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'Report
xl_-f 2004

Board of Governors of the Federal Reserve System



This publication is available from the Board of Governors of the Federal Reserve System,
Publications Fulfillment, Mail Stop 127, Washington, DC 20551. It is also available on the
Board's web site, at www.federalreserve.gov.




Letter of Transmitted

BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM

Washington, D.C., April 2005

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 ninety-first annual report of the Board of Governors
of the Federal Reserve System.
This report covers operations of the Board during calendar year 2004.

Sincerely,




Contents
Monetary Policy and Economic Developments
3
4
7
9
10
12
15
18
20
21
23
27

MONETARY POLICY AND THE ECONOMIC OUTLOOK
Monetary Policy, Financial Markets, and the Economy in 2004 and Early 2005
Economic Projections for 2005 and 2006
ECONOMIC AND FINANCIAL DEVELOPMENTS IN 2004 AND EARLY 2005
The Household Sector
The Business Sector
The Government Sector
The External Sector
The Labor Market
Prices
U.S. Financial Markets
International Developments

31 MONETARY POLICY REPORT OF JULY 2004
31 Monetary Policy and the Economic Outlook
34 Economic and Financial Developments in 2004

Federal Reserve Operations
55 CONSUMER AND COMMUNITY AFFAIRS
55 Implementation of Statutes Designed to Inform and Protect Consumers
62 Supervision for Compliance with Consumer Protection and
Community Reinvestment Laws
73 Consumer Complaints
75 Advice from the Consumer Advisory Council
77 Promotion of Community Economic Development in Historically
Underserved Markets
83 Outreach Activities
85
87
88
97
107
108
110

BANKING SUPERVISION AND REGULATION
Scope of Responsibilities for Supervision and Regulation
Supervision for Safety and Soundness
Supervisory Policy
Supervisory Information Technology
Staff Development
Regulation of the U.S. Banking Structure




114 Enforcement of Other Laws and Regulations
115 Federal Reserve Membership

117 FEDERAL RESERVE BANKS
117
118
123
124
127
127
128
129
130
130
130
132

Major Initiatives
Developments in Federal Reserve Priced Services
Developments in Currency and Coin
Developments in Fiscal Agency and Government Depository Services
Electronic Access
Information Technology
Examinations of the Federal Reserve Banks
Income and Expenses
Holdings of Securities and Loans
Volume of Operations
Federal Reserve Bank Premises
Pro Forma Financial Statements for Federal Reserve Priced Services

137
137
137
137
139

THE BOARD OF GOVERNORS AND THE GOVERNMENT PERFORMANCE
AND RESULTS ACT
Strategic Plan, Performance Plan, and Performance Report
Mission
Goals and Objectives
Interagency Coordination

141
141
141
142
142

FEDERAL LEGISLATIVE PROPOSALS
Interest on Depository Institution Balances Held at Federal Reserve Banks
Interest on Demand Deposits
Depository Institution Reserve Requirements
Interstate Branching

Records
147 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS
147 Regulation B (Equal Credit Opportunity), Regulation E (Electronic Fund Transfers),
Regulation M (Consumer Leasing), Regulation Z (Truth in Lending), and
Regulation DD (Truth in Savings)
147 Regulation C (Home Mortgage Disclosure)
147 Regulation D (Reserve Requirements of Depository Institutions)
148 Regulation H (Membership of State Banking Institutions in the
Federal Reserve System) and Regulation Y (Bank Holding Companies and
Change in Bank Control)
148 Regulation H, Regulation K (International Banking Operations),
Regulation V (Fair Credit Reporting), and Regulation Y
148 Regulation J (Collection of Checks and Other Items by Federal Reserve Banks and
Funds Transfers through Fedwire)



148
149
149
150
150
150
151

Regulation V
Regulation Z
Regulation BB (Community Reinvestment)
Regulation CC (Availability of Funds and Collection of Checks)
Rules of Practice for Hearings
Policy Statements and Other Actions
Discount Rates in 2004

155 MINUTES OF FEDERAL OPEN MARKET COMMnTEE MEETINGS
155 Authorization for Domestic Open Market Operations
157 Guidelines for the Conduct of System Open Market Operations
in Federal Agency Issues
157 Domestic Policy Directive
157 Authorization for Foreign Currency Operations
159 Foreign Currency Directive
159 Procedural Instructions with Respect to Foreign Currency Operations
160 Meeting Held on January 27-28, 2004
175 Meeting Held on March 16, 2004
183 Meeting Held on May 4, 2004
192 Meeting Held on June 29-30, 2004
200 Meeting Held on August 10, 2004
208 Meeting Held on September 21, 2004
215 Meeting Held on November 10, 2004
222 Meeting Held on December 14, 2004
231 LITIGATION
231 Judicial Review of Board Orders under the Bank Holding Company Act
231 Litigation under the Financial Institutions Supervisory Act
231 Other Actions

Federal Reserve System Organization
235

BOARD OF GOVERNORS

238

FEDERAL OPEN MARKET COMMITTEE

239

ADVISORY COUNCILS TO THE BOARD OF GOVERNORS

239
240
241

Federal Advisory Council
Consumer Advisory Council
Thrift Institutions Advisory Council

242
242

FEDERAL RESERVE BANKS AND BRANCHES
Officers of the Banks and Branches




243
243
244
244

Conference of Chairmen
Conference of Presidents
Conference of First Vice Presidents
Directors of the Banks and Branches

261

MEMBERS OF THE BOARD OF GOVERNORS, 1913-2004

Statistical Tables
266
270
274
275
276
280
284
285
286
287
288
289
290

298

1. Statement of Condition of the Federal Reserve Banks, by Bank,
December 31, 2004 and 2003
2. Federal Reserve Open Market Transactions, 2004
3. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities,
December 31, 2002-04
4. Number and Annual Salaries of Officers and Employees of the Federal Reserve
Banks, December 31, 2004
5. Income and Expenses of the Federal Reserve Banks, by Bank, 2004
6. Income and Expenses of the Federal Reserve Banks, 1914-2004
7. Acquisition Costs and Net Book Value of Premises of the Federal Reserve
Banks and Branches, December 31, 2004
8. Operations in Principal Departments of the Federal Reserve Banks, 2001-2004
9. Federal Reserve Bank Interest Rates on Loans to Depository Institutions,
December 31, 2004
10. Reserve Requirements of Depository Institutions, December 31, 2004
11. Initial Margin Requirements under Regulations T, U, and X
12. Principal Assets and Liabilities of Insured Commercial Banks
in the United States, by Class of Bank, June 30, 2004 and 2003
13. Reserves of Depository Institutions, Federal Reserve Bank Credit,
and Related Items
A. Year-End 1984-2004 and Month-End 2004
B. Year-End 1918-1983
14. Banking Offices and Banks Affiliated with Bank Holding Companies
in the United States, December 31, 2003 and 2004

Federal Reserve System Audits
301 AUDITS OF THE FEDERAL RESERVE SYSTEM
303 BOARD OF GOVERNORS FINANCIAL STATEMENTS
315 FEDERAL RESERVE BANKS COMBINED FINANCIAL STATEMENTS
329 OFFICE OF INSPECTOR GENERAL ACTIVITIES
330

GENERAL ACCOUNTING OFFICE REVIEWS

331

MAPS OF THE FEDERAL RESERVE SYSTEM

337

INDEX




Monetary Policy and
Economic Developments




Monetary Policy and the Economic Outlook
The year 2004 was marked by contin- inflation moved up as well. In response
ued expansion in economic activity to positive economic news and higher
and appreciable gains in employment. inflation during this period, market
With fiscal policy stimulative, monetary participants came to anticipate that
policy accommodative, and financial monetary policy tightening would begin
conditions favorable, household spend- sooner than they had expected, and
ing remained buoyant and businesses interest rates increased considerably.
increased investment in capital equip- With the economic expansion more
ment and inventories, despite the firmly established and slack in labor and
restraint imposed by sizable increases product markets somewhat diminished,
in oil prices. Labor market conditions the Federal Open Market Committee
improved significantly, albeit at an (FOMC) at its June meeting began to
uneven pace, and productivity rose nota- reduce the substantial degree of monebly further. Consumer price inflation tary accommodation that was in place.
moved higher with the surge in energy
The gradual removal of monetary
prices, but core consumer price inflation policy stimulus continued in the sec(that is, excluding food and energy) ond half of the year as the economy
remained well contained, and measures expanded at a healthy clip on balance.
of expected inflation over longer hori- Around midyear, some measures of
zons held steady or edged lower.
growth in activity softened, partly
Although economic activity had because of the drain on income and the
increased substantially in 2003, the rise in business costs created by higher
expansion nevertheless appeared some- oil prices. The expansion of consumer
what tentative as 2004 opened, in large spending slowed in the spring, and the
measure because businesses still seemed pace of hiring and gains in industrial
to be reluctant to boost hiring. Over the production dropped back notably durcourse of the spring, however, it became ing the summer. Equity prices and
clearer that the expansion was solidify- longer-term interest rates moved lower
ing. Businesses added appreciably to over this period as well. In the event,
their payrolls, boosted investment in the slowdown in household spending
equipment and software, and started growth proved short lived. Both hiring
restocking inventories. While household and increases in factory output stepped
spending growth softened somewhat, up again in the autumn, and these
residential construction expanded rap- gains were extended early this year.
idly. Rising energy prices boosted over- With profits healthy and financial condiall consumer price inflation, and core tions still supportive, capital spending
increased at a brisk pace throughout
the year. Over the final quarter of 2004,
NOTE. The discussion here and in the next
short-term interest rates rose further as
section ("Economic and Financial Developments
in 2004 and Early 2005") consists of the text, monetary policy was firmed at each
tables, and selected charts from the Monetary Pol- FOMC meeting, but long-term interest
icy Report submitted to the Congress on February 16, 2005, pursuant to section 2B of the Federal rates were largely unchanged. Equity
prices rose appreciably in the fourth
Reserve Act.



4

91st Annual Report, 2004

quarter, and the dollar depreciated
against most other major currencies. The
FOMC increased the target federal funds
rate 25 basis points again at its meeting this month, bringing the cumulative
tightening over the past year to IV2 percentage points.
The fundamental factors underlying
the continued strength of the economy
last year should carry forward into
2005 and 2006, promoting both healthy
expansion of activity and low inflation.
Monetary policy is still accommodative,
and financial conditions more generally
continue to be advantageous for households and firms. Profits have been rising briskly, and corporate borrowing
costs are low. Household net worth has
increased with the continued sharp rise
in the value of real estate assets as well
as gains in equity prices, and this will
likely help support consumer demand in
the fiiture. Absent a significant increase
in oil prices from current levels, the
drag from last year's run-up should
wane this year. The lagged effects of
the decline in the exchange value of the
dollar since the autumn and sustained
foreign economic growth are likely to
boost the demand for U.S. exports. The
prospects for the expansion of aggregate
supply also appear to be quite favorable.
Gains in structural labor productivity
should continue, although not necessarily at the pace of recent years. Economic
growth will likely be sufficient to generate notable increases in employment,
although any reversal of the decline in
labor force participation observed since
2001 would tend to hold up the unemployment rate. Core consumer price
inflation has remained low since the
larger increases posted in the early
months of 2004, and long-term inflation expectations have been similarly
well contained. With some slack likely
remaining in labor and product markets
at present and with the indirect effects of



higher oil and import prices diminishing, the prospects for inflation staying
low are good. A favorable economic
outcome is, of course, not assured, but
at the most recent FOMC meeting the
Committee again assessed the risks to
both output and inflation as balanced.
The Committee also reaffirmed that it is
prepared to respond to events as necessary in its pursuit of price stability.

Monetary Policy, Financial
Markets, and the Economy
in 2004 and Early 2005
In early 2004, against the backdrop of
stimulative fiscal and monetary policy,
continued rapid growth in productivity, and supportive financial market
conditions, business outlays appeared to
be firming significantly and household
spending remained strong. The FOMC
became more confident that the economic expansion was likely gaining
traction and that the risk of significant
further disinflation had been greatly
reduced. In these circumstances, it recognized that a highly accommodative
stance for monetary policy could not
be maintained indefinitely. Nonetheless,
the Committee was concerned about
the persistently slow pace of hiring and
viewed underlying inflation pressures as
likely to remain subdued. Accordingly,
the Committee left its target for the federal funds rate unchanged at 1 percent at
its January and March meetings. However, beginning in January, it modified
the language of its policy statement to
gain greater flexibility to tighten policy
should circumstances warrant by indicating that monetary policy accommodation would eventually have to be
removed. At the same time, the Committee suggested that it could be patient
in undertaking such actions.
By the time of the May and June
FOMC meetings, incoming economic

Monetary Policy and the Economic Outlook
Selected Interest Rates
Percent

Intended federal funds rate

1 \ ,
1/30

5/7
3/19

8/13
6/26

9/24

2002

11/6
1/29
5/6
8/12
10/28
1/28
5/4
12/10
3/18
6/25
9/16
12/9
3/16

2003

8/10
U/10
2/2
6/30
9/2!
12/14

2004

2005

NOTE. The data are daily and extend through February 9, 2005. Treasury rates are constant-maturity yields based
on the most actively traded securities. The dates on the horizontal axis are those of FOMC meetings.
SOURCE. Department of the Treasury and the Federal Reserve.

data pointed to a broader and more
firmly established expansion, with continued strength in housing markets and
business fixed investment. Also, the
employment reports for March, April,
and May had indicated strong and widespread gains in private nonfarm payrolls, and previous reports for January
and February were revised upward significantly. Overall consumer price inflation in the first quarter was faster than
it had been a year earlier, and core inflation also increased, in part because of
the indirect effects of higher energy
prices. The Committee maintained its
target for the federal funds rate at 1 percent in May, but on the basis of the
evolving outlook for economic activity
and prices, it revised its assessment of
risks to indicate that the upside and
downside risks for inflation had moved
into balance. The Committee also stated
that monetary policy accommodation
could "be removed at a pace that is
likely to be measured" to communicate
its belief, given its economic outlook,



that policy would probably soon need to
move toward a more neutral stance,
though probably not at a rapid pace. The
Committee retained this language at the
June meeting while raising its target for
the federal funds rate from 1 percent
to 1V4 percent and noting that it would
"respond to changes in economic prospects as needed to fulfill its obligation to
maintain price stability."
The information that the Committee
had received by the time of its August
meeting indicated that economic growth
had softened somewhat earlier in the
summer. Although the housing market
had remained strong and business outlays had continued to be healthy, consumer spending growth had slowed significantly, and industrial production had
begun to level off. Also, the June and
July labor market reports revealed that
employment growth had slowed considerably. At the same time, core consumer
price inflation had moderated in May
and June even though sizable increases
in food and energy prices continued.

6

91st Annual Report, 2004

However, the Committee believed that
the softness in economic activity was
caused importantly by higher prices of
imported oil and would prove short
lived. With financial conditions remaining stimulative, the economy appeared
poised to grow at a pace sufficient to
trim slack in resource utilization. In that
regard, given the unusually low level of
the federal funds rate, especially relative
to the level of inflation, policymakers
noted that significant cumulative policy
tightening would likely be needed to
meet the Federal Reserve's long-run
objectives of price stability and sustainable economic growth. The Committee's decision at the meeting to raise its
target for the federal funds rate 25 basis
points, to IV2 percent, and to maintain
its assessment of balanced risks with
respect to sustainable growth and price
stability was largely anticipated by
financial markets. However, market participants revised up their expectations
for the path of the federal funds rate,
reportedly because the announcement
conveyed a somewhat more optimistic
outlook for the economy than many had
anticipated.
By the time of the September FOMC
meeting, available information suggested that the economy had regained
momentum. Real consumer spending
bounced back sharply in July after a
weak second quarter, and incoming data
on industrial production indicated a
modest strengthening. Housing activity
had increased further, and business outlays had picked up significantly in the
second quarter. In addition, the labor
market showed signs of improvement in
August, as the unemployment rate edged
down and nonfarm payrolls grew moderately. Core consumer price inflation
slowed in June and July, and a decline in
energy prices from record levels pushed
down readings on headline inflation.
Although the Committee acknowledged



that higher oil prices had damped the
pace of economic activity around midyear, it nonetheless saw the expansion
as still on solid footing. Consequently,
the Committee agreed to increase its
target for the federal funds rate another
25 basis points, to P/4 percent; to reiterate its view that the risks to price stability and to sustainable growth were balanced; and to repeat its indication that
the removal of policy accommodation
would likely proceed at a "measured"
pace. The reaction in financial markets
to the policy rate decision and the
accompanying statement was muted.
The information in hand at the time
of the November FOMC meeting generally suggested that the economy had
continued to expand at a moderate rate
despite the restraint that higher oil prices
imparted to real incomes and consumer
confidence. Consumer and business
spending stayed firm, and the housing market remained buoyant. However, industrial production was about
unchanged, and the news on job growth
was uneven—lackluster increases in
nonfarm payrolls in September were
followed by robust expansion in October. Inflation rpeasures were moderate,
although up somewhat from one year
earlier. On balance, the Committee saw
the economy as growing at a pace that
would reduce margins of slack in the
utilization of resources. The Committee
also judged that inflationary pressures
would likely be well contained if monetary policy accommodation were gradually withdrawn. The Committee's decision to raise its target for the federal
funds rate from \3A percent to 2 percent
with minimal change in the language in
the accompanying statement was largely
anticipated by financial markets and
elicited little reaction.
At its December meeting, the Committee viewed available information as
continuing to indicate that the pace of

Monetary Policy and the Economic Outlook
the economic expansion was sufficient
to further reduce the undemtilization
of resources, despite elevated oil prices.
Consumer spending remained solid,
investment spending was strong, and
manufacturing production showed modest growth. Also, employment gains in
October and November were consistent
with gradual improvement in the labor
market. Meanwhile, core inflation, while
above the unusually low rates of late
2003, remained subdued. Accordingly,
the Committee voted to raise its target
for the federal funds rate 25 basis points,
to 2lA percent, and to retain the previous
statement that the removal of policy
accommodation would likely be "measured." Investors had largely anticipated
the policy rate decision, but a few market participants had reportedly speculated that the Committee would signal
increased concern about inflationary
pressures. In the absence of any such
signal, implied rates on near-dated
futures contracts and longer-term Treasury yields declined a few basis points
after the release of the December
statement.
Also at its December meeting, the
Committee considered an accelerated
release of the minutes of FOMC meetings. The Committee's practice had
been to publish the minutes for each
meeting on the Thursday after the next
scheduled meeting. Trie Committee
believed that, because the minutes contain a more nuanced explanation of policy decisions than the statement released
immediately after each meeting, publishing them on a timelier basis would
help market participants interpret economic developments and thereby better
anticipate the course of interest rates.
Earlier release would also provide a context for the public remarks of individual
FOMC members. It was also recognized, however, that financial markets
might misinterpret the minutes at times



and that earlier release might adversely
affect the Committee's discussions and,
perhaps, the minutes themselves. After
weighing these considerations, the Committee voted unanimously to publish the
FOMC minutes three weeks after the
day of the policy decision.
The information that the Committee
reviewed at its February 2005 meeting
indicated that the economy had continued to expand at a steady pace. The
labor market showed signs of further
improvement, and consumer spending
and the housing market remained
robust. Industrial production accelerated, particularly at the end of 2004, and
growth of business fixed investment
was solid in the fourth quarter. Core
inflation stayed moderate, and measures
of inflation expectations remained well
anchored. Given the solid economic
expansion and limited price pressures,
the Committee voted to continue its
removal of policy accommodation by
raising its target for the federal funds
rate from 2lA percent to 2Vi percent
and to essentially repeat the language
of the December statement. Futures
market quotes indicated that investors
had already priced in a 25 basis point
increase in the target federal funds rate
at the meeting, and market participants
reportedly expected no substantive
changes to the accompanying statement. Accordingly, the reaction in financial markets to the announcement was
minimal.

Economic Projections
for 2005 and 2006
Federal Reserve policymakers expect
the economy to expand moderately and
inflation to remain low in 2005 and
2006.l The central tendency of the fore1. As a further step to enhance monetary policy
communications, Federal Reserve policymakers

8

91st Annual Report, 2004

Economic Projections for 2005 and 2006
Percent
Federal Reserve Governors
and Reserve Bank presidents
Indicator

MEMO:

2006

2005

2004 actual
Range

Change, fourth quarter
to fourth quarter1
Nominal GDP
Real GDP
PCE price index excluding
food and energy
Average level, fourth quarter
Civilian unemployment rate

Central
tendency

Range

6.2
3.7

5-6
VhrA

5V2-5V4
33/4-4

5-5 3 / 4
3V4-3%

1.6

1V2-2

lVfc-1%

W2-2

5.4

5-5V6

5V4

5-5V4

Central
tendency

5-5V*
3%
V/2-W4
5-5V4

1. Change from average for fourth quarter of previous
year to average for fourth quarter of year indicated.

casts of real GDP growth made by the
members of the Board of Governors and
the Federal Reserve Bank presidents is
33/4 percent to 4 percent over the four
quarters of 2005. The civilian unemployment rate is expected to average
about 5V4 percent in the fourth quarter
of 2005. For 2006, the policymakers
will now provide economic projections for two
years, rather than one, in the February Monetary
Policy Report.




project real GDP to increase about
3V2 percent, and they expect the unemployment rate to edge down to between
5 percent and 5lA percent. With regard
to inflation, FOMC participants project
that the chain-type price index for
personal consumption expenditures
excluding food and energy (core PCE)
will increase between IV2 percent and
P/4 percent both this year and next—
about the same as the 1.6 percent
increase posted over 2004.
•

Economic and Financial Developments
in 2004 and Early 2005
The economy proved to be sufficiently
resilient to maintain solid growth and
moderate core inflation in 2004 even
as higher oil prices drained consumers'
purchasing power and boosted firms'
costs. Real GDP rose 33/4 percent last
year after having increased AVi percent
in 2003. Activity was supported by continued robust advances in household
spending. In addition, capital spending
by businesses increased notably. Labor
market conditions improved significantly, though at an uneven pace over
the course of the year. Private payrolls, which turned up in late 2003, rose
170,000 per month last year, on average,
and the unemployment rate declined
below 5Vi percent by year-end and to
5V4 percent in January 2005—the lowest
rates since 2001.
Consumer price inflation was driven
higher last year by the sharp rise in
energy prices. Although core consumer
price inflation moved up somewhat from
Change in Real GDP

unusually low levels recorded in 2003, it
remained well contained. Price increases
were restrained by continuing, though
diminishing, slack in labor and product markets, which tended to offset the
effects of higher energy and commodity
prices, as well as the weaker dollar,
on firms' overall costs. In addition, solid
productivity gains implied that unit
labor costs rose only modestly, even
if up from the declines in the preceding two years. The decline in crude oil
prices, on balance, since October points
to some easing of cost pressures on
firms from that source in the period
ahead.
Several forces likely contributed to
last year's impressive economic performance in the face of the sizable adverse
oil shock. The growth of real output
continued to be undergirded by gains
in structural labor productivity. Moreover, fiscal policy remained stimulative
last year through the combination of the
lagged effect of earlier cuts in personal
Change in PCE Chain-Type Price Index

Percent, annual rate

•
•

1998

2000

2002

2004

i Mini

I i l l
1998

NOTE. Here and in subsequent charts, except as noted,
change for a given period is measured to its final quarter
from the final quarter of the preceding period.
SOURCE. Department of Commerce, Bureau of Economic Analysis.




Total
Excluding food and energy

2000

2002

—

1

J_J

2004

NOTE. The data are for personal consumption
expenditures (PCE).
SOURCE. Department of Commerce, Bureau of Economic Analysis.

10

91st Annual Report, 2004

tax rates, the rise in defense spending, exceeded 5 percent; however, spending
and perhaps also the partial-expensing on computing equipment increased less
tax incentives for business investment. in 2004 than in preceding years, and
Monetary policy was highly accommo- consumers responded to the high cost
dative in the early part of the year and of gasoline and heating fuel by cutting
remained accommodative, though pro- back on real spending for these items.
gressively less so throughout the year, Real outlays for services also increased
and credit remained readily available at rapidly last year, and medical services
favorable terms. Consumer demand posted especially large gains.
was also boosted by the strong increases
Real disposable personal income
in asset values during the past two (DPI) rose nearly 4 percent last year, but
years.
this figure is exaggerated by Microsoft's
Financial conditions remained stimu- $32 billion special dividend payment
lative last year even as market partici- in December (the bulk of which is estipants revised up their expectations for mated to have accrued to U.S. housethe near-term path of monetary policy. holds). If this one-time event is excluded
Interest rates on longer-term Treasury from the calculation, real DPI rose only
securities remained low, risk spreads on 23/4 percent in 2004, well below the
corporate bonds narrowed, and commer- increase posted in 2003. Faster job
cial banks eased terms and standards growth helped to support increases in
on business loans. In this environment, households' incomes last year in nomi
household debt again increased briskly. nal terms, and the Jobs and Growth
The borrowing needs of nonfinancial Tax Relief Reconciliation Act of 2003
businesses were damped by their strong (JGTRRA), which brought lower percash flows. Equity values rose, espe- sonal tax rates forward into 2003, led to
cially toward the end of the year. At the larger refunds and smaller final paysame time, the exchange value of the ments in the spring of 2004. However,
dollar declined, on net, over the year as real income gains were held down, as
market participants apparently focused higher oil prices siphoned off household
on the financing implications of tnc purchasing power.
large and growing U.S. current account
With the growth of real consumption
deficit.
spending outpacing that of real income
through most of last year, the personal

The Household Sector
Change in Real Income and Consumption

Consumer Spending
Consumer spending grew substantially
last year. Personal consumption expenditures (PCE) advanced nearly 4 percent in real terms, about the same as
the increase in 2003. Sales of new motor
vehicles remained brisk, on average,
at 163/4 million units. Excluding motor
vehicles, consumer spending on most
categories of durable and nondurable
goods rose rapidly, as gains in real
expenditures for food and clothing both



Percent, annual rate

•
•

Disposable personal income
Personal consumption
expenditures

— g
— 6

llllllllli

1998

2000

2002

— 4
— 2

2004

SOURCE. Department of Commerce, Bureau of Economic Analysis.

Economic and Financial Developments in 2004 and Early 2005
saving rate moved lower, from 1 Vi percent, on average, in 2003 to only V2 percent in the third quarter of last year.
(The fourth-quarter surge in income
associated with the Microsoft dividend
payments pushed the saving rate back
up to 1% percent, but this increase will
likely be reversed early this year as
dividend income falls back. Because the
company's share price declined in step
with the dividend payouts, the dividends
had no effect on shareholders' overall
financial resources and so probably had
little effect on consumption.)
Low interest rates were one factor
that helped to support consumption
growth—especially for durable goods—
despite comparatively slow gains in real
income. Higher household wealth was
also an important force that propelled
consumer spending last year. According
to the Federal Reserve's flow of funds
accounts, the ratio of household net
worth to disposable income rose sharply
in 2003, as corporate equity values
rebounded and home prices continued to
rise. Moreover, although equity values
were little changed, on net, through
much of 2004 before rising notably in
the final quarter, home prices continued
to rise throughout the year, and the
wealth-to-income ratio moved up further; by the third quarter (the most
recent period for which the complete
wealth data are available), the ratio had
reversed nearly half its decline since
the stock market peak in 2000. Because
wealth feeds through into household
spending over a period of several quarters, the wealth increases in both 2003
and 2004 were important in supporting
consumer spending last year. The rise
in house prices, together with continued
low interest rates, also led consumers
to extract additional equity from their
homes, in particular through home
equity loans. Such actions provided
many households with a readily avail


11

able and relatively low-cost source of
funds for financing consumption.
Consumer confidence, which had
improved in 2003, remained at generally
favorable levels last year, according to
surveys by both the Michigan Survey
Research Center (SRC) and the Conference Board. Confidence tended to dip
at times during the year when energy
prices were moving up most rapidly, but
it recovered soon after those episodes.
Residential Investment
Residential investment remained robust
last year. Real expenditures increased
53/4 percent in 2004—the third straight
year of strong gains. Demand for housing was influenced by the same factors
that affected household spending more
generally, but it was especially supported by nominal mortgage interest
rates that have remained near their lowest levels since the late 1960s. Rates on
thirty-year fixed-rate mortgages fluctuated between about 5!/2 percent and
6V4 percent over the past two years; they
edged up to the high end of that range
during the spring but dropped back to
under 6 percent by the end of summer
and now stand below 53A percent.

Mortgage Rates

Fixed rate

2001

2002

2003

2004

2005

NOTE. The data, which are weekly and extend
through February 9, 2005, are contract rates on
thirty-year mortgages.
SOURCE. Federal Home Loan Mortgage Corporation.

12

91st Annual Report, 2004

In the single-family sector, housing
starts amounted to 1.6 million units last
year, a rate faster than the already rapid
pace of 1.5 million units started in 2003.
In the multifamily sector, starts totaled
a solid 350,000 units last year, a figure
in line with that of the preceding several
years. Sales of both new and existing
single-family homes hit new highs last
year, and home prices moved up sharply.
The repeat-transactions price index for
existing homes (limited to purchase
transactions only), which is published
by the Office of Federal Housing Enterprise Oversight, climbed more than
10 percent over the four quarters ending in the third quarter of last year (the
latest quarter for which data are available) and is up a cumulative 65 percent since 1997, when it started to
rise notably more rapidly than overall
inflation. These price increases have
also outstripped by a wide margin the
increases in household incomes and
rents. Another nationwide price index,
the Census Bureau's constant-quality
price index for new homes, rose only
63/4 percent last year. Because this
index does not adjust for the location
of new homes within metropolitan
areas, and because new homes constitute only a small fraction of the overall
housing stock, this index is probably a
less reliable indicator of overall home
values than is the repeat-transactions
index.

in 2003. Refinancing activity fell off
sharply last year, as the pool of outstanding mortgages with interest rates above
current market rates shrank considerably. Mortgages with adjustable interest
rates, including hybrids that feature both
fixed and adjustable interest rate components, were increasingly popular in
2004. Consumer credit continued to
expand at a moderate pace by historical
standards, restrained in part by the substitution of other forms of debt, such as
home equity loans. Higher interest rates
on some consumer loans and credit
cards in the second half of 2004 may
have also damped the growth of consumer credit.
Relatively low interest rates and further gains in disposable personal income
limited pressures on household balance
sheets in 2004. Measures of aggregate
household financial obligations and debt
service, which capture pre-committed
expenditures relative to disposable
income, were little changed last year, on
balance, though they remained high by
historical standards. Nevertheless, measures of household credit quality either
held steady or improved during the
course of the year. The latest available
data indicate mat delinquency rates on
credit card loans, consumer loans, and
residential mortgages at commercial
banks declined, while those on auto
loans at captive finance companies were
about unchanged at a low level. Household bankruptcy filings ran below the
elevated levels of 2003, although they
Household Finance
stayed generally above the rates posted
Household debt is estimated to have in earlier years.
increased about 93/4 percent in 2004, a
touch less than in the previous year.
The Business Sector
Mortgage debt again paced this advance.
The brisk expansion of mortgages
reflected continued strong activity in Fixed Investment
housing markets and rising house prices. Business fixed investment rose robustly
However, the growth rate of mortgage for a second consecutive year in 2004.
debt did not quite match that registered Real spending on equipment and soft-




Economic and Financial Developments in 2004 and Early 2005
ware (E&S) increased \3Vi percent,
about as much as in 2003, as firms' final
sales continued to increase, profits and
cash flow rose further, and many businesses reported a need to replace or
upgrade existing equipment and software. Although many firms had little
need to seek outside financing given
their flush cash situation, those that did
generally found financial markets to
be receptive—interest rates remained
low, and other terms and conditions
stayed relatively favorable. The partialexpensing tax incentives, which covered
new equipment and software installed
by the end of 2004, boosted profits and
cash flow and may have also stimulated
some investment spending.
Increases in E&S spending were
fairly widespread across categories
of capital goods. Spending on hightechnology equipment increased \5Vi perChange in Real Business Fixed Investment
Percent, annual rate

•

Structures

|

Equipment and software
re

—

Jil

20

—

10

—

+
0

— 10
— 20
I 1

J_
•
•

J_

High-tech equipment
and software
Other equipment excluding
transportation

[LIU
1

I 1

_L

—

60

— 40

r fui

— 20

I
1998

2000

2002

2004

NOTE. High-tech equipment consists of computers
and peripheral equipment and communications
equipment.
SOURCE. Department of Commerce, Bureau of Economic Analysis.




13

cent last year after having risen 19 percent in 2003; these gains followed two
years of declines. Although the pattern
of spending was uneven over the four
quarters of 2004, for the year as a whole,
business outlays for computing equipment rose 25 percent in real terms, while
spending on software and communications equipment posted increases of
13 percent and 10 percent respectively.
Outside of the high-tech sector, business
spending on aircraft moved lower for
the third consecutive year, as airlines
continued to struggle with a highly competitive market environment and high
fuel prices. In contrast, business outlays
on motor vehicles rose substantially last
year, with the demand for trucks exceptionally strong. Investment in equipment
other than high-tech and transportation
goods—a category that includes industrial machinery and a wide range of
other types of equipment—moved up
11 percent last year, the most in more
than ten years.
In contrast to the rebound in equipment spending, real outlays in the nonresidential construction sector were
about unchanged for a second year in
2004 and have yet to recover from their
sharp downturn during 2001 and 2002.
In the office sector, where construction increased rapidly in the late 1990s,
spending has remained especially weak;
vacancy rates for these properties,
although down a touch over the past
year, are still quite elevated. Construction of industrial buildings has also
remained low as a result of high
vacancy rates. In contrast, demand for
new retail and wholesale properties has
been firmer, reportedly a reflection of
the steady increases in consumer spending, and outlays for these types of buildings moved higher last year. In addition,
investment in the drilling and mining
sector rose last year in response to high
prices for natural gas.

14

91st Annual Report, 2004

Inventory Investment
Businesses added appreciably to inventories last year for the first time since
running down their holdings sharply in
2001. As economic activity strengthened during 2002 and 2003, many
businesses chose to operate with inventories that were increasingly lean relative to sales. In 2004, when stocks
had become quite spare—even after taking into account the ongoing improvements in inventory management that
have allowed firms to economize
on stockholding—and businesses had
apparently grown more confident in the
durability of the recovery, businesses
accumulated $45 billion of inventories
(in real terms), according to preliminary
data. The step-up in the pace of stockbuilding contributed about lA percentage point to GDP growth last year.

Corporate Profits and
Business Finance
Strong growth of corporate profits again
allowed many firms to finance capital
spending with internal funds last year.
As a result, nonfinancial business debt
rose at only a moderate pace. Net equity
issuance dropped further into negative
territory in 2004, and on balance nonfinancial corporations are estimated to
have raised no net funds in credit and
equity markets. However, short-term
business debt, including commercial
paper and commercial and industrial
(C&I) loans, expanded last year after
three years of contraction, and commercial mortgage debt continued to increase
rapidly. The credit quality of businesses
remained strong.
Corporate profits held up well in 2004
after surging in the previous year. The
ratio of before-tax profits of nonfinancial corporations to that sector's gross
value added increased for a second



Before-Tax Profits of Nonfinancial
Corporations as a Percent of Sector GDP
Percent

— 14
— 12
— 10

—

6

1 i 1 I 1 I I i i 1 I ! 1 1 I! 1 I 1 1 1 I I I I I I I i i 1
1980 1984 1988 1992 19% 2000 2004
NOTE. The data are quarterly and extend through
2004 :Q 3. Profits are from domestic operations of
nonfinancial corporations, with inventory valuation and
capital consumption adjustments.
SOURCE. Department of Commerce, Bureau of Economic Analysis.

consecutive year. In the fourth quarter of
2004, operating earnings per share for
S&P 500 firms were nearly 20 percent
above their level four quarters earlier.
Analysts' earnings forecasts began to
moderate somewhat in the second half
of 2004 after several months of strong
upward revisions.
In equity markets, net issuance of
shares by nonfinancial firms turned
more negative in 2004. Although initial
public offerings rebounded from the
sluggish pace of the past two years,
ample profits and sizable cash holdings
helped boost share retirements from
mergers and repurchases.
Net corporate bond issuance was
sluggish in 2004, as firms evidently
relied heavily on their considerable profits to fund investment in fixed capital
and inventories. The timing of gross
bond issuance was influenced by interest rate movements during the year, as
firms took advantage of occasional dips
in longer-term yields to issue bonds.
Firms reportedly used a large portion
of the proceeds to pay down existing
debt, although some companies used the
funds raised in the bond market to

Economic and Financial Developments in 2004 and Early 2005
Selected Components of Net Business
Financing
Billions ol dollars

Q Commercial paper
• Bonds
• Bank loans
Sum of selected
components

600
400
200
0

2002

2003

2004

NOTE. Seasonally adjusted annual rate for nonfinancial corporate business. The data for the sum of
selected components are quarterly. The data for
2004:Q4 are estimated.
SOURCE. Federal Financial Institutions Examination
Council, Consolidated Reports of Condition and Income
(Call Report).

repurchase equity shares or to finance
mergers.
Short-term business borrowing revived in 2004 after a prolonged contraction. Commercial paper outstanding
turned up in the first half of the year,
although it flattened out over the second
half. Business loans at banks rebounded
over the course of last year. According
to results from the Federal Reserve's
Senior Loan Officer Opinion Survey
on Bank Lending Practices, commercial
banks eased terms and standards on
business loans during the course of 2004
in response to the improved economic
outlook and to increased competition
from other banks and nonbank lenders. Survey responses also indicated
an increase in demand for C&I loans
that reflected firms' need to fund rising
accounts receivable, inventories, capital
expenditures, and merger activity. Concerns over loan quality seemed to diminish further in 2004, as spreads on leveraged deals in the syndicated loan market
edged down from already low levels.
Corporate credit quality remained
solid in 2004 amid strong earnings, low
interest rates, and a further buildup of



15

already substantial cash positions on
firms' balance sheets. The delinquency
rate on C&I loans declined further, and
the twelve-month trailing default rate on
corporate bonds fell to historically low
levels before edging up late in the year.
Net upgrades of bonds by Moody's
Investors Service for both investmentand speculative-grade nonfinancial
firms increased last year.
The stock of commercial mortgage
debt outstanding grew at a rapid pace in
2004. Some firms reportedly continued
to find mortgages an attractive source
of long-term funding. The expansion of
commercial mortgage credit helped propel issuance of commercial-mortgagebacked securities (CMBS) to nearrecord levels. Delinquency rates on
commercial mortgages on the books
of banks and insurance companies
remained low throughout the year, and
those on loans backing mortgage securities fell. Considerable gains in commercial real estate prices increased owners' equity and largely kept pace with
the sizable increase in mortgage debt
obligations. Yield spreads of CMBS
over comparable Treasury securities
remained moderate.
The Government Sector
Federal Government
The federal budget position deteriorated
slightly further in 2004, as spending
increases and further tax reductions
offset the effects of stronger economic
growth on revenues. The unified budget
deficit widened from $378 billion in fiscal 2003 to $412 billion in fiscal 2004.
As a share of GDP, the federal unified
deficit stood close to V/i percent in both
years. Receipts increased 5Vi percent in
fiscal 2004 after two years of declines.
Corporate receipts surged more than
40 percent, or $58 billion, reflecting

16

91st Annual Report, 2004

Federal Receipts and Expenditures
1 6 1 6 1 of nominal GDP
*1011

—

24

Expenditures
Receipts
Expenditures
ex. net interest

^

22
20
18

—

v^ _
11 1 1 1 1 1 1 1 1 i l

16

h i i i i i 1 1 1 11 1
1986 1989 1992 1995 1998 2001 2004

NOTE. The budget data are from the unified budget
and are for fiscal years (October through September);
GDP is for the year ending in Q3.
SOURCE. Office of Management and Budget.

the improvement in corporate profits;
individual tax receipts—restrained by
JGTRRA, which pulled forward reductions of personal tax rates that had been
scheduled for the second half of the
decade—rose only about 2 percent.
Overall federal receipts increased less
rapidly than nominal GDP, and the
ratio of receipts to GDP edged down to
16!/4 percent, the lowest level in more
than forty years.
Meanwhile, nominal federal outlays
increased about 6 percent in fiscal 2004.
Spending for national defense increased
especially sharply, but spending also
increased notably for Medicare and
Medicaid. Debt service costs, which
fell sharply from 1997 through 2003 as
a result of reduced debt and declining
interest rates, edged higher last year.
Federal government purchases of goods
and services—the part of spending that
is counted in GDP—rose about 4 percent in real terms in 2004 after larger
increases in the preceding two years.
(Government spending on items such
as interest payments and transfers is
excluded from GDP because these items
do not constitute a direct purchase of
final production.)
Regarding legislative initiatives, two
new tax bills were enacted in the fall of



2004. First, the Working Families Tax
Relief Act extended through 2010 a
variety of personal tax reductions that
had previously been set to expire earlier.
Second, the American Jobs Creation Act
replaced the exclusion of extraterritorial
income (which the World Trade Organization had declared an illegal export
subsidy) with numerous other tax
reductions for domestic manufacturers
and U.S. multinationals. The first bill is
expected to have a ten-year budget cost
of around $150 billion, while the second
bill was scored as being revenue neutral.
As for federal spending in fiscal 2005,
the regular appropriations bills provided
for sizable increases in spending on
defense and homeland security and for
modest increases in nondefense discretionary expenditures. In addition, emergency legislation passed in the autumn
provided disaster aid for victims of
hurricanes and for ranchers and farmers
affected by drought conditions.
The recent sizable deficits in the unified budget mean that the federal government, which had been contributing
to the pool of national saving from 1997
through 2000, has been drawing on that
pool since 2001. Net federal saving—
essentially the unified budget balance
adjusted to the accounting practices
of the national income and product
accounts (NIPA)—dropped from positive 2 percent of GDP in 2000 to a level
below negative 3 percent of GDP in
2003 and 2004. Personal saving moved
lower over this period as well, while
business net saving rose with the
rebound in corporate profits. In all, net
national saving edged up in 2004 but
remained near its postwar lows. Because
net national saving has fallen increasingly short of net domestic investment
over the past several years, the inflow
of foreign funds needed to finance that
investment has risen. The growing
inflow of foreign capital is mirrored in

Economic and Financial Developments in 2004 and Early 2005
Federal Government Debt Held
by the Public
Percent of nominal GDP

—

55

—

45

y—
—

35
25

IIMii 1
1 if 11i!i11i1S1i111111111 i 111411 i 1111111 i i 1
1964
1974
1984
1994
2004
NOTE. Through 2003, the data for debt are year-end
figures, and the corresponding value for GDP is for Q4
at an annual rate; the final observation is for 2004:Q3.
Excludes securities held as investments of federal government accounts.

the widening of the nation's current
account deficit. Over time, the low
national saving rate could eventually
slow the rise in living standards either
by increasing the burden of servicing
U.S. foreign debt or by impinging on
domestic capital formation.
The growth rate of Treasury debt
moderated slightly last year after
increasing substantially in 2003. Nonetheless, federal debt held by the public
as a percentage of GDP continued to
edge higher over the course of 2004 and
currently stands at about 36Vi percent.
To help finance substantial budget deficits, the Treasury issued a considerable
volume of bills as well as two-, three-,
five-, and ten-year nominal notes. In
addition, the Treasury expanded its
borrowing program in 2004 by adding
semiannual auctions of twenty-year
inflation-protected bonds and five-year
inflation-protected notes.
Various indicators suggested a continued strong appetite for Treasury securities among foreign investors last year.
Indirect bidding at Treasury auctions,
which includes bidding by the Federal
Reserve Bank of New York on behalf
of foreign official institutions, remained



17

robust, and Treasury securities held in
custody at the Federal Reserve Bank of
New York on behalf of such institutions
increased just over $200 billion in 2004.
Also, data from the Treasury International Capital System showed a substantial increase in holdings of Treasury
securities by foreign official and private
investors, particularly those in Japan.
The proportion of Treasury securities
held by foreign investors is estimated to
have risen to a record 43 Vi percent by
the third quarter of 2004.
Treasury debt reached its statutory
ceiling late last year. To cope with
the constraint, the Treasury temporarily
resorted to accounting devices, suspended issuance of state and local
government series securities, and postponed a four-week bill auction. In midNovember, Congress raised the debt
ceiling from $7.4 trillion to $8.1 trillion,
and the Treasury subsequently resumed
normal financing operations.
State and Local Governments
Pressures on the budgets of state and
local governments have eased as economic activity has strengthened. Tax
receipts have been spurred by the
increases in household income, consumer spending, and property values.
As a result, many states seem to be on
track to meet balanced budget requirements in the current fiscal year (which
ends June 30 for all but a few states)
without using as much borrowing or
other extraordinary measures as in
recent years. Nevertheless, a number of
states still must deal with lingering fiscal
problems, particularly depleted reserve
funds, the expiration of temporary tax
hikes, and rising Medicaid costs. In
addition, several states still face serious
structural imbalances in their budgets.
Real expenditures by state and local
governments as measured in the NIPAs

18

91st Annual Report, 2004

remained about flat for a second year in
2004. Real spending on current operations rose less than 1 percent last year,
while real investment spending declined.
However, even as they were holding the
line on spending increases, states and
localities were able to resume net hiring
in 2004 after having left employment
about unchanged in 2003.
Net issuance of debt by state and local
governments edged down from the rapid
pace set in 2003, as improved budget
positions permitted some contraction
in short-term debt. Advance refunding
offerings were again strong during
the year, as states and municipalities
took advantage of low long-term interest rates and moderate credit spreads.
Credit quality of tax-exempt borrowers
improved in 2004. Rating upgrades of
tax-exempt bonds outpaced downgrades,
especially later in the year.

U.S. Trade and Current Account Balances
Percent of nominal GDP

+
0

J
1998

1 i

L
2000

2002

2004

NOTE. The data are quarterly. The trade data extend
through 2004 :Q4, and the current account data extend
through 2004:Q3.
SOURCE. Department of Commerce.

boost exports in the first half, but that
stimulus diminished in the second half
of the year when foreign growth slowed.
The External Sector
For the year as a whole, exports of
After narrowing in 2003, the U.S. cur- industrial supplies and capital goods
rent account deficit widened again last posted solid growth. Exports to Canada,
year and was $660 billion (annual rate), Mexico, and western Europe rose
or 5.6 percent of GDP, in both the smartly in 2004, whereas exports to
second and third quarters. Much of Japan were relatively weak. Real
this widening reflected a considerable exports of services increased about
increase in the deficit on goods and ser- 3Vi percent through 2004 as a whole.
vices trade, as a marked rise in imports
After increasing at an annual rate of
more than offset solid increases in almost 6 percent in the first half of 2004,
exports. The trade deficit expanded from prices of exported goods moved up at
$500 billion during the fourth quarter of just a 2V2 percent rate in the second
2003 to more than $650 billion, on aver- half. This deceleration was due in large
age, during the second half of 2004.
part to a reversal of the run-up in the
prices of agricultural products that had
occurred in late 2003 and early 2004.
International Trade
Better harvests last year returned prices
Real exports of goods and services rose of agricultural products to levels near
an estimated 5V6 percent in 2004 despite those that had prevailed before the
a deceleration in the fourth quarter. In spike.
Solid growth in income in the United
the first half, exports were supported by
the lagged effect of the fall in the dol- States spurred growth of real imports
lar's value in 2003. Strong expansion of of 9l/z percent in 2004. The increase priforeign economic activity also helped marily reflected higher imports of goods




Economic and Financial Developments in 2004 and Early 2005
that occurred despite a notable rise in
their prices. Real oil imports expanded
almost 10 percent in 2004. Imports of
capital equipment increased throughout
the year, but imports of consumer goods
suffered a period of weakness through
the middle of the year before rebounding in the fourth quarter. Imports of
services moved up only PA percent in
2004.
Prices of imported non-oil goods
increased at an annual rate of just over
4 percent in the first half of 2004, but
the pace slowed to 2 percent in the
second half. This step-down largely
reflected a deceleration in the prices
of industrial supplies, driven by a leveling off of nonfuel commodity prices
at the elevated levels reached in March.
Declines in the prices of foods offset
continued price increases for metals.
The spot price of West Texas intermediate (WTI) crude oil moved up during
most of 2004 and surged temporarily to
a record high of $55 per barrel in October. Since then, it has fluctuated somewhat below that peak but still at levels
well above $33 per barrel, the price at
which it started 2004. Oil prices were
driven up by intensified concerns that
oil supply would not keep pace with
surprisingly strong global demand. Oil
consumption in China grew nearly
15 percent in 2004, pushing that economy past Japan as the world's secondlargest consumer. As oil prices rose,
OPEC increased its oil production,
diminishing the cartel's estimated spare
capacity to historically low levels.
Increased OPEC production damped
particularly the rise in prices of heavier,
more sulfurous grades of crude oil but
had less effect on prices of lighter grades
like WTI. Supply disruptions also
played a role in the run-up of oil prices.
In October, Hurricane Ivan extensively
damaged oil and gas production facilities in the Gulf of Mexico, boosting the



19

price of WTI relative to other grades
of crude oil. Sabotage of production and
distribution facilities in Iraq hindered oil
exports from that country, which remain
below pre-war levels. In Nigeria, ethnic
violence and community protests shut
down some production. Russian oil
output, however, continued despite the
breakup of Yukos, formerly Russia's
largest oil company. Late in the year,
oil prices declined from their October
highs, as production recovered in the
Gulf of Mexico and OPEC added new
capacity. The price of the far-dated
NYMEX oil futures contract (currently
for delivery in December 2011) rose
about $10 per barrel during 2004, possibly reflecting expectations of greater
oil demand in Asian emerging-market
economies. The far-dated futures contract averaged about $38 per barrel in
January 2005, while the spot price of
WTI averaged about $48 per barrel.
The Financial Account
In 2004, the U.S. current account deficit
was financed once again largely by foreign purchases of U.S. bonds. Foreign
official inflows picked up further last
year and were especially strong in the
first quarter, reflecting sizable bond
purchases by Asian central banks. Private foreign purchases of U.S. bonds
rebounded in 2004 from a slight decline
in 2003, with especially large purchases
coming late in the fourth quarter. In
contrast, foreign demand for U.S. equities weakened further in 2004, although
this also picked up late in the year. Net
purchases of foreign securities by U.S.
investors remained strong in 2004, with
most of the strength coming in the second half of the year.
U.S. direct investment abroad continued at a strong pace, as reinvested earnings remained sizable. Direct investment into the United States rebounded

20

91st Annual Report, 2004

months since then, increases in private
payrolls have averaged 165,000 per
month.
The improved pace of hiring was
widespread, as all major industry groups
contributed to faster employment
growth relative to that of the latter part
of 2003. The largest gains were in
professional and business services and
health services. The construction sector also posted substantial gains. In the
manufacturing sector—where employment had declined almost continuously
since early 2000—payrolls increased in
the spring when overall employment
was rising sharply but were about
unchanged, on net, over the second
half of the year. Employment gains in
The Labor Market
retail trade and in food services were
also brisk over the first half of the
Employment and Unemployment
year but tapered off in the second half.
The labor market improved notably in Meanwhile, state and local governments
2004. Private payrolls, which began added substantially to their payrolls last
to post sustained increases in late year, especially for education, but civil2003, rose an average of 170,000 per ian employment in the federal governmonth last year. Progress was not steady ment edged lower.
over the course of the year, however.
The unemployment rate fell from
Employment growth stepped up sharply near 6 percent in late 2003 to less than
in the spring to a pace of almost 300,000 5Vi percent by late last year; joblessness
per month in March, April, and May; fell further in January 2005, to 5!/4 pernet hiring then dropped back to subpar cent. The decline in the unemployment
rates of about 100,000 per month in rate over the past year reflected both the
June through September. In the four pickup in hiring and a labor force participation rate that remained surprisingly
low. From 2001 through 2003, the parNet Change in Payroll Employment
ticipation rate declined by more than
would have been predicted on the basis
Thousands of jobs, monthly average
of past relationships with indicators
Private nonfarm
of labor demand, and in 2004, when the
—
400
—
Jan.
pace of hiring increased, the participa1
— 200
tion rate leveled off but failed to rise.
These considerations suggest that there
III
A
may be a persistent component to the
— 200
recent softness in participation. However, participation had been quite strong
1
1 1
1
1
1
1
I
1 i II
through 2000, when the labor market
1999
2005
2001
2003
was extremely tight, and the fact that
SOURCE. Department of Labor, Bureau of Labor
participation turned down at the same
Statistics.

in the first three quarters of 2004 from
its anemic pace in 2003; global mergers
and acquisitions revived, and reinvested
earnings picked up. Overall, net direct
investment outflows continued over the
first three quarters of 2004 but at a lower
pace than in 2003.
Net inflows of portfolio capital
exceeded net outflows of direct investment and represented the financial counterpart to the U.S. current account deficit. These net financial inflows imply a
further decline in the U.S. net international investment position, which began
2004 at a reported level of negative
$2.4 trillion (22 percent of GDP).

1•

.1

•"
"




Economic and Financial Developments in 2004 and Early 2005
time that labor demand weakened suggests that at least some of the recent
low participation is cyclical. To the
extent that some of this low participation proves to be transitory, the resumption of more-rapid labor force growth
will limit the speed at which employment gains further push down the unemployment rate.
Productivity and Labor Costs
Labor productivity rose solidly again
last year. Output per hour in the nonfarm business sector increased an estimated 2V2 percent over the year. This
increase was somewhat below the outsized 4 percent average pace of increase
from 2001 through 2003. Those earlier
huge productivity gains were not associated with especially large accumulations
of new capital equipment, as had been
the case during the late 1990s; instead,
to a large degree, the gains seem to
have been related to more effective use
of capital equipment that had been
acquired earlier and to one-time organizational innovations induced by firms'
earlier reluctance to commit to increased
hiring. Still, last year's 2Vi percent
increase in productivity was impressive
by long-run standards: It was in line
Change in Output per Hour
l^ercent, annual rale

—

— 6

••1
1JL I 1
•

19481973

19952000

with the pace of the late 1990s and well
above rates that had prevailed during the
preceding two decades.
Increases in hourly labor compensation remained moderate last year. As
measured by the employment cost index
(ECI), which is based on a quarterly
survey from the Bureau of Labor Statistics, hourly compensation in private
nonfarm businesses increased 33A percent in 2004, a bit less than in 2003. An
alternative measure is compensation per
hour in the nonfarm business sector as
derived from compensation data in the
NIPAs. This measure of hourly compensation rose 3Vi percent last year, an
increase similar to that in the ECI but
substantially less than the 5Vz percent
rise in 2003.
As has been the case for several years,
the cost of employee benefits rose considerably more than did wages and salaries last year. The benefits component
of the ECI increased nearly 7 percent,
while the wages and salaries component
posted a much more moderate 3 percent
increase. The rise in hourly wages and
salaries was about the same as increases
in the preceding two years; although
probably boosted by last year's higher
rate of price inflation, wages were likely
held down by the continued, though
diminishing, labor market slack and also
by employers' attempts to offset continued large increases in benefits costs.
Health insurance costs continued to
rise rapidly. As measured by the ECI,
employers' costs of health insurance,
which account for about 6 percent of
overall compensation costs, rose 7 percent last year after having increased
more than 10 percent per year in 2002
and 2003.

liliIJi i
2002

19731995
NOTE. Nonfarm business sector.

2004

SOURCE. Department of Labor, Bureau of Labor
Statistics.




21

Prices
Overall consumer prices rose notably
more in 2004 than they did in 2003, and

22

91st Annual Report, 2004

the sharp increase in energy prices Alternative Measures of Price Change
accounted for much of the step-up. The Percent
chain-type price index for personal
Price measure
2002 2003 2004
consumption expenditures (PCE) rose
2Vi percent last year, compared with an
Chain-type
increase of P/4 percent in 2003. The Gross domestic product
1.6
1.7
2.4
Gross domestic purchases
1.8
1.8
2.9
increase in PCE prices excluding food Personal consumption
and energy was considerably smaller—
expenditures
1.8
1.7
2.5
Excluding
1.6
only \Vi percent, up a little more than Market-basedfood and energy . . . 1.5 1.2
PCE excluding
l
food and energy
A percentage point from the increase
1.4
1.0
1.6
in 2003. Inflation as measured by the Fixed-weight
2.2
1.9
3.4
market-based component of core PCE Consumer price index
Excluding food and energy . . . 2.0
1.2
2.1
prices—which excludes a collection of
erratic prices that are unobservable from
NOTE. Changes are based on quarterly averages of
market transactions and which the seasonally adjusted data.
SOURCE. For chain-type measures, Department of
Bureau of Economic Analysis began to
Commerce, Bureau of Economic Analysis; for fixedpublish early last year—was in line with weight measures, Department of Labor, Bureau of Labor
overall core PCE inflation last year. The Statistics.
core consumer price index (CPI) rose
about 2 percent last year after having prices for residential and nonresidential
increased \lA percent in 2003. (The CPI structures.
differs from PCE prices in a number of
The jump in consumer energy prices
respects, but one factor that boosted CPI in 2004 was driven by the run-up in
inflation relative to PCE inflation last crude oil prices. The prices of both gasoyear was a difference in the way the two line and fiiel oil increased approximately
indexes measure the prices of medical 30 percent over the year, and higher oil
services, especially physicians' services, costs accounted for the bulk of the
which rose much more rapidly in the increase. Prices of natural gas, which
CPI than in the PCE index.) The rise in can often substitute for fuel oil in the
core consumer prices was largest in the industrial sector, rose notably as well
early months of 2004: Core PCE prices last year despite the restraining influincreased at an annual rate of nearly ence of ample inventories. Electricity
2 percent over the first half of the year prices, which tend to reflect fuel costs
and then decelerated to a \lA percent with a lag, also moved higher through
rate of increase in the second half.
most of the year but dropped back some
The price index for GDP was less near year-end.
affected by last year's rise in energy
Consumer food prices rose around
prices than was the PCE measure; much 3 percent for a second consecutive
of the energy price increase was attribut- year in 2004. Exports of beef dropped
able to the higher prices of imported oil, sharply last year when most of the largwhich are excluded from GDP because est importing countries placed restricthey are not part of domestic produc- tions on U.S. beef after a case of mad
tion. GDP prices increased 2Vi percent cow disease was discovered. Neverthelast year, 3A percentage point faster less, domestic demand was sufficiently
than in 2003. In addition to the rise in strong to support consumer meat prices
PCE prices (excluding the influence of last year. Fruit and vegetable prices
imported oil), GDP prices were affected trended sideways through most of the
by a sizable increase in construction year but then rose sharply in the fall



Economic and Financial Developments in 2004 and Early 2005
because of crop damage associated with
the series of hurricanes that hit the
Southeast in August and September.
In addition, prices for food away from
home, which are driven more by labor
costs than by raw food prices, increased
more rapidly last year than in 2003.
Core consumer prices were influenced by a variety of forces last year.
Price increases were likely restrained by
continuing slack in labor markets and
in some product markets, but businesses
faced considerable pressure from several sources of increased costs. First,
the indirect effects of the large jump in
energy prices fed through to businesses
throughout the economy and were especially important for firms in energyintensive industries, such as those that
produce plastics and fertilizers. Second,
prices were up sharply for a number
of other industrial commodities, including lumber and a variety of metals.
These price increases reflected strengthening economic activity abroad as well
as in the United States. Although these
non-oil commodities represent a small
part of businesses' overall costs, some
businesses likely felt the pinch of sustained price increases in these areas.
Third," the declining exchange value of
the dollar boosted import prices, including those of many inputs to production.
Finally, the deceleration in labor productivity boosted unit labor costs after
two years of declines; nevertheless, last
year's 1 percent rise in unit labor costs
was quite modest.
Taken together, these influences left
their clearest mark on the prices of
goods rather than services. Core goods
prices were about unchanged, on average, last year, but this period of stability
followed a period of unusually large
declines in 2003. In particular, the prices
of new motor vehicles leveled off after
falling notably in 2003, and the prices
of used vehicles reversed some of their



23

sharp 2003 declines. Prices of nonenergy PCE services rose about 2 percent in 2004—a smaller increase than in
2003.
Last year's rise in inflation showed
through to short-term measures of
expected inflation, but longer-term measures remained stable. According to
the Michigan SRC, households' median
expectations for inflation over the next
year moved up considerably in the
spring as inflation was rising, but then
they eased back and ended the year near
3 percent—up from around 2V2 percent
in late 2003. In contrast, the median
expectation for inflation over the next
five to ten years held about steady
near 23A percent throughout this period.
Inflation compensation as measured
by spreads between yields on nominal
Treasury securities and inflationindexed securities—another indicator of
expected inflation, albeit one that is also
influenced by perceptions of inflation
risk and perhaps also by the development of the market for inflation-indexed
debt—showed a similar pattern. Inflation compensation over the next five
years moved up about V2 percentage
point during 2004, to 2Vi percent, while
compensation at the five- to ten-year
horizon edged lower, on net, over the
year.

U.S. Financial Markets
Domestic financial conditions were supportive of economic growth in 2004.
Interest rates on longer-term Treasury
securities remained low, corporate risk
spreads fell, and stock prices, on balance, registered gains. These developments occurred even as market participants revised up their expectations for
the path of the federal funds rate. At
the beginning of 2004, futures market
quotes implied that investors expected a
PA percent target for the federal funds

24

91st Annual Report, 2004

Interest Rates on Selected
Treasury Securities
Percent
6

Ten-year

—wT

5

/

4

_yj

Zz

\ Two-year
iree-month w~^~

1

2002

fh\**
*

1

1

2003

3
2

1
2004

1

2005

NOTE. The data are daily and extend through February 9, 2005.
SOURCE. Department of the Treasury.

rate at year-end, 50 basis points below
the target actually established at the
FOMC meeting in December 2004.
Consistent with the revision in policy
expectations, yields on two-year Treasury notes increased about \lA percentage points in 2004. Yields on longerdated Treasury securities, however,
ended the year essentially unchanged.
Despite the run-up in oil prices, equity
prices registered solid gains in 2004
after rising sharply the year before. Risk
spreads on investment-grade corporate
debt declined a touch, and those on
speculative-grade debt fell more noticeably. Moreover, banks appreciably eased
terms and standards for lending to
businesses.
Interest Rates
Most market interest rates rose, on balance, over the first half of 2004, particularly at shorter maturities. The FOMC's
decision at its January meeting to shift
from a statement that monetary policy
could remain accommodative for "a
considerable period" to an indication
that it could be "patient" in removing
policy accommodation prompted a rise
in market interest rates. In early Febru


ary and March, yields fell substantially
in response to employment reports that
indicated tepid job growth. Prices of
federal funds and Eurodollar futures
contracts implied that investors placed
only small odds on an increase in
the target funds rate before late 2004
and that they envisioned only moderate
monetary policy tightening thereafter.
Longer-term interest rates and the
expected path for the federal funds rate
were considerably marked up later in
the spring in response to data suggesting
a pickup in aggregate demand and hiring, readings on core inflation that came
in above expectations, and rising oil
prices. In the statement released after its
May meeting, the Committee indicated
that policy accommodation was likely to
be removed at a "measured" pace. At
its June meeting, the Committee raised
the target for the federal funds rate from
1 percent to 1 lA percent, but it continued
to assess the risks to sustainable growth
and to price stability as balanced and
reiterated the "measured pace" language. Interest rates across the term
structure declined somewhat immediately after the announcement, reportedly
because some market participants had
expected the FOMC to mention upside
risks to growth or inflation in its
statement.
Chairman Greenspan's congressional
testimony in July on monetary policy,
which suggested that recent softness in
consumer spending would likely prove
short lived, sparked a jump in yields
on Treasury securities. However, interest rates subsequently moved lower, on
balance, as incoming data pointed to
weaker spending and employment than
investors had expected as well as to
more-subdued core inflation. Apart from
the August employment report, which
seemed to hint that the economy was
emerging from its "soft patch," incoming economic news remained somewhat

Economic and Financial Developments in 2004 and Early 2005
lackluster through the end of the third
quarter. However, investors reportedly
viewed FOMC statements and comments by FOMC officials as more sanguine on near-term prospects for the
economy than they had expected. In particular, the release of the minutes from
the August FOMC meeting, which referenced the probable need for "significant
cumulative tightening," prompted investors to mark up their expectations for the
near-term path of monetary policy.
Short-term Treasury yields rose a bit
further over the fall in association with
actual and expected policy tightening,
but long-term Treasury yields were little
changed on net. Investors' expectations
for the path of monetary policy firmed
a bit more in the fourth quarter
in response to higher-than-anticipated
inflation and remarks from Federal
Reserve officials that were reportedly
interpreted as suggesting that an imminent pause in the tightening cycle was
unlikely.
As the economic expansion gathered
momentum and measures of corporate
credit quality improved, investors' perception of risk seemed to diminish, and
Spreads of Corporate Bond Yields over
Comparable Off-the-Run Treasury Yields
Percentage points
10

I
1997

I

1999

I

I

2001

I

1 1 i 1 "

2003

2005

NOTE. The data are daily and extend through
February 9, 2005. The high-yield index is compared
with the five-year Treasury yield, and the BBB and AA
indexes are compared with the ten-year Treasury yield.
SOURCE. Merrill Lynch AA and BBB indexes and
Merrill Lynch Master II high-yield index.




25

their willingness to bear risk apparently
increased. Risk spreads on investmentgrade corporate debt over comparable
Treasuries ended the year slightly below
their levels at the end of 2003. Spreads
of speculative-grade yields declined
further after narrowing sharply during
2003.
In early 2005, market participants
boosted their expectations for the
path of the federal funds rate, partly in
response to the publication of the minutes of the December FOMC meeting,
which investors reportedly interpreted
as pointing to greater concerns about
inflation than had been expected. Shortand intermediate-term Treasury yields
rose along with expectations for the
path of monetary policy, but longerterm yields edged lower. Yields on
investment- and speculative-grade corporate bonds largely moved with those
on comparable Treasury securities, and
hence risk spreads remained at low
levels.
Equity Markets
After surging as much as 30 percent
in 2003, broad stock market indexes
climbed modestly over the first half of
2004. The boost to equity prices from
robust earnings reports and analysts'
upward revisions for future profits
during this period was offset in part by
rising interest rates in the second quarter, worries about geopolitical developments, and sharply higher oil prices.
Stock prices dipped early in the second
half in response to softer economic data,
further concerns about energy prices,
and guidance from corporations that
pointed to a less optimistic trajectory for
earnings than investors had reportedly
been expecting. However, as oil prices
pulled back toward the end of 2004 and
news on the economy improved, stock
prices rebounded to post solid gains

26

91st Annual Report, 2004

Stock Price Indexes
January 2, 2003 = 100

2003

2004

2005

NOTE. The data are daily and extend through February 9,2005.

for the year. The increases were led by
stocks with comparatively small market
capitalizations; the Russell 2000 index
climbed 17 percent in 2004 to a record
high. The S&P 500 and the technologyladen Nasdaq advanced about 9 percent
and 8V2 percent respectively. To date in
2005, equity prices have edged lower,
on balance, as investors have responded
to a rebound in oil prices, lackluster
earnings reports, cautious guidance for
future profits, and indications of continued monetary policy tightening.
Expected volatility implied by options
prices for both the Nasdaq 100 and
the S&P 500 declined further in 2004
from already low levels. The difference
between the earnings-price ratio and the
real ten-year Treasury yield—a crude
measure of the premium investors
require for holding equity shares—
changed little, on balance, remaining
close to its average value over the past
two decades but above its level during
the late 1990s.
Debt, Bank Credit, and M2
The aggregate debt of domestic nonfinancial sectors is estimated to have
increased about 73/4 percent in 2004,
somewhat faster than nominal income
but a bit slower than the pace set the



year before. Household and federal debt
expanded rapidly. Borrowing by nonfinancial businesses was moderate,
although it picked up in the fourth
quarter.
Commercial bank credit rose about
9 percent in 2004, a larger advance than
in the previous year. Expansion of mortgage and home equity loans on banks'
books remained strong, as activity in
the housing market stayed robust while
mortgage originations shifted somewhat
toward adjustable-rate products. After
several years of runoffs, business loans
began to grow in the second quarter of
the year. According to survey evidence,
commercial banks eased terms and standards on business loans as the economic
outlook improved and competition from
other banks and nonbank lenders intensified. Also, banks reported a pickup in
demand for business loans that was said
to be driven by customers' needs to fund
rising accounts receivable, inventories,
capital expenditures, and mergers. After
adjusting for certain reclassifications
of securities as loans, the growth of consumer loans on banks' books remained
sluggish. Despite reports of increased
competition among banks and nonbank
intermediaries, bank profits were again
strong in 2004. Banks experienced further improvements in asset quality and,
as a result, reduced their provisions for
loan losses.
M2 grew at a pace roughly in line
with that of nominal GDP during the
first half of 2004. A resurgence of mortgage refinancing spurred by the firstquarter decline in mortgage rates likely
boosted liquid deposit growth, as proceeds from refinancing were temporarily
held in deposit accounts pending disbursement to the holders of mortgagebacked securities. M2 growth slowed in
the second half of the year in response
to a drop in mortgage refinancing activity and the increased opportunity cost of

Economic and Financial Developments in 2004 and Early 2005
holding M2 assets, as returns available
on market instruments rose more than
those on M2 components. For example,
yields on retail money market mutual
funds moved up more slowly than
did short-term market interest rates, and
assets of money funds accordingly continued to shrink. Small time deposits,
which had contracted over the previous
three years, resumed expansion in the
second half of the year, as their yields
began to rise in association with the
increase in other market rates. Currency
grew at its slowest rate since 2000,
apparently reflecting sluggish demand
by both domestic and foreign holders.
On balance, M2 growth from the fourth
quarter of 2003 to the fourth quarter of
2004 was about 5x/4 percent. The velocity of M2 rose 1 percent, on net, roughly
in line with the historical relationships
among money, income, and opportunity
cost.

International Developments
Foreign economic activity expanded in
2004 at a faster pace than in the preceding three years. The pickup in growth
was widespread—global manufacturing and trade rebounded across industrial and emerging economies, in part
because of strong demand from the
United States and China. In the second
half of the year, trade and foreign GDP
growth slowed, partly as a result of
higher oil prices and the appreciation of
some foreign currencies against the dollar. The run-up in oil prices and other
commodity prices contributed to higher,
though still moderate, inflation across
industrial and emerging economies.
Monetary policy in many foreign
economies tightened over the course
of 2004. Citing high rates of capacity
utilization and mounting inflationary
pressures, the Bank of England raised its
target interest rate 100 basis points but



27

has been on hold since August amid
signs that housing prices and consumer
spending are cooling. After cutting official interest rates earlier in the year, the
Bank of Canada raised rates in the fall
in response to diminishing slack in the
economy. The Bank of Mexico tightened policy throughout the year to resist
rising inflation, and Chinese authorities
made monetary policy more restrictive
to rein in soaring investment demand. In
the euro area and Japan, central banks
kept policy interest rates unchanged in
2004.
Foreign equity price indexes recorded
moderate net gains last year after larger
increases in 2003. Equity markets
started the year strong, but prices
declined in the spring as interest rates
rose. The run-up in oil prices between
July and October appeared to weigh
on foreign equity prices, but the subsequent decline in oil prices helped support a rise in equity prices late in the
year. Foreign long-term interest rates
declined, on net, during 2004. Rates
rose in the second quarter as new data
(including reports from the United
States) that showed faster growth and
higher inflation led market participants
to expect more-aggressive monetary
tightening. However, foreign long-term
interest rates slipped after midyear,
when foreign growth slowed and foreign currencies appreciated against the
dollar. Over the first half of the year,
spreads on internationally issued sovereign debt of emerging-market economies over U.S. Treasuries moved up
somewhat from low levels, but spreads
more than reversed those increases in
the second half.
The path of the exchange rate was
uneven over the course of 2004. The
dollar rose slightly in the first half of the
year on perceptions that monetary policy would tighten more quickly in the
United States than abroad. Beginning in

28

91st Annual Report, 2004

Spread on Internationally Issued Sovereign
Debt of Emerging-Market Economies
Percentage points

10

2002

2003

2004

2005

NOTE. The data are weekly averages. The last
observation is the average of trading days through
February 9, 2005. The series shown is the spread of the
yield of certain dollar-denominated sovereign debt
instruments of emerging-market economies over U.S.
Treasury securities; over the period shown, the index
encompassed nineteen countries.
SOURCE. J.P. Morgan Emerging Market Bond Index
Plus (EMBI+).

September, however, the dollar resumed
the depreciation that had started in 2002,
as market participants focused on the
financing implications of the large and
growing U.S. current account deficit. In
2004, the dollar depreciated about 7 percent, on net, against the euro, the U.K.

U.S. Dollar Exchange Rate against
Selected Major Currencies
Week ending January 4, 2002 = 100

Canadian
k
dollar

100
v - ^

—

Japanese

tRL

—

1

90

* yen

Euro

11

80

U.K.
2002

1 pound
2003

2004

70

V
,

|

2005

NOTE. The data are weekly and are in foreign
currency units per dollar. The last observation for each
series is the average of trading days through February 9,
2005.
SOURCE. Bloomberg L.P.




pound, and the Canadian dollar. The dollar declined 4 percent, on net, against
the Japanese yen and 13 percent against
the Korean won, but some other Asian
central banks, most notably the People's
Bank of China, kept their currencies
stable against the dollar. So far in 2005,
the dollar has rebounded, with market
commentary focusing on the positive
differential between U.S. economic
growth and that in Europe and Japan.
Industrial Economies
After increasing strongly in the first
quarter, Japanese GDP growth stagnated
in the remainder of 2004. Growth in
exports and business investment slowed
over the year, and government investment contracted. However, corporate
profits and balance sheets improved, and
labor market conditions also brightened,
with the job-offers-to-applicants ratio
rising to a twelve-year high. Consumer
prices continued to decline in 2004,
though only slightly. In contrast, higher
commodity prices helped push twelvemonth wholesale price inflation up to
2 percent late in the year, its highest rate
since 1990. The yield on the ten-year
bellwether government bond rose from
its June 2003 record low of about V2 percent to nearly 2 percent in midyear
before retreating to about IV2 percent
recently. After making substantial sales
of yen for dollars in the first quarter,
Japanese authorities ceased intervention in mid-March and remained on the
sidelines even as the yen appreciated
significantly against the dollar in the
fall.
Economic conditions in the euro area
firmed during the first half of 2004 but
weakened in the second half. Private
consumption and investment spending
continued to rise, but export growth
slowed after midyear. German GDP
growth slowed to a crawl in the second

Economic and Financial Developments in 2004 and Early 2005
half, as German consumer spending
remained anemic, held down by a weak
labor market and low consumer confidence. In contrast, French GDP growth
was strong in the fourth quarter. The
euro-area unemployment rate has been
near 9 percent since rising to that level
in early 2003. Inflation for the euro area
remained just above the European Central Bank's medium-term goal of less
than, but close to, 2 percent.
With the exception of a slowdown in
the third quarter, economic expansion in
the United Kingdom stayed strong during 2004, largely because of the brisk
growth of consumption and government
spending. Labor markets remained tight
in 2004; the unemployment rate ticked
down to its lowest level in almost three
decades, and labor earnings posted solid
gains. Consumer price inflation over the
twelve months ending in December was
IV2 percent, below the central bank's
official target rate of 2 percent. Housing
price rises slowed sharply from rapid
rates and were muted during the second
half of 2004. Household net mortgage
borrowing declined to a level 20 percent
below its 2003 peak.
The Canadian economy expanded at
a healthy pace throughout 2004. Sizable
gains in consumption and investment
boosted output throughout the year.
Export growth, supported by demand
from the United States, was strong in
the first half of the year but stagnated in
the second half as U.S. manufacturing
growth slowed and the Canadian dollar's appreciation hurt Canadian trade.
The unemployment rate declined moderately over the year, and employment
posted strong gains. Consumer price
inflation has settled at about 2 percent,
the midpoint of the Bank of Canada's
inflation target range, whereas inflation
excluding food, energy, and indirect
taxes declined to around 1 Vi percent by
year-end.



29

Emerging-Market Economies
Growth of real GDP in China remained
very robust in 2004, supported by strong
domestic demand and exports. The
Chinese government took steps early in
the year to slow investment spending,
curbing investment approvals and lending. Investment growth slowed significantly but remained rapid. At the same
time, indicators of personal consumption spending strengthened, and Chinese
exports and imports continued to soar in
2004. Consumer price inflation peaked
at a twelve-month change of more than
5 percent in July but has fallen since
then to less than 3 percent, as food
prices have moderated. Inflation excluding food is only about 1 percent.
Supported by exports to China, economic growth in other Asian emergingmarket economies was generally strong
in 2004. Economic expansion in Korea
remained heavily dependent on external
demand because high levels of consumer debt continued to weigh on consumption spending. Inflation across
emerging Asia, though still moderate,
was pushed up by higher energy prices
and strong aggregate demand.
The Mexican economy grew rapidly
in the first half of the year in response to
strong demand from the United States.
In the third quarter, Mexican GDP
growth slowed somewhat, as manufacturing exports stagnated, but domestic
demand remained buoyant. Increases
in energy and food prices pushed up
twelve-month consumer price inflation
to more than 5 percent, above the Bank
of Mexico's target range of 2 percent
to 4 percent. Monetary policy tightened
throughout the year, and inflation
began to fall near year-end. Oil revenues
boosted the Mexican public-sector fiscal
surplus and allowed Mexican government spending to provide stimulus while
still meeting fiscal targets.

30

91st Annual Report, 2004

In Brazil, economic activity continued to expand robustly in 2004.
Domestic demand was supported by the
monetary loosening that occurred in the
second half of 2003 and early 2004.
Export growth was boosted by demand
for commodities and the recovery
in Argentina. Brazilian asset prices
declined through May on expectations
that higher global interest rates would
make it more difficult for the Brazilian
government to finance its debt, but stock
prices have moved up sharply since
May, and the currency has appreciated.




Concerns over inflation pressures have
prompted the central bank to tighten
monetary policy since September.
In Argentina, the economic recovery
picked up steam last year, as exports
were supported by strong demand for
commodities. The country continues,
however, to grapple with difficult
structural problems. After more than
three years in default, the government
launched a debt swap in January with
the goal of restructuring more than
$80 billion in defaulted bonds.
•

31

Monetary Policy Report of July 2004
Monetary Policy and the
Economic Outlook
The economic expansion in the United
States became increasingly well established in the first half of 2004, but the
pace of inflation picked up from its
very low rate in 2003. At the time of the
February Monetary Policy Report to the
Congress, considerable evidence was
already in hand indicating that the U.S.
economy had made the transition from
a period of subpar growth to one of
more-vigorous expansion. Nevertheless,
job creation remained limited, and gains
in investment, although sizable, still
seemed restrained by a lingering caution
on the part of some businesses. In the
event, businesses stepped up their hiring in the spring, and capital spending
seems to have continued apace.
Over the first half of this year, energy
prices soared; moreover, inflation in
core consumer prices—as measured by
the price index for personal consumption expenditures excluding the direct
effects of movements in food and energy
prices—increased from an exceptionally
low rate of 1 percent over the four quarters of 2003 to an annual rate of a little
more than 2 percent. To some extent, the
upturn in core inflation reflected the
indirect effects of higher energy prices,
but other forces also played a role.
Strengthening aggregate demand both at
home and abroad induced a surge in the
prices of many primary commodities
NOTE. The discussion in this section consists
of the text and tables from the Monetary Policy
Report submitted to the Congress on July 20,
2004; the charts from this report (as well as earlier
reports) are available on the Board's web site, at
www.federalreserve.gov/boarddocs/hh.



and industrial materials. In addition, the
decline in the foreign exchange value
of the dollar in 2003 put upward pressure on the prices of imported goods and
services. With strong demand in the
United States and increased utilization
of the productive capacity of the economy, firms were better able to pass on
the higher costs of imports, raise the
prices of domestically produced items
that compete with imports, and in many
cases boost their profit margins. Likely
in response to the faster rate of price
increases experienced this year, surveys
suggest that near-term inflation expectations have moved up somewhat; still,
expectations for price inflation over the
longer term have remained in their
recent range.
Monetary policy was very accommodative at the start of 2004 as the Federal Open Market Committee (FOMC)
sought to provide continuing support to
an economic expansion that had yet to
produce a sustained improvement in the
labor market and to ensure that the previous year's threat of an unwelcome
disinflation would continue to recede.
Although real GDP had accelerated
sharply in the second half of 2003, the
incoming data through the time of the
March meeting suggested that employment was growing only slowly, as
employers were relying on increased
production efficiencies to satisfy considerable gains in aggregate demand. Surging oil prices were boosting overall
inflation, while core inflation—though
no longer declining—was still low. With
subsequent labor market reports suggesting that hiring was on a stronger
track, growth in output continuing at a
solid pace, and core consumer price

32

91st Annual Report, 2004

inflation possibly running higher, the
FOMC announced in May that it saw
the risks to the goal of price stability as
having moved into balance. Even so, the
Committee stated that it believed that
the monetary policy accommodation
then in place could be "removed at a
pace that is likely to be measured."
Indeed, at its June meeting, the FOMC
decided that sufficient evidence was in
hand to begin moving the federal funds
rate back toward a more neutral setting
and raised the federal funds rate lA percentage point to WA percent, a decision
that was widely anticipated by market
participants.
Although some of the recent data
have been on the soft side, the available information on the outlook for
the U.S. economy is, on balance, positive. Households are enjoying a generally improving job market, rising
real incomes, and greater wealth, all of
which are providing them with the confidence and wherewithal to spend. In the
business sector, capital spending apparently is continuing to increase briskly,
bolstered by expectations of strong sales
as well as by booming profits and
supportive financial conditions; investment should also continue to be buoyed
by firms' adoption of productivityenhancing technologies. Moreover,
inventories appear to be lean relative to
sales even after taking account of the
substantial improvements firms have
made in managing their stocks, suggesting that stockbuilding may provide
some impetus to production in the near
term. The brightening outlook for economic activity abroad suggests that
demand for U.S. exports should grow
and provide a further lift to domestic
production.
The prospects also seem favorable for
inflation to remain contained in the
period ahead. For one reason, some of
the forces that contributed to the upturn



in core inflation in the first half of 2004
are likely to prove transitory. In particular, the upward impetus from the rise in
energy and commodity prices is likely
to lessen in coming quarters. For another
reason, the evidence suggests that the
productive capacity of the economy is
still not being fully used and that the
attendant slack is probably exerting
some downward pressure on inflation.
If—as seems likely—the economy
approaches full utilization of its productive capacity only gradually, that downward pressure should persist for a time.
Moreover, productivity remains on a
solid uptrend and should continue to
restrain costs. To date, the gains in productivity have helped to boost profit
margins. As firms compete to take
advantage of profit opportunities, they
may eventually be forced to absorb a
portion of any increases in labor and
other costs that occur. But history suggests that the absorption of costs has
limits. Indeed, unit labor costs have
turned up of late, as productivity growth
has slowed below the rate of increase in
hourly compensation. If increases in
those costs were to develop any upward
momentum, the well-behaved nature
of inflation in recent years could be
jeopardized.

Monetary Policy, Financial
Markets, and the Economy
over the First Half of 2004
At the beginning of 2004, the FOMC
was growing more confident that the
economic expansion was likely to be
self-sustaining, particularly in light of
the significant firming of business outlays and the continued strength in household spending. Moreover, stimulative
fiscal and monetary policies, in conjunction with receptive financial markets,
appeared likely to provide substantial
support to economic activity and to ward

Monetary Policy Report of July 2004
off any further disinflation. However,
the Committee remained concerned
about the persistent weakness in the
labor market. At its January meeting,
the FOMC left the target for the federal
funds rate at 1 percent. The Committee
generally felt that the apparent slack in
labor and product markets and continued strong productivity growth were
likely to keep the underlying trend in
inflation subdued, but it nevertheless
was cognizant that a highly accommodative stance for monetary policy could
not be maintained indefinitely. Given
these considerations, the Committee
modified the language of its policy statement to gain greater flexibility to firm
policy should circumstances warrant.
The Committee achieved this added
flexibility by removing its assessment
that monetary policy would be accommodative for "a considerable period"
and instead saying that the Committee
could be "patient" in removing its policy accommodation.
At the time of the March FOMC
meeting, the Committee believed that
conditions were mostly in place for further solid economic growth. Industrial
production had picked up broadly, and
consumer and business spending continued to expand briskly. However, the
employment reports for January and February still painted a picture of subdued
hiring. With financial markets quite
accommodative, the Committee recognized that maintaining the current stance
of policy could fuel inflation pressures
and perhaps encourage excessive risktaking by financial market participants.
The Committee concluded that the low
level of core consumer price inflation
and continued evidence of weak hiring
argued for the retention of both its 1 percent target for the federal funds rate
and the wording in its statement that
the Committee could be "patient" with
respect to changes in monetary policy.



33

At the May FOMC meeting, members
noted a distinct improvement in the economic outlook. The labor market figures
reported for March had proved to be
strong, and the reports for the two previous months had been revised upward
significantly. Consumer price inflation
in the first quarter of the year was faster
than it had been in the previous quarter.
Although much of this rise was due to
escalating energy costs, core inflation
also stepped up, and survey-based measures of near-term inflation expectations
had edged higher. In response to the
indications of rising aggregate demand
and a strengthening job market, yields
on Treasury securities had risen appreciably. Accordingly, the Committee was
of the view that the expansion would be
vigorous and believed that the odds of
any further disinflation had been substantially reduced. On the basis of the
evolving outlook for economic activity
and prices, the Committee revised its
assessment of risks to indicate that the
upside and downside risks for inflation
had moved into balance. To underscore
its belief that policy would probably
soon need to move toward a more neutral stance while emphasizing that this
process was not expected to be rapid,
the Committee stated its judgment that
monetary policy accommodation "can
be removed at a pace that is likely to be
measured."
At the time of the June FOMC meeting, incoming information tended to
confirm that the economy was expanding at a solid pace but also indicated
that inflation was higher than had been
anticipated. Quotes on near-term money
market futures and options suggested
that market participants were nearly certain of an increase of 25 basis points in
the target for the federal funds rate at
that meeting and had priced in a cumulative increase of about 2lA percentage
points in the federal funds rate over the

34

91st Annual Report, 2004

next year. The Committee agreed that
the current substantial degree of policy
accommodation was no longer warranted and decided to increase its target
for the federal funds rate 25 basis points.
The Committee noted that it considered
the risks to both sustainable economic
growth and stable prices to be roughly
balanced and maintained its appraisal
that policy accommodation "can be
removed at a pace that is likely to be
measured" but also emphasized that it
will "respond to changes in economic
prospects as needed to fulfill its obligation to maintain price stability."
Economic Projections
for 2004 and 2005
In conjunction with the FOMC meeting
at the end of June, the members of the
Board of Governors and the Federal
Reserve Bank presidents, all of whom
participate in the deliberations of the
FOMC, were asked to provide economic
projections for 2004 and 2005. The central tendency of the FOMC participants'
forecasts for the increase in real GDP is
AVi percent to A3A percent over the four
quarters of 2004 and 3V2 percent to
4 percent in 2005. The civilian unemployment rate is expected to lie between
5lA percent and 5Vi percent in the
fourth quarter of 2004 and to decline to
between 5 percent and 5lA percent by
the fourth quarter of 2005.
Starting with this report, the Federal
Reserve will provide projections for the
price index for personal consumption
expenditures excluding food and energy
(core PCE), which the Committee
believes is better as an indicator of
underlying inflation trends than is the
overall PCE price measure previously
featured. Core PCE inflation appears to
have run a little above an annual rate of
2 percent in the first half of 2004; for
2004 as a whole, most FOMC partici


Economic Projections for 2004 and 2005
Percent

Indicator

Federal Reserve Governors
and
Reserve Bank presidents
Central
tendency

Range
2004
Change, fourth quarter
to fourth quarter1
Nominal GDP
RealGDP
PCE price index excluding
food and energy
Average level,
fourth quarter
Civilian unemployment
rate

6-7
4-43/4

1V&-2

61/4-63/4
41/2-43/4

l3/4-2

5lA-5V2 2005 SVA-SVI
Change, fourth quarter
to fourth quarter1
Nominal GDP
RealGDP
PCE price index excluding
food and energy
Average level,
fourth quarter
Civilian unemployment
rate

43/4-61/2
31/2-4

5V4-6
3V2-4

W2-2V2

IV2-2

5-5 quarter of 5-5 VA
1. Change from average for fourth Vi
previous
year to average for fourth quarter of year indicated.

pants expect it to lie between l3/4 percent and 2 percent. For 2005, the central
tendency of the projections for core PCE
inflation is W2 percent to 2 percent.

Economic and Financial
Developments in 2004
After having surged in the second half
of 2003, economic activity continued to
expand at a solid pace in the first half
of 2004. In the labor market, payroll
employment started to increase last fall
after a long string of declines and picked
up further during the first half of
this year. Headline inflation has been
boosted significantly by the jump in

Monetary Policy Report of July 2004
energy prices this year, but core inflation has also moved up from the exceptionally low levels of late 2003.

The Household Sector
Consumer Spending
Consumer spending, which had gathered a good bit of steam in the second
half of 2003, continued to move higher
in the first half of 2004. The growth in
spending was spurred by substantial
gains in income. In addition, household
wealth has risen sharply over the past
year, and consumer surveys indicate that
individuals are generally upbeat in their
assessments of the economy's prospects
and of their own situations.
Personal consumption expenditures
rose at an annual rate of 33A percent in
real terms in the first quarter. Spending
on light motor vehicles, which had been
supported in late 2003 by aggressive
price and financing incentives, slipped
somewhat in early 2004. But outlays for
goods other than motor vehicles, which
had risen 6Vz percent in real terms in
2003, posted another huge increase in
the first quarter; spending on services
also perked up after having advanced
only modestly in 2003. The available
data point to a much smaller increase in
consumer spending in the second quarter; the deceleration mainly reflects a
sharp slowing in the growth of outlays
on goods other than motor vehicles.
Real disposable personal income
(DPI)—that is, after-tax income adjusted
for inflation—rose at an annual rate of
nearly 4 percent between the fourth
quarter of 2003 and May 2004, a gain
about in line with its rate of growth last
year. To be sure, the rise in energy prices
cut into the growth of real income in the
first half of the year. However, aggregate wages and salaries, boosted by
increases in both employment and earn


35

ings, rose appreciably in nominal terms.
In addition, last year's tax legislation,
which had already reduced withholding rates in mid-2003, added further
to households' cash flow by increasing
refunds and lowering final settlements
this spring.
Household wealth increased only
about in line with nominal DPI in the
first quarter of 2004, and the wealth-toincome ratio was likely little changed in
the second quarter as well. Nonetheless,
the increase in wealth over the past year
has been considerable—and probably
large enough to more or less offset
any lingering restraint on spending
growth from the earlier declines in stock
prices. Thus, with wealth approximately
a neutral influence on the growth of
spending of late, the personal saving
rate has held fairly steady. In fact, the
average saving rate over the first five
months of the year—at 2lA percent of
DPI—was very close to the annual figures for 2002 and 2003.
Residential Investment
Activity in the housing sector remained
torrid in the first half of 2004. Although
starts in the single-family sector faltered
a bit early in the year, in part because of
unusually adverse weather, they subsequently snapped back and reached an
annual rate of more than 1.6 million
units in April and May—8V2 percent
greater than the already rapid pace for
2003 as a whole. Sales of new and existing homes have also been exceptionally
strong, and they hit record highs in May.
In general, housing activity has been
supported by the favorable developments regarding jobs and income and,
especially early in the year, by low mortgage rates. Rates on thirty-year fixedrate mortgages, which had dipped to
5V2 percent in March, rose markedly in
the spring; they have edged down in

36

91st Annual Report, 2004

recent weeks and now stand at 6 percent, a level still quite low by historical
standards.
Home prices have continued to rise
rapidly. For example, the national
repeat-sales price index from the
Office of Federal Housing Enterprise
Oversight—which partially adjusts for
shifts in the quality of homes sold—rose
73/4 percent over the year ending in the
first quarter (the latest available data),
a rate similar to the average annual gain
since late 2000. By this measure—and
many others—house price increases
have outstripped gains in incomes as
well as in rents in recent years.
Starts in the multifamily sector averaged an annual rate of 360,000 units
over the first five months of the year, a
pace slightly faster than that of the past
several years. Low interest rates have
apparently helped maintain the profitability of apartment construction, given
that other fundamental determinants of
activity in the sector have been weak: In
particular, rents have remained soft, and
in the first quarter, vacancy rates for
multifamily rental properties reached a
new high.
Household Finance
Household debt rose at an annual rate of
about 103/4 percent in the first quarter of
2004. The especially rapid growth of
mortgage debt was driven by the strong
pace of activity in the housing market
and the renewed wave of mortgage refinancing. However, the second-quarter
rise in interest rates appears to have
slowed the rate of refinancing and, consequently, the amount of equity being
extracted from the value of homes
through such transactions. Consumer
credit—which constitutes the bulk of
household debt aside from mortgage
borrowing—expanded at an annual rate
of about 6 percent over the first quarter



of the year and at roughly a 4 percent
pace in April and May. The growth of
consumer credit likely has continued to
be restrained by the substitution toward
mortgage debt as a means to finance
household expenditures.
Low interest rates, in concert with
strong growth in disposable personal
income, have helped to keep financial
obligations manageable for most households. In the first quarter of the year, the
debt service ratio and the financial obligations ratio for the household sector in
the aggregate, both of which gauge precommitted expenditures relative to disposable income, continued to edge down
from their peaks in 2001. Other indicators also suggest that the financial wellbeing of households has stabilized and
may be improving. Delinquencies on
credit card and auto loans generally
declined in the first three months of the
year, and bankruptcy rates, while still
high, stepped down in the first quarter
from their recent peak.
Rapid increases in home prices have
continued to buoy household net worth
this year. In contrast, stock prices are
about unchanged. Although news on
earnings and economic activity has
generally been favorable, rising oil
prices and interest rates and, perhaps,
heightened geopolitical concerns have
weighed on investor sentiment. Nevertheless, inflows into equity mutual funds
have been even stronger thus far in 2004
than they were last year.
The Business Sector
Fixed Investment
For the most part, businesses appear to
be shaking off the extraordinary reluctance to undertake new investment
projects that was evident in 2002 and
2003. Indeed, although outlays on nonresidential construction have not yet

Monetary Policy Report of July 2004
turned up decisively, real spending on
equipment and software (E&S) has been
advancing briskly. The broadly based
growth in E&S spending has been
driven by increasingly favorable fundamentals: positive expectations for sales,
high levels of corporate profits and cash
flow, a desire to replace or upgrade
aging equipment after a period of weak
investment spending, and the continued
low cost of capital.
Real E&S spending rose at an annual
rate of more than 15 percent in the second half of last year, and it posted
another sizable increase in the first quarter of 2004 despite flat business purchases of motor vehicles and a dip in
deliveries of aircraft. Excluding transportation equipment, real spending on
E&S rose at an annual rate of \3Vi percent in the first quarter. In the high-tech
category, real purchases of computers
and software remained on the solid
uptrend that has been evident for the
past couple of years, and real outlays on
communications equipment increased
further, reaching a level about 20 percent above the low in the fourth quarter
of 2002. Spending for equipment other
than high-tech and transportation, which
accounts for about 40 percent of E&S
(measured in nominal terms), also rose
markedly in the first quarter. Such
spending tends to be particularly sensitive to the prospects for aggregate
demand. In addition, it may be receiving
a lift from the partial-expensing tax provision, which is especially valuable for
equipment with relatively long service
lives for tax purposes; that provision is
slated to expire at the end of 2004.
Equipment spending appears to have
posted another solid increase in the second quarter. Outlays on transportation
equipment seem to have rebounded, and
the incoming data on high-tech equipment point to robust real expenditures.
Some indicators for spending on other



37

nontransportation equipment have been
a bit soft recently. But the May level of
shipments for this broad category was
still above that of the first quarter, and
backlogs of unfilled orders, which have
risen impressively over the past year,
continued to build.
Real nonresidential construction has
remained about unchanged, on net, since
the steep decline in 2001 and 2002.
Construction of office buildings is still
running at roughly half the pace of
2000, although vacancy rates have
stabilized—albeit at very high levels—
and the decline in rents has slowed. Factory construction also remains sluggish.
Construction of retail and wholesale
facilities, in contrast, has held up fairly
well, a performance consistent with the
strength in consumer spending. Outlays
on buildings for health care and education also have been reasonably well
sustained.
Inventory Investment
Inventory investment has generally
remained subdued even as final sales
have strengthened. Although real nonfarm inventory investment picked up to
an annual rate of $30 billion in the first
quarter, the accumulation occurred
almost entirely in the motor vehicle sector, in which sagging sales and a high
level of production early in the year
created a noticeable bulge in dealer
stocks, especially of light trucks. In the
second quarter, the automakers reduced
assemblies; but with sales running only
a little above their first-quarter pace on
average, inventories of motor vehicles
remained elevated. Outside the motor
vehicle industry, nonfarm inventories
increased at a meager $6 billion annual
rate in real terms in the first quarter, and
the available data point to only a moderate step-up in real stockbuilding, on balance, in April and May. In general, non-

38

91st Annual Report, 2004

auto inventories appear lean relative to
sales, even after factoring in the downward trend in inventory-sales ratios that
has accompanied the ongoing improvements in supply-chain and logistics
management.
Corporate Profits
and Business Finance
Continuing the gains of last year, profits
of the business sector to date have
remained strong. In the first quarter of
2004, earnings per share for S&P 500
firms were about 26 percent higher than
their level four quarters earlier, and
before-tax profits of nonfinancial corporations as a share of GDP from that
sector edged up following a steep
increase in 2003. A jump in profits in
the petroleum and gas industries owing
to higher oil prices was responsible for
much of the rise in earnings. However,
firms across many industries, with the
notable exception of telecommunication
services, registered solid gains in earnings. In response to this pattern of higher
profits, analysts have been steadily
marking up their forecasts for earnings
in subsequent quarters.
Net equity issuance has remained
negative this year. Seasoned offerings
have been scarce, the pace of initial
public offerings has only inched up, and
share retirements have continued to be
strong. Corporations have continued to
repurchase shares at a rapid rate to manage their cash positions, even as they
have increased dividend payments.
Firms relied heavily on their elevated
profits and substantial cash holdings to
finance their investment in inventories
and fixed capital in the first half of
2004. As a result, the growth of nonfinancial business debt remained modest.
Much of the proceeds from bond issuance was used to pay down higher-cost
debt, and the timing of the issuance of



investment-grade bonds in particular
was influenced by movements in interest rates; issuance spiked in March in
the wake of the drop in yields but subsided in April as rates rebounded. Shortterm debt financing showed signs of
turning around after contracting over
the previous three years. Commercial
paper outstanding expanded in the first
two quarters of 2004. Business loans at
banks have fallen on balance so far this
year but at a much slower pace than in
2003. The Federal Reserve's Senior
Loan Officer Opinion Survey conducted
in April 2004 indicated that demand for
business loans had begun to expand and
that commercial banks had again eased
both standards and terms on these loans
over the previous three months.
Strong profits, low interest rates, and
continued deleveraging helped improve
the credit quality of nonfinancial firms
over the first half of the year. In the
second quarter, the delinquency rate on
business loans dropped for the sixth consecutive quarter; the continued decline
has reversed a large part of the preceding run-up. Early in the year the twelvemonth trailing default rate on outstanding bonds fell into the relatively low
range observed over much of the 1990s,
and in June it registered another decline.
Moreover, in the first part of the year,
the pace of upgrades of bond ratings by
Moody's Investors Service rose while
the pace of downgrades fell.
Borrowing against commercial real
estate assets continued at a rapid pace
during the first half of this year. Anecdotal reports suggest that some firms
were using mortgages on commercial
property to lock in low-cost, long-term
funding. Despite the persistently high
vacancy rates for most types of commercial property, the loans backed by these
assets have continued to perform well.
Delinquency rates on commercial mortgages held by banks and insurance com-

Monetary Policy Report of July 2004
panies remained very low in the first
quarter. A drop in delinquencies on
commercial-mortgage-backed securities
(CMBS) in recent months has partially
reversed last year's rise, and the narrow
risk spreads on CMBS suggest that
investors have limited concerns about
loan quality.
The Government Sector
Federal Government
The deficit in the federal unified budget
has continued to widen. Over the twelve
months ending in June, the unified budget recorded a deficit of $431 billion,
$120 billion more than during the comparable period last year and equal to
nearly 4 percent of nominal GDP. In
large part, the rise in the deficit is attributable to further rapid increases in
spending on defense and other programs
and the loss of revenues resulting from
the tax legislation enacted in recent
years. In addition, interest costs, which
fell sharply between fiscal 1997 and fiscal 2003 as a result of budget surpluses
and declining interest rates, have leveled
off and thus are no longer a significant
factorhelping to restrain the deficit. The
primary deficit, which excludes net
interest, totaled $276 billion over the
twelve months ending in June, also
approximately $120 billion more than
over the year ending in June 2003.
Over the twelve months ending in
June, nominal federal spending was
nearly 7 percent higher than during the
same period a year earlier and stood at
about 20 percent of nominal GDP—
virtually the same as in fiscal 2003 but
\Vi percentage points above the recent
low in fiscal 2000. Spurred by the war
in Iraq, defense spending ramped up
another 14 percent; outlays for nondefense discretionary programs, which
include homeland security, moved up



39

further as well. Spending on the major
health programs rose at a rapid clip,
in part because the Jobs and Growth
Tax Relief Reconciliation Act of 2003
(JGTRRA) temporarily increased grants
to the states under the Medicaid program and boosted payments to some
Medicare providers. In addition, as
noted, net interest payments, which had
plummeted between 1997 and 2003,
flattened out. Real federal expenditures
for consumption and gross investment—
the part of government spending that is
a component of real GDP—rose at an
annual rate of 8V2 percent in the first
calendar quarter of 2004; that increase
reflected a surge in real defense spending, which now stands more than 30 percent above the levels that prevailed, on
average, from 1997 to 2000.
Federal receipts in the twelve months
ending in June were 1V2 percent higher
than during the comparable period of
the previous year after having fallen
markedly between fiscal 2000 and fiscal
2003. Receipts received a substantial
boost over the past year from a strong
gain in corporate taxes, which were
lifted by robust profits. Social insurance
taxes, which tend to move in line with
wages and salaries, also increased. But
individual income taxes were below last
year's level: Although taxable incomes
rose moderately, collections were
reduced by the lower withholding rates
in place since mid-2003 and by the
effects of JGTRRA on refunds and final
settlements this spring.
The deterioration in the unified budget since 2000 has been mirrored in a
sharp downswing in federal saving—
essentially, the unified surplus or deficit
adjusted to conform to the accounting practices followed in the national
income and product accounts (NIPA).
Gross federal saving fell from a high
of nearly 3 percent of nominal GDP in
2000 to negative 3 percent of GDP in

40

91st Annual Report, 2004

the first quarter of 2004; measured net
of estimated depreciation, federal saving
fell from 2 percent of GDP to negative 4 percent of GDP over this period.
In the past couple of years, the rise in
business saving from the rebound in
profits and reductions in corporate taxes
has cushioned to some extent the effect
of growing budget deficits on national
saving. In fact, because of the dramatic
increase in business saving in recent
quarters, national saving has recovered
some from the extreme lows of early
2003. Even so, as of the first quarter of
2004, national saving (measured net of
estimated depreciation) was still equal
to just about 2V2 percent of GDP, compared with a recent high of 6V2 percent
in 1998. If not reversed over the longer
haul, such low levels of national saving
could eventually impinge on private
capital formation and thus slow the rise
of living standards.
Reflecting the need to finance the sizable federal budget deficit, federal debt
held by the public expanded at an annual
rate of H3/4 percent in the first half
of the year. The ratio of this debt to
nominal GDP now exceeds 36 percent.
The Treasury tilted its issuance toward
longer-term and inflation-indexed securities somewhat, and announced semiannual issuance of a twenty-year inflationprotected bond beginning in July and a
five-year inflation-protected note beginning in October.
State and Local Governments
States and localities have started to see
some improvement in their budget positions after having gone through several
difficult years. Strong growth in household income and consumer spending has
boosted revenues in recent quarters, as
have the additional federal grants authorized under JGTRRA. And although
rising medical costs and security needs



have continued to put upward pressure on spending, state and local governments have generally held the line
on hiring and have kept other outlays
in check. The restraint on spending,
in combination with a drawdown of
reserve funds and some increases in
taxes, has helped states and localities
satisfy their balanced-budget requirements. In fact, between the third quarter
of 2003 and the first quarter of 2004,
NIPA net saving (excluding social insurance funds) for this sector averaged
$21 billion at an annual rate (}A percent
of nominal GDP), compared with negative $7 billion in 2002 and negative
$31 billion in the first half of 2003. (Net
saving is roughly similar to the surplus or deficit in an operating budget.)
Although a few states are still struggling
with strained fiscal situations, most have
entered fiscal 2005 (which started on
July 1 in all but four states) with expectations of respectable growth in revenues and with budgets in place that
allow for some increases in spending on
high-priority services and some rebuilding of reserve funds.
Real consumption and investment
spending by state and local governments
was essentially flat in the first quarter
of 2004; available indicators point to a
moderate increase in the second quarter.
Outlays for consumption items, which
were little changed in 2003, appear to
have remained subdued throughout the
first half of the year. Investment expenditures also were about unchanged in
the first quarter, but they turned up
sharply in the spring, mainly because of
a jump in spending on highways.
Significant demand for infrastructure
spending and favorable interest rates led
to robust issuance of state and local
government debt to finance capital
expenditures and to advance refund
higher-cost debt. Nevertheless, over the
first half of the year, net issuance edged

Monetary Policy Report of July 2004
down from its rapid pace in 2003 to
about a 6 percent annual rate. The deceleration reflected a decline in short-term
borrowing as improvements in the fiscal
positions of state and local governments
lessened the need for temporary funding
of budget shortfalls.
The credit quality of municipal borrowers has stabilized after two years
of deterioration; for the year to date,
upgrades and downgrades of credit ratings have been roughly equal. In a
marked change from last year's sentiment, rating agencies have begun to
express guarded optimism about the
credit quality of states because of improvements in state revenue flows and
restraint on spending.
The External Sector
In the first quarter of 2004, the U.S.
current account deficit expanded to an
annual rate of $580 billion, or about
5 percent of GDP. As in the past, the
widening was driven primarily by a
larger deficit in trade of goods and
services. The surplus on net investment
income declined in the first quarter but
remained well above its average value
in the previous year. The deficit on net
unilateral transfers rose because of a
concentration of disbursements of government grants in the first quarter.
International Trade
The U.S. trade deficit in goods and
services registered $548 billion at an
annual rate in the first quarter, about
$46 billion larger than in the fourth
quarter of 2003. On average, data for
April and May suggest that the trade
deficit continued to widen in the second
quarter.
Real exports of goods and services
increased at an annual rate of 11A percent in the first quarter of 2004, well off



41

the blistering 20 percent pace of the
fourth quarter but still above the average
for 2003. Solid gains in exports since
mid-2003 arose in part from the strong
economic performance of many of our
major trading partners. In addition, the
net decline in the exchange value of
the dollar since 2002 continued to make
U.S. goods and services more competitive abroad. Increases in exports of
U.S. goods were widespread across our
major trading partners, with the exception of Japan, and were concentrated
in real exports of capital goods, industrial supplies, and consumer goods. Real
exports of agricultural products fell
sharply, hurt by foreign bans on U.S.
beef products following reports of mad
cow disease in a U.S. herd. Exports of
services rose moderately.
Prices of total exports rose at an
annual rate of 53A percent in the first
quarter, boosted by another jump in agricultural prices along with substantial
increases in the prices of other primary
commodities and industrial supplies.
Prices of U.S. agricultural exports have
been pushed up by very strong global
demand, particularly from China. For
specific products, such as cotton and
soybeans, lower production in some
countries also contributed to price runups. More recently, prices of soybeans
and other agricultural products have
eased in the face of a slowing in the
growth of demand from China and the
anticipation of larger harvests. Even so,
available data point to continued strong
increases in export prices in the second
quarter.
Supported by solid U.S. economic
growth, real imports of goods and services rose at an annual rate of 101/2 percent in the first quarter. This increase
was below the fourth-quarter pace but
still roughly double the rate of increase
for 2003 as a whole. Real imports of
goods were boosted by a sharp increase

42

91st Annual Report, 2004

in oil imports. Gains in imports of nonoil goods were also sizable and widespread across categories. Imports of services grew slightly in the first quarter.
The spot price of West Texas intermediate (WTI) crude oil surged above $40
per barrel in May and has since fluctuated close to that level. The run-up in
the price since the beginning of the year
has been driven by surprisingly strong
global demand for oil. Supply issues
have been important as well. These were
mainly continued violence in Iraq,
including the sabotage of oil facilities,
attacks on foreigners in Saudi Arabia,
ongoing unrest in Nigeria, political turmoil in Venezuela, and tax payment
difficulties at a major Russian oil company. The recent increase in OPEC production (mainly by Saudi Arabia) has
eased the upward pressure on prices a
bit, but they have remained elevated.
Prices of imported non-oil goods rose
at an annual rate of 5Vi percent in
the first quarter after minimal increases
in the second half of 2003. Prices for
imported consumer goods rose at an
annual rate of 23/4 percent after being
flat in 2003. Skyrocketing global commodity prices last year and early this
year boosted prices of imported industrial supplies (especially metals) and of
foods, feed, and beverages. The jump
in commodity prices reflected strong
demand, the net depreciation of the
dollar over the past two years, and the
limited expansion in supply of many
commodities since the 2001 trough in
commodity prices. Available data suggest a modest stepdown in the rate of
increase of import prices in the second
quarter; the move in part reflects a flattening of consumer goods prices.
The Financial Account
The U.S. current account deficit has continued to be financed largely by foreign



flows into U.S. bonds. Foreign official
inflows, already sizable in 2003, rose
sharply in the first quarter of 2004
and then moderated somewhat. Similarly, private foreign purchases of U.S.
bonds, which were significant in 2003,
increased sharply in the first quarter and
also appear to have moderated in the
second quarter. In contrast, foreign
demand for U.S. equities was weak in
2003 and has remained so in 2004. Purchases of foreign equities by private U.S.
investors appear to be strengthening, but
U.S. investors still show no appetite for
foreign bonds.
Direct investment into the United
States in the first quarter continued to be
restrained by the slowdown of global
mergers and acquisitions since 2002. In
contrast, U.S. direct investment abroad
was strong in 2003 and in the first quarter of 2004, as the effect of fewer mergers and acquisitions was offset by sizable reinvested earnings.
The Labor Market
Employment and Unemployment
The demand for labor turned up in late
2003 after an extended period of weakness, and it has gathered additional
steam this year. After averaging about
60,000 per month in the fourth quarter
of 2003, gains in private nonfarm payroll employment rose to an average of
about 200,000 per month in the first half
of 2004. The job gains were especially
large in March, April, and May but
ebbed somewhat in June. The civilian
unemployment rate, which had fallen
from a recent peak of 6.3 percent in
June 2003 to 5.7 percent in December
2003, was little changed over the first
half of the year. In June, it stood at
5.6 percent.
The increases in payrolls over the first
half of 2004 were widespread. Espe-

Monetary Policy Report of July 2004

43

cially notable was the turnaround in the cent per year in the second half of
manufacturing sector, in which employ- the 1990s. During that earlier period, an
ment bottomed out in January and expansion of the capital stock was an
then rose a cumulative 65,000 jobs important source of product! vity growth.
through June. The rise in manufacturing However, in the more recent period,
jobs was concentrated in the durable when the business environment—at
goods industries—in particular, those least until the past few quarters—was
making fabricated metals and other characterized by sluggish demand, lean
construction-related products, comput- capital budgets, and an extraordinary
ers and electronic equipment, and reluctance of firms to add to payrolls,
machinery. After a long string of businesses appear to have raised their
declines, employment at producers of productivity mainly through changes in
nondurable goods was little changed, organizational structures and better use
on net, over the first half. Job gains in of the capital already in place. With
virtually all other major sectors have hiring having picked up of late, meabeen greater this year than last. In par- sured productivity growth may slow in
ticular, hiring in retail trade, which coining quarters; but if recent experihad been lackluster in 2003, turned up ence is any guide, businesses will conappreciably, and construction employ- tinue to focus on achieving structural
ment increased further. The professional improvements in the efficiency of their
and business services sector also posted operations. The upswing in investment
a sizable rise, in part because the spending now under way also bodes
rebound in manufacturing activity lifted well for sustained favorable productivhiring at temporary-help firms. A clear ity performance in the period ahead.
indication of the breadth of the employThe rapid productivity growth in
ment increases is provided by the six- recent years has helped to bolster
month diffusion index compiled by the increases in hourly compensation in the
Bureau of Labor Statistics (BLS). The face of the soft labor market and the low
index is equal to the percentage of consumer price inflation in 2003. As a
industries that increased employment result, increases in the employment cost
over the most recent six months plus index (ECI) measure of hourly compenone-half the percentage with unchanged sation, which is based on a survey of
employment; in June, the index moved private nonfarm businesses conducted
up to its highest level since April 2000.
quarterly by the BLS, have held fairly
steady of late. In fact, the rise in the ECI
over the twelve months ending in
Productivity and Labor Costs
March—at a shade less than 4 percent—
Gains in labor productivity have slowed was virtually the same as the increases
somewhat in recent quarters after the over the preceding two years. Benefit
spectacular increases of mid-2003. Still, costs, which rose 7 percent over the year
according to the currently published ending in March, have continued to
data, output per hour in the nonfarm be the fastest rising portion of hourly
business sector rose a remarkable compensation; health insurance costs
5V2 percent over the year ending in the have remained on a steep uptrend, and
first quarter. Over the past three years, employers have boosted their contribuincreases in productivity have averaged tions to defined-benefit retirement plans
more than 4 percent per year, compared to make up for earlier stock market
with average increases of about IVi per- losses. The rising benefit costs have



44

91st Annual Report, 2004

likely exerted some downward pressure
on wages, which rose just 2Vi percent
over the twelve months ending in
March; the twelve-month change in the
wage component of the ECI, which was
close to 4 percent in 2000 and 2001, has
been in the range of 2l/i percent to 3 percent since late 2002.
The change in compensation per
hour in the nonfarm business (NFB)
sector—an alternative measure of hourly
compensation based on data constructed
for the NIPA—has swung widely in
recent years. Fluctuations in the value
of stock option exercises, which are
excluded from the ECI but included in
the NFB measure, likely account for
some of the differential movements in
the two series. The four-quarter change
in the NFB measure bottomed out at a
bit less than 2 percent in 2002, when the
value of exercised options was dropping; it has moved up steadily since that
time and, in the first quarter, stood at
4V2 percent—a rate not much different
from the increase in the ECI. With
productivity growth slowing to a pace
below that of NFB hourly compensation, unit labor costs rose in both the
fourth and first quarters after having
trended down over the preceding two
years.

