annual reports · December 31, 2017

Annual Report of the Federal Reserve Board, 2018

105th Annual Report 2018 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

This and other Federal Reserve Board reports and publications are available online at https://www.federalreserve.gov/publications/default.htm. To order copies of Federal Reserve Board publications offered in print, see the Board’s Publication Order Form (https://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 2019 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 105th annual report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar-year 2018. Sincerely, Jerome H. Powell Chair

v Contents 1 Overview .............................................................................................................................. 1 About This Report ...................................................................................................................... 1 About the Federal Reserve System ............................................................................................. 2 2 Monetary Policy and Economic Developments ..................................................... 5 Monetary Policy Report February 2019 ....................................................................................... 5 Monetary Policy Report July 2018 ............................................................................................. 23 3 Financial Stability ........................................................................................................... 35 Monitoring Risks to Financial Stability ....................................................................................... 35 Domestic and International Cooperation and Coordination ......................................................... 40 4 Supervision and Regulation ......................................................................................... 43 Banking System Conditions ...................................................................................................... 43 Supervisory Developments ....................................................................................................... 47 Regulatory Developments ........................................................................................................ 68 5 Consumer and Community Affairs ........................................................................... 73 Supervision and Examinations .................................................................................................. 73 Consumer Laws and Regulations .............................................................................................. 82 Consumer Research and Analysis of Emerging Issues and Policy ............................................... 83 Community Development ......................................................................................................... 85 6 Federal Reserve Banks ................................................................................................... 87 Federal Reserve Priced Services ............................................................................................... 87 Currency and Coin ................................................................................................................... 90 Fiscal Agency and Government Depository Services .................................................................. 91 Use of Federal Reserve Intraday Credit ..................................................................................... 93 FedLine Access to Reserve Bank Services ................................................................................ 94 Information Technology ............................................................................................................ 94 Examinations of the Federal Reserve Banks .............................................................................. 95 Income and Expenses .............................................................................................................. 95 SOMA Holdings and Loans ...................................................................................................... 98 Federal Reserve Bank Premises ................................................................................................ 99 Pro Forma Financial Statements for Federal Reserve Priced Services ....................................... 100 7 Other Federal Reserve Operations ........................................................................... 105 Regulatory Developments ....................................................................................................... 105

vi The Board of Governors and the Government Performance and Results Act ............................. 110 8 Record of Policy Actions of the Board of Governors ...................................... 111 Rules and Regulations ............................................................................................................ 111 Policy Statements and Other Actions ...................................................................................... 114 Discount Rates for Depository Institutions in 2018 ................................................................... 116 9 Minutes of Federal Open Market Committee Meetings .................................. 119 Meeting Held on January 30–31, 2018 ..................................................................................... 120 Meeting Held on March 20–21, 2018 ....................................................................................... 140 Meeting Held on May 1–2, 2018 .............................................................................................. 168 Meeting Held on June 12–13, 2018 ......................................................................................... 180 Meeting Held on July 31–August 1, 2018 ................................................................................. 207 Meeting Held on September 25–26, 2018 ................................................................................ 220 Meeting Held on November 7–8, 2018 ..................................................................................... 247 Meeting Held on December 18–19, 2018 ................................................................................. 260 10 Litigation .......................................................................................................................... 291 Pending ................................................................................................................................. 291 Resolved ............................................................................................................................... 291 11 Statistical Tables ............................................................................................................. 293 12 Federal Reserve System Audits ................................................................................. 323 Board of Governors Financial Statements ................................................................................ 324 Federal Reserve Banks Combined Financial Statements .......................................................... 347 Office of Inspector General Activities ....................................................................................... 394 Government Accountability Office Reviews .............................................................................. 395 13 Federal Reserve System Budgets .............................................................................. 397 System Budgets Overview ...................................................................................................... 397 Board of Governors Budgets .................................................................................................. 400 Federal Reserve Banks Budgets ............................................................................................. 404 Currency Budget .................................................................................................................... 408 14 Federal Reserve System Organization .................................................................... 413 Board of Governors ................................................................................................................ 413 Federal Open Market Committee ............................................................................................ 419 Board of Governors Advisory Councils .................................................................................... 421 Federal Reserve Banks and Branches ..................................................................................... 425 15 Index .................................................................................................................................. 441

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 https://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 https://www President of the United States and supported by a .federalreserve.gov/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 also discusses the Board’s compliance with the Board plays a major role in the supervision and regu- Government 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 2018, 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 summa- About This Report rizes litigation involving the Board. • 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 2018. 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 2018 budget performance of in consumer and community affairs; and section 6, the Board and Reserve Banks, as well as their 2018 in Reserve Bank operations. budgets, budgeting processes, and trends in their expenses and employment. • Regulatory developments. Section 7 summarizes the Board’s efforts in 2018 to implement key laws and • Federal Reserve System organization. Section 14 statutes, such as the Economic Growth, Regulatory provides listings of key officials at the Board and in Relief, and Consumer Protection Act. The section the Federal Reserve System, including the Board of

2 105th Annual Report | 2018 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, what future adjustments to the federal funds rate may the Federal Reserve Board submits written reports to be appropriate to support the Committee’s congresthe Congress that contain discussions of “the con- sionally mandated objectives of maximum employduct of monetary policy and economic developments ment and price stability. and prospects for the future.” The Monetary Policy Report, submitted semiannually to the Senate Com- Economic and Financial Developments mittee on Banking, Housing, and Urban Affairs and The labor market. The labor market has continued to to the House Committee on Banking and Financial strengthen since the middle of last year. Payroll Services, is delivered concurrently with testimony employment growth has remained strong, averaging from the Federal Reserve Board Chair. 224,000 per month since June 2018. The unemployment rate has been about unchanged over this The following discussion is a review of U.S. monetary period, averaging a little under 4 percent—a low level policy and economic developments in 2018, excerpted by historical standards—while the labor force particifrom the Monetary Policy Report published in Febru- pation rate has moved up despite the ongoing downary 2019 and July 2018. Those complete reports ward influence from an aging population. Wage are available on the Board’s website at https://www growth has also picked up recently. .federalreserve.gov/monetarypolicy/files/ 20190222_mprfullreport.pdf (February 2019) and https Inflation. Consumer price inflation, as measured by ://www.federalreserve.gov/monetarypolicy/files/ the 12-month change in the price index for personal 20180713_mprfullreport.pdf (July 2018). consumption expenditures, moved down from a little above the FOMC’s objective of 2 percent in the middle of last year to an estimated 1.7 percent in Monetary Policy Report December, restrained by recent declines in consumer February 2019 energy prices. The 12-month measure of inflation that excludes food and energy items (so-called core Summary inflation), which historically has been a better indicator of where overall inflation will be in the future Economic activity in the United States appears to than the headline measure that includes those items, have increased at a solid pace, on balance, over the is estimated to have been 1.9 percent in Decemsecond half of 2018, and the labor market strength- ber—up ¼ percentage point from a year ago. Surveyened further. Inflation has been near the Federal based measures of longer-run inflation expectations Open Market Committee’s (FOMC) longer-run have generally been stable, though market-based objective of 2 percent, aside from the transitory measures of inflation compensation have moved effects of recent energy price movements. In this envi- down some since the first half of 2018. ronment, the FOMC judged that, on balance, current and prospective economic conditions called for a fur- Economic growth. Available indicators suggest that ther gradual removal of policy accommodation. In real gross domestic product (GDP) increased at a particular, the FOMC raised the target range for the solid rate, on balance, in the second half of last year federal funds rate twice in the second half of 2018, and rose a little under 3 percent for the year as a putting its level at 2¼ to 2½ percent following the whole—a noticeable pickup from the pace in recent December meeting. In light of softer global economic years. Consumer spending expanded at a strong rate and financial conditions late in the year and muted for most of the second half, supported by robust job inflation pressures, the FOMC indicated at its Janu- gains, past increases in household wealth, and higher ary meeting that it will be patient as it determines disposable income due in part to the Tax Cuts and

6 105th Annual Report | 2018 Jobs Act, though spending appears to have weakened within segments of the loan market focused on toward year-end. Business investment grew as well, lower-rated or unrated firms—deteriorated in the secthough growth seems to have slowed somewhat from ond half of 2018, issuance of these loans has slowed a sizable gain in the first half. However, housing mar- more recently. ket activity declined last year amid rising mortgage interest rates and higher material and labor costs. International developments. Foreign economic growth Indicators of both consumer and business sentiment stepped down significantly last year from the brisk remain at favorable levels, but some measures have pace in 2017. Aggregate growth in the advanced forsoftened since the fall, likely a reflection of financial eign economies slowed markedly, especially in the market volatility and increased concerns about the euro area, and several Latin American economies global outlook. continued to underperform. The pace of economic activity in China slowed noticeably in the second half Financial conditions. Domestic financial conditions of 2018. Inflation pressures in major advanced forfor businesses and households have become less sup- eign economies remain subdued, prompting central portive of economic growth since July. Financial banks to maintain accommodative monetary policies. market participants’ appetite for risk deteriorated markedly in the latter part of last year amid investor Financial conditions abroad tightened in the second concerns about downside risks to the growth outlook half of 2018, in part reflecting political uncertainty in and rising trade tensions between the United States Europe and Latin America, trade policy developand China. As a result, Treasury yields and risky ments in the United States and its trading partners, asset prices declined substantially between early as well as concerns about moderating global growth. October and late December in the midst of height- Although financial conditions abroad improved in ened volatility, although those moves partially recent weeks, alongside those in the United States, on retraced early this year. On balance since July, the balance since July 2018, global equity prices were expected path of the federal funds rate over the next lower, sovereign yields in many economies declined, several years shifted down, long-term Treasury yields and sovereign credit spreads in the European periphand mortgage rates moved lower, broad measures of ery and the most vulnerable emerging market econo- U.S. equity prices increased somewhat, and spreads mies increased somewhat. Market-implied paths of of yields on corporate bonds over those on policy rates in advanced foreign economies generally comparable-maturity Treasury securities widened edged down. modestly. Credit to large nonfinancial firms remained solid in the second half of 2018; corporate bond issu- Monetary Policy ance slowed considerably toward the end of the year Interest rate policy. As the labor market continued to but has rebounded since then. Despite increases in strengthen and economic activity expanded at a interest rates for consumer loans, consumer credit strong rate, the FOMC increased the target range for expanded at a solid pace, and financing conditions the federal funds rate gradually over the second half for consumers largely remain supportive of growth in of 2018. Specifically, the FOMC decided to raise the household spending. The foreign exchange value of federal funds rate in September and in December, the U.S. dollar strengthened slightly against the cur- bringing it to the current range of 2¼ to 2½ percent. rencies of the U.S. economy’s trading partners. In December, against the backdrop of increased con- Financial stability. The U.S. financial system remains cerns about global growth, trade tensions, and volasubstantially more resilient than in the decade pre- tility in financial markets, the Committee indicated it ceding the financial crisis. Pressures associated with would monitor global economic and financial develasset valuations eased compared with July 2018, par- opments and assess their implications for the ecoticularly in the equity, corporate bond, and leveraged nomic outlook. In January, the FOMC stated that it loan markets. Regulatory capital and liquidity ratios continued to view sustained expansion of economic of key financial institutions, including large banks, activity, strong labor market conditions, and inflation are at historically high levels. Funding risks in the near the Committee’s 2 percent objective as the most financial system are low relative to the period leading likely outcomes. Nonetheless, in light of global ecoup to the crisis. Borrowing by households has risen nomic and financial developments and muted inflaroughly in line with household incomes and is con- tion pressures, the Committee noted that it will be centrated among prime borrowers. While debt owed patient as it determines what future adjustments to by businesses is high and credit standards—especially the target range for the federal funds rate may be

Monetary Policy and Economic Developments 7 appropriate to support these outcomes. FOMC com- stronger rebound in urban areas. (See the box munications continued to emphasize that the Com- “Employment Disparities between Rural and Urban mittee’s approach to setting the stance of policy Areas” on pages 10–12 of the February 2019 Monshould be importantly guided by the implications of etary Policy Report.) incoming data for the economic outlook. In particu- Monetary policy rules. In evaluating the stance of lar, the timing and size of future adjustments to the monetary policy, policymakers consider a wide range target range for the federal funds rate will depend on of information on the current economic conditions the Committee’s assessment of realized and expected and the outlook. Policymakers also consult prescripeconomic conditions relative to its maximumtions for the policy interest rate derived from a variemployment objective and its symmetric 2 percent ety of policy rules for guidance, without mechaniinflation objective. cally following the prescriptions of any specific rule. Balance sheet policy. The FOMC continued to imple- The FOMC’s approach for conducting systematic ment the balance sheet normalization program that monetary policy provides sufficient flexibility to has been under way since October 2017. Specifically, address the intrinsic complexities and uncertainties in the FOMC reduced its holdings of Treasury and the economy while keeping monetary policy predictagency securities in a gradual and predictable manner able and transparent. (See the box “Monetary Policy by reinvesting only principal payments it received Rules and Systematic Monetary Policy” on pages from these securities that exceeded gradually rising 36–39 of the February 2019 Monetary Policy Report.) caps. Consequently, the Federal Reserve’s total assets Balance sheet normalization and monetary policy declined by about $260 billion since the middle of implementation. Since the financial crisis, the size of last year, ending the period close to $4 trillion. the Federal Reserve’s balance sheet has been determined in large part by its decisions about asset pur- Together with the January postmeeting statement, chases for economic stimulus, with growth in total the Committee released an updated Statement assets primarily matched by higher reserve balances Regarding Monetary Policy Implementation and Balof depository institutions. However, liabilities other ance Sheet Normalization to provide additional than reserves have grown significantly over the past information about its plans to implement monetary decade. In the longer run, the size of the balance policy over the longer run. In particular, the FOMC sheet will be importantly determined by the various stated that it intends to continue to implement monfactors affecting the demand for Federal Reserve etary policy in a regime with an ample supply of liabilities. (See the box “The Role of Liabilities in reserves so that active management of reserves is not Determining the Size of the Federal Reserve’s Balrequired. In addition, the Committee noted that it is ance Sheet” on pages 41–43 of the February 2019 prepared to adjust any of the details for completing Monetary Policy Report.) balance sheet normalization in light of economic and financial developments. Federal Reserve transparency and accountability. For central banks, transparency provides an essential Special Topics basis for accountability. Transparency also enhances Labor markets in urban versus rural areas. The recov- the effectiveness of monetary policy and a central ery in the U.S. labor market since the end of the bank’s efforts to promote financial stability. For these recession has been uneven across the country, with reasons, the Federal Reserve uses a wide variety of rural areas showing markedly less improvement than communications to explain its policymaking cities and their surrounding metropolitan areas. In approach and decisions as clearly as possible. particular, the employment-to-population ratio and Through several new initiatives, including a review of labor force participation rate in rural areas remain its monetary policy framework that will include outwell below their pre-recession levels, while the recov- reach to a broad range of stakeholders, the Federal ery in urban areas has been more complete. Differ- Reserve seeks to enhance transparency and accountences in the mix of industries in rural and urban ability regarding how it pursues its statutory responareas—a larger share of manufacturing in rural areas sibilities. (See the box “Federal Reserve Transparency: and a greater concentration of fast-growing services Rationale and New Initiatives” on pages 45–46 of the industries in urban areas—have contributed to the February 2019 Monetary Policy Report.)

8 105th Annual Report | 2018 Part 1: Recent Economic and Financial Figure 2. Labor force participation rates and Developments employment-to-population ratio Domestic Developments Percent Percent The labor market strengthened further during the second half of 2018 and early this year . . . 85 Labor force participation rate 68 Payroll employment gains have remained strong, 66 84 averaging 224,000 per month since June 2018 64 (figure 1). This pace is similar to the pace in the first 83 half of last year, and it is faster than the average pace 62 82 of job gains in 2016 and 2017. 60 81 58 The strong pace of job gains over this period has pri- Employment-to-population ratio Prime-age labor force marily been manifest in a rising labor force participa- 80 participation rate 56 tion rate (LFPR)—the share of the population that is either working or actively looking for work—rather 2001 2004 2007 2010 2013 2016 2019 than a declining unemployment rate.1 Since Note: The data are monthly. The prime-age labor force participation rate is a per- June 2018, the LFPR has moved up about ¼ percent- centage of the population aged 25 to 54. The labor force participation rate and the employment-to-population ratio are percentages of the population aged 16 age point and was 63.2 percent in January—a bit and over. higher than the narrow range it has maintained in Source: Bureau of Labor Statistics via Haver Analytics. recent years (figure 2). The improvement is especially notable because the aging of the population—and, in 1 The observed pace of payroll job gains would have been suffi- particular, the movement of members of the babycient to push the unemployment rate lower had the LFPR not boom cohort into their retirement years—has otherrisen. Indeed, monthly payroll gains in the range of 115,000 to wise imparted a downward influence on the LFPR. 145,000 appear consistent with an unchanged unemployment rate around 4.0 percent and an unchanged LFPR around Indeed, the LFPR for individuals between 25 and 62.9 percent (which are the June 2018 values of these rates). If 54 years old—which is much less sensitive to populainstead the LFPR were declining 0.2 percentage point per tion aging—has improved considerably more than year—roughly the influence of population aging—the range of job gains needed to maintain an unchanged unemployment rate the overall LFPR, including a ½ percentage point would be about 40,000 per month lower. There is considerable rise since June 2018.2 uncertainty around these estimates, as the difference between monthly payroll gains and employment changes from the Current Population Survey (the source of the unemployment rate At the same time, the unemployment rate has and LFPR) can be quite volatile over short periods. remained little changed and has generally been running a little under 4 percent.3 Nevertheless, the unemployment rate remains at a historically low level and Figure 1. Net change in payroll employment is ½ percentage point below the median of the Federal Open Market Committee (FOMC) participants’ Monthly Thousands of jobs estimates of its longer-run normal level (figure 3).4 Private Combining the movements in both unemployment 400 and labor force participation, the employment-to- 200 population ratio for individuals 16 and over—the + _0 200 2 Since 2015, the increase in the prime-age LFPR for women was Total nonfarm nearly 2 percentage points, while the increase for men was only 400 about 1 percentage point. In January, the LFPR for prime-age women was slightly above where it stood in 2007, whereas for 600 men it was still about 2 percentage points below. 800 3 The unemployment rate in January was 4.0 percent, boosted somewhat by the partial government shutdown, as some furloughed federal workers and temporarily laid-off federal 2009 2011 2013 2015 2017 2019 contractors are treated as unemployed in the household employment survey. Note: The data are 3-month moving averages. 4 See the Summary of Economic Projections in Part 3 of the Feb- Source: Bureau of Labor Statistics via Haver Analytics. ruary 2019 Monetary Policy Report.

Monetary Policy and Economic Developments 9 Figure 3. Measures of labor utilization Monthly Percent 18 U-6 16 U-4 14 U-5 12 10 8 Unemployment rate 6 4 2 2007 2009 2011 2013 2015 2017 2019 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. share of that segment of the population who are ployment rates for blacks or African Americans and working—was 60.7 percent in January and has been for Hispanics has been particularly notable, and the gradually increasing since 2011. unemployment rates for these groups are near their lowest readings since these series began in the early Other indicators are also consistent with a strong 1970s. Differences in unemployment rates across ethlabor market. As reported in the Job Openings and nic and racial groups have narrowed in recent years, Labor Turnover Survey (JOLTS), the job openings as they typically do during economic expansions, rate has moved higher since the first half of 2018, after having widened during the recession; on net, and in December, it was at its highest level since the unemployment rates for African Americans and Hisdata began in 2000. The quits rate in the JOLTS is panics remain substantially above those for whites also near the top of its historical range, an indication and Asians, with differentials generally a bit below that workers have become more confident that they pre-recession levels. can successfully switch jobs when they wish to. In addition, the JOLTS layoff rate has remained low, The rise in LFPRs for prime-age individuals over the and the number of people filing initial claims for past few years has also been apparent in each of unemployment insurance benefits has also remained these racial and ethnic groups. Nonetheless, the low. Survey evidence indicates that households per- LFPR for whites remains higher than that for other ceive jobs as plentiful and that businesses see vacan- groups. Important differences in economic outcomes cies as hard to fill. persist across other characteristics as well (see, for example, the box “Employment Disparities between . . . and unemployment rates have fallen for all Rural and Urban Areas” on pages 10–12 of the Febmajor demographic groups over the past several ruary 2019 Monetary Policy Report, which highlights years that there has been less improvement since 2010 in The flattening in unemployment since mid-2018 has the LFPR and employment-to-population ratio for been evident across racial and ethnic groups. Even so, prime-age individuals in rural areas compared with over the past several years, the decline in the unem- urban areas).

10 105th Annual Report | 2018 Increases in labor compensation have picked up whether this faster rate of growth will persist, a susrecently but remain moderate by historical tained pickup in productivity growth, as well as addistandards . . . tional labor market strengthening, would likely sup- Most available indicators suggest that growth of port stronger gains in labor compensation. hourly compensation has stepped up further since Price inflation is close to 2 percent June 2018 after having firmed somewhat over the past few years; however, growth rates remain moder- Consumer price inflation has fluctuated around the ate compared with those that prevailed in the decade FOMC’s objective of 2 percent, largely reflecting before the recession. Compensation per hour in the movements in energy prices. As measured by the business sector—a broad-based measure of wages 12-month change in the price index for personal conand benefits, but one that is quite volatile—rose sumption expenditures (PCE), inflation is estimated 2¼ percent over the four quarters ending in 2018:Q3, to have been 1.7 percent in December after being about the same as the average annual increase over above 2 percent for much of 2018 (figure 4).6 Core the past seven years or so. The employment cost PCE inflation—that is, inflation excluding consumer index, a less volatile measure of both wages and the food and energy prices—is estimated to have been cost to employers of providing benefits, increased 1.9 percent in December. Because food and energy 3 percent over the same period, while average hourly prices are often quite volatile, core inflation typically earnings—which do not take account of benefits— provides a better indication than the total measure of increased 3.2 percent over the 12 months ending in where overall inflation will be in the future. Total January of this year; the annual increases in both of inflation was below core inflation for the year as a these measures were the strongest in nearly 10 years. whole not only because of softness in energy prices, The measure of wage growth computed by the Fed- but also because food price inflation has remained eral Reserve Bank of Atlanta that tracks median relatively low. 12-month wage growth of individuals reporting to the Current Population Survey showed an increase of Core inflation has moved up since 2017, when infla- 3.7 percent in January, near the upper end of its read- tion was held down by some unusually large price ings in the past three years and well above the average declines in a few relatively small categories of spendincrease in the preceding few years.5 6 The partial government shutdown has delayed publication of . . . and have likely been restrained by slow the Bureau of Economic Analysis’s estimate for PCE price inflagrowth of labor productivity over much of the tion in December, and the numbers reported here are estimates based on the December consumer and producer price indexes. expansion These moderate rates of compensation gains likely reflect the offsetting influences of a strong labor mar- Figure 4. Change in the price index for personal ket and productivity growth that has been weak consumption expenditures through much of the expansion. From 2008 to 2017, labor productivity increased a little more than 1 per- Monthly 12-month percent change cent per year, on average, well below the average pace from 1996 to 2007 of nearly 3 percent and also below 3.0 the average gain in the 1974–95 period. Although Trimmed mean Total 2.5 Excluding food considerable debate remains about the reasons for the and energy slowdown over this period, the weakness in produc- 2.0 tivity growth may be partly attributable to the sharp 1.5 pullback in capital investment during the most recent 1.0 recession and the relatively slow recovery that followed. More recently, however, labor productivity is .5 estimated to have increased almost 2 percent at an + _0 annual rate in the first three quarters of 2018—still moderate relative to earlier periods, but its fastest 2012 2013 2014 2015 2016 2017 2018 three-quarter gain since 2010. While it is uncertain Note: The data for total and excluding food and energy extend through December 2018; final values are staff estimates. The trimmed data extend through November 2018. 5 The Atlanta Fed’s measure differs from others in that it meas- Source: For trimmed mean, Federal Reserve Bank of Dallas; for all else, Bureau of ures the wage growth only of workers who were employed both Economic Analysis; all via Haver Analytics. in the current survey month and 12 months earlier.

Monetary Policy and Economic Developments 11 ing, such as mobile phone services. The trimmed price declines, but concerns about weaker global mean PCE price index, produced by the Federal growth likely also played a role. Reserve Bank of Dallas, provides an alternative way to purge inflation of transitory influences, and it may . . . while prices of imports other than energy be less sensitive than the core index to idiosyncratic have also declined price movements such as those noted earlier. The After climbing steadily since their early 2016 lows, 12-month change in this measure did not decline as nonfuel import prices peaked in May 2018 and much as core PCE inflation in 2017, and it was declined for much of the rest of 2018 in response to 2.0 percent in November.7 Inflation likely has been dollar appreciation, lower foreign inflation, and increasingly supported by the strong labor market in declines in commodity prices. In particular, metal an environment of stable inflation expectations; prices fell markedly in the second half of 2018, partly inflation last year was also boosted slightly by the reflecting concerns about prospects for the global tariffs that were imposed throughout 2018. economy. Nonfuel import prices, before accounting for the effects of tariffs on the price of imported Oil prices have dropped markedly in recent goods, had roughly a neutral influence on U.S. price months . . . inflation in 2018. As noted, the slower pace of total inflation in late 2018 relative to core inflation largely reflected soften- Survey-based measures of inflation expectations ing in consumer energy prices toward the end of the have been stable . . . year. After peaking at about $86 per barrel in early Expectations of inflation likely influence actual infla- October, the price of crude oil subsequently fell tion by affecting wage- and price-setting decisions. sharply and has averaged around $60 per barrel this Survey-based measures of inflation expectations at year (figure 5). The recent decline in oil prices has led medium- and longer-term horizons have remained to moderate reductions in the cost of gasoline and generally stable over the second half of 2018. In the heating oil. Supply factors, including surging oil pro- Survey of Professional Forecasters, conducted by the duction in Saudi Arabia, Russia, and the United Federal Reserve Bank of Philadelphia, the median States, appear to be most responsible for the recent expectation for the annual rate of increase in the PCE price index over the next 10 years has been very close to 2 percent for the past several years (figure 6). In the University of Michigan Surveys of Consumers, 7 The trimmed mean index excludes whichever prices showed the the median value for inflation expectations over the largest increases or decreases in a given month. Note that over next 5 to 10 years has been around 2½ percent since the past 20 years, changes in the trimmed mean index have averaged about ¼ percentage point above core PCE inflation and 0.1 percentage point above total PCE inflation. Figure 6. Median inflation expectations Figure 5. Spot and futures prices for crude oil Percent Weekly Dollars per barrel 130 Michigan survey expectations 4 Brent spot price 120 for next 5 to 10 years 110 3 100 90 24-month-ahead futures contracts 80 2 70 SPF expectations 60 for next 10 years 50 1 40 30 20 2005 2007 2009 2011 2013 2015 2017 2019 2014 2015 2016 2017 2018 2019 Note: The Michigan survey data are monthly and extend through February 2019; the February data are preliminary. The SPF data for inflation expectations for per- Note: The data are weekly averages of daily data and extend through February 20, sonal consumption expenditures are quarterly and begin in 2007:Q1. 2019. Source: University of Michigan Surveys of Consumers; Federal Reserve Bank of Source: ICE Brent Futures via Bloomberg. Philadelphia, Survey of Professional Forecasters (SPF).

12 105th Annual Report | 2018 the end of 2016, though this level is about ¼ percent- cent pace in 2017 and the 2 percent pace in the preage point lower than had prevailed through 2014. In ceding two years (figure 7). Last year’s growth contrast, in the Survey of Consumer Expectations, reflects, in part, solid growth in household and busiconducted by the Federal Reserve Bank of New ness spending, on balance, as well as an increase in York, the median of respondents’ expected inflation government purchases of goods and services; by conrate three years hence—while relatively stable around trast, housing-sector activity turned down last year. 3 percent since early 2018—is nonetheless at the top Private domestic final purchases—that is, final purof the range it has occupied over the past couple chases by households and businesses, which tend to of years. provide a better indication of future GDP growth than most other components of overall spending— . . . while market-based measures of inflation likely posted a strong gain for the year. compensation have come down since the first half of 2018 Some measures of consumer and business sentiment Inflation expectations can also be gauged by market- have recently softened—likely reflecting concerns based measures of inflation compensation. However, about financial market volatility, the global economic the inference is not straightforward, because market- outlook, trade policy tensions, and the government based measures can be importantly affected by shutdown—and consumer spending appears to have changes in premiums that provide compensation for weakened at the end of the year. Nevertheless, the bearing inflation and liquidity risks. Measures of economic expansion continues to be supported by longer-term inflation compensation—derived either steady job gains, past increases in household wealth, from differences between yields on nominal Treasury expansionary fiscal policy, and still-favorable domessecurities and those on comparable-maturity Treas- tic financial conditions, including moderate borrowury Inflation-Protected Securities (TIPS) or from ing costs and easy access to credit for many houseinflation swaps—moved down in the fall and are holds and businesses. below levels that prevailed earlier in 2018.8 The TIPSbased measure of 5-to-10-year-forward inflation Ongoing improvements in the labor market compensation and the analogous measure from infla- continue to support household income and tion swaps are now about 1¾ percent and 2¼ per- consumer spending . . . cent, respectively, with both measures below their Real consumer spending picked up after some transirespective ranges that persisted for most of the tory weakness in the first half of 2018, rising at a 10 years before the start of the notable declines in strong annual rate of 3½ percent in the third quarter mid-2014.9 and increasing robustly through November (figure 8). However, despite anecdotal reports of favorable holi- Real gross domestic product growth was solid, day sales, retail sales were reported to have declined on balance, in the second half of 2018 Real gross domestic product (GDP) rose at an annual rate of 3½ percent in the third quarter, and available Figure 7. Change in real gross domestic product and gross indicators point to a moderate gain in the fourth domestic income quarter.10 For the year, GDP growth appears to have been a little less than 3 percent, up from the 2½ per- Percent, annual rate Gross domestic product 8 Inflation compensation implied by the TIPS breakeven inflation Gross domestic income rate is based on the difference, at comparable maturities, 5 between yields on nominal Treasury securities and yields on Q3 TIPS, which are indexed to the total consumer price index 4 (CPI). Inflation swaps are contracts in which one party makes payments of certain fixed nominal amounts in exchange for cash H1 flows that are indexed to cumulative CPI inflation over some 3 horizon. Inflation compensation derived from inflation swaps typically exceeds TIPS-based compensation, but week-to-week 2 movements in the two measures are highly correlated. 9 As these measures are based on CPI inflation, one should probably subtract about ¼ percentage point—the average differential 1 with PCE inflation over the past two decades—to infer inflation compensation on a PCE basis. 10 The initial estimate of GDP by the Bureau of Economic Analy- 2012 2013 2014 2015 2016 2017 2018 sis for the fourth quarter was delayed because of the partial gov- Source: Bureau of Economic Analysis via Haver Analytics. ernment shutdown and will now be released on February 28.

Monetary Policy and Economic Developments 13 ages since 2000. However, consumer sentiment has Figure 8. Change in real personal consumption turned down since around year-end, on net, with the expenditures and disposable personal income declines primarily reflecting consumers’ expectations for future conditions rather than their assessment of Percent, annual rate current conditions. Consumer attitudes about car Personal consumption expenditures 6 buying have also weakened. Nevertheless, these indi- Disposable personal income 5 cators of consumers’ outlook remain at generally H1 Q3 4 favorable levels, likely reflecting rising income, job 3 gains, and low inflation. 2 Borrowing conditions for consumers remain 1 + generally favorable despite interest rates being _0 near the high end of their post-recession range 1 Despite increases in interest rates for consumer loans 2 and some reported further tightening in credit card 3 lending standards, financing conditions for consum- 2012 2013 2014 2015 2016 2017 2018 ers largely remain supportive of growth in household Source: Bureau of Economic Analysis via Haver Analytics. spending, and consumer credit growth in 2018 expanded further at a solid pace. Mortgage credit has continued to be readily available for households with sharply in December. Real disposable personal solid credit profiles. For borrowers with low credit income—that is, income after taxes and adjusted for scores, mortgage underwriting standards have eased price changes—looks to have increased around 3 persomewhat since the first half of 2018 but remain cent over the year, boosted by ongoing improvements noticeably tighter than before the recession. Financin the labor market and the reduction in income taxes ing conditions in the student loan market remain due to the implementation of the Tax Cuts and Jobs stable, with over 90 percent of such credit being Act (TCJA). With consumer spending rising at about extended by the federal government. Delinquencies the same rate as gains in disposable income in 2018 on such loans, though staying elevated, continued to through the third quarter (the latest data available), improve gradually on net. the personal saving rate was roughly unchanged, on net, over this period. Business investment growth has moderated after strong gains early in 2018 . . . . . . although wealth gains have moderated and Investment spending by businesses rose rapidly in the consumer confidence has recently softened first half of last year, and the available data are con- While increases in household wealth have likely consistent with growth having slowed in the second half tinued to support consumer spending, gains in net (figure 9). The apparent slowdown reflects, in part, worth slowed last year. House prices continued to more moderate growth in investment in equipment move up in 2018, boosting the wealth of homeownand intangibles as well as a likely decline in investers, but the pace of growth moderated. U.S. equity ment in nonresidential structures after strong gains prices are, on net, similar to their levels at the end of earlier in the year. Forward-looking indicators of 2017. Still, the level of equity and housing wealth business spending—such as business sentiment, capirelative to income remains very high by historical tal spending plans, and profit expectations from standards.11 industry analysts—have softened recently but remain positive overall. And while new orders of capital Consumer sentiment as measured by the Michigan goods flattened out toward the end of last year, the survey flattened out at a high level through much of backlog of unfilled orders for this equipment has 2018, and the sentiment measure from the Confercontinued to rise. ence Board survey climbed through most of the year, with both measures posting their highest annual aver- . . . as corporate financing conditions tightened somewhat but remained accommodative overall 11 Indeed, in the third quarter of 2018—the most recent period for which data are available—household net worth was seven times Spreads of yields on nonfinancial corporate bonds the value of disposable income, the highest-ever reading for that over those on comparable-maturity Treasury securiratio, which dates back to 1947. However, following the decline ties widened modestly, on balance, since the middle in stock prices since the summer, this ratio has likely fallen somewhat. of 2018 as investors’ risk appetite appeared to recede

14 105th Annual Report | 2018 Figure 9. Change in real private nonresidential fixed Figure 10. Private housing starts and permits investment Monthly Millions of units, annual rate Percent, annual rate Single-family starts Structures 1.2 Equipment and intangible capital 20 1.0 H1 15 .8 10 Single-family .6 Q3 permits 5 + .4 _0 .2 Multifamily starts 5 0 10 2008 2010 2012 2014 2016 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 Note: The data extend through November 2018. Source: Bureau of Economic Analysis via Haver Analytics. Source: U.S. Census Bureau via Haver Analytics. some. Nonetheless, a net decrease in Treasury yields investment reflects rising mortgage rates—which over the past several months has left interest rates on remain higher than in 2017 despite coming down corporate bonds still low by historical standards, and some recently—as well as higher material and labor financing conditions appear to have remained building costs, which have likely restrained new home accommodative overall. Aggregate net flows of credit construction. Consumers’ perceptions of homebuyto large nonfinancial firms remained solid in the ing conditions deteriorated sharply over 2018, consisthird quarter. The gross issuance of corporate bonds tent with the decline in the affordability of housing and new issuance of leveraged loans both fell consid- associated with both higher mortgage rates and stillerably toward the end of the year but have since rising house prices. rebounded, mirroring movements in financial market volatility. Net exports likely subtracted from GDP growth in 2018 Respondents to the January Senior Loan Officer After a strong performance in the first half of last year Opinion Survey on Bank Lending Practices, or supported by robust exports of agricultural products, SLOOS, reported that lending standards for commer- real exports declined in the third quarter, and available cial and industrial (C&I) loans remained basically indicators suggest only a partial rebound in the fourth unchanged in the fourth quarter after having quarter. At the same time, growth in real imports reported easing standards over the past several quar- seems to have picked up in the second half of 2018. As ters. However, banks reported tightening lending a result, real net exports—which lifted U.S. real GDP standards on all categories of commercial real estate growth during the first half of 2018—appear to have (CRE) loans in the fourth quarter on net. subtracted from growth in the second half. For the year as a whole, net exports likely subtracted a little Meanwhile, financing conditions for small businesses from real GDP growth, similar to 2016 and 2017. The have remained generally accommodative. Lending vol- nominal trade deficit and the current account deficit in umes to small businesses rebounded a bit in recent 2018 were little changed as a percent of GDP from months, and indicators of recent loan performance 2017 (figure 11). stayed strong. Federal fiscal policy actions boosted economic Activity in the housing sector has been declining growth in 2018 . . . Residential investment declined in 2018, as housing Fiscal policy at the federal level boosted GDP growth starts held about flat and sales of existing homes in 2018, both because of lower income and business moved lower (figure 10). The drop in residential taxes from the TCJA and because federal purchases

Monetary Policy and Economic Developments 15 the local level, property tax collections continue to Figure 11. U.S. trade and current account balances rise at a solid clip, pushed higher by past house price gains. After declining a bit in 2017, real state and Annual Percent of nominal GDP local government purchases grew moderately last + year, driven largely by a boost in construction but _0 also reflecting modest growth in employment at these 1 governments. 2 3 Financial Developments 4 Trade The expected path of the federal funds rate over 5 the next several years has moved down 6 Current account Despite the further strengthening in the labor market 7 and continued expansion in the U.S. economy, market-based measures of the expected path for the 2002 2004 2006 2008 2010 2012 2014 2016 2018 federal funds rate over the next several years have Note: Data for 2018 are the average of the first three quarters of the year, at an declined, on net, since the middle of last year. Variannualized rate. GDP is gross domestic product. ous factors contributed to this shift, including Source: Bureau of Economic Analysis via Haver Analytics. increased investor concerns about downside risks to the global economic outlook and rising trade tenappear to have risen significantly faster than in 2017 sions, as well as FOMC communications that were as a result of the Bipartisan Budget Act of 2018.12 viewed as signaling patience and greater flexibility in The partial government shutdown, which was in the conduct of monetary policy in response to effect from December 22 through January 25, likely adverse macroeconomic or financial market held down GDP growth in the first quarter of this developments. year somewhat, largely because of the lost work of furloughed federal government workers and tempo- Survey-based measures of the expected path of the rarily affected federal contractors. policy rate through 2020 also shifted down, on net, relative to the levels observed in the first half of 2018. The federal unified deficit widened in fiscal year According to the results of the most recent Survey of 2018 to 3¾ percent of nominal GDP because receipts Primary Dealers and Survey of Market Participants, moved lower, to roughly 16½ percent of GDP. both conducted by the Federal Reserve Bank of New Expenditures edged down, to 20¼ percent of GDP, York just before the January FOMC meeting, the but remain above the levels that prevailed in the median of respondents’ modal projections for the decade before the start of the 2007–09 recession. The path of the federal funds rate implies two additional ratio of federal debt held by the public to nominal 25 basis point rate increases in 2019. Relative to the GDP equaled 78 percent at the end of fiscal 2018 and December survey, these increases are expected to remains quite elevated relative to historical norms. occur later in 2019. Looking further ahead, respon- The Congressional Budget Office projects that this dents to the January survey forecast no rate increases ratio will rise over the next several years. in 2020 and in 2021.13 Meanwhile, market-based measures of uncertainty about the policy rate . . . and the fiscal position of most state and local approximately one to two years ahead were little governments is stable changed, on balance, from their levels at the end of The fiscal position of most state and local govern- last June. ments is stable, although there is a range of experiences across these governments. After several years of slow growth, revenue gains of state governments strengthened notably as sales and income tax collections have picked up over the past few quarters. At 13 The results of the Survey of Primary Dealers and the Survey of 12 The Joint Committee on Taxation estimated that the TCJA Market Participants are available on the Federal Reserve Bank would reduce average annual tax revenue by a little more than of New York’s website at https://www.newyorkfed.org/ 1 percent of GDP starting in 2018 and for several years thereaf- markets/primarydealer_survey_questions.html and https://www ter. This revenue estimate does not account for the potential .newyorkfed.org/markets/survey_market_participants, macroeconomic effects of the legislation. respectively.

16 105th Annual Report | 2018 The nominal Treasury yield curve continued to Broad equity price indexes increased somewhat flatten Broad U.S. stock market indexes increased somewhat The nominal Treasury yield curve flattened somewhat since the middle of last year, on net, amid substantial further since the first half of 2018, with the 2-year volatility (figure 13). Concerns over the sustainability nominal Treasury yield little changed and the 5- and of corporate earnings growth, the global growth out- 10-year nominal Treasury yields declining about look, international trade tensions, and some Federal 25 basis points on net (figure 12). At the same time, Reserve communications that were perceived as less yields on inflation-protected Treasury securities accommodative than expected weighed on investor edged up, leaving market-based measures of inflation sentiment for a time. There were considerable differcompensation moderately lower. In explaining move- ences in stock returns across sectors, reflecting their ments in Treasury yields since mid-2018, market par- varying degrees of sensitivities to energy price ticipants have pointed to developments related to the declines, trade tensions, and rising interest rates. In global economic outlook and trade tensions, FOMC particular, stock prices of companies in the utilities communications, and fluctuations in oil prices. sector—which tend to benefit from falling interest Option-implied volatility on swap rates—an indicator rates—and in the health-care sector outperformed of uncertainty about Treasury yields—declined broader indexes. Conversely, stock prices in the slightly on net. energy sector substantially underperformed the broad indexes, as oil prices dropped sharply. Basic Consistent with changes in yields on nominal Treas- materials—a sector that was particularly sensitive to ury securities, yields on 30-year agency mortgage- concerns about the global growth outlook and trade backed securities (MBS)—an important determinant tensions—also underperformed. Bank stock prices of mortgage interest rates—decreased about 20 basis declined slightly, on net, as the yield curve flattened points, on balance, since the middle of last year and and funding costs rose. Measures of implied and realremain low by historical standards. Meanwhile, yields ized stock price volatility for the S&P 500 index—the on both investment-grade and high-yield corporate VIX and the 20-day realized volatility—increased debt declined a bit. As a result, the spreads on corpo- sharply in the fourth quarter of last year to near the rate bond yields over comparable-maturity Treasury high levels observed in early February 2018 amid yields are modestly wider than at the end of June. sharp equity price declines. These volatility measures The cumulative increases over the past year have left partially retraced following the turn of the year, with spreads for high-yield and investment-grade corpo- the VIX returning to near the 30th percentile of its rate bonds close to their historical medians, with historical distribution and with realized volatility both spreads notably above the very low levels that ending the period close to the 70th percentile of its prevailed a year ago. historical range (figure 14). (For a discussion of Figure 13. Equity prices Figure 12. Yields on nominal Treasury securities Daily December 31, 1999 = 100 Daily Percent 200 7 Dow Jones bank index 175 6 10-year S&P 500 index 150 5 125 5-year 4 100 3 75 2 50 1 2-year 25 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Source: Standard & Poor's Dow Jones Indices via Bloomberg. (For Dow Jones Source: Department of the Treasury via Haver Analytics. Indices licensing information, see the note on the Contents page.)

Monetary Policy and Economic Developments 17 FOMC’s policy actions in September and December. Figure 14. S&P 500 volatility The effective federal funds rate moved to parity with the interest rate paid on reserves and was closely Daily Percent tracked by the overnight Eurodollar rate. Other short-term interest rates, including those on commer- 80 cial paper and negotiable certificates of deposits, also 70 moved up in light of increases in the policy rate. 60 VIX 50 Bank credit continued to expand, and bank 40 profitability improved 30 Aggregate credit provided by commercial banks 20 expanded through the second half of 2018 at a stronger pace than the one observed in the first half 10 Realized volatility of last year, as the strength in C&I loan growth more 0 than offset the moderation in the growth in CRE 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 loans and loans to households. In the fourth quarter of last year, the pace of bank credit expansion was Note: The VIX is a measure of implied volatility that represents the expected annualized change in the S&P 500 index over the following 30 days. For realized vola- about in line with that of nominal GDP, leaving the tility, five-minute returns are used in an exponentially weighted moving average ratio of total commercial bank credit to currentwith 75 percent of weight distributed over the past 20 days. dollar GDP little changed relative to last June Source: Cboe Volatility Index® (VIX®) accessed via Bloomberg. (figure 15). Overall, measures of bank profitability improved further in the third quarter despite a flatfinancial stability issues, see the box “Developments tening yield curve, but they remain below their pre- Related to Financial Stability” on pages 26–28 of the crisis levels. February 2019 Monetary Policy Report.) International Developments Markets for Treasury securities, mortgage-backed securities, and municipal Economic activity in most foreign economies bonds have functioned well weakened in the second half of 2018 Available indicators of Treasury market functioning After expanding briskly in 2017, foreign GDP growth have generally remained stable since the first half of moderated in 2018. While part of this slowdown is 2018, with a variety of liquidity metrics—including likely due to temporary factors, it also appears to bid-ask spreads, bid sizes, and estimates of transaction costs—displaying few signs of liquidity pres- Figure 15. Ratio of total commercial bank credit to nominal sures. Liquidity conditions in the agency MBS gross domestic product market were also generally stable. Overall, the functioning of Treasury and agency MBS markets has not been materially affected by the implementation of Quarterly Percent the Federal Reserve’s balance sheet normalization program over the past year and a half. Credit condi- 75 tions in municipal bond markets have remained stable since the middle of last year, though yield 70 spreads on 20-year general obligation municipal bonds over comparable-maturity Treasury securities 65 were modestly higher on net. 60 Money market rates have moved up in line with increases in the FOMC’s target range 55 Conditions in domestic short-term funding markets have also remained generally stable since the begin- 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 ning of the summer. Increases in the FOMC’s target Note: Data for 2018:Q4 are estimated. range were transmitted effectively through money Source: Federal Reserve Board, Statistical Release H.8, “Assets and Liabilities of markets, with yields on a broad set of money market Commercial Banks in the United States”; Bureau of Economic Analysis via Haver Analytics. instruments moving higher in response to the

18 105th Annual Report | 2018 reflect weaker underlying momentum against the Political uncertainty and slower economic growth backdrop of somewhat tighter financial conditions, weighed on AFE asset prices increased policy uncertainty, and ongoing debt Moderation in global growth, protracted budget deleveraging. negotiations between the Italian government and the EU, and developments related to the United King- The growth slowdown was particularly dom’s withdrawal from the EU weighed on AFE pronounced in advanced foreign economies asset prices in the second half of 2018. Broad stock Real GDP growth in several advanced foreign econo- price indexes in the AFEs fell, interest rates on sovermies (AFEs) slowed markedly in the second half of eign bonds in several countries in the European the year. This slowdown was concentrated in the periphery remained elevated, and European bank manufacturing sector against the backdrop of soft- shares underperformed, although these moves have ening global trade flows. In Japan, real GDP con- partially retraced in recent weeks. Market-implied tracted in the second half of 2018, as economic paths of policy in major AFEs and long-term soveractivity, which was disrupted by a series of natural eign bond yields declined somewhat, as economic disasters in the third quarter, rebounded only partly data disappointed. in the fourth quarter. Growth in the euro area slowed in the second half of the year: Transportation bottle- Growth slowed in many emerging market necks and complications in meeting tighter emissions economies standards for new motor vehicles weighed on Ger- Chinese GDP growth slowed in the second half of man economic activity, while output contracted in 2018 as an earlier tightening of credit policy, aimed Italy. Although some of these headwinds appear to at restraining the buildup of debt, caused infrastrucbe fading, recent indicators—especially for the manu- ture investment to fall sharply and squeezed housefacturing sector—point to only a limited recovery of hold spending. However, increased concerns about a activity in the euro area at the start of 2019. sharper-than-expected slowdown in growth, as well as prospective effects of trade policies, prompted Inflation pressures remain contained in advanced Chinese authorities to ease monetary and fiscal foreign economies . . . policy somewhat. Elsewhere in emerging Asia, In recent months, headline inflation has fallen below growth remained well below its 2017 pace amid headcentral bank targets in many major AFEs, reflecting winds from moderating global growth. Tighter finanlarge declines in energy prices. In the euro area and cial conditions also weighed on growth in other Japan, low headline inflation rates also reflect sub- EMEs—notably, Argentina and Turkey. dued core inflation. In Canada and the United Kingdom, instead, core inflation rates have been close to Economic activity strengthened somewhat in 2 percent. Mexico and Brazil, but uncertainty about policy developments remains elevated . . . prompting central banks to withdraw In Mexico, economic activity increased at a more accommodation only gradually rapid rate in the third quarter after modest advances With underlying inflation still subdued, the Bank of earlier in the year. However, growth weakened again Japan and the European Central Bank (ECB) kept in the fourth quarter, as perceptions that the newly their short-term policy rates at negative levels. elected government would pursue less market- Although the ECB concluded its asset purchase pro- friendly policies led to a sharp tightening in financial gram in December, it signaled an only very gradual conditions. Amid a sharp peso depreciation and removal of policy accommodation going forward. above-target inflation, the Bank of Mexico raised its The Bank of England (BOE) and the Bank of policy rate to 8.25 percent in December. Brazilian Canada, which both began raising interest rates in real GDP growth rebounded in the third quarter 2017, increased their policy rates further in the sec- after being held down by a nationwide trucker’s ond half of 2018 but to levels that are still low by his- strike in May, and financial markets have rallied on torical standards. The BOE noted that elevated expectations that Brazil’s new government will puruncertainty around the United Kingdom’s exit from sue economic policies that support growth. However, the European Union (EU) weighed on the country’s investors continued to focus on whether the new economic outlook. administration would pass significant fiscal reforms.

Monetary Policy and Economic Developments 19 Financial conditions in many emerging market monetary policy normalization in the United States economies were volatile but are, on net, little contributed to the appreciation of the dollar. The changed since July Chinese renminbi depreciated against the dollar Financial conditions in the EMEs generally tightened slightly, on net, amid ongoing trade negotiations and in the second half of 2018, as investor concerns increased concerns about growth prospects in China. about vulnerabilities in several EMEs intensified The Mexican peso has been volatile amid ongoing against the backdrop of higher policy uncertainty, political developments and trade negotiations but slowing global growth, and rising U.S. interest rates. has, on net, declined only modestly against the dollar. Trade policy tensions between the United States and Sharp declines in oil prices also weighed on the cur- China weighed on asset prices, especially in China rencies of some energy-exporting economies. and other Asian economies. Broad measures of EME sovereign bond spreads over U.S. Treasury yields Part 2: Monetary Policy rose, and benchmark EME equity indexes declined. However, financial conditions improved significantly The Federal Open Market Committee continued to gradually increase the federal funds rate in the in recent months, supported in part by more positive second half of last year policy developments—including the U.S.-Mexico- Canada Agreement and progress on U.S.–China From late 2015 through the first half of last year, the trade negotiations—and FOMC communications Federal Open Market Committee (FOMC) gradually indicating a more gradual normalization of U.S. increased its target range for the federal funds rate as interest rates. EME mutual fund inflows resumed in the economy continued to make progress toward the recent months after experiencing outflows in the Committee’s congressionally mandated objectives of middle of 2018. While movements in asset prices and maximum employment and price stability. In the seccapital flows have been sizable for a number of ond half of 2018, the FOMC continued this gradual economies, broad indicators of financial stress in process of monetary policy normalization, raising the EMEs are below those seen during other periods of federal funds rate at its September and December stress in recent years. meetings, bringing the target range to 2¼ to 2½ percent (figure 17).14 The FOMC’s decisions to increase The dollar appreciated slightly the federal funds rate reflected the solid performance The foreign exchange value of the U.S. dollar is bit a of the U.S. economy, the continued strengthening of higher than in July (figure 16). Concerns about the the labor market, and the fact that inflation had global outlook, uncertainty about trade policy, and moved near the Committee’s 2 percent longer-run objective. Looking ahead, the FOMC will be patient as it Figure 16. U.S. dollar exchange rate indexes determines what future adjustments to the target range for the federal funds rate may be Weekly Week ending January 9, 2015 = 100 appropriate With the gradual reductions in the amount of policy 150 Dollar appreciation accommodation to date, the federal funds rate is now Mexican peso 140 at the lower end of the range of estimates of its longer-run neutral level—that is, the level of the fed- 130 eral funds rate that is neither expansionary nor 120 contractionary. Broad dollar 110 Developments at the time of the December FOMC 100 Chinese renminbi meeting, including volatility in financial markets and Euro 90 increased concerns about global growth, made the 2015 2016 2017 2018 2019 14 See Board of Governors of the Federal Reserve System (2018), “Federal Reserve Issues FOMC Statement,” press release, Sep- Note: The data, which are in foreign currency units per dollar, are weekly averages tember 26, https://www.federalreserve.gov/newsevents/ of daily data and extend through February 20, 2019. As indicated by the arrow, pressreleases/monetary20180926a.htm; and Board of Governors increases in the data represent U.S. dollar appreciation, and decreases represent U.S. dollar depreciation. of the Federal Reserve System (2018), “Federal Reserve Issues FOMC Statement,” press release, December 19, https://www Source: Federal Reserve Board, Statistical Release H.10, “Foreign Exchange .federalreserve.gov/newsevents/pressreleases/monetary20181219a Rates.” .htm.

20 105th Annual Report | 2018 Figure 17. Selected interest rates Daily Percent 5 10-year Treasury rate 4 3 2 2-year Treasury rate 1 0 Target federal funds rate 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 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. appropriate extent and timing of future rate increases incoming data. Specifically, in deciding on the timing more uncertain than earlier. Against that backdrop, and size of future adjustments to the federal funds the Committee indicated it would monitor global rate, the Committee will assess realized and expected economic and financial developments and assess economic conditions relative to its objectives of their implications for the economic outlook. In the maximum employment and 2 percent inflation. This Summary of Economic Projections (SEP) from the assessment will take into account a wide range of December meeting—the most recent SEP available— information, including measures of labor market participants generally revised down their individual conditions, indicators of inflation pressures and assessments of the appropriate path for monetary inflation expectations, and readings on financial and policy relative to their assessments at the time of the international developments. September meeting.15 In addition to evaluating a wide range of economic In January, the Committee stated that it continued to and financial data and information gathered from view sustained expansion of economic activity, business contacts and other informed parties around strong labor market conditions, and inflation near the country, policymakers routinely consult prescripthe Committee’s symmetric 2 percent objective as the tions for the policy interest rate from a variety of most likely outcomes. Nonetheless, in light of global rules, which can serve as useful guidance to the economic and financial developments and muted FOMC. However, many practical considerations inflation pressures, the Committee will be patient as make it undesirable for the FOMC to mechanically it determines what future adjustments to the federal follow the prescriptions of any specific rule. Consefunds rate may be appropriate to support these quently, the FOMC’s framework for conducting sysoutcomes. tematic monetary policy respects key principles of good monetary policy and, at the same time, provides Future changes in the federal funds rate will flexibility to address many of the limitations of these depend on the economic outlook as informed by policy rules (see the box “Monetary Policy Rules and incoming data Systematic Monetary Policy” on pages 36–39 of the The FOMC has continued to emphasize that the February 2019 Monetary Policy Report). actual path of monetary policy will depend on the evolution of the economic outlook as informed by The FOMC has continued to implement its program to gradually reduce the Federal 15 See the December Summary of Economic Projections, which Reserve’s balance sheet appeared as an addendum to the minutes of the December 18– The Committee has continued to implement the bal- 19, 2018, meeting of the FOMC and is presented in Part 3 of the February 2019 Monetary Policy Report. ance sheet normalization program that has been

Monetary Policy and Economic Developments 21 under way since October 2017.16 Under this pro- of agency debt and agency MBS at approximately gram, the FOMC has been reducing its holdings of $1.6 trillion (figure 18). Treasury and agency securities in a gradual and predictable manner by decreasing its reinvestment of the As the Federal Reserve has continued to gradually principal payments it received from these securities. reduce its securities holdings, the level of reserve bal- Specifically, such payments have been reinvested only ances in the banking system has declined. In particuto the extent that they exceeded gradually rising caps. lar, the level of reserve balances has decreased by about $350 billion since the middle of last year, and In the third quarter of 2018, the Federal Reserve by about $1.2 trillion since its peak in 2014.17 At the reinvested principal payments from its holdings of January meeting, the Committee released an updated Treasury securities maturing during each calendar Statement Regarding Monetary Policy Implementamonth in excess of $24 billion. It also reinvested in tion and Balance Sheet Normalization to provide agency mortgage-backed securities (MBS) the additional information regarding its plans to impleamount of principal payments from its holdings of ment monetary policy over the longer run.18 In this agency debt and agency MBS received during each statement, the Committee indicated that it intends to calendar month in excess of $16 billion. In the fourth continue to implement monetary policy in a regime quarter, the FOMC increased the caps for Treasury in which an ample supply of reserves ensures that securities and for agency securities to their respective control over the level of the federal funds rate and maximums of $30 billion and $20 billion. Of note, other short-term interest rates is exercised primarily reinvestments of agency debt and agency MBS through the setting of the Federal Reserve's adminisceased in October as principal payments fell below tered rates, and in which active management of the the maximum redemption caps. supply of reserves is not required. This operating procedure is often called a “floor system.” The The Federal Reserve’s total assets have continued to FOMC judges that this approach provides good condecline from about $4.3 trillion last July to about trol of short-term money market rates in a variety of $4.0 trillion at present, with holdings of Treasury securities at approximately $2.2 trillion and holdings 17 Since the start of the normalization program, reserve balances have dropped by approximately $600 billion. 16 For more information, see the Addendum to the Policy Normal- 18 See the Statement Regarding Monetary Policy Implementation ization Principles and Plans, which is available on the Board’s and Balance Sheet Normalization, which is available on the website at https://www.federalreserve.gov/monetarypolicy/files/ Board’s website at https://www.federalreserve.gov/newsevents/ FOMC_PolicyNormalization.20170613.pdf. pressreleases/monetary20190130c.htm. 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 2019 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 13, 2019. Source: Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances.”

22 105th Annual Report | 2018 market conditions and effective transmission of those FOMC’s policy decisions in September and Decemrates to broader financial conditions. In addition, the ber. Usage of the ON RRP facility has remained low, FOMC stated that it is prepared to adjust any of the excluding quarter-ends. details for completing balance sheet normalization in light of economic and financial developments. The effective federal funds rate moved to parity with the interest rate paid on reserve balances in the Although reserve balances play a central role in the months before the December meeting. At its Decemongoing balance sheet normalization process, in the ber meeting, the Committee made a second small longer run, the size of the balance sheet will also be technical adjustment by setting the interest on excess importantly determined by trend growth in nonre- reserves rate 10 basis points below the top of the tarserve liabilities. The box “The Role of Liabilities in get range for the federal funds rate; this adjustment Determining the Size of the Federal Reserve’s Bal- was intended to foster trading in the federal funds ance Sheet” on pages 41–43 of the February 2019 market at rates well within the FOMC’s target range. Monetary Policy Report discusses various factors that influence the size of reserve and nonreserve liabilities. The Federal Reserve will conduct a review of its strategic framework for monetary policy in 2019 Meanwhile, interest income on the Federal Reserve’s With labor market conditions close to maximum securities holdings has continued to support substanemployment and inflation near the Committee’s tial remittances to the U.S. Treasury. Preliminary 2 percent objective, the FOMC judges it is an opporfinancial statement results indicate that the Federal tune time for the Federal Reserve to conduct a review Reserve remitted about $65 billion in 2018. of its strategic framework for monetary policy—including the policy strategy, tools, and communication The Federal Reserve’s implementation of practices. The goal of this assessment is to identify monetary policy has continued smoothly possible ways to improve the Committee’s current As with the previous federal funds rate increases policy framework in order to ensure that the Federal since late 2015, the Federal Reserve successfully Reserve is best positioned going forward to achieve raised the effective federal funds rate in September its statutory mandate of maximum employment and and December by increasing the interest rate paid on price stability. reserve balances and the interest rate offered on overnight reverse repurchase agreements (ON RRPs). Specific to the communications practices, the Federal Specifically, the Federal Reserve raised the interest Reserve judges that transparency is essential to rate paid on required and excess reserve balances to accountability and the effectiveness of policy, and 2.20 percent in September and to 2.40 percent in therefore the Federal Reserve seeks to explain its December. In addition, the Federal Reserve increased policymaking approach and decisions to the Conthe ON RRP offering rate to 2.00 percent in Septemgress and the public as clearly as possible. The box ber and to 2.25 percent in December. The Federal “Federal Reserve Transparency: Rationale and New Reserve also approved a ¼ percentage point increase Initiatives” on pages 45–46 of the February 2019 in the discount rate (the primary credit rate) in both Monetary Policy Report discusses the steps and new September and December. Yields on a broad set of initiatives the Federal Reserve has taken to improve money market instruments moved higher, roughly in transparency. line with the federal funds rate, in response to the

Monetary Policy and Economic Developments 23 Monetary Policy Report July 2018 Economic growth. Real gross domestic product (GDP) is reported to have increased at an annual rate of 2 percent in the first quarter of 2018, and recent Summary indicators suggest that economic growth stepped up Economic activity increased at a solid pace over the in the second quarter. Gains in consumer spending first half of 2018, and the labor market has contin- slowed early in the year, but they rebounded in the ued to strengthen. Inflation has moved up, and in spring, supported by strong job gains, recent and May, the most recent period for which data are avail- past increases in household wealth, favorable conable, inflation measured on a 12-month basis was a sumer sentiment, and higher disposable income due little above the Federal Open Market Committee’s in part to the implementation of the Tax Cuts and (FOMC) longer-run objective of 2 percent, boosted Jobs Act. Business investment growth has remained by a sizable increase in energy prices. In this eco- robust, and indexes of business sentiment have been nomic environment, the Committee judged that cur- strong. Foreign economic growth has remained solid, rent and prospective economic conditions called for a and net exports had a roughly neutral effect on real further gradual removal of monetary policy accom- U.S. GDP growth in the first quarter. However, activmodation. In line with that judgment, the FOMC ity in the housing market has leveled off this year. raised the target for the federal funds rate twice in the first half of 2018, bringing it to a range of 1¾ to Financial conditions. Domestic financial conditions 2 percent. for businesses and households have generally continued to support economic growth. After rising Economic and Financial Developments steadily through 2017, broad measures of equity The labor market. The labor market has continued to prices are modestly higher, on balance, from their levstrengthen. Over the first six months of 2018, pay- els at the end of last year amid some bouts of heightrolls increased an average of 215,000 per month, ened volatility in financial markets. While long-term which is somewhat above the average pace of 180,000 Treasury yields, mortgage rates, and yields on corpoper month in 2017 and is considerably faster than rate bonds have risen so far this year, longer-term what is needed, on average, to provide jobs for new interest rates remain low by historical standards, and entrants into the labor force. The unemployment rate corporate bond issuance has continued at a moderate edged down from 4.1 percent in December to 4.0 per- pace. Moreover, most types of consumer loans cent in June, which is about ½ percentage point remained widely available for households with strong below the median of FOMC participants’ estimates creditworthiness, and credit provided by commercial of its longer-run normal level. Other measures of banks continued to expand. The foreign exchange labor utilization were consistent with a tight labor value of the U.S. dollar has appreciated somewhat market. However, hourly labor compensation growth against the currencies of our trading partners this has been moderate, likely held down in part by the year, but it remains below its level at the start of weak pace of productivity growth in recent years. 2017. Foreign financial conditions remain generally supportive of growth despite recent increases in Inflation. Consumer price inflation, as measured by financial stress in several emerging market economies. the 12-month percentage change in the price index for personal consumption expenditures, moved up Financial stability. The U.S. financial system remains from a little below the FOMC’s objective of 2 per- substantially more resilient than during the decade cent at the end of last year to 2.3 percent in May, before the financial crisis. Asset valuations continue boosted by a sizable increase in consumer energy to be elevated despite declines since the end of 2017 prices. The 12-month measure of inflation that in the forward price-to-earnings ratio of equities and excludes food and energy items (so-called core infla- the prices of corporate bonds. In the private nonfition), which historically has been a better indicator of nancial sector, borrowing among highly levered and where overall inflation will be in the future than the lower-rated businesses remains elevated, although the total figure, was 2 percent in May. This reading was ratio of household debt to disposable income contin- ½ percentage point above where it had been ues to be moderate. Vulnerabilities stemming from 12 months earlier, as the unusually low readings from leverage in the financial sector remain low, reflecting last year were not repeated. Measures of longer-run in part strong capital positions at banks, whereas inflation expectations have been generally stable. some measures of hedge fund leverage have

24 105th Annual Report | 2018 increased. Vulnerabilities associated with maturity Special Topics and liquidity transformation among banks, insurance Prime-age labor force participation. Labor force parcompanies, money market mutual funds, and asset ticipation rates (LFPRs) for men and women managers remain below levels that generally prevailed between 25 and 54 years old—that is, the share of before 2008. these individuals either working or actively seeking work—trended lower between 2000 and 2013. Those Monetary Policy trends likely reflect numerous factors, including a Interest rate policy. Over the first half of 2018, the long-run decline in the demand for workers with FOMC has continued to gradually increase the target lower levels of education and an increase in the share range for the federal funds rate. Specifically, the of the population with some form of disability. By Committee decided to raise the target range for the contrast, the prime-age LFPR has increased notably federal funds rate at its meetings in March and June, since 2013, and the share of nonparticipants who bringing it to the current range of 1¾ to 2 percent. report wanting a job remains above pre-recession lev- The decisions to increase the target range for the fedels. Thus, some continuation of the recent increase in eral funds rate reflected the economy’s continued the prime-age LFPR may be possible if labor progress toward the Committee’s objectives of maxidemand remains strong. (See the box “The Labor mum employment and price stability. Even with these Force Participation Rate for Prime-Age Individuals” policy rate increases, the stance of monetary policy on pages 8–10 of the July 2018 Monetary Policy remains accommodative, thereby supporting strong Report.) labor market conditions and a sustained return to 2 percent inflation. Oil prices. Oil prices have climbed rapidly over the past year, reflecting both supply and demand factors. The FOMC expects that further gradual increases in Although higher oil prices are likely to restrain the target range for the federal funds rate will be conhousehold consumption in the United States, much sistent with a sustained expansion of economic activof the negative effect on GDP from lower consumer ity, strong labor market conditions, and inflation spending is likely to be offset by increased production near the Committee’s symmetric 2 percent objective and investment in the growing U.S. oil sector. Conseover the medium term. Consistent with this outlook, quently, higher oil prices now imply much less of a in the most recent Summary of Economic Projecnet overall drag on the economy than they did in the tions (SEP), which was compiled at the time of the past, although they will continue to have important June FOMC meeting, the median of participants’ distributional effects. The negative effect of upward assessments for the appropriate level for the federal moves in oil prices should get smaller still as U.S. oil funds rate rises gradually over the period from production grows and net oil imports decline further. 2018 to 2020 and stands somewhat above the median (See the box “The Recent Rise in Oil Prices” on projection for its longer-run level by the end of 2019 pages 16–17 of the July 2018 Monetary Policy and through 2020. (The June SEP is presented in Part 3 Report.) of the July 2018 Monetary Policy Report.) However, as the Committee has continued to emphasize, the timing and size of future adjustments to the target Monetary policy rules. Monetary policymakers conrange for the federal funds rate will depend on the sider a wide range of information on current eco- Committee’s assessment of realized and expected nomic conditions and the outlook when deciding on economic conditions relative to its maximum- a policy stance they deem most likely to foster the employment objective and its symmetric 2 percent FOMC’s statutory mandate of maximum employinflation objective. ment and stable prices. They also routinely consult monetary policy rules that connect prescriptions for Balance sheet policy. The FOMC has continued to the policy interest rate with variables associated with implement the balance sheet normalization program the dual mandate. The use of such rules requires, described in the Addendum to the Policy Normaliza- among other considerations, careful judgments about tion Principles and Plans that the Committee issued the choice and measurement of the inputs into the about a year ago. Specifically, the FOMC has been rules such as estimates of the neutral interest rate, reducing its holdings of Treasury and agency securi- which are highly uncertain. (See the box “Complexities by decreasing, in a gradual and predictable man- ties of Monetary Policy Rules” on pages 37–41 of the ner, the reinvestment of principal payments it receives July 2018 Monetary Policy Report.) from these securities.

Monetary Policy and Economic Developments 25 Interest on reserves. The payment of interest on overall participation rate. In particular, members of reserves—balances held by banks in their accounts at the baby-boom cohort are increasingly moving into the Federal Reserve—is an essential tool for imple- their retirement years, a time when labor force parmenting monetary policy because it helps anchor the ticipation is typically low. Indeed, the share of the federal funds rate within the FOMC’s target range. civilian population aged 65 and over in the United This tool has permitted the FOMC to achieve a States climbed from 16 percent in 2000 to 19 percent gradual increase in the federal funds rate in combina- in 2017 and is projected to rise to 24 percent by 2026. tion with a gradual reduction in the Fed’s securities Given this trend, the flat trajectory of the LFPR durholdings and in the supply of reserve balances. The ing the past few years is consistent with strengthening FOMC judged that removing monetary policy labor market conditions. Similarly, the LFPR for accommodation through first raising the federal individuals between 25 and 54 years old—which is funds rate and then beginning to shrink the balance much less sensitive to population aging—has been sheet would best contribute to achieving and main- rising for the past several years. (The box “The Labor taining maximum employment and price stability Force Participation Rate for Prime-Age Individuals” without causing dislocations in financial markets or on pages 8–10 of the July 2018 Monetary Policy institutions that could put the economic expansion at Report examines the prospects for further increases in risk. (See the box “Interest on Reserves and Its participation for these individuals.) The employment- Importance for Monetary Policy”on pages 44–46 of to-population ratio for individuals 16 and over—the the July 2018 Monetary Policy Report.) share of the total population who are working—was 60.4 percent in June and has been gradually increas- Part 1: Recent Economic and Financial ing since 2011, reflecting the combination of the Developments declining unemployment rate and the flat LFPR. Domestic Developments Other indicators are also consistent with a strong labor market. As reported in the Job Openings and The labor market strengthened further during the Labor Turnover Survey (JOLTS), the rate of job first half of the year . . . openings has remained quite elevated.3 The rate of Labor market conditions have continued to quits has stayed high in the JOLTS, an indication strengthen so far in 2018. According to the Bureau of that workers are able to successfully switch jobs when Labor Statistics (BLS), gains in total nonfarm payroll they wish to. In addition, the JOLTS layoff rate has employment averaged 215,000 per month over the been low, and the number of people filing initial first half of the year. That pace is up from the aver- claims for unemployment insurance benefits has age monthly pace of job gains in 2017 and is consid- remained near its lowest level in decades. Other surerably faster than what is needed to provide jobs for vey evidence indicates that households perceive jobs new entrants into the labor force.1 Indeed, the unem- as plentiful and that businesses see vacancies as hard ployment rate edged down from 4.1 percent in to fill. Another indicator, the share of workers who December to 4.0 percent in June. This rate is below are working part time but would prefer to be all Federal Open Market Committee (FOMC) par- employed full time—which is part of the U-6 measticipants’ estimates of its longer-run normal level and ure of labor underutilization from the BLS—fell furis about ½ percentage point below the median of ther in the first six months of the year and now those estimates.2 The unemployment rate in June is stands close to its pre-recession level. close to the lows last reached in 2000. . . . and unemployment rates have fallen for all The labor force participation rate (LFPR), which is major demographic groups the share of individuals aged 16 and older who are The continued decline in the unemployment rate has either working or actively looking for work, was been reflected in the experiences of multiple racial 62.9 percent in June and has changed little, on net, and ethnic groups. The unemployment rates for since late 2013. The aging of the population is an blacks or African Americans and Hispanics tend to important contributor to a downward trend in the rise considerably more than rates for whites and Asians during recessions but decline more rapidly 1 Monthly job gains in the range of 130,000 to 160,000 are consis- during expansions. Indeed, the declines in the unemtent with an unchanged unemployment rate and an unchanged labor force participation rate. 2 See the Summary of Economic Projections in Part 3 of the 3 Indeed, the number of job openings now about matches the July 2018 Monetary Policy Report. number of unemployed individuals.

26 105th Annual Report | 2018 ployment rates for blacks and Hispanics have been the average pace from 1996 through 2007 of 2.8 perparticularly striking, and the rates have recently been cent and also below the average gain in the 1974–95 at or near their lowest readings since these series period of 1.6 percent. The weakness in productivity began in the early 1970s. Although differences in growth may be partly attributable to the sharp pullunemployment rates across ethnic and racial groups back in capital investment during the most recent have narrowed in recent years, they remain substan- recession and the relatively slow recovery that foltial and similar to pre-recession levels. The rise in lowed. However, considerable debate remains about LFPRs for prime-age individuals over the past few the reasons for the recent slowdown in productivity years has also been evident in each of these racial and growth and whether it will persist.6 ethnic groups, with increases again particularly notable for African Americans. Even so, the LFPR Price inflation has picked up from the low for whites remains higher than that for the other readings in 2017 groups.4 In 2017, inflation remained below the FOMC’s longer-run objective of 2 percent. Partly because the Increases in labor compensation have been softness in some price categories appeared idiosynmoderate . . . cratic, Federal Reserve policymakers expected infla- Despite the strong labor market, the available indica- tion to move higher in 2018.7 This expectation tors generally suggest that increases in hourly labor appears to be on track so far. Consumer price inflacompensation have been moderate. Compensation tion, as measured by the 12-month percentage per hour in the business sector—a broad-based meas- change in the price index for personal consumption ure of wages, salaries, and benefits that is quite vola- expenditures (PCE), moved up to 2.3 percent in May. tile—rose 2¾ percent over the four quarters ending in Core PCE inflation, which excludes consumer food 2018:Q1, slightly more than the average annual and energy prices that are often quite volatile and increase over the preceding seven or so years. The typically provides a better indication than the total employment cost index—a less volatile measure of measure of where overall inflation will be in the both wages and the cost to employers of providing future, was 2 percent over the 12 months ending in benefits—likewise was 2¾ percent higher in the first May—0.5 percentage point higher than it had been quarter of 2018 relative to its year-earlier level; this one year earlier. The total measure exceeded core increase was ½ percentage point faster than its gain a inflation because of a sizable increase in consumer year earlier. Among measures that do not account for energy prices. In contrast, food price inflation has benefits, average hourly earnings rose 2¾ percent in continued to be low by historical standards—data June relative to 12 months earlier, a gain in line with through May show the PCE price index for food and the average increase in the preceding few years. beverages having increased less than ½ percent over According to the Federal Reserve Bank of Atlanta, the past year. the median 12-month wage growth of individuals reporting to the Current Population Survey increased The higher readings in both total and core inflation about 3¼ percent in May, also similar to its readings relative to a year earlier reflect faster price increases from the past few years.5 for a wide range of goods and services this year and the dropping out of the 12-month calculation of the . . . and likely have been restrained by slow steep one-month decline in the price index for wiregrowth of labor productivity less telephone services in March last year. The Those moderate rates of compensation gains likely 12-month change in the trimmed mean PCE price reflect the offsetting influences of a strong labor mar- index—an alternative indicator of underlying inflaket and persistently weak productivity growth. Since 2008, labor productivity has increased only a little 6 The box “Productivity Developments in the Advanced Economies” in the July 2017 Monetary Policy Report provides more more than 1 percent per year, on average, well below information. See Board of Governors of the Federal Reserve System (2017), Monetary Policy Report (Washington: Board of 4 The lower levels of labor force participation for these other Governors, July), pp. 12–13, https://www.federalreserve.gov/ groups differ importantly by sex. For African Americans, men monetarypolicy/2017-07-mpr-part1.htm. have a lower participation rate relative to white men, while the 7 Additional details can be found in the June 2017 Summary of participation rate for African American women is as high as Economic Projections, an addendum to the minutes of the that of white women. By contrast, the lower LFPRs for Hispan- June 2017 FOMC meeting. See Board of Governors of the Fedics and Asians reflect lower participation among women. eral Reserve System (2017), “Minutes of the Federal Open Mar- 5 The Atlanta Fed’s measure differs from others in that it meas- ket Committee, June 13–14, 2017,” press release, July 5, https:// ures the wage growth only of workers who were employed both www.federalreserve.gov/newsevents/pressreleases/ in the current survey month and 12 months earlier. monetary20170705a.htm.

Monetary Policy and Economic Developments 27 tion produced by the Federal Reserve Bank of Dallas Federal Reserve Bank of New York, the median of that may be less sensitive than the core index to idio- respondents’ expected inflation rate three years hence syncratic price movements—slowed by less than core has been moving up recently and is currently at the inflation over 2017 and has also increased a bit less top of the range it has occupied over the past couple this year. This index rose 1.8 percent over the of years. 12 months ending in May, up a touch from the increase over the same period last year.8 . . . while market-based measures of inflation compensation have largely moved sideways Oil prices have surged amid supply concerns . . . this year As noted, the faster pace of total inflation this year Inflation expectations can also be gauged by marketrelative to core inflation reflects a substantial rise in based measures of inflation compensation. However, consumer energy prices. Retail gasoline prices this the inference is not straightforward, because marketyear were driven higher by a rise in oil prices. The based measures can be importantly affected by spot price of Brent crude oil rose from about $65 per changes in premiums that provide compensation for barrel in December to around $75 per barrel in early bearing inflation and liquidity risks. Measures of July. Although that increase took place against a longer-term inflation compensation—derived either backdrop of continued strength in global demand, from differences between yields on nominal Treasury supply concerns have become more prevalent in securities and those on comparable-maturity Treasrecent months. (For a discussion of the reasons ury Inflation-Protected Securities (TIPS) or from behind the oil price increases along with a review of inflation swaps—have moved sideways for the most the effects of oil prices on U.S. economic growth, see part this year after having returned to levels seen in the box “The Recent Rise in Oil Prices” on pages early 2017.9 The TIPS-based measure of 5-to-10- 16–17 of the July 2018 Monetary Policy Report.) year-forward inflation compensation and the analogous measure of inflation swaps are now about 2 per- . . . while prices of imports other than energy cent and 2½ percent, respectively, with both measures have also increased below the ranges that persisted for most of the Nonfuel import prices rose sharply in early 2018, 10 years before the start of the notable declines in partly reflecting the pass-through of earlier increases mid-2014.10 in commodity prices. In particular, metals prices Real gross domestic product growth slowed in posted sizable gains late last year due to strong global the first quarter, but spending by households demand but have retreated somewhat in recent weeks. appears to have picked up in recent months Survey-based measures of inflation expectations After having expanded at an annual rate of 3 percent have been stable . . . in the second half of 2017, real gross domestic prod- Expectations of inflation likely influence actual infla- uct (GDP) is now reported to have increased 2 pertion by affecting wage- and price-setting decisions. cent in the first quarter of this year. The step-down Survey-based measures of inflation expectations at in growth during the first quarter was largely attribmedium- and longer-term horizons have remained utable to a sharp slowing in the growth of consumer generally stable so far this year. In the Survey of Pro- spending that appears transitory, and gains in GDP fessional Forecasters conducted by the Federal appear to have rebounded in the second quarter. Reserve Bank of Philadelphia, the median expecta- Meanwhile, business investment has remained strong, tion for the annual rate of increase in the PCE price index over the next 10 years has been around 2 per- 9 Inflation compensation implied by the TIPS breakeven inflation rate is based on the difference, at comparable maturities, cent for the past several years. In the University of between yields on nominal Treasury securities and yields on Michigan Surveys of Consumers, the median value TIPS, which are indexed to the total consumer price index for inflation expectations over the next 5 to 10 years (CPI). Inflation swaps are contracts in which one party makes payments of certain fixed nominal amounts in exchange for cash has been about 2½ percent since the end of 2016, flows that are indexed to cumulative CPI inflation over some though this level is about ¼ percentage point lower horizon. Focusing on inflation compensation 5 to 10 years than had prevailed through 2014. In contrast, in the ahead is useful, particularly for monetary policy, because such forward measures encompass market participants’ views about Survey of Consumer Expectations conducted by the where inflation will settle in the long term after developments influencing inflation in the short term have run their course. 8 The trimmed mean index excludes whatever prices showed the 10 As these measures are based on CPI inflation, one should problargest increases or decreases in a given month; for example, the ably subtract about ¼ to ½ percentage point—the average difsharp decline in prices for wireless telephone services in ferential with PCE inflation over the past two decades—to infer March 2017 was excluded from this index. inflation compensation on a PCE basis.

28 105th Annual Report | 2018 and net exports had little effect on output growth in highest-ever reading for that ratio, which dates back the first quarter. On balance, over the first half of to 1947. this year, overall economic activity appears to have expanded at a solid pace. . . . and borrowing conditions for consumers remain generally favorable . . . The economic expansion continues to be supported Financing conditions for consumers are generally by favorable consumer and business sentiment, past favorable and remain supportive of growth in houseincreases in household wealth, solid economic growth hold spending. However, banks have continued to abroad, and accommodative domestic financial con- tighten standards for credit cards and auto loans for ditions, including moderate borrowing costs and easy borrowers with low credit scores, possibly in response access to credit for many households and businesses. to some upward moves in the delinquency rates of those borrowers. Mortgage credit has remained read- Gains in income and wealth continue to support ily available for households with solid credit profiles. consumer spending . . . For borrowers with low credit scores, mortgage Following exceptionally strong growth in the fourth financing conditions have eased somewhat further quarter of 2017, consumer spending in the first quar- but remain tight overall. In this environment, conter of this year was tepid, rising at an annual rate of sumer credit continued to increase in the first few 0.9 percent. The slowdown in growth was evident in months of 2018, though the rate of increase moderoutlays for motor vehicles and in retail sales more ated some from its robust pace in the previous year. generally; moreover, unseasonably warm weather . . . while consumer confidence remains strong depressed spending on energy services. However, consumer spending picked up in more recent months as Consumers have remained upbeat. So far this year, retail sales firmed, and PCE in April and May rose at the Michigan survey index of consumer sentiment an annual rate of 2¼ percent relative to the average has been near its highest level since 2000, likely over the first quarter. reflecting rising income, job gains, and low inflation. Indeed, households’ expectations for real income Real disposable personal income (DPI), a measure of changes over the next year or two now stand above after-tax income adjusted for inflation, has increased levels preceding the previous recession. at a solid annual rate of about 3 percent so far this Business investment has continued to rebound . . . year. Real DPI has been supported by the reduction in income taxes owing to the implementation of the Investment spending by businesses has continued to Tax Cuts and Jobs Act (TCJA) as well as the contin- increase so far this year, with notable gains for spendued strength in the labor market. With consumer ing, both on equipment and intangibles and on nonspending rising just a little less than the gains in dis- residential structures. Within structures, the rise in oil posable income so far this year, the personal saving prices propelled another steep ramp-up in investment rate has edged up after having fallen for the past in drilling and mining structures—albeit not yet back two years. to the levels recorded from 2012 to 2014—while investment in nonresidential structures outside of the Ongoing gains in household net worth likely have energy sector picked up after declining in 2017. also supported consumer spending. House prices, Forward-looking indicators of business investment which are of particular importance for the balance spending remain favorable on balance. Business sentisheet positions of a large set of households, have ment and the profit expectations of industry analysts been increasing at an average annual pace of about have been positive overall, while new orders of capital 6 percent in recent years.11 Although U.S. equity goods have advanced on net this year. prices have posted modest gains, on net, so far this . . . while corporate financing conditions have year, this flattening followed several years of sizable remained accommodative gains. Buoyed by the cumulative increases in home and equity prices, aggregate household net worth was Aggregate flows of credit to large nonfinancial firms 6.8 times household income in the first quarter, down remained strong in the first quarter, supported in just slightly from its ratio in the fourth quarter—the part by relatively low interest rates and accommodative financing conditions. The gross issuance of corporate bonds stayed robust during the first half of 2018, while yields on both investment- and 11 For the majority of households, home equity makes up the largest share of their wealth. speculative-grade corporate bonds moved up notably

Monetary Policy and Economic Developments 29 but remained low by historical standards. Despite Net exports had a neutral effect on GDP growth strong growth in business investment, outstanding in the first quarter commercial and industrial (C&I) loans on banks’ After being a small drag on U.S. real GDP growth books rose only modestly in the first quarter, last year, net exports had a neutral effect on growth although their pace of expansion in more recent in the first quarter. Real U.S. exports increased about months has strengthened on average. In April, 3½ percent at an annual rate, as exports of automorespondents to the Senior Loan Officer Opinion Sur- biles and consumer goods remained robust. Real vey on Bank Lending Practices, or SLOOS, reported import growth slowed sharply following a surge late that demand for C&I loans weakened in the first last year. Nominal trade data through May suggest quarter even as lending standards and terms on such that export growth picked up in the second quarter, loans eased.12 Respondents attributed this decline in led by agricultural exports, while import growth was demand in part to firms drawing on internally gener- tepid. All told, the available data suggest that the ated funds or using alternative sources of financing. nominal trade deficit likely narrowed relative to GDP Meanwhile, growth in commercial real estate loans in the second quarter. has moderated some but remains strong. In addition, financing conditions for small businesses appear to Fiscal policy became more expansionary have remained generally accommodative, with lend- this year . . . ing standards little changed at most banks and with Federal fiscal policy will likely provide a moderate most firms reporting that they are able to obtain boost to GDP growth this year. The individual and credit. Although small business credit growth has corporate tax cuts in the TCJA should lead to been subdued, survey data suggest this sluggishness is increased private consumption and investment, while largely due to continued weak demand for credit by the Bipartisan Budget Act of 2018 (BBA) enables small businesses. increased federal spending on goods and services. As the effects of the BBA had yet to show through, fed- But activity in the housing sector has leveled off eral government purchases posted only a modest gain Residential investment, which rose a modest 2½ perin the first quarter. cent in 2017, appears to have largely moved sideways over the first five months of the year. The slowing in After narrowing significantly for several years, the residential investment likely is partly a result of federal unified deficit widened from about 2½ perhigher mortgage interest rates. Although these rates cent of GDP in fiscal year 2015 to 3½ percent in fisare still low by historical standards, they have moved cal 2017, and it is on pace to move up further in fiscal up and are near their highest levels in seven years. In 2018. Although expenditures as a share of GDP in addition, higher lumber prices and tight supplies of 2017 were relatively stable at 21 percent, receipts skilled labor and developed lots reportedly have been moved lower to roughly 17 percent of GDP and have restraining home construction. While starts of both remained at about the same level so far this year. The single-family and multifamily housing units rose in ratio of federal debt held by the public to nominal the fourth quarter, single-family starts have been little GDP was 76½ percent at the end of fiscal 2017 and is changed, on net, since then, whereas multifamily quite elevated relative to historical norms. starts continued to climb earlier this year before flattening out. Meanwhile, over the first five months of . . . and the fiscal position of most state and local this year, new home sales have held at around the rate governments is stable of late last year, but sales of existing homes have The fiscal position of most state and local governeased somewhat. Despite the continued increases in ments remains stable, although there is a range of house prices, the pace of construction has not kept experiences across these governments and some states up with demand. As a result, the months’ supply of are still struggling. After several years of slow inventories of homes for sale has remained at a relagrowth, revenue gains of state governments have tively low level, and the aggregate vacancy rate stands strengthened notably as sales and income tax collecat the lowest level since 2003. tions have picked up over the past few quarters. In addition, house price gains have continued to push up property tax revenues at the local level. But expen- 12 The SLOOS is available on the Board’s website at https://www .federalreserve.gov/data/sloos/sloos.htm. ditures by state and local governments have been

30 105th Annual Report | 2018 restrained. Employment growth in this sector has levels at the end of 2017. The increase in Treasury been moderate, while real outlays for construction by yields seems to largely reflect investors’ greater optithese governments have largely been moving sideways mism about the domestic growth outlook and firmat a relatively low level. ing expectations for further gradual removal of monetary policy accommodation. Expectations for Financial Developments increases in the supply of Treasury securities following the federal budget agreement in early February The expected path of the federal funds rate has also appear to have contributed to the increase in moved up Treasury yields, while increased concerns about trade Market-based measures of the path of the federal policy both domestically and abroad, political develfunds rate continue to suggest that market partici- opments in Europe, and the foreign economic outpants expect further gradual increases in the federal look weighed on longer-dated Treasury yields. Yields funds rate. Relative to the end of last year, the on 30-year agency mortgage-backed securities expected policy rate path has moved up, boosted in (MBS)—an important determinant of mortgage part by investors’ perception of a strengthening in interest rates—increased about 60 basis points over the domestic economic outlook. In particular, the the first half of the year, a bit more than the rise in policy path moved higher in response to incoming the 10-year nominal Treasury yield, but remain low economic data so far this year, especially the by historical standards. Yields on corporate debt employment reports, which were seen as supporting securities—both investment grade and high yield— expectations for a solid pace of growth in domestic rose more than Treasury yields, leaving the spreads economic activity. In addition, investors reportedly on corporate bond yields over comparable-maturity interpreted FOMC communications in the first half Treasury yields notably wider than at the beginning of 2018 as signaling an upbeat economic outlook and of the year. as reinforcing expectations for further gradual removal of monetary policy accommodation. Broad equity indexes rose modestly amid some bouts of market volatility Survey-based measures of the expected path of the After surging as much as 20 percent in 2017, broad policy rate over the next few years have also increased stock market indexes rose modestly, on balance, so modestly since the end of last year. According to the far this year amid some bouts of heightened volatility results of the most recent Survey of Primary Dealers in financial markets. The boost to equity prices from and Survey of Market Participants, both conducted first-quarter earnings reports that generally beat anaby the Federal Reserve Bank of New York just before lysts’ expectations was reportedly offset by increased the June FOMC meeting, the median of respondents’ uncertainty about trade policy, rising interest rates, projections for the path of the federal funds rate and concerns about political developments abroad. shifted up about 25 basis points for 2018 and beyond, While stock prices for companies in the technology compared with the median of assessments last and consumer discretionary sectors rose notably, December.13 Market-based measures of uncertainty those of companies in the industrial and financial about the policy rate approximately one to two years sectors declined modestly. After spiking considerably ahead increased slightly, on balance, from their levels in early February, the implied volatility for the S&P at the end of last year. 500 index—the VIX—declined and ended the period slightly above the low levels that prevailed in 2017. The nominal Treasury yield curve has shifted up (For a discussion of financial stability issues, see the The nominal Treasury yield curve has shifted up and box “Developments Related to Financial Stability” flattened somewhat further during the first half of on pages 26–28 of the July 2018 Monetary Policy 2018 after flattening considerably in the second half Report.) of 2017. In particular, the yields on 2- and 10-year nominal Treasury securities increased about 70 basis Markets for Treasury securities, points and 45 basis points, respectively, from their mortgage-backed securities, and municipal bonds have functioned well On balance, indicators of Treasury market function- 13 The results of the Survey of Primary Dealers and the Survey of Market Participants are available on the Federal Reserve Bank ing remained broadly stable over the first half of of New York’s website at https://www.newyorkfed.org/ 2018. A variety of liquidity metrics—including bidmarkets/primarydealer_survey_questions.html and https://www ask spreads, bid sizes, and estimates of transaction .newyorkfed.org/markets/survey_market_participants, respectively. costs—have displayed minimal signs of liquidity

Monetary Policy and Economic Developments 31 pressures overall, with the exception of a brief period International Developments of reduced liquidity in early February amid elevated financial market volatility. Liquidity conditions in the Political developments and signs of moderating agency MBS market were also generally stable. Over- growth weighed on advanced foreign economy all, the functioning of Treasury and agency MBS asset prices markets has not been materially affected by the Since February, political developments in Europe and implementation of the Federal Reserve’s balance moderation in economic growth outside of the sheet normalization program, including the accom- United States weighed on some risky asset prices in panying reduction in reinvestment of principal pay- advanced foreign economies (AFEs). Interest rates ments from the Federal Reserve’s securities holdings. on sovereign bonds in several countries in the Euro- Credit conditions in municipal bond markets have pean periphery rose notably relative to core countries, remained stable since the turn of the year. Over that and European bank shares came under pressure, as period, yield spreads on 20-year general obligation investors focused on the formation of the Italian govmunicipal bonds over comparable-maturity Treasury ernment. Nonetheless, peripheral bond spreads securities edged up a bit. remained well below their levels at the height of the euro-area crisis, and the moves partly retraced as a Money market rates have moved up in line with government was put in place. Broad stock price increases in the FOMC’s target range indexes were little changed on net. In contrast to the Conditions in domestic short-term funding markets United States, long-term sovereign yields and have also remained generally stable so far in 2018. market-implied paths of policy rates in the core euro Yields on a broad set of money market instruments area as well as the United Kingdom declined somemoved higher in response to the FOMC’s policy what, and rates were little changed in Japan. actions in March and June. Some money market rates rose during the first quarter more than what Heightened investor focus on vulnerabilities in would normally occur with monetary tightening. For emerging market economies led asset prices to come under pressure example, the spreads of certificates of deposit and term London interbank offered rates relative to over- Investor concerns about financial vulnerabilities in night index swap (OIS) rates increased notably, several emerging market economies (EMEs) intensireportedly reflecting increased issuance of Treasury fied this spring against the backdrop of rising U.S. bills and perhaps also the anticipated tax-induced interest rates. Broad measures of EME sovereign repatriation of foreign earnings by U.S. corporations. bond spreads over U.S. Treasury yields widened The upward pressure on short-term funding rates, notably, and benchmark EME equity indexes beyond that driven by expected monetary policy, declined, as investors scrutinized macroeconomic eased in recent months, leading to a narrowing of policy approaches in several countries. Turkey and spreads of some money market rates to OIS rates. Argentina, which faced persistently high inflation, However, the spreads remain wider than at the begin- expansionary fiscal policies, and large current ning of the year. account deficits, were among the worst performers. Trade policy developments between the United States Bank credit continued to expand and bank and its trading partners also weighed on EME asset profitability improved prices, especially on stock prices in China and some Aggregate credit provided by commercial banks con- emerging Asian countries. EME mutual funds saw tinued to increase through the first quarter of 2018 at net outflows in May and June after generally solid a pace similar to the one seen in 2017. Its pace was inflows earlier in the year. While movements in asset slower than that of nominal GDP, thus leaving the prices and capital flows were notable for a number of ratio of total commercial bank credit to current- economies, broad indicators of financial stress in dollar GDP slightly lower than in the previous year. EMEs remained low relative to levels seen during Available data for the second quarter suggest that other periods of stress in recent years. growth in banks’ core loans continued to be moderate. Measures of bank profitability improved in the The dollar appreciated first quarter of 2018 after having experienced a tem- After depreciating during 2017, the broad exchange porary decline in the last quarter of 2017. Weaker value of the U.S. dollar has appreciated moderately fourth-quarter measures of bank profitability were in recent months. Factors contributing to the apprepartly driven by higher write-downs of deferred tax ciation of the dollar likely include moderating growth assets in response to the U.S. tax legislation. in some foreign economies combined with continued

32 105th Annual Report | 2018 output strength and ongoing policy tightening in the in credit may have softened domestic demand. Most United States, downside risks stemming from politi- other emerging Asian economies registered strong cal developments in Europe and several EMEs, and growth in the first quarter of 2018, partly reflecting the recent developments in trade policy. Several cur- solid external demand. rencies appeared particularly sensitive to trade policy developments, including the Canadian dollar and the . . . while growth in some Latin American Mexican peso, related to the North American Free economies was mixed Trade Agreement negotiations, as well as the Chinese In Mexico, real GDP surged in the first quarter as renminbi, which fell notably against the dollar economic activity rebounded from two major earthin June. quakes and a hurricane last year. Following a brief recovery in the first half of 2017, Brazil’s economy The pace of economic activity moderated in stalled in the fourth quarter and grew tepidly in the the AFEs first quarter, and a truckers’ strike paralyzed eco- In the first quarter, real GDP growth decelerated in nomic activity in late May. all major AFEs and turned negative in Japan, down from robust rates of activity in 2017. Part of this Part 2: Monetary Policy slowing is a result of temporary factors, though, including unusually cold weather in Japan and the The Federal Open Market Committee continued United Kingdom, labor strikes in the euro area, and to gradually increase the federal funds target disruptions in oil production in Canada. In most range in the first half of the year . . . AFEs, economic indicators for the second quarter, Since December 2015, the Federal Open Market including purchasing manager surveys and exports, Committee (FOMC) has been gradually increasing are generally consistent with solid economic growth. its target range for the federal funds rate as the economy has continued to make progress toward the Despite tight labor markets, inflation pressures Committee’s congressionally mandated objectives of remain subdued in most AFEs . . . maximum employment and price stability. In the first Sustained increases in oil prices provided upward half of this year, the Committee continued this pressure on consumer price inflation across all AFEs gradual process of scaling back monetary policy in the first half of the year. However, core inflation accommodation, increasing its target range for the has generally remained muted in most AFEs, despite federal funds rate ¼ percentage point at its meetings further improvement in labor market conditions. In in both March and June. With these increases, the Canada, in contrast, core inflation picked up amid federal funds rate is currently in the range of 1¾ to solid wage growth, pushing the total inflation rate 2 percent.14 The Committee’s decisions reflected the above the central bank target. continued strengthening of the labor market and the accumulating evidence that, after many years of run- . . . prompting central banks to maintain highly ning below the Committee’s 2 percent longer-run accommodative monetary policies objective, inflation had moved close to 2 percent. With underlying inflation still subdued, the Bank of Japan and the European Central Bank (ECB) kept . . . but monetary policy continues to support their policy rates at historically low levels, although economic growth the ECB indicated it would again reduce the pace of Even after the gradual increases in the federal funds its asset purchases starting in October. The Bank of rate over the first half of the year, the Committee England and the Bank of Canada, which both began judges that the stance of monetary policy remains raising interest rates last year, signaled that further accommodative, thereby supporting strong labor rate increases will be gradual, given a moderation in market conditions and a sustained return to 2 perthe pace of economic activity. cent inflation. In particular, the federal funds rate In emerging Asia, growth remained solid . . . Economic growth in China remained solid in the first 14 See Board of Governors of the Federal Reserve System (2018), “Federal Reserve Issues FOMC Statement,” press release, quarter of 2018, as a rebound in steel production and March 21, https://www.federalreserve.gov/newsevents/ strong external demand bolstered a recovery in indus- pressreleases/monetary20180321a.htm; and Board of Governors trial activity and overall growth. Indicators of invest- of the Federal Reserve System (2018), “Federal Reserve Issues FOMC Statement,” press release, June 13, https://www ment and retail sales have slowed in recent months, .federalreserve.gov/newsevents/pressreleases/monetary20180613a however, suggesting that the authorities’ effort to rein .htm.

Monetary Policy and Economic Developments 33 remains somewhat below most FOMC participants’ June 2017 Addendum to the Policy Normalization estimates of its longer-run value. Principles and Plans.16 This program is gradually and predictably reducing the Federal Reserve’s securities The Committee expects that a gradual approach to holdings by decreasing the reinvestment of the prinincreasing the target range for the federal funds rate cipal payments it receives from securities held in the will be consistent with a sustained expansion of eco- System Open Market Account. Since the initiation of nomic activity, strong labor market conditions, and the balance sheet normalization program in October inflation near the Committee’s symmetric 2 percent of last year, such payments have been reinvested to objective over the medium term. Consistent with this the extent that they exceeded gradually rising caps. outlook, in the most recent Summary of Economic Projections (SEP), which was compiled at the time of In the first quarter, the Open Market Desk at the the June FOMC meeting, the median of participants’ Federal Reserve Bank of New York, as directed by assessments for the appropriate level of the target the Committee, reinvested principal payments from range for the federal funds rate at year-end rises the Federal Reserve’s holdings of Treasury securities gradually over the period from 2018 to 2020 and maturing during each calendar month in excess of stands somewhat above the median projection for its $12 billion. The Desk also reinvested in agency longer-run level by the end of 2019 and through mortgage-backed securities (MBS) the amount of 2020.15 principal payments from the Federal Reserve’s holdings of agency debt and agency MBS received during Future changes in the federal funds rate will each calendar month in excess of $8 billion. Over the depend on the economic outlook as informed by second quarter, payments of principal from maturing incoming data Treasury securities and from the Federal Reserve’s The FOMC has continued to emphasize that, in holdings of agency debt and agency MBS were reindetermining the timing and size of future adjust- vested to the extent that they exceeded $18 billion ments to the target range for the federal funds rate, it and $12 billion, respectively. At its meeting in June, will assess realized and expected economic conditions the FOMC increased the cap for Treasury securities relative to its maximum-employment objective and its to $24 billion and the cap for agency debt and agency symmetric 2 percent inflation objective. This assess- MBS to $16 billion, both effective in July. The ment will take into account a wide range of informa- Committee has indicated that the caps for Treasury tion, including measures of labor market conditions, securities and for agency securities will increase to indicators of inflation pressures and inflation expec- $30 billion and $20 billion per month, respectively, in tations, and readings on financial and international October. These terminal caps will remain in place developments. until the Committee judges that the Federal Reserve is holding no more securities than necessary to imple- In evaluating the stance of monetary policy, policy- ment monetary policy efficiently and effectively. makers routinely consult prescriptions from a variety of policy rules, which can serve as useful bench- The implementation of the program has proceeded marks. However, the use and interpretation of such smoothly without causing disruptive price moveprescriptions require, among other considerations, ments in Treasury and MBS markets. As the caps careful judgments about the choice and measurement have increased gradually and predictably, the Federal of the inputs to these rules such as estimates of the Reserve’s total assets have started to decrease, from neutral interest rate, which are highly uncertain (see about $4.4 trillion last October to about $4.3 trillion the box “Complexities of Monetary Policy Rules” on at present, with holdings of Treasury securities at pages 37–41 of the July 2018 Monetary Policy approximately $2.4 trillion and holdings of agency Report). and agency MBS at approximately $1.7 trillion. The FOMC has continued to implement its The Federal Reserve’s implementation of program to gradually reduce the Federal monetary policy has continued smoothly Reserve’s balance sheet To implement the FOMC’s decisions to raise the tar- The Committee has continued to implement the bal- get range for the federal funds rate in March and ance sheet normalization program described in the June of 2018, the Federal Reserve increased the rate 15 See the June SEP, which appeared as an addendum to the min- 16 The addendum, adopted on June 13, 2017, is available at https:// utes of the June 12–13, 2018, meeting of the FOMC and is pre- www.federalreserve.gov/monetarypolicy/files/FOMC_ sented in Part 3 of the July 2018 Monetary Policy Report. PolicyNormalization.20170613.pdf.

34 105th Annual Report | 2018 of interest on excess reserves (IOER) along with the The effective federal funds rate moved up toward the interest rate offered on overnight reverse repurchase IOER rate in the months before the June FOMC agreements (ON RRPs). Specifically, the Federal meeting and, therefore, was trading near the top of Reserve increased the IOER rate to 1¾ percent and the target range. At its June meeting, the Committee the ON RRP offering rate to 1½ percent in March. made a small technical adjustment in its approach to In June, the Federal Reserve increased the IOER rate implementing monetary policy by setting the IOER to 1.95 percent—5 basis points below the top of the rate modestly below the top of the target range for target range—and the ON RRP offering rate to the federal funds rate. This adjustment resulted in the 1¾ percent. In addition, the Board of Governors effective federal funds rate running closer to the approved a ¼ percentage point increase in the dis- middle of the target range since mid-June. In an envicount rate (the primary credit rate) in both March ronment of large reserve balances, the IOER rate has and June. Yields on a broad set of money market been an essential policy tool for keeping the federal instruments moved higher, roughly in line with the funds rate within the target range set by the FOMC federal funds rate, in response to the FOMC’s policy (see the box “Interest on Reserves and Its Importance decisions in March and June. Usage of the ON RRP for Monetary Policy” on pages 44–46 of the facility has declined, on net, since the turn of the July 2018 Monetary Policy Report). year, reflecting relatively attractive yields on alternative investments.

35 3 Financial Stability A stable financial system promotes economic welfare approach accounting for financial stability concerns through many channels: It facilitates household sav- informs the supervision of systemically important ings to purchase a home, finance a college education, financial institutions (SIFIs), including large bank and smooth consumption in response to job loss and holding companies (BHCs), the U.S. operations of other adverse developments; it promotes responsible certain foreign banking organizations, and financial risk-taking and economic growth by channeling sav- market utilities (FMUs). In addition, the Federal ings to firms to start new businesses and expand Reserve serves as a “consolidated supervisor” of existing businesses; and it spreads risk across nonbank financial companies designated by the investors. FSOC as institutions whose distress or failure could pose a threat to the stability of the U.S. financial A financial system is considered stable when financial system as a whole (see “Financial Stability Oversight institutions—banks, savings and loan associations, Council Activities” later in this section). Enhanced and other financial product and service providers— standards for the largest, most systemic firms proand financial markets are able to provide households, mote the safety of the overall system and minimize communities, and businesses with the resources, ser- the regulatory burden on smaller, less systemic vices, and products they need to invest, grow, and institutions. participate in a well-functioning economy. Disrup- This section discusses key financial stability activities tions to these activities of the financial system have undertaken by the Federal Reserve over 2018, which arisen during, and contributed to, stressed macroecoinclude monitoring risks to financial stability; pronomic environments. Accordingly, the Federal moting a perspective on the supervision and regula- Reserve’s objective to promote financial stability tion of large, complex financial institutions that strongly complements the goals of price stability and accounts for the potential spillovers from distress at full employment. In pursuit of continued financial such institutions to the financial system and broader stability, the Federal Reserve monitors the potential economy; and engaging in domestic and international buildup of risks to financial stability; uses such analycooperation and coordination. ses to inform Federal Reserve responses, including the design of stress-test scenarios and decisions regarding Some of these activities are also discussed elsewhere other policy tools such as the countercyclical capital in this annual report. A broader set of economic and buffer; works with other domestic agencies directly financial developments are discussed in section 2, and through the Financial Stability Oversight Coun- “Monetary Policy and Economic Developments,” cil (FSOC); and engages with the global community with the discussion that follows concerning surveilin monitoring, supervision, and regulation that mitilance of economic and financial developments gate the risks and consequences of financial instabilfocused on financial stability. The full range of activiity domestically and abroad. ties associated with supervision of SIFIs, designated Moreover, the Federal Reserve promotes financial nonbank companies, and designated FMUs is disstability through its supervision and regulation of cussed in section 4, “Supervision and Regulation.” financial institutions. A central tenet of the Federal Reserve’s efforts in promoting financial stability is the Monitoring Risks to Financial adoption of an approach to supervision and regula- Stability tion that, in addition to a traditional approach focused on the safety and soundness of individual institutions, accounts for the stability of the financial Financial institutions are linked together through a system as a whole. In particular, a supervisory complex set of relationships, and their condition

36 105th Annual Report | 2018 depends on the economic condition of the nonfinan- the Board’s current assessment of financial system cial sector. In turn, the condition of the nonfinancial vulnerabilities. It aims to promote public understandsector hinges on the strength of financial institutions’ ing about Federal Reserve views on this topic and balance sheets, as the nonfinancial sector obtains thereby increase transparency and accountability. funding through the financial sector. Monitoring The report complements the annual report of the risks to financial stability is aimed at better under- FSOC, which is chaired by the Secretary of the standing these complex linkages and has been an Treasury and includes the Federal Reserve Chair and important part of Federal Reserve efforts in pursuit other financial regulators. of overall economic stability. Asset Valuation Pressures A stable financial system, when hit by adverse events or “shocks,” is able to continue meeting demands for Overvalued assets are a fundamental source of vulfinancial services from households and businesses, nerability because the unwinding of high prices can such as credit provision and payment services. In be destabilizing, especially if the assets are widely contrast, in an unstable system, these same shocks held and the values are supported by excessive leverare likely to have much larger effects, disrupting the age, maturity transformation, or risk opacity. Moreflow of credit and leading to declines in employment over, stretched asset valuations are likely to be an and economic activity. indicator of a broader buildup in risk-taking. Nonetheless, it is very difficult to judge whether an asset Consistent with this view of financial stability, the price is overvalued relative to fundamentals. As a Federal Reserve Board’s monitoring framework dis- result, the Federal Reserve’s analysis of asset valuatinguishes between shocks to and vulnerabilities of tion pressures typically includes a broad range of the financial system. Shocks, such as sudden changes possible valuation metrics and tracks developments to financial or economic conditions, are typically sur- in areas in which asset prices are rising particularly prises and are inherently hard to predict. Vulnerabili- rapidly, into which investor flows have been considerties tend to build up over time and are the aspects of able, or where volatility has been at unusually low or the financial system that are most expected to cause high levels. widespread problems in times of stress. As a result, the Federal Reserve maintains a flexible, forward- Across markets, asset valuations remained elevated looking financial stability monitoring program through most of 2018, supported by the solid ecofocused on assessing the financial system’s vulner- nomic expansion and an apparent increase in invesabilities to a wide range of potential adverse shocks. tors’ appetite for risk. However, valuation pressures Each quarter, Federal Reserve Board staff assess a set Figure 1. Forward price-to-earnings ratio of S&P 500 firms, of vulnerabilities relevant for financial stability, 1988−2018 including but not limited to asset valuation pressures, borrowing by businesses and households, leverage in Ratio the financial sector, and funding risk. These monitor- Monthly 30 ing efforts inform discussions concerning policies to 25 promote financial stability, such as supervision and regulatory policies as well as monetary policy. They 20 also inform Federal Reserve interactions with broader monitoring efforts, such as those by the 15 Median Dec. FSOC and the Financial Stability Board (FSB). 10 In November 2018, the Federal Reserve Board pub- 5 lished its first Financial Stability Report.1 The report, which will be published on a semiannual basis, sum- 0 marizes the Board’s framework for assessing the 1988 1993 1998 2003 2008 2013 2018 resilience of the U.S. financial system and presents Note: The data, based on expected earnings for 12 months ahead, extend through December 2018 and consist of the aggregate forward price-to-earnings ratio of S&P 500 firms. The shaded bars indicate periods of business recession as defined 1 See Board of Governors of the Federal Reserve System (2018), by the National Bureau of Economic Research. Financial Stability Report (Washington: Board of Governors, Source: Federal Reserve Board staff calculations using Refinitiv (formerly Thom- November), https://www.federalreserve.gov/publications/files/ son Reuters), IBES Estimates. financial-stability-report-201811.pdf.

Financial Stability 37 Figure 2. S&P 500 volatility, 2000−18 Figure 4. Commercial real estate price index, 1998−2018 Percent (log scale) 2001:Q1 = 100 Monthly average 100 Monthly 300 S&P 500 implied volatility index (VIX) 250 Realized volatility 50 Dec. 200 Dec. 20 150 100 10 50 5 0 2000 2003 2006 2009 2012 2015 2018 2000 2003 2006 2009 2012 2015 2018 Note: The data extend through December 2018. For realized volatility, five-minute Note: The data extend through December 2018. Series deflated using the conreturns used in an exponentially weighted moving average, with 75 percent of the sumer price index for all urban consumers less food and energy and seasonally weight distributed over the last 20 days. adjusted by Board staff. The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research. Source: Bloomberg Finance LP. Source: CoStar Group, Inc., CoStar Commercial Repeat Sale Indices (CCRSI); Bureau of Labor Statistics via Haver Analytics, consumer price index. in equity and corporate bond markets moderated in the fourth quarter of 2018 amid a step-up in market grade bonds remained near the lower end of their volatility. historical range (figure 3). In equity markets, price fluctuations toward the end Property prices continued to be an area of ongoing of 2018 brought down the forward price-to-earnings valuation pressures over the past year. Commercial ratio of S&P 500 firms, a metric of valuations in real estate prices, which had risen substantially over equity markets, to a level near the median of its his- the previous seven years, were about flat last year, torical distribution (figure 1). At the same time, both although at historical highs (figure 4). Similar patrealized and option-implied market volatility, which terns were also observed in farmland prices, where had remained low since mid-2016, jumped back to price-to-rent ratios also remained at historical highs, levels slightly above historical averages (figure 2). In and in home prices, with price-to-rent ratios above debt markets, corporate bond spreads to comparable- long-run historical trends but below the extraordimaturity Treasury securities widened slightly through nary levels seen before the financial crisis. 2018, though spreads on investment- and speculative- Borrowing by Households and Businesses Figure 3. Corporate bond spreads, 1997−2018 Excessive borrowing by households and businesses has been an important contributor to past financial Percentage points Percentage points crises. Highly indebted households and nonfinancial 8 16 Monthly 10-year high-yield businesses may be vulnerable to negative shocks to 7 14 (right scale) incomes or asset values and may be forced to curtail 6 10-year triple-B 12 5 (left scale) 10 spending, which could amplify the effects of financial shocks. In turn, losses among households and busi- 4 8 nesses can lead to mounting losses at financial insti- 3 6 Dec. tutions, creating an adverse feedback loop in which 2 4 weaknesses among households, nonfinancial busi- 1 2 nesses, and financial institutions cause further 0 0 1997 2000 2003 2006 2009 2012 2015 2018 declines in income and accelerate financial losses, Note: The data extend through December 2018. The 10-year triple-B reflects the potentially leading to financial instability and a sharp effective yield of the ICE BofAML 7-to-10-year triple-B U.S. Corporate Index contraction in economic activity. (C4A4), and the 10-year high-yield reflects the effective yield of the ICE BofAML 7-to-10-year U.S. Cash Pay High Yield Index (J4A0). Treasury yields from smoothed yield curve estimated from off-the-run securities. Vulnerabilities associated with household and busi- Source: ICE Data Indices, LLC, used with permission; Department of the Treasury. ness borrowing remained moderate overall in 2018.

38 105th Annual Report | 2018 However, business debt and household debt, which above 6, increased their share of large loan issuance started to diverge following the 2007–09 recession, to historically high levels, above the previous peak have continued to trend in opposite directions (fig- levels observed in 2007 and 2014 (figure 7). Nonetheure 5). Business credit continued to grow faster than less, the strong economy and low interest rates helped nominal gross domestic product (GDP), leaving the sustain a solid credit performance of leveraged loans business-sector credit-to-GDP ratio close to histori- in 2018, with the default rate on such loans near the cal highs. low end of its historical range. At the same time, the favorable credit performance of the corporate sector Risky debt issuance picked up in 2017 and 2018 (fig- recently was likely due in part to the strength of ure 6). Moreover, highly leveraged corporations, overall economic activity, and high leverage could measured by debt-to-EBITDA (earnings before inter- leave some parts of the corporate sector vulnerable to est, taxes, depreciation, and amortization) ratios difficulties should adverse shocks materialize. Furthermore, the share of bonds rated at the lowest Figure 5. Credit-to-GDP ratio, 1980−2018 investment-grade level (for example, an S&P rating of triple-B) reached near-record levels. As of Decem- Household (left scale) Business (right scale) ber 2018, around 42 percent of corporate bonds out- Ratio Ratio 1.1 Quarterly 0.75 standing were at the lowest end of the investmentgrade segment, amounting to about $3 trillion. 1.0 0.70 0.9 Q4 In contrast to the business sector, household debt 0.65 0.8 growth continued to be modest over the past year 0.7 0.60 and remained mostly in line with income growth. Aggregate borrowing relative to income in the house- 0.6 0.55 hold sector has declined significantly from its 2007 0.5 peak, with growth skewed mostly toward households 0.50 0.4 with strong credit histories. 0.3 0.45 1982 1988 1994 2000 2006 2012 2018 The composition of household debt has, however, Note: The data extend through 2018:Q4. The shaded bars indicate periods of busi- experienced significant changes over the past 10 years ness recession as defined by the National Bureau of Economic Research. GDP is (figure 8). Credit card debt decreased significantly gross domestic product. Source: Federal Reserve Board, Statistical Release Z.1, “Financial Accounts of the United States”; Bureau of Economic Analysis via Haver Analytics, national income and product accounts, Table 1.1.5: Gross Domestic Product; Board staff Figure 7. Distribution of large institutional leveraged loan calculations. volumes, by debt-to-EBITDA ratio, 2001−18 Debt multiples ≥ 6x Figure 6. Total net issuance of risky debt, 2005−18 Debt multiples 5x–5.99x Debt multiples 4x–4.99x Percent Annual Debt multiples < 4x 100 Total Billions of dollars Institutional leveraged loans 80 Quarterly High-yield and unrated bonds 80 60 Q4 60 40 20 40 0 20 -20 0 -40 2002 2006 2010 2014 2018 2006 2008 2010 2012 2014 2016 2018 Note: The data extend through 2018. Volumes are for large corporations with Note: The data extend through 2018:Q4. Total net issuance of risky debt is the earnings before interest, taxes, depreciation, and amortization (EBITDA) greater sum of the net issuance of speculative-grade and unrated bonds and leveraged than $50 billion and exclude existing tranches of add-ons and amendments and loans. The data are four-quarter moving averages. restatements with no new money. Key identifies bar segments in order from top to Source: Mergent, Fixed Investment Securities Database (FISD); S&P Global, Lever- bottom. aged Commentary & Data. Source: S&P Global, Leveraged Commentary & Data.

Financial Stability 39 Figure 8. Consumer credit balances, 1999−2018 Figure 9. Common equity tier 1 ratio, 2001−18 Billions of dollars (real) Percent of 1600 risk-weighted assets Quarterly 14 Student loans Quarterly 1400 12 1200 Q4 Q4 1000 10 800 8 Credit cards 600 Auto loans 6 400 Large BHCs 4 200 Other BHCs 2 0 2000 2003 2006 2009 2012 2015 2018 0 Note: The data extend through 2018:Q4. The data are converted to constant 2018 dollars using the consumer price index. 2002 2006 2010 2014 2018 Source: FRBNY Consumer Credit Panel/Equifax; Bureau of Labor Statistics, con- Note: The data extend through 2018:Q4 and are seasonally adjusted by Board sumer price index. staff. Sample consists of banks as of 2018:Q2. Before 2014:Q1, the numerator of the common equity tier 1 ratio is tier 1 common capital for advanced-approaches bank holding companies (BHCs) (before 2015:Q1, for non-advanced-approaches BHCs). Afterward, the numerator is common equity tier 1 capital. Large BHCs are between 2009 and 2011, and its recent level (in real those with greater than $50 billion in total assets. The denominator is riskterms) remains well below its 2008 peak. In contrast, weighted assets. The shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research. student and auto loans have maintained a strong Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements upward trend during the past 10 years. for Holding Companies. Leverage in the Financial System leverage has also been falling, while it has been roughly constant over the past decade for life insur- Vulnerabilities related to financial-sector leverage ance companies. However, hedge fund leverage appear low, in part because of regulatory reforms appears to have been increasing over the past two enacted since the financial crisis. Core financial interyears. The increased use of leverage by hedge funds mediaries, including large banks, insurance compaexposes their counterparties to risk and raises the nies, and broker-dealers, appear well positioned to possibility that adverse shocks would result in forced weather economic stress. asset sales that could exacerbate price declines. That Regulatory capital remained at historically high levels said, hedge funds do not play the same central role in for large domestic banks. The ratio of tier 1 common the financial system as banks or other institutions. equity to risk-weighted assets remained around 12 percent, on average, for BHCs in 2018 (figure 9). Funding Risk Moreover, the leverage ratio, which looks at common equity relative to total assets without adjusting for Vulnerabilities associated with funding risk continrisk, also remained at levels substantially above pre- ued to be low in 2018, in part because of the postcrisis norms. Finally, all 34 firms participating in the crisis implementation of liquidity regulations for Federal Reserve’s supervisory stress tests for 2018 banks and the 2016 money market reforms.3 were able to maintain capital ratios above required In total, liquid assets in the banking system have minimums to absorb losses from a severe macroecoincreased more than $3 trillion since the financial crinomic shock.2 sis. Large banks, in particular, hold substantial Leverage of broker-dealers has been trending down amounts of liquid assets, far exceeding pre-crisis levand, as of 2018, was substantially below pre-crisis els and well above regulatory requirements (figlevels. At property and casualty insurance firms, ure 10). Bank funding is less susceptible to runs now than in the period leading up to the financial crisis— 2 The 2018 supervisory stress-test methodology and results are available on the Board’s website at https://www.federalreserve 3 See Securities and Exchange Commission (2014), “SEC Adopts .gov/publications/2018-june-dodd-frank-act-stress-test-preface Money Market Fund Reform Rules,” press release, July 23, .htm. https://www.sec.gov/news/press-release/2014-143.

40 105th Annual Report | 2018 Domestic and International Figure 10. High-quality liquid assets, by BHC size, 2001−18 Cooperation and Coordination Percent of assets 24 Quarterly The Federal Reserve cooperated and coordinated with both domestic and international institutions in 20 Large BHCs 2018 to promote financial stability. Other BHCs 16 Financial Stability Oversight Council Q4 Activities 12 As mandated by the Dodd-Frank Wall Street Reform 8 and Consumer Protection Act (Dodd-Frank Act), the FSOC was created in 2010 and, as noted earlier, 4 is chaired by the Treasury Secretary and includes the Federal Reserve Chair as a member (see box 1). It 0 established an institutional framework for identifying 2002 2006 2010 2014 2018 and responding to the sources of systemic risk. Note: The data extend through 2018:Q4. High-quality liquid assets (HQLA) are excess reserves plus estimates of securities that qualify for HQLA. Haircuts and Through collaborative participation in the FSOC, Level 2 asset caps are incorporated into the estimate. Large bank holding compa- U.S. financial regulators monitor not only institunies (BHCs) are those with greater than $50 billion in total assets. tions, but also the financial system as a whole. The Source: Federal Reserve Board, Form FR Y-9C (Consolidated Financial Statements for Holding Companies) and Form FR 2900 (Report of Transaction Accounts, Other Federal Reserve, in conjunction with other partici- Deposits and Vault Cash). pants, assists in monitoring financial risks, analyzes the implications of those risks for financial stability, further reducing vulnerabilities from liquidity trans- Box 1. Regular Reporting on formation. Core deposits, which include checking Financial Stability Oversight Council accounts, small-denomination time deposits, and Activities other retail deposits that are typically insured, are near historical highs as a share of banks’ total liabili- The Federal Reserve cooperated and coordinated ties. Core deposits have traditionally been a relatively with domestic agencies in 2018 to promote finanstable source of funds for banks, in the sense that cial stability, including through the activities of the Financial Stability Oversight Council (FSOC). they have been less prone to runs. In contrast, shortterm wholesale funding, a source of funds that Meeting minutes. In 2018, the FSOC met eight proved unreliable during the crisis, is near historical times, including at least once a quarter. The minutes for each meeting are available on the U.S. lows as a share of banks’ total liabilities. Treasury website (https://www.treasury.gov/ initiatives/fsoc/council-meetings/Pages/meeting- Money market fund (MMF) reforms implemented in minutes.aspx). 2016 have reduced run risk in the financial system. FSOC annual report. On December 19, 2018, The reforms required “prime” MMFs, which have the FSOC released its eighth annual report proved vulnerable to runs in the past, to use floating (https://home.treasury.gov/system/files/261/ net asset values that adjust with the market prices of FSOC2018AnnualReport.pdf), which includes a the assets they hold, which resulted in a shift by review of key developments in 2018 and a set of investors into government MMFs. A shift in invest- recommended actions that could be taken to ensure financial stability and to mitigate systemic ments toward short-term vehicles that provide alterrisks that affect the economy. natives to MMFs and could also be vulnerable to runs or run-like dynamics would increase risk, but For more on the FSOC, see https://home.treasury .gov/policy-issues/financial-markets-financialassets in these alternatives have increased only modinstitutions-and-fiscal-service/fsoc. estly compared with the drop in prime MMF assets.

Financial Stability 41 and identifies steps that can be taken to mitigate FSOC made the decision that Prudential’s potential those risks. In addition, when an institution is desig- to pose material financial distress to U.S. financial nated by the FSOC as systemically important, the stability was substantially reduced following changes Federal Reserve assumes responsibility for supervis- to simplify the company’s corporate structure and ing that institution. enhanced capital and liquidity management policies. Further, Prudential is subject to a new regulatory In 2018, the Federal Reserve worked, in conjunction regime under New Jersey state law that allows for with other FSOC participants, on the following groupwide supervision. major initiatives: Financial Stability Board Activities Application under section 117 of the Dodd-Frank Act. On September 12, 2018, the council announced its In light of the interconnected global financial system decision to grant the appeal of ZB, N.A. (Zions), and the global activities of large U.S. financial instiunder section 117 of the Dodd-Frank Act.4 The tutions, the Federal Reserve participates in internaaction removed the firm’s treatment as a nonbank tional bodies, such as the FSB. The FSB monitors the financial company following its merger with Zions global financial system and promotes financial stabil- Bancorporation. The FSOC found that Zions’s ity through the adoption of sound policies across potential to pose material financial distress to U.S. countries. The Federal Reserve participates in the financial stability was greatly reduced, as the firm FSB, along with the Securities and Exchange Comengages in limited capital markets activities, presents mission and the U.S. Treasury. minimal fire sale risks, and is subject to extensive regulation and supervision. In the past year, the FSB has examined several issues, including monitoring of shadow banking activities, Nonbank designations process. On October 17, 2018, coordination of regulatory standards for global systhe council announced it had voted to rescind its temically important financial institutions, asset mandetermination that material financial distress at Pru- agement, fintech (emerging financial technologies), dential Financial, Inc. (Prudential), could pose a evaluating the effects of reforms, and development of threat to U.S. financial stability, and that the com- effective resolution regimes for large financial institupany should be subject to supervision by the Federal tions. In November, the FSB published its report on Reserve and enhanced prudential standards.5 The incentives to centrally clear over-the-counter derivatives.6 Also in November, Randal K. Quarles, the Federal Reserve’s Vice Chair for Supervision, was 4 See U.S. Department of the Treasury (2018), “Financial Stability Oversight Council Announces Final Decision to Grant Peti- appointed chair of the FSB. tion from ZB, N.A.,” press release, September 12, https://home .treasury.gov/news/press-releases/sm478. 5 See U.S. Department of the Treasury (2018), “Financial Stabil- 6 See Financial Stability Board (2018), “Incentives to Centrally ity Oversight Council Announces Rescission of Nonbank Clear Over-the-Counter (OTC) Derivatives,” press release, Financial Company Designation,” press release, October 17, November 19, http://www.fsb.org/2018/11/incentives-tohttps://home.treasury.gov/news/press-releases/sm525. centrally-clear-over-the-counter-otc-derivatives-2.

Supervision and Regulation The Federal Reserve has supervisory and regulatory and guidance), and regulating the U.S. banking authority over a variety of financial institutions and and financial structure by acting on a variety of activities with the goal of promoting a safe, sound, proposals. and efficient financial system that supports the growth and stability of the U.S. economy. Banking System Conditions The Federal Reserve carries out its supervisory and regulatory responsibilities and supporting functions The financial condition of the U.S. banking system is primarily by generally strong. The strong economic trends of the • collecting data, along with the other federal finan- last several years have contributed to improvements cial regulatory agencies, to monitor trends in the in the financial condition of banks. Two important banking sector; measures of profitability—return on equity (ROE) and return on average assets (ROAA)—have seen • engaging in supervisory activities that steady gains over the past several years and ended the —promote the safety and soundness of individual year near a 10-year high (figure 1).1 Earnings for institutions supervised by the Federal Reserve; firms of all sizes have been bolstered by rising net interest income and the recent reduction in effective —identify requirements and set priorities for supertax rates. Moderately rising interest rates have been visory information technology initiatives; and positive for bank earnings and have helped drive —meet evolving supervisory responsibilities increases in net interest income. through ongoing staff development; and • developing regulatory policy (rulemakings, supervi- 1 The dip in ROE and ROAA in 2017 was driven by a one-time sion and regulation letters, policy statements, tax effect. Figure 1. Bank profitability 20 Percent Percent 2.0 ROE (left) ROAA (right) 15 1.5 10 1.0 5 0.5 0 0.0 -5 -0.5 -10 -1.0 -15 -1.5 -20 -2.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 EOR ROAA 43 4 Note: ROAA is net income/quarterly average assets; ROE is net income/average equity capital. Values are annualized. Source: Call Report and FR Y-9C.

44 105th Annual Report | 2018 Figure 2. Loan growth by sector Percent 150 Non-residential real estate C&I 140 Total Consumer 130 Residential real estate 120 110 100 90 2013 2014 2015 2016 2017 2018 Source: Call Report and FR Y-9C. Firms have reported growth in loan volume coupled exposures from loans to securities. As a result, the with lower nonperforming loan ratios. Loan growth banking industry’s overall loan portfolio is shifting remains robust, with total loan volume for the indus- away from residential real estate loans toward C&I try growing over 30 percent since 2013 (figure 2). loans and consumer loans (figure 3). Commercial and industrial (C&I) loans and nonresidential real estate loans have experienced the The nonperforming loan ratio—one measure of asset strongest growth. Since 2013, the volume of C&I and quality—is generally improving or stable across the non-residential real estate loans has grown by close to banking system (figure 4).2 Currently, nonperforming 50 percent. Residential real estate lending, which loans as a share of total loans and leases are at or experienced structural changes over this period, near a 10-year low. However, nonperforming conexhibited tepid growth. sumer loans saw a slight increase in the second half of 2018. In recent quarters, nonbank finance companies are increasing their market share in new mortgage origi- 2 Nonperforming loans, or problem loans, are those loans that are nations, and large banks are shifting their mortgage 90 days or more past due, plus loans in nonaccrual status. Figure 3. Loan composition Percent 100 80 60 40 20 0 2013 2014 2015 2016 2017 2018 Residential real estate Non-residential real estate C&I Consumer Other Note: Loan composition is individual loan categories as a share of total loans. Chart key shows bars in order from top to bottom. Source: Call Report and FR Y-9C.

Supervision and Regulation 45 Figure 4. Nonperforming loan ratio Percent 10 Residential real estate Total Consumer 8 C&I Non-residential real estate 6 4 2 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Note: Nonperforming loan ratio is the ratio of loans 90 days or delinquent and nonaccrual loans to total loans. Source: Call Report and FR Y-9C. Firms maintain reserves to provide a cushion against indicator of loan losses and other factors are considlosses on loans and leases they are unable to collect. ered when estimating the allowance, such as changes One important financial metric is the ratio of allow- in underwriting standards and changes in local or ance for loan and lease losses (ALLL, which is the regional economic conditions. amount of reserves banks set aside to absorb losses related to troubled loans) to the volume of nonper- As profitability and asset quality continue to improve, forming loans and leases held by a bank, also known firms still maintain high levels of quality capital. Capias the reserve coverage ratio (figure 5). A higher ratio tal provides a buffer to absorb losses that may result generally indicates a better ability to absorb future from unexpected operational, credit, or market loan losses. events. Since the financial crisis, the Federal Reserve has implemented new rules that have significantly Since 2013, as the volume of nonperforming loans raised the requirements for the quantity and quality has declined, the industrywide coverage ratio has of bank capital, particularly at the largest firms. As a improved considerably. While the entire industry has result of the new requirements, capital levels have seen an improvement in this ratio, the largest firms increased across the industry (figure 6). have seen the greatest improvement. It is important to note that nonperforming loan status is a lagging Firms have also significantly bolstered their liquidity after coming under funding pressure during the financial crisis. The funding stresses faced by large banks Figure 5. Reserve coverage ratio during the financial crisis heavily influenced the subsequent U.S. regulatory framework for addressing Percent 200 funding and liquidity risk. The financial crisis demonstrated the need to ensure that banks hold enough fundamentally sound and reliable liquid assets to sur- 150 vive a stress scenario. Liquidity requirements put in place since the crisis have significantly increased aggregate levels of highly liquid assets (figure 7). 100 The banking industry remains concentrated, while the market share of the largest banking organizations has 50 declined. Over the past few decades, as the banking 2006 2008 2010 2012 2014 2016 2018 system has grown, there has been a trend of Note: Reserve coverage ratio is the ratio of ALLL to loans 90 days or more delin- increased bank consolidation. During the height of quent and nonaccrual loans. Data adjusted for GNMA guaranteed loans. the financial crisis, and immediately after, as the Source: Call Report and FR Y-9C. financial system was strained, many banks merged

Figure 6. Common equity tier 1 ratio/share of instituions not well capitalized 7 6 5 4 Share of institutions (right) 3 2 1 0 2007 2012 2016 with other institutions, or failed. Upon closing, the assets of these failed banks were sold to other, often larger, institutions, and the industry saw a wave of consolidation and growth of the largest institutions. In recent years, however, concentration has slowed by some measures. Even as the total volume of loans and leases has been growing, the distribution of those loans has spread to a broader section of the industry. The market share of loans for the 10 largest banking organizations has declined (figure 8). Market indicators generally reflect stronger industry performance. The improvements in overall banking system conditions since the crisis are reflected in market indicators of bank health, such as the market leverage ratio and credit default swap (CDS) spreads. The market leverage ratio is a market-based measure of firm capital, and a higher ratio generally indicates investor confidence in banks’ financial strength. oitar 1 reit ytiuqe nommoC Share of institutions not well capitalized 46 105th Annual Report | 2018 Percent Percent 15 10 Common equity tier 1 leverage ratio (left) 5 0 2006 2008 2009 2010 2011 2013 2014 2015 2017 2018 Note: Common equity tier 1 is the ratio of tier 1 common equity to risk-weighted assets. Source: Call Report and FR Y-9C. Figure 7. Highly liquid assets as share of total assets Percent 30 25 20 15 10 2006 2008 2010 2012 2014 2016 2018 Note: Highly liquid assets (HLA) displayed here are an approximation of highquality liquid assets (HQLA). Source: Call Report and FR Y-9C. Figure 8. Concentration of banking industry outstanding loans and leases Percent 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Largest 10 firms (top) Largest 11–30 firms (middle) Other firms (bottom) Source: Call Report and FR Y-9C.

