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'Report
> O 2005
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 Transmittal
Board of Governors of the Federal Reserve System
Washington, D.C.
June 2006
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-second annual report of the
Board of Governors of the Federal Reserve System.
This report covers operations of the Board during calendar year 2005.
Sincerely,
Ben Bernanke
Chairman
Overview of the Federal Reserve
As the nation's central bank, the Federal
Reserve System has numerous, varied
responsibilities:
• conducting the nation's monetary policy by influencing monetary and
credit conditions in the economy
• supervising and regulating banking
institutions, to ensure the safety and
soundness of the nation's banking and
financial system and to protect the
credit rights of consumers
• maintaining the stability of the financial system and containing systemic
risk that may arise in financial
markets
• providing financial services to depository institutions, the U.S. government,
and foreign official institutions
The Federal Reserve is a federal system composed of a central, governmental agency—the Board of Governors—
and twelve regional Federal Reserve
Banks. The Board of Governors, located
in Washington, D.C., is made up of
seven members appointed by the President of the United States and supported
by a staff of about 1,800. In addition
to conducting research, analysis, and
policymaking related to domestic and
international financial and economic
matters, the Board plays a major role
in the supervision and regulation of the
U.S. banking system and administers
most of the nation's laws regarding consumer credit protection. It also has broad
oversight responsibility for the nation's
payments system and the operations and
activities of the Federal Reserve Banks.
The Federal Reserve Banks, which
combine public and private elements,
are the operating arms of the central
banking system. They carry out a variety of System functions, including operating a nationwide payments system;
distributing the nation's currency and
coin; under authority delegated by the
Board of Governors, supervising and
regulating bank holding companies and
state-chartered banks that are members
of the System; serving as fiscal agents
of the U.S. Treasury; and providing a
variety of financial services for the Treasury, other government agencies, and
other fiscal principals.
A major component of the Federal
Reserve System is the Federal Open
Market Committee (FOMC), which is
made up of the members of the Board of
Governors, the president of the Federal
Reserve Bank of New York, and presidents of four other Federal Reserve
Banks, who serve on a rotating basis.
The FOMC establishes monetary policy
and oversees open market operations,
the main tool used by the Federal
Reserve to influence overall monetary
and credit conditions. The FOMC sets
the federal funds rate, but the Board has
sole authority over changes in reserve
requirements and must approve any
change in the discount rate initiated by a
Reserve Bank.
Two other groups play roles in the
functioning of the Federal Reserve System: depository institutions, through
which monetary policy operates, and
advisory councils, which make recommendations to the Board of Governors
and the Reserve Banks regarding the
System's responsibilities.
•
Contents
Monetary Policy and Economic Developments
3
5
7
9
9
12
15
18
20
22
24
28
MONETARY POLICY AND THE ECONOMIC OUTLOOK
Monetary Policy, Financial Markets, and the Economy in 2005 and Early 2006
Economic Projections for 2006 and 2007
ECONOMIC AND FINANCIAL DEVELOPMENTS IN 2005 AND EARLY 2006
The Household Sector
The Business Sector
The Government Sector
The External Sector
The Labor Market
Prices
U.S. Financial Markets
International Developments
33 MONETARY POLICY REPORT OF JULY 2005
33 Monetary Policy and the Economic Outlook
36 Economic and Financial Developments in 2005
Federal Reserve Operations
57
58
59
67
77
78
80
84
85
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
Enforcement of Other Laws and Regulations
Federal Reserve Membership
87
87
92
CONSUMER AND COMMUNITY AFFAIRS
Implementation of Statutes Designed to Inform and Protect Consumers
Supervision for Compliance with Consumer Protection and
Community Reinvestment Laws
Consumer Complaints
Advice from the Consumer Advisory Council
Promotion of Consumer Education and Community Economic Development
in Historically Underserved Markets
Outreach Activities
103
104
107
111
113
113
118
118
122
122
124
124
125
126
126
128
FEDERAL RESERVE BANKS
Developments in Federal Reserve Priced Services
Developments in Currency and Coin
Developments in Fiscal Agency and Government Depository Services
Electronic Access to Reserve Bank Services
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
133
THE BOARD OF GOVERNORS AND THE GOVERNMENT PERFORMANCE
AND RESULTS ACT
133 Strategic Plan, Performance Plan, and Performance Report
133 Mission
133 Goals and Objectives
137
137
141
FEDERAL LEGISLATIVE DEVELOPMENTS
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
Post-Employment Restrictions on Senior Examiners
Records
145 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS
145 Regulation D (Reserve Requirements of Depository Institutions)
145 Regulation E (Electronic Fund Transfers)
145 Regulation H (Membership of State Banking Institutions in the
Federal Reserve System) and Regulation Y (Bank Holding Companies and
Change in Bank Control)
146 Regulation J (Collection of Checks and Other Items by Federal Reserve Banks
and Funds Transfers through Fedwire) and Regulation CC (Availability of Funds
and Collection of Checks
146 Regulation V (Fair Credit Reporting) and Regulation FF (Obtaining and Using
Medical Information in Connection with Credit)
147 Regulation BB (Community Reinvestment)
147 Regulation DD (Truth in Savings)
148 Post-Employment Restrictions for Senior Examiners
148 Rules Regarding Equal Opportunity
148 Policy Statements and Other Actions
149 Discount Rates in 2005
153
153
155
155
156
157
158
170
179
187
195
201
208
215
MINUTES OF FEDERAL OPEN MARKET COMMITTEE MEETINGS
Authorization for Domestic Open Market Operations
Domestic Policy Directive
Authorization for Foreign Currency Operations
Foreign Currency Directive
Procedural Instructions with Respect to Foreign Currency Operations
Meeting Held on February 1-2, 2005
Meeting Held on March 22, 2005
Meeting Held on May 3, 2005
Meeting Held on June 29-30, 2005
Meeting Held on August 9, 2005
Meeting Held on September 20, 2005
Meeting Held on November 1, 2005
Meeting Held on December 13, 2005
223 LITIGATION
223 Litigation under the Financial Institutions Supervisory Act
223 Other Actions
Federal Reserve System Organization
227
BOARD OF GOVERNORS
230 FEDERAL OPEN MARKET COMMITTEE
231
ADVISORY COUNCILS TO THE BOARD OF GOVERNORS
231 Federal Advisory Council
232 Consumer Advisory Council
233 Thrift Institutions Advisory Council
234
234
235
235
236
236
FEDERAL RESERVE BANKS AND BRANCHES
Officers of the Banks and Branches
Conference of Chairmen
Conference of Presidents
Conference of First Vice Presidents
Directors of the Banks and Branches
253 MEMBERS OF THE BOARD OF GOVERNORS, 1913-2005
Statistical Tables
258
262
263
264
265
266
274
275
276
280
284
290
291
292
1. Federal Reserve Open Market Transactions, 2005
2. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities,
December 31,2003-2005
3. Federal Reserve Bank Interest Rates on Loans to Depository Institutions,
December 31,2005
4. Reserve Requirements of Depository Institutions, December 31, 2005
5. Banking Offices and Banks Affiliated with Bank Holding Companies
in the United States, December 31, 2004 and 2005
6. Reserves of Depository Institutions, Federal Reserve Bank Credit,
and Related Items
A. Year-End 1984-2005 and Month-End 2005
B. Year-End 1918-1983
7. Principal Assets and Liabilities of Insured Commercial Banks,
by Class of Bank, June 30,2005 and 2004
8. Initial Margin Requirements under Regulations T, U, and X
9. Statement of Condition of the Federal Reserve Banks, by Bank,
December 31, 2005 and 2004
10. Income and Expenses of the Federal Reserve Banks, by Bank, 2005
11. Income and Expenses of the Federal Reserve Banks, 1914-2005
12. Operations in Principal Departments of the Federal Reserve Banks, 2002-2005
13. Number and Annual Salaries of Officers and Employees of the Federal Reserve
Banks, December 31, 2005
14. Acquisition Costs and Net Book Value of the Premises of the Federal Reserve
Banks and Branches, December 31, 2005
Federal Reserve System Audits
295
297
311
325
326
AUDITS OF THE FEDERAL RESERVE SYSTEM
BOARD OF GOVERNORS FINANCIAL STATEMENTS
FEDERAL RESERVE BANKS COMBINED FINANCIAL STATEMENTS
OFFICE OF INSPECTOR GENERAL A C n v m E S
GOVERNMENT ACCOUNTABILITY OFFICE REVIEWS
328
MAPS OF THE FEDERAL RESERVE SYSTEM
333
INDEX
Monetary Policy and
Economic Developments
Monetary Policy and the Economic Outlook
The U.S. economy delivered a solid performance in 2005 despite a further sharp
increase in energy prices and devastating hurricanes that claimed many lives,
destroyed homes and businesses, and
displaced more than 1 million persons.
Real gross domestic product is estimated
to have risen a little more than 3 percent over the four quarters of 2005 even
though growth slowed significantly in
the fourth quarter as a result of stormrelated disruptions and other factors
that are likely to prove transitory. The
increase in real GDP in 2005 was sufficient to add 2 million new jobs, on net,
to employers' payrolls and to further
reduce slack in labor and product markets. As in 2004, overall consumer price
inflation was boosted by the surge
in energy prices. Core consumer price
inflation (as measured by the price index
for personal consumption expenditures
excluding the direct effects of movements in food and energy prices) picked
up early in the year, but it subsequently
eased and totaled less than 2 percent
over the year as a whole. The dollar
appreciated against most major currencies in 2005, and, with domestic demand
expanding strongly, the U.S. current
account deficit widened further.
NOTE: The discussion here and in the next
chapter consists of the text, tables, and selected
charts from the Monetary Policy Report submitted
to the Congress on February 15, 2006, pursuant to
section 2B of the Federal Reserve Act; the complete set of charts is available on the Board's web
site, at www.federakeserve.gov/boarddocs/hh.
Other materials in this annual report related to
the conduct of monetary policy include the minutes of the 2005 meetings of the Federal Open
Market Committee (see the "Records" section)
and statistical tables 1-4 (at the back of this
report).
In 2005, energy prices were up substantially for a second year in a row.
Crude oil costs climbed further, on net,
and prices of refined petroleum products
and natural gas came under additional
upward pressure for a time after supplies were curtailed by hurricane damage to production facilities in the Gulf
Coast region. As a result, households in
the United States faced steep increases
in gasoline and home heating expenses,
and many firms were likewise burdened
with rising energy costs.
The resilience of the U.S. economy
in the face of these major shocks likely
reflects, in part, improvements in energy
efficiency over the past several decades.
A number of other factors also helped to
keep economic activity moving forward
in 2005. For one, the rapid gain in real
estate values in the past few years, in
combination with the rise in stock prices
since 2002, has encouraged households
to sustain their spending through a
period of relatively weak growth in real
income. For another, credit conditions
remained supportive for businesses last
year, facilitating a brisk expansion of
capital spending. In addition, labor
productivity has been on a strong
uptrend in recent years, which has fostered substantial growth in the economy's productive capacity and no doubt
lifted households' and businesses'
assessments of their long-term income
prospects.
In light of elevated inflation pressures
and shrinking margins of unutilized
resources, and with short-term interest
rates relatively low, the Federal Open
Market Committee (FOMC) continued
to remove monetary policy accommodation gradually in 2005, raising the target
92nd Annual Report, 2005
federal funds rate 25 basis points at each
of its eight meetings. This cumulative
policy firming of 2 percentage points
was substantially greater than market
participants had expected at the start of
the year. But each action was anticipated
by the time of the meeting at which it
was taken, as the Committee's communications, policy strategy, and responses
to incoming economic data appear to
have been well understood. At its
meeting in January 2006, the FOMC
increased the target federal funds rate
another 25 basis points, bringing it to
4Vi percent. The Committee indicated
that possible increases in resource utilization as well as elevated energy prices
had the potential to add to inflation pressures and that, as a result, some further
policy tightening may be needed.
The U.S. economy should continue to
perform well in 2006 and 2007. To be
sure, higher energy prices will probably
exert some restraint on activity for a
while longer. But so long as energy
price increases slow, as is suggested by
futures prices, this restraint should
diminish as 2006 progresses. In addition, economic activity should receive
some impetus from post-hurricane
recovery efforts. Although progress to
date has been uneven in the affected
regions, the reopening of facilities shut
down by the hurricanes is already being
reflected in a rebound in industrial production. Federal assistance will buttress
rebuilding activity in coming quarters.
More broadly, the major factors
that contributed to the favorable performance of the U.S. economy in 2005
remain in place. Long-term interest rates
are low, and conditions in corporate
credit markets are generally positive.
The household sector is also in good
financial shape overall and should stay
so even if—as expected—the housing
sector cools. In addition, the improved
outlook for economic growth abroad
bodes well for U.S. exports. However,
the effects of the cumulative tightening
in monetary policy should keep the
growth in aggregate output close to that
of its longer-run potential.
Core inflation is likely to remain
under some upward pressure in the near
term from rising costs as the passthrough of higher energy prices runs its
course. But those cost pressures should
wane as the year progresses. Moreover,
strength in labor productivity should
continue to damp business costs more
generally. With little evidence to date
that resource utilization has put appreciable upward pressure on prices, and
with longer-run inflation expectations
continuing to be well anchored, core
inflation should remain contained in
2006 and 2007.
Nonetheless, significant risks attend
this economic outlook. Some of the
uncertainty is centered on the prospects
for the housing sector. On the one hand,
some observers believe that home values have moved above levels that can
be supported by fundamentals and that
some realignment is warranted. Such a
realignment—if abrupt—could materially sap household wealth and confidence and, in turn, depress consumer
spending. On the other hand, if home
values continue to register outsized
increases, the accompanying increment
to household wealth would stimulate
aggregate demand and raise resource
utilization further. With the economy
already operating in the neighborhood
of its productive potential, this higher
resource utilization would risk adding
to inflation pressures. Another major
source of uncertainty is the price of
energy, which continues to be buffeted
by concerns about future supply disruptions. Additional steep increases
in the price of energy would intensify
cost pressures and weigh on economic
activity.
Monetary Policy and the Economic Outlook
conditions progressed as anticipated, it
would need to continue to remove policy accommodation gradually to keep
inflation pressures contained.
In the spring, policymakers perceived
some signs of softness in spending,
which they attributed in part to the earlier step-up in energy prices. Nonetheless, the federal funds rate was still
relatively low, and robust underlying
growth in productivity was providing
ongoing support to economic activity.
Accordingly, the Committee anticipated
some strengthening of activity, and it
reduced policy accommodation further
in May by lifting the target federal funds
rate another quarter percentage point, to
3 percent.
In the event, the signs of softness
proved transitory. Incoming data suggested that output, employment, and
spending were growing moderately
through midyear. Inflation expectations
seemed to be well contained, but pressures on inflation remained elevated.
With the stance of policy still accommo-
Monetary Policy, Financial
Markets, and the Economy
in 2005 and Early 2006
The year 2005 opened with the target
federal funds rate at 2VA percent, a
level that Federal Reserve policymakers
judged to be quite accommodative. During the first few months of the year,
output appeared to be growing at a
solid pace despite rising energy prices.
Improving labor market conditions and
favorable financing terms were providing considerable support to consumer
outlays and homebuilding activity, while
reasonably bright sales prospects and
strong profitability were buoying business investment. Pressures on inflation
appeared to be mounting, however,
partly owing to increasing energy prices.
Measures of inflation compensation
derived from securities markets were on
the rise as well. In these circumstances,
the Committee firmed policy 25 basis
points at both its February and March
meetings and signaled that, if economic
Selected Interest Rates, 2003-06
1/29
5/6
3/18
8/12
6/25
(
V16
10/28
1/28
5/4
12/^
.V16
2003
8/10
6/30
2004
9/21
11/10
2/2
5/3
12/14
3/22
8/0
6/30
2005
\\fl
9/20
1/31
12/13
2006
NOTE: The data are daily and extend through February 8, 2006. The ten-year Treasury rate is the
constant-maturity yield 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.
92nd Annual Report, 2005
dative, the Committee added another
25 basis points to the target federal
funds rate at both its June and August
meetings.
Subsequently, the devastation caused
by Hurricane Katrina increased uncertainty about the vitality of the economic
expansion in the near term. The destruction in the Gulf Coast region, the associated dislocation of economic activity—
including considerable disruption of
energy production—and the accompanying further boost to energy prices
were expected to impose some restraint
on spending, production, and employment in the near term. Although the
region had been dealt a severe blow, the
Committee did not see these developments as posing a more persistent threat
to the overall economic expansion. Consequently, it decided to firm policy
another 25 basis points at its September
meeting.
Over the following weeks, the Gulf
Coast region absorbed further setbacks
from Hurricanes Rita and Wilma. The
growth of economic activity dipped for
a time—hiring slowed, consumer spending softened, and confidence declined.
At the same time, however, soaring
energy prices fed through to top-line
consumer price inflation and pushed
some survey measures of inflation
expectations upward. With employment
and growth expected to be supported by
accommodative financial conditions, the
FOMC continued the process of policy
tightening at its November meeting.
By December, incoming data indicated that the overall expansion
remained on track, although recovery
from the damage in the hurricaneaffected areas would apparently require
considerable time. The Committee
judged that possible increases in
resource utilization as well as elevated
energy prices had the potential to add to
inflation pressures. Accordingly, policy
was firmed another 25 basis points,
bringing the target federal funds rate
to 4lA percent. In the accompanying
statement, monetary policy was no
longer characterized as "accommodative" because the federal funds rate had
been boosted substantially and was now
within the broad range of values that, in
the judgment of the Committee, might
turn out to be consistent with output
remaining close to its potential. Indeed,
because policy actions over the previous eighteen months had significantly
reduced the degree of monetary accommodation, Committee members thought
that the outlook for their near-term policy actions was becoming considerably
less certain. In such an environment,
policy decisions would increasingly
depend on incoming data and their
implications for future economic growth
and inflation. Nonetheless, the Committee indicated that some further measured
policy firming was likely to be needed
to keep the risks to the attainment of its
goals of sustainable economic growth
and price stability roughly in balance.
Over the period leading up to the
January 2006 meeting, incoming data
on economic activity were uneven. The
advance estimate of real GDP pointed
to a slowing in the growth of output
in the fourth quarter, but the underlying strength in consumer and business
spending suggested that the economic
expansion remained on solid footing.
With the potential for added pressures
on inflation still evident, the FOMC
raised the target federal funds rate
another 25 basis points, bringing its
level to 4Vz percent. In its statement
after the meeting, the Committee indicated that some further policy firming
may be necessary and again noted that it
would respond to changes in economic
prospects as needed.
Monetary Policy and the Economic Outlook
Economic Projections
for 2006 and 2007
In conjunction with the FOMC meeting
in January, the members of the Board of
Governors and the Federal Reserve
Bank presidents, all of whom participate
in the deliberations of the FOMC, provided economic projections for 2006
and 2007. The central tendency of the
FOMC participants' forecasts for the
increase in real GDP is about 3Vi per-
cent over the four quarters of 2006 and
3 percent to 3Vi percent in 2007. The
civilian unemployment rate is expected
to lie between 43/4 percent and 5 percent
in the fourth quarter of 2006 and to
remain in that area in 2007. As for inflation, the FOMC participants expect that
the price index for personal consumption expenditures excluding food and
energy (core PCE) will rise about 2 percent in 2006 and between 13A percent
and 2 percent in 2007.
•
Economic Projections of Federal Reserve Governors and Reserve Bank Presidents
for 2006 and 2007
Percent
2007
2006
Indicator
Change, fourth quarter
to fourth quarter1
Nominal GDP
Real GDP
PCE price index excluding
food and energy
Average level, fourth quarter
Civilian unemployment rate
MEMO:
2005 actual
Range
Central
tendency
6.2
3.1
5lA-6V2
3VA-A
5V2-6
AboutS 1 /!
1.9
VA-2V2
About 2
P/4-2
l 3 / 4 -2
5.0
4^2-5
43/4-5
4V&-5
43/4-5
1. Change from average for fourth quarter of previous
year to average for fourth quarter of year indicated.
Range
5-6
3-4 •
Central
tendency
5-53/4
3-3 V2
Economic and Financial Developments
in 2005 and Early 2006
The economic expansion remained
firmly entrenched in 2005, although the
growth of real GDP late in the year was
apparently restrained by the effects of
the hurricanes and by sharp drops in
some volatile categories of spending.
In the labor market, payroll employment rose moderately for a second year
in a row, and the unemployment rate
declined further. As in 2004, headline
inflation was boosted appreciably by
soaring energy prices; however, core
inflation remained subdued. In 2005,
financial market conditions were once
again supportive of growth, with longterm market interest rates low and credit
spreads and risk premiums narrow.
The Household Sector
Consumer Spending
Consumer spending had gathered considerable steam in 2003 and 2004 and
Change in PCE Chain-Type Price Index,
1999-2005
D Total
1999
2001
2003
2005
NOTE: The data are for personal consumption expenditures (PCE).
SOURCE: Department of Commerce, Bureau of Economic Analysis.
remained vigorous in 2005. Higher
energy prices last year continued to
siphon off household purchasing power,
and short-term interest rates moved up;
nevertheless, spending was again bolstered by an improving labor market and
rising household wealth.
Change in Real GDP, 1999-2005
Percent, annual rate
Change in Real Income and Consumption,
1999-2005
— 6
—
Percent, annual rate
4
expenditures
1999
Jll
2001
Lj
2003
2005
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.
ULnMl
1999
2001
2003
2005
0
L
SOURCE: Department of Commerce, Bureau of Economic Analysis.
10
92nd Annual Report, 2005
Real personal consumption expenditures (PCE) had posted back-to-back
increases of 33A percent in 2003 and
2004 and continued to rise at about that
pace over the first three quarters of
2005; in the fourth quarter, PCE growth
slowed to an annual rate of just 1 percent as consumer outlays for motor vehicles slackened after a surge prompted
by last summer's "employee discount"
programs. For 2005 as a whole, sales
of light vehicles (cars, vans, sport-utility
vehicles, and pickup trucks) totaled
nearly 17 million units, about the same
as the annual figure for 2004. Real
spending on consumer goods other than
motor vehicles was robust in 2005, with
substantial gains almost across the
board; a notable exception was real
spending on gasoline, which was up
only modestly for a second year in a
row as prices at the pump soared. Real
expenditures on services rose moderately in 2005, as a sizable further
increase in outlays for medical care was
partly offset by a relatively small gain in
outlays for energy services.
Excluding the estimated effects of the
one-time special dividend payment that
Microsoft made in December 2004, disposable personal income (DPI)—that is,
personal income less personal current
taxes—rose about IV2 percent in real
terms in 2005, considerably less than
in 2003 and 2004. Although aggregate
wages and salaries advanced moderately
last year and some other major types of
nominal income posted notable gains,
the increases in real terms were eroded
by the rise in energy prices. In addition,
personal tax payments rose faster last
year than did personal income as measured in the national income and product accounts (NIPA). In the second half
of the year, the growth of real DPI was
volatile, mainly because of the hurricanes. Rental income and proprietors'
income were pulled down in the third
quarter as a result of uninsured losses on
residential and business property. Real
DPI snapped back in the fourth quarter
as income in these hurricane-affected
categories rebounded from the exceptionally low levels in the third quarter.
Although the run-up in energy prices
restrained the growth of real DPI in
2005, its effect on overall spending
appears to have been largely offset
by other factors. In particular, sharp
increases in household wealth since
2002 have provided many households
with the resources and inclination to sustain their spending through a period of
relatively weak growth of real income.
Household net worth, which typically
feeds through to spending over several
quarters, posted sizable gains in 2003
and 2004, and it rose further in 2005
as house values continued to climb and
as stock prices moved modestly higher.
At the end of the third quarter (the
most recent period for which complete
data on wealth are available), the ratio
of household net worth to disposable
income stood at 5.65, well above its
long-run average level of 4.75. Meanwhile, surveys by the Michigan Survey
Research Center (SRC) and the Conference Board suggest that, apart from
the first few months after the hurricanes, consumer confidence was about
at the favorable levels that had prevailed
in 2004. All in all, personal outlays
exceeded disposable income in 2005. As
a result, the personal saving rate, which
had dropped below 2 percent in 2004,
fell further in 2005, ending the year at
negative V2 percent.
Residential Investment
Activity in the housing sector remained
torrid through much of 2005. By the end
of the year, however, a few tentative
signs of cooling had begun to appear. In
the single-family sector, starts of new
Economic and Financial Developments in 2005 and Early 2006
units dipped in December after a string
of exceptionally strong months; still,
they totaled 1.7 million for the year as a
whole—6V2 percent above the already
rapid pace in 2004. Starts in the multifamily sector totaled 350,000 in 2005, a
pace similar to that of the preceding
three years. Real expenditures on residential structures—which include outlays not only for new construction but
also for additions and alterations as
well as commissions paid to real estate
agents—rose nearly 8 percent in 2005,
the fourth large yearly increase in a row.
Sales of both new and existing homes
set records in 2005, although they, like
housing starts, seem to have lost some
steam late in the year. Rates on thirtyyear fixed-rate mortgages were in the
neighborhood of 53A percent for much
of the year, but they rose in the autumn.
Since October, they have averaged close
to 6lA percent, at the upper end of the
narrow range that has prevailed since
2003 but still fairly low by historical
standards. Rates on adjustable-rate mortgages have been trending up since early
2004. The softening of home sales in
recent months has contributed to an
updrift in the stock of unsold new and
existing homes. As of December, the
stock of unsold new homes was equal to
Mortgage Rates, 2001-06
WOl
2002
J
2003
2004
2005
2006
NOTE: The data, which are weekly and extend
through February 8, 2006, are contract rates on
thirty-year mortgages.
SOURCE: Federal Home Loan Mortgage Corporation.
nearly five months of supply when measured at that month's sales pace.
Between 1998 and 2004, the stock of
unsold new homes had averaged about
four months of supply.
Measures of house prices that attempt
to control for shifts in the quality and
composition of homes sold show that
prices continued to rise rapidly through
the third quarter of 2005, though partial
data for the fourth quarter point to some
slowing. Notably, the purchase-only version of the repeat-transactions price
index for existing homes, which is published by the Office of Federal Housing
Enterprise Oversight and tracks sales
of the same houses over time, rose
11 percent over the year ending in the
third quarter (the latest available data),
once again outstripping the increases
in household incomes and rents. The
Census Bureau's constant-quality price
index for new homes, which controls
for changes in the composition of sales
by geography, home size, and other
readily observable characteristics, had
also shown sizable increases through
the third quarter, but it decelerated
sharply in the fourth quarter and was
up just A3A percent over 2005 as a
whole; in 2004, this measure had risen
8V2 percent.
Household Finance
JL
?"
11
Household debt expanded about
IOV2 percent at an annual rate over the
first three quarters of last year, roughly
the same brisk pace as had been registered in 2004. Home-mortgage debt continued to grow rapidly, as homeowners
took advantage of the further sizable
increases in house prices last year. The
use of alternative mortgage products
spread further in 2005, in part because
rising home values generally made
house purchases less affordable. Last
May federal regulators issued guid-
12
92nd Annual Report, 2005
ance promoting sound risk-management practices to financial institutions
with home equity lending programs.
Mortgage-related borrowing likely took
the place of some funding with consumer credit, which expanded only
modestly again last year. Overall, the
expansion in household debt outpaced
the growth in disposable personal
income, and the financial obligations
ratio moved up to a level close to the
peak that it had reached earlier this
decade. However, the relatively low
readings on most measures of loan
delinquencies last year indicate that
most households were not struggling to
meet their obligations.
A large number of households filed
for bankruptcy in the weeks leading
up to October 17, the date when a new
bankruptcy law took effect. The law was
designed in part to diminish the ability
of households to discharge their debts
through chapter 7 filings. After the new
law became effective, filings fell sharply
to a level significantly below the average of recent years, and they have
since remained low. This suggests that,
to avoid the new rules, some households
accelerated filings they would have
undertaken eventually even under the
old law. The spike in bankruptcies
appears to have induced a jump in
charge-offs of consumer loans in the
fourth quarter.
final sales, ample financial resources in
the corporate sector, and supportive conditions in financial markets.
Real investment in high-technology
equipment rose 17 percent in 2005, as
further declines in prices provided a substantial incentive for firms to step up
their outlays on such items; the increase
was 5 percentage points faster than in
2003 and 2004 and about in line with
the average annual gain over the past
twenty-five years. Spending on communications equipment was exceptionally
strong last year, as telecom service providers rolled out major new fiber-optic
systems and third-generation wireless
gear. Business spending for computing
equipment rose roughly 30 percent in
real terms, a pace close to its historical
average, while spending on software
posted its largest increase in several
years.
Change in Real Business Fixed Investment,
1999-2005
Percent, drnu.il rate
•
•
—
J
1
it 1
\
I
1
1
1999
20
LJT
LI
i
2001
i
i
10
0
J
L
Q High-tech equipment
and software
B Other equipment excluding
transportation
Fixed Investment
—
In
JJi
The Business Sector
Real business fixed investment rose
6V2 percent in 2005. Real spending on
equipment and software (E&S) posted
an increase of more than 8 percent after
rising nearly 14 percent in 2004. The
broadly based growth in E&S spending
last year was supported by favorable
fundamentals: appreciable growth in
Structures
Equipment and software
t
2003
.,;
~~~" ^0 *
\
^ ;•
If
1
i
2035
1 1
NOTE: High-tech equipment consists of computers
and peripheral equipment and communications
equipment.
SOURCE: Department of Commerce, Bureau of Economic Analysis.
Economic and Financial Developments in 2005 and Early 2006
Although aircraft investment remained depressed as domestic airlines
continued to grapple with overcapacity
and soaring fuel prices, the other major
categories of E&S spending outside the
high-tech area did well in 2005. Business outlays on motor vehicles rose
markedly, with the demand for heavy
trucks especially strong. Investment in
equipment other than high-tech and
transportation goods—a broad category
that accounts for nearly half of E&S
spending when measured in nominal
terms—barely rose in real terms over
the first half of 2005. Investment in
this category sped up after midyear, to
increase moderately over the year as a
whole.
Apart from the drilling and mining
sector, where investment has strengthened in response to higher energy prices,
outlays for nonresidential construction
have yet to gain much traction. Spending on office and commercial structures
has been essentially flat since 2003;
construction of manufacturing facilities leveled out in 2005 after having
firmed in late 2004; and investment in
the power and communications sector
moved down further last year. However, vacancy rates have continued to
reverse some of the run-up that occurred
between 2000 and 2003, and some
industry reports suggest that an upturn
in building activity is in train.
Inventory Investment
After having been exceptionally restrained earlier in the economic expansion, inventory investment picked up
sharply in 2004, and the higher pace of
accumulation extended into early 2005.
The step-up in accumulation, which provided considerable impetus to industrial
production for a time, brought stocks
into better alignment with sales and set
the stage for a subsequent downswing in
13
inventory investment. Inventories in the
motor vehicle sector were drawn down
in both the second and third quarters,
though accumulation resumed in the
fourth quarter after last summer's surge
in sales cleared out dealers' lots. Apart
from motor vehicles, real stockbuilding
slowed sharply over the course of the
year and, according to the advance NIPA
estimate, came to a halt in the fourth
quarter. At year-end, inventories seemed
to be in reasonable alignment with sales,
even taking into account the downward
trend in inventory-sales ratios that has
resulted from the ongoing improvement
in supply-chain management.
Corporate Profits and
Business Finance
With profits posting further solid gains
in 2005 and ample liquid assets on corporate balance sheets, nonfinancial businesses were able to finance much of
their capital expenditures out of internal
funds, pay record sums to shareholders
in the form of share buybacks, and still
maintain strong balance sheets. Nonetheless, elevated merger and acquisition activity and the considerable rise in
share buybacks boosted the pace of business borrowing. Short-term borrowing
rose significantly, driven by financing
from banks. The issuance of long-term
debt remained moderate overall, but
debt related to commercial mortgages
continued to expand rapidly. Indicators
of corporate credit quality generally
remained favorable.
Corporate profits continued to grow
strongly in 2005. The ratio of before-tax
profits of domestic nonfinancial corporations to that sector's gross value added
rose to more than 12 percent, near its
1997 peak. Gains in earnings were fairly
widespread, with profits in the petroleum and gas industries especially
strong. In the fourth quarter of 2005,
14
92nd Annual Report, 2005
operating earnings per share for
S&P 500 firms appear to have been
nearly 14 percent above their level four
quarters earlier.
Gross equity issuance remained modest in 2005, while net equity issuance
sank into deeply negative territory as
corporations retired shares at a rapid
pace. Both a jump in cash-financed
mergers and a record-setting level of
share repurchases were spurred by the
strong growth of profits as well as by
the substantial liquidity that firms had
built up in recent years.
Net corporate bond issuance was
subdued in 2005, as modest growth
in nominal capital expenditures, strong
cash positions, and robust profits
apparently limited the demand for
such financing. However, commercialmortgage debt grew rapidly last year.
Gross
issuance
of
commercialmortgage-backed
securities
likely
reached a record pace in the fourth
quarter.
Short-term borrowing by businesses
rose smartly in 2005, as business lendFinancing Gap and Net Equity Retirement
at Nonfinancial Corporations, 1990-2005
Billions of dollars
100
1993
1997
2001
2005
NOTE: The data are annual; the observations for 2005
are based on partially estimated data. The financing gap
is the difference between capital expenditures and
internally generated funds. Net equity retirement is the
difference between equity retired through share repurchases, domestic cash-financed mergers, or foreign takeovers of U.S. firms and equity issued in public or private
markets, including funds invested by venture capital
partnerships.
SOURCE: Federal Reserve Board, flow of funds data.
Selected Components of Net Financing
for Nonfinancial Corporate Businesses,
2003-05
Billions of dollars, annual rate
__
D Commercial paper
H Bonds
• Bank loans
_
— 800
— 600
Sum of selected
com ponents
f
gHHi
,— 400
— 200
•f
o
MXfcj. _ 200
—
|
|
|
2003
|
|
2004
| ...i
1 i 1
2005
-J
NOTE: The data for the components excluding bonds
are seasonally adjusted. The data for the sum of selected
components are quarterly; 2005 :Q4 is estimated.
SOURCE: Federal Reserve Board; Securities Data
Company; and Federal Financial Institutions Examination Council, Consolidated Reports of Condition and
Income (Call Report).
ing by both large and small commercial banks surged. Throughout the year,
respondents to the Senior Loan Officer
Opinion Surveys indicated that their
institutions had further eased standards
and terms for lending to businesses
and that the demand for such loans had
continued to strengthen. Most respondents attributed the stronger demand
to borrowers' increased need to finance
inventories, accounts receivable, and
investment in plant and equipment; a
substantial fraction of respondents to
some surveys also pointed to a pickup
in merger and acquisition activity. By
contrast, outstanding commercial paper
declined last year.
Readings on credit quality for nonfinancial companies generally remained
favorable in 2005 despite some pockets
of distress. The amount of corporate
debt that was downgraded by Moody's
Investors Service last year exceeded the
amount that was upgraded, mainly as a
result of the high-profile downgrades of
the debt of General Motors and Ford.
After trending down over the first three
quarters of last year, the six-month trail-
Economic and Financial Developments in 2005 and Early 2006
15
ber 30, was primarily for needs that
emerged before Hurricane Katrina.) As
for the major health programs, Medicare
outlays continued to climb. Medicaid
spending rose relatively slowly, mainly
because it had been boosted during
much of fiscal 2004 by the temporary
increase in the federal share of the program's costs included in the Jobs and
Growth Tax Relief Reconciliation Act
of 2003 (JGTRRA). Net interest payments, which had declined steadily from
1998 to 2003 and had increased only
moderately in 2004, were up significantly in fiscal 2005 as short-term interest rates rose. Thus far in fiscal 2006,
outlays have continued to rise rapidly, in
The Government Sector
part because of heavy spending for flood
insurance payouts and other hurricaneFederal Government
related disaster relief. According to the
The deficit in the federal unified budget NIPA, real federal expenditures on connarrowed appreciably in fiscal year sumption and gross investment, the part
2005. Although outlays continued to rise of government spending that is la comrapidly, receipts rose even faster; as a ponent of real GDP, increased \ A perconsequence, the deficit fell to $318 bil- cent over the four quarters of calendar
lion, roughly $100 billion less than the year 2005.
deficit in fiscal 2004. The latest proFederal receipts rose \AVi percent
jections from the Administration and in fiscal 2005; as a ratio to GDP, they
the Congressional Budget Office, how- stood at YIV2 percent—more than 1 perever, point to a deterioration in the uni- centage point higher than in 2004. Corfied budget position in fiscal 2006, in
part because of the start of the Medi- Federal Receipts and Expenditures,
care drug benefit and the need to pay 1985-2005
for post-hurricane reconstruction and
relief.
Percent of nominal
Nominal federal spending rose nearly
24
8 percent in fiscal 2005 and stood at
Expenditures
about 20 percent of GDP—virtually the
22
Receipts
same as in 2003 and 2004 but IVi perExpenditures^.
20
centage points above the recent low in
18
fiscal 2000. Defense spending rose
/
—
8V2 percent after three years of double16
digit increases; outlays for nondefense
h i l l n i I M I 1 1 IM M M 1 1 I i l
1985
discretionary programs moved up fur1990
1995
2000
2005
ther as well, in part because of higher
NOTE: The receipts and expenditures data are on a
spending for education and for disaster unified-budget basis and are for fiscal years (October
relief. (Spending on disaster relief in through September); GDP is for the four quarters ending
inQ3.
fiscal 2005, which ended on SeptemSOURCE: Office of Management and Budget.
ing bond default rate moved up in the
fall, most notably because of the bankruptcies of Delta Air Lines, Northwest
Airlines, Delphi, and Calpine. However,
these bankruptcies were widely anticipated and had little effect on other measures of aggregate credit quality. The
credit quality of commercial mortgage
debt also appeared to remain robust
during 2005; delinquency rates on commercial mortgages held by banks and
on those pooled into securities trended
down on balance over last year, while
delinquencies on mortgages held by
insurance companies remained low.
"7C
16
92nd Annual Report, 2005
porate payments rose nearly 50 percent,
lifted by the robust profits of 2004
and 2005 and the termination of the
partial-expensing tax incentive at the
end of calendar 2004. Individual income
taxes increased nearly 15 percent; nonwithheld taxes rose especially rapidly
because of both substantial strength in
nonwage taxable incomes (including
capital gains) and certain features of
JGTRRA that altered the timing of tax
payments in a way that temporarily
reduced the level of collections in 2004.
Social insurance taxes rose in line with
wages and salaries.
Mirroring the narrowing of the unified deficit, federal saving (essentially,
the unified surplus or deficit adjusted
to conform to the accounting practices
followed in the NIPA) improved from
negative 3Vz percent of GDP in calendar
2004 to negative 2Vi percent in the first
half of 2005. However, the beneficial
effect of the smaller deficit in terms of
national saving was essentially offset by
a sharp decline in personal saving. Measured net of estimated depreciation,
national saving in the first half of 2005
was equal to just 1 Vi percent of GDP,
about the same as in 2004 and well
below the recent highs of more than
6 percent of GDP in the late 1990s.
In the third quarter, net saving was
dragged down by sizable hurricanerelated reductions in both federal and
nonfederal net saving; excluding these
one-time factors, net saving in the third
quarter would have been roughly the
same as it was in the first half of the
year. If not reversed over the longer
haul, persistent low levels of saving will
necessitate either slower capital formation or continued heavy borrowing from
abroad, either of which would hamper
the ability of the nation to cope with the
retirement needs of the baby-boom generation and would retard the growth of
the standard of living.
Federal Borrowing
Borrowing by the Treasury moderated
somewhat in calendar year 2005—
federal debt rose 7 percent last year after
increasing 9 percent in 2004. Much of
the improvement reflected the surge in
tax receipts noted earlier. As a result, the
amount of Treasury bills outstanding
contracted on net in 2005, and Treasury
sales of coupon securities declined. As
was widely anticipated, the Treasury
announced in August that it would
resume regular semiannual issuance of a
thirty-year nominal bond. The first such
auction, held on February 9, 2006, was
well received, with a high level of participation from indirect bidders. The
Treasury expects issuance of the thirtyyear bond to help stabilize the average
maturity of outstanding marketable
Treasury debt, which declined from a
high of about seventy months at the end
of 2000 to fifty-three months at the end
of 2005.
Federal debt held by the public as a
percentage of nominal GDP was steady
during 2005 and stood at about 36 percent at the end of the third quarter. The
federal debt ceiling did not need to be
Federal Government Debt Held
by the Public, 1960-2005
— 45
1 iiinmimiimiiiJiiiMiiii
,^,. r ,, 1MS5 ,
1975
19S5
1995
NOTE: The final observation is for 2005:Q3. For
previous years, the data for debt are as of year-end, and
the corresponding values for GDP are for Q4 at an
annual rate. Excludes securities held as investments of
federal government accounts.
SOURCE: Federal Reserve Board, flow of funds data.
Economic and Financial Developments in 2005 and Early 2006
raised last year, but the Treasury has
announced that it expects that the debt
will reach its statutory ceiling in February 2006.
The appetite for Treasury securities
among foreign investors remained
strong in the aggregate in 2005. The
proportion of outstanding Treasury
securities held by foreign investors is
estimated to have climbed to slightly
more than 45 percent in the third quarter
of 2005, a record. Data from the Treasury International Capital reporting
system suggest that net purchases of
Treasury securities by foreign private
investors jumped last year, whereas such
purchases by foreign official institutions
slowed significantly amid upward pressure on the foreign exchange value of
the dollar.
17
situations, and some face significant
structural imbalances in their budgets
that likely will be exacerbated in coming years by the need to provide pensions and health care to a growing number of retired employees. In addition,
the jurisdictions in the Gulf Coast region
confront the dual challenge of substantial post-hurricane demands and diminished flows of tax revenues.
According to the NIPA, real expenditures on consumption and gross investment by state and local governments
rose \lA percent in 2005. Real outlays
for current consumption were up only
about 1 percent for a second year, in part
because of the relatively slow pace of
hiring. Real investment expenditures
also registered a small gain.
State and Local Governments
State and Local Government
Borrowing
The fiscal positions of state and local
governments continued to improve in
2005. Strong growth in income and
retail sales boosted revenues, as did rising property values. And although the
sector continued to grapple with higher
medical costs and pressures to restore
funding to programs that had been cut
back earlier in the decade, states and
localities generally kept a tight rein on
current outlays. On a NIPA basis, net
saving by state and local governments—
which is broadly similar to the surplus
in an operating budget—turned positive
in the first half of 2005 after having
been negative between 2002 and 2004,
and it would have remained positive in
the third quarter in the absence of the
hurricanes. The sizable revenue gains
reported by many states in fiscal 2005,
which ended on June 30 in all but four
states, appear to have extended into fiscal 2006. Even so, some governments
are still struggling with strained fiscal
Borrowing by state and local governments picked up in 2005. Gross issuance
of municipal securities was brisk, as
the relatively low level of longer-term
market interest rates spurred advance
refundings of outstanding securities. The
bulk of new capital issues last year
reportedly was earmarked for educationrelated projects. Credit quality in the
state and local sector generally remained
favorable in 2005. Notable exceptions
were the obligations of numerous
municipal issuers in Michigan, which
were downgraded last year largely as a
consequence of the difficulties of GM
and Ford. In addition, the obligations
of a number of issuers in the regions
that were hit by last year's hurricanes
were downgraded in the fourth quarter, and some bonds from these areas
remain on watch. Despite these isolated
troubles, rating upgrades of municipal
bonds slightly outpaced downgrades in
2005.
18
92nd Annual Report, 2005
The External Sector
International Trade
The U.S. current account deficit widened further in 2005. At an annual rate,
it came in at just under $800 billion, or
about 6VA percent of nominal GDP, in
the first three quarters (the latest available data). As in the past, a substantial
portion of the widening of the current
account deficit came from a larger deficit on trade of goods and services, but a
decrease in net investment income also
worsened the external account. Net
investment income edged into negative
territory in the second quarter of 2005
for the first time in the post-World
War II period. Unilateral transfer payments to foreigners dropped sharply
on net in the third quarter because of a
surge in receipts from foreign insurance
companies for damage caused by the
hurricanes, leading to a slight narrowing
of the deficit from the previous quarter.
The trade data through December
showed that the U.S. trade deficit widened further in the fourth quarter of
2005, to about $790 billion at an annual
rate. This increase suggests that the
fourth-quarter current account deficit,
yet to be reported, will also widen
substantially.
Real exports of goods and services continued the solid pace of expansion registered in both 2003 and 2004; they rose
an estimated 53A percent in 2005, supported by robust foreign economic activity. Export growth was rapid in the first
half of the year, spurred by the depreciation of the dollar in previous years;
it then slowed in the second half of
the year, in part owing to the dollar's
appreciation since the beginning of
2005. For the year as a whole, exports
of capital goods posted solid growth.
Exports of aircraft performed especially
well despite an interruption of their production in September because of a strike
at Boeing. Exports of industrial supplies
were hampered late in the year by the
effects of the hurricanes on production and shipping in the Gulf Coast
region. By destination, exports to Canada and Mexico grew rapidly in 2005,
those to Western Europe also increased,
but exports to Japan were relatively
weak. Exports of services rose about
3 percent in 2005 in real terms.
Prices of exported goods increased at
an annual rate of 23A percent in 2005, a
bit below the rate of increase in 2004.
Prices decelerated in the second and
third quarters as the dollar strengthened
and as pressures on prices of agricultural exports and other nonfuel commodities ebbed. Prices accelerated again
in the fourth quarter, when a sharp rise
in the prices of oil and metals drove up
prices for many nonagricultural industrial supplies.
After expanding at a double-digit
pace in 2004, real imports of goods and
services decelerated to about 4V2 percent in 2005, even as U.S. GDP growth
remained robust. Although overall
growth of non-oil imports was slower
last year than in 2004, capital goods
imports continued strong. The hurri-
U.S. Trade and Current Account Balances,
1998-2005
1999
2001
2003
2005
NOTE: The data are quarterly. The current account
data extend through 2005 :Q3, and the trade data extend
through 2005:Q4.
SOURCE: Department of Commerce.
Economic and Financial Developments in 2005 and Early 2006
canes affected several categories of
imports. Despite a contraction of domestic oil consumption, real imports of oil
expanded to offset reduced production
in the Gulf Coast region. Chemicals
imports also registered strong gains
toward year-end amid hurricane-related
losses in domestic production. Real
imports of services moved up only
2V4 percent in 2005, a substantial cooling from their 2004 pace.
Prices of imported goods excluding
oil and natural gas increased at an
annual rate of 1V2 percent in 2005, down
from a rate of 23A percent in 2004.
Prices decelerated in midyear as the dollar appreciated and nonfuel commodity
prices steadied. However, import prices
accelerated in the fourth quarter of 2005,
led by higher prices for chemicals,
metals, and building materials. In global
commodity markets, prices of metals
increased an average of 30 percent in
2005, a surge that reflected both robust
global demand and limited increases in
supply.
A key event in 2005 was the substantial increase in the price of crude oil.
The spot price of West Texas intermediate (WTI) crude oil climbed from
about $43 per barrel at the start of 2005
to a peak of about $70 per barrel in
late August, at the time of Hurricane
Katrina. The spot price then edged down
as production revived in the Gulf of
Mexico and as above-average temperatures in the United States reduced oil
demand. After falling to below $60 per
barrel by late November, oil prices
moved up to an average of about $65
per barrel for January, in part on concerns about possible disruptions of foreign supply. However, oil prices have
declined so far in February. Growing
conviction among traders that oil-market
conditions would remain tight in future
years pushed the price of the far-dated
NYMEX oil futures contract (currently
19
Prices of Oil and of Nonfuel Commodities,
2002-06
Imiwy 2002= 100
Deltas per barrel
160 —
Nonfuel
140 —
Of:
120 —
80 —
I l
\
2002
l
2003
— 40
—
—
i
2004
30"
— 10
1
I
2005 2006
NOTE: The data are monthly and extend through
January 2006. The oil price is the spot price of West
Texas intermediate crude oil. The price of nonfuel
commodities is an index of forty-five primarycommodity prices.
SOURCE: For oil, the Commodity Research Bureau;
for nonfuel commodities, International Monetary Fund.
for delivery in 2012) from an average of
$38 per barrel for January 2005 to about
$61 per barrel for January 2006.
Although the rate of growth in
world oil consumption slowed in 2005
from its torrid pace of 2004, spare production capacity among OPEC members remained limited, at an estimated
level of only about 1 million barrels per
day. With the perception that additional
capacity would be slow to come on
line, oil markets were highly sensitive to
news about fluctuations in supply and
demand. Market participants' concerns
about crude oil supply were heightened
by production difficulties in Iraq and by
the resumption of nuclear activities in
Iran, both posing risks to the stability of
Middle East supply. Elsewhere, production problems in Nigeria stemming from
social unrest and a marked slowdown
in the growth of Russian production
also kept upward pressure on oil prices
throughout the year.
Domestic crude oil supply was
severely hampered by last year's hurricanes, which were the most damaging in
the history of the U.S. energy industry.
At the peak of the disruption, all U.S.
20
92nd Annual Report, 2005
crude oil production in the Gulf of
Mexico (about 28 percent of total U.S.
production) and 88 percent of U.S. natural gas production there (about 17 percent of total U.S. production) were shut
in. At the end of January 2006, 25 percent of Gulf oil production remained
shut in, and cumulative lost production
in the Gulf stood at about 22 percent of
the average annual output from that
region. Refinery outages, which peaked
after Hurricane Rita at more than onefourth of total U.S. refining capacity,
caused sharp increases in the prices of
refined products. Retail gasoline prices
in the United States jumped to more
than $3 per gallon in early September,
briefly crimping gasoline demand and,
in turn, demand for crude oil. Petroleum
product prices returned to pre-hurricane
levels within a few weeks as imports
soared and refineries resumed operations, but they began to rise again in
December and January.
The Financial Account
In 2005, foreign official financial
inflows slowed from their extraordinary
pace of 2004 but remained sizable. Most
of these official inflows took the form of
purchases of U.S. long-term government
and private securities for reserve accumulation, primarily by Asian central
banks. The slowdown in foreign official
inflows last year was more than offset,
however, by an increase in foreign private purchases of U.S. securities. Most
of this pickup was concentrated in
bonds, as in 2004, but foreign private
purchases of U.S. equities also increased
somewhat. Foreign direct investment
flows into the United States continued
to be strong in 2005, with the average
pace during the first three quarters a bit
higher than in 2004.
U.S. residents' net purchases of foreign securities remained brisk last year,
near the levels recorded in 2003 and
2004, with smaller purchases of foreign
bonds offset by larger purchases of foreign equities. By contrast, U.S. direct
investment flows abroad slowed markedly during the first half of 2005 and
turned negative in the third quarter. This
unusual pattern reflected responses to
the partial tax holiday provided in the
2004 Homeland Investment Act, which
allowed firms to repatriate at a preferential tax rate previous years' earnings that
had been reinvested in their foreign
affiliates.
The Labor Market
Employment and Unemployment
Conditions in the labor market continued to improve, on balance, in 2005,
although many individuals lost jobs in
the aftermath of the hurricanes. Nonfarm payroll employment rose 175,000
per month, on average, through August,
the same as the average monthly
increase in 2004. Net hiring then slowed
sharply in September and October, as
job losses in the Gulf Coast region
largely offset moderate increases in payrolls elsewhere in the nation. In November and December, monthly job growth
Net Change in Payroll Employment,
2000-06
Thousands of jobs, month y average
January
-
1
LJ
~~~ 100
1
1
2000
200
—
0
_L
2002
2004
2006
NOTE: Nonfarm business sector.
SOURCE: Department of Labor, Bureau of Labor
Statistics.
Economic and Financial Developments in 2005 and Early 2006
conditions over the course of 2005. Initial claims for unemployment insurance
drifted lower, and the job openings rate
moved up. At year-end, the Conference
Board reported that a larger proportion
of respondents to its monthly survey
thought that jobs were plentiful than
thought that jobs were hard to get.
Productivity and Labor Costs
Labor productivity in the nonfarm business sector continued to advance in
2005. Last year's increase in output per
hour of 2VA percent was noticeably
below the average annual gain over the
preceding four years. But taking the
longer view, growth in labor productivity over the past five years has averaged
3% percent per year, nearly 3A percentage point faster than the already impressive gains posted between 1995 and
2000. Productivity appears to have
received considerable impetus in recent
years from a number of factors, including the rapid pace of technological
change and the growing ability of firms
to use information and other technology
to improve the efficiency of their operations. Increases in the amount of capital
per worker, especially high-tech capital,
have also helped to spur productivity
Change in Output per Hour, 1948-2005
Percent, annual rate
—
— 6
—
j
1
1948-
1973
1
1973-
•J
I
•
19951995 2000
4
I
11
was uneven, but it averaged 250,000,
and hiring remained brisk in January.
The reemployment of many of those
who lost jobs because of the hurricanes
appears to have provided a modest lift to
overall hiring in recent months. However, others affected by the storms
apparently have not found new jobs
yet, and the unemployment rate among
evacuees seems to have remained quite
high.
Employment gains were widespread
by industry in 2005. As in 2004, hiring
was especially strong at firms supplying
professional and business services and
in health care. The construction industry
also continued to exhibit a good deal of
vigor, spurred by the booming housing
sector. Employment in retail trade and
in food services rose fairly briskly in the
first half of the year, but it was held
down in the second half by job losses in
the Gulf Coast region. In the manufacturing sector, employment was essentially flat for a second year after three
years of steep declines. In the government sector, state and local payrolls continued to rise modestly, while civilian
employment in the federal government
was about unchanged.
After hovering around 5V2 percent
during the second half of 2004, the
unemployment rate fell, on net, over the
first three months of 2005. During the
remainder of the year, it fluctuated in a
narrow range around 5 percent. In January 2006, it decreased to 4.7 percent.
The labor force participation rate, which
had dropped noticeably between 2000
and 2004, edged up, on net, in 2005.
The participation rate in January 2006
was 66 percent, well below the high of
61 lA percent reached in early 2000 but
not far from its trend, which has been
declining in recent years as a consequence of demographic forces.
Other indicators also pointed to a
gradual improvement in labor market
21
• • • • i
2003
2005
NOTE: Nonfarm business sector.
SOURCE: Department of Labor, Bureau of Labor
Statistics.
22
92nd Annual Report, 2005
growth over the past few years, although
apparently by less than was the case
during the capital spending boom in the
late 1990s.
Increases in hourly labor compensation were moderate in 2005 even though
overall consumer prices rose relatively
rapidly for a second year and the downward pressure on wages from labor market slack diminished. As measured by
the employment cost index (ECI) for
private nonfarm businesses, hourly compensation increased 3 percent last year,
3
/4 percentage point less than in 2004.
The wages and salaries component of
the ECI rose just 2Vi percent, the same
as in 2004, while the cost of providing
benefits rose 4 percent after two years of
increases in the area of 6V2 percent to
7 percent. Much of the deceleration in
benefits costs was in employers' contributions to retirement plans, which had
increased markedly in 2003 and 2004 as
firms ratcheted up their contributions
to defined-benefit plans to cover earlier
declines in the market value of the
plans' assets. Health insurance costs
rose 6V2 percent in 2005, the smallest
increase since the late 1990s.
According to preliminary data, compensation per hour in the nonfarm business (NFB) sector—an alternative measure of compensation developments
derived from the data in the NIPA—rose
3Vi percent in 2005, about the same rise
as in the ECI. In 2004, NFB compensation had risen nearly 6 percent; a fourthquarter surge in the value of stock
option exercises, which are excluded
from the ECI, likely contributed to that
increase. The preliminary estimate for
NFB compensation in 2005 reflects the
apparent reversal of some of the late2004 upswing in compensation, though
it is subject to revision when moredetailed information becomes available
later this year. In any event, the deceleration in hourly compensation last year
held the increase in unit labor costs to
1 percent. Unit labor costs had risen
more than 3 percent in 2004 after having
been close to flat over the preceding
three years.
Prices
Headline inflation continued to be
boosted by soaring energy prices in
2005, while core inflation—which
excludes the direct effects of movements
in food and energy prices—remained
subdued. The PCE chain-type price
index rose 3 percent for the second year
in a row. The increase in core PCE
prices, which in 2004 had ticked up to
2lA percent, remained high in early 2005
by recent standards. Core PCE inflation
subsequently subsided and came in a
shade below 2 percent for the year as
a whole. The market-based component
of the core PCE price index—which
excludes prices that must be imputed
because they cannot be observed in
market transactions and that often
move erratically—rose 13A percent in
2005, unchanged from its pace in 2004.
Alternative Measures of Price Change,
2003-05
Percent
Price measure
Chain-type
Gross domestic product (GDP)..
Gross domestic purchases
Personal consumption
expenditures (PCE)
Excluding food and energy . . .
Market-based PCE excluding
food and energy
Fixed-weight
Consumer price index
Excluding food and energy . . .
2003
2004
2005
2.0
2.0
2.9
3.4
3.0
3.4
1.7
1.3
3.1
2.2
3.0
1.9
1.0
1.7
1.7
1.9
1.2
3.4
2.1
3.7
2.1
NOTE: Changes are based on quarterly averages of
seasonally adjusted data.
SOURCE: For chain-type measures, Department of
Commerce, Bureau of Economic Analysis; for fixedweight measures, Department of Labor, Bureau of Labor
Statistics.
Economic and Financial Developments in 2005 and Early 2006
A similar pattern is evident in the core
consumer price index, which rose about
2 percent in both 2004 and 2005, and in
broad NIPA price measures such as the
price index for GDP, which was up
about 3 percent in both years.
The PCE price index for energy rose
roughly 20 percent in 2005 for the second year in a row. The nearly 25 percent
increase in gasoline prices in 2005
largely reflected the effects of the continuing surge in crude oil prices on retail
energy prices. Gasoline prices recorded
some dramatic spikes—notably in the
spring and after the hurricanes—when
disruptions at refineries depleted inventories and pushed up the margin of the
retail price over the already-elevated
cost of the associated crude oil. After
peaking at more than $3 per gallon in
early September, gasoline prices fell
sharply over the balance of 2005 as
demand moderated, refinery capacity in
the Gulf Coast region came back on
line, and imports surged. In January
2006, gasoline prices turned up in
response to higher crude oil costs, and
they are now running about 50 cents per
gallon higher than they were in January
2005.
Consumer prices for natural gas rose
more than 35 percent in 2005, with most
of the increase coming in the second
half of the year. Prices started to move
up around midyear and then skyrocketed in September and October after
Hurricanes Katrina and Rita curtailed
production in the Gulf of Mexico. Most
of the shut-in production was restored
by late 2005, and inventories remained
ample for a normal heating season, but
spot natural gas prices held at elevated
levels through mid-December. They
have since plummeted in response to
unseasonably warm weather in much of
the nation but are still far above their
levels of a year ago. Reflecting higher
input costs, PCE electricity prices rose
23
10 percent in 2005 after a much smaller
rise in 2004.
Consumer food prices rose about
2 percent in 2005 after slightly larger
increases in 2003 and 2004. Food prices
received some upward pressure late in
the year. Crop damage from Hurricane
Wilma temporarily pushed up the prices
of some fruits and vegetables, and beef
prices were boosted by the resumption
of some exports to Pacific Rim countries after the lifting in early December
of an extended ban (which was subsequently reinstated in January 2006).
But, in general, the higher production
of several livestock products and a
bumper harvest of grains helped to limit
increases in retail food prices to about
the rate of core inflation.
The broad contours of core inflation
in 2005 were about the same as those in
2004. Prices of core goods, which had
declined in 2002 and 2003, were about
flat for a second year. Prices of core
services decelerated a bit—from about
3 percent in 2004 to 23/4 percent in 2005.
The deceleration was concentrated in
some nonmarket categories—in particular, prices of financial services provided
by banks without explicit charge, foreign travel by U.S. residents, and life
and motor vehicle insurance—that had
posted large increases in 2004. With the
notable exception of airfares, which
picked up in 2005 after having fallen in
2004, prices in other market-based categories of services rose about as fast as
they had in 2004.
The run-up in energy prices in
2005 boosted the cost of producing
other goods and services—especially
for energy-intensive items, including
chemicals, plastics, and nitrogenous fertilizers. In addition, prices of other commodities such as lumber and a variety
of metals, which had soared in 2004 in
response to the strengthening of economic activity worldwide, moved up
24
92nd Annual Report, 2005
further in early 2005. Many of those
prices slackened in the spring and summer as industrial production softened,
but they turned up again in the fall. All
told, however, the higher input costs left
only a small mark on the prices of core
goods and services. A major reason is
that the robust upward trend in labor
productivity helped to hold labor costs
in check and gave firms scope to absorb
cost increases.
Near-term inflation expectations have
come under some upward pressure over
the past year, but recent readings have
been close to those at the beginning of
2005. Apart from an energy-related
spurt to 4V2 percent in early autumn, the
Michigan SRC measure of households'
median expectation for inflation over
the next twelve months has been in the
neighborhood of 3 percent to 3lA percent since March 2005 after hovering
in the area of 23A percent to 3 percent
in late 2004 and early 2005. In January 2006, it stood at 3 percent. The
Michigan SRC measure of the median
expectation for inflation over the next
five to ten years was also running a
bit above 3 percent in late 2005, but
it dipped to 2.9 percent in January of
this year, a reading similar to those in
2004 and in the first eight months of
2005. Other indicators likewise suggest
that longer-run inflation expectations
have remained well contained. According to the Survey of Professional
Forecasters, conducted by the Federal
Reserve Bank of Philadelphia, expectations of inflation over the next ten
years remained at 2V2 percent in 2005,
as they have since 1998. In addition,
inflation compensation, as measured by
the spread of yields on nominal Treasury securities over their inflationprotected counterparts, fell a bit, on balance, in 2005.
U.S. Financial Markets
U.S. financial markets withstood some
strains in 2005, most notably a large
cumulative upward revision to the
expected path of monetary policy, sharp
increases in energy prices, troubles in
the auto and airline sectors, and three
major hurricanes. Longer-term market
interest rates remained low, corporate
risk spreads stayed relatively narrow by
historical standards, and equity prices
advanced modestly. Banks continued to
ease standards and terms on loans to
businesses, and bank lending to businesses surged. Overall, debt growth in
the business sector picked up, and the
expansion of household debt remained
quite brisk, but federal borrowing
dropped back. The M2 monetary aggregate grew moderately.
Interest Rates
The FOMC lifted the target federal
funds rate a total of 2 percentage points
in 2005, nearly 1 percentage point more
than market participants had anticipated
at the start of the year. Over the first
half of 2005, short- and intermediateterm interest rates rose in line with the
gradual firming in the stance of monetary policy, but longer-term interest rates
moved lower on balance. For a time
early in the year, rising oil prices and
incoming data showing higher-thanexpected inflation appeared to lift policy
expectations as well as interest rates at
intermediate- and longer-term horizons.
The minutes of the December 2004
FOMC meeting, released on January 4,
2005, and the FOMC's conditioning
of its risk assessment on "appropriate
monetary policy action" after its March
2005 meeting were read as indicating
more concern among Committee mem-
Economic and Financial Developments in 2005 and Early 2006
bers about inflation pressures than
investors had anticipated. The ten-year
Treasury yield moved up after Chairman Greenspan's semiannual congressional testimony in February 2005, as
investors reportedly focused on his
remark that the low level of long-term
interest rates at that time was a "conundrum." However, the subsequent release
of weaker-than-expected data on consumer spending, consumer sentiment,
and output led investors to mark down
again their anticipated path for monetary policy and caused intermediateterm Treasury yields to retreat somewhat on balance during the second
quarter, while the ten-year Treasury
yield declined sharply.
On balance over the second half of
the year, investors became more confident that the economic expansion had
substantial momentum, and the expected
path of policy and nominal Treasury
yields moved considerably higher. Economic data that came in over the summer months suggested more strength in
spending and output than investors had
been anticipating. However, in response
to the devastation caused by Hurricane
Katrina in August and the subsequent
Interest Rates on Selected Treasury
Securities, 2003-06
Perceat
—-
Ten-year
*—s
_^
Two-year
! i
1
(/
Tltree-month
—
2
i
20Q3
!
2004 .
1
2005
1
2006
NOTE: The data are daily and extend through February 8,2006.
SOURCE: Department of the Treasury.
25
landfall of two additional major storms,
investors marked down sharply their
expectations for the path of monetary policy, predominantly at longer
horizons, and nominal Treasury yields
dipped. Those declines in yields proved
temporary, though, as incoming data in
the weeks after the hurricanes indicated
that output had been expanding briskly
before the storms hit and that the
resulting disruptions to economic activity would probably be less severe than
investors had initially feared. In addition, a drop in some energy prices might
have contributed to an upgrading of the
economic outlook. Over the remaining
three months of the year, data on spending and production generally appeared
robust, and investors raised their expectations for the path of monetary policy a
bit more.
On net in 2005, the yield on the twoyear nominal Treasury note rose about
135 basis points, whereas the yield on
the ten-year Treasury note increased
only about 15 basis points. As a result,
longer-horizon forward rates extended
their decline that had begun around the
middle of 2004, the onset of the current
tightening cycle. Although the reasons
for this large cumulative drop are not
entirely clear, this general pattern was
also evident last year in other major
industrialized economies, where longerterm interest rates mainly declined. One
possibility is that higher energy prices
might have led investors to trim their
assessment of the cumulative amount
of monetary policy restraint required
over the longer run that would be consistent with sustainable economic
growth. Investors also appeared to
become less uncertain about the outlook
and so might have become more willing
to accept smaller risk premiums on longterm securities. Another possible expla-
26
92nd Annual Report, 2005
nation is that long-term inflation expectations have fallen and have become
more firmly anchored. As measured by
the spread between yields on nominal
Treasury securities and their inflationprotected counterparts, inflation compensation fell a bit more than 30 basis
points at the ten-year horizon over 2005.
Finally, it is possible that an excess of
global saving over planned investment
has lowered real longer-term interest
rates.
In the corporate bond market, risk
spreads widened modestly in 2005, but
the generally healthy state of corporate
balance sheets and the robust growth of
profits kept spreads low by historical
standards. Spreads in the auto sector
were an exception, however, as the
troubles that emerged in the spring at
GM and Ford and the bankruptcy of
Delphi last fall boosted spreads sharply
in this sector. The bankruptcies of two
major airlines and the revelation of
apparent accounting fraud at Refco, a
large derivatives broker, did not appear
to have a material effect on broad corporate risk spreads.
Spreads of Corporate Bond Yields over
Comparable Off-the-Run Treasury Yields,
1997-2006
Percentage points
To date in 2006, amid uneven incoming economic data, investors' expectations for the path of the target federal
funds rate have edged up, as have
intermediate- and longer-term nominal
Treasury rates. However, spreads on
investment-grade corporate securities
have changed little, whereas those on
speculative-grade issues have declined
somewhat.
Equity Markets
Share values, as measured by the
Wilshire 5000 index, rose about 4V2 percent in 2005. Higher energy prices and
expectations for tighter monetary policy
damped equity prices at times during
the year, but these downward pressures
were offset by continued strong corporate earnings growth and largely upbeat
news on the economy. The response of
stock prices to the hurricanes was generally muted—low longer-term interest
rates and the prospect of additional fiscal stimulus apparently offset concerns
that yet-higher energy prices might trim
economic growth. On net last year,
energy-related stocks registered substantial gains in response to the rise in
the price of oil. To date in 2006, major
equity indexes have risen modestly amid
Stock Price Indexes, 2004-06
January' 2» 2004 * 100
Russell 2000 A
w
1998
2000
2002
2004
2006
NOTE: The data are daily and extend through
February 8, 2006. 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.
2004
2005
2006
NOTE: The data are daily and extend through February 8, 2006.
SOURCE: Frank Russell Company; Dow Jones
Indexes.
Economic and Financial Developments in 2005 and Early 2006
largely positive news about fourthquarter earnings.
Volatilities of equity prices implied
by prices on options contracts on both
the S&P 500 and Nasdaq 100 indexes
remained low over most of 2005,
apparently owing to perceptions of
only modest near-term macroeconomic
risk. However, the spread between the
twelve-month forward earnings-price
ratio for S&P 500 firms and an estimate
of the real long-term Treasury yield—
a measure of the long-term equity risk
premium—widened a bit last year and is
now in the upper part of its range of
the past two decades. Arithmetically, the
widening in this spread can be attributed
to a decline in the measure of the real
long-term Treasury yield; the measure
of the earnings yield on the S&P 500
changed little on balance last year.
Debt and Financial Intermediation
The total debt of the domestic nonflnancial sectors expanded an estimated
9 percent in 2005, about the same pace
as in 2004. However, the composition of
debt growth differed somewhat from the
previous year: Borrowing by nonfinancial businesses picked up in 2005 while
federal borrowing dropped back. The
growth of debt of the household sector
remained brisk, driven by the rapid
expansion of mortgages.
Commercial bank credit expanded
lO1^ percent in 2005, a bit faster than
the brisk pace registered in 2004.
Growth of commercial and industrial
loans jumped to 13V2 percent, the fastest
pace in more than two decades. As
noted, senior loan officers reported in
quarterly surveys that they had eased
terms and standards on such loans last
year. They attributed the easing to an
improved economic outlook and moreaggressive competition from other banks
and nonbank lenders. They also reported
27
that loan demand had strengthened. Real
estate lending by banks was brisk again
last year, though it cooled somewhat
in the fourth quarter in the wake of
the backup in longer-term interest
rates. Consumer loans on banks' books
expanded rapidly during the first quarter
of 2005 but then less so over the balance
of the year, in part because some households substituted lower-cost mortgage
credit for consumer loans.
Measures of bank profitability in
2005 fell back a bit from the very
high levels posted in 2003 and 2004 but
remained robust by historical standards.
Profitability was restrained by vigorous
competition and downward pressure on
net interest margins from increases in
market interest rates, but it was supported by excellent asset quality and
reductions in noninterest expenses relative to assets. Banks' provisioning for
loan losses over the first three quarters
of last year was lower, on average, than
in 2004, even with the increase in provisioning in the third quarter owing to the
prospective surge in personal bankruptcies and to the hurricanes.
Mortgage market assets held by
government-sponsored enterprises declined in 2005, as Fannie Mae reduced
its mortgage portfolio about 20 percent
and the rate of portfolio increase by
Freddie Mac was somewhat below the
rate of growth of residential mortgage
debt in general. The reduction at Fannie
Mae occurred partly in response to
regulatory concerns about the adequacy
of its capitalization. These concerns
increased substantially after the company revealed in late 2004 that it had
improperly accounted for certain derivative transactions. Fannie Mae's share
price dropped about 30 percent last
year, and Freddie Mac's declined about
10 percent. Yield spreads on both firms'
debt over comparable-maturity Treasury
securities were little changed on net.
28
92nd Annual Report, 2005
The M2 Monetary Aggregate
M2 rose 4 percent in 2005, a pace significantly slower than the growth in
nominal income and the lowest annual
rate of expansion in about a decade.1 As
is typical in a period of rising rates, the
opportunity cost of holding M2 assets
increased significantly over the course
of the year, as changes in rates on liquid
deposits lagged those in market yields.
Consequently, growth in liquid deposits
almost came to a halt following doubledigit expansion during the previous several years. Some offset was provided by
a rapid increase in small time deposits,
rates on which remained better aligned
with short-term market rates. After having contracted sharply in the past couple
of years, shares of retail money market
mutual funds were about flat, on net, as
the return on such balances improved in
line with short-term interest rates. Hurricane relief efforts likely added a little
to the growth of M2 last year: Funds
provided by the federal government
to displaced households and funds
advanced by insurance companies probably buoyed M2 over the last four
months of 2005, as did a rise in the use
of currency in the affected areas.
International Developments
Foreign economic activity remained
strong in 2005, as the global economy
displayed resilience in the face of sizable increases in energy prices. Manufacturing and trade expanded in most
industrial and emerging economies. As
in 2004, global economic growth in
1. The Board announced in November that
in March 2006 it would cease compilation and
publication of data on the M3 monetary aggregate;
publication of M3 was judged to be no longer
generating sufficient benefit in the analysis of the
economy or of the financial sector to justify the
costs of publication.
2005 was driven importantly by strong
demand from the United States and
China, but domestic demand picked up
in a number of other countries as well.
The run-up in prices of crude oil and
other commodities over 2005 appeared
to have had only a modest effect on
measures of inflation in most countries.
Cumulative changes in monetary policy in foreign industrial economies during 2005 varied in direction and, in contrast to the United States, were mostly
small. The European Central Bank,
which had maintained its main policy
interest rate at 2 percent since the middle
of 2003, tightened 25 basis points late
in 2005, citing a need to keep inflation
expectations in check. The Bank of
England, after tightening 100 basis
points in 2004, lowered its policy rate
25 basis points in August 2005, as the
U.K. housing market had cooled and as
the growth of household spending and
business investment had slowed. The
Bank of Canada raised its target for the
overnight rate a total of 100 basis points
in the latter part of 2005 and the beginning of 2006, stating that the Canadian
economy was operating again at full
capacity. The Bank of Japan did not
depart in 2005 from its policy of quantitative easing, as it continued to provide
large amounts of bank reserves to keep
short-term interest rates near zero. However, in the second half of the year, amid
growing evidence that an end to consumer price deflation might be near,
Bank of Japan officials began to discuss
publicly the possibility of ending the
policy in 2006.
Ten-year sovereign yields in the euro
area and Canada have declined 15 to
20 basis points on net since the beginning of 2005, and ten-year U.K. sovereign yields have dropped 35 basis
points. Over the same period, Japanese
ten-year sovereign yields have risen
about 15 basis points, somewhat less
Economic and Financial Developments in 2005 and Early 2006
than U.S. Treasury yields of the same
maturity. Despite higher energy prices,
long-term inflation expectations appear
to have remained well contained abroad.
In Europe, Canada, and Japan, the differences between ten-year nominal and
inflation-indexed bond yields currently
are little changed from their levels at the
start of 2005.
Our broadest measure of the nominal
trade-weighted exchange value of the
dollar has risen 2x/2 percent on net since
the beginning of 2005. The dollar likely
was supported by the FOMC's significant cumulative policy tightening, only
part of which had been anticipated by
market participants at the start of 2005.
The dollar's overall appreciation was
driven by its sharp gains against the
currencies of several major industrial
countries; the dollar depreciated on
average against the currencies of the
United States' other important trading
partners. Since the start of 2005, the
dollar has appreciated about 15 percent
versus the euro and the Japanese yen,
and 10 percent against the British
pound. A notable exception to this
pattern is the Canadian dollar, against
which the U.S. dollar has depreciated
U.S. Dollar Exchange Rate against
Selected Major Currencies, 2003-06
i
Week ending January ~\, 200 \= 100
V.IC. pound
100
Japanese yen
*JL Euro
t
80
Canadian
dollar
h i
\
i
2003
I
|
2004
2005
•—
70
1
2006
NOTE: The data are weekly and are in foreign
currency units per dollar. The last observation for each
series is the average of February 6 through February 8,
2006.
SOURCE: Bloomberg L.P.
29
4 percent since early 2005. With respect
to currencies of other important trading partners, the dollar has depreciated
6 percent against the Mexican peso,
17 percent versus the Brazilian real, and
7 percent against the Korean won.
Equity prices have risen substantially
in most foreign industrial and emergingmarket countries since early 2005; these
prices have been supported by the continued global economic expansion and
by interest rates that, in most countries, have remained well below historical averages. Rising commodity prices
have buoyed share prices of firms in the
energy and mining sectors, and share
prices in the technology sector have also
increased sharply. Since the beginning
of 2005, headline equity indexes, measured in local currencies, have risen
about 20 percent on net in the United
Kingdom, 30 percent in the euro area,
and 45 percent in Japan. In the United
States, by contrast, equity prices have
increased only modestly over the same
period.