Prices
Inflation moved higher in the first half
of 2004. After rising just IV2 percent
over the four quarters of 2003, the price
index for personal consumption expenditures (PCE) increased at an annual
rate of 3V2 percent between the fourth
quarter of 2003 and May 2004. In
that period, energy prices soared, and
increases in core consumer prices picked
up to an annual rate of 2lA percent—
more than 1 percentage point faster than
the increase in 2003. Data for the consumer price index (CPI) are available



through June and show some moderation in the core component of the series.
Over the first half of the year, the core
CPI rose at an annual rate of 2Vi percent, compared with an increase of
WA percent over the four quarters of
2003.
Reflecting the surge in crude oil
prices, PCE energy prices rose at an
annual rate of more than 25 percent in
the first quarter; they apparently posted
another outsized increase in the second
quarter. Gasoline prices increased rapidly through May as crude oil costs rose
and as price markups were boosted by
strong demand and lean inventories;
although gasoline prices have fallen on
balance since late May, they are currently nearly 30 percent above their
level at the end of last year. As for
natural gas, which can often substitute
for fuel oil in the industrial sector, spot
prices were elevated at the start of the
year, fell somewhat in February and
March, and trended up over the spring.
The higher spot prices for natural gas
this spring pushed up prices paid by
consumers through June. PCE electricity prices appear to have risen at an
annual rate of 3 percent over the first
half of the year, a pace similar to that in
2003.
Although volatile from month to
month, consumer food prices rose moderately on balance over the first half
of 2004 after having moved up in late
2003. Robust global demand is imparting upward impetus to food prices,
but U.S. producers are in the process
of boosting supply, which should help
restrain increases in retail food prices in
coming quarters.
The step-up in core PCE inflation this
year has been especially pronounced
in a few categories. In particular, prices
of motor vehicles have firmed after a
noticeable decrease in 2003. In addition,
increases in shelter costs, which were

Monetary Policy Report of July 2004
surprisingly low in 2003, are now running more in line with earlier trends.
Core inflation has also been lifted this
year by substantial increases, on balance, in a number of categories for
which prices cannot be derived from
market transactions and thus must be
imputed by the Bureau of Economic
Analysis—for example, prices of financial services provided by banks without
explicit charge. These non-market-based
prices, which were about flat in 2003,
are difficult to estimate, and the imputed
figures tend to be volatile.
A number of factors have contributed
to the run-up in core inflation this year.
Higher oil prices have doubtless raised
the cost of producing other goods and
services. So have the steep increases in
prices of non-oil commodities such as
copper and lumber, which came about as
economic activity strengthened worldwide and as industrial capacity utilization both here and abroad tightened.
Likewise, the decline in the dollar has
boosted non-oil import prices and thus
the costs of inputs for many domestic
producers. The weaker dollar has also
likely lessened the pressure on firms
facing foreign competition to hold the
line on prices—a consideration that is
probably contributing to the widespread
perception that firms' pricing power has
increased lately. Moreover, unit labor
costs have edged up recently after having declined noticeably in 2002 and
2003.
From a cyclical perspective, the sharp
upturn in commodity prices is not surprising, given the pickup in the growth
of industrial production. In fact, such
large increases in commodity prices
are typical as economic activity accelerates and capacity utilization rises—
especially for products for which the
supply is relatively fixed in the short
run. Some portion of these increases
usually proves transitory. More impor


45

tant, cyclical swings in commodity
prices tend to have only a minor effect
on overall inflation, both because they
account for a small share of total costs
and because changes in commodity
prices tend to be partly absorbed in
firms' profit margins, at least for a time.
The faster rate of inflation this year
underscores the difficulty of gauging
price pressures. Nevertheless, on the
whole, the evidence suggests that slack
remains in labor and product markets, which should be exerting some
downward pressure on inflation. The
unemployment rate—at 5Vi percent
currently—is not significantly lower
than it was through much of 2002 and
2003, when core inflation was trending
down. And despite the run-up this year,
capacity utilization in the manufacturing
sector is still below its longer-run average. In addition, the strong upward trend
in productivity is continuing to help
keep the rise in labor costs muted, and
profit margins are sufficiently wide to
give firms scope to absorb cost increases
for a while without putting undue
upward pressure on prices.
The upturn in actual inflation has
been echoed in some measures of inflation expectations. For example, according to the Michigan Survey Research
Center, the median expectation for inflation over the coming year has averaged
slightly more than 3 percent since early
spring after hovering in the area of
2Vi percent to 23A percent in 2003 and
early 2004. The median expectation for
inflation over the next five to ten years
has been running a bit below 3 percent
in recent months, a reading similar to the
figures for 2002 and 2003. According to
the Survey of Professional Forecasters
conducted by the Federal Reserve Bank
of Philadelphia, expectations of inflation over the next ten years held steady
in June at 2Vi percent. Inflation compensation over the next five years as mea-

46

91st Annual Report, 2004

Alternative Measures of Price Change
Percent

Price measure

Chain-type (Ql to Ql)
Gross domestic product
Gross domestic purchases
Personal consumption
expenditures
Excluding food and energy . . .
Fixed-weight (Q2 to Q2)
Consumer price index
Excluding food and energy . . .

2002
to
2003

2003
to
2004

1.7
2.3

1.8
1.7

2.4
1.6

1.6
1.3

2.2
1.5

2.8
1.8

NOTE. Changes are based on quarterly averages of
seasonally adjusted data.

sured by the spread between the yield
on nominal Treasury securities and their
indexed counterparts rose noticeably
during the first half of 2004. To be sure,
inflation compensation is also influenced by perceptions of inflation risk
and the secular increase in demand for
inflation-indexed debt, but the rise in
near-term inflation compensation likely
reflects, at least in part, higher inflation
expectations. Similar to the surveybased measures of longer-run inflation
expectations, inflation compensation for
the period five years to ten years ahead
was little changed on net over the first
half of the year.
Broader NIPA price measures are
available only through the first quarter,
and the four-quarter changes in these
series do not show the rise in inflation
indicated by the monthly data discussed
above. In particular, the rate of increase
in the price index for GDP over the year
ending in the first quarter was just
P/4 percent, the same as over the preceding year. The four-quarter change
in the price index for gross domestic
purchases—which is defined as the
prices paid for purchases of domestic
and imported consumption, investment,
and government goods and services—



dropped from 2V4 percent to l3/4 percent
over the same period; the deceleration
reflects mainly the effects of energy
prices, which rose even more rapidly
over the year ending in the first quarter
of 2003 than they did over the most
recent year.
U.S. Financial Markets
As 2004 opened, financial market conditions were quite accommodative, with
low corporate bond yields, narrow risk
spreads, and relatively easy terms and
standards on bank lending. Although
equity prices changed little, and interest
rates rose on balance in response to
positive economic news and expectations of a tightening of monetary policy,
financial conditions in the first half
of the year remained supportive of
economic growth. Business borrowing
nevertheless remained tentative, while
increases in the debt of the federal
government and of households were
sizable.
Interest Rates
From tnt ?nd of 2003 through the end of
March, yields on nominal Treasury coupon securities fell, on net, about 30 to
45 basis points. Although interest rates
rose immediately after the FOMC's
January meeting in response to the
Committee's decision to remove its
statement that monetary policy could
remain accommodative for "a considerable period," the increase proved to be
short lived. Weak employment reports
released in early February and early
March prompted yields to fall amid
doubts about the strength of the economic expansion. Federal funds futures
contracts at the end of March appeared
to indicate that market participants
placed small odds on a tightening of
monetary policy before late 2004, and

Monetary Policy Report of July 2004
contracts also seemed to price in only a
gradual increase in the federal funds rate
during 2005.
Interest rates backed up in the second
quarter as data releases increasingly
suggested that the economic expansion
would remain vigorous. Yields on the
two-year and ten-year nominal Treasury
notes ended the first half of the year
90 and 36 basis points higher, respectively, than at the end of 2003, as markets adjusted to the greater likelihood of
an earlier onset and more rapid pace of
monetary policy tightening. The surprisingly strong employment reports published in April and May, higher-thanexpected readings on core inflation, and
surging oil prices all spurred increases
in Treasury yields. After the release of
the employment report in May, federal
funds futures contracts priced in a hike
in the target federal funds rate at the
June FOMC meeting and a more rapid
tightening of monetary policy than had
been anticipated. With the evolving outlook for monetary policy, the volatility
of short-term interest rates implied by
option prices jumped in the first half of
the year after staying in a relatively low
range in 2003. Near-term interest rates
declined a bit after the Committee's
decision at its June meeting to raise the
intended federal funds rate 25 basis
points; the Committee's reaffirmation
that policy accommodation likely could
be removed at a "measured" pace
apparently reassured investors that a
steep rise in the federal funds rate probably was not in train.
Yields on investment-grade corporate
debt moved roughly in line with those
on comparable nominal Treasury securities over the first half of the year, producing little net change in risk spreads
from their level at the end of last year.
Spreads on speculative-grade debt over
Treasury debt declined a bit further after
having narrowed sharply during 2003



47

as the economic expansion was seen as
gathering steam.
Equity Markets
Over the first half of 2004, equity prices
were subject to the strong crosscurrents
of robust earnings reports, rising interest
rates, fluctuating fears about geopolitical developments, and sharply higher oil
prices. On balance, broad equity price
indexes at the end of June had edged
about 2Vi percent to 3XA percent above
year-end levels after having surged
25-30 percent over the course of 2003.
Over the first half, analysts raised their
estimates of profits for coming quarters;
the upward revision outstripped the
more modest increase in equity prices
and boosted the ratio of expected yearahead earnings to stock prices. With real
interest rates higher, however, the difference between the earnings-price ratio
and the real ten-year Treasury yield—
a crude measure of the equity risk
premium—changed little to remain
close to its average value over the past
two decades and above its level during
the late 1990s.
Debt and Financial Intermediation
Aggregate debt of the domestic nonfinancial sectors expanded at an annual
rate of about 8V2 percent in the first
quarter of 2004, a gain similar to last
year's increase. Debt growth in the business sector has remained subdued so far
this year, as ample internal funding has
limited the need for external finance. In
contrast, household debt has continued
to expand rapidly, spurred by an elevated pace of home purchases and cashouts from mortgage refinancing. The
large federal budget deficit led to
another sharp increase in Treasury debt
in the first half of this year. Municipal
borrowing moderated somewhat, on bal-

48

91st Annual Report, 2004

ance, in the first half of the year, as the
improving fiscal condition of state and
local governments reduced the need for
short-term borrowing to cover budget
gaps.
The growth of credit on the books of
depository institutions picked up to an
annual rate of 14 percent in the first
quarter of 2004. Financing secured by
residential real estate—including home
mortgages, home equity loans, and
mortgage-backed securities—drove the
expansion. In contrast, business loans
continued to run off, falling at an annual
rate of about 5 percent in the first half
of the year after a 10 percent drop in
2003. The deceleration was consistent
with some signs that demand for business loans was beginning to recover as
well as with an easing of standards and
terms on these loans.

weakness in money market mutual funds
and small time deposits. Given the
recent very low yields on these two
components of M2, households likely
viewed them as less attractive savings
vehicles than other assets.
International Developments

Foreign economic activity expanded in
the first half of this year at a pace only
slightly below the rapid increase in the
second half of 2003. Global trade has
been boosted by strong demand, especially from the United States and China.
The run-up in oil and commodity prices
has contributed to rising, though still
moderate, inflation across the industrial
and developing countries.
By the end of the first half of this
year, monetary policy in most major foreign economies had either tightened or
assumed a less accommodative tone.
The M2 Monetary Aggregates
Citing high rates of capacity utilization
In thefirsthalf of 2004, short-term inter- and mounting inflationary pressures, the
est rates were stable and M2 grew at an Bank of England has raised its target
annual rate of 6V2 percent—a pace that rate 100 basis points since early Novemwas roughly in line with estimates of ber. Mexico and China also have tightnominal GDP—after contracting at a ened policy. Elsewhere, including the
record rate in the fourth quarter of 2003. euro area, Canada, and Japan, central
Liquid deposits—the largest component banks most recently have kept policy
of M2—had been depressed late last unchanged after easing previously. In
year by the ebbing of last summer's general, official statements are expressmortgage refinancing boom. Mortgage ing increasing concern over the inflarefinancings tend to boost M2 as the tionary risks associated with stronger
proceeds are temporarily placed in non- economic activity and higher world
interest-bearing deposit accounts pend- energy and commodity prices.
ing disbursement of funds to the holdIn foreign financial markets, equity
ers of mortgage-backed securities. When price performance has been more mixed
refinancings slowed last year, the so far in 2004 than during the second
decline in such escrow accounts held half of 2003; sharply rising interest rates
down the growth of liquid deposits. In over the past few months have weighed
the first half of this year, M2 probably on equity valuations, damping the
received a boost from the new round of effects of an improved earnings outlook.
mortgage refinancings that followed the Since year-end, stock prices in Europe
first-quarter decline in mortgage interest and Canada have changed little, on balrates. The strength in liquid deposits ance. In contrast, rapidly improving ecowas partly offset, however, by continued nomic conditions in Japan have helped




Monetary Policy Report of July 2004
boost Japanese equity prices about
10 percent. Other Asian stock price
indexes have fallen, on average, in part
because of concerns about the possibility of an acute slowdown in China.
Mexican stocks have been bolstered by
strong earnings growth of leading Mexican communications firms and, more
generally, by the strengthening U.S.
expansion. Foreign long-term interest
rates rose rapidly in the second quarter
as new data (including from the United
States) showing faster growth and
higher inflation led market participants
to expect more-aggressive monetary
tightening. Over the first half of the
year, the spread on internationally issued
sovereign debt of emerging-market
economies over U.S. Treasuries moved
up somewhat from its very low level.
After depreciating over the previous
two years, the value of the dollar rose
slightly, on balance, in the first half of
2004. The firming of the dollar has been
attributed to perceptions by market participants that near-term monetary tightening in the United States would be
faster than such tightening abroad.
Industrial Economies
A broadly based recovery appears to
have been established in Japan over the
first half of 2004. Real GDP rose at an
annual rate of more than 6 percent in
the first quarter after an even greater
increase in the fourth quarter. Aided by
demand from China, growth of Japanese
real exports remained robust. Personal
consumption and business investment
also firmed. More-recent indicators
show that domestic strength continued
in the spring with large gains in household expenditures and improved labor
market conditions. Deflation continued
to wane in Japan. Consumer price deflation over the first half of the year was
slight, and wholesale prices increased.



49

In financial markets, the stronger economy boosted equity markets and helped
drive up the yield on the ten-year bellwether government bond to more than
PA percent from its June 2003 record
low of about Vi percent. After making
substantial sales of yen for dollars in the
first quarter, Japanese authorities ceased
intervention in mid-March. Even so, the
yen depreciated early in the second
quarter before appreciating to around
¥109 per dollar.
Economic conditions in the euro area
firmed over the first half of 2004, but
performance varied across countries,
and the region as a whole continues to
lag the global upturn. Real GDP in the
euro area increased at an annual rate of
2VA percent in the first quarter; output
in France, Spain, and several smaller
member countries rose relatively briskly,
while growth in Germany and Italy
was less robust. In the first quarter,
domestic demand firmed noticeably,
except in Germany, where growth was
due entirely to a spike in exports. German consumer spending remains anemic, held down by a weak labor market
and low consumer confidence. Euroarea indicators for the second quarter
initially were upbeat, but more-recent
data have been mixed. Labor markets
have yet to benefit from the recovery,
and the average unemployment rate in
the region edged up to 9 percent in the
spring. Inflation for the euro area over
the twelve months ending in June was
near 2x/2 percent, a rate above the European Central Bank's medium-term goal
of less than, but close to, 2 percent.
Excluding energy, food, alcohol, and
tobacco, prices rose slightly less than
2 percent over the same period.
Economic expansion in the United
Kingdom continued unabated over the
first half of 2004. Labor markets tightened further; the unemployment rate
edged down to its lowest level in almost

50

91st Annual Report, 2004

three decades, and labor earnings posted
solid gains. Despite the strong economy, consumer price inflation over the
twelve months ending in June was
IV2 percent, remaining below the central
bank's official target rate of 2 percent.
Conditions in the U.K. housing market,
however, remained red hot, with doubledigit price increases, high levels of
household mortgage and consumer
borrowing, and sizable withdrawals of
home equity.
The Canadian economy picked up
steam in the first half of 2004 after a
year plagued with difficulties including
SARS, mad cow disease, and a regional
power outage. Sizable gains in consumption and investment boosted output
in the first quarter, and indicators are
pointing to continued good performance
in these sectors. Export growth was
strong, as the robust economic performance of the United States appears to
have outweighed the negative effect of
Canadian dollar appreciation on trade.
The unemployment rate was relatively
stable over the first half, and employment bounced back in the second quarter from a first-quarter lull. Consumer
price inflation decreased early in the
year, but energy costs helped drive up
the rate to 2V2 percent over the twelve
months ending in June. Prices excluding
food, energy, and indirect taxes have
remained more subdued, rising slightly
less than IV2 percent over the same
period.
Emerging-Market Economies
Estimates suggest that real GDP in
China surged in the first quarter with
continued outsized gains in fixed-asset
investment. Fears of overinvestment,
particularly in the steel, cement, and aluminum industries, led Chinese officials
to intensify their tightening measures
early in the second quarter. These mea


sures included increases in reserve
requirements and in some interest
rates as well as stricter criteria for the
approval of investment projects. A sharp
slowdown in estimated real GDP for the
second quarter suggests that these steps
are working. Despite the recent slowing
in growth, Chinese exports and imports
soared in the first half of the year, and
trade was close to balanced.
Growth in the other Asian emergingmarket economies slowed only moderately in the first quarter from the fast
pace at the end of last year. Exports,
which continued to be the driving force
behind that growth, were fueled by
Chinese demand as well as by the
recovery in the global high-tech market
and stronger world demand overall.
Consumer demand generally rose across
the region with the notable exception of Korea, where high levels of consumer debt are weighing on spending. Although still only moderate,
inflation across the Asian emergingmarket economies is beginning to rise
as stronger aggregate demand takes
hold and higher energy and commodity prices pass through to prices more
generally.
The Mexican economy has been propelled this year by strong demand from
the United States. Gains have been
broadly based, with sharp increases in
industrial production, exports, construction, and retail sales. Employment in
the industries most closely linked to
U.S. trade also has started to increase.
Responding to a rise in twelve-month
inflation to slightly above its 2 percent
to 4 percent target range, the Bank of
Mexico has tightened policy several
times so far this year. Elevated oil prices
boosted the Mexican public-sector fiscal
surplus to a record high during the first
five months of the year and facilitated
an increase in federal transfers to state
governments.

Monetary Policy Report of July 2004
In Brazil, GDP grew robustly in the
first quarter, and indications are that
economic activity continued to expand
in the second quarter with support from
strong external demand. Job growth has
been robust, although unemployment
has remained high. Inflation, however,
continues to concern authorities. Asset
prices weakened earlier this year, in part
because of rising global interest rates
but also because of market participants'
unease about the direction of structural
and fiscal reforms; since then, asset
prices have partially rebounded.




51

The recovery in Argentina has continued at a rapid pace in recent quarters,
but limited investment in the energy
sector, reflecting a lack of structural
reforms, has forced the government to
import electricity, natural gas, and fuel
oil from neighboring countries. Creditors have shown little enthusiasm for
the country's latest debt restructuring
plan, and the federal government faces
difficult challenges in normalizing its
international financial situation and
reforming its fiscal relations with the
provinces.
•

Federal Reserve Operations




55

Consumer and Community Affairs
consumer financial products and services at the request of Congress.
During 2004, the Board issued final
rules implementing provisions of the
• writing and interpreting regulations to Fair and Accurate Credit Transactions
implement federal laws that protect Act, an act that significantly amends
the Fair Credit Reporting Act. The
and inform consumers,
Board also issued guidance on the stan• supervising state member banks to dards it and the Federal Deposit Insurensure their compliance with the ance Corporation (FDIC) will use when
determining whether to take supervisory
regulations,
or enforcement actions in cases involv• investigating complaints from the ing the unfair and deceptive trade pracpublic about state member bank com- tices provisions of the Federal Trade
Commission Act. The Board produced
pliance with regulations, and
two reports for Congress summarizing
• promoting community development in the findings of Board studies on the
disclosure of fees related to debit card
historically underserved markets.
purchases and on the ability of consumThese responsibilities are carried out by ers to avoid receiving unsolicited writthe members of the Board of Governors, ten offers of credit or insurance. In addithe Board's Division of Consumer and tion, the Board revised its Truth in
Community Affairs, and the consumer Lending Act regulation and the associand community affairs staff of the Fed- ated commentary, issued interim final
rules incorporating technical changes
eral Reserve Banks.
to the regulation implementing the
Community Reinvestment Act, raised
Implementation of Statutes
certain thresholds that would trigger
Designed to Inform and Protect
additional requirements under the Home
Consumers
Ownership and Equity Protection Act,
The Board of Governors writes regula- and issued a final rule revising the distions to implement federal laws involv- closure tables that the federal finaning consumer financial services and fair cial regulatory agencies use to publicly
lending. The Board revises and updates release Home Mortgage Disclosure Act
these regulations to address the intro- data reported by covered institutions.
duction of new products, to implement
legislative changes to existing laws, and
to address problems consumers may Fair and Accurate Credit
encounter in their financial transactions. Transactions Act
To interpret and clarify the regulations, In December 2003, the President signed
Board staff issues commentaries and the Fair and Accurate Credit Transother guidance. In addition, the staff actions Act (the FACT Act) into law.
may undertake studies on aspects of The FACT Act amends the Fair Credit

Among the Federal Reserve's responsibilities in the areas of consumer and
community affairs are




56

91st Annual Report, 2004

Reporting Act (FCRA) in numerous established December 31, 2003, as the
respects, including making permanent effective date for the preemption proan FCRA provision that preempts states visions of the FACT Act, as well as for
from enacting laws in seven areas provisions authorizing the agencies to
addressed by the FCRA. The FACT Act adopt rules or take other actions to
also includes provisions to address iden- implement the FACT Act. The final joint
tity theft, the accuracy of consumer rules the agencies adopted in February
reports, the duties of furnishers of infor- 2004 included the same schedule of
mation, the ability of consumers to opt effective dates contained in the interim
out of receiving marketing solicitations rules. The Board's final rule amended
from an organization when the solicita- its Regulation V, which implements the
tion is based on information provided FCRA.
to that organization by its affiliate, and
Also in December 2003, the Board
the ability of creditors to obtain or and the FTC had issued for comment
use medical information in connection proposed joint rules that would establish
with determining credit eligibility. (The a schedule of effective dates for other
FACT Act also established the Finan- provisions of the FACT Act that did not
cial Literacy and Education Commis- contain effective dates. After reviewing
sion. See "Promotion of Community the comments on the proposal, the agenEconomic Development in Historically cies, in the February 2004 joint final
Underserved Markets" later in this rules, established March 31, 2004, as
chapter.)
the effective date for provisions of the
The FACT Act requires the Board to FACT Act that did not require signifiissue regulations or guidelines to imple- cant changes to business procedures. For
ment various provisions of the statute. those FACT Act provisions that would
In 2004, the Board issued three final likely entail significant changes to busirules: one pertaining to effective dates ness procedures, the agencies estabfor certain provisions of the FACT Act, lished December 1, 2004, as the effecone pertaining to the furnishing of nega- tive date, to allow a reasonable time
tive information to consumer reporting for the industry to establish systems that
agencies, and one pertaining to the comply with the statute.
disposal of consumer information. The
Board is currently working on several Furnishing of Negative Information
additional regulations or guidelines
In June, the Board issued a final rule
required by the FACT Act.
amending Regulation V to add model
notices that financial institutions may
Effective Dates
use to comply with the notice requireIn February, the Board and the Federal ment for furnishing negative informaTrade Commission (FTC) issued joint tion to nationwide consumer reportfinal rules to implement section 3 of the ing agencies. Under section 217 of the
FACT Act, which required these agen- FACT Act, a financial institution that
cies to establish effective dates for pro- furnishes negative information about
visions of the act that did not already credit extended to a customer (such as
contain specific effective dates. The information on a customer's delinquenBoard and the FTC had jointly adopted cies or late payments) to a nationwide
interim rules in December 2003 that consumer reporting agency is required



Consumer and Community Affairs
to provide a clear and conspicuous written notice to the customer about furnishing negative information. The required
notice is a one-time notice, and a financial institution may provide the notice
before, or no later than thirty days after,
furnishing the negative information to a
nationwide consumer reporting agency.
Section 217 of the FACT Act became
effective on December 1, 2004.
The FACT Act required the Board
to issue a concise model form not to
exceed thirty words that institutions
may, but are not required to, use to
comply with the notice requirement. The
Board's final rule added two model
notices to Regulation V. One notice may
be used by financial institutions that
give the notice before furnishing negative information to a nationwide consumer reporting agency. The other may
be used by financial institutions that
give the notice after furnishing negative
information to a nationwide consumer
reporting agency. The Board also
amended Regulation V to incorporate a
statutory safe harbor relating to the use
of the model notices. The safe harbor in
the FACT Act provides that a financial
institution will be considered to be in
compliance with the notice requirement
if the institution uses the model notice
issued by the Board, or if it uses the model
notice and rearranges the format. The
Board also provided additional guidance
about using the model notices, including
guidance on how financial institutions
may rearrange the format of the notices
without losing the safe harbor from liability that the model notices provide.
Disposal of Consumer Information
In December, the Board along with the
other federal financial regulatory agencies issued interagency final rules to
require financial institutions to adopt



57

measures for properly disposing of consumer information derived from consumer reports (such as credit reports).
The agencies' final rules implement section 216 of the FACT Act by amending
the Interagency Guidelines Establishing Standards for Safeguarding Customer Information (retitled the Interagency Guidelines Establishing Standards for Information Security), which
were adopted in 2001 (as appendix D-2
of Regulation H). The National Credit
Union Administration, the FTC, and
the Securities and Exchange Commission adopted similar standards for their
institutions.
The interagency guidelines currently
require financial institutions to protect
customer information by implementing
information security programs. An institution's information security program
must include measures for the proper
disposal of "customer information."
Such information is generally defined as
nonpublic personal information about a
"customer," namely, an individual who
obtains a financial product or service to
be used primarily for personal, family,
or household purposes, and who has
a continuing relationship with the financial institution. The final rules amend
the interagency guidelines to require institutions to also include measures for
the proper disposal of "consumer information," which is generally defined as
information that is a consumer report
(such as a credit report), or that is
derived from a consumer report about
an individual (regardless of whether that
individual is a customer), and that is
maintained or otherwise possessed by,
or on behalf of, the institution for a
business purpose. The final rules will
take effect on July 1, 2005; however,
financial institutions do not need to
modify existing contracts with their service providers until July 1, 2006.

58

91st Annual Report, 2004

Interagency Guidance on Unfair
and Deceptive Practices
In March, the Board and the FDIC
jointly issued a statement outlining the
standards the agencies will use to determine when state-chartered banks are
engaging in unfair or deceptive trade
practices. Such practices are illegal
under section 5 of the Federal Trade
Commission Act. The Board and the
FDIC will apply these standards when
weighing the need to take supervisory or
enforcement actions and when seeking
to ensure that unfair or deceptive practices do not recur. The statement also
provides best practices and general guidance to state-chartered banks to help
them manage risks relating to unfair or
deceptive acts or practices, as well as to
help them avoid engaging in such acts
or practices. The best practices address
some of the business areas that have
the greatest potential for unfair or
deceptive acts and practices: advertising and solicitation, servicing and collections, and managing and monitoring employees and third-party service
providers.

Board Study of the Disclosure of
Point-of-Sale Debit Fees under the
Electronic Fund Transfer Act
In November, the Board issued a report
summarizing the results of its study of
the disclosure of fees related to debit
card purchases. The study focused specifically on the debit fees that a financial
institution may impose when a customer
engages in a point-of-sale (POS) debit
transaction and provides a personal
identification number (PIN). These fees
are referred to as "PIN fees." Some
members of the U.S. Senate Committee
on Banking, Housing, and Urban Affairs
requested the study because they were
concerned that consumers may be



unaware of the existence or the source
of PIN fees. The primary conclusions of
the study address four principal areas:
(1) the prevalence of PIN fees; (2) the
degree of compliance by depository
institutions with current disclosure
requirements under the Electronic Fund
Transfer Act (EFTA), as implemented
by the Board's Regulation E; (3) the
adequacy of existing disclosures and the
likely benefits and costs of new requirements for disclosure statements; and
(4) the feasibility of real-time disclosure
(namely, disclosing PIN fees at the
time of a transaction on a POS terminal
display).
Prevalence of PIN Fees
The Board estimated that in 2004 about
15 percent of all customers with debit
cards had accounts that were subject to
PIN fees. Because customers can
modify their behavior to avoid PIN fees
(for example, by using a signature
instead of a PIN to secure a transaction), the fraction of customers with
debit cards who actually pay these
fees is likely between 10 percent and
15 percent.
Degree of Compliance by
Depository Institutions
The EFTA and the Board's Regulation E
require depository institutions to disclose certain fees to consumers on the
initial disclosure of account terms, on
change-in-terms notices, and on periodic statements of account activity. The
Board found that more than 95 percent
of depository institutions satisfy all the
current regulatory requirements for any
electronic funds transfer, and that an
even higher percentage satisfy the specific requirements for the disclosure of
PIN fees at the point of sale.

Consumer and Community Affairs
Adequacy of Existing Disclosures
Consumer and other data suggest that
the PIN fee information in initial disclosures and in change-in-terms notices
is of limited value to consumers. Some
consumers first learn of debit fees from
their periodic statements, and many
institutions' periodic statements do not
identify the recipient of a debit fee.
These findings suggest that improving
periodic statements, and potentially
initial disclosures and change-in-terms
notices, could be a relatively low-cost
way to provide consumers with better
information about the PIN fees their
depository institutions impose.
Feasibility of Real-Time Disclosures
The Board found that disclosing debit
fees in real time at a POS terminal (for
example, showing fee information on a
POS terminal display before a customer
commits to a method of payment) would
involve the most extensive changes to
the infrastructure of the payments system. Although such disclosures would
improve consumers' knowledge of debit
fees, these improvements would be
achieved at extremely high costs.
Board Study of Prescreened
Solicitations under the Fair Credit
Reporting Act
In December, the Board issued a report
to Congress summarizing the Board's
study of unsolicited written offers of
credit or insurance in which the sender
of the offer has prescreened the recipients for creditworthiness and suitability on the basis of consumer credit
records in the files of consumer reporting agencies. The FCRA allows consumer credit records to be used for these
so-called prescreened solicitations. In
section 213(e) of the FACT Act, Con


59

gress directed the Board to study the
ability of consumers to avoid (or opt out
of) receiving written offers of credit or
insurance in connection with transactions the consumer did not initiate. The
Board also studied the potential effect
on consumers of any further restrictions
on providing them with such written
offers of credit or insurance. In particular, Congress directed the Board to
address the following five issues: (1) the
availability to consumers of opt-out
mechanisms, that is, methods for consumers to opt out of having their names
and other information used for prescreened solicitations; (2) the extent to
which consumers use existing opt-out
mechanisms; (3) the benefits to consumers of receiving written offers; (4) the
costs to consumers of receiving written
offers, or any adverse effects on consumers from receiving the offers; and
(5) the potential effects on certain factors, such as the cost and availability
of credit, if further restrictions were
imposed on the ability of creditors and
insurers to make written offers.
Availability and Use of
Opt-Out Provisions
The Board found that currently about
6 percent of consumers with credit
records have opted out of receiving prescreened written offers of credit or insurance. Further, most consumers who elect
to opt out use the statutory mechanisms
provided in section 604 of the FCRA,
which governs the use of prescreening
techniques. Beyond that statutory provision, industry groups and individual
companies have voluntarily established
ways for consumers to eliminate their
name from the listings companies use
to make prescreened written offers of
credit or insurance. These voluntary
mechanisms are important in the marketplace; an estimated one-third of the

60

91st Annual Report, 2004

individuals on the opt-out lists of the
national consumer reporting agencies
used a voluntary mechanism to request
that their personal information not be
used for prescreened offers.
Benefits and Costs of Receiving
Written Offers

The Board found that prescreened
written solicitations for credit and insurance carry some potential costs for consumers, including the inconvenience of
receiving unwanted mail, the possibility of identity theft, the possible loss of
privacy, and the potential for additional
debt burden. Although these are important considerations, the Board did not
find that restricting written offers of
credit or insurance would mitigate these
problems; the alternatives to prescreening may even exacerbate some of them.

The Board found that the benefits to
consumers of receiving prescreened
written offers of credit or insurance are
significant. Because prescreened offers
must be "firm offers" of credit or insurance, a consumer generally receives Potential Effects of
offers for only those products for which Further Restrictions
he or she is likely qualified. Consequently, consumers shopping for credit The Board found that written offers of
or insurance are able to quickly iden- credit or insurance sent directly to contify products suitable for them. These sumers have the potential to increase
prescreened offers also contain pricing competition in the market for those
and product information, often in a form consumer financial services. The prithat allows a consumer to compare the mary benefits of competition are lower
terms of products offered with those of prices and an increased availability of
accounts he or she already holds—and the product or service in question. As a
with products offered by other compa- result, the Board concluded that actions
nies. Thus, the widespread availability undertaken to restrict the ability of lendof pricing and product information in ers and insurers to provide written offers
prescreened offers helps to make the of credit or insurance to consumers
market for these products more com- would, on balance, result in a less competitive, an advantage that benefits all petitive marketplace and thus relatively
higher prices and the reduced availabilconsumers.
For creditors and insurers, the ability ity of credit or insurance.
to tailor offers of credit or insurance
to consumers' pricing and product Other Regulatory Actions
preferences at a relatively low cost
enhances competition and marketing The Board also took the following reguefficiency. Moreover, by having access latory actions during 2004:
to credit record information for the purposes of prescreening, creditors and • In March, the Board revised Reguinsurers are better able to control certain
lation Z (Truth in Lending) and its
risks related to offering these products.
official staff commentary to add an
In a competitive market, cost savings
interpretative rule of construction
for creditors and insurers translate into
clarifying that the word "amount"
lower prices and wider credit and insurreferred to a numerical amount. The
ance availability for consumers, possirevisions also provided guidance
bly benefiting traditionally underserved
on consumers' exercise of rescission
consumers.
rights for certain home-secured loans.



Consumer and Community Affairs
In July, the Board and the other
federal financial regulatory agencies
issued joint interim final rules containing technical changes to their regulations implementing the Community Reinvestment Act (CRA). The
changes conform those regulations
to changes in (1) the Standards for
Defining Metropolitan and Micropolitan Statistical Areas, published by the
U.S. Office of Management and Budget in December 2000; (2) the census
tracts designated by the U.S. Bureau
of the Census; and (3) the Board's
Regulation C, which implements
the Home Mortgage Disclosure Act
(HMDA). The joint interim rules did
not make substantive changes in the
requirements of the CRA regulations.
The Board's regulation implementing
the CRA is Regulation BB.

(

61

• In December, the Board raised to
$34 million the exemption threshold
for depository institutions required
to collect data in 2005 under HMDA
and Regulation C. As prescribed by
the statute, the increased threshold
reflects changes in the consumer price
index.
Economic Effects of the
Electronic Fund Transfer Act

As required by the Electronic Fund
Transfer Act (EFTA), the Board monitors the effects of the act on the costs of
compliance to financial institutions and
the benefits of the act to consumers.
According to data from the most
recent triennial Survey of Consumer
Finances (conducted in 2001), approximately 88 percent of U.S. families in
that year used or had access to one or
In August, the Board amended the more EFT services—for example, an
official staff commentary to Regula- ATM card, a debit card, direct deposit,
tion Z to raise from $499 to $510 the or direct payment—up from approxitotal dollar amount of points and fees mately 85 percent in 1998. ATMs were
that triggers additional requirements the most widely used EFT service;
for certain mortgage loans under the approximately 70 percent of U.S. famiHome Ownership and Equity Protec- lies had an ATM card. In 2003, the
tion Act. As prescribed by the statute, number of ATM transactions per month
the increased amount (effective Janu- averaged approximately 902 million,
ary 2005) reflects changes in the con- and the number of installed ATMs
sumer price index.
rose nearly 5.4 percent from 2002, to
371,000.
In December, the Board issued a final
Direct deposit was almost as widely
rule revising disclosure tables the used. About 67 percent of U.S. families
Board and the other federal financial had funds deposited directly into their
regulatory agencies use to publicly checking or savings account. Use of the
release data collected by lenders service is particularly common in the
under HMDA and the Board's Regu- public sector; during fiscal year 2004,
lation C. In particular, the final rule approximately 75 percent of all governrevised the formats for some of the ment payments were made using EFT,
existing disclosure tables, deleted one including 81 percent of Social Security
set of existing tables, and added new payments, 98 percent of federal salary
tables. These changes reflect the and retirement payments, and 45 percent
Board's 2002 revisions to Regula- of federal income tax refunds.
tion C that required lenders to collect
About 47 percent of U.S. families use
new data beginning January 1, 2004.
debit cards, which consumers can use at




62

91st Annual Report, 2004

merchant terminals to pay for purchases.
Approximately 16.2 billion debit card
transactions took place in 2003, an
increase of approximately 21 percent
from the previous year's volume. Direct
payment is a less widely used EFT payment mechanism; about 40 percent of
U.S. families have payments automatically deducted from their accounts.
The incremental costs associated with
the EFTA are difficult to quantify
because no one knows how industry
practices would have evolved in the
absence of statutory requirements. The
benefits of the EFTA are also difficult to
measure, as they cannot be isolated from
consumer protections that would have
been provided in the absence of regulation. The available evidence suggests no
serious consumer problems with EFTA.
(See "Agency Reports on Compliance
with Consumer Protection Laws" later
in this chapter.)

Supervision for Compliance
with Consumer Protection and
Community Reinvestment Laws
Activities Related to the
Community Reinvestment Act
The Community Reinvestment Act
(CRA) requires that the Board and other
banking agencies encourage financial
institutions to help meet the credit needs
of the local communities in which they
do business, consistent with safe and
sound business practices. To carry out
this mandate, the Federal Reserve
• examines state member banks to
assess their compliance with the CRA,
• analyzes applications for mergers and
acquisitions by state member banks
and bank holding companies in relation to CRA performance, and



• disseminates information on community development techniques to bankers and the public through Community
Affairs Offices at the Reserve Banks.
Examinations for Compliance
with the CRA
The Federal Reserve assesses and rates
the CRA performance of state member banks in the course of examinations conducted by staff at the twelve
Reserve Banks. During the 2004 reporting period, the Reserve Banks conducted 242 CRA examinations. Of the
banks examined, 43 were rated "outstanding" in meeting community credit
needs, 198 were rated "satisfactory,"
none was rated "needs to improve," and
1 was rated as being in "substantial
noncompliance."1
Analysis of Applications for
Mergers and Acquisitions in
Relation to the CRA
Under the Bank Holding Company Act
and the Bank Merger Act, the Board
considers applications for which CRA
protests are raised or significant issues
exist regarding CRA or consumer
compliance. Other cases are decided
by the Reserve Banks under delegated
authority.
During 2004, the Board of Governors
considered applications for several significant banking mergers and acquisitions. The Board sponsored four public meetings in connection with two of
these applications. For the application
by Bank of America Corporation (Charlotte, North Carolina) to acquire Fleet
Financial Group, Inc. (Boston, Massachusetts), public meetings were held at
the Federal Reserve Banks of Boston
and San Francisco. Two public meetings
1. The 2004reportingperiod was July 1, 2003,
through June 30, 2004.

Consumer and Community Affairs

The public submitted comments on
each of these applications. Most of the
commenters expressed concerns that
lending to lower-income communities
and populations was insufficient and that
the institutions had failed to address the
convenience and needs of affected communities. Commenters also raised issues
relating to potentially abusive lending
practices involving subprime and payday lenders; the potentially adverse
effects of branch closings; the failure of
minority-owned and -operated institutions to adequately serve other minority
populations; the loss of local ownership;
institutions' alleged attempts to circumvent state consumer laws; and alleged
fraud.
In addition to considering these applications for significant banking mergers
An application by New Alliance Bane- and acquisitions, the Board acted on
shares (New Haven, Connecticut) to thirteen other bank and bank holding
acquire New Haven Savings Bank company applications that involved pro(New Haven, Connecticut) was tests by members of the public concerning the performance under the CRA
approved in February.
of insured depository institutions. The
Three applications by National City System also approved one application
Corporation (Cleveland, Ohio) were that involved an institution having a
approved in March, June, and August. CRA rating of lower than satisfactory
and another thirty-three applications
An application by Regions Financial involving other issues related to CRA,
Corporation (Birmingham, Alabama) fair lending, or compliance with conto acquire Union Planters Corporation sumer credit protection laws.2
(Memphis, Tennessee) was approved
in June.
Other Consumer Compliance
Activities
An application by Royal Bank of
Scotland and Citizens Financial Group The Division of Consumer and Com(both in Providence, Rhode Island) to munity Affairs supports and oversees
acquire Charter One Financial Group, the supervisory efforts of the Federal
Inc. (Cleveland, Ohio), was approved Reserve Banks to ensure that consumer
in August.
protection laws and regulations are fully
and fairly enforced. Division staff proAn application by Wachovia Corpo- vide guidance and expertise to the
ration (Charlotte, North Carolina) to Reserve Banks on consumer protection
acquire SouthTrust Corporation (Birmingham, Alabama) was approved in
2. In addition, five applications involving other
October.
CRA or compliance issues were withdrawn.

were held at the Federal Reserve Banks
of New York and Chicago in connection
with the merger of J.P. Morgan Chase &
Company (New York, New York) with
Bank One Corporation (Chicago, Illinois). Members of the public submitted
numerous comments on these two applications during the thirty-day comment
period allocated for such applications.
The public meetings, however, allowed
the public to enter oral or written testimony into the record of information
considered by the Board. The Board
approved the application by Bank of
America Corporation in March and the
application by J.P. Morgan Chase &
Company in June. Several other significant applications are summarized
below.
•

•

•

•

•

63




64

91st Annual Report, 2004

regulations, examination and enforcement techniques, examiner training, and
emerging issues. They develop and
update examination policies, procedures, and guidelines, and review
Reserve Bank supervisory reports and
work products. They also participate in
interagency activities that promote uniformity in examination principles and
standards.
Examinations are the Federal Reserve's primary means of enforcing
compliance with consumer protection
laws. During the 2004 reporting period,
the Reserve Banks conducted 329 consumer compliance examinations—305
of state member banks and 24 of foreign
banking organizations (FBOs).3
The Board periodically issues guidance for Reserve Bank examiners on
consumer protection laws and regulations. In addition to updating examination procedures for a number of regulations in concert with the other federal
financial institution regulatory agencies, the Board revised the procedures
that Federal Reserve consumer compliance examiners are to use when assessing whether a compliance or CRA
examination of an FBO or specialpurpose bank is necessary. Further, the
Board updated its risk-focused supervision program to reflect new regulations
and the level of risk associated with
existing regulations. The Board also
completed a pilot program for an interdisciplinary electronic banking profile
to identify and monitor risk factors asso3. The foreign banking organizations examined
by the Federal Reserve are organizations operating
under section 25 or 25A of the Federal Reserve
Act (Edge Act and agreement corporations) and
state-chartered commercial lending companies
owned or controlled by foreign banks. These institutions are not subject to the Community Reinvestment Act and typically engage in relatively few
activities that are covered by consumer protection
laws.



ciated with the rapid changes in electronic banking.
Fair Lending
The Board has a responsibility to ensure
that the banks under its jurisdiction comply with the federal fair lending laws—
the Equal Credit Opportunity Act
(ECOA) and the Fair Housing Act. The
ECOA prohibits all creditors from discriminating against any applicant, in
any aspect of a credit transaction, on the
basis of race, color, religion, national
origin, sex, marital status, or age. In
addition, creditors may not discriminate
against an applicant because the applicant receives income from a public
assistance program or has exercised,
in good faith, any right under the Consumer Credit Protection Act. As provided by the ECOA, the Board enacted
Regulation B to fully implement the act
for the banks under its jurisdiction and
periodically reviews that regulation
and modifies it as needed. Congress
assigned responsibility for administrative enforcement of the ECOA to the
Board for banks under its jurisdiction, to
other regulators for creditors that they
regulate, and to the Federal Trade Commission for all other creditors.
The Fair Housing Act covers credit
for the purchase, construction, improvement, repair, or maintenance of a dwelling. Under the act, it is unlawful for
a creditor to deny any form of financial
assistance, or discriminate in fixing the
amount, interest rate, or any other terms
or conditions of any financial assistance,
on the basis of race, color, religion,
national origin, handicap, familial status, or sex.
The ECOA also obligates the Board
and other agencies with enforcement
responsibilities under the act to refer
any pattern or practice of ECOA violations to the Department of Justice

Consumer and Community Affairs
(DOJ). When a violation of the ECOA
also violates the Fair Housing Act, the
matter may be referred to the Department of Housing and Urban Development. To promote consistency in how
fair lending issues are analyzed throughout the System, Division of Consumer
and Community Affairs staff coordinate
the investigation of potential fair lending violations with Reserve Bank staff
and develop recommendations for the
division director regarding whether
referral is necessary or appropriate.
During 2004, division staff received
and analyzed six reports from Reserve
Banks regarding possible referral matters. Four of these reports had to do with
potentially discriminatory underwriting
standards affecting applicants on the
basis of marital status or sex; the other
two matters involved apparent discriminatory loan-pricing practices on the
basis of marital status. In two of the six
cases, the Board determined that referrals were not warranted; two cases were
referred to the DOJ; and two cases are
pending.
In early 2004, division staff, together
with staff from the Board's Legal Division and the Federal Reserve Bank of
New York, negotiated a consent order
to finalize an investigation of a major
holding company subsidiary. The order
addressed issues raised during the investigation, including regulatory compliance violations, the making of loans that
were unsafe and unsound and that borrowers could not afford, and misleading
and incorrect statements made by lending personnel to examiners. In addition
to a substantial civil money penalty, the
consent order provided for extensive
corrective measures, including the payment of restitution to victims.
The ECOA prohibits not only practices that constitute intentional discriminatory treatment of credit applicants
on a prohibited basis but also practices



65

that have an unintended but unjustified
discriminatory "disparate impact." In
2004, division staff determined that a
lender's adoption of a "housing proxy"
debt payment constituted a disparateimpact violation of the ECOA on the
basis of the prohibited characteristic of
age. The lender had been adding a multihundred-dollar payment to the monthly
debt of persons who applied for credit
but reported no housing cost on their
loan application—and for whom no
housing cost appeared on their credit
bureau report. This proxy practice was
shown to adversely affect a disproportionate number of younger applicants,
and the lender failed to demonstrate an
adequate "business-necessity" justification for its adoption of the proxy.
Since 1994, the Federal Reserve has
used a two-stage statistical regression
program to help assess fair lending compliance by high-volume mortgage lenders. The program uses reported HMDA
data for a stage one analysis to identify
banks having significant disparities in
their loan-denial rates for loan applications submitted by members of a protected class and those submitted by
members of a nonprotected class; the
program then targets these banks for a
stage two analysis that considers extensive additional information taken from
a sample of a bank's loan files. The
program produces statistically reliable
results, even in cases in which the number of denied applicants in a protected
class is small.
Flood Insurance
The National Flood Insurance Act
imposes certain requirements on loans
secured by buildings or mobile homes
located in, or to be located in, areas
determined to have special flood hazards. Under the Federal Reserve's Regulation H, which implements the act, state

66

91 st Annual Report, 2004

member banks in general are prohibited
from making, extending, increasing,
or renewing any such loan unless the
building or mobile home and any personal property securing the loan are covered by flood insurance for the term of
the loan. The act requires the Federal
Reserve to impose civil money penalties
when it finds a pattern or practice of
violations of the regulation. The civil
money penalties are turned over to
the Federal Emergency Management
Agency for deposit into the National
Flood Mitigation Fund.
During 2004, the Board imposed civil
money penalties on three state member banks. The penalties, which were
assessed via consent orders, ranged from
$3,250 to $10,000.
Coordination with
Other Federal Banking Agencies
The member agencies of the Federal
Financial Institutions Examination
Council (FFIEC) develop uniform
examination principles, standards, procedures, and report formats.4 In 2004,
the FFIEC issued revised examination
procedures for determining compliance
with the fair lending provisions of Regulation B (which implements the Equal
Credit Opportunity Act), the Homeowners Protection Act, and the new subpart D of Regulation CC. Subpart D
implements the Check Clearing for the
21st Century Act, or Check 21. (Regulation CC continues to implement the
Expedited Funds Availability Act.) In
addition to issuing revised examination
procedures to implement Check 21,
staff from the FFIEC member agencies
4. The FFIEC member agencies are the Board
of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Office
of the Comptroller of the Currency, the Office of
Thrift Supervision, and the National Credit Union
Administration.



developed a Check 21 web site to provide examiners and the financial industry with educational tools, reference
materials, and answers to frequently
asked questions (www.ffiec.gov/exam/
check21).
The FFIEC also issues guidance to
the agencies' consumer compliance
examination staff and to supervised
financial institutions. To ensure that
CRA performance evaluations are comprehensive and include facts and data
to support the evaluation results, the
FFIEC in 2004 developed interagency
guidance on examiners' use of data
tables in CRA evaluations. Additionally,
the FFIEC member agencies developed
interagency guidance on overdraft protection programs, which was released
for public comment in 2004. Finally,
in response to a review of preliminary
2004 HMDA data submissions, the
FFIEC issued guidance to HMDA data
reporters regarding proper collection
and reporting of the new data fields
being collected for the first time in 2004.
The Board and the FDIC issued joint
guidance outlining standards the two
agencies will consider when determining whether specific acts or practices
at state-chartered banks are unfair or
deceptive. The Board, the OCC, and the
FDIC also updated the host-state loanto-deposit ratios used to determine compliance with section 109 of the RiegleNeal Interstate Banking and Branching
Efficiency Act of 1994.
Training for Bank Examiners
Ensuring that financial institutions comply with laws that protect consumers
and encourage community reinvestment
is an important part of the bank examination and supervisory process. As the
number and complexity of consumer
financial transactions grow, training for
examiners of the state member banks for

Consumer and Community Affairs

67

which the Federal Reserve has supervisory responsibility becomes even more
important. The consumer affairs curriculum comprises courses on various consumer protection laws, regulations, and
examining concepts. In 2004, these
courses were offered in eleven sessions
to more than 225 Federal Reserve consumer compliance examiners.
Board and Reserve Bank staff regularly review the core curriculum for
examiner training, updating subject matter and adding new elements as appropriate. During 2004, staff conducted
curriculum reviews for two courses to
incorporate technical changes in policy
and laws, along with changes in instructional delivery techniques. The two
courses reviewed were

In 2004, the consumer affairs function
added a new course to the core curriculum, Consumer Affairs Risk-Focused
Examination Techniques. The course is
designed to enhance examiners' analytical, decisionmaking, and leadership
skills.
In addition to providing core training,
the examiner curriculum emphasizes the
importance of continuing professional
development. Opportunities for continuing development include special projects
and assignments, self-study programs,
rotational assignments, the opportunity
to instruct at System schools, and mentoring programs.

• Community Reinvestment Act Examination Techniques. Equips assistant
examiners and others to write the performance evaluation for the CRA portion of a consumer compliance bank
examination.

The Home Mortgage Disclosure Act
(HMDA) requires that mortgage lenders
collect and make public certain data
about their home purchase, home
improvement, and refinancing loan
transactions. A depository institution
generally is covered by the act if (1) it is
located in a metropolitan statistical area,
(2) it met the asset threshold at the end
of the preceding calendar year (for 2002
and 2003, assets of more than $32 million; for 2004, assets of more than
$33 million), and (3) it originated at
least one home purchase loan (or refinancing) in the preceding calendar year.
A for-profit mortgage company is covered if (1) it has offices in a metropolitan statistical area, (2) it had assets of
more than $10 million (when combined
with the assets of any parent company)
at the end of the preceding calendar
year or it originated 100 or more
home purchase loans or refinancings in
the preceding calendar year, and (3) in
the preceding calendar year, its home
purchase loan originations and refinancings accounted for at least 10 percent of its total loans by dollar vol-

• Commercial Lending Essentials for
Consumer Affairs. Equips assistant
examiners with the basic techniques
to underwrite and price commercial
loans.
Staff members also look for opportunities to deliver courses via alternative
channels such as the Internet or other
distance-learning technologies. The two
courses discussed above are now taught
using several instructional methods:
classroom instruction focusing on case
studies, specially developed computerbased instruction, electronic bulletin
boards, and vendor-delivered online
instruction. Additionally, the new examiner training on the consumer compliance aspects of the Check 21 Act was
delivered on both an interactive web site
and an interactive CD-ROM.



Reporting on Home Mortgage
Disclosure Act Data

68

91st Annual Report, 2004

ume, or if such loans equaled at least
$25 million.
In 2004, a total of 6,935 depository
institutions and affiliated mortgage companies and 1,186 independent mortgage
companies reported HMDA data for
calendar year 2003. Lenders submitted
information about the disposition of loan
applications, the geographic location of
the properties related to loans and loan
applications, and, in most cases, the race
or national origin, income, and sex of
applicants and borrowers. The FFIEC
processed the data and produced disclosure statements on behalf of the FFIEC
member agencies and the Department
of Housing and Urban Development
(HUD).
The FFIEC prepared individual disclosure statements for each lender that
reported data—one statement for each
metropolitan statistical area in which the
lender had offices and reported loan
activity for 2003. In 2004, the FFIEC
prepared 65,808 disclosure statements.5
In July, each institution made its disclosure statement public, and reports containing aggregate data for all mortgage
and home improvement loans in each of
the 337 metropolitan statistical areas in
the United States were also made available to the public at central depositories.6 These data are used by the
FFIEC agencies, the reporting institutions, HUD, the Department of Justice
(DOJ), and members of the public. They
also assist HUD, the DOJ, and state and
local agencies in responding to allega5. The FFIEC also compiles information on
applications for private mortgage insurance (PMI)
similar to the information on home mortgage lending collected under HMDA. Lenders typically
require PMI for conventional mortgages that
involve small down payments.
6. Central depository sites include libraries,
universities, and city planning offices. A list of
sites can be found at www.ffiec.gov/hmdacf/
centdep/default2.cfm.



tions of lending discrimination and in
targeting lenders for further inquiry.
The HMDA data reported for 2003
covered about 42 million loans and loan
applications, about 33 percent more than
in 2002. The greater volume was due
primarily to an increase of about 41 percent in refinancing activity. The number of covered home purchase loans
extended in 2003, compared with 2002,
increased 16 percent for Asians, 18 percent for Hispanics, 15 percent for
blacks, and 11 percent for whites.
Native Americans experienced a 5 percent decline in such lending from 2002
through 2003. Over the period from
1993 through 2003, the number of home
purchase loans extended to Hispanics
rose 236 percent; to Asians, 163 percent; to blacks, 106 percent; to Native
Americans, 50 percent; and to whites,
44 percent. For each income category,
the number of home purchase loans
reported was higher in 2003 than in
2002; the increase was 6 percent for
lower-income applicants; 8.6 percent for
middle-income applicants; and 13 percent for upper-income applicants. From
1993 through 2003, the number of home
purchase loans to lower-, middle-, and
upper-income applicants increased by
102 percent, 68 percent, and 88 percent,
respectively.
In 2003, 19 percent of Hispanic applicants and 21 percent of black applicants for home purchase loans reported
under HMDA applied for governmentbacked mortgages; the comparable figures for Asians, whites, and Native
Americans were 4 percent, 12 percent,
and 15 percent, respectively. Twentyone percent of lower-income applicants
for home purchase loans, compared
with 5 percent of upper-income applicants, applied for government-backed
mortgages.
Overall, the denial rate in 2003 for
conventional home purchase loans

Consumer and Community Affairs
(that is, loans that are not governmentbacked) was 14 percent, a rate unchanged from 2002. The denial rate
rose from 1993 through 1998 but has
fallen since then. In 2003, denial rates
for conventional home purchase loans
reported under HMDA declined slightly
for black applicants, to 24 percent; the
rates rose modestly for Native Americans and Asians, to 24 percent and
11 percent, respectively. Denial rates for
whites and Hispanics remained the same
from 2002 to 2003, at 12 percent and
18 percent, respectively.
Agency Reports on Compliance
with Consumer Protection Laws
The Board reports annually on compliance with consumer protection laws by
entities supervised by federal agencies.
This section summarizes data collected
from the twelve Federal Reserve Banks,
the FFIEC member agencies, and other
federal enforcement agencies.7
Regulation B
(Equal Credit Opportunity)
The FFIEC agencies reported that
88 percent of the institutions examined
during the 2004 reporting period were in
compliance with Regulation B, compared with 84 percent for the 2003
reporting period. The most frequent violations involved failure to take one or
more of the following actions:
• collect information for monitoring
purposes about the race or national
origin and sex of applicants seeking
credit primarily for the purchase or
refinancing of a principal residence
7. Because the agencies use different methods
to compile the data, the information presented
here supports only general conclusions. The 2004
reporting period was July 1, 2003, through
June 30, 2004.



69

• note on the application form when
an applicant chooses not to provide
monitoring information regarding race
or national origin and sex
• notify the credit applicant of the
action taken within the time frames
specified in the regulation
• provide a written notice of credit
denial or other adverse action containing a statement of the action taken, the
name and address of the creditor, a
notice of rights, and the name and
address of the federal agency that
enforces compliance
• collect information for monitoring
purposes about the race, color, religion, national origin, or sex of an
applicant
During 2004, the Federal Trade Commission (FTC) entered into one settlement with a telecommunications corporation for alleged violations of the
ECOA and Regulation B. The defendants were required to pay civil money
penalties of $1,125 million and provide
injunctive relief. Additionally, the FTC
continued litigation against a mortgage lender for alleged violations of the
ECOA and Regulation B, and continued
its enforcement efforts against other
organizations.
The other agencies that enforce
the ECOA—the Farm Credit Administration (FCA), the Department of
Transportation, the Securities and
Exchange Commission, the Small Business Administration, and the Grain
Inspection, Packers and Stockyards
Administration of the Department of
Agriculture—reported substantial compliance among the entities they supervise. The FCAs examination and
enforcement activities revealed that
most Regulation B violations involved

70

91st Annual Report, 2004

creditors' providing inadequate statements of specific reasons for denial
or involved creditors' failure to request
or provide information for governmentmonitoring purposes. These agencies
did not initiate any formal enforcement
actions relating to Regulation B during
2004, although the FCA indicated that
its supervisory process requires corrective actions for violations noted.

In 2004, the FTC settled two cases in
federal district court involving violations of the Electronic Fund Transfer
Act (EFTA). In one case, the complaint
alleged that the defendants had deceptively marketed videos and charged
consumers' credit and debit cards on a
recurring basis, without obtaining written authorization from the consumers to
initiate preauthorized electronic fund
transfers from their accounts, in violation of the EFTA. Under the stipulated
Regulation E
court order in this case, defendants were
(Electronic Fund Transfers)
required to pay approximately $1.1 milThe FFIEC agencies reported that lion in combined consumer redress and
approximately 95 percent of the institu- civil penalties and were barred from a
tions examined during the 2004 report- range of unlawful activities. In the secing period were in compliance with ond case, the complaint alleged that the
Regulation E, compared with 94 per- defendants initiated recurring automatic
cent for the 2003 reporting period. charges from consumers' accounts at the
The most frequent violations involved conclusion of a "free" trial period assofailure to comply with the following ciated with a variety of offered services,
requirements:
without disclosing the cancellation
policy or obtaining the consumers'
• determine whether an error occurred, written authorization. The court order in
and transmit the results of the inves- this case included injunctive relief and
tigation to the consumer within ten required payment of $2.4 million.
business days
Regulation M
• when a determination is made that no (Consumer Leasing)
error has occurred, provide a written
explanation and note the consumer's The FFIEC agencies reported that more
right to request documentation sup- than 99 percent of the institutions examined during the 2004 reporting period
porting the institution's findings
were in compliance with Regulation M,
• provide initial disclosures that a con- which is comparable to the level of compliance for the 2003 reporting period.
sumer may retain, at the time he or
The few violations noted involved failshe contracts for an electronic fund
ure to adhere to specific disclosure
transfer service or before the first
requirements. The agencies did not issue
electronic fund transfer involving the
any formal enforcement actions relating
consumer's account is made
to Regulation M during the period.
• provide initial disclosures at the time
a consumer contracts for an electronic
fund transfer service that contain
required information, including limitations on the types of transfers permitted and error-resolution procedures




Regulation P
(Privacy of Consumer
Financial Information)
The FFIEC agencies reported that
96 percent of the institutions exam-

Consumer and Community Affairs
ined during the 2004 reporting period
were in compliance with Regulation P,
compared with 97 percent for the 2003
reporting period. The most frequent violations involved failure to comply with
the following requirements:
• provide a clear and conspicuous initial
privacy notice to customers that accurately reflects the institution's privacy
policies and practices, not later than
when the customer relationship is
established
• provide a clear and conspicuous
annual privacy notice to customers
• disclose the institution's informationsharing practices in initial, annual, and
revised privacy notices
No formal enforcement actions relating to Regulation P were issued during
the reporting period.
Regulation Z
(Truth in Lending)
The FFTEC agencies reported that
84 percent of the institutions examined
during the 2004 reporting period were
in compliance with Regulation Z, compared with 78 percent for the 2003
reporting period. The most frequent violations involved failure to take one or
more of the following actions:
• accurately disclose the finance charge,
using that term, and provide a brief
definition of "finance charge"
• accurately disclose the payment
schedule for closed-end credit
• on certain residential mortgage transactions, provide a good faith estimate
of the required disclosures before con


71

summation, or not later than three
business days after receipt of the loan
application
• ensure that disclosures reflect the
terms of the legal obligation between
the parties, and when any information necessary for an accurate disclosure is unknown, ensure that the creditor states that the disclosure is an
estimate
• ensure that disclosures reflect that the
creditor has or will acquire a security
interest in the property identified
The OCC issued one formal enforcement action containing provisions relating to Regulation Z during the 2004
reporting period. In addition, 114 institutions supervised by the Federal
Reserve and the FDIC were required,
under the Interagency Enforcement
Policy on Regulation Z, to refund a
total of approximately $500,000 to
consumers.
The FTC continued its enforcement
activities to halt unlawful subprimelending practices. The FTC filed two
federal district court actions (currently
in litigation) and continued litigating
three cases; all five cases concern
alleged violations of the Truth in Lending Act, Regulation Z, and the Federal Trade Commission Act. The defendants in these cases include mortgage brokers, a mortgage corporation, a
finance company, and a tax-shelter consulting firm.
The FCA's examination and enforcement activities revealed that most Regulation Z violations involved inadequate
or incorrect disclosures for closed-end
credit. FCA examiners determined that
all violations had been or were being
corrected or adequately addressed by the
respective institutions.

72

91st Annual Report, 2004

Regulation AA
(Unfair or Deceptive Acts
or Practices)
The three banking regulators with
responsibility for enforcing Regulation AA's Credit Practices Rule—the
Federal Reserve, the OCC, and the
FDIC—along with the NCUA, reported
that more than 99 percent of the institutions examined during the 2004 reporting period were in compliance with
Regulation AA, which is comparable
to the level of compliance for the 2003
reporting period. The few violations
involved the following actions:
• failing to provide a clear and conspicuous disclosure regarding a
cosigner's liability for a debt
• entering into a consumer credit obligation that contains a waiver of exemption, or enforcing provisions in a purchased consumer credit obligation that
contains such a waiver, unless the
waiver applies solely to property subject to a security interest executed in
connection with the obligation
No formal enforcement actions relating to Regulation AA were issued during the reporting period.
Regulation CC
(Availability of Funds and
Collection of Checks)
The FFIEC agencies reported that
93 percent of institutions examined during the 2004 reporting period were in
compliance with Regulation CC, compared with 90 percent for the 2003
reporting period. Among the institutions
not in full compliance, the most frequently cited violations involved the
failure to take one or more of the following actions:
• make available on the next business

day the lesser of $100 or the aggregate


amount of checks deposited that are
not subject to next-day availability
• follow special procedures when
invoking the exception for large-dollar
deposits
• when placing an exception hold on an
account other than a new account, provide the customer with a notice containing certain information within prescribed time periods
• make funds from certain checks, both
local and nonlocal, available for withdrawal within the times prescribed by
the regulation
• provide training to each employee
that performs duties subject to this
regulation, and establish procedures
to ensure and monitor employee
compliance
No formal enforcement actions relating to Regulation CC were issued during the reporting period.
Regulation DD
(Truth in Savings)
The FFIEC agencies reported that
92 percent of institutions examined
during the 2004 reporting period were
in compliance with Regulation DD,
compared with 89 percent for the
2003 reporting period. Among the
institutions not in full compliance,
the most frequently cited violations
involved
• using the phrase "annual percentage
yield" in an advertisement without
disclosing additional terms and conditions of customer accounts;
• failing to provide account disclosures containing certain required
information;

Consumer and Community Affairs
• failing to provide timely maturity notification for time deposits;
• failing to provide account disclosures
clearly and conspicuously, in writing,
and in a form that the consumer may
keep; and
• providing an advertisement that did
not disclose that fees could reduce the
earnings on the account.
No formal enforcement actions relating to Regulation DD were issued during the reporting period.

73

the scope of complaint investigations
and improve the quality and timeliness
of responses to consumers.
During 2004, the CAESAR Users
Advisory Group finalized business and
technical requirements for a web-based
CAESAR application that will streamline the System's consumer complaint
process. These requirements entailed the
development of new reports for analyzing and monitoring complaint trends. In
addition, the advisory group developed
a new consumer code structure for the
web-based system to allow users to classify consumer complaints in more detail
and identify investigation findings more
easily.

Consumer Complaints
The Federal Reserve investigates complaints against state member banks
and forwards to the appropriate enforcement agency complaints that involve
other creditors and businesses. Each
Reserve Bank investigates complaints
against state member banks in its District. Complaints and inquiries received
by the Federal Reserve System are
entered into its online database, Complaint Analysis Evaluation System and
Reports (CAESAR).
The Board provides guidance to the
Reserve Banks on complaint program
policies and procedures through advisory letters and periodic updates to the
Consumer Complaint Manual. In 2004,
the Board issued guidance about new
codes for the CAESAR database. The
new codes will be used to track consumer concerns about emerging issues,
such as stored-value cards, reaffirmed
debt, the Check Clearing for the
21st Century Act, and the Fair and
Accurate Credit Transactions Act. Additional guidance on the CAESAR database was issued to strengthen the documentation of complaint investigations.
In addition to the CAESAR guidance,
the Board issued guidance on new proDigitized cedures that are intended to better focus
for FRASER


Complaints against
State Member Banks
In 2004 the Federal Reserve received
approximately 5,130 complaints from
consumers—by mail, by telephone, in
person, and electronically via the Internet (see tables). About 45 percent of the
Consumer Complaints against State
Member Banks, by Classification, 2004
Classification

Number

Regulation B (Equal Credit Opportunity) .
Regulation C (Home Mortgage
Disclosure Act)
Regulation E (Electronic Fund Transfers) .
Regulation H (Bank Sales of Insurance)...
Regulation M (Consumer Leasing)
Regulation P (Privacy of Consumer
Financial Information)

36

Regulation Q (Payment of Interest)
Regulation Z (Truth in Lending)
Regulation BB (Community Reinvestment)
Regulation CC (Expedited Funds
Availability)
Regulation DD (Truth in Savings)
Fair Credit Reporting Act

1
215
1

1
75
2
0
17

25
28
155

Fair Debt Collection Practices Act
Fair Housing Act
Flood insurance rules
Regulations T, U, and X
Real Estate Settlement Procedures Act
Unregulated practices

24
3
11
4
12
1,708

Total

2318

74

91st Annual Report, 2004

Consumer Complaints against State Member ]Banks, by Subject of Complaint, 2004
Total

Not investigated

Subject of complaint
Number

Percent

Unable
to obtain
sufficient
information
from
consumer

Explanation
of law
provided
to consumer

Loans
Discrimination alleged
Real estate loans
Credit cards
Other loans
Other type of complaint
Real estate loans
Credit cards
Other loans

15
13
8

1
1
0

1
1
1

1
1
1

463
892
174

20
38
8

4
4
1

35
74
16

Deposits
.
Electronic fund transfers
Trust services
Other

460
75
30
188

20
3
1
8

6
1
8
5

59
3
5
30

2318

100

32

225

Total

complaints (2,318) were against state
member banks. Of the complaints
against state member banks, 68 percent
involved consumer loans: 2 percent
alleged discrimination on a basis prohibited by law (race, color, religion,
national origin, sex, marital status,
age, the fact that the applicant's income
comes from a public assistance program, or the fact that the applicant has
exercised a right under the Consumer
Credit Protection Act), and 66 percent
concerned other credit-related practices,
such as the imposition of annual membership fees on credit card accounts, the
amount of interest banks charge on
credit card accounts, or credit denial
on a basis not prohibited by law (for
example, credit history or length of
residence). Twenty percent of the
complaints involved disputes about
interest on deposits and other deposit
account practices; the remaining
12 percent concerned disputes about
electronic fund transfers, trust ser


vices, or other practices. Information
on the outcomes of the investigations
of these complaints is provided in the
table.
During 2004, the Federal Reserve
System completed the investigation of
125 complaints against state member
banks that were pending at year-end
2003, finding no violations of regulations. In 84 percent of the state member
bank complaints investigated in 2004,
the banks had correctly handled a customer's account. In 44 percent of these
cases, the banks nevertheless chose to
reimburse or otherwise accommodate
the customer.
The Federal Reserve also handled
more than 1,600 inquiries about consumer credit and banking policies and
practices during 2004. In responding
to these inquiries, the Board and the
Reserve Banks gave specific explanations of laws, regulations, and banking
practices and provided relevant printed
materials on consumer issues.

Consumer and Community Affairs

75

Consumer Complaints—Continued
Investigated
Bank legally correct
No reimbursement
or other
accommodation

Goodwill
reimbursement or
other
accommodation

Customer
error

Bank
error

Factual or
bank
contractual
dispute— violation—
resolvable bank took
corrective
only by
action
the courts

Matter
in
litigation

Pending,
Withdrawn December 31
by
customer

6
6
6

2
0
0

0
0
0

0
0
0

0
0
0

1
0
0

0
0
0

0
0
0

4
5
0

192
257
86

125
379
25

0
1
0

49
54
23

6
14
11

13
5
1

20
3
4

10
27
5

9
74
2

203
20
8
72

100
27
3
25

0
0
0
0

45
7
2
9

19
2
0
8

4
10
0
2

6
\
0
14

13
3
3
5

5
I
1
18

856

686

1

189

60

36

48

66

119

Unregulated Practices
As required by section 18(f) of the Federal Trade Commission Act, the Board
monitors complaints about banking
practices that are not subject to existing regulations, focusing on those that
concern possible unfair or deceptive
practices. In 2004 the Board received
approximately 1,700 complaints against
state member banks that involved
unregulated practices. The categories
that received the most complaints
involved real estate loans, credit card
accounts, and checking accounts. Consumers most frequently complained
about escrow account problems (78
complaints); other complaints involved
customer service problems (75), debt
collection practices (70), insufficientfunds charges and procedures (67), loan
and deposit account fees (64), and interest rates and terms (61). The remainder
of the complaints concerned a wide
range of unregulated practices in other



areas, including credit card fraud, the
amount charged for late payments, and
disputes about the amount withdrawn
from checking accounts.
Complaint Referrals to HUD
In accordance with a memorandum of
understanding between HUD and the
federal bank regulatory agencies, in
2004 the Federal Reserve referred six
complaints to HUD that alleged state
member bank violations of the Fair
Housing Act. In five of the six cases
the Federal Reserve's investigations
revealed no evidence of illegal discrimination. The remaining case was pending
at year-end.

Advice from the
Consumer Advisory Council
The Board's Consumer Advisory
Council—whose members represent
consumer and community organizations,

76

91st Annual Report, 2004

the financial services industry, academic
institutions, and state agencies—advises
the Board of Governors on matters concerning laws and regulations that the
Board administers and on other issues
related to consumer financial services.
Council meetings are open to the public.
(For a list of members of the council,
see the section "Federal Reserve System Organization.")
In 2004, the council met in March,
June, and October. In March, council
members discussed the Board's proposal
to provide more uniform and consistent
guidance on what constitutes a "clear
and conspicuous" disclosure for its
consumer regulations. The discussion
focused on whether the standards and
guidance in Regulation P, which implements the financial privacy provisions
of the Gramm-Leach-Bliley Act, could
be used as the model for providing clear
and conspicuous standards. While members applauded the Board's effort to
make disclosures more understandable, they did not support adopting the
Regulation P standard as a means of
providing more consistent standards
and guidance for consumer protection
disclosures.
The council also discussed the January 2004 General Accounting Office
(GAO) study on predatory lending. The
GAO recommended that Congress consider making certain statutory changes
to consumer financial services and fair
lending laws. Members commented on
a proposal that would grant the Board
the authority to routinely monitor and,
as necessary, examine nonbank mortgage lending subsidiaries of bank and
financial holding companies to potentially deter predatory lending. Members
who supported this proposal believed
that the Federal Reserve has the ability
and the expertise to conduct rigorous
and consistent examinations. Others did
not favor the recommendation.



The Community Reinvestment Act
(CRA) was a topic at each of the three
meetings. The discussions focused on
regulatory changes proposed by the
Board and three other federal financial
institution regulators (the Office of the
Comptroller of the Currency, the Office
of Thrift Supervision, and the Federal
Deposit Insurance Corporation). The
agencies proposed changing the criteria
for designation as a small bank and adding a caveat that abusive asset-based
lending might reduce a bank's CRA rating. Some members expressed concern
about the proposal to change the criteria
for small-bank designation because a
larger number of banks would qualify
for a more limited CRA examination,
and some banks located in rural geographies might not have incentives to
participate in community and economic
development initiatives. Further, some
members asserted that additional regulation of regulated depository institutions
is not necessary and should instead be
targeted at unregulated and unsupervised bank affiliates and other loosely
supervised organizations.
In June, council members discussed
an ongoing review to identify outdated
and unduly burdensome regulatory
requirements pursuant to the Economic
Growth and Regulatory Paperwork
Reduction Act of 1996. Members did
not reach consensus on the necessity
of the Truth in Lending Act provision
giving consumers a three-day right to
rescind certain mortgage loan transactions before financial institutions disburse the funds, nor did they agree on
the importance of Home Mortgage Disclosure Act data from small banks and
rural areas. Members agreed that the
CRA provisions of the Gramm-LeachBliley Act, which require financial institutions and other community-based
organizations that are parties to certain
written CRA agreements to make the

Consumer and Community Affairs
agreements available to the public and
their primary regulator, serve no useful
purpose. Furthermore, the provisions
have created a data collection and
reporting burden for all parties involved
in the agreements. Another topic of discussion at the June meeting was the
remittance market, or the transfer of
funds by immigrant workers to families
and friends in their native countries (see
the related box "Remittances and Immigrant Markets: Opportunities and Challenges" later in this chapter). Members
emphasized the importance of lowering
the cost of remittances and of providing
immigrants with access to banking
services—especially for lower-income
immigrant workers who regularly send
money to their home countries.
Courtesy overdraft protection, frequently referred to as bounced-check
protection, was a topic at the June
and October meetings. The courtesy
overdraft-protection services offered by
some financial institutions are covered
under the Truth in Savings Act. Some
members had concerns about the adequacy of disclosures, the need for additional regulatory coverage, and deceptive marketing practices for these
services. Council members discussed
whether the Truth in Savings Act or the
Truth in Lending Act is the most effective way to inform and protect consumers. Some council members asserted that
bounced-check protection programs are
short-term extensions of credit that fit
the definition of credit under the Truth
in Lending Act; others believed that the
programs do not qualify as credit extensions because there is no loan application, underwriting, note, or annual percentage rate calculation in connection
with the service.
At the October meeting, members
discussed anti-predatory-lending laws.
Members reviewed various state and
federal legislative approaches, including



77

the Home Ownership and Equity Protection Act (HOEPA), which was established to respond to predatory mortgage
lending practices and to protect consumers from these abusive lending practices.
Members had differing opinions on
whether state laws or federal legislation
is the most effective means of addressing predatory lending. Some members
believed that state laws provide the necessary protections for deterring predatory lending practices—protections that
HOEPA does not offer. Other members
strongly preferred federal legislation
that preempts state laws because of its
uniform application and consistency.
The council also discussed proposed
amendments to Regulation E, which
implements the Electronic Fund Transfer Act. Members commented on a revision that would require that payroll card
accounts, established on behalf of a consumer for the purpose of providing salary, wages, and other employee compensation on a recurring basis, be covered
by Regulation E. Specific comments
addressed whether periodic statements
should apply to payroll cards. Some
members agreed that employers issuing
payroll cards either directly or through
service providers should provide periodic statements to employees. Other
members noted that payroll cards are a
low-profit service for financial institutions; the additional costs associated
with providing payroll statements could
discourage institutions from offering the
cards.

Promotion of Community
Economic Development in
Historically Underserved
Markets
During 2004, the community affairs
function within the Federal Reserve System engaged in a variety of initiatives to
promote community economic develop-

78

91st Annual Report, 2004

ment that benefit low- and moderateincome communities and populations.
The function continued to focus on
financial literacy and education, the sustainability of community development
organizations, emerging and immigrant
markets, and community economic
development. Activities included conducting research, publishing newsletters
and articles, sponsoring conferences
and seminars, and providing advisory
services, all of which helped to deliver
pertinent information to both general
and targeted audiences.
As a decentralized function, the community affairs programs at the Board
and each of the twelve Reserve Banks
design activities that are responsive to
the communities in the regions they
serve. At the Reserve Banks, Community Affairs Offices focus on providing
information and promoting awareness
of investment opportunities to financial institutions, government agencies,
and organizations that serve low- and
moderate-income communities and
populations, while the Board's Community Affairs Office engages in activities
that have implications for public policy.
In 2004, Board staff actively participated in interagency working groups
created to fulfill the legislative mandates of the U.S. Department of the
Treasury's Financial Literacy and Education Commission (the commission),
established under the Fair and Accurate
Credit Transactions Act (the FACT Act).
The commission consists of the chiefs
of twenty federal agencies; Governor
Edward Gramlich represents Chairman
Alan Greenspan as the Board's member.
Board staff participated on two of the
commission's working groups: one to
help design and launch a web site to link
consumers with financial education
resources available from federal government agencies, and one to frame
a national strategy for the federal



government to improve the level of
financial literacy among American
consumers. In October, the web site
www.MyMoney.gov and a toll-free
number (1-888-my-money [1-888-6966639]) were launched to provide consumers with easy access to information
resources. The national strategy working group will continue its work, incorporating public remarks submitted in
response to a request for comment and
finalizing the national strategy in a
report to Congress due in June 2005.
Consistent with the national goal to
increase financial literacy among consumers, community affairs staff assisted
in the planning and delivery of financial
and consumer education programs to
Board employees. Four programs were
offered in 2004, and a web site for
online personal finance education was
established for Board employees.
Board staff use surveys and focus
groups to learn about what issues are
important to consumers and to test and
develop educational materials. Last year
Board staff updated the "Consumer's
Guide to Mortgage Settlement Costs"
and the "Choosing a Credit Card"
brochures and issued two new publications dealing with checks and the new
Check 21 provisions: the "Consumer
Guide to Check 21 and Substitute
Checks" and "What You Should Know
about Your Checks." The Board, in
cooperation with the other federal bank,
thrift, and credit union regulators, produced materials on "phishing," "Internet Pirates Are Trying to Steal Your
Personal Financial Information," and on
bounced-check fees, "Protecting Yourself from Overdraft and Bounced-Check
Fees." These publications are available on the Board's consumer information web site (www.federalreserve.gov/
consumers.htm).
Board staff are involved in ongoing
research projects related to financial

Consumer and Community Affairs
privacy disclosures, consumers' use of
electronic banking services and storedvalue cards, remittances and immigrants' use of financial services (see the
related box "Remittances and Immigrant Markets: Opportunities and
Challenges"), and the role of financial
education in community development.
Board staff are also working with the
Department of Defense on a longitudinal study on the effects of financial education conducted on military
installations.
Board staff assisted with national
financial education initiatives throughout the year. The director of the Division of Consumer and Community
Affairs served as an adviser to the board
of Operation HOPE, a national nonprofit organization dedicated to delivering financial education programs to lowincome populations through schools and
community centers, as well as to communities suffering from natural disasters. In addition, staff participated in
two national forums: one sponsored by
the National Endowment for Financial
Education to explore strategies for promoting positive financial management
behaviors, and another convened by the
Government Accountability Office (formerly the General Accounting Office) to
define the federal government's role in
personal financial education.
System financial education projects
supplemented the Board's efforts. The
community affairs and public information officers at the Reserve Banks collaborated with the U.S. Conference of
Mayors to explore strategies for establishing financial education initiatives in
cities throughout the country. The resulting "Dollar Wi$e" initiative enables
cities to create programs that meet the
needs of their citizens. For example, the
campaign in Detroit, Michigan, focuses
on providing financial education training to community educators, while the



79

program in Providence, Rhode Island,
offers programs to teach seniors about
credit card use, predatory lending, and
financial planning. By serving as advisers to the mayors in the nearly thirtyfive cities involved in the campaign, the
Federal Reserve Banks are helping to
increase the public's awareness of and
access to resources for financial literacy and education. In addition, Federal
Reserve System community affairs staff
continued to work closely with national
leaders from the Native American community to develop a financial education policy and other resources that are
responsive to the unique needs of residents in Indian Country. Board staff
hosted a meeting of the Native American Financial Education Task Force in
December. The meeting provided an
opportunity for the five committees
of the task force to focus on the financial education needs of Native Americans and on how to deliver education
resources to these communities.
The Community Affairs Offices at
the Reserve Banks continued their
financial education initiatives. The Federal Reserve Bank of Cleveland worked
with bank and community partners in
Cleveland, Pittsburgh, and Cincinnati
to form regional collaborations to
develop and deliver financial education
resources. The Federal Reserve Bank of
Minneapolis was instrumental in forming the Montana Financial Education
Coalition. The Federal Reserve Bank
of Boston partnered with a community
group to provide train-the-trainer workshops to social service workers, hosted
a conference on best practices, and
worked with Operation HOPE to launch
a financial literacy campaign in the
schools in Providence, Rhode Island.
In addition, the Federal Reserve Bank
of Kansas City sponsored a number of
financial education events that specifically targeted youth, Native Ameri-

80

91st Annual Report, 2004

Remittances and Immigrant Markets:
Opportunities and Challenges
The provision of remittance services is a potentially effective method by which
mainstream financial institutions can attract unbanked immigrants.
Ben S. Bemanke, Member; Board of Governors
April 16, 2004
Immigrant workers typically send a large
portion of their earnings back to their home
countries. The United States is the largest
source country for these cross-border funds
transfers, known as remittances: About
$32 billion was remitted in 2003, according to a recent report from the InterAmerican Dialogue. (As used in this
article, the term remittances refers specifically to the international transfer of funds
between individuals.) Because they are
such a significant flow of funds, remittances have attracted the attention of lawmakers, bankers, consumer and community
groups, and domestic and international
banking agencies.
The Inter-American Development
Bank's Multilateral Investment Fund
reports that the highest volume of remittance traffic—an estimated 100 million
transactions each year—occurs between the
United States and Latin America. Billions
in Motion, a 2002 report published by the
Pew Hispanic Center, described a typical
remitter in the United States as a thirtyseven-year-old, lower-skilled immigrant
from Mexico or another Latin American
country who earns less than $30,000 annually, has not completed high school, does
not have a credit card, does not own his or
her home, and is among the 43 percent of
Latino immigrants who do not have a bank
account.
The process of remitting funds has
changed significantly since 1990, when
many immigrants used informal networks,
such as friends and family, to transfer
funds. Today, money-transfer organizations
are the dominant providers of remittance
services. But these firms typically charge



service fees as high as 15 percent of the
transfer, thus eroding the amount of money
an immigrant's family receives. Many factors influence the fees charged, including
the service provider's operating costs and
geographic coverage.
To facilitate cost-effective funds transfers to Canada, Mexico, and five transatlantic countries, the Reserve Banks offer
FedACH International products to banks.
These products allow banks to send international credit transactions electronically
via the same process used to send domestic
transactions. Intended primarily for international corporate payments, the products
provide a potentially less costly way for
consumers to remit funds. In 2004, the
service was expanded to include Mexico.
The Reserve Banks worked cooperatively
with the Central Bank of Mexico to make it
easier for Mexican retail banking systems
to support remittances—an effort that may
also encourage consumers in the United
States and Mexico to develop banking
relationships.
Along with the other Federal Financial
Institutions Examination Council agencies,
the Federal Reserve Board examined the
role of the Community Reinvestment Act
in encouraging banks to provide financial
services to immigrants—who are typically
a low-income, underserved population. As
a result of policy guidance issued in June
2004, banks that offer remittance services
may receive CRA credit if these services
are affordable and meet the needs of the
lower-income remitters in their markets.
For banks, immigrants and remittances
present a market opportunity. The Remittance Marketplace, a 2004 report from the

Consumer and Community- Affairs

Pew Hispanic Center, found that only about
3 percent of remittance transactions to
Mexico were conducted through banks.
Despite recent efforts by banks and credit
unions to increase account ownership
among Hispanic markets, the report also
found that 8 million Latinos remain
"unbanked."
Banks, however, need to understand the
many issues involved in serving immigrants. For example, many immigrants are
uncomfortable using banks and do not
understand how banks charge for their services. In 2004, the Federal Reserve System
undertook several initiatives to share information on reaching immigrant markets.
• The Federal Reserve Bank of Chicago
launched the Center for the Study of
Financial Access for Immigrants, which
hosted a national conference, "Financial
Access for Immigrants: Learning from
Diverse Perspectives," in collaboration
with the Brookings Institution. In addition, the Chicago Reserve Bank's Community Affairs Office convened several
forums throughout the Seventh District
to gain insight into the social, economic,
and other issues that inhibit immigrants
from using banks.
• The Federal Reserve Bank of Atlanta
hosted "Payments in the Americas," a
conference that explored the policy and
regulatory challenges of providing remittance services. Staff from the Board and
the Atlanta Reserve Bank are also sponsoring focus groups with Mexican immigrants to learn about the factors influencing their banking and remitting
behaviors.
• Federal Reserve Board staff participated
on a remittances panel at the 2004
conference of the American Council of
Consumer Interests. The panel addressed
consumer information, disclosure, and
protection issues.
• The Community Affairs Office of the
Federal Reserve Bank of Dallas hosted
"The Business of Immigrant Markets:
Providing Access to Financial Services."