Figure 9. Average credit default swap (CDS) spread and market leverage ratio Percent Percent 300 14 CDS (left) Market leverage (right) 12 250 10 200 8 150 6 100 4 50 2 0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Credit default spreads are a measure of market per- Examinations and Inspections ceptions of bank risk, and a small spread reflects The Federal Reserve conducts examinations of state investor confidence in banks’ financial health. Both member banks, financial market utilities (FMUs), the measures are close to pre-crisis levels, despite U.S. branches and agencies of foreign banks, and increased market volatility in the fourth quarter of Edge Act and agreement corporations. In a process 2018 (figure 9).3 distinct from examinations, it conducts inspections of holding companies and their nonbank subsidiaries. Whether an examination or an inspection is being Supervisory Developments conducted, the review of financial performance and operations entails In overseeing the institutions under its authority, the • analysis of financial condition, including capital, Federal Reserve seeks primarily to promote safety, asset quality, earnings, and liquidity; soundness, and efficiency, including compliance with laws and regulations. For supervisory purposes, the • an assessment of the risk-management and internal Federal Reserve categorizes institutions into the control processes in place to identify, measure, groups described in table 1. monitor, and control risks; Safety and Soundness • an evaluation of the adequacy of governance, including oversight by the board and execution by The Federal Reserve uses a range of supervisory senior management, which incorporates an assessactivities to promote the safety and soundness of ment of internal policies, procedures, risk limits, financial institutions and maintain a comprehensive and controls; and understanding and assessment of each firm. These • a review for compliance with applicable laws and activities include horizontal reviews, firm-specific regulations. examinations and inspections, continuous monitoring and surveillance activities, and implementation of Consolidated Supervision enforcement or other supervisory actions as neces- Consolidated supervision, a method of supervision sary. The Federal Reserve also provides training and that encompasses the parent company and its subsidtechnical assistance to foreign supervisors and iaries, allows the Federal Reserve to understand the minority-owned and de novo depository institutions. organization’s structure, activities, resources, risks, and financial and operational resilience. Working 3 For definitions of market leverage and credit default swap with other relevant supervisors and regulators, the spreads, see the Federal Reserve Supervision and Regulation Federal Reserve seeks to ensure that financial, operareport at https://www.federalreserve.gov/publications/2018-11supervision-and-regulation-report-appendix-a.htm. tional, or other deficiencies are addressed before they SDC Market leverage Supervision and Regulation 47 Note: Market leverage ratio is the ratio of market value of equity to market value of equity plus total liabilities. CDS values are for the eight U.S. and four FBO LISCC firms only (U.S.: Bank of America; Bank of New York Mellon; Citigroup; Goldman Sachs; JPMorgan Chase; Morgan Stanley; State Street; Wells Fargo; FBO: Barclays; Credit Suisse; Deutsche Bank; UBS). Source: CDS—IHS Markit; market leverage—Bloomberg, Factset.

48 105th Annual Report | 2018 Table 1. Summary of organizations supervised by the Federal Reserve Portfolio Definition N umber of institutions T otal assets ($ trillions) Large Institution Supervision Eight U.S. G-SIBs, four foreign banking organizations (FBOs) with large and 1 2* 1 2.1 Coordinating Committee (LISCC) complex U.S. operations, and a nonbank financial institution designated systemically important by the FSOC State member banks (SMBs) SMBs within LISCC organizations 5 0 .7 Large and foreign banking Non-LISCC U.S. firms with total assets $50 billion and larger and 1 53 7 .7 organizations (LFBO) non-LISCC FBOs Large banking organizations Non-LISCC U.S. firms with total assets $100 billion and greater 1 7 3 .5 FBOs Non-LISCC FBOs 1 62** 3 .8 State member banks SMBs within LFBO organizations 8 0 .9 Regional banking organizations Total assets between $10 billion and $100 billion 8 2 1 .8 (RBOs) State member banks SMBs within RBOs 5 0 0 .6 Community banking organizations Total assets less than $10 billion 3 ,912 holding 2 .3 (CBO) companies State member banks SMBs within CBOs 7 31 (includes 0 .5 663 SMBs with a holding company and 68 without a holding company) Insurance and commercial SLHCs primarily engaged in insurance or commercial activities 9 insurance SLHCs 1 savings and loan holding 4 commercial SLHCs companies (SLHCs) * Bank of America; Bank of New York Mellon; Citigroup; Goldman Sachs; JPMorgan Chase; Morgan Stanley; State Street; Wells Fargo; Barclays; Credit Suisse; Deutsche Bank; UBS; Credit Suisse, BBVA, and Industrial and Commercial Bank of China did not publish their fourth quarter assets. Assets were generated via regulatory report forms (FFIEC 002, FFIEC Y9C). ** Count includes foreign banks that operate in the U.S. through a representative office. pose a danger to the consolidated organization, its eral Reserve assesses whether these BHCs have suffibanking offices, or to the broader economy.4 cient capital to withstand highly stressful operating environments and be able to continue operations, Capital Planning and Stress Tests maintain ready access to funding, meet obligations to Since the financial crisis, the Board has led a series of creditors and counterparties, and serve as credit initiatives to strengthen the capital positions of the intermediaries. Capital is central to a BHC’s ability largest banking organizations. Two related initiatives to absorb losses and continue to lend to creditworthy are the Comprehensive Capital Analysis and Review businesses and consumers. Through CCAR, a BHC’s (CCAR) and the Dodd-Frank Act stress tests capital adequacy is evaluated on a forward-looking, (DFAST). post-stress basis as the BHC is required to demonstrate in its capital plan how it will maintain, CCAR is a supervisory exercise to evaluate capital throughout a very stressful period, capital above adequacy, internal capital planning processes, and minimum regulatory capital requirements.6 The 2018 planned capital distributions simultaneously at all CCAR results are available at https://www bank holding companies (BHCs) with $100 billion or .federalreserve.gov/publications/files/2018-ccarmore in total consolidated assets and U.S. intermedi- assessment-framework-results-20180628.pdf. ate holding companies (IHCs).5 In CCAR, the Fedcycle this year. The relief applies to firms generally with total consolidated assets between $100 and $250 billion. As a result, 4 “Banking offices” are defined as U.S. depository institution sub- these less-complex firms will not be subject to the supervisory sidiaries as well as the U.S. branches and agencies of foreign stress test during the 2019 cycle and their capital distributions banking organizations. for this year will be largely based on the results from the 2018 5 On February 5, 2019, the Board announced that it will provide supervisory stress test. relief to less-complex firms from stress testing requirements and 6 For more information on CCAR, see https://www.federalreserve CCAR by effectively moving the firms to an extended stress test .gov/supervisionreg/ccar.htm.

Supervision and Regulation 49 DFAST is a supervisory stress test conducted by the conducted by the Federal Reserve during the past Federal Reserve to evaluate whether large BHCs and five years. IHCs have sufficient capital to absorb losses resulting from stressful economic and financial market condi- Bank Holding Companies tions. The Dodd-Frank Wall Street Reform and Con- At year-end 2018, a total of 4,300 U.S. BHCs were in sumer Protection Act (Dodd-Frank Act) also operation, of which 3,848 were top-tier BHCs. These requires BHCs and other financial companies super- organizations controlled 3,948 insured commercial vised by the Federal Reserve to conduct their own banks and held approximately 94 percent of all stress tests. Together, the Dodd-Frank Act supervi- insured commercial bank assets in the United States. sory stress tests and the company-run stress tests are intended to provide company management and Federal Reserve guidelines call for annual inspections boards of directors, the public, and supervisors with of large BHCs and complex smaller companies. In forward-looking information to help gauge the judging the financial condition of the subsidiary potential effect of stressful conditions on the capital banks owned by holding companies, Federal Reserve adequacy of these large banking organizations. The examiners consult examination reports prepared by 2018 DFAST results are available at https://www the federal and state banking authorities that have .federalreserve.gov/publications/files/2018-dfast- primary responsibility for the supervision of those methodology-results-20180621.pdf. banks, thereby minimizing duplication of effort and reducing the supervisory burden on banking State Member Banks organizations. At the end of 2018, a total of 1,611 banks (excluding nondepository trust companies and private banks) Inspections of BHCs with less than $100 billion in were members of the Federal Reserve System, of assets, including financial holding companies which 794 were state chartered. Federal Reserve (FHCs), are built around a rating system introduced System member banks operated 53,339 branches, and in 2005. The system reflects the shift in supervisory accounted for 33 percent of all commercial banks in practices away from a historical analysis of financial the United States and for 70 percent of all commer- condition toward a more dynamic, forward-looking cial banking offices. State-chartered commercial assessment of risk-management practices and finanbanks that are members of the Federal Reserve, com- cial factors. Under the system, known as RFI but monly referred to as state member banks, represented more fully termed RFI/C(D), holding companies are approximately 17 percent of all insured U.S. commer- assigned a composite rating (C) that is based on cial banks and held approximately 17 percent of all assessments of three components: Risk Management insured commercial bank assets in the United States. (R), Financial Condition (F), and the potential Impact (I) of the parent company and its nondeposi- Under section 10 of the Federal Deposit Insurance tory subsidiaries on the subsidiary depository institu- Act, as amended by section 111 of the Federal tion. The fourth component, Depository Institution Deposit Insurance Corporation Improvement Act of (D), is intended to mirror the primary supervisor’s 1991 and by the Riegle Community Development rating of the subsidiary depository institution.9 Nonand Regulatory Improvement Act of 1994, the Fed- complex BHCs with consolidated assets of $1 billion eral Reserve must conduct a full-scope, on-site exami- or less are subject to a special supervisory program nation of state member banks at least once a year.7 that permits a more flexible approach.10 In 2018, the However, qualifying well-capitalized, well-managed Federal Reserve conducted 533 inspections of large state member banks with less than $3 billion in total assets are eligible for an 18-month examination cycle.8 The Federal Reserve conducted 321 examina- 9 Each of the first two components has four subcomponents: Risk Management—(1) Board and Senior Management Overtions of state member banks in 2017. Table 2 prosight; (2) Policies, Procedures, and Limits; (3) Risk Monitoring vides information on examinations and inspections and Management Information Systems; and (4) Internal Controls. Financial Condition—(1) Capital, (2) Asset Quality, (3) Earnings, and (4) Liquidity. 10 The special supervisory program was implemented in 1997, most 7 The Office of the Comptroller of the Currency examines nation- recently modified in 2018 by an interim final rule that increased ally chartered banks, and the Federal Deposit Insurance Corpo- the asset threshold from $1 billion to $3 billion (83 Fed. Reg. ration examines state-chartered banks that are not members of 44,195). See SR letter 13-21 for a discussion of the factors conthe Federal Reserve. sidered in determining whether a BHC is complex or noncom- 8 Effective January 28, 2019. 83 Fed. Reg. 67,033 plex (https://www.federalreserve.gov/bankinforeg/srletters/sr1321 (December 28, 2018). .htm).

50 105th Annual Report | 2018 Table 2. State member banks and bank holding companies, 2014–18 Entity/item 2018 2017 2016 2 015 2 014 State member banks Total number 794 815 829 839 858 Total assets (billions of dollars) 2,851 2,729 2,577 2,356 2,233 Number of examinations 563 643 663 698 723 By Federal Reserve System 321 354 406 392 438 By state banking agency 242 289 257 306 285 Top-tier bank holding companies Large (assets of more than $1 billion) Total number 604 583 569 547 522 Total assets (billions of dollars) 19,233 18,762 17,593 1 6,961 1 6,642 Number of inspections 549 597 659 709 738 By Federal Reserve System1 533 574 646 669 706 On site 325 394 438 458 501 Off site 208 180 208 211 205 By state banking agency 16 23 13 40 32 Small (assets of $1 billion or less) Total number 3,273 3,448 3,682 3,719 3,902 Total assets (billions of dollars) 893 931 914 938 953 Number of inspections 2,216 2,318 2,597 2,783 2,824 By Federal Reserve System 2,132 2,252 2,525 2,709 2,737 On site 81 101 126 123 142 Off site 2,051 2,151 2,399 2,586 2,595 By state banking agency 84 66 72 74 87 Financial holding companies Domestic 490 492 473 442 426 Foreign 44 42 42 40 40 1 For large bank holding companies subject to continuous, risk-focused supervision, includes multiple targeted reviews. BHCs and 2,132 inspections of small, noncom- scope securities underwriting, merchant banking, plex BHCs. and insurance underwriting and sales. As of year-end 2018, a total of 490 domestic BHCs and 44 foreign In 2018, the Board adopted a new ratings framework banking organizations had FHC status. Of the for BHCs with $100 billion or more in assets, which domestic FHCs, 25 had consolidated assets of was designed to align with the supervisory program $50 billion or more; 48, between $10 billion and for Large Institution Supervision Coordinating Com- $50 billion; 153, between $1 billion and $10 billion; mittee (LISCC) firms and other large financial insti- and 264, less than $1 billion. tutions. Under the system, known as LFI, these firms are assigned ratings for three separate components: Savings and Loan Holding Companies Capital Planning and Positions; Liquidity Risk Management and Positions; and Governance and Con- The Dodd-Frank Act transferred responsibility for trols. The Federal Reserve is using the new ratings supervision and regulation of SLHCs from the forframework to assign ratings to LISCC firms in 2019, mer Office of Thrift Supervision to the Federal and to other large financial institutions in 2020. (See Reserve in July 2011. At year-end 2018, a total of 379 box 1 for further explanation of the Board’s newly SLHCs were in operation, of which 194 were top-tier adopted ratings system.) SLHCs. These SLHCs control 203 depository institutions and include 16 companies engaged primarily in Financial Holding Companies nonbanking activities, such as insurance underwrit- Under the Gramm-Leach-Bliley Act, BHCs that ing (9 SLHCs), securities brokerage (3 SLHCs), and meet certain capital, managerial, and other require- commercial activities (4 SLHCs). The 25 largest ments may elect to become FHCs and thereby engage SLHCs accounted for more than $1.5 trillion of total in a wider range of financial activities, including full- combined assets. Approximately 91 percent of

Supervision and Regulation 51 Box 1. LFI Ratings Framework In2018,theBoardadoptedanewsupervisoryrat- Thenewratingssystemisapplicabletothesefirms ingsframeworkforlargefinancialinstitutions(LFIs) andismorecloselyalignedwiththeLFIsupervisory thatisdesignedtoalignwiththeFederalReserve’s program,sothattheratingsmoredirectlycommunicurrentsupervisoryprogramsandpractices.1For catetheresultsoftheFederalReserve’ssupervisory thesepurposes,LFIsincludebankholdingcompa- assessment.Thenewratingssystemalsoprovides niesandnon-insurance,non-commercialsavings moretransparencyrelatedtothesupervisoryconseandloanholdingcompanieswithtotalconsolidated quencesofagivenrating. assetsof$100billionormore,andU.S.intermediate TheFederalReservewouldassignratingstoLFIsin holdingcompaniesofforeignbankingorganizations thethreecoreareasofsupervision:capitalplanning establishedunderRegulationYYwithtotalconsoliandpositions,liquidityriskmanagementandposidatedassetsof$50billionormore. tions,andgovernanceandcontrols.TheLFIrating Intheyearsfollowingthe2007-09financialcrisis,the systemalsousesanewratingscale,whichincludes FederalReservedevelopedasupervisoryprogram thefollowingfourratingscategories:BroadlyMeets specificallydesignedtoenhanceresiliencyand Expectations,ConditionallyMeetsExpectations, addresstherisksposedbylargefinancialinstitutions Deficient-1,andDeficient-2.AllthreecomponentrattoU.S.financialstability(LFIsupervisoryprogram). ingsmustberatedeither“BroadlyMeetsExpecta- TheLFIsupervisoryprogramfocusessupervisory tions”or“ConditionallyMeetsExpectations”foran attentiononcapital,liquidity,andgovernanceand LFItobeconsidered“wellmanaged”forpurposesof controls,whichwereidentifiedasthecoreareasthat lawsandregulations,includingactivityrestrictions aremostlikelytothreatenthefirm’sfinancialand undertheBankHoldingCompanyAct.The“Condioperationalstrengthandresilience. tionallyMeetsExpectations”ratingcategoryenables theFederalReservetoidentifycertainmaterialissues atafirmandprovideafirmwithnoticeandtheability 1 Formoreinformationaboutthesupervisoryframework,seeSR tofixthoseissuesbeforethefirmexperiencesreguletter 19-3/CA 19-2, “Large Financial Institution (LFI) Rating System” at https://www.federalreserve.gov/supervisionreg/ latoryconsequencesasaresultoftheratings srletters/sr1903.htm. downgrade. SLHCs engage primarily in depository activities. Several complex policy issues continue to be These firms hold approximately 20 percent ($331 bil- addressed by the Board, including those related to lion) of the total combined assets of all SLHCs. The consolidated capital requirements for insurance Office of the Comptroller of the Currency (OCC) is SLHCs and issues pertaining to intermediate holding the primary regulator for most of the subsidiary sav- companies for commercial SLHCs. In June 2016, the ings associations of the firms engaged primarily in Board issued an advance notice of proposed ruledepository activities. Table 3 provides information on making (ANPR) inviting comment on conceptual examinations of SLHCs for the past five years. frameworks for capital standards that could apply to Table 3. Savings and loan holding companies, 2014–18 Entity/item 2018 2017 2016 2015 2014 Top-tier savings and loan holding companies Large (assets of more than $1 billion) T otal number 55 59 67 67 76 Total assets (billions of dollars) 1,615 1,696 1,664 1,525 1,493 Number of inspections 40 52 54 58 83 By Federal Reserve System 40 52 54 57 82 On site 20 31 34 31 45 Off site 20 21 20 26 37 Small (assets of $1 billion or less) Total number 139 164 171 194 221 Total assets (billions of dollars) 38 47 50 55 65 Number of inspections 107 165 181 187 212 By Federal Reserve System 107 165 181 187 212 On site 1 9 9 13 10 Off site 106 156 172 174 202

52 105th Annual Report | 2018 companies with significant insurance activities.11 A institutions and the FMU. Under the Federal request for public comment on the adoption of the Reserve Act, the Federal Reserve supervises FMUs formal rating system for certain SLHCs closed on that are chartered as member banks or Edge Act cor- February 13, 2017. On November 9, 2018, the Board porations and coordinates with other federal banking determined that it would apply the formal rating supervisors to supervise FMUs considered bank sersystem to SLHCs that are depository in nature. The vice providers under the Bank Service Company Act. determination does not apply the formal rating system to SLHCs engaged in significant insurance or In July 2012, the FSOC voted to designate eight commercial activities. Additionally, SLHCs that are FMUs as systemically important under title VIII of depository in nature and have $100 billion or more in the Dodd-Frank Act. As a result of these designaconsolidated assets will be rated under the RFI rating tions, the Board assumed an expanded set of responsystem until the Board applies the new rating system sibilities related to these designated FMUs that for large financial institutions. include promoting uniform risk-management standards, playing an enhanced role in the supervision of Savings and loan holding companies primarily engaged designated FMUs, reducing systemic risk, and supin insurance underwriting activities. The Federal porting the stability of the broader financial system. Reserve supervises 9 insurance SLHCs (ISLHCs), For certain designated FMUs, the Board established with $886 billion in estimated total combined assets, risk-management standards and expectations that are and $151 billion in thrift assets. Of the ten, three articulated in the Board’s Regulation HH. In addifirms have total assets greater than $100 billion, four tion to setting minimum risk-management standards, firms have total assets between $10 billion and Regulation HH establishes requirements for the $100 billion, and three firms have total assets less advance notice of proposed material changes to the than $10 billion. With the exception of two ISLHCs, rules, procedures, or operations of a designated each of which owns a thrift subsidiary that comprises FMU for which the Board is the supervisory agency roughly half of the firm’s total assets, thrift subsid- under title VIII. Finally, Regulation HH also estabiary assets for most ISLHCs represent less than lishes minimum conditions and requirements for a 25 percent of total assets. Federal Reserve Bank to establish and maintain an account for, and provide services to, a desig- As the consolidated supervisor of ISLHCs, the Fed- nated FMU.12 eral Reserve evaluates the organization’s riskmanagement practices, the financial condition of the The Federal Reserve’s risk-based supervision prooverall organization, and the impact of the nonbank gram for FMUs is administered by the FMU Superactivities on the depository institution. The Federal vision Committee (FMU-SC). The FMU-SC is a Reserve focuses supervisory attention on legal entities multidisciplinary committee of senior supervision, and activities that are not directly supervised or regupayment policy, and legal staff at the Board of Govlated by state insurance regulators, including interernors and Reserve Banks who are responsible for, company transactions between the depository instituand knowledgeable about, supervisory issues for tion and its affiliates. The Federal Reserve relies to FMUs. The FMU-SC’s primary objective is to prothe fullest extent possible on the work of state insurvide senior-level oversight, consistency, and direction ance regulators as part of the overall supervisory to the Federal Reserve’s supervisory process for assessment of ISLHCs. The Federal Reserve has been FMUs. The FMU-SC coordinates with the LISCC active in engaging with the state departments of on issues related to the roles of LISCC firms in insurance and the National Association of Insurance FMUs as well as the payment, clearing, and settle- Commissioners (NAIC) on general insurance superment activities of LISCC firms and the FMU activivision matters. ties and implications for financial institutions in the LISCC portfolio. Financial Market Utilities FMUs manage or operate multilateral systems for In an effort to promote greater financial market stathe purpose of transferring, clearing, or settling paybility and mitigate systemic risk, the Board works ments, securities, or other financial transactions closely with the Securities and Exchange Commission among financial institutions or between financial (SEC) and the Commodity Futures Trading Com- 11 The ANPR is available at https://www.gpo.gov/fdsys/pkg/FR- 2016-06-14/pdf/2016-14004.pdf. The comment period for this 12 The Federal Reserve Banks maintain accounts for and provide ANPR closed on September 16, 2016. services to several designated FMUs.

Supervision and Regulation 53 mission (CFTC), both of which also have supervisory with rules and regulations. Examinations abroad are authority for certain FMUs. The Federal Reserve’s conducted with the cooperation of the supervisory work with these agencies under title VIII, including authorities of the countries in which they take place; the sharing of appropriate information and partici- for national banks, the examinations are coordinated pation in designated FMU examinations, aims to with the OCC. improve consistency in FMU supervision, promote robust FMU risk management, and improve regula- At the end of 2018, a total of 29 member banks were tors’ ability to monitor and mitigate systemic risks. operating 322 branches in foreign countries and overseas areas of the United States; 14 national banks Designated Nonbank Financial Companies were operating 271 of these branches, and 15 state member banks were operating the remaining 51. In The Dodd-Frank Act requires the Board to apply addition, 6 nonmember banks were operating 14 enhanced prudential standards to the nonbank finanbranches in foreign countries and overseas areas of cial companies designated by the FSOC for supervithe United States. sion by the Board. There are currently no nonbank financial companies subject to Federal Reserve supervision. Edge Act and agreement corporations. Edge Act corporations are international banking organizations In March 2019, the FSOC sought comment on pro- chartered by the Board to provide all segments of the posed guidance to prioritize its efforts to identify, U.S. economy with a means of financing internaassess, and address potential risks and threats to U.S. tional business, especially exports. Agreement corpofinancial stability through a process that emphasizes rations are similar organizations, state or federally an activities-based approach. The proposed guidance chartered, that enter into agreements with the Board indicated that the FSOC would pursue entity-specific to refrain from exercising any power that is not perdeterminations under the Dodd-Frank Act only if a missible for an Edge Act corporation. Sections 25 potential risk or threat could not be addressed and 25A of the Federal Reserve Act grant Edge Act through an activities-based approach. This approach and agreement corporations permission to engage in is intended to enable the FSOC to more effectively international banking and foreign financial transacidentify and address the underlying sources of risks tions. These corporations, most of which are subsidto financial stability, rather than addressing risks iaries of member banks, may (1) conduct a deposit only at a particular nonbank financial company that and loan business in states other than that of the parmay be designated. ent, provided that the business is strictly related to international transactions, and (2) make foreign International Activities investments that are broader than those permissible for member banks. The Federal Reserve supervises the foreign branches and overseas investments of state member banks, Edge Act and agreement corporations, and BHCs At year-end 2018, out of 36 banking organizations (including the investments by BHCs in export trading chartered as Edge Act or agreement corporations, companies). In addition, it supervises the activities 3 operated 6 Edge Act and agreement branches. that foreign banking organizations conduct through These corporations are examined annually. entities in the United States, including branches, agencies, representative offices, and subsidiaries. U.S. activities of foreign banks. Foreign banks continue to be significant participants in the U.S. bank- Foreign operations of U.S. banking organizations. In ing system. As of year-end 2018, a total of 140 forsupervising the international operations of state eign banks from 48 countries operated 155 statemember banks, Edge Act and agreement corpora- licensed branches and agencies, of which 6 were tions, and BHCs, the Federal Reserve generally con- insured by the Federal Deposit Insurance Corporaducts its examinations or inspections at the U.S. head tion (FDIC), and 57 OCC-licensed branches and offices of these organizations, where the ultimate agencies, of which 4 were insured by the FDIC. responsibility for the foreign offices resides. Examin- These foreign banks also owned 8 Edge Act and ers also visit the overseas offices of U.S. banking agreement corporations. In addition, they held a conorganizations to obtain financial and operating infor- trolling interest in 39 U.S. commercial banks. Altomation and, in some instances, to test their adherence gether, the U.S. offices of these foreign banks conto safe and sound banking practices and compliance trolled approximately 20 percent of U.S. commercial

54 105th Annual Report | 2018 banking assets. These 140 foreign banks also oper- Board regulations require that banks develop written ated 79 representative offices; an additional 36 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.13 In most cases, on-site nation Council’s (FFIEC’s) Bank Secrecy Act/Antiexaminations are conducted at least once every Money Laundering Examination Manual.15 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 468 examinations of Board’s margin regulations. foreign banks in 2018. Information Technology Activities Compliance with Regulatory Requirements In 2018, the Federal Reserve contributed to FFIEC The Federal Reserve examines institutions for com- information systems and technology policy and pliance with a broad range of legal requirements, emerging technology issues, including prescribing including anti-money-laundering (AML) and con- principles and guidance for the examination of sumer protection laws and regulations, and other financial institutions and their technology service laws pertaining to certain banking and financial providers to promote uniformity in the supervision of activities. Most compliance supervision is conducted these entities. The Federal Reserve chaired the under the oversight of the Board’s Division of FFIEC’s IT Subcommittee of the Task Force on Supervision and Regulation (S&R), but consumer Supervision, the primary interagency group responcompliance supervision is conducted under the over- sible for coordination across member agencies on sight of the Division of Consumer and Community information technology policy activities. The IT Sub- Affairs (DCCA).14 The two divisions coordinate their committee conducted a conference for IT examiners efforts with each other and also with the Board’s from all of the FFIEC member agencies, which high- Legal Division to ensure consistent and comprehen- lighted current and emerging technology issues sive Federal Reserve supervision for compliance with affecting supervised institutions and their service prolegal requirements. viders. Additionally, the Federal Reserve contributed updates to the IT Examination Handbook to incor- Anti-Money-Laundering Examinations porate a more enterprise-wide, risk-management The Treasury regulations implementing the Bank approach to the assessment of information technol- Secrecy Act (BSA) generally require banks and other ogy and related risks at supervised institutions in types of financial institutions to file certain reports reflection of changes that have occurred in technoland maintain certain records that are useful in crimi- ogy and the financial sector. nal, tax, or regulatory proceedings. The BSA and separate Board regulations require banking organiza- In October 2018, the Cybersecurity and Critical tions supervised by the Board to file reports on suspi- Infrastructure Working Group (CCIWG) published cious activity related to possible violations of federal an interagency joint statement on Office of Foreign law, including money laundering, terrorism financing, and other financial crimes. In addition, BSA and 15 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 13 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- 14 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.

Supervision and Regulation 55 Assets Control (OFAC) sanctions to raise awareness ment securities dealers or brokers not exempt from that entities were targeting U.S. financial institutions the Treasury’s regulations. During 2018, the Federal with malicious software and services. Because of the Reserve conducted six examinations of broker-dealer nature of the claims under OFAC’s Cyber-Related activities in government securities at these organiza- Sanctions Program, financial institutions were tions. These examinations are generally conducted advised to assess the risk of having, or continuing to concurrently with the Federal Reserve’s examination use, sanctioned entities’ software and services. In rec- of the state member bank or branch. ognition of National Cybersecurity Awareness Month, the CCIWG hosted a webinar on Octo- The Federal Reserve is also responsible for ensuring ber 31, 2018, to announce free public and private sec- that state member banks and BHCs that act as tor resources to help financial institutions enhance municipal securities dealers comply with the Securitheir resilience. 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. Five entities superfor state member banks and some nondepository vised by the Federal Reserve that dealt in municipal trust companies, which hold assets in various fidu- securities were examined during 2018. ciary and custodial capacities. On-site examinations of fiduciary and custodial activities are risk-focused Securities Credit Lenders and entail the review of an organization’s compliance Under the Securities Exchange Act of 1934, the with laws, regulations, and general fiduciary prin- Board is responsible for regulating credit in certain ciples, including effective management of conflicts of transactions involving the purchasing or carrying of interest; management of legal, operational, and com- securities. As part of its general examination propliance risk exposures; the quality and level of earn- gram, the Federal Reserve examines the banks under ings; the management of fiduciary assets; and audit its jurisdiction for compliance with the Board’s and control procedures. In 2018, Federal Reserve Regulation U. In addition, the Federal Reserve mainexaminers conducted 95 fiduciary examinations of tains a registry of persons other than banks, brokers, state member banks and nondepository trust and dealers who extend credit subject to Regulacompanies. tion U. The Federal Reserve may conduct specialized examinations of these lenders if they are not already Transfer Agents subject to supervision by the Farm Credit Adminis- As directed by the Securities Exchange Act of 1934, tration (FCA) or the National Credit Union Adminthe Federal Reserve conducts specialized examina- istration (NCUA). tions of those state member banks and BHCs that are registered with the Board as transfer agents. Cybersecurity and Critical Infrastructure Among other things, transfer agents countersign and The Federal Reserve collaborated with other finanmonitor the issuance of securities, register the trans- cial regulators, the U.S. Treasury, private industry, fer of securities, and exchange or convert securities. and international partners to promote effective safe- On-site examinations focus on the effectiveness of an guards against cyber threats to the financial services organization’s operations and its compliance with sector and to bolster the sector’s cyber resiliency. relevant securities regulations. During 2018, the Fed- Throughout the year, Federal Reserve examiners coneral Reserve conducted transfer agent examinations ducted targeted cybersecurity assessments of the at two state member banks that were registered as largest and most systemically important financial transfer agents. institutions (SIFIs), FMUs, and technology service providers (TSPs). The Federal Reserve worked closely Government and Municipal Securities Dealers with the OCC and FDIC to develop and implement and Brokers improved examination procedures for the cybersecu- The Federal Reserve is responsible for examining rity assessments of TSPs. Federal Reserve examiners state member banks and foreign banks for compli- also continued to conduct tailored cybersecurity ance with the Government Securities Act of 1986 assessments at community and regional banking and with the Treasury regulations governing dealing organizations. and brokering in government securities. Fourteen state member banks and six state branches of foreign In October 2018, the Federal Reserve presented a banks have notified the Board that they are govern- webinar to examiners to inform them of internal

56 105th Annual Report | 2018 resources to assist financial institutions in meeting related risks and efforts to bolster cyber resiliency. their control objectives, regardless of whether they The Federal Reserve supported the Group of Seven use the FFIEC Cybersecurity Assessment Tool, (G-7) Fundamental Elements of Threat-led Penetra- National Institute for Standards and Technology tion Testing and Third Party Cyber Risk Manage- (NIST) Cybersecurity Framework, Financial Services ment in the Financial Sector and the development of Sector Specific Cybersecurity Profile, or any other incident coordination protocols to enhance internamethodology to assess their cybersecurity prepared- tional coordination and knowledge sharing. The Fedness. Also, in December 2018, the Federal Reserve eral Reserve also supported the Financial Stability issued an advisory letter to examiners and other Board’s (FSB’s) cyber lexicon for the financial sector. supervisory staff responsible for responding to cyber Additional information about the FSB cyber lexicon and security incidents at supervised institutions. The is available at http://www.fsb.org/2018/11/cyber-lexicon/. advisory letter formalizes roles, responsibilities, and process guiding S&R’s response to cyber and security Enforcement Actions incidents, and implements a playbook to guide The Federal Reserve has enforcement authority over response actions and interdivisional communication the financial institutions it supervises and their affiliduring and after incidents. ated parties. Enforcement actions may be taken to address unsafe and unsound practices or violations In 2018, the Financial and Banking Information of any law or regulation. Formal enforcement actions Infrastructure Committee (FBIIC) Harmonization include cease and desist orders, written agreements, Working Group (HWG), chaired by the Federal prompt corrective action directives, removal and pro- Reserve, analyzed the cyber terms and definitions hibition orders, and civil money penalties. In 2018, used by the FBIIC agencies in published cyber- the Federal Reserve completed 92 formal enforcerelated laws, regulations, tools, and guidance. The ment actions. Civil money penalties totaling HWG sought to identify instances of the FBIIC $223,960,223 were assessed. As directed by statute, all agencies using different definitions for the same cyber civil money penalties are remitted to either the Treasterms. Going forward, the agencies agreed to use ury or the Federal Emergency Management Agency. NIST as the primary source of cyber terms and defi- Enforcement orders and prompt corrective action nitions in cyber-related regulations, tools and guid- directives, which are issued by the Board, and written ance. Also in 2018, representatives of the HWG con- agreements, which are executed by the Reserve ducted outreach to a number of financial institutions Banks, are made public and are posted on the with multiple regulators to gather information that Board’s website (https://www.federalreserve.gov/apps/ would help the HWG identify opportunities to enforcementactions/search.aspx). improve regulatory harmonization and the coordination of cyber examinations. In 2018, the Reserve Banks completed 62 informal enforcement actions. Informal enforcement actions The Federal Reserve actively participated in inter- include memoranda of understanding (MOU), comagency groups, such as the FFIEC’s CCIWG and the mitment letters, and board of directors’ resolutions. FBIIC to share information and collaborate on cybersecurity and critical infrastructure issues Surveillance and Off-Site Monitoring impacting the financial sector. In coordination with The Federal Reserve uses automated screening sys- FBIIC members, the Federal Reserve collaborated tems to monitor the financial condition and perforwith government and industry partners to plan and mance of state member banks and BHCs in the execute sector-wide and regional tabletop exercises period between on-site examinations. Such monitorfocused on identifying areas where sector resiliency, ing and analysis helps direct examination resources to information sharing, and public-private collaboration institutions that have higher risk profiles. Screening can be enhanced with respect to potential cybersecu- systems also assist in the planning of examinations rity incidents. The exercises focused on tactical, stra- by identifying companies that are engaging in new or tegic, operational, and financial stability consider- complex activities. ations that tested both government and private sector processes and capabilities for addressing cyber inci- The primary offsite monitoring tool used by the Feddents across the financial services sector. eral Reserve is the Supervision and Regulation Statistical Assessment of Bank Risk (SR-SABR) model. In addition, the Federal Reserve was actively involved Drawing mainly on the financial data that banks in international policy coordination to address cyber- report on their Reports of Condition and Income

Supervision and Regulation 57 (Call Reports), SR-SABR uses econometric tech- The Federal Reserve offered a number of training niques to identify banks that report financial charac- programs for the benefit of foreign supervisory teristics weaker than those of other banks assigned authorities, which were held both in the United similar supervisory ratings. To supplement the States and in many foreign jurisdictions. Federal SR-SABR screening, the Federal Reserve also moni- Reserve staff took part in technical assistance and tors various market data, including equity prices, training assignments led by the International Mondebt 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 2018 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 Reserve Bank of India, the Arab Monand comparisons with peer companies. BHCPRs are etary Fund, the European Central Bank, and the made available to the public on the National Infor- Association of Supervisors of Banks of the mation Center (NIC) website, which can be accessed Americas. at https://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, surbilities 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, (MDIs) by facilitating activities designed to FR Y-9 statements, BHCPRs, and other regulatory strengthen their business strategies, maximize their reports. In the surveillance module, users can generresources, and increase their awareness and underate reports summarizing the results of surveillance standing of supervisory expectations. In addition, the screening for banks and BHCs. During 2018, one Federal Reserve continues to maintain the PFP webmajor and five minor upgrades to the web-based site, which supports MDIs by providing them with PRISM application were completed to enhance the technical information and links to useful resources user’s experience and provide the latest technology. (https://www.fedpartnership.gov). Representatives from each of the 12 Federal Reserve Districts, along The Federal Reserve works through the FFIEC Task with staff from the S&R and DCCA divisions at the Force on Surveillance Systems to coordinate surveil- Board of Governors, continue to offer technical lance activities with the other federal banking assistance tailored to MDIs by providing targeted agencies. supervisory guidance, identifying additional resources, and fostering mutually beneficial partner- Training and Technical Assistance ships between MDIs and community organizations. The Federal Reserve provides training and technical As of year-end 2018, the Federal Reserve’s MDI assistance to foreign supervisors and minority-owned portfolio consisted of 14 state member banks. depository institutions. In 2018, the Federal Reserve System continued to International Training and Technical Assistance support MDIs through the following activities: In 2018, the Federal Reserve continued to provide training and technical assistance on supervisory mat- • Staff of the PFP program organized the first bianters to foreign central banks and supervisory authori- nual MDI Leadership Forum that took place ties. Technical assistance involves visits by Federal April 19–20, 2018, in Washington, D.C. The MDI Reserve staff members to foreign authorities as well Leadership Forum will continue as a biannual as consultations with foreign supervisors who visit opportunity for the Fed to host CEOs of a number the Board of Governors or the Reserve Banks. of state-member-bank (SMB) MDIs to provide

58 105th Annual Report | 2018 them with an opportunity to express their experi- • P4P staff and a senior Board employee attended ences and challenges and provide the PFP staff the annual National Bankers Association meeting with an opportunity to improve our communica- in October 2018 in Washington, D.C., and hosted tion and outreach. In addition, it provides an an exhibit table. opportunity for Federal Reserve staff to present on • System staff provided technical assistance to the a number of pertinent supervision and regulation industry through the presentation of commissioned and consumer affairs topics. The conference was research results on a webinar open to the MDI attended by senior level officers from SMB MDIs audience; provided examiner training via a Rapid supervised by the Federal Reserve. During the Response Session educating Federal Reserve examcourse of the Leadership Forum, the senior level iners on the mission of the P4P program. officers also had an opportunity to speak with the Vice Chairman of the Federal Reserve Board con- • The Board of Governors co-sponsored the Forum cerning issues particular to MDIs. The next Lead- for Minority Bankers with the Federal Reserve ership Forum will take place in 2020. Banks of Kansas City (lead sponsor), Philadelphia, Richmond, Atlanta, Chicago, St. Louis, and Dal- • In April 2018, the Federal Reserve System, together las. The forum is a national program that provides with the other federal banking agencies sent repreminority bank leaders with industry knowledge sentatives to present at the Native Banks Gathering and professional development. The forum was held II in Shawnee, Oklahoma. This gathering was a in September 2018 in Charlotte, North Carolina. collaborative assembly of native-owned banks sponsored by the Citizen Potawatomi Nation, the Federal Reserve Bank of Minneapolis’ Center for International Coordination on Indian Country Development, and the Board of Supervisory Policies Governors, in conjunction with the Office of As a member of several international financial Indian Energy and Economic Development, a divi- standard-setting bodies, the Federal Reserve actively sion under the U.S. Department of Interior’s participates in efforts to advance sound supervisory Bureau of Indian Affairs. The Federal Reserve dis- policies for internationally active financial organizacussed “Banking in Indian Country” and provided tions and to enhance the strength and stability of the “A Washington Perspective on the Banking Indus- international financial system. try and the Opportunities of Minority-Owned Banks.” The goal of the gathering was to familiar- Basel Committee on Banking Supervision ize native-owned banks with the Indian Loan During 2018, the Federal Reserve contributed to Guarantee Program and to better understand supervisory policy recommendations, reports, and opportunities for growth and diversification of papers issued for consultative purposes or finalized portfolios for all Native American and Alaskan by the BCBS that are designed to improve the super- Native businesses. The gathering helped identify vision of banking organizations’ practices and to new growth strategies and ways to increase revenue address specific issues that emerged during the finanstreams to contribute to the nurturing of vital, cial crisis. Of note, the Federal Reserve contributed strong economies in Indian Country. to the finalization of the capital requirements for • On August 27, 2018, the Federal Reserve Board of market risk, the revised assessment methodology for Governors and the Center for Indian Country global systemically important banking organizations, Development at the Federal Reserve Bank of Min- supervisory guidelines related to stress testing and neapolis organized a peer-to-peer meeting for fintech developments, and further updates to the Native American banks, Native American credit Basel III disclosure requirements. The Federal unions, and Native American community develop- Reserve also participated in ongoing international ment financial institutions. The meeting was held at initiatives to track the progress of implementation of the Flathead Reservation of the Confederated Sal- the BCBS framework in member countries. ish and Kootenai Tribes, Polson, Montana, with the goal of the gathering being one of sharing best Final BCBS documents issued in 2018 include banking practices and developing networks to bet- • Sound practices: Implications of fintech developter serve the financial needs of Native Americans ments for banks and bank supervisors (issued in Feband their communities.

Supervision and Regulation 59 ruary and available at https://www.bis.org/bcbs/ mentation of financial sector policies in the interest publ/d431.pdf). of financial stability. • Progress report on adoption of the Basel regulatory FSB publications issued in 2018 include framework (issued in April and October and available at https://www.bis.org/bcbs/publ/d440.pdf and • Monitoring the technical implementation of the FSB https://www.bis.org/bcbs/publ/d452.pdf). total loss-absorbing capacity (TLAC) standard • Capital treatment for short-term “simple, transpar- (issued in June and available at http://www.fsb.org/ wp-content/uploads/P060618.pdf). ent and comparable” securitizations (issued in May and available at https://www.bis.org/bcbs/publ/ • Crypto-assets: Report to the G20 on the work of the d442.pdf). FSB and standard-setting bodies (issued in July and • Treatment of extraordinary monetary policy opera- available at http://www.fsb.org/wp-content/uploads/ tions in the Net Stable Funding Ratio (issued in P160718-1.pdf). June and available at https://www.bis.org/bcbs/ • Incentives to centrally clear over-the-counter derivapubl/d444.pdf). tives (issued jointly by the BCBS, the Committee • Global systemically important banks: revised assess- on Payments and Market Infrastructures, and the ment methodology and the higher loss absorbency International Organization of Securities Commisrequirements (issued in July and available at https:// sions in August and available at http://www.fsb.org/ www.bis.org/bcbs/publ/d445.pdf). wp-content/uploads/P070818.pdf). • Pillar 3 disclosure requirements – regulatory treat- Committee on Payments and Market ment of accounting provisions (issued in August and Infrastructures available at https://www.bis.org/bcbs/publ/d446 In 2018, the Federal Reserve continued its active par- .pdf). ticipation in the activities of the CPMI, a forum in • Stress testing principles (issued in October and which central banks promote the safety and effiavailable at https://www.bis.org/bcbs/publ/d450 ciency of payment, clearing and settlement activities .pdf). and related arrangements. In conducting its work on financial market infrastructure and market-related • Cyber-resilience: Range of practices (issued in reforms, the CPMI often coordinated with the Inter- December and available at https://www.bis.org/ national Organization of Securities Commissions bcbs/publ/d454.pdf). (IOSCO). Over the course of 2018, CPMI-IOSCO • Pillar 3 disclosure requirements – updated frame- continued to monitor implementation of the Prinwork (issued in December and available at https:// ciples for Financial Market Infrastructures. Addiwww.bis.org/bcbs/publ/d455.pdf). tionally, CPMI-IOSCO published a framework for • Minimum capital requirements for market risk supervisory stress testing of central counterparties as well as two additional reports as part of a series on (issued in December and available at https://www critical, over-the-counter data elements. The CPMI .bis.org/bcbs/publ/d457.pdf). also issued a report on cross border retail payments, Consultative BCBS documents issued in 2018 include released its final strategy on addressing the risk of wholesale payments fraud related to endpoint secu- • Leverage ratio treatment of client cleared derivatives rity, and, jointly with the Markets Committee, pre- (issued in October and available at https://www.bis pared a report on central bank digital currencies. .org/bcbs/publ/d451.pdf). Additional information is available at http://www. • Revisions to the leverage ratio disclosure require- bis.org/. ments (issued in December and available at https:// www.bis.org/bcbs/publ/d456.pdf). International Association of Insurance Supervisors Financial Stability Board The Federal Reserve continued its participation in In 2018, the Federal Reserve continued its participa- 2018 in the development of international supervisory tion in the activities of the FSB, an international standards and guidance to ensure that they are group that helps coordinate the work of national appropriate for the U.S. insurance market. The Fedfinancial authorities and international standard- eral Reserve continues to participate actively in stansetting bodies, and develops and promotes the imple- dard setting at the IAIS in consultation and collabo-

60 105th Annual Report | 2018 ration with state insurance regulators, the NAIC, and and available at https://www.iaisweb.org/page/ the Federal Insurance Office to present a coordinated supervisory-material/application-papers/file/77815/ U.S. voice in these proceedings. The Federal application-paper-on-the-use-of-digital- Reserve’s participation focuses on those aspects most technology-in-inclusive-insurance). relevant to financial stability and consolidated • Application Paper on Supervision of Insurer supervision. Cybersecurity (issued in November and available at https://www.iaisweb.org/page/supervisory-material/ In 2018, the IAIS issued for public consultation the application-papers/file/77763/application-paper-onrevised text of five Insurance Core Principles (ICPs) supervision-of-insurer-cybersecurity). as well as certain associated standards and guidance specific to supervision of internationally active insur- • Application Paper on the Composition and the ance groups, and adopted revisions to one of these Role of the Board (issued in November and avail- ICPs (covering change of control and portfolio trans- able at https://www.iaisweb.org/page/supervisoryfers).16 The IAIS plans to adopt revisions to all of material/application-papers/file/77741/applicationthese ICPs by year-end 2019.17 paper-on-the-composition-and-the-role-of-theboard). The IAIS also issued a second version of its developing Insurance Capital Standard in July 2018.18 In Consultative papers: addition, the IAIS issued several final and consulta- • Holistic Framework for Systemic Risk in the Insurtive reports as well as research reports in 2018.19 ance Sector (issued in November and available at https://www.iaisweb.org/page/consultations/closed- Papers and reports: consultations/2019/holistic-framework-for- • Issues Paper on Index-based Insurances Particu- systemic-risk-in-the-insurance-sector/file/77862/ larly in Inclusive Insurance Markets (issued in June holistic-framework-for-systemic-risk-consultationand available at https://www.iaisweb.org/page/ document). supervisory-material/issues-papers/file/75169/ • Application Paper on Proactive Supervision of issues-paper-on-index-based-insurances- Corporate Governance (issued in November and particularly-in-inclusive-insurance-markets). available at https://www.iaisweb.org/page/ • IAIS and [Sustainable Insurance Forum] Issues consultations/closed-consultations/2018/ Paper on Climate Change Risks to the Insurance application-paper-on-proactive-supervision-of- Sector (issued in July and available at https://www corporate-governance/file/77733/draft-application- .iaisweb.org/page/supervisory-material/issues- paper-on-proactive-supervision-of-corporatepapers/file/76026/sif-iais-issues-paper-on-climate- governance). changes-risk). • Application Paper on Recovery Planning (issued in • Issues Paper on Increasing Digitalization in Insur- November and available at https://www.iaisweb ance and its Potential Impact on Consumer Out- .org/page/consultations/closed-consultations/2018/ comes (issued in November and available at https:// application-paper-on-recovery-planning/file/77804/ www.iaisweb.org/page/supervisory-material/issues- draft-application-paper-on-recovery-planning). papers/file/77816/issues-paper-on-increasingdigitalisation-in-insurance-and-its-potential- Accounting Policy impact-on-consumer-outcomes). The Federal Reserve supports sound corporate governance and effective accounting and auditing practices • Application Paper on the Use of Digital Technolfor all regulated financial institutions. Accordingly, ogy in Inclusive Insurance (issued in November the Federal Reserve’s accounting policy function is responsible for providing expertise in policy develop- 16 This material is addressed in ICP 6. 17 Additional information is available at https://www.iaisweb.org/ ment and implementation efforts, both within and page/supervisory-material/insurance-core-principles/file/78064/ outside the Federal Reserve System, on issues affecttimeline-of-comframe-development-and-icps-revision. ing the banking and insurance industries in the areas 18 Additional information is available at https://www.iaisweb.org/ of accounting, auditing, internal controls over finanpage/supervisory-material/insurance-capital-standard/file/76133/ ics-version-20-public-consultation-document. cial reporting, financial disclosure, and supervisory 19 Additional information is available at https://www.iaisweb.org. financial reporting.

Supervision and Regulation 61 Federal Reserve staff regularly consult with key con- auditing, and disclosure issues affecting global bankstituents in the accounting and auditing professions, ing and insurance organizations. Working with interincluding domestic and international standard- national bank supervisors, Federal Reserve staff consetters, accounting firms, accounting and financial tributed to the development of publications and a sector trade groups, and other financial sector regula- comment letter that were issued by the BCBS, includtors to facilitate the Board’s understanding of ing guidelines on identification and management of domestic and international practices; proposed step-in risk and a comment letter to the International accounting, auditing, and regulatory standards; and Auditing and Assurance Standards Board on the the interactions between accounting standards and proposed auditing standard on identifying and regulatory reform efforts. The Federal Reserve also assessing the risk of material misstatement. In colparticipates in various accounting, auditing, and laboration with international insurance supervisors, regulatory forums in order to both formulate and Federal Reserve staff also made contributions to communicate its views. work related to enhancing IAIS standards on disclosures and drafting comment letters to standard set- The Financial Accounting Standards Board (FASB) ters on accounting and audit exposure documents. issued an accounting standard in 2016 that overhauls the accounting for credit losses with a new impairment Additionally, Federal Reserve staff provided their model based on the Current Expected Credit Losses accounting and business expertise through participa- (CECL) methodology. CECL’s implementation will tion in other supervisory activities during the past affect a broad range of supervisory activities, including year. These activities included supporting Doddregulatory reports, examinations, and examiner train- Frank Act initiatives related to stress testing of banks ing. During 2018, the Federal Reserve together with as well as various regulatory capital-related issues. the other federal banking agencies continued to monitor the industry’s implementation efforts, and provided Credit-Risk Management comments on significant interpretations as observers The Federal Reserve works with the other federal of the FASB’s Transition Resource Group and banking agencies to develop guidance on the manthrough outreach and routine discussions with stan- agement of credit risk; to coordinate the assessment dard setters and other stakeholders, as described of regulated institutions’ credit-risk management above. During 2018, the Board, along with the OCC practices; and to ensure that institutions properly and FDIC issued a comment letter on the FASB’s pro- identify, measure, and manage credit risk. The Fedposed codification improvements to financial instru- eral Reserve jointly with other federal banking agenments guidance on credit losses. cies develops and maintains a regulatory framework covering the use of real estate appraisals in federally Other notable outreach efforts during 2018 include related transactions engaged in by regulated instituthe Federal Reserve co-hosting a series of “Ask the tions; a component in the management of credit risk. Regulators” webinars in February and July on “Practical Examples of How Smaller, Less Complex Com- Shared National Credit Program munity Banks can Implement CECL” and “CECL The Shared National Credit (SNC) program is a key Q&A for Community Institutions,” respectively. In supervisory program employed by the Federal Reserve December 2018, the Board, along with the OCC and and the other federal banking agencies to ensure the FDIC, issued a final rule that provides firms with the safety and soundness of the financial system. SNC is a option to phase in the day-one adverse regulatory long-standing program used to assess credit risk and capital effects of CECL over a three-year period. trends as well as underwriting and risk-management Separately, in December 2018, the Board issued a practices associated with the largest and most complex statement on supervisory stress testing, announcing loans shared by multiple regulated financial instituthat it will maintain the current modeling framework tions. The program also provides for uniform treatfor loan allowances in its supervisory stress test ment and increased efficiency in shared credit risk through 2021. analysis and classification. Federal Reserve staff continued to participate in A SNC is any loan or formal loan commitment—and meetings of the BCBS Accounting Experts Group any asset, such as other real estate, stocks, notes, and the IAIS Accounting and Auditing Working bonds, and debentures taken as debts previously con- Group. These groups represent their respective orga- tracted—extended to borrowers by a supervised instinizations at international meetings on accounting, tution, its subsidiaries, and affiliates, which has the

62 105th Annual Report | 2018 following characteristics: an original loan amount ited lending restrictions, and loan agreement lanthat aggregates to $100 million or more20 and either guage which allows the removal of assets to unre- (1) is shared by three or more unaffiliated supervised stricted subsidiaries. Borrowers possess greater institutions under a formal lending agreement, or control over lending relationships and market (2) a portion of which is sold to two or more unaffili- dynamics are changing. Non-regulated entities have ated supervised institutions with the purchasing insti- increased their participation in the leveraged lending tutions assuming their pro rata share of the market via both purchases of loans and/or direct credit risk. underwriting and syndication of exposure. More leveraged lending risk is being transferred to these non- At the end of 2018, the SNC portfolio totaled regulated entities. $4.4 trillion, with 8,567 credit facilities to 5,314 borrowers. Summary examination findings rate the over- For more information on the 2018 SNC review, visit all risk in the SNC portfolio as moderate, given the the Board’s website at https://www.federalreserve asset quality outside of leveraged loans. The percent- .gov/newsevents/pressreleases/bcreg20190125a.htm ages of non-pass (aggregate special mention and classified) assets declined from 2017,21 largely due to Compliance Risk Management improving conditions in the oil and gas sectors. The Federal Reserve works with international and Despite the improvement in the percentage of non- domestic supervisors to develop guidance that propass commitments, the overall level of criticized motes compliance with Bank Secrecy Act and antiassets continued to be higher than observed in previ- money-laundering compliance (BSA/AML) and ous periods of economic expansion, such that losses counter-terrorism (CFT) laws. could rise considerably in the event of an economic downturn. During prior cycles, non-investment-grade Bank Secrecy Act and Anti-Money-Laundering Compliance borrowers relied more heavily on the high-yield bond market to finance operations. Today, those borrow- In 2018, the Federal Reserve continued to actively ers, especially when controlled by financial sponsors, promote the development and maintenance of effectend to favor the syndicated loan market for their tive BSA/AML compliance risk-management profinancing needs. As a result, the current portfolio grams, including developing supervisory strategies reflects a larger volume of riskier paper in aggregate. and providing guidance to the industry on trends in BSA/AML compliance. For example, the Federal Leveraged lending accounts for a substantial portion Reserve supervisory staff participated in a number of of the SNC portfolio and remains a key focus in the industry conferences to continue to communicate agencies’ broader effort to evaluate overall safety and regulatory expectations and policy interpretations for soundness of bank underwriting and risk- financial institutions. management practices. Risks associated with leveraged lending activities are building, as contrasted The Federal Reserve is a member of the Treasury-led with the SNC portfolio overall. Leveraged loans with BSA Advisory Group, which includes representatives supervisory ratings below pass typically reflect bor- of regulatory agencies, law enforcement, and the rowers with higher than average leverage levels and financial services industry and covers all aspects of weaker repayment capabilities. The SNC review the BSA. In October 2018, the Federal Reserve, in found that many leveraged loan transactions possess conjunction with the World Bank and International weakened transaction structures and increased reli- Monetary Fund, hosted the Seminar for Senior Bank ance upon revenue growth or anticipated cost Supervisors from Emerging Economies which was savings/synergies to support borrower repayment attended by representatives from over 45 foreign capacity. Weaknesses include the prevalence of cov- jurisdictions. That seminar included a discussion of enant lite transactions, incremental facilities with lim- anti-money-laundering developments for banks designed to promote information sharing and understanding of BSA/AML issues. In addition, the Fed- 20 In December 2017, the agencies issued a press release and eral Reserve participated in meetings during the year amended the SNC definition to raise the qualifying threshold from $20 million to $100 million from 2018 onwards. See https:// to discuss BSA/AML issues with delegations from www.federalreserve.gov/newsevents/pressreleases/ Canada and Japan. bcreg20171221c.htm. 21 Results discussed here are based on examinations conducted in The Federal Reserve participates in the FFIEC BSA/ the first and third quarters of 2018, and cover loan commitments originated on or before March 31, 2018. AML working group, a monthly forum for the dis-

Supervision and Regulation 63 cussion of pending BSA policy and regulatory mat- safety and soundness, provide for excessive compenters. In addition to the FFIEC agencies, the BSA/ sation, or could lead to material financial loss. The AML working group includes the Financial Crimes Federal Reserve along with the other federal banking Enforcement Network (FinCEN) and, on a quarterly agencies adopted interagency guidance oriented to basis, the SEC, the CFTC, the Internal Revenue Ser- the risk-taking incentives created by incentive comvice, and OFAC. The FFIEC BSA/AML working pensation arrangements in June 2010. The guidance group is responsible for updating the FFIEC Bank is based on the principles that incentive compensa- Secrecy Act/Anti-Money Laundering Examination tion arrangements at a banking organization should Manual. The FFIEC developed this manual as part provide employees incentives that appropriately balof its ongoing commitment to provide current and ance risk and financial results; be compatible with consistent interagency guidance on risk-based poli- effective controls and risk management; and be supcies, procedures, and processes for financial institu- ported by strong corporate governance. tions to comply with the BSA and safeguard their operations from money laundering and terrorist Section 956 of the Dodd-Frank Act requires the financing. Throughout 2018, the Federal Reserve Board, OCC, FDIC, SEC, NCUA, and FHFA to continued to regularly share examination findings develop joint regulations or guidelines implementing and enforcement proceedings with FinCEN as well as disclosures and prohibitions concerning incentivewith OFAC under the interagency MOUs finalized in based compensation at covered financial institutions 2004 and 2006. with at least $1 billion in assets. The agencies published a revised proposed rule in 2016. International Coordination on Sanctions, Anti-Money-Laundering, and Counter-Terrorism Guidance on Guidance Financing The federal banking agencies issue various types of The Federal Reserve participates in a number of supervisory guidance, including interagency stateinternational coordination initiatives related to sanc- ments advisories, bulletins, policy statements, questions, money laundering, and terrorism financing. tions and answers, and frequently asked questions, to The Federal Reserve has a long-standing role in the their respective supervised institutions. In Septem- U.S. delegation to the intergovernmental Financial ber 2018, the Federal Reserve—along with other fed- Action Task Force (FATF) and its working groups, eral financial agencies—issued a statement confirmcontributing a banking supervisory perspective to the ing the proper role of this supervisory guidance. The formulation of international standards. The Federal statement clarified that unlike a law or regulation, Reserve participated in the development of FATF supervisory guidance does not have the force and Guidance on Regulation of Virtual Assets published effect of law. Examiners cannot cite a financial instiin October 2018. tution for a violation of supervisory guidance as they would violation of a law or regulation. To ensure that The Federal Reserve also continues to participate in supervisory guidance is properly applied, the Federal committees and subcommittees through the Bank for Reserve has taken several steps since issuance of the International Settlements. Specifically, the Federal statement, including conducting several internal Reserve actively participates in the AML Experts training sessions, providing internal examination Group under the BCBS that focuses on AML and materials, more closely reviewing draft supervisory CFT issues as well as the CPMI. The Federal Reserve communications to institutions, and coordinating participated in the BCBS, CPMI, FATF, and FSB with other federal banking agencies. The Federal joint issuance welcoming the Correspondent Banking Reserve remains committed to ensuring the proper Due Diligence Questionnaire published by the Wolfs- role of guidance in the supervisory process going berg Group, as one of the industry initiatives that forward. will help to address the decline in the number of correspondent banking relationships by facilitating due Regulatory Reports diligence processes. The Federal Reserve and the other U.S. federal banking agencies have the authority to require banks and Incentive Compensation holding companies to submit information, on both a The Federal Reserve believes that supervision of solo and a consolidated basis, on their financial conincentive compensation programs at financial institu- dition, performance, and risks, at regular intervals. tions can play an important role in helping safeguard The Federal Reserve’s data collections, reporting, financial institutions against practices that threaten and governance function is responsible for develop-

64 105th Annual Report | 2018 ing, coordinating, and implementing regulatory $1 billion to $3 billion in total consolidated assets. reporting requirements for various financial report- As a result of this change, nearly 55 percent of ing forms filed by domestic and foreign financial holding companies filing the Y-9C quarterly report institutions subject to Federal Reserve supervision. became eligible to file the significantly shorter Federal Reserve staff members interact with other semiannual FR Y-9SP report. federal agencies, state supervisors, and, as needed, • FR Y-9LP and FR Y-9SP—to implement revisions foreign bank supervisors, to recommend and implein response to changes in the accounting for equity ment appropriate and timely revisions to the reportsecurities, effective March 2018. Effective Septeming forms and the attendant instructions. ber 2018, reporting thresholds on these forms were modified as a result of EGRRCPA section 207. Federal Reserve Regulatory Reports The FR Y-9LP reporting threshold was increased The Federal Reserve requires that U.S. holding comto $3 billion or more in total consolidated assets panies (HCs) periodically submit reports that provide (from $1 billion or more), and the FR Y-9SP information about their financial condition and threshold was increased to under $3 billion in total structure.22 This information is essential to formulatconsolidated assets (from under $1 billion). As a ing and conducting financial institution regulation result, nearly 55 percent of holding companies filand supervision. It is also used to respond to inforing the FR Y-9LP quarterly reports became eligible mation requests by Congress and the public about to file the shorter semiannual FR Y-9SP report. HCs and their nonbank subsidiaries. Foreign banking organizations also are required to periodically • FR Y-14—to modify several FR Y-14Q schedules submit reports to the Federal Reserve. For more to improve consistency of reported data and to information on the various reporting forms, see enhance supervisory modeling. Additionally, varihttps://www.federalreserve.gov/apps/reportforms/ ous FR Y-14A, FR Y-1Q, and FR Y-14M scheddefault.aspx. ules were revised to reflect current accounting standards, eliminate a sub-schedule, and streamline During 2018, the following reporting forms had sub- reporting. These changes were effective stantive revisions: March 2018. • FR Y-9C—to implement a number of burden- • FR Y-16—to discontinue this form and transfer the reducing revisions corresponding to Call Report stress testing information collection for institutions revisions, as applicable. The revisions, effective with between $10 billion and $50 billion in total June 2018, included deleting certain data items, consolidated assets to an FFIEC collection. consolidating existing data items into new data items, and adding new or raising existing reporting FFIEC Regulatory Reports thresholds for certain data items. These changes The law establishing the FFIEC and defining its affected approximately 28 percent of the data items functions requires the FFIEC to develop uniform collected for holding companies filing the FR Y-9C. reporting systems for federally supervised financial Additionally, several reporting schedules were institutions. The Federal Reserve, along with the revised in response to changes in the accounting for other member FFIEC agencies, requires financial equity securities, and changes to the definitions of institutions to submit various uniform regulatory reciprocal deposits brokered deposits and high reports. This information is essential to formulating volatility commercial real estate exposures. Effec- and conducting supervision and regulation and for tive September 2018, the reporting threshold was the ongoing assessment of the overall soundness of increased from $1 billion or more to $3 billion or the nation’s financial system. During 2018, the folmore in total consolidated assets, as a result of sec- lowing FFIEC reporting forms had substantive tion 207 of the Economic Growth, Regulatory revisions: Relief, and Consumer Protection Act (EGRRCPA) • FFIEC 031, 041, and 051—to implement certain (box 2). EGRRCPA directed the Board to revise burden-reducing revisions to the FFIEC 031, the Small Bank Holding Company Policy State- FFIEC 041 and FFIEC 051 Call Reports. See secment (Policy Statement) to raise the total consolition below on the Call Report Burden Reduction dated asset limit in the Policy Statement from Initiative for more details. Additionally, several reporting schedules were revised in response to 22 HCs are defined as BHCs, IHCs, SLHCs, and securities holding companies. changes in the accounting for equity securities.

Supervision and Regulation 65 Box 2. The Economic Growth, Regulatory Relief, and Consumer Protection Act: Reducing Regulatory Burden TheEconomicGrowth,RegulatoryRelief,andCon- supervise.OnOctober2,2018,ViceChairQuarles sumerProtectionAct(EGRRCPA),enactedon testifiedbeforetheSenateCommitteeonBanking, May24,2018,changedseveralaspectsofbanking Housing,andUrbanAffairsontheFederalReserve’s lawtoreduceregulatoryburdenoncommunitybanks implementationofEGRRCPA(tableA).Inhistestiandalsorequiredthefederalbankingagenciestofur- mony,ViceChairQuarlesnotedthattheFederal thertailortheirregulationstobetterreflectthechar- Reserve'simplementationofEGRRCPAisunderway acterofthedifferentbankingfirmsthattheagencies andthatprogresscontinuestobemade. TableA.ImplementationofEGRRCPA,2018 Dateissued Rules/guidance 7/6/2018 Federal Reserve Board issues statement describing how, consistent with recently enacted EGRRCPA, the Board will no longer subject primarily smaller, less complex banking organizations to certain Board regulations https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180706b.htm 8/22/2018 Agencies issue interim final rule regarding the treatment of certain municipal securities as high-quality liquid assets https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180822a.htm 8/23/2018 Agencies issue interim final rules expanding examination cycles for qualifying small banks and U.S. branches and agencies of foreign banks https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180823a.htm 8/28/2018 Federal Reserve Board issues interim final rule expanding the applicability of the Board’s small bank holding company policy statement https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180828a.htm 9/18/2018 Agencies propose rule regarding the treatment of high volatility commercial real estate https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180918a.htm 10/31/2018 Federal Reserve Board invites public comment on framework that would more closely match regulations for large banking organizations with their risk profiles https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181031a.htm 11/7/2018 Agencies issue proposal to streamline regulatory reporting for qualifying small institutions https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181107a.htm 11/20/2018 Agencies propose amendments to Regulation CC regarding funds availability https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181120a.htm 11/21/2018 Agencies propose community bank leverage ratio for qualifying community banking organizations https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181121c.htm 12/4/2018 Agencies seek public comment on proposal to raise appraisal exemption threshold for residential real estate transactions https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181204a.htm 12/21/2018 Agencies invite comment on a proposal to exclude community banks from the Volcker rule https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181221d.htm 12/21/2018 Agencies issue final rules expanding examination cycles for qualifying small banks and U.S. branches and agencies of foreign banks https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181221c.htm • FFIEC 002—to implement certain burden- entity identifier if they already have one. The pasreducing revisions corresponding to Call Report sage of EGRRCPA in 2018 eliminated the Doddrevisions, as applicable. Additionally, certain Frank Act stress testing requirements for these reporting information was revised in response to firms and no data was collected on this form. changes in the accounting for equity securities. Call Report Burden Reduction Initiative • FFIEC 016—to create a new, single FFIEC form to combine the agencies’ three separate, yet identical, In 2018, the FFIEC concluded a multiyear initiative stress test forms for institutions with between that began in 2015 to streamline and simplify regula- $10 billion and $50 billion in total consolidated tory reporting requirements for banking institutions, assets, with modifications to align the report form primarily community banks, and reduce their reportwith burden-reducing changes made to other finan- ing burden. The objectives of this initiative were concial reports and to collect an institution’s legal sistent with feedback the FFIEC received as part of

66 105th Annual Report | 2018 Table 4. Cumulative data items revised through June 30, 2018 Finalized Call Report revisions FFIEC 051 F FIEC 041 F FIEC 031 Items removed, net* 1,002 3 16 2 44 Change in item frequency to semiannual 113 31 31 Change in item frequency to annual 36 3 3 Items with a new or increased reporting threshold 55 2 87 3 95 * “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. the regulatory review conducted as required by the advanced quantitative analysis platforms and tool- Economic Growth and Regulatory Paperwork sets, as well as and data visualization software to Reduction Act of 1996 to reduce burden. allow supervisory analysts to glean insights from supervisory data. Through this initiative, the FFIEC implemented burden-reducing changes that removed or consoli- Streamlined data access and improved security. For dated data items, added new or raised certain existing the supervision function, IT continues to enhance its reporting thresholds, or reduced the frequency of data-access process using a central tool established reporting data items. Collectively, these changes for managing and granting user access. This central affected approximately 51 percent of required data tool provides assurance that user-access is established items for smaller, less complex institutions filing the for important data, applications, and research that FFIEC 051 Call Report, and 28 percent of required will be published externally. The resulting effect of data items for all other institutions filing the this tool is enhanced prevention and detection con- FFIEC 031 and FFIEC 041 Call Reports, that were trols that reduces information security risks. included in the Call Reports for December 31, 2016. Table 4 summarizes the overall number of changes IT has implemented information security policies, finalized and implemented by Call Report form procedures, and practices designed to safeguard conunder the burden reduction initiative. fidential information, including confidential supervisory information and personally identifiable informa- Supervisory Information Technology tion. A comprehensive, defense-in-depth approach leveraging multiple layers of security are imple- The Federal Reserve’s supervisory information tech- mented to protect confidential information. IT connology function established a new multiyear IT strat- tinually assesses the effectiveness of its information egy focused on optimizing our technology spend, security programs and controls, and implements simplifying our IT environment and leveraging new additional security measures as needed to further or emerging technologies. High priority initiatives enhance the protection of confidential information. included: (1) the completion of the IT strategy, (2) establishing an Enterprise Information Manage- Information sharing and external collaboration. IT ment Program for the Supervision function, provides a Federal Reserve business area representa- (3) developing a Records and Document Manage- tive to the FFIEC Task Force on Information Sharment Strategy, and (4) the successful investigation of ing, and representatives who lead both the Technical new technology solutions to improve examiner effi- Working Group and the Path Forward Working ciency while reducing burden for regulated Group, which focuses efforts to work with the busiinstitutions. ness areas to increase capabilities for collaboration between the agencies. Supervisory and support tools. To support examiners and other supervisory staff, IT continues to manage The Federal Reserve exchanges approved regulatory tools to support the collection, use, and storage of interagency information with several external agensupervisory data—both directly within the supervi- cies, managed through interagency sharing agreesory programs or to manage resources. There has ments for specific data sets, and overseen by the been increased investment and growth in the IT area.

Supervision and Regulation 67 Document management. In addition to continued Examiner Commissioning Program efforts to implement a document and records man- An overview of the Federal Reserve System’s Examagement strategy, IT continues to improve document iner Commissioning Program for assistant examiners tracking, storage, and access through the implemen- is set forth in SR letter 17-6, “Overview of the Fedtation of document management software. The soft- eral Reserve’s Supervisory Education Programs.”23 ware eliminates point-to-point interfaces between document management systems and systems upload- Examiners choose from one of three specialty tracks: ing or referencing documents. The software also (1) safety and soundness, (2) consumer compliance, moves and tracks documents between management or (3) large financial institutions. On average, indisystems as the documents progress through their viduals move through a combination of classroom life cycle. offerings, self-paced learning, virtual instruction, and on-the-job training over a period of two to three National Information Center years. Achievement is measured by completing the IT continues to be responsible for the delivery of the required course content, demonstrating adequate NIC, the Federal Reserve’s authoritative source for on-the-job knowledge, and passing a professionally supervisory, financial, and banking structure data as validated proficiency examination. In 2018, 58 examwell as information on supervisory documents. The iners passed the proficiency examination (35 in safety NIC includes (1) structure, financial, and supervisory and soundness and 23 in consumer compliance). data on banking structures throughout the United States and foreign banking concerns (2) national In 2018, the Board enhanced the consumer compliapplications on various supervisory programs and ance proficiency examination by adding applicationthe data they capture, (3) data collection processes, based questions designed to measure performance and (4) a platform for sharing of the information reflecting the level of knowledge and skills needed to with external agencies and the public. Thousands of effectively perform in an examiner-in-charge role. In data points are updated on a daily basis and a public addition, further learning units were released for the version of the data is made available through the Large Financial Institutions Examiner Commission- NIC’s website. ing Program, which will continue to be developed and deployed in 2019. Staff Development Continuing Professional Development Throughout 2018, the Federal Reserve System con- The Federal Reserve’s staff development program tinued to enhance its continuing professional develsupports the ongoing development of nearly 3,000 opment program. Professional development and professional supervisory staff, ensuring that they have training content was developed to support several the requisite skills necessary to meet their evolving major supervision initiatives, including CECL, Diversupervisory responsibilities. The Federal Reserve also gent Views, Cybersecurity, and the LISCC program. provides course offerings to staff at state banking agencies. Training activities in 2018 are summarized 23 SR letter 17-6 is available at https://www.federalreserve.gov/ in table 5. supervisionreg/srletters/sr1706.htm. Table 5. Training for banking supervision and regulation, 2018 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 1,299 64 5 10 1 02 FFIEC 794 467 3 24 81 Rapid Response2 14,208 897 3 30 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.

68 105th Annual Report | 2018 Box 3. Transparency in Supervising and Regulating Financial Institutions InanefforttoincreasetransparencyaroundtheFed- Reserveandotherfederalfinancialregulatory eralReserve’sworkinsupervisingandregulating agenciesaswellasmarketindicatorsofindustry financialinstitutionsandactivities,theBoardofGov- conditions. ernorsoftheFederalReserveSystemisissuinga • TheSupervisoryDevelopmentssection,which SupervisionandRegulationReport.1Theinaugural providesbackgroundinformationonsupervisory reportwasissuedonNovember2018. programsandapproachesaswellasanoverview Thefocusofthereportwillbekeydevelopmentsand ofkeythemesandtrends,supervisoryfindings, trendsinsupervision(particularlyprudentialsupervi- andsupervisorypriorities.Thereportdistinguishes sion)andregulation.Thereportwillcontainthree betweenlargefinancialinstitutionsandregional mainsections: andcommunitybankingorganizationsbecause supervisoryapproachesandprioritiesforthese • TheBankingSystemConditionssection,which institutionsfrequentlydiffer. providesanoverviewoftrendsinthebankingsectorbasedondatacollectedbytheFederal • TheRegulatoryDevelopmentssection,which providesanoverviewofthecurrentareasoffocus 1 See https://www.federalreserve.gov/publications/files/201811- oftheFederalReserve’sregulatorypolicyframesupervision-and-regulation-report.pdf. work,includingpendingrules. Educational efforts specific to financial technology, Efficiency involves two components. The first is including use cases and industry perspectives, were related to methods: efficient methods tailor the also delivered to a national supervision audience. requirements and intensity of regulations and supervision programs based on the asset size and complexity of firms. Efficient methods also minimize compli- Regulatory Developments ance burdens generally while achieving regulatory objectives. The second is related to goals: we have a Post-Crisis Framework strong public interest in an efficient financial system, just as we do in a safe and sound one. We include the Regulatory policies implemented over the past efficient operation of the financial sector as one of decade have contributed significantly to improving the goals we seek to promote through our regulation the safety and soundness of banking organizations and supervision.24 and the financial system so they are able to support the needs of the economy through good times and Transparency is not only a core requirement for bad. Today, U.S. banking firms are significantly betaccountability to the public but also benefits the ter capitalized and have much stronger liquidity posiregulatory process by exposing ideas to a variety of tions. They rely less on short-term wholesale funding, perspectives. Similarly, transparent supervisory prinwhich can evaporate quickly during periods of stress. ciples and guidance allow firms and the public to The largest banking firms have also developed resoluunderstand the basis on which supervisory decisions tion plans that reduce the potential negative systemic are made and allow firms the ability to respond conimpact that could result in the event of their failures. structively to supervisors (box 3). As the regulatory framework has been strengthened, Simplicity complements and reinforces transparency the Federal Reserve has also focused on the efficiency by promoting the public’s understanding of the of financial institution supervision. Compliance bur- Board’s regulatory and supervisory programs. Conden should be minimized without compromising the fusion and unnecessary compliance burden resulting safety and soundness gains that have been made in from overly complex regulation do not advance the recent years. In addition, the Federal Reserve contingoal of a safe financial system. ues to tailor its regulations, ensuring that the rules vary with the risk of the institution. 24 The Federal Reserve’s bank holding company supervision pro- In an effort to refine the post-crisis supervisory and gram also involves reliance on—and extensive coordination with—the insured depository primary regulator in order to regulatory framework, the Board promotes the prinreduce burden and duplicative efforts, thereby promoting ciples of efficiency, transparency, and simplicity. efficiency.

Supervision and Regulation 69 Since the crisis, the Federal Reserve has substantially • increasing the loan size under which regulations strengthened its supervisory programs for the largest require banks to obtain formal real estate appraisinstitutions. The financial crisis made clear that poli- als for commercial loans, and cymakers needed to address more substantially the • proposing changes to simplify regulatory capital threat to financial stability posed by the largest and rules. most complex banking organizations, in particular those considered systemically important. As a result, In addition, the Federal Reserve has taken steps to the Federal Reserve has strategically shifted supervireduce the amount of undue burden associated with sory resources to its large bank supervision proexaminations, including conducting portions of grams. For SIFIs, LISCC was established in 2010 to oversee a national program for these firms.25 An examinations offsite. There has also been an increased emphasis on risk-focusing examination increased number of horizontal examinations were activities, where more in-depth examinations are conintroduced, focusing on capital, liquidity, governance and controls, and resolution planning.26 In addition, ducted for banks identified as high risk or in areas with high-risk activities, and less-intensive examinafinancial and management information collections tions are conducted at lower-risk banks, or in lines of from large institutions increased, giving supervisors businesses at banks that have historically been lower more timely and better insight into firms’ risk proin risk. files and activities. The Federal Reserve also enhanced its supervision U.S. Banking System Structure programs for smaller institutions to address lessons The Federal Reserve acts on a variety of applications learned during the crisis and has more recently and notices that directly or indirectly affect the strucfocused on tailoring its supervisory expectations to ture of the U.S. banking system at the local, regional, minimize regulatory burden whenever possible withand national levels; the international operations of out compromising safety and soundness. During the domestic banking organizations; or the U.S. banking financial crisis of 2007–09, a large number of operations of foreign banks. The applications and regional and community banks failed or experienced notices concern BHC and SLHC formations and financial stress. Accordingly, the Federal Reserve acquisitions, bank mergers, and other transactions took steps to improve its regional and community involving banks and savings associations or nonbank bank supervision programs to enhance expectations firms. In 2018, the Federal Reserve acted on 1,356 for examinations, particularly for those conducted at applications filed under the six statutes. banks with significant concentrations of credit risk in particular loan segments or that relied significantly on less-stable funding sources. In 2018, the Federal Reserve published its Semiannual Report on Banking Applications Activity, which provides aggregate information on proposals filed by As banking conditions have improved and regulators banking organizations and reviewed by the Federal have gained more experience implementing the post- Reserve. The report includes statistics on the number crisis regulatory regime, the Federal Reserve, along of proposals that have been approved, denied, withwith other regulatory agencies, has recalibrated drawn, mooted, or returned as well as general inforsupervisory programs to ensure they are effectively mation about the length of time taken to process proand efficiently achieving their goals. As a result, the posals and common reasons for proposals to be withagencies have implemented several burden-reducing drawn from consideration. The reports are available supervisory changes, including at https://www.federalreserve.gov/publications/ • reducing the volume of financial data that smaller, semiannual-report-on-banking-applications-activity less-risky banks must submit to the agencies each .htm quarter, Public Notice of Federal Reserve Decisions 25 See also SR letter 15-7, “Governance Structure of the Large and Filings Received Institution Supervision Coordinating Committee (LISCC) Supervisory Program,” at https://www.federalreserve.gov/ Certain decisions by the Federal Reserve that involve supervisionreg/srletters/sr1507.htm. a BHC, SLHC, a bank merger, a change in control, 26 Horizontal examinations are exercises in which several institu- or the establishment of a new U.S. banking presence tions are examined simultaneously. Doing so encompasses both by a foreign bank are made known to the public by firm-specific supervision and the development of broader perspectives across firms. an order or an announcement. Orders state the deci-

70 105th Annual Report | 2018 sion, the essential facts of the application or notice, 2018. The information submitted by these two small and the basis for the decision; announcements state state member banks is available to the public upon only the decision. All orders are made public imme- request and is primarily used for disclosure to the diately and are subsequently reported in the Board’s bank’s shareholders and public investors. weekly H.2 statistical release. The H.2 release also contains announcements of applications and notices Assessments for Supervision and Regulation received by the Federal Reserve upon which action The Dodd-Frank Act directs the Board to collect has not yet been taken. For each pending application assessments, fees, or other charges equal to the total and notice, the related H.2A release gives the dead- expenses the Board estimates are necessary or approline for comments. The Board’s website provides priate to carry out the supervisory and regulatory information on orders and announcements (https:// responsibilities of the Board for BHCs and SLHCs www.federalreserve.gov/newsevents/pressreleases with total consolidated assets of $50 billion or more .htm) as well as a guide for U.S. and foreign banking and nonbank financial companies designated for organizations that wish to submit applications (https Board supervision by the FSOC. As a collecting ://www.federalreserve.gov/bankinforeg/afi/afi.htm). entity, the Board does not recognize the supervision and regulation assessments as revenue nor does the Other Laws and Regulation Enforcement Board use the collections to fund Board expenses; the Activity/Actions funds are transferred to the Treasury. The Board collected and transferred $564,081,227 in 2018 for the The Federal Reserve issued the following rules and 2017 supervision and regulation assessment. guidance in 2018 (table 6). Securities Credit The Federal Reserve’s enforcement responsibilities Under the Securities Exchange Act of 1934, the also extend to the disclosure of financial information Board is responsible for regulating credit in certain by state member banks and the use of credit to pur- transactions involving the purchasing or carrying of chase and carry securities. securities. The Board’s Regulation T limits the amount of credit that may be provided by securities Financial Disclosures by State Member Banks brokers and dealers when the credit is used to pur- Under the Securities Exchange Act of 1934 and the chase debt and equity securities. The Board’s Regula- Federal Reserve’s Regulation H, certain state mem- tion U limits the amount of credit that may be prober banks are required to make financial disclosures vided by lenders other than brokers and dealers when to the Federal Reserve using the same reporting the credit is used to purchase or carry publicly held forms (such as Form 10K—annual report and Sched- equity securities if the loan is secured by those or ule 14A—proxy statement) that are normally used by other publicly held equity securities. The Board’s publicly held entities to submit information to the Regulation X applies these credit limitations, or mar- SEC.27 As most of the publicly held banking organi- gin requirements, to certain borrowers and to certain zations are BHCs and the reporting threshold was credit extensions, such as credit obtained from forrecently raised, only two state member banks were eign lenders by U.S. citizens. required to submit data to the Federal Reserve in Several regulatory agencies enforce the Board’s securities credit regulations. The SEC, the Financial 27 Under section 12(g) of the Securities Exchange Act, certain Industry Regulatory Authority, and the Chicago companies that have issued securities are subject to SEC registration and filing requirements that are similar to those imposed Board Options Exchange examine brokers and dealon public companies. Per section 12(i) of the Securities ers for compliance with Regulation T. With respect to Exchange Act, the powers of the SEC over banking entities that compliance with Regulation U, the federal banking fall under section 12(g) are vested with the appropriate banking regulator. Specifically, state member banks with 2,000 or more agencies examine banks under their respective jurisshareholders and more than $10 million in total assets are dictions; the FCA and the NCUA examine lenders required to register with, and submit data to, the Federal under their respective jurisdictions; and the Federal Reserve. These thresholds reflect the recent amendments by the Jumpstart Our Business Startups Act (JOBS Act). Reserve examines other Regulation U lenders.

Supervision and Regulation 71 Table 6. Federal Reserve or interagency rulemakings/statements (proposed and final), 2018 Date Rule/guidance issued 1/4/2018 Federal Reserve requests comments on proposed guidance that would clarify the Board’s supervisory expectations related to risk management for large financial institutions. Federal Register (FR) doc: https://www.gpo.gov/fdsys/pkg/FR-2018-01-11/pdf/2018-00294.pdf 2/5/2018 Agencies seek comment on proposed technical amendments to the swap margin rule. FR doc: https://www.gpo.gov/fdsys/pkg/FR-2018-02-21/pdf/2018-02560.pdf 4/2/2018 Agencies issue final rule to exempt commercial real estate transactions of $500,000 or less from appraisal requirements. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/files/2018-06960.pdf 4/10/2018 Federal Reserve seeks comment on proposal to simplify capital rule for large banks while preserving strong capital levels that would maintain their ability to lend under stressful conditions. FR doc: https://www.gpo.gov/fdsys/pkg/FR-2018-04-25/pdf/2018-08006.pdf 4/11/2018 Federal Reserve and OCC propose rule to tailor enhanced supplementary leverage ratio requirements. Comment period ended 6/25/18. FR doc: https://www.gpo.gov/fdsys/pkg/FR-2018-04-19/pdf/2018-08066.pdf 4/17/2018 Agencies issue proposal to revise regulatory capital rules to address and provide an option to phase in the effects of the new accounting standard for credit losses (CECL). Comment period ended 6/13/18. FR doc: https://www.gpo.gov/fdsys/pkg/FR-2018-05-14/pdf/2018-08999.pdf 5/7/2018 Federal Reserve Board announces approval of final amendments to its Regulation A. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180507a.htm 5/18/2018 Federal Reserve and Office of the Comptroller of the Currency extend comment period for proposed rule tailoring leverage ratio requirements. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180518a.htm 5/30/2018 Federal Reserve Board asks for comment on proposed rule to simplify and tailor compliance requirements relating to the “Volcker rule.” FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180530a.htm 6/5/2018 Agencies ask for public comment on a proposed rule to simplify and tailor the Volcker Rule. Comment period ended 10/17/18. FR doc: https://www.gpo.gov/fdsys/pkg/FR-2018-07-17/pdf/2018-13502.pdf 6/14/2018 Federal Reserve approves final rule to prevent concentration of risk between large banking organizations and their counterparties from undermining financial stability. FR doc: https://www.gpo.gov/fdsys/pkg/FR-2018-08-06/pdf/2018-16133.pdf 7/6/2018 Agencies issue statement regarding the impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act. Statement: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180706a1.pdf 8/22/2018 Agencies issue interim final rule regarding the treatment of certain municipal securities as high-quality liquid assets. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/files/2018-18610.pdf 8/28/2018 Federal Reserve issues interim final rule expanding the applicability of the Board’s Small Bank Holding Company Policy Statement. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/files/2018-18756.pdf 9/11/2018 Agencies issue statement reaffirming the role of supervisory guidance. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180911a.htm 9/14/2018 Federal and state financial regulatory agencies issue interagency statement on supervisory practices regarding financial institutions affected by Hurricane Florence. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180914a.htm 9/18/2018 Agencies issue proposed rule regarding the treatment of high-volatility commercial real estate. Comment period ends 60 days after publication in the FR. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180918a1.pdf 9/21/2018 Agencies issue final rule to amend swap margin rule. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180921a.pdf 9/21/2018 Federal Reserve Board seeks public comment on proposal to amend Regulation H and Regulation K to reflect the transferal of the Board’s rulemaking for the Secure and Fair Enforcement for Mortgage Licensing Act (S.A.F.E. Act) to the Bureau of Consumer Financial Protection. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180921b.htm 10/3/2018 Federal agencies issue a joint statement on banks and credit unions sharing resources to improve efficiency and effectiveness of Bank Secrecy Act compliance. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181003a.htm 10/10/2018 Federal and state financial regulatory agencies issue interagency statement on supervisory practices regarding financial institutions affected by Hurricane Michael. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181010a.htm 10/30/2018 Agencies propose rule to update calculation of derivative contract exposure amounts under regulatory capital rules. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181030a.htm 10/31/2018 Federal Reserve Board invites public comment on framework that would more closely match regulations for large banking organizations with their risk profiles. Proposed prudential standards for large bank holding companies and savings and loan holding companies (83 Fed. Reg. 61,408 (November 29, 2018)). Proposed changes to applicable threshold for regulatory capital and liquidity requirements (83 Fed. Reg. 66,024 (December 21, 2018)). FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181031a.htm 11/2/2018 Federal Reserve Board finalizes new supervisory rating system for large financial institutions. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181102a.htm (continued on next page)

72 105th Annual Report | 2018 Table 6.—continued Date Rule/guidance issued 11/7/2018 Agencies issue proposal to streamline regulatory reporting for qualifying small institutions. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181107a.htm 11/15/2018 Federal and state financial regulatory agencies issue interagency statement on supervisory practices regarding financial institutions and their customers affected by California wildfires. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181115b.htm 11/21/2018 Agencies propose community bank leverage ratio for qualifying community banking organizations. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181120a.htm 12/3/2018 Federal Reserve Board issues joint statement encouraging depository institutions to explore innovative approaches to meet BSA/anti-money-laundering compliance obligations and to further strengthen the financial system against illicit financial activity. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181203a.htm 12/4/2018 Agencies seek public comment on proposal to raise appraisal exemption threshold for residential real estate transactions. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181204a.htm 12/21/2018 Agencies allow three-year regulatory capital phase-in for new Current Expected Credit Losses (CECL) accounting standard. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181221a.htm 12/21/2018 Federal Reserve Board will maintain current modeling framework for loan allowances in its supervisory stress test through 2021. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181221b.htm 12/21/2018 Agencies issue final rules expanding examination cycles for qualifying small banks and U.S. branches and agencies of foreign banks. FR doc:https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181221c.htm 12/21/2018 Agencies invite comment on a proposal to exclude community banks from the Volcker rule. FR doc: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20181221d.htm

73 5 Consumer and Community Affairs The Division of Consumer and Community Affairs nomic development issues and opportunities. The (DCCA) has primary responsibility for carrying out division analyzed ongoing and emerging consumer the Board of Governors’ consumer protection and financial services and community risks, practices, community development activities to promote fair issues, and opportunities to understand and act on and transparent financial service markets, protect their implications for supervisory policy as well as consumers’ rights, and ensure that its policies and to gain insight into consumer decisionmaking research take into account consumer and community related to financial services and access to credit for perspectives. This charge includes assessing and tak- small businesses. ing corrective actions to address consumer risks • Engaging and convening key stakeholders to identify among financial institutions it supervises while also emerging issues and advance what works in commufostering proven programs in consumer compliance nity reinvestment and consumer protection. The and community reinvestment. division continued to promote fair and informed access to financial markets for all consumers, par- Throughout 2018, the division engaged in numerous ticularly underserved populations, by engaging consumer and community-related functions and lenders, government officials, and community leadpolicy activities in the following areas: ers. Throughout the year, DCCA convened pro- • Formulating consumer-focused supervision and grams to share information on the financial and examination policy to ensure that financial institu- economic needs in low- and moderate-income tions for which the Federal Reserve has authority (LMI) communities, research on effective commucomply with consumer protection laws and regula- nity development policies and strategies, and best tions and meet requirements of community reinvest- practices in the management and control of conment laws and regulations. The Federal Reserve’s sumer compliance risks. consumer protection supervision program includes • Writing and reviewing regulations that effectively a review of state member banks’ performance implement consumer protection and community reinunder the Community Reinvestment Act (CRA) as vestment laws. The division manages the Board’s well as assessment of compliance with and enforceregulatory responsibilities with respect to certain ment of a wide range of consumer protection laws entities and specific statutory provisions of the and regulations, including those related to fair consumer financial services and fair lending laws. lending, unfair or deceptive acts or practices In 2018, DCCA participated in drafting inter- (UDAP), and flood insurance. The division develagency regulations and compliance guidance for oped policies that govern, and provided oversight the industry and the Reserve Banks. of, the Reserve Banks’ programs for consumer compliance supervision and examination of state member banks and bank holding companies Supervision and Examinations (BHCs). The division’s activities also included the development and delivery of examiner training; DCCA develops supervisory policy and examination analysis of bank and BHC applications related to procedures for consumer protection laws and regulaconsumer protection, convenience and needs, and tions, as well as for the CRA, as part of its supervithe CRA; and processing of consumer complaints. sion of the organizations for which the Board has • Conducting research, analysis, and data collection to authority, including bank and financial holding cominform Federal Reserve and other policymakers panies, state member banks, savings and loan holding about consumer protection risks and community eco- companies, foreign banking organizations, Edge Act

74 105th Annual Report | 2018 corporations, and agreement corporations.1 The divi- consumer protection laws and regulations, bank and sion also administers the Federal Reserve System’s BHC application analysis and processing, examinarisk-focused program for assessing consumer compli- tion and enforcement techniques and policy matters, ance risk at the largest banks and financial holding examiner training, and emerging issues. Finally, staff companies in the System, with division staff ensuring members participate in interagency activities that that consumer compliance risk is effectively inte- promote consistency in examination principles, stangrated into the consolidated supervision of the hold- dards, and processes. ing company. DCCA staff monitor trends in consumer products to inform the risk-based supervisory Examinations are the Federal Reserve’s primary planning process. Quantitative risk metrics and method of ensuring compliance with consumer proscreening systems use data to assess market activity, tection laws and assessing the adequacy of consumer consumer complaints, and supervisory findings to compliance risk-management systems within reguassist with the determination of risk levels at firms. lated entities. During 2018, the Reserve Banks completed 253 consumer compliance examinations of The division oversees the efforts of the 12 Reserve state member banks, 237 CRA examinations of state Banks to ensure that the Federal Reserve’s consumer member banks, 24 examinations of foreign banking compliance supervisory program reflects its commit- organizations, 2 examinations of Edge Act corporament to promoting financial inclusion and compli- tions, and no examinations of agreement ance with applicable federal consumer protection corporations. laws and regulations in the 794 state member banks it supervises. Division staff coordinate with the pruden- Mortgage Servicing and Foreclosure tial regulators and the Consumer Financial Protection Bureau (CFPB) as part of the supervisory coor- Payment Agreement Status dination requirements under the Dodd-Frank Wall As of 2018, the majority of the enforcement actions Street Reform and Consumer Protection Act (Dodd- that were issued by the Federal Reserve and the Frank Act), and ensure that consumer compliance Office of the Comptroller of the Currency (OCC) risk is appropriately incorporated into the consoli- against 16 mortgage loan servicers between dated risk-management program of the approxi- April 2011 and April 2012 were terminated. At the mately 159 bank and financial holding companies time of the enforcement actions, along with other with assets over $10 billion. Division staff provide requirements, the two regulators directed servicers to guidance and expertise to the Reserve Banks on retain independent consultants to conduct comprehensive reviews of foreclosure activity to determine whether eligible2 borrowers suffered financial injury because of servicer errors, misrepresentations, or 1 The Federal Reserve has examination and enforcement authority for federal consumer financial laws and regulations for other deficiencies. The file review initiated by the insured depository institutions with assets of $10 billion or less independent consultants, combined with a significant that are state member banks and not affiliates of covered instiborrower outreach process, was referred to as the tutions, as well as for conducting CRA examinations for all state member banks regardless of size. The Federal Reserve Board Independent Foreclosure Review (IFR). also has examination and enforcement authority for certain federal consumer financial laws and regulations for insured deposi- In 2013, the regulators entered into agreements with tory institutions that are state member banks with over $10 billion 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 and other assistance (the Payment Agreement).3 The institutions with over $10 billion in assets and their affiliates (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 activi- 2010. The Payment Agreement also required the ties. An agreement corporation is a type of bank chartered by a state to engage in international banking. The bank agrees with 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 75 servicers to contribute an additional $5.8 billion in ful home preservation actions within two years from other foreclosure prevention assistance, such as loan the date the agreement in principle was reached. modifications and forgiveness of deficiency judgments. All servicers were required to submit reports detailing the consumer-relief actions they had taken to sat- A paying agent, Rust Consulting, Inc. (Rust), was isfy these requirements. The foreclosure prevention retained to administer payments to borrowers on assistance actions reported included loan modificabehalf of the participating servicers. tions, short sales, deeds-in-lieu of foreclosure, debt cancellation, and lien extinguishment. In order to More than $3.5 billion was distributed to eligible receive credit toward the servicer’s total foreclosure borrowers through 3.9 million checks, representing prevention obligation, the actions submitted had to nearly 91 percent of the total value of the funds. be validated by the regulators. A third party com- Receiving a payment under the agreement did not pleted this validation to ensure that the foreclosure prevent borrowers from taking any action they may prevention assistance amounts met the requirements wish to pursue related to their foreclosure. Servicers of the amendments to the enforcement actions. were not permitted to ask borrowers to sign a waiver Servicer Efforts to Address Deficiencies of any legal claims they may have against their servicer in connection with receiving payment.4 In addition to the foreclosure review requirements, the enforcement actions required mortgage servicers At the Federal Reserve’s direction, in August 2016, to submit acceptable written plans to address various Rust redistributed any funds remaining after all out- mortgage loan servicing and foreclosure processing standing initial checks expired, to eligible borrowers deficiencies. In the time since the enforcement actions of Federal Reserve-supervised servicers who had were issued, the banking organizations have been cashed or deposited their initial checks. This direc- implementing the action plans, including enhanced tion applied only to funds related to mortgage ser- controls, and improving systems and processes. The vicers supervised by the Federal Reserve and was supervisory review of the mortgage servicers’ action consistent with the Federal Reserve’s intention to dis- plans has shown that the banking organizations tribute the maximum amount of funds to borrowers under the enforcement actions have implemented sigpotentially affected by deficient servicing and foreclo- nificant corrective actions with regard to their mortsure practices. The redistribution of approximately gage servicing and foreclosure processes, and for $80 million in remaining funds resulted in nearly most servicers, those corrective actions appear to be $59 million being cashed or deposited by borrowers sustainable. The majority of the enforcement actions of servicers supervised by the Federal Reserve. The were terminated in 2018.5 For the remaining serborrower payment process concluded at the end of vicers, the Federal Reserve supervisory team contin- 2016. ues to monitor and evaluate the servicers’ progress on implementing the action plans to address unsafe and In 2018, the audit of the final reconciliation of the unsound mortgage servicing and foreclosure pracpayment funds was completed, and funds remaining tices as required by the enforcement actions. that were provided by servicers supervised by the Supervisory Matters Federal Reserve as part of the Payment Agreement have been remitted to the U.S. Treasury. Board staff Enforcement Activities is currently working with Rust to close the qualified settlement funds. Fair Lending and UDAP Enforcement Foreclosure Prevention Actions Through its Supervision and Enforcement teams, DCCA is committed to ensuring that the institutions The Payment Agreement also required servicers to it supervises comply fully with the federal fair lending undertake well-structured loss-mitigation efforts laws—the Equal Credit Opportunity Act (ECOA) focused on foreclosure prevention, with preference and the Fair Housing Act (FHA). The ECOA progiven to activities designed to keep borrowers in their hibits creditors from discriminating against any homes through affordable, sustainable, and meaning- 5 For the press releases, see https://www.federalreserve.gov/ 4 For more information, see https://www.federalreserve.gov/ newsevents/pressreleases/enforcement20180112a.htm and consumerinfo/independent-foreclosure-review-payment- https://www.federalreserve.gov/newsevents/pressreleases/ agreement.htm. enforcement20180810a.htm.

76 105th Annual Report | 2018 applicant, in any aspect of a credit transaction, on engaged in a pattern or practice of discrimination in the basis of race, color, religion, national origin, sex, violation of the ECOA, the matter must be referred marital status, or age. In addition, creditors may not to the Department of Justice (DOJ). The DOJ discriminate against an applicant because the appli- reviews the referral and determines whether further cant receives income from a public assistance pro- investigation is warranted. A DOJ investigation may gram or has exercised, in good faith, any right under result in a public civil enforcement action. Alternathe Consumer Credit Protection Act. The FHA pro- tively, the DOJ may decide to return the matter to the hibits discrimination in residential real-estate-related Board for administrative enforcement. When a mattransactions—including the making and purchasing ter is returned to the Board, staff ensure that the of mortgage loans—on the basis of race, color, reli- institution takes all appropriate corrective action. gion, sex, handicap, familial status, or national origin. If there is a fair lending violation that does not constitute a pattern or practice under the ECOA or a The Board supervises all state member banks for UDAP violation, the Federal Reserve takes action to compliance with the FHA. The Board and the CFPB ensure that the violation is remedied by the bank. both have supervisory authority for compliance with Most lenders readily agree to correct fair lending and the ECOA. For state member banks with assets of UDAP violations, often taking corrective action as $10 billion or less, the Board has the authority to soon as they become aware of a problem. Thus, the enforce the ECOA. For state member banks with Federal Reserve frequently uses informal supervisory assets over $10 billion, the CFPB has this authority. tools (such as memoranda of understanding between banks’ boards of directors and the Reserve Banks, or With respect to the Federal Trade Commission Act board resolutions) to ensure that violations are cor- (FTC Act), which prohibits unfair or deceptive acts rected. When necessary, the Board can bring public or practices, the Board has supervisory and enforce- enforcement actions. ment authority over all state member banks, regardless of asset size. The Board is committed to ensuring The Board brought one public enforcement action that the institutions it supervises comply fully with for UDAP violations in 2018, issuing a consent order the prohibition on unfair or deceptive acts or prac- against a bank for unfair practices related to the billtices as outlined in the FTC Act. An act or practice ing of deposit add-on products administered through may be found to be unfair if it causes or is likely to third parties. The order required the bank to pay cause substantial injury to consumers that is not rea- approximately $4.75 million in restitution to approxisonably avoidable by consumers and not outweighed mately 11,000 consumers and take other corrective by countervailing benefits to consumers or to compe- actions.6 tition. A representation, omission, or practice is deceptive if it is likely to mislead a consumer acting Given the complexity of this area of supervision, the reasonably under the circumstances and is likely to Federal Reserve seeks to provide transparency on its affect a consumer’s conduct or decision regarding a perspectives and processes to the industry and the product or service. public. Fair Lending and UDAP Enforcement staff meet regularly with consumer advocates, supervised Fair lending and UDAP reviews are conducted regu- institutions, and industry representatives to discuss larly within the supervisory cycle. Additionally, fair lending and UDAP issues and receive feedback. examiners may conduct fair lending and UDAP Through this outreach, the Board is able to address reviews outside of the usual supervisory cycle, if war- emerging fair lending and UDAP issues and promote ranted by fair lending and UDAP risk. When exam- sound fair lending and UDAP compliance. This iners find evidence of potential discrimination or includes DCCA staff’s participation in numerous potential UDAP violations, they work closely with meetings, conferences, and trainings sponsored by DCCA’s Fair Lending and UDAP Enforcement sec- consumer advocates, industry representatives, and tions, which provide additional legal and statistical interagency groups. expertise and ensure that fair lending and UDAP laws are enforced consistently and rigorously throughout the Federal Reserve System. With respect to fair lending, pursuant to the ECOA, 6 For more information, see https://www.federalreserve.gov/ if the Board has reason to believe that a creditor has newsevents/pressreleases/enforcement20180726b.htm.

Consumer and Community Affairs 77 Flood Insurance rated “Outstanding,” 198 were rated “Satisfactory,” 3 The National Flood Insurance Act imposes certain were rated “Needs to Improve,” and none were rated requirements on loans secured by buildings or mobile “Substantial Non-Compliance.” homes located in, or to be located in, areas determined to have special flood hazards. Under the Fed- The Federal Reserve is interested in updating the eral Reserve’s Regulation H, which implements the CRA regulations to better reflect structural and techact, state member banks are generally prohibited nological changes in the banking industry. To help from making, extending, increasing, or renewing any achieve that, in 2018 DCCA established a dedicated such loan unless the building or mobile home, as well team to focus on modernizing the CRA. The Board as any personal property securing the loan, are cov- also held a series of external engagement meetings ered by flood insurance for the term of the loan. The with bankers and community members to collect law requires the Board and other federal financial information to help identify issues and potential soluinstitution regulatory agencies to impose civil money tions that will inform our work to revise the penalties when they find a pattern or practice of vio- regulations. lations of the regulation. The Federal Reserve also improved its public website In 2018, the Federal Reserve issued six formal con- to include better information on the CRA, including sent orders and assessed $196,000 in civil money pen- educational materials; enhanced navigation and funcalties against state member banks to address viola- tionality; and access to state and component ratings, tions of the flood regulations. These statutorily man- as well as direct access to bank strategic plans and dated penalties were forwarded to the National Flood performance evaluations. The updated website is Mitigation Fund held by the Treasury for the benefit available at https://www.federalreserve.gov/ of the Federal Emergency Management Agency. consumerscommunities/cra_about.htm. Community Reinvestment Act Mergers and Acquisitions The CRA requires that the Federal Reserve and other The Federal Reserve analyzes expansionary applicafederal banking regulatory agencies encourage finan- tions by banks or BHCs, taking into account the cial institutions to help meet the credit needs of the likely effects of the acquisition on competition, the local communities where they do business, consistent convenience and needs of the communities to be with safe and sound operations. To carry out this served, the financial and managerial resources and mandate, the Federal Reserve future prospects of the companies and banks involved, and the effectiveness of the company’s poli- • examines state member banks to assess their percies to combat money laundering. As part of this formance under the CRA; process, DCCA evaluates whether the institutions are • considers banks’ CRA performance in context with currently meeting the convenience and needs of their other supervisory information when analyzing communities and the effectiveness of existing manaapplications for mergers and acquisitions; and gerial resources, as well as the institutions’ ability to meet the convenience and needs of their communities • disseminates information about community develand the adequacy of their managerial resources after opment practices to bankers and the public the proposed transaction. through community development offices at the Reserve Banks.7 The depository institution’s CRA record is a critical component of this analysis. The CRA requires the The Federal Reserve assesses and rates the CRA per- Federal Reserve to consider a bank’s record of helpformance of state member banks in the course of ing to meet the credit needs of its local communities examinations conducted by staff at the 12 Reserve in evaluating applications for mergers, acquisitions, Banks. During the 2018 reporting period, the Reserve and branches. An institution’s most recent CRA per- Banks completed 237 CRA examinations of state formance evaluation is a particularly important conmember banks. Of those banks examined, 36 were sideration in the mergers and acquisitions process because it represents a detailed on-site evaluation of 7 For more information on various community development the institution’s performance under the CRA by its activities of the Federal Reserve System, see https://www .fedcommunities.org/. federal supervisor.

78 105th Annual Report | 2018 As part of the analysis of managerial resources, the the surviving entity of a merger would be a state Federal Reserve reviews the institution’s record of member bank.9 compliance with consumer protection laws and regulations. The institution’s most recent consumer com- The Board provides information on its actions assopliance rating is central to this review because, like ciated with these merger and acquisition transactions, the CRA performance evaluation, it represents the issuing press releases and Board Orders for each.10 detailed findings of the institution’s supervisory The Federal Reserve also publishes semiannual agency. reports that provide pertinent information on applications and notices filed with the Federal Reserve.11 Less-than-satisfactory CRA or consumer compliance The reports include statistics on the number of proratings or other significant consumer compliance posals that had been approved, denied, and withissues can pose an impediment to the processing and drawn as well as general information about the length approval of the application. Federal Reserve staff of time taken to process proposals. Additionally, the gather additional information about CRA and con- reports discuss common reasons that proposals have sumer compliance performance in many circum- been withdrawn from consideration. stances, such as when the financial institution(s) involved in a proposed transaction that has a During 2018, the Board considered over 100 applicaless-than-satisfactory CRA or compliance ratings or tions, with topics ranging from change in control recently identified consumer compliance issues, or notices, to branching requests, to mergers and acquiwhen the Federal Reserve receives comments from sitions. DCCA staff analyzed 14 notices and applicainterested parties that raise CRA or consumer com- tions for transactions involving bank mergers and pliance issues. To further enhance transparency branching that involved adverse public comments on about this process, the Board issued guidance to the CRA issues or consumer compliance issues, such as public in 2014 describing the Federal Reserve’s fair lending, which the Board considered and approach to applications and notices.8 approved.12 Coordination with the Consumer Financial Because these applications are of interest to the pub- Protection Bureau lic, they often generate comments that raise various issues for Board staff to consider in their analyses of During 2018, staff continued to coordinate on superthe supervisory and lending records of the appli- visory matters with the CFPB in accordance with the cants. With respect to consumer compliance and Interagency Memorandum of Understanding on community reinvestment, one of the more common Supervision Coordination with the CFPB. The agreeallegations is that either or both the target and the ment is intended to establish arrangements for cooracquirer fail to make credit available to certain dination and cooperation among the CFPB and the minority groups and to LMI individuals and commu- OCC, the FDIC, the National Credit Union Associanities. Commenters also often express concerns about tion, and the Board of Governors. The agreement branch closures or the banks’ record of lending to strives to minimize unnecessary regulatory burden small businesses in LMI geographies. and to avoid unnecessary duplication of effort and conflicting supervisory directives amongst the prudential regulators. The regulators work cooperatively In evaluating the applications, the Board assesses the to share exam schedules for covered institutions and merits of the public comments in addition to inforcovered activities to plan simultaneous exams, promation provided by applicants and analyzes supervisory information, including examination reports with 9 In October 2015, the Federal Reserve issued guidance providing evaluations of compliance with fair lending and further explanation on its criteria for waiving or conducting other consumer protection laws and regulations, and such pre-merger or pre-membership examinations. For more confers with other regulators, as appropriate, for information, see https://www.federalreserve.gov/supervisionreg/ srletters/SR1511.htm. their supervisory views. If warranted, the Federal 10 To access the Board’s Orders on Banking Applications, see Reserve will also conduct pre-membership exams for https://www.federalreserve.gov/newsevents/pressreleases.htm. a transaction in which an insured depository institu- 11 For these reports, see https://www.federalreserve.gov/ tion will become a state member bank or in which supervisionreg/semiannual-reports-banking-applications-activity .htm. 12 Another application on which adverse public comments were received was withdrawn by the applicant. Related notices and 8 For more information, see https://www.federalreserve.gov/ applications for which a single Board Order was issued were supervisionreg/srletters/sr1402.htm. counted as a single notice or application in this total.

Consumer and Community Affairs 79 vide final drafts of examination reports for comment, Examiner Training and share supervisory information. The Examiner Training team of DCCA supports the ongoing professional development of the consumer Coordination with Other Federal Banking compliance supervisory staff, from an initial intro- Agencies duction to the Federal Reserve System through the The Board regularly coordinates with other federal development of proficiency in consumer compliance banking agencies, including through the development topics sufficient to earn an examiner’s commission. of interagency guidance, in order to clearly commu- The goal of these efforts is to ensure that examiners nicate supervisory expectations. The Federal Reserve have the skills necessary to meet their supervisory also works with the other member agencies of the responsibilities now and in the future. Federal Financial Institutions Examination Council (FFIEC) to develop consistent examination prin- Consumer Compliance Examiner ciples, standards, procedures, and report formats.13 Commissioning Program In 2018, the banking agencies continued to work An overview of the Federal Reserve System’s Examtogether on various initiatives. iner Commissioning Program for assistant examiners is set forth in supervision and regulation (SR)/ Updating Examination Procedures community affairs (CA) letter SR 17-6/CA 17-1, In June, the Board issued examination procedures “Overview of the Federal Reserve’s Supervisory Eduwith respect to the Protecting Tenants at Foreclosure cation Programs.”14 Act (PTFA), which had previously expired at the end of December 2014 but was restored in May 2018 by The consumer compliance examiner training curricuthe Economic Growth, Regulatory Relief, and Con- lum consists of five courses focused on consumer sumer Protection Act. When examiners review PTFA protection laws, regulations, and examining concepts. compliance in an examination, they use the examina- On average, examiners progress through a combination procedures to evaluate an institution’s awareness tion of classroom offerings, self-paced learning, virof the law, its compliance efforts, and its responsive- tual instruction, and on-the-job training over a ness to addressing implementation deficiencies. period of two to three years. Achievement is measured by completing the required course content, In December, the Board, working in consultation demonstrating adequate on-the-job knowledge, and with the Federal Deposit Insurance Corporation passing a professionally validated proficiency exami- (FDIC) and the OCC developed updated informa- nation. In 2018, 23 examiners passed the Consumer tion regarding the key data fields that examiners use Compliance Proficiency Examination. The combinain connection with validating the accuracy of Home tion of multiple training delivery channels offers Mortgage Disclosure Act (HMDA) data collected learners and Reserve Banks an ability to customize since January 1, 2018, pursuant to the CFPB’s and to meet training demands more individually and amendments to Regulation C and the Economic cost effectively. Growth, Regulatory Relief, and Consumer Protection Act’s amendments to HMDA. The HMDA key Continuing Professional Development data fields are those that the Federal Reserve, the In addition to providing core examiner training, the FDIC, and the OCC collectively determined to be Examiner Staff Development function emphasizes most critical to the integrity of analyses of overall the importance of continuing, career-long learning. HMDA data. Opportunities for continuing professional development include special projects and assignments, self- Outreach study programs, rotational assignments, instruction The Federal Reserve maintains a comprehensive pub- at System schools, mentoring programs, and a conlic outreach program to promote consumer protec- sumer compliance examiner forum held every tion, financial inclusion, and community reinvest- 18 months. Additionally, staff have begun to create a ment. During 2018, the Federal Reserve continued to resource for examiners moving into examination enhance its program. Box 1 highlights some of the responsibilities at large financial institutions. key supervisory-related outreach activities the Board engaged in during 2018. 14 See https://www.federalreserve.gov/supervisionreg/srletters/ 13 For more information, see https://www.ffiec.gov/. sr1706.htm.

80 105th Annual Report | 2018 Box 1. Federal Reserve Consumer and Community Outreach Highlights in 2018 The Federal Reserve conducts outreach to provide The Federal Reserve also offered the following Outvarious stakeholders with information and resources look Live webinars: that support their roles in consumer protection, finan- • “Healthy Communities: Opportunities for CRA Colcial inclusion, and community reinvestment. In laboration” (https://consumercomplianceoutlook July 2018, the Board launched a new outreach tool, .org/outlook-live/2018/healthy-communitiesthe Consumer Compliance Supervision Bulletin, to opportunities-for-cra-collaboration/) provide bankers, consumer advocates, and others interested in consumer protection with high-level • “Complaints as a Supervisory and Risk Managesummaries of examiners’ observations. The publica- ment Tool” (https://consumercomplianceoutlook tion also covers other noteworthy developments .org/outlook-live/2018/complaints-as-arelated to consumer protection supervisory issues. supervisory-and-risk-management-tool/) The Bulletin, which will be published periodically, is • “Keeping Fintech Fair: Thinking About Fair Lendintended to enhance transparency regarding the Fed- ing and UDAP Risks” (https://www eral Reserve’s consumer compliance supervisory .consumercomplianceoutlook.org/2017/secondprogram by highlighting supervisory observations. It issue/keeping-fintech-fair-thinking-about-fairalso provides practical steps for institutions to con- lending-and-udap-risks/) sider when managing consumer compliance risks. Consumer Compliance Outlook (https://www The inaugural issue of the Bulletin focused on the ille- .consumercomplianceoutlook.org/) discusses congal discrimination practice known as “redlining,” as sumer compliance topics of interest to compliance well as on discriminatory loan pricing and underwritprofessionals. This publication is distributed elecing. The issue also discussed unfair or deceptive acts tronically to state member banks and to bank and or practices involving overdrafts, loan officer misrepsavings and loan holding companies supervised by resentations, and products and services marketed to the Federal Reserve, among other subscribers. In students. Finally, the Bulletin briefly highlighted 2018, two issues of Consumer Compliance Outlook recent regulatory and policy developments. The pubwere published, covering topics such as preparing lication is available on the Board’s website at https:// for a consumer compliance exam and understanding www.federalreserve.gov/publications/consumerhow culture drives a bank’s mission. compliance-supervision-bulletin.htm. The Connecting Communities webinar series (https:// The Bulletin complements other Federal Reserve bsr.stlouisfed.org/connectingcommunities/) provides System outreach efforts to banking organizations, timely insights and information on emerging and consumer and community advocates, and other important community and economic development stakeholders, such as the Outlook Live webinar topics. As the Fed recognizes that stable communiseries, the Consumer Compliance Outlook publica- ties promote stable regions and, thus, a more robust tion, and the Connecting Communities webinar economy overall, its community development offices series. work to help advance economic growth and financial stability in communities, especially low- and Outlook Live webinars (https://www.consumer moderate-income neighborhoods. Connecting Comcomplianceoutlook.org/outlook-live/) focus on deliv- munities shares information and research with comering timely, relevant information on current con- munity development practitioners, financial institution sumer protection and community reinvestment topics representatives, nonprofit organizations, and policyto the banking industry, advocates, and other stake- makers, complementing existing Federal Reserve holders. In 2018, the Federal Reserve collaborated Community Development outreach initiatives conwith its supervisory agency partners to offer an Out- ducted by the 12 Reserve Bank regional offices and look Live seminar entitled “2018 Interagency Fair the Board. Lending Hot Topics.” In 2018, the System continued to offer Rapid offered that addressed a broader range of supervi- Response sessions. Introduced in 2008, these sessions sory issues, including consumer compliance issues. offer examiners webinars and case studies on emerging issues or urgent training needs that result from, Responding to Consumer Complaints for example, the implementation of new laws or regu- and Inquiries lations. Four Rapid Response sessions with an exclu- The Federal Reserve investigates complaints against sive consumer compliance focus were designed, devel- state member banks and selected nonbank subsidiaroped, and presented to System staff during 2018. ies of BHCs (Federal Reserve regulated entities), and Additionally, four Rapid Response sessions were forwards complaints against other creditors and busi-

Consumer and Community Affairs 81 nesses to the appropriate enforcement agency. Each Table 1. Investigated complaints against state member Reserve Bank investigates complaints against Federal banks and selected nonbank subsidiaries of bank holding Reserve regulated entities in its District. The Federal companies about regulated practices, by regulation/act, Reserve also responds to consumer inquiries on a 2018 broad range of banking topics, including consumer protection questions. Regulation/act N umber Regulation AA (Unfair or Deceptive Acts or Practices) 33 Federal Reserve Consumer Help (FRCH) processes Regulation B (Equal Credit Opportunity) 24 consumer complaints and inquiries centrally. In 2018, Regulation BB (Community Reinvestment) 4 Regulation C (Home Mortgage Disclosure Act) 2 FRCH processed 32,226 cases. Of these cases, 17,761 Regulation CC (Expedited Funds Availability) 131 were inquiries and the remainder (14,465) were com- Check21 1 plaints, with most cases received directly from con- Regulation D (Reserve Requirements) 4 sumers. Approximately 8 percent of cases were Regulation DD (Truth in Savings) 55 referred to the Federal Reserve from other federal Regulation E (Electronic Funds Transfers) 179 and state agencies. Regulation H (National Flood Insurance Act/Insurance Sales) 6 Regulation M (Consumer Leasing Provisions of TILA) 1 Regulation P (Privacy of Consumer Financial Information) 9 While consumers can contact FRCH by a variety of Regulation V (Fair and Accurate Credit Transactions) 88 different channels, more than half of the FRCH con- Regulation Z (Truth in Lending) 131 sumer contacts occurred by telephone (53 percent). Garnishment Rule 4 Nevertheless, 47 percent (15,121) of complaint and Homeownership Counseling 1 Homeowners Protection Act of 1998 4 inquiry submissions were made in writing (via email, Fair Credit Reporting Act 644 online submissions, mail, and fax). The online form Fair Debt Collection Practices Act 25 page received 20,135 visits during the year. Fair Housing Act 12 Real Estate Settlement Procedures Act 24 Consumer Complaints Right to Financial Privacy Act 2 Total 1 ,384 Complaints against Federal Reserve regulated entities totaled 3,349 in 2018. Of the total, 89 percent (2,990) were investigated. Fifty-four percent (1,606) of the cent (262) of the total complaints were still under investigated complaints involved unregulated prac- investigation in January 2019. tices, and 46 percent (1,384) involved regulated practices. (Table 1 shows the breakdown of complaints Complaints about Regulated Practices about regulated practices by regulation or act; table 2 The majority of regulated practices complaints conshows complaints by product type.) cerned credit card accounts (approximately 54 percent), checking accounts (21 percent), and real estate Approximately 1 percent (33) of the total complaints (6 percent).15 The most common credit card comwere closed without investigation, pending the receipt of additional information from consumers. Two per- 15 Real estate loans include adjustable-rate mortgages, residential cent (64) were withdrawn by the consumer. Eight per- construction loans, open-end home equity lines of credit, home Table 2. Investigated complaints against state member banks and selected nonbank subsidiaries of bank holding companies about regulated practices, by product type, 2018 All complaints C omplaints involving violations Subject of complaint/product type Number Percent N umber P ercent Total 1,384 100 4 0 3 Discrimination alleged Real estate loans 13 1 0 0 Credit cards 3 < 1 0 0 Other loans 6 < 1 0 0 Nondiscrimination complaints Checking accounts 287 21 1 7 4 2 Real estate loans 72 5 9 2 3 Credit cards 739 53 4 1 0 Other 264 19 1 0 2 5

82 105th Annual Report | 2018 plaints related to inaccurate credit reporting (75 per- tions of the Fair Housing Act16 and were closed in cent), forgery/fraud (5 percent), and billing error 2018. The Federal Reserve’s investigation of these resolution (4 percent). The most common checking complaints revealed no instances of illegal credit account complaints related to deposit error resolu- discrimination. tion (24 percent), funds availability not as expected (22 percent), and insufficient funds/overdraft charges Consumer Inquiries and procedures (9 percent). The most common real The Federal Reserve received 17,761 consumer inquiestate complaints by problem code related to debt ries in 2018 covering a wide range of topics. Consumcollection/foreclosure concerns (14 percent), rates ers were typically directed to other resources, includand/or fees (13 percent), and escrow problems ing other federal agencies or written materials, to (7 percent). address their inquiries. Twenty-two regulated practices complaints alleging Consumer Laws and Regulations credit discrimination on the basis of prohibited borrower traits or rights were received in 2018. Thirteen discrimination complaints were related to the race, Throughout 2018, DCCA continued to administer color, national origin, or ethnicity of the applicant or the Board’s regulatory responsibilities with respect to borrower. Nine discrimination complaints were certain entities and specific statutory provisions of related to either the age, handicap, familial status, or the consumer financial services and fair lending laws. religion of the applicant or borrower. Of the closed This included drafting regulations and issuing comcomplaints alleging credit discrimination based on a pliance guidance for the industry and the Reserve prohibited basis in 2018, there were no violations Banks and fulfilling the division’s role in consulting related to illegal credit discrimination. with the CFPB on consumer financial services and fair lending regulations for which it has rulemaking In 70 percent of investigated complaints against Fed- responsibility. eral Reserve regulated entities, evidence revealed that Annual Indexing of Exempt Consumer institutions correctly handled the situation. Of the remaining 30 percent of investigated complaints, Credit and Lease Transactions 12 percent were identified errors that were corrected by the bank; 3 percent were deemed violations of In November 2018, the Board and the CFPB law; and the remainder included matters involving announced the revised dollar thresholds in Regulalitigation or factual disputes, internally referred com- tion Z (Truth in Lending) and Regulation M (Conplaints, or complaints about matters for which the sumer Leasing) that will apply in 2019 for determinconsumer was provided responsive information. ing exempt consumer credit and lease transactions. These thresholds are set pursuant to statutory Complaints about Unregulated Practices changes enacted by the Dodd-Frank Act that require adjusting these thresholds annually based on the The Board continued to monitor complaints about annual percentage increase in the Consumer Price banking practices not subject to existing regulations. Index for Urban Wage Earners and Clerical Workers In 2018, the Board received 1,606 complaints against (CPI-W). Transactions at or below the thresholds are Federal Reserve regulated entities that involved these subject to the protections of the regulations.17 unregulated practices. The majority of the complaints were related to electronic transactions/prepaid Threshold for Small Loan Exemption from products (45 percent), checking account activity Appraisal Requirements for Higher-Priced (21 percent), and credit cards (13 percent). Mortgage Loans Complaint Referrals In November 2018, the Board, the CFPB, and the In 2018, the Federal Reserve forwarded 10,998 com- OCC announced that the threshold for exempting plaints to other regulatory agencies and government loans from special appraisal requirements for higheroffices for investigation. The Federal Reserve forwarded 12 complaints to the Department of Housing 16 A memorandum of understanding between HUD and the fedand Urban Development (HUD) that alleged violaeral bank regulatory agencies requires that complaints alleging a violation of the Fair Housing Act be forwarded to HUD. improvement loans, home purchase loans, home refinance/ 17 For more information, see https://www.federalreserve.gov/ closed-end loans, and reverse mortgages. newsevents/pressreleases/bcreg20181121b.htm.

Consumer and Community Affairs 83 priced mortgage loans would increase for 2019.18 The $1.284 billion as of December 31 of either of the Dodd-Frank Act amended the Truth in Lending Act prior two calendar years. to add special appraisal requirements for higherpriced mortgage loans, including a requirement that These asset-size threshold adjustments took effect creditors obtain a written appraisal based on a physi- January 1, 2019. cal visit to the home’s interior before making a higher-priced mortgage loan. The rules implementing Consumer Research and Analysis of these requirements contain an exemption for loans of $25,000 or less and also provide that the exemption Emerging Issues and Policy threshold will be adjusted annually to reflect increases in the CPI-W. Throughout 2018, DCCA analyzed emerging issues in consumer financial services policies and practices Annual Adjustment to CRA Asset-Size in order to understand their implications for the Threshold for Small and Intermediate market-risk surveillance and supervisory policies that Small Institutions are core to the Federal Reserve’s functions. This research and analysis also provided insight into con- In addition, in December the Board and other federal sumer financial decisionmaking. bank regulatory agencies announced the annual adjustment to the asset-size thresholds used to define Researching Issues Affecting Consumers small bank, small savings association, intermediate and Communities small bank, and intermediate small savings association under the CRA regulations.19 In 2018, DCCA explored various issues related to consumers and communities by convening experts, Financial institutions are evaluated under different conducting original research, and fielding surveys. CRA examination procedures based upon their asset- The information gleaned from these undertakings size classification. Those meeting the small and inter- provided insights into the factors affecting consumers mediate small institution asset-size thresholds are not and households. subject to the reporting requirements applicable to large banks and savings associations unless they Household Economics and Decisionmaking choose to be evaluated as a large institution. In order to better understand consumer decisionmaking in the rapidly evolving financial services sec- Annual adjustments to these asset-size thresholds are tor, DCCA periodically conducts internet panel surbased on the change in the average of the CPI-W, not veys to gather data on consumers’ experiences and seasonally adjusted, for each 12-month period ending perspectives on various issues of interest. in November, with rounding to the nearest million. Results of DCCA’s fifth annual Survey of Household As a result of the 2.59 percent increase in the CPI-W Economics and Decisionmaking (SHED) were pubfor the period ending in November 2018, the defini- lished in the Report on the Economic Well-Being of tions of small and intermediate small institutions for U.S. Households in 2017, released in May 2018.20 CRA examinations were changed as follows: DCCA launched the survey to better understand consumer decisionmaking in the wake of the Great • “Small bank” or “small savings association” means Recession, with the aim to capture a snapshot of the an institution that, as of December 31 of either of financial and economic well-being of U.S. housethe prior two calendar years, had assets of less than holds. In doing so, the SHED collects information on $1.284 billion. households that is not readily available from other • “Intermediate small bank” or “intermediate small sources or is not available in combination with other savings association” means a small institution with variables of interest. It also oversamples LMI houseassets of at least $321 million as of December 31 of holds in order to obtain additional precision regardboth of the prior two calendar years and less than ing findings among these populations. In 2017, the survey was doubled in size to be able to study smaller 18 For more information, see https://www.federalreserve.gov/ subpopulations and geographies. newsevents/pressreleases/bcreg20181121a.htm. 19 For more information, see https://www.federalreserve.gov/ 20 For more information, see https://www.federalreserve.gov/ newsevents/pressreleases/bcreg20181220a.htm. consumerscommunities/shed.htm.

84 105th Annual Report | 2018 The survey also asked respondents about specific financial services issues that affect the well-being of aspects of their financial lives, including the follow- consumers and communities. To this end, staff anaing areas: lyze and anticipate trends, monitor legislative activity, form working groups, and organize expert round- • employment and informal work tables to identify emerging consumer risks and • income and savings inform supervision, research, and policy. • economic preparedness In 2018, Policy Analysis staff developed a new article • banking and credit series, Consumer & Community Context, for policymakers and the public about the financial conditions • housing and living arrangements and experiences of consumers and communities, • education and human capital including traditionally underserved and economically vulnerable households and neighborhoods. The goal • education debt and student loans of the series is to further understanding of how the • retirement financial well-being of consumers and communities affects the broader economy. The first issue, released The latest findings underscored the overall economic in January 2019, focused on student loans while subrecovery and expansion over the five years of the sur- sequent issues will focus on other themes.21 vey. When asked about their finances, 74 percent of adults said they were either doing okay or living In addition, staff developed analyses on a broad comfortably in 2017—over 10 percentage points more range of issues in financial services markets that than in the first survey in 2013. Despite these gains, potentially pose risks to consumers: stark differences in economic well-being remain, in • Auto lending. Staff has continued to explore develparticular, by education and race. Over three-fourths opments in the auto finance market and their of whites were at least doing okay financially in 2017 impact on consumers, especially subprime auto versus less than two-thirds of blacks and Hispanics. borrowers. Topics of particular focus in 2018 included early payment delinquency rates and loan The survey also highlights some aspects of subjective performance trends. well-being and emerging issues that can be missed in long-standing measures of objective outcomes. Our • Housing. In March, the team convened an understanding of full employment and how to meas- invitation-only workshop with nationally recogure it is a key example. Many workers in the survey nized experts to discuss policies to address the have a full-time job with regular hours, pay raises, diminished production of new affordable housing and good benefits. Others who are also employed units in many areas of the country. Speakers disdescribe a very different experience: fewer hours than cussed the various factors limiting new housing they want to work, only a few days’ notice on work supply including rising labor and material costs as schedules, and little in benefits or pay increases. Still well as the growth of restrictive local regulations others supplement their income through side jobs and the dearth of vacant lots for development. and gig work. In an effort to understand how the opi- Representatives from four Federal Reserve Bank oid crisis may relate to economic well-being, the sur- Districts highlighted regional challenges. DCCA vey asked questions related to opioids for the first will continue monitoring this issue along with gentime. About one-fifth of adults (and one-quarter of eral housing market trends. white adults) personally know someone who has been addicted to opioids. Exposure to opioid addiction • Retail banking. Policy Analysis team members have was much more common among whites—at all edu- been collaborating with colleagues throughout the cation levels—than among minorities. Those who division to monitor trends in retail banking, such have been exposed to addiction have somewhat less as rising numbers of branch closures and increasfavorable assessments of economic conditions than ing adoption of online and mobile technologies by those who have not been exposed. consumers for their banking needs. In 2019, staff will continue to track technology’s influence on Analysis of Emerging Issues access to financial services and monitor the degree The Policy Analysis function of DCCA provides key 21 For more information, see https://www.federalreserve.gov/ insights, information, and analysis on emerging publications/consumer-community-context.htm.

Consumer and Community Affairs 85 to which bank branches and branch alternatives are ency of its actions. Raising awareness of emerging effectively serving customers. economic trends and risks makes regulation and supervision more responsive to evolving consumer • Small business lending. The Policy Analysis section financial services markets and technologies. monitored credit availability and access for smaller firms that often lack the financing options and Community Development is a decentralized function in-house financial expertise of larger firms. Staff within the Federal Reserve System, and the Commuconducted outreach with banks, nonbank lenders, nity Affairs Officers at each of the 12 Reserve Banks and borrower advocates to stay abreast of developdesign activities to respond to the specific needs of ments. In June, the team, together with the Federal the communities they serve. Board staff provide over- Reserve Bank of Cleveland, released a report, sight for alignment with Board objectives and coordi- Browsing to Borrow: “Mom and Pop” Small Businate System priorities. ness Perspectives on Online Lenders,22 that analyzes small business owners’ perceptions of online lend- Over the next several years, Community Developers and their understanding of information pro- ment staff across the System will focus their efforts vided by online lenders about credit products. on advancing the economic resiliency and mobility of LMI and underserved households and communities. • Student lending. DCCA staff analyzed the relation- The barriers that prevent LMI and underserved ship between rural-urban migration patterns and households and communities from participating and student loan balances. This work, presented at the deriving benefit from the economy are complex and Student Financial Aid Research Network Conference,23 also was the basis of an article included in often structural in nature. The Federal Reserve is well positioned to research and analyze the underlying the first issue of Consumer & Community Context factors of those barriers as well as the policies and (mentioned above). practices that can help to overcome them. The Com- • Gender wealth gap. Recent media focus on income munity Development function is committed to equality does not fully capture the challenges engaging practitioners and policymakers in an indewomen experience in building household wealth, pendent, objective, and nonpartisan manner that will especially women of color and those who are lower identify shared interests, stimulate new ideas, and fosincome. In 2018, the Policy Analysis team gathered ter collective action. Federal Reserve economists specializing in the Survey of Consumer Finances (SCF) and the SHED The Community Development function also along with researchers from the Closing the Wom- advances the Federal Reserve’s Community Reinvesten’s Wealth Gap organization. These discussions ment Act supervisory responsibilities by analyzing have identified areas for further analysis that will and disseminating information related to local finanenhance understanding of the issues surrounding cial needs and successful approaches for attracting the gender wealth gap. and deploying capital. These efforts support both financial institutions and community organizations Community Development to meet the needs of the communities they serve. In addition to providing a richer, more nuanced The Federal Reserve System’s Community Developunderstanding of current economic and financial ment function promotes economic growth and financonditions, Community Development staff across the cial stability—particularly for underserved house- System are deeply engaged in helping lower-income holds and communities—by informing research, and underserved communities overcome their chalpolicy, and action. Soliciting diverse views on issues lenges and capitalize on their assets. They foster local affecting the economy and financial markets partnerships and comprehensive solutions that supimproves the quality of Federal Reserve research, port building both physical infrastructure and human ensures the fairness of its policies, and the transparcapital. To recognize the individual and collective efforts of System staff in this mission, the Board 22 See https://www.federalreserve.gov/publications/files/2018-smallannounced the Janet L. Yellen Award for Excellence business-lending.pdf. in Community Development. For more information 23 See http://pellinstitute.org/downloads/sfarn_2018-Tabit_ Winters_060718.pdf. on the inaugural award, see box 2.