Industrial Economies
After expanding at an annual rate of
5lA percent in the first half of 2005,
Japanese real GDP growth declined to
1 percent in the third quarter, largely
because of slower inventory accumulation. Throughout the year, the most
important source of support to economic
growth was domestic demand, which
was lifted by improvements in corporate
profitability and labor market conditions. The unemployment rate declined
sharply during 2005, ending the year at
just under AVi percent. The rate of deflation in core consumer prices subsided
considerably in 2005; in fact, from
December 2004 to December 2005, core
prices posted a 0.1 percent increase.
However, the GDP deflator continued to
fall at a slow rate.
30
92nd Annual Report, 2005
Economic growth in the euro area
remained weak in the first half of 2005,
at around a IV2 percent annual rate.
Growth picked up to 2Vi percent in
the third quarter, spurred by stronger
exports, especially by Germany. However, weakness in household spending
persisted. The area-wide unemployment rate fell slightly over the year,
to 8V4 percent near year-end, although
employment only edged up. For the
sixth straight year, euro-area inflation
remained just above the ECB's mediumterm goal of less than (but close to)
2 percent.
The rate of growth of real GDP in the
United Kingdom slowed from 3V4 percent in 2004 to VA percent in 2005. The
slowdown was marked by a substantial
deceleration of both private and government consumption. Labor markets
remained tight, however; the unemployment rate of 2.9 percent in December
was up only slightly from the twentyyear low of 2.6 percent recorded in
January 2005. Consumer price inflation
over the twelve months ending in
December 2005 was 2 percent, in line
with the central bank's official target.
In contrast to the substantial run-up in
real estate prices of 2004, housing price
increases in 2005 were small.
Canadian economic growth was solid
again in 2005. Recovering from a slow
first quarter that featured a sharp but
temporary pullback in exports, real GDP
growth rebounded to around 3V2 percent in the second and third quarters.
For a second straight year, strong
domestic demand underpinned growth,
but net exports also made a positive
contribution to growth late in the year.
Employment made gains, although not
as large as in the previous three years,
and the unemployment rate touched a
thirty-year low of 6.4 percent at year's
end. After spiking in the third quarter on
rising gasoline prices, consumer price
inflation settled back toward 2 percent,
the midpoint of the Bank of Canada's
inflation target range.
Emerging-Market Economies
Growth of real GDP in China remained
vigorous in 2005, supported again by
robust domestic demand and exports.
Both personal consumption and investment expenditures continued to grow
rapidly during the year. Export growth
also remained strong through most
of the year, while import growth
slowed. As a result, the Chinese trade
surplus more than tripled and exceeded
$100 billion. Consumer price inflation
in 2005 was low in comparison with
the previous year, when higher food
prices had caused inflation to surge;
the twelve-month change in consumer
prices finished the year at just over
IV2 percent.
On July 21, China revalued the
renminbi 2.1 percent versus the dollar
and announced that henceforth it would
manage the value of its currency with
reference to a basket of foreign currencies. Since the July revaluation, the
exchange value of the renminbi versus
the dollar has risen about Vi percent.
Chinese authorities also have implemented some reforms of the financial
system that are intended to facilitate
further exchange rate flexibility, including the introduction of an over-thecounter trading system in the domestic
foreign exchange market. China's foreign exchange reserves increased more
than $200 billion in 2005; the pace of
reserve accumulation did not change
appreciably after the revaluation of the
renminbi in July.
In other emerging-market nations in
Asia, economic activity also picked up
substantially in 2005, driven by the
growth of domestic demand and exports.
Despite the global rise of energy costs,
Economic and Financial Developments in 2005 and Early 2006
31
consumer price inflation generally since then. High oil revenues boosted
remained contained. Equity indexes the public-sector surplus, and yield
registered large increases in a number spreads of Mexican sovereign debt over
of Asian countries, led in many cases U.S. Treasuries declined to record lows.
by gains in share prices of technology
In Brazil, growth in economic activity
firms. In particular, Korean equity prices was moderate in the first half of 2005,
have risen about 45 percent since early and some indicators point to a slow2005. Several countries in the region ing over the second half. Nonetheless,
added to their holdings of foreign risk spreads of Brazilian sovereign debt
exchange reserves over the period, but declined over the course of the year to
their lowest levels since 1997, the real
in all cases far less than China did.
After a solid performance in 2004, appreciated strongly, and stock prices
the Mexican economy slowed in the rose sharply. Concerns over inflation
first quarter of 2005 and contracted in kept monetary policy very tight for most
the second quarter because of weaker of the year, but the central bank began
exports to the United States and a sharp easing in September, and the policy rate
drop in agricultural production. How- was reduced a total of 250 basis points,
ever, the Mexican economy recovered to 11 VA percent, by January. In late
in the second half of the year, as agri- December, Brazil paid in full its debt to
cultural and manufacturing production the International Monetary Fund (IMF),
bounced back. Aggressive tightening using a portion of its foreign exchange
of monetary policy from early 2004 to reserves.
March 2005 seemed to be successful in
In Argentina, the economic recovery
restraining inflationary pressures: Con- continued last year, driven in part by
sumer price inflation declined from increases in consumption and investmore than 5 percent at the end of 2004 ment. After more than three years in
to a bit less than 4 percent in January default, the government completed a
2006, within the central bank's target debt swap, restructuring $80 billion in
range of 2 percent to 4 percent. The bonds and obtaining a participation rate
soft economy and an improved outlook of 76 percent. Early this year, Argentina
for inflation led the Bank of Mexico to also paid in full its IMF obligations out
•
begin easing policy in August 2005, and of its foreign exchange reserves.
the central bank has continued to ease
33
Monetary Policy Report of July 2005
Monetary Policy and the
Economic Outlook
The U.S. economy continued to expand
at a solid pace over the first half of 2005
despite the restraint imposed on aggregate demand by a further rise in crude
oil prices. Household spending trended
up, propelled by rising wealth and
income and by low interest rates, and
business outlays received ongoing support from favorable financial conditions,
rising sales, and increased profitability.
Moreover, the earlier declines in the foreign exchange value of the dollar shifted
some domestic and foreign demand
toward U.S. producers. Overall, the economic expansion was sufficient to create
jobs at roughly the same pace as in late
2004 and to lower the unemployment
rate further over the first half of this
year.
Higher oil prices boosted retail prices
of a broad range of consumer energy
products and, as a result, continued to
hold up the rate of overall consumer
price inflation in the first half of 2005.
In addition, the rise in energy prices
this year, coupled with increases in the
prices of some other commodities,
imported goods, and industrial materials, put upward pressure on the costs
of many businesses. A portion of these
costs was passed on to consumers,
which contributed to a higher rate of
inflation in core consumer prices (that
is, total prices excluding the food and
NOTE: The discussion in this chapter consists
of the text and tables from the Monetary Policy
Report submitted to the Congress on July 20,
2005; the charts from that report (as well as earlier
reports) are available on the Board's web site, at
www.federalreserve.gov/boarddocs/hh.
energy components, which are volatile).
As measured by the price index for personal consumption expenditures excluding food and energy, core inflation
increased from an annual rate of 1 ¥z percent in 2004 to about 2 percent between
the fourth quarter of 2004 and May
2005. While survey measures of nearterm inflation expectations have edged
up this year, surveys, as well as readings
from financial markets, suggest that
expected inflation at longer horizons has
remained contained.
With financial conditions advantageous for households and firms, a solid
economic expansion in train, and some
upward pressure on inflation, the Federal Open Market Committee (FOMC)
continued to remove policy accommodation at a measured pace over the first
half of the year, raising the intended
federal funds rate an additional 1 percentage point, to 3lA percent, by the end
of June. At the most recent FOMC meeting, the Committee judged that policy
remained accommodative. With appropriate monetary policy, however, the
upside and downside risks to output and
inflation were viewed as balanced, and
the Committee underscored its commitment to respond to changes in economic
prospects as needed to fulfill its obligation to maintain price stability.
The fundamental factors that supported the U.S. economy in the first half
of 2005 should continue to do so over
the remainder of 2005 and in 2006. In
the household sector, the combination of
further gains in employment, favorable
borrowing terms, and generally healthy
balance sheets should keep consumer
spending and residential investment on
an upward path. In the business sector,
34
92nd Annual Report, 2005
expanding sales, the low cost of capital,
and the replacement or upgrade of aging
equipment and software should help to
maintain increases in capital spending.
And, although economic performance
has been uneven across countries, continued growth overall in the economies
of U.S. trading partners should sustain
the demand for U.S. exports. In contrast,
ongoing increases in imports will likely
continue to subtract from the growth
of U.S. gross domestic product. In addition, high energy prices remain a drag
on aggregate demand both here and
abroad, though this drag should lessen
over time if prices for crude oil level out
in line with quotes in futures markets.
Despite the upward pressure on costs
and prices over the past year or so, core
consumer price inflation is likely to
remain contained in 2005 and 2006.
Longer-run inflation expectations are
still well anchored, and because businesses are adding to their stocks of capital and are continuing to find ways to
use their capital and work forces more
effectively, structural productivity will
likely rise at a solid pace over the foreseeable future. In addition, barring a further increase in oil prices, the boost that
higher energy costs have given to core
inflation should wane in coming quarters, while the recent appreciation of
the dollar, as well as the deceleration
in global materials prices, will likely
reduce the impetus to inflation from rising import prices.
Of course, substantial uncertainties
surround this economic outlook. A further sharp rise in crude oil prices would
have undesirable consequences for both
economic activity and inflation, and the
possibility that housing prices, at least in
some locales, have moved above levels
that can be supported by fundamentals
remains a concern. As another example,
if the recent surge in measured unit
labor costs were to prove more persis
tent than currently appears likely, the
outlook for inflation would be adversely
affected. Economic growth and inflation
will also be shaped importantly by the
evolution of the imbalance in the U.S.
current account.
The Conduct of Monetary Policy
over the First Half of 2005
Despite increases in the federal funds
rate totaling 1V4 percentage points in
2004, monetary policy was still judged
to be accommodative at the start of
2005. At the time of the February
FOMC meeting, the available information indicated that the economy had
expanded at a robust pace through the
end of 2004 and retained considerable
momentum. Accordingly, the Committee voted to raise its target for the
federal funds rate from 2VA percent
to 2V2 percent and to make minimal
changes to the text of the accompanying statement. The statement reiterated
that "the Committee believes that policy
accommodation can be removed at a
pace that is likely to be measured."
Members noted, however, that this
forward-looking language was clearly
conditioned on economic developments
and therefore would not stand in the
way of either a pause or a step-up in
policy firming depending on events.
By March, the data were pointing to a
further solid gain in activity during the
first quarter, fueled especially by continued increases in consumption expenditures and residential investment. In
addition, private nonfarm payrolls were
posting widespread advances, and slack
in resource utilization appeared to be
diminishing. The Committee voted at its
March meeting to raise the federal funds
rate another 25 basis points, to 23A percent. In view of the rise in prices of
energy and other commodities and
recent elevated readings on inflation in
Monetary Policy Report of July 2005
core consumer prices, the Committee
altered the text of the policy statement
to note the pickup in inflationary pressures. The Committee also decided to
modify the assessment of the balance of
risks to make it explicitly conditional on
an assumption of "appropriate" monetary policy, so as to underscore that
maintaining balanced risks would likely
require continued removal of policy
accommodation.
The evidence that had accumulated
by the spring pointed to some moderation in the pace of activity. Retail spending flattened out for a time, likely in
response to higher energy prices, and
the growth of capital spending dropped
back from its elevated pace of late last
year. Nonetheless, with long-term interest rates still quite low and with employment and profits continuing to rise,
economic activity appeared to retain
considerable momentum, suggesting that
the softness would be short lived.
Against this backdrop, the FOMC
decided to raise the federal funds rate
another 25 basis points at its May meeting and to make few changes to the text
of the accompanying statement.
In the weeks after the May meeting,
incoming indicators supported the view
that the underlying pace of activity was
not faltering. The information that the
Committee reviewed at the time of the
June FOMC meeting showed that consumer spending and business investment
had turned up, on balance, and that
demand for housing continued to be
strong. With economic activity remaining firm and crude oil prices ratcheting
higher, the FOMC voted to raise the
funds rate an additional 25 basis points,
to 3lA percent, and to make only minimal changes to the text of the accompanying statement. This action brought the
cumulative increase in the target federal
funds rate since June 2004 to 2lA percentage points.
35
Economic Projections
for 2005 and 2006
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 2005 and 2006. In general, Federal Reserve policymakers
expect the economy to continue to
expand at a moderate pace and core
inflation to remain roughly stable over
this period. The central tendency of the
FOMC participants' forecasts for the
increase in real (that is, inflation
adjusted) GDP is 3Vi percent over the
Economic Projections for 2005 and 2006
Percent
Indicator
Federal Reserve Governors
and
Reserve Bank presidents
Central
tendency
Range
2005
Change, fourth quarter
to fourth quarter1
Nominal GDP
Real GDP
PCE price index excluding
food and energy
Average level,
fourth quarter
Civilian unemployment
rate
5y2-53/4
3V2
5-6V4
3-3 3 / 4
V/2r-2V4
5-5V4
P/4-2
5
2006
Change, fourth quarter
to fourth quarter1
Nominal GDP
Real GDP
PCE price index excluding
food and energy
Average level,
fourth quarter
Civilian unemployment
rate
5-6
VA-VA
5V*-5Vi
3lA-VA
\Yz-2Vi
P/4-2
5
5
1. Change from average for fourth quarter of previous
year to average for fourth quarter of year indicated.
36
92nd Annual Report, 2005
four quarters of 2005 and 3x/4 percent to
3V2 percent in 2006. The civilian unemployment rate is expected to average
5 percent in both the fourth quarter of
2005 and the fourth quarter of 2006.
FOMC participants project that the
chain-type price index for personal consumption expenditures excluding food
and energy will increase between
l3/4 percent and 2 percent both this year
and next.
Economic and Financial
Developments in 2005
The economic expansion entered 2005
on a solid footing and was led by ongoing increases in consumption, residential investment, and business spending
on equipment and software. Although
the pace of expansion slowed somewhat
in the early spring, activity has picked
up again more recently. On average, real
GDP appears to have increased a little
less rapidly over the first half of 2005
than in the second half of 2004, a reflection in part of reduced fiscal stimulus
and the drag on economic activity from
higher energy prices. Industrial production has also risen more slowly so far
this year than in 2004: The increase
totaled 3 percent at an annual rate
between December 2004 and June
2005, down from 5 percent during the
previous six months. Nevertheless, the
economic expansion has been sufficient to gradually absorb slack in labor
and product markets. Nonfarm payroll
employment has continued to increase,
and the unemployment rate has moved
down further since the beginning of the
year, to 5 percent in June. Similarly, the
rate of capacity utilization in the manufacturing sector stood at 78.4 percent
in June, up from 77.9 percent at the end
of 2004 and just a little below its longterm historical average.
Rising energy prices continued to
boost consumer price inflation in the
first half of 2005. With consumer energy
prices having climbed more than 13 percent at an annual rate so far this year,
the price index for personal consumption expenditures (PCE) increased at an
annual rate of about 2Vi percent between
the fourth quarter of 2004 and May
2005, the same pace as in 2004. Meanwhile, the core PCE price index rose at
an annual rate of about 2 percent in the
first half of 2005, up from 1 Vi percent in
2004.
The Household Sector
Consumer Spending
Consumer spending continued to move
higher in the first half of this year,
though not as rapidly as in the second
half of 2004. After increasing at an average annual rate of AVi percent in the
third and fourth quarters of last year,
real personal consumption expenditures
rose at a 3V2 percent rate in the first
quarter and appear to have advanced at a
roughly similar pace in the second quarter. Household spending this year has
been supported by rising employment
and household wealth as well as by the
low level of interest rates. However,
higher costs for consumer energy products have eroded households' purchasing power.
Sales of light motor vehicles, which
had been buoyed in the second half of
last year by a variety of sales inducements, dropped back in the first quarter
after many of the inducements expired.
However, sales firmed again in the second quarter to an average annual pace
of more than 17 million units, a level
similar to that in the fourth quarter of
last year. Underlying demand for light
motor vehicles has remained relatively
strong, though sales likely have also
Monetary Policy Report of July 2005
been boosted recently by sizable price
discounts.
Excluding motor vehicles, consumer
spending posted strong gains in early
2005, flattened out in March, and picked
up again in the spring. On a quarterly
average basis, the rate of increase in
non-auto spending appears to have
stepped down in the second quarter,
largely because of a deceleration in outlays for consumer goods. Meanwhile,
real outlays for services rose at an
annual rate of about 3 percent in the first
quarter, and the available data point to
an increase of about the same magnitude
in the second quarter.
If the effect of Microsoft's $32 billion
special dividend payment in December
2004 is excluded from the calculation,
real disposable personal income (that is,
after-tax income adjusted for inflation)
rose at an annual rate of about 2 percent
between the fourth quarter of 2004 and
May 2005, a slower pace than in 2004.
Although increases in employment and
earnings pushed up wage and salary
income over the first half of 2005, the
rise in real income was damped to some
degree by the energy-driven increase in
consumer prices. Higher energy prices
also appear to have weighed on consumer confidence for much of this
year. Surveys by both the Michigan
Survey Research Center (SRC) and the
Conference Board indicate that household sentiment edged down through
the early spring, though readings from
these surveys turned up again more
recently.
Household wealth appears to have
increased a bit faster than nominal disposable income over the first half of this
year; the small increase in the wealthto-income ratio comes on the heels of
substantial increases in 2003 and 2004.
Although stock prices have changed
little, on net, thus far this year, home
prices have continued to rise sharply.
37
Because changes in wealth influence
consumer spending with a lag, both the
earlier and the more-recent increases
in household net worth have supported
consumption this year. As wealth
increased and interest rates remained
quite low, the personal saving rate edged
down to just Vi percent of disposable
income in April and May. Over the previous two decades, the personal saving
rate averaged close to 5 percent.
Residential Investment
Activity in the housing market continued at a strong pace in the first half of
2005. Real expenditures on residential
structures increased at an annual rate
of 11V2 percent in the first quarter and
appear to have posted another gain in
the second quarter. In the single-family
sector, starts of new units averaged
1.69 million at an annual rate between
January and June—nearly 4 percent
above the pace posted over the second
half of 2004. Similarly, starts of multifamily units averaged 360,000 over the
first six months of 2005, about 3lA percent higher than in the previous six
months.
As in 2004, the demand for housing
during the first half of 2005 was supported by rising employment and
income and by low mortgage rates.
Rates on thirty-year fixed-rate mortgages have fluctuated between 5V2 percent and 6 percent in recent months and
are currently near the low end of that
range. In addition, demand reportedly
has been boosted by a rise in purchases
of second homes—either as vacation
units or as investments—and by the
greater availability of less-conventional
financing instruments. These financing
instruments, including interest-only
mortgages and adjustable-rate mortgages that allow borrowers a degree of
flexibility in the size of their monthly
38
92nd Annual Report, 2005
payments, have enabled some households to buy homes that would otherwise have been unaffordable. As a
result, both new and existing home sales
have remained remarkably robust this
year, and both were at or near record
levels in May.
The strong demand for housing has
continued to push up home prices this
year. Although rates of house price
appreciation were a little slower in the
first quarter of this year than in 2004,
the repeat-transactions price index for
existing homes (limited to purchasetransactions only), which is published
by the Office of Federal Housing Enterprise Oversight and partially adjusts for
changes in the quality of homes sold,
was nonetheless up 10 percent relative
to its year-earlier level. Price appreciation has been especially sharp over the
past year in some large metropolitan
areas, including Las Vegas, Miami,
San Francisco, and New York, but rapid
increases in home prices have been
observed in other areas as well. In many
of these locales, recent price increases
have far exceeded the increases in rents
and household incomes.
many households would currently find
refinancing to be attractive.
Consumer credit expanded at an
annual rate of about 4V2 percent over the
first quarter of the year and was about
unchanged in April and May. The
growth of consumer credit has continued to be restrained by substitution
toward home equity debt as a means to
finance household expenditures.
Measures of household credit quality
have remained favorable. Delinquency
rates on credit card debt and auto loans
have continued to decline from already
low levels. The pace of bankruptcy filings has run a little higher than at the
same time last year; however, that pace
has probably been boosted by a rush to
file before the new rules in the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 take effect in
October. Reflecting the rapid pace of
household debt growth, the ratio of
household financial obligations to disposable personal income has edged up
from a year earlier, though this ratio
remains a bit below the peak level
reached in late 2002.
Household Finance
The Business Sector
Supported by rising house prices and
continued economic expansion, household debt increased at an annual rate of
about 9lA percent in the first quarter of
2005. This advance was paced by a rise
in mortgage debt of lOVi percent at an
annual rate. However, even that rapid
rise in mortgage debt represented a
slight deceleration from the torrid pace
in 2004, a development in line with the
small slowdown in the pace of house
price appreciation. Despite the increase
in mortgage debt, net housing wealth
rose. Refinancing activity has remained
subdued, as rates on fixed-rate mortgages are a little above levels at which
Fixed Investment
After posting a robust gain in the second
half of 2004, real business fixed investment rose at a more moderate pace over
the first half of 2005, as the rate of
increase in expenditures on equipment
and software (E&S) dropped back and
outlays for nonresidential structures
remained lackluster. Nonetheless, economic and financial conditions appear
to be supportive of capital spending:
Sales and corporate profits have continued to increase, businesses have ample
liquid assets at their disposal, and financial market participants appear willing
Monetary Policy Report of July 2005
to finance new investment projects at
favorable terms.
Real E&S spending rose at an annual
rate of 6 percent in the first quarter after
having advanced at an 18 percent pace
in the second half of 2004. Led by large
increases in purchases of computers and
communications equipment, spending
on high-tech equipment posted a sizable gain in the first quarter. In contrast,
outlays for transportation equipment
dropped back early in the year because
of a small decline in business expenditures on motor vehicles and a sharp drop
in aircraft purchases after a surge in
the fourth quarter of 2004. Investment
in equipment other than high-tech and
transportation goods, a category that
accounts for about 40 percent of E&S
in nominal terms, also edged down in
the first quarter after registering a sizable gain in the second half of last year.
The types of equipment in this category
of investment tend to be sensitive to
trends in business sales, but the timing
of business spending may have been
influenced by the provisions of the
partial-expensing tax incentive, which
encouraged capital spending to be pulled
forward in advance of the incentive's
expiration at the end of 2004.
More-recent indicators of E&S spending point to another moderate rise in
investment in the second quarter. In particular, outlays for transportation equipment appear to have turned up, on net,
as a step-up in purchases of aircraft
more than offset a further decline in
business spending on motor vehicles. At
the same time, the evidence on hightech spending has been mixed: Real
spending on computers appears to have
registered another large gain in the second quarter, while the rate of increase
in outlays for communications equipment apparently fell back. Indicators of
spending on equipment other than transportation and high tech have looked
39
more favorable recently, as shipments
and imports for this broad category
increased noticeably, on balance, in
April and May. In addition, unfilled
orders for such equipment remain at
high levels.
Real nonresidential construction continued at a low level in the first half of
this year, but fundamentals are starting
to show signs of improvement. The construction of office buildings and industrial facilities has been restrained for
some time by elevated vacancy rates,
weak demand, and higher costs for construction materials. However, vacancy
rates in these sectors have recently
turned down, and construction outlays
for these types of buildings appear
to have edged higher, on net, so far
this year. Commercial building—which
includes retail outlets and warehouses—
also appears to have increased this year,
in part because of strong growth in the
construction of large retail stores. Meanwhile, investment in the drilling and
mining sector has trended up, on balance, over the past year, as higher prices
for natural gas boosted the demand for
new drilling rigs.
Inventory Investment
As in 2004, businesses accumulated
inventories at an appreciable pace early
this year. Outside the motor vehicle
industry, nonfarm inventories increased
at an annual rate of $66 billion in real
terms in the first quarter of 2005. The
rapid rate of inventory accumulation late
last year and early in 2005 appears primarily to have been the result of efforts
by firms to replenish stocks that had
been depleted by the strong pace of sales
in 2003 and 2004; apart from firms
in a limited number of sectors, such as
steel and paper, most businesses do not
appear to be holding excess stocks,
even taking into account the downward
40
92nd Annual Report, 2005
trend in inventory-sales ratios that has
resulted from the improvement in
supply-chain management capabilities.
The rebuilding of inventories in most
industries appears to have been largely
completed, and the available data for
April and May point to a noticeable
step-down in the pace of stockbuilding.
Indeed, in recent surveys, businesses
have been reporting that they and their
customers are increasingly comfortable
with current levels of stocks, whereas
in 2004 and early 2005, many were still
characterizing inventory positions as too
lean.
One important exception to this characterization is the motor vehicle industry, for which dealer stocks—especially
of light trucks—were high by historical
standards in recent months. In response,
several major motor vehicle manufacturers reduced production in the second
quarter, and, more recently, some have
introduced price discounts on many
2005 models. These efforts appear to
have helped, in that inventories of light
vehicles at the end of June fell to sixtyfive days of supply, a level more in line
with historical norms.
Corporate Profits
and Business Finance
Corporate profits have continued to rise
so far this year, though at a slower pace
than in 2003 and 2004. Earnings per
share for S&P 500 firms in the first
quarter of 2005 were up about 13 percent since the same time last year, a
pace in line with the profit figures
reported in the national income and
product accounts (NIPA). The ratio of
before-tax profits of nonfinancial corporations to that sector's gross value added
was about flat in the first quarter after
having moved up in 2003 and 2004. In
the first half of this year, the petroleum
and gas industries benefited from higher
oil prices, but corporate earnings in the
automobile sector declined sharply.
Given continued strong corporate
profits and the accompanying strength
in cash flow, nonfinancial firms'
demand for external financing to fund
capital expenditures has remained somewhat subdued. Net equity issuance has
stayed negative so far this year, and
share retirements have been boosted by
considerable stock buybacks and cashfinanced merger and acquisition activity. Gross corporate bond issuance has
been limited, and the proceeds have
been used mainly to pay down existing
debt. Short-term debt financing, however, continued to pick up in the first
half of 2005. Both commercial and
industrial loans and commercial paper
expanded at a brisk pace that was likely
in part the result of firms' need to fund
the rapid rate of inventory accumulation earlier in the year. The Federal
Reserve's Senior Loan Officer Opinion
Survey on Bank Lending Practices conducted in April 2005 indicated that
demand for business loans had strengthened over the previous three months
and that substantial fractions of banks
had eased standards and terms on these
loans. In response to special questions
regarding longer-term changes in lending practices, most banks reported that
standards on business loans were somewhat tighter, but that terms were somewhat easier, than they had been in 1996
and 1997.
Indicators of credit quality in the
nonfinancial business sector have stayed
generally very strong amid continued
growth of profits and corporate balance
sheets that remain flush with liquid
assets. Both the default rate on outstanding corporate bonds and the delinquency
rate on business loans stand at the low
end of their historical ranges. However,
the automobile sector has been an
exception to the pattern of solid corpo-
Monetary Policy Report of July 2005
rate credit quality. All three major credit
rating agencies downgraded the debt of
both Ford and General Motors this year
in response to disappointing earnings
news. General Motors' debt now has
a below-investment-grade rating from
both Standard & Poor's and Fitch,
though it is still rated as investmentgrade by Moody's. Ford retains an
investment-grade rating with all the rating agencies except Standard & Poor's.
Expansion of commercial-mortgage
debt continued apace in the first half of
the year and was accompanied by record issuance of commercial-mortgagebacked securities. Likely because of
that heavy issuance, spreads of yields
on commercial-mortgage-backed securities over those on comparable-maturity
Treasuries have turned up recently, but
these spreads remain relatively low. The
credit quality of commercial-mortgage
debt remains quite strong, as delinquency rates on holdings of commercial
mortgages at banks and insurance companies and on loans that back mortgage
securities have been declining from
already low levels.
The Government Sector
Federal Government
The deficit in the federal unified budget narrowed over the past year. Over
the twelve months ending in June, the
unified budget recorded a deficit of
$336 billion, $99 billion less than during the comparable period last year.
Both revenues and outlays rose faster
than did nominal GDP over this period,
but the rise in receipts was especially
strong. Even at its lower level, the deficit was still equal to about 23/4 percent
of nominal GDP.
Nominal federal receipts during the
twelve months ending in June were
14 percent higher than during the same
41
period a year earlier and reached 17 percent of nominal GDP. Revenues were
boosted by a large increase in corporate
receipts that was driven by the strength
of corporate profits. In addition, individual income and payroll taxes rose
nearly 12 percent, twice as fast as the
growth of household income. However,
some of this rise was due to the features
of the Jobs and Growth Tax Relief Reconciliation Act of 2003 that altered the
timing of tax payments in a way that
temporarily reduced the level of tax collections last year.
Nominal federal outlays during the
twelve months ending in June were
7 percent higher than during the same
period a year ago and stood at 20 percent of nominal GDP. Spending for
national defense continued to trend up
at a rapid clip, and outlays for Medicare
also posted a sizable increase. In addition, federal net interest payments,
boosted both by higher interest rates and
by the higher level of federal debt, rose
more than 13 percent over this period.
Real federal expenditures for consumption and investment—the part of government spending that is a component of
real GDP—increased at an annual rate
of just Vi percent in the first calendar
quarter of 2005 after having risen 4 percent in 2004. Although defense spending changed little in real terms in the
first quarter, it has risen considerably in
recent years and is likely to increase
further in coming quarters. Nondefense
spending in the first quarter edged up in
line with its recent trend, and enacted
legislation is consistent with its continuing to rise at a subdued pace.
The deficit in the federal budget has
depressed national saving in the past
few years. The narrowing of the deficit
of late has lessened this reduction in
national saving from a little more than
3 percent of nominal GDP in 2003 and
2004 to roughly 2 percent in the first
42
92nd Annual Report, 2005
quarter of 2005. Even so, as business
and personal saving rates changed little,
on average, over the past year, net
national saving rose to just 31/* percent
of nominal GDP in the first quarter, well
below the long-term historical average
of about 7 percent and below recent
levels of net domestic investment. If not
reversed, such a low level of net national
saving will necessitate either slower
capital formation or continued heavy
borrowing from abroad. The pressures
on national saving will intensify greatly
with the retirement of the baby-boom
generation and the associated increases
in Social Security and Medicare benefit
payments.
Federal Borrowing
institutions that place bids through the
Federal Reserve Bank of New York—
have been awarded an average of
33 percent of coupon securities issued at
auctions held so far this year, down from
42 percent in 2004. Treasury securities
held in custody at the Federal Reserve
Bank of New York on behalf of foreign
official institutions have grown only
about $25 billion so far this year after an
increase of more than $200 billion in
2004. Data from the Treasury International Capital System also suggest an
ebbing of demand for Treasury securities from foreign official investors during the first five months of the year.
These data, however, indicate that foreign private investors have continued to
accumulate Treasury securities at a rapid
pace.
Because of the need to finance the sizable federal budget deficit, federal debt State and Local Governments
held by the public expanded at a seasonally adjusted annual rate of 13% percent The fiscal positions of states and localiin the first quarter of the year. The ratio ties have improved this year. Ongoing
of this debt to nominal GDP increased gains in income and consumer spending,
to more than 37 percent for the first time along with sharp increases in property
since 2000. The average maturity of out- values, have continued to boost tax
standing marketable Treasury debt has receipts. Although many jurisdictions
been declining for several years and have increased their spending moderreached fifty-three months at the end of ately, some are also using the additional
the first quarter of 2005, down from revenues to rebuild reserve funds. On a
about seventy months in 2000. How- NIPA basis, net saving by state and local
ever, in the May mid-quarter refunding governments equaled $34 billion at an
statement, the Treasury announced that annual rate in the first quarter (roughly
it was considering reintroducing regu- lA percent of nominal GDP), double the
lar issuance of a thirty-year nominal 2004 average. In addition, virtually all
bond in February 2006, a move that states registered surpluses in their genwould presumably slow or arrest this eral fund budgets in fiscal year 2005,
downtrend.
which ended on June 30 for all but
Indicators of demand for Treasury four states. Nevertheless, lingering fissecurities by foreign investors have been cal concerns are still evident in some
mixed so far this year; demand by for- jurisdictions; these concerns are related
eign official institutions seems to have primarily to rising Medicaid costs, the
moderated, but demand by foreign pri- termination of temporary federal grants
vate investors appears to have remained that were appropriated in fiscal year
robust. Indirect bidders at Treasury 2004, and pressures to restore funding to
auctions—which include foreign official programs—such as elementary and sec
Monetary Policy Report of July 2005
ondary education—that were cut back
earlier in the decade.
Real consumption and investment
spending by state and local governments
edged down in the first quarter of 2005
after having changed little in 2004. Real
outlays for consumption items increased
at an annual rate of less than Vi percent,
a reflection of some slowing in the pace
of hiring. Nominal spending on investment rose at a moderate rate in the first
quarter, but because construction costs
escalated, investment spending declined
a little in real terms.
State and Local Government
Borrowing
State and local government debt held
by the public expanded at a rapid pace
in the first quarter of the year, rising
at a seasonally adjusted annual rate of
\6lA percent, up from 5Vi percent in
the fourth quarter of last year. However,
much of this borrowing was for the
advance refunding of existing debt, as
state and local governments continued
to take advantage of low long-term
interest rates. A significant portion of
the proceeds of these advance refundings were invested in U.S. Treasury
instruments tailored to meet the cash
management needs of municipal governments. In addition, financing of
transportation- and education-related
projects boosted issuance of long-term
municipal bonds for new capital.
The credit quality of municipal borrowers improved last year, and this trend
has generally continued so far in 2005,
as upgrades of municipal bonds by Standard & Poor's continued to outpace
downgrades.
The External Sector
The U.S. current account deficit
expanded in the first quarter of 2005 to
43
$780 billion at an annual rate, or about
6.4 percent of nominal GDP. The deficit
in trade in goods continued to widen,
increasing $17 billion from the previous
quarter. The deficit on net unilateral
transfers also widened in the first quarter, largely because of an increase in
government grants. In contrast, the surplus on trade in services rose $7 billion, and the surplus on net investment
income rose $2 billion.
International Trade
Real exports of goods and services
accelerated in the first quarter of 2005
to an annual rate of about 9 percent,
roughly twice as fast as the rate in the
second half of last year. The dollar's
decline in recent years has raised the
competitiveness of U.S. relative prices
and has continued to provide a mounting boost to exports. Support from foreign economic activity, though still
substantial, moderated after the first
half of 2004 as growth abroad slowed.
Increases in exports of U.S. goods were
widespread across major U.S. trading
partners, with the exception of Japan,
and were concentrated in capital goods
and consumer goods. Real exports of
services rose at an annual rate of about
13 ^percent.
Real imports of goods and services
rose at an annual rate of about 9lA percent in the first quarter, a pace similar to
the average in 2004. The growth of real
oil imports ebbed after surging late last
year. Increases in imports of non-oil
goods were widespread across categories. The expiration of the Multifibre
Arrangement and the resulting elimination of quotas shifted the source of some
U.S. textile and apparel imports among
U.S. trading partners, but these events
appear to have had a limited effect on
the overall level of imports of these
goods. Real imports of services reversed
44
92nd Annual Report, 2005
their fourth-quarter decline, posting a
gain of 7 percent at an annual rate, as
some travel-related expenditures and
also royalties and license fees recovered
from a very weak fourth quarter.
Boosted by substantial increases in
the prices of primary commodities and
industrial supplies, prices of total
exports rose at an annual rate of AlA percent in the first quarter. Prices of U.S.
agricultural exports rebounded in the
first quarter after good harvests in the
second half of 2004 had caused prices
to fall sharply. The available data for
the second quarter point to continued
increases in export prices.
Prices of imported non-oil goods rose
at an annual rate of 33/4 percent in the
first quarter, almost IV2 percentage
points faster than in the second half of
2004. Prices of material-intensive items,
such as industrial supplies and foods,
steadily increased in the last quarter of
2004 and in the first quarter of 2005.
In part, this rise reflected higher prices
for nonfiiel primary commodities, as
strength in global demand for many
commodities outstripped a slow expansion of supply. Prices forfinishedgoods,
such as consumer goods and many kinds
of capital goods, also turned noticeably
higher. Available data for the second
quarter show that the increases in prices
of both material-intensive and finished
goods have slowed.
The spot price of West Texas intermediate (WTI) crude oil began 2005 near
$43 per barrel, but it climbed above $50
per barrel in late February and breached
$60 per barrel in late June. The increase
in the spot price of WTI largely reflects
several global factors: continued strong
demand for oil, limited spare production
capacity, and concerns about the reliability of supply from some foreign
sources. In contrast to the market outlook during last October's peak in oil
prices, futures contracts indicate that
market participants now expect oil
prices to remain near their current high
levels, a view consistent with the belief
that demand will remain strong and
production will have difficulty keeping pace. The price of the far-dated
NYMEX oil futures contract (currently
for delivery in December 2011) rose
from about $38 per barrel as of last
October to about $56 per barrel in late
June.
OPEC spare production capacity
appears to be near historical lows, with
only Saudi Arabia able to increase production substantially. Many other OPEC
producers are either pumping close to
capacity or encountering production
problems. Venezuela and Indonesia cannot meet their production quotas, and
Iraqi production this year has averaged
less than in 2004. In addition, several
governments have moved to increase
their control of the energy industry as
oil prices haverisen.Russian oil production, which had provided most of the
growth in non-OPEC supply over the
previous five years, has stagnated since
last September amid the partial nationalization of Yukos, formerly Russia's
largest oil company. Venezuela has also
increased the taxes and royalty payments of foreign oil firms.
The Financial Account
Foreign official inflows, which accounted for more than half of all net
financial inflows to the United States
in 2004, slowed significantly in the first
quarter but showed signs of renewed
strength in April and May. In contrast,
private inflows moderated in April and
May after having increased substantially
in the preceding six months. As has
been the case for several years, the U.S.
current account has been financed primarily by foreign purchases of U.S. debt
securities. U.S. residents' purchases of
Monetary Policy Report of July 2005
foreign securities increased after a temporary lull in the fourth quarter and have
been more heavily weighted toward purchases of equities.
Net direct investment outflows in the
first quarter were well below their levels
in the fourth quarter; direct investment
into the United States was roughly
unchanged, but U.S. direct investment
abroad fell back after a surge in new
equity late last year. There is little evidence to date that U.S. companies have
repatriated earnings from their foreign
subsidiaries using the temporarily
reduced tax rate available under the
American Jobs Creation Act of 2004.
However, there are indications that these
remittances may pick up in the second
half of this year.
The Labor Market
Employment and Unemployment
Labor markets have continued to improve this year, albeit at an uneven pace
from month to month. On average, nonfarm payroll employment expanded
roughly 180,000 per month over the first
half of 2005, about the same pace as in
the fourth quarter of 2004. At the same
time, the civilian unemployment rate,
which had declined from 53A percent to
just below 5V2 percent over 2004, continued to move down. The jobless rate
stood at 5 percent in June, the lowest
level since September 2001.
The increases in payrolls over the first
half of 2005 were relatively widespread
across industries. Particularly sizable
gains were registered at providers of
health-care services and leisure and hospitality services and at establishments
that provide business services, such as
professional and technical assistance
and administrative and support services
(a category that includes temporary
help). In addition, construction employ
45
ment continued to climb at a steady
pace, a reflection of the buoyant residential housing market and increased
spending on infrastructure by state and
local governments. In contrast, manufacturing employment continued to
trend down, as cutbacks in industries
that produce wood products, furniture,
and a variety of nondurable goods more
than offset hiring at producers of fabricated metals and machinery. Employment in retail trade has advanced at a
moderate pace this year. Increases in
employment at state and local governments slowed somewhat in the first half
of this year from the pace in the second
half of last year, and federal civilian
employment changed little.
The gradual rise in job opportunities
appears to be attracting some potential
workers back into the labor market. The
labor force participation rate, which had
declined noticeably between 2000 and
2004, edged up over the first half of
2005. Nevertheless, the participation
rate in June, at 66 percent, remained
well below the high of 61 VA percent
reached in early 2000. To some extent,
both the high level of the participation rate in 2000 and the more recent
decline are likely related to cyclical
developments in the economy: The tight
labor markets of the late 1990s, perhaps coupled with the introduction of
work requirements for many welfare
recipients, undoubtedly drew additional
people into the labor force at that time,
while the subsequent recession and slow
recovery in the labor market have discouraged many job seekers in recent
years. However, the downtrend in the
aggregate participation rate also appears
to be associated with structural developments that seem likely to limit future
increases. For example, the large babyboom cohorts are now entering ages at
which labor force participation rates
typically drop off sharply. And, in con-
46
92nd Annual Report, 2005
trast to patterns observed in previous
decades, participation rates for women
between 25 and 54 years of age no
longer appear to be trending up.
Productivity and Labor Costs
Gains in labor productivity have slowed,
on balance, in recent quarters. According to currently published data, output
per hour in the nonfarm business sector
rose 2Vz percent over the year ending in
the first quarter of 2005, down from the
5Vi percent pace registered in the comparable period a year earlier. A deceleration in productivity is not unusual as
an economic expansion matures and as
businesses—which become increasingly
confident about future prospects for
sales—step up their pace of hiring. In
addition, the recent slowdown in productivity growth was from the unusually rapid average rate that prevailed
between 2002 and early 2004. That
elevated rate likely reflected both an
atypical reluctance to hire—as employers reacted to a succession of economic
and geopolitical shocks—and newfound
efficiencies brought about by the better
use of high-tech capital purchased by
businesses in earlier years and by organizational changes implemented to
maintain profitability when the economy was relatively weak. As the impetus from these influences has waned,
productivity growth has fallen back.
Measures of labor compensation for
recent quarters suggest that the remaining slack in labor markets continued to
restrain increases in base wage rates but
that large increases in some of the more
flexible components of worker pay and
for some types of employer-provided
benefits added to labor costs. In particular, compensation per hour in the nonfarm business sector, which is based on
the data from the national income and
product accounts, rose 7 percent over
the four quarters ending in thefirstquarter of this year, having registered a particularly large bulge in the final quarter
of 2004. Much of this sharp rise may
be the result of the exercise of a large
number of stock options late last year,
a development perhaps induced by an
increase in equity prices that boosted
the number of options that were "in
the money" and by a proposed change
in accounting regulations that led some
companies to accelerate the vesting
of options that had been previously
granted. In addition, the strong performance of profits in 2004 may have been
associated with sizable nonproduction
bonus payments at the end of last year.
A more modest rate of increase in
hourly compensation is indicated by the
employment cost index (ECI), which is
based on a quarterly survey of private
nonfarm establishments conducted by
the Bureau of Labor Statistics and which
excludes income receivedfromthe exercise of stock options. In particular, the
ECI measure of hourly compensation
rose 3V2 percent over the twelve months
ending in March 2005, about V2 percentage point less than the increases
over the preceding two years. The wages
and salaries component of the ECI was
up just 2Vi percent over the twelve
months ending in March, a pace similar
to that in the preceding year, while
employer costs for benefits increased
53A percent, a bit below the pace of the
previous year but a sizable gain nonetheless. Part of the outsized rise in benefit
costs stemmed from the need by many
companies to rebuild their definedbenefit pension assets to make up for
earlier losses in those plans. In addition,
health insurance costs have continued to
rise more rapidly than wages, although
the IV2 percent increase in these costs
over the year ending in March of this
year was down from the double-digit
rates of growth in 2002 and 2003.
Monetary Policy Report of July 2005
The acceleration in the nonfarm business measure of hourly compensation,
coupled with the deceleration in productivity, has contributed to a noticeable
pickup in unit labor costs in recent quarters. In particular, unit labor costs rose
4x/4 percent over the four quarters ending in the first quarter of 2005 after
having declined 1 percent over the preceding four quarters. However, to the
extent that the acceleration in compensation was the result of a temporary bulge
in stock option exercises in late 2004,
unit labor costs should moderate significantly this year. Moreover, the implications of such a spike in unit labor costs
for price inflation are probably minimal,
at least as judged by previous spikes of
this nature. For example, the sharp rise
in unit labor costs in 2000 had little or
no subsequent effect on price inflation.
Prices
47
quarter of 2004 and May 2005, having
been pushed higher by a further run-up
in crude oil prices. Gasoline prices
climbed especially rapidly between
February and April, when higher crude
costs were accompanied by a significant
widening in retail margins. Although
these margins subsequently dropped
back, retail gasoline prices in June were
still nearly 10 percent above their level
at the end of last year, and they moved
up further in early July. Electricity
prices also rose sharply over the first
half of 2005 because of higher input
costs for electricity generation.
Consumer food prices increased at an
annual rate of about 2V2 percent over the
first half of 2005, a bit less than in 2004.
Prices for fruits and vegetables dropped
back early in the year, as supplies recovered from the damage associated with
last year's succession of hurricanes.
Although these prices turned up a little
in the spring, they remain below their
fourth-quarter levels. In contrast, meat
prices rose at an annual rate of 3 percent
over the first half of the year; relatively
strong domestic demand has lifted prices
despite increases in the number of cattle
being fed for slaughter and ample supplies of other meats and poultry. Prices
Higher energy prices continued to show
through to overall consumer price inflation this year. The chain-type price index
for personal consumption expenditures
rose at an annual rate of about 2¥z percent between the fourth quarter of 2004
and May 2005, a rate of increase similar
to that over the four quarters of 2004.
Within that total, core PCE prices accel- Alternative Measures of Price Change
erated over that period to an annual rate Percent
of about 2 percent, from 1 Vi percent in
2004
2003
2004. However, data for the consumer
Price measure
to
to
price index (CPI), which are available
2004
2005
through June, suggest that core inflaChain-type (Ql to Ql)
tion has moderated in recent months; Gross domestic product (GDP).. 1.7
2.4
the core CPI rose at an annual rate of Gross domestic purchases
1.7
2.8
Personal consumption
VA percent in the three months endexpenditures (PCE)
1.7
2.2
Excluding food and energy . . .
1.4
1.6
ing in June after having increased at a
3V4 percent pace over the first three Market-based PCE excluding
food and energy
1.3
1.7
months of this year.
Fixed-weight (Q2 to Q2)
The PCE price index for energy, Consumer price index
2.9
2.9
Excluding food and energy . . .
1.8
2.2
which moved up more than 18 percent
in 2004, increased at an annual rate of
NOTE. Changes are based on quarterly averages
nearly 14 percent between the fourth seasonally adjusted data.
of
48
92nd Annual Report, 2005
for beef were also influenced by a
variety of trade restrictions associated
with concerns about mad cow disease:
Both the full resumption of imports
from Canada (which would tend to push
down prices) and the resumption of
exports to other important trading partners (which would tend to push up
prices) were delayed. Prices of food
away from home, for which labor costs
are more important than raw food costs,
rose at an annual rate of about 3V2 percent over the first half of this year, a
little higher than the recent trend.
The pickup in core PCE inflation this
year is due both to the sharp run-up
in energy prices and to higher prices
for other intermediate materials; these
developments have raised production
and distribution costs for a wide range
of domestically produced goods and
services. In addition, the decline in the
exchange value of the dollar into early
2005 continued to push up prices of core
nonfuel imports this year, both for items
used in the domestic production of other
goods and services and for items sold
directly to consumers. Partially offsetting these influences have been the gains
in productivity, which have enabled
firms to absorb a portion of the higher
costs. Moreover, although the price of
crude oil remains high, prices for some
other industrial materials have decelerated or edged down of late: The Journal
of Commerce industrial price index—
which excludes energy items—has
fallen 6 percent since the beginning of
April, while the producer price index for
core intermediate materials rose at an
annual rate of just \lA percent in the
second quarter of this year after having increased at roughly a 7 percent
pace, on average, in the preceding few
quarters.
Measures of shorter-term inflation
expectations have edged higher this
year, while those of longer-term expec
tations have held steady or moved lower.
Most notably, the Michigan SRC survey indicates that households' median
expectations for inflation over the next
twelve months have ranged between
3 percent and ?>lA percent in recent
months, up from just under 3 percent at
the beginning of the year. In contrast,
households' median expectations for
inflation over the next five to ten years,
at a little under 3 percent, are similar to
readings in recent years. The latest Survey of Professional Forecasters likewise
shows that inflation is expected to average 2V2 percent over the next ten years,
a figure unchanged since 2001. Readings of longer-term inflation compensationfromfinancialmarkets show a more
pronounced decline: Inflation compensation as measured by the spread of the
yield on nominal Treasury securities
over their indexed counterparts for the
period five to ten years ahead has fallen
about 50 basis points since the end of
2004.
U.S. Financial Markets
Financial market conditions remained
generally accommodative during the
first half of 2005, as Treasury and private interest rates stayed low. Risk
spreads on speculative-grade debt had
become very tight by the end of the first
quarter, but they subsequently rose, on
balance, after the downgrades of Ford
and General Motors; current levels
suggest more-typical compensation for
default risk. Banks continued easing
terms and standards on lending to businesses. The pace of business borrowing,
which had been sluggish, picked up last
year and remained fairly robust in the
first half of 2005. Nevertheless, strong
corporate profits and the large stockpile of liquid assets already on firms'
balance sheets continued to limit their
demand for external financing. Debt of
Monetary Policy Report of July 2005
the federal government, of state and
local governments, and of households
continued to expand briskly. Broad
equity price indexes were little changed
on net; higher oil prices boosted share
prices in the energy sector but weighed
on other stocks.
Interest Rates
The FOMC boosted the intended federal
funds rate 25 basis points at each of its
four meetings in the first half of the
year. Judging from federal funds futures
quotes, these policy actions had all been
widely anticipated by investors for some
time before each meeting. Since the start
of the year, rates on interest rate futures
contracts that will expire at the end of
2005 have moved up about 60 basis
points in response to evidence of robust
economic growth and concerns about
the possible emergence of inflationary
pressures. Two-year nominal Treasury
yields have risen about 80 basis points
over that period, reflecting both the firming of policy expectations and actual
monetary policy tightening.
Nevertheless, ten-year nominal Treasury yields have edged down so far
this year and are now about 60 basis
points below their level just before the
FOMC meeting in June 2004. Moreover, this fall in long-term yields is a
global phenomenon: Long-term yields
have declined in most foreign industrialized economies, in several cases by
more than in the United States. From the
term structure of interest rates, the tenyear Treasury yield can be decomposed
into a series of ten consecutive one-year
forward rates. The last of these—the
one-year forward rate ending ten years
hence—now stands about 160 basis
points below its level just before the
June 2004 FOMC meeting.
Several potential explanations have
been offered for the decline in long-term
49
yields and distant-horizon forward rates
in the United States since mid-2004.
Among these is the possibility that longterm inflation expectations have fallen
and become more firmly anchored.
Indeed, longer-term inflation compensation, measured by the spread between
the yields on ten-year Treasury
inflation-protected securities and their
nominal counterparts, has fallen about
30 basis points over this period. A second possible explanation is investors'
willingness to accept smaller risk premiums on long-term securities amid
declining macroeconomic and interest
rate uncertainty. The volatility of shortterm interest rates and Treasury yields
implied by option prices has indeed
declined to historically low levels. A
third possibility is that several factors
have spurred an excess of global saving
over planned investment, such as rising incomes in countries with high saving rates, the desire by the aging citizens of many industrialized countries
to save for retirement, and apparently
diminished investment prospects in
many industrialized and developing
economies.
Spreads of yields on investmentgrade corporate debt over those on
comparable-maturity Treasury securities
fell during the first quarter of 2005, and
risk spreads on high-yield corporate debt
reached very low levels. However, in
March, news about difficulties in the
domestic motor vehicle industry apparently became a focal point for a revision
of investors' assessment of risks. Further revelations of accounting irregularities in the insurance industry also
seem to have made investors somewhat
charier of risk. As a result, risk spreads
on corporate bonds and credit default
swaps have widened; speculative-grade
bond spreads are now about 50 basis
points higher than at the start of the
year.
50
92nd Annual Report, 2005
Equity Markets
Broad equity price indexes fell modestly
in the first quarter, but they rebounded
and are now little changed, on net, since
the start of 2005. Thus far this year,
stock prices have been buoyed by continued strong profits and low long-term
interest rates, but higher oil prices and
a few high-profile earnings disappointments have weighed on share prices
outside the energy sector. The forward
earnings-price ratio held about steady
despite the fall in real interest rates.
Equity price volatility implied by quotes
on stock options declined, as the implied volatility on the S&P 500 index
dropped to a record low level of less
than 11 percent.
Net inflows into equity mutual funds
were moderate in the first half of 2005,
down from the rapid pace during the
same period last year. These flows likely
followed the pattern set by share prices,
which surged about 30 percent in 2003,
rose about 10 percent in 2004, and have
been flat so far this year.
Debt and Financial Intermediation
The aggregate debt of the domestic nonfinancial sectors expanded at an annual
rate of about 10 percent in the first quarter of 2005, up from an SVA percent pace
in the fourth quarter of 2004, mainly
because of faster growth of federal government debt and state and local government debt. The mix of household and
business debt growth has shifted modestly since the same time last year.
Household debt decelerated, though it
continued expanding at a rapid pace,
and the growth of business-sector debt
picked up even though ample internal
funding continued to limit firms' need
for external financing.
Commercial bank credit expanded at
an annual rate of 13 percent in the first
quarter of 2005. Financing secured by
residential real estate, including home
mortgages, home equity loans, and
mortgage-backed securities, extended
its long, robust expansion. In May, the
Federal Reserve Board and other federal agencies that regulate depository
institutions issued guidance on sound
underwriting and effective credit-riskmanagement practices for home equity
lending. Recently there has been increased use of potentially riskier types
of mortgages, including adjustable-rate
and interest-only loans, which could
pose challenges to both lenders and
borrowers. Business loans, which had
begun to grow in 2004 after several
years of runoffs, accelerated to a 15 percent annual rate of growth in the first
quarter of 2005, supported in part by
strong demand for short-term financing to fund rising accounts receivable,
inventories, and merger and acquisition
activity.
Credit market assets held by
government-sponsored enterprises declined in the first quarter of this year, as
Freddie Mac and Fannie Mae reduced
their outright holdings of mortgagebacked securities.
The M2 Monetary Aggregate
In the first half of 2005, M2 grew at a
2Vz percent annual rate—probably
slower than nominal GDP and down
from a 5V4 percent pace last year.
Slower growth in liquid deposits—likely
a consequence of their rising opportunity cost—accounted for most of this
deceleration. Yields on retail money
market mutual funds rose noticeably in
the first half but continued to lag interest
rates on market instruments, and assets
in these funds continued their prolonged
runoff. Small time deposits, whose
yields have better kept pace with rising
market interest rates, rose briskly during
Monetary Policy Report of July 2005
the same period. Currency expanded at
a slow rate, apparently a reflection in
large measure of weak demand from
abroad. On net, the velocity of M2 is
estimated to have moved up in the first
half at a somewhat slower pace than
would be expected from the historical
relationship between money, income,
and opportunity cost.
International Developments
Foreign economic activity has expanded
a bit less rapidly this year than in the
second half of 2004, as measured by
an export-weighted average of growth
among U.S. trading partners. The pace
of expansion in the industrial economies
has generally increased, but, with the
important exception of China, this
increase has been offset by moderating
growth in many developing economies.
Inflation has remained well contained in
most countries.
The stance of monetary policy has not
changed this year in most major foreign
economies. The European Central Bank
has held its policy rate constant since
June 2003, and both the Bank of
England and the Bank of Canada have
kept policy rates unchanged after having
raised them in the latter half of 2004.
The Bank of Japan has maintained
its commitment to a policy of quantitative easing until deflation ends, but
in late May it made what it described
as a technical change to allow temporary deviations below the target range
for reserve accounts if banks' demand
for funds is too weak to satisfy the
target. Reserve account balances temporarily fell below ¥30 trillion, the
lower end of the target, in early June.
Monetary policy has also remained
unchanged in most emerging Asian
economies; however, several Latin
American monetary authorities have
continued tightening cycles that began
51
last year in efforts to restrain inflationary pressures.
After having edged up during the first
three months of this year, long-term
interest rates in the major foreign industrial economies have fallen and now
stand below their levels at the start of
the year. As in the United States, the
decline in foreign long-term interest
rates continues a trend that began in
mid-2004. However, long-term rates in
the major foreign industrial economies
have fallen more than rates in the United
States this year. The decline in European long-term rates occurred amid
weak economic news and a shift away
from market expectations of a policy
rate increase. In contrast, long-term rates
in Canada and the United Kingdom
have trended down despite policy rate
increases in the second half of last year
by both countries' central banks, though
market perceptions that the Bank of
England may cut rates have recently
increased. Although the decline in Japanese rates last year was consistent with
both the weak performance of the economy and the persistence of deflation,
long-term rates fell further this year
despite solid growth in the first quarter.
As foreign interest rates have fallen
in recent months, the value of the dollar
has risen. Most of this rise has been
against the currencies of the major
industrial countries; the dollar is largely
unchanged against the currencies of
the United States' other important trading partners. The dollar has appreciated
about 12 percent against the euro and
about 9 percent against the yen and
sterling since the start of the year. Some
of the appreciation against the euro
occurred after voters in France and the
Netherlands rejected the proposed constitution for the European Union by
unexpectedly large margins in May.
European, British, and Canadian
stock indexes have risen more than
52
92nd Annual Report, 2005
8 percent since the start of the year. The
rise in European stock prices is notable
because indicators of economic activity
have been fairly weak. In contrast, Japanese stock prices are now little changed
after having reversed first-quarter gains.
Equity prices in the majority of emerging markets began the year on a strong
note but reversed course late in the first
quarter and currently stand close to their
January levels. Despite these swings,
intraday volatility has remained subdued in most equity markets.
Industrial Economies
Real GDP in Japan increased at an
annual rate of nearly 5 percent in the
first quarter of 2005, bouncing back
from last year's recession. Personal consumption spending reversed its recent
declines, pushing the household saving
rate down further. Private investment
also rose sharply after having grown
tepidly in the second half of 2004. In
contrast, the external sector made a
small negative contribution to GDP, as
imports rose modestly but exports fell.
While Japanese manufacturers of hightech goods reduced their levels of inventories from last year's peak, inventory
stocks of firms outside the high-tech
sector increased, perhaps because of the
slowdown in exports. The labor market
has steadily improved: The unemployment rate has reached a seven-year low,
and the ratio of job offers to job applicants is at a twelve-year high. Despite
the pickup in economic activity and
continuing inflation in wholesale prices,
consumer price deflation has worsened slightly. The GDP price deflator
returned to a year-over-year rate of
deflation of more than 1 percent after
having temporarily registered a more
modest decline in the fourth quarter of
2004.
The pace of activity in the euro area
appears to have slowed after a stronger
start to the year. Real GDP grew at a
2 percent annual rate in the first quarter,
as private consumption rose moderately
and both households and firms switched
expenditures away from imports and
toward domestically produced goods.
Both Germany and Spain grew at rates
above the area average in the first quarter. In contrast, real GDP in both Italy
and the Netherlands declined, while
French growth was slower than in most
of 2004. Measures of activity point
toward slower growth in the euro area
in the second quarter. Retail sales, which
had risen in the first quarter, were
roughly flat, on average, in April and
May. The trade balance fell in April,
threatening a main engine of growth,
though the recent rise in the dollar
against the euro should help stimulate
export demand going forward. Twelvemonth consumer price inflation edged
up in June to just above the European
Central Bank's target ceiling of 2 percent for inflation over the medium term.
The European Central Bank's measure
of core inflation, which excludes energy
and unprocessed foods, has eased since
January to an annual rate comfortably
below 2 percent.
Consumer spending in the United
Kingdom increased only modestly in the
first quarter, slowing real GDP growth
to lx/2 percent. Nevertheless, the labor
market remains tight, as unemployment
is at its lowest levels since the mid1970s and real earnings continue to
trend up. The twelve-month rate of consumer price inflation ticked up in June
to the Bank of England's target of 2 percent. In its May Inflation Report, the
Bank of England forecast that inflation
would temporarily rise but stay near the
target over a two-year period. House
prices have been fairly stable this year,
Monetary Policy Report of July 2005
53
Economic developments in other
Asian emerging-market economies have
varied. Hong Kong maintained its strong
performance. As in China, growth in
Hong Kong has been driven by both
investment and exports. Export growth
has also played an important role in
supporting growth in most of the other
countries in this region, but domestic
demand, particularly inventory investment, has declined in many economies
so far this year. Inflation has risen
slightly, reflecting higher food and
energy prices, but remains well contained and under 3 percent in most
countries.
The Mexican economy has slowed so
far this year, as demand for its manufacturing exports has weakened and monetary tightening has tempered investment and consumption demand. The
Bank of Mexico has left monetary polEmerging-Market Economies
icy unchanged since March, but its tightChinese real GDP continues to rise rap- ening over the preceding twelve months
idly following strong growth in 2004. raised short-term interest rates 500 basis
Economic expansion has been led by points. Twelve-month consumer price
investment, exports, and, more recently, inflation has fallen from its levels of late
a surge in domestic production of goods last year but still stands above the Bank
that had previously been imported. of Mexico's target range of 2 percent to
Investment expenditure has remained 4 percent. After having risen in the secvigorous despite the government's ond half of last year, core inflation has
attempts early last year to slow its rate also trended down in recent months.
of increase. Import growth slowed in the
Economic growth in most South
first quarter, but the rise of exports was American economies has also slowed
unabated, leading to a significant widen- compared with the pace of activity at
ing of the trade surplus. Although recent the end of 2004. Brazil's real GDP rose
attention has focused on China's exports at only a \lA percent annual rate in the
of textiles, export growth has remained first quarter, as both private consumpstrong across most major categories tion and investment declined in the wake
of goods. The slowdown in imports of the Brazilian central bank's decision
has also been broadly based. Despite to begin raising its policy rate in the
China's strong rate of economic expan- second half of 2004 to counter inflationsion, consumer price inflation fell to less ary pressures. Exports, which rose rapthan 3 percent in the first quarter and idly and outpaced imports, provided the
has remained low, as declining food only bright spot. Twelve-month inflaprices have offset modest increases in tion has remained above 7 percent, and
nonfood prices.
the central bank has continued to raise
and household net mortgage borrowing
has also been subdued.
Growth in Canada remains moderate.
Continuing a pattern that has largely
held for the past two years, private
consumption and investment demand
rose in the first quarter while net exports
fell. Activity in the second quarter
appears to have been solid. Data on
housing starts indicate that construction
spending grew further, and the merchandise trade surplus improved in April,
as exports rose and imports decreased
slightly. Twelve-month consumer price
inflation fell in May to about IV2 percent after having averaged slightly above
2 percent in the first quarter. The Bank
of Canada's measure of core inflation
has stayed below 2 percent throughout
this year.
54
92nd Annual Report, 2005
its policy rate this year. Argentina has
gradually recovered from its 2001 crisis,
but real GDP sharply decelerated in
the first quarter. The unemployment
rate, which had steadily fallen over the
past few years, also edged up slightly.
Twelve-month consumer price inflation
appears to have stabilized after having
been pushed up by food price increases
earlier in the year, but it still lies above
the central bank's unofficial target range
of 5 percent to 8 percent. The Argentine
government recently completed the final
settlement of its debt exchange but has
not yet resolved the treatment of the
remaining investors (holders of roughly
one-fourth of all defaulted government
bonds) who rejected the agreement. •
Federal Reserve Operations
57
Banking Supervision and Regulation
The Federal Reserve has supervisory
and regulatory authority over a wide
range of financial institutions and activities. It works with other federal and
state supervisory authorities to ensure
the safety and soundness of financial
institutions and the stability of the financial markets.
In 2005, U.S. banking organizations
reported record earnings and maintained
strong asset quality. However, banking
organizations also faced some challenges during the year. Throughout the
year, a flattening yield curve placed
pressure on bank net interest margins,
necessitating adjustments to balancesheet positions and interest-rate risk
management strategies at many institutions. In September, banking organizations in several Gulf Coast states faced
extraordinary challenges in the aftermath of Hurricanes Katrina and Rita.
For the most part, the banking organizations supervised by the Federal Reserve
in the affected areas resumed operations expeditiously. The Federal Reserve
and the other federal banking agencies
encouraged banking organizations to be
flexible in responding to the needs- of
borrowers and other customers in communities and regions affected by the
disasters. At year-end, the ramifications
of the hurricanes on banking organizations had not been fully quantified.
The federal banking agencies continue
to work with the banking organizations
in the affected regions as they deal with
the after-effects of the storms.
During the latter half of the year, personal bankruptcy filings rose sharply
as a result of consumers accelerating
their filings before the effective date
of the 2005 amendments to the Bankruptcy Code. These filings temporarily increased loan losses—particularly
within credit card portfolios—but had
little effect on the industry's sound loan
quality. The number of consumer bankruptcy filings is expected to diminish in
2006.
Rapid growth in home equity lines of
credit, nontraditional residential mortgages, and commercial real estate loans
raised some supervisory concerns in
2005 and led the federal banking agencies to issue or propose guidance on
sound risk-management practices for
these lines of business. Nevertheless,
delinquencies in these and most other
loan segments remained low, and nonperforming asset ratios reached very low
levels during the year.
While banks and supervisors have traditionally ranked credit and market risks
as top concerns, in recent years these
risks often have been overshadowed by
compliance and other operational risks.
Some of the largest banking organizations have experienced rapid growth and
significantly expanded their products
and services, heightening supervisory
concern about whether these organizations' compliance risk management
practices are keeping pace. One significant area of concern for supervisors is
compliance with anti-money-laundering
laws and regulations. In 2005, the Federal Reserve, in conjunction with the
other federal banking agencies and
the Department of the Treasury's Financial Crimes Enforcement Network
(FinCEN), issued the Bank Secrecy Act/
Anti-Money Laundering (BSA/AML)
Examination Manual to help strengthen
58
92nd Annual Report, 2005
enforcement of these laws and further promote consistent examination
approaches among supervisors.
Federal Reserve staff continue to
devote considerable effort to revising
domestic and international capital standards. In 2006, the U.S. banking agencies expect to issue a notice of proposed
rulemaking (NPR) setting forth their
views and seeking public comment with
respect to the U.S. implementation of
the Basel II capital accord, an international agreement among banking supervisors that was issued in June 2004. *
The Federal Reserve is also working
with the other federal banking agencies to develop supervisory guidance
for both examiners and the banking
industry.
The U.S. banking organizations
expect that only a small number of large,
internationally active U.S. banking organizations will be subject to the Basel II
framework. The vast majority of banking organizations are expected to remain
on the existing risk-based capital framework (Basel I). To update Basel I and
mitigate some of the consequences of
the differences between Basel I and
Basel II, the federal banking agencies in
October jointly published an advance
notice of proposed rulemaking that contains proposed revisions to Basel I that
would enhance its risk sensitivity.
Scope of Responsibilities for
Supervision and Regulation
The Federal Reserve is the federal
supervisor and regulator of all U.S. bank
1. The agreement, titled "International Convergence of Capital Measurement and Capital Standards: A Revised Framework," was developed by
the Basel Committee on Banking Supervision,
which is made up of representatives of the central
banks or other supervisory authorities of thirteen
countries. The November 2005 updated version is
available on the web site of the Bank for International Settlements (www.bis.org).
holding companies, including financial
holding companies formed under the
authority of the 1999 Gramm-LeachBliley Act, and 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.2
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
activities with the other federal banking
agencies, state agencies, functional regulators, and the bank regulatory agencies of other nations.
2. 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.
Banking Supervision and Regulation
Supervision for
Safety and Soundness
To promote 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
59
holding companies and their nonbank
subsidiaries. Preexamination planning
and on-site review of operations are
integral parts of the overall effort to
ensure the safety and soundness of banking organizations. Whether an examination or an inspection is being conducted,
the review of operations 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
State Member Banks and Holding Companies, 2001-2005
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
2005
2004
2003
2002
2001
907
1,318
783
563
220
919
1,275
809
581
228
935
1,912
822
581
241
949
1,863
814
550
264
970
1,823
816
561
255
394
10,261
501
496
457
39
5
355
8,429
500
491
440
51
9
365
8,295
454
446
399
47
329
7,483
439
431
385
46
8
312
6,905
413
409
372
37
4
4,760
890
3,420
3,233
170
3,063
187
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
591
38
600
36
612
32
602
30
567
23
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.
60
92nd Annual Report, 2005
applicable laws and regulations. The
table provides information on the examinations and inspections conducted by
the Federal Reserve during the past five
years.
To manage the supervisory process,
the Federal Reserve follows a riskfocused approach that seeks to focus
supervisory resources on (1) those business activities posing the greatest risk to
banking organizations and (2) the organizations' management processes for
identifying, measuring, monitoring, and
controlling risks. The key features of the
supervision program for large complex
banking organizations (LCBOs) are
(1) identifying those LCBOs that are
judged, on the basis of their shared risk
characteristics, to present the highest
level of supervisory risk to the Federal
Reserve System, (2) maintaining continual supervision of these organizations
so that the Federal Reserve's assessment
of each organization's condition is
current, (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 System-wide
and interagency information-sharing
through automated systems.
For other banking organizations,
the risk-focused supervision program
provides that examination procedures
should be tailored to each bank's
size, complexity, and risk profile.
Examinations entail both off-site and
on-site work, including planning, preexamination visits, detailed documentation, and examination reports tailored to the scope and findings of the
examination.
State Member Banks
At the end of 2005, 907 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,
although certain well-capitalized, wellmanaged organizations having assets of
less than $250 million may be examined
once every eighteen months. The Federal Reserve conducted 563 exams of
state member banks in 2005.
Bank Holding Companies
At year-end 2005, a total of 5,860 U.S.
bank holding companies were in operation, of which 5,154 were top-tier bank
holding companies. These organizations
controlled 6,160 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
Banking Supervision and Regulation
that have primary responsibility for 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 2002.3 The program permits
a more flexible approach to the supervision of these companies. In 2005, the
Federal Reserve conducted 496 inspections of large bank holding companies
and 3,233 inspections of small, noncomplex bank holding companies.
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 a wider range of financial
activities, including full-scope securities
underwriting, merchant banking, and
insurance underwriting and sales. 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 firms).
As of year-end 2005, 591 domestic
bank holding companies and 38 foreign
banking organizations had financial
3. 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/).
61
holding company status. Of the domestic financial holding companies, 39
had consolidated assets of $15 billion
or more; 115, between $1 billion and
$15 billion; 82, between $500 million
and $1 billion; and 355, 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/anti-money-laundering (AML)
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 its supervised institutions for compliance with various antimoney-laundering laws and regulations.
During examinations of state member
banks and U.S. branches and agencies of
foreign banks and, when appropriate,
62
92nd Annual Report, 2005
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.
Quantitative Risk Management
To better coordinate the System's existing advanced risk-management and
risk-measurement efforts, the division
created a quantitative risk management
group in early 2005. This new group
will focus on Basel II quantification
and validation, and will play a broader
role by helping the System set priorities on the allocation of quantitative
resources, identifying important issues
at both systemic and institutional levels,
collaborating on original research and
data analysis with colleagues in the Federal Reserve's economic research divisions, and generally providing input on
quantitative matters. In 2005, the group
participated in the fourth Basel II Quantitative Impact Study (QIS-4) and other
interagency efforts, participated in Basel
Committee on Banking Supervision
(Basel Committee) working groups and
projects, and assisted with quantitative
training for examiners and other staff.
Business Continuity
In 2005, the Federal Reserve continued
its efforts to strengthen the resilience of
the U.S. financial system in the event of
unexpected disruptions. Throughout 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 provided some guidance
to help firms that are implementing
the sound practices verify their efforts.
In addition, the agencies continue to
closely coordinate efforts to ensure a
consistent supervisory approach for
business-continuity 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. All
safety and soundness examinations are
expected to include a review of information technology risks and activities. During 2005, the Federal Reserve was the
lead agency in 2 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
Banking Supervision and Regulation
together hold more than $26 trillion of
assets in various fiduciary or custodial
capacities. During on-site examinations
of fiduciary activities, an 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, riskmanagement, and audit and control
procedures, are also evaluated. In 2005,
Federal Reserve examiners conducted
119 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 2005, the Federal
Reserve conducted on-site examinations
at 24 of the 77 state member banks
and bank holding companies that were
registered as transfer agents. In 2005,
the Federal Reserve also 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
63
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 2005, the
Federal Reserve conducted 9 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 that both state member banks and bank holding companies that act as municipal securities
dealers comply with the Securities Act
Amendments of 1975. Municipal securities dealers 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
2005, 7 were examined during the year.
Securities Credit Lenders
Under the Securities Exchange Act of
1934, the Board is responsible for regulating credit in certain transactions
involving the purchase or carrying of
securities. As part of its general examination program, the Federal Reserve
examines the banks under its jurisdiction for compliance with the Board's
Regulation U. In addition, the Federal
Reserve maintains a registry of persons
other than banks, brokers, and dealers
who extend credit subject to Regulation U. 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).
64
92nd Annual Report, 2005
At the end of 2005, 628 lenders other
than banks, brokers, or dealers were registered with the Federal Reserve. Other
federal regulators supervised 216 of
these lenders, and the remaining 412
were subject to limited Federal Reserve
supervision. On the basis of regulatory
requirements and annual reports, the
Federal Reserve exempted 181 lenders
from its on-site inspection program. The
securities credit activities of the remaining 231 lenders were subject to either
biennial or triennial inspection. Eighty
inspections were conducted during the
year, compared with 55 in 2004.
Enforcement Actions
and Special Examinations
The Federal Reserve has enforcement
authority over the banking organizations
it supervises and their affiliated parties.
Enforcement actions may be taken to
address unsafe and unsound practices or
violations of any law or regulation. Formal enforcement actions include ceaseand-desist orders, written agreements,
removal and prohibition orders, and
civil money penalties. In 2005, the
Federal Reserve completed 64 formal
enforcement actions. Civil money penalties totaling $40.2 million were
assessed. All civil money penalties, as
directed by statute, are remitted either
to the Department of the Treasury or to
the Federal Emergency Management
Agency. Enforcement orders, which
are issued by the Board, and written
agreements, which are executed by
the Reserve Banks, are made public
and posted on the Board's web site
(www.federalreserve.gov/boarddocs/
enforcement).
In addition to formal enforcement
actions, the Reserve Banks completed
95 informal enforcement actions in
2005. Informal enforcement actions
include memoranda of understanding
and board of directors resolutions. Information about these actions is not available to the public.
Surveillance and
Off-Site Monitoring
The Federal Reserve uses automated
screening systems to monitor the financial condition and performance of state
member banks and bank holding companies between on-site examinations. This
analysis helps to direct examination
resources to institutions that exhibit
higher risk profiles. Screening systems
also assist in the planning of examinations by identifying companies that are
engaging in new or complex activities.
Since 1994, the Federal Reserve's
screening systems have included a set
of two models that together are known
as the System to Estimate Examination
Ratings (SEER). These models use
econometric techniques to estimate, for
each bank, a supervisory rating and
probability of failure using the supervisory information and financial data
banks report on their Reports of Condition and Income (Call Reports). During
2005, the Federal Reserve completed an
initiative to enhance the SEER models;
this effort resulted in a new off-site
monitoring tool known as the Supervision and Regulation Statistical Assessment of Bank Risk model. The new
model is scheduled for implementation
in early 2006. To supplement these
screens that use financial and supervisory data, the Federal Reserve also
monitors various 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.
The Federal Reserve also prepares
quarterly Bank Holding Company Performance Reports (BHCPRs) for use in
monitoring and inspecting supervised
Banking Supervision and Regulation
65
banking organizations. The reports con- International Activities
tain, for individual bank holding companies, financial statistics and com- The Federal Reserve supervises the forparisons with peer companies. BHCPRs eign branches and overseas investments
are compiled from data provided by of member banks, Edge Act and agreelarge bank holding companies in quar- ment corporations, and bank holding
terly regulatory reports (FR Y-9C and companies and also the investments
FR Y-9LP). BHCPRs are made avail- by bank holding companies in export
able to the public on the National Infor- trading companies. In addition, it supermation Center web site, which can be vises the activities that foreign banking
organizations conduct through entities
accessed at www.ffiec.gov.
in the United States, including branches,
During 2005, the surveillance function implemented two major upgrades agencies, representative offices, and
to its web-based Performance Report subsidiaries.