81

Conference participants shared insights
on essential policies and practices.
• The Federal Reserve Bank of Boston's
Community Affairs Office conducted
in-depth market research on immigrant
communities in the First District. The
office's other financial education initiatives targeted Hispanic communities in
Boston, Massachusetts, and Providence,
Rhode Island.
As the U.S. population becomes more
diverse, the Federal Reserve System will
continue to work with policymakers, community groups, and bankers to ensure that
immigrants have fair and equal access to
the U.S. financial system. The following
Reserve Bank publications provide more
information on remittances and immigrant
banking.
• "Financial Access for Immigrants
Conference: Learning from Diverse
Perspectives," Profitwise News and
Views, Federal Reserve Bank of Chicago,
October 2004, www.chicagofed.org/
community_development/
• "Meeting in the Mainstream," Banking
and Community Perspectives, Federal
Reserve Bank of Dallas, issue 1, 2004,
www.dallasfed.org/ca/index.html
• "FedACH International Services Opens
Payments Channel to Mexico," Partners in Community and Economic Development, Federal Reserve Bank of
Atlanta, volume 14, number 1, 2004,
www.atl.frb.org/comm.cfm
• "Banking Unbanked Immigrants through
Remittances," Communities and Banking, Federal Reserve Bank of Boston,
Fall 2003, www.bos.frb.org/commdev/
index.htm
• Community Investments Online, Federal
Reserve Bank of San Francisco, November 2003, www.sf.frb.org/community/
index.html
• "Banking Latino Immigrants: A Lucrative New Market for Progressive
Financial Institutions," Bridges, Federal
Reserve Bank of St. Louis, Autumn
2002, www.stlouisfed.org/community/

82

91st Annual Report, 2004

can, and Hispanic populations. The
Federal Reserve Banks of Atlanta,
Chicago, and Philadelphia hosted
events on wealth-building and assetaccumulation strategies and initiatives
throughout their Districts. An article
highlighting the various financial education efforts of the Federal Reserve System was published in the Autumn 2004
edition of the Federal Reserve Bulletin
(www.federakeserve.gov/pubs/bulletin/
default.htm).
In recent years, reduced funding and
changing priorities among government
and philanthropic organizations have
diminished access to resources for many
community development organizations.
As it did in 2003, the Board's Community Affairs Office convened meetings of federal government officials
and national community development
leaders to explore the sustainability and
capitalization of community economic
development finance (CEDF) organizations. The Board's Community
Affairs Office convened a policy forum
in April with the Aspen Institute,
a national research and leadership
development organization. The forum
discussed Aspen's research on the
attributes of industries, organizations,
and products that achieve scale and
become self-sustaining. The research
compared and contrasted the funding
and business strategies of sustainable
enterprises with those of CEDF institutions, identifying areas where the field
needs to focus efforts to increase its
future viability. The forum assembled
leaders from financial institutions,
government agencies, foundations, and
membership associations.
Reserve Bank Community Affairs
Offices explored new sources of capital
to increase the sustainability of CEDF
organizations. The Federal Reserve
Bank of San Francisco expanded the
scope of its Center for Community



Development Investments; the Bank's
staff worked closely with an advisory
board of industry experts to develop a
web site of resources, training, and technical assistance on community development investments. The System's Community Affairs Offices also continued to
work with the Wall Street Without Walls
initiative to help community development organizations increase their access
to the capital markets for funding. The
Federal Reserve Banks of Chicago,
San Francisco, and New York hosted
training events that attracted nearly 370
community development leaders interested in understanding the requirements
of the capital markets. In addition, the
Community Affairs Office of the Boston
Reserve Bank collaborated with Wall
Street Without Walls and Southern New
Hampshire University to sponsor the
inaugural session of the "Capital Markets Training Institute" in Manchester,
New Hampshire. Participants at this
three-day event learned how they can
use the capital markets to fulfill their
organizations' missions more efficiently
and learned how to adapt their operations to allow their organizations to
access the capital markets. Demonstrating the ongoing commitment of the
System's Community Affairs Offices,
the director of the Board's Division
of Consumer and Community Affairs
began serving on the Walls Street Without Walls advisory board in 2004.
Reserve Bank efforts also explored
ways to increase the effectiveness of
community development finances in
their Districts. The Federal Reserve
Bank of Dallas sponsored "Momentum
Texas: The Texas Community Development Finance Summit" to examine
the state's strategies for securing and
using community economic development funds. The Cleveland Reserve
Bank organized a policy summit,
"Recapitalization of Communities," in

Consumer and Community Affairs
which regional and national community
development leaders discussed challenges to and opportunities for attracting
new capital to fund CEDF institutions'
initiatives for infrastructure development, wealth-building, and other assetaccumulation programs.
The System's Community Affairs
Offices remain committed to increasing
the role of research in their work. Preparations have begun for the biennial community affairs research conference in
April 2005; Chairman Greenspan will
be a keynote speaker at the two-day
event. System community affairs staff
collaborated with their research colleagues at the Board and the Cleveland
Reserve Bank to identify and review
papers that would best address the conference's theme, "Promises and Pitfalls:
As Consumer Finance Options Multiply,
Who Is Being Served and at What
Cost?" Studies chosen will assess the
impact that consumer behavior, alternative financial services providers, financial education, and other factors have on
consumers' access to and experiences
with the financial sector.
The New York, Philadelphia, and
Cleveland Reserve Banks collaborated
to host a community development
finance research conference in December. The conference commissioned
papers from leading researchers on a
broad range of topics, including strategies for asset creation among lowerincome populations, the role of microlending in community development,
methods for measuring the impact of
community development, and the relationship between subprime markets and
predatory lending. In addition, scholars
and practitioners explored the roles of
alternative depository institutions and
public policy in helping traditionally
underserved populations and communities access capital for asset accumulation and development. Senator Hillary



83

Rodham Clinton was the keynote
speaker.
The Board's Community Affairs
Office continued to improve and support
its Fiscal Impact Tool (FIT), a webbased modeling tool designed to support
the evaluation of prospective community and economic development projects
in midsize communities. This analytic
tool enables community economic
developers to conduct a cost-benefit
analysis of a proposed development
project by estimating its effect on
local sales and property tax revenues and on costs to local government.
Available at no cost on the Board's
web site (www.federalreserve.gov/forms/
fiscalimpactrequest.cfm), FIT can aid
decisionmakers in determining the economic value of a proposed activity for
their community.
The Board's Community Affairs
Office, in partnership with the Chicago, Kansas City, Philadelphia,
Richmond, and St. Louis Reserve
Banks, continued to develop bestpractice case studies for the web-based
database Lessons Learned: Community
and Economic Development Case
Studies (www.chicagofed.org/cedric/
lesle_index.cfm). The database provides
detailed case studies that identify a
community development issue, present
one community's solution, describe the
results, and offer "lessons learned" to
community developers addressing similar concerns in their communities. The
database can be accessed on the System's research repository web site, the
Community and Economic Development Research Information Center
(CEDRIC).

Outreach Activities
The Board engages in outreach activities throughout the year to provide information to the public about the Board's

84

91st Annual Report, 2004

responsibilities, to facilitate understanding of changes in banking regulations
and their impact on banks and consumers, to promote community development
and consumer education, and to foster
discussion of public policy issues. Board
staff periodically meet with financial
institutions, community groups, and
other members of the public in formal
and informal settings. The Board sponsors and participates in meetings, conferences, and seminars for the general
public and targeted audiences. This year,




the Board again participated in the
Congressional Black Caucus Foundation's 2004 annual legislative conference, which provides a national forum
for examining strategies and viable solutions to public policy issues facing African Americans. Board staff distributed
consumer education materials provided
by the Federal Reserve System and used
the opportunity to inform conference
attendees about the Federal Reserve and
its multifaceted responsibilities.
•

85

Banking Supervision and Regulation
Earnings of insured commercial banks
exceeded the $100 billion mark for the
second consecutive year in 2004 amid
significant changes in the interest rate
environment, an end to the boom period
in mortgage refinancings, and several
mergers among large bank holding
companies.
At $106.7 billion, profits rose 6.4 percent from 2003, fueled by growth in
loans (11.0 percent overall) and investment securities (6.4 percent) and by a
decline in provisions for loan loss
(22.3 percent). The net interest margin
on all earning assets fell 7 basis points,
to 3.72 percent, low by historical standards. Non-interest income grew modestly overall (3.9 percent) despite lower
revenues from mortgage originations
and soft trading income. Servicing
income, income from fiduciary activities, and deposit fees accounted for most
of the growth. Expenses rose sharply
(9.4 percent), significantly influenced by
nonrecurring items related to mergers
and the creation of litigation reserves at
a few large institutions.
Return on total shareholders' equity
fell a full percentage point, to a stillstrong 14.27 percent. The decline in
this profitability ratio was due primarily
to significant merger-related increases
in equity that were largely offset by
increases in merger-related intangible
assets.1 Return on assets fell only

1. The number and size of bank-related merger
transactions significantly affected the aggregation
of commercial bank reports of income and condition (Call Reports) in 2004. The data used in
this discussion have been adjusted to address the
effects of purchase accounting and, in particular,
push-down accounting for bank subsidiaries of



slightly, to 1.35 percent, the third
consecutive year in which this ratio
exceeded 1.30 percent.
Loans grew a remarkable 11.0 percent, or $480 billion, in 2004, with most
growth occurring in commercial real
estate ($131 billion), home equity
($114 billion), residential mortgages
($89 billion), and credit card loans
($61 billion). The growth of commercial
real estate lending was even more rapid
than in the past few years, with construction lending up 25.2 percent and
loans secured by nonfarm nonresidential
properties up 10.7 percent. Home equity
loans grew an extraordinary 40.2 percent, the fifth consecutive year in which
their growth exceeded 20 percent. The
growth of residential mortgages came
mostly in the first half of the year and
slowed considerably once short-term
market interest rates began to rise in
June. Some of the increase in credit card
lending was technical in nature, related
to the reclassification of balances from
credit-card-related securities to loans as
accounting treatments were harmonized
at newly merged large banks. Commercial and industrial (C&I) loans rose
$37 billion, or 4.3 percent, for the year
despite having declined modestly in the
first quarter amid weak loan demand.
Holdings of investment securities
grew less rapidly than loans, expanding
6.4 percent overall (or $93 billion) for
the full year while experiencing substantial shifts as the year progressed in
response to changing market conditions.
Essentially all the net growth for the
year could be attributed to mortgage
large holding companies acquired by other bank
holding companies.

86

91st Annual Report, 2004

pass-through securities acquired during
the first quarter. Reacting to changes in
the interest rate environment, banks sold
off $36 billion (or 5.9 percent) of their
mortgage pass-through securities holdings in the second and third quarters
and then purchased roughly the same
amount during the fourth quarter as
longer-term interest rates stabilized.
Banks also sold off a modest proportion
of their structured mortgage securities
(for example, collateralized mortgage
obligations) and asset-backed securities
in the third quarter and then acquired
additional foreign-issued debt securities
during the fourth quarter. These repositioning transactions came in response
to actual and anticipated movements
in market interest rates (together with
unexpected stability in long-term rates,
leading to a flatter yield curve) and the
associated volatility in the carrying
value of mortgage-servicing assets.
Supporting this robust asset growth,
core deposits continued their recent
strong expansion. Money market deposit
account (MMDA) deposits and savings deposits grew $270 billion, or
11.7 percent, slightly exceeding the
remarkable growth rate for loans. Noteworthy increases were evident among
other core deposit categories, including
other transaction accounts (up $6.1 billion) and demand deposits (up $24.5 billion). The increase in demand deposits
was influenced by an inflow of balances
from corporate customers in the latter
half of the year as short-term market
interest rates rose, boosting earnings
credits on compensating balances.2
Time deposits under $100,000 grew less
2. Although banks are prohibited from paying
interest on transaction accounts held by commercial customers, these customers in many cases
receive "earnings credits" on their transaction
balances that may be used to offset service charges
they incur. The amounts of such earnings credits
are determined by a number of factors, including



significantly ($10.5 billion, or 1.6 percent); the bulk of the increase came
in the final quarter of the year as consumers sought to take advantage of
rising interest rates. Time deposits
over $100,000 rose $128.3 billion, or
21.5 percent, and foreign deposits grew
$125 billion, or 16.8 percent; these
categories include large-denomination
deposits raised in wholesale and offshore money markets, which, along with
a modest rise in short-term non-deposit
borrowings (4.6 percent), accommodated the growth in assets.
Influenced by both balance sheet
changes and movements in market interest rates, net interest margins narrowed
7 basis points, to 3.72 percent. Yields on
domestic real estate loans—including
commercial real estate and home equity
loans—fell 25 basis points despite
higher short-term interest rates. Overall yields on securities holdings rose
modestly—in part because of rising
short-term interest rates—while yields
on C&I loans held steady at 6.00 percent amid reports that bankers were easing their lending standards through the
year. Changes in the effective rates for
credit cards and other consumer loans
were mixed. Funding costs reflected
some resistance to higher interest rates,
as the effective cost of MMDA and
savings deposits remained essentially
unchanged from 2003, at 0.73 percent,
while the effective cost of other deposits
and borrowings declined 20-30 basis
points.
Equity-to-assets ratios rose a full percentage point in 2004, primarily as a
result of the merger-related increases
in shareholders' equity noted earlier.
Regulatory capital ratios, in contrast,
remained relatively steady, as the
merger-related increase in equity was
the size of collected balances and prevailing shortterm market interest rates.

Banking Supervision and Regulation
largely offset by goodwill-related intangible assets, which are deducted from
regulatory capital measures. Dividends
paid by commercial banks fell sharply,
declining $18 billion, or 23.4 percent.
Most of the decline (61 percent) came in
dividends paid to the five largest bank
holding companies (Citigroup, JPMorgan Chase, Bank of America, Wachovia
and Wells Fargo, all on a mergeradjusted basis) by their commercial
bank subsidiaries; dividend payments
from the holding companies to their
shareholders rose.
Already-strong asset quality improved further in 2004 according to all
conventional measures. Nonperforming
assets fell to 0.62 percent of loans and
related assets, well below both the
0.94 percent rate for 2003 and the previous credit-cycle low point in 1997-99
(0.75 percent). Net charge-offs fell to
0.63 percent of loans, from 0.88 percent in 2003, roughly in line with the
1997-99 period. Reserves fell in absolute terms (4.2 percent), but reserve
coverage of nonperforming assets still
improved substantially.
Reflecting ongoing consolidation in
the industry, the number of insured commercial banks declined by 142 (on a net
basis), to 7,621. Still, some 122 new
charters were granted in 2004 (105 of
these by state authorities), a sign of the
continuing attractiveness of commercial
bank charters. Assuming a minimum
initial capitalization of $8 million, these
newly chartered institutions attracted
nearly $1 billion of new capital into the
banking industry.
Consistent with the industry's strong
earnings and balance sheets, only three
banks failed in 2004 (combined assets
of roughly $200 million), one more than
in 2003. The number of problem banks
(that is, those receiving a supervisory
rating of 4 or 5 on overall condition)
declined by 28, to 90 institutions.



87

Scope of Responsibilities for
Supervision and Regulation
The Federal Reserve is the federal
supervisor and regulator of all U.S. bank
holding companies, including financial
holding companies formed under the
authority of the 1999 Gramm-LeachBliley Act, and of state-chartered commercial banks that are members of the
Federal Reserve System. In overseeing
these organizations, the Federal Reserve
seeks primarily to promote their safe
and sound operation, including their
compliance with laws and regulations.3
The Federal Reserve also has responsibility for the supervision of all Edge
Act and agreement corporations; the
international operations of state member
banks and U.S. bank holding companies;
and the operations of foreign banking
companies in the United States.
The Federal Reserve exercises important regulatory influence over entry into
the U.S. banking system and the structure of the system through its administration of the Bank Holding Company
Act, the Bank Merger Act (with regard
to state member banks), the Change in
Bank Control Act (with regard to bank
holding companies and state member
banks), and the International Banking
Act. The Federal Reserve is also responsible for imposing margin requirements
on securities transactions. In carrying
out these responsibilities, the Federal
Reserve coordinates its supervisory
3. The Board's Division of Consumer and
Community Affairs coordinates the Federal
Reserve's supervisory activities with regard to
compliance with consumer protection and civil
rights laws. Those activities are described in
the chapter "Consumer and Community Affairs."
Compliance with other banking laws and regulations, which is treated in this chapter, is the
responsibility of the Board's Division of Banking Supervision and Regulation and the Federal
Reserve Banks, whose examiners also check for
safety and soundness.

88

91st Annual Report, 2004

activities with other federal banking
agencies, state agencies, functional
regulators, and the bank regulatory
agencies of other nations.

Supervision for
Safety and Soundness
To ensure the safety and soundness of
banking organizations, the Federal
Reserve conducts on-site examinations
and inspections and off-site surveillance
and monitoring. It also undertakes
enforcement and other supervisory
actions.

Examinations and Inspections
The Federal Reserve conducts examinations of state member banks, the U.S.
branches and agencies of foreign banks,
and Edge Act and agreement corporations. In a process distinct from examinations, it conducts inspections of bank
holding companies and their nonbank
subsidiaries. Pre-examination planning
and on-site review of operations are
integral parts of the overall effort to
ensure the safety and soundness of
banking organizations. Whether it is an
examination or an inspection, the review
entails (1) an assessment of the quality
of the processes in place to identify,
measure, monitor, and control risks,
(2) an assessment of the quality of the
organization's assets, (3) an evaluation
of management, including an assessment of internal policies, procedures,
controls, and operations, (4) an assessment of the key financial factors of capital, earnings, liquidity, and sensitivity to
market risk, and (5) a review for compliance with applicable laws and regulations. The table provides information
on the examinations and inspections
conducted by the Federal Reserve during the past five years.



State Member Banks
At the end of 2004, 919 state-chartered
banks (excluding nondepository trust
companies and private banks) were
members of the Federal Reserve System. These banks represented approximately 12 percent of all insured U.S.
commercial banks and held approximately 15 percent of all insured commercial bank assets in the United States.
The guidelines for Federal Reserve
examinations of state member banks
are fully consistent with section 10 of
the Federal Deposit Insurance Act, as
amended by section 111 of the Federal
Deposit Insurance Corporation Improvement Act of 1991 and by the Riegle
Community Development and Regulatory Improvement Act of 1994. A fullscope, on-site examination of these
banks is required at least once a year;
exceptions are certain well-capitalized,
well-managed organizations having
assets of less than $250 million, which
may be examined once every eighteen
months.
Bank Holding Companies
At year-end 2004, a total of 5,863 U.S.
bank holding companies were in operation, of which 5,151 were top-tier bank
holding companies. These organizations
controlled 6,235 insured commercial
banks and held approximately 96 percent of all insured commercial bank
assets in the United States.
Federal Reserve guidelines call for
annual inspections of large bank holding
companies as well as smaller companies
that have significant nonbank assets. In
judging the financial condition of the
subsidiary banks owned by holding
companies, Federal Reserve examiners
consult examination reports prepared
by the federal and state banking authorities that have primary responsibility for

Banking Supervision and Regulation

89

State Member Banks and Holding Companies, 2000-2004
Entity/Item
State member banks
Total number
Total assets (billions of dollars)
Number of examinations
By Federal Reserve System .
By state banking agency
Top-tier bank holding companies
Large (assets of more than $1 billion)
Total number
Total assets (billions of dollars)
Number of inspections
By Federal Reserve System1
On site
Off site
By state banking agency
Small (assets of $1 billion or less)
Total number
Total assets (billions of dollars)
Number of inspections
By Federal Reserve System
On site 2
Off site
By state banking agency
Financial holding companies
Domestic
Foreign

2004

2003

2002

2001

2000

919
1,275
809
581
228

935
1,912
822
581
241

949
1,863
814
550

970
1,823
816
561
255

991
1,645
899
610
289

355
8,429
500
491
440
51
9

365
8,295
454
399
47

329
7,483
439
431
385
46

312
6,905
413
409
372
37
4

309
6,213
352
346
309
37
6

4,796
852
3,703
3,526
186
3,340
177

4,787
847
3,453
3,324
183
3,141
129

4,806
821
3,726
3,625
264
3,361
101

4,816
768
3,486
3,396
730
2,666
90

4,800
716
3,347
3,264
835
2,429
83

600
36

612
32

602
30

567
23

462
21

446

264

1. For large bank holding companies subject to continuous, risk-focused supervision, includes multiple targeted reviews.
2. In 2002, the supervisory program for small bank
holding companies was revised, resulting in more

inspections being performed off site versus on site.
See text section "Bank Holding Companies" for more
information.

the supervision of those banks, thereby
minimizing duplication of effort and
reducing the burden on banking
organizations.
Small, noncomplex bank holding
companies—those that have consolidated assets of $1 billion or less—are
subject to a special supervisory program
that was implemented in 1997 and
modified in 2002.4 The program permits
a more flexible approach to supervision
of such companies. If all of a company's
subsidiary depository institutions have
composite and management ratings of
"satisfactory" or better, and if no mate-

rial outstanding issues at the holding
company or consolidated level are otherwise indicated, only a composite rating
and a management rating based on the
ratings of the lead subsidiary depository
institution are assigned to the company.
In 2004 the Federal Reserve conducted
3,703 reviews of such bank holding
companies. If a company's subsidiary
depository institutions have ratings
lower than "satisfactory" or have other
significant supervisory issues, a more
thorough off-site review of the organization is conducted using surveillance
results and other information. If the
information obtained off-site from these
sources is not sufficient to determine the
overall financial condition of the holding company and to assign the composite and management ratings, the holding

4. Refer to SR Letter 02-01 for a discussion
of the factors considered in determining whether a
bank holding company is complex or noncomplex
(www.federalreserve.gov/boarddocs/SRLETTERS/
2002/srO201.htm).



90

91st Annual Report, 2004

company is subject to increased supervisory review that may include an on-site
review and off-site monitoring.
Financial Holding Companies
Under the Gramm-Leach-Bliley Act,
bank holding companies that meet certain capital, managerial, and other requirements may elect to become financial holding companies and thereby
engage in full-scope securities underwriting, merchant banking, and insurance underwriting and sales activities.
The statute streamlines the Federal
Reserve's supervision of all bank holding companies, including financial holding companies, and sets forth parameters for the relationship between the
Federal Reserve and other regulators.
The statute also differentiates between
the Federal Reserve's relations with
regulators of depository institutions and
its relations with functional regulators
(that is, regulators for insurance, securities, and commodities).
As of year-end 2004, 600 domestic
bank holding companies and 36 foreign
banking organizations had financial
holding company status. Of the domestic financial holding companies, 34 had
consolidated assets of $15 billion or
more; 110, between $1 billion and
$15 billion; 82, between $500 million
and $1 billion; and 374, less than
$500 million.

Anti-Money-Laundering
Examinations
The U.S. Department of the Treasury
regulations (31 CFR 103) implementing the Bank Secrecy Act (BSA) generally require banks and other types
of financial institutions to file certain
reports and maintain certain records that
are useful in criminal or regulatory
proceedings.



The BSA and separate Board regulations require banking organizations
supervised by the Board to file reports
on suspicious activity related to possible
violations of federal law, including
money laundering, terrorist financing,
and other financial crimes. In addition,
BSA and Board regulations require that
banks develop written programs on BSA
compliance and that the programs be
formally approved by bank boards of
directors. An institution's compliance
program must (1) establish a system of
internal controls to ensure compliance
with the BSA, (2) provide for independent compliance testing, (3) identify
individuals responsible for coordinating
and monitoring day-to-day compliance,
and (4) provide training for personnel as
appropriate.
The Federal Reserve is responsible
for examining supervised institutions for
compliance with various anti-moneylaundering regulations. During examinations of state member banks and U.S.
branches and agencies of foreign banks
and, when appropriate, inspections of
bank holding companies, examiners
review the institution's compliance with
the BSA and determine whether adequate procedures and controls to guard
against money laundering are in place.
The Anti-Money-Laundering Policy
and Compliance Section of the Board's
Division of Banking Supervision and
Regulation is responsible for BSA/antimoney-laundering matters. The section
develops BSA polices and examination
guidance and oversees the Federal
Reserve Banks' implementation of this
guidance.

Business Continuity
In 2004 the Federal Reserve continued
its efforts to strengthen the resilience of
the U.S. financial system in the event
of unexpected disruptions. Throughout

Banking Supervision and Regulation
the year, the Federal Reserve monitored
financial institutions' progress toward
implementing the sound practices identified in the April 2003 "Interagency
Paper on Sound Practices to Strengthen
the Resilience of the U.S. Financial
System," a joint publication with the
Office of the Comptroller of the Currency (OCC) and the Securities and
Exchange Commission (SEC), which
specifies 2005-06 implementation dates.
The agencies also began analyzing the
risks associated with business continuity
testing, in order to develop examiner
guidance, and continue to coordinate
efforts to ensure a consistent supervisory approach toward implementation of
the sound practices.
Specialized Examinations
The Federal Reserve conducts specialized examinations of banking organizations in the areas of information technology, fiduciary activities, transfer agent
activities, and government and municipal securities dealing and brokering. The
Federal Reserve also conducts specialized examinations of certain entities,
other than banks, brokers, or dealers,
that extend credit subject to the Board's
margin regulations.
Information Technology Activities
In recognition of the importance of
information technology to safe and
sound operations in the financial
industry, the Federal Reserve reviews
the information technology activities
of supervised banking organizations as
well as certain independent data centers
that provide information technology
services to these organizations. Several
years ago, the information technology
reviews of banking organizations were
integrated into the overall supervisory
process, and thus all safety and sound


91

ness examinations are now expected to
include a review of information technology risks and activities. During 2004 the
Federal Reserve was the lead agency in
two examinations of large, multiregional
data processing servicers examined in
cooperation with the other federal banking agencies.
Fiduciary Activities
The Federal Reserve has supervisory
responsibility for organizations that
together hold more than $24 trillion of
assets in various fiduciary capacities,
including custodial capacities. During
on-site examinations of fiduciary activities, the organization's compliance with
laws, regulations, and general fiduciary
principles and potential conflicts of
interest are reviewed; its management
and operations, including its asset- and
account-management, risk-management,
and audit and control procedures, are
also evaluated. In 2004 Federal Reserve
examiners conducted 163 on-site fiduciary examinations.
Transfer Agents and
Securities Clearing Agencies
As directed by the Securities Exchange
Act of 1934, the Federal Reserve conducts specialized examinations of those
state member banks and bank holding
companies that are registered with the
Board as transfer agents. Among other
things, transfer agents countersign and
monitor the issuance of securities, register the transfer of securities, and
exchange or convert securities. On-site
examinations focus on the effectiveness of an organization's operations and
its compliance with relevant securities
regulations. During 2004 the Federal
Reserve conducted on-site examinations
at 21 of the 86 state member banks and
bank holding companies that were reg-

92

91st Annual Report, 2004

istered as transfer agents. Also during
the year the Federal Reserve examined
1 state member limited-purpose trust
company acting as a national securities
depository.
Government and Municipal Securities
Dealers and Brokers
The Federal Reserve is responsible for
examining state member banks and foreign banks for compliance with the Government Securities Act of 1986 and with
Department of the Treasury regulations
governing dealing and brokering in
government securities. Twenty-eight
state member banks and 7 state branches
of foreign banks have notified the Board
that they are government securities dealers or brokers not exempt from Treasury's regulations. During 2004 the Federal Reserve conducted 6 examinations
of broker-dealer activities in government securities at these organizations.
These examinations are generally conducted concurrently with the Federal
Reserve's examination of the state member bank or branch.
The Federal Reserve is also responsible for ensuring compliance with the
Securities Act Amendments of 1975 by
state member banks and bank holding
companies that act as municipal securities dealers, which are examined pursuant to the Municipal Securities Rulemaking Board's rule G-16 at least once
every two calendar years. Of the 22 entities that dealt in municipal securities
during 2004, 6 were examined during
the year.
Securities Credit Lenders
Under the Securities Exchange Act of
1934, the Federal Reserve Board is
responsible for regulating credit in certain transactions involving the purchase
or carrying of securities. In addition to
examining banks under its jurisdiction



for compliance with the Board's margin
regulations as part of its general examination program, the Federal Reserve
maintains a registry of persons other
than banks, brokers, and dealers who
extend credit subject to those regulations. The Federal Reserve may conduct
specialized examinations of these lenders if they are not already subject to
supervision by the Farm Credit Administration, the National Credit Union
Administration, or the Office of Thrift
Supervision (OTS).
At the end of 2004, 679 lenders other
than banks, brokers, or dealers were registered with the Federal Reserve. Other
federal regulators supervised 215 of
these lenders, and the remaining 464
were subject to limited Federal Reserve
supervision. On the basis of regulatory
requirements and annual reports, the
Federal Reserve exempted 245 lenders
from its on-site inspection program. The
securities credit activities of the remaining 219 lenders were subject to either
biennial or triennial inspection. Fiftyfive inspections were conducted during
the year, compared with 89 in 2003.
Enforcement Activities
and Special Investigations
The Federal Reserve has enforcement
authority over the banking organizations
it supervises and their affiliated parties.
Enforcement action may be taken to
address unsafe and unsound practices or
violations of any law or regulation. Formal enforcement actions include orders
to cease and desist, written agreements,
removal and prohibition orders, and
civil money penalties. Informal enforcement actions include memorandums of
understanding and board of directors
resolutions.
In 2004 the Federal Reserve completed 64 formal enforcement actions,
including the issuance of cease-and-

Banking Supervision and Regulation

93

desist orders, written agreements, and Regional Banking Organizations
removal and prohibition orders and the
imposition of civil money penalties. The risk-focused supervision program
Civil money penalties totaling $188 mil- for regional banking organizations
lion were assessed. All civil money applies to organizations having a manpenalties, as directed by statute, are agement structure organized by funcremitted either to the Department of the tion or business line, a broad array
Treasury or to the Federal Emergency of products, and operations that span
Management Agency. Enforcement multiple supervisory jurisdictions. For
orders, which are issued by the Board, smaller regional banking organizations,
and written agreements, which are the supervisory program may be impleexecuted by the Reserve Banks, are pub- mented with a point-in-time inspection.
lic information and are posted on the For larger organizations, it may take the
Board's web site (www.federalreserve.gov/ form of a series of targeted reviews. For
boarddocs/enforcement). In addition to the largest, most complex organizations,
formal enforcement actions, the Reserve the process is continuous, as described
Banks completed 102 informal enforce- in the next section. To minimize burden
ment actions in 2004. Information about on the organization, work is performed
these actions is not available to the off-site to the greatest extent possible.
Additionally, to minimize the number of
public.
requests for information from organizaThe Special Investigations Section of
tions, examiners make use of public and
the Division of Banking Supervision and
regulatory financial reports, market data,
Regulation conducts financial investiinformation from automated screening
gations, provides expertise to U.S. law
systems (see the section "Surveillance
enforcement in connection with finanand Off-Site Monitoring"), and internal
cial crimes investigations, and offers
management reports.
training to foreign and domestic government agencies. Board staff also work
with law enforcement, the financial Large, Complex Banking Organizations
industry, and other regulatory agencies The Federal Reserve applies a riskon various task forces and groups estab- focused supervision program to large,
lished to combat bank fraud and other complex
banking
organizations
financial crimes.
(LCBOs).5 The key features of the
LCBO supervision program are (1) identifying those LCBOs that are judged, on
Risk-Focused Supervision
the basis of their shared risk characterPrograms
istics, to present the highest level of
In recent years the Federal Reserve has supervisory risk to the Federal Reserve
created several programs aimed at System, (2) maintaining continual superenhancing the effectiveness of the super- vision of these organizations to keep
visory process. The main objective of current the Federal Reserve's assessthese programs has been to sharpen the ment of each organization's condition,
focus on (1) those business activities
posing the greatest risk to banking orga5. For more information, see Lisa M. DeFerrari
nizations and (2) the organizations'
and David E. Palmer, "Supervision of Large Commanagement processes for identifying, plex Banking Organizations," Federal Reserve
measuring, monitoring, and controlling Bulletin, vol. 87 (February 2001), pp. 47-57
risks.
(www.federalreserve.gov/pubs/bulletin/default.htm).



94

91st Annual Report, 2004

(3) assigning to each LCBO a supervisory team composed of Reserve Bank
staff members who have skills appropriate for the organization's risk profile (the team leader is the central point
of contact, has responsibility for only
one LCBO, and is supported by specialists skilled in evaluating the risks
of LCBO business activities and functions), and (4) promoting Systemwide
and interagency information-sharing
through automated systems.
Community Banks
The risk-focused supervision program
for community banks emphasizes the
review of activities posing the greatest
risk to an organization and provides for
a tiered approach to the examination of
those activities. Examination procedures
are tailored to the bank's characteristics,
keeping in mind its size, complexity,
and risk profile. The examination entails
both off-site and on-site work, including
planning, completing a pre-examination
visit, preparing a detailed scope-ofexamination memorandum, documenting the work done, and preparing an
examination report tailored to the scope
and findings of the examination. The
framework for risk-focused supervision
of community banks was developed
jointly with the Federal Deposit Insurance Corporation (FDIC) and has been
adopted by the Conference of State
Bank Supervisors.

Surveillance and
Off-Site Monitoring
The Federal Reserve uses automated
screening systems that monitor supervisory data and regulatory financial
reports in order to analyze the financial
condition and performance of state
member banks and bank holding companies between on-site examinations and



inspections. This analysis aids in directing examination resources to those organizations that exhibit relatively highrisk profiles. Screening systems also
assist in the planning of examinations
by identifying companies that are engaging in new or complex activities. The
Federal Reserve also has systems that
monitor market data, including equity
prices, debt spreads, agency ratings, and
measures of expected default frequency,
to gauge market perceptions of the risk
in banking organizations.
In addition to using automated screening systems, the Federal Reserve prepares quarterly Bank Holding Company
Performance Reports (BHCPRs) for
use in monitoring and inspecting supervised banking organizations. The reports
are compiled from data provided by
large bank holding companies in quarterly regulatory reports (FR Y-9C and
FR Y-9LP) and contain, for individual
bank holding companies, financial statistics and comparisons with peer companies. BHCPRs are available to the
public via the Board's National Information Center web site (www.ffiec.gov/nic).
During 2004 the web-based Performance Report Information and Surveillance Monitoring (PRISM) application
received major upgrades. PRISM is a
querying tool used by Federal Reserve
analysts to access and display financial,
surveillance, and examination data. In
the analytical module, users can customize the presentation of institutional
financial data drawn from Call Reports,
Uniform Bank Performance Reports,
FR Y-9 statements, Bank Holding Company Performance Reports, and other
regulatory reports. In the surveillance
module, users can generate reports summarizing the results of surveillance
screens for banks and bank holding
companies. The upgrades established
direct links between PRISM and other
automated supervisory tools (the Bank-

Banking Supervision and Regulation
ing Organization National Desktop, or
BOND, and the National Examination
Database), expanded the number of surveillance screens available from BOND,
and enhanced the range of regulatory
data available for querying.
The Federal Reserve works through
the Federal Financial Institutions
Examination Council (FFIEC) Task
Force on Surveillance Systems to coordinate surveillance activities with the
other federal banking agencies.6

International Activities
The Federal Reserve supervises the foreign branches and overseas investments
of member banks, Edge Act and agreement corporations, and bank holding
companies and also the investments
by bank holding companies in export
trading companies. In addition, it supervises the activities that foreign banking
organizations conduct through entities
in the United States, including branches,
agencies, representative offices, and
subsidiaries.
Foreign Operations of
U.S. Banking Organizations
The Federal Reserve examines the
international operations of state member banks, Edge Act and agreement corporations, and bank holding companies
generally at the U.S. head offices of
these organizations, where the ultimate
responsibility for their foreign offices
lies. Examiners also visit the overseas
offices of U.S. banks to obtain financial
and operating information and, in some
instances, to evaluate the organizations'
6. The member agencies of the FFIEC are the
Board of Governors, the Federal Deposit Insurance Corporation, the National Credit Union
Administration, the Office of the Comptroller of
the Currency, and the Office of Thrift Supervision.
State supervisory authorities also participate in
some FFIEC initiatives.



95

efforts to implement corrective measures
or to test their adherence to safe and
sound banking practices. Examinations
abroad are conducted with the cooperation of the supervisory authorities of the
countries in which they take place; when
appropriate, the examinations are coordinated with the OCC.
At the end of 2004, 56 member banks
were operating 763 branches in foreign countries and overseas areas of the
United States; 32 national banks were
operating 706 of these branches, and 24
state member banks were operating the
remaining 57. In addition, 16 nonmember banks were operating 17 branches in
foreign countries and overseas areas of
the United States.
Edge Act and Agreement Corporations
Edge Act corporations are international
banking organizations chartered by the
Board to provide all segments of the
U.S. economy with a means of financing international business, especially
exports. Agreement corporations are
similar organizations, state chartered or
federally chartered, that enter into an
agreement with the Board to refrain
from exercising any power that is not
permissible for an Edge Act corporation.
Sections 25 and 25A of the Federal
Reserve Act grant Edge Act and agreement corporations permission to engage
in international banking and foreign
financial transactions. These corporations, most of which are subsidiaries
of member banks, may (1) conduct a
deposit and loan business in states other
than that of the parent, provided that
the business is strictly related to international transactions, and (2) make foreign
investments that are broader than those
made by member banks, as they may
invest in foreign financial organizations,
such as finance companies and leasing
companies, as well as in foreign banks.

96

91st Annual Report, 2004

At year-end 2004, 79 banking organizations, operating 9 branches, were
chartered as Edge Act or agreement corporations. These corporations are examined annually.
US. Activities of Foreign Banks
The Federal Reserve has broad authority
to supervise and regulate the U.S. activities of foreign banks that engage in
banking and related activities in the
United States through branches, agencies, representative offices, commercial
lending companies, Edge Act corporations, commercial banks, and certain
nonbank companies. Foreign banks continue to be significant participants in the
U.S. banking system.
As of year-end 2004, 188 foreign
banks from 54 countries were operating
228 state-licensed branches and agencies (of which 8 were insured by the
FDIC) as well as 51 branches licensed
by the OCC (of which 5 had FDIC
insurance). These foreign banks also
directly owned 14 Edge Act and agreement corporations and 3 commercial
lending companies; in addition, they
held an equity interest of at least 25 percent in 88 U.S. commercial banks.
Altogether, the U.S. offices of these
foreign banks at the end of 2004 controlled approximately 16 percent of U.S.
commercial banking assets. These foreign banks also operated 68 representative offices; an additional 56 foreign banks operated in the United States
solely through a representative office.
State-licensed and federally licensed
branches and agencies of foreign banks
are examined on-site at least once every
eighteen months, either by the Federal
Reserve or by a state or other federal
regulator; in most cases, on-site examinations are conducted at least once
every twelve months, but the period
may be extended to eighteen months



if the branch or agency meets certain
criteria.
The Federal Reserve conducts a joint
program for supervising the U.S. operations of foreign banking organizations
in cooperation with the other federal
banking agencies and state banking
agencies. The program has two main
parts. One part addresses the examination process for those foreign banking
organizations that have multiple U.S.
operations and is intended to ensure
coordination among the various U.S.
supervisory agencies. The other part is a
review of the financial and operational
profile of each organization to assess its
general ability to support its U.S. operations and to determine what risks, if any,
the organization poses through its U.S.
operations. Together, these two processes provide critical information to
U.S. supervisors in a logical, uniform,
and timely manner. The Federal Reserve
conducted or participated with state
and federal regulatory authorities in
256 examinations in 2004.
Technical Assistance
In 2004 the Federal Reserve System
continued to provide technical assistance on bank supervisory matters to
foreign central banks and supervisory authorities. Technical assistance
involves visits by System staff members
to foreign authorities as well as consultations with foreign supervisors who
visit the Board or the Reserve Banks.
Technical assistance in 2004 was concentrated in Latin America, Asia, and
former Soviet bloc countries.
During the year, the Federal Reserve
offered training courses exclusively for
foreign supervisory authorities in Washington, D.C., and in a number of foreign jurisdictions. System staff also took
part in technical assistance and training
missions led by the International Mone-

Banking Supervision and Regulation
tary Fund, the World Bank, the InterAmerican Development Bank, the Asian
Development Bank, the Basel Committee on Banking Supervision, and the
Financial Stability Institute.

Supervisory Policy
The Federal Reserve's supervisory policy function is responsible for developing guidance for examiners and banking
organizations as well as regulations for
banking organizations under the Federal
Reserve's supervision. Staff members
participate in international supervisory
forums and provide support for the work
oftheFFIEC.
Capital Adequacy Standards
During 2004 the Federal Reserve,
together with the OCC, the FDIC, and
the OTS (collectively, the federal banking agencies), issued a final rule on capital requirements for asset-backed commercial paper programs. The agencies
also continued to consider possible
revisions to their risk-based capital
adequacy regulations to reflect the new
Basel II framework and issued proposed
guidance for internal-ratings-based systems that may be used to determine
capital for retail credit risk. In addition,
the Federal Reserve requested public
comment on a proposed rule concerning
the treatment of trust preferred securities in the tier 1 capital of bank holding
companies.
Asset-Backed
Commercial Paper Programs
In July the Federal Reserve and the
other federal banking agencies adopted
a final rule that amended the agencies'
risk-based capital rules for asset-backed
commercial paper (ABCP) programs.



97

The rule permits banking organizations
to continue to exclude from their riskweighted asset base, for purposes of calculating their risk-based capital ratios,
ABCP program assets that are consolidated onto the balance sheets of sponsoring banking organizations as a result
of Financial Accounting Standards
Board Financial Interpretation No. 46,
"Consolidation of Variable Interest
Entities" (FIN 46). Sponsoring banking organizations must continue to
hold risk-based capital against all other
risk exposures arising in connection
with ABCP programs, including direct
credit substitutes, recourse obligations,
residual interests, long-term liquidity
facilities, and loans, in accordance with
existing risk-based capital standards.
In addition, any minority interests in
ABCP programs that are consolidated
as a result of FIN 46 are to be excluded
from the sponsoring banking organization's minority interest component
of tier 1 capital and, hence, from riskbased capital. The amended capital
treatment does not alter the accounting
rules for balance sheet consolidation,
nor does it affect the denominator of the
tier 1 leverage capital ratio calculation,
which continues to be based primarily
on on-balance-sheet assets as reported
under generally accepted accounting
principles. Thus, as a result of FIN 46,
banking organizations must include all
assets of consolidated ABCP programs
in on-balance-sheet assets for purposes
of calculating their tier 1 leverage capital ratio.
In addition, the rules impose a riskbased capital charge on liquidity facilities having an original maturity of one
year or less that organizations provide to
ABCP programs by imposing a 10 percent credit conversion factor on such
facilities. This treatment recognizes that
such facilities expose banking organizations to credit risk and is consistent with

98

91st Annual Report, 2004

the industry's practice of internally allocating economic capital against the risk
associated with such facilities. A separate capital charge on liquidity facilities
provided to an ABCP program is not
required of banking organizations that
consolidate the program for purposes of
risk-based capital.
Risk-Based Capital Standards
for Certain Internationally Active
Banking Organizations
In August 2003 the Federal Reserve,
together with the other federal banking
agencies, issued for public comment an
advance notice of proposed rulemaking
and draft supervisory guidance setting
forth the agencies' views on implementing the Basel II framework in the United
States. The proposed plan would allow
banking organizations that meet specific criteria to use their own estimates
of certain risk parameters as key inputs
in determining their regulatory capital
requirements.
Over the course of 2004, working
both independently and with the member countries of the Basel Committee on
Banking Supervision, the federal banking agencies continued to modify the
methodologies in the Basel II framework. In October the agencies issued
proposed guidance on internal-ratingsbased systems that may be used to determine regulatory capital for retail credit
risk under the Basel II framework. The
proposed guidance describes the agencies' views on the components and
characteristics of a qualifying internalratings-based system for measuring
the credit risk associated with retail
exposures, including residential mortgages, consumer credit cards, automobile loans, personal loans, and some
small business loans. The comment
period was scheduled to end in January
2005. (For more information on the



Basel II framework, see the box "Implementing the Basel II Framework in the
United States.")
Capital Treatment of
Trust Preferred Securities
In May the Federal Reserve Board proposed to allow the continued inclusion
of outstanding and prospective issuances
of trust preferred securities in the tier 1
capital of bank holding companies while
imposing stricter quantitative limits and
clarifying qualitative standards for capital instruments included in regulatory
capital. The stricter quantitative limits
would apply to the aggregate amount
of trust preferred securities, cumulative
perpetual preferred stock, and minority
interests in the equity accounts of certain consolidated subsidiaries (collectively, restricted core capital elements)
included in bank holding company tier 1
capital. The proposed rule would make
explicit a general expectation that internationally active bank holding companies would limit the amount of restricted
core capital elements to 15 percent of
the sum of core capital elements, including restricted core capital elements, net
of goodwill less any associated deferred
tax liability, consistent with a 1998
Basel agreement. Other bank holding
companies would be subject to a 25 percent limit on the amount of restricted
core capital elements. The proposal provides for a three-year transition period
for compliance with the stricter quantitative limits.
These revisions were proposed to
address supervisory concerns, competitive equity considerations, and changes
in generally accepted accounting principles. They would have the effect of
strengthening the definition of regulatory capital for bank holding companies. A final rule is to be issued in early
2005.

Banking Supervision and Regulation

99

assessment of the subsidiary depository
institution(s), as had been the case for
In December 2004, the Federal Reserve the bank rating under the previous ratand the other federal banking agencies ing system, BOPEC (Bank subsidiaries,
issued guidance on the safety-and- Other subsidiaries, Parent, Earnings,
soundness and risk-management impli- Capital).
cations of purchases and holdings of
To provide a consistent framework
life insurance by banks and savings for assessing risk management, the riskassociations. The guidance addresses management component of the new ratthe unique characteristics of bank- ing system is supported by four subcomowned life insurance (BOLI) as well as ponents that reflect the effectiveness of
the need for a comprehensive pre- and the banking organization's risk manpost-purchase analysis of the risks and agement and controls: board and senior
rewards of BOLL
management oversight; policies, procedures, and limits; risk monitoring
and management information systems;
Bank Holding Company
and internal controls. The financialRating System
condition component is similarly supTo more closely align the supervisory ported by four subcomponents that
rating system for bank holding compa- reflect an assessment of the quality
nies with its supervisory practices, the of the banking organization's capital,
Federal Reserve in December 2004 assets, earnings, and liquidity. A simpliadopted a revised bank holding com- fied version of the rating system that
pany rating system, effective January 1, requires only the assignment of the risk2005. The increased complexity of the management component rating and
U.S. banking industry has necessitated composite rating (C) will be applied to
a shift over time in the focus of the noncomplex bank holding companies
Federal Reserve's supervisory practices having assets of less than $1 billion.
for bank holding companies away from
historical analyses of financial condition
toward more-forward-looking assess- Bank Secrecy Act and
ments of risk management and financial Anti-Money Laundering
factors. Under the revised rating system, The Federal Reserve in 2004 issued a
each bank holding company is assigned number of supervisory letters to domesa composite rating based on an eval- tic and foreign banking organizations on
uation and rating of its managerial and such topics as examination procedures
financial condition and an assessment for customer identification programs
of future potential risk to its subsidiary and the imposition of "special meadepository institution(s). The three main sures" by the Department of the Treacomponents of the new RFI/C (D) rating sury on certain jurisdictions and forsystem are Risk management, Financial eign financial institutions suspected of
condition, and potential Impact of the being of "primary money laundering
parent company and nondepository sub- concern."
sidiaries (collectively, nondepository
The Federal Reserve is actively workentities) on the subsidiary depository ing with the other federal and state
institution(s). The rating of a fourth banking agencies to develop intercomponent, Depository institution, will agency Bank Secrecy Act/anti-moneygenerally mirror the primary regulator's laundering examination procedures to be

Bank-Owned Life Insurance




100 91st Annual Report, 2004

Implementing the Basel II Framework in the United States
We are embarking on an effort to achieve considerably more precision in
correlating the riskiness of an institution's activities and its regulatory capital.
Roger Ferguson, Vice Chairman, Board of Governors
November 2004
Preparation continued during 2004 for
implementation in the United States of a
new international agreement on capital adequacy for banking organizations.1 The new
agreement, familiarly known as Basel fi,
sets forth a framework for ensuring that
banks hold adequate capital against risk
and builds on the initial international capital agreement adopted in 1988.
The original Basel Capital Accord,
though widely considered to have achieved
its principal objectives of promoting financial stability and providing an equitable
basis for competition among internationally active banks, has in recent years been
viewed as too simple to address the activities of today's large, complex banking
organizations. Basel II creates a stronger
framework for these organizations through
minimum capital requirements that are
more sensitive to each organization's risk
profile and that reinforce incentives for
strong risk management.2
The Basel II framework contains provisions addressing credit risk (the risk of loss
due to failure of a counterparty to meet
its obligations) and operational risk (the
risk of loss resulting from inadequate or
failed internal processes, people, or systems or from external events).3 It relies on
three pillars—minimum capital requirements, supervisory review, and market
discipline—and is the basis on which
revisions to existing US. capital adequacy regulations and standards are being
developed.
1. The final agreement, titled "International
Convergence of Capital Measurement and
Capital Standards: A Revised Framework" and
published in June 2004, was developed by




Scope of Application in the United States
Final rules for application of the Basel II
framework in the United States are still
being developed- It is expected that only
a small number of large, internationally
active U.S. banking organizations will be
subject to the new framework. Those
institutions would be required to use the
most advanced options of the framework
for determining their risk-based capital
requirements (the advanced internalratings-based approach, or A-IRB, for
credit risk and the advanced measurement
approaches, or AMA, for operational risk).
Other U.S. banking organizations would
not be required to adopt Basel II but could
opt to do so, provided they could demonstrate the ability to develop the risk measures required as inputs to determine capital requirements. Those banks not adopting
Basel II would continue to operate under
existing capital rules.
Implementation Plan and Timetable
The U.S. banking and thrift agencies have
been coordinating their efforts to implethe Basel Committee on Banking Supervision,
which is made up of representatives of the central banks or other supervisory authorities of the
G-10 countries plus Luxembourg and has its
secretariat at the Bank for International Settlements in Basel, Switzerland. See www.bis.org/
publ/bcbslO7.htm.
2. See "Capital Standards for Banks: The
Evolving Basel Accord," Federal Reserve Bulletin, vol. 89 (September 2003), pp. 395-405
(www.federalreserve.gov/pubs/bulletin/default.htm).
3. Basel I was updated in 1996 to account for
market risk.

Banking Supervision and Regulation

rnent Basel II. The new rules are expected
to take effect on January 1, 2008; before
then, institutions subject to the new rules
will be required to conduct a year of parallel calculations—that is, to simultaneously
calculate capital requirements according to
the Basel II-based rules and the current
rules. Both supervisors and bankers have
much to accomplish before the target 2008
date, including the writing of final rules
and guidance by the agencies and the
development and execution of an acceptable, detailed written plan for implementation by each adopting institution.

101

capital requirements is seen as among the
most significant steps institutions can take
in advance of the issuance of final rules
and associated guidance. The qualification
process will be iterative. The plans will
serve as instruments of communication
between institutions and their supervisors
in their home country and other jurisdictions. They are expected to include a
self-assessment by the institution, a gap
analysis (based on the self-assessment)
identifying areas needing additional work,
an action plan for addressing shortcomings, objectively measurable milestones,
and an assessment of resources needed.

Revision of Regulations
Comments on an advance notice of proposed rulemakmg issued in August 2003
that set forth possible revisions to the capital adequacy regulations are currently being
reviewed. Importantly, all U.S. banking
organizations would continue to be subject to leverage ratio requirements and to
prompt corrective action regulations, which
closely link enforcement actions to banks'
capital levels.
The agencies expect that a notice of proposed rulemaking on possible revisions
to the regulations will be published in
mid-2005. Final rules are expected in the
second quarter of 2006. The agencies are
also considering possible changes to riskbased capital regulations for U.S. institutions not subject to the Basel Il-based regulations; these changes are expected to
become effective at the same time as the
Basel II -based regulations.
Qualification for Using
Advanced Approaches
The agencies have issued guidance setting
forth their ideas about the qualification process for Basel II in the United States. The
development of a detailed written plan
for implementing the A-IRB and AMA
approaches for determining risk-based




Issuance of Supervisory Guidance
During 2005 the agencies will continue to
develop supervisory guidance concerning
the various portfolios and risk exposures
addressed by Basel II; draft supervisory
guidance on corporate and retail credit risk
and operational risk has already been published. The guidance will set forth supervisory expectations for banking organizations adopting the Basel II-based rules, for
example, the components and characteristics of an acceptable risk-measurement and
risk-management infrastructure.
Completion of Quantitative Studies
In 2004 the agencies began a fourth Quantitative Impact Study (QIS-4) to evaluate
the potential effects of U.S. implementation of the Basel II framework and a "loss
data collection exercise" (LDCE) focused
on operational risk. About thirty banking
organizations are participating in QIS-4;
about twenty are participating in the
LDCE. These studies are intended to help
banking organizations and their supervisors
better understand the implications of the
Basel II framework for regulatory capital
and may provide some insight on implications of the new approaches for competition within the banking industry.

102 91st Annual Report, 2004
released in 2005. The Department of the
Treasury's Financial Crimes Enforcement Network (FinCEN) has participated in this initiative.
To support this work and to provide a forum for the federal banking
agencies to discuss matters related
to Bank Secrecy Act/anti-moneylaundering examination and training, a
Bank Secrecy Act Working Group was
formed in 2004 under the FFIEC. The
working group, which also includes
FinCEN and state bank regulators,
complements other interagency and
international efforts, such as the Bank
Fraud Working Group, the Financial
Action Task Force, and various supervisors committees within the Basel
Committee on Banking Supervision.
The Federal Reserve participates in
another such group, the BSA Advisory
Group, which was established by statute
to seek ways to reduce unnecessary burden created by the BSA and to increase
the utility of data gathered under the act
to aid regulators and law enforcement.
In addition, through this group, the Federal Reserve assists the Treasury Department in providing feedback to financial
institutions on the reporting of suspicious activity. Finally, staff of the Division of Banking Supervision and Regulation engage in outreach to the financial
services industry by, for example, speaking at banking conferences to promote
best practices to combat money laundering and terrorist financing.
International Guidance on
Supervisory Policies
As a member of the Basel Committee
on Banking Supervision, the Federal
Reserve in 2004 participated in efforts
to revise the international capital regime
and to develop international supervisory
guidance. The Federal Reserve's goals
in these activities are to advance sound



supervisory policies for internationally active banking organizations and
to improve the stability of the international banking system. The efforts are
described in the following sections.
Capital Adequacy
During 2004 the Federal Reserve continued to participate in a number of technical working groups of the Basel Committee in efforts to develop the revised
Basel framework (familiarly referred
to as Basel II), which was published
in June, and to address issues not fully
resolved in that framework. In particular, the Federal Reserve participated in
a joint Basel Committee-International
Organization of Securities Commissions
(IOSCO) working group on the trading
book to review issues related to counterparty credit risk, double default effects
(reflecting the low probability that both
a borrower and its guarantor will default
at the same time), and the definition of
the trading book.
Risk Management
The Federal Reserve contributed to
several supervisory policy papers,
reports, and recommendations issued
by the Basel Committee during 2004
that were generally aimed at improving the supervision of banking organizations' risk-management practices.
• "Consolidated Know-Your-Customer
Risk Management," issued in October, provides guidance to help international banking organizations establish
centralized processes for sharing
information and for coordinating and
promulgating customer due diligence
policies and procedures on a consolidated basis. The guidance, which
builds on Basel Committee publications issued in 2001 and 2003, also
encourages government jurisdictions

Banking Supervision and Regulation
to facilitate consolidated customer due
diligence risk management by providing a legal framework that allows
overseas subsidiaries and affiliates of
banking organizations to share information with their head offices or parent banks.
"Principles for the Management and
Supervision of Interest Rate Risk,"
issued in July, describes the pillar 2
(supervisory review) approach to
calculating interest rate risk under
Basel II. The paper reflects comments
received on a September 2003 consultative paper.
"Implementation of Basel II: Practical Considerations," issued in July,
discusses the costs and benefits of
Basel II implementation from the
point of view of non-GlO countries,
focusing in particular on potential
changes to the legal and regulatory
framework and on resource and training requirements.
In January the Basel Committee
issued changes to the internal-ratingsbased approach to securitization exposures under Basel II, in response to
industry concerns related to the complexity of the proposal and the operational burdens of implementation.
1

In January the Basel Committee
announced its decision to base the
Basel II framework on unexpected
losses rather than a combination of
unexpected and expected losses, in
response to industry requests and
comments. However, under the framework, banks would be required to
compare provisions with expected
losses and to deduct any deficiency
from capital. Excess provisions would
be eligible for inclusion in tier 2 capital, subject to a cap.




103

• "Principles for the Home-Host Recognition of AMA Operational Risk
Capital," issued in January, addresses
industry concerns about practical
impediments to the cross-border
implementation of the advanced measurement approaches for operational
risk, an element of the Basel II
framework.
Joint Forum
In its work with the Basel Committee,
the Federal Reserve also continued its
participation in the Joint Forum—a
group made up of representatives of the
committee, IOSCO, and the International Association of Insurance Supervisors. The Joint Forum works to increase
mutual understanding of issues related
to the supervision of firms operating
in each of the financial sectors. The
Joint Forum issued three publications in
2004:
• "Credit Risk Transfer," issued in
October, reviews the rapid growth in
credit risk transfer products, such as
single-name credit default swaps and
collateralized debt obligations, and
concludes that these markets have
provided banking organizations with
significantly more liquid and efficient
methods of trading and diversifying
their credit risks. The report notes that
although these products do not raise
immediate and significant financial
stability concerns, financial organizations should adopt appropriate riskmanagement practices when conducting business in these products.
• "Outsourcing in Financial Services,"
issued in August, discusses the key
issues and risks associated with financial firms' outsourcing of significant
parts of their regulated and unregulated activities to third parties and sets

104 91st Annual Report, 2004
forth principles to help firms mitigate
these risks.
• "Financial Disclosure in the Banking,
Insurance and Securities Sectors:
Issues and Analysis," issued in May,
outlines the findings of a working
group established to follow up on
recommendations contained in a 1999
report that provided advice to supervisors on enhancing financial institutions' public disclosures of their financial risks.
International Accounting
and Disclosure
The Federal Reserve participates in the
Basel Committee's Accounting Task
Force and represents the Basel Committee at international meetings on accounting, auditing, and disclosure issues
affecting global banking organizations.
In particular, officials of the Federal
Reserve represent the Basel Committee
at meetings that address financial instruments accounting and disclosure issues
associated with international accounting
standards. In addition, an official of the
Federal Reserve is a member of the
Standards Advisory Council of the International Accounting Standards Board
(IASB).
During 2004 the Federal Reserve had
a key role in development of the Basel
Committee's comments on the IASB's
proposed amendment to the guidance in
International Accounting Standard 39 on
the optional use of fair value accounting
for financial instruments. In addition,
the Federal Reserve strongly supported
the Basel Committee's efforts to develop
guidance on improving disclosure for
the purpose of enhancing market discipline. This support contributed to
the finalization of pillar 3 guidance on
improved disclosures in support of
Basel E.



The Federal Reserve and the Basel
Committee also worked with other international regulatory organizations, such
as IOSCO, the International Association
of Insurance Supervisors, the World
Bank, and the Financial Stability Forum,
as part of an organization called the
Monitoring Group, to promote stronger
international audit standards and practices. This effort led to the adoption by
the International Federation of Accountants (IFAC) of comprehensive reforms
that will result in greater public oversight of IFAC's audit-standard-setting
activities.

Sarbanes-Oxley Act
During 2004 the Federal Reserve continued to evaluate the effects of the
Sarbanes-Oxley Act on banking organizations. The effort involved the Federal
Reserve's working closely with banking
organizations and their external auditors to better understand the challenges
they are encountering in complying with
the sections of the act that relate to
internal controls. It also involved dialogue with the SEC and the Public
Company Accounting Oversight Board
(PCAOB) on various interpretative
issues related to these matters.
In addition, an official of the Federal
Reserve serves on the Standing Advisory Group of the PCAOB, which is
advising the PCAOB as it develops standards for the external audits of publicly
traded companies in the United States.
The Federal Reserve also continued in
2004 to work with the FDIC and other
banking agencies to consider changes
that should be made to the regulations
implementing the Federal Deposit
Insurance Corporation Improvement Act
to promote strong internal controls
and consistency with the SarbanesOxley Act requirements.

Banking Supervision and Regulation

Efforts to Enhance Transparency
As part of ongoing efforts to promote
sound accounting and disclosure practices by banking organizations, the Federal Reserve, together with the other
banking agencies, in February issued
guidance on the appropriate accounting
treatment for obligations under certain
types of deferred compensation agreements (see SR Letter 04-4). In March
the Federal Reserve and the other banking agencies issued guidance identifying
current sources of generally accepted
accounting principles (GAAP) and
supervisory guidance that should be
used by banking organizations in determining their allowance for loan and
lease losses (see SR Letter 04-5). The
Federal Reserve also worked with foreign supervisors in developing pillar 3
of the Basel II framework, which aims
to enhance banking organizations' public disclosure of their risk exposures,
capital, and capital adequacy.
In October the Federal Reserve submitted a comment letter to the Financial
Accounting Standards Board (FASB) on
its "Fair Value Measurements Exposure
Draft." In addition, Federal Reserve
staff provided comments to FASB on an
accounting interpretation that addressed
impairment of securities.

Bank Holding Company
Regulatory Financial Reports
The Federal Reserve requires that U.S.
bank holding companies periodically
submit reports providing financial and
structure information. This information
is essential to the supervision of the
organizations and the formulation of
regulations and supervisory policies.
The information is also used in responding to requests from Congress and
the public for information on bank



105

holding companies and their nonbank
subsidiaries.
The FR Y-9 series of reports provides
standardized financial statements for
bank holding companies on a consolidated and parent-only basis. The reports
are used to detect emerging financial
problems, review performance and conduct pre-inspection analysis, monitor
and evaluate risk profiles and capital
adequacy, evaluate proposals for bank
holding company mergers and acquisitions, and analyze the holding company's overall financial condition. The
nonbank subsidiary reports—FR Y-ll,
FR 2314, and FR Y-7N—aid the Federal Reserve in determining the condition of bank holding companies that are
engaged in nonbanking activities and in
monitoring the volume, nature, and condition of their nonbanking subsidiaries.
The FR Y-8 report collects information
on transactions between an insured
depository institution and its affiliate
that are subject to section 23A of the
Federal Reserve Act; it enhances the
Federal Reserve's ability to monitor
bank exposures to affiliates and to
ensure compliance with section 23A of
the act.
In March 2004, several revisions to
the FR Y-9C report were implemented
for the purpose of collecting preliminary
data from selected large bank holding
companies on a voluntary basis, improving the reporting of trust preferred securities, and collecting from some of the
largest bank holding companies the
addresses of their web pages displaying risk disclosures. In September and
December the electronic filing process
for the FR Y-9 series of reports was
enhanced to require respondents to perform data validation checks prior to
filing.
In May revisions were made to
clarify the language in the reporting
forms and instructions for three

106 91st Annual Report, 2004
reports—the Annual Report of Bank
Holding Companies (FR Y-6), the
Report of Changes in Organizational
Structure (FR Y-10), and the Report
of Changes in FBO Organizational
Structure for foreign banking organizations (FRY-10F).
In June the FR Y-8 was revised to
allow for collection of additional information to be used in monitoring compliance with section 23A of the Federal
Reserve Act and to assist in monitoring
derivatives transactions and establishing
policy for regulating such transactions.
The report was also revised to reflect
interpretations and definitions in Regulation W, the rule that comprehensively
implements sections 23 A and 23B of the
act.

Commercial Bank
Regulatory Financial Reports
As the federal supervisor of state member banks, the Federal Reserve, acting in
concert with the other federal banking
agencies through the FFIEC, requires
banks to submit quarterly Reports of
Condition and Income (Call Reports).
Call Reports are the primary source of
data for the supervision and regulation
of banks and for the ongoing assessment
of the overall soundness of the nation's
banking system. Call Report data, which
also serve as benchmarks for the financial information required by many other
Federal Reserve regulatory financial
reports, are widely used by state and
local governments, state banking supervisors, the banking industry, securities
analysts, and the academic community.
The Federal Reserve and the other
banking agencies have begun a Call
Report modernization project to
improve the timeliness and quality of
supervisory data and to enhance market
discipline by ensuring more timely
access by the public. Proposed enhance


ments to the data collection and disclosure process include requiring electronic
submission of Call Reports to a central
data repository, moving forward the
deadline for filing reports, and requiring
respondents to validate their data before
filing. The effort to set up a central data
repository is currently in the testing
phase, and the repository is expected to
be operational in 2005.
No significant changes were made to
the Call Report in 2004. A proposal was
issued in April to make two instructional clarifications to the report.
Also in 2004, the Report of Assets
and Liabilities of U.S. Branches and
Agencies of Foreign Banks (FFIEC 002)
was revised, effective in March, to
include additional information on
derivatives contracts. A proposal was
issued in August to revise the Country
Exposure Report (FFIEC 009) and the
Country Exposure Information Report
(FFIEC 009a) to harmonize U.S. data
with data on cross-border exposures collected by other countries.
Federal Financial Institutions
Examination Council
During 2004 the Federal Financial Institutions Examination Council focused on
coordinating the agencies' efforts in the
area of Bank Secrecy Act examination
and training by enhancing communication and cooperation with FinCEN, an
agency within the Treasury Department
whose mission is to safeguard the financial system from terrorist financing,
money laundering, and other financial
crimes. It also continued its efforts to
identify and eliminate outdated, unnecessary, or unduly burdensome regulations, pursuant to the Economic Growth
and Regulatory Paperwork Reduction
Act of 1996. The FFIEC made significant progress on a project to modernize and streamline the way in which

Banking Supervision and Regulation 107
the banking agencies collect, process,
and distribute quarterly bank financial
reports. In addition, the FFIEC continued its efforts related to examiner training and education, consumer compliance issues, bank surveillance processes,
and information-sharing.

Supervisory Information
Technology
Under the direction of the division's
chief technology officer, the supervisory
information technology (SIT) function
within the Division of Banking Supervision and Regulation facilitates the
management of information technology
within the Federal Reserve System's
supervision function. Its goals are to
ensure that
• IT initiatives support a broad range of
supervisory activities without duplication or overlap;
• the underlying IT architecture fully
supports those initiatives;
• adequate resources are devoted to
interagency working groups on supervisory initiatives (for example, Call
Report modernization and the federal
bridge investigation initiatives);
• the supervision function's use of technology leverages the resources and
expertise available more broadly
within the Federal Reserve System;
and
• practices that maximize the supervision function's business value, cost
effectiveness, and quality are identified, analyzed, and approved for
implementation.
SIT works through assigned staff at the
Board of Governors and the Reserve



Banks, as well as through a Systemwide
committee structure, to ensure that key
staff members throughout the System
participate in identifying requirements
and setting priorities for IT initiatives.
SIT Project Management
In 2004 the SIT project management
staff, in partnership with other Federal
Reserve System staff, developed a strategic plan for 2005-09 that identifies
opportunities for enhancing business
value through the use of information
technology. Another major activity was
development of a program to ensure
compliance with the Federal Information Security Management Act. In addition, staff members supported modernization of the Shared National Credit
program as well as assessments of
opportunities in the areas of electronic
applications, administrative systems,
and learning management systems to
improve information technology services in conjunction with efforts of
Board and Reserve Bank internal IT
providers.
National Information Center
The National Information Center (NIC)
is the Federal Reserve's comprehensive
repository for supervisory, financial, and
banking structure data and documents.
NIC includes the structure data system; the National Examination Database
(NED), which provides supervisory
personnel and state banking authorities
with access to NIC data; and the Central Document and Text Repository
(CDTR), which contains documents
supporting the supervisory process.
In 2004 the structure data system was
modified to adhere to the industry standards for use of NAICS (North American Industry Classification System)
business activity codes. Changes were

108 91st Annual Report, 2004
made to NED to accommodate the new
bank holding company supervisory rating system and to provide user interoperability with PRISM and the CDTR.
The CDTR was expanded to contain
examination reports for regional and
community banking organizations prepared by Reserve Banks. Significant
resources continue to be devoted to Call
Report modernization for the FFIEC
Central Data Repository initiative, with
implementation expected in 2005.

Banking Organization
National Desktop
Supervision of domestic banking organizations and the U.S. operations of
foreign banking organizations is supported by an automated application—
the Banking Organization National
Desktop (BOND)—that
facilitates
secure, real-time electronic informationsharing and collaboration among federal
and state banking regulators. During
2004 BOND was enhanced to improve
its usability, reduce administrative burden, increase the effectiveness of management reporting, and facilitate the
sharing of information related to Basel II
and the tracking of parallel-owned banks
or bank holding companies (that is,
organizations in the United States and
another country that have the same controlling shareholder). Other enhancements included financial holding company compliance monitoring, improved
data quality edits, the addition of applications data, and changes to accommodate the new RFI/C (D) rating scheme
for bank holding companies (see the
section "Bank Holding Company Rating System"). BOND has been updated
to include seamless links to the Federal
Reserve's Applications Management
and Processing System and to a new
system for accessing data on the Shared
National Credit program, an interagency



effort that aims to reduce examination
costs and improve the timeliness and
reliability of data associated with the
review of large, syndicated credit facilities of commercial banks. At year-end
2004, BOND had 2,850 registered users
across the Federal Reserve System, the
OCC, the FDIC, and ten state banking
departments.

Staff Development
The Federal Reserve System's staff
development program trains staff members at the Board, the Reserve Banks,
and state banking departments who have
supervisory and regulatory responsibilities as well as students from foreign supervisory authorities. Training
is offered at the basic, intermediate, and
advanced levels in several disciplines
within bank supervision: safety and
soundness, information technology,
international banking, and consumer
affairs. Classes are conducted in Washington, D.C., as well as at Reserve
Banks and other locations.
The Federal Reserve System also
participates in training offered by the
FFIEC and by certain other regulatory
agencies. The System's involvement
includes developing and implementing
basic and advanced training in relation
to various emerging issues as well as
in specialized areas such as international banking, information technology,
municipal securities dealing, capital
markets, payment systems risk, white
collar crime, and real estate lending. In
addition, the System co-hosts the World
Bank Seminar for students from developing countries.
In 2004 the Federal Reserve trained
2,365 students in System schools, 721 in
schools sponsored by the FFIEC, and 20
in other schools, for a total of 3,106,
including 293 representatives of foreign

Banking Supervision and Regulation

109

Training Programs for Banking Supervision and Regulation, 2004
Number of sessions conducted
Program
Total
Schools or seminars conducted by the Federal Reserve
Core schools
Banking and supervision elements
Operations and analysis
Bank management
Report writing
Management skills
Conducting meetings with management

Regional

5
1
12
9
13

7
43
2
12
8
13

Other schools
Credit risk analysis
Examination management
Real estate lending seminar
Senior forum for current banking and regulatory issues
Basel II corporate activities
Basel II retail activities
Principles of fiduciary supervision
Commercial lending essentials for consumer affairs
Consumer compliance examinations I
Consumer compliance examinations II
CRA examination techniques
CRA risk-focused examinations
Fair lending examination techniques
Foreign banking organizations
Information systems continuing education
Capital markets seminars
Technology risk integration
Leadership dynamics
Internal bank ratings and credit risk modeling
Seminar for senior supervisors of foreign central banksv
and seven other international courses
Other agencies conducting courses2
Federal Financial Institutions Examination Council
The Options Institute
1. Conducted jointly with the World Bank.

central banks (see table). The number of
training days in 2004 totaled 17,738.
The System gave scholarship assistance to the states for training their
examiners in Federal Reserve and
FFIEC schools. Through this program,
410 state examiners were trained—242
in Federal Reserve courses, 158 in
FFIEC programs, and 10 in other
courses.
A staff member seeking an examiner's commission is required to take a
first proficiency examination, which
tests knowledge of a core body of information, and also a second proficiency



65
2
2. Open to Federal Reserve employees.

examination in one of three specialty
areas: safety and soundness, consumer
affairs, or information technology. In
2004, 135 examiners passed the first
proficiency examination. In the second
proficiency examination, 87 examiners
passed the safety and soundness examination, 29 passed the consumer affairs
examination, and 6 passed the information technology examination. The overall pass rate for these examinations was
79 percent. At the end of 2004, the
System had 1,223 field examiners, of
which 950 were commissioned (see
table).

110 91st Annual Report, 2004
Year-End Reserve Bank Supervision Levels, 2000-2004
Type of staff
Field examination staff
Commissioned field staff

2004

2003

2002

2001

2000

1,223
950

1,239
936

1,234
892

1,242
861

1,172
786

Regulation of the
U.S. Banking Structure
The Federal Reserve administers several federal statutes in relation to bank
holding companies, financial holding
companies, member banks, and foreign
banking organizations—the Bank Holding Company Act, the Bank Merger Act,
the Change in Bank Control Act, and
the International Banking Act. In administering these statutes, the Federal
Reserve acts on a variety of proposals
that would directly or indirectly affect
the structure of U.S. banking at the local,
regional, and national levels; the international operations of domestic banking
organizations; and the U.S. banking
operations of foreign banks.
Bank Holding Company Act
Under the Bank Holding Company Act,
a corporation or similar organization
must obtain the Federal Reserve's
approval before forming a bank holding
company through the acquisition of one
or more banks in the United States.
Once formed, a bank holding company
must receive Federal Reserve approval
before acquiring or establishing additional banks. The act also identifies
activities permissible for bank holding
companies; depending on the circumstances, these activities may or may not
require Federal Reserve approval in
advance of their commencement.
When reviewing a bank holding company application or notice that requires
prior approval, the Federal Reserve



considers the financial and managerial
resources of the applicant, the future
prospects of both the applicant and the
firm to be acquired, the convenience and
needs of the community to be served,
the potential public benefits, the competitive effects of the proposal, and the
applicant's ability to make available to
the Federal Reserve information deemed
necessary to ensure compliance with
applicable law. In the case of a foreign
banking organization seeking to acquire
control of a U.S. bank, the Federal
Reserve also considers whether the foreign bank is subject to comprehensive
supervision or regulation on a consolidated basis by its home country supervisor. Data on decisions regarding domestic and international applications in 2004
are shown in the accompanying table.
Bank holding companies generally
may engage in only those activities that
the Board has previously determined
to be closely related to banking under
section 4(c)(8) of the Bank Holding
Company Act. Since 1996, the act has
provided an expedited prior-notice procedure for certain permissible nonbank
activities and for acquisitions of small
banks and nonbank entities. Since that
time the act has also permitted well-run
bank holding companies that satisfy certain criteria to commence certain other
nonbank activities on a de novo basis
without first obtaining Federal Reserve
approval.
Since 2000, the Bank Holding Company Act has permitted the creation
of a special type of bank holding company called a financial holding com-

Banking Supervision and Regulation

111

Decisions by the Federal Reserve on Domestic and International Applications, 2004
Action under authority delegated
by the Board of Governors
Direct action
by the
Board of Governors

Proposal

Approved
Formation of bank
holding
company
Merger of bank
holding
company
Acquisition or
retention of
bank
Acquisition of
nonbank
Merger of bank
Change in control
Establishment of a
branch, agency,
or representative
office by a
foreign bank
Other
Total

Denied

Director of the
Office
Division of Banking of the
Supervision and
Secretary
Regulation

Permitted Approved

9

0

0

14

0

1

16

0

1

0

31
0
1

0

0

8

0
4
0

0

1

0

0

0

Denied

Federal
Reserve Banks

Total

Approved Approved Permitted

0

187

3

27

25

70

11

114

26

168

0
0

0

43

0

0

135

0

0

0

5
9
0

0
67
0

108
0
124

144
80
125

0
0

0

0

0

0

9

134

0

0

85

0

98

941

507

1,765

178

0

34

93

0

126

1,284

833

2,548

pany. Financial holding companies are
allowed to engage in a broader range of
nonbank activities than are traditional
bank holding companies. Among other
things, they may affiliate with securities firms and insurance companies and
engage in certain merchant banking
activities. Bank holding companies
seeking financial holding company status must file a written declaration with
the Federal Reserve. In 2004, 47 domestic financial holding company declarations and 5 foreign bank declarations
were approved.
Bank Merger Act
The Bank Merger Act requires that
all proposals involving the merger of
insured depository institutions be acted
on by the appropriate federal banking



agency. If the institution surviving the
merger is a state member bank, the Federal Reserve has primary jurisdiction.
Before acting on a merger proposal, the
Federal Reserve considers the financial
and managerial resources of the applicant, the future prospects of the existing
and combined organizations, the convenience and needs of the community
to be served, and the competitive effects
of the proposed merger. It also considers the views of certain other agencies regarding the competitive factors
involved in the transaction. In 2004 the
Federal Reserve approved 80 merger
applications.
When the FDIC, the OCC, or the
OTS has jurisdiction over a merger, the
Federal Reserve is asked to comment
on the competitive factors related to the
proposal. By using standard terminol-

112 91st Annual Report, 2004
ogy in assessing competitive factors
in merger proposals, the four agencies
have sought to ensure consistency in
administering the Bank Merger Act. The
Federal Reserve submitted 534 reports
on competitive factors to the other agencies in 2004.

Change in Bank Control Act
The Change in Bank Control Act
requires persons seeking control of a
U.S. bank or bank holding company to
obtain approval from the appropriate
federal banking agency before completing the transaction. The Federal Reserve
is responsible for reviewing changes in
the control of state member banks and
bank holding companies. In its review,
the Federal Reserve considers the financial position, competence, experience,
and integrity of the acquiring person;
the effect of the proposed change on the
financial condition of the bank or bank
holding company being acquired; the
effect of the proposed change on competition in any relevant market; the completeness of the information submitted
by the acquiring person; and whether
the proposed change would have an
adverse effect on the federal deposit
insurance funds. As part of the process,
the Federal Reserve may contact other
regulatory or law enforcement agencies for information about relevant
individuals.
In 2004 the Federal Reserve approved
125 changes in control of state member
banks and bank holding companies.

International Banking Act
The International Banking Act, as
amended by the Foreign Bank Supervision Enhancement Act of 1991, requires
foreign banks to obtain Federal Reserve
approval before establishing branches,



agencies, commercial lending company
subsidiaries, or representative offices in
the United States.
In reviewing proposals, the Federal
Reserve generally considers whether
the foreign bank is subject to comprehensive supervision or regulation on a
consolidated basis by its home country
supervisor. It also considers whether the
home country supervisor has consented
to the establishment of the U.S. office;
the financial condition and resources of
the foreign bank and its existing U.S.
operations; the managerial resources
of the foreign bank; whether the home
country supervisor shares information
regarding the operations of the foreign
bank with other supervisory authorities;
whether the foreign bank has provided
adequate assurances that information
concerning its operations and activities
will be made available to the Federal
Reserve, if deemed necessary to determine and enforce compliance with
applicable law; whether the foreign bank
has adopted and implemented procedures to combat money laundering and
whether the home country of the foreign
bank is developing a legal regime to
address money laundering or is participating in multilateral efforts to combat
money laundering; and the record of the
foreign bank with respect to compliance
with U.S. law.
In 2004 the Federal Reserve approved
9 applications by foreign banks to establish branches, agencies, and representative offices in the United States.
Overseas Investments by
U.S. Banking Organizations
U.S. banking organizations may engage
in a broad range of activities overseas.
Many of the activities are conducted
indirectly through Edge Act and agreement corporation subsidiaries. Although
most foreign investments are made

Banking Supervision and Regulation
under general consent procedures that
involve only after-the-fact notification
to the Federal Reserve, large and other
significant investments require prior
approval. In 2004 the Federal Reserve
approved 27 proposals for significant
overseas investments by U.S. banking
organizations. The Federal Reserve also
approved 14 applications to make additional investments through an Edge Act
or agreement corporation, 5 applications
to extend the corporate existence of
or acquire an Edge Act corporation, and
4 applications to establish or acquire an
agreement corporation.

113

Stock Repurchases by
Bank Holding Companies
A bank holding company may repurchase its own shares from its shareholders. When the company borrows
money to buy the shares, the transaction increases the company's debt
and decreases its equity. The Federal
Reserve may object to stock repurchases
by holding companies that fail to meet
certain standards, including the Board's
capital adequacy guidelines. In 2004
the Federal Reserve reviewed 16 stock
repurchase proposals by bank holding
companies; all were approved by a
Reserve Bank under delegated authority.

Applications by Member Banks
State member banks must obtain Federal Reserve approval to establish
domestic branches, and all member
banks (including national banks) must
obtain Federal Reserve approval to
establish foreign branches. When
reviewing proposals to establish domestic branches, the Federal Reserve considers the scope and nature of the
banking activities to be conducted.
When reviewing proposals for foreign
branches, the Federal Reserve considers, among other things, the condition of
the bank and the bank's experience in
international banking. In 2004 the Federal Reserve acted on new and mergerrelated branch proposals for 1,428
domestic branches and granted prior
approval for the establishment of
34 new foreign branches.
State member banks must also obtain
Federal Reserve approval to establish
financial subsidiaries. These subsidiaries
may engage in activities that are financial in nature or incidental to financial
activities, including securities and insurance agency-related activities. In 2004,
2 applications for financial subsidiaries
were approved.



Public Notice of
Federal Reserve Decisions
Certain decisions by the Federal Reserve
that involve a bank holding company, a
bank merger, a change in control, or the
establishment of a new U.S. banking
presence by a foreign bank are made
known to the public by an order or an
announcement. Orders state the decision,
the essential facts of the application or
notice, and the basis for the decision;
announcements state only the decision.
All orders and announcements are made
public immediately; they are subsequently reported in the Board's weekly
H.2 statistical release and in the Federal
Reserve Bulletin. The H.2 release also
contains announcements of applications
and notices received by the Federal
Reserve upon which action has not yet
been taken. For each pending application
and notice, the related H.2A contains the
deadline for comments. The Board's web
site (www.federalreserve.gov) provides
information on orders and announcements as well as a guide for U.S. and
foreign banking organizations submitting
applications or notices to the Federal
Reserve.

114 91st Annual Report, 2004

Timely Processing of Applications
The Federal Reserve sets internal target
time frames for the processing of applications. The setting of internal targets
promotes efficiency at the Board and the
Reserve Banks and reduces the burden
on applicants. Generally, the length of
the target period ranges from twelve
to sixty days, depending on the type of
application or notice filed. In 2004,
92 percent of decisions were made
within the target time period.

Enforcement of
Other Laws and Regulations
The Federal Reserve's enforcement
responsibilities also extend to financial
disclosures by state member banks,
securities credit, and extensions of credit
to executive officers.

Financial Disclosures by
State Member Banks
State member banks that issue securities
registered under the Securities Exchange
Act of 1934 must disclose certain information of interest to investors, including
annual and quarterly financial reports
and proxy statements. By statute, the
Board's financial disclosure rules must
be substantially similar to those of
the SEC. At the end of 2004, 15 state
member banks were registered with the
Board under the Securities Exchange
Act.

Securities Credit
Under the Securities Exchange Act, the
Board is responsible for regulating
credit in certain transactions involving
the purchase or carrying of securities.
The Board's Regulation T limits the
amount of credit that may be provided
by securities brokers and dealers when



the credit is used to trade debt and
equity securities. The Board's Regulation U limits the amount of credit that
may be provided by lenders other than
brokers and dealers when the credit is
used to purchase or carry publicly held
equity securities if the loan is secured by
those or other publicly held equity securities. The Board's Regulation X applies
these credit limitations, or margin
requirements, to certain borrowers and
to certain credit extensions, such as
credit obtained from foreign lenders by
U.S. citizens.
Several regulatory agencies enforce
the Board's securities credit regulations.
The SEC, the National Association of
Securities Dealers, and the national
securities exchanges examine brokers
and dealers for compliance with Regulation T. With respect to compliance with
Regulation U, the federal banking agencies examine banks under their respective jurisdictions; the Farm Credit
Administration, the National Credit
Union Administration, and the OTS
examine lenders under their respective
jurisdictions; and the Federal Reserve
examines other Regulation U lenders.
Since 1998, the Board has published
a list of foreign stocks that meet the
requirements of section 220.11 of Regulation T (Credit by Brokers and Dealers), thereby making them eligible for
margin treatment at broker-dealers on
the same basis as domestic margin securities. In March 2004 the Board removed
all the stocks from its Foreign Margin Stock List because the stocks had
not been recertified under procedures
approved by the Board in 1990. Foreign stocks may also qualify as margin
securities by being deemed to have
a "ready market" under the SEC's
net capital rule (17 CFR 240.15c3-3)
(see the March 3, 2004, press release
at www.federalreserve.gov/boarddocs/
press/all/2004/).

Banking Supervision and Regulation

115

Extensions of Credit by State Member Banks to their Executive Officers, 2003 and 2004

Number

Amount (dollars)

Range of interest
rates charged
(percent)

2003
October 1-December 31

590

66,901,000

0.0-18.0

2004
January 1-March 31
April 1-June 30
July 1-September 30
October 1-December 31

545
576
479
476

62,624,000
79,207,000
72,401,000
53,083,000

0.0-18.0
0.0-18.0
0.0-19.8
0.0-20.8

Period

SOURCE. Call Reports.

Extensions of
Credit to Executive Officers
Under section 22(g) of the Federal
Reserve Act, a state member bank must
include in its quarterly Call Report
information on all extensions of credit
by the bank to its executive officers
since the date of the preceding report.
The accompanying table summarizes
this information for 2004.




Federal Reserve Membership
At the end of 2004, 2,794 banks were
members of the Federal Reserve System
and were operating 51,864 branches.
These banks accounted for 37 percent of
all commercial banks in the United
States and for 73 percent of all commercial banking offices.
•

117

Federal Reserve Banks
The Federal Reserve Banks contribute
to the setting of national monetary policy and are involved in the supervision
and regulation of banks and other financial entities. They also operate a nationwide payments system, distribute the
nation's currency and coin, and serve as
fiscal agent and depository to the United
States.

environment, see the box "Reserve
Bank Services in a Changing Payments
Market.")
In addition to acting to control costs
for priced services, the Reserve Banks
have undertaken a number of projects
to reduce support and overhead costs.
They have consolidated operations
locally and nationally, adopted moreefficient practices, and adjusted staffing
levels commensurate with a shrinking
Major Initiatives
base of internal customers requiring supIn 2004, the Federal Reserve Banks con- port services. Reserve Bank support and
tinued to pursue efficiencies in their overhead costs, including national supoperations, including the provision of port services, decreased $68 million, or
priced services, and in support and 6 percent, from 2003 to 2004.l Over the
same period, ANP associated with supoverhead.
The Reserve Banks are processing a port and overhead areas declined 700, or
2
declining number of checks as consum- 8 percent.
ers and businesses make more payments
Over the past several years, the
electronically. Because of the decline, Reserve Banks have consolidated their
the Banks have found it challenging to employee health and welfare plans,
fully recover their costs as required by human resources information systems,
the Monetary Control Act of 1980. In and payroll-processing operations.
response, the Banks are fundamentally These plans, systems, and operations
restructuring their check operations. previously were unique to each Bank
During the year, they completed the first and were managed and administered
phase of a check restructuring initiative, from each Reserve Bank head office.
reducing the number of Federal Reserve Although some of the consolidations are
check-processing and check-adjustment not yet complete, each has already genlocations. The initiative has reduced erated significant cost savings. The savReserve Bank check operating expenses ings resulting from staff reductions in
and staffing levels; since 1999, the num- support and overhead functions is
ber of employees processing checks has expected to be $3.9 million when fully
declined about 25 percent, to approxi- implemented in 2006. The savings
mately 4,000 at the end of 2004. As the resulting from lower vendor fees and
market for check collection services
continues to decline, the Banks will pur1. National support services include functions
sue additional restructuring efforts and
staffing reductions to achieve full cost and projects managed by a Reserve Bank on
behalf of the other Reserve Banks.
recovery. (For a broad discussion of
2. ANP is the number of employees during a
the Reserve Banks' response to today's year in terms of full-time positions.




118

91st Annual Report, 2004

Reserve Bank Services in a Changing Payments Market
More payments in the United States are
now being made electronically than by
check. The number of checks written annually peaked in the mid-1990s at around
50 billion. By 2003, the number was down
to about 37 billion. In contrast, the number
of payments made electronically via credit
and debit cards, the automated clearinghouse (ACH), and electronic benefit transfer cards was about 45 billion in 2003, up
from approximately 15 billion in the mid1990s.
The shift largely reflects a growing consumer and business preference for making payments electronically, particularly by
debit card. It has also been spurred by the
financial services industry through its use
of new technologies, introduction of new
products and services, and adoption of
operating rules and standards that support
the greater use of electronic payments. For
example, recent industry rule changes have
enabled businesses to use the information on a consumer's check to transfer
funds electronically using the ACH, a process now commonly known as check
conversion.
The Federal Reserve has supported and
helped facilitate this ongoing transition to a
more-electronic payments system. Its Payments System Development Committee,
chaired by Vice Chairman Roger Ferguson
and Minneapolis Federal Reserve Bank
President Gary Stern, has promoted a

wide-ranging dialogue on improving the
payments system by sponsoring several
conferences and seminars and by conducting other outreach activities.
The Federal Reserve also worked with
the financial services industry, the legal
community, consumer and business representatives, and Congress to enact the
Check Clearing for the 21st Century Act
(Check 21), which facilitates (but does not
mandate) the greater use of electronics
in the processing of checks. The Board
amended two of its regulations concerned
with check processing (Regulations J and
CC) to implement the law and has worked
closely with the Reserve Banks and the
industry to educate the public about the
implications of Check 21 for consumers.
The Board also clarified the application of
the consumer protections in Regulation E
to electronic payments made via check
conversion.1
The ongoing shift to electronic payments
has affected the Reserve Banks' checkprocessing operations. The number of
checks collected annually through the
Banks has fallen nearly 20 percent since

from lower plan costs due to consolidation of health and welfare plans is
expected to be $25 million in 2005.
The other significant initiative affecting Reserve Bank check operations in
2004 was the introduction of products,
services, and associated infrastructure
related to the Check Clearing for the
21st Century Act (Check 21), which
took effect in October. Check 21 is
intended to foster payments system

innovation and to increase payments
system efficiency by reducing legal
impediments to check truncation.




1. Consumer information on Check 21 and
electronic check conversion is available at
www.federalreserve.gov/consumers.htm. Banking industry educational and reference material
on Check 21 is available at www.ffiec.gov/
exam/check21/defaulthtm.

Developments in
Federal Reserve Priced Services
The Monetary Control Act of 1980
requires that the Federal Reserve set
fees for providing "priced services" to
depository institutions that, over the

Federal Reserve Banks

1999, to fewer than 14 billion in 2004. And
the decline is accelerating, as the Banks
processed 12 percent fewer checks in 2004
than in 2003. As a result, the revenue the
Banks earn from providing check collection services to depository institutions has
begun to decline. Over the past five years,
the Banks also made a significant investment in modernizing and improving
the longer-term efficiency of their checkprocessing operations.
This combination of market and business factors has challenged the Reserve
Banks' ability to meet the expectations of
the Monetary Control Act of 1980 (MCA).
The MCA requires that the Banks set fees
for providing payment services (including
check collection services) to depository
institutions to recover, over the long run,
all the direct, indirect, and imputed costs of
providing the services, including the taxes
that would have been paid and the return
on equity that would have been earned had
the services been provided by a private
firm.
To better meet the MCA requirements,
the Reserve Banks have undertaken a range
of cost-reduction and revenue-generation
initiatives as part of a long-term business
strategy to facilitate the greater use of electronics in check processing. These initiatives have included streamlining management structures, reducing staffing levels,
increasing productivity, and selectively
raising fees. To better align their operations

long run, recover all the direct and indirect costs of providing the services as
well as the imputed costs, such as the
income taxes that would have been paid
and the return on equity that would have
been earned had the services been provided by a private firm. The imputed
costs and imputed profit are collectively
referred to as the private-sector adjustment factor (PSAF). 3 Over the past ten
3. In addition to income taxes and the return on
equity, the PSAF is made up of three imputed
costs: interest on debt, sales taxes, and assess


119

with a declining check market, the Banks
also have begun to fundamentally restructure the location and nature of their
national check-processing operations. The
number of offices at which checks are processed was reduced from forty-five at the
beginning of 2003 to thirty-two by the end
of 2004. A further reduction, to twentythree offices, will be completed in early
2006. As part of these changes, five
regional sites dedicated solely to processing checks have been closed. Additional
restructuring will occur in response to continued market changes in the use of checks.
Major improvements in the operational
efficiency and productivity of Reserve
Bank check-collection operations have
resulted from these initiatives. The Cincinnati check-processing office, for example,
now processes both its own usual volume
and the checks previously processed at the
Indianapolis, Louisville, and Charleston
offices. The number of employees providing check-collection services has been
reduced to approximately 4,000, about onefourth fewer than in 1999 and the lowest
level since enactment of MCA. Although
the one-time charges associated with the
restructuring efforts have been substantial,
the costs of ongoing operations have
decreased. As a result, the Reserve Banks
expect to recover fully all the costs of
providing check-collection services in 2005
and to continue to meet their broader statutory obligations over the longer term.

years, the Federal Reserve Banks have
recovered 97.5 percent of their priced
services costs, including the PSAF
(table).

ments for deposit insurance by the Federal Deposit
Insurance Corporation. Also allocated to priced
services are assets and personnel costs of the
Board of Governors that are related to priced
services; in the pro forma statements at the end of
this chapter, Board expenses are included in operating expenses and Board assets are part of longterm assets.

120 91st Annual Report, 2004
Priced Services Cost Recovery, 1995-2004
Millions of dollars except as noted

Year

Revenue from
services1

Operating
expenses and
imputed costs2

Targeted return
on equity

Total
costs

Cost recovery
(percent)3

1995
1996
1997
1998

765.2
815.9
818.8
839.8

752.7
746.4
752.8
743.2

31.5
42.9
54.3
66.8

784.2
789.3
807.1
809.9

97.6
103.4
101.5
103.7

1999
2000
2001
2002
2003
2004

867.6
922.8
960.4
918.3
881.7
914.6

775.7
818.2
901.9
891.7
931.3
842.6

57.2
98.4
109.2
92.5
104.7
112.4

832.9
916.6
1,011.1
984.3
1,036.1
955.0

104.2
100.7
95.0
93.3
85.1
95.8

769.9

8,926.5

97.5

1995-2004

8,705.1

8,156.4

NOTE. Here and elsewhere in this chapter, components
may not sum to totals or yield percentages shown because
of rounding.
1. For the ten-year period, includes revenue from services of $8,444.2 million and other income and expense
(net) of $261.0 million.

2. For the ten-year period, includes operating expenses
of $7,490.2 million, imputed costs of $387.7 million, and
imputed income taxes of $259.1 million. Also includes
the effect of a one-time accounting change net of taxes of
$19.4 million for 1995.
3. Revenue from services divided by total costs.

Overall, the price index for priced
services increased 6.7 percent from
2003. Revenue from priced services
amounted to $865.9 million, other
income related to priced services was
$48.7 million, and costs related to priced
services were $842.6 million, resulting
in net income of $72.0 million. In 2004,
the Reserve Banks recovered 95.8 percent of total costs of $955 million,
including the PSAF.4

totaled $709.6 million, of which
$45.3 million was attributable to the
transportation of commercial checks
between
Reserve
Bank
checkprocessing centers. Revenue amounted
to $719.7 million, of which $45.8 million was attributable to estimated revenues derived from the transportation
of commercial checks between Reserve
Bank check-processing centers, and
other income was $40.5 million. The
resulting net income was $50.5 million.
Check service revenue in 2004 declined
$22.3 million from 2003, largely because
of declining volume and customers'
moving to lower-priced products.
The Reserve Banks handled 13.9 billion checks in 2004, a decrease of
12.0 percent from the 15.8 billion
checks handled in 2003 (table). The
decline in Reserve Bank check volume
is consistent with nationwide trends

Commercial Check
Collection Service
In 2004, operating expenses and
imputed costs for the Reserve Banks'
commercial check collection service
4. Financial data reported throughout this
chapter—revenue, other income, cost, net revenue, and income before taxes—can be linked to
the pro forma statements at the end of this chapter.
Other income is revenue from investment of clearing balances net of earnings credits, an amount
termed net income on clearing balances. Total cost
is the sum of operating expenses, imputed costs




(interest on debt, interest on float, sales taxes, and
the Federal Deposit Insurance Corporation assessment), imputed income taxes, and the targeted
return on equity.

Federal Reserve Banks 121
Activity in Federal Reserve Priced Services, 2002-2004
Thousands of items
Percent change
Service

2004

2003

2002
2003 to 2004

Commercial check
Funds transfer
Securities transfer
Commercial ACH
Noncash

13,904,382
128,270
9,208
6,486,091
211

15,805,894
125,936
10,071
5,588,381
280

16,586,804
117,133
8,480
4,986,152
333

2002 to 2003

-12.0
1.9
-8.6
16.1
-24.7

-4.7
7.5
18.8
12.1
-15.8

NOTE. Activity in commercial check is the total number of commercial checks collected, including processed
and fine-sort items; in funds transfer and securities transfer, the number of transactions originated online and off-

line; in commercial ACH, the total number of commercial
items processed; and in noncash, the number of items on
which fees were assessed.

away from the use of checks and toward
greater use of electronic payment methods.5 Overall, the price index for check
services increased 8.7 percent from
2003.
In response to the continuing decline
in check volume, the Reserve Banks
took further steps in 2004 to reduce
check service operating costs by implementing a business and operational strategy that will position the service to
achieve its financial and payment system objectives over the long term. The
strategy will reduce operating costs
through a combination of measures:
streamlining management structures,
reducing staff, decreasing the number of
check-processing locations, and increasing processing capacity at some
locations. In 2004, check-processing
facilities were closed at some locations
and the work moved to others. Checks
that would have been processed in
Miami are now processed in Jackson-

ville. Omaha check processing has been
consolidated to Des Moines; Richmond
to Baltimore; Little Rock to Memphis;
and Columbia (South Carolina) to Charlotte. Both El Paso and San Antonio
have been consolidated to Dallas, and
both Milwaukee and Peoria to Chicago.
Volume from Charleston (West Virgina), Louisville, and Indianapolis is
now processed in Cincinnati.
Of all the checks presented by the
Reserve Banks to paying banks,
23.1 percent (approximately 3.2 billion checks) were presented electronically, compared with 22.7 percent in
2003. The Banks captured images of
10.4 percent of the checks they collected, an increase from 9.3 percent in
2003.
The Reserve Banks also expanded the
services available to depository institutions through the web during the year.
These investments are expected to
increase operating efficiency and the
Reserve Banks' ability to offer additional services to depository institutions.

5. The Federal Reserve System's recent retail
payments research suggests that the number of
checks written in the United States has been
declining since the mid-1990s. See Federal
Reserve System, "The 2004 Federal Reserve
Payments Study: Analysis of Noncash Payments Trends in the United States, 2000-2003"
(December 2004). (www.frbservices.org/Retail/
pdf/2004PaymentResearchReport.pdf)




Commercial Automated
Clearinghouse Services
Reserve Bank operating expenses and
imputed costs for commercial automated

122 91st Annual Report, 2004
clearinghouse (ACH) services totaled
$64.0 million in 2004. Revenue from
ACH operations totaled $71.1 million
and other income totaled $4.0 million,
resulting in net income of $11.1 million.
The Banks processed 6.5 billion
commercial ACH transactions (worth
$12.5 trillion), an increase of 16.1 percent from 2003. Overall, the price index
for ACH services decreased 10.2 percent from 2003.
In 2004, the Reserve Banks began
offering international ACH funds transfer service from the United States to
Austria, Canada, Germany, Mexico, and
the Netherlands. The Banks also offer
service to Switzerland and the United
Kingdom.

Fedwire Funds and
National Settlement Services
Reserve Bank operating expenses and
imputed costs for the Fedwire Funds
and National Settlement Services totaled
$50.7 million in 2004. Revenue from
these operations totaled $54.1 million, and other income amounted to
$3.0 million, resulting in net income of
$6.5 million.
Fedwire Funds Service
The Fedwire Funds Service allows participants to draw on their reserve or
clearing balances at the Reserve Banks
and transfer funds to other institutions
that maintain accounts at the Banks. In
2004, the number of Fedwire funds
transfers originated by depository institutions increased 1.9 percent from 2003,
to approximately 128.3 million. In May,
the Banks expanded the operating hours
for the online service. The service is
now open three and one-half hours
earlier—at 9:00 p.m. eastern time the
preceding calendar day rather than the
previous opening time of 12:30 a.m.



eastern time. The impetus for the expansion of operating hours was industry
requests to achieve greater overlap of
wholesale payments system operating
hours in U.S. and Asia-Pacific markets.
National Settlement Service
Private clearing arrangements that
exchange and settle transactions may
use the Reserve Banks' National Settlement Service to settle their transactions.
This service is provided to approximately seventy local and national private arrangements, primarily check
clearinghouse associations but also other
types of arrangements. In 2004, the
Reserve Banks processed slightly fewer
than 435,000 settlement entries for these
arrangements.
Fedwire Securities Service
The Fedwire Securities Service allows
participants to electronically transfer
securities issued by the U.S. Treasury, federal government agencies,
government-sponsored enterprises, and
certain international organizations to
other participants in the United States.6
Reserve Bank operating expenses and
imputed costs for providing this service
totaled $16.9 million in 2004. Revenue
from the service totaled $19.3 million, and other income totaled $1.1 million, resulting in net income of $3.4 million. Approximately 9.2 million transfers of Treasury and other securities
6. The expenses, revenues, and volumes
reported here are for transfers of securities issued
by federal government agencies, governmentsponsored enterprises, and international institutions. The Treasury Department assesses fees on
depository institutions for some of the transfer,
account maintenance, and settlement services for
U.S. Treasury securities provided by the Reserve
Banks. For details, see the section "Debt Services" later in this chapter.

Federal Reserve Banks
were processed by the service during
the year, a decrease of 8.6 percent
from 2003. In 2004, the fee for securities transfers decreased from $0.40 to
$0.32, and the surcharge for offline
transfers increased from $25 to $28.

123

The Federal Reserve includes the cost
of or income from float associated with
priced services as part of the fees for
those services.

Developments in
Currency and Coin

Noncash Collection Service

The Reserve Banks received 37.5 billion
Federal Reserve notes from circulation
in 2004, a 5.1 percent increase from
2003, and made payments of 37.9 billion notes into circulation, a 3.6 percent
increase from 2003. They received
55.7 billion coins from circulation in
2004, a 15.6 percent increase from 2003,
and made payments of 67.5 billion coins
into circulation, a 9.8 percent increase
from 2003.8
In October 2004, the Reserve Banks
began issuing the redesigned $50 Federal Reserve note, which has enhanced
security features and subtle background
colors. In connection with issuance of
the new notes, the Federal Reserve and
the Bureau of Engraving and Printing
conducted a public education campaign
to raise awareness of the note's design
and security features.
In 2003, the Board requested comments on a proposed cash-recirculation
policy intended to change its cashservices policy to reduce overuse of
Reserve Bank cash-processing services.
Currently, many depository institutions
order currency late in the week to meet
temporary, cyclical demand and then
return the currency to a Federal Reserve
facility several days later to minimize
their holdings of vault cash, which does
Float
not earn interest. The process repeats
The Federal Reserve had daily average each week, and the Federal Reserve
credit float of $76.4 million in 2004, facility receiving the returned currency
compared with $43.0 million in 2003.7 must process it each time. To test the
effectiveness of a program that supports

The Reserve Banks provide a service to
collect and process municipal bearer
bonds and coupons issued by state and
local governments (referred to as "noncash" items). The service, which is centralized at one Federal Reserve office,
processed slightly less than 211,000
noncash transactions in 2004, representing a 24.7 percent decline in volume
from 2003. Operating expenses and
imputed costs for noncash operations
totaled $1.4 million in 2004, and revenue and other income totaled $1.9 million, resulting in net income of $0.5 million. The fee for return items increased
from $20 to $35.
In October, the Board requested comment on a proposal to withdraw from
the noncash collection service at yearend 2005. The volume of coupons and
bonds presented for collection is declining, a result of a continuing decline in
the number of physical municipal securities outstanding since passage of the
Tax Equity and Fiscal Responsibility
Act of 1982, which removed tax advantages for investors and effectively led to
the end of issuance of bearer municipal
securities.

7. Credit float occurs when the Reserve Banks
receive settlement for items prior to providing
credit to the depositing institution.