86 105th Annual Report | 2018 Community Development function strives to under- Box 2. Recognizing Outstanding stand the ever-changing financial services market- Achievement in Community place and its implications for access to capital, par- Development ticularly for underserved households and communities. Bank branch locations and the people and In2018,theBoardestablishedtheJanetL.Yellen communities that they are serving—or, in some cases, AwardforExcellenceinCommunityDevelopment. not serving adequately—are of particular interest. TheawardhonorsformerChairYellen’slegacyand hercommitmenttoensuringthattheperspectivesof Data at the county and national level indicate that consumersandcommunitiescontinuetoinformFederalReserveresearch,policy,andaction.1Through most rural markets are well served, but that can mask herleadershipattheFederalReserve,ChairYellen the impact of bank branch closures in smaller marelevatedtheimportanceofeconomicandfinancial kets. To assess the effects of bank closures on rural inclusion,underscoringthatavibranteconomyisone communities, the Community Development function thatisinclusive.Shealsorecognizedtheuniquerole conducted a national series of listening sessions with thecommunitydevelopmentfunctionplaysin advancingitsmissiontofacilitateinnovativesolutions local residents and small business owners to hear thatbringcapitaltosupporteconomicdevelopment what the loss of a bank meant to them and their inlower-incomecommunities.2 community.24 Not surprisingly, small businesses, TheawardwascreatedbytheDivisionofConsumer older people, and people with limited access to transandCommunityAffairs(DCCA)torecognizestaff in portation are most affected. The listening sessions theFederalReserveSystem’scommunitydevelop- also revealed that the loss of the branch often means mentfunctionwhodemonstrateexemplaryleadermore than the loss of access to financial services; it shipandoutstandingachievementthroughactivities also means the loss of financial advice, local civic thatfurthertheSystem’sresponsibilitiesandgoalsto supportcommunityeconomicdevelopment,asChair leadership, and an institution that brings needed cus- JeromePowelldescribedattheevent.3Eachyear, tomer activity to nearby businesses. theFederalReserveBanksandDCCAcannominate staffforconsideration. Understanding Disparities in the ArielCisneros,seniorcommunitydevelopmentadvi- Labor Market sorattheFederalReserveBankofKansasCity, receivedtheinauguralawardonDecember3,2018. Labor market outcomes vary widely across demo- DCCArecognizedhimforhisworkinestablishing graphic groups, including those defined by race/ innovativeandimpactfulcommunitydevelopment resourcesandprogramsthatbenefitlow-to ethnicity, gender, and geography. Accordingly, ecomoderate-incomecommunitiesbothwithinthe10th nomic analyses that focus exclusively on aggregate Districtandatanationallevel. outcomes may overlook important disparities in how various groups experience the labor market. In recent years, community development programs across the 1 For more information, see https://www.federalreserve.gov/ newsevents/pressreleases/other20181130a.htm. System dedicated significant resources to identifying 2 For more information, see https://www.federalreserve.gov/ disparities in labor market outcomes and undernewsevents/speech/files/brainard20181203b.pdf. standing policies that could improve economic out- 3 For more information, see https://www.federalreserve.gov/ comes for vulnerable workers. Board staff completed newsevents/speech/files/powell20181203a.pdf. an analysis of disparities in job separations across racial groups based on data from the 2018 SHED. Access to Capital and Financial Services in Rural Communities Rooted in its responsibility to help banks meet their 24 For more information, see https://www.federalreserve.gov/ obligations under the CRA, the Federal Reserve’s newsevents/speech/quarles20181205a.htm.

87 6 Federal Reserve Banks The Federal Reserve Banks provide payment services Cost Recovery to depository and certain other institutions, distribute the nation’s currency and coin to depository institu- The Monetary Control Act of 1980 requires that the tions, and serve as fiscal agents and depositories for Federal Reserve establish fees for priced services to the U.S. government and other entities. The Reserve recover, over the long run, all direct and indirect costs Banks also contribute to setting national monetary actually incurred as well as the imputed costs that policy and supervision of banks and other financial would have been incurred—including financing costs, entities operating in the United States (discussed in taxes, and certain other expenses—and the return on sections 2 through 4 of this annual report). equity (profit) that would have been earned if a private business firm had provided the services.2 The imputed costs and imputed profit are collectively Federal Reserve Priced Services referred to as the private-sector adjustment factor (PSAF). From 2009 through 2018, the Reserve Banks Reserve Banks provide a range of payment and recovered 102.6 percent of the total priced services related services to depository and certain other insti- costs, including the PSAF (see table 1).3 tutions; these “priced services” include collecting checks, operating an automated clearinghouse In 2018, Reserve Banks recovered 102.1 percent of (ACH) service, transferring funds and securities, and the total priced services costs, including the PSAF.4 providing a multilateral settlement service.1 The Reserve Banks’ operating expenses and imputed costs totaled $428.1 million. Revenue from opera- The Reserve Banks have been engaged in a number tions totaled $442.5 million, resulting in net income of multiyear technology initiatives that will modern- from priced services of $14.4 million. The commerize their priced-services processing platforms. These cial check-collection service and the Fedwire Funds investments are expected to enhance efficiency, the and National Settlement Services achieved full cost overall quality of operations, and the Reserve Banks’ recovery; however, the FedACH Service and Fedwire ability to offer additional services, consistent with the Securities Service did not achieve full cost recovery. longstanding principles of fostering efficiency and FedACH Service did not achieve full cost recovery safety, to depository institutions. The Reserve Banks because of investment costs associated with the multicontinued to enhance the resiliency and information year technology initiative to modernize its processing security posture of the Fedwire Funds, National Settlement Service, and Fedwire Securities Service 2 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 reported throughout this section—including revenue, other initiative to respond to environmental threats and 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. 3 According to the Accounting Standards Codification (ASC) processing platform to improve the efficiency and Topic 715 (ASC 715), Compensation–Retirement Benefits, the reliability of their current FedACH operations. Reserve Banks recognized a $624.1 million reduction in equity related to the priced services’ benefit plans through 2018. Including this reduction in equity, which represents a decline in economic value, results in cost recovery of 104.1 percent for the 10-year period. For details on how implementing ASC 715 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 4 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.

88 105th Annual Report | 2018 Table 1. Priced services cost recovery, 2009–18 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 C ost recovery (percent)4 2 009 675.4 707.5 19.9 727.5 92.8 2010 574.7 532.8 13.1 545.9 1 05.3 2011 478.6 444.4 16.8 461.2 1 03.8 2012 449.8 423.0 8.9 432.0 1 04.1 2013 441.3 409.3 4.2 413.5 1 06.7 2014 433.1 418.7 5.5 424.1 1 02.1 2015 429.1 397.8 5.6 403.4 1 06.4 2016 434.1 410.5 4.1 414.7 1 04.7 2017 441.6 419.4 4.6 424.0 1 04.1 2018 442.5 428.1 5.2 433.3 1 02.1 2009–18 4,800.4 4,591.6 88.0 4 ,679.6 1 02.6 Note: Here and elsewhere in this section, components may not sum to totals or yield percentages shown because of rounding. 1 For the 10-year period, includes revenue from services of $4,777.8 million and other income and expense (net) of $22.6 million. 2 For the 10-year period, includes operating expenses of $4,444.7 million, imputed costs of $58.5 million, and imputed income taxes of $88.4 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 104.1 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. platform. Fedwire Securities Services did not achieve Banks’ operating expenses and imputed costs totaled full cost recovery because of volume declines driven $149.1 million. The Reserve Banks processed by market changes. 14.7 billion commercial ACH transactions in 2018, an increase of 6.9 percent from 2017 (see table 2). Commercial Check-Collection Service The average daily value of FedACH transfers in 2018 was approximately $103.0 billion, an increase of The commercial check-collection service provides a 10.5 percent from the previous year. suite of electronic and paper processing options for forward and return collections. In 2018, the Reserve Banks recovered 102.7 percent of the total costs of Fedwire Funds and National Settlement their commercial check-collection service, including Services the related PSAF. Revenue from operations totaled $132.9 million, resulting in net income of $5.1 mil- In 2018, the Reserve Banks recovered 105.8 percent lion. The Reserve Banks’ operating expenses and of the costs of their Fedwire Funds and National imputed costs totaled $127.8 million. Reserve Banks Settlement Services, including the related PSAF. Revhandled 4.7 billion checks in 2018, a decrease of enue from operations totaled $132.4 million, resulting 8.0 percent from 2017 (see table 2). The average daily in a net income of $8.8 million. The Reserve Banks’ value of checks collected by the Reserve Banks in operating expenses and imputed costs totaled 2018 was approximately $33.8 billion, a decrease of $123.7 million in 2018. 0.6 percent from the previous year. Fedwire Funds Service Commercial Automated Clearinghouse Service The Fedwire Funds Service allows its participants to send or receive domestic time-critical payments using The commercial ACH service provides domestic and their balances at Reserve Banks to transfer funds in cross-border batched payment options for same-day real time. From 2017 to 2018, the number of Fedwire and next-day settlement. In 2018, the Reserve Banks funds transfers originated by depository institutions recovered 99.2 percent of the total costs of their com- increased 3.9 percent, to approximately 163.0 million mercial ACH services, including the related PSAF. (see table 2). The average daily value of Fedwire Revenue from operations totaled $149.7 million, funds transfers in 2018 was $2.8 trillion, a decrease of resulting in a net income of $0.6 million. The Reserve 3.2 percent from the previous year.

Federal Reserve Banks 89 Table 2. Activity in Federal Reserve priced services, 2016–18 Thousands of items, except as noted P ercent change Service 2018 2017 2016 2 017–18 2 016–17 Commercial check 4,739,534 5,152,521 5,241,286 - 8.0 -1.7 Commercial ACH 14,691,615 13,749,249 12,960,346 6.9 6.1 Fedwire funds transfer 162,980 156,788 151,899 3.9 3.1 National settlement 521 517 501 0.8 3.3 Fedwire securities 3,510 3,465 3,881 1.3 - 10.7 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. National Settlement Service 521,000 settlement entries for these arrangements in The National Settlement Service is a multilateral 2018 (see table 2). Settlement file activity in 2018 settlement system that allows participants in private- increased 4.5 percent, and settlement entries sector clearing arrangements to settle transactions increased 0.8 percent. using their balances at Reserve Banks. In 2018, the Fedwire Securities Service service processed settlement files for 12 local and national private-sector arrangements. The Reserve The Fedwire Securities Service allows its participants Banks processed 9,674 files that contained about to transfer electronically to other service participants Box 1. Improving the U.S. Payment System The Federal Reserve plays many roles in the payment The launch of the FPC formally concluded the system, including payment system operator, supervi- GFFT’s work. sor of financial institutions and systemically important financial market utilities, regulator, researcher, and Also as part of its recommendations, the task force catalyst for improvement. Acting primarily in its cata- asked the Federal Reserve to develop a 24x7x365 lyst role, the Federal Reserve encouraged payment settlement service to support faster payments and to stakeholders to join together to improve the payment explore and assess the need for other Federal system in the United States in its “Strategies for Reserve operational roles in faster payments. In Improving the U.S. Payment System” paper, issued response, the Federal Reserve initiated a strategic in January 2015. The strategies outlined in the paper assessment of its settlement services and, in Octoincluded the creation of the Faster Payments Task ber 2018, published a Federal Register notice Force (FPTF) and the Secure Payments Task Force requesting public comments on two potential actions (SPTF) , both of which provided forums for a diverse the Federal Reserve could take to support real-time group of industry participants to collaborate on pay- gross settlement of faster payments in the United ment system improvements. States: a service for 24x7x365 real-time gross interbank settlement of faster payments and a liquidity In its final report, released in 2017, the FPTF pub- management tool to support private-sector faster lished a set of consensus recommendations for payment settlement services. achieving its vision of ubiquitous, safe, and efficient faster payment capabilities for the United States. The SPTF concluded in 2018, having largely accom- One recommendation called for industry develop- plished its objective of identifying and promoting ment of a governance framework for faster pay- actions that can be taken by payment system particiments, and in response, an industry group called the pants to promote payment security through develop- Governance Framework Formation Team (GFFT) was ing and publishing two resources: one on shared established with Federal Reserve leadership. The data sources on payments security and another on GFFT focused on defining the structure, decision- risks associated with various payment processes. making, and processes of a governance framework The Federal Reserve has developed plans through and in late 2018 announced a newly formed, 2020 to continue its engagement with the industry on industry-led U.S. Faster Payments Council (FPC) that secure payments topics through research and other is intended to develop collaborative approaches to collaboration efforts. accelerate U.S. adoption of faster payments.

90 105th Annual Report | 2018 certain securities issued by the U.S. Treasury Depart- growth was attributable to growth in demand for ment, federal government agencies, government- $100 notes, and an additional 32.0 percent was attribsponsored enterprises, and certain international orga- utable to growth in demand for $1 and $20 notes. In nizations.5 In 2018, the Reserve Banks recovered 2018, the Reserve Banks distributed 36.8 billion Fed- 98.7 percent of the costs of their Fedwire Securities eral Reserve notes into circulation and received Service, including the related PSAF. Revenue from 35.0 billion Federal Reserve notes from circulation, operations totaled $27.5 million, resulting in a net which is relatively unchanged from 2017. income of $0.0 million. The Reserve Banks’ operating expenses and imputed costs totaled $27.5 million The value of Federal Reserve notes in circulation at in 2018. In 2018, the number of non-Treasury securi- year-end 2018 totaled $1,671.9 billion, a 6.4 percent ties transfers processed via the service increased increase from 2017. The year-over-year increase is 1.3 percent from 2017, to approximately 3.5 million attributable largely to increased demand for $100 (see table 2). The average daily value of Fedwire notes. The Board estimates that at least one-half of Securities transfers in 2018 was approximately the value of Federal Reserve notes in circulation is $1.2 trillion, a decrease of approximately 1.0 percent held abroad, mainly as a store of value. from the previous year. In addition, the Reserve Banks distributed 69.9 bil- Float lion coins into circulation, a 2.8 percent decrease from 2017, and received 56.0 billion coins from circu- In 2018, the Reserve Banks had daily average credit lation, a 3.8 percent decrease from 2017. float of $254.6 million, compared with daily average credit float of $379.3 million in 2017.6 Other Improvements and Efforts Currency and Coin During 2018, the Federal Reserve continued developmental work to replace the aging high-speed currency The Federal Reserve Board issues the nation’s cur- processing equipment and sensors at all Reserve rency (in the form of Federal Reserve notes) to 28 Banks by 2026. Through a competitive process, the Federal Reserve Bank offices. The Reserve Banks, in Federal Reserve selected two vendors to build prototurn, distribute Federal Reserve notes to depository type machines for delivery in 2020. Following the institutions in response to public demand. Together, prototype assessments, the Reserve Banks will select the Board and Reserve Banks work to maintain the one vendor to develop new production machines. In integrity of and confidence in Federal Reserve notes. addition to new machine development, the Federal In 2018, the Board paid Treasury’s Bureau of Reserve issued a request for proposals to replace sen- Engraving and Printing (BEP) $804.8 million for sors within the replacement high-speed currency procosts associated with the production of 8.0 billion cessing equipment, and expects to award this con- Federal Reserve notes. The Reserve Banks also dis- tract in 2019. tribute coin to depository institutions on behalf of the United States Mint.7 In 2018, the Board approved a policy change permitting the Reserve Banks to accept and distribute mis- The volume of Federal Reserve notes in circulation at faced $50 and $100 notes, improved the quality of year-end 2018 totaled 43.4 billion pieces, a 4.2 per- $1 notes that the Reserve Banks distribute to circulacent increase from 2017. More than half of this tion, and accelerated the destruction of old-design $5, $10, $20, and $50 notes.8 5 The expenses, revenues, volumes, and fees reported here are for transfers of securities issued by federal government agencies, 8 Misfaced notes are notes that are reverse-side up, rather than government-sponsored enterprises, and certain international portrait-side up; in previous years, Reserve Banks destroyed $50 organizations. Reserve Banks provide Treasury securities ser- and $100 misfaced notes during processing, even if they were vices in their role as Treasury’s fiscal agent. These services are otherwise fit for recirculation. In 2018, Reserve Banks began to not considered priced services. For details, see “Treasury Securi- pay out misfaced $50 and $100 notes to depository institutions ties Services” later in this section. and accept misfaced notes in deposits from depository institu- 6 Credit float occurs when the Reserve Banks debit the paying tions. This change reduces the number of notes that Reserve bank for checks and other items prior to providing credit to the Banks destroy and increases the number of fit notes that depositing bank. Reserve Banks can pay out to meet domestic demand. 7 The Federal Reserve Board is the issuing authority for Federal Based on analysis of circulation patterns and the condition of Reserve notes, while the United States Mint, a bureau of the notes being deposited at the Reserve Banks, the policy changed U.S. Department of the Treasury, is the issuing authority to improve the quality of $1 notes, tightened the screening for for coin. soiling used by high-speed currency processing equipment to

Federal Reserve Banks 91 Fiscal Agency and Government Reserve Banks for the expense of providing fiscal agency and depository services. Depository Services In 2018, the Reserve Banks successfully concluded a In accordance with section 15 of the Federal Reserve Treasury-initiated, multiyear fiscal agent consolida- Act, the Reserve Banks, upon the direction of the tion effort, migrated an information repository to the Secretary of the United States Department of the cloud, and completed efforts to modernize systems Treasury, act as fiscal agents of the United States that the Reserve Banks operate and maintain on government. As fiscal agents, the Reserve Banks aucbehalf of the Treasury, while strengthening the Treation Treasury securities, process electronic and check sury’s systems against ever-evolving cybersecurity payments for the Treasury, collect funds owed to the threats.9 In addition, Reserve Banks provided bookfederal government, maintain the Treasury’s operatentry securities services and custodial and corresponing cash account, and develop, operate, and maintain dent banking services to other government agencies, a number of automated systems to support the Treagovernment-sponsored enterprises, official internasury’s mission. In addition, the Reserve Banks also tional organizations, and foreign central banks. provide certain fiscal agency services to other entities. The Treasury and other entities fully reimburse the The Reserve Banks expenses for providing fiscal agency services in 2018 were $706.0 million, an increase of $7.7 million, or 1.1 percent (see table 3). evaluate $1 bank notes for either recirculation or destruction. Support for Treasury programs accounted for This change is expected to increase the number of $1 notes destroyed in 2019 for soiling, reduce the number but improve the 94.4 percent of expenses, and support for other entifitness of $1 notes returned to circulation, and should help ties accounted for 5.6 percent. ensure that $1 notes in circulation continue to function well in commerce. The accelerated destruction of $5, $10, $20, and $50 notes 9 The Federal Reserve migrated the financial information system reduces the variety of note designs co-circulating and the burto the cloud and can be accessed at https://www.transparency den to authenticate a very small population of older design .treasury.gov/. notes. All designs of U.S. currency, however, remain legal tender. Table 3. Expenses of the Federal Reserve Banks for fiscal agency and depository services, 2016–18 Thousands of dollars Agency and service 2018 2 017 2 016 D epartment of the Treasury Payment, cash-management, and collection services Payment services 206,809 195,306 177,558 Cash-management services 85,391 82,281 96,455 Collection services 70,326 75,960 75,039 Technology infrastructure development and support1 115,850 117,380 96,931 Other services 13,214 12,115 11,708 Total payment, collection, and cash-management services 491,589 483,043 457,691 Treasury securities services Treasury wholesale securities Treasury auction 46,695 47,227 46,430 Treasury securities safekeeping and transfer 26,564 25,171 22,890 Treasury retail securities 49,249 50,370 54,838 Technology infrastructure development and support1 6,140 7,442 6,909 Other services 674 1,573 3,640 Total Treasury securities services 129,321 131,783 134,706 Other Treasury services Total other Treasury Services 45,853 45,686 43,312 Total, Treasury 666,763 660,511 635,709 Other entities Total, other entities 39,231 37,759 41,270 Total reimbursable expenses 705,995 698,271 676,979 Note: Service costs include reimbursable pension costs, where applicable. Previous versions of the Annual Report provided a separate line item for pension expenses. 1 These costs include the development and support costs of Treasury technology infrastructure.

92 105th Annual Report | 2018 Payment Services and invoice. In 2018, expenses for the invoiceprocessing platform were $21.0 million, a decrease of The Reserve Banks work closely with the Treasury 31.9 percent, largely because of decreased costs foland other government agencies to process payments lowing Treasury’s fiscal agent consolidation. to individuals, businesses, institutions, and government agencies. The Reserve Banks process federal The U.S. Treasury Electronic Payment Solution Suppayroll payments, Social Security and veterans’ ben- port Center provides broad support for Treasury iniefits, income tax refunds, vendor payments, and tiatives aimed at eliminating paper check payments other types of payments. and increasing electronic payments to individuals. In fiscal year 2018, Treasury disbursed 98.4 percent of Reserve Bank operating expenses for payment-related all benefit payments electronically.10 In 2018, activities were $206.8 million in 2018, an increase of expenses for the U.S. Treasury Electronic Payment 5.9 percent. The most notable programs that contrib- Solution Support Center were $20.7 million, an uted to cost changes included the stored-value card increase of 7.6 percent, largely attributable to program, the post-payment system, the invoice- increased software amortization and personnel costs. processing platform, and the U.S. Electronic Payment Solution Center. Treasury Cash-Management Services The stored-value card program comprises three mili- The Reserve Banks maintain the Treasury’s operating tary cash-management services: EagleCash, EZPay, cash account and provide collateral-management and and Navy Cash. These programs provide electronic collateral-monitoring services for those Treasury propayment methods for goods and services on military grams that have collateral requirements. bases and Navy ships, both domestic and overseas. Stored-value cards can be found on over 80 U.S. mili- In 2018, Reserve Bank operating expenses related to tary bases and installations in over 19 countries and Treasury cash-management services were $85.4 milon over 135 naval ships. In 2018, Reserve Bank oper- lion, an increase of 3.8 percent. The increase reflects ating expenses for the stored-value card program higher application development and operations and were $48.2 million, an increase of 19.6 percent, pri- maintenance costs associated with the Bank Managemarily driven by the Reserve Banks incurring a full ment System application and the Financial Informayear of operations and maintenance costs based on tion Repository.11 The Bank Management System work that transitioned from a financial agent to the determines commercial bank compensation for Reserve Banks in mid-2017. depository services provided to the Treasury. The Financial Information Repository provides informa- The Reserve Banks continued work on the post- tion on financial transactions processed by the payment system initiative, a multiyear effort to mod- Treasury. ernize several of the Treasury’s legacy post-payment processing systems into a single system to enhance Collection Services operations, reduce expenses, improve data analytics capabilities, and provide a centralized and standard- The Reserve Banks work closely with the Treasury to ized set of payment data. In 2018, the program con- collect funds, including various taxes, fees for goods ducted an assessment that resulted in a change in and services, and delinquent debts owed to the fedapproach and technical architecture. In 2018, pro- eral government. In 2018, Reserve Bank expenses gram expenses for the post-payment system initiative related to collection services were $70.3 million, a were $31.1 million, an increase of 32.3 percent, decrease of 7.4 percent, largely because of decreased largely because of software development costs and staffing costs following Treasury’s fiscal agent consoftware amortization. solidation program. The invoice-processing platform is an electronic The Reserve Banks operate and maintain Pay.gov, an invoicing and payment information system that application that allows the public to use the internet allows vendors to enter invoice data electronically, to initiate and authorize payments to federal agenthrough either a web-based portal or electronic sub- 10 The U.S. government fiscal year 2018 spanned October 1, 2017, mission. The system accepts, processes, and presents through September 30, 2018. data from supplier systems related to various stages 11 The Bank Management System also provides analytical tools to of a payment transaction, such as the purchase order review and approve compensation, budgets, and outflows.

Federal Reserve Banks 93 cies. Pay.gov expenses were $24.7 million in 2018, an services were $49.2 million in 2018, a decrease of increase of 2.5 percent, primarily because of 2.2 percent, largely because of the Treasury’s increased software, personnel, and support costs. July 2017 decision to phase out the myRA retirement During the year, the Pay.gov program expanded to savings program.14 Program expenses included techinclude more than 143 new agency programs and nology enhancements to TreasuryDirect.gov, savings processed more than 205 million online payments bond processing, and fulfillment center costs such as totaling over $179 billion.12 mail processing and virtual case file management. Treasury Securities Services Services Provided to Other Entities The Reserve Banks work closely with the Treasury in The Reserve Banks, when permitted by federal statsupport of the borrowing needs to operate the federal ute or when required by the Secretary of the Treasgovernment. The Reserve Banks auction, issue, main- ury, also provide fiscal agency services to other tain, and redeem securities; provide customer service; domestic and international entities. and operate the automated systems supporting U.S. savings bonds and marketable Treasury securities Reserve Bank operating expenses for services pro- (bills, notes, and bonds). Treasury securities services vided to other entities were $39.2 million in 2018, an consist of wholesale securities programs, which pri- increase of 3.9 percent. Debt servicing activities, marily serve institutional investors, and retail securi- which include issuing principal and interest payments ties programs, which primarily serve individual on mortgage-backed securities, account for a signifiinvestors. cant amount of the work performed for other entities, with the majority performed for the Federal Wholesale Securities Programs Home Loan Mortgage Association (Freddie Mac), the Federal National Mortgage Association (Fannie The Reserve Banks support wholesale securities ser- Mae), and the Government National Mortgage vices through the sale, issuance, safekeeping, and Association (Ginnie Mae). transfer of marketable Treasury securities for institutional investors. During 2018, the Reserve Banks con- Use of Federal Reserve Intraday ducted 284 Treasury securities auctions and issued Credit approximately $10.2 trillion in securities. In 2018, Reserve Bank operating expenses to support The Board’s Payment System Risk policy governs the Treasury securities auctions were $46.7 million, a use of Federal Reserve Bank intraday credit, also slight decrease of 1.1 percent. Operating expenses known as daylight overdrafts. A daylight overdraft reflect upgrades to the application that receives and occurs when an institution’s account activity creates processes auction bids submitted primarily by whole- a negative balance in the institution’s Federal Reserve sale securities auction participants. account at any time in the operating day. Daylight overdrafts enable an institution to send payments Operating expenses associated with Treasury securi- more freely throughout the day than if it were limited ties safekeeping and transfer activities were $26.6 mil- strictly by its available intraday funds balance, lion in 2018, an increase of 5.5 percent, primarily increasing efficiency and reducing payment system because of increased activity. risk. The Payment System Risk policy recognizes explicitly the role of the central bank in providing Retail Securities Programs intraday balances and credit to healthy institutions; under the policy, the Reserve Banks provide collater- The Reserve Banks support Treasury’s retail securi- alized intraday credit at no cost. ties services, which provide retail securities to institutional and individual customers through electronic Before the 2007–09 financial crisis, overnight balsystems and provide customer service.13 Reserve ances were much lower and daylight overdrafts sig- Bank operating expenses to support retail securities nificantly higher than levels observed since late 2008. The use of daylight overdrafts spiked amid the mar- 12 In 2017, Pay.gov processed more than 189 million online payments, totaling nearly $155 billion. 14 The Treasury’s July 2017 announcement is available at https:// 13 The retail securities program operates and maintains the www.treasury.gov/press-center/press-releases/Pages/sm0135 TreasuryDirect.gov website. .aspx.

94 105th Annual Report | 2018 electronically accessing the Banks’ payment and Figure 1. Aggregate daylight overdrafts, 2008–18 information services. For priced services, the Reserve Banks charge fees for these electronic connections Billions of dollars 200 Peak daylight overdrafts and allocate the associated costs and revenue to the Average daylight overdrafts various services. There are currently six FedLine channels through which customers can access the Reserve Banks’ priced services: FedMail, FedLine 150 Exchange, FedLine Web, FedLine Advantage, Fed- Line Command, and FedLine Direct. These FedLine channels are designed to meet the individual connectivity, security, and contingency requirements of 100 depository institution customers. Between 2008 and 2017, Reserve Bank priced Fed- Line connections decreased nearly 23 percent, while 50 the number of depository institutions in the United States declined 34 percent. 0 The Reserve Banks continue to advance the safety 2008 2010 2012 2014 2016 2018 and security of the FedLine network through key infrastructure upgrades, proactive monitoring of an ket turmoil near the end of 2008 but dropped sharply evolving threat environment, strengthened endpoint as various liquidity programs initiated by the Federal security policies, and dedicated customer communi- Reserve, all since terminated, took effect. During this cation and education programs. period, the Federal Reserve also began paying interest on balances held at the Reserve Banks, increased Information Technology its lending under the Term Auction Facility, and began purchasing government-sponsored enterprise The improvement of the efficiency, effectiveness, and mortgage-backed securities. These measures tended security of information technology (IT) services and to increase balances institutions held at the Banks, operations continued to be a central focus of the Fedwhich decreased the demand for intraday credit. In eral Reserve Banks. Led by the Federal Reserve’s 2007, for example, institutions held, on average, less National IT organization, the 2016–2020 IT System than $20 billion in overnight balances, and total aver- Strategy continued to mature to enhance the delivery age daylight overdrafts were around $60 billion. In of IT services and better support the Federal Reserve contrast, institutions held historically high levels of business strategies. Elements of the plan focus on IT overnight balances at the Reserve Banks in 2018, productivity, simplicity, accountability, and stewardwhile daylight overdrafts remained historically low, ship across the Reserve Banks. Several specific initiaas shown in figure 1. tives under the strategy also strengthened the Daylight overdraft fees are also at historically low System’s information security posture. National IT levels. In 2018, institutions paid about $111,417 in continues to guide the strategy’s implementation and daylight overdraft fees; in contrast, fees totaled more track progress toward the strategy’s goals and will than $50 million in 2008. The decrease in fees is refresh the effort in 2020. largely attributable to the elevated level of reserve balances that began to accumulate in late 2008 and to The Reserve Banks remained vigilant about their the 2011 policy revision that eliminated fees for day- cybersecurity posture, investing in risk-mitigation inilight overdrafts that are collateralized. tiatives and programs and continuously monitoring and assessing cybersecurity risks to operations and protecting systems and data. The Federal Reserve FedLine Access to Reserve Bank implemented several cybersecurity initiatives that Services enhanced identity and access management capabilities; enhanced the ability to respond to evolving The Reserve Banks’ FedLine access solutions provide cybersecurity threats with agility, decisiveness, and financial institutions with a variety of alternatives for speed by streamlining decision making during a

Federal Reserve Banks 95 cybersecurity incident; and continue to improve con- ongoing basis, the activities of each Reserve Bank, tinuous monitoring capabilities of critical assets. National IT, and the System’s Office of Employee Benefits (OEB). The oversight program identifies the most strategically important Reserve Bank current Examinations of the Federal Reserve and emerging risks and defines specific approaches to Banks achieve a comprehensive evaluation of the Reserve Banks’ controls, operations, and management The combined financial statements of the Reserve effectiveness. Banks as well as the financial statements of each of the 12 Reserve Banks are audited annually by an The comprehensive reviews include an assessment of independent public accounting firm retained by the the internal audit function’s effectiveness and its con- Board of Governors.15 In addition, the Reserve formance to the Institute of Internal Auditors’ (IIA) Banks are subject to oversight by the Board of Gov- International Standards for the Professional Practice ernors, which performs its own reviews (see box 2). of Internal Auditing, applicable policies and guidance, and the IIA’s code of ethics. The Reserve Banks use the 2013 framework estab- The Board also reviews System Open Market lished by the Committee of Sponsoring Organiza- Account (SOMA) and foreign currency holdings tions of the Treadway Commission (COSO) to assess annually to their internal controls over financial reporting, including the safeguarding of assets. The manage- • determine whether the New York Reserve Bank, ment of each Reserve Bank annually provides an while conducting the related transactions and assoassertion letter to its board of directors that confirms ciated controls, complies with the policies estabadherence to COSO standards. lished by the Federal Open Market Committee (FOMC); and The Federal Reserve Board engaged KPMG LLP • assess SOMA-related IT project management and (KPMG) to audit the 2018 combined and individual financial statements of the Reserve Banks.16 In 2018, application development, vendor management, and system resiliency and contingency plans. KPMG also conducted audits of the internal controls associated with financial reporting for each of In addition, KPMG audits the year-end schedule of the Reserve Banks. Fees for KPMG’s services totaled SOMA participated asset and liability accounts and $7.0 million. To ensure auditor independence, the the related schedule of participated income accounts. Board requires that KPMG be independent in all The FOMC is provided with the external audit matters relating to the audits. Specifically, KPMG reports and a report on the Board review. may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making management decisions on behalf Income and Expenses of the Reserve Banks, or in any other way impairing its audit independence. In 2018, the Reserve Banks Table 4 summarizes the income, expenses, and distridid not engage KPMG for significant non-audit butions of net earnings of the Reserve Banks for services. 2018 and 2017. Income in 2018 was $112.9 billion, compared with $114.2 billion in 2017. The Board’s reviews of the Reserve Banks include a wide range of oversight activities, conducted primar- Expenses totaled $49,383 million, including ily by its Division of Reserve Bank Operations and Payment Systems. Division personnel monitor, on an • $38,486 million in interest paid to depository institutions on reserve balances and others; 15 See “Federal Reserve Banks Combined Financial Statements” in • $4,527 million in Reserve Bank operating expenses; section 12 of this report. 16 In addition, KPMG audited the Office of Employee Benefits of • $4,559 million in interest expense on securities sold the Federal Reserve System (OEB), the Retirement Plan for under agreements to repurchase; Employees of the Federal Reserve System (System Plan), and the Thrift Plan for Employees of the Federal Reserve System • $484 million in net periodic pension expense; (Thrift Plan). The System Plan and the Thrift Plan provide retirement benefits to employees of the Board, the Federal • $838 million in assessments for Board of Gover- Reserve Banks, the OEB, and the Consumer Financial Protection Bureau. nors expenditures;

96 105th Annual Report | 2018 Box 2. Oversight The Board of Governors is authorized by the Federal performing annual on-site attentions at each Reserve Reserve Act to exercise general supervision over the Bank and annual on-site attentions of critical System Reserve Banks; to examine at its discretion the functions, such as information technology and maraccounts, books, and affairs of each Reserve Bank; kets operations. After reviewing its approach, RBOPS and to require such statements and reports as it may adopted more flexibility, determining the frequency of deem necessary. In addition, the Board is required to on-site attentions based on an assessment of risk. In order an examination of each Reserve Bank at least addition to on-site attentions, the revised approach once each year. recognized that other oversight activities contribute to the essential elements of an examination. For The Act is silent on the form of these annual exami- example, Board staff has access to the Reserve nations. In its first Annual Report (1914), the Board Banks’ deliberation and decisionmaking process and stated that examinations of Reserve Banks should documentation through liaison roles on a wide array include compliance with provisions of the Act and of Reserve Bank policy committees, advisory groups, Board regulations, competency of management, and and task forces. In addition, Board staff analyzes adequacy of records, calling attention to any unsafe each Reserve Bank’s annual budget, both individually or unsound condition. and in the context of System initiatives, and throughout the year monitors actual performance against Since the passage of the Act, the management and budgets. operational structure of the Reserve Banks has changed significantly. In recent years, critical opera- In 2017, RBOPS again reassessed its oversight tions were consolidated into fewer sites, and man- approach, concluding that the existing approach agement decisions have increasingly been made at remained largely relevant and permitted a sufficient the System level. For example, before 2005, each degree of flexibility. However, continued evolution of Reserve Bank was engaged in the processing of the Reserve Banks, including consolidation and more check payments, but now most processing occurs at coordination among functional areas, indicated that a single Reserve Bank. In addition, the role and increased targeted and System-level oversight focus responsibilities of the Reserve Banks’ internal audit on specific programs and functions was warranted, and the audit committee of each Reserve Bank’s supplementing and, in some cases, replacing the board of directors have grown in importance. To focus on each Reserve Bank entity. Another outcome address these changes, the Board’s Committee on of this assessment was a renewed emphasis on Federal Reserve Bank Affairs and the Division of evaluating management effectiveness and the Reserve Bank Operations and Payment Systems planned introduction of periodic assessments of (RBOPS) have continuously refined their oversight management culture. strategy to maintain a focus on areas of high risk and The results of the examination process are reported strategic importance to the System. to the Board throughout the year through a variety of Since 1995, the Board has contracted with a public mechanisms. Written reports to the Board’s Commitaccounting firm to conduct on-site audits of the tee on Federal Reserve Bank Affairs and the examfinancial statements of each Reserve Bank, the ined entity (senior management and boards of direc- System Open Market Account at the Federal Reserve tors) are produced for each external audit attention Bank of New York, and the combined financial state- and significant attention by RBOPS staff. Staff memments of the Reserve Banks. In 1999, the Act was bers write analyses covering major Reserve Bank iniamended to require that the Board order an annual tiatives and projects as well as proposals requiring independent audit of each Reserve Bank. The exter- Board approval. The Committee on Federal Reserve nal auditor also conducts audits of the internal con- Bank Affairs meets with the chairman and deputy trols associated with financial reporting for each of chairman of the board of directors, president, and the Reserve Banks. Before the contract with an exter- first vice president of each Reserve Bank each year nal auditor, RBOPS examiners conducted that work. to discuss their Bank’s past year’s performance and strategic plans. Through this reporting process, the In 2001, RBOPS reviewed its oversight approach to Board members receive a wealth of information and assess the relevance of its longstanding oversight assessments that together constitute a complete and activities for the current operations and risk profiles thorough picture of each Reserve Bank. of the Reserve Banks. RBOPS staff had been

Federal Reserve Banks 97 Table 4. Income, expenses, and distribution of net earnings of the Federal Reserve Banks, 2018 and 2017 Millions of dollars Item 2018 2 017 Current income 112,862 1 14,194 Loan interest income 3 1 SOMA interest income 112,257 1 13,592 Other current income1 602 601 Net expenses 47,354 33,398 Operating expenses 4,527 4,337 Reimbursements -706 -698 Net periodic pension expense 484 525 Interest paid on depository institutions deposits and others 38,486 25,862 Interest expense on securities sold under agreements to repurchase 4,559 3,365 Other expenses 4 7 Current net income 65,508 80,796 Net (deductions from) additions to current net income -383 1,933 Treasury securities gains, net 5 28 Federal agency and government-sponsored enterprise mortgage-backed securities (losses) gains, net -3 8 Foreign currency translation (losses) gains, net -390 1,894 Net income from consolidated VIE, net 7 4 Other deductions -2 -1 Assessments by the Board of Governors 2,024 2,037 For Board expenditures 838 740 For currency costs 849 724 For Consumer Financial Protection Bureau costs2 337 573 Net income before providing for remittances to the Treasury 63,101 80,692 Earnings remittances to the Treasury 65,319 80,559 Net income after providing for remittances to the Treasury -2,218 133 Other comprehensive gain 42 651 Comprehensive (loss) income -2,176 784 Total distribution of net income 63,143 81,343 Dividends on capital stock 999 784 Transfer to surplus and change in accumulated other comprehensive income -3,175 0 Earnings remittances to the Treasury 65,319 80,559 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. • $849 million for the cost of producing, issuing, and Net income before remittances to Treasury totaled retiring currency; and $63,143 million in 2018 (net income of $63,101 million increased by other comprehensive gain of • $337 million for Consumer Financial Protection $42 million). Dividends paid to member banks for Bureau costs. 2018 totaled $999 million. Earnings remittances to • The expenses were reduced by $706 million in reim- the Treasury totaled $65,319 million in 2018, inclubursements for services provided to government sive of a $2,500 million payment made in Februagencies. ary 2018 as required by the Bipartisan Budget Act of 2018 and a $675 million payment made in June 2018 Net deductions from current net income totaled as required by the Economic Growth, Regulatory $383 million, which includes $390 million in unreal- Relief, and Consumer Protection Act. The Reserve ized losses on foreign currency denominated invest- Banks reported comprehensive loss of $2,176 million ments revalued to reflect current market exchange in 2018 after providing for remittances to Treasury. rates, $5 million in realized gains on Treasury securities, $3 million in realized losses on federal agency Section 11 of this report, “Statistical Tables,” proand government-sponsored enterprise mortgage- vides more detailed information on the Reserve backed securities (GSE MBS), and $5 million in Banks. Table 9A is a statement of condition for each other net additions. Reserve Bank; table 10 details the income and

98 105th Annual Report | 2018 Table 5. System Open Market Account (SOMA) holdings of the Federal Reserve Banks, 2018 and 2017 Millions of dollars, except as noted Average daily assets (+)/liabilities (–) Current income (+)/expense (–)* A verage interest rate (percent) Item 2018 2017 2018 2017 2 018 2 017 U.S. Treasury securities1 2 ,442,075 2,560,796 62,807 64,267 2.57 2.51 Government-sponsored enterprise debt (GSE) securities1 3,638 9,932 175 416 4.81 4.19 Federal agency and GSE mortgage-backed securities2 1,769,026 1,822,543 49,289 48,912 2.79 2.68 Foreign currency denominated investments3 21,335 20,673 -29 -17 - 0.14 - 0.08 Central bank liquidity swaps4 677 858 15 14 2.23 1.63 Other SOMA assets5 7 12 * * 1.50 0.68 Total SOMA assets 4,236,758 4,414,814 112,257 113,592 2.65 2.57 Securities sold under agreements to repurchase: primary dealers and expanded counterparties -12,552 -145,959 -186 -1,224 1.48 0.84 Securities sold under agreements to repurchase: foreign official and international accounts -236,818 -241,581 -4,373 -2,141 1.85 0.89 Total securities sold under agreements to repurchase -249,370 -387,540 -4,559 -3,365 1.83 0.87 Other SOMA liabilities6 -302 -878 n/a n/a n /a n /a Total SOMA liabilities -249,672 -338,418 -4,559 -3,365 1.83 0.87 Total SOMA holdings 3,987,086 4,026,396 107,698 110,227 2.70 2.74 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. expenses of each Reserve Bank for 2018; table 11 holdings of federal agency and GSE MBS decreased shows a condensed statement for each Reserve Bank by $54 billion, to an average daily amount of for the years 1914 through 2018; and table 13 gives $1,769 billion. the number and annual salaries of officers and employees for each Reserve Bank. Through September 2017, FRBNY continued to reinvest all principal payments from SOMA holdings A detailed account of the assessments and expendi- of GSE debt securities and federal agency and GSE tures of the Board of Governors appears in the MBS into federal agency and GSE MBS and to roll Board of Governors Financial Statements (see over maturing Treasury securities at auction. Beginsection 12, “Federal Reserve System Audits”). ning in October 2017, the FOMC initiated a balance sheet normalization program intended to reduce gradually the SOMA holdings by decreasing the rein- SOMA Holdings and Loans vestment of principal payments received from securities held in the SOMA through the implementation The Reserve Banks’ average net daily SOMA hold- of monthly caps. Such principal payments will be ings during 2018 amounted to $3,987 billion, a reinvested only to the extent that they exceed specidecrease of $39 billion from 2017 (see table 5). fied caps. SOMA Securities Holdings There were no significant holdings of securities purchased under agreements to resell in 2018 or 2017. The average daily holdings of Treasury securities Average daily holdings of foreign currency denomidecreased by $119 billion, to an average daily amount nated investments in 2018 were $21,335 million, comof $2,442 billion. The average daily holdings of pared with $20,673 million in 2017. The average daily GSE debt securities decreased by $6 billion, to an balance of central bank liquidity swap drawings was average daily amount of $4 billion. The average daily $677 million in 2018 and $858 million in 2017. The

Federal Reserve Banks 99 average daily balance of securities sold under agree- the Bank. On November 1, 2018, ML LLC was disments to repurchase was $249,370 million, a decrease solved. While its affairs are being wound up, ML of $138,170 million from 2017. LLC will retain minimal cash to meet any trailing expenses as required by law. The costs to wind up The average rates of interest earned on the Reserve ML LLC are not expected to be material. Net portfo- Banks’ holdings of Treasury securities increased to lio assets and liabilities at the end of 2018 were 2.57 percent, and the average rates on GSE debt secu- immaterial amounts and decreased from $1,722 milrities increased to 4.81 percent in 2018. The average lion and $9 million, respectively, at the end of 2017. rate of interest earned on federal agency and GSE ML net income of $7 million in 2018 was composed MBS increased to 2.79 percent in 2018. The average of interest income of $20 million, loss on investments interest rates paid for securities sold under agree- of $11 million, and operating expenses of $2 million. ments to repurchase increased to 1.83 percent in 2018. The average rate of interest earned on foreign currency denominated investments decreased to Federal Reserve Bank Premises -0.14 percent,17 while the average rate of interest earned on central bank liquidity swaps increased to 2.23 percent in 2018. Several Reserve Banks took action in 2018 to maintain and renovate their facilities. Multiyear renova- Lending tion programs at the New York, Cleveland, and San Francisco Reserve Banks’ headquarters buildings In 2018, the average daily primary, secondary, and continued. Many Reserve Banks implemented projseasonal credit extended by the Reserve Banks to ects to update building automation systems and depository institutions increased by $26 million, to uninterruptable power supplies to ensure infrastruc- $129 million. The average rate of interest earned on ture resiliency and continuity of operations. The New primary, secondary, and seasonal credit increased to York Reserve Bank continued repairs and renova- 2.14 percent in 2018, from 1.16 percent in 2017. tions to the 33 Maiden Lane building, and the Philadelphia Reserve Bank continued development of a Maiden Lane LLC (ML) is a lending facility estab- building project to replace its entire mechanical and lished in 2008 under authority of FRA sec- electrical infrastructure, with construction to begin in tion 13(3) in response to the 2007–09 financial crisis. 2019. The Minneapolis Reserve Bank completed the During 2018, the FRBNY sold all remaining securi- purchase of land for a new parking ramp and began ties from the ML portfolio, and in accordance with schematic design for the structure. the ML agreements, net proceeds were distributed to For more information on the acquisition costs and 17 As a result of negative interest rates in certain foreign currency net book value of the Reserve Banks and Branches, denominated investments held in the SOMA, interest income on see table 14 in section 11 (“Statistical Tables”) of this foreign currency denominated investments, net contains negative interest. annual report.

100 105th Annual Report | 2018 Pro Forma Financial Statements for Federal Reserve Priced Services Table 6. Pro forma balance sheet for Federal Reserve priced services, December 31, 2018 and 2017 Millions of dollars Item 2018 2 017 S hort-term assets (note 1) Imputed investments 770.1 920.1 Receivables 38.2 36.4 Materials and supplies 0.6 0.6 Prepaid expenses 14.4 12.4 Items in process of collection 236.2 80.8 Total short-term assets 1,059.5 1 ,050.3 L ong-term assets (note 2) Premises 113.0 139.3 Furniture and equipment 37.0 39.4 Leases, leasehold improvements, and long-term prepayments 103.8 105.2 Deferred tax asset 183.3 184.4 Total long-term assets 437.1 468.4 Total assets 1,496.6 1 ,518.7 S hort-term liabilities (note 3) Deferred-availability items 1,006.2 1 ,000.9 Short-term debt 27.6 23.3 Short-term payables 25.7 26.1 Total short-term liabilities 1,059.5 1 ,050.3 L ong-term liabilities (note 3) Long-term debt 20.2 44.7 Accrued benefit costs 342.1 347.7 Total long-term liabilities 362.3 392.4 Total liabilities 1,421.8 1 ,442.8 Equity (including accumulated other comprehensive loss of $624.1 million and $628.1 million at December 31, 2018 and 2017, respectively) 74.8 75.9 Total liabilities and equity (note 3) 1,496.6 1 ,518.7 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 101 Table 7. Pro forma income statement for Federal Reserve priced services, 2018 and 2017 Millions of dollars Item 2018 2 017 Revenue from services provided to depository institutions (note 4) 442.5 4 41.6 Operating expenses (note 5) 421.6 4 10.7 Income from operations 20.9 30.9 Imputed costs (note 6) Interest on debt 3.1 2.0r Interest on float -4.7 - 3.8r Sales taxes 3.8 2.3 4.0 2.2 Income from operations after imputed costs 18.7 28.7 Other income and expenses (note 7) Investment income - - Income before income taxes 18.7 28.7 Imputed income taxes (note 6) 4.2 6.5 Net income 14.4 22.2 Memo: Targeted return on equity (note 6) 5.2 4.6 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. r Revised Table 8. Pro forma income statement for Federal Reserve priced services, by service, 2018 Millions of dollars Commercial check Item Total Commercial ACH F edwire funds F edwire securities collection Revenue from services (note 4) 442.5 132.9 149.7 1 32.4 2 7.5 Operating expenses (note 5)1 421.6 124.1 151.3 1 19.1 2 7.1 Income from operations 20.9 8.8 -1.6 13.3 0.4 Imputed costs (note 6) 2.3 2.2 -2.4 2.0 0.4 Income from operations after imputed costs 18.7 6.6 0.8 11.3 0 Other income and expenses, net (note 7) 0 0 0 0 0 Income before income taxes 18.7 6.6 0.8 11.3 0 Imputed income taxes (note 6) 4.2 1.5 0.2 2.6 0 Net income 14.4 5.1 0.6 8.8 0 Memo: Targeted return on equity (note 6) 5.2 1.5 1.9 1.5 0.3 Cost recovery (percent) (note 8) 102.1 102.7 99.2 1 05.8 9 8.7 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.

102 105th Annual Report | 2018 Notes to Pro Forma Financial Statements for Priced Services (1) Short-Term Assets Receivables are composed of fees due the Reserve Banks for providing priced services and the share of suspense- and difference-account balances related to priced services. Items in process of collection are gross Federal Reserve cash items in process of collection (CIPC), stated on a basis comparable to that of a commercial bank. They reflect adjustments for intra-Reserve Bank items that would otherwise be double-counted on the combined Federal Reserve balance sheet and adjustments for items associated with nonpriced items (such as those collected for government agencies). Among the costs to be recovered under the Monetary Control Act is the cost of float, or net CIPC during the period (the difference between gross CIPC and deferred-availability items, which is the portion of gross CIPC that involves a financing cost), valued at the federal funds rate. Investments of excess financing derived from credit float are assumed to be invested in federal funds. (2) Long-Term Assets Long-term assets consist of long-term assets used solely in priced services and the priced-service portion of long-term assets shared with nonpriced services, including a deferred tax asset related to the priced services pension and postretirement benefits obligation. The tax rate associated with the deferred tax asset was 22.7 percent for 2018 and 2017. 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 2018 equity is imputed at 5.0 percent of total assets and 11.3 percent of risk-weighted assets, and 2017 equity is imputed at 5.0 percent of total assets and 11.0 percent of risk-weighted assets. The Board’s Payment System Risk policy reflects the 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 outlines the expectation that the Fedwire Services will meet or exceed the applicable risk-management standards. Although the Fedwire Funds Service does not face the risk that a business shock would cause the service to wind down in a disorderly manner and disrupt the stability of the financial system, in order to foster competition with private-sector financial market infrastructures, 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 2018 and 2017, there was sufficient assets and equity such that additional imputed balances were not required.

Federal Reserve Banks 103 In accordance with Accounting Standards Codification (ASC) Topic 715 (ASC 715), Compensation–Retirement Benefits, the Reserve Banks record the funded status of pension and other benefit plans on their balance sheets. To reflect the funded status of their benefit plans, the Reserve Banks recognize the deferred 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 $19.1 million in 2018 and a pension asset of $32.0 million in 2017. The change in the funded status of the pension and other benefit plans resulted in a corresponding decrease in accumulated other comprehensive loss of $4.0 million in 2018. (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 $5.1 million in 2018 and $5.4 million in 2017. In accordance with ASC 715, the Reserve Bank priced services recognized qualified pension-plan operating expenses of $26.5 million in 2018 and $31.9 million in 2017. Operating expenses also include the nonqualified net pension expense of $5.0 million in 2018 and $3.3 million in 2017. The adoption of ASC 715 does not change the systematic approach required by generally accepted accounting principles to recognize the expenses associated with the Reserve Banks’ benefit plans in the income statement. As a result, these expenses do not include amounts related to changes in the funded status of the Reserve Banks’ benefit plans, which are reflected in AOCI. The income statement by service reflects revenue, operating expenses, imputed costs, other income and expenses, and cost recovery. The tax rate associated with imputed taxes was 22.7 percent for 2018 and 2017, 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 2018 cost of short-term debt imputed in the PSAF model is based on nonfinancial commercial paper rates; the cost of imputed long-term debt is based on Merrill Lynch Corporate and High Yield Index returns; and the effective tax rate is derived from U.S. publicly traded firm data, which serve as the proxy for the financial data of a representative private-sector firm. The after-tax rate of return on equity is based on the returns of the equity market as a whole.18 18 See Federal Reserve Bank Services Private-Sector Adjustment Factor, 77 Fed. Reg. 67,007 (November 8, 2012), www.gpo.gov/fdsys/pkg/FR-2012-11-08/pdf/2012-26918.pdf, for details regarding the PSAF methodology change.

104 105th Annual Report | 2018 Interest is imputed on the debt assumed necessary to finance priced-service assets. These imputed costs are allocated among priced services according to the ratio of operating expenses, less shipping expenses, for each service to the total expenses, less the total shipping expenses, for all services. 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 2018, in millions of dollars: Total float - 254.6 Float not related to priced services1 -0.1 Float subject to recovery through per-item fees - 254.5 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 2018 and 2017. (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.

105 7 Other Federal Reserve Operations Regulatory Developments rule, high-volatility commercial real estate exposures, and the treatment of certain municipal obligations as high-quality liquid assets, among other topics men- Passage and Implementation of the tioned in the statement. Economic Growth, Regulatory Relief, and Consumer Protection Act Since issuance of the two statements in July, the Board has made substantial progress in implementing On May 24, 2018, the Economic Growth, Regulatory EGRRCPA. The following is a summary of the regu- Relief, and Consumer Protection Act (EGRRCPA) was signed into law.1 In addition to a number of latory initiatives undertaken in response to EGRRC- PA’s changes that have taken effect, as well as initiastandalone provisions, EGRRCPA amended the tives that have been proposed but are not yet effec- Dodd-Frank Wall Street Reform and Consumer Protive. Interim final rules are effective immediately tection Act (Dodd-Frank Act) as well as other statupon publication. utes administered by the Board. For example, EGRRCPA provides for additional tailoring of vari- Effective EGRRCPA Initiatives ous provisions of federal banking law while maintaining the authority of the federal banking agencies Treatment of Certain Municipal Securities as to apply enhanced prudential standards to address High-Quality Liquid Assets (Regulation WW) financial stability and ensure the safety and sound- In August 2018, the agencies adopted an interim final ness of depository institutions and their holding rule to implement section 403 of EGRRCPA.2 Seccompanies. tion 403 amended section 18 of the Federal Deposit Insurance Act and required the agencies, for pur- On July 6, 2018, the Board released two statements poses of their liquidity coverage ratio (LCR) rules regarding regulations and associated reporting and any other regulation that incorporates a definirequirements that EGRRCPA immediately affected. tion of the term “high-quality liquid asset” (HQLA) The Board issued one statement that related to reguor another substantially similar term, to treat a lations and reporting requirements administered municipal obligation as an HQLA if the obligation is solely by the Board, and a second interagency state- “liquid and readily marketable” and “investment ment with the Office of the Comptroller of the Curgrade,” as those terms were defined in EGRRCPA. rency (OCC) and the Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies). Both To effect this change, the interim final rule amended statements detailed interim positions that the Board each agency’s LCR rule to include a definition of and the agencies would take until the relevant regula- “municipal obligation” that is consistent with the tions and reporting forms were amended to reflect definition in section 403. The interim final rule also EGRRCPA’s changes. Specifically, in the Board’s amends the HQLA criteria by adding municipal oblistatement, the Board provided that it would not take gations that are both liquid and readily marketable as action to enforce certain regulations and reporting well as investment grade to the list of assets eligible requirements for firms with less than $100 billion in for treatment as level 2B liquid assets. In addition, total consolidated assets, such as rules implementing the interim final rule rescinds certain amendments enhanced prudential standards and the liquidity covthe Board made to its LCR rule in 2016 related to the erage ratio requirements. Additionally, the intertreatment of certain U.S. municipal securities as agency statement provided relief regarding companyrun stress testing, resolution planning, the Volcker 2 Liquidity Coverage Ratio Rule: Treatment of Certain Municipal Obligations as High-Quality Liquid Assets, 83 Fed. Reg. 44,451 1 Pub. L. No. 115-174, 132 Stat. 1296 (2018). (August 31, 2018).

106 105th Annual Report | 2018 HQLA so that municipal obligations under the Proposed EGRRCPA Initiatives Board’s rule will be treated consistently with section 403. Regulatory Capital Treatment for High Volatility Commercial Real Estate Exposures Small Bank Holding Company and Savings and (Regulation Q) Loan Holding Company Policy Statement In September 2018, the agencies requested comment (Regulations Q and Y) on a proposed rule that would amend the regulatory In August 2018, the Board adopted an interim final capital rule to revise the definition of “high volatility rule to implement section 207 of EGRRCPA, which commercial real estate exposure” (HVCRE) to condirected the Board to revise its Small Bank Holding form to the statutory definition of “high volatility Company and Savings and Loan Holding Company commercial real estate acquisition, development, or Policy Statement (Policy Statement).3 Bank holding construction (HVCRE ADC) loan,” in accordance companies and savings and loan holding companies with section 214 of EGRRCPA.5 Section 214 that are subject to the Policy Statement are exempt amended the Federal Deposit Insurance Act by addfrom the Board’s regulatory capital rule. Section 207 ing a new section 51 to provide a statutory definition required the Board to raise the consolidated asset of an HVCRE ADC loan. The statute stated that the threshold for application of the Policy Statement agencies may only require a depository institution to from $1 billion to $3 billion. In accordance with sec- assign a heightened risk weight to an HVCRE expotion 207, the interim final rule increased the Policy sure, as defined under the capital rule, if such expo- Statement’s asset size threshold from $1 billion to sure is an HVCRE ADC loan under EGRRCPA. $3 billion and made other conforming amendments to the Policy Statement. In accordance with section 214 of EGRRCPA, the agencies proposed to revise the HVCRE exposure Expanded Examination Cycles for Qualifying definition in section 2 of the agencies’ capital rule to Small Banks and U.S. Branches and Agencies of conform to the statutory definition of an HVCRE Foreign Banks (Regulations H and K) ADC loan. Loans that meet the revised definition of In December 2018, the agencies adopted final rules an HVCRE exposure would receive a 150 percent to implement section 210 of EGRRCPA.4 Sec- risk weight under the capital rule’s standardized tion 210 amended section 10(d) of the Federal approach. Deposit Insurance Act to permit the agencies to conduct on-site examinations of qualifying insured Although not expressly required by EGRRCPA, the depository institutions with under $3 billion in total proposed rule also would apply the revised definition assets not less than once during each 18-month of an HVCRE exposure to all Board-regulated instiperiod. Prior to EGRRCPA’s enactment, qualifying tutions that are subject to the Board’s capital rule, insured depository institutions with less than $1 bil- including bank holding companies, savings and loan lion in total assets were eligible for an 18-month holding companies, and intermediate holding compaon-site examination cycle. nies of foreign banking organizations. The comment period ended on November 27, 2018. The final rules generally allow qualifying insured depository institutions with under $3 billion in total Prudential Standards for Large Bank Holding Companies and Savings and Loan Holding consolidated assets to benefit from the extended Companies (Regulations Y, LL, PP, and YY) and 18-month examination schedule. In addition, the Proposed Changes to Applicability Thresholds for interim final rules make parallel changes to the agen- Regulatory Capital and Liquidity Requirements cies’ regulations governing the on-site examination (Regulations Q and WW) cycle for U.S. branches and agencies of foreign In October 2018, the Board requested comment on a banks, consistent with the International Banking Act Board-only proposal that would establish risk-based of 1978. categories for determining prudential standards for large U.S. banking organizations, consistent with sec- 3 Small Bank Holding Company and Savings and Loan Holding tion 401 of EGRRCPA. At the same time and in Company Policy Statement and Related Regulations; Changes connection with the Board-only proposal, the agento Reporting Requirements, 83 Fed. Reg. 44,195 (August 30, 2018). 4 Expanded Examination Cycle for Certain Small Insured 5 Regulatory Capital Treatment for High Volatility Commercial Depository Institutions and U.S. Branches and Agencies of Real Estate (HVCRE) Exposures, 83 Fed. Reg. 48,990 (Septem- Foreign Banks, 83 Fed. Reg. 67,033 (December 28, 2018). ber 28, 2018).

Other Federal Reserve Operations 107 cies also requested comment on an interagency pro- proposed to amend the scope of certain aspects of posal that would establish risk-based categories for the regulatory capital rule and the LCR rule and determining liquidity and capital standards for large re-propose the scope of the net stable funding ratio U.S. banking organizations, again consistent with rule to incorporate the four categories of standards section 401 of EGRRCPA. and differentiate the application of standards in each category to align with the risk profile of banking Section 401 raised the minimum asset threshold from organizations. $50 billion to $250 billion for general application of enhanced prudential standards under section 165 of The comment period for both proposals ended on the Dodd-Frank Act. In addition, section 401 January 22, 2019. authorized the Board to apply such standards to bank holding companies with total consolidated Reduced Reporting for Covered Depository assets of $100 billion or more but less than $250 bil- Institutions (Regulation H) lion, provided that the Board take into consideration In November 2018, the agencies requested comment certain statutory factors—capital structure, riskiness, on a proposal to implement section 205 of complexity, financial activities (including financial EGRRCPA.8 Section 205 amended section 7(a) of activities of subsidiaries), size, and any other risk- the Federal Deposit Insurance Act and required the related factors that the Board deems appropriate— agencies to issue regulations that allow for a reduced when doing so. EGRRCPA also raised the threshold reporting requirement by “covered depository instifrom $10 billion to $50 billion in total consolidated tutions” for the first and third reports of condition in assets for application of risk committee and risk- a year. “Covered depository institution” is defined in management standards to publicly traded bank hold- section 205 as an insured depository institution ing companies and required the Board to implement “that—(i) has less than $5,000,000,000 in total conperiodic supervisory stress testing for bank holding solidated assets; and (ii) satisfies such other criteria companies with $100 billion or more but less than as the [agencies] determine appropriate.” $250 billion in total consolidated assets. The proposed rule would implement section 205 by The first proposal would establish four categories of (1) authorizing covered depository institutions to file prudential standards for large U.S. bank holding the Federal Financial Institutions Examinations companies and certain savings and loan holding Council (FFIEC) 051 Call Report (the most streamcompanies.6 Consistent with EGRRCPA, risk- lined version of the Call Report), and (2) reducing committee and risk-management requirements would the information required to be reported on the be required for all bank holding companies and cer- FFIEC 051 Call Report by covered depository institain savings and loan holding companies with at least tutions in the first and third calendar quarters. The $50 billion in total consolidated assets. Likewise, proposal would define “covered depository institubank holding companies and certain savings and tion” to include certain insured depository instituloan holding companies with at least $100 billion in tions that have less than $5 billion in total consolitotal consolidated assets would be subject to supervi- dated assets and satisfy certain other proposed critesory stress tests, with the periodicity depending on ria. The OCC and the Board also proposed to the applicable category of standards. The first pro- establish reduced reporting for certain uninsured posal also included proposed changes to related institutions under their supervision that have less reporting forms, as well as proposed definitional than $5 billion in total consolidated assets and meet changes in the Board’s Regulation PP. the proposed criteria. In addition, the Board proposed a technical amendment to its Regulation H to The second proposal, which was proposed by the implement the requirement in section 9 of the Fedagencies, would utilize the categories introduced in eral Reserve Act pursuant to which state member the Board-only proposal and apply tailored capital banks are required to file Call Reports. The comment and liquidity requirements for banking organizations period ended on January 18, 2019. subject to each category.7 Specifically, the agencies 6 Prudential Standards for Large Bank Holding Companies and Capital and Liquidity Requirements, 83 Fed. Reg. 66,024 Savings and Loan Holding Companies, 83 Fed. Reg. 61,408 (November 21, 2018). (November 29, 2018). 8 Reduced Reporting for Covered Depository Institutions, 83 7 Proposed Changes to Applicability Thresholds for Regulatory Fed. Reg. 58,432 (November 19, 2018).

108 105th Annual Report | 2018 Regulatory Capital Rule: Capital Simplification Act by narrowing the definition of banking entity, for Qualifying Community Banking Organizations and section 204 revised the statutory provisions (Regulation Q) related to the naming of hedge funds and private In November 2018, the agencies requested comment equity funds. on a proposal that would provide for a simple measure of capital adequacy for certain community bank- The Volcker rule generally restricts banking entities ing organizations, consistent with section 201 of from engaging in proprietary trading and from own- EGRRCPA.9 Section 201 directed the agencies to ing or sponsoring hedge funds or private equity develop a community bank leverage ratio of not less funds. The proposed rule would exclude community than 8 percent and not more than 10 percent for banks with $10 billion or less in total consolidated qualifying community banking organizations, which assets, and total trading assets and liabilities of 5 perare depository institutions or depository institution cent or less of total consolidated assets, from the holding companies with total consolidated assets of restrictions of the Volcker rule. Additionally, the proless than $10 billion that the agencies have not deter- posal would, under certain circumstances, permit a mined are ineligible based on the banking organiza- hedge fund or private equity fund to share the same tion’s risk profile. name or a variation of the same name with an investment adviser that is not an insured depository insti- Under the proposal, depository institutions and tution, company that controls an insured depository depository institution holding companies that have institution, or bank holding company. The comment less than $10 billion in total consolidated assets, meet period ends on March 11, 2019. qualifying criteria, and have a community bank lever- Real Estate Appraisals (Regulation Y) age ratio (as defined in the proposal) of greater than 9 percent would be eligible to opt in to a community In December 2018, the agencies requested comment bank leverage ratio framework. Such banking organi- on a proposal that would raise the transaction value zations that elect to use the community bank leverage threshold for residential real estate transactions ratio and maintain a community bank leverage ratio requiring an appraisal from $250,000 to $400,000, as of greater than 9 percent would not be subject to well as align the agencies’ appraisal regulations with other risk-based and leverage capital requirements. In section 103 of EGRRCPA.11 Section 103 provided an addition, these banking organizations would be con- exemption to the appraisal requirement for certain sidered to be “well capitalized” for purposes of sec- transactions with values of less than $400,000 involvtion 38 of the Federal Deposit Insurance Act and ing real property or an interest in real property that is regulations implementing that section, as applicable, located in a rural area. and the generally applicable capital requirements under the agencies’ capital rule. The comment period The proposal would eliminate the requirement under ended on April 9, 2019. the agencies’ appraisal regulations for regulated financial institutions to obtain an appraisal for real Prohibitions and Restrictions on Proprietary estate-related financial transactions with a transac- Trading and Certain Interests in, and tion value of $400,000 or less, or that are exempted Relationships with, Hedge Funds and Private by the rural residential exemption in section 103 of Equity Funds (Regulation VV) EGRRCPA. Instead, the proposal would require In December 2018, the agencies, along with the Secu- evaluations for such transactions that are consistent rities and Exchange Commission and Commodities with safe and sound banking practices. The comment Futures Trading Commission, requested comment on period ended on February 5, 2019. a proposal that would amend Regulation VV (known as the Volcker rule) to align with amendments in sec- Other Dodd-Frank Implementation tions 203 and 204 of EGRRCPA.10 Section 203 amended section 13 of the Bank Holding Company Throughout 2018, in addition to implementing EGRRCPA, the Federal Reserve continued to implement the Dodd-Frank Act, which gives the Federal 9 Regulatory Capital Rule: Capital Simplification for Qualifying Community Banking Organizations, 84 Fed. Reg. 3062 (Febru- Reserve important responsibilities to issue rules and ary 8, 2019). supervise financial companies to enhance financial 10 Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds, 84 Fed. Reg. 2778 (February 8, 2019). 11 Real Estate Appraisals, 83 Fed. Reg. 63,110 (February 5, 2019).

Other Federal Reserve Operations 109 stability and preserve the safety and soundness of the exposure that such a bank holding company or forbanking system. eign banking organization can have to an unaffiliated company in order to reduce the risks arising from the The following is a summary of the key Dodd-Frank unaffiliated company’s possible failure.13 regulatory initiatives that were finalized during 2018 that were not related to EGRRCPA. Under the final rule, a bank holding company with $250 billion or more in total consolidated assets that Single Counterparty Credit Limits is not a G-SIB is prohibited from having aggregate (Regulation YY) net credit exposure to an unaffiliated counterparty in excess of 25 percent of its tier 1 capital. A U.S. In June 2018, the Board adopted a final rule to estab- G-SIB is prohibited from having aggregate net credit lish single-counterparty credit limits for bank holding exposure in excess of 15 percent of its tier 1 capital to companies and foreign banking organizations with an unaffiliated counterparty that is a G-SIB or a $250 billion or more in total consolidated assets, nonbank financial company supervised by the Board including any U.S. intermediate holding company of (major counterparty) and in excess of 25 perfect of such a foreign banking organization with $50 billion its tier 1 capital to any other unaffiliated counteror more in total consolidated assets and any bank party. The final rule also includes requirements for holding company identified as a global systemically any foreign banking organization operating in the important bank holding company (G-SIB) under the Board’s capital rules.12 The final rule implements sec- United States with $250 billion or more in total global consolidated assets and any U.S. intermediate tion 165(e) of the Dodd-Frank Act, which requires holding companies of such an organization with the Board to impose limits on the amount of credit $50 billion or more in total assets. 12 Single-Counterparty Credit Limits for Bank Holding Companies and Foreign Banking Organizations, 83 Fed. Reg. 38,460 (August 6, 2018). 13 12 USC 5365(e).

110 105th Annual Report | 2018 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 https://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-

111 8 Record of Policy Actions of the Board of Governors Policy actions of the Board of Governors are pre- Backed Securities Loan Facility (or TALF).2 The sented pursuant to section 10 of the Federal Reserve final rule is effective June 8, 2018. Act. That section provides that the Board shall keep a record of all questions of policy determined by the Voting for this action: Chair Powell, Vice Chair Board and shall include in its annual report to Con- for Supervision Quarles, and Governor Brainard. gress a full account of such actions. This section provides a summary of policy actions in 2018, as imple- Regulations H (Membership of State mented through (1) rules and regulations, (2) policy Banking Institutions in the Federal statements and other actions, and (3) discount rates Reserve System) and K (International for depository institutions. Policy actions were Banking Operations) approved by all Board members in office, unless indicated otherwise.1 More information on the actions is On August 21, 2018, the Board approved an interim available from the relevant Federal Register notices or final rule and request for comment (Docket No. other documents (see links in footnotes) or on R-1615), published jointly with the Federal Deposit request from the Board’s Freedom of Information Insurance Corporation (FDIC) and Office of the Office. Comptroller of the Currency (OCC), to increase the asset threshold, from $1 billion to $3 billion in total For information on the Federal Open Market Com- assets, below which certain small insured depository mittee’s policy actions relating to open market opera- institutions and U.S. branches and agencies of fortions, see section 9, “Minutes of Federal Open Mar- eign banks may qualify for an extended on-site ket Committee Meetings.” examination cycle, from 12 to 18 months, in accordance with the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).3 The Rules and Regulations interim final rule is effective August 29, 2018. Regulation A (Extensions of Credit by Voting for this action: Chair Powell, Vice Chair Federal Reserve Banks) for Supervision Quarles, and Governor Brainard. On April 30, 2018, the Board approved a final rule On December 20, 2018, the Board approved a final (Docket No. R-1585) to (1) revise the provisions rule (Docket No. R-1615), published jointly with the regarding the establishment of the primary credit rate FDIC and OCC, to adopt without change the in a financial emergency to provide that the primary interim final rule establishing an 18-month on-site credit rate will be the target federal funds rate or, if examination cycle for insured depository institutions the Federal Open Market Committee has established and U.S. branches and agencies of foreign banks a target range for the federal funds rate, a rate correwith total assets of less than $3 billion, consistent sponding to the top of the target range; and with the EGRRCPA.4 The final rule is effective (2) delete references to the expired Term Asset- January 28, 2019. 2 See Federal Register notice at https://www.govinfo.gov/content/ pkg/FR-2018-05-09/html/2018-09805.htm. 1 Jerome Powell was sworn in as Chair on February 5, and 3 See Federal Register notice at https://www.govinfo.gov/content/ Richard Clarida was sworn in as Vice Chair and a member of pkg/FR-2018-08-29/html/2018-18685.htm. the Board on September 17, 2018. Michelle Bowman was sworn 4 See Federal Register notice at https://www.govinfo.gov/content/ in as a member of the Board on November 26, 2018. pkg/FR-2018-12-28/html/2018-28267.htm.

112 105th Annual Report | 2018 Voting for this action: Chair Powell, Vice Chair amended their respective capital rules. The final rule, Clarida, Vice Chair for Supervision Quarles, and which also made conforming changes to other Board Governors Brainard and Bowman. regulations, is effective April 1, 2019. Banking organizations may choose to early-adopt the final rule as Regulation J (Collection of Checks and of the first quarter of 2019. Other Items by Federal Reserve Banks and Funds Transfers through Fedwire) Voting for this action: Chair Powell, Vice Chair Clarida, Vice Chair for Supervision Quarles, and On November 14, 2018, the Board approved a final Governors Brainard and Bowman. rule (Docket No. R-1599) to clarify and simplify certain provisions of the regulation and remove obsolete Regulation Y (Bank Holding Companies provisions; align the rights and obligations of send- and Change in Bank Control) ing banks, paying banks, and Federal Reserve Banks with provisions in the Board’s 2017 amendments to On March 23, 2018, the Board approved a final rule Regulation CC (Availability of Funds and Collection (Docket No. R-1568), published jointly with the of Checks) to reflect the virtually all-electronic check FDIC and OCC (together with the Board, “the agencollection and return environment; and clarify that cies”), to increase, from $250,000 to $500,000, the financial messaging standards for Fedwire funds dollar threshold at or below which appraisals are not transfers, such as the international common format required for commercial real estate transactions standard ISP 20022, do not confer or connote legal under the agencies’ appraisal regulations.7 Regulated status to the funds transfers.5 The final rule is effec- institutions would be required to obtain evaluations tive January 1, 2019. for such transactions at or below the threshold, rather than an appraisal. The agencies determined Voting for this action: Chair Powell, Vice Chair that the higher threshold would reduce regulatory Clarida, Vice Chair for Supervision Quarles, and burden without posing a threat to the safety and Governor Brainard. soundness of financial institutions. The final rule is effective April 9, 2018. Regulation Q (Capital Adequacy of Bank Holding Companies, Savings and Loan Voting for this action: Chair Powell, Vice Chair Holding Companies, and State Member for Supervision Quarles, and Governor Brainard. Banks) On August 21, 2018, the Board approved an interim On December 20, 2018, the Board approved a final final rule and request for comment (Docket No. rule (Docket No. R-1605) to revise its regulatory R-1619) to raise the asset-size threshold, from $1 bilcapital rule to address upcoming changes to credit lion to $3 billion of total consolidated assets, for loss accounting under U.S. generally accepted determining applicability of the Small Bank Holding accounting principles, including banking organiza- Company and Savings and Loan Holding Company tions’ implementation of the Current Expected Policy Statement, in accordance with the Credit Losses (CECL) methodology.6 The final rule EGRRCPA.8 The Policy Statement facilitates the would (1) identify which credit loss allowances under transfer of ownership of small community banks by CECL are eligible for inclusion in firms’ tier 2 capital allowing their holding companies to operate with and (2) provide firms with the option to phase in, higher levels of debt than would normally be permitover three years, any immediate adverse effects of ted. The interim final rule, which also makes con- CECL on regulatory capital. In addition, the rule forming changes to Regulation Q, is effective would direct firms that have adopted CECL to August 30, 2018. include provisions calculated under CECL in their stress testing projections, starting with the 2020 stress Voting for this action: Chair Powell, Vice Chair test cycle. The final rule was published jointly with for Supervision Quarles, and Governor Brainard. the FDIC and OCC, both of which similarly 5 See Federal Register notice at https://www.govinfo.gov/content/ 7 See Federal Register notice at https://www.govinfo.gov/content/ pkg/FR-2018-11-30/html/2018-25267.htm. pkg/FR-2018-04-09/html/2018-06960.htm. 6 See Federal Register notice at https://www.govinfo.gov/content/ 8 See Federal Register notice at https://www.govinfo.gov/content/ pkg/FR-2019-02-14/html/2018-28281.htm. pkg/FR-2018-08-30/html/2018-18756.htm.

Record of Policy Actions of the Board of Governors 113 Regulation CC (Availability of Funds and to modify its liquidity coverage ratio rule to treat cer- Collection of Checks) tain eligible municipal obligations as high-quality liquid assets, in accordance with the EGRRCPA.11 The On September 4, 2018, the Board approved final interim final rule is effective August 31, 2018. amendments (Docket No. R-1620) to address disputes between banks on whether a substitute or an Voting for this action: Chair Powell, Vice Chair electronic check has been altered or was issued with for Supervision Quarles, and Governor Brainard. an unauthorized signature, when the original check is not available for inspection.9 The final rule is effective Regulation YY (Enhanced Prudential January 1, 2019. Standards) Voting for this action: Chair Powell, Vice Chair On June 14, 2018, the Board approved a final rule for Supervision Quarles, and Governor Brainard. (Docket No. R-1534) to establish single-counterparty credit limits for large banking organizations.12 The Regulation KK (Swaps Margin and Swaps final rule implements section 165(e) of the Dodd- Push-Out) Frank Wall Street Reform and Consumer Protection Act, which requires the Board to impose limits on the On September 18, 2018, the Board approved a final amount of credit exposure a domestic bank holding rule (Docket No. R-1596) amending its swap margin company that has $250 billion or more in total conrequirements to conform with recently adopted solidated assets, including bank holding companies restrictions on certain qualified financial contracts of identified as global systemically important banking systemically important banking organizations (QFC organizations (G-SIBs) under the Board’s capital Rules).10 The rule provides that legacy swaps entered rules (together, “covered companies”), can have to an into before the applicable compliance date will not unaffiliated counterparty in order to reduce the risks become subject to swap margin requirements if they that an individual company’s failure or distress might are amended solely to comply with the requirements pose to the stability of the U.S. financial system. of the QFC Rules. The final rule was published Under the final rule, a covered company is prohibited jointly with the FDIC, OCC, Farm Credit Adminis- from having an aggregate net credit exposure of more tration, and Federal Housing Finance Agency, all of than 25 percent of its tier 1 capital to a single unafwhich similarly amended their respective swap mar- filiated counterparty. G-SIBs are subject to an addigin requirements. The final rule also harmonizes the tional restriction—15 percent of tier 1 capital—on definition of “Eligible Master Netting Agreement” in their aggregate net credit exposures to another systhe swap margin requirements with recent changes to temically important financial firm. Foreign banking the definition of “Qualifying Master Netting Agree- organizations operating in the United States that ment” in the capital and liquidity regulations of the have $250 billion or more in total global consolidated Board, OCC, and FDIC by recognizing the restric- assets, as well as their intermediate holding compations that were adopted by those agencies with nies (IHCs) that have $50 billion or more in total U.S. respect to the QFC Rules. The final rule is effective consolidated assets, would also be subject to credit November 9, 2018. exposure limits. The scope and application of all the credit exposure limits in the final rule are consistent Voting for this action: Chair Powell, Vice Chair with the EGRRCPA. The final rule is effective Clarida, Vice Chair for Supervision Quarles, and October 5, 2018. Governor Brainard. Voting for this action: Chair Powell, Vice Chair Regulation WW (Liquidity Risk for Supervision Quarles, and Governor Brainard. Measurement Standards) Rules Regarding Delegation of Authority On August 21, 2018, the Board approved an interim final rule and request for comment (Docket No. On February 27, 2018, the Board approved a final R-1616), published jointly with the FDIC and OCC, rule (Docket No. R-1600) amending its delegation of 9 See Federal Register notice at https://www.govinfo.gov/content/ 11 See Federal Register notice at https://www.govinfo.gov/content/ pkg/FR-2018-09-17/html/2018-20029.htm. pkg/FR-2018-08-31/html/2018-18610.htm. 10 See Federal Register notice at https://www.govinfo.gov/content/ 12 See Federal Register notice at https://www.govinfo.gov/content/ pkg/FR-2018-10-10/html/2018-22021.htm. pkg/FR-2018-08-06/html/2018-16133.htm.

114 105th Annual Report | 2018 authority rules to delegate authority to the Secretary Statements on the Impact of the Economic of the Board to review and determine appeals of Growth, Regulatory Relief, and Consumer denial of access to Board records under the Freedom Protection Act of Information Act, the Privacy Act, and the Board’s rules regarding access to such records.13 The rule On July 4, 2018, the Board approved two public would repeal the existing delegation of authority on statements to provide information on regulations and these matters to any Board member designated by associated reporting requirements that the the Chair. The final rule is effective March 6, 2018. EGRRCPA immediately affected. Enacted in May 2018, EGRRCPA amended various provisions Voting for this action: Chair Powell, Vice Chair of banking law to reduce regulatory requirements or for Supervision Quarles, and Governor Brainard. provide additional tailoring for certain banking organizations. The first statement describes statutory changes that do not require Board action to have an Policy Statements and Other Actions immediate effect as well as other Board actions that would be consistent with EGRRCPA’s provisions.15 Policy Statement on Interagency In particular, the statement describes how the Board Notification of Formal Enforcement will not take action to require certain smaller, less Actions complex banking organizations to comply with certain Board regulations, including those relating to On April 2, 2018, the Board approved a policy statestress testing and liquidity. The second statement, ment (Docket No. OP-1609), published jointly with issued jointly with the FDIC and OCC, provides the FDIC and OCC, to promote notification of, and similar relief for depository institutions.16 coordination on, formal enforcement actions among the three agencies at the earliest practicable date.14 Voting for this action: Chair Powell, Vice Chair The final policy statement incorporates and reflects for Supervision Quarles, and Governor Brainard. current practices and replaces the Federal Financial Institutions Examination Council’s rescinded policy Customer Identification Program statement, “Interagency Coordination of Formal Corrective Action by the Federal Bank Regulatory On August 30, 2018, the Board approved an order, Agencies.” The final policy statement is effective issued jointly with the FDIC, OCC, Financial Crimes June 12, 2018. Enforcement Network, and National Credit Union Administration, granting an exemption to banks Voting for this action: Chair Powell, Vice Chair from the requirements in the customer identification for Supervision Quarles, and Governor Brainard. program (CIP) rules under the Bank Secrecy Act (BSA) when a bank extends loans to commercial cus- Determination on New Markets Tax Credit tomers to facilitate the purchase of property and Investments as Public Welfare Investments casualty insurance.17 Under the CIP rules, banks are generally required to obtain certain identifying infor- On June 28, 2018, the Board determined that an mation from a customer at account opening in order investment made by a state member bank in a “quali- to verify the true identity of the customer. The CIP fied community development entity” eligible for the rules permit exemptions from these requirements, U.S. Department of the Treasury’s New Markets Tax provided any exemption is consistent with the pur- Credit program is an investment “designed primarily poses of the BSA and safety and soundness. The to promote the public welfare” within the meaning of order is effective September 27, 2018. section 9(23) of the Federal Reserve Act and section 208.22(b)(1)(i) of Regulation H, provided all Voting for this action: Chair Powell, Vice Chair other statutory and regulatory criteria are met. for Supervision Quarles, and Governor Brainard. Voting for this action: Chair Powell, Vice Chair for Supervision Quarles, and Governor Brainard. 15 See press release at https://www.federalreserve.gov/newsevents/ pressreleases/bcreg20180706b.htm. 13 See Federal Register notice at https://www.govinfo.gov/content/ 16 See press release at https://www.federalreserve.gov/newsevents/ pkg/FR-2018-03-06/html/2018-04385.htm. pressreleases/bcreg20180706a.htm. 14 See Federal Register notice at https://www.govinfo.gov/content/ 17 See interagency order at https://www.federalreserve.gov/ pkg/FR-2018-06-12/html/2018-12556.htm. supervisionreg/srletters/sr1806a1.pdf.

Record of Policy Actions of the Board of Governors 115 Large Financial Institution Rating System Voting for this action: Chair Powell, Vice Chair Clarida, Vice Chair for Supervision Quarles, and On November 1, 2018, the Board approved a new Governor Brainard. supervisory rating system for large financial institutions (LFIs) to align with the Federal Reserve’s cur- Conversion Triggers in Eligible Long-Term rent supervisory programs and practices for these Debt firms.18 The new rating system applies to (1) bank holding companies and non-insurance, non- On December 10, 2018, the Board identified criteria commercial savings and loan holding companies for evaluating whether a proposed internal debt “con- (SLHCs) with at least $100 billion in total consoli- version trigger” of a U.S. intermediate holding comdated assets and (2) U.S. IHCs of foreign banking pany of a foreign global systemically important organizations established under Regulation YY that banking organization (a covered IHC) is consistent have at least $50 billion in total consolidated assets. with the requirements of the Board’s total loss- The rating system will assign component ratings for absorbing capacity (TLAC) regulation, in connection capital planning and positions, liquidity risk manage- with its approval of the proposed internal debt “conment and positions, and governance and controls, version triggers” of two covered IHCs.20 Under the and will introduce a new rating scale. Initial LFI rat- TLAC regulation, covered IHCs are required to ings will be assigned to institutions under the Large maintain outstanding a minimum amount of long- Institution Supervision Coordinating Committee term debt that meets certain eligibility factors, beginframework beginning in early 2019 and to other LFIs ning on January 1, 2019. In addition, eligible longin early 2020. Conforming revisions were also made term debt issued by a covered IHC to its foreign to Regulations K and LL (Docket No. R-1569), affiliates must include a conversion trigger, a contracwhich are effective February 1, 2019. tual provision that permits the Board to order the conversion of the debt into equity. The Board also Voting for this action: Chair Powell, Vice Chair approved a delegation of authority to the General Clarida, Vice Chair for Supervision Quarles, and Counsel, in consultation with the Director of the Governor Brainard. Division of Supervision and Regulation, to approve proposed conversion triggers for other covered IHCs, Application of the RFI/C(D) Rating System provided the triggers meet the eligibility criteria and to Savings and Loan Holding Companies do not raise significant legal, policy, or supervisory issues. On November 1, 2018, the Board approved a notice (Docket No. OP-1631) to apply the RFI/C(D) rating Voting for this action: Chair Powell, Vice Chair system (the RFI rating system) to SLHCs that are Clarida, Vice Chair for Supervision Quarles, and depository in nature.19 However, SLHCs that are Governors Brainard and Bowman. depository in nature and have at least $100 billion in total consolidated assets will be rated under the RFI Resolution Plan Guidance rating system only until the Board applies its new LFI rating system to them, beginning in early 2020. On December 19, 2018, the Board approved final SLHCs that are depository in nature but have less guidance (Docket No. OP-1644), published jointly than $100 billion in total consolidated assets would with the FDIC, for the eight largest, most complex remain subject to the RFI rating system. The RFI U.S. banking organizations regarding their future rating system would not apply to SLHCs that meet resolution plan submissions.21 The joint final guidcertain criteria to be considered commercial or insur- ance consolidates prior resolution plan guidance proance SLHCs. Commercial SLHCs and insurance vided to these institutions and describes the two SLHCs would continue to receive “indicative rat- agencies’ expectations regarding a number of key ings,” which describe how the firm would be rated if vulnerabilities for an orderly resolution under the subject to the RFI rating system. The notice is effective February 1, 2019. 20 See the Board’s letters to UBS Group AG and Credit Suisse AG: https://www.federalreserve.gov/supervisionreg/ legalinterpretations/bhc_changeincontrol20181213g.pdf and 18 See Federal Register notice at https://www.govinfo.gov/content/ https://www.federalreserve.gov/supervisionreg/ pkg/FR-2018-11-21/html/2018-25350.htm. legalinterpretations/bhc_changeincontrol20181213c.pdf. 19 See Federal Register notice at https://www.govinfo.gov/content/ 21 See Federal Register notice at https://www.govinfo.gov/content/ pkg/FR-2018-11-09/html/2018-24496.htm. pkg/FR-2019-02-04/html/2019-00800.htm.

116 105th Annual Report | 2018 U.S. Bankruptcy Code. This includes updated expec- Voting for this action: Chair Powell, Vice Chair tations regarding payment, clearing, and settlement Clarida, Vice Chair for Supervision Quarles, and services and on derivatives and trading activities. Governor Brainard. Voting for this action: Chair Powell, Vice Chair On December 19, 2018, the Board approved raising Clarida, Vice Chair for Supervision Quarles, and the interest rate paid on required and excess reserve Governors Brainard and Bowman. balances from 2.20 percent to 2.40 percent, effective December 20, 2018.25 This action was taken to sup- Interest on Reserves port the FOMC’s decision on December 19 to raise the target range for the federal funds rate by 25 basis On March 21, 2018, the Board approved raising the points, to a range of 2¼ percent to 2½ percent. Setinterest rate paid on required and excess reserve bal- ting the interest rate paid on required and excess ances from 1½ percent to 1¾ percent, effective reserve balances 10 basis points below the top of the March 22, 2018.22 This action was taken to support target range for the federal funds rate was intended to the Federal Open Market Committee’s (FOMC’s) foster trading in the federal funds market at rates well decision on March 21 to raise the target range for the within the FOMC’s target range. federal funds rate by 25 basis points, to a range of 1½ percent to 1¾ percent. Voting for this action: Chair Powell, Vice Chair Clarida, Vice Chair for Supervision Quarles, and Voting for this action: Chair Powell, Vice Chair Governors Brainard and Bowman. for Supervision Quarles, and Governor Brainard. Discount Rates for Depository On June 13, 2018, the Board approved raising the interest rate paid on required and excess reserve bal- Institutions in 2018 ances from 1¾ percent to 1.95 percent, effective June 14, 2018.23 This action was taken to support the Under the Federal Reserve Act, the boards of direc- FOMC’s decision on June 13 to raise the target range tors of the Federal Reserve Banks must establish for the federal funds rate by 25 basis points, to a rates on discount window loans to depository institurange of 1¾ percent to 2 percent. Setting the interest tions at least every 14 days, subject to review and rate paid on required and excess reserve balances determination by the Board of Governors. Periodi- 5 basis points below the top of the target range for cally, the Board considers proposals by the 12 the federal funds rate was intended to foster trading Reserve Banks to establish the primary credit rate in the federal funds market at rates well within the and approves proposals to maintain the formulas for FOMC’s target range. computing the secondary and seasonal credit rates. Voting for this action: Chair Powell, Vice Chair Primary, Secondary, and Seasonal Credit for Supervision Quarles, and Governor Brainard. Primary credit, the Federal Reserve’s main lending On September 26, 2018, the Board approved raising program for depository institutions, is extended at the interest rate paid on required and excess reserve the primary credit rate, which is set above the usual balances from 1.95 percent to 2.20 percent, effective level of short-term market interest rates. It is made September 27, 2018.24 This action was taken to sup- available, with minimal administration and for very port the FOMC’s decision on September 26 to raise short terms, as a backup source of liquidity to the target range for the federal funds rate by 25 basis depository institutions that, in the judgment of the points, to a range of 2 percent to 2¼ percent. lending Federal Reserve Bank, are in generally sound financial condition. During 2018, the Board approved four increases in the primary credit rate, bringing the rate from 2 percent to 3 percent. The Board reached these determinations on the primary 22 See press release at https://www.federalreserve.gov/newsevents/ credit rate recommendations of the Reserve Bank pressreleases/monetary20180321a1.htm. boards of directors. The Board’s actions were taken 23 See press release at https://www.federalreserve.gov/newsevents/ pressreleases/monetary20180613a1.htm. 24 See press release at https://www.federalreserve.gov/newsevents/ 25 See press release at https://www.federalreserve.gov/newsevents/ pressreleases/monetary20180926a1.htm. pressreleases/monetary20181219a1.htm.

Record of Policy Actions of the Board of Governors 117 in conjunction with the FOMC’s decisions to raise June 13, 2018. Effective June 14, 2018, the Board the target range for the federal funds rate by approved actions taken by the boards of directors of 100 basis points, to 2¼ percent to 2½ percent. Mon- the Federal Reserve Banks of Boston, Philadelphia, etary policy developments are reviewed more fully in Cleveland, Richmond, Atlanta, Chicago, St. Louis, other parts of this report (see section 2, “Monetary Minneapolis, Kansas City, Dallas, and San Francisco Policy and Economic Developments”). to increase the primary credit rate from 2¼ percent to 2½ percent. On June 14, 2018, the Board approved Secondary credit is available in appropriate circum- an identical action subsequently taken by the board stances to depository institutions that do not qualify of directors of the Federal Reserve Bank of New for primary credit. The secondary credit rate is set at York, effective immediately. a spread above the primary credit rate. Throughout 2018, the spread was set at 50 basis points. At year- Voting for this action: Chair Powell, Vice Chair end, the secondary credit rate was 3½ percent. for Supervision Quarles, and Governor Brainard. Seasonal credit is available to smaller depository September 26, 2018. Effective September 27, 2018, institutions to meet liquidity needs that arise from the Board approved actions taken by the boards of regular swings in their loans and deposits. The rate directors of the Federal Reserve Banks of Boston, on seasonal credit is calculated every two weeks as an Philadelphia, Cleveland, Richmond, Atlanta, Chiaverage of selected money market yields, typically cago, St. Louis, Kansas City, Dallas, and San Franresulting in a rate close to the target range for the cisco to increase the primary credit rate from 2½ perfederal funds rate. At year-end, the seasonal credit cent to 2¾ percent. On September 27, 2018, the rate was 2.40 percent.26 Board approved identical actions subsequently taken by the boards of directors of the Federal Reserve Votes on Changes to Discount Rates for Banks of New York and Minneapolis, effective Depository Institutions immediately. Details on the four actions by the Board to approve Voting for this action: Chair Powell, Vice Chair increases in the primary credit rate are provided Clarida, Vice Chair for Supervision Quarles, and below. Governor Brainard. March 21, 2018. Effective March 22, 2018, the Board December 19, 2018. Effective December 20, 2018, the approved actions taken by the boards of directors of Board approved actions taken by the boards of directhe Federal Reserve Banks of Boston, New York, tors of the Federal Reserve Banks of Boston, Cleve- Philadelphia, Cleveland, Richmond, Atlanta, St. land, Richmond, Atlanta, Chicago, and San Fran- Louis, Kansas City, Dallas, and San Francisco to cisco to increase the primary credit rate from 2¾ perincrease the primary credit rate from 2 percent to cent to 3 percent. On December 20, 2018, the Board 2¼ percent. On March 22, 2018, the Board approved approved identical actions subsequently taken by the identical actions subsequently taken by the boards of boards of directors of the Federal Reserve Banks of directors of the Federal Reserve Banks of Chicago New York, Philadelphia, St. Louis, Minneapolis, and Minneapolis, effective immediately. Kansas City, and Dallas, effective immediately. Voting for this action: Chair Powell, Vice Chair Voting for this action: Chair Powell, Vice Chair for Supervision Quarles, and Governor Brainard. Clarida, Vice Chair for Supervision Quarles, and Governors Brainard and Bowman. 26 For current and historical discount rates, see https://www .frbdiscountwindow.org/.

119 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 Committee at the time of the meetings. 1 As of January 1, 2018, the Federal Reserve Bank of New York was operating under the Domestic Policy Directive approved at the December 12–13, 2017, Committee meeting. The other Members of the Committee voting for a particular policy instruments (the Authorization for Domestic Open Maraction may differ among themselves as to the reasons ket Operations, the Authorization for Foreign Currency Operations, and the Foreign Currency Directive) in effect as of Janufor their votes; in such cases, the range of their views ary 1, 2018, were approved at the January 31–February 1, 2017, is noted in the minutes. When members dissent from meeting.

120 105th Annual Report | 2018 Meeting Held Steven B. Kamin Economist on January 30–31, 2018 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, January 30, 2018, at 10:00 a.m. and continued on David Altig, Kartik B. Athreya, Thomas A. Connors, Wednesday, January 31, 2018, at 9:00 a.m.1 Mary Daly, David E. Lebow, Trevor A. Reeve, Argia M. Sbordone, Ellis W. Tallman, Present William Wascher, 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 Thomas I. Barkin Ann E. Misback Raphael W. Bostic Secretary, Office of the Secretary, Lael Brainard Board of Governors Loretta J. Mester Matthew J. Eichner2 Director, Division of Reserve Bank Operations and Jerome H. Powell Payment Systems, Board of Governors Randal K. Quarles Andreas Lehnert John C. Williams Director, Division of Financial Stability, Board of Governors James Bullard, Charles L. Evans, Esther L. George, Michael Strine, and Eric Rosengren Rochelle M. Edge Alternate Members of the Federal Open Market Deputy Director, Division of Monetary Affairs, Committee Board of Governors Patrick Harker, Robert S. Kaplan, and Neel Kashkari Maryann F. Hunter Presidents of the Federal Reserve Banks of Deputy Director, Division of Supervision and Philadelphia, Dallas, and Minneapolis, respectively Regulation, Board of Governors James A. Clouse David Reifschneider and John M. Roberts Secretary Special Advisers to the Board, Office of Board Members, Board of Governors Matthew M. Luecke Deputy Secretary Linda Robertson Assistant to the Board, Office of Board Members, David W. Skidmore Board of Governors Assistant Secretary Joseph W. Gruber Michelle A. Smith Senior Associate Director, Division of International Assistant Secretary Finance, Board of Governors Mark E. Van Der Weide Michael G. Palumbo General Counsel Senior Associate Director, Division of Research and Statistics, Board of Governors Michael Held Deputy General Counsel 1 The Federal Open Market Committee is referenced as the 2 Attended through the discussion of developments in financial “FOMC” and the “Committee” in these minutes. markets and open market operations.

Minutes of Federal Open Market Committee Meetings | January 121 Antulio N. Bomfim, Ellen E. Meade, Carlos Garriga and Jonathan L. Willis Stephen A. Meyer, Edward Nelson, Vice Presidents, Federal Reserve Banks of St. Louis and Joyce K. Zickler and Kansas City, respectively Senior Advisers, Division of Monetary Affairs, Board of Governors Annual Organizational Matters4 Jeremy B. Rudd In the agenda for this meeting, it was reported that Senior Adviser, Division of Research and Statistics, advices of the election of the following members and Board of Governors alternate members of the Federal Open Market Com- William F. Bassett mittee for a term beginning January 30, 2018, had Associate Director, Division of Financial Stability, been received and that these individuals had executed Board of Governors their oaths of office. Andrew Figura The elected members and alternate members were as Assistant Director, Division of Research and follows: Statistics, Board of Governors William C. Dudley Jason Wu President of the Federal Reserve Bank of New York, Assistant Director, Division of Monetary Affairs, with Board of Governors Michael Strine Penelope A. Beattie3 First Vice President of the Federal Reserve Bank of Assistant to the Secretary, Office of the Secretary, New York, as alternate. Board of Governors Thomas I. Barkin Dana L. Burnett and Michele Cavallo President of the Federal Reserve Bank of Richmond, Section Chiefs, Division of Monetary Affairs, with Board of Governors Eric Rosengren David H. Small President of the Federal Reserve Bank of Boston, Project Manager, Division of Monetary Affairs, as alternate. Board of Governors Loretta J. Mester Andrea Ajello, Kurt F. Lewis, and Bernd Schlusche President of the Federal Reserve Bank of Cleveland, Principal Economists, Division of Monetary Affairs, with Board of Governors Charles L. Evans President of the Federal Reserve Bank of Chicago, Ekaterina Peneva and Daniel J. Vine as alternate. Principal Economists, Division of Research and Statistics, Board of Governors Raphael W. Bostic President of the Federal Reserve Bank of Atlanta, Camille Bryan with Lead Financial Analyst, Division of International Finance, Board of Governors James Bullard President of the Federal Reserve Bank of St. Louis, Ellen J. Bromagen as alternate. First Vice President, Federal Reserve Bank of Chicago John C. Williams President of the Federal Reserve Bank of Jeff Fuhrer and Daniel G. Sullivan San Francisco, with Executive Vice Presidents, Federal Reserve Banks of Boston and Chicago, respectively Esther L. George President of the Federal Reserve Bank of Todd E. Clark,3 Evan F. Koenig, Keith Sill, Kansas City, as alternate. and Mark L. J. Wright Senior Vice Presidents, Federal Reserve Banks of By unanimous vote, the Committee selected Janet L. Cleveland, Dallas, Philadelphia, and Minneapolis, Yellen to serve as Chairman through February 2, respectively 4 Committee organizational documents are available at www 3 Attended Tuesday session only. .federalreserve.gov/monetarypolicy/rules_authorizations.htm.

122 105th Annual Report | 2018 2018, and Jerome H. Powell to serve as Chairman, By unanimous vote, the Committee selected Simon effective February 3, 2018, until the selection of his Potter and Lorie K. Logan to serve at the pleasure of successor at the first regularly scheduled meeting of the Committee as manager and deputy manager of the Committee in 2019. the SOMA, respectively, on the understanding that these selections were subject to their being satisfac- By unanimous vote, the following officers of the tory to the Federal Reserve Bank of New York. Committee were selected to serve until the selection of their successors at the first regularly scheduled Secretary’s note: Advice subsequently was meeting of the Committee in 2019: received that the manager and deputy manager selections indicated above were satisfactory to the William C. Dudley Federal Reserve Bank of New York. Vice Chairman James A. Clouse By unanimous vote, the Authorization for Domestic Secretary Open Market Operations was approved with revi- Matthew M. Luecke sions to incorporate transactions of securities lending Deputy Secretary into the existing operational readiness testing provision and to improve the document’s readability. The David W. Skidmore Guidelines for the Conduct of System Open Market Assistant Secretary Operations in Federal-Agency Issues remained Michelle A. Smith suspended. Assistant Secretary Authorization for Domestic Open Market Mark E. Van Der Weide Operations (As Amended Effective General Counsel January 30, 2018) Michael Held Deputy General Counsel Open Market Transactions Richard M. Ashton Assistant General Counsel 1. The Federal Open Market Committee (the “Committee”) authorizes and directs the Federal Steven B. Kamin Reserve Bank selected by the Committee to Economist execute open market transactions (the “Selected Thomas Laubach Bank”), to the extent necessary to carry out the Economist most recent domestic policy directive adopted by the Committee: David W. Wilcox Economist A. To buy or sell in the open market securities David Altig that are direct obligations of, or fully guaran- Kartik B. Athreya teed as to principal and interest by, the United States, and securities that are direct Thomas A. Connors obligations of, or fully guaranteed as to prin- Mary Daly cipal and interest by, any agency of the David E. Lebow United States, that are eligible for purchase Trevor A. Reeve or sale under Section 14(b) of the Federal Reserve Act (“Eligible Securities”) for the Argia M. Sbordone System Open Market Account (“SOMA”): Ellis W. Tallman i. As an outright operation with securities William Wascher dealers and foreign and international Beth Anne Wilson accounts maintained at the Selected Associate Economists Bank: on a same-day or deferred delivery basis (including such transactions as are By unanimous vote, the Federal Reserve Bank of commonly referred to as dollar rolls and New York was selected to execute transactions for coupon swaps) at market prices; or the System Open Market Account (SOMA).

Minutes of Federal Open Market Committee Meetings | January 123 ii. As a temporary operation: on a same-day iv. Subject to reasonable limitations on the or deferred delivery basis, to purchase amount of Eligible Securities that each such Eligible Securities subject to an borrower may borrow. agreement to resell (“repo transactions”) or to sell such Eligible Securities subject B. The Selected Bank may: to an agreement to repurchase (“reverse i. Reject bids that, as determined in its sole repo transactions”) for a term of 65 busidiscretion, could facilitate a bidder’s abilness days or less, at rates that, unless othity to control a single issue; erwise authorized by the Committee, are determined by competitive bidding, after ii. Accept Treasury securities or cash as colapplying reasonable limitations on the lateral for any loan of securities authorvolume of agreements with individual ized in this paragraph 2; and counterparties; iii. Accept agency securities as collateral only B. To allow Eligible Securities in the SOMA to for a loan of agency securities authorized mature without replacement; in this paragraph 2. C. To exchange, at market prices, in connection Operational Readiness Testing with a Treasury auction, maturing Eligible Securities in the SOMA with the Treasury, in 3. The Committee authorizes the Selected Bank to the case of Eligible Securities that are direct undertake transactions of the type described in obligations of the United States or that are paragraphs 1 and 2 from time to time for the purfully guaranteed as to principal and interest pose of testing operational readiness, subject to by the United States; and the following limitations: D. To exchange, at market prices, maturing Eli- A. All transactions authorized in this paragraph gible Securities in the SOMA with an agency 3 shall be conducted with prior notice to the of the United States, in the case of Eligible Committee; Securities that are direct obligations of that agency or that are fully guaranteed as to B. The aggregate par value of the transactions principal and interest by that agency. authorized in this paragraph 3 that are of the type described in paragraph 1.A.i shall not Securities Lending exceed $5 billion per calendar year; and 2. In order to ensure the effective conduct of open C. The outstanding amount of the transactions market operations, the Committee authorizes the described in paragraphs 1.A.ii and 2 shall not Selected Bank to operate a program to lend Eliexceed $5 billion at any given time. gible Securities held in the SOMA to dealers on an overnight basis (except that the Selected Bank Transactions with Customer Accounts may lend Eligible Securities for longer than an overnight term to accommodate weekend, holi- 4. In order to ensure the effective conduct of open day, and similar trading conventions). market operations, while assisting in the provision of short-term investments or other authorized A. Such securities lending must be: services for foreign central bank and international i. At rates determined by competitive accounts maintained at a Federal Reserve Bank bidding; (the “Foreign Accounts”) and accounts maintained at a Federal Reserve Bank as fiscal agent ii. At a minimum lending fee consistent with of the United States pursuant to section 15 of the the objectives of the program; Federal Reserve Act (together with the Foreign iii. Subject to reasonable limitations on the Accounts, the “Customer Accounts”), the Comtotal amount of a specific issue of Eli- mittee authorizes the following when undertaken gible Securities that may be auc- on terms comparable to those available in the tioned; and open market:

124 105th Annual Report | 2018 A. The Selected Bank, for the SOMA, to under- about the stance of policy at its most recent meettake reverse repo transactions in Eligible ing and the Committee’s long-run objectives to Securities held in the SOMA with the Cus- foster maximum employment and price stability, tomer Accounts for a term of 65 business and shall be based on economic, financial, and days or less; and monetary developments since the most recent meeting of the Committee. The Chairman, when- B. Any Federal Reserve Bank that maintains ever feasible, will consult with the Committee Customer Accounts, for any such Customer before making any instruction under this para- Account, when appropriate and subject to all graph 5. other necessary authorization and approvals, to: The Committee voted unanimously to reaffirm without revision the Authorization for Foreign Currency i. Undertake repo transactions in Eligible Operations and the Foreign Currency Directive as Securities with dealers with a correspondshown below. ing reverse repo transaction in such Eligible Securities with the Customer Authorization for Foreign Currency Operations Accounts; and (As Reaffirmed Effective January 30, 2018) ii. Undertake intra-day repo transactions in In General Eligible Securities with Foreign Accounts. 1. The Federal Open Market Committee (the “Com- Transactions undertaken with Customer mittee”) authorizes the Federal Reserve Bank Accounts under the provisions of this paragraph selected by the Committee (the “Selected Bank”) 4 may provide for a service fee when appropriate. to execute open market transactions for the Transactions undertaken with Customer System Open Market Account as provided in this Accounts are also subject to the authorization or Authorization, to the extent necessary to carry approval of other entities, including the Board of out any foreign currency directive of the Governors of the Federal Reserve System and, Committee: when involving accounts maintained at a Federal Reserve Bank as fiscal agent of the United States, the United States Department of the Treasury. A. To purchase and sell foreign currencies (also known as cable transfers) at home and Additional Matters abroad in the open market, including with the United States Treasury, with foreign mon- 5. The Committee authorizes the Chairman of the etary authorities, with the Bank for Interna- Committee, in fostering the Committee’s objec- tional Settlements, and with other entities in tives during any period between meetings of the the open market. This authorization to pur- Committee, to instruct the Selected Bank to act chase and sell foreign currencies encompasses on behalf of the Committee to: purchases and sales through standalone spot or forward transactions and through foreign A. Adjust somewhat in exceptional circum- exchange swap transactions. For purposes of stances the stance of monetary policy and to this Authorization, foreign exchange swap take actions that may result in material transactions are: swap transactions with the changes in the composition and size of the United States Treasury (also known as wareassets in the SOMA; or housing transactions), swap transactions with other central banks under reciprocal currency B. Undertake transactions with respect to Eli- arrangements, swap transactions with other central banks under standing dollar liquidity gible Securities in order to appropriately and foreign currency liquidity swap arrangeaddress temporary disruptions of an operaments, and swap transactions with other entitional or highly unusual nature in U.S. dollar ties in the open market. funding markets. Any such adjustment described in subparagraph B. To hold balances of, and to have outstanding A of this paragraph 5 shall be made in the con- forward contracts to receive or to deliver, fortext of the Committee’s discussion and decision eign currencies.

Minutes of Federal Open Market Committee Meetings | January 125 2. All transactions in foreign currencies undertaken advance to execute the operation if it pursuant to paragraph 1 above shall, unless other- would result in the overall volume of wise authorized by the Committee, be conducted: standalone spot and forward transactions in foreign currencies, as defined in para- A. In a manner consistent with the obligations graph 3.C of this Authorization, totaling regarding exchange arrangements under $5 billion or less since the close of the Article IV of the Articles of Agreement of most recent regular meeting of the the International Monetary Fund (IMF).1 Committee. B. In close and continuous cooperation and B. Such an operation also shall be: consultation, as appropriate, with the United i. Generally directed at countering disor- States Treasury. derly market conditions; or C. In consultation, as appropriate, with foreign ii. Undertaken to adjust System balances in monetary authorities, foreign central banks, light of probable future needs for currenand international monetary institutions. cies; or iii. Conducted for such other purposes as D. At prevailing market rates. may be determined by the Committee. Standalone Spot and Forward Transactions C. For purposes of this Authorization, the overall volume of standalone spot and forward 3. For any operation that involves standalone spot transactions in foreign currencies is defined or forward transactions in foreign currencies: as the sum (disregarding signs) of the dollar values of individual foreign currencies pur- A. Approval of such operation is required as chased and sold, valued at the time of the follows: transaction. i. The Committee must direct the Selected Bank in advance to execute the operation Warehousing if it would result in the overall volume of standalone spot and forward transactions 4. The Committee authorizes the Selected Bank, in foreign currencies, as defined in para- with the prior approval of the Subcommittee and graph 3.C of this Authorization, exceed- at the request of the United States Treasury, to ing $5 billion since the close of the most conduct swap transactions with the United States recent regular meeting of the Committee. Exchange Stabilization Fund established by sec- The Foreign Currency Subcommittee (the tion 10 of the Gold Reserve Act of 1934 under “Subcommittee”) must direct the Selected agreements in which the Selected Bank purchases Bank in advance to execute the operation foreign currencies from the Exchange Stabilizaif the Subcommittee believes that consul- tion Fund and the Exchange Stabilization Fund tation with the Committee is not feasible repurchases the foreign currencies from the in the time available. Selected Bank at a later date (such purchases and sales also known as warehousing). ii. The Committee authorizes the Subcommittee to direct the Selected Bank in Reciprocal Currency Arrangements, and Standing Dollar and Foreign Currency 1 In general, as specified in Article IV, each member of the IMF Liquidity Swaps undertakes to collaborate with the IMF and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. These obligations include seeking to 5. The Committee authorizes the Selected Bank to direct the member’s economic and financial policies toward the maintain reciprocal currency arrangements estabobjective of fostering orderly economic growth with reasonable price stability. These obligations also include avoiding manipu- lished under the North American Framework lating exchange rates or the international monetary system in Agreement, standing dollar liquidity swap such a way that would impede effective balance of payments arrangements, and standing foreign currency adjustment or to give an unfair competitive advantage over other members. liquidity swap arrangements as provided in this

126 105th Annual Report | 2018 Authorization and to the extent necessary to consistent with principles discussed with carry out any foreign currency directive of the and guidance provided by the Committee. Committee. Other Operations in Foreign Currencies A. For reciprocal currency arrangements all 6. Any other operations in foreign currencies for drawings must be approved in advance by the which governance is not otherwise specified in Committee (or by the Subcommittee, if the this Authorization (such as foreign exchange swap Subcommittee believes that consultation with transactions with private-sector counterparties) the Committee is not feasible in the time must be authorized and directed in advance by available). the Committee. B. For standing dollar liquidity swap arrange- Foreign Currency Holdings ments all drawings must be approved in advance by the Chairman. The Chairman may approve a schedule of potential draw- 7. The Committee authorizes the Selected Bank to ings, and may delegate to the manager, hold foreign currencies for the System Open Mar- System Open Market Account, the authority ket Account in accounts maintained at foreign to approve individual drawings that occur central banks, the Bank for International Settleaccording to the schedule approved by the ments, and such other foreign institutions as Chairman. approved by the Board of Governors under Section 214.5 of Regulation N, to the extent neces- C. For standing foreign currency liquidity swap sary to carry out any foreign currency directive of arrangements all drawings must be approved the Committee. in advance by the Committee (or by the Subcommittee, if the Subcommittee believes that A. The Selected Bank shall manage all holdings consultation with the Committee is not fea- of foreign currencies for the System Open sible in the time available). Market Account: i. Primarily, to ensure sufficient liquidity to D. Operations involving standing dollar liquidenable the Selected Bank to conduct fority swap arrangements and standing foreign eign currency operations as directed by currency liquidity swap arrangements shall the Committee; generally be directed at countering strains in financial markets in the United States or ii. Secondarily, to maintain a high degree of abroad, or reducing the risk that they could safety; emerge, so as to mitigate their effects on ecoiii. Subject to paragraphs 7.A.i and 7.A.ii, to nomic and financial conditions in the United provide the highest rate of return possible States. in each currency; and E. For reciprocal currency arrangements, stand- iv. To achieve such other objectives as may ing dollar liquidity swap arrangements, and be authorized by the Committee. standing foreign currency liquidity swap arrangements: B. The Selected Bank may manage such foreign i. All arrangements are subject to annual currency holdings by: review and approval by the Committee; i. Purchasing and selling obligations of, or ii. Any new arrangements must be approved fully guaranteed as to principal and interby the Committee; and est by, a foreign government or agency thereof (“Permitted Foreign Securities”) iii. Any changes in the terms of existing through outright purchases and sales; arrangements must be approved in advance by the Chairman. The Chairman ii. Purchasing Permitted Foreign Securities shall keep the Committee informed of any under agreements for repurchase of such changes in terms, and the terms shall be Permitted Foreign Securities and selling

Minutes of Federal Open Market Committee Meetings | January 127 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 30, 2018) 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 aggregate amount of such transactions shall not $5 billion. 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:

128 105th Annual Report | 2018 A. Reciprocal currency arrangements with the minor revision was required at this meeting, which following foreign central banks: was to update the reference to the median of FOMC participants’ estimates of the longer-run normal rate Foreign central bank (million M s o a f x i d m o u ll m ar s a o m r o e u q n u t ivalent) of unemployment from 4.8 percent to 4.6 percent. All participants supported the statement with the Bank of Canada 2,000 revision, and the Committee voted unanimously to Bank of Mexico 3,000 approve the updated statement. B. Standing dollar liquidity swap arrangements Statement on Longer-Run Goals and with the following foreign central banks: Monetary Policy Strategy (As Amended Effective January 30, 2018) Bank of Canada Bank of England The Federal Open Market Committee (FOMC) is Bank of Japan firmly committed to fulfilling its statutory mandate European Central Bank from the Congress of promoting maximum employ- Swiss National Bank ment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary C. Standing foreign currency liquidity swap policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking arrangements with the following foreign cenby households and businesses, reduces economic and tral banks: financial uncertainty, increases the effectiveness of Bank of Canada monetary policy, and enhances transparency and Bank of England accountability, which are essential in a democratic Bank of Japan society. European Central Bank Swiss National Bank Inflation, employment, and long-term interest rates fluctuate over time in response to economic and 4. The Committee directs the Selected Bank to hold financial disturbances. Moreover, monetary policy and to invest foreign currencies in the portfolio actions tend to influence economic activity and in accordance with the provisions of paragraph 7 prices with a lag. Therefore, the Committee’s policy of the Authorization. decisions reflect its longer-run goals, its mediumterm outlook, and its assessments of the balance of 5. The Committee directs the Selected Bank to risks, including risks to the financial system that report to the Committee, at each regular meeting could impede the attainment of the Committee’s of the Committee, on transactions undertaken goals. pursuant to paragraphs 1 and 6 of the Authorization. The Selected Bank is also directed to pro- The inflation rate over the longer run is primarily vide quarterly reports to the Committee regard- determined by monetary policy, and hence the Coming the management of the foreign currency mittee has the ability to specify a longer-run goal for holdings pursuant to paragraph 7 of the inflation. The Committee reaffirms its judgment that Authorization. inflation at the rate of 2 percent, as measured by the annual change in the price index for personal con- 6. The Committee directs the Selected Bank to con- sumption expenditures, is most consistent over the duct testing of transactions for the purpose of longer run with the Federal Reserve’s statutory manoperational readiness in accordance with the pro- date. The Committee would be concerned if inflavisions of paragraph 9 of the Authorization. tion were running persistently above or below this objective. Communicating this symmetric inflation By unanimous vote, the Committee revised its goal clearly to the public helps keep longer-term Program for Security of FOMC Information inflation expectations firmly anchored, thereby foswith a set of technical changes to update refer- tering price stability and moderate long-term interest ences to other documents. rates and enhancing the Committee’s ability to promote maximum employment in the face of signifi- In the Committee’s annual reconsideration of the cant economic disturbances. The maximum level of Statement on Longer-Run Goals and Monetary employment is largely determined by nonmonetary Policy Strategy, participants agreed that only a factors that affect the structure and dynamics of the

Minutes of Federal Open Market Committee Meetings | January 129 labor market. These factors may change over time funds rate shifted up over the period but continued to and may not be directly measurable. Consequently, it imply a gradual expected pace of policy firming. The would not be appropriate to specify a fixed goal for deputy manager followed with a discussion of recent employment; rather, the Committee’s policy deci- developments in money markets and FOMC operasions must be informed by assessments of the maxi- tions. Year-end pressures were evident in the market mum level of employment, recognizing that such for foreign exchange basis swaps, but conditions assessments are necessarily uncertain and subject to returned to normal early in 2018. Yields on Treasury revision. The Committee considers a wide range of bills maturing in early March were elevated, reflectindicators in making these assessments. Information ing investors’ concerns about the possibility that a about Committee participants’ estimates of the failure to raise the federal debt ceiling could affect longer-run normal rates of output growth and the timing of principal payments for these securities. unemployment is published four times per year in The Open Market Desk continued to execute reinthe FOMC’s Summary of Economic Projections. vestment operations for Treasury and agency securi- For example, in the most recent projections, the ties in the SOMA in accordance with the procedure median of FOMC participants’ estimates of the specified in the Committee’s directive to the Desk. longer-run normal rate of unemployment was The deputy manager also reported on the volume of 4.6 percent. overnight reverse repurchase agreement operations over the intermeeting period and discussed the In setting monetary policy, the Committee seeks to Desk’s plans for small-value operational tests of varimitigate deviations of inflation from its longer-run ous types of open market operations over the comgoal and deviations of employment from the Com- ing year. mittee’s assessments of its maximum level. These objectives are generally complementary. However, By unanimous vote, the Committee ratified the Open under circumstances in which the Committee judges Market Desk’s domestic transactions over the interthat the objectives are not complementary, it follows meeting period. There were no intervention operaa balanced approach in promoting them, taking into tions in foreign currencies for the System’s account account the magnitude of the deviations and the during the intermeeting period. potentially different time horizons over which employment and inflation are projected to return to Inflation Analysis and Forecasting levels judged consistent with its mandate. The staff presented three briefings on inflation analy- The Committee intends to reaffirm these principles sis and forecasting. The presentations reviewed a and to make adjustments as appropriate at its annual number of commonly used structural and reducedorganizational meeting each January. form models. These included structural models in which the rate of inflation is linked importantly to Developments in Financial Markets and measures of resource slack and a measure of Open Market Operations expected inflation relevant for wage and price setting—so-called Phillips curve specifications—as The manager of the System Open Market Account well as statistical models in which inflation is primar- (SOMA) provided a summary of developments in ily determined by a time-varying inflation trend or domestic and global financial markets over the inter- longer-run inflation expectations. The briefings noted meeting period. Financial conditions eased further several factors beyond those captured in the models over recent weeks with market participants pointing that appeared to have put downward pressure on to increasing appetites for risk and perceptions of prices in recent years. These included structural diminished downside risks as factors buoying market changes in price setting for some items, such as medisentiment. In this environment, yields on safe assets cal care, and the effects of idiosyncratic price shocks, such as U.S. Treasury securities moved up some while such as the unusual drop in prices of wireless telecorporate risk spreads narrowed and equity prices phone services in 2017. The staff found little compelrecorded further significant gains. Breakeven meas- ling evidence for the possible influence of other facures of inflation compensation derived from Treasury tors such as a more competitive pricing environment Inflation Protected Securities (TIPS) moved up but or a change in the markup of prices over unit labor remained low. Survey measures of longer-term infla- costs. Overall, for the set of models presented, the tion expectations showed little change. Judging from prediction errors in recent years were larger than interest rate futures, the expected path of the federal those observed during the 2001–07 period but were

130 105th Annual Report | 2018 consistent with historical norms and, in most models, work remained useful as one of their tools for underdid not appear to be biased. standing inflation dynamics and informing their decisions on monetary policy. Policymakers pointed to a The staff presentations considered two key channels number of possible reasons for the difficulty in estiby which monetary policy influences inflation—the mating the link between resource utilization and response of inflation to changes in resource utiliza- inflation in recent years. These reasons included an tion and the role of inflation expectations, or trend extended period of low and stable inflation in the inflation, in the price-setting process. In part because United States and other advanced economies during inflation was importantly influenced by a number of which the effects of resource utilization on inflation short-lived factors, the effects of current and became harder to identify, the shortcomings of comexpected resource utilization gaps on inflation were monly used measures of resource gaps, the effects of not easy to discern empirically. Estimates of the transitory changes in relative prices, and structural strength of those effects had diminished noticeably in factors that had made business pricing more comrecent years. The briefings highlighted a number of petitive or prices more flexible over time. It was noted other challenges associated with estimating the that research focusing on inflation across U.S. states strength and timing of the linkage between resource or metropolitan areas continued to find a significant utilization and inflation, including the reliability of relationship between price or wage inflation and and changes over time in estimates of the natural rate measures of resource gaps. A couple of participants of unemployment and potential output and the abil- questioned the usefulness of a Phillips curve–type ity to adequately account for supply shocks. In addi- framework for policymaking, citing the limited abiltion, some research suggested that the relationship ity of such frameworks to capture the relationship between resource utilization and inflation may be between economic activity and inflation. nonlinear, with the response of inflation increasing as rates of utilization rise to very high levels. Participants generally agreed that inflation expectations played a fundamental role in understanding and With regard to inflation expectations, two of the forecasting inflation, with stable inflation expectabriefings presented findings that the longer-run trend tions providing an important anchor for the rate of in inflation, absent cyclical disturbances or transitory inflation over the longer run. Participants acknowlfluctuations, had been stable in recent years at a little edged that the causes of movements in short- and below 2 percent. The briefings reported that the aver- longer-run inflation expectations, including the role age forecasting performance of models employing of monetary policy, were imperfectly understood. either statistical estimates of inflation trends or They commented that various proxies for inflation survey-based measures of inflation expectations as expectations—readings from household and business proxies for inflation expectations appeared compa- surveys or from economic forecasters, estimates rable, even though different versions of such models derived from market prices, or estimated trends— could yield very different forecasts at any given point were imperfect measures of actual inflation expectain time. Moreover, although survey-based measures tions, which are unobservable. That said, participants of longer-run inflation expectations tended to move emphasized the critical need for the FOMC to mainin parallel with estimated inflation trends, the empiri- tain a credible longer-run inflation objective and to cal research provided no clear guidance on how to clearly communicate the Committee’s commitment construct a measure of inflation expectations that to achieving that objective. Several participants indiwould be the most useful for inflation forecasting. cated that they viewed the available evidence as sug- The staff noted that although reduced-form models gesting that longer-run inflation expectations in which inflation tends to revert toward longer-run remained well anchored; one cited recent research inflation trends described the data reasonably well, finding that inflation expectations had become better those models offered little guidance to policymakers anchored following the Committee’s adoption of a on how to conduct policy so as to achieve their numerical inflation target. However, a few saw low desired outcome for inflation. levels of inflation over recent years as reflecting, in part, slippage in longer-run inflation expectations Following the staff presentations, participants dis- below the Committee’s 2 percent objective. In that cussed how the inflation frameworks reviewed in the regard, a number of participants noted the imporbriefings informed their views on inflation and mon- tance of continuing to emphasize that the Commitetary policy. Almost all participants who commented tee’s 2 percent inflation objective is symmetric. A agreed that a Phillips curve–type of inflation frame- couple of participants suggested that the Committee

Minutes of Federal Open Market Committee Meetings | January 131 might consider expressing its objective as a range employees rose about 2½ percent over the 12 months rather than a point estimate. A few other participants ending in December. suggested that the FOMC could begin to examine whether adopting a monetary policy framework in Total industrial production increased over the two which the Committee would strive to make up for months ending in December, with broad-based gains past deviations of inflation from target might address in manufacturing, mining, and utilities output. Autothe challenge of achieving and maintaining inflation makers’ schedules indicated that assemblies of light expectations consistent with the Committee’s infla- motor vehicles would likely move up over the coming tion objective, particularly in an environment in months. Broader indicators of manufacturing prowhich the neutral rate of interest appeared likely to duction, such as the new orders indexes from remain low. national and regional manufacturing surveys, pointed to further solid increases in factory output in the Staff Review of the Economic Situation near term. The information reviewed for the January 30–31 Real PCE increased strongly in the fourth quarter. meeting indicated that labor market conditions con- Recent readings on key factors that influence continued to strengthen through December and that real sumer spending—including gains in employment, gross domestic product (GDP) expanded at about a real disposable personal income, and households’ net 2½ percent pace in the fourth quarter of last year. worth—continued to be supportive of further solid Growth of real final domestic purchases by house- growth of real PCE in the near term. Consumer senholds and businesses, generally a good indicator of timent in early January, as measured by the Univerthe economy’s underlying momentum, was solid. sity of Michigan Surveys of Consumers, remained Consumer price inflation, as measured by the upbeat. 12-month percentage change in the price index for personal consumption expenditures (PCE), remained Real residential investment rose briskly in the fourth below 2 percent in December. Survey-based measures quarter after having declined in the previous two of longer-run inflation expectations were little quarters. Both starts and issuance of building perchanged on balance. mits for new single-family homes increased in the fourth quarter as a whole, and starts for multifamily Total nonfarm payroll employment increased solidly units also moved up. Moreover, sales of both new in December, and the national unemployment rate and existing homes rose in the fourth quarter. remained at 4.1 percent. The unemployment rates for Hispanics, for Asians, and for African Americans Real private expenditures for business equipment and were lower than earlier in the year and close to the intellectual property increased at a solid pace in the levels seen just before the most recent recession. The fourth quarter. Recent indicators of business equipnational labor force participation rate held steady in ment spending—such as rising new orders of nonde- December; relative to the declining trend suggested fense capital goods excluding aircraft and upbeat by an aging population, this sideways movement in readings on business sentiment from national and the participation rate represented a further strength- regional surveys—pointed to further gains in equipening in labor market conditions. The participation ment spending in the near term. Firms’ real spending rate for prime-age (defined as ages 25 to 54) men for nonresidential structures rose modestly in the edged up in December, while the rate for prime-age fourth quarter, as an increase in outlays for drilling women declined slightly. The share of workers who and mining structures was largely offset by a decline were employed part time for economic reasons was in expenditures for other business structures. The little changed in December and was close to its pre- number of crude oil and natural gas rigs in operarecession level. The rates of private-sector job open- tion—an indicator of spending for structures in the ings and quits were little changed in November, and drilling and mining sector—continued to edge up the four-week moving average of initial claims for through late January. unemployment insurance benefits continued to be at a low level in mid-January. Recent readings showed Total real government purchases rose modestly in the that gains in hourly labor compensation remained fourth quarter. Increased federal government purmodest. Both the employment cost index for private- chases mostly reflected a rise in defense spending, sector workers and average hourly earnings for all and the gains in purchases by state and local govern-

132 105th Annual Report | 2018 ments were led by an increase in construction spend- nancial corporate bonds over those for comparableing in this sector. maturity Treasury securities narrowed further. In addition, the dollar depreciated broadly amid strong The nominal U.S. international trade deficit widened foreign economic data and monetary policy commufurther in November after widening sharply in Octo- nications by some foreign central banks that investors ber. Exports of goods and services picked up in reportedly viewed as less accommodative than November, while imports, particularly of consumer expected. goods, increased robustly. Available data for goods trade in December suggested that import growth FOMC communications over the intermeeting again outpaced export growth. All told, real net period were generally characterized by market parexports were estimated to be a substantial drag on ticipants as consistent with their expectations for real GDP growth in the fourth quarter. continued gradual removal of monetary policy accommodation. The Committee’s decision to raise Total U.S. consumer prices, as measured by the PCE the target range for the federal funds rate at the price index, increased about 1¾ percent over the December meeting was widely expected, and the 12 months ending in December. Core PCE price probability of an increase in the target range for the inflation, which excludes changes in consumer food federal funds rate occurring at the January meeting, and energy prices, was 1½ percent over that same as implied by quotes on federal funds futures conperiod. The consumer price index (CPI) rose around tracts, remained essentially zero. Over the intermeet- 2 percent over the same period, while core CPI infla- ing period, the futures-implied probability of policy tion was 1¾ percent. Recent readings on survey- firming at the March meeting rose to about 85 perbased measures of longer-run inflation expecta- cent; respondents to the Desk’s Survey of Primary tions—including those from the Michigan survey and Dealers and Survey of Market Participants assigned, the Desk’s Survey of Primary Dealers and Survey of on average, similarly high odds to a rate increase at Market Participants—were little changed on balance. the March meeting. Levels of the federal funds rate at the end of 2018 and 2019 implied by overnight Incoming data suggested that economic activity index swap rates moved up moderately. abroad continued to expand at a solid pace and that this expansion was broad based across countries. In The nominal Treasury yield curve shifted up over the the advanced foreign economies (AFEs), real GDP in intermeeting period amid an improved outlook for the euro area and the United Kingdom expanded at a domestic and foreign economic growth. Yields on moderate pace in the fourth quarter. In the emerging both 2- and 10-year Treasury securities moved up market economies (EMEs), Mexico’s economy about 30 basis points. Measures of inflation compenrebounded after being held back by natural disasters sation based on TIPS fell in response to the soft readin the third quarter. Economic growth remained solid ing on core inflation in the November CPI release but in China but cooled off a bit in some emerging Asian subsequently moved up against the backdrop of an economies after a very strong third-quarter perfor- improving global growth outlook, higher commodity mance. Inflation in both AFEs and EMEs picked up prices, depreciation of the dollar, and the strongersignificantly in the fourth quarter, largely reflecting a than-expected reading on core inflation in the boost from rising oil prices. Inflation excluding food December CPI release. On net, inflation compensaand energy prices remained well below central bank tion moved up at both the 5-year and the 5-to-10targets in several economies, including the euro area year horizons, and both measures returned to levels and Japan. seen in early 2017 before the string of generally weaker-than-expected inflation readings. Staff Review of the Financial Situation Broad equity price indexes rose substantially over the Domestic financial market conditions eased consider- intermeeting period, with investors pointing to a ably further over the intermeeting period. A strength- stronger global economic outlook and the supportive ening outlook for economic growth in the United effect of the recently enacted tax legislation on risk States and abroad, along with recently enacted tax sentiment. The VIX, an index of option-implied legislation, appeared to boost investor sentiment. volatility for one-month returns on the S&P 500 U.S. equity prices, Treasury yields, and market-based index, increased but remained low by historical stanmeasures of inflation compensation rose, and spreads dards. Spreads of both investment- and speculativeof yields on investment- and speculative-grade nonfi- grade corporate bond yields over comparable-