Information and Surveillance Monitoring (PRISM) application. PRISM is a
Foreign Operations of
querying tool used by Federal Reserve
U.S. Banking Organizations
analysts to access and display financial,
surveillance, and examination data. In To examine the international operations
the analytical module, users can cus- of state member banks, Edge Act and
tomize the presentation of institutional agreement corporations, and bank holdfinancial information drawn from Call ing companies, the Federal Reserve
Reports, Uniform Bank Performance generally conducts its examinations or
Reports, FR Y-9 statements, BHCPRs, inspections at the U.S. head offices of
and other regulatory reports. In the sur- these organizations—where the ultimate
veillance module, users can generate responsibility for their foreign offices
reports summarizing the results of Sys- lies. Examiners also visit the overseas
tem surveillance screens for banks and offices of U.S. banks to obtain financial
bank holding companies. The upgrades and operating information and, in some
enhanced the range of regulatory data instances, to evaluate the organizations'
available for queries, expanded the num- efforts to implement corrective measures
ber of surveillance screens, added new or to test their adherence to safe and
search options, and improved the user sound banking practices. Examinations
interface.
abroad are conducted with the cooperaThe Federal Reserve works through tion of the supervisory authorities of the
the Federal Financial Institutions Exam- countries in which they take place; when
ination Council (FFIEC) Task Force on appropriate, the examinations are coorSurveillance Systems to coordinate sur- dinated with the OCC.
veillance activities with the other fedAt the end of 2005, 55 member banks
eral banking agencies.4
were operating 748 branches in foreign
countries and overseas areas of the
United States; 34 national banks were
operating 693 of these branches, and 21
state member banks were operating the
4. The member agencies of the FFIEC are the remaining 55. In addition, 16 nonmemFederal Reserve Board, the Federal Deposit Insurber banks were operating 20 branches in
ance Corporation, the National Credit Union
foreign countries and overseas areas of
Administration, the Office of the Comptroller of
the United States.
the Currency, and the Office of Thrift Supervision.
66
92nd Annual Report, 2005
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
permissible for member banks.
At year-end 2005, 70 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 2005, 183 foreign
banks from 54 countries were operating
220 state-licensed branches and agen
cies (of which 8 were insured by the
Federal Deposit Insurance Corporation)
as well as 50 branches licensed by the
OCC (of which 4 had FDIC insurance).
These foreign banks also directly owned
12 Edge Act and agreement corporations and 2 commercial lending companies; in addition, they held an equity
interest of at least 25 percent in 67 U.S.
commercial banks.
Altogether, the U.S. offices of these
foreign banks at the end of 2005 controlled approximately 18 percent of U.S.
commercial banking assets. These foreign banks also operated 73 representative offices; an additional 52 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.
In cooperation with the other federal
and state banking agencies, the Federal Reserve conducts a joint program
for supervising the U.S. operations
of foreign banking organizations. 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 man-
Banking Supervision and Regulation
ner. The Federal Reserve conducted or
participated with state and federal regulatory authorities in 338 examinations in
2005.
Technical Assistance
In 2005, the Federal Reserve continued
to provide technical assistance on bank
supervisory matters to foreign central
banks and supervisory authorities. Technical assistance involves visits by Federal Reserve staff members to foreign
authorities as well as consultations with
foreign supervisors who visit the Board
or the Reserve Banks. Technical assistance in 2005 was concentrated in Latin
America, Asia, and former Soviet bloc
countries. The Federal Reserve, along
with the OCC, FDIC, and Department
of the Treasury, was also an active
participant in the newly launched
Middle East and North Africa (MENA)
Financial Regulators' Training Initiative, which is part of the U.S. government's Middle East Partnership
Initiative.
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 Monetary Fund, the World Bank, the InterAmerican Development Bank, the Asian
Development Bank, the Basel Committee, and the Financial Stability Institute.
The Federal Reserve is also an associate member of the Association of
Supervisors of Banks of the Americas
(ASBA), an umbrella group of bank
supervisors from countries in the Western Hemisphere. The group, headquartered in Mexico, promotes communication and cooperation among bank
supervisors in the region; coordinates
training programs throughout Latin
67
America, with the help of national banking supervisors and international agencies; and aims to help members develop
banking laws, regulations, and supervisory practices that conform to international best practices. For the past
three years, a Federal Reserve official
has served as chairman of the board
of directors of ASBA; the Federal
Reserve also contributes significantly to
ASBA's organizational management and
to its training and technical assistance
activities.
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, such as the Basel Committee
and the International Accounting Standards Board (IASB), and provide support for the work of the FFEEC.
Capital Adequacy Standards
During 2005, the Federal Reserve, OCC,
FDIC, and OTS continued to draft proposed revisions to their risk-based capital adequacy regulations to reflect the
June 2004 international agreement on
capital adequacy for banking organizations, commonly known as Basel n. The
agencies also issued an advance notice
of proposed rulemaking (ANPR) on
potential changes to the Basel I framework; these proposed changes would
affect banking organizations not subject
to Basel II. Further, the agencies issued
joint interagency guidance on capital
requirements for asset-backed commercial paper (ABCP) programs, and they
are developing a proposal to revise the
68
92nd Annual Report, 2005
capital requirements for trading book
positions subject to the market risk capital rule. In addition, the Federal Reserve
adopted a final rule on the treatment of
trust preferred securities in the tier 1
capital of bank holding companies.
Risk-Based Capital Standards
for Certain Internationally Active
Banking Organizations
weighted assets, with the minimum for
tier 1 capital set at 4 percent and the
minimum for total qualifying capital set
at 8 percent. The components of tier 1
and total qualifying capital have been
adjusted to an unexpected-loss basis
consistent with the denominator. The
primary difference between the current
rules and the proposed Basel II rule is
the internal-ratings-based methodologies Basel II uses to calculate riskweighted assets; the proposed rule also
contains the Basel II advanced measurement approach for operational risk.
Banking organizations using the methods set forth in the NPR would also
be subject to certain public disclosure
requirements to foster transparency and
market discipline. All banking organizations, including those using the internalratings-based approach for credit risk
and the advanced measurement approach for operational risk, would continue to be subject to the tier 1 leverage
ratio requirement and the market risk
capital rule, if applicable, as well as the
prompt corrective action rules.
During 2005, the agencies continued to
prepare for the U.S. implementation of
Basel II. In early 2006, the U.S. banking
agencies expect to make available a
notice of proposed rulemaking (NPR)
setting forth their views on Basel II and
seeking public comment on the U.S.
plan for implementing the agreement.
The agencies expect that only a small
number of large, internationally active
U.S. banking organizations will be
required to use the Basel II framework.
In April, the agencies announced preliminary results from the fourth quantitative impact study (QIS-4), which
evaluated the potential impact of implementing Basel II at the approximately
thirty banking organizations that par- Risk-Based Capital Standards
ticipated in the study. The preliminary for Banking Organizations Not Subject
results of QIS-4 showed a larger overall to Basel II
decline and a greater dispersion in regulatory capital requirements than had On October 20, the agencies issued for
been originally expected. QIS-4 results public comment an ANPR that considalso indicated that participating institu- ers modifications to the existing risktions have additional work to do to com- based capital framework, or Basel I,
plete the systems and processes they which would continue to apply to bankneed to have in place before Basel II is ing organizations not subject to Basel II.
implemented. Partly as a result of con- The changes seek to enhance the risk
cerns identified in the analysis of QIS-4 sensitivity of Basel I by increasing the
results, the agencies announced on Sep- number of risk-weight categories, pertember 30 additional prudential safe- mitting greater use of external ratings as
guards and a one-year delay in the time- an indicator of credit risk for externally
line for Basel II implementation in the rated exposures, expanding the types of
guarantees and collateral that may be
United States.
The NPR will maintain the basic recognized, and modifying the risk
minimumrisk-basedcapital ratio format weights associated with residential
of regulatory capital divided by risk- mortgages. The ANPR also discusses
Banking Supervision and Regulation
approaches that would change the
credit-conversion factor for certain types
of commitments, assign a risk-based
capital charge to certain securitizations
with early-amortization provisions, and
assign a higher risk weight to loans
that are 90 days or more past due or in
nonaccrual status and to certain commercial real estate exposures. The agencies are also considering modifying the
risk weights on certain other retail and
commercial exposures. The comment
period for the ANPR will end in January
2006.
Asset-Backed
Commercial Paper Programs
On August 4, the agencies issued "Interagency Guidance on the Eligibility of
Asset-Backed Commercial Paper Program Liquidity Facilities and the Resulting Risk-Based Capital Treatment." The
guidance reiterates the agencies' position that the primary function of an eligible ABCP liquidity facility should
be to provide liquidity—not to enhance
credit. The guidance clarifies (1) the
application of the asset-quality test set
forth in the agencies' risk-based capital
rules for determining the eligibility of
an ABCP liquidity facility and (2) the
resulting risk-based capital treatment
of such a facility for banking organizations. An eligible liquidity facility must
have an asset-quality test that precludes
funding against assets that are 90 days
or more past due, in default, or below
investment grade. This test implies that
the banking organization providing the
ABCP liquidity facility should not be
exposed to the credit risk associated
with such assets. The guidance clarifies
that an ABCP liquidity facility meets
the asset-quality test if, at all times
throughout the transaction, (1) the
liquidity provider has access to certain
types of acceptable credit enhancements
69
that support the liquidity facility and
(2) the notional amount of such credit
enhancements exceeds the amount of
underlying assets that are 90 days or
more past due, defaulted, or below
investment grade that the liquidity provider may be obligated to fund under the
facility.
Other Capital Issues
In March, the Board adopted a final rule
that allows for the continued inclusion
of trust preferred securities in the tier 1
capital of bank holding companies, subject to stricter quantitative limits and
clearer qualitative standards. The final
rule revised the quantitative limits
applied to the aggregate amount of certain core capital elements that may be
included in tier 1 capital and revised the
qualitative standards for capital instruments included in regulatory capital,
consistent with long-standing Board
policies.
Board staff members are working
with the other agencies to develop a
proposal to implement a revised, more
risk-sensitive methodology for determining the capital charge for positions
subject to the market risk capital rule.
The proposal will address the issues
identified in the July 2005 paper "The
Application of Basel II to Trading
Activities and the Treatment of Double
Default Effects," which was published
by the Basel Committee and the International Organization of Securities Commissioners (IOSCO).
The Board's staff also conduct supervisory analyses of innovative capital
instruments and novel transactions in
order to determine the appropriate
supervisory and regulatory capital treatment and to identify and address
supervisory concerns. These reviews
frequently require staff to review the
various ftinding strategies proposed in
70
92nd Annual Report, 2005
New Bank Secrecy Act/Anti-Money Laundering Examination Manual
This intemgency manual is a significant step toward consistency in the area of
anti-money-laundering examination. The new manual promotes a shared understanding of the Bank Secrecy Act and anti-money-laundering regulations and
supervisory expectations.
Susan Schmidt Bies, Member, Board of Governors
Jane 2005
The rclcaM: r- in.. Bank Srcrec}
Act/Anil
Money Laundering Examination Manual
on June 30, 2005, marked an important
milestone for the federal banking agencies
in their effort to enhance the consistent
application of the Bank Secrecy Act
(BSA). The five federal financial institutions regulatory agencies1 developed the
new manual, in collaboration with the
1. The agencies are the Board of Governors
of the Federal Reserve System (Federal
Reserve), Federal Deposit Insurance Corporation (FDICX National Credit Union Administration (NCUA), Office of the Comptroller of the
Currency (OCC), and Office of Thrift Supervision (OTS).
applications for acquisitions and other
transactions that institutions submit to
the Federal Reserve.
Bank-Owned Life Insurance
In 2005, an interagency working group
issued "Interagency Interpretations of
the Interagency Statement on the Purchase and Risk Management of Life
Insurance." The interpretations clarify
financial reporting, credit-exposure limits, concentration limits, and the appropriate methods for calculating the
amount of insurance a banking organization may purchase.
Department of the Treasury's Financial
Crimes Enforcement Network {FinCEN),
The state banking agencies and Treasury's
Office of Foreign Assets Control (OFAC)
also contributed to this initiative.
In the manual, the agencies emphasize
that banking organizations are responsible
for establishing and implementing riskbased policies* procedures, and processes
to comply with the BSA and to safeguard their operations from money laundering and terrorist financing. The agencies focus on a banking organization's
sound risk assessment so that the banking organization can develop an antimoney-laundering program calibrated to
its own risk profile. The agencies further <
Bank Holding Company
Rating System
In January, the Federal Reserve adopted
a revised bank holding company rating
system known as RFI/C(D). The three
main components of the system are Risk
management, Financial condition, and
potential Impact of the parent company
and nondepository subsidiaries (collectively, nondepository entities) on the
subsidiary depository institution(s). The
fourth component, Depository institution, generally mirrors the primary regulator's assessment of the subsidiary
depository institution(s). The revised
rating system reflects the shift that has
Banking Supervision and Regulation
$r tfe'^primary role of the
examiner is to evaluate the adequacy of a
banking organization's controls and not to
second-guess individual, transaction-level
decisions.
To promote a greater understanding of
the BSA and anti-moiiey-laundering (BSA/
AML) requirements outlined in the manual,
the Federal Reserve, along with the other
federal banking agencies, FinCEN, and
the OFAC? participated in a series of outreach events following the manual's
release. The events, intended for the banking industry and federal and state banking
agency examination staff, consisted of
nationwide conference calls, regional outreach meetings, and a simultaneous broadcast via the Internet. More than 23^000
bankers and examiners participated In these
sessions, where they also had the opportunity to ask questions and receive feedback
on specific issues.
Moving forward, the agencies will
ensure that the manual provides the industry and examiners with relevant, up-to-date
information* The manual will be revised in
response to changes in law or regulation,
occurred over time in the Federal
Reserve's supervisory practices: a shift
away from historical analyses of a
BHC's financial condition toward moreforward-looking assessments of its risk
management and financial factors. One
year into the implementation of the new
ratings system, Federal Reserve supervisors have found it to be an effective
tool for communicating key supervisory
points to banking organizations.
Bank Secrecy Act and
Anti-Money Laundering
In June 2005, the FFIEC issued a new
examination manual that compiles
71
other guidance, or evolving rlslts or controls. The agencies will hold periodic discussions with banking industry represen*
tatives so that issues related to the manual
may be raised. These sessions will be held
through the Bank Secrecy Act Advisory
Group (BSAAG), which is a public-private
partnership sponsored by the Department
of the Treasury devoted to evaluating BSArelated matters. Specifically, the meetings
will be held through a BS AAG subcommittee on examination issues, co-chaired by
the Federal Reserve.
The Federal Reserve recognizes that
banking organizations have invested significant resources to comply with the
BSA and related regulations in order to
deter and detect money laundering and
terrorist financing. Both the banking industry and the regulatory agencies share the
goal of combating the threats these crimes
pose to the US. financial system. The
Federal Reserve remains committed to
ensuring that supervisory expectations
for BSA/AML compliance are clearly
understood by banking organizations and
examiners.
existing regulatory requirements, supervisory expectations, and sound practices for BSA/AML compliance. To foster consistency, the manual includes the
examination procedures that each agency's examiners are expected to follow.
(For more information, see the box
"New Bank Secrecy Act/Anti-Money
Laundering Examination Manual.")
In March and April, the Federal
Reserve, FDIC, OCC, OTS, NCUA, and
FinCEN issued guidance to clarify the
requirements of the BSA/AML regulations for banking organizations that
provide banking services to moneyservices businesses operating in the
United States.
72
92nd Annual Report, 2005
International Guidance on
Supervisory Policies
As a member of the Basel Committee,
the Federal Reserve in 2005 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.
Capital Adequacy
To address issues not fully resolved in
the Basel II framework, the Federal
Reserve in 2005 continued to participate in a number of Basel Committee working groups, including a joint
Basel Committee-IOSCO working
group reviewing 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 positions that
are subject to a market risk capital
requirement.
Risk Management
The Federal Reserve contributed to several supervisory policy papers, reports,
and recommendations issued by the
Basel Committee during 2005 that were
generally aimed at improving the supervision of banking organizations' riskmanagement practices.5
5. Papers issued by the Basel Committee can
be accessed via the Bank for International Settlements web site at www.bis.org.
• "Home-Host Information Sharing for
Effective Basel II Implementation,"
issued as a consultative document in
November by the Basel Committee, in
association with the Core Principles
Liaison Group
• "Enhancing Corporate Governance
for Banking Organizations," issued in
July (to update guidance published in
1999)
• "The Application of Basel II to Trading Activities and the Treatment of
Double Default Effects," issued in
July by the Basel Committee and
IOSCO
• "Compliance and the Compliance
Function in Banks," issued in April
Core Principles for
Effective Banking Supervision
The Core Principles, developed by the
Basel Committee in 1997, have become
the de facto international standard for
sound prudential regulation and supervision of banks. During 2005, the Federal
Reserve participated in a Basel Committee effort to update the Core Principles
in light of the significant changes that
have occurred in international banking
regulation and the experience that has
been gained since the principles were
last revised in 1999.
Joint Forum
In 2005, the Federal Reserve also continued its participation in the Joint
Forum—a group made up of representatives of the Basel Committee, IOSCO,
and the International Association of
Insurance Supervisors. The Joint Forum
is a forum for supervisors to discuss
their experiences with financial conglomerates. The Federal Reserve contributed to several supervisory policy
Banking Supervision and Regulation
papers, reports, and recommendations
issued by the Joint Forum during 2005.6
• "High-Level Principles for Business
Continuity," issued in December
• "Credit Risk Transfer," issued in
March
• "Outsourcing in Financial Services,"
issued in February
International Accounting
and Disclosure
The Federal Reserve participates in the
Basel Committee's Accounting Task
Force (ATF) 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 IASB.
The IASB issued an amendment in
June that reflects extensive Basel Committee and European Central Bank comments. The amended fair value option
(FVO) rule in International Accounting
Standard (IAS) 39 allows an organization to irrevocably elect, at inception,
a fair value measurement for certain
financial instruments, with gains and
losses from changes in fair value
recorded in current earnings. The FVO
rule amendment to IAS 39 will become
effective January 1, 2006.
6. Papers issued by the Joint Forum can be
accessed via the Bank for International Settlements web site at www.bis.org.
73
During 2005, the Federal Reserve had
a key role in the development of ATF's
consultative document "Supervisory
Guidance on the Use of the Fair Value
Option by Banks under International
Financial Reporting Standards," issued
for public comment in July. The document provides guidance for the prudential supervision of banks in their implementation of the FVO rule under the
amended IAS 39.
The Federal Reserve also provided
input on ATF's proposed consultative
document "Sound Credit Risk Assessment and Valuation for Loans," which
was issued for comment in November.
The guidance consists of ten principles
addressing supervisory expectations
for and supervisory evaluations of a
banking organization's establishment
and support of its loan-loss allowance
accounts.
Response to 2005 Hurricanes
In 2005, the Federal Reserve worked
cooperatively with the other federal
banking agencies, state banking agencies, and other organizations to determine the operating status of financial
institutions located in the areas affected
by Hurricanes Katrina, Rita, and Wilma.
The agencies encouraged banks to work
with consumer and commercial customers experiencing difficulties due to the
storms. The agencies promptly released
joint guidance on regulatory and reporting issues to assist examiners and banking organizations affected by the hurricanes. In addition, the Federal Reserve,
in consultation with the other federal
banking agencies, issued responses to
questions frequently asked by financial
institutions about whether certain BSA
provisions applied when providing services to victims of Hurricane Katrina.
The agencies also exercised their authority under section 2 of the Deposi-
74
92nd Annual Report, 2005
tory Institutions Disaster Relief Act of lending requirements when financing
1992 to waive statutory and regulatory residential construction in a tract
appraisal requirements for transactions development.
that involve real property in major disaster areas, when waiving the appraisal
requirements would facilitate disaster Home Equity Lending
recovery and would be consistent with
In May, the Federal Reserve and the
safe and sound banking practice.
other federal financial institutions regIn an effort to provide the industry
ulatory agencies issued "Interagency
and examiners with further guidance on
Credit Risk Management Guidance on
a growing number of hurricane-related
Home Equity Lending" to promote
issues, the FFIEC established a formal sound risk management in banks' home
Katrina working group composed of equity lending. The guidance addressed
senior supervision officials from each of the agencies' concerns about the easing
the FFIEC agencies. The Katrina work- of underwriting standards as lenders
ing group published frequently asked compete to attract home equity lending
questions (FAQs) and developed exam- business—sometimes by offering prodiner guidance that will be issued in early ucts with high loan-to-value ratios,
2006. Because of the severity and scale requiring only limited documentation of
of Katrina and the other natural disasters a borrower's assets and income, using
in 2005, the working group's efforts automated valuation models to a greater
are expected to continue into 2006. The extent, or relying on loans originated
Katrina working group has established by third parties. The guidance advances
a user-friendly, web-based "frequently sound underwriting standards, controls
asked questions" forum on the FFIEC's over third-party originations, a robust
web site (www.ffiec.gov).
collateral-valuation process, and account
and portfolio management practices.
Credit Risk Management
The Federal Reserve works with the
other federal banking agencies to
develop guidance on credit risk
management.
Real Estate Appraisals
In September, the Federal Reserve,
FDIC, NCUA, OCC, and OTS issued
FAQs on the requirements of the agencies' real estate appraisal regulations
and on the October 2003 interagency
statement "Independence of Appraisal
and Evaluation Functions." The agencies also issued FAQs in March to help
institutions comply with the agencies'
appraisal regulations and real estate
Nontraditional Mortgage Products
In December, the Federal Reserve and
the other federal financial institutions
regulatory agencies issued for public
comment "Proposed Interagency Guidance on Nontraditional Mortgage Products." Nontraditional mortgage products typically include payment-option
adjustable-rate mortgages and interestonly mortgages. These mortgage products allow for principal-payment
deferral and negative amortization. Institutions may also combine these products
with other risk-layering practices, such
as less stringent underwriting standards,
reduced loan documentation, or simultaneous second-lien loans. The proposed
interagency guidance emphasizes that an
Banking Supervision and Regulation
institution needs to develop and maintain adequate risk-management practices
to monitor and control the risk associated with these products. The proposed
guidance also contains recommended
practices for providing consumers with
information about the terms and risks of
nontraditional mortgage products. Comments on the proposal are due March 29,
2006.
Commercial Real Estate
Concentrations
During 2005, the Federal Reserve and
the federal financial institutions regulatory agencies developed proposed
interagency guidance, "Concentrations
in Commercial Real Estate Lending,
Sound Risk Management Practices."
The proposed guidance, to be issued for
public comment in January 2006, will
respond to the agencies' concerns about
rising commercial real estate (CRE)
concentrations, particularly at small to
medium-sized institutions. This guidance will reinforce the agencies' existing real estate lending guidelines and
provide criteria for identifying institutions that have CRE lending concentrations and that should therefore
employ heightened risk-management
practices. Comments on the proposal are
due April 13, 2006.
Overdraft Protection
In February, the Federal Reserve, FDIC,
NCUA, and OCC issued interagency
guidance to assist insured depository
institutions in the responsible disclosure and administration of overdraftprotection services. The guidance
(1) seeks to ensure that institutions adopt
adequate policies and procedures to
address the credit, operational, and
other risks associated with overdraftprotection services; (2) alerts institu
75
tions offering these services to the need
to comply with all applicable federal
and state laws; and (3) sets forth
examples of best practices that are currently observed in, or recommended by,
the industry.
Small Bank Holding Company
Threshold
In September, the Board requested comment on a proposal to raise the assetsize threshold used to determine whether
a bank holding company qualifies for
(1) the Board's Small Bank Holding
Company Policy Statement and (2) an
exemption from the Board's risk-based
and leverage capital adequacy guidelines for bank holding companies. The
proposal would raise that threshold from
$150 million to $500 million in consolidated assets. The proposal would also
modify the qualitative criteria used in
determining whether a bank holding
company that is under the asset-size
threshold nevertheless would not qualify for the policy statement or the
exemption from the capital guidelines.
In addition, the proposal would clarify
the treatment under the policy statement of subordinated debt associated
with trust preferred securities. Final
action on this proposal is expected in
early 2006.
Economic Growth and Regulatory
Paperwork Reduction Act of 1996
The Federal Reserve, OCC, FDIC, and
OTS are in the process of reviewing
agency regulations as required by
the Economic Growth and Regulatory
Paperwork Reduction Act of 1996
(EGRPRA). EGRPRA requires that the
banking agencies review their regulations every ten years to identify any
unnecessary regulatory requirements
imposed on insured depository institu-
76
92nd Annual Report, 2005
tions and eliminate these requirements,
as appropriate. This review is in addition to the Board's periodic review of
each of its regulations.
The agencies met with representatives from the banking industry and
from consumer groups around the country to listen to their concerns and to
solicit their suggestions for reducing
regulatory burden. The agencies have
received public comments on several of
their regulations and expect to issue a
final report in 2006.
Sarbanes-Oxley Act
During 2005, the Federal Reserve continued to evaluate the effects of the
Sarbanes-Oxley Act (SOX) on banking
organizations. Federal Reserve accounting staff reviewed material internal control weaknesses and deficiencies at certain public banking organizations and
are now drafting supervisory guidance
for examiners and inspectors. The guidance will instruct examiners and inspectors to consider internal control information, including findings generated
by the requirements of section 404 of
SOX, in the overall risk-assessment
process.
In addition, an official of the Federal
Reserve serves on the Standing Advisory Group of the Public Company
Accounting Oversight Board (PCAOB);
the group 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 2005 to work with the
FDIC and other federal 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 SOX
requirements.
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 holding
companies and their nonbank subsidiaries. In addition, foreign banking organizations must periodically submit
reports to the Federal Reserve.
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, to review performance and
conduct pre-inspection analysis, to
monitor and evaluate risk profiles and
capital adequacy, to evaluate proposals
for bank holding company mergers and
acquisitions, and to analyze the holding
company's overall financial condition.
The nonbank subsidiary reports—
FRY-11, 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.
In March, several revisions to the
FR Y-9C and FR Y-9SP reports were
implemented in order to identify private
equity merchant banking activity, identify firms providing auditing services to
the bank holding company, collect information on subordinated notes payable to
trusts issuing trust preferred securities
(changes affected the FR Y-9C balance
sheet), and collect information on nonvoting equity capital (changes affected
Banking Supervision and Regulation
the FR Y-9SP). In September, the
FR Y-9C was modified to collect information on purchased impaired loans in
response to Statement of Position 03-3
of the American Institute of Certified
Public Accountants, "Accounting for
Certain Loans or Debt Securities
Acquired in a Transfer," and to collect
information related to the Government National Mortgage Association
(GNMA) optional repurchase program
for mortgage loans (rebooked loans
backing GNMA securities).
Effective December 31, revisions to
the Annual Report of Foreign Banking
Organizations (FR Y-7) reorganized
the form and instructions, expanded
information collected on foreign companies held under the authority of
section 2(h)(2) of the Bank Holding
Company Act, added language to the
confidentiality section, and clarified the
instructions pursuant to Regulation K.
In December, a new report was implemented: the Supplement to the Reports
of Changes in Organizational Structure
(FR Y-10S). In this report, bank holding
companies, financial holding companies, and state member banks not owned
by bank holding companies report their
SEC registration status and whether they
are subject to the requirements of section 404 of SOX. They also report their
six-digit CUSIP number to help the Federal Reserve compare regulatory data
with market data.
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 Call Reports.
Call Reports are the primary source of
data for the supervision and regulation
of banks and for the ongoing assessment
11
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 under the auspices
of the FFIEC have completed the Call
Report modernization project. Through
the use of new open data exchange standards (known as "extensible Business
Reporting Language," or XBRL), the
new Central Data Repository (CDR)
system improves the timeliness and
quality of supervisory data and enhances
market discipline by ensuring that the
public has more timely access to the
data. This is the first wide-scale application of XBRL. Enhancements to the
data-collection and -disclosure process
include requiring banks to submit their
Call Report data electronically to the
CDR, moving forward the deadline for
filing reports, and requiring respondents
to validate their data before filing. The
effort to set up the CDR was completed
and became operational on October 1.
The FFIEC issued for public comment the proposed changes to the 2006
Call Report. The agencies planned to
implement some changes effective
March 31, 2006, and to defer implementation on other issues until September 30, 2006, and March 31, 2007, pending final interagency approval.
Supervisory Information
Technology
Under the direction of the division's
chief technology officer, the supervisory
information technology (SIT) function
within the division facilitates the management of information technology
78
92nd Annual Report, 2005
across the Federal Reserve System's
overall supervision function. SIT works
through assigned staff at the Board and
the Reserve Banks, as well as through
a System-wide committee structure, to
ensure that key staff members throughout the System participate in identifying
requirements and setting priorities for
IT initiatives.
In 2005, the SIT function worked on
the following strategic projects and initiatives: (1) refine and institutionalize
processes governing IT investments to
ensure that all technology investments
are aligned with business needs and
that accountability for business success is clearly defined and accepted;
(2) improve the security of informationsharing technologies and provide for
seamless collaboration in interagency
efforts; (3) develop a measurementbased management and investment culture; (4) identify opportunities to converge and streamline IT applications,
including key administrative systems, to
provide consistent and seamless information; (5) develop a foundation for
evaluating technologies (such as portals,
search engines, and content management tools) to improve access to these
systems and to integrate supervisory and
management information systems that
support both office-based and field staff;
(6) enhance the information security
framework for the supervisory function;
and (7) participate in the selection of a
learning management system that will
enhance the delivery of online examiner
training.
Database (NED), which provides supervisory personnel and state banking
authorities with access to NIC data; the
Banking Organization National Desktop
(BOND), an application that facilitates
secure, real-time electronic informationsharing and collaboration among federal
and state banking regulators for the
supervision of banking organizations;
and the Central Document and Text
Repository, which contains documents
supporting the supervisory processes.
During 2005, the NED application
was modified to incorporate information
from consumer affairs and Community
Reinvestment Act examinations, thereby
eliminating a separate legacy system.
In early 2006, NED will be enhanced to
begin collecting important BSA information in an automated format to support the Federal Reserve's enforcement
activities.
In 2005, the BOND application was
enhanced to improve usability, reduce
administrative burden, and increase the
effectiveness of management reporting.
BOND was also updated to accommodate the new FR Y-10S reporting form
(see the section "Bank Holding Company Regulatory Financial Reports").
At year-end 2005, BOND had approximately 2,700 registered users across the
Federal Reserve System, the OCC, the
FDIC, and eleven state banking departments. In 2005, significant resources
were also devoted to the FFIEC Call
Report modernization initiative (see the
section "Commercial Bank Regulatory
Financial Reports").
National Information Center
Staff Development
The National Information Center (NIC)
is the Federal Reserve's comprehensive
repository for supervisory,financial,and
banking structure data and supervisory
documents. NIC includes the structure
data system; the National Examination
The System Staff Development Program
trains staff members at the Board, the
Reserve Banks, state banking departments, and foreign supervisory authorities. Training is offered at the basic,
intermediate, and advanced levels in
Banking Supervision and Regulation
79
Training Programs for Banking Supervision and Regulation, 2005
Number of sessions conducted
Program
Total
7
6
4
12
9
10
Principles of fiduciary supervision
Commercial lending essentials for consumer affairs
Consumer compliance examinations I
Consumer compliance examinations II
CRA examination techniques
CRA risk-focused examination techniques
Fair lending examination techniques
Foreign banking organizations seminar
Information systems continuing education
Asset liability management (ALM1)
Asset liability management (ALM2)
Fundamentals of interest rate risk management
Trading and operations
Technology risk integration
Leadership dynamics
Fundamentals of fraud
Information technology seminars1
Seminar for senior supervisors of foreign central banks 2
and ten other international courses
4
4
3
3
1
1
1
0
2
1
0
2
1
3
2
1
4
2
1
5
1
3
6
5
13
35
27
70
1
Other schools
Credit risk analysis
Examination management
Real estate lending seminar
Senior forum for current banking and regulatory issues —
Assessing capital adequacy
Basel II corporate activities
Basel II operational risk
Basel II retail activities
5
6
3
3
1
2
1
2
1
4
2
1
5
1
3
7
5
13
Report writing .
Management skills
Conducting meetings with management
5
5
2
12
7
10
2
1
2
2
2
3
2
Schools or seminars conducted by the Federal Reserve
Core schools
Banking and supervision elements
Operations and analysis
Regional
12
1
Self-study or online learning3
Orientation (core and specialty) ..
Self-study modules (26 modules) .
Other agencies conducting courses4
Federal Financial Institutions Examination Council
The Options Institute
1. Held at Chicago IT Lab.
2. Conducted jointly with the World Bank.
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
3. Self-study programs do not involve group sessions.
4. Open to Federal Reserve employees.
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
80
92nd Annual Report, 2005
Results of First Proficiency and Second Proficiency Examinations, 2005
Second proficiency
Result
First proficiency
Safety and soundness
Passed
155
Consumer affairs
Information technology
65
18
2
markets, payment systems risk, whitecollar crime, and real estate lending. In
addition, the System co-hosts the World
Bank Seminar for supervisors from
developing countries.
In 2005, the Federal Reserve trained
3,296 students in System schools, 946 in
schools sponsored by the FFIEC, and
11 in other schools, for a total of 4,253,
including 266 representatives of foreign
central banks and supervisory agencies
(see the table on the preceding page).
The number of training days in 2005
totaled 18,441.
The System gave scholarship assistance to the states for training their
examiners in Federal Reserve and
FFIEC schools. Through this program,
473 state examiners were trained—267
in Federal Reserve courses, 203 in
FFIEC programs, and 3 in other courses.
A staff member seeking an examiner's commission is required to take a
first proficiency examination as well as
a second proficiency examination in one
of the following three specialty areas:
safety and soundness, consumer affairs,
or information technology. In 2005, 155
examiners passed the first proficiency
examination (see Results of Examinations table). In the second proficiency
examination, 65 examiners passed the
safety and soundness examination, 18
examiners passed the consumer affairs
examination, and 2 examiners passed
the information technology examination. The average pass rate for the first
proficiency examination was 79 percent. The average pass rate for the
second proficiency examinations was
78 percent.
Regulation of the
U.S. Banking Structure
The Federal Reserve administers several federal statutes that apply 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, the
Federal Reserve Act, and the International Banking Act. In administering
these statutes, the Federal Reserve acts
on a variety of proposals that directly or
indirectly affect the structure of the U.S.
banking system at the local, regional,
and national levels; the international
operations of domestic banking organizations; or the U.S. banking operations
of foreign banks. The proposals include
bank holding company formations and
acquisitions, bank mergers, and other
transactions involving bank or nonbank
firms. In 2005, the Federal Reserve
acted on 1,283 proposals, which represented 3,442 individual applications
filed under the five administered
statutes.
Bank Holding Company Act
Under the Bank Holding Company Act,
a corporation or similar legal entity must
obtain the Federal Reserve's approval
before forming a bank holding com-
Banking Supervision and Regulation
pany 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
the nonbanking 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 may
consider 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. In 2005, the Federal Reserve acted
upon 512 applications filed by bank
holding companies to acquire a bank or
a nonbank firm, or to otherwise expand
their activities.
Bank holding companies generally
may engage in only those nonbanking
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 priornotice procedure for certain permissible
nonbank activities and for acquisitions
of small banks and nonbank entities.
Since that time, the act has also permit
81
ted 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.
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 bank holding companies that fail
to meet certain standards, including the
Board's capital adequacy guidelines. In
2005, the Federal Reserve reviewed 6
stock-repurchase proposals by bank
holding companies.
The Federal Reserve also reviews
elections from bank holding companies seeking financial holding company status under the authority granted
by the Gramm-Leach-Bliley Act. Bank
holding companies seeking financial
holding company status must file a
written declaration with the Federal
Reserve. In 2005, 35 domestic financial holding company declarations and
3 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. The Federal Reserve has primary jurisdiction if the institution surviving the merger is a state member
bank. 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 communities to be served, and the competitive effects of the proposed merger. It
82
92nd Annual Report, 2005
also considers the views of certain other
agencies regarding the competitive factors involved in the transaction. In 2005,
the Federal Reserve approved 58 merger
applications under the act.
When the FDIC, OCC, or OTS has
jurisdiction over a merger, the Federal
Reserve is asked to comment on the
competitive factors related to the proposal. By using standard terminology 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 472 reports on competitive factors to the other agencies in
2005.
Change in Bank Control Act
The Change in Bank Control Act
requires individuals and certain other
parties that seek 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 2005, the Federal Reserve
approved 111 changes in control of
state member banks and bank holding
companies.
Federal Reserve Act
Under the Federal Reserve Act, a
member bank may be required to seek
prior Federal Reserve approval before
expanding its operations domestically
or internationally. 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, among other things, 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
2005, the Federal Reserve acted on new
and merger-related branch proposals for
2,435 domestic branches, and granted
prior approval for the establishment of
5 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 2005,
2 applications for financial subsidiaries
were approved.
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
Banking Supervision and Regulation
indirectly through Edge Act and agreement corporation subsidiaries. Although
most foreign investments are made
under general consent procedures that
involve only after-the-fact notification
to the Federal Reserve, large and other
significant investments require prior
approval. In 2005, the Federal Reserve
approved 43 proposals for significant
overseas investments by U.S. banking
organizations. The Federal Reserve also
approved 11 applications to make additional investments through an Edge Act
or agreement corporation, 3 applications
to establish an Edge Act or agreement
corporation, and 2 applications to extend
the corporate existence of an Edge Act
corporation.
83
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 2005, the Federal
Reserve approved 10 applications by
foreign banks to establish branches,
agencies, or representative offices in the
United States.
International Banking Act
Public Notice of
Federal Reserve Decisions
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 homecountry 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
Certain decisions by the Federal Reserve
that involve an acquisition by 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;
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
84
92nd Annual Report, 2005
submitting applications or notices to the
Federal Reserve.
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
Enforcement of
by securities brokers and dealers when
Other Laws and Regulations
the credit is used to trade debt and
The Federal Reserve's enforcement equity securities. The Board's Regularesponsibilities also extend to financial tion U limits the amount of credit that
disclosures by state member banks, may be provided by lenders other than
securities credit, and extensions of credit brokers and dealers when the credit is
used to purchase or carry publicly held
to executive officers.
equity securities if the loan is secured
by those or other publicly held equity
securities. The Board's Regulation X
Financial Disclosures by
applies these credit limitations, or marState Member Banks
gin requirements, to certain borrowers
State member banks that issue securities and to certain credit extensions, such as
registered under the Securities Exchange credit obtained from foreign lenders by
Act of 1934 must disclose certain infor- U.S. citizens.
mation of interest to investors, including
Several regulatory agencies enforce
annual and quarterly financial reports the Board's securities credit regulations.
and proxy statements. By statute, the The SEC, the National Association of
Board's financial disclosure rules must Securities Dealers, and the national
be substantially similar to those of the securities exchanges examine brokers
SEC. At the end of 2005, 18 state mem- and dealers for compliance with Regulaber banks were registered with the tion T. With respect to compliance with
Board under the Securities Exchange
Regulation U, the federal banking agenAct of 1934.
cies examine banks under their respective jurisdictions; the Farm Credit
Administration, the NCUA, and the OTS
Securities Credit
examine lenders under their respective
Under the Securities Exchange Act, the jurisdictions; and the Federal Reserve
Board is responsible for regulating examines other Regulation U lenders.
Extensions of Credit by State Member Banks to their Executive Officers, 2004 and 2005
Number
Amount (dollars)
Range of interest
rates charged
(percent)
2004
October 1-December 31
479
53,340,000
0.0-20.8
2005
January 1-March 31
April 1-June 30
July 1-September 30
October 1-December 31
414
530
504
485
54,737,000
117,416,000
56,969,000
57,422,000
0.0-21.2
0.0-20.6
0.0-21.6
0.0-18.0
Period
SOURCE. Call Reports.
Banking Supervision and Regulation
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 2005.
85
Federal Reserve Membership
At the end of 2005, 2,698 banks were
members of the Federal Reserve System
and were operating 52,639 branches.
These banks accounted for 37 percent of
all commercial banks in the United
States and for 72 percent of all commercial banking offices.
•
87
Consumer and Community Affairs
Among the Federal Reserve's responsibilities in the areas of consumer and
community affairs are
• writing and interpreting regulations to
implement federal laws that protect
and inform consumers;
• supervising state member banks to
ensure their compliance with the
regulations;
• investigating complaints from the
public about state member bank compliance with regulations; and
• promoting community development in
historically underserved markets.
These responsibilities are carried out by
the members of the Board of Governors,
the Board's Division of Consumer and
Community Affairs, and the consumer
and community affairs staff of the Federal Reserve Banks.
Implementation of Statutes
Designed to Inform and Protect
Consumers
The Board of Governors writes regulations to implement federal laws involving consumer financial services and fair
lending. The Board revises and updates
these regulations to address the introduction of new products and technologies, to implement legislative changes to
existing laws, and to address problems
consumers may encounter in their financial transactions. To interpret and clarify
the regulations, Board staff issues commentaries and other guidance.
During 2005, the Board, with the
Office of the Comptroller of the Currency (OCC), the Federal Deposit
Insurance Corporation (FDIC), and the
National Credit Union Administration (NCUA), issued joint guidance
on overdraft-protection programs. The
guidance is intended to help insured
depository institutions responsibly administer and provide appropriate disclosures for these programs. To improve
the uniformity and adequacy of information consumers receive about overdraftprotection services, the Board also
issued final rules amending its Truth in
Savings Act regulation (Regulation DD)
and the associated commentary. The
Board, FDIC, and OCC jointly revised
certain provisions of their rules implementing the Community Reinvestment
Act (CRA). In addition, the Board
amended its regulation implementing
the Electronic Fund Transfer Act (Regulation E) to address the regulation's coverage of electronic check conversion
services; a separate interim final rule
under Regulation E dealt with payroll
card accounts. The Board issued final
rules with the FDIC, NCUA, OCC,
and Office of Thrift Supervision (OTS)
to implement provisions of the Fair
and Accurate Credit Transactions Act
of 2003 (the FACT Act) that govern
the use of medical information in connection with credit-eligibility determinations. Furthermore, the Board
raised the threshold that triggers additional requirements under the Home
Ownership and Equity Protection Act
(HOEPA) and raised the exemption
threshold for depository institutions
required to collect data under the Home
Mortgage Disclosure Act (HMDA).
88
92nd Annual Report, 2005
Interagency Guidance on OverdraftProtection Programs
of complying with all applicable federal
and state laws, and it advises institutions to have legal counsel review their
overdraft-protection programs—before
implementation—to ensure the overall
compliance of the programs. The best
practices section addresses the marketing and communication of overdraftprotection programs as well as disclosures and other operational aspects of
these programs.
In February, the Board issued guidance
jointly with the FDIC, NCUA, and OCC
on overdraft-protection programs at
insured depository institutions. These
services, sometimes referred to as
"bounced-check protection" or "courtesy overdraft protection," pay customer's checks or allow other overdrafts
when a customer has insufficient funds
in his or her account. Typically, an
overdraft-protection program is an auto- Amendments to Regulation DD
mated service provided to transaction (Truth in Savings)
account customers as an alternative to a
In May, the Board published final
traditional overdraft line of credit.
amendments to Regulation DD, which
In June 2004, the agencies published implements the Truth in Savings Act,
for comment proposed interagency guid- and to the regulation's official staff comance on overdraft-protection programs, mentary. The amendments address conin response to concerns about the mar- cerns about the uniformity and adequacy
keting, disclosure, and implementation of information provided to consumof these programs. The final guidance ers when they overdraw their deposit
responds to comments the agencies accounts, and some of the amendments
received from consumer and community specifically address overdraft-protection
groups, individual consumers, deposi- programs, which are offered by many
tory institutions, trade associations, ven- depository institutions.
dors offering overdraft-protection prodTo address concerns about the maructs, other industry representatives, and keting of overdraft services, the Board
1
state agencies.
expanded the regulation's prohibition
The final joint guidance has three against misleading advertisements to
primary sections: Safety and Soundness cover institutions' communications with
Considerations, Legal Risks, and Best current customers about their existing
Practices. The safety and soundness dis- accounts. The Board also revised the
cussion seeks to ensure that financial staff commentary to the regulation to
institutions offering overdraft-protection provide examples of misleading adverprograms have adequate policies and tisements for overdraft-protection serprocedures to address the credit, opera- vices. To help consumers distinguish
tional, and other risks associated with overdraft-protection services from the
these programs. The legal risks discus- traditional lines of credit offered by an
sion alerts institutions to the importance institution, the final rule requires that
institutions promoting the payment of
overdrafts include, in their advertise1. In 2004, the agencies, along with the
OTS, produced a consumer publication, "Protect- ments, certain disclosures about the
ing Yourself from Overdraft and Bouncedterms of the service.
Check Fees," which is available in English
In addition, the final rule includes
and Spanish. Both versions are available on
provisions to enhance the uniformity
the Board's consumer information web site
(www.federalreserve.gov/consumers.htm).
and adequacy of the cost disclosures
Consumer and Community Affairs
89
the new rules reduce data collection and
reporting burden for "intermediate small
banks" (banks with assets at least
$250 million and less than $1 billion)
and, at the same time, encourage these
banks to engage in meaningful community development lending, investment,
and services.
Under the new rules, intermediate
small banks will no longer need to collect and report CRA loan data. Nevertheless, examiners will continue to
evaluate bank lending activity during
their CRA examinations of intermediate
small banks and will disclose those
results in the public evaluation. Intermediate small banks will be evaluated
under two separately rated tests: (1) the
small bank lending test and (2) a new,
flexible community development test
that includes an evaluation of community development loans, investments,
and services in light of the community's
needs and the bank's capacity. Satisfactory ratings are required on both tests
to obtain an overall satisfactory CRA
rating.
For banks of any size, the new rules
expand the definition of community
development to include activities that
Community Reinvestment Act
revitalize or stabilize designated disaster
Rules
areas and distressed or underserved rural
In July, the Board, FDIC, and OCC areas. By doing so, the agencies seek to
approved a joint final rule to revise cer- recognize banks' community developtain provisions of their rules implement- ment efforts in these areas and encouring the Community Reinvestment Act age further efforts in other rural areas.
(CRA). (Regulation BB is the Board's The rules also clarify when a bank's (or
CRA regulation.) The revised rules are its affiliate's) discrimination or other
intended to reduce regulatory burden on illegal credit practices will adversely
community banks and make CRA evalu- affect an evaluation of its CRA perforations more effective tools for encour- mance. The joint final rule became
aging banks to meet community devel- effective September 1, 2005.
opment needs.
The final rules raise the small bank
asset-size threshold from less than FACT Act Rules on
$250 million in assets to less than $1 bil- Medical Information
lion in assets without regard to hold- In November, the Board, FDIC, NCUA,
ing company affiliation. Accordingly, OCC, and OTS issued final rules under
institutions provide to consumers about
overdraft and returned-item fees. Institutions that promote the payment of
overdrafts in an advertisement must
separately disclose, on their periodic
statements, the total dollar amount
imposed on the account for paying overdrafts and the total dollar amount of fees
charged for returning items unpaid.
These disclosures must be provided for
the statement period and for the calendar year to date, for any account
to which the advertisement applies.
To help institutions comply with this
requirement, the staff commentary provides specific examples of when an
institution is promoting the payment of
overdrafts in an advertisement. The final
rule also requires institutions to state, in
their account-opening disclosures, the
categories of transactions for which an
overdraft fee may be imposed, for example, by specifying that fees are imposed
for overdrafts created by checks, ATM
withdrawals, or other electronic transactions, as applicable.
The amendments to Regulation DD
become effective on July 1, 2006.
90
92nd Annual Report, 2005
the Fair Credit Reporting Act (FCRA).
(The Board's rules are Regulation V and
Regulation FF.) The rules create exceptions to the statutory prohibition against
creditors' obtaining or using medical
information in connection with their
credit-eligibility determinations. The
final rules also address the sharing of
medically related information among
affiliates.
Section 411 of the Fair and Accurate
Credit Transactions Act of 2003 (the
FACT Act) amended the FCRA to provide that a creditor may not obtain or
use medical information in connection with any determination of a consumer's eligibility, or continued eligibility, for credit, except as permitted
by regulations. The FACT Act requires
the agencies to prescribe regulations
that permit creditors to obtain and
use medical information for crediteligibility purposes when necessary and
appropriate to protect legitimate operational, transactional, risk-management,
and other needs. The final rules permit creditors to obtain and use medical information that is typically considered in credit underwriting. Under
the final rules, all creditors can rely
upon the exceptions for obtaining and
using medical information.
Section 411 of the FACT Act also
amended the FCRA to limit the ability
of creditors and others to share medically related information among their
affiliates, except as permitted by the
statute or by regulation or order. The
final rules specify the circumstances in
which certain creditors may share medically related information among affiliates without becoming consumer reporting agencies, which are subject to
additional requirements.
Final rules will become effective
April 1, 2006.
Amendments to Regulation E
(Electronic Fund Transfers)
In December, the Federal Reserve Board
announced final amendments to Regulation E, which implements the Electronic
Fund Transfer Act. The amendments
clarify the responsibilities of parties
involved in electronic check conversion
transactions and require that consumers
receive written notification in advance
of these transactions. Additional revisions to the regulation's official staff
commentary provide guidance on preauthorized transfers from consumers'
accounts, error resolution, and disclosures at ATMs.
Among other provisions, the final rule
specifies that merchants and other payees that convert consumers' check payments into electronic fund transfers must
provide the consumer with a notice and
obtain his or her authorization for the
electronic fund transfer. Merchants and
other payees must also notify consumers
that
• if a check is converted to an electronic
fund transfer, funds may be debited
from their accounts as soon as the
same day that payment is received and
• the check will not be returned to them
by their financial institution.
Revisions to the official staff commentary on Regulation E clarify the
error resolution obligations of financial institutions and clarify the disclosure obligations of ATM operators with
respect to the fees they charge a consumer for initiating an electronic fund
transfer or for using an ATM to make a
balance inquiry.
The mandatory compliance date for
the final rule is January 1, 2007.
Consumer and Community Affairs
Interim Final Rule Governing
Payroll Cards
In December, the Board adopted a separate interim final rule on payroll card
accounts. Under the interim final rule,
payroll card accounts that are established to provide salary, wages, or other
employee compensation on a recurring
basis are accounts covered by Regulation E. The interim final rule grants flexibility to financial institutions that must
provide account transaction information
to payroll card users. The interim final
rule will become effective July 1, 2007.
Other Regulatory Actions
The Board also took the following regulatory actions during 2005:
• In March, the Board and the other
federal financial regulatory agencies
adopted in final form, without change,
joint interim rules making technical
changes to the agencies' regulations
implementing the Community Reinvestment Act (CRA). The joint
interim rules had been published for
comment in July 2004. (Regulation BB is the Board's CRA regulation.) The changes conform the CRA
regulations to changes in (1) the Standards for Defining Metropolitan and
Micropolitan Statistical areas, published by the U.S. Office of Management and Budget; (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 final rule did not make substantive changes to the requirements
of the CRA regulations.
• In August, the Board amended the
official staff commentary to Regula-
91
tion Z to raise from $510 to $528 the
total dollar amount of points and fees
that triggers additional requirements
for certain mortgage loans under the
Home Ownership and Equity Protection Act (HOEPA). As prescribed by
that statute, the increased amount
(effective January 1, 2006) reflects
changes in the consumer price index.
• In December, the Board amended the
official staff commentary to Regulation C to raise to $35 million the
exemption threshold for depository
institutions required to collect data in
2006 under HMDA. As prescribed by
that 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 what effects the act has on compliance costs for financial institutions,
as well as the benefits of the act to
consumers.
According to data from the most
recent triennial Survey of Consumer
Finances (conducted in 2004), approximately 91 percent of U.S. families that
year used or had access to one or more
EFT services, for example, automated
teller machine (ATM) services, debit
card services, or direct deposit or payment services—up from approximately
88 percent in 2001. The 2004 Survey
of Consumer Finances also reported that
approximately 74 percent of U.S. families had an ATM card. In 2004, the
number of ATM transactions per month
averaged approximately 919 million,
and the number of installed ATMs rose
about 3 percent from 2003, to 383,000.
92
92nd Annual Report, 2005
About 71 percent of U.S. families
had funds deposited directly into their
checking or savings account by direct
deposit in 2004. Use of the service
appears even more common in the
public sector; during fiscal year 2005,
approximately 76 percent of all government payments were made using EFT,
including 81 percent of Social Security
payments, 99 percent of federal salary
and retirement payments, and 49 percent
of federal income tax refunds.
About 59 percent of U.S. families had
debit cards in 2004; consumers can use
these cards at merchant terminals to pay
for purchases. Approximately 17.6 billion debit card transactions took place
in 2004, an increase of approximately
9 percent from the previous year's volume. Direct payment appears to be the
least widely used EFT payment mechanism. About 47 percent of U.S. families
had payments automatically deducted
from their accounts in 2004.
The incremental costs associated with
the EFTA are difficult to quantify
because it is difficult to determine 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 2005 reporting
period, the Reserve Banks conducted
163 CRA examinations. Of the banks
examined, 35 were rated "outstanding" in meeting community credit
needs, 127 were rated "satisfactory,"
none was rated "needs to improve,"
and 1 was rated as being in "substantial
noncompliance." 2
Analysis of Applications for
Mergers and Acquisitions in
Relation to the CRA
During 2005, the Board of Governors
considered applications for several significant banking mergers, including the
application by Citigroup, Inc., New
York, New York, to acquire First Ameri2. The 2005reportingperiod was July 1, 2004,
through June 30, 2005.
Consumer and Community Affairs
can Bank, Bryan, Texas. The Board
approved Citigroup's application in
March, after considering information
from ongoing examinations of Citigroup, publicly disclosed investigations,
and domestic and foreign financial
supervisory authorities, in addition to
confidential information on Citigroup's
compliance with anti-money-laundering
laws. Citigroup acknowledged some
deficiencies in its compliance and internal controls for the areas being investigated and stated that it had developed plans to address those weaknesses.
The Board noted the improvements Citigroup had made to parts of its compliance structure; the Board also expected
that the company would fully implement its plan to enhance oversight of its
operations. To that end, the Board further expected that Citigroup would not
undertake significant expansion during
this implementation period.
Several other significant applications
are listed below.
93
in December. A total of thirteen comments were submitted in opposition to
the application.
The public submitted comments on
each of these applications. Most of the
commenters expressed concerns that an
institution's lending to lower-income
communities and minority populations
was insufficient or that the institution
failed to address the convenience and
needs of affected communities. Many of
the comments referenced the new pricing information on residential mortgage
loans that was required to be reported
for 2004 Home Mortgage Disclosure
Act (HMDA) data; the new data raised
concerns that minority applicants were
more likely than nonminority applicants to receive high-cost mortgages.3
Other commenters raised concerns about
potentially predatory lending practices
by subprime and payday lenders, as well
as the potential adverse effects of branch
closings.
In total, the Board acted on twenty• An application by Wells Fargo & Co., three bank and bank holding company
San Francisco, California, to acquire applications that involved protests by
First Community Capital Corporation, members of the public concerning the
Houston, Texas, was approved in CRA performance of insured depository
June.
institutions. The Board also reviewed
twenty-nine applications involving other
• An application by Capital One Finan- issues related to CRA, fair lending, or
cial Corporation (Capital One), compliance with consumer credit proMcLean, Virginia, to acquire Hibernia tection laws.4
Bancorporation, New Orleans, Louisiana, was approved in August. The
Board considered information on
pending lawsuits or investigations
3. "High-cost mortgages" refers to mortgage
undertaken by the attorneys general
of Minnesota and West Virginia relat- loans whose annual percentage rates (APRs) are
3 percent or more over the yield on comparable
ing to Capital One's marketing of its Treasury securities on first liens, and 5 percent or
credit cards.
more over that yield on subordinate liens. Interest
• An application by Bank of America
Corporation, Charlotte, North Carolina, to acquire MBNA Corporation,
Wilmington, Delaware, was approved
rate spreads that exceed these two thresholds are
required to be reported under Regulation C, which
implements the Home Mortgage Disclosure Act
(HMDA).
4. In addition, four applications involving consumer compliance issues were withdrawn.
94
92nd Annual Report, 2005
Other Consumer Compliance
Activities
The Division of Consumer and Community Affairs supports and oversees
the supervisory efforts of the Federal
Reserve Banks to ensure that consumer
protection laws and regulations are fully
and fairly enforced. Division staff provides guidance and expertise to the
Reserve Banks on consumer protection
regulations, examination and enforcement techniques, examiner training, and
emerging issues. They develop and
update examination policies, procedures, and guidelines, as well as 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 2005 reporting period,
the Reserve Banks conducted 239 consumer compliance examinations—220
of state member banks and 19 of foreign
banking organizations (FBO).5
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 issued guidance that Federal
Reserve consumer compliance examiners are to use when evaluating cases that
5. 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.
may involve any pattern or practice of
flood insurance violations.
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
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
(DOJ). When a violation of the ECOA
Consumer and Community Affairs
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 2005, division staff received
and analyzed five reports from Reserve
Banks regarding possible referral matters. Three of these reports dealt with
potentially discriminatory underwriting
standards—two involved potential discrimination on the basis of applicants'
marital status and one involved potential
discrimination on the basis of an applicant's sex. In one report, a bank's apparent discriminatory loan-pricing practices
affected borrowers on the basis of their
marital status. The fifth report involved
discriminatory redlining on the basis
of race. In one of the cases, the Board
determined that a referral was not warranted; one case was referred to DOJ;
and three cases are pending.
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 black and Hispanic
applicants and those submitted by white
applicants; 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. As a result of 2002 amendments to Regulation C and the receipt
of expanded HMDA data for 2004, the
regression program has been modified.
95
Differences among groups of loan
applicants are now identified using two
additional criteria: (1) the incidence
of higher-priced lending and (2) differences in the mean spread paid by borrowers who obtained higher-priced
loans. The modified statistical program,
like the denial-rate review, can target
lenders for a more intensive fair lending
review that would include the collection
and assessment of additional loan-level
information, such as credit scores and
debt-to-income and loan-to-value ratios.
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
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 payable to the Federal Emergency Management Agency
for deposit into the National Flood Mitigation Fund.
During 2005, the Board imposed civil
money penalties on ten state member
banks. The penalties, which were
assessed via consent orders, totaled
$219,810.
Coordination with
Other Federal Banking Agencies
The member agencies of the Federal
Financial Institutions Examination
96
92nd Annual Report, 2005
Council (FFIEC) develop uniform
examination principles, standards, procedures, and report formats.6 In 2005,
the FFIEC revised examination procedures for the Fair Credit Reporting Act
(FCRA) to reflect amendments to the
FCRA by the Fair and Accurate Credit
Transactions Act (the FACT Act). The
FFIEC also issued examination procedures on the Federal Communications
Commission's telemarketing rules and
its CAN-SPAM Act (Controlling the
Assault of Non-Solicited Pornography
and Marketing Act). The new procedures address the requirements each of
these rules lays out for electronic communications with consumers. Finally,
the Board, OCC, and FDIC issued
examination procedures for reviewing
the Community Reinvestment Act
(CRA) performance of intermediate
small banks. Following the issuance of
new CRA regulations last year, these
agencies also published for comment
proposed questions and answers on their
new regulations.
The FFIEC issues guidance to the
agencies' consumer compliance examination staff and to supervised financial
institutions. The agencies issued final
guidance on overdraft-protection programs (see "Interagency Guidance on
Overdraft-Protection Programs" earlier
in this chapter). In addition, the Board,
OCC, and FDIC issued new templates
for preparing CRA performance evaluations for intermediate small banks; these
agencies also revised the existing templates in order to reflect the amended
definition of community development
that now applies to all banks, as the term
is defined in the new CRA regulations.
6. 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.
Finally, the Board, OCC, and FDIC
updated the host-state loan-to-deposit
ratios used to determine compliance
with section 109 of the Riegle-Neal
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 supervision process. As the
number and complexity of consumer
financial transactions grow, training for
examiners of the state member banks
under the Federal Reserve's supervisory responsibility becomes even more
important. The consumer affairs curriculum is composed of six courses focused
on various consumer protection laws,
regulations, and examining concepts.
In 2005, these courses were offered in
ten sessions to more than 190 consumer
compliance examiners and System staff
members.
Board and Reserve Bank staff regularly review the consumer affairs curriculum, updating subject matter and
adding new elements as appropriate.
During 2005, staff conducted a curriculum review of the Commercial Lending
Essentials for Consumer Affairs course
to incorporate different instructional
methods (for example, an expanded case
study). This course provides consumer
compliance examiners with a basic
understanding of how a loan officer
underwrites and prices commercial
loans.
In addition to providing core training,
the examiner curriculum emphasizes
the importance of continuing professional development (CPD). Opportunities for continuing development include
special projects and assignments, selfstudy programs, rotational assignments,
Consumer and Community Affairs
the opportunity to instruct at System
schools, and mentoring programs.
Reporting on Home Mortgage
Disclosure Act Data
The Home Mortgage Disclosure Act
(HMDA), enacted by Congress in 1975,
requires most mortgage lenders located
in metropolitan areas to collect data
about their housing-related lending
activity, report the data annually to the
government, and make the data publicly
available. In 1989, Congress expanded
the data required by HMDA to include
information about loan applications that
did not result in a loan origination, as
well as information about the race, sex,
and income of applicants and borrowers. Since 1989, mortgage markets have
changed dramatically as information
technology has improved, permitting
more-efficient and more-accurate risk
assessment and management. These
developments have made it feasible for
institutions to lend to higher-risk borrowers, albeit at prices commensurate
with the higher risk. In the past, many of
the borrowers who now receive higherpriced loans were often denied lowerpriced credit.
Although a positive development, the
growth of the subprime market has also
raised public policy concerns. One concern is whether consumers who obtain
higher-priced loans are sufficiently
informed about the loan options available to them, allowing them to shop
effectively and protect themselves from
unfair or deceptive lending practices.
This concern has contributed to an
ongoing debate about how adequate and
effective proposed or existing mortgage
lending disclosures and limitations are
in protecting consumers from abuse. In
addition, the wider range of loan prices
available in today's marketplace has
raised concerns about whether price
97
variations reflect, even in part, unlawful
discrimination rather than legitimate
risk- and cost-related factors.
In response to these concerns, the
Federal Reserve updated Regulation C,
the regulation that implements HMDA.
The revisions, which were effective in
2004, required lenders to collect price
information for loans they originated in
the higher-priced segment of the home
loan market. Lenders report the number
of percentage points (if any) by which
a loan's annual percentage rate (known
as the "APR") exceeds a threshold; the
threshold is 3 percentage points above
the yield on comparable Treasury securities for first-lien loans, and 5 percentage points above that yield for juniorlien loans. Loans with rates above this
threshold are referred to as "higherpriced loans." The HMDA data collected in 2004 and released to the public
in 2005 provide the first publicly available loan-level data about loan prices.
An article published by Federal
Reserve staff in the Summer 2005 issue
of the Federal Reserve Bulletin uses
the 2004 data to describe the market for
higher-priced loans and patterns of lending across loan products, geographic
markets, and borrowers and neighborhoods of different races and incomes.7
Relatively few lenders account for most
higher-priced originations. In 2004, only
500 of the 8,850 reporting home lenders
made 100 or more higher-priced loans;
the 10 home lenders with the largest
volume accounted for about 40 percent
of all such loans. Higher-priced lending
is also concentrated by price: in 2004
the vast majority of higher-priced loans
had annual percentage rates within 1 or
2 percentage points of the reporting
thresholds. Furthermore, a relatively
7. The complete article is available at
www.federalreserve.gov/pubs/bulletin/2005/
05index.htm.
98
92nd Annual Report, 2005
small share of loan originations are Regulation B
higher-priced loans—16 percent in (Equal Credit Opportunity)
2004.
The prevalence of higher-priced lend- The FFIEC agencies reported that
ing varies widely, however. First, it 85 percent of the institutions examined
varies by product type. For example, during the 2005 reporting period were
15.5 percent of first-lien refinance loans in compliance with Regulation B, comwere higher-priced in 2004 compared pared with 88 percent for the 2004
with 27.4 percent of comparable junior- reporting period. The most frequent violien loans. Manufactured-home loans lations involved failure to take one or
show the greatest incidence of higher more of the following actions:
pricing across all loan products, a result
consistent with the elevated credit • collect information for monitoring
purposes about the race, ethnicity, and
risk associated with such lending. Secsex of applicants seeking credit primaond, higher-priced lending varies widely
rily for the purchase or refinancing of
by geography. Most of the metropolia principal residence
tan areas with the greatest incidence of
higher-priced lending are in the south• notify a credit applicant of the action
ern region of the country (in many
taken on his or her loan request within
metropolitan areas in the South and
the time frames specified in the
Southwest, 30 to 40 percent of homeregulation
buyers who obtained conventional loans
in 2004 received higher-priced loans), • provide a written notice of denial or
whereas metropolitan areas with the
other adverse action to a credit applilowest incidence are much more discant that contains the specific reapersed. Third, the incidence of higherson for the adverse action, along with
priced borrowing varies greatly among
other required information
borrowers of different races and ethnicities (see related box "2004 HMDA Data
During this reporting period, the OTS
and Fair Lending"). All of these pat- issued two cease-and-desist orders
terns are expected to be the subject of against savings associations for their
further research.
alleged violations of the ECOA and
Regulation B, as well as other consumer
regulations. For these violations, the
Agency Reports on Compliance
associations paid civil money penalties
with Consumer Protection Laws
that totaled $17,500. The other FFIEC
The Board reports annually on compli- agencies did not issue any formal
ance with consumer protection laws by enforcement actions relating to Regulaentities supervised by federal agencies. tion B during the reporting period.
This section summarizes data collected
The Federal Trade Commission
from the twelve Federal Reserve Banks, (FTC) entered into one settlement with a
the FFIEC member agencies, and other mortgage corporation for its alleged viofederal enforcement agencies.8
lations of the ECOA and Regulation B,
as well as other statutes. The defendants
8. Because the agencies use different methwere required to pay consumer restituods to compile the data, the information pretion for their alleged violations of the
sented here supports only general conclusions.
Truth in Lending Act (see the discussion
The 2005 reporting period was July 1, 2004,
under Regulation Z).
through June 30, 2005.
Consumer and Community Affairs
99
2004 HMDA Data and Fair Lending
The 2004 HMDA data included, for the
first time, information on "higher-priced
loans,** or loans whose pricing (interest
rates and fees) exceeded certain thresholds.
An analysis of this new data offers some
insights about where higher-priced lending
is more prevalent and what types of borrowers are more likely to receive a higherpriced loan. While these statistics alone
cannot explain the reasons why higherpriced lending was concentrated in some
geographic areas or among some borrowers, the 2004 data are still an important tool
for fair lending enforcement.
The
incidence
of
higher-priced
borrowing—the proportion of borrowers
who obtain higher-priced loans—varies
widely by race and ethnicity. In 2004,
blacks and Hispanics were much more
likely than non-Hispanic whites to receive
higher-priced loans, and Asians were less
likely than non-Hispanic whites to receive
such loans. For example, 32 percent of
black borrowers, and 20 percent of Hispanic borrowers, received higher-priced
home purchase loans, but only 9 percent of
non-Hispanic white borrowers did* In other
words, black homebuyers received higherpriced loans more than three times as often
as non-Hispanic white homebuyers, and
Hispanic homebuyers received higherpriced loans more than two times as often*
In general, differences of this magnitude
persist across borrowers with different
jglacome levels and across neighborhoods
with different median incomes (for example, low-income versus middle-income),
|:.Xhe differences in the incidence of higherjjlpriced loans shrink minimally when indi| vidual borrowers are matched by, for exam* pie, their income, the amount of their loan,
and the location of the property being
financed—which are the principal loan|:|sricing factors reported in the HMDA data.
In large part, the differences in what
groups of borrowers were more likely to
i::: receive a higher-priced loan reflect the segf mentation of the home loan market. That
is, a major reason that black and Hispanic
borrowers were much more likely than
non-Hispanic white borrowers to obtain
higher-priced mortgage loans is the fact
that black and Hispanic borrowers were
much more likely to obtain mortgage loans
from institutions that specialize in higherpriced lending.
Some, perhaps much, of the market segmentation and the related price differences
for mortgages are the result of differences
in legitimate price-determining factors,
such as a borrower's credit risk. Credit risk
is typically measured by a borrower's
credit score, his or her debt-to-income
ratio, the loan-to-value ratio, and other
information, But the HMDA data do not
include this type of information. Therefore,
the data do not yield any conclusions about
the reasons behind racial and ethnic differences in the incidence of higher-priced
lending; the data also cannot be used to
prove (or disprove) the legitimacy of any
speculated reasons for these di fferenees.
Notwithstanding the limitations of the
HMDA loan-pricing data, the data can be
used to improve enforcement of the laws
that prohibit racial and ethnic discrimina- *
tion in mortgage lending: the Federal
Reserve md the other agencies that enforce
these laws can use the data as a screening
tool to determine which institutions' pricing practices warrant scrutiny. For exam- ?
pie, Board staff used the 2004 data to determine (1) which lenders exhibited a highly
statistically significant difference in their
higher-priced lending to black and Hispanic borrowers, on the one hand, and to
non-Hispanic white borrowers, on the
other, and (2) when that difference could .)
not be explained by a difference in bor- 7
rower income, loan amount, or property •
location. Board staff shared statistical A
reports about the identified tenders with the {
relevant state and federal agencies, who ^
can use the data, as appropriate, in their .£
fair lending enforcement and supervision
efforts.
100 92nd Annual Report, 2005
The other agencies that enforce the
ECOA—the Farm Credit Administration (FCA), the Department of Transportation, the Securities and Exchange
Commission (SEC), 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 FCA's examination activities
revealed that most Regulation B violations involved either creditors' providing inadequate statements of specific
reasons for denial or creditors' failure
to request or provide information for
government-monitoring purposes. As
reported by the SEC, the National Association of Securities Dealers, Inc.,
(NASD) found that one of its member
firms could not produce evidence that
its customers were notified about the
denial of their applications for margin
accounts. In addition, a different NASD
firm could not demonstrate that it sent
required annual margin disclosure statements to its customers. However, none
of these other agencies initiated any
formal enforcement actions relating to
Regulation B during 2005.
Regulation E
(Electronic Fund Transfers)
The FFIEC agencies reported that
approximately 95 percent of the institutions examined during the 2005 reporting period were in compliance with
Regulation E, which is comparable to
the level of compliance for the 2004
reporting period. The most frequent violations involved failure to comply with
the following requirements:
• determine whether an error occurred
within ten business days of receiving
a notice of error from a consumer
• report the results of an error investigation to the consumer within three business days
• give the consumer provisional credit
for the amount of the alleged error
when the investigation cannot be completed within 10 business days
The OTS issued one cease-and-desist
order for violations of a number of consumer regulations, including Regulation E. The savings association paid a
civil money penalty of $10,000 for the
violations. Tlie other FFIEC agencies
and the SEC did not issue any formal
enforcement actions relating to Regulation E during the period.
Regulation M
(Consumer Leasing)
The FFIEC agencies reported that more
than 99 percent of the institutions examined during the 2005 reporting period
were in compliance with Regulation M,
which is comparable to the level of compliance for the 2004 reporting period.
The few violations noted involved failure to adhere to specific disclosure
requirements. The FFIEC agencies did
not issue any formal enforcement
actions relating to Regulation M during
the period.
Regulation P
(Privacy of Consumer
Financial Information)
The FFIEC agencies reported that
97 percent of the institutions examined
during the 2005 reporting period were
in compliance with Regulation P, compared with 96 percent for the 2004
reporting period. The most frequent violations involved failure to comply with
the following requirements:
Consumer and Community Affairs
• 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
101
• on certain residential mortgage transactions, provide a good faith estimate
of the required disclosures before
consummation, or not later than three
business days after receipt of the loan
application
In addition, 93 banks supervised by
the Federal Reserve and the FDIC were
required, under the Interagency Enforce• disclose the institution's information- ment Policy on Regulation Z, to reimsharing practices in initial, annual, and burse a total of approximately $591,000
to consumers for understating the annual
revised privacy notices
percentage rate or the finance charge in
The OCC issued a civil money pen- their consumer loan disclosures.
alty of $180,000 to a mortgage company
The OCC entered into a formal agreesubsidiary of a national bank for its fail- ment with a bank and its mortgage comure to properly and securely dispose of pany subsidiary for violations of the
confidential customer information. The Truth in Lending Act, the Real Estate
OTS issued one cease-and-desist order Settlement Procedures Act, and the Fedto a former institution-affiliated party eral Trade Commission Act. The subsidfor violations of Regulation P and iary was required to reimburse borrowanother consumer regulation. The indi- ers who were harmed and was directed
vidual paid a civil money penalty of to set aside at least $14 million to fund
$2,000 for the violations. The other these reimbursements.
FFIEC agencies did not issue any forThe OCC also issued a prohibition
mal enforcement actions relating to and cease-and-desist order, as well as a
Regulation P during the reporting civil money penalty of $20,000, against
period.
a former bank vice president for making
tax lien loans that violated the Home
Ownership Equity Protection Act, the
Regulation Z
Truth in Lending Act, the Real Estate
(Truth in Lending)
Settlement Procedures Act, and the FedThe FFIEC agencies reported that eral Trade Commission Act. The OCC
80 percent of the institutions examined had previously ordered the bank to reimduring the 2005 reporting period were burse affected customers and had issued
in compliance with Regulation Z, com- a cease-and-desist order against the
pared with 84 percent for the 2004 company that marketed, originated, and
reporting period. The most frequent vio- serviced the loans.
lations involved failure to take one or
The OTS issued five cease-and-desist
more of the following actions:
orders for violations of a number of
consumer regulations, including Regu• accurately disclose the finance charge lation Z, during the reporting period.
Three of the banks paid civil money
in closed-end credit transactions
penalties totaling $18,900. The FDIC
• accurately disclose the annual percent- issued one cease-and-desist order for
age rate (APR) in closed-end credit violations of a number of consumer
regulations, including Regulation Z. The
transactions
• provide a clear and conspicuous
annual privacy notice to customers
102 92nd Annual Report, 2005
other FFIEC agencies did not issue
any formal enforcement actions relating
to Regulation Z during the reporting
period.
The FTC settled charges against an
individual defendant and a group of
mortgage brokers for their alleged violations of the Truth in Lending Act
and Regulation Z, the Federal Trade
Commission Act, and other statutes.
Under the consent judgment, the
individual defendant will cease making misrepresentations about home
mortgage refinancing offers and cease
future violations of Regulation Z. The
defendant was also required to pay
$128,300 in consumer restitution. In
another case, the FTC settled charges,
through a stipulated order, against a
mortgage corporation for its alleged
violations of the Truth in Lending Act
and Regulation Z, the Federal Trade
Commission Act, and other statutes. The
stipulated order requires the defendant
to pay $750,000 in consumer restitution; the order also set up a $350,000
performance fund to be used if the
defendant fails to comply with the
order. In addition, the order bars the
defendant from making or servicing any
home-secured loans and includes other
injunctions.
The FTC continued litigation against
a mortgage broker and its principals for
their alleged violations of the Truth
in Lending Act, Regulation Z, and the
Federal Trade Commission Act, in
connection with advertisements for
extremely low mortgage rates. In 2004,
the court entered a stipulated preliminary injunction against the defendants.
In 2005, the court held the defendant's
chief executive officer in civil contempt
of that order; he was subsequently
arrested under a bench warrant. The
court released this individual after he
paid $275,000 in sanctions and agreed
to pay $400,000 in consumer restitution,
among other terms. Litigation is ongoing in this case.
