Application for Payments 56 Asia, Economy of, 16, 30 Bank Management System, 98 Asset-backed securities, 39 Bank Merger Act, 69, 70 Assets and liabilities Bank of Canada, Monetary policies, 29 Commercial banks, 310 Bank of England, Monetary policies, 29–30 Federal Reserve Banks, 20, 106–107, 302, 303, 304–307, Bank of Japan, Monetary policies, 29 312–315 Bank Secrecy Act (BSA), 53, 63–64 Valuations, 35–37 Bank Secrecy Act/Anti-Money Laundering Examination Audits Manual, 53, 64 Board of Governors, 328–351 Bank Service Company Act, 51 Federal Reserve Banks, 352–399 Banking organizations, U.S. See also Bank holding by Government Accountability Office, 401 companies; Commercial banks by Office of the Inspector General, 400 Affiliation with bank holding companies, 301 Automated clearinghouse (ACH) services, 91, 92 Enhanced prudential standards, 57–58 Automated Standard Application for Payments (ASAP), 98 Financial stability monitoring, 33–42

448 104th Annual Report | 2017 International activities, 52, 71 High-yield, 38 Overseas investments by, 71 Municipal, 15–16, 29 Regulation of, 69–72 Borrowing. See Debt Supervision of, 39–40, 45–69 Branches. See Federal Reserve Banks Transitional capital requirements, 59 Brazil, Economy of, 17, 30 Banking Supervision Learning Center, 83 Brent spot, 10 Basel Committee on Banking Supervision (BCBS) BSA. See Bank Secrecy Act Accounting Experts Group, 62 Budgets, Federal Reserve System International coordination on supervisory policies, Board of Governors, 406–410 59–60 Budget performance, 2017, 404, 406–407, 410, 411–413, Post-crisis reforms, 44–45, 46 415 Supervisory policies, 57 Capital budgets, 2018, 405, 408–410, 414 Website, 59 Currency, 414–417 Basel III post-crisis reforms, 44–45, 46 Federal Reserve Banks, 410–411 BCBS. See Basel Committee on Banking Supervision Office of Inspector General, 410 Benefits Equalization Plan, 340–341 Operating expense budget, 2017-18, 403, 407–408, 411–412 BEP. See Bureau of Engraving and Printing Overview, 403 BHCs. See Bank holding companies Trends in expenses and employment, 404–405 BHCPRs. See Bank Holding Company Performance Burden reduction initiatives, 59, 66–67 Reports Bureau of Consumer Financial Protection, 349 Bipartisan Budget Act, 13 Bureau of Engraving and Printing (BEP), 94, 95–96, Board of Governors 414–416 Accounting policies, 335–338 Business sector, 13, 25, 26–27, 40–41 Accumulated other comprehensive income, 347 Advisory councils, 427–430 Audits, 328–351 C Balance sheets, 331 Budget, 406–410 Call Reports, 56, 66–67 Bureau of Consumer Financial Protection Canada, Economy of, 17, 29 responsibilities, 349 Capital Cash flows, 333 Countercyclical capital buffer, 40 Commitments and contingencies, 337, 350 Federal Reserve Banks, 356, 367 Currency costs, 350 Regulatory capital rules, 65 Divisions, 419–424 Transitional capital requirements, 59 FFIEC responsibilities, 349 Capital Adequacy of Bank Holding Companies, Savings Financial statements, 328–351 and Loan Holding Companies, and State Member Government Performance and Results Act requirements, Banks (Regulation Q), 109–110, 114–115 111 Capital leases, 339 H.2 statistical release, 72 Capital planning, 45, 49, 109 Interest on reserves, 117–118 Cash flows, Board of Governors, 333 Leases, 337, 339 Cash-management services, 98 Litigation, 295–296, 350 CC Rating System. See Uniform Interagency Consumer Members, 419 Compliance Rating System Officers, 419–424 CCAR. See Comprehensive Capital Analysis and Review Operations and services, 334–335 CCIWG. See Cybersecurity and Critical Infrastructure Operations statements, 332 Working Group Policy actions, 113–119 CCyB. See Countercyclical capital buffer Postemployment benefits, 346 CDFI. See Community Development Financial Postretirement benefits, 3450346 Institutions Property, equipment, and software, 336, 338–339 CECL. See Current expected credit losses Retirement benefits, 340–345 CEP. See Currency Education Program Rules of organization, 115–116 CFPB. See Consumer Financial Protection Bureau Structure, 334 CFTC. See Commodities Futures Trading Commission Transactions with Reserve Banks, 348 Change in Bank Control Act, 69, 70 Website, 1, 5, 72, 111 Check-collection service, 92 Bonds Chicago Board Options Exchange, 73 Corporate, 13, 15, 22–23, 27, 28, 36, 37 China, Economy of, 30 Government, 17 C&I loans. See Commercial and industrial loans