Minutes of Federal Open Market Committee Meetings | January 133 maturity Treasury yields declined slightly and narrowing loan spreads for large and middle-market remained well below their historical averages. firms and attributed this easing to more aggressive competition from other bank or nonbank lenders. The FOMC’s decision at its December meeting to Net debt financing by investment-grade nonfinancial raise the target range for the federal funds rate was corporations turned negative in December, but the transmitted smoothly to money market rates. The weakness appeared to reflect a softening in the effective federal funds rate held steady at a level near demand for credit, possibly related to the anticipathe middle of the target range except at year-end. tion of higher after-tax cash flows and repatriation of While borrowing costs moved up briefly in offshore foreign earnings. In contrast, gross issuance of dollar funding markets over year-end, conditions in speculative-grade bonds and institutional leveraged money markets were reported to be orderly. In line loans remained strong. Credit market conditions for with recent year-end experiences, rates and volumes small businesses remained relatively accommodative in the federal funds and Eurodollar markets declined, despite sluggish credit growth among these firms. while in secured markets, rates on Treasury repur- Credit conditions in municipal bond markets also chase agreements increased. After year-end, pressures remained accommodative. in money markets abated quickly and rates and volumes returned to recent ranges. In commercial real estate (CRE) markets, growth of loans held by banks slowed further in the fourth The broad nominal dollar index declined nearly quarter, though CRE loans held by small banks and 4 percent relative to its value at the time of the some types of CRE loans held by large banks—con- December FOMC meeting; the decline was most pro- struction and land development loans in particular— nounced against AFE currencies, but the dollar expanded at a more robust pace. Financing condidepreciated notably against most EME currencies as tions in the commercial mortgage-backed securities well. EME equity prices registered substantial gains, (CMBS) market remained accommodative as issuin part supported by a significant rise in commodity ance continued at a robust pace and spreads on prices; emerging market bond spreads narrowed CMBS remained near their lowest levels since the moderately, and flows into EME equity and bond financial crisis. Credit conditions in the residential funds strengthened substantially. mortgage market remained accommodative for most borrowers, though credit standards remained tight Market-based measures of policy expectations and for borrowers with low credit scores or hard-tolonger-term sovereign yields moved up in most document incomes. Mortgage rates increased in tan- AFEs. The Bank of Canada raised its policy rate at dem with rates on longer-term Treasury securities but its January meeting, largely in response to better- remained quite low by historical standards. than-expected economic data. The Bank of England, the Bank of Japan, and the European Central Bank Conditions in consumer credit markets remained (ECB) left their monetary policy stances unchanged, largely supportive of economic activity. Consumer as expected. Nonetheless, the ECB president’s opti- credit increased notably in November, exceeding the mistic assessment of the euro-area economy at the more moderate volume of borrowing observed earlier press conference following the January meeting was in the year. Revolving credit expanded in November, interpreted by market participants as a signal that while nonrevolving credit grew robustly, mainly monetary policy would be less accommodative than driven by expansion in student and other consumer expected. Following those remarks, the euro appreci- loans. In contrast, growth of auto lending slowed in ated notably against the dollar and core euro-area recent months, consistent with the weakening sovereign yields moved higher. That said, market- demand for such loans in the fourth quarter as based measures of policy expectations continued to reported in the January SLOOS. For subprime borindicate that investors anticipate a gradual pace of rowers, conditions remained tight, particularly in the monetary policy normalization in the euro area. market for credit cards and auto loans. Financing conditions for nonfinancial businesses and The staff provided its latest report on the potential households remained generally accommodative over risks to financial stability; the report continued to the intermeeting period and continued to be support- characterize the financial vulnerabilities of the U.S. ive of economic activity. Respondents to the January financial system as moderate on balance. This overall Senior Loan Officer Opinion Survey on Bank Lend- assessment incorporated the staff’s judgment that ing Practices (SLOOS) reported easing standards and vulnerabilities associated with asset valuation pres-

134 105th Annual Report | 2018 sures continued to be elevated; asset valuation pres- tainty about the macroeconomic outlook remained sures apparently reflected, in part, a broad-based subdued; on the other hand, considerable uncertainty appetite for risk among investors. The staff judged remained about a number of federal government that vulnerabilities from leverage in the nonfinancial policies relevant for the economic outlook. The staff sector appeared to remain moderate, while vulner- saw the risks to the forecasts for real GDP growth abilities stemming from financial-sector leverage and and the unemployment rate as balanced. The risks to from maturity and liquidity transformation contin- the projection for inflation also were seen as balued to be viewed as low. anced. Downside risks included the possibilities that longer-term inflation expectations may have edged Staff Economic Outlook lower or that the run of soft core inflation readings this year 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 January FOMC meeting was stronger than essentially counterbalanced by the upside risk that the staff forecast at the time of the December meet- inflation could increase more than expected in an ing. Real GDP was estimated to have risen in the economy that was projected to move further above its fourth quarter of last year by somewhat more than potential. the staff had previously expected, as gains in both household and business spending were larger than Participants’ Views on Current Conditions anticipated. Beyond 2017, the forecast for real GDP and the Economic Outlook growth was revised up, reflecting a reassessment of the recently enacted tax cuts, along with higher pro- In their discussion of the economic situation and the jected paths for equity prices and foreign economic outlook, meeting participants agreed that informagrowth and a lower assumed path for the foreign tion received since the FOMC met in December indiexchange value of the dollar. Real GDP was pro- cated that the labor market continued to strengthen jected to increase at a somewhat faster pace than and that economic activity expanded at a solid rate. potential output through 2020; the staff continued to Gains in employment, household spending, and busiassume that the recently enacted tax cuts would ness fixed investment were solid, and the unemployboost real GDP growth moderately over the medium ment rate stayed low. On a 12-month basis, both term. The unemployment rate was projected to overall inflation and inflation for items other than decline further over the next few years and to con- food and energy continued to run below 2 percent. tinue to run well below the staff’s estimate of its Market-based measures of inflation compensation longer-run natural rate over this period. increased in recent months but remained low; surveybased measures of longer-term inflation expectations Estimates of total and core PCE price inflation for were little changed, on balance. 2017 were in line with the staff’s previous forecast. The projection for inflation over the medium term Participants generally saw incoming information on was revised up slightly, primarily reflecting tighter economic activity and the labor market as consistent resource utilization in the January forecast. Total with continued above-trend economic growth and a PCE price inflation in 2018 was projected to be further strengthening in labor market conditions, somewhat faster than in 2017 despite a slower pro- with the recent solid gains in household and business jected pace of increases in consumer energy prices; spending indicating substantial underlying economic core PCE prices were forecast to rise notably faster in momentum. They pointed to accommodative finan- 2018, importantly reflecting both the expected wan- cial conditions, the recently enacted tax legislation, ing of transitory factors that held down 12-month and an improved global economic outlook as factors measures of inflation in 2017 as well as the projected likely to support economic growth over coming quarfurther tightening in resource utilization. The staff ters. Participants expected that with further gradual projected that core inflation would reach 2 percent in adjustments in the stance of monetary policy, eco- 2019 and that total inflation would be at the Com- nomic activity would expand at a moderate pace and mittee’s 2 percent objective in 2020. labor market conditions would remain strong. Nearterm risks to the economic outlook appeared roughly The staff viewed the uncertainty around its projec- balanced. Inflation on a 12-month basis was expected tions for real GDP growth, the unemployment rate, to move up this year and to stabilize around the and inflation as similar to the average of the past Committee’s 2 percent objective over the medium 20 years. On the one hand, many indicators of uncer- term. However, participants judged that it was

Minutes of Federal Open Market Committee Meetings | January 135 important to continue to monitor inflation develop- involuntary part-time employment—had returned to ments closely. their pre-recession levels. A few participants judged that while the labor market was close to full employ- Participants expected the recent solid growth in con- ment, some margins of slack remained; these particisumer spending to continue, supported by further pants pointed to the employment-to-population ratio gains in employment and income, increased house- or the labor force participation rate for prime-age hold wealth resulting from higher asset prices, and workers, which remained below pre-recession levels, high levels of consumer confidence. It was noted that as well as the absence to date of clear signs of a spending on durable goods to replace those damaged pickup in aggregate wage growth. during the hurricanes in September may have provided a temporary boost to consumer spending. In During their discussion of labor market conditions, connection with solid growth in consumer spending, participants expressed a range of views about recent a couple of participants noted that the household wage developments. While some participants heard saving rate had declined to its lowest level since 2005, more reports of wage pressures from their business likely driven by buoyant consumer sentiment or contacts over the intermeeting period, participants expectations that the rise in household wealth would generally noted few signs of a broad-based pickup in be sustained. wage growth in available data. With regard to how firms might use part of their tax savings to boost Participants characterized their business contacts as compensation, a few participants suggested that such generally upbeat about the economy; their contacts a boost could be in the form of onetime bonuses or cited the recent tax cuts and notable improvements in variable pay rather than a permanent increase in the global economic outlook as positive factors. wage structures. It was noted that the pace of wage Manufacturers in a number of Districts had gains might not increase appreciably if productivity responded to increased orders by boosting produc- growth remains low. That said, a number of particition. Against a backdrop of higher energy prices and pants judged that the continued tightening in labor increased global demand for crude oil, a couple of markets was likely to translate into faster wage participants revised up their forecasts for energy pro- increases at some point. duction in their respective Districts. Businesses in a number of Districts reported plans to further In their discussion of inflation developments, many increase investment in coming quarters in order to participants noted that inflation data in recent expand capacity. Even so, several participants months had generally pointed to a gradual rise in expressed considerable uncertainty about the degree inflation, as the 12-month core PCE price inflation to which changes to corporate taxes would support rose to 1.5 percent in December, up 0.2 percentage business investment and capacity expansion; accord- point from the low recorded in the summer. Meaning to these participants, firms may be only just while, total PCE price inflation was 1.7 percent over beginning to determine how they might allocate their the same 12-month period. Participants anticipated tax savings among investment, worker compensation, that inflation would continue to gradually rise as mergers and acquisitions, returns to shareholders, or resource utilization tightened further and as wage other uses. pressures became more apparent; several expected that declines in the foreign exchange value of the dol- The labor market had strengthened further in recent lar in recent months would also likely help return months, as indicated by continued solid payroll gains, inflation to 2 percent over the medium term. Business a small increase in average hours worked, and a labor contacts in a few Districts reported that they had force participation rate that had held steady despite begun to have some more ability to raise prices to the longer-run declining trend implied by an aging cover higher input costs. That said, a few participants population. Many participants reported that labor posited that the recently enacted corporate tax cuts market conditions were tight in their Districts, evi- might lead firms to cut prices in order to remain denced by low unemployment rates, difficulties for competitive or to gain market share, which could employers in filling open positions or retaining work- result in a transitory drag on inflation. ers, or some signs of upward pressure on wages. The unemployment rate, at 4.1 percent, had remained With regard to inflation expectations, available readnear the lowest level seen in the past 20 years. It was ings from surveys had been steady and TIPS-based noted that other labor market indicators—such as measures of inflation compensation had moved up, the U-6 measure of unemployment or the share of although they remained low. Many participants

136 105th Annual Report | 2018 thought that inflation expectations remained well pace over the medium term, they anticipated that the anchored and would support the gradual return of rate of economic growth in 2018 would exceed their inflation to the Committee’s 2 percent objective over estimates of its sustainable longer-run pace and that the medium term. However, a few other participants labor market conditions would strengthen further. A pointed to the record of inflation consistently run- number of participants indicated that they had ning below the Committee’s 2 percent objective over marked up their forecasts for economic growth in the recent years and expressed the concern that longer- near term relative to those made for the December run inflation expectations may have slipped below meeting in light of the strength of recent data on ecolevels consistent with that objective. nomic activity in the United States and abroad, continued accommodative financial conditions, and Many participants noted that financial conditions information suggesting that the effects of recently had eased significantly over the intermeeting period; enacted tax changes—while still uncertain—might be these participants generally viewed the economic somewhat larger in the near term than previously effects of the decline in the dollar and the rise in thought. Several others suggested that the upside equity prices as more than offsetting the effects of risks to the near-term outlook for economic activity the increase in nominal Treasury yields. One partici- may have increased. A majority of participants noted pant reported that financial market contacts did not that a stronger outlook for economic growth raised see the relatively flat slope of the yield curve as sig- the likelihood that further gradual policy firming naling an increased risk of recession. A few others would be appropriate. judged that it would be important to continue to monitor the effects of policy firming on the slope of Almost all participants continued to anticipate that the yield curve, noting the strong association between inflation would move up to the Committee’s 2 perpast yield curve inversions and recessions. cent objective over the medium term as economic growth remained above trend and the labor market Regulatory actions and improved risk management stayed strong; several commented that recent develin recent years had put the financial system in a bet- opments had increased their confidence in the outter position to withstand adverse shocks, such as a look for further progress toward the Committee’s substantial decline in asset prices, than in the past. 2 percent inflation objective. A couple noted that a However, amid elevated asset valuations and an step-up in the pace of economic growth could tighten increased use of debt by nonfinancial corporations, labor market conditions even more than they curseveral participants cautioned that imbalances in rently anticipated, posing risks to inflation and finanfinancial markets may begin to emerge as the cial stability associated with substantially overshooteconomy continued to operate above potential. In ing full employment. However, some participants saw this environment, increased use of leverage by non- an appreciable risk that inflation would continue to bank financial institutions might be difficult to detect fall short of the Committee’s objective. These particiin a timely manner. It was also noted that the Com- pants saw little solid evidence that the strength of mittee should regularly reassess risks to the financial economic activity and the labor market was showing system and their implications for the economic out- through to significant wage or inflation pressures. look in light of the potential for changes in regula- They judged that the Committee could afford to be tory policies over time. patient in deciding whether to increase the target range for the federal funds rate in order to support In their consideration of monetary policy, partici- further strengthening of the labor market and allow pants discussed the implications of recent economic participants to assess whether incoming information and financial developments for the outlook for eco- on inflation showed that it was solidly on a track nomic growth, labor market conditions, and inflation toward the Committee’s objective. and, in turn, for the appropriate path of the federal funds rate. Participants agreed that a gradual Some participants also commented on the likely evoapproach to raising the target range for the federal lution of the neutral federal funds rate. By most estifunds rate remained appropriate and reaffirmed that mates, the neutral level of the federal funds rate had adjustments to the policy path would depend on their been very low in recent years, but it was expected to assessments of how the economic outlook and risks rise slowly over time toward its longer-run level. to the outlook were evolving relative to the Commit- However, the outlook for the neutral rate was uncertee’s policy objectives. While participants continued tain and would depend on the interplay of a number to expect economic activity to expand at a moderate of forces. For example, the neutral rate, which

Minutes of Federal Open Market Committee Meetings | January 137 appeared to have fallen sharply during the Global inflation, measures of inflation expectations, or wage Financial Crisis when financial headwinds had growth. Several members commented that they saw restrained demand, might move up more than antici- both upside and downside risks to the inflation outpated as the global economy strengthened. Alterna- look, and members agreed to continue to monitor tively, the longer-run level of the neutral rate might inflation developments closely. remain low in the absence of fundamental shifts in trends in productivity, demographics, or the demand After assessing current conditions and the outlook for safe assets. for economic activity, the labor market, and inflation, members voted to maintain the target range for the Committee Policy Action federal funds rate at 1¼ to 1½ percent. They indicated that the stance of monetary policy remained In their discussion of monetary policy for the period accommodative, thereby supporting strong labor ahead, members judged that information received market conditions and a sustained return to 2 persince the Committee met in December indicated that cent inflation. the labor market had continued to strengthen and that economic activity had been rising at a solid rate. Members agreed that the timing and size of future Gains in employment, household spending, and busi- adjustments to the target range for the federal funds ness fixed investment had been solid, and the unem- rate would depend on their assessments of realized ployment rate had stayed low. On a 12-month basis, and expected economic conditions relative to the both overall inflation and inflation for items other Committee’s objectives of maximum employment than food and energy had continued to run below and 2 percent inflation. They reiterated that this 2 percent. Market-based measures of inflation com- assessment would take into account a wide range of pensation had increased in recent months but information, including measures of labor market remained low; survey-based measures of longer-term conditions, indicators of inflation pressures and inflation expectations were little changed, on balance. inflation expectations, and readings on financial and international developments. Members also agreed to Members expected that, with further gradual adjust- carefully monitor actual and expected inflation develments in the stance of monetary policy, economic opments relative to the Committee’s symmetric inflaactivity would expand at a moderate pace and labor tion goal. Members expected that economic condimarket conditions would remain strong. In their dis- tions would evolve in a manner that would warrant cussion of the economic outlook, most members further gradual increases in the federal funds rate. viewed the recent data bearing on real economic They judged that a gradual approach to raising the activity as suggesting a modestly stronger near-term target range would sustain the economic expansion outlook than they had anticipated at their meeting in and balance the risks to the outlook for inflation and December. In addition, financial conditions had unemployment. Members agreed that the strengthenremained accommodative, and the details of the tax ing in the near-term economic outlook increased the legislation suggested that its effects on consumer and likelihood that a gradual upward trajectory of the business spending—while still uncertain—might be a federal funds rate would be appropriate. They therebit greater in the near term than they had previously fore agreed to update the characterization of their thought. Although several saw increased upside risks expectation for the evolution of the federal funds rate to the near-term outlook for economic activity, mem- in the postmeeting statement to point to “further bers generally continued to judge the risks to that gradual increases” while maintaining the target range outlook as remaining roughly balanced. at the current meeting. Members continued to anticipate that the federal funds rate would likely remain, Most members noted that recent information on for some time, below levels that were expected to preinflation along with prospects for a continued solid vail in the longer run. Nonetheless, they again stated pace of economic activity provided support for the that the actual path for the federal funds rate would view that inflation on a 12-month basis would likely depend on the economic outlook as informed by the move up in 2018 and stabilize around the Commit- incoming data. tee’s 2 percent objective over the medium term. However, a couple of members expressed concern about At the conclusion of the discussion, the Committee the outlook for inflation, seeing little evidence of a voted to authorize and direct the Federal Reserve meaningful improvement in the underlying trend in Bank of New York, until it was instructed otherwise,

138 105th Annual Report | 2018 to execute transactions in the SOMA in accordance of longer-term inflation expectations are little with the following domestic policy directive, to be changed, on balance. released at 2:00 p.m.: Consistent with its statutory mandate, the Com- “Effective February 1, 2018, the Federal Open mittee seeks to foster maximum employment Market Committee directs the Desk to under- and price stability. The Committee expects that, take open market operations as necessary to with further gradual adjustments in the stance of maintain the federal funds rate in a target range monetary policy, economic activity will expand of 1¼ to 1½ percent, including overnight reverse at a moderate pace and labor market conditions repurchase operations (and reverse repurchase will remain strong. Inflation on a 12-month operations with maturities of more than one day basis is expected to move up this year and to stawhen necessary to accommodate weekend, holi- bilize around the Committee’s 2 percent objecday, or similar trading conventions) at an offer- tive over the medium term. Near-term risks to ing rate of 1.25 percent, in amounts limited only the economic outlook appear roughly balanced, by the value of Treasury securities held outright but the Committee is monitoring inflation develin the System Open Market Account that are opments closely. available for such operations and by a percounterparty limit of $30 billion per day. In view of realized and expected labor market conditions and inflation, the Committee decided The Committee directs the Desk to continue to maintain the target range for the federal funds rolling over at auction the amount of principal rate at 1¼ to 1½ percent. The stance of monpayments from the Federal Reserve’s holdings of etary policy remains accommodative, thereby Treasury securities maturing during each calensupporting strong labor market conditions and a dar month that exceeds $12 billion, and to reinsustained return to 2 percent inflation. vest in agency mortgage-backed securities the amount of principal payments from the Federal In determining the timing and size of future Reserve’s holdings of agency debt and agency adjustments to the target range for the federal mortgage-backed securities received during each funds rate, the Committee will assess realized calendar month that exceeds $8 billion. Small and expected economic conditions relative to its deviations from these amounts for operational objectives of maximum employment and 2 perreasons are acceptable. cent inflation. This assessment will take into account a wide range of information, including The Committee also directs the Desk to engage measures of labor market conditions, indicators in dollar roll and coupon swap transactions as of inflation pressures and inflation expectations, necessary to facilitate settlement of the Federal and readings on financial and international Reserve’s agency mortgage-backed securities developments. The Committee will carefully transactions.” monitor actual and expected inflation developments relative to its symmetric inflation goal. The vote also encompassed approval of the statement The Committee expects that economic condibelow to be released at 2:00 p.m.: tions will evolve in a manner that will warrant further gradual increases in the federal funds “Information received since the Federal Open rate; the federal funds rate is likely to remain, for Market Committee met in December indicates some time, below levels that are expected to prethat the labor market has continued to vail in the longer run. However, the actual path strengthen and that economic activity has been of the federal funds rate will depend on the ecorising at a solid rate. Gains in employment, nomic outlook as informed by incoming data.” household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both Voting for this action: Janet L. Yellen, William C. overall inflation and inflation for items other Dudley, Thomas I. Barkin, Raphael W. Bostic, Lael than food and energy have continued to run Brainard, Loretta J. Mester, Jerome H. Powell, Ranbelow 2 percent. Market-based measures of dal K. Quarles, and John C. William inflation compensation have increased in recent months but remain low; survey-based measures Voting against this action: None.

Minutes of Federal Open Market Committee Meetings | January 139 Consistent with the Committee’s decision to leave the 2018. The meeting adjourned at 10:50 a.m. on Janutarget range for the federal funds rate unchanged, the ary 31, 2018. Board of Governors voted unanimously to leave the interest rates on required and excess reserve balances unchanged at 1½ percent and voted unanimously to Notation Vote approve establishment of the primary credit rate (discount rate) at the existing level of 2 percent.5 By notation vote completed on January 2, 2018, the Committee unanimously approved the minutes of the It was agreed that the next meeting of the Committee Committee meeting held on December 12–13, 2017. would be held on Tuesday–Wednesday, March 20–21, James A. Clouse 5 The second vote of the Board also encompassed approval of the Secretary establishment of the interest rates for secondary and seasonal credit under the existing formulas for computing such rates.

140 105th Annual Report | 2018 Meeting Held on March 20–21, 2018 David W. Wilcox Economist A joint meeting of the Federal Open Market David Altig, Kartik B. Athreya, Committee and the Board of Governors was held in Thomas A. Connors, Trevor A. Reeve, the offices of the Board of Governors of the Federal Ellis W. Tallman, and William Wascher Reserve System in Washington, D.C., on Tuesday, Associate Economists March 20, 2018, at 1:00 p.m. and continued on Wednesday, March 21, 2018, at 9:00 a.m.1 Simon Potter Manager, System Open Market Account Present Lorie K. Logan Deputy Manager, System Open Market Account Jerome H. Powell Chairman Ann E. Misback Secretary, Office of the Secretary, William C. Dudley Board of Governors Vice Chairman Matthew J. Eichner3 Thomas I. Barkin Director, Division of Reserve Bank Operations and Raphael W. Bostic Payment Systems, Board of Governors Lael Brainard Michael S. Gibson Director, Division of Supervision and Regulation, Loretta J. Mester Board of Governors Randal K. Quarles Andreas Lehnert John C. Williams Director, Division of Financial Stability, Board of Governors James Bullard, Charles L. Evans, Esther L. George, Eric Rosengren, and Michael Strine2 Rochelle M. Edge Alternate Members of the Federal Open Market Deputy Director, Division of Monetary Affairs, Committee Board of Governors Patrick Harker, Robert S. Kaplan, and Neel Kashkari Michael T. Kiley Presidents of the Federal Reserve Banks of Deputy Director, Division of Financial Stability, Philadelphia, Dallas, and Minneapolis, respectively Board of Governors James A. Clouse Antulio N. Bomfim Secretary Special Adviser to the Chairman, Office of Board Members, Board of Governors Matthew M. Luecke Deputy Secretary Joseph W. Gruber and John M. Roberts2 Special Advisers to the Board, Office of Board Members, David W. Skidmore Board of Governors Assistant Secretary Linda Robertson Michelle A. Smith Assistant to the Board, Office of Board Members, Assistant Secretary Board of Governors Mark E. Van Der Weide Shaghil Ahmed, Brian M. Doyle, General Counsel and Christopher J. Erceg Michael Held Senior Associate Directors, Division of International Deputy General Counsel Finance, Board of Governors Thomas Laubach Eric M. Engen and Diana Hancock Economist Senior Associate Directors, Division of Research and Statistics, 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 developments in financial 2 Attended Tuesday session only. markets and open market operations.

Minutes of Federal Open Market Committee Meetings | March 141 Ellen E. Meade, Stephen A. Meyer, Developments in Financial Markets and Edward Nelson, and Robert J. Tetlow Open Market Operations Senior Advisers, Division of Monetary Affairs, Board of Governors The deputy manager of the System Open Market Account (SOMA) provided a summary of develop- Stacey Tevlin ments in domestic and global financial markets over Associate Director, Division of Research the intermeeting period; she also reported on open and Statistics, Board of Governors market operations and related issues. Financial mar- Glenn Follette and Karen M. Pence2 kets experienced a notable bout of volatility early in Assistant Directors, Division of Research the intermeeting period; volatility was particularly and Statistics, Board of Governors pronounced in equity markets. Market participants pointed to incoming economic data released in early Eric C. Engstrom February—particularly data on average hourly earn- Adviser, Division of Monetary Affairs, ings—as raising concerns about the prospects for and higher inflation and higher interest rates. These con- Adviser, Division of Research and Statistics, cerns reportedly contributed to a steep decline in Board of Governors equity prices and an associated rise in measures of Penelope A. Beattie2 volatility. Some reports suggested that the increase in Assistant to the Secretary, Office of the Secretary, volatility was amplified by the unwinding of trading Board of Governors positions based on various types of volatility trading Etienne Gagnon strategies. Measures of equity market volatility Section Chief, Division of Monetary Affairs, declined over subsequent weeks but remained above Board of Governors levels that prevailed earlier in the year, and stock prices finished lower, on net, over the intermeeting David H. Small period. Interest rates rose modestly over the period. Project Manager, Division of Monetary Affairs, Respondents to the Open Market Desk’s surveys of Board of Governors primary dealers and market participants suggested Kurt F. Lewis that revisions in investors’ views regarding the fiscal Principal Economist, Division of Monetary Affairs, outlook were an important factor boosting yields Board of Governors and contributing to a slightly steeper expected trajectory of the federal funds rate. The deputy manager Anna Orlik noted that a rapid and sizable increase in Treasury Senior Economist, Division of Monetary Affairs, bill issuance over recent weeks had put upward pres- Board of Governors sure on money market yields over the period. Three- Valerie Hinojosa month Treasury bill yields moved up significantly Information Manager, Division of Monetary Affairs, and those increases passed through to rates on other Board of Governors short-term instruments such as three-month Eurodollar deposits and commercial paper. The spread of Meredith Black market rates on overnight repurchase agreements First Vice President, Federal Reserve Bank of Dallas over the offering rate at the Federal Reserve’s over- Michael Dotsey, Glenn D. Rudebusch, night reverse repurchase (ON RRP) facility widened, and Daniel G. Sullivan and take-up at the facility fell to quite low levels as a Executive Vice Presidents, Federal Reserve Banks of result. Rates on overnight federal funds and Eurodol- Philadelphia, San Francisco, and Chicago, lar transactions edged higher relative to the interest respectively rate on excess reserves. The Desk continued to execute the FOMC’s balance sheet normalization Marc Giannoni, Luke Woodward, plan initiated in October of last year. and Mark L. J. Wright Senior Vice Presidents, Federal Reserve Banks of By unanimous vote, the Committee ratified the Open Dallas, Kansas City, and Minneapolis, respectively Market Desk’s domestic transactions over the inter- David Andolfatto, Jonathan P. McCarthy, meeting period. There were no intervention opera- Giovanni Olivei, and Jonathan L. Willis tions in foreign currencies for the System’s account Vice Presidents, Federal Reserve Banks of St. Louis, during the intermeeting period. New York, Boston, and Kansas City, respectively

142 105th Annual Report | 2018 Staff Review of the Economic Situation declined slightly. However, household spending was probably held back somewhat in February because of The information reviewed for the March 20–21 meet- a delay in many federal tax refunds, and the subseing indicated that labor market conditions continued quent delivery of those refunds would likely contribto strengthen through February and suggested that ute to an increase in consumer spending in March. real gross domestic product (GDP) was rising at a Moreover, the lower tax withholding resulting from moderate pace in the first quarter. Consumer price the tax cuts enacted late last year, which was begininflation, as measured by the 12-month percentage ning to show through in consumers’ paychecks, change in the price index for personal consumption would likely provide some impetus to spending in expenditures (PCE), remained below 2 percent in coming months. More broadly, recent readings on January. Survey-based measures of longer-run infla- key factors that influence consumer spending— tion expectations were little changed on balance. including gains in employment and real disposable personal income, along with households’ elevated net Gains in total nonfarm payroll employment were worth—continued to be supportive of solid real PCE strong over the two months ending in February. The growth in the near term. In addition, consumer sentilabor force participation rate held steady in January ment in early March, as measured by the University and then stepped up markedly in February, with the of Michigan Surveys of Consumers, was at its highparticipation rates for prime-age (defined as ages est level since 2004. 25 to 54) women and men moving up on net. The national unemployment rate remained at 4.1 percent. Real residential investment looked to be slowing in Similarly, the unemployment rates for African the first quarter after rising briskly in the fourth Americans, Asians, and Hispanics were roughly flat, quarter. Starts of new single-family homes increased on balance, in recent months. The share of workers in January and February, although building permit employed part time for economic reasons edged up issuance moved down somewhat. Starts of multifambut remained close to its pre-recession levels. The ily units jumped in January but fell back in February. rates of private-sector job openings and quits Sales of both new and existing homes declined in increased slightly, on net, over the two months end- January. ing in January, and the four-week moving average of initial claims for unemployment insurance benefits Growth in real private expenditures for business continued to be low in early March. Recent readings equipment and intellectual property appeared to be showed that increases in labor compensation moderating in the first quarter after increasing at a remained modest. Compensation per hour in the solid pace in the preceding quarter. Nominal shipnonfarm business sector advanced 2¾ percent over ments of nondefense capital goods excluding aircraft the four quarters of last year, and average hourly edged down in January. However, recent forwardearnings for all employees rose 2½ percent over the looking indicators of business equipment spending— 12 months ending in February. such as the backlog of unfilled capital goods orders, along with upbeat readings on business sentiment Total industrial production expanded, on net, in from national and regional surveys—pointed to fur- January and February, with gains in both manufac- ther solid gains in equipment spending in the near turing and mining. Automakers’ schedules indicated term. Firms’ nominal spending for nonresidential that assemblies of light motor vehicles would likely structures outside of the drilling and mining sector edge down in coming months. However, broader declined in January. In contrast, the number of crude indicators of manufacturing production, such as the oil and natural gas rigs in operation—an indicator of new orders indexes from national and regional manu- business spending for structures in the drilling and facturing surveys, pointed to further solid increases mining sector—continued to move up through in factory output in the near term. mid-March. Consumer expenditures appeared likely to rise at a Total real government purchases seemed to be flatmodest pace in the first quarter following a strong tening out, on balance, in the first quarter after rising gain in the preceding quarter. Real PCE edged down solidly in the fourth quarter. Nominal defense spendin January, and the components of the nominal retail ing in January and February was consistent with a sales data used by the Bureau of Economic Analysis decline in real federal purchases. In contrast, real purto construct its estimate of PCE rose somewhat in chases by state and local governments looked to be February while the pace of light motor vehicle sales rising, as the payrolls of these governments increased

Minutes of Federal Open Market Committee Meetings | March 143 in January and February and nominal state and local Those concerns appeared to induce a substantial construction spending advanced somewhat in decline in equity prices. The decline may have been January. exacerbated by broader concerns about the level of stock market valuations. On February 5, the The change in net exports was a significant drag on VIX—an index of option-implied volatility for onereal GDP growth in the fourth quarter of 2017, as month returns on the S&P 500 index—rose to its imports grew rapidly. The nominal U.S. international highest level since 2015, reportedly driven in part by trade deficit widened in January; exports declined, the unwinding of investment strategies designed to led by lower exports of capital goods and industrial profit from low volatility. Subsequently, equity prices supplies, while imports were about flat. The slowing recovered about half of their decline, and the VIX of real import growth following the rapid increase in partially retraced its earlier increase. the fourth quarter suggested that the drag on real GDP growth from net exports would lessen in the Monetary policy communications over the intermeetfirst quarter. ing period—including the January FOMC statement, the minutes of the January FOMC meeting, and the Total U.S. consumer prices, as measured by the PCE Chairman’s semiannual testimony to the Congress— price index, increased 1¾ percent over the 12 months were generally viewed by market participants as sigending in January. Core PCE price inflation, which naling a somewhat stronger economic outlook and excludes changes in consumer food and energy prices, thus reinforced expectations for further gradual was 1½ percent over that same period. The consumer increases in the target range for the federal funds rate. price index (CPI) rose 2¼ percent over the 12 months The probability of the next rate hike occurring at the ending in February, while core CPI inflation was March FOMC meeting, as implied by quotes on fed- 1¾ percent. Recent readings on survey-based meas- eral funds futures contracts, increased to near cerures of longer-run inflation expectations—including tainty. Conditional on a March rate hike, the marketthose from the Michigan survey, the Survey of Pro- implied probability of another increase in the federal fessional Forecasters, and the Desk’s Survey of Pri- funds rate target range at the June FOMC meeting mary Dealers and Survey of Market Participants— edged up to just above 70 percent. Expectations for were little changed on balance. the federal funds rate at the end of 2019 and 2020, derived from overnight index swap (OIS) quotes, Foreign economic activity expanded at a moderate moved up somewhat since late January. pace in the fourth quarter. Real GDP growth picked up in Mexico but slowed a bit in some advanced for- On net, the nominal Treasury yield curve shifted up eign economies (AFEs) and in emerging Asia. Recent and flattened a bit. Monetary policy communicaindicators pointed to solid economic growth abroad tions, higher-than-expected domestic price data, and in the first quarter of this year. Inflation abroad con- expectations for increases in the supply of Treasury tinued to be boosted by the pass-through to con- securities following the federal budget agreement in sumer prices of past increases in oil prices. However, early February contributed to the increase in Treasexcluding food and energy prices, inflation remained ury yields. Measures of inflation compensation subdued in many foreign economies, including the derived from Treasury Inflation-Protected Securities euro area and Japan. were little changed on net. Option-implied volatility on longer-term rates rose notably following the jump Staff Review of the Financial Situation in equity market volatility on February 5 but mostly retraced that increase by the end of the intermeeting Financial markets were turbulent over the intermeet- period. On balance, spreads on investment- and ing period, and market volatility increased notably. speculative-grade corporate bond yields over On net, U.S. equity prices declined, corporate bond comparable-maturity Treasury yields widened but spreads widened, and nominal Treasury yields rose. remained near the lower end of their historical ranges. Broad equity price indexes decreased over the inter- In short-term funding markets, increased issuance of meeting period. Market participants pointed to a Treasury bills lifted Treasury bill yields above larger-than-expected increase in average hourly earn- comparable-maturity OIS rates for the first time in ings in the January employment report as a factor almost a decade. The rise in bill yields was a factor triggering increased investor concerns about inflation that pushed up money market rates and widened the and the associated pace of interest rate increases. spreads of certificates of deposit and term London

144 105th Annual Report | 2018 interbank offered rates relative to OIS rates. The Since the January FOMC meeting, foreign equity upward pressure on money market rates also showed prices moved notably lower, on net, and generally up in slight increases in the effective federal funds declined more in the AFEs than in the United States. rate and the overnight bank funding rate relative to Longer-term yields on sovereign debt in AFEs either the interest rate on excess reserves. The rise in market decreased moderately or ended the period little rates on overnight repurchase agreements relative to changed, in contrast to the increase in U.S. Treasury the offering rate on the Federal Reserve’s ON RRP yields. Weaker-than-expected economic data weighed facility resulted in low levels of take-up at the facility. on market-based measures of expected policy rate Reductions in the size of the Federal Reserve’s bal- paths and on longer-term yields in Canada and in the ance sheet continued as scheduled without a notable euro area. Communications from the Bank of effect on markets. Canada also seemed to contribute to the decline in Canadian yields. In the United Kingdom, longer- Despite the recent volatility in some financial mar- term yields were little changed, on net, although the kets, financing conditions for nonfinancial corpora- market-based path of expected policy rates moved up tions and households remained accommodative over moderately in response to Bank of England commuthe intermeeting period and continued to support nications. In emerging market economies (EMEs), further expansion of economic activity. Gross issu- sovereign yield spreads widened modestly, and flows ance of investment- and speculative-grade bonds was into EME mutual funds were volatile over the period. slightly lower than usual in January and February, while gross issuance of institutional leveraged loans The broad nominal dollar index appreciated moderstayed strong. The provision of bank-intermediated ately over the period, largely reflecting an outsized credit to businesses slowed further, likely reflecting depreciation of the Canadian dollar and a massive weak loan demand rather than tight supply. Small devaluation of the Venezuelan bolivar. (The Venezubusiness owners continued to report accommodative elan government devalued the official Venezuelan credit supply conditions but also weak demand for exchange rate by more than 99 percent against the credit. Credit conditions in municipal bond markets dollar, bringing the official rate closer to its black remained accommodative. market value.) Lower oil prices, weaker-thanexpected economic data, and uncertainty over U.S. In commercial real estate markets, loan growth at trade policy likely contributed to the weakness in the banks slowed further in January and February. Canadian dollar. In contrast, the Japanese yen appre- Financing conditions in commercial mortgage- ciated against the dollar, in part supported by safebacked securities (CMBS) markets remained accom- haven demand. Late in the intermeeting period, the modative, as issuance was robust (relative to the usual British pound was boosted by news of a preliminary seasonal slowdown) and CMBS spreads continued to agreement between U.K. and European Union be at low levels. Financing conditions in the residen- authorities regarding the transition period of the tial mortgage market remained accommodative for Brexit process, but the pound still ended the intermost borrowers, though credit conditions stayed tight meeting period modestly weaker against the dollar. for borrowers with low credit scores or with hard-todocument incomes. Mortgage rates moved up, on Staff Economic Outlook net, over the period, along with the rise in other longterm rates. The staff projection for U.S. economic activity prepared for the March FOMC meeting was somewhat Consumer credit grew at a solid pace in January fol- stronger, on balance, than the forecast at the time of lowing a rapid expansion in the fourth quarter. the January meeting. The near-term forecast for real Aggregate credit card balances continued to expand GDP growth was revised down a little; the incoming steadily in January. Nonetheless, for subprime bor- spending data were a bit softer than the staff had rowers, conditions remained tight, with credit limits expected, and the staff judged that the softness was and balances still low by historical standards. Auto not associated with residual seasonality in the data. lending continued to grow at a moderate pace in However, the slowing in the pace of spending in the recent months; although underwriting standards in first quarter was expected to be transitory, and the the subprime segment continued to tighten, there medium-term projection for GDP growth was revised were few signs of a significant restriction in credit up modestly, largely reflecting the expected boost to supply for auto loans. GDP from the federal budget agreement enacted in

Minutes of Federal Open Market Committee Meetings | March 145 February. Real GDP was projected to increase at a described in the Summary of Economic Projections faster pace than potential output through 2020. The (SEP), which is an addendum to these minutes. unemployment rate was projected to decline further over the next few years and to continue to run below In their discussion of economic conditions and the the staff’s estimate of its longer-run natural rate over outlook, meeting participants agreed that informathis period. tion received since the FOMC met in January indicated that economic activity had been rising at a The projection for inflation over the medium term moderate rate and that the labor market had continwas revised up a bit, reflecting the slightly tighter ued to strengthen. Job gains had been strong in resource utilization in the new forecast. The rates of recent months, and the unemployment rate had both total and core PCE price inflation were pro- stayed low. On a 12-month basis, both overall inflajected to be faster in 2018 than in 2017. The staff tion and inflation for items other than food and projected that inflation would reach the Committee’s energy continued to run below 2 percent. Market- 2 percent objective in 2019. based measures of inflation compensation had increased in recent months but remained low; survey- The staff viewed the uncertainty around its projec- based measures of longer-term inflation expectations tions for real GDP growth, the unemployment rate, were little changed, on balance. and inflation as similar to the average of the past 20 years. The staff saw the risks to the forecasts for Participants noted incoming data suggesting some real GDP growth and the unemployment rate as bal- slowing in the rate of growth of household spending anced. On the upside, recent fiscal policy changes and business fixed investment after strong fourthcould lead to a greater expansion in economic activ- quarter readings. However, they expected that the ity over the next few years than the staff projected. first-quarter softness would be transitory, pointing to On the downside, those fiscal policy changes could a variety of factors, including delayed payment of yield less impetus to the economy than the staff some personal tax refunds, residual seasonality in the expected if the economy was already operating above data, and more generally to strong economic fundaits potential level and resource utilization continued mentals. Among the fundamentals that participants to tighten, as the staff projected. Risks to the infla- cited were high levels of consumer and business sentition projection also were seen as balanced. An upside ment, supportive financial conditions, improved ecorisk was that inflation could increase more than nomic conditions abroad, and recent changes in fiscal expected in an economy that was projected to move policy. Participants generally saw the news on spendfurther above its potential. Downside risks included ing and the labor market over the past few quarters the possibilities that longer-term inflation expecta- as being consistent with continued above-trend tions may have edged lower or that the run of low growth and a further strengthening in labor markets. core inflation readings last year could prove to be Participants expected that, with further gradual more persistent than the staff expected. increases in the federal funds rate, economic activity would expand at a solid rate during the remainder of this year and a moderate pace in the medium term, Participants’ Views on Current Conditions and that labor market conditions would remain and the Economic Outlook strong. Inflation on a 12-month basis was expected to move up in coming months and to stabilize around In conjunction with this FOMC meeting, members the Committee’s 2 percent objective over the medium of the Board of Governors and Federal Reserve term. Several participants noted that the 12-month Bank presidents submitted their projections of the PCE price inflation rate would likely shift upward most likely outcomes for real GDP growth, the when the March data are released because the effects unemployment rate, and inflation for each year from of the outsized decline in the prices of cell phone ser- 2018 through 2020 and over the longer run, based on vice plans in March of last year will drop out of that their individual assessments of the appropriate path calculation. Near-term risks to the economic outlook for the federal funds rate. The longer-run projections appeared to be roughly balanced, but participants represented each participant’s assessment of the rate agreed that it would be important to continue to to which each variable would be expected to con- monitor inflation developments closely. verge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. Many participants reported considerable optimism These projections and policy assessments are among the business contacts in their Districts, consis-

146 105th Annual Report | 2018 tent with a firming in business expenditures. Respon- to keep the unemployment rate flat over the past few dents to District surveys in both the manufacturing months despite strong payroll gains. The firmness in and service sectors were generally upbeat about the the overall participation rate—relative to its demoeconomic outlook. In some Districts, reports from graphically driven downward trend—and the rising business contacts or evidence from surveys pointed participation rate of prime-age adults were regarded to continuing shortages of workers in segments of as signs of continued strengthening in labor market the labor market. Activity in the energy sector con- conditions. A few participants thought that these tinued to expand, with contacts suggesting that fur- favorable developments could continue for a time, ther increases were likely, provided that sufficient whereas others expressed doubts. A few participants labor resources were forthcoming. In contrast, con- warned against inferring too much from comparisons tacts in the agricultural sector reported that farm of the current low level of the unemployment rate income continued to experience downward pressure with historical benchmarks, arguing that the much due to low crop prices. higher levels of education of today’s workforce—and the lower average unemployment rate of more highly A number of participants reported concern among educated workers than less educated workers—sugtheir business contacts about the possible ramifica- gested that the U.S. economy might be able to sustain tions of the recent imposition of tariffs on imported lower unemployment rates than was the case in the steel and aluminum. Participants did not see the steel 1950s or 1960s. and aluminum tariffs, by themselves, as likely to have a significant effect on the national economic outlook, In some Districts, reports from business contacts or but a strong majority of participants viewed the evidence from surveys pointed to a pickup in wages, prospect of retaliatory trade actions by other coun- particularly for unskilled or entry-level workers. tries, as well as other issues and uncertainties associ- However, business contacts or national surveys led a ated with trade policies, as downside risks for the few participants to conclude that some businesses U.S. economy. Contacts in the agricultural sector facing labor shortages were changing job requirereported feeling particularly vulnerable to retaliation. ments so that they matched more closely the skills of available workers, increasing training, or offering Tax changes enacted late last year and the recent fed- more flexible work arrangements, rather than eral budget agreement, taken together, were expected increasing wages in a broad-based fashion. Regardto provide a significant boost to output over the next ing wage growth at the national level, several particifew years. However, participants generally regarded pants noted a modest increase, but most still the magnitude and timing of the economic effects of described the pace of wage gains as moderate; a few the fiscal policy changes as uncertain, partly because participants cited this fact as suggesting that there there have been few historical examples of expan- was room for the labor market to strengthen somesionary fiscal policy being implemented when the what further. economy was operating at a high level of resource utilization. A number of participants also suggested In some Districts, surveys or business contacts that uncertainty about whether all elements of the reported increases in nonwage costs, particularly in tax cuts would be made permanent, or about the the cost of materials, and in a few Districts, contacts implications of higher budget deficits for fiscal sus- reported passing on some of those costs in the form tainability and real interest rates, represented sources of higher prices. Contacts in a few Districts sugof downside risk to the economic outlook. A few gested that widely known, observable cost participants noted that the changes in tax policy increases—such as those associated with rising comcould boost the level of potential output. modity prices—would be more likely to be accepted and passed through to final goods prices than would Most participants described labor market conditions less observable costs such as wage increases. A few as strong, noting that payroll gains had remained participants argued that either an absence of pricing well above the pace regarded as consistent with power among at least some firms—perhaps stemabsorbing new labor force entrants over time, the ming from globalization and technological innovaunemployment rate had stayed low, job openings had tions, including ones that facilitate price comparibeen high, or that initial claims for unemployment sons—or the ability of firms to find ways to cut costs insurance benefits had been low. Many participants of production has been damping inflationary presobserved that the labor force participation rate had sures. Many participants stated that recent readings been higher recently than they had expected, helping from indicators on inflation and inflation expecta-

Minutes of Federal Open Market Committee Meetings | March 147 tions increased their confidence that inflation would On the one hand, the associated tightness in the labor rise to the Committee’s 2 percent objective in coming market might help speed the return of inflation to the months and then stabilize around that level; others Committee’s 2 percent goal and induce a further suggested that downside risks to inflation were sub- increase in labor force participation; on the other siding. In contrast, a few participants cautioned that, hand, an overheated economy could result in signifidespite increases in market-based measures of infla- cant inflation pressures or lead to financial instability. tion compensation in recent months and the stabilization of some survey measures of inflation expecta- Based on their current assessments, almost all particitions, the levels of these indicators remained too low pants expressed the view that it would be appropriate to be consistent with the Committee’s 2 percent infla- for the Committee to raise the target range for the tion objective. federal funds rate 25 basis points at this meeting. These participants agreed that, even after such an In their discussion of developments in financial mar- increase in the target range, the stance of monetary kets, some participants observed that financial condi- policy would remain accommodative, supporting tions remained accommodative despite the rise in strong labor market conditions and a sustained market volatility and repricing of assets that had return to 2 percent inflation. A couple of participants occurred in February. Many participants reported pointed to possible benefits of postponing an that their contacts had taken the previous month’s increase in the target range for the federal funds rate turbulence in stride, although a few participants sug- until a subsequent meeting; these participants suggested that financial developments over the inter- gested that waiting for additional data to provide meeting period highlighted some downside risks more evidence of a sustained return of the 12-month associated with still-high valuations for equities or inflation rate to 2 percent might more clearly demonfrom market volatility more generally. A few partici- strate the data dependence of the Committee’s decipants expressed concern that a lengthy period in sions and its resolve to achieve the price-stability which the economy operates beyond potential and component of its dual mandate. financial conditions remain highly accommodative could, over time, pose risks to financial stability. With regard to the medium-term outlook for monetary policy, all participants saw some further firming In their consideration of monetary policy, partici- of the stance of monetary policy as likely to be warpants discussed the implications of recent economic ranted. Almost all participants agreed that it and financial developments for the appropriate path remained appropriate to follow a gradual approach of the federal funds rate. All participants agreed that to raising the target range for the federal funds rate. the outlook for the economy beyond the current Several participants commented that this gradual quarter had strengthened in recent months. In addi- approach was most likely to be conducive to maintion, all participants expected inflation on a taining strong labor market conditions and returning 12-month basis to move up in coming months. This inflation to 2 percent on a sustained basis without expectation partly reflected the arithmetic effect of resulting in conditions that would eventually require the soft readings on inflation in early 2017 dropping an abrupt policy tightening. A number of particiout of the calculation; it was noted that the increase pants indicated that the stronger outlook for ecoin the inflation rate arising from this source was nomic activity, along with their increased confidence widely expected and, by itself, would not justify a that inflation would return to 2 percent over the change in the projected path for the federal funds medium term, implied that the appropriate path for rate. Most participants commented that the stronger the federal funds rate over the next few years would economic outlook and the somewhat higher inflation likely be slightly steeper than they had previously readings in recent months had increased the likeli- expected. Participants agreed that the longer-run hood of progress toward the Committee’s 2 percent normal federal funds rate was likely lower than in the inflation objective. A few participants suggested that past, in part because of secular forces that had put a modest inflation overshoot might help push up downward pressure on real interest rates. Several parlonger-term inflation expectations and anchor them ticipants expressed the judgment that it would likely at a level consistent with the Committee’s 2 percent become appropriate at some point for the Committee inflation objective. A number of participants offered to set the federal funds rate above its longer-run northeir views on the potential benefits and costs associ- mal value for a time. Some participants suggested ated with an economy operating well above potential that, at some point, it might become necessary to for a prolonged period while inflation remained low. revise statement language to acknowledge that, in

148 105th Annual Report | 2018 pursuit of the Committee’s statutory mandate and months and stabilize around the Committee’s 2 perconsistent with the median of participants’ policy cent objective over the medium term. Members agreed rate projections in the SEP, monetary policy eventu- to continue to monitor inflation developments closely. ally would likely gradually move from an accommodative stance to being a neutral or restraining factor After assessing current conditions and the outlook for economic activity. However, participants for economic activity, the labor market, and inflation, expressed a range of views on the amount of policy members voted to raise the target range for the fedtightening that would likely be required over the eral funds rate to 1½ to 1¾ percent. They indicated medium term to achieve the Committee’s goals. Par- that the stance of monetary policy remained accomticipants agreed that the actual path of the federal modative, thereby supporting strong labor market funds rate would depend on the economic outlook as conditions and a sustained return to 2 percent informed by incoming data. inflation. Committee Policy Action Members agreed that the timing and size of future adjustments to the target range for the federal funds In their discussion of monetary policy for the period rate would depend on their assessments of realized ahead, members judged that information received and expected economic conditions relative to the since the Committee met in January indicated that Committee’s objectives of maximum employment the labor market had continued to strengthen and and 2 percent inflation. They reiterated that this that economic activity had been rising at a moderate assessment would take into account a wide range of rate. Job gains had been strong in recent months, and information, including measures of labor market the unemployment rate had stayed low. Recent data conditions, indicators of inflation pressures and suggested that growth rates of household spending inflation expectations, and readings on financial and and business fixed investment had moderated from international developments. Members also agreed their strong fourth-quarter readings. On a 12-month that they would carefully monitor actual and basis, both overall inflation and inflation for items expected developments in inflation in relation to the other than food and energy had continued to run Committee’s symmetric inflation goal. Members below 2 percent. Market-based measures of inflation expected that economic conditions would evolve in a compensation had increased in recent months but manner that would warrant further gradual increases remained low; survey-based measures of longer-term in the federal funds rate. They judged that raising the inflation expectations were little changed, on balance. target range gradually would balance the risks to the outlook for inflation and unemployment and was All members viewed the recent data and other devel- most likely to support continued economic expanopments bearing on real economic activity as sug- sion. Members agreed that the strengthening in the gesting that the outlook for the economy beyond the economic outlook in recent months increased the current quarter had strengthened in recent months. likelihood that a gradual upward trajectory of the In addition, notwithstanding increased market vola- federal funds rate would be appropriate. Members tility over the intermeeting period, financial condi- continued to anticipate that the federal funds rate tions had stayed accommodative, and developments would likely remain, for some time, below levels that since the January meeting had indicated that fiscal were expected to prevail in the longer run. Nonethepolicy was likely to provide greater impetus to the less, they again stated that the actual path for the fedeconomy over the next few years than members had eral funds rate would depend on the economic outpreviously thought. Consequently, members expected look as informed by incoming data. that, with further gradual adjustments in the stance of monetary policy, economic activity would expand At the conclusion of the discussion, the Committee at a moderate pace in the medium term, and labor voted to authorize and direct the Federal Reserve market conditions would remain strong. Members Bank of New York, until it was instructed otherwise, generally continued to judge the risks to the eco- to execute transactions in the SOMA in accordance nomic outlook as remaining roughly balanced. with the following domestic policy directive, to be released at 2:00 p.m.: Most members noted that recent readings on inflation, along with the strengthening of the economic “Effective March 22, 2018, the Federal Open outlook, provided support for the view that inflation Market Committee directs the Desk to underon a 12-month basis would likely move up in coming take open market operations as necessary to

Minutes of Federal Open Market Committee Meetings | March 149 maintain the federal funds rate in a target range quarter readings. On a 12-month basis, both of 1½ to 1¾ percent, including overnight reverse overall inflation and inflation for items other repurchase operations (and reverse repurchase than food and energy have continued to run operations with maturities of more than one day below 2 percent. Market-based measures of when necessary to accommodate weekend, holi- inflation compensation have increased in recent day, or similar trading conventions) at an offer- months but remain low; survey-based measures ing rate of 1.50 percent, in amounts limited only of longer-term inflation expectations are little by the value of Treasury securities held outright changed, on balance. in the System Open Market Account that are available for such operations and by a per- Consistent with its statutory mandate, the Comcounterparty limit of $30 billion per day. mittee seeks to foster maximum employment and price stability. The economic outlook has The Committee directs the Desk to continue strengthened in recent months. The Committee rolling over at auction the amount of principal expects that, with further gradual adjustments in payments from the Federal Reserve’s holdings of the stance of monetary policy, economic activity Treasury securities maturing during March that will expand at a moderate pace in the medium exceeds $12 billion, and to continue reinvesting term and labor market conditions will remain in agency mortgage-backed securities the strong. Inflation on a 12-month basis is expected amount of principal payments from the Federal to move up in coming months and to stabilize Reserve’s holdings of agency debt and agency around the Committee’s 2 percent objective over mortgage-backed securities received during the medium term. Near-term risks to the economic March that exceeds $8 billion. Effective in April, outlook appear roughly balanced, but the Comthe Committee directs the Desk to roll over at mittee is monitoring inflation developments closely. auction the amount of principal payments from the Federal Reserve’s holdings of Treasury secu- In view of realized and expected labor market rities maturing during each calendar month that conditions and inflation, the Committee decided exceeds $18 billion, and to reinvest in agency to raise the target range for the federal funds mortgage-backed securities the amount of prin- rate to 1½ to 1¾ percent. The stance of moncipal payments from the Federal Reserve’s hold- etary policy remains accommodative, thereby ings of agency debt and agency mortgage- supporting strong labor market conditions and a backed securities received during each calendar sustained return to 2 percent inflation. month that exceeds $12 billion. Small deviations from these amounts for operational reasons are In determining the timing and size of future acceptable. adjustments to the target range for the federal funds rate, the Committee will assess realized The Committee also directs the Desk to engage and expected economic conditions relative to its in dollar roll and coupon swap transactions as objectives of maximum employment and 2 pernecessary to facilitate settlement of the Federal cent inflation. This assessment will take into Reserve’s agency mortgage-backed securities account a wide range of information, including 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 January 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 at a further gradual increases in the federal funds moderate rate. Job gains have been strong in rate; the federal funds rate is likely to remain, for recent months, and the unemployment rate has some time, below levels that are expected to prestayed low. Recent data suggest that growth rates vail in the longer run. However, the actual path of household spending and business fixed invest- of the federal funds rate will depend on the ecoment have moderated from their strong fourth- nomic outlook as informed by incoming data.”

150 105th Annual Report | 2018 Voting for this action: Jerome H. Powell, William C. It was agreed that the next meeting of the Committee Dudley, Thomas I. Barkin, Raphael W. Bostic, Lael would be held on Tuesday–Wednesday, May 1–2, 2018. Brainard, Loretta J. Mester, Randal K. Quarles, and The meeting adjourned at 9:55 a.m. on March 21, 2018. John C. Williams. Notation Vote Voting against this action: None. By notation vote completed on February 20, 2018, To support the Committee’s decision to raise the tar- the Committee unanimously approved the minutes of get range for the federal funds rate, the Board of the Committee meeting held on January 30–31, 2018. Governors voted unanimously to raise the interest rates on required and excess reserve balances ¼ per- James A. Clouse centage point, to 1¾ percent, effective March 22, Secretary 2018. The Board of Governors also voted unanimously to approve a ¼ percentage point increase in the primary credit rate (discount rate) to 2¼ percent, Federal Reserve Banks, effective on the later of March 22, 2018, effective March 22, 2018.4 and the date such Reserve Banks informed the Secretary of the Board of such a request. (Secretary’s note: Subsequently, the Federal Reserve Banks of Chicago and Minneapolis were 4 In taking this action, the Board approved requests submitted by informed by the Secretary of the Board of the Board’s approval the boards of directors of the Federal Reserve Banks of Boston, of their establishment of a primary credit rate of 2¼ percent, New York, Philadelphia, Cleveland, Richmond, Atlanta, St. effective March 22, 2018.) The second vote of the Board also Louis, Kansas City, Dallas, and San Francisco. This vote also encompassed approval of the establishment of the interest rates encompassed approval by the Board of Governors of the estab- for secondary and seasonal credit under the existing formulas lishment of a 2¼ percent primary credit rate by the remaining for computing such rates.

Minutes of Federal Open Market Committee Meetings | March 151 Addendum: marked up their projections for real GDP growth and lowered their projections for the unemployment rate; Summary of Economic Projections participants indicated that these revisions reflected a number of factors, such as changes in fiscal policy, a In conjunction with the Federal Open Market Com- stronger outlook for economic growth abroad, or mittee (FOMC) meeting held on March 20–21, 2018, recent strong job gains. For inflation, a majority of meeting participants submitted their projections of participants made slight upward revisions to their the most likely outcomes for real gross domestic projections; these revisions were attributed to recent product (GDP) growth, the unemployment rate, and price data and the effects of a stronger economic outinflation for each year from 2018 to 2020 and over look than in the December SEP. Table 1 and figure 1 the longer run.1 Each participant’s projections were provide summary statistics for the projections. based on information available at the time of the meeting, together with his or her assessment of As shown in figure 2, participants generally continappropriate monetary policy—including a path for ued to expect that the evolution of the economy relathe federal funds rate and its longer-run value—and tive to their objectives of maximum employment and assumptions about other factors likely to affect eco- 2 percent inflation would likely warrant further nomic outcomes. The longer-run projections repregradual increases in the federal funds rate. Although sent each participant’s assessment of the value to the median of participants’ projections for the federal which each variable would be expected to converge, funds rate at the end of 2018 was unchanged relative over time, under appropriate monetary policy and in to the December SEP, a number of participants the absence of further shocks to the economy.2 marked up their projections for this year. Moreover, a “Appropriate monetary policy” is defined as the substantial majority of participants revised up their future path of policy that each participant deems federal funds rate projections for 2019 and 2020. The most likely to foster outcomes for economic activity median of participants’ projections for the longerand inflation that best satisfy his or her individual run level of the federal funds rate was slightly higher interpretation of the statutory mandate to promote relative to the December SEP. Nearly all participants maximum employment and price stability. who submitted longer-run projections expected that evolving economic conditions would make it appro- All participants who submitted longer-run projec- priate for the federal funds rate to move above their tions expected that real GDP in 2018 would expand estimates of its longer-run level during part of the at a pace exceeding their individual estimates of the projection period. longer-run growth rate of real GDP. Participants generally saw real GDP growth moderating some- In general, participants continued to view the uncerwhat in each of the following two years, with almost tainty attached to their economic projections as all participants who submitted longer-run projections broadly similar to the average of the past 20 years. As anticipating that real GDP growth in 2020 would be in December, most participants judged the risks at or within a few tenths of a percentage point of around their projections for real GDP growth, the their longer-run estimates. All participants who subunemployment rate, and inflation to be broadly mitted longer-run projections expected that, throughbalanced. out the projection period, the unemployment rate would run below their estimates of its longer-run The Outlook for Economic Activity level. All participants projected that inflation, as measured by the four-quarter percentage change in The median of participants’ projections for the the price index for personal consumption expendi- growth rate of real GDP, conditional on their inditures (PCE), would rise to or toward the Committee’s vidual assessments of appropriate monetary policy, 2 percent objective this year and would be at or a was 2.7 percent for this year and 2.4 percent for next little above that objective by 2020. Compared with year. The median projection for real GDP growth in the Summary of Economic Projections (SEP) from 2020 was 2.0 percent, a touch above the 1.8 percent December, a substantial majority of participants median of participants’ longer-run estimates. Most participants cited federal fiscal policy develop- 1 Three members of the Board of Governors were in office at the ments—specifically, the enactment of the Tax Cuts time of the March 2018 meeting, one member fewer than in and Jobs Act and the Bipartisan Budget Act of December 2017. 2018—as boosting their projections for economic 2 One participant did not submit longer-run projections for real GDP growth, the unemployment rate, or the federal funds rate. activity over the next couple of years. Several partici-

152 105th Annual Report | 2018 Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, March 2018 Percent Median1 Central tendency2 R ange3 Variable Longer Longer L onger 2 018 2019 2020 run 2018 2019 2020 run 2 018 2 019 2 020 run Change in real GDP 2.7 2.4 2.0 1.8 2.6–3.0 2.2–2.6 1.8–2.1 1.8–2.0 2 .5–3.0 2 .0–2.8 1 .5–2.3 1 .7–2.2 December projection 2.5 2.1 2.0 1.8 2.2–2.6 1.9–2.3 1.7–2.0 1.8–1.9 2 .2–2.8 1 .7–2.4 1 .1–2.2 1 .7–2.2 Unemployment rate 3.8 3.6 3.6 4.5 3.6–3.8 3.4–3.7 3.5–3.8 4.3–4.7 3 .6–4.0 3 .3–4.2 3 .3–4.4 4 .2–4.8 December projection 3.9 3.9 4.0 4.6 3.7–4.0 3.6–4.0 3.6–4.2 4.4–4.7 3 .6–4.0 3 .5–4.2 3 .5–4.5 4 .3–5.0 PCE inflation 1.9 2.0 2.1 2.0 1.8–2.0 2.0–2.2 2.1–2.2 2.0 1 .8–2.1 1 .9–2.3 2 .0–2.3 2 .0 December projection 1.9 2.0 2.0 2.0 1.7–1.9 2.0 2.0–2.1 2.0 1 .7–2.1 1 .8–2.3 1 .9–2.2 2 .0 Core PCE inflation4 1.9 2.1 2.1 1.8–2.0 2.0–2.2 2.1–2.2 1 .8–2.1 1 .9–2.3 2 .0–2.3 December projection 1.9 2.0 2.0 1.7–1.9 2.0 2.0–2.1 1 .7–2.0 1 .8–2.3 1 .9–2.3 Memo: Projected appropriate policy path Federal funds rate 2.1 2.9 3.4 2.9 2.1–2.4 2.8–3.4 3.1–3.6 2.8–3.0 1 .6–2.6 1 .6–3.9 1 .6–4.9 2 .3–3.5 December projection 2.1 2.7 3.1 2.8 1.9–2.4 2.4–3.1 2.6–3.1 2.8–3.0 1 .1–2.6 1 .4–3.6 1 .4–4.1 2 .3–3.0 Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The projections for the federal funds rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. The December projections were made in conjunction with the meeting of the Federal Open Market Committee on December 12–13, 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 December 12–13, 2017, meeting, and one participant did not submit such projections in conjunction with the March 20–21, 2018, 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 153 Figure 1. Medians, central tendencies, and ranges of economic projections, 2018–20 and over the longer run Percent Change in real GDP Median of projections Central tendency of projections Range of projections 3 Actual 2 1 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent Unemployment rate 7 6 5 4 3 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent PCE inflation 3 2 1 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent Core PCE inflation 3 2 1 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.

154 105th Annual Report | 2018 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 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 | March 155 pants mentioned other factors that influenced their Figures 3.C and 3.D provide information on the diseconomic projections, including accommodative tributions of participants’ views about the outlook monetary policy and financial conditions, strength in for inflation. Participants generally made minor the global economic outlook, and continued momen- upward adjustments to their inflation projections, tum in the labor market. Compared with the Decem- resulting in slight shifts of the distributions to the ber SEP, the medians of participants’ projections for right relative to the distributions in December. Parreal GDP growth this year and next year were up a ticipants generally expected each measure to increase few tenths of a percentage point. to no more than 2 percent this year and to rise to, or edge above, 2 percent in 2019 and 2020. Consistent with their projections for economic activity, almost all participants expected labor market Appropriate Monetary Policy conditions to strengthen further over the projection period. The medians of projections for the unem- Figure 3.E provides the distribution of participants’ ployment rate showed that rate stepping down from judgments regarding the appropriate target—or mid- 4.1 percent in the final quarter of 2017 to 3.8 percent point of the target range—for the federal funds rate in the final quarter of this year, and then to 3.6 per- at the end of each year from 2018 to 2020 and in the cent in the final quarters of 2019 and 2020. The longer run. The distributions of projected policy median of participants’ estimates of the longer-run rates through 2020 shifted modestly higher, consisunemployment rate was 4.5 percent. Compared with tent with the revisions to participants’ projections of the December SEP, almost all participants marked real GDP growth, the unemployment rate, and infladown their unemployment rate projections. Some tion. For 2018, there was a notable reduction in the participants also lowered their estimates of the dispersion of participants’ views, with most particilonger-run level of the unemployment rate, leading to pants now regarding the appropriate target at the end a small decline in the corresponding median of the year as being between 2.13 and 2.62 percent. projection. For each subsequent year, the dispersion of participants’ year-end projections was somewhat greater than that in the December SEP, and the range of Figures 3.A and 3.B show the distributions of parparticipants’ projections was noticeably larger than ticipants’ projections for real GDP growth and the for 2018. unemployment rate from 2018 to 2020 and in the longer run. The distributions of individual projections for real GDP growth this year and next year shifted The median of participants’ projections of the fedup noticeably from those in the December SEP; par- eral funds rate rises gradually to a level of 2.1 percent ticipants’ projections ranged from 2.5 to 3.0 percent at the end of this year, 2.9 percent at the end of 2019, in 2018 and from 2.0 to 2.8 percent in 2019. By con- and 3.4 percent at the end of 2020. The median of trast, the distributions of projected real GDP growth participants’ longer-run estimates, at 2.9 percent, was in 2020 and in the longer run shifted up modestly a bit higher than in the December SEP. Nearly all since December. Consistent with participants’ gener- participants projected that it would likely be approally more upbeat outlook for real GDP growth, the priate for the federal funds rate to rise above their distributions of individual projections for the unem- individual longer-run estimates at some point over ployment rate were lower than the corresponding dis- the forecast period. tributions in December for each year of the projection period. In discussing their projections, many participants continued to express the view that the appropriate trajectory of the federal funds rate over the next few The Outlook for Inflation years would likely involve gradual increases. This view was predicated on several factors, including a The medians of participants’ projections for both judgment that a gradual path likely would appropritotal and core PCE price inflation were 1.9 percent in ately balance the risks associated with, among other 2018—with all participants anticipating that each considerations, the possibility that inflation pressures measure would rise from its 2017 rate—and 2.1 per- and financial imbalances could build if economic cent by 2020. Compared with the December SEP, the activity were to run well above its long-run sustainmedians of participants’ projections for each meas- able level and the possibility that the forces depressure were unchanged this year and up 0.1 percentage ing inflation could prove to be more persistent than point in 2020. currently anticipated. Another factor mentioned was

156 105th Annual Report | 2018 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2018–20 and over the longer run Number of participants 2018 March projections 18 December 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 – 3.0 – 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 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 – 3.0 – 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 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 – 3.0 – 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.0 – 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 2.8 – 3.0 – 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | March 157 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2018–20 and over the longer run Number of participants 2018 March projections 18 December projections 16 14 12 10 8 6 4 2 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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.

158 105th Annual Report | 2018 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2018–20 and over the longer run Number of participants 2018 March projections 18 December projections 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 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 | March 159 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2018–20 Number of participants 2018 March projections December projections 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

160 105th Annual Report | 2018 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, 2018–20 and over the longer run Number of participants 2018 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 – 4.13 – 4.38 – 4.63 – 4.88 – 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 4.37 4.62 4.87 5.12 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 – 4.13 – 4.38 – 4.63 – 4.88 – 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 4.37 4.62 4.87 5.12 Percent range Number of participants 2020 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 – 4.13 – 4.38 – 4.63 – 4.88 – 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 4.37 4.62 4.87 5.12 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 – 4.13 – 4.38 – 4.63 – 4.88 – 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 4.37 4.62 4.87 5.12 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | March 161 three variables, this measure of uncertainty is sub- Table 2. Average historical projection error ranges stantial and generally increases as the forecast hori- Percentage points zon lengthens. Variable 2018 2019 2020 Participants’ assessments of the level of uncertainty Change in real GDP1 ±1.5 ±2.0 ±2.0 surrounding their individual economic projections Unemployment rate1 ±0.5 ±1.3 ±1.7 Total consumer prices2 ± 0.9 ±1.0 ±1.1 are shown in the bottom-left panels of figure 4.A, Short-term interest rates3 ±0.9 ±2.0 ±2.5 4.B, and 4.C. Nearly all participants viewed the degree of uncertainty attached to their economic Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 1998 through 2017 that were released in the spring by projections about real GDP growth, the unemployvarious private and government forecasters. As described in the box “Forecast ment rate, and inflation as broadly similar to the Uncertainty,” under certain assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, consumer prices, and the average of the past 20 years, a view that was essenfederal funds rate will be in ranges implied by the average size of projection tially unchanged from December.3 errors made in the past. For more information, see David Reifschneider and Peter Tulip (2017), “Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting Errors: The Federal Reserve’s Approach,” Finance and Economics Because the fan charts are constructed to be symmet- Discussion Series 2017-020 (Washington: Board of Governors of the Federal Reserve System, February), www.federalreserve.gov/econresdata/feds/2017/files/ ric around the median projections, they do not reflect 2017020pap.pdf. any asymmetries in the balance of risks that partici- 1 Definitions of variables are in the general note to table 1. pants may see in their economic projections. Partici- 2 Measure is the overall consumer price index, the price measure that has been most widely used in government and private economic forecasts. Projections pants’ assessments of the balance of risks to their are percent changes on a fourth quarter to fourth quarter basis. economic projections are shown in the bottom-right 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 panels of figures 4.A, 4.B, and 4.C. As in December, calculated using average levels, in percent, in the fourth quarter. most participants judged the risks to their projections of real GDP growth, the unemployment rate, total inflation, and core inflation as broadly balanced—in the view that the neutral real interest rate was histori- other words, as broadly consistent with a symmetric cally low and would likely move up only slowly. As fan chart. Participants who saw the risks as skewed always, the appropriate path of the federal funds rate typically judged that the balance of risks was tilted would depend on evolving economic conditions and toward stronger GDP growth, lower unemployment their implications for participants’ economic out- rates, and higher inflation. Compared with the looks and assessments of risks. December SEP, participants’ assessments of the balance of risks attending their projections were little Uncertainty and Risks changed overall, with one more participant reporting that the risks to the unemployment rate were In assessing the path for the federal funds rate that, weighted to the downside and two fewer participants in their view, is likely to be appropriate, FOMC par- reporting that the risks to either total or core PCE ticipants take account of the range of possible eco- inflation were weighted to the downside. nomic outcomes, the likelihood of those outcomes, and the potential benefits and costs should they In discussing the uncertainty and risks surrounding occur. As a reference, table 2 provides measures of their projections, most participants noted that the forecast uncertainty, based on the forecast errors of magnitude and timing of the economic effects of various private and government forecasts over the recent changes in fiscal policy were uncertain or that past 20 years, for real GDP growth, the unemployfiscal policy developments posed upside risks to real ment rate, and total PCE inflation. Those measures economic activity. Most participants also cited trade are represented graphically in the “fan charts” shown policy as a source of either uncertainty or downside in the top panels of figures 4.A, 4.B, and 4.C. The risk. A few participants noted that a prolonged fan charts display the median SEP projections for the period of tight labor markets posed risks of higher three variables surrounded by symmetric confidence inflation, could fuel financial imbalances, and might intervals derived from the forecast errors reported in contribute to heightened recession risks. table 2. If the degree of uncertainty attending these projections is similar to the typical magnitude of past forecast errors and the risks around the projections 3 At the end of this summary, the box “Forecast Uncertainty” are broadly balanced, then future outcomes of these discusses the sources and interpretation of uncertainty surrounding the economic forecasts and explains the approach variables would have about a 70 percent probability used to assess the uncertainty and risks attending the particiof being within these confidence intervals. For all pants’ projections.

162 105th Annual Report | 2018 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 Actual 2 1 0 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 March projections March projections December projections 18 December 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 | March 163 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 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 March projections March projections December projections 18 December 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.”

164 105th Annual Report | 2018 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 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 March projections March projections December projections 18 December projections 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 Lower Broadly Higher Weighted to Broadly Weighted to similar downside balanced upside Number of participants Number of participants Uncertainty about core PCE inflation Risks to core PCE inflation March projections March projections December projections 18 December 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 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 165 Participants’ assessments of the appropriate future vides a graphical representation of this uncertainty, path of the federal funds rate are also subject to con- plotting the median SEP projection for the federal siderable uncertainty. Because the Committee adjusts funds rate surrounded by confidence intervals the federal funds rate in response to actual and pro- derived from the results presented in table 2. As with spective developments over time in real GDP growth, the macroeconomic variables, forecast uncertainty the unemployment rate, and inflation, uncertainty surrounding the appropriate path of the federal surrounding the projected path for the federal funds funds rate is substantial and increases for longer rate importantly reflects the uncertainties about the horizons. paths for those key economic variables. Figure 5 pro-

166 105th Annual Report | 2018 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 Median of projections 6 70% confidence interval* 5 4 3 2 1 Actual 0 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 | March 167 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 1.5 to 4.5 percent in the current year funds rate generated by the uncertainty about the and 1.0 to 5.0 percent in the second and third years. macroeconomic variables as well as additional The corresponding 70 percent confidence intervals adjustments to monetary policy that would be approfor overall inflation would be 1.1 to 2.9 percent in the priate to offset the effects of shocks to the economy. current year, 1.0 to 3.0 percent in the second year, If at some point in the future the confidence interval and 0.9 to 3.1 percent in the third year. Figures 4.A around the federal funds rate were to extend below through 4.C illustrate these confidence bounds in zero, it would be truncated at zero for purposes of “fan charts” that are symmetric and centered on the the fan chart shown in figure 5; zero is the bottom of medians of FOMC participants’ projections for GDP the lowest target range for the federal funds rate that growth, the unemployment rate, and inflation. Howhas been adopted by the Committee in the past. This ever, in some instances, the risks around the projecapproach to the construction of the federal funds rate tions may not be symmetric. In particular, the unemfan chart would be merely a convention; it would not ployment rate cannot be negative; furthermore, the have any implications for possible future policy decirisks around a particular projection might be tilted to sions regarding the use of negative interest rates to either the upside or the downside, in which case the provide additional monetary policy accommodation if corresponding fan chart would be asymmetrically doing so were appropriate. In such situations, the positioned 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

168 105th Annual Report | 2018 Meeting Held on May 1–2, 2018 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 Reserve System in Washington, D.C., on Tuesday, David W. Wilcox May 1, 2018, at 1:00 p.m. and continued on Wednes- Economist day, May 2, 2018, at 9:00 a.m.1 Kartik B. Athreya, Thomas A. Connors, Mary Daly, Trevor A. Reeve, Present Ellis W. Tallman, William Wascher, Jerome H. Powell and Beth Anne Wilson Chairman Associate Economists William C. Dudley Simon Potter Vice Chairman Manager, System Open Market Account Thomas I. Barkin Lorie K. Logan Deputy Manager, System Open Market Account Raphael W. Bostic Matthew J. Eichner3 Lael Brainard Director, Division of Reserve Bank Operations and Loretta J. Mester Payment Systems, Board of Governors Randal K. Quarles Michael S. Gibson Director, Division of Supervision and Regulation, John C. Williams Board of Governors James Bullard, Charles L. Evans, Esther L. George, Eric Rosengren, and Michael Strine Andreas Lehnert Alternate Members of the Federal Open Market Director, Division of Financial Stability, Committee Board of Governors Patrick Harker, Robert S. Kaplan, and Neel Kashkari Margie Shanks Presidents of the Federal Reserve Banks of Deputy Secretary, Office of the Secretary, Philadelphia, Dallas, and Minneapolis, respectively Board of Governors James A. Clouse Daniel M. Covitz Secretary Deputy Director, Division of Research and Statistics, Board of Governors Matthew M. Luecke Deputy Secretary Rochelle M. Edge Deputy Director, Division of Monetary Affairs, David W. Skidmore Board of Governors Assistant Secretary Michael T. Kiley Michelle A. Smith Deputy Director, Division of Financial Stability, Assistant Secretary Board of Governors Mark E. Van Der Weide Antulio N. Bomfim General Counsel Special Adviser to the Chairman, Office of Board Michael Held2 Members, Board of Governors Deputy General Counsel Joseph W. Gruber and John M. Roberts Special Advisers 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 developments in financial 2 Attended Tuesday session only. markets and open market operations.

Minutes of Federal Open Market Committee Meetings | May 169 Linda Robertson George A. Kahn Assistant to the Board, Office of Board Members, Vice President, Federal Reserve Bank of Kansas City Board of Governors Richard K. Crump Eric M. Engen and Joshua Gallin Assistant Vice President, Federal Reserve Bank of Senior Associate Directors, Division of Research and New York Statistics, Board of Governors Anthony Murphy Stephen A. Meyer and Joyce K. Zickler Senior Economic Policy Advisor, Federal Reserve Senior Advisers, Division of Monetary Affairs, Bank of Dallas Board of Governors Jeremy B. Rudd Developments in Financial Markets and Senior Adviser, Division of Research and Statistics, Open Market Operations Board of Governors The manager of the System Open Market Account Jane E. Ihrig and David López-Salido (SOMA) provided a summary of domestic and Associate Directors, Division of Monetary Affairs, global financial developments over the intermeeting Board of Governors period. Broad measures of financial conditions had Stephanie R. Aaronson and Norman J. Morin tightened somewhat in recent weeks, with U.S. equity Assistant Directors, Division of Research and prices lower, the foreign exchange value of the dollar Statistics, Board of Governors moderately higher, and longer-term Treasury yields up a little. Market participants pointed to a range of Robert Vigfusson factors contributing to the decline in stock prices, Assistant Director, Division of International Finance, including concerns about the outlook for trade policy Board of Governors both in the United States and abroad, the potential Eric C. Engstrom for increased regulatory oversight of U.S. technology Adviser, Division of Monetary Affairs, companies, and incoming data suggesting some modand eration in global economic growth. The rise in nomi- Adviser, Division of Research and Statistics, nal U.S. Treasury yields was associated with an Board of Governors increase in inflation compensation that, in turn, seemed to reflect a firming in inflation data as well as Penelope A. Beattie4 a notable rise in crude oil prices. Judging from federal Assistant to the Secretary, Office of the Secretary, funds futures quotes, the expected path of the federal Board of Governors funds rate changed relatively little over the intermeet- Dana L. Burnett and Rebecca Zarutskie ing period. While term LIBOR (London interbank Section Chiefs, Division of Monetary Affairs, offered rates) had widened relative to comparable- Board of Governors maturity OIS (overnight index swap) rates in recent months, the cost of dollar funding through the for- Marcelo Rezende eign exchange swap market had not risen to the same Principal Economist, Division of Monetary Affairs, degree. Recent usage of standing U.S. dollar liquidity Board of Governors swap lines had been low, consistent with a view that Ron Feldman the recent widening in LIBOR–OIS spreads did not First Vice President, Federal Reserve Bank of reflect increased funding pressures or rising concerns Minneapolis about the condition of financial institutions. Michael Dotsey, Geoffrey Tootell, and The manager discussed the role of standing liquidity Christopher J. Waller swap lines in supporting financial stability and rec- Executive Vice Presidents, Federal Reserve Banks of ommended that these swap lines be renewed at this Philadelphia, Boston, and St. Louis, respectively meeting following the usual annual schedule. The Spencer Krane, Paula Tkac, and Mark L. J. Wright manager also discussed current projections for princi- Senior Vice Presidents, Federal Reserve Banks of pal payments received from mortgage-backed securi- Chicago, Atlanta, and Minneapolis, respectively ties (MBS) held in the SOMA. These projections suggested that, under the Committee’s plan for balance 4 Attended through the discussion on financial stability issues. sheet normalization, reinvestments of MBS principal

170 105th Annual Report | 2018 would likely cease later this year, although the timing ment in the Policy Normalization Principles and is uncertain. Plans that it would be prepared to adjust the details of the approach to policy implementation during the The deputy manager followed with a briefing focused period of normalization in light of economic and on recent developments in the federal funds market, financial developments. Many participants judged noting that the effective federal funds rate had that it would be useful to make such a technical increased in recent weeks and had moved toward the adjustment sooner rather than later. Participants gentop of the target range for the federal funds rate. In erally agreed that it would be desirable to make that large part, this development seemed to reflect a firm- adjustment at a time when the FOMC decided to ing in rates on repurchase agreements (repos) that, in increase the target range for the federal funds rate; turn, had resulted from an increase in Treasury bill that timing would simplify FOMC communications issuance and the associated higher demands for repo and emphasize that the IOER rate is a helpful tool financing by dealers and others. Higher rates had for implementing the FOMC’s policy decisions but reportedly made repos a more attractive alternative does not, in itself, convey the stance of policy. While investment for major lenders in the federal funds additional technical adjustments in the IOER rate market, thus reducing the availability of funding in could become necessary over time, these were not that market and putting some upward pressure on expected to be frequent. A number of participants the federal funds rate. While some of the recent pres- also suggested that, before too long, the Committee sure on the federal funds rate could be expected to might want to further discuss how it can implement fade over coming weeks as the market adjusts to monetary policy most effectively and efficiently when higher levels of Treasury bills, the gradual normaliza- the quantity of reserve balances reaches a level appretion of the Federal Reserve’s balance sheet and the ciably below that seen in recent years. accompanying decline in reserves was anticipated to continue putting some upward pressure on the fed- The Committee voted unanimously to renew the eral funds rate relative to the interest on excess reciprocal currency arrangements with the Bank of reserves (IOER) rate. Canada and the Bank of Mexico; these arrangements are associated with the Federal Reserve’s participa- The deputy manager then discussed the possibility of tion in the North American Framework Agreement a small technical realignment of the IOER rate rela- of 1994. In addition, the Committee voted unanitive to the top of the target range for the federal mously to renew the dollar and foreign currency funds rate. Since the target range was established in liquidity swap arrangements with the Bank of December 2008, the IOER rate has been set at the Canada, the Bank of England, the Bank of Japan, top of the target range to help keep the effective fed- the European Central Bank, and the Swiss National eral funds rate within the range. Lately the spread of Bank. The votes to renew the Federal Reserve’s parthe IOER rate over the effective federal funds rate ticipation in these standing arrangements are taken had narrowed to only 5 basis points. A technical annually at the April or May FOMC meeting. adjustment of the IOER rate to a level 5 basis points below the top of the target range could keep the By unanimous vote, the Committee ratified the Open effective federal funds rate well within the target Market Desk’s domestic transactions over the interrange. This could be accomplished by implementing meeting period. There were no intervention operaa 20 basis point increase in the IOER rate at a time tions in foreign currencies for the System’s account when the Committee raised the target range for the during the intermeeting period. federal funds rate by 25 basis points. Alternatively, the IOER rate could be lowered 5 basis points at a meeting in which the Committee left the target range Staff Review of the Economic Situation for the federal funds rate unchanged. The information reviewed for the May 1–2 meeting In their discussion of this issue, participants generally indicated that labor market conditions continued to agreed that it could become appropriate to make a strengthen in the first quarter, while real gross small technical adjustment in the Federal Reserve’s domestic product (GDP) rose at a moderate pace. approach to implementing monetary policy by set- Consumer price inflation, as measured by the ting the IOER rate modestly below the top of the tar- 12{month percentage change in the price index for get range for the federal funds rate. Such an adjust- personal consumption expenditures (PCE), was ment would be consistent with the Committee’s state- 2 percent in March. Survey-based measures of

Minutes of Federal Open Market Committee Meetings | May 171 longer-run inflation expectations were, on balance, that influence consumer spending—including gains little changed. in employment and real disposable personal income, along with households’ elevated net worth—should Total nonfarm payroll employment rose less in continue to support solid real PCE growth in the March than in the previous two months, but the near term. In addition, the lower tax withholding increase for the first quarter as a whole was solid. resulting from the tax cuts enacted late last year was The labor force participation rate edged down in likely to provide some impetus to spending in coming March but moved up a little, on net, in the first quar- months. Consumer sentiment, as measured by the ter. The national unemployment rate remained at University of Michigan Surveys of Consumers, 4.1 percent for a sixth consecutive month. Similarly, remained elevated in April. the unemployment rates for African Americans, Asians, and Hispanics were roughly flat, on balance, Real residential investment was unchanged in the first in recent months. The share of workers employed quarter after a strong increase in the fourth quarter. part time for economic reasons was little changed at Starts for new single-family homes decreased in a rate close to that prevailing before the previous March, but the average pace in the first quarter was recession. The rate of private-sector job openings little changed from the fourth quarter. In contrast, stayed at an elevated level in February, the rate of starts of multifamily units moved up in March after quits remained high, and initial claims for unemploy- contracting in February, and they were higher in the ment insurance benefits continued to be low through first quarter than in the fourth. Sales of both new mid-April. Recent readings showed that increases in and existing homes increased in February and labor compensation stepped up modestly over the March. past year. The employment cost index for private workers rose 2.8 percent over the 12 months ending Real private expenditures for business equipment and in March, and average hourly earnings for all intellectual property increased at a moderate pace in employees increased 2.7 percent over that period. the first quarter after rising briskly in the second half Both increases were larger than those reported for of last year. Nominal shipments of nondefense capithe 12 months ending in March 2017. tal goods excluding aircraft edged down in March. However, forward-looking indicators of business Total industrial production increased in March and equipment spending—such as the backlog of unfilled rose at a solid pace for the first quarter as a whole, capital goods orders, along with upbeat readings on with gains in the output of manufacturers, mines, business sentiment from national and regional surand utilities. Automakers’ schedules suggested that veys—continued to point to robust gains in equipassemblies of light motor vehicles would edge down ment spending in the near term. Real business expenin the second quarter from the average pace in the ditures for nonresidential structures rose at a robust first quarter, but broader indicators of manufactur- pace in the first quarter, and the number of crude oil ing production, such as the new orders indexes from and natural gas rigs in operation—an indicator of national and regional manufacturing surveys, contin- business spending for structures in the drilling and ued to point to further gains in factory output in the mining sector—continued to move up through near term. mid-April. Consumer expenditures rose at a modest pace in the Total real government purchases rose at a slower rate first quarter following a strong gain in the preceding in the first quarter than in the fourth quarter. Real quarter. Monthly data pointed to some improvement federal purchases increased in the first quarter, with toward the end of the quarter, as real PCE moved up gains in both defense and nondefense spending. Real in March after declining in January and February. purchases by state and local governments also moved However, the recent movements might have partly higher; state and local government payrolls were reflected the effects of a delay in many federal tax unchanged in the first quarter, but nominal construcrefunds, which could have shifted some consumer tion spending by these governments rose somewhat. spending from February to March. Light motor vehicle sales stepped down in the first quarter after a The nominal U.S. international trade deficit widened strong fourth-quarter pace that was partly boosted in February as imports rose briskly, outpacing the by replacement sales following the fall hurricanes; increase in exports. Preliminary data on trade in sales declined in April, but indicators of vehicle goods suggested that the trade deficit narrowed demand remained upbeat. More broadly, key factors sharply in March, with exports continuing to grow

172 105th Annual Report | 2018 robustly but imports retracing earlier gains. The decision to raise the target range for the federal funds Bureau of Economic Analysis estimated that the rate 25 basis points at the March meeting was widely change in real net exports added slightly to growth of anticipated. Market reaction to the release of the real GDP in the first quarter. March FOMC minutes later in the intermeeting period was minimal. The probability of an increase in Total U.S. consumer prices, as measured by the PCE the target range for the federal funds rate occurring price index, increased 2 percent over the 12 months at the May FOMC meeting, as implied by quotes on ending in March. Core PCE price inflation, which federal funds futures contracts, remained close to excludes changes in consumer food and energy prices, zero; the probability of an increase at the June was 1.9 percent over that same period. The consumer FOMC meeting rose to about 90 percent by the end price index (CPI) rose 2.4 percent over the 12 months of the intermeeting period. Expected levels of the ending in March, while core CPI inflation was federal funds rate at the end of 2019 and 2020 2.1 percent. Recent readings on survey-based meas- implied by OIS rates rose modestly. ures of longer-run inflation expectations—including those from the Michigan survey, the Survey of Pro- The nominal Treasury yield curve continued to flatfessional Forecasters, and the Desk’s Survey of Pri- ten over the intermeeting period, with yields on mary Dealers and Survey of Market Participants— 2-year and 10-year Treasury securities up 17 basis were little changed on balance. points and 7 basis points, respectively. Measures of inflation compensation derived from Treasury Incoming data suggested that foreign economic activ- Inflation-Protected Securities increased 4 basis points ity continued to expand at a solid pace. Real GDP and 7 basis points at the 5- and 5-to-10-year horigrowth picked up in the first quarter in several zons, respectively, against a backdrop of rising oil emerging market economies (EMEs), including prices. Option-implied measures of volatility of Mexico, China, and some other parts of emerging longer-term interest rates continued to decline over Asia. However, incoming data in a number of the intermeeting period after their marked increase advanced foreign economies (AFEs)—in particular, earlier this year. real GDP in the United Kingdom—showed somewhat slower growth than market participants were The S&P 500 index decreased over the period on net. expecting, partly because of transitory factors such Equity prices declined early in the intermeeting as severe weather. Overall, inflation in most AFEs period, reportedly in response to trade tensions and EMEs continued to be subdued, increasing in between the United States and China as well as negathe AFEs in the first quarter on higher energy prices tive news about the technology sector. However, but stepping down some in the EMEs, partly reflect- equity prices subsequently retraced some of the earing lower food prices in some Asian economies. lier declines as concerns about trade policy seemed to ease and corporate earnings reports for the first quar- Staff Review of the Financial Situation ter of 2018 generally came in stronger than expected. Option-implied volatility on the S&P 500 index at the Early in the intermeeting period, uncertainty over one-month horizon—the VIX—declined but trade policy and negative news about the technology remained at elevated levels relative to 2017, ending sector reportedly contributed to lower prices for risky the period at approximately 15 percent. On net, assets, but these concerns subsequently seemed to spreads of yields of investment-grade corporate recede amid stronger-than-expected corporate earn- bonds over comparable-maturity Treasury securities ings reports. Equity prices declined, nominal Treas- widened a bit, while spreads for speculative-grade ury yields increased modestly, and market-based corporate bonds were unchanged. measures of inflation compensation ticked up on net. Meanwhile, financing conditions for nonfinancial Conditions in short-term funding markets remained businesses and households largely remained support- generally stable over the intermeeting period. Spreads ive of spending. on term money market instruments relative to comparable-maturity OIS rates were still larger than FOMC communications over the intermeeting usual in some segments of the money market. period were generally viewed by market participants Reflecting the FOMC’s policy action in March, as reflecting an upbeat outlook for economic growth yields on a broad set of money market instruments and as consistent with a continued gradual removal moved about 25 basis points higher. Bill yields also of monetary policy accommodation. The FOMC’s stayed high relative to OIS rates as cumulative Treas-

Minutes of Federal Open Market Committee Meetings | May 173 ury bill supply remained elevated. Money market Spreads on commercial mortgage-backed securities dynamics over quarter-end were muted relative to (CMBS) were little changed over the intermeeting previous quarter-ends. period and remained near their post-crisis lows. CMBS issuance continued to be strong in March but Foreign equity markets were mixed over the inter- slowed somewhat in April. Respondents to the April meeting period, with investors attuned to develop- SLOOS reported easing standards on nonfarm nonments related to U.S. and Chinese trade policies and residential loans and tightening standards on multito news about the U.S. technology sector. Broad family loans, whereas standards on construction and Japanese and European equity indexes outperformed land development loans were little changed in the their U.S. counterparts, ending the period somewhat first quarter. Meanwhile, respondents indicated higher. Market-based measures of policy expecta- weaker demand for loans across these three CRE tions and longer-term yields were little changed in loan categories. the euro area and Japan but declined modestly in the United Kingdom on weaker-than-expected economic Financing conditions in the residential mortgage data. Longer-term yields in Canada moved up mod- market remained accommodative for most borrowers erately amid notably higher oil prices. In EMEs, sov- in March and April. For borrowers with low credit ereign bond spreads edged up; capital continued to scores, conditions continued to ease, but credit flow into EME mutual funds, although at a slower remained relatively tight and the volume of mortgage pace lately. loans extended to this group remained low. Banks responding to the April SLOOS reported weaker On net, the broad nominal dollar index appreciated loan demand across most residential real estate moderately over the intermeeting period. In the early (RRE) loan categories, while standards were reportpart of the period, the index depreciated slightly, as edly about unchanged for most RRE loan types in relatively positive news about the current round of the first quarter. NAFTA (North American Free Trade Agreement) negotiations led to appreciation of the Mexican peso Consumer credit growth moderated in March and and Canadian dollar, two currencies with large the first half of April. Respondents to the April weights in the index. Later in the period, there was a SLOOS reported that standards and terms on auto broad-based appreciation of the dollar against most and credit card loans tightened, and that demand for currencies as U.S. yields increased relative to those in these loans weakened in the first quarter. On balance, AFEs and as the Mexican peso declined amid uncer- credit remained readily available to prime-rated bortainty associated with the upcoming presidential rowers, but tight for subprime borrowers, over the elections. intermeeting period. Growth in banks’ commercial and industrial (C&I) The staff provided its latest report on potential risks loans strengthened in March and the first half of to financial stability; the report again characterized April following relatively weak growth in January and the financial vulnerabilities of the U.S. financial February. Respondents to the April Senior Loan system as moderate on balance. This overall assess- Officer Opinion Survey on Bank Lending Practices ment incorporated the staff’s judgment that vulner- (SLOOS) reported that their institutions had eased abilities associated with asset valuation pressures, standards and terms on C&I loans in the first quar- while having come down a little in recent months, ter, most often citing increased competition from nonetheless continued to be elevated. The staff other lenders as the reason for doing so. Gross issu- judged vulnerabilities from financial-sector leverage ance of corporate bonds and leveraged loans was and maturity and liquidity transformation to be low, strong in March, and equity issuance was robust. The vulnerabilities from household leverage as being in credit quality of nonfinancial corporations was stable the low-to-moderate range, and vulnerabilities from over the intermeeting period, and the ratio of aggre- leverage in the nonfinancial business sector as gate debt to assets remained near multidecade highs. elevated. The staff also characterized overall vulnerabilities to foreign financial stability as moderate Commercial real estate (CRE) financing conditions while highlighting specific issues in some foreign remained accommodative over the intermeeting economies, including—depending on the country— period. CRE loan growth at banks strengthened in elevated asset valuation pressures, high private or March but edged down in the first half of April. sovereign debt burdens, and political uncertainties.

174 105th Annual Report | 2018 Staff Economic Outlook further above its potential. Downside risks included the possibilities that longer-term inflation expecta- The staff projection for U.S. economic activity pre- tions may be lower than was assumed or that the run pared for the May FOMC meeting continued to sug- of low core inflation readings last year could prove to gest that the economy was expanding at an above- be more persistent than the staff expected. trend pace. Real GDP growth, which slowed in the first quarter, was expected to pick up in the second Participants’ Views on Current Conditions quarter and to outpace potential output growth and the Economic Outlook through 2020. The unemployment rate was projected to decline further over the next few years and to con- In their discussion of the economic situation and the tinue to run below the staff’s estimate of its longer- outlook, meeting participants agreed that informarun natural rate over this period. Relative to the fore- tion received since the FOMC met in March indicast prepared for the March meeting, the projection cated that the labor market had continued to for real GDP growth in 2018 was revised down a strengthen and that economic activity had been rising little, primarily in response to incoming consumer at a moderate rate. Job gains had been strong, on spending data that were somewhat softer than the average, in recent months, and the unemployment staff had expected. Beyond 2018, the projection for rate had stayed low. Recent data suggested that GDP growth was essentially unrevised. With real growth of household spending had moderated from GDP rising a little less, on balance, over the forecast its strong fourth-quarter pace, while business fixed period, the projected decline in the unemployment investment had continued to grow strongly. On a rate over the next few years was also a touch smaller 12-month basis, both overall inflation and inflation than in the previous forecast. for items other than food and energy had moved close to 2 percent. Market-based measures of infla- The near-term projection for consumer price infla- tion compensation remained low; survey-based meastion was revised up slightly in response to incoming ures of longer-term inflation expectations were little data on prices. Beyond the near term, the forecast for changed, on balance. inflation was a bit lower than in the previous projection, reflecting the slightly higher unemployment rate Participants viewed recent readings on spending, in the new forecast. The rates of both total and core employment, and inflation as suggesting little change, PCE price inflation were projected to be faster in on balance, in their assessments of the economic out- 2018 than in 2017. The staff projected that total PCE look. Real GDP growth slowed somewhat less in the inflation would be near the Committee’s 2 percent first quarter than anticipated at the time of the objective over the next several years. Total PCE infla- March meeting, and participants expected that the tion was expected to run slightly below core inflation moderation in the growth of consumer spending in 2019 and 2020 because of a projected decline in early in the year would prove temporary. They noted energy prices. a number of economic fundamentals were currently supporting continued above-trend economic growth; The staff viewed the uncertainty around its projec- these included a strong labor market, federal tax and tions for real GDP growth, the unemployment rate, spending policies, high levels of household and busiand inflation as similar to the average of the past ness confidence, favorable financial conditions, and 20 years. The staff saw the risks to the forecasts for strong economic growth abroad. Participants generreal GDP growth and the unemployment rate as bal- ally expected that further gradual increases in the taranced. On the upside, recent fiscal policy changes get range for the federal funds rate would be consiscould lead to a greater expansion in economic activ- tent with solid expansion of economic activity, strong ity over the next few years than the staff projected. labor market conditions, and inflation near the Com- On the downside, those fiscal policy changes could mittee’s symmetric 2 percent objective over the yield less impetus to the economy than the staff medium term. Participants generally viewed the risks expected if the economy was already operating above to the economic outlook to be roughly balanced. its potential level and resource utilization continued to tighten, as the staff projected. Risks to the infla- Participants generally reported that their business tion projection also were seen as balanced. An upside contacts were optimistic about the economic outrisk was that inflation could increase more than look. However, in a number of Districts, contacts expected in an economy that was projected to move expressed concern about the possible adverse effects

Minutes of Federal Open Market Committee Meetings | May 175 of tariffs and trade restrictions, including the poten- Committee’s symmetric 2 percent objective on a sustial for postponing or pulling back on capital spend- tained basis. In particular, the recent readings ing. Labor markets were generally strong, and con- appeared to support the view that the downside surtacts in a number of Districts reported shortages of prises last year were largely transitory. Some particiworkers in specific industries or occupations. In some pants noted that inflation was likely to modestly cases, labor shortages were contributing to upward overshoot 2 percent for a time. However, several parpressure on wages. In many Districts, business con- ticipants suggested that the underlying trend in inflatacts experienced rising costs of nonlabor inputs, par- tion had changed little, noting that some of the ticularly trucking, rail, and shipping rates and prices recent increase in inflation may have represented of steel, aluminum, lumber, and petroleum-based transitory price changes in some categories of health commodities. Reports on the ability of firms to pass care and financial services, or that various measures through higher costs to customers varied across Dis- of underlying inflation, such as the 12-month tricts. Activity in the energy sector remained strong, trimmed mean PCE inflation rate from the Federal and crude oil production was expected to continue to Reserve Bank of Dallas, remained relatively stable at expand in response to rising global demand. In con- levels below 2 percent. In discussing the outlook for trast, in agricultural areas, low crop prices continued inflation, many participants emphasized that, after to weigh on farm income. It was noted that the an extended period of low inflation, the Committee’s potential for higher Chinese tariffs on key agricul- longer-run policy objective was to return inflation to tural products could, in the longer run, hurt U.S. its symmetric 2 percent goal on a sustained basis. competitiveness. Many saw tight resource utilization, the pickup in wage increases and nonlabor input costs, and stable Participants generally agreed that labor market con- inflation expectations as supporting their projections ditions strengthened further during the first quarter that inflation would remain near 2 percent over the of the year. Nonfarm payroll employment posted medium term. But a few cautioned that, although strong gains, averaging 200,000 per month. The market-based measures of inflation compensation unemployment rate was unchanged, but at a level had moved up over recent months, in their view these below most estimates of its longer-run normal rate. measures, as well as some survey-based measures, Both the overall labor force participation rate and the remained at levels somewhat below those that would employment-to-population ratio moved up. The first- be consistent with an expectation of sustained 2 perquarter data from the employment cost index indi- cent inflation as measured by the PCE price index. cated that the strength in the labor market was showing through to a gradual pickup in wage increases, Participants commented on a number of risks and although the signal from other wage measures was uncertainties associated with their expectations for less clear. Many participants commented that overall economic activity, the labor market, and inflation wage pressures were still moderate or were strong over the medium term. Some participants saw a risk only in industries and occupations experiencing very that, as resource utilization continued to tighten, suptight labor supply; several of them noted that recent ply constraints could develop that would intensify wage developments provided little evidence of gen- upward wage and price pressures, or that financial eral overheating in the labor market. With economic imbalances could emerge, which could eventually growth anticipated to remain above trend, partici- erode the sustainability of the economic expansion. pants generally expected the unemployment rate to Alternatively, some participants thought that a remain below, or to decline further below, their esti- strengthening labor market could bring a further mates of its longer-run normal rate. Several partici- increase in labor supply, allowing the unemployment pants also saw scope for a strong labor market to rate to decline further with less upward pressure on continue to draw individuals into the workforce. wages and prices. Another area of uncertainty was However, a few others questioned whether tight labor the outlook for fiscal and trade policies. Several parmarkets would have a lasting positive effect on labor ticipants continued to note the challenge of assessing force participation. the timing and magnitude of the effects of recent fiscal policy changes on household and business spend- The 12-month changes in overall and core PCE ing and on labor supply over the next several years. prices moved up in March, to 2 percent and 1.9 per- In addition, they saw the trajectory of fiscal policy cent, respectively. Most participants viewed the thereafter as difficult to forecast. With regard to recent firming in inflation as providing some reassur- trade policies, a number of participants viewed the ance that inflation was on a trajectory to achieve the range of possible outcomes for economic activity and

176 105th Annual Report | 2018 inflation to be particularly wide, depending on what the intermeeting period had not materially altered actions were taken by the United States and how U.S. their assessment of the outlook for the economy. Partrading partners responded. And some participants ticipants commented that above-trend growth in real observed that while these policies were being debated GDP in recent quarters, together with somewhat and negotiations continued, the uncertainty sur- higher recent inflation readings, had increased their rounding trade issues could damp business sentiment confidence that inflation on a 12-month basis would and spending. In their discussion of the outlook for continue to run near the Committee’s longer-run inflation, a few participants also noted the risk that, 2 percent symmetric objective. That said, it was noted if global oil prices remained high or moved higher, that it was premature to conclude that inflation U.S. inflation would be boosted by the direct effects would remain at levels around 2 percent, especially and pass-through of higher energy costs. after several years in which inflation had persistently run below the Committee’s 2 percent objective. In Financial conditions tightened somewhat over the light of subdued inflation over recent years, a few intermeeting period but remained accommodative participants observed that adjustments in the stance overall. The foreign exchange value of the dollar rose of policy should take account of the possibility that modestly, but this move retraced only a bit of the longer-term inflation expectations have drifted a bit depreciation of the dollar since its 2016 peak. With below levels consistent with the Committee’s 2 pertheir decline over the intermeeting period, equity cent inflation objective. Most participants judged prices were about unchanged, on net, since the begin- that if incoming information broadly confirmed their ning of the year but were still near their historical current economic outlook, it would likely soon be highs. Longer-term Treasury yields rose, but some- appropriate for the Committee to take another step what less than shorter-term yields, and the yield in removing policy accommodation. Overall, particicurve flattened somewhat further. pants agreed that the current stance of monetary policy remained accommodative, supporting strong In commenting on the staff’s assessment of financial labor market conditions and a return to 2 percent stability, a couple of participants noted that after the inflation on a sustained basis. bout of financial market volatility in early February, the use of investment strategies predicated on a low- With regard to the medium-term outlook for monvolatility environment may have become less preva- etary policy, all participants reaffirmed that adjustlent, and that some investors may have become more ments to the path for the policy rate would depend cautious. However, asset valuations across a range of on their assessments of the evolution of the ecomarkets and leverage in the nonfinancial corporate nomic outlook and risks to the outlook relative to sector remained elevated relative to historical norms, the Committee’s statutory objectives. Participants leaving some borrowers vulnerable to unexpected generally agreed with the assessment that continuing negative shocks. With regard to the ability of the to raise the target range for the federal funds rate financial system to absorb such shocks, several par- gradually would likely be appropriate if the economy ticipants commented that regulatory reforms since evolves about as expected. These participants comthe crisis had contributed to appreciably stronger mented that this gradual approach was most likely to capital and liquidity positions in the financial sector. be conducive to maintaining strong labor market In this context, a few participants emphasized the conditions and achieving the symmetric 2 percent need to build additional resilience in the financial sec- inflation objective on a sustained basis without tor at this point in the economic expansion. resulting in conditions that would eventually require an abrupt policy tightening. A few participants com- In their consideration of monetary policy over the mented that recent news on inflation, against a backnear term, participants discussed the implications of ground of continued prospects for a solid pace of recent economic and financial developments for the economic growth, supported the view that inflation outlook for economic growth, labor market condi- on a 12-month basis would likely move slightly above tions, and inflation and, in turn, for the appropriate the Committee’s 2 percent objective for a time. It was path of the federal funds rate. All participants also noted that a temporary period of inflation modexpressed the view that it would be appropriate for estly above 2 percent would be consistent with the the Committee to leave the target range for the fed- Committee’s symmetric inflation objective and could eral funds rate unchanged at the May meeting. Par- be helpful in anchoring longer-run inflation expectaticipants concurred that information received during tions at a level consistent with that objective.

Minutes of Federal Open Market Committee Meetings | May 177 Meeting participants also discussed the recent flatter economic activity had been rising at a moderate rate. profile of the term structure of interest rates. Partici- Job gains had been strong, on average, in recent pants pointed to a number of factors contributing to months, and the unemployment rate had stayed low. the flattening of the yield curve, including the Recent data suggested that growth of household expected gradual rise of the federal funds rate, the spending had moderated from its strong fourthdownward pressure on term premiums from the Fed- quarter pace, while business fixed investment contineral Reserve’s still-large balance sheet as well as asset ued to grow strongly. On a 12-month basis, both purchase programs by other central banks, and a overall inflation and inflation for items other than reduction in investors’ estimates of the longer-run food and energy had moved close to 2 percent. In neutral real interest rate. A few participants noted particular, in March the 12-month percent increase in that such factors could make the slope of the yield PCE prices was equal to the Committee’s longer-run curve a less reliable signal of future economic activ- objective of 2 percent, while the measure excluding ity. However, several participants thought that it food and energy prices was only slightly below 2 perwould be important to continue to monitor the slope cent. Market-based measures of inflation compensaof the yield curve, emphasizing the historical regular- tion remained low, and survey-based measures of ity that an inverted yield curve has indicated an longer-term inflation expectations were little increased risk of recession. changed, on balance. Participants commented on how the Committee’s All members viewed the recent data as indicating that communications in its postmeeting statement might the outlook for the economy had changed little since need to be revised in coming meetings if the economy the previous meeting. In addition, financial condievolved broadly as expected. A few participants tions, although somewhat tighter than at the time of noted that if increases in the target range for the fed- the March FOMC meeting, had stayed accommodaeral funds rate continued, the federal funds rate could tive overall, while fiscal policy was likely to provide be at or above their estimates of its longer-run nor- sizable impetus to the economy over the next few mal level before too long. In addition, a few observed years. Consequently, members expected that, with that the neutral level of the federal funds rate might further gradual adjustments to the stance of moncurrently be lower than their estimates of its longer- etary policy, economic activity would expand at a run level. In light of this, some participants noted it moderate pace in the medium term and labor market might soon be appropriate to revise the forward- conditions would remain strong. Members agreed guidance language in the statement indicating that that inflation on a 12-month basis is expected to run the “federal funds rate is likely to remain, for some near the Committee’s symmetric 2 percent objective time, below levels that are expected to prevail in the over the medium term. Members judged that the longer run” or to modify the language stating that risks to the economic outlook appeared to be roughly “the stance of monetary policy remains accommoda- balanced. tive.” Participants expressed a range of views on the amount of further policy firming that would likely be After assessing current conditions and the outlook required over the medium term to achieve the Com- for economic activity, the labor market, and inflation, mittee’s goals. Participants indicated that the Com- members agreed to maintain the target range for the mittee, in making policy decisions over the next few federal funds rate at 1½ to 1¾ percent. They noted years, should conduct policy with the aim of keeping that the stance of monetary policy remained accominflation near its longer-run symmetric objective modative, thereby supporting some further strengthwhile sustaining the economic expansion and a ening in labor market conditions and a sustained strong labor market. Participants agreed that the return to 2 percent inflation. actual path of the federal funds rate would depend on the economic outlook as informed by incoming Members agreed that the timing and size of future information. adjustments to the target range for the federal funds rate would depend on their assessments of realized Committee Policy Action and expected economic conditions relative to the Committee’s objectives of maximum employment In their discussion of monetary policy for the period and 2 percent inflation. They reiterated that this ahead, members judged that information received assessment would take into account a wide range of since the Committee met in March indicated that the information, including measures of labor market labor market had continued to strengthen and that conditions, indicators of inflation pressures and

178 105th Annual Report | 2018 inflation expectations, and readings on financial and The vote also encompassed approval of the statement international developments. Members also agreed below to be released at 2:00 p.m.: that they would carefully monitor actual and expected developments in inflation in relation to the “Information received since the Federal Open Committee’s symmetric inflation goal. Members Market Committee met in March indicates that expected that economic conditions would evolve in a the labor market has continued to strengthen manner that would warrant further gradual increases and that economic activity has been rising at a in the federal funds rate. Members agreed that the moderate rate. Job gains have been strong, on federal funds rate was likely to remain, for some time, average, in recent months, and the unemploybelow levels that they expected to prevail in the lon- ment rate has stayed low. Recent data suggest ger run. However, they noted that the actual path of that growth of household spending moderated the federal funds rate would depend on the economic from its strong fourth-quarter pace, while busioutlook as informed by incoming data. ness fixed investment continued to grow strongly. On a 12-month basis, both overall At the conclusion of the discussion, the Committee inflation and inflation for items other than food voted to authorize and direct the Federal Reserve and energy have moved close to 2 percent. Bank of New York, until it was instructed otherwise, Market-based measures of inflation compensato execute transactions in the SOMA in accordance tion remain low; survey-based measures of with the following domestic policy directive, to be longer-term inflation expectations are little released at 2:00 p.m.: changed, on balance. “Effective May 3, 2018, the Federal Open Mar- Consistent with its statutory mandate, the Comket Committee directs the Desk to undertake mittee seeks to foster maximum employment open market operations as necessary to main- and price stability. The Committee expects that, tain the federal funds rate in a target range of with further gradual adjustments in the stance of 1½ to 1¾ percent, including overnight reverse monetary policy, economic activity will expand repurchase operations (and reverse repurchase at a moderate pace in the medium term and operations with maturities of more than one day labor market conditions will remain strong. when necessary to accommodate weekend, holi- Inflation on a 12-month basis is expected to run day, or similar trading conventions) at an offer- near the Committee’s symmetric 2 percent ing rate of 1.50 percent, in amounts limited only objective over the medium term. Risks to the by the value of Treasury securities held outright economic outlook appear roughly balanced. in the System Open Market Account that are available for such operations and by a per- In view of realized and expected labor market counterparty limit of $30 billion per day. conditions and inflation, the Committee decided to maintain the target range for the federal funds The Committee directs the Desk to continue rate at 1½ to 1¾ percent. The stance of monrolling over at auction the amount of principal etary policy remains accommodative, thereby payments from the Federal Reserve’s holdings of supporting strong labor market conditions and a Treasury securities maturing during each calen- sustained return to 2 percent inflation. dar month that exceeds $18 billion, and to reinvest in agency mortgage-backed securities the In determining the timing and size of future amount of principal payments from the Federal adjustments to the target range for the federal Reserve’s holdings of agency debt and agency funds rate, the Committee will assess realized mortgage-backed securities received during each and expected economic conditions relative to its calendar month that exceeds $12 billion. Small objectives of maximum employment and 2 perdeviations from these amounts for operational cent inflation. This assessment will take into reasons are acceptable. account a wide range of information, including measures of labor market conditions, indicators The Committee also directs the Desk to engage of inflation pressures and inflation expectations, in dollar roll and coupon swap transactions as and readings on financial and international necessary to facilitate settlement of the Federal developments. The Committee will carefully Reserve’s agency mortgage-backed securities monitor actual and expected inflation developtransactions.” ments relative to its symmetric inflation goal.

Minutes of Federal Open Market Committee Meetings | May 179 The Committee expects that economic condi- approve establishment of the primary credit rate (distions will evolve in a manner that will warrant count rate) at the existing level of 2¼ percent.5 further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for It was agreed that the next meeting of the Committee some time, below levels that are expected to pre- would be held on Tuesday–Wednesday, June 12–13, vail in the longer run. However, the actual path 2018. The meeting adjourned at 10:00 a.m. on of the federal funds rate will depend on the eco- May 2, 2018. nomic outlook as informed by incoming data.” Notation Vote Voting for this action: Jerome H. Powell, William C. Dudley, Thomas I. Barkin, Raphael W. Bostic, Lael By notation vote completed on April 10, 2018, the Brainard, Loretta J. Mester, Randal K. Quarles, and Committee unanimously approved the minutes of the John C. Williams. Committee meeting held on March 20–21, 2018. Voting against this action: None. James A. Clouse Secretary Consistent with the Committee’s decision to leave the target range for the federal funds rate unchanged, the Board of Governors voted unanimously to leave the 5 The second vote of the Board also encompassed approval of the interest rates on required and excess reserve balances establishment of the interest rates for secondary and seasonal unchanged at 1¾ percent and voted unanimously to credit under the existing formulas for computing such rates.

180 105th Annual Report | 2018 Meeting Held on June 12–13, 2018 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, David Altig, Kartik B. Athreya, June 12, 2018, at 1:00 p.m. and continued on Thomas A. Connors, David E. Lebow, Wednesday, June 13, 2018, at 9:00 a.m.1 Trevor A. Reeve, Ellis W. Tallman, William Wascher,2 and Beth Anne Wilson Present Associate Economists Jerome H. Powell Simon Potter Chairman Manager, System Open Market Account William C. Dudley Lorie K. Logan Vice Chairman Deputy Manager, System Open Market Account Thomas I. Barkin Ann E. Misback Secretary, Office of the Secretary, Raphael W. Bostic Board of Governors Lael Brainard Matthew J. Eichner3 Loretta J. Mester Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Randal K. Quarles Michael S. Gibson John C. Williams Director, Division of Supervision and Regulation, James Bullard, Charles L. Evans, Esther L. George, Board of Governors Eric Rosengren, and Michael Strine2 Andreas Lehnert Alternate Members of the Federal Open Market Director, Division of Financial Stability, Committee Board of Governors Patrick Harker, Robert S. Kaplan, and Neel Kashkari Rochelle M. Edge Presidents of the Federal Reserve Banks of Deputy Director, Division of Monetary Affairs, Philadelphia, Dallas, and Minneapolis, respectively Board of Governors James A. Clouse Michael T. Kiley Secretary Deputy Director, Division of Financial Stability, Matthew M. Luecke Board of Governors Deputy Secretary Antulio N. Bomfim David W. Skidmore Special Adviser to the Chairman, Office of Board Members, Assistant Secretary Board of Governors Michelle A. Smith Joseph W. Gruber 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 Shaghil Ahmed Steven B. Kamin Senior Associate Director, Division of International Economist Finance, 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 developments in financial 2 Attended Tuesday session only. markets and open market operations.

Minutes of Federal Open Market Committee Meetings | June 181 Ellen E. Meade, Stephen A. Meyer, Achilles Sangster II and Robert J. Tetlow Information Management Analyst, Division of Senior Advisers, Division of Monetary Affairs, Monetary Affairs, Board of Governors Board of Governors Kenneth C. Montgomery John J. Stevens and Stacey Tevlin First Vice President, Federal Reserve Bank of Boston Associate Directors, Division of Research and Jeff Fuhrer, Daniel G. Sullivan, Statistics, Board of Governors and Christopher J. Waller Jeffrey D. Walker3 Executive Vice Presidents, Federal Reserve Banks of Deputy Associate Director, Division of Reserve Bank Boston, Chicago, and St. Louis, respectively Operations and Payment Systems, Marc Giannoni, Paolo A. Pesenti, Board of Governors and Mark L. J. Wright Min Wei Senior Vice Presidents, Federal Reserve Banks of Deputy Associate Director, Division of Monetary Dallas, New York, and Minneapolis, respectively Affairs, Board of Governors Roc Armenter Burcu Duygan-Bump, Norman J. Morin, Vice President, Federal Reserve Bank of Philadelphia John Sabelhaus, and Paul A. Smith Willem Van Zandweghe Assistant Directors, Division of Research and Assistant Vice President, Federal Reserve Bank of Statistics, Board of Governors Kansas City Christopher J. Gust Nicolas Petrosky-Nadeau Assistant Director, Division of Monetary Affairs, Senior Research Advisor, Federal Reserve Bank of Board of Governors San Francisco Penelope A. Beattie2 Developments in Financial Markets and Assistant to the Secretary, Office of the Secretary, Board of Governors Open Market Operations John Ammer2 The manager of the System Open Market Account Senior Economic Project Manager, Division of (SOMA) provided a summary of developments in International Finance, Board of Governors domestic and global financial markets over the intermeeting period. Developments in emerging market Dan Li economies (EMEs) and in Europe were the focus of Section Chief, Division of Monetary Affairs, considerable attention by financial market partici- Board of Governors pants over recent weeks. Investor perceptions of David H. Small increased economic and political vulnerabilities in Project Manager, Division of Monetary Affairs, several EMEs led to a notable depreciation in EME Board of Governors currencies relative to the dollar. Market participants reported that an unwinding of investor positions had Martin Bodenstein and Marcel A. Priebsch been a factor amplifying these currency moves. In Principal Economists, Division of Monetary Affairs, Europe, concerns about the political situation in Italy Board of Governors and its potential economic implications prompted a Logan T. Lewis significant widening in risk spreads on Italian sover- Principal Economist, Division of International eign securities. The share prices of Italian banks and Finance, Board of Governors other banks that could be exposed to Italy declined sharply. In domestic financial markets, expectations Maria Otoo for the path of the federal funds rate were little Principal Economist, Division of Research and changed over the intermeeting period. The manager Statistics, Board of Governors noted that the release of the minutes of the May Marcelo Ochoa FOMC meeting, and particularly the reference to a Senior Economist, Division of Monetary Affairs, possible technical adjustment in the interest on excess Board of Governors reserves (IOER) rate relative to the top of the

182 105th Annual Report | 2018 FOMC’s target range for the federal funds rate, based measures of longer-run inflation expectations prompted a small reduction in federal funds futures were little changed on balance. rates. Total nonfarm payroll employment expanded at a The deputy manager followed with a discussion of strong pace, on average, in April and May. The money markets and open market operations. Rates national unemployment rate edged down in both on Treasury repurchase agreements (repo) had months and was 3.8 percent in May. The unemployremained elevated in recent weeks, apparently ment rates for African Americans, Asians, and Hisresponding, in part, to increased Treasury issuance panics all declined, on net, from March to May; the over recent months. In light of the firmness in repo rate for African Americans was the lowest on record rates, the volume of operations conducted through but still noticeably above the rates for other groups. the Federal Reserve’s overnight reverse repurchase The overall labor force participation rate edged down agreement facility remained low. Elevated repo rates in April and May but was still at about the same level may also have contributed to some upward pressure as a year earlier. The share of workers employed part on the effective federal funds rate in recent weeks as time for economic reasons was little changed at a lenders in that market shifted some of their invest- level close to that from just before the previous recesments to earn higher rates available in repo markets. sion. The rate of private-sector job openings rose in The deputy manager also discussed the current out- March and stayed at that elevated level in April; the look for reinvestment purchases of agency mortgage- rate of quits edged up, on net, over those two backed securities (MBS). Based on current projec- months; and initial claims for unemployment insurtions, principal payments on the Federal Reserve’s ance benefits continued to be low through early June. holdings of agency MBS would likely be lower than Recent readings showed that increases in labor comthe monthly cap on redemptions that will be in effect pensation stepped up over the past year. Compensabeginning in the fall of this year. Consistent with the tion per hour in the nonfarm business sector June 2017 addendum to the Policy Normalization increased 2.7 percent over the four quarters ending in Principles and Plans, reinvestment purchases of the first quarter of this year (compared with 1.9 peragency MBS then are projected to fall to zero from cent over the same four quarters a year earlier), and that point onward. However, principal payments on average hourly earnings for all employees increased agency MBS are sensitive to changes in various fac- 2.7 percent over the 12 months ending in May (comtors, particularly long-term interest rates. As a result, pared with 2.5 percent over the same 12 months a agency MBS principal payments could rise above the year earlier). monthly redemption cap in some future scenarios and thus require MBS reinvestment purchases. In Total industrial production increased at a solid pace light of this possibility, the deputy manager in April, but the available indicators for May, particudescribed plans for the Desk to conduct small value larly production worker hours in manufacturing, purchases of agency MBS on a regular basis in order indicated that output declined in that month. Autoto maintain operational readiness. makers’ schedules suggested that assemblies of light motor vehicles would increase in the coming months, By unanimous vote, the Committee ratified the Open and broader indicators of manufacturing production, Market Desk’s domestic transactions over the inter- such as the new orders indexes from national and meeting period. There were no intervention opera- regional manufacturing surveys, continued to point tions in foreign currencies for the System’s account to solid gains in factory output in the near term. during the intermeeting period. Consumer spending appeared to be increasing briskly Staff Review of the Economic Situation in the second quarter after rising at only a modest pace in the first quarter. Real PCE increased at a The information reviewed for the June 12–13 meeting robust pace in April after a strong gain in March. indicated that labor market conditions continued to Although light motor vehicle sales declined in May, strengthen in recent months, and that real gross indicators of vehicle demand generally remained domestic product (GDP) appeared to be rising at a upbeat. More broadly, recent readings on key factors solid rate in the first half of the year. Consumer price that influence consumer spending—including gains inflation, as measured by the 12-month percentage in employment, real disposable personal income, and change in the price index for personal consumption households’ net worth—continued to be supportive expenditures (PCE), was 2 percent in April. Survey- of solid real PCE growth in the near term. In addi-

Minutes of Federal Open Market Committee Meetings | June 183 tion, the lower tax withholding resulting from the tax ending in April. Core PCE price inflation, which cuts enacted late last year still appeared likely to pro- excludes changes in consumer food and energy prices, vide some additional impetus to spending in coming was 1.8 percent over that same period. The consumer months. Consumer sentiment, as measured by the price index (CPI) rose 2.8 percent over the 12 months University of Michigan Surveys of Consumers, ending in May, while core CPI inflation was 2.2 perremained elevated in May. cent. Recent readings on survey-based measures of longer-run inflation expectations—including those Residential investment appeared to be declining fur- from the Michigan survey, the Survey of Professional ther in the second quarter after decreasing in the first Forecasters, and the Desk’s Survey of Primary Dealquarter. Starts for new single-family homes were ers and Survey of Market Participants—were little unchanged in April from their first-quarter average, changed on balance. but starts of multifamily units declined noticeably. Sales of both new and existing homes decreased in Incoming data suggested that foreign economic activ- April. ity continued to expand at a solid pace. Real GDP growth picked up in the first quarter in several Real private expenditures for business equipment and EMEs—including Mexico, China, and much of intellectual property appeared to be rising at a mod- emerging Asia—although recent indicators pointed erate pace in the second quarter after a somewhat to some moderation in the pace of activity in most faster increase in the first quarter. Nominal ship- EMEs. By contrast, in the advanced foreign economents of non-defense capital goods excluding aircraft mies (AFEs), real GDP growth slowed in the first rose in April, and forward-looking indicators of quarter, owing partly to temporary factors such as business equipment spending—such as the backlog labor strikes in some European countries and bad of unfilled capital goods orders, along with upbeat weather in Japan. More recent indicators pointed to readings on business sentiment from national and a partial rebound in AFE economic growth in the regional surveys—continued to point to robust gains second quarter. Inflation pressures in the foreign in equipment spending in the near term. Real busi- economies generally remained subdued, even though ness expenditures for nonresidential structures higher oil prices put some upward pressure on headappeared to be expanding at a solid pace again in the line inflation. second quarter, and the number of crude oil and natural gas rigs in operation—an indicator of busi- Staff Review of the Financial Situation ness spending for structures in the drilling and mining sector—increased, on net, from mid-April During the intermeeting period, global financial marthrough early June. kets were buffeted by increased concerns about the outlook for foreign growth and political develop- Nominal federal government spending data for April ments in Italy, but these concerns subsequently eased. and May pointed to an increase in real federal pur- On net, Treasury yields were little changed despite chases in the second quarter. Real state and local gov- significant intraperiod moves, and the dollar appreciernment purchases also appeared to be moving up; ated notably as a range of AFE and EME currencies although nominal construction expenditures by these and sovereign bonds came under pressure. However, governments edged down in April, their payrolls rose broad domestic stock price indexes increased, on net, at a moderate pace, on net, in April and May. as generally strong corporate earnings reports helped support prices. Meanwhile, financing conditions for Net exports made a negligible contribution to real nonfinancial businesses and households remained GDP growth in the first quarter, with growth of both supportive of economic activity on balance. real exports and real imports slowing from the brisk pace of the fourth quarter of last year. After narrow- Over the intermeeting period, macroeconomic data ing in March, the nominal trade deficit narrowed fur- releases signaling moderating growth in some foreign ther in April, as exports continued to increase while economies, along with downside risks stemming from imports declined slightly, which suggested that net political developments in Italy and several EMEs, exports might add modestly to real GDP growth in weighed on prices of foreign risk assets. These develthe second quarter. opments, together with a still-solid economic outlook for the United States, supported an increase in the Total U.S. consumer prices, as measured by the PCE broad trade-weighted index of the foreign exchange price index, increased 2.0 percent over the 12 months value of the dollar.