8. Percentages reflect restatements of previously reported data.

124 91st Annual Report, 2004
the proposed cash-recirculation policy,
the Banks established eleven custodial
inventory sites in 2004. Custodial inventories allow depository institutions to
transfer a portion of their cash holdings
to the books of a Reserve Bank and are
intended to encourage depository institutions to recirculate fit currency rather
than return it to the Federal Reserve for
processing. The program will operate
for six months, after which the Federal
Reserve will evaluate the program's
effectiveness in promoting currency
recirculation.
In 2004, the Federal Reserve also
established a group to study the potential effects of the proposed cashrecirculation policy on the quality of
currency in circulation. The group is
working with the vending industry and
manufacturers of currency-handling
equipment to evaluate the importance of
currency quality for their industries.

Developments in
Fiscal Agency and
Government Depository Services
As fiscal agents and depositories for the
federal government, the Federal Reserve
Banks provide services related to the
federal debt, help the Treasury collect
funds owed to the government, process
electronic and check payments for the
Treasury, maintain the Treasury's bank
account, and invest excess Treasury balances. The Reserve Banks also provide
limited fiscal agency and depository services to other entities.
The total cost of providing fiscal
agency and depository services to the
Treasury and other entities in 2004
amounted to $369.8 million, compared
with $327.0 million in 2003 (table).
Treasury-related costs were $341.4 million in 2004, compared with $291.7 million in 2003, an increase of 17 percent.



The cost of providing services to other
entities was $28.4 million, compared
with $35.3 million in 2003. In 2004, as
in 2003, the Treasury and other entities
reimbursed the Reserve Banks for the
costs of providing these services.
The most significant development in
relation to the fiscal agency service in
2004 was the Reserve Banks' consolidation of operations that support the
Treasury's retail securities programs,
through which retail investors purchase
and hold marketable Treasury securities
and savings bonds. As the Treasury
replaced paper processes in retail securities with more-efficient electronic processes, fewer operations sites were
needed. In December 2003, the Treasury directed the Banks to consolidate
their retail securities operations from
seven sites to two. The consolidation
has proceeded ahead of schedule and
should be completed late in 2005. The
Banks expect that in 2006, annual operating costs for the retail securities operations will decline significantly because
of lower personnel costs.
Debt Services
The Reserve Banks auction, provide
safekeeping for, and transfer marketable Treasury securities. Reserve Bank
operating expenses for these activities totaled $23.4 million in 2004, an
8.3 percent increase from 2003. The
Banks processed more than 156,000 tenders for Treasury securities, compared
with 140,000 in 2003, and handled
2 million reinvestment requests, compared with 2.2 million in 2003. The
Banks originated 10.7 million transfers of Treasury securities in 2004, a
13.6 percent increase from 2003. As of
December 31, 2004, the Reserve Banks'
Fedwire Securities Service maintained
custody of $3.9 trillion (par value) of
Treasury securities.

Federal Reserve Banks 125
Expenses of the Federal Reserve Banks for Fiscal Agency and Depository Services,
2002-2004
Thousands of dollars
Agency and service

2004

2003

2002

DEPARTMENT OF THE TREASURY

Bureau of the Public Debt
Treasury retail securities
Savings bonds
TreasuryDirect and Treasury coupons
Treasury securities safekeeping and transfer
Treasury auction
Computer infrastructure development and support
Other services
Total

72,385.1
30,872.7
6,267.0
17,159.5
5,935.1
1,709.8
134,329.1

33,013.5
4,836.3
16,802.6
7,836.7
1,460.7
130,353.4

68,888.3
33,953.6
8,830.1
14,597.6
2,349.6
2,385.8
131,005.0

66,403.7

Financial Management Service
Payment services
Government check processing
Automated clearinghouse
Fedwire funds transfers
Other payment-related services
Collection services
Tax and other revenue collections
Other collection-related services
Cash management services
Computer infrastructure development and support
Other services
Total

24,245.4
5,352.9
111.6
33,646.9

25,624.7
6,253.9
187.3
23,630.8

30,284.4
6,280.0
201.4
20,172.1

34,248.4
12,922.8
21,835.8
52,673.3
6,931.6
191,968.6

29,782.9
12,532.6
18,227.8
24,575.3
6,666.2
147,481.5

26,361.3
10,296.4
17,310.8
7,592.6
5,415.8
123,914.7

Other Treasury
Total
Total, Treasury

15,106.1
341,403.7

13,913.5
291,748.5

14,471.2
269,390.9

4,519.0

7,791.4

10,240.8

OTHER FEDERAL AGENCIES

Department of Agriculture
Food coupons
U.S. Postal Service
Postal money orders
Other agencies
Other services
Total, other agencies .

7,774.6

10,959.5

12,381.6

16,104.0
28,397.5

16,508.2
35,259.2

16,494.1
39,116.5

Total reimbursable expenses .

369,801.2

327,007.7

308,507.4

In support of the Treasury's retail
securities programs, the Reserve Banks
operate TreasuryDirect, a program that
allows retail investors to purchase and
hold Treasury securities directly with
the Treasury instead of through a broker.
As the program was designed for investors who plan to hold their securities
to maturity, TreasuryDirect provides
custody services only. Reserve Bank
operating expenses for TreasuryDirect
totaled $30.9 million in 2004, compared
with $33.0 million in 2003. In 2004,
investors purchased 13.7 billion of Treasury securities through TreasuryDirect.



As of December 31, 2004, TreasuryDirect held $62.2 billion (par value) of
marketable Treasury securities.
TreasuryDirect customers may sell
their securities for a fee through Sell
Direct, a program operated by one of
the Reserve Banks. That Bank sold
approximately 15,000 securities worth
$673.3 million in 2004, compared with
more than 14,000 securities worth
$671.6 million in 2003. It collected
approximately $504,000 in fees on
behalf of the Treasury, an increase of
2.6 percent from the more than $491,000
in fees collected in 2003.

126 91st Annual Report, 2004
Reserve Bank operating expenses for
issuing, servicing, and redeeming savings bonds totaled $72.4 million in
2004, an increase of 9 percent from
2003. The Banks printed and mailed
more than 35 million savings bonds, an
11.4 percent decrease from 2003. They
issued more than 4.2 million Series I
(inflation indexed) bonds and 25.4 million Series EE bonds. Reissued or
exchanged bonds accounted for the
remaining bonds printed. The Banks
processed about 601,000 redemption,
reissue, and exchange transactions, a
5.8 percent increase from 2003.

sury's stored value card program, which
provides salary and allowance payments
to military personnel, via a smart card,
for use at military bases. In 2004, the
Banks worked with the Treasury on
plans for a web-based application to
allow federal agencies and vendors to
electronically exchange purchase orders
and invoices and initiate ACH payments. The operating costs for these
three programs totaled $15.4 million in
2004, compared with $14.3 million in
2003.
Collection Services

The Reserve Banks support several
Treasury programs to collect funds
The Reserve Banks process both elec- owed the government. Reserve Bank
tronic and check payments for the Trea- operating expenses related to these prosury. Reserve Bank operating expenses grams totaled $47.2 million in 2004,
for processing government payments compared with $42.3 million in 2003.
totaled $63.4 million in 2004, compared The Banks operate the Federal Reserve
with $55.7 million in 2003. The Banks Electronic Tax Application (FR-ETA) as
processed 940 million ACH payments an adjunct to the Treasury's Electronic
for the Treasury, an increase of 3.0 per- Federal Tax Payment System (EFTPS).
cent from 2003, and 876,000 Fedwire EFTPS allows businesses and individual
funds transfers, a decrease of 11.5 per- taxpayers to pay their taxes electronicent from 2003 (the latter percentage cally. Because EFTPS uses the autoreflects a restatement of previously mated clearinghouse to collect funds,
reported data). They also processed tax payments must be scheduled at least
234.1 million paper government checks, one day in advance. Some business taxa decline of 12.3 percent from 2003. In payers, however, do not know their tax
addition, the Banks issued more than liability until the tax due date. FR-ETA,
278,000 fiscal agency checks, a decrease for wire payments, allows these taxpayers to use EFTPS by providing a sameof 10.4 percent from 2003.
In addition to processing payments, day electronic federal tax payment alterthe Reserve Banks operate programs to native. FR-ETA collected $344.8 billion
help the Treasury increase the use of for the Treasury in 2004, compared with
electronic payments. They operate a $275.8 billion in 2003.
program that enables recipients of fedThe Reserve Banks also operate
eral grants to request payments using Pay.gov, a Treasury program that allows
the Internet. This application, the Auto- members of the public to make paymated Standard Application for Pay- ments to the federal government over
ment, processed $404.7 billion in Fed- the Internet. They also operate the Treawire funds transfers and ACH payments sury's Paper Check Conversion and
in 2004, compared with $384.2 billion Electronic Check Processing programs,
in 2003. The Banks also operate Trea- whereby checks written to government

Payments Services




Federal Reserve Banks
agencies are converted at the point of
sale or at lockbox locations into automated clearinghouse transactions. In
2004, the Reserve Banks originated
more than 1.9 million ACH transactions
through these programs, a 58.3 percent
increase from the 1.2 million originated
in 2003.
Cash Management Services
The Treasury maintains its bank account
at the Reserve Banks and invests the
funds it does not need for making current payments with qualified depository
institutions through the Treasury Tax
and Loan (TT&L) program, which the
Reserve Banks operate. Reserve Bank
operating expenses related to this program totaled $21.8 million in 2004,
compared with $18.2 million in 2003.
The investments either are callable on
demand or are for a set term. In 2004,
the Reserve Banks placed a total of
$17.1 billion in immediately callable
investments. The rate for term investments is set at Term Investment Option
(TIO) auctions; the Reserve Banks
held 45 TIO auctions in 2004, placing
$309 billion in term investments, compared with 12 auctions placing $66 billion in 2003. In 2004, the Treasury's
investment income, which comes from
the TT&L program, was $87 million.
Services Provided to Other Entities
The Reserve Banks provide fiscal
agency and depository services to other
domestic and international entities when
required to do so by the Secretary of the
Treasury or when required or permitted
to do so by federal statute. The majority
of the work is securities-related.

Electronic Access
In November 2004, the Reserve Banks
announced the general availability of



127

FedLine Advantage, the next-generation
platform for providing PC-based electronic access to Federal Reserve financial services. The new platform uses
web technology to provide financial
institutions with more-efficient access
to such payments services as the
Fedwire Funds Service, the Fedwire
Securities Service, and FedACH Services. To complement the transition
to web-based electronic access, the
Reserve Banks completed consolidation
of the electronic-access customer support function to two offices. The consolidation will improve the efficiency
and consistency of customer support.

Information Technology
In 2004, the Federal Reserve Banks
completed an initiative to standardize
desktop hardware and software across
Banks. In addition to reducing costs
over the long term, the standardization
is expected to facilitate interoperability,
increase productivity, and improve the
Federal Reserve's ability to respond to
cyber security threats. Projects are now
under way to standardize local area network components and telephone private
branch exchange systems and to implement reduced-cost wide area network
telecommunications services.
In partnership with the agencies that
make up the Financial and Banking
Information Infrastructure Committee,
the Federal Reserve continued in 2004
to sponsor clearing and settlement utilities, key financial institutions, and key
market participants in the national
security/emergency preparedness programs offered by the Department of
Homeland Security's National Communications System, which coordinates the
preparedness of critical telecommunications services to meet natural disasters
and national emergencies. During the
year, the Federal Reserve participated in

128 91st Annual Report, 2004
the President's National Security Telecommunications Advisory Committee
Financial Services Task Force, which in
April 2004 released a report on network
resilience in support of critical financial services. TTie Reserve Banks are
currently working with telecommunications vendors and other government
agencies to identify policies that would
improve the resilience of the telecommunications infrastructure for critical
financial services functions.

Examinations of the
Federal Reserve Banks
Section 21 of the Federal Reserve Act
requires the Board of Governors to order
an examination of each Federal Reserve
Bank at least once a year. The Board
engages a public accounting firm to perform an annual audit of the combined
financial statements of the Reserve
Banks (see the section "Federal Reserve
Banks Combined Financial Statements"). The public accounting firm
also audits the annual financial statements of each of the twelve Banks. The
Reserve Banks use the framework established by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in assessing their internal controls over financial reporting,
including the safeguarding of assets.
In 2004, the Reserve Banks enhanced
their assessments under the COSO
framework, strengthening the key control assertion process, consistent with
the requirements of the Sarbanes-Oxley
Act of 2002. Within this framework,
management of each Reserve Bank provides an assertion letter to its board of
directors annually confirming adherence to COSO standards, and a public
accounting firm certifies management's
assertion and issues an attestation report



to the Bank's board of directors and to
the Board of Governors.
The firm engaged for the audits of
the individual and combined financial
statements of the Reserve Banks for
2004 was PricewaterhouseCoopers LLP
(PwC). Fees for these services totaled
$2.0 million. To ensure auditor independence, the Board requires that PwC be
independent in all matters relating to the
audit. Specifically, PwC 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 of the
Reserve Banks, or in any other way
impairing its audit independence. In
2004 the Reserve Banks did not engage
PwC for non-audit services other than a
training session at one Reserve Bank
that was obtained at a rate available to
the general public.
The Board's annual examination of
the Reserve Banks includes a wide
range of off-site and on-site oversight
activities conducted by the Division of
Reserve Bank Operations and Payment
Systems. Division personnel monitor
the activities of each Reserve Bank on
an ongoing basis and conduct on-site
reviews based on the division's riskassessment methodology. The 2004
examinations also included assessing the
efficiency and effectiveness of the internal audit function. To assess compliance
with the policies established by the Federal Reserve's Federal Open Market
Committee (FOMC), the division also
reviews the accounts and holdings of
the System Open Market Account at
the Federal Reserve Bank of New York
and the foreign currency operations
conducted by that Bank. In addition,
PwC audits the schedule of participated asset and liability accounts and
the related schedule of participated

Federal Reserve Banks

129

Income, Expenses, and Distribution of Net Earnings
of the Federal Reserve Banks, 2004 and 2003
Millions of dollars

2004

2003

Current income
Current expenses
Operating expensesi
Earnings credits granted

23,540
2,239
2,123
116

23,793
2,463
2,342
121

Current net income
Net additions to (deductions from, — ) current net income
Assessments by the Board of Governors
For expenditures of Board
For cost of currency

21,301
918
776
272
504

21,330
2,481
805
297
508

Net income before payments to Treasury
Dividends paid
Transferred to surplus

21,443
582
2,783

23,006
518
467

Payments to Treasury2

18,078

22,022

Item

1. Includes a net periodic pension credit of $37 million
in 2004 and net periodic pension costs of $58 million in
2003.

income accounts at year-end. The
FOMC receives the external audit
reports and the report on the division's
examination.

Income and Expenses
The accompanying table summarizes the
income, expenses, and distributions of
net earnings of the Federal Reserve
Banks for 2003 and 2004.
Income in 2004 was $23,540 million,
compared with $23,793 million in 2003.
Expenses totaled $3,015 million ($2,123
million in operating expenses, $116 million in earnings credits granted to
depository institutions, $272 million in
assessments for expenditures by the
Board of Governors, and $504 million
for the cost of new currency). Revenue
from priced services was $866 million.
The profit and loss account showed a
net profit of $918 million. The profit
was due primarily to unrealized gains on
assets denominated in foreign currencies revalued to reflect current market




2. Interest on Federal Reserve notes.

exchange rates. Statutory dividends paid
to member banks totaled $582 million,
$64 million more than in 2003; the
increase reflects an increase in the capital and surplus of member banks and a
consequent increase in the paid-in capital stock of the Reserve Banks.
Payments to the U.S. Treasury in the
form of interest on Federal Reserve
notes totaled $18,078 million in 2004,
down from $22,022 million in 2003; the
payments equal net income after the
deduction of dividends paid and of the
amount necessary to bring the surplus of
the Reserve Banks to the level of capital
paid in.
In the "Statistical Tables" section of
this volume, table 5 details the income
and expenses of each Reserve Bank for
2004 and table 6 shows a condensed
statement for each Bank for the years
1914 through 2004. A detailed account
of the assessments and expenditures of
the Board of Governors appears in the
section "Board of Governors Financial
Statements."

130 91st Annual Report, 2004
Securities and Loans of the Federal Reserve Banks, 2002-2004
Millions of dollars except as noted

Total

U.S.
government
securities!

621,834
683,438
719,647

621,721
683,294
719,494

113
144
153

25,527
22,598
22,347

25,525
22,597
22,344

2
1
3

4.11
3.31
3.11

4.11
3.31
3.11

1.94
1.00
1.74

Item and year

Average daily holdings3
2002
2003
2004
Earnings4
2002
2003
2004 .
Average interest rate (percent)
2002
2003
2004

Loans 2

1. Includes federal agency obligations.
2. Does not include indebtedness assumed by the Federal Deposit Insurance Corporation.
3. Based on holdings at opening of business.

4. Earnings have not been netted with the interest expense on securities sold under agreements to
repurchase.

Holdings of Securities and Loans

Reserve Bank's Houston Branch and the
Chicago Bank's Detroit Branch.
Security enhancement programs
prompted by the events of September 11, 2001, continue at several facilities. One such project is an ongoing
external perimeter security improvement project at the Boston Bank that
involves restoration of the Bank's property after recently completed construction of the Central Artery, an underground roadway.
The Kansas City Bank purchased
property and retained design and construction consultants for its new headquarters building project. The Board
approved the project's schematic design,
and work continues on the final design.
The Board approved the St. Louis
Bank's purchase of a building to be
renovated as a business-continuity relocation facility.
The Richmond Bank purchased and
renovated a building as a relocation site
for critical staff. Design work on additional security improvements continued.
The Dallas Bank continues to pursue
the purchase of property behind its head-

The Federal Reserve Banks' average
daily holdings of securities and loans
during 2004 amounted to $719,647 million, an increase of $36,209 million
from 2003 (table). Holdings of U.S. government securities increased $36,200
million, and holdings of loans increased
$9 million. The average rate of interest
earned on the Reserve Banks' holdings
of government securities declined to
3.11 percent, from 3.31 percent in 2003,
and the average rate of interest earned
on loans increased to 1.74 percent, from
1.00 percent.

Volume of Operations
Table 8 in the "Statistical Tables" section shows the volume of operations in
the principal departments of the Federal Reserve Banks for the years 2001
through 2004.

Federal Reserve Bank Premises
In 2004, construction continued on the
new buildings for the Dallas Federal



Federal Reserve Banks
quarters building for the construction of
a remote vehicle screening and shipping/
receiving facility.
As part of its long-term facility redevelopment program, the St. Louis Bank
purchased and renovated a parking
garage for staff parking and a warehouse
for remote screening of deliveries. The
Bank retained design consultants for
expansion of the Bank's headquarters
building, and design work began.
The San Francisco Bank retained
design and construction consultants for
the new Seattle Branch building and
finalized an agreement to purchase property for the new building. Design work
has begun.




131

The multiyear renovation program
continued at the New York Bank's headquarters building.
Several Banks continue to implement facility renovation projects to
accommodate the consolidation of check
activities.
Agreements were reached in 2004 to
sell the buildings housing the New York
Bank's Buffalo Branch, the St. Louis
Bank's Louisville Branch, and the Chicago Bank's Milwaukee facility. Administration activities for the Buffalo
and Louisville Branches will be moved
to leased space.
•

132 91st Annual Report, 2004

Pro Forma Financial Statements for Federal Reserve Priced Services
Pro Forma Balance Sheet for Priced Services, December 31, 2004 and 2003
Millions of dollars
Item
Short-term assets (Note 1)
Imputed reserve requirements
on clearing balances
Imputed investments
Receivables
Materials and supplies
Prepaid expenses
Items in process of collection
Total short-term assets
Long-term assets (Note 2)
Premises
Furniture and equipment
Leases, leasehold improvements, and
long-term prepayments
Prepaid pension costs
Total long-term assets

2004

Long-term liabilities
Long-term debt
Postretirement/postemployment
benefits obligation
Total long-term liabilities ..

17,024.1

18,015.8

471.8
152.8

494.6
179.4

107.9
795.4

103.2
787.9
1,528.0

1,565.1

18,552.1

19,580.9

11,788.1
6,448.3
.0
78.1

11,909.5
5,354.3
.0
92.2

18,314.4

17,355.9
.0

.0

268.6

287.5

Total liabilities
Equity
Total liabilities and equity (Note 3)
NOTE. Components may not sum to totals because of
rounding.




1,296.4
11,332.5
77.1
2.3
35.6
5,271.9

1,115.7
9,691.9
75.8
1.9
31.8
6,107.1

Total assets
Short-term liabilities
Clearing balances and balances
arising from early credit
of uncollected items
Deferred-availability items
Short-term debt
Short-term payables
Total short-term liabilities ..

2003

268.6

287.5

17,624.5

18,601.9

927.6

979.0

18,552.1

19,580.9

The accompanying notes are an integral part of these
pro forma priced services financial statements.

Federal Reserve Banks 133
Pro Forma Income Statement for Federal Reserve Priced Services, 2004 and 2003
Millions of dollars
Item

2003

2004

Revenue from services provided
to depository institutions (Note 4)
Operating expenses (Note 5)
Income from operations
Imputed costs (Note 6)
Interest on float
Interest on debt
Sales taxes
FDIC insurance
Income from operations after
imputed costs
Other income and expenses (Note 7)
Investment income
Earnings credits
Income before income taxes
Imputed income taxes (Note 6)
Net income
MEMO: Targeted return on equity (Note 6) . . .

886.9
941.6
-54.7

865.9
800.6
65.3
-.1
.0
11.6
.0

-.7
.0
12.1
.0

11.4

11.4

53.8
156.8
-108.1

NOTE. Components may not sum to totals because of
rounding.

48.7
102.5
30.6
72.0
112.4

-66.1
108.0
-113.2

-5.2
-71.3
-21.7
-49.6
104.7

The accompanying notes are an integral part of these
pro forma priced services financial statements.

Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 2004
Millions of dollars

Item

Total

Commercial
check
collection

Fedwire
funds

Fedwire
securities

Commercial
ACH

Noncash
services

Revenue from services
(Note 4)

865.9

719.7

54.1

19.3

71.1

1.8

Operating expenses
(Note 5)

800.6

678.5

47.2

15.2

58.6

L2

65.3

41.2

6.9

4.1

12.5

.6

11.4

9.7

.7

.3

.7

.0

53.8

31.4

6.2

3.8

11.8

Income from operations
Imputed costs (Note 6)

,

Income from operations
after imputed costs
Other income and expenses,
net (Note 7)

48.7

40.5

3.0

1.1

4.0

.1

102.5

71.9

9.2

4.9

15.8

.7

Imputed income taxes
(Note 6)

30.6

21.4

2.8

1.4

4.7

.2

Net income .

72.0

50.5

6.5

3.4

11.1

.5

112.4

93.6

6.8

2.9

8.9

.2

Income before income taxes ...

MEMO: Targeted return on
equity (Note 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.

134 91st Annual Report, 2004
FEDERAL RESERVE BANKS
NOTES TO PRO FORMA FINANCIAL STATEMENTS FOR PRICED SERVICES
(1) SHORT-TERM ASSETS

The imputed reserve requirement on clearing balances
held at Reserve Banks by depository institutions reflects a
treatment comparable to that of compensating balances
held at correspondent banks by respondent institutions.
The reserve requirement imposed on respondent balances
must be held as vault cash or as non-earning balances
maintained at a Reserve Bank; thus, a portion of priced
services clearing balances held with the Federal Reserve
is shown as required reserves on the asset side of the
balance sheet. Another portion of the clearing balances
is used to finance short-term and long-term assets. The
remainder of clearing balances is assumed to be invested
in a portfolio of investments, shown as imputed investments. For 2003, imputed investments were assumed to
be three-month Treasury bills.
Receivables are (1) amounts due the Reserve Banks for
priced services and (2) the share of suspense-account and
difference-account balances related to priced services.
Materials and supplies are the inventory value of shortterm assets.
Prepaid expenses include salary advances and travel
advances for priced-service personnel.
Items in process of collection is gross Federal Reserve
cash items in process of collection (CIPC) stated on a
basis comparable to that of a commercial bank. It reflects
adjustments for intra-System items that would otherwise
be double-counted on a consolidated Federal Reserve
balance sheet; adjustments for items associated with nonpriced items, such as those collected for government
agencies; and adjustments for items associated with
providing fixed availability or credit before items are
received and processed. 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.
(2) LONG-TERM ASSETS

Consists of long-term assets used solely in priced services, the priced-services portion of long-term assets
shared with nonpriced services, and an estimate of the
assets of the Board of Governors used in the development
of priced services. Effective Jan. 1, 1987, the Reserve
Banks implemented the Financial Accounting Standards
Board's Statement of Financial Accounting Standards
No. 87, Employers' Accounting for Pensions (SFAS 87).
Accordingly, the Reserve Banks recognized a credit to
expenses of $7.5 million in 2004 and expenses of
$21.3 million in 2003 and a corresponding increase and
decrease in this asset account.
(3) LIABILITIES AND EQUITY

Under the matched-book capital structure for assets,
short-term assets are financed with short-term payables
and clearing balances. Long-term assets are financed with
long-term liabilities and clearing balances. As a result,
no short- or long-term debt is imputed. Other short-term
liabilities include clearing balances maintained at Reserve




Banks and deposit balances arising from float. Other
long-term liabilities consist of accrued postemployment
and postretirement benefits costs and obligations on capital leases.
Equity is imputed at 5 percent of total assets based on
the Federal Deposit Insurance Corporation's definition of
a well-capitalized institution for deposit insurance premium purposes.
(4)

REVENUE

Revenue represents charges to depository institutions for
priced services and is realized from each institution
through one of two methods: direct charges to an institution's account or charges against its accumulated earnings credits.
(5) OPERATING EXPENSES

Operating expenses consist of the direct, indirect, and
other general administrative expenses of the Reserve
Banks for priced services plus the expenses for staff
members of the Board of Governors working directly on
the development of priced services. The expenses for
Board staff members were $7.6 million in 2004 and
$6.4 million in 2003. The credit to expenses under
SFAS 87 (see note 2) is reflected in operating expenses.
The income statement by service reflects revenue,
operating expenses, and imputed costs. Certain corporate
overhead costs not closely related to any particular priced
service are allocated to priced services in total based on
an expense-ratio method, but are allocated among priced
services based on management decision. Corporate overhead was allocated among the priced services during
2004 and 2003 as follows (in millions):
2004

2003

Check
ACH
Fedwirefunds
Fedwire securities
Noncash services

33.5
3.4
2.5
1.3
J_

38.9
3.3
2.1
1.1
.1

Total

40.8

45.5*

(6) IMPUTED COSTS

Imputed costs consist of income taxes, return on equity,
interest on debt, sales taxes, the FDIC assessment, and
interest on float. Many imputed costs are derived from the
private-sector adjustment factor (PSAF) model, which
uses bank holding companies as the proxy for a privatesector firm. The cost of debt and the effective tax rate
from the PSAF model are used to impute debt and income
taxes. The after-tax rate of return on equity is used to
impute the profit that would have been earned had the
services been provided by a private-sector firm.
Interest is imputed on the debt assumed necessary to
finance priced-service assets; however, no debt was

* Restatement of previously reported total.

Federal Reserve Banks
imputed in 2004 or 2003. The sales taxes and FDIC
assessment that the Federal Reserve would have paid had
been a private-sector firm are also among the components
of the PS AF.
Interest on float is derived from the value of float to be
recovered, either explicitly or through per-item fees, during the period. Float costs include costs for checks, bookentry securities, noncash collection, ACH, and funds
transfers.
Float cost or income is based on the actual float
incurred for each priced service. Other imputed costs are
allocated among priced services according to the ratio of
operating expenses less shipping expenses for each service to the total expenses for all services less the total
shipping expenses for all services.
The following list shows the daily average recovery of
actual float by the Reserve Banks for 2004 in millions of
dollars:
Total
float
Unrecovered
float
Float subject to recovery
Sources of recovery of float
Income on clearing balances
As-of adjustments
Direct charges
Per-item fees

-13.5
19.4
-33.0
-3.3
-62.8
823.4
-915.9

Unrecovered float includes float generated by services
to government agencies and by other central bank services. Float recovered through income on clearing balances is the result of the increase in investable clearing




135

balances; the increase is produced by a deduction for float
for cash items in process of collection, which reduces
imputed reserve requirements. The income on clearing
balances reduces the float to be recovered through other
means. As-of adjustments and direct charges refer to float
that is created by interterritory check transportation and
the observance of non-standard holidays by some depository institutions. Such float may be recovered from the
depository institutions through adjustments to institution
reserve or clearing balances or by billing institutions
directly. Float recovered through direct charges and peritem fees is valued at the federal funds rate; credit float
recovered through per-item fees has been subtracted from
the cost base subject to recovery in 2004.
(7) OTHER INCOME AND EXPENSES

Consists of investment income on clearing balances and
the cost of earnings credits. Investment income on clearing balances for 2004 represents the average couponequivalent yield on three-month Treasury bills plus a
constant spread, based on the return on a portfolio of
investments. For 2003, the investment income is based on
the yield of the three-month Treasury bill. In both years,
the return is applied to the total clearing balance maintained, adjusted for the effect of reserve requirements on
clearing balances. Expenses for earnings credits granted
to depository institutions on their clearing balances are
derived by applying a discounted average couponequivalent yield on three-month Treasury bills in 2004
and the average federal funds rate in 2003 to the required
portion of the clearing balances, adjusted for the net effect
of reserve requirements on clearing balances.

137

The Board of Governors and the
Government Performance and Results Act
Under the Government Performance and
Results Act of 1993 (GPRA), federal
agencies are required to prepare, in
consultation with Congress and outside
stakeholders, a strategic plan covering a
multiyear period and to submit annual
performance plans and performance
reports. Though not covered by the act,
the Board of Governors is voluntarily
complying with many of the act's
mandates.

Strategic Plan, Performance
Plan, and Performance Report
The Board's latest strategic plan in the
GPRA format, released in August 2004,
covers the period 2004-08. The document articulates the Board's mission,
sets forth major goals for the period,
outlines strategies for achieving those
goals, and discusses the environment
and other factors that could affect their
achievement. It also addresses issues
that cross agency jurisdictional lines,
identifies key quantitative measures of
performance, and discusses performance
evaluation.
The 2004-05 performance plan and
the 2002-03 performance report were
posted on the Board's public web site
in August 2004 for access by Congress, the public, and the Government
Accountability Office (formerly the
General Accounting Office). The performance plan sets forth specific targets
for some of the performance measures
identified in the strategic plan. The
performance plan also describes the
operational processes and resources
needed to meet those targets and dis


cusses data validation and verification
of results. The performance report indicates that the Board generally met its
explicit goals for 2002-03.
The strategic plan, performance
plan, and performance report are available on the Board's public web site
(www.federalreserve.gov/boarddocs/
rptcongress/). The Board's mission
statement and a summary of the goals
and objectives set forth in the strategic
plan and performance plan are given
below.

Mission
The mission of the Board is to foster the
stability, integrity, and efficiency of the
nation's monetary, financial, and payment systems so as to promote optimal
macroeconomic performance.

Goals and Objectives
The Federal Reserve has five primary
goals with interrelated and mutually
reinforcing elements:
Goal
To conduct monetary policy that promotes the achievement of maximum
sustainable long-term growth and the
price stability that fosters that goal.
Objectives
• Stay abreast of recent developments
and prospects in the U.S. economy
and financial markets, and in those
abroad, so that monetary policy decisions will be well informed.

138 91st Annual Report, 2004
• Enhance our knowledge of the structural and behavioral relationships in
the macroeconomic and financial markets, and improve the quality of the
data used to gauge economic performance, through developmental
research activities.
• Implement monetary policy effectively in rapidly changing economic
circumstances and in an evolving
financial market structure.
• Contribute to the development of
U.S. international policies and procedures, in cooperation with the U.S.
Department of the Treasury and other
agencies.
• Promote an understanding of Federal
Reserve policy among other government policy officials and the general
public.

Goal
To promote a safe, sound, competitive,
and accessible banking system and
stable financial markets.
Objectives
• Promote overall financial stability,
manage and contain systemic risk, and
ensure that emerging financial problems are identified early and successfully resolved before they become
crises.
• Provide a safe, sound, competitive,
and accessible banking system
through comprehensive and effective
supervision of U.S. banks, bank and
financial holding companies, foreign
banking organizations, and related
entities.
• Enhance efficiency and effectiveness,
while remaining sensitive to the
burden on supervised institutions, by
addressing the supervision function's
procedures, technology, resource allocation, and staffing issues.



• Promote adherence by domestic and
foreign banking organizations supervised by the Federal Reserve with
applicable laws, rules, regulations,
policies, and guidelines through a
comprehensive and effective supervision program.
Goal
To enforce the consumer financial services laws fully and fairly, protect and
promote the rights of consumers under
these laws, and encourage banks to meet
the credit needs of consumers, including
those in low- and moderate-income
neighborhoods.
Objectives
• Maintain a strong consumer compliance supervision and complaint
investigation program that protects
consumers and reflects the rapidly
changing financial services industry.
• Implement statutes designed to inform
and protect consumers that reflect
congressional intent, while achieving
the proper balance between consumer
protection and industry costs.
• Promote equal access to banking
services.
• Promote community development in
historically underserved areas.
Goal
To provide high-quality professional
oversight of Reserve Banks
Objective
• Produce high-quality assessments of
Federal Reserve Bank operations,
projects, and initiatives to help Federal Reserve management foster and
strengthen sound internal control
systems and efficient and effective
performance.

The Board of Governors and the Government Performance and Results Act

Goal
To foster the integrity, efficiency, and
accessibility of U.S. payment and settlement systems.
Objectives
• Develop sound, effective policies and
regulations that foster payment system integrity, efficiency, and accessibility. Support and assist the Board
in overseeing U.S. dollar payment
and securities settlement systems
against relevant policy objectives and
standards.
• Conduct research and analysis that
contributes to policy development and
increases the Board's and others'
understanding of payment system
dynamics and risk.

139

eral Financial Institutions Examination
Council (FFIEC), the most formal coordination effort has occurred jointly with
the other depository institution regulatory agencies.1 In addition, a coordinating committee of the depository institution regulatory agencies was created to
address and report on issues of mutual
concern. This interagency working
group has been meeting since June 1997
to work on issues related to those
general goals and objectives that cross
agency functions, programs, and activities. Whether interagency coordination was effected through the FFIEC,
the coordinating group, or interaction
between agency staff, the results have
been positive—resulting in improved
planning for the agencies and substantial benefits to the public.
•

Interagency Coordination
Interagency coordination helps focus
efforts to eliminate redundancy and
lower costs. As mandated by GPRA and
in conformance with past practice, the
Board has worked closely with other
federal agencies to consider plans and
strategies for programs such as bank
supervision that transcend the jurisdiction of each agency. Coordination of
activities with the U.S. Department of
the Treasury and other agencies is evident throughout both the strategic plan
and the performance plan. Given the
degree of similarity in the agencies'
missions and the existence of the Fed-




1. The FFIEC consists of the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the National
Credit Union Administration, the Office of the
Comptroller of the Currency, and the Office of
Thrift Supervision. It was established in 1979 pursuant to title X of the Financial Institutions Regulatory and Interest Rate Control Act of 1978. The
FFIEC is a formal interagency body empowered to
prescribe uniform principles, standards, and report
forms for the federal examination of financial
institutions and to make recommendations to promote uniformity in the supervision of financial
institutions. The FFIEC also provides uniform
examiner training and has taken a lead in developing standardized software needed for major data
collection programs to support the requirements of
the Home Mortgage Disclosure Act and the Community Reinvestment Act.

141

Federal Legislative Proposals
In 2004, the Board of Governors proposed and supported a number of legislative initiatives that would reduce regulatory burden on financial institutions
and benefit consumers without undermining the safety and soundness of
insured depository institutions, consumer protection, or other important
public policy principles, such as the
principle of competitive fairness. The
Board recommended that Congress
adopt legislation that, among other
things, would remove restrictions on the
payment of interest on balances held at
Federal Reserve Banks and on demand
deposits. The Board also recommended
that Congress adopt legislation that
would give the Board greater flexibility
in setting reserve requirements for
depository institutions and would ease
restrictions on interstate branching by
banks. These proposals are summarized
below.

remove a substantial portion of the
incentive for depository institutions to
engage in avoidance measures, and the
resulting improvements in efficiency
could be expected to eventually be
passed through to bank borrowers and
depositors. When depository institutions
keep their balances at Reserve Banks
as low as possible to minimize the cost
of holding these non-interest-bearing
assets, their actions could lead to volatility in the federal funds rate. Payment
of interest on balances at Reserve Banks
could help eliminate the need for these
actions and help ensure that the Federal
Reserve can continue to implement
monetary policy using existing procedures. The Board therefore recommended legislation that explicitly authorizes the payment of interest on balances
held by depository institutions at Federal Reserve Banks.

Interest on Demand Deposits
Interest on Depository Institution
Balances Held at
Federal Reserve Banks
The Board is obliged by law to establish
reserve requirements for certain deposits held at depository institutions, for the
purpose of implementing monetary policy. Banks, thrift institutions, and credit
unions may satisfy their reserve requirements by holding vault cash, a balance
in an account at a Federal Reserve Bank,
or a combination thereof. Unnecessary
restrictions on the payment of interest
on balances at Reserve Banks could
distort market prices and lead to economically wasteful efforts to circumvent
the restrictions. The payment of interest
on balances at Reserve Banks would



The Board restated in 2004 its longstanding recommendation that Congress
repeal the statutory prohibition against
the payment of interest on demand
deposits. Since the advent of NOW
accounts, the prohibition has effectively applied only to checking accounts
held by businesses and other for-profit
entities. At the time it enacted the
Depression-era legislation, Congress
was concerned that large money center
banks were bidding deposits away from
smaller community banks to make loans
to stock market speculators, depriving
rural areas of financing. This rationale
no longer appears applicable, as funds
flow freely around the country and
among banks of all sizes to find the

142 91st Annual Report, 2004
most profitable lending opportunities.
The prohibition against the payment of
interest on demand deposits distorts the
pricing of transaction deposits and associated bank services; to compete for
businesses' liquid assets, banks have set
up complicated procedures for implicitly paying interest. The prohibition also
distorts the pricing of other bank products. Because banks cannot pay explicit
interest on demand deposits, they often
try to attract those deposits by pricing
other bank services below their actual
cost. When services are offered below
cost, they tend to be overused to the
extent that the benefits of consuming
them are less than the costs to society of
producing them.
The prohibition against the payment
of interest on demand deposits has also
led to the introduction of deposit
"sweep" services, which permit institutions and their customers to avoid the
prohibition's effects to a large extent.
Banks spend resources—and charge
fees—for nightly sweeping businesses'
excess demand deposits into money
market investments. The progress of
computer technology has reduced the
cost of sweep services, but the expenses
are not trivial, particularly when systems must be upgraded or the diverse
systems of merging banks must be integrated. From the standpoint of the overall economy, such expenses are a waste
of resources and would be unnecessary
if the payment of interest on demand
deposits was allowed.

flexibility to adjust reserve requirements: By law, the ratio of required
reserves to transaction account deposits
above a certain level must be set
between 8 percent and 14 percent. The
Board in 2004 supported a legislative
proposal to increase the range within
which it may set transaction account
reserve requirements, so that it could
lower the requirements to zero percent
if, at some point in the future, the Board
believes it in the best interests of monetary policy to do so. Lower reserve
requirement ratios could be possible if
explicit statutory authority to pay interest on balances held by depository
institutions at Federal Reserve Banks
were to be granted concurrently with
greater flexibility in setting reserve
requirements.

Interstate Branching

Currently, national and state banks are
permitted to expand into additional
states through the acquisition of another
bank. However, if they do not acquire
another bank, they may open a branch in
an additional state only if the host state
has adopted legislation that expressly
permits de novo interstate branching
(an "opt-in requirement"). As of 2004,
only eighteen states had enacted legislation expressly authorizing interstate
branching.
The restriction on de novo branching
is an obstacle to interstate banking, particularly for small banks that seek to
operate across state lines, and may limit
competition and access to banking serDepository Institution
vices. Branch entry into new markets
Reserve Requirements
leads to less concentration in local bankThe Federal Reserve Act requires that ing markets, which in turn results in
banks and other depository institutions better banking services for households
maintain reserves against certain types and small businesses, lower interest
of deposit accounts, also for the purpose rates on loans, and higher interest rates
of implementing monetary policy. Cur- on deposits. Allowing banks to operate
rently, the Board is constrained in its freely across state lines also benefits




Federal Legislative Proposals
customers as they become more mobile
and live, work, and operate in multiple
states. The restriction also places banks
at a competitive disadvantage in relation
to federal savings associations, which
are allowed to open de novo branches in
any state.
In light of the benefits, the Board
recommended that Congress eliminate
the opt-in requirement for interstate
branching by banks and affirmatively
authorize national and state banks to
establish interstate branches on a de
novo basis. Under the Board's proposal,
the establishment and operation of new
interstate branches by banks would continue to be subject to the other regulatory provisions and conditions established by Congress for de novo interstate
branches, including the financial, managerial, and Community Reinvestment
Act requirements set forth in the RiegleNeal Interstate Banking and Branching
Efficiency Act of 1994.
A special exception in existing law
allows companies to own an FDICinsured industrial loan company (ILC)
without being subject to the type of consolidated supervision and activities restrictions generally applicable to the
owners of insured banks. The number,
size, and powers of ILCs generally were
limited when the ILC exception was
adopted in 1987; however, the number
and size of ILCs operating under this
exception recently have increased significantly, and some states have granted
ILCs essentially all the powers of commercial banks.




143

If legislative changes were to permit
ELCs to branch de novo on an interstate
basis, companies that are not supervised
or regulated on a consolidated basis
would be able to operate a nationwide
banking institution. Such a result would
be inconsistent with the basis on which
the exception for ILCs initially was
granted—that the activities of these
institutions were, and would remain,
limited in scope. In addition, allowing
companies to own an ILC that operates
a nationwide banking franchise without
being subject to the type of consolidated
supervision generally required of the
owners of other insured banks would
raise significant safety and soundness
concerns and place commercial banks
and their owners at a substantial
competitive disadvantage. Moreover,
because any type of firm, including a
commercial or retail firm, may own an
ILC, permitting these institutions to
branch de novo nationwide has the
potential to undermine seriously the
separation of banking and commerce.
For these reasons, the Board's proposal would require the owners of ILCs
that establish interstate branches to operate within the same supervisory regime
that generally applies to other companies that own insured banks. Importantly, the Board's proposal would not
alter the rights of companies that own
ILCs that continue to operate on a limited basis.
•

Records




147

Record of Policy Actions
of the Board of Governors
Regulation B
Equal Credit Opportunity
Regulation E
Electronic Fund Transfers
Regulation M
Consumer Leasing
Regulation Z
Truth in Lending
Regulation DD
Truth in Savings
[Docket Nos. R-1168, R-1169, R-1170,
R-1167, and R-1171]
On June 22, 2004, the Board withdrew
revisions proposed in December 2003 to
define more specifically the standard for
providing "clear and conspicuous" disclosures to consumers and to provide a
more uniform standard for those disclosures among the regulations. In light
of public comment, the Board concluded
that improving the effectiveness of the
disclosures required by each regulation
rather than adopting general definitions
and standards would better ensure that
consumers receive noticeable and understandable information about consumer
financial products and services.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn.
NOTE. Full texts of the policy actions are available via the online version of the Annual Report,
from the "Reading Rooms" on the Board's FOIA
web page, and on request from the Board's Freedom of Information Office.



Regulation C
Home Mortgage Disclosure
[Docket No. R-1186]
On December 10, 2004, the Board
revised the tables used to publicly disclose mortgage lending data in light of
revisions to the regulation that require
lending institutions to report additional
data, including loan pricing and other
data, under the Home Mortgage Disclosure Act. The new data reporting
requirements begin January 1, 2004, and
the revised tables are expected to be
implemented in summer or fall 2005.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Olson, Bernanke, and
Kohn. Absent and not voting: Governor
Bies.
Regulation D
Reserve Requirements of
Depository Institutions
[Docket No. R-1213]
On October 5, 2004, the Board approved
amendments to reflect the annual indexing of the low reserve tranche and of
the reserve requirement exemption for
use in 2005 reserve requirement calculations. The amendments increase
the 3 percent low reserve tranche for
net transaction accounts to $47.6 million (from $45.4 million in 2004) and
the reserve requirement exemption to
$7 million (from $6.6 million in 2004).
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn.

148 91st Annual Report, 2004
Regulation H
Membership of
State Banking Institutions in the
Federal Reserve System
Regulation Y
Bank Holding Companies and
Change in Bank Control
[Docket No. R-1162]
On July 19, 2004, the Board, acting with
the other federal bank and thrift regulatory agencies, approved interagency
amendments to provide for the riskbased capital treatment of asset-backed
commercial paper program assets that
have been consolidated in accordance
with Financial Accounting Standards
Board Interpretation No. 46, as revised
(FIN 46-R). The amendments are effective September 30, 2004, and replace
an interim risk-based capital treatment
approved in October 2003 and extended
in April 2004.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn.
Regulation H
Membership of
State Banking Institutions in the
Federal Reserve System
Regulation K
International Banking Operations
Regulation V
Fair Credit Reporting
Regulation Y
Bank Holding Companies and
Change in Bank Control
[Docket No. R-1199]
On December 16, 2004, the Board, acting with the other federal bank and thrift



regulatory agencies, approved interagency amendments to implement provisions of the Fair and Accurate Credit
Transactions Act that require financial
institutions to adopt measures for properly disposing of consumer information
derived from consumer reports. The
amendments are effective July 1, 2005.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn.
Regulation J
Collection of Checks
and Other Items by
Federal Reserve Banks and
Funds Transfers through Fedwire
[Docket No. R-1202]
On October 22, 2004, the Board
approved amendments to provide for
the rights and obligations of depository
institutions and Federal Reserve Banks
in connection with items handled in
electronic form by the Reserve Banks.
The amendments ensure that the regulation covers the entire range of checkprocessing services that the Reserve
Banks will offer in light of the Check
Clearing for the 21st Century Act. They
are effective October 28, 2004.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn.
Regulation V
Fair Credit Reporting
[Docket Nos. R-1172, R-1175, and
R-1187]
On February 5, 2004, the Board, acting
with the Federal Trade Commission,
approved interagency amendments to
establish effective dates for certain pro-

Record of Policy Actions of the Board of Governors
visions of the Fair and Accurate Credit
Transactions Act (FACT Act). The
amendments establish December 31,
2003, as the effective date for the FACT
Act provisions that preempt state laws
regulating areas governed by the Fair
Credit Reporting Act. The amendments
also establish March 31, 2004, as the
effective date for FACT Act provisions
that require no changes, or minimal
changes, to existing business procedures
and December 1, 2004, as the effective
date for provisions that involve changes
requiring a significant implementation
period or regulatory action. The amendments are effective March 12, 2004,
and replace an interim rule adopted in
December 2003 that established the
December 31 effective date.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn.
On June 8, 2004, the Board approved
amendments providing model notices
that financial institutions may use to
comply with the notice requirements of
the FACT Act when furnishing negative
information to consumer reporting agencies. The amendments are effective
July 16, 2004.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn.

Regulation Z
Truth in Lending

149

sure requirements refers to a numerical
amount and to provide guidance on consumers' exercise of the right to rescind
certain home-secured loans. The amendments are effective April 1, 2004, and
compliance is mandatory by October 1,
2004.
Votes for this action: Chairman Greenspan and Governors Gramlich, Bies,
Olson, Bernanke, and Kohn. Absent and
not voting: Vice Chairman Ferguson.

Regulation BB
Community Reinvestment
[Docket No. R-1181]
On July 16, 2004, the Board withdrew
proposed amendments that would have
(1) raised the asset threshold for streamlined Community Reinvestment Act
(CRA) evaluations of state member
banks from $250 million to $500 million and (2) allowed examiners to
lower a state member bank's CRA rating
if the bank engaged in a pattern or
practice of abusive asset-based lending.
In light of public comment, the Board
concluded that the uncertain savings
to institutions from increasing the
threshold did not clearly justify the
potential adverse effects on community
development in certain rural communities. It also noted that commenters
were united in their opposition to defining abusive asset-based lending in the
regulation to the exclusion of other abusive practices. The Board and the other
federal bank and thrift regulatory agencies had proposed identical amendments
to their CRA regulations in February
2004.

[Docket No. R-1167]
On March 25, 2004, the Board approved
amendments to clarify that the term
"amount" in the description of disclo


Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn.

150 91st Annual Report, 2004

Regulation CC
Availability of Funds and
Collection of Checks
[Docket No. R-1176]
On July 27, 2004, the Board approved
amendments that add a subpart D, with
commentary, to implement the Check
Clearing for the 21st Century Act. Subpart D sets forth the new requirements
for banks, including indorsement and
identification requirements for substitute checks, and contains model notices,
including a model consumer-awareness
disclosure. The amendments also clarify
provisions of the regulation and its commentary. They are effective October 28,
2004, with the exception of appendix C's model consumer-awareness disclosure, which is effective immediately,
and appendix D's requirement that bank
indorsements and identifications be
printed in black ink, which is effective
January 1, 2006.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and
Governors Bies, Olson, Bernanke, and
Kohn. Absent and not voting: Governor
Gramlich.

Rules of Practice for Hearings
[Docket No. OP-1211]
On September 20, 2004, the Board
approved amendments to increase the
maximum amount of each statutory civil
money penalty under its jurisdiction to
account for inflation, as required by the
Debt Collection Improvement Act. The
amendments are effective October 12,
2004.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn.



Policy Statements and
Other Actions
Unfair or Deceptive Acts or
Practices by State-Chartered Banks
[Interagency Guidance]
On March 9, 2004, the Board, acting
with the Federal Deposit Insurance Corporation, issued interagency guidance on
the standards used by the two agencies
to determine whether acts or practices
by state-chartered banks are unfair or
deceptive under the Federal Trade
Commission Act. The guidance also
addresses measures and "best practices"
that banks may use to avoid such acts or
practices.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn.
Policy Statement
on Payments System Risk
[Docket Nos. OP-1182 and OP-1191]
On September 22, 2004, the Board
revised its policy to modify the daylight
overdraft measurement rules for interest
and redemption payments on securities
issued by government-sponsored enterprises (GSEs) and certain international
organizations and to align the treatment
of the general corporate account activity
of these entities with that of other Federal Reserve account holders that do
not have regular access to the discount
window. The revised policy also reflects
recent changes to the operating hours
of the online Fedwire Funds Service and
clarifies or updates certain items. The
revisions related to GSEs and certain
international organizations are effective
July 20, 2006, and the other revisions
are effective September 22, 2004.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Gov-

Record of Policy Actions of the Board of Governors
ernors Gramlich, Bies, Olson, Bernanke,
and Kohn.

On November 24, 2004, the Board
revised the part of its policy dealing
with risks and risk management in payments and securities settlement systems.
In general, the revisions expand the
policy's scope to include those Federal
Reserve Bank payments and securities
settlement systems that meet the policy's application criteria, revise general
risk-management expectations for systems subject to the policy, and incorporate standards for payments and
securities settlement systems that are
systemically important. The revisions
are effective January 2, 2005.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn.
Bank Holding Company
Rating System
[Docket No. OP-1207]
On December 1, 2004, the Board revised
its bank holding company rating system
to emphasize risk management, implement a comprehensive and adaptable
framework for analyzing and rating
financial factors, and provide a framework for assessing and rating the potential impact of a bank holding company's
nondepository entities on its subsidiary
depository institutions. The revised rating system is effective January 1, 2005.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn.

Discount Rates in 2004
Under the Federal Reserve Act, the
boards of directors of the Federal



151

Reserve Banks must establish rates on
loans to depository institutions at least
every fourteen days, subject to review
and determination by the Board of
Governors.
Primary Credit Rate
Primary credit is the Federal Reserve's
main lending program. Primary credit is
made available with minimal administration for very short terms as a backup
source of liquidity to depository institutions that, in the judgment of the
lending Federal Reserve Bank, are
in generally sound financial condition.
Primary credit is extended at a rate
above the Federal Open Market Committee's (FOMC's) federal funds rate
target.
During 2004, the Board approved five
increases in the primary credit rate,
bringing the rate from 2 percent to
3lA percent. The Board reached its
determinations on the primary credit rate
recommendations of the Reserve Bank
boards of directors in conjunction with
the FOMC's decisions to raise the target
federal funds rate from 1 percent to
2VA percent and related economic and
financial developments. In the first half
of the year, disappointing employment
growth and the continued slack in
resource utilization led the Board and
FOMC to maintain a highly accommodative stance of monetary policy. By
midyear, however, output and employment had begun to show persistent
improvements and there were indications of some increase in inflation, so
the Board and FOMC began to gradually move the structure of policy rates
toward a more neutral setting. Monetary
policy developments are reviewed more
fully elsewhere in this report (see the
section "Monetary Policy and Economic Developments" and the minutes
of FOMC meetings held in 2004).

152 91st Annual Report, 2004

Secondary and
Seasonal Credit Rates
Secondary credit is available in appropriate circumstances to depository institutions that do not qualify for primary credit. The secondary credit rate
is set on the basis of a formula at a
spread—50 basis points in 2004—above
the primary credit rate.
Seasonal credit is available to smaller
depository institutions to meet liquidity
needs that arise from regular swings in
their loans and deposits. The rate on
seasonal credit is calculated every two
weeks as an average of selected money
market yields, typically resulting in a
rate close to the federal funds rate target.
At year-end, the secondary and seasonal credit rates were 33/A percent and
2.35 percent, respectively.

Votes on Discount Rate Changes
About every two weeks during 2004,
the Board approved proposals by the
Reserve Banks to maintain the formulas
for computing the secondary and seasonal credit rates. Details on the five
actions by the Board to approve changes
in the primary credit rate are provided
below.
June 30, 2004. Effective this date, the
Board approved actions taken by the
directors of the Federal Reserve Banks
of Boston, New York, Philadelphia,
Cleveland, Richmond, Atlanta, Chicago,
Minneapolis, Kansas City, Dallas, and
San Francisco to raise the rate on discounts and advances under the primary
credit program by VA percentage point,
to 2VA percent. The same increase was
approved for the Federal Reserve Bank
of St. Louis, effective July 1, 2004.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Gov


ernors Gramlich, Bies, Olson, Bernanke,
and Kohn. Votes against this action: None.
August 10, 2004. Effective this date, the
Board approved actions taken by the
directors of the Federal Reserve Banks
of Boston, New York, Philadelphia,
Cleveland, Richmond, Atlanta, Chicago,
Minneapolis, Kansas City, Dallas, and
San Francisco to raise the rate on discounts and advances under the primary
credit program by VA percentage point,
to 2Vi percent. The same increase was
approved for the Federal Reserve Bank
of St. Louis, effective August 11, 2004.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn. Votes against this action: None.
September 21, 2004. Effective this date,
the Board approved actions taken by the
directors of the Federal Reserve Banks
of Boston, New York, Philadelphia,
Cleveland, Richmond, Atlanta, Chicago,
Minneapolis, Kansas City, Dallas, and
San Francisco to raise the rate on discounts and advances under the primary
credit program by VA percentage point,
to 1?/A percent. The same increase was
approved for the Federal Reserve Bank
of St. Louis, effective September 22,
2004.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn. Votes against this action: None.
November 10, 2004. Effective this date,
the Board approved actions taken by the
directors of the Federal Reserve Banks
of Boston, New York, Philadelphia,
Cleveland, Richmond, Atlanta, Chicago,
Minneapolis, and Kansas City to raise
the rate on discounts and advances
under the primary credit program by
VA percentage point, to 3 percent. The

Record of Policy Actions of the Board of Governors
same increase was approved for the Federal Reserve Bank of St. Louis, effective
November 12,2004.
The Board also approved identical
actions subsequently taken by the directors of the Federal Reserve Banks of
San Francisco, effective November 10,
2004, and Dallas, effective November 12, 2004.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn. Votes against this action: None.
December 14, 2004. Effective this date,
the Board approved actions taken by the




153

directors of the Federal Reserve Banks
of Boston, New York, Philadelphia,
Cleveland, Richmond, Atlanta, Chicago,
Minneapolis, Kansas City, Dallas, and
San Francisco to raise the rate on discounts and advances under the primary
credit program by lA percentage point,
to 3V4 percent. The same increase was
approved for the Federal Reserve Bank
of St. Louis, effective December 15,
2004.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn. Votes against this action:
None.
•

155

Minutes of Federal Open Market
Committee Meetings
The policy actions of the Federal Open
Market Committee, contained in the
minutes of its meetings, are presented in
the Annual Report of the Board of Governors pursuant to the requirements of
section 10 of the Federal Reserve Act.
That section provides that the Board
shall keep a complete record of the
actions taken by the Board and by the
Federal Open Market Committee on all
questions of policy relating to open market operations, that it shall record
therein the votes taken in connection
with the determination of open market
policies and the reasons underlying each
policy action, and that it shall include in
its annual report to the Congress a full
account of such actions.
The minutes of the meetings contain
the votes on the policy decisions made
at those meetings as well as a resume of
the information and discussions that led
to the decisions. The summary descriptions of economic and financial conditions are based on the information that
was available to the Committee at the
time of the meetings rather than on data
as they may have been revised later.
Members of the Committee voting for
a particular action may differ among
themselves as to the reasons for their
votes; in such cases, the range of thenviews is noted in the minutes. When
members dissent from a decision, they
are identified in the minutes and a summary of the reasons for their dissent is
provided.
Policy directives of the Federal Open
Market Committee are issued to the
Federal Reserve Bank of New York as
the Bank selected by the Committee to



execute transactions for the System
Open Market Account. In the area of
domestic open market operations, the
Federal Reserve Bank of New York
operates under three sets of instructions
from the Federal Open Market Committee: an Authorization for Domestic
Open Market Operations, Guidelines for
the Conduct of System Open Market
Operations in Federal Agency Issues,
and a Domestic Policy Directive. (A
new Domestic Policy Directive is
adopted at each regularly scheduled
meeting.) In the foreign currency area,
the Committee operates under an
Authorization for Foreign Currency
Operations, a Foreign Currency Directive, and Procedural Instructions with
Respect to Foreign Currency Operations. These policy instruments are
shown below in the form in which they
were in effect at the beginning of 2004.
Changes in the instruments during the
year are reported in the minutes for the
individual meetings.

Authorization for Domestic
Open Market Operations
In Effect January 1, 2004
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, to the extent necessary to carry out the most recent domestic
policy directive adopted at a meeting of the
Committee:
(a) To buy or sell U.S. Government
securities, including securities of the Federal
Financing Bank, and securities that are direct
obligations of, or fully guaranteed as to
principal and interest by, any agency of the

156 91st Annual Report, 2004
United States in the open market, from or to
securities dealers and foreign and international accounts maintained at the Federal
Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System
Open Market Account at market prices, and,
for such Account, to exchange maturing U.S.
Government and Federal agency securities
with the Treasury or the individual agencies
or to allow them to mature without replacement; provided that the aggregate amount of
U.S. Government and Federal agency securities held in such Account (including forward
commitments) at the close of business on the
day of a meeting of the Committee at which
action is taken with respect to a domestic
policy directive shall not be increased or
decreased by more than $12.0 billion during
the period commencing with the opening of
business on the day following such a meeting and ending with the close of business on
the day of the next such meeting;

2. In order to ensure the effective conduct
of open market operations, the Federal Open
Market Committee authorizes the Federal
Reserve Bank of New York to lend on an
overnight basis U.S. Government securities
held in the System Open Market Account to
dealers at rates that shall be determined by
competitive bidding. The Federal Reserve
Bank of New York shall set a minimum
lending fee consistent with the objectives of
the program and apply reasonable limitations
on the total amount of a specific issue that
may be auctioned and on the amount of
securities that each dealer may borrow. The
Federal Reserve Bank of New York may
reject bids which could facilitate a dealer's
ability to control a single issue as determined solely by the Federal Reserve Bank of
New York.

3. In order to ensure the effective conduct of
open market operations, while assisting in
the provision of short-term investments for
(b) To buy U.S. Government securities, foreign and international accounts mainobligations that are direct obligations of, tained at the Federal Reserve Bank of New
or fully guaranteed as to principal and inter- York, the Federal Open Market Committee
est by, any agency of the United States, from authorizes and directs the Federal Reserve
dealers for the account of the Federal Bank of New York (a) for System Open
Reserve Bank of New York under agree- Market Account, to sell U.S. Government
ments for repurchase of such securities or securities to such foreign and international
obligations in 65 business days or less, at accounts on the bases set forth in pararates that, unless otherwise expressly autho- graph l(a) under agreements providing for
rized by the Committee, shall be determined the resale by such accounts of those securiby competitive bidding, after applying rea- ties within 65 business days or less on terms
sonable limitations on the volume of agree- comparable to those available on such transments with individual dealers; provided that actions in the market; and (b) for New York
in the event Government securities or agency Bank account, when appropriate, to underissues covered by any such agreement are take with dealers, subject to the conditions
not repurchased by the dealer pursuant to the imposed on purchases and sales of securities
agreement or a renewal thereof, they shall be in paragraph l(b), repurchase agreements in
sold in the market or transferred to the Sys- U.S. Government and agency securities, and
tem Open Market Account;
to arrange corresponding sale and repurchase
agreements between its own account and
(c) To sell U.S. Government securities foreign and international accounts mainand obligations that are direct obligations of, tained at the Bank. Transactions undertaken
or fully guaranteed as to principal and inter- with such accounts under the provisions of
est by, any agency of the United States to this paragraph may provide for a service fee
dealers for System Open Market Account when appropriate.
under agreements for the resale by dealers of
such securities or obligations in 65 business 4. In the execution of the Committee's decidays or less, at rates that, unless otherwise sion regarding policy during any intermeetexpressly authorized by the Committee, shall ing period, the Committee authorizes and
be determined by competitive bidding, after directs the Federal Reserve Bank of
applying reasonable limitations on the vol- New York, upon the instruction of the Chairume of agreements with individual dealers.
man of the Committee, to adjust somewhat




Minutes of FOMC Meetings

157

in exceptional circumstances the degree of
pressure on reserve positions and hence the
intended federal funds rate. Any such adjustment shall be made in the context of the
Committee's discussion and decision at its
most recent meeting and the Committee's
long-run objectives for price stability and
sustainable economic growth, and shall be
based on economic, financial, and monetary developments during the intermeeting
period. Consistent with Committee practice, the Chairman, if feasible, will consult
with the Committee before making any
adjustment.

The Committee perceives that the upside
and downside risks to the attainment of sustainable growth for the next few quarters are
roughly equal. The probability of an unwelcome fall in inflation has diminished in
recent months and now appears almost equal
to that of a rise in inflation.

Guidelines for the Conduct of
System Open Market Operations
in Federal Agency Issues

1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, for System Open Market
Account, to the extent necessary to carry out
the Committee's foreign currency directive
and express authorizations by the Committee pursuant thereto, and in conformity with
such procedural instructions as the Committee may issue from time to time:

In Effect January 1, 2004
1. System open market operations in Federal agency issues are an integral part of total
System open market operations designed to
influence bank reserves, money market conditions, and monetary aggregates.
2. System open market operations in Federal agency issues are not designed to support individual sectors of the market or
to channel funds into issues of particular
agencies.

Domestic Policy Directive
In Effect January 1, 20041
The Federal Open Market Committee seeks
monetary and financial conditions that will
foster price stability and promote sustainable
growth in output. To farther its long-run
objectives, the Committee in the immediate
future seeks conditions in reserve markets
consistent with maintaining the federal funds
rate at an average of around 1 percent.

The Committee also approved the
sentences below for inclusion in the
press statement to be released shortly
after the December 9, 2003, meeting:
1. Adopted by the Committee at its meeting on
December 9, 2003.



Authorization for Foreign
Currency Operations
In Effect January 1, 2004

A. To purchase and sell the following
foreign currencies in the form of cable transfers through spot or forward transactions on
the open market at home and abroad, including transactions with the U.S. Treasury, with
the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve
Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial
institutions:
Canadian dollars
Danish kroner
Euro
Pounds sterling
Japanese yen

Mexican pesos
Norwegian kroner
Swedish kronor
Swiss francs

B. To hold balances of, and to have
outstanding forward contracts to receive or
to deliver, the foreign currencies listed in
paragraph A above.
C. To draw foreign currencies and to
permit foreign banks to draw dollars under
the reciprocal currency arrangements listed
in paragraph 2 below, provided that drawings by either party to any such arrangement
shall be fully liquidated within 12 months
after any amount outstanding at that time
was first drawn, unless the Committee,
because of exceptional circumstances, specifically authorizes a delay.

158 91st Annual Report, 2004
D. To maintain an overall open position in all foreign currencies not exceeding
$25.0 billion. For this purpose, the overall
open position in all foreign currencies is
defined as the sum (disregarding signs) of
net positions in individual currencies. The
net position in a single foreign currency is
defined as holdings of balances in that currency, plus outstanding contracts for future
receipt, minus outstanding contracts for
future delivery of that currency, i.e., as the
sum of these elements with due regard to
sign.

ing operating arrangements with foreign
central banks on System holdings of foreign
currencies, the Federal Reserve Bank of
New York shall not commit itself to maintain
any specific balance unless authorized by
the Federal Open Market Committee. Any
agreements or understandings concerning the
administration of the accounts maintained by
the Federal Reserve Bank of New York with
the foreign banks designated by the Board
of Governors under Section 214.5 of Regulation N shall be referred for review and
approval to the Committee.

2. The Federal Open Market Committee directs the Federal Reserve Bank of
New York to maintain reciprocal currency
arrangements ("swap" arrangements) for the
System Open Market Account for periods up
to a maximum of 12 months with the following foreign banks, which are among those
designated by the Board of Governors of the
Federal Reserve System under Section 214.5
of Regulation N, Relations with Foreign
Banks and Bankers, and with the approval of
the Committee to renew such arrangements
on maturity:

5. Foreign currency holdings shall be invested to ensure that adequate liquidity is
maintained to meet anticipated needs and so
that each currency portfolio shall generally
have an average duration of no more than
18 months (calculated as Macaulay duration). When appropriate in connection with
arrangements to provide investment facilities
for foreign currency holdings, U.S. Government securities may be purchased from foreign central banks under agreements for
repurchase of such securities within 30 calendar days.

Foreign bank

Amount
of arrangement
(millions of
dollars equivalent)

Bank of Canada .
Bank of Mexico .

2,000
3,000

Any changes in the terms of existing swap
arrangements, and the proposed terms of any
new arrangements that may be authorized,
shall be referred for review and approval to
the Committee.
3. All transactions in foreign currencies
undertaken under paragraph LA. above
shall, unless otherwise expressly authorized
by the Committee, be at prevailing market
rates. For the purpose of providing an investment return on System holdings of foreign
currencies, or for the purpose of adjusting
interest rates paid or received in connection
with swap drawings, transactions with foreign central banks may be undertaken at
nonmarket exchange rates.
4. It shall be the normal practice to arrange
with foreign central banks for the coordination of foreign currency transactions. In mak


6. All operations undertaken pursuant to
the preceding paragraphs shall be reported
promptly to the Foreign Currency Subcommittee and the Committee. The Foreign
Currency Subcommittee consists of the
Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of
Governors, and such other member of the
Board as the Chairman may designate (or in
the absence of members of the Board serving
on the Subcommittee, other Board members
designated by the Chairman as alternates,
and in the absence of the Vice Chairman of
the Committee, his alternate). Meetings of
the Subcommittee shall be called at the
request of any member, or at the request of
the Manager, System Open Market Account
("Manager"), for the purposes of reviewing
recent or contemplated operations and of
consulting with the Manager on other matters relating to his responsibilities. At the
request of any member of the Subcommittee,
questions arising from such reviews and consultations shall be referred for determination
to the Federal Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed agreement or

Minutes of FOMC Meetings
understanding with the Secretary of the Treasury about the division of responsibility for
foreign currency operations between the System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with
the Secretary on policy matters relating to
foreign currency operations;
C. From time to time, to transmit
appropriate reports and information to the
National Advisory Council on International
Monetary and Financial Policies.
8. Staff officers of the Committee are authorized to transmit pertinent information on
System foreign currency operations to appropriate officials of the Treasury Department.
9. All Federal Reserve Banks shall participate in the foreign currency operations for
System Account in accordance with paragraph 3 G(l) of the Board of Governors'
Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks
dated January 1, 1944.

Foreign Currency Directive
In Effect January 1, 2004
1. System operations in foreign currencies
shall generally be directed at countering disorderly market conditions, provided that
market exchange rates for the U.S. dollar
reflect actions and behavior consistent with
the IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign exchange.
B. Maintain
reciprocal
currency
("swap") arrangements with selected foreign central banks.
C. Cooperate in other respects with
central banks of other countries and with
international monetary institutions.

159

currencies and to facilitate operations of the
Exchange Stabilization Fund.
C. For such other purposes as may be
expressly authorized by the Committee.
4. System foreign currency operations shall
be conducted:
A. In close and continuous consultation and cooperation with the United States
Treasury;
B. In cooperation, as appropriate, with
foreign monetary authorities; and
C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange
arrangements under the IMF Article IV.

Procedural Instructions with
Respect to Foreign Currency
Operations
In Effect January 1, 2004
In conducting operations pursuant to the
authorization and direction of the Federal
Open Market Committee as set forth in the
Authorization for Foreign Currency Operations and the Foreign Currency Directive,
the Federal Reserve Bank of New York,
through the Manager, System Open Market
Account ("Manager"), shall be guided by
the following procedural understandings
with respect to consultations and clearances
with the Committee, the Foreign Currency
Subcommittee, and the Chairman of the
Committee. All operations undertaken pursuant to such clearances shall be reported
promptly to the Committee.
1. The Manager shall clear with the Subcommittee (or with the Chairman, if the
Chairman believes that consultation with the
Subcommittee is not feasible in the time
available):

A. To adjust System balances in light
of probable future needs for currencies.

A. Any operation that would result in a
change in the System's overall open position
in foreign currencies exceeding $300 million
on any day or $600 million since the most
recent regular meeting of the Committee.

B. To provide means for meeting System and Treasury commitments in particular

B. Any operation that would result in a
change on any day in the System's net posi-

3. Transactions may also be undertaken:




160 91st Annual Report, 2004
tion in a single foreign currency exceeding
$150 million, or $300 million when the
operation is associated with repayment of
swap drawings.
C. Any operation that might generate a
substantial volume of trading in a particular
currency by the System, even though the
change in the System's net position in that
currency might be less than the limits specified in LB.
D. Any swap drawing proposed by a
foreign bank not exceeding the larger of
(i) $200 million or (ii) 15 percent of the size
of the swap arrangement.
2. The Manager shall clear with the Committee (or with the Subcommittee, if the
Subcommittee believes that consultation
with the full Committee is not feasible in the
time available, or with the Chairman, if the
Chairman believes that consultation with
the Subcommittee is not feasible in the time
available):
A. Any operation that would result in a
change in the System's overall open position
in foreign currencies exceeding $1.5 billion
since the most recent regular meeting of the
Committee.
B. Any swap drawing proposed by
a foreign bank exceeding the larger of
(i) $200 million or (ii) 15 percent of the
size of the swap arrangement.
3. The Manager shall also consult with the
Subcommittee or the Chairman about proposed swap drawings by the System and
about any operations that are not of a routine
character.

Meeting Held on
January 27-28, 2004
A meeting of the Federal Open Market
Committee was held in the offices of
the Board of Governors of the Federal
Reserve System in Washington, D.C.,
starting at 2:00 p.m. on Tuesday, January 27, 2004, and continuing at
9:00 a.m. on Wednesday, January 28,
2004.



Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Mr. Bernanke
Ms. Bies
Mr. Ferguson
Mr. Gramlich
Mr. Hoenig
Mr. Kohn
Ms. Minehan
Mr. Olson
Ms. Pianalto
Mr. Poole
Messrs. McTeer, Moskow, Santomero,
and Stern, Alternate Members
of the Federal Open Market
Committee
Messrs. Broaddus, Guynn, and Parry,
Presidents of the Federal Reserve
Banks of Richmond, Atlanta,
and San Francisco respectively
Mr. Reinhart, Secretary and Economist
Mr. Bernard, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Baxter, Deputy General Counsel
Ms. Johnson, Economist
Mr. Stockton, Economist
Mr. Connors, Ms. Cumming,
Messrs. Fuhrer, Hakkio, Howard,
Madigan, Rasche, Slifman,
Sniderman, and Wilcox, Associate
Economists
Mr. Kos, Manager, System Open
Market Account
Mr. Ettin2, Deputy Director, Division
of Research and Statistics,
Board of Governors
Messrs. Oliner and Struckmeyer,
Associate Directors, Division of
Research and Statistics, Board
of Governors
Messrs. Clouse,2 and Whitesell, Deputy
Associate Directors, Division of
Monetary Affairs, Board of
Governors
2. Attended Wednesday's session only.

Minutes of FOMC Meetings, January

161

Mr. Kamin and Ms. Zickler,3 Deputy
Associate Directors, Divisions
of International Finance and
Research and Statistics
respectively, Board of Governors

these individuals had executed their
oaths of office.
The elected members and alternate
members were as follows:

Mr. English, Assistant Director,
Division of Monetary Affairs,
Board of Governors

Timothy F. Geithner, President of the Federal Reserve Bank of New York, with a
vacancy in the position of alternate
member for the Federal Reserve Bank
of New York

Mr. Skidmore, Special Assistant to the
Board, Office of Board Members,
Board of Governors
3

Messrs. Nelson and Wood, Senior
Economists, Divisions of
Monetary Affairs and International
Finance respectively, Board of
Governors
Mr. Carpenter,3 Economist, Division
of Monetary Affairs, Board of
Governors
Mr. Luecke, Senior Financial Analyst,
Division of Monetary Affairs,
Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. Eisenbeis, Evans, Goodfriend,
Ms. Mester, Messrs. Rolnick
and Rosenblum, Senior Vice
Presidents, Federal Reserve Banks
of Atlanta, Chicago, Richmond,
Philadelphia, Minneapolis, and
Dallas respectively
Messrs. Elsasser and Rudebusch,
Vice Presidents, Federal Reserve
Banks of New York and
San Francisco respectively

In the agenda for this meeting, it was
reported that advices of the election of
the following members and alternate
members of the Federal Open Market
Committee for the period commencing
January 1, 2004, and ending December 31, 2004, had been received and that
3. Attended portion of meeting relating to the
Committee's review of the economic outlook.



Cathy E. Minehan, President of the Federal Reserve Bank of Boston, with
Anthony M. Santomero, President of
the Federal Reserve Bank of Philadelphia, as alternate
Sandra Pianalto, President of the Federal
Reserve Bank of Cleveland, with
Michael H. Moskow, President of the
Federal Reserve Bank of Chicago, as
alternate
William Poole, President of the Federal
Reserve Bank of St. Louis, with Robert D. McTeer, Jr., President of the
Federal Reserve Bank of Dallas, as
alternate
Thomas M. Hoenig, President of the Federal Reserve Bank of Kansas City, with
Gary H. Stern, President of the Federal Reserve Bank of Minneapolis, as
alternate
Following this meeting the board of
directors of the Federal Reserve Bank of
New York appointed Christine M. Cumming to the position of First Vice President of the Bank, effective February 6,
2004. The directors also elected her to
serve as an alternate member of the Federal Open Market Committee representing the Federal Reserve Bank of
New York. Subsequently, Ms. Cumming
executed her oath of office as an alternate member of the Committee, effective for the period from February 20 to
December 31, 2004.
By unanimous vote, the following
officers of the Federal Open Market
Committee were elected to serve until

162

91st Annual Report, 2004

the election of their successors at the
first regularly scheduled meeting of the
Committee after December 31, 2004,
with the understanding that in the event
of the discontinuance of their official
connection with the Board of Governors
or with a Federal Reserve Bank, they
would cease to have any official connection with the Federal Open Market
Committee:
Alan Greenspan
Timothy F. Geithner
Vincent R. Reinhart
Normand R.V. Bernard
Michelle A. Smith
J. Virgil Mattingly, Jr.
Thomas C. Baxter, Jr.
Karen H. Johnson
David J. Stockton

Chairman
Vice Chairman
Secretary and
Economist
Deputy Secretary
Assistant
Secretary
General Counsel
Deputy General
Counsel
Economist
Economist

Thomas A. Connors, Christine M.
Cumming, Jeffrey C. Fuhrer, Craig S.
Hakkio, David H. Howard, Brian F.
Madigan, Robert H. Rasche, Lawrence
Slifman, Mark S. Sniderman, and
David W. Wilcox, Associate
Economists
By unanimous vote, the Federal
Reserve Bank of New York was selected
to execute transactions for the System
Open Market Account until the adjournment of the first regularly scheduled
meeting of the Committee after December 31, 2004.
By unanimous vote, Dino Kos was
selected to serve at the pleasure of the
Committee as Manager, System Open
Market Account, on the understanding
that his selection was subject to being
satisfactory to the Federal Reserve Bank
of New York.4

4. Secretary's note: Advice subsequently was
received that the selection of Mr. Kos as Manager
was satisfactory to the board of directors of the
Federal Reserve Bank of New York.



By unanimous vote, the Committee
amended its Program for Security of
FOMC Information on January 27,
2004, by making small clarifying additions or changes relating especially to
electronic transmissions of confidential
information.
By unanimous vote, the Authorization for Domestic Open Market Operations was amended in the form shown
below.

Authorization for Domestic
Open Market Operations
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, to the extent necessary to carry out the most recent domestic
policy directive adopted at a meeting of the
Committee:
(a) To buy or sell U.S. Government
securities, including securities of the Federal
Financing Bank, and securities that are direct
obligations of, or fully guaranteed as to
principal and interest by, any agency of the
United States in the open market, from or to
securities dealers and foreign and international accounts maintained at the Federal
Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System
Open Market Account at market prices, and,
for such Account, to exchange maturing U.S.
Government and Federal agency securities
with the Treasury or the individual agencies
or to allow them to mature without replacement; provided that the aggregate amount of
U.S. Government and Federal agency securities held in such Account (including forward
commitments) at the close of business on the
day of a meeting of the Committee at which
action is taken with respect to a domestic
policy directive shall not be increased or
decreased by more than $12.0 billion during
the period commencing with the opening of
business on the day following such a meeting and ending with the close of business on
the day of the next such meeting;
(b) To buy U.S. Government securities,
obligations that are direct obligations of, or
fully guaranteed as to principal and interest
by, any agency of the United States, from
dealers for the account of the Federal

Minutes of FOMC Meetings, January

163

Reserve Bank of New York under agree- System Open Market Account, to sell U.S.
ments for repurchase of such securities or Government securities to such accounts on
obligations in 65 business days or less, at the bases set forth in paragraph l(a) under
rates that, unless otherwise expressly autho- agreements providing for the resale by such
rized by the Committee, shall be determined accounts of those securities in 65 business
by competitive bidding, after applying rea- days or less on terms comparable to those
sonable limitations on the volume of agree- available on such transactions in the market;
ments with individual dealers; provided that and (b) for New York Bank account, when
in the event Government securities or agency appropriate, to undertake with dealers, subissues covered by any such agreement are ject to the conditions imposed on purchases
not repurchased by the dealer pursuant to the and sales of securities in paragraph l(b),
agreement or a renewal thereof, they shall be repurchase agreements in U.S. Government
sold in the market or transferred to the Sys- and agency securities, and to arrange corresponding sale and repurchase agreements
tem Open Market Account.
(c) To sell U.S. Government securities between its own account and such foreign,
and obligations that are direct obligations of, international, and fiscal agency accounts
or fully guaranteed as to principal and inter- maintained at the Bank. Transactions underest by, any agency of the United States to taken with such accounts under the prodealers for System Open Market Account visions of this paragraph may provide for a
under agreements for the resale by dealers service fee when appropriate.
of such securities or obligations in 65 busi4. In the execution of the Committee's
ness days or less, at rates that, unless other- decision regarding policy during any interwise expressly authorized by the Committee, meeting period, the Committee authorizes
shall be determined by competitive bidding, and directs the Federal Reserve Bank of New
after applying reasonable limitations on York, upon the instruction of the Chairman
the volume of agreements with individual of the Committee, to adjust somewhat in
dealers.
exceptional circumstances the degree of
2. In order to ensure the effective conduct pressure on reserve positions and hence the
of open market operations, the Federal Open intended federal funds rate. Any such adjustMarket Committee authorizes the Federal ment shall be made in the context of the
Reserve Bank of New York to lend on an Committee's discussion and decision at its
overnight basis U.S. Government securities most recent meeting and the Committee's
held in the System Open Market Account long-run objectives for price stability and
to dealers at rates that shall be determined sustainable economic growth, and shall be
by competitive bidding. The Federal Reserve based on economic, financial, and moneBank of New York shall set a minimum tary developments during the intermeeting
lending fee consistent with the objectives of period. Consistent with Committee practhe program and apply reasonable limitations tice, the Chairman, if feasible, will consult
on the total amount of a specific issue that with the Committee before making any
may be auctioned and on the amount of adjustment.
securities that each dealer may borrow. The
Federal Reserve Bank of New York may
The amendment to the authorization
reject bids which could facilitate a dealer's
ability to control a single issue as deter- for domestic open market operations
mined solely by the Federal Reserve Bank of involved the addition of a reference in
New York.
paragraph 3 to accounts held at the Fed3. In order to ensure the effective conduct eral Reserve Bank of New York pursuof open market operations, while assisting
in the provision of short-term investments ant to fiscal agency instructions from
for foreign and international accounts main- the Secretary of the Treasury. Accounts
tained at the Federal Reserve Bank of New listed in paragraph 3, which include
York and accounts maintained at the Federal those maintained by the Bank on behalf
Reserve Bank of New York as fiscal agent of official foreign and international
of the United States pursuant to Section 15
of the Federal Reserve Act, the Federal Open accounts, are eligible for participation in
Market Committee authorizes and directs the the Bank's short-term investment facilFederal Reserve Bank of New York (a) for ity, the so-called "repo pool."



164 91st Annual Report, 2004
By unanimous vote, the Authorization for Foreign Currency Operations
was reaffirmed in the form shown
below.
Authorization for Foreign
Currency Operations
1. The Federal Open Market Committee
authorizes and directs the Federal Reserve
Bank of New York, for System Open Market
Account, to the extent necessary to carry out
the Committee's foreign currency directive
and express authorizations by the Committee
pursuant thereto, and in conformity with
such procedural instructions as the Committee may issue from time to time:
A. To purchase and sell the following
foreign currencies in the form of cable transfers through spot or forward transactions on
the open market at home and abroad, including transactions with the U.S. Treasury, with
the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve Act
of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial
institutions:
Canadian dollars
Danish kroner
Euro
Pounds sterling
Japanese yen

Mexican pesos
Norwegian kroner
Swedish kronor
Swiss francs

B. To hold balances of, and to have
outstanding forward contracts to receive or
to deliver, the foreign currencies listed in
paragraph A above.
C. To draw foreign currencies and to
permit foreign banks to draw dollars under
the reciprocal currency arrangements listed
in paragraph 2 below, provided that drawings by either party to any such arrangement
shall be fully liquidated within 12 months
after any amount outstanding at that time
was first drawn, unless the Committee,
because of exceptional circumstances, specifically authorizes a delay.
D. To maintain an overall open position in all foreign currencies not exceeding
$25.0 billion. For this purpose, the overall
open position in all foreign currencies is
defined as the sum (disregarding signs) of
net positions in individual currencies. The
net position in a single foreign currency is



defined as holdings of balances in that currency, plus outstanding contracts for future
receipt, minus outstanding contracts for
future delivery of that currency, i.e., as the
sum of these elements with due regard to
sign.
2. The Federal Open Market Committee directs the Federal Reserve Bank of
New York to maintain reciprocal currency
arrangements ("swap" arrangements) for the
System Open Market Account for periods up
to a maximum of 12 months with the following foreign banks, which are among those
designated by the Board of Governors of the
Federal Reserve System under Section 214.5
of Regulation N, Relations with Foreign
Banks and Bankers, and with the approval of
the Committee to renew such arrangements
on maturity:

Foreign bank
°
Bank of Canada
Bank of Mexico

Amount of
arrangement
(millions of
dollars equivalent)
2,000
3,000

Any changes in the terms of existing swap
arrangements, and the proposed terms of any
new arrangements that may be authorized,
shall be referred for review and approval to
the Committee.
3. All transactions in foreign currencies
undertaken under paragraph LA. above
shall, unless otherwise expressly authorized
by the Committee, be at prevailing market
rates. For the purpose of providing an investment return on System holdings of foreign
currencies or for the purpose of adjusting
interest rates paid or received in connection
with swap drawings, transactions with foreign central banks may be undertaken at
non-market exchange rates.
4. It shall be the normal practice to
arrange with foreign central banks for the
coordination of foreign currency transactions. In making operating arrangements
with foreign central banks on System holdings of foreign currencies, the Federal
Reserve Bank of New York shall not commit itself to maintain any specific balance,
unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning the administration of
the accounts maintained by the Federal

Minutes of FOMC Meetings, January
Reserve Bank of New York with the foreign
banks designated by the Board of Governors
under Section 214.5 of Regulation N shall
be referred for review and approval to the
Committee.
5. Foreign currency holdings shall be
invested to ensure that adequate liquidity is
maintained to meet anticipated needs and so
that each currency portfolio shall generally
have an average duration of no more than
18 months (calculated as Macaulay duration). When appropriate in connection with
arrangements to provide investment facilities
for foreign currency holdings, U.S. Government securities may be purchased from foreign central banks under agreements for
repurchase of such securities within 30 calendar days.
6. All operations undertaken pursuant to
the preceding paragraphs shall be reported
promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee,
the Vice Chairman of the Board of Governors, and such other member of the Board
as the Chairman may designate (or in the
absence of members of the Board serving on
the Subcommittee, other Board members
designated by the Chairman as alternates,
and in the absence of the Vice Chairman
of the Committee, his alternate). Meetings
of the Subcommittee shall be called at the
request of any member, or at the request of
the Manager, System Open Market Account
("Manager"), for the purposes of reviewing
recent or contemplated operations and of
consulting with the Manager on other matters relating to his responsibilities. At the
request of any member of the Subcommittee,
questions arising from such reviews and consultations shall be referred for determination
to the Federal Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter into any needed agreement or
understanding with the Secretary of the Treasury about the division of responsibility for
foreign currency operations between the System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning System foreign currency operations, and to consult with
the Secretary on policy matters relating to
foreign currency operations;
C. From time to time, to transmit
appropriate reports and information to the



165

National Advisory Council on International
Monetary and Financial Policies.
8. Staff officers of the Committee are
authorized to transmit pertinent information on System foreign currency operations
to appropriate officials of the Treasury
Department.
9. All Federal Reserve Banks shall participate in the foreign currency operations
for System Account in accordance with paragraph 3G(1) of the Board of Governors'
Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks
dated January 1,1944.

By unanimous vote, the Foreign Currency Directive was reaffirmed in the
form shown below.
Foreign Currency Directive
1. System operations in foreign currencies shall generally be directed at countering
disorderly market conditions, provided that
market exchange rates for the U.S. dollar
reflect actions and behavior consistent with
IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales of foreign exchange.
B. Maintain
reciprocal
currency
("swap") arrangements with selected foreign central banks.
C. Cooperate in other respects with
central banks of other countries and with
international monetary institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light
of probable future needs for currencies.
B. To provide means for meeting System and Treasury commitments in particular
currencies, and to facilitate operations of the
Exchange Stabilization Fund.
C. For such other purposes as may be
expressly authorized by the Committee.
4. System foreign currency operations
shall be conducted:
A. In close and continuous consultation and cooperation with the United States
Treasury;
B. In cooperation, as appropriate, with
foreign monetary authorities; and
C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange
arrangements under IMF Article IV.

166 91st Annual Report, 2004
By unanimous vote, the Procedural
Instructions with Respect to Foreign
Currency Operations were reaffirmed in
the form shown below.
Procedural Instructions with
Respect to Foreign
Currency Operations
In conducting operations pursuant to the
authorization and direction of the Federal
Open Market Committee as set forth in the
Authorization for Foreign Currency Operations and the Foreign Currency Directive,
the Federal Reserve Bank of New York,
through the Manager, System Open Market
Account ("Manager"), shall be guided by
the following procedural understandings
with respect to consultations and clearances
with the Committee, the Foreign Currency
Subcommittee, and the Chairman of the
Committee. All operations undertaken pursuant to such clearances shall be reported
promptly to the Committee.
1. The Manager shall clear with the Subcommittee (or with the Chairman, if the
Chairman believes that consultation with the
Subcommittee is not feasible in the time
available):
A. Any operation that would result in a
change in the System's overall open position
in foreign currencies exceeding $300 million
on any day or $600 million since the most
recent regular meeting of the Committee.
B. Any operation that would result in a
change on any day in the System's net position in a single foreign currency exceeding $150 million, or $300 million when the
operation is associated with repayment of
swap drawings.
C. Any operation that might generate a
substantial volume of trading in a particular
currency by the System, even though the
change in the System's net position in that
currency might be less than the limits specified in I.B.
D. Any swap drawing proposed by a
foreign bank not exceeding the larger of
(i) $200 million or (ii) 15 percent of the size
of the swap arrangement.
2. The Manager shall clear with the Committee (or with the Subcommittee, if the
Subcommittee believes that consultation
with the full Committee is not feasible in the
time available, or with the Chairman, if the



Chairman believes that consultation with the
Subcommittee is not feasible in the time
available):
A. Any operation that would result in a
change in the System's overall open position
in foreign currencies exceeding $1.5 billion
since the most recent regular meeting of the
Committee.
B. Any swap drawing proposed by a
foreign bank exceeding the larger of (i) $200
million or (ii) 15 percent of the size of the
swap arrangement.
3. The Manager shall also consult with
the Subcommittee or the Chairman about
proposed swap drawings by the System and
about any operations that are not of a routine
character.
On January 9, 2004, the continuing
rules, regulations, and other instructions
of the Committee had been distributed
with the advice that, in accordance with
procedures approved by the Committee,
they were being called to the Committee's attention before the January 27-28
organization meeting to give members
an opportunity to raise any questions
they might have concerning them. Members were asked to indicate if they
wished to have any of the instruments
in question placed on the agenda
for consideration at this meeting, and
no requests for consideration were
received. Accordingly, all of these
instruments remained in effect in their
existing form.
The Committee considered a report
from the Manager of the System Open
Market Account that discussed the feasibility and costs of purchasing mortgagebacked securities guaranteed by the
Government National Mortgage Association (GNMA), a federal government
agency. A potential advantage of transactions in such GNMA obligations was
their use to supplement purchases of
direct Treasury securities in periods
when large federal surpluses reduced
market supplies of Treasury debt. However, the resumption of large federal

Minutes of FOMC Meetings, January
deficits had led to sizable increases in
market supplies of Treasury obligations,
which members saw as the preferred
vehicle to supply the need for permanent additions to the System Open
Market Account. The report concluded
that outright transactions in mortgagebacked GNMA securities were feasible
but would involve sizable start-up costs
and would tend to complicate the conduct of System open market operations.
Against this background the Committee
decided not to initiate outright transactions in mortgage-backed GNMA obligations. It was understood, however,
that such GNMA obligations would continue to be eligible as collateral for System repurchase agreements.
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on December 9, 2003,
were approved.
The Manager of the System Open
Market Account reported on recent
developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's Account in the period since the
previous meeting.
The Manager also reported on developments in domestic financial markets
and on System open market transactions
in government securities and federal
agency obligations during the period
December 9, 2003 to January 27, 2004.
By unanimous vote, the Committee ratified these transactions.
At this meeting the Committee
engaged in a broad-ranging discussion
of its communication practices.
A portion of this discussion focused
on the report of a working group that
had been directed to study how the
Committee's announcements might be
improved. In the course of the discussion, members stressed the importance
that they attached to conveying clearly
to the public information regarding the



167

reasons for policy decisions and how
those decisions related to the Committee's longer-term objectives. However,
only limited support emerged for the
use of particular standard wording to
express the Committee's appraisals of
the economic outlook and views about
the balance of risks. Indeed, several
members were in favor of discontinuing
the use of statements regarding the balance of risks to the outlook and instead
focusing mostly on the reasons for their
policy decisions in the announcement.
At the same time, all the members indicated that they could support a flexible
approach in which the wording of the
Committee's announcements, including
the assessment of the balance of risks
going forward, would be adjusted gradually over time in keeping with evolving
economic conditions.
In further discussion the members
reviewed the potential value and drawbacks of accelerating the publication of
Committee minutes. Possible benefits
would include the provision of more
complete information sooner after meetings on the considerations that led the
Committee to adopt the current stance
of policy. Some members expressed
concern, however, that accelerated
release of the minutes might have the
potential to feed back adversely on the
deliberations of the Committee and on
the minutes themselves. The members
also emphasized the importance of
allowing sufficient time for them to
review and comment on the minutes and
for reconciling differences of opinion
among the members of a large and geographically dispersed committee. At the
conclusion of this discussion, staff was
asked to study the issue further.
The members also discussed the
possible advantages of making some
changes in the content, time horizon,
and frequency of the individual forecasts that are summarized in the semi-

168 91st Annual Report, 2004
annual Monetary Policy Reports to the
Congress. In general, the members saw
little to be gained by altering the Committee's current practices in any significant way, although some proposed relatively minor changes. It was agreed that
there was no need to reach a decision on
such changes at this time, but staff was
instructed to ascertain the degree of
interest on the part of the members in
making possible minor adjustments to
current procedures.
The Committee then turned to a discussion of the economic outlook and the
conduct of monetary policy over the
intermeeting period.
The economy appeared to have
expanded at a robust pace in the fourth
quarter, though well below the exceptional pace recorded in the third quarter. Consumer spending continued to
increase at a solid rate over the final
three months of the year, and activity in
the residential sector remained at a very
high level. On the business side, outlays for equipment and software likely
posted moderate gains in the fourth
quarter, and firms apparently accumulated inventories for the first time in
three quarters. Despite the strong pace
of economic activity, the labor market
was improving only slowly, with private
payrolls showing a small acceleration in
the fourth quarter. Core consumer price
inflation continued to slow, and inflation expectations remained subdued
over the closing months of 2003.
The December employment report
suggested that the labor market had not
gained as much momentum as previously appeared to be under way. Private
nonfarm payrolls increased only slightly
in that month, and their level in November was revised down appreciably. The
average monthly increase in employment in the fourth quarter was indicative
of a fairly weak recovery in the labor
market, although it was a clear improve


ment over the average monthly loss during the first half of the year. Manufacturing payrolls continued to shrink in
December at about the same pace as in
the previous few months, and holidayrelated hiring in retail trade was below
average. In other sectors, job gains were
recorded in construction, education and
health services, and professional and
business services. Average weekly hours
of production or nonsupervisory workers declined somewhat in December,
reversing the gains of the previous two
months. Aggregate hours worked by
nonfarm employees fell in December
but in the fourth quarter as a whole
posted theirfirstquarterly increase since
2000. Despite the weak payroll data, the
unemployment rate, which is measured
by the household survey, fell to 5.7 percent in December, in part because of a
further decline in the labor force participation rate. Initial claims for unemployment insurance continued to drift down
in the weeks following the reference
week for the December employment
report, suggesting improved job growth
in January.
The pace of expansion in the industrial sector picked up in the fourth quarter. Total industrial production rose at
the fastest rate since the second quarter of 2002, and manufacturing production posted solid and widespread
gains. High-tech industries, including
those producing semiconductors, computers, and communications equipment,
accounted for nearly one-third of the
increase in total industrial production in
the fourth quarter. After having surged
in the third quarter, the production of
motor vehicles and parts moved up in
the fourth quarter at about the same rate
as overall manufacturing. Outside the
manufacturing sector, output at mines
increased modestly in the quarter, while
output at utilities rose appreciably, led
by a solid advance in electricity genera-

Minutes of FOMC Meetings, January
tion that mirrored the strengthening
in the manufacturing sector. Capacity
utilization was unchanged in December
and remained well below its long-term
average.
Sales of light vehicles jumped in
December, and the fourth-quarter average, although below the torrid thirdquarter pace, was well above that
recorded for the first half of the year.
These data, along with those on retail
sales excluding autos, were consistent
with a solid increase in real personal
consumption expenditures in the fourth
quarter. Real disposable personal
income advanced smartly in November. Spending was also supported by
the recent stock market gains, and
by greater consumer confidence as
reflected in the Michigan Survey
Research Center's index of consumer
sentiment and the Conference Board's
index of consumer confidence, both of
which stood significantly above thenaverage readings for 2003.
Activity in the housing market
remained very robust. In December,
single-family starts edged down only a
bit from the exceptional rate they had
reached in November, and multifamily
starts moved up to the highest level in
almost four years. New home sales
declined in November for the third consecutive month, but they were still not
far below the record highs registered
earlier in the year. Existing home sales
had fallen back from September's high,
though the level in November was still
noticeably higher than average monthly
sales in the first half of 2003.
The available data suggested that
business purchases of transportation
equipment strengthened in the fourth
quarter and that spending on other capital goods advanced at a moderate
pace. Business expenditures on aircraft
rebounded noticeably in the fourth quarter, albeit to a level that was still far



169

below the levels that prevailed before
the downturn following the terrorist
attacks in 2001. Both fleet sales of light
vehicles and truck sales also rose significantly. In the high-tech sector, real outlays for computing equipment and for
software again appeared to have posted
sizable increases in the fourth quarter,
while spending on communications
equipment was little changed after three
quarters of double-digit growth. Outside
transportation and high tech, nominal
shipments were about unchanged in the
fourth quarter, but the upward trend in
orders established since the beginning
of last year was consistent with further
gains in spending. After holding roughly
steady, on balance, in the first half of
2003, real spending on private nonresidential construction appeared to have
slipped further in the third and fourth
quarters. In the commercial and healthcare sector and in the manufacturing sector, average nominal outlays
in October and November were about
unchanged from the previous quarter.
However, spending on other types of
construction moved down.
The book value of manufacturing and
trade inventories excluding motor vehicles posted the third consecutive significant monthly increase in November.
Stocks at manufacturers were down a
little on average in October and November, but non-auto wholesalers and retailers accumulated inventories at a brisk
pace. Strong increases in sales, however,
kept book-value inventory-sales ratios
at or near their recent lows. Motor vehicle and parts inventories ended the year
noticeably above the level at the end of
the third quarter.
The international trade deficit in
November shrank to its lowest level in
about a year. Exports of goods and services increased to a level not recorded
since early 2001, while imports fell
moderately. Recent data indicated that

170 91st Annual Report, 2004
the pickup in economic activity in the
major foreign industrial countries continued in the fourth quarter. Japanese
exports, machinery orders, and industrial production rose strongly in October
and November. Euro-area manufacturing data exhibited increasing strength,
particularly in Germany. In the United
Kingdom, indicators of business and
retail sales in December pointed to a
maintained expansion. And Canadian
employment and sales data were strong
in the fourth quarter, with the housing
sector continuing to make a significant
contribution to growth.
Prices of consumer goods and services other than food and energy continued to decelerate through the end of
2003. Overall consumer prices were flat,
on balance, over the past three months,
as a small increase in core prices and a
large rise in food prices were offset by a
sizable drop in energy prices. Over the
year, the consumer price index posted
a moderate increase that was noticeably
below that in the previous year. Core
consumer prices decelerated more
sharply and rose only slightly over the
year. Producer prices for finished goods
were up moderately over the year, and
the advance was substantially above that
over the previous year. The rise last year
was due almost entirely to substantial
increases in food and energy prices as
core producer prices rose only a little
after having edged down over 2002.
With regard to labor costs, the average
hourly earnings of production or nonsupervisory workers on private nonfarm
payrolls rose modestly in the twelve
months ending in December, an increase
somewhat below that over 2002.
At its meeting on December 9, 2003,
the Federal Open Market Committee
(FOMC) adopted a directive that called
for maintaining conditions in reserve
markets consistent with keeping the
federal funds rate at around 1 percent.