Index 449 Civil money penalties, 116, 336 Enforcement activities, 78–79 Coin. See Currency and coin operations Examinations, 75–85 Collection Information Repository, 98 Examiner training, 82–84 Collection services, Federal Reserve Banks, 98 Flood insurance, 79 Commercial and industrial (C&I) loans, 13, 27 Mergers and acquisitions, 80–81 Commercial automated clearinghouse services, 92 Mortgage servicing and foreclosure, 76–78 Commercial banks Supervision, 75–85 Assets and liabilities, 310 Consumer complaints, 84–85 Credit availability, 16, 28–29 Consumer compliance examiner training, 82–83 Commercial check-collection service, 92 Consumer Compliance Outlook, 83 Commercial mortgage-backed securities, 147 Consumer Credit Protection Act, 78 Commercial real estate (CRE) loans, 36, 38, 58 Consumer Financial Protection Bureau (CFPB), 76, 78, 81, Committee of Sponsoring Organizations of the Treadway 86, 87, 113 Commission (COSO), 100 Consumer Leasing (Regulation M), 86, 87 Committee on Payments and Market Infrastructures Consumer Leasing Act, 87 (CPMI), 57, 60–61 Consumer Price Index for Urban Wage Earners and Commodities Futures Trading Commission (CFTC), 52, 64 Clerical Workers (CPI-W), 86–87 Community Advisory Council, 429 Consumer prices, 175 Community affairs. See Consumer and community affairs Consumer spending, 12, 25–26 Community Depository Institutions Advisory Council, 428 Continuing professional development, 69 Community development, 89–90 Core inflation, 5, 21, 24, 30, 156–157, 163, 199–200, 206, Community Development Financial Institutions (CDFI), 240–241, 247, 279–280, 286 57 Corporate bonds, 13, 15, 22–23, 27, 28, 36, 37 Community Development Research Conference, 90 Correspondent Banking, 64 Community Leaders Forum, 89–90 COSO. See Committee of Sponsoring Organizations of the Community Reinvestment (Regulation BB), 115 Treadway Commission Community Reinvestment Act (CRA) Cost recovery, 91–92, 108 Annual adjustment to asset-size threshold, 86–87 Countercyclical capital buffer, 40 Conforming regulations to HMDA regulation, 85–86 Counterfeit deterrence, 417 Consumer protection regulations, 79–80 Counterterrorism activities, 63–64 Mergers and acquisitions in relation to, 80–81 Covenant lite loans, 36, 37 Minority-owned depository institutions regulations, 57 CPD. See Continuing professional development Complaint referrals, 85 CPI-W. See Consumer Price Index for Urban Wage Complaints, consumer, 84–85 Earners and Clerical Workers Compliance Outlook Live, 79 CPMI. See Committee on Payments and Market Compliance risk management, 63–64 Infrastructures Comprehensive Capital Analysis and Review (CCAR), 40, CRA. See Community Reinvestment Act 44, 45, 49, 58, 109, 115 CRE. See Commercial real estate loans Comptroller of the Currency, Office of the (OCC), 50, 76, Credit 114 Availability, 16, 26, 28–29 Condition statements, Federal Reserve Banks, 312–315, Nonfinancial sector, 37 316, 354 Primary, 118 Conferences, Federal Reserve Banks Officers, 445–446 Seasonal, 118 Congress. See Monetary policy reports to Congress; Secondary, 118 specific legislation by name Securities credit, 54 Consolidated supervision, 47–53 Credit by Banks and Persons Other Than Brokers or Consolidation, 359–360 Dealers for the Purpose of Purchasing or Carrying Consumer and community affairs Margin Stock (Regulation U), 72, 73, 311 Community development, 89–90 Credit by Brokers and Dealers (Regulation T), 72, 73, 311 Community Reinvestment Act requirements, 79–80 Credit-risk management, 62–63 Consumer complaints and inquiries, 84–85 Critical Infrastructure, 55 Consumer laws and regulations, 85–87 Currency and coin operations, 93–96, 302–309, 350, 361, Consumer research, 87–88 414–417 Coordination with Consumer Financial Protection Currency Education Program (CEP), 95, 417 Bureau, 81 Currency reader program, 416 Coordination with federal banking agencies, 81–82 Current expected credit losses (CECL), 61–62, 65 Emerging-issues analysis, 88–89 Cybersecurity, 54, 55

450 104th Annual Report | 2017 Cybersecurity and Critical Infrastructure Working Group Economic Growth and Regulatory Paperwork Reduction (CCIWG), 54, 55 Act, 59 Economy, U.S. Activity review, 132–133, 145–146, 174–176, 188–189, D 217–218, 228–230, 257–259, 269–270 Daylight overdrafts, 99 Business sector, 13, 25, 26–27, 40–41 DCCA. See Division of Consumer and Community Financial markets, 16–17, 133–135, 143–144, 146–147, Affairs 173–174, 176–177, 186–187, 189–191, 216–220, Debt 227–228, 230–231, 257, 259–261, 268–269, 270–271 Household, 12, 21, 38 Forecast uncertainty, 171, 214, 293 Nonfinancial sector, 37 Government sector, 13–14, 27 Deferred credit items, 367 Household sector, 12, 21, 25, 37, 87 Delegation of authority, 115–116 Housing sector, 12–13, 26 Deposit Insurance Fund, 70 Interest rates, 6, 18, 22, 23, 117, 300 Depository institutions Labor market, 5, 6–9, 12, 21, 23–24, 31, 88 Discount rates in 2017, 118–119 Outlook and projections, 135–139, 148–151, 159, Loans to, 371–372 177–183, 191–195, 202, 220–223, 231–235, 239, 243, Reserve requirements, 300 261–264, 271–275, 278–282 Reserves of, 302–305, 366 Policy actions, 18–20, 30–32, 139–141, 151–154, Depository services, 96–99 181–183, 195–197, 223–225, 236–238, 264–266, Deposits 275–277 Federal Reserve Banks, 