184 105th Annual Report | 2018 The dollar appreciated notably against several EME comparable-maturity Treasury securities widened currencies (primarily those of Argentina, Turkey, moderately for both investment- and speculative- Mexico, and Brazil), as the increase in U.S. interest grade firms. However, these spreads remained low by rates since late 2017, along with political develop- historical standards. ments and other issues, intensified concerns about financial vulnerabilities. EME mutual funds saw Over the intermeeting period, short-term funding slight net outflows, and, on balance, EME sovereign markets stayed generally stable despite still-elevated spreads widened and equity prices edged lower. In spreads between rates on some private money market the AFEs, sovereign spreads in some peripheral instruments and OIS rates of similar maturity. While European countries widened and European bank some of the factors contributing to pressures in shares came under pressure, as investors focused on short-term funding markets had eased recently, the political developments in Italy. Broad equity indexes three-month spread between the London interbank in the euro area, with the exception of Italy, ended offered rate and the OIS rate remained significantly the period little changed, while those in Canada, the wider than at the start of the year. United Kingdom, and Japan edged higher. Marketbased measures of expected policy rates were little Growth of outstanding commercial and industrial changed, on balance, and flight-to-safety flows loans held by banks appeared to have moderated in reportedly contributed to declines in German longer- May after a strong reading in April. The issuance of term sovereign yields. institutional leveraged loans was strong in April and May; meanwhile, corporate bond issuance was weak, FOMC communications over the intermeeting likely reflecting seasonal patterns. Gross issuance of period—including the May FOMC statement and municipal bonds in April and May was solid, as issuthe May FOMC meeting minutes—elicited only ance continued to recover from the slow pace minor reactions in asset markets. Quotes on federal recorded at the start of the year. funds futures contracts suggested that the probability of an increase in the target range for the federal Financing conditions for commercial real estate funds rate occurring at the June FOMC meeting (CRE) remained accommodative. Even so, the inched up further to near certainty. Levels of the fed- growth of CRE loans held by banks ticked down in eral funds rate at the end of 2019 and 2020 implied April and May. Commercial mortgage-backed securiby overnight index swap (OIS) rates were little ties (CMBS) issuance, in general, continued at a changed on net. robust pace; although issuance softened somewhat in April, partly reflecting seasonal factors, it recovered Longer-term nominal Treasury yields ended the in May. Spreads on CMBS were little changed over period largely unchanged despite notable movements the intermeeting period, remaining near their postduring the intermeeting period. Measures of infla- crisis lows. tion compensation derived from Treasury Inflation- Protected Securities were also little changed on net. Residential mortgage financing conditions remained accommodative for most borrowers. For borrowers Broad U.S. equity price indexes increased about with low credit scores, conditions stayed tight but 5 percent, on net, since the May FOMC meeting, continued to ease. Growth in home-purchase mortboosted in part by the stronger-than-expected May gages slowed a bit and refinancing activity continued Employment Situation report. Stock prices also to be muted in recent months, with both developappeared to have been buoyed by first-quarter earn- ments partly reflecting the rise in mortgage rates earings reports that generally beat expectations—par- lier this year. ticularly for the technology sector, which outperformed the broader market. However, the turbulence Financing conditions in consumer credit markets abroad and, to a lesser degree, mounting concerns were little changed in the first few months of 2018, about trade policy weighed on equity prices at times. on balance, and remained largely supportive of Option-implied volatility on the S&P 500 at the one- growth in household spending. Growth in consumer month horizon—the VIX—was down somewhat, on credit slowed a bit in the first quarter, as seasonally net, remaining just a couple of percentage points adjusted credit card balances were about flat after above the very low levels that prevailed before early having surged in the fourth quarter of last year. February. Over the intermeeting period, spreads of Financing conditions for consumers with subprime yields on nonfinancial corporate bonds over those of credit scores continued to tighten, likely contributing

Minutes of Federal Open Market Committee Meetings | June 185 to a decline in auto loan extensions to such consume for groups most affected by the tax cuts are borrowers. lower than the staff had assumed. Risks to the inflation projection also were seen as balanced. The Staff Economic Outlook upside risk that inflation could increase more than expected in an economy that was projected to move In the U.S. economic forecast prepared for the June further above its potential was counterbalanced by FOMC meeting, the staff continued to project that the downside risk that longer-term inflation expectathe economy would expand at an above-trend pace. tions may be lower than was assumed in the staff Real GDP appeared to be rising at a much faster forecast. pace in the second quarter than in the first, and it was forecast to increase at a solid rate in the second Participants’ Views on Current Conditions half of this year. Over the 2018–20 period, output and the Economic Outlook was projected to rise further above the staff’s estimate of its potential, and the unemployment rate was In conjunction with this FOMC meeting, members projected to decline further below the staff’s estimate of the Board of Governors and Federal Reserve of its longer-run natural rate. Relative to the forecast Bank presidents submitted their projections of the prepared for the May meeting, the projection for real most likely outcomes for real GDP growth, the GDP growth beyond the first half of 2018 was unemployment rate, and inflation for each year from revised down a little in response to a higher assumed 2018 through 2020 and over the longer run, based on path for the exchange value of the dollar. In addition, their individual assessments of the appropriate path the staff continued to anticipate that supply con- for the federal funds rate. The longer-run projections straints might restrain output growth somewhat. represented each participant’s assessment of the rate With real GDP rising a little less, on balance, over the to which each variable would be expected to conforecast period, the projected decline in the unem- verge, over time, under appropriate monetary policy ployment rate over the next few years was a touch and in the absence of further shocks to the economy. smaller than in the previous forecast. These projections and policy assessments are described in the Summary of Economic Projections, The staff forecast for total PCE price inflation from which is an addendum to these minutes. 2018 to 2020 was not revised materially. Total consumer price inflation over the first half of 2018 In their discussion of the economic situation and the appeared to be a little lower than in the previous pro- outlook, meeting participants agreed that informajection, mainly because of slightly softer incoming tion received since the FOMC met in May indicated data on nonmarket prices, but the forecast for the that the labor market had continued to strengthen second half of the year was a little higher, reflecting and that economic activity had been rising at a solid an upward revision to projected consumer energy rate. Job gains had been strong, on average, in recent prices over the next couple of quarters. The staff months, and the unemployment rate had declined. continued to project that total PCE inflation would Recent data suggested that growth of household remain near the Committee’s 2 percent objective over spending had picked up, while business fixed investthe medium term and that core PCE price inflation ment had continued to grow strongly. On a 12-month would run slightly higher than total inflation over basis, overall inflation and core inflation, which that period because of a projected decline in con- excludes changes in food and energy prices, had both sumer energy prices in 2019 and 2020. moved close to 2 percent. Indicators of longer-term inflation expectations were little changed, on balance. The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, Participants viewed recent readings on spending, and inflation as similar to the average of the past employment, and inflation as suggesting little change, 20 years. The staff saw the risks to the forecasts for on balance, in their assessments of the economic outreal GDP growth and the unemployment rate as bal- look. Incoming data suggested that GDP growth anced. On the upside, recent fiscal policy changes strengthened in the second quarter of this year, as could lead to a greater expansion in economic activ- growth of consumer spending picked up after slowity over the next few years than the staff projected. ing earlier in the year. Participants noted a number of On the downside, those fiscal policy changes could favorable economic factors that were supporting yield less impetus to the economy than the staff above-trend GDP growth; these included a strong expected if, for example, the marginal propensities to labor market, stimulative federal tax and spending

186 105th Annual Report | 2018 policies, accommodative financial conditions, and rate. Several participants, however, suggested that continued high levels of household and business con- there may be less tightness in the labor market than fidence. They also generally expected that further implied by the unemployment rate alone, because gradual increases in the target range for the federal there was further scope for a strong labor market to funds rate would be consistent with sustained expan- continue to draw individuals into the workforce. sion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric Contacts in several Districts reported difficulties 2 percent objective over the medium term. Partici- finding qualified workers, and, in some cases, firms pants generally viewed the risks to the economic out- were coping with labor shortages by increasing salalook as roughly balanced. ries and benefits in order to attract or retain workers. Other business contacts facing labor shortages were Participants reported that business fixed investment responding by increasing training for less-qualified had continued to expand at a strong pace in recent workers or by investing in automation. On balance, months, supported in part by substantial investment for the economy overall, recent data on average growth in the energy sector. Higher oil prices were hourly earnings indicated that wage increases expected to continue to support investment in that remained moderate. A number of participants noted sector, and District contacts in the industry were gen- that, with the unemployment rate expected to remain erally upbeat, though supply constraints for labor below estimates of its longer-run normal rate, they and infrastructure were reportedly limiting expansion anticipated wage inflation to pick up further. plans. By contrast, District reports regarding the construction sector were mixed, although here, too, some Participants noted that the 12-month changes in both contacts reported that supply constraints were acting overall and core PCE prices had recently moved close as a drag on activity. Conditions in both the manu- to 2 percent. The recent large increases in consumer facturing and service sectors in several Districts were energy prices had pushed up total PCE price inflation reportedly strong and were seen as contributing to relative to the core measure, and this divergence was solid investment gains. However, many District con- expected to continue in the near term, resulting in a tacts expressed concern about the possible adverse temporary increase in overall inflation above the effects of tariffs and other proposed trade restric- Committee’s 2 percent longer-run objective. In gentions, both domestically and abroad, on future invest- eral, participants viewed recent price developments as ment activity; contacts in some Districts indicated consistent with their expectation that inflation was that plans for capital spending had been scaled back on a trajectory to achieve the Committee’s symmetric or postponed as a result of uncertainty over trade 2 percent objective on a sustained basis, although a policy. Contacts in the steel and aluminum industries number of participants noted that it was premature expected higher prices as a result of the tariffs on to conclude that the Committee had achieved that these products but had not planned any new invest- objective. The generally favorable outlook for inflaments to increase capacity. Conditions in the agricul- tion was buttressed by reports from business contacts tural sector reportedly improved somewhat, but con- in several Districts suggesting some firming of inflatacts were concerned about the effect of potentially tionary pressures; for example, many business conhigher tariffs on their exports. tacts indicated that they were experiencing rising input costs, and, in some cases, firms appeared to be Participants agreed that labor market conditions passing these cost increases through to consumer strengthened further over the intermeeting period. prices. Although core inflation and the 12-month Nonfarm payroll employment posted strong gains in trimmed mean PCE inflation rate calculated by the recent months, averaging more than 200,000 per Federal Reserve Bank of Dallas remained a little month this year. The unemployment rate fell to below 2 percent, many participants anticipated that 3.8 percent in May, below the estimate of each par- high levels of resource utilization and stable inflation ticipant who submitted a longer-run projection. Par- expectations would keep overall inflation near 2 perticipants pointed to other indicators such as a very cent over the medium term. In light of inflation havhigh rate of job openings and an elevated quits rate ing run below the Committee’s 2 percent objective for as additional signs that labor market conditions were the past several years, a few participants cautioned strong. With economic growth anticipated to remain that measures of longer-run inflation expectations above trend, participants generally expected the derived from financial market data remained someunemployment rate to remain below, or decline fur- what below levels consistent with the Committee’s ther below, their estimates of its longer-run normal 2 percent objective. Accordingly, in their view, inves-

Minutes of Federal Open Market Committee Meetings | June 187 tors appeared to judge the expected path of inflation noted that this measure may be less affected by many as running a bit below 2 percent over the medium of the factors that have contributed to the flattening run. Some participants raised the concern that a pro- of the yield curve, such as depressed term premiums longed period in which the economy operated at longer horizons. Several participants cautioned beyond potential could give rise to heightened infla- that yield curve movements should be interpreted tionary pressures or to financial imbalances that within the broader context of financial conditions could lead eventually to a significant economic and the outlook, and would be only one among downturn. many considerations in forming an assessment of appropriate policy. Participants commented on a number of risks and uncertainties associated with their outlook for eco- In their consideration of monetary policy at this nomic activity, the labor market, and inflation over meeting, participants generally agreed that the ecothe medium term. Most participants noted that nomic expansion was progressing roughly as anticiuncertainty and risks associated with trade policy pated, with real economic activity expanding at a had intensified and were concerned that such uncer- solid rate, labor market conditions continuing to tainty and risks eventually could have negative effects strengthen, and inflation near the Committee’s objecon business sentiment and investment spending. Par- tive. Based on their current assessments, almost all ticipants generally continued to see recent fiscal participants expressed the view that it would be policy changes as supportive of economic growth appropriate for the Committee to continue its over the next few years, and a few indicated that fis- gradual approach to policy firming by raising the tarcal policy posed an upside risk. A few participants get range for the federal funds rate 25 basis points at raised the concern that fiscal policy is not currently this meeting. These participants agreed that, even on a sustainable path. Many participants saw poten- after such an increase in the target range, the stance tial downside risks to economic growth and inflation of monetary policy would remain accommodative, associated with political and economic developments supporting strong labor market conditions and a susin Europe and some EMEs. tained return to 2 percent inflation. One participant remarked that, with inflation having run consistently Meeting participants also discussed the term struc- below 2 percent in recent years and market-based ture of interest rates and what a flattening of the measures of inflation compensation still low, postyield curve might signal about economic activity poning an increase in the target range for the federal going forward. Participants pointed to a number of funds rate would help push inflation expectations up factors, other than the gradual rise of the federal to levels consistent with the Committee’s objective. funds rate, that could contribute to a reduction in the spread between long-term and short-term Treasury With regard to the medium-term outlook for monyields, including a reduction in investors’ estimates of etary policy, participants generally judged that, with the longer-run neutral real interest rate; lower longer- the economy already very strong and inflation term inflation expectations; or a lower level of term expected to run at 2 percent on a sustained basis over premiums in recent years relative to historical experi- the medium term, it would likely be appropriate to ence reflecting, in part, central bank asset purchases. continue gradually raising the target range for the Some participants noted that such factors might tem- federal funds rate to a setting that was at or someper the reliability of the slope of the yield curve as an what above their estimates of its longer-run level by indicator of future economic activity; however, sev- 2019 or 2020. Participants reaffirmed that adjusteral others expressed doubt about whether such fac- ments to the path for the policy rate would depend tors were distorting the information content of the on their assessments of the evolution of the ecoyield curve. A number of participants thought it nomic outlook and risks to the outlook relative to would be important to continue to monitor the slope the Committee’s statutory objectives. of the yield curve, given the historical regularity that an inverted yield curve has indicated an increased Participants pointed to various reasons for raising risk of recession in the United States. Participants short-term interest rates gradually, including the also discussed a staff presentation of an indicator of uncertainty surrounding the level of the federal funds the likelihood of recession based on the spread rate in the longer run, the lags with which changes in between the current level of the federal funds rate monetary policy affect the economy, and the potenand the expected federal funds rate several quarters tial constraints on adjustments in the target range for ahead derived from futures market prices. The staff the federal funds rate in response to adverse shocks

188 105th Annual Report | 2018 when short-term interest rates are low. In addition, a Members viewed the recent data as consistent with a few participants saw survey- or market-based indica- strong economy that was evolving about as they had tors as suggesting that inflation expectations were not expected. They judged that continuing along a path yet firmly anchored at a level consistent with the of gradual policy firming would balance the risk of Committee’s objective. A few also noted that a tem- moving too quickly, which could leave inflation short porary period of inflation modestly above 2 percent of a sustained return to the Committee’s symmetric could be helpful in anchoring longer-run inflation goal, against the risk of moving too slowly, which expectations at a level consistent with the Commit- could lead to a buildup of inflation pressures or tee’s symmetric objective. material financial imbalances. Consequently, members expected that further gradual increases in the Participants offered their views about how much target range for the federal funds rate would be conadditional policy firming would likely be required to sistent with sustained expansion of economic activsustainably achieve the Committee’s objectives of ity, strong labor market conditions, and inflation maximum employment and 2 percent inflation. Many near the Committee’s symmetric 2 percent objective noted that, if gradual increases in the target range for over the medium term. Members continued to judge the federal funds rate continued, the federal funds that the risks to the economic outlook remained rate could be at or above their estimates of its neutral roughly balanced. level sometime next year. In that regard, participants discussed how the Committee’s communications After assessing current conditions and the outlook might evolve over coming meetings if the economy for economic activity, the labor market, and inflation, progressed about as anticipated; in particular, a num- members voted to raise the target range for the fedber of them noted that it might soon be appropriate eral funds rate to 1¾ to 2 percent. They indicated to modify the language in the postmeeting statement that the stance of monetary policy remained accomindicating that “the stance of monetary policy modative, thereby supporting strong labor market remains accommodative.” conditions and a sustained return to 2 percent inflation. Participants supported a plan to implement a technical adjustment to the IOER rate that would place it Members agreed that the timing and size of future at a level 5 basis points below the top of the FOMC’s adjustments to the target range for the federal funds target range for the federal funds rate. A few partici- rate would depend upon their assessment of realized pants suggested that, before too long, the Committee and expected economic conditions relative to the might want to further discuss how it can implement Committee’s maximum employment objective and monetary policy most effectively and efficiently when symmetric 2 percent inflation objective. They reiterthe quantity of reserve balances reaches a level appre- ated that this assessment would take into account a ciably below that seen recently. wide range of information, including measures of labor market conditions, indicators of inflation pres- Committee Policy Action sures and inflation expectations, and readings on financial and international developments. In their discussion of monetary policy for the period ahead, members judged that information received With regard to the postmeeting statement, members since the FOMC met in May indicated that the labor favored the removal of the forward-guidance lanmarket had continued to strengthen and that eco- guage stating that “the federal funds rate is likely to nomic activity had been rising at a solid rate. Job remain, for some time, below levels that are expected gains had been strong, on average, in recent months, to prevail in the longer run.” Members noted that, and the unemployment rate had declined. Recent although this forward-guidance language had been data suggested that growth of household spending useful for communicating the expected path of the had picked up, while business fixed investment had federal funds rate during the early stages of policy continued to grow strongly. On a 12-month basis, normalization, this language was no longer appropriboth overall inflation and inflation for items other ate in light of the strong state of the economy and than food and energy had moved close to 2 percent. the current expected path for policy. Moreover, the Indicators of longer-term inflation expectations were removal of the forward-guidance language and other little changed, on balance. changes to the statement should streamline and

Minutes of Federal Open Market Committee Meetings | June 189 facilitate the Committee’s communications. Impor- Reserve’s agency mortgage-backed securities tantly, the changes were a reflection of the progress transactions.” toward achieving the Committee’s statutory goals and did not reflect a shift in the approach to policy The vote also encompassed approval of the statement going forward. below to be released at 2:00 p.m.: At the conclusion of the discussion, the Committee “Information received since the Federal Open voted to authorize and direct the Federal Reserve Market Committee met in May indicates that Bank of New York, until it was instructed otherwise, the labor market has continued to strengthen to execute transactions in the SOMA in accordance and that economic activity has been rising at a with the following domestic policy directive, to be solid rate. Job gains have been strong, on averreleased at 2:00 p.m.: age, in recent months, and the unemployment rate has declined. Recent data suggest that “Effective June 14, 2018, the Federal Open Mar- growth of household spending has picked up, ket Committee directs the Desk to undertake while business fixed investment has continued to open market operations as necessary to main- grow strongly. On a 12-month basis, both overall tain the federal funds rate in a target range of inflation and inflation for items other than food 1¾ to 2 percent, including overnight reverse and energy have moved close to 2 percent. Indirepurchase operations (and reverse repurchase cators of longer-term inflation expectations are operations with maturities of more than one day little changed, on balance. when necessary to accommodate weekend, holiday, or similar trading conventions) at an offer- Consistent with its statutory mandate, the Coming rate of 1.75 percent, in amounts limited only mittee seeks to foster maximum employment by the value of Treasury securities held outright and price stability. The Committee expects that in the System Open Market Account that are further gradual increases in the target range for available for such operations and by a per- the federal funds rate will be consistent with suscounterparty limit of $30 billion per day. tained expansion of economic activity, strong labor market conditions, and inflation near the The Committee directs the Desk to continue Committee’s symmetric 2 percent objective over rolling over at auction the amount of principal the medium term. Risks to the economic outpayments from the Federal Reserve’s holdings of look appear roughly balanced. Treasury securities maturing during June that exceeds $18 billion, and to continue reinvesting In view of realized and expected labor market in agency mortgage-backed securities the conditions and inflation, the Committee decided amount of principal payments from the Federal to raise the target range for the federal funds Reserve’s holdings of agency debt and agency rate to 1¾ to 2 percent. The stance of monetary mortgage-backed securities received during June policy remains accommodative, thereby supportthat exceeds $12 billion. Effective in July, the ing strong labor market conditions and a sus- Committee directs the Desk to roll over at auc- tained return to 2 percent inflation. tion the amount of principal payments from the Federal Reserve’s holdings of Treasury securities In determining the timing and size of future maturing during each calendar month that adjustments to the target range for the federal exceeds $24 billion, and to reinvest in agency funds rate, the Committee will assess realized mortgage-backed securities the amount of prin- and expected economic conditions relative to its cipal payments from the Federal Reserve’s hold- maximum employment objective and its symings of agency debt and agency mortgage- metric 2 percent inflation objective. This assessbacked securities received during each calendar ment will take into account a wide range of month that exceeds $16 billion. Small deviations information, including measures of labor market from these amounts for operational reasons are conditions, indicators of inflation pressures and acceptable. inflation expectations, and readings on financial and international developments.” The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as Voting for this action: Jerome H. Powell, William C. necessary to facilitate settlement of the Federal Dudley, Thomas I. Barkin, Raphael W. Bostic, Lael

190 105th Annual Report | 2018 Brainard, Loretta J. Mester, Randal K. Quarles, and Election of Committee Vice Chairman John C. Williams. By unanimous vote, the Committee selected John C. Voting against this action: None. Williams to serve as Vice Chairman, effective on June 18, 2018, until the selection of a successor at the To support the Committee’s decision to raise the tar- Committee’s first regularly scheduled meeting in get range for the federal funds rate, the Board of 2019. Governors voted unanimously to raise the interest rates on required and excess reserve balances to It was agreed that the next meeting of the Committee 1.95 percent, effective June 14, 2018. The Board of would be held on Tuesday–Wednesday, July 31– Governors also voted unanimously to approve a August 1, 2018. The meeting adjourned at 10:00 a.m. ¼ percentage point increase in the primary credit rate on June 13, 2018. (discount rate) to 2½ percent, effective June 14, 2018.4 Notation Vote By notation vote completed on May 22, 2018, the 4 In taking this action, the Board approved requests submitted by the boards of directors of the Federal Reserve Banks of Boston, Committee unanimously approved the minutes of the Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Committee meeting held on May 1–2, 2018. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. This vote also encompassed approval by the Board of Governors of the establishment of a 2½ percent primary credit rate by James A. Clouse the remaining Federal Reserve Bank, effective on the later of Secretary June 14, 2018, and the date such Reserve Bank informed the Secretary of the Board of such a request. (Secretary’s note: Subsequently, the Federal Reserve Bank of New York was informed by the Secretary of the Board of the Board’s approval encompassed approval of the establishment of the interest rates of their establishment of a primary credit rate of 2½ percent, for secondary and seasonal credit under the existing formulas effective June 14, 2018.) The second vote of the Board also for computing such rates.

Minutes of Federal Open Market Committee Meetings | June 191 Addendum: strength in incoming data. A large majority of participants made slight upward adjustments to their Summary of Economic Projections projections of inflation in 2018. Table 1 and figure 1 provide summary statistics for the projections. In conjunction with the Federal Open Market Committee (FOMC) meeting held on June 12–13, 2018, As shown in figure 2, participants generally continmeeting participants submitted their projections of ued to expect that the evolution of the economy relathe most likely outcomes for real gross domestic tive to their objectives of maximum employment and product (GDP) growth, the unemployment rate, and 2 percent inflation would likely warrant further inflation for each year from 2018 to 2020 and over gradual increases in the federal funds rate. The centhe longer run.1 Each participant’s projections were tral tendencies of participants’ projections of the fedbased on information available at the time of the eral funds rate for both 2018 and 2019 were roughly meeting, together with his or her assessment of unchanged, but the medians for both years were appropriate monetary policy—including a path for 25 basis points higher relative to March. Nearly all the federal funds rate and its longer-run value—and participants who submitted longer-run projections assumptions about other factors likely to affect ecoexpected that, during part of the projection period, nomic outcomes. The longer-run projections repreevolving economic conditions would make it approsent each participant’s assessment of the value to priate for the federal funds rate to move somewhat which each variable would be expected to converge, above their estimates of its longer-run level. over time, under appropriate monetary policy and in the absence of further shocks to the economy.2 In general, participants continued to view the uncer- “Appropriate monetary policy” is defined as the tainty attached to their economic projections as future path of policy that each participant deems broadly similar to the average of the past 20 years. As most likely to foster outcomes for economic activity in March, most participants judged the risks around and inflation that best satisfy his or her individual their projections for real GDP growth, the unemployinterpretation of the statutory mandate to promote ment rate, and inflation to be broadly balanced. maximum employment and price stability. The Outlook for Economic Activity All participants who submitted longer-run projections expected that, in 2018, real GDP would expand The median of participants’ projections for the at a pace exceeding their individual estimates of the growth rate of real GDP, conditional on their indilonger-run growth rate of real GDP. Participants vidual assessments of appropriate monetary policy, generally saw real GDP growth moderating some- was 2.8 percent for this year and 2.4 percent for next what in each of the following two years but remain- year. The median was 2.0 percent for 2020, a touch ing above their estimates of the longer-run rate. All above the median projection of longer-run growth. participants who submitted longer-run projections Most participants continued to cite fiscal policy as a expected that, throughout the projection period, the driver of strong economic activity over the next unemployment rate would run below their estimates couple of years. Many participants also mentioned of its longer-run level. All participants projected that accommodative monetary policy and financial condiinflation, as measured by the four-quarter percentage tions, strength in the global outlook, continued change in the price index for personal consumption momentum in the labor market, or positive readings expenditures (PCE), would run at or slightly above on business and consumer sentiment as important the Committee’s 2 percent objective by the end of factors shaping the economic outlook. Compared 2018 and remain roughly flat through 2020. Com- with the March SEP, the median of participants’ propared with the Summary of Economic Projections jections for the rate of real GDP growth was 0.1 per- (SEP) from March, most participants slightly marked centage point higher for this year and unchanged for up their projections of real GDP growth in 2018 and the next two years. somewhat lowered their projections for the unemployment rate from 2018 through 2020; participants Almost all participants expected the unemployment indicated that these revisions reflected, in large part, rate to decline somewhat further over the projection period. The median of participants’ projections for 1 Three members of the Board of Governors were in office at the the unemployment rate was 3.6 percent for the final time of the June 2018 meeting. quarter of this year and 3.5 percent for the final 2 One participant did not submit longer-run projections for real GDP growth, the unemployment rate, or the federal funds rate. quarters of 2019 and 2020. The median of partici-

192 105th Annual Report | 2018 Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, June 2018 Percent Median1 Central tendency2 R ange3 Variable Longer Longer L onger 2 018 2019 2020 run 2018 2019 2020 run 2 018 2 019 2 020 run Change in real GDP 2.8 2.4 2.0 1.8 2.7 – 3.0 2.2 – 2.6 1.8 – 2.0 1.8 – 2.0 2 .5– 3 .0 2 .1– 2 .7 1 .5– 2 .2 1 .7– 2 .1 March projection 2.7 2.4 2.0 1.8 2.6 – 3.0 2.2 – 2.6 1.8 – 2.1 1.8 – 2.0 2 .5– 3 .0 2 .0– 2 .8 1 .5– 2 .3 1 .7– 2 .2 Unemployment rate 3.6 3.5 3.5 4.5 3.6 – 3.7 3.4 – 3.5 3.4 – 3.7 4.3 – 4.6 3 .5– 3 .8 3 .3– 3 .8 3 .3– 4 .0 4 .1– 4 .7 March projection 3.8 3.6 3.6 4.5 3.6 – 3.8 3.4 – 3.7 3.5 – 3.8 4.3 – 4.7 3 .6– 4 .0 3 .3– 4 .2 3 .3– 4 .4 4 .2– 4 .8 PCE inflation 2.1 2.1 2.1 2.0 2.0 – 2.1 2.0 – 2.2 2.1 – 2.2 2.0 2 .0– 2 .2 1 .9– 2 .3 2 .0– 2 .3 2 .0 March projection 1.9 2.0 2.1 2.0 1.8 – 2.0 2.0 – 2.2 2.1 – 2.2 2.0 1 .8– 2 .1 1 .9– 2 .3 2 .0– 2 .3 2 .0 Core PCE inflation4 2.0 2.1 2.1 1.9 – 2.0 2.0 – 2.2 2.1 – 2.2 1 .9– 2 .1 2 .0– 2 .3 2 .0– 2 .3 March projection 1.9 2.1 2.1 1.8 – 2.0 2.0 – 2.2 2.1 – 2.2 1 .8– 2 .1 1 .9– 2 .3 2 .0– 2 .3 Memo: Projected appropriate policy path Federal funds rate 2.4 3.1 3.4 2.9 2.1 – 2.4 2.9 – 3.4 3.1 – 3.6 2.8 – 3.0 1 .9– 2 .6 1 .9– 3 .6 1 .9– 4 .1 2 .3– 3 .5 March projection 2.1 2.9 3.4 2.9 2.1 – 2.4 2.8 – 3.4 3.1 – 3.6 2.8 – 3.0 1 .6– 2 .6 1 .6– 3 .9 1 .6– 4 .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 March projections were made in conjunction with the meeting of the Federal Open Market Committee on March 20–21, 2018. 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 20–21, 2018, meeting, and one participant did not submit such projections in conjunction with the June 12–13, 2018, 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 | June 193 Figure 1. Medians, central tendencies, and ranges of economic projections, 2018–20 and over the longer run Percent Change in real GDP Median of projections Central tendency of projections Range of projections 3 Actual 2 1 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent Unemployment rate 7 6 5 4 3 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent PCE inflation 3 2 1 2013 2014 2015 2016 2017 2018 2019 2020 Longer run Percent Core PCE inflation 3 2 1 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.

194 105th Annual Report | 2018 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 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 | June 195 pants’ estimates of the longer-run unemployment conditions would likely warrant the equivalent of a rate was unchanged at 4.5 percent. total of either three or four increases of 25 basis points in the target range for the federal funds rate Figures 3.A and 3.B show the distributions of par- over 2018. There was a slight reduction in the disperticipants’ projections for real GDP growth and the sion of participants’ views, with no participant unemployment rate from 2018 to 2020 and over the regarding the appropriate target at the end of the longer run. The distribution of individual projections year to be below 1.88 percent. For each subsequent for real GDP growth this year shifted up noticeably year, the dispersion of participants’ year-end projecfrom that in the March SEP. By contrast, the distri- tions was somewhat smaller than that in the butions of projected real GDP growth in 2019 and March SEP. 2020 and over the longer run were little changed. The distributions of individual projections for the unem- The medians of participants’ projections of the fedployment rate in 2018 to 2020 shifted down relative eral funds rate rose gradually to 2.4 percent at the to the distributions in March, while the downward end of this year, 3.1 percent at the end of 2019, and shift in the distribution of longer-run projections was 3.4 percent at the end of 2020. The median of parvery modest. ticipants’ longer-run estimates, at 2.9 percent, was unchanged relative to the March SEP. The Outlook for Inflation In discussing their projections, many participants The medians of participants’ projections for total continued to express the view that the appropriate and core PCE price inflation in 2018 were 2.1 percent trajectory of the federal funds rate over the next few and 2.0 percent, respectively, and the median for each years would likely involve gradual increases. This measure was 2.1 percent in 2019 and 2020. Com- view was predicated on several factors, including a pared with the March SEP, the medians of partici- judgment that a gradual path of policy firming likely pants’ projections for total PCE price inflation for would appropriately balance the risks associated this year and next were revised up slightly. Some par- with, among other considerations, the possibilities ticipants pointed to incoming data on energy prices that U.S. fiscal policy could have larger or more peras a reason for their upward revisions. The median of sistent positive effects on real activity and that shifts participants’ forecasts for core PCE price inflation in trade policy or developments abroad could weigh was up a touch for this year and unchanged for sub- on the expansion. As always, the appropriate path of sequent years. the federal funds rate would depend on evolving economic conditions and their implications for partici- Figures 3.C and 3.D provide information on the dis- pants’ economic outlooks and assessments of risks. tributions of participants’ views about the outlook for inflation. The distributions of both total and core Uncertainty and Risks PCE price inflation for 2018 shifted to the right relative to the distributions in March. The distributions In assessing the path for the federal funds rate that, of projected inflation in 2019, 2020, and over the lon- in their view, is likely to be appropriate, FOMC parger run were roughly unchanged. Participants gener- ticipants take account of the range of possible ecoally expected each measure to be at or slightly above nomic outcomes, the likelihood of those outcomes, 2 percent in 2019 and 2020. and the potential benefits and costs should they occur. As a reference, table 2 provides measures of Appropriate Monetary Policy forecast uncertainty, based on the forecast errors of various private and government forecasts over the Figure 3.E provides the distribution of participants’ past 20 years, for real GDP growth, the unemployjudgments regarding the appropriate target—or mid- ment rate, and total PCE price inflation. Those measpoint of the target range—for the federal funds rate ures are represented graphically in the “fan charts” at the end of each year from 2018 to 2020 and over shown in the top panels of figures 4.A, 4.B, and 4.C. the longer run. The distributions of projected policy The fan charts display the median SEP projections rates through 2020 shifted modestly higher, consis- for the three variables surrounded by symmetric content with the revisions to participants’ projections of fidence intervals derived from the forecast errors real GDP growth, the unemployment rate, and infla- reported in table 2. If the degree of uncertainty tion. As in their March projections, a large majority attending these projections is similar to the typical of participants anticipated that evolving economic magnitude of past forecast errors and the risks

196 105th Annual Report | 2018 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2018–20 and over the longer run Number of participants 2018 June projections 18 March projections 16 14 12 10 8 6 4 2 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 2.8 – 3.0 – 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 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 – 2.6 – 2.8 – 3.0 – 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 2.8 – 3.0 – 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 2.8 – 3.0 – 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | June 197 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2018–20 and over the longer run Number of participants 2018 June projections 18 March projections 16 14 12 10 8 6 4 2 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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.

198 105th Annual Report | 2018 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2018–20 and over the longer run Number of participants 2018 June projections 18 March projections 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 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 | June 199 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2018–20 Number of participants 2018 June projections 18 March projections 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

200 105th Annual Report | 2018 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, 2018–20 and over the longer run Number of participants 2018 June projections 18 March projections 16 14 12 10 8 6 4 2 1.63 – 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 – 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.63 – 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 – 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.63 – 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 – 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.63 – 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 – 1.87 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | June 201 economic projections are shown in the bottom-right Table 2. Average historical projection error ranges panels of figures 4.A, 4.B, and 4.C. Most partici- Percentage points pants judged the risks to their projections of real Variable 2018 2019 2020 GDP growth, the unemployment rate, total inflation, and core inflation as broadly balanced—in other Change in real GDP1 ±1.3 ±2.0 ±2.1 words, as broadly consistent with a symmetric fan Unemployment rate1 ±0.4 ±1.2 ±1.8 chart. Compared with March, even more participants Total consumer prices2 ±0.7 ±1.0 ±1.0 Short-term interest rates3 ±0.7 ±2.0 ±2.2 saw the risks to their projections as broadly balanced. Specifically, for GDP growth, only one participant Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 1998 through 2017 that were released in the summer by viewed the risks as tilted to the downside, and the various private and government forecasters. As described in the box “Forecast number of participants who viewed the risks as tilted Uncertainty,” under certain assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, consumer prices, and the to the upside dropped from four to two. For the federal funds rate will be in ranges implied by the average size of projection unemployment rate, the number of participants who errors made in the past. For more information, see David Reifschneider and Peter Tulip (2017), “Gauging the Uncertainty of the Economic Outlook Using Historical saw the risks as tilted toward low readings dropped Forecasting Errors: The Federal Reserve’s Approach,” Finance and Economics from four to two. For inflation, all but one partici- Discussion Series 2017-020 (Washington: Board of Governors of the Federal Reserve System, February), www.federalreserve.gov/econresdata/feds/2017/files/ pant judged the risks to either total or core PCE 2017020pap.pdf. price inflation as broadly balanced. 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. Projections In discussing the uncertainty and risks surrounding are percent changes on a fourth quarter to fourth quarter basis. their projections, several participants continued to 3 For Federal Reserve staff forecasts, measure is the federal funds rate. For other point to fiscal developments as a source of upside forecasts, measure is the rate on 3-month Treasury bills. Projection errors are calculated using average levels, in percent, in the fourth quarter. risk, many participants cited developments related to trade policy as posing downside risks to their growth forecasts, and a few participants also pointed to around the projections are broadly balanced, then political developments in Europe or the global outfuture outcomes of these variables would have about look more generally as downside-risk factors. A few a 70 percent probability of being within these confiparticipants noted that the appreciation of the dollar dence intervals. For all three variables, this measure posed downside risks to the inflation outlook. A few of uncertainty is substantial and generally increases participants also noted the risk of inflation moving as the forecast horizon lengthens. higher than anticipated as the unemployment rate falls. Participants’ assessments of the level of uncertainty surrounding their individual economic projections Participants’ assessments of the appropriate future are shown in the bottom-left panels of figures 4.A, path of the federal funds rate were also subject to 4.B, and 4.C. Nearly all participants viewed the considerable uncertainty. Because the Committee degree of uncertainty attached to their economic adjusts the federal funds rate in response to actual projections for real GDP growth, the unemployment and prospective developments over time in real GDP rate, and inflation as broadly similar to the average of growth, the unemployment rate, and inflation, uncerthe past 20 years, a view that was essentially unchanged from March.3 tainty surrounding the projected path for the federal funds rate importantly reflects the uncertainties Because the fan charts are constructed to be symmet- about the paths for those key economic variables. ric around the median projections, they do not reflect Figure 5 provides a graphical representation of this any asymmetries in the balance of risks that partici- uncertainty, plotting the median SEP projection for pants may see in their economic projections. Partici- the federal funds rate surrounded by confidence pants’ assessments of the balance of risks to their intervals derived from the results presented in table 2. As with the macroeconomic variables, forecast uncer- 3 At the end of this summary, the box “Forecast Uncertainty” tainty surrounding the appropriate path of the feddiscusses the sources and interpretation of uncertainty sur- eral funds rate is substantial and increases for longer rounding the economic forecasts and explains the approach horizons. used to assess the uncertainty and risks attending the participants’ projections.

202 105th Annual Report | 2018 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 Actual 2 1 0 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 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 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 | June 203 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 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 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 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.”

204 105th Annual Report | 2018 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 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 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.”

Minutes of Federal Open Market Committee Meetings | June 205 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 1 Actual 0 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.

206 105th Annual Report | 2018 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 1.7 to 4.3 percent in the current funds rate generated by the uncertainty about the year, 1.0 to 5.0 percent in the second year, and 0.9 to macroeconomic variables as well as additional 5.1 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 1.3 to 2.7 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–August 207 Meeting Held Steven B. Kamin Economist on July 31–August 1, 2018 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, July 31, 2018, at 10:00 a.m. and continued on Kartik B. Athreya, Thomas A. Connors, Mary Daly, Wednesday, August 1, 2018, at 9:00 a.m.1 David E. Lebow, Trevor A. Reeve, Ellis W. Tallman, William Wascher, and Beth Anne Wilson Present Associate Economists Simon Potter Jerome H. Powell Manager, System Open Market Account Chairman Lorie K. Logan John C. Williams Deputy Manager, System Open Market Account Vice Chairman Ann E. Misback Thomas I. Barkin Secretary, Office of the Secretary, Board of Raphael W. Bostic Governors Lael Brainard Matthew J. Eichner2 Director, Division of Reserve Bank Operations and Loretta J. Mester Payment Systems, Board of Governors Randal K. Quarles Michael S. Gibson James Bullard, Charles L. Evans, Esther L. George, Director, Division of Supervision and Regulation, Eric Rosengren, and Michael Strine Board of Governors Alternate Members of the Federal Open Market Andreas Lehnert Committee Director, Division of Financial Stability, Patrick Harker, Robert S. Kaplan, and Neel Kashkari Board of Governors Presidents of the Federal Reserve Banks of Rochelle M. Edge Philadelphia, Dallas, and Minneapolis, respectively Deputy Director, Division of Monetary Affairs, Mark A. Gould Board of Governors First Vice President, Federal Reserve Bank of Jon Faust San Francisco Senior Special Adviser to the Chairman, Office of James A. Clouse Board Members, Board of Governors Secretary Antulio N. Bomfim Special Adviser to the Chairman, Office of Board Matthew M. Luecke Members, Board of Governors Deputy Secretary Joseph W. Gruber 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, Mark E. Van Der Weide Board of Governors General Counsel Christopher J. Erceg Michael Held Senior Associate Director, Division of International Deputy General Counsel Finance, 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.

208 105th Annual Report | 2018 Gretchen C. Weinbach James M. Trevino4 Senior Associate Director, Division of Monetary Technology Analyst, Division of Monetary Affairs, Affairs, Board of Governors Board of Governors Ellen E. Meade, Edward Nelson, and Robert J. Tetlow Michael Dotsey, Beverly Hirtle, Senior Advisers, Division of Monetary Affairs, Board and Christopher J. Waller of Governors Executive Vice Presidents, Federal Reserve Banks of Philadelphia, New York, and St. Louis, respectively Jeremy B. Rudd Senior Adviser, Division of Research and Statistics, Anna Paulson Board of Governors Senior Vice President, Federal Reserve Bank of Chicago John J. Stevens Associate Director, Division of Research and Joe Peek Statistics, Board of Governors Vice President, Federal Reserve Bank of Boston Luca Guerrieri Karel Mertens Deputy Associate Director, Division of Financial Senior Economic Policy Advisor, Federal Reserve Stability, Board of Governors Bank of Dallas Glenn Follette and Shane M. Sherlund A. Lee Smith Assistant Directors, Division of Research and Senior Economist, Federal Reserve Bank of Statistics, Board of Governors Kansas City Christopher J. Gust Brent Meyer Assistant Director, Division of Monetary Affairs, Policy Advisor and Economist, Federal Reserve Bank Board of Governors of Atlanta Penelope A. Beattie3 Cristina Arellano Assistant to the Secretary, Office of the Secretary, Monetary Advisor, Federal Reserve Bank of Board of Governors Minneapolis Etienne Gagnon4 Monetary Policy Options at the Effective Section Chief, Division of Monetary Affairs, Lower Bound Board of Governors Matthias Paustian4 The staff provided a briefing that summarized its Section Chief, Division of Research and Statistics, analysis of the extent to which some of the Commit- Board of Governors tee’s monetary policy tools could provide adequate policy accommodation if, in future economic down- David H. Small turns, the policy rate were again to become con- Project Manager, Division of Monetary Affairs, strained by the effective lower bound (ELB).5 The Board of Governors staff examined simulations from the staff’s FRB/US Hess T. Chung4 model and various other economic models to assess the likelihood of the policy rate returning to the ELB Group Manager, Division of Research and Statistics, and to evaluate how much additional policy accom- Board of Governors modation could be delivered by the current toolkit. Andrea Ajello, Edward Herbst, and Bernd Schlusche4 This toolkit included threshold-based forward- Principal Economists, Division of Monetary Affairs, guidance policies, in which the Committee communi- Board of Governors cates that the federal funds rate will remain at the ELB until either inflation or the unemployment rate Randall A. Williams reaches a certain threshold, and balance sheet poli- Senior Information Manager, Division of Monetary cies, involving increases in the size or duration of the Affairs, Board of Governors Federal Reserve’s asset holdings. 3 Attended Tuesday session only. 5 In the analysis, the staff assumed that the ELB was 12.5 basis 4 Attended through the discussion of monetary policy options at points, equal to the midpoint of the target range for the federal the effective lower bound. funds rate from December 2008 to December 2015.

Minutes of Federal Open Market Committee Meetings | July–August 209 The staff’s analysis indicated that under various future economic downturn in which monetary policy policy rules, including those prescribing aggressive was constrained by the ELB; however, countercyclireductions in the federal funds rate in response to cal fiscal policy actions in the United States may be adverse economic shocks, there was a meaningful constrained by the high and rising level of federal risk that the ELB could bind sometime during the government debt. A couple of participants saw macnext decade. That analysis also implied that roprudential and regulatory policies as tools that threshold-based forward guidance and balance sheet could be used to mitigate the risk of financial imbalactions could provide additional accommodation ances inducing an economic downturn in which the that could help support economic activity and miti- ELB constrained the federal funds rate. gate disinflationary pressures in these episodes. In the model simulations, because of unanticipated shocks Participants generally agreed that both forward guidand lags in the transmission of the effects of mon- ance and balance sheet actions would be effective etary policy actions on economic activity and infla- tools to use if the federal funds rate were to become tion, the effectiveness of monetary policy in general, constrained by the ELB. In the Addendum to the including forward-guidance and balance sheet poli- Policy Normalization Principles and Plans statement cies, was limited in mitigating the initial downturn in issued in June 2017, the Committee indicated that it the economy. The staff noted that there was consider- would be prepared to use its full range of tools, able uncertainty surrounding the estimated effects of including altering the size and composition of its balthose policies on the economy; in addition, estimates ance sheet, if future economic conditions were to of how frequently the ELB could bind in the future warrant a more accommodative monetary policy differed across the models that the staff examined. than can be achieved solely by reducing the federal funds rate. However, participants acknowledged that In the discussion that followed the staff’s briefing, there may be limits to the effectiveness of these tools participants generally agreed that their current tool- in addressing an ELB episode. They also emphasized kit could provide significant accommodation but that there was considerable uncertainty about the expressed concern about the potential limits on economic effects of these tools. Consistent with that policy effectiveness stemming from the ELB. They view, a few participants noted that economic viewed it as a matter of prudent planning to evaluate researchers had not yet reached a consensus about potential policy options in advance of such ELB the effectiveness of unconventional policies. A numevents. Many participants commented on the mon- ber of participants indicated that there might be sigetary policy implications of the apparent secular nificant costs associated with the use of unconvendecline in neutral real interest rates. That decline was tional policies, and that these costs might limit, in viewed as likely driven by various factors, including particular, the extent to which the Committee should slower trend growth of the labor force and productiv- engage in large-scale asset purchases. ity as well as increased demand for safe assets. In such circumstances, those participants saw monetary Participants discussed the prominent role that previpolicy as having less scope than in the past to reduce ous communications about forward guidance and the federal funds rate in response to negative shocks. balance sheet actions, in conjunction with those Accordingly, in their view, spells at the ELB could policy measures, had in shaping public expectations become more frequent and protracted than in the about the potential future use of these tools and in past, consistent with the staff’s analysis. Moreover, determining their effectiveness. In general, advance the secular decline in interest rates was a global phe- communications about these policies were seen as nomenon, and a couple of participants emphasized important in reinforcing public understanding of the that this decline increased the likelihood that the Committee’s commitment to achieving its dual- ELB could bind simultaneously in a number of mandate objectives. However, several participants countries. A few other participants raised the concern cautioned against being too specific about how the that frequent or extended ELB episodes could result Committee would deploy such tools. In particular, it in expectations for inflation that were below the was difficult to anticipate the forces that might push Committee’s symmetric 2 percent objective, further the economy into a recession, and thus preserving limiting the scope for reductions in the federal funds some flexibility in responding to an economic downrate to serve as a buffer for the economy and increas- turn could be appropriate. Moreover, although making the likelihood of ELB episodes. Fiscal policy was ing multiyear commitments regarding asset purviewed as a potentially important tool in addressing a chases or the future path of the federal funds rate

210 105th Annual Report | 2018 could enhance the effectiveness of these policies, such Desk’s Survey of Primary Dealers and Survey of commitments could unduly constrain the choices of Market Participants indicated that concerns about the Committee in the future. trade tensions had not affected the outlook for U.S. monetary policy. While the Committee’s current toolkit was judged to be effective, participants agreed, as a matter of pru- The deputy manager followed with a discussion of dent planning, to discuss their policy options further money markets and open market operations. Money and to broaden the discussion to include the evalua- market rates had moved up in line with the 20 basis tion of potential alternative policy strategies for point increase in the interest on excess reserves addressing the ELB. Building on their discussions at (IOER) rate at the June meeting. Over the days folprevious meetings, participants suggested that a num- lowing the June FOMC meeting, the effective federal ber of possible alternatives might be worth consider- funds rate (EFFR) moved up relative to the IOER ation and agreed to return to this topic at future rate, reportedly reflecting some special factors in the meetings. Several participants indicated that it would federal funds market, including increased demand for be desirable to hold periodic and systematic reviews overnight funding by banks in connection with in which the Committee assessed the strengths and liquidity regulations and a pullback by Federal Home weaknesses of its current monetary policy framework. Loan Banks in their lending in the federal funds market. These developments proved temporary, and the Developments in Financial Markets and EFFR subsequently returned to a level about 4 basis Open Market Operations points below the IOER rate. The deputy manager also discussed the Desk’s plans for small-value pur- The manager of the System Open Market Account chases of agency mortgage-backed securities (MBS). (SOMA) provided a summary of developments in The staff projected that principal payments from the domestic and global financial markets over the inter- Federal Reserve’s holdings of agency MBS would fall meeting period. Asset prices were influenced by a below the FOMC’s monthly redemption cap beginnumber of factors, including reports concerning ning in October. If principal payments followed this trade tensions among the United States and its major anticipated trajectory, the Desk planned to begin trading partners, foreign monetary policy develop- conducting monthly small-value purchases of agency ments, and data pointing to strong growth momen- MBS at that time to maintain operational readiness. tum in the United States. Escalating trade tensions The deputy manager also discussed the Federal between China and the United States prompted Housing Finance Agency’s Single Security Initiative, notable market moves, particularly in foreign under which Uniform Mortgage-Backed Securities exchange markets. News on an agreement between (UMBS) would be issued by both Fannie Mae and the United States and the European Union to con- Freddie Mac beginning in June 2019. The Desk tinue talks to resolve their trade disputes provided planned to develop the capability to conduct UMBS some support for global equity prices. The manager transactions and, to more efficiently manage the summarized recent policy announcements by the portfolio, convert some portion of the SOMA’s exist- European Central Bank (ECB) and the Bank of ing agency MBS holdings to UMBS where appropriate. Japan (BOJ). European yields moved lower following a revision of the ECB’s forward guidance at its June By unanimous vote, the Committee ratified the meeting concerning asset purchases and the path of Desk’s domestic transactions over the intermeeting short-term rates. The Japanese yield curve steepened period. There were no intervention operations in forfollowing reports that the BOJ may facilitate an eign currencies for the System’s account during the increase in longer-term interest rates. At its July intermeeting period. meeting, the BOJ announced a number of changes with respect to forward guidance on its policy out- Staff Review of the Economic Situation look, including its intention to keep interest rates low for an extended period. Meanwhile, expectations con- The information reviewed for the July 31–August 1 cerning the path of monetary policy in the United meeting indicated that labor market conditions con- States were little changed over the intermeeting tinued to strengthen in recent months and that real period. Futures quotes indicated that market partici- gross domestic product (GDP) rose at a strong rate in pants placed high odds on a further quarter-point the first half of the year. Consumer price inflation, as firming in the federal funds rate at the September measured by the 12-month percentage change in the FOMC meeting. Responses to the Open Market price index for personal consumption expenditures

Minutes of Federal Open Market Committee Meetings | July–August 211 (PCE), remained near 2 percent in June. Survey- supportive of solid real PCE growth in the near term. based measures of longer-run inflation expectations Consumer sentiment, as measured by the University were little changed on balance. of Michigan Surveys of Consumers, remained upbeat in June and July. Total nonfarm payroll employment expanded at a strong pace again in June. The national unemploy- Residential investment declined again in the second ment rate moved up to 4.0 percent, but the labor quarter. Starts for new single-family homes were little force participation rate rose by a similar amount, changed, on average, in May and June, but starts of leaving the employment-to-population ratio multifamily units declined on net. The issuance of unchanged from May. The three-month moving aver- building permits for both types of housing was lower ages of the unemployment rates for African Ameri- in the second quarter than in the first quarter, which cans, Asians, and Hispanics were each at or below the suggested that starts might move lower in coming lows achieved during the previous expansion. The months. Sales of existing homes edged down in May share of workers employed part time for economic and June, while sales of new homes moved up on reasons edged down to its lowest level since late 2007. balance. The rate of private-sector job openings ticked down Real private expenditures for business equipment and in May but remained elevated, while the rate of quits intellectual property rose at a moderate pace in the moved higher; initial claims for unemployment insursecond quarter after a strong gain in the first quarter. ance benefits continued to be low through mid-July. Nominal shipments of nondefense capital goods excluding aircraft rose in May and June, and Recent readings showed that increases in hourly forward-looking indicators of business equipment labor compensation stepped up modestly over the spending—such as the backlog of unfilled capital past year. The employment cost index for private goods orders, along with upbeat readings on business workers increased 2.9 percent over the 12 months sentiment from national and regional surveys—conending in June (compared with 2.4 percent over the tinued to point to robust gains in equipment spendsame 12 months a year earlier), and average hourly ing in the near term. Real business expenditures for earnings for all employees rose 2.7 percent over that nonresidential structures expanded at a solid pace period (compared with 2.5 percent over the same again in the second quarter. However, the number of 12 months a year earlier). (Data on compensation crude oil and natural gas rigs in operation—an indiper hour that reflected the comprehensive revision of cator of business spending for structures in the drillthe national income and product accounts by the ing and mining sector—decreased slightly in recent Bureau of Economic Analysis (BEA) were not availweeks. able at the time of the meeting.) Total real government purchases rose at a faster rate Total industrial production was little changed, on in the second quarter than in the first. Real federal net, from April to June despite solid increases in the defense and nondefense purchases both increased in output of the mining sector. Over the first half of the the second quarter. Real purchases by state and local year, manufacturing production rose at a modest governments also moved higher; state and local govpace. Automakers’ assembly schedules suggested a ernment payrolls and construction spending by those sizable increase in light motor vehicle production in governments increased in the second quarter. the third quarter, and broader indicators of manufacturing production, such as the new orders indexes The nominal U.S. international trade deficit narfrom national and regional manufacturing surveys, rowed in May, as exports, led by agricultural prodpointed to solid gains in factory output in the near ucts (particularly soybeans) and capital goods, term. increased strongly and imports increased only modestly. In June, however, advance data suggested that Real PCE rose briskly in the second quarter after a nominal goods exports fell and imports rose. All told, modest gain in the first quarter. Light motor vehicle the BEA estimates that net exports made a positive sales maintained a robust pace in June, and indica- contribution of about 1 percentage point to real tors of vehicle demand were mixed but generally GDP growth in the second quarter after a near-zero favorable. More broadly, recent readings on key fac- contribution in the first. tors that influence consumer spending—including gains in employment, real disposable personal Total U.S. consumer prices, as measured by the PCE income, and households’ net worth—continued to be price index, increased 2.2 percent over the 12 months

212 105th Annual Report | 2018 ending in June. Core PCE price inflation, which close to zero; the probability of an increase at the excludes changes in consumer food and energy prices, September FOMC meeting rose to about 90 percent was 1.9 percent over that same period. The consumer by the end of the intermeeting period. Levels of the price index (CPI) rose 2.9 percent over the 12 months federal funds rate at the end of 2019 and 2020 ending in June, while core CPI inflation was 2.3 per- implied by overnight index swap (OIS) rates edged up cent. Recent readings on survey-based measures of slightly on net. longer-run inflation expectations—including those from the Michigan survey and the Desk’s Survey of The nominal Treasury yield curve flattened somewhat Primary Dealers and Survey of Market Partici- during the intermeeting period. Measures of inflapants—were little changed on balance. tion compensation derived from Treasury Inflation- Protected Securities were little changed on net. Incoming data suggested that foreign economic activity expanded at a moderate pace in the second quar- Concerns about international trade disputes led to a ter. Monthly indicators pointed to a pickup in the slight decline in sentiment toward some domestic pace of economic activity in most advanced foreign risky assets early in the period, but sentiment was economies (AFEs) following a temporary dip in the buoyed later by positive corporate earnings releases first quarter. However, real GDP growth remained for the second quarter. Broad U.S. equity price moderate in the euro area and appeared to have indexes displayed mixed results since the June FOMC slowed notably in many emerging market economies meeting. Option-implied volatility on the S&P 500 (EMEs), especially Mexico, from an unusually strong index at the one-month horizon—the VIX—was little start to the year. Foreign inflation fell in the second changed, on net, and remained only a bit above the quarter, largely reflecting lower retail energy and very low levels that prevailed before early February. food price inflation. Underlying inflation pressures in Over the intermeeting period, spreads of yields on most foreign economies, especially in some AFEs, nonfinancial corporate bonds over those of remained subdued. comparable-maturity Treasury securities were little changed, on net, for both investment- and Staff Review of the Financial Situation speculative-grade firms. These spreads remained low by historical standards. Concerns regarding international trade policy weighed on market sentiment at times over the inter- Short-term funding markets functioned smoothly, meeting period, prompting notable declines in some and spreads of unsecured rates over comparableforeign equity markets but leaving only a modest maturity OIS rates continued to narrow during the imprint on domestic asset prices on net. Meanwhile, intermeeting period. After the June FOMC meeting, FOMC communications were viewed by market parthe EFFR rose around 20 basis points, in line with ticipants as slightly less accommodative than the increase in the IOER rate, and traded well within expected, and domestic economic data releases were the target range throughout the period. seen as mixed. On balance, market-based measures of the expected path of the federal funds rate through the end of 2019 edged up slightly. Yields on medium- The dollar appreciated against most currencies, with and longer-term nominal Treasury securities were the notable exception of the Mexican peso, which little changed. The broad dollar index moved up. appreciated on some easing of investor concerns Financing conditions for nonfinancial businesses and around prospective economic policies of the newly households remained supportive of economic activity elected government. Escalating trade tensions conon balance. tributed to an unusually sharp depreciation of the Chinese renminbi. Trade tensions also drove foreign Although the reactions of asset prices to FOMC equity prices lower, but there was a modest reversal communications during the period were generally late in the intermeeting period following an agreemodest, market participants reportedly interpreted ment between the United States and the European the June FOMC statement and Summary of Eco- Union to hold off on tariff increases pending further nomic Projections (SEP) as somewhat less accommo- negotiations. On net, equity prices were little changed dative than expected. The probability of an increase in the AFEs, while they declined in the EMEs, led in the target range for the federal funds rate occur- largely by a steep drop in China. Outflows from dediring at the August FOMC meeting, as implied by cated emerging market funds slowed, and EME sovquotes on federal funds futures contracts, remained ereign bond spreads narrowed slightly.

Minutes of Federal Open Market Committee Meetings | July–August 213 On balance, longer-term bond yields in the AFEs Most borrowers in the residential mortgage market declined slightly over the intermeeting period. ECB continued to face accommodative financing condicommunications following its June meeting were per- tions. For borrowers with low credit scores, credit ceived as more accommodative than expected and led conditions continued to ease but stayed tight overall. to a noticeable decline in market-based measures of Growth in home-purchase mortgages slowed a bit, policy rate expectations. The BOJ issued revised for- and refinancing activity continued to be muted over ward guidance at its July meeting indicating that it the past year, with both developments partly reflectintends to maintain current low short- and long-term ing the rise in mortgage rates earlier this year. Relainterest rates for an extended period. Finally, the tive to the June FOMC meeting, interest rates on Bank of England held its policy rate steady at its 30-year conforming mortgages and yields on agency June meeting, but U.K. yields declined slightly amid MBS were little changed. ongoing Brexit-related concerns as well as lowerthan-expected inflation data. Financing conditions in consumer credit markets were little changed so far this year, on balance, and Financing conditions for nonfinancial corporations remained largely supportive of growth in household continued to be favorable over the intermeeting spending. Growth in consumer credit picked up in period. Gross issuance of corporate bonds and insti- May from the more moderate pace seen earlier this tutional leveraged loans picked up in May and stayed year. Despite rising interest rates, financing rates strong in June, with the rise in corporate bond issu- remained low compared with historical levels, and ance concentrated in the investment-grade segment recent household surveys indicated that consumers’ of the market. Meanwhile, the volume of equity issu- assessments of buying conditions for autos and other ance remained robust. expensive durable goods were generally positive. Credit supply conditions also continued to be largely Growth of outstanding commercial and industrial supportive of spending. A moderate net fraction of (C&I) loans held by banks was strong, on average, in July SLOOS respondents reported easing standards June. Respondents to the June Senior Loan Officer on auto loans over the previous three months after Opinion Survey on Bank Lending Practices (SLOOS) several quarters in which banks had reported tightenreported that their institutions had eased standards ing standards. However, a significant net fraction of and terms on C&I loans in the second quarter, most banks reportedly continued to tighten standards for often citing increased competition from other lenders credit card accounts. and increased ease of transacting in the secondary market as the reasons for doing so. Although some The staff provided its latest report on potential risks signs of deterioration emerged over the intermeeting to financial stability; the report again characterized period, the credit quality of nonfinancial corpora- the financial vulnerabilities of the U.S. financial tions continued to be solid overall. The ratio of system as moderate on balance. This overall assessaggregate debt to assets in this sector stayed near ment incorporated the staff’s judgment that vulnermultidecade highs. Gross issuance of municipal abilities associated with asset valuation pressures bonds in June was robust, continuing to increase continued to be elevated, with no major asset class from its slow start to the year. exhibiting valuations below their historical midpoints. Additionally, the staff judged vulnerabilities Financing conditions for commercial real estate from financial-sector leverage and maturity and (CRE) remained accommodative. CRE loans at liquidity transformation to be low, vulnerabilities banks maintained solid growth over the past several from household leverage as being in the low-toquarters, with growth shared across all three major moderate range, and vulnerabilities from leverage in CRE loan categories. On a weighted basis across all the nonfinancial business sector as elevated. major CRE loan categories, respondents to the June SLOOS reported that standards and demand for Staff Economic Outlook CRE loans continued to be unchanged, on the whole, over the second quarter. Interest rate spreads on In the U.S. economic forecast prepared for this commercial mortgage-backed securities (CMBS) FOMC meeting, the staff continued to project that were little changed over the intermeeting period and the economy would expand at an above-trend pace. remained near their post-crisis lows, while issuance of Real GDP was forecast to increase in the second half non-agency and agency CMBS maintained a solid of this year at a pace that was just a little slower than pace in the second quarter. in the first half of the year. Over the 2018–20 period,

214 105th Annual Report | 2018 output was projected to rise further above the staff’s tions may be lower than was assumed in the staff estimate of potential output, and the unemployment forecast. rate was projected to decline further below the staff’s estimate of the longer-run natural rate. However, Participants’ Views on Current Conditions with labor market conditions already tight, the staff and the Economic Outlook continued to assume that the projected decline in the unemployment rate will be attenuated by a greater- In their discussion of the economic situation and the than-usual cyclical improvement in the labor force outlook, meeting participants agreed that informaparticipation rate. Relative to the forecast prepared tion received since the FOMC met in June indicated for the June meeting, the projection for real GDP that the labor market had continued to strengthen growth was revised up a little, primarily in response and that economic activity had been rising at a to stronger incoming data on household spending. In strong rate. Job gains had been strong, on average, in addition, the staff continued to anticipate that supply recent months, and the unemployment rate had constraints might restrain output growth somewhat stayed low. Household spending and business fixed in the medium term. The unemployment rate was investment had grown strongly. On a 12-month basis, projected to be a little higher over the next few quar- both overall inflation and core inflation, which ters than in the previous forecast, but it was essen- excludes changes in food and energy prices, had tially unrevised thereafter. remained near 2 percent. Indicators of longer-term inflation expectations were little changed, on balance. The staff forecast for total PCE price inflation in 2018 was revised down a little, mainly because of a Participants generally noted that economic growth in slower-than-expected increase in consumer energy the second quarter had been strong; incoming data prices in the second quarter and a downward revision indicated considerable momentum in spending by to the forecast for energy price inflation in the second households and businesses. Several participants half of this year. The staff continued to project that stressed the possibility that real GDP growth in the total PCE inflation would remain near the Commit- second quarter may have been boosted by transitory tee’s 2 percent objective over the medium term and factors, including an outsized increase in U.S. that core PCE price inflation would run slightly exports. For the second half of the year, participants higher than total inflation over that period because of generally expected that GDP growth would likely a projected decline in consumer energy prices in 2019 slow from its second-quarter rate but would still and 2020. exceed that of potential output. Participants noted a number of favorable economic factors that were sup- The staff viewed the uncertainty around its projec- porting above-trend GDP growth; these included a tions for real GDP growth, the unemployment rate, strong labor market, stimulative federal tax and and inflation as similar to the average of the past spending policies, accommodative financial condi- 20 years. The staff saw the risks to the forecasts for tions, and continued high levels of household and real GDP growth and the unemployment rate as bal- business confidence. Participants generally viewed the anced. On the upside, household spending and busi- risks to the economic outlook as roughly balanced. ness investment could expand faster over the next few years than the staff projected, supported in part by Reports from business contacts confirmed a robust the tax cuts enacted last year. On the downside, trade pace of expansion in several sectors of the economy, policies could move in a direction that would have including energy, manufacturing, and services. Crude significant negative effects on economic growth. oil production was reported as having grown rapidly. Another possibility was that recent fiscal policy In contrast to other sectors, residential construction actions could produce less of a boost to aggregate activity appeared to have softened somewhat, possidemand than assumed in the baseline projection, as bly reflecting declining home affordability, higher the current tightness of resource utilization may mortgage rates, scarcity of available lots in certain result in smaller multiplier effects than would be typi- cities, and delays in building approvals. However, a cal at other points in the business cycle. Risks to the couple of participants reported vibrancy in industrial inflation projection also were seen as balanced. The and multifamily construction activity. Business conupside risk that inflation could increase more than tacts in various sectors had cited labor shortages and expected in an economy that was projected to move other supply constraints as impediments to producfurther above its potential was counterbalanced by tion. Furthermore, recent tariff increases had put the downside risk that longer-term inflation expecta- upward pressure on input prices. Business contacts in

Minutes of Federal Open Market Committee Meetings | July–August 215 a few Districts reported that uncertainty regarding response to strong demand or increases in input trade policy had led to some reductions or delays in costs, including those associated with tariff increases their investment spending. Nonetheless, a number of and recent rises in fuel and freight expenses. Many participants indicated that most businesses concerned participants anticipated that, over the medium term, about trade disputes had not yet cut back their capi- high levels of resource utilization and stable inflation tal expenditures or hiring but might do so if trade expectations would keep inflation near 2 percent. tensions were not resolved soon. Several participants However, some participants observed that inflation in observed that the agricultural sector had been recent years had shown only a weak connection to adversely affected by significant declines in crop and measures of resource pressures or indicated that they livestock prices over the intermeeting period. A would like to see further evidence that measures of couple of participants noted that this development underlying inflation or readings on inflation expectalikely partly flowed from trade tensions. tions were on course to attain levels consistent with sustained achievement of the Committee’s symmetric Participants agreed that labor market conditions had 2 percent inflation objective. Although a few particistrengthened further over the intermeeting period. pants observed that the trimmed mean measure of Payrolls had grown strongly in June, and labor mar- inflation calculated by the Federal Reserve Bank of ket tightness was reflected in recent readings on rates Dallas was still below 2 percent, a couple noted foreof private-sector job openings and quits and on job- casts that this measure would reach 2 percent by the to-job switching by workers. Although the unemploy- end of the year. Some participants raised the concern ment rate increased slightly in June, this increase was that a prolonged period in which the economy operaccompanied by an uptick in the labor force partici- ated beyond potential could give rise to inflationary pation rate. pressures or to financial imbalances that could eventually trigger an economic downturn. Many participants commented on the fact that measures of aggregate nominal wage growth had so far Participants commented on a number of risks and picked up only modestly. Among the factors cited as uncertainties associated with their outlook for ecocontaining the pickup in wage growth were low trend nomic activity, the labor market, and inflation over productivity growth, lags in the response of nominal the medium term. They generally continued to see wage growth to resource pressures, and improve- fiscal policy and the strengthening of the labor marments in the terms of employment that were not ket as supportive of economic growth in the near recorded in the wage data. Alternatively, the recent term. Some noted larger or more persistent positive pace of nominal wage growth might indicate contin- effects of these factors as an upside risk to the outued slack in the labor market. However, some partici- look. A few participants indicated, however, that a pants expected a pickup in aggregate nominal wage faster-than-expected fading of the fiscal impetus or a growth to occur before long, with a number of par- greater-than-anticipated subsequent fiscal tightening ticipants reporting that wage pressures in their Dis- constituted a downside risk. In addition, all particitricts were rising or that firms now exhibited greater pants pointed to ongoing trade disagreements and willingness to grant wage increases. proposed trade measures as an important source of uncertainty and risks. Participants observed that if a Participants noted that both overall inflation and large-scale and prolonged dispute over trade policies inflation for items other than food and energy developed, there would likely be adverse effects on remained near 2 percent on a 12-month basis. A few business sentiment, investment spending, and participants expressed increased confidence that the employment. Moreover, wide-ranging tariff increases recent return of inflation to near the Committee’s would also reduce the purchasing power of U.S. longer-term 2 percent objective would be sustained. households. Further negative effects in such a sce- Several participants commented that increases in the nario could include reductions in productivity and prices of particular goods, such as those induced by disruptions of supply chains. Other downside risks the tariff increases, would likely be one source of cited included the possibility of a significant weakenshort-term upward pressure on the inflation rate, ing in the housing sector, a sharp increase in oil although offsetting influences—including the nega- prices, or a severe slowdown in EMEs. tive effects that trade developments were having on agricultural prices—were also noted. Reports from Participants remarked on the extent to which finanseveral Districts suggested that firms had greater cial conditions remained supportive of economic scope than in the recent past to raise prices in expansion. Over the intermeeting period, only a small

216 105th Annual Report | 2018 change in overall financial conditions occurred, with ing that long-term inflation expectations could be modest movements on net in equity prices and in the below levels consistent with the Committee’s 2 perforeign exchange value of the dollar. The yield curve cent inflation objective. had flattened further over the intermeeting period. Participants generally judged that the current stance Participants who commented on financial stability of monetary policy remained accommodative, supnoted that asset valuations remained elevated and porting strong labor market conditions and inflation corporate borrowing terms remained easy. They also of around 2 percent. Participants agreed that it noted that regulatory changes introduced in the past would be appropriate for the Committee to leave the decade had helped to reduce the susceptibility of the target range for the federal funds rate unchanged at financial sector to runs and to strengthen the capital this meeting. positions of banks and other financial institutions. In discussing the capital positions of large banks, a few With regard to the medium term, various participarticipants emphasized that financial stability risks pants indicated that information gathered since the could be reduced if these institutions further boosted Committee met in June had not significantly altered their capital cushions while their profits are strong their outlook for the U.S. economy. Many particiand the economic outlook is favorable; arguments for pants suggested that if incoming data continued to and against the activation of the countercyclical capi- support their current economic outlook, it would tal buffer as a means of further strengthening the likely soon be appropriate to take another step in capital positions of large banks were discussed in this removing policy accommodation. Participants genercontext. ally expected that further gradual increases in the target range for the federal funds rate would be consis- In their consideration of monetary policy, partici- tent with a sustained expansion of economic activity, pants discussed the implications of recent economic strong labor market conditions, and inflation near and financial developments for the economic outlook the Committee’s symmetric 2 percent objective over and the associated risks to that outlook. Participants the medium term. Many participants reiterated that remarked on recent above-trend growth in real GDP the actual path for the federal funds rate would ultiand on indicators of resource utilization. Some com- mately depend on the incoming data and on how mented that consumer spending had been quite those data affect the economic outlook. strong in the second quarter, confirming their impressions that the first-quarter weakness had been Participants discussed the economic forces and risks temporary. Several participants also pointed to the they saw as providing the rationale for gradual continued strength in business fixed investment, increases in the federal funds rate as well as scenarios although the persistent weakness and the risk of a that might cause them to depart from this expected further slowdown in residential investment were also path. Among other factors, they pointed to uncernoted. A few participants suggested there could still tainty about the appropriate level of the federal funds be some labor market slack, citing recent increases in rate over the longer run and to constraints on the labor force participation rates relative to prevailing provision of monetary accommodation during ELB demographically driven downward trends; the par- episodes as reasons for proceeding gradually in the ticipation rate of prime-age men, in particular, was removal of accommodation. Some participants noted still below its previous business cycle peak. Other that stronger underlying momentum in the economy participants judged that labor market conditions was an upside risk; most expressed the view that an were tight, pointing to other data, including job quits escalation in international trade disputes was a and openings rates, and anecdotes from contacts. potentially consequential downside risk for real activity. Some participants suggested that, in the event of Participants generally characterized inflation as run- a major escalation in trade disputes, the complex ning close to the Committee’s objective of 2 percent, nature of trade issues, including the entire range of and most of those who expressed a view indicated their effects on output and inflation, presented a that recent readings on inflation had come in close to challenge in determining the appropriate monetary their expectations. Consistent with their SEP submis- policy response. sions in June, several participants remarked that inflation, measured on a 12-month basis, was likely Participants also discussed the possible implications to move modestly above the Committee’s objective of a flattening in the term structure of market interfor a time. Others pointed to some indicators suggest- est rates. Several participants cited statistical evidence

Minutes of Federal Open Market Committee Meetings | July–August 217 for the United States that inversions of the yield nomic activity had been rising at a strong rate. Job curve have often preceded recessions. They suggested gains had been strong, on average, in recent months, that policymakers should pay close attention to the and the unemployment rate had stayed low. Houseslope of the yield curve in assessing the economic hold spending and business fixed investment had and policy outlook. Other participants emphasized grown strongly. On a 12-month basis, both overall that inferring economic causality from statistical cor- inflation and inflation for items other than food and relations was not appropriate. A number of global energy remained near 2 percent. Indicators of factors were seen as contributing to downward pres- longer-term inflation expectations were little sure on term premiums, including central bank asset changed, on balance. purchase programs and the strong worldwide demand for safe assets. In such an environment, an Policymakers viewed the recent data as indicating inversion of the yield curve might not have the sig- that the outlook for the economy was evolving about nificance that the historical record would suggest; the as they had expected. Consequently, members signal to be taken from the yield curve needed to be expected that further gradual increases in the target considered in the context of other economic and range for the federal funds rate would be consistent financial indicators. with sustained expansion of economic activity, strong labor market conditions, and inflation near A couple of participants commented on issues the Committee’s symmetric 2 percent objective over related to the operating framework for the implemen- the medium term. Members continued to judge that tation of monetary policy, including, among other the risks to the economic outlook appeared roughly things, the implications of changes in financial mar- balanced. ket regulations for the demand for reserves and for the size and composition of the Federal Reserve’s After assessing the incoming data, current condibalance sheet. These participants judged that it tions, and the outlook for economic activity, the would be important for the Committee to resume its labor market, and inflation, members agreed to discussion of operating frameworks before too long. maintain the target range for the federal funds rate at The Chairman suggested that the Committee would 1¾ to 2 percent. They noted that the stance of monlikely resume a discussion of operating frameworks etary policy remained accommodative, thereby supin the fall. porting strong labor market conditions and a sustained return to 2 percent inflation. Many participants noted that it would likely be appropriate in the not-too-distant future to revise the Members agreed that the timing and size of future Committee’s characterization of the stance of mon- adjustments to the target range for the federal funds etary policy in its postmeeting statement. They rate would depend on their assessments of realized agreed that the statement’s language that “the stance and expected economic conditions relative to the of monetary policy remains accommodative” would, objectives of maximum employment and 2 percent at some point fairly soon, no longer be appropriate. inflation. They reiterated that this assessment would Participants noted that the federal funds rate was take into account a wide range of information, moving closer to the range of estimates of its neutral including measures of labor market conditions, indilevel. A number of participants emphasized the con- cators of inflation pressures and inflation expectasiderable uncertainty in estimates of the neutral rate tions, and readings on financial and international of interest, stemming from sources such as fiscal developments. policy and large-scale asset purchase programs. Against this background, continuing to provide an At the conclusion of the discussion, the Committee explicit assessment of the federal funds rate relative voted to authorize and direct the Federal Reserve to its neutral level could convey a false sense of Bank of New York, until it was instructed otherwise, precision. to execute transactions in the SOMA in accordance with the following domestic policy directive, to be Committee Policy Action released at 2:00 p.m.: In their discussion of monetary policy for the period “Effective August 2, 2018, the Federal Open ahead, members judged that information received Market Committee directs the Desk to undersince the FOMC met in June indicated that the labor take open market operations as necessary to market had continued to strengthen and that eco- maintain the federal funds rate in a target range

218 105th Annual Report | 2018 of 1¾ to 2 percent, including overnight reverse Committee’s symmetric 2 percent objective over repurchase operations (and reverse repurchase the medium term. Risks to the economic outoperations with maturities of more than one day look appear roughly balanced. when necessary to accommodate weekend, holiday, or similar trading conventions) at an offer- In view of realized and expected labor market ing rate of 1.75 percent, in amounts limited only conditions and inflation, the Committee decided by the value of Treasury securities held outright to maintain the target range for the federal funds in the System Open Market Account that are rate at 1¾ to 2 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 strong labor market conditions and a sustained return to 2 percent inflation. The Committee directs the Desk to continue rolling over at auction the amount of principal In determining the timing and size of future payments from the Federal Reserve’s holdings of adjustments to the target range for the federal Treasury securities maturing during each calen- funds rate, the Committee will assess realized dar month that exceeds $24 billion, and to rein- and expected economic conditions relative to its vest in agency mortgage-backed securities the maximum employment objective and its symamount of principal payments from the Federal metric 2 percent inflation objective. This assess- Reserve’s holdings of agency debt and agency ment will take into account a wide range of mortgage-backed securities received during each information, including measures of labor market calendar month that exceeds $16 billion. Small conditions, indicators of inflation pressures and deviations from these amounts for operational inflation expectations, and readings on financial reasons are acceptable. and international developments.” The Committee also directs the Desk to engage Voting for this action: Jerome H. Powell, John C. in dollar roll and coupon swap transactions as Williams, Thomas I. Barkin, Raphael W. Bostic, Lael necessary to facilitate settlement of the Federal Brainard, Esther L. George, Loretta J. Mester, and Reserve’s agency mortgage-backed securities Randal K. Quarles. transactions.” Voting against this action: None. The vote also encompassed approval of the statement below to be released at 2:00 p.m.: Ms. George voted as alternate member at this meeting. “Information received since the Federal Open Market Committee met in June indicates that Consistent with the Committee’s decision to leave the the labor market has continued to strengthen target range for the federal funds rate unchanged, the and that economic activity has been rising at a Board of Governors voted unanimously to leave the strong rate. Job gains have been strong, on averinterest rates on required and excess reserve balances age, in recent months, and the unemployment unchanged at 1.95 percent and voted unanimously to rate has stayed low. Household spending and approve establishment of the primary credit rate (disbusiness fixed investment have grown strongly. count rate) at the existing level of 2½ percent, effec- On a 12-month basis, both overall inflation and tive August 2, 2018.6 inflation for items other than food and energy remain near 2 percent. Indicators of longer-term It was agreed that the next meeting of the Committee inflation expectations are little changed, on would be held on Tuesday–Wednesday, Septembalance. ber 25–26, 2018. The meeting adjourned at 9:45 a.m. on August 1, 2018. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sus- 6 The second vote of the Board also encompassed approval of the tained expansion of economic activity, strong establishment of the interest rates for secondary and seasonal labor market conditions, and inflation near the credit under the existing formulas for computing such rates.

Minutes of Federal Open Market Committee Meetings | July–August 219 Notation Vote By notation vote completed on July 3, 2018, the Committee unanimously approved the minutes of the Committee meeting held on June 12–13, 2018. James A. Clouse Secretary

220 105th Annual Report | 2018 Meeting Held Steven B. Kamin Economist on September 25–26, 2018 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 25, 2018, at 2:00 p.m. and continued on David Altig, Kartik B. Athreya, Thomas A. Connors, Wednesday, September 26, 2018, at 9:00 a.m.1 Mary C. Daly, David E. Lebow, Trevor A. Reeve, William Wascher, and Beth Anne Wilson Present Associate Economists Jerome H. Powell Simon Potter Chairman Manager, System Open Market Account John C. Williams Lorie K. Logan Vice Chairman Deputy Manager, System Open Market Account Thomas I. Barkin Ann E. Misback Secretary, Office of the Secretary, Raphael W. Bostic Board of Governors Lael Brainard Matthew J. Eichner2 Richard H. Clarida Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Loretta J. Mester Andreas Lehnert Randal K. Quarles Director, Division of Financial Stability, James Bullard, Charles L. Evans, Esther L. George, Board of Governors Eric Rosengren, and Michael Strine Jennifer L. Burns Alternate Members of the Federal Open Market Deputy Director, Division of Supervision and Committee Regulation, Board of Governors Patrick Harker, Robert S. Kaplan, and Neel Kashkari Rochelle M. Edge Presidents of the Federal Reserve Banks of Deputy Director, Division of Monetary Affairs, Philadelphia, Dallas, and Minneapolis, respectively Board of Governors Mark A. Gould First Vice President, Federal Reserve Bank Michael T. Kiley of San Francisco Deputy Director, Division of Financial Stability, Board of Governors James A. Clouse Secretary Jon Faust Senior Special Adviser to the Chairman, Office of Matthew M. Luecke Board Members, Board of Governors Deputy Secretary Antulio N. Bomfim David W. Skidmore Special Adviser to the Chairman, Office of Board Assistant Secretary Members, Board of Governors Michelle A. Smith Joseph W. Gruber and John M. Roberts Assistant Secretary Special Advisers to the Board, Office of Board Mark E. Van Der Weide Members, Board of Governors General Counsel Linda Robertson Michael Held Assistant to the Board, Office of Board Members, Deputy General Counsel 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 | September 221 Eric M. Engen, Joshua Gallin, Michael Dotsey and Geoffrey Tootell and Michael G. Palumbo Executive Vice Presidents, Federal Reserve Banks of Senior Associate Directors, Division of Research Philadelphia and Boston, respectively and Statistics, Board of Governors Edward S. Knotek II, Spencer Krane, Christopher J. Erceg and Mark L. J. Wright Senior Associate Director, Division of International Senior Vice Presidents, Federal Reserve Banks of Finance, Board of Governors Cleveland, Chicago, and Minneapolis, respectively Ellen E. Meade, Edward Nelson, Jonathan P. McCarthy and Jonathan L. Willis and Joyce K. Zickler3 Vice Presidents, Federal Reserve Banks of New York Senior Advisers, Division of Monetary Affairs, and Kansas City, respectively Board of Governors William Dupor Jeremy B. Rudd Assistant Vice President, Federal Reserve Bank of Senior Adviser, Division of Research and Statistics, St. Louis Board of Governors Jim Dolmas Senior Research Economist, Federal Reserve Bank of David López-Salido Dallas Associate Director, Division of Monetary Affairs, Board of Governors Developments in Financial Markets and Stacey Tevlin Open Market Operations Associate Director, Division of Research and Statistics, Board of Governors The manager of the System Open Market Account (SOMA) discussed U.S. and global financial develop- Eric C. Engstrom ments. In global markets, strains in emerging market Deputy Associate Director, Division of economies (EMEs) contributed to volatility in cur- Monetary Affairs, rency and equity markets over the period. In addiand tion, concerns about trade tensions between the Adviser, Division of Research and Statistics, United States and China were the focus of a great Board of Governors deal of attention among market participants. Such Penelope A. Beattie4 concerns led the Shanghai Composite index to drop Assistant to the Secretary, Office of the Secretary, as much as 8 percent at one point over the intermeet- Board of Governors ing period before recovering somewhat. The renminbi, however, was relatively stable, reportedly in Jeffrey Huther part because investors believed that Chinese authori- Section Chief, Division of Monetary Affairs, ties were prepared to take measures to counter sig- Board of Governors nificant renminbi depreciation. David H. Small Project Manager, Division of Monetary Affairs, Regarding domestic financial markets, the manager Board of Governors noted that U.S. equity markets had posted strong gains, spurred by optimism regarding the U.S. eco- Benjamin K. Johannsen nomic outlook and rising corporate earnings. Senior Economist, Division of Monetary Affairs, Longer-term Treasury yields moved higher, and Board of Governors market-based measures of the expected path of the funds rate edged up. According to the Open Market Achilles Sangster II Desk’s Survey of Primary Dealers and Survey of Information Management Analyst, Division of Market Participants, a 25 basis point increase in the Monetary Affairs, Board of Governors target range for the federal funds rate at the Septem- Gregory L. Stefani ber meeting was widely expected; moreover, investors First Vice President, Federal Reserve Bank of appeared to be placing high odds on a further Cleveland quarter-point policy firming at the December meeting. In U.S. money markets, the spread between the 3 Attended opening remarks for Tuesday session only. three-month London interbank offered rate and 4 Attended Tuesday session only. three-month overnight index swap (OIS) rates contin-

222 105th Annual Report | 2018 ued to narrow. The widening in that spread earlier in gross domestic product (GDP) appeared to be rising the year appeared to reflect an especially rapid at a strong rate in the third quarter, similar to its pace run-up in Treasury bill supply. Treasury bill supply in the first half of the year. The flooding and damage remained elevated and reportedly continued to con- from Hurricane Florence, which made landfall on tribute to upward pressure on overnight repurchase September 14, seemed likely to have a modest, transiagreement (repo) rates. The relatively high level of tory effect on national economic growth in the secrepo rates was associated with continued very modest ond half of the year. Consumer price inflation, as take-up in the Federal Reserve’s overnight reverse measured by the 12-month percentage change in the repurchase agreement (ON RRP) operations. price index for personal consumption expenditures Elevated repo rates may also have contributed to the (PCE), remained near 2 percent in July. Survey-based relatively tight spread between the interest on excess measures of longer-run inflation expectations were reserves (IOER) rate and the effective federal funds little changed on balance. rate. That spread stood at 3 basis points over much of the period and seemed likely to narrow to 2 basis Total nonfarm payroll employment increased at a points in the near future. As yet, there were no signs strong pace, on average, in July and August. The that the upward pressure on the federal funds rate national unemployment rate decreased to 3.9 percent relative to the IOER rate was due to scarcity of in July and remained at that level in August, while the aggregate reserves in the banking system. The level of labor force participation rate and the employment-toreserves in the banking system temporarily dipped population ratio moved down somewhat, on balance, sharply in mid-September in connection with a siz- over those two months. The unemployment rates for able inflow of tax receipts to the Treasury’s account African Americans, Asians, and Hispanics in August at the Federal Reserve; however, that reduction in were below their levels at the end of the previous reserves in the banking system did not seem to have expansion. The share of workers employed part time any effect on the federal funds market or the effective for economic reasons declined further to below its federal funds rate. level in late 2007. The rate of private-sector job openings continued to be elevated in June and July, while In reviewing Federal Reserve operations, the manager the rate of quits moved higher on balance; initial noted that market reaction to the ongoing reduction claims for unemployment insurance benefits were at in the System’s holdings of Treasury and agency a historically low level in mid-September. Total labor securities had been muted to date. With the increase compensation per hour in the nonfarm business secin the caps on redemptions to be implemented begin- tor increased 3.3 percent over the four quarters endning in October, reinvestment of Treasury securities ing in the second quarter, and average hourly earnwould occur almost exclusively in the middle month ings for all employees rose 2.9 percent over the of each quarter in connection with the Treasury’s 12 months ending in August. mid-quarter refunding auctions. Under the baseline path for interest rates, the Federal Reserve’s reinvest- Industrial production expanded at a solid pace in ments of principal payments on agency mortgage- July and August. Automakers’ assembly schedules backed securities would likely fall to zero beginning suggested that light motor vehicle production would in October; however, prepayments could rise some- be roughly flat in the fourth quarter, although what above the redemption cap in some months in broader indicators of manufacturing production, the future given the uncertainties surrounding pre- such as the new orders indexes from national and payment projections. regional manufacturing surveys, pointed to further solid gains in factory output in the near term. By unanimous vote, the Committee ratified the Desk’s domestic transactions over the intermeeting Real PCE appeared to be rising strongly in the third period. There were no intervention operations in for- quarter. Retail sales increased somewhat in August, eign currencies for the System’s account during the and the data for July were revised up to show a sizintermeeting period. able gain. However, the rate of light motor vehicle sales moved down in July and August from the robust Staff Review of the Economic Situation pace in the second quarter. The staff’s preliminary assessment was that the consequences of Hurricane The information reviewed for the September 25–26 Florence would have a slight negative effect on aggremeeting indicated that labor market conditions con- gate real PCE growth in the third quarter but that tinued to strengthen in recent months and that real spending would bounce back in the fourth quarter.

Minutes of Federal Open Market Committee Meetings | September 223 More broadly, recent readings on key factors that industrial supplies boosted overall imports. The availinfluence consumer spending—including gains in able data suggested that the change in net exports employment, real disposable personal income, and would be a notable drag on real GDP growth in the households’ net worth—continued to be supportive third quarter. of solid real PCE growth in the near term. Moreover, consumer sentiment, as measured by the University Total U.S. consumer prices, as measured by the PCE of Michigan Surveys of Consumers, remained price index, increased 2.3 percent over the 12 months upbeat in August and early September. ending in July. Core PCE price inflation, which excludes changes in consumer food and energy prices, Real residential investment looked to be declining was 2.0 percent over that same period. The consumer further in the third quarter. Starts for new single- price index (CPI) rose 2.7 percent over the 12 months family homes and multifamily units were, on average, ending in August, while core CPI inflation was below their second-quarter rates in July and August. 2.2 percent. Recent readings on survey-based meas- The issuance of building permits for both types of ures of longer-run inflation expectations—including housing stepped down, on net, over those two those from the Michigan survey, the Survey of Promonths, which suggested that starts might move fessional Forecasters, and the Desk’s Survey of Prilower in coming months. Sales of both new and exist- mary Dealers and Survey of Market Participants— ing homes declined somewhat in July, and existing were little changed on balance. home sales were flat in August. Foreign economic growth slowed in the second quar- Growth in real private expenditures for business ter, as a pickup in growth for the advanced foreign equipment and intellectual property appeared to be economies (AFEs) was more than offset by slower moderating a little in the third quarter following growth in the EMEs. Incoming indicators for the strong gains in expenditures in the first half of the AFEs pointed to some moderation in the pace of year. Nominal shipments of nondefense capital growth in the third quarter, especially for Canada goods excluding aircraft rose briskly in July, although and Japan, while indicators for the EMEs suggested a spending for transportation equipment investment pickup in many countries from the unusually slow moved down in recent months. Forward-looking pace of the second quarter. Foreign inflation had indicators of business equipment spending—such as risen a bit recently, boosted by higher oil prices and, increases in new and unfilled capital goods orders, in the EMEs, higher food prices and recent currency along with upbeat readings on business sentiment depreciation. from national and regional surveys—pointed to robust gains in equipment spending in the near term. Staff Review of the Financial Situation Nominal business expenditures for nonresidential structures outside of the drilling and mining sector Nominal Treasury yields increased over the interdeclined in July, and the number of crude oil and meeting period, as market reactions to domestic econatural gas rigs in operation—an indicator of busi- nomic data releases that were, on balance, slightly ness spending for structures in the drilling and min- stronger than expected appeared to outweigh ongoing sector—held about steady in recent weeks. ing concerns about trade policy and negative developments in some EMEs. FOMC communications Total real government purchases looked to be rising over the period were largely in line with expectations further in the third quarter. Nominal defense spend- and elicited little market reaction. Domestic stock ing in July and August was consistent with continued prices rose, buoyed in part by positive news about increases in real federal purchases. Real expenditures corporate earnings, while foreign equity indexes by state and local governments appeared to be declined and the broad dollar index moved up. roughly flat, as state and local government payrolls Financing conditions for nonfinancial businesses and decreased slightly in July and August, while nominal households remained supportive of economic activity construction spending by these governments rose on balance. modestly in July. Global financial markets were volatile during the The nominal U.S. international trade deficit widened intermeeting period amid significant stress in some in June and July, with declining exports and rising EMEs, ongoing focus on Brexit and on fiscal policy imports. The decline in exports largely reflected lower in Italy, and continued trade tensions. On balance, exports of capital goods, while greater imports of the dollar was little changed against AFE currencies

224 105th Annual Report | 2018 and appreciated against EME currencies, as financial yields over comparable-maturity Treasury yields narpressures on some EMEs weighed on broader risk rowed a bit on net. sentiment. Turkey and Argentina experienced significant stress, and other countries with similar macro- Short-term funding markets functioned smoothly economic vulnerabilities also came under pressure. over the intermeeting period. An elevated level of There were small outflows from dedicated emerging Treasury bills outstanding, following heavy issuance market funds, and EME sovereign bond spreads wid- this summer, continued to put upward pressure on ened. Trade tensions weighed on foreign equity money market rates and reduced the attractiveness of prices, as the United States continued its trade nego- the Federal Reserve’s ON RRP facility. Take-up at tiations with Canada and placed additional tariffs on the facility averaged $2.9 billion per day over the Chinese products. intermeeting period. Spreads of unsecured funding rates over comparable-maturity OIS rates continued FOMC communications elicited limited price reac- to retrace the rise in spreads recorded earlier tions in financial markets over the intermeeting this year. period, and market-implied measures of monetary policy expectations were little changed. The probabil- On balance, financing conditions for large nonfinanity of an increase in the target range for the federal cial firms remained accommodative in recent months. funds rate occurring at the September FOMC meet- Demand for corporate borrowing appeared to have ing, as implied by quotes on the federal funds futures declined, in part because of strong earnings, rising contracts, increased to near certainty. The market- interest rates, and seasonal factors. In July and implied probability of an additional rate increase at August, gross issuance of corporate bonds was relathe December FOMC meeting rose to about 75 per- tively weak, while commercial and industrial loan cent. The market-implied path for the federal funds growth moderated. Meanwhile, the pace of equity rate beyond 2018 increased a touch. issuance was solid in July but fell in August, reflecting seasonal factors. Financing conditions for small Evolving trade-related risks and other international businesses remained favorable, and survey-based developments reportedly weighed somewhat on mar- measures of credit demand among small business ket sentiment. However, domestic economic data owners showed signs of strengthening, although releases came in a bit above market expectations, on demand was still weak relative to pre-crisis levels. net, with the stronger-than-expected average hourly Gross issuance of municipal bonds continued to earnings in the August employment report notably be solid. boosting Treasury yields. Nominal Treasury yields moved up over the intermeeting period, with the In the commercial real estate (CRE) sector, financing 10-year yield rising above 3 percent. Measures of conditions also remained accommodative. Although inflation compensation derived from Treasury CRE loan growth at banks moderated in July and Inflation-Protected Securities over the next 5 years August, issuance of commercial mortgage-backed ticked up and were little changed 5 to 10 years ahead. securities (CMBS) was robust. CMBS spreads were little changed over the intermeeting period and Broad U.S. equity price indexes increased about stayed near their post-crisis lows. 4 percent since the August FOMC meeting, as positive news about corporate earnings and the domestic Residential mortgage financing conditions remained economy outweighed negative international develop- accommodative on balance. For borrowers with low ments. Stock prices increased for many sectors in the credit scores, however, conditions were still somewhat S&P 500 index, as the second-quarter earnings tight despite continued easing in credit availability. reports for firms that reported later in the earnings Refinancing activity continued to be muted in recent cycle came in strong. However, concerns about eco- months, and the growth in purchase mortgage originomic prospects abroad—particularly with respect to nations slowed a bit relative to year-earlier levels, in trade policy and China—appeared to weigh on part reflecting the notable increase in mortgage rates stocks in the energy and basic materials sectors, earlier this year. which declined. Option-implied volatility on the S&P 500 index at the one-month horizon—the VIX— On net, financing conditions in consumer credit marmoved down but remained somewhat above the kets were little changed in recent months and extremely low levels seen in late 2017. Spreads of remained largely supportive of growth in household investment- and speculative-grade corporate bond spending. However, the supply of credit to consum-

Minutes of Federal Open Market Committee Meetings | September 225 ers with subprime credit scores remained tight. More because of a projected decline in consumer energy broadly, although interest rates for credit cards and prices in 2019 through 2021. auto loans continued to rise, consumer credit expanded at a solid pace. The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, Staff Economic Outlook and inflation as similar to the average of the past 20 years. The staff also saw the risks to the forecasts In the U.S. economic forecast prepared for the Sep- for real GDP growth and the unemployment rate as tember FOMC meeting, real GDP was projected to balanced. On the upside, household spending and increase in the second half of this year at a rate that business investment could expand faster than the was just a little slower than in the first half of the staff projected, supported in part by the tax cuts year. The staff’s preliminary assessment was that the enacted last year. On the downside, trade policies and effects of Hurricane Florence would lead to a slight foreign economic developments could move in direcreduction in real GDP growth in the third quarter tions that have significant negative effects on U.S. and a small addition to growth in the fourth quarter economic growth. Risks to the inflation projection as economic activity returned to more normal levels also were seen as balanced. The upside risk that inflaand some disrupted activity was made up. Over the tion could increase more than expected in an 2018–20 period, output was projected to rise at a rate economy that was projected to move further above its above or at the staff’s estimate of potential growth potential was counterbalanced by the downside risk and then slow to a pace below it in 2021. The unem- that longer-term inflation expectations may be lower ployment rate was projected to decline further below than was assumed in the staff forecast. the staff’s estimate of its longer-run natural rate but to bottom out in 2020 and begin to edge up in 2021. Participants’ Views on Current Conditions Relative to the forecast prepared for the previous and the Economic Outlook meeting, the projection for real GDP growth this year was revised up a little, primarily in response to In conjunction with this FOMC meeting, members stronger-than-expected incoming data on household of the Board of Governors and Federal Reserve spending and business investment. The projection for Bank presidents submitted their projections of the the medium term was not materially changed, in part most likely outcomes for real GDP growth, the because the recently enacted tariffs on Chinese goods unemployment rate, and inflation for each year from and the retaliatory actions of China were judged to 2018 through 2021 and over the longer run, based on have only a small net effect on U.S. real GDP growth their individual assessments of the appropriate path over the next few years. In addition, the staff contin- for the federal funds rate. The longer-run projections ued to anticipate that supply constraints might represented each participant’s assessment of the rate restrain output growth somewhat in the medium to which each variable would be expected to conterm. The unemployment rate was projected to be a verge, over time, under appropriate monetary policy little lower over the medium term than in the previ- and in the absence of further shocks to the economy. ous forecast, partly in response to the staff’s assess- These projections are described in the Summary of ment that the natural rate of unemployment was a bit Economic Projections (SEP), which is an addendum lower than previously assumed. With labor market to these minutes. conditions already tight, the staff continued to assume that projected employment gains would In their discussion of the economic situation and the manifest in smaller-than-usual downward pressure on outlook, meeting participants agreed that informathe unemployment rate and in larger-than-usual tion received since the FOMC met in August indiupward pressure on the labor force participation rate. cated that the labor market continued to strengthen and that economic activity rose at a strong rate. Job The staff forecast for total PCE price inflation in gains were strong, on average, in recent months, and 2018 was revised up slightly, mainly because of a the unemployment rate stayed low. Recent data sugfaster-than-expected increase in consumer energy gested that household spending and business fixed prices in the second half. The staff continued to proj- investment grew strongly. On a 12-month basis, both ect that total PCE inflation would remain near the overall inflation and inflation for items other than Committee’s 2 percent objective over the medium food and energy remained near 2 percent. Indicators term and that core PCE price inflation would run of longer-term inflation expectations were little slightly higher than total inflation over that period changed on balance.

226 105th Annual Report | 2018 Meeting participants noted that a number of com- District level, which was attributed in part to higher munities suffered devastating losses associated with interest rates or supply constraints. Hurricane Florence. Despite the magnitude of the storm-related destruction, participants expected the Participants noted that business fixed investment had imprint on the level of overall economic activity at grown strongly so far this year. A few commented the national level to be relatively modest, consistent that recent changes in federal tax policy had likely with the experience following several previous major bolstered investment spending. Contacts in most secstorms. tors remained optimistic about their business prospects, and surveys of manufacturing activity were Based on recent readings on spending, employment, broadly favorable. Despite this optimism, a number and inflation, almost all participants saw little change of contacts cited factors that were causing them to in their assessment of the economic outlook, forego production or investment opportunities in although a few of them judged that recent data some cases, including labor shortages and uncerpointed to a pace of economic activity that was tainty regarding trade policy. In particular, tariffs on stronger than they had expected earlier this year. Par- aluminum and steel were cited as reducing new ticipants noted a number of favorable economic fac- investment in the energy sector. Contacts also sugtors that were supporting above-trend GDP growth; gested that firms were attempting to diversify the set these included strong labor market conditions, stimu- of countries with which they trade—both imports lative federal tax and spending policies, accommoda- and exports—as a result of uncertainty over tariff tive financial conditions, solid household balance policy. Contacts in the agricultural industry reported sheets, and continued high levels of household and that tariffs imposed by China had resulted in lower business confidence. A number of participants crop prices, further depressing incomes in that sector, observed that the stimulative effects of the changes in although a new federal program was expected to offfiscal policy would likely diminish over the next sev- set some income losses. eral years. A couple of participants commented that recent strong growth in GDP may also be due in part In their discussion of labor markets, participants to increases in the growth rate of the economy’s pro- generally agreed that conditions continued to ductive capacity. strengthen. Contacts in many Districts reported tight labor markets, with difficulty finding qualified work- In their discussion of the household sector, partici- ers. In some cases, firms were coping with labor pants generally characterized consumption growth as shortages by increasing salaries, benefits, or workstrong, and they judged that robust increases in dis- place amenities in order to attract and retain workers. posable income, high levels of consumer confidence, Other business contacts facing labor shortages were and solid household balance sheets had contributed responding by increasing training for less-qualified to the strength in spending. Several participants workers. For the economy overall, participants genernoted that the household saving rate had been revised ally agreed that, on balance, recent data suggested up significantly in the most recent estimates pub- some acceleration in labor costs, but that wage lished by the Bureau of Economic Activity. A few of growth remained moderate by historical standards, those participants remarked that the upward revision which was due in part to tepid productivity growth. in the saving rate could be viewed as evidence of the strength of the financial position of the household Regarding inflation, participants noted that on a sector and could be a factor that would further sup- 12-month basis, both overall inflation and inflation port solid expansion of consumption spending. for items other than food and energy remained near However, a couple of participants noted that the 2 percent. Indicators of longer-term inflation expechigher saving rate may not be a precursor to higher tations were little changed on balance. In general, future consumption growth. For example, the higher participants viewed recent consumer price developsaving rate may indicate some greater caution on the ments as consistent with their expectation that inflapart of consumers, greater inequality of income and tion was on a trajectory to achieve the Committee’s wealth—which would imply a lower aggregate pro- symmetric 2 percent objective on a sustained basis. pensity to spend—or changing consumer behavior in Several participants commented that inflation may a low interest rate environment. With regard to resi- modestly exceed 2 percent for a period of time. dential investment, a few participants noted weak Reports from business contacts and surveys in a residential construction activity at the national or number of Districts also indicated some firming in

Minutes of Federal Open Market Committee Meetings | September 227 inflationary pressures. In particular, some contacts sistently running below 2 percent were mentioned as indicated that input prices had been bolstered by risks that could lead to lower inflation. strong demand or import tariffs. Moreover, several participants reported that firms in their Districts that A few participants offered perspectives on the term were facing higher input prices because of tariffs per- structure of interest rates and what a potential inverceived that they had an increased ability to raise the sion of the yield curve might signal about economic prices of their products. A couple of participants prospects in light of the historical regularity that an emphasized that because inflation had run below the inverted yield curve has often preceded the onset of Committee’s 2 percent objective for the past several recessions in the United States. On the one hand, an years, some measures of trend inflation or longer- inverted yield curve could indicate an increased risk term inflation expectations were below levels consis- of recession; on the other hand, the low level of term tent with the 2 percent objective; these participants premiums in recent years—reflecting, in part, central judged that a modest increase in inflation expecta- bank asset purchases—could temper the reliability of tions would be important for achieving the inflation the slope of the yield curve as an indicator of future objective on a sustained basis. economic activity. In addition, the recent rise and possible further increases in longer-term interest rates In their discussion of developments in financial mar- might diminish the likelihood that the yield curve kets, a number of participants noted that financial would invert in the near term. conditions remained accommodative: The rise in interest rates and appreciation of the dollar over the In their consideration of monetary policy at this intermeeting period had been offset by increases in meeting, participants generally judged that the equity prices, and broader measures continued to economy was evolving about as anticipated, with real point to accommodative financial conditions. Some economic activity rising at a strong rate, labor market participants commented about the continued growth conditions continuing to strengthen, and inflation in leveraged loans, the loosening of terms and stan- near the Committee’s objective. Based on their curdards on these loans, or the growth of this activity in rent assessments, all participants expressed the view the nonbank sector as reasons to remain mindful of that it would be appropriate for the Committee to vulnerabilities and possible risks to financial stability. continue its gradual approach to policy firming by raising the target range for the federal funds rate Participants commented on a number of risks and 25 basis points at this meeting. Almost all considered uncertainties associated with their outlook for eco- that it was also appropriate to revise the Committee’s nomic activity, the labor market, and inflation over postmeeting statement in order to remove the lanthe medium term. Participants generally agreed that guage stating that “the stance of monetary policy risks to the outlook appeared roughly balanced. remains accommodative.” Participants discussed a Some participants commented that trade policy number of reasons for removing the language at this developments remained a source of uncertainty for time, noting that the Committee would not be signalthe outlook for domestic growth and inflation. The ing a change in the expected path for policy, particudivergence between domestic and foreign economic larly as the target range for the federal funds rate growth prospects and monetary policies was cited as announced after the Committee’s meeting would still presenting a downside risk because of the potential be below all of the estimates of its longer-run level for further strengthening of the U.S. dollar; some submitted in the September SEP. In addition, waiting participants noted that financial stresses in a few until the target range for the federal funds rate had EMEs could pose additional risks if they were to been increased further to remove the characterization spread more broadly through the global economy of the policy stance as “accommodative” could conand financial markets. With regard to upside risks, vey a false sense of precision in light of the considerparticipants variously noted that high consumer con- able uncertainty surrounding all estimates of the neufidence, accommodative financial conditions, or tral federal funds rate. greater-than-expected effects of fiscal stimulus could lead to stronger-than-expected economic outcomes. With regard to the outlook for monetary policy Tightening resource utilization and an increasing beyond this meeting, participants generally anticiability of firms to raise output prices were cited as pated that further gradual increases in the target factors that could lead to higher-than-expected infla- range for the federal funds rate would most likely be tion, while lower-than-expected growth, a strengthen- consistent with a sustained economic expansion, ing of the U.S. dollar, or inflation expectations per- strong labor market conditions, and inflation near

228 105th Annual Report | 2018 2 percent over the medium term. This gradual months, and the unemployment rate had stayed low. approach would balance the risk of tightening mon- Household spending and business fixed investment etary policy too quickly, which could lead to an had grown strongly. On a 12-month basis, both overabrupt slowing in the economy and inflation moving all inflation and inflation for items other than food below the Committee’s objective, against the risk of and energy remained near 2 percent. Indicators of moving too slowly, which could engender inflation longer-term inflation expectations were little changed persistently above the objective and possibly contrib- on balance. ute to a buildup of financial imbalances. Members viewed the recent data as consistent with Participants offered their views about how much an economy that was evolving about as they had additional policy firming would likely be required for expected. Consequently, members expected that furthe Committee to sustainably achieve its objectives of ther gradual increases in the target range for the fedmaximum employment and 2 percent inflation. A few eral funds rate would be consistent with sustained participants expected that policy would need to expansion of economic activity, strong labor market become modestly restrictive for a time and a number conditions, and inflation near the Committee’s symjudged that it would be necessary to temporarily raise metric 2 percent objective over the medium term. the federal funds rate above their assessments of its Members continued to judge that the risks to the ecolonger-run level in order to reduce the risk of a sus- nomic outlook remained roughly balanced. tained overshooting of the Committee’s 2 percent inflation objective or the risk posed by significant After assessing current conditions and the outlook financial imbalances. A couple of participants indi- for economic activity, the labor market, and inflation, cated that they would not favor adopting a restrictive members voted to raise the target range for the fedpolicy stance in the absence of clear signs of an over- eral funds rate to 2 to 2¼ percent. Members agreed heating economy and rising inflation. that the timing and size of future adjustments to the target range for the federal funds rate would depend Participants reaffirmed that adjustments to the path on their assessment of realized and expected ecofor the policy rate would depend on their assessments nomic conditions relative to the Committee’s of the evolution of the economic outlook and risks maximum-employment objective and symmetric to the outlook relative to the Committee’s statutory 2 percent inflation objective. They reiterated that this objectives. Many of them noted that future adjust- assessment would take into account a wide range of ments to the target range for the federal funds rate information, including measures of labor market will depend on the evaluation of incoming informa- conditions, indicators of inflation pressures and tion and its implications for the economic outlook. inflation expectations, and readings on financial and In this context, estimates of the level of the neutral international developments. federal funds rate would be only one among many factors that the Committee would consider in making With regard to the postmeeting statement, members its policy decisions. agreed to remove the sentence indicating that “the stance of monetary policy remains accommodative.” Building on comments expressed at previous meet- Members made various points regarding the removal ings, a couple of participants indicated that it would of the sentence from the statement. These points be desirable to assess the Committee’s strategic included that the characterization of the stance of approach to the conduct of policy and to hold a peri- policy as “accommodative” had provided useful forodic and systematic review of the strengths and ward guidance in the early stages of the policy norweaknesses of the Committee’s monetary policy malization process, that this characterization was no framework. longer providing meaningful information in light of uncertainty surrounding the level of the neutral Committee Policy Action policy rate, that it was appropriate to remove the characterization of the stance from the Committee’s In their discussion of monetary policy for the period statement before the target range for the federal ahead, members judged that information received funds rate moved closer to the range of estimates of since the Committee met in August indicated that the the neutral policy rate, and that the Committee’s earlabor market had continued to strengthen and that lier communications had helped prepare the public economic activity had been rising at a strong rate. for this change. Job gains had been strong, on average, in recent

Minutes of Federal Open Market Committee Meetings | September 229 At the conclusion of the discussion, the Committee “Information received since the Federal Open voted to authorize and direct the Federal Reserve Market Committee met in August indicates that Bank of New York, until it was instructed otherwise, the labor market has continued to strengthen to execute transactions in the SOMA in accordance and that economic activity has been rising at a with the following domestic policy directive, to be strong rate. Job gains have been strong, on averreleased at 2:00 p.m.: age, in recent months, and the unemployment rate has stayed low. Household spending and “Effective September 27, 2018, the Federal Open business fixed investment have grown strongly. Market Committee directs the Desk to under- On a 12-month basis, both overall inflation and take open market operations as necessary to inflation for items other than food and energy maintain the federal funds rate in a target range remain near 2 percent. Indicators of longer-term of 2 to 2¼ percent, including overnight reverse inflation expectations are little changed, on repurchase operations (and reverse repurchase balance. operations with maturities of more than one day when necessary to accommodate weekend, holi- Consistent with its statutory mandate, the Comday, or similar trading conventions) at an offer- mittee seeks to foster maximum employment ing rate of 2.00 percent, in amounts limited only and price stability. The Committee expects that by the value of Treasury securities held outright further gradual increases in the target range for in the System Open Market Account that are the federal funds rate will be consistent with susavailable for such operations and by a per- tained expansion of economic activity, strong counterparty limit of $30 billion per day. labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic out- The Committee directs the Desk to continue look appear roughly balanced. rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of In view of realized and expected labor market Treasury securities maturing during September conditions and inflation, the Committee decided that exceeds $24 billion, and to continue reinto raise the target range for the federal funds vesting in agency mortgage-backed securities the rate to 2 to 2¼ percent. amount of principal payments from the Federal Reserve’s holdings of agency debt and agency In determining the timing and size of future mortgage-backed securities received during Sepadjustments to the target range for the federal tember that exceeds $16 billion. Effective in funds rate, the Committee will assess realized October, the Committee directs the Desk to roll and expected economic conditions relative to its over at auction the amount of principal paymaximum employment objective and its symments from the Federal Reserve’s holdings of metric 2 percent inflation objective. This assess- Treasury securities maturing during each calenment will take into account a wide range of dar month that exceeds $30 billion, and to reininformation, including measures of labor market vest in agency mortgage-backed securities the conditions, indicators of inflation pressures and amount of principal payments from the Federal inflation expectations, and readings on financial Reserve’s holdings of agency debt and agency and international developments.” mortgage-backed securities received during each calendar month that exceeds $20 billion. Small Voting for this action: Jerome H. Powell, John C. deviations from these amounts for operational Williams, Thomas I. Barkin, Raphael W. Bostic, Lael reasons are acceptable. Brainard, Richard H. Clarida, Esther L. George, Loretta J. Mester, and Randal K. Quarles. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as Voting against this action: None. necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities Ms. George voted as alternate member at this transactions.” meeting. The vote also encompassed approval of the statement To support the Committee’s decision to raise the tarbelow to be released at 2:00 p.m.: get range for the federal funds rate, the Board of

230 105th Annual Report | 2018 Governors voted unanimously to raise the interest Following the vote, Chairman Powell noted that he rates on required and excess reserve balances to had asked Governor Clarida to serve as chair of a 2.20 percent, effective September 27, 2018. The subcommittee on communications issues. The other Board of Governors also voted unanimously to members of the subcommittee will include Governor approve a ¼ percentage point increase in the primary Brainard, President Kaplan, and President Rosencredit rate (discount rate) to 2.75 percent, effective gren. The role of the subcommittee will be to help September 27, 2018.5 prioritize and frame communications issues for the Committee. It was agreed that the next meeting of the Committee would be held on Wednesday–Thursday, Novem- 5 In taking this action, the Board approved requests to establish ber 7–8, 2018. The meeting adjourned at 10:00 a.m. that rate submitted by the Boards of Directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, on September 26, 2018. Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco. This vote also encompassed approval by the Board of Notation Vote Governors of the establishment of a 2.75 percent primary credit rate by the remaining Federal Reserve Banks, effective on the later of September 27, 2018, and the date such Reserve Banks By notation vote completed on August 21, 2018, the informed the Secretary of the Board of such a request. (Secre- Committee unanimously approved the minutes of the tary’s note: Subsequently, the Federal Reserve Banks of New Committee meeting held on July 31–August 1, 2018. York and Minneapolis were informed by the Secretary of the Board of the Board’s approval of their establishment of a primary credit rate of 2.75 percent, effective September 27, 2018.) James A. Clouse The second vote of the Board also encompassed approval of the Secretary 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 231 Addendum: up their projections of real GDP growth and most increased their forecast of the unemployment rate in Summary of Economic Projections 2018, with participants indicating that these revisions mostly reflected incoming data. Participants’ projec- In conjunction with the Federal Open Market Comtions of inflation were largely unchanged from June. mittee (FOMC) meeting held on September 25–26, Table 1 and figure 1 provide summary statistics for 2018, meeting participants submitted their projecthe projections. tions of the most likely outcomes for real gross domestic product (GDP) growth, the unemployment As shown in figure 2, almost all participants continrate, and inflation for each year from 2018 to 2021 ued to expect that the evolution of the economy, relaand over the longer run.1 Each participant’s projective to their objectives of maximum employment and tions were based on information available at the time 2 percent inflation, would likely warrant further of the meeting, together with his or her assessment of gradual increases in the federal funds rate. The mediappropriate monetary policy—including a path for ans of participants’ projections of the federal funds the federal funds rate and its longer-run value—and rate through 2020 were unchanged relative to their assumptions about other factors likely to affect eco- June projections, and the median of participants’ nomic outcomes. The longer-run projections repreprojections for 2021 was the same as that for 2020. sent each participant’s assessment of the value to The median projection for the longer-run federal which each variable would be expected to converge, funds rate rose slightly, with several participants citover time, under appropriate monetary policy and in ing increases in model-based estimates of the longerthe absence of further shocks to the economy.2 run real federal funds rate and strong economic data “Appropriate monetary policy” is defined as the as reasons for the revision. A substantial majority of future path of policy that each participant deems participants expected that the year-end 2020 and most likely to foster outcomes for economic activity 2021 federal funds rate would be above their estiand inflation that best satisfy his or her individual mates of the longer-run rate. interpretation of the statutory mandate to promote maximum employment and price stability. In general, participants continued to view the uncertainty around their economic projections as broadly All participants who submitted longer-run projecsimilar to the average of the past 20 years. Risks to tions expected that, in 2018, real GDP would expand their outlooks were viewed as balanced, although a at a pace exceeding their individual estimates of the couple more participants than in June saw risks to longer-run growth rate of real GDP. All participants their inflation projections as weighted to the upside. anticipated that real GDP growth would moderate in the coming years, and a majority of participants pro- The Outlook for Economic Activity jected growth in 2021 to be below their estimates of the longer-run rate. All participants who submitted The medians of participants’ projections for the longer-run projections expected that the unemploy- growth rate of real GDP, conditional on their indiment rate would run below their estimates of its vidual assessments of appropriate monetary policy, longer-run level throughout the projection period. were 3.1 percent for 2018, 2.5 percent for 2019, and Participants generally projected that inflation, as 2.0 percent for 2020. For this SEP, participants also measured by the four-quarter percentage change in submitted projections for economic variables in 2021 the price index for personal consumption expendi- for the first time. Participants’ projections for real tures (PCE), would be at or near the Committee’s GDP growth in 2021 were almost all below partici- 2 percent objective at the end of 2018 and would con- pants’ projections of growth in 2020 and, for a tinue at close to that rate through 2021. Compared majority of participants, below their longer-run prowith the Summary of Economic Projections (SEP) jections of real GDP growth. Some participants cited from June, a solid majority of participants marked the waning of fiscal stimulus, less accommodative monetary policy, or anticipated appreciation of the 1 Four members of the Board of Governors, one more than in dollar as factors contributing to their forecasts for a June 2018, were in office at the time of the September 2018 moderation of real GDP growth over the course of meeting and submitted economic projections. The office of the president of the Federal Reserve Bank of San Francisco was the projection period. vacant at the time of this FOMC meeting; First Vice President Mark A. Gould submitted economic projections. While most participants made slight upward revi- 2 One participant did not submit longer-run projections for real GDP growth, the unemployment rate, or the federal funds rate. sions to their unemployment rate projections for this

232 105th Annual Report | 2018 Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, September 2018 Percent Median1 Central tendency2 R ange3 Variable Longer Longer L onger 2 018 2019 2020 2021 run 2018 2019 2020 2021 run 2 018 2 019 2 020 2 021 run Change in real GDP 3.1 2.5 2.0 1.8 1.8 3.0–3.2 2.4–2.7 1.8–2.1 1.6–2.0 1.8–2.0 2 .9–3.2 2 .1–2.8 1 .7–2.4 1 .5–2.1 1 .7–2.1 June projection 2.8 2.4 2.0 n.a. 1.8 2.7–3.0 2.2–2.6 1.8–2.0 n.a. 1.8–2.0 2 .5–3.0 2 .1–2.7 1 .5–2.2 n .a. 1 .7–2.1 Unemployment rate 3.7 3.5 3.5 3.7 4.5 3.7 3.4–3.6 3.4–3.8 3.5–4.0 4.3–4.6 3 .7–3.8 3 .4–3.8 3 .3–4.0 3 .4–4.2 4 .0–4.6 June projection 3.6 3.5 3.5 n.a. 4.5 3.6–3.7 3.4–3.5 3.4–3.7 n.a. 4.3–4.6 3 .5–3.8 3 .3–3.8 3 .3–4.0 n .a. 4 .1–4.7 PCE inflation 2.1 2.0 2.1 2.1 2.0 2.0–2.1 2.0–2.1 2.1–2.2 2.0–2.2 2.0 1 .9–2.2 2 .0–2.3 2 .0–2.2 2 .0–2.3 2 .0 June projection 2.1 2.1 2.1 n.a. 2.0 2.0–2.1 2.0–2.2 2.1–2.2 n.a. 2.0 2 .0–2.2 1 .9–2.3 2 .0–2.3 n .a. 2 .0 Core PCE inflation4 2.0 2.1 2.1 2.1 1.9–2.0 2.0–2.1 2.1–2.2 2.0–2.2 1 .9–2.0 2 .0–2.3 2 .0–2.2 2 .0–2.3 June projection 2.0 2.1 2.1 n.a. 1.9–2.0 2.0–2.2 2.1–2.2 n.a. 1 .9–2.1 2 .0–2.3 2 .0–2.3 n .a. Memo: Projected appropriate policy path Federal funds rate 2.4 3.1 3.4 3.4 3.0 2.1–2.4 2.9–3.4 3.1–3.6 2.9–3.6 2.8–3.0 2 .1–2.4 2 .1–3.6 2 .1–3.9 2 .1–4.1 2 .5–3.5 June projection 2.4 3.1 3.4 n.a. 2.9 2.1–2.4 2.9–3.4 3.1–3.6 n.a. 2.8–3.0 1 .9–2.6 1 .9–3.6 1 .9–4.1 n .a. 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 June projections were made in conjunction with the meeting of the Federal Open Market Committee on June 12–13, 2018. 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 12–13, 2018, meeting, and one participant did not submit such projections in conjunction with the September 25–26, 2018, 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 233 Figure 1. Medians, central tendencies, and ranges of economic projections, 2018–21 and over the longer run Percent Change in real GDP Median of projections Central tendency of projections Range of projections 3 Actual 2 1 2013 2014 2015 2016 2017 2018 2019 2020 2021 Longer run Percent Unemployment rate 7 6 5 4 3 2013 2014 2015 2016 2017 2018 2019 2020 2021 Longer run Percent PCE inflation 3 2 1 2013 2014 2015 2016 2017 2018 2019 2020 2021 Longer run Percent Core PCE inflation 3 2 1 2013 2014 2015 2016 2017 2018 2019 2020 2021 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.

234 105th Annual Report | 2018 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 2018 2019 2020 2021 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 235 year, their projections in subsequent years and in the butions of participants’ views of the appropriate fedlonger run were largely unchanged. A substantial eral funds rate at the ends of 2019 and 2020 were majority of participants expected the unemployment relatively wide, as was the case in the June SEP. rate to bottom out in 2019 or 2020 at levels below their estimates of the unemployment rate in the lon- In discussing their projections, almost all participants ger run, and then to rise a little in 2021. continued to express the view that the appropriate trajectory of the federal funds rate would likely Figures 3.A and 3.B show the distributions of par- involve gradual increases. This view was predicated ticipants’ projections for real GDP growth and the on several factors, including a judgment that a unemployment rate from 2018 to 2021 and over the gradual path of policy firming would appropriately longer run. The distribution of individual projections balance the risk of a buildup of inflationary presfor real GDP growth for this year shifted noticeably sures or other imbalances associated with high levels to the right relative to that in the June SEP; the distri- of resource utilization, against the risk that factors bution for projected real GDP growth for 2019 also such as diminishing fiscal stimulus and adverse develshifted to the right, albeit only a little. The distribu- opments in foreign economies could become a sigtions of individual projections for the unemployment nificant drag on real GDP growth. As always, the rate in 2018 and 2019 shifted up a little relative to the appropriate path of the federal funds rate would distributions in June, while the distributions of the depend on incoming economic data and their impliprojections for the unemployment rate in the longer cations for participants’ economic outlooks and run were largely unchanged. assessments of risks. The Outlook for Inflation Uncertainty and Risks The medians of projections for total PCE price inflation were 2.1 percent in 2018, 2.0 percent in 2019, In assessing the appropriate path of the federal funds and 2.1 percent in 2020 and 2021. The medians of rate, FOMC participants take account of the range projections for core PCE price inflation were 2.0 per- of possible economic outcomes, the likelihood of cent in 2018 and 2.1 percent in 2019, 2020, and 2021. those outcomes, and the potential benefits and costs For the entire period between 2018 and 2020, these should they occur. As a reference, table 2 provides medians were very similar to the June SEP. Figures measures of forecast uncertainty, based on the fore- 3.C and 3.D provide information on the distributions cast errors of various private and government foreof participants’ views about the outlook for inflation. casts over the past 20 years, for real GDP growth, the Relative to the June SEP, a number of participants unemployment rate, and total PCE price inflation. revised slightly down their projections for total PCE Those measures are represented graphically in the inflation this year and next. Most participants pro- “fan charts” shown in the top panels of figures 4.A, jected total PCE price inflation in the range of 1.9 to 4.B, and 4.C. The fan charts display the median SEP 2.0 percent for 2018 and 2019 and 2.1 to 2.2 percent projections for the three variables surrounded by in 2020 and 2021. Most participants projected that symmetric confidence intervals derived from the forecore PCE inflation would run at 1.9 to 2.0 percent in cast errors reported in table 2. If the degree of uncer- 2018 and at 2.1 to 2.2 percent in 2019, 2020, and tainty attending these projections is similar to the 2021. Relative to the June SEP, a larger number of typical magnitude of past forecast errors and the participants projected that core PCE inflation in risks around the projections are broadly balanced, 2019 and 2020 would fall in the 2.1 to 2.2 percent then future outcomes of these variables would have range. about a 70 percent probability of being within these confidence intervals. For all three variables, this Appropriate Monetary Policy measure of uncertainty is substantial and generally increases as the forecast horizon lengthens. Figure 3.E shows distributions of participants’ judgments regarding the appropriate target—or midpoint Participants’ assessments of the level of uncertainty of the target range—for the federal funds rate for the surrounding their individual economic projections end of each year from 2018 to 2021 and over the lon- are shown in the bottom-left panels of figures 4.A, ger run. The distribution of projected policy rates for 4.B, and 4.C. Nearly all participants viewed the year-end 2018 was higher than in the June SEP, with degree of uncertainty attached to their economic projections clustered around 2.4 percent. The distri- projections for real GDP growth and inflation as

236 105th Annual Report | 2018 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2018–21 and over the longer run Number of participants 2018 September projections 18 June projections 16 14 12 10 8 6 4 2 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 2.8 – 3.0 – 3.2 – 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 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 – 2.6 – 2.8 – 3.0 – 3.2 – 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 2.8 – 3.0 – 3.2 – 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Percent range Number of participants 2021 18 16 14 12 10 8 6 4 2 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 2.8 – 3.0 – 3.2 – 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 2.8 – 3.0 – 3.2 – 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | September 237 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2018–21 and over the longer run Number of participants 2018 September projections 18 June projections 16 14 12 10 8 6 4 2 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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 2021 18 16 14 12 10 8 6 4 2 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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.

238 105th Annual Report | 2018 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2018–21 and over the longer run Number of participants 2018 September projections 18 June projections 16 14 12 10 8 6 4 2 1.9 – 2.1– 2.3 – 2.0 2.2 2.4 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.9 – 2.1– 2.3 – 2.0 2.2 2.4 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.9 – 2.1– 2.3 – 2.0 2.2 2.4 Percent range Number of participants 2021 18 16 14 12 10 8 6 4 2 1.9 – 2.1– 2.3 – 2.0 2.2 2.4 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.9 – 2.1– 2.3 – 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 | September 239 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2018–21 Number of participants 2018 September projections 18 June projections 16 14 12 10 8 6 4 2 1.9 – 2.1– 2.3 – 2.0 2.2 2.4 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.9 – 2.1– 2.3 – 2.0 2.2 2.4 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.9 – 2.1– 2.3 – 2.0 2.2 2.4 Percent range Number of participants 2021 18 16 14 12 10 8 6 4 2 1.9 – 2.1– 2.3 – 2.0 2.2 2.4 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

240 105th Annual Report | 2018 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, 2018–21 and over the longer run Number of participants 2018 September projections 18 June projections 16 14 12 10 8 6 4 2 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 – 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 – 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 – 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Number of participants 2021 18 16 14 12 10 8 6 4 2 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 – 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 – 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | September 241 balanced—in other words, as broadly consistent with Table 2. Average historical projection error ranges a symmetric fan chart. Percentage points Variable 2018 2019 2020 2021 Those participants who did not judge the risks to their real GDP growth and unemployment rate pro- Change in real GDP1 ±1.2 ±1.8 ±1.9 ±2.0 jections as balanced were roughly evenly split Unemployment rate1 ±0.3 ±1.1 ±1.6 ±2.0 Total consumer prices2 ± 0.8 ±1.0 ±1.1 ±1.1 between those who viewed the risks as being Short-term interest rates3 ±0.5 ±1.7 ±2.3 ±2.7 weighted to the upside and those who viewed the risks as being weighted to the downside. Risks Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 1998 through 2017 that were released in the fall by around both total and core inflation projections were various private and government forecasters. As described in the box “Forecast judged to be broadly balanced by a solid majority of Uncertainty,” under certain assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, consumer prices, and the participants; however, those participants who saw the federal funds rate will be in ranges implied by the average size of projection risks as uneven saw them as weighted to the upside. errors made in the past. For more information, see David Reifschneider and Peter Tulip (2017), “Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting Errors: The Federal Reserve’s Approach,” Finance and Economics In discussing the uncertainty and risks surrounding Discussion Series 2017-020 (Washington: Board of Governors of the Federal Reserve System, February), www.federalreserve.gov/econresdata/feds/2017/files/ their economic projections, many participants 2017020pap.pdf. pointed to upside risks to real GDP growth from fis- 1 Definitions of variables are in the general note to table 1. cal stimulus or stronger-than-expected effects of 2 Measure is the overall consumer price index, the price measure that has been most widely used in government and private economic forecasts. Projections business optimism. Many participants also pointed are percent changes on a fourth quarter to fourth quarter basis. to downside risks for the economy and inflation 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 stemming from factors such as trade policy, stresses calculated using average levels, in percent, in the fourth quarter. in emerging market economies, or stronger-thananticipated appreciation of the dollar. broadly similar to the average of the past 20 years.3 A couple more participants than in June viewed the Participants’ assessments of the appropriate future uncertainty around the unemployment rate as higher path of the federal funds rate were also subject to than average. considerable uncertainty. Because the Committee adjusts the federal funds rate in response to actual Because the fan charts are constructed to be symmet- and prospective developments over time in real GDP ric around the median projections, they do not reflect growth, the unemployment rate, and inflation, uncerany asymmetries in the balance of risks that partici- tainty surrounding the projected path for the federal pants may see in their economic projections. Partici- funds rate importantly reflects the uncertainties pants’ assessments of the balance of risks to their about the paths for those key economic variables economic projections are shown in the bottom-right along with other factors. Figure 5 provides a graphipanels of figures 4.A, 4.B, and 4.C. Most partici- cal representation of this uncertainty, plotting the pants assessed the risks to their projections of real median SEP projection for the federal funds rate sur- GDP growth and the unemployment rate as broadly rounded by confidence intervals derived from the results presented in table 2. As with the macroeco- 3 At the end of this summary, the box “Forecast Uncertainty” nomic variables, the forecast uncertainty surrounding discusses the sources and interpretation of uncertainty sur- the appropriate path of the federal funds rate is subrounding the economic forecasts and explains the approach stantial and increases for longer horizons. used to assess the uncertainty and risks attending the participants’ projections.

242 105th Annual Report | 2018 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 Actual 2 1 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 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 243 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 2013 2014 2015 2016 2017 2018 2019 2020 2021 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.”

244 105th Annual Report | 2018 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 2013 2014 2015 2016 2017 2018 2019 2020 2021 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 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 Number of participants Number of participants Uncertainty about core PCE inflation Risks to core PCE inflation 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 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 245 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 Median of projections 6 70% confidence interval* 5 4 3 2 1 Actual 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 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.

246 105th Annual Report | 2018 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, 1.2 to 4.8 percent in the second year, 1.1 to funds rate generated by the uncertainty about the 4.9 percent in the third year, and 1.0 to 5.0 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, 1.0 to 3.0 percent in If at some point in the future the confidence interval the second year, and 0.9 to 3.1 percent in the third around the federal funds rate were to extend below and fourth years. Figures 4.A through 4.C illustrate zero, it would be truncated at zero for purposes of these confidence bounds in “fan charts” that are the fan chart shown in figure 5; zero is the bottom of symmetric and centered on the medians of FOMC the lowest target range for the federal funds rate that participants’ projections for GDP growth, the unemhas been adopted by the Committee in the past. This ployment rate, and inflation. However, in some approach to the construction of the federal funds rate instances, the risks around the projections may not fan chart would be merely a convention; it would not be symmetric. In particular, the unemployment rate have any implications for possible future policy decicannot be negative; furthermore, the risks around a sions regarding the use of negative interest rates to particular projection might be tilted to either the provide additional monetary policy accommodation if upside or the downside, in which case the corredoing so were appropriate. In such situations, the sponding fan chart would be asymmetrically posi- Committee could also employ other tools, including tioned 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

Minutes of Federal Open Market Committee Meetings | November 247 Meeting Held Steven B. Kamin Economist on November 7–8, 2018 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 Wednesday, November 7, 2018, at 1:00 p.m. and continued on David Altig, Thomas A. Connors, Thursday, November 8, 2018, at 9:00 a.m.1 Trevor A. Reeve, Ellis W. Tallman, William Wascher, and Beth Anne Wilson Present Associate Economists Jerome H. Powell Simon Potter Chairman Manager, System Open Market Account John C. Williams Lorie K. Logan Vice Chairman Deputy Manager, System Open Market Account Thomas I. Barkin Ann E. Misback Secretary, Office of the Secretary, Raphael W. Bostic Board of Governors Lael Brainard Matthew J. Eichner2 Richard H. Clarida Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors Mary C. Daly Michael S. Gibson Loretta J. Mester Director, Division of Supervision and Regulation, Randal K. Quarles Board of Governors James Bullard, Charles L. Evans, Esther L. George, Andreas Lehnert Eric Rosengren, and Michael Strine Director, Division of Financial Stability, Alternate Members of the Federal Open Market Board of Governors Committee Daniel M. Covitz Patrick Harker, Robert S. Kaplan, and Neel Kashkari Deputy Director, Division of Research and Presidents of the Federal Reserve Banks of Statistics, Board of Governors Philadelphia, Dallas, and Minneapolis, respectively Rochelle M. Edge James A. Clouse Deputy Director, Division of Monetary Affairs, Secretary Board of Governors Matthew M. Luecke Michael T. Kiley Deputy Secretary Deputy Director, Division of Financial Stability, Board of Governors David W. Skidmore Assistant Secretary Jon Faust Senior Special Adviser to the Chairman, Office of Michelle A. Smith Board Members, Board of Governors Assistant Secretary Antulio N. Bomfim Mark E. Van Der Weide Special Adviser to the Chairman, Office of Board General Counsel Members, Board of Governors Michael Held 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.

248 105th Annual Report | 2018 Brian M. Doyle, Joseph W. Gruber, Penelope A. Beattie4 Ellen E. Meade, and John M. Roberts Assistant to the Secretary, Office of the Secretary, Special Advisers to the Board, Office of Board Board of Governors Members, Board of Governors Michiel De Pooter Linda Robertson Section Chief, Division of Monetary Affairs, Assistant to the Board, Office of Board Members, Board of Governors Board of Governors David H. Small Eric M. Engen Project Manager, Division of Monetary Affairs, Senior Associate Director, Division of Research Board of Governors and Statistics, Board of Governors Alyssa G. Anderson3 and Kurt F. Lewis Christopher J. Erceg Principal Economists, Division of Monetary Affairs, Senior Associate Director, Division of International Board of Governors Finance, Board of Governors Joshua S. Louria3 Edward Nelson Lead Financial Institution and Policy Analyst, Senior Adviser, Division of Monetary Affairs, Division of Monetary Affairs, Board of Governors Board of Governors Sriya Anbil3 S. Wayne Passmore Senior Economist, Division of Monetary Affairs, Senior Adviser, Division of Research and Statistics, Board of Governors Board of Governors Randall A. Williams William F. Bassett Senior Information Manager, Division of Monetary Associate Director, Division of Financial Stability, Affairs, Board of Governors Board of Governors Andre Anderson Marnie Gillis DeBoer3 and David López-Salido First Vice President, Federal Reserve Bank of Atlanta Associate Directors, Division of Monetary Affairs, Board of Governors Jeff Fuhrer, Sylvain Leduc, Kevin Stiroh,4 Molly E. Mahar3 Daniel G. Sullivan, and Christopher J. Waller Executive Vice Presidents, Federal Reserve Banks of Associate Director, Division of Supervision and Boston, San Francisco, New York, Chicago, Regulation, Board of Governors and St. Louis, respectively Stacey Tevlin Associate Director, Division of Research and Paolo A. Pesenti, Paula Tkac,3 Luke Woodward, Statistics, Board of Governors Mark L. J. Wright, and Nathaniel Wuerffel3 Senior Vice Presidents, Federal Reserve Banks of Jeffrey D. Walker2 New York, Atlanta, Kansas City, Minneapolis, Deputy Associate Director, Division of Reserve and New York, respectively Bank Operations and Payment Systems, Board of Governors Roc Armenter,3 Satyajit Chatterjee, Deborah L. Leonard,3 Pia Orrenius, Min Wei Matthew D. Raskin,3 and Patricia Zobel3 Deputy Associate Director, Division of Monetary Vice Presidents, Federal Reserve Banks of Affairs, Board of Governors Philadelphia, Philadelphia, New York, Dallas, Christopher J. Gust, Laura Lipscomb,3 New York, New York, respectively and Zeynep Senyuz3 John P. McGowan3 Assistant Directors, Division of Monetary Affairs, Assistant Vice President, Federal Reserve Bank of Board of Governors New York Patrick E. McCabe Andreas L. Hornstein Assistant Director, Division of Research and Senior Advisor, Federal Reserve Bank of Richmond Statistics, Board of Governors 3 Attended through the discussion of the long-run monetary policy implementation frameworks. 4 Attended Wednesday session only.