In reaching this decision, the Committee
members generally perceived the upside
and downside risks to the attainment
of sustainable growth for the next few
quarters to be roughly equal. They also
judged that the probability of an unwelcome fall in inflation had diminished in
recent months and now appeared almost
equal to that of a rise in inflation. Nevertheless, with inflation quite low and
resource use slack, the Committee
believed that policy accommodation
could be maintained for a considerable
period.
The Committee's decision at the
December meeting to keep its target
for the federal funds rate at 1 percent
appeared to have been fully anticipated
in financial markets, and interest
rate futures for the first half of 2004
were essentially unchanged after the
announcement. But futures rates for the
second half of the year rose a few basis
points, presumably in response to the
Committee's assessment that the probability of an unwelcome decline in inflation had fallen in recent months to a
level almost equal to that of a rise in
inflation. Subsequently, however, the
release of the minutes for the October
FOMC meeting, which indicated that at
that time the Committee was concerned
about the possibility of persistent slack
arising from rapid productivity growth,
and the publication of surprisingly modest growth in employment in December
led most market participants to push
back the date of the expected onset of
tightening by several months to some
time in the fall. Reflecting the change in
policy expectations, intermediate- and
longer-term nominal Treasury yields
declined substantially over the intermeeting period. Yields on inflationindexed debt fell by nearly as much,
suggesting that the drop in nominal
yields owed more to lower real interest
rates than to reduced inflation compen-

Minutes of FOMC Meetings, January
sation. Yields on investment-grade and
most speculative-grade securities moved
down by about the same amount as
Treasury yields. Major equity indexes
rose strongly in response to the declines
in yields and positive news about the
outlook for profits.
The exchange value of the dollar, as
measured by the major currencies index,
declined moderately on net over the
intermeeting period. Ongoing investor
concerns about the ability of the United
States to finance its current account deficit reportedly were again a primary factor exerting pressure on the dollar.
M2 fell in December, the fourth consecutive monthly decline. The decline in
M2 over the fourth quarter was the largest on record since the start of consistent
data collection in 1959. The weakness
was concentrated in liquid deposits and,
to a lesser extent, in retail money market
mutual funds and appeared to be due in
large part to the unwinding of a previous
buildup in deposits associated with
heavy mortgage refinancing activity and
to portfolio shifts by households into
equities.
The staff forecast prepared for this
meeting indicated that the momentum in
economic activity that had built up in
the second half of 2003 would carry
over into the first half of the current year
and that the ongoing gains in spending
and production would soon result in a
more visible improvement in labor market conditions. The considerable stimulus being provided by fiscal and monetary policies was expected to keep
aggregate demand on a solid uptrend. In
addition, improving labor market conditions and the effects of strong productivity growth on permanent income were
projected to support household spending, while business investment spending
was seen as strengthening in response
to the acceleration in business output,
swelling profits, and continued favor


171

able financing conditions. Some slight
downward pressure on core consumer
price inflation was anticipated in the
forecast given the ongoing slack in labor
and product markets.
In the Committee's discussion of current and prospective economic developments, the members commented that the
information that had become available
since the December meeting had tended
to validate their earlier assessment that
the expansion was firmly established
and that robust economic growth, under
way since about mid-2003, was likely to
continue as the year progressed. Many
emphasized that business expenditures
now appeared to be on a solid upward
trajectory amid widespread reports of
much improved business sentiment.
Indeed, business expenditures had
broadened the sources of significant
strength in the expansion, which earlier
had been sustained mainly by household and government spending. Factors
underlying a favorable outlook for economic activity continued to include
stimulative fiscal and monetary policies,
accommodative conditions in financial
markets, and the positive effects of a
strong uptrend in productivity on business investment incentives and, with
some lag, on household incomes. The
members nonetheless expressed disappointment that the acceleration in economic activity had thus far failed to
generate significant strengthening in
employment, though they pointed to a
number of positive signs in labor markets. Given their expectations of persisting above-trend economic growth, they
saw increasing demand for workers as a
likely prospect going forward. Regarding the outlook for inflation, members
observed that wide margins of slack in
labor and product markets continued to
hold down wages and prices, especially
given the concurrent strength in productivity. Core consumer inflation appeared

172 91st Annual Report, 2004
to have drifted lower recently, and a
number of members mentioned the
possibility of a modest further decline in
such inflation from its current subdued
level. Over the year ahead, however, the
members generally anticipated little net
change in consumer price inflation.
In keeping with the practice at meetings preceding the Federal Reserve's
semi-annual report to the Congress on
the economy and monetary policy, the
members of the Board of Governors and
the presidents of the Federal Reserve
Banks had provided individual projections of the growth of GDP, the rate of
unemployment, and consumer price
inflation for the year 2004. The forecasts pointed to a continuation of relatively vigorous growth in economic
activity, some further decline in unemployment, and a quite low rate of inflation. Specifically, the forecasts of the
expansion in real GDP between the
fourth quarter of 2003 and the fourth
quarter of 2004 had a central tendency
of 4V2 to 5 percent and a full range of
4 to 5Vz percent. The projections of the
civilian unemployment rate in the fourth
quarter of 2004 were all in a range of
5V4 to 5Vi percent. Forecasts of consumer price inflation for the year, as
measured by the PCE chain-type price
index, were centered in a range of 1 to
1V4 percent, with a full range of 1 to
IV2 percent.
In their discussion of developments
across the nation, members emphasized
growing indications of rising business
confidence and, despite persisting softness in a number of industries, more
widespread signs of increasing business
spending for equipment and software
and for inventories. The members cited
a variety of factors that pointed to a
further pickup in business capital expenditures over the coming year, including the strength in new orders and shipments, increasing profits and cash flow,



the improved financial condition of
many business firms, the general availability of financing on favorable terms,
and the temporary tax incentive on
expenditures for new equipment. Anecdotal reports from business contacts
about capital spending plans were
indicative of appreciable further acceleration in business expenditures on a
widening range of capital goods. While
many contacts indicated that replacement demand or the cost-saving opportunities provided by more productive
new equipment were still the driving
factors in guiding investment decisions,
there were more reports of investment
spending to expand capacity.
The members also viewed business
inventory investment as likely to provide some support to the economic
expansion over the year ahead. Business
inventories were at exceptionally low
levels in relation to sales, and if farther
brisk growth in demand broadly in line
with current forecasts materialized this
year, business firms could be expected
to make commensurate additions to
their inventories. Indeed, inventories
appeared to have turned up in the fourth
quarter after declining on balance earlier
in 2003 as businesses evidently became
more confident that increases in their
sales would be sustained.
While business expenditures had
turned up, employers had continued to
display a high degree of caution in
hiring new workers. Employment had
trended up since mid-2003 after a protracted period of job losses, but the gains
were significantly weaker than was typical at similar stages of earlier business
cycles. A key factor that had tended
to hold down hiring was the continuing
ability of business firms to meet increasing demand by improving productivity
with existing workforces rather than
hiring new workers. Against this background, labor markets continued to be

Minutes of FOMC Meetings, January
described as soft in most areas, albeit
with more signs of at least modest
improvement. In this regard, members
referred to positive developments such
as the decline in initial claims and the
rise in aggregate hours worked in the
fourth quarter. Looking ahead, the members saw considerably faster growth
in employment as a likely prospect in
the context of further strengthening in
aggregate demand and expectations of
some slowing in the growth of productivity from its extraordinary pace in
recent quarters. Several emphasized,
however, that the timing and extent of
the improvement in employment were
subject to considerable uncertainty.
The household sector was continuing to supply major impetus to the
expansion. Household spending was
benefiting from stimulative fiscal and
monetary policies, the wealth effects of
rising real estate and equity prices, and
increased consumer confidence about
the economic outlook. Members noted
that retailers in many parts of the country reported solid sales during the holiday period. With respect to the outlook
for overall consumer spending, it was
suggested that the elevated growth of
productivity could be expected to raise
incomes over time and thereby help to
buttress consumption even as the stimulus from earlier tax cuts faded. Residential construction activity remained at a
high level, evidently supported in part
by recent declines in mortgage interest
rates. Contacts in the housing industry
indicated that they expected a high level
of construction activity in 2004, though
perhaps not as robust as in 2003.
Fiscal policy was providing considerable stimulus to the economy and would
continue to do so in the first part of this
year, reflecting the large tax refunds
anticipated as a result of overwithholdings in 2003. Beyond the nearer term,
however, the fiscal stimulus was pro


173

jected to diminish under existing legislation. In this regard, one member
questioned whether a robust expansion
would be sustained once the fiscal
impulse was removed. Some members
expressed concern about the longer-run
prospects for large federal deficits and
their implications for the future performance of the economy.
In their comments about the international economy, members noted that
the strengthening in economic activity
abroad and the decline in the foreign
exchange value of the dollar had boosted
exports. Even so, the ongoing strength
in imports was still producing a widening trade deficit, and net exports were
expected to be a small arithmetic drag
on domestic economic activity over the
year ahead. Some members indicated
that they were concerned about the
implications of the nation's rapidly
growing external debt for domestic
financial markets and the economy over
time.
In the Committee's discussion of
the outlook for inflation, the members
agreed that increases in core consumer
prices were likely to remain muted
this year, with ongoing strength in the
expansion only gradually reducing the
current output gap and anticipated gains
in productivity exerting downward pressure on costs and prices. Some members
commented, however, that the relationship between the output gap and
inflation was quite loose and that the
outlook for productivity remained
uncertain. Accordingly, while members
agreed that changes in core consumer
price inflation were likely to be limited,
there was some divergence of opinion
about the most probable direction. In the
view of many, some modest further disinflation appeared to be the most likely
prospect. A few members noted that
such disinflation, if it was associated
with rapid growth in productivity, could

174 91st Annual Report, 2004
be viewed as non-threatening. Moreover, the expected strength in aggregate demand would curb the extent of
disinflation over time. A few members
expressed the differing view that core
consumer prices might well edge up
over the course of the year in light of the
considerable stimulus stemming from
current monetary and fiscal policies and
the possibility that the expected pickup
in economic activity and employment,
especially if it were on the high side of
current forecasts, would be associated
with slower growth in productivity. The
evidence pointing to the possibility of
an uptick in inflation was still quite
limited, but some members noted that in
addition to sizable advances in the prices
of many commodities including oil,
reports from business contacts indicated
that a few firms had been able to raise
their selling prices and maintain them
at higher levels in an effort to pass on
increases in costs. Overall, however,
the pricing power of business firms
remained quite limited.
In the Committee's discussion of policy for the intermeeting period ahead,
all the members favored an unchanged
policy stance that was directed toward
maintaining reserve conditions consistent with a target federal funds rate of
1 percent. While the members were persuaded that a relatively vigorous economic expansion was now firmly established and was likely at some point to
call for a move toward a more neutral
policy stance, they concluded that such
an adjustment was not warranted under
current circumstances. In this regard
they stressed that unused labor and other
resources remained substantial, that
inflation was at a very low level, and
that inflation was not expected to change
appreciably in either direction over the
year ahead. Members acknowledged
that there were risks in maintaining what
might eventually prove to be an overly



accommodative policy stance, but for
now they judged that it was desirable to
take risks on the side of assuring the
rapid elimination of economic slack.
With regard to the wording of the
Committee's press statement to be
released shortly after the meeting, members discussed at some length the desirability of retaining a reference from earlier statements to the prospect that an
accommodative policy could be maintained "for a considerable period." The
existing language had been explicitly
qualified at the December meeting by
tying it to low inflation and slack in
resource use, thereby underscoring the
notion that a move away from the current degree of policy accommodation
would depend on economic conditions
rather than simply on the passage of
time. All the members agreed that a
change in wording was desirable, not
to signal a policy tightening move in
the near term, but rather to increase the
Committee's flexibility to take such an
action when it was deemed to be desirable and to underline that any such
decision would be made on the basis of
evolving economic conditions. However, some differences of opinion arose
with regard to the specific proposal
under consideration, namely to remove
the reference to "considerable period"
and to substitute one referring to
"patience." Those who fully endorsed
the proposal believed that the new wording conveyed important information
about the Committee's strategy in an
environment of price stability and economic slack and under those circumstances was unlikely to have outsized
effects in financial markets. A number
of members commented that expectations of sustained policy accommodation appeared to have contributed to
valuations in financial markets that left
little room for downside risks, and the
change in wording might prompt those

Minutes of FOMC Meetings, March
markets to adjust more appropriately to
changing economic circumstances in the
future. A few members, while expressing agreement with respect to the merits
of a language change, nonetheless preferred to drop the reference to a "considerable period" entirely without substituting a reference to the Committee's
ability to be patient. In this view, even
the replacement language would tend to
shape expectations in ways that could
complicate the conduct of policy, and
with the economy in a strong uptrend,
the Committee no longer needed to utilize such special language.
At the conclusion of the meeting, the
Committee voted to authorize and direct
the Federal Reserve Bank of New York,
until it was instructed otherwise, to
execute transactions in the System
Account in accordance with the following domestic policy directive:
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. To further its longrun objectives, the Committee in the immediate future seeks conditions in reserve
markets consistent with maintaining the
federal funds rate at an average of around
1 percent.
The vote encompassed approval of
the paragraph below for inclusion in the
press statement to be released shortly
after the meeting:
The Committee perceives that the upside
and downside risks to the attainment of sustainable growth for the next few quarters are
roughly equal. The probability of an unwelcome fall in inflation has diminished in
recent months and now appears almost equal
to that of a rise in inflation. With inflation
quite low and resource use slack, the Committee believes that it can be patient in
removing its policy accommodation.
Votes for this action: Messrs. Greenspan, Geithner, Bernanke, Ms. Bies,
Messrs. Ferguson, Gramlich, Hoenig,



175

Kohn, Ms. Minehan, Mr. Olson, Ms. Pianalto, and Mr. Poole. Vote against this
action: None.
It was agreed that the next meeting of
the Committee would be held on Tuesday, March 16, 2004.
The meeting adjourned at 1:45 p.m.
on January 28, 2004.
Vincent R. Reinhart
Secretary

Meeting Held on
March 16, 2004
A meeting of the Federal Open Market
Committee was held in the offices of
the Board of Governors of the Federal Reserve System in Washington,
D.C., on Tuesday, March 16, 2004, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Mr. Bernanke
Ms. Bies
Mr. Ferguson
Mr. Gramlich
Mr. Hoenig
Mr. Kohn
Ms. Minehan
Mr. Olson
Ms. Pianalto
Mr. Poole
Messrs. McTeer, Moskow, Santomero,
and Stern, Alternate Members of
the Federal Open Market
Committee
Messrs. Broaddus, Guynn, and Parry,
Presidents of the Federal Reserve
Banks of Richmond, Atlanta, and
San Francisco respectively
Mr. Reinhart, Secretary and Economist
Mr. Bernard, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Mattingly, General Counsel
Ms. Johnson, Economist
Mr. Stockton, Economist

176 91st Annual Report, 2004
Messrs. Connors, Fuhrer, Howard,
Madigan, Rasche, Sniderman,
Slifman, and Wilcox, Associate
Economists

Mr. Kahn, Vice President, Federal
Reserve Bank of Kansas City

The Manager of the System Open
Market Account reported on recent
developments in foreign exchange markets. There were no open market operaMr. Ettin, Deputy Director, Division
tions in foreign currencies for the Sysof Research and Statistics,
tem's account in the period since the
Board of Governors
previous meeting.
Messrs. Struckmeyer and Oliner,
The Manager also reported on develAssociate Directors, Division
opments in domestic financial markets
of Research and Statistics,
and on System open market transactions
Board of Governors
in government securities and securities
issued or fully guaranteed by federal
Messrs. Clouse, Freeman, and
agencies during the period January 28,
Whitesell, Deputy Associate
Directors, Divisions of Monetary
2004, through March 15, 2004. By
Affairs, International Finance, and unanimous vote, the Committee ratified
Monetary Affairs respectively,
these transactions.
Board of Governors
The information reviewed at this
meeting suggested that economic activMr. English, Assistant Director,
Division of Monetary Affairs,
ity continued to expand at a solid pace
Board of Governors
in early 2004. Consumer spending
growth appeared to have picked up
Mr. Skidmore, Special Assistant to
somewhat, and activity in the housing
the Board, Office of Board
market remained at high levels. In the
Members, Board of Governors
business sector, spending for equipment
Mr. Sack, Section Chief, Division
and software was apparently advancing
of Monetary Affairs,
vigorously, and firms were adding
Board of Governors
modestly to their inventories. Still, the
increases in economic activity had not
Mr. Luecke, Senior Financial Analyst,
Division of Monetary Affairs,
yet generated sizable gains in employBoard of Governors
ment. Core consumer price inflation
remained low, and expectations of
Ms. Low, Open Market Secretariat
future inflation continued to be subdued.
Assistant, Division of Monetary
The January and February employAffairs, Board of Governors
ment reports depicted a labor market
Mr. Moore, First Vice President,
that was slow to pick up momentum.
Federal Reserve Bank of
The modest gains posted in private nonSan Francisco
farm payrolls over the period were
Messrs. Eisenbeis, Evans, Judd, Lacker, smaller than had been expected by most
forecasters. Employment in the manuMses. Mester and Perelmuter,
Messrs. Rolnick, Rosenblum, and
facturing sector, which had fallen conSteindel, Senior Vice Presidents,
tinually for over three years, was essenFederal Reserve Banks of Atlanta, tially unchanged in February, while
Chicago, San Francisco,
employment in other sectors showed
Richmond, Philadelphia,
mixed changes. Average weekly hours
New York, Minneapolis, Dallas,
and New York respectively
of production or nonsupervisory work-

Mr. Kos, Manager, System Open
Market Account




Minutes of FOMC Meetings, March 111
ers edged above the average level of
the fourth quarter of 2003. Despite the
weakness in employment, the unemployment rate in January and February came in below its fourth-quarter
level.
Industrial production moved up
briskly in January and February following strong increases in the fourth
quarter. These gains in production were
realized across a wide set of industries.
High-tech industries, including semiconductors, computers, and communications equipment, posted particularly
strong advances, while the production of
motor vehicles and the output of other
manufacturing sectors were also strong.
Outside the manufacturing sector, power
generation by utilities surged in January
but fell back in February in response to
outsized swings in average temperatures
during those months. Capacity utilization continued to move higher in January and February, although it remained
below its longer-run average.
Consumer spending growth in recent
months appeared to pick up somewhat
from its pace in the fourth quarter of
2003. Retail sales rose briskly, on average, in January and February, and spending on services was up in January (the
most recent month for which data were
available). In contrast, purchases of
motor vehicles slipped in January and
February from the strong pace in the
fourth quarter. Overall, expenditures
were supported by sizable gains in
real disposable personal income and
increases in household wealth owing to
rising home and equity prices. Disposable income was boosted by significant
growth in private wages and salaries and
by a drop in taxes that was due to the
lower final payments and higher refunds
associated with last year's tax cut. Surveys indicated that consumer sentiment
moved higher in January but subsequently fell back. Despite the pullback,



sentiment remained above the levels
seen during most of 2003.
Activity in the housing market moderated in January and February from its
elevated pace in the fourth quarter.
Single-family housing starts and permits
stepped down, although both measures
remained above their average levels of
the first three quarters of 2003. Housing
starts in the multifamily sector slipped
only slightly from the fourth quarter
pace, even though vacancy rates reached
a record high level in the fourth quarter.
Sales of new and existing homes slowed
in January, but this change retraced only
a small part of the extraordinary run-up
in home sales that began last spring.
Home prices continued to rise briskly.
Spending on capital goods had
advanced at a vigorous pace in the
fourth quarter and appeared to be continuing that growth early this year.
Spending by businesses was supported
by increases in their sales and the continuation of strong cash flows and a
low user cost of capital. Nominal shipments of computing and communication
equipment moved up sharply in recent
months, as did shipments outside the
high-tech sector. By contrast, business
investment in transportation equipment
was mixed. Data for new orders of nondefense capital goods excluding aircraft
suggested that the strength in capital
expenditures would continue going forward. As has been the case for some
time, real spending on private nonresidential structures languished, and vacancies in industrial buildings and office
properties were at high levels.
Real nonfarm inventory investment
remained modest in recent months.
Although manufacturers' inventories
moved higher in January, that increase
primarily reflected stockbuilding at producers of petroleum and coal products.
Retail inventories also rose in January,
as stocks at auto dealers increased;

178 91st Annual Report, 2004
wholesalers accumulated inventories at
a modest pace. Inventory-sales ratios in
these sectors lingered at or near their
historical lows.
The U.S. international trade deficit
rose to a record high level in January.
Exports of goods and services fell,
owing importantly to a drop in agricultural exports. Imports edged lower, with
higher oil imports partly offsetting
declines in most other categories.
Recent data suggested that economic
activity in major foreign industrial countries strengthened outside the euro area,
notably including a sizable jump in
Japan's output in the fourth quarter.
Growth in the euro area remained tepid.
Core consumer price inflation stayed
very low in early 2004. Over the twelve
months ending in January, the increase
in core consumer prices was around
1 percent—about 3/4 percentage point
below the increase over the preceding
twelve months. Total consumer price
inflation, however, was boosted in January by a surge in energy prices. Incoming information on trends in labor costs
were more mixed. The average hourly
earnings of production or nonsupervisory workers on private nonfarm
payrolls rose modestly over the twelve
months ending in February, decelerating
from its year-earlier pace. By contrast,
the employment cost index for hourly
compensation in private industry grew a
bit faster over the twelve months ending
in December than over the year-earlier
period.
At its meeting on January 27-28,
2004, the Federal Open Market Committee decided to leave its target for the
federal funds rate unchanged at 1 percent. The Committee also retained its
assessment that the upside and downside risks to the attainment of sustainable growth were roughly equal as well
as its judgment that the probability of an
unwelcome fall in inflation had dimin


ished and was almost equal to that of a
rise in inflation. With inflation low and
resource use slack, the Committee saw
no need for tightening policy in the near
future. However, to provide additional
flexibility to adjust monetary policy at a
later date once such action was deemed
appropriate given economic developments, the Committee removed from
its post-meeting statement the explicit
reference to a "considerable period"
and substituted a statement that conveyed the sense that it could be patient
in removing its policy accommodation.
Although the Committee's decision at
the January meeting to keep the federal
funds rate unchanged had been widely
anticipated, the changes in the wording
of the accompanying statement elicited
a sharp reaction in financial markets.
Investors moved up the date when they
expected policy tightening to commence, resulting in a jump in Treasury
yields. Over the balance of the intermeeting period, however, the Chairman's testimony on monetary policy and
data on nonfarm payroll employment
with a weakish cast persuaded investors
that policy tightening was still some
ways off. Treasury yields declined considerably in response and ended the
intermeeting period lower, on balance.
Yields on inflation-indexed securities
also fell, leaving measures of inflation
compensation little changed.
Yields on investment-grade bonds
generally moved in tandem with those
on Treasuries over the intermeeting
period, but spreads on high-yield bonds
widened as investors reassessed credit
risks in light of the negative tone of
some incoming economic data. The
disappointing employment data and
renewed concerns about terrorism contributed to a decline in broad equity
price
indexes.
Technology-related
issues, which had registered very large
gains over the preceding year or so,

Minutes of FOMC Meetings, March
fell more sharply. The foreign exchange
value of the dollar against other major
currencies declined through the middle
of February but subsequently rebounded
to end the intermeeting period higher.
After four consecutive months of
decline, M2 rose slightly in January and
accelerated markedly in February. The
effects of mortgage refinancing, which
had depressed M2 growth in the second
half of last year, appeared to wane,
allowing the expansion in nominal
income to show through to M2 growth.
The staff forecast prepared for this
meeting indicated that economic activity would continue to expand at a solid
pace through 2005. Monetary policy is
expected to support growth over the projection period, and fiscal policy is anticipated to remain accommodative through
2004. In addition, structural productivity growth is projected to remain
substantial this year and next. Strong
advances in real disposable income were
expected to keep consumer spending
on a solid upward trajectory. Business
spending on equipment and software
was seen as increasing briskly as a result
of sizable profits, an improving outlook
for demand, and continued favorable
financing conditions. Also, inventory
investment was anticipated to rise
gradually as businesses became more
convinced that final demand was
expanding along a sustainable track. The
pace of economic expansion was forecasted to be sufficient to reduce resource
slack over this year and next, although
the employment data received over the
intermeeting period indicated that this
process would begin from a higher rate
of unused resources than had been previously expected. Core inflation was projected to remain low over the forecast
period.
In the Committee's discussion of current and prospective economic developments, the members noted that overall



179

economic activity still seemed to be
increasing at a solid pace, though perhaps not quite as quickly as some members had anticipated at the time of
the January meeting. Investment spending had continued to advance, and the
manufacturing sector, which had lagged
the rest of the economy earlier in the
expansion, had extended recent gains.
Residential construction activity was
down somewhat from the very high levels posted late last year, but increases
in household wealth and the effects of
last year's tax cuts continued to buoy
consumer spending. Despite the gains
in spending and production, however,
employment growth had been disappointing. While job losses had moderated, hiring had yet to strengthen, holding down net increases in employment.
Nonetheless, the breadth of the expansion was seen as providing considerable
assurance of its sustainability, and Committee members generally expected that
accommodative monetary policy, favorable financial market conditions, and,
at least in the near term, fiscal stimulus would continue to foster a pace of
output growth that exceeded that of
its potential. Although economic slack
likely would be declining, it was
expected to be a little higher than
previously had been anticipated. Prices
for energy, commodities, and non-oil
imports were rising, however, and some
business contacts had reported seeing a
return of "pricing power." On balance,
inflation was expected to remain near its
current low level.
In their discussion of economic developments across the nation, a number of
Committee members noted some slippage in business and consumer confidence from the high levels reached late
last year. While business contacts in
some regions remained optimistic about
prospects for their sales and planned to
increase investment and, in some cases,

180 91st Annual Report, 2004
employment, firms in other parts of the
country had become somewhat more
uncertain about the pace of the expansion going forward. Those firms, as
a result, were more wary about committing to new investment plans or
increased hiring. Financial markets also
seemed a little less positive about the
outlook, with stock prices lower and
some risk spreads wider than at the time
of the last meeting. The reasons for the
reduced optimism were not entirely
clear but may have included higher
energy and commodity prices as well
as renewed concerns about terrorism.
Some members also pointed to the persistent weakness in employment, which
might be seen as reducing the odds that
household spending would continue
to expand briskly once the stimulative
effects of tax cuts waned. Lingering
business caution likely accounted for a
good deal of the lag in job creation, but
some members also pointed to a number
of other factors that might be restraining
hiring, including ongoing opportunities
to increase efficiency through organizational changes and new investments, the
effects on labor costs of increases in the
costs of benefits, and, in some selected
industries and regions, a shortage of
job candidates with appropriate skills.
The extent and duration of the resulting restraint on hiring were difficult
to assess, however, and the Committee
continued to expect employment growth
to pick up as the expansion progressed.
In their comments about demand in
key sectors of the economy, members
indicated that investment spending had
continued to expand at a robust pace.
Members anticipated vigorous growth
in investment outlays going forward,
supported by rapid productivity growth,
high profits and cash flow, and accommodative financial markets. Despite this
generally upbeat assessment, a number
of members reported that firms were



investing primarily to replace old equipment or to reduce costs, but remained
hesitant to expand capacity. The commercial real estate sector remained
weak, on balance, although some members suggested that market conditions
were stabilizing and, in a few cases,
even beginning to improve.
Committee members noted that activity in the housing sector, while still
quite elevated, had fallen back from
its extraordinary pace of late last year.
However, some of the moderation may
have owed to the effects of severe winter weather rather than more lasting
influences, and the recent decline in
mortgage interest rates was expected to
support the housing sector going forward. Reports from some contacts suggested that speculative forces might be
boosting housing demand in some parts
of the country, with concomitant effects
on prices, suggesting the possibility that
house prices might be moving into the
high end of the range that could be
consistent with fundamentals.
Consumer spending outside the auto
sector had remained strong, with data
and retail contacts generally suggesting
continued growth in sales this year.
Committee members noted that sales
had been bolstered by rising asset prices
and the effects of last year's tax cuts on
refunds and final payments. By contrast,
sales of motor vehicles had fallen back
noticeably, reflecting in part reductions
in incentives. However, members anticipated that sales would pick up again,
partly in response to an anticipated
rebound in incentives. Looking forward,
gains in employment and the passthrough of higher productivity to wages
and salaries were also expected to boost
consumer spending, even as the stimulus to growth from tax cuts faded and
increases in home and equity prices
likely slowed from their rapid pace in
recent quarters.

Minutes of FOMC Meetings, March
The Committee anticipated that government spending would provide some
further support for aggregate demand
going forward. The budget pressures
that had constrained state and local government expenditures of late were easing in some cases, and federal outlays
were expected to rise. Fiscal policy was
seen as providing less stimulus to aggregate demand in 2005 than this year, but
the federal budget deficit was expected
to remain substantial.
In their remarks concerning the external sector of the economy, members
cited the decline in the value of the
dollar on foreign exchange markets
since the middle of last year and
stronger economic growth in many of
our trading partners as factors boosting the demand for exports in a variety
of industries. While exports were likely
to continue to advance, the value of
U.S. imports was expected to rise as
well, implying continued very large current account deficits. Some Committee
members noted that opportunities to cut
costs had led some of their business
contacts to consider moving production
abroad.
In their review of the outlook for
prices, members generally anticipated
that core inflation would remain near
current low levels, with output growth
only gradually eliminating slack in labor
and goods markets and strong growth
in productivity limiting increases in unit
labor costs. Some members thought that
core inflation had stabilized and was
unlikely to move lower. Increases in the
prices of energy, other commodities, and
non-oil imports, as well as reports from
some business contacts that higher costs
were increasingly being passed through
to prices, suggested that the downtrend
in inflation had ended. Moreover, if, as
some members thought likely, productivity growth slowed as employment
picked up, the result could be reductions



181

in slack accompanied by higher unit
labor costs and associated pressures on
prices. Other members were less certain
that inflation had leveled out. Recent
price trends were not clear, with some
measures of core inflation still declining. Increases in commodity prices
remained limited to a few selected
industries, and with the persistence of
slack in labor and product markets, core
inflation might well edge lower once
any transitory influences had ebbed.
Moreover, if productivity were to
expand at a rapid pace rather than slowing, unit labor costs could fall, putting
downward pressure on prices.
In the Committee's discussion of policy for the intermeeting period, all the
members favored the retention of the
current target rate of 1 percent for the
federal funds rate. This preference for
an unaltered stance of policy was based
on the absence of significant changes
in economic conditions or in the members' basic assessment of the outlook
since the January meeting. To be sure,
some of the incoming information—
notably with regard to labor market
developments—had been somewhat disappointing, but the Committee continued to see the conditions in place for
further solid economic growth. Similarly, despite the rise in energy and commodity prices and reports of increased
pricing power in some sectors, many
Committee members commented that
persisting slack in labor and output markets would keep inflation low. In these
circumstances, the current accommodative stance of monetary policy remained
appropriate. Some members, while supporting an unchanged policy at this
meeting, nonetheless emphasized that
the maintenance of a very accommodative monetary policy over an extended
period in concert with a stimulative
fiscal policy called for careful attention
to the possible emergence of inflation-

182 91st Annual Report, 2004
ary pressures. And, while adjustments
in financial markets to low rates had
generally been consistent with the usual
operation of the monetary transmission
mechanism, some members were concerned that keeping monetary policy
stimulative for so long might be encouraging increased leverage and excessive
risk-taking. Such developments could
heighten the potential for the emergence
of financial and economic instability
when policy tightening proved necessary in the future. At present, however,
the persistence of low inflation coupled
with soft labor markets underscored
the desirability of a monetary policy
strategy characterized by continued
patience.
In the Committee's discussion of its
statement to be released shortly after
this meeting, the members saw merit in
not changing the characterization of the
risks to the outlook for inflation and
economic activity. Many members held
that a case could be made for moving to
a balanced risk assessment with regard
to the outlook for inflation, with a
number of them expressing a marginal
preference for such a change. However,
other members thought the evidence for
a balanced risk assessment was not yet
compelling and pointed out that with
inflation quite low and slack in labor
and output markets likely to persist for a
while longer, the costs to the economy
associated with a further decline in inflation likely outweighed those associated
with a comparable increase. While many
viewed it as a close call, all members
indicated that they could support a proposal to retain the existing wording
involving a slight tilt toward the possibility of some further disinflation. The
members also agreed on the desirability
of retaining the assessment that the risks
with regard to the outlook for economic
growth were balanced. Accordingly, it
was agreed that the only changes in



the post-meeting statement would be to
update the descriptions of the economic
expansion and labor market conditions
in light of the information received over
the intermeeting period.
At the conclusion of the discussion,
the Committee voted to authorize and
direct the Federal Reserve Bank of New
York, until it was instructed otherwise,
to execute transactions in the System
Account in accordance with the following domestic policy directive.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. To further its longrun objectives, the Committee in the immediate future seeks conditions in reserve
markets consistent with maintaining the
federal funds rate at an average of around
1 percent.
The vote encompassed approval of
the paragraph below for inclusion in the
Committee's statement to be released
shortly after the meeting:
The Committee perceives that the upside
and downside risks to the attainment of sustainable growth for the next few quarters arcroughly equal. The probability of an unwelcome fall in inflation has diminished in
recent months and now appears almost equal
to that of a rise in inflation. With inflation
quite low and resource use slack, the Committee believes that it can be patient in
removing its policy accommodation.
Votes for this action: Messrs. Greenspan, Geithner, Bernanke, Ms. Bies,
Messrs. Ferguson, Gramlich, Hoenig,
Kohn, Ms. Minehan, Mr. Olson, Ms. Pianalto, and Mr. Poole. Vote against this
action: None.
It was agreed that the next meeting of
the Committee would be held on Tuesday, May 4, 2004.
The meeting adjourned at 1:00 p.m.

Minutes of FOMC Meetings, May

183

Notation Vote

Ms. Johnson, Economist
Mr. Stockton, Economist

By notation vote completed on
March 18, 2004, the Committee unanimously approved the minutes of the
meeting of the Federal Open Market
Committee held on January 27-28,
2004.

Messrs. Connors, Fuhrer, Hakkio,
Howard, Madigan, Rasche,
Struckmeyer, Tracy, and Wilcox,
Associate Economists

Vincent R. Reinhart
Secretary

Meeting Held on
May 4, 2004
A meeting of the Federal Open Market
Committee was held in the offices of
the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, May 4, 2004, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Mr. Bernanke
Ms. Bies
Mr. Ferguson
Mr. Gramlich
Mr. Hoenig
Mr. Kohn
Ms. Minehan
Mr. Olson
Ms. Pianalto
Mr. Poole
Messrs. McTeer, Moskow, Santomero,
and Stern, Alternate Members
of the Federal Open Market
Committee
Messrs. Broaddus and Guynn,
Presidents of the Federal Reserve
Banks of Richmond and Atlanta
respectively
Mr. Reinhart, Secretary and Economist
Mr. Bernard, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Baxter, Deputy General Counsel



Mr. Kos, Manager, System Open
Market Account
Mr. Ettin, Deputy Director, Division
of Research and Statistics,
Board of Governors
Messrs. Slifman and Oliner, Associate
Directors, Division of Research
and Statistics, Board of Governors
Messrs. Clouse and Whitesell, Deputy
Associate Directors, Division of
Monetary Affairs, Board of
Governors
Messrs. English and Sheets, Assistant
Directors, Divisions of Monetary
Affairs and International Finance
respectively, Board of Governors
Mr. Simpson, Senior Adviser, Division
of Research and Statistics,
Board of Governors
Mr. Skidmore, Special Assistant to the
Board, Office of Board Members,
Board of Governors
Mr. Bassett, Economist, Division
of Monetary Affairs, Board of
Governors
Mr. Luecke, Senior Financial Analyst,
Division of Monetary Affairs,
Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. Connolly and Moore, First
Vice Presidents, Federal
Reserve Banks of Boston and
San Francisco respectively

184 91st Annual Report, 2004
Messrs. Eisenbeis, Evans, Goodfriend,
Judd, Ms. Mester, and
Mr. Rolnick, Senior Vice
Presidents, Federal Reserve Banks
of Atlanta, Chicago, Richmond,
San Francisco, Philadelphia, and
Minneapolis respectively
Mr. Altig, Ms. Hargraves, and
Mr. Koenig, Vice Presidents,
Federal Reserve Banks of
Cleveland, New York, and Dallas
respectively
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on March 16, 2004,
were approved.
By unanimous vote, Joseph S. Tracy
was elected to serve as associate economist until the first regularly scheduled
meeting of the Committee after December 31, 2004, with the understanding
that in the event of the discontinuance
of his official connection with a Federal
Reserve Bank or with the Board of Governors, he would cease to have any official connection with the Committee.
The Manager of the System Open
Market Account reported on recent
developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the
previous meeting.
By unanimous vote, the Committee
voted to extend for one year beginning
in mid-December 2004 the reciprocal
currency ("swap") arrangements with
the Bank of Canada and the Bank of
Mexico. The arrangement with the Bank
of Canada is in the amount of $2 billion
equivalent and that with the Bank of
Mexico in the amount of $3 billion
equivalent. Both arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement. The vote to renew
the System's participation in the swap
arrangements maturing in December



was taken at this meeting because of the
provision that each party must provide
six months prior notice of an intention
to terminate its participation.
The Manager also reported on developments in domestic financial markets
and on System open market transactions
in government securities and securities
issued or fully guaranteed by federal
agencies during the period March 16,
2004, through May 3, 2004. By unanimous vote, the Committee ratified these
transactions.
The information reviewed at this
meeting suggested that the economy
expanded at a rapid pace in the first
quarter. Consumer spending and the
housing market continued to exhibit
strength. Business fixed investment
grew smartly, reflecting increased outlays for equipment and software that
more than offset a significant fall in
investment in nonresidential structures.
The labor market displayed further signs
of improvement during the quarter,
capped by a significant increase in private payrolls in March. Recent increases
in the prices of imports and commodities showed through to a pickup in core
consumer price inflation during the first
quarter, although some of the categories
that registered large gains had posted
unusually small increases earlier.
The labor market showed renewed
vigor during the first quarter. The
growth in payroll employment during
March pushed the average monthly gain
for the first quarter as a whole well
above that of the fourth quarter of last
year. Hiring during the quarter was
widespread across industries, with large
increases in construction, retail trade,
and business and nonbusiness services.
Net job losses in manufacturing, which
had waned during the winter, reportedly
came to an end by March. Some surveys of business hiring intentions also
suggested renewed strength. However, a

Minutes of FOMC Meetings, May
small decline in the average workweek
during March held down the increase in
aggregate hours, which rose at a slightly
slower pace in the first quarter than in
the fourth quarter. Moreover, the unemployment rate ticked up to 5.7 percent in
March, and the labor force participation
rate remained low.
Despite a weather-related decline in
output at utilities during March, the pace
of industrial production quickened during the first quarter, and the gains were
widespread across industry and market
groups. The high-tech sector accounted
for a significant part of the increase, as
output of computers and semiconductors rose rapidly. Production of other
business equipment also increased
markedly, and indexes for business and
construction supplies were up notably.
Motor vehicle assemblies were slightly
higher for the first quarter as a whole,
although they slowed in March. Manufacturing capacity utilization rose for the
second consecutive quarter, but to a rate
well below its long-run average. Available weekly physical product data for
April were up slightly.
Real consumer spending grew at a
somewhat faster pace in the first quarter
than it had in the fourth quarter. Retail
sales rose briskly, with strength widespread across spending categories, while
expenditures on services also posted a
substantial increase. Light vehicle sales
were down slightly for the first quarter
as a whole, but they firmed in March.
Solid growth in wages and salaries and
an increase in tax refunds generated a
large increase in real disposable personal income in the first quarter. Measures of consumer confidence were
roughly stable in March and April.
Residential housing activity remained
high in the first quarter despite a marked
rise in mortgage interest rates. Smoothing through weather-related swings in
the volatile monthly data, the underlying



185

pace of single-family housing starts continued to display appreciable strength.
Sales of new homes jumped to a record
level in March, and sales of existing
homes increased to their highest level
since last September. In the multifamily sector, construction activity also
remained robust through March, even
though the vacancy rate for multifamily
units reached a record high in the first
quarter.
Business fixed investment continued
to be supported by favorable underlying
fundamentals, including increased corporate cash flow, a low user cost of
capital, and, at least as judged by survey data, increased business confidence
in the sustainability of the economic
expansion. Outlays for equipment and
software expanded at a vigorous pace in
the first quarter, with the exception of
spending on transportation equipment.
Shipments of nondefense capital goods
excluding aircraft were strong, especially outside the high-tech industries.
Within the high-tech sectors, rapid
growth of shipments of communications
equipment offset declines in the computers and peripherals category. By
contrast, investment in nonresidential
structures fell considerably in the first
quarter, and vacancy rates for industrial
buildings and office properties remained
high.
Real nonfarm inventories increased a
bit more in the first quarter than they
had in the fourth quarter. Motor vehicle
inventories at the retail and wholesale
levels accounted for the entire increase,
while non-auto inventories ran off
slightly. In particular, manufacturers
continued to reduce their stocks, though
at a slower pace than last year. Inventory accumulation lagged growth in
sales and shipments, and the inventorysales ratio edged down further.
The U.S. international trade deficit
shrank in February from January's

186 91st Annual Report, 2004
record high, with exports increasing
across a range of major categories of
goods. Economic growth in the major
industrialized countries in the first quarter was uneven. The economies of Japan
and the United Kingdom likely continued to expand, though at paces below
those of late last year. In the euro area,
economic indicators were mixed. A
moderation of growth in Canada led the
Bank of Canada to ease monetary policy
for the third time this year, citing a need
to support aggregate demand. Inflation
was little changed in Canada and the
euro area, but it slipped further in the
United Kingdom. In Japan, consumer
prices were about unchanged, while
wholesale prices edged up in March
relative to their level of a year earlier
and posted the first increase on a twelvemonth basis since July 2000.
In the United States, the core consumer price index advanced at a faster
rate in the first quarter than it had in
the fourth quarter, reflecting the passthrough of higher energy prices and a
leveling off of goods prices after sizable
declines last year. The higher goods
price inflation owed, in part, to the
recent run-up in the prices of non-oil
imports, energy, and other commodities.
The price index for core personal consumption expenditures also rose at a
faster rate in the first quarter than it had
late last year. Despite the rise in inflation this year, however, the cumulative
increase in the overall consumer price
index for the year ending in March was
somewhat less than the advance for the
twelve months ending in March 2003. In
the year ending in March, the increase
in the price index for total personal consumption expenditures was similar to
that of a year earlier. Survey measures
of near-term inflation expectations
edged up somewhat in March and April,
but measures of longer-term expectations decreased. With regard to labor



costs, average hourly earnings of production or nonsupervisory workers on
private nonfarm payrolls rose notably
less for the twelve months ending in
March than they had in the year-earlier
period. The overall increase in the
employment cost index for private
industry for the twelve months ending in
March was about the same as that for
the twelve-month period ending a year
earlier, as wages and salaries decelerated and benefits accelerated.
At its meeting on March 16, 2004,
the Federal Open Market Committee
decided to keep its target for the federal funds rate unchanged at 1 percent.
In its announcement of this decision, the
Committee indicated that the upside and
downside risks to sustainable growth
were roughly equal and that the probability of an unwelcome fall in inflation had declined further so that it was
almost equal to that of a rise. The Committee also noted in March that although
output had continued to expand at a
solid pace, new hiring had lagged, and
increases in core consumer prices were
muted and expected to remain low. As a
result, the Committee determined that it
could remain patient in removing its policy accommodation.
The Committee's decision at its
March meeting to leave the intended
level of the federal funds rate unchanged
had been fully anticipated in financial
markets. However, market participants
reportedly viewed the accompanying
statement as suggesting that the Committee had a slightly weaker outlook for
the economy than had been expected,
and longer-dated futures rates and
Treasury yields declined a few basis
points after the announcement. In
response to the generally positive tone
of economic data—especially the
release of the much stronger-thanexpected employment report for
March—and congressional testimony by

Minutes of FOMC Meetings, May

187

Chairman Greenspan, investors pushed refinancing boosted liquid deposits. The
market interest rates substantially higher strength was likely offset somewhat by
over the intermeeting period. By the the effects of individual non-withheld
time of the FOMC meeting in early tax payments in April, which were lower
May, quotes on federal funds futures than last year and therefore probably led
contracts suggested that market par- to a smaller buildup in liquid deposits
ticipants expected policy tightening to than incorporated in the seasonal adjustbegin sooner than previously anticipated ment factors. Although currency growth
and to proceed at a faster pace once continued to be held down in the first
it began. The revision to policy expec- quarter by weak demand from abroad, it
tations showed through to interest moved closer to its long-term trend in
rates on nominal Treasury securities, April.
which climbed significantly. Yields on
The staff forecast prepared for this
inflation-indexed Treasury securities meeting suggested that the economy
rose almost as much, implying that would continue to expand briskly for the
inflation compensation only edged a rest of 2004 before decelerating somelittle higher. Yields on investment-grade what in 2005 as fiscal policy shifted to a
corporate bonds rose a bit less than slightly restrictive stance. The considerthose on comparable-maturity Trea- able monetary and fiscal stimulus this
suries, but risk spreads on below- year and still-strong advances in strucinvestment-grade bonds narrowed sig- tural productivity were expected to
nificantly as their yields increased by cause businesses to shed still more of
a more modest amount. Major equity the caution they had been exhibiting in
price indexes were about unchanged, investing and hiring. The labor market
as the downward pressure exerted by was projected to show steady improvehigher interest rates was offset by the ment through the end of 2004, but the
effects of strong earnings reports, forecasted pace of hiring was expected
upward revisions to expected future to slow a little next year as economic
earnings, and other positive economic growth moderated. The staff anticipated
news.
that inventories would increase at a
In foreign exchange markets, the dol- modest rate during the forecast horizon
lar appreciated against most major cur- as businesses responded to continued
rencies over the intermeeting period, strength in demand. Business spendand it also gained against an index of the ing on equipment and software was
currencies of other major U.S. trading expected to remain strong, with the
partners. The dollar fell sharply against expiration of the partial-expensing tax
the yen early in the intermeeting period, provision at the end of 2004 adding
but subsequently about reversed the impetus this year. The rise in mortgage
decline. Market participants attributed rates was not likely to show through
the dollar's overall gains particularly to demand for housing until the second
to the stronger-than-expected U.S. half of 2004 and was expected to be
economic data and the weaker-than- partially offset in the longer term by
expected performance of the Canadian rising employment and personal income.
economy and economies in the euro The increases in employment and
area.
income were also projected to continue
M2 grew briskly during March and to boost consumer spending. In light of
April as continued low opportunity costs recent increases in some price measures,
and the temporary effects of mortgage the staff anticipated a transitory rise in



188 91st Annual Report, 2004
the pace of core inflation in the near
term. However, it was expected that the
remaining slack in resource utilization
and strong productivity growth would
keep core inflation at a low level over
the forecast period.
In the Committee's discussion of current and prospective economic developments, a number of members noted that
the outlook for production and employment had improved distinctly in the
period since the March FOMC meeting.
Newly available data as well as commentary from business contacts almost
uniformly suggested that the expansion
had continued to broaden and had
become more firmly established. Statistical releases confirmed that consumer
spending was rising at a brisk rate,
housing activity remained at a high
level, and business fixed investment was
growing vigorously. Significantly, the
most recent data also provided evidence
that the pace of hiring had begun to pick
up, a development that was expected to
provide further support to the expansion
going forward. Anecdotal information
gathered from business contacts across
the nation—particularly commentary
suggesting rising orders, improving confidence, and a growing willingness to
increase payrolls—tended to confirm the
data that pointed to increasingly solid
expansion. Prospects for growth continued to be supported by fiscal policy,
which was expected to remain stimulative through 2004, and by the effects of
monetary policy accommodation. Overall, Committee members were now more
convinced that robust growth would be
sustained, and most likely at a pace that
would be adequate to make appreciable
headway in narrowing margins of unutilized resources. Regarding the outlook
for inflation, members took particular
note of recent data pointing to jumps
in consumer and producer prices. Many
members indicated that the surprisingly



large advances had substantially reduced
the odds of further disinflation and also
had increased their uncertainty about
prospective price trends. Still, most
members saw low inflation as the most
likely outcome.
In their comments about key economic sectors, a number of members
pointed to developments that were likely
to support increased investment spending going forward. Many business firms
appeared to be experiencing a significant pickup in demand. Anecdotal information suggested that some manufacturers had seen a notable rebound in orders,
with several members citing, in particular, stronger demand for high-tech
products as well as for machine tools,
various types of heavy machinery, and
aircraft. Also, optimism regarding economic prospects among business executives seemed to be mounting, no doubt
prompted in part by the increased
demand they were experiencing and
robust growth in profits. Business contacts in several districts had indicated
that, as a result of the improved outlook,
they were taking steps to expand thencapacity to produce, both by starting to
augment work forces and by boosting
fixed investment. Committee members
generally perceived overall business
fixed investment as accelerating considerably, especially for equipment and
software. In contrast, investment in nonresidential structures remained sluggish,
as vacancy rates in many markets were
elevated and considerable excess capacity persisted in many production plants.
Drilling, however, was said to be
strengthening in response to high oil and
gas prices.
While Committee members saw an
overall brightening in the outlook for
business fixed investment, a number of
policymakers commented that some of
the considerable caution that had earlier
marked business attitudes apparently

Minutes of FOMC Meetings, May

189

lingered. The pace of hiring seemed source of restraint on future household
to be picking up only gradually, fixed spending.
investment was still moderate in comFiscal policy was viewed as likely to
parison with the strong cash flow being buoy the expansion of economic activity
generated by robust profits, and anec- through 2004. Real federal expenditures
dotal information indicated that firms had jumped in the first quarter and were
in most industries were continuing to expected to rise further over the balance
exercise tight control over inventories. of the year. Next year, fiscal impetus
Indeed, several members remarked that was likely to diminish, largely owing to
the rate of inventory investment was the expiration of the tax provision persurprisingly modest in the first quarter, mitting partial expensing of certain capialthough motor vehicle inventories were tal outlays. Assessing the prospects for
on the high side. On the whole, the fiscal policy, however, was complicated
evidence of continued caution and disci- by a lack of legislative progress to date
plined spending in the business sector in passing federal appropriations bills.
was seen as boding well for the durabil- Regarding the longer-term federal budity of the expansion.
getary outlook, an apparent breakdown
Members viewed the household sec- in fiscal discipline was seen as an ongotor as continuing to play a key role in ing concern; However, some progress
the expansion, with recent data as well was noted in reducing budgetary imbalas anecdotal information indicating that ances at the state and local levels.
consumer spending was rising at a
The external sector was expected to
solid pace. After dropping back in Jan- provide limited support for U.S. ecouary, auto sales had accelerated over nomic growth over the next two years.
the remainder of the first quarter and Expansion of foreign economies was
appeared to be well maintained in April. likely to fuel increases in U.S. exports,
Expenditures for consumer services with strength expected particularly in
seemed to be expanding steadily. Sev- computers and semiconductors. Real
eral members noted that tourism in imports, however, also appeared likely
their regions was picking up. In addi- to continue rising strongly as domestion, housing activity had stayed strong tic demand climbed further, leading to
across the nation and was still climbing a widening of already substantial trade
in some regions, with reports of growing and current account deficits. Some
backlogs in deliveries and substantial members saw a risk that growth in cerprice increases in some markets. The tain rapidly expanding regions abroad
overall vigor in household spending was could slow, perhaps sharply, with potenbeing supported by substantial gains in tially significant effects on the demand
disposable income, partly reflecting tax for U.S. exports as well as on global
cuts, generally sound balance sheets, commodity prices.
accommodative financial conditions,
After a protracted period of meager
and increases in consumer sentiment gains in employment, conditions in
over the past year or so. To date, the the U.S. labor market evidently were
backup in fixed mortgage interest rates improving in recent weeks. In addition
in recent months seemed to have had to noting the substantial jump in paylittle adverse effect on homebuying, rolls in March, several members relayed
although it was noted that an appre- anecdotal information from business
ciable further rise in longer-term mar- contacts around the nation that hiring
ket rates would represent a potential was continuing to pick up and that firms



190 91st Annual Report, 2004
were planning further increases in workforces. Some temporary help firms
reported rising demand, a possible precursor of a pickup in permanent hiring.
A number of members cited reports of
difficulties in hiring within certain job
families in which specialized skills were
in short supply together with indications
that wage increases in those occupations
tended to be larger than average. Even
so, considerable slack seemed to remain
in the labor market overall, and wage
gains on the whole were moderate.
Data on consumer and producer
prices over the intermeeting period had
generally come in on the high side of
expectations, following considerable
increases in commodity prices. A significant number of Committee members
reported information from their contacts
that businesses were increasingly able to
pass on cost increases to their customers
and to boost prices more generally.
Some members cited instances in which
earlier price discounts had been canceled and noted that surcharges for
higher energy and steel prices were
being added to base prices for certain
goods. Nonetheless, the extent to which
these developments signaled an upturn
in underlying inflation was unclear. To
some degree, the recent uptick in various price measures partly reflected
factors, such as jumps in the prices of
energy and non-oil imports, that were
unlikely to be repeated. Also, the recent
evidence could be interpreted as indicating that the surprisingly sharp decline in
measured inflation in 2003 exaggerated
the drop in the underlying rate of inflation. Indeed, some members saw underlying inflation as relatively stable and
put low odds on the possibility that
prices now were accelerating. In their
view, a range of factors was continuing
to restrain inflation, including slack in
resource utilization, strong productivity gains and corresponding downward



pressures on unit labor costs, currently
high price markups, and longer-term
inflation expectations that apparently
remained contained. Others, however,
were less confident about the degree of
restraint on prices, noting that inflation
predictions based on estimated output or
employment gaps were subject to considerable error.
In the Committee's discussion of policy for the intermeeting period, all of the
members favored maintenance of the
existing target of 1 percent for the federal funds rate. It was recognized that
the Committee would need to initiate
a process of removing monetary policy
accommodation at some point, and the
recent experience suggested that the
time at which policy firming appropriately would commence might be closer
than previously had seemed most probable. However, the appreciable rise in
real long-term interest rates over the
intermeeting period implied that financial market conditions had already tightened on balance. Moreover, the evidence of a significant acceleration in
hiring was still limited, and some members referred to the possibility that
growth could falter, particularly if market yields were to rise sharply further.
With inflation low and resource use
slack, the Committee saw a continuation
of its existing policy stance as providing
a degree of support to the economic
expansion that was still appropriate.
With regard to the Committee's
announcement to be released after the
meeting, it was understood that the
recent evidence that hiring had picked
up, as well as the continued solid growth
in output, would be highlighted. Policymakers also concurred that, with the
expansion apparently well established,
the statement should again indicate that
the upside and downside risks to sustainable growth for the next few quarters
seemed to be roughly equal. Members

Minutes of FOMC Meetings, May

191

saw both downside and upside risks policy to a more neutral setting would
to prospects for inflation. The probable be more gradual, once under way, than
persistence of slack in the economy for in past episodes when inflation was
at least several more quarters, together well above levels consistent with price
with the likelihood that recent substan- stability. In addition, some policymaktial gains in productivity would be ers observed that the timing and magniextended, should continue to exert slight tude of future policy adjustments would
downward pressures on inflation. At the ultimately be determined by the Comsame time, though, the recent stronger- mittee's interpretation of the incomthan-expected increases in a number of ing data on the economy and prices
price measures, anecdotal information rather than by its current expectation
suggesting a greater ability of businesses of those developments. On balance, all
to implement and sustain price hikes, the members agreed that they could
and multiplying signs of solid economic accept an indication in the statement
growth suggested that the upside risks that " . . . policy accommodation can be
to inflation had increased. The members removed at a pace that is likely to be
agreed that, all things considered, the measured."
risks to the goal of price stability had
At the conclusion of the discussion,
moved into balance in the period since the Committee voted to authorize and
the last meeting.
direct the Federal Reserve Bank of New
The Committee also discussed at York, until it was instructed otherwise,
length the advantages and disadvantages to execute transactions in the System
of modifying or dropping its statement Open Market Account in accordance
in the announcement following the with the following domestic policy
March meeting that "With inflation directive.
quite low and resource use slack, the
Committee believes that it can be
The Federal Open Market Committee
patient in removing its policy accommo- seeks monetary and financial conditions that
dation." All of the members agreed that, will foster price stability and promote suswith policy tightening likely to begin tainable growth in output. To further its
long-run objectives, the Committee in the
sooner than previously expected, the ref- immediate future seeks conditions in reserve
erence to patience was no longer war- markets consistent with maintaining the
ranted. The Committee focused instead federal funds rate at an average of around
on a formulation that would emphasize 1 percent.
that policy tightening, once it began,
probably could proceed at a pace that
The vote encompassed approval of
would be "measured." A number of the paragraph below for inclusion in the
policymakers were concerned that such press statement to be released shortly
an assertion could unduly constrain after the meeting:
future adjustments to the stance of
policy should the evidence emerging in
The Committee perceives that the upside
coming months suggest that an appre- and downside risks to the attainment of susciable firming would be appropriate. tainable growth for the next few quarters are
Others, however, saw substantial bene- roughly equal. Similarly, the risks to the goal
have moved into
fits to inclusion of the proposed lan- of price stabilitywith inflation quite balance.
At this juncture,
low and
guage. These members noted that cur- resource use slack, the Committee believes
rent economic circumstances made it that policy accommodation can be removed
likely that the process of returning at a pace that is likely to be measured.



192 91st Annual Report, 2004
Votes for this action: Messrs. Greenspan, Geithner, Bernanke Ms. Bies,
Messrs. Ferguson, Gramlich, Hoenig,
Kohn, Ms. Minehan, Mr. Olson, Ms. Pianalto, and Mr. Poole. Vote against this
action: None.
It was agreed that the next meeting
of the Committee would be held on
Tuesday-Wednesday, June 29-30,2004.
The meeting adjourned at 1:15 p.m.
Vincent R. Reinhart
Secretary

Meeting Held on
June 29-30, 2004

Mr. Reinhart, Secretary and Economist
Mr. Bernard, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Mattingly, General Counsel
Ms. Johnson, Economist
Mr. Stockton, Economist
Messrs. Connors, Fuhrer, Hakkio,
Howard, Madigan, Sniderman,
Slifman, Tracy, and Wilcox,
Associate Economists
Mr. Kos, Manager, System Open
Market Account
Messrs. Oliner and Struckmeyer,
Associate Directors, Division
of Research and Statistics,
Board of Governors

A meeting of the Federal Open Market
Committee was held in the offices of
the Board of Governors of the Federal
Reserve System in Washington, D.C.,
on Tuesday, June 29, 2004, at 2:30 p.m.
and continued on Wednesday, June 30,
2004, at 9:00 a.m.

Messrs. Clouse and Whitesell, Deputy
Associate Directors, Division of
Monetary Affairs, Board of
Governors

Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Mr. Bernanke
Ms. Bies
Mr. Ferguson
Mr. Gramlich
Mr. Hoenig
Mr. Kohn
Ms. Minehan
Mr. Olson
Ms. Pianalto
Mr. Poole

Messrs. Gagnon,5 Leahy,5 and Sheets,
Assistant Directors, Division
of International Finance,
Board of Governors

Ms. Cumming, Messrs. McTeer,
Moskow, Santomero, and Stern,
Alternate Members of the Federal
Open Market Committee
Mr. Guynn and Ms. Yellen, Presidents
of the Federal Reserve Banks of
Atlanta and San Francisco
respectively
Mr. Lacker, President-Elect of the
Federal Reserve Bank of
Richmond



Mr. Kamin,5 Deputy Associate
Director, Division of International
Finance, Board of Governors

Mr. English, Assistant Director,
Division of Monetary Affairs,
Board of Governors
Mr. Simpson, Senior Adviser, Division
of Research and Statistics,
Board of Governors
Mr. Thomas,5 Section Chief,
Division of International Finance,
Board of Governors
Ms. Kusko6 and Mr. Zakrajsek, Senior
Economists, Divisions of Research
and Statistics and Monetary
Affairs respectively, Board of
Governors
5. Attended portion of the meeting relating to
the discussion of prospective external adjustment.
6. Attended portion of the meeting relating to
the discussion of economic developments.

Minutes of FOMC Meetings, June
Mr. Carpenter,6 Economist, Division
of Monetary Affairs, Board of
Governors
Mr. Skidmore, Special Assistant to the
Board, Office of Board Members,
Board of Governors
Mr. Luecke, Senior Financial Analyst,
Division of Monetary Affairs,
Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Mr. Lyon, First Vice President, Federal
Reserve Bank of Minneapolis
Mr. Judd, Executive Vice President,
Federal Reserve Bank of
San Francisco
Messrs. Eisenbeis, Evans, Goodfriend,
Mses. Mester and Perelmuter,5
Messrs. Rolnick and Rosenblum,
Senior Vice Presidents, Federal
Reserve Banks of Atlanta,
Chicago, Richmond, Philadelphia,
New York, Minneapolis, and
Dallas respectively
Ms. Goldberg5 and Mr. Thornton,
Vice Presidents, Federal Reserve
Banks of New York and St. Louis
respectively
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on May 4, 2004, were
approved.
The Manager of the System Open
Market Account reported on recent
developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the
previous meeting.
The Manager also reported on developments in domestic financial markets
and on System open market transactions
in government securities and securities
issued or fully guaranteed by federal



193

agencies during the period May 4,
2004, through June 29, 2004. By unanimous vote, the Committee ratified these
transactions.
At this meeting, the Committee discussed staff papers and presentations on
adjustment of the U.S. external accounts.
At more than $500 billion, the deficits
in trade and current account balances
are quite large in comparison with
aggregate income. Financing of the deficits had recently included both large foreign private purchases of U.S. securities
and increased foreign official inflows.
The sizable current account deficit could
be viewed as reflecting very low levels
of national saving, in both its government and private components, in relation to investment opportunities in the
United States that were very attractive.
The staff noted that outsized external
deficits could not be sustained indefinitely. However, the historical evidence
indicated that such deficits could be
quite persistent, and the adjustment of
imbalances was not necessarily imminent. The adjustment, once under way,
might well proceed in a relatively
benign fashion, particularly if fiscal,
monetary, and trade policies were appropriate, but the possibility that the adjustment could involve more wrenching
changes could not be ruled out. In any
case, a movement toward balance in the
trade and current accounts would likely
have effects that differ appreciably
across sectors of the U.S. economy.
Members of the Committee noted that
monetary policy was not well equipped
to promote the adjustment of external
imbalances but could best contribute by
maintaining an environment of price stability that would foster maximum sustainable economic growth. Fiscal policy
had a potentially larger role to play by
promoting an increase in national saving, but the adjustment would involve
shifts in demand and output both domes-

194 91st Annual Report, 2004
tically and abroad, and changes to U.S.
fiscal policy alone probably would not
be sufficient to foster the adjustment.
The information reviewed at this
meeting suggested that the economy
continued to expand at a solid pace during the second quarter. Although growth
in consumer spending appeared to have
slowed somewhat, the demand for
housing increased from its robust firstquarter pace. Business fixed investment,
boosted by surging outlays on equipment and software, also grew rapidly.
The labor market improved further during the quarter, with large gains in
employment registered in April and
May. Core consumer price inflation
picked up, reflecting in part the passthrough of substantial advances in
energy prices and non-energy import
prices.
The labor market rebounded strongly
in recent months. Private nonfarm payrolls grew rapidly in April and May,
with hiring widespread across industries. The manufacturing sector appeared
to be on a more solid footing, as manufacturers added jobs in each of the past
four months after more than three years
of declines. Aggregate hours moved up
in both April and May, bringing the
level of hours substantially above its
trough of last summer. Despite the
recent strength in hiring, the unemployment rate changed little in recent
months, and the labor force participation
rate remained low.
Industrial production accelerated in
April and May after a sizable advance
in the first quarter. Output at utilities
surged in the latter month, reflecting
weather-related factors, and factory output excluding motor vehicles, buoyed
by strong gains in both high-tech manufacturing industries and in most nonhigh-tech industries, expanded sharply
in both months. In contrast, the production of motor vehicles declined as auto


makers trimmed outsized inventory
positions. Capacity utilization moved
higher but stayed below its long-run
average.
Growth in real consumer spending
appeared to have slowed somewhat in
recent months from its first-quarter
pace. Although outlays for motor vehicles in May more than retraced their
April decline and purchases of services
advanced at an appreciable rate, spending on nondurable goods remained sluggish. Despite higher energy prices, real
disposable personal income continued
its uptrend in recent months, benefiting
from an improved labor market and last
year's tax cut. Home prices also continued to rise at a rapid pace, contributing
importantly to increases in household
wealth. Survey measures of consumer
confidence moved up in June from
already favorable levels.
Activity in the housing market
increased in April and May despite a
considerable rise in mortgage interest
rates. Single-family housing starts edged
above their rapid first-quarter pace, and
sales of both new and existing homes
reached record levels in May. In the
volatile multifamily sector, housing
starts fell somewhat in May, but, more
generally, construction activity in this
sector had been surprisingly resilient in
light of the high vacancy rate for such
units.
Business investment spending appeared to have advanced at a brisk pace
in the second quarter, as rising output,
low user cost of capital, and increased
corporate cash flow continued to foster
a favorable environment for capital
spending. Although new orders and
shipments of nondefense capital goods
excluding aircraft dipped in May, both
series remained on a solid uptrend,
and, with orders exceeding shipments,
backlogs continued to grow. Spending
on transportation equipment, which

Minutes of FOMC Meetings, June
dropped in the first quarter, appeared to
rebound in recent months, while outside
the transportation and high-tech sectors,
increases in spending moderated from
their rapid first-quarter pace. After
declining in the first quarter, overall
investment in nonresidential structures
appeared to pick up a little in the second
quarter, though the performance of the
major types of construction remained
mixed. Spending on office buildings and
manufacturing structures continued to
be depressed by high vacancy rates,
while outlays for commercial buildings
moved up in conjunction with declines
in vacancy rates for such structures. In
addition, judging by the number of natural gas drilling rigs in operation, spending on drilling and mining structures
rose in recent months.
The pace of inventory accumulation
remained subdued. Although the book
value of manufacturing and trade inventories increased appreciably in the first
quarter and continued to rise at about
the same pace in April, the recent large
increases in the book-value data were
due importantly to a jump in the price of
oil and a run-up in the prices of intermediate materials. Inventory-sales ratios in
manufacturing and retail trade edged
higher in April but remained near their
historical lows; meanwhile, inventorysales ratios in the wholesale trade sector
trended lower.
The U.S. international trade deficit
reached a new record in April, reflecting
in large part a sharp decline in exports
of goods. The fall in goods exports was
widespread, with notable decreases in
capital goods, industrial supplies, and
agricultural products. Exports of services, in contrast, increased in April.
Imports of goods edged higher, as a
large decline in the value of imported oil
was offset by an increase in imports
of non-oil products, and imports of services increased. Real GDP in the major



195

foreign industrial countries expanded at
a healthy pace in the first quarter. Indicators of economic activity in the second quarter for Canada and the United
Kingdom were also favorable, whereas
those for the euro area were somewhat
mixed. Japan's economy, supported by
robust private domestic demand and rising consumer confidence, evidently continued to expand strongly in the second
quarter. Mainly as a result of higher
energy prices, consumer price inflation
moved up a bit in the second quarter
in Canada, the United Kingdom, and the
euro area, while slight deflation persisted in Japan.
Consumer price inflation turned up
this year from the very low rates registered in 2003, both for overall measures
and for those that exclude food and
energy. Overall consumer prices rose
more quickly than core prices, reflecting
the direct contributions of substantial
increases in prices of food and energy.
But the step-up in core inflation was
also due in part to the pass-through of
higher energy and import costs into core
consumer prices. Some survey measures
of short-term inflation expectations
moved higher in recent months, but
longer-term expectations remained reasonably well contained. Commodity
prices escalated sharply during the early
months of 2004, but indexes of spot
prices for industrial materials and for
wholesale gasoline retreated appreciably
in recent weeks. Meanwhile, labor costs
appeared to have turned up in the first
half of the year. Hourly compensation in
private industry rose in the first quarter
at the same rate as in 2003, but with the
pace of productivity advance moderating, unit labor costs moved higher. In
April and May, increases in average
hourly earnings of production or nonsupervisory workers on private nonfarm
payrolls exceeded the monthly gains
registered in the first quarter and were

196 91st Annual Report, 2004
well above the increases in the fourth
quarter of 2003.
At its meeting on May 4, 2004, the
Federal Open Market Committee
decided to leave its target for the federal
funds rate unchanged at 1 percent. The
Committee retained its assessment that
the upside and downside risks to the
attainment of sustainable growth were
roughly equal, but it announced that the
risks to the goal of price stability had
moved into balance. The Committee
also noted that output had continued
to expand at a solid pace, new hiring
had appeared to pick up, and although
incoming data on inflation showed
that it had moved somewhat higher,
longer-term inflation expectations had
remained well contained. Reflecting
these developments, the Committee
concluded that it could remove policy
accommodation at a pace that was likely
to be measured.
The Committee's decision at its May
meeting to leave the intended level of
the federal funds rate unchanged had
been fully anticipated by market participants. Likewise, the replacement of the
sentence in the announcement reporting
that the Committee could be patient
in removing policy accommodation with
one indicating that policy accommodation can be removed at a pace that is
likely to be measured had little net effect
on money market futures rates on the
day of the announcement. Over the balance of the intermeeting period, however, market participants marked up significantly the extent of expected policy
tightening in response to data that indicated robust gains in employment and
spending and somewhat elevated inflation, as well as to comments by Committee members providing reassurance
that policy would be tightened as necessary to contain any incipient inflationary
pressures. Revisions to policy expectations showed through to interest rates



on nominal Treasury securities, which
increased commensurately. Yields on
inflation-indexed Treasury securities
rose almost as much as those on their
nominal counterparts, leaving inflation
compensation only slightly higher, on
net, by the end of the intermeeting
period. Yields on investment- and
speculative-grade corporate securities
rose about the same amount as those
on comparable Treasuries, leaving risk
spreads about unchanged. Generally
positive economic news and further
improvements in the outlook for corporate earnings evidently offset the influence of higher interest rates, and major
equity indexes edged higher over the
intermeeting period. In foreign exchange
markets, the dollar depreciated somewhat against major currencies, and it
rose a bit against an index of currencies
of other major U.S. trading partners.
M2 continued to expand rapidly in
May. The upswing in M2 growth since
late winter stemmed in part from the
temporary effects of mortgage refinancing, which boosted liquid deposits over
this period, though M2 was also buoyed
by strong gains in nominal income. In
recent months, a rebound in currency
growth and reduced portfolio shifts by
households from monetary assets to
equities and bonds also supported the
expansion of M2. The growth of M2
slowed appreciably during the first half
of June. Commercial bank credit decelerated in May, reflecting a contraction in
bank holdings of securities and a slowdown in the growth of loans. The slowing in loan growth was concentrated
mainly in real estate credits and was due
partly to heavy securitizations.
The staff forecast prepared for this
meeting suggested that the economy
would continue to expand at a solid
pace through 2005. Monetary policy
was expected to support economic activity over the projection period, and fiscal

Minutes of FOMC Meetings, June
policy was anticipated to remain accommodative through 2004. Moreover, persisting strong gains in structural productivity would likely continue to provide
significant impetus to spending. With
firms shedding their unusual caution
of the past few years, further large
additions to payrolls over the next
several quarters were anticipated, followed by a gradual moderation in the
rate of increase in employment. Strong
profits, sustained increases in aggregate
demand, and a favorable financing environment were expected to keep business
spending on equipment and software
on a healthy upward trajectory over the
forecast period. The impending expiration of the partial-expensing tax provision was likely to provide an additional
boost to capital spending later this year,
although the shifting forward of some
investment was expected to dampen
capital spending in early 2005. In addition, inventory investment was forecast
to increase gradually in order to bring
changes in stocks closer in line with
rising sales. Robust employment growth
and the cumulative productivity gains of
recent years were expected to contribute
to strong advances in real disposable
income, sustaining the expansion of
consumption spending over the forecast
period. Core inflation was projected to
fall back later this year from its pace
in the first five months and to remain
low in 2005, as the transitory effects of
higher energy and non-oil import prices
waned.
In the Committee's discussion of current and prospective economic conditions, members commented that the
evidence accumulated over the intermeeting period continued to portray an
economy that was expanding briskly and
was likely to continue to do so for some
time. Business and consumer expenditures were on a strong uptrend, and
related growth in output was associated



197

with notable improvement in labor market conditions and in manufacturing
activity. Members saw the persistence
of a relatively vigorous expansion in
overall economic activity as a likely
prospect in the context of continuing
stimulus from fiscal and monetary
policies, accommodative financial conditions, growing business optimism,
favorable consumer sentiment, and
robust increases in productivity. Solid
increases in economic activity and
employment should in turn provide
ongoing support to business and consumer spending. Members acknowledged that their favorable outlook for
economic activity was based on the
assumption that major terrorist disruptions would be averted.
In light of the strength of economic
activity and recent indications of somewhat increased price pressures, the
members focused particular attention on
the outlook for inflation. They referred
to statistical and anecdotal evidence that
on the whole pointed to some recent
acceleration of consumer prices and to
some increase in near-term inflation
expectations. Factors cited in this regard
included large increases in prices of
energy and intermediate materials, both
of which appeared to be passing through
at least in part to core consumer prices.
Members referred to some limited inflationary impetus as well from the depreciation of the dollar and larger increases
in labor compensation. Considerable
uncertainty still surrounded the overall
extent to which competitive pressures
would allow producers to pass through
rising costs to prices of finished goods;
anecdotal reports suggested that the
ability of many producers to do so was
increasing but was far from universal
at this point. With regard to the prospective course of inflation, members
suggested that some of the rise in core
inflation in recent months appeared to

198 91st Annual Report, 2004
have resulted from what might well
prove to be transitory factors, notably
including increases in energy and other
import prices, which were not seen as
likely to persist and indeed might be
partially reversed. Just how much slowing of price increases was likely after
some relatively elevated readings was
difficult to forecast. Those who anticipated a noticeable deceleration emphasized the contribution of the one-time
price increases that had boosted inflation recently, persisting, albeit diminishing, margins of unemployed labor and
other productive resources, the anticipation of strong further gains in productivity and declines in markups of goods
prices over costs, and steady long-term
inflation expectations. Others tended to
emphasize the changes in business attitudes and expectations, the strength in
labor compensation, and the tendency
for underlying inflation trends to be subject to considerable momentum that was
unlikely to be reversed quickly. Whatever their inflation forecasts, several
noted that they now had less confidence
in those forecasts than earlier. A number
of members qualified their inflation outlook by noting that its realization likely
would require an adjustment to monetary policy over time that brought the
latter to a neutral stance as the economy
continued to move toward full utilization of its resources.
In preparation for the midyear monetary policy report to Congress, the members of the Board of Governors and the
presidents of the Federal Reserve Banks
submitted individual projections of the
growth of GDP, the rate of unemployment, and the rate of inflation for the
years 2004 and 2005. The forecasts of
the rate of expansion in real GDP were
concentrated in the upper part of a 4 to
43/4 percent range for 2004, implying
expectations by most members of a
pickup over the second half of the year;



for 2005 the forecasts were in a reduced
range of 3Vi to 4 percent. These rates of
growth were associated with ranges for
the civilian rate of unemployment of
5V4 to 5V2 percent in the fourth quarter
of 2004 and 5 to 5Vi percent in the
fourth quarter of 2005. Forecasts of the
rate of inflation, as measured by the
core PCE price index, pointed to marginally higher rates of inflation encompassed by ranges of 1 Vi to 2 percent for
this year and Wi to 2V2 percent for
2005.
In their comments about developments in key sectors of the economy,
many of the members emphasized the
strength in business capital spending.
Explanatory factors included the sustained demand for business output,
strong profit margins and cash flow, low
capital costs, and the partial-expensing
tax provision. Weakness persisted, however, in the nonresidential construction
sector, though signs of improvement
were emerging in some areas. Many
business contacts were expressing a
marked degree of optimism about the
outlook for business activity in the second half of the year. Currently low
inventory-to-sales ratios, indeed reports
of emerging bottlenecks in some markets, were expected to foster efforts to
rebuild inventories and thus add support
to the expansion going forward.
Consumer outlays were rising more
moderately in the second quarter and
somewhat below expectations. The
slowing was not universal, however.
Some members reported a continuation
of robust consumer expenditures in various parts of the country. Looking ahead,
members, in part echoing the sentiment
of contacts among retailers, anticipated
renewed strength in consumer spending
in the context of sizable further growth
in employment and disposable incomes
and a generally high level of consumer
confidence. In housing markets, activity

Minutes of FOMC Meetings, June
had remained at generally high levels,
with only a few signs that rising mortgage rates were beginning to hold down
sales and construction. There was evidence in some areas that inventories
of unsold homes had risen. Members
noted that persisting overall strength
in housing might to some extent be
a response to expectations of further
increases in mortgage rates, implying
that a slowdown might be likely later in
the year.
Members commented that fiscal policy was continuing to provide appreciable impetus to the economy, in part
because of the incentives for business
investment associated with the partialexpensing tax legislation. Following the
scheduled expiration of that legislation
at the end of this year and with more
moderate gains in federal spending forecast in the absence of new legislation,
the federal budget was expected to
become mildly contractionary in 2005,
although a marked degree of uncertainty
surrounded this outlook. Many state and
local governments were increasing their
spending more rapidly in response to
brightening budget situations.
Expanding foreign economies and the
depreciation of the dollar were expected
to foster appreciable growth in U.S.
exports, but with imports still considerably larger than exports, the external
sector was likely to make a measurable
negative contribution to U.S. GDP
growth this year and next. On the
inflation side, higher import prices
and, importantly, the rise in domestic
and imported oil prices were adding
to domestic inflationary pressures,
although improving oil supplies had
recently contributed to somewhat lower
domestic gasoline prices.
In the Committee's discussion of policy for the intermeeting period, all of the
members indicated that they could support an upward adjustment in the target



199

for the federal funds rate from a level of
1 percent to 1V4 percent. Recent developments, notably the persistence of solid
gains in output and employment along
with indications of some increase in
inflation, were seen as warranting a first
step in the process of removing policy
accommodation. The timing and pace of
further policy moves would depend, of
course, on the members' reading of the
incoming economic information and
their interpretation of its implications
for economic activity and inflation. In
this regard, members commented that
they could envision a series of gradual
or "measured" policy moves as likely
to be consistent with the attainment of
the Committee's objectives for sustaining progress toward higher levels of
resource utilization and maintaining
price stability. A few indicated, however, that their preference would be to
remove any characterization of possible
future policy actions from the Committee's statements. Partly reflecting anticipated monetary policy actions, financial market conditions had tightened in
recent months, but short-term interest
rates were quite low, especially when
judged against the recent level of inflation. Depending on the rate at which
resource utilization increased and the
level and trend of inflation, a more
aggressive pace toward reaching a neutral policy stance might be called for
so as to provide assurance of containing
emerging inflationary pressures and
averting the potential need for greater
overall tightening over time.
In the Committee's review of the
announcement to be released shortly
after this meeting, members agreed that
an updating of the reasons for its policy
decision was desirable, specifically by
adding a reference to the possibility that
some of the recent acceleration in inflation might reflect transitory factors. The
members also decided to modify the

200 91st Annual Report, 2004
reference to labor market conditions by
referring in general terms to improved
conditions rather than more narrowly to
a pickup in hiring to acknowledge the
broad range of labor market indicators
considered by the Committee. They
agreed to retain the assessments adopted
at the May meeting indicating that they
viewed the upside and downside risks to
both the attainment of sustainable economic growth and to the goal of price
stability as roughly in balance for the
next few quarters. However, with regard
to the outlook for inflation, a number of
members emphasized that they would
view the risks as tilted to the upside in
the absence of further policy tightening
actions that would bring the stance of
policy to a more neutral setting. Many
members also underscored their view
that the statement should make clear
that the Committee would be prepared
to respond to significant changes in
economic prospects and take actions that
were deemed necessary to meet the
Committee's commitment to maintain
price stability.
At the conclusion of the discussion,
the Committee voted to authorize and
direct the Federal Reserve BajpV of New
York, until it was instructed otherwise,
to execute transactions in the System
Account in accordance with the following domestic policy directive.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. To further its
long-run objectives, the Committee in the
immediate future seeks conditions in reserve
markets consistent with increasing the federal funds rate to an average of around
1 VA percent.
The vote encompassed approval of
the paragraph below for inclusion in the
press statement to be released shortly
after the meeting:



The Committee perceives the upside and
downside risks to the attainment of both
sustainable growth and price stability for the
next few quarters are roughly equal. With
underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a
pace that is likely to be measured. Nonetheless, the Committee will respond to changes
in economic prospects as needed to fulfill its
obligation to maintain price stability.
Votes for this action: Messrs. Greenspan, Geithner, Bernanke, Ms. Bies,
Messrs. Ferguson, Gramlich, Hoenig,
Kohn, Ms. Minehan, Mr. Olson, Ms. Pianalto, and Mr. Poole. Vote against this
action: None.
The next meeting of the Committee
was scheduled to be held on Tuesday,
August 10, 2004.
The meeting adjourned at 1:35 p.m.
Vincent R. Reinhart
Secretary

Meeting Held on
August 10, 2004
A meeting of the Federal Open Market
Committee was held in the offices of
the Board of Governors of the Federal
Reserve System in Washington, D.C.,
on Tuesday, August 10, 2004, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Mr. Bernanke
Ms. Bies
Mr. Ferguson
Mr. Gramlich
Mr. Hoenig
Mr. Kohn
Ms. Minehan
Mr. Olson
Ms. Pianalto
Mr. Poole

Minutes of FOMC Meetings, August
Messrs. McTeer, Moskow, Santomero,
and Stern, Alternate Members
of the Federal Open Market
Committee
Messrs. Guynn, Lacker, and
Ms. Yellen, Presidents of the
Federal Reserve Banks of Atlanta,
Richmond, and San Francisco
respectively
Mr. Reinhart, Secretary and Economist
Mr. Bernard, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Alvarez, General Counsel
Ms. Johnson, Economist
Mr. Stockton, Economist
Messrs. Connors, Hakkio, Howard,
Madigan, Rasche, Sniderman,
Slifman, Tracy, and Wilcox,
Associate Economists
Mr. Kos, Manager, System Open
Market Account
Messrs. Oliner and Struckmeyer,
Associate Directors, Division
of Research and Statistics,
Board of Governors
Mr. Whitesell, Deputy Associate
Director, Division of Monetary
Affairs, Board of Governors
Mr. English, Assistant Director,
Division of Monetary Affairs,
Board of Governors
Mr. Simpson, Senior Adviser, Division
of Research and Statistics,
Board of Governors
Mr. Nelson, Section Chief, Division
of Monetary Affairs, Board
of Governors
Mr. Small, Project Manager, Division
of Monetary Affairs, Board
of Governors
Mr. Luecke, Senior Financial Analyst,
Division of Monetary Affairs,
Board of Governors



201

Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Messrs. Goodfriend and Rudesbusch
and Ms. Mester, Senior Vice
Presidents, Federal Reserve Banks
of Richmond, San Francisco, and
Philadelphia respectively
Messrs. Cunningham, Hilton, Marshall,
Tootell, and Wynne, Vice
Presidents, Federal Reserve Banks
of Atlanta, New York, Chicago,
Boston, and Dallas respectively
Mr. Weber, Senior Research Officer,
Federal Reserve Bank of
Minneapolis
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on June 29-30, 2004,
were approved.
By unanimous vote, the Federal Open
Market Committee approved the election of Scott G. Alvarez as General
Counsel of the Committee to serve
until the election of a successor at the
first regularly scheduled meeting after
December 31, 2004.
The Manager of the System Open
Market Account reported on recent
developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the
previous meeting.
The Manager also reported on recent
developments in domestic financial markets and on System open market transactions in government securities and
securities issued or fully guaranteed
by federal agencies during the period
June 29, 2004, through August 9, 2004.
By unanimous vote, the Committee ratified these transactions.
The information reviewed at this
meeting suggested that economic
growth softened somewhat in recent

202 91st Annual Report, 2004
months. While strength in the housing
market persisted and business outlays
remained healthy, growth in consumer
spending fell off significantly. Additionally, gains in employment, which were
robust in earlier months, slowed sharply
in June and July. Industrial production
also decelerated modestly in June, but
available indicators suggested a bounceback in July. Core consumer price inflation moderated in May and June, despite
further increases in energy prices.
Growth in employment slowed in
June and July after displaying significant improvement in preceding months.
The weakness was reported to be widespread, with the retail trade, information, financial activities, and government sectors registering declines on
average over the two months. The construction and services sectors posted
gains, but at a pace well below those of
previous months. In contrast, after little
change in June, payrolls in manufacturing rose appreciably in July. The average workweek declined in June but
edged up in July, and aggregate hours
of private production workers showed
a similar pattern. Labor force participation moved up slightly in recent months,
and the unemployment rate, which was
unchanged in June, edged down to
5Vi percent in July.
After rising rapidly in April and May,
industrial production declined modestly
in June, although manufacturing output,
excluding motor vehicles and parts,
increased a bit. Production of motor
vehicles and parts declined noticeably,
as automakers scaled back assemblies in
response to elevated inventories. Output
at utilities also fell in June as temperatures returned to more normal levels
after an unseasonably warm May. Activity in the mining sector changed little.
Overall capacity utilization was off
slightly in June, but utilization on average over the quarter was above that of



the first quarter. However, data on the
growth in production-worker hours and
other indicators of production suggested
that manufacturing output bounced back
in July.
Growth in consumer spending slowed
sharply in the second quarter, posting
only a small increase after a robust
expansion in the first quarter. Although
gains in outlays for services continued
at a solid rate in the second quarter,
expenditures for goods declined markedly. Data on consumer expenditures
showed particular weakness in June,
with either declines or no growth in
purchases across most categories of
goods and services. Purchases of cars
and trucks contracted in that month but
rebounded in July. Real disposable
income was unchanged in June, held
back by increases in prices of food and,
especially, energy.
Activity in the housing market
remained strong in June despite some
variation across segments. Single-family
housing starts fell back from very high
levels in April and May. Multifamily
housing starts also declined in June,
though only a bit. Sales of existing
homes jumped again in June to set a
new record, and sales of new homes
came in just below the record pace
posted in May.
Business investment spending on
equipment and software was solid in the
second quarter, posting growth a little
above the pace of the first quarter. Performance across categories, however,
was uneven. Spending in the transportation equipment sector bounced back
from a first-quarter decline, and outlays
in the high-tech sector grew twice as
fast as overall equipment and software
spending in the quarter. Excluding transportation and high-tech equipment,
however, gains were minimal. Real
business investment in nonresidential
structures turned up in the second

Minutes of FOMC Meetings, August

203

quarter, albeit to a still-depressed level. July, households' expectations for conIncreased spending on office buildings, sumer inflation in the year ahead fell
commercial structures, and various other somewhat. Overall producer prices for
types of buildings more than offset a finished goods were down in June, as
sizable decline in the power generation declines in prices for food and energy
component.
were only partially offset by modest
Real nonfarm inventories excluding growth in the core components of the
motor vehicles picked up in the sec- index. With regard to labor costs, the
ond quarter as the manufacturing, mer- employment cost index for hourly comchant wholesalers, and retail trade seg- pensation of private workers for the
ments all boosted stocks. Book-value three months ending in June advanced at
inventory-sales ratios edged up, but about the same rate as it had over the
remained at fairly low levels.
previous year-and-a-half. Unit labor
The U.S. international trade deficit costs, however, increased faster in the
declined somewhat in May after reach- second quarter than in the first.
ing a record high in April. The value of
At its meeting on June 29-30, 2004,
exports of goods and services climbed the Federal Open Market Committee
substantially, with exports of goods adopted a directive that called for condimore than accounting for the entire rise, tions in reserve markets consistent with
as exports of services edged down. The increasing the federal funds rate to an
value of imports of goods and services average of around \lA percent. The
also increased in the month, but by less Committee continued to perceive that
than exports. Available data indicated the upside and downside risks to the
that major foreign industrial economies attainment of both sustainable growth
continued to expand at a solid pace in and price stability for the next few quarrecent months. In Japan, gains in exports ters were roughly equal. In its public
and household expenditures fueled the statement, the Committee noted that,
advance in output, and surveys of busi- with underlying inflation still expected
ness and consumer confidence were also to be relatively low, it believed that polfavorable. Real GDP accelerated in the icy accommodation could be removed at
United Kingdom, and economic activity a pace that was likely to be measured,
grew at a solid pace in Canada, led by a but that, nonetheless, it would respond
surge in investment. Indicators for the to changes in economic prospects as
euro area suggested that activity deceler- needed to fulfill its obligation to mainated a bit in the second quarter. Growth tain price stability.
of real GDP in China slowed signifiThis decision to raise the intended
cantly in the spring.
level of the federal funds rate by 25
Core consumer price inflation mod- basis points was anticipated in the finanerated substantially in May and June, cial markets, yet investors revised down
though sizable increases in food and their expectations for the path of policy
energy prices continued to push up over- upon the release of the accompanying
all consumer price inflation. Increases in statement. In particular, investors noted
the food and energy components of the that the Committee attributed some of
CPI were smaller in June than in May, the recent increase in inflation to transiand further deceleration was expected as tory factors, retained its earlier balance
gasoline and natural gas prices eased in of risks assessment, and reiterated its
July and supply conditions in a number belief that policy accommodation could
of agricultural segments improved. In be removed at a pace that would likely



204 91st Annual Report, 2004
be measured. Subsequently, the Chairman's Congressional testimony on
monetary policy, which suggested that
recent softness in consumer spending
should prove short-lived and emphasized the FOMC's commitment to price
stability, spurred an upward tilt in the
market's expected path of monetary
policy. Over the remainder of the intermeeting period, though, expectations of
policy tightening were revised down
somewhat, on balance, as incoming
data pointed to weaker-than-anticipated
spending and employment and more
subdued core inflation. Yields on
intermediate- and long-term nominal
Treasury securities dropped significantly over the intermeeting period.
Available data suggested that corporate credit quality remained strong,
and yields on investment-grade bonds
moved roughly in line with those on
Treasury securities. Speculative-grade
yields, however, fell by less. In equity
markets, broad indexes declined appreciably, reflecting the soft economic
data, concerns about energy prices, and
guidance from corporations pointing to
a less-optimistic trajectory for earnings
than investors apparently had been
expecting. In foreign exchange markets,
the dollar's trade-weighted value against
other major currencies ended the period
little changed, on net.
Following several months of robust
expansion, M2 grew at a slower pace in
June and available data implied a slight
contraction in July. Most of the weakness owed to a slowdown in liquid
deposit growth that was related in part
to the decline in mortgage refinancing
activity. In addition, retail money market funds resumed their earlier decline.
Currency growth, however, strengthened
over the two months, partly as a result
of a pickup in foreign demand.
The staff forecast prepared for this
meeting suggested that the economy



would continue to expand at a solid pace
through 2005, supported by a relatively
accommodative monetary policy over
the projection period and by stimulative
fiscal policy through 2004. Consumer
spending was expected to strengthen in
the near term, boosted by strong consumer confidence and rising disposable
income, which would likely continue
to be propelled by robust growth in
structural productivity. Favorable financial conditions, higher profits, and the
partial-expensing tax incentives over the
remainder of this year were projected to
lead to a near-term acceleration in business fixed investment. Subsequently,
growth in capital spending was expected
to moderate somewhat but still to remain
on a healthy upward trajectory. Despite
recent weakness in employment growth,
the waning of firms' unusual caution of
recent years was expected to foster a
pickup in hiring over the next several
quarters. Consumer price inflation was
projected to remain low over the forecast period as the sharp increases in
energy and import prices experienced
earlier in the year partially unwound.
Slack resource utilization through 2005
was also expected to help hold down
inflation.
In the Committee's discussion of current and prospective economic developments, members noted that the pace
of the expansion had moderated. In particular, consumer spending, which had
previously provided considerable support to aggregate demand, had slowed
sharply in the second quarter. At the
same time, growth in payrolls had fallen
back in June and July after posting significant gains in the spring. While the
recent moderation in growth might portend a substantially slower expansion
going forward than had previously been
expected, the Committee did not see
such a sizable shortfall as the most likely
outcome. Activity in the housing sector

Minutes of FOMC Meetings, August
remained strong, and investment outlays continued to advance at a good
pace. With economic growth buoyed by
accommodative monetary policy and
supportive credit conditions more generally as well as by robust underlying
growth in productivity, the Committee
believed that conditions were in place
for the pace of expansion to strengthen
enough to continue to trim margins of
slack in resource utilization. Indeed, the
limited available evidence pointed to a
rebound in household spending, especially on motor vehicles, in July and
early August, and some indicators suggested continued improvement in labor
market conditions. Regarding the outlook for inflation, the most recent data
were seen as consistent with an assessment that a portion of the higher rates of
price increases recorded earlier in the
year had reflected transitory factors.
Committee members generally agreed
that higher energy prices had played an
important role in the recent moderation
of economic growth. While the direct
effect of higher energy prices on real
disposable income could account for
only a relatively small part of the reduction in the growth of consumer spending, some members suggested that those
effects may have been exacerbated by
substantial increases in expected future
energy costs as well as greater uncertainty about those costs. Moreover, the
economy seemed to have responded in
some past episodes to sharp increases in
energy costs by much more than could
be explained by most models. Still,
some Committee members doubted that
higher energy prices were sufficient to
explain all of the recent slowdown in
spending. Effects of increased energy
prices on consumer and business confidence, which might have led to a larger
spending response, had not been evident, and the consequences for growth
in other industrialized countries depen


205

dent on imported oil appeared to have
been fairly modest thus far. Informed in
part by prices in futures markets, Committee members anticipated that energy
costs would level out and perhaps fall
back from their recent highs, but they
noted that there was considerable uncertainty about that outlook.
Policymakers focused their comments
about key sectors of the economy on the
slowdown in consumer spending toward
the end of the second quarter. Business
contacts in some parts of the country
suggested that, in addition to higher
energy prices, unseasonable weather
may have limited spending for a time.
The Committee discussed a number of
other factors that may have contributed
to the slowdown, including a waning of
the stimulus from last year's tax cuts,
which had previously provided considerable impetus to spending, and the possibility that, with stock prices down,
saving rates near historic lows, and the
outlook more uncertain, households may
have felt the need to boost saving.
Although a complete accounting for the
moderation in growth was not possible,
the Committee agreed that a resumption
of faster growth in consumer spending
was very likely. Continued strength in
home construction did not suggest that
households were in the process of
retrenching, and gains in income, low
interest rates, and robust consumer confidence were seen as undergirding further gains in household spending going
forward. Members noted that reports
of rising motor vehicle sales in July
and early August and a firming of chain
store sales in recent weeks provided
some limited evidence that consumption
spending was picking up.
Investment spending had continued to
advance, though perhaps at a somewhat
slower pace than some members had
anticipated. Several policymakers noted
that businesses remained cautious about

206 91st Annual Report, 2004
capital spending and hiring and were
attempting to boost production as much
as possible with existing capacity and
payrolls. Indeed, some members suggested that heightened uncertainty,
reflecting the effects of higher energy
prices and increased concerns about
geopolitical risks, might have contributed to greater business caution of late.
Nonetheless, business confidence generally remained high, and the fundamentals for investment—including solid
growth in productivity, robust profits
and cash flow, and accommodative
financial markets—pointed to continued
healthy gains in business outlays. A few
members also noted that the commercial
real estate sector, which had been weak
for some time, was showing signs of
improvement.
In their remarks regarding the external sector of the economy, members
noted that on average growth abroad
had remained reasonably robust, which
should support U.S. exports. However,
the U.S. trade deficit was expected to
remain large as imports increased in
response to solid growth in the United
States.
In their discussion of recent labor
market trends, Committee members
noted the slowing of job growth reported
in June and July. Committee members
pointed to several factors that that might
have contributed to the recent weakness. Firms' focus on controlling costs
and implementing further productivity
improvements were doubtless continuing to play a role. Higher labor costs,
particularly those related to health benefits, were also reportedly weighing on
some firms' hiring decisions. However,
policymakers noted that the monthly
payrolls data might be providing an
incomplete picture of expansion in
economic activity because of near-term
variation in the rate of growth of productivity. In addition, many members



pointed to data from the survey of
households, which showed both a rise in
labor force participation and a decline
in the unemployment rate in July, as
well as to initial claims for unemployment compensation, which remained
near recent lows. Moreover, survey data
on labor market attitudes of both consumers and businesses had not signaled
a significant deterioration in employment prospects. All things considered,
the Committee expected the pace of
employment gains to improve in coming
months.
In their review of the outlook for
prices, members noted that incoming
data over the intermeeting period had
shown a slowing in core inflation from
the high levels posted earlier in the year,
consistent with the Committee's view
that a portion of the earlier increase
had reflected transitory factors. Information from business contacts suggested
that a number of firms had been able to
pass on at least some of their higher
energy and other costs to customers, but
few signs of more widespread price
increases were apparent. Some members
expressed concern about developments
in the transportation sector, where trucking costs were reportedly on the rise
and bottlenecks in the railroad industry
were triggering delivery delays. Looking forward, however, most members
thought that rapid productivity growth
and flat or declining energy prices
would limit increases in the overall
unit costs of businesses. Despite the
higher rates of headline inflation earlier
in the year, longer-term inflation expectations remained well contained and
slack in resource markets was seen as
persisting, leading the Committee to
expect underlying inflation to be relatively low.
In the Committee's discussion of policy for the intermeeting period, all the
members favored an increase in the tar-

Minutes of FOMC Meetings, August
get for the federal funds rate from 1V* to
1 Vi percent. Although the pace of economic growth had moderated in the second quarter, the Committee believed that
the softness would prove short-lived and
that the economy was poised to resume
a stronger rate of expansion going forward. Given the current quite low level
of short-term rates, especially when
judged against the recent level of inflation, members noted that significant
cumulative policy tightening likely
would be needed to foster conditions
consistent with the Committee's objectives for price stability and sustainable
economic growth. In this context, a
relatively small tightening move at this
meeting would help to limit the risk of a
rise in inflation expectations and reduce
the likelihood that policy might need to
be adjusted more sharply in the future,
thereby lowering the attendant risks to
financial markets and the economy. The
members thought that policy accommodation probably could be removed
gradually—a view that had been reinforced by the slower pace of growth and
more moderate rates of price increase
that had become evident over the intermeeting period. However, members also
recognized that the timing and pace
of additional policy tightening would
depend importantly on incoming economic data and the Committee's assessment of their implications for economic
activity and inflation.
With regard to the Committee's
announcement to be released after the
meeting, members agreed that the
description of recent economic circumstances should acknowledge the slowing in output and employment growth,
as well as highlight the role of higher
energy prices in those developments.
They also agreed to retain the assessments adopted at the June meeting that
the risks to the Committee's goals of
sustainable economic growth and price



207

stability were balanced over the next
few quarters. While a more persistent
slowing of household spending was
possible, and more subdued inflation
readings over the intermeeting period
had eased concerns about a potential
increase in underlying inflation, policymakers continued to judge the risks to
sustainable growth and the inflation outlook as roughly balanced. The Committee chose to reiterate its belief that policy accommodation could be removed
at a pace that is likely to be measured
as well as its intention to respond
to changes in economic prospects as
needed to fulfill its obligation to achieve
its goal of price stability.
At the conclusion of the discussion,
the Committee voted to authorize and
direct the Federal Reserve Bank of New
York, until it was instructed otherwise,
to execute transactions in the System
Account in accordance with the following domestic policy directive.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. To further its
long-run objectives, the Committee in the
immediate future seeks conditions in reserve
markets consistent with increasing the
federal funds rate to an average of around
1 Yi percent.
The vote encompassed approval of
the paragraph below for inclusion in the
press statement to be released shortly
after the meeting:
The Committee perceives the upside
and downside risks to the attainment of both
sustainable growth and price stability for the
next few quarters are roughly equal. With
underlying inflation still expected to be
relatively low, the Committee believes that
policy accommodation can be removed at a
pace that is likely to be measured. Nonetheless, the Committee will respond to changes
in economic prospects as needed to fulfill its
obligation to maintain price stability.