299, 308–309, 366–367 Prices, 5, 10, 29, 63 Designated nonbank financial companies, 52 Recent economic and financial developments, 7–17, DFAST. See Dodd-Frank Act stress tests 23–30 Direct Voucher System, 98 State and local governments, 14, 27 Disaster-related appraisals, 82, 117 Uncertainty and risk, 58–59, 131, 166–168, 170–171, Discount rates, 118–119 208–214, 249–255, 288–293 Disposable personal income (DPI), 12, 26 Edge Act, 46, 52, 53, 76 Division of Consumer and Community Affairs (DCCA), Educational attainment, 22 53, 57, 75–76, 87 EGRPRA. See Economic Growth and Regulatory Dodd-Frank Wall Street Reform and Consumer Paperwork Reduction Act Protection Act Electronic Payment Solution Center, 97 Consumer compliance regulations, 87 Emerging market economies (EMEs), 17, 29–30, 175 Consumer compliance risk, 76 EMEs. See Emerging market economies Consumer credit and lease transactions, 86 Employment, 5, 7–8, 23–24. See also Labor markets; Designated nonbank financial companies regulations, 52 Unemployment Enhanced prudential standards implementation, 43, Energy prices, 10, 24, 29, 63 57–58 Energy service companies, 63 Financial market utilities regulations, 51 Enforcement actions Financial Stability Oversight Council activities, 41–42 Consumer and community affairs, 78–79 Incentive compensation regulation, 64–65 Federal Reserve System, 55–56, 72–73 Partnership for Progress program, 56 Enhanced prudential standards, 43–44, 57–58 Regulatory assessment fees, 72 Enhanced Prudential Standards (Regulation YY), 109–110, Regulatory developments in 2017, 109–111 114–115 Savings and loan holding companies authority, 50, 71 Equal Credit Opportunity Act (ECOA), 78 Stress testing, 40, 44, 49, 62 Equipment and software (E&S), 336, 338–339, 365, 386 Supervisory assessment fees, 72 Equity markets and prices, 15, 17, 28 Volcker rule, 65, 116 Equity risk premium, 35 DOJ. See Justice, U.S. Department of E&S. See Equipment and software Dollar exchange rate, 17, 29 European Central Bank (ECB), Monetary policies, 29 DPI. See Disposable personal income Examinations and inspections Anti-money laundering, 53 Consumer and community affairs, 75–85 E Critical infrastructure, 55 EagleCash, 97 Cybersecurity, 53, 55 ECB. See European Central Bank Examiner training, 82–84 ECOA. See Equal Credit Opportunity Act Federal Reserve Banks, 45, 46–47, 100–101

Index 451 Fiduciary activities, 54 Federal government, Fiscal policy, 13 Information technology activities, 53–54 Federal Home Loan Mortgage Association, Federal Securities credit lenders, 54 Reserve Bank services to, 99 Securities dealers and brokers, government and Federal National Mortgage Association, Federal Reserve municipal, 54 Bank services to, 99 Specialized, 53–55 Federal Open Market Committee (FOMC). See also Open Transfer agents, 54 market operations Updating FFIEC procedures, 81 Annual organizational matters, 123–131 Examiner Commissioning Program, 68–69 Appropriate monetary policy, 156, 158, 159, 165, 199, Examiner Transaction Testing Guidelines, 81 201, 202, 208, 240, 242, 243, 249, 279, 282, 288 Expenses. See Income and expenses Domestic open market operations, 124–126 Exploration and production companies, 63 Economic outlook, 135–139, 148–151, 159, 177–183, Exports, 13–14, 27 191–195, 202, 220–223, 231–235, 239, 243, 261–264, Extensions of Credit by Federal Reserve Banks 271–275, 278–282 (Regulation A), 113 Economic review, 132–133, 145–146, 174–176, 188–189, EZPay, 97 217–218, 228–230, 257–259, 269–270 Financial market developments, 131–132, 143–144, 173–174, 186–187, 216–217, 227–228, 257, 259–261, F 268–269 Fair Housing Act, 78 Financial review, 133–135, 146–147, 176–177, 189–191, Fair lending enforcement, 78–79 218–220, 230–231, 270–271 Fair value measurement, 369, 384–385, 392–393 Forecast uncertainty, 171, 214, 255, 293 Farm Credit Administration (FCA), 54, 73 Foreign currency operations and directives, 126–130 FASB. See Financial Accounting Standards Board Inflation outlook, 159, 202, 243, 282 Faster Payments Task Force, 94 Meeting minutes, 121–293 FATF. See Financial Action Task Force Members, 425 FBIIC. See Financial and Banking Information Monetary policy strategies and communications, 18–20, Infrastructure Committee 30–32, 130–131 FCA. See Farm Credit Administration Notation votes, 141, 154, 184, 197, 225, 238, 266, 277 FDIC. See Federal Deposit Insurance Corporation Officers, 425–426 Federal Advisory Council, 427 Policy actions, 18–20, 30–32, 139–141, 151–154, Federal agency securities and obligations 181–183, 195–197, 223–225, 236–238, 264–266, Federal Reserve Bank holdings, 299, 302–303, 306–307, 275–277 361–362 Policy Normalization Principles and Plans, 31 Open market transactions, 297 Summary of Economic Projections, 6, 22, 131, 155–171, Federal Civil Penalties Inflation Adjustment Act 198–214, 239–255, 