Minutes of Federal Open Market Committee Meetings | November 249 Samuel Schulhofer-Wohl policy rate close to target. This technique worked Senior Economist and Research Advisor, well before the financial crisis, when reserve demand Federal Reserve Bank of Chicago was fairly stable in the aggregate and largely influenced by payment needs and reserve requirements. Gara Afonso3 However, with the increased use of reserves for pre- Research Officer, Federal Reserve Bank of New York cautionary liquidity purposes following the crisis, there was some uncertainty about whether banks’ Long-Run Monetary Policy Implementation demand for reserves would now be sufficiently pre- Frameworks dictable for the Federal Reserve to be able to precisely target an interest rate in this way. In the latter type of Committee participants resumed their discussion of regime, money market interest rates are not sensitive potential long-run frameworks for monetary policy to small fluctuations in the demand for and supply of implementation, a topic last discussed at the Novem- reserves, and the stance of monetary policy is instead ber 2016 FOMC meeting. The staff provided brief- transmitted from the Federal Reserve’s administered ings that described changes in recent years in banks’ rates to market rates—an approach that has been uses of reserves, outlined tradeoffs associated with effective in controlling short-term interest rates in the potential choices of operating regimes to implement United States since the financial crisis, as well as in monetary policy and control short-term interest other countries where central banks have used this rates, reviewed potential choices of the policy target approach. rate, and summarized developments in the policy implementation frameworks of other central banks. The staff briefings also examined the tradeoffs between alternative policy rates that the Committee The staff noted that banks’ liquidity management could choose in each of the regimes. In a regime of practices had changed markedly since the financial limited excess reserves, the Federal Reserve’s policy crisis, with large banks now maintaining substantial tools most directly affect overnight unsecured rates buffers of reserves, among other high-quality liquid paid by banks, such as the effective federal funds rate assets, to meet potential outflows and to comply with (EFFR) and the overnight bank funding rate regulatory requirements. Information from bank con- (OBFR). These rates could also be targeted with tacts as well as a survey of banks indicated that, in an abundant excess reserves, as could interest rates on environment in which money market interest rates secured funding or a mixture of secured and unsewere very close to the interest rate paid on excess cured rates. reserve balances, banks would likely be comfortable operating with much lower levels of reserve balances Participants commented on the advantages of a than at present but would wish to maintain substan- regime of policy implementation with abundant tially higher levels of balances than before the crisis. excess reserves. Based on experience over recent On average, survey responses suggested that banks years, such a regime was seen as providing good conmight reduce their reserve holdings only modestly trol of short-term money market rates in a variety of from those “lowest comfortable” levels if money market conditions and effective transmission of those market interest rates were somewhat above the inter- rates to broader financial conditions. Participants est on excess reserves (IOER) rate. Across banks, commented that, by contrast, interest rate control however, individual survey responses on this issue might be difficult to achieve in an operating regime varied substantially. of limited excess reserves in view of the potentially greater unpredictability of reserve demand resulting The staff highlighted how changes in the determi- from liquidity regulations or changes in risk appetite, nants of reserve demand since the crisis could affect or the increased variability of factors affecting the tradeoffs between two types of operating regimes: reserve supply. Participants also observed that (1) one in which aggregate excess reserves are suffi- regimes with abundant excess reserves could provide ciently limited that money market interest rates are effective control of short-term rates even if large sensitive to small changes in the supply of reserves amounts of liquidity needed to be added to address and (2) one in which aggregate excess reserves are liquidity strains or if large-scale asset purchases sufficiently abundant that money market interest needed to be undertaken to provide macroeconomic rates are not sensitive to small changes in reserve sup- stimulus in situations where short-term rates are at ply. In the former type of regime, the Federal Reserve their effective lower bound. Monetary policy operaactively adjusts reserve supply in order to keep its tions in this regime would also not require active

250 105th Annual Report | 2018 management of reserve supply. In addition, the pro- require significant changes in the way the Committee vision of sizable quantities of reserves could enhance conducted and communicated monetary policy. Some financial stability and reduce operational risks in the participants saw it as desirable to explore the possibilpayment system by maintaining a high level of ity of targeting a secured interest rate. Some also liquidity in the banking system. expressed interest in studying, over the longer term, approaches in which the Committee would target a A number of participants commented that the attrac- mixture of secured and unsecured rates. tive features of a regime of abundant excess reserves should be weighed against the potential drawbacks of Participants expected to continue their discussion of such a regime as well as the potential benefits of long-run implementation frameworks and related returning to a regime similar to that employed before issues at upcoming meetings. They emphasized that it the financial crisis. Potential drawbacks of an abun- would be important to communicate clearly the ratiodant reserves regime included challenges in precisely nale for any choice of operating regime and target determining the quantity of reserves necessary in interest rate. such systems, the need to maintain relatively sizable quantities of reserves and holdings of securities, and Developments in Financial Markets and relatively large ongoing interest expenses associated Open Market Operations with the remuneration of reserves. Some noted that returning to a regime of limited excess reserves could The manager of the System Open Market Account demonstrate the Federal Reserve’s ability to fully (SOMA) reviewed recent developments in domestic unwind the policies used to respond to the crisis and and global financial markets. The equity market was might thereby increase public acceptance or effective- quite volatile over the intermeeting period, with U.S. ness of such policies in the future. Participants noted stock prices down as much as 10 percent at one point that the level of reserve balances required to remain before recovering somewhat. Investors pointed to a in a regime where rate control does not entail active number of uncertainties in the global outlook that management of the supply of reserves was quite may have contributed to the decline in stock prices, uncertain, but they thought that reserve supply could including ongoing trade tensions between the United be reduced substantially below its current level while States and China, growing concerns about the fiscal remaining in such a regime. They expected to learn position of the Italian government and its broader more about the demand for reserves as the balance implications for financial markets and institutions, sheet continued to shrink in a gradual and predict- and some worries about the outcome of the Brexit able manner. They also observed that it might be pos- negotiations. Market contacts also noted some nersible to adopt strategies that provide incentives for vousness about corporate earnings growth and an banks to reduce their demand for reserves. Partici- increase in longer-term Treasury yields over recent pants judged that if the level of reserves needed for a weeks as factors contributing to downward pressure regime with abundant excess reserves turned out to on equity prices. The volatility in equity markets was be considerably higher than anticipated, the possibil- accompanied by a rise in risk spreads on corporate ity of returning to a regime in which excess reserves debt, although the widening in risk spreads was not were limited and adjustments in reserve supply were as notable as in some past stock market downturns. used to influence money market rates would warrant further consideration. On balance, the turbulence in equity markets did not leave much imprint on near-term U.S. monetary Participants noted that lending in the federal funds policy expectations. Respondents to the Open Marmarket was currently dominated by the Federal Home ket Desk’s recent Survey of Primary Dealers and Loan Banks (FHLBs). Participants cited several Survey of Market Participants indicated that responpotential benefits of targeting the OBFR rather than dents placed high odds on a further quarter-point the EFFR: The larger volume of transactions and increase in the target range for the federal funds rate greater variety of lenders underlying the OBFR could at the December FOMC meeting; that expectation make that rate a broader and more robust indicator of also seemed to be embedded in federal funds futures banks’ overnight funding costs, the OBFR could quotes. Further out, the median of survey responbecome an even better indicator after the potential dents’ modal expectations for the path of the federal incorporation of data on onshore wholesale deposits, funds rate pointed to about three additional policy and the similarity of the OBFR and the EFFR sug- firmings next year while futures quotes appeared to gested that transitioning to the OBFR would not be pricing in a somewhat flatter trajectory.

Minutes of Federal Open Market Committee Meetings | November 251 The manager also reviewed recent developments in become a very important factor influencing the global markets. In China, investors were concerned spread between the IOER rate and the EFFR over about the apparent slowing of economic expansion the last three quarters of next year. The deputy manand the implications of continued trade tensions with ager also provided an update on plans to incorporate the United States. Chinese stock price indexes additional data on overnight deposits in the OBFR. declined further over the intermeeting period and Banks had begun reporting new data on onshore were off nearly 20 percent on the year to date. The overnight deposits in October. In aggregate, the volrenminbi continued to depreciate, moving closer to umes reported in onshore overnight deposits were 7.0 renminbi per dollar—a level that some market substantial and the rates reported for these instruparticipants viewed as a possible trigger for intensify- ments were very close to rates reported on overnight ing depreciation pressures. Anecdotal reports sug- Eurodollar transactions. The new data were expected gested that Chinese authorities had intervened to to be incorporated in the calculation of the OBFR support the renminbi. later next year. The deputy manager followed with a discussion of Following the Desk briefings, the Chairman noted recent developments in money markets and Desk the upward trend in the EFFR relative to the IOER operations. The EFFR along with other overnight rate over the intermeeting period and suggested that rates edged higher over the weeks following the it might be appropriate to implement another techniincrease in the target range at the previous meeting. cal adjustment in the IOER rate relative to the top of Most recently, the EFFR had risen to the level of the the target range for the federal funds rate fairly soon. IOER rate, placing it 5 basis points below the top of While the funds rate seemed to have stabilized the target range. The upward pressure on the EFFR recently, there remained some risk that it could conand other money market rates reportedly stemmed tinue to drift higher before the Committee’s next partly from a sizable increase in Treasury bill supply meeting. As a contingency plan, participants agreed and a corresponding increase in Treasury bill yields. that it would be appropriate for the Board to imple- In part reflecting that development, FHLBs shifted ment such a technical adjustment in the IOER rate the composition of their liquidity portfolios away before the December meeting if necessary to keep the from overnight lending in the federal funds market in federal funds rate well within the target range estabfavor of the higher returns on overnight repurchase lished by the FOMC. agreements and on interest-bearing deposit accounts at banks; these reallocations in their liquidity portfo- By unanimous vote, the Committee ratified the lios in turn contributed to upward pressure on the Desk’s domestic transactions over the intermeeting EFFR. At the same time, anecdotal reports suggested period. There were no intervention operations in forthat some depositories were seeking to increase their eign currencies for the System’s account during the borrowing in federal funds from FHLBs, partly intermeeting period. because of the favorable treatment of such borrowing under liquidity regulations. In addition, rates on term Staff Review of the Economic Situation borrowing had moved higher over recent weeks, perhaps encouraging some depositories to bid up rates The information reviewed for the November 7–8 on overnight federal funds loans. To date, there were meeting indicated that labor market conditions conno clear signs that the ongoing decline in reserve bal- tinued to strengthen in recent months and that real ances in the banking system associated with the gross domestic product (GDP) rose at a strong rate in gradual normalization of the Federal Reserve’s bal- the third quarter, similar to its pace in the first half of ance sheet had contributed meaningfully to the the year. Consumer price inflation, as measured by upward pressure on money market rates. Indeed, the 12-month percentage change in the price index banks reportedly were willing to reduce reserve hold- for personal consumption expenditures (PCE), was ings in order to lend in overnight repurchase agree- 2.0 percent in September. Survey-based measures of ment (repo) markets at rates just a few basis points longer-run inflation expectations were little changed above the IOER rate. on balance. However, respondents to the Desk’s recent Survey of Total nonfarm payroll employment increased at a Primary Dealers and Survey of Market Participants strong pace, on average, in September and October. indicated that they anticipated the reduction in the The national unemployment rate decreased to supply of reserves in the banking system could 3.7 percent in September and remained at that level

252 105th Annual Report | 2018 in October, while the labor force participation rate third quarter, while pending home sales edged up in and the employment-to-population ratio moved up September. somewhat over those two months. The unemployment rates for African Americans, Asians, and His- Growth in real private expenditures for business panics in October were below their levels at the end equipment and intellectual property moderated in the of the previous expansion. The share of workers third quarter following strong gains in these expendiemployed part time for economic reasons continued tures in the first half of the year. Nominal orders and to be close to the lows reached in late 2007. The rates shipments of nondefense capital goods excluding airof private-sector job openings and quits both craft edged down over the two months ending in Sepremained at high levels in September; initial claims tember after brisk increases in July, while readings on for unemployment insurance benefits in late October business sentiment remained upbeat. Real business were close to historically low levels. Total labor com- expenditures for nonresidential structures declined in pensation per hour in the nonfarm business sector the third quarter both for the drilling and mining secincreased 2.8 percent over the four quarters ending in tor and outside that sector. The number of crude oil the third quarter, the employment cost index for pri- and natural gas rigs in operation—an indicator of vate workers increased 2.9 percent over the business spending for structures in the drilling and 12 months ending in September, and average hourly mining sector—held about steady from late May earnings for all employees rose 3.1 percent over the through late October. 12 months ending in October. Total real government purchases rose in the third Industrial production expanded at a solid pace again quarter. Real federal purchases increased, mostly in September, and indicators for output in the fourth reflecting higher defense expenditures. Real purquarter were generally positive. Production worker chases by state and local governments also increased, hours in the manufacturing sector increased in Octo- as real construction spending by these governments ber, automakers’ assembly schedules suggested that rose and payrolls expanded. light motor vehicle production would rise in the fourth quarter, and new orders indexes from national The nominal U.S. international trade deficit widened and regional manufacturing surveys pointed to solid in August and September. Exports decreased in gains in factory output in the near term. August but more than recovered in September, reflecting the pattern of industrial supplies exports. Real PCE continued to grow strongly in the third Imports of consumer goods led imports higher in quarter. Overall consumer spending rose steadily in both months. The change in net exports was estirecent months, and light motor vehicle sales stepped mated to have been a sizable drag on real GDP up to a robust pace in September and edged higher in growth in the third quarter. October. Key factors that influence consumer spending—including solid gains in real disposable personal Total U.S. consumer prices, as measured by the PCE income and the effects of earlier increases in equity price index, increased 2.0 percent over the 12 months prices and home values on households’ net worth— ending in September. Core PCE price inflation, continued to be supportive of solid real PCE growth which excludes changes in consumer food and energy in the near term. Consumer sentiment, as measured prices, also was 2.0 percent over that same period. by the University of Michigan Surveys of Consum- The consumer price index (CPI) rose 2.3 percent over ers, remained upbeat in October. the 12 months ending in September, while core CPI inflation was 2.2 percent. Recent readings on survey- Real residential investment declined further in the based measures of longer-run inflation expectathird quarter, likely reflecting a range of factors tions—including those from the Michigan survey, the including the continued effects of rising mortgage Blue Chip Economic Indicators, and the Desk’s Surinterest rates on the affordability of housing. Starts vey of Primary Dealers and Survey of Market Parof both new single-family homes and multifamily ticipants—were little changed on balance. units decreased last quarter, but building permit issuance for new single-family homes—which tends to be Foreign economic growth appeared to pick up in the a good indicator of the underlying trend in construc- third quarter, as a strong rebound in economic activtion of such homes—was little changed on net. Sales ity in several emerging market economies (EMEs) of both new and existing homes declined again in the more than offset a slowdown in China and most

Minutes of Federal Open Market Committee Meetings | November 253 advanced foreign economies (AFEs). Preliminary for the federal funds rate at the November FOMC GDP data showed that Mexico’s economy grew meeting and high odds of a further firming at the briskly, reversing its second-quarter contraction, December FOMC meeting. The market-implied path while indicators suggested that Brazil’s economy for the federal funds rate beyond 2018 increased a bit. rebounded from a nationwide truckers’ strike. In contrast, GDP growth slowed in China and the euro Medium- and longer-term nominal Treasury yields area, and indicators pointed to a step-down in Japa- ended the period higher amid some moderate volatilnese growth. Foreign inflation picked up in the third ity over the intermeeting period. Meanwhile, measquarter, boosted by higher oil prices and, in China, ures of inflation compensation derived from Treasury by higher food prices. However, underlying inflation Inflation-Protected Securities declined somewhat, pressures remained muted, especially in some AFEs. with some of the decline occurring following the weaker-than-expected September CPI release. Staff Review of the Financial Situation Overnight interest rates in short-term funding mar- Concerns about ongoing international trade tensions, kets rose in line with the increase in the target range the global growth outlook, and rising interest rates for the federal funds rate announced at the Septemweighed on global equity market sentiment over the ber FOMC meeting. Over the intermeeting period, intermeeting period. Domestic stock prices declined the spread between the EFFR and the IOER rate considerably, on net, and equity market implied vola- narrowed from 2 basis points to 0 basis points. tility rose. Nominal Treasury yields ended the period Take-up at the Federal Reserve’s overnight reverse higher amid some moderate volatility, and the broad repo facility remained low. dollar index moved up. Financing conditions for nonfinancial businesses and households remained Over the intermeeting period, global investors supportive of economic activity on balance. focused on changes in U.S. equity prices and interest rates, ongoing trade tensions between the United During the intermeeting period, broad U.S. equity States and China, and uncertainty regarding budget price indexes declined considerably, on net, amid negotiations between the Italian government and the somewhat elevated day-to-day volatility. Various fac- European Union. Foreign equity prices posted tors appeared to weigh on investor sentiment includ- notable net declines; option-implied measures of foring news related to ongoing international trade ten- eign equity volatility spiked in October but remained sions and investors’ concerns about the sustainability well below levels seen in February and subsequently of strong corporate earnings growth. Stock prices in retraced some of those increases. Ten-year Italian the basic materials and industrial sectors underper- sovereign bond spreads over German equivalents formed the broader market, reportedly reflecting an widened significantly, and there were moderate spillincrease in trade tensions with China. More broadly, overs to other euro-area peripheral spreads. Bond investors seemed to reassess equity valuations that yields in Germany and the United Kingdom fell, appeared elevated. Investors also reacted to some partly reflecting weaker-than-expected inflation data large firms raising concerns about the effect of rising and European political developments. In contrast, costs on their future profitability in their latest earn- Canadian yields increased slightly, bolstered by the ings reports. Option-implied volatility on the S&P announcement of the U.S.-Mexico-Canada trade 500 index at the one-month horizon—the VIX—in- agreement and a policy rate hike by the Bank of creased, though it remained below the levels seen in Canada. The dollar appreciated against most early February. Despite the considerable declines in advanced and emerging market currencies, and domestic stock prices, spreads of investment- and EME-dedicated funds experienced small outflows. speculative-grade corporate bonds over comparablematurity Treasury yields widened only modestly. Financing conditions for nonfinancial firms continued to be supportive of borrowing and spending over FOMC communications over the intermeeting the intermeeting period. Net debt financing of nonfiperiod were viewed by market participants as consis- nancial firms was robust in the third quarter, as weak tent with a continued gradual removal of monetary speculative-grade bond issuance was largely offset by policy accommodation. Market-implied measures of rapid leveraged loan issuance. The pace of equity monetary policy expectations were generally little issuance was solid in September but slowed somechanged. Investors continued to see virtually no odds what in October. The outlook for corporate earnings of a further quarter-point firming in the target range remained favorable on balance.

254 105th Annual Report | 2018 Respondents to the October Senior Loan Officer continued to be elevated, that vulnerabilities from Opinion Survey on Bank Lending Practices (SLOOS) financial-sector leverage and maturity and liquidity reported, on net, that their institutions had eased transformation remained low, and that vulnerabilities standards and terms for commercial and industrial from household leverage were still in the low-toloans to large and middle-market firms over the past moderate range. Additionally, the staff judged vulthree months. All respondents that had done so cited nerabilities from leverage in the nonfinancial business increased competition from other lenders as an sector as elevated and noted a pickup in the issuance important reason. The credit quality of nonfinancial of risky debt and the continued deterioration in corporations remained solid, though there were some underwriting standards on leveraged loans. The staff signs of modest deterioration. Gross issuance of also characterized overall vulnerabilities to foreign municipal bonds in September and October was financial stability as moderate while highlighting spestrong, much of which raised new capital. cific issues in some foreign economies, including—depending on the country—high private or sovereign Financing conditions in the commercial real estate debt burdens, external vulnerabilities, and political (CRE) sector remained accommodative. Banks in the uncertainties. October SLOOS reported, on a portfolio-weighted basis, an easing of standards on CRE loans over the Staff Economic Outlook third quarter on net. Interest rate spreads on commercial mortgage-backed securities (CMBS) In the U.S. economic forecast prepared for the remained near their post-crisis lows, while issuance of November FOMC meeting, the staff continued to non-agency and agency CMBS was stable in recent project that real GDP would increase a little less rapmonths and similar to year-earlier levels. idly in the second half of the year than in the first half. Hurricanes Florence and Michael had devastat- Most borrowers in the residential mortgage market ing effects on many communities, but they appeared continued to experience accommodative financing likely to leave essentially no imprint on the national conditions, although the increase in mortgage rates economy in the second half of the year as a whole. since 2016 appeared to have reduced housing Relative to the forecast prepared for the previous demand, and financing conditions remained some- meeting, the projection for real GDP growth this year what tight for borrowers with low credit scores. was little revised. Over the 2018–20 period, output Growth in home-purchase mortgage originations was forecast to rise at a rate above or at the staff’s slowed over the past year as mortgage rates stayed estimate of potential growth and then slow to a pace near their highest level since 2011, and refinancing below it in 2021. The unemployment rate was proactivity continued to be very muted. jected to decline further below the staff’s estimate of its longer-run natural rate but to bottom out in 2020 Financing conditions in consumer credit markets, on and begin to edge up in 2021. The medium-term probalance, remained supportive of growth in household jection for real GDP growth was only a bit weaker spending, although interest rates for consumer loans than in the previous forecast, primarily reflecting a continued to rise. Credit card loan growth showed lower projected path for equity prices, leaving the signs of moderating amid rising interest rates and unemployment rate forecast little revised. With labor reported tightening of lending standards at the larg- market conditions already tight, the staff continued est credit card banks. Compared with the beginning to assume that projected employment gains would of this year, respondents to the October 2018 SLOOS manifest in smaller-than-usual downward pressure on reported, on a portfolio-weighted basis, a reduced the unemployment rate and in larger-than-usual willingness to issue credit card loans to borrowers upward pressure on the labor force participation rate. across the credit spectrum and, in particular, to borrowers with lower credit scores; meanwhile, banks The staff expected both total and core PCE price reported having eased standards on auto loans. inflation to remain close to 2 percent through the medium term. The staff’s forecasts for both total and The staff provided its latest report on potential risks core PCE price inflation were little revised on net. to financial stability; the report again characterized the financial vulnerabilities of the U.S. financial The staff viewed the uncertainty around its projecsystem as moderate on balance. This overall assess- tions for real GDP growth, the unemployment rate, ment incorporated the staff’s judgment that vulner- and inflation as similar to the average of the past abilities associated with asset valuation pressures 20 years. The staff also saw the risks to the forecasts

Minutes of Federal Open Market Committee Meetings | November 255 for real GDP growth and the unemployment rate as reports from District contacts, which were mostly balanced. On the upside, household spending and upbeat regarding consumer spending. Although business investment could expand faster than the household spending overall was seen as strong, most staff projected, supported in part by the tax cuts participants noted weakness in residential investenacted last year. On the downside, trade policies and ment. This weakness was attributed to a variety of foreign economic developments could move in direc- factors, including increased mortgage rates, building tions that have significant negative effects on U.S. cost increases, and supply constraints. economic growth. Risks to the inflation projection also were seen as balanced. The upside risk that infla- Participants observed that growth in business fixed tion could increase more than expected in an investment slowed in the third quarter following seveconomy that was projected to move further above its eral quarters of rapid growth. Some participants potential was counterbalanced by the downside risk pointed to anecdotal evidence regarding higher tariffs that longer-term inflation expectations may be lower and uncertainty about trade policy, slowing global than was assumed in the staff forecast. demand, rising input costs, or higher interest rates as possible factors contributing to the slowdown. A Participants’ Views on Current Conditions couple of others noted that business investment and the Economic Outlook growth can be volatile on a quarterly basis and factors such as the recent cuts in corporate taxes and In their discussion of the economic situation and the high levels of business sentiment were expected to outlook, meeting participants agreed that informa- support investment going forward. tion received since the FOMC met in September indicated that the labor market had continued to Reports from District contacts in the manufacturing, strengthen and that economic activity had been rising energy, and service sectors were generally favorable, at a strong rate. Job gains had been strong, on aver- though growth in manufacturing activity was reportage, in recent months, and the unemployment rate edly moderating in a couple of Districts. Business had declined. Household spending had continued to contacts generally remained optimistic about the outgrow strongly, while growth of business fixed invest- look, but concerns about trade policy, slowing forment had moderated from its rapid pace earlier in the eign demand, and labor shortages were reportedly year. On a 12-month basis, both overall inflation and weighing on business prospects. Contacts in the agricore inflation, which excludes changes in food and cultural sector reported that conditions remain energy prices, had remained near 2 percent. Indica- depressed, in part, due to the effects of trade policy tors of longer-term inflation expectations were little actions on exports and farm incomes. changed on balance. Participants agreed that labor market conditions had Based on recent readings on spending, prices, and the strengthened further over the intermeeting period. labor market, participants generally indicated little Payrolls had increased strongly in October, and change in their assessment of the economic outlook, measures of labor market tightness such as rates of with above-trend economic growth expected to con- job openings and quits continued to be elevated. The tinue before slowing to a pace closer to trend over the unemployment rate remained at a historically low medium term. Participants pointed to several factors level in October, and the labor force participation supporting above-trend growth, including strong rate moved up. A couple of participants saw scope employment gains, expansionary federal tax and for further increases in the labor force participation spending policies, and continued high levels of con- rate as the strong economy pulled more workers into sumer and business confidence. Several participants the labor market, while a couple of other participants observed that the stimulative effects of fiscal policy judged that there was little scope for significant furwould likely diminish over time, while the lagged ther increases. effects of reductions in monetary policy accommodation would show through more fully, with both fac- Contacts in many Districts continued to report tight tors contributing to their expectation that economic labor markets with difficulties finding qualified workgrowth would slow to a pace closer to trend. ers. In some cases, firms were responding to these difficulties by increasing training for less-qualified In their discussion of the household sector, partici- workers, outsourcing work, or automating producpants generally continued to characterize consump- tion, while in other cases, firms were responding by tion growth as strong. This view was supported by raising wages. Contacts in a couple of Districts indi-

256 105th Annual Report | 2018 cated that labor shortages, particularly for skilled lization in conjunction with an increase in the ability labor, might be constraining activity in certain indus- of firms to pass through increases in tariffs or in tries. Participants observed that, at the national level, other input costs to consumer prices could generate measures of nominal wage growth appeared to be undesirable upward pressure on inflation. In general, picking up. Many participants noted that the recent participants agreed that risks to the outlook pace of aggregate wage gains was broadly consistent appeared roughly balanced. with trends in productivity growth and inflation. In their discussion of financial developments, partici- Participants observed that both overall and core PCE pants observed that financial conditions tightened price inflation remained near 2 percent on a over the intermeeting period, as equity prices 12-month basis. In general, participants viewed declined, longer-term yields and borrowing costs for recent price developments as consistent with their most sectors increased, and the foreign exchange expectation that inflation would remain near the value of the dollar rose. Despite these developments, Committee’s symmetric 2 percent objective on a sus- a number of participants judged that financial conditained basis. Reports from business contacts and sur- tions remained accommodative relative to historical veys in a number of Districts were consistent with norms. some firming in inflationary pressure. Contacts in many Districts indicated that input costs had risen Among those who commented on financial stability, and that increased tariffs were raising costs, especially a number cited possible risks related to elevated CRE for industries relying heavily on steel and aluminum. prices, narrow corporate bond spreads, or strong In a few Districts, transportation costs had report- issuance of leveraged loans. A few participants sugedly increased. Some contacts indicated that while gested that some of these financial vulnerabilities input costs were higher, it appeared that the pass- might not currently represent risks to financial stabilthrough of these higher costs to consumer prices was ity so much as they represent downside risks to the limited. economic outlook; a couple of participants suggested that financial stability risks and risks to the outlook Participants commented on a number of risks and are interconnected. A couple of participants also uncertainties associated with their outlook for eco- commented on the upcoming release of the Board’s nomic activity, the labor market, and inflation over first public Financial Stability Report and noted that the medium term. A few participants indicated that the report would increase the transparency of the uncertainty had increased recently, pointing to the Federal Reserve’s financial stability work as well as high levels of uncertainty regarding the effects of fis- enhance communications on this topic. cal and trade policies on economic activity and inflation. Some participants viewed economic and finan- In their discussion of monetary policy, participants cial developments abroad, including the possibility of agreed that it would be appropriate to maintain the further appreciation of the U.S. dollar, as posing current target range for the federal funds rate at this downside risks for domestic economic growth and meeting. Participants generally judged that the inflation. A couple of participants expressed the con- economy had been evolving about as they had anticicern that measures of inflation expectations would pated, with economic activity rising at a strong rate, remain low, particularly if economic growth slowed labor market conditions continuing to strengthen, more than expected. Several participants were con- and inflation running at or near the Committee’s cerned that the high level of debt in the nonfinancial longer-run objective. Almost all participants reafbusiness sector, and especially the high level of lever- firmed the view that further gradual increases in the aged loans, made the economy more vulnerable to a target range for the federal funds rate would likely be sharp pullback in credit availability, which could consistent with sustaining the Committee’s objectives exacerbate the effects of a negative shock on eco- of maximum employment and price stability. nomic activity. The potential for an escalation in tariffs or trade tensions was also cited as a factor that Consistent with their judgment that a gradual could slow economic growth more than expected. approach to policy normalization remained appropri- With regard to upside risks, participants noted that ate, almost all participants expressed the view that greater-than-expected effects of fiscal stimulus and another increase in the target range for the federal high consumer confidence could lead to stronger- funds rate was likely to be warranted fairly soon if than-expected economic outcomes. Some partici- incoming information on the labor market and inflapants raised the concern that tightening resource uti- tion was in line with or stronger than their current

Minutes of Federal Open Market Committee Meetings | November 257 expectations. However, a few participants, while On a 12-month basis, both overall inflation and inflaviewing further gradual increases in the target range tion for items other than food and energy remained of the federal funds rate as likely to be appropriate, near 2 percent. Indicators of long-term inflation expressed uncertainty about the timing of such expectations were little changed on balance. increases. A couple of participants noted that the federal funds rate might currently be near its neutral Members generally judged that the economy had level and that further increases in the federal funds been evolving about as they had anticipated at the rate could unduly slow the expansion of economic previous meeting. Financial conditions, although activity and put downward pressure on inflation and somewhat tighter than at the time of the September inflation expectations. FOMC meeting, had stayed accommodative overall, while the effects of expansionary fiscal policies Participants emphasized that the Committee’s enacted over the past year were expected to continue approach to setting the stance of policy should be through the medium term. Consequently, members importantly guided by incoming data and their impli- continued to expect that further gradual increases in cations for the economic outlook. They noted that the target range for the federal funds rate would be their expectations for the path of the federal funds consistent with sustained expansion of economic rate were based on their current assessment of the activity, strong labor market conditions, and inflation economic outlook. Monetary policy was not on a near the Committee’s symmetric 2 percent objective preset course; if incoming information prompted over the medium term. Members continued to judge meaningful reassessments of the economic outlook that the risks to the economic outlook were roughly and attendant risks, either to the upside or the down- balanced. side, their policy outlook would change. Various factors such as the recent tightening in financial condi- After assessing current conditions and the outlook tions, risks in the global outlook, and some signs of for economic activity, the labor market, and inflation, slowing in interest-sensitive sectors of the economy members decided to maintain the target range for the on the one hand, and further indicators of tightness federal funds rate at 2 to 2¼ percent. Members in labor markets and possible inflationary pressures, agreed that the timing and size of future adjustments on the other hand, were noted in this context. Partici- to the target range for the federal funds rate would pants also commented on how the Committee’s com- depend on their assessment of realized and expected munications in its postmeeting statement might need economic conditions relative to the Committee’s to be revised at coming meetings, particularly the lan- maximum employment and symmetric 2 percent guage referring to the Committee’s expectations for inflation objectives. They reiterated that this assess- “further gradual increases” in the target range for the ment would take into account a wide range of inforfederal funds rate. Many participants indicated that it mation, including measures of labor market condimight be appropriate at some upcoming meetings to tions, indicators of inflation pressures and inflation begin to transition to statement language that placed expectations, and readings on financial and internagreater emphasis on the evaluation of incoming data tional developments. More generally, members noted in assessing the economic and policy outlook; such a that decisions regarding near-term adjustments of change would help to convey the Committee’s flex- the stance of monetary policy would appropriately ible approach in responding to changing economic remain dependent on the evolution of the outlook as circumstances. informed by incoming data. Committee Policy Action At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve In their discussion of monetary policy for the period Bank of New York, until instructed otherwise, to ahead, members judged that information received execute transactions in the SOMA in accordance since the Committee met in September indicated that with the following domestic policy directive, to be the labor market had continued to strengthen and released at 2:00 p.m.: that economic activity had been rising at a strong rate. Job gains had been strong, on average, in recent “Effective November 9, 2018, the Federal Open months, and the unemployment rate had declined. Market Committee directs the Desk to under- Household spending had continued to grow strongly, take open market operations as necessary to while growth of business fixed investment had mod- maintain the federal funds rate in a target range erated recently from its rapid pace earlier in the year. of 2 to 2¼ percent, including overnight reverse

258 105th Annual Report | 2018 repurchase operations (and reverse repurchase labor market conditions, and inflation near the operations with maturities of more than one day Committee’s symmetric 2 percent objective over when necessary to accommodate weekend, holi- the medium term. Risks to the economic outday, or similar trading conventions) at an offer- look appear roughly balanced. ing rate of 2.00 percent, in amounts limited only by the value of Treasury securities held outright In view of realized and expected labor market in the System Open Market Account that are conditions and inflation, the Committee decided available for such operations and by a per- to maintain the target range for the federal funds counterparty limit of $30 billion per day. rate at 2 to 2¼ percent. The Committee directs the Desk to continue In determining the timing and size of future rolling over at auction the amount of principal adjustments to the target range for the federal payments from the Federal Reserve’s holdings of funds rate, the Committee will assess realized Treasury securities maturing during each calen- and expected economic conditions relative to its dar month that exceeds $30 billion, and to con- maximum employment objective and its symtinue reinvesting in agency mortgage-backed metric 2 percent inflation objective. This assesssecurities the amount of principal payments ment will take into account a wide range of from the Federal Reserve’s holdings of agency information, including measures of labor market debt and agency mortgage-backed securities conditions, indicators of inflation pressures and received during each calendar month that inflation expectations, and readings on financial exceeds $20 billion. Small deviations from these and international developments.” amounts for operational reasons are acceptable. Voting for this action: Jerome H. Powell, John C. The Committee also directs the Desk to engage Williams, Thomas I. Barkin, Raphael W. Bostic, Lael in dollar roll and coupon swap transactions as Brainard, Richard H. Clarida, Mary C. Daly, Loretta necessary to facilitate settlement of the Federal J. Mester, and Randal K. Quarles. Reserve’s agency mortgage-backed securities transactions.” Voting against this action: None. The vote also encompassed approval of the statement Consistent with the Committee’s decision to leave the below to be released at 2:00 p.m.: target range for the federal funds rate unchanged, the Board of Governors voted unanimously to leave the “Information received since the Federal Open interest rates on required and excess reserve balances Market Committee met in September indicates unchanged at 2.20 percent and voted unanimously to that the labor market has continued to approve establishment of the primary credit rate at strengthen and that economic activity has been the existing level of 2.75 percent, effective Novemrising at a strong rate. Job gains have been ber 9, 2018. strong, on average, in recent months, and the unemployment rate has declined. Household spending has continued to grow strongly, while Update from Subcommittee on growth of business fixed investment has moder- Communications ated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and infla- Governor Clarida presented a proposal from the subtion for items other than food and energy committee on communications to conduct a review remain near 2 percent. Indicators of longer-term during 2019 of the Federal Reserve’s strategic frameinflation expectations are little changed, on work for monetary policy. This assessment would balance. consider the strategy, tools, and communications that would best enable the Federal Reserve to meet its Consistent with its statutory mandate, the Com- statutory objectives of maximum employment and mittee seeks to foster maximum employment price stability. With labor market conditions close to and price stability. The Committee expects that maximum employment and inflation near the Comfurther gradual increases in the target range for mittee’s 2 percent objective, it was an opportune time the federal funds rate will be consistent with sus- for the Federal Reserve to undertake this review and tained expansion of economic activity, strong assess the robustness of its strategic framework.

Minutes of Federal Open Market Committee Meetings | November 259 During the review, the Federal Reserve would engage Notation Vote with a broad range of interested stakeholders across the country and host a research conference in By notation vote completed on October 16, 2018, the June 2019. FOMC participants would discuss the Committee unanimously approved the minutes of the strategic framework at subsequent FOMC meetings, Committee meeting held on September 25–26, 2018. drawing on the lessons from the outreach efforts and on staff analysis. The goal of these discussions would James A. Clouse be to identify possible ways to improve the Commit- Secretary tee’s current strategic policy framework in order to ensure that the Federal Reserve is best positioned going forward to achieve its statutory mandate.

260 105th Annual Report | 2018 Meeting Held Steven B. Kamin Economist on December 18–19, 2018 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, David Altig, Kartik B. Athreya, Thomas A. Connors, December 18, 2018, at 1:00 p.m. and continued on David E. Lebow, Trevor A. Reeve, William Wascher, Wednesday, December 19, 2018, at 9:00 a.m.1 and Beth Anne Wilson Associate Economists Present Simon Potter Jerome H. Powell Manager, System Open Market Account Chairman Lorie K. Logan John C. Williams Deputy Manager, System Open Market Account Vice Chairman Ann E. Misback Thomas I. Barkin Secretary, Office of the Secretary, Board of Raphael W. Bostic Governors Michelle W. Bowman Matthew J. Eichner2 Director, Division of Reserve Bank Operations and Lael Brainard Payment Systems, Board of Governors Richard H. Clarida Michael S. Gibson Mary C. Daly Director, Division of Supervision and Regulation, Board of Governors Loretta J. Mester Andreas Lehnert Randal K. Quarles Director, Division of Financial Stability, Board of James Bullard, Charles L. Evans, Esther L. George, Governors Eric Rosengren, and Michael Strine Daniel M. Covitz Alternate Members of the Federal Open Market Deputy Director, Division of Research and Statistics, Committee Board of Governors Patrick Harker, Robert S. Kaplan, and Neel Kashkari Rochelle M. Edge Presidents of the Federal Reserve Banks of Deputy Director, Division of Monetary Affairs, Philadelphia, Dallas, and Minneapolis, respectively Board of Governors James A. Clouse Michael T. Kiley Secretary Deputy Director, Division of Financial Stability, Board of Governors Matthew M. Luecke Deputy Secretary Jon Faust Senior Special Adviser to the Chairman, Office of David W. Skidmore Board Members, Board of Governors Assistant Secretary Antulio N. Bomfim Michelle A. Smith Special Adviser to the Chairman, Office of Board Assistant Secretary Members, Board of Governors Mark E. Van Der Weide Brian M. Doyle, Joseph W. Gruber, Ellen E. Meade, General Counsel and John M. Roberts Michael Held Special Advisers to the Board, Office of Board Deputy General Counsel Members, 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 | December 261 Linda Robertson Michele Cavallo5 Assistant to the Board, Office of Board Members, Section Chief, Division of Monetary Affairs, Board of Governors Board of Governors Shaghil Ahmed and Christopher J. Erceg Mark A. Carlson2 Senior Associate Directors, Division of International Senior Economic Project Manager, Division of Finance, Board of Governors Monetary Affairs, Board of Governors Eric M. Engen David H. Small Senior Associate Director, Division of Research and Project Manager, Division of Monetary Affairs, Statistics, Board of Governors Board of Governors Gretchen C. Weinbach3 Andrea Ajello and Alyssa G. Anderson3 Senior Associate Director, Division of Monetary Principal Economists, Division of Monetary Affairs, Affairs, Board of Governors Board of Governors Edward Nelson Arsenios Skaperdas3 Senior Adviser, Division of Monetary Affairs, Economist, Division of Monetary Affairs, Board of Governors Board of Governors Marnie Gillis DeBoer,3 David López-Salido, Donielle A. Winford and Min Wei Information Management Analyst, Division of Associate Directors, Division of Monetary Affairs, Monetary Affairs, Board of Governors Board of Governors Michael Dotsey, Sylvain Leduc, Daniel G. Sullivan, John J. Stevens Geoffrey Tootell, and Christopher J. Waller Associate Director, Division of Research and Executive Vice Presidents, Federal Reserve Banks of Statistics, Board of Governors Philadelphia, San Francisco, Chicago, Boston, and Steven A. Sharpe St. Louis, respectively Deputy Associate Director, Division of Research and Todd E. Clark, Evan F. Koenig, Antoine Martin, Statistics, Board of Governors and Julie Ann Remache3 Jeffrey D. Walker2 Senior Vice Presidents, Federal Reserve Banks of Deputy Associate Director, Division of Reserve Bank Cleveland, Dallas, New York, and New York, Operations and Payment Systems, Board of respectively Governors Roc Armenter,3 Kathryn B. Chen,3 Jonathan L. Willis, Andrew Figura and John Sabelhaus and Patricia Zobel3 Assistant Directors, Division of Research and Vice Presidents, Federal Reserve Banks of Statistics, Board of Governors Philadelphia, New York, Kansas City, and Christopher J. Gust,4 Laura Lipscomb,3 New York, respectively and Zeynep Senyuz3 Gara Afonso3 and William E. Riordan3 Assistant Directors, Division of Monetary Affairs, Assistant Vice Presidents, Federal Reserve Bank of Board of Governors New York Don Kim Suraj Prasanna3 and Lisa Stowe3 Adviser, Division of Monetary Affairs, Board of Markets Officers, Federal Reserve Bank of New York Governors Samuel Schulhofer-Wohl2 Penelope A. Beattie5 Senior Economist and Research Advisor, Federal Assistant to the Secretary, Office of the Secretary, Reserve Bank of Chicago Board of Governors Fabrizio Perri 3 Attended through the discussion of the long-run monetary Monetary Advisor, Federal Reserve Bank of policy implementation frameworks. Minneapolis 4 Attended the discussion of financial developments and open market operations through the close of the meeting. 5 Attended Tuesday session only.

262 105th Annual Report | 2018 Long-Run Monetary Policy Implementation various issues related to the long-run composition of Frameworks the System Open Market Account (SOMA) portfolio, including the maturity composition of the portfo- Committee participants resumed their discussion lio’s Treasury securities and the management of from the November 2018 FOMC meeting of poten- residual holdings of agency mortgage-backed securitial long-run frameworks for monetary policy imple- ties (MBS) after the Committee has normalized the mentation. At the December meeting, the staff pro- size of the balance sheet. vided a set of briefings that considered various issues related to the transition to a long-run operating In discussing the transition to a long-run operating regime with lower levels of excess reserves than at regime, participants commented on the advantages present and to a long-run composition of the bal- and disadvantages of allowing reserves to decline to a ance sheet. level that could put noticeable upward pressure on the federal funds rate, at least for a time. Reducing The staff noted that during the transition to a long- reserves close to the lowest level that still correrun operating regime with excess reserves below cur- sponded to the flat portion of the reserve demand rent levels, the effective federal funds rate (EFFR) curve would be one approach consistent with the could begin to rise a little above the interest on excess Committee’s previously stated intention, in the Policy reserves (IOER) rate as reserves in the banking Normalization Principles and Plans that it issued in system declined gradually to a level that the Commit- 2014, to “hold no more securities than necessary to tee judges to be most appropriate for efficient and implement monetary policy efficiently and effeceffective implementation of policy. This upward tively.” However, reducing reserves to a point very movement in the federal funds rate could be gradual. close to the level at which the reserve demand curve However, the staff noted that the federal funds rate begins to slope upward could lead to a significant and other money market rates could possibly become increase in the volatility in short-term interest rates somewhat volatile at times as banks and financial and require frequent sizable open market operations markets adjusted to lower levels of reserve balances. or new ceiling facilities to maintain effective interest Were upward pressures on the federal funds rate to rate control. These considerations suggested that it emerge, it could be challenging to distinguish might be appropriate to instead provide a buffer of between pressures that were transitory and likely to reserves sufficient to ensure that the Federal Reserve abate as financial institutions adjust and those that operates consistently on the flat portion of the were more persistent and associated with aggregate reserve demand curve so as to promote the efficient reserve scarcity. The staff reported on the monitoring and effective implementation of monetary policy. of conditions in money markets as well as various survey and market outreach activities that could Participants discussed options for maintaining conassist in detecting reserve scarcity. The staff reviewed trol of interest rates should upward pressures on a number of steps that the Federal Reserve could money market rates emerge during the transition to a take to ensure effective monetary policy implementa- regime with lower excess reserves. Several particition were upward pressures on the federal funds rate pants commented on options that rely on existing or and other money market rates to emerge. These steps currently used tools, such as further technical adjustincluded lowering the IOER rate further within the ments to the IOER rate to keep the federal funds rate target range, using the discount window to support within the target range or using the discount window, the efficient distribution of reserves, and slowing or although such options were recognized to have limismoothing the pace of reserve decline through open tations in some situations. Some participants commarket operations or through slowing portfolio mented on the possibility of slowing the pace of the redemptions. The staff also discussed new ceiling decline in reserves in approaching the longer-run tools that could help keep the EFFR within the level of reserves. Standard temporary open market Committee’s target range, including options that operations could be used for this purpose. In addiwould add new counterparties for the Open Market tion, participants discussed options such as ending Desk’s operations. The staff also provided a review of portfolio redemptions with a relatively high level of the liabilities on the Federal Reserve’s balance sheet; reserves still in the system and then either maintainthe review described the factors that influence the ing that level of reserves or allowing growth in nonresize of reserve and nonreserve liabilities and dis- serve liabilities to very gradually reduce reserves furcussed the increase in the size of these liabilities since ther. These approaches could allow markets and the financial crisis. Additionally, the staff outlined banks more time to adjust to lower reserve levels

Minutes of Federal Open Market Committee Meetings | December 263 while maintaining effective control of interest rates. Participants expected to continue their discussion of Several participants, however, expressed concern that long-run implementation frameworks and related a slowing of redemptions could be misinterpreted as issues at upcoming meetings. They reiterated the a signal about the stance of monetary policy. Some importance of communicating clearly on the ratioparticipants expressed an interest in learning more nale for any decision made on the implementation about possible options for new ceiling tools to pro- framework. vide firmer control of the policy rate. Developments in Financial Markets and Participants commented on the role that the Federal Open Market Operations Reserve’s nonreserve liabilities have played in the expansion of the Federal Reserve’s balance sheet The SOMA manager reviewed developments in since the financial crisis. Many participants noted financial markets over the intermeeting period. Asset that the magnitudes of these nonreserve liabilities— prices were volatile in recent weeks, reportedly most significantly currency but also liabilities to the reflecting a pullback from risk-taking by investors. In Treasury through the Treasury General Account and part, the deterioration in risk sentiment appeared to liabilities to foreign official institutions through their stem importantly from uncertainty about the state of accounts at the Federal Reserve—are not closely trade negotiations between China and the United related to Federal Reserve monetary policy decisions. States. In addition, investors pointed to concerns They also remarked that the size of the Federal about the global growth outlook, the unsettled state Reserve’s balance sheet was expected to increase over of Brexit negotiations, and uncertainties about the time as the growth of these liabilities roughly tracks political situation in Europe. the growth of nominal gross domestic product (GDP). Additionally, participants cited the social Against this backdrop, U.S. stock prices were down benefits provided by these liabilities to the economy. nearly 8 percent on the period. Risk spreads on cor- Participants considered it important to present infor- porate bonds widened appreciably, with market parmation on the Federal Reserve’s balance sheet to the ticipants reportedly focusing on the potential implipublic in ways that communicated these facts. In dis- cations of downside risks to the U.S. economic outcussing the long-run level of reserve liabilities, par- look for the financial condition of companies, ticipants noted that it might be useful to explore ways particularly for companies at the lower end of the to encourage banks to reduce their demand for investment-grade spectrum. Treasury yields declined reserves and to provide information to banks and the significantly, especially at longer maturities, contribpublic about the likely long-run level of reserves. uting to some flattening of the Treasury yield curve. Based on readings from Treasury Inflation-Protected Participants commented on a number of issues Securities (TIPS), the decline in nominal Treasury related to the long-run composition of the SOMA yields was associated with a notable drop in inflation portfolio. With regard to the portfolio of Treasury compensation. A sizable decline in oil prices was securities, participants discussed the advantages of cited as an important factor contributing to the drop different portfolio maturity compositions. Several in measures of inflation compensation. participants noted that a portfolio of holdings weighted toward shorter maturities would provide The deterioration in market sentiment was accompagreater flexibility to lengthen maturity if warranted nied by a significant downward revision in the by an economic downturn, while a couple of others expected path of the federal funds rate based on fednoted that a portfolio with maturities that matched eral funds futures quotes. In addition, futures-based the outstanding Treasury market would have a more measures of policy expectations moved lower in neutral effect on the market. With regard to the MBS response to speeches by Federal Reserve officials. The portfolio, participants noted that the passive runoff revision in the expected policy path was less noticeable of MBS holdings through principal paydowns would in the Desk’s survey-based measures of the expected continue for many years after the size of the balance path of the federal funds rate. Desk surveys indicated sheet had been normalized. Several participants com- that respondents placed high odds on a further mented on the possibility of reducing agency MBS quarter-point firming in the stance of monetary policy holdings somewhat more quickly than the passive at the December meeting, but lower than the near cerapproach by implementing a program of very tainty of a rate increase reported just before previous gradual MBS sales sometime after the size of the bal- policy firmings in 2018; survey responses anticipated ance sheet had been normalized. that the median projected path of the federal funds

264 105th Annual Report | 2018 rate in the Summary of Economic Projections (SEP) Total nonfarm payroll employment expanded further would show only two additional quarter-point policy in November, and job gains were strong, on average, firmings next year—down from the three policy firm- over recent months. The national unemployment rate ings in the median path in the September SEP results. remained at a very low level of 3.7 percent, and both the labor force participation rate and the The deputy manager followed with a discussion of employment-to-population ratio also stayed flat in money market developments and open market opera- November. The unemployment rates for African tions. After a fast narrowing of the spread between the Americans, Asians, and Hispanics in November were IOER rate and the EFFR before the November meet- below their levels at the end of the previous economic ing, the EFFR had remained stable at, or just 1 basis expansion. The share of workers employed part time point below the level of the IOER rate since then. for economic reasons was still close to the lows Some upward pressures on overnight rates were evi- reached in late 2007. The rates of private-sector job dent in the repurchase agreement (repo) market, openings and quits were both still at high levels in apparently from higher issuance of Treasury bills and October; initial claims for unemployment insurance an associated expansion of primary dealer inventories benefits in early December were still close to historiover the intermeeting period. Banks expanded their cally low levels. Total labor compensation per hour in lending in repo markets in light of higher repo rates the nonfarm business sector—a volatile measure even relative to the IOER rate; the willingness of banks to on a four-quarter change basis—increased 2.2 perlend in repo markets suggested that the reserve supply cent over the four quarters ending in the third quarwas still ample. The deputy manager noted the results ter. Average hourly earnings for all employees rose of the recent Desk surveys of primary dealers and 3.1 percent over the 12 months ending in November. market participants indicating an increase in the median respondent’s estimate of the long-run level of Industrial production expanded, on net, over Octoreserve balances to a level closer to that implied by ber and November. Output increased in the mining banks’ responses in the Senior Financial Officer Sur- and utilities sectors, while manufacturing production vey conducted in advance of the November FOMC edged down on balance. Automakers’ assembly meeting. The deputy manager also reported on pay- schedules suggested that production of light motor downs on the SOMA securities holdings. Under the vehicles would rise in December, and new orders baseline outlook, prepayments of principal on agency indexes from national and regional manufacturing MBS would remain below the $20 billion redemption surveys pointed to moderate gains in total factory cap for the foreseeable future. However, if longer-term output in the coming months. interest rates moved substantively lower than assumed in the baseline, some modest reinvestments in MBS Household spending continued to increase at a strong could occur for a few months next year concurrent pace in recent months. Real PCE growth was brisk in with the pickup in seasonal turnover. October, and the components of the nominal retail sales used by the Bureau of Economic Analysis to con- By unanimous vote, the Committee ratified the struct its estimate of PCE rose considerably in Novem- Desk’s domestic transactions over the intermeeting ber. The pace of light motor vehicle sales edged down period. There were no intervention operations in for- in November but stayed near its recent elevated level. eign currencies for the System’s account during the Key factors that influence consumer spending—inintermeeting period. cluding ongoing gains in real disposable personal income and the effects of earlier increases in equity prices and home values on households’ net worth— Staff Review of the Economic Situation continued to be supportive of solid real PCE growth in the near term. Consumer sentiment, as measured by The information reviewed for the December 18–19 the University of Michigan Surveys of Consumers, meeting indicated that labor market conditions con- remained relatively upbeat through early December. tinued to strengthen in recent months and that real GDP growth was strong. Consumer price inflation, Real residential investment appeared to be declining as measured by the 12-month percentage change in further in the fourth quarter, likely reflecting in part the price index for personal consumption expendi- the effects of the rise in mortgage interest rates over tures (PCE), was 2 percent in October. Survey-based the past year on the affordability of housing. Starts of measures of longer-run inflation expectations were new single-family homes decreased in October and little changed on balance. November, although starts of multifamily units rose

Minutes of Federal Open Market Committee Meetings | December 265 sharply in November. Building permit issuance for new 2.2 percent. Recent readings on survey-based meassingle-family homes, which tends to be a good indica- ures of longer-run inflation expectations—including tor of the underlying trend in construction of such those from the Michigan survey, the Survey of Prohomes, moved down modestly over recent months. fessional Forecasters, and the Desk’s Survey of Pri- Sales of new homes declined markedly in October, mary Dealers and Survey of Market Participants— although existing home sales increased modestly. were little changed on balance. Growth in real private expenditures for business Foreign economic growth continued at a moderate equipment and intellectual property looked to be pace in the third quarter, as a pickup in emerging picking up solidly in the fourth quarter after moder- market economies (EMEs) roughly offset slowing ating in the previous quarter. Nominal shipments of growth in advanced foreign economies (AFEs). nondefense capital goods excluding aircraft moved Among EMEs, growth in Mexico and Brazil bounced up in October. Forward-looking indicators of busi- back from transitory second-quarter weakness, more ness equipment spending—such as a rising backlog than offsetting a slowdown in China and India. The of unfilled orders for nondefense capital goods softness in AFE growth partly reflected temporary excluding aircraft and upbeat readings on business factors, including disruptions from natural disasters sentiment—pointed to further spending gains in the in Japan and the adoption of new car emissions testnear term. Nominal business expenditures for non- ing in Germany. Indicators for economic activity in residential structures outside of the drilling and min- the fourth quarter were consistent with continued ing sector declined modestly in October, while the moderate foreign economic growth. Foreign inflation number of crude oil and natural gas rigs in opera- fell in recent months, largely reflecting a significant tion—an indicator of business spending for struc- drag from lower oil prices. Underlying inflation prestures in the drilling and mining sector—held about sures, especially in some AFEs, remained muted. steady in November through early December. Staff Review of the Financial Situation Total real government purchases appeared to be rising moderately in the fourth quarter. Nominal Investors’ perceptions of downside risks to the defense spending in October and November pointed domestic and global outlook appeared to increase to solid growth in real federal purchases. Real pur- over the intermeeting period, reportedly driven in chases by state and local governments looked to be part by signs of slowing in foreign economies and only edging up, as nominal construction spending by growing concerns over escalating trade frictions. Both these governments rose solidly in October but their nominal U.S. Treasury yields and U.S. equity prices payrolls declined a little in October and November. declined notably over the period. Financing conditions for businesses and households tightened a bit The nominal U.S. international trade deficit widened but generally remained supportive of economic slightly in October. Exports declined a little, with growth. decreases in exports of agricultural products and capital goods, although exports of industrial supplies Remarks by Federal Reserve officials over the interincreased. Imports rose a bit, with increases in meeting period were interpreted by market particiimports of consumer goods and automotive prod- pants as signaling a shift in the stance of policy ucts, but imports of capital goods declined sharply toward a more gradual path of federal funds rate from September’s elevated level. Available trade data increases. The market-implied path for the federal suggested that the contribution of the change in net funds rate for 2019 and 2020 shifted down markedly, exports to the rate of real GDP growth in the fourth while the market-implied probability for a rate hike at quarter would be much less negative than the drag of the December FOMC meeting declined slightly nearly 2 percentage points in the third quarter. though remained high. Total U.S. consumer prices, as measured by the PCE Nominal Treasury yields fell considerably over the price index, increased 2 percent over the 12 months period, with the declines most pronounced in longerending in October. Core PCE price inflation, which dated maturities and contributing to a flattening of excludes changes in consumer food and energy prices, the yield curve. The spread between 10- and 2-year was 1.8 percent over that same period. The consumer nominal Treasury yields narrowed to near the price index (CPI) rose 2.2 percent over the 12 months 20th percentile of its distribution since 1971. Investor ending in November, and core CPI inflation was also perceptions of increased downside risks to the out-

266 105th Annual Report | 2018 looks for domestic and foreign economic growth, Financing conditions for nonfinancial firms including growing concerns over trade frictions remained accommodative, on net, though funding between the United States and China, reportedly conditions for capital markets tightened somewhat as weighed on yields. Measures of inflation compensa- spreads on nonfinancial corporate bonds widened to tion derived from TIPS also decreased notably over near the middle of their historical distribution. Gross the period along with the declines in oil prices. issuance of corporate bonds also moderated in November, driven by a significant step-down in Concerns over escalating trade tensions, global speculative-grade bond issuance, while institutional growth prospects, and the sustainability of corporate leveraged loan issuance also slowed in November. earnings growth were among the factors that Small business credit market conditions were little appeared to contribute to a significant drop in U.S. changed, and credit conditions in municipal bond equity prices. The declines were largest in the tech- markets stayed accommodative on net. nology and retail sectors. One-month option-implied volatility on the S&P 500 index—the VIX—increased Private-sector analysts revised down their projections over the period and corporate credit spreads wid- for year-ahead corporate earnings a bit. In many ened, consistent with the selloff in equities. cases, nonfinancial firms’ earnings reports suggested that tariffs were a salient concern in the changed out- Over the intermeeting period, foreign financial mar- look for corporate earnings. The pace of gross equity kets were affected by perceived increases in downside issuance through both seasoned and initial offerings risks to the global growth outlook and ongoing moderated, consistent with the weakness and volatiluncertainty about trade relations between the United ity in the stock market. States and China. Investors also focused on the state of negotiations over Brexit and the Italian govern- In the commercial real estate (CRE) sector, financing ment budget deficit. Equity markets in AFEs posted conditions remained accommodative. Commercial notable declines, and Europe-dedicated bond and mortgage-backed securities (CMBS) spreads widened equity funds reported strong outflows. Equity slightly over the intermeeting period but remained declines in EMEs were more modest, and emerging near post-crisis lows. Issuance of non-agency CMBS market funds received modest inflows on net. was stable while CRE loan growth remained strong at banks. Financing conditions in the residential mort- AFE sovereign yields declined significantly, reflecting gage market also remained accommodative for most decreases in U.S. bond yields and weaker-than- borrowers, but the demand for mortgage credit softexpected euro-area and U.K. economic data. Meas- ened. Purchase mortgage origination activity declined ures of inflation compensation generally fell, partly modestly, while refinance activity remained muted. reflecting sharp decreases in oil prices. Spreads of Italian sovereign yields over German counterparts Financing conditions in consumer credit markets also narrowed amid progress on budget negotiations remained accommodative. Broad consumer credit between the Italian government and the European grew at a solid pace through September, though Commission. The U.S. dollar appreciated modestly; October and November saw credit card growth at although declines in U.S. yields weighed on the dol- banks edge a bit lower on average. Conditions in the lar, deteriorating global risk sentiment provided sup- consumer asset-backed securities market remained port. Ongoing uncertainty about the passage of a stable over the intermeeting period with slightly Brexit withdrawal agreement put downward pressure higher spreads and robust issuance. on the exchange value of the British pound. Staff Economic Outlook Short-term funding markets functioned smoothly over the intermeeting period. Elevated levels of With some stronger-than-expected incoming data on Treasury bills outstanding have continued to put economic activity and the recent tightening in finanupward pressure on money market rates. The EFFR cial conditions, particularly the decline in equity held steady at or very close to the level of the IOER prices, the U.S. economic forecast prepared by the rate, while take-up in the overnight reverse repo facil- staff for the December FOMC meeting was little ity remained near historically low levels. In offshore revised on balance. The staff continued to expect that funding markets, the one-month foreign exchange real GDP growth would be strong in the fourth quarswap basis for most major currencies increased, con- ter of 2018, although somewhat slower than the rapid sistent with typical year-end pressures. pace of growth in the previous two quarters. Over the

Minutes of Federal Open Market Committee Meetings | December 267 2018–20 period, real GDP was forecast to rise at a their individual assessments of the appropriate path rate above the staff’s estimate of potential output for the federal funds rate. The longer-run projections growth and then slow to a pace below it in 2021. The represented each participant’s assessment of the rate unemployment rate was projected to decline further to which each variable would be expected to conbelow the staff’s estimate of its longer-run natural verge, over time, under appropriate monetary policy rate but to bottom out by 2020 and begin to edge up and in the absence of further shocks to the economy. in 2021. With labor market conditions already tight, These projections and policy assessments are the staff continued to assume that projected employ- described in the SEP, which is an addendum to these ment gains would manifest in smaller-than-usual minutes. downward pressure on the unemployment rate and in larger-than-usual upward pressure on the labor force In their discussion of the economic situation and the participation rate. outlook, meeting participants agreed that information received since the FOMC met in November indi- The staff expected both total and core PCE price cated that the labor market had continued to inflation to be just a touch below 2 percent in 2018, strengthen and that economic activity had been rising with total inflation revised down a bit because of at a strong rate. Job gains had been strong, on averrecent declines in consumer energy prices. Core PCE age, in recent months, and the unemployment rate price inflation was forecast to move up to 2 percent had remained low. Household spending had continin 2019 and remain at that level through the medium ued to grow strongly, while growth of business fixed term; total inflation was forecast to be a little below investment had moderated from its rapid pace earlier core inflation in 2019, reflecting projected declines in in the year. On a 12-month basis, both overall inflaenergy prices, and then to run at the same level as tion and inflation for items other than food and core inflation over the following two years. The energy remained near 2 percent. Indicators of staff’s medium-term projections for both total and longer-term inflation expectations were little changed core PCE price inflation were little revised on net. on balance. The staff viewed the uncertainty around its projec- In assessing the economic outlook, participants tions for real GDP growth, the unemployment rate, noted the contrast between the strength of incoming and inflation as similar to the average of the past data on economic activity and the concerns about 20 years. The staff also saw the risks to the forecasts downside risks evident in financial markets and in for real GDP growth and the unemployment rate as reports from business contacts. Recent readings on balanced. On the upside, household spending and household and business spending, inflation, and business investment could expand faster than the labor market conditions were largely in line with parstaff projected, supported in part by the tax cuts ticipants’ expectations and indicated continued enacted last year. On the downside, trade policies and strength of the economy. By contrast, financial marforeign economic developments could move in direc- kets were volatile and conditions had tightened over tions that have significant negative effects on U.S. the intermeeting period, with sizable declines in economic growth. Risks to the inflation projection equity prices and notably wider corporate credit also were seen as balanced. The upside risk that infla- spreads coinciding with a continued flattening of the tion could increase more than expected in an Treasury yield curve; in part, these changes in finaneconomy that was projected to move further above its cial conditions appeared to reflect greater concerns potential was counterbalanced by the downside risk about the global economic outlook. Participants also that longer-term inflation expectations may be lower reported hearing more frequent concerns about the than was assumed in the staff forecast. global economic outlook from business contacts. Participants’ Views on Current Conditions After taking into account incoming economic data, and the Economic Outlook information from business contacts, and the tightening of financial conditions, participants generally In conjunction with this FOMC meeting, members revised down their individual assessments of the of the Board of Governors and Federal Reserve appropriate path for monetary policy and indicated Bank presidents submitted their projections of the either no material change or only a modest downmost likely outcomes for real GDP growth, the ward revision in their assessment of the economic unemployment rate, and inflation for each year from outlook. Economic growth was expected to remain 2018 through 2021 and over the longer run, based on above trend in 2019 and then slow to a pace closer to

268 105th Annual Report | 2018 trend over the medium term. Participants who down- pants cited a few recent favorable developments, graded their assessment of the economic outlook including new trade mitigation payments as well as pointed to a variety of factors underlying their legislative action to maintain crop insurance that was assessment, including recent financial market devel- seen as reducing uncertainty. opments, some softening in the foreign economic growth outlook, or a more pessimistic outlook for Participants agreed that labor market conditions had housing-sector activity. remained strong. Payrolls continued to grow at an above-trend rate in November, and measures of labor In their discussion of the household sector, partici- market tightness such as rates of job openings and pants generally characterized real PCE growth as quits continued to be elevated. The unemployment remaining strong. Participants pointed to a number rate remained at a historically low level in November, of factors that were supporting consumer spending, and the labor force participation rate stayed steady, including further gains in wages and household which represented an improvement relative to its income reflecting a strong labor market, expansion- gradual downward-sloping underlying trend. Several ary federal tax policies, still-upbeat readings on con- participants observed that labor force participation sumer sentiment, recent declines in oil prices, and had been improving for low-skilled workers and for household balance sheets that generally remained prime-age workers. A couple of participants saw healthy despite tighter financial conditions. Although scope for further improvements in the labor force household spending overall was seen as strong, sev- participation rate relative to its historical downward eral participants noted continued weakness in resi- trend, while a couple of others judged that there was dential investment. This weakness was attributed to a little scope for significant further improvements. variety of factors, including increased mortgage rates and rising home prices. Reports from District con- Contacts in many Districts continued to report tight tacts in the auto sector were mixed. labor markets with difficulties finding qualified workers. In some cases, firms were responding to these dif- Several participants noted that business fixed invest- ficulties by using various types of nonwage incentives ment remained solid despite a slowdown in the third to attract and retain workers, while in other cases, quarter, as more recent data pointed to a rebound in firms were responding by raising wages. Many parinvestment spending. Business contacts in several ticipants observed that, at the national level, most Districts reported robust activity through the end of measures of nominal wage growth had risen and were 2018 and planned to follow through or expand on currently at levels that were broadly in line with their current capital expenditure projects. However, trends in productivity growth and inflation. contacts in a number of Districts appeared less upbeat than at the time of the November meeting, as Participants observed that both overall and core PCE concerns about a variety of factors—including trade price inflation remained near 2 percent on a policy, waning fiscal stimulus, slowing global eco- 12-month basis, but that core inflation had edged nomic growth, or financial market volatility—were lower in recent months. A few participants noted that reportedly beginning to weigh on business sentiment. the recent declines in energy prices would likely only A couple of participants commented that the recent temporarily weigh on headline inflation. Several pardecline in oil prices could be a sign of a weakening in ticipants remarked that longer-term TIPS-based global demand that could weigh on capital spending inflation compensation had declined notably since by oil production companies and affect companies November, concurrent with both falling oil prices providing services to the oil industry. However, a and a deterioration in investor risk sentiment. A few couple of participants noted that the recent oil price participants pointed to the decline in longer-term decline could also be associated with increasing oil inflation compensation as an indication that longersupply rather than softening global demand. run inflation expectations may have edged lower, while several others cited survey-based measures as Contacts in the agricultural sector reported that con- suggesting that longer-run expectations likely ditions remained depressed, in part because of the remained anchored. Participants generally continued effects of trade policy actions on exports and farm to view recent price developments as consistent with incomes, uncertainty about future trade agreements, their expectation that inflation would remain near and continued low commodity prices. Banks contin- the Committee’s symmetric 2 percent objective on a ued to report a gradual increase in agricultural loan sustained basis. Although a few participants pointed delinquencies in recent months. Nonetheless, partici- to anecdotal and survey evidence indicating rising

Minutes of Federal Open Market Committee Meetings | December 269 input costs and pass-through of these higher costs to In their consideration of monetary policy at this meetconsumer prices, reports from business contacts and ing, participants generally judged that the economy surveys in some other Districts suggested some mod- was evolving about as anticipated, with real economic eration in inflationary pressure. activity rising at a strong rate, labor market conditions continuing to strengthen, and inflation near the Com- In their discussion of financial developments, partici- mittee’s objective. Based on their current assessments, pants agreed that financial markets had been volatile most participants expressed the view that it would be and financial conditions had tightened over the inter- appropriate for the Committee to raise the target range meeting period, as equity prices declined, corporate for the federal funds rate 25 basis points at this meetcredit spreads widened, and the Treasury yield curve ing. A few participants, however, favored no change in continued to flatten. Some participants commented the target range at this meeting, judging that the that these developments may reflect an increased focus absence of signs of upward inflation pressure afforded among market participants on tail risks such as a the Committee some latitude to wait and see how the sharp escalation of trade tensions or could be a signal data would develop amid the recent rise in financial of a significant slowdown in the pace of economic market volatility and increased uncertainty about the growth in the future. A couple of participants noted global economic growth outlook. that the tightening in financial conditions so far did not appear to be restraining real activity, although a With regard to the outlook for monetary policy more persistent tightening would undoubtedly weigh beyond this meeting, participants generally judged on business and household spending. Participants that some further gradual increases in the target agreed to continue to monitor financial market develrange for the federal funds rate would most likely be opments and assess the implications of these developconsistent with a sustained economic expansion, ments for the economic outlook. strong labor market conditions, and inflation near 2 percent over the medium term. With an increase in Participants commented on a number of risks associthe target range at this meeting, the federal funds rate ated with their outlook for economic activity, the labor would be at or close to the lower end of the range of market, and inflation over the medium term. Various estimates of the longer-run neutral interest rate, and factors that could pose downside risks for domestic participants expressed that recent developments, economic growth and inflation were mentioned, including the volatility in financial markets and the including the possibilities of a sharper-than-expected increased concerns about global growth, made the slowdown in global economic growth, a more rapid appropriate extent and timing of future policy firmwaning of fiscal stimulus, an escalation in trade tening less clear than earlier. Against this backdrop, sions, a further tightening of financial conditions, or many participants expressed the view that, especially greater-than-anticipated negative effects from the monin an environment of muted inflation pressures, the etary policy tightening to date. A few participants Committee could afford to be patient about further expressed concern that longer-run inflation expectapolicy firming. A number of participants noted that, tions would remain low, particularly if economic before making further changes to the stance of growth slowed more than expected. With regard to policy, it was important for the Committee to assess upside risks, participants noted that the effects of fiscal factors such as how the risks that had become more stimulus could turn out to be greater than expected pronounced in recent months might unfold and to and the uncertainties surrounding trade tensions or the what extent they would affect economic activity, and global growth outlook could be resolved favorably, the effects of past actions to remove policy accomleading to stronger-than-expected economic outcomes, modation, which were likely still working their way while a couple of participants suggested that tightenthrough the economy. ing resource utilization in conjunction with an increase in the ability of firms to pass through increases in Participants emphasized that the Committee’s input costs to consumer prices could generate undesirapproach to setting the stance of policy should be able upward pressure on inflation. A couple of particiimportantly guided by the implications of incoming pants pointed to risks to financial stability stemming data for the economic outlook. They noted that their from high levels of corporate borrowing, especially by expectations for the path of the federal funds rate were riskier firms, and elevated CRE prices. In general, parbased on their current assessment of the economic ticipants agreed that risks to the outlook appeared outlook. Monetary policy was not on a preset course; roughly balanced, although some noted that downside neither the pace nor the ultimate endpoint of future risks may have increased of late.

270 105th Annual Report | 2018 rate increases was known. If incoming information nomic activity, strong labor market conditions, and prompted meaningful reassessments of the economic inflation near the Committee’s symmetric 2 percent outlook and attendant risks, either to the upside or the objective over the medium term. downside, their policy outlook would change. Various factors, such as the recent tightening in financial condi- After assessing current conditions and the outlook tions and risks to the global outlook, on the one hand, for economic activity, the labor market, and inflation, and further indicators of tightness in labor markets members decided to raise the target range for the fedand possible risks to financial stability from a pro- eral funds rate to 2¼ to 2½ percent. Members agreed longed period of tight resource utilization, on the that the timing and size of future adjustments to the other hand, were noted in this context. target range for the federal funds rate would depend on their assessment of realized and expected eco- Participants discussed ideas for effectively communi- nomic conditions relative to the Committee’s maxicating to the public the Committee’s data-dependent mum employment and symmetric 2 percent inflation approach, including options for transitioning away objectives. They reiterated that this assessment would from forward guidance language in future postmeet- take into account a wide range of information, ing statements. Several participants expressed the including measures of labor market conditions, indiview that it might be appropriate over upcoming cators of inflation pressures and inflation expectameetings to remove forward guidance entirely and tions, and readings on financial and international replace it with language emphasizing the data- developments. More generally, members noted that dependent nature of policy decisions. decisions regarding near-term adjustments of the stance of monetary policy would appropriately Participants supported a plan to implement another remain dependent on the evolution of the outlook as technical adjustment to the IOER rate that would informed by incoming data. place it 10 basis points below the top of the target range for the federal funds rate. This adjustment With regard to the postmeeting statement, members would foster trading in the federal funds market at agreed to modify the phrase “the Committee expects rates well within the FOMC’s target range. that further gradual increases” to read “the Committee judges that some further gradual increases.” The Committee Policy Action use of the word “judges” in the revised phrase was intended to better convey the data-dependency of the In their discussion of monetary policy for the period Committee’s decisions regarding the future stance of ahead, members judged that information received policy; the reference to “some” further gradual since the Committee met in November indicated that increases was viewed as helping indicate that, based the labor market had continued to strengthen and on current information, the Committee judged that a that economic activity had been rising at a strong relatively limited amount of additional tightening rate. Job gains had been strong, on average, in recent likely would be appropriate. While members judged months, and the unemployment rate had remained that the risks to the economic outlook were roughly low. Household spending had continued to grow balanced, they decided that recent developments warstrongly, while growth of business fixed investment ranted emphasizing that the Committee would “conhad moderated from its rapid pace earlier in the year. tinue to monitor global economic and financial devel- On a 12-month basis, both overall inflation and infla- opments and assess their implications for the ecotion for items other than food and energy remained nomic outlook.” near 2 percent. Indicators of longer-term inflation expectations were little changed, on balance. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Members generally judged that the economy had Bank of New York, until instructed otherwise, to been evolving about as they had anticipated at the execute transactions in the SOMA in accordance previous meeting. Though financial conditions had with the following domestic policy directive, to be tightened and global growth had moderated, mem- released at 2:00 p.m.: bers generally anticipated that growth would remain above trend and the labor market would remain “Effective December 20, 2018, the Federal Open strong. Members judged that some further gradual Market Committee directs the Desk to underincreases in the target range for the federal funds rate take open market operations as necessary to would be consistent with sustained expansion of eco- maintain the federal funds rate in a target range

Minutes of Federal Open Market Committee Meetings | December 271 of 2¼ to 2½ percent, including overnight reverse cators of longer-term inflation expectations are repurchase operations (and reverse repurchase little changed, on balance. operations with maturities of more than one day when necessary to accommodate weekend, holi- Consistent with its statutory mandate, the Comday, or similar trading conventions) at an offer- mittee seeks to foster maximum employment and ing rate of 2.25 percent, in amounts limited only price stability. The Committee judges that some by the value of Treasury securities held outright further gradual increases in the target range for in the System Open Market Account that are the federal funds rate will be consistent with susavailable for such operations and by a per- tained expansion of economic activity, strong counterparty limit of $30 billion per day. labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over The Committee directs the Desk to continue the medium term. The Committee judges that rolling over at auction the amount of principal risks to the economic outlook are roughly balpayments from the Federal Reserve’s holdings of anced, but will continue to monitor global eco- Treasury securities maturing during each calen- nomic and financial developments and assess dar month that exceeds $30 billion, and to con- their implications for the economic outlook. tinue reinvesting in agency mortgage-backed securities the amount of principal payments In view of realized and expected labor market from the Federal Reserve’s holdings of agency conditions and inflation, the Committee decided debt and agency mortgage-backed securities to raise the target range for the federal funds received during each calendar month that rate to 2¼ to 2½ percent. exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable. In determining the timing and size of future adjustments to the target range for the federal The Committee also directs the Desk to engage funds rate, the Committee will assess realized in dollar roll and coupon swap transactions as and expected economic conditions relative to its necessary to facilitate settlement of the Federal maximum employment objective and its sym- Reserve’s agency mortgage-backed securities metric 2 percent inflation objective. This assesstransactions.” ment will take into account a wide range of information, including measures of labor market The vote also encompassed approval of the statement conditions, indicators of inflation pressures and below to be released at 2:00 p.m.: inflation expectations, and readings on financial and international developments.” “Information received since the Federal Open Market Committee met in November indicates Voting for this action: Jerome H. Powell, John C. that the labor market has continued to strengthen Williams, Thomas I. Barkin, Raphael W. Bostic, and that economic activity has been rising at a Michelle W. Bowman, Lael Brainard, Richard H. strong rate. Job gains have been strong, on aver- Clarida, Mary C. Daly, Loretta J. Mester, and age, in recent months, and the unemployment rate Randal K. Quarles. has remained low. Household spending has continued to grow strongly, while growth of business Voting against this action: None. fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, To support the Committee’s decision to raise the target both overall inflation and inflation for items other range for the federal funds rate, the Board of Goverthan food and energy remain near 2 percent. Indi- nors voted unanimously to raise the interest rates on

272 105th Annual Report | 2018 required and excess reserve balances to 2.40 percent, It was agreed that the next meeting of the Committee effective December 20, 2018. The Board of Governors would be held on Tuesday–Wednesday, January 29– also voted unanimously to approve a ¼ percentage 30, 2019. The meeting adjourned at 10:50 a.m. on point increase in the primary credit rate (discount rate) December 19, 2018. to 3.00 percent, effective December 20, 2018.6 Notation Vote 6 In taking this action, the Board approved requests to establish that rate submitted by the boards of directors of the Federal By notation vote completed on November 28, 2018, Reserve Banks of Boston, Cleveland, Richmond, Atlanta, Chithe Committee unanimously approved the minutes of cago, and San Francisco. This vote also encompassed approval by the Board of Governors of the establishment of a 3.00 per- the Committee meeting held on November 7–8, 2018. cent primary credit rate by the remaining Federal Reserve Banks, effective on the later of December 20, 2018, and the date James A. Clouse such Reserve Banks informed the Secretary of the Board of such a request. (Secretary’s note: Subsequently, the Federal Secretary Reserve Banks of New York, Philadelphia, St. Louis, Minneapolis, Kansas City, and Dallas were informed by the Secretary of the Board’s approval of their establishment of a primary credit rate of 3.00 percent, effective December 20, 2018.) The establishment of the interest rates for secondary and seasonal second vote of the Board also encompassed approval of the credit under the existing formulas for computing such rates.

Minutes of Federal Open Market Committee Meetings | December 273 Addendum: for real GDP growth and inflation in 2019. Table 1 and figure 1 provide summary statistics for the Summary of Economic Projections projections. In conjunction with the Federal Open Market Com- As shown in figure 2, participants generally continmittee (FOMC) meeting held on December 18–19, ued to expect that the evolution of the economy, rela- 2018, meeting participants submitted their projective to their objectives of maximum employment and tions of the most likely outcomes for real gross 2 percent inflation, would likely warrant some further domestic product (GDP) growth, the unemployment gradual increases in the federal funds rate. Compared rate, and inflation for each year from 2018 to 2021 with the September submissions, the median projecand over the longer run.1 Each participant’s projections for the federal funds rate for the end of 2019 tions were based on information available at the time through 2021 and over the longer run were a little of the meeting, together with his or her assessment of lower. Most participants expected that the federal appropriate monetary policy—including a path for funds rate at the end of 2020 and 2021 would be the federal funds rate and its longer-run value—and modestly higher than their estimate of its level over assumptions about other factors likely to affect ecothe longer run; however, many marked down the nomic outcomes. The longer-run projections repreextent to which it would exceed their estimate of the sent each participant’s assessment of the value to longer-run level relative to their September which each variable would be expected to converge, projections. over time, under appropriate monetary policy and in the absence of further shocks to the economy.2 On balance, participants continued to view the uncer- “Appropriate monetary policy” is defined as the tainty around their projections as broadly similar to future path of policy that each participant deems the average of the past 20 years. While most particimost likely to foster outcomes for economic activity pants viewed the risks to the outlook as balanced, a and inflation that best satisfy his or her individual couple more participants than in September saw risks interpretation of the statutory mandate to promote to real GDP growth as weighted to the downside, and maximum employment and price stability. one less participant viewed the risks to inflation as weighted to the upside. All participants who submitted longer-run projections expected that, under appropriate monetary The Outlook for Economic Activity policy, growth in real GDP in 2019 would run somewhat above their individual estimate of its longer-run The median of participants’ projections for the rate. Most participants continued to expect real GDP growth rate of real GDP for 2019, conditional on growth to slow throughout the projection horizon, their individual assessment of appropriate monetary with a majority of participants projecting growth in policy, was 2.3 percent, slower than the 3.0 percent 2021 to be a little below their estimate of its longer- pace expected for 2018. Most participants continued run rate. Almost all participants who submitted to expect GDP growth to slow throughout the prolonger-run projections continued to expect that the jection horizon, with the median projection at unemployment rate would run below their estimate 2.0 percent in 2020 and at 1.8 percent in 2021, a of its longer-run level through 2021. Most partici- touch lower than the median estimate of its longerpants projected that inflation, as measured by the run rate of 1.9 percent. Relative to the September four-quarter percentage change in the price index for SEP, the medians of the projections for real GDP personal consumption expenditures (PCE), would growth for 2018 and 2019 were slightly lower, while increase slightly over the next two years, and nearly the median for the longer-run rate of growth was a all participants expected that it would be at or bit higher. Several participants mentioned tighter slightly above the Committee’s 2 percent objective in financial conditions or a softer global economic out- 2020 and 2021. Compared with the Summary of look as factors behind the downward revisions to Economic Projections (SEP) from September, many their near-term growth estimates. participants marked down slightly their projections The median of projections for the unemployment 1 Five members of the Board of Governors, one more than in rate in the fourth quarter of 2019 was 3.5 percent, September 2018, were in office at the time of the Decemunchanged from the September SEP and almost ber 2018 meeting and submitted economic projections. 1 percentage point below the median assessment of 2 One participant did not submit longer-run projections for real GDP growth, the unemployment rate, or the federal funds rate. its longer-run normal level. With participants gener-

274 105th Annual Report | 2018 Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assessments of projected appropriate monetary policy, December 2018 Percent Median1 Central tendency2 R ange3 Variable Longer Longer L onger 2 018 2019 2020 2021 run 2018 2019 2020 2021 run 2 018 2 019 2 020 2 021 run Change in real GDP 3.0 2.3 2.0 1.8 1.9 3.0–3.1 2.3–2.5 1.8–2.0 1.5–2.0 1.8–2.0 3 .0–3.1 2 .0–2.7 1 .5–2.2 1 .4–2.1 1 .7–2.2 September projection 3.1 2.5 2.0 1.8 1.8 3.0–3.2 2.4–2.7 1.8–2.1 1.6–2.0 1.8–2.0 2 .9–3.2 2 .1–2.8 1 .7–2.4 1 .5–2.1 1 .7–2.1 Unemployment rate 3.7 3.5 3.6 3.8 4.4 3.7 3.5–3.7 3.5–3.8 3.6–3.9 4.2–4.5 3 .7 3 .4–4.0 3 .4–4.3 3 .4–4.2 4 .0–4.6 September projection 3.7 3.5 3.5 3.7 4.5 3.7 3.4–3.6 3.4–3.8 3.5–4.0 4.3–4.6 3 .7–3.8 3 .4–3.8 3 .3–4.0 3 .4–4.2 4 .0–4.6 PCE inflation 1.9 1.9 2.1 2.1 2.0 1.8–1.9 1.8–2.1 2.0–2.1 2.0–2.1 2.0 1 .8–1.9 1 .8–2.2 2 .0–2.2 2 .0–2.3 2 .0 September projection 2.1 2.0 2.1 2.1 2.0 2.0–2.1 2.0–2.1 2.1–2.2 2.0–2.2 2.0 1 .9–2.2 2 .0–2.3 2 .0–2.2 2 .0–2.3 2 .0 Core PCE inflation4 1.9 2.0 2.0 2.0 1.8–1.9 2.0–2.1 2.0–2.1 2.0–2.1 1 .8–1.9 1 .9–2.2 2 .0–2.2 2 .0–2.3 September projection 2.0 2.1 2.1 2.1 1.9–2.0 2.0–2.1 2.1–2.2 2.0–2.2 1 .9–2.0 2 .0–2.3 2 .0–2.2 2 .0–2.3 Memo: Projected appropriate policy path Federal funds rate 2.4 2.9 3.1 3.1 2.8 2.4 2.6–3.1 2.9–3.4 2.6–3.1 2.5–3.0 2 .1–2.4 2 .4–3.1 2 .4–3.6 2 .4–3.6 2 .5–3.5 September projection 2.4 3.1 3.4 3.4 3.0 2.1–2.4 2.9–3.4 3.1–3.6 2.9–3.6 2.8–3.0 2 .1–2.4 2 .1–3.6 2 .1–3.9 2 .1–4.1 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 September projections were made in conjunction with the meeting of the Federal Open Market Committee on September 25–26, 2018. 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 25–26, 2018, meeting, and one participant did not submit such projections in conjunction with the December 18–19, 2018, meeting. 1 For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the average of the two middle projections. 2 The central tendency excludes the three highest and three lowest projections for each variable in each year. 3 The range for a variable in a given year includes all participants’ projections, from lowest to highest, for that variable in that year. 4 Longer-run projections for core PCE inflation are not collected.

Minutes of Federal Open Market Committee Meetings | December 275 Figure 1. Medians, central tendencies, and ranges of economic projections, 2018–21 and over the longer run Percent Change in real GDP Median of projections Central tendency of projections Range of projections 3 Actual 2 1 2013 2014 2015 2016 2017 2018 2019 2020 2021 Longer run Percent Unemployment rate 7 6 5 4 3 2013 2014 2015 2016 2017 2018 2019 2020 2021 Longer run Percent PCE inflation 3 2 1 2013 2014 2015 2016 2017 2018 2019 2020 2021 Longer run Percent Core PCE inflation 3 2 1 2013 2014 2015 2016 2017 2018 2019 2020 2021 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.

276 105th Annual Report | 2018 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 2018 2019 2020 2021 Longer run Note: Each shaded circle indicates the value (rounded to the nearest ⅛ percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. One participant did not submit longer-run projections for the federal funds rate.

Minutes of Federal Open Market Committee Meetings | December 277 ally continuing to expect the unemployment rate to Appropriate Monetary Policy bottom out in 2019 or 2020, the median projections for 2020 and 2021 edged back up to 3.6 percent and Figure 3.E shows distributions of participants’ judg- 3.8 percent, respectively. Nevertheless, most partici- ments regarding the appropriate target—or midpoint pants continued to project that the unemployment of the target range—for the federal funds rate at the rate in 2021 would still be well below their estimates end of each year from 2018 to 2021 and over the lonof its longer-run level. The median estimate of the ger run. The distributions for 2019 through 2021 longer-run normal rate of unemployment was were less dispersed and shifted slightly toward lower slightly lower than in September. values. Compared with the projections prepared for the September SEP, the median federal funds rate Figures 3.A and 3.B show the distributions of par- was 25 basis points lower over the 2019–21 period. ticipants’ projections for real GDP growth and the For the end of 2019, the median of federal funds rate unemployment rate from 2018 to 2021 and in the lon- projections was 2.88 percent, consistent with two ger run. The distributions of individual projections 25 basis point rate increases over the course of 2019. for real GDP growth for 2019 and 2020 shifted down Thereafter, the medians of the projections were relative to those in the September SEP, while the dis- 3.13 percent at the end of 2020 and 2021. Most partributions for 2021 and for the longer-run rate of ticipants expected that the federal funds rate at the GDP growth were little changed. The distribution of end of 2020 and 2021 would be modestly higher than individual projections for the unemployment rate in their estimate of its level over the longer run; how- 2019 was a touch more dispersed relative to the dis- ever, many marked down the extent to which it would tribution of the September projections; the distribu- exceed their estimate of the longer-run level relative tion moved slightly higher for 2020, while the distri- to their September projections. The median of the bution for the longer-run normal rate shifted toward longer-run projections of the federal funds rate was the lower end of its range. 2.75 percent, 25 basis points lower than in September. The Outlook for Inflation In discussing their projections, many participants The median of projections for total PCE price infla- continued to express the view that any further tion was 1.9 percent in 2019, a bit lower than in the increases in the federal funds rate over the next few September SEP, while the medians for 2020 and 2021 years would likely be gradual. That anticipated pace were 2.1 percent, the same as in the previous projec- reflected a few factors, such as a short-term neutral tions. The medians of projections for core PCE price real interest rate that is currently low and an inflation inflation over the 2019–21 period were 2.0 percent, a rate that has been rising only gradually to the Comtouch lower than in September. Some participants mittee’s 2 percent objective. Some participants cited a pointed to softer incoming data or recent declines in weaker near-term trajectory for economic growth or oil prices as reasons for shaving their projections for a muted response of inflation to tight labor market inflation. conditions as factors contributing to the downward revisions in their assessments of the appropriate path Figures 3.C and 3.D provide information on the dis- for the policy rate. tributions of participants’ views about the outlook for inflation. On the whole, the distributions of pro- Uncertainty and Risks jections for total PCE price inflation and core PCE price inflation beyond this year either shifted slightly In assessing the appropriate path of the federal funds to the left or were unchanged relative to the Septem- rate, FOMC participants take account of the range ber SEP. Most participants revised down slightly of possible economic outcomes, the likelihood of their projections of total PCE price inflation for those outcomes, and the potential benefits and costs 2019. All participants expected that total PCE price should they occur. As a reference, table 2 provides inflation would be in a range from 2.0 to 2.3 percent measures of forecast uncertainty—based on the forein 2020 and 2021. Most participants projected that cast errors of various private and government forecore PCE inflation would run at 2.0 to 2.1 percent casts over the past 20 years—for real GDP growth, throughout the projection horizon. the unemployment rate, and total PCE price infla-

278 105th Annual Report | 2018 Figure 3.A. Distribution of participants’ projections for the change in real GDP, 2018–21 and over the longer run Number of participants 2018 December projections 18 September 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 – 2.8 – 3.0 – 3.2 – 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 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 – 2.8 – 3.0 – 3.2 – 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 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 – 2.8 – 3.0 – 3.2 – 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Percent range Number of participants 2021 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 – 2.8 – 3.0 – 3.2 – 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.2 – 1.4 – 1.6 – 1.8 – 2.0 – 2.2 – 2.4 – 2.6 – 2.8 – 3.0 – 3.2 – 1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | December 279 Figure 3.B. Distribution of participants’ projections for the unemployment rate, 2018–21 and over the longer run Number of participants 2018 December projections 18 September projections 16 14 12 10 8 6 4 2 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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 2021 18 16 14 12 10 8 6 4 2 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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 3.0 – 3.2 – 3.4 – 3.6 – 3.8 – 4.0 – 4.2 – 4.4 – 4.6 – 4.8 – 5.0 – 3.1 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.

280 105th Annual Report | 2018 Figure 3.C. Distribution of participants’ projections for PCE inflation, 2018–21 and over the longer run Number of participants 2018 December projections 18 September projections 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants 2021 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 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 281 Figure 3.D. Distribution of participants’ projections for core PCE inflation, 2018–21 Number of participants 2018 December projections 18 September projections 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Number of participants 2021 18 16 14 12 10 8 6 4 2 1.7– 1.9 – 2.1– 2.3 – 1.8 2.0 2.2 2.4 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

282 105th Annual Report | 2018 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, 2018–21 and over the longer run Number of participants 2018 December projections 18 September projections 16 14 12 10 8 6 4 2 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 – 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Number of participants 2019 18 16 14 12 10 8 6 4 2 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 – 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Number of participants 2020 18 16 14 12 10 8 6 4 2 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 – 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Number of participants 2021 18 16 14 12 10 8 6 4 2 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 – 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Number of participants Longer run 18 16 14 12 10 8 6 4 2 1.88 – 2.13 – 2.38 – 2.63 – 2.88 – 3.13 – 3.38 – 3.63 – 3.88 – 4.13 – 4.38 – 4.63 – 4.88 – 2.12 2.37 2.62 2.87 3.12 3.37 3.62 3.87 4.12 4.37 4.62 4.87 5.12 Percent range Note: Definitions of variables and other explanations are in the notes to table 1.

Minutes of Federal Open Market Committee Meetings | December 283 tember viewed the uncertainty around the unemploy- Table 2. Average historical projection error ranges ment rate as higher than average. Percentage points Because the fan charts are constructed to be symmet- Variable 2018 2019 2020 2021 ric around the median projections, they do not reflect Change in real GDP1 ±0.8 ±1.6 ±2.1 ±2.1 any asymmetries in the balance of risks that partici- Unemployment rate1 ±0.1 ±0.8 ±1.5 ±1.9 pants may see in their economic projections. Partici- Total consumer prices2 ± 0.2 ±1.0 ±1.0 ±1.0 Short-term interest rates3 ±0.1 ±1.4 ±2.0 ±2.4 pants’ assessments of the balance of risks to their economic projections are shown in the bottom-right Note: Error ranges shown are measured as plus or minus the root mean squared panels of figures 4.A, 4.B, and 4.C. Most particierror of projections for 1998 through 2017 that were released in the winter by various private and government forecasters. As described in the box “Forecast pants generally judged the risks to the outlook for Uncertainty,” under certain assumptions, there is about a 70 percent probability real GDP growth, the unemployment rate, headline that actual outcomes for real GDP, unemployment, consumer prices, and the federal funds rate will be in ranges implied by the average size of projection inflation, and core inflation as broadly balanced—in errors made in the past. For more information, see David Reifschneider and Peter other words, as broadly consistent with a symmetric Tulip (2017), “Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting Errors: The Federal Reserve’s Approach,” Finance and Economics fan chart. Two more participants than in September Discussion Series 2017-020 (Washington: Board of Governors of the Federal saw the risks to real GDP growth as weighted to the Reserve System, February), https://dx.doi.org/10.17016/FEDS.2017.020. 1 Definitions of variables are in the general note to table 1. downside, and one less judged the risks as weighted 2 Measure is the overall consumer price index, the price measure that has been to the upside. The balance of risks to the projection most widely used in government and private economic forecasts. Projections for the unemployment rate was unchanged, with are percent changes on a fourth quarter to fourth quarter basis. 3 For Federal Reserve staff forecasts, measure is the federal funds rate. For other three participants judging the risks to the unemployforecasts, measure is the rate on 3-month Treasury bills. Projection errors are ment rate as weighted to the downside and two parcalculated using average levels, in percent, in the fourth quarter. ticipants viewing the risks as weighted to the upside. In addition, the balance of risks to the inflation projections shifted down slightly relative to September, tion. Those measures are represented graphically in as one less participant judged the risks to both total the “fan charts” shown in the top panels of figures and core inflation as weighted to the upside and one 4.A, 4.B, and 4.C. The fan charts display the median more participant viewed the risks as weighted to the SEP projections for the three variables surrounded by downside. symmetric confidence intervals derived from the forecast errors reported in table 2. If the degree of uncer- In discussing the uncertainty and risks surrounding tainty attending these projections is similar to the their economic projections, participants mentioned typical magnitude of past forecast errors and the trade tensions as well as financial and foreign ecorisks around the projections are broadly balanced, nomic developments as sources of uncertainty or then future outcomes of these variables would have downside risk to the growth outlook. For the inflaabout a 70 percent probability of being within these tion outlook, the effects of trade restrictions were confidence intervals. For all three variables, this cited as upside risks and lower energy prices and the measure of uncertainty is substantial and generally stronger dollar as downside risks. Those who comincreases as the forecast horizon lengthens. mented on U.S. fiscal policy viewed it as an additional source of uncertainty and noted that it might Participants’ assessments of the level of uncertainty present two-sided risks to the outlook, as its effects surrounding their individual economic projections could be waning faster than expected or turn out to are shown in the bottom-left panels of figures 4.A, be more stimulative than anticipated. 4.B, and 4.C. Participants generally continued to view the degree of uncertainty attached to their eco- Participants’ assessments of the appropriate future nomic projections for real GDP growth and inflation path of the federal funds rate were also subject to as broadly similar to the average of the past considerable uncertainty. Because the Committee 20 years.3 A couple more participants than in Sepadjusts the federal funds rate in response to actual and prospective developments over time in real GDP 3 At the end of this summary, the box “Forecast Uncertainty” growth, the unemployment rate, and inflation, uncerdiscusses the sources and interpretation of uncertainty sur- tainty surrounding the projected path for the federal rounding the economic forecasts and explains the approach funds rate importantly reflects the uncertainties used to assess the uncertainty and risks attending the participants’ projections. about the paths for those key economic variables

284 105th Annual Report | 2018 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 Actual 2 1 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 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.”

Minutes of Federal Open Market Committee Meetings | December 285 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 2013 2014 2015 2016 2017 2018 2019 2020 2021 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.”

286 105th Annual Report | 2018 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 2013 2014 2015 2016 2017 2018 2019 2020 2021 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.”

Minutes of Federal Open Market Committee Meetings | December 287 along with other factors. Figure 5 provides a graphi- results presented in table 2. As with the macroecocal representation of this uncertainty, plotting the nomic variables, the forecast uncertainty surrounding median SEP projection for the federal funds rate sur- the appropriate path of the federal funds rate is subrounded by confidence intervals derived from the stantial and increases for longer horizons.

288 105th Annual Report | 2018 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 1 Actual 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 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 289 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 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 associciated 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 prodconfidence 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 perprojections 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 2.2 to 3.8 percent in the current funds rate generated by the uncertainty about the year, 1.4 to 4.6 percent in the second year, and 0.9 to macroeconomic variables as well as additional 5.1 percent in the third and fourth years. The correadjustments to monetary policy that would be approsponding 70 percent confidence intervals for overall priate to offset the effects of shocks to the economy. inflation would be 1.8 to 2.2 percent in the current year and 1.0 to 3.0 percent in the second, third, and If at some point in the future the confidence interval fourth years. Figures 4.A through 4.C illustrate these around the federal funds rate were to extend below confidence bounds in “fan charts” that are symmetric zero, it would be truncated at zero for purposes of and centered on the medians of FOMC participants’ the fan chart shown in figure 5; zero is the bottom of projections for GDP growth, the unemployment rate, the lowest target range for the federal funds rate that and inflation. However, in some instances, the risks has been adopted by the Committee in the past. This around the projections may not be symmetric. In par- approach to the construction of the federal funds rate ticular, the unemployment rate cannot be negative; fan chart would be merely a convention; it would not furthermore, the risks around a particular projection have any implications for possible future policy decimight be tilted to either the upside or the downside, sions regarding the use of negative interest rates to in which case the corresponding fan chart would be provide additional monetary policy accommodation if asymmetrically positioned around the median doing so were appropriate. In such situations, the projection. Committee could also employ other tools, including forward guidance and asset purchases, to provide Because current conditions may differ from those additional accommodation. that prevailed, on average, over history, participants provide judgments as to whether the uncertainty While figures 4.A through 4.C provide information on attached to their projections of each economic vari- the uncertainty around the economic projections, able is greater than, smaller than, or broadly similar figure 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.

291 10 Litigation During 2018, the Board of Governors was a party in Resolved 7 lawsuits or appeals filed that year and was a party in 12 other cases pending from previous years, for a Ashton v. Board of Governors, No. 18-1033 (D.C. Cirtotal of 19 cases. In 2017, the Board had been a party cuit, filed January 29, 2018), was a petition for review in a total of 17 cases. As of December 31, 2018, of final enforcement order. On May 10, 2018, the 7 cases were pending. petition was voluntarily dismissed. BBX Capital Corporation v. FDIC, No. 17-cv-62317 Pending (S.D. Florida, filed November 22, 2017), was an action relating to golden parachute payments. On Baylor v. Powell, No. 17-cv-02647 (D. District of November 14, 2018, the district court granted the Columbia, filed December 11, 2017), is an employ- agencies’ motion for summary judgment. ment discrimination case. Board of Governors v. Afnani, No. 17-cv-00503 (E.D. Virginia, filed May 1, 2017), was a claim for recovery Burford v. Powell, No. 15-cv-02074 (D. District of of disability benefits. On February 1, 2018, judgment Columbia, filed December 1, 2015), is an employfor the Board was entered by consent of the parties. ment discrimination case. Community Financial Services Association of Center for Popular Democracy v. Board of Governors, America, Ltd., v. Board of Governors, No. 14-cv- No. 16-cv-5829 (E.D. New York, filed October 19, 00953 (D. District of Columbia, filed June 11, 2014), 2016), is an action under the Freedom of Informawas a challenge to actions of the Board, the Federal tion Act. Deposit Insurance Corporation, and the Office of the Comptroller of the Currency that allegedly disad- Garrett v. PennyMac Loan Services et al., No. 18vantage payday lenders. On September 24, 2018, the 00718 (M.D. Pennsylvania, filed April 11, 2018), is Board was dismissed as a defendant by stipulation of an action arising out of mortgage foreclosure. the parties. Jiampietro v. Board of Governors, No. 18-2806 (2d Crisman v. Board of Governors et al., No. 12-cv-1871 Circuit, filed September 21, 2018), was a petition for (D. District of Columbia, filed November 19, 2012), review of a Board order remanding an enforcement was a Freedom of Information Act case. On Septemaction for further proceedings before an administraber 18, 2018, the court dismissed all claims against tive law judge. On January 30, 2019, the court of the Board. appeals granted the Board’s motion to dismiss the petition. Dickson v. Board of Governors, No. 18-cv-00205 (W.D. Texas, notice of removal filed March 1, 2018), Mitchell v. Powell, No. 17-cv-00182 (D. District of was an action involving an allegedly fraudulent Columbia, filed January 27, 2017), is an employment check. On May 25, 2018, the district court granted discrimination case. the Board’s motion to dismiss. Richardson v. Powell, No. 14-cv-01673 (D. District of Handy v. Johnson & Johnson et al., No. 18-1008 Columbia, filed October 8, 2014), is an employment (4th Circuit, notice of appeal filed December 29, discrimination case. 2017), was an appeal of the dismissal of an action

292 105th Annual Report | 2018 arising out of employment at a Federal Reserve 2018, the petition was dismissed by stipulation of the Bank. The court of appeals affirmed the dismissal on parties. May 29, 2018, and the Supreme Court denied review on October 27, 2018. The Loan Syndications and Trading Association v. Board of Governors, No. 17-5004 (D.C. Circuit, Hardy v. Yellen, No. 16-cv-1572 (D. District of appeal docketed February 10, 2017), was an appeal of Columbia, filed August 2, 2016), was an employment a district court decision (223 F. Supp. 3d 37) upholddiscrimination action. On July 10, 2018, the district ing the credit-risk retention rules issued under seccourt granted the Board’s motion for summary tion 941 of the Dodd-Frank Wall Street Reform and judgment. Consumer Protection Act of 2010. On February 9, 2018, the court of appeals reversed and vacated the Jiampietro v. Board of Governors, No. 18-cv-04769 credit-risk retention rule insofar as it applied to (S.D. New York, filed May 30, 2018), was a manda- investment managers of open-market collateralized mus action filed by a respondent in an administrative loan obligations. enforcement case brought by the Board. On September 20, 2018, the action was dismissed by stipulation Richardson v. Board of Governors, No. 18-5063 (D.C. of the parties. Circuit, notice of appeal filed March 2, 2018), was an appeal of a district court order dismissing claims Jiampietro v. Board of Governors, No. 18-1989 (2d brought under the Federal Tort Claims Act, Privacy Circuit, filed July 5, 2018), was a petition for review Act, and Freedom of Information Act, among othof an interlocutory order temporarily staying an ers. On November 1, 2018, the court of appeals sumadministrative enforcement action. On September 20, marily affirmed the dismissal.

293 11 Statistical Tables Table 1. Federal Reserve open market transactions, 2018 Millions of dollars Type of security Jan. Feb. Mar. Apr. May June July Aug. Sept. O ct. N ov. D ec. T otal and transaction U .S. Treasury securities1 Outright transactions2 Treasury bills Gross purchases 0 0 0 0 0 0 0 100 0 0 0 0 100 Gross sales 0 0 0 0 0 0 0 0 0 47 0 0 47 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 53 0 53 Others 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 -18,945 -36,610 -19,201 -16,575 -36,706 -12,454 -7,436 -20,001 0 0 -29,220 0 -197,148 Redemptions 12,000 12,000 12,000 18,000 18,000 18,000 24,000 24,000 19,007 23,833 30,000 18,209 229,049 Over 1 to 5 years Gross purchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 11,836 20,273 14,039 12,815 19,459 8,717 4,961 11,901 0 0 16,063 0 120,118 Over 5 to 10 years Gross purchases 0 0 0 0 0 0 0 0 0 0 0 0 0 Gross sales 0 0 0 100 0 0 0 0 0 0 0 0 100 Exchanges 6,703 11,606 5,109 3,737 13,149 3,736 2,420 5,680 0 0 9,282 0 61,422 More than 10 years Gross purchases 0 100 0 0 0 0 0 0 0 0 0 0 100 Gross sales 0 0 0 0 0 0 0 0 0 0 0 0 0 Exchanges 406 4,731 0 22 4,098 0 54 2,420 0 0 3,875 0 15,606 All maturities Gross purchases 0 100 0 0 0 0 0 100 0 0 0 0 200 Gross sales 0 0 0 100 0 0 0 0 0 47 0 0 147 Redemptions 12,000 12,000 12,000 18,000 18,000 18,000 24,000 24,000 19,007 23,833 30,053 18,209 229,102 Net change in U.S. Treasury securities -12,000 -11,900 -12,000 -18,100 -18,000 -18,000 -24,000 -23,900 -19,007 -23,880 -30,053 -18,209 -229,049 Federal 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 0 0 0 0 1,982 0 0 0 0 0 0 1,982 Net change in federal agency obligations 0 0 0 0 0 -1,982 0 0 0 0 0 0 -1,982 Mortgage-backed securities3 Net settlements2 Net change in mortgage-backed securities -4,185 -772 -5,604 -9,396 -10,382 -13,318 -11,729 -12,537 -15,231 -12,787 -15,519 -16,346 -127,805 Total net change in securities holdings4 -16,185 -12,672 -17,604 -27,496 -28,382 -33,300 -35,729 -36,437 -34,238 -36,667 -45,572 -34,555 -358,836 (continued on next page)

294 105th Annual Report | 2018 Table 1.—continued Type of security Jan. Feb. Mar. Apr. May June July Aug. Sept. O ct. N ov. D ec. T otal and transaction T emporary transactions Repurchase agreements5 0 0 0 0 9 0 0 0 0 0 3 3 n/a Reverse repurchase agreements5 290,080 266,993 238,668 248,708 252,150 255,107 253,470 241,292 235,391 225,612 232,978 246,245 n/a Foreign official and international accounts 242,964 232,134 227,606 242,212 247,413 244,017 248,977 239,663 227,018 222,723 227,862 240,700 n/a Others 47,116 34,859 11,062 6,496 4,737 11,091 4,494 1,629 8,373 2,889 5,115 5,546 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 (https://www.federalreserve.gov/releases/h41/) for the maturity distribution of the securities. 1 Transactions exclude changes in compensation for the effects of inflation on the principal of inflation-indexed securities. Transactions include the rollover of inflation compensation into new securities. The maturity distributions of exchanged Treasury securities are based on the announced maturity of new securities rather than actual day counts. 2 Excludes the effect of temporary transactions—repurchase agreements and reverse repurchase agreements. 3 Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Monthly net change in the remaining principal balance of the securities, reported at face value. 4 The net change in securities holdings reflects the settlements of purchases, reinvestments, sales, and maturities of portfolio securities. 5 Averages of daily business cash value of agreements, which are collateralized by U.S. Treasury securities, federal agency debt securities, and mortgage-backed securities. For additional details on temporary transactions, see the temporary open market operations historical search available at https://apps.newyorkfed.org/markets/autorates/ tomo-search-page. n/a Not applicable.

Statistical Tables 295 Table 2. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities, December 31, 2016–18 Millions of dollars December 31 C hange Description 2018 2017 2016 2017–18 2 016–17 U.S. Treasury securities1 H eld outright2 2,222,547 2,454,208 2,463,616 - 231,661 -9,408 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 384,936 443,679 206,822 -58,743 236,857 More than 1 year through 5 years 958,065 1,077,270 1,224,348 - 119,205 - 147,078 More than 5 years through 10 years 260,898 310,375 399,277 -49,477 -88,902 More than 10 years 618,648 622,884 633,169 -4,236 -10,285 By type Bills 0 0 0 0 0 Notes 1,382,654 1,624,620 1,638,172 - 241,966 -13,552 Bonds 839,893 829,588 825,444 10,305 4,144 F ederal agency securities1 Held outright2 2,409 4,391 16,180 -1,982 -11,789 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 62 1,982 11,789 -1,920 -9,807 More than 1 year through 5 years 0 62 2,044 -62 -1,982 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 2,409 4,391 16,180 -1,982 -11,789 By issuer Federal Home Loan Mortgage Corporation 591 2,573 8,356 -1,982 -5,783 Federal National Mortgage Association 1,818 1,818 5,401 0 -3,583 Federal Home Loan Banks 0 0 2,423 0 -2,423 M ortgage-backed securities3,4 H eld outright2 1,637,123 1,764,929 1,741,391 - 127,806 23,538 By remaining maturity 1 year or less 4 1 0 3 1 More than 1 year through 5 years 214 173 77 41 96 More than 5 years through 10 years 62,706 20,013 10,584 42,693 9,429 More than 10 years 1,574,199 1,744,742 1,730,730 - 170,543 14,012 By issuer Federal Home Loan Mortgage Corporation 481,436 515,025 506,931 -33,589 8,094 Federal National Mortgage Association 761,166 826,306 836,558 -65,140 -10,252 Government National Mortgage Association 394,521 423,598 397,901 -29,077 25,697 Temporary transactions5 R epurchase agreements6 0 0 0 0 0 Reverse repurchase agreements6 304,012 563,958 725,210 - 259,946 - 161,252 Foreign official and international accounts 262,164 244,363 256,855 17,801 -12,492 Primary dealers and expanded counterparties 41,848 319,595 468,355 - 277,747 - 148,760 Note: Components may not sum to totals because of rounding. 1 Par value. 2 Excludes the effect of temporary transactions—repurchase agreements and reverse repurchase agreements. 3 Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. 4 The par amount shown is the remaining principal balance of the securities. 5 Contract amount of agreements. 6 Cash value of agreements, which are collateralized by U.S. Treasury securities, federal agency debt securities, and mortgage-backed securities.

296 105th Annual Report | 2018 Table 3. Federal Reserve Bank interest rates on loans to Table 4. Reserve requirements of depository institutions, depository institutions, December 31, 2018 December 31, 2018 Percent R equirements 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 P ercentage E ffective of liabilities date All banks 3.00 3.50 2.40 Net transaction accounts1 Note: For details on rate changes over the course of 2018, see “Discount Rates for $0 million–$16.0 million2 0 1/18/2018 Depository Institutions in 2018” in section 8 of this annual report (“Record of Policy Actions of the Board of Governors”). Primary credit is available for very More than $16.0 million– short terms as a backup source of liquidity to depository institutions that are in $122.3 million3 3 1/18/2018 generally sound financial condition in the judgment of the lending Federal Reserve Bank. Secondary credit is available in appropriate circumstances to depository More than $122.3 million 1 0 1/18/2018 institutions that do not qualify for primary credit. Seasonal credit is available to Nonpersonal time deposits 0 1 2/27/1990 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 1 2/27/1990 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 297 Table 5. Banking offices and banks affiliated with bank holding companies in the United States, December 31, 2017 and 2018 Commercial banks1 Type of office Total Member Savings banks Total N onmember Total National S tate A ll banking offices Banks Number, Dec. 31, 2017 5,181 4,918 1,654 864 790 3,264 263 Changes during 2018 New banks 28 25 5 4 1 20 3 Banks converted into branches -213 -207 -66 -34 -32 -141 -6 Ceased banking operations2 -33 -31 -14 -8 -6 -17 -2 Other3 0 8 -1 -17 16 9 -8 Net change -218 -205 -76 -55 -21 -129 -13 Number, Dec. 31, 2018 4,963 4,713 1,578 809 769 3,135 250 Branches and additional offices Number, Dec. 31, 2017 80,457 77,535 54,302 39,791 14,511 2 3,233 2 ,922 Changes during 2018 New branches 1,073 1,034 643 435 208 391 39 Banks converted to branches 213 200 87 39 48 113 13 Discontinued2 -2,508 -2,453 -1,866 -1,459 -407 -587 -55 Other3 0 4 173 1 172 -169 -4 Net change -1,222 -1,215 -963 -984 21 -252 -7 Number, Dec. 31, 2018 79,235 76,320 53,339 38,807 14,532 2 2,981 2 ,915 Banks affiliated with bank holding companies Number, Dec. 31, 2017 4,374 4,244 1,493 763 730 2,751 130 Changes during 2018 BHC-affiliated new banks 36 32 10 8 2 22 4 Banks converted into branches -183 -179 -59 -29 -30 -120 -4 Ceased banking operations2 -29 -29 -15 -9 -6 -14 0 Other3 0 3 -1 -16 15 4 -3 Net change -176 -173 -65 -46 -19 -108 -3 Number, Dec. 31, 2018 4,198 4,071 1,428 717 711 2,643 127 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.

298 105th Annual Report | 2018 Table 6A. Reserves of depository institutions, Federal Reserve Bank credit, and related items, year-end 1984–2018 and month-end 2018 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 F loat 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 1 6,418 1985 186,025 5,223 3,060 988 15,302 210,598 11,090 4,718 1 7,075 1986 205,454 16,005 1,565 1,261 17,475 241,760 11,084 5,018 1 7,567 1987 226,459 4,961 3,815 811 15,837 251,883 11,078 5,018 1 8,177 1988 240,628 6,861 2,170 1,286 18,803 269,748 11,060 5,018 1 8,799 1989 233,300 2,117 481 1,093 39,631 276,622 11,059 8,518 1 9,628 1990 241,431 18,354 190 2,222 39,897 302,091 11,058 1 0,018 2 0,402 1991 272,531 15,898 218 731 34,567 323,945 11,059 1 0,018 2 1,014 1992 300,423 8,094 675 3,253 30,020 342,464 11,056 8,018 2 1,447 1993 336,654 13,212 94 909 33,035 383,904 11,053 8,018 2 2,095 1994 368,156 10,590 223 -716 33,634 411,887 11,051 8,018 2 2,994 1995 380,831 13,862 135 107 33,303 428,239 11,050 1 0,168 2 4,003 1996 393,132 21,583 85 4,296 32,896 451,992 11,048 9,718 2 4,966 1997 431,420 23,840 2,035 719 31,452 489,466 11,047 9,200 2 5,543 1998 452,478 30,376 17 1,636 36,966 521,475 11,046 9,200 2 6,270 1999 478,144 140,640 233 -237 35,321 654,100 11,048 6,200 2 8,013 2000 511,833 43,375 110 901 36,467 592,686 11,046 2,200 3 1,643 2001 551,685 50,250 34 -23 37,658 639,604 11,045 2,200 3 3,017 2002 629,416 39,500 40 418 39,083 708,457 11,043 2,200 3 4,597 2003 666,665 43,750 62 -319 40,847 751,005 11,043 2,200 3 5,468 2004 717,819 33,000 43 925 42,219 794,007 11,045 2,200 3 6,434 2005 744,215 46,750 72 885 39,611 831,532 11,043 2,200 3 6,540 2006 778,915 40,750 67 -333 39,895 859,294 11,041 2,200 3 8,206 2007 740,611 46,500 72,636 -19 41,799 901,528 11,041 2,200 3 8,681 2008 495,629 80,000 1,605,848 -1,494 43,553 2,223,537 11,041 2,200 3 8,674 2009 1,844,838 0 281,095 -2,097 92,811 2,216,647 11,041 5,200 4 2,691 2010 2,161,094 0 138,311 -1,421 110,255 2,408,240 11,041 5,200 4 3,542 2011 2,605,124 0 144,098 -631 152,568 2,901,159 11,041 5,200 4 4,198 2012 2,669,589 0 11,867 -486 218,296 2,899,266 11,041 5,200 4 4,751 2013 3,756,158 0 2,177 -962 246,947 4,004,320 11,041 5,200 4 5,493 2014 4,236,873 0 3,351 -555 239,238 4,478,908 11,041 5,200 4 6,301 2015 4,241,958 0 2,830 -36 221,448 4,466,199 11,041 5,200 4 7,567 2016 4,221,187 0 7,325 -804 206,551 4,434,259 11,041 5,200 4 8,536 2017 4,223,528 0 13,914 -920 194,288 4,430,809 11,041 5,200 4 9,381 2018 3,862,079 0 4,269 -770 173,324 4,038,902 11,041 5,200 4 9,801 (continued on next page)

Statistical Tables 299 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 F loat 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 2 018, month-end Jan 4,201,346 0 2,442 -1,038 197,165 4,399,914 11,041 5 ,200 4 9,440 Feb 4,188,604 0 1,808 -807 184,734 4,374,340 11,041 5 ,200 4 9,440 Mar 4,183,711 0 6,736 -700 189,448 4,379,195 11,041 5 ,200 4 9,517 Apr 4,144,804 0 1,993 -902 190,553 4,336,449 11,041 5 ,200 4 9,545 May 4,116,745 0 1,895 -976 180,478 4,298,143 11,041 5 ,200 4 9,586 Jun 4,101,985 0 3,040 -543 184,355 4,288,837 11,041 5 ,200 4 9,617 Jul 4,048,821 0 2,073 -827 186,311 4,236,378 11,041 5 ,200 4 9,646 Aug 4,012,615 0 2,028 -527 174,071 4,188,187 11,041 5 ,200 4 9,667 Sep 3,997,394 0 352 -969 177,941 4,174,718 11,041 5 ,200 4 9,691 Oct 3,941,797 0 317 -877 179,498 4,120,735 11,041 5 ,200 4 9,721 Nov 3,896,390 0 252 -557 169,752 4,065,837 11,041 5 ,200 4 9,745 Dec 3,862,079 0 4,269 -770 173,324 4,038,902 11,041 5 ,200 4 9,801 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.

300 105th Annual Report | 2018 Table 6A. Reserves of depository institutions, Federal Reserve Bank credit, and related items, year-end 1984–2018 and month-end 2018—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 5 13 n/a 5,316 n/a 253 867 1,126 5,952 20,693 1985 197,488 0 5 50 n/a 9,351 n/a 480 1,041 1,490 5,940 27,141 1986 211,995 0 4 47 n/a 7,588 n/a 287 917 1,812 6,088 46,295 1987 230,205 0 4 54 n/a 5,313 n/a 244 1,027 1,687 7,129 40,097 1988 247,649 0 3 95 n/a 8,656 n/a 347 548 1,605 7,683 37,742 1989 260,456 0 4 50 n/a 6,217 n/a 589 1,298 1,618 8,486 36,713 1990 286,963 0 5 61 n/a 8,960 n/a 369 528 1,960 8,147 36,081 1991 307,756 0 6 36 n/a 17,697 n/a 968 1,869 3,946 8,113 25,051 1992 334,701 0 5 08 n/a 7,492 n/a 206 653 5,897 7,984 25,544 1993 365,271 0 3 77 n/a 14,809 n/a 386 636 6,332 9,292 27,967 1994 403,843 0 3 35 n/a 7,161 n/a 250 1,143 4,196 1 1,959 25,061 1995 424,244 0 2 70 n/a 5,979 n/a 386 2,113 5,167 1 2,342 22,960 1996 450,648 0 2 49 n/a 7,742 n/a 167 1,178 6,601 1 3,829 17,310 1997 482,327 0 2 25 n/a 5,444 n/a 457 1,171 6,684 1 5,500 23,447 1998 517,484 0 85 n/a 6,086 n/a 167 1,869 6,780 1 6,354 19,164 1999 628,359 0 1 09 n/a 28,402 n/a 71 1,644 7,481 1 7,256 16,039 2000 593,694 0 4 50 n/a 5,149 n/a 216 2,478 6,332 1 7,962 11,295 2001 643,301 0 4 25 n/a 6,645 n/a 61 1,356 8,525 1 7,083 8,469 2002 687,518 21,091 367 n/a 4,420 n/a 136 1,266 1 0,534 1 8,977 11,988 2003 724,187 25,652 321 n/a 5,723 n/a 162 995 1 1,829 1 9,793 11,054 2004 754,877 30,783 270 n/a 5,912 n/a 80 1,285 9,963 2 6,378 14,137 2005 794,014 30,505 202 n/a 4,573 n/a 83 2,144 8,651 3 0,466 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 4 1,622 13,986 2008 889,898 88,352 259 n/a 106,123 259,325 1,365 21,221 4,387 4 8,921 855,599 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 9 9,602 965,712 2011 1,075,820 99,900 1 28 0 85,737 0 125 64,909 2,480 7 2,766 1 ,559,731 2012 1,169,159 107,188 150 0 92,720 0 6,427 27,476 n /a 6 6,093 1 ,491,044 2013 1,241,228 315,924 234 0 162,399 0 7,970 26,181 n /a 6 3,049 2 ,249,070 2014 1,342,957 509,837 201 0 223,452 0 5,242 20,320 n /a 6 1,447 2 ,377,995 2015 1,424,967 712,401 266 0 333,447 0 5,231 31,212 n /a 4 5,320 1 ,977,163 2016 1,509,440 725,210 166 0 399,190 0 5,165 53,248 n /a 4 6,943 1 ,759,675 2017 1,618,006 563,958 214 0 228,933 0 5,257 77,762 n /a 4 7,876 1 ,954,426 2018 1,719,302 304,012 214 0 402,138 0 5,245 73,073 n /a 4 5,007 1 ,555,954 (continued on next page)

Statistical Tables 301 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 2 018, month-end Jan 1,607,534 310,476 267 0 275,794 0 5,255 76,740 n /a 4 7,153 2 ,142,376 Feb 1,627,206 277,458 304 0 199,390 0 5,255 77,043 n /a 4 5,057 2 ,208,308 Mar 1,636,694 273,381 319 0 289,648 0 5,253 88,012 n /a 4 4,582 2 ,107,065 Apr 1,643,149 263,241 290 0 419,376 0 5,254 77,087 n /a 4 4,633 1 ,949,204 May 1,661,173 269,493 245 0 354,393 0 5,255 69,944 n /a 4 4,921 1 ,958,546 Jun 1,666,880 341,633 198 0 332,805 0 5,301 76,224 n /a 4 4,735 1 ,886,919 Jul 1,668,836 248,166 206 0 358,159 0 5,257 70,924 n /a 4 5,498 1 ,905,220 Aug 1,685,329 239,097 211 0 317,971 0 5,256 64,625 n /a 4 3,648 1 ,897,958 Sep 1,685,463 278,949 214 0 384,713 0 5,256 72,428 n /a 4 4,136 1 ,769,493 Oct 1,695,923 236,530 232 0 366,596 0 5,257 66,688 n /a 4 3,929 1 ,771,541 Nov 1,703,441 234,532 203 0 344,874 0 5,256 69,124 n /a 4 4,355 1 ,730,038 Dec 1,719,302 304,012 214 0 402,138 0 5,245 73,073 n /a 4 5,007 1 ,555,954 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. n/a Not applicable.

302 105th Annual Report | 2018 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 S pecial 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 1 0,125 n /a 2 ,476 1936 2,430 0 3 39 28 0 2,500 1 1,258 n /a 2 ,532 1937 2,564 0 10 19 19 0 2,612 1 2,760 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 1 7,644 n /a 2 ,963 1940 2,184 0 3 80 8 0 2,274 2 1,995 n /a 3 ,087 1941 2,254 0 3 94 10 0 2,361 2 2,737 n /a 3 ,247 1942 6,189 0 6 471 14 0 6,679 2 2,726 n /a 3 ,648 1943 11,543 0 5 681 10 0 12,239 2 1,938 n /a 4 ,094 1944 18,846 0 80 815 4 0 19,745 2 0,619 n /a 4 ,131 1945 24,262 0 249 578 2 0 25,091 2 0,065 n /a 4 ,339 1946 23,350 0 163 580 1 0 24,093 2 0,529 n /a 4 ,562 1947 22,559 0 85 535 1 0 23,181 2 2,754 n /a 4 ,562 1948 23,333 0 223 541 1 0 24,097 2 4,244 n /a 4 ,589 1949 18,885 0 78 534 2 0 19,499 2 4,427 n /a 4 ,598 1950 20,725 53 67 1,368 3 0 22,216 2 2,706 n /a 4 ,636 1951 23,605 196 19 1,184 5 0 25,009 2 2,695 n /a 4 ,709 1952 24,034 663 156 967 4 0 25,825 2 3,187 n /a 4 ,812 1953 25,318 598 28 935 2 0 26,880 2 2,030 n /a 4 ,894 1954 24,888 44 143 808 1 0 25,885 2 1,713 n /a 4 ,985 1955 24,391 394 108 1,585 29 0 26,507 2 1,690 n /a 5 ,008 1956 24,610 305 50 1,665 70 0 26,699 2 1,949 n /a 5 ,066 1957 23,719 519 55 1,424 66 0 25,784 2 2,781 n /a 5 ,146 1958 26,252 95 64 1,296 49 0 27,755 2 0,534 n /a 5 ,234 1959 26,607 41 458 1,590 75 0 28,771 1 9,456 n /a 5 ,311 1960 26,984 400 33 1,847 74 0 29,338 1 7,767 n /a 5 ,398 1961 28,722 159 130 2,300 51 0 31,362 1 6,889 n /a 5 ,585 1962 30,478 342 38 2,903 110 0 33,871 1 5,978 n /a 5 ,567 1963 33,582 11 63 2,600 162 0 36,418 1 5,513 n /a 5 ,578 1964 36,506 538 186 2,606 94 0 39,930 1 5,388 n /a 5 ,405 1965 40,478 290 137 2,248 187 0 43,340 1 3,733 n /a 5 ,575 1966 43,655 661 173 2,495 193 0 47,177 1 3,159 n /a 6 ,317 1967 48,980 170 141 2,576 164 0 52,031 1 1,982 n /a 6 ,784 (continued on next page)

Statistical Tables 303 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 1 0,367 n /a 6,795 1969 57,154 0 183 3,440 64 2,743 63,584 1 0,367 n /a 6,852 1970 62,142 0 335 4,261 57 1,123 67,918 1 0,732 400 7,147 1971 69,481 1,323 39 4,343 261 1,068 76,515 1 0,132 400 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 1 1,567 400 8,716 1974 84,760 954 299 2,001 999 3,195 92,208 1 1,652 400 9,253 1975 92,789 1,335 211 3,688 1,126 3,312 102,461 1 1,599 500 1 0,218 1976 100,062 4,031 25 2,601 991 3,182 110,892 1 1,598 1 ,200 1 0,810 1977 108,922 2,352 265 3,810 954 2,442 118,745 1 1,718 1 ,250 1 1,331 1978 117,374 1,217 1,174 6,432 587 4,543 131,327 1 1,671 1 ,300 1 1,831 1979 124,507 1,660 1,454 6,767 704 5,613 140,705 1 1,172 1 ,800 1 3,083 1980 128,038 2,554 1,809 4,467 776 8,739 146,383 1 1,160 2 ,518 1 3,427 1981 136,863 3,485 1,601 1,762 195 9,230 153,136 1 1,151 3 ,318 1 3,687 1982 144,544 4,293 717 2,735 1,480 9,890 163,659 1 1,148 4 ,618 1 3,786 1983 159,203 1,592 918 1,605 418 8,728 172,464 1 1,121 4 ,618 1 5,732 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.

304 105th Annual Report | 2018 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 C u a rr n e d ncy R equired11 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 1 1,129 1 ,988 1943 20,449 2,303 579 1,360 356 339 0 0 12,886 n /a 1 1,650 1 ,236 1944 25,307 2,375 440 1,204 394 402 0 0 14,373 n /a 1 2,748 1 ,625 1945 28,515 2,287 977 862 446 495 0 0 15,915 n /a 1 4,457 1 ,458 1946 28,952 2,272 393 508 314 607 0 0 16,139 n /a 1 5,577 562 1947 28,868 1,336 870 392 569 563 0 0 17,899 n /a 1 6,400 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 1 5,550 1 ,018 1950 27,741 1,293 668 895 565 714 0 0 17,681 n /a 1 6,509 1 ,172 1951 29,206 1,270 247 526 363 746 0 0 20,056 n /a 1 9,667 389 1952 30,433 1,270 389 550 455 777 0 0 19,950 n /a 2 0,520 -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 1 8,574 -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 305 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 C u a rr n e d ncy R equired11 E xcess11,12 coin10 Banks 1 968 50,961 695 703 216 747 -1,353 0 0 21,818 4,921 2 7,439 -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 3 5,268 - 1,360 1974 79,743 185 3,113 418 1,27513 0 0 2,935 25,843 7,370 3 7,011 - 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 3 5,461 - 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 4 0,558 675 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.

306 105th Annual Report | 2018 Table 7. Principal assets and liabilities of insured commercial banks, by class of bank, June 30, 2018 and 2017 Millions of dollars, except as noted Member banks Item Total N onmember banks Total National State 2 018 Assets Loans and investments 3,232,554 2,811,901 2,223,698 588,203 420,654 Loans, gross Net 8,644,391 6,865,683 5,447,509 1,418,174 1 ,778,708 Investments 3,232,554 2,811,901 2,223,698 588,203 420,654 U.S. government securities 459,324 437,362 361,754 75,608 21,962 Other 2,773,230 2,374,539 1,861,944 512,595 398,692 Cash assets, total 1,316,958 1,175,055 949,841 225,214 141,904 Liabilities Deposits, total 11,254,955 9,273,322 7,396,328 1,876,994 1 ,981,633 Interbank 276,625 254,320 216,231 38,089 22,305 Other transactions 1,860,078 1,516,713 1,138,826 377,887 343,365 Other nontransactions 9,118,253 7,502,289 6,041,270 1,461,019 1 ,615,964 Equity capital 1,846,170 1,547,780 1,237,118 310,661 298,390 Number of banks 4,822 1,612 850 762 3,210 2017 Assets Loans 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. government 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 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 2017 have been revised.

Statistical Tables 307 Table 8. Initial margin requirements under Regulations T, U, and X Percent of market value Short Margin 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.

308 105th Annual Report | 2018 Table 9A. Statement of condition of the Federal Reserve Banks, by Bank, December 31, 2018 and 2017 Millions of dollars Total Boston New York Philadelphia C leveland R ichmond Item 2018 2017 2018 2017 2018 2017 2018 2017 2 018 2 017 2 018 2 017 A ssets Gold certificates 11,037 11,037 364 349 3,626 3,592 350 348 544 553 773 776 Special drawing rights certificates 5,200 5,200 196 196 1,818 1,818 210 210 237 237 412 412 Coin 1,726 1,892 41 47 39 47 148 187 124 145 236 270 Loans and securities Primary, secondary, and seasonal loans 61 134 8 * * 70 * * * * * * Treasury securities, bought outright1 2,222,547 2,454,208 42,448 47,817 1,227,018 1,381,944 56,115 63,367 63,010 71,170 1 31,522 1 43,793 Government-sponsored enterprise debt securities, bought outright1 2,409 4,391 46 86 1,330 2,473 61 113 68 127 142 257 Federal agency and governmentsponsored enterprise mortgage-backed securities, bought outright2 1,637,123 1,764,929 31,267 34,387 903,819 993,817 41,334 45,570 46,413 51,181 96,879 1 03,408 Unamortized premiums on securities held outright3 140,083 158,760 2,676 3,093 77,336 89,396 3,536 4,099 3,972 4,604 8,290 9,302 Unamortized discounts on securities held outright3 -13,427 -14,103 -256 -275 -7,413 -7,941 -339 -364 -380 -409 -795 -826 Total loans and securities 3,988,796 4,368,319 76,189 85,108 2,202,090 2,459,759 100,707 112,785 1 13,083 1 26,673 2 36,038 2 55,934 Accrued interest receivable - System Open Market Account 22,236 24,744 426 484 12,258 13,912 564 641 634 722 1,328 1,464 Net portfolio holdings of consolidated variable interest entity4 * 1,713r n /a n/a * 1,713r n /a n/a n /a n /a n /a n /a Foreign currency denominated investments5 20,906 21,316 890 924 6,590 6,825 1,188 1,146 1,687 1,736 4,517 4,607 Central bank liquidity swaps6 4,207 12,067 179 523 1,326 3,864 239 649 340 983 909 2,608 Other SOMA assets * 13 * * * 7 * * * * * 1 Other assets Items in process of collection 236 81 * * * * * * * * * * Bank premises 2,218 2,217 109 114 468 455 82 73 118 121 195 197 Deferred asset (accrued liability) remittances to the Treasury * * * * * * * * * * * * All other assets7 1,318 1,369 50 66 324 355 29 29 55 55 283 270 Interdistrict settlement account * * 27,157 12,789 -165,634 -166,593 -670 5,003 8,181 12,153 25,831 26,896 Total assets 4,057,880 4,449,968r 1 05,601 100,600 2,062,905 2,325,754r 1 02,847 121,071 1 25,003 1 43,378 2 70,522 2 93,435 (continued on next page)

Statistical Tables 309 Table 9A.—continued Total Boston New York Philadelphia C leveland R ichmond Item 2018 2017 2018 2017 2018 2017 2018 2017 2 018 2 017 2 018 2 017 L iabilities Federal Reserve notes outstanding 1,861,768 1,745,775 57,940 57,138 615,087 577,769 54,893 54,181 88,686 83,646 1 25,630 119,325 Less: Notes held by Federal Reserve Bank 190,331 175,048 5,686 6,032 55,968 49,106 6,600 6,451 7,740 8,699 12,341 13,343 Federal Reserve notes outstanding, net 1,671,437 1,570,727 52,254 51,106 559,119 528,663 48,293 47,730 80,946 74,947 1 13,289 105,982 Securities sold under agreements to repurchase8 304,012 563,958 5,806 10,988 167,838 317,560 7,676 14,561 8,619 16,354 17,990 33,043 Deposits Depository institutions 1,555,954 1,947,633r 45,654 36,282r 891,753 1,206,552r 44,391 56,228 32,030 45,193r 1 29,765 1 44,246r T reasury, general account 402,138 228,933 n/a n/a 402,138 228,993 n/a n/a n /a n /a n /a n /a Foreign, official accounts 5,245 5,257 2 2 5,217 5,230 2 2 3 3 9 9 Other9 73,072 84,559r 18 265r 22,013 22,672r 1 * 20 3,271r 478 601r T otal deposits 2,036,409 2,266,382 45,665 36,549 1,321,121 1,463,387 44,394 56,230 32,053 48,467 1 30,252 144,856 Other liabilities Accrued remittances to the Treasury10 1,597 2,337 33 42 612 1,448 47 21 86 79 174 143 Deferred credit items 1,006 1,001 * * * * * * * * * * All other liabilities11 4,259 4,174 157 154 1,789 1,650 174 178 173 190 467 470 Total liabilities 4,018,720 4,408,579r 1 03,915 98,839 2,050,479 2,312,708r 1 00,584 118,720 1 21,877 1 40,037 2 62,172 284,494 Capital accounts Capital paid-in 32,335 31,389 1,393 1,336 10,260 9,894 1,869 1,783 2,581 2,534 6,895 6,781 Surplus (including accumulated other comprehensive loss) 6,825 10,000 293 425 2,166 3,152 394 568 545 807 1,455 2,160 Total liabilities and capital accounts 4,057,880 4,449,968r 1 05,601 100,600 2,062,905 2,325,754r 1 02,847 121,071 1 25,003 1 43,378 2 70,522 293,435 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. 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. 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. r Revised. * Less than $500,000. n/a Not applicable.