The FTC settled charges against a
finance company, seven related companies, and their principals for their
alleged violations of the Truth in Lending Act and Regulation Z, the Federal
Trade Commission Act, and other statutes. The final order shut down the companies and permanently bars them and
their principals from participating in any
lending or direct-deposit business and
from offering or selling ancillary products. The FTC will receive a $10.5 million claim in the consolidated bankruptcy case against the companies,
50 percent of the assets in receivership,
and two suspended judgments totaling
approximately $674,000. Finally, the
FTC continues litigation against two
related companies and their officers for
their alleged violations of the Truth in
Lending Act, Regulation Z, and the Federal Trade Commission Act. The companies are alleged to have engaged in
misrepresentation about merchandise
refunds and, when consumers were
owed refunds, to have failed to promptly
credit their credit card accounts.
The FCA's examination and enforcement activities revealed that most Regulation Z violations involved inadequate
or incorrect disclosures for closed-end
credit. The other agencies that enforce
Regulation Z—the Department of
Transportation and the Grain Inspection,
Packers, and Stockyards Administration of the Department of Agriculture—
reported substantial compliance among
the entities they supervise.
Regulation AA
(Unfair or Deceptive Acts
or Practices)
The FFIEC agencies reported that
more than 99 percent of the institutions
examined during the 2005 reporting
Consumer and Community Affairs
period were in compliance with Regulation AA, which is comparable to the
level of compliance for the 2004 reporting period. 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 2005 reporting period were in
compliance with Regulation CC, which
is comparable to the level of compliance
for the 2004 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
103
ing the 2005 reporting period were in
compliance with Regulation DD, compared with 92 percent for the 2004
reporting period. Among the institutions
not in full compliance, the most frequently cited violations involved the following actions:
• using the phrase "annual percentage
yield" in an advertisement without
disclosing required additional terms
and conditions for customer accounts
• providing account disclosures that did
not contain all required information
• failing to provide timely maturity notification for time deposits
The OTS issued one cease-and-desist
order for violations of a number of
consumer regulations, including Regulation DD. The other FFIEC agencies
did not issue any formal enforcement
actions related to Regulation DD during
the reporting period.
Consumer Complaints
The OTS issued one cease-and-desist
order for violations of a number of
consumer regulations, including Regulation CC. The other FFIEC agencies
did not issue any formal enforcement
actions related to Regulation CC during
the reporting period.
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. In
2005, the Federal Reserve received 460
consumer complaints about regulated
practices by state member banks—
complaints were received by mail, by
telephone, in person, and electronically
via the Internet.
Regulation DD
(Truth in Savings)
Complaints against
State Member Banks
The FFIEC agencies reported that
Of the 460 complaints about regulated
• provide required information when
placing an exception hold on an
account
104 92nd Annual Report, 2005
loans: 5 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
73 percent concerned other creditrelated practices, such as credit card disclosures, preapproved solicitations, and
billing error resolution. Seventeen percent of the complaints involved disputes
about interest on deposits and other
deposit account practices, including
electronic fund transfers; the remaining
5 percent concerned disputes about trust
services or other practices. (See tables.)
In 95 percent of the complaints
against state member banks regarding
regulated practices that were investigated in 2005, the banks had correctly
handled the customer's account. The
remaining 5 percent of the complaints
against state member banks resulted in
a finding that the bank had violated
a consumer protection regulation. The
Consumer Complaints against State
Member Banks, by Classification, 2005
Classification
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)
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
Fair Debt Collection Practices Act
Fair Housing Act
Flood Insurance
Regulations T, U, and X
Real Estate Settlement Procedures Act
Total
Number
29
0
30
2
0
4
0
187
2
18
37
96
40
2
3
4
6
460
most common violations involved real
estate loans, deposit accounts, and electronic fund transfers.
Unregulated Practices
As required by section 18(f) of the Federal Trade Commission Act, the Board
continued to monitor complaints about
banking practices that are not subject
to existing regulations and to focus on
those that concern possible unfair or
deceptive practices. In 2005, the Board
received more than 1,300 complaints
against state member banks that involved unregulated practices. The categories that received the most complaints
involved checking accounts and credit
cards. Consumers most frequently complained about insufficient funds charges
and procedures (95 complaints); other
issues concerned interest rates and terms
on credit cards (95), customer service
(83), and fraud (57). The remainder of
the complaints concerned a wide range
of unregulated practices involving credit
cards, including banks' refusals to close
accounts when requested to do so by
customers, the amounts banks charge
for late payments, and the unsolicited
offers banks send to consumers.
Complaint Referrals to HUD
In accordance with a memorandum of
understanding between HUD and the
federal bank regulatory agencies, in
2005 the Federal Reserve referred three
complaints to HUD that alleged state
member bank violations of the Fair
Housing Act.
Advice from the
Consumer Advisory Council
The Board's Consumer Advisory
Council—whose members represent
consumer and community organizations,
Consumer and Community Affairs
105
Complaints against State Member Banks that Involve Regulated Practices, 2005
All complaints
Complaints involving violations
Subject of complaint
Number
Percent
Number
Percent
460
100
22
5
Loans
Discrimination alleged
Real estate loans
Credit cards
Other loans
5
11
7
1
2
1
0
0
0
0
Other type of complaints
Real estate loans
Credit cards
Other loans
42
257
38
9
56
8
7
3
2
17
1
5
Deposits
Electronic fund transfers
Trust services
Other
50
26
1
23
11
6
4
4
8
15
0
9
Total
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 held three times a
year and are open to the public. (For
a list of members of the council, see
the section "Federal Reserve System
Organization.")
In 2005, the council met in March,
June, and October. In March, council
members discussed the Board's proposed amendments to Regulation E,
which implements the Electronic Fund
Transfer Act (EFTA). Members focused
on proposed revisions to cover payroll
cards as "accounts" under Regulation E; the revisions would require
financial institutions to provide written
periodic statements to consumers who
use payroll cards. Some members
asserted that providing written periodic
statements to these consumers posed
operational problems for lenders,
because payroll card users are often not
bank customers. Other members
believed that payroll cards are a major
1
0
0
0
5
2
monetary asset for many unbanked
consumers—and consumers should
receive periodic statements for these
accounts, regardless of any statementdelivery or other concerns.
In March and June, the council discussed the advance notice of proposed
rulemaking (ANPR) to revise Regulation Z, which implements the Truth
in Lending Act (TILA). Members commented on the current content and
format of disclosures for credit card
accounts and also pointed out that competition between credit card companies
has led to consumers being offered
complicated and confusing products
that they may not understand. Members
commented on the disclosure table
known as the "Schumer box," which is
provided with credit card applications
and solicitations. Although including a
Schumer box on credit card applications
and solicitations has been a successful
way for lenders to disclose the associated fees, the design and format of
the box could still be improved. Members also discussed whether the TILA
amendments included in the Bankruptcy
Abuse and Prevention and Consumer
106 92nd Annual Report, 2005
Protection Act of 2005 should be implemented as part of the ongoing regulatory
review of Regulation Z. All members
agreed that developing the Bankruptcy
Act TILA disclosures in conjunction
with the review of Regulation Z would
be beneficial.
The Home Mortgage Disclosure Act
(HMDA) was a topic of discussion at
both the March and October meetings.
In March, council members discussed
revisions to Regulation C (HMDA's
implementing regulation) that require
federally insured depository and forproflt nondepository lenders to collect,
report, and publicly disclose loan-price
data for certain higher-priced home
mortgage loans. Many lenders and community groups expressed concerns about
the release and interpretation of the
new HMDA data. They emphasized that
the Federal Reserve System's community affairs staff could promote a better
understanding of the data by supporting
education efforts and starting a dialogue
between lenders and community groups.
In October, members noted that the new
HMDA pricing data show a higher incidence of higher-priced lending among
minorities; members also believed that
more research on opportunities for
reaching underserved individuals, including low-income and minority borrowers, is needed.
The proposed revisions to the financial agencies' regulations implementing the Community Reinvestment Act
(CRA) were discussed at the March and
June meetings. Members' comments
primarily focused on community development in rural areas. Prior to July 19,
2005, the CRA rules considered community development in rural areas as
eligible for CRA credit if the activities
targeted low- or moderate-income census tracts or populations. However,
rural areas are frequently categorized as
middle-income tracts because of the
uneven distribution of income levels
within those census tracts. Members
generally agreed that, in rural areas, the
definition of community development
should be expanded to be more responsive to the community development
needs of those areas, regardless of their
overall income levels. Members also
focused on the community development
test for branching services; they did not
agree with the proposed rule change that
would eliminate CRA credit for branching by banks with assets of between
$250 million and $1 billion. They
believed that a branching test should be
required for intermediate small banks
under the revised CRA proposal.
In June, council membersfromfinancial institutions discussed the scope and
variety of recent information security
breaches involving customer information, and they explored the challenges
of finding solutions for safeguarding
customer information. Members generally agreed that federal regulation (1) is
needed to address information security
problems on a national basis and
(2) should cover entities beyond financial institutions. Entities that are not
subject to regulatory oversight should
be required to meet federal guidelines
for establishing security programs and
providing notice to customers and law
enforcement agencies when breaches
occur.
In October, pursuant to the Economic
Growth and Regulatory Paperwork
Reduction Act of 1996 (EGRPRA),
members provided comments on consumer protection laws and regulations
that may have become outdated, unnecessary, or unduly burdensome. Members commented on the rules governing
the asset-size exemption for reporting
HMDA data, TILA's provisions addressing the right to rescind certain mortgage
loan transactions, the Gramm-LeachBliley Act (GLB Act) requirements for
Consumer and Community Affairs
sending annual privacy notices, and the
CRA rule requiring federal regulators'
prior approval for establishing branches.
Members agreed that the requirements
for HMDA reporting and TTLA's rightof-rescission rules were important and
should be retained without change.
Members suggested that the rules concerning GLB Act privacy notices and
the CRA notice requirements for establishing branches could be simplified.
Nontraditional mortgage loan products were also discussed at the October
meeting. During the past two years, the
number of consumers obtaining nontraditional mortgages, such as paymentoption adjustable-rate mortgages or
interest-only mortgages, has significantly increased. Council members
noted that these products are complex;
require extensive education on the part
of consumers, as well as extensive
disclosures by lenders; and are often
offered without considering sound
underwriting criteria for the loan. Members expressed concern that some lenders do not provide consumers with disclosures that explain the full range of
risks involved in repaying the loan.
Members highlighted the need for moreextensive consumer financial education,
which should be balanced with clear
disclosures from lenders, understandable and less complex products, and
underwriting standards that assess borrowers' suitability for nontraditional
loan products. Hurricane Katrina was
another topic of discussion at the October meeting. Members discussed a wide
range of issues connected with the
impact of the hurricane, commending
the performance of the Federal Reserve
and the other bank regulatory agencies
in addressing immediate issues. However, members noted that the Gulf Coast
region now needs long-term rebuilding
and revitalization strategies to supplement the shorter-term "piecemeal"
107
responses that occurred immediately
after the disaster. Members encouraged
the Federal Reserve Board to take a
leadership role in bringing federal policymakers together for a dialogue about
long-term goals and solutions.
Promotion of Consumer
Education and Community
Economic Development in
Historically Underserved
Markets
In 2005, the community affairs function within the Federal Reserve System
supported several initiatives to promote community economic development and fair access to credit for lowand moderate-income communities and
populations. The function continued to
focus on financial literacy and education, the sustainability of community
development organizations, policies to
help low-income individuals build their
assets, and community economic development. Activities included conducting
research, publishing newsletters and
articles, sponsoring conferences and
seminars, and supporting the dissemination of information to both general and
targeted audiences.
As a decentralized function, the Community Affairs Offices (CAOs) at the
Board and each of the twelve Reserve
Banks design activities in response to
the needs of communities in the regions
they serve. At the Reserve Banks, CAOs
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; the
Board's CAO engages in activities and
explores issues that have public policy
implications.
Promoting well-educated and informed consumers is vital to supporting
108 92nd Annual Report, 2005
consumer protection and efficient financial market operations. Accordingly, the
Board has a long-standing commitment
to providing consumers with information that helps them know their rights
and responsibilities in relation to financial services, including how they can
use disclosures to shop and compare
products and providers. The Federal
Reserve maintains a consumer information web site (www.federalreserve.gov/
consumers.htm) that includes educational materials related to the Board's
consumer regulations. In 2005, the consumer publication "How to File a Consumer Complaint about a Bank" was
substantially revised and updated to
reflect the current marketplace.
Last year, Board staff continued to
be involved with an interagency working group drafting a national strategy for
financial education. The working group
was created to fulfill the legislative mandate of the Financial Literacy and Education Commission (the commission),
established by the Fair and Accurate
Credit Transactions Act (the FACT Act).
The thirteen-agency working group, led
by Treasury Department staff, is charged
with developing a national strategy to
promote basic financial literacy and education. The working group has sought
the participation of government, private,
nonprofit, and public institutions in this
effort. In 2005, Board staff submitted
comments to Treasury Department staff,
who are writing the final strategy. Board
staff also worked with the other agencies to update the www.MyMoney.gov
web site; the update links the web site to
the Federal Reserve's consumer education materials. The globalization of the
financial services industry has made
financial education an international, as
well as a national, concern. In November, Board staff shared insights on financial education and consumer protection
regulation at a conference hosted by the
European Credit Research Institute in
Belgium, and at the Third International
Forum on Financial and Consumer Protection and Education in Malaysia.
Recognizing the importance of providing access to consumer and financial
education to its employees, the Board
offered several informational seminars
in conjunction with its Workplace
Financial Education Task Force, chaired
by the director of the Division of Consumer and Community Affairs. Four
programs were offered in 2005: identity
theft, alternative and interest-only mortgage loans, credit reports, and an orientation to money and finances for Take
Your Sons and Daughters to Work Day.
Staff also assisted in the design and
launch of a tax resources web site on the
Board's intranet.
Board staff continued to be involved
in national financial education initiatives throughout the year. The division's
director serves as an adviser to the board
of Operation HOPE, a national nonprofit organization dedicated to delivering financial education programs to
low-income populations with a particular focus on communities suffering from
natural disasters. Currently, a member
of the Board of Governors serves on
the board of directors of NeighborWorks
America (the trade name of the Neighborhood Reinvestment Corporation).
Community Affairs staff participate in
strategic planning for the NeighborWorks Center for Homeownership Education and Counseling, with the objective of developing national standards for
financial counseling and training to promote homeownership among low- and
moderate-income populations. To further support consumers' informed decision making about mortgage credit,
Board staff developed an information
brochure describing the implications of
interest-only loans, a popular product
in high-cost housing markets. The bro-
Consumer and Community Affairs
chure describes the rate and payment
adjustments inherent in the terms of
these loans. Board and Reserve Bank
staff also continued to support the Conference of Mayors' financial education
program, Dollar Wi$e. In various cities
throughout the country, the program
seeks to increase the awareness of the
importance of personal financial management. Membership in the campaign
doubled in 2005, with seventy-one cities
now participating.
The CAOs at the Reserve Banks
remained active in financial education
initiatives during 2005. The Federal
Reserve Bank of Kansas City actively
promoted workplace financial education by convening employers in Kansas
City and Denver to discuss the advantages of providing financial education
to employees. In partnership with the
Atlanta Reserve Bank, Kansas City
staff also published a brochure identifying the characteristics of an effective financial education program
(www.kc.frb.org/comaffrs/Workshops/
FEbrochure.pdf). The Oklahoma City
Branch of the Kansas City Reserve Bank
collaborated with the Oklahoma
Jump$tart Coalition to host a conference
of local financial-education service
providers and community members to
identify strategies for expanding financial education throughout the state. In
an effort to expand the scope of the
regional financial education collaboratives it has helped establish in key cities
in the Fourth District, the Cleveland
Reserve Bank hosted a conference that
underscored effective strategies for measuring success and conducting research
on financial education.
Complementing the System's financial education efforts, various CAOs
partnered with CFED, a national nonprofit organization formerly known as
the Corporation for Enterprise Development, to host a series of events
109
delving into asset-building and wealthaccumulation strategies for lowerincome individuals. The San Francisco,
New York, Boston, and Philadelphia
Reserve Banks cohosted two conferences with CFED in San Francisco and
New York that highlighted privatesector innovations as well as local and
national policies that facilitate and
encourage savings and investment
among lower-income consumers. In
addition, the Board and the Richmond
Reserve Bank cohosted a forum of
national research and policy experts to
discuss opportunities for improving
asset-building among lower-income
populations.
Building on prior years' efforts to
help community development financing
organizations grow and survive, the
Federal Reserve System and the Aspen
Institute collaborated on a series of conferences. Research by the Aspen Institute, a national research and leadership development organization, was the
foundation for conference discussions
about the industry and how to increase
its impact. One event, sponsored by
the Chicago Reserve Bank, explored
various business models that have led
to successful community development
finance programs. Another event,
cohosted by the Boston Reserve Bank,
explored whether socially responsible
investments can be used to fund community development institutions and
help them operate more effectively.
Board staff also participated in an international conference, sponsored by the
Social Enterprise Initiative at Harvard
Business School, on effective business
strategies for serving lower-income
populations. Staff presented a case study
of a community development financial
institution, highlighting the role banking
regulation and policy had in motivating
private investment in these institutions,
as well as the business strategies these
110 92nd Annual Report, 2005
institutions adopted to respond to the
credit and financial services needs of
their lower-income markets.
The System's CAOs remain committed to increasing research and data on
community economic development. In
2005, the System hosted its biennial
community development research conference, "Promises and Pitfalls: As Consumer Finance Options Multiply, Who
Is Being Served and at What Cost?"
The Research and Community Affairs
staffs at the Board and the Cleveland
Reserve Bank collaborated on the event.
Papers presented at the conference
assessed 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. In one paper, System staff studied
data from focus groups with Mexican
immigrants who remitted money to family members in Mexico. Those results
are being used to help immigrants
connect with the banking system and
thereby increase market efficiencies for
both financial institutions and consumers. The results are also being used in
interagency efforts to educate consumers about the remittance channels available to them. A call for papers for the
System's 2007 research conference has
been issued. The 2007 conference will
address the effectiveness of the Community Reinvestment Act (CRA) in promoting access to and encouraging community and economic development, in
light of the dramatic changes that have
occurred in the financial services industry in the thirty years since the CRA was
enacted.9
In addition to participating in the System research conference, several CAOs
9. The web site for the 2005 conference
(including conference papers), as well as
the 2007 call for papers, can be accessed at
www.federakeserve.gov/community.htm.
at Reserve Banks have expanded their
programs to include research and data
collection. The Boston Reserve Bank
launched a series of community economic development papers that offer
in-depth coverage of current community
economic development issues. The Boston Bank also created a new series of
data resources on the socioeconomic
characteristics of lower-income communities in New England (www.bos.frb.org/
commdev/index.htm). The New York
Reserve Bank published research on
whether stored-value cards are an effective electronic payment tool for unbanked consumers; the Bank also published a paper on using the earned
income tax credit to encourage savings
and banking system participation by
unbanked consumers (www.ny.frb.org/
regional/commdev.html). To bridge the
gap between community economic
development theory and practice, the
San Francisco Reserve Bank launched a
new community development journal
that features articles and commentary
by researchers, policymakers, and practitioners (www .sf.frb.org/publications/
community/). Research by Board staff
on the financial education programs
offered to military personnel by the
Department of Defense (DoD) continued. Staff collected data from recipients
of the DoD's financial education program as support for a longitudinal study
to assess the impact of DOD's programs
on the financial management behavior
of the recipients.
Finally, Board staff undertook efforts
to help the public understand and use
the new Home Mortgage Disclosure
Act (HMDA) data. Public interest in
HMDA data increased significantly in
2005, with the release of previously
uncollected data on the pricing of
home mortgage loans. To address
potential concerns and questions about
the new HMDA data, Board staff
Consumer and Community Affairs
worked collaboratively with other
agencies to develop questions and
answers about the insights and limitations the new data provide. (See the
Board's March 31, 2005, press release at
www.federalreserve.gov/newsevents.htm.)
These questions and answers were
designed to both help interested parties
use the data objectively and to discourage individuals and groups from forming conclusions about mortgage lending
patterns that are not supported by the
data.
Outreach Activities
The Board engages in outreach activities throughout the year to provide information to the public about the Board's
responsibilities, to facilitate understanding of changes in banking regulations
and their impact on banks and consum-
111
ers, 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 2005 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.
•
113
Federal Reserve Banks
In addition to contributing to the setting
of national monetary policy and supervising and regulating banks and other
financial entities (discussed in preceding chapters), the Federal Reserve
Banks operate a nationwide payments
system, distribute the nation's currency
and coin, and serve as fiscal agents and
depositories for the United States.
Developments in
Federal Reserve Priced Services
In operating a nationwide payments system, the Federal Reserve Banks provide
numerous services to depository institutions, including collecting and processing checks, operating an automated
clearinghouse service, transferring funds
and securities, and providing settlement
services. The Reserve Banks charge fees
for providing these "priced services."
The Monetary Control Act of 1980
requires that the Federal Reserve establish fees for priced services provided to
depository institutions so as to recover,
over the long run, all direct and indirect
costs actually incurred as well as the
imputed costs that would have been
incurred, including financing costs,
taxes, and certain other expenses, and
the return on equity (profit) that would
have been earned if a private business
firm had provided the services. The
imputed costs and imputed profit are
collectively referred to as the privatesector adjustment factor (PSAF).1 Over
1. 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 assessments for deposit insurance by the Federal Deposit
Insurance Corporation (FDIC). Board of Governors assets and personnel costs that are related to
the past ten years, the Reserve Banks
have recovered 98.4 percent of thenpriced services costs, including the
PSAF (table). In 2005, the Board
approved changes, to be effective in
2006, to the method for calculating the
target return on equity measure in the
PSAF.
Overall, the price index for priced
services increased 8.4 percent from
2004 to 2005. Revenue from priced services amounted to $901.0 million, other
income was $93.7 million, and costs
were $834.7 million, resulting in
net income from priced services of
$160.0 million. In 2005, the Reserve
Banks recovered 106.1 percent of total
costs of $937.7 million, including the
PSAF.2
Commercial Check
Collection Service
In 2005, operating expenses and
imputed costs for the Reserve Banks'
commercial check collection service
totaled $688.6 million, of which
$39.0 million was attributable to the
transportation of commercial checks
priced services are also allocated 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.
2. 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 FDIC assessment), imputed income taxes, and
the targeted return on equity.
114 92nd Annual Report, 2005
Priced Services Cost Recovery, 1996-2005
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
1996
1997
1998
1999
2000
815.9
818.8
839.8
867.6
922.8
746.4
752.8
743.2
775.7
818.2
42.9
54.3
66.8
57.2
98.4
789.3
807.1
809.9
832.9
916.6
103.4
101.5
103.7
104.2
100.7
2001
2002
2003
2004
2005
960.4
918.3
881.7
914.6
994.7
901.9
891.7
931.3
842.6
834.7
109.2
92.5
104.7
112.4
103.0
1,011.1
984.3
1,036.1
955.0
937.7
95.0
93.3
85.1
95.8
106.1
8,934.6
8,238.4
841.4
9,080.0
98.4
. . .
1996-2005
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 $8,606.3 million and other income and expense
(net) of $328.3 million.
2. For the ten-year period, includes operating expenses
of $7,585.1 million, imputed costs of $341.4 million, and
imputed income taxes of $312.0 million.
3. Revenue from services divided by total costs.
between Reserve Bank check-processing
centers. Revenue amounted to $740.3
million, of which $42.9 million was
attributable to estimated revenues
derived from the transportation of commercial checks between Reserve Bank
check-processing centers, and other
income was $77.1 million. The resulting
net income was $128.7 million. Check
service revenue in 2005 increased
$20.6 million from 2004, largely
because of price increases and a slowerthan-anticipated reduction of checkprocessing volume.
The Reserve Banks handled 12.2 billion checks in 2005, a decrease of
12.3 percent from the 13.9 billion
checks handled in 2004 (table). The
decline in Reserve Bank check volume
is consistent with nationwide trends
away from the use of checks and toward
greater use of electronic payment methods.3 Overall, the price index for check
services increased 10.2 percent from
2004.
In response to the continuing decline
in check volume, the Reserve Banks in
2005 continued to reduce check service
operating costs through a combination
of measures, including closing some
check-processing sites and increasing
capacity at others. Checks that once
would have been processed in Birmingham are now processed in Atlanta.
Detroit check processing has been consolidated to Cleveland; Salt Lake City to
Denver; Portland to Seattle; and Houston and Oklahoma City to Dallas.
Of all the checks presented by the
Reserve Banks to paying banks in 2005,
25.2 percent (approximately 3.1 billion checks) were presented electronically, compared with 23.1 percent in
2004. The Banks captured images of
11.8 percent of the checks they col-
3. The Federal Reserve System's retail payments research suggests that the number of checks
written in the United States has been declining
since the mid-1990s. For details, 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)
Federal Reserve Banks
115
Activity in Federal Reserve Priced Services, 2003-2005
Thousands of items
Percent change
Service
2004
2005
2003
2004 to 2005
Commercial check
Funds transfer
Securities transfer
Commercial ACH
Noncash
12,195,301
135,227
9,235
7,338,950
117
13,904,382
128,270
9,208
6,486,091
211
15,805,894
125,936
10,071
5,588,381
280
2003 to 2004
-12.3
5.4
.3
13.1
-44.5
-12.0
1.9
-8.6
16.1
-24.7
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.
lected, an increase from 10.4 percent
in 2004. In 2005 the Banks presented
approximately 241.5 million substitute
checks, or 2.0 percent of the total number of checks they collected. (For more
information on substitute checks, see the
box "The First Full Year of Check 21.")
Fedwire Funds and
National Settlement Services
Commercial Automated
Clearinghouse Services
Reserve Bank operating expenses and
imputed costs for commercial automated
clearinghouse (ACH) services totaled
$72.1 million in 2005. Revenue from
ACH operations totaled $79.3 million
and other income totaled $8.2 million,
resulting in net income of $15.2 million.
The Banks processed 7.3 billion commercial ACH transactions (worth
$12.8 trillion), an increase of 13.1 percent from 2004. Overall, the price index
for ACH services decreased 1.1 percent
from 2004.
In 2005 the Reserve Banks conducted
a pilot program of an ACH riskmanagement service that will be available to all depository institutions in
2006. The service will help originating
institutions manage operational, credit,
and third-party risk associated with
originating ACH payments.
Reserve Bank operating expenses and
imputed costs for the Fedwire Funds
and National Settlement Services totaled
$55.3 million in 2005. Revenue from
these operations totaled $61.0 million and other income amounted to
$6.3 million, resulting in net income of
$12.1 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
2005, the number of Fedwire funds
transfers originated by depository institutions increased 5.4 percent from 2004,
to approximately 135.2 million. The
average daily value of Fedwire funds
transfers in 2005 was $2.1 trillion.
National Settlement Service
Private clearing arrangements that
exchange and settle transactions may
use the Reserve Banks' National Settle-
116
92nd Annual Report, 2005
The First Full Year of Check 21
The United States is in the midst of significant change in Ihe way payments are made.
At one time, most nortcash payments were
made by paper cheek. Evidence of major
change was seen in the results of the
Federal Reserve's most-recent payments
research, which found that in 2003, for the
first time ever, businesses and consumers
made more payments electronically (by
debit and credit card, for example) than by
paper check. Hie declining use of checks is
only a part of the ongoing change within
the payments system, however. The way in
which checks are collected is changing as
well, as a result of the Check Clearing for
the 21st Century Act (commonly referred
to as Check 21)* Before implementation of
the act in 2004, laws governing check collection allowed a paying bank to require
that the original check be physically
presented for payment. Check 21 was
designed to facilitate the electronic processing of checks, with the goal of making
check collection faster, more efficient, and
kss costly.
Under Check 2i> while a paying bank
may demand that presentment be in the
ment Service to settle their transactions.
This service is provided to approximately fifty-five local and national
private arrangements, primarily check
clearinghouse associations but also other
types of arrangements. In 2005, the
Reserve Banks processed slightly more
than 440,000 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
form of a paper check, it may no longer
require that the original check be pre*
seated* Instead* paying banks must accept a
^substitute check/* a special paper copy of
an original check that can be processed
in the same way as the original check. By
authorizing this new, legally equivalent
negotiable instrument, Check 21 facilitates,
through the action of market forces, the
adoption of check truncation and the electronic collection of checks.1 As banks
increasingly send and receive checks electronically, they will be able to reduce their
1. Check truncation Is the removal of an
original check from the check-collection system
and the collection, instead, of a substitute check
or, by agreement, information contained on the
original check's magnetic ink character recognition (MICR) line, including the paying bank's
routing number, the check writer's account number, the check serial number, and the amount of
the check. Additional consumer information on
Check 21 is available at www.federakeserve.gov/
consumers.htm. Banking industry educational
and reference material on Check 21 is available
at www .ffiec. gov/exam/check21 /default.htm.
certain international organizations to
other participants in the United States.4
Reserve Bank operating expenses and
imputed costs for providing this service totaled $17.4 million in 2005.
Revenue from the service totaled
$19.3 million, and other income totaled
4. The expenses, revenues, and volumes
reported here are for transfers of securities issued
by federal government agencies, governmentsponsored enterprises, and certain international
organizations. 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
infrastructure for processing paper checks
and the cost of physically transporting
original paper checks from the bask where
they were deposited to the banks that pay
them.
The Federal Reserve Banks have been
leaders within the payments industry in
making use of the authority granted by
Check 21. They began offering Check 21
services as soon as the law became effective in October 2004. The services allow
for the deposit of digital check images
with the Reserve Banks and the truncation
of paper-check deposits by the Reserve
Banks. The check images are transmitted
to the Reserve Bank closest to the paying
bank, thereby eliminating the need to
physically transport paper checks between
the Banks, The receiving Reserve Bank
either prints substitute checks from the
check images for presentment to the paying
bank or, if the paying bank accepts electronic presentment, provides the check
information electronically.
Across the industry, banks have begun to
take advantage of the opportunities created
117
by Check 21, More than 500 depository
institution customers were using Federal
Reserve Check 21 services by year-end
2005, In December 2005, peak daily volume processed by the Reserve Banks
exceeded 3 million substitute checks valued at more than $19 billion.
As with many significant operational
and technological changes, adoption of the
new check-processing methods made possible by Check 21 has been gradual. To
fully realize the benefits of a faster, more
efficient, less costly, and more resilient
check-collection system envisioned when
Check 21 was enacted, the banking industry will need to make changes to its current
systems to support the exchange of digital
check images. As technology improves
and scale economies are realized, the
cost of collecting checks electronically
will decrease relative to the cost of collecting paper checks, and this decrease
should eventually spur greater adoption of
Check 21 technologies across the banking
industry.
$2.0 million, resulting in net income of
$3.8 million. Approximately 9.2 million
transfers of Treasury and other securities were processed by the service during the year, almost unchanged from
2004. In 2005, the surcharge for offline
transfers increased from $28 to $33.
2005, representing a 44.5 percent
decline in volume from 2004. Operating
expenses and imputed costs for noncash
operations totaled $1.1 million in 2005,
and revenue and other income totaled
$1.2 million, resulting in net income of
approximately $0.1 million.
Noncash Collection Service
Float
At year-end 2005, the Reserve Banks
withdrew from the noncash collection
service, which collected and processed
municipal bearer bonds and coupons
issued by state and local governments
(referred to as "noncash" items),
because of a declining volume of coupons and bonds presented for collection.
The service processed slightly fewer
than 117,000 noncash transactions in
The Federal Reserve had daily average
debit float of $133.4 million in 2005,
compared with credit float of $76.4 million in 2004.5
5. Credit float occurs when the Reserve Banks
receive settlement for items prior to providing
credit to the depositing institution, and debit float
occurs when the Reserve Banks credit the depositing institution prior to receiving settlement.
118 92nd Annual Report, 2005
Developments in
Currency and Coin
The Federal Reserve Banks distribute
the nation's currency (in the form of
Federal Reserve notes) and coin through
depository institutions and receive currency and coin from circulation. As currency flows into the Reserve Banks, the
Banks inspect the notes and destroy
those that are unfit for recirculation.
The Reserve Banks received 37.2 billion Federal Reserve notes from circulation in 2005, a 0.9 percent decrease from
2004, and made payments of 38.5 billion notes into circulation, a 1.6 percent increase from 2004. They received
56.1 billion coins from circulation in
2005, a 0.8 percent increase from 2004,
and made payments of 72.1 billion coins
into circulation, a 6.9 percent increase
from 2004.6
Because many depository institutions
overuse Reserve Bank cash-processing
services, the Board in 2003 requested
comment on a policy of providing incentives to encourage depository institutions to recirculate fit currency to their
customers rather than return it to the
Federal Reserve for processing. Under
the policy, the Federal Reserve would
establish a custodial inventory program
that allows depository institutions to
transfer a portion of their cash holdings
to the books of a Reserve Bank. Reserve
Banks would charge fees to institutions
that, within a one-week period, deposited fit currency and reordered currency
of the same denomination within the
same Reserve Bank office's service
area. The Reserve Banks conducted a
custodial inventory proof-of-concept
program in 2004 to test the effectiveness
of a program that supports the proposed
policy and evaluated the program in
6. Percentages reflect restatements of previously reported data.
2005. The Reserve Banks believe that a
permanent custodial inventory program,
together with recirculation fees, would
provide incentives to depository institutions to recirculate currency.
Study of the proposed policy's potential effects on the quality of currency
in circulation continues. In 2005, the
Federal Reserve worked with vending
industry representatives to determine the
effect of quality variance on machines'
ability to accept currency. The Federal
Reserve is also developing a technical
definition of currency that is "fit for
commerce" and a Reserve Bank program to monitor and control the quality
of currency in circulation. The Board is
expected to consider approval of a final
recirculation policy in early 2006.
The Reserve Banks also continue to
study cost-effective alternatives to the
existing infrastructure for providing
cash services. Earlier studies resulted
in the elimination of cash operations
at the Little Rock, Louisville, Buffalo,
and Portland (Oregon) offices and the
replacement of these offices with cash
depots. In a cash depot arrangement,
armored carrier facilities serve as collection and distribution points for depository institutions' currency deposits and
orders. The deposits and orders are
transported to and from a nearby
Reserve Bank by armored carrier.
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 federal government,
process electronic and check payments
for the Treasury, maintain the Treasury's bank account, and invest excess
Treasury balances. The Reserve Banks
Federal Reserve Banks 119
Expenses of the Federal Reserve Banks for Fiscal Agency and Depository Services,
2003-2005
Thousands of dollars
Agency and service
2005
2004
2003
59,624.0
26,879.2
6,055.8
17,553.5
2,575.5
1,806.5
114,494.5
72,385.1
30,872.7
6,267.0
17,159.5
5,935.1
1,709.8
134,329.1
66,403.7
33,013.5
4,836.3
16,802.6
7,836.7
1,460.7
130,353.4
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
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
20,988.0
5,709.5
109.4
49,366.0
24,245.4
5,352.9
111.6
33,646.9
25,624.7
6,253.9
187.3
23,630.8
39,736.0
14,354.2
40,496.7
67,703.3
2,332.2
240,795.4
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
Other Treasury
Total
Total, Treasury
15,726.7
371,016.6
15,106.1
341,403.7
13,913.5
291,748.5
2,642.4
4,519.0
7,791.4
OTHER FEDERAL AGENCIES
Department of Agriculture
Food coupons
U.S. Postal Service
Postal money orders
Other agencies
Other services
Total, other agencies
7,647.8
7,774.6
10,959.5
14,870.2
25,160.4
16,104.0
28,397.5
16,508.2
35,259.2
Total reimbursable expenses
396,177.0
369,801.2
327,007.7
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 2005
amounted to $396.2 million, compared
with $369.8 million in 2004 (table).
Treasury-related costs were $371 million in 2005, compared with $341.4 million in 2004, an increase of 8.7 percent.
The cost of providing services to other
entities was $25.2 million, compared
with $28.4 million in 2004. In 2005, as
in 2004, the Treasury and other entities
reimbursed the Reserve Banks for the
costs of providing these services.
The most-significant development in
the provision of fiscal agency services
in 2005 was the Reserve Banks' consolidation of customer service and
back-office 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
120 92nd Annual Report, 2005
needed. The consolidation to two sites
was completed in October 2005. The
Banks expect that annual operating costs
for retail securities operations will
decline considerably in 2006 because of
lower personnel costs.
Debt Services
15,000 securities worth $673.3 million
in 2004. Fees associated with the sale of
securities through Sell Direct totaled
$566,000, an increase of 12.2 percent
from the more than $504,000 in fees
collected in 2004.
The Banks printed and mailed more
than 32 million savings bonds in 2005, a
9.6 percent decrease from 2004. They
issued more than 3 million Series I
(inflation indexed) bonds and 12.6 million Series EE bonds. Reissued or
exchanged bonds accounted for the
remaining bonds printed. The Banks
processed about 3.5 million redemption,
reissue, and exchange transactions, a
9.6 percent decrease from 2004.
The Reserve Banks auction, provide
safekeeping for, and transfer Treasury
securities. Reserve Bank operating
expenses for these activities totaled
$23.6 million in 2005, a slight increase
from 2004. The Banks processed
245,000 tenders for Treasury securities,
compared with 156,000 in 2004. They
originated 12.6 million transfers of
Treasury securities in 2005, an 18.6 perPayments Services
cent increase from 2004.
The Reserve Banks also operate com- The Reserve Banks process both elecputer applications and provide customer tronic and check payments for the Treaservice and back-office support for the sury. Reserve Bank operating expenses
Treasury's retail securities programs, for processing government payments
including Treasury securities and sav- totaled $76.2 million in 2005, compared
ings bonds. Reserve Bank operating with $63.4 million in 2004. The Banks
expenses for these activities were processed 981 million ACH payments
$86.5 million in 2005, compared with for the Treasury, an increase of 4.4 per$103.3 million in 2004.
cent from 2004, and more than 849,000
In addition, the Reserve Banks oper- Fedwire funds transfers. They also proate Treasury Direct, a program that cessed 214.8 million paper government
allows investors to purchase and hold checks, a decline of 8.3 percent from
Treasury securities directly with the 2004. In addition, the Banks issued more
Treasury instead of through a broker. than 206,000 fiscal agency checks, a
The program held $68.1 billion (par decrease of 25.9 percent from 2004.
value) of Treasury securities as of
In addition to processing payments,
December 31, 2005. Because the pro- the Reserve Banks operate several program was designed for investors who grams to help the Treasury increase the
plan to hold their securities to maturity, use of electronic payments. One such
it does not provide transfer services. program, the Automated Standard
Investors may, however, sell their secu- Application for Payment, enables recipirities for a fee through Sell Direct, a ents of federal grants to request payprogram operated by one of the Reserve ments using the Internet. This applicaBanks. Approximately 14,000 securities tion processed $423.8 billion in Fedwire
worth $874.8 million were sold through funds transfers and ACH payments in
Sell Direct in 2005, compared with 2005, compared with $404.7 billion in
Federal Reserve Banks
2004. Another such program, the storedvalue card program, provides salary and
benefit payments to military personnel,
via a smart card, for use at military
bases. In 2005, the Banks worked with
the Treasury to plan a web-based application to allow federal agencies and vendors to exchange purchase orders and
invoices and initiate ACH payments
electronically. The operating costs for
these three programs totaled $19.7 million in 2005, compared with $15.4 million in 2004.
Collection Services
The Reserve Banks support several
Treasury programs to collect funds
owed the federal government. Reserve
Bank operating expenses related to these
programs totaled $54.1 million in 2005,
compared with $47.2 million in 2004.
The Banks operate the Federal Reserve
Electronic Tax Application (FR-ETA) as
an adjunct to the Treasury's Electronic
Federal Tax Payment System (EFTPS).
EFTPS allows businesses and individual
taxpayers to pay their taxes electronically. It uses the automated clearinghouse (ACH) to collect funds, so tax
payments must be scheduled at least one
day in advance. Some business taxpayers, however, do not know their tax
liability until the tax due date. FR-ETA
allows these taxpayers to use EFTPS by
providing a same-day electronic federal
tax payment alternative. FR-ETA collected $409.2 billion for the Treasury in
2005, compared with $344.8 billion in
2004.
In addition, the Reserve Banks operate Pay.gov, a Treasury program that
allows members of the public to pay for
goods and services offered by the federal government over the Internet. They
also operate the Treasury's Paper Check
121
Conversion and Electronic Check Processing programs, whereby checks written to government agencies are converted into ACH transactions at the
point of sale or at lockbox locations. In
2005, the Reserve Banks originated
more than 2.6 million ACH transactions
through these programs, a 36 percent
increase from the 1.9 million originated
in 2004.
Cash Management Services
The Treasury maintains its bank account
at the Reserve Banks and invests the
funds it does not need for 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
$40.5 million in 2005, compared with
$21.8 million in 2004. The investments
either are callable on demand or are for
a set term. In 2005, the Reserve Banks
placed a total of $8.8 billion in immediately callable investments and
$574.1 billion in term investments. The
rate for term investments is set at auction; the Reserve Banks held 104 such
auctions in 2005, compared with 45 auctions in 2004. In 2005, the Treasury's
income from the TT&L program was
$597.4 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.
122 92nd Annual Report, 2005
The Federal Reserve System's Response
to Hurricane Katrina
The damage from Hurricane Katri&a's
strike along the Gulf Coast on August 29,
2005, and the subsequent flooding of
much of New Orleans when levees were
breached, seriously affected the banking
system's ability to provide financial services at a time when individuals and businesses needed access to their funds. Some
depository institutions were flooded and
unable to open. Others in the Gulf Coast
region that were not severely damaged and
might have opened were usable to do so
because of interruptions to utility services
or a shortage of employees. The transportation of cash for distribution to the public
was impeded, and the process of presenting
and collecting checks was disrupted.
These conditions presented challenges to
the Federal Reserve, which is charged with
distributing the nation's currency and coin
and provides check-collection services to
depository institutions, in the Gulf Coast
region, the Federal Reserve conducts
these operations through the New Orleans
Branch of the Atlanta Federal Reserve
Electronic Access to
Reserve Bank Services
The Federal Reserve Banks have been
using a DOS-based platform, FedLine,
to provide services and information to
about seven thousand depository institution end points, mainly small and
medium-sized institutions. A moreefficient replacement delivery channel,
FedLine Advantage, which uses Internet
web technologies to provide financial
institutions with access to such critical
payment systems as Fedwire Funds Service, Fedwire Securities Service, and
FedACH Services, has been developed.
Migration to FedLine Advantage began
in 2005 and will be completed in 2006.
Bank. The New Orleans Branch building
was not flooded and sustained only minor
damage from the hurricane, Only a few
essential employees were able to remain in
the building, however, so the Branch was
unable to provide services as usual. Nonetheless, even before Hurricane Katrina
struck, the Branch implemented its contingency operations plans by relocating cer~
tain essential employees from New Orleans
to the Atlanta Bank's Birmingham, Ala- i
bama, Branch, and it quickly began providing services to depository institutions
through other Federal Reserve oftiees. Recognizing that depository institutions faced
gasoline shortages and could incur high
costs to obtain cash from offices outside
New Orleans, the Atlanta and Dallas
Reserve Banks arranged for armored carriers to transport cash into the affected areas.
To further support recovery efforts, the
Atlanta Reserve Bank also opened drop-off
points for check deposits a few days after
the hurricane, These deposits were then
transported to the Bank's Atlanta office
Information Technology
In 2005, the Federal Reserve Banks
completed projects to standardize local
area network components and telephone
private branch exchange systems and to
implement reduced-cost wide area network telecommunications services. An
initiative is now under way to strengthen
information security controls across the
System.
In partnership with the agencies that
make up the Financial and Banking
Information Infrastructure Committee,
the Federal Reserve continued in 2005
to sponsor clearing and settlement utilities, key financial institutions, and key
market participants in the national secu-
Federal Reserve Banks
for processing. StafY from other Federal
Reserve offices—and, subsequently, relocated New Orleans employees—have continued to process checks in Atlanta. The
Atlanta Bank provided credit for deposited
checks drawn on depository institutions in
the New Orleans area even though it was
initially unable to present checks to those
institutions for collection, and it did not
return the checks that it could not present.
During the crisis, the number of checks
drawn on New Orleans area institutions
that cleared through the Federal Reserve
rose significantly as checks that would
normally have cleared through other channels were redirected through the Federal
Reserve.
As depository institutions in the affected
area began operating at contingency locations, the Atlanta Reserve Bank contacted
those institutions to gather information on
their situation, particularly on their liquidity and their ability to process payments.
Reestablishing contact with depository
institutions—an effort on which the Fed|eral Reserve worked closely with other
Regulatory agencies—was critical, as some
^institutions had difficulty restoring their
rity and emergency preparedness programs offered by the Department of
Homeland Security's National Communications System, which coordinates
activities to ensure that critical telecommunications services are prepared
to meet natural disasters and national
emergencies. The Board's role in implementing one of these programs—the
Telecommunications Service Priority
program—to help restore telecommunications services to financial institutions
in Mississippi and Louisiana in the wake
of Hurricane Katrina and the subsequent
flooding in New Orleans is described in
the accompanying box.
In response to recommendations in
the 2004 report of the Financial Services
123
operations and were unable to retrieve their
ACH (automated clearinghouse) files,
which contained information on payroll,
Social Security, and other credit payments
that their customers oeeded in this time of
crisis*
The Board also worked with key government finance and banking regulatory agencies to devise a strategy for restoring vital
telecommunications services to affected
institutions. The Board served as the central point of contact for management of the
overall restoration effort under the Telecommunications Service Priority (TSP)
program—a federal program that identifies
and prioritizes those telecommunications
services essential to national security and
emergency preparedness.1 Most institutions
that were assigned high TSP priority had
some measure of telecommunications services available within a matter of days.
1, The TSP program is administered by the
National Communications System (NCS), an
interagency group of federal departments md
agencies that plans for and coordinates national
security and emergency preparedness telecommunications, especially during crises.
Task Force of the President's National
Security Telecommunications Advisory
Committee, the Federal Reserve in 2005
partnered with the Alliance for Telecommunications Industry Solutions (ATIS)
on a collaborative project. The team
assessed the ability to track changes in
the way telecommunications circuits
are routed to customer locations and
determined that there is currently no
commercially viable product that can
be adopted to automate this process. The
greater the number of carriers involved
in providing services, the more difficult
it becomes to track such changes. A
diverse network provides more protection against disruption of service during
contingencies, however, because diver-
124 92nd Annual Report, 2005
sity lessens the risk of a single point
of failure. A report on this initiative, the
National Diversity Assurance Initiative,
was released in February 2006.
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 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 2005, the
Reserve Banks further 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
2005 was PricewaterhouseCoopers LLP
(PwC). Fees for these services totaled
$4.6 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
2005, the Reserve Banks did not engage
PwC for non-audit services.
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 2005
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 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 2004 and 2005.
Income in 2005 was $30,729 million, compared with $23,540 million
in 2004. Expenses totaled $3,633 million ($2,677 million in operating
expenses, $213 million in earnings
Federal Reserve Banks
125
Income, Expenses, and Distribution of Net Earnings
of the Federal Reserve Banks, 2005 and 2004
Millions of dollars
2005
2004
Current income
Current expenses
Operating expenses1
Earnings credits granted
30,729
2,890
2,677
213
23,540
2,239
2,123
116
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
27,840
-3,577
743
266
477
21,301
918
776
272
504
Net income before payments to Treasury
Dividends paid
Transferred to surplus
23,520
781
1,272
21,443
582
2,783
Payments to Treasury2
21,468
18,078
Item
1. Includes net periodic pension credit of $11 million
in 2005 and $37 million in 2004.
credits granted to depository institutions,
$266 million in assessments for expenditures by the Board of Governors, and
$477 million for the cost of new currency). Revenue from priced services
was $901 million. The profit and loss
account showed a net loss of $3,577
million. The loss was due primarily to
unrealized losses on assets denominated
in foreign currencies revalued to reflect
current market exchange rates. Statutory
dividends paid to member banks totaled
$781 million, $199 million more than
in 2004; 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 $21,468 million in 2005,
up from $18,078 million in 2004; the
payments equal net income after the
deduction of dividends paid and of the
amount necessary to equate the Reserve
Banks' surplus to paid-in capital.
In the "Statistical Tables" section of
this report, table 10 details the income
2. Interest on Federal Reserve notes.
and expenses of each Reserve Bank for
2005 and table 11 shows a condensed
statement for each Bank for the years
1914 through 2005; table 9 is a statement of condition for each Bank, and
table 13 gives number and annual salaries of officers and employees for each.
A detailed account of the assessments
and expenditures of the Board of Governors appears in the section "Board of
Governors Financial Statements."
Holdings of Securities and Loans
The Federal Reserve Banks' average
daily holdings of securities and loans
during 2005 amounted to $761,509
million, an increase of $41,862 million from 2004 (table). Holdings of
U.S. government securities increased
$41,801 million, and holdings of loans
increased $61 million. The average rate
of interest earned on the Reserve Banks'
holdings of government securities
increased to 3.80 percent, from 3.11 percent in 2004, and the average rate of
interest earned on loans increased to
3.49 percent, from 1.74 percent.
126 92nd Annual Report, 2005
Secunties and Loans of the Federal ]Reserve Banks, 2003-2005
Millions of dollars except as noted
Average daily holdings3'
2003
2004
2005
Total
U.S.
government
securities1
683,438
719,647
761,509
Item and year
683,294
719,494
761,295
144
153
214
22,598
22,347
28,966
22,597
22,344
28,959
1
3
7
3.31
3.11
3.80
3.31
3.11
3.80
1.00
1.74
3.49
Loans 2
Earnings4
2003
2004
2005
..
.
....
Average interest rate (percent)
2003
.
2004
2005
1. Includes federal agency obligations.
2. Does not include indebtedness assumed by the Federal Deposit Insurance Corporation.
3.
4. Earnings have not been netted with the interest expense on securities sold under agreements to
repurchase.
Volume of Operations
project is an ongoing external perimeter
security improvement project at the
Boston Bank. Another is taking place at
the St. Louis Bank, where, as part of a
long-term facility redevelopment program, construction of a new pedestrian
entrance screening vestibule was completed and design work for an addition
to the Bank's headquarters building continued. The St. Louis Bank also completed the purchase and renovation of
a building to be used as a businesscontinuity relocation facility. In addition, the Richmond Bank completed
renovation of a building to be used as a
relocation site for critical staff and initiated construction of additional security improvements to the building. The
Dallas Bank completed the purchase
of property behind its headquarters
building for the construction of a remote vehicle screening and shipping/
receiving facility.
Also during 2005, the Board
approved the Richmond Bank's purchase of property adjacent to its headquarters building for construction of a
new parking garage, and the sales of the
Table 12 in the "Statistical Tables" section shows the volume of operations in
the principal departments of the Federal Reserve Banks for the years 2002
through 2005.
Federal Reserve Bank Premises
In 2005, construction was completed on
new buildings for the Dallas Federal
Reserve Bank's Houston Branch and the
Chicago Bank's Detroit Branch, and
construction began on the Kansas City
Bank's new headquarters building after
the Board approved the project's final
design. Design work continued, and
site preparation work began, for the
San Francisco Bank's new Seattle
Branch building. The multiyear renovation program at the New York Bank's
headquarters building continued, as did
facility renovation projects at several
Reserve Bank offices to accommodate
the consolidation of check activities.
Security enhancement programs continue at several facilities. One such
Federal Reserve Banks 127
New York Bank's Buffalo Branch and
the Kansas City Bank's headquarters building were finalized. Efforts to
sell the Chicago Bank's Detroit Branch
building, the St. Louis Bank's Little
Rock Branch building, and the
San Francisco Bank's Seattle and Portland Branch buildings continued, as did
efforts by the Dallas Bank to sell excess
land at its Houston Branch and to lease
excess space in the Branch building.
Administrative activities for the
Buffalo, Louisville, and Little Rock
Branches were moved to leased facilities. Check operations formerly conducted at the San Francisco Bank's
Seattle and Portland Branches were con-
solidated and relocated to a leased facility near the Seattle airport. The Portland
Branch cash operation was relocated to
the current Seattle Branch building until
the new building is completed.
Although utility services were interrupted, the Atlanta Bank maintained the
security and building systems operations of its New Orleans Branch building during Hurricane Katrina. Because
the building sits several feet above flood
level, it was not damaged by flooding.
Table 14 in the "Statistical Tables"
section of this report details the acquisition costs and net book value of the
Federal Reserve Banks and Branches. •
128 92nd Annual Report, 2005
Pro Forma Financial Statements for Federal Reserve Priced Services
Pro Forma Balance Sheet for Priced Services, December 31, 2005 and 2004
Millions of dollars
2005
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
Long-term liabilities
Long-term debt
Postretirement/postemployment
benefits obligation
Total long-term liabilities
17,024.1
15,657.7
424.5
156.1
471.8
152.8
88.5
796.8
107.9
795.4
1,465.9
1,528.0
17,123.6
18,552.1
10,703.2
5,163.0
.0
126.2
11,909.5
5,354.3
.0
92.2
17,355.9
15,992.4
.0
.0
275.0
Total liabilities
Equity
Total liabilities and equity (Note 3) .
NOTE: Components may not sum to totals because of
rounding.
1,115.7
9,691.9
75.8
1.9
31.8
6,107.1
993.2
8,626.4
77.0
1.3
25.6
5,934.4
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
2004
268.6
275.0
268.6
16,267.4
17,624.5
856.2
927.6
17,123.6
18,552.1
The accompanying notes are an integral part of these
pro forma priced services financial statements.
Federal Reserve Banks
129
Pro Forma Income Statement for Federal Reserve Priced Services, 2005 and 2004
Millions of dollars
Item
2004
2005
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) . . .
865.9
800.6
65.3
901.0
750.0
150.9
6.1
.0
11.3
.0
-.1
.0
11.6
.0
17.4
11.4
53.8
133.5
292.7
-199.0
NOTE: Components may not sum to totals because of
rounding.
93.7
227.2
67.3
160.0
103.0
156.8
-108.1
48.7
102.5
30.6
72.0
112.4
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, 2005
Millions of dollars
Item
Total
Commercial
check
collection
Fedwire
funds
Fedwire
securities
Commercial
ACH
Noncash
services
Revenue from services
(Note 4)
901.0
740.3
61.0
19.3
79.3
1.1
Operating expenses
(Note 5)
750.0
619.0
49.3
15.5
65.1
LI
Income from operations
150.9
121.3
11.7
3.8
14.1
.0
Imputed costs (Note 6)
17.4
15.5
.9
.3
.6
.0
133.5
105.7
10.9
3.4
13.5
93.7
77.1
6.3
2.0
8.2
.1
182.9
17.2
5.4
21.6
.1
Income from operations
after imputed costs
Other income and expenses,
net (Note 7)
Income before income taxes
Imputed income taxes
(Note 6)
227.2
67.3
54.1
5.1
1.6
6.4
Net income .
160.0
128.7
12.1
3.8
15.2
.1
MEMO: Targeted return on
equity (Note 6)
103.0
82.0
7.9
2.9
10.0
.2
NOTE: Components may not sum to totals because of
rounding.
The accompanying notes are an integral part of these
pro forma priced services financial statements.
130 92nd Annual Report, 2005
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.
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 for the qualified pension plan of $1.3 million
in 2005 and a credit to expenses of $7.5 million in 2004
with a corresponding increase 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,
postretiremen^ and nonqualified pension 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 $6.6 million in 2005 and
$7.6 million in 2004. The net credit to expenses under
SFAS 87 (see note 2) that includes the nonqualified
pension expense of $1.0 million in 2005 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
2005 and 2004 as follows (in millions):
2005
2004
Check
ACH
Fedwire funds
Fedwire securities
Noncash services
29.4
3.7
2.6
1.3
.1^
33.5
3.4
2.5
1.3
1
Total
37.1
40.8
(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
imputed in 2005 or 2004. The sales taxes and FDIC
assessment that the Federal Reserve would have paid had
Federal Reserve Banks
it 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 2005 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
134.3
11.9
122.5
12.3
-1.0
837.7
-728.4
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
131
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 2005.
(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 and 2005 represents the average
coupon-equivalent yield on three-month Treasury bills
plus a constant spread, based on the return on a portfolio
of investments. 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 coupon-equivalent yield on three-month
Treasury bills to the required portion of the clearing
balances, adjusted for the net effect of reserve requirements on clearing balances.
133
The Board of Governors and the
Government Performance and Results Act
The Government Performance and
Results Act of 1993 (GPRA) requires
that federal agencies, in consultation
with Congress and outside stakeholders,
prepare a strategic plan covering a multiyear period and submit an annual performance plan and performance report.
Although the Federal Reserve is not
covered by the GPRA, the Board of
Governors voluntarily complies with the
spirit of the act.
Strategic Plan, Performance
Plan, and Performance Report
The Board's strategic plan in the GPRA
format, which is prepared biennially and
covers a four-year period, 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
most recent strategic plan, covering the
period 2004-08, was made public in
August 2004. (A strategic plan covering
the period 2006-09 is scheduled for
release in late spring 2006.)
The Board's performance plan, which
is prepared biennially and covers a twoyear period, sets forth specific targets
for some of the performance measures identified in the strategic plan and
describes the operational processes and
resources needed to meet those targets;
it also discusses data validation and verification of results. The most recent per
formance plan, covering the period
2004-05, was made public in August
2004. The equivalent document for
2006-07, in the form of a performance
budget, will be released in 2006.
The most recent performance report,
covering the period 2002-03, was made
public in August 2004. The report indicates that the Board generally met
its goals for 2002-03. A performance
report covering 2004-05 will be
released in 2006.
These documents—the strategic and
performance plans and the performance
report—are available on the Board's
web site, at www.federalreserve.gov/
boarddocs/rptcongress. The Board's
mission statement and a summary of the
Federal Reserve's goals and objectives,
as set forth in the most recently released
strategic and performance plans, 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 six primary
goals with interrelated and mutually
reinforcing elements:
Goal
To conduct monetary policy that promotes the achievement of maximum
134 92nd Annual Report, 2005
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.
• 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 understanding of Federal
Reserve policy among other government policy officials and the general
public.
financial holding companies, foreign
banking organizations, and related
entities. At the same time, remain
sensitive to the burden on supervised
institutions.
• Provide a dynamic work environment
that is challenging and rewarding.
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 compliance 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 effectively implement federal laws
designed to inform and protect the consumer, to encourage community development, and to promote access to banking services in historically underserved
markets
Objectives
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
identify emerging financial problems
early so that crises can be averted.
• Provide a safe, sound, competitive,
and accessible banking system
through comprehensive and effective
supervision of U.S. banks, bank and
• Take a leadership role in shaping the
national dialogue on consumer protection in financial services, addressing
the rapidly emerging issues that affect
today's consumers, strengthening consumer compliance supervision programs when required, and remaining
sensitive to the burden on supervised
institutions.
• Promote, develop, and strengthen
effective communications and collaborations within the Board, the Federal Reserve Banks, and other agencies and organizations.
• Increase public understanding of consumer protection and community
Government Performance and Results Act
development and the Board's role in
these areas through increased outreach
and by developing programs that
address the information needs of consumers and the financial services
industry.
• Develop a staff that is highly skilled,
professional, innovative, and diverse,
providing career development opportunities to ensure the retention of
highly productive staff and recruiting highly qualified and skilled
employees.
• Promote an efficient and effective
work environment by aligning business functions with appropriate work
processes and implementing solutions
for work products and processes
that can be handled more efficiently
through automation.
135
Objective
• Produce high-quality assessments and
oversight of Federal Reserve System
strategies, projects, and operations,
including adoption of technology to
the business and operational needs of
the Federal Reserve. The oversight
process and outputs should help Federal Reserve management foster and
strengthen sound internal control systems, efficient and reliable operations,
effective performance, and sound project management and should assist the
Board in the effective discharge of its
oversight responsibilities.
Goal
To foster the integrity, efficiency, and
effectiveness of Board programs
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
by assessing their risks and riskmanagement approaches 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.
Goal
To provide high-quality professional
oversight of Reserve Banks
Objectives
• Oversee a planning and budget process that clearly identifies the Board's
mission, results in concise plans
for the effective accomplishment of
operations, transmits to the staff the
information needed to attain objectives efficiently, and allows the public
to measure our accomplishments.
• Develop appropriate policies, oversight mechanisms, and measurement
criteria to ensure that the recruiting,
training, and retention of staff meet
Board needs.
• Establish, encourage, and enforce a
climate of fair and equitable treatment
for all employees regardless of race,
creed, color, national origin, age, or
sex.
• Provide financial management support needed for sound business
decisions.
• Provide cost-effective and secure
information resource management services to Board divisions, support divi-
136 92nd Annual Report, 2005
sional distributed-processing requirements, and provide analysis on
information technology issues to the
Board, Reserve Banks, other financial
regulatory institutions, and central
banks.
• Efficiently provide safe, modern, and
secure facilities and necessary support
for activities conducive to efficient
and effective Board operations.
•
137
Federal Legislative Developments
Bankruptcy Abuse Prevention
and Consumer Protection Act
of 2005
On April 20, 2005, President Bush
signed the Bankruptcy Abuse Prevention and Consumer Protection Act of
2005 (Bankruptcy Act of 2005). Title IX
of the act contains provisions designed
to reduce systemic risk in the banking
system and the financial markets when
parties to certain types of financial transactions become bankrupt or insolvent,
by allowing expeditious termination or
netting of certain types of financial
transactions. In addition, the Bankruptcy
Act of 2005 makes several important
amendments to the Truth in Lending
Act.
ting across economically similar transactions that are the subject of recurring
dealings in swap agreements.
In addition, the Bankruptcy Act of
2005 clarifies that the FDI Act and
the FCUA expressly protect rights under
securities agreements, arrangements, or
other credit enhancements related to
qualified financial contracts (QFCs).
The act also clarifies that no provision
of federal or state law relating to the
avoidance of preferential or fraudulent
transfers may be invoked to avoid a
transfer made in connection with any
QFC of an insured depository institution in conservatorship or receivership,
absent actual fraudulent intent on the
part of the transferee.
Cross-Product Netting
Financial Contract Provisions
Treatment of Swaps and QFCs
The Bankruptcy Act of 2005 amends the
definitions of several terms that appear
in the Federal Deposit Insurance Act
(FDI Act) and the Federal Credit Union
Act (FCUA) to make them consistent
with the definitions in the Bankruptcy
Code and to reflect the enactment of the
Commodity Futures Modernization Act
of 2000 (CFMA). Of particular importance, the act updates the definition of
"swap agreement" to include types of
transactions that have recently entered
the market. Under the FDI Act, the
FCUA, and the Bankruptcy Code, swap
agreements are eligible for termination,
liquidation, acceleration, offset, and netting. The amended definition includes
combinations of the listed agreements or
transactions and permits contractual net
The Bankruptcy Act of 2005 also promotes cross-product netting through
master agreements for QFCs. The act
specifies that under the FDI Act and the
FCUA, a master agreement for one or
more securities contracts, commodity
contracts, forward contracts, repurchase
agreements, or swap agreements is to
be treated as a single QFC, but only
with respect to the underlying agreements that are themselves QFCs. This
provision ensures that cross-product
netting pursuant to a master agreement,
or pursuant to an umbrella agreement
for separate master agreements between
the same parties, will be enforceable
under the FDI Act and the FCUA.
Cross-product netting permits the netting of a wide variety of financial
transactions between two participants,
thereby maximizing the present and
potential future risk-reducing benefits
138 92nd Annual Report, 2005
of the netting arrangement between the
parties.
The Bankruptcy Act of 2005 similarly promotes cross-product netting
through amendments to the Bankruptcy
Code. The act adds definitions for "master netting agreement" and "master netting agreement participant" to the Bankruptcy Code in order to protect the
termination and close-out netting provisions of cross-product master agreements between parties. These agreements may be used (1) to document
a wide variety of securities contracts,
commodity contracts, forward contracts,
repurchase agreements, and swap agreements or (2) as umbrella agreements for
separate master agreements between
the same parties, each of which is used
to document a discrete type of transaction. The act also adds a new section 561
to the Bankruptcy Code designed to
expressly protect the contractual rights
of a master netting agreement participant to enforce any rights of termination, liquidation, acceleration, offset, or netting under a master netting
agreement.
"Financial Participants" under the
Bankruptcy Code
The Bankruptcy Act of 2005 adds a new
definition for "financial participant"
and allows such market participants
to close out and net agreements with
insolvent entities under the Bankruptcy
Code. These changes are designed to
limit the potential effect of insolvencies
on major market participants. "Financial participant" is defined by the act to
include entities having contracts of a
total gross dollar value of not less than
$1 billion in notional or actual principal amount outstanding or having gross
mark-to-market positions of not less
than $100 million (aggregated across
counterparties). Clearing organizations
are also expressly included in the definition and may take advantage of these
expanded protections. This amendment
is intended to further the goal of promoting the clearing of derivatives and other
transactions as a way of reducing systemic risk. The act also makes several
amendments to the Bankruptcy Code to
reflect current market practice and to
conform certain definitions to the FDI
Act.
FD1CIA Netting Protections
The Bankruptcy Act of 2005 also
extends the protections afforded to
netting arrangements by the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). FDICIA
provides that a netting arrangement will
be enforced pursuant to its terms, notwithstanding the failure of a party to the
agreement. The act extended FDICIA's
protections of netting arrangements to
• multilateral clearing organizations,
• uninsured national and state member
banks,
• foreign banks and their branches and
agencies,
• netting arrangements governed by the
laws of a foreign country, and
• netting arrangements between clearing organizations.
Authority of FDIC and NCUAB
The Bankruptcy Act of 2005 provides
that no provision of law may be construed to limit the power of the FDIC
or the National Credit Union Administration Board (NCUAB) to transfer, or
to disaffirm or repudiate, any QFC in
accordance with its powers under the
Federal Legislative Developments
FDI Act or the FCUA, respectively.
Moreover, the act denies enforcement of
"walkaway" clauses in QFCs. The act
defines a walkaway clause as a provision that, after calculation of the value
of a party's position or an amount due
to or from one of the parties upon termination, liquidation, or acceleration
of the QFC, either (1) does not create
a payment obligation for the party or
(2) extinguishes a payment obligation
of the party in whole or in part solely
because of the party's status as a nondefaulting party.
The Bankruptcy Act of 2005 also
amends the FDIA and the FCUA to
expand the receivership authority of the
FDIC and the NCUAB, respectively, to
permit transfers of QFCs to "financial
institutions." The amendment allows
the FDIC and the NCUAB, when acting
as receiver for an insolvent depository
institution, to transfer QFCs to a nondepository financial institution, provided
the transferee institution is not subject
to bankruptcy or insolvency proceedings. In transferring QFCs, the receiver
may not split the QFCs and related interests between the depository institution
in default and a particular counterparty;
rather, either the receiver must transfer
all such QFCs to a single person or it
may not transfer any of the QFCs for
that particular counterparty. The act's
amendments also permit transfers to an
eligible financial institution that is a
non-U.S. person, or the branch or agency
of a non-U.S. person, or a U.S. financial
institution that is not an FDIC-insured
institution if, following the transfer, the
contractual rights of the parties would
be enforceable substantially to the same
extent as under the FDI Act and the
FCUA. The act similarly limits the disafrirmance and repudiation authorities
of the FDIC and NCUAB with respect
to QFCs so as to make those authorities
consistent with the agencies' transfer
139
authority. The act requires that a conservator or receiver must either disaffirm
or repudiate all QFCs between the
depository institution in default and a
particular counterparty or disaffirm
or repudiate none of such QFCs. This
requirement limits the ability of the
FDIC and the NCUAB to "cherry pick"
the QFCs between a depository institution in default and a particular counterparty. The amendment is consistent with
the FDIC's policy not to repudiate or
disaffirm QFCs selectively. The unified
treatment is fundamental to the reduction of systemic risk.
The Bankruptcy Act of 2005 also limits the enforcement of rights of termination, liquidation, or netting that arise
solely because of the insolvency of a
depository institution or that are based
on the "financial condition" of the institution in receivership or conservatorship. However, any payment, delivery,
or other performance-based default, or a
breach of a representation or covenant
putting in question the enforceability of
the agreement, will not be deemed to be
based solely on the financial condition
of the institution. The amendment does
not prevent counterparties from taking
all actions permitted and recovering all
damages authorized upon repudiation of
any QFC by a conservator or receiver.
The Bankruptcy Act of 2005's
amendments also permit the FDIC and
the NCUAB to transfer QFCs of a failed
depository institution to a bridge bank
or a depository institution organized by
the FDIC or NCUAB for which a conservator is appointed either (1) immediately upon the organization of such institution or (2) at the time of a purchase
and assumption transaction between
the FDIC or NCUAB and the institution.
These institutions are not to be considered financial institutions that are ineligible to receive transfers of QFCs under
the FDI Act.
140 92nd Annual Report, 2005
TILA Amendments
The Bankruptcy Act of 2005 also
includes several provisions that amend
the Truth in Lending Act (TILA). These
provisions deal principally with openend (revolving) credit accounts and
require new disclosures on periodic
statements and on credit card applications and solicitations. The Board is
required to issue regulations implementing most of the new provisions, and
the new provisions generally will not
become effective until twelve months
after the regulations are finalized.
Minimum-Payment Warnings
The Bankruptcy Act of 2005 requires
creditors to provide, on each periodic
statement for open-end credit, a clear
and conspicuous disclosure that making only the minimum payment will
increase the interest the consumer pays
and the time it takes to repay the balance. The statute also requires that the
disclosure include
• a hypothetical example of how long it
would take to pay off a specified balance with a 17 percent annual percentage rate and
• a toll-free telephone number that consumers can call to obtain an estimate
of how long it will take to pay off
their own balance if only minimum
payments are made.
The Bankruptcy Act of 2005 contains
an exemption from these disclosure
requirements for a creditor that maintains a toll-free telephone number for
the purpose of providing customers with
the actual number of months that it will
take to repay the customer's outstanding
balance. To standardize the information
provided to consumers, the act directs
the Board to develop a "table" that
creditors may use in responding to consumers. The Board and the FTC must
establish their own toll-free telephone
numbers for use by customers of small
banks and non-depository institution
creditors, respectively.1
Introductory Rate Offers
Credit card issuers that offer discounted
introductory interest rates are required,
under the Bankruptcy Act of 2005, to
disclose clearly and conspicuously on
the application or solicitation for the
credit card the expiration date of the
offer, the rate that will apply after that
date, and an explanation of how the
introductory rate could be lost (for
example, by making a late payment).
Internet Solicitations
The act requires that credit card offers
on the Internet must include the same
disclosure table—commonly known
as the "Schumer box"—that now is
required to be included in applications
or solicitations for credit cards that are
sent by direct mail.
Late Fees
For open-end credit, the Bankruptcy Act
of 2005 requires creditors to disclose, on
each periodic statement, the earliest date
on which a late payment fee may be
charged, as well as the amount of the
fee.
1. The Board is required to operate its tollfree telephone number for two years, while the
FTC must operate its toll-free telephone number
indefinitely.
Federal Legislative Developments
High Loan-to-Value
Mortgage Credit
For home-secured credit that may
exceed the home's fair market value, the
act requires creditors to disclose in the
application and in advertisements that
the interest on the portion of the loan
that exceeds the home's fair market
value is not tax deductible.
Account Termination
Creditors are prohibited under the Bankruptcy Act of 2005 from terminating an
open-end credit account before its expiration date solely because the consumer
has not incurred finance charges on the
account.
Post-Employment Restrictions
on Senior Examiners
In December 2004, Congress imposed a
new federal post-employment restriction
applicable to senior examiners of the
federal banking agencies, as part of
the Intelligence Reform Act.2 Under
this provision, an officer or employee
of a federal banking agency or a Federal
Reserve Bank who acts as the "senior
examiner" for a particular depository
institution may not, within one year
after terminating employment with the
agency or Reserve Bank, knowingly
accept compensation as an officer, director, employee, or consultant from that
depository institution or any company
(including a bank holding company)
that controls the depository institution.
A similar post-employment restriction
is imposed on an officer or employee
2. Codified at section 10(k) of the FDI Act.
141
who acts as the senior examiner of a
particular bank holding company or
savings and loan holding company; in
these circumstances, the post-employment
restrictions apply to relationships with
the bank holding company or savings
and loan holding company and any
depository institution subsidiary of the
holding company. These post-employment
restrictions are in addition to any other
conflict of interest and ethics rules and
restrictions that may apply to examiners
under applicable federal law or the internal codes of conduct established by the
agency or Reserve Bank.
Under the statute, an officer or
employee of an agency or a Reserve
Bank is considered to be the "senior
examiner" of a particular depository
institution or depository institution holding company only if the examiner has
"continuing, broad responsibility" for
the examination or inspection of that
depository institution or holding company. In addition, to be subject to these
new post-employment restrictions, the
officer or employee must have served
as the senior examiner for the relevant
institution or holding company for two
or more months during the final twelve
months of his or her employment with
the agency or Reserve Bank. If a senior
examiner violates the one-year postemployment restrictions, the appropriate agency must initiate proceedings to
impose an order of removal and prohibition or a civil money penalty on the
former senior examiner, and may seek
both remedies.
In November 2005, the Board and the
other federal banking agencies jointly
adopted rules implementing these new
post-employment restrictions. See 70 FR
69,633 (November 17, 2005).
Records
145
Record of Policy Actions
of the Board of Governors
Regulation D
Reserve Requirements of
Depository Institutions
[Docket No. R-1236]
On October 4, 2005, the Board approved
amendments to reflect the annual indexing of the low reserve tranche and of
the reserve requirement exemption for
use in 2006 reserve requirement calculations. The amendments increase the
3 percent low reserve tranche for net
transaction accounts to $48.3 million
(from $47.6 million in 2005) and the
reserve requirement exemption to
$7.8 million (from $7 million in 2005).
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
Regulation E
Electronic Fund Transfers
[Docket Nos. R-1210, R-1234,
and R-1247]
On December 30, 2005, the Board
approved amendments to clarify the
responsibilities of parties in transactions
involving electronic check conversion
and to require that consumers receive
written notification in advance of these
transactions. The Board also revised the
regulation's official staff commentary
to provide guidance on preauthorized
transfers from consumers' accounts,
NOTE: Full texts of the policy actions are available via the "Reading Rooms" on the Board's
FOIA web page and on request from the Board's
Freedom of Information Office.
error resolutions, and disclosures at
ATMs. The amendments are effective
February 9, 2006, and compliance is
mandatory by January 1, 2007.
In addition, the Board approved an
interim final rule with request for comment that applies the regulation to payroll card accounts established to distribute employee salaries, wages, or other
compensation on a recurring basis.
The interim final rule is effective July 1,
2007.
Votes for these actions: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
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-1193]
On February 28, 2005, the Board
approved amendments to the risk-based
capital standards for bank holding companies to allow the continued inclusion
of trust preferred securities in tier 1 capital, under stricter quantitative limits
and qualitative standards. The amendments also revise (1) quantitative limits
for the aggregate amount of trust preferred securities and other restricted core
capital elements included in tier 1 capital and (2) qualitative standards for capital instruments included in regulatory
capital. The amendments are effective
146 92nd Annual Report, 2005
April 11, 2005, with a transition period
for the new quantitative limits ending
March 31, 2009.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn.
[Docket No. OP-1155]
On March 21, 2005, the Board, acting
with the other federal banking and thrift
regulatory agencies, approved the Interagency Guidance on Response Programs
for Unauthorized Access to Customer
Information and for Customer Notice.
The guidance, which builds on the Interagency Guidelines Establishing Information Security Standards, provides
that financial institutions should implement a response program for security
breaches involving customer information. As part of their response program,
institutions should notify their customers when they determine that misuse of
customer information has occurred or
is reasonably possible. The guidance is
effective March 29, 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
Regulation CC
Availability of Funds and
Collection of Checks
[Docket No. R-1226]
On November 21, 2005, the Board
approved amendments defining "remotely created checks"—checks cre
ated by a seller or creditor with the
account holder's authorization but without the account holder's handwritten
signature on the check. Such checks are
typically used to purchase goods or
pay bills by telephone. The Board also
approved amendments shifting liability for unauthorized remotely created
checks from the paying bank to the
depositary bank (in most cases the bank
for the seller or creditor that created and
deposited the check). The amendments
are effective July 1, 2006.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies and Olson. Absent and not
voting: Governor Kohn.