208 91st Annual Report, 2004
Votes for this action: Messrs, Greenspan, Geithner, Bernanke, Ms. Bies,
Messrs. Ferguson, Gramlich, Hoenig,
Kohn, Ms. Minehan, Mr. Olson, Ms. Pianalto, and Mr. Poole. Vote against this
action: None.
It was agreed that the next meeting of
the Committee would be held on Tuesday, September 21, 2004.
The meeting adjourned at 1:00 p.m.
Vincent R. Reinhart
Secretary

Meeting Held on
September 21, 2004
A meeting of the Federal Open Market
Committee was held in the offices of
the Board of Governors of the Federal
Reserve System in Washington, D.C.,
on Tuesday, September 21, 2004, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Mr. Bernanke
Ms. Bies
Mr. Ferguson
Mr. Gramlich
Mr. Hoenig
Mr. Kohn
Ms. Minehan
Mr. Olson
Ms. Pianalto
Mr. Poole
Messrs. McTeer, Moskow, Santomero,
and Stern, Alternate Members
of the Federal Open Market
Committee
Messrs. Guynn and Lacker, and
Ms. Yellen, Presidents of the
Federal Reserve Banks of Atlanta,
Richmond, and San Francisco
respectively
Mr. Reinhart, Secretary and Economist
Mr. Bernard, Deputy Secretary



Ms. Smith, Assistant Secretary
Mr. Alvarez, General Counsel
Mr. Baxter, Deputy General Counsel
Ms. Johnson, Economist
Mr. Stockton, Economist
Messrs. Connors, Fuhrer, Hakkio,
Howard, Madigan, Slifman, Tracy,
and Wilcox, Associate Economists
Mr. Kos, Manager, System Open
Market Account
Mr. Ettin, Deputy Director, Division
of Research and Statistics,
Board of Governors
Messrs. Oliner and Struckmeyer,
Associate Directors, Division
of Research and Statistics,
Board of Governors
Messrs. Clouse and Whitesell, Deputy
Associate Directors, Division of
Monetary Affairs, Board of
Governors
Mr. English, Assistant Director,
Division of Monetary Affairs,
Board of Governors
Mr. Simpson, Senior Adviser,
Division of Research and
Statistics, Board of Governors
Ms. Danker, Special Assistant to the
Board, Division of Monetary
Affairs, Board of Governors
Mr. Small, Project Manager,
Division of Monetary Affairs,
Board of Governors
Mr. Skidmore, Special Assistant to the
Board, Office of Board Members,
Board of Governors
Ms. Weinbach, Senior Economist,
Division of Monetary Affairs,
Board of Governors
Mr. Luecke, Senior Financial Analyst,
Division of Monetary Affairs,
Board of Governors

Minutes of FOMC Meetings, September 209
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Mr. Barron, First Vice President,
Federal Reserve Bank of Atlanta
Mr. Judd, Executive Vice President,
Federal Reserve Bank of
San Francisco
Messrs. Eisenbeis, Evans, and
Goodfriend, Mses. Mester and
Perelmuter, and Messrs. Rolnick
and Rosenblum, Senior Vice
Presidents, Federal Reserve Banks
of Atlanta, Chicago, Richmond,
Philadelphia, New York,
Minneapolis, and Dallas
respectively
Messrs. Bryan and Gavin, Vice
Presidents, Federal Reserve Banks
of Cleveland and St. Louis
respectively
By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on August 10, 2004,
were approved.
The Manager of the System Open
Market Account reported on recent
developments in foreign exchange markets. There were no open market operations in foreign currencies for the
System's account in the period since the
previous meeting.
The Manager also reported on recent
developments in domestic financial markets and on System open market transactions in government securities and
securities issued or fully guaranteed
by federal agencies during the period
August 10, 2004, through September 20,
2004. By unanimous vote, the Committee ratified these transactions.
The information reviewed at this
meeting suggested that economic
growth regained some vigor in recent
months after having slowed in late
spring. The August labor market report



showed a moderate gain in payrolls.
After contracting in June, industrial
production strengthened modestly on
average in July and August, and the
increases were widespread across sectors. Consumer spending rose sharply in
July, housing activity increased further
in August, and business outlays picked
up last month. Core consumer price
inflation moderated in June and July,
and a decline in energy prices further
damped overall inflation in July.
The labor market improved in
August, and the unemployment rate
edged down to 5.4 percent. Private nonfarm payrolls grew moderately, with
gains registered in the manufacturing,
construction, financial activities, and
nonbusiness services categories. In addition, the figures for June and July were
revised upward and suggested that the
deceleration in hiring over that period
was not as abrupt as had been previously thought. The average workweek
was unchanged in August from the
upward-revised July level and was a bit
higher than its second-quarter average.
The labor force participation rate edged
down in August.
Total industrial production advanced
modestly on average in July and August,
down slightly from its second-quarter
pace. The increases in manufacturing
production since the end of the second
quarter were widespread. Output of
motor vehicles and parts jumped in
August. Excluding motor vehicles and
parts, the expansion in manufacturing
output was brisk in July but more subdued in August. In the high-tech sector,
computer production continued to rise
in August, and the output of communications equipment posted its fourth consecutive monthly increase. In contrast,
output at utilities declined further in July
and August, while mining-related production was about flat on average over
those same months. The rate of capacity

210 91st Annual Report, 2004
utilization ticked up in July from its
average over the first half of the year
and remained steady in August.
Real consumer spending grew sharply
in July after having slowed in the second quarter, and the available indicators suggest that spending held fairly
steady in August. Expenditures on
goods jumped in July and moderated
in August, while spending on services
moved up somewhat in July. Purchases
of motor vehicles surged in July and
fell back in August. For the two months
together, the average pace of these outlays exceeded that seen in the first half
of the year, reflecting in part a further
sweetening of incentives. Real disposable income was up slightly in July, as
increases in compensation were largely
offset by declines in other income categories. The latest readings on consumer
confidence showed a drop in August
amid labor market slack and near-record
gasoline prices, and a further slight
decline in September, but the readings
for the third quarter averaged above
those for the second quarter.
Housing activity increased further in
August. Housing starts for new singlefamily homes bounced up in July and
remained about unchanged in August,
and starts of multi-family homes rose
somewhat each month. Taken together,
total housing starts in August reached
the highest level in five months. Home
sales remained robust in July for both
existing and new homes, although sales
were below the monthly peaks recorded
earlier in the year. Interest rates on
thirty-year conventional mortgages
receded over the past couple of months,
retracing much of the runup in rates that
occurred earlier in the year. Weekly data
on mortgage applications to purchase
homes continued to move up, on average, through mid-September.
Business outlays for equipment and
software increased at a significant pace



in the second quarter, and the available
data pointed to a similar advance more
recently. Spending was being supported
by the continued gains in business output, low financing costs, ongoing price
declines for high-tech capital, and the
corporate sector's large cushion of liquid assets. Spending on transportation
equipment and other capital goods was
brisk in the second quarter, although
expenditures in the high-tech sector
decelerated. In July, shipments of capital goods excluding aircraft fell substantially from the rate seen in the first
half of the year, but orders were relatively strong. Real business investment
in nonresidential structures remained
depressed, but the most recent data provided a sign of some improvement. In
the office sector, the vacancy rate came
in only a little below its recent peak,
although property values had inched up,
and the vacancy rate for industrial space
also remained near its high. The retail
sector, in contrast, continued to fare
better.
Excluding motor vehicles, the pace of
inventory accumulation in July continued at its second-quarter rate. A decline
in stocks in the retail trade segment was
more than offset by stockbuilding in
the manufacturing and wholesale trade
segments. Although the book value of
manufacturing and trade inventories
rose appreciably in July, these gains
were again inflated by price increases in
the petroleum sector. Inventory-sales
ratios in the manufacturing sector, as
in the retail and wholesale trade sectors
(excluding motor vehicles and parts),
remained about flat in July.
The U.S. international trade deficit
reached a record high in June, bringing
it to a new high in the second quarter
as a percentage of nominal GDP. While
the deficit fell back in July, it remained
much above May's reading. In June,
exports fell sharply, with declines wide-

Minutes of FOMC Meetings, September 211
spread, while imports rose, owing in
part to a surge in petroleum imports. In
July, exports registered a modest recovery, driven by capital goods, industrial
supplies, and automotive products,
while the value of imports fell with the
sharp decline in oil imports. Economic
activity in the major foreign industrial
countries continued to expand in the second quarter, although growth slowed in
Japan and in the euro area. Indicators to
date for the third quarter were mixed.
Core consumer prices edged up
slightly over the months of June and
July, as inflation in both goods and services moderated. The core PCE price
index was flat in July but, like the core
CPI, was up a bit on balance over June
and July. The twelve-month change in
core consumer prices based on either
measure was somewhat higher this
July than for the same period last year.
Retail energy prices fell in July, led
by a drop in gasoline prices after large
gains in a number of earlier months.
During the summer, gasoline inventories climbed above seasonal norms
because of lower demand and increased
imports, and the resulting downward
pressure on margins led gasoline prices
to fall even as crude oil prices moved
higher. Owing to the decline in energy
prices in July, inflation in overall consumer prices slowed that month. In
August, households' expectations for
consumer inflation in the year ahead
edged lower for the second consecutive
month. Meanwhile, after a small rise
in July, the prices of finished goods
faced by producers moved down a
bit in August. Turning to labor costs,
hourly compensation in the nonfarm
business sector rose at a faster pace in
the second quarter than it did in the first,
but the advance was in line with the
average rate of increase over the preceding four quarters. Unit labor costs measured at nonfinancial corporations also



registered an increase in the second
quarter.
At its meeting on August 10, 2004,
the Federal Open Market Committee
decided to increase the target federal
funds rate by 25 basis points, to Wi percent, and to retain its assessment of balanced risks with respect to sustainable
economic growth and price stability. In
its announcement, the Committee noted
that output growth had moderated in
recent months and that the pace of
improvement in labor market conditions
had slowed, but that the softness likely
owed importantly to the substantial rise
in energy prices. It also noted that while
inflation was somewhat elevated this
year, a portion of the pickup seemed
to reflect transitory factors. The Committee went on to comment that the
economy appeared poised to resume
a stronger pace of expansion going
forward, that it continued to believe
that policy accommodation could be
removed at a pace that was likely to be
measured, and that it would respond
to changes in economic prospects as
needed to fulfill its obligation to maintain price stability.
Although the Committee's decision
to raise the intended level of the federal
funds rate by 25 basis points was widely
anticipated in financial markets, the
accompanying statement was read as
setting a more optimistic tone about economic prospects than had been anticipated and prompted investors to mark
up their expectations for the near-term
path of policy. That sentiment was
apparently reinforced over the remainder of the period by the comments of
several Federal Reserve officials and
the release of the August employment
report, which seemed to convey the
view that the economy was emerging
from its "soft patch." As a result, policy
rate expectations for the next two quarters ended the intermeeting period

212 91st Annual Report, 2004
slightly firmer. Longer-term policy
expectations, however, moved noticeably lower, reflecting the release of relatively benign readings on inflation and
the Chairman's comments on the inflation outlook in testimony to the House
Budget Committee. In line with these
revised expectations for the path of policy, the term structure of interest rates
flattened over the intermeeting period,
as the two-year Treasury yield ended
about unchanged and the ten-year Treasury yield dropped somewhat. While
credit spreads on investment-grade corporate bonds narrowed a bit, spreads
on speculative-grade issues fell significantly more, particularly in riskier segments of the market, probably reflecting
greater confidence about prospects in
the business sector. Further evidence of
such confidence was visible in equity
markets, where broad indexes advanced
5Vi to IVi percent. The exchange value
of the dollar against other major currencies was about unchanged over the intermeeting period.
M2 balances were about flat on average over the previous two months: After
contracting a bit in July, M2 expanded
slightly in August. Money growth was
damped by a rise in the opportunity cost
of holding M2 assets (as typically occurs
in periods of policy tightening). In addition, the lift to M2 from mortgage refinancings in evidence during the spring
was likely still unwinding over the past
couple of months, depressing the growth
of liquid deposits. Business loans at
banks expanded in August for the third
consecutive month.
The staff forecast prepared for this
meeting suggested that the economy
would continue expanding at a solid
pace through the end of 2006. Labor
market improvements and accommodative monetary policy were seen as counterbalancing the drag from the swing in
fiscal policy from considerable stimulus



this year to modest restraint next year.
Consumer spending was expected to
pick up in conjunction with the strengthening labor market and associated gains
in wages and salaries that would offset
the effects of an anticipated rise in the
savings rate from its recent low level.
The contour of business spending was
expected to be affected by the expiration
of the partial-expensing tax provisions
at year-end, which gave an incentive for
businesses to invest more heavily this
year. Supported by a favorable financing environment, ample stocks of liquid
assets, and the ongoing need to replace
aging or obsolete equipment and software, investment outlays were expected
to grow robustly once the tax-related
swings were completed. After the current period of below-average employment gains, employers were expected to
hire at a relatively robust pace next year.
At the same time, as labor market conditions improved, individuals who had
withdrawn from the labor force were
thought likely to return, so that job gains
were expected to have a muted effect on
the unemployment rate. Consumer price
inflation was projected to remain at or
below its current level. Slack in resource
utilization, continued rapid growth in
structural productivity, and the passthrough of declining energy prices were
expected to contribute to the restraint on
inflation.
In the Committee's discussion of
current and prospective developments,
the members agreed that the economy
had strengthened somewhat after going
through a "soft patch" in late spring
and early summer. Recent data and
anecdotal information suggested solid
growth ahead, but at a pace that could
well be less brisk than previously anticipated. Consumer spending appeared
to have rebounded in the third quarter.
Business investment also was robust,
but executives, especially those at larger

Minutes of FOMC Meetings, September 213
firms, seemed more cautious about the
outlook than they had been several
months ago. Although higher energy
prices had played an important role in
damping growth, questions remained
about the reasons for the shortfall from
expectations held this spring, and several policymakers remarked that their
uncertainty about the likely pace of
the expansion going forward had risen.
Members commented that the benign
incoming data on prices tended to confirm their previous judgment that the
increase in inflation earlier in the year
had importantly reflected temporary factors and that core inflation would probably remain relatively low.
In their discussion of developments
in key sectors of the economy, policymakers agreed that business investment
would most likely continue to provide
considerable impetus to the overall economic expansion going forward. The
anticipated further expansion of aggregate demand should boost investment.
Also, low real interest rates, strong business balance sheets, and high levels of
profits and cash flow were expected to
support capital spending. However, the
extent to which the federal tax provision
permitting partial expensing of most
investment expenditures had been boosting capital expenditures was difficult
to discern, and it was possible that the
expiration of that provision at year-end
could result in a fairly sharp slowing in
investment, at least for a time. In addition, recent discussions with business
contacts, as well as a range of statistical
information, suggested a persisting tendency for corporate executives to limit
capital spending commitments. The reasons for this tendency were unclear, but
a continuing focus on corporate governance issues might still be playing a
role, and business concerns about terrorism and other geopolitical risks might
have risen this year. Some members also



noted that the pace of technological
advance could be slowing a bit, trimming the rate of decline in the cost of
capital for high-tech equipment and
software. High vacancy rates for office
buildings and industrial structures would
likely continue to weigh on nonresidential investment, although activity in
that sector was showing some signs of
revival.
Committee members interpreted
recent data and anecdotal information
as indicating that growth in consumer
spending was rebounding from its relatively slow rate of late spring. They saw
household spending as most likely continuing to expand at a solid pace going
forward. Gains in nominal income,
partly resulting from gradual increases
in employment, were expected to continue to support consumer spending and
low interest rates to buoy residential
investment. However, members perceived several possible sources of downside risk to household spending. In particular, households might hold back on
spending in an attempt to increase their
saving, which had fallen to a very low
level relative to income. The ebbing of
stimulus from last year's tax cuts also
could tend to slow growth in consumer
spending. And a failure of employment
to accelerate as expected could undermine consumer confidence as well as
hold down the growth in personal
income.
With regard to the external sector,
foreign economies were seen as generally expanding steadily, with the high
level of crude oil prices apparently having restrained growth abroad somewhat
less than in the United States. Still,
expectations for foreign economic
growth had been marked down somewhat, with adverse implications for U.S.
exports and for overall U.S. growth.
Indeed, some policymakers noted that
domestic demand in several major U.S.

214 91st Annual Report, 2004
trading partners was relatively weak and
that aggregate demand in those economies was being sustained importantly
by exports to the United States. That
pattern was contributing to a worrisome further widening of the U.S. trade
and current account balances, and the
Committee discussed the significance
of wide external deficits and various
adjustments that might occur in the process of their return to more sustainable
levels.
Committee
members
generally
viewed labor market conditions as having improved modestly of late. Although
payroll growth had been weak in June
and July, it registered a somewhat
better performance in August, and initial
claims for unemployment insurance
continued to hover around relatively low
levels. Some members noted a mismatch
between demand and supply for certain
types of labor. In particular, unskilled
workers were said to be having considerable difficulty finding jobs, while
firms were facing challenges in hiring
workers with some specific skills,
including truck drivers and heavyequipment operators. Partly as a result,
businesses in a few sectors, such as
transportation and construction, reportedly were experiencing constraints on
their output. Overall, however, some
slack appeared to remain in labor markets. Looking forward, policymakers
expected gradual improvement in labor
market conditions as the economy
expanded. However, anecdotal information suggested that many firms remained
quite cautious about expanding payrolls,
citing, among other factors, continued
uncertainty about economic prospects
and the high cost of providing health
care benefits.
Partly reflecting the likely persistence
of some economic slack, members
expected inflation to stay low. Although
non-energy commodity prices remained



relatively high, energy prices had
declined noticeably from record levels
in recent weeks, and the effects of the
energy price shock on inflation were
expected to wane. In this regard, a number of policymakers commented that
data on consumer and producer inflation had generally come in at or below
expectations over the intermeeting
period, tending to confirm the Committee's judgment that the upturn in inflation earlier in the year had owed importantly to temporary factors. Moreover,
inflation expectations appeared to be
well-contained, although those expectations probably were conditioned in part
on investors' anticipation that the stance
of monetary policy would likely be
tightened over time.
In the Committee's discussion of policy for the intermeeting period, all of
the members favored raising the target
for the federal funds rate by 25 basis
points to l3/4 percent at this meeting.
The expansion evidently was resilient
and self-sustaining and appeared no
longer to require the unusual degree of
monetary stimulus that had previously
been necessary. A gradual increase in
interest rates seemed likely to be consistent with continued solid economic
growth that would be sufficient to erode
remaining margins of slack in resource
utilization over time. In view of these
considerations, the Committee believed
that another modest reduction in the
degree of monetary policy accommodation at today's meeting was warranted. With today's action, the real
federal funds rate—measured as the
difference between the nominal funds
rate and a moving average of core PCE
inflation—would move slightly into
positive territory.
With regard to the Committee's
announcement to be released after the
meeting, the members agreed that the
statement should indicate that, after

Minutes of FOMC Meetings, November 215
The vote encompassed approval of
moderating earlier in the year, partly in
response to the substantial rise in energy the paragraph below for inclusion in
prices, output growth appeared to have the press statement to be released shortly
regained some traction and that labor after the meeting:
market conditions had improved modThe Committee perceives the upside
estly. In addition, policymakers concurred that the statement should indicate and downside risks to the attainment of both
that inflation and inflation expectations sustainable growth and price stability for the
next few quarters to be roughly equal. With
had eased in recent months. They also underlying inflation expected to be relatively
agreed again to characterize the risks low, the Committee believes that policy
to sustainable growth and price stability accommodation can be removed at a pace
as balanced. Members commented that that is likely to be measured. Nonetheless,
recent evidence had boosted their confi- the Committee will respond to changes in
prospects as needed to fulfill its
dence that moderate economic growth economic to maintain price stability.
obligation
would continue and that inflation would
be contained. With aggregate demand
Votes for this action: Messrs. Greenprobably expanding at least as rapidly as
span, Geithner, Bernanke, Ms. Bies,
the economy's potential to produce over
Messrs. Ferguson, Gramlich, Hoenig,
Kohn, Ms. Minehan, Mr. Olson, Ms. Pianthe next several quarters, policymakers
alto, and Mr. Poole. Vote against this
continued to see economic conditions
action: None.
as likely to warrant a further reduction
in policy accommodation in coming
The Committee noted that Deputy
quarters. However, in the view of many
Secretary Normand R.V. Bernard had
members, policy actions would need to
be increasingly keyed to incoming data. announced his intention to retire in the
Indeed, it was noted that market partici- period before the next FOMC meetpants now appeared to anticipate some ing, following more than four decades
slowing in the pace of policy firming at the Federal Reserve. The Committee
before long and did not interpret the thanked Mr. Bernard for his dedication,
removal of policy accommodation at a integrity, and steadfast support through
measured rate as necessarily involving the more than 345 FOMC meetings he
attended during his career.
the same policy action at each meeting.
It was agreed that the next meeting
At the conclusion of the discussion,
the Committee voted to authorize and of the Committee would be held on
direct the Federal Reserve Bank of New Wednesday, November 10, 2004.
The meeting adjourned at 1:15 p.m.
York, until it was instructed otherwise,
to execute transactions in the System
Vincent R. Reinhart
Account in accordance with the followSecretary
ing domestic policy directive.
The Federal Open Market Committee
seeks monetary and financial conditions that Meeting Held on
will foster price stability and promote sus- November 10, 2004
tainable growth in output. To further its longrun objectives, the Committee in the imme- A meeting of the Federal Open Market
diate future seeks conditions in reserve
markets consistent with increasing the fed- Committee was held in the offices of
eral funds rate to an average of around the Board of Governors of the Federal
l3/4 percent.
Reserve System in Washington, D.C.,



216 91st Annual Report, 2004
on Wednesday, November 10, 2004, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Mr. Bernanke
Ms. Bies
Mr. Ferguson
Mr. Gramlich
Mr. Hoenig
Mr. Kohn
Ms. Minehan
Mr. Olson
Ms. Pianalto
Mr. Poole

Mr. English, Assistant Director,
Division of Monetary Affairs,
Board of Governors
Mr. Simpson, Senior Adviser,
Division of Research and
Statistics, Board of Governors
Mr. Brady, Section Chief, Division of
Monetary Affairs, Board of
Governors
Mr. Small, Project Manager, Division
of Monetary Affairs, Board of
Governors

Messrs. Moskow, Santomero, and
Stern, Alternate Members of the
Federal Open Market Committee

Mr. Skidmore, Special Assistant to the
Board, Office of Board Members,
Board of Governors

Messrs. Guynn, Lacker, and
Ms. Yellen, Presidents of the
Federal Reserve Banks of Atlanta,
Richmond, and San Francisco
respectively

Mr. Luecke, Senior Financial Analyst,
Division of Monetary Affairs,
Board of Governors

Mr. Reinhart, Secretary and Economist
Ms. Danker, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Alvarez, General Counsel
Mr. Baxter, Deputy General Counsel
Ms. Johnson, Economist
Mr. Stockton, Economist
Messrs. Connors, Fuhrer, Hakkio,
Howard, Madigan, Slifman,
Sniderman, Rasche, and Wilcox,
Associate Economists
Mr. Kos, Manager, System Open
Market Account
Mr. Ettin, Deputy Director, Division
of Research and Statistics,
Board of Governors
Messrs. Oliner and Struckmeyer,
Associate Directors, Division
of Research and Statistics,
Board of Governors
Messrs. Clouse and Whitesell, Deputy
Associate Directors, Division of
Monetary Affairs, Board of
Governors



Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Ms. Holcomb and Mr. Rasdall, First
Vice Presidents, Federal Reserve
Banks of Dallas and Kansas City
respectively
Messrs. Eisenbeis, Estrella, Evans,
and Goodfriend, Ms. Mester,
Messrs. Rosenblum and Williams,
Senior Vice Presidents, Federal
Reserve Banks of Atlanta,
New York, Chicago, Richmond,
Philadelphia, Dallas, and
San Francisco respectively
Mr. Hilton, Vice President, Federal
Reserve Bank of New York
Mr. Weber, Senior Research Officer,
Federal Reserve Bank of
Minneapolis

By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on September 21, 2004,
were approved.

Minutes of FOMC Meetings, November 217
By unanimous vote, the Federal Open
Market Committee approved the selection of Deborah J. Danker as Deputy
Secretary of the Committee to serve
until the selection of a successor at the
first regularly scheduled meeting after
December 31, 2004.
The Manager of the System Open
Market Account reported on recent
developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the
previous meeting.
The Manager reported on recent
developments in domestic financial markets and on System open market transactions in government securities and
securities issued or fully guaranteed by
federal agencies during the period September 21, 2004, through November 9,
2004. By unanimous vote, the Committee ratified these transactions.
The Manager also discussed the pressures on the federal funds rate prior to,
and volatility in the rate that has ensued
at times after, recent FOMC meetings as
depository institutions sought to satisfy
a larger portion of their reserve requirements before anticipated increases in the
FOMC's target funds rate. The Committee agreed that the Desk would continue
to conduct open market operations as it
has in such situations—leaning against
anticipatory pressures in the funds market while taking account of the reserve
management implications of such operations for the remainder of the reserve
maintenance period.
The information received at this
meeting suggested that the economy
expanded at a moderate pace over the
third quarter. Low interest rates helped
to maintain a buoyant housing market
and spending by both consumers and
businesses was firm. Available information suggested that the recent tempo of
economic activity continued into the



current quarter despite the restraint
imparted on real incomes and consumer
confidence from higher oil prices. However, industrial production was flat in
recent months, and hiring activity was
lackluster through September before
advancing sharply in October. Inflation
measures continued at low levels
through September.
Employment gains were subdued in
the third quarter, but showed substantial
strength in October. Job growth last
month was fairly widespread, although
heavy hiring in the construction sector
was due partly to efforts to repair damage from the four hurricanes that hit
the southeastern states. Employment
increases were particularly large in the
financial and services sectors. However, a small decline was registered in
employment in the manufacturing sector. The average workweek held steady
in October at its third-quarter level and
was a bit above the average for the
second quarter. Despite the strong
increase in payroll employment, the
household survey indicated a slight
increase in the unemployment rate to
5.5 percent in October.
Industrial production was about unchanged in September, likely restrained
by the hurricanes that month. A decline
in manufacturing was about offset by a
jump in utilities output and expansion in
high-tech industries. The available data
suggested that industrial production
rebounded in October. Capacity utilization was unchanged in September at
about the third-quarter average but was
up from its level earlier in the year.
Consumer
spending
advanced
strongly in the third quarter from the
sluggish pace of the second quarter. The
acceleration reflected a surge in expenditures on motor vehicles that owed
partly to attractive incentives, but spending on other durables and nondurables
was also up. Spending on services was

218 91st Annual Report, 2004
steady for the third quarter on average,
but advanced in September on a boost to
electricity consumption related to unseasonably warm weather. Real disposable
income slowed in the third quarter to a
moderate pace and was flat in September, probably in part because of effects
of the hurricanes. Measures of consumer
confidence moved down in September and again in October. Activity in
housing markets remained generally
strong in September, supported by
favorable mortgage rates. Although
starts of single-family homes slowed
to well below the level of preceding
months, multifamily starts rose and sales
of both existing and new homes were
elevated.
Business investment spending on
equipment and software continued to
expand at a rapid pace in the third quarter, supported by positive fundamentals
that included robust business output,
low interest rates and readily available
credit, and healthy business balance
sheets. Outlays for high-tech equipment
and software stepped down in the third
quarter, but spending on other types
of equipment, including transportation,
was at a high level. At the same time,
investment in nonresidential structures,
which had turned up in the second quarter, softened in the third quarter. Construction spending for retail buildings
and warehouses advanced, but high
vacancy rates for office buildings held
back investment in that sector.
Accumulation of nonfarm inventories
excluding motor vehicles picked up
smartly over the third quarter. The level
of sales also rose, however, keeping
inventory-sales ratios fairly steady at
low levels.
The U.S. international trade deficit
rose in the third quarter on average,
reflecting some weakening in the growth
of service exports and an increase in
the price and quantity of petroleum



imports. The deficit narrowed in September, however, as imports fell while
exports expanded moderately. The lower
level of imports in September mainly
reflected declines in the petroleum and
services categories. Economic expansion abroad on average appeared to slow
in the third quarter, although it remained
solid.
Consumer prices continued to
advance at a moderate rate in recent
months, although both overall and core
consumer price measures rose a bit
faster in the twelve months ending in
September 2004 than in the year-earlier
period. Expectations of near-term inflation picked up in October, consistent
with the increase in energy prices. Labor
costs continued to rise moderately. The
increase in the employment cost index
for private compensation over the third
quarter was a bit below the average pace
of the last two years.
At its meeting of September 21, 2004,
the Federal Open Market Committee
adopted a directive that called for conditions in reserves markets consistent
with increasing the federal funds rate
to an average of around 13A percent. In
its public statement, the Committee
expressed a belief that monetary policy
remained accommodative even after this
tightening, and judged the upside and
downside risks to the attainment of both
sustainable growth and price stability
over the next few quarters to be roughly
equal. The Committee noted its expectation that the underlying rate of inflation
would continue to be low and that policy accommodation could be removed
at a pace that is likely to be measured,
but also stated that it would nonetheless
respond to changes in economic prospects as needed to fulfill its obligation to
maintain price stability.
The FOMC's decision in September
to raise the intended level of the federal
funds rate 25 basis points and its atten-

Minutes of FOMC Meetings, November
dant public statement were anticipated
by the market, and the reaction was
muted. Over subsequent weeks, however, a reference in the minutes of the
August FOMC meeting to the need for
"significant cumulative tightening" and
comments by the Chairman and other
FOMC members, which were read as
minimizing the likely damping effect on
the economy of higher energy prices,
led markets to raise their expectations of
forthcoming policy tightenings. These
expectations were boosted further by the
release of the strong employment data
for October. The shift in the market's
outlook for monetary policy contributed
to noticeable upward pressure on shortterm interest rates, and most longterm rates also moved up. Yields on
investment-grade corporate bonds rose
about in line with those on comparablematurity Treasuries, but yields on
speculative-grade bonds edged down
and equity markets posted strong
advances. In foreign exchange markets,
the dollar declined appreciably, apparently in part on continuing market concerns about the financing of the U.S.
current account deficit.
M2 expanded in October at about the
sluggish pace of the third quarter. The
growth of M2 was restrained in recent
months by increases in its opportunity
cost. Rates paid on its liquid asset components have lagged increases in market
rates associated with the three monetary
tightenings since midyear.
In the staff forecast prepared for this
meeting, the economy was seen as likely
to expand next year at around this year's
solid pace under an assumption of generally accommodative financial conditions. Recent declines in the dollar were
expected to support domestic economic
activity by boosting net exports. Fiscal
policy was expected to become much
less stimulative after the current quarter,
owing to the expiration of the temporary



219

partial-expensing provisions of the tax
code. Oil prices were anticipated to
decline somewhat with the repair of
hurricane-related damage to oil infrastructure in the Gulf of Mexico, leading
to some slowing in inflation. With the
economy expected to advance over the
coming year at a rate a bit above its
longer-run potential, the pace of hiring
should firm and the unemployment rate
should edge lower. In response to rising
real incomes, consumer spending was
forecast to strengthen after the early part
of next year. The staff expected business
investment spending to slow sharply
early next year as partial-expensing provisions expired, but then to pick up
noticeably in response to favorable
financing conditions, ample business
liquidity, and the need to replace or
upgrade aging equipment and software.
In the Committee's discussion of current and prospective developments, the
members generally expressed assessments that economic expansion in the
neighborhood of the rate of growth of
the economy's potential appeared to
have become even more firmly established over recent months, despite the
drag from higher energy prices. Recent
data and anecdotal information suggested that spending by businesses and
households had been reasonably robust
of late, supported by accommodative
financial conditions, continuing gains in
productivity, and increasing employment. Looking forward, economic fundamentals appeared to be favorable for
continued solid growth, and while fiscal
stimulus would abate next year, a flattening out of energy prices, as markets
seemed to anticipate, would bolster economic expansion. However, significant
uncertainties surrounded the prospects
for energy prices and fiscal policy, as
well as the external sector. The Committee anticipated that underlying inflation pressures would remain contained

220 91st Annual Report, 2004
as monetary accommodation was withdrawn. Core consumer price inflation
had been quite damped on average in
recent months and longer-term inflation
expectations remained well anchored,
despite further increases in energy prices
and prospective increases in near-term
headline inflation.
In their discussion of key sectors of
the economy, policymakers noted that
business investment had been expanding robustly and was likely to continue
to be buoyed by the strength of productivity and profits. Some sectors, such as
trucks and heavy equipment, had experienced rapid growth. However, even after
taking account of likely effects of higher
oil prices, the pace of overall business
investment spending was still boosting
GDP growth somewhat less than might
have been expected given accommodative financial conditions and tax incentives. Some uncertainties, such as those
associated with the election, had been
resolved, but others persisted, including
the prospects for oil prices and their
consequences for the economy. Many
business firms seemed hesitant about
large-scale investment to increase productive capacity and hiring commitments, perhaps partly reflecting an environment of greater scrutiny regarding
corporate governance and internal control systems. The high-tech sector, and
investment in information technology
more generally, had been growing less
rapidly of late and was seen as posing a
possible downside risk to the outlook. If
the recent slower rate of price declines
on high-tech products implied a softer
underlying pace of technological
change, both the outlook for investment
demand and the prospects for persisting high trend growth in productivity
could be damped relative to previous
expectations.
While acknowledging data indicating
a rebound in consumption spending in



recent months, Committee members
reported contacts with retail merchants
that suggested mixed readings on the
ongoing pace of consumer buying. The
effect of higher energy prices on real
incomes was likely still restraining consumer spending. Moreover, the stock of
automobiles owned by households had
risen substantially in recent years, and
the willingness of households to purchase autos was seen as continuing to
depend importantly on the provision of
incentives by manufacturers. Home buying and residential construction generally remained robust, although a few
members pointed to some moderation in
activity in selected markets. It was noted
that a slowdown in the rate of increase
in home prices going forward might lead
households to increase their desired saving. However, the risk of any significant drop-off in the growth of consumer
spending would likely diminish with a
sustained rebound in the pace of hiring.
In their comments on fiscal policy,
Committee members indicated an
expectation that the economic stimulus
provided in recent years by discretionary fiscal measures was likely to fade
next year. However, considerable uncertainty surrounded the likely evolution of
the federal budget. Members stressed
the importance of fiscal discipline to
facilitate a better balance between net
national saving and investment and
thereby promote an adjustment of the
imbalance in the current account of the
balance of payments.
Committee members noted that the
balance of trade had improved a little
in September and commented that the
decline in the value of the dollar over
the past few years had been boosting
demand seen by some exporting firms.
However, with foreign economic growth
moderating and the large excess of
imports over exports, members generally viewed the prospects for net exports

Minutes of FOMC Meetings, November 221
as likely to provide a continuing drag on
U.S. economic expansion. One implication of this outlook was that U.S. external indebtedness relative to GDP would
be increasing further.
Committee members remarked on
signs of improvement in labor market
conditions. While acknowledging the
need to be cautious about readings from
a single labor market report, members
saw the increase in payroll employment
in October and the upward revisions
to previous months as encouraging. Furthermore, business contacts in several
regions were indicating greater difficulty in filling some types of positions,
both skilled and unskilled. Nevertheless,
many firms evidently remained slow to
expand hiring, in part because of rising
benefit costs. One member commented
on the performance of a few key industries, citing evidence that the job losses
since the business cycle peak had
been driven primarily by weak demand
rather than productivity improvements.
Although the extent of economic slack
was uncertain, some members indicated
a sense that the economy needed to
grow faster than trend in order to take
up remaining unused resources.
Wage and price pressures were generally still modest. While some firms
reportedly were finding it easier to pass
higher oil and other commodity costs on
to their business customers, most business contacts indicated considerable
difficulty in passing cost increases on
to consumers. Longer-term inflation
expectations had remained reasonably
low, helping to restrain the spillover of
elevated energy prices to the prices of
other goods and services. Some members noted that any remaining resource
slack would probably exert downward
pressure on inflation and that the depreciation of the dollar seemed to be having
a muted effect on import prices to date.
However, upside risks to the inflation



outlook included possible further depreciation of the dollar or increases in
energy prices. In addition, a few members cited the possibility that the elevated pace of trend productivity growth
experienced since the mid-1990s would
begin to slow.
In the Committee's discussion of the
setting of policy, all of the members
favored raising the target for the federal
funds rate by 25 basis points to 2 percent at this meeting. The economy
appeared to be continuing to expand at
a moderate pace that was likely to be
rapid enough to gradually reduce margins of underutilized resources. In that
regard, the Committee was encouraged
by more evident signs of improvement
in hiring. The Committee felt that the
outlook justified the further removal of
the policy accommodation that had been
appropriate when the economic expansion was more tentative. Today's action
would move the real funds rate, measured using core PCE inflation, toward a
more positive setting.
In discussing the FOMC announcement for this meeting and going forward, several members commented that
policy actions would likely become
increasingly dependent on incoming
data and their implications for future
activity and prices. This might imply a
more gradual path of tightening going
forward than that of the last several
months, as for example now seemed to
be built into the term structure of interest rates, or it might mean that the Committee on occasion would need to firm
policy more rapidly. A few members felt
that, because of greater uncertainties, it
might become appropriate eventually
to move away from the recent practice
of providing guidance about the likely
future path of policy, while others
emphasized the desirability of continuing to be as informative as possible
about the Committee's perceived out-

222 91st Annual Report, 2004
look. For now, most members agreed
that the current statement language
provided considerable flexibility with
regard to the Committee's future actions
and that market participants understood
that flexibility. As regards the announcement to be released after the meeting,
most members felt that little change
in the statement language was required.
Policymakers concurred that the statement should indicate that output appears
to be growing at a moderate pace
despite the rise in energy prices, that
labor market conditions have improved,
and that inflation and longer-term inflation expectations remain well contained.
They agreed to characterize the risks
to sustainable growth and price stability
as balanced and to reiterate that policy
accommodation could be removed at
a pace that was likely to be measured
but that the Committee will respond
to changes in economic prospects as
needed to maintain price stability.
At the conclusion of the discussion,
the Committee voted to authorize and
direct the Federal Reserve Bank of New
York, until it was instructed otherwise,
to execute transactions in the System
Account in accordance with the following domestic policy directive.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. To further its
long-run objectives, the Committee in the
immediate future seeks conditions in reserve
markets consistent with increasing the
federal funds rate to an average of around
2 percent.
The vote encompassed approval of
the paragraph below for inclusion in the
statement to be released shortly after the
meeting:
The Committee perceives the upside and
downside risks to the attainment of both



sustainable growth and price stability for the
next few quarters to be roughly equal. With
underlying inflation expected to be relatively
low, the Committee believes that policy
accommodation can be removed at a pace
that is likely to be measured. Nonetheless,
the Committee will respond to changes in
economic prospects as needed to fulfill its
obligation to maintain price stability.
Votes for this action: Messrs. Greenspan, Geithner, Bernanke, Ms. Bies,
Messrs. Ferguson, Gramlich, Hoenig,
Kohn, Ms. Minehan, Mr. Olson, Ms. Pianalto, and Mr. Poole. Vote against this
action: None.
It was agreed that the next meeting of
the Committee would be held on Tuesday, December 14, 2004.
The meeting adjourned at 1:15 p.m.
Notation Vote
By notation vote completed on December 10, 2004, the Committee authorized
Mr. Santomero, an alternate member of
the Committee, to accept the honor of
the title of "Cavaliere" to be awarded
by the government of Italy.
Votes for this action: Messrs Greenspan, Geithner, Bernanke, Ms. Bies,
Messrs. Ferguson, Gramlich, Hoenig,
Kohn, Ms. Minehan, Mr. Olson, Ms. Pianalto, and Mr. Poole. Vote against this
action: None.
Vincent R. Reinhart
Secretary

Meeting Held on
December 14, 2004
A meeting of the Federal Open Market
Committee was held in the offices of
the Board of Governors of the Federal
Reserve System in Washington, D.C.,
on Tuesday, December 14, 2004, at
9:00 a.m.

Minutes of FOMC Meetings, December 223
Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Mr. Bernanke
Ms. Bies
Mr. Ferguson
Mr. Gramlich
Mr. Hoenig
Mr. Kohn
Ms. Minehan
Mr. Olson
Ms. Pianalto
Mr. Poole
Messrs. Moskow, Santomero, and
Stern, Alternate Members of the
Federal Open Market Committee
Messrs. Guynn, Lacker, and
Ms. Yellen, Presidents of the
Federal Reserve Banks of Atlanta,
Richmond, and San Francisco,
respectively
Ms. Holcomb, First Vice President,
Federal Reserve Bank of Dallas
Mr. Reinhart, Secretary and Economist
Ms. Danker, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Alvarez, General Counsel
Mr. Baxter, Deputy General Counsel
Ms. Johnson, Economist
Mr. Stockton, Economist
Messrs. Connors, Fuhrer, Hakkio,
Howard, Madigan, Slifman,
Sniderman, Rasche, and Wilcox,
Associate Economists
Mr. Kos, Manager, System Open
Market Account

Mr. Reifschneider, Deputy Associate
Director, Division of Research and
Statistics, Board of Governors
Mr. English, Assistant Director,
Division of Monetary Affairs,
Board of Governors
Mr. Simpson, Senior Adviser, Division
of Research and Statistics,
Board of Governors
Messrs. Brayton and Carpenter, Senior
Economists, Divisions of Research
and Statistics and Monetary
Affairs, respectively, Board of
Governors
Mr. Skidmore, Special Assistant to the
Board, Office of Board Members,
Board of Governors
Mr. Luecke, Senior Financial Analyst,
Division of Monetary Affairs,
Board of Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Ms. Cumming, First Vice President,
Federal Reserve Bank of
New York
Messrs. Eisenbeis and Goodfriend,
Ms. Mester, Messrs. Rosenblum
and Williams, Senior Vice
Presidents, Federal Reserve
Banks of Atlanta, Richmond,
Philadelphia, Dallas and
San Francisco, respectively

Mr. Ettin, Deputy Director, Division
of Research and Statistics,
Board of Governors

Messrs. Elsasser, Peach, and Sullivan,
Vice Presidents, Federal Reserve
Banks of New York, New York,
and Chicago, respectively

Messrs. Oliner and Struckmeyer,
Associate Directors, Division
of Research and Statistics,
Board of Governors

Mr. Weber, Senior Research Officer,
Federal Reserve Bank of
Minneapolis

Messrs. Clouse and Whitesell, Deputy
Associate Directors, Division of
Monetary Affairs, Board of
Governors



By unanimous vote, the minutes of
the meeting of the Federal Open Market
Committee held on November 10, 2004,
were approved.

224 91st Annual Report, 2004
The Manager of the System Open
Market Account reported on recent
developments in foreign exchange markets. There were no open market operations in foreign currencies for the System's account in the period since the
previous meeting. The Manager also
reported on recent developments in
domestic financial markets and on System open market transactions in government securities and securities issued
or fully guaranteed by federal agencies
during the period November 10, 2004,
through December 13, 2004. By unanimous vote, the Committee ratified these
transactions.
The information received at this
meeting suggested that the economy
expanded at a moderate pace over the
third quarter and into the current quarter.
Consumer spending was solid, and
investment spending remained strong.
Manufacturing production increased at
a modest pace, and employment gains
in October and November indicated that
the labor market continued to improve
gradually. Core inflation measures
remained subdued, albeit running at a
slightly higher pace than last year,
owing, in part, to the indirect effects of
higher energy prices.
Gains in employment were moderate
in November after a surge in October.
Job growth was fairly widespread, with
the exception of slightly weak seasonal
hiring in the retail sector. Construction
employment grew rapidly in November
even after the outsized gains in October
due to hurricane-related repair work. In
contrast, employment in manufacturing
edged lower. The average workweek
in November was a touch below its
level in October, but still a bit above the
third-quarter average. The unemployment rate ticked down to 5.4 percent in
November.
Industrial production expanded a little
more slowly in November than it had



in recent months. Output at mines
increased noticeably for a second
month, and manufacturing output posted
a moderate gain. At utilities, output fell
back in November after large increases
in the preceding two months. Utilization
rates moved higher in November.
Consumer spending appeared to be
expanding at a more moderate pace in
the fourth quarter, after growing at a
robust rate in the third quarter. Although
sales of motor vehicles declined in
November, spending on other goods
rose further after the large increase
posted in October. Spending on services
continued to register solid gains. Real
disposable income, restrained by sharply
higher energy prices, rose slightly. Even
so, measures of consumer confidence
were little changed and remained consistent with sustained increases in
spending.
Activity in housing markets, buoyed
by mortgage rates only modestly above
their recent lows, remained strong in
October. Starts of both single-family and
multifamily homes increased and were
above their third-quarter levels. Home
sales remained at near-record levels.
Shipments of nondefense capital
goods stepped up in October against the
backdrop of solid expansion in business
output, low user cost of capital, and an
ample stock of liquid assets in the corporate sector. Shipments of computers
jumped in October, while gains in the
transportation sector were more modest.
Outside the high-tech and transportation
sectors, shipments moved up considerably in October from their robust thirdquarter pace. Outlays on nonresidential
construction edged down in October.
After a rapid rise in the third quarter,
nonfarm inventories appeared to accumulate at a moderate pace in October. The book value of manufacturers'
inventories increased notably; however,
shipments also stepped up, an increase

Minutes of FOMC Meetings, December
that left the inventory-shipments ratio in
this sector unchanged.
The U.S. international trade deficit
widened in October, primarily because
of a surge in merchandise imports. Economic activity in most of the major foreign industrial countries slowed in the
third quarter, and data for the fourth
quarter pointed to continued subpar
growth.
Consumer prices jumped in October,
as hurricane damage contributed to
higher prices for food and energy. For
the twelve months ending in October,
consumer prices rose considerably faster
than they did in the year-earlier period.
Core consumer prices increased much
more modestly in October than did
overall consumer prices, although the
twelve-month change for core prices
was also somewhat higher than it was a
year before. The employment cost index
for private compensation advanced
moderately in the year ending the
third quarter, and the markup of prices
over labor costs remained somewhat
elevated.
At its meeting on November 10,
2004, the Federal Open Market Committee (FOMC) adopted a directive that
called for conditions in reserves markets
consistent with increasing the federal
funds rate to an average of around 2 percent. In its public statement, the Committee expressed a belief that monetary
policy remained accommodative even
after this tightening and judged that the
upside and downside risks to the attainment of both sustainable growth and
price stability over the next few quarters
were roughly equal. The Committee
noted its expectation that the underlying rate of inflation would continue to
be low and that policy accommodation
could be removed at a pace that is likely
to be measured, but it also stated that
it would nonetheless respond to changes
in economic prospects as needed to



225

fulfill its obligation to maintain price
stability.
The FOMC's decision in November
to raise the intended federal funds rate
25 basis points and its attendant public statement were apparently anticipated by the market, so that the reaction
was muted. Subsequently, higher-thanexpected inflation data, remarks by the
Chairman that were viewed as pointing
to future rate increases, and the depreciation of the dollar all led market participants to price in a somewhat steeper
path for future policy. The upward revision in policy expectations prompted
modest increases in shorter-term Treasury coupon security yields. The yield
on the ten-year Treasury note, however,
was unchanged on net. Yields on both
investment-grade and speculative-grade
corporate bonds edged lower. The value
of the dollar relative to other major currencies declined.
M2 accelerated a bit in November
from its sluggish pace in October, but
growth in money continued to be
restrained by increases in its opportunity
cost. Rates paid on the liquid components of M2 lagged increases in market
rates associated with the monetary policy tightenings this year. Bank credit
rebounded in November, with both securities and loans registering gains.
In the staff forecast prepared for this
meeting, the economy was seen as likely
to expand at a moderate pace, supported
by accommodative monetary policy
and financial conditions. Consistent with
readings from futures markets, oil prices
were anticipated to edge lower. With
economic activity projected to expand at
a pace a little above that of its longerrun potential over the coming year,
hiring was projected to continue to
firm, causing the unemployment rate to
edge down next year. The steep run-up
in housing prices, recent increases in
equity prices, and anticipated gains in

226 91st Annual Report, 2004
payrolls were viewed as likely to boost
the growth of consumption spending
next year to a pace somewhat above that
recorded this year. Business investment
was anticipated to decline a bit early
next year in light of the expiration of
the partial-expensing tax provision at
the end of 2004 but was projected to
resume vigorous growth in response to a
favorable economic outlook, supportive
financial conditions, ample liquid assets
in the corporate sector, and an ongoing
need to replace or upgrade aging equipment and software. Measures of total
consumer price inflation were expected
to decline from current levels reflecting the direct effect of the downturn in
energy prices. By contrast, core inflation was seen in the staff forecast as
remaining stable. The upward pressure
on inflation from a slight step-down
in structural productivity growth and a
narrowing margin of resource slack was
expected to be about counterbalanced
by diminishing pressure from the passthrough of the earlier rise in energy
prices and decline in the dollar.
In their discussion of the economic
outlook, the participants at the meeting
(the members of the Board of Governors and the Reserve Bank Presidents
or those acting in their place) generally
regarded incoming data since the prior
meeting as consistent with an expectation that the economy would continue to
expand at a pace that would likely prove
sufficient to reduce margins of underutilized resources further. Recent data and
anecdotal information indicated that the
economic expansion was firmly established and had proven quite resilient
in the face of rising oil prices and the
reduction in policy accommodation.
Although the November employment
report had been disappointing, when
viewed over several months, labor market conditions were generally seen as
gradually improving. That improvement



was expected to persist and, along with
higher wealth and relatively low interest rates, would support further gains
in spending by households. Rising
demand, elevated underlying productivity growth, and accommodative financial conditions should keep business
spending on a strong uptrend. With
some economic slack persisting and
longer-term inflation expectations wellanchored, inflation was anticipated to
remain subdued. A number of participants cited the recent depreciation of
the dollar on foreign exchange markets,
elevated energy costs, and the possibility of a slowing in underlying productivity growth as factors tending to boost
the upside risks to their inflation outlook, though, on net, they saw the risks
to stable underlying inflation as still
balanced.
In their discussion of important sectors of the economy, participants noted
that increasing equity and home prices
had boosted household net worth, leaving consumers well positioned to maintain a brisk pace of spending. Continued gains in employment were thought
likely to provide additional support to
spending by bolstering consumer confidence and income. Participants commented that real disposable incomes
should receive a further lift from the
recent drop in oil prices. Moreover,
intermediate- and long-term interest
rates remained low in both nominal
and real terms despite the recent firming
in the stance of policy, encouraging
spending on consumer durables and
housing.
Many of the fundamentals underlying the demand for capital goods—
expanding output, a low cost of capital,
strong profits, and ample liquid assets—
appeared quite favorable, and participants generally were upbeat in their
assessment of the prospects for investment. While some participants noted

Minutes of FOMC Meetings, December 227
that their business contacts seemed more
confident about the future and that the
sense of caution previously evident in
business spending and hiring behavior
seemed to be waning, others believed
that many businesses remained quite
wary. Most participants acknowledged
some significant uncertainties in their
outlook, including the effects of the expiration of the partial-expensing provision for investment at the end of 2004
and recent indications of a softening in
high-tech spending in the United States
and elsewhere. The possible downshift
in the pace of high-tech spending also
raised the possibility of an erosion of
profit margins that could result from a
slackening in the pace of technology-led
productivity growth and the associated
increase in cost pressures.
A number of participants voiced concerns about domestic and global financial imbalances. On the domestic front,
such concerns focused on the magnitude
of current and projected fiscal deficits,
which seemed likely to keep national
saving low. Views about the prospects
for fiscal restraint in the years ahead
were mixed; some participants believed
that the odds of significant deficit reduction over the next few years were
remote while others were more optimistic. Regarding global imbalances
and the current account deficit in the
United States, a number of participants
expressed doubts that such imbalances would be reduced in the nearterm. Better global balance would
require not only greater national saving
in the United States but also a notable
strengthening in domestic demand
among major trading partners. Such a
strengthening seemed unlikely in the
near term given the recent softening
in the economies of several important
industrial countries.
In their discussion of financial market
conditions, participants noted that inves


tors anticipated further increases in the
federal funds rate over the coming year,
but intermediate- and long-term interest
rates along with financial conditions
more generally had remained quite supportive of growth. A few participants
commented that the generally low level
of interest rates across a wide range
of maturities and the recent flattening of
the slope of the yield curve (measured
as the spread between ten- and two-year
Treasury yields) might signal that
expectations of longer-term growth had
been marked down. Some participants
believed that the prolonged period of
policy accommodation had generated a
significant degree of liquidity that might
be contributing to signs of potentially
excessive risk-taking in financial markets evidenced by quite narrow credit
spreads, a pickup in initial public offerings, an upturn in mergers and acquisition activity, and anecdotal reports that
speculative demands were becoming
apparent in the markets for single-family
homes and condominiums.
Although the November employment
report had been disappointing and recent
readings on initial claims for unemployment insurance had risen, participants viewed labor market conditions
still as improving gradually. Averaging
over recent months, or even the entire
year, employment growth had been fast
enough to absorb unutilized labor
resources over time. Anecdotal information suggested a significant tightening in
the market for skilled workers in some
industries and regions, although demand
for less skilled workers still appeared
soft. Recent surveys of hiring plans by
businesses were read as signaling future
gains in employment. Despite the further improvement in labor markets,
a number of participants noted that
wage and compensation increases had
not picked up materially and generally
remained moderate.

228 91st Annual Report, 2004
In their discussion of the outlook for
prices, a number of participants cited
developments that could pose upside
inflation risks. Although oil prices had
fallen of late, they were still considerably higher than they had been in the
spring, and the recent decline in the
dollar would raise import prices and
diminish competitive pressures on many
industries. The pass-through from both
sources should be limited, but they were
still a potential source of upward pressure on prices that could get embedded
in higher inflation under certain circumstances. In addition, productivity growth
had slowed appreciably in the most
recent quarter and unit labor costs had
increased, raising questions about cost
pressures going forward. A few participants also noted that uncertainty about
the extent of resource slack in the economy was considerable and that it was
quite possible that the economy could
soon be operating close to potential, particularly if labor force participation rates
did not turn up much while employment
continued to register gains. The increase
over the last few months in five-year
measures of inflation compensation
derived from Treasury nominal and
inflation-indexed securities might be a
warning sign that expectations were not
as well anchored as they had been over
the summer.
Despite these concerns, participants
generally expected that inflation would
remain low in the foreseeable future.
While the depreciation of the dollar over
recent months had been notable, some
participants found persuasive the evidence from recent studies pointing to a
decline over time and across countries
in the pass-through of exchange rate
movements into domestic prices. Forward market-based measures of inflation compensation beyond the next five
years as well as survey measures of both
short- and long-term inflation expec


tations had been quite stable of late,
despite the previous rise in energy prices
and the lower dollar. Moreover, several
participants cited factors that likely
would continue to provide a counterweight to any upside risks. Although
participants generally acknowledged
that the degree of economic slack was
quite uncertain, the moderate pace of
wage and compensation growth in
recent months in the face of higher
energy prices and several years of rapid
productivity growth was consistent with
an economy still operating somewhat
below its potential. In a similar vein,
the recent quarterly dip in productivity
growth notwithstanding, there were no
clear signs that underlying productivity
had slowed appreciably of late, and a
close reading of recent history suggested
that upside risks to the outlook for productivity growth could be significant.
Even if structural productivity growth
were to slow, price markups remained
quite elevated and some participants
noted that further increases in unit labor
costs could well be absorbed for some
time by a return of markups to more
normal levels.
In the Committee's discussion of policy for the intermeeting period, all of the
members (the members of the Board of
Governors and the five voting Reserve
Bank Presidents) favored raising the target for the federal funds rate by 25 basis
points to 2V4 percent at this meeting. All
members judged that a further quarterpoint tightening in the target federal
funds rate at this meeting was appropriate in light of the prospects for solid
growth and diminished slack. Even with
this action, the current level of the
real funds rate target remained below
the level it most likely would need to
reach to keep inflation stable and output at its potential. With the economic
expansion more firmly entrenched,
cost and price pressures were likely

Minutes of FOMC Meetings, December 229
to become a clearer intermediate-term
risk to sustained good economic performance absent further reduction of
accommodation.
With regard to the Committee's
announcement to be released after the
meeting, members generally agreed that
overall economic prospects were similar to those prevailing at the time of
the November meeting and that consequently the statement should be altered
only to the minor extent required to
reflect recent economic developments.
They concurred that the statement
should note that output appears to be
growing at a moderate pace despite the
earlier rise in energy prices, that labor
market conditions continue to improve
gradually, and that inflation and longerterm inflation expectations remain wellcontained. They also agreed again to
characterize the risks to sustainable
growth and price stability as balanced.
A few members believed that the Committee's flexibility would be enhanced
by eliminating the forward-looking elements of the Committee's statement
referring to the pace of removal of
policy accommodation. More of the
members believed that this language
was useful in conveying the Committee's sense of the outlook for the economy and the stance of monetary policy and was appropriately conditioned
on economic developments. All members agreed that the FOMC statement
for this meeting should again indicate
that policy accommodation could be
removed at a pace that was likely to be
measured but that the Committee would
respond to changes in economic prospects as needed to maintain price
stability.
At the conclusion of the discussion,
the Committee voted to authorize and
direct the Federal Reserve Bank of New
York, until it was instructed otherwise,
to execute transactions in the System



Account in accordance with the following domestic policy directive.
The Federal Open Market Committee
seeks monetary and financial conditions that
will foster price stability and promote sustainable growth in output. To further its longrun objectives, the Committee in the immediate future seeks conditions in reserve
markets consistent with increasing the federal funds rate to an average of around
2VA percent.
The vote encompassed approval of
the paragraph below for inclusion in the
statement to be released shortly after the
meeting:
The Committee perceives the upside and
downside risks to the attainment of both
sustainable growth and price stability for the
next few quarters to be roughly equal. With
underlying inflation expected to be relatively
low, the Committee believes that policy
accommodation can be removed at a pace
that is likely to be measured. Nonetheless,
the Committee will respond to changes in
economic prospects as needed to fulfill its
obligation to maintain price stability.
Votes for this action: Messrs. Greenspan, Geithner, Bernanke, Ms. Bies,
Messrs. Ferguson, Gramlich, Hoenig,
Kohn, Ms. Minehan, Mr. Olson, Ms. Pianalto, and Mr. Poole. Vote against this
action: None.
The meeting then turned to consideration of releasing FOMC minutes on
an accelerated schedule. Meeting participants agreed that an experiment with
accelerating the preparation of the minutes that had been conducted since early
in the year had been successful in identifying the procedural changes that would
be necessary if an accelerated schedule
were to be followed going forward. Participants noted that the minutes contained a more complete and nuanced
explanation of the reasons for the Committee's decisions and view of the risks
to the outlook than was possible in the

230 91st Annual Report, 2004
post-meeting announcement, and their
earlier release would help markets interpret economic developments and predict
the course of interest rates. They also
would provide the public a more upto-date context for individual policymakers' public remarks. Meeting participants supported the principle of
openness and transparency, but debated
the possibility that the markets would
misinterpret the minutes and that the
prospect of early release would lead to
either less productive discussions at the
meetings or to less comprehensive, and
therefore less useful, minutes. A few
participants expressed support for trimming the length and forward-looking
elements of the post-meeting announcements, should the Committee decide
to accelerate release of the minutes.
Others, however, preferred not to link
the two decisions or viewed the more
extensive announcements as useful
regardless of the minutes' publication
schedule.
The clear consensus of the participants at the meeting was to release the




minutes on an expedited schedule, and
the Committee voted unanimously to
begin publishing the minutes of regularly scheduled meetings three weeks
after the day of the policy decision. The
minutes of any other Committee meetings, such as conference calls, would be
handled somewhat differently. In those
cases, if a policy action were taken, an
announcement of that action would be
made as soon as practicably possible.
If, however, no action were taken, the
fact that the conference call took place
would be reflected in the statement following the subsequent regular meeting,
and, in any case, the minutes of the call
would be released along with the minutes of the subsequent regular meeting.
It was agreed that the next meeting
of the Committee would be held on
Tuesday-Wednesday, February 1-2,
2005.
The meeting adjourned at 1:25 p.m.
Vincent R. Reinhart
Secretary

231

Litigation
During 2004, the Board of Governors
was a party in eight lawsuits or appeals
filed that year and was a party in nine
other cases pending from previous
years, for a total of seventeen cases; in
2003, the Board had been a party in a
total of twelve cases. Two of the lawsuits or appeals filed in 2004 raised
questions under the Bank Holding Company Act. As of December 31, 2004,
nine cases were pending.

Judicial Review of Board Orders
under the Bank Holding
Company Act
Haili et ai v. Greenspan et ah, No. 0400089 DAE-LEK (D. Hawaii, filed February 6, 2004), was an action seeking
an order requiring the Board to enforce
an alleged commitment made under
the Community Reinvestment Act. The
action also sought a declaratory judgment and an injunction preventing the
approval of an application under the
Bank Holding Company Act until the
asserted commitment was fulfilled. On
February 23, 2004, the district court
granted the Board's motion to dismiss
the action.
CB Bancshares, Inc. v. Board of Governors, No. 04-70229 (9th Circuit, filed
January 14, 2004), was a petition for
review of the Board order granting Central Pacific Financial Corp. of Honolulu,
Hawaii, approval to acquire CB Bancshares, Inc., also of Honolulu. On
June 3, 2004, the court dismissed the
action on the motion of the petitioner.




Litigation under the Financial
Institutions Supervisory Act
Board of Governors v. Thomas, et al.,
No. l:04-CV-0777 (N.D. Georgia, filed
March 19, 2004), is an injunctive action
brought to compel eighteen individuals
named in a separate Board administrative enforcement proceeding to deposit
sufficient funds into the registry of the
court to satisfy civil money penalties
sought by the Board in the administrative action. On April 2, 2004, the court
issued a temporary restraining order
granting the relief sought by the Board,
and on April 28, 2004, the court issued a
preliminary injunction extending this
relief until completion of the Board's
enforcement proceeding.
Ulrich v. Board of Governors, No. 0373854 (9th Circuit, filed October 24,
2003), and Diehl McCarthy v. Board of
Governors, No. 03-73997 (9th Circuit,
filed October 28, 2003), are petitions for
review of orders of prohibition issued
by the Board on October 15, 2003. On
December 12, 2003, the court consolidated these cases with related petitions
for review of orders issued by the Office
of the Comptroller of the Currency
imposing civil money penalties and restitution against the petitioners.

Other Actions
Inner City Press/Community on the
Move v. Board of Governors, No. 04CV-8337 (S.D. New York, filed October 21, 2004), is a case brought under
the Freedom of Information Act.

232 91st Annual Report, 2004
Texas State Bank v. United States,
No. 04-5126 (Federal Circuit, filed
July 28, 2004), is an appeal of a decision
of the United States Court of Federal
Claims dismissing an action {Community Bank & Trust v. United States,
No. 01-571C, 60 Fed. Cl. 815 (2004))
challenging on constitutional grounds
the failure to pay interest on reserve
accounts held at Federal Reserve Banks.
Sciba v. Board of Governors, No. 04CV-1011 (D. District of Columbia, filed
June 21, 2004), is a case brought under
the Freedom of Information Act.
Price v. Greenspan, No. 04-CV-0973
(D. District of Columbia, filed June 14,
2004), is an employment discrimination
action.
Thomas v. Board of Governors,
No. 04-CV-1554 (N.D. Georgia,
removed from Superior Court of Gwinnett County, Georgia, on May 28, 2004),
was an action against the Board, its
enforcement staff, and others by individuals involved in a pending enforcement action. On October 4, 2004, the
court granted the Board's motion to dismiss the action.
Skanska USA Building, Inc. v. Board
of Governors, No. 304CV00675 SRU
(D. Connecticut, filed April 22, 2004),
was a Freedom of Information Act case.
The case was dismissed by stipulation
of the parties on November 29, 2004.
Laigo v. Board of Governors, No. 03CV-03576-MJP (W.D. Washington, filed
November 19, 2003), was a claim
regarding redemption of U.S. savings




bonds. On June 9, 2004, the court
granted the Board's motion to dismiss
the action.
Apffel v. Board of Governors, No. 03343 (S.D. Texas, filed May 20, 2003),
was a case brought under the Freedom
of Information Act. On January 9, 2004,
the court granted the Board's motion to
dismiss the case.
Carter v. Greenspan, No. 03-1026
(D. District of Columbia, filed May 9,
2003), was an employment discrimination action. On February 19, 2004, the
court granted the Board's motion to dismiss the case.
Albrecht v. Board of Governors,
No. 02-5235 (D.C. Circuit, filed October 18, 2002), was an appeal of a district
court order dismissing a challenge to
the pension funding method applicable
to certain Board employees under the
Board's retirement plan. The district
court's dismissal was affirmed by the
Court of Appeals on February 10, 2004.
Artis v. Greenspan, No. 01-0400
(D. District of Columbia, filed February 22, 2001), is an employment discrimination action. An identical action,
No. 99-2073 (EGS) (D. District of
Columbia, filed August 3, 1999), was
consolidated with this action on
August 15,2001.
Fraternal Order of Police v. Board of
Governors, No. 98-3116 (D. District
of Columbia, filed December 22, 1998),
is an action seeking a declaratory judgment regarding the Board's labor policy
governing Federal Reserve Banks.
•

Federal Reserve System
Organization




Federal Reserve System Organization 235

Board of Governors
December 31,2004

Members
Term expires

Alan Greenspan, Chairman1
Roger W. Ferguson, Jr.,
Vice Chairman1
Edward M. Gramlich
Susan S. Bies
Mark W. Olson
Ben S. Bernanke
Donald L. Kohn

January 31,

2006
2014
2008
2012
2010
2018
2016

Officers
OFFICE OF BOARD MEMBERS
Michelle A. Smith, Director
Winthrop P. Hambley, Assistant to the
Board and Director for Congressional
Liaison
Rosanna Pianalto-Cameron, Special
Assistant to the Board for Public
Information
David W. Skidmore, Special Assistant
to the Board
Laricke D. Blanchard, Special Assistant to
the Board for Congressional Liaison
LEGAL DIVISION
Scott G. Alvarez, General Counsel
Richard M. Ashton, Associate
General Counsel
Stephanie Martin, Associate General
Counsel
Kathleen M. O'Day, Associate General
Counsel
Ann Misback, Assistant General Counsel
Katherine H. Wheatley, Assistant General
Counsel
Cary K. Williams, Assistant General
Counsel

1. The designations as Chairman and Vice
Chairman expire on June 19, 2008, and October 28, 2007, respectively, unless the service of
these members of the Board shall have terminated
sooner.




OFFICE OF THE SECRETARY
Jennifer J. Johnson, Secretary
Robert deV. Frierson, Deputy Secretary
Margaret M. Shanks, Assistant Secretary
DIVISION OF
INTERNATIONAL FINANCE
Karen H. Johnson, Director
David H. Howard, Deputy Director
Thomas A. Connors, Senior Associate
Director
Dale W. Henderson, Senior Adviser
Richard T. Freeman, Associate Director
Steven B. Kamin, Associate Director
William L. Helkie, Senior Adviser
Jon W. Faust, Assistant Director
Joseph E. Gagnon, Assistant Director
Willene A. Johnson, Adviser
Michael P. Leahy, Assistant Director
D. Nathan Sheets, Assistant Director
Ralph W. Tryon, Assistant Director
DIVISION OF MONETARY AFFAIRS
Vincent R. Reinhart, Director
Brian F. Madigan, Deputy Director
James A. Clouse, Deputy Associate
Director
William C. Whitesell, Deputy Associate
Director
Cheryl L. Edwards, Assistant Director
William B. English, Assistant Director
Athanasios Orphanides, Adviser
Deborah J. Danker, Special Assistant
to the Board

236 91st Annual Report, 2004

Board of Governors—Continued
DIVISION OF RESEARCH
AND STATISTICS
David J. Stockton, Director
Edward C. Ettin, Deputy Director
David W. Wilcox, Deputy Director
Myron L. Kwast, Associate Director
Stephen D. Oliner, Associate Director
Patrick M. Parkinson, Associate Director
Lawrence Slifman, Associate Director
Charles S. Struckmeyer, Associate Director
David L. Reifschneider, Deputy Associate
Director
William L. Wascher HI, Deputy Associate
Director
Alice Patricia White, Deputy Associate
Director
Joyce K. Zickler, Deputy Associate
Director
Douglas W. Elmendorf, Assistant Director
and Chief
Michael S. Gibson, Assistant Director
and Chief
Diana Hancock, Assistant Director
and Chief
J. Nellie Liang, Assistant Director
S. Wayne Passmore, Assistant Director
Janice Shack-Marquez, Assistant Director
Daniel E. Sichel, Assistant Director
Mary M. West, Assistant Director
Glenn B. Canner, Senior Adviser
David S. Jones, Senior Adviser
Thomas D. Simpson, Senior Adviser
DIVISION OF BANKING SUPERVISION
AND REGULATION
Richard Spillenkothen, Director
Stephen M. Hoffman, Jr., Deputy Director
Herbert A. Biern, Senior Associate
Director
Roger T. Cole, Senior Associate Director
Michael G. Martinson, Senior Adviser
Deborah P. Bailey, Associate Director
Norah M. Barger, Associate Director
Betsy Cross, Associate Director
Gerald A. Edwards, Jr., Associate Director
James V. Houpt, Associate Director



Jack P. Jennings, Associate Director
Molly S. Wassom, Associate Director
David M. Wright, Associate Director
Peter J. Purcell, Associate Director and
Chief Technology Officer
Howard A. Amer, Deputy Associate
Director
Barbara J. Bouchard, Deputy Associate
Director
Angela Desmond, Deputy Associate
Director
James A. Embersit, Deputy Associate
Director
Charles H. Holm, Deputy Associate
Director
William G. Spaniel, Deputy Associate
Director
Stacy Lee Coleman, Assistant Director
Jon D. Greenlee, Assistant Director
Walt H. Miles, Assistant Director
William C. Schneider, Jr., Assistant
Director
William F. Treacy, Assistant Director
DIVISION OF CONSUMER
AND COMMUNITY AFFAIRS
Sandra F. Braunstein, Director
Glenn E. Loney, Deputy Director
Adrienne D. Hurt, Associate Director
Irene Shawn McNulty, Associate Director
James A. Michaels, Assistant Director
Tonda E. Price, Assistant Director
DIVISION OF RESERVE BANK
OPERATIONS AND PAYMENT
SYSTEMS
Louise L. Roseman, Director
Paul W. Bettge, Associate Director
Jeffrey C. Marquardt, Associate Director
Kenneth D. Buckley, Assistant Director
Joseph H. Hayes, Jr., Assistant Director
Lisa Hoskins, Assistant Director
Dorothy LaChapelle, Assistant Director
Jeff J. Stehm, Assistant Director
Jack K. Walton II, Assistant Director

Federal Reserve System Organization 237

Board of Governors—Continued
OFFICE OF STAFF DIRECTOR
FOR MANAGEMENT

DIVISION OF
INFORMATION TECHNOLOGY

Stephen R. Malphrus, Staff Director for
Management
Sheila Clark, Equal Employment
Opportunity Programs Director
Lynn S. Fox, Senior Adviser

Marianne M. Emerson, Director
Maureen T. Hannan, Deputy Director
Tillena G. Clark, Assistant Director
Geary L. Cunningham, Assistant Director
Wayne A. Edmondson, Assistant Director
Po Kyung Kim, Assistant Director
Susan F. Marycz, Assistant Director
Sharon L. Mowry, Assistant Director
Raymond Romero, Assistant Director

MANAGEMENT DIVISION

H. Fay Peters, Director
Stephen J. Clark, Senior Associate Director
Darrell R. Pauley, Deputy Director
Christine M. Fields, Associate Director
Marsha W. Reidhill, Associate Director
Billy J. Sauls, Associate Director
Donald A. Spicer, Associate Director
Charles F. O'Malley, Assistant Director
James R. Riesz, Assistant Director




OFFICE OF INSPECTOR GENERAL

Barry R. Snyder, Inspector General
Donald L. Robinson, Deputy Inspector
General
Elizabeth A. Coleman, Assistant Inspector
General
Laurence A. Froehlich, Assistant Inspector
General
William L. Mitchell, Assistant Inspector
General

238 91st Annual Report, 2004

Federal Open Market Committee
December 31,2004

Members

Officers

A L A N GREENSPAN, Chairman, Board of

VINCENT R. REINHART, Secretary and

Governors
TIMOTHY F. GEITHNER, Vice Chairman,

President, Federal Reserve Bank of
New York
B E N S. BERNANKE, Board of Governors
SUSAN SCHMIDT BIES, Board of

Governors
ROGER W. FERGUSON, J R . , Board of

Governors
EDWARD M. GRAMLICH, Board of

Governors
THOMAS M. HOENIG, President, Federal

Reserve Bank of Kansas City
DONALD L. K O H N , Board of Governors
CATHY E. M I N E H A N , President, Federal

Reserve Bank of Boston
M A R K W. OLSON, Board of Governors
SANDRA PIANALTO, President, Federal

Reserve Bank of Cleveland
WILLIAM POOLE, President, Federal

Reserve Bank of St. Louis

Alternate Members
CHRISTINE M. CUMMING, First Vice

President, Federal Reserve Bank of
New York
M I C H A E L H. MOSKOW, President,

Federal Reserve Bank of Chicago
A N T H O N Y M. SANTOMERO, President,

Federal Reserve Bank of Philadelphia
GARY H. STERN, President, Federal

Reserve Bank of Minneapolis




Economist
DEBORAH J. DANKER, Deputy Secretary
MICHELLE A. SMITH, Assistant Secretary
SCOTT G. ALVAREZ, General Counsel
THOMAS C. BAXTER, JR., Deputy General

Counsel
KAREN H. JOHNSON, Economist
DAVID J. STOCKTON, Economist

THOMAS A. CONNORS, Associate Economist
JEFFREY C. FUHRER, Associate Economist
CRAIG S. HAKKIO, Associate Economist
DAVID H. HOWARD, Associate Economist
BRIAN F. MADIGAN, Associate Economist
RICHARD H. RASCHE, Associate Economist
LAWRENCE SLIFMAN, Associate Economist
MARK S. SNIDERMAN, Associate Economist
JOSEPH S. TRACY, Associate Economist
DAVID W. WILCOX, Associate Economist

DINO Kos, Manager, System Open Market
Account
During 2004 the Federal Open Market Committee held eight regularly scheduled meetings (see "Minutes of Federal Open Market
Committee Meetings" in this volume).

Federal Reserve System Organization 239

Federal Advisory Council
December 31,2004

Members
District 1—WILLIAM J. RYAN, Chairman,

President and Chief Executive Officer,
Banknorth Group, Inc., Portland, Maine
District 2—THOMAS A. RENYI, Chairman

and Chief Executive Officer, The Bank of
New York, New York, New York

District 10—BYRON G. THOMPSON, Chair-

man, Country Club Bank, N.A., Kansas
City, Missouri
District 11—GAYLE M. EARLS, President

and Chief Executive Officer, TIB—The
Independent BankersBank, Dallas, Texas
District 12—VACANT

District 3—RUFUS A. FULTON, JR., Chair-

man and Chief Executive Officer, Fulton Financial Corporation, Lancaster,
Pennsylvania
District 4—MARTIN G. MCGUINN, Chair-

man and Chief Executive Officer, Mellon
Financial Corp., Pittsburgh, Pennsylvania
District 5—FRED L. GREEN III, Chairman,

President, and Chief Executive Officer,
The National Bank of South Carolina,
Columbia, South Carolina
District 6—VACANT
District 7—DENNIS J. KUESTER, President

and Chief Executive Officer, Marshall &
Ilsley Corporation, Milwaukee, Wisconsin
District 8—DAVID W. KEMPER, Chairman,

President, and Chief Executive Officer,
Commerce Bancshares, Inc., St. Louis,
Missouri
District 9—JERRY A. GRUNDHOFER, Presi-

dent and Chief Executive Officer, U.S.
Bancorp, Minneapolis, Minnesota




Officers
DAVID W. KEMPER, President
VACANT, Vice President
JAMES E. ANNABLE, Secretary

The Federal Advisory Council, which is
composed of one representative of the banking industry from each of the twelve Federal
Reserve Districts, is required by the Federal
Reserve Act to meet in Washington at least
four times each year and is authorized by the
act to consult with, and advise, the Board
of Governors on all matters within the jurisdiction of the Board. The council met on
February 5-6, May 6-7, September 9-10,
and December 2-3, 2004. The Board met
with the council on February 6, May 7, September 10, and December 3, 2004.

240 91st Annual Report, 2004

Consumer Advisory Council
December 31,2004

Members

DEBRA S. REYES, President, Neighborhood

DENNIS L. ALGIERE, Senior Vice President,
The Washington Trust Company,
Westerly, Rhode Island
JANIE BARRERA, President and Chief Executive Officer, ACCION Texas, San
Antonio, Texas
KENNETH P. BORDELON, Chief Executive

Officer, E Federal Credit Union, Baton
Rouge, Louisiana
SUSAN BREDEHOFT, Senior Vice President/
Compliance Risk Management, Commerce Bank, N.A., Cherry Hill, New
Jersey
SHEILA CANAVAN, Consumer Attorney, Law

Office of Sheila Canavan, Moab, Utah
ROBIN COFFEY, Vice President, Harris Bank,
Chicago, Illinois
A N N DIEDRICK, Senior Vice President,
JPMorgan Chase Bank, New York, New
York
DAN DIXON, Group Senior Vice President,
World Savings Bank, FSB, Washington,
District of Columbia
HATTIE B. DORSEY, President and Chief

Executive Officer, Atlanta Neighborhood Development Partnership, Atlanta,
Georgia
THOMAS FITZGIBBON, Senior Vice President,
MB Financial Bank, Chicago, Illinois
JAMES GARNER, Senior Vice President and
General Counsel, North America
Consumer Finance for Citigroup,
Baltimore, Maryland
CHARLES GATSON, Vice President, Midtown
Community Development Corporation,
Kansas City, Missouri
LARRY HAWKINS, President

and Chief

Executive Officer, Unity National Bank,
Houston, Texas
W. JAMES KING, President and Chief Executive Officer, Community Redevelopment
Group, Cincinnati, Ohio
RUHI MAKER, Senior Attorney, Law Office
of Rochester, Rochester, New York
PATRICIA

MCCOY,

Professor

of

Law,

University of Connecticut School of Law,
Hartford, Connecticut
ELSIE MEEKS, Executive Director, First
Nations Oweesta Corporation, Rapid City,

South Dakota
http://fraser.stlouisfed.org/
RRITP.F R MORHAN Chnirmnn President
Federal Reserve Bank of St. Louis

Lending Partners, Inc., Tampa, Florida
BENSON ROBERTS, Vice President for Policy,
Local Initiatives Support Corporation,
Washington, District of Columbia
BENJAMIN ROBINSON III, President and

Chief Executive Officer, Innovative Risks
Solutions, LLC, Charlotte, North Carolina
MARY JANE

SEEBACH, Executive Vice

President, Chief Compliance Officer,
Countrywide Financial Corporation,
Calabasas, California
PAUL J. SPRINGMAN, Group Executive,

Predictive Sciences, Equifax, Atlanta,
Georgia
FORREST F. STANLEY, Senior Vice President
and Deputy General Counsel, KeyBank
National Association, Cleveland, Ohio
LORI R. SWANSON, Solicitor General, Office
of the Minnesota Attorney General,
St. Paul, Minnesota
DIANE THOMPSON, Supervising Attorney,

Land of Lincoln Legal Assistance
Foundation, Inc., East St. Louis, Illinois
HUBERT VAN TOL, Co-Director, Fairness in
Rural Lending, Sparta, Wisconsin
CLINT WALKER, General

Counsel/Chief

Administrative Officer, Juniper Bank,
Wilmington, Delaware

Officers
AGNES BUNDY SCANLAN, Chair

Senior Vice President,
Regulatory Relations Executive
Bank of America
Boston, Massachusetts
MARK PINSKY, Vice Chair

President and Chief Executive Officer
National Community Capital Association
Philadelphia, Pennsylvania
The Consumer Advisory Council is composed of academics, state and local government officials, representatives of the
financial industry, and representatives of
consumer and community interests. It was
established pursuant to the 1976 amendments to the Equal Credit Opportunity Act
to advise the Board of Governors on consinner financial services. The council met

Federal Reserve System Organization 241

Thrift Institutions Advisory Council
December 31,2004

GEORGE W. NISE, President and Chief

Members
ELDON R. ARNOLD, President and Chief

Executive Officer, Citizens Equity First
Credit Union (CEFCU), Peoria, Illinois
H. BRENT BEESLEY, Chairman and Chief

Executive Officer,
St. George, Utah

Heritage

Bank,

MICHAEL J. BROWN, SR., President and

Chief Executive Officer, Harbor Federal
Savings Bank, Fort Pierce, Florida
RICHARD J. DRISCOLL, Chief Executive Officer, First Savings Bank, FSB, Arlington,
Texas
DOUGLAS K. FREEMAN, Chairman and Chief

Executive Officer, NetBank, Alpharetta,
Georgia
CURTIS L. HAGE, Chairman and Chief

Executive Officer, Home Federal Bank,
Sioux Falls, South Dakota
DAVID H. HANCOCK, Chief Executive Officer, North American Savings Bank,
Grandview, Missouri
OLAN 0 . JONES, JR., President and Chief

Executive Officer, Eastman Credit Union,
Kingsport, Tennessee
D. TAD LOWREY, Chairman, President, and
Chief Executive Officer, Jackson Federal
Bank, Brea, California




Executive Officer, Beneficial Savings
Bank, Philadelphia, Pennsylvania
WILLIAM J. SMALL, Chairman and Chief

Executive Officer, First Federal Bank,
Defiance, Ohio
ROY M. WHITEHEAD, President and Chief
Executive Officer, Washington Federal
Savings, Seattle, Washington

Officers
WILLIAM J. SMALL, President

D. TAD LOWREY, Vice President
The Thrift Institutions Advisory Council,
which is composed of representatives from
credit unions, savings and loan associations,
and savings banks, consults with, and advises, the Board of Governors on issues pertaining to the thrift industry and on various
other matters within the Board's jurisdiction.
The members of the council met with the
Board on March 5, July 9, and December 10,
2004.

242 91st Annual Report, 2004

Federal Reserve Banks and Branches
December 31,2004

Officers
Chairman1
Deputy Chairman

President
First Vice President

BOSTON2

Samuel 0. Thier
Blenda J. Wilson

Cathy E. Minehan
Paul M. Connolly

NEW YORK2

John E. Sexton
Jerry I. Speyer

Timothy F. Geithner
Christine M.
Cumming

Buffalo

Marguerite D.
Hambleton

PHILADELPHIA

Ronald J. Naples
Doris M. Damm

Anthony M. Santomero
William H. Stone, Jr.

CLEVELAND2*

Robert W. Mahoney
Charles E. Bunch
Dennis C. Cuneo
Roy W. Haley

Sandra Pianalto
Robert Christy Moore

Wesley S. Williams, Jr.
Thomas J.
Mackell, Jr.
Owen E. Herrnstadt
Michael A. Almond

Jeffrey M. Lacker
Walter A. Varvel

David M. Ratcliffe
V. Larkin Martin
Catherine Crenshaw
Julie Hilton
Rosa Sugranes
Rodney Lawler
Dave Dennis

Jack Guynn
Patrick K. Barron

CHICAGO2

W James FarreU
Miles D. White

Michael H. Moskow
Gordon R.G.
Werkema

Detroit

Edsel B. Ford II

ST. LOUIS

Walter L. Metcalfe, Jr.
Gayle P. W. Jackson
Scott T. Ford
Cornelius A. Martin
Meredith B. Allen

William Poole
W. LeGrande Rives

Linda Hall Whitman
Frank L. Sims
Dean Folkvord

Gary H. Stern
James M. Lyon

BANK or Branch

Cincinnati
Pittsburgh
RICHMOND2
Baltimore
Charlotte
ATLANTA
Birmingham
Jacksonville
Miami
Nashville
New Orleans

Little Rock
Louisville
Memphis
MINNEAPOLIS
Helena




Vice President
in charge of Branch

Barbara L.Walter3

Barbara B. Henshaw
Robert B. Schaub

David Beck4
Jeffreys. Kane3
James M.McKee 3
Lee C. Jones
Christopher L. Oakley
Juan del Busto
Melvyn K. Purcell3
Robert J. Musso3

Glenn Hansen3

Robert A. Hopkins5
Thomas A. Boone5
Martha Perine Beard5

Samuel H. Gane

Federal Reserve System Organization 243

Officers—Continued
BANK or Branch
KANSAS CITY
Denver
Oklahoma City
Omaha
DALLAS

El Paso
Houston
San Antonio
SAN FRANCISCO

Chairman1
Deputy Chairman

President
First Vice President

Richard H. Bard
Robert A. Funk
Thomas Williams
Tyree O. Minner
A.F. Raimondo

Thomas M. Hoenig
Richard K. Rasdall

Ray L. Hunt
Patricia M.
Patterson
Ron C. Helm
Lupe Fraga
Ron R. Harris

Los Angeles
Portland

George M. Scalise
Sheila D. Harris
William D. Jones
Karla S. Chambers

Salt Lake City
Seattle

H. Roger Boyer
Mic R. Dinsmore

Vice President
in charge of Branch

Pamela L. Weinstein
Dwayne E. Boggs
Kevin A. Drusch
Helen E. Holcomb6
Robert W Gilmer4
Robert Smith IIP
D.Karen Diaz8
Janet L. Yellen
John F. Moore
MarkL. Mullinix7
Richardson B.
Hornsby
Andrea P. Wolcott
Mark Gould3

NOTE. A current list of these officers appears each
quarter in the Federal Reserve Bulletin.
1. The chairman of a Federal Reserve Bank serves, by
statute, as Federal Reserve agent.
2. Additional offices of these Banks are located at
Windsor Locks, Connecticut; Utica at Oriskany, New
York; East Rutherford, New Jersey, Columbus, Ohio;
Des Moines, Iowa; Midway at Bedford Park, Illinois, and
Phoenix, Arizona.

3. Senior vice president.
4. Acting vice president.
5. Senior branch executive.
6. Served as acting president as of November 5, 2004,
following the resignation of President Robert D.
McTeer, Jr.
7. Executive vice president.
8. Acting assistant vice president.

Conference of Chairmen

Conference of Presidents

The chairmen of the Federal Reserve Banks
are organized into the Conference of Chairmen, which meets to consider matters of
common interest and to consult with and
advise the Board of Governors. Such meetings, attended also by the deputy chairmen,
were held in Washington on June 2 and 3,
and on December 1 and 2, 2004.
The members of the executive committee of the Conference of Chairmen during 2004 were Wesley S. Williams, Jr., chair;
George M. Scalise, vice chair; and Walter L.
Metcalfe, Jr., member.
On December 2, 2004, the conference
elected its executive committee for 2005,
naming George M. Scalise as chair;
Walter L. Metcalfe, Jr., as vice chair; and
John E. Sexton as the third member.

The presidents of the Federal Reserve
Banks are organized into the Conference
of Presidents, which meets periodically to
consider matters of common interest and
to consult with and advise the Board of
Governors.
Michael H. Moskow, president of the
Federal Reserve Bank of Chicago, served
as chair of the conference in 2004, and
Cathy E. Minehan, president of the Federal
Reserve Bank of Boston, served as its vice
chair. Valerie J. Van Meter, of the Federal
Reserve Bank of Chicago, served as its secretary, and Michael P. Malone, of the Federal
Reserve Bank of Boston, served as its assistant secretary.
On October 27, 2004, the conference
elected Cathy E. Minehan as its chair for




244 91st Annual Report, 2004
2005-06 and Anthony M. Santomero, president of the Federal Reserve Bank of Philadelphia, as its vice chair.

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.
Walter A. Varvel, first vice president of
the Federal Reserve Bank of Richmond,
served as chair of the conference in 2004,
and Helen E. Holcomb, first vice president
of the Federal Reserve Bank of Dallas,
served as its vice chair. Janice E. Clatterbuck, of the Federal Reserve Bank of Richmond, served as its secretary, and Harvey R.
Mitchell, of the Federal Reserve Bank of
Dallas, served as its assistant secretary.

Directors
Each Federal Reserve Bank has a ninemember board: three Class A and three
Class B directors, who are elected by the
stockholding member banks, and three
Class C directors, who are appointed by the
Board of Governors of the Federal Reserve
System.
Class A directors represent the stockholding member banks in each Federal Reserve
District. Class B and Class C directors represent the public and are chosen with due, but




not exclusive, consideration to the interests
of agriculture, commerce, industry, services,
labor, and consumers; they may not be officers, directors, or employees of any bank or
bank holding company. In addition, Class C
directors may not be stockholders of any
bank or bank holding company.
For the election of Class A and Class B
directors, the member banks of each Federal Reserve District are classified into
three groups. Each group, which comprises
banks with similar capitalization, elects one
Class A director and one Class B director.
Annually, the Board of Governors designates
one of the Class C directors as chair of
the board and Federal Reserve agent of
each District Bank, and it designates another
Class C director as deputy chair.
Federal Reserve Branches have either five
or seven directors, a majority of whom are
appointed by the parent Federal Reserve
Bank; the others are appointed by the Board
of Governors. One of the directors appointed
by the Board is designated annually as chair
of the board of that Branch in a manner
prescribed by the parent Federal Reserve
Bank.
The chairs and deputy chairs of the
Reserve Bank boards of directors, and the
chairs of the Branches, are listed in the preceding table, titled "Officers." The directors
of the Banks and Branches are listed in the
following table. For each director, the class
of directorship, the director's principal organizational affiliation, and the date the director's term expires is shown.

Federal Reserve System Organization 245
Directors
BANK or BRANCH, Category

Name

Title

Term expires
Dec. 31

DISTRICT 1—BOSTON
RESERVE BANK

Class A
Lawrence K. Fish

James R. Wood
Peter A. Blyberg
Class B
Robert K. Kraft
Orit Gadiesh
KirkRPond

Class C
Samuel O. Thier
Blenda J. Wilson
Lisa M. Lynch

Chairman, President, and Chief Executive Officer,
Citizens Financial Group, Inc.,
Providence, Rhode Island
President, First National Bank of Suffield,
Suffield, Connecticut
President and Chief Executive Officer,
Union Trust Company, Ellsworth, Maine
Chairman and Chief Executive Officer,
The Kraft Group, Foxborough, Massachusetts
Chairman, Bain & Company, Inc., Boston, Massachusetts
President, Chief Executive Officer, and Chairman,
Fairchild Semiconductor International,
South Portland, Maine
Professor of Medicine and Health Care Policy,
Harvard Medical School, Massachusetts
General Hospital, Boston, Massachusetts
President and Chief Executive Officer, Nellie Mae
Education Foundation, Quincy, Massachusetts
William L. Clayton Professor of International Affairs,
The Fletcher School of Law and Diplomacy,
Medford, Massachusetts

2004

2005
2006

2004
2005
2006

2004
2005
2006

DISTRICT 2—NEW YORK
RESERVE BANK

Class A
Jill M. Considine
Charles V. Wait
Sanford I. Weill
Class B
Ronay Menschel
Marta Tienda
Denis M. Hughes
Class C
John E. Sexton
Loretta E. Lynch
Jerry I. Speyer



Chairman and Chief Executive Officer, The Depository
Trust Company, New York, New York
President, Chief Executive Officer, and Chairman,
The Adirondack Trust Company,
Saratoga Springs, New York
Chairman, Citigroup Inc., New York, New York

2004

Chairman, Phipps Houses, New York, New York
Maurice P. During Professor of Demographic Studies,
Princeton University, Princeton, New Jersey
President, New York State AFL-CIO,
New York, New York

2004
2005

President, New York University, New York, New York
Partner, Hogan & Hartson LLC, New York, New York
President and Chief Executive Officer, Tishman Speyer
Properties, New York, New York

2004
2005
2006

2005
2006

2006

246 91st Annual Report, 2004

Directors—Continued
BANK or BRANCH, Category

Name

Title

Term expires
Dec. 31

BUFFALO BRANCH

Appointed by the
Federal Reserve Bank
Emerson L. Brumback

President and Chief Operating Officer, Manufacturers
and Traders Trust Company, Buffalo, New York
Geraldine C. Ochocinska ... Regional Director, Region 9, UAW, Amherst, New York
Maureen Torrey Marshall .. Vice President, Torrey Farms, Inc., Elba, New York
Chairman, President, and Chief Executive Officer,
Peter G. Humphrey
Financial Institutions, Inc., Warsaw, New York

2004
2005
2006
2006

Appointed by the
Board of Governors
Marguerite D. Hambleton .. President and Chief Executive Officer, AAA Western

and Central New York, Williamsville, New York
Chairman and Chief Executive Officer, Gibraltar,
Brian J. Lipke
Buffalo, New York
Alphonso O'Neil-White . . . . President and Chief Executive Officer, HealthNow
New York, Inc., Buffalo, New York

2004
2005
2006

DISTRICT 3—PHILADELPHIA
RESERVE B A N K

Class A
Walter E.Daller, Jr.
Kenneth R. Shoemaker
Eugene W. Rogers

Chairman, President, and Chief Executive Officer,
Harleysville National Corporation,
Harleysville, Pennsylvania
President and Chief Executive Officer, Orrstown Bank,
Shippensburg, Pennsylvania
Chief Executive Officer, Newfield National Bank,
Newfield, New Jersey

Class B
P. Coleman Townsend, Jr. .. Chairman and Chief Executive Officer, Townsends, Inc.,
Wilmington, Delaware
Robert E. Chappell
Chairman and Chief Executive Officer, Penn Mutual
Life Insurance Co., Horsham, Pennsylvania
Garry L. Maddox
President and Chief Executive Officer,
A. Pomerantz & Company,
Philadelphia, Pennsylvania
Class C
Doris M. Damm
Ronald J. Naples
William F. Hecht




President and Chief Executive Officer, ACCU Staffing
Services, Cherry Hill, New Jersey
Chairman and Chief Executive Officer, Quaker
Chemical Corporation, Conshohocken, Pennsylvania
Chairman, President, and Chief Executive Officer,
PPL Corporation, Allentown, Pennsylvania

2004
2005
2006

2004
2005
2006

2004
2005
2006

Federal Reserve System Organization 247

BANK or BRANCH, Category

Name

Titlf

l lllc

Term expires
Dec. 31

DISTRICT 4—CLEVELAND
RESERVE BANK

Class A
John R. Cochran
Bick Weissenrieder
Stephen P. Wilson
Class B
Wayne R. Embry
Tanny Crane
V. Ann Hailey
Class C
Charles E. Bunch
Phillip R. Cox
Robert W. Mahoney

Chairman and Chief Executive Officer,
FirstMerit Corporation, Akron, Ohio
Chairman and Chief Executive Officer,
Hocking Valley Bank, Athens, Ohio
President and Chief Executive Officer,
Lebanon Citizens National Bank, Lebanon, Ohio

2004

Former President and Chief Operating Officer,
Cleveland Cavaliers, Cleveland, Ohio
President and Chief Executive Officer,
Crane Group Company, Columbus, Ohio
Executive Vice President and Chief Financial Officer,
Limited Brands, Columbus, Ohio

2004

President and Chief Operating Officer,
PPG Industries, Inc., Pittsburgh, Pennsylvania
President and Chief Executive Officer,
Cox Financial Corporation, Cincinnati, Ohio
Retired Chairman and Chief Executive Officer,
Diebold, Incorporated, Canton, Ohio

2004

President, Czar Coal Corporation, Lovely, Kentucky
Executive Secretary-Treasurer, Cincinnati AFL-CIO
Labor Council, Cincinnati, Ohio
President, Bank One, NA, Lexington, Kentucky
President and Chief Executive Officer, Great Lakes
Bankers Bank, Gahanna, Ohio

2004
2005

Senior Vice President, Western and Southern Financial
Group, Cincinnati, Ohio
Senior Vice President, Toyota Motor North America,
Inc., New York, New York
Retired President, Ashland Inc. Foundation,
Villa Hills, Kentucky

2004

President and Chief Executive Officer,
Iron and Glass Bank, Pittsburgh, Pennsylvania
President and Chief Operating Officer, CEcD,
Pittsburgh Regional Alliance,
Pittsburgh, Pennsylvania

2004

2005
2006

2005
2006

2005
2006

CINCINNATI BRANCH

Appointed by the
Federal Reserve Bank
James H. Booth
V. Daniel Radford
Glenn D. Leveridge
Charlotte W. Martin
Appointed by the
Board of Governors
Herbert R. Brown
Dennis C. Cuneo
Charles Whitehead

2005
2006

2005
2006

PITTSBURGH BRANCH

Appointed by the
Federal Reserve Bank
Michael J. Hagan
Ronnie L. Bryant




2005

248 91st Annual Report, 2004

Directors—Continued
BANK or BRANCH, Category

Name
Georgiana N. Riley
Kristine N. Molnar
Appointed by the
Board of Governors
Robert O. Agbede
Roy W.Haley
James I. Mitnick

Title

Term expires
Dec. 31

President and Chief Executive Officer,
TIGG Corporation, Bridgeville, Pennsylvania
Executive Vice President, WesBanco Bank, Inc.,
Wheeling, West Virginia

2005

President and Chief Executive Officer,
ATS-Chester Engineers, Pittsburgh, Pennsylvania
Chairman and Chief Executive Officer,
WESCO International, Inc., Pittsburgh, Pennsylvania
Senior Vice President, Turner Construction Company,
Pittsburgh, Pennsylvania

2004

2006

2005
2006

DISTRICT 5—RICHMOND
RESERVE BANK

Class A
Eddie Canterbury
Barry J. Fitzpatrick
Ernest J. Sewell
Class B
JoeEdens
W. Henry Harmon
Kenneth R. Sparks

President and Chief Executive Officer, Logan Bank &
Trust Company, Logan, West Virginia
Chairman, Branch Banking & Trust Co. of Virginia,
Falls Church, Virginia
President and Chief Executive Officer, FNB Southeast,
Greensboro, North Carolina

2004

Chairman, Edens & Avant, Columbia, South Carolina
President and Chief Executive Officer, Columbia
Natural Resources, LLC, Charleston, West Virginia
President and Chief Executive Officer, Ken Sparks
Associates LLC, White Stone, Virginia

2004
2005

2005
2006

2006

Class C
Chief Financial Officer, Jefferson-Pilot Corporation,
President, Jefferson-Pilot Communications Company,
Greensboro, North Carolina
President and Chief Operating Officer,
Thomas J. Mackell, Jr.
The Kamber Group, Washington, D.C.
Wesley S. Williams, Jr. . . . . Partner, Covington & Burling, Washington, D.C.

Theresa M. Stone

2004
2005
2006

BALTIMORE BRANCH

Appointed by the
Federal Reserve Bank
Donald P. Hutchinson
Dyan Brasington
Kenneth C. Lundeen




President and Chief Executive Officer, SunTrust Bank,
Maryland, Baltimore, Maryland
President (Retired), Technology Council of Maryland,
Rockville, Maryland
President, C.J. Langenfelder & Son, Inc.,
Baltimore, Maryland

2004
2005
2006

Federal Reserve System Organization 249

BANK or BRANCH, Category

Name
Michael L. Middleton
Appointed by the
Board of Governors
Owen E. Herrnstadt

Cynthia Collins Allner
William C.Handorf

Title

Term expires
Dec. 31

Chairman and President, Community Bank of
Tri-County, Waldorf, Maryland

2006

Director, International Department, International
Association of Machinists and Aerospace Workers,
AFL-CIO, Upper Marlboro, Maryland
Principal, Miles & Stockbridge PC,
Baltimore, Maryland
Professor of Finance, George Washington University,
Washington, D.C.

2004

Chairman and Chief Executive Officer, Wayfarer
Financial Group, Sumter, South Carolina
Durham, North Carolina
Chairman and President, FNB Corp. and First National
Bank and Trust Company, Asheboro, North Carolina
Chief Risk Officer, Wachovia Corporation,
Charlotte, North Carolina

2004

2005
2006

CHARLOTTE BRANCH

Appointed by the
Federal Reserve Bank
William H. Nock
Lucy J. Reuben
Michael C Miller
Donald K. Truslow
Appointed by the
Board of Governors
James F. Goodmon
Michael A. Almond
Jim Lowry

President and Chief Executive Officer, Capitol
Broadcasting Company, Inc., Raleigh, North Carolina
President and Chief Executive Officer, Charlotte
Regional Partnership, Charlotte, North Carolina
Dealer Operator, Crown Automotive,
High Point, North Carolina

2005
2006
2006

2004
2005
2006

DISTRICT 6—ATLANTA
RESERVE BANK

Class A
James F. Beall
Richard G. Hickson
William G. Smith, Jr.
Class B
Suzanne E. Boas




Chairman, President, and Chief Executive Officer,
Farmers & Merchants Bank, Centre, Alabama
Chairman and Chief Executive Officer, Trustmark
Corporation, Jackson, Mississippi
Chairman, President, and Chief Executive Officer,
Capital City Bank Group, Inc., Tallahassee, Florida

2004

President, Consumer Credit Counseling Service of
Greater Atlanta, Inc., Atlanta, Georgia

2004

2005
2006

250 91st Annual Report, 2004

Directors—Continued
BANK or BRANCH, Category

Name
Egbert L.J. Perry
Teri G. Fontenot
Class C
David M. Ratcliffe
V. Larkin Martin
D. Scott Davis

Tiflf
1 Hit

Term expires
Dec. 31

Chairman and Chief Executive Officer,
The Integral Group, LLC, Atlanta, Georgia
President and Chief Executive Officer, Woman's
Hospital, Baton Rouge, Louisiana

2005

Chairman, President, and Chief Executive Officer,
Southern Company, Atlanta, Georgia
Managing Partner, Martin Farm, Courtland, Alabama
Chief Financial Officer, United Parcel Service,
Atlanta, Georgia

2004

Monroeville President and Chairman, BankTrust,
Monroeville, Alabama
Chairman and Chief Executive Officer, Alabama
National Bancorporation, Birmingham, Alabama
Business Manager, International Union of Operating
Engineers-Local 312, Birmingham, Alabama
Retired Senior Vice President and Group Manager,
Science Applications International Corporation,
Huntsville, Alabama

2004

2006

2005
2006

BIRMINGHAM BRANCH

Appointed by the
Federal Reserve Bank
John B. Barnett III
John H. Holcomb III
Samuel F. Dodson
Bobby A. Bradley

Appointed by the
Board of Governors
Catherine Sloss Crenshaw .. President, Sloss Real Estate Group, Inc.,
Birmingham, Alabama
Chairman of the Board, HOME Place Farms, Inc.,
James H. Sanford
Prattville, Alabama
President, Welborn and Associates, Inc.,
W. Millet Welborn
Lookout Mountain, Tennessee

2005
2006
2006

2004
2005
2006

JACKSONVILLE BRANCH

Appointed by the
Federal Reserve Bank
Harvey R. Heller
Jerry M. Smith
Robert L. Fisher
Ellen S.Titen
Appointed by the
Board of Governors
Julie K. Hilton
Fassil Gabremariam
Linda H. Sherrer




President, Heller Brothers Packing Corporation,
Winter Garden, Florida
Chairman and President, First National Bank
of Alachua, Alachua, Florida
President and Chief Executive Officer, MacDill
Federal Credit Union, Tampa, Florida
President, E.T. Consultants, Winter Park, Florida

2004

Vice President and Co-Owner, Paradise Found Resorts
& Hotels, Panama City Beach, Florida
President and Founder, U.S.-Africa Free Enterprise
Education Foundation, Tampa, Florida
President and Chief Executive Officer, Prudential
Network Realty, Jacksonville, Florida

2004

2005
2006
2006

2005
2006

Federal Reserve System Organization 251

BANK or BRANCH, Category

Name

1 lllc

Term expires
Dec. 31

MIAMI BRANCH

Appointed by the
Federal Reserve Bank
Rudy Everett Schupp
Francis V. Gudorf
Joseph C. Schwartzel
Miriam Lopez
Appointed by the
Board of Governors
Rosa Sugranes
Edwin A. Jones, Jr.
Brian E. Keeley

President and Chief Executive Officer, First United
Bank, North Palm Beach, Florida
President and Executive Director, Jubilee Community
Development Corporation, Miami, Florida
President, Meridian Broadcasting, Inc.,
Fort Myers, Florida
Chairman and Chief Executive Officer,
TransAtlantic Bank, Miami, Florida

2004

Chairman, Iberia Tiles Corp, Miami, Florida
President, Angus Investments, Inc.,
Port St. Lucie, Florida
President and Chief Executive Officer, Baptist Health
South Florida, Coral Gables, Florida

2004
2005

2005
2005
2006

2006

NASHVILLE BRANCH

Appointed by the
Federal Reserve Bank
Sam O. Franklin IE . . . . . . . . . Retired Chairman, SunTrust Bank, Nashville,
Nashville, Tennessee
Michael B. Swain
President and Chief Executive Officer, First National
Bank, Oneida, Tennessee
James W. Spradley, Jr.
President and Chief Executive Officer, Standard
Candy Company, Inc., Nashville, Tennessee
Daniel A. Gaudette . . . . . . . . . Senior Vice President, North American Manufacturing
and Quality Assurance, Nissan North America, Inc.,
Smyrna, Tennessee
Appointed by the
Board of Governors
F. Rodney Lawler
Beth Dortch Franklin
David Williams II

2004
2005
2006
2006

Co-Founder and Chief Executive Officer,
Lawler-Wood, LLC, Knoxville, Tennessee
Chief Executive Officer, Star Transportation, Inc.,
Nashville, Tennessee
Vice Chancellor and General Counsel, Vanderbilt
University, Nashville, Tennessee

2004

Chairman and Chief Executive Officer, The First
Bancshares, Inc., and The First, A National Banking
Association, Hattiesburg, Mississippi
President and Chief Executive Officer, MidSouth Bank,
Lafayette, Louisiana
President and Chief Executive Officer, Zatarain's,
Gretna, Louisiana
Partner, General Business, SSA Consultants, LLC,
Baton Rouge, Louisiana

2004

2005
2006

NEW ORLEANS BRANCH

Appointed by the
Federal Reserve Bank
David E. Johnson

C. R. Cloutier
Lawrence E. Kurzius
Christel C. Slaughter



2005
2006
2006

252 91st Annual Report, 2004

Directors—Continued
BANK or BRANCH, Category

Name
Appointed by the
Board of Governors
Dave Dennis
Earl L. Shipp

Ben Tom Roberts

Titif*

Ftesident, Specialty Contractors & Assoc, Inc.,
Gulfport, Mississippi
Vice President and Site Director, The Dow Chemical
Company, Louisiana Operations,
Plaquemine, Louisiana
Senior Executive Vice President/Owner, Roberts
Brothers, Inc., Realtors, Mobile, Alabama

Term expires
Dec. 31

2004
2005

2006

DISTRICT 7—CHICAGO
RESERVE BANK

Class A
AlanR.Tubbs
William A. Osborn

Michael L. Kubacki
Class B
James H. Keyes
Connie E. Evans
MarkT. Gaffhey
Class C
Miles D. White
John A. Canning, Jr.
W. James Farrell

President, Maquoketa State Bank and Ohnward
Bancshares Inc., Maquoketa, Iowa
Chairman and Chief Executive Officer, Northern Trust
Corporation and The Northern Trust
Company, Chicago, Illinois
Chairman, President, and Chief Executive Officer,
Lakeland Financial Corporation, Warsaw, Indiana

2004

Chairman of the Board-Retired, Johnson Controls, Inc.,
Milwaukee, Wisconsin
President and Chief Executive Officer, WSEP Ventures,
Chicago, Illinois
President, Michigan AFL-CIO, Lansing, Michigan

2004

Chairman and Chief Executive Officer, Abbott
Laboratories, Abbott Park, Illinois
Chairman and Chief Executive Officer, Madison
Dearborn Partners, Inc., Chicago, Illinois
Chairman and Chief Executive Officer, Illinois Tool
Works, Inc., Glenview, Illinois

2004

Chairman and Chief Executive Officer, Citizens
National Bank, Cheboygan, Michigan
Chief Operating Officer, Compuware Corporation,
Detroit, Michigan
Executive Director, Kalamazoo Neighborhood
Housing Services, Kalamazoo, Michigan
Chairman, President, and Chief Executive Officer,
Comerica Incorporated, Detroit, Michigan

2004

President, Wayne State University, Detroit, Michigan
Board Director, Ford Motor Company,
Dearborn, Michigan
Executive Vice President and Chief Financial Officer,
Pulte Homes, Inc., Bloomfield Hills, Michigan

2004
2005

2005

2006

2005
2006

2005
2006

DETROIT BRANCH

Appointed by the
Federal Reserve Bank
Robert E. Churchill
Tommi A. White
Linda S. Likely
Ralph W.Babb, Jr.
Appointed by the
Board of Governors
IrvinD.Reid
Edsel B. Ford II
Roger A. Cregg



2005
2005
2006

2006

Federal Reserve System Organization 253

BANK or BRANCH, Category

Name

Titlf
1 Hie

Term expires
Dec. 31

DISTRICT 8—ST. LOUIS
RESERVE BANK

Class A
Lewis F. Mallory, Jr.
Lunsford W. Bridges
Bradley W. Small
Class B
Bert Greenwalt
J. Stephen Barger
A. Rogers Yarnell II
Class C
Charles W. Mueller
Gayle P.W. Jackson
Walter L. Metcalfe, Jr.