310 105th Annual Report | 2018 Table 9A. Statement of condition of the Federal Reserve Banks, by Bank, December 31, 2018 and 2017—continued Millions of dollars Atlanta Chicago St. Louis Minneapolis Kansas City D allas S an Francisco Item 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2 018 2 017 2 018 2 017 A ssets Gold certificates 1,491 1,520 739 737 334 341 199 191 307 292 905 916 1,405 1,422 Special drawing rights certificates 654 654 424 424 150 150 90 90 153 153 282 282 574 574 Coin 180 198 285 299 27 37 46 52 111 108 197 193 293 308 Loans and securities Primary, secondary, and seasonal loans 6 26 33 23 1 2 13 12 * 1 * * * * Treasury securities, bought outright1 133,413 144,464 119,035 103,221 29,589 32,726 18,547 19,134 34,988 34,806 91,902 98,249 2 74,961 3 13,516 Government-sponsored enterprise debt securities, bought outright1 145 259 129 185 32 58 20 34 38 62 100 176 298 561 Federal agency and governmentsponsored enterprise mortgage-backed securities, bought outright2 98,271 103,890 87,681 74,231 21,796 23,535 13,662 13,760 25,772 25,031 67,695 70,655 2 02,535 2 25,463 Unamortized premiums on securities held outright3 8,409 9,345 7,503 6,677 1,865 2,118 1,169 1,238 2,205 2,252 5,792 6,355 17,331 20,281 Unamortized discounts on securities held outright3 -807 -831 -720 -593 -179 -188 -112 -110 -211 -200 -556 -564 -1,662 -1,802 Total loans and securities 239,437 257,153 213,661 183,744 53,104 58,251 33,299 34,068 62,792 61,952 1 64,933 1 74,871 4 93,463 5 58,019 Accrued interest receivable - System Open Market Account 1,335 1,456 1,190 1,041 296 330 185 193 350 351 917 988 2,753 3,163 Net portfolio holdings of consolidated variable interest entity4 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 1,208 1,243 886 892 302 233 96 90 207 207 259 273 3,077 3,139 Central bank liquidity swaps6 243 704 178 505 61 132 19 51 42 117 52 154 619 1,777 Other SOMA assets * 1 * 1 * * * * * * * 1 * 2 Other assets Items in process of collection 236 81 * * * * * * * * * * * * Bank premises 206 203 194 204 107 110 95 88 232 236 221 221 192 193 Deferred asset (accrued liability) remittances to the Treasury * * * * * * * * * * * * * * All other assets7 84 106 47 61 105 109 62 26 84 89 55 58 136 151 Interdistrict settlement account 46,747 32,445 15,866 56,756 10,352 3,353 3,559 5,162 1,277 5,258 18,270 13,909 9,064 -7,132 Total assets 291,821 295,764 2 33,470 244,664 64,838 63,046 37,650 40,011 65,555 68,763 1 86,091 1 91,866 5 11,576 5 61,616 (continued on next page)

Statistical Tables 311 Table 9A.—continued Atlanta Chicago St. Louis Minneapolis Kansas City D allas S an Francisco Item 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2 018 2 017 2 018 2 017 L iabilities Federal Reserve notes outstanding 262,457 244,418 121,764 115,902 56,057 52,041 31,497 31,010 49,969 47,902 1 50,909 1 40,794 2 46,879 221,648 Less: Notes held by Federal Reserve Bank 28,508 24,170 13,680 10,707 5,129 5,167 2,561 2,898 5,440 5,711 17,032 16,336 29,646 26,428 Federal Reserve notes outstanding, net 233,949 220,248 108,084 105,195 50,928 46,874 28,936 28,112 44,529 42,191 1 33,877 1 24,458 2 17,233 195,220 Securities sold under agreements to repurchase8 18,249 33,197 16,282 23,719 4,047 7,520 2,537 4,397 4,786 7,998 12,571 22,577 37,611 72,044 Deposits Depository institutions 35,885 37,214r 57,527 58,480r 9,099 7,920 5,767 7,087r 15,020 16,964r 38,673 43,836r 2 50,400 2 87,631r T reasury, 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 3 2 2 2 1 * * * * * * 1 6 6 Other9 30 1,255r 49,569 55,176r 6 3 72 83r 675 1,048r 187 182r 1 2r T otal deposits 35,918 38,471 1 07,098 113,659 9,106 7,923 5,839 7,170 15,695 18,012 38,860 44,019 2 50,407 287,639 Other liabilities Acrued remittances to the Treasury10 170 173 75 51 35 5 20 11 43 25 96 88 207 252 Deferred credit items 1,006 1,001 * * * * * * * * * * * * All other liabilities11 252 282 296 285 125 127 132 131 123 127 202 212 369 368 Total liabilities 289,544 293,372 2 31,835 242,909 64,241 62,449 37,464 39,821 65,176 68,353 1 85,606 1 91,354 5 05,827 555,524 C apital accounts Capital paid-in 1,880 1,814 1,350 1,331 493 453 154 144 313 311 400 388 4,747 4,620 Surplus (including accumulated other comprehensive loss) 397 578 285 424 104 144 32 46 66 99 85 124 1,002 1,472 Total liabilities and capital accounts 291,821 295,764 233,470 244,664 64,838 63,046 37,650 40,011 65,555 68,763 1 86,091 1 91,866 5 11,576 561,616 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. 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. 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. r Revised. * Less than $500,000. n/a Not applicable.

312 105th Annual Report | 2018 Table 9B. Statement of condition of the Federal Reserve Banks, December 31, 2018 and 2017 Supplemental information—collateral held against Federal Reserve notes: Federal Reserve agents’ accounts Millions of dollars Item 2018 2017 Federal Reserve notes outstanding 1,861,768 1,745,775 Less: Notes held by Federal Reserve Banks not subject to collateralization 190,331 175,048 Collateralized Federal Reserve notes 1,671,437 1,570,727 Collateral for Federal Reserve notes Gold certificates 11,037 11,037 Special drawing rights certificates 5,200 5,200 U.S. Treasury securities1 1 ,655,200 1,554,490 Total collateral 1,671,437 1,570,727 1 Face value. Includes compensation to adjust for the effect of inflation on the original face value of inflation-indexed securities.

Statistical Tables 313 Table 10. Income and expenses of the Federal Reserve Banks, by Bank, 2018 Thousands of dollars K ansas S an Item Total Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis D allas City Francisco Current income Interest income Primary, secondary, and seasonal loans 2,765 9 57 3 8 5 192 485 950 781 93 14 166 Treasury securities 62,806,6201,206,41334,870,861 1,595,946 1,792,1773,706,1933,749,3033,158,389 836,547 5 14,323 960,8602,573,520 7,842,088 Government-sponsored enterprise debt securities, net 174,937 3,365 97,258 4,452 5,000 10,316 10,429 8,660 2,330 1,426 2,658 7,152 21,891 Federal agency and government-sponsored enterprise mortgage-backed securities, net 49,288,798 946,94027,370,850 1,252,723 1,406,7552,908,2352,941,7922,473,163 656,508 4 03,366 753,3152,018,999 6,156,152 Foreign currency denominated investments, net -28,959 -1,237 -9,159 -1,626 -2,342 -6,257 -1,677 -1,224 -396 -131 -286 -361 -4,263 Central bank liquidity swaps1 15,102 649 4,799 834 1,225 3,263 877 636 191 66 148 190 2,223 Total interest income 112,259,2632,156,13962,334,666 2,852,332 3,202,8236,621,7556,700,9165,640,1091,496,130 9 19,831 1,716,7884,599,51414,018,257 Income from priced services 442,520 n/a 116,708 n/a n/a n/a 236,249 89,562 n/a n /a n /a n /a n /a Compensation received for services provided2 135,034 15,907 576 407 1,380 24,486 707 27,284 859 13,286 39,987 5,424 4,729 Securities lending fees 20,577 397 11,474 525 590 1,212 1,223 983 274 166 308 837 2,587 Other income 4,263 60 3,463 58 30 102 69 102 46 34 63 78 159 Total other income 602,394 16,364 132,221 990 2,000 25,800 238,248 117,931 1,179 13,486 40,358 6,339 7,475 Total current income 112,861,6572,172,50362,466,887 2,853,322 3,204,8236,647,5556,939,1645,758,0401,497,309 9 33,317 1,757,1464,605,85314,025,732 N et expenses Personnel Salaries and other personnel expenses 2,510,957 143,801 555,998 107,683 111,903 352,983 206,201 208,056 159,927 1 05,971 195,241 134,079 229,114 Retirement and other benefits 755,370 38,179 159,229 32,524 37,142 108,033 64,819 56,297 47,354 35,032 58,085 47,846 70,831 Administrative Fees 423,306 11,404 43,169 13,439 4,983 300,571 12,388 8,090 6,100 4,020 5,789 2,111 11,242 Travel 101,657 5,007 14,291 3,306 5,512 13,992 10,309 11,235 6,166 3,911 8,546 5,943 13,440 Postage and other shipping costs 13,946 264 1,298 163 1,443 379 2,655 174 779 263 898 2,186 3,443 Communications 39,210 856 4,719 594 512 24,763 1,381 2,067 1,051 414 811 923 1,120 Materials and supplies 74,730 4,837 22,650 10,296 2,900 5,631 4,970 6,108 2,925 2,104 3,842 3,529 4,937 Building Taxes on real estate 53,045 8,185 14,293 1,632 1,822 2,561 2,052 5,375 801 3,771 4,123 3,337 5,092 Property depreciation 142,404 12,421 28,964 7,976 8,215 14,542 11,162 16,094 8,258 3,823 8,754 9,375 12,820 Utilities 36,122 3,890 8,783 1,603 1,406 3,976 2,603 2,010 1,904 1,966 2,720 2,547 2,713 Rent 33,427 390 1,638 14 983 23,085 301 1,225 3,629 192 756 836 378 Other building 73,130 6,921 15,067 5,036 3,873 6,425 5,202 10,088 2,562 2,419 2,634 5,515 7,388 Equipment/software Purchases 42,185 3,893 7,308 2,213 1,640 7,959 2,420 3,266 2,320 2,419 3,562 2,392 2,793 Rentals 3,254 303 952 215 314 463 279 572 17 64 9 27 38 Depreciation 81,072 2,144 6,390 1,869 1,948 47,750 3,681 3,657 1,743 1,193 2,644 3,359 4,694 Repairs and maintenance 66,665 3,351 5,344 1,939 2,471 28,863 5,843 3,503 1,695 1,244 2,197 3,683 6,531 Software 278,336 5,430 47,502 3,587 8,842 113,063 11,674 7,962 11,985 4,322 33,022 8,301 22,647 Other expenses Compensation paid for service costs incurred2 135,034 n/a 43,608 n/a n/a n/a 80,898 10,528 n/a n /a n /a n /a n /a Other expenses 97,329 20,736 131,461 18,962 18,309 -531,773 74,227 74,335 164,348 15,674 34,375 29,874 46,801 Recoveries -370,214 -47,728 -45,301 -19,054 -8,109 -53,239 -9,962 -28,968 -13,508 -17,281 -45,331 -28,824 -52,908 (continued on next page)

314 105th Annual Report | 2018 Table 10.—continued Item Total Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis K ansas D allas S an City Francisco Expenses capitalized3 -63,479 -2,840 -22,402 -2,623 -6,814 -1,450 -1,844 -3,075 -112 -23 -11,899 -2,367 -8,031 Total operating expenses before pension expense and reimbursements 4,527,486 221,444 1,044,961 191,374 199,295 468,577 491,259 398,599 409,944 1 71,498 310,778 234,672 385,083 Net periodic pension expense4 483,507 4,225 436,987 2,576 3,201 4,178 4,222 7,550 2,586 3,815 4,059 4,116 5,992 Reimbursements -706,097 -37,995 -144,023 -10,756 -46,323 -33,803 -24,319 -4,204 -251,060 -37,616 -92,560 -20,015 -3,425 Operating expenses 4,304,896 187,674 1,337,925 183,194 156,173 438,952 471,162 401,945 161,470 1 37,697 222,277 218,773 387,650 Interest expense on securities sold under agreements to repurchase 4,558,384 87,468 2,528,255 115,696 129,919 269,127 272,392 231,950 60,710 37,458 70,106 187,093 568,210 Interest on reserves 38,483,872 538,45224,987,772 916,063 676,3682,455,071 672,4991,962,791 127,563 1 07,208 325,573 762,597 4 ,951,916 Interest on term deposits 2,209 18 746 723 6 34 * 202 * * 118 * 362 Other expenses 4,275 82 2,377 109 122 252 255 212 57 35 65 175 535 Net expenses 47,353,636 813,69428,857,075 1,215,785 962,5883,163,4361,416,3082,597,100 349,800 2 82,398 618,1391,168,638 5 ,908,673 Current net income 6 5,508,021 1,358,80933,609,812 1,637,537 2,242,2353,484,1195,522,8563,160,9401,147,509 6 50,919 1,139,0073,437,215 8 ,117,059 Additions to (+) and deductions from (-) current net income Profit on sales of Treasury securities 5,511 107 3,103 142 160 323 324 232 73 43 78 221 704 Profit on sales of federal agency and government-sponsored enterprise mortgage-backed securities -3,203 -61 -1,758 -80 -90 -190 -193 -182 -43 -27 -52 -134 -393 Foreign currency translation gains (losses) -390,164 -15,939 -118,828 -24,685 -30,874 -84,228 -22,092 -16,986 -8,537 -2,094 -4,031 -4,492 -57,377 Net income from consolidated variable interest entity5 7,226 n/a 7,226 n/a n/a n/a n/a n/a n/a n /a n /a n /a n /a Other additions 65 15 10 2 2 4 3 22 1 1 1 1 4 Other deductions -2,394 n/a -1,407 9 -6 -462 -146 -37 -133 5 8 147 -374 Net additions to current net income -382,959 -15,878 -111,654 -24,612 -30,808 -84,553 -22,104 -16,951 -8,639 -2,072 -3,996 -4,257 -57,436 Cost of unreimbursed Treasury services 1 n/a n/a n/a n/a n/a n/a n/a 1 n /a n /a n /a n /a Assessments by Board Board expenditures6 838,000 35,384 265,390 48,177 67,191 180,479 48,231 35,240 12,413 3,824 8,175 10,353 123,143 Cost of currency 848,807 35,597 170,075 36,678 52,969 73,322 129,306 75,381 26,650 17,406 25,931 67,299 138,193 Consumer Financial Protection Bureau7 337,100 14,239 106,644 19,458 27,016 72,664 19,374 14,176 5,009 1,539 3,307 4,172 49,504 Assessments by the Board of Governors 2,023,907 85,220 542,109 104,313 147,176 326,465 196,911 124,797 44,072 22,769 37,413 81,824 310,840 Net income before providing for remittances to the Treasury 63,101,154 1,257,71132,956,049 1,508,612 2,064,2513,073,1015,303,8413,019,1921,094,797 6 26,078 1,097,5983,351,134 7 ,748,783 Earnings remittances to the Treasury, as required by the Federal Reserve Act 65,319,280 1,350,29233,608,434 1,627,722 2,255,9083,581,4835,441,7783,119,9371,120,479 6 38,374 1,121,2623,374,514 8 ,079,097 Net income after providing for remittances to the Treasury -2,218,126 -92,581 -652,385 -119,110 -191,657 -508,382 -137,937 -100,745 -25,682 -12,296 -23,664 -23,380 -330,314 Other comprehensive income (loss) 41,831 3,064 -29,979 3,673 6,638 9,745 16,742 7,688 3,586 5,063 5,428 3,106 7,076 Comprehensive income -2,176,295 -89,517 -682,364 -115,437 -185,019 -498,637 -121,195 -93,057 -22,096 -7,233 -18,236 -20,274 -323,238 (continued on next page)

Statistical Tables 315 Table 10.—continued Item Total Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis K ansas D allas S an City Francisco Distribution of comprehensive income Dividends on capital stock 998,703 42,080 304,096 58,231 77,295 206,395 59,774 45,947 18,156 6,210 14,776 19,065 146,678 Transferred to/from surplus and change in accumulated other comprehensive income -3,175,000 -131,602 -986,459 -173,667 -262,315 -705,034 -180,968 -139,001 -40,247 -13,443 -33,011 -39,338 -469,915 Earnings remittances to the Treasury 65,319,280 1,350,29233,608,434 1,627,722 2,255,9083,581,4835,441,7783,119,9371,120,479 6 38,374 1,121,2623,374,514 8 ,079,097 Total distribution of net income 63,142,983 1,260,77032,926,071 1,512,286 2,070,8883,082,8445,320,5843,026,8831,098,388 6 31,141 1,103,0273,354,241 7 ,755,860 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 $413,948 thousand is recorded on behalf of the System in the books of the FRBNY. The Benefit Equalization Retirement Plan and the Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks are recorded by each Federal Reserve Bank. 5 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. 6 For additional details, see the “Board of Governors Financial Statements” in section 12. 7 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. * Less than $500.

316 105th Annual Report | 2018 Table 11. Income and expenses of the Federal Reserve Banks, 1914–2018 Thousands of dollars D istributions Assessments by the Board to the T ransferred of Governors U.S. Treasury to/from surplus Federal Net Other and Reserve additions Consumer compre- T rans- 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 1 66,690 n /a 18,523 1949 316,537 67,931 -12,122 3,243 6,304 n/a n/a 12,329 n /a 1 93,146 n /a 21,462 1950 275,839 69,822 36,294 3,434 7,316 n/a n/a 13,083 n /a 1 96,629 n /a 21,849 1951 394,656 83,793 -2,128 4,095 7,581 n/a n/a 13,865 n /a 2 54,874 n /a 28,321 1952 456,060 92,051 1,584 4,122 8,521 n/a n/a 14,682 n /a 2 91,935 n /a 46,334 1953 513,037 98,493 -1,059 4,100 10,922 n/a n/a 15,558 n /a 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 2 76,289 n /a 35,888 1955 412,488 101,159 -265 4,194 4,707 n/a n/a 17,712 n /a 2 51,741 n /a 32,710 1956 595,649 110,240 -23 5,340 5,603 n/a n/a 18,905 n /a 4 01,556 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 5 24,059 n /a 59,215 1959 886,226 131,848 98,247 6,471 6,384 n/a n/a 22,722 n /a 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 8 96,816 n /a 42,613 1961 941,648 148,254 3,482 6,265 6,756 n/a n/a 25,570 n /a 6 87,393 n /a 70,892 (continued on next page)

Statistical Tables 317 Table 11.—continued D istributions Assessments by the Board to the T ransferred of Governors U.S. Treasury to/from surplus Federal Net Other and Reserve additions Consumer compre- T rans- 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 1 1,706,370 n /a 56,821 1981 15,508,350 814,190 -372,879 63,163 82,924 n/a n/a 74,574 n /a 1 4,023,723 n /a 76,897 1982 16,517,385 926,034 -68,833 61,813 98,441 n/a n/a 79,352 n /a 1 5,204,591 n /a 78,320 1983 16,068,362 1,023,678 -400,366 71,551 152,135 n/a n/a 85,152 n /a 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 1 7,796,464 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 1 7,803,895 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 1 7,738,880 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 2 1,646,417 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 2 3,608,398 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 2 0,470,011 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 1 4,565,624 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 2 4,495,490 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 2 2,021,528 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 3 1,688,688 n /a 2 ,626,053 2009 54,463,121 5,978,795 4,820,204 386,400 502,044 n/a 1,006,813 1,428,202 n /a 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)

318 105th Annual Report | 2018 Table 11.—continued D istributions Assessments by the Board to the T ransferred of Governors U.S. Treasury to/from surplus Federal Net Other and Reserve additions Consumer compre- T rans- 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 2018 112,861,657 47,353,636 -382,959 838,000 848,807 337,100 41,831 998,703 65,319,280 n /a n /a -3,175,000 Total 1914–2018 1,755,847,144 218,094,925 38,925,252 11,286,117 16,779,364 3,833,477 -1,443,298 24,718,534307,415,3931,198,433,402 -4 12,767,3896 A ggregate for each Bank, 1914–2018 Boston 63,889,866 7,266,637 351,381 485,360 896,172 168,915 1,917 1,081,350 9,014,013 44,842,511 135 488,070 New York 800,030,704 99,910,3007 26,405,804 3,195,014 4,401,270 1,226,964 -1,661,116 6,988,554159,379,577 545,077,826 - 433 4,596,318 Philadelphia 55,450,377 7,450,601 810,394 697,633 769,424 257,386 16,822 1,721,812 8,512,009 36,308,189 291 560,246 Cleveland 72,595,936 7,112,715 727,340 847,715 962,834 299,573 13,707 1,845,900 11,802,358 49,612,575 -10 853,321 Richmond 127,820,065 15,906,655 2,355,950 2,157,401 1,440,080 819,877 54,993 4,997,708 21,077,814 81,295,580 -72 2,535,970 Atlanta 115,397,578 15,662,466 1,751,262 748,763 1,826,050 218,320 32,443 1,606,520 20,785,281 75,616,315 5 717,566 Chicago 143,018,934 15,570,926 1,913,712 748,590 1,726,434 122,759 35,510 1,461,388 14,827,596 109,806,844 12 703,619 St. Louis 42,277,054 4,776,964 434,813 181,869 579,929 37,968 26,174 375,699 5,408,061 31,149,772 -27 227,816 Minneapolis 23,308,347 4,683,018 430,264 205,849 328,219 21,673 6,187 451,336 2,428,070 15,436,029 65 190,543 Kansas City 47,124,417 6,837,584 592,996 212,217 594,690 38,550 -3,138 422,760 4,943,309 34,476,668 -9 188,503 Dallas 71,463,609 8,229,570 1,101,627 313,100 1,034,260 55,925 14,274 610,042 12,194,338 49,889,286 55 252,443 S an Francisco 193,470,250 24,687,491 2,049,705 1,492,612 2,219,999 565,573 18,929 3,155,465 37,042,970 124,921,807 -17 1,452,977 Total 1 ,755,847,144 218,094,925 38,925,252 11,286,117 16,779,364 3,833,477 -1,443,298 24,718,534307,415,3931,198,433,402 -4 12,767,389 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 2015–18. 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 $12,767,389 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 $6,825,000 thousand on December 31, 2018. 7 This amount is reduced by $8,004,994 thousand for expenses of the System Retirement Plan. See note 4, “Table 10. Income and expenses of the Federal Reserve Banks, by Bank, 2018.” n/a Not applicable.

Statistical Tables 319 Table 12. Operations in principal departments of the Federal Reserve Banks, 2015–18 Operation 2018 2017 2 016 2 015 Millions of pieces Currency processed 34,312 32,942 31,504 32,596 Currency destroyed 4,819 4,571 4,837 5,212 Coin received 58,249 58,221 58,223 55,921 Checks handled U.S. government checks1 53 56 58 60 Postal money orders 83 85 88 92 Commercial 4,740 5,153 5,241 5,452 Securities transfers2 17 16 17 17 Funds transfers3 158 153 148 143 Automated clearinghouse transactions Commercial 14,692 13,749 12,960 12,298 Government 1,668 1,629 1,594 1,558 Millions of dollars Currency processed 659,126 644,395 596,053 604,391 Currency destroyed 98,590 112,202 118,199 139,833 Coin received 5,387 5,585 5,563 5,394 Checks handled U.S. government checks1 148,149 145,599 152,392 143,764 Postal money orders 21,033 20,682 20,672 20,761 Commercial 8,485,159 8,438,008 8,088,569 8,109,457 Securities transfers2 296,335,209 299,334,719 286,671,689 2 95,755,612 Funds transfers3 716,211,759 740,096,838 766,961,537 8 34,630,440 Automated clearinghouse transactions Commercial 25,860,072 23,398,576 21,772,168 20,564,724 Government 5,515,114 5,370,695 5,192,786 5,054,219 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.

320 105th Annual Report | 2018 Table 13. Number and annual salaries of officers and employees of the Federal Reserve Banks, December 31, 2018 President Other officers Employees T otal 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 N umber ( 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 rl r y 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 Boston 424,700 78 20,167,384 911 18 10 104,925,179 1,018 125,517,263 New York 486,600 590 152,636,817 2,462 28 0 317,654,090 3,081 470,777,507 Philadelphia 410,100 71 15,562,150 778 15 19 79,316,092 884 95,288,342 Cleveland 403,900 67 14,785,917 901 19 40 87,367,071 1,028 102,556,888 Richmond 382,500 81 17,455,228 1,340 15 10 129,946,253 1,447 147,783,981 Atlanta 393,700 98 22,038,480 1,602 21 20 155,534,148 1,742 177,966,328 Chicago 424,700 136 32,649,987 1,391 34 51 153,587,097 1,613 186,661,784 St. Louis 381,000 101 22,964,700 1,258 29 10 120,011,539 1,399 143,357,239 Minneapolis 410,200 62 13,958,112 927 43 9 83,627,557 1,042 97,995,869 Kansas City 381,200 105 21,258,400 1,837 17 4 151,231,532 1,964 172,871,132 Dallas 415,400 78 17,411,852 1,166 10 10 100,729,044 1,265 118,556,296 San Francisco 455,100 108 27,607,550 1,575 18 12 177,489,546 1,714 205,552,196 Federal Reserve Information Technology n/a 71 16,560,840 1,172 1 10 144,019,244 1,254 160,580,084 Office of Employee Benefits n/a 15 4,077,865 39 1 0 5,040,770 55 9,118,635 Total 4,969,100 1,661 399,135,282 17,359 269 205 1,810,479,162 1 9,506 2 ,214,583,544 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, 2018. 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). n/a Not applicable.

Statistical Tables 321 Table 14. Acquisition costs and net book value of the premises of the Federal Reserve Banks and Branches, December 31, 2018 Thousands of dollars Acquisition costs Federal Reserve Bank N et O ther real estate or Branch Land Buildings B uilding machinery Total2 book value (including vaults)1 and equipment B oston 27,293 202,973 47,132 277,398 109,441 n /a New York 68,872 616,435 135,120 820,427 467,860 n /a Philadelphia 8,146 134,683 28,046 170,875 81,812 n /a Cleveland 4,219 152,050 35,015 191,284 103,190 n /a Cincinnati 3,917 31,280 16,386 51,583 15,159 n /a Richmond 32,044 179,633 65,462 277,139 135,356 n /a Baltimore 7,917 42,853 14,109 64,879 28,378 n /a Charlotte 7,884 45,972 13,993 67,849 31,905 n /a Atlanta 23,358 163,233 23,580 210,171 132,544 n /a Birmingham 5,347 13,163 2,446 20,956 10,887 n /a Jacksonville 2,185 27,915 13,430 43,530 24,530 n /a New Orleans 3,785 16,321 7,174 27,280 11,558 n /a Miami 4,509 35,022 13,572 53,103 26,189 n /a Chicago 7,460 256,603 39,514 303,577 122,669 n /a Detroit 13,223 74,974 13,122 101,319 71,266 n /a St. Louis 9,942 146,792 17,434 174,168 97,703 n /a Memphis 2,472 18,287 6,737 27,496 8,943 n /a Minneapolis 22,641 111,666 20,840 155,147 86,460 n /a Helena 3,316 10,327 2,054 15,697 8,081 n /a Kansas City 38,691 212,954 26,208 277,853 213,989 n /a Denver 3,696 11,104 5,971 20,771 7,137 n /a Omaha 4,537 11,154 2,705 18,396 10,444 n /a Dallas 38,100 139,801 36,149 214,050 112,621 n /a El Paso 262 5,864 3,360 9,486 3,735 n /a Houston 32,323 104,574 9,550 146,447 104,364 n /a San Francisco 20,988 137,983 34,773 193,744 81,489 n /a Los Angeles 6,306 86,328 26,770 119,404 56,129 n /a Salt Lake City 1,294 6,552 1,815 9,661 3,167 n /a Seattle 13,101 49,970 5,829 68,900 51,200 n /a Total 417,828 3,046,466 668,296 4,132,590 2 ,218,206 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.

323 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.

324 105th Annual Report | 2018 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, 2018 and 2017. March 6, 2019 Management’s Report on Financial Statements and 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 sheets as of December 31, 2018 and 2017, and the statements 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 controls, no matter how well designed, have inherent limitations, including the possibility of human error, and therefore can provide only reasonable assurance with respect to the preparation of reliable financial statements. In addition, projections of effectiveness in the future 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. Michell Clark Ricardo A. Aguilera Chief Operating Officer (Acting) Chief Financial Officer Director, Management Division Director, Division of Financial Management

Federal Reserve System Audits 325 KPMG LLP Suite 12000 1801 K Street, NW Washington, DC 20006 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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, 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, 2018 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 over 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.

326 105th Annual Report | 2018 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 6, 2019 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 6, 2019

Federal Reserve System Audits 327 Board of Governors of the Federal Reserve System Balance Sheets As of December 31, 2018 2 017 A ssets Current assets: Cash $215,087,854 $ 177,529,448 Accounts receivable – net 2,140,266 2,183,803 Prepaid expenses and other assets 6,602,772 7,335,702 Total current assets 223,830,892 187,048,953 Noncurrent assets: Property, equipment, and software – net 337,453,642 266,484,427 Other assets 754,410 941,190 Total noncurrent assets 338,208,052 267,425,617 Total assets $562,038,944 $ 454,474,570 L iabilities and cumulative results of operations Current liabilities: Accounts payable and accrued liabilities $ 35,437,008 $ 27,203,026 Accrued payroll and related taxes 41,671,555 37,953,047 Accrued annual leave 43,141,495 40,857,846 Capital lease payable 74,164 77,744 Unearned revenues and other liabilities 3,489,739 4,455,970 Total current liabilities 123,813,961 110,547,633 Long-term liabilities: Capital lease payable 74,015 140,342 Retirement benefit obligation 106,702,283 102,881,136 Postretirement benefit obligation 14,582,700 15,915,271 Postemployment benefit obligation 6,129,290 7,055,281 Deferred rent 43,056,641 45,418,714 Other liabilities 4,440,119 – Total long-term liabilities 174,985,048 171,410,744 Total liabilities 298,799,009 281,958,377 Cumulative results of operations: Fund balance 300,864,880 222,621,531 Accumulated other comprehensive loss (37,624,945) (50,105,338) Total cumulative results of operations 263,239,935 172,516,193 Total liabilities and cumulative results of operations $562,038,944 $ 454,474,570 See notes to financial statements.

328 105th Annual Report | 2018 Board of Governors of the Federal Reserve System Statements of Operations For the years ended December 31, 2018 2 017 Board operating revenues: Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $838,000,000 $ 740,000,000 Assessments levied on Federal Reserve Banks for currency-related operating expenses and capital expenditures 43,874,751 44,008,726 Other revenues 16,096,191 17,141,918 Total operating revenues 897,970,942 801,150,644 B oard operating expenses: Salaries 456,517,512 437,179,633 Retirement, insurance, and benefits 100,550,193 97,442,384 Other components of net periodic pension and postretirement costs 9,206,084 7,330,010 Contractual services and professional fees 63,602,914 65,027,459 Depreciation, amortization, and net gains or losses on disposals 42,325,685 40,023,558 Travel 15,764,961 14,020,574 Non-capital furniture, equipment, postage, and supplies 27,781,455 34,372,697 Data, news, and research 16,705,844 13,372,175 Utilities 7,713,508 8,353,654 Software 18,841,942 16,010,063 Rentals of space and equipment 36,718,324 31,325,898 Repairs and maintenance 7,161,325 8,304,501 Other expenses 16,837,846 17,259,902 Total operating expenses 819,727,593 790,022,508 Net income 78,243,349 11,128,136 C urrency costs: Assessments levied or to be levied on Federal Reserve Banks for currency costs 804,843,293 679,613,935 Expenses for costs related to currency 804,843,293 679,613,935 Currency assessments over (under) expenses – – Bureau of Consumer Financial Protection (Bureau): Assessments levied on the Federal Reserve Banks for the Bureau 337,100,000 573,000,000 Transfers to the Bureau 337,100,000 573,000,000 Bureau assessments over (under) transfers – – Total net income $ 78,243,349 $ 11,128,136 O ther comprehensive income (loss): Pension and other postretirement benefit plans: Amortization of prior service cost $ 73,588 $ 138,609 Amortization of net actuarial loss 4,255,630 2,856,656 Net actuarial gain (loss) arising during the year 8,151,175 (21,682,486) Total other comprehensive income (loss) 12,480,393 (18,687,221) Comprehensive income (loss) 90,723,742 (7,559,085) Cumulative results of operations – beginning of period 172,516,193 180,075,278 Cumulative results of operations – end of period $263,239,935 $ 172,516,193 See notes to financial statements.

Federal Reserve System Audits 329 Board of Governors of the Federal Reserve System Statements of Cash Flows For the years ended December 31, 2018 2 017 Cash flows from operating activities: Net income $ 78,243,349 $ 11,128,136 Adjustments to reconcile results of operations to net cash from (used in) operating activities: Depreciation and amortization 41,910,585 38,904,644 Net loss on disposal of property and equipment 415,100 1,118,914 Other additional noncash adjustments to results of operations (14,012) 324,078 (Increase) decrease in assets: Accounts receivable 43,537 1,484,872 Prepaid expenses 732,930 (896,622) Other assets 186,780 (54,276) Increase (decrease) in liabilities: Accounts payable and accrued liabilities (507,057) 4,498,215 Accrued payroll and related taxes 3,718,508 3,625,316 Accrued annual leave 2,283,649 1,566,437 Unearned revenues and other liabilities 238,952 (360,536) Net retirement benefit obligation 14,229,828 11,398,148 Net postretirement benefit obligation 739,140 565,113 Net postemployment benefit obligation (925,991) (159,866) Deferred rent (2,362,073) (1,625,988) Net cash from by operating activities 138,933,225 71,516,585 C ash flows used in investing activities: Capital expenditures (101,304,912) (42,195,544) Net cash used in investing activities (101,304,912) (42,195,544) Cash flows used in financing activities: Capital lease payments (69,907) (46,147) Net cash used in financing activities (69,907) (46,147) Net increase (decrease) in cash 37,558,406 29,274,894 Cash balance – beginning of year 177,529,448 148,254,554 Cash balance – end of year $215,087,854 $ 177,529,448 See notes to financial statements.

330 105th Annual Report | 2018 Board of Governors of the Federal Reserve System Notes to Financial Statements as of and for the Years Ended December 31, 2018 and 2017 (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 Federal Reserve System uses advisory and working committees in carrying out its varied responsibilities. Five of these committees advise the Board: the Community Advisory Council, the Community Depository Institutions Advisory Council, the Federal Advisory Council, the Insurance Policy Advisory Committee, and the Model Validation Council. The Federal Advisory Council and the Insurance Policy Advisory Committee were established by law. The Community Advisory Council, the Community Depository Institutions Advisory Council, and the Model Validation Council were created by the Board. 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

Federal Reserve System Audits 331 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 supervised by the Board. Although the Dodd-Frank Act gave the Bureau general rulewriting responsibility for federal consumer financial laws, the Board retains rulewriting responsibility under the Community Reinvestment Act and other specific statutory provisions. The Board also enforces the requirements of federal consumer financial laws for state member banks with assets of $10 billion or less. In addition, the Board enforces certain other consumer laws at all state member banks, regardless of size. Section 11 of the Federal Reserve Act (as amended) 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 certain bank holding companies and savings and loan holding companies 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). Section 7(a)(3)(A) of the Federal Reserve Act requires that any amount of surplus funds of the Reserve Banks that exceed or would exceed $6.825 billion be transferred to the Treasury via the Board. As an intermediary transfer agent, the Board does not recognize the remittances as revenue nor does the Board use the remittances to fund Board expenses. Additional information and disclosures regarding these remittances to the Treasury can be found in the combined financial statements of the Federal Reserve Banks. (3) Significant Accounting Policies Basis of Accounting — The Board prepares its financial statements in accordance with accounting principles generally accepted in the United States (GAAP) on an accrual basis of accounting. 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

332 105th Annual Report | 2018 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. 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. 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 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 Board started undertaking a greater role in the currency program including the areas of research and development, and quality assurance. See the currency footnote disclosures for more detail on these costs. 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. 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

Federal Reserve System Audits 333 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. 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. 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. 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. 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. Subsequently, in July 2018, the FASB issued a related ASU, ASU 2018-11, Leases (Topic 842). This lease accounting guidance is effective no later than the year ended December 31, 2020, although earlier adoption is permitted. The Board is continuing to evaluate the effect of this new guidance on its 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 from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU 2016-10, Revenue from Contracts with

334 105th Annual Report | 2018 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 January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business (Topic 805). The update clarifies that a set of inputs, processes applied to inputs, and the ability to create outputs is not a business when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. This standard is effective for the Board for the year ending December 31, 2019. The Board has decided to adopt this guidance early in 2018, as permitted. 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. In August 2018, the FASB issued ASU 2018-14, Compensation, Retirement Benefits, Defined Benefits Plans, General (Subtopic 715-20). This update modifies the disclosure requirements for the Board’s pension and postretirement plans. The update is effective for the Board for the year ending December 31, 2021, although earlier adoption is permitted. The Board is continuing to evaluate the effect of this new guidance on its disclosures. In August 2018, the FASB issued ASU 2018-15, Intangibles, Goodwill and Other Internal Use Software (Subtopic 350-40). This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This update is effective for the Board for the year ending December 31, 2020, although earlier adoption is permitted. The Board plans to early adopt this standard for the year ended December 31, 2019, and it is not expected to have a material effect on the Board’s financial statements.

Federal Reserve System Audits 335 (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, 2018 and 2017: As of December 31, 2018 2 017 Land $ 49,464,201 $ 18,640,314 Buildings and improvements 313,052,243 310,235,261 Construction in process 84,820,423 31,670,962 Furniture and equipment 87,136,166 77,682,539 Software in use 66,188,603 59,373,571 Software in process 3,338,072 3,462,045 Vehicles 2,590,042 2,297,985 Lease – office equipment 283,300 283,300 Subtotal 606,873,050 503,645,977 Less accumulated depreciation and amortization (269,419,408) (237,161,550) Property, equipment, and software – net $337,453,642 $ 266,484,427 Construction in process include costs incurred in the current or prior years for long-term projects and building enhancements. The Board recorded accrued liabilities for noncash capital assets of goods received or services performed of $8,741,000 and $5,946,000 at December 31, 2018 and 2017, respectively. The Board recorded retainage liabilities for noncash capital assets of goods received or services performed of $3,235,000 for the year ended December 31, 2018. In June 2018, the Board acquired a building and land for $40.8 million from the General Services Administration. (5) Leases Capital Leases — The Board entered into capital leases for copier equipment in 2016 with lease terms that extend through 2020. Furniture and equipment includes capitalized leases of $283,000 as of 2018 and 2017. Accumulated depreciation includes $143,000 and $77,000 related to assets under capital leases as of 2018 and 2017, respectively. The depreciation expense for leased equipment is $66,000 and $50,000 for 2018 and 2017, respectively.

336 105th Annual Report | 2018 The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of December 31, 2018, are as follows: Years Ended December 31, A mount 2019 $ 77,636 2020 49,698 2021 29,742 2022 22,306 Total minimum lease payments 179,382 Less amount representing maintenance (35,688) Net minimum lease payments 143,694 Less amount representing interest (3,352) Present value of net minimum lease payments 140,342 Less current maturities of capital lease payments (66,327) Long-term capital lease obligations $ 74,015 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, 2018, are as follows: Years Ended December 31, 2019 $ 37,252,968 2020 36,237,798 2021 36,761,628 2022 24,720,092 2023 20,723,748 After 2023 49,439,916 $205,136,150 Deferred Rent — The Board recorded noncash lease incentives of $7,734,000 for the year ended December 31, 2017. The Board did not have any new lease incentives for the year ended December 31, 2018. (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 $240,000,000 and $720,000,000 during each of the years ended December 31, 2018 and 2017, respectively. The Board was not assessed a contribution for 2018 or 2017.

Federal Reserve System Audits 337 Annually, the Society of Actuaries releases new mortality tables and updates mortality projection scales. The System analyzed these new tables relative to the System’s actual retiree mortality experience. Based on these analyses, the System, in 2018, adopted the modified MP-2018 projection scales and RP-2014 mortality tables with various adjustments to reflect the System’s recent mortality experience of System retirees. The adjusted tables and scales included the Board’s experience and the Board concurred with the adoption of these changes. 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 limitations imposed by the Internal Revenue Code. Activity for the BEP as of December 31, 2018 and 2017, is summarized in the following tables: 2018 2 017 Change in projected benefit obligation: Benefit obligation – beginning of year $66,654,768 $ 41,832,904 Service cost 5,837,651 4,359,375 Interest cost 2,864,362 2,365,386 Plan participants’ contributions – – Actuarial (gain) loss (3,208,061) 18,158,332 Gross benefits paid (143,137) (61,229) Benefit obligation – end of year $72,005,583 $ 66,654,768 Accumulated benefit obligation – end of year $14,288,814 $ 11,854,561 Weighted-average assumptions used to determine benefit obligation as of December 31: Discount rate 4.56% 3 .75% Rate of compensation increase 4.25% 4 .00% C hange in plan assets: Fair value of plan assets – beginning of year $ – $ – Employer contributions 143,137 61,229 Plan participants’ contributions – – Gross benefits paid (143,137) (61,229) 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) 203,296 145,694 Benefit obligation (noncurrent) 71,802,287 66,509,074 Funded status (72,005,583) (66,654,768) Amount recognized – end of year $(72,005,583) $ (66,654,768) Amounts recognized in the balance sheets consist of: Asset $ – $ – Liability – current (203,296) (145,694) Liability – noncurrent (71,802,287) (66,509,074) Net amount recognized $(72,005,583) $ (66,654,768) Amounts recognized in accumulated other comprehensive income consist of: Net actuarial loss $26,737,493 $ 32,673,765 Prior service cost 39,689 122,876 Net amount recognized $26,777,182 $ 32,796,641

338 105th Annual Report | 2018 Expected cash flows: Expected employer contributions – 2019 $ 203,296 Expected benefit payments:* 2019 $ 203,296 2020 $ 270,457 2021 $ 347,999 2022 $ 439,644 2023 $ 555,449 2024–2028 $5,875,800 * Expected benefit payments to be made by the Board. 2018 2 017 Components of net periodic benefit cost: Service cost $ 5,837,651 $ 4,359,375 Interest cost $ 2,864,362 $ 2,365,386 Expected return on plan assets – – Amortization: Actuarial (gain) loss $ 2,728,211 $ 1,796,670 Prior service cost 83,187 99,578 Net periodic benefit cost $11,513,411 $ 8,621,009 Weighted-average assumptions used to determine net periodic benefit cost: Discount rate 3.75% 4 .32% Rate of compensation increase 4.00% 4 .00% O ther changes in plan assets and benefit obligations recognized in other comprehensive income: Current year actuarial (gain) loss $(3,208,061) $ 18,158,332 Amortization of prior service cost $ (83,187) $ (99,578) Amortization of actuarial gain (loss) (2,728,211) (1,796,670) Total recognized in other comprehensive (income) loss $(6,019,459) $ 16,262,084 Total recognized in net periodic benefit cost and other comprehensive income $ 5,493,952 $ 24,883,093 Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2019 are shown below: Net actuarial loss $1,762,415 Prior service cost 39,689 Total $1,802,104

Federal Reserve System Audits 339 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 above the Social Security integration level to 2.0 percent. Activity for the PEP as of December 31, 2018 and 2017, is summarized in the following tables: 2018 2 017 Change in projected benefit obligation: Benefit obligation – beginning of year $36,590,675 $ 32,378,804 Service cost 1,194,522 1,094,459 Interest cost 1,416,533 1,358,925 Plan participants’ contributions – – Actuarial (gain) loss (3,216,655) 2,164,636 Gross benefits paid (560,508) (406,149) Benefit obligation – end of year $35,424,567 $ 36,590,675 Accumulated benefit obligation – end of year $31,363,223 $ 31,462,483 Weighted-average assumptions used to determine benefit obligation as of December 31: Discount rate 4.35% 3 .69% Rate of compensation increase 4.25% 4 .00% C hange in plan assets: Fair value of plan assets – beginning of year $ – $ – Employer contributions 560,508 406,149 Plan participants’ contributions – – Gross benefits paid (560,508) (406,149) 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 648,627 456,157 Benefit obligation – noncurrent 34,775,940 36,134,518 Funded status (35,424,567) (36,590,675) Amount recognized – end of year $(35,424,567) $ (36,590,675) Amounts recognized in the balance sheets consist of: Asset $ – $ – Liability – current (648,627) (456,157) Liability – noncurrent (34,775,940) (36,134,518) Net amount recognized $(35,424,567) $ (36,590,675) Amounts recognized in accumulated other comprehensive income consist of: Net actuarial loss $ 8,961,358 $ 13,350,579 Prior service cost – – Net amount recognized $ 8,961,358 $ 13,350,579 Expected cash flows: Expected employer contributions – 2019 $ 648,627 Expected benefit payments:* 2019 $ 648,627 2020 $ 781,575 2021 $ 919,930 2022 $1,074,821 2023 $1,244,420 2024–2028 $8,824,664 * Expected benefit payments to be made by the Board.

340 105th Annual Report | 2018 2018 2 017 Components of net periodic benefit cost: Service cost $1,194,522 $ 1,094,459 Interest cost 1,416,533 1,358,925 Expected return on plan assets – – Amortization: Actuarial loss 1,172,566 832,304 Prior service cost – 54,908 Net periodic benefit cost $3,783,621 $ 3,340,596 Weighted-average assumptions used to determine net periodic benefit cost: Discount rate 3.69% 4 .22% Rate of compensation increase 4.00% 4 .00% O ther changes in plan assets and benefit obligations recognized in other comprehensive income: Current year actuarial (gain) loss $(3,216,655) $ 2,164,636 Amortization of prior service cost - (54,908) Amortization of actuarial gain (loss) (1,172,566) (832,304) Total recognized in other comprehensive (income) loss $(4,389,221) $ 1,277,424 Total recognized in net periodic benefit cost and other comprehensive income $ (605,600) $ 4,618,020 Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2019 are shown below: Net actuarial loss $599,512 Prior service cost – Total $599,512 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, 2018 and 2017, is summarized in the following table: 2 018 2 017 Retirement benefit obligation: Benefit obligation – BEP $ 72,005,583 $ 66,654,768 Benefit obligation – PEP 35,424,567 36,590,675 Additional benefit obligations 124,056 237,544 Total accumulated retirement benefit obligation $107,554,206 $ 103,482,987 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 $1,112,000 and $1,080,000 in 2018 and 2017, 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 $28,833,000 and $27,320,000 in 2018 and 2017, respectively.

Federal Reserve System Audits 341 (7) Postretirement Benefits The Board provides certain life insurance programs for its active employees and retirees. Activity as of December 31, 2018 and 2017, is summarized in the following tables: 2018 2 017 Change in benefit obligation: Benefit obligation – beginning of year $16,467,035 $ 14,710,985 Service cost 170,564 164,069 Interest cost 595,971 610,434 Plan participants’ contributions – – Actuarial (gain) loss (1,726,457) 1,359,518 Gross benefits paid (343,937) (377,971) Benefit obligation – end of year 15,163,176 16,467,035 Weighted-average assumptions used to determine benefit obligation as of December 31 – discount rate 4.31% 3 .64% C hange in plan assets: Fair value of plan assets – beginning of year $ – $ – Employer contributions 343,937 377,971 Gross benefits paid (343,937) (377,971) 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 580,476 551,764 Benefit obligation – noncurrent 14,582,700 15,915,271 Funded status (15,163,176) (16,467,035) Amount recognized – end of year $(15,163,176) $ (16,467,035) Amounts recognized in the balance sheets consist of: Asset $ – $ – Liability – current (580,476) (551,764) Liability – noncurrent (14,582,700) (15,915,271) Net amount recognized $(15,163,176) $ (16,467,035) Amounts recognized in accumulated other comprehensive income consist of: Net actuarial loss $ 1,984,526 $ 4,065,836 Prior service credit (98,118) (107,717) Net amount recognized $ 1,886,408 $ 3,958,119 Expected cash flows: Expected employer contributions – 2019 $ 580,476 Expected benefit payments:* 2019 $ 580,476 2020 $ 608,475 2021 $ 654,047 2022 $ 679,536 2023 $ 711,195 2024–2028 $ 3,961,346 * Expected benefit payments to be made by the Board.

342 105th Annual Report | 2018 2018 2 017 Components of net periodic benefit cost: Service cost $ 170,564 $ 164,069 Interest cost 595,971 610,434 Expected return on plan assets – – Amortization: Actuarial (gain) loss 354,853 227,682 Prior service credit (9,599) (15,877) Net periodic benefit cost $1,111,789 $ 986,308 Weighted-average assumptions used to determine net periodic benefit cost – discount rate 3.64 % 4 .14 % O ther changes in plan assets and benefit obligations recognized in other comprehensive income: Current year actuarial (gain) loss $(1,726,459) $ 1,359,518 Amortization of prior service credit 9,599 15,877 Amortization of actuarial gain (loss) (354,853) (227,682) Total recognized in other comprehensive (income) loss $(2,071,713) $ 1,147,713 Total recognized in net periodic benefit cost and other comprehensive income $ (959,924) $ 2,134,021 Estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost (credit) in 2019 are shown below: Net actuarial loss $65,950 Prior service credit (9,599) Total $56,351 (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 2.84 percent and 2.59 percent as of December 31, 2018 and 2017, respectively. The net periodic postemployment benefit cost (credit) recognized by the Board as of December 31, 2018 and 2017, was ($284,000) and $1,017,000, respectively.

Federal Reserve System Audits 343 (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, 2018 and 2017, is as follows: Amount Related to Amount Related to T otal Accumulated Defined Benefit Postretirement Other Benefits Other Comprehensive Retirement Plans Than Pensions Income (Loss) Balance – January 1, 2017 $(28,607,712) $(2,810,405) $ (31,418,117) Change in accumulated other comprehensive income (loss): Net actuarial gain (loss) arising during the year (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 (gain) 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) C hange in accumulated other comprehensive income (loss): Net actuarial (gain) loss arising during the year(a) 6,424,716 1,726,459 8,151,175 Other comprehensive income before reclassifications 6,424,716 1,726,459 8,151,175 Amortization of prior service (credit) costs(a)(b) 83,187 (9,599) 73,588 Amortization of net actuarial (gain) loss(a)(b) 3,900,777 354,853 4,255,630 Amounts reclassified from accumulated other comprehensive income 3,983,964 345,254 4,329,218 Change in accumulated other comprehensive income (loss) 10,408,680 2,071,713 12,480,393 Balance – December 31, 2018 $(35,738,540) $(1,886,405) $ (37,624,945) ( 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. (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. Selected activity related to the Board and Reserve Banks is summarized in the following table: 2018 2 017 For the years ended December 31: Assessments levied or to be levied on Reserve Banks for: Currency expenses $ 848,718,044 $ 723,622,661 Board operations 838,000,000 740,000,000 Transfers of funds to the Bureau 337,100,000 573,000,000 Total assessments levied or to be levied on Reserve Banks $2,023,818,044 $ 2,036,622,661 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 $2,957,000 and $2,733,000 for

344 105th Annual Report | 2018 the years ended December 31, 2018 and 2017, respectively. Activity related to the Board and the OEB is summarized in the following table: 2018 2 017 As of December 31: Accounts receivable due from the Office of Employee Benefits $839,258 $ 603,452 Accounts payable due to the Office of Employee Benefits $ – $ 121,184 (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. The Council expenses charged to the Board were $4,527,000 and $4,179,577 for the years ended December 31, 2018 and 2017, respectively for the assessment of operating, examiner education, and other Council program expenses. The Board expenses charged to the Council were $1,846,000 and $2,990,578 for the years ended December 31, 2018 and 2017, respectively for the reimbursement of data processing and other administrative charges performed on behalf of the Council. (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 related to OIG funding in each of the 2018 and 2017 calendar years. (13) Currency Costs The Bureau of Engraving and Printing is the sole supplier for currency printing and also provides currency retirement, new Bureau of Engraving and Printing facility, and meaningful access services. The Board contracts for other services associated with currency, such as shipping, education, and quality assurance. Certain currency amounts relating to the prior year have been reclassified to conform to the current-year presentation. The presentation of $9,597,309 of the $13,117,081 quality assurance services for the year ended December 31, 2017, has been revised to conform to the current-year presentation from other expenses to contractual services and professional fees.

Federal Reserve System Audits 345 The currency costs incurred by the Board for the years ended December 31, 2018 and 2017, are reflected in the following table: 2018 2 017 Costs related to Bureau of Engraving and Printing: Printing $799,885,504 $ 673,936,234 Retirement 3,501,362 3,568,867 Meaningful access program 1,452,899 1,425,853 New facility 3,528 682,981 Subtotal related to Bureau of Engraving and Printing $804,843,293 $ 679,613,935 Other currency costs: Shipping $ 20,252,210 $ 21,710,886 Research and development 11,961,481 6,831,283 Quality assurance services 9,755,730 13,117,081 Education services 1,905,330 2,349,476 Subtotal of other currency costs $ 43,874,751 $ 44,008,726 Total currency costs $848,718,044 $ 723,622,661 (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. 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, 2018. Subsequent events were evaluated through March 6, 2019, which is the date the financial statements were available to be issued.

346 105th Annual Report | 2018 KPMG LLP Suite 12000 1801 K Street, NW Washington, DC 20006 Independent Auditors’ Report on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards To the Board of Governors of the Federal Reserve System: We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), auditing standards generally accepted in the United States of America, and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the Board of Governors of the Federal Reserve System (the “Board”), which comprise the balance sheet as of December 31, 2018, and the related statement of operations and cash flows for the year then ended, and the related notes to the financial statements. We have issued our report thereon dated March 6, 2019. 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 compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Board’s compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Board’s compliance. Accordingly, this communication is not suitable for any other purpose. This report is intended solely for the information and use of the Board of Governors of the Federal Reserve System and is not intended to be and should not be used by anyone other than this specified party. Washington, District of Columbia March 6, 2019

Federal Reserve System Audits 347 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, 2018 and 2017. KPMG LLP Suite 12000 1801 K Street, NW Washington, DC 20006 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, 2018 and 2017, 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, 2018 and 2017, and the results of its operations for the years then ended, on the basis of accounting described in Note 3. Washington, DC March 8, 2019

348 105th Annual Report | 2018 Federal Reserve Banks Abbreviations ACH Automated clearinghouse ASC Accounting Standards Codification ASU Accounting Standards Update BEP Benefit Equalization Retirement Plan Budget Act Bipartisan Budget Act of 2018 Bureau Bureau of Consumer Financial Protection CDS Credit default swaps CIP Committee on Investment Performance (related to System Retirement Plan) DFMU Designated financial market utility FAM Financial Accounting Manual for Federal Reserve Banks FASB Financial Accounting Standards Board FOMC Federal Open Market Committee FRBNY Federal Reserve Bank of New York GAAP Accounting principles generally accepted in the United States of America GSE Government-sponsored enterprise IMF International Monetary Fund JPMC JPMorgan Chase & Co. LLC Limited liability company MBS Mortgage-backed securities ML Maiden Lane LLC RMBS Residential mortgage-backed securities OEB Office of Employee Benefits of the Federal Reserve System SDR Special drawing rights SERP Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks SOMA System Open Market Account STRIPS Separate Trading of Registered Interest and Principal of Securities TBA To be announced TDF Term Deposit Facility TRS Total return swap VIE Variable interest entity

Federal Reserve System Audits 349 Combined Statements of Condition As of December 31, 2018 and December 31, 2017 (in millions) 2018 2 017 ASSETS Gold certificates $ 11,037 $ 11,037 Special drawing rights certificates 5,200 5,200 Coin 1,726 1,892 Loans Note 4 61 134 System Open Market Account: Note 5 Treasury securities, net (of which $25,102 and $28,053 is lent as of December 31, 2018 and 2017, respectively) 2,302,462 2,545,733 Government-sponsored enterprise debt securities, net (of which $0 is lent as of December 31, 2018 and 2017) 2,741 4,752 Federal agency and government-sponsored enterprise mortgage-backed securities, net 1,683,532 1,817,700 Foreign currency denominated investments, net 20,906 21,316 Central bank liquidity swaps 4,207 12,067 Accrued interest receivable 22,236 24,744 Other assets - 13 Investments held by consolidated variable interest entity, net (of which $0 and $1,712 is measured at fair value as of December 31, 2018 and 2017, respectively) Note 6 - 1,713 Prepaid pension benefit costs Note 9 - 14 Bank premises and equipment, net Note 7 2,553 2,571 Items in process of collection 236 81 Other assets 983 1,001 Total assets $4,057,880 $ 4,449,968 L IABILITIES AND CAPITAL Federal Reserve notes outstanding, net $1,671,437 $ 1,570,727 System Open Market Account: Note 5 Securities sold under agreements to repurchase 304,012 563,958 Other liabilities 34 558 Deposits: Depository institutions 1,555,954 1,947,633 Treasury, general account 402,138 228,933 Other deposits 78,317 89,816 Interest payable to depository institutions and others 1,381 1,006 Accrued benefit costs Notes 9, 10 2,558 2,332 Deferred credit items 1,006 1,001 Accrued remittances to the Treasury 1,597 2,337 Other liabilities 286 278 Total liabilities 4,018,720 4,408,579 Capital paid-in 32,335 31,389 Surplus (including accumulated other comprehensive loss of $3,292 and $3,334 at December 31, 2018 and 2017, respectively) 6,825 10,000 Total capital 39,160 41,389 Total liabilities and capital $4,057,880 $ 4,449,968 The accompanying notes are an integral part of these combined financial statements.

350 105th Annual Report | 2018 Combined Statements of Operations For the years ended December 31, 2018 and December 31, 2017 (in millions) 2018 2 017 INTEREST INCOME Loans Note 4 $ 3 $ 1 System Open Market Account: Note 5 Treasury securities, net 62,807 64,267 Government-sponsored enterprise debt securities, net 175 416 Federal agency and government-sponsored enterprise mortgage-backed securities, net 49,289 48,912 Foreign currency denominated investments, net (29) (17) Central bank liquidity swaps 15 14 Total interest income 112,260 113,593 INTEREST EXPENSE System Open Market Account: Note 5 Securities sold under agreements to repurchase 4,559 3,365 Other 4 7 Deposits: Depository institutions and others 38,484 25,849 Term Deposit Facility 2 13 Total interest expense 43,049 29,234 Net interest income 69,211 84,359 O THER ITEMS OF INCOME (LOSS) System Open Market Account: Note 5 Treasury securities gains, net 5 28 Federal agency and government-sponsored enterprise mortgage-backed securities (losses) gains, net (3) 8 Foreign currency translation (losses) gains, net (390) 1,894 Other 21 27 Income from investments held by consolidated variable interest entity, net Note 6 9 6 Income from services 443 442 Reimbursable services to government agencies 706 698 Other 69 68 Total other items of income 860 3,171 O PERATING EXPENSES Salaries and benefits 3,206 3,085 Occupancy 338 325 Equipment 193 184 Net periodic pension expense Note 9 484 525 Other 725 682 Assessments: Board of Governors operating expenses and currency costs 1,687 1,464 Bureau of Consumer Financial Protection 337 573 Total operating expenses 6,970 6,838 Net income before providing for remittances to the Treasury 63,101 80,692 Earnings remittances to the Treasury: Note 3o 65,319 80,559 Net (loss) income after providing for remittances to the Treasury (2,218) 133 Change in prior service costs related to benefit plans Note 9, 10 31 59 Change in actuarial gains related to benefit plans Note 9, 10 11 592 Total other comprehensive income 42 651 Comprehensive (loss) income $ (2,176) $ 784 The accompanying notes are an integral part of these combined financial statements.

Federal Reserve System Audits 351 Combined Statements of Changes in Capital For the years ended December 31, 2018 and December 31, 2017 (in millions, except share data) Surplus Capital Accumulated T otal paid-in Net income other T otal capital retained comprehensive surplus income (loss) 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 (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 Net change in capital stock issued (18,931,796 shares) 946 - - - 946 Comprehensive income: Net loss - (2,218) - (2,218) (2,218) Other comprehensive income - - 42 42 42 Dividends on capital stock - (999) - (999) (999) Net change in capital 946 (3,217) 42 (3,175) (2,229) Balance at December 31, 2018 (646,704,007 shares) $32,335 $10,117 $(3,292) $ 6,825 $ 39,160 The accompanying notes are an integral part of these combined financial statements.

352 105th Annual Report | 2018 (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

Federal Reserve System Audits 353 (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 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.

354 105th Annual Report | 2018 Due to the unique nature of the Bank’s 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. Certain amounts relating to the prior year have been reclassified in the Combined Statements of Condition to conform to the current year presentation. $1,722 million previously reported as “Assets: Investments held by consolidated variable interest entity” and $9 million previously reported as “Liabilities and capital: Liabilities of consolidated variable interest entity,” as of December 31, 2017, have been combined and reported in a new line titled “Assets: Investments held by consolidated variable interest entity, net.” Also, parenthetical fair value amounts $1,720 million and $8 million previously reported as of December 31, 2017 in the line headings of “Assets: Investments held by consolidated variable interest entity” and “Liabilities and capital: Liabilities of consolidated variable interest entity,”

Federal Reserve System Audits 355 have been combined and reported parenthetically in the line “Assets: Investments held by consolidated variable interest entity, net.” Certain amounts relating to the prior year have been reclassified in the Combined Statements of Operations to conform to the current year presentation. $15 million and $9 million previously reported for the year ended December 31, 2017 as “Interest income: Investments held by consolidated variable interest entity” and “Non-interest income: Investments held by consolidated variable interest entity losses, net” have been combined and reported in a new line titled “Other items of income (loss): Income from investments held by consolidated variable interest entity, net.” Certain amounts relating to the prior year have been reclassified in the Combined Statements of Condition to conform to the current year presentation. $6,798 million previously reported as “Liabilities and capital: Deposits: Depository institutions” as of December 31, 2017 have been reclassified as “Liabilities and capital: Deposits: Other deposits.” Significant accounts and accounting policies are explained below. a. Consolidation The combined financial statements include the accounts and results of operations of the Reserve Banks as well as a variable interest entity (VIE), Maiden Lane Limited Liability Company (LLC) (ML). The consolidation of the VIE was assessed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810 (ASC 810), Consolidation, which requires a VIE to be consolidated by its controlling financial interest holder. Intercompany balances and transactions have been eliminated in consolidation. See Note 6 for additional information on the VIE. The combined financial statements of the Reserve Banks also include accounts and results of operations of Maiden and Nassau LLC, a Delaware LLC wholly-owned by the FRBNY, which was formed to own and operate the FRBNY-owned 33 Maiden Lane building. A Reserve Bank consolidates a VIE if it has a controlling financial interest, which is defined as the power to direct the significant economic activities of the entity and the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the VIE. To determine whether it is the controlling financial interest holder of a VIE, the Reserve Bank evaluates the VIE’s design, capital structure, and relationships with the variable interest holders. The Reserve Bank reconsiders whether it has a controlling financial interest in a VIE, as required by ASC 810, at each reporting date or if there is an event that requires consideration. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the Bureau of Consumer Financial Protection (Bureau) as an independent bureau within the System that has supervisory authority over some institutions previously supervised by the Reserve Banks in connection with those institutions’ compliance with consumer protection statutes. Section 1017 of the Dodd-Frank Act provides that the financial statements of the Bureau are not to be consolidated with those of the Board of Governors or the System. The Board of Governors funds the Bureau through assessments on the Reserve Banks as required by the Dodd-Frank Act. The Reserve Banks reviewed the law and evaluated the design of and their relationship to the Bureau and deter-

356 105th Annual Report | 2018 mined 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 certificates among the Reserve Banks based upon each Reserve Bank’s Federal Reserve notes outstanding at the end of the preceding calendar year. SDR certificates are recorded by the Reserve Banks at original cost. c. Coin The amount reported as coin in the Combined Statements of Condition represents the face value of all United States coin held by the Reserve Banks. The Reserve Banks buy coin at face value from the U.S. Mint in order to fill depository institution orders. d. Loans Loans to depository institutions are reported at their outstanding principal balances and interest income is recognized on an accrual basis. Loans are impaired when current information and events indicate that it is probable that the Reserve Banks 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

Federal Reserve System Audits 357 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 which 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 the 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: 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

358 105th Annual Report | 2018 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 “Other items of income (loss): System Open Market Account: Other” in the Combined Statements of Operations. Activity related to repurchase agreements, reverse repurchase agreements, and securities lending is allocated to each of the Reserve Banks on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in the second quarter of each year. f. Treasury Securities, Government-Sponsored Enterprise Debt Securities, Federal Agency and Government-Sponsored Enterprise Mortgage-Backed Securities, and Foreign Currency Denominated Investments Interest income on Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign currency denominated investments included in the SOMA is recorded when earned and includes amortization of premiums and accretion of discounts using the effective interest method. Interest income on federal agency and GSE MBS also includes 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, 2018 and 2017, 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 “Other items of income (loss): System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities (losses) gains, 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

Federal Reserve System Audits 359 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 “Other items of income (loss): System Open Market Account: Foreign currency translation (losses) gains, net” in the Combined Statements of Operations. Because the FRBNY enters into commitments to buy Treasury securities, federal agency and GSE MBS, and foreign government debt instruments and records the related securities on a settlement-date basis in accordance with the FAM, the related outstanding commitments are not reflected in the Combined Statements of Condition. Activity related to Treasury securities, GSE debt securities, and federal agency and GSE MBS, including the premiums, discounts, and realized gains and losses, is allocated to each Reserve Bank on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in the second quarter of each year. Activity related to foreign currency denominated investments, including the premiums, discounts, and realized and unrealized gains and losses, is allocated to each Reserve Bank 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 “Other items of income (loss): Other” in the Combined Statements of Operations. g. Central Bank Liquidity Swaps Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, can be structured as either U.S. dollar or foreign currency liquidity swap arrangements. Central bank liquidity swaps activity, including the related income and expense, is 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

360 105th Annual Report | 2018 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. h. Consolidated VIE – Investments and Liabilities The investments held by the consolidated VIE consist primarily of cash and cash equivalents, short-term investments with maturities of greater than three months and less than one year, and swap contracts. Swap contracts consist of credit default swaps (CDS). Investments are reported as “Investments held by consolidated variable interest entity, net” in the Combined Statements of Condition. Changes in fair value of the investments are recorded in “Other items of income (loss): Income from investments held by consolidated variable interest entity, 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 in “Investments held by consolidated variable interest entity, net” in the Combined Statements of Condition. Changes in fair value of the liabilities are recorded in “Other items of income (loss): Income from investments held by consolidated variable interest entity, net” in the Combined Statements of Operations. i. Bank Premises, Equipment, and Software 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.

Federal Reserve System Audits 361 Costs incurred to acquire software are capitalized based on the purchase price. Costs incurred during the application development stage to develop internal-use software are capitalized based on the cost of direct services and materials associated with designing, coding, installing, and testing the software. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the software applications, which generally range from two to five years. Maintenance costs and minor replacements related to software are charged to operating expense in the year incurred. Leased assets that meet the criteria of FASB ASC Topic 840, Leases, are capitalized and amortized over the shorter of the useful life of the asset or the term of the lease . Capitalized assets, including software, buildings, leasehold improvements, furniture, and equipment, are impaired and an adjustment is recorded when events or changes in circumstances indicate that the carrying amount of assets or asset groups is not recoverable and significantly exceeds the assets’ fair value. j. Federal Reserve Notes Federal Reserve notes are the circulating currency of the United States. These notes, which are identified as issued to a specific Reserve Bank, must be fully collateralized. All of the Reserve Banks’ assets are eligible to be pledged as collateral. The collateral value is equal to the book value of the collateral tendered with the exception of securities, for which the collateral value is equal to the par value of the securities tendered. The par value of securities pledged as collateral under 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 $190 billion and $175 billion at December 31, 2018 and 2017, respectively. At December 31, 2018 and 2017, all Federal Reserve notes outstanding, net, were fully collateralized. At December 31, 2018 and 2017, all gold certificates, all SDR certificates, and $1,655 billion and $1,554 billion, respectively, of domestic securities held in the SOMA were pledged as collateral. At December 31, 2018 and 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

362 105th Annual Report | 2018 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 deposits held by the Reserve Banks under the TDF 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, 2018 and 2017. 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 of Governors 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 represent 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

Federal Reserve System Audits 363 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 $10.2 billion and $10.1 billion for the years ended December 31, 2018 and 2017, 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. 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. Effective May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (Economic Growth Act), further reduced the statutory limit on aggregate Reserve Bank surplus from $7.5 billion to $6.825 billion. Reserve Bank surplus 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 income is reported as a component of “Surplus” in the Combined Statements of Condition and the Combined Statements of Changes in Capital. Additional information regarding the classifications of accumulated other comprehensive income is provided in Notes 9, 10, and 11. o. Earnings Remittances to the Treasury 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 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 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 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, 2018 and 2017, the Bank was reimbursed for all services provided to the Treasury as its fiscal agent.

364 105th Annual Report | 2018 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, 2018 and 2017 was 13.31 percent ($663.0 million) and 12.98 percent ($646.2 million), respectively. The Bank’s assessment for Bureau funding is reported as “Operating expenses: Assessments: Bureau of Consumer Financial Protection” in the Combined Statements of Operations. r. Fair Value Investments and liabilities of the Combined 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 $53 million and $49 million for the years ended December 31, 2018 and 2017, respectively, and are

Federal Reserve System Audits 365 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 Bank commits to a formalized restructuring plan or executes the specific actions contemplated in the plan and all criteria for financial statement recognition have been met. The Bank had no significant restructuring activities in 2018 and 2017. u. Recently Issued Accounting Standards Other than the significant differences described in Note 3, the accounting policies described in FAM are generally consistent with those in GAAP. The following items represent recent GAAP accounting standards and describe how 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, and is not expected to have a material effect on the Reserve Banks’ combined financial statements. In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update eliminate the requirement to disclose methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. This update is effective for the Reserve Banks for the year ending December 31, 2019, 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

366 105th Annual Report | 2018 balance sheet. Subsequently, in July 2018, the FASB issued additional related ASUs, ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements;and in November 2018, ASU 2018-20, Leases (Topic 842): Narrow-scope Improvements for Lessors. This lease accounting guidance is effective for the Reserve Banks for the year ending December 31, 2020. The Board of Governors is continuing to evaluate the effect of this guidance on the Reserve Banks’ combined financial statements, and is considering the information and processes necessary to adopt the guidance. 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. Subsequently, in November 2018, the FASB issued one related ASU, ASU 2018- 19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The update is effective for the Reserve Banks for the year ending December 31, 2022, although earlier adoption is permitted, and is not expected to have a material effect on the 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 is not expected to have a material effect 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, and is not expected to have a material effect on the Reserve Banks’ combined financial statements. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). This update modifies disclosure requirements for fair value measurements in Topic 820 to provide users of financial statements with information about assets and liabilities measured at fair value, including the valuation techniques, the uncertainty in fair value measurements, and how changes in the measurements will affect financial performance. This update is effective for the Reserve Banks for the year ending December 31, 2020. The Board of Governors is continuing to evaluate the effect of this new guidance on the Reserve Banks’ combined financial statements. In August 2018, the FASB issued ASU 2018-14, Retirement Benefits-Defined Benefits Plans-General (Subtopic 715-20). This update modifies the disclosure requirements for pension and postretirement plans. The update is effective for the Reserve Banks for the year ending December 31, 2021, although earlier adoption is permit-

Federal Reserve System Audits 367 ted. The Board of Governors is continuing to evaluate the effect of this new guidance on the Reserve Banks’ combined financial statements. In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40). This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This update is effective for the Reserve Banks for the year ending December 31, 2021, although earlier adoption is permitted. The Board of Governors plans to early adopt this standard for the year ending December 31, 2019, and it is not expected to have a material effect on the Reserve Banks’ combined financial statements. (4) Loans Loans to Depository Institutions The Reserve Banks offer primary, secondary, and seasonal loans to eligible borrowers (depository institutions that maintain reservable transaction accounts or nonpersonal time deposits and have established discount window borrowing privileges). Each program has its own interest rate and interest is accrued using the applicable interest rate established at least every 14 days by the Reserve Banks’ board of directors, subject to review and determination by the Board of Governors. Primary and secondary loans are extended on a short-term basis, typically overnight, whereas seasonal loans may be extended for a period of up to nine months. Primary, secondary, and seasonal loans are collateralized to the satisfaction of the Reserve Bank to reduce credit risk. Assets eligible to collateralize these loans include consumer, business, and real estate loans; Treasury securities; GSE debt securities; foreign sovereign debt; municipal, corporate, and state and local government obligations; asset-backed securities; corporate bonds; commercial paper; and bank-issued assets, such as certificates of deposit, bank notes, and deposit notes. Collateral is assigned a lending value that is deemed appropriate by the Reserve Bank, which is typically fair value reduced by a margin. Loans to depository institutions are monitored daily to ensure that borrowers continue to meet eligibility requirements for these programs. If a borrower no longer qualifies for these programs, the Reserve Bank will generally request full repayment of the outstanding loan or, for primary or seasonal loans, may convert the loan to a secondary credit loan. Collateral levels are reviewed daily against outstanding obligations, and borrowers that no longer have sufficient collateral to support outstanding loans are required to provide additional collateral or to make partial or full repayment. The remaining maturity distribution of loans to depository institutions outstanding as of December 31, 2018 and 2017 was as follows (in millions): Within 16 days T otal 15 days to 90 days December 31, 2018 $ 61 $- $ 61 December 31, 2017 $133 $1 $ 134 At December 31, 2018 and 2017, 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

368 105th Annual Report | 2018 December 31, 2018 and 2017. Interest income attributable to loans to depository institutions was immaterial during the years ended December 31, 2018 and 2017. (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 period from January 1, 2017 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. Effective 2018, the monthly cap on Treasury redemptions increased in steps of $6 billion at three-month intervals until it reached $30 billion per month, and the monthly cap for federal agency and GSE MBS increased in steps of $4 billion at three-month intervals until it reached $20 billion per month. The FOMC also anticipates that the caps will remain in place so that the SOMA holdings will 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.

Federal Reserve System Audits 369 The total Treasury securities, GSE debt securities, and federal agency and GSE MBS, net, excluding accrued interest, held in the SOMA at December 31, 2018 and 2017 was as follows (in millions): 2018 T otal Unamortized Unaccreted Par amortized premiums discounts cost Treasury securities Notes $1,382,654 $ 5,434 $ (4,159) $ 1,383,929 Bonds 839,893 87,579 (8,939) 918,533 Total Treasury securities $2,222,547 $93,013 $(13,098) $ 2,302,462 GSE debt securities $ 2,409 $ 332 $ - $ 2,741 Federal agency and GSE MBS $1,637,123 $46,738 $ (329) $ 1,683,532 2017 T otal Unamortized Unaccreted Par 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 There were no material transactions related to repurchase agreements during the years ended December 31, 2018 and 2017.

370 105th Annual Report | 2018 During the years ended December 31, 2018 and 2017, 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 information related to reverse repurchase agreements held in the SOMA for the years ended December 31, 2018 and 2017 was as follows (in millions): 2018 2 017 Primary dealers and expanded counterparties: Contract amount outstanding, end of year $ 41,848 $ 319,595 Average daily amount outstanding, during the year 12,552 145,959 Maximum balance outstanding, during the year 319,595 468,355 Securities pledged (par value), end of year 42,485 302,690 Securities pledged (fair value), end of year 41,919 320,048 Foreign official and international accounts: Contract amount outstanding, end of year $262,164 $ 244,363 Average daily amount outstanding, during the year 236,818 241,581 Maximum balance outstanding, during the year 262,164 264,290 Securities pledged (par value), end of year 261,615 240,660 Securities pledged (fair value), end of year 262,184 244,417 Total contract amount outstanding, end of year $304,012 $ 563,958 Supplemental information - interest expense: Primary dealers and expanded counterparties $ 186 $ 1,224 Foreign official and international accounts 4,373 2,141 Total interest expense - securities sold under agreements to repurchase $ 4,559 $ 3,365 Securities pledged as collateral, at December 31, 2018 and 2017, consisted solely of Treasury securities. The contract amount outstanding as of December 31, 2018 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, 2019. The contract amount outstanding as of December 31, 2018 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, 2019.

Federal Reserve System Audits 371 The remaining maturity distribution of Treasury securities, GSE debt securities, federal agency and GSE MBS bought outright, and reverse repurchase agreements at December 31, 2018 and 2017 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 O ver T otal 15 days to 90 days to 1 year 10 years to 5 years to 10 years December 31, 2018: Treasury securities (par value) $ 2,092 $ 92,622 $290,222 $ 958,065 $260,898 $ 618,648$2,222,547 GSE debt securities (par value) - 62 - - - 2,347 2,409 Federal agency and GSE MBS (par value)1 - - 4 214 62,706 1,574,199 1,637,123 Securities sold under agreements to repurchase (contract amount) 304,012 - - - - - 304,012 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 1 The par amount shown for federal agency and GSE MBS is the remaining principal balance of the securities. Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted-average life of these securities, which differs from the stated maturity primarily because it factors in scheduled payments and prepayment assumptions, was approximately 7.0 and 6.9 years as of December 31, 2018 and 2017, respectively. The amortized cost and par value of Treasury securities that were loaned from the SOMA under securities lending agreements at December 31, 2018 and 2017 were as follows (in millions): 2018 2 017 Treasury securities (amortized cost) $25,102 $ 28,053 Treasury securities (par value) 24,761 26,990 Securities pledged as collateral by the counterparties in the securities lending arrangements at December 31, 2018 and 2017 consisted solely of Treasury securities. The securities lending agreements outstanding as of December 31, 2018 had a term of one business day and matured on January 2, 2019. 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, 2018, there were no outstanding commitments. The FRBNY enters into commitments to buy and sell federal agency and GSE MBS and records the related securities on a settlement-date basis. As of December 31, 2018, the total purchase price of the federal agency and GSE MBS under outstanding purchase commitments was $294 million, none of which was related

372 105th Annual Report | 2018 to dollar rolls. These commitments, which had contractual settlement dates extending through January 2019, 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, 2018, 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 held in the SOMA consist primarily of cash and short-term investments related to the federal agency and GSE MBS portfolio and were immaterial and $13 million at December 31, 2018 and 2017, respectively. Other liabilities include the FRBNY’s accrued interest payable related to repurchase agreements transactions, obligations to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE MBS, and 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 liabilities held in the SOMA at December 31, 2018 and 2017 was as follows (in millions): 2018 2 017 Other liabilities: Accrued interest payable $25 $ 63 Cash margin 8 481 Obligations from MBS transaction fails 1 14 Total other liabilities $34 $ 558 In 2018, the description of the line item “Other liabilities: Other” has been revised to “Other liabilities: Accrued interest payable” in the preceding table to better reflect the nature of the item. The amount related to this line item was not changed from the prior year, only the nomenclature for the line item was revised. Accrued interest receivable on domestic securities held in the SOMA was $22,160 million and $24,655 million as of December 31, 2018 and 2017, 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 373 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, 2018 and 2017, is summarized as follows (in millions): Total SOMA Total F ederal G SE debt Bills Notes Bonds Treasury agency and securities securities GSE MBS 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 - - Subtotal of activty - (17,768) (3,921) (21,689) (11,896) 22,697 Balance at December 31, 2016 $ - $1,629,571 $916,162 $2,545,733 $ 4,752 $1,817,700 Purchases1 126 192,346 15,560 208,032 - 121,190 Sales1 (47) (49) (65) (161) - (253) Realized gains (losses), net2 - (1) 6 5 - (5) Principal payments and maturities (79) (435,970) (7,731) (443,780) (1,982) (246,316) Amortization of premiums and accretion of discounts, net - (2,929) (7,781) (10,710) (29) (8,784) Inflation adjustment on inflation-indexed securities - 961 2,382 3,343 - - Subtotal of activty - (245,642) 2,371 (243,271) (2,011) (134,168) Balance at December 31, 2018 $ - $1,383,929 $918,533 $2,302,462 $ 2,741 $1,683,532 Year-ended December 31, 2017 Supplemental information - par value of transactions: Purchases3 $ - $ 161,796 $ 15,976 $ 177,772 $ - $ 314,797 Sales - (125) (275) (400) - (320) Year-ended December 31, 2018 Supplemental information - par value of transactions: Purchases3 $126 $ 193,093 $ 15,713 $ 208,932 $ - $ 118,762 Sales3 (47) (51) (59) (157) - (251) 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 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.

374 105th Annual Report | 2018 At December 31, 2018 and 2017, there were no repurchase agreements outstanding and, consequently, no related foreign securities held as collateral. 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, 2018 and 2017 was as follows (in millions): 2018 2 017 Euro: Foreign currency deposits $ 6,390 $ 6,070 French government debt instruments 3,045 3,089 Dutch government debt instruments 1,511 1,626 German government debt instruments 1,440 2,239 Japanese yen: Foreign currency deposits 7,286 6,765 Japanese government debt instruments 1,234 1,527 Total $20,906 $ 21,316 Net interest income earned on foreign currency denominated investments for the years ended December 31, 2018 and 2017 held in the SOMA as follows (in millions): 2018 2 017 Net interest income:1 Euro $(30) $ (19) Japanese yen 1 2 Total net interest income $(29) $ (17) 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 $43 million and $36 million for the years ended December 31, 2018 and 2017, respectively. Accrued interest receivable on foreign currency denominated investments, net was $72 million and $82 million as of December 31, 2018 and 2017, 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, 2018 and 2017 was as follows (in millions): Within 16 days 91 days Over 1 year Over 5 years T otal 15 days to 90 days to 1 year to 5 years to 10 years D ecember 31, 2018: Euro $ 6,425 $ 81 $ 448 $2,792 $ 2,640 $ 12,386 Japanese yen 7,286 90 301 843 - 8,520 Total $13,711 $171 $ 749 $3,635 $ 2,640 $ 20,906 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 There were no foreign exchange contracts related to foreign currency operations outstanding as of December 31, 2018.

Federal Reserve System Audits 375 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, 2018, there were no outstanding commitments to purchase foreign government debt instruments. During 2018, there were purchases, sales, and maturities of foreign government debt instruments of $842 million, $2 million, and $1,734 million, respectively. 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, 2018 and 2017. 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, 2018 and 2017 was $4,207 million and $12,067 million. The remaining maturity distribution of U.S. dollar liquidity swaps at December 31, 2018 and 2017 was as follows (in millions): 2018 2 017 Within W ithin 15 days 15 days Euro $4,197 $ 11,907 Japanese yen 10 160 Total $4,207 $ 12,067 Foreign Currency Liquidity Swaps At December 31, 2018 and 2017, there was no balance outstanding related to foreign currency liquidity swaps. d. Fair Value of SOMA Assets and Liabilities The fair value amounts below are presented solely for informational purposes and are not intended to comply with the fair value disclosures required by ASC 820. Although the fair value of SOMA security holdings can be substantially greater than or less than the recorded value at any point in time, these unrealized gains or losses have no effect on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and responsibilities. Because SOMA securities are recorded at amortized cost, cumulative unrealized gains (losses) are not recognized in the Combined Statements of Condition and the changes in cumulative unrealized gains (losses) are not recognized in the Combined Statements of Operations. The fair value of the Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign government debt instruments held in the SOMA is subject to market risk, arising from movements in market variables such as interest rates and credit risk. The fair value of federal agency and GSE MBS is also affected by the expected rate of prepayments of mortgage loans underlying the securities. The

376 105th Annual Report | 2018 fair value of foreign government debt instruments is also affected by currency risk. Based on evaluations performed as of December 31, 2018 and 2017, there are no credit impairments of SOMA securities holdings. The following table presents the amortized cost, fair value, and cumulative unrealized gains (losses) on the Treasury securities, GSE debt securities, and federal agency and GSE MBS held in the SOMA at December 31, 2018 and 2017 (in millions): 2018 2 017 Cumulative C umulative unrealized unrealized Amortized Amortized Fair value gains F air value gains cost cost (losses), (losses), net net Treasury securities: Notes $1,383,929 $1,370,515 $(13,414) $1,629,571 $1,624,540 $ (5,031) Bonds 918,533 967,479 48,946 916,162 1,008,468 92,306 Total Treasury securities 2,302,462 2,337,994 35,532 2,545,733 2,633,008 87,275 GSE debt securities 2,741 3,222 481 4,752 5,383 631 Federal agency and GSE MBS 1,683,532 1,641,381 (42,151) 1,817,700 1,809,918 (7,782) Total domestic SOMA portfolio securities holdings $3,988,735 $3,982,597 $ (6,138) $4,368,185 $4,448,309 $ 80,124 Memorandum - Commitments for: Purchases of Treasury securities $ - $ - $ - $ 11,447 $ 11,467 $ 20 Purchases of Federal agency and GSE MBS 294 296 2 19,257 19,285 28 Sales of Federal agency and GSE MBS - - - - - - The fair value of Treasury securities and GSE debt securities was determined using pricing services that provide market consensus prices based on indicative quotes from various market participants. The fair value of federal agency and GSE MBS was determined using pricing services that utilize 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 approximates fair value. At December 31, 2018 and 2017, the fair value of foreign currency denominated investments held in the SOMA was $20,957 million and $21,348 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. Due to the short-term nature of foreign currency deposits, the cost basis is estimated to approximate fair value.

Federal Reserve System Audits 377 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, 2018 and 2017 (in millions): Distribution 2018 2017 of MBS holdings by coupon rate Amortized Fair value Amortized F air value cost cost Total SOMA: 2.0% $ 7,532 $ 7,296 $ 8,968 $ 8,739 2.5% 92,877 89,530 110,452 108,371 3.0% 601,805 577,317 674,138 660,939 3.5% 585,114 571,406 630,590 630,245 4.0% 297,546 294,038 289,819 291,868 4.5% 69,474 71,559 68,069 71,896 5.0% 23,296 24,128 28,352 30,048 5.5% 5,097 5,277 6,318 6,739 6.0% 691 722 870 939 6.5% 100 108 124 134 Total $1,683,532 $1,641,381 $1,817,700 $ 1,809,918 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, 2018 and 2017 (in millions): 2018 2017 Change in Change in Realized gains cumulative R ealized gains cumulative (losses), net1, 2 unrealized gains (losses), net1, 2 unrealized gains (losses)3 (losses)3 T reasury securities $5 $(51,743) $28 $ 13,991 GSE debt securities - (150) - (163) Federal agency and GSE MBS (3) (34,369) 8 (263) Total $2 $(86,262) $36 $ 13,565 1 Realized gains (losses) for Treasury securities are reported in “Other items of income (loss): System Open Market Account: Treasury securities gains, net” in the Combined Statements of Operations. 2 Realized gains (losses) for federal agency and GSE MBS are reported in “Other items of income (loss): System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities (losses) gains, net” in the Combined Statements of Operations. 3 Because SOMA securities are recorded at amortized cost, the change in the cumulative unrealized gains (losses) is not reported in the Combined Statements of Operations. The amount of change in cumulative unrealized gains (losses) position, net related to foreign currency denominated investments was a gain of $19 million and a loss of $36 million for the years ended December 31, 2018 and 2017, respectively. Realized gains, net related to foreign currency denominated investments was immaterial for the years ended December 31, 2018 and 2017. 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.

378 105th Annual Report | 2018 (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. During 2018, the FRBNY sold all remaining securities from the ML portfolio and in accordance with the ML agreements, net proceeds were distributed to the FRBNY. On November 1, 2018, ML LLC was dissolved. While its affairs are being wound up, ML LLC will retain minimal cash to meet trailing expenses and other obligations as required by law. The costs to wind up ML LLC are not expected to be material. b. Summary Information for Consolidated VIE As of December 31, 2018, investments held by the consolidated VIE consisted primarily of $0.4 million in cash equivalents. The classification of significant assets and liabilities of ML at December 31, 2017 is summarized in the following table (in millions): 2 017 Assets: Short-term investments $ 998 Swap contracts 5 Other investments 1 Subtotal 1,004 Cash, cash equivalents, accrued interest receivable, and other receivables 716 Cash collateral on swap contracts 2 Total investments held by consolidated VIE $ 1,722 Liabilities: Swap contracts $ 8 Other liabilities 1 Total liabilities of consolidated VIE 9 Investments held by consolidated VIE, net $ 1,713 At December 31, 2018, FRBNY had no remaining exposure to loss from its investments. At December 31, 2017, FRBNY’s approximate maximum exposure to loss was $1,004 million. This estimate incorporates potential losses associated with the investments recorded on the FRBNY’s balance sheet.

Federal Reserve System Audits 379 The net income attributable to ML for the year ended December 31, 2018 and 2017 was as follows (in millions): 2018 2 017 Other items of income: Interest income: Investments held by consolidated VIE $20 $ 15 Realized portfolio holdings losses, net (58) (6) Unrealized portfolio holdings gains (losses), net 47 (3) Other items of income: Consolidated VIE, net 9 6 Less: Professional fees 2 2 Net income attributable to consolidated VIE $ 7 $ 4 i. Debt Securities ML had short-term investments with maturities of greater than three months and less than one year when acquired. As of December 31, 2018 there were no remaining investments in debt securities held in ML. As of December 31, 2017, ML’s short-term investments consisted of U.S. Treasury bills. 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. As of December 31, 2018, there were no remaining derivative financial instruments in ML and the total return swap (TRS) with JPMC was terminated on September 11, 2018. As of December 31, 2017, the ML portfolio was composed of derivative financial instruments included in a 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. 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 propri-

380 105th Annual Report | 2018 etary 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. As of December 31, 2018, all remaining assets, consisting entirely of cash equivalents, were classified as Level 1. There were no remaining Level 2 or Level 3 assets or liabilities held in ML as of December 31, 2018. The following table presents 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 L evel 31 Netting2 fai T r o v t a a l l ue Assets: Short-term investments $ 998 $- $ - $ - $ 998 Cash equivalents3 716 - - - 716 Swap contracts - - 6 (1) 5 Other investments - 1 - - 1 Total assets $1,714 $1 $ 6 $ (1) $ 1,720 Liabilities: Swap contracts $ - $- $14 $ (6) $ 8 Investments held by consolidated VIE, net $1,714 $1 $(8) $ 5 $ 1,712 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. Certain amounts relating to the prior year have been revised in the preceding table. $716 million previously reported as of December 31, 2017 as “Assets: Short-term investments” has been revised to $998 million. $998 million previously reported as of December 31, 2017 as “Assets: Cash equivalents” has been revised to $716 million. As of December 31, 2017, both the Level 3 assets and liabilities held in the Combined Statements of Condition as “Investments held by consolidated variable interest entity, net”, and the associated unrealized gains and losses related to those assets and liabilities are immaterial.

Federal Reserve System Audits 381 (7) Bank Premises, Equipment, and Software Bank premises and equipment at December 31, 2018 and 2017 were as follows (in millions): 2 018 2 017 Bank premises and equipment: Land and land improvements $ 418 $ 408 Buildings 2,978 2,923 Building machinery and equipment 668 633 Construction in progress 68 64 Furniture and equipment 1,068 1,077 Subtotal 5,200 5,105 Accumulated depreciation (2,647) (2,534) Bank premises and equipment, net $2,553 $ 2,571 Depreciation expense, for the years ended December 31 $ 223 $ 217 Reserve Bank premises and equipment at December 31, 2018 and 2017 included the following amounts for capitalized leases (in millions): 2 018 2 017 Leased premises and equipment under capital leases $30 $ 29 Accumulated depreciation (21) (23) Leased premises and equipment under capital leases, net $ 9 $ 6 Depreciation expense related to leased premises and equipment under capital leases, for the years ended December 31 $ 4 $ 3 The Reserve Banks lease space to outside tenants with remaining lease terms ranging from 1 to 15 years. Rental income from such leases was $41 million and $40 million for the years ended December 31, 2018 and 2017, respectively, and is reported as a component of “Other items of income (loss): 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, 2018, are as follows (in millions): 2019 $ 38 2020 36 2021 32 2022 28 2023 23 Thereafter 55 Total $ 212 The Reserve Banks had capitalized software assets, net of amortization, of $436 million and $438 million at December 31, 2018 and 2017, respectively. Amortization expense was $134 million and $122 million for the years ended December 31, 2018 and 2017, 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.

382 105th Annual Report | 2018 (8) Commitments and Contingencies In conducting their operations, the Reserve Banks enter into contractual commitments, normally with fixed expiration dates or termination provisions, at specific rates and for specific purposes. At December 31, 2018, the Reserve Banks were obligated under non-cancelable leases for premises and equipment with remaining terms ranging from 1 to approximately 11 years. These leases provide for increased lease payments based upon increases in real estate taxes, operating costs, or selected price indexes. Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office equipment (including taxes, insurance, and maintenance when included in rent), net of sublease rentals, was $14 million and $16 million for the years ended December 31, 2018 and 2017, 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, 2018, are as follows (in millions): Operating leases 2019 $ 5 2020 5 2021 3 2022 3 2023 3 Thereafter 6 Future minimum lease payments $ 25 At December 31, 2018, the Reserve Banks had unrecorded unconditional purchase commitments and long-term obligations extending through the year 2022 with a remaining fixed commitment of $118 million. Purchases of $36 million and $37 million were made against these commitments during 2018 and 2017, respectively. These commitments represent maintenance of currency processing machines and development of new equipment and have variable and 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): 2019 $ 18 2020 42 2021 29 2022 29 Under the Insurance Agreement of the Reserve Banks, each of the Reserve Banks has agreed to bear, on a per-incident basis, a share of certain losses in excess of 1 percent of the capital paid-in of the claiming Reserve Bank, up to 50 percent of the total capital paid-in of all Reserve Banks. Losses are borne in the ratio of a Reserve Bank’s capital paid-in to the total capital paid-in of all Reserve Banks at the beginning of the calendar year in which the loss is shared. No claims were outstanding under the agreement at December 31, 2018 and 2017. 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 coun-

Federal Reserve System Audits 383 sel, the legal actions and claims will be resolved without material adverse effect on the financial position or results of operations of the Reserve Banks. (9) Retirement and Thrift Plans Retirement Plans The Reserve Banks currently offer three defined benefit retirement plans to its employees, based on length of service and level of compensation. Substantially all of the employees of the Reserve Banks, Board of Governors, and Office of Employee Benefits of the Federal Reserve System (OEB) participate in the Retirement Plan for Employees of the Federal Reserve System (System Plan).1 Under the Dodd-Frank Act, eligible Bureau employees may participate in the System Plan and, during the years ended December 31, 2018 and 2017, 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, as a component of “Operating expenses: Net periodic pension expense” in its 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, 2018 and 2017 (in millions): 2018 2 017 Estimated actuarial present value of projected benefit obligation at January 1 $16,501 $ 14,642 Service cost-benefits earned during the period 576 486 Interest cost on projected benefit obligation 622 614 Actuarial loss (gain) (1,621) 1,179 Contributions by plan participants 6 4 Special termination benefits 12 11 Benefits paid (463) (435) Estimated actuarial present value of projected benefit obligation at December 31 $15,633 $ 16,501 Annually, the Society of Actuaries released new mortality tables and updated mortality projection scales. The System analyzed these new tables relative to the System’s actual retiree mortality experience. Based on these analyses, the System in 2018 adopted the modified MP-2018 projections scales and RP-2014 mortality tables with various adjustments to reflect the System’s recent mortality experience of System retirees. These adjustments resulted in a reduction to the System Plan projected benefit obligation of approximately $62 million and $70 million in 2018 and 2017, respectively. 1 The OEB was established by the System to administer selected System benefit plans.

384 105th Annual Report | 2018 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, 2018 and 2017 (in millions): 2018 2 017 Estimated plan assets at January 1 (of which $16,454 and $13,671 is measured at fair value as of January 1, 2018 and 2017, respectively) $16,515 $ 13,699 Actual return on plan assets (920) 2,497 Contributions by the employer 276 750 Contributions by plan participants 6 4 Benefits paid (463) (435) Estimated plan assets at December 31 (of which $15,389 and $16,454 is measured at fair value as of December 31, 2018 and 2017, respectively) $15,414 $ 16,515 Funded status and accrued pension benefit costs $ (219) $ 14 Amounts included in accumulated other comprehensive loss are shown below: Prior service cost $ (20) $ (82) Net actuarial loss (3,167) (3,045) Total accumulated other comprehensive loss $(3,187) $ (3,127) The FRBNY, on behalf of the System, funded $240 million and $720 million during the years ended December 31, 2018 and 2017, 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 2018 and 2017, the Bank received contributions from the Bureau of $36 million and $30 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 $13,705 million and $14,376 million at December 31, 2018 and 2017, respectively. The weighted-average assumptions used in developing the accumulated pension benefit obligation for the System Plan as of December 31 were as follows: 2 018 2 017 Discount rate 4.36% 3 .65% Rate of compensation increase 4.25% 4 .00% Net periodic benefit expenses for the years ended December 31, 2018 and 2017 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: 2 018 2 017 Discount rate 3.65% 4 .15% Expected asset return 6.00% 6 .50% 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 projected returns for equities and fixed income investments based on observable

Federal Reserve System Audits 385 inputs for real interest rates, inflation expectations, and equity risk premiums. In 2018, a change in estimate was made to the discount rate methodology used by the actuarial model to determine the System Plan’s projected benefit obligation. Specifically, the discount rate methodology was refined to expand the universe of eligible fixed income securities and market pricing data. This change was applied prospectively and resulted in a reduction to the System Plan projected benefit obligation of approximately $324 million for the year ended December 31, 2018. The components of net periodic pension benefit expense (credit) for the System Plan for the years ended December 31, 2018 and 2017 are shown below (in millions): 2018 2 017 Service cost - benefits earned during the period $576 $ 486 Interest cost on projected benefit obligation 622 614 Amortization of prior service cost 62 88 Amortization of net loss 160 209 Expected return on plan assets (983) (899) Net periodic pension benefit expense 437 498 Special termination benefits 12 11 Bureau of Consumer Financial Protection contributions (36) (30) Total periodic pension benefit expense $413 $ 479 Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic pension benefit expense in 2019 are shown below (in millions): Prior service cost $ 9 Net actuarial loss 160 Total $ 169 The recognition of special termination benefits is primarily the result of enhanced retirement benefits provided to employees in the normal course of operations. Following is a summary of expected benefit payments, excluding enhanced retirement benefits (in millions): 2019 $ 539 2020 577 2021 616 2022 656 2023 697 2024 - 2028 4,094 Total $ 7,179 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, 2018, 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

386 105th Annual Report | 2018 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. 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 System Plan and the guidelines for these portfolios are designed to limit portfolio deviations from the benchmark. The passively-managed longduration 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-, mid- and 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 certain derivatives, are defined in either the trust agreement (for the passively-managed long-duration fixed income portfolio) or the investment guidelines (for the remaining investments). The CIP reviews the trust agreement and approves all investment guidelines as part of the selection of each investment to ensure that they are consistent with the CIP’s investment objectives for the System Plan’s assets.

Federal Reserve System Audits 387 The System Plan’s policy weight and actual asset allocations at December 31, 2018 and 2017 by asset category, are as follows: 2018 Actual asset allocations Policy weight 2018 2 017 Fixed income 50.0% 51.6% 48.6% U.S. equities 21.9% 21.1% 22.8% International equities 14.0% 13.3% 16.0% Emerging markets equities 4.7% 4.4% 5.1% Private equity 4.7% 5.1% 3.6% Real estate 4.7% 3.8% 2.9% Cash 0.0% 0.7% 1.0% Total 100.0% 100.0% 1 00.0% 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 2019 is $180 million. In 2019, the FRBNY plans to make monthly contributions of $15 million and will reevaluate the monthly contributions upon completion of the 2019 actuarial valuation. The Reserve Banks’ projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31, 2018 and 2017, 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.

388 105th Annual Report | 2018 The following tables present the financial instruments recorded at fair value as of December 31, 2018 and 2017 by ASC 820 hierarchy (in millions): 2018 Description Level 1 Level 2 Level 3 T otal1 Short-term investments $ 159 $ - $ - $ 159 Treasury and Federal agency securities 136 2,697 - 2,833 Corporate bonds - 2,844 - 2,844 Other fixed income securities - 327 - 327 Collective trusts 7,844 - - 7,844 Investments measured at net asset value2 - - - 1,375 Total investments at fair value3 $ 8,139 $5,868 $- $ 15,382 1 There were no transfers between Levels during the year ended December 31, 2018. 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 $14 million and future margin payable of $7 million at December 31, 2018. 2017 Description Level 1 Level 2 Level 3 T otal1 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. 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, 2018 and 2017, a portion of short-term investments was available for futures trading. There were $5 million and $7 million of Treasury securities pledged as collateral for the years ended December 31, 2018 and 2017, respectively. Thrift Plan Employees of the Reserve Banks participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The Reserve Banks match 100 percent of the first 6 percent of employee contributions from the date of hire and provides an automatic employer contribution of 1 percent of eli-

Federal Reserve System Audits 389 gible pay. The Reserve Banks’ Thrift Plan contributions totaled $141 million and $136 million for the years ended December 31, 2018 and 2017, 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, 2018 and 2017 (in millions): 2018 2 017 Accumulated postretirement benefit obligation at January 1 $1,865 $ 1,751 Service cost benefits earned during the period 86 75 Interest cost on accumulated benefit obligation 68 70 Net actuarial loss (gain) (117) 48 Contributions by plan participants 28 26 Benefits paid (104) (103) Medicare Part D subsidies 2 2 Plan amendments (1) (4) Accumulated postretirement benefit obligation at December 31 $1,827 $ 1,865 At December 31, 2018 and 2017, the weighted-average discount rate assumptions used in developing the postretirement benefit obligation were 4.26 percent and 3.59 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.

390 105th Annual Report | 2018 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, 2018 and 2017 (in millions): 2018 2 017 Fair value of plan assets at January 1 $ - $ - Contributions by the employer 74 75 Contributions by plan participants 28 26 Benefits paid (104) (103) Medicare Part D subsidies 2 2 Fair value of plan assets at December 31 $ - $ - Unfunded obligation and accrued postretirement benefit cost $1,827 $ 1,865 Amounts included in accumulated other comprehensive loss are shown below: Prior service cost $ 98 $ 128 Net actuarial loss (203) (336) Deferred curtailment gain - 1 Total accumulated other comprehensive loss $ (105) $ (207) 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, 2018 and 2017 are provided in the table below: 2018 2 017 Health-care cost trend rate assumed for next year 6.25% 6 .20% 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 2025 2 022 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, 2018 (in millions): One percentage O ne percentage point increase point decrease Effect on aggregate of service and interest cost components of net periodic postretirement benefit costs $ 28 $ (23) Effect on accumulated postretirement benefit obligation 241 (203)

Federal Reserve System Audits 391 The following is a summary of the components of net periodic postretirement benefit expense for the years ended December 31, 2018 and 2017 (in millions): 2018 2 017 Service cost-benefits earned during the period $ 86 $ 75 Interest cost on accumulated benefit obligation 68 70 Amortization of prior service cost (32) (33) Amortization of net actuarial loss 18 11 Total periodic expense 140 123 Curtailment gain (1) - Net periodic postretirement benefit expense $139 $ 123 Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit expense in 2019 are shown below: Prior service cost $ (31) Net actuarial loss 8 Total $ (23) Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2018 and 2017, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 3.59 percent and 4.07 percent, respectively. Net periodic postretirement benefit expense is reported as a component of “Operating expenses: Salaries and benefits” in the Combined Statements of Operations. 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. Federal Medicare Part D subsidy receipts were immaterial in the years ended December 31, 2018 and 2017. Expected receipts in 2019, related to benefits paid in the years ended December 31, 2018 and 2017, are immaterial. Following is a summary of expected postretirement benefit payments (in millions): W ithout subsidy With subsidy 2019 $ 78 $ 77 2020 86 85 2021 91 90 2022 97 95 2023 103 101 2024 - 2028 593 581 Total $1,048 $ 1,029

392 105th Annual Report | 2018 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; survivor income benefits, and certain workers’ compensation expenses. The accrued postemployment benefit costs recognized by the Reserve Banks at December 31, 2018 and 2017 were $110 million and $131 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 2018 and 2017 operating expenses were $3 million and $13 million, respectively, and are recorded as a component of “Operating expenses: Salaries and benefits” in the Combined Statements of Operations. (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, 2018 and 2017 (in millions): 2018 2017 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 $(3,127) $(207) $(3,334) $(3,844) $(141) $ (3,985) Change in funded status of benefit plans: Prior service costs arising during the year - 1 1 - 4 4 Amortization of prior service cost 621 (32)2 30 881 (33)2 55 Change in prior service costs related to benefit plans 62 (31) 31 88 (29) 59 Net actuarial gain (loss) arising during the year (282) 116 (166) 420 (48) 372 Amortization of net actuarial loss 1601 182 178 2091 112 220 Amortization of deferred curtailment gain - (1) (1) - - - Change in actuarial gain (loss) related to benefit plans (122) 133 11 629 (37) 592 Change in funded status of benefit plans— other comprehensive income (loss) (60) 102 42 717 (66) 651 Balance at December 31 $(3,187) $(105) $(3,292) $(3,127) $(207) $ (3,334) 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.

Federal Reserve System Audits 393 (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 the Reserve Bank’s allocated portion of the aggregate surplus limitation. For the year ending December 31, 2017 and through February 8, 2018, the aggregate surplus limitation was $10 billion. On February 9, 2018, the Budget Act reduced the aggregate surplus limitation 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, and the payment was remitted to the Treasury on February 22, 2018. On May 24, 2018, the Economic Growth Act reduced the aggregate surplus limitation to $6.825 billion, which required the Reserve Banks to make a lump-sum payment to the Treasury in the amount of $675 million, and the payment was remitted to the Treasury on June 21, 2018. The following table presents the distribution of the System total comprehensive income for the years ended December 31, 2018 and 2017 (in millions): 2018 2 017 Net income before providing for remittances to Treasury $63,101 $ 80,692 Other comprehensive income 42 651 Comprehensive income - available for distribution $63,143 $ 81,343 Distribution of comprehensive income (loss): Transfer from surplus $(3,175) $ - Dividends 999 784 Earnings remittances to the Treasury1 65,319 80,559 Total distribution of comprehensive income $63,143 $ 81,343 1 Inclusive of lump-sum payments required by legislation enacted during the year ended December 31, 2018. (13) Subsequent Events There were no subsequent events that required adjustments to or disclosures in the combined financial statements as of December 31, 2018. Subsequent events were evaluated through March 8, 2019, which is the date that the combined financial statements were available to be issued.

394 105th Annual Report | 2018 Office of Inspector General Activities reviews to evaluate actions taken on prior recommendations. Because of the sensitive nature of some of The Office of Inspector General (OIG) for the Fed- the material, the OIG issued four nonpublic reports eral Reserve Board, which is also the OIG for the to the Board and three nonpublic reports to the Consumer Financial Protection Bureau (CFPB), CFPB, as indicated. Regarding the OIG’s investigaoperates in accordance with the Inspector General tive work related to the Board and the CFPB, 29 Act of 1978, as amended. The OIG plans and con- investigations were opened and 31 investigations were ducts audits, inspections, evaluations, investigations, closed during the year. OIG investigative work and other reviews relating to Board and CFPB pro- resulted in 4 indictments, 10 convictions, and 4 prohigrams and operations, including functions that the bitions from the banking industry, as well as Board has delegated to the Federal Reserve Banks. It $1.34 billion in criminal fines and restitution. The also retains an independent public accounting firm to OIG also issued its listings of major management annually audit the Board’s and the Federal Financial challenges facing the Board and the CFPB. Further, Institutions Examination Council’s financial state- the OIG issued two semiannual reports to Congress ments. These activities promote economy and effi- and performed approximately 30 reviews of legislaciency; enhance policies and procedures; and prevent tion and regulations related to the operations of the and detect waste, fraud, and abuse. In addition, the Board, the CFPB, or the OIG. OIG keeps the Congress, the Board of Governors, For more information and to view OIG reports, visit and the CFPB director fully informed about serious the OIG’s website at https://oig.federalreserve.gov. abuses and deficiencies. Specific details about the OIG’s body of work also During 2018, the OIG issued 26 reports (table 1) to may be found in the OIG’s Work Plan and semianthe Board and the CFPB and conducted follow-up nual reports to Congress. Table 1. OIG reports issued in 2018 Report title M onth issued The CFPB Can Further Strengthen Controls Over Certain Offboarding Processes and Data J anuary Audit of the CFPB’s Encryption of Data on Mobile Devices (nonpublic report) J anuary Report on the Independent Audit of the Consumer Financial Protection Bureau’s Privacy Program F ebruary Fiscal Year 2017 Risk Assessment of the CFPB’s Travel Card Program F ebruary Fiscal Year 2017 Risk Assessment of the CFPB’s Purchase Card Program F ebruary Federal Financial Institutions Examination Council Financial Statements as of and for the Years Ended December 31, 2017 and 2016, and Independent Auditors’ Reports F ebruary Board of Governors of the Federal Reserve System Financial Statements as of and for the Years Ended December 31, 2017 and 2016, and Independent Auditors’ Reports M arch Security Control Review of the RADAR Data Warehouse (nonpublic report) M arch Review of the Failure of Allied Bank M arch Security Control Review of the Board’s Public Website (nonpublic report) M arch Closure of the Security Control Review of the CFPB’s SQL Operating Environment (nonpublic report) M arch Independent Accountants’ Report on the Bureau Civil Penalty Fund’s 2017 Compliance With the Improper Payments Information Act of 2002, as Amended M ay In Accordance With Applicable Guidance, Reserve Banks Rely on the Primary Federal Regulator of the Insured Depository Institution in the Consolidated Supervision of Regional Banking Organizations, but Document Sharing Can Be Improved J une The Bureau Could Have Better Managed Its GMMB Contract and Should Strengthen Controls for Contract Financing and Contract Management J une Security Control Review of the Bureau’s Mosaic System (nonpublic report) J une Knowledge Management for the Board’s Comprehensive Liquidity Analysis and Review Is Generally Effective and Can Be Further Enhanced S eptember The Bureau’s Travel Card Program Controls Are Generally Effective but Could Be Further Strengthened S eptember Review of the Failure of Fayette County Bank S eptember Security Control Review of the Board Division of Research and Statistics’ General Support System (nonpublic report) S eptember 2018 Audit of the Board’s Information Security Program O ctober 2018 Audit of the Bureau’s Information Security Program O ctober Evaluation of the Board’s Implementation of Splunk (nonpublic report) N ovember The Board Can Strengthen Information Technology Governance N ovember The Board’s Currency Shipment Process Is Generally Effective but Can Be Enhanced to Gain Efficiencies and to Improve Contract Administration D ecember Bureau Purchase Card Program Controls Appear to Be Operating Effectively D ecember The Board Can Strengthen Controls Over Its Academic Assistance Program D ecember

Federal Reserve System Audits 395 Government Accountability eral Reserve System operations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of Office Reviews 2010 (Dodd-Frank Act) directs the GAO to conduct additional audits with respect to these operations. In The Federal Banking Agency Audit Act (Pub. L. 2018, the GAO completed 18 projects that involved No. 95–320) authorizes the Government Account- the Federal Reserve (table 1). Twelve projects were ability Office (GAO) to audit certain aspects of Fed- ongoing as of December 31, 2018 (table 2). Table 1. Reports completed during 2018 Report title Report number M onth issued (2018) Dodd-Frank Regulations: Consumer Financial Protection Bureau Needs a Systematic Process to Prioritize Consumer Risks GAO-19-158 D ecember Financial Technology: Agencies Should Provide Clarification on Lenders’ Use of Alternative Data GAO-19-111 D ecember Financial Company Bankruptcies: Experts Had Mixed Views on Companies’ Controls for Mitigating Obstacles GAO-19-30 D ecember Financial Audit: Bureau of the Fiscal Service’s Fiscal Years 2018 and 2017 Schedules of Federal Debt GAO-19-113 N ovember Community Banks: Effect of Regulations on Small Business Lending and Institutions Appears Modest, but Lending Data Could Be Improved GAO-18-312 S eptember Freedom of Information Act: Agencies Are Implementing Requirements but Additional Actions Are Needed GAO-18-365 J une Small Business Loans: Additional Actions Needed to Improve Compliance with the Credit Elsewhere Requirement GAO-18-421 J une Puerto Rico: Factors Contributing to the Debt Crisis and Potential Federal Actions to Address Them GAO-18-387 M ay Bureau of Engraving and Printing: Options for and Costs of a Future Currency Production Facility GAO-18-338 M ay Management Report: Areas for Improvement in the Federal Reserve Banks’ Information System Controls GAO-18-334R A pril Financial Technology: Additional Steps by Regulators Could Better Protect Consumers and Aid Regulatory Oversight GAO-18-254 M arch Community Reinvestment Act: Options for Treasury to Consider to Encourage Services and Small-Dollar Loans When Reviewing Framework GAO-18-244 M arch Commercial Real Estate Lending: Banks Potentially Face Increased Risk; Regulators Generally Are Assessing Banks’ Risk Management Practices GAO-18-245 M arch Homeownership: Information on Mortgage Options and Effects on Accelerating Home Equity Building GAO-18-297 M arch Remittances to Fragile Countries: Treasury Should Assess Risks from Shifts to Non-Banking Channels GAO-18-313 M arch Community Banks and Credit Unions: Regulators Could Take Additional Steps to Address Compliance Burdens GAO-18-213 F ebruary Bank Secrecy Act: Derisking along the Southwest Border Highlights Need for Regulators to Enhance Retrospective Reviews GAO-18-263 F ebruary Financial Services Regulations: Procedures for Reviews under Regulatory Flexibility Act Need to Be Enhanced GAO-18-256 January Table 2. Projects active at year-end 2018 Subject of project Month initiated S tatus Impact of de-risking on money transmitters October 2016 O pen Bank regulatory oversight April 2017 O pen Tax-time financial products August 2017 O pen Potential changes to coin and currency January 2018 C losed 3/21/2019 Credit reporting agencies’ data security January 2018 C losed 3/26/2019 Data governance good practices and lessons learned March 2018 O pen Bank Secrecy Act implementation March 2018 O pen Public comment fraud April 2018 O pen Fair credit reporting for student loans July 2018 O pen Consumer reporting agencies’ data accuracy and protection September 2018 O pen Bank Secrecy Act costs and benefits October 2018 O pen Federal debt management and demand for Treasury securities December 2018 O pen

397 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’ 2018 budtion on the 2018 budget performance of the Board geted, 2018 actual, and 2019 budgeted operating and Reserve Banks and on their 2019 budgets, budexpenses and employment.2 geting processes, and trends in expenses and employment. This section also presents information on the costs of new currency. 2 Substantially all employees of the Board and Reserve Banks participate in the Retirement Plan for Employees of the Federal Reserve System (System Plan). Reserve Bank employees at certain compensation levels participate in the Benefit Equalization Plan, and certain Reserve Bank officers participate in the 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 https://www.federalreserve.gov/publications/budget- plans; however, the 2018 claims for reimbursement include the review/default.htm. allocated portion of the pension. Additional information about Each budget covers one calendar year. these expenses can be found in section 11, “Statistical Tables” Table 1. Total operating expenses of the Federal Reserve System, net of receipts and claims for reimbursement, 2018–19 Millions of dollars, except as noted Variance Variance 2018 actual to 2018 budget 2019 budget to 2018 actual Item 2018 budget 2018 actual 2019 budget Amount Percent Amount Percent Board 766.7 739.0 -27.7 -3.6 793.6 54.6 7.4 Office of Inspector General 35.9 33.3 -2.7 -7.4 35.4 2.1 6.3 Reserve Banks1 4,451.3 4,394.1 -57.2 -1.3 4 ,573.8 179.6 4.1 Currency 861.7 848.8 -13.0 -1.5 955.8 1 07.0 12.6 Total System operating expenses2 6,115.7 6,015.1 -100.5 -1.6 6,358.5 343.4 5.7 Revenue from priced services 441.7 442.5 0.8 0.2 440.3 -2.2 -0.5 Claims for reimbursement3 668.2 706.1 37.9 5.7 709.2 3.1 0.4 Other income4 2.5 3.0 0.5 21.7 2.9 -0.1 -3.8 Revenue and claims for reimbursement5 1,112.4 1,151.6 39.2 3.5 1 ,152.4 0.8 0.1 Total System operating expenses, net of revenue and claims for reimbursement 5,003.3 4,863.5 -139.8 -2.8 5,206.1 342.6 7.0 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 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 2018 actual, the fiscal agency allocated portion of the pension is also included but is not included for the budget. The fiscal agency budgeted pension expense is $40.7 million in 2018 and $57.4 million in 2019. 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).

398 105th Annual Report | 2018 Table 2. Employment in the Federal Reserve System, 2018–19 V ariance V ariance 2018 actual to 2018 budget 2019 budget to 2018 actual Item 2018 budget 2018 actual 2019 budget Amount Percent A mount P ercent Board1 2,847 2,847 0 0.0 2,861 14 0.5 Office of Inspector General1 132 132 0 0.0 132 0 0.0 Reserve Banks2 19,878 19,577 -300 -1.5 19,856 279 1.4 Total System employment 22,857 22,556 -300 -1.3 22,849 293 1.3 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. 2018 Budget Performance Figure 1. Distribution of budgeted expenses of the Federal Reserve System, 2019 In carrying out its responsibilities in 2018, the Federal Reserve System incurred $4,863.5 million in net Board of Governors and OIG expenses. Total System operating expenses of 13.0% $6,015.1 million were offset by $1,151.6 million in Reserve Banks 72.0% revenue from priced services, claims for reimbursement, and other income. Total 2018 System operating Currency 15.0% expenses were $139.8 million, or 2.8 percent, less than the amount budgeted for 2018. 2019 Operating Expense Budget Budgeted 2019 System operating expenses of $5,206.1 million, net of revenue and reimbursements, are $342.6 million, or 7.0 percent, higher than 2018 actual expenses. The Reserve Bank budgets comprise almost three-quarters of the System budget OIG Office of Inspector General. (figure 1). Budgeted 2019 revenue from priced services is 0.5 percent lower than 2018 actual revenue, driven largely by decreased check volumes, offset by cent per year (figure 2). Over the same period, nonhigher FedACH volumes, and incremental revenue defense discretionary spending by the federal governfor the new Exception Resolution Service.3 ment has increased an average of 0.8 percent per year (figure 3). Staffing has increased in information tech- Trends in Expenses and Employment nology (IT) to support large application-development projects, information security efforts, end-user ser- From the actual 2009 level to the budgeted 2019 vices, and the central computing environment. Superamount, the total operating expenses of the Federal vision resource levels were augmented to meet Reserve System have increased an average of 4.6 per- requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) (see Table 10. “Income and expenses of the Federal Reserve and to support portfolio growth (figure 4). Banks, by Bank”). Board employees also participate in the Benefit Equalization Plan, and Board officers participate in the Pension Enhance- Growth in supervision expenses over the past ment Plan for Officers of the Board of Governors of the Fed- 10 years has been driven by additional supervisory eral Reserve System (PEP). The operating expenses of the Board presented in this section include expenses related to Board par- resources needed to respond to the financial crisis ticipants in the Benefit Equalization Plan and PEP but do not and a growth in the state member bank portfolio, to include expenses related to the System Plan. implement expanded responsibilities mandated by 3 Exception Resolution Service provides an automated means for the Dodd-Frank Act, to build out the cybersecurity participants to manage ACH exceptions for entries settled through FedACH. supervision program, and to support other strategic

Federal Reserve System Budgets 399 Figure 2. Total expenses of the Federal Reserve System, Figure 4. Employment in the Federal Reserve System, 2009–19 2009–19 Billions of dollars Thousands of persons 7 23 Current dollars 6 22 5 2009 dollars1 21 4 3 20 2 19 1 18 0 2009 2011 2013 2015 2017 2019 Note: For 2019, budgeted. Includes expenses of the OIG. 17 2009 2011 2013 2015 2017 2019 1 Calculated with the GDP price deflator. Note: For 2019, budgeted. Employment numbers presented include position counts for the Board and the OIG and average number of personnel (ANP) for the Reserve Banks. Figure 3. Cumulative change in Federal Reserve System expenses and federal government expenses, 2009–19 have been partially offset by lower expenses because Percent of efficiency improvements in cash operations. Treas- 60 ury services expenses have increased to meet evolving 50 needs, including the automation of the Treasury’s 40 collection and payment services, the addition of Federal Reserve2 Treasury applications to the Treasury Web Applica- 30 tion Infrastructure (TWAI), and other requested 20 projects.4 Federal government1 10 2019 Capital Budgets 0 The capital budgets for the Board and Reserve Banks -10 total $185.6 million and $483.4 million, respectively.5 2009 2011 2013 2015 2017 2019 As in previous years, the 2019 capital budgets include 1 Discretionary spending less expenditures on defense. Source: Budget of the United States Government, Fiscal Year 2019: Historical Tables, Table 8.1. Outlays funding for projects that support the strategic direcby Budget Enforcement Act Category, 1962–2023. tion outlined by the Board and each Reserve Bank. 2 Includes expenses of the OIG. These strategic goals emphasize investments that continue to improve operational efficiencies, enhance services to Bank customers, and ensure a safe and pronational initiatives. However, supervision growth is ductive work environment. moderating as supervisory conditions improve, efficiencies are found, and resources are shifted toward higher-risk activities and emerging risks. Expense 4 TWAI is a dedicated, distributed computing environment that growth in the monetary policy area during the finan- houses multiple Treasury applications. cial crisis has been followed more recently by In 2018, the Reserve Banks successfully concluded a multiyear fiscal agency consolidation effort, which reduced the number of increased investment in financial stability monitoring Reserve Banks that provide services to the Treasury to increase and the dedication of additional resources to regional operational efficiency and effectiveness and provide long-term economic research. cost savings. 5 The capital budget reported for the Board includes single-year capital expenditures and 2019 expected capital expenditures Federal Reserve Bank expenses in the cash area have from multiyear projects of the Board and the Office of Inspecincreased as a result of a multiyear investment pro- tor General. The capital budget reported for the Reserve Banks includes the amounts budgeted for the Federal Reserve Informagram to modernize the cash-processing and tion Technology support function and the Office of Employee inventory-tracking infrastructure. These increases Benefits.

400 105th Annual Report | 2018 Board of Governors Budgets the administrative governor submits the budget to the full Board for review and final approval. Board of Governors • Expenses are monitored throughout the year. Quarterly financial forecasts provide insights into The Board’s budget is grounded in the principles budgetary pressures. Variances are analyzed and established by the Strategic Plan 2016–19 and proreported to senior management. vides funding to advance the Plan’s goals, objectives, and initiatives.6 The budget is structured by division, Tables 3 and 4 summarize the Board’s 2018 budgeted office, or special account. and actual expenses and its 2019 budgeted expenses by division, office, or special account and by account The Board’s budget process is as follows: classification, respectively. Table 5 summarizes the • At the start of the budget process, the chief operat- Board’s budgeted and actual authorized position count for 2018 and 2019. Each table includes a line ing officer and chief financial officer meet with the item for the Office of Inspector General (OIG), Committee on Board Affairs (CBA) to recommend which is discussed later in this section. a specific growth target for the Board’s operating budget. For 2019, the recommended growth target 2018 Budget Performance included known changes in the run-rate of the Board’s ongoing operations, projected increases to Total expenses for Board operations were $739.0 milcentrally managed retirement and post-retirement lion, which was $27.7 million, or 3.6 percent, less benefits, known strategic priorities for 2019, and than the approved 2018 budget of $766.7 million. the 2019 triennial Survey of Consumer Finances. After the CBA endorses the growth target, staff Personnel services expenses were $13.8 million less from the Division of Financial Management briefs than budgeted primarily because of lower employthe Board members and the Executive Committee, ment levels, which caused higher-than-budgeted which comprises the directors of each division, on vacancy rates. The underrun in personnel services the target. was partially offset by an overrun in centrally managed retirement and post-retirement benefits, which • To achieve the CBA’s growth target, divisions allowas driven by changes in actuarial assumptions. cate resources to their highest priorities and seek tradeoffs and efficiencies. For 2019, this included Goods and services expenses were $13.9 million less reducing several accounts in goods and services to than budgeted. Lower utilization of contractual proreflect historic utilization and adjusting general fessional services and reduced travel expenses driven lapse rates (vacancy) to more closely align with hisby lower employment levels contributed heavily to toric hiring and attrition rates. the underrun. Additional underruns occurred • Division of Financial Management staff review ini- because of reduced telecommunications expenses and tial budget requests submitted by divisions and col- lower depreciation expenses driven by purchase laborate with all divisions to achieve the growth delays and lower capital expenditures. target. The Board’s 2018 single-year capital spending was • The chief operating officer and chief financial offiless than budgeted by $3.7 million, or 21.6 percent. cer subsequently meet with the Executive Commit- Multiyear capital projects remained within their overtee and the CBA to further review and refine the all project budgets; however, actual spending in 2018 budget submissions. Once the budget is finalized, was less than budgeted by $87.9 million, or 46.9 percent, because of schedule delays for building improvement projects. Table 6 summarizes the 6 The Strategic Plan 2016–19, which was approved by the Board Board’s budgeted and actual capital expenditures for in July 2015, continues the work of the Strategic Framework 2012–15. In addition to investing in ongoing operations, the 2018 and 2019. Board is prioritizing investments and dedicating resources to six pillars over the 2016–19 period, which will allow the Board to 2019 Operating Expense Budget advance its mission and respond to continuing and evolving challenges. The six pillars are project development and resource The 2019 budget for Board operations is $793.6 milallocation, workforce, physical infrastructure, technology, data, lion, which is $54.6 million higher than 2018 actual and public engagement and accountability. More information expenses. Excluding the Survey of Consumer may be found at https://www.federalreserve.gov/publications/ gpra/files/2016-2019-gpra-strategic-plan.pdf. Finances, the 2019 budget has grown by 5.5 percent

Federal Reserve System Budgets 401 Table 3. Operating expenses of the Board of Governors, by division, office, or special account, 2018–19 Millions of dollars, except as noted Variance V ariance 2018 actual to 2018 budget 2019 budget to 2018 actual Division, office, or special account 2018 budget 2018 actual 2019 budget Amount Percent A mount P ercent Research and Statistics 85.0 81.5 -3.5 -4.2 85.6 4.1 5.1 International Finance 34.7 31.8 -2.9 -8.4 35.0 3.2 10.1 Monetary Affairs 43.4 42.1 -1.3 -3.0 44.7 2.6 6.2 Financial Stability 13.1 12.9 -0.3 -2.0 13.5 0.6 5.0 Supervision and Regulation 144.8 142.1 -2.7 -1.9 1 51.4 9.4 6.6 Consumer and Community Affairs 37.6 35.3 -2.3 -6.0 38.1 2.7 7.7 Reserve Bank Operations and Payment Systems 46.3 44.5 -1.8 -3.9 45.7 1.2 2.6 Board Members 28.5 27.1 -1.4 -5.0 28.9 1.8 6.8 Secretary 12.0 11.9 -0.1 -0.7 12.3 0.5 4.0 Legal 32.0 30.0 -1.9 -6.1 32.2 2.2 7.3 Chief Operating Officer 19.2 17.2 -1.9 -10.1 19.2 2.0 11.3 Financial Management 13.1 13.2 0.1 0.5 14.0 0.8 6.4 Information Technology 118.2 114.4 -3.8 -3.2 1 17.2 2.9 2.5 IT income -52.8 -52.8 0.0 0.0 -55.8 -3.0 5.7 Management 137.7 133.8 -3.9 -2.9 1 39.3 5.5 4.1 Special projects1 14.5 15.2 0.7 4.9 12.9 -2.3 -15.4 Centrally managed benefits2 17.4 19.4 2.0 11.4 21.1 1.7 8.9 Extraordinary items3 20.9 17.6 -3.3 -15.9 29.7 1 2.1 68.9 Savings and reallocations4 0.0 0.0 0.0 n/a -7.4 -7.4 n /a Survey of Consumer Finances5 1.2 2.0 0.8 66.7 16.0 1 4.0 7 00.0 Total, Board operations 766.7 739.0 -27.7 -3.6 7 93.6 5 4.6 7.4 Office of Inspector General 35.9 33.3 -2.7 -7.4 35.4 2.1 6.3 n/a Not applicable. 1 Includes centralized Boardwide benefit programs. 2 Retirement and post-retirement benefits fluctuate due to changes in actuarial assumptions and demographics. 3 Includes several strategic projects, including the Martin Building renovation, and a centralized position pool that was approved with the 2019 budget. 4 For 2019, includes centralized budget execution adjustments. 5 The survey collects information about family incomes, net worth, balance sheet components, credit use, and other financial outcomes, and is conducted every three years. over 2018 actual expenses, and 7.4 percent including Board’s total authorized position count for 2019 the survey. The operating budget includes funding for increased from 2,847 to 2,861. the Board’s ongoing operations and support for the six overarching pillars identified in the Board’s Stra- Risks in the 2019 Budget tegic Plan 2016–19. The budget process required all divisions to make tradeoffs and prioritize resources to fund mission- The 2019 budget includes employment growth critical activities. Specifically, divisions were asked to expected to occur in 2019, funding for the Board’s align their goods and services budgets for continuing compensation and benefit programs, projected operations with historical spending trends. In addiincreases to centrally managed retirement and posttion, Division of Financial Management staff incorretirement benefits, and expenses related to the 2019 porated centralized adjustments into the budget to triennial Survey of Consumer Finances. The budget reflect historical under-execution. allows for continued investments in strategic, highpriority projects in support of the plan’s pillars— Staff from the Division of Financial Management project development and resource allocation, workwill monitor spending and work closely with all diviforce, physical infrastructure, technology, data, and sions throughout the year to mitigate potential budpublic engagement and accountability. get overruns. Building improvement projects will con- For 2019, the Board added 14 positions in support of tinue to be an area of focus, from both a budget and a centralized position pool, which leadership may a project management perspective, given their size, allocate to strategic areas of growth. As a result, the complexity, and strategic importance.