Regulation V
Fair Credit Reporting
Regulation FF
Obtaining and
Using Medical Information
in Connection with Credit
[Docket No. R-1188]
On November 14, 2005, the Board, acting with the other federal bank, thrift,
and credit union regulatory agencies,
approved interagency rules implementing restrictions in the Fair and Accurate
Credit Transactions Act on creditors'
use and sharing of medical information.
The rules permit creditors (1) to obtain
and use consumers' medical information in connection with credit determinations when necessary and appropriate
for legitimate purposes, consistent with
congressional intent to restrict the use of
such information for inappropriate purposes, and (2) to share medical information among affiliates under limited
circumstances without becoming credit
reporting agencies. The amendments,
which are substantially similar to
interim final rules published by the
Record of Policy Actions of the Board of Governors 147
agencies on June 10, 2005, are effective
April 1, 2006.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
Regulation BB
Community Reinvestment
[Docket No. R-1205]
On March 2, 2005, the Board, acting
with the other federal bank and thrift
regulatory agencies, approved interagency amendments to conform with
changes by the Office of Management
and Budget in the standards for defining
metropolitan and micropolitan statistical
areas, by the U.S. Bureau of the Census
in designating census tracts, and by the
Board in Regulation C (Home Mortgage
Disclosure). The amendments, which
are identical to the interim final rules
published by the agencies on July 8,
2004, are effective March 28, 2005.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn.
[Docket No. R-1225]
On July 18, 2005, the Board approved
amendments under the Community
Reinvestment Act (CRA) to reduce
regulatory burden on intermediate small
banks (banks with assets between
$250 million and $1 billion) and to more
effectively encourage bank investment
in community development. The amendments exempt intermediate small banks
from certain data collection and reporting requirements and provide for the
evaluation of those banks' CRA performance under the small-bank lending test
and a new, flexible community development test. The amendments also
expand the definition of "community
development" to include bank activities
in underserved or distressed middleincome rural areas as well as in designated disaster areas. Finally, they clarify
the effect of illegal credit practices on
a bank's CRA performance rating. The
amendments, which are identical to
amendments to their regulations adopted
by the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation, are effective September 1,2005.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, and Kohn.
Regulation DD
Truth in Savings
[Docket No. R-1197]
On May 19, 2005, the Board approved
amendments to the regulation and its
official staff commentary to improve
the uniformity and adequacy of information provided to consumers when they
overdraw their deposit accounts. The
amendments, in part, address a specific service, commonly referred to as
"bounced-check protection" or "courtesy overdraft protection," that pays
checks and allows other transactions in
accounts that have insufficient funds.
They also (1) expand the regulation's
prohibition against misleading advertisements, to address concerns about
the marketing of this service, and
(2) require additional disclosures about
fees and other terms for overdraft services in such materials as advertisements and periodic account statements.
The amendments are effective July 1,
2006.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Gov-
148 92nd Annual Report, 2005
ernors Gramlich, Bies, Olson, Bernanke,
and Kohn.
Policy Statements and
Other Actions
Overdraft Protection Programs
Post-Employment Restrictions
for Senior Examiners
[Docket No. R-1230]
On November 10, 2005, the Board, acting with the other federal bank and
thrift regulatory agencies, approved
new interagency rules implementing
post-employment restrictions on certain
senior examiners contained in the Intelligence Reform and Terrorism Prevention Act. The rules provide that a senior
examiner employed by one of the agencies or a Federal Reserve Bank may
not knowingly accept compensation, as
an employee, officer, director, or consultant, from a depository institution or
holding company that he or she examined, or from certain related entities, for
one year after leaving the employment
of the agency or Reserve Bank. The
rules are effective December 17, 2005.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
Rules Regarding Equal
Opportunity
[Docket No. OP-1239]
On November 2, 2005, the Board
approved an interim final rule with
request for comment to clarify the limitations on access to sensitive information by employees who are not U.S.
citizens. The interim final rule is effective November 8, 2005.
[Docket No. OP-1198]
On February 17, 2005, the Board, acting with the other federal bank and
credit union regulatory agencies, approved joint guidance on overdraft protection programs to help depository
institutions in the disclosure and administration of their overdraft-protection
services.
Votes for this action: Chairman Greenspan and Governors Gramlich, Bies,
Olson, Bernanke, and Kohn. Absent and
not voting: Vice Chairman Ferguson.
Reserve Bank Withdrawal from
Noncash Collection Service
[Docket No. OP-1214]
On February 28, 2005, the Board
approved the withdrawal of the Federal
Reserve Banks from the noncash collection service, which involves collecting
and processing definitive municipal
securities issued by state and local governments. The service was terminated
in light of declining volume, expected
under-recovery of costs in future years,
and the availability of alternative service providers and substitutable services. Withdrawal is effective December 30, 2005; items will be accepted for
deposit until September 30.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn.
Information Security Standards
[Interagency Compliance Guide]
Votes for this action: Chairman Greenpan, Vice Chairman Ferguson, and Gover- On November 29, 2005, the Board, actnors Bies, Olson, and Kohn.
ing with the other federal bank and thrift
Record of Policy Actions of the Board of Governors 149
regulatory agencies, approved publication of a Small-Entity Compliance
Guide to help financial institutions comply with the Interagency Guidelines
Establishing Information Security Standards. The guide summarizes in plain
language the obligations of financial
institutions to protect customer information and illustrates how certain provisions of the interagency security guidelines apply in specific situations.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
Discount Rates in 2005
Under the Federal Reserve Act, the
boards of directors of the Federal
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 funds rate target set by the Federal Open Market Committee (FOMC).
During 2005, the Board approved
eight increases in the primary credit
rate, bringing the rate from 3x/4 percent
to 5lA 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 2lA percent to
4VA percent and related economic and
financial developments. The U.S. economy delivered a solid performance in
2005 despite a further sharp increase
in energy prices and devastating hurricanes. The increase in GDP in 2005 was
sufficient to further reduce slack in labor
and product markets. Core consumer
price inflation picked up early in the
year, but it subsequently eased and
totaled less than 2 percent over the
year as a whole. In light of these conditions, the Board and FOMC raised the
structure of policy rates at a measured
pace. Monetary policy developments are
reviewed more fully in other parts of
this report (see the section "Monetary
Policy and Economic Developments"
and the minutes of FOMC meetings held
in 2005).
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 at a spread above the primary
credit rate. In 2005, the spread was set at
50 basis points.
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 moneymarket yields, typically resulting in a
rate close to the federal funds rate target.
At year-end, the secondary and seasonal credit rates were 53A percent and
4.35 percent, respectively.
Votes on Discount Rate Changes
About every two weeks during 2005, the
Board approved proposals by the twelve
Reserve Banks to maintain the formulas
150
92nd Annual Report, 2005
for computing the secondary and seasonal credit rates. Details on the eight
actions by the Board to approve changes
in the primary credit rate are provided
below.
February 2, 2005. 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 lA percentage point,
to 3V2 percent. The same increase was
approved for the Federal Reserve Bank
of St. Louis, effective February 3, 2005.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn. Votes against this action: None.
March 22, 2005. 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 San Francisco to raise
the rate on discounts and advances under
the primary credit program by lA percentage point, to 33A percent. The same
increase was approved for the Federal Reserve Bank of St. Louis, effective March 23, 2005. The Board also
approved identical actions subsequently
taken by the directors of the Federal
Reserve Banks of Kansas City, effective
March 23, 2005, and Dallas, effective
March 24, 2005.
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 4 percent. The same increase was
approved for the Federal Reserve Bank
of St. Louis, effective May 4, 2005.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, and Kohn.
Votes against this action: None.
June 30, 2005. 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 lA percentage point,
to AlA percent. The same increase was
approved for the Federal Reserve Bank
of St. Louis, effective July 1, 2005.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, and Kohn.
Votes against this action: None.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke,
and Kohn. Votes against this action: None.
August 9, 2005. 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 lA percentage point,
to AVi percent. The same increase was
approved for the Federal Reserve Bank
of St. Louis, effective August 10, 2005.
May 3, 2005. Effective this date, the
Board approved actions taken by the
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Gov-
Record of Policy Actions of the Board of Governors 151
ernors Bies, Olson, and Kohn. Votes
against this action: None.
September 20, 2005. Effective this date,
the Board approved actions taken by the
directors of the Federal Reserve Banks
of Boston, New York, Philadelphia,
Richmond, Chicago, Minneapolis, Kansas City, and San Francisco to raise
the rate on discounts and advances under
the primary credit program by lA percentage point, to 43/4 percent. The Board
also approved identical actions subsequently taken by the directors of the
Federal Reserve Banks of St. Louis,
effective September 21, 2005, and
Cleveland, Atlanta, and Dallas, effective
September 22, 2005.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn. Votes
against this action: None.
November 1, 2005. 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 dis-
counts and advances under the primary
credit program by lA percentage point,
to 5 percent. The same increase was
approved for the Federal Reserve Bank
of St. Louis, effective November 2,
2005.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn. Votes
against this action: None.
December 13, 2005. 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 lA percentage point,
to 5lA percent. The same increase was
approved for the Federal Reserve Bank
of St. Louis, effective December 14,
2005.
Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn. Votes
against this action: None.
•
153
Minutes of Federal Open Market
Committee Meetings
The policy actions of the Federal Open Open Market Account. In the area of
Market Committee, contained in the domestic open market operations, the
minutes of its meetings, are presented in Federal Reserve Bank of New York
the Annual Report of the Board of Gov- operates under instructions from the
ernors pursuant to the requirements of Federal Open Market Committee that
section 10 of the Federal Reserve Act. take the form of an Authorization for
That section provides that the Board Domestic Open Market Operations and
shall keep a complete record of the a Domestic Policy Directive. (A new
actions taken by the Board and by the Domestic Policy Directive is adopted at
Federal Open Market Committee on all each regularly scheduled meeting.) In
questions of policy relating to open mar- the foreign currency area, the Federal
ket operations, that it shall record Reserve Bank of New York operates
therein the votes taken in connection under an Authorization for Foreign Curwith the determination of open market rency Operations, a Foreign Currency
policies and the reasons underlying each Directive, and Procedural Instructions
policy action, and that it shall include with Respect to Foreign Currency
in its annual report to Congress a full Operations. These policy instruments
are shown below in the form in which
account of such actions.
The minutes of the meetings contain they were in effect at the beginning of
the votes on the policy decisions made 2005. Changes in the instruments during
at those meetings as well as a summary the year are reported in the minutes for
of the information and discussions that the individual meetings.
led to the decisions. The descriptions of
economic and financial conditions are
based solely on the information that was Authorization for Domestic
available to the Committee at the time Open Market Operations
of the meetings.
Members of the Committee voting for In Effect January 1, 2005
a particular action may differ among 1. The Federal Open Market Committee
themselves as to the reasons for their authorizes and directs the Federal Reserve
votes; in such cases, the range of their Bank of New York, to the extent necesviews is noted in the minutes. When sary to carry out the most recent domestic
policy directive adopted at a meeting of the
members dissent from a decision, they Committee:
are identified in the minutes and a summary of the reasons for their dissent is
(a) To buy or sell U.S. Government
provided.
securities, including securities of the Federal
Policy directives of the Federal Open Financing Bank, and securities that are direct
Market Committee are issued to the obligations of, or fully guaranteed as to
principal and interest by, any agency of the
Federal Reserve Bank of New York as United States in the open market, from or to
the Bank selected by the Committee to securities dealers and foreign and interexecute transactions for the System national accounts maintained at the Federal
154 92nd Annual Report, 2005
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
Reserve Bank of New York under agreements for repurchase of such securities or
obligations in 65 business days or less, at
rates that, unless otherwise expressly authorized by the Committee, shall be determined
by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers; provided that
in the event Government securities or agency
issues covered by any such agreement are
not repurchased by the dealer pursuant to the
agreement or a renewal thereof, they shall be
sold in the market or transferred to the System Open Market Account;
(c) To sell U.S. Government securities
and obligations that are direct obligations of,
or fully guaranteed as to principal and interest by, any agency of the United States to
dealers for System Open Market Account
under agreements for the resale by dealers of
such securities or obligations in 65 business
days or less, at rates that, unless otherwise
expressly authorized by the Committee, shall
be determined by competitive bidding, after
applying reasonable limitations on the volume of agreements with individual dealers.
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
foreign and international accounts maintained at the Federal Reserve Bank of New
York and accounts maintained at the Federal
Reserve Bank of New York as fiscal agent
of the United States pursuant to Section 15
of the Federal Reserve Act, the Federal Open
Market Committee authorizes and directs the
Federal Reserve Bank of New York (a) for
System Open Market Account, to sell U.S.
Government securities to such accounts on
the bases set forth in paragraph l(a) under
agreements providing for the resale by such
accounts of those securities within 65 business days or less on terms comparable to
those available on such transactions in the
market; and (b) for New York Bank account,
when appropriate, to undertake with dealers,
subject to the conditions imposed on purchases and sales of securities in paragraph l(b), repurchase agreements in U.S.
Government and agency securities, and to
arrange corresponding sale and repurchase
agreements between its own account and
foreign and international accounts maintained at the Bank. Transactions undertaken
with such accounts under the provisions of
this paragraph may provide for a service fee
when appropriate.
4. In the execution of the Committee's decision regarding policy during any intermeeting period, the Committee authorizes and
directs the Federal Reserve Bank of
New York, upon the instruction of the Chairman of the Committee, to adjust somewhat
in exceptional circumstances the degree of
Minutes of FOMC Meetings
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.
Domestic Policy Directive
In Effect January 1, 2005l
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 increasing the federal funds
rate to an average of around 2lA percent.
Authorization for Foreign
Currency Operations
In Effect January 1, 2005
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 Settle1. Adopted by the Committee at its meeting on
December 14, 2004.
155
ments, 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
156 92nd Annual Report, 2005
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 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
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.
Foreign Currency Directive
In Effect January 1, 2005
1. System operations in foreign currencies
shall generally be directed at countering dis-
Minutes of FOMC Meetings
orderly 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.
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 the IMF Article IV.
Procedural Instructions with
Respect to Foreign Currency
Operations
In Effect January 1, 2005
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
157
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 l.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
158 92nd Annual Report, 2005
(i) $200 million or (ii) 15 percent of the
size of the swap arrangement.
Ms. Johnson, Economist
Mr. Stockton, Economist
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.
Messrs. Connors, Evans, Howard,
Madigan, Oliner, Rolnick, Tracy,
and Wilcox, Associate Economists
Meeting Held on
February 1-2, 2005
Mr. Ettin, Deputy Director, 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, February 1, 2005, at
1:30 p.m. and continued on Wednesday,
February 2, 2005, at 9:00 a.m.
PresentMr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Mr. Bernanke
Ms. Bies
Mr. Ferguson
Mr. Gramlich
Mr. Kohn
Mr. Moskow
Mr. Olson
Mr. Santomero
Mr. Stern
Messrs. Guynn, Lacker, Mses. Pianalto
and Yellen, Alternate Members
of the Federal Open Market
Committee
Mr. Hoenig, Ms. Minehan, and
Mr. Poole, Presidents of the
Federal Reserve Banks of
Kansas City, Boston, and
St. Louis, respectively
Mr. Kos, Manager, System Open
Market Account
Messrs. Slifman and Struckmeyer,
Associate Directors, Division
of Research and Statistics,
Board of Governors
Messrs. Clouse, Reifschneider,3 and
Whitesell, Deputy Associate
Directors, Divisions of Monetary
Affairs, Research and Statistics,
and Monetary Affairs,
respectively, Board of Governors
Messrs. Elmendorf,3 English, Faust,3
and Leahy,3 Assistant Directors,
Divisions of Research and
Statistics, Monetary Affairs,
International Finance, 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. Small, Project Manager, Division
of Monetary Affairs, Board of
Governors
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,2 Deputy General Counsel
2. Attended Tuesday's session only.
3. Attended portion of meeting relating to special topic of a numerical definition of the pricestability objective for monetary policy.
Minutes of FOMC Meetings, February
Messrs. Bassett, Lebow,4 Ms. Lindner,3
Messrs. Rudd,3 Tetlow,3 and
Wood,4 Senior Economists,
Divisions of Monetary Affairs,
Research and Statistics,
Reasearch and Statistics,
Reasearch and Statistics,
Research and Statistics, and
International Finance,
respectively, Board of Governors
Mr. Durham,4 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
Mr. Moore, First Vice President,
Federal Reserve Bank of
Cleveland
Mr. Judd, Executive Vice President,
Federal Reserve Bank of
San Francisco
Messrs. Eisenbeis, Fuhrer, Goodfriend,
Hakkio, and Rasche, Senior Vice
Presidents, Federal Reserve Banks
of Atlanta, Boston, Richmond,
Kansas City, and St. Louis,
respectively
Messrs. Altig, Dotsey, Ms. Hargraves,
and Mr. Wynne, Vice Presidents,
Federal Reserve Banks of
Cleveland, Philadelphia,
New York, and Dallas,
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, 2005 had been received and
that these individuals had executed their
oaths of office.
4. Attended portion of meeting related to the
economic outlook.
159
The elected members and alternate
members were as follows:
Timothy F. Geithner, President of the Federal Reserve Bank of New York, with
Christine M. Cumming, First Vice
President, Federal Reserve Bank of
New York as alternate.
Anthony M. Santomero, President of the
Federal Reserve Bank of Philadelphia,
with Jeffrey M. Lacker, President of the
Federal Reserve Bank of Richmond, as
alternate.
Michael H. Moskow, President of the Federal Reserve Bank of Chicago, with
Sandra Pianalto, President of the Federal Reserve Bank of Cleveland, as
alternate.
Jack Guynn, President of the Federal
Reserve Bank of Atlanta as alternate,
voting pending the election of the President of the Federal Reserve Bank of
Dallas.
Gary H. Stern, President of the Federal
Reserve Bank of Minneapolis, with
Janet L. Yellen, President of the Federal Reserve Bank of San Francisco, as
alternate.
By unanimous vote, the following
officers of the Federal Open Market
Committee were selected to serve until
the selection of their successors at the
first regularly scheduled meeting after
December 3 1 , 2005, 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
Deborah J. Danker
Michelle A. Smith
Chairman
Vice Chairman
Secretary and
Economist
Deputy Secretary
Assistant
Secretary
160
92nd Annual Report, 2005
Scott G. Alvarez
Thomas C. Baxter, Jr.
Karen H. Johnson
David J. Stockton
General Counsel
Deputy General
Counsel
Economist
Economist
Thomas A. Connors, Charles L. Evans,
David H. Howard, Brian F. Madigan,
Loretta J. Mester, Stephen D. Oliner,
Arthur J. Rolnick, Harvey Rosenblum,
Joseph S. Tracy, and David W. Wilcox,
Associate Economists
As customarily occurs at the first
regularly scheduled meeting of the year,
the Committee reviewed a range of
organizational items, covered below.
By unanimous vote, the Federal
Reserve Bank of New York was selected
to execute transactions for the System
Open Market Account.
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.5
By unanimous vote, the Authorization for Foreign Currency Operations
was reaffirmed in the form shown
below.
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
Authorization for Foreign
defined as holdings of balances in that curCurrency Operations
rency, plus outstanding contracts for future
receipt, minus outstanding contracts for
(Reaffirmed February 1, 2005)
future delivery of that currency, i.e., as the
1. The Federal Open Market Committee sum of these elements with due regard to
authorizes and directs the Federal Reserve sign.
Bank of New York, for System Open Market
2. The Federal Open Market CommitAccount, to the extent necessary to carry out tee directs the Federal Reserve Bank of
the Committee's foreign currency directive New York to maintain reciprocal currency
and express authorizations by the Commit- arrangements ("swap" arrangements) for the
tee pursuant thereto, and in conformity with System Open Market Account for periods up
such procedural instructions as the Commit- to a maximum of 12 months with the followtee may issue from time to time:
ing foreign banks, which are among those
designated by the Board of Governors of the
Federal Reserve System under Section 214.5
5. Secretary's note: Advice subsequently was of Regulation N, Relations with Foreign
received that the selection of Mr. Kos as Manager Banks and Bankers, and with the approval of
was satisfactory to the board of directors of the the Committee to renew such arrangements
on maturity:
Federal Reserve Bank of New York.
Minutes of FOMC Meetings, February
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
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
161
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
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.
162 92nd Annual Report, 2005
Foreign Currency Directive
(Reaffirmed February 1, 2005)
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.
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
(Reaffirmed February 1, 2005)
In conducting operations pursuant to the
authorization and direction of the Federal
Open Market Committee as set forth in the
Authorization for Foreign Currency Opera
tions 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 l.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
Minutes of FOMC Meetings, February
about any operations that are not of a routine
character.
By unanimous vote, the Authorization for Domestic Open Market Operations was amended and approved in
the form shown below. The amendment
involved removing from paragraph l(a)
the reference to the limit on the amount
by which the System Open Market
Account holdings of securities can
change between FOMC meetings. This
limit had become outdated, as it had
been superseded by other, more effective mechanisms for the Committee to
oversee Desk operations.
Authorization for Domestic
Open Market Operations
(Amended February 1, 2005)
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;
(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
Reserve Bank of New York under agreements for repurchase of such securities or
obligations in 65 business days or less, at
rates that, unless otherwise expressly authorized by the Committee, shall be determined
163
by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers; provided that
in the event Government securities or agency
issues covered by any such agreement are
not repurchased by the dealer pursuant to the
agreement or a renewal thereof, they shall be
sold in the market or transferred to the System Open Market Account.
(c) To sell U.S. Government securities
and obligations that are direct obligations of,
or fully guaranteed as to principal and interest by, any agency of the United States to
dealers for System Open Market Account
under agreements for the resale by dealers
of such securities or obligations in 65 business days or less, at rates that, unless otherwise expressly authorized by the Committee,
shall be determined by competitive bidding,
after applying reasonable limitations on
the volume of agreements with individual
dealers.
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 foreign and international accounts maintained at the Federal Reserve Bank of New
York and accounts maintained at the Federal
Reserve Bank of New York as fiscal agent
of the United States pursuant to Section 15
of the Federal Reserve Act, the Federal Open
Market Committee authorizes and directs the
Federal Reserve Bank of New York (a) for
System Open Market Account, to sell U.S.
Government securities to such accounts on
the bases set forth in paragraph l(a) under
agreements providing for the resale by such
accounts of those securities in 65 business
164 92nd Annual Report, 2005
days or less on terms comparable to those
available on such transactions in the market;
and (b) for New York Bank account, when
appropriate, to undertake with dealers, subject to the conditions imposed on purchases
and sales of securities in paragraph l(b),
repurchase agreements in U.S. Government
and agency securities, and to arrange corresponding sale and repurchase agreements
between its own account and such foreign,
international, and fiscal agency accounts
maintained at the Bank. Transactions undertaken with such accounts under the provisions of this paragraph may provide for a
service fee when appropriate.
4. In the execution of the Committee's
decision regarding policy during any intermeeting period, the Committee authorizes
and directs the Federal Reserve Bank of New
York, upon the instruction of the Chairman
of the Committee, to adjust somewhat 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.
By unanimous vote, the Committee
made several amendments to its rules,
statements, and resolutions, including
to align the starting dates of Committee
membership terms of Presidents with
those of Committee officers, and to
authorize the Secretary of the Committee, with the concurrence of the General
Counsel, to make technical changes to
the rules in the future.
By unanimous vote, the Committee
amended its Program for Security of
FOMC Information on February 1,
2005, to reflect an updating and streamlining of the document.
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 14, 2004
to February 1, 2005. By unanimous
vote, the Committee ratified these
transactions.
At this meeting the Committee
engaged in a broad-ranging discussion
of the pros and cons of formulating
a numerical definition of the pricestability objective of monetary policy. A
staff presentation on the topic included a
review of the potential costs and benefits of introducing such a definition as
well as of other countries' experiences.
In the subsequent discussion, meeting
participants uniformly agreed that price
stability provided the best environment
for maximizing sustainable economic
growth in the long run, but expressed
a range of views on whether it would
be helpful for the Committee to articulate a specific numerical definition for
the Federal Reserve's price-stability
objective—either a single figure or a
range. Those who believed such a move
would be on balance beneficial cited, for
example, its usefulness as an anchor for
long-term inflation expectations, as a
vehicle for enhanced clarity of Committee deliberations, and as an additional
tool for communications. Several of
those who saw greater potential drawbacks were concerned that such a shift
might appear to be inconsistent with the
Committee's dual mandate of fostering
maximum employment as well as price
stability or that it might inappropriately
bias or constrain policy at times; in any
case, with inflation expectations wellcontained over recent years, the benefits
Minutes of FOMC Meetings, February
of announcing a specific inflation objective were not likely to be large. The
Committee decided to defer further
discussion.
The information reviewed at this
meeting suggested that the economy
expanded at a solid pace in recent
months. Consumer spending and the
housing market continued to exhibit
strength, and business fixed investment
grew robustly in the fourth quarter. The
pace of inventory accumulation picked
up and industrial production accelerated. The labor market showed further
signs of improvement. Core consumer
prices rose moderately over the past
few months, and measures of inflation
expectations remained well-anchored.
Moderate increases in payroll
employment during November and
December pushed the average monthly
advance in the quarter well above that
of the third quarter. Employment gains
were fairly widespread, with hiring in
business services, health care, financial
activities, and wholesale trade more
than offsetting continued sluggishness
in manufacturing and a seasonally
adjusted decline in retail services during
December. Surveys of employers' hiring
plans and job openings pointed to continued moderate gains in employment
early this year. The average workweek
during the fourth quarter was unchanged
from the third quarter, and as a result
aggregate hours decelerated despite
the pickup in employment growth. The
unemployment rate held steady at
5.4 percent in December.
Industrial activity accelerated noticeably during the fourth quarter. The
pickup of industrial production in
December owed largely to increased
motor vehicle assemblies and a turnaround in the output of utilities associated with cold weather across the northeast. Production of high-tech goods
slowed slightly in the fourth quarter.
165
Available weekly physical product data
suggested that manufacturing production would increase moderately in January. Capacity utilization continued to
climb through the end of the year but
remained below its longer-run average.
Real consumer spending expanded
briskly in December and in the fourth
quarter as a whole, with retail sales
exhibiting widespread strength across
categories. Expenditures on consumer
services also continued to post solid
increases. A surge in light vehicle sales
in December pulled the average rate of
sales during the fourth quarter slightly
above the third-quarter pace. Real
disposable personal income increased
at a rapid rate at the end of the year—
boosted in part by the special dividend payment by Microsoft; excluding this payment, real disposable personal income rose at a more moderate
rate. Measures of consumer confidence
remained favorable and consistent with
sustained increases in spending.
Residential housing activity remained
buoyant in the fourth quarter. A rebound
in single-family housing starts in
December from a disappointing November brought the fourth quarter pace
about in line with that earlier in the year.
Sales of new and existing homes slipped
some late in the year but remained
robust. Mortgage rates had changed
little since August and continued to support demand. Construction activity in
the multifamily sector weakened a bit in
November and December, but indicators
of underlying demand pointed to a
rebound in starts in January.
Business fixed investment continued
to be bolstered by favorable fundamentals, including sustained expansion of
business output, the flush cash position
of many firms, readily available credit,
and a still-favorable cost of capital.
Equipment and software spending grew
at a solid rate in the fourth quarter,
166 92nd Annual Report, 2005
though not quite as briskly as in the
third quarter owing to a deceleration in
spending outside the high-tech sector.
By contrast, investment in nonresidential structures had edged down in recent
months, with expenditures only for drilling and mining operations showing
some strength amid flat outlays for
manufacturing facilities and a decline in
spending on office buildings.
Nonfarm inventories increased a bit
more in the fourth quarter than they
had in the third quarter. The buildup
of inventories was widespread across
manufacturers, wholesalers, and retailers as well as across stages of production. Motor vehicle inventories were an
exception, as motor vehicle manufacturers sought to reduce stocks of unsold
light vehicles. The aggregate inventorysales ratio outside of motor vehicles
likely edged up in the fourth quarter but
remained within the range that had prevailed since the middle of last year.
The most recent data suggested that
the U.S. international trade deficit widened in the fourth quarter as a result
of a broad-based decline in exports of
goods and increase in imports of oil
and consumer goods. The expansion in
economic activity in the major foreign
industrialized economies appeared to
remain sluggish in the fourth quarter,
but the growth of real GDP in Latin
America and emerging Asia likely
stepped up.
Core consumer prices decelerated
over the past few months, while overall
consumer prices were buffeted by movements in energy prices. The rate of
increase in core prices in the twelve
months ending in December was somewhat higher than the very low rate that
prevailed during the year-earlier period;
the overall index also accelerated, with
about half of its advance accounted for
by a sharp rise in energy prices. Measures of inflation expectations were little
changed over the intermeeting period.
With regard to labor costs, the employment cost index decelerated in the fourth
quarter; the slowdown was attributable
to wages, which gained only slightly,
while benefit costs rose a bit faster than
in the third quarter.
At its meeting on December 14,2004,
the Federal Open Market Committee
decided to increase its target for the
federal funds rate 25 basis points to
2VA percent. In its announcement of this
decision, the Committee indicated that
the upside and downside risks to the
attainment of both sustainable growth
and price stability were roughly equal.
The Committee also noted that output
appeared to be growing at a moderate
pace and labor market conditions continued to improve gradually, while inflation and inflation expectations remained
well-contained. As a result, the Committee again judged that policy accommodation could be removed at a pace that
was likely to be measured, although
the path of policy would depend importantly on evolving economic prospects.
The Committee's decision at its
December meeting to increase the federal funds rate had been fully anticipated in financial markets, and reaction
to the attendant statement was muted.
The release of the minutes of the
December meeting on January 4, however, triggered a significant upward revision in the anticipated path of monetary
policy: Investors apparently read them
as expressing more widespread concern
among Committee members about inflation pressures than had been the case
previously. Market participants viewed
the generally favorable incoming data
on economic activity as consistent with
their expectations of firmer policy. Interest rates on intermediate-term Treasury
securities rose in response to the revision to policy expectations, but longerterm yields were little changed over
Minutes of FOMC Meetings, February
167
the intermeeting period. As yields on supportive financial conditions, and an
inflation-indexed Treasury securities ongoing need to replace or upgrade
rose roughly in line with their nominal aging equipment and software. Real net
counterparts, longer-term inflation com- exports were projected to be roughly
pensation remained about unchanged. stable for several quarters, held up by
Risk spreads on corporate bonds were the lagged effect of the lower foreign
stable at relatively low levels, consis- exchange value of the dollar and some
tent with favorable indicators of corpo- strengthening in foreign demand. Mearate credit quality. Broad stock indexes sures of total consumer price inflation
declined a bit over the intermeeting were expected to decline over the foreperiod. In foreign exchange markets, cast horizon as energy prices receded,
the dollar ended the period little changed while core inflation was seen as remainon a trade-weighted basis, appreciating ing stable in the staff forecast. Tendenagainst the major European currencies cies for core inflation to increase
but falling vis-a-vis other important because of slightly higher trend unit
trading partners.
labor costs and a narrowing margin of
M2 grew moderately in recent resource slack were expected to be offmonths, its expansion restrained by set by the waning contribution of elerising opportunity costs associated with vated prices for energy and imported
monetary policy tightening. Because goods.
changes in interest rates on liquid deposIn their discussion of the economic
its typically lag those in market interest outlook, the meeting participants
rates, the growth of that component regarded incoming data since the last
slowed in the second half of 2004. By meeting as supporting their expectations
contrast, growth of small time deposits, that, with the farther removal of monewhose yields closely track market rates, tary accommodation, GDP would likely
picked up. Currency growth was about grow at a moderate pace consistent
flat in December.
with a gradual reduction of remaining
In the staff forecast prepared for this economic slack, and inflation would
meeting, the economy was seen as likely probably continue to be low. Domestic
to expand at a pace a little above that demand had stayed strong through the
of its longer-run potential over this year fourth quarter and should continue to
and next, while hiring was expected to be bolstered by favorable financial confirm some more, resulting in a further ditions. Recent data indicated low and
decrease in the unemployment rate. stable rates of core consumer inflation
Household spending was projected to and apparently well-anchored inflation
grow at a fairly solid rate, supported by expectations. Against this backdrop, the
higher employment and somewhat lower risks to the outlook for both output and
energy prices but damped somewhat by inflation relative to the Committee's
lessened stimulus from gains in wealth goals appeared to remain well-balanced.
and the need for households to rebuild
In preparation for the Federal
savings. After a temporary dip in the Reserve's semi-annual report to the
level of business investment this quarter Congress on the economy and monetary
related to the expiration of the partial- policy, the members of the Board of
expensing tax provision, investment out- Governors and the presidents of the Fedlays were seen as likely to resume vigor- eral Reserve Banks submitted individous growth in response to steadily rising ual projections of the growth of GDP,
sales, strong corporate balance sheets, the rate of unemployment, and core con
168 92nd Annual Report, 2005
sumer price inflation for the years 2005
and 2006. As part of its continuing effort
to improve its communications, the
Committee had earlier decided to add
one year to the forecast period so as
to make the projections more useful to
the public. The forecasts of the rate of
expansion in real GDP were concentrated in the upper part of a V/i to 4 percent range for 2005; for 2006 the forecasts were in a slightly lower range of
3V4 to 3% percent, with a central tendency at 3V2 percent. These rates of
growth were associated with a civilian
unemployment rate in the range of 5 to
52/2 percent and a central tendency of
5lA percent in the fourth quarter of 2005
and 5 to 5lA percent in the fourth quarter
of 2006. The rate of inflation, as measured by the core PCE price index, was
expected to remain fairly stable, with
forecasts concentrated in the lower portion of a \lh to 2 percent range for both
this year and next.
In their comments about developments in key sectors of the economy,
meeting participants noted that, relative
to several months ago, many firms now
seemed somewhat more confident about
the economic outlook. The anticipation of increased sales relative to existing production capacity and also desires
to upgrade technology and improve
competitiveness were leading firms to
increase spending on equipment and
software. Gains in capital spending had
been quite strong last year, and while
some of that spending might have been
motivated by the year-end expiration of
the partial-expensing provisions of the
tax code, participants had seen little
evidence to date that there would be a
significant slowdown in the growth of
spending in the early part of 2005. Low
longer-term interest rates on corporate
borrowing—reflecting in part narrow
credit risk spreads—along with strong
corporate profitability and improved
balance sheets were continuing to support fairly brisk growth of capital expenditures. Low longer-term nominal interest rates were partly attributable to wellcontained inflation expectations, but
low real interest rates, along with slight
declines in equity prices so far this year,
might reflect lingering caution on the
part of businesses about the outlook.
Nevertheless, narrow credit spreads and
risk premiums, along with abundant
liquidity in financing markets, suggested
that markets now assigned fairly low
odds to significant downside risks.
Solid income gains, low interest rates,
and consumer confidence were seen by
participants as helping to sustain strong
growth of household spending. Some
firms had reported that holiday sales
were higher than a year earlier and
better than expected, while auto sales
had responded strongly to incentives in
December. The current low measured
saving rate seemed mostly explainable
by the strength of expected income
gains, low interest rates, and the increase
in household wealth resulting from
the rise in equity and housing prices.
Although the saving rate might well
drift up over the next couple of years,
participants generally thought it likely
that consumer spending would continue
growing at a strong pace. However, a
marked slowing in home price appreciation and possible increases in longerterm interest rates, which would raise
financing costs and reduce opportunities
to extract equity from homes through
refinancings and home equity loans,
were seen as downside risks to the prospects for consumption spending and for
housing construction.
Several participants mentioned that
the low level of measured national saving, which implied a continued need
for foreign financing of U.S. investment, and imbalances in the external
sector imparted additional uncertainty to
Minutes of FOMC Meetings, February
the longer-term economic outlook. The
extent to which the federal budget deficit would decline over coming years was
an open question. As regards the current account balance, some participants
noted that the sharp drop in net exports
in November probably reflected transitory factors in large part, as well as
reported measurement errors. However,
there has been little hard evidence as
yet of a strengthening in the growth of
spending in our foreign trading partners
or of substantial effects on net exports
from previous dollar declines. As a
result, the external imbalance seemed
likely to remain elevated, with a high
level of uncertainty surrounding the
prospects for and path of adjustment.
A number of participants noted continued modest gains in employment,
though some commented that, based
on anecdotal information, job growth
seemed to have picked up of late. The
increase in aggregate demand was
expected to be sufficient over coming
quarters to allow the rate of unemployment to continue to edge lower even as
more people return to the labor force.
Participants noted considerable uncertainty about the sustainable rate of
resource utilization and about structural
productivity growth. One participant
suggested that, given the range of uncertainty, output might already be at-or
close to potential. Others commented
that recent studies did not on balance
support a conclusion that structural labor
market shifts had caused resource slack
to be lower than commonly estimated
and that the flat pattern of growth in
wages and compensation suggested an
absence of pressures in labor markets.
However, unit labor costs had accelerated over 2004 owing to a tapering off
in productivity growth. If that slowing
reflected a moderation in structural productivity growth and if firms believed
that the associated increases in the
169
growth rate of labor costs were permanent, these cost pressures might be
passed through to consumer prices
fairly quickly to preserve profit margins.
While participants generally felt that the
pace of underlying productivity growth
remained robust, careful attention would
need to be paid to developments regarding unit labor costs and profit margins.
Despite some pickup in costs, participants thought that the rate of core
inflation likely would remain low and
stable, assuming further removal of
policy accommodation. Elevated price
markups and profits, as well as slack
in resource use, had helped absorb cost
increases and put downward pressure
on inflation and would likely continue
to do so. Indeed, core inflation measures
had eased off, both in the latest readings
and on balance over the second half of
2004 relative to the first half. However,
several participants suggested the possibility of an upward skew to the distribution of inflation outcomes, especially if
there were appreciable further declines
in the foreign exchange value of the
dollar or in structural productivity
growth; already some participants were
hearing anecdotal reports from firms
of an increased ability to pass cost
increases through to product prices,
perhaps because of increasing confidence in the outlook for the economic
expansion.
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 2lA percent at this meeting. All members judged that a further quarter-point
firming in the target federal funds rate
was appropriate in light of current overall accommodative financial conditions
and the continuing outlook for solid
economic growth and diminished slack
in resource utilization. A higher nominal
federal funds rate was seen as needed
170 92nd Annual Report, 2005
to contain risks of increased cost and long-run objectives, the Committee in the
price pressures, but even with this immediate future seeks conditions in reserve
markets consistent
increasing
action, the real federal funds rate was eral funds rate at with average of the fedan
around
generally seen as remaining below lev- 2lh percent.
els that might reasonably be associated
with maintaining a stable inflation rate
The vote encompassed approval of
over the medium run. The pace of pol- the paragraph below for inclusion in the
icy moves at upcoming meetings, how- statement to be released shortly after the
ever, would depend on incoming data.
meeting:
With regard to the Committee's
The Committee perceives the upside and
announcement to be released after the
meeting, members concurred that over- downside risks to the attainment of both
sustainable growth and
all economic prospects were similar next few quarters to beprice stability for the
roughly equal. With
to those prevailing at the time of the underlying inflation expected to be relatively
December meeting and that conse- low, the Committee believes that policy
quently the statement should be altered accommodation can be removed at a pace
only to the minor extent required to that is likely to be measured. Nonetheless,
reflect recent economic developments. the Committee will respond to changes in
economic prospects as needed to fulfill its
They concurred that the statement obligation to maintain price stability.
should note that output appeared to be
growing at a moderate pace despite the
Votes for this action: Messrs. Greenspan,
Geithner, Bernanke, Ms. Bies, Messrs.
rise in energy prices, that labor market
Ferguson, Gramlich, Guynn, Kohn,
conditions continued to improve graduMoskow, Olson, Santomero, and Stern.
ally, and that inflation and longer-term
Vote against this action: None. Mr. Guynn
inflation expectations remained wellvoted as alternate member.
contained. They also agreed again to
characterize the risks to sustainable
It was agreed that the next meeting
growth and price stability as balanced. of the Committee would be held on
All members agreed that the FOMC Tuesday, March 22, 2005.
statement for this meeting should again
The meeting adjourned at 12:35 p.m.
indicate that policy accommodation on February 2, 2005.
could be removed at a pace that was
likely to be measured but that the Committee would respond to changes in eco- Notation Vote
nomic prospects as needed to maintain By notation vote completed on Decemprice stability.
ber 31, 2004, the Committee unaniAt the conclusion of the discussion, mously approved the minutes of the
the Committee voted to authorize and meeting of the Federal Open Market
direct the Federal Reserve Bank of New Committee held on December 14, 2004.
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
will foster price stability and promote sustainable growth in output. To further its
Meeting Held on
March 22, 2005
A meeting of the Federal Open Market
Committee was held in the offices of
Minutes of FOMC Meetings, March 111
the Board of Governors of the Federal Reserve System in Washington,
D.C., on Tuesday, March 22, 2005, at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Mr. Bernanke
Ms. Bies
Mr. Ferguson
Mr. Gramlich
Mr. Kohn
Mr. Moskow
Mr. Olson
Mr. Santomero
Mr. Stern
Ms. Cumming, Messrs. Guynn and
Lacker, Mses. Pianalto and Yellen,
Alternate Members of the Federal
Open Market Committee
Mr. Hoenig, Ms. Minehan, and
Mr. Poole, Presidents of the
Federal Reserve Banks of
Kansas City, Boston, and
St. Louis, respectively
Ms. Holcomb, First Vice President,
Federal Reserve Bank of Dallas
Mr. Reinhart, Secretary and Economist
Ms. Smith, Assistant Secretary
Mr. Alvarez, General Counsel
Ms. Johnson, Economist
Mr. Stockton, Economist
Messrs. Connors, Evans, and Madigan,
Ms. Mester, Messrs. Oliner,
Rolnick, Rosenblum, and Wilcox,
Associate Economists
Mr. Kos, Manager, System Open
Market Account
Mr. Ettin, Deputy Director, Division
of Research and Statistics,
Board of Governors
Messrs. Kamin and Slifman, Associate
Directors, Divisions of
International Finance and
Research and Statistics,
respectively, Board of Governors
Mr. Whitesell, Deputy Associate
Director, Division of Monetary
Affairs, Board of Governors
Messrs. English and Leahy, 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. Small, Project Manager, Division
of Monetary Affairs, Board of
Governors
Mr. Nelson, Section Chief, Division
of Monetary Affairs, Board of
Governors
Mr. Carpenter, Senior Economist,
Division of Monetary Affairs,
Board of Governors
Messrs. Kumasaka and Luecke, Senior
Financial Analysts, Division of
Monetary Affairs, Board of
Governors
Ms. Low, Open Market Secretariat
Assistant, Division of Monetary
Affairs, Board of Governors
Mr. Judd, Executive Vice President,
Federal Reserve Bank of
San Francisco
Messrs. Eisenbeis, Fuhrer, Goodfriend,
Hakkio, Rasche, Sniderman, and
Steindel, Senior Vice Presidents,
Federal Reserve Banks of Atlanta,
Boston, Richmond, Kansas City,
St. Louis, Cleveland, and
New York, respectively
Mr. Elsasser, Vice President, Federal
Reserve Bank of New York
The Manager of the System Open
Market Account reported on recent
172 92nd Annual Report, 2005
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 February 2, 2005,
through March 21, 2005. By unanimous vote, the Committee ratified these
transactions.
The information reviewed at this
meeting suggested that the economy
was expanding at a solid pace in the
first quarter of the year. Employment
was improving. Consumer spending still
appeared to be growing briskly, and residential construction expenditures continued to move higher. Business spending on equipment and software showed
notable gains early in the quarter, and
industrial production increased moderately in the first two months of the year.
Consumer prices moved higher in January after being unchanged in December.
The labor market continued to
improve in February. Private nonfarm
payrolls grew at a solid pace, and these
gains were widespread across industries. Of particular note, manufacturing
employment, which had been declining,
edged higher. On balance, surveys of
employers and of households pointed
to firming labor demand. With the average workweek unchanged, aggregate
hours increased moderately in February.
Although the unemployment rate in February ticked back up to its December
level, the set of available information on
the labor market suggested that resource
slack was diminishing.
Industrial production posted a moderate gain in February, led by a surge
in motor vehicle production. Production of high-tech equipment rose, with
the increase in output of communica
tions equipment far outpacing sluggish
growth of computer production. Production of consumer goods, both durable
and nondurable, also rose. In contrast,
the production of non-high-tech business equipment edged down, and the
output of construction and business supplies and materials dropped back. Mining output edged up, but the output of
utilities fell for a second consecutive
month amid a generally warm winter.
Supported by strong income gains and
higher wealth, consumer spending had
increased at a robust rate in the last
quarter of 2004 and appeared to be on
track to post another strong advance
in the first quarter of the year. Apart
from purchases of motor vehicles, which
stepped down early this year after a
year-end surge, the increases in outlays
had been broad based. On average, real
disposable income increased at a vigorous pace in December and January, well
above that seen over most of last year.
Increases in equity prices and in house
values pushed up the wealth-to-income
ratio in the fourth quarter, and the saving rate remained low by historical
standards.
Activity in the housing market continued to expand early this year. Starts
of single-family homes in January and
February were well above their fourthquarter pace, although indicators of
fiiture production pointed to some slowing. Similarly, in the multifamily sector, starts increased substantially in
the first two months of the year but
appeared poised to moderate this month.
Although both new and existing home
sales declined somewhat in January,
demand continued to be supported by
low mortgage rates.
Business spending on equipment and
software increased sharply in the fourth
quarter and, excluding motor vehicles,
appeared to be growing briskly in the
first quarter. The expiration at the end of
Minutes of FOMC Meetings, March 173
2004 of the special tax provisions that
permitted partial expensing of investment expenditures seemed not to be
retarding capital spending. Presumably
contributing to the vigor of capital
spending were further increases in
business output, strong cash positions
of corporations, and an attractive cost
of capital amid generally low interest
rates. Shipments and orders for hightech equipment remained strong in January. Outside the high-tech sector, shipments posted a sizable and broad-based
increase in January, and the rising backlog of orders pointed to further gains in
the near future. Spending on nonresidential construction was subdued, as it had
been for some time.
Increased inventory accumulation
contributed significantly to the rise in
economic output in the fourth quarter of
last year and appeared likely to make an
additional contribution in the first quarter of this year. In January, manufacturers' book-value inventories increased
at nearly twice the rate seen in the
fourth quarter, while wholesale and
retail inventories about kept pace with
the advance in the previous quarter.
The rapid buildup in inventories left
the inventory-to-sales ratio unchanged
rather than on the downtrend of recent
years. However, the available evidence
suggested that firms generally were
not uncomfortable with their inventory
positions.
The U.S. international trade deficit
widened in January, primarily reflecting
a surge in imported non-oil goods and
services. After a general slowdown in
the fourth quarter of last year, indicators
for major foreign industrial countries
revealed a broad pickup in economic
growth in the first quarter, with industrial production rising in Japan and the
major euro-area countries. Meanwhile,
consumer price inflation across most
industrial economies remained subdued.
Among the emerging-market economies, indicators of economic activity
were mixed.
Consumer prices edged higher in
January after having been flat in December. Core consumer prices rose a bit
faster than overall prices, with price
increases widespread across commodities and services. Consumer energy
prices fell in January but turned back up
in February and early March. For the
twelve-month period ended in January,
overall consumer prices were boosted
significantly by higher oil prices, but
core consumer price inflation over
the same period was fairly subdued. A
survey measure of near-term inflation
expectations moved up in early March,
but long-term expectations had changed
little since the end of last year. Producer
prices and commodity indexes were
broadly higher in January, with the
exception of prices for core crude materials. With regard to labor costs, average
hourly earnings rose slowly over January and February. Over the preceding year, compensation costs increased
moderately, contributing to a small rise
in unit labor costs.
At its February meeting, the Committee decided to increase the target federal
funds rate 25 basis points, to 2x/2 percent. In its accompanying statement, the
Committee indicated that the upside
and downside risks to the attainment of
both sustainable growth and price stability were roughly equal. In addition,
the Committee noted that the economy
appeared to be growing at a moderate
rate despite increases in energy prices,
that labor market conditions continued
to improve gradually, and that inflation and inflation expectations remained
well contained. As a consequence, the
Committee again judged that policy
accommodation could be removed at a
pace that was likely to be measured,
although the path of policy would
174 92nd Annual Report, 2005
depend importantly on evolving economic prospects.
The Committee's decision to change
the target rate was universally anticipated by market participants, as was the
tenor of the statement. As a result, the
reaction infinancialmarkets was muted.
Over the intermeeting period, however,
the Chairman's semiannual testimony
on monetary policy, higher oil prices,
and incoming data that showed a pickup
in price inflation led market participants
to mark up their expectations for the
trajectory of the target federal funds
rate. Consistent with the upward revision to policy expectations, yields on
Treasury securities rose significantly.
Some of the increase in nominal rates
likely owed to higher inflation expectations, as inflation compensation, measured from the spread between Treasury
nominal debt and comparable inflationindexed securities, rose. However, staff
analysis suggested that the increases
were concentrated over the next few
years and that long-term inflation expectations were little changed. Risk spreads
on most corporate bonds narrowed on
balance, significantly so for speculativegrade debt, amid generally strong corporate balance sheets and good credit performance. Broad stock market indexes
edged up over the intermeeting period.
In foreign exchange markets, the tradeweighted value of the dollar depreciated
slightly, with the declines widespread
against the currencies of industrialized
countries other than Japan.
M2 growth slowed in the first two
months of the year, as the opportunity
cost of holding money rose with monetary policy tightening. Rates paid on
liquid deposits were little changed, but
those on small time deposits tracked
market rates more closely. As a result,
growth in liquid deposits was depressed,
while that of small time deposits was
vigorous. Rows into equity and bond
funds picked up in the first two months
of the year. In the staff forecast prepared
for this meeting, the economy was seen
as likely to expand at a rate above the
growth of potential this year and next,
led by strong business demand for
equipment and software. Consequently,
labor markets were expected to continue to firm and the unemployment
rate to decline gradually. In light of the
robust expansion of capital spending
thus far this year, the outlook for business investment spending was revised
up appreciably, as more of the strength
over the latter part of 2004 was attributed to underlying demand and less
to the effects of the partial-expensing
tax provision. Steadily rising sales, an
ongoing need to replace and upgrade
software and equipment, and favorable
financing costs were all expected to continue to buoy business spending this
year and next. Household spending, supported by rising disposable income and,
to a lesser degree, by increasing wealth,
was projected to expand at a solid rate.
Net exports were seen as exerting less of
an arithmetic drag on economic growth
than in 2004. Measures of overall consumer price inflation were expected to
be lower this year than last and to step
down again next year as energy prices
retreated. Inflation in core consumer
prices was seen as being boosted a bit
by the effects of higher import and
energy costs in the near term but still
largely contained by continued strong
growth in underlying labor productivity and remaining slack in resource
markets.
In their discussion of current conditions and the economic outlook, many
participants said that circumstances had
changed from those anticipated at the
time of the Committee's meeting in
early February. In particular, incoming
data and anecdotal information indicated that economic activity had appre-
Minutes of FOMC Meetings, March
ciably more forward momentum than
previously perceived and that inflation
pressures could be intensifying. While
underlying inflation appeared to have
moved up only modestly and nearly all
participants thought that core and total
inflation going forward would be relatively low, they had become less certain of that outlook for the next few
quarters.
Many participants noted that the most
recent data and business commentary
indicated that investment was running
considerably stronger in the first quarter
of the year than had previously been
anticipated. Underlying trends in capital
spending appeared to be more robust
than had earlier been recognized, perhaps partly in response to unusually
supportive financial conditions, and that
strength was thought likely to carry
forward. Business contacts were more
confident about economic prospects, and
that confidence was bolstering firms'
willingness to invest. Anecdotal information suggested that firms were investing in part to expand capacity and in
part to boost productivity and lower
costs. Some investment was being
prompted by a need to replace equipment that was becoming obsolete, in
part because of the higher level of
energy prices. Increased demand was
reported for a wide variety of categories
of capital goods, ranging from several
types of heavy equipment, including
trucks, farm machinery, and construction equipment, to software and hightech equipment. Nonresidential construction, however, remained soft in
many regions, damped by relatively
high vacancy rates for office buildings
and other commercial real estate.
Spending on housing and consumer
goods and services was also seen as
underpinning economic expansion. With
single-family housing starts at record
levels, residential investment expendi
175
tures apparently continued to be spurred
by relatively low interest rates. A few
participants cited some evidence of
speculative activity in the housing market in several regions. However, recent
house price developments were mixed,
with reports of incipient softness in
some markets, including high-end properties, and overall house price inflation
was seen as likely to slow in coming
quarters. Consumer expenditures were
expected to continue to advance at a
solid pace, buoyed by strong gains in
personal income, although high energy
prices could exert some restraint on
spending. The possibility of an appreciable rise in the personal saving rate,
which was near its historical low, represented another possible downside risk
to consumer spending. The recent sharp
slowing in motor vehicle sales, which
appeared to be related in part to the
paring of purchase incentives and perhaps also to the high level of energy
prices, raised some concerns about the
expansion of economic activity in some
regions.
Some participants mentioned that
expansion abroad was apparently
strengthening early this year, particularly in emerging-market economies.
This development, in turn, was likely
to help support U.S. exports. Several
participants noted that past declines in
the foreign exchange value of the dollar
were contributing to U.S. economic
activity. Tourism from abroad, for example, was being spurred by relative currency values. At the same time, though,
it was recognized that growth in U.S.
domestic demand would likely continue
to be met in part by imports, tending to
trim the increase in domestic output.
U.S. industrial activity was increasing
steadily, pushing capacity utilization
higher. Production was expanding in
a broad range of manufacturing categories, notably including high-tech and
176 92nd Annual Report, 2005
defense industries. Business contacts
indicated that the high level of energy
prices was spurring coal mining activity.
Drilling for oil and gas was also increasing, although extraction was said to be
crimped in some instances by a scarcity
of experienced rig hands as well as spot
shortages of certain key production
inputs, such as drilling pipe.
Around the nation, labor markets
conditions were reported to be stable
to improving, and meeting participants
perceived that slack in labor markets
was gradually diminishing. In general,
business executives indicated that labor
was readily available, although again
workers with certain skills and in certain occupations, such as trucking, were
becoming increasingly difficult to hire.
Some commented that the failure of
labor force participation to rise as
expected as the expansion gained
momentum likely portended somewhat
weaker labor force growth than previously anticipated; such a development,
at the margin, would tend to reduce the
expansion of potential output. Still, pressures on prices stemming from labor
costs seemed well contained and were
expected to remain damped in coming
quarters. National data and anecdotal
information suggested that wages generally continued to increase moderately.
However, health-care expenses were a
persistent source of pressure on costs.
Growth in unit labor costs had continued to be held down by growth of output
per hour worked, which had continued
to perform surprisingly well. Although
productivity growth had slowed from
the extraordinarily rapid pace that prevailed earlier in the expansion, data
for the fourth quarter of 2004, as well
as preliminary indications for the first
quarter of this year, suggested that gains
from efficiency remained substantial.
Participants remarked that many business executives were seeking further
advances in productivity through organizational improvements as well as
through investment in equipment and
software. Regarding the latter, some evidence suggested that rapid technological
progress was being sustained, which
would continue to drive down the cost
of many forms of productive capital and
thus boost returns on investment. Moreover, the stronger picture of capital
spending that had emerged of late boded
well for the performance of productivity
going forward. Still, considerable uncertainty persisted about longer-run prospects for productivity growth, unit labor
costs, and cost pressures on profits and
prices.
Meeting participants commented in
particular detail on the inflation situation. They noted with some concern
the recent elevated readings on inflation
in prices of core personal consumption
expenditures, the producer price index,
and indicators of prices at earlier stages
of production, as well as the sizable
further increase in energy prices. Nonetheless, many participants stated that
they expected total inflation to diminish
and any rise in core consumer inflation
to be limited. One source of upward
pressure on inflation had been the rise in
energy prices, and it seemed reasonable
to expect that these prices would level
out or even decline mildly, as built into
futures prices. Unit labor costs were still
being held down by moderate wage
growth and rising productivity. Indeed,
a few saw a distinct possibility of further positive productivity surprises, representing a downside risk to the inflation outlook. Moreover, the markup of
prices over costs in nonfarm businesses
remained quite high, and firms would
likely be pressed by competition to
absorb a portion of any step-up in the
growth of unit labor costs, at least if that
acceleration were limited in extent and
duration. In addition, prices of many
Minutes of FOMC Meetings, March 111
non-energy commodities had risen in
recent weeks, but such inputs constituted a relatively small fraction of overall business costs, and, partly for that
reason, in the past commodity prices
had demonstrated little predictive content for broad inflation rates. While
short-term inflation expectations had
risen somewhat, longer-term inflation
expectations remained well contained.
And lastly, monetary policy would be
aimed at preserving price stability.
Still, many participants indicated that
their uncertainty about the intensity of
inflation pressures had risen in response
to recent developments and that, in particular, the distribution of possible inflation outcomes was now tilted a little
to the upside. Although monthly statistical releases could be quite volatile, the
recent data showing consumer inflation
a little above previous expectations were
of concern. Also, anecdotal indications
of price increases were becoming more
common across a number of industries.
Some business executives reportedly
believed that, with aggregate demand
expanding robustly and the lower foreign exchange value of the dollar putting upward pressure on import prices, a
degree of "pricing power" had returned.
Moreover, the recent rebound in spot
crude oil prices, and especially the substantial advance in prices of crude oil
futures contracts for delivery well into
the future, suggested that a significant
unwinding of higher energy costs might
not be in prospect. Several participants
indicated that, in current circumstances,
they viewed an upside surprise to inflation as potentially more harmful than
an equivalent downside surprise, partly
because such an outcome could well
impart additional upward momentum to
inflation expectations.
In the Committee's discussion of
monetary policy for the intermeeting
period, all of the members favored
boosting the target for the federal funds
rate by 25 basis points to 2% percent at
this meeting. Monetary conditions evidently were still quite accommodative,
economic activity appeared to have
more momentum than had previously
been perceived, and, while core inflation most probably would stay low,
pressures on inflation seemed to have
risen. Prospects for legislative action
to apply significant fiscal restraint were
unclear, even as the expansion became
increasingly well established and private demand proved strong and resilient.
Although the required amount of cumulative tightening may have increased,
members noted that an accelerated pace
of policy tightening did not appear
necessary at this time, as a degree of
economic slack apparently remained,
productivity growth would probably
continue to damp increases in unit labor
costs and prices, and inflation would
most likely continue to be contained. In
these circumstances, Committee members judged that the measured removal
of policy accommodation was appropriate for now.
In discussing the announcement to
be released after the meeting, members agreed that it was appropriate to
acknowledge the recent evolution in the
inflation situation by indicating that
"though longer-term inflation expectations remain well contained, pressures
on inflation have picked up in recent
months and pricing power is more evident. The rise in energy prices, however,
has not notably fed through to core consumer prices." Regarding the risks to
sustainable growth and price stability,
members discussed a proposal to make
the Committee's assessment explicitly
conditional on an assumption of appropriate monetary policy so as to underscore that maintaining balanced risks
would require policy action. It was
noted that the Committee's assessment
178
92nd Annual Report, 2005
of balanced risks over the past nine
months—a period in which monetary
policy had been steadily tightened—
necessarily had to be interpreted as
based implicitly on an assumption
that policy accommodation would be
removed. A number of members
believed that formulaic language by its
nature was too rigid to reflect evolving
economic circumstances in a satisfactory manner, especially when developments were subtle or complex, and some
of these members believed that the risk
assessment should be discontinued. All
the members ultimately approved making the risk assessment in the policy
announcement following this meeting
explicitly conditional on appropriate
policy.
Members also focused on the issue of
whether to reiterate the judgment
expressed in the Committee's recent
statements that " . . . policy accommodation can be removed at a pace that is
likely to be measured." Some expressed
the view that such language could
constrain future policy inappropriately;
while these concerns were not new, they
were now felt to be more pressing, as
the odds that the Committee might need
to step up the pace of policy firming
were thought to have increased. Members noted, however, that the existing
"measured pace" language was clearly
conditional on the economy evolving in
a way that promised a gradual return to
high levels of resource utilization and
on inflation remaining low, and thus
believed that the wording did not rule
out either picking up the pace of firming
or pausing in the process of removing
policy accommodation should circumstances warrant. They also noted that the
language had not precluded a notable
increase in medium- and longer-term
interest rates over the intermeeting
period as markets extended the expected
gradual increase in policy rates. Some
discomfort was expressed with language
that related so explicitly to the likely
trajectory of future policy action. But it
was also averred that the Committee
should, to the extent possible, provide
information that would help the public
anticipate the probable course of monetary policy; providing such information
would tend to increase the effectiveness
of monetary policy. More generally,
members recognized that the Committee's statement would need to evolve
over time.
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
23A percent.
The vote encompassed approval of
the paragraph below for inclusion in the
statement to be released shortly after the
meeting:
The Committee perceives that, with appropriate monetary policy action, the upside
and downside risks to the attainment of both
sustainable growth and price stability should
be kept roughly equal. With underlying inflation expected to be contained, 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.
Minutes of FOMC Meetings, May
Ferguson, Gramlich, Guynn, Kohn,
Moskow, Olson, Santomero, and Stern.
Vote against this action: None. Mr. Guynn
voted as alternate member.
179
Messrs. Guynn and Lacker, Mses.
Pianalto and Yellen, Alternate
Members of the Federal Open
Market Committee
It was agreed that the next meeting
of the Committee would be held on
Tuesday, May 3, 2005. The meeting
adjourned at 1:25 p.m.
Mr. Hoenig, Ms. Minehan, and
Mr. Poole, Presidents of the
Federal Reserve Banks of
Kansas City, Boston, and
St. Louis, respectively
Notation Vote
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
By notation vote completed on February 22, 2005, the Committee unanimously approved the minutes of the
meeting of the Federal Open Market
Committee held on February 1-2, 2005.
Vincent R. Reinhart
Secretary
Messrs. Connors, Evans, and Madigan,
Ms. Mester, Messrs. Oliner,
Rosenblum, and Wilcox,
Associate Economists
Meeting Held on
May 3, 2005
Mr. Kos, Manager, System Open
Market Account
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 3, 2005 at
9:00 a.m.
Mr. Ettin, Deputy Director, Division
of Research and Statistics,
Board of Governors
Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Ms. Bies
Mr. Ferguson
Mr. Fisher6
Mr. Gramlich
Mr. Kohn
Mr. Moskow
Mr. Olson
Mr. Santomero
Mr. Stern
6. Secretary's note: Advice had been received
that Richard W. Fisher had been elected by the
directors of the Federal Reserve Banks of Atlanta,
Dallas, and St. Louis, as a member of the Federal
Open Market Committee for the period commencing April 4, 2005, and that he had executed his
oath of office.
Messrs. Freeman, Slifman, and
Struckmeyer, Associate Directors,
Divisions of International Finance,
Research and Statistics, and
Research and Statistics,
respectively, Board of Governors
Messrs. Clouse and Whitesell, Deputy
Associate Directors, Division of
Monetary Affairs, Board of
Governors
Messrs. English and Leahy, 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
180 92nd Annual Report, 2005
Mr. Small, Project Manager, Division
of Monetary Affairs, Board of
Governors
Mr. Brady, Section Chief, 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
Mr. Lyon, First Vice President, Federal
Reserve Bank of Minneapolis
Messrs. Eisenbeis, Goodfriend,
Hakkio, Rasche, Rudebusch,
and Sniderman, Senior Vice
Presidents, Federal Reserve
Banks of Atlanta, Richmond,
Kansas City, St. Louis,
San Francisco, and Cleveland,
respectively
Mr. Elsasser, Ms. Little, and Messrs.
Peach and Todd, Vice Presidents,
Federal Reserve Banks of
New York, Boston, New York,
and Minneapolis, respectively
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 since the previous
meeting. By unanimous vote, the Committee ratified these transactions.
By unanimous vote, the Committee
voted to extend for one year beginning
in mid-December 2005 the reciprocal
currency ("swap") arrangements with
the Bank of Canada and the Banco de
Mexico. The arrangement with the Bank
of Canada is in the amount of $2 billion equivalent and that with the Banco
de Mexico in the amount of $3 billion
equivalent. Both arrangements are associated with the Federal Reserve's participation in the North American Framework Agreement of 1994. 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 information received at this meeting suggested that the growth of economic activity had unexpectedly moderated during the first quarter from
the rapid pace seen during the second
half of 2004. Gains in private payroll
employment over the first quarter were
similar to the average for the second
half of 2004 but weakened in March,
and manufacturing production rose only
a little, on balance, over February and
March. Consumers appeared to have
turned somewhat cautious in thenspending, likely a reflection of higher
energy prices. Housing starts fell in
March after a sustained stretch of very
high readings, but home sales continued
at a rapid rate throughout the quarter.
Growth of capital spending, while
strong in the first quarter, was down
from the brisk rates of previous quarters.
Sharp increases in energy prices pushed
up headline inflation, and core measures
were also somewhat elevated. Labor
costs, however, advanced at a moderate
rate. Employment continued to expand
in March, although the increase was less
than the strong advance in February.
Employment declined in manufacturing,
retail trade, and temporary help services, but most other sectors registered
gains. The average workweek remained
Minutes of FOMC Meetings, May
at its recent level, and aggregate hours
posted a small gain. The unemployment
rate moved down to 5.2 percent in
March. Also suggesting a gradual erosion of slack in labor markets were surveys indicating that some employers
were finding some jobs requiring special skills harder to fill and that households were experiencing increases in job
availability. Nevertheless, survey measures of expected conditions in labor
markets softened somewhat in the early
months of the year, and the labor market participation rate remained low in
March.
Industrial production continued to
expand in the first quarter, but the pace
was slower than in the final months of
2004. Gains were restrained by a decline
in manufacturing output, particularly
for motor vehicles and parts, and by a
reduction in energy generation at utilities, which was held down by unseasonably warm weather early in the year.
Mining output, however, accelerated, as
did production in the business equipment and defense and space equipment
industries. Capacity utilization in manufacturing edged up on average in the
first quarter, but moved down in March
and remained a bit below its thirty-year
average.
Consumer spending advanced solidly
in the first quarter despite some slowing
in automobile sales. However, much of
that strength was registered early in the
quarter, and spending in March was subdued. Measures of consumer confidence
declined in the early months of the year
but remained well above the lows of two
years ago. Other factors underlying consumer spending also remained favorable: Real wages and salaries continued
to rise, and the ratio of wealth to income
remained high, although it was down a
bit because of a decline in equity prices.
The personal saving rate stayed low over
the first quarter of the year.
181
Housing starts slowed in March, after
exceptional strength in the prior two
months. However, a substantial increase
in the level of permits in March suggested that starts likely turned back up
in April. A similar pattern was observed
in the multifamily sector. The thirtyyear mortgage rate in the first quarter
stayed in a range around its average
level for the past two years. Sales of
existing homes were rapid throughout
the quarter, and sales of new homes rose
to another record level in March. House
prices continued to rise rapidly over the
first quarter, although recent data suggested some slowing.
Growth of business spending on
equipment and software moderated substantially in the first quarter from
the very high rates of last year, but
appeared to retain considerable momentum; strong gains occurred in all major
categories except motor vehicles. This
performance reflected favorable underlying fundamentals, including solid
growth in business output, strong
retained earnings, high levels of liquid
assets, and favorable borrowing conditions in the form of low interest rates
and narrow risk spreads in bond and
loan markets. At the same time, construction of nonresidential structures
remained quite subdued. Over the first
quarter, outlays for manufacturing facilities picked up a bit, but those for
office buildings stayed low despite some
declines in the office vacancy rate, and
spending on commercial structures fell.
Nonfarm inventories accumulated in
the first two months of the year at a
much faster rate than in the preceding
quarter, prompting a small increase in
inventory-sales ratios. Inventory gains
were especially strong early in the quarter and were concentrated in the manufacturing sector.
The U.S. international trade deficit
widened in February as exports held
182 92nd Annual Report, 2005
steady. The value of imported oil
jumped sharply, and nonoil imports also
rose. Economic indicators for major foreign industrial countries suggested some
slowing of growth late in the quarter
after a pickup earlier in the year. In
Japan, industrial production rose briskly
in January before falling back; the
euro-area industrial sector evidenced a
similar pattern. By contrast, economic
activity in China and other developing
countries showed greater buoyancy.
Consumer price inflation abroad remained subdued.
U.S. consumer price inflation firmed
in recent months as energy prices rose
sharply. Core consumer prices also rose
a bit more rapidly recently, but the
increase over the twelve months ending in March was little different than
over the year-earlier period. According
to survey information, expectations of
near-term inflation picked up in March,
consistent with the increase in energy
prices. As for labor costs, the employment cost index for private industry
decelerated over the first quarter from
an already moderate pace. The slowing
occurred in both the wages and salaries
component and the benefits component
and was fairly widespread across industry groups.
At its March meeting, the Federal
Open Market Committee decided to
increase the target level of the federal
funds rate 25 basis points, to 23A percent. In its accompanying statement,
the Committee expressed its perception
that, with appropriate monetary policy
action, the upside and downside risks
to the attainment of both sustainable
growth and price stability should be
kept roughly equal. The Committee also
noted that economic output continued to
grow at a solid pace despite the rise in
energy prices and that labor market conditions continued to improve gradually.
While pressures on inflation had picked
up in recent months and pricing power
was more evident, longer-term inflation
expectations remained well contained.
In these circumstances, the Committee
believed that policy accommodation
could be removed at a pace that would
likely be measured but noted that it
would respond to changes in economic
prospects as needed to fulfill its obligation to maintain price stability.
The FOMC's decision in March to
raise the intended level of the federal
funds rate 25 basis points was fully
anticipated by the market, as were its
retention in the accompanying statement
of the "measured pace" language and its
assessment that the risks to price stability and sustainable economic growth
were balanced. Interest rates, however,
rose, reportedly in response to the statement's references to increased price
pressures and to more evident pricing
power as well as to the Committee's
conditioning of its risk assessment on
"appropriate monetary policy action."
Interest rates rose further the next day
following the release of a larger-thanexpected increase in the CPI for February. Over subsequent weeks, however,
these increases were more than reversed
by weaker-than-expected data on consumer spending, consumer sentiment,
and output. Further downward pressure
on interest rates was exerted by the market's response to the release of the minutes of the March meeting, as attention
focused on the reference to Committee
members' judgment that an accelerated
path of policy tightening was not necessary at that time. Despite generally
good first-quarter earnings reports,
equity indexes moved down considerably in response to the signs of weaker
economic growth. In foreign exchange
markets, the dollar rose on balance,
apparently due, in part, to disappointing news on employment and output
abroad.
Minutes of FOMC Meetings, May
M2 expanded in March and April at
about the same sluggish pace as it did
earlier in the year. The growth of M2
continued to be restrained by increases
in its opportunity cost resulting from
rising short-term interest rates. Rates
paid on its liquid components particularly lagged increases in market rates.
Partly in response to the receipt of
weaker-than-expected data for spending and output in the first quarter, the
staff marked down somewhat its forecast of economic growth for 2005 and
2006. Even so, the economy was seen as
retaining considerable momentum, and
growth was expected to pick up some
after the first quarter, paced by business
spending on equipment and software.
Consumption expenditures were seen as
likely to expand at a moderate rate and
residential investment to slow. With
exports forecast to expand a bit more
rapidly than imports, the arithmetic net
drag on the economy from trade was
expected to lessen. Fiscal policy was
expected to provide a more moderate
impetus to growth this year and next,
following the substantial boost estimated for earlier years. Although economic growth was projected to run a bit
above the staffs estimate of the economy's potential, the unemployment rate
was projected to hold around its current
level with improvements in job prospects expected to lure more workers
back into the labor force. Inflation was
projected to edge lower over the rest
of the year and into 2006, reflecting
the attenuation of the impact of higher
energy prices and the effects of a slowed
rate of growth of import prices and
remaining slack in resource markets.
In their discussion of current conditions and the economic outlook, meeting
participants observed that incoming data
over the intermeeting period hinted at
possible upside risks for inflation and
downside risks for economic growth.
183
Earlier increases in energy prices
seemed to be an important factor contributing to an uptick in core inflation
and a slower pace of economic activity.
With energy prices leveling out more
recently, however, and the behavior of
compensation suggesting a lack of pressure in labor markets, underlying inflation appeared to remain contained. The
weakness in spending was widespread
and could not be completely dismissed,
but it had appeared only very recently
and could be a product of the inherent
noisiness of high-frequency economic
data. On balance, economic fundamentals including low interest rates, robust
underlying productivity growth, and
strengthened business balance sheets
were expected to support economic
growth at a pace sufficient to gradually
eliminate remaining slack in resource
utilization. Although the economic outlook generally seemed favorable, there
was also broad recognition of greater
uncertainty attending the outlook for
both inflation and output growth.
Capital expenditures advanced briskly
over the first quarter, but at a pace significantly below that registered over the
latter half of last year. To some extent,
businesses probably had pulled capital
outlays forward from this year into 2004
to benefit from the partial-expensing
tax provision that expired at year-end,
but the unexpected weakness in capital
goods orders for February and March
seemed hard to attribute to this factor
alone. In addition, the prolonged period
of elevated spot energy prices, the sense
supported by futures markets that these
higher prices may persist for some time,
and the heightened uncertainty about
energy prices going forward, together
may have left businesses less confident
about the future and wary of longerterm commitments such as expanding
plant capacity or taking on new workers. A less buoyant and less certain
184 92nd Annual Report, 2005
economic outlook seemed apparent in
financial markets as well, where equity
prices had fallen and risk spreads had
widened. On balance, though, these
financial developments did not appear
to signal the onset of a sharp retrenchment in investors' willingness to bear
risk, and capital expenditures were seen
as likely to remain quite robust, spurred
by strong economic fundamentals that
included elevated profits, opportunities
to raise efficiency by utilizing new
technologies, a low cost of capital, and
strong corporate balance sheets. Indeed,
a substantial weakening in business
investment in an environment with such
favorable fundamentals would be at
odds with the historical record.
Incoming data for the household
sector were viewed as mixed. Higher
gasoline prices seemed to be sapping
consumer confidence and consumer
spending. The pace of consumption
growth had fallen off appreciably toward
the end of the first quarter, and some
participants worried about the potential for continued sluggishness in consumer spending if increasingly cautious
households sought to raise their saving
rate rapidly. On balance, though, strong
income growth and low interest rates
augured well for household spending.
Although housing starts had dropped of
late, home sales and other indicators of
activity in the residential real estate market remained at very high levels. House
price appreciation was expected to moderate over coming quarters, but a number of local real estate markets were still
regarded as "hot," with signs of possible speculative excesses in some areas.
The deceleration in final sales over
the first quarter had been accompanied
by a sizable accumulation of businesses
inventories. The available data suggested that stocks had accumulated in
a variety of industries, but particularly
in the motor vehicle sector where the
inventory of new autos had moved
appreciably higher. Although difficult
to judge, the inventory buildup was not
regarded as likely to have major implications for aggregate manufacturing
beyond some modest production cutbacks in the current quarter.
A relatively high proportion of
demand had continued to be met by
imports. Some concern was expressed
that incoming data suggested weaker
growth in some of our major trading
partners, which posed a downside risk
to forecasts for U.S. exports. Moreover,
advances in domestic income were
expected to contribute to brisk growth
in imports. Looking ahead, the U.S.
economy was expected to continue to
run quite substantial current account
deficits, although the impact of past
dollar depreciation should work to boost
exports and slow the rise in imports to
some extent.
Recent energy price developments
garnered considerable attention. Declines in energy prices in recent weeks
were viewed as welcome, but participants noted that far-dated futures prices
for oil remained quite elevated and that
persistently high energy prices could
trigger a range of deleterious effects
on the economy. High energy prices
appeared to be taking a toll on household and business confidence and might
be beginning to crimp corporate profits.