278–293 Improvements Act, 116 Uncertainty and risks, 58–59, 131, 166–168, 170–171, Federal Deposit Insurance Corporation (FDIC), 80, 114 208–214, 249–255, 288–293 Federal Financial Institutions Examination Council Federal Register, 80, 227 (FFIEC) Federal Reserve Act, 52, 69, 70–71 Bank Secrecy Act/Anti-Money Laundering Examination Federal Reserve Bank of Atlanta, 314–315, 317–319, Manual, 53, 64 435–436 Board responsibilities, 349 Federal Reserve Bank of Boston, 312–313, 317–319, 431 BSA/AML working group, 64 Federal Reserve Bank of Chicago, 314–315, 317–319, Call reports, 56, 66–67 436–437 Coordination with other banking agencies, 81–82 Federal Reserve Bank of Cleveland, 312–313, 317–319, 433 Cybersecurity, 54, 55 Federal Reserve Bank of Dallas, 314–315, 317–319, Examiner Transaction Testing Guidelines, 81 440–441 Information Technology Examination Handbook, 54 Federal Reserve Bank of Kansas City, 314–315, 317–319, Regulatory reports, 66 439–440 Task Force on Information Sharing, 68 Federal Reserve Bank of Minneapolis, 314–315, 317–319, Task Force on Surveillance Systems, 56 438–439 Uniform Interagency Consumer Compliance Rating Federal Reserve Bank of New York, 102, 312–313, System, 82 317–319, 432 Website, 55 Federal Reserve Bank of Philadelphia, 312–313, 317–319, Federal funds rate, 14, 18–19, 27–28, 30, 31, 156, 158, 164, 432 170, 199, 201, 207, 213, 240, 242, 248, 254, 279, 281, Federal Reserve Bank of Richmond, 312–313, 317–319, 287, 292 434

452 104th Annual Report | 2017 Federal Reserve Bank of San Francisco, 314–315, 317–319, Restructuring charges, 369 441–442 Retail securities programs, 96 Federal Reserve Bank of St. Louis, 314–315, 317–319, Retirement plans, 387–393 437–438 Salaries of officers and employees, 324 Federal Reserve Banks Securities holdings, 102, 299, 302–303, 361–364 Accounting policies, 358–371 Services provided to other entities, 98–99 Assessments, 368 Structure, 357 Assets and liabilities, 20, 106 Surplus, 367–368 Audits, 352–399 System Open Market Account holdings and loans, Automated clearinghouse (ACH) services, 92 102–103, 372–381 Balance sheets, 19, 22, 31 Taxes, 369 Branches, 431–444 Thrift plans, 393–394 Budget, 403–417 Treasury securities services, 96, 368 Capital, 367 Wholesale securities programs, 96–97 Cash-management services, 98 Federal Reserve Consumer Help (FRCH), 84 Collection services, 98 Federal Reserve System. See also Board of Governors; Commercial check-collection service, 92 Federal Reserve Banks Commitments and contingencies, 386–387 Accounting policies, 61–62 Condition statements, 312–315, 316 Budget, 403–417 Consolidated variable interest entity, 365, 382–385 Community Development Research Conference, 90 Cost recovery, 91–92, 108 Compliance risk management, 63–64 Credit outstanding, 367 Compliance with regulatory requirements, 53 Currency and coin operations, 93–96 Consolidated supervision, 47–53 Deposits, 304, 308–309, 366–367 Credit-risk management, 62–64 Directors, 431–444 Developments in 2017, 43–45 Earnings remittances, 368 Employment, 404–405, 412 Employment, 404–405, 412 Enforcement actions, 55–56, 72–73 Equipment and software, 365, 386 Enhanced prudential standards, 57–58 Examinations and inspections, 46–47, 100–101 Examinations and inspections, 45, 46–47 Fair value, 369 Financial stability activities, 33–42 FedLine access to services, 99–100 Incentive compensation, 64–65 Fedwire Funds Service, 92–93 International activities, 52–53, 59–61 Fedwire Securities Service, 93 Maps, 2–3 Financial statements, 104–108 Overview, 1–2 Fiscal agency services, 96–99 Public notice of decisions, 72 Float, 93 Regulatory developments in 2017, 109–111 Government depository services, 96–99 Regulatory reports, 65–67 Income and expenses, 101–102, 108, 317–322, 368, Regulatory responsibilities, 40–41, 69–72 398–399 Safety and soundness responsibilities, 46–57 Information technology, 100 Specialized examinations, 53–55 Interest on reserves, 117–118 Staff development, 68–69 Interest rates on depository institutions loans, 300 Supervision responsibilities, 40–41, 45–69 Intraday credit, 99 Supervisory information technology, 67–68 Joint accounts, 117 Supervisory policy, 57–67 Loans and other credit extensions, 102–103, 361, Surveillance and off-site monitoring, 56 371–372 Training and technical assistance, 56–57 National Settlement Service, 92–93 Website, 55, 59, 63 Notes, 366 Federal Trade Commission Act, 78 Open market transactions, 297–298 FedLine, 99–100 Operating expenses, 107 FedPayments Improvement website, 94 Operations, volume of, 323 Fedwire Funds Service, 92–93 Operations and services, 357–358 Fedwire Securities Service, 93 Payment services, 97–98 FFIEC. See Federal Financial Institutions Examination Payment system, 94, 117 Council Postemployment benefits, 397 FHCs. See Financial holding companies Postretirement benefits, 394–397 Financial Accounting Standards Board (FASB), 61–62, 65, Premises, 103, 325, 365, 386 337–338 Priced services, 91–93, 104–108 Financial Action Task Force (FATF), 64