402 105th Annual Report | 2018 Table 4. Operating expenses of the Board of Governors, by account classification, 2018–19 Millions of dollars, except as noted Variance V ariance 2018 actual to 2018 budget 2019 budget to 2018 actual Account classification 2018 budget 2018 actual 2019 budget Amount Percent A mount P ercent P ersonnel services Salaries 449.8 435.9 -13.9 -3.1 4 61.3 2 5.4 5.8 Retirement/Thrift plans 61.7 56.1 -5.6 -9.0 58.4 2.3 4.1 Employee insurance and other benefits 42.8 39.2 -3.6 -8.3 41.1 1.8 4.6 Net periodic benefits costs1 0.0 9.2 9.2 n/a 9.0 -0.2 -2.1 Subtotal, personnel services 554.3 540.5 -13.8 -2.5 5 69.7 2 9.3 5.4 Goods and services Postage and shipping 0.3 0.3 0.1 23.4 0.2 -0.1 - 34.6 Travel 17.1 14.9 -2.1 -12.5 15.0 0.1 0.6 Telecommunications 7.2 6.0 -1.2 -16.6 6.1 0.1 2.3 Printing and binding 1.8 0.5 -1.3 -69.7 0.5 -0.1 - 14.1 Publications 0.6 0.4 -0.2 -34.9 0.6 0.2 53.7 Stationery and supplies 1.4 1.2 -0.2 -13.6 1.4 0.1 11.1 Software 17.0 17.7 0.8 4.6 19.4 1.7 9.5 Furniture and equipment (F&E) 6.3 5.6 -0.7 -11.6 6.5 0.9 16.3 Rentals 32.5 33.5 1.0 3.0 33.9 0.4 1.1 Data, news, and research 14.8 16.6 1.8 12.3 32.0 1 5.4 92.6 Utilities 2.3 1.6 -0.7 -31.0 2.0 0.4 27.3 Repairs and alterations—building 2.5 2.7 0.1 4.2 3.4 0.7 27.9 Repairs and maintenance—F&E 4.7 4.5 -0.2 -5.0 4.5 0.0 -0.5 Contractual professional services 54.2 46.8 -7.4 -13.7 52.8 6.0 12.9 Interest 0.0 0.0 0.0 171.7 0.0 0.0 - 34.0 Training and dues 4.7 4.3 -0.4 -9.1 4.9 0.6 14.8 Subsidies and contributions 2.1 2.0 -0.1 -4.6 3.1 1.1 54.6 All other 4.0 2.7 -1.3 -32.3 3.3 0.6 22.0 Depreciation/amortization 43.2 41.2 -2.0 -4.6 39.8 -1.5 -3.6 IT user charge 52.2 52.2 0.0 -0.1 55.2 3.0 5.7 IT income -52.8 -52.8 0.0 -0.1 -55.8 -3.0 5.8 Income -3.8 -3.5 0.2 -6.3 -4.9 -1.4 39.4 Subtotal, goods and services 212.4 198.5 -13.9 -6.5 2 23.9 2 5.3 12.8 Total, Board operations 766.7 739.0 -27.7 -3.6 7 93.6 5 4.6 7.4 Office of Inspector General Personnel services 27.7 25.8 -1.8 -6.7 27.4 1.6 6.2 Goods and services 8.3 7.4 -0.8 -9.9 7.9 0.5 6.9 Total, OIG operations 35.9 33.3 -2.7 -7.4 35.4 2.1 6.3 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. 2019 Capital Budgets funding for the acquisition of the 1951 Constitution The Board’s 2019 single-year capital budget totals Avenue, NW building, renovation of the Martin $19.5 million, which is $6.0 million higher than 2018 Building, and planned renovations of the 1951, actual capital expenditures. The increase is primarily Eccles, and New York Avenue buildings. The Board driven by the continuation of software development has developed its capital spending plans to provide a projects in supervision and regulation, which was secure, modern environment that meets the needs of previously classified in the multiyear capital budget. the workforce, promotes efficiency, supports resiliency and continuity efforts, and maximizes produc- The Board’s multiyear capital budget totals tivity. Table 6 summarizes the Board’s budgeted and $634.5 million, which includes 2019 expected capital actual capital expenditures for 2018 and 2019. expenditures of $165.8 million. The budget reflects

Federal Reserve System Budgets 403 Table 5. Positions authorized by the Board of Governors, by division, office, or special account, 2018–19 Variance V ariance 2018 actual to 2018 budget 2019 budget to 2018 actual Division, office, or special account 2018 budget1 2018 actual 2019 budget Amount Percent A mount P ercent Research and Statistics 356 356 0 0.0 356 0 0 .0 International Finance 155 156 1 0.6 156 0 0 .0 Monetary Affairs 172 171 -1 -0.6 171 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 67 62 -5 -7.5 62 0 0 .0 Financial Management 69 69 0 0.0 69 0 0 .0 Information Technology 413 413 0 0.0 413 0 0 .0 Management 454 459 5 1.1 459 0 0 .0 Extraordinary items2 0 0 0 n/a 14 1 4 n /a Total, Board operations 2,847 2,847 0 0.0 2 ,861 1 4 0 .5 Office of Inspector General 132 132 0 0.0 132 0 0 .0 n/a Not applicable. 1 Budget represents authorized position count at the beginning of the year and actual represents authorized position count at year-end. 2 Includes a centralized position pool, which will be used for strategic areas of growth. Office of Inspector General ing external stakeholder engagement; and advancing organizational effectiveness and modeling a culture The budget for the OIG is grounded in the goals of continuous improvement.7 established in its strategic plan, which are delivering results that promote agency excellence; promoting a diverse, skilled, and engaged workforce and fostering 7 Additional information is available at https://oig.federalreserve an inclusive and collaborative environment; optimiz- .gov/strategic-plan.htm. Table 6. Capital expenditures of the Board of Governors, by capital type, 2018–19 Millions of dollars, except as noted Variance V ariance 2018 actual to 2018 budget 2019 budget to 2018 actual Item 2018 budget 2018 actual 2019 budget Amount Percent A mount P ercent B oard Single-year capital expenditures 17.3 13.6 -3.7 -21.6 19.5 6.0 4 4.1 Multiyear capital expenditures1 187.6 99.6 -87.9 -46.9 1 65.8 6 6.2 6 6.5 Total capital expenditures 204.8 113.2 -91.7 -44.8 1 85.3 7 2.2 6 3.8 Office of Inspector General Single-year capital expenditures 0.1 0.1 0.0 1.0 0.2 0.1 6 8.4 Multiyear capital expenditures 0.0 0.0 0.0 n/a 0.0 0.0 n /a Total capital expenditures 0.1 0.1 0.0 1.0 0.2 0.1 6 8.4 Board and OIG total capital expenditures 205.0 113.3 -91.7 -44.7 1 85.6 7 2.3 6 3.8 Note: The amount reported for the multiyear capital budget represents the expected expenditure for the budget year. n/a Not applicable. 1 In May 2018, the Board of Governors approved a budget amendment, which included a revision to the 2018 multiyear capital budget. The initial multiyear capital budget was $140.6 million.

404 105th Annual Report | 2018 In keeping with its statutory independence, the OIG The Reserve Bank budget process is as follows: prepares its proposed budget apart from the Board’s • The Conference of Presidents, operating through budget. The OIG presents its budget directly to the its Committee on Spend Stewardship, defines, in Board for approval. close consultation with the Board’s Committee on Federal Reserve Bank Affairs (BAC), key strategic 2018 Budget Performance objectives for the System. Considering longer-term Total expenses for OIG operations were $33.3 milenvironmental trends and historical growth rates of lion, which was $2.7 million, or 7.4 percent, less than expense, these governance bodies articulate an the approved 2018 budget of $35.9 million. Personnel aggregate System-level growth expectation for a services expenses were $1.8 million less than budmultiyear period. geted because of slower-than-expected net employment activities. Goods and services expenses were • The Reserve Banks develop budgets that reflects $0.8 million less than budgeted. The OIG slightly this direction through appropriate trade-offs, and exceeded its single-cycle capital budget in 2018 by less senior leadership in the Reserve Banks reviews the than $0.1 million, or 1.0 percent, because of higher- budgets for alignment with Reserve Bank and than-expected costs for vehicle life-cycle replace- System priorities. ments. The overexpenditure was approved through its • The Reserve Banks submit preliminary budget 2019 budget memorandum. Table 6 summarizes the information to the Board for review, including OIG’s budgeted and actual capital expenditures for documentation to support the budget request. 2018 and 2019. • Board staff analyzes the Banks’ budgets, both indi- 2019 Operating Expense Budget vidually and in the context of System initiatives. The 2019 budget for OIG operations is $35.4 million, • The BAC reviews the Bank budgets. which is $2.1 million, or 6.3 percent, higher than • The Reserve Banks make any needed changes, and 2018 actual expenses. The OIG’s total authorized the BAC chair submits the revised budgets to position count for 2019 remains unchanged at 132. Board members for review and final action. 2019 Capital Budget • Throughout the year, Reserve Bank and Board The OIG’s 2019 single-year capital budget totals staffs monitor actual performance and compare it $0.2 million, which is $0.1 million higher than 2018 with approved budgets and forecasts. actual capital expenditures. In addition to the budget approval process, the Reserve Banks must submit proposals for certain Federal Reserve Banks Budgets capital expenditures to the Board for further review and approval. Each Reserve Bank establishes major operating goals Tables 7, 8, and 9 summarize the Reserve Banks’ for the coming year, devises strategies for attaining 2018 budgeted and actual expenses and 2019 budthose goals, estimates required resources, and monigeted expenses by Reserve Bank, functional area, and tors results. The Reserve Banks structure their budaccount classification.8 Table 10 shows the Reserve gets around specific functional areas reflecting the Banks’ budgeted and actual employment for 2018 core responsibilities of the Federal Reserve: and budgeted employment for 2019. In addition, • contributing to the formulation of monetary policy table 11 shows the Reserve Banks’ budgeted and and enhancing monetary policy implementation to actual capital expenditures for 2018 and budgeted become more effective, flexible, and resilient capital for 2019. • promoting financial stability through effective 2018 Budget Performance monitoring, analysis, and policy development Total 2018 operating expenses for the Reserve Banks • promoting safety and soundness of financial instiwere $4,394.1 million, which is $57.2 million, or tutions through effective supervision • leading efforts to enhance the security, resiliency, 8 Additional information about the operating expenses of each of the Reserve Banks can be found in section 11, “Statistical functionality, and efficiency of services provided to Tables” (see Table 10. “Income and expenses of the Federal financial institutions and the public Reserve Banks, by Bank”).

Federal Reserve System Budgets 405 Table 7. Operating expenses of the Federal Reserve Banks, by District, 2018–19 Millions of dollars, except as noted Variance V ariance 2018 actual to 2018 budget 2019 budget to 2018 actual District 2018 budget 2018 actual 2019 budget Amount Percent A mount P ercent Boston 233.0 221.4 -11.5 -4.9 231.6 10.1 4 .6 New York 1,006.7 1,002.4 -4.2 -0.4 1 ,043.5 41.0 4 .1 Philadelphia 191.8 191.4 -0.4 -0.2 194.8 3.5 1 .8 Cleveland 203.3 199.3 -4.0 -2.0 209.4 10.1 5 .1 Richmond 479.8 469.0 -10.8 -2.2 503.6 34.5 7 .4 Atlanta 420.3 410.5 -9.8 -2.3 415.5 5.0 1 .2 Chicago 397.8 388.1 -9.6 -2.4 396.1 8.0 2 .1 St. Louis 412.0 410.1 -2.0 -0.5 431.2 21.1 5 .1 Minneapolis 174.0 171.5 -2.5 -1.4 180.0 8.5 4 .9 Kansas City 307.3 310.8 3.4 1.1 332.7 21.9 7 .1 Dallas 238.6 234.5 -4.0 -1.7 239.1 4.6 1 .9 San Francisco 386.8 385.1 -1.7 -0.4 396.5 11.4 3 .0 Total Reserve Bank operating expenses 4,451.3 4,394.1 -57.2 -1.3 4 ,573.8 1 79.6 4 .1 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. 1.3 percent, less than the approved 2018 budget of budget underrun. The underrun is partially offset by $4,451.3 million. The actual average number of per- increased expenses for several Treasury-related initiasonnel (ANP) was 19,577 ANP, an underrun of 300 tives, including the TWAI, the Treasury auction pro- ANP, or 1.5 percent, from 2018 budgeted staffing lev- gram, and a software write-off for the Post Payment els, largely because of slower-than-forecasted hiring System initiative, which will be strategically reset and in the supervision, support and overhead, and IT redeveloped as the Post Payment Modernization Inifunctions. The Reserve Banks’ 2018 capital expendi- tiative in 2019.9 tures were less than budgeted by $66.5 million, or 16.4 percent, because of changes in timing and scope 9 The Post Payment System initiative was a multiyear effort to modernize several of the Treasury’s legacy post-payment profor numerous initiatives. cessing systems into a single application to enhance operations, reduce expenses, improve data analytics capabilities, and provide Revised project plans, benefits assumptions, and less- a centralized and standardized set of payment data. The Post Payment Modernization Initiative will modernize and consolithan-planned personnel expenses driven by delays in date five of Treasury’s legacy post-payment processing systems hiring contributed to the 2018 operating expense into a single application. Table 8. Operating expenses of the Federal Reserve Banks, by operating area, 2018–19 Millions of dollars, except as noted Variance V ariance 2018 actual to 2018 budget 2019 budget to 2018 actual Operating area 2018 budget 2018 actual 2019 budget Amount Percent A mount P ercent Monetary and economic policy 721.5 720.4 -1.1 -0.2 756.7 36.3 5.0 Services to the U.S. Treasury and other government agencies 616.1 608.3 -7.7 -1.3 657.0 48.6 8.0 Services to financial institutions and the public 1,211.6 1,199.6 -11.9 -1.0 1 ,245.2 45.6 3.8 Supervision and regulation 1,449.3 1,424.2 -25.1 -1.7 1 ,473.6 49.4 3.5 Fee-based services to financial institutions 452.9 441.5 -11.3 -2.5 441.2 -0.3 - 0.1 Total Reserve Bank operating expenses1 4 ,451.3 4,394.1 -57.2 -1.3 4 ,573.8 1 79.6 4.1 1 Operating expenses exclude pension costs, reimbursements, and operating expense of the Board of Governors (see table 4).

406 105th Annual Report | 2018 Table 9. Operating expenses of the Federal Reserve Banks, by account classification, 2018–19 Millions of dollars, except as noted Variance V ariance 2018 actual to 2018 budget 2019 budget to 2018 actual Account classification 2018 budget 2018 actual 2019 budget Amount Percent A mount P ercent Salaries and other benefits1 3,330.2 3,253.9 -76.3 -2.3 3 ,394.5 1 40.5 4.3 Building 335.2 340.4 5.1 1.5 343.8 3.5 1.0 Software costs 264.6 278.5 14.0 5.3 275.3 -3.2 -1.1 Equipment 192.4 193.7 1.3 0.7 197.9 4.3 2.2 Recoveries2 -394.4 -374.7 19.6 -5.0 -384.1 -9.3 2.5 Expenses capitalized -76.5 -66.9 9.5 -12.5 -87.2 -20.3 3 0.3 All other3 799.8 769.3 -30.5 -3.8 833.4 64.1 8.3 Total Reserve Bank operating expenses 4,451.3 4,394.1 -57.2 -1.3 4 ,573.8 1 79.6 4.1 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. 2019 Operating Expense Budget Supervision expenses are increasing primarily for the ongoing support of the supervision portfolio, The 2019 operating budgets of the Reserve Banks total $4,573.8 million, which is $179.6 million, or the Fiscal Service provided final authorization of its requested 4.1 percent, higher than 2018 actual expenses.10 services on December 19, which resulted in aggregate reductions of $10.7 million and $1.8 million for the operating expense and capital budgets, respectively. The 2019 Reserve Bank operating 10 On December 11, 2018, the Board of Governors approved the and capital budgets discussed here reflect the updated expecta- 2019 Reserve Bank operating and capital budgets, including tions from Fiscal Service. Additional information is available at conditionally approved expenditures associated with services to https://www.federalreserve.gov/foia/files/ the Treasury. The U.S. Department of the Treasury’s Bureau of 2019ReserveBankBudgets.pdf. Table 10. Employment at the Federal Reserve Banks, by District, and at FRIT and OEB, 2018–19 Variance V ariance 2018 actual to 2018 budget 2019 budget to 2018 actual District 2018 budget 2018 actual 2019 budget Amount Percent A mount P ercent Boston 1,086 1,053 -32 -3.0 1,037 -16 - 1.5 New York 3,277 3,182 -96 -2.9 3,232 51 1.6 Philadelphia 876 885 9 1.0 859 -26 - 2.9 Cleveland 999 982 -16 -1.6 988 5 0.5 Richmond 1,498 1,458 -40 -2.7 1,481 24 1.6 Atlanta 1,774 1,761 -13 -0.7 1,737 -24 - 1.4 Chicago 1,605 1,558 -47 -2.9 1,599 40 2.6 St. Louis 1,442 1,396 -46 -3.2 1,435 39 2.8 Minneapolis 1,030 1,018 -12 -1.2 1,060 42 4.1 Kansas City 1,910 1,951 41 2.1 2,006 55 2.8 Dallas 1,320 1,284 -36 -2.7 1,278 -6 - 0.5 San Francisco 1,732 1,712 -20 -1.2 1,765 52 3.1 Total, all Districts 18,550 18,241 -309 -1.7 1 8,477 2 35 1.3 Federal Reserve Information Technology 1,270 1,281 12 0.9 1,321 39 3.1 Office of Employee Benefits 58 55 -3 -5.4 59 4 7.7 Total 19,878 19,577 -300 -1.5 1 9,856 2 79 1.4

Federal Reserve System Budgets 407 Table 11. Capital expenditures of the Federal Reserve Banks, by District, and of FRIT and OEB, 2018–19 Millions of dollars, except as noted Variance V ariance 2018 actual to 2018 budget 2019 budget to 2018 actual District 2018 budget 2018 actual 2019 budget Amount Percent A mount P ercent Boston 20.5 11.1 -9.4 -45.8 15.1 4.0 36.2 New York 92.0 108.7 16.8 18.2 1 25.6 16.9 15.6 Philadelphia 34.6 20.7 -13.9 -40.1 36.2 15.4 74.4 Cleveland 13.7 12.6 -1.1 -8.1 23.1 10.5 83.6 Richmond 20.4 15.8 -4.6 -22.7 15.2 -0.6 -3.9 Atlanta 21.1 19.3 -1.7 -8.2 23.2 3.8 19.8 Chicago 22.3 11.5 -10.8 -48.6 26.7 15.2 1 32.4 St. Louis 6.6 5.4 -1.2 -18.3 6.7 1.3 23.5 Minneapolis 19.3 11.4 -7.9 -40.8 26.0 14.5 1 27.4 Kansas City 23.4 20.4 -3.1 -13.0 32.9 12.5 61.5 Dallas 20.1 15.0 -5.1 -25.3 24.2 9.1 60.7 San Francisco 30.9 23.4 -7.4 -24.1 53.1 29.7 1 26.9 Total, all Districts 324.9 275.4 -49.5 -15.2 4 07.9 1 32.5 48.1 Federal Reserve Information Technology 81.6 64.6 -17.0 -20.8 75.3 10.6 16.4 Office of Employee Benefits 0.1 * * -35.0 0.2 0.2 6 07.7 Total 406.6 340.1 -66.5 -16.4 4 83.4 1 43.3 42.1 * Less than $50,000. national and horizontal review initiatives, and the currency-processing program (NextGen).12 Growth continued development and implementation of the in monetary policy reflects increased resources dedicybersecurity supervision program. Treasury cated to regional economic research, including new expenses are increasing primarily to support new and studies on inflation and low- and moderate-income ongoing technology development for the Treasury communities. auction program, TWAI, Stored Value Card (SVC), and the Treasury Retail Investment Manager initia- Total 2019 budgeted employment for the Reserve tive.11 Additionally, increases in cash expenses are Banks, FRIT, and OEB is 19,856 ANP, an increase of driven by the first phase of the next-generation 279 ANP, or 1.4 percent, from 2018 actual employment levels. In IT, resource additions will support information security initiatives, application development projects for Treasury and Supervision, and application development projects to enhance data In addition, the chair of the BAC designated a portion of the 2019 operating expense budgets ($15.5 million) associated with analytics and integration services. In Treasury serthe adoption, integration, and implementation of the procure- vices, the increase is attributable to updated requirement, financial management, and human capital technology iniments for new and ongoing programs, including the tiatives for conditional approval, requiring additional review and approval by the director of the Division of Reserve Bank Opera- Treasury auction program, SVC, Do Not Pay, and tions and Payment Systems. The multiyear initiative will replace Fiscal Accounting.13 legacy procurement, financial management, and human capital systems to allow for greater capability and flexibility in managing, reporting, and analyzing System financial and human capi- Support and overhead functions plan to add tal information. resources to strengthen strategic planning, enterprise 11 The SVC program comprises three military cash-management programs: EagleCash, EZpay, and Navy Cash. These programs provide electronic payment methods for goods and services on 12 The NextGen program is a multiyear initiative to replace highmilitary bases and Navy ships, both domestic and overseas, to speed currency-processing equipment and sensors in cash offices reduce costs and increase convenience for the military and ser- across the Federal Reserve System. vice members. The Treasury Retail Investment Manager will be 13 Do Not Pay helps agencies mitigate and eliminate improper paythe primary vehicle used by individual and entity investors to ment. Fiscal Accounting maintains the federal government’s set interact directly with Treasury to purchase and manage savings of accounts and serves as a repository for information pertainbonds and marketable securities. ing to the government’s financial position.

408 105th Annual Report | 2018 risk management, and law enforcement capabilities. Capital Expenditures Designated for Further contributing to the growth are resources to Conditional Approval support regional economic research and outreach ini- The BAC chair designated projects with an aggregate tiatives, the NextGen program, and a multiyear effort cost of $138.4 million in 2019 for conditional to enhance the resiliency, security, and customer approval, requiring additional review and approval by experience of the FedLine access solutions.14 the Board’s director of the Division of Reserve Bank Operations and Payment Systems before the commit- Increases are offset by reductions in the check func- ment of funds.17 The expenditures designated for tion in recognition of operational efficiencies; in conditional approval by the chair of the BAC include ACH following the planned completion of the multi- large-scale building projects to renovate office space, year ACH Modernization initiative; and in supervi- increase parking, and upgrade mechanical and elecsion related to efficiency efforts, changes in supervi- trical infrastructure. Technology projects include sory responsibilities, and the enactment of Economic Fedwire and FedLine initiatives and updates to Growth, Regulatory Relief, and Consumer Protec- supervision applications.18 tion Act.15 Other Capital Expenditures Reserve Bank officer and staff personnel expenses for Significant capital expenditures (typically expendi- 2019 total $2,644.9 million, an increase of tures exceeding $1 million) that are not designated $123.1 million, or 4.9 percent, from 2018 actual for conditional approval include total multiyear budexpenses. The increase reflects expenses associated geted expenditures of $566.6 million for 2019 and with additional staff and budgeted salary administra- future years, of which the single-year 2019 budgeted tion adjustments.16 expenditures are $247.8 million. This category includes building expenditures for office space reno- The 2019 Reserve Bank budgets include a salary vations, infrastructure upgrades, building automaadministration program for eligible officers, senior tion, and security enhancements. IT projects include professionals, and staff totaling $100.8 million and a ongoing IT infrastructure investments; initiatives that variable pay program totaling $213.8 million. enable better access to data and enhance cybersecurity and cyberresiliency; and applications to support 2019 Capital Budgets fee-based services, supervision, cash, and open market operations. The 2019 capital budgets for the Reserve Banks, FRIT, and OEB total $483.4 million. The increase in Capital initiatives that are individually less than the 2019 capital budget is $143.3 million, or 42.1 per- $1 million are budgeted at an aggregate amount of cent, more than the 2018 actual levels of $340.1 mil- $97.2 million for 2019 and include building maintelion, largely reflecting ongoing multiyear building nance expenditures, scheduled software and equipand information technology projects. Initiatives in ment upgrades, and equipment and furniture the 2019 capital budget include supporting work- replacements. space renovations, addressing aging building infrastructure, and providing application upgrades and Currency Budget releases. The Board is the issuing authority for Federal Reserve notes. As the issuing authority, the Board has a wide range of responsibilities, from ensuring an 14 FedLine provides financial institutions with direct access to Fed- adequate supply of notes in circulation to protecting eral Reserve System services. 15 The ACH Modernization program is a multiyear technology ini- 17 Generally, capital expenditures that are designated for conditiative designed to replace the Federal Reserve’s current core tional approval include certain building projects, District expen- ACH processing system with a new, modern technology solu- ditures that substantially affect or influence future System direction. The Economic Growth, Regulatory Relief, and Consumer tion or the manner in which significant services are performed, Protection Act, enacted in May of 2018, aims to right-size the expenditures that may be inconsistent with System direction or regulatory system for smaller financial institutions, allowing vary from previously negotiated purchasing agreements, and community banks and credit unions to succeed and invest fur- local expenditures that duplicate national efforts. ther in their local areas. 18 The Reserve Banks operate two key payment and settlement sys- 16 The salary administration program includes a budgeted pool for tems—the Fedwire Funds Service and the Fedwire Securities merit increases, equity adjustments, and promotions. Service (collectively, “Fedwire Services”), among other services.

Federal Reserve System Budgets 409 the integrity of and maintaining confidence in U.S. design work on security feature development and currency. The Board works with the Reserve Banks, delayed planned design work until more progress was the Treasury Department, the Treasury’s Bureau of made on security of the next family of notes. In addi- Engraving and Printing (BEP), and the U.S. Secret tion, budget underruns resulted from Board staff Service to ensure that the notes meet quality stan- using a secure, but lower-cost mode of transportation dards from production through destruction; moni- to ship $20 notes to Reserve Banks from the BEP tors counterfeiting threats for each denomination; and shipped fewer notes than planned overall from and conducts adversarial analysis on existing and the BEP to the Reserve Banks.20 The research and new security features to ensure they are robust to development program eliminated certain options for counterfeiting. The currency budget funds the security feature development to focus on the most Board’s and BEP’s activities related to note produc- promising features and to ensure that the program’s tion and issuance.19 requirements could be met. The annual currency budget process is as follows: 2019 Budget • Each August, based on Board staff’s assessment of The 2019 operating budget for currency is $955.8 milcurrency demand and other factors, the Board’s lion, and the multicycle capital budget is $3.2 million. director of the Division of Reserve Bank Opera- The proposed 2019 operating budget represents an tions and Payment Systems submits a fiscal year increase of $107.0 million, or 12.6 percent, from 2018 print order for notes to the director of the BEP. actual expenses, and includes $210.0 million in reim- • Each fourth quarter, Board staff estimates expenses bursements to the BEP to fund facilities improvefor the calendar-year currency budget, including ment costs. The two improvement projects are an BEP printing expenses (based on estimated produc- expansion of the Fort Worth, Texas, facility and new tion costs provided by the BEP); BEP facility reim- design and engineering studies in support of a new bursements; BEP support costs; and expenses for facility to replace the BEP’s existing Washington, currency transportation, research and develop- D.C., facility.21 ment, annual contributions and management support, quality assurance, counterfeit deterrence, cur- The proposed multicycle capital budget is an increase rency education, capital expenses, and depreciation. of $3.2 million (there were no multicycle capital expenses in 2018) and covers information technology • Each December, the BAC reviews the proposed equipment for exploratory research and development currency budget. for prototypes that would enable an automated coun- • The BAC chair submits the proposed currency terfeit inspection system. BEP costs are 95 percent of budget to Board members for review and final the operating budget. Board expenses for currency action. transportation, research and development, annual contributions and management support, quality 2018 Budget Performance assurance, currency education, and depreciation make up the remaining 5 percent of the operating The Board’s 2018 actual operating expenses for new budget (table 12). currency were $848.8 million, a decrease of $13.0 million, or 1.5 percent, from the 2018 budget. Printing of Federal Reserve Notes This budget underrun is primarily attributable to The currency budget includes $690.8 million in printlower-than-budgeted expenses for currency quality ing costs for 2019, which represents a decrease of assurance (CQA), currency transportation, and $109.1 million, or 13.6 percent, from 2018 actual research and development. Board staff focused CQA expenses. The decrease is attributable to a reduction of 11.7 percent in the number of notes the BEP 19 The Board reimburses the BEP for all costs related to the pro- expects to print in calendar year 2019. This decrease duction of currency because the BEP does not receive federal appropriations. All operations of the BEP are financed by a revolving fund that is reimbursed through product sales, virtu- 20 After consultation with Reserve Banks and armored carriers, ally all of which are sales of Federal Reserve notes to the Board the Board determined $20 notes could be shipped using a lowerto fulfill its annual print order. Section 16 of the Federal Reserve cost mode of transportation that improved operational effi- Act requires that all costs incurred for the issuing of notes shall ciency, appropriately mitigated risk, and reduced overall costs. be paid for by the Board and included in its assessments to the 21 Excluding reimbursements for these BEP facilities improve- Reserve Banks. Customer billings are the BEP’s only means of ments, the proposed 2019 operating budget is $745.8 million, recovering costs of operations and generating funds necessary which is $103.0 million, or 12.1 percent, less than 2018 actual for capital investment. expenses.

410 105th Annual Report | 2018 Table 12. Federal Reserve currency budget, 2018 and 2019 Thousands of dollars, except as noted Variance V ariance 2018 actual to 2018 budget 2019 budget to 2018 actual Item 2018 budget 2018 actual 2019 budget Amount Percent A mount P ercent P rinting Federal Reserve notes BEP fixed printing costs 468,876.0 468,876.0 0.0 0.0 4 01,938.0 -66,938.0 -14.3 BEP variable printing costs 332,118.9 331,009.5 -1,109.4 -0.3 2 88,822.1 -42,187.4 -12.7 BEP facility reimbursements Fort Worth facility expansion 0.0 0.0 0.0 n/a 1 50,000.0 1 50,000.0 n /a D.C. facility design work 0.0 3.5 3.5 n/a 60,000.0 59,996.5 * BEP support costs Other1 3,697.2 3,501.4 -195.9 -5.3 3,672.7 171.3 4.9 Currency reader 1,285.6 1,452.9 167.3 13.0 956.8 -496.1 -34.1 Board expenses Currency transportation 24,260.5 20,252.2 -4,008.3 -16.5 22,496.7 2,244.5 11.1 Research and development 7,740.0 5,383.7 -2,356.3 -30.4 11,767.7 6,384.0 1 18.6 Annual contributions and management support2 7,145.1 6,577.8 -567.3 -7.9 7,100.4 522.6 7.9 Currency quality assurance 14,000.0 9,755.7 -4,244.3 -30.3 6,500.0 -3,255.7 -33.4 Currency education 2,531.0 1,905.3 -625.7 -24.7 2,430.2 524.9 27.5 Depreciation 80.2 62.9 -17.3 -21.6 74.5 11.7 18.5 Operating budget 861,734.5 848,780.9 -12,953.5 -1.5 9 55,759.1 1 06,978.2 12.6 Capital expenses Multiyear cycle capital 0.0 0.0 0.0 n/a 3,207.3 3,207.3 n /a * The percentage change is greater than 100 percent and based on comparison to a de minimis value in the prior year. n/a Not applicable. 1 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 Division of the Office of Financial Management. 2 The annual contributions and management support budget category was previously titled counterfeit deterrence. budget includes $401.9 million (58 percent) in fixed Figure 5. Federal Reserve costs for currency, 2009–19 printing costs and $288.8 million (42 percent) in variable printing costs. Millions of dollars 1,000 BEP Facility Reimbursements 800 The proposed budget for BEP Fort Worth facility expansion and preliminary studies and contractor 600 expenses in support of a replacement of the Washington, D.C., facility costs is $210.0 million.23 Of the 400 total, the BEP expects to spend $150.0 million for the Fort Worth facility expansion and $60.0 million for 200 architectural and engineering work in support of the D.C. replacement facility. 0 2009 2011 2013 2015 2017 2019 BEP Support Costs Note: For 2019, budgeted. Data for 2009–18 have been revised. The 2019 budget for BEP support costs is $4.6 million, which is a decrease of $0.3 million, or 6.6 perin new notes printed does not represent a decline in currency demand, but rather a difference in the tim- ing the estimated volume of notes that the BEP will produce in ing of BEP deliveries to the Board.22 The printing the first quarter of its fiscal year and estimating the volume of notes projected to be produced by the BEP in the fourth quarter of the calendar year. 22 The BEP fulfilled the fiscal year 2018 print order; however, the 23 In 2018, there were de minimis facility reimbursement expenses BEP operates on a fiscal year that begins on October 1 and ends of $4,000 for requirements definition work done for the BEP by September 30. This difference in timing requires that the Board the General Services Administration. These are included in estimate its calendar-year budget for new currency by eliminat- table 12 for comparison with the proposed 2019 budget.

Federal Reserve System Budgets 411 cent, from 2018 actual expenses. The 2019 budget for studies to help inform the U.S. currency program other reimbursements to the BEP is $3.7 million, about security feature and banknote design decisions. which is an increase of $0.2 million from 2018 actual expenses. This funding reimburses the BEP for Annual Contributions and Management expenses incurred by its Destruction Standards and Support Compliance Division of the Office of Compliance The 2019 budget for annual contributions and manand Mutilated Currency Division of the Office of agement support is $7.1 million, which is $0.5 mil- Financial Management. The Office of Compliance lion, or 7.9 percent, higher than 2018 actual expenses. develops standards for cancellation and destruction The budget funds membership in the Central Bank of unfit currency and for note accountability at the Counterfeit Deterrence Group, which is an associa- Reserve Banks and reviews Reserve Banks’ cash tion of central banks charged with combating digital operations for compliance with those standards. As a counterfeiting, and funds the Reproduction Research public service, the Mutilated Currency Division also Center to perform adversarial analysis on design conprocesses claims for the redemption of damaged or cepts and potential security features in a shared mutilated currency. member-central bank facility. The 2019 currency reader budget is $1.0 million, Currency Quality Assurance which is $0.5 million lower than 2018 actual expenses. The 2019 budget for quality assurance initiatives is The budget allows the BEP to distribute currency $6.5 million, which is $3.3 million less than 2018 readers to qualified blind or visually impaired indi- actual expenses. The decrease is attributable to a viduals at no cost to the user; to reimburse the reduction in consultant work needed in this final con- Library of Congress for administering the currency tract year in support of the CQA program. This reader program through the existing infrastructure of reduction also is attributed to a reallocation of design its book reader program, which is managed by the activities from the CQA budget category to the National Library Service; and other administrative research and development budget. The CQA consuland outreach expenses. tants will help facilitate executive program review meetings between the Board and BEP and recom- Transportation mend operational, cost, and performance metrics The 2019 currency transportation budget is that are intended to measure the overall health of the $22.5 million, an increase of $2.2 million, or U.S. currency program and result in more operational 11.1 percent, from 2018 actual expenses. The budget and cost transparency and better decisionmaking includes the cost of shipping new notes from the BEP capabilities among executives responsible for the U.S. to Reserve Banks, of intra-System shipments of fit currency program. and unprocessed notes, and of returning pallets from the Reserve Banks to the BEP. The majority of the Currency Education Program increase is attributable to the increase in armored The 2019 budget for the currency education program carrier rates between 2018 and 2019, as specified in (CEP) is $2.4 million, which is $0.5 million higher the existing multiyear armored carrier contracts. In than 2018 actual expenses. The CEP works to protect addition, the budget includes funds to ship a larger and maintain confidence in U.S. currency worldwide volume of notes from the BEP to the Reserve Banks by providing information on all circulating designs of in 2019 because the Board did not ship all of the notes to the global public and key stakeholder notes the BEP produced in the previous year. groups. In 2019, the CEP will continue to conduct outreach to domestic and international businesses Research and Development and retailers, maintain the uscurrency.gov educa- The 2019 budget for research and development is tional website, and further develop digital resources $11.8 million, which is $6.4 million higher than 2018 to reach a broader community of users. actual expenses. The Board will develop, test, and evaluate new and existing security features in support Capital Budget of the new family of notes. In addition, the Board The 2019 capital budget includes $3.2 million of mulwill continue development work on optical- tiyear capital to develop requirements for and supinspection technology and will integrate data from a port the integration of prototype optical technology prototype counterfeit-inspection system. The Board intended to automate the counterfeit analysis funcalso will continue work on cognitive and perception tion into the Board’s broader information technology

412 105th Annual Report | 2018 infrastructure. This capital item includes funds to capital equipment lease, and capital equipment reimburse the Board’s Division of Information Tech- needed for the effort. nology for capitalized internal software development,

413 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 Chair 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 2018. For a full listing of Board members from 1914 through the present, visit www.federalreserve.gov/ aboutthefed/bios/board/boardmembership.htm. Jerome H. Powell Richard H. Clarida Michelle W. Bowman Chair (as of February 3, 2018) Vice Chair (as of September 17, (as of November 26, 2018) 2018) Janet L. Yellen Lael Brainard Chair (through February 3, 2018) Randal K. Quarles Vice Chair for Supervision 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 David W. Skidmore Antulio Bomfim Assistant to the Board and Assistant to the Board Special Adviser to the Chairman Director Jennifer C. Gallagher Linda L. Robertson Special Assistant to the Board for Assistant to the Board Congressional Liaison Jon Faust Lucretia M. Boyer Senior Special Adviser to the Assistant to the Board Chairman

414 105th Annual Report | 2018 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 Joseph W. Gruber Stephanie E. Curcuru Director Senior Associate Director Assistant Director Thomas A. Connors Sally M. Davies Matteo Iacoviello Deputy Director Associate Director Assistant Director Beth Anne Wilson Carol Bertaut Andrea Raffo Deputy Director Deputy Associate Director Assistant Director Shaghil Ahmed James A. Dahl Robert Vigfusson Senior Associate Director Deputy Associate Director Assistant Director Brian M. Doyle Paul Wood John H. Rogers Senior Associate Director Deputy Associate Director Senior Adviser Christopher J. Erceg Ricardo Correa Senior Associate Director Assistant Director Division of Financial Stability Andreas W. Lehnert Luca Guerrieri Chiara Scotti Director Deputy Associate Director Assistant Director William F. Bassett Skander J. Van den Heuvel Michael T. Kiley Senior Associate Director Deputy Associate Director Special Adviser Andrew M. Cohen John W. Schindler Assistant Director Senior Associate Director Namirembe Mukasa Elizabeth Klee Assistant Director and Chief of Associate Director Staff Division of Monetary Affairs Thomas Laubach James A. Clouse Rochelle M. Edge Director Deputy Director Deputy Director

Federal Reserve System Organization 415 Trevor A. Reeve Katherine Tom Antulio Bomfim Deputy Director Associate Director Senior Adviser Fabio M. Natalucci Min Wei David H. Bowman Senior Associate Director Associate Director Senior Adviser Gretchen C. Weinbach Eric C. Engstrom Ellen E. Meade Senior Associate Director Deputy Associate Director Senior Adviser Margaret G. DeBoer Karen Brooks Edward M. Nelson Associate Director Assistant Director Senior Adviser Mary T. Hoffman Christopher J. Gust Robert J. Tetlow Associate Director Assistant Director Senior Adviser Jane E. Ihrig Laura Lipscomb Associate Director Assistant Director Egon Zakrajsek Senior Adviser J. David Lopez-Salido Zeynep Senyuz Associate Director Assistant Director Don H. Kim Matthew M. Luecke Rebecca Zarutskie Adviser Associate Director Assistant Director Division of Research and Statistics David W. Wilcox Steven A. Sharpe Karen M. Pence Director Deputy Associate Director Assistant Director Jeffrey C. Campione Gianni Amisano John E. Sabelhaus Deputy Director Assistant Director and Chief Assistant Director Daniel M. Covitz Burcu Duygan-Bump Shane M. Sherlund Deputy Director Assistant Director Assistant Director William L. Wascher III J. Andrew Figura Lillian Shewmaker Deputy Director Assistant Director Assistant Director Lacey Dingman-Woodsmall Charles Fleischman Paul A. Smith Senior Associate Director Assistant Director and Chief Assistant Director Eric M. Engen Glenn R. Follette Senior Associate Director Assistant Director Gustavo Suarez Assistant Director and Chief Joshua H. Gallin Li Geng Senior Associate Director Assistant Director and Chief Clara Vega Diana Hancock Erik A. Heitfield Assistant Director and Chief Senior Associate Director Assistant Director S. Wayne Passmore David E. Lebow Paul Lengermann Senior Adviser Senior Associate Director Assistant Director and Chief Robin A. Prager Michael G. Palumbo Byron Lutz Senior Adviser Senior Associate Director Assistant Director and Chief Jeremy Rudd Elizabeth K. Kiser Patrick E. McCabe Senior Adviser Associate Director Assistant Director Eric C. Engstrom John J. Stevens Raven Molloy Adviser Associate Director Assistant Director and Chief John M. Roberts Stacey Tevlin Norman J. Morin Adviser Associate Director Assistant Director Timothy Mullen Matthias Paustian Deputy Associate Director Assistant Director and Chief

416 105th Annual Report | 2018 Division of Supervision and Regulation Michael S. Gibson Molly Mahar Karen Caplan Director Associate Director Assistant Director Jennifer Burns Richard A. Naylor II Keith Coughlin Deputy Director Associate Director Assistant Director Michael Johnson Lisa H. Ryu Kathleen W. Johnson Deputy Director Associate Director Assistant Director Arthur W. Lindo Michael D. Solomon Keith A. Ligon Deputy Director Associate Director Assistant Director Mary L. Aiken Thomas R. Sullivan Ann McKeehan Senior Associate Director Associate Director Assistant Director Barbara J. Bouchard John Beebe Senior Associate Director Deputy Associate Director Vaishali Sack Assistant Director Steven P. Merriett James Ray Diggs Senior Associate Director Deputy Associate Director Robert Sarama Richard N. Ragan Constance Horsley Assistant Director Senior Associate Director Deputy Associate Director Steven M. Spurry Todd Vermilyea Ryan P. Lordos Assistant Director Senior Associate Director Deputy Associate Director Catherine Ann Tilford Kevin M. Bertsch David K. Lynch Assistant Director Associate Director Deputy Associate Director Donna Webb Nida Davis Susan Motyka Assistant Director Associate Director Deputy Associate Director Norah M. Barger Christopher Finger T. Kirk Odegard Senior Adviser Associate Director Deputy Associate Director Robert T. Ashman Jeffery Gunther Catherine Piche Adviser Associate Director Deputy Associate Director Anna L. Hewko Laurie Priest Fang Du Associate Director Deputy Associate Director Adviser Michael J. Hsu Joanne Wakim William F. Treacy Associate Director Deputy Associate Director Adviser John Kolb Suzanne L. Williams Associate Director Deputy Associate Director Division of Consumer and Community Affairs Eric S. Belsky Phyllis L. Harwell Minh-Duc T. Le Director Associate Director Assistant Director V. Nicole Bynum James A. Michaels Caterina Petrucco-Littleton Deputy Director Associate Director Assistant Director Anna Alvarez Boyd David E. Buchholz Allen Fishbein Senior Associate Director Deputy Associate Director Senior Adviser Suzanne G. Killian Joseph A. Firschein Senior Associate Director Deputy Associate Director Carol A. Evans Marisa A. Reid Associate Director Deputy Associate Director

Federal Reserve System Organization 417 Division of Reserve Bank Operations and Payment Systems Matthew J. Eichner Michael J. Lambert Sonja Danburg Director Associate Director Assistant Director and Manager Jeffrey C. Marquardt Jennifer K. Liu Brian Lawler Deputy Director Deputy Associate Director Assistant Director Marta E. Chaffee Jennifer A. Lucier Timothy W. Maas Senior Associate Director Deputy Associate Director Assistant Director Gregory L. Evans David C. Mills Travis D. Nesmith Senior Associate Director Deputy Associate Director Assistant Director and Chief Susan V. Foley Stuart E. Sperry Mark J. Olechowski Senior Associate Director Deputy Associate Director Assistant Director Lawrence E. Mize Jeffrey Walker Rebecca L. Royer Senior Associate Director Deputy Associate Director Assistant Director 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 Mary Johnson 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 Steven A. Miranda Ann Buckingham Jeffrey A. Martin Deputy Director Deputy Associate Director Assistant Director Winona Varnon Reginald V. Roach Stephen E. Pearson Deputy Director Deputy Associate Director Assistant Director Tameika L. Pope Keith F. Bates Katherine Perez-Grines Senior Associate Director Assistant Director Assistant Director and Assistant Curtis B. Eldridge Catherine Jack Chief Associate Director and Chief Assistant Director Marie S. Savoy Kendra Gastright Tim Ly Senior Adviser Associate Director Assistant Director

418 105th Annual Report | 2018 Division of Information Technology Sharon L. Mowry William K. Dennison Langston Shaw Director Deputy Associate Director Assistant Director Lisa M. Bell Marietta Murphy Jonathan F. Shrier Deputy Director Deputy Associate Director Assistant Director Raymond Romero Theresa C. Palya Eric C. Turner Deputy Director Deputy Associate Director Assistant Director Kofi A. Sapong Charles B. Young Virginia M. Wall Deputy Director Deputy Associate Director Assistant Director Glenn S. Eskow Brian Lester Edgar Wang Associate Director Assistant Director Assistant Director Kassandra A. Quimby Scott Meyerle Associate Director Assistant Director Ivan K. Wun Assistant Director Sheryl Lynn Warren Can Xuan Nguyen Associate Director Assistant Director Tillena G. Clark Rajasekhar R. Yelisetty Deborah Prespare Adviser Associate Director Assistant Director Office of Inspector General Mark Bialek Melissa Heist Gerald Maye Inspector General Associate Inspector General Assistant Inspector General Jacqueline M. Becker Peter Sheridan Associate Inspector General Associate Inspector General

Federal Reserve System Organization 419 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 2018, the Federal Open Market Committee held eight regularly scheduled meetings (see section 9, “Minutes of Federal Open Market Committee Meetings”). Members Janet L. Yellen John C. Williams Lael Brainard Chair, Board of Governors Vice Chairman, President, Federal Member, Board of Governors (through February 3, 2018) Reserve Bank of New York (as of Richard H. Clarida June 18, 2018; previously, Jerome H. Powell Member, Board of Governors (as President, Federal Reserve Bank of Chair, Board of Governors (as of of September 17, 2018) San Francisco) February 3, 2018; previously, Mary C. Daly Member) Thomas I. Barkin President, Federal Reserve Bank President, Federal Reserve Bank of San Francisco (as of William C. Dudley of Richmond October 1, 2018; previously, Vice Chairman, President, Federal Reserve Bank of New York Raphael W. Bostic Associate Economist) (through June 17, 2018) President, Federal Reserve Bank Loretta J. Mester of Atlanta President, Federal Reserve Bank of Cleveland Michelle W. Bowman Member, Board of Governors (as Randal K. Quarles of November 26, 2018) Member, Board of Governors Alternate Members James Bullard Esther L. George Michael Strine President, Federal Reserve Bank President, Federal Reserve Bank First Vice President, Federal of St. Louis of Kansas City Reserve Bank of New York Charles L. Evans Eric Rosengren President, Federal Reserve Bank President, Federal Reserve Bank of Chicago of Boston Officers James A. Clouse Richard M. Ashton Thomas A. Connors Secretary Assistant General Counsel Associate Economist Matthew M. Luecke Steven B. Kamin Mary C. Daly Deputy Secretary Economist Associate Economist (through September 30, 2018) David W. Skidmore Heinrich T. Laubach Assistant Secretary Economist David E. Lebow Associate Economist Michelle A. Smith David W. Wilcox Assistant Secretary Trevor A. Reeve Economist Associate Economist Mark E. Van Der Weide David Altig General Counsel Argia M. Sbordone Associate Economist Associate Economist Michael Held Kartik B. Arthreya Deputy General Counsel Associate Economist

420 105th Annual Report | 2018 Ellis W. Tallman Beth Anne Wilson Lorie K. Logan Associate Economist Associate Economist Deputy Manager, System Open Market Account William Wascher Simon Potter Associate Economist Manager, System Open Market Account

Federal Reserve System Organization 421 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 2018, the council met on February 8–9, May 10–11, September 6–7, and December 6–7. The council met with the Board on February 9, May 11, September 7, and December 7, 2018. Members District 1 District 5 District 9 Bruce W. Van Saun Brian T. Moynihan Kenneth J. Karels Chairman and Chief Executive Chairman and Chief Executive President and Chief Executive Officer, Citizens Financial Group, Officer, Bank of America, Officer, Great Western Bank, Inc., Stamford, CT Charlotte, NC Sioux Falls, SD District 2 District 6 District 10 William H. Rogers, Jr. Leslie R. Andersen Michael L. Corbat Chairman and Chief Executive President and Chief Executive Chief Executive Officer, Officer, SunTrust Banks, Inc., Officer, Bank of Bennington, Citigroup, New York, NY Atlanta, GA Bennington, NE District 3 District 7 District 11 Mark A. Turner Jeffrey J. Brown Phillip D. Green President and Chief Executive Chief Executive Officer, Ally Chairman and Chief Executive Officer, WSFS Bank, Financial Inc., Detroit, MI Officer, Cullen/Frost Bankers Wilmington, DE Inc., San Antonio, TX District 8 District 4 Ronald J. Kruszewski District 12 Beth E. Mooney Chairman, President, and Chief James H. Herbert, II Chairman Chairman and Chief Executive Executive Officer, Stifel Financial and CEO, First Republic Bank, Officer, KeyCorp, Cleveland, OH Corp., St. Louis, MO San Francisco, CA Officers Michael L. Corbat Kenneth J. Karels Herb Taylor President Vice President Secretary

422 105th Annual Report | 2018 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 2018, the council met on April 13 and November 16. 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 Chairman, President, and Chief Officer, Visions Federal Credit Officer, McCoy Federal Credit Executive Officer, Flatirons Bank, Union, Endicott, NY Union, Orlando, FL Boulder, CO District 3 District 7 District 11 Christopher D. Maher Christopher J. Murphy, III Joe Quiroga President and Chief Executive Chairman and Chief Executive President, Texas National Bank, Officer, OceanFirst Financial Officer, 1st Source Corporation Edinburg, TX Corporation and OceanFirst and 1st Source Bank, South Bank, Toms River, NJ Bend, IN District 12 Richard M. Sanborn District 4 District 8 President and Chief Executive Thomas J. Fraser Ann Wells Officer, Seacoast Commerce President and Chief Executive Chief Executive Officer, Bank and Seacoast Commerce Officer, First Federal Lakewood, Commonwealth Bank & Trust Banc Holdings, San Diego, CA Lakewood, OH Company, Louisville, KY Officers Gilda M. Nogueria Christopher D. Maher President Vice President

Federal Reserve System Organization 423 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 2018, the council met with the Board on May 4 and October 5. Members Roberto Barragan Donald Hinkle-Brown Jonny Price Principal, Aquaria Funding President and CEO, Reinvestment Director of Business Development, Solutions, Los Angeles, CA Fund, Philadelphia, PA Wefunder, San Francisco, CA Angela Glover Blackwell Barb Lau Gerry Roll Founder and Chief Executive Executive Director, Association of Executive Director, Foundation Officer, PolicyLink, Oakland, CA Women Contractors, St. for Appalachian Kentucky, Juan Bonilla Paul, MN Chavies, KY Deputy Director, Lawrence Andrea Levere Bethany Sanchez Community Works, President, Prosperity Now, Fair Lending Director, Lawrence, MA Washington, DC Metropolitan Milwaukee Fair Barrett Burns Housing Council, Milwaukee, WI Ben Mangan President and CEO, VantageScore Executive Director and Lecturer, Sue Taoka Solutions LLC, Stamford, CT Haas School of Business, U.C. Executive Vice President, Craft3, Vanessa Calderon-Rosado Berkeley, Center for Social Sector Seattle, WA CEO, IBA (Inquilinos Boricuas Leadership, Berkeley, CA en Accion), Boston, MA Rodrick Miller Patrick Dujakovich Founder and CEO, Ascendant President, Greater Kansas City Global, Detroit, MI AFL-CIO, Kansas City, MO Officers Roberto Barragan Andrea Levere Chair Vice Chair

424 105th Annual Report | 2018 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 Gregory Duffee Jennie Bai Paul Glasserman Professor, John Hopkins Assistant Professor, Georgetown Professor, Columbia University University University Monika Piazzesi Robert Stine Professor, Stanford University Professor, University of Pennsylvania

Federal Reserve System Organization 425 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 Chandler Howard, 2018 Roger S. Berkowitz, 2018 Phillip L. Clay, 2018 President and Chief Executive President and Chief Executive Professor – Department of Urban Officer, Liberty Bank, Officer, Legal Sea Foods, LLC, Studies & Planning, Middletown, CT Boston, MA Massachusetts Institute of Joseph L. Hooley, 2019 Niraj Shah, 2019 Technology (MIT), Chairman and Chief Executive Chief Executive Officer, Cambridge, MA Officer, State Street Corporation, Co-Founder, and Co-Chairman, Christina Hull Paxson, 2019 Boston, MA Wayfair, Boston, MA President, Brown University, Michael E. Tucker, 2020 Kathleen E. Walsh, 2020 Providence, RI President and Chief Executive President and Chief Executive Gary L. Gottlieb, MD, 2020 Officer, Greenfield Cooperative Officer, Boston Medical Center, Chief Executive Officer, Partners Bank, Greenfield, MA Boston, MA In Health, Boston, MA

426 105th Annual Report | 2018 District 2–New York Class A Class B Class C James P. Gorman, 2018 Glenn H. Hutchins, 2018 Sara Horowitz, 2018 Chairman and Chief Executive Chairman, North Island, and Chief Executive Officer and Officer, Morgan Stanley, New Co-Founder, Silver Lake, New Founder, Trupo, Inc., York, NY York, NY Brooklyn, NY Denise Scott, 2019 Gerald H. Lipkin, 2019 Vacancy, 2019 Executive Vice President, Local Chairman, Valley National Bank Charles Phillips, 2020 Initiatives Support Corporation, and Valley National Bancorp, Chief Executive Officer, Infor, New York, NY Wayne, NJ New York, NY Rosa Gil, 2020 Paul P. Mello, 2020 President and Chief Executive President and Chief Executive Officer, Comunilife, Inc., New Officer, Solvay Bank, Solvay, NY York, NY District 3–Philadelphia Class A Class B Class C David R. Hunsicker, 2018 Carol J. Johnson, 2018 Phoebe Haddon, 2018 Chairman, President, and Chief Retired President and Chief Chancellor, Rutgers Executive Officer, New Tripoli Operating Officer, AlliedBarton University–Camden, Camden, Bank, New Tripoli, PA Security Services, NJ Conshohocken, PA William S. Aichele, 2019 Brian M. McNeill, 2019 Anthony Ibarguen, 2019 Chairman, Univest Corporation President and Chief Executive President, AquaVenture Holdings, of Pennsylvania, Souderton, PA Officer, TouchPoint, Inc., Ltd., and Chief Executive Officer, Concordville, PA Jon S. Evans, 2020 Quench USA, Inc., King of President and Chief Executive Prussia, PA Madeline Bell, 2020 Officer, Atlantic Community President and Chief Executive Patricia Hasson, 2020 Bankers Bank, Camp Hill, PA Officer, The Children’s Hospital President and Executive Director, of Philadelphia – CHOP, Clarifi, Philadelphia, PA Philadelphia, PA

Federal Reserve System Organization 427 District 4–Cleveland Class A Cincinnati Branch Pittsburgh Branch Claude E. Davis, 2018 Appointed by the Federal Reserve Bank Appointed by the Federal Reserve Bank Executive Chairman, First Tucker Ballinger, 2018 Dmitri D. Shiry, 2018 Financial Bancorp, President and Chief Executive Managing Partner, Deloitte LLP, Cincinnati, OH Officer, Forcht Bank, N.A., Pittsburgh, PA Stephen D. Steinour, 2019 Lexington, KY Shelley L. Fant, 2019 Chairman, President, and Chief Darin C. Hall, 2019 President and Chief Executive Executive Officer, Huntington President and Chief Executive Officer, FCG Solutions, Inc., Bancshares Incorporated, Officer, Civitas Development Pittsburgh, PA Columbus, OH Group, Cincinnati, OH Dean J. Miller, 2020 Audrey Dunning, 2020 President and Chief Executive Alfonso Cornejo, 2020 Senior Vice President, CGI Officer, First National Bank, President, Hispanic Chamber Group, Inc., Pittsburgh, PA Bellevue, OH Cincinnati USA, Cincinnati, OH Robert I. Glimcher, 2020 David C. Evans, 2020 President, Glimcher Group Inc., Class B President and Chief Executive Pittsburgh, PA George S. Barrett, 2018 Officer, TESSEC LLC, Appointed by the Board of Governors Former Chairman and Chief Dayton, OH Executive Officer, Cardinal Stefani Pashman, 2018 Health, Inc., Dublin, OH Appointed by the Board of Governors Chief Executive Officer, Christopher C. Cole, 2018 Allegheny Conference on David Megenhardt, 2019 Founder, Intelligrated Inc., Community Development, Executive Director, United Labor Mason, OH Pittsburgh, PA Agency, Cleveland, OH Valarie L. Sheppard, 2019 Kathryn Z. Klaber, 2019 Charles H. Brown, 2020 Senior Vice President, Managing Partner, The Klaber Executive Adviser, Toyota Motor Comptroller, and Treasurer, The Group, Sewickley, PA North America, Erlanger, KY Procter & Gamble Company, Suzanne Mellon, 2020 Cincinnati, OH Class C President, Carlow University, Dawne S. Hickton, 2018 Jenell R. Ross, 2020 Pittsburgh, PA President and Founding Partner, President, Bob Ross Auto Group, Cumberland Highstreet Partners, Centerville, OH Sewickley, PA Dwight E. Smith, 2019 President and Chief Executive Officer, Sophisticated Systems, Inc., Columbus, OH Doris Carson Williams, 2020 President and Chief Executive Officer, African American Chamber of Commerce of Western Pennsylvania, Pittsburgh, PA

428 105th Annual Report | 2018 District 5–Richmond Class A Baltimore Branch Charlotte Branch Susan K. Still, 2018 Appointed by the Federal Reserve Bank Appointed by the Federal Reserve Bank President and Chief Executive Christopher J. Estes, 2018 Michael D. Garcia, 2018 Officer, HomeTown Bankshares Vice President, Business President, Pulp and Paper, Corporation and HomeTown Development and Advocacy, Domtar Corp., Fort Mill, SC Bank, Roanoke, VA Rebuilding Together of Jerry L. Ocheltree, 2018 William A. Loving, Jr., 2019 Washington, DC, President and Chief Executive President and Chief Executive Washington, DC Officer, Carolina Trust Bank, Officer, Pendleton Community Laura L. Gamble, 2018 Lincolnton, NC Bank, Franklin, WV Regional President Greater Robert R. Hill, Jr., 2020 Michael C. Crapps, 2019 Maryland, PNC, Baltimore, MD Chief Executive Officer, South President and Chief Executive State Corporation, Columbia, SC Mary Ann Scully, 2019 Officer, First Community Bank, Chairman, President, and Chief Lexington, SC Class B Executive Officer, Howard Laura C. Meagher, 2020 Bancorp, Ellicott City, MD Catherine A. Meloy, 2018 Vice President, General Counsel, President and Chief Executive Austin J. Slater, Jr., 2020 and Secretary, VF Corporation, Officer, Goodwill of Greater President and Chief Executive Greensboro, NC Washington/Goodwill Excel Officer, Southern Maryland Appointed by the Board of Governors Center, Washington, DC Electric Cooperative, Inc., Hughesville, MD Laura Y. Clark, 2018 Ángel Cabrera, 2019 Executive Vice President and President, George Mason Appointed by the Board of Governors Chief Impact Officer, United Way University, Fairfax, VA Kenneth R. Banks, 2018 of Central Carolinas, Thomas C. Nelson, 2020 President and Chief Executive Charlotte, NC Chairman, President, and Chief Officer, Banks Contracting Michelle A. Mapp, 2019 Executive Officer, National Company, Greenbelt, MD Chief Executive Officer, South Gypsum Company, Wayne A. I. Frederick, MD, 2019 Carolina Community Loan Fund, Charlotte, NC President, Howard University, Charleston, SC Washington, DC Class C R. Glenn Sherrill, Jr., 2020 Vacancy, 2018 Susan J. Ganz, 2020 Chairman and Chief Executive Chief Executive Officer, Lion Officer, SteelFab Inc., Margaret G. Lewis, 2019 Brothers Company, Inc., Owings Charlotte, NC Retired President, HCA Capital Mills, MD Division, Richmond, VA Kathy J. Warden, 2020 President and Chief Operating Officer, Northrop Grumman Corporation, Falls Church, VA

Federal Reserve System Organization 429 District 6–Atlanta Class A Birmingham Branch Paul G. Boynton, 2019 Chairman, President, and Chief Gerard R. Host, 2018 Appointed by the Federal Reserve Bank Executive Officer, Rayonier President and Chief Executive David M. Benck, 2018 Advanced Materials, Inc., Officer, Trustmark Corporation, Vice President and General Jacksonville, FL Jackson, MS Counsel, Hibbett Sports, Robert W. Dumas, 2019 Birmingham, AL William O. West, 2020 President and Chief Executive Michael Case, 2018 Chief Executive Officer, The Officer, AuburnBank, Retired President and Chief Bank of Tampa, Tampa, FL Auburn, AL Executive Officer, The Westervelt Appointed by the Board of Governors O.B. Grayson Hall, Jr., 2020 Company, Tuscaloosa, AL Timothy P. Cost, 2018 Chairman and Chief Executive Brian C. Hamilton, 2019 President, Jacksonville University, Officer, Regions Financial President and Chief Executive Jacksonville, FL Corporation, Birmingham, AL Officer, Trillion Communications Nicole B. Thomas, 2019 Corp., Bessemer, AL Class B Hospital President, Baptist Herschell L. Hamilton, 2020 Medical Center South, Elizabeth A. Smith, 2018 Chief Strategic Officer, BLOC Jacksonville, FL Chairman and Chief Executive Global Group, Birmingham, AL Officer, Bloomin’ Brands, Inc., Troy D. Taylor, 2020 Tampa, FL Appointed by the Board of Governors Chairman and Chief Executive Pamela B. Hudson, MD, 2018 Officer, Coca-Cola Beverages Mary A. Laschinger, 2019 Chief Executive Officer, Florida, LLC, Tampa, FL Chairman and Chief Executive Crestwood Medical Center, Officer, Veritiv Corporation, Huntsville, AL Miami Branch Atlanta, GA Merrill H. Stewart, Jr., 2019 Jonathan T.M. Reckford, 2020 Appointed by the Federal Reserve Bank President, The Stewart/Perry Chief Executive Officer, Habitat Millar Wilson, 2018 Company, Inc., Birmingham, AL for Humanity International, Vice Chairman and Chief Atlanta, GA Nancy C. Goedecke, 2020 Executive Officer, Mercantil Chairman and Chief Executive Commercebank, Coral Class C Officer, Mayer Electric Supply Gables, FL Company, Inc., Birmingham, AL Thomas A. Fanning, 2018 Eduardo Arriola, 2019 Chairman, President, and Chief Chairman and Chief Executive Jacksonville Branch Executive Officer, Southern Officer, Apollo Bank, Miami, FL Company, Atlanta, GA Appointed by the Federal Reserve Bank N. Maria Menendez, 2020 Mike J. Jackson, 2019 John Hirabayashi, 2018 Chief Financial Officer, GL Chairman, Chief Executive President and Chief Executive Homes of Florida Holding, Officer, and President, Officer, Community First Credit Sunrise, FL AutoNation, Inc., Fort Union of Florida, Lauderdale, FL Jacksonville, FL Victoria E. Villalba, 2020 President and Chief Executive Myron A. Gray, 2020 Dawn Lockhart, 2018 Officer, Victoria & Associates Retired President, U.S. Director of Strategic Partnerships, Career Services, Inc., Miami, FL Operations, United Parcel Service, Office of the Mayor, City of Atlanta, GA Jacksonville, Jacksonville, FL

430 105th Annual Report | 2018 Appointed by the Board of Governors John W. Garratt, 2020 Suzanne T. Mestayer, 2018 Michael A. Wynn, 2018 Executive Vice President and Managing Principal, ThirtyNorth Board Chairman and President, Chief Financial Officer, Dollar Investments, LLC, New Sunshine Ace Hardware, Bonita General, Goodlettsville, TN Orleans, LA Springs, FL Appointed by the Board of Governors Elizabeth A. Ardoin, 2019 Ana M. Menendez, 2019 Senior Executive Vice President – Richard D. Holder, 2018 Chief Financial Officer and Director of Communications, President and Chief Executive Treasurer, Watsco, Inc., IBERIABANK, Lafayette, LA Officer, NN, Inc., Johnson Miami, FL City, TN Lampkin Butts, 2020 Keith T. Koenig, 2020 President and Chief Operating Matthew S. Bourlakas, 2019 President, City Furniture, Officer, Sanderson Farms, Inc., President and Chief Executive Tamarac, FL Laurel, MS Officer, Goodwill Industries of Middle Tennessee, Inc., Nashville Branch Appointed by the Board of Governors Nashville, TN Art E. Favre, 2018 Appointed by the Federal Reserve Bank Benjamin G. Brock, 2020 President and Chief Executive Kent M. Adams, 2018 President and Chief Executive Officer, Performance Contractors, Former President and Chief Officer, Astec Industries, Inc., Inc., Baton Rouge, LA Executive Officer, Caterpillar Chattanooga, TN Financial Services Corp., G. Janelle Frost, 2019 Nashville, TN President and Chief Executive New Orleans Branch Officer, AMERISAFE, Inc., Beth R. Chase, 2018 Senior Managing Director, Appointed by the Federal Reserve Bank DeRidder, LA Ankura Consulting Group, Phillip R. May, 2018 Michael E. Hicks, 2020 Nashville, TN President and Chief Executive President and Chief Executive Claire W. Tucker, 2019 Officer, Entergy Louisiana, LLC Officer, Hixardt Technologies, President and Chief Executive and Entergy Gulf States Inc., Pensacola, FL Louisiana, L.L.C., Jefferson, LA Officer, CapStar Financial Holdings, Inc., Nashville, TN District 7–Chicago Class A Jorge Ramirez, 2019 E. Scott Santi, 2020 Managing Director, GCM Chairman and Chief Executive William M. Farrow, 2018 Grosvenor, Chicago, IL Officer, Illinois Tool Works Inc., Former President and Chief Glenview, IL Executive Officer, Urban Wright L. Lassiter III, 2020 Partnership Bank, Chicago, IL President and Chief Executive Detroit Branch Abram A. Tubbs, 2019 Officer, Henry Ford Health Chairman and Chief Executive System, Detroit, MI Appointed by the Federal Reserve Bank Officer, Ohnward Bank & Trust, Rip Rapson, 2018 Cascade, IA Class C President and Chief Executive Officer, The Kresge Foundation, David W. Nelms, 2020 Greg Brown, 2018 Troy, MI Chairman, Discover Financial Chairman and Chief Executive Services, Riverwoods, IL Officer, Motorola Solutions, Inc., Michael L. Seneski, 2019 Chicago, IL Chief Financial Officer, Credibly, Class B Troy, MI Anne R. Pramaggiore, 2019 Susan M. Collins, 2018 Senior Executive Vice President, Sandy K. Baruah, 2020 Professor of Public Policy and Exelon Corp., and Chief President and Chief Executive Economics, University of Executive Officer, Exelon Officer, Detroit Regional Michigan, Ann Arbor, MI Utilities, Chicago, IL Chamber, Detroit, MI

Federal Reserve System Organization 431 Sandra E. Pierce, 2020 Appointed by the Board of Governors Joseph B. Anderson, Jr., 2020 Chairman and Senior Executive James M. Nicholson, 2018 Chairman and Chief Executive Vice President, Private Client Co-Chairman, PVS Chemicals, Officer, TAG Holdings, LLC, Group and Regional Banking Inc. Detroit, MI Wixom, MI Director, Huntington Michigan, Southfield, MI Linda P. Hubbard, 2019 President and Chief Operating Officer, Carhartt, Inc., Dearborn, MI District 8–St. Louis Class A Class B Class C Patricia L. Clarke, 2018 Daniel J. Ludeman, 2018 Suzanne Sitherwood, 2018 President and Chief Executive President and Chief Executive President and Chief Executive Officer, First National Bank of Officer, Concordance Academy of Officer, Spire Inc., St. Louis, MO Raymond, Raymond, IL Leadership, St. Louis, MO Kathleen M. Mazzarella, 2019 D. Bryan Jordan, 2019 Alice K. Houston, 2019 Chairman, President, and Chief Chairman, President, and Chief Chief Executive Officer, HJI Executive Officer, Graybar Executive Officer, First Horizon Supply Chain Solutions, Electric Company, Inc., St. National Corporation, Louisville, KY Louis, MO Memphis, TN John N. Roberts III, 2020 James M. McKelvey, Jr., 2020 Elizabeth G. McCoy, 2020 President and Chief Executive Chief Executive Officer, Invisibly, President and Chief Executive Officer, J.B. Hunt Transport St. Louis, MO Officer, Planters Bank, Services, Inc., Lowell, AR Hopkinsville, KY

432 105th Annual Report | 2018 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 Jeff Lynch, 2018 Ben Reno-Weber, 2018 Julianne Goodwin, 2018 President and Chief Executive Co-Founder, MobileServe, Owner, Express Employment Officer, Eagle Bank and Trust, Louisville, KY Professionals, Tupelo, MS Little Rock, AR Patrick J. Glotzbach, 2019 J. Brice Fletcher, 2019 R. Andrew Clyde, 2019 President and Chief Executive Chairman, First National Bank of President and Chief Executive Officer, New Independent Eastern Arkansas, Forrest Officer, Murphy USA Inc., El Bancshares, Inc., City, AR Dorado, AR Charlestown, IN Michael E. Cary, 2020 Emerson M. Goodwin, 2020 Keith Glover, 2020 President and Chief Executive Corporate Regional Director, President and Chief Executive Officer, Carroll Bank and Trust, ARcare d/b/a KentuckyCare, Officer, Producers Rice Mill, Inc., Huntingdon, TN Paducah, KY Stuttgart, AR Michael Ugwueke, 2020 Blake B. Willoughby, 2020 Karama Neal, 2020 President and Chief Executive President, First Breckinridge Chief Operating Officer, Southern Officer, Methodist Le Bonheur Bancshares, Inc., Irvington, KY Bancorp Community Partners, Healthcare, Memphis, TN Little Rock, AR Appointed by the Board of Governors Appointed by the Board of Governors Susan E. Parsons, 2018 Appointed by the Board of Governors Eric D. Robertson, 2018 Chief Financial Officer, Secretary, Robert Martinez, 2018 President, Community LIFT and Treasurer, Koch Enterprises, Owner, Rancho La Esperanza, De Corporation, Memphis, TN Inc., Evansville, IN Queen, AR Randy W. Schumaker, 2019 Carolyn Chism Hardy, 2019 Millie A. Ward, 2019 Former President and Chief President and Chief Executive President, Stone Ward, Little Management Officer, Logan Officer, Chism Hardy Rock, AR Aluminum, Inc., Russellville, KY Investments, LLC, Collierville, TN Vickie D. Judy, 2020 Sadiqa N. Reynolds, 2020 Chief Financial Officer and Vice President and Chief Executive David T. Cochran, Jr., 2020 President, America’s Car-Mart, Officer, Louisville Urban League, Partner, CoCo Planting Co., Inc, Bentonville, AR Louisville, KY Avon, MS District 9–Minneapolis Class A Class B Class C Randy L. Newman, 2018 Christine E. Hamilton, 2018 Harry D. Melander, 2018 Chairman and Chief Executive Managing Partner, Christiansen President, Minnesota Building Officer, Alerus Financial, NA & Land and Cattle, Ltd., and Construction Trades Council, Alerus Financial Corp., Kimball, SD St. Paul, MN Grand Forks, ND David R. Emery, 2019 Kendall J. Powell, 2019 Chairman and Chief Executive Retired Chairman, General Mills, Catherine T. Kelly, 2019 Officer, Black Hills Corporation, Inc., Minneapolis, MN Regional President, PNC Bank, Rapid City, South Dakota Minneapolis-St. Paul, Srilata Zaheer, 2020 Minneapolis, MN Kathleen Neset, 2020 Dean, Carlson School of President, Neset Consulting Management, University of Thomas W. Armstrong, 2020 Service, Tioga, ND Minnesota, Minneapolis, MN President, First National Bank of Park Falls, Park Falls, WI

Federal Reserve System Organization 433 Helena Branch William E. Coffee, 2020 Sarah Walsh, 2020 Chief Executive Officer, Chief Operating Officer, Appointed by the Federal Reserve Bank Stockman Financial Corporation, PayneWest Insurance, Barbara Stiffarm, 2018 Billings, MT Helena, MT Executive Director, Opportunity Link, Inc., Havre, MT Appointed by the Board of Governors Norma Nickerson, 2019 Marsha Goetting, 2018 Director, Institute for Tourism & Professor and Extension Family Recreation Research, University Economics Specialist, Montana of Montana, Missoula, MT State University, Bozeman, MT District 10–Kansas City Class A Class C Appointed by the Board of Governors Richard L. Lewis, 2018 Mark A. Zaback, 2018 Steve Maestas, 2018 President and Chief Executive President and Chief Executive Chief Executive Officer, Maestas Officer, RTL Networks, Inc., Officer, Jonah Bank of Wyoming, Development Group, Denver, CO Casper, WY Albuquerque, NM Taryn Edwards, 2019 Gregory Hohl, 2019 Rose M. Washington, 2019 Senior Vice President, Saunders Chairman and President, Wahoo Executive Director, Tulsa Construction, Englewood, CO State Bank, Wahoo, NE Economic Development Corporation, Tulsa, OK Denny Marie Post, 2020 Patricia J. Minard, 2020 Chief Executive Officer, Red James C. Farrell, 2020 President and Chief Executive Robin International, Greenwood Officer, Southwest National President and Chief Executive Village, CO Bank, Wichita, KS Officer, Farmers National Company, Omaha, NE Oklahoma City Branch Class B Denver Branch Appointed by the Federal Reserve Bank Brent A. Stewart, Sr., 2018 Michael C. Coffman, 2018 President and Chief Executive Appointed by the Federal Reserve Bank Retired President and Chief Officer, United Way of Greater Edmond Johnson, 2018 Executive Officer, Panhandle Oil Kansas City, Kansas City, MO President and Owner, Premier and Gas, Inc., Oklahoma Manufacturing Inc., Douglas J. Stussi, 2019 City, OK Frederick, CO Executive Vice President and Susan Chapman Plumb, 2019 Treasurer, Love’s Travel Stops & Katharine W. Winograd, 2018 Board Chair and Chief Executive Country Stores, Managing President, Central New Mexico Officer, Bank of Cherokee Director, Love Family Office, Community College, County, Tahlequah, OK Oklahoma City, OK Albuquerque, NM Christopher C. Turner, 2019 Lilly Marks, 2020 Jeffrey C. Wallace, 2019 President and Chief Financial Vice President for Health Affairs, Chief Executive Officer, Wyoming Officer, The First State Bank, University of Colorado and Bank & Trust, Cheyenne, WY Oklahoma City, OK Anschutz Medical Campus, Ashley J. Burt, 2020 Dana S. Weber, 2020 Aurora, CO President and Chief Executive President and Chief Executive Officer, The Gunnison Bank and Officer, Webco Industries, Inc., Trust Company, Gunnison, CO Sand Springs, OK

434 105th Annual Report | 2018 Appointed by the Board of Governors Thomas J. Henning, 2018 John F. Bourne, 2019 Tina Patel, 2018 President and Chief Executive Retired International Chief Financial Officer, Promise Officer, Cash-Wa Distributing Representative, International Hotels, Inc., Tulsa, OK Co., Kearney, NE Brotherhood of Electrical Workers, Omaha, NE Clint D. Abernathy, 2019 Annette Hamilton, 2019 President, Abernathy Farms, Inc., Chief Operating Officer, Eric L. Butler, 2020 Altus, OK Ho-Chunk, Inc. Winnebago, NE Retired Executive Vice President Katrina Washington, 2020 Dwayne W. Sieck, 2020 and Chief Administrative Officer, Owner, Stratos Realty Group President and Chief Operating Union Pacific Railroad, LLC, Oklahoma City, OK Officer, Mutual of Omaha Bank, Omaha, NE Omaha, NE Omaha Branch Appointed by the Board of Governors Appointed by the Federal Reserve Bank Kimberly A. Russel, 2018 Brian D. Esch, 2018 President and Chief Executive President and Chief Executive Officer, Bryan Health, Officer, MNB Bank, Lincoln, NE McCook, NE District 11–Dallas Class A Class C Teresa O. Molina, 2020 President, First New Mexico Allan James Rasmussen, 2018 Greg L. Armstrong, 2018 Bank, Deming, NM President and Chief Executive Chairman, Plains All American Officer, HomeTown Bank, N.A., Pipeline L.P., Houston, TX Appointed by the Board of Governors Galveston, TX Matthew K. Rose, 2019 Renard U. Johnson, 2018 J. Russell Shannon, 2019 Executive Chairman, BNSF President and Chief Executive President and Chief Executive Railway Company, Fort Officer, Management & Officer, National Bank of Worth, TX Engineering Technologies Andrews, Andrews, TX International, Inc. (METI, Inc.), Mary E. Kipp, 2020 Christopher C. Doyle, 2020 El Paso, TX President and Chief Executive President and Chief Executive Officer, El Paso Electric Julio Chiu, 2019 Officer, Texas First Bank, Texas Company, El Paso, TX Founder and Chief Executive City, TX Officer, SEISA Medical, Inc., El El Paso Branch Paso, TX Class B Appointed by the Federal Reserve Bank Richard D. Folger, 2020 Ann B. Stern, 2018 William Serrata, 2018 Managing General Partner, President and Chief Executive Officer, Houston Endowment President, El Paso Community Colbridge Partners Ltd., Inc., Houston, TX College, El Paso, TX Midland, TX Curtis V. Anastasio, 2019 Paul L. Foster, 2019 Chairman, GasLog Partners L.P., President, Franklin Mountain San Antonio, TX Management, LLC, El Paso, TX Gerald B. Smith, 2020 Sally A. Hurt-Deitch, 2020 Chairman and Chief Executive Group President/Chief Executive Officer, Smith, Graham & Officer El Paso Rio Grande Valley, Company Investment Advisors, The Hospitals of L.P., Houston, TX Providence/Tenet, El Paso, TX

Federal Reserve System Organization 435 Houston Branch Marcus A. Watts, 2019 Robert L. Lozano, 2020 President, The Friedkin Group, President/Owner, Lynn Lee Appointed by the Federal Reserve Bank Houston, TX Inc./Dairy Queen, Pharr, TX David Zalman, 2018 Chairman and Chief Executive Cynthia Taylor, 2020 Appointed by the Board of Governors Officer, Prosperity Bancshares, President and Chief Executive Jesús Garza, 2018 Houston, TX Officer, Oil States International Retired President and Chief Inc., Houston, TX Darryl L. Wilson, 2019 Executive Officer, Seton Vice President and Chief Healthcare Family, Austin, TX San Antonio Branch Commercial Officer, General James Conrad Weaver, 2019 Electric Company, Houston, TX Appointed by the Federal Reserve Bank Chief Executive Officer, Albert Chao, 2020 Alfred B. Jones, 2018 McCombs Partners, San President and Chief Executive President and Director, American Antonio, TX Officer, Westlake Chemical Corp., Bank Holding Corp., Marie T. Mora, 2020 Houston, TX Corpus Christi, TX Professor of Economics and Gina Luna, 2020 Charles E. Amato, 2019 Associate Provost for Faculty Chief Executive Officer, Luna Chairman and Co-Founder, Diversity, The University of Strategies, LLC, Houston, TX Southwest Business Corp. Texas, Rio Grande Valley, (SWBC), San Antonio, TX Edinburg, TX Appointed by the Board of Governors Janiece Longoria, 2018 Paula Gold-Williams, 2020 Chairman, Port Commision of President and Chief Executive the Port of Houston Authority, Officer, CPS Energy, San Houston, TX Antonio, TX District 12–San Francisco Class A Sanford L. Michelman, 2019 Rosemary Turner, 2020 Chairman, Michelman & President, UPS North California Peter S. Ho, 2018 Robinson, LLP, Los Angeles, CA District, Oakland, CA Chairman, President, and Chief Executive Officer, Bank of Tamara L Lundgren, 2020 Los Angeles Branch Hawaii and Bank of Hawaii President and Chief Executive Corporation, Honolulu, HI Officer, Schnitzer Steel Industries, Appointed by the Federal Reserve Bank Steven R. Gardner, 2019 Inc., Portland, OR Ilyanne Morden Kichaven, 2018 Chairman and Chief Executive Executive Director, Los Angeles, Officer, Pacific Premier Bank, Class C SAG-AFTRA, Los Angeles, CA Irvine, CA Alexander R. Mehran, 2018 Luis Faura, 2018 S. Randolph Compton, 2020 Chairman and Chief Executive President and Chief Executive Chief Executive Officer and Officer, Sunset Development Officer, C&F Foods, Inc., City of Co-Chair of the Board, Pioneer Company, San Ramon, CA Industry, CA Trust Bank, N.A., Salem, OR Barry M. Meyer, 2019 Steven W. Streit, 2019 Retired Chairman and Chief Class B Founder, President, and Chief Executive Officer, Warner Bros., Executive Officer, Green Dot Steven E. Bochner, 2018 Founder and Chairman, North Bank and Green Dot Partner, Wilson, Sonsini, Ten Mile Associates, Los Corporation, Pasadena, CA Goodrich, & Rosati, P.C., Angeles, CA Palo Alto, CA

436 105th Annual Report | 2018 Carl J.P. Chang, 2020 Anne C. Kubisch, 2019 Seattle Branch Chief Executive Officer, President and Chief Executive Appointed by the Federal Reserve Bank Redwood-Kairos Real Estate Officer, The Ford Family Partners and Pieology Pizzeria, Foundation, Roseburg, OR Cheryl B. Fambles, 2018 Rancho Santa Margarita, CA Chief Executive Officer, Pacific Charles A. Wilhoite, 2020 Mountain Workforce Appointed by the Board of Governors Managing Director, Willamette Development Council, Anita V. Pramoda, 2018 Management Associates, Tumwater, WA Chief Executive Officer, Owned Portland, OR Outcomes, Las Vegas, NV Andrew Wolff, 2019 Salt Lake City Branch Chief Financial Officer, James A. Hughes, 2019 International and Channel Former Director and Chief Appointed by the Federal Reserve Bank Development, Starbucks Coffee Executive Officer, First Solar, Susan D. Mooney Johnson, 2018 Company, Seattle, WA Inc., Tempe, AZ President Emeritus, Futura Craig Dawson, 2020 Robert H. Gleason, 2020 Industries, Clearfield, UT President and Chief Executive President and Chief Executive Peter R. Metcalf, 2019 Officer, Retail Lockbox, Inc., Officer, Evans Hotels, San Founder, Brand Advocate, and Seattle, WA Diego, CA Chief Executive Officer Emeritus, Laura Lee Stewart, 2020 Black Diamond, Inc., Salt Lake Portland Branch President and Chief Executive City, UT Officer, Sound Community Bank Appointed by the Federal Reserve Bank Park Price, 2020 and Sound Financial Stacey M.L. Dodson, 2018 Chief Executive Officer Emeritus Bancorporation, Seattle, WA Market President, Portland and and Chairman, Bank of Idaho, Southwest Washington, U.S. Appointed by the Board of Governors Idaho Falls, ID Bank, Portland, OR West Mathison, 2018 Vacancy, 2020 Steven J. Zika, 2019 President, Stemilt Growers, LLC, Chief Executive Officer, Hampton Wenatchee, WA Appointed by the Board of Governors Lumber, Portland, OR Arthur F. Oppenheimer, 2018 Sophie Minich, 2019 Hilary K. Krane, 2020 Chairman and Chief Executive President and Chief Executive Executive Vice President, Chief Officer, Oppenheimer Companies, Officer, Cook Inlet Region, Inc., Administrative Officer, and Inc., Boise, ID Anchorage, AK General Counsel, Nike, Inc., Russel A. Childs, 2019 Elaine S. Couture, 2020 Beaverton, OR Chief Executive Officer and Executive Vice President and Cheryl R. Nester Wolfe, 2020 President, SkyWest, Inc., St. Chief Executive Officer, President and Chief Executive George, UT Washington and Montana Region, Officer, Salem Health Hospital Providence St. Joseph Health, and Clinics, Salem, OR Patricia R. Richards, 2020 Spokane, WA President and Chief Executive Appointed by the Board of Governors Officer, SelectHealth, Inc., Román D. Hernández, 2018 Murray, UT Partner, Troutman Sanders, LLP, Portland, OR

Federal Reserve System Organization 437 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 Nancy C. Goedecke, 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 Stefani Pashman, Chair Christopher L. Oakley, Vice Vice President and Chief President and Regional Executive Operating Officer Guhan Venkatu, Senior Regional Officer Miami New York Michael A. Wynn, Chair Richmond Sara Horowitz, Chair Karen Gilmore, Vice President and Margaret G. Lewis, Chair Denise Scott, Deputy Chair Regional Executive Kathy J. Warden, Deputy Chair John C. Williams, President Thomas I. Barkin, President Nashville Michael Strine, First Vice President Becky C. Bareford, First Vice Richard D. Holder, Chair President Lee C. Jones, Vice President and Additional office at East Rutherford, NJ Regional Executive Baltimore Philadelphia Susan J. Ganz, Chair New Orleans Brian M. McNeill, Chair David E. Beck, Senior Vice G. Janelle Frost, Chair Phoebe Haddon, Deputy Chair President and Baltimore Regional Adrienne C. Slack, Vice President Patrick T. Harker, President Executive and Regional Executive James D. Narron, First Vice Charlotte President Chicago Laura Y. Clark, Chair Anne R. Pramaggiore, Chair Cleveland Matthew A. Martin, Senior Vice President and Charlotte Regional E. Scott Santi, Deputy Chair Dawne S. Hickton, Chair Executive Charles L. Evans, President Dwight E. Smith, Deputy Chair Ellen J. Bromagen, First Vice Loretta J. Mester, President Atlanta President and Chief Operating Gregory Stefani, First Vice Officer Mike J. Jackson, Chair President Additional office at Des Moines, IA Myron A. Gray, Deputy Chair Raphael W. Bostic, President Andre Anderson, First Vice President

438 105th Annual Report | 2018 Detroit Helena Houston Joseph B. Anderson, Jr, Chair Susan Woodrow, Assistant Vice Marcus A. Watts, Chair President and Branch Executive Theresa Chiang, Office Manager Daron D. Peschel, Officer in and Branch Contact Charge Kansas City San Antonio St. Louis Rose M. Washington, Chair Steve Maestas, Deputy Chair James Conrad Weaver, Chair Kathleen M. Mazzarella, Chair Esther L. George, President Blake Hastings, Officer in Charge Suzanne Sitherwood, Deputy Kelly J. Dubbert, First Vice Chair President San Francisco James Bullard, President Denver Alexander R. Mehran, Chair David A. Sapenaro, First Vice President and Chief Operating Richard L. Lewis, Chair Barry M. Meyer, Deputy Chair Officer Alison Felix, Vice President and Mary Daly, President Branch Executive Mark A. Gould, First Vice Little Rock President Oklahoma City Millie A. Ward, Chair Additional office at Phoenix, AZ Clint D. Abernathy, Chair Robert A. Hopkins, Senior Vice Los Angeles President and Regional Executive Chad R. Wilkerson, Vice President and Branch Executive Robert Gleason, Chair Louisville Roger W. Replogle, Regional Omaha Susan E. Parsons, Chair Executive Eric L. Butler, Chair Nikki R. Jackson, Senior Vice Portland Nathan Kauffman, Assistant Vice President and Regional Executive President and Branch Executive Román D. Hernández, Chair Memphis Lynn Jorgensen, Regional Dallas Executive Eric D. Johnson, Chair Matthew K. Rose, Chair Douglas G. Scarboro, Senior Vice Salt Lake City President and Regional Executive Greg L. Armstrong, Deputy Chair Patricia R. Richards, Chair Robert S. Kaplan, President Meredith N. Black, First Vice Robin A. Rockwood, Regional Minneapolis President Executive Kendall J. Powell, Chair El Paso Seattle Harry D. Melander, Deputy Chair Renard U. Johnson, Chair West Mathison, Chair Neel T. Kashkari, President Roberto A. Coronado, Officer in Darlene Wilczynski, Regional Ron Feldman, First Vice President Charge Executive

Federal Reserve System Organization 439 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 22–23, 2018 and November 13–14, 2018. The conference’s executive committee members for 2018 are listed below.1 Conference of Chairs Kendall J. Powell, Vice Chair, Dawne Hickton, Member, Executive Committee—2018 Federal Reserve Bank of Federal Reserve Bank of Minneapolis Cleveland Rose M. Washington, Chair, Federal Reserve Bank of Kansas City Conference of Presidents The presidents of the Federal Reserve Banks are organized into the Conference of Presidents, which meets periodically to identify, define, and deliberate issues of strategic significance to the Federal Reserve System; to consider matters of common interest; and to consult with and advise the Board of Governors. The chief executive officer of each Reserve Bank was originally labeled governor and did not receive the title of president until the passage of the Banking Act of 1935. Consequently, when the Conference was first established in 1914 it was known as the Conference of Governors. Conference officers for 2018 are listed below. Conference of Presidents—2018 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 14, 2018, the Conference of Chairs elected Kendall J. Powell, chair of the Federal Reserve Bank of Minneapolis, as chair of the conference’s executive committee for 2019. The conference also elected Dawne S. Hickton, chair of the Federal Reserve Bank of Cleveland for 2018 as vice chair, and Phillip L. Clay, deputy chair of the Federal Reserve Bank of Boston for 2018, as the executive committee’s third member.

440 105th Annual Report | 2018 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 2018 are listed below.2 Conference of First Vice Erika Hamilton, Secretary, Presidents—2018 Federal Reserve Bank of Kansas City Kelly J. Dubbert, Chair, Federal Reserve Bank of Laura Forman, Assistant Kansas City Secretary, Michael Strine, Vice Chair, Federal Reserve Bank of Federal Reserve Bank of New York New York 2 On December 5, 2017, the conference elected Kelly J. Dubbert, Federal Reserve Bank of Kansas City, as chair for 2018–19 and Michael Strine, Federal Reserve Bank of New York, as vice chair. The conference also elected Erika Hamilton, Federal Reserve Bank of Kansas City, as secretary and Laura Forman, Federal Reserve Bank of New York, as assistant secretary.

441 15 Index A Availability of Funds and Collection of Checks (Regulation CC), 113 Abbreviations, 348 Accounting and Auditing Working Group, 61 B Accounting Experts Group, 61 Accounting policies, 60–61, 353–367 Balance sheets Accounting Standards Codification, 103 Board of Governors, 327 Accumulated other comprehensive income, 103, 343, 392 Federal Reserve Banks, 20–22, 33 ACH. See Automated clearinghouse services Normalization program, 6, 24, 33 Acquisitions, 77–78 Priced services, 100–104 Advance notice of proposed rulemaking (ANPR), 51 Bank holding companies (BHCs) Advanced foreign economies (AFEs), 6, 18, 31–32 Banks affiliated with, 297 Advisory Councils Capital planning, 48–49 Community Advisory Council, 423 Complaints against, 81 Community Depository Institutions Advisory Council, Consumer and community affairs, 73 422 Funding risk, 39–40 Federal Advisory Council, 421 High-quality liquid assets, 40 Model Validation Council, 424 International activities, 53 AFEs. See Advanced foreign economies Loan composition, 44 ALLL. See Allowance for loan and lease losses Loan growth by sector, 44 Allowance for loan and lease losses (ALLL), 45 Number of, 48, 50 AML. See Anti-money laundering Regulation of, 69–70, 106–107 ANPR. See Advance notice of proposed rulemaking Regulatory assessment fees, 70 Anti-money laundering (AML) Regulatory capital ratios, 38 Bank Secrecy Act/Anti-Money Laundering Examination Regulatory reports, 63–65 Manual, 54, 63 RFI/C(D) system, 49 Compliance risk management, 62–63 Stress testing, 48–49 Compliance with regulatory requirements, 54 Supervision of, 49–50 Examinations, 54 Supervisory assessment fees, 70 Experts Group, 63 Surveillance and off-site monitoring, 56–57 International coordination, 63 Bank Holding Companies and Change in Bank Control Appropriate monetary policy, 154, 155, 161, 192, 194, 195, (Regulation Y), 106–107, 108, 112 234, 235, 276, 277 Bank Holding Company Act, 108 Argentina, Economy of, 31 Bank Holding Company Performance Reports (BHCPRs), Asia, Economy of, 31, 32 57 Assets and liabilities Bank Management System, 92 Commercial banks, 306 Bank of Canada, Monetary policies, 18, 32 Federal Reserve Banks, 21, 102–103, 298–306, 308–318 Bank of England, Monetary policies, 18, 32 Valuations, 36–37 Bank of Japan, Monetary policies, 18, 32 Audits Bank of Mexico, Monetary policies, 18 Board of Governors, 324–346 Bank Secrecy Act (BSA), 54, 62–63, 114 Federal Reserve Banks, 346–393 Bank Secrecy Act/Anti-Money Laundering Examination by Government Accountability Office, 395 Manual, 54, 63 by Office of the Inspector General, 394 Bank Service Company Act, 52 Authority delegation, 113–114 Banking organizations, U.S. See also Bank holding Automated clearinghouse (ACH) services, 88 companies; Commercial banks Automobile lending, 84 Affiliation with bank holding companies, 297

442 105th Annual Report | 2018 Financial condition of, 43–47 Bonds Financial stability monitoring, 35–40 Corporate, 13–14, 28–29, 37 International activities, 53 Municipal, 17, 30–31 Profitability of, 43 Borrowing. See Debt Regulation of, 68–72 Branches. See Federal Reserve Banks Structure of, 69 Brazil, Economy of, 18 Supervision of, 47–68 BSA. See Bank Secrecy Act Bankruptcy, Resolution plan guidance, 115–116 Budgets, Federal Reserve System Basel Committee on Banking Supervision (BCBS) Board of Governors, 400–404 Accounting Experts Group, 61 Budget performance, 2018, 398, 400, 404–405, 409 International coordination on supervisory policies, Capital budgets, 2019, 399, 402, 404, 408, 411–412 58–59 Currency, 408–412 Supervisory policies, 58–59 Federal Reserve Banks, 404–408 Website, 58 Office of Inspector General, 403–404 BCBS. See Basel Committee on Banking Supervision Operating expense budget, 2018–19, 397, 400–402, Benefits Equalization Plan, 337–338 404–408 BEP. See Bureau of Engraving and Printing Overview, 397–399 BHCPRs. See Bank Holding Company Performance Trends in expenses and employment, 398–399 Reports Burden reduction initiatives, 64–66 BHCs. See Bank holding companies Bureau of Engraving and Printing (BEP), 90, 409–412 Bipartisan Budget Act, 15, 29, 97 Bureau of Labor Statistics, 25 Board of Governors Business sector, 6, 13–14, 23, 28–29, 37–39 Accounting policies, 331–335 Accumulated other comprehensive income, 343 C Advisory councils, 421–424 Audits, 324–346 Call Reports, 56–57, 64–66 Balance sheets, 327 Canada, Economy of, 32 Budget, 400–404 Capital Bureau of Consumer Financial Protection Federal Reserve Banks, 351, 362–363 responsibilities, 344 Capital Adequacy of Bank Holding Companies, Savings Cash flows, 329 and Loan Holding Companies, and State Member Commitments and contingencies, 345 Banks (Regulation Q), 106–107, 108, 112 Currency costs, 344–345 Capital leases, 335–336 Delegation of authority, 113–114 Capital planning, 48–49 Divisions, 413–418 Cash flows, Board of Governors, 329 FFIEC responsibilities, 344 Cash-management services, 92 Financial Stability Report, 36 CCAR. See Comprehensive Capital Analysis and Review Financial statements, 324–346 CCIWG. See Cybersecurity and Critical Infrastructure Government Performance and Results Act requirements, Working Group 110 CDS. See Credit default swap H.2 statistical release, 70 CECL. See Current expected credit losses Interest on reserves, 116 CEP. See Currency Education Program Leases, 335–336 CFPB. See Consumer Financial Protection Bureau Litigation, 291–292 CFTC. See Commodities Futures Trading Commission Members, 413 Check-collection service, 88 Officers, 413–418 China, Economy of, 6, 18, 19, 31, 32 Operations and services, 330–331 C&I loans. See Commercial and industrial loans Operations statements, 328 CIP. See Customer identification program Oversight responsibilities, 96 Civil money penalties, 333 Policy actions, 111–117 Coin. See Currency and coin operations Postemployment benefits, 341–342 Collection of Checks and other Items by Federal Reserve Postretirement benefits, 341–342 Banks and Funds Transfers through Fedwire Property, equipment, and software, 335 (Regulation J), 112 Resolution plan guidance, 115–116 Collection services, Federal Reserve Banks, 88, 92–93 Retirement benefits, 336–340 Commercial and industrial (C&I) loans, 14, 17, 29, 44 Structure, 330 Commercial automated clearinghouse services, 88 Transactions with Reserve Banks, 343–344 Commercial banks Website, 1, 5, 62, 70, 110 Assets and liabilities, 306

Index 443 Credit availability, 17 Consumer Leasing (Regulation M), 82 Commercial check-collection service, 88 Consumer price index (CPI), 12, 27 Commercial real estate (CRE) loans, 14, 17, 37 Consumer Price Index for Urban Wage Earners and Committee of Sponsoring Organizations of the Treadway Clerical Workers (CPI-W), 82–83 Commission (COSO), 95 Consumer spending, 5–6, 12–13, 28 Committee on Payments and Market Infrastructures Continuing professional development, 67, 79–80 (CPMI), 59 Core inflation, 5, 10–11, 26, 152–153, 159, 192–193, 199, Commodities Futures Trading Commission (CFTC), 232–233, 274–275 52–53, 108 Corporate bonds, 13–14, 28–29, 37 Common equity tier 1 ratio, 39, 46 COSO. See Committee of Sponsoring Organizations of the Community Advisory Council, 423 Treadway Commission Community affairs. See Consumer and community affairs Cost recovery, 87–88, 104 Community banking organizations, 48, 108 Counterterrorism activities, 63 Community Depository Institutions Advisory Council, 422 Covered depository institutions, 107 Community development, 85–86 CPI. See Consumer price index CPI-W. See Consumer Price Index for Urban Wage Community Reinvestment Act (CRA) Earners and Clerical Workers Annual adjustment to asset-size threshold, 83 CPMI. See Committee on Payments and Market Community development supervisory responsibilities, 85 Infrastructures Consumer protection regulations, 73, 77, 83 Mergers and acquisitions in relation to, 77–78 CRA. See Community Reinvestment Act Complaint referrals, 82 CRE. See Commercial real estate loans Complaints, consumer, 80–82 Credit. See also Debt Compliance Outlook Live, 80 Availability, 17, 28, 31 Compliance risk management, 62–63 Nonfinancial sector, 37–39 Comprehensive Capital Analysis and Review (CCAR), 48 Primary, 116–117 Comptroller of the Currency, Office of the (OCC), 51, 74, Seasonal, 116–117 79, 82, 105, 111, 113 Secondary, 116–117 Condition statements, Federal Reserve Banks, 308–312, 349 Securities credit, 55 Conferences, Federal Reserve Banks Officers, 439–440 Single-counterparty credit limits, 109 Credit, Intraday, 93–94 Congress. See Monetary policy reports to Congress; Credit by Banks and Persons other than Brokers or Dealers specific legislation by name for the Purpose of Purchasing or Carrying Margin Consolidated supervision, 47–54 Stock (Regulation U), 307 Consolidation, 355–356 Credit by Brokers and Dealers (Regulation T), 307 Consumer and community affairs Credit card debt, 38–39 Community development, 85–86 Credit default swap (CDS), 46–47 Community Reinvestment Act requirements, 77 Credit-risk management, 61–62 Consumer complaints and inquiries, 80–82 Critical Infrastructure, 55–56 Consumer laws and regulations, 82–83 Currency and coin operations, 90, 298–305, 356, 408–412 Consumer research, 83–85 Currency Education Program (CEP), 411 Coordination with Consumer Financial Protection Current expected credit losses (CECL), 61, 112 Bureau, 78–79 Customer identification program (CIP), 114 Coordination with Federal banking agencies, 79 Cybersecurity, 55–56 Emerging-issues analysis, 83–85 Cybersecurity and Critical Infrastructure Working Group Enforcement activities, 75–76 (CCIWG), 54–55, 56 Examinations, 73–82 Cybersecurity Assessment Tool, 56 Examiner training, 79–80 Flood insurance, 77 Mergers and acquisitions, 77–78 D Mortgage servicing and foreclosure, 74–75 Outreach, 79, 80 Daylight overdrafts, 93–94 Supervision, 73–82 DCCA. See Division of Consumer and Community Consumer complaints, 80–82 Affairs Consumer compliance examiner training, 79–80 Debt. See also Credit Consumer Compliance Outlook, 80 Conversion triggers in long-term debt, 115 Consumer Credit Protection Act, 76 Credit card debt, 38–39 Consumer Financial Protection Bureau (CFPB), 74, 76, Household, 6, 13, 23, 28, 37–39 78–79, 82, 344 Nonfinancial sector, 37–39

444 105th Annual Report | 2018 Risky debt, 38 Business sector, 6, 13–14, 23, 28–29, 37–39 Deferred credit items, 362 Financial markets, 6, 17–19, 23–24, 31–32, 129, 141, Definitions Relating to Title I of the Dodd-Frank Act 143–144, 169–170, 181–182, 210, 221–222–225, (Regulation PP), 106–107 250–251, 263–264 Delegation of authority, 113–114 Forecast uncertainty, 167, 206, 246, 289 Depository institutions Government sector, 6, 14–15, 29–30 Covered depository institutions, 107 Household sector, 6, 12–13, 23, 27–28, 37–39 Discount rates in 2018, 116–117 Housing sector, 6, 14, 29, 84 Loans to, 367–368 Interest rates, 6–7, 20, 24, 25, 116, 296 Reserve requirements, 296 Labor market, 5, 7, 8–10, 12–13, 23, 25–26, 32, 86 Reserves of, 298–305, 361–362 Outlook and projections, 134–137, 144–148, 151–155, Depository services, 91–93 174–177, 185–188, 191–195, 213–217, 225–228, Deposits 231–235, 254–257, 266–270, 273–277 Federal Reserve Banks, 300–301, 304–306, 361–362 Policy actions, 19–22, 32–34, 111–117, 137–139, Designated nonbank financial companies, 53 148–150, 177–179, 188–190, 217–218, 228–230, DFAST. See Dodd-Frank Act stress tests 257–258, 270–272 Discount rates, 116–117 Prices, 5, 10–11, 16–17, 24, 27, 30, 37 Disposable personal income (DPI), 12–13, 28 Recent economic and financial developments, 8–19, Division of Consumer and Community Affairs (DCCA), 25–32 54, 73, 82–84, 86 State and local governments, 15 Dodd-Frank Act stress tests (DFAST), 48–49 Uncertainty and risk, 161–167, 195, 201–205, 241–245 Dodd-Frank Wall Street Reform and Consumer Edge Act, 53, 73 Protection Act Effective lower bound (ELB), 208–210 Consumer compliance regulations, 82, 83 EGRPRA. See Economic Growth and Regulatory Consumer compliance risk, 74 Paperwork Reduction Act Consumer credit and lease transactions, 82 EGRRCPA. See Economic Growth, Regulatory Relief, and Designated nonbank financial companies regulations, 53 Consumer Protection Act Financial market utilities regulations, 52 ELB. See Effective lower bound Financial Stability Oversight Council activities, 40–41 Electronic Payment Solution Center, 92 Implementation, 108–109 Emerging market economies (EMEs), 18–19, 31–32, 181 Incentive compensation regulation, 63 EMEs. See Emerging market economies Partnership for Progress program, 57, 58 Employment, 5, 7, 8–10. See also Labor markets; Regulatory assessment fees, 70 Unemployment Regulatory developments, 105–108 Energy prices, 10, 11, 24, 27 Savings and loan holding companies authority, 50 Enforcement actions Stress testing, 48–49 Consumer and community affairs, 75–76 Supervisory assessment fees, 70 Federal Reserve System, 56, 70 Volcker rule, 105, 108 Enhanced Prudential Standards (Regulation YY), 106–107, DOJ. See Justice, U.S. Department of 109, 113 Dollar exchange rate, 19, 23, 31–32 Equal Credit Opportunity Act (ECOA), 75–76 DPI. See Disposable personal income Equipment and software (E&S), 335 Equity markets and prices, 16–17, 30, 37 E&S. See Equipment and software E Europe, Economy of, 6, 31 EagleCash, 92 European Central Bank (ECB), Monetary policies, 18, 32 Earnings before interest, taxes, depreciation, and Examinations and inspections amortization (EBITDA), 38 Anti-money laundering, 54 EBITDA. See Earnings before interest, taxes, depreciation, Consumer and community affairs, 73–82 and amortization Critical infrastructure, 55–56 ECB. See European Central Bank Cybersecurity, 55–56 ECOA. See Equal Credit Opportunity Act Examiner training, 79–80 Economic Growth, Regulatory Relief, and Consumer Federal Reserve Banks, 47, 95 Protection Act (EGRRCPA), 65, 79, 97, 105–108, 114 Fiduciary activities, 55 Economic Growth and Regulatory Paperwork Reduction Information technology activities, 54–55 Act (EGRPRA), 65 Securities credit lenders, 55 Economy, U.S. Securities dealers and brokers, government and Activity review, 131–134, 142–143, 170–173, 182–185, municipal, 55 210–213, 222–223, 251–254, 264–266 Specialized, 54–56

Index 445 Transfer agents, 55 Economic outlook, 134–137, 144–148, 151–155, Examiner Commissioning Program, 67 174–177, 185–188, 191–195, 213–217, 225–228, Expenses. See Income and expenses 231–235, 254–257, 266–270, 273–277 Exports, 14, 29 Economic review, 131–132, 142–143, 170–172, 182–183, Extensions of Credit by Federal Reserve Banks 210–212, 222–223, 251–253, 264–265 (Regulation A), 111 Financial market developments, 129, 141, 169–170, 210, EZPay, 92 221–222, 250–251, 263–264 Financial review, 132–134, 143–144, 172–173, 181–182, 183–185, 212–213, 223–225, 253–254, 265–266 F Forecast uncertainty, 167, 206, 246, 289 Fair Housing Act, 75–76, 82 Foreign currency operations and directives, 124–128 Fair lending enforcement, 75–76 Inflation outlook, 129–131, 155, 195, 235, 277 Fair value measurement, 364, 375–377, 379–380, 387–388 Meeting minutes, 120–289 Farm Credit Administration (FCA), 55, 113 Members, 419 FASB. See Financial Accounting Standards Board Monetary policy strategies and communications, 19–22, Faster Payments Council (FPC), 89 32–34, 128–129, 208–210, 249–250, 262–263 Faster Payments Task Force (FPTF), 89 Notation votes, 139, 148, 179, 190, 219, 230, 259, 272 FATF. See Financial Action Task Force Officers, 419–420 FBIIC. See Financial and Banking Information Policy actions, 19–22, 32–34, 137–139, 148–150, Infrastructure Committee 177–179, 188–190, 217–218, 228–230, 257–258, FCA. See Farm Credit Administration 270–272 FDIC. See Federal Deposit Insurance Corporation Policy Normalization Principles and Plans, 33 Federal Advisory Council, 421 Summary of Economic Projections, 20, 33, 151–167, Federal agency securities and obligations 191–206, 231–246, 273–289 Federal Reserve Bank holdings, 295 Uncertainty and risks, 161–167, 195, 201–205, 241–245 Open market transactions, 293 Federal Reserve Act (FRA), 52, 91, 96, 99, 116 Federal Deposit Insurance Act, 105, 106, 107 Federal Reserve Bank of Atlanta, 310–311, 313–315, Federal Deposit Insurance Corporation (FDIC), 53, 78, 79, 429–430 105, 111, 113 Federal Reserve Bank of Boston, 308–309, 313–315, 425 Federal Financial Institutions Examination Council Federal Reserve Bank of Chicago, 310–311, 313–315, (FFIEC) 430–431 Bank Secrecy Act/Anti-Money Laundering Examination Federal Reserve Bank of Cleveland, 308–309, 313–315, 427 Manual, 54 Federal Reserve Bank of Dallas, 310–311, 313–315, Board responsibilities, 344 434–435 Call reports, 56–57, 64–66 Federal Reserve Bank of Kansas City, 310–311, 313–315, Coordination with other banking agencies, 79 433–434 Covered depository institutions, 107 Federal Reserve Bank of Minneapolis, 310–311, 313–315, Cybersecurity Assessment Tool, 56 432–433 Information Technology Examination Handbook, 54 Federal Reserve Bank of New York, 33, 98, 99, 308–309, Regulatory reports, 64–65 313–315, 426 Task Force on Surveillance Systems, 57 Federal Reserve Bank of Philadelphia, 308–309, 313–315, Federal funds rate, 15, 19–20, 30, 33, 116, 152, 154, 160, 426 166, 192, 194, 200, 205, 232, 234, 240, 245, 274, 276, Federal Reserve Bank of Richmond, 308–309, 313–315, 282, 288 428 Federal government, Fiscal policy, 14–15 Federal Reserve Bank of San Francisco, 310–311, 313–315, Federal Home Loan Mortgage Association, Federal 435–436 Reserve Bank services to, 93 Federal Reserve Bank of St. Louis, 310–311, 313–315, Federal Housing Finance Agency, 113 431–432 Federal National Mortgage Association, Federal Reserve Federal Reserve Banks Bank services to, 93 Accounting policies, 353–367 Federal Open Market Committee (FOMC). See also Assessments, 364 Federal funds rate; Open market operations Assets and liabilities, 21 Annual organizational matters, 121–129 Audits, 346–393 Appropriate monetary policy, 154, 155, 161, 192, 194, Automated clearinghouse services, 88 195, 234, 235, 276, 277 Balance sheets, 20–22, 33 Communications Subcommittee, 258–259 Branches, 424–438 Domestic open market operations, 122–124 Budget, 397–412

446 105th Annual Report | 2018 Capital, 362–363 Wholesale securities programs, 93 Cash-management services, 92 Federal Reserve Consumer Help (FRCH), 81 Collection services, 92–93 Federal Reserve System. See also Board of Governors; Commercial check-collection service, 88 Federal Reserve Banks Commitments and contingencies, 382–38 Accounting policies, 60–61 Condition statements, 308–312 Budget, 397–412 Consolidated variable interest entity, 360, 378–380 Compliance risk management, 62–63 Cost recovery, 87–88, 104 Compliance with regulatory requirements, 54 Currency and coin operations, 90 Consolidated supervision, 47–54 Deferred credit, 362 Credit-risk management, 61–62 Deposits, 300–301, 304–306, 361–362 Employment, 398–399, 406 Directors, 424–438 Enforcement actions, 56, 70 Earnings remittances, 363 Examinations and inspections, 47, 54–56 Employment, 398–399, 406 Financial stability activities, 35–40 Equipment and software, 360–361, 381 Incentive compensation, 63 Examinations and inspections, 47, 95 International activities, 53–54, 58–60, 63 Fair value, 364 Maps, 2–3 FedLine access to services, 94 Overview, 1–2 Fedwire Funds Service, 88 Regulatory reports, 63–66 Fedwire Securities Service, 89–90 Regulatory responsibilities, 43, 68–72, 105–109 Financial statements, 100–104 Safety and soundness responsibilities, 47–65 Fiscal agency services, 91–93 Specialized examinations, 54–56 Float, 90 Staff development, 67 Government depository services, 91–93 Supervision responsibilities, 43, 47–67 Income and expenses, 95–98, 316–318 Supervisory information technology, 66–67 Information technology, 94–95 Supervisory policy, 47–68 Interest on reserves, 116 Surveillance and off-site monitoring, 56–57 Interest rates on depository institutions loans, 296 Training and technical assistance, 57–58 Intraday credit, 93–94 Transparency and accountability, 7 Loans and other credit extensions, 298, 299, 302, 303, Website, 56 306, 308, 310, 356–357 Federal Trade Commission Act, 76 National Settlement Service, 89 FedLine, 94 Notes, 361, 409–410 Fedwire Funds Service, 88, 112 Open market transactions, 293–294 Fedwire Securities Service, 89–90 Operating expenses, 103 FFIEC. See Federal Financial Institutions Examination Operations, volume of, 319 Council Operations and services, 352–353 FHCs. See Financial holding companies Payment services, 92 Financial Accounting Standards Board (FASB), 61, 65, 333 Payment system, 89 Financial Action Task Force (FATF), 63 Postemployment benefits, 391 Financial and Banking Information Infrastructure Postretirement benefits, 389–391 Committee (FBIIC), 56 Premises, 99, 321, 381 Financial Crimes Enforcement Network (FinCEN), 63 Priced services, 87–90, 100–104 Financial holding companies (FHCs) Restructuring charges, 365 Supervision of, 9, 50 Retail securities programs, 93 Financial Industry Regulatory Authority, 72–73 Retirement plans, 383–389 Financial Information Repository, 92 Salaries of officers and employees, 320 Financial Institutions Reform, Recovery, and Enforcement Securities holdings, 368–373 Act, 62 Services provided to other entities, 93 Financial market utilities (FMUs), 47, 52–53 Structure, 352 Financial markets Surplus, 363 Developments in 2018, 129, 141, 143–144, 169–170, System Open Market Account holdings and loans, 173–174, 176–177, 181–182, 186–187, 189–191, 210, 98–99, 368–377 216–220, 221–222, 227–228, 230–231, 250–251, 257, Taxes, 364–365 259–261, 263–264, 268–269, 270–271 Thrift plans, 388–389 Domestic, 23–24 Treasury securities services, 93, 363 International, 6, 17–19, 31–32

Index 447 Financial Stability Board (FSB), 36, 41, 56, 59 Government Performance and Results Act (GPRA), 110 Financial Stability Oversight Council (FSOC), 36, 40–41, Government sector, 6, 14–15, 29–30. See also Federal 70 government; State and local governments Financial Stability Report, 36 Government Securities Act, 55 Financial statements Government securities dealers and brokers, 55 Board of Governors, 324–346 Government-sponsored enterprises (GSEs), 97, 98, Federal Reserve Banks, 100–104, 346–393 358–359 Financial technology, 95 GPRA. See Government Performance and Results Act FinCEN. See Financial Crimes Enforcement Network Gramm-Leach Bliley Act, 50 Fiscal agency services, 91–93 Gross domestic product, 5, 12, 14–15, 17–18, 23, 24, 27, 29, Float, Federal Reserve Banks, 90, 104, 298, 299, 302, 303 31–32, 38, 131–132, 152–153, 156, 162, 192, 193, 196, Floating Rate Note (FRN), 96 201–202, 232–233, 236, 242, 274–275, 278, 284 Flood insurance, 77 GSEs. See Government-sponsored enterprises FMUs. See Financial market utilities FOMC. See Federal Open Market Committee H Food prices, 10 Food systems investments, 89 H.2 statistical release, 70 Forecast uncertainty, 167, 206, 246, 289 Harmonization Working Group (HWG), 56 Foreclosures, Prevention actions, 75 HCs. See Holding companies Foreign Assets Control, Office of (OFAC), 55, 63 Hedge fund leverage, 39 Foreign banks. See alsospecific banks by name High-quality liquid assets, 40, 105–106 Supervision of, 53–54 High volatility commercial real estate exposures (HVCRE), U.S. activities, 53–54, 106, 294, 295 106 Foreign currency operations HMDA. See Home Mortgage Disclosure Act Denominated investments, 373–375 Holding companies (HCs) Directives, 124–128 Policy Statement, 106 Liquidity swaps, 359–360 Regulatory reports, 63 Foreign economies. See Advanced foreign economies; Home Mortgage Disclosure Act (Regulation C), 79 Emerging market economies; International financial Household sector, 6, 12–13, 23, 27–28, 37–39 markets; specific countries by name Housing activity, 6, 14, 29, 84 FPC. See Faster Payments Council Housing and Urban Development, Department of (HUD), FPTF. See Faster Payments Task Force 82 FRA. See Federal Reserve Act HUD. See Housing and Urban Development, FRBNY. See Federal Reserve Bank of New York Department of FRCH. See Federal Reserve Consumer Help HVCRE. See High volatility commercial real estate Freedom of Information Act, 114 exposures FRN. See Floating Rate Note HWG. See Harmonization Working Group FSB. See Financial Stability Board FSOC. See Financial Stability Oversight Council I Futures prices, 11 IAIS. See International Association of Insurance Supervisors IHCs. See Intermediate holding companies G Imports, 11, 27 G-SIBs. See Global systemically important banking Imputed costs, 103–104 organizations Incentive compensation, 63 GAO. See Government Accountability Office, U.S. Income and expenses, Federal Reserve Banks, 95–98, GDP. See Gross domestic product 316–318, 393 Gender wealth gap, 85 Independent Foreclosure Review, 74 Germany, Economy of, 18 Inflation, 5, 10–12, 18, 23, 26–27, 32, 129–131, 152–153, GFFT. See Governance Framework Formation Team 155, 158–159, 164, 192–193, 195, 198–199, 204, Global systemically important banking organizations 232–233, 235, 238–239, 244, 274–275, 277, 286 (G-SIBs), 109, 113, 115 Information technology (IT) Gold stock, 298, 299, 302, 303, 356 Examinations, 54–55 Governance Framework Formation Team (GFFT), 89 Federal Reserve Bank developments, 94–95 Government Accountability Office, U.S. (GAO), 395 FFIEC Information Technology Examination Government depository services, 91–93 Handbook, 54 Government National Mortgage Association, Federal Security practices, 66 Reserve Bank services to, 93 Supervisory activities, 66–67

448 105th Annual Report | 2018 Inspections. See Examinations and inspections LCR. See Liquidity coverage ratio Inspector General, Office of (OIG), 394, 403–404, 418 Leadership Conferences, 439–440 Insurance Core Principles, 60 Leases, 335–336 Insurance savings and loan holding companies (ISLHCs), Leveraged loans, 38 48, 52 LFIs. See Large financial institutions Insurance underwriting, 52 LFPR. See Labor force participation rate Insured commercial banks. See Commercial banks Liabilities. See Assets and liabilities Interagency Advisory on the Availability of Appraisers, 62 Liquidity coverage ratio (LCR), 105 Interagency Minority Depository Institutions, 57 Liquidity Risk Measurement Standards (Regulation WW), Interest on excess reserves (IOER), 34 105–107, 113 Interest rates, 6–7, 20, 24, 25, 116, 296 Liquidity swap arrangements, 359–360, 375 Intermediate holding companies (IHCs), 48–49, 113, 115 LISCC. See Large Institution Supervision Coordinating International Association of Insurance Supervisors (IAIS), Committee 59–60, 61 Litigation involving Board of Governors International Banking Act, 106 Afnani, 291 International Banking Operations ( Regulation K), 106 Ashton, 291 International financial markets, 6, 17–19, 31–32, 53 Baylor, 291 International Organization of Securities Commissions BBX Capital Corporation, 291 (IOSCO), 59 Burford, 291 International training and technical assistance, 57 Center for Popular Democracy, 291 International Treasury Services, 97, 98 Community Financial Services Association of America, Intraday credit, 93–94 Ltd., 291 InTREx. See Information Technology Risk Examination Crisman, 291 program Dickson, 291 Invoice processing platform, 92 FDIC, 291 IOER. See Interest on excess reserves Garrett, 291 IOSCO. See International Organization of Securities Handy, 291 Commissions Hardy, 292 ISLHCs. See Insurance savings and loan holding Jiampietro, 291, 292 companies Johnson & Johnson, et al., 291 Issue and Cancellation of Federal Reserve Bank Capital Loan Syndications and Trading Association, 292 Stock (Regulation I), 114 Mitchell, 291 IT. See Information technology PennyMac Loan Services et al., 291 Italy, Economy of, 18 Powell, 291 Richardson, 291, 292 J Yellen, 292 LMI consumers. See Low- and moderate-income Japan, Economy of, 18, 31 consumers Job losses. See Unemployment Loans. See alsospecific types of loans Job Openings and Labor Turnover Survey, 9, 25 Concentration of outstanding loans, 46 Joint accounts, 117 Federal Reserve Bank holdings, 298, 299, 302, 303, 306, JOLTS. See Job Openings and Labor Turnover Survey 308, 310, 356–357, 367–368 Justice, U.S. Department of (DOJ) Growth by sector, 44 Fair lending laws enforcement, 76 Leveraged loans, 38 Loan composition, 44 K Nonperforming, 44–45 System Open Market Account, 99 KPMG LLP, 95, 325–326, 346–347 Local governments. See State and local governments Low- and moderate-income consumers (LMI), 73, 78, 85 L Labor force participation rate, 8, 9, 24, 25, 26 Labor markets, 5, 7, 8–10, 12–13, 23, 25–26, 32, 86 M Labor productivity, 10, 26 Large and foreign banking organizations, 48 Maiden Lane LLC, 99 Large financial institutions (LFIs), 50, 51, 115 Maps, Federal Reserve System, 2–3 Large Institution Supervision Coordinating Committee Margin requirements, 307 (LISCC), 48, 50, 52, 69 MBSs. See Mortgage-backed securities Latin America, Economy of, 6, 32 MDIs. See Minority depository institutions

Index 449 Membership of State Banking Institutions in the Federal Nonbank financial companies, 53, 81 Reserve System (Regulation H), 106, 107, 111–112 Nonfinancial sector, 37–39 Memoranda of understanding (MOU), 56, 63 Nonperforming loan ratio, 44–45 Mergers and acquisitions, 77–78 Mexico, Economy of, 18, 32 Michigan Survey. See University of Michigan Surveys of O Consumers OCC. See Comptroller of the Currency, Office of the Minority depository institutions (MDIs), 57–58 OFAC. See Foreign Assets Control, Office of MMFs. See Money market funds Off-site monitoring, 56–57 Model Validation Council, 424 OIG. See Inspector General, Office of Monetary Control Act, 87 Oil prices. See Energy prices Monetary policy ON RRP. See Overnight reverse repurchase agreements Appropriate monetary policy, 154, 155, 161, 192, 194, Open Market Desk, 33 195, 234, 235, 276, 277 Open market operations. See also Federal Open Market Developments, 19–22, 32–34, 111–117, 137–139, Committee 148–150, 177–179, 188–190, 213–218, 228–230, Developments in 2018, 129, 141, 169–170, 181–182, 210, 257–258, 270–272 221–222, 250–251, 263–264 Long-run goals and strategy, 128–130, 249–250, 262–263 Volume of transactions, 293–294 Options at the effective lower bound, 208–210 Operating expenses Overview, 5–7, 23–25 Board of Governors, 400–402 Monetary policy reports to Congress Federal Reserve Banks, 103, 404–408 February 2019, 5–22 Office of Inspector General, 404 July 2018, 23–34 Operating leases, 336 Money laundering prevention. See Anti-money laundering Outlook Live, 80 Money market funds (MMFs), 17, 31, 40 Overdraft services, 93–94 Mortgage-backed securities (MBSs), 16, 17, 21, 30–31, 33, Overnight index swap, 31 93, 97, 98, 293, 295 Overnight reverse repurchase agreements (ON RRP), 22, Mortgage rates, 6 34 Mortgage regulations Foreclosure prevention actions, 75 Payment agreement status, 74–75 P Servicer efforts to address deficiencies, 75 MOU. See Memoranda of understanding Partnership for Progress (PFP), 57, 58 Municipal bonds, 17, 30–31 Pay.gov, 92–93 Municipal securities, 105 Payment Agreement, 75–76 Municipal securities dealers and brokers, 55 Payment system, 89 Municipal Securities Rulemaking Board, 55 Payment System Risk, 93, 102 myRA retirement savings program, 93 Payments services, Federal Reserve Banks, 92 PCEs, Personal consumption expenditures Penalties. See Civil money penalties Pension Enhancement Plan (PEP), 339–340 N PEP. See Pension Enhancement Plan NAIC. See National Association of Insurance Performance Report Information and Surveillance Commissioners Monitoring (PRISM), 57 National Association of Insurance Commissioners Personal consumption expenditures (PCEs), 10–11, 12–13, (NAIC), 52 26, 27, 28, 131–132, 152–153, 158–159, 164, 192, 193, National Credit Union Administration (NCUA), 55 195, 198–199, 204, 232–233, 238–239, 244, 274–275, National Flood Insurance Act, 77 280–281, 286 National Flood Mitigation Fund, 77 PFP. See Partnership for Progress National Information Center (NIC), 57, 66–67 Policy actions National Institute for Standards and Technology (NIST), Board of Governors, 111–117 56 Federal Open Market Committee, 19–22, 32–34, National Settlement Service, 89 137–139, 148–150, 177–179, 188–190, 217–218, Navy Cash, 92 228–230, 234, 235, 257–258, 270–272 NCUA. See National Credit Union Administration Policy Normalization Principles and Plans, 33 New Markets Tax Credit program, 114 Postemployment benefits, 342, 391 NIC. See National Information Center Postretirement benefits, 341–342, 389–391 NIST. See National Institute for Standards and Premises, Federal Reserve Banks, 99, 321, 381 Technology Priced services, 87–90, 100–104

450 105th Annual Report | 2018 Prices X, Real Estate Settlement Procedures, 307 Energy, 10, 11, 24, 27 Y, Bank Holding Companies and Change in Bank Equity prices, 16–17, 30, 37 Control, 106–107, 108, 112 Food, 10 YY, Enhanced Prudential Standards, 106–107, 109, 113 Imports, 11 Z, Truth in Lending, 82, 83 Price index, 5, 10 Regulatory assessment fees, 70 Primary credit, 116–117 Regulatory capital ratios, 39 PRISM. See Performance Report Information and Regulatory policy Surveillance Monitoring Compliance with, 54 Privacy Act, 114 Consumer and community affairs, 82–83 Private sector adjustment factor (PSAF), 87, 88, 90, 103 Transparency, 68 Professional development, 67–68, 79–80 U.S. banking structure, 69–70 Prohibitions and Restrictions on Proprietary Trading and Regulatory reports, 63–66 Certain Interests in, and Relationships with Hedge Report on the Economic Well-Being of U.S. Households in Funds and Private Equity Funds (Regulation VV), 2017, 83 108 Reports of Condition and Income, 56–57, 64–65, 66 Protecting Tenants at Foreclosure Act (PTFA), 79 Repurchase agreements, 294, 295, 298, 299, 302 PSAF. See Private sector adjustment factor Reserve Bank Operations and Payment Systems (RBOPS), PTFA. See Protecting Tenants at Foreclosure Act 96 Reserve coverage ratio, 45 Retail banking, 84–85 Q Retail securities program, 93 QFCs. See Qualified financial contracts Retirement plans, 336–340, 383–389 Qualified financial contracts (QFCs), 113 Retirement savings program, 93 Return on average assets (ROAA), 43 Return on equity (ROE), 43 R Revenue. See Income and expenses RBOPS. See Reserve Bank Operations and Payment Reverse repurchase agreements, 294, 295, 300, 301, 304, Systems 305 Real estate appraisals, 108 RFI/C(D) system, 49, 115 Real estate loans, 44 Risks. See Uncertainty and risk Real Estate Settlement Procedures (Regulation X), 307 Risky debt, 38 Regional banking organizations, 48 ROAA. See Return on average assets Regulations ROE. See Return on equity A, Extensions of Credit by Federal Reserve Banks, 111 Rural communities, 86 CC, Availability of Funds and Collection of Checks, 113 Rust Consulting, Inc., 75 H, Membership of State Banking Institutions in the Federal Reserve System, 106, 107, 111–112 S J, Collection of Checks and other Items by Federal Reserve Banks and Funds Transfers through Fedwire, Savings and Loan Holding Companies (Regulation LL), 112 106–107 K, International Banking Operations, 106 Savings and loan holding companies (SLHCs) KK, Swaps Margin and Swaps Push-Out, 113 Insurance underwriting activities, 52 LL, Savings and Loan Holding Companies, 106–107 Number of, 48, 51 M, Consumer Leasing, 82 Policy Statement, 106 PP, Definitions Relating to Title I of the Dodd-Frank Regulation of, 69–70, 106–107 Act, 106–107 Regulatory assessment fees, 70 Q, Capital Adequacy of Bank Holding Companies, RFI rating system, 115 Savings and Loan Holding Companies, and State Supervision of, 50–52 Member Banks, 106–107, 108, 112 Supervisory assessment fees, 70 T, Credit by Brokers and Dealers, 307 SCF. See Survey of Consumer Finances U, Credit by Banks and Persons other than Brokers or Seasonal credit, 116–117 Dealers for the Purpose of Purchasing or Carrying SEC. See Securities and Exchange Commission Margin Stock, 307 Secondary credit, 116–117 VV, Prohibitions and Restrictions on Proprietary Secure Payments Task Force, 89 Trading and Certain Interests in, and Relationships Securities. See also Federal agency securities and with Hedge Funds and Private Equity Funds, 108 obligations; Treasury securities; specific types of WW, Liquidity Risk Measurement Standards, 105–107, securities 113 Resell and repurchase agreements, 357–358

Index 451 Securities and Exchange Commission (SEC), 52, 63, 108 Supervisory policy Securities credit, 70 Accounting policy, 60–61 Securities credit lenders, 55 Burden reduction initiatives, 64–65 Securities dealers and brokers, 55 Compliance risk management, 62–63 Securities Exchange Act, 55, 70 Consolidated supervision, 47–54 Security Consumer and community affairs, 73–82 Counterterrorism activities, 63 Credit-risk management, 61–62 Cybersecurity, 55–56 Examinations and inspections, 47 Cybersecurity and Critical Infrastructure Working Incentive compensation, 63 Group, 54–55, 56 Information technology, 66–67 Information technology, 66 International coordination, 58–60 Senior Loan Officer Opinion Survey on Bank Lending Regulatory reports, 63–65 Practices (SLOOS), 14, 29 Safety and soundness, 47–65 SEP. See Summary of Economic Projections Staff development, 67 Shared National Credit program (SNC), 61–62 Stress testing, 48–49 SHED. See Survey of Household Economics and Transparency, 68 Decisionmaking Surveillance, 56–57 SIFIs. See Systemically important financial institutions Survey of Consumer Finances (SCF), 85 Single-counterparty credit limits, 109, 113 Survey of Household Economics and Decisionmaking SIT. See Supervisory information technology (SHED), 83, 85, 86 SLHCs. See Savings and loan holding companies Survey of Market Participants, 15, 30 SLOOS. See Senior Loan Officer Opinion Survey on Bank Survey of Primary Dealers, 15, 30 Lending Practices Survey of Professional Forecasters, 11 Small business lending, 85 Swaps Margin and Swaps Push-Out (Regulation KK), 113 System Open Market Account (SOMA), 33, 95, 98–99, SNC. See Shared National Credit program 141, 169–170, 181, 210, 221–222, 250–251, 263–264, Software. See Equipment and software 375–377 SOMA. See System Open Market Account Systemically important financial institutions (SIFIs), 55, 69 S&P. See Standard and Poor’s 500 Special drawing rights certificates, 298, 299, 302, 303, 356 Spot prices, 11 T SPTF. See Secure Payments Task Force SR-SABR. See Supervision and Regulation Statistical Task Force on Surveillance Systems, 57 Assessment of Bank Risk Tax Credit program, 114 Staff development, 67 Tax Cuts and Jobs Act (TCJA), 5–6, 13, 14–15, 28, 29 Standard and Poor’s 500 (S&P 500), 16–17, 30, 36–37 TCJA. See Tax Cuts and Jobs Act State and local governments, 15 Technical assistance, 57–58 State member banks Technology service providers (TSPs), 55 Complaints against, 81 Term Auction Facility, 94 Financial disclosures, 70 Term deposits, 300, 301 International activities, 53 Terrorism. See Counterterrorism activities Number of, 48, 50 Thrift plans, 388–389 Supervision of, 49 TIPS. See Treasury Inflation-Protected Securities Surveillance and off-site monitoring, 56–57 Total loss-absorbing capacity, 115 Statements of changes in capital, 351 Trade policies, 6, 19, 32 Statements of Condition, Federal Reserve Banks, 308–312, Training programs, 57–58, 79–80 349 Transfer agents, 55 Statements of operations, 328, 350 Transition Resource Group, 61 Statistical tables, 293–321 Treasury, U.S. Department of the Stored value cards, 92 Cash holdings, 300, 301, 304, 305 Stress testing, 48–49 Cash management services, 92 Student loans, 85 Currency in circulation and outstanding, 298–305 Summary of Economic Projections, 20, 33, 151–167, Deposits, 362 191–206, 231–246, 273–289 Treasury Electronic Payment Solution Support Center, 92 Supervision and Regulation Statistical Assessment of Bank Treasury Inflation-Protected Securities (TIPS), 12, 27 Risk (SR-SABR), 56–57 Treasury securities Supervisory assessment fees, 70 Federal Reserve Bank holdings, 295 Supervisory information technology (SIT), 66–67 Open market transactions, 293

452 105th Annual Report | 2018 Services, 93 U.S. Congress. See Monetary policy reports to Congress; Yields, 6, 13–14, 16, 17, 30–31, 33 specific legislation by name TreasuryDirect.gov, 93 Truth in Lending (Regulation Z), 82, 83 V TSPs. See Technology service providers Turkey, Economy of, 31 Variable interest entities (VIEs), 360, 378–380 VIEs. See Variable interest entities VIX, 16, 30 Volcker rule, 105, 108 U W UDAP. See Unfair or Deceptive Acts or Practices Uncertainty and risk, 161–167, 195, 201–205, 235, Wages, 10, 26 241–245, 277, 284–288 Websites Unemployment, 5, 8–9, 25–26, 152–153, 157, 163, 192, 197, Basel Committee on Banking Supervision, 58 203, 232–233, 237, 243, 274–275, 279, 285 Board of Governors, 1, 5, 62, 69, 110 Unfair or Deceptive Acts or Practices (UDAP), 73, 75–76 Federal Reserve, 56 United Kingdom Financial Stability Board, 56 Economy of, 18, 31, 32 Financial Stability Oversight Council annual report, 40 University of Michigan Surveys of Consumers, 27, 28 Partnership for Progress, 57 U.S. Bankruptcy Code, 115–116 Wholesale securities program, 93

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Cite this document

APA

Federal Reserve (2017, December 31). Annual Report of the Federal Reserve Board, 2018. Annual Reports, Federal Reserve. https://whenthefedspeaks.com/doc/annual_report_2018

BibTeX

@misc{wtfs_annual_report_2018,
  author = {Federal Reserve},
  title = {Annual Report of the Federal Reserve Board, 2018},
  year = {2017},
  month = {Dec},
  howpublished = {Annual Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/annual_report_2018},
  note = {Retrieved via When the Fed Speaks corpus}
}