Chairman and Chief Executive Officer, National Bank
of Commerce, Starkville, Mississippi
President and Chief Executive Officer, Metropolitan
National Bank, Little Rock, Arkansas
Principal, Mathis, Marifian, Richter & Grandy, Ltd.,
Belleville, Illinois

2004

Partner, Greenwalt Company, Hazen, Arkansas
Taft-Hartley Coordinator, Indiana/Kentucky Regional
Council of Carpenters, Louisville, Kentucky
President, Yarnell Ice Cream Co., Inc., Searcy, Arkansas

2004
2005

Retired Chairman and Chief Executive Officer,
Ameren Corporation, St. Louis, Missouri
Managing Director, FondElec Clean Energy Group, Inc.,
St. Louis, Missouri
Partner, Bryan Cave LLP, St. Louis, Missouri

2004

Chancellor, University of Arkansas at Pine Bluff,
Pine Bluff, Arkansas
President and Chief Executive Officer, First State Bank,
Lonoke, Arkansas
Chairman, President, and Chief Executive Officer,
Arkansas Best Corporation, Fort Smith, Arkansas
Little Rock, Arkansas

2004

Chief Executive Officer, E-Z Mart Stores, Inc.,
Texarkana, Texas
Chief Executive Officer, Baxter Regional Medical
Center, Mountain Home, Arkansas
President and Chief Executive Officer,
ALLTEL Corporation, Little Rock, Arkansas

2004

Chairman and Chief Executive Officer, Stock Yards
Bank & Trust Company, Louisville, Kentucky
Executive Director and Chief Executive Officer,
Welborn Foundation, Evansville, Indiana

2004

2005
2006

2006

2005
2006

LITTLE ROCK BRANCH

Appointed by the
Federal Reserve Bank
Lawrence A. Davis, Jr
David R. Estes
Robert A. Young IE
Raymond E. Skelton
Appointed by the
Board of Governors
Sonja Yates Hubbard
Stephen M. Erixon
Scott T. Ford

2005
2005
2006

2005
2006

LOUISVILLE BRANCH

Appointed by the
Federal Reserve Bank
David H. Brooks
Marjorie Z. Soyugenc




2005

254 91st Annual Report, 2004

Directors—Continued
BANK or BRANCH, Category

Name
L. Clark Taylor, Jr.
Gordon B. Guess

l me

Chief Executive Officer, Ephraim McDowell Health,
Danville, Kentucky
Chairman, President, and Chief Executive Officer,
The Peoples Bank, Marion, Kentucky

Appointed by the
Board of Governors
Cornelius A. Martin

President and Chief Executive Officer, Martin
Management Group, Bowling Green, Kentucky
Maria Gerwing Hampton ... President, The Housing Partnership, Inc.,
Louisville, Kentucky
Norman E. Pfau, Jr.
President and Chief Executive Officer, Geo. Pfau's Sons
Company, Inc., Jeffersonville, Indiana

Term expires
Dec. 31
2005
2006

2004
2005
2006

MEMPHIS BRANCH

Appointed by the
Federal Reserve Bank
Walter L.Morris, Jr.
James A. England
TomA.Wright
David P. Rumbarger, Jr
Appointed by the
Board of Governors
Gregory M. Duckett
Meredith Baird Allen
Russell Gwatney

President, H&M Lumber Co., Inc.,
West Helena, Arkansas
Chairman, President, and Chief Executive Officer,
Decatur County Bank, Decaturville, Tennessee
Chairman and Chief Executive Officer, Enterprise
National Bank, Memphis, Tennessee
President and Chief Executive Officer, Community
Development Foundation, Tupelo, Mississippi

2004

Senior Vice President and Corporate Counsel,
Baptist Memorial Health Care Corporation,
Memphis, Tennessee
Vice President, Marketing, Staple Cotton Cooperative
Association, Greenwood, Mississippi
President, Gwatney Companies, Memphis, Tennessee

2004

2005
2005
2006

2005
2006

DISTRICT 9—MINNEAPOLIS
RESERVE BANK

Class A
Kay Clevidence
Robert Dickson
Douglas C. Morrison
Class B
Jay F. Hoeschler
Randy Peterson




President, Farmers State Bank, Victor, Montana
Chairman and Chief Executive Officer, The First
National Bank of Fairfax, Fairfax, Minnesota
Chief Financial Officer, Citibank (South Dakota) N.A.,
Sioux Falls, South Dakota

2004
2005

President and Owner, Hoeschler Corporation,
La Crosse, Wisconsin
General Manager, Precision Edge Surgical
Products Co., LLC, Sault Ste. Marie, Michigan

2004

2006

2005

Federal Reserve System Organization 255

BANK or BRANCH, Category

Name
D. Greg Heineman
Class C
Frank L. Sims
Linda Hall Whitman
James J. Hynes

11 lie

Term expires
Dec. 31

Chairman, Williams Insurance Agency,
Sioux Falls, South Dakota

2006

Corporate Vice President, Transportation, Cargill, Inc.,
Minnetonka, Minnesota
Chief Executive Officer, MinuteClinic,
Minneapolis, Minnesota
Executive Administrator, Twin City Pipe Trades Service
Association, St. Paul, Minnesota

2004

Former Dean and Director, Museum of the Rockies,
Bozeman, Montana
Regional President and Chief Executive Officer,
Wells Fargo Bank Montana, N.A., Billings, Montana
President and Chief Executive Officer, The First State
Bank of Malta, Malta, Montana

2004

President and Chief Executive Officer, Wheat Montana
Farms and Bakery, Three Forks, Montana
President, Washington Corporations, Missoula, Montana

2004

2005
2006

HELENA BRANCH

Appointed by the
Federal Reserve Bank
Marilyn F. Wessel
Joy N. Ott
Ronald D. Scott
Appointed by the
Board of Governors
Dean Folkvord
Lawrence R. Simkins

2004
2005

2005

DISTRICT 10—KANSAS CITY
RESERVE BANK

Class A
President and Chief Executive Officer, First National
Bank of Newman Grove, Newman Grove, Nebraska
Rick L. Smalley
Chief Executive Officer, Dickinson Financial
Corporation, Kansas City, Missouri
Mark W. Schifferdecker . . . . President and Chief Executive Officer, Girard National
Bank, Girard, Kansas

Jeffrey L. Gerhart

Class B
Frank Moore
Dan L. Dillingham
Kevin K. Nunnink
Class C
Richard H. Bard




2004
2005
2006

President, Spearhead Ranch Company,
Douglas, Wyoming
Chief Executive Officer, Dillingham Insurance,
Enid, Oklahoma
Chairman, Integra Realty Resources, Westwood, Kansas

2004

Chairman and Chief Executive Officer, International
Surface Preparation Corporation, Golden, Colorado

2004

2005
2006

256 91st Annual Report, 2004

Directors—Continued
BANK or BRANCH, Category

Name
Vacancy
Robert A. Funk

1 lllc

Chairman and Chief Executive Officer,
Express Personnel Services International,
Oklahoma City, Oklahoma

Term expires
Dec. 31
2005
2006

DENVER BRANCH

Appointed by the
Federal Reserve Bank
Michael R. Stanford
Virginia K. Berkeley
James A. Helzer
Kristy A. Schloss
Appointed by the
Board of Governors
James A. King
Kathleen Avila
Thomas Williams

President and Chief Executive Officer, First State
Bancorporation, Albuquerque, New Mexico
President, CoBiz Bank, N.A., Denver, Colorado
President and Chief Executive Officer, Unicover
Corporation, Cheyenne, Wyoming
President and Chief Executive Officer, Schloss
Engineered Equipment, Inc., Aurora, Colorado

2004

Chief Executive Officer, BT, Inc., Riverton, Wyoming
Managing Member, Avila Retail Development &
Management, Albuquerque, New Mexico
President and Chief Executive Officer, Williams
Group LLC, Golden, Colorado

2004
2005

President and Chief Executive Officer, Citizens
Bank & Trust Co., Okmulgee, Oklahoma
President and Chief Operating Officer,
The F&M Bank & Trust Company, Tulsa, Oklahoma
President, Greater Tulsa Hispanic Chamber
of Commerce, Tulsa, Oklahoma
Chairman, Ratcliffe's Inc., Weatherford, Oklahoma

2004

Chairman and Chief Executive Officer, Devon Energy
Corporation, Oklahoma City, Oklahoma
President and Chief Executive Officer, Mercy Health
System of Oklahoma, Inc., Oklahoma City, Oklahoma
Plant Manager, Oklahoma City Assembly,
General Motors, Oklahoma City, Oklahoma

2004

Dean, College of Business Administration,
University of Nebraska-Lincoln, Lincoln, Nebraska
Retired President and Chief Executive Officer,
Wells Fargo Bank, N.A., Omaha, Nebraska

2004

2005
2006
2006

2006

OKLAHOMA CITY BRANCH

Appointed by the
Federal Reserve Bank
W. Carlisle Mabrey III
Robert R. Gilbert ID
Fred M. Ramos
Richard K. Ratcliffe
Appointed by the
Board of Governors
J. Larry Nichols
Michael J. Packnett
Tyree O. Minner

2004
2005
2006

2005
2006

OMAHA BRANCH

Appointed by the
Federal Reserve Bank
Cynthia Hardin Milligan ..
Judith A. Owen




2005

Federal Reserve System Organization 257

BANK or BRANCH, Category

Name
Rodrigo Lopez
Michael J. Nelson
Appointed by the
Board of Governors
Terry L. Moore
James A. Timmerman

A.F. Raimondo

l lllc

Term expires
Dec. 31

President and Chief Executive Officer, AmeriSphere
Multifamily Finance, LLC, Omaha, Nebraska
Chairman, FirsTier Bank, Kimball, Nebraska

2006

President, Omaha Federation of Labor,
Omaha, Nebraska
Chief Financial Officer and Secretary/Treasurer,
Timmerman and Sons Feeding Co.,
Springfield, Nebraska
Chairman and Chief Executive Officer,
Behlen Mfg. Co., Columbus, Nebraska

2004

2006

2005

2006

DISTRICT 11—DALLAS
RESERVE BANK

Class A
David S. Barnard
Richard W. Evans, Jr.
Matthew T. Doyle
Class B
Vacancy
Malcolm Gillis
Judy Ley Allen
Class C
Ray L. Hunt
Patricia M. Patterson .
Anthony R. Chase

Chairman and Chief Executive Officer, National Bank,
Gatesville, Texas
Chairman and Chief Executive Officer, Cullen/Frost
Bankers, Inc., San Antonio, Texas
Vice Chairman and Chief Executive Officer,
Texas First Bank, Texas City, Texas

University Professor and Past President,
Rice University, Houston, Texas
Partner, Allen Investments, Houston, Texas

2004
2005
2006

2004
2005
2006

Chairman, President, and Chief Executive Officer,
Hunt Consolidated, Inc., Dallas, Texas
President, Patterson Investments, Inc., Dallas, Texas
Chairman and Chief Executive Officer, ChaseCom, LP,
Houston, Texas

2004

Regional President, State National Bank, El Paso, Texas
President and Chief Executive Officer, First National
Bank of Alamogordo, Alamogordo, New Mexico
Chairman, Fred Loya Insurance, El Paso, Texas
Chairman, President, and Chief Executive Officer,
Helen of Troy Corporation Limited, El Paso, Texas

2004
2005

President, MFI International Mfg., LLC, El Paso, Texas

2004

2005
2006

EL PASO BRANCH

Appointed by the
Federal Reserve Bank
F. James Volk
Pete Cook
Fred J. Loya
Gerald J. Rubin
Appointed by the
Board of Governors
Cecilia Ochoa Levine




2005
2006

258 91st Annual Report, 2004

Directors—Continued
BANK or BRANCH, Category

Name
Ron C. Helm
William V. Flores

Titlo
iiiie

Term expires
Dec. 31

Owner, Helm Land and Cattle Company,
Van Horn, Texas
Provost, New Mexico State University,
Las Cruces, New Mexico

2005

Chairman, Weekley Development Company,
Houston, Texas
President, Texas Southern University, Houston, Texas
Chairman, Chief Executive Officer, and President,
DX Service Company, Inc., Houston, Texas
Chairman and Chief Executive Officer, The First
National Bank of Bryan, Bryan, Texas

2004

President and Chief Executive Officer, Anadarko
Petroleum Corporation, Houston, Texas
Chairman and Chief Executive Officer,
Tejas Office Products, Inc., Houston, Texas

2004

2006

HOUSTON BRANCH

Appointed by the
Federal Reserve Bank
Richard W Weekley
Priscilla D. Slade
S. Reed Morian
Timothy N. Bryan
Appointed by the
Board of Governors
James T. Hackett
Lupe Fraga
Vacancy

2005
2005
2006

2005
2006

SAN ANTONIO BRANCH

Appointed by the
Federal Reserve Bank
R.TomRoddy
Matt F. Gorges
Daniel B. Hastings, Jr.
Steven R. Vandegrift
Appointed by the
Board of Governors
Ron R. Harris
Elizabeth Chu Richter
Marvin L. Ragsdale

Chairman, Lone Star Capital Bank, N.A.,
San Antonio, Texas
Chairman and Chief Executive Officer, Valley
International Cold Storage, Inc., Harlingen, Texas
President and Owner, Daniel B. Hastings, Inc.,
Laredo, Texas
Founder and President, SRV Holdings, Austin, Texas,

2004

General Partner, Southwest Capital Partners,
Austin, Texas
Chairman and Chief Executive Officer,
Richter Architects, Corpus Christi, Texas
President, Iron Workers District Council of the State
of Texas, Georgetown, Texas

2004

2005
2005
2006

2005
2006

DISTRICT 12—SAN FRANCISCO
RESERVE BANK

Class A
Richard W. Decker, Jr
Candace Hunter Wiest
Richard C. Hartnack



Chairman and Co-Founder, Belvedere Capital
Partners, LLC, San Francisco, California
President, Inland Empire National Bank,
Riverside, California
Vice Chairman, Union Bank of California,
Los Angeles, California

2004
2005
2006

Federal Reserve System Organization 259

BANK or BRANCH, Category

Name
Class B
Jack McNally
David K.Y. Tang
Barbara L. Wilson
Class C
Sheila D. Harris
George M. Scalise

Titip
i

me

Term expires
Dec. 31

Principal, JKM Consulting, Sacramento, California
Partner, Preston Gates & Ellis LLP, Seattle, Washington
Consultant and Regional Vice President (Retired),
Qwest Communications, Boise, Idaho

2004
2005
2006

Director, Arizona Department of Housing,
Phoenix, Arizona
President, Semiconductor Industry Association,
San Jose, California

2004

Vacancy

2005
2006

Los ANGELES BRANCH

Appointed by the
Federal Reserve Bank
Russell Goldsmith
Peter M. Thomas
D. Linn Wiley
Karen Caplan
Appointed by the
Board of Governors
William D. Jones
Diane Donoghue
Anita Santiago

Chairman and Chief Executive Officer, City National
Bank, Beverly Hills, California
Managing Partner, Thomas & Mack Co.,
Las Vegas, Nevada
President and Chief Executive Officer, Citizens Business
Bank, Ontario, California
President and Chief Executive Officer, Frieda's, Inc.,
Los Alamitos, California

2004

Chairman, President, and Chief Executive Officer,
CityLink Investment Corporation,
San Diego, California
Executive Director, Esperanza Community Housing
Corporation, Los Angeles, California
President, Anita Santiago Advertising,
Santa Monica, California

2004

2005
2006
2006

2005
2006

PORTLAND BRANCH

Appointed by the
Federal Reserve Bank
George J. Passadore
Chairman, Oregon, Wells Fargo Bank, Portland, Oregon
William D. Thorndike, Jr. .. President, Medford Fabrication, Medford, Oregon
James H. Rudd
Chief Executive Officer, Ferguson Wellman Capital
Management, Inc., Portland, Oregon
Robert D. Sznewajs
President and Chief Executive Officer, West Coast
Bancorp, Lake Oswego, Oregon
Appointed by the
Board of Governors
Karla S. Chambers
Peter O. Kohler
Judi Johansen



Vice President, Stahlbush Island Farms, Inc.,
Corvallis, Oregon
President, Oregon Health & Science University,
Portland, Oregon
President and Chief Executive Officer, PacifiCorp,
Portland, Oregon

2004
2005
2005
2006

2004
2005
2006

260 91st Annual Report, 2004

Directors—Continued
BANK or BRANCH, Category

Name

Title

Term expires
Dec. 31

SALT LAKE CITY BRANCH

Appointed by the
Federal Reserve Bank
Curtis H. Harris
A. Scott Anderson
Deborah Bayle Nielsen
Annette K. Herman
Appointed by the
Board of Governors
Gary L. Crocker
H. Roger Boyer
William C. Glynn

Chairman, President, and Chief Executive Officer,
Barnes Banking Company, Kaysville, Utah
President and Chief Executive Officer, Zions First
National Bank, Salt Lake City, Utah
President and Chief Executive Officer, United Way
of Salt Lake, Salt Lake City, Utah
President and Chief Executive Officer,
UnitedHealthcare, Salt Lake City, Utah

2004

Chairman and Chief Executive Officer, AnZenBio,
Salt Lake City, Utah
Chairman, The Boyer Company, Salt Lake City, Utah
President, Intermountain Industries, Inc., Boise, Idaho

2004

2005
2005
2006

2005
2006

SEATTLE BRANCH

Appointed by the
Federal Reserve Bank
Chairman and Chief Executive Officer, Advanced
Digital Information Corp., Redmond, Washington
Mary E. Pugh
President, Pugh Capital Management, Inc.,
Seattle, Washington
Kenneth M. Kirkpatrick . . . . President, U.S. Bank, Seattle, Washington
President, NANA Development Corp.,
Helvi K. Sandvik
Anchorage, Alaska

Peter H. van Oppen

Appointed by the
Board of Governors
Mic R. Dinsmore
James R. Gill
David W. Wyckoff




Chief Executive Officer, Port of Seattle,
Seattle, Washington
President, Pacific Northwest Title, Seattle, Washington
Chairman and Chief Executive Officer, Wyckoff
Farms, Inc., Grandview, Washington

2004
2005
2005
2006

2004
2005
2006

Members of the Board of Governors, 1913-2004 261

Members of the Board of Governors, 1913-2004
Appointed Members
Name

Charles S. Hamlin
Paul M. Warburg
Frederic A. Delano
W.P.G. Harding
Adolph C. Miller
Albert Strauss
Henry A. Moehlenpah
Edmund Platt
David C. Wills
John R. Mitchell
Milo D. Campbell
Daniel R. Crissinger
George R. James
Edward H. Cunningham
Roy A. Young
Eugene Meyer
Wayland W. Magee
Eugene R. Black
M.S. Szymczak
J.J. Thomas
Marriner S. Eccles
Joseph *A. Broderick
John K. McKee
Ronald Ransom
Ralph W. Morrison
Chester C. Davis
Ernest G. Draper
Rudolph M. Evans
James K. Vardaman, Jr.
Lawrence Clayton
Thomas B. McCabe
Edward L. Norton
Oliver S. Powell
Wm. McC. Martin, Jr.
A.L. Mills, Jr.
J.L. Robertson
C. Canby Balderston
Paul E. Miller

Federal Reserve
District

Date initially took
oath of office

Other dates'

Aug. 10, 1914 Reappointed in 1916 and 1926. Served
until Feb. 3, 1936.2
New York
Aug. 10, 1914 Term expired Aug. 9, 1918.
Chicago
Aug. 10, 1914 Resigned July 21, 1918.
Aug. 10, 1914 Term expired Aug. 9, 1922.
Atlanta
San Francisco Aug. 10, 1914 Reappointed in 1924. Reappointed in 1934
from the Richmond District. Served
until Feb. 3, 1936.2
New York
Oct. 26, 1918 Resigned Mar. 15,1920.
Chicago
Nov. 10, 1919 Term expired Aug. 9, 1920.
New York
June 8, 1920 Reappointed in 1928. Resigned Sept. 14,
1930.
Sept. 29, 1920 Term expired Mar. 4, 1921.
Cleveland
Minneapolis
May 12, 1921 Resigned May 12, 1923.
Mar. 14, 1923 Died Mar. 22, 1923.
Chicago
Cleveland
May 1, 1923 Resigned Sept. 15, 1927.
St. Louis
May 14, 1923 Reappointed in 1931. Served until Feb. 3,
1936.3
May 14, 1923 Died Nov. 28, 1930.
Chicago
Resigned Aug. 31, 1930.
Minneapolis
Oct. 4, 1927
New York
Sept. 16, 1930 Resigned May 10, 1933.
Kansas City
May 18, 1931 Term expired Jan. 24, 1933.
Atlanta
May 19, 1933 Resigned Aug. 15, 1934.
Chicago
June 14, 1933 Reappointed in 1936 and 1948. Resigned
May 31, 1961.
June 14, 1933 Served until Feb. 10, 1936.2
Kansas City
San Francisco Nov. 15, 1934 Reappointed in 1936, 1940, and 1944.
Resigned July 14, 1951.
New York
Feb. 3, 1936
Resigned Sept. 30, 1937.
Cleveland
Feb. 3, 1936
Served until Apr. 4, 1946.2
Atlanta
Feb. 3,1936
Reappointed in 1942. Died Dec. 2, 1947.
Dallas
Feb. 10, 1936 Resigned July 9, 1936.
Richmond
June 25, 1936 Reappointed in 1940. Resigned Apr. 15,
1941.
New York
Mar. 30, 1938 Served until Sept. 1, 1950 ?
Mar. 14, 1942 Served until Aug. 13, 1954.2
Richmond
St. Louis
Apr. 4, 1946
Resigned Nov. 30,1958.
Boston
Feb. 14,1947 Died Dec. 4, 1949.
Philadelphia
Apr. 15, 1948 Resigned Mar. 31,1951.
Atlanta
Sept. 1, 1950 Resigned Jan. 31, 1952.
Minneapolis
Sept. 1, 1950 Resigned June 30, 1952.
New York
April 2, 1951 Reappointed in 1956. Term expired
Jan. 31, 1970.
San Francisco Feb. 18, 1952 Reappointed in 1958. Resigned Feb. 28,
1965.
Kansas City
Feb. 18, 1952 Reappointed in 1964. Resigned Apr. 30,
1973.
Philadelphia
Aug. 12, 1954 Served through Feb. 28, 1966.
Minneapolis
Aug. 13, 1954 Died Oct. 21, 1954.
Boston




262 91st Annual Report, 2004

Appointed Members—Continued
Federal Reserve
District

Date initially took
oath of office

Chas. N. Shepardson
G.H. King, Jr.

Dallas
Atlanta

Mar. 17, 1955
Mar. 25, 1959

George W. Mitchell

Chicago

Aug. 31,1961

J. Dewey Daane
Sherman J. Maisel
Andrew F. Brimmer
William W.Sherrill

Richmond
San Francisco
Philadelphia
Dallas

Nov. 29, 1963
Apr. 30, 1965
Mar. 9,1966
May 1, 1967

Arthur F. Burns

New York

Jan. 31, 1970

John E. Sheehan
Jeffrey M. Bucher
Robert C. Holland
Henry C. Wallich
Philip E. ColdweU
Philip C. Jackson, Jr.
J. Charles Partee
Stephen S. Gardner
David M. Lilly
G.William Miller
Nancy H. Teeters
Emmett J. Rice
Frederick H. Schultz
Paul A. Volcker
Lyle E. Gramley
Preston Martin
Martha R. Seger
Wayne D. Angell
Manuel H. Johnson
H. Robert Heller
Edward W. Kelley, Jr.
Alan Greenspan
John P. LaWare
David W. Mullins, Jr.
Lawrence B. Lindsey
Susan M. Phillips
Alan S. Blinder
Janet L. Yellen
Laurence H. Meyer
Alice M. Rivlin
Roger W. Ferguson, Jr.
Edward M. Gramlich
Susan S. Bies
Mark W. Olson
Ben S. Bernanke
Donald L. Kohn

St. Louis
San Francisco
Kansas City
Boston
Dallas
Atlanta
Richmond
Philadelphia
Minneapolis
San Francisco
Chicago
New York
Atlanta
Philadelphia
Kansas City
San Francisco
Chicago
Kansas City
Richmond
San Francisco
Dallas
New York
Boston
St. Louis
Richmond
Chicago
Philadelphia
San Francisco
St. Louis
Philadelphia
Boston
Richmond
Chicago
Minneapolis
Atlanta
Kansas City

Jan. 4, 1972
June 5, 1972
June 11, 1973
Mar. 8, 1974
Oct. 29, 1974
July 14, 1975
Jan. 5, 1976
Feb. 13, 1976
June 1,1976
Mar. 8, 1978
Sept. 18, 1978
June 20, 1979
July 27, 1979
Aug. 6, 1979
May 28, 1980
Mar. 31, 1982
July 2, 1984
Feb. 7, 1986
Feb. 7, 1986
Aug. 19, 1986
May 26, 1987
Aug. 11, 1987
Aug. 15, 1988
May 21,1990
Nov. 26, 1991
Dec. 2, 1991
June 27, 1994
Aug. 12, 1994
June 24,1996
June 25,1996
Nov. 5, 1997
Nov. 5, 1997
Dec. 7, 2001
Dec. 7, 2001
Aug. 5, 2002
Aug. 5, 2002

Name




Other dates1
Retired Apr. 30,1967.
Reappointed in 1960. Resigned Sept. 18,
1963.
Reappointed in 1962. Served until
Feb. 13, 1976.2
Served until Mar. 8, 1974.2
Served through May 31, 1972.
Resigned Aug. 31,1974.
Reappointed in 1968. Resigned Nov. 15,
1971.
Term began Feb. 1, 1970. Resigned
Mar. 31, 1978.
Resigned June 1, 1975.
Resigned Jan. 2,1976.
Resigned May 15, 1976.
Resigned Dec. 15, 1986.
Served through Feb. 29,1980.
Resigned Nov. 17, 1978.
Served until Feb. 7, 1986.2
Died Nov. 19, 1978.
Resigned Feb. 24, 1978.
Resigned Aug. 6, 1979.
Served through June 27, 1984.
Resigned Dec. 31,1986.
Served through Feb. 11, 1982.
Resigned August 11, 1987.
Resigned Sept. 1, 1985.
Resigned April 30, 1986.
Resigned March 11, 1991.
Served through Feb. 9, 1994.
Resigned August 3, 1990
Resigned July 31, 1989.
Resigned Dec. 31,2001.
Reappointed in 1992.
Resigned April 30,1995.
Resigned Feb. 14,1994.
Resigned Feb. 5, 1997.
Served through June 30, 1998.
Term expired Jan. 31,1996.
Resigned Feb. 17,1997.
Term expired Jan. 31, 2002.
Resigned July 16, 1999.
Reappointed in 2001.

Reappointed in 2003.

Members of the Board of Governors, 1913-2004

263

Appointed Members—Continued
Term

Name

Chairmen 3
Charles S. Hamlin
W.P.G. Harding
Daniel R. Crissinger
Roy A. Young
Eugene Meyer
Eugene R. Black
Marriner S. Eccles
Thomas B. McCabe
Wm. McC. Martin, Jr.
Arthur F. Burns
G. William Miller
Paul A. Volcker
Alan Greenspan

Aug. 10, 1914-Aug. 9, 1916
Aug. 10, 1916-Aug. 9, 1922
May 1, 1923-Sept. 15,1927
Oct. 4, 1927-Aug. 31, 1930
Sept. 16, 1930-May 10, 1933
May 19, 1933-Aug. 15, 1934
Nov. 15, 1934-Jan.31, 19484
Apr. 15, 1948-Mar. 31, 1951
Apr. 2, 1951-Jan. 31, 1970
Feb. 1, 1970-Jan. 31, 1978
Mar. 8, 1978-Aug. 6, 1979
Aug. 6. 1979-Aug. 11, 1987
Aug. 11, 1987- 5

Vice Chairmen3
Frederic A. Delano
Paul M. Warburg
Albert Strauss
Edmund Platt
J.J. Thomas
Ronald Ransom
C. Canby Balderston
J.L. Robertson
George W. Mitchell
Stephen S. Gardner
Frederick H. Schultz
Preston Martin
Manuel H. Johnson
David W. Mullins, Jr.
Alan S. Blinder
Alice M. Rivlin
Roger W. Ferguson, Jr.

Aug. 10, 1914-Aug. 9, 1916
Aug. 10, 1916-Aug. 9, 1918
Oct. 26, 1918-Mar. 15, 1920
July 23, 1920-Sept. 14, 1930
Aug. 21, 1934-Feb. 10, 1936
Aug. 6, 1936-Dec.2, 1947
Mar. 11, 1955-Feb.28, 1966
Mar. 1, 1966-Apr. 30, 1973
May 1, 1973-Feb. 13, 1976
Feb. 13, 1976-Nov. 19, 1978
July 27, 1979-Feb. 11, 1982
Mar. 31, 1982-Apr. 30, 1986
Aug. 4, 1986-Aug. 3, 1990
July 24, 1991-Feb. 14, 1994
June 27, 1994-Jan. 31, 1996
June 25, 1996-July 16, 1999
Oct. 5, 1999-

NOTE. Under the original Federal Reserve Act, the
Federal Reserve Board was composed of five appointed
members, the Secretary of the Treasury (ex officio chairman of the Board), and the Comptroller of the Currency.
The original term of office was ten years; the five original
appointed members had terms of two, four, six, eight, and
ten years. In 1922 the number of appointed members was
increased to six, and in 1933 the term of office was raised
to twelve years. The Banking Act of 1935 changed the
name to the Board of Governors of the Federal Reserve
System and provided that the Board be composed of
seven appointed members; that the Secretary of the Treasury and the Comptroller of the Currency continue to
serve until Feb. 1, 1936; that the appointed members in




office on Aug. 23, 1935, continue to serve until Feb. 1,
1936, or until their successors were appointed and had
qualified; and that thereafter the terms of members be
fourteen years and that the designation of Chairman and
Vice Chairman of the Board be for four years.
1. Date following "Resigned" and "Retired" denotes
final day of service.
2. Successor took office on this date.
3. Before Aug. 23, 1935, Chairmen and Vice Chairmen were designated Governor and Vice Governor.
4. Served as Chairman Pro Tempore from February 3,
1948, to April 15, 1948.
5. Served as Chairman Pro Tempore from March 3,
1996, to June 20, 1996.

264 91st Annual Report, 2004

Ex Offido Members
Name

Term

Secretaries of the Treasury
W.G. McAdoo
Carter Glass
David F. Houston
Andrew W. Mellon
Ogden L. Mills
William H.Woodin
Henry Morgenthau, Jr.

Dec. 23,1913-Dec. 15, 1918
Dec. 16, 1918-Feb. 1, 1920
Feb. 2,1920-Mar. 3,1921
Mar. 4,1921-Feb. 12, 1932
Feb. 12,1932-Mar. 4, 1933
Mar. 4,1933-Dec. 31,1933
Jan. 1, 1934-Feb. 1, 1936

Comptrollers of the Currency
John Skelton Williams
Daniel R. Crissinger
Henry M. Dawes
Joseph W. Mclntosh
J.W. Pole
J.F.T. O'Connor

Feb. 2, 1914-Mar. 2,1921
Mar. 17,1921-Apr. 30,1923
May 1,1923-Dec. 17, 1924
Dec. 20, 1924-Nov. 20, 1928
Nov. 21,1928-Sept. 20, 1932
May 11,1933-Feb. 1,1936




Statistical Tables




266

91st Annual Report, 2004

Statement of Condition of the Federal Reserve Banks,
by Bank, December 31, 2004 and 2003
Millions of dollars
Total

Boston

Item
2004

2003

11,041
2,200
728

11,039
2,200
722

494
115
19

495
115
23

43
0

62
0

1
0

0
0

33,000

43,750

0
0

0
0

0
0

0
0

717,819
0
750,863
7,964
1,778

666,665
0
710,477
9,236
1,630

33,707
0
33,708
457
99

32,230
0
32,230
531
93

21,368
19,004
0
814,946

19,868
18,722
0
773,894

1,083
1,182
2,979
40,136

1,034
762
3,079

38363

848,370
128,933
719,437
30,783

799,933
110,176
689,757
25,652

38,054
4,137
33,917
1,445

38,627
4,750
33,877
1,240

24,043
5,912
80
1,288
31,323
7,038
2,821
791,402

23,058
5,723
162
730
29,673
9,026
2,092
756,200

1,050
0
2
2
1,054
578
151
37,145

1,633
0
2
19
1,653
576
119
37,466

11,914
11,630
0
814,946

8,847
8,847
0
773,894

1,638
1,353
0

448
448
0

40,136

38363

848,370
128,933
719,437

799,933
110,176
689,757

11,041
2,200
0
706,196
719,437

11,039
2,200
0
676,518
689,757

2004

2003

ASSETS

Gold certificate account
Special drawing rights certificate account
Coin
Loans
To depository institutions
Other
Securities purchased under agreements
to resell (triparty)
Federal agency obligations
Bought outright
Held under repurchase agreements
US. Treasury securities
Bought outright1
Held under repurchase agreements
Total loans and securities
Items in process of collection
Bank premises
Other assets
Denominated in foreign currencies2
Other 3
Interdistrict settlement account
Total assets
LIABILITIES

Federal Reserve notes outstanding (issued to Bank) ..
Less: Notes held by Federal Reserve Bank
Federal Reserve notes, net
Securities sold under agreements to repurchase
Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
Other 4
Total deposits
Deferred credit items
Other liabilities and accrued dividends5
Total liabilities
CAPITAL ACCOUNTS

Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts
FEDERAL RESERVE NOTE STATEMENT

Federal Reserve notes outstanding
Less: Held by Banks not subject to collateralization
Collateralized Federal Reserve notes
Collateral for Federal Reserve notes
Gold certificate account
Special drawing rights certificate account
Other eligible assets
U.S. Treasury and federal agency securities
Total collateral
For notes see end of table.




Statistical Tables 267
1.—Continued

New York
2004

Philadelphia
2004

2003

Richmond

Cleveland

2003

2004

2003

2004

2003

4,651
874
42

4,706
874
30

382
83
56

380
83
37

452
104
52

477
104
33

819
147
62

808
147
83

0
0

15
0

5
0

0
0

0

0

0

0

0
0

0
0

33,000

43,750

0
0

0
0

0
0

0
0

0
0

0
0

0
0

0
0

311,256
0
344,256
407
196

285,221
0
328,986
803
189

21,350
0
21,354
360
53

20,843
0
20,843
493
53

30,673
0
30,673
814
157

31,238
0
31,238
595
151

54,557
0
54,558
341
144

51,269
0
51,269
714
146

4,905
9,176
-24,125
340^81

4,289
9,264
-19,034
330,106

624
530
4,007
27,449

552
588
905
23,934

1,757
966
-495
34,479

1,665
793
-2,103
32,954

5,009
1,337
-420
61,996

4,915
1,384
2,793
62,258

335,998
35,347
300,651
13,348

325,387
23,793
301,594
10,975

32,698
7,973
24,725
916

29,636
8,288
21,347
802

34,511
5,408
29,103
1,315

33,115
4,740
28,375
1,202

64,991
12,275
52,716
2,340

59,949
9,855
50,094
1,973

11,388
5,912
57
527
17,884
651
988
333^22

5,607
5,723
139
324
11,792
1,025
658
326,045

603
0
1
28
632
490
99
26,861

719
0
1
10
730
451
87
23,417

1,272
0
2
2
1,277
505
149
32^49

1,259
0
3
26
1,288
521
113
31,500

1,645
0
7
169
1,820
544
280
57,700

5,087
0
7
108
5,203
628
213
58,110

3,430
3,430
0

2,031
2,031
0

294
294
0

259
259
0

1,065
1,065
0

727
727
0

2,148
2,148
0

2,074
2,074
0

340^81

330,106

27,449

23,934

34,479

32,954

61,996

62,258




268

91st Annual Report, 2004

1. Statement of Condition of the Federal Reserve Banks,
by Bank, December 31, 2004 and 2003—Continued
Millions of dollars
Atlanta

Chicago

Item
2004

2003

2004

2003

ASSETS

Gold certificate account
Special drawing rights certificate account
Coin
Loans
To depository institutions
Other
Securities purchased under agreements
to resell (triparty)
Federal agency obligations
Bought outright
Held under repurchase agreements
U.S. Treasury securities
Bought outright1
Held under repurchase agreements
Total loans and securities
Items in process of* collection
Bank premises
Other assets
Denominated in foreign currencies2 ..
Other 3
Interdistrict settlement account.
Total assets

894
166
82

863
166
82

924
212
111

982
212
90

5
0

14
0

17
0

0
0

0
0

0
0

0
0

48,408
0
48,415
637
276

45,037
0
45,043
723
278

64,660
0
64,674
559
157

67,367
0
67,384
942
125

1,181
1,076
9,939
62,666

1,127
1,108
4,274
53,664

2,232
1,374
225
70,469

2,033
1,571
-6,831
66,509

74,144
17,376
56,768
2,076

66,711
18,415
48,296
1,733

72,517
9,046
63,470
2,773

66,835
8,141
58,694
2,592

1,722
0
2
56
1,780
796
214
61,634

1,608
0
2
22
1,632
855
170
52,686

1,762
0
3
246
2,011

2,349
0
3
29
2,382

421
267
68,942

781
211
64,660

516
516
0

489
489
0
53,664

763
763
0
70,469

924
924
0
66,509

LIABILITIES

Federal Reserve notes outstanding (issued to Banks) .
Less: Notes held by Federal Reserve Banks
Federal Reserve notes, net
Securities sold under repurchase agreements
Deposits
Depository institutions
U.S. Treasury, general account
Foreign, official accounts
Other 4
Total deposits
Deferred credit items
Other liabilities and accrued dividends5
Total liabilities
CAPITAL ACCOUNTS

Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts
NOTE. Components may not sum to totals because of
rounding.
1. Includes securities loaned—fully guaranteed by U.S.
Treasury securities pledged with Federal Reserve Banks—
and excludes securities purchased under agreements to
resell.




62,666

2. Valued daily at market exchange rates.
3. The System total includes depository institution overdrafts of $1 million for 2004 and $3 million for 2003.

Statistical Tables 269

1.—Continued

2004

2003

2004

Dallas

Kansas City

Minneapolis

St. Louis

2003

2004

2003

2004

San Francisco
2003

2004

2003

325
71
36

331
71
53

218
30
22

224
30
23

302
66
48

303
66
42

525
98
93

507
98
141

1,055
234
105

963
234
84

2
0

0
0

13
0

2
0

1
0

2
0

0
0

0
0

0
0

20
0

0
0
21,089
0
21,090

0
0
20,974
0
20,974
341
49

0
0
15,657
0
15,669
512
123

0
0
14,881
0
14,883

0
0
18,863
0
18,864

0
0
17,916
0
17,919

0
0
53,563
0
53,583

653
82

596
56

0
0
26,126
0
26,126
383
187

0
0
64,871
0
64,871

426
125

0
0
32,729
0
32,729
334
257

2,542
168

2,689
179

835
351
-969

805
368
-166
16,720

392
416
1,584

476
439

2,058
1,287

25
19,921

2,532
1,395
4,414

22,408

267
716
1,461
36,479

442
641
6,997

24377

472
516
-1,330
21,477

35322

77316

25,006
2,819
22,187
904

23,244
3,961
19,283
807

16,370
1,982
14,387

15,491
1,335
14,155
573

24,535
4,497
20,038
809

21,599
4,083
17,516
689

41,146
7,503
33,643
1,404

39,785
7,129
32,657
1,005

88,401
20,570
67,831
2,782

79,553
15,685
63,868

479
0
1
22
507
197
111
23,906

509
0
1
14
524
308
98
21,020

473
0

564
0
1
12
577
650
74
16,029

721
0
1
32
753
409
92
22,101

813
0
1
48
861
450
81

684
0
0
26
710

953
0
1
88
1,041
487
110

2,244
0
4
57
2,305

1,957
0
3
30
1,990
2,296
157

236
236
0
24377

228
228
0
21,477

346
346
0
16,720

153
153
0
22,408

348
68
551
487
1,401

16,790

671

115
590
548
85
16,281
254
254
0
16,790

4. Includes international organization deposits of
$144 million for 2004 and $139 million for 2003.




19396
162
162
0
19,921

301
152
36,209

35301

135
135
0
36,479

111
111
0
35322

1,599
234
74,751
1,283
1,283
0

77316

11,391
72,467

2,061

70371
1,048
1,048
0
72,467

5. Includes exchange-translation account reflecting the
monthly revaluation at market exchange rates of foreign
exchange commitments.
. . . Not applicable.

270

91st Annual Report, 2004

2. Federal Reserve Open Market Transactions, 2004
Millions of dollars
Jan.

Apr.

Feb.

Mar.

619
0
80,276
80,276
0

747
0
61,389
61,389
0

341
0
56,267
56,267
0

3,516
0
74,959
74,959
0

Others within 1 year
Gross purchases ..
Gross sales
Maturity shifts . . .
Exchanges
Redemptions

ooooo

Type of security and transaction

1,311
0
10,791
-10,700
0

0
0
16,544
-16,333
0

0
0
7,293
-8,333
0

1 to 5 years
Gross purchases .
Gross sales
Maturity shifts ..
Exchanges

0
0
0
0

1,555
0
-9,361
9,627

1,293
0
-16,544
16,333

0
0
-7,293
8,333

5 to 10 years
Gross purchases ..
Gross sales
Maturity shifts . . .
Exchanges

0
0
0
0

510
0
-357
1,072

741
0
0
0

0
0
0
0

More than 10 years
Gross purchases .
Gross sales
Maturity shifts ..
Exchanges

0
0
0
0

235
0
-1,072
0

40
0
0
0

0
0
0
0

All maturities
Gross purchases .
Gross sales
Redemptions

619
0
0

4,358
0
0

2,414
0
0

3,516
0
0

619

4,358

2,414

3,516

U.S. TREASURY SECURITIES 1

Outright transactions2
Treasury bills
Gross purchases
Gross sales
Exchanges
For new bills
Redemptions

Net change in U.S. Treasury securities .
For notes see end of table.




Statistical Tables 271
2.—Continued

May

July

June

Aug.

Sept.

Oct.

Nov.

Dec.

Total

409
0
66,123
66,123
0

3,831
0
63,302
63,302
0

952
0
78,894
78,894
0

83
0
66,355
66,355
0

3,473
0
80,572
80,572
0

500
0
59,837
59,837
0

3,155
0
60,682
60,682
0

512
0
73,029
73,029
0

18,138
0
821,685
821,685
0

1,693
0
9,748
-8,913
0

0
0
6,998
-13,879
0

1,898
0
0
0
0

0
0
17,703
-21,489
0

0
0
6,535
-7,652
0

1,593
0
0
0
0

0
0
19,781
-23,125
0

1,499
0
7,987
-7,948
0

7,994
0
103,380
-118,373
0

783
0
-4,066
6,620

1,760
0
-6,998
13,879

3,078
0
0
0

428
0
-10,029
19,771

899
0
-6,535
7,652

2,765
0
0
0

2,284
0
-16,031
20,655

2,404
0
-7,987
7,948

17,249
0
-84,844
110,819

713
0
-2,520
2,293

275
0
0
0

244
0
0
0

568
0
-5,051
1,718

695
0
0
0

1,225
0
0
0

453
0
-84
2,471

340
0
0
0

5,763
0
-8,012
7,554

84
0
-3,163
0

0
0
0
0

29
0
0
0

0
0
-2,624
0

405
0
0
0

400
0
0
0

86
0
-3,666
0

85
0
0
0

1,364
0
-10,524
0

3,681
0
0

5,866
0
0

6,202
0
0

1,078
0
0

5,473
0
0

6,484
0
0

5,977
0
0

4,840
0
0

50,507
0
0

3,681

5,866

6,202

1,078

5,473

6,484

5,977

4,840

50,507




272 91st Annual Report, 2004
2. Federal Reserve Open Market Transactions, 2004—Continued
Millions of dollars
Type of security and transaction

Jan.

Mar.

Feb.

Apr.

FEDERAL AGENCY OBLIGATIONS

Outright transactions 2
Gross purchases
Gross sales
Redemptions

0
0
0

0
0
0

0
0
0

0
0
0

Repurchase agreements3
Gross purchases
Gross sales

138,250
158,500

121,750
116,500

167,500
168,750

163,650
165,900

Reverse repurchase agreements4
Gross purchases
Gross sales

416,239
410,716

391,676
393,309

444,402
444,341

443,463
442,966

-14,727

3,617

-1,189

-1,752

-14,108

7,975

1,225

1,764

Net change in federal agency obligations
TEMPORARY TRANSACTIONS

Net change in temporary transactions
Total net change in System Open Market Account
NOTE. Sales, redemptions, and negative figures reduce
holdings of the System Open Market Account; all other
figures increase such holdings. Components may not sum
to totals because of rounding.
1. Transactions exclude changes in compensation for
the effects of inflation on the principal of inflationindexed securities. Transactions include the rollover of
inflation compensation into new securities.




2. Excludes the effect of temporary transactions—
repurchase agreements, matched sale-purchase agreements (MSPs), and reverse repurchase agreements
(RRPs).
3. Cash value of agreements, which are collateralized
by U.S. government and federal agency securities.
4. Cash value of agreements, which are collateralized
by U.S. Treasury securities.

Statistical Tables 273
2.—Continued

May

June

July

Sept.

Aug.

Oct.

Nov.

Dec.

Total

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

138,500
133,000

138,750
136,000

173,500
182,250

179,500
172,000

180,000
183,000

153,500
157,500

166,750
158,250

155,250
156,000

1,876,900
1,887,650

392,021
391,293

427,319
426,071

416,602
417,540

465,642
468,417

510,205
512,957

510,553
511,896

547,160
548,325

655,872
658,454

5,621,153
5,626,285

6,227

3,998

-9,688

4,725

-5,752

-5,343

7,335

-3,332

-15,882

9,908

9,864

-3,487

5,804

-280

1,140

13312

1,508

34,626




274

91st Annual Report, 2004

3. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities,
December 31, 2002-04
Millions of dollars
December 31

Change

Description

2003 to
2004

2002 to
2003

629,406

51,154

37,259

2004

2003

2002

717,819

666,665

U.S. TREASURY SECURITIES

Held outright1
By remaining maturity
Bills
1-90 days
91 days to 1 year
Notes and bonds
1 year or less
More than 1 year through 5 years ..
More than 5 years through 10 years
More than 10 years

179,748
83,222

168,381
76,452

153,311
73,372

11,367
6,770

15,070
3,080

116,443
208,269
54,372
75,765

113,301
180,074
51,312
77,146

96,827
172,758
53,300
79,840

3,142
28,195
3,060
-1,381

16,474
7,316
-1,988
-2,694

By type
Bills . . .
Notes ..
Bonds ..

262,970
360,832
94,017

244,833
323,361
98,471

226,682
297,893
104,832

18,137
37,471
-4,454

18,151
25,468
-6,361

FEDERAL AGENCY SECURITIES

Held outright1

-10

10

By remaining maturity
1 year or less
More than 1 year through 5 years ..
More than 5 years through 10 years
More than 10 years

0
0
0
0

By issuer
Federal National Mortgage Association ..

10
0
0
0

0
0
0
0

—10
0
0
0
-10

10

TEMPORARY TRANSACTIONS

Repurchase agreements2

33,000

43,750

39,500

-10,750

4,250

Matched sale-purchase agreements
Foreign official and international accounts
Dealers

0
0
0

0
0
0

0
0

0
0
0

0
0
0

Reverse repurchase agreements3
Foreign official and international accounts
Dealers

30,783
30,783
0

25,652
25,652
0

21,091
21,091
0

5,131
5,131
0

4361
4,561
0

NOTE. Components may not sum to totals because of
rounding.
1. Excludes the effect of temporary transactions—
repurchase agreements, matched sale-purchase agreements (MSPs), and reverse repurchase agreements
(RRPs).




2. Cash value of agreements, which are collateralized
by U.S. government and federal agency securities.
3. Cash value of agreements, which are collateralized
by U.S. Treasury securities.

Statistical Tables 275
4. Number and Annual Salaries of Officers and Employees of the Federal Reserve Banks,
December 31, 2004

President
Federal Reserve
Bank (including
Branches)

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco . . .
Federal Reserve
Information
Technology .

Employees

Total

Number
Number

Number

270,900
310,000
245,300
240,500
235,000
294,300
293,700
248,100
275,000
269,800
Vacant2
300,000

61
265
57
64
76
74
92
74
43
76
54
73

9,284,100
47,044,590
7,989,500
8,719,300
10,407,200
11,099,000
13,030,938
10,270,100
6,172,000
10,645,200
7,089,154
12,051,966

914
2,732
990
1,400
1,715
1,947
1,562
985
1,158
1,350
1,184
1,761

112
56
48
38
76
39
62
55
132
46
35
38

66,615,928
190,097,746
48,614,628
62,609,238
90,915,466
96,235,343
100,031,698
50,158,181
57,721,267
67,793,739
58,676,998
108,706,295

1,088
3,054
1,096
1,503
1,868
2,061
1,717
1,115
1,334
1,473
1,273
1,873

76,170,928
237,452,336
56,849,428
71,569,038
101,557,666
107,628,643
113,356,336
60,676,381
64,168,267
78,708,739
65,766,152
121,058,261

32

4,761,900

691

4

* 53,371,219

727

58,133,119

6

1,201,300

29

0

2,369,000

35

3,570,300

1,047

159,766,248

18,418

741

1,053,916,746

20,217

1,216,665,594

2,982,600

Salaries
(dollars)1

Salaries
(dollars)1

Salary
(dollars)1

Office of
Employee
Benefits . . . .
Total

Other officers

1. Annualized salary liability based on salaries in effect
on December 31, 2004.




Fulltime

Parttime

Salaries
(dollars)1

2. Dallas president separated in November 2004.
. . . Not applicable.

276 91st Annual Report, 2004
5. Income and Expenses of the Federal Reserve Banks, by Bank, 2004
Thousands of dollars
Item

Total

Boston

New York

Philadelphia

Cleveland

CURRENT INCOME
2,653

185

379

70

47

22,344,362
269,424
865,924
57,579
23339,542

1,040,391
13,677
37,678
975
1,092,906

9,855,437
61,630
124,144
40,846
10,082,437

662,490
7,852
38,469
622
709,504

962,401
22,172
61,225
1,410
1,047,256

1,350,934
310,508
-33,957
96,778
56,528
116,624

76,036
14,679
179
2,206
2,051
5,047

261,274
71,851
-35,938
8,908
7,419
12,820

65,141
9,462
139
1,196
1,918
4,273

76,054
26,723
169
6,606
4,067
11,549

Communications
Materials and supplies

87,304
14,110
45,679

1,780
1,904
2,296

4,415
2,472
8,551

1,539
All
3,046

2,897
657
3,470

Building expenses
Taxes on real estate ..
Property depreciation
Utilities
Rent
Other

31,079
88,214
32,217
40,812
34,944

4,707
4,983
2,900
778
933

4,452
14,581
6,472
16,083
6,854

1,561
3,595
2,464
305
2,002

1,921
6,558
1,998
351
2,605

Equipment
Purchases
Rentals
Depreciation
Repairs and maintenance

26,881
31,836
101,172
92,374

1,050
1,770
5,575
6,079

4,752
1,847
9,049
8,662

834
640
5,838
5,513

1,713
342
5,937
6,668

Earnings-credit costs .
Other
Recoveries
Expenses capitalized2

116,033
70,80^
-79,364
-22,825

5,900
29,769
-11,838
-495

38,756
48,381
-9,695
-6,880

7,454
9,532
-3,196
-2,006

8,230
9,865
-2,542
-265

2,608,684
-369,979
2,238,705

158088
-23,030
135,259

485,085
-74,709
410,377

121,669
-21,111
100,559

175,573
-42,854
132,718

Loans
US. Treasury and federal
agency securities
Foreign currencies
Priced services
Other
Total
CURRENT EXPENSES

Salaries and other personnel
expenses
Retirement and other benefits
Net periodic pension costs1 ..
Fees
Travel
Software expenses
Postage and other shipping

Total
Reimbursements .
Net expenses .

For notes see end of table.




Statistical Tables 277
5.—Continued

Richmond

Atlanta

Chicago

St. Louis

55
1,676,581

109
1,483,890

551
2,041,238

178
657,563

549
482,515

256
581,234

28
967,792

247
1,932,829

63,356
66,718
2,520

14,915
160,899
2,003

28,114
114,006
2,677

6,920
39,916
899

10,545
45,601
439

5,030
52,761
550

3,515
46,416
886

31,696
78,090
3,752

1,809,230

1,661^17

2,186,586

705,476

539,649

639,831

1,018,637

2,046,613

178,316
38,006
249
50,376
8,089
51,250

127,914
24,164
111
6,546
5,790
4,579

121,506
22,251
167
5,514
6,500
3,984

71,919
13,643
186
6,564
3,506
3,384

66,896
16,270
197
1,603
2,992
2,505

91,096
14,410
137
1,156
4,223
3,704

74,450
19,045
151
2,278
3,145
5,183

140,332
40,004
229
3,826
6,829
8,349

4,164
1,780
6,029

51,388
1,034
5,647

4,473
1,239
3,665

2,377
979
2,450

2,734
1,011
1,682

3,138
742
2,497

2,361
708
2,983

6,038
1,164
3,363

2,157
7,919
3,502
14,586
4,413

3,417
10.080
2,801
899
3,467

1,590
9,042
1,885
3,186
5,034

477
4,602
1,837
1,291
1,117

3,860
4,548
1,668
233
1,577

1,112
4,223
1,683
1,666
916

2,834
5,646
1,935
1,288
3,739

2,992
12,438
3,072
148
2,287

7,672
23,509
36,588
20,302

2,002
726
8,255
11,142

1,701
565
4,831
8,855

1,283
197
3,617
3,755

1,339
541
2,314
2,948

1,587
316
4,746
3,362

1,165
939
5,062
5,346

1,783
445
9,360
9,741

16,512
-235,234
-26,824
-1,933

5,318
15,106
-2,660
-455

13,704
43,740
-6,227
-782

1,786
65,884
-1,656
-3,819

2,309
17,747
-843
-1,265

3,644
19,042
-2,847
-1,639

2,326
31,328
-6,196
-1,133

10,094
15,646
-4,840
-2,153

211,428
-31,751
179,677

287^36
-16,555
270,780

256,420
-7,044
249,376

185,379
-90,742
94,636

132^64
-21,350
111,514

158,914
-13,648
145,265

164,583
-11,578
153,005

271,146
-15,607
255,539




Minneapolis Kansas City

Dallas

San Francisco

278

91st Annual Report, 2004

5. Income and Expenses of the Federal Reserve Banks, by Bank, 2004—Continued
Thousands of dollars
Item

Boston

Total

New York

Philadelphia

957,648

9,672,060

608,945

Cleveland

PROFIT AND LOSS

Current net income
Additions to and deductions
from {-) current net income 3
Profits on sales of U.S. Treasury
and federal agency
securities
Profits on foreign exchange
transactions
Other additions
Total additions
Losses on sales of U.S. Treasury
and federal agency
securities
Losses on foreign exchange
transactions
Interest expense on reverse
repurchase agreements
Other deductions
Total deductions
Net addition to or
deduction from (-)
current net income

21,301,238

914,537

0

0

0

0

0

1,230,325
396
1,230,721

62,418
2
62,420

281,819
40
281,859

35,898
21
35,918

101,203

0

0

0

0

0

15
101,219

-13,175

0

0

0

-13,175

-290,153
-9,487

-14,315
-1

-131,228
-19

-9,101
-A

0
-1

-131,247

-9,105

-13,176

150,612

26,813

88,042

-14,316

-312,815
48,104

Cost of unreimbursed Treasury
services

917,906

Assessments by Board
Board expenditures4 ..
Cost of currency

35
272,331
503,784

14,095
33,919

25
62,507
117,119

10
8,023
26,153

0
22,192
23,070

21,442,992

Net income before payment to
U.S. Treasury

957,738

9,643,022

601,573

957,317

Dividends paid
Payments to U.S. Treasury
(interest on Federal
Reserve notes)

582,402

53,156

136,390

16,824

45,121

18,078,003

0

8,107,0^2

549,401

574,815

Transferred to/from surplus

2,782,587

904,581

1,399,011

35,348

337,381

8,846,916
11,629,504

448,422
1,353,004

2,030,557
3,429,567

258,560
293,908

727,244
1,064,625

Surplus, January 1
Surplus, December 31

NOTE. Components may not sum to totals because of
rounding.
1. Reflects the effect of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions (SFAS
87). The System Retirement Plan for employees is
recorded on behalf of the System on the books of the
Federal Reserve Bank of New York, resulting in a
decrease in expenses of $36,556 thousand. The expenses
related to the Benefit Equalization Plan and the Supplemental Retirement Plan are recorded by each Federal
Reserve Bank.




2. Includes expenses for labor and materials capitalized and depreciated or amortized as charges to activities
in the periods benefited.
3. Includes reimbursement from the U.S. Treasury for
uncut sheets of Federal Reserve notes, gains and losses on
the sale of Reserve Bank buildings, counterfeit currency
that is not charged back to the depositing institution, and
stale Reserve Bank checks that are written off.
4. For additional details, see the chapter "Board of
Governors Financial Statements."

Statistical Tables 279
5.-—Continued

Richmond

Atlanta

Chicago

St. Louis

Minneapolis Kansas City

Dallas

San Francisco

1,629,553

1,391,037

1,937,209

610,840

428,135

494,565

865,633

1,791,074

288,950
8
288,958

68,071
5
68,077

128,442
5
128,448

31,658
5
31,663

48,113
3
48,116

22,814
8
22,822

15,780
279
16,059

145,157
4
145,162

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

-23,101
-3
-23,104

-20,462
-184
-20,646

-27,892
-1,404
-29,296

-9,019
-3
-9,022

-6,642
-2
-6,644

-8,002
-1
-8,003

-13,498
-4
-13,502

-26,893
-7,860
-34,753

265,854

47,430

99,152

22,641

41,472

14,819

2,556

110,409

0

0

0

0

0

0

0

0

63,193
39,010

15,051
61,605

28,933
47,395

6,979
16,115

9,912
13,671

4,851
17,234

3,514
42,533

33,083
65,960

1,793,204

1,361,811

1,960,033

610,387

446,024

487,299

822,143

1,802,440

125,013

30,224

56,831

13,930

16,461

9,118

7,513

71,819

1,593,869

1,304,705

2,063,931

589,070

520,699

487,495

790,246

1,496,150

74,322

26,882

-160,728

7,387

-91,136

-9,314

24,383

234,471

2,073,888
2,148,210

489,053
515,935

924,227
763,499

228,257
235,644

345,531
254,396

162,382
153,068

110,570
134,953

1,048,225
1,282,696




280

91st Annual Report, 2004

6. Income and Expenses of the Federal Reserve Banks, 1914-2004
Thousands of dollars

Federal Reserve Bank
and period

Current
income

Net
expenses

Net additions
or
deductions (-) 1

Board of Governors
Board
expenditures

Costs
of currency

All Banks

1914-15 ..
1916
1917
1918
1919

2,173
5,218
16,128
67,584
102,381

2,018
2,082
4,922
10,577
18,745

6
-193
-1,387
-3,909
-4,673

302
192
238
383
595

1920.
1921.
1922.
1923.
1924.
1925.
1926.
1927.
1928.
1929.

181,297
122,866
50,499
50,709
38,340
41,801
47,600
43,024
64,053
70,955

27,549
33,722
28,837
29,062
27,768
26,819
24,914
24,894
25,401
25,810

-3,744
-6,315
-4,442
-8,233
-6,191
^,823
-3,638
-2,457
-5,026
-4,862

710
741
723
703
663
709
722
779
698
782

1,714
1,845
806
3,099

1930..
1931..
1932..
1933..
1934..
1935..
1936..
1937..
1938..
1939..

36,424
29,701
50,019
49,487
48,903
42,752
37,901
41,233
36,261
38,501

25,358
24,843
24,457
25,918
26,844
28,695
26,016
25,295
25,557
25,669

-93
311
-1,413
-12,307
-4,430
-1,737
486
-1,631
2,232
2,390

810
719
729
800
1,372
1,406
1,680
1,748
1,725
1,621

2,176
1,479
1,106
2,505
1,026
1,477
2,178
1,757
1,630
1,356

1940..
1941..
1942..
1943..
1944..
1945..
1946..
1947..
1948..
1949..

43,538
41,380
52,663
69,306
104,392
142,210
150,385
158,656
304,161
316,537

25,951
28,536
32,051
35,794
39,659
41,666
50,493
58,191
64,280
67,931

11,488
721
-1,568
23,768
3,222
-830
-626
1,973
-34,318
-12,122

1,704
1,840
1,746
2,416
2,296
2,341
2,260
2,640
3,244
3,243

1,511
2,588
4,826
5,336
7,220
4,710
4,482
4,562
5,186
6,304

1950..
1951..
1952..
1953..
1954..
1955..
1956..
1957..
1958..
1959..

275,839
394,656
456,060
513,037
438,486
412,488
595,649
763,348
742,068
886,226

69,822
83,793
92,051
98,493
99,068
101,159
110,240
117,932
125,831
131,848

36,294
-2,128
1,584
-1,059
-134
-265
-23
-7,141
124
98,247

3,434
4,095
4,122
4,100
4,175
4,194
5,340
7,508
5,917
6,471

7,316
7,581
8,521
10,922
6,490
4,707
5,603
6,374
5,973
6,384

I960..
1961..
1962..
1963..
1964.
1965.,
1966.
1967.
1968.
1969.

1,103,385
941,648
1,048,508
1,151,120
1,343,747
1,559,484
1,908,500
2,190,404
2,764,446
3,373,361

139,894
148,254
161,451
169,638
171,511
172,111
178,212
190,561
207,678
237,828

13,875
3,482
-56
615
726
1,022
996
2,094
8,520
-558

6,534
6,265
6,655
7,573
8,655
8,576
9,022
10,770
14,198
15,020

7,455
6,756
8,030
10,063
17,230
23,603
20,167
18,790
20,474
22,126

For notes see end of table.



Statistical Tables 281
6.—Continued

Payments to U.S. Treasury
Dividends
paid

Statutory
transfers 2

Interest on
Federal Reserve
notes

to surplus
(section 13b)

to surplus
(section 7)

217
1,743
6,804
5,541
5,012

1,134

'. '. '.

2,704

'. '. '.

5.654
6,120
6,307
6,553
6,682
6,916
7,329
7,755
8,458
9,584

60,725
59,974
10,851
3,613
114
59
818
250
2,585
4,283

82,916
15,993
-660
2,546
-3,078
2,474
8,464
5,044
21,079
22,536

10,269
10,030
9,282
8,874
8,782
8,505
7,830
7,941
8,019
8,110

17

-2,298
-7,058
11,021
-917
6,510
607
353
2,616
1,862
4,534

8,215
8,430
8,669
8,911
9,500
10,183
10,962
11,523
11,920
12,329

2,6il

'. '. .

' 298
227
177
120
25

' . '.

U34
48,334
70,652

82
141
198
245
327
248
67
36

75,284
166,690
193,146

-60
28
103
67
-419
-426
-54
-4
50
135
201
262
28
87

17,617
571
3,554
40,327
48,410
81,970
81,467
8,366
18,523
21,462

13,083
13,865
14,682
15,558
16,442
17,712
18,905
20,081
21,197
22,722

196,629
254,874
291,935
342,568
276,289
251,741
401,556
542,708
524,059
910,650

21,849
28,321
46,334
40,337
35,888
32,710
53,983
61,604
59,215
-93,601

23,948
25,570
27,412
28,912
30,782
32,352
33,696
35,027
36,959
39,237

896,816
687,393
799,366
879,685
1,582,119
1,296,810
1,649,455
1,907,498
2,463,629
3,019,161

42,613
70,892
45,538
55,864
-465,823
27,054
18,944
29,851
30,027
39,432




282

91st Annual Report, 2004

6. Income and Expenses of the Federal Reserve Banks, 1914-2004—Continued
Thousands of dollars

Federal Reserve Bank
and period

Current
income

Net additions
or
deductions (-) ]

Net
expenses

Assessments by
Board of Governors
Board
expenditures

Costs
of currency

1970..
1971..
1972..
1973..
1974..
1975..
1976..
1977..
1978..
1979..

3,877,218
3,723,370
3,792,335
5,016,769
6,280,091
6,257,937
6,623,220
6,891,317
8,455,309
10,310,148

276,572
319,608
347,917
416,879
476,235
514,359
558,129
568,851
592,558
625,168

11,442
94,266
-49,616
-80,653
-78,487
-202,370
7,311
-177,033
-633,123
-151,148

21,228
32,634
35,234
44,412
41,117
33,577
41,828
47,366
53,322
50,530

23,574
24,943
31,455
33,826
30,190
37,130
48,819
55,008
60,059
68,391

1980..
1981..
1982..
1983..
1984..
1985..
1986..
1987..
1988..
1989..

12,802,319
15,508,350
16,517,385
16,068,362
18,068,821
18,131,983
17,464,528
17,633,012
19,526,431
22,249,276

718,033
814,190
926,034
1,023,678
1,102,444
1,127,744
1,156,868
1,146,911
1,205,960
1,332,161

-115,386
-372,879
-68,833
-^00,366
^12,943
1,301,624
1,975,893
1,796,594
-516,910
1,254,613

62,231
63,163
61,813
71,551
82,116
77,378
97,338
81,870
84,411
89,580

73,124
82,924
98,441
152,135
162,606
173,739
180,780
170,675
164,245
175,044

1990..
1991..
1992..
1993..
1994..
1995..
1996 .
1997 .
1998 .
1999 .

23,476,604
22,553,002
20,235,028
18,914,251
20,910,742
25,395,148
25,164,303
26,917,213
28,149,477
29,346,836

1,349,726
1,429,322
1,474,531
1,657,800
1,795,328
1,818,416
1,947,861
1,976,453
1,833,436
1,852,162

2,099,328
405,729
-987,788
-230,268
2,363,862
857,788
-1,676,716
-2,611,570
1,906,037
-533,557

103,752
109,631
128,955
140,466
146,866
161,348
162,642
174,407
178,009
213,790

193,007
261,316
295,401
355,947
368,187
370,203
402,517
364,454
408,544
484,959

2000
2001 ,
2002
2003
2004

33,963,992
31,870,721
26,760,113
23,792,725
23,539,942

1,971,688
2,084,708
2,227,078
2,462,658
2,238,705

-1,500,027
-1,117,435
2,149,328
2,481,127
917,870

188,067
295,056
205,111
297,020
272,331

435,838
338,537
429,568
508,144
503,784

47,193,869

7,777345

4,138,045

7,862,963

3,140,9574
7,280,428
2,542,934
2,968,781
4,141,554
4,890,082
5,961,783
2,398,978
2,299,447
3,081,674
3,090,244
5,397,008

338,671
2,102,239
200,363
540,433
1,059,465
546,057
925,960
153,844
218,125
198,986
457,869
1,035,534

175,263
1,009,352
169,950
296,428
531,065
316,723
488,548
107,149
129,234
139,470
211,688
563,174

459,567
2,573,085
318,524
463,041
643,402
536,289
901,978
286,799
131,198
287,617
382,645
878,816

47,193,869

7,777^45

4,138,045

7,8624)63

Total, 1914-2004

641,749,857

Aggregate for each Bank,
1914-2004
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

34,556,554
222,443,921
23,869,631
39,693,014
49,669,998
33,833,187
79,234,017
22,208,274
10,784,532
23,543,939
29,310,581
72,602,208

Total

641,749,857

NOTE. Components may not sum to totals because of
rounding.
. . . Not applicable.
1. For 1987 and subsequent years, includes the cost of
services provided to the Treasury by Federal Reserve
Digitized Banks for which reimbursement was not received.
for FRASER



2. 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; and
transfers made under section 7 of the Federal Reserve Act
for 19% and 1997.

Statistical Tables 283
6.—Continued

Payments to U.S. Treasury
Dividends
paid

Statutory
transfers -

Interest on
Federal Reserve
notes

to surplus
(section 13b)

Transferred
to surplus
(section 7)

41,137
43,488
46,184
49,140
52,580
54,610
57,351
60,182
63,280
67,194

3,493,571
3,356,560
3,231,268
4,340,680
5,549,999
5,382,064
5,870,463
5,937,148
7,005,779
9,278,576

32,580
40,403
50,661
51,178
51,483
33,828
53,940
45,728
47,268
69,141

70,355
74,574
79,352
85,152
92,620
103,029
109,588
117,499
125,616
129,885

11,706,370
14,023,723
15,204,591
14,228,816
16,054,095
17,796,464
17,803,895
17,738,880
17,364,319
21,646,417

56,821
76,897
78,320
106,663
161,996
155,253
91,954
173,771
64,971
130,802

140,758
152,553
171,763
195,422
212,090
230,527
255,884
299,652
343,014
373,579

23,608,398
20,777,552
16,774,477
15,986,765
20.470,011
23,389,367
14,565,624
0
8,774,994
25,409,736

180,292
228,356
402,114
347,583
282,122
283,075
635,343
831,705
731,575
479,053

25,343,892
27,089,222
24,495,490
22,021,528
18,078,003

4,114,865
517,580
1,068,598
466,796
2,782,587

5,517,716
20,658,972
17,785,942

409,614
428,183
483,596
517,705
582,402
7,086,659

44,113,958

523,408,737

-4

338,234
1,739,744
296,712
521,358
964,861
511,227
814,121
183,699
226,818
227,829
330,064
931,991

2,579,504
17,307,161
1,312,118
2,827,043
3,083,928
2,713,230
4,593,811
1,833,837
416,227
1,249,703
1,510,802
4,686,594

26,661,526
190,344,011
18,993,444
31,805,942
38,208,638
24,601,609
66,258,309
17,213,488
7,399,208
18,486,949
23,968,266
59,467,347

135
-433
291
-10
-72
5
12
-27
65
-9
55
-17

7,086,659

44,113,958

523,408,737

-4

3. The $15,723,176 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 eliminaDigitized tion FRASER 13b surplus (1958), and $106,000 thoufor of section
sand (1996), $107,000 thousand (1997), and
http://fraser.stlouisfed.org/

Federal Reserve Bank of St. Louis

15,723,1763

1,540,038
4,292,813
436,021
1,350,863
3,156,085
810,079
1,141,414
338,194
400,462
269,691
274,686
1,712,829
15,723,1763

as statutorily required; and was increased by transfer of
$11,131 thousand from reserves for contingencies (1955),
leaving a balance of $11,629,504 thousand on December 31, 2004.
4. This amount is reduced by $2,675,308 thousand
for expenses of the System Retirement Plan. See note 1,
table 5.

284 91st Annual Report, 2004
7. Acquisition Costs and Net Book Value of Premises of the Federal Reserve Banks
and Branches, December 31, 2004
Thousands of dollars
Acquisition costs
Federal Reserve
Bank or
Branch

BOSTON . . .
NEW YORK
Buffalo

Land

22,074
20,103

Buildings
(including
vaults)1

Building machinery and
equipment

116,556
218,243
4,142

19,284
60,251
3,699

Total

2

157,914
298,596
8,729

Net
book
value

Other
real
estate 3

98,853
192,722
3,462

PHILADELPHIA

2,561

75,796

11,857

90,214

53,306

CLEVELAND .
Cincinnati

3,112
2,247
1,658

121,824
28,740
18,806

23,924
11,474
11,967

148,859
42,460
32,432

114,370
23,160
19,349

RICHMOND
Baltimore . . .
Charlotte

12,923
6,482
3,130

84,560
27,956
28,568

38,545
5,490
6,104

136,028
39,929
37,802

94,468
23,530
25,553

ATLANTA ..
Birmingham .
Jacksonville .
Miami
Nashville
New Orleans

22,735
7,194
1,812
4,266
687
3,952

146,569
46,118
20,302
17,672
6,147
9,530

15,786
4,170
3,839
4,728
3,305
4,943

185,090
57,483
25,953
26,667
10,139
18,425

171,374
52,501
17,656
17,139
5,845
11,339

48

CHICAGO
Detroit . . . .

4,512
4,706

147,541
46,497

18,392
3,358

170,445
54,561

108,476
48,865

1,386

ST. LOUIS
Little Rock
Louisville .
Memphis ..,

4,774
1,148
800
1,136

52,240
4,861
4,735
13,743

11,160
2,155
2,068
4,418

68,173
8,165
7,603
19,297

45,459
4,697
3,422
14,247

MINNEAPOLIS
Helena

15,666
2,890

104,234
9,716

13,742
958

133,643
13,564

112,292
10,216

KANSAS CITY
Denver
Oklahoma City .
Omaha

29,059
3,511
977
7,165

28,921
8,859
12,195
11,824

7,999
4,573
3,488
2,477

65,979
16,943
16,660
21,466

48,004
9,310
8,574
15,992

DALLAS . . .
El Paso
Houston
San Antonio .

31,597
262
19,908
826

111,755
3,533
102,810
7,414

20,675
1,487
0
3,103

164,027
5,283
122,718
11,343

124,925
2,330
122,718
6,713

SAN FRANCISCO
Los Angeles
Portland
Salt Lake City
Seattle

20,084
6,306
1,287
1,294
380

92,910
69,700
8,764
4,785
14,406

22,148
12,533
2,532
1,600
4,699

135,142
88,539
12,584
7,679
19,484

84,251
60,223
6,801
3,492
12,765

515

274,111

1,832,974

372,933

2,480,018

1,778^99

9,154

Total

NOTE. Components may not sum to totals because of
rounding.
1. Includes expenditures for construction at some
offices, pending allocation to appropriate accounts.
2. Excludes charge-offs of $17,699 thousand before
1952.




2
7,202

3. Covers acquisitions for banking-house purposes and
Bank premises formerly occupied and being held pending
sale.
. . . Not applicable.

Statistical Tables 285
8. Operations in Principal Departments of the Federal Reserve Banks, 2001-2004

Operation

2004

Millions of pieces (except as noted)
Currency processed
Currency destroyed
Coin received1
Checks handled
U.S. government checks
Postal money orders
Other
Government securities transfers
Transfer of funds
Automated clearinghouse transactions
Commercial
Government
Food stamps redeemed
Millions of dollars
Currency processed
Currency destroyed
Coin received1
Checks handled
U.S. government checks
Postal money orders
Other
Government securities transfers
Transfer of funds
Automated clearinghouse transactions
Commercial
Government
Food stamps redeemed

2002

2001

36,242
6,748
55,655

34,832
7,375
48,138

34,208
8,363
43,445

33,740
7,850
39,735

234
187
13,904
20
125

267
198
15,806
20
123

289
216
16,587
17
115

346
229
16,905
15
112

6,486
941
48

5,588
914
287

4,986
883
500

4,448
900
587

625,127
90,943
5,403

584,915
101,338
4,879

565,302
92,511
4,579

540,746
86,298
4,296

277,649
29,045
14,287,740
313,425,252
469,898,863

308,055
29,197
15,431,625
267,644,194
436,706,269

307,627
30,161
15,033,298
228,907,121
405,761,750

333,849
30,461
14,853,072
212,343,034
423,606,365

12,543,907
2,913,189
239

13,951,600
2,810,283
1,510

13,135,350
2,711,384
2,543

12,707,247
2,528,562
2,989

1. Amounts in bold are restatements due to the inclusion of coin activity at Federal Reserve off-site coin
terminals.




2003

286

91st Annual Report, 2004

9. Federal Reserve Bank Interest Rates on Loans to Depository Institutions,
December 31, 2004
Reserve Bank
All Federal Reserve Banks

Primary credit1

Secondary credit2

Seasonal credit 3

3.25

3.75

2.35

1. Primary credit is available for very short terms as
a backup source of liquidity to depository institutions mat
are in generally sound financial condition in the judgment
of the lending Federal Reserve Bank.
2. Secondary credit is available in appropriate circumstances to depository institutions mat do not qualify for
primary credit.




3. Seasonal credit is available to 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 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 two-week reserve maintenance period.

Statistical Tables 287
10. Reserve Requirements of Depository Institutions, December 31, 2004

Requirements
Type of deposit
Percentage of deposits

Effective date

0
3
10

12-23-04
12-23-04
12-23-04

Nonpersonal time deposits

0

12-27-90

Eurocurrency liabilities

0

12-27-90

Net transaction accounts1
$0 million-$7.0 million2
More than $7.0 million-$47.6 million3
More than $47.6 million

NOTE. 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 that is a member of the Federal Reserve System must hold that deposit directly with a Reserve Bank;
an institution that is not a member of the System can
maintain 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 consists of demand
deposits, automatic transfer service (ATS) accounts,
NOW accounts, share draft accounts, telephone or preauthorized transfer accounts, ineligible bankers acceptances,
and obligations issued by affiliates 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 at www.federalreserve.gov/boarddocs/
reportforms/.
2. The amount of net transaction accounts subject to a
reserve requirement ratio of zero 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.

288

91st Annual Report, 2004

11. Initial Margin Requirements under Regulations T, U, and X
Percent of market value
Short sales,
Tonly 1

Effective date
1934, Oct. 1 .
1936, Feb. 1 .
Apr. 1 .
1937, Nov. 1 .
1945, Feb. 5 .
July 5 .
1946, Jan. 21 .
1947, Feb. 1 .
1949, Mar. 3 .
1951, Jan. 17 .
1953, Feb. 20
1955, Jan. 4 ..
Apr. 23
1958, Jan. 16 .
Aug. 5 .
Oct. 16
1960, July 28
1962, July 10
1963, Nov. 6
1968, Mar. 11
June 8
1970, May 6
1971, Dec. 6
1972, Nov. 24
1974, Jan. 3 .

25-45
25-55
55
40
50
75
100
75
50
75
50
60
70
50
70
90
70
50
70
70
80
65
55
65
50

NOTE. These regulations, adopted by the Board of
Governors pursuant to the Securities Exchange Act of
1934, limit the amount of credit to purchase and carry
"margin securities" (as defined in the regulations) when
such value is coUateralized by securities. Margin requirements on securities are the difference between the market
value (100 percent) and the maximum loan value of
collateral as prescribed by the Board. Regulation T was




50
60
50
50
50
50

50
50
75
100
75
50
75
50
60
70
50
70
90
70
50
70
70
80
65
55
65
50

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 with 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.

Statistical Tables 289
12. Principal Assets and Liabilities of Insured Commercial Banks in the United States,
by Class of Bank, June 30, 2004 and 2003
Millions of dollars, except as noted
Member banks
Item

Total
Total

National

State

Nonmember
banks

2004
ASSETS

5,788,749
4,267,979
4,266,463
1,520,770

4,567,717
3,381,763
3,380,928
1,185,955

3,321,077
2,481,333
2,480,744
839,744

1,246,640
900,430
900,183
346,210

1,221,031
886,216
885,535
334,815

333,691
1,187,079
271,089

212,367
973,588
218,068

122,046
717,698
156,194

90,320
255,890
61,874

121,324
213,491
53,021

4,454,462
68,720
675,846
3,709,896
721,273

3,413,426
54,897
487,519
2,871,010
576,917

2,442,362
37,078
343,929
2,061,355
419,886

971,063
17,819
143,589
809,655
157,031

1,041,036
13,824
188,327
838,886
144,356

7,676

Loans and investments
Loans, gross
Net
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total

2,885

1,955

930

4,791

LIABILITIES

Deposits, total
Interbank
Other transaction
Other nontransaction
Equity capital
Number of banks

2003
ASSETS

Loans and investments
Loans, gross
Net
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total

5,338,735
3,922,431
3,920,108
1,416,304

4,201,136
3,105,061
3,103,351
1,096,075

2,969,072
2,225,277
2,223,849
743,795

1,232,064
879,784
879,502
352,280

1,137,599
817,370
816,757
320,229

289,327
1,126,977
301,052

186,267
909,808
246,847

101,918
641,877
177,579

84,349
267,931
69,267

103,060
217,169
54,205

4,206,473
67,939
684,284
3,454,250
658,407

3,240,228
56,239
504,700
2,679,289
526,805

2,292,202
40,330
361,115
1,890,756
371,055

948,026
15,909
143,585
788,533
155,750

966,245
11,699
179,585
774,961
131,602

7,813

2,995

2,044

951

4,818

LIABILITIES

Deposits, total
Interbank
Other transaction
Other nontransaction
Equity capital

Number of banks

NOTE. 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.

290 91st Annual Report, 2004
13A. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items,
Year-End 1984-2004 and Month-End 2004
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
Securities
held
outright1

Repurchase
agreements2

Loans

Float

Other
Federal
Reserve
assets

Gold
stock
Total

Special
drawing
rights
certificate
account

Treasury
currency
outstanding 3

1984

167,612

2,015

3,577

833

12,347

186,384

11,096

4,618

16,418

1985
1986
1987
1988
1989

186,025
205,454
226,459
240,628
233,300

5,223
16,005
4,961
6,861
2,117

3,060
1,565
3,815
2,170
481

988
1,261
811
1,286
1,093

15,302
17,475
15,837
18,803
39,631

210,598
241,760
251,883
269,748
276,622

11,090
11,084
11,078
11,060
11,059

4,718
5,018
5,018
5,018
8,518

17,075
17,567
18,177
18,799
19,628

1990
1991
1992
1993
1994

241,431
272,531
300,423
336,654
368,156

18,354
15,898
8,094
13,212
10,590

190
218
675
94
223

2,566
1,026
3,350
963
740

39,880
34,524
30,278
33,394
33,441

302,421
324,197
342,820
384,317
413,150

11,058
11,059
11,056
11,053
11,051

10,018
10,018
8,018
8,018
8,018

20,402
21,014
21,447
22,095
22,994

1995
1996
1997
1998
1999

380,831
393,132
431,420
452,478
478,144

13,862
21,583
23,840
30,376
140,640

135
85
2,035
17
233

231
5,297
561
1,009
407

33,483
32,222
32,044
37,692
34,799

428,543
452,319
489,901
521,573
654,223

11,050
11,048
11,047
11,046
11,048

10,168
9,718
9,200
9,200
6,200

24,003
24,966
25,543
26,270
28,013

2000
2001
2002
2003
2004

511,833
551,685
629,416
666,665
717,819

43,375
50,250
39,500
43,750
33,000

110
34
40
62
43

795
698
832
211
927

36,896
36,885
38,574
40,214
42,161

593,009
639,552
708,363
750,901
793,950

11,046
11,045
11,043
11,043
11,045

2,200
2,200
2,200
2,200
2,200

31,643
33,017
34,597
35,475
36,505

For notes see end of table.




Statistical Tables 291
13 A.—Continued

Factors absorbing reserve funds

Currency
in
circulation

Reverse
repurchase
agreements4

Treasury
cash
holdings 5

Deposits with Federal Reserve Banks,
other than reserve balances

Treasury

183,796

Foreign

53
1

5,316

23
5

197,488
211,995
230,205
247,649
260,456

0
0
0
0
0

550
447
454
395
450

9,351
7,588
5,313
8,656
6,217

480
287
244
347
589

286,963
307,756
334,701
365,271
403,843

0
0
0
0
0

561
636
508
377
335

8,960
17,697
7,492
14,809
7,161

369
968
206
386
250

424,244
450,648
482,327
517,484
628,359

0
0
0
0
0

270
249
225
85
109

5,979
7,742
5,444
6,086
28,402

386
167
457
167
71

593,694
643,301
687,518
724,194
754,948

0
0
21,091
25,652
30,783

450
425
367
321
270

5,149
6,645
4,420
5,723
5,912

216
61
136
162
80




Required
clearing
balances

Other

87
6
1,041

917
1,027

548
1,298

242
1,706

372
397
876
932
892
900
1,605
1,261
1,382

820
1,152

717
1,285

Other
Federal
Reserve
liabilities
and
capital

Reserve
balances
with
Federal
Reserve
Banks 6

1,126

5,952

20,693

1,490
1,812
1,687
1,605
1,618

5,940
6,088
7,129
7,683
8,486

27,141
46,295
40,097
37,742
36,713

1,960
3,946
5,897
6,332
4,196

8,147
8,113
7,984
9,292
11,959

36,698
25,467
26,182
28,619
26,593

5,167
6,601
6,679
6,781
7,482

12,342
13,829
15,500
16,354
17,256

24,444
17,923
24,159
19,525
16,545

6,332
8,525
10,533
11,828r
9,963

17,962
17,083
18,977
19,793
26,378

12,713
8,953
12,008
11,230r
14,080

292 91st Annual Report, 2004
13A. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items,
Year-End 1984-2004 and Month-End 2004—Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
Securities Repurchase
held
agreements2
outright1
2004
Jan
Feb
Mar. . . . .
May'.'.'.'.'.
June
July . . . .
Aug
Sept . . . .
Oct
Nov. . . . .
Dec

667,242
671,583
674,084
677,687
681,472
687,391
693,727
694,859
700,341
706,834
712,870
717,819

23,500
28,750
27,500
25,250
30,750
33,500
24,750
32,250
29,250
25,250
33,750
33,000




Loans

Float

Other
Federal
Reserve
assets

19
23
64
84
122
323
260
457
236
121
77
43

-26
520
-586
-829
-155
116
-23
1,002
-25
-114
810
927

41,456
38,754
40,169
40,345
38,354
39,465
40,581
38,043
39,557
41,681
39,844
42,161

Total

732,191
739,630
74131
742,537
750,543
760,795
759,294
766,610
769,359
773,772
787,351
793,950

Gold
stock

Special
drawing
rights
certificate
account

Treasury
currency
outstanding3

11,043
11,045
11,045
11,045
11,045
11,045
11,044
11,043
11,043
11,043
11,043
11,045

2,200
2,200
2,200
2,200
2,200
2,200
2,200
2,200
2,200
2,200
2,200
2,200

35,567
35,649
35,761
35,842
35,924
36,039
36,087
36,211
36,279
36,364
36,435
36,505

Statistical Tables 293
13 A.—Continued

Factors absorbing reserve funds

Currency
in
circulation

Reverse
repurchase
agreements4

Treasury
cash
holdings5

Deposits with Federal Reserve Banks,
other than reserve balances

Treasury

708,952
712,613
716,136
717,528
726,367
733,183
733,020
736,506
738,372
741,440
754,226
754,948

20,129
21,762
21,701
21,204
20,477
19,228
20,167
22,941
25,693
27,037
28,201
30,783

356
318
366
321
320
303
283
330
291
299
283
270

Foreign

84
82
83
96
86
280
81
158
128
92
89
80

426
302
231
368
267
226
304
275
243
310
326
1,285

NOTE. Components may not sum to totals because of
rounding.
1. Includes U.S. Treasury and federal agency securities. U.S. Treasury securities contain securities lent to
dealers and are fully collateralized by other US. Treasury
securities. Federal agency securities are included at face
value.
2. Cash value of agreements, which are collateralized
by U.S. Treasury and federal agency securities.
3. Includes currency and coin (other than gold) issued
directly by the Treasury. The largest components are




10,614
10,078
10,410
10,561
10,145
10,861
9,802
10,206
10,718
10,571
10,024
9,963

20,365
20,033
20,880
20,804
21,718
21,198
21,302
23,084
23,502
23,918
25,627
26,378

Other

4,184
6,513
5,884
6,392
4,637
6,032
4,917
2,456
5,987
5,116
3,759
5,912

Required
clearing
balances

Other
Federal
Reserve
liabilities
and
capital

Reserve
balances
with
Federal
Reserve
Banks6

15,889
16,823
14,545
14,350
15,696
18,767
18,751
20,109
13,946
14,597
14,494
14,080

fractional and dollar coins. For details see "Currency and
Coin in Circulation," Treasury Bulletin.
4. Cash value of agreements, which are collateralized
by U.S. Treasury securities.
5. Coin and paper currency held by the Treasury, as
well as any gold in excess of the gold certificates issued
to the Reserve Bank.
6. Excludes required clearing balances and adjustments to compensate for float.
r. Revised.

294 91st Annual Report, 2004
13B. 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
Period
Securities
held
outright1

Repurchase
agreements 2

Loans

Float 3

All
other 4

Other
Federal
Reserve
assets 5

Gold
stock 6
Total

Special
drawing
rights
certificate
account

Treasury
currency
outstanding7

1918
1919

239
300

0
0

1,766
2,215

199
201

294
575

0
0

2,498
3,292

2,873
2,707

1,795
1,707

1920
1921
1922
1923
1924

287
234
436
80
536

0
0
0
54
4

2,687
1,144

119
40
78
27
52

262
146
273
355
390

0
0
0
0
0

3,355
1,563
1,405
1,238
1,302

2,639
3,373
3,642
3,957
4,212

1,709
1,842
1,958
2,009
2,025

1925
1926
1927
1928
1929

367
312
560
197
488

8
3
57
31
23

643
637
582

378
384
393
500
405

0
0

1,459
1,381
1655
1,809
1,583

4,112

632

63
45
63
24
34

4092
3,854
3,997

1,977
1,991
2 006
2,012
2,022

1930
1931
1932
1933
1934

686
775

251
638
235
98
7

21
20
14
15
5

372
378
41
137
21

0

1,851
2,435
2,430

43
42
4
2
0

0
0

1,373
1853
2,145
2,688
2,463

4,306
4173
4,226
4,036
8,238

2,027
2035
2,204
2,303
2,511

1935
1936
1937
1938
1939

2,430
2,430
2,564
2,564
2,484

1
0
0
0
0

5
3
10
4
7

12
39
19
17
91

38
28
19
16
11

0
0
0
0
0

2,486
2,500
2,612
2,601
2,593

10,125
11,258
12,760
14,512
17,644

2,476
2,532
2,637
2,798
2,963

1940
1941
1942
1943
1944

2,184
2,254
6,189
11,543
18,846

0
0
0
0
0

3
3
6
5
80

80
94
471
681
815

8
10
14
10
4

0
0
0
0
0

2,274
2,361
6,679
12,239
19,745

21,995
22,737
22,726
21,938
20,619

3,087
3,247
3,648
4,094
4,131

1945
1946
1947
1948
1949

24,252
23,350
22,559
23,333
18,885

0
0
0
0
0

249
163
85
223
78

578
580
535
541
534

2
1
1
1
2

0
0
0
0
0

15,091
24,093
23,181
24,097
19,499

20,065
20,529
22,754
24,244
24,427

4,339
4,562
4,562
4,589
4,598

1950
1951
1952
1953
1954

20,725
23,605
24,034
25,318
24,888

53
196
663
598
44

67
19
156
28
143

1,368
1,184

967
935
808

3
5
4
2
1

0
0
0
0
0

22,216
25,009
25,825
26,880
25,885

22,706
22,695
23,187
22,030
21,713

4,636
4,709
4,812
4,894
4,985

1955
1956
1957
1958
1959

24,391
24,610
23,719
26,252
26,607

394
305
519
95
41

108
50
55
64
458

1,585
1,665
1,424
1,296
1,590

29
70
66
49
75

0
0
0
0
0

26,507
26,699
25,784
27,755
28,771

21,690
21,949
22,781
20,534
19,456

5,008
5,066
5,146
5,234
5,311

For notes see end of table.




618
723
320

1,056

o
0
0
o
0

435

Statistical Tables 295
13B.—Continued

Factors absorbing reserve funds

Currency
in
circulation

Deposits with
Federal Reserve Banks,
other than reserve balances
Treasury
cash
holdings 8
Treasury

Foreign

Member bank
reserves9
Other
Required
Federal
clearing
Reserve
balances
accounts5

Other

Other
Federal
Reserve
liabilities
and
capital 5

With
Federal
Reserve
Banks

Currency
and
coin10

51
68

0
1,884
2,161

0
99
0
14
59

0
0
0
0
0

2,256
2.250
2,424
2,430
2,428

-44
-56
63
-41
-73

2,471
1,961
2,509
2,729
4,096

0
0
0
0
0

2,375
1,994
1,933
1,870
2,282

96
-33
576
859
1,814

0
0
0
0
0

5,587
6,606
7,027
8,724
11,653

0
0
0
0
0

2,743
4,622
5,815
5,519
6,444

2,844
1,984
1,212
3,205
5,209

0
0
0
0
0

0
0
0
0
0

4,026
12,450
13,117
12,886
14,373

0
0
0
0
0

7,411
9,365
11,129
11,650
12,748

6,615
3,085
1,988
1,236
1,625

495
607
563
590
106

0
0
0
0
0

0
0
0
0
0

15,915
16,139
17,899
20,479
16,568

0
0
0
0
0

14,457
15,577
16,400
19,277
15,550

1,458

565
363
455
493
441

714
746
111
839
907

0
0
0
0
0

0
0
0
0
0

17,681
20,056
19,950
20,160
18,876

0
0
0
0
0

16,509
19,667
20,520
19,397
18,618

1,172

554
426
246
391
694

925
901
998

0
0
0
0
0

0
0
0
0
0

19,005
19,059
19,034
18,504
18,174

0
0
0
0
310

18,903
19,089
19,091
18,574
18,619

102
-30
-57
-70

288
385

51
51

96
73

25
28

118
208

0
0

0
0

1,636
1,890

0
0

5,325
4,403
4,530
4,757
4,760

218
214
225
213
211

57
96
11
38
51

5
12
3
4
19

18
15
26
19
20

298
285
276
275
258

0
0
0
0
0

0
0
0
0
0

1,781
1,753
1,934
1,898
2,220

0
0
0
0
0

4,817
4,808
4,716
4,686
4,578

203
201
208
202
216

16
17
18
23
29

8
46
5
6
6

21
19
21
21
24

272
293
301
348
393

0
0
0
0
0

0
0
0
0
0

2,212
2,194
2,487
2,389
2,355

4,603
5,360
5,388
5,519
5,536

211
222
272
284
3,029

19
54
8
3
121

6
79
19
4
20

22
31
24
128
169

375
354
355
360
241

0
0
0
0
0

0
0
0
0
0

5,882
6,543
6,550
6,856
7,598

2,566
2,376
3,619
2,706
2,409

544
244
142
923
634

29
99
172
199
397

226
160
235
242
256

253
261
263
260
251

0
0
0
0
0

8,732
2,213
11,160 " 2,215
2,193
15,410
2,303
20,499
2,375
25,307

368
867
799
579
440

1,133

1,360
1,204

599
586
485
356
394

284
291
256
339
402

28,515
28,952
28,868
28,224
27,600

2,287
2,272
1,336
1,325
1,312

977
393
870
821

862
508
392
642
767

446
314
569
547
750

27,741
29,206
30,433
30,781
30,509

1,293
1,270
1,270

761
796

668
247
389
346
563

895
526
550
423
490

31,158
31,790
31,834
32,193
32,591

767
775
761
683
391

394
441
481
358
504

402
322
356
272
345

1,123




Excess 11 - 12

1,585
1,822

4,951
5,091

774
793

Required11

1,122

841

1,654

0

562
1,499
1,202
1,018

389
-570

763
258

-135

296 91st Annual Report, 2004
13B. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items,
Year-End 1918-1983—Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
Gold
stock 6

Special
drawing
rights
certificate
account

Treasury
currency
outstanding7

Securities
held
outright1

Repurchase
agreements 2

Loans

Float 3

All
other 4

1960
1961
1962
1963
1964

26,984
30,478
28,722
33,582
36,506

400
159
342
11
538

33
130
38
63
186

1,847
2300
2,903
2,600
2,606

74
51
110
162
94

0
0
0
0
0

29338
31,362
33,871
36,418
39,930

17,767
16,889
15,978
15,513
15,388

.
.
.
.
.

.
.
.
.
.

.
.
.
.
.

5,398
5,585
5,567
5,578
5,405

1965
1966
1967
1968
1969

40,478
43,655
48,980
52,937
57,154

290
661
170
0
0

137
173
141
186
183

2,248
2,495
2,576
3,443
3,440

187
193
164
58
64

0
0
0
0
2,743

43,340
47,177
52,031
56,624
64,584

13,733
13,159
11,982
10,367
10,367

.
.
.
.
.

.
.
.
.
.

.
.
.
.
.

5,575
6,317
6,784
6,795
6,852

1970
1971
1972
1973
1974

62,142
69,481
71,119
80,395
84,760

0
1,323
111
100
954

335
39
1,981
1,258
299

4,261
4,343
3,974
3,099
2,001

57
261
106
68
999

1,123
1,068
1,260
1,152
3,195

67,918
76,515
78,551
86,072
92,208

10,732
10,132
10,410
11,567
11,652

400
400
400
400
400

7,147
7,710
8,313
8,716
9,253

1975
1976
1977
1978
1979

92,789
100,062
108,922
117,374
124,507

1335
4,031
2,352
1,217
1,660

211
25
265
1,174
1,454

3,688
2,601
3,810
6,432
6,767

1,126
991
954
587
704

3,312
3,182
2,442
4,543
5,613

102,461
110,892
118,745
131327
140,705

11,599
11,598
11,718
11,671
11,172

500
1,200
1,250
1,300
1,800

10,218
10,810
11,331
11,831
13,083

1980
1981
1982
1983

128,038
136,863
144,544
159,203

2,554
3,485
4,293
1,592

1,809
1,601
717
918

4,467
1,762
2,735
1,605

776
195
1,480
418

8,739
9,230
9,890
8,728

146,383
153,136
63,659
172,464

11,160
11,151
11,148
11,121

2,518
3,318
4,618
4,618

13,427
13,687
13,786
15,732

N O T E . 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 US. 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; see Federal Reserve Bulletin, vol. 47
(February 1961), p. 164.




Other
Federal
Reserve
assets 5

Total

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
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 see "Currency and
Coin in Circulation," Treasury Bulletin.

Statistical Tables 297
13B.—Continued

Factors absorbing reserve funds

Currency
in
circulation

32,869
33,918
35,338
37,692
39,619

Deposits with
Federal Reserve Banks,
other than reserve balances
Treasury
cash
holdings 8
Treasury

Foreign

485
465
597
880
820

217
279
247
171
229

533
320
393
291
321

760

668
416

355
588
563
747
807
1,233

Other
Required
Federal
clearing
Reserve
balances
5
accounts

Other

377
422
380
361
612

Member bank
reserves9
Other
Federal
Reserve
liabilities
and
capital5

With
Federal
Reserve
Banks

Currency
and
coin10

Required11

Excess 1 1 ' 1 2

0
0
0
0
0

0
0
0
0
0

17,081
17,387
17,454
17,049
18,086

2,544
2,544
3,262
4,099
4,151

18,988
18,988
20,071
20,677
21,663

637
96
645
471
574

0
0
0
0

0

0
0
0
0
0

1,919

18,447
19,779
21,092
21,818
22,085

4,163
4,310
4,631
4,921
5,187

22,848
24,321
25,905
27,439
28,173

-238
-232
-182
-700
-901

0
0
0
0
0

1,986
2,131
2,143
2,669
2,935

24,150
27,788
25,647
27,060
25,843

5,423
5,743
6,216
6,781
7,370

30,033
32,496
32,044
35,268
37,011

-460
1,035

-1,360
-3,798

941
1,044
1,007
1,065
1,036

211

1,176
1,344

1,123

695
596

1,312

150
174
135
216
134

57,903
61,068
66,516
72,497
79,743

431
460
345
317
185

1,156
2,020
1,855
2,542
2,113

148
294
325
251
418

1,419 13
1,275 1 3

0
0
0
0
0

86,547
93,717
103,811
114,645
125,600

483
460
392
240
494

7,285
10,393
7,114
4,196
4,075

353
352
379
368
429

1,090
1,357
1,187
1,256
1,412

0
0
0
0
0

0
0
0
0
0

2,968
3,063
3,292
4,275
4,957

26,052
25,158
26,870
31,152
29,792

8,036
8,628
9,421
10,538
11,429

35,197
35,461
37,615
42,694
44,217

-1,103
-1,535
-1,265
-893
-2,835

136,829
144,774
154,908
171,935

441
443
429
479

3,062
4,301
5,033
3,661

411
505
328
191

617
781

0
0
0
0

0
117
436

4,671
5,261
4,990
5,392

27,456
25,111
26,053
20,413

13,654
15,576
16,666
17,821

40,558
42,145
41,391
39,179

675
-1,442
1,328
-945

42,056
44,663
47,226
50,961
53,950

703

999
840

1,033

851

-147
-773
-1,353

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.
10. Between December 1, 1959, and November 23,
1960, part was allowed as reserves; thereafter, all was
allowed.
11. Estimated 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.
12. For 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):




1,013

98i2

u

1973—Ql, $279; Q2, $172; Q3, $112; Q4, $84;
1974—Ql, $67; Q2, $58. The transition period ended
with the second quarter of 1974.
13. For the period before July 1973, includes certain
deposits of domestic nonmember banks and foreignowned 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.
14. Adjusted to include waivers of penalties for reserve
deficiencies, in accordance with change in Board policy,
effective November 19, 1975.
. . . Not applicable.