Index 453 Financial and Banking Information Infrastructure Global systemically important banking organizations Committee (FBIIC), 55 (G-SIBs), 39, 46, 58, 67, 109–110, 114 Financial Crimes Enforcement Network (FinCEN), 64 Gold stock, 302, 303, 306–307, 360–361 Financial holding companies (FHCs) Government Accountability Office, U.S. (GAO), 401 Regulation of, 69 Government bonds, 17 Supervision of, 50 Government depository services, 96–99 Financial Industry Regulatory Authority, 72–73 Government National Mortgage Association, Federal Financial Institutions Reform, Recovery, and Enforcement Reserve Bank services to, 99 Act, 62 Government Performance and Results Act (GPRA), 111 Financial market utilities (FMUs), 51–52 Government sector, 13–14, 27. See also Federal Financial markets, 16–17, 131–132, 133–135, 143–144, government; State and local governments 146–147, 173–174, 176–177, 186–187, 189–191, Government Securities Act, 54 216–220, 227–228, 230–231, 257, 259–261, 268–269, Government securities dealers and brokers, Federal Reserve 270–271 examination, 54 Financial Stability Board (FSB), 42, 55, 57, 60 Government-sponsored enterprises (GSEs), 102, 362–364 Financial Stability Oversight Council (FSOC), 41–42, 72 GPRA. See Government Performance and Results Act Financial statements Gramm-Leach Bliley Act, 50, 70 Board of Governors, 328–351 Gross domestic income, 11 Federal Reserve Banks, 104–108, 352–399 Gross domestic product, 5, 11, 13–14, 16, 21, 25, 27, 37, Financial technology, 95 132, 145, 148, 155–157, 159–160, 166, 169, 199–200, FinCEN. See Financial Crimes Enforcement Network 203, 209, 240–241, 244, 250, 279–280, 283, 289 Fiscal agency services, 96–99 GSEs. See Government-sponsored enterprises Float, Federal Reserve Banks, 93, 302, 303, 306–307 Floating Rate Note (FRN), 96 H Flood insurance, 79 FMUs. See Financial market utilities H.2 statistical release, 72 FOMC. See Federal Open Market Committee HCs. See Holding companies Food prices, 10 High-quality liquid assets (HQLA), 39 Food systems investments, 89 High-yield bonds, 38 Forecast uncertainty, 171, 214, 255, 293 HMDA. See Home Mortgage Disclosure Act Foreclosures, Prevention actions, 77 HOLA. See Home Owners’ Loan Act Foreign Assets Control, Office of (OFAC), 64 Holding companies (HCs), Regulatory reports, 66 Foreign Bank Supervision Enhancement Act, 71 Home Mortgage Disclosure Act (Regulation C), 80, 81, Foreign banks. See also specific banks by name 85–86, 87, 113–114 Supervision of, 52–53 Home Owners’ Loan Act (HOLA), 69, 71 U.S. activities, 52, 71, 298 Household sector, 12, 21, 25, 37, 87 Foreign currency operations Housing activity, 12–13, 26 Directives, 126–130 Housing and Urban Development, Department of (HUD), Liquidity swaps, 364 85 Foreign economies. See Advanced foreign economies; HQLA. See High-quality liquid assets (HQLA) Emerging market economies; International financial HUD. See Housing and Urban Development, markets; specific countries by name Department of FRBNY. See Federal Reserve Bank of New York Hurricane disaster appraisals, 82, 117 FRCH. See Federal Reserve Consumer Help Freedom of Information Act regulations, 116, 227 I FRN. See Floating Rate Note FSB. See Financial Stability Board IAIS. See International Association of Insurance FSOC. See Financial Stability Oversight Council Supervisors Futures prices, 10 Imports, 14, 24–25 Imputed costs, 107–108 Incentive compensation, 64–65 Income and expenses, Federal Reserve Banks, 101–102, G 107, 108, 317–322, 368, 398–399 G-SIBs. See Global systemically important banking Independent Foreclosure Review, 76, 77 organizations Inflation, 5, 7, 9–11, 16, 21, 24, 25, 29, 30, 156–157, 159, GAO. See Government Accountability Office, U.S. 163, 168, 199–200, 202, 205–206, 211, 240–241, 243, GDP. See Gross domestic product 246–247, 252, 279–280, 282, 285–286, 291 Gender wealth gap, 88 Information technology (IT) GLBA. See Gramm-Leach Bliley Act Examinations, 53–54