In some cases, firms seemed to be more
successfully passing on energy costs to
their customers. Indeed, some portion
of recent elevated inflation readings
probably represented, at least partly,
such pass-through effects from higher
energy costs. However, while passthrough effects could leave the overall
price level higher, their impact on inflation should fade over time, as long as
inflation expectations remain well contained. Still, considerable uncertainty
surrounded the degree of pass-through
Minutes of FOMC Meetings, May
from energy prices to core consumer
prices, and pass-through effects might
be more pronounced when energy
price increases were perceived as more
likely to be permanent. Persistently high
energy prices were mentioned as a factor that could trim the level of potential
output to a small degree over time, possibly contributing to additional upward
pressure on consumer prices at the
margin.
Participants voiced concerns about
recent price trends; they expected inflation to remain contained but also perceived that the risks to that inflation
outlook now might be skewed somewhat to the upside. Core measures of
price inflation had moved up over recent
quarters and particularly so over the last
few months. A discernable upcreep was
apparent in survey measures of shortand, to a limited extent, long-term inflation expectations over recent months.
Moreover, there were risks that the relative stability of long-term survey measures of inflation expectations could
simply reflect lags in households' perceptions of changing economic prospects. The success that some businesses
seemed to be encountering in passing
through cost increases raised the possibility that competitive pressures and
resource slack were exerting somewhat
less restraint on inflation than had been
anticipated.
However, available indicators of
wages and benefits had registered only
modest growth, suggesting to many that
some slack in labor markets persisted.
Moreover, market measures of inflation compensation had ebbed in recent
weeks, and survey measures of longterm inflation expectations, albeit a
touch higher of late, remained in the
broad range of recent years. Along with
energy prices, import and materials
prices apparently had contributed to the
recent uptick in inflation, and pressures
185
on inflation stemming from these three
sources were expected to lessen over
coming quarters. On balance, measures
of core inflation were thought likely to
remain in check over the remainder of
this year and next.
In the Committee's discussion of
monetary policy for the intermeeting
period, all members favored raising the
target federal funds rate 25 basis points
to 3 percent at this meeting. Although
downside risks to sustainable growth
had become more evident, most members regarded the recent slower growth
of economic activity as likely to be transitory. In this regard, the ability of the
U.S. economy to withstand significant
shocks over recent years buttressed the
view that policymakers should not overreact to a comparatively small number
of disappointing indicators, especially
when economic fundamentals appeared
to remain quite supportive of continued
solid expansion. To be sure, the Committee had raised its federal funds rate
target appreciably over the past year,
and, in the view of a few members,
a larger-than-expected moderation of
aggregate demand in response to this
cumulative policy action could not
be ruled out. However, all members
regarded the stance of policy as accommodative and judged that the current
level of short-term rates remained too
low to be consistent with sustainable
growth and stable prices in the long
run. Against the backdrop of the recent
uptick in core inflation and in some
measures of inflation expectations, members agreed that they should continue
along the course of removing policy
accommodation at a measured pace conditional on the outlook for inflation and
economic growth.
In discussing the statement to be
released after the meeting, members
agreed that it was appropriate to
acknowledge that rising energy prices
186
92nd Annual Report, 2005
seemed to have spurred an increase in conditioned on economic developments
core measures of inflation by dropping and therefore would not stand in the
the reference from the March statement way of either a pause or a step-up in
indicating that "The rise in energy policy firming depending on events. In
prices, however, has not notably fed the end, all members agreed to retain the
through to core consumer prices." They forward-looking language.
likewise all agreed that mention should
At the conclusion of the discussion,
be made that, on balance, longer-term the Committee voted to authorize and
inflation expectations remained well direct the Federal Reserve Bank of New
contained. Regarding the risks to sus- York, until it was instructed otherwise,
tainable growth and price stability, some to execute transactions in the System
members noted that the risk assess- Account in accordance with the followment conditioned on "appropriate pol- ing domestic policy directive:
icy" no longer seemed to convey useful
The Federal Open Market Committee
information regarding the Committee's
seeks monetary and financial conditions
economic and policy outlook. Although
that will foster price stability and promote
some members noted that a case could sustainable growth in output. To further
be made that the risks to inflation were its long-run objectives, the Committee in
now somewhat skewed to the upside and the immediate future seeks conditions in
those to sustainable economic growth reserve markets consistent with increasing
perhaps to the downside, the most likely the federal funds rate to an average of around
3 percent.
outcome remained one of stable prices
and sustainable growth, and the ComThe vote encompassed approval of
mittee agreed that it should retain a bal- the paragraph below for inclusion in the
anced assessment of risks conditional on statement to be released shortly after the
appropriate policy.
meeting:
For many, heightened economic
uncertainty in the current environment
The Committee perceives that, with approimplied greater uncertainty about the priate monetary policy action, the upside and
range of possible policy outcomes and downside risks to the attainment of both
sustainable growth and price stability should
placed a premium on flexibility in set- be kept roughly equal. With underlying inflating policy at upcoming meetings. Some tion expected to be contained, the Commitmembers commented that this greater tee believes that policy accommodation
uncertainty called for eliminating or can be removed at a pace that is likely to be
paring back forward-looking language measured. Nonetheless, the Committee will
respond to changes in economic prospects as
from the statement—if not at this meetneeded to fulfill its obligation to maintain
ing, then fairly soon. In the event, most price stability.
members viewed the forward-looking
Votes for this action: Messrs. Greenspan
language in the statement—including
and Geithner, Ms. Bies, Messrs. Ferguson,
the characterization of the stance of
Fisher, Gramlich, Kohn, Moskow, Olson,
policy as accommodative as well as
Santomero, and Stern. Votes against this
the judgment that policy accommodaaction: None. Absent and not voting:
tion could be removed at a pace that is
Mr. Bernanke
"likely to be measured"—as a reasonable characterization of the policy stance
It was agreed that the next meeting
and its likely evolution over time. More- of the Committee would be held on
over, a number remarked that the lan- Wednesday-Thursday, June 29-30,2005.
guage in its current form was clearly
The meeting adjourned at 1:25 p.m.
Minutes of FOMC Meetings, June
Notation Vote
By notation vote completed on April 11,
2005, the Committee unanimously
approved the minutes of the meeting of
the Federal Open Market Committee
held on March 22, 2005.
Vincent R. Reinhart
Secretary
Meeting Held on
June 29-30, 2005
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 Wednesday, June 29, 2005 at
2:00 p.m. and continued on Thursday,
June 30, 2005 at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Ms. Bies
Mr. Ferguson
Mr. Fisher
Mr. Gramlich
Mr. Kohn
Mr. Moskow
Mr. Olson
Mr. Santomero
Mr. Stern
Ms. dimming, Messrs. Guynn and
Lacker, Mses. Pianalto and Yellen,
Alternate Members of the Federal
Open Market Committee
Mr. Hoenig, Ms. Minehan, and
Mr. Poole, Presidents of the
Federal Reserve Banks of
Kansas City, Boston, and
St. Louis, respectively
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
187
Messrs. Evans, Freeman, and Madigan,
Ms. Mester, Messrs. Oliner,
Rolnick, Rosenblum, 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. Kamin, Slifman, and
Struckmeyer, Associate Directors,
Divisions of International Finance,
Research and Statistics, and
Research and Statistics,
respectively, Board of Governors
Messrs. Clouse, Wascher, and
Whitesell, Deputy Associate
Directors, Divisions of Monetary
Affairs, Research and Statistics,
and Monetary Affairs,
respectively, Board of Governors
Messrs. English, Leahy, and Treacy,7
Assistant Directors, Divisions of
Monetary Affairs, International
Finance, and Banking Supervision
and Regulation, 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. Small, Project Manager, Division
of Monetary Affairs, Board of
Governors
Mr. Wright,8 Section Chief, Division
of Monetary Affairs, Board of
Governors
7. Attended Wednesday's portion of the meeting.
8. Attended Thursday's portion of the meeting.
188 92nd Annual Report, 2005
Messrs. Bowman,8 Gallin,7 and
Lehnert,7 Senior Economists,
Divisions of International Finance,
Research and Statistics, and
Research and Statistics,
respectively, Board of Governors
Messrs. Doyle7 and Martin,7
Economists, Division of
International Finance, Board
of Governors
Messrs. Kumasaka7 and Luecke, Senior
Financial Analysts, Division of
Monetary Affairs, Board of
Governors
Ms. Low, Open Market Secretariat
Specialist, Division of Monetary
Affairs, Board of Governors
Mr. Barron, First Vice President,
Federal Reserve Bank of Atlanta
Messrs. Eisenbeis and Judd, Executive
Vice Presidents, Federal Reserve
Banks of Atlanta and
San Francisco, respectively
Messrs. Fuhrer, Goodfriend, and
Hakkio, Ms. Perelmuter,
Messrs. Rasche, Rudebusch,7
Sniderman, and Williams,7 Senior
Vice Presidents, Federal Reserve
Banks of Boston, Richmond,
Kansas City, New York, St. Louis,
San Francisco, Cleveland, and
San Francisco, respectively
Mr. Peach,7 Vice President, Federal
Reserve Bank of New York
By unanimous vote, the Federal Open
Market Committee approved the selection of Richard T. Freeman to serve as
associate economist of the Committee
until the selection of a successor at the
first regularly scheduled meeting after
December 31, 2005.
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 since the previous
meeting. By unanimous vote, the Committee ratified these transactions.
At this meeting the Committee
reviewed and discussed staff presentations on the topic of housing valuations
and monetary policy. Prices of houses in
the United States had risen sharply in
recent years, especially in certain areas
of the country, to very high levels relative to incomes or rents. In addition to
local market factors, a wide range of
influences appeared to be supporting
home prices, including solid gains in
disposable income, low mortgage rates,
and financial innovation in the residential mortgage market. Prices might be
somewhat above the levels consistent
with these underlying factors, but measuring the extent of any overvaluation
either nationally or in regional markets
posed considerable conceptual and statistical difficulties. Meeting participants
noted that the rise in house prices
had been accompanied by a modest shift
toward potentially riskier types of mortgages, including adjustable-rate and
interest-only loans, which could pose
challenges to both lenders and borrowers. Nonetheless, financial institutions
generally remained in a comfortable
capital position, such loans had performed well thus far, much of the associated risk had been transferred to other
investors through securitization, and
valuations had risen more rapidly than
mortgage debt on average—so that loanto-value ratios had fallen.
The information received at this
meeting suggested that the economy
was expanding at a moderate pace in
the second quarter. Housing activity
Minutes of FOMC Meetings, June
189
Real personal consumption expendiremained at a high level, business
investment appeared to have improved tures appeared to be increasing at a
some after a slowdown of growth in the moderate pace this quarter, though a bit
first quarter, and manufacturing picked below that of the first quarter. Purchases
up notably in May. Supported by a of motor vehicles rebounded smartly
rebound in motor vehicle purchases, after declining in the first quarter.
consumer spending appeared on track to Excluding motor vehicles, however,
post another moderate gain for the quar- the expansion of real consumer outlays
ter. Labor demand continued to expand, likely slowed of late, against a backand the unemployment rate edged down drop of modest gains in real income.
further in May. Core CPI inflation Recent measures of consumer confislowed in April and May, but crude oil dence improved from their levels earlier
prices turned higher again following a in the spring, when higher gasoline
prices and concerns about a slowing in
decline earlier in the spring.
Averaging through a large gain in the pace of the economic expansion may
April and a more modest increase in have served as restraining influences.
May, growth in payroll employment was
Activity in the housing sector
on par with that over the preceding six remained robust. Single-family starts
months. Payrolls expanded in line with averaged more than 1.65 million units
their recent trends in the construction, at an annual rate in April and May, not
transportation and utilities, and nonbusi- much below the very strong first-quarter
ness services sectors, while hiring in pace. Sales of both new and existing
financial services slowed a bit, and the homes remained at a high level in May.
manufacturing sector posted further While prices of existing homes continsmall losses of jobs. The average work- ued to increase rapidly, new home prices
week of production or nonsupervisory showed signs of decelerating. Available
workers edged up over the two-month indicators suggested that, with the ongoperiod, helping to boost aggregate hours ing support of low mortgage rates, the
to the highest level since early 2001. housing sector remained strong in June.
The unemployment rate dipped to
Spending on equipment and soft5.1 percent in May. Meanwhile, the ware registered a solid increase in the
labor force participation rate moved up first quarter, and the available data
a bit, suggesting that the labor market suggested that second-quarter spendhad strengthened enough to attract some ing was continuing at a slightly faster
individuals back into the workforce. pace. Shipments of nondefense capital
Survey indicators and the continued goods posted sizable increases in recent
relatively low level of initial claims for months, although gains in orders were
unemployment insurance also supported more uneven. Broadly speaking, the funthe notion of continued improvement in damentals continued to support business
the labor market.
investment, with the user cost of capital
Industrial production declined in still low and corporate balance sheets
April, owing to a dip in utilities output, healthy. Outlays for construction of
but widespread gains in manufacturing nonresidential structures appeared to
output in May offset that loss. On net, have picked up some, but die level of
industrial production was little changed such investment remained subdued. And
over April and May; capacity utilization although spending on commercial strucgenerally followed the same pattern as tures had moved up in recent months,
outlays for office buildings were still at
output.
190 92nd Annual Report, 2005
depressed levels, and expenditures on
manufacturing and other facilities were
lackluster.
The book value of manufacturing and
trade inventories continued to grow in
April, but more slowly than in the
first quarter. With these increases, the
inventory-sales ratio fell back in April
after moving up a little in the first
quarter.
After reaching a record high relative
to GDP in February, the U.S. international trade deficit narrowed in March,
but widened again in April. While the
value of exports of goods and services
increased in both months, the value of
imports of goods and services jumped
in April, more than offsetting a decline
in March. GDP growth in most major
foreign industrial economies picked up
slightly in the first quarter, but recent
economic indicators for the major foreign economies in the second quarter
were mixed.
Consumer prices were about unchanged in May after posting large
increases in the previous few months.
Consumer energy prices, in particular,
reversed part of their earlier run-up.
Excluding food and energy, inflation
appeared to have moderated slightly
from its pace in the early part of the
year. Despite this moderation, measures
of core consumer price inflation over
the past year were somewhat above
those for the comparable period a year
ago. The producer price index rose
sharply in April, but dropped back again
in May, driven largely by a swing in the
food and energy components. According to recent surveys, both near-term
and longer-term inflation expectations
had changed little over the past two
months, and market measures of inflation compensation had moved lower.
With regard to labor costs, growth in
hourly compensation in the nonfarm
business sector in the first quarter was
estimated to have slowed some after
advancing notably in the fourth quarter;
the first quarter increase was broadly
similar to those posted during the middle
of last year.
At its May meeting, the Federal Open
Market Committee decided to increase
the target level of the federal funds
rate 25 basis points, to 3 percent. In its
accompanying statement, the Committee expressed its perception that, with
appropriate monetary policy action, the
upside and downside risks to the attainment of both sustainable growth and
price stability should be kept roughly
equal. The Committee also noted that
recent data suggested that the solid pace
of spending growth had slowed somewhat, partly in response to the earlier
increases in energy prices, but that labor
market conditions apparently continued
to improve gradually. While pressures
on inflation had picked up in recent
months and pricing power was more
evident, longer-term inflation expectations remained well contained. In these
circumstances, the Committee believed
that policy accommodation could be
removed at a pace that would likely
be measured but noted that it would
respond to changes in economic prospects as needed to fulfill its obligation to
maintain price stability.
The decision at the May FOMC meeting to raise the federal funds rate target 25 basis points, to 3 percent, to
maintain an assessment that risks to the
goals of price stability and sustained
growth were balanced, and to retain the
"measured pace" language was widely
expected in financial markets. The publication of the minutes three weeks later
also contained few surprises for investors and elicited little market reaction.
Market expectations for the future path
of policy ended the period higher in the
near term but lower at longer horizons.
Nominal Treasury yields followed the
Minutes of FOMC Meetings, June
shift in policy expectations, with nearterm yields higher and longer-term
yields modestly lower, on net. Spreads
on investment-grade corporate bonds
were little changed over the intermeeting period, but spreads on speculativegrade bonds contracted notably. Buoyed
by the drop in longer-term interest rates
and largely upbeat economic news,
major equity indexes rose appreciably
over the intermeeting period. The positive economic data also seemed to lift
the dollar against major foreign currencies, though the dollar's moves against
individual currencies varied widely.
M2 edged lower over April and May
as the opportunity cost of holding M2
assets rose further. Liquid deposits were
especially weak, owing to the slow
adjustment of yields paid on these
deposits to increases in market rates.
Despite the recent softness in M2, its
velocity remained quite low relative to
its historical relationships with opportunity cost. Bank credit decelerated
sharply in April and May from rapid
gains posted in the first quarter, as
growth in both securities and loans fell.
In the staff forecast prepared for this
meeting, the economy was seen as likely
to expand this year and next at a rate
just above its potential. The effects of
reduced monetary and fiscal policy
stimulus were expected to be counterbalanced by continued low long-term
interest rates and an abatement of
energy-related headwinds. Household
spending was expected to firm going
forward as real income posts solid
gains attributable in part to the ongoing
improvement in the labor market. Business investment was projected to benefit
from the combination of favorable prospects for sales, supportive financial markets, and the ongoing need to replace or
upgrade aging equipment and software.
A slightly larger portion of domestic
demand was expected to be supplied by
191
imports over the forecast period. The
forecast for consumer price inflation
was revised up, with inflation seen as
somewhat higher this year than in 2004,
reflecting in part higher import prices
and the direct and indirect effects of
higher energy prices, and only edging
lower next year as these price pressures
wane.
In their discussion of current conditions and the economic outlook, many
meeting participants noted that incoming data had been reassuring about the
strength of the expansion. Following
some softer readings earlier in the year,
incoming spending and production data
over the intermeeting period indicated
that the expansion remained firm, led by
residential and business investment. In
addition, labor market conditions continued to strengthen gradually. The economy evidently had been resilient in the
face of rising energy prices, and financial conditions remained accommodative, supporting growth going forward.
Increases in core consumer prices had
slowed of late, though underlying inflation was still seen by most meeting participants as likely to be modestly higher
this year than last, impelled in part
by the pass-through of a further rise in
energy prices. However, the impetus to
inflation from the prices of oil and other
commodities was expected to wane, and
long-term inflation expectations apparently remained well-anchored. With
some limited remaining slack in labor
markets likely damping growth in compensation, as well as further withdrawal
of policy accommodation, core inflation
was expected to remain contained.
In preparation for the Federal Reserve's semiannual report to the Congress on monetary policy, 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 unemploy-
192 92nd Annual Report, 2005
ment, and core consumer price inflation
for 2005 and 2006. The forecasts of the
rate of expansion in real GDP were concentrated in the upper part of a 3 to
33/4 percent range for 2005, and the forecasts for 2006 were concentrated at the
lower end of a range of 3XA to 33A percent. These rates of growth were associated with a civilian unemployment rate
of 5 to 5V4 percent in the fourth quarter
of this year and a rate of 5 percent in
the fourth quarter of 2006. Forecasts of
the rate of inflation, as measured by the
core PCE price index, were mainly near
the middle of a V/i to 2VA percent range
this year and somewhat below the middle of a range of lx/2 to 2V2 percent next
year.
In their comments about developments in key sectors of the economy,
meeting participants noted that the fundamentals underlying household spending remained firm. With rising home
and equity prices buoying household
wealth, consumer expenditures continued to advance. Although the recent
surge in energy prices was anticipated
to impose some drag for a time, consumption spending was expected to
grow about in line with income going
forward, in an environment of further
gradual improvements in labor markets.
Increased speculative activity in housing markets was evident in some parts
of the country, but robust demand for
new homes owed in large part to the
ongoing economic expansion and low
long-term interest rates.
Business outlays for capital goods
continued to rise, and the outlook for
investment spending remained solid,
supported by increased sales, low interest rates, robust profits, and strong business balance sheets. Anecdotal reports
from industry contacts generally pointed
to planned increases in investment
spending, though in some regions businesses apparently remained cautious
about the outlook. Conditions in the
commercial real estate sector, which
had been weak for some time, were said
to have improved in some parts of the
nation.
Several meeting participants expressed some concern about domestic
and global imbalances. Large federal
budget deficits were expected to persist despite an increase in tax receipts
in recent months. These deficits were
contributing to a low level of national
saving that would, if not corrected over
time, ultimately constrain investment
and overall economic growth. Moreover, U.S. trade deficits were expected
to remain large going forward, reflecting both the low level of U.S. saving and
relatively slow growth in some of our
trading partners. Uncertainties regarding the nature and timing of the potential correction of these imbalances
complicated the assessment of the
intermediate-term prospects for the U.S.
economy.
In their discussion of developments
in asset markets, the participants' comments focused on two related issues: the
low level of long-term interest rates and
the continued run-up in home prices.
Despite substantial cumulative policy
tightening over the past year, long-term
Treasury yields had moved considerably
lower, implying a significant flattening
of the yield curve (measured as the
spread between long-term and shortterm Treasury yields). Lower compensation for inflation accounted for a portion
of the decline in longer-term nominal
yields, but a larger portion reflected
reductions in real yields. Participants
cited a variety of factors as possibly
contributing to the unusual behavior
of long-term rates over this period.
For one, investors might have marked
down the level of real interest rates
seen as likely to be necessary to contain inflation and keep output in line
Minutes of FOMC Meetings, June
with potential—perhaps reflecting weak
investment demand abroad relative to
saving—or even might have come to
expect a stretch of sub-par U.S. growth.
However, anticipation of slow growth
seemed inconsistent with higher stock
prices and thin risk spreads in corporate
debt markets. The behavior of long-term
interest rates could also reflect reduced
uncertainty on the part of investors
about the economic outlook—as seen
in low readings of implied volatility
in bond and equity markets. Finally,
demands for longer-term U.S. securities
by both domestic and foreign investors
might have been boosted by special factors. Confidence about the economic
outlook and low market interest rates—
along with possibly outsized expectations of capital gains in some markets—
could also help to account for the high
level of home prices the Committee
had discussed on the first day of the
meeting. It was agreed that considerable
uncertainty attended the outlook for both
long-term interest rates and home prices.
With regard to any role for monetary
policy in responding to possible imbalances in housing or bond markets, meeting participants stressed the importance
of the pursuit of their core objectives
of price stability and maximum sustainable economic growth. To the extent
that an asset price movement threatened
the achievement of those objectives, it
would of course be taken into consideration in setting policy. However, given
the unavoidable uncertainties associated
with judgments regarding the appropriate level of and likely future movements
in asset prices, a strategy of responding
more directly to possible mispricing was
seen as very unlikely to contribute, on
balance, to the achievement of the Committee' s objectives over time.
Participants' views on the inflation
outlook were mixed. Thus far in 2005,
core consumer price inflation had
193
been higher than most participants had
expected at the start of the year, reflecting, at least in part, the pass-through
effects of higher energy, commodity, and
import prices. While such shocks could
be expected to boost inflation temporarily, some participants expressed concern that, with policy still accommodative, the underlying pace of inflation
might be in the process of stepping up,
perhaps to a level that was at the upper
end of the range that they viewed as
compatible with the Committee's price
stability objective. The degree of slack
remaining in labor and resource markets
was very uncertain, and unit labor costs
in the nonfarm business sector had
moved notably higher in recent quarters.
Trend unit labor costs could also be
boosted by slower growth in structural
productivity; while recent evidence
was not conclusive, some participants
thought the underlying pace of productivity growth might well fall back
in coming quarters following the substantial gains seen in recent years. And
with higher energy prices already eating
into profit margins at firms outside the
energy sector, increases in unit labor
costs might be more likely to be passed
through into prices.
While agreeing that inflation developments had to be watched carefully, other
meeting participants emphasized that
recent core inflation data had been relatively restrained, and anecdotal reports
suggested that pricing power at many
firms remained quite limited. Moreover,
readings from futures markets suggested
that oil prices would likely flatten out,
so their effect on inflation should gradually ebb. Similarly, prices of other commodities and imports, which had surged
for a time, were now moderating. Survey and market measures of long-term
inflation expectations did not suggest
that the earlier higher inflation readings
were going to persist. Finally, while the
194 92nd Annual Report, 2005
degree of slack in labor markets was
uncertain, total labor compensation had
probably been boosted temporarily
around the turn of the year by special
factors, and the recent behavior of a
range of other indicators of labor costs
appeared consistent with some remaining slack that would likely tend to
restrain inflation pressures. Moreover,
anecdotal reports of labor market conditions continued to point to shortages
of labor only for certain, mostly skilled,
occupations.
In the Committee's discussion of
monetary policy for this meeting, all
members agreed on a 25 basis point
increase in the target federal fimds
rate to 3x/4 percent. Economic growth
remained firm, while rising energy, and
possibly labor, costs threatened to put
upward pressure on inflation. Even
with this action, the federal funds rate
remained below the level members
anticipated would prove necessary in the
long run to contain inflation pressures
and keep output near potential. However, the pace and extent of future policy moves would depend on incoming
data.
In considering the statement to be
released following this meeting, members concurred that it should note that
even with the rise in oil prices, the
expansion remained firm and labor
markets continued to improve gradually.
All also thought that the statement
should note the continued pressures on
inflation, while mentioning that longterm inflation expectations remained
well contained. With policy still seen as
accommodative, members agreed that
the statement should retain an assessment that the risks to both sustainable
economic growth and price stability
were balanced, conditional on appropriate policy action. Members also agreed
that the statement language indicating
that "policy accommodation can be
removed at a pace that is likely to be
measured" correctly characterized the
outlook for policy for now. The members concurred that at this stage in
the expansion, with margins of slack
resources narrowing and inflation somewhat higher, the Committee needed to
be particularly alert to signs of a further
increase in inflation. Such an increase
could be particularly problematic
because it might impart upward momentum to inflation expectations that would
be costly to reverse. In any case, additional tightening would probably be necessary, but views differed on the amount
of tightening that would likely be
required to keep inflation contained and
bring output in line with potential. However, members agreed that there was no
need to make such an assessment at this
time, and that the appropriate pace and
degree of cumulative policy adjustment
would depend on economic developments going forward. With the forwardlooking language in the statement
clearly conditioned on the outlook, it
was not seen as limiting the Committee's flexibility in responding to such
developments.
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
VA percent.
The vote encompassed approval of
the paragraph below for inclusion in the
Minutes of FOMC Meetings, August
statement to be released shortly after the
meeting:
The Committee perceives that, with appropriate monetary policy action, the upside
and downside risks to the attainment of both
sustainable growth and price stability should
be kept roughly equal. With underlying inflation expected to be contained, 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
and Geithner, Ms. Bies, Messrs. Ferguson,
Fisher, Gramlich, Kohn, Moskow, Olson,
Santomero, and Stern. Votes against this
action: None.
It was agreed that the next meeting of
the Committee would be held on Tuesday, August 9, 2005.
The meeting adjourned at 1:25 p.m.
Notation Vote
By notation vote completed on May 23,
2005, the Committee unanimously
approved the minutes of the meeting of
the Federal Open Market Committee
held on May 3, 2005.
Vincent R. Reinhart
Secretary
Meeting Held on
August 9, 2005
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 9, 2005 at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Ms. Bies
195
Mr. Ferguson
Mr. Fisher
Mr. Kohn
Mr. Moskow
Mr. Olson
Mr. Santomero
Mr. Stern
Messrs. Guynn and Lacker,
Mses. Pianalto and Yellen,
Alternate Members of the Federal
Open Market Committee
Mr. Hoenig, Ms. Minehan, and
Mr. Poole, Presidents of the
Federal Reserve Banks of
Kansas City, Boston, and
St. Louis, respectively
Ms. Danker, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Alvarez, General Counsel
Ms. Johnson, Economist
Mr. Stockton, Economist
Messrs. Connors and Madigan,
Ms. Mester, Messrs. Rosenblum,
Tracy, and Wilcbx, Associate
Economists
Mr. Kos, Manager, System Open
Market Account
Mr. Struckmeyer, Associate Director,
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 Gagnon, and
Ms. Liang, Assistant Directors,
Divisions of Monetary Affairs,
International Finance, and
Research and Statistics,
respectively, Board of Governors
Mr. Skidmore, Special Assistant to the
Board, Office of Board Members,
Board of Governors
Mr. Small, Project Manager, Division
of Monetary Affairs, Board of
Governors
196 92nd Annual Report, 2005
Mr. Wright, Section Chief, Division
of Monetary Affairs, Board of
Governors
Mr. Luecke, Senior Financial Analyst,
Division of Monetary Affairs,
Board of Governors
Ms. Low, Open Market Secretariat
Specialist, Division of Monetary
Affairs, Board of Governors
Mr. Connolly, First Vice President,
Federal Reserve Bank of Boston
Mr. Judd, Executive Vice President,
Federal Reserve Bank of
San Francisco
Messrs. Hakkio, Rasche, and
Sniderman, Senior Vice
Presidents, Federal Reserve
Banks of Kansas City, St. Louis,
and Cleveland, respectively
Ms. Mosser and Messrs. Porter,
Tallman, and Tootell, Vice
Presidents, Federal Reserve
Banks of New York, Chicago,
Atlanta, and Boston, respectively
Mr. Weber, Senior Research Officer,
Federal Reserve Bank of
Minneapolis
Mr. Hetzel, Senior Economist, Federal
Reserve Bank of Richmond
The Manager of the System Open
Market Account reported on recent
developments in the 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 since the previous
meeting. By unanimous vote, the Committee ratified these transactions.
The information received at this meeting suggested that final demand had
expanded at a solid pace in the second
quarter, led by a surge in net exports and
another robust gain in residential investment, while business investment and
consumer spending rose at moderate
rates. The labor market continued to
improve gradually in June and July.
Core CPI and PCE prices decelerated
in recent months, after notable increases
earlier in the year. Crude oil prices continued to rise, reaching record levels
in nominal terms over the intermeeting
period.
Payroll employment grew in June and
July at a pace that was roughly on par
with that over the preceding six months.
Hiring in the services and construction
sectors remained strong, but the manufacturing sector posted further small job
losses. With employment increasing and
the average workweek of production or
nonsupervisory workers unchanged over
these two months, aggregate hours continued to firm. The unemployment rate
dipped to 5.0 percent in June and held
steady at that rate in July. Initial claims
for unemployment insurance remained
at low levels.
Industrial production picked up in
June. A jump in utilities output, apparently owing to unseasonably warm
weather, accounted for more than half of
the gain. Motor vehicle production also
rose a good bit, but the pace of production growth in the high-tech sector
was sluggish, reflecting a decline in the
output of communications equipment.
Overall capacity utilization moved up to
its highest level since December 2000.
Real personal consumption expenditures increased at a moderate pace in
the second quarter, buoyed by a surge
in purchases of motor vehicles that
appeared to be due largely to the extension by an automaker of its "employee
discount" program to the general pub-
Minutes of FOMC Meetings, August
197
Consumer prices were about unlie. Excluding spending on motor vehicles, the growth of real personal con- changed in June after posting notable
sumption expenditures slowed slightly increases earlier in the year. Consumer
in the second quarter. Survey measures energy prices reversed a small part
of consumer confidence continued to be of their previous run-up, and core
consumer inflation remained low. The
quite favorable in July.
Activity in the housing sector re- producer price index was unchanged
mained robust. In June, starts of single- in June. The annual revisions to the
family homes maintained the strong national income and product accounts,
pace of earlier this year. Both new and which were released in early August,
existing home sales jumped. Mortgage included a substantial upward revision
rates remained low, and house prices to core PCE inflation for 2004, from
1.6 percent to 2.2 percent, reflecting
apparently continued to rise briskly.
Business spending on equipment and changes to the nonmarket-based composoftware posted a solid increase in the nents of the index. Survey measures of
second quarter, boosted by a surge in near-term inflation expectations edged
outlays for transportation equipment. down in July, and longer-term inflation
Excluding this volatile component, busi- expectations firmed only a touch. The
ness spending on equipment and soft- employment cost index for private
ware decelerated markedly in the sec- industry workers again rose at a modest
ond quarter. Spending on nonresidential pace in the second quarter, and increases
construction remained subdued. None- in compensation per hour in the nontheless, fundamentals appeared to con- farm business sector slowed somewhat
tinue to support business investment, from the rapid rate of the first quarter.
with the user cost of capital still low and
At its June meeting, the Federal Open
corporations experiencing strong cash Market Committee decided to increase
flows and holding ample liquid assets.
the target level of the federal funds
Real nonfarm inventories edged down rate 25 basis points, to 3*/4 percent. In
in the second quarter, after a substantial its accompanying statement, the Comrise in the first quarter. The strong pace mittee indicated that, with appropriate
of motor vehicle sales contributed to the monetary policy action, the upside and
runoff of inventories in the second quar- downside risks to the attainment of both
ter. Outside the automobile sector, real sustainable growth and price stability
nonfarm inventories continued to rise, should be kept roughly equal. In addibut at a much slower pace than earlier tion, the Committee noted that the
in the year. The inventory-sales ratio for expansion remained firm, that labor
the nonfarm business sector declined market conditions continued to improve
further from an already low level, con- gradually, and that, although pressures
on inflation had remained elevated,
tinuing its long-term downward trend.
The U.S. international trade deficit longer-term inflation expectations renarrowed in May as the value of exports mained well contained. In these cirof goods and services rose slightly and cumstances, the Committee believed
the value of imports declined, partly that policy accommodation could be
reflecting a sharp drop in the value of removed at a pace that would likely
oil imports. GDP growth in a number be measured but noted that it would
of major foreign industrial economies respond to changes in economic prosappeared to have slowed a bit in the pects as needed to fulfill its obligation to
maintain price stability.
second quarter.
198 92nd Annual Report, 2005
The Committee's decision at its June
meeting to raise the intended level of the
federal funds rate 25 basis points, to
maintain an assessment that risks to the
goals of price stability and sustained
growth were balanced assuming appropriate monetary policy action, and to
retain the "measured pace" language
was widely expected in financial markets. Over the intermeeting period, however, investors appreciably marked up
their expectations for the path of policy,
primarily in response to incoming economic data suggesting more strength
in spending and output than had been
anticipated. Nominal Treasury yields
increased in line with the revision to
policy expectations. Yields on inflationindexed Treasury securities rose a touch
less than their nominal counterparts,
leaving inflation compensation only
slightly higher. Spreads on investmentgrade corporate bonds were little
changed over the intermeeting period,
but those on speculative-grade bonds
declined markedly, ending the period
close to the very low levels reached
earlier this year. Major equity indexes
advanced, supported by strong corporate
earnings reports. The trade-weighted
foreign exchange value of the dollar
depreciated slightly over the intermeeting period. The People's Bank of China
announced a change to its exchange-rate
regime, including an immediate 2.1 percent appreciation of the renminbi versus
the dollar.
M2 continued to grow sluggishly on
balance over June and July. Small time
deposits, whose rates of return adjust
relatively quickly to changes in market
rates, expanded briskly. However, liquid
deposits and retail money market mutual
funds were little changed on net over
these two months. Despite the recent
slow growth of M2, its velocity remained low relative to the level that
would be expected based on its his
torical relationship with opportunity
cost. The growth of bank credit was
restrained in June by a runoff in securities holdings but picked up in July.
In the forecast prepared for this meeting, the staff raised its projection for
economic growth over the remainder
of 2005 in light of incoming data suggesting greater near-term momentum
in aggregate demand. At the same time,
however, it trimmed the growth rate
forecast for 2006, reflecting the effects
of higher energy prices, higher longterm interest rates, and the somewhat
slower growth of productive capacity
implied by the annual revisions to the
national accounts. The output gap was
predicted to be essentially closed by the
end of this year. Inventory investment
was projected to resume contributing
to GDP growth over the second half of
this year, after the sharp swing toward
inventory runoffs in the second quarter.
Growth in consumer spending was
expected to firm in the third quarter,
buoyed by motor vehicle spending,
before falling back in the fourth quarter.
With housing starts essentially flat,
residential investment was projected to
decelerate substantially over the remainder of this year. Business investment
was predicted to continue to rise at a
moderate pace, benefiting from stillaccommodative financial conditions and
the ongoing need to replace depreciating equipment and software. The recent
improvement in the trade balance was
expected to be transitory. Notwithstanding recent benign readings on inflation,
the forecast for core PCE inflation was
raised somewhat, owing in part to the
recent further rise in energy prices and,
in light of the revisions to historical
data, a higher assumed trajectory for
the nonmarket component of core PCE
prices.
In their discussion of current conditions and the economic outlook, meeting
Minutes of FOMC Meetings, August
199
participants noted that aggregate spend- anticipated that the pace of home price
ing appeared to have picked up in recent appreciation would slow over time,
months by more than anticipated and though the timing and extent of that
that current estimates of slack were nar- slowing, as well as its implications
rower than those reviewed at the June for consumer spending, were quite
meeting. In addition, high and rising uncertain.
energy prices were adding to pressures
Participants indicated that business
on overall inflation, and energy price investment had been evolving roughly
increases probably would feed through, in line with their expectations. Strong
at least temporarily, to core measures fundamentals, including low interest
of inflation. Nonetheless, core infla- rates, wide profit margins, and a high
tion recently had been relatively low level of liquid assets, were seen as supand inflation expectations remained porting expenditures on software and
well contained. Moreover, participants equipment going forward. Inventory
thought that some slowing in final sales investment declined in the second quarwas likely later this year as net exports ter, with much of the falloff concenresumed their decline and purchases of trated in the motor vehicle industry,
automobiles fell back with the expira- where sales had been boosted sharply by
tion of special discount programs. In the introduction of special discount prothese circumstances, it appeared that, grams. Inventories now seemed to be
for now, continued removal of policy coming in line with the trend in final
accommodation at a measured pace still demand and were anticipated to expand
would likely be sufficient to keep infla- along with sales later this year.
tion contained, but participants also recParticipants viewed the increases in
ognized that the pace and cumulative market interest rates over the intermeetextent of policy adjustment going for- ing period as an appropriate response
ward would depend importantly on eco- to the stronger economic outlook. A few
nomic developments.
participants voiced concerns that stillIn the household sector, the path for low interest rates and insufficient recogspending was expected to be bolstered nition by investors of the dependency of
in the near term by still-low interest the Committee's policy expectations on
rates, solid growth in disposable income, economic data were continuing to foster
and ongoing increases in wealth. How- an inappropriate degree of risk-taking
ever, elevated energy prices were seen in financial markets. Another participant
as likely to be a significant drag on mentioned, however, that recent slugconsumption and, on net, household gish growth of the monetary aggregates
spending was expected to advance at a suggested that the stance of policy was
moderate pace. Housing sales and con- not overly accommodative. Moreover,
struction activity generally remained with a higher proportion of mortgages
strong across the country, but meeting now tied to short-term rates, it was
participants noted anecdotal evidence of noted that increases in short-term rates
some cooling in housing markets in could have a somewhat larger-thancertain areas. And at least some banks usual effect on spending. On balance,
were reportedly beginning to apply current financial conditions, which
somewhat tighter standards in real estate embedded expectations of future policy
lending and becoming more cautious in tightening, were generally seen as likely
their promotion of nontraditional mort- to be consistent with sustained modgage products. Participants generally erate economic growth and containment
200 92nd Annual Report, 2005
of pressures on inflation in coming
quarters.
Regarding the federal budget, a recent
narrowing of the deficit was noted, but
the improvement appeared to be attributable to cyclical factors and to increases
in the level of tax collections that were
not likely to be repeated. Few signs were
evident that greater fiscal discipline in
the budget process would emerge any
time soon. As a result, federal deficits
were expected to continue to act as a
considerable drain on national saving
over the longer run.
Although net exports had been significantly higher over the second quarter
than had been expected, participants did
not see this development as signaling
the beginning of a sustained improvement in the trade and current account
balances. The strong advance in exports
and weakness in imports in the second
quarter seemed largely attributable to
special factors. Continued brisk import
growth appeared likely to be sustained
for the foreseeable future by gains in
domestic demand.
Participants discussed at length the
factors affecting costs and prices.
Although uncertainties about the underlying pace of productivity increases,
trends in labor force participation, and
the level of potential output complicated
the inflation outlook, higher energy
prices and reduced resource slack were
seen as pointing to elevated inflation
pressures. While recent monthly readings indicated that core inflation had
been subdued, a number of participants
noted that underlying core inflation
appeared to be running at a pace around
the upper end of the range they viewed
as consistent with price stability—an
assessment that was reinforced by the
recent upward revisions to historical
data on core PCE inflation. Participants
commented that an increase in inflation
from recent rates could have especially
adverse effects on longer-run economic
performance.
While most participants viewed the
risks to inflation as having ticked up
over the intermeeting period, many
also cited factors that, in concert with
the likely continued removal of policy accommodation, would tend to
hold inflation pressures in check. For
example, few indications had emerged
recently that businesses had enjoyed any
significant increase in pricing power,
and the continuing expansion of global
trade was seen as an important factor
limiting firms' ability to pass through
cost increases. In these circumstances
and with markups at relatively high
levels, a substantial proportion of any
increases in business costs might well
be reflected in narrower profit margins.
Moreover, the recent relatively low
monthly readings on core inflation and
modest wage pressures, at least by some
measures, suggested that some slack
remained in resource utilization. Despite
the rise in oil prices and quickening
pace of economic activity, both marketand survey-based measures of inflation
expectations seemed to remain quite
well anchored.
In the Committee's discussion of
monetary policy for the intermeeting
period, all of the members favored raising the target federal funds rate by
25 basis points to 3Vi percent at this
meeting. Even with this action, the federal funds rate would remain below the
level that members anticipated would
prove necessary to contain inflation
pressures and keep output near potential, and thus in all likelihood further
policy action would be required. However, the pace of future policy moves,
although likely to be measured, as well
as the extent of those moves, would
depend on incoming data.
In discussing the statement to be
released after the meeting, members
Minutes of FOMC Meetings, September 201
agreed that it was appropriate to highlight the apparent strengthening in
aggregate spending. Policymakers exchanged views on the characterization
of labor market conditions in light of
recent employment reports and other
indicators, but members ultimately concurred that the description of labor markets as "improving gradually" remained
appropriate. Members agreed that it was
appropriate to acknowledge the recent
relatively low monthly rates of core
inflation, but also to emphasize that
inflation pressures remained elevated.
As in past meetings, there was some
discussion about the desirability of
including forward-looking language in
the statement, but members agreed to
retain the forward-looking language for
now.
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
3x/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 that, with appropriate monetary policy action, the upside
and downside risks to the attainment of both
sustainable growth and price stability should
be kept roughly equal. With underlying inflation expected to be contained, 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
and Geithner, Ms. Bies, Messrs. Ferguson,
Fisher, Kohn, Moskow, Olson, Santomero,
and Stern. Vote against this action: None.
Absent and not voting: Mr. Gramlich.
It was agreed that the next meeting of
the Committee would be held on Tuesday, September 20, 2005.
The meeting adjourned at 1:00 p.m.
Notation Vote
By notation vote completed on July 20,
2005, the Committee unanimously
approved the minutes of the meeting of
the Federal Open Market Committee
held on June 29-30, 2005.
Vincent R. Reinhart
Secretary
Meeting Held on
September 20, 2005
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 20, 2005 at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Ms. Bies
Mr. Ferguson
Mr. Fisher
Mr. Kohn
Mr. Moskow
Mr. Olson
Mr. Santomero
Mr. Stern
202
92nd Annual Report, 2005
Messrs. Guynn and Lacker,
Mses. Pianalto and Yellen,
Alternate Members of the Federal
Open Market Committee
Mr. Hoenig, Ms. Minehan, and
Mr. Poole, Presidents of the
Federal Reserve Banks of
Kansas City, Boston, and
St. Louis, respectively
Mr. Reinhart, Secretary and Economist
Ms. Danker, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Alvarez, General Counsel
Mr. Baxter, Assistant General Counsel
Ms. Johnson, Economist
Mr. Stockton, Economist
Messrs. Connors, Evans, Freeman,
and Madigan, Ms. Mester,
Messrs. Oliner, Rosenblum, and
Wilcox, Associate Economists
Mr. Kos, Manager, System Open
Market Account
Messrs. Slifman 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
Mr. Skidmore, Special Assistant to the
Board, Office of Board Members,
Board of Governors
Mr. Small, Project Manager, Division
of Monetary Affairs, Board of
Governors
Mr. Durham, Senior 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
Specialist, Division of Monetary
Affairs, Board of Governors
Mr. Rives, First Vice President, Federal
Reserve Bank of St. Louis
Mr. Eisenbeis, Executive Vice
President, Federal Reserve
Bank of Atlanta
Messrs. Elsasser, Fuhrer, Hakkio,
Rasche, Sniderman, Weinberg,
and Williams, Senior Vice
Presidents, Federal Reserve
Banks of New York, Boston,
Kansas City, St. Louis, Cleveland,
Richmond, and San Francisco,
respectively
Mr. Potter, Assistant Vice President,
Federal Reserve Bank of
New York
Mr. Weber, Senior Research Officer,
Federal Reserve Bank of
Minneapolis
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 since the previous
meeting. By unanimous vote, the Committee ratified these transactions.
The information reviewed at this
meeting suggested that, before the landfall of Hurricane Katrina on the Gulf
Coast, expansion of economic activity
had been solid, led by robust gains in
housing and buoyant consumer spend-
Minutes of FOMC Meetings, September
ing. While business investment appeared
to be losing some momentum, labor
markets continued to improve, and increases in core CPI and PCE prices were
modest after notable increases earlier in
the year. Only limited data bearing on
the likely economic effects of the hurricane were available. Oil and gasoline
prices, however, were on the rise, spiking to record levels in the days immediately following the hurricane.
Payroll employment grew at a good
pace in August, and the average increase
over the most recent three months was
largely on par with the advances made
since the fourth quarter of last year.
Employment gains were widespread
across industries, with the exception of
the manufacturing sector, which continued to post small job losses. With
employment increasing and the average
workweek of production or nonsupervisory workers unchanged in August,
aggregate hours continued to firm modestly. The unemployment rate dipped
to 4.9 percent in August, its lowest
level since August 2001. Given the
increase in the labor-force participation rate reported for the month, the
employment-population ratio rose to
its highest level in three years. Initial
claims for unemployment insurance
jumped in the latest available week,
however, as workers in the Gulf Coast
region began to file claims.
Industrial production increased only
slightly in August; the staff estimated
that the curtailment of activity as a result
of Hurricane Katrina shaved 0.3 percent
from the index. Petroleum refining and
crude oil and natural gas extraction were
especially hard hit by the storm. The
output of utilities declined in August
after surging earlier in the summer in
response to unseasonably warm weather.
Higher production of motor vehicles and
parts boosted manufacturing output.
After slowing in the second quarter,
203
the pace of production in the high-tech
sector accelerated somewhat in recent
months, owing to increased output of
communications equipment and semiconductors. Overall capacity utilization
through August remained close to its
highest level since December 2000.
Real personal consumption expenditures, boosted by motor vehicles purchases in response to employee-discount
programs, were robust during the summer. Spending on goods outside the
automobile sector and on services was
moderate. Strong overall spending along
with lackluster real income growth
put downward pressure on the saving
rate. Survey measures of consumer confidence early in August were generally
consistent with solid increases in spending, but confidence fell appreciably in
the period immediately after the storm.
Activity in the housing sector
remained brisk. Starts of new singlefamily homes in July were slightly
above their average level for the first
half of the year. New home sales
advanced further in July, and existing
home sales stayed elevated. Mortgage
rates remained low and supported
demand. Prices of existing homes again
rose briskly, while price appreciation for
new homes moderated somewhat.
Although real outlays for equipment
and software increased solidly in the
second quarter, available data on orders
and shipments suggested some softness
in the third quarter. Amid continued
rapid expansion in business output,
favorable financing conditions, and
ample cash balances, the fundamentals
stayed positive. Real spending on nonresidential construction remained lackluster despite incremental improvements
in nonresidential property market conditions this year.
Investment in real nonfarm inventories excluding motor vehicles slowed
markedly in the second quarter, and
204 92nd Annual Report, 2005
partial data for July suggested that real
stockbuilding continued to be subdued.
The slower rate of inventory accumulation suggested that firms had largely
completed the stockbuilding that had
been prompted by earlier low ratios of
inventories to sales.
The U.S. international trade deficit
narrowed somewhat in July, as the value
of exports of goods and services
rose slightly and the value of imports
declined. The value of oil imports
increased strongly in July but that rise
was offset by decreases in imports of
services and of non-oil goods. GDP
growth in foreign industrial economies
picked up, on balance, in the second
quarter, but performance across economies was mixed.
Core consumer price inflation remained benign in July and August.
However, the surge in energy prices
considerably boosted overall consumer
price inflation over those months. Gasoline prices in particular rose steeply in
August, and survey data pointed to a
larger increase in early September. Producer price inflation was subdued. One
survey of households in early September indicated that near-term inflation
expectations jumped and that longerterm inflation expectations edged higher.
With regard to labor costs, the employment cost index for private industry
workers rose at a modest pace in the
second quarter, and the twelve-month
change in this index declined from that
of a year earlier. Average hourly earnings rose only moderately over the past
twelve months.
At its August meeting, the Federal
Open Market Committee decided to
increase the target level of the federal
funds rate 25 basis points, to 3V2 percent. In its accompanying statement, the
Committee indicated that, with appropriate monetary policy action, the upside
and downside risks to the attainment of
sustainable growth and price stability
should be kept roughly equal. In addition, the Committee noted that, despite
high energy prices, aggregate spending
appeared to have strengthened, labor
market conditions continued to improve
gradually, and longer-term inflation
expectations remained well contained,
although pressures on inflation had
stayed elevated. In these circumstances,
the Committee believed that policy
accommodation could be removed at a
pace that would likely be measured but
noted that it would respond to changes
in economic prospects as needed to
fulfill its obligation to maintain price
stability.
The Committee's decision at its
August meeting was widely expected
in financial markets and evoked little
price reaction. Over the intermeeting
period, however, investors marked down
their expectations for the path of policy,
partly in response to the devastation
caused by Hurricane Katrina. Nominal
Treasury yields decreased about in line
with the revision to policy expectations.
Yields on inflation-indexed Treasury
securities fell a bit more than their
nominal counterparts, leaving inflation
compensation slightly higher. Spreads
on investment-grade corporate bonds
were little changed over the intermeeting period, but those on speculativegrade bonds increased from very low
levels. Major equity indexes appeared
to be supported by lower interest rates
and posted modest gains despite the
increases in energy prices. The tradeweighted foreign exchange value of the
dollar depreciated slightly over the intermeeting period.
M2 grew moderately, on balance, in
August. Liquid deposits edged higher,
but retail money market mutual funds
contracted, on net. Small time deposits,
whose rates of return adjust relatively
quickly to changes in market rates, con-
Minutes of FOMC Meetings, September 205
tinued to expand rapidly. The growth of
bank credit surged, as loans expanded
briskly.
In the forecast prepared for this meeting, the staff lowered its projection for
economic growth over the remainder of
2005 in light of the economic dislocation associated with Hurricane Katrina.
At the same time, however, the staff
increased the growth rate forecast for
2006 to reflect the boost to economic
activity from the rebuilding effort. By
2007, the level of output was expected
to move back to the path it would have
followed in the absence of the storm.
The staff revised upward its forecast of
overall inflation for 2005 and of core
inflation for 2006, reflecting the effects
of higher energy prices, but lowered its
projection for overall inflation slightly
for 2006. It was recognized that there
were considerable near-term uncertainties and that many data series in coming months would be influenced by the
effects of the storm.
In their discussion of the economic
situation and outlook, meeting participants agreed that output and employment appeared to have been growing at
a good pace before Hurricane Katrina's
landfall. Business fixed investment had
been a little softer than expected, but
household spending had been especially
strong. Participants agreed that the widespread devastation in the Gulf Coast
region and the dislocation of many
people would hold down indicators of
spending for a time. But they also were
of the view that aggregate demand and
output would likely rebound before
long, fueled in part by private spending
to rebuild and outlays by the federal
government to assist in the recovery.
With growth of the economy expected
to recover, meeting participants were
concerned that price pressures, which
had been elevated before the storm,
could climb further, primarily as a
result of additional increases in energy
prices.
Meeting participants recognized that
Hurricane Katrina would have significant effects on the U.S. economy, but the
size and timing of those effects were
uncertain. Economic activity in the Gulf
Coast region would be disrupted by the
destruction of capital and the displacement of a large population, perhaps for
an extended period. Moreover, damage
to infrastructure for extracting and processing oil and natural gas was expected
to be substantial, with significant nearterm implications for energy prices and
the national economy, and the projected
track of Hurricane Rita raised additional
concerns. In that environment, the prices
of crude oil, natural gas, and gasoline
likely would remain elevated and subject to considerable volatility, particularly given the limited spare capacity
available in energy extraction and
refining industries. Participants noted
that very substantial rebuilding would
probably be underway soon, supported
importantly by government programs.
The pace at which reconstruction activity would take place, however, was
uncertain, as it depended in part on factors that were still difficult to assess,
such as how quickly the affected areas
could again be made habitable. On
balance, participants thought that there
would likely be a significant shift in
the timing of aggregate economic activity over the next several quarters but
probably little effect on the economy's
intermediate-term growth prospects.
Several participants voiced concern that
the effects of the hurricane were likely
to add to already considerable pressures
on prices.
For the nation as a whole, participants
noted that household spending had been
fairly robust before the hurricane, supported by strong advances in income
and continuing gains in wealth that
206 92nd Annual Report, 2005
reflected in part further large increases
in home prices. Most anecdotal information supported the indications from
available data that activity in housing
markets generally remained brisk. The
termination of some inducements to purchase motor vehicles was expected to
retard expenditures on consumer durables in the latter part of this year. The
reduction in real disposable incomes
caused by large increases in consumer
energy prices was also anticipated to
restrain consumer spending, with business contacts indicating that retail outlets that typically serve lower- and
middle-income households could see
particular weakness. The reduction in
spending as a result of higher energy
prices and hurricane-related dislocations
could be augmented by a weakening
of consumer attitudes. Many of the
restraining effects were thought likely to
dissipate over time, however. Retail
energy prices were likely to retrace at
least a portion of the post-hurricane
increase, and consumer confidence
should rebound. Moreover, demands for
consumer durables, as well as housing,
would receive support as hurricane victims repaired or replaced lost property,
with help from insurance payments and
government transfers. Although uncertainties about the outlook for spending
had increased, it appeared that, over
time, consumption would probably
expand at a moderate pace—perhaps a
little below the pace of income growth
once the increases in house prices
slowed to more historically typical rates.
Meeting participants noted that, even
prior to the hurricane, business fixed
investment had been somewhat weaker
than expected. The softness was somewhat puzzling, as sales were growing,
business balance sheets appeared quite
strong in the aggregate, profitability was
high, and financing was readily available and relatively inexpensive for most
Digitizedfirms. Although the apparent sluggishfor FRASER
ness could reflect only short-term fluctuations in volatile data series, some evidence suggested that it may also have
stemmed from concern among business
executives about the effects of high
energy prices. The anecdotal information on commercial real estate markets
was mixed, with some districts reporting
firming markets while activity elsewhere was said to remain subpar.
With regard to fiscal policy, meeting
participants noted that federal outlays
would increase sharply in order to assist
with recovery and reconstruction efforts
in the aftermath of the hurricane. The
eventual size of the increment to federal
outlays was unclear, but it was likely to
be quite large. The substantial step-up in
government spending would add to federal deficits that were already large and
underscored the worrisome loss of fiscal
discipline evident in recent years. The
expansion of federal spending implied
an increase in fiscal stimulus at a time
when the margin of unutilized resources
in the overall economy was probably
thin.
Participants' concerns about inflation
prospects generally had increased over
the intermeeting period. The surge in
energy prices, in particular, was boosting overall inflation, and some of that
increase would probably pass through
for a time into core prices. This posed
the risk that there could be a more persistent influence on inflation should
inflation expectations rise. Indeed, some
recent survey evidence on such expectations had been troubling, and widening
federal deficits were mentioned as a factor that could further stir inflationary
concerns. Measures of labor costs were
giving conflicting signals, with some
indexes indicating that growth in labor
compensation remained relatively low
but another showing appreciably more
rapid increases. Anecdotal information
continued to point to shortages of certain types of labor, such as truck drivers,
Minutes of FOMC Meetings, September 207
and some business contacts reported
difficulties in hiring more generally, a
development that had prompted some
firms to boost wages. Underlying productivity growth to date apparently had
remained robust but, at this stage of
the business cycle, gains in productivity could not necessarily be counted
on to stay strong. The prices of a number of intermediate goods, including a
wide range of petrochemical products
and building materials, were subject to
upward pressure, reflecting high crude
oil prices, production disruptions in the
energy sector, and elevated demands
for materials in anticipation of rebuilding in the Gulf Coast region. Still, core
inflation in recent months had been quite
damped, and market-based measures
of longer-term inflation expectations
had risen only modestly of late. It was
observed that, after the early 1980s, the
pass-through of energy prices into core
inflation had been quite limited, suggesting that, in current circumstances,
core inflation could stay relatively low
and overall inflation would probably
drop back if inflation expectations
remained contained.
In the Committee's discussion of
monetary policy for the intermeeting
period, nearly all members favored raising the target federal funds rate 25 basis
points to 33/4 percent at this meeting.
Although uncertainty had increased, in
the Committee's judgment the fundamental factors influencing the longerterm path of the economy probably had
not been affected by the hurricane, but
the upside risks to inflation appeared
to have increased. Even after today's
action, the federal funds rate would
likely be below the level that would be
necessary to contain inflationary pressures, and further rate increases probably would be required. Moreover, the
uncertainties about near-term economic
prospects resulting from Hurricane
Katrina would probably not be reduced
materially in coming weeks. Indeed,
underlying economic trends would
be particularly difficult to assess over
the next several months as a result of
the direct, and presumably temporary,
effects of the storm and its aftermath on
the incoming data. A pause in policy
tightening at this meeting had the potential to mislead the public both about the
Committee's perceptions of the fundamental strength and resilience of the
economy and about its commitment to
fostering price stability.
In discussing the statement to be
released after the meeting, members
agreed that it would be appropriate to
characterize the macroeconomic effects
of Hurricane Katrina, while significant,
as essentially temporary. Members also
believed that the statement should again
note that both monetary policy accommodation and robust underlying productivity growth were continuing to support economic activity. Although energy
prices had the potential to add to inflation pressures, and inflation expectations had recently exhibited some signs
of increasing, members agreed that the
risks to inflation, as well as those to
growth, remained essentially balanced
under an assumption of appropriate policy action. The Committee also agreed
to reiterate its previous expectation that
" . . . policy accommodation can be
removed at a pace that is likely to be
measured." However, some sentiment
was expressed to consider changes to
forward-looking aspects of the statement at upcoming meetings, in part
because of the considerable reduction in
monetary policy accommodation that
had already been accomplished.
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:
208
92nd Annual Report, 2005
The Federal Open Market Committee meeting of the Federal Open Market
seeks monetary and financial conditions that Committee held on August 9, 2005.
will foster price stability and promote sustainable growth in output. To further its longVincent R. Reinhart
run objectives, the Committee in the immeSecretary
diate future seeks conditions in reserve
markets consistent with increasing the federal funds rate to an average of around Meeting Held on
33A percent.
November 1, 2005
The vote encompassed approval of
the paragraph below for inclusion in the
statement to be released shortly after the
meeting:
The Committee perceives that, with appropriate monetary policy action, the upside and
downside risks to the attainment of both
sustainable growth and price stability should
be kept roughly equal. With underlying inflation expected to be contained, 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
and Geithner, Ms. Bies, Messrs. Ferguson, Fisher, Kohn, Moskow, Santomero,
and Stern. Vote against this action:
Mr. Olson.
Mr. Olson dissented because he
preferred that the Committee defer
policy action at this meeting, pending
the receipt of additional information
on the economic effects resulting
from the severe shock of Hurricane
Katrina.
It was agreed that the next meeting of
the Committee would be held on Tuesday, November 1, 2005.
The meeting adjourned at 1:15 p.m.
Notation Vote
By notation vote completed on
August 29, 2005, the Committee unanimously approved the minutes of the
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, November 1, 2005 at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Ms. Bies
Mr. Ferguson
Mr. Fisher
Mr. Kohn
Mr. Moskow
Mr. Olson
Mr. Santomero
Mr. Stern
Messrs. Guynn and Lacker,
Mses. Pianalto and Yellen,
Alternate Members of the
Federal Open Market Committee
Mr. Hoenig, Ms. Minehan, and
Mr. Poole, Presidents of the
Federal Reserve Banks of
Kansas City, Boston, and
St. Louis, respectively
Mr. Reinhart, Secretary and Economist
Ms. Danker, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Alvarez, General Counsel
Ms. Johnson, Economist
Mr. Stockton, Economist
Messrs. Connors, Freeman, and
Madigan, Ms. Mester,
Messrs. Oliner, Rosenblum,
Tracy, Rolnick, and Wilcox,
Associate Economists
Mr. Kos, Manager, System Open
Market Account
Minutes ofFOMC Meetings, November
Messrs. Slifman and Struckmeyer,
Associate Directors, Division
of Research and Statistics,
Board of Governors
209
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
Mr. Whitesell, Deputy Associate
System's account in the period since
Director, Division of Monetary
the previous meeting. The Manager also
Affairs, Board of Governors
reported on developments in domestic
Mr. English, Assistant Director,
financial markets and on System open
Division of Monetary Affairs,
market transactions in government secuBoard of Governors
rities and federal agency obligations
Mr. Simpson, Senior Adviser, Division during the period since the previous
meeting. By unanimous vote, the Comof Research and Statistics, Board
mittee ratified these transactions.
of Governors
The information reviewed at this
Mr. Small, Project Manager, Division
meeting suggested that the economy had
of Monetary Affairs, Board of
a good deal of forward momentum in
Governors
the third quarter. Although recent hurricanes caused considerable damage and
Mr. Nelson, Section Chief, Division
disruption, particularly in the energy
of Monetary Affairs, Board of
sector, economic activity outside the
Governors
Gulf region appeared to have been well
Mr. Luecke, Senior Financial Analyst,
maintained. In September, hiring in
Division of Monetary Affairs,
other regions remained in line with its
Board of Governors
pace over the preceding twelve months,
and excluding the estimated effects of
Ms. Low, Open Market Secretariat
the hurricanes and a strike by Boeing
Specialist, Division of Monetary
machinists, industrial production inAffairs, Board of Governors
creased briskly. In addition, residential
Mr. Werkema, First Vice President,
construction remained buoyant. ConFederal Reserve Bank of Chicago
sumer spending, however, showed some
signs of weakening. Although consumer
Mr. Eisenbeis, Executive Vice
spending was strong for the third quarter
President, Federal Reserve Bank
as a whole, it softened in September,
of Atlanta
and survey measures of consumer confidence slumped noticeably. Despite the
Messrs. Fuhrer, Hakkio, Rasche,
Rudebusch, and Sniderman,
large increase in consumer energy prices
Senior Vice Presidents, Federal
since midyear, core price inflation was
Reserve Banks of Boston,
restrained through September.
Kansas City, St. Louis,
Hurricane Rita caused further disrupSan Francisco, and Cleveland,
respectively
tion to energy production in the Gulf
area, which had not yet fully recovered
Mr. Krane and Ms. Mucciolo, Vice
from Hurricane Katrina. Energy proPresidents, Federal Reserve Banks duction in October was still below preof Chicago and New York,
hurricane levels, although progress had
respectively
been made in reopening shut-down
energy facilities. Rising imports, along
Mr. Hetzel, Senior Economist, Federal
with more-subdued consumption of
Reserve Bank of Richmond
210 92nd Annual Report, 2005
gasoline and other petroleum products,
helped to offset the effect on energy
prices of some of the output losses in
refined products. In addition, to address
the low level of gasoline inventories
and more-immediate retail demands,
domestic refiners sharply increased the
share of gasoline in their output of total
refined product. Wholesale and retail
gasoline prices spiked soon after Rita's
landfall but had since declined to prehurricane levels. Spot prices for natural
gas soared with the hurricanes and
remained at elevated levels.
Payroll employment fell in September, held down by substantial job losses
associated with Hurricane Katrina.
Employment in the areas unaffected by
the hurricane increased at a rate in line
with the average pace over the previous
twelve months. The largest employment
loss occurred in the leisure and hospitality category, an industry particularly
hard hit by the storm. The average
workweek was unchanged in September, so with employment lower, aggregate hours declined slightly. The unemployment rate rose 0.2 percentage points
to 5.1 percent. The labor force participation rate held steady, but the number
of individuals reporting that they had a
job but were not at work because of bad
weather surged. More recently, weekly
data on initial claims for unemployment
insurance suggested that the job losses
associated with the hurricane were
subsiding.
Industrial production fell substantially
in September, but excluding the effects
of hurricane-related disturbances and
the Boeing strike, industrial production
was estimated to have risen at a brisk
pace. The hurricanes caused the index
for oil and natural gas extraction and
refining to plummet in September, and
they also significantly affected petrochemical production. Manufacturing
output fell noticeably in the shipbuild
ing, food manufacturing, paper, and
plywood industries. In the transportation equipment category, motor vehicle
production climbed notably, but the
machinists' strike at Boeing caused the
company to cease nearly all commercial
aircraft production during the month.
High-tech output—led by strong gains
in the production of semiconductors and
communications equipment—surged in
September. Manufacturing capacity utilization dropped substantially in September, but was still noticeably above
its year-earlier level.
Real consumer spending increased at
a moderate rate in the third quarter as
a whole, although it declined in August
and September after having risen substantially earlier in the summer. The
softening in spending of late reflected
in part the diminishing boost to light
vehicle sales from manufacturers' programs offering employee discounts to
nonemployees. Spending on other goods
and services was also sluggish, likely
because of the direct effects of the dislocation of households by the hurricanes,
high energy prices, and falling consumer
confidence. Consumer sentiment in
October, as measured by both the Michigan Survey and the Conference Board's
indicator, dropped a little further after
plunging in September. The personal
saving rate remained slightly negative in
September.
Residential construction continued at
a robust pace. In September, new singlefamily homes were started at a rate a bit
above their elevated average rate in the
first half of the year, and permit issuance jumped to a new high. New home
sales remained substantial in August,
but they were below July's elevated
level. Although they remained low by
historical standards, both the thirty-year
fixed mortgage rate and the one-year
adjustable rate had moved up a bit in
recent months and were notably above
Minutes of FOMC Meetings, November 211
the levels seen at the beginning of the increase in exports was driven by higher
year. The average selling price of exist- merchandise exports, although exports
ing homes rose in the twelve months of services also advanced a bit. GDP
ending in September at about the same growth in foreign industrial economies
rapid clip as a year earlier, but the aver- appeared to have continued at a moderage selling price of new homes rose ate pace in the third quarter.
more slowly over the past few months.
Soaring energy prices have boosted
Real outlays for equipment and soft- overall measures of consumer price
ware were sluggish in the summer, but inflation in recent months. However,
a broad-based pickup in orders for and measures of core consumer price inflashipments of nondefense capital goods tion were much more restrained. The
excluding aircraft in August suggested twelve-month change in core consumer
some firming. Investment fundamen- prices through September was about
tals remained relatively solid, including unchanged from its year-earlier level.
continued expansion in business sales, a One survey of households in October
declining cost of capital, and corporate found that expectations for inflation
balance sheets that were flush with cash. over the coming year rose to a level well
Surveys of executive sentiment squared above the readings that had prevailed
well with the fundamentals: Although over the spring and summer, presumably
business leaders expressed some misgiv- in response to rising energy prices.
ings about the overall macroeconomic However, median expectations for inflaenvironment, their stated capital spend- tion over the next five to ten years were
ing intentions pointed to increasing only a little above the average range
investment. Vacancy rates for nonresi- reported in recent years. With regard to
dential properties continued to edge labor costs, the employment cost index
lower, but they remained elevated for for private industry workers rose at a
office and industrial properties, and real moderate pace in the third quarter, up
spending on new construction had yet to somewhat from its second-quarter pace,
but the twelve-month change in the
improve materially.
Business investment in real nonfarm index declined from that of a year earinventories was subdued over the sum- lier. Hourly compensation in the nonmer. Although inventory-to-sales ratios farm business sector was estimated to
moved down some in July and August, have also risen at a moderate rate in the
businesses did not appear dissatisfied third quarter.
At its September meeting, the Federal
with their level of stocks. For example,
September results from the Institute for Open Market Committee decided to
Supply Management survey indicated increase the target level of the federal
that respondents viewed their custom- funds rate 25 basis points, to VA perers' current inventory situation as rea- cent. In its accompanying statement, the
Committee indicated that, with approprisonably well aligned with demand.
The U.S. international trade deficit ate monetary policy action, the upside
widened somewhat in August, as a and downside risks to the attainment
surge in imports of goods and services of sustainable growth and price stability
was partially offset by a sizable gain in should be kept roughly equal. The Comexports. The growth in imports reflected mittee noted that the widespread devasboth a marked increase in oil imports tation in the Gulf region from Hurriand a rise in nonoil goods; imports cane Katrina, the associated dislocation
of services were little changed. The of economic activity, and the boost to
212 92nd Annual Report, 2005
energy prices would set back spending,
production, and employment in the near
term. However, the Committee judged
that these unfortunate developments did
not pose a more persistent threat to the
overall economy. Rather, monetary policy accommodation, coupled with robust
underlying growth in productivity, was
providing ongoing support to economic
activity. Although higher energy and
other costs had the potential to add to
inflation pressure, core inflation had
been relatively low in the preceding few
months and longer-term inflation expectations remained contained. In these
circumstances, the Committee believed
that policy accommodation could be
removed at a pace that would likely
be measured but noted that it would
respond to changes in economic prospects as needed to fulfill its obligation to
maintain price stability.
With investors putting only small
odds on a pause in the tightening cycle
following Hurricane Katrina, there was
little market reaction to the Committee's decision at the September meeting.
However, the expected path for monetary policy shifted up in subsequent
weeks, as incoming data indicated that
output had been expanding briskly prior
to the hurricanes and that the disruptions
to economic activity from the hurricanes were likely to be less severe than
initially feared. This upward pressure
on interest rates may have been amplified by comments from a number of
Federal Reserve officials that were read
as stressing inflation concerns. Nominal
Treasury yields rose in line with the
shift in the outlook for monetary policy.
Despite a large increase in the overall
consumer price index for September,
measures of inflation compensation
calculated using yields on nominal and
inflation-protected Treasury securities
were about unchanged over the intermeeting period, although they remained
a bit above the levels seen before Hurricane Katrina. As broad indexes of
investment- and speculative-grade corporate bond yields moved largely in line
with Treasury yields over the period,
spreads were little changed. Major stock
price indexes fell moderately and the
trade-weighted foreign exchange value
of the dollar appreciated slightly over
the intermeeting period.
Domestic nonfinancial debt appeared
to have advanced briskly in the third
quarter. Growth in household debt was
estimated to have edged down in the
third quarter because of a slowing in
mortgage debt growth but remained elevated. Household bankruptcies surged
in the weeks immediately before bankruptcy reforms went into effect on
October 17. The debt of nonfinancial
businesses rose in the third quarter at a
rate comparable to the increases seen
in the first half of the year. Bank loans
to businesses continued to advance
briskly, and the results of the October
Senior Loan Officer Opinion Survey
showed some further easing of lending
terms and standards for such loans. M2
expanded at a fairly solid rate in September. The increase in September was
in part attributable to a boost to currency
and liquid deposits resulting from Hurricane Katrina. Growth in nominal output
in the third quarter exceeded that of M2,
implying a further rise in velocity.
In the forecast prepared for this meeting, the staff continued to project moderate economic growth for the second
half of 2005. Output growth was expected to pick up in 2006, as the boost
from hurricane-related rebuilding activity more than offset the effects of somewhat tighter financial conditions, and
then slow in 2007, as the impetus from
rebuilding waned. The near-term forecast again entailed a marked downshift
in headline inflation as energy prices
fall back consistent with readings from
Minutes ofFOMC Meetings, November
futures markets. Favorable incoming
data led the staff to reduce its forecast
for near-term core inflation a bit. The
outlook continued to be for core inflation to pick up modestly over coming
quarters owing to the lagged effects of
higher energy prices but then to return
to near current levels in 2007 primarily
as the result of the restraining influence
of falling energy prices.
In their discussion of the economic
situation and outlook, meeting participants saw the economy as continuing to
grow at a solid pace, notwithstanding
the disruptive effects to economic activity and employment from the hurricanes.
However, the near-term outlook continued to be subject to considerable uncertainty given the difficulties in assessing
the net effects of the downturn in consumer confidence and the rise in energy
prices through the summer, on the one
hand, and the rebuilding from hurricane
damage, on the other. Although oil and
gasoline prices had fallen in recent
weeks and core inflation had remained
benign, some businesses had reported
increased ability to pass through cost
increases in the environment of higher
headline inflation. On balance, meeting
participants remained concerned about
heightened inflation pressures.
Meeting participants generally saw
accumulating evidence as supporting the
view that the disruptions to aggregate
economic activity and employment from
the hurricanes were likely to be limited
and temporary. In areas that had been
devastated by the hurricanes, recovery
of energy production and the rebuilding
of homes and businesses might take
longer than had been expected, in part
because of a slow return of evacuees.
However, in regions just outside those
that were most severely damaged, recovery was already well underway, and
the pace of economic activity had
strengthened, in some cases owing to
213
spending by relocated households. Reconstruction along the Gulf Coast would
likely pick up substantially in the next
couple of quarters.
In the household sector, spending
seemed to have held up fairly well, aside
from a drop in purchases of autos. Some
participants noted, however, that the
erosion of consumer confidence, stillelevated gasoline prices, and the prospect of higher heating bills might augur
weakness ahead. The housing market
had remained robust, although a slowing in house price gains in some areas
and recent declines in home equity lending at banks could be indicating that
the long-expected cooling in the housing market was near. Motor vehicle purchases had slowed substantially in October, but that seemed to owe primarily
to the end of discount programs that had
generated a surge in auto spending over
the summer. Over the longer-term, with
house price gains moderating and perhaps greater perceived needs to invest
for retirement purposes, the household
saving rate was likely to rise gradually.
Growth in business investment spending seemed to remain moderate overall,
but anecdotal reports suggested that a
number of firms had boosted their plans
for capital spending. Moreover, construction spending and commercial real
estate investment seemed to be picking
up in some areas. Significant problems
persisted amongst U.S. nameplates in
the auto sector, however. The rise in
longer-term real interest rates and some
widening of private credit spreads in
recent months were seen as perhaps
having a little restraining effect on the
investment outlook.
Economic growth in the near term
was likely to be boosted by additional
fiscal stimulus, in part to support recovery and rebuilding from the hurricanes.
Strong demand from overseas was evidently boosting exports this year by
214 92nd Annual Report, 2005
more than the increase in imports, with
the nation's external accounts thereby
providing a small net positive contribution to growth in domestic production.
Next year, however, the arithmetic contribution to growth from net exports
was seen as likely to return to negative
territory.
While participants noted some recent
favorable data on core inflation and
labor costs, upside risks to the outlook
for underlying inflation remained a key
concern. Wage gains had remained modest relative to continued strong productivity growth, suggesting that labor costs
were not putting much upward pressure
on prices. Indeed, core inflation continued to be subdued, and in recent weeks
gasoline prices had unwound a significant portion of their steep increases.
Nevertheless, there was a risk that the
large cumulative rise in energy and
petroleum product prices through the
summer would be transmitted to core
consumer prices. A number of firms had
been reporting a greater ability to pass
through increases in energy and other
costs to customers, though evidently
more so to other businesses than to
consumers. A survey measure of the
near-term inflation expectations of
households had risen notably, but
intermediate- and longer-term inflation
expectations implied by Treasury security yields had remained fairly stable.