298 91st Annual Report, 2004
14. Banking Offices and Banks Affiliated with Bank Holding Companies (BHCs) in the
United States, December 31, 2003 and 2004
Commercial banks'
Type of office

Member

Total
Total

Nonmember
Total

National

Statechartered
savings
banks

State

All banking offices
BANKS

Number, Dec 31, 2003 ..
Changes during 2004
New banks
Banks converted
into branches
Ceased banking
operation2
Other 3
Net change
Number, Dec 31,2004 ..

8,116

7,725

2,892

1,963

929

4,833

391

131

126

29

19

10

97

5

-248

-236

-121

-79

-42

-115

-12

-39
0
-156

-27
-2
-139

-16
10
-98

-13
-10
-83

-3
20
-15

-11
-12
-41

-12
2
-17

7,960

7^86

2,794

1,880

914

4,792

374

72,936

69,440

50,628

36,553

14,075

18,812

3,496

2,190

2,078

1,535

1,124

411

543

112

248
-883
0
1,555

241
-666
81
1,734

138
-437
0
1,236

99
-295
1,202
2,130

39
-142
-1,202
-894

103
-229
81
498

7
-217
-81
-179

74,491

71,174

51,864

38,683

13,181

19310

3317

3,801

116

BRANCHES AND
ADDITIONAL OFFICES

Number, Dec 31, 2003 ..
Changes during 2004
New branches
Branches converted
from banks
Discontinued2
Other 3
Net change
Number, Dec. 31, 2004 ..

Banks affiliated with BHCs
BANKS

Number, Dec 31, 2003 .

6,403

Changes during 2004
BHC-affiliated
new banks
Banks converted
into branches
Ceased banking
operation2
Other 3
Net change

171

159

47

33

14

112

12

-201

-196

-107

-70

-37

-89

-5

-30
-69

-17
9
-68

-16
-6
-59

-1
15
-9

-13
-11
-1

-10
2
-1

Number, Dec 31,2004 .

6333

6,218

2,418

1,613

805

3,800

115

-40
0
-70

6,287

-

2

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




2,486

1,672

814

defined as an insured bank in section 3(h) of the FDIC
Act. Covers entities in the United States and its territories
and possessions (affiliated insular areas).
2. Institutions that no longer meet the Regulation Y
definition of bank.
3. Interclass changes and sales of branches.

Federal Reserve System Audits




301

Audits of the Federal Reserve System
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 its
compliance with laws and regulations
affecting those statements, are audited
annually by an outside auditor retained
by the Board's Office of Inspector General. The Office of Inspector General
also audits and investigates the Board's
programs and operations, as well as
those Board functions delegated to the
Reserve Banks.
The financial statements of the
Reserve Banks are also audited annually




by an independent outside auditor. In
addition, the Reserve Banks are subject
to annual examination by the Board.
As discussed in the chapter "Federal
Reserve Banks," the Board's examination includes a wide range of ongoing
oversight activities conducted on and off
site by staff of the Board's Division of
Reserve Bank Operations and Payment
Systems.
Federal Reserve operations are also
subject to review by the Government
Accountability Office.
•

303

Board of Governors Financial Statements
The financial statements of the Board for 2004 and 2003 were audited
by KPMG LLP, independent auditors.

KPMGLLP
2001 M Street, NW
Washington, DC 20036

Independent Auditors' Report on Financial Statements

To the Board of Governors of the Federal Reserve System:
We have audited the accompanying balance sheets of the Board of Governors of the Federal Reserve
System (the Board) as of December 31, 2004 and 2003, and the related statements of revenues and
expenses and changes in cumulative results of operations, and cash flows for the years then ended. These
financial statements are the responsibility of the Board' s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America and the standards applicable to financial audits contained in the 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 die financial statements are free of material
misstatement. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Board's internal control over financial reporting. Accordingly, we
express no such opinion. 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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the Board at December 31, 2004 and 2003, and the results of its operations, and its
cash flows for the years then ended, in conformity with accounting principles generally accepted in the
United States of America.
In accordance with Government Auditing Standards, we have also issued our reports dated April 1, 2005,
on our consideration of the Board's internal control over financial reporting and its compliance with certain
provisions of laws, regulations, and contracts. The purpose of those reports is to describe the scope of our
testing of internal control over financial reporting and compliance and the results of that testing, and not to
provide an opinion on the internal control over financial reporting or on compliance. Those reports are an
integral part of an audit conducted in accordance with Government Auditing Standards, and should be read
in conjunction with this report in considering the results of our audit.

April 1,2005




304

91st Annual Report, 2004
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEETS
As of December 31,
2004
2003
ASSETS

CURRENT ASSETS

Cash
Accounts receivable
Prepaid expenses and other assets

$ 60,107,292
1,696,480
4,015,067

$ 56,179,654
1,251,117
2,614,354

65,818,839

60,045,125

149,028,686

149,595,059

149,028,686

149,595,059

$214,847,525

$209,640,184

$ 13,891,861
4,552,039
14,195,910
250,794
467,664

$ 15,347,390
5,056,647
13,428,993
206,590
390,698

33,358,268

34,430,318

675,271
594,169
5,789,566
5,308,565

763,699
595,601
5,322,053
4,949,892

Total long-term liabilities

12,367,571

11,631,245

Total liabilities

45,725,839

46,061,563

32,711,365
(11,692,300)
148,102,621

25,821,397
(10,867,546)
148,624,770

169,121,686

163,578,621

$214,847,525

$209,640,184

Total current assets
NONCURRENT ASSETS

Property and equipment, net (Note 2)
Collections (Note 1)
Total noncurrent assets
Total assets

LIABILITIES AND CUMULATIVE RESULTS OF OPERATIONS
CURRENT LIABILITIES

Accounts payable and accrued liabilities
Accrued payroll and related taxes
Accrued annual leave
Capital lease payable (current portion)
Unearned revenues and other liabilities
Total current liabilities
LONG-TERM LIABILITIES

Capital lease payable (non-current portion)
Accumulated retirement benefit obligation (Note 3)
Accumulated postretirement benefit obligation (Note 4)
Accumulated postemployment benefit obligation (Note 5)

CUMULATIVE RESULTS OF OPERATIONS

Working capital
Unfunded long-term liabilities
Net investment in property and equipment
Total cumulative results of operations
Total liabilities and cumulative results of operations




See accompanying notes to financial statements.

Board of Governors Financial Statements 305
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF REVENUES AND EXPENSES
AND CHANGES IN CUMULATIVE RESULTS OF OPERATIONS
For the years ended December 31,
2004
2003
BOARD OPERATING REVENUES

Assessments levied on Federal Reserve Banks for Board
operating expenses and capital expenditures
Other revenues (Note 6)

$272,331,500
8,336,581

$297,020,200
8,835,440

280,668,081

305,855,640

166,797,724
30,850,441
24,835,904
12,445,708
8,273,801
7,088,444
6,302,695
6,116,355
3,954,263
1,944,552
6,515,129

156,547,392
28,263,776
17,501,035
12,194,612
7,664,716
5,981,254
5,910,128
8,175,120
4,029,441
1,864,006
6,642,118

275,125,016

254,773,598

5,543,065

51,082,042

503,784,304

508,144,248

503,784,304

508,144,248

0

0

Total operating revenues
BOARD OPERATING EXPENSES

Salaries
Retirement and insurance contributions
Contractual services and professional fees
Depreciation and net losses on disposals
Utilities
Travel
Software
Postage and supplies
Repairs and maintenance
Printing and binding
Other expenses (Note 6)
Total operating expenses
RESULTS OF OPERATIONS
ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES

Assessments levied on Federal Reserve Banks
for currency costs
Expenses for currency printing, issuance,
retirement, and shipping
CURRENCY ASSESSMENTS OVER (UNDER) EXPENSES

TOTAL RESULTS OF OPERATIONS

5,543,065

51,082,042

163,578,621

112,496,579

$169,121,686

$163,578,621

CUMULATIVE RESULTS OF OPERATIONS, Beginning of year
CUMULATIVE RESULTS OF OPERATIONS, End of year




See accompanying notes to financial statements.

306 91st Annual Report, 2004
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF CASH FLOWS
For the years ended December 31,
2004
2003
CASH FLOWS FROM OPERATING AcnvrnES

RESULTS OF OPERATIONS

$ 5,543,065

$51,082,042

Adjustments to reconcile results of operations
to net cash provided by (used in) operating activities:
Depreciation and net losses on disposals

12,445,708

12,194,612

Increase in assets:
Accounts receivable, prepaid expenses, and other assets

(1,846,076)

(2,192,814)

Increase (decrease) in liabilities:
Accounts payable and accrued liabilities
Accrued payroll and related taxes
Accrued annual leave
Unearned revenues and other liabilities
Accumulated retirement benefit obligation
Accumulated postretirement benefit obligation
Accumulated postemployment benefit obligation

(1,455,529)
(504,608)
766,917
76,966
(1,432)
467,513
358,673

3,897,291
(3,046,063)
1,555,466
(51,368)
(18,507)
404,266
650,640

Net cash provided by operating activities

15,851,197

64,475,565

4,005
(11,715,861)

15,790
(16,809,964)

(11,711,856)

(16,794,174)

CASH FLOWS FROM INVESTING ACTTVITIES

Proceeds from disposals
Capital expenditures
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES

Capital lease payments

(211,703)

NET INCREASE IN CASH

(136,901)

(211,703)

Net cash used in financing activities

(136,901)

3,927,638

47,544,490

56,179,654

8,635,164

$60,107,292

$ 56,179,654

$

$ 1,024,491

CASH BALANCE, Beginning of year
CASH BALANCE, End of year

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Capital lease obligations incurred




See accompanying notes to financial statements.

190,538

Board of Governors Financial Statements 307
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 2004 AND 2003
(1) SIGMFICANT ACCOUNTING POLICIES

Organization—The Federal Reserve System was established by Congress in 1913 and consists of the Board of
Governors (Board), the Federal Open Market Committee,
the twelve regional Federal 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 supported by Washington staff numbering
approximately 1,800, as it carries out its responsibilities
in conjunction with other components of the Federal
Reserve System.
The Board is required by the Federal Reserve 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 Federal Reserve
Bank and to publish each week a statement of the financial condition of each such Reserve Bank and a consolidated statement for all of the Reserve Banks. Accordingly, the Board believes_that the best financial disclosure
consistent with law is achieved by issuing separate fmancial statements for the Board and for the Reserve Banks.
Therefore, the accompanying financial statements include
only the operations and activities of the Board. Combined
financial statements for the Federal Reserve Banks are
included in the Board's annual report to the Speaker of
the House of Representatives.
Basis of Accounting—The financial statements have
been prepared on the accrual basis of accounting.
Revenues—Assessments for operating expenses and
additions to property are based on expected cash needs.
Amounts over or under assessed due to differences
between actual and expected cash needs flow in to or out
of "Cumulative Results of Operations" during the year.
Issuance and Redemption of Federal Reserve Notes—
The Board incurs expenses and assesses the Federal
Reserve Banks for currency printing, issuance, retirement, and shipping of Federal Reserve Notes. These
assessments and expenses are separately reported in the
statements of revenues and expenses because they are not
Board operating transactions.
Property and Equipment—The Board's property, buildings, 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 3 to 10 years for furniture and equipment and
from 10 to 50 years for building equipment and structures. Upon the sale or other disposition of a depreciable
asset, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is
recognized.
Collections—The Board has collections of works of
art, historical treasures, and similar assets. These collections are maintained and held for public exhibition in
furtherance of public service. Proceeds from any sales of
collections are used to acquire other items for collections.
As permitted by FAS 116, 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.
Estimates—The preparation of financial statements in
conformity with accounting principles generally accepted
^
^
^ $
ta ^
S t a K s rf ^
m a n a g e m e n t t0
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.
Reclassifications—Certain 2003 amounts have been
reclassified to conform with the 2004 presentation.
(2) PROPERTY AND EQUIPMENT
The

fonowing j s

B o a r d > s p r o p e r t y md
lated

a

summary of the components of the
equipment, at cost, net of accumu-

depreciation.
As of December 31,

£•*•

•

"" ^ r o T e m e n t s ...
Furniture and
equipment
Software
Construction in
process
Less accumulated
depreciation
Property and
equipment, net ...

OS^403lT

$ 18,640,314

132,891,551

129,161,957

44 450 522
12 207 125

43 890 215
11 425 411

4 380 259
212569771

0
203 117 897

(63,541,085)

(53,522,838)
~~
$149,028,686 $149,595,059
= = = = =
=
Furniture and equipment includes $1,230,000 and
$1,156,000 for capitalized leases as of December 31,
2004 and 2003 respectively. Accumulated depreciation
includes $356,000 and $195,000 for capitalized leases as
of December 31, 2004 and 2003, respectively. The Board
paid interest related to these capital leases in the amount
of $104,000 and $76,000 for 2004 and 2003, respectively.
The future minimum lease payments required under
the capital leases and the present value of the net minimum lease payments as of December 31, 2004, are as
follows:

308 91st Annual Report, 2004
Year
ending
December 31

Amount

2005
2006
2007
2008

$ 427,659
416,274
416,274
138,279

Total minimum lease
payments
Less: Amount representing
maintenance included
in total amounts above .
Net minimum lease
payments
Less: Amount representing
interest
Present value of net
minimum lease
payments
Less: Current maturities
of capital lease
obligations
Long-term capital lease
obligations

1,398,486
(301,512)
1,096,974
(170,909)
926,065

$ 675,271

RETIREMENT BENEFITS

Substantially all of the Board's employees participate
in the Retirement Plan for Employees of the Federal
Reserve System (System Plan). The System Plan is a
multi-employer plan which covers employees of the Federal Reserve Banks, the Board, and the Plan Administrative Office.
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 noncontributory defined benefits program under the System
Plan. Contributions to the System Plan are actuarially
determined and funded by participating employers at
amounts prescribed by the System Plan's administrator.
Based on actuarial calculations, it was determined that
employer funding contributions were not required for the
years 2004 and 2003, and the Board was not assessed
a contribution for these years. Excess Plan assets are
expected to continue to fund future years' contributions.
Because the plan is part of a multi-employer plan, information as to vested and nonvested benefits, as well as
plan assets, as it relates solely to the Board, is not readily
available.
A relatively small number of Board employees participate in the Civil Service Retirement System (CSRS) or
the Federal Employees' Retirement System (FERS). The
Board matches employee contributions to these plans.
These defined benefit plans are administered by the
Office of Personnel Management. The Board's contributions to these plans totaled $330,000 and $312,000 in
2004 and 2003, respectively. The Board has no liability




2004

(250,794)

Construction in process includes costs incurred in 2004
for two long-term security projects. The first, the Electronic Security System, has an estimated cost of $5.1 million and expected completion in 2005. The second, the
Security Perimeter Barrier Project, has an estimated cost
of $11.8 million and expected completion in 2006.
(3)

for future payments to retirees under these programs, and
it is not accountable for the assets of the plans.
Employees of the Board may also participate in the
Federal Reserve System's Thrift Plan. Under the Thrift
Plan, members may contribute up to a fixed percentage
of their salary. Board contributions are based upon a
fixed percentage of each member's basic contribution
and were $8,314,000 and $7,692,000 in 2004 and 2003,
respectively.
Effective January 1, 1996, 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 mat cannot be paid from the
System Plan due to limitations imposed by Sections 401(aX17), 415(b) and 415(e) of the Internal Revenue Code of 1986. Pension costs attributed to the System
Plan reduce the pension costs of the BEP. Activity for the
BEP for 2004 and 2003 is summarized in the following
table:

Change in projected
benefit obligation
Benefit obligation at
beginning of year .. $
Service cost
Interest cost
Plan participants'
contributions
Plan amendments
Actuarial (gain)Aoss . . . .
Benefits paid
Benefit obligation at
end of year

74,956
23,239
6,170

$

12,866
13,689
3,412

0
0
36,588
0

$ 140,953

Change in plan assets
Fair value of plan assets
at beginning
of year
$
Actual return on plan
assets
Employer contributions .
Plan participants'
contributions
Benefits paid
Fair value of plan assets
at end of year
$
Reconciliation of funded
status at end of year
Funded status
Unrecognized net
actuarial (gain)/
loss
Unrecognized prior
service cost
Unrecognized net
transition
obligation
Retirement
benefit liability . . . .

2003

0

0
0
44,989
0
$

74,956

$

0

0
0

0
0

0
0

0
0

0

$

0

$ (140,953)

$ (74,956)

(177,773)

(231,189)

(817,732)

(934,339)

542,289
$ (594,169)

644,883
$ (595,601)

Board of Governors Financial Statements
2004

Information for pension
plans with an
accumulated benefit
obligation in excess of
plan asset:
Projected benefit
obligation
Accumulated benefit
obligation

$ 140,953

Components of net
periodic benefit cost
Service cost—benefits
earned during the
period
Interest cost on
projected benefit
obligation
Expected return
on plan assets
Amortization of
prior service cost
Amortization of
(gains)/losses
Amortization of initial
(asset)/obligation
Net periodic benefit
cost (credit)

$

74,956

33

Weighted-average
assumptions used to
determine benefit
obligation as of
December 31
Discount rate
Rate of compensation
increase

2004

2003

28

5.75%
4.25%

$

6.25%
4.00%

23,239

$

13,689

6,170

3,412

0

0

(116,607)

(116,607)

(16,828)

(21,595)

102,594

102,594

$

(1,432)

Weighted-average
assumptions used to
determine net periodic
benefit cost for years
ended December 31
Discount rate
Rate of compensation
increase

$ (18,507)

6.25%

6.75%

4.00%

4.25%

(4) POSTRETIREMENT BENEFITS

The Board provides certain life insurance programs for
its active employees and retirees. Activity for 2004 and
2003 is summarized in the following table:
2004

Change in benefit
obligation
Benefit obligation at
beginning of year .. $7,166,146
Service cost
203,229
Interest cost
443,043
Plan participants'
contributions
0
Plan amendments
0
Actuarial (gain)/loss . . . .
845,851
Benefits paid
(253,717)
Benefit obligation
at end of year
$ 8,404,552




2003

$6,134,395
170,636
414,319
0
0
673,998
(227,202)
$ 7,166,146

Change in plan assets
Fair value of plan
assets at beginning
of year
$
0
Actual return on
plan assets
0
Employer contribution ..
253,717
Plan participants'
contributions
0
Benefits paid
(253,717)
Fair value of plan
assets at end
of year
$
0
Reconciliation of
funded status
at end of year
Funded status
Unrecognized net
actuarial
(gain)/loss
Unrecognized prior
service cost
PrepaidAaccrued)
postretirement
benefit liability .
Components of net
periodic cost
for year
Service cost
Interest cost
Amortization of prior
service cost
Amortization of
(gains)/losses . . .
Total net periodic
cost

309

2003

$

0
0
227,202
0
(227,202)

$

0

$(8,404,551)

$(7,166,146)

2,537,211

1,760,246

77,774

83,847

$(5,789,566)

$(5,322,053)

$

$

203,229
443,043

170,636
414,319

6,073

$

6,073

68,885

40,440

721,230

$

631,468

The liability and costs for the postretirement benefit
plan were determined using discount rates of 5.75 percent
and 6.25 percent as of December 31, 2004 and 2003,
respectively. Unrecognized losses of $2,537,211 and
$1,760,246 as of December 31, 2004 and 2003, respectively, result from changes in the discount rate used to
measure the liabilities. Under Statement of Financial
Accounting Standards No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, the
Board may have to record some of these unrecognized
losses in operations in future years. The assumed salary
trend rate for measuring the increase in postretirement
benefits related to life insurance was an average of
4.25 percent.
The above accumulated postretirement benefit obligation is related to the Board sponsored life insurance
programs. The Board has no liability for future payments
to employees who continue coverage under the federally
sponsored life and health programs upon retiring. Contributions for active employees participating in federally
sponsored health programs totaled $8,223,000 and
$7,188,000 in 2004 and 2003, respectively.

310 91st Annual Report, 2004
(5) POSTEMPLOYMENT BENEFIT PLAN

(7) COMMITMENTS

The Board provides certain postemployment benefits
to eligible former or inactive employees and their dependents during the period subsequent to employment but
prior to retirement. Costs were projected using the same
discount rates as were used for projecting postretirement
costs. The accrued postemployment benefit costs recognized by the Board for the years ended December 31,
2004 and 2003, were $733,000 and $957,000,
respectively.

The Board has entered into several operating leases to
secure office, training and warehouse space for remaining
periods ranging from one to four years. In addition, the
Board has entered into an agreement with the Federal
Deposit Insurance Corporation and the Office of the
Comptroller of the Currency, through the Federal Financial Institutions Examination Council (the "Council") to
fund a portion of enhancements for a central data repository project through 2013.
Mimimum annual payments under the operating leases
having an initial or remaining noncancelable lease term in
excess of one year at December 31, 2004, are as follows:

(6) OTHER REVENUES AND OTHER EXPENSES

The following are summaries of the components of
Other Revenues and Other Expenses.
As of December 31,
2004
2003
Other revenues
Data processing
revenue
Rent
Subscription
revenue
Reimbursable
services to
other agencies ..
National Information
Center
Board sponsored
conferences
Miscellaneous
Total other
revenues
Other expenses
Tuition, registration,
and membership
fees
Contingency
operations
Public transportation
subsidy
Subsidies and
contributions . . .
Administrative
law judges
Meals and
representation ..
Equipment and
facilities rental..
Security
investigations . . .
Former employee
related
payments
Miscellaneous
Total other
expenses

$3,984,610
2,332,089

$4,639,084
2,029,514

787,053

799,356

673,730

588,894

15,422

24,422

0
543,677

275,110
479,060

$8,336,581

$8,835,440

$2,048,610

$1,615,074

782,052

704,699

800,724

732,124

2005
2006
After2006

$163,363
71,991
0
$235,354

Rental expenses under the operating leases were
$156,000 in 2004 and 2003.
(8) FEDERAL FINANCIAL INSTITUTIONS
EXAMINATION COUNCIL

The Board is one of the five member agencies of
the Council, and currently performs certain management
functions for the Council. The five agencies which are
represented on the Council are the Board, Federal Deposit
Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and
Office of Thrift Supervision. The Board's financial statements do not include financial data for the Council.
Activity related to the Board and Council for 2004 and
2003 is summarized in the following table:
2004

635,336

627,854

492,155

307,173

377,963

534,618

307,999

473,659

205,627
577,952

507,082
700,084

$6,515,129

$6,642,118

2003

$ 112,020

$ 105,920

326,640

630,000

199,230

201,666

$ 637,890

$ 937,586

3,360,055

3,485,701

133,500

72,250

$3,493,555

$3,557,951

439,751

286,711

Board paid to the
Council:
Assessments for
operating expenses
of the Council
Central Data
Repository
Uniform Bank
Performance
Report
Total Board
paid to the
Council




Council paid to the
Board:
Data processing
related services
Administrative
services
Total Council
paid to the
Board

Board of Governors Financial Statements 311
(9) FEDERAL RESERVE BANKS

The Board performs certain functions for the Reserve
Banks in conjunction with its responsibilities for the
Federal Reserve System, and the Federal Reserve Banks
provide certain administrative functions for the Board.
Activity related to the Board and Reserve Banks for 2004
and 2003 is summarized in the following table:
2004

Board paid to the
Reserve Banks:
Assessments for
employee benefits ..
Data processing and
communication
Contingency site
Total Board paid
to the Reserve
Banks
Reserve Banks paid
to the Board:
Assessments for
currency costs
Assessments for
operating expenses
of the Board
Data processing
Total Reserve Banks
paid to the
Board

$

2003

2,151,078 $
1,920,996
1,481,452

1,963,247
704,699

5,553,526 $

$

2,137,781

4,805,727

$503,784,304 $508,144,248
272,331,500
686,312

297,020,200
1,484,015

$776,802,116 $806,648,463




312 91st Annual Report, 2004

KPMGLLP
2001 M Street, NW
Washington. DC 20036

Independent Auditors' Report on Internal Control over Financial Reporting

To the Board of Governors of the Federal Reserve System:
We have audited the balance sheets of the Board of Governors of the Federal Reserve System (the Board)
as of December 31, 2004 and 2003, and the related statements of revenues and expenses and changes in
cumulative results of operations, and cash flows for the years men ended, and have issued our report
thereon dated April 1, 2005. We conducted our audits in accordance with 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.
In planning and performing our fiscal year 2004 audit, we considered the Board's internal control over
financial reporting by obtaining an understanding of the Board's internal control, determining whether
these internal controls had been placed in operation, assessing control risk, and performing tests of controls
in order to determine our auditing procedures for the purpose of expressing our opinion on the financial
statements. We limited our internal control testing to those controls necessary to achieve the objectives
described in Government Auditing Standards. The objective of our audit was not to provide assurance on
the Board's internal control over financial reporting. Consequently, we do not provide an opinion thereon.
Our consideration of the internal control over financial reporting would not necessarily disclose all matters
in the internal control over financial reporting that might be material weaknesses under standards issued by
the American Institute of Certified Public Accountants. Material weaknesses are conditions in which the
design or operation of one or more of the internal control components does not reduce to a relatively low
level the risk that misstatements, in amounts that would be material in relation to the financial statements
being audited, may occur and not be detected within a timely period by employees in the normal course of
performing their assigned functions. Because of inherent limitations in any internal control, misstatements
due to error or fraud may occur and not be detected. However, we noted no matters involving the internal
control and its operation that we consider to be material weaknesses as defined above.
We noted other matters involving internal control and its operation that we have reported to the
management of the Board in a separate letter dated April 1,2005.
This report is intended solely for the information and use of the members of the Board and its management,
the Office of the Inspector General, and Congress and is not intended to be and should not be used by
anyone other than these specified parties.

K
April 1,2005




UP

Board of Governors Financial Statements

mm

KPMG LLP
2001 M Street, NW
Washington, DC 20036

Independent Auditors' Report on Compliance and Other Matters

To the Board of Governors of the Federal Reserve System:
We have audited the balance sheets of the Board of Governors of the Federal Reserve System (the Board)
as of December 31, 2004 and 2003, and the related statements of revenues and expenses and changes in
cumulative results of operations, and cash flows for the years then ended, and have issued our report
thereon dated April 1, 2005. We conducted our audits in accordance with 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 management of the Board is responsible for complying with laws, regulations, and contracts applicable
to the Board. As part of obtaining reasonable assurance about whether the Board's 2004 financial
statements are free of material misstatement, we performed tests of the Board's 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. We limited our tests of compliance to the
provisions described in the preceding sentence, and we did not test compliance with all laws, regulations,
and contracts applicable to the Board. However, providing an opinion on compliance with laws,
regulations, and contracts was not an objective of our audit and, accordingly, we do not express such an
opinion.
The results of our tests of compliance described in the preceding paragraph of this report disclosed no
instances of noncompliance or other matters that are required to be reported herein under Government
Auditing Standards.
This report is intended solely for the information and use of the members of the Board and its management,
the Office of the Inspector General, and Congress and is not intended to be and should not be used by
anyone other than these specified parties.

H
April 1, 2005




UP

313

315

Federal Reserve Banks
Combined Financial Statements
The combined financial statements of the Federal Reserve Banks were audited by
PricewaterhouseCoopers LLP, independent auditors, for the years ended
December 31, 2004 and 2003.

REPORT OF INDEPENDENT AUDITORS

To the Board of Governors of the Federal Reserve System
and the Board 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, 2004 and 2003,
and the related combined statements of income and changes in capital for the years
then ended, which have been prepared in conformity with the accounting principles, policies, and practices established by the Board of Governors of the Federal
Reserve System. These combined financial statements are the responsibility of the
Reserve Banks' management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits 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 combined
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, these combined financial statements were prepared in
conformity with the accounting principles, policies, and practices established by
the Board of Governors of the Federal Reserve System. These principles, policies,
and practices, which were designed to meet the specialized accounting and reporting needs of the Federal Reserve System, are set forth in the Financial Accounting
Manual for Federal Reserve Banks and constitute a comprehensive basis of
accounting other than accounting principles generally accepted in the United States
of America.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Reserve
Banks as of December 31, 2004 and 2003, and the combined results of their
operations for the years then ended, on the basis of accounting described in Note 3.




316

91st Annual Report, 2004
FEDERAL RESERVE BANKS
COMBINED STATEMENTS OF CONDITION
December 31, 2004 and 2003
(in millions)
ASSETS

Gold certificates
Special drawing rights certificates
Coin
Items in process of collection
Loans to depository institutions
Securities purchased under agreements to resell
U.S. government securities, net
Investments denominated in foreign currencies
Accrued interest receivable
Bank premises and equipment, net
Other assets
Total assets

2004

2003

$ 11,041
2,200
728
6,233
43
33,000
725,584
21,368
5,104
2,216
3,350
$810,867

$ 11,039
2,200
722
7,793
62
43,750
675,569
19,868
5,064
2,117
3,303
$771,487

$719,437
30,783

$689,757
25,652

LIABILITIES AND CAPITAL
LIABILITIES

Federal Reserve notes outstanding, net
Securities sold under agreements to repurchase
Deposits
Depository institutions
U.S. Treasury, general account
Other deposits
Deferred credit items
Interest on Federal Reserve notes due U.S. Treasury
Accrued benefit costs
Other liabilities
Total liabilities

24,043
5,912
332
5,306
329
891
290
787,323

23,058
5,723
394
7,582
428
956
. 243
753,793

11,914
11,630
23,544
$810,867

8,847
8,847
17,694
$771,487

CAPITAL

Capital paid-in
Surplus
Total capital
Total liabilities and capital

The accompanying notes are an integral part of these combined financial statements.




Federal Reserve Banks Combined Financial Statements

317

FEDERAL RESERVE BANKS
COMBINED STATEMENTS OF INCOME
for the years ended December 31, 2004 and 2003
(in millions)
2004

2003

$22,344
269
3
22,616

$22,597
260
1
22,858

290
22,326

215
22,643

Other operating income
Income from services
Reimbursable services to government agencies
Foreign currency gains, net
Other income
Total other operating income

866
370
1,217
89
2,542

887
328
2,695
79
3,989

Operating expenses
Salaries and other benefits
Occupancy expense
Equipment expense
Assessments by Board of Governors
Other expenses

1,604
222
245
776
578

1,819
213
257
805
532

Total operating expenses

3,425

3,626

Net income prior to distribution

$21,443

$23,006

$

$

Interest income
Interest on U.S. government securities
Interest on investments denominated in foreign currencies
Interest on loans to depository institutions
Total interest income
Interest expense
Interest expense on securities sold under agreements to repurchase
Net interest income

Distribution of net income
Dividends paid to member banks
Transferred to surplus
Payments to U.S. Treasury as interest on Federal Reserve notes
Total distribution

582
2,783
18,078
$21,443

The accompanying notes are an integral part of these combined financial statements.




518
467
22,021
$23,006

318 91st Annual Report, 2004
FEDERAL RESERVE BANKS
COMBINED STATEMENTS OF CHANGES IN CAPITAL
for the years ended December 31, 2004 and 2003
(in millions)
Capital
paid-in
Balance at January 1, 2003
(167 million shares)
Transferred to surplus
Net change in capital stock issued
(9 million shares)
Balance at December 31, 2003
(176 million shares)
Transferred to surplus
Net change in capital stock issued
(61 million shares)
Balance at December 31,2004
(238 million shares)

Surplus

Total
capital

$ 8,380
...

$ 8,380
467

$16,760
467

467
$ 8,847
...

467
$ 8,847
2,783

3,067
$11,914

$17,694
2,783
3,067

$11,630

$23,544

The accompanying notes are an integral part of these combined financial statements.

NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS
(1) STRUCTURE

The twelve 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. Other
major elements of the System are the Board of Governors
of the Federal Reserve System (Board of Governors), the
Federal Open Market Committee (FOMC) and the Federal Advisory Council. 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. Banks
that are members of the System include all national banks
and any state-chartered bank that applies and is approved
for membership in the System.
Although the Reserve Banks are chartered as independent organizations overseen by the Board of Governors,
the Reserve Banks work jointly to carry out their statutory responsibilities. The majority of the assets, liabilities,
and income of the Reserve Banks is derived from central
bank activities and responsibilities with regard to monetary policy and currency. For this reason, the accompanying combined set of financial statements for the twelve
independent Reserve Banks is prepared with adjustments
to eliminate interdistrict accounts and transactions.
Board of Directors
The Reserve Banks serve twelve Federal Reserve Districts nationwide. 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, and
six directors are elected by member banks. Of the six
elected by member banks, three represent the public and
three repiw~ent member banks. Member banks are divided
into three classes according to size. Member banks in
each class elect one director representing member banks
and one representing the public. In any election of directors, each member bank receives one vote, regardless of
the number of shares of Reserve Bank stock it holds.
(2) OPERATIONS AND SERVICES

The System performs a variety of services and operations.
Functions include formulating and conducting monetary
policy; participating actively in the payments mechanism,
including large-dollar transfers of funds, automated clearinghouse (ACH) operations and check processing; distributing coin and currency; performing fiscal agency functions for the U.S. Treasury and certain federal agencies;
serving as the federal government's bank; providing
short-term loans to depository institutions; serving the
consumer and the community by providing educational
materials and information regarding consumer laws;
supervising bank holding companies, state member banks
and U.S. offices of foreign banking organizations; and
administering other regulations of the Board of Governors. The Board of Governors' operating costs are funded
through assessments on the Reserve Banks.

Federal Reserve Banks Combined Financial Statements 319
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
In performing fiscal agency functions for the U.S.
Treasury, seven Reserve Banks provide U.S. securities
direct purchase and savings bond processing services. In
March 2004, the U.S. Treasury provided an implementation plan for consolidating the provision of these services
at the Cleveland and Minneapolis Reserve Banks. The
costs for the associated restructuring for the affected
Banks have been included in footnote 10.
The FOMC establishes policy regarding open market
operations, oversees these operations, and issues authorizations and directives to the FRBNY for its execution of
transactions. Authorized transaction types include direct
purchase and sale of securities, the purchase of securities
under agreements to resell, the sale of securities under
agreements to repurchase, and the lending of U.S. government securities. The FRBNY is also authorized by the
FOMC to hold balances of, and to execute spot and
forward foreign exchange ("F/X") and securities contracts in, nine foreign currencies and to invest such foreign currency holdings ensuring adequate liquidity is
maintained. In addition, FRBNY is authorized to maintain reciprocal currency arrangements ("F/X swaps")
with various central banks, and "warehouse" foreign
currencies for the U.S. Treasury and Exchange Stabilization Fund ("ESF") through the 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 the Financial Accounting Standards
Board. The Board of Governors has developed specialized accounting principles and practices that it believes
are appropriate for the significantly different nature and
function of a central bank as compared with the private
sector. These accounting principles and practices are
documented in the Financial Accounting Manual for Federal Reserve Banks (Financial Accounting Manual),
which is issued by the Board of Governors. All Reserve
Banks are required to adopt and apply accounting policies
and practices that are consistent with the Financial
Accounting Manual.
These combined financial statements have been prepared in accordance with the Financial Accounting
Manual. Differences exist between the accounting principles and practices of the System and generally accepted
accounting principles in the United States of America
(GAAP). The primary difference is the presentation of all
security holdings at amortized cost, rather than at the fair
value presentation requirements of GAAP. In addition,
the Board of Governors and the Reserve Banks have
elected not to present a Statement of Cash Flows. The
Statement of Cash Flows has not been included, because
the liquidity and cash position of the Reserve Banks are
not of primary concern to users of these combined financial statements. Other information regarding the Reserve
Banks' activities is provided in, or may be derived from,
the Statements of Condition, Income, and Changes in
Capital. A Statement of Cash Flows, therefore, would not
provide any additional useful information. There are no
other significant differences between the policies outlined
in the Financial Accounting Manual and GAAP.
The preparation of the combined financial statements
in conformity with the Financial Accounting Manual




requires management to make certain estimates and
assumptions that affect the reported amounts of assets and
liabilities, 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 to conform to the current-year presentation. Unique accounts and significant accounting policies
are explained below.
(A) Gold Certificates
The Secretary of the Treasury is authorized to issue gold
certificates to the Reserve Banks to monetize gold held
by the U.S. Treasury. Payment for the gold certificates by
the Reserve Banks is made by crediting equivalent
amounts in dollars into the account established for the
U.S. Treasury. These gold certificates held by the Reserve
Banks are required to be backed by the gold of the US.
Treasury. The U.S. Treasury may reacquire the gold certificates at any time and the Reserve Banks must deliver
them to the U.S. Treasury. At such time, the US. Treasury's account is charged and the Reserve Banks' gold
certificate account is lowered. The value of gold for
purposes of backing the gold certificates is set by law at
$42% a fine troy ounce.
(B) Special Drawing Rights Certificates
Special drawing rights (SDRs) are issued by the International Monetary Fund (Fund) to its members in proportion to each member's quota in the Fund 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 United States participation in the SDR
system, the Secretary of the U.S. Treasury is authorized to
issue SDR certificates, somewhat like gold certificates, to
the Reserve Banks. At such time, equivalent amounts in
dollars are credited to the account established for the US.
Treasury, and the Reserve Banks' SDR certificate account
is increased. The Reserve Banks are required to purchase
SDR certificates, at the direction of the US. Treasury, for
the purpose of financing SDR acquisitions or for financing exchange stabilization operations. There were no SDR
transactions in 2004 or 2003.
(C) Loans to Depository Institutions
The Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that all depository institutions that maintain reservable transaction accounts or
nonpersonal time deposits, as defined in Regulation D
issued by the Board of Governors, have borrowing privileges at the discretion of the Reserve Banks. Borrowers
execute certain lending agreements and deposit sufficient collateral before credit is extended. Loans are evaluated for collectibility, and currently all are considered
collectible and fully collateralized. If loans were ever
deemed to be uncollectible, an appropriate reserve would
be established. Interest is accrued using the applicable
discount rate established at least every fourteen days by

320

91st Annual Report, 2004

NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
the Board of Directors of each Reserve Bank, subject to
review by the Board of Governors.

(D) US. Government Securities and Investments
Denominated in Foreign Currencies
The FOMC has designated the FRBNY to execute open
market transactions on its behalf and to hold the resulting
securities in the portfolio known as the System Open
Market Account (SOMA). In addition to authorizing and
directing operations in the domestic securities market,
the FOMC authorizes and directs the FRBNY to execute
operations in foreign markets for major currencies in
order to counter disorderly conditions in exchange markets or to meet other needs specified by the FOMC in
carrying out the System's central bank responsibilities.
Such authorizations are reviewed and approved annually
by the FOMC.
In addition to sales of securities under agreements to
repurchase, the FRBNY may engage in tri-party purchases of securities under agreements to resell (tri-party
agreements). Tri-party agreements are conducted with
two custodial banks that manage the clearing and settlement of collateral. Acceptable collateral under tri-party
agreements primarily includes U.S. government securities, pass-through mortgage securities of Government
National Mortgage Association, Federal Home Loan
Mortgage Corporation, and Federal National Mortgage
Association, STRIP securities of the U.S. government and
"stripped" securities of other government agencies. The
tri-party agreements are accounted for as financing transactions with the associated interest income accrued over
the life of the agreements.
The FRBNY has sole authorization by the FOMC to
lend U.S. government securities held in the SOMA to U.S.
government securities dealers and to banks participating
in U.S. government securities clearing arrangements on
behalf of the System, in order to facilitate the effective
functioning of the domestic securities market. These
securities-lending transactions are fully collateralized by
other U.S. government securities. FOMC policy requires
FRBNY to take possession of collateral in excess of the
market values of the securities loaned. The market values
of the collateral and the securities loaned are monitored
by the FRBNY on a daily basis, with additional collateral
obtained as necessary. The securities lent are accounted
for in the SOMA.
F/X contracts are contractual agreements between two
parties to exchange specified currencies, at a specified
price, on a specified date. Spot foreign contracts normally
settle two days after the trade date, whereas the settlement
date on forward contracts is negotiated between the contracting parties, but will extend beyond two days from the
trade date. The FRBNY generally enters into spot contracts, with any forward contracts generally limited to the
second leg of a swap/warehousing transaction.
The FRBNY, on behalf of the Reserve Banks, maintains renewable, short-term F/X swap arrangements with
two authorized foreign central banks. The parties agree to
exchange their currencies up to a pre-arranged maximum
amount and for an agreed-upon period of time (up to
twelve months), at an agreed-upon interest rate. These
arrangements give the FOMC temporary access to foreign




currencies that it may need for intervention operations to
support the dollar and give the partner foreign central
bank temporary access to dollars it may need to support
its own currency. Drawings under the F/X swap arrangements can be initiated by either the FRBNY or the partner
foreign central bank and must be agreed to by the drawee.
The F/X swaps are structured so that the party initiating
the transaction (the drawer) bears the exchange rate risk
upon maturity. The Bank will generally invest the foreign
currency received under an F/X swap in interest-bearing
instruments.
Warehousing is an arrangement under which the
FOMC agrees to exchange, at the request of the Treasury,
U.S. dollars for foreign currencies held by the Treasury
or ESF over a limited period of time. The purpose of the
warehousing facility is to supplement the U.S. dollar
resources of the Treasury and ESF for financing purchases of foreign currencies and related international
operations.
In connection with its foreign currency activities, the
FRBNY, on behalf of the Reserve Banks, may enter into
contracts that contain varying degrees of off-balancesheet market risk, because they represent contractual commitments involving future settlement, and counter-party
credit risk. The FRBNY controls credit risk by obtaining
credit approvals, establishing transaction limits, and performing daily monitoring procedures.
While the application of current market prices to the
securities currently held in the SOMA portfolio and
investments denominated in foreign currencies may result
in values substantially above or below their carrying
values, these unrealized changes in value would have no
direct effect on the quantity of reserves available to the
banking system or on the prospects for future Reserve
Bank earnings or capital. Both the domestic and foreign
components of the SOMA portfolio from time to time
involve transactions that may result in gains or losses
when holdings are sold prior to maturity. Decisions
regarding the securities and foreign currencies transactions, including their purchase and sale, are motivated
by monetary policy objectives rather than profit. Accordingly, market values, earnings, and any gains or losses
resulting from the sale of such currencies and securities
are incidental to the open market operations and do not
motivate its activities or policy decisions.
U.S. government securities and investments denominated in foreign currencies comprising the SOMA are
recorded at cost, on a settlement-date basis, and adjusted
for amortization of premiums or accretion of discounts on
a straight-line basis. Securities sold under agreements to
repurchase are accounted for as secured borrowing transactions with the associated interest expense recognized
over the life of the transaction. Such transactions are
settled by FRBNY. Interest income is accrued on a
straight-line basis. Income earned on securities lending
transactions is reported as a component of "Other
income." Gains and losses resulting from sales of securities are determined by specific issues based on average
cost. Foreign-currency-denominated assets are revalued
daily at current market exchange rates in order to report
these assets in U.S. dollars. Realized and unrealized gains
and losses on investments denominated in foreign currencies are reported as "Foreign currency gains (losses),
net."

Federal Reserve Banks Combined Financial Statements 321
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
Activity related to U.S. government securities bought
outright, securities sold under agreements to repurchase,
securities loaned, investments denominated in foreign
currency, excluding those held under an F/X swap
arrangement, and deposit accounts of foreign central
banks and governments above core balances are allocated
to each Reserve Bank. U.S. government securities purchased under agreements to resell and unrealized gains
and losses on the revaluation of foreign currency holdings
under F/X swaps and warehousing arrangements are allocated to the FRBNY and not to other Reserve Banks.
In 2003, additional interest income of $61 million,
representing one day's interest on the SOMA portfolio,
was accrued to reflect a change in interest accrual calculations. The effect of this change was not material; therefore, it was included in 2003 interest income.
(E) 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 estimated useful lives of assets
ranging from two to fifty years. Major alterations, renovations and improvements are capitalized at cost as additions to the asset accounts and are amortized over the
remaining useful life of the asset. Maintenance, repairs
and minor replacements are charged to operations in the
year incurred. Costs incurred for software, either developed internally or acquired for internal use, during the
application stage are capitalized based on the cost of
direct services and materials associated with designing,
coding, installing, or testing software. Capitalized software costs are amortized on a straight-line basis over the
estimated useful lives of the software applications, which
range from two to five years.
(F) Federal Reserve Notes
Federal Reserve notes are the circulating currency of the
United States. These notes are issued through the various
Federal Reserve agents (the Chairman of the Board of
Directors of each Reserve Bank) to the Reserve Banks
upon deposit with such agents of certain classes of collateral security, typically U.S. government securities. These
notes are identified as issued to a specific Reserve Bank.
The Federal Reserve Act provides that the collateral
security tendered by the Reserve Bank to the Federal
Reserve agent must be equal to the sum of the notes
applied for by such Reserve Bank. In 2003, the Federal
Reserve Act was amended to expand the assets eligible to
be pledged as collateral security to include all Federal
Reserve Bank assets. Prior to the amendment, only gold
certificates, special drawing rights certificates, U.S. government securities, securities purchased under agreements to resell, loans to depository institutions, and
investments denominated in foreign currencies could be
pledged as collateral. The collateral value is equal to the
book value of the collateral tendered, with the exception
of securities, whose collateral value is equal to the par
value of the securities tendered and securities purchased
under agreements to resell, which are valued at the
contract amount. The par value of securities pledged for
securities sold under agreements to repurchase is simi-




larly deducted. The Board of Governors may, at any time,
call upon a Reserve Bank for additional security to adequately collateralize the 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 that certain assets
of the Reserve Banks are jointly pledged as collateral
for the Federal Reserve notes of 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, as obligations of the United States, Federal Reserve notes are backed by the full faith and credit
of the United States government.
The "Federal Reserve notes outstanding, net" account
represents Federal Reserve notes outstanding reduced by
the Reserve Banks' currency holdings of $128,933 million and $110,176 million at December 31, 2004 and
2003, respectively.
At December 31, 2004, all Federal Reserve notes outstanding were fully collateralized. All gold certificates,
all special drawing rights certificates, and $706,196 million of domestic securities and securities purchased under
agreements to resell were pledged as collateral. At
December 31, 2004, no loans or investments denominated
in foreign currencies were pledged as collateral.
(G) 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. As a member bank's capital and surplus
changes, its holdings of the Reserve Bank's stock must
be adjusted. Member banks are state-chartered banks that
apply and are approved for membership in the System
and all national banks. Currently, only one-half of the
subscription is paid-in and the remainder is subject to
call. These shares are nonvoting with a par value of $100.
They may not be transferred or hypothecated. By law,
each member bank is entitled to receive an annual
dividend of 6 percent on the paid-in capital stock. This
cumulative dividend is paid semiannually. A member
bank is liable for Reserve Bank liabilities up to twice the
par value of stock subscribed by it.
The Financial Accounting Standards Board (FASB)
has deferred the implementation date for SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" for the Banks.
When applicable, the Banks will determine the impact
and provide the appropriate disclosures.
(H) Surplus
The Board of Governors requires Reserve Banks to maintain a surplus equal to the amount of capital paid-in as of
December 31. This amount is intended to provide additional capital and reduce the possibility that the Reserve
Banks would be required to call on member banks for
additional capital.
Pursuant to Section 16 of the Federal Reserve Act,
Reserve Banks are required by the Board of Governors
to transfer to the U.S. Treasury as interest on Federal
Reserve notes excess earnings, after providing for the

322 91st Annual Report, 2004
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
costs of operations, payment of dividends, and reservation of an amount necessary to equate surplus with capital
paid-in.
In the event of losses or an increase in capital paid-in,
payments to the U.S. Treasury are suspended and earnings are retained until the surplus is equal to the capital
paid-in. Weekly payments to the U.S. Treasury may vary
significantly.
In the event of a decrease in capital paid-in, the excess
surplus, after equating capital paid-in and surplus at
December 31, is distributed to US. Treasury in the following year. This amount is reported as a component
of "Payments to U.S. Treasury as interest on Federal
Reserve notes."
(I) Income and Costs Related to Treasury Services
Reserve Banks are required by the Federal Reserve Act
to serve as fiscal agents and depositories of the United
States. By statute, the Department of the Treasury is
permitted, but not required, to pay for these services.

2004

^government

Notes'\\\\\\\\\\'.'.Y.'.'.'.'.'.
Bonds
^

^ ^ ; ; " ; ;

Unamortized premiums
Unaccreted discounts

(K) Restructuring Charges
In 2003, the System started the restructuring of several
operations, primarily check, cash, and Treasury services.
The restructuring included streamlining the management
and support structures, reducing staff, decreasing the
number of processing locations, and increasing processing capacity in the remaining locations. These restructuring activities continued in 2004.
Footnote 10 describes the restructuring and provides
information about the Banks' costs and liabilities associated with employee separations and contract terminations.
The costs associated with the write-down of certain Bank
assets are discussed in footnote 6. Costs and liabilities
associated with enhanced pension benefits for all Reserve
Banks are recorded on the books of the FRBNY.

360^832
94 017
- ^ ^
9,405
(1,640)
$725 584

Total

323361
98 471

9,797
(893)
$675 569

The maturity distribution of U.S. government securities
bought outright, securities purchased under agreements to
reserj5 m<^ securities sold under agreements to repurchase,
which were held in the SOMA at December 31, 2004,
w a s ^ f o n o w s ( i n millions):
Securities
purchased
under
agree-

(J) Taxes
The Reserve Banks are exempt from federal, state, and
local taxes, except for taxes on real property. Real propery taxes were $33 million for each of the years ended
December 31, 2004 and 2003, and are reported as a
component of "Occupancy expense."

2003

us

government
Maturities of
securities
securities held
(Par)
Within 15 days . . . $ 30,647
Over 1 year to
5 years
Over 5 years to
10 years
Over 10 years

J^

tQ

Securities
sold
under
agree-

^

t
Q

resell
(Contract
amount)
$33,000

repurchase
(Contract
amount)
$30,783

$33,000
========

$30,783
========

208,269

54,372
75,765
T o t a l . . . . $717,819
=====

(4) U.S. GOVERNMENT SECURITIES

At December 31, 2004 and 2003, U.S. government
securities, net with par values of $6,609 million and
$4,426 million, respectively, were loaned from the
SOMA.
At December 31, 2004 and 2003, securities sold under
agreements to repurchase with a contract amount of
$30,783 million and $25,652 million, respectively, were
outstanding. At December 31, 2004 and 2003, securities
sold under agreements to repurchase with a par value of
$30,808 million and $25,658 million, respectively, were
outstanding.

Securities bought outright are held in the SOMA at the
FRBNY.

(5) INVESTMENTS DENOMINATED IN
FOREIGN CURRENCIES

Total securities held in the SOMA at December 31 that
were bought outright, were as follows (in millions):

The FRBNY, on behalf of the Reserve Banks, holds
foreign currency deposits with foreign central banks and
the Bank for International Settlements, and invests in
foreign government debt instruments. Foreign government debt instruments held include both securities bought
outright and securities purchased under agreements to
resell. These investments are guaranteed as to principal
and interest by the foreign governments.




Federal Reserve Banks Combined Financial Statements 323
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
Total investments denominated in foreign currencies,
valued at current foreign currency market exchange rates
at December 31, were as follows (in millions):
2004

$ 6,870
2,057
2,033

1,540
7,660

Accrued interest

2004

2003

European Union euro
Foreign currency deposits
$ 6,063
Securities purchased under
agreements to resell
2,142
Government debt instruments ..
3,840
Japanese yen
Foreign currency deposits
Government debt instruments ..

1,475
7,341

123

92

$21,368

Total

$19,868

The maturity distribution of investments denominated
in foreign currencies at December 31, 2004, was as
follows (in millions):
Maturities of investments
denominated
in foreign currencies

European
Union Japanese
euro
yen

Within 1 year
$ 8,978
Over 1 year to 5 years
3,006
Over 5 years to 10 years . . .
185
Over 10 years
. . .
Total

$12,169

Total

$9,199
. . .
...
. . .

$18,177
3,006
185
. . .

$9,199

$21,368

At December 31, 2004 and 2003, there were no outstanding F/X swaps or material open foreign exchange
contracts.
At December 31,2004 and 2003, the warehousing facility was $5,000 million, with no balance outstanding.
(6) BANK PREMISES, EQUIPMENT, AND SOFTWARE

A summary of bank premises and equipment at December 31 is as follows (in millions):
Maximum
useful
life
(in years)
Bank premises and
equipment
Land
N/A
Buildings
50
Building machinery and
equipment
20
Construction in progress .. N/A
Furniture and equipment . 10
Subtotal
Accumulated
depreciation

2004

2003

$ 274
1,631

$ 244
1,559

373
202
1,200

364
96
1,334

$3,680

$3,597

(1,464) (1,480)

Bank premises and
equipment, net .

$2,216

$2,117

Depreciation expense,
for the
years ended . . . .

$ 179

$ 184




Bank premises and equipment at December 31 include
the following amounts for leases that have been capitalized (in millions):

Bank premises and equipment
Accumulated depreciation
Capitalized leases, net

2003

$11
_(6)

$ 9
(6)

$_5

$_3

Certain of the Reserve Banks lease unused space to
outside tenants. Those leases have terms ranging from 1
to 12 years. Rental income from such leases totaled
$21 million and $20 million for the years ended December 31, 2004 and 2003, respectively. Future minimum
lease payments under noncancelable agreements in existence at December 31, 2004, were (in millions):
2005
2006
2007
2008
2009
Thereafter
Total

$ 20
17
12
11
10
43
$113

The Reserve Banks have capitalized software assets,
net of amortization, of $203 million and $164 million at
December 31, 2004 and 2003, respectively. Amortization
expense was $56 million and $54 million for the years
ended December 31, 2004 and 2003, respectively.
Several Reserve Banks impaired assets as a result of
the System's restructuring plans, as discussed in footnote 10. Impaired assets include software, buildings,
leasehold improvements, furniture, and equipment. Asset
impairment losses related to the restructuring and check
processing standardization of $21 million and $11 million
for the years ended December 31, 2004 and 2003, respectively, were determined using fair values based on quoted
market values or other valuation techniques and are
reported as a component of "Other expenses."
Three Reserve Banks are constructing new buildings,
one to replace the head office and two to replace branch
offices. At December 31, 2004, the contractual obligation
for these projects has been recognized or is reported as a
commitment in footnote 7 below.
(7) COMMITMENTS AND CONTINGENCIES

At December 31, 2004, the Reserve Banks were obligated
under noncancelable leases for premises and equipment
with terms ranging from 1 to 20 years. These leases
provide for increased rental payments based upon
increases in real estate taxes, operating costs, or selected
price indices.
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
$70 million and $71 million for the years ended December 31, 2004 and 2003, respectively. Certain of the
Reserve Banks' leases have options to renew.

324 91st Annual Report, 2004
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
Future minimum rental payments under noncancelable
operating and capital leases, net of sublease rentals, with
terms of one year or more, at December 31, 2004, were
(in millions):
Operating

Capital

$ 10.2
8.9
8.0
7.1
7.2
.. 114.3

$ 1.6
1.5
.6
.2
.1

$155.7

2005
2006
2007
2008
2009
Thereafter

$ 4.0

Amount representing
Interest
Present value of minimum
lease payments

(.3)
$ 3.7

At December 31, 2004, the Reserve Banks had contractual commitments through the year 2011 totaling
$307 million, $58 million of which has been recognized.
Purchases of $117 million and $76 million were made
against these commitments during 2004 and 2003, respectively. These commitments are for goods and services for
the maintenance of currency machines, check-processingrelated services, and check transportation services, and
have variable and fixed components. The variable portion
of the commitment is for additional services above fixed
contractual service limits. The fixed payments for the
next five years under these commitments are (in millions):
Fixed
commitment

2005 .
2006.
2007 .
2008.
2009.

$89.5
66.2
23.9
.7
.7

The Reserve Banks are involved in certain legal actions
and claims arising in the ordinary course of business.
Although it is difficult to predict the ultimate outcome of
these actions, in management's opinion, based on discussions with counsel, the aforementioned litigation and
claims will be resolved without material adverse effect
on the financial position or results of operations of the
Reserve Banks.




(8) RETIREMENT AND THRIFT PLANS

Retirement Plans
The Reserve Banks currently offer two defined benefit
retirement plans to their employees, based on length of
service and level of compensation. Substantially all of
the Reserve Banks', Board of Governors', and the Plan
Administrative Office's employees participate in the
Retirement Plan for Employees of the Federal Reserve
System (System Plan) and the Benefit Equalization
Retirement Plans offered by each individual Reserve
Bank (BEP). In addition, certain Bank officers participate
in a Supplemental Employee Retirement Plan (SERP).
The System Plan is a multi-employer plan with contributions fully funded by participating employers. Participating employers are the Federal Reserve Banks, the
Board of Governors of the Federal Reserve System, and
the Office of Employee Benefits of the Federal Reserve
Employee Benefits System. Certain Board employees not
covered by the Social Security Act also contribute to the
plan. No separate accounting is maintained of assets
contributed by the participating employers. FRBNY acts
as a sponsor of the Plan for the System and costs associated with the Plan are not redistributed to other participating employers. The prepaid pension cost includes
amounts related to the participating employees of all
employers who participate in the plans.
Following is a reconciliation of the beginning and
ending balances of the System Plan benefit obligation (in
millions):
2004

Estimated actuarial present value
of projected benefit
obligation at January 1
$3,930
Service cost—benefits earned
during the period
116
Interest cost on projected
benefit obligation
245
Actuarial loss
457
Special termination loss
20
Contributions by plan participants ..
3
Benefits paid
(247)
Plan amendments
•••
Estimated actuarial present value
of projected benefit
obligation at December 31 . . . . $4,524

2003

$3,523
109
232
192
67
4
(197)
• ••

$3,930

Federal Reserve Banks Combined Financial Statements 325
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
Following is a reconciliation of the beginning and
ending balances of the System Plan assets, the funded
status, and the prepaid pension benefit costs (in millions):
2004

Estimated fair value of plan
assets at January 1
$5,703
Actual return on plan assets
428
Contributions by plan participants ..
3
Employer contributions
• ••
Benefits paid
(247)

2003

$4,997
899
4
(197)

Estimated fair value of plan
assets at December 31

$5,887

$5,703

Funded status
Unrecognized prior service cost
Unrecognized net actuarial loss

$1,362
173
1,182

$1,774
197
710

Prepaid pension benefit costs

$2,717

$2,681

Prepaid pension benefit costs are reported as a component
of "Other assets."
The accumulated benefit obligation for the defined
benefit pension plan was $3,894 million and $3,456 million at December 31, 2004 and 2003, respectively.
The weighted-average assumptions used in developing
the pension benefit obligation for the System Plan as of
December 31 are as follows:
2004

Discount rate
Rate of compensation increase

2003

5.75%
4.25%

6.25%
4.00%

The weighted-average assumptions used in developing
net periodic benefit cost for the System Plan for the years
ending December 31 are as follows:
2004

Discount rate
Expected asset return
Rate of compensation increase

6.25%
8.25%
4.00%

Net periodic pension benefit credit ..
Special termination benefits
Net periodic pension benefit
(credit) cost

2003

$ 116

$ 109

245

232

24
20
(462)

26
42
(418)

(57)
20

(9)
67

$ (37)

$ 58

The recognition of special termination benefits is the
result of enhanced retirement benefits provided to 384
System employees in conjunction with the restructuring
disclosed in footnote 10. Net periodic pension benefit
(credit) cost is reported as a component of "Salaries and
other benefits."
The expected benefit payments for the next ten years
(in millions) are:

2005
2006
2007
2008
2009
2010-2014

$ 206

Total

$2,518

1,406

The Federal Reserve System's pension plan weightedaverage asset allocations at December 31, by asset category, are as follows:

2003

6.75%
8.50%
4.25%

The long-term rate of return on assets was based on a
combination of methodologies including the System
Plan's historical returns, surveys of other plans' expected
rates of return, building a projected return for equities and
fixed income investments based on real interest rates,
inflation expectations and equity risk premiums and
finally, surveys of expected returns in equity and fixed
income markets.
The components of net periodic pension benefit (credit)
cost for the System Plan as of December 31 are shown
below (in millions):




2004

Service cost—benefits earned
during the period
Interest cost on projected
benefit obligation
Amortization of prior service
cost
Recognized net loss
Expected return on plan assets

2004

Equities
Fixed income
Cash
Total

2003

67.5%
30.0%
2.5%

61.9%
34.8%
3.3%

100.0%

100.0%

The System's Committee on Investment Performance
(CIP) contracts with investment managers who are
responsible for implementing the System Plan's investment policies. The managers' performance is measured
against a trailing 36-month-benchmark of 60 percent of
a market value weighted index of predominantly large
capitalization stocks trading on the New York Stock
Exchange, the American Stock Exchange, and the
National Association of Securities Dealers Automated
Quotation National Market System and 40 percent of a
broadly diversified investment-grade fixed income index
(rebalanced monthly). The managers invest Plan funds
within CIP-established guidelines for investment in
equities and fixed income instruments. Equity investments can range between 40 percent and 80 percent of the
portfolio. Investments, however, cannot be concentrated
in particular industries and equity security holdings of
any one company are limited. Fixed income securities

326 91st Annual Report, 2004
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
must be investment grade and the effective duration of
the fixed income portfolio must remain within a range
of 67 percent and 150 percent of a broadly diversified investment-grade fixed income index. CIP guidelines
prohibit margin, short sale, foreign exchange, and commodities trading as well as investment in bank, bank
holding company, savings and loan, and government
securities dealer's stocks. In addition, investments in nondollar denominated securities are prohibited; however, a
small portion of the portfolio can be invested in American
Depositary Receipts/Shares and foreign-issued dollar
denominated fixed income securities.
The Federal Reserve System does not expect to make a
cash contribution to the Retirement Plan during 2005.
The Reserve Banks' projected benefit obligations and
net pension costs for the BEP and the SERP at December 31, 2004 and 2003, and for the years then ended, are
not material.
Thrift Plan
Employees of the Reserve Banks may also participate in
the defined contribution Thrift Plan for Employees of
the Federal Reserve System (Thrift Plan). The Reserve
Banks' Thrift Plan contributions totaled $63 million for
the year ended December 31, 2004, and $64 million for
the year ended December 31, 2003, and are reported as a
component of "Salaries and other benefits."
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
AND POSTEMPLOYMENT BENEFITS

Postretirement Benefits Other Than Pensions
In addition to the Reserve Banks' retirement plans,
employees who have met certain age and length of service requirements are eligible for both medical benefits
and life insurance coverage during retirement.
The Reserve Banks fund benefits payable under the
medical and life insurance plans as due and, accordingly,
have no plan assets. Net postretirement benefit costs are
actuarially determined using a January 1 measurement
date.
Following is a reconciliation of the beginning and ending
balances of the benefit obligation (in millions):
2004

Accumulated postretirement benefit
obligation at January 1
Service cost—benefits earned during
theperiod
Interest cost of accumulated
benefit obligation
Actuarial loss
Curtailment (gain)/loss
Special termination loss
Contributions by plan participants
Benefits paid
Plan amendments
Accumulated postretirement benefit
obligation at December 31




$942

2003

$742

19

18

52
10
(2)
1
9
(50)
(112)

50
157
7
2
6
(40)
. . .

$869

$942

At December 31, 2004 and 2003, the weighted-average
discount rate assumptions used in developing the postretirement benefit obligation were 5.75 percent and
6.25 percent, respectively.
Following is a reconciliation of the beginning and ending
balances of the plan assets, the unfunded postretirement
benefit obligation and the accrued postretirement benefit
costs (in millions):
2004

2003

Fair value of plan assets at January 1 . . . $ . . .
Contributions by the employer
42
Contributions by plan participants
8
Benefits paid
_(50)

$...
34
6
(40)

Fair value of plan assets at
December31

$. . •

$. • •

Unfunded postretirement benefit
obligation
Unrecognized net curtailment gain
Unrecognized prior service cost
Unrecognized net actuarial loss

$869
5
128
(247)

$942
2
122
(246)

Accrued postretirement benefit costs . . . $755

$820

Accrued postretirement benefit costs are reported as a
component of "Accrued benefit costs."
For measurement purposes, the assumed health care
cost trend rates at December 31 are as follows:
2004

Health care cost trend rate
assumed for next year
Rate to which the cost trend is
assumed to decline
(the ultimate trend rate)
Year that the rate reaches the
ultimate trend rate

2003

9.00%

10.00%

4.75%

5.00%

2011

2011

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 health care cost
trend rates would have the following effects for the year
ended December 31, 2004 (in millions):
One percentage
point increase
Effect on aggregate
of service and
interest cost
components of
net periodic
postretirement
benefit costs
$ 10
Effect on accumulated
postretirement
benefit obligation . . . 105

One percentage
point decrease

$ (8)
(86)

Federal Reserve Banks Combined Financial Statements 327
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
The following is a summary of the components of net
periodic postretirement benefit costs for the years ended
December 31 (in millions):
2004

Service cost—benefits earned during
theperiod
Interest cost of accumulated benefit
obligation
Amortization of prior service cost
Recognized net actuarial loss

$ 19

$18

52
(17)
8

50
(15)
4

62
(86)
1
_

57
5
2

$(23)

$64

Total periodic expense
Curtailment (gain)/loss
Special termination loss
Net periodic postretirement
benefit (credit)/costs

2003

At December 31, 2004 and 2003, the weighted-average
discount rate assumptions used to determine net periodic
postretirement benefit costs were 6.25 percent and 6.75
percent, respectively.
Net periodic postretirement benefit costs are reported
as a component of "Salaries and other benefits."
A plan amendment that modified the credited service
period eligibility requirements created curtailment gains.
The recognition of special termination losses is primarily
the result of enhanced retirement benefits provided to
employees during the restructuring described in footnote 10.
The Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was enacted in
December 2003. The Act 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. Following the guidance of the
Financial Accounting Standards Board, the Bank elected
to defer recognition of the financial effects of the Act
until further guidance was issued in May 2004.
Benefits provided to certain participants are at least
actuarially equivalent to Medicare Part D. The estimated
effects of the subsidy, retroactive to January 1, 2004, are
reflected in actuarial loss in the accumulated postretirement benefit obligation and net periodic postretirement
benefit costs.
Following is a summary of the effects of the expected
subsidy (in millions):
2004

Decrease in
benefit
Decrease in
benefit

the accumulated postretirement
obligation
the net periodic postretirement
costs




$120
16

Expected benefit payments:
Without
subsidy

2005 .
2006
2007
2008
2009

With
subsidy
$ 45
43
44
46
47
257

$532

2010-2014
Total

. $ 45
..
47
..
49
..
51
..
52
_288

$482

Postemployment Benefits
The Reserve Banks offer benefits to former or inactive
employees. Postemployment benefit costs are actuarially
determined using a December 31, 2004, measurement
date and include the cost of medical and dental insurance,
survivor income, and disability benefits. For 2004, the
Banks changed their practices for estimating postemployment costs and used a 5.25 percent discount rate and the
same health care trend rates as were used for projecting
postretirement costs. Costs for 2003, however, were projected using the same discount rate and health care trend
rates as were used for projecting postretirement costs.
The accrued postemployment benefit costs recognized
by the Banks at December 31, 2004 and 2003, were
$128 million and $130 million, respectively. This cost is
included as a component of "Accrued benefit costs." Net
periodic postemployment benefit costs included in 2004
and 2003 operating expenses were $17 million and
$26 million, respectively.
10.

BUSINESS RESTRUCTURING CHARGES

In 2003, several Banks announced consolidation and
restructuring plans to streamline operations and reduce
costs, including consolidation of check operations and
staff reductions in various functions. In 2004, additional consolidation and restructuring initiatives were
announced in the check and fiscal services operations.
These actions resulted in the following business restructuring charges:

328

91st Annual Report, 2004

NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
Major categories of expense (in millions):
Total
estimated
costs

Employee separation
Contract termination
Other
Total

$61
1
1
_
$63
=

Accrued
liability
Total
12/31/03 charges
Employee
separation
Contract
termination . . .
Other
Total

Total
paid

Accrued
liability
12/31/04

$29

$25

$(26)

$28

1
•_!_:
$30

...
—
$25

...
:_L_:
$(26)

1
:_^j.
$29




Employee separation costs are primarily severance costs
related to identified staff reductions of approximately
1,290, including some of the 1,483 staff reductions related
to restructuring that was announced in 2003, and have not
been paid out. These costs are reported as a component of
"Salaries and other benefits." Contract termination costs
include the charges resulting from terminating existing
lease and other contracts and are shown as a component
of "Other expenses."
Restructing costs associated with the write-downs of
certain Bank assets, including software, buildings, leasehold improvements, furniture, and equipment are discussed in footnote 6. Costs associated with enhanced
pension benefits for all Reserve Banks are discussed in
footnote 8. Costs associated with enhanced postretirement
benefits are disclosed in footnote 9.
Future costs associated with the restructuring that are
not estimable and are not recognized as liabilities will be
incurred in 2005 and 2006.
The Reserve Banks anticipate substantially completing
their announced restructuring plans by March 2006.

329

Office of Inspector General Activities
The Board's Office of Inspector General
(OIG) functions in accordance with
the Inspector General Act of 1978, as
amended. In addition to retaining an
independent auditor each year to audit
the Board's financial statements, the
OIG plans and conducts audits and
investigations of the Board's programs
and operations and its delegated functions at the Federal Reserve Banks. The
OIG also reviews existing and proposed
legislation and regulations for economy
and efficiency. It recommends policies,
and it supervises and conducts activities
that promote economy and efficiency
and that prevent and detect waste, fraud,

and abuse in Board and Board-delegated
programs and operations, as well as in
activities administered or financed by
the Board. The OIG keeps the Congress
and the Chairman of the Board fully
informed about serious abuses and deficiencies and about the status of any corrective actions.
During 2004, the OIG completed
ten audits, reviews, and other assessments and conducted a number of
follow-up reviews to evaluate action
taken on earlier recommendations. The
OIG also closed nine investigations and
performed numerous legislative and
regulatory reviews.

Audits, Reviews, and Assessments Completed during 2004
Report title
Audit of the FFIEC's Financial Statements (Year Ended December 31, 2003)
Review of Internal Control Assessments Performed during Community Bank Examinations
Evaluation of Key Emergency Preparedness and Security Enhancements
Audit of the Board's Financial Statements (Year Ended December 31, 2003)
Audit of the Board's Outsourcing Operations
Evaluation of the Fine Arts Program
Evaluation of the Administrative Controls Over an Outsourced Contract
Review of the Oversight Function of the Division of Reserve Bank Operations
and Payment Systems
Audit of the Board's Information Security Program
Audit of the Board's Automated Travel System




Month issued
February
March
March
April
April
April
June
August
September
November

330

Government Accountability Office Reviews
Under the Federal Banking Agency
Audit Act (Public Law 95-320), most
Federal Reserve System operations are
under the purview of the Government
Accountability Office (GAO). In 2004,
the GAO completed six reports on
selected aspects of Federal Reserve
operations. In addition, five projects

concerning the Federal Reserve were in
various stages of completion at yearend. The Federal Reserve also provided
information to the GAO during the year
in relation to numerous other GAO
investigations.
The completed reports are available
directly from the GAO.

Reports Completed during 2004
Report title
Consumer Protection: Federal and State Agencies Face Challenges
in Combating Predatory Lending
Federal Reserve Banks: Areas for Improvement in Computer Controls
Coins and Currency: How the Costs and Earnings Associated
with Producing Coins and Currency Are Budgeted and
Accounted For
Regulatory Information Sharing: Better Information Sharing
among Financial Services Regulators Could Improve Protections
for Consumers
Foreign Regimes' Assets: The United States Faces Challenges
in Recovering Assets, but Has Mechanisms that Could Guide
Future Efforts . . .
Financial Regulation: Industry Changes Prompt Need to Reconsider
U.S. Regulatory Structure

Report number

Month issued
(2004)

GAO-04-280
GAO-04-336R

January
March

GAO-04-283

April

GAO-04-882R

June

GAO-04-1006
GAO-05-61

September
October

Projects Active at Year-End 2004
Subject of project
USA Patriot Act implementation
Bank Secrecy Act examinations
Industrial loan corporations
Information security at financial organizations .
Consumer impact on remittance transfer system




Month initiated
(2004)
January
January
May
November
December

Maps of the
Federal Reserve System




332 91st Annual Report, 2004

The Federal Reserve System

1

9
MINNEAPOLIS

SAN FRANCISCO

2

7

12
•

•
o

CHICAGO •

10

KANSAS CITY 9

BOSTON

CLEVELAND

g
ST. LOUIS

4

Rj

• NEW YORK
PHILADELPHIA

S

>

CHMONE

5

8
6 •

ATLANTA

11 •

DALLAS

ALASKA
HAWAII

LEGEND

Both pages
• Federal Reserve Bank city
El Board of Governors of the Federal
Reserve System, Washington, D.C.

Facing page
• Federal Reserve Branch city
— Branch boundary

NOTE

The Federal Reserve officially identifies
Districts by number and by Reserve
Bank city (shown on both pages) and by
letter (shown on the facing page).
In the 12th District, the Seattle
Branch serves Alaska, and the San Francisco Bank serves Hawaii.
The System serves commonwealths
and territories as follows: The New York



Bank serves the Commonwealth of
Puerto Rico and the U.S. Virgin Islands;
the San Francisco Bank serves American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands.
The maps show the boundaries within
the System as of year-end 2004.

Maps of the Federal Reserve System 333
2-B

1-A

4-D

3-C

ME

5-E
Pittsburgh
\

• l

vr

•Cincinnati

Bi

NEW YORK

(

Mt
—

iT
Jacksonville

j

) IK

r' Louisville

r-2j"-*-™
c! •Memphis
tittle)
Hock ( M
S

• -IN

New Orleans

tL

^^

Detroit*

<5A

-V
LA

RICHMOND

8-H

7-G

™ _ ^ •Nashville
r— """—
Birmingham ^ 1
\«
1

•Charlotte

CLEVELAND

PHILADELPHIA

6-F

MS

• T Vt$J*

/

Buffalo

BOSTON

Baltimore M
D

PA

Miami
CHICAGO

ATLANTA

ST. LOUIS

9-1
• Helena
::

>-:vW--.

.-«**•••••-

•
1

MINNEAPOLIS

12-L

10-J
WY

1

CO

1 " \m
^ •

Dei?ver | K S

I

ALASKA

^

Seattle
Oklahoma City
•

Portland

CC
M

KANSAS CITY

U-K

/

"***^-^^

1D

/

TX

|

^

J Salt Lake City

#

El Paso

A ^r~^VBoustor
•Los Angeles

• V*

San Antonio

HAWAII
AZ

DALLAS




SAN FRANCISCO

Index




337

Index
Agreement corporations, examinations
of, 95-96
American Jobs Creation Act, 16
Anti-money-laundering initiatives,
examinations for, 90, 99
Applications, processing of, 62-63, 111,
114
Asset-backed commercial paper (ABCP),
97-98
Assets and liabilities
Board of Governors, 304
Commercial banks, 289
Federal Reserve Banks, 266-69, 315
ATM (automated teller machine) card use,
61
Auditors' reports, 301, 303, 312-14
Audits, reviews, and assessments, Office of
Inspector General, 329
Automated clearinghouse services, Federal
Reserve Banks, 121-22, 285
Automated Standard Application for
Payment, 126
Availability of Funds and Collection of
Checks (Regulation CC), 72, 150
Balance sheets
Board of Governors, 304
Federal Reserve priced services, 132-35
Bank credit, 26
Bank examiner training, 66-67
Bank holding companies
Application procedure, 110-11
Banks affiliated with, 298
Examinations and inspections of, 88-91
Rating system, 99, 151
Regulatory financial reports of, 105-6
Stock repurchases by, 113
Surveillance by Federal Reserve System,
94
Bank Holding Companies and Change in
Bank Control (Regulation Y), 148
Bank Holding Company Act, 110-11
Bank Holding Company Performance
Reports (BHCPRs), 94
Banking Organization National Desktop
(BOND), 108



Banking organizations, U.S.
Examinations and inspections of, 88-90
Financial reporting, transparency, 105
Foreign operations, 95-96, 100-102
Number of, 298
Overseas investments by, 112-13
Regulation of, 110-14
Risk-focused supervision of, 93-94
Bank Merger Act, 111-12
Bank-owned life insurance (BOLI), 99
Bank Secrecy Act, examinations, 90, 99,
102
Basel Committee on Banking Supervision,
102-4
Basel II framework, implementation, 98,
100-101
BHCPRs (Bank Holding Company
Performance Reports), 94
Board of Governors {See also Federal
Reserve System)
Applications, processing of, 113
Assets and liabilities of, 304
Audits of, 303-13, 321, 327
Consumer Advisory Council, 75-77, 240
Decisions, public notice, 113
Ex officio members, 264
Federal Advisory Council, 239
Federal legislative proposals, 141-43
FFIEC activities, 66, 106-7
Financial statements of, 303-13
Government Performance and Results
Act, 137-39
Inspector General, Office of, audits,
reviews, and assessments, 329
Litigation, 231-32
Members and officers, lists, 235-37,
261-64
Outreach activities, 83-84
Policy actions by, 147-53
Rules of practice for hearings, 150
Thrift Institutions Advisory Council, 241
Training and development, staff and
bank examiners, 66-67, 108-9
BOLI (Bank-owned life insurance), 99
BOND (Banking Organization National
Desktop), 108
Bonds, 126, 288

338 91st Annual Report, 2004
Borrowers of Securities Credit
(Regulation X), 288
Branches, Federal Reserve Banks, 2 4 2 ^ 3 ,
284-85
BSA (Bank Secrecy Act), 90, 99, 102
Business continuity, 90-91
Business spending, investment, and
finance, 14-21, 36-44
CAESAR (Complaint Analysis
Evaluation System and Reports), 73
Call Reports, 106
Capital
Accounts, Federal Reserve Banks,
266-69, 315
Changes in, Federal Reserve Banks, 317
Flows, 19, 42
Standards, 97-98, 102
Cash flows, Board of Governors, 306
Cash management services, 127
Cash-recirculation policy, 123-24
Change in Bank Control Act, 112
Check Clearing for the 21st Century Act
(Check 21), 66, 117, 118
Check collection and processing, 120-21,
285
Citizens Financial Group, merger, 63
Civil money penalties, Federal Reserve
enforcement of, 92-93
Collection of Checks and Other Items by
Federal Reserve Banks and Funds
Transfers through Fedwire
(Regulation J), 148
Collection services, Federal Reserve Banks,
126-27
Combined financial statements, Federal
Reserve Banks, 314-27
Commercial and industrial loans, 14—15, 85
Commercial banks
Assets and liabilities of, 289
Developments, 85
Financial reports, 106
Number of, 298
Commercial-mortgage-backed securities
(CMBS), 15, 39
Commercial paper, asset-backed, programs,
97-98
Community affairs (See Consumer and
community affairs)
Community banks, supervision of, 94
Community economic development,
promotion of, 77-83



Community Reinvestment Act (CRA)
Compliance examinations, 62
Mergers and acquisitions, applications
for, 62-63
Review of, 76
Supervision for compliance, 62-63
Technical changes to, 149
Community Reinvestment (Regulation BB),
149
Complaint Analysis Evaluation System and
Reports (CAESAR), 73
Compliance examinations, 63-67, 69-73
Condition statements, Federal Reserve
Banks, 266-69, 315
"Consolidated Know-Your-Customer Risk
Management," policy paper, 102-3
Consumer Advisory Council, 75-77, 240
Consumer and community affairs
Community economic development,
77-83
Consumer Advisory Council, advice,
75-77
Consumer complaints, 73-75
Financial education, 78-79, 82-83
Outreach activities, 83-84
Statutes to inform and protect
consumers, 55-62
Supervision for compliance with laws,
62-73
Consumer complaints, 73-75
Consumer financial education, 78-79,
82-83
Consumer information, reporting and
solicitation of, 56-57, 59-60
Consumer Leasing (Regulation M), 70, 147
Consumer price index (CPI), 22, 44
Consumer prices, 21-23, 44
Consumer protection laws, compliance
with, 63-73
Consumer spending, 10-11, 35
Corporate profits, 14-15, 38-39
CRA (See Community Reinvestment Act)
Credit
Rates, primary, secondary, and seasonal,
151-52, 286
Reports and solicitations, 57, 59-60
State member banks to executive
officers, 115
Credit by Banks, Brokers, and Dealers
(Regulation T), 288

Index 339
Credit by Banks for the Purpose of
Purchasing or Carrying Margin Stocks
(Regulation U), 288
"Credit Risk Transfer/' Joint Forum paper,
103
Currency and coin, operations and
developments in, 123-24, 285, 291,
293, 295, 315
Data, home mortgage lending, 67, 71
Debit card use, 61-62
Debit fees, 58-59
Debt, 26, 47-48
Debt services, 124-26
Demand deposits, interest on, 141-42
Depository institutions
Compliance with EFTA, 58
Home mortgage disclosure data, 68
Interest on balances held at Federal
Reserve Banks, 141
Interest rates on loans, Federal Reserve
Banks, 286
Reserve requirements, exemption
threshold increased, 61
Reserves held, 142, 287, 290-97
Services to, Federal Reserve Banks,
124-27
Depository services to other agencies by
Federal Reserve Banks, 124-27
Deposits
Federal Reserve Banks, 266-69, 291,
293
Insured commercial banks, 289
Directors, Federal Reserve Banks and
Branches, list, 244-60
Disclosures by state member banks, 114
Disclosure tables for reporting HMDA
data, 61
Discount rate (See also Interest rates),
151-53, 286
Disposable personal income (DPI), 10, 35
Dollar exchange rate, 28, 49-50
Dollar Wi$e initiative, 79
ECI (See Employment cost index)
Economy, international, 27-30, 48-51
Economy, U.S. developments
Business sector, 12-15, 36-39
External sector, 18-20, 41-42
Financial markets, 4-7, 23-27, 46-48
Government sector, 15-18, 39-41
Household sector, 10-12, 35-36



Economy, U.S. developments—Continued
Interest rates, 5, 24-25, 46-47
Labor market, 20-23, 42-46
Monetary aggregates, 26-27, 48
Monetary policy, 3-7, 31-34
Prices, 21-23, 44
Projections, 7-8, 34
Edge Act corporations, examinations of,
95-96
Education, financial, 78-79, 82-83
Electronic access and payments services,
126, 127
Electronic Check Processing program,
126-27
Electronic Federal Tax Payment System
(EFTPS), 126
Electronic Fund Transfer Act (EFTA),
58-59, 61-62, 70
Electronic Fund Transfers (Regulation E),
70, 147
Electronic fund transfer use and services,
61, 121-22
Emerging-market economies, 29-30, 50-51
Employment, 20-21, 42^t3
Employment cost index (ECI), 21, 43-44
Energy prices, 22, 44
Enforcement actions, Federal Reserve
System, 92-93
Equal Credit Opportunity (Regulation B),
69-70, 147
Equipment and software investment, 12-13,
37
Equity markets and prices, 25-26, 47
Examinations and inspections
Anti-money laundering, 90
Bank holding companies, 88-90
Community Reinvestment Act,
compliance with, 62
Consumer protection laws, compliance
with, 63-73
Fair lending laws, compliance with,
64-65
Federal Reserve Banks, 128-29
FFIEC procedures, 66
Financial holding companies, 90
Financial system continuity, 90-91
International banking activities, 95-96
Specialized, 91-92
State member banks, 88, 89, 95
Supervisory policy, 97-107
Training for bank examiners, 66-67
Transfer agents, 91

340 91st Annual Report, 2004
Examinations and inspections—Continued
U.S. banking organizations, foreign
operations, 95
Expenses (See Income and expenses)
Exports, 18, 41
External sector, developments in, 18-20,
41-42
Fair and Accurate Credit Transactions
Act (FACT Act), 55-57
Fair Credit Reporting Act (FCRA), 59-60
Fair Credit Reporting (Regulation V),
Fair lending laws, compliance with, 64-65
Federal Advisory Council, members and
officers, 239
Federal agency securities and obligations
Depository institution holdings, 289
Federal Reserve Bank holdings, 266-69,
274, 276-79, 290, 292, 294, 296
Federal Financial Institutions Examination
Council (FFIEC), 66, 68, 106-7
Federal funds rate, 5-7, 32, 191, 200, 207,
215, 222, 229
Federal government, economic
developments, 15-17, 39-40
Federal Open Market Committee (FOMC)
Authorizations, 155, 157, 162-65
Directives, 157, 159, 165-66, 191, 200,
207, 215, 222, 229
Foreign currency operations, procedural
instructions, 159-60, 166-75
Guidelines for open market operations,
157
Meetings, minutes of, 155, 160, 175,
183, 192, 200, 208, 215, 222
Members and officers, list, 238
Notation votes, 183, 222
System Open Market Account, 157, 158,
163, 164
Federal Reserve Banks
Acquisition costs, 284
Assessments by Board of Governors,
278, 280, 282
Assets and liabilities of, 266-69, 315
Audit of, 315
Automated clearinghouse services,
121-22
Bond services, 126
Branches of, 242-43
Capital, changes in, 317
Cash, 123, 127



Federal Reserve Banks—Continued
Chairmen, conference of, 243
Check collection service, commercial,
120-21
Checks handled, 285
Collection services, government, 126-27
Condition statements of, 266-69, 315
Conference of Chairmen, Presidents, and
First Vice Presidents, 243-44
Credit outstanding, 290-97
Currency and coin, operations and
developments in, 123-24, 285, 291,
293, 295, 314
Depository institution balances, interest
on, 141
Depository services, 124-27
Deposits, 266-69
Directors of, 244-60
Discount rate, 151-53, 286
Electronic access and payments services,
126, 127
Examinations of, 128-29
Examiners, training, 66-67
Federal Reserve decisions, public notice
of, 96
FedLine Advantage, 127
Fedwire Funds Service, 122
Fedwire Securities Service, 122-23
Financial statements of, combined,
314-27
First Vice Presidents, conference of, 244
Fiscal agency services, 124—27
Float, 123, 290, 292, 294, 296
Food coupon services, 285
Foreign banks, U.S. activities of,
supervision, 96
Government depository services, 124-27
Holdings of securities and loans, 130,
266-69, 274, 290, 292, 294, 296
Income and expenses of, 129, 134-35,
276-83, 316
Information technology developments,
127-28
Initiatives, 117-18
Interest rates on loans to depository
institutions, 286
National Settlement Service, 122
Noncash collection service, 123
Officers and employees, number of, 275
Officers of, 242-43
Operations in principal departments, 285
Payments to the U.S. Treasury, 278-79

Index 341
Federal Reserve Banks—Continued
Premises of, 130-31, 284-85
Presidents, conference of, 243
Priced services, 118-23, 132-35
Profit and loss, 276
Salaries of officers and employees, 275
Securities and loans, holdings of, 124,
130, 276-77
Treasury Tax and Loan program, 127
Federal Reserve Electronic Tax Application
(FR-ETA), 126
Federal Reserve fifty dollar note, 123
Federal Reserve System (See also Board of
Governors)
Anti-money-laundering examinations, 90
Applications to establish banking
institutions, processing of, 113-14
Bank holding company regulatory
financial reports to, 105-6
Banks and Branches, list of, 242-43
Basel Committee activities, 102-4
Capital adequacy standards, 97-98, 102
Decisions, public notice of, 113
Edge Act and agreement corporations,
examinations of, 95-96
Enforcement actions, 92-93
Enforcement of laws and regulations,
114-15
Examinations and inspections, 88-90
Executive officers, credit to, 115
Financial system continuity initiatives,
90-91
Government Accountability Office,
reviews by, 330
International guidance on supervisory
policies, 102-4
International supervision, 95-97
Maps of, 332-33
Membership, 115
Monitoring supervisory data, off-site,
94-95
Open market transactions, 270-73
Processing of applications, 114
Regulation of U.S. banking structure,
110-14
Risk management and supervision,
93-94, 102-3
Safety and soundness supervision
responsibilities, 88-97
Sarbanes-Oxley Act, 104
Securities credit responsibilities, 114
Special investigations, 92-93



Federal Reserve System—Continued
Specialized examinations, 91-92
Staff development, 66-67, 108-9
Supervision and regulation
responsibilities, 62-73, 87-88
Supervision of international banking
organizations, 95-96
Supervisory policy, 97-107
Surveillance, 94-95
Technical assistance, 96-97
Training, staff and examiners, 66-67,
108-9
Transparency enhancement efforts, 105
Federal sector, developments in, 15-17,
39-40
Federal tax payments, 126
FedLine Advantage, 127
Fedwire Funds Service, 122
Fedwire Securities Service, 122-23
FFTEC (Federal Financial Institutions
Examination Council), 66, 68, 106-7
Fiduciary activities, supervision of, 91
Fifty dollar note, issuance, 123
Finance
Business, 14-15, 38-39
Household, 12, 36
Financial Crimes Enforcement Network
(FinCEN), 106
"Financial Disclosure in the Banking,
Insurance and Securities Sectors:
Issues and Analysis," Joint Forum
paper, 104
Financial statements
Board of Governors, 303-13
Federal Reserve Banks, combined,
314-27
Federal Reserve priced services, 132-35
Financial system
Account, 19-20, 42
Continuity initiatives, 90-91
Developments, 34-51
Education, 78-79, 82-83
Holding companies, inspections and
examinations of, 90
Intermediation, 26-27, 47-48
Markets, 4-7, 23-27, 32-34, 46-48
Reports, bank holding companies and
commercial banks, 105-6
FinCEN (See Financial Crimes
Enforcement Network)
Fiscal agency services, by Federal Reserve
Banks, 124-27

342 91st Annual Report, 2004
Fiscal Impact Tool (FIT), web-based
resource, 83
Fixed investment, business sector, 12-13,
36-37
Float, 123, 290, 292, 294, 296
Flood insurance, compliance with, 65-66
FOMC (See Federal Open Market
Committee)
Foreign banking operations of U.S. banks,
95-96, 100-102
Foreign banks, U.S. activities of, 96
Foreign currency operations
Authorizations for, 157-59, 164-65
Directives, 159, 165-66
Procedural instructions for, 159-60,
166-75
Foreign economies, developments in,
27-30, 48-51
Foreign trade, 18-19, 41-42
FR-ETA, 126
GDP (gross domestic product), 8, 9,
39-40
Gold stock, 290, 292, 294, 296
Government
Depository services, 124-27
Developments in, 15-18, 39^U
Federal, economic developments, 15-17,
Municipal securities dealers and brokers,
examination of, 92
Securities, examinations of, 92
State and local, economic developments,
17-18, 40-41
Government Accountability Office (GAO),
330
Government Performance and Results Act
(GPRA), 137-39
Gross domestic product (GDP), 8, 9, 39-40
Hearings, rules of practice, 150
Home Mortgage Disclosure Act (HMDA),
61, 67-69
Home Mortgage Disclosure (Regulation C),
147
Household sector, developments in, 10-12,
35-36
Housing and Urban Development,
Department of, complaint referrals, 75
Immigrant banking services, 80-81



"Implementation of Basel II: Practical
Considerations," policy paper, 103
Imports, 18-19, 4 1 ^ 2
Income and expenses
Board of Governors, 305
Federal Reserve Banks, 129, 134-35,
276-83, 316
Federal Reserve priced services, 118-35,
276
Industrial economies, developments, 28-29,
49-50
Inflation, 8, 9, 23, 31, 32, 44-46
Information technology
Developments in, 107-8, 127-28
Federal Reserve examination of, 91
Supervisory Information Technology
(SIT), 107-8
Inspections (See Examinations and
inspections)
Inspector General, Office of (OIG), audits,
reviews, and assessments, 329
Insured commercial banks, assets and
liabilities, 289
Interest rates, See also Discount rate and
Federal funds rate, 5, 24-25, 46-47,
286
International Banking Act, 112
International Banking Operations
(Regulation K), 148
International developments
Banking activities, supervision of,
95-96, 98, 102-4, 112-13
Economic developments, 27-30, 48-51
Trade, 18-19, 41-42
Interstate branching, 142-43
Investments
Business sector, 12-14, 36-37
Inventory, 14, 37-38
Overseas, by U.S. organizations, 112-13
Residential, 11-12, 35-36
Jobs and Growth Tax Relief
Reconciliation Act (JGTRRA), 10,
16,39
Labor market, 20-23, 42-44
Large, complex banking organizations
(LCBOs), supervision of, 93-94
Legislation, Federal, proposals, 141-43
Liabilities (See Assets and liabilities)
Life insurance, bank-owned, 99

Index 343
Litigation involving Board of Governors
Albrecht, 232
Apffel, 232
Artis, 232
Carter, 232
CB Bancshares, Inc., 231
Fraternal Order of Police, 232
Haili, 231
Inner City Press/Community on the
Move, 231
Laigo, 232
McCarthy, 231
Price, 232
Sciba, 232
Skanska USA Building, Inc., 232
Texas State Bank, 232
Thomas, 231, 232
Ulrich, 231
Loans
Federal Reserve Bank holdings, 130,
290, 292, 294, 296
Insured commercial banks, 289
Interest rates for depository institutions,
286
State member banks to executive
officers, 115
Local governments, 17-18, 40-41
Maps, Federal Reserve System, 332-33
Margin requirements, 288
Member banks (See also State member
banks)
Applications by, 113
Assets and liabilities, 289
Number of, 115,298
Reserves, 295, 297
Members and officers
Board of Governors, 235-37, 261-64
Consumer Advisory Council, 240
Federal Advisory Council, 239
Federal Open Market Committee, 238
Federal Reserve Banks and Branches,
242-43
Salaries, Federal Reserve Banks, 275
Thrift Institutions Advisory Council, 241
Membership of State Banking Institutions
in the Federal Reserve System
(Regulation H), 148
Monetary aggregates (M2), 26, 48
Monetary policy, economic outlook, 3-8,
31-34



Monetary Policy Reports to the Congress
February 2005, 3-30
July 2004, 31-51
Money laundering prevention, 90, 99
Money market deposit accounts (MMDAs),
86
Mortgage interest rates, 11, 12, 36
Municipal securities dealers and brokers,
examination of, 92
National City Corporation, merger, 63
National Flood Insurance Act of 1968,
65-66
National Information Center (NIC), 107-8
National Settlement Service, 122
New Alliance Bancshares, merger, 63
Noncash collection services, Federal
Reserve Banks, 123
Nonfarm business sector, 21, 44
Nonmember banks, assets and liabilities,
289,298*
Notes, Federal Reserve
Fifty dollar bill issuance, 123
Interest, 281, 283
Operations, 123-24, 285, 291, 293, 295,
315
Officers, Board of Governors (See
Members and officers)
OIG, 329
Oil prices, 19, 42
Open market operations
Authorization for conduct of, 155-57,
162-64
Guidelines for the conduct of, 157
Volume of transactions, 270-73
Opt-out provisions, prescreened
solicitations, 59-60
"Outsourcing in Financial Services," Joint
Forum paper, 103-4
Overdraft protection services, 77
Overseas investments, U.S. banking
organizations, 112
Papers, interagency or Joint Forum
papers, 102-4
Pay.gov, 126
Payments services, by Federal Reserve
Banks, 126
Payments system risk, 150-51
Performance Report Information and
Surveillance Monitoring (PRISM), 94

344 91st Annual Report, 2004
Personal consumption expenditures (PCE),
8-10, 22, 34, 44
PIN fees, 58-59
Point-of-sale debit fees, 58-59
Policy actions and statements, 97-102,
147-51
Premises, Federal Reserve Banks, 130-31,
284, 315
Prescreened credit solicitations, 59-60
Priced services
Federal Reserve Banks, 118-23, 132-35
Prices
Consumer, 21-23, 44
Energy, 22, 44
Equity, 25, 47
Primary credit rate, 151, 286
"Principles for the Home-Host
Recognition of AMA Operational Risk
Capital," policy paper, 103
"Principles for the Management and
Supervision of Interest Rate Risk,"
policy paper, 103
PRISM, 94
Privacy of Consumer Financial Information
(Regulation P), 70-71
Productivity and labor costs, 21, 43-44
Profit and loss, Federal Reserve Banks, 276
Profits, corporate, 14-15, 38-39
Regional banking organizations, risk
supervision of, 93
Regions Financial Corporation, merger, 63
Regulations
B, Equal Credit Opportunity, 69-70, 147
C, Home Mortgage Disclosure, 147
D, Reserve Requirements of Depository
Institutions, 147
E, Electronic Fund Transfers, 70, 147
H, Membership of State Banking
Institutions in the Federal Reserve
System, 148
J, Collection of Checks and Other Items
by Federal Reserve Banks and
Funds Transfers through Fedwire,
148
K, International Banking Operations, 148
M, Consumer Leasing, 70, 147
P, Privacy of Consumer Financial
Information, 70-71
T, Credit by Banks, Brokers and Dealers,
288



Regulati ons—Continued
U, Credit by Banks for the Purpose of
Purchasing or Carrying Margin
Stocks, 288
V, Fair Credit Reporting, 148-49
X, Borrowers of Securities Credit, 288
Y, Bank Holding Companies and Change
in Bank Control, 148
Z, Truth in Lending, 60, 61, 71, 147,
149
AA, Unfair or Deceptive Acts or
Practices, 72
BB, Community Reinvestment, 149
CC, Availability of Funds and Collection
of Checks, 72, 150
DD, Truth in Savings, 72-73, 147
Remittance services, immigrant markets,
80-81
Reports of Condition and Income (Call
Reports), 106
Repurchase agreements
Federal Reserve Bank credit, 290, 292,
294, 296
Treasury securities, 274
Reserve requirements, depository
institutions, 142, 287, 290-97
Reserve Requirements of Depository
Institutions (Regulation D), 147
Residential investment, 11-12, 35-36
Revenue and income (See Income and
expenses)
Risk capital, 97-99
Risk-focused supervision, Federal Reserve
System, 93-94
Risk management, Federal Reserve System,
102-3, 151
Royal Bank of Scotland, merger, 63
Rules of Practice for Hearings, 150
Salaries, Federal Reserve Bank officers
and employees, 275
Sarbanes-Oxley Act, 104
Secondary and seasonal credit rates, 152,
286
Securities (See also Treasury securities)
Clearing agencies, examination of, 91-92
Credit lenders, examination of, 92, 114
Government and municipal, supervision
of dealers and brokers, 92
Holdings by Federal Reserve Banks,
130, 290, 292, 294, 296
Trust-preferred, 98

Index 345
Settlement Service, National, Federal
Reserve Banks, 122
SIT, 107-8
SOMA (See System Open Market Account)
Special drawing rights certificate account,
266-69, 290, 292, 294, 296, 315
Special investigations, Federal Reserve
System, 232
Staff development, Federal Reserve, 66-67,
108-9
State and local governments, 17-18, 40-41
State-chartered banks, 150, 298
State member banks (See also Member
banks)
Applications by, 113
Community Reinvestment Act,
compliance with, 62
Complaints against, 73-75
Disclosure by, 114
Examinations of, 62, 66-67, 88, 91, 92
Extensions of credit to executive
officers, 115
Number of, 115, 298
Securities clearing agents, 91-92
Surveillance by Federal Reserve System,
94-95
Transfer agents, 91-92
Statistical tables, 266-98
Stocks
Margin requirements, 288
Price indexes, 25, 26
Repurchases, bank holding companies,
113
Supervision and regulation responsibilities,
Federal Reserve System, 85-115
Supervisory Information Technology (SIT),
107-8
Supervisory policy papers, 102-3
Surveillance monitoring, 94-95
System Open Market Account (SOMA),
(See also Open market operations),
157, 158, 163, 164
Tax payment services, electronic, 126

0405




Technical assistance, 96-97
Term Investment Option (TIO), 127
Thrift Institutions Advisory Council, 241
Trade, international, 18-19, 4 1 ^ 2
Training and development, Federal Reserve
staff, 66-67, 108-9
Transfer agents, supervision of, 91-92
Transparency efforts, 105
Treasury, U.S. Department of the, See also
Treasury securities
Currency outstanding, 290, 292, 294,
296
Payments processed for, 126
Payments to, by Federal Reserve Banks,
129, 278, 281, 283
TreasuryDirect, 125
Treasury securities
Depository institution holdings, by class
of bank, 289
Federal Reserve Bank holdings, 124,
274, 276-79, 290, 292, 294, 296
Interest rates, 24-25, 46-47
Open market transactions, 270-73
Repurchase agreements, 266-69, 270-73,
274, 290, 292, 294, 296
Treasury Tax and Loan (TT&L) program,
127
Trust-preferred securities, 98
Truth in Lending (Regulation Z), 60, 61,
71, 147, 149
Truth in Savings (Regulation DD), 72-73,
147
Unemployment, 8, 20-21, 42-43
Unfair and deceptive practices, 58, 72, 75,
150
Unfair or Deceptive Acts or Practices
(Regulation AA), 72
Unsolicited credit offers, 59-60
Wachovia Corporation, merger, 63
West Texas intermediate (WTI), prices, 19,
42
Working Families Tax Relief Act, 16


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