454 104th Annual Report | 2017 Federal Reserve Bank developments, 100 Leadership Conferences, 445–446 FFIEC Information Technology Examination Leases, 339 Handbook, 54 Leveraged loans, 37, 38, 63 Security practices, 67 Liabilities. See Assets and liabilities Supervisory activities, 67–68 LIBOR. See London interbank offered rate Information Technology Risk Examination program, 53 Liquidity coverage ratio (LCR), 46, 59 Inspections. See Examinations and inspections Liquidity Focus Report, 67 Inspector General, Office of (OIG), 400, 410, 424 Liquidity Monitoring Report, 45, 67 Institute of Internal Auditors, 100–101 Liquidity Risk Measurement Standards (Regulation WW), Insurance Core Principles, 61 109–110, 114–115 Insurance savings and loan holding companies (ISLHCs), Liquidity swap arrangements, 364, 379 50–51 Liquidity transformation, 39 Insured commercial banks. See Commercial banks LISCC. See Large Institution Supervision Coordinating Interagency Advisory on the Availability of Appraisers, 62 Committee Interagency Minority Depository Institutions, 57 Litigation involving Board of Governors Interest rates, 6, 18, 22, 23, 117, 300 Afnani, 295 International Association of Insurance Supervisors (IAIS), Bank of America, et al., 295, 296 57, 61, 62 Baylor, 295 International Banking Act, 69, 71–72 BBX Capital Corporation, 295 International financial markets, 16–17, 22, 29–30, 52 Center for Popular Democracy, 295 International Organization of Securities Commissions Community Financial Services Association of America, (IOSCO), 60 Ltd., 295 International training and technical assistance, 56 Crisman, 295 International Treasury Services, 97, 98 FDIC, 295 Intraday credit, 99 Haase, 296 InTREx. See Information Technology Risk Examination Handy, 295 program Hardy, 295 Investment-grade firms, 39 Johnson & Johnson, et al., 295 Invoice Processing Platform (IPP), 97–98 Loan Syndications and Trading Association, 295 IOSCO. See International Organization of Securities Mitchell, 295 Commissions Mullins, 295 IPP. See Invoice Processing Platform Richardson, 295 ISLHCs. See Insurance savings and loan holding Rodriguez, 295 companies WMI Liquidating Trust, 296 Issue and Cancellation of Federal Reserve Bank Capital Yellen, 295 Stock (Regulation I), 114 LMI consumers. See Low- and moderate-income IT. See Information technology consumers Loans. See also specific types of loans Covenant lite loans, 36, 37 J Federal Reserve Bank holdings, 302, 303, 306–307, Japan, Economy of, 29 312–315, 361, 371–372 Job losses. See Unemployment Leveraged loans, 37, 38, 63 Job Openings and Labor Turnover Survey, 8, 23 Student loans, 89 Joint accounts, 117 System Open Market Account, 102–103 Justice, U.S. Department of (DOJ) Local governments. See State and local governments Fair lending laws enforcement, 78 London interbank offered rate, 28 Low- and moderate-income (LMI) consumers, 80 K KPMG LLP, 100, 101, 328–330, 351, 352 M Macroprudential supervision, 34 L Maiden Lane LLC, 103 Labor markets, 5, 6–9, 12, 21, 23–24, 31, 88 Maps, Federal Reserve System, 2–3 Labor productivity, 9, 24 Margin requirements, 311 Large Institution Supervision Coordinating Committee MBSs. See Mortgage-backed securities (LISCC), 45, 47–48, 51 MDIs. See Minority depository institutions Latin America, Economy of, 17, 30 Membership of State Banking Institutions in the Federal LCR. See Liquidity coverage ratio Reserve System (Regulation H), 72, 79

Index 455 Memoranda of understanding (MOU), 56, 64 NCUA. See National Credit Union Administration Mergers and acquisitions, 80–81 Neighborhood Stabilization Program, 80, 85 Metals, 10 Net stable funding ratio, 46 Mexico, Economy of, 17, 30 NIC. See National Information Center MHC. See Mutual holding companies Nonbank financial companies, 52 Michigan Survey. See University of Michigan Surveys of Nonfinancial sector, 37–38 Consumers Minority depository institutions (MDIs), 56–57 O MMFs. See Money market funds Model Validation Council, 430 OCC. See Comptroller of the Currency, Office of the Monetary Control Act, 91 OFAC. See Foreign Assets Control, Office of Monetary policy Off-site monitoring, 56 Appropriate monetary policy, 156, 158, 159, 165, 199, OIG. See Inspector General, Office of 201, 202, 208, 240, 242, 243, 249, 279, 282, 288 Oil prices. See Energy prices Developments, 18–20, 30–32 ON RRP. See Overnight reverse repurchase agreements Long-run goals and strategy, 130–131 Open Market Desk, 19 Overview, 5–7, 21–22 Open market operations. See also Federal Open Market Monetary policy reports to Congress Committee February 2018, 5–20 Developments in 2017, 131–132, 143–144, 173–174, July 2017, 21–32 186–187, 216–217, 227–228, 257, 268–269 Money laundering prevention. See Anti-money laundering Volume of transactions, 297–298 Money market funds, 39 Operating expenses Mortgage-backed securities (MBSs), 15–16, 19, 22, 28, 31, Board of Governors, 407–408 38, 102, 147, 297, 299, 362–364 Federal Reserve Banks, 107, 323, 403, 407–408, 411–412 Mortgage rates, 6 Office of Inspector General, 410 Mortgage regulations Overdraft services, 99 Foreclosure prevention actions, 77 Overnight index swap, 28 Payment agreement status, 76–77 Overnight reverse repurchase agreements (ON RRP), Servicer efforts to address deficiencies, 77–78 19–20, 31–32, 144 MOU. See Memoranda of understanding Municipal bonds, 15–16, 29 P Municipal securities dealers and brokers, Federal Reserve examination, 54 Partnership for Progress (PFP), 56, 57 Municipal Securities Rulemaking Board, 54 Pay.gov, 98 