It was noted, however, that longerterm expectations of inflation remained
contained in the context of an increase
in the extent of additional monetary policy tightening expected in financial
markets.
In the Committee's discussion of
monetary policy for the intermeeting
period, all members favored raising the
target federal funds rate 25 basis points
to 4 percent at this meeting. The economy seemed to be growing at a fairly
strong pace, despite the temporary dis
ruptions associated with the hurricanes,
and underlying economic slack was
likely quite limited. In that context, all
members believed it important to continue removing monetary policy accommodation in order to check upside risks
to inflation and keep inflation expectations contained, but noted that policy
setting would need to be increasingly
sensitive to incoming economic data.
Some members cautioned that risks of
going too far with the tightening process
could also eventually emerge. Nonetheless, all members agreed to indicate at
the conclusion of this meeting that a
continued measured pace of policy firming remained likely.
In their ongoing discussion of the
Committee's communication strategy,
participants expressed a variety of perspectives about how the policy statement issued at the end of FOMC meetings might evolve over time. Several
aspects of the statement language would
have to be changed before long, particularly those related to the characterization of and outlook for policy. Possible
future changes in the sentence on the
balance of risks to the Committee's
objectives were also discussed. Participants noted that any forward-looking
elements of the statement should clearly
be conditioned on the outlook for inflation and economic growth. For this
meeting, members concurred that the
current statement structure could be
retained, as it accurately conveyed their
near-term economic and policy outlook.
In view of the continued rapid pace of
observed productivity gains, members
agreed that the statement to be released
after the meeting should again indicate that robust underlying productivity
growth and monetary policy accommodation were supporting the economic
expansion. Those influences were expected to be augmented by planned
rebuilding and recovery activity in
Minutes of FOMC Meetings, December 215
hurricane-affected areas. While gasoline
prices had recently moved lower, the
cumulative rise in energy prices and
other costs was seen as having the
potential to add to inflation pressures.
However, core inflation had been subdued in recent months and longer-run
inflation expectations remained contained. Against that backdrop, the risks
to the objective of price stability, as well
as that for sustainable growth, remained
in balance, given appropriate monetary
policy actions.
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
4 percent.
The vote encompassed approval of
the paragraph below for inclusion in the
statement to be released shortly after the
meeting:
The Committee perceives that, with appropriate monetary policy action, the upside and
downside risks to the attainment of both
sustainable growth and price stability should
be kept roughly equal. With underlying inflation expected to be contained, 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
and Geithner, Ms. Bies, Messrs. Ferguson,
Fisher, Kohn, Olson, Moskow, Santomero,
and Stern. Votes against this action: None
It was agreed that the next meeting of
the Committee would be held on Tuesday, December 13, 2005.
The meeting adjourned at 1:15 p.m.
Notation Vote
By notation vote completed on October 7,2005, the Committee unanimously
approved the minutes of the meeting
of the Federal Open Market Committee
held on September 20, 2005.
Vincent R. Reinhart
Secretary
Meeting Held on
December 13, 2005
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 13, 2005 at
9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. Geithner, Vice Chairman
Ms. Bies
Mr. Ferguson
Mr. Fisher
Mr. Kohn
Mr. Moskow
Mr. Olson
Mr. Santomero
Mr. Stern
Ms. Cumming, Messrs. Guynn and
Lacker, Mses. Pianalto and Yellen,
Alternate Members of the Federal
Open Market Committee
Mr. Hoenig, Ms. Minehan, and
Mr. Poole, Presidents of the
Federal Reserve Banks of
Kansas City, Boston, and
St. Louis, respectively
216 92nd Annual Report, 2005
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. Fuhrer, Hakkio, Rasche,
Sniderman, Weinberg, and
Williams, Senior Vice Presidents,
Federal Reserve Banks of Boston,
Kansas City, St. Louis, Cleveland,
Richmond, and San Francisco,
respectively
Messrs. Connors, Freeman, and
Madigan, Ms. Mester,
Messrs. Oliner, Rosenblum, Tracy,
and Wilcox, Associate Economists
Mr. Cunningham, Ms. Mosser, and
Mr. Sullivan, Vice Presidents,
Federal Reserve Banks of Atlanta,
New York, and Chicago,
respectively
Mr. Kos, Manager, System Open
Market Account
Messrs. Slifman and Struckmeyer,
Associate Directors, Division of
Research and Statistics, Board
of Governors
Mr. Whitesell, Deputy Associate
Director, 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. Small, Project Manager, Division
of Monetary Affairs, Board of
Governors
Mr. ZakrajSek, Section Chief, Division
of Monetary Affairs, Board of
Governors
Mr. Kumasaka, Senior Financial
Analyst, Division of Monetary
Affairs, Board of Governors
Ms. Low, Open Market Secretariat
Specialist, Division of Monetary
Affairs, Board of Governors
Mr. Barron, First Vice President,
Federal Reserve Bank of Atlanta
Mr. Weber, Senior Research Officer,
Federal Reserve Bank of
Minneapolis
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 since the
previous meeting. By unanimous
vote, the Committee ratified these
transactions.
The information reviewed at this
meeting suggested that the economy
continued to expand at a solid rate in
the fourth quarter. Industrial production
rebounded, and employment growth
appeared to have recovered smartly
from the depressing effects of recent
hurricanes. Although some scattered
signs of cooling of the housing sector
had emerged, the pace of construction
activity and sales remained brisk. More
broadly, spending by consumers and
businesses was well maintained. Core
consumer price inflation remained subdued, even though some of the increase
in energy costs had apparently passed
Minutes of FOMC Meetings, December 217
through to prices of final goods and
services.
Private nonfarm payrolls grew rapidly in November after a small gain
in October. Construction employment
posted another large increase, probably owing in part to hurricane-related
activity. Broad-based gains in durable
goods industries augmented manufacturing employment, and employment in
the related industries of temporary help
services and wholesale trade increased
as well. With employment rising but
the average workweek of production or
nonsupervisory workers falling slightly,
aggregate hours slipped in November—
albeit to a level above that of their
third-quarter average. The unemployment rate held steady at 5 percent, and
the labor force participation rate was
also unchanged. Survey measures of
individuals' expectations of future labor
market conditions improved in November, largely reversing post-Katrina
declines.
Industrial production rebounded in
October after having been held down in
September by hurricanes and by a strike
at Boeing. The resumption of commercial aircraft production boosted manufacturing output and more than offset
a fall in the production of motor vehicles and parts. Large output gains in
hurricane-affected industries—such as
segments of the food, rubber and plastics, and paper industries—also contributed to the increase in manufacturing output. The growth of high-tech
output slowed slightly in October,
mainly as a result of smaller increases
in the production of semiconductors. In
contrast, production of communication
equipment—particularly data networking equipment—accelerated. With many
energy facilities in the Gulf region
still closed, output at mines, which is
defined to include oil and gas extraction,
slipped further in October. Manufacturing capacity utilization moved up again
in October and was only a touch below
its long-run average.
Real personal consumption expenditures appeared to be increasing solidly
over the course of the fourth quarter,
led by improvements in the fundamental determinants of consumer spending.
Real disposable personal income was
bolstered by gains in employment and
falling retail energy prices, while continued brisk advances in house prices and
the recent strengthening of equity prices
contributed importantly to increases in
household wealth. Consumer sentiment
picked up in November and early
December; some survey measures of
confidence returned to the range seen
during the first half of the year. The
personal saving rate—while still slightly
negative—moved up in October.
Activity in the housing market
remained brisk despite a rise in mortgage interest rates. Starts of new singlefamily homes dropped back somewhat in October from September's
very strong pace, but permit issuance
remained elevated. New home sales
reached a new high in October, and
existing home sales eased off only a
little from the high levels recorded during the summer. Other available indicators of housing activity were on the soft
side: An index of mortgage applications
for purchases of homes declined in
November, and builders' ratings of new
home sales had fallen off in recent
months. In addition, survey measures of
homebuying attitudes had declined to
levels last observed in the early 1990s.
Real outlays for equipment and software posted a solid gain in the third
quarter. Although business purchases of
motor vehicles declined in October and
November, growth in investment in nontransportation equipment appeared to
218 92nd Annual Report, 2005
have been well maintained in the fourth
quarter. Rising business sales, a declining cost of capital, and ample financial
resources in the corporate sector continued to foster a favorable environment for capital spending, a sentiment
echoed in executive surveys, which generally pointed to widespread increases
in planned capital outlays. Real spending on nonresidential construction improved materially in the third quarter,
boosted by substantial gains in drilling
and mining expenditures.
Real nonfarm inventories ran off in
the third quarter as automakers pared
their motor vehicle stocks. But even outside the motor vehicle sector, inventory
investment was relatively restrained, and
partial data for October suggested that
real stockbuilding continued to be subdued. The level of stocks appeared
reasonably well aligned with sales.
The U.S. international trade deficit
reached a new record in September. A
surge in imports was accompanied by
a fairly sizable drop in exports, part
of which was due to a steep falloff in
aircraft exports as a result of the strike
at Boeing. The jump in the value of
imports was driven by strong growth in
most categories of goods and, to a lesser
extent, growth in services; increases in
the dollar value of imports of oil and of
industrial supplies—especially natural
gas—were particularly strong, a reflection of higher prices. Foreign industrialized economies expanded robustly in
the third quarter, and available indicators for the fourth quarter appeared
promising, on balance.
Core consumer price inflation was
moderate in recent months, although
some signs of pass-through of higher
energy costs were evident, especially
in transportation services. Consumer
energy prices had retreated notably from
their elevated post-hurricane levels.
Wholesale and retail gasoline prices
dropped as gasoline inventories rebounded. And spot prices for natural
gas fell sharply through mid-November
amidst unusually temperate weather,
plentiful inventories, and declining
prices of competing fuels; unusually
cold weather in early December, however, caused spot prices to move back
up to their October levels. Presumably
in response to falling retail energy
prices, one survey of households in
November and early December showed
a marked retreat in expectations for
inflation over the coming year. Longerterm inflation expectations also edged
down, but stayed a touch above the
narrow range observed in recent years.
Although recent increases in energy
costs had pushed up producer prices
in some sectors, overall producer price
inflation remained subdued. With regard
to labor costs, the twelve-month change
in the employment cost index for private
industry workers in September was well
below its year-ago increase. Hourly
compensation in the nonfarm business
sector also appeared to have slowed a
bit recently.
At its November meeting, the Federal
Open Market Committee decided to
increase the target level of the federal
funds rate 25 basis points, to 4 percent. In its accompanying statement, the
Committee indicated that, with appropriate monetary policy action, the upside
and downside risks to the attainment of
sustainable growth and price stability
should be kept roughly equal. The Committee also noted that elevated energy
prices and hurricane-related disruptions
in economic activity had temporarily
depressed output and employment.
However, monetary policy accommodation, coupled with robust underlying
growth in productivity, was providing
ongoing support to economic activity.
And although the cumulative rise in
energy and other costs had the poten-
Minutes of FOMC Meetings, December
tial to add to inflation pressures, core
inflation had been relatively low in
recent months, and longer-term inflation expectations remained contained.
In these circumstances, the Committee
believed that policy accommodation
could be removed at a pace that was
likely to be measured but noted that it
would respond to changes in economic
prospects as needed to fulfill its obligation to maintain price stability.
Market participants widely anticipated the Committee's decision at its
November meeting, and the policy
announcement evoked little reaction in
financial markets. Over the intermeeting period, investors marked up slightly
their expectations for the path of
monetary policy in light of strongerthan-expected data on spending and
production. Nominal Treasury yields
changed little, on net, but measures
of inflation compensation at longer
horizons—which are calculated using
yields on nominal and inflationprotected securities—declined somewhat. Credit spreads on both
investment- and speculative-grade corporate bonds were about unchanged
over the intermeeting period. Major
equity price indexes posted substantial
gains, spurred by the perception that the
economy had retained considerable
momentum with limited inflation pressures. In foreign exchange markets, the
trade-weighted value of the dollar was
about unchanged over the intermeeting
period.
The expansion of domestic nonfinancial debt appeared to have moderated a
little from its brisk third-quarter pace.
Consumer credit dipped in October, and
nonfinancial firms' net borrowing in the
form of bank loans, commercial paper,
and bonds was a bit below the thirdquarter pace. Household bankruptcies
hovered at very low levels in recent
weeks after soaring to unprecedented
219
heights just before the implementation
of more-stringent bankruptcy rules in
mid-October. Hurricane relief payments
apparently boosted M2 in October, but
that aggregate decelerated in November,
partly reflecting the continued rise in
the opportunity cost of holding liquid
deposits.
The staff forecast prepared for this
meeting suggested that growth of economic activity would slow from this
year's pace, but remain solid, with output staying near the economy's potential over the next two years. Although
hurricane-related rebuilding would
boost activity, especially in the near
term, this stimulus increasingly would
be countered by higher interest rates,
the anticipated waning of the positive
wealth effect associated with large earlier gains in equity and house prices,
and reduced impetus from fiscal policy.
Both overall and core consumer price
inflation were projected to move higher
in the first half of next year, reflecting
the effects of higher energy prices, but
then to trend lower as those effects ebb.
In their discussion of the economic
situation and outlook, meeting participants noted that incoming data over the
intermeeting period had been encouraging with regard to both economic
growth and inflation. The economic
expansion had shown considerable
resilience in the face of higher energy
prices and hurricane-related disruptions,
suggesting greater underlying strength
than had been apparent at the time of
the November meeting. At the same
time, incoming inflation data had been
benign, indicating relatively modest
pass-through of higher energy prices to
core inflation to date; subdued gains in
compensation and strong growth in productivity were holding down business
costs; and inflation expectations, which
had jumped after the hurricanes, had
fallen back. Nonetheless, with growth
220 92nd Annual Report, 2005
solid and prices of energy products still
well above levels earlier in the year,
possible increases in resource utilization
had the potential to add to pressures on
prices, especially in the absence of some
further firming of policy.
In their discussion of major sectors
of the economy, meeting participants
noted that, while light vehicle sales had
slowed in the fall, consumer spending
outside the auto sector appeared to have
remained vigorous. Holiday sales were
said to be off to a good start in many
parts of the country. The substantial
recovery in measures of consumer confidence after their sharp declines in the
aftermath of the hurricanes had reduced
meeting participants' concerns about
a significant pull-back in spending.
Going forward, consumer outlays were
expected to be supported by further
advances in employment and income.
Meeting participants discussed tentative signs that activity was beginning to
slow in the housing sector. Reports from
contacts in many parts of the country
suggested somewhat less ebullient market conditions, and measures of confidence of homebuyers and builders had
fallen back noticeably. A downshift in
attitudes regarding the outlook for the
housing sector could have significant
market effects, in part by damping the
demand for houses by investors and
speculators. A slowing of house price
increases, by restraining the expansion
of consumption, and a moderation in the
pace of new building were expected to
reduce the growth of aggregate demand
somewhat in coming quarters. To date,
however, the national data on home
prices, sales, and construction activity
did not suggest a significant weakening
in the sector.
Business investment spending had
accelerated some since midyear. In
part, the pickup may have reflected an
increase in business confidence as the
economy proved resilient in the face of
this year's substantial adverse shocks.
Participants noted that the improved
performance of investment suggested
that the expansion was becoming more
balanced, with strengthening business
spending potentially offsetting some
moderation in the growth of household
spending from the elevated rates of
recent years.
Economic activity also could be
buoyed by developments in other sectors of the economy. Increased federal
government outlays were expected to
boost output a little next year. Supportive financial conditions and an apparent
increase in confidence had contributed
to a pickup in growth abroad. Despite
possible firming of monetary policy by
some foreign central banks and the rise
in the foreign exchange value of the
dollar owing to global demands for dollar assets, a good portion of the recent
strength in foreign economic growth
was expected to persist and provide support for U.S. exports.
In their discussion of prices, participants indicated that their concerns about
near-term inflation pressures had eased
somewhat over the intermeeting period.
Recent data suggested that, thus far,
indirect effects of elevated energy prices
on core inflation had been muted. Moreover, energy prices generally had fallen
back on balance since earlier in the fall,
and much of the increases in inflation
expectations posted in the aftermath
of the hurricanes had reversed. Participants noted that robust competition—
including that from foreign producers—
and further substantial gains in productivity were helping to contain cost
and price pressures. Moreover, measures
of labor compensation showed only
moderate gains while relatively wide
profit margins could allow firms to
absorb somewhat larger increases in
labor and other costs without boosting
Minutes of FOMC Meetings, December 221
prices. Nonetheless, surveys and anecdotal reports suggested that some firms
were successfully passing at least a portion of their increased costs on to customers, and many participants remained
concerned that elevated energy prices
could put pressure on core inflation.
Also, in the view of a number of participants, the economy was possibly
producing in the neighborhood of its
potential, and the persistent strength in
spending of late suggested that resource
markets could tighten further and inflation pressures build. Under these circumstances, and with policy having
been accommodative for some time,
inflation expectations could rise if
monetary policy were not seen as
responding to contain such risks.
In the Committee's discussion of
monetary policy for the intermeeting
period, all members favored raising the
target federal funds rate 25 basis points
to AlA percent. With spending apparently retaining considerable momentum,
and with the indirect effects of increased
energy prices still threatening to raise
core inflation at least for a time, the
Committee thought that additional policy firming at this meeting was appropriate to keep inflation and inflation expectations in check. Committee members
generally anticipated that policy would
likely need to be firmed further going
forward. In that process, the Committee
would need to be mindful of the lags in
the effect of policy finning on the economy. However, it would also have to
take account of the effects of the sustained period of favorable financial conditions on asset prices and aggregate
demand as well as the resulting possibility of further increases in resource utilization and pressures on prices. Views
differed on how much further tightening
might be required. Because the Committee's actions over the past eighteen
months had significantly reduced the
degree of monetary policy accommodation, members thought that the policy
outlook was becoming considerably less
certain and that policy decisions going
forward would depend to an increased
extent on the implications of incoming
economic data for future growth and
inflation.
The Committee agreed that several
changes in the wording of the announcement to be released after today's meeting would be appropriate. The federal
funds rate had been boosted substantially, and, in the view of some members, it was now likely within a broad
range of values that might turn out to be
consistent with output remaining close
to potential. In these circumstances, the
Committee thought that policy should
no longer be characterized as accommodative. Members concurred that the
statement should note that the expansion
remained solid despite elevated energy
prices and hurricane-related disruptions.
While inflation and long-term inflation
expectations remained contained, the
Committee agreed that the announcement should indicate that possible increases in resource utilization, as well as
elevated energy prices, had the potential
to add to inflation pressures and that
"some further measured policy firming
is likely to be needed to keep the risks to
the attainment of both sustainable economic growth and price stability roughly
in balance." Although future action
would depend on the incoming data, this
characterization of the outlook for policy was seen by most members as indicating that, given the information now
in hand, the number of additional firming steps required probably would not
be large. Some members thought that
the word "measured" was no longer
necessary, but its retention for this
meeting was seen as potentially useful
to preclude a possible misinterpretation
that the Committee now saw a sig-
222
92nd Annual Report, 2005
nificant possibility of adjusting policy
in larger increments in the near ftiture.
Wording of the announcement along
these lines was not expected to have
a substantial effect on market expectations for policy, though such effects
were especially difficult to judge given
the extensive changes being made to the
statement. The members agreed that the
announcement should end by noting that
policy will respond to changes in economic prospects as needed to foster the
Committee's objectives.
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
4lA percent.
The vote encompassed approval of
the paragraph below for inclusion in the
statement to be released shortly after the
meeting:
The Committee judges that some further
measured policy firming is likely to be
needed to keep the risks to the attainment of
both sustainable economic growth and price
stability roughly in balance. In any event, the
Committee will respond to changes in economic prospects as needed to foster these
objectives.
Votes for this action: Messrs. Greenspan
and Geithner, Ms. Bies, Messrs. Ferguson,
Fisher, Kohn, Olson, Moskow, Santomero,
and Stern. Votes against this action: None
It was agreed that the next meeting of
the Committee would be held on Tuesday, January 31, 2006.
The meeting adjourned at 1:00 p.m.
Notation Vote
By notation vote completed on November 21, 2005, the Committee unanimously approved the minutes of the
meeting of the Federal Open Market
Committee held on November 1, 2005.
Vincent R. Reinhart
Secretary
223
Litigation
During 2005, the Board of Governors
was a party in three lawsuits or appeals
filed that year and was a party in ten
other cases pending from previous
years, for a total of thirteen cases; in
2004, the Board had been a party in a
total of seventeen cases. None of the
lawsuits or appeals filed in 2005 raised
questions under the Bank Holding Company Act. As of December 31, 2005,
five cases were pending.
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), were petitions
for review of orders of prohibition
issued by the Board on October 15,
2003. On April 27, 2005, the court
denied the petitions for review. 129 Fed.
App'x. 386 (9th Cir. 2005).
Other Actions
Litigation under the Financial
Institutions Supervisory Act
Bazy v. Board of Governors, No. 051320 (D.C. Circuit, filed August 12,
2005), was a petition for review of an
interlocutory order in an administrative
enforcement proceeding. On August 24,
2005, the court dismissed the case on
the motion of the petitioner.
Board of Governors v. Thomas, et aL,
No. l:04-CV-0777 (N.D. Georgia, filed
March 19, 2004), was an injunctive
action in which, in 2004, the court
ordered eighteen individuals to deposit
funds into the court's registry to satisfy
civil money penalties the Board was
seeking against them in a separate
administrative enforcement proceeding.
On July 13, 2005, the court granted the
Board's motion to dismiss the preliminary injunction issued on the Board's
behalf so that the deposited funds could
instead be transferred to the United
States Bankruptcy Court, Middle District of Florida, Tampa Division, which
had issued judgments against the same
eighteen defendants in an adversary proceeding brought by the court-appointed
trustee.
Inner City Press/Community on the
Move v. Board of Governors, No. 056162 (2nd Circuit, filed November 21,
2005), is an appeal of the district court's
order (No. 04-CV-8337, 380 F. Supp. 2d
211 (S.D.N.Y. 2005)) granting in part
and denying in part the Board's motion
for summary judgment in a Freedom of
Information Act case. On December 5,
2005, the Board filed a cross-appeal in
the matter.
Price v. Greenspan, No. 05-5361
(D.C. Circuit, filed September 29,
2005), is an appeal of an order of
the district court (No. 04-CV-0973,
374 F. Supp. 2d 17 (D.D.C. 2005)) dismissing an employment discrimination
action.
Barnes v. Greenspan, No. 04-CV1989 (CKK) (D. District of Columbia, filed November 15, 2004), is a
case under the Age Discrimination in
Employment Act.
Fakolujo v. Federal Reserve System,
et ah, No. 05-304 (E.D. Pennsylvania,
filed October 15, 2004, in the Court of
Common Pleas, Philadelphia County,
Pa., and removed to federal court on
January 21, 2005), was an action for
224 92nd Annual Report, 2005
wrongful denial of insurance claim. The June 21, 2004), was a case brought
action was dismissed by agreement of under the Freedom of Information Act.
the parties on April 15, 2005.
On September 30, 2005, the court
Jones v. Greenspan, No. 04-CV-1696 granted the Board's motion for sum(RMU) (D. District of Columbia, filed mary judgment.
October 4, 2004), is an employment
Artis v. Greenspan, No. 01-0400
discrimination action. On December 13, (D. District of Columbia, filed Febru2005, the district court granted in part ary 22, 2001), is an employment disand denied in part the Board's motion to crimination action. An identical action,
dismiss and for summary judgment.
No. 99-2073 (EGS) (D. District of
Texas State Bank v. United States, Columbia, filed August 3, 1999), was
No. 04-5126 (Federal Circuit, filed consolidated with this action on
July 28, 2004), was an appeal from a August 15, 2001.
decision of the United States Court
Fraternal Order of Police v. Board of
of Federal Claims dismissing an action Governors, No. 98-3116 (D. District of
challenging on constitutional grounds Columbia, filed December 22, 1998),
the failure to pay interest on reserve was an action seeking a declaratory
accounts held at Federal Reserve Banks. judgment regarding the Board's labor
On September 21, 2005, the court policy governing Federal Reserve
affirmed the lower court's dismissal of Banks. On July 28, 2005, the district
the action. 423 F.3d 1370 (Fed. Cir. court granted the Board's motion for
2005). The petitioner's request for summary judgment and dismissed
rehearing and rehearing en bane was the action. 391 F. Supp. 2d 1 (D.D.C.
denied on December 13, 2005.
2005).
.
Sciba v. Board of Governors, No. 04CV-1011 (D. District of Columbia, filed
Federal Reserve System
Organization
Federal Reserve System Organization 227
Board of Governors
December 31, 2005
Members
STEPHEN H. MEYER, Assistant General
ALAN GREENSPAN, Chairman1
Term expires
January 31,
2006
ROGER W. FERGUSON, JR.,
1
Vice Chairman
2014
SUSAN S. BIES
MARK W. OLSON
DONALD L. KOHN
2012
2010
2016
Officers
Counsel
PATRICIA A. ROBINSON, Assistant General
Counsel
CARY K. WILLIAMS, Assistant General
Counsel
OFFICE OF THE SECRETARY
JENNIFER J. JOHNSON, Secretary
ROBERT DEV. FRIERSON, Deputy Secretary
MARGARET M. SHANKS, Associate
Secretary
OFFICE OF BOARD MEMBERS
MICHELLE A. SMITH, Director
DIVISION OF
WINTHROP P. HAMBLEY, Assistant to the
INTERNATIONAL FINANCE
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
BRIAN J. GROSS, Special Assistant to the
Board for Congressional Liaison
ROBERT M. PRIBBLE, Special Assistant to
the Board for Congressional Liaison
KAREN H. JOHNSON, Director
THOMAS A. CONNORS, Senior Associate
Director
WILLIAM L. HELKIE, Senior Adviser
DALE W. HENDERSON, Senior Adviser
RICHARD T. FREEMAN, Associate Director
STEVEN B. KAMIN, Associate Director
JON W. FAUST, Assistant Director
JOSEPH E. GAGNON, Assistant Director
MICHAEL P. LEAHY, Assistant Director
D. NATHAN SHEETS, Assistant Director
RALPH W TRYON, Assistant Director
LEGAL DIVISION
SCOTT G. ALVAREZ, General Counsel
RICHARD M. ASHTON, Deputy General
Counsel
KATHLEEN M. O'DAY, Deputy General
Counsel
STEPHANIE MARTIN, Associate General
Counsel
ANN MISBACK, Associate General Counsel
KATHERINE H. WHEATLEY, Associate
General Counsel
KIERAN J. FALLON, 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 terminates sooner.
DIVISION OF MONETARY AFFAIRS
VINCENT R. REINHART, Director
BRIAN F. MADIGAN, Deputy Director
DEBORAH J. DANKER, Special Assistant
to the Board
ATHANASIOS ORPHANIDES, Adviser
JAMES A. CLOUSE, Deputy Associate
Director
WILLIAM C. WHITESELL, Deputy Associate
Director
CHERYL L. EDWARDS, Assistant Director
WILLIAM B. ENGLISH, Assistant Director
228 92nd Annual Report, 2005
Board of Governors—Continued
DIVISION OF RESEARCH
AND STATISTICS
DAVID J. STOCKTON, Director
PATRICK M. PARKINSON, Deputy Director
DAVID W. WILCOX, Deputy Director
MYRON L. KWAST, Senior Associate
Director
STEPHEN D. OLINER, Associate Director
LAWRENCE SLIFMAN, Associate Director
CHARLES S. STRUCKMEYER, Associate
Director
ALICE PATRICIA WHITE, Associate Director
GLENN B. CANNER, Senior Adviser
DAVID S. JONES, Senior Adviser
THOMAS D. SIMPSON, Senior Adviser
S. WAYNE PASSMORE, Deputy Associate
Director
DAVID L. REIFSCHNEIDER, Deputy
Associate Director
JANICE SHACK-MARQUEZ, Deputy
Associate Director
WILLIAM L. WASCHER m, Deputy
Associate Director
JOYCE K. ZICKLER, Deputy Associate
Director
J. NELLIE LIANG, Assistant Director
DANIEL E. SICHEL, Assistant Director
MARY M. WEST, Assistant Director
MICHAEL S. CRINGOLI, Assistant Director
ROGER T. COLE, Senior Associate Director
MICHAEL G. MARTINSON, Senior Adviser
STEVEN M. ROBERTS, Senior Adviser
DEBORAH P. BAILEY, Associate Director
NORAH M. BARGER, Associate Director
BETSY CROSS, Associate Director
GERALD A. EDWARDS, JR., Associate
Director
JACK P. JENNINGS, Associate Director
ROBIN L. LUMSDAINE, Associate Director
PETER J. PURCELL, Associate Director and
Chief Technology Officer
MOLLY S. WASSOM, Associate Director
DAVID M. WRIGHT, 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 C. SCHNEIDER, JR., 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 F. TREACY, Assistant Director
and Chief
DOUGLAS W. ELMENDORF, Assistant
Director and Chief
MICHAEL S. GIBSON, Assistant Director
and Chief
DIANA HANCOCK, Assistant Director
and Chief
ROBIN A. PRAGER, Assistant Director and
Chief
DIVISION OF BANKING SUPERVISION
AND REGULATION
RICHARD SPILLENKOTHEN, Director
STEPHEN M. HOFFMAN, JR., Deputy
Director
DIVISION OF CONSUMER
AND COMMUNITY AFFAIRS
SANDRA F. BRAUNSTEIN, Director
GLENN E. LONEY, Deputy Director
LEONARD CHANIN, Associate Director
ADRIENNE D. HURT, Associate Counsel
MARY T. JOHNSEN Associate Director
TONDA E. PRICE, Associate Director
SUZANNE G. KILLIAN, Assistant Director
SHEILA F. MAITH, Assistant Director
JAMES A. MICHAELS, Assistant Director
Federal Reserve System Organization 229
Board of Governors—Continued
DIVISION OF RESERVE BANK
OPERATIONS AND PAYMENT
SYSTEMS
LOUISE L. ROSEMAN, Director
JEFFREY C. MARQUARDT, Deputy Director
PAUL W. BETTGE, Senior Associate
Director
KENNETH D. BUCKLEY, Associate Director
DOROTHY LACHAPELLE, Associate Director
JACK K. WALTON II, Associate Director
GREGORY L. EVANS, Assistant Director
LISA HOSKINS, Assistant Director
MICHAEL J. LAMBERT, Assistant Director
JEFF J. STEHM, Assistant Director
OFFICE OF STAFF DIRECTOR
FOR MANAGEMENT
STEPHEN R. MALPHRUS, Staff Director for
Management
SHEILA CLARK, Equal Employment
Opportunity Programs Director
LYNN S. FOX, Senior Adviser
MANAGEMENT DIVISION
H. FAY PETERS, Director
DARRELL R. PAULEY, Deputy Director
STEPHEN J. CLARK, Senior Associate
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
DIVISION OF
INFORMATION TECHNOLOGY
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
JILL R. ROSEN, 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
230 92nd Annual Report, 2005
Federal Open Market Committee
December 31,2005
Members
Officers
ALAN GREENSPAN, Chairman, Board of
VINCENT R. REINHART, Secretary and
Governors
TIMOTHY F. GEITHNER, Vice Chairman,
President, Federal Reserve Bank of
New York
SUSAN S. BIES, Board of Governors
ROGER W. FERGUSON, JR., Board of
Governors
RICHARD W. FISHER, President, Federal
Reserve Bank of Dallas
DONALD L. KOHN, Board of Governors
MICHAEL H. MOSKOW, President, Federal
Reserve Bank of Chicago
MARK W. OLSON, Board of Governors
ANTHONY M. SANTOMERO, President,
Federal Reserve Bank of Philadelphia
GARY H. STERN, President, Federal
Reserve Bank of Minneapolis
Alternate Members
CHRISTINE M. CUMMTNG, First Vice
President, Federal Reserve Bank of
New York
JACK GUYNN, President, Federal Reserve
Bank of Atlanta
JEFFREY M. LACKER, President, Federal
Reserve Bank of Richmond
SANDRA PIANALTO, President, Federal
Reserve Bank of Cleveland
JANET L. YELLEN, President, Federal
Reserve Bank of San Francisco
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
CHARLES L. EVANS, Associate Economist
RICHARD T. FREEMAN, Associate Economist
BRIAN F. MADIGAN, Associate Economist
LORETTA J. MESTER, Associate Economist
STEPHEN D. OLINER, Associate Economist
ARTHUR J. ROLNICK, Associate Economist
HARVEY ROSENBLUM, Associate Economist
JOSEPH S. TRACY, Associate Economist
DAVID W. WILCOX, Associate Economist
DINO Kos, Manager, System Open Market
Account
During 2005 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 231
Federal Advisory Council
December 31, 2005
Members
District 1—JAMES C. SMITH, Chairman and
Chief Executive Officer, Webster Bank,
N.A. and Webster Financial Corporation,
Waterbury, Conn.
District 2—THOMAS A. RENYI, Chairman
and Chief Executive Officer, The Bank of
New York, N.Y.
District 3—BRUCE L. HAMMONDS President
and Chief Executive Officer, MBNA
Corporation, Wilmington, Del.
District 4—MARTIN G. MCGUINN, Chair-
man and Chief Executive Officer, Mellon
Financial Corp., Pittsburgh, Pa.
District 5—G. KENNEDY THOMPSON, Chair-
man, President, and Chief Executive Officer, Wachovia Corporation, Charlotte,
N.C.
District 6—FRED L. GREEN HI, Vice Chairman, Synovus Financial Corporation,
Columbus, Ga.
District 7—DENNIS J. KUESTER, President
and Chief Executive Officer, Marshall &
Dsley Corporation, Milwaukee, Wis.
District 8—J. KENNETH GLASS, Chairman,
President, and Chief Executive Officer,
First Horizon National Corporation,
Memphis, Tenn.
District 9—JERRY A. GRUNDHOFER, Presi-
dent and Chief Executive Officer, U.S.
Bancorp, Minneapolis, Minn.
District 10—BYRON G. THOMPSON, Chair-
man, Country Club Bank, N.A., Kansas
City, Mo.
District 11—GAYLE M. EARLS, President
and Chief Executive Officer, TIB—The
Independent BankersBank, Dallas, Tex.
District
12—RICHARD
M.
KOVACEVICH,
Chairman, President, and Chief Executive
Officer, Wells Fargo and Company, San
Francisco, Calif.
Officers
MARTIN G. MCGUINN, President
JERRY A. GRUNDHOFER, Vice President
JAMES E. ANNABLE, Secretary
The Federal Advisory Council, which is a
statutory body established under the Federal
Reserve Act, consults with, and advises, the
Board of Governors on all matters within the
Board's jurisdiction. It is composed of one
representative from each Federal Reserve
District, chosen by the Reserve Bank in that
District. The Federal Reserve Act requires
the council to meet in Washington, D.C., at
least four times a year. In 2005, it met on
February 10-11, May 5-6, September 1-2,
and December 8-9. The council met with the
Board on February 11, May 6, September 2,
and December 9, 2005.
232 92nd Annual Report, 2005
Consumer Advisory Council
December 31,2005
BRUCE B. MORGAN, Chairman, President,
Members
STELLA ADAMS, Executive Director, North
Carolina Fair Housing Center, Durham,
N.C.
DENNIS L. ALGIERE, Senior Vice President,
The Washington Trust Company,
Westerly, R.I.
FAITH L. ANDERSON, Vice President/Legal
Compliance and General Counsel,
American Airlines Federal Credit Union,
Fort Worth, Tex.
SUSAN BREDEHOFT, Senior Vice President/
Compliance Risk Management, Commerce Bank, N.A., Cherry Hill, NJ.
SHEILA CANAVAN, Consumer Attorney, Law
Office of Sheila Canavan, Moab, Utah
CAROLYN CARTER, Attorney, National Con-
sumer Law Center, Boston, Mass.
MICHAEL COOK, Vice President, Wal-Mart
Stores, Inc., Bentonville, Ark.
DONALD S. CURRIE, Executive Director,
Community Development Corporation of
Brownsville, Brownsville, Tex.
ANNE DIEDRICK, Senior Vice President,
JPMorgan Chase Bank, New York, N.Y.
DAN DIXON, Group Senior Vice President,
World Savings Bank, FSB, Washington,
D.C.
HATTIE B. DORSEY, President and Chief
Executive Officer, Atlanta Neighborhood
Development Partnership, Atlanta, Ga.
KURT EGGERT, Professor of Law and Direc-
tor of Clinical Legal Education, Chapman
University School of Law, Orange, Calif.
JAMES GARNER, Senior Vice President and
General Counsel, North American Consumer Finance for Citigroup, Baltimore,
Md.
CHARLES GATSON, Former Vice President,
Midtown Community Development Corporation, Kansas City, Mo.
DEBORAH
HICKOK,
Vice
President,
MoneyGram Payment Systems, Inc.,
Ooltewah, Tenn.
W. JAMES KING, President and Chief Executive Officer, Community Redevelopment
Group, Cincinnati, Ohio
ELSIE MEEKS, Executive Director, First
Nations Oweesta Corporation, Rapid City,
S.D.
and Chief Executive Officer, Valley State
Bank, Roeland Park, Kans.
BENJAMIN ROBINSON III, President
and
Chief Executive Officer, Innovative Risk
Solutions, LLC, Charlotte, N.C.
MARY JANE SEEBACH, Managing Director,
Public Affairs, Countrywide Financial
Corporation, Calabasas, Calif.
LISA SODEIKA, Executive Vice PresidentCorporate Affairs, HSBC North America
Holdings, Inc., Prospect Heights, 111.
PAUL J. SPRINGMAN, Chief Marketing Officer, Equifax, Atlanta, Ga.
FORREST F. STANLEY, Senior Vice President
and Deputy General Counsel, KeyBank
National Association, Cleveland, Ohio
DIANE THOMPSON, Supervising Attorney,
Land of Lincoln Legal Assistance Foundation, Inc., East St. Louis, 111.
ANSELMO VBLLARREAL, Executive Director,
LaCasa de Esperanza, Inc., Waukesha, Wis.
CLINT WALKER, General
Counsel/Chief
Administrative Officer, Juniper Bank,
Wilmington, Del.
KELLY K. WALSH, Former Senior Vice
President, Bank of Hawaii, Honolulu,
Hawaii
MARVA E. WILLIAMS, Senior Vice President,
Woodstock Institute, Chicago, 111.
Officers
MARK PINSKY, Chair, President and Chief
Executive Officer, National Community
Capital Association, Philadelphia, Pa.
LORI SWANSON, Vice Chair, Solicitor General, Office of the Minnesota Attorney
General, St. Paul, Minn.
The Consumer Advisory Council—a statutory body established pursuant to the 1976
amendments to the Equal Credit Opportunity
Act—advises the Board of Governors on
consumer financial services. Its members,
who are appointed by the Board, are academics, state and local government officials,
and representatives of the financial services
industry and of consumer and community
interests. In 2005, the council met with members of the Board on March 17, June 23, and
October 27.
Federal Reserve System Organization 233
Thrift Institutions Advisory Council
December 31,2005
Members
GEORGE JEFFREY RECORDS, JR., Chairman
ELDON R. ARNOLD, President and Chief
Executive Officer, Citizens Equity First
Credit Union (CEFCU), Peoria, HI.
H. BRENT BEESLEY, Chairman and Chief
Executive Officer,
St. George, Utah
Heritage
Bank,
CRAIG G. BLUNDEN, Chairman, President,
and Chief Executive Officer, Provident
Savings Bank, FSB, Riverside, Calif.
ALEXANDER R.M. BOYLE, Vice Chairman,
Chevy Chase Bank, Bethesda, Md.
ROBERT M. COUCH, President and Chief
Executive Officer, New South Federal
Savings Bank, Birmingham, Ala.
JEFFREY H. FARVER, President and Chief
Executive Officer, San Antonio Federal
Credit Union, San Antonio, Tex.
DOUGLAS K. FREEMAN, Chairman and Chief
Executive Officer, NetBank, Alpharetta,
Ga.
CURTIS L. HAGE, Chairman and Chief
Executive Officer, Home Federal Bank,
Sioux Falls, S.D.
DAVID H. HANCOCK, Chief Executive Officer, North American Savings Bank,
Grandview, Mo.
and Chief Executive Officer, MidFirst
Bank, Oklahoma City, Okla.
DAVID RUSSELL TAYLOR, President
and
Chief Executive Officer, Rahway Savings
Institution, Rahway, N.J.
ROY M. WHITEHEAD, President and Chief
Executive Officer, Washington Federal
Savings, Seattle, Wash.
Officers
CURTIS L. HAGE, President
ROY M. WHITEHEAD, Vice President
The Thrift Institutions Advisory Council was
established by the Board of Governors to
consult with, and advise, the Board on issues
pertaining to the thrift industry and on other
matters within the Board's jurisdiction. Its
members, who are appointed by the Board,
represent credit unions, savings and loan
associations, and savings banks. In 2005, the
council met with the Board on March 4,
July 8, and December 2.
234 92nd Annual Report, 2005
Federal Reserve Banks and Branches
December 31,2005
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.
dimming
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
James M. Anderson
Roy W.Haley
Sandra Pianalto
Robert Christy Moore
Thomas J. Mackell, Jr.
Theresa M. Stone
William C.Handorf
Michael A. Almond
Jeffrey M. Lacker
Walter A. Varvel
David M. Ratcliffe
V. Larkin Martin
James H. Sanford
Fassil Gabremariam
Edwin A. Jones, Jr.
Beth Dortch Franklin
Earl L. Shipp
Jack Guynn
Patrick K. Barren
CHICAGO2
W. James Farrell
Miles D. White
Michael H. Moskow
Gordon R.G.
Werkema
Detroit
Edsel B. Ford II
ST. LOUIS
Little Rock
Louisville
Walter L.Metcalfe, Jr.
Gayle P. W. Jackson
Stephen M. Erixon
Norman E. Pfau, Jr.
Memphis
Russell Gwatney
MINNEAPOLIS
Linda Hall Whitman
Frank L. Sims
Lawrence R. Simkins
BANK or Branch
Cincinnati
Pittsburgh
RICHMOND
Baltimore
Charlotte
ATLANTA
Birmingham
Jacksonville
Miami
Nashville
New Orleans
Helena.
.
Officer
in charge of Branch
Kausar Hamdani
Barbara B. Henshaw
Robert B. Schaub
David Beck
Jeffrey S. Kane
James M. McKee
Lee C. Jones
Christopher L. Oakley
Juan del Busto
Melvyn K. Purcell
Robert J. Musso
Glenn Hansen
William Poole
W. LeGrande Rives
Robert A. Hopkins
Maria Gerwing
Hampton
Martha Perine Beard
Gary H. Stern
James M. Lyon
Samuel H. Gane
Federal Reserve System Organization 235
Officers—Continued
BANK or Branch
KANSAS CITY
Denver
Oklahoma City
Omaha
DALLAS
El Paso
Houston
San Antonio
SAN FRANCISCO2
Los Angeles
Portland
Salt Lake City
Seattle
Chairman1
Deputy Chairman
President
First Vice President
Robert A. Funk
Richard H. Bard
Thomas Williams
Tyree O. Minner
James A. Timmerman
Thomas M. Hoenig
Richard K. Rasdall
Ray L. Hunt
Patricia M.
Patterson
Ron C. Helm
Lupe Fraga
Elizabeth Chu Richter
Richard W. Fisher
Helen E. Holcomb
George M. Scalise
David K.Y. Tang
James L. Sanford
James H. Rudd
H. Roger Boyer
Mic R. Dinsmore
Janet L.Yellen
John F. Moore
Officer
in charge of Branch
Pamela L. Weinstein
Dwayne E. Boggs
Kevin A. Drusch
Robert W. Gilmer
Robert Smith III
D. Karen Diaz
Mark L. Mullinix
Mary E. Lee
Andrea P. Wolcott
Mark Gould
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.
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, also attended by the deputy chairmen,
were held in Washington, D.C. on June 1 and
2, November 30, and December 1, 2005.
The members of the executive committee of the Conference of Chairmen during 2005 were George M. Scalise, chair;
Walter L. Metcalfe, Jr., vice chair; and John
Sexton, member.
On December 1, 2005, the conference
elected its executive committee for 2006,
naming John E. Sexton as chair; Charles E.
Bunch as vice chair; and Robert A. Funk 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.
Cathy E. Minehan, president of the Federal Reserve Bank of Boston, served as chair
of the conference in 2005, and Anthony M.
Santomero, president of the Federal Reserve
Bank of Philadelphia, served as vice chair.
Michael P. Malone, of the Federal Reserve
Bank of Boston, served as secretary, and
Herbert E. Taylor, of the Federal Reserve
Bank of Philadelphia, served as assistant
secretary.
236 92nd Annual Report, 2005
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 2005,
and Helen E. Holcomb, first vice president
of the Federal Reserve Bank of Dallas,
served as vice chair. Janice E. Clatterbuck,
of the Federal Reserve Bank of Richmond,
served as secretary, and Harvey R. Mitchell,
of the Federal Reserve Bank of Dallas,
served as assistant secretary.
On September 20, 2005, the conference
elected Helen E. Holcomb as chair for
2006-07 and James M. Lyon, first vice president of the Federal Reserve Bank of Minneapolis, as vice chair.
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.
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 237
Directors
BANK or BRANCH, Category
Name
Title
Term expires
Dec. 31
DISTRICT 1—BOSTON
RESERVE BANK
Class A
James R. Wood
Peter A. Blyberg
Ronald E. Logue
Class B
Orit Gadiesh
KirkP.Pond
Robert K. Kraft
Class C
Blenda J. Wilson
Lisa M. Lynch
Samuel O. Thier, M.D
President and Chief Executive Officer, The First
National Bank of Suffield, Suffield, Connecticut
President and Chief Executive Officer,
Union Trust Company, Ellsworth, Maine
Chairman and Chief Executive Officer,
State Street Corporation, Boston, Massachusetts
2005
Chairman, Bain & Company, Inc.,
Boston, Massachusetts
President, Chief Executive Officer, and Chairman,
Fairchild Semiconductor International,
South Portland, Maine
Chairman and Chief Executive Officer,
The Kraft Group, Foxborough, Massachusetts
2005
President and Chief Executive Officer,
Nellie Mae Education Foundation,
Quincy, Massachusetts
William L. Clayton Professor of International Economic
Affairs, The Fletcher School of Law and Diplomacy,
Tufts University, Medford, Massachusetts
Professor of Medicine and Professor of Health Care
Policy, Harvard Medical School, Massachusetts
General Hospital, Boston, Massachusetts
2005
2006
2007
2006
2007
2006
2007
DISTRICT 2—NEW YORK
RESERVE BANK
Class A
Charles V. Wait
Sanford I. Weill
Jill M. Considine
Class B
Marta Tienda
Denis M. Hughes
Richard S. Fuld, Jr.
Class C
Loretta E. Lynch
Jerry I. Speyer
John E. Sexton
President; Chief Executive Officer, and Chairman,
The Adirondack Trust Company,
Saratoga Springs, New York
Chairman, Citigroup Inc., New York, New York
Chairman and Chief Executive Officer,
The Depository Trust Company,
New York, New York
2005
Maurice P. During Professor of Demographic Studies,
Princeton University, Princeton, New Jersey
President, New York State AFL-CIO,
New York, New York
Chairman and Chief Executive Officer,
Lehman Brothers, New York, New York
2005
Partner, Hogan & Hartson LLP, New York, New York
President and Chief Executive Officer, Tishman Speyer,
New York, New York
President, New York University, New York, New York
2005
2006
2006
2007
2006
2007
2007
238 92nd Annual Report, 2005
Directors—Continued
BANK or BRANCH, Category
Name
Titlp
1 lllC
Term expires
Dec. 31
BUFFALO BRANCH
Appointed by the
Federal Reserve Bank
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
President and Chief Operating Officer,
Emerson L. Bramback
Manufacturers and Traders Trust Company,
Buffalo, New York
Appointed by the
Board of Governors
Brian J. Lipke
Chairman and Chief Executive Officer, Gibraltar,
Buffalo, New York
Alphonso O'Neil-White .... President and Chief Executive Officer,
HealthNow New York Inc., Buffalo, New York
Marguerite D. Hambleton .. President and Chief Executive Officer,
AAA Western and Central New York,
Williamsville, New York
2005
2006
2006
2007
2005
2006
2007
DISTRICT 3—PHILADELPHIA
RESERVE BANK
Class A
Kenneth R. Shoemaker
Eugene W. Rogers
Wayne R.Weidner
President and Chief Executive Officer, Orrstown Bank,
Shippensburg, Pennsylvania
Chief Executive Officer, Newfield National Bank,
Newfield, New Jersey
Chairman, National Penn Bank,
Boyertown, Pennsylvania
Class B
Robert E. Chappell
Chairman and Chief Executive Officer, Penn Mutual
Life Insurance Company, Horsham, Pennsylvania
President and Chief Executive Officer, A. Pomerantz &
Garry L. Maddox
Company, Philadelphia, Pennsylvania
P. Coleman Townsend, Jr. .. Chairman and Chief Executive Officer, Townsends, Inc.
Wilmington, Delaware
Class C
Ronald J. Naples
William F.Hecht
Doris M. Damm
Chairman and Chief Executive Officer, Quaker
Chemical Corporation, Conshohocken, Pennsylvania
Chairman and Chief Executive Officer,
PPL Corporation, Allentown, Pennsylvania
President and Chief Executive Officer, ACCU Staffing
Services, Cherry Hill, New Jersey
2005
2006
2007
2005
2006
2007
2005
2006
2007
Federal Reserve System Organization 239
BANK or BRANCH, Category
Name
line
Term expires
Dec. 31
DISTRICT 4—CLEVELAND
RESERVE BANK
Class A
Bick Weissenrieder
Stephen P. Wilson
Henry L. Meyer III
Class B
Tanny B. Crane
V. Ann Hailey
Les C. Vinney
Class C
Phillip R. Cox
Robert W. Mahoney
Charles E. Bunch
Chairman of the Board and Chief Executive Officer,
Hocking Valley Bank, Athens, Ohio
President and Chief Executive Officer,
Lebanon Citizens National Bank, Lebanon, Ohio
Chairman of the Board and Chief Executive Officer,
KeyCorp, Cleveland, Ohio
2005
President and Chief Executive Officer,
Crane Group Company, Columbus, Ohio
Executive Vice President and Chief Financial Officer,
Limited Brands, Columbus, Ohio
President and Chief Executive Officer,
STERIS Corporation, Mentor, Ohio
2005
President and Chief Executive Officer, Cox Financial
Corporation, Cincinnati, Ohio
Retired Chairman and Chief Executive Officer,
Diebold, Incorporated, North Canton, Ohio
Chairman and Chief Executive Officer,
PPG Industries, Inc., Pittsburgh, Pennsylvania
2005
Executive Secretary-Treasurer, Cincinnati AFL-CIO
Labor Council, Cincinnati, Ohio
President, Lexington Market, JPMorgan Chase
Bank, NA, Lexington, Kentucky
President and Chief Executive Officer, Great Lakes
Bankers Bank, Gahanna, Ohio
President, Czar Coal Corporation, Lovely, Kentucky
2005
President and Chief Executive Officer, Cincinnati
Children's Hospital Medical Center,
Cincinnati, Ohio
Retired President, Ashland Inc. Foundation,
Covington, Kentucky
Senior Vice President, Western and Southern Financial
Group, Cincinnati, Ohio
2005
2006
2007
2006
2007
2006
2007
CINCINNATI BRANCH
Appointed by the
Federal Reserve Bank
V. Daniel Radford
Glenn D. Leveridge
Charlotte W. Martin
James H. Booth
Appointed by the
Board of Governors
James M. Anderson
Charles Whitehead
Herbert R. Brown
2005
2006
2007
2006
2007
PITTSBURGH BRANCH
Appointed by the
Federal Reserve Bank
Vacancy
Georgiana N. Riley
President and Chief Executive Officer,
TIGG Corporation, Bridgeville, Pennsylvania
2005
2005
240 92nd Annual Report, 2005
Directors—Continued
BANK or BRANCH, Category
Name
Kristine N. Molnar
Michael J. Hagan
Appointed by the
Board of Governors
Roy W.Haley
James I. Mitnick
Robert O. Agbede
Title
Term expires
Dec. 31
Executive Vice President, WesBanco Bank, Inc.,
Wheeling, West Virginia
President and Chief Executive Officer,
Iron and Glass Bank, Pittsburgh, Pennsylvania
2006
Chairman and Chief Executive Officer,
WESCO International, Inc., Pittsburgh, Pennsylvania
Senior Vice President, Turner Construction Company,
Pittsburgh, Pennsylvania
President and Chief Executive Officer,
ATS-Chester Engineers, Inc.,
Pittsburgh, Pennsylvania
2005
2007
2006
2007
DISTRICT 5—RICHMOND
RESERVE BANK
Class A
Barry J. Fitzpatrick
Ernest J. Sewell
Kathleen Walsh Carr
Class B
W. Henry Harmon
Kenneth R. Sparks
Harry M. Lightsey, HI
Class C
Thomas J. Mackell, Jr.
Lemuel E. Lewis
Theresa M. Stone
Chairman, Branch Banking & Trust Co. of Virginia,
Falls Church, Virginia
Senior Advisor, FNB Southeast,
Greensboro, North Carolina
President, Cardinal Bank Washington, Washington, D.C
2005
President and Chief Executive Officer,
Triana Energy, Inc., Charleston, West Virginia
President and Chief Executive Officer,
Ken Sparks Associates LLC, White Stone, Virginia
State President—South Carolina, BellSouth,
Columbia, South Carolina
2005
Director, National Investment Managers, Inc.,
Warrenton, Virginia
Executive Vice President and Chief Financial Officer,
Landmark Communications, Inc.,
Norfolk, Virginia
Chief Financial Officer, Jefferson-Pilot Corporation;
President, Jefferson-Pilot Communications Company,
Greensboro, North Carolina
2005
Director, Economic and Workforce Development,
Towson University, Towson, Maryland
President, C. J. Langenfelder & Son, Inc.,
Baltimore, Maryland
Chairman and President, Community Bank
of Tri-County, Waldorf, Maryland
2005
2006
2007
2006
2007
2006
2007
BALTIMORE BRANCH
Appointed by the
Federal Reserve Bank
Dyan Brasington
Kenneth C. Lundeen
Michael L. Middleton
2006
2006
Federal Reserve System Organization 241
BANK or BRANCH, Category
Name
Donald P. Hutchinson
Appointed by the
Board of Governors
Cynthia Collins Allner
William C. Handorf
William R. Roberts
Title
Term expires
Dec. 31
President and Chief Executive Officer,
SunTrust Bank, Maryland, Baltimore, Maryland
2007
Principal, Miles & Stockbridge P.C.,
Baltimore, Maryland
Professor of Finance, George Washington University,
Washington, D.C.
President, Verizon Maryland Inc., Baltimore, Maryland
2005
Visiting Fellow, Duke University,
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
President and Chief Executive Officer,
First South Bancorp, Inc.,
Spartanburg, South Carolina
2005
Counsel, Parker Poe Adams & Bernstein LLP,
Charlotte, North Carolina
Dealer Operator (Retired), Crown Automotive,
High Point, North Carolina
President, Winthrop University,
Rock Hill, South Carolina
2005
2006
2007
CHARLOTTE BRANCH
Appointed by the
Federal Reserve Bank
Lucy J. Reuben
Michael C. Miller
Donald K. Truslow
Barry L. Slider
Appointed by the
Board of Governors
Michael A. Almond
Jim Lowry
Anthony J. DiGiorgio
2006
2006
2007
2006
2007
DISTRICT 6—ATLANTA
RESERVE BANK
Class A
Richard G. Hickson
William G. Smith, Jr.
James F. Beall
Class B
Egbert L.J. Perry
Teri G. Fontenot
Lee M. Thomas
Chairman and Chief Executive Officer, Trustmark
Corporation, Jackson, Mississippi
Chairman, President, and Chief Executive Officer,
Capital City Bank Group, Inc., Tallahassee, Florida
Chairman, President, and Chief Executive Officer,
Farmers & Merchants Bank, Centre, Alabama
2005
Chairman and Chief Executive Officer,
The Integral Group, LLC, Atlanta, Georgia
President and Chief Executive Officer,
Woman's Hospital, Baton Rouge, Louisiana
President and Chief Operating Officer,
Georgia-Pacific Corporation, Atlanta, Georgia
2005
2006
2007
2006
2007
242 92nd Annual Report, 2005
Directors—Continued
BANK or BRANCH, Category
Name
Class C
V. Larkin Martin
D. Scott Davis
David M. Ratcliffe
Title
Term expires
Dec. 31
Managing Partner, Martin Farm, Courtland, Alabama
Chief Financial Officer, United Parcel Service,
Atlanta, Georgia
Chairman, President, and Chief Executive Officer,
Southern Company, Atlanta, Georgia
2005
2006
Chairman and Chief Executive Officer, Alabama
National Bancorporation, Birmingham, Alabama
Business Manager, International Union of Operating
Engineers—Local 312, Birmingham, Alabama
Managing Partner, Lewis Properties, LLC and Anderson
Investments, LLC, Athens, Alabama
Monroeville Chairman and President, BankTrust,
Monroeville, Alabama
2005
Chairman of the Board, HOME Place Farms, Inc.,
. Prattville, Alabama
President, Welborn and Associates, Inc.,
Lookout Mountain, Tennessee
President, Ram Tool and Supply Company, Inc.,
Birmingham, Alabama
2005
Chairman of Alachua County Community Board,
Capital City Bank, Alachua, Florida
President and Chief Executive Officer,
MacDill Federal Credit Union, Tampa, Florida
President, E.T. Consultants, Winter Park, Florida
President, Amelia Island Plantation Company,
Amelia Island, Florida
2005
President and Founder, US-Africa Free Enterprise
Education Foundation, Tampa, Florida
President and Chief Executive Officer,
Prudential Network Realty, Jacksonville, Florida
President and Chief Executive Officer,
AmStaff Human Resources, Inc., Pensacola, Florida
2005
2007
BIRMINGHAM BRANCH
Appointed by the
Federal Reserve Bank
John H. Holcomb III
Samuel F. Dodson
Bobby A. Bradley
John B. Barnett HI
Appointed by the
Board of Governors
James H. Sanford
W. Miller Welborn
Maryam B. Head
2006
2006
2007
2006
2007
JACKSONVILLE BRANCH
Appointed by the
Federal Reserve Bank
Jerry M. Smith
Robert L. Fisher
Ellen S. Titen
Jack B. Healan, Jr.
Appointed by the
Board of Governors
Fassil Gabremariam
Linda H. Sherrer
H. Britt Landram, Jr.
2006
2006
2007
2006
2007
Federal Reserve System Organization 243
BANK or BRANCH, Category
Name
Title
Term expires
Dec. 31
MIAMI BRANCH
Appointed by the
Federal Reserve Bank
Francis V. Gudorf
Joseph C. Schwartzel
Miriam Lopez
Dennis S. Hudson III
Appointed by the
Board of Governors
Edwin A. Jones, Jr.
Brian E. Keeley
Gay Rebel Thompson
President/Executive Director, Jubilee Community
Development Corporation, Miami, Florida
President, Meridian Broadcasting, Inc.,
Fort Myers, Florida
Chairman and Chief Executive Officer,
TransAtlantic Bank, Miami, Florida
Chairman and Chief Executive Officer, Seacoast
Banking Corporation of Florida, Stuart, Florida
2005
President, Angus Investments, Inc.,
Port St. Lucie, Florida
President and Chief Executive Officer,
Baptist Health South Florida, Coral Gables, Florida
President and Chief Executive Officer,
Cement Industries, Inc., Fort Myers, Florida
2005
Chairman, First National Bank, Oneida, Tennessee
President and Chief Executive Officer,
Standard Candy Company, Inc., Nashville, Tennessee
Senior Vice President, North American Manufacturing
and Quality Assurance, Nissan North America, Inc.,
Smyrna, Tennessee
Chairman and Chief Executive Officer,
Cavalry Banking, Murfreesboro, Tennessee
2005
2006
Chief Executive Officer, Star Transportation, Inc.,
Nashville, Tennessee
Vice Chancellor and General Counsel,
Vanderbilt University, Nashville, Tennessee
President and Chief Executive Officer,
St. Mary's Health System, Knoxville, Tennessee
2005
President and Chief Executive Officer,
MidSouth Bank, Lafayette, Louisiana
President, U.S. Consumer Foods, McCormick &
Company, Incorporated, Baltimore, Maryland
Partner, SSA Consultants, LLC, Baton Rouge, Louisianai
Chairman and Chief Executive Officer,
The First Bancshares, Inc., and
The First, A National Banking Association,
Hattiesburg, Mississippi
2005
2005
2006
2007
2006
2007
NASHVILLE BRANCH
Appointed by the
Federal Reserve Bank
Michael B. Swain
James W. Spradley, Jr.
Daniel A. Gaudette
Ed C. Loughry, Jr.
Appointed by the
Board of Governors
Beth Dortch Franklin
David Williams II
Debra K. London
2006
2007
2006
2007
NEW ORLEANS BRANCH
Appointed by the
Federal Reserve Bank
C.R. Cloutier
Lawrence E. Kurzius
Christel C. Slaughter
David E. Johnson
2006
2006
2007
244 92nd Annual Report, 2005
Directors—Continued
BANK or BRANCH, Category
Name
Appointed by the
Board of Governors
EarlL.Shipp
BenTomRoberts
Dave Dennis
llllc
Global Business Vice President for Oxides and Glycols,
The Dow Chemical Company, Midland, Michigan
President, Roberts Brothers Commercial and Property
Management, Inc., Realtors, Mobile, Alabama
President and Chief Executive Officer,
Specialty Contractors & Assoc., Inc.,
Gulfport, Mississippi
Term expires
Dec. 31
2005
2006
2007
DISTRICT 7—CHICAGO
RESERVE BANK
Class A
William A. Osborn
Michael L. Kubacki
JeffPlagge
Class B
Connie E. Evans
Mark T. Gafrhey
Mindy C. Meads
Class C
John A. Canning, Jr.
W. James Farrell
MilesD.White
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
President and Chief Executive Officer, The First
National Bank of Waverly, Waverly, Iowa
2005
President and Chief Executive Officer, WSEP Ventures,
Chicago, Illinois
President, Michigan AFL-CIO, Lansing, Michigan
Former President and Chief Executive Officer,
Lands' End, Inc., Dodgeville, Wisconsin
2005
Chairman and Chief Executive Officer,
Madison Dearborn Partners, Inc., Chicago, Illinois
Chairman, Illinois Tool Works, Inc., Glenview, Illinois
Chairman and Chief Executive Officer,
Abbott Laboratories, Abbott Park, Illinois
2005
Chief Operating Officer, Compuware Corporation,
Detroit, Michigan
Director of Housing & Community Development,
Kent County Community Development Department
& Housing Commission, Grand Rapids, Michigan
Chairman, President, and Chief Executive Officer,
Comerica Incorporated, Detroit, Michigan
President and Chief Executive Officer,
Independent Bank Corporation, Ionia, Michigan
2005
Board Director, Ford Motor Company,
Dearborn, Michigan
2005
2006
2007
2006
2007
2006
2007
DETROIT BRANCH
Appointed by the
Federal Reserve Bank
Tommi A. White
Linda S. Likely
Ralph W.Babb, Jr.
Michael M. Magee, Jr.
Appointed by the
Board of Governors
Edsel B. Ford II
2005
2006
2007
Federal Reserve System Organization 245
BANK or BRANCH, Category
Name
Roger A. Cregg
IrvinD.Reid
Title
Executive Vice President and Chief Financial Officer,
Pulte Homes, Inc., Bloomfield Hills, Michigan
President, Wayne State University, Detroit, Michigan
Term expires
Dec. 31
2006
2007
DISTRICT 8—ST. LOUIS
RESERVE BANK
Class A
Lunsford W. Bridges
David R. Pirsein
Lewis F. Mallory, Jr.
Class B
Vacancy
A. Rogers Yarnell, II
Paul T. Combs
Class C
Gayle RW. Jackson
Walter L. Metcalfe, Jr.
Irl F. Engelhardt
President and Chief Executive Officer,
Metropolitan National Bank, Little Rock, Arkansas
President and Chief Executive Officer, First National
Bank in Pinckneyville, Pinckneyville, Illinois
Chairman and Chief Executive Officer,
NBC Capital Corporation, Starkville, Mississippi
President, Yarnell Ice Cream Company, Inc.,
Searcy, Arkansas
President, Baker Implement Company,
Kennett, Missouri
2005
2006
2007
2005
2006
2007
Managing Director, FondElec Clean Energy Group, Inc.,
St. Louis, Missouri
Partner, Bryan Cave LLP, St. Louis, Missouri
Chairman and Chief Executive Officer, Peabody Energy,
St. Louis, Missouri
2005
President and Chief Executive Officer, First State Bank,
Lonoke, Arkansas
Chairman, President, and Chief Executive Officer,
Arkansas Best Corporation, Fort Smith, Arkansas
Retired Regional President, U.S. Bank,
North Little Rock, Arkansas
Executive Director, The Downtown Partnership,
Little Rock, Arkansas
2005
Chief Executive Officer, Baxter Regional Medical
Center, Mountain Home, Arkansas
President and Chief Executive Officer,
ALLTEL Corporation, Little Rock, Arkansas
Chief Executive Officer, E-Z Mart Stores, Inc.,
Texarkana, Texas
2005
Executive Director and Chief Executive Officer,
Welborn Foundation, Evansville, Indiana
2005
2006
2007
LITTLE ROCK BRANCH
Appointed by the
Federal Reserve Bank
David R.Estes
Robert A. Young III
Raymond E. Skelton
Sharon Priest
Appointed by the
Board of Governors
Stephen M. Erixon
Scott T. Ford
Sonja Yates Hubbard
2005
2006
2007
2006
2007
LOUISVILLE BRANCH
Appointed by the
Federal Reserve Bank
Marjorie Z. Soyugenc
246 92nd Annual Report, 2005
Directors—Continued
BANK or BRANCH, Category
Name
L. Clark Taylor, Jr.
Gordon B. Guess
Steven E. Trager
Appointed by the
Board of Governors
John L. Huber
Norman E. Pfau, Jr.
Cornelius A. Martin
1 lllC
Term expires
Dec. 31
Chief Executive Officer, Ephraim McDowell Health,
Danville, Kentucky
Chairman, President, and Chief Executive Officer,
The Peoples Bank, Marion, Kentucky
Chairman and Chief Executive Officer, Republic
Bank & Trust Company, Louisville, Kentucky
2005
President and Chief Executive Officer,
Louisville Water Company, Louisville, Kentucky
President and Chief Executive Officer,
Geo. Pfau's Sons Company, Inc.,
Jeffersonville, Indiana
President and Chief Executive Officer, Martin
Management Group, Bowling Green, Kentucky
2005
Chairman, President, and Chief Executive Officer,
Decatur County Bank, Decaturville, Tennessee
President, Regions Bank, Memphis, Tennessee
President and Chief Executive Officer, Community
Development Foundation, Tupelo, Mississippi
President, Southern Hardware Company, Inc.,
West Helena, Arkansas
2005
Vice President, Marketing, Staple Cotton Cooperative
Association, Greenwood, Mississippi
President, Gwatney Companies, Memphis, Tennessee
Owner and Chief Executive Officer, Gibson Companies,
Memphis, Tennessee
2005
2006
2007
2006
2007
MEMPHIS BRANCH
Appointed by the
Federal Reserve Bank
James A. England
Levon Mathews
David P. Rumbarger, Jr.
Thomas G. Miller
Appointed by the
Board of Governors
Meredith B. Allen
Russell Gwatney
J.W.GibsonH
2005
2006
2007
2006
2007
DISTRICT 9—MINNEAPOLIS
RESERVE BANK
Class A
Robert Dickson
Douglas C. Morrison
John H. Hoeven, Jr.
Class B
Randy Peterson
D. Greg Heineman
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
Chairman, First Western Bank & Trust,
Minot, North Dakota
2005
General Manager, Precision Edge Surgical
Products Co., LLC, Sault Ste. Marie, Michigan
Chairman, Williams Insurance Agency,
Sioux Falls, South Dakota
2005
2006
2007
2006
Federal Reserve System Organization 247
BANK or BRANCH, Category
Name
Todd L. Johnson
Class C
Linda Hall Whitman
James J. Hynes
Frank L. Sims
Title
Term expires
Dec. 31
President and Chief Executive Officer,
Reuben Johnson & Son, Inc. & Affiliated Companies,
Superior, Wisconsin
2007
Chief Operating Officer, MinuteClinic,
Minneapolis, Minnesota
Executive Administrator, Twin City Pipe Trades Service
Association, St. Paul, Minnesota
Corporate Vice President, Transportation, Cargill, Inc.,
Wayzata, Minnesota
2005
President and Chief Executive Officer,
The First State Bank of Malta, Malta, Montana
Former Dean and Director, Museum of the Rockies,
Bozeman, Montana
Regional President and Chief Executive Officer,
Wells Fargo Bank Montana, N.A., Billings, Montana
2005
President, Washington Corporations, Missoula, Montana
President and Chief Executive Officer, Wheat Montana
Farms and Bakery, Three Forks, Montana
2005
2006
2006
2007
HELENA BRANCH
Appointed by the
Federal Reserve Bank
RonaldD. Scott
Marilyn F. Wessel
JoyN.Ott
Appointed by the
Board of Governors
Lawrence R. Simkins
Dean Folkvord
2006
2006
DISTRICT 10—KANSAS CITY
RESERVE BANK
Class A
Chief Executive Officer, Dickinson Financial
Corporation, Kansas City, Missouri
Mark W. Schifferdecker . . . . President and Chief Executive Officer, Girard National
Bank, Girard, Kansas
Robert C. Fricke
President and Chief Executive Officer, Farmers &
Merchants National Bank, Ashland, Nebraska
Rick L. Smalley
Class B
Dan L. Dillingham
Kevin K. Nunnink
Frank Moore
Class C
Lu M. Cordova
Robert A. Funk
2005
2006
2007
Chief Executive Officer, Dillingham Insurance,
Enid, Oklahoma
Chairman, Integra Realty Resources, Westwood, Kansas
President, Spearhead Ranch Company,
Douglas, Wyoming
2005
Chief Executive Officer, Corlund Industries;
Chairman, CTEK Angels, Boulder, Colorado
Chairman and Chief Executive Officer,
Express Personnel Services International,
Oklahoma City, Oklahoma
2005
2006
2007
2006
248 92nd Annual Report, 2005
Directors—Continued
BANK or BRANCH, Category
Name
Richard H. Bard
Titlp
1 ltlC
Term expires
Dec. 31
Chairman and Chief Executive Officer,
International Surface Preparation Corporation,
Golden, Colorado
2007
President, CoBiz Bank, N.A., Denver, Colorado
President and Chief Executive Officer,
Unicover Corporation, Cheyenne, Wyoming
Real Estate Broker/Owner, Pearson Real Estate
Co., Inc., Buffalo, Wyoming
President and Chief Executive Officer,
First State Bancorporation,
Albuquerque, New Mexico
2005
2006
DENVER BRANCH
Appointed by the
Federal Reserve Bank
Virginia K. Berkeley
James A. Helzer
John D. Pearson
Michael R. Stanford
Appointed by the
Board of Governors
Kathleen Avila
Thomas Williams
Kristy A. Schloss
Managing Member, Avila Retail Development &
Management, Albuquerque, New Mexico
... President and Chief Executive Officer,
Williams Group LLC, Golden, Colorado
President and Chief Executive Officer,
Schloss Engineered Equipment, Inc.,
Aurora, Colorado
2006
2007
2005
2006
2007
OKLAHOMA CITY BRANCH
Appointed by the
Federal Reserve Bank
Fred M. Ramos
Richard K. Ratcliffe
Robert R. Gilbert, m
Terry M.Almon
Appointed by the
Board of Governors
Michael J. Packnett
Tyree O. Minner
J. Larry Nichols
President, Tulsa Hispanic Chamber of Commerce,
Tulsa, Oklahoma
Chairman, Ratcliffe's Inc., Weatherford, Oklahoma
President and Chief Operating Officer,
The F&M Bank & Trust Company, Tulsa, Oklahoma
President and Chief Executive Officer, Arkansas
Valley State Bank, Broken Arrow, Oklahoma
2005
President and Chief Executive Officer,
Mercy Health System of Oklahoma, Inc.,
Oklahoma City, Oklahoma
Plant Manager, General Motors Assembly Plant,
Oklahoma City, Oklahoma
Chairman and Chief Executive Officer, Devon Energy
Corporation, Oklahoma City, Oklahoma
2005
Retired President and Chief Executive Officer,
Wells Fargo Bank, Nebraska, Omaha, Nebraska
President and Chief Executive Officer, AmeriSphere
Multifamily Finance, LLC, Omaha, Nebraska
2005
2006
2007
2007
2006
2007
OMAHA BRANCH
Appointed by the
Federal Reserve Bank
Judith A. Owen
Rodrigo Lopez
2006
Federal Reserve System Organization 249
B A N K or BRANCH,
Name
Category
line
Chairman, FirsTier Bank, Kimball, Nebraska
Michael J. Nelson
CynthiaHardinMilligan . . . Dean—College of Business Administration,
Term expires
Dec. 31
2006
2007
University of Nebraska-Lincoln, Lincoln, Nebraska
Appointed by the
Board of Governors
James A. Timmerman
Charles R. Hermes
Terry L. Moore
Chief Financial Officer and Secretary/Treasurer,
Timmerman and Sons Feeding Company,
Springfield, Nebraska
President, Dutton-Lainson Company,
Hastings, Nebraska
President, Omaha Federation of Labor,
Omaha, Nebraska
2005
2006
2007
DISTRICT 11—DALLAS
RESERVE BANK
Class A
Richard W. Evans, Jr.
Matthew T. Doyle
David S. Barnard
Class B
Malcolm Gillis
Judy Ley Allen
Robert A. Estrada
Class C
Patricia M. Patterson
Anthony R. Chase
RayL.Hunt
Chairman and Chief Executive Officer,
Cullen/Frost Bankers, Inc., San Antonio, Texas
Vice Chairman and Chief Executive Officer,
Texas First Bank, Texas City, Texas
Chairman and Chief Executive Officer,
National Banks of Central Texas, Gatesville, Texas
2005
University Professor and Zingler Professor
of Economics, Rice University, Houston, Texas
Partner, Allen Investments, Houston, Texas
Chairman and Chief Executive Officer,
Estrada Hinojosa & Company, Inc., Dallas, Texas
2005
President, Patterson Investments, Inc., Dallas, Texas
Chairman and Chief Executive Officer, ChaseCom, LP,
Houston, Texas
Chairman, President, and Chief Executive Officer,
Hunt Consolidated, Inc., Dallas, Texas
2005
2006
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 Limited, El Paso, Texas
Regional President, State National Bank, El Paso, Texas
2005
Owner, Helm Land and Cattle Company,
Van Horn, Texas
Provost, New Mexico State University,
Las Cruces, New Mexico
2005
2006
2007
2006
2007
2007
EL PASO BRANCH
Appointed by the
Federal Reserve Bank
Pete Cook
Fred J. Loya
Gerald J. Rubin
F. James Volk
Appointed by the
Board of Governors
Ron C. Helm
William V. Flores
2005
2006
2007
2006
250 92nd Annual Report, 2005
Directors—Continued
BANK or BRANCH, Category
Name
Cecilia Ochoa Levine
Tttlp
1111C
Term expires
Dec. 31
President, MFI International Mfg., LLC,
El Paso, Texas
2007
President, Texas Southern University, Houston, Texas
Chairman, President, and Chief Executive Officer,
DX Service Company, Inc., Houston, Texas
Chairman and Chief Executive Officer,
The First National Bank of Bryan, Bryan, Texas
Senior Vice President, First Albany Capital, Inc.,
Houston, Texas
2005
2005
Chairman and Chief Executive Officer, Tejas Office
Products, Inc., Houston, Texas
President and Chief Executive Officer, Tanox, Inc.,
Houston, Texas
President and Chief Executive Officer,
Anadarko Petroleum Corporation, Houston, Texas
2005
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
Chairman & Chief Executive Officer, Broadway
National Bank, San Antonio, Texas
2005
Chairman and Chief Executive Officer,
Richter Architects, Corpus Christi, Texas
President, Southwest Research Institute,
San Antonio, Texas
President, The University of Texas at San Antonio,
San Antonio, Texas
2005
HOUSTON BRANCH
Appointed by the
Federal Reserve Bank
Priscilla D. Slade
S. Reed Morian
Timothy N. Bryan
Jodie L. Jiles
Appointed by the
Board of Governors
Lupe Fraga
Nancy T. Chang
James T. Hackett
2006
2007
2006
2007
SAN ANTONIO BRANCH
Appointed by the
Federal Reserve Bank
MattF. Gorges
Daniel B. Hastings, Jr.