Mutual holding companies (MHC), 71 Payment Agreement, 76–77 Payment system, 94, 117 Payment System Risk, 99 Payments services, Federal Reserve Banks, 97–98 N PCEs, Personal consumption expenditures NACHA. See National Automated Clearing House Penalties. See Civil money penalties Association Pension Enhancement Plan, 342–344 NAIC. See National Association of Insurance PEP. See Pension Enhancement Plan Commissioners Performance Report Information and Surveillance NASFAA. See National Association of Student Financial Monitoring (PRISM), 56 Aid Administrators Personal consumption expenditures (PCEs), 5, 9–10, 12, National Association of Insurance Commissioners 24, 25, 145–146, 148, 156–157, 162–163, 168, 175, (NAIC), 51 199–200, 205–206, 211, 240–241, 246–247, 252, National Association of Student Financial Aid 279–280, 285–286, 291 Administrators (NASFAA), 89 PFP. See Partnership for Progress National Automated Clearing House Association Policy actions (NACHA), 91 Board of Governors, 113–119 National Bankers Association (NBA), 57 Federal Open Market Committee, 18–20, 30–32, National Credit Union Administration (NCUA), 54, 62, 73 139–141, 151–154, 181–183, 195–197, 223–225, National Flood Insurance Act, 79 236–238, 264–266, 275–277 National Flood Mitigation Fund, 79 Policy Normalization Principles and Plans, 31 National Information Center (NIC), 56, 67–68 Post Payment System (PPS), 97, 98 National Settlement Service, 92–93 Postemployment benefits, 346, 397 Navy Cash, 97 Postretirement benefits, 345–346, 394–397 NBA. See National Bankers Association PPS. See Post Payment System

456 104th Annual Report | 2017 Premises, Federal Reserve Banks, 103, 325, 365, 386 Regulatory capital rules, 65 Priced services, 91–93, 104–108 Regulatory policy Prices Developments in 2017, 44, 45 Consumer, 175 U.S. banking structure, 69–73 Energy, 10, 24, 29, 63 Regulatory reports, 45, 65–67 Equity prices, 15 Report on the Economic Well-Being of U.S. Households in Food, 10 2016, 87 Metals, 10 Reports of Condition and Income (Call Reports), 56 Price index, 5 Repurchase agreements, 298, 299, 302, 303, 306–307, Primary credit, 118 361–362 PRISM. See Performance Report Information and Reserve Requirements of Depository Institutions Surveillance Monitoring (Regulation D), 113 Private sector adjustment factor (PSAF), 91–92, 107 Retail banking, 88 Professional development, 69 Retail securities program, 96 PSAF. See Private sector adjustment factor Retirement plans, 340–344, 387–393 Public Accounting Oversight Board, 62 Revenue. See Income and expenses Puerto Rico Reverse repurchase agreements, 298, 299, 304, 305 Debt restructuring, 29 RFI/C(D) system, 50 Risks. See Uncertainty and risk Rust Consulting, Inc., 77 Q QFCs. See Qualified financial contracts Qualified financial contracts (QFCs), 58, 110, 114 S SameDay ACH services, 91 R Savings and loan holding companies (SLHCs) Rapid Response sessions, 83 Insurance underwriting activities, 50–51 Real estate appraisals, 58, 62 Number of, 51 Real Estate Settlement Procedures (Regulation X), 72, 311 Regulation of, 70–71, 72 Regional food systems investments, 89 Regulatory assessment fees, 72 Regulations Regulatory reports, 69 A, Extensions of Credit by Federal Reserve Banks, 113 Supervision of, 50–51 BB, Community Reinvestment, 115 Supervisory assessment fees, 72 C, Home Mortgage Disclosure Act, 80, 81, 85–86, 87, Seasonal credit, 118 113–114 SEC. See Securities and Exchange Commission CC, Availability of Funds and Collection of Checks, 115 Secondary credit, 118 D, Reserve Requirements of Depository Institutions, Securities. See also Federal agency securities; Treasury 113 securities; specific types of securities H, Membership of State Banking Institutions in the Asset-backed securities, 39 Federal Reserve System, 72, 79 Resell and repurchase agreements, 361–362 I, Issue and Cancellation of Federal Reserve Bank Securities and Exchange Commission (SEC), 41, 52, 64 Capital Stock, 114 Securities credit, 72–73 M, Consumer Leasing, 86, 87 Securities credit lenders, 54 Q, Capital Adequacy of Bank Holding Companies, Securities dealers and brokers, 54 Savings and Loan Holding Companies, and State Securities Exchange Act, 54, 72 Member Banks, 109–110, 114–115 Security T, Credit by Brokers and Dealers, 72, 73, 311 Counterterrorism activities, 63–64 U, Credit by Banks and Persons Other Than Brokers or Cybersecurity, 54, 55 Dealers for the Purpose of Purchasing or Carrying Cybersecurity and Critical Infrastructure Working Margin Stock, 72, 73, 311 Group, 54, 55 WW, Liquidity Risk Measurement Standards, 109–110, Information technology, 67 114–115 Seeding hedge fund investments, 116–117 X, Real Estate Settlement Procedures, 72, 311 Semiannual Report on Banking Applications Activity, 69 Y, Bank Holding Companies and Change in Bank Senior Loan Officer Opinion Survey on Bank Lending Control, 109, 115 Practices (SLOOS), 13, 27, 28 YY, Enhanced Prudential Standards, 109–110, 114–115 SEP. See Summary of Economic Projections Z, Truth in Lending, 86 Shared National Credit program (SNC), 62–63 Regulatory assessment fees, 72 SHED. See Survey of Household Economics and Regulatory capital ratios, 38 Decisionmaking

Index 457 SIFI. See Systemically important financial institutions Regulatory reports, 65–7 SIT. See Supervisory information technology Safety and soundness, 46–57 SLHCs. See Savings and loan holding companies Staff development, 68–69 SLOOS. See Senior Loan Officer Opinion Survey on Bank Stress testing, 44 Lending Practices Tailoring, 45 Surveillance, 56 SLR. See Supplementary leverage ratio Survey of Household Economics and Decisionmaking Small business lending, 88–89 (SHED), 87–88 SNC. See Shared National Credit program Survey of Market Participants, 28 Software. See Equipment and software Survey of Primary Dealers, 28 SOMA. See System Open Market Account Survey of Professional Forecasters, 10, 25 S&P. See Standard and Poor’s 500 SVC. See Stored Value Card program Special drawing rights certificate account, 302, 303, System Open Market Account (SOMA), 19, 31, 100–101, 306–307 102–103, 144–145, 183–184, 187–188, 372–382 Special drawing rights certificates, 360–361 Speculative-grade firms, 37 SR-SABR. See Supervision and Regulation Statistical T Assessment of Bank Risk Task Force on Information Sharing, 68 Staff development, 68–69 Task Force on Surveillance Systems, 56 Standard and Poor’s 500 (S&P 500), 15, 28, 36 Tax Cuts and Jobs Act, 13, 43 State and local governments, 14, 27 Technical assistance, 56–57 State member banks Technology, Financial, 95 Complaints against, 84–85 Technology service providers, 53 Developments in 2017, 43 Term deposits, 304, 305 Financial disclosures, 72 Terrorism. See Counterterrorism activities International activities, 52 Texas Student Loan Guarantee Corporation, 89 Number of, 47 The Path Forward, 68 Supervision of, 47–49 Thrift plans, 393–394 Surveillance and off-site monitoring, 56 TIPS. See Treasury Inflation-Protected Securities Statements of changes in capital, 356 Training programs, 56–57, 68, 82–83 Statements of Condition, Federal Reserve Banks, 312–315, Transfer agents, 54 316, 354 Transition Resource Group, 62 Statements of operations, 332, 355 Transitional capital requirements, 59 Statistical tables, 297–325 Treasury, U.S. Department of the Stored Value Card (SVC) program, 97 Bureau of Engraving and Printing, 94 Straight-Through Processing initiative, 98 Cash holdings, 304 Strategic Plan 2016-19, 111 Cash management services, 98 Stress testing, 40, 45, 49, 58, 62, 109, 110 Currency in circulation and outstanding, 302–305, Student loans, 89 306–309 Summary of Economic Projections, 6, 22, 131, 155–171, Deposits, 299, 367 198–214, 239–255, 278–293 Treasury Electronic Payment Solution Support Center, 98 Supervision and Regulation Statistical Assessment of Bank Treasury Inflation-Protected Securities, 11, 25 Risk (SR-SABR), 56 Treasury securities Supervisory assessment fees, 72 Federal Reserve Bank holdings, 299, 302, 306–307, Supervisory information technology (SIT), 67–68 361–364, 372–377 Supervisory policy Open market transactions, 297 Accounting policy, 61–62 Services, 96 Burden reduction initiatives, 66–67 Yields, 6, 14–16, 21, 28 Compliance risk management, 63–64 Trellis Company, 89 Consolidated supervision, 47–53 Truth in Lending (Regulation Z), 86 Consumer and community affairs, 75–85 Credit-risk management, 62–63 U Developments in 2017, 44, 45–57 Enhanced prudential standards, 57–58 UDAP. See Unfair or Deceptive Acts or Practices Examinations and inspections, 46–47 Uncertainty and risk, 58–59, 131, 166–168, 170–171, Incentive compensation, 64–65 208–214, 288–293 Information technology, 67–68 Unemployment, 5, 7–9, 23, 156–157, 161, 167, 199–200, International coordination, 59–61 204, 210, 240–241, 245, 251, 279–280, 284, 290 Policymaking initiatives, 65 Unfair or Deceptive Acts or Practices (UDAP), 75, 78–79

458 104th Annual Report | 2017 Uniform Interagency Consumer Compliance Rating Volcker rule, 65, 116 System, 82 United Kingdom, Economy of, 17, 29 W University of Michigan Surveys of Consumers, 10 U.S. Congress. See Monetary policy reports to Congress; Wages, 9, 11, 23–24 specific legislation by name Websites Basel Committee on Banking Supervision, 59 Board of Governors, 1, 5, 72, 111 Currency Education Program, 95 Federal Reserve, 55, 59, 63 FedPayments Improvement, 94 V FFIEC cybersecurity awareness, 55 Variable interest entities (VIEs), 365, 382–385 Financial Stability Oversight Council annual report, 41 VIEs. See Variable interest entities Partnership for Progress, 56 VIX, 28, 36 Wholesale securities program, 96–97

Back Cover www.federalreserve.gov 0518