Steven R. Vandegrift
James D. Goudge
Appointed by the
Board of Governors
Elizabeth Chu Richter
J.DanBates
RicardoRomo
2005
2006
2007
2006
2007
DISTRICT 12—SAN FRANCISCO
RESERVE BANK
Class A
Candace Hunter Wiest
Vacancy
Richard W. Decker, Jr.
President, Inland Empire National Bank,
Riverside, California
Chairman and Co-Founder, Belvedere Capital
Partners, LLC, San Francisco, California
2005
2006
2007
Federal Reserve System Organization 251
BANK or BRANCH, Category
Name
Class B
Karla S. Chambers
Barbara L. Wilson
Jack McNally
Class C
George M. Scalise
T. Gary Rogers
David K.Y. Tang
1 lllc
Term expires
Dec. 31
Vice President, Stahlbush Island Farms, Inc.,
Corvallis, Oregon
Consultant; and Regional Vice President (Retired),
Qwest Communications, Boise, Idaho
Principal, JKM Consulting, Sacramento, California
2005
President, Semiconductor Industry Association,
San Jose, California
Chairman and Chief Executive Officer,
Dreyer's Grand Ice Cream, Inc., Oakland, California
Partner, Preston Gates & Ellis LLP, Seattle, Washington
2005
Managing Partner, Thomas & Mack Company,
Las Vegas, Nevada
President and Chief Executive Officer,
Citizens Business Bank, Ontario, California
President and Chief Executive Officer,
Frieda's, Inc., Los Alamitos, California
Chairman, President, and Chief Executive Officer,
East West Bank, San Marino, California
2005
Executive Director, Esperanza Community Housing
Corporation, Los Angeles, California
President, Anita Santiago Advertising,
Santa Monica, California
Corporate Vice President and Treasurer, Northrop
Grumman Corporation, Los Angeles, California
2005
2006
2007
2006
2007
Los ANGELES BRANCH
Appointed by the
Federal Reserve Bank
Peter M. Thomas
D. Linn Wiley
Karen B. Caplan
Dominic Ng
Appointed by the
Board of Governors
Diane Donoghue
Anita Santiago
James L. Sanford
2006
2006
2007
2006
2007
PORTLAND BRANCH
Appointed by the
Federal Reserve Bank
William D. Thorndike, Jr. .. President, Medford Fabrication, Medford, Oregon
George J. Puentes
President, Don Pancho Authentic Mexican Foods, Inc.,
Salem, Oregon
Robert D. Sznewajs
President and Chief Executive Officer,
West Coast Bancorp, Lake Oswego, Oregon
Alan V. Johnson
Regional President for Oregon and Southwest
Washington, Wells Fargo Bank, Portland, Oregon
Appointed by the
Board of Governors
Peter O. Kohler
Vacancy
President, Oregon Health & Science University,
Portland, Oregon
2005
2005
2006
2007
2005
2006
252 92nd Annual Report, 2005
Directors—Continued
BANK or BRANCH, Category
Name
JamesH.Rudd
Title
Term expires
Dec. 31
Chief Executive Officer and Principal, Ferguson
Wellman Capital Management, Inc., Portland, Oregon
2007
President and Chief Executive Officer, Zions Bank,
Salt Lake City, Utah
President and Chief Executive Officer,
United Way of Salt Lake, Salt Lake City, Utah
Vice President, Strategic Initiatives Uniprise,
UnitedHealth Group, Salt Lake City, Utah
President and Chief Executive Officer,
Farmers & Merchants State Bank, Boise, Idaho
2005
Chairman, The Boyer Company, Salt Lake City, Utah
President, Intermountain Industries, Inc., Boise, Idaho
Chairman of the Board, Merrimack Pharmaceuticals,
Salt Lake City, Utah
2005
2006
2007
SALT LAKE CITY BRANCH
Appointed by the
Federal Reserve Bank
A. Scott Anderson
Deborah Bayle Nielsen
Annette K. Herman
Michael M. Mooney
Appointed by the
Board of Governors
H. Roger Boyer
William C. Glynn
Gary L. Crocker
2005
2006
2007
SEATTLE BRANCH
Appointed by the
Federal Reserve Bank
President, Pugh Capital Management, Inc.,
Seattle, Washington
Kenneth M. Kirkpatrick . . . . President, Washington State, U.S. Bank,
Seattle, Washington
Helvi K. Sandvik
President, NANA Development Corp.,
Anchorage, Alaska
President, Nordstrom, Inc., Seattle, Washington
Blake W. Nordstrom
MaryE.Pugh
Appointed by the
Board of Governors
James R. Gill
David W.Wyckoff
Mic R. Dinsmore
President, Pacific Northwest Title Holding Co.,
Seattle, Washington
Chairman and Chief Executive Officer,
Wyckoff Farms, Inc., Grandview, Washington
Chief Executive Officer, Port of Seattle,
Seattle, Washington
2005
2005
2006
2007
2005
2006
2007
Members of the Board of Governors, 1913-2005 253
Members of the Board of Governors, 1913-2005
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
WaylandWMagee
Eugene R. Black
M.S. Szymczak
JJ. 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 dates1
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.
Atlanta
Aug. 10, 1914 Term expired Aug. 9,1922.
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.
Chicago
Mar. 14,1923 Died Mar. 22, 1923.
Resigned Sept. 15,1927.
Cleveland
May 1, 1923
St. Louis
May 14, 1923 Reappointed in 1931. Served until Feb. 3,
1936.3
Chicago
May 14, 1923 Died Nov. 28,1930.
Minneapolis
Oct. 4, 1927
Resigned Aug. 31, 1930.
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.
Kansas City
June 14,1933 Served until Feb. 10,1936. 2
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.
June 25, 1936 Reappointed in 1940. Resigned Apr. 15,
Richmond
1941.
New York
Mar. 30,1938 Served until Sept. 1, 1950.2
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
254 92nd Annual Report, 2005
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. Coldwell
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.
Resigned August 31,2005.
Resigned June 21, 2005.
Members of the Board of Governors, 1913-2005
255
Appointed Members—Continued
Name
Term
Chairmen3
Charles S. Hamlin
W.RG. 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. 31,1948 4
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, 193^-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.
256 92nd Annual Report, 2005
Ex OfiBcio Members
Name
Term
Secretaries of the Treasury
W.G. McAdoo
Carter Glass
David F. Houston
Andrew W. Mellon
OgdenL. 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
M a y l l , 1933-Feb. 1,1936
Statistical Tables
258
92nd Annual Report, 2005
1. Federal Reserve Open Market Transactions, 2005
Millions of dollars
Type of security and transaction
Jan.
Feb.
Mar.
Apr.
Outright transactions2
Treasury bills
Gross purchases
Gross sales
Exchanges
For new bills
Redemptions
0
0
62,448
62,448
0
35
0
66,741
66,741
0
0
0
78,822
78,822
0
0
0
63,637
63,637
0
Others within 1 year
Gross purchases
Gross sales
Maturity shifts
Exchanges
Redemptions
0
0
6,928
-8,000
0
0
0
2,989
-12,710
333
0
0
8,334
-8,000
211
0
0
0
0
0
1 to 5 years
Gross purchases
Gross sales
Maturity shifts
Exchanges
0
0
-6,928
5,000
0
0
3,180
11,498
0
0
-8,334
8,000
1,200
0
0
0
5 to 10 years
Gross purchases
Gross sales
Maturity shifts
Exchanges
oooo
0
0
-3,112
1,212
0
0
0
0
470
0
0
0
0
0
0
3,000
0
0
-3,058
0
0
0
0
0
230
0
0
0
ooo
U.S. TREASURY SECURITIES1
35
0
333
0
0
111
1,900
0
0
-298
-211
1,900
More than 10 years
Gross purchases
Gross sales
Maturity shifts
Exchanges
All maturities
Gross purchases
Gross sales
Redemptions
Net change in U.S. Treasury securities . . . .
For notes see end of table.
Statistical Tables 259
1.—Continued
May
June
July
Aug.
Sept.
Oct.
Nov.
1,760
0
70,894
70,894
0
250
0
91,408
91,408
0
0
0
68,438
68,438
0
2,751
0
66,899
66,899
0
1,992
0
87,522
87,522
0
1,023
0
68,397
68,397
0
489
0
65,570
65,570
0
0
0
80,886
80,886
0
8,300
0
871,661
871,661
0
0
0
23,149
-26,036
0
0
0
7,997
-6,667
1,305
0
0
0
0
0
1,298
0
26,261
-18,253
757
0
0
7,999
-6,585
0
500
0
11,700
-6,551
0
1,096
0
14,200
-15,297
189
0
0
0
0
0
2,894
0
109,557
-108,098
2,795
2,295
0
-19,402
23,565
0
0
-7,997
6,667
0
0
0
0
1,390
0
-20,702
16,781
3,635
0
-7,999
6,585
1,693
0
-11,700
6,551
1,096
0
-11,240
13,077
0
0
0
0
11,309
0
-91,121
97,723
898
0
-1,277
2,471
340
0
0
0
0
0
0
0
988
0
-2,919
1,472
130
0
0
0
0
0
0
0
800
0
266
2,221
0
0
0
0
3,626
0
-7,041
7,375
0
0
-2,471
0
785
0
0
0
0
0
0
0
0
0
-2,640
0
90
0
0
0
902
0
0
0
0
0
-3,227
0
0
0
0
0
2,007
0
-11,395
3,000
4,953
0
0
1,375
0
1,305
0
0
0
6,427
0
757
5,847
0
0
4,118
0
0
3,481
0
189
0
0
0
28,136
0
2,795
4,953
70
0
5,670
5,847
4,118
3,292
0
25,341
Dec.
Total
260 92nd Annual Report, 2005
1. Federal Reserve Open Market Transactions, 2005—Continued
Millions of dollars
Type of security and transaction
Jan.
Feb.
Apr.
Mar.
FEDERAL AGENCY OBLIGATIONS
Outright transactions2
Gross purchases
Gross sales
Redemptions
0
0
0
0
0
0
0
0
0
0
0
0
Repurchase agreements3
Gross purchases
Gross sales
148,500
152,750
125,250
120,250
201,500
204,250
163,500
167,000
Reverse repurchase agreements4
Gross purchases
Gross sales
563,559
559,501
490,482
488,781
581,322
580,402
505,211
507,649
-193
6,700
-1,831
-5,938
-193
6,402
-2,041
-4,038
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 261
1.—Continued
May
June
July
Aug.
Nov.
Oct.
Sept.
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
186,250
179,000
173,250
173,500
201,750
200,750
200,750
200,750
187,300
197,050
145,250
147,000
140,750
129,500
223,000
211,500
2,097,050
2,083,300
547,538
546,380
526,972
527,769
531,351
532,647
555,779
554,786
523,085
523,518
509,449
508,709
505,101
508,976
584,950
585,400
6,424,797
6,424,519
8,408
-1,047
-297
993
-10,183
-1,010
7,375
11,050
14,028
13,361
-977
-297
6,662
-4336
3,108
10,667
11,050
39369
262
92nd Annual Report, 2005
2. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities,
December 31, 2003-2005
Millions of dollars
December 31
Change
Description
2004 to
2005
2003 to
2004
666,665
26,399
51,151
179,748
83,222
168,381
76,452
7,622
678
11,367
6,770
136,233
193,559
52,589
67,213
116,443
208,269
54,372
75,765
113,301
180,074
51,312
77,146
19,790
-14,710
-1,783
-8,552
3,142
28,195
3,060
-1,381
271,270
380,118
92,827
262,970
360,830
94,016
244,833
323,361
98,471
8,300
19,288
-1,189
18,137
37,469
-4,455
46,750
35,000
43,750
11,750
-8,750
Matched sale-purchase agreements
Foreign official and international accounts
Dealers
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Reverse repurchase agreements3
Foreign official and international accounts
Dealers
30305
30,116
30,116
0
25,652
25,652
0
389
389
0
4,464
4,464
0
2005
2004
2003
744,215
717,816
187,370
83,900
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
By type
Bills . . .
Notes ..
Bonds ..
FEDERAL AGENCY SECURITIES
Held outright1
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
By issuer
Federal National Mortgage Association ..
TEMPORARY TRANSACTIONS
Repurchase agreements2
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).
30,505
0
2. Cash value of agreements, which are coUateralized
by U.S. government and federal agency securities.
3. Cash value of agreements, which are coUateralized
by U.S. Treasury securities.
Statistical Tables 263
3. Federal Reserve Bank Interest Rates on Loans to Depository Institutions,
December 31, 2005
Reserve Bank
All Federal Reserve Banks
Primary credit1
Secondary credit2
Seasonal credit3
5.25
5.75
4.35
1. Primary credit is available for very short terms as
a backup source of liquidity to depository institutions that
are in generally sound financial condition in the judgment
of the lending Federal Reserve Bank.
2. Secondary credit is available in appropriate circumstances to depository institutions that 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.
264
92nd Annual Report, 2005
4. Reserve Requirements of Depository Institutions, December 31, 2005
Requirements
Type of deposit
Percentage of deposits
Effective date
0
3
10
12-22-05
12-22-05
12-22-05
Nonpersonal time deposits
0
12-27-90
Eurocurrency liabilities
0
12-27-90
Net transaction accounts1
$0 million-$7.8 million2
More than $7.8 million-$48.3 million3
More than $48.3 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 banker's acceptances, and affiliate-issued obligations maturing in seven
days or less. Net transaction accounts are total transaction
accounts less amounts due from other depository institutions and less cash items in the process of collection.
For a more detailed description of these deposit types,
see Form FR 2900 at www.federalreserve.gov/boarddocs/
reportforms/.
2. The amount of net transaction accounts subject to a
reserve requirement ratio of 0 percent (the "exemption
amount" ) is adjusted each year by statute. The exemption amount is adjusted upward by 80 percent of the
previous year's (June 30 to June 30) rate of increase in
total reservable liabilities at all depository institutions.
No adjustment is made in the event of a decrease in such
liabilities.
3. The amount of net transaction accounts subject to a
reserve requirement ratio of 3 percent is the "low reserve
tranche." By statute, the upper limit of the low reserve
tranche is adjusted each year by 80 percent of the previous year's (June 30 to June 30) rate of increase or
decrease in net transaction accounts held by all depository
institutions.
Statistical Tables 265
5. Banking Offices and Banks Affiliated with Bank Holding Companies (BHCs) in the
United States,1 December 31, 2004 and 2005
Commercial banks 2
Type of office
Member
Total
Nonmember
Total
Total
National
Statechartered
savings
banks
State
All banking offices
BANKS
Number, Dec. 31, 2004 ..
7,965
7,591
2,794
1,880
914
4,797
374
Changes during 2005
New banks
Banks converted
into branches
Ceased banking
operation3
Other4
Net change
173
165
29
20
9
136
8
-265
-253
-110
-81
-29
-143
-12
-29
0
-121
-20
2
-106
-5
-10
-96
-3
-20
-84
-2
10
-12
-15
12
-10
-9
-2
-15
Number, Dec 31,2005 ..
7,844
7,485
2,698
1,796
902
4,787
359
75,272
71,931
52,329
38,985
13,344
19,602
3341
BRANCHES AND
ADDITIONAL OFFICES
Number, Dec. 31, 2004 ..
Changes during 2005
New branches
Branches converted
from banks
Discontinued3
Other4
Net change
2,256
2,170
1,434
953
481
736
86
265
-2,062
0
459
257
-1,632
250
1,045
146
-1,488
218
310
101
-769
-462
-177
45
-719
680
487
111
-144
32
735
8
-430
-250
-586
Number, Dec. 31, 2005 ..
75,731
72,976
52,639
38,808
13,831
20337
2,755
3,807
115
Banks affiliated with BHCs
BANKS
Number, Dec. 31, 2004 ..
6340
Changes during 2005
BHC-affiliated
new banks
Banks converted
into branches
Ceased banking
operation3
Other4
Net change
170
157
35
26
9
122
13
-226
-221
-98
-74
-24
-123
-5
-23
0
-79
-21
1
-84
-9
-9
-81
-5
-18
-71
-4
9
-10
-12
10
-3
-2
-1
5
Number, Dec 31,2005 ..
6,261
6,141
2337
1,541
796
3,804
120
6,225
1. Includes banking offices and BHCs in U.S. territo2. 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
2,418
1,612
806
of making commercial loans or any institution that is
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).
3. Institutions that no longer meet the Regulation Y
definition of bank.
4. Interclass changes and sales of branches.
266
92nd Annual Report, 2005
6A. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items,
Year-End 1984-2005 and Month-End 2005
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
428343
452319
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
39^00
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
36,434 r
2005
744,215
46,750
72
891
39,319
831,247
11,043
2,200
36,610
For notes see e n d of table.
Statistical Tables 267
6A.—Continued
Factors absorbing reserve funds
Currency
in
circulation
Reverse
repurchase
agreements4
Treasury
cash
holdings5
Deposits with Federal Reserve Banks,
other than reserve balances
Required
clearing
balances
Other
Federal
Reserve
liabilities
and
capital
Reserve
balances
with
Federal
Reserve
Banks 6
Treasury
513
183,796
Foreign
5,316
253
867
1,126
5,952
20,693
1,041
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
17,962
17,083
18,977
19,793
26,378
12,713
8,953
12,008
11,230
14,080
30,466
10,391
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
0
0
Other
917
1,027
548
1,298
242
1,706
372
397
876
932
892
900
1,605
1,261
593,694
643,301
687,518
724,194
754,877 r
450
425
367
321
270
5,149
6,645
4,420
5,723
5,912
216
61
136
162
80
1,382
21,091
25,652
30,783
1,285
6,332
8,525
10,533
11,828
9,963
794,084
30,505
202
4,573
83
2,144
8,652
820
1,152
717
268 92nd Annual Report, 2005
6A. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items,
Year-End 1984-2005 and Month-End 2005—Continued
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Gold
stock
special
drawing
rights
certificate
account
Treasury
currency
outstanding3
11,042
11,042
11,041
11,041
11,042
11,041
11,041
11,041
11,041
11,041
11,041
11,043
2,200
2,200
2,200
2,200
2,200
2,200
2,200
2,200
2,200
2,200
2,200
2,200
36,434
36,546
36,545
36,545
36,545
36,615
36,429
36,429
36,429
36,429
36,540
36,610
Period
Securities
held
outright1
2005
Jan
Feb
Mar.
Apr.
May
June
July
Aug
Sept
Oct
Nov.
Dec
....
....
....
....
....
Repurchase
agreements2
Loans
717,869
717,492
717326
719,350
724,471
724,722
724,699
730380
736360
740,595
744,168
744,215
28,750
33,750
31,000
27,500
34,750
34,500
35,500
35,500
25,750
24,000
35,250
46,750
71
114
52
105
160
235
273
336
910
159
86
72
Float
1,277
3
-1,025
-1,160
-950
-936
-1,205
741
-312
345
886
891
Other
Federal
Reserve
assets
Total
42,094
39,547
40,327
41,882
38,704
39,685
40,781
38,292
38,974
39,909
37,351
39,319
790,061
790,906
787,680
787,676
797,135
798,206
800,048
805,248
801,682
805,008
817,741
831,247
Statistical Tables 269
6A.—Continued
Factors absorbing reserve funds
Currency
in
circulation
Reverse
repurchase
agreements4
Treasury
cash
holdings5
Deposits with Federal Reserve Banks,
other than reserve balances
Treasury
746,746
751,631
754,637
752,786
761,384
764,713
762,035
765,723
766,482
768,130
780,223
794,084
26,726
25,026
24,106
26,544
25,386
26,183
27,480
26,487
26,920
26,180
30,055
30,505
269
263
284
258
275
237
252
262
237
211
204
202
Foreign
121
86
139
126
105
103
83
81
96
88
82
83
313
282
235
318
274
250
297
265
295
315
255
2,144
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 coUateralized by other U.S. Treasury
securities. Federal agency securities are included at face
value.
2. Cash value of agreements, which are coUateralized
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
8,944
8,670
9,514
9,025
8,851
8,278
8,674
8,717
8,864
8,781
8,754
8,652
26,932
27,776
27,862
28,846
29,255
29,095
30,326
30,748
31,015
31,820
31,865
30,466
Other
4,971
4,673
5,219
3,585
5,538
4,373
5,064
5,650
4,381
5,712
4,634
4,573
Required
clearing
balances
Other
Federal
Reserve
liabilities
and
capital
Reserve
balances
with
Federal
Reserve
Banks6
24,715
22,286
15,470
15,975
15,854
14,830
15,508
16,985
13,063
13,440
11,450
10,391
fractional and dollar coins. For details see "Currency and
Coin in Circulation," Treasury Bulletin.
4. Cash value of agreements, which are coUateralized
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.
270
92nd Annual Report, 2005
6B. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items,
Year-End 1918-1983
Millions of dollars
Factors supplying reserve funds
Federal Reserve Bank credit outstanding
Period
Securities
held
outright1
Repurchase
agreements 2
Gold
stock 6
Special
drawing
rights
certificate
account
Treasury
currency
outstanding 7
All
other 4
Other
Federal
Reserve
assets 5
199
201
294
575
0
0
2,498
3,292
2,873
2,707
1,795
1,707
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
632
63
45
63
24
34
378
384
393
500
405
0
0
0
0
0
1,459
1,381
1,655
1,809
1,583
4,112
4,205
4,092
3,854
3,997
1,977
1,991
2,006
2,012
2,022
Loans
Float 3
1,766
2,215
Total
1918
1919
239
300
o
1920
1921
1922
1923
1924
287
234
436
80
536
0
0
0
54
4
2,687
1,144
1925
1926
1927
1928
1929
367
312
560
197
488
8
3
57
31
23
643
637
582
1930
1931
1932
1933
1934
686
775
1,851
2,435
2,430
43
42
4
2
0
251
638
235
98
7
21
20
14
15
5
372
378
41
137
21
0
0
0
0
0
1,373
1,853
2,145
2,688
2,463
4,306
4,173
4,226
4,036
838
2,027
2,035
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
4339
4362
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
0
For notes see e n d of table.
618
723
320
1,056
Statistical Tables 271
6B.—Continued
Factors absorbing reserve funds
Currency
in
circulation
Deposits with
Federal Reserve Banks,
other than reserve balances
Treasury
cash
holdings8
Treasury
Foreign
Member bank
reserves9
Other
Required
Federal
clearing
Reserve
balances
accounts5
Other
Other
Federal
Reserve
liabilities
and
capital5
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
^4
-56
63
-A\
-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
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
607
563
590
106
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
18374
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
11,160
15,410
20,499
25,307
2,213
2,215
2,193
2,303
2,375
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
446
314
569
547
750
-495
821
862
508
392
642
767
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
272
92nd Annual Report, 2005
6B. 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
Other
Federal
Reserve
assets 5
Gold
stock 6
Special
drawing
rights
certificate
account
Treasury
currency
outstanding 7
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
2,300
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
15313
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
80395
84,760
0
335
39
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
76315
78351
86,072
92,208
10,732
10,132
10,410
11367
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
3,688
2,601
3,810
6,432
6,767
1,126
3,312
3,182
2,442
4^43
5,613
102,461
110,892
118,745
131,327
140,705
11399
11398
11,718
11,671
11,172
500
4,031
2,352
1,217
1,660
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
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
1,323
111
100
954
1,981
1,258
1335
211
25
265
299
1,174
1,454
1,809
1,601
717
918
4,467
1,762
2,735
1,605
991
954
587
704
776
195
1,480
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
1. In 1969 and thereafter, includes securities loaned—
fully guaranteed by U.S. government securities pledged
with Federal Reserve Banks—and excludes securities
sold and scheduled to be bought back under matched
sale-purchase transactions. On September 29, 1971, and
thereafter, includes federal agency issues bought outright.
2. On December 1, 1966, and thereafter, includes
federal agency obligations held under repurchase
agreements.
3. In 1960 and thereafter, figures reflect a minor
change in concept; see Federal Reserve Bulletin, vol. 47
(February 1961), p. 164.
418
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
separately.
6. Before January 30, 1934, includes gold held in
Federal Reserve Banks and in circulation.
7. Includes currency and coin (other than gold) issued
directly by the Treasury. The largest components are
fractional and dollar coins. For details see "Currency and
Coin in Circulation," Treasury Bulletin.
Statistical Tables 273
6B.—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
377
422
380
361
612
Foreign
217
279
247
171
229
533
320
393
291
321
668
416
355
588
563
747
807
1,233
Other
Required
Federal
clearing
Reserve
balances
accounts5
Other
485
465
597
880
820
Member bank
reserves9
Other
Federal
Reserve
liabilities
and
capital 5
With
Federal
Reserve
Banks
Currency
and
coin10
Required11
Excess 11 ' 12
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
98 12
-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
-1,10314
-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
41391
39,179
675
-1,442
1,328
-945
42,056
44,663
47,226
50,961
53,950
760
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
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.
274
92nd Annual Report, 2005
7. Principal Assets and Liabilities of Insured Commercial Banks,1 by Class of Bank,
June 30, 2005 and 2004
Millions of dollars, except as noted
Member banks
Item
Total
Total
National
State
Nonmember
banks
2005
ASSETS
6,255,126
4,714,324
4,712,455
1,540,802
4,893,231
3,691,084
3,689,964
1,202,147
3,885,313
2,955,338
2,954,473
929,975
1,007,918
735,746
735,490
272,172
1,361,895
1,023,240
1,022,492
338,655
300,767
1,240,035
262,667
182,541
1,019,606
209,058
120,644
809,331
172,000
61,897
210,275
37,058
118,226
220,430
53,608
4,844,823
80,342
703,015
4,061,466
871,715
Loans and investments
Loans, gross
Net
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total
3,692,187
66,527
504,561
3,121,099
700,401
2,941,844
55,023
396,603
2,490,219
570,411
750,342
11,504
107,958
630,880
12,989
1,152,636
13,816
198,454
940,367
171,314
7,528
2,764
1,861
903
4,764
LIABILITIES
Deposits, total
Interbank
Other transaction
Other nontransaction
Equity capital
Number of banks
:
2004
ASSETS
Loans and investments
Loans, gross
Net
Investments
U.S. Treasury and federal agency
securities
Other
Cash assets, total
5,788,806
4,267,991
4,266,475
1,520,816
4,567,709
3,381,763
3,380,928
1,185,946
3,321,077
2,481,333
2,480,744
839,744
1,246,632
900,430
900,183
346,202
1,221,097
886,228
885,547
334,869
333,738
1,187,078
271,104
212,361
973,585
218,068
122,041
717,703
156,194
90,320
255,882
61,874
121,376
213,493
53,037
4,460,713
68,721
682,017
3,709,976
721,218
3,419,602
54,897
493,695
2,871,010
576,854
2,442,681
37,078
344,248
2,061,355
419,827
976,921
17,819
149,447
809,655
157,027
1,041,111
13,824
188,322
838,966
144,364
7,677
2,885
1,955
930
4,792
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.
1. Includes U.S.-insured commercial banks located in
the United States but not U.S.-insured commercial banks
operating in U.S. territories or possessions.
Statistical Tables 275
8. Initial Margin Requirements under Regulations T, U, and X
Percent of market value
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 ..
Margin
stocks
25^5
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
Convertible
bonds
Short sales
T only1
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.
276
92nd Annual Report, 2005
9. Statement of Condition of the Federal Reserve Banks, by Bank,
December 31, 2005 and 2004
Millions of dollars
Total
Boston
Item
2005
2004
11,039
2,200
11,041
2,200
686
728
72
43
46,750
744,215
0
791,036
6,834
1,827
2005
2004
ASSETS
Gold certificate account
Special drawing rights certificate account
Coin
Loans
To depository institutions
Securities purchased under agreements
to resell (triparty)
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
510
115
31
494
115
19
33,000
717,819
0
750,863
7,964
1,778
38,076
0
38,078
368
112
33,707
0
33,708
457
99
18,928
18,579
0
851,130
21,368
19,004
0
814,946
2,405
792
-3,268
39,143
1,083
1,182
2,979
40,136
906,511
148,152
758,359
30,505
848,370
128,933
719,437
30,783
38,971
4,424
34,548
1,561
38,054
4,137
33,917
1,445
19,043
4,573
83
2,168
25,867
5,943
4,019
824,693
24,043
5,912
80
1,288
31,323
7,038
2,821
791,402
622
0
5
1,068
1,695
488
218
38,510
1,050
0
2
2
1,054
578
151
37,145
13,536
12,901
851,130
11,914
11,630
814,946
317
317
39,143
1,638
1,353
40,136
906,511
148,152
758,359
848,370
128,933
719,437
11,039
2,200
0
745,120
758,359
11,041
2,200
0
706,196
719,437
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
Total liabilities and capital accounts .
FEDERAL RESERVE NOTE STATEMENT
Federal Reserve notes outstanding
Less: Held by Banks not subject to collateralizatio
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 277
9.—Continued
Philadelphia
New York
2005
2004
2005
Richmond
Cleveland
2004
2005
2004
2005
2004
4,357
874
47
4,651
874
42
432
83
34
382
83
56
453
104
55
452
104
52
836
147
66
819
147
62
0
0
0
5
0
0
1
0
46,750
33,000
0
0
0
0
0
0
295,107
0
341,857
625
207
311,256
0
344,256
407
196
26,401
0
26,401
586
53
21,350
0
21,354
360
53
31,439
0
31,439
820
158
30,673
0
30,673
814
157
56,796
0
56,797
225
153
54,557
0
54,558
341
144
5,514
8,740
-45,332
316,889
4,905
9,176
-24,125
340^381
473
672
6,148
34,883
624
530
4,007
27,449
1,712
718
833
36,293
1,757
966
-495
34,479
3,454
1,341
8,521
71,540
5,009
1,337
-420
61,996
327,194
43,521
283,673
12,096
335,998
35,347
300,651
13,348
37,426
6,130
31,296
1,082
32,698
7,973
24,725
916
36,539
5,081
31,457
1,289
34,511
5,408
29,103
1,315
69,647
11,887
57,759
2,328
64,991
12,275
52,716
2,340
6,389
4,573
55
523
11,539
797
1,414
309,519
11,388
5,912
57
527
17,884
651
988
333,522
485
0
1
4
490
363
164
33,395
603
0
1
28
632
490
99
26,861
658
0
4
82
743
581
196
34,266
1,272
0
2
2
1,277
505
149
32,349
3,182
0
7
146
3,336
509
359
64,291
1,645
0
7
169
1,820
544
280
57,700
3,685
3,685
3,430
3,430
744
744
294
294
1,013
1,013
1,065
1,065
3,942
3,307
2,148
2,148
316,889
340381
34,883
27,449
36,293
34,479
71,540
61,996
278 92nd Annual Report, 2005
9. Statement of Condition of the Federal Reserve Banks, by Bank,
December 31, 2005 and 2004—Continued
Millions of dollars
Atlanta
Chicago
Item
2005
2004
2005
2004
ASSETS
Gold certificate account
Special drawing rights certificate account
Coin
Loans
To depository institutions
Securities purchased under agreements
to resell (triparty)
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
945
166
89
894
166
82
928
212
76
924
212
111
27
14
57,576
0
57,583
1,281
232
48,408
0
48,415
637
276
67,020
0
67,047
414
211
64,660
0
64,674
559
157
830
1,276
10,086
72,489
1,181
1,076
9,939
62,666
1,228
1,386
1,908
73,408
2,232
1,374
225
70,469
84,653
19,039
65,614
2,360
74,144
17,376
56,768
2,076
76,740
10,216
66,524
2,747
72,517
9,046
63,470
2,773
1,626
0
2
13
1,641
763
326
70,704
1,722
0
2
56
1,780
796
214
61,634
1,591
0
3
72
1,665
349
371
71,656
1,762
0
3
246
2,011
421
267
68,942
892
892
516
516
876
876
763
763
72,489
62,666
73,408
70,469
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
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.
2. Valued daily at market exchange rates.
3. The System total includes depository institution overdrafts of $2 million for 2005 and $1 million for 2004.
Statistical Tables 279
9.—Continued
2005
2004
2005
2004
2005
San Francisco
Dallas
Kansas City
Minneapolis
St. Louis
2004
2005
2004
2004
2005
327
71
43
325
71
36
212
30
22
218
30
22
318
66
61
302
66
48
549
98
68
525
98
93
1,172
234
94
1,055
234
105
0
2
16
13
11
1
3
0
5
0
0
0
0
0
0
0
0
0
0
0
23,094
0
23,094
217
70
21,089
0
21,090
348
68
15,543
0
15,560
339
119
15,657
0
15,669
512
123
21,050
0
21,060
591
84
18,863
0
18,864
653
82
36,654
0
36,657
535
261
32,729
0
32,729
334
257
75,459
0
75,464
834
165
64,871
0
64,871
2,542
168
379
524
2,010
26,735
551
487
1,401
24^77
409
338
38
17,067
835
351
-969
16,790
246
441
2,422
25,290
392
416
1,584
22,408
217
786
-2,693
36,477
267
716
1,461
36,479
2,062
1,563
19,327
1004)16
2,532
1,395
4,414
77^16
28,096
3,494
24,602
947
25,006
2,819
22,187
904
17,854
2,789
15,065
637
16,370
1,982
14,387
671
27,832
5,016
22,816
863
24,535
4,497
20,038
809
50,474
17,163
33,311
1,502
41,146
7,503
33,643
1,404
111,084
19,391
91,694
3,093
88,401
20,570
67,831
2,782
482
0
1
108
591
151
156
26,447
479
0
1
27
507
197
111
23,906
388
0
1
25
414
353
107
16,576
473
0
1
115
590
548
85
16,281
655
0
1
22
678
457
128
24,941
721
0
1
32
753
409
92
22,101
811
0
0
31
843
303
212
36,172
684
0
0
26
710
301
152
36,209
2,154
0
4
74
2,232
830
369
98,218
2,244
0
4
57
2,305
1,599
234
74,751
144
144
26,735
236
236
24^77
245
245
17,067
254
254
16,790
175
175
25,290
153
153
22,408
153
153
36,477
135
135
36,479
1,349
1,349
100,916
1,283
1,283
77316
4. Includes international organization deposits of
$125 million for 2005 and $144 million for 2004.
5. Includes exchange-translation account reflecting the
monthly revaluation at market exchange rates of foreign
exchange commitments.
. . . Not applicable.
280
92nd Annual Report, 2005
10. Income and Expenses of the Federal Reserve Banks, by Bank, 2005
Thousands of dollars
Item
Total
Boston
New York
Philadelphia
Cleveland
7,453
28,958,637
282,772
900,959
438
1,409,356
34,326
0
1,217
12,249,381
81,081
66,264
75
957,863
7,149
0
234
1,190,864
25,400
0
483,381
96,154
30,729,357
45,065
3,045
1,492,230
43,001
57,582
12,498^25
25,090
1,975
992,152
60,225
2,682
1,279,405
1,345,171
398,173
-7,183
110,156
58,849
123,740
72,098
16,139
148
2,487
2,314
3,752
275,567
76,046
-9,736
8,916
7,512
13,512
63,784
18,703
162
1,306
1,993
4,206
81,748
23,990
292
7,347
3,778
16,626
91,465
39,198
44,739
1,446
2,193
2,358
4,637
2,799
8,459
1,508
469
3,052
4,871
724
3,795
Building expenses
Taxes on real estate ..
Property depreciation
Utilities
Rent
Other
32,431
88,592
37,424
37,165
34,872
4,993
4,862
3,640
822
1,255
4,885
14,495
7,954
11,421
6,495
1,563
3,891
2,914
314
1,716
2,163
6,919
2,376
386
2,848
Equipment
Purchases
Rentals
Depreciation
Repairs and maintenance .
25,873
5,173
91^17
78,727
1,476
231
3,894
4,639
3,328
1,908
9,801
8,656
1,051
3oo
5,641
4,289
1,703
311
4,576
5,019
212,773
9,994
71,225
16,036
15,719
483,381
68,829
-88,186
-26,794
0
27,839
-12,108
-430
0
51,092
-10,514
-9,330
0
9,703
-3,176
-1,994
0
12,429
-2,696
0
3086,085
-396340
2,889,544
154,040
-20,265
133,775
559,127
-72,912
486,215
137,497
-25,397
112,100
194,924
-55,008
139,916
CURRENT INCOME
Loans
U.S. Treasury securities
Foreign currencies
Priced services
Compensation received for
check services provided1
Other
Total
CURRENT EXPENSES
Salaries and other personnel
expenses
Retirement and other benefits
Net periodic pension costs 2 ..
Fees
Travel
Software expenses
Postage and other shipping
costs
Communications
Materials and supplies
Earnings-credit costs
Compensation paid for check
services costs incurred1 .
Other
Recoveries
Expenses capitalized3
Total
Reimbursements .
Net expenses .
For notes see end of table.
Statistical Tables 281
10.—Continued
Dallas
San Francisco
628
781,316
3,789
0
88
1,359,392
3,263
0
451
2,774,590
31,011
0
30,954
1,199
633,457
55,727
1,540
843,000
48,605
2,588
1,413,936
2,87233
72,595
22,602
213
13,694
3,667
5,156
69,431
19,249
189
1,865
2,692
3,214
88,102
21,027
160
1,667
4,379
3,577
73,578
28312
210
2,547
3,332
5,157
134,117
41,238
514
2,516
7,797
8,033
4,180
1,320
3,378
2,091
1,108
2,162
2,850
1,239
1,737
2,540
1,011
2,413
2,680
1,312
3322
5,703
1,610
3,782
2,232
11,451
3,040
876
3,618
2,631
9,239
1,785
2,536
4,923
545
5,103
1,910
1,602
1,028
2,721
4,661
1,827
243
1,568
1,286
4,022
1,141
2,759
938
4,297
7,109
3,630
767
4,169
3,061
8,645
3,606
305
2,420
5,124
793
34,995
18,081
2,432
612
7,817
9,609
813
378
4,294
6,734
1,364
206
3,138
2,407
2,302
27
2,509
2,197
2,687
50
3,597
3,046
1326
121
4,028
4,830
2,067
171
7,226
9,222
31,683
11,035
19,750
3,585
4,056
6,245
4,042
19,404
0
-251,340
-28,720
-3,150
483,381
14,042
-2,870
0
0
41,067
-7,433
-267
0
74,996
^,522
-6,903
0
21,616
-1,132
-1,600
0
17,763
-3,461
-527
0
33,827
-6,699
-1,008
0
15,795
^,855
-1387
231,374
-27,886
203,489
793,405
-17,557
775,848
247,807
-5,085
242,722
207,746
-111,621
96,125
143,462
-24,484
118,978
164,421
-10,518
153,903
181,491
-11,118
170,373
270,790
-14,689
256,101
Minneapolis Kansas City
Richmond
Atlanta
Chicago
St. Louis
43
2,143,162
52,691
0
220
2,106,639
12,633
785,660
1,813
2,531,655
19,171
49,035
881
860,958
5,782
0
1,365
593,462
6,477
0
39,736
5,674
2,241,306
0
4,793
2,909,945
54,319
5,567
2,661,560
21,659
2,259
891,539
178,932
64,877
242
54,937
7,673
51,773
127,470
37,363
274
7,355
7,532
4,279
107,750
28,427
148
5,518
6,180
4,455
3,928
23,912
4,755
55,031
1,502
5,326
2,055
8,195
3,600
15,135
3,894
59,001
7,251
282
92nd Annual Report, 2005
10. Income and Expenses of the Federal Reserve Banks, by Bank, 2005—Continued
Thousands of dollars
Item
Boston
New York
Philadelphia
Cleveland
27,839,813
1,358,455
12,012,310
880,052
1,139,488
933
25
99
3
1
-2,723,131
-313,128
-766,723
-69,819
-242,721
-808,808
-45,875
-40,649
-1
-327,177
-545
-27,694
-5
-34,253
-2
-3,577,814
-353,778
-1,094,445
-97,518
-276,976
-3,576,881
-353,753
-1,094,347
-97,515
-276,974
22
0
3
19
0
265,742
477,087
24,617
28,344
77,166
101,397
6,600
27,030
23,959
26,020
23,520,080
951,741
10,739,398
748,889
812,534
780,863
50,819
214,923
30,700
64,845
21,46735
1,937,102
10,268,863
268,048
798,844
1,271,672
-1,036,180
255,612
450,140
-51,155
11,629304
12,901,176
1,353,004
316,824
3,429,567
3,685,179
293,908
744,048
1,064,625
1,013,470
Total
PROFIT AND LOSS
Current net income
Additions to and deductions
from (-) current net income4
Other additions
Losses on foreign exchange
transactions
Interest expense on reverse
repurchase agreements
Other deductions
Total deductions
Net addition to or
deduction from (-)
current net income
Cost of unreimbursed Treasury
services
Assessments by Board
Board expenditures5
Cost of currency
Net income before payment to
U.S. Treasury
Dividends paid
Payments to U.S. Treasury
(interest on Federal
Reserve notes)
Transferred to/from surplus
Surplus, January 1
Surplus, December 31
NOTE: Components may not sum to totals because of
rounding.
1. Beginning in 2005, the Reserve Banks adopted a
new management model for providing check services
to depository institutions. The Federal Reserve Bank of
Atlanta compensates the other eleven Banks for the costs
incurred to provide check services.
2. 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 $10,652 thousand. The expenses
related to the Retirement Benefit Equalization Plan and
the Supplemental Employee Retirement Plan are recorded
by each Federal Reserve Bank.
3. Includes expenses for labor and materials capitalized and depreciated or amortized as charges to activities
in the periods benefited.
4. 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.
5. For additional details, see the chapter "Board of
Governors Financial Statements."
Statistical Tables 283
10.—Continued
Richmond
Atlanta
Chicago
St. Louis
2,037,817
2,134,097
2,418,838
795,414
Minneapolis Kansas City
514,479
689,098
Dallas
San Francisco
1,243,563
2,616,201
0
279
49
427
0
9
6
35
-519,271
-124,274
-193,661
-56,998
-66,356
-37,711
-31,662
-300,808
-61,671
-6
-60,845
-39,568
-72,841
-979
-24,810
-2
-17,054
-1
-22,527
-4,630
-39,198
-136
-80,089
0
-580,949
-224,687
-267,481
-81,810
-83,410
-64,868
-70,996
-380,897
-580,949
-224,408
-267,432
-81,383
-83,410
-64,858
-70,990
-380,862
0
0
0
0
0
0
0
0
57,140
42,101
13,260
58,604
17,373
52,210
4,722
17,653
5,639
12,652
3,419
16,897
3,068
29,984
28,779
64,197
1,357,628
691,656
412,777
603,924
1,139,520
2,142,364
15,403
14,946
9,708
8,788
80,414
1,837,825
2,081,824
198,386
41,652
50,279
0
1,419,942
1,918,743
767,897
406,905
572,526
1,113,058
1,995,617
1,159,242
376,231
112,802
-91,644
-9,073
21,689
17,674
66,333
2,148,210
3,307,452
515,935
892,166
763,499
876,301
235,644
144,000
254,396
245,322
153,068
174,757
134,953
152,628
1,282,696
1,349,029
284
92nd Annual Report, 2005
11. Income and Expenses of the Federal Reserve Banks, 1914-2005
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
-AMI
-8,233
-6,191
-4,823
-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
For notes see end of table.
Statistical Tables 285
11.—Continued
Payments to U.S. Treasury
Dividends
Statutory
transfers2
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
13,083
13,865
14,682
15,558
16,442
17,712
18,905
20,081
21,197
22,722
2,011
' . .
298
227
177
120
25
'.'.'.
1,1*34
48,334
70,652
82
141
198
245
327
248
67
36
75,284
166,690
193,146
196,629
254,874
291,935
342,568
276,289
251,741
401,556
542,708
524,059
910,650
^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
21,849
28,321
46,334
40,337
35,888
32,710
53,983
61,604
59,215
-93,601
286
92nd Annual Report, 2005
11. Income and Expenses of the Federal Reserve Banks, 1914-2005—Continued
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
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
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
^100,366
^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
2005
33,963,992
31,870,721
26,760,113
23,792,725
23,539,942
30,729,357
1,971,688
2,084,708
2,227,078
2,462,658
2,238,705
2,889,544
-1,500,027
-1,117,435
2,149,328
2,481,127
917,870
-3,576,903
188,067
295,056
205,111
297,020
272,331
265,742
435,838
338,537
429,568
508,144
503,784
477,087
672,479,214
50,083,413
4,200,642
4,403,787
8^40,050
Total, 1914-2005 .
Statistical Tables 287
11.—Continued
Payments to U.S. Treasury
Dividends
paid
Transferred
X KUlOivllvU
Statutory
transfers2
Interest on
Federal Reserve
notes
Transferred
to surplus
(section 13b)
to surplus
(section 7)
J lUliijlvllvU
.
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
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
21,467,545
4,114,865
517,580
1,068,598
466,796
2,782,587
1,271,672
5,517,716
20,658,972
17,785,942
409,614
428,183
483,596
517,705
582,402
780,863
7,867322
44,113,958
544,876,281
-4
16,994,848 3
288
92nd Annual Report, 2005
11. Income and Expenses of the Federal Reserve Banks, 1914-2005—Continued
Thousands of dollars
Federal Reserve Bank
and period
Current
income
Net
expenses
Net additions
or
deductions (-) 1
Assessments by
Board of Governors
Board
expenditures
Costs
of currency
Aggregate for each Bank,
1914-2005
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
36,048,784
234,942,446
24,861,783
40,972,417
51,911,304
36,743,133
81,895,577
23,099,813
11,417,989
24,386,940
30,724,517
75,474,511
3,274,732
7,766,6434
2,655,034
3,108,697
4,345,043
5,665,930
6,204,504
2,495,102
2,418,425
3,235,577
3,260,617
5,653,109
-15,082
1,007,889
102,829
263,458
478,516
321,649
658,528
72,461
134,715
134,127
386,879
654,672
199,880
1,086,518
176,550
320,387
588,205
329,983
505,921
111,872
134,873
142,889
214,756
591,953
487,911
2,674,482
345,554
489,061
685,503
594,893
954,188
304,452
143,849
304,514
412,630
943,014
Total
672,479,214
50,083,413
4,200,642
4,403,787
8340,050
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
Banks for which reimbursement was not received.
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 1996 and 1997.
Statistical Tables 289
11.—Continued
Payments to U.S. Treasury
Dividends
paid
Transferred
to surplus
(section 13b)
Transferred
to surplus
(section 7)
Statutory
transfers2
Interest on
Federal Reserve
notes
389,053
1,954,667
327,412
586,203
1,163,247
552,880
864,400
199,102
241,764
237,538
338,852
1,012,405
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
28,598,628
200,612,873
19,261,492
32,604,787
38,208,638
26,021,551
68,177,052
17,981,385
7,806,113
19,059,475
25,081,323
61,462,963
135
-433
291
-10
-72
5
12
-27
65
-9
55
-17
503,858
4,548,425
886,161
1,299,708
4,315,327
1,186,310
1,254,217
246,550
391,389
291,380
292,361
1,779,161
7,867,522
44,113,958
544,876,281
-4
16,994,848 3
3. The $16,994,848 thousand transferred to surplus
was reduced by direct charges of $500 thousand for
charge-off on Bank premises (1927), $139,300 thousand
for contributions to capital of the Federal Deposit Insurance Corporation (1934), $4 thousand net upon elimination of section 13b surplus (1958), and $106,000 thousand (1996), $107,000 thousand (1997), and
$3,752,000 thousand (2000) transferred to the Treasury
as statutorily required; and was increased by transfer of
$11,131 thousand from reserves for contingencies (1955),
leaving a balance of $12,901,176 thousand on December 31, 2005.
4. This amount is reduced by $2,664,656 thousand
for expenses of the System Retirement Plan. See note 2,
table 10.
290
92nd Annual Report, 2005
12. Operations in Principal Departments of the Federal Reserve Banks, 2002-2005
Operation
2005
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
2003
2002
36,463
6,551
56,080
36,242
6,748
55,655
34,832
7,375
48,138
34,208
8,363
43,445
215
176
12,195
22
132
234
187
13,904
20
125
267
198
15,806
20
123
289
216
16,587
17
115
7,339
964
1
6,486
941
48
5,588
914
287
4,986
883
500
639,832
83,187
5,412
625,127
90,943
5,403
584,915
101,338
4,879
565,302
92,511
4,579
250,865
28,395
14,379,874
368,896,819
518,546,592
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
12,801,914
3,156,556
2
12,543,907
2,913,189
239
13,951,600
2,810,283
1,510
13,135,350
2,711,384
2,543
1. Amounts in bold are restatements due to the inclusion of coin activity at Federal Reserve off-site coin
terminals.
2004
Statistical Tables 291
13. Number and Annual Salaries of Officers and Employees of the Federal Reserve Banks,
December 31, 2005
President1
Federal Reserve
Bank (including
Branches)
Boston3
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago 3
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco . . .
Federal Reserve
Information
Technology .
Employees
Total
Number
Salary
(dollars)2
Number
355,600
327,800
293,700
249,000
262,800
355,600
355,600
295,700
355,600
323,800
262,800
310,700
62
271
53
60
69
77
84
73
43
73
54
73
10,095,965
50,656,321
7,735,500
8,780,700
9,771,300
12,185,600
12,367,949
10,227,500
6,221,000
10,761,200
7,838,405
12,606,008
927
2,594
912
1,481
1,629
1,917
1,325
972
1,164
1,237
1,199
1,626
98
54
36
36
67
41
57
54
121
47
25
30
59,160,815
196,934,336
48,862,872
70,106,859
91,936,492
101,452,089
81,933,636
51,984,088
60,410,547
66,213,955
60,943,991
106,306,340
1,088
2,920
1,002
1,578
1,766
2,036
1,467
1,100
1,329
1,358
1,279
1,730
69,612,380
247,918,457
56,892,072
79,136,559
101,970,592
113,993,289
94,657,185
62,507,288
66,987,147
77,298,955
69,045,196
119,223,048
36
5,432,900
700
3
56,009,962
739
61,442,862
7
1,412,100
34
0
2,721,309
41
4,133,409
1,035
166,092,448
17,717
669
1,054,977,290
19,433
1,224,818,438
Office of
Employee
Benefits . . . .
Total
Other officers
3,748,700
Salaries
(dollars)2
1. The policies governing the salaries of Federal
Reserve Bank presidents were revised in 2005. Under
the revised policies, appointment salaries are normally
85 percent of the midpoint of the salary range (an 85
compa-ratio), with the exception of the appointment
salary of the New York Reserve Bank president, which is
normally set at a 95 compa-ratio. The Board has discretion to approve a higher appointment salary if requested
by a Reserve Bank's board of directors.
On January 1 of each year, each president receives a
salary increase equal to the percentage increase in the
midpoint of his or her salary range. In addition, on every
third-year anniversary of his or her initial appointment
(through year 9), each president receives a salary increase
that results in a higher compa-ratio, as follows: year 3, 95
(for the New York Bank, 105); year 6, 105 (New York,
115); year 9, 115 (New York, 125).
There continue to be tiered salary ranges for Reserve
Bank presidents, reflecting differences in the costs of
Fulltime
Parttime
Salaries
(dollars)2
Number
Salaries
(dollars)2
labor in the head-office cities. Currently, the New York
and San Francisco Banks are in tier 1, which has a midpoint of $345,000; the Boston, Philadelphia, Richmond,
Atlanta, Chicago, Minneapolis, and Dallas Banks are in
tier 2, which has a midpoint of $309,200; and the Cleveland, St. Louis, and Kansas City Banks are in tier 3,
which has a midpoint of $281,600. The Board reviews
Reserve Bank officer salary ranges and the placement of
individual Reserve Banks in the salary tiers annually.
2. Annualized salary liability based on salaries in effect
on December 31, 2005.
3. Data for 2004 have been corrected, as follows: For
the Boston Reserve Bank, employee annual salaries,
$57,177,807; total annual salaries, $66,461,907. For the
Chicago Reserve Bank, number of full-time employees,
1,471; number of part-time employees, 60; total number of employees, 1,624; employee annual salaries,
$86,707,060; total annual salaries, $100,031,698.
. . . Not applicable.
292
92nd Annual Report, 2005
14. Acquisition Costs and Net Book Value of the Premises of the Federal Reserve Banks
and Branches, December 31, 2005
Thousands of dollars
Acquisition costs
Federal Reserve
Bank or
Branch
BOSTON . . .
NEW YORK
Buffalo
Land
27,081
20,103
0
Buildings
(including
vaults)1
Building machinery and
equipment
121,666
242,759
0
27,090
60,251
0
Total
2
175,837
323,113
0
Net
book
value
Other
real
estate 3
112,296
206,967
0
PHILADELPHIA . . .
2,561
78,924
12,117
93,602
53,461
CLEVELAND .
Cincinnati
Pittsburgh
4,386
2,541
1,658
123,627
29,487
20,117
24,766
11,575
12,531
152,780
43,602
34,307
114,863
23,093
20,093
RICHMOND
Baltimore
Charlotte
22,637
6,482
3,130
86,413
29,286
30,582
38,210
5,815
6,842
147,260
41,584
40,554
101,465
24,499
27,368
ATLANTA ..
Birmingham .
Jacksonville .
Miami
Nashville . . . .
New Orleans
22,735
5,347
1,730
4,254
603
3,785
147,904
10,939
20,603
19,381
5,585
9,437
16,065
1,439
3,741
4,618
3,648
5,218
186,704
17,725
26,074
28,252
9,836
18,439
169,033
11,623
17,153
18,738
5,232
10,418
48
CHICAGO
Detroit
4,512
7,132
158,996
76,585
18,962
11,845
182,470
95,562
115,395
95,376
2,744
ST. LOUIS
Little Rock
Louisville .,
Memphis ...
8,3%
0
0
2,472
59,903
0
0
13,935
12,217
0
0
5,164
80,516
0
0
21,571
54,736
0
0
15,704
4,657
MINNEAPOLIS
Helena
15,666
2,890
104,426
9,716
13,851
943
133,943
13,549
109,389
9,898
KANSAS CITY
Denver
Oklahoma City .
Omaha
28,771
3,511
433
7,165
24,389
12,255
8,186
11,770
0
4,502
2,629
2,437
53,160
20,268
11,248
21,371
53,160
12,135
3,438
15,429
DALLAS . . .
El Paso
Houston
San Antonio .
32,135
262
22,938
826
110,203
3,426
100,629
7,351
23,572
1,553
8,236
3,089
165,911
5,241
131,802
11,266
122,878
1,875
130,085
6,285
SAN FRANCISCO
20,122
6,306
1,287
1,294
380
93,921
69,935
8,764
4,680
17,220
22,238
13,009
2,532
1,680
4,545
136,280
89,249
12,584
7,654
22,145
82,133
58,544
6,375
3,276
14,913
8,205
295,531
1,872,998
386^30
2,555,460
1,827,324
24,560
Los Angeles
Portland
Salt Lake City
Seattle
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.
1,702
7,204
3. Covers acquisitions for banking-house purposes and
Bank premises formerly occupied and being held pending
sale.
. . . Not applicable.
Federal Reserve System Audits
295
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 Reserve Banks' financial statements are audited annually by an inde-
pendent outside auditor retained by the
Board of Governors. 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.
•
297
Board of Governors Financial Statements
The financial statements of the Board for 2005 and 2004 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, 2005 and 2004, 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 Government Auditing Standards,
issued by the Comptroller General of the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements are free of material
nrisstatement. An audit includes 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 also 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 die 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 of Governors of the Federal Reserve System, at December 31, 2005 and
2004, 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 reports dated May 31, 2006, on
our consideration of the Board's internal control over financial reporting and our tests of its compliance
with certain provisions of laws, regulations, contracts, and other matters. 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 performed in accordance with Government
Auditing Standards and should be read in conjunction with this report in assessing the results of our audits.
Mr
May 31,2006
UP
298
92nd Annual Report, 2005
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEETS
As of December 31,
2005
2004
ASSETS
CURRENT ASSETS
Cash
Accounts receivable
Prepaid expenses and other assets
$ 45,970,435
3,345,446
2,728,486
$ 60,107,292
1,696,480
4,015,067
52,044,367
65,818,839
155,441,553
149,028,686
155,441,553
149,028,686
$207,485,920
$214,847,525
$ 16,906,350
4,860,572
15,456,484
270,167
783,711
$ 13,891,861
4,552,039
14,195,910
250,794
467,664
38,277,284
33,358,268
406,188
813,497
6,237,290
5,111,365
675,271
594,169
5,789,566
5,308,565
Total long-term liabilities
12,568,340
12,367,571
Total liabilities
50,845,624
45,725,839
14,037,250
(12,162,152)
154,765,198
32,711,365
(11,692,300)
148,102,621
156,640,296
169,121,686
$207,485,920
$214,847,525
Total current assets
NONCURRENT ASSETS
Property and equipment, net (Note 3)
Art collections (Note 2)
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 4)
Accumulated postretirement benefit obligation (Note 5)
Accumulated postemployment benefit obligation (Note 6)
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 299
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,
2005
2004
BOARD OPERATING REVENUES
Assessments levied on Federal Reserve Banks for Board
operating expenses and capital expenditures
Other revenues (Note 7)
$265,742,100
8,520,342
$272,331,500
8,336,581
274,262,442
280,668,081
174,523,825
31,847,951
24,695,564
12,954,506
9,065,329
7,794,483
6,052,617
7,169,829
3,361,179
1,973,594
7,304,955
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
286,743,832
275,125,016
Total operating revenues
BOARD OPERATING EXPENSES
Salaries
Retirement and insurance
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 7)
Total operating expenses
RESULTS OF OPERATIONS
(12,481,390)
5,543,065
ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES
Assessments levied on Federal Reserve Banks
for currency costs
Expenses for currency printing, issuance,
retirement, and shipping
477,087,471
477,087,471
503,784,304
0
CURRENCY ASSESSMENTS OVER (UNDER) EXPENSES
503,784,304
0
5,543,065
TOTAL RESULTS OF OPERATIONS
(12,481,390)
CUMULATIVE RESULTS OF OPERATIONS, Beginning of year
169,121,686
163,578,621
$156,640,296
$169,121,686
CUMULATIVE RESULTS OF OPERATIONS, End of year
See accompanying notes to financial statements.
300
92nd Annual Report, 2005
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENTS OF CASH FLOWS
For the years ended December 31,
2005
2004
CASH FLOWS FROM OPERATING ACTTVITIES
RESULTS OF OPERATIONS
$(12,481,390)
$ 5,543,065
12,954,506
12,445,708
Adjustments to reconcile results of operations
to net cash provided by (used in) operating activities:
Depreciation and net losses on disposals
Increase in assets:
Accounts receivable, prepaid expenses, and other assets
(362,385)
(1,846,076)
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
3,014,489
308,533
1,260,574
316,047
219,328
447,724
(197,200)
(1,455,529)
(504,608)
766,917
76,966
(1,432)
467,513
358,673
Net cash provided by operating activities
5,480,226
15,851,197
2,850
(19,370,223)
4,005
(11,715,861)
(19,367,373)
(11,711,856)
(249,710)
(211,703)
(249,710)
(211,703)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals
Capital expenditures
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Capital lease payments
Net cash used in financing activities
N E T INCREASE (DECREASE) IN CASH
(14,136,857)
3,927,638
CASH BALANCE, Beginning of year
60,107,292
56,179,654
$ 45,970,435
$ 60,107,292
$
$
CASH BALANCE, End of year
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Capital lease obligations incurred
See accompanying notes to financial statements.
0
190,538
Board of Governors Financial Statements 301
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004
(1)
STRUCTURE
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 DC based 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 financial statements for the Board and for the Reserve Banks.
Therefore, the accompanying financial statements include
only the results of operations and activities of the Board.
Combined financial statements for the Federal Reserve
Banks are included in the Board's annual report to the
Speaker of the House of Representatives.
(2) SIGNIFICANT ACCOUNTING POLICIES
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
passed through Board accounts and 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.
Art Collections—The Board has collections of works
of art, historical treasures, and similar assets. These collections are maintained and held for public exhibition in
furtherance of public service. Proceeds from any sales of
collections are used to acquire other items for collections.
As permitted by Statement of Financial Accounting Standards Number 116, Accounting for Contributions
Received and Contributions Made, 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
in the United States of America requires management to
make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
Reclassifications—Certain 2004 amounts have been
reclassified to conform with the 2005 presentation.
(3) PROPERTY AND EQUIPMENT
The following is a summary of the components of the
Board's property and equipment, at cost, net of accumulated depreciation.
As of December 31,
Land
Buildings and
improvements . . .
Furniture and
equipment
Software
Construction in
process
Less accumulated
depreciation
Property and
equipment, net . . .
2005
$ 18,640,314
2004
$ 18,640,314
135,152,735
132,891,551
39,926,270
12,990,050
44,450,522
12,207,125
13,928,149
220,637,518
4,380,259
212,569,771
(65,195,965)
(63,541,085)
$155,441,553
$149,028,686
Furniture and equipment includes $1,230,000 each year
for capitalized leases as of December 31, 2005 and
2004. Accumulated depreciation includes $612,000 and
$356,000 for capitalized leases as of December 31, 2005
and 2004, respectively. The Board paid interest related
to these capital leases in the amount of $83,000 and
$104,000 for 2005 and 2004, respectively.
Construction in process includes costs incurred in 2005
and 2004 for long-term security projects and building
enhancements.
The future minimum lease payments required under
the capital leases and the present value of the net minimum lease payments as of December 31, 2005, are as
follows:
302 92nd Annual Report, 2005
Year
ending
December 31
Amount
2006
2007
2008
$ 417,358
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
971,911
2005
(207,125)
764,786
(88,431)
676,355
(270,167)
$ 406,188
(4) ACCUMULATED RETIREMENT BENEFITS
The following information provides disclosure requirements contained in Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement 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 Office of
Employee Benefits.
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. Based
on actuarial calculations, it was determined that employer
funding contributions were not required for the years
2005 and 2004, and the Board was not assessed a contribution for these years. 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).
These defined benefit plans are administered by the U.S.
Office of Personnel Management, which determines the
required employer contribution levels. The Board's contributions to these plans totaled $324,000 and $330,000 in
2005 and 2004, respectively. The Board has no liability
for future payments to retirees under these programs and
is not accountable for the assets of the plans.
Employees of the Board may also participate in the
Federal Reserve System's Thrift Plan. Board contributions to members' accounts are based upon a fixed
percentage of each member's basic contribution
and were $8,617,000 and $8,314,000 in 2005 and 2004,
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 that cannot be paid from the
System Plan due to limitations imposed by Sections 401(a)(17), 415(b), and 415(e) of the Internal Revenue Code of 1986. Activity for the BEP for 2005 and
2004 is summarized in the following table:
2004
Change in projected
benefit obligation
Benefit obligation at
beginning of year .. $ 140,953
Service cost
193,209
Interest cost
35,964
Plan participants'
contributions
0
Plan amendments
0
Actuarial (gain)/loss . . . .
168,027
Benefits paid
(1,814)
Benefit obligation at
end of year
$ 536,339
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 . . . .
Information for pension
plans with an
accumulated benefit
obligation in excess of
plan asset:
Projected benefit
obligation
Accumulated benefit
obligation
0
$
74,956
23,239
6,170
0
0
36,588
0
$ 140,953
$
0
0
1,814
0
0
0
(1,814)
0
0
0
$
0
$ (536,339) $
(140,953)
(15,728)
(177,773)
(701,125)
(817,732)
439,695
542,289
$ (813,4
$ 536,339
$ 140,953
278,252
33
Board of Governors Financial Statements 303
2005
Weighted-average
assumptions used to
determine benefit
obligation as of
December 31
Discount rate
Rate of compensation
increase
2004
5.75%
5.75%
4.50%
4.25%
Components of net
periodic benefit cost
Service cost—benefits
earned during the
period
$ 193,209
Interest cost on
projected benefit
obligation
35,964
Expected return
on plan assets
0
Amortization of
prior service cost ..
(116,607)
Amortization of
(gains)/losses
5,982
Amortization of initial
(asset)/obligation ..
102,594
Net periodic benefit
cost (credit)
$ 221,142
Weighted-average
assumptions used to
determine net periodic
benefit cost for years
ended December 31
Discount rate
Rate of compensation
increase
$
2004
2005
Change in plan assets
Fair value of plan
assets at beginning
of year
$
0
Actual return on
0
plan assets
Employer contribution ..
284,485
Plan participants'
contributions
0
(284,485)
Benefits paid
Fair value of plan
assets at end
of year
$
0
$
0
0
253,717
0
(253,717)
$
0
23,239
6,170
0
(116,607)
(16,828)
102,594
$
(1,432)
5.75%
6.25%
4.25%
4.00%
Reconciliation of
funded status
at end of year
Funded status
$(8,273,832)
Unrecognized net
actuarial
(gain)/loss
2,145,920
Unrecognized prior
service cost
(109,378)
Prepaid/(accrued)
postretirement
benefit liability . . . . $(6,237,290)
Components of net
periodic cost
for year
Service cost
Interest cost
Amortization of prior
service cost
Amortization of
(gains)/losses
Total net periodic
cost
$
217,421
437,320
$(8,404,551)
2,537,211
77,774
$(5,789,566)
$
203,229
443,043
(9,818)
$
6,073
87,286
68,885
732,209
$
721,230
(5) ACCUMULATED POSTRETIREMENT BENEFITS
This following information provides disclosure requirements contained in Statement of Financial Accounting
Standards No. 106, Employers'Accounting for Postretirement Benefits Other Than Pensions.
The Board provides certain life insurance programs for
its active employees and retirees. Activity for 2005 and
2004 is summarized in the following table:
2005
Change in benefit
obligation
Benefit obligation at
beginning of year .. $ 8,404,552
Service cost
217,421
Interest cost
437,320
Plan participants'
contributions
0
Plan amendments
(196,970)
Actuarial (gain)/loss . . . .
(304,006)
Benefits paid
(284,485)
Benefit obligation
atendofyear
$ 8,273,832
2004
$ 7,166,146
203,229
443,043
0
0
845,851
(253,717)
$ 8,404,552
The liability and costs for the postretirement benefit
plan were determined using discount rates of 5.75 percent
as of December 31, 2005 and 2004. Unrecognized losses
of $2,145,920 as of December 31, 2005 and $2,537,211
as of December 31, 2004 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 $8,933,000 and
$8,223,000 in 2005 and 2004, respectively.
304 92nd Annual Report, 2005
(6) ACCUMULATED POSTEMPLOYMENT BENEFIT PLAN
(8) COMMITMENTS AND CONTINGENCIES
This following information provides disclosure requirements contained in Statement of Financial Accounting
Standards No. 112, Employers' Accounting for Postemployment Benefits.
The Board provides certain postemployment benefits
to eligible former or inactive employees and their dependents during the period subsequent to employment but
prior to retirement. 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,
2005 and 2004, were $155,800 and $733,000,
respectively.
Leases
(7) OTHER REVENUES AND OTHER EXPENSES
The following are summaries of the components of
Other Revenues and Other Expenses.
For the years ended
December 31,
2004
2005
Other revenues
Data processing
revenue
Rent
Subscription
revenue
Reimbursable
services to
other agencies . . .
Board sponsored
conferences
Miscellaneous
Total other
revenues
Other expenses
Tuition, registration,
and membership
fees
Contingency
operations
Public transportation
subsidy
Subsidies and
contributions . . . .
Meals and
representation . . .
Equipment and
facilities rental...
Administrative
law judges
Security
investigations
Former employee
related
payments
Miscellaneous
Total other
expenses
$3,788,217
2,433,833
$3,984,610
2,332,089
782,743
787,053
664,755
673,730
250,650
600,144
0
559,099
$8,520,342
$8,336,581
$2,573,028
$2,048,610
956,476
782,052
691,264
800,724
656,150
635,336
518,640
377,963
336,342
307,999
268,228
492,155
184,880
286,711
319,461
800,486
205,627
577,952
$7,304,955
$6,515429
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 are $71,991 for 2006.
Rental expenses under the operating leases were
$157,000 in 2005 and $156,000 in 2004.
Benefit Obligations
The Board is subject to potential liabilities for a supplemental benefit for certain employees that participate in
CSRS and who meet certain other criteria. Based on
information currently available, the exact amount of the
additional pension liability as of December 31, 2005 is
unknown. It is management's opinion that the additional
liability, if any, will not have a materially adverse effect
on the financial statements.
Litigation
The Board is subject to contingent liabilities which
include litigation cases. These contingent liabilities arise
in the normal course of operations and their ultimate
disposition is unknown. Based on information currently
available to management, it is management's opinion that
the expected outcome of these matters, individually or in
the aggregate, will not have a materially adverse effect on
the financial statements. Management believes the Board
has substantial defenses and that the likelihood of an
adverse judgement is small.
One action pending in the United States District Court
for the District of Columbia under Title VH of the Civil
Rights Act of 1964, as amended, alleges discrimination
on behalf of a class of African American secretaries at the
Board. The case is a successor to an earlier lawsuit that
was dismissed for failure to exhaust administrative remedies. Following a period of discovery on the issue of
exhaustion of administrative remedies, the Board has
moved to dismiss the action; that motion is pending.
Should the case proceed beyond the motion to dismiss the
Board believes it has substantial defenses and intends to
defend the case vigorously.
Seven additional matters alleging employment discrimination are currently pending administrative resolution or have been resolved recently and could be the
subject of an administrative appeal or a judicial action.
The chances that any of these cases will result in court
litigation cannot reasonably be estimated at this time. In
five of these cases, there has not yet been an investigative
report. Therefore, management is unable at this time to
determine the potential for a materially adverse effect on
the financial statements. Management believes the likelihood of an unfavorable outcome in the remaining two
cases is remote.
Board of Governors Financial Statements 305
(10)
(9) 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 2005 and
2004 is summarized in the following table:
2005
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
$
2004
83,811
$ 112,020
1,096,062
326,640
202,666
199,230
$1,382,539
$ 637,890
3,572,816
3,360,055
175,000
133,500
$3,747,816
$3,493,555
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 2005
and 2004 is summarized in the following table:
2005
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
$
2004
2,151,078
2,106,850
956,476
$
2,072,595 $
1,920,996
1,481,452
5,135,921 $
5,553,526
$477,087,471 $503,784,304
265,742,100
516,433
272,331,500
686,312
$743,346,004 $776,802,116
306 92nd Annual Report, 2005
K/2M.G
KPMGLLP
2001 M Street NW
Washington. DC 20036
' 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, 2005 and 2004, 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 May 31, 2006. 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 2005 audit, we considered the Board's internal control over financial
reporting by obtaining an understanding of the Board's internal control, determining whether 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 financialreporting.Consequently, we do not provide an opinion thereon.
Our consideration of internal control over financial reporting would not necessarily disclose all matters in
the internal control overfinancialreporting that might be reportabk conditions. Under standards issued by
the American Institute of Certified Public Accountants, reportable conditions are matters coming to our
attentionrelatingtosignificant deficiencies in the design or operation of the internal control over financial
reporting that, in our judgment, could adversely affect the Board's ability to record, process, summarize,
and reportfinancialdata consistent with the assertions by management in the financial statements. Material
weaknesses are reportable 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.
In our 2005 audit, we noted certain matters, discussed in Exhibit I, involving the internal control over
financial reporting and its operation that we consider to be areportablecondition. However, the reportable
condition is not believed to be a material weakness. Management's responses to our findings are also
included in Exhibit L
Board of Governors Financial Statements 307
We also noted certain additional matters that we reported to the management of the Board in a separate
letter dated May 31,2006.
This report is intended solely for the information and use of the Board and its management, the Office of
Inspector General, the Government Accountability Office, and the U.S. Congress and is not intended to be
and should not be used by anyone other than these specified parties.
May 31,2006
308 92nd Annual Report, 2005
Exhibit I
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Reportable Condition
December 31, 2005
Improvement Is Needed in Internal Controls over Financial Reporting
Management is responsible for developing
and maintaining effective internal controls to
provide assurance that the Board has the
ability to record, process, summarize, and
report financial data consistent with the
assertions of management in its financial
statements.
The following paragraphs discuss weaknesses noted in the Board's internal control
over financial reporting that could adversely
affect the Board's ability to produce accurate
and timely financial statements.
Controls over Accounts
Accrued Liabilities
Payable
and
During our audit, we noted that the Board
recorded material post closing entries
amounting to $1,957,836 to reduce liabilities, prepayments, and the related expenses
as of December 31, 2005. Issues we identified that resulted in post closing entries
included:
• Recording transactions as liabilities and
prepaid expenses, although the Board did
not receive the related goods/services prior
to December 31, 2005.
• Recording transactions in both accounts
payable and accrued liabilities. Therefore,
these liabilities were duplicated in the
financial statements.
• Recording transactions based on incorrect
supporting documents or estimates provided by the operating divisions that differed significantly from the actual
invoices.
We also noted that the Board received an
invoice from the General Services Administration (GSA) in April 2006 for $275,100
that might include some expenses for steam
provided in 2005. The Board recorded an
accrual for $50,000 at December 31, 2005.
However, management is unable to determine if an additional accrual is required for
2005 as the invoices received from GSA
during 2005 and 2006 did not provide sufficient details on the billing period.
Control of Census Data
During our audit, we coordinated with the
Office of Inspector General (OIG) to perform an analysis of the accuracy of the census data used by the Board's actuary in the
pension benefit liability and noted that there
were discrepancies between the Board's
Human Resources database and the data used
by the actuary. We noted that the Board has
not established controls to verify the accuracy of the underlying data used by the actuary in the pension liability calculation.
Specifically, we noted the following:
• Of the 176 employees included in the
Benefits Equalization Plan (BEP) liability:
— One individual was retired and covered under the CSRS plan; accordingly
he/she should not have been included
in the BEP population. Also, the gender of the individual was reported
incorrectly.
— One individual was covered under the
FERS plan and therefore does not
qualify for the BEP.
— One individual was included twice in
the BEP calculation.
— Two individuals did not have retirement service credit dates in PeopleSoft.
— Sixteen individuals had incorrect service credit dates in the data used by the
actuary.
— For two individuals, the total pay used
in the actuarial calculations was incorrect because their variable pay amounts
were not included.
• The 930 employees included by the actuary in the Board Postretirement Welfare
Benefits Plan (BEGLI) calculation
included two retired individuals who
should not have been in the active file.
• Of the 1,777 employees included in the
Board of Governors Financial Statements 309
Board Postemployment Benefit Plan
(Long-term disability):
— Three individuals who retired prior to
January 1, 2005 were incorrectly
included in the actuarial liability calculations.
— Thirty individuals in the Board Plan
had differences over 30 days that
related to incorrect service credit dates.
We also noted that the actuary incorrectly
included variable pay in the calculations
for long-term disability.
Recommendations:
We recommend that the Board:
1. Establish policies and procedures for processing year-end accounts payables and
accruals to include the requirements for
management to review and approve all
entries and supporting documents before
they are recorded. Management should
also perform a review of the year-end
accounts payable listings and subsequent
disbursements to ensure that the transactions reported at year end are appropriately stated. Further, a reconciliation of
the GSA account should be performed
timely, to identify any discrepancies on
the invoices received.
2. Confirm the data used by the actuary in
the pension liability calculation prior to
recording the entries in the general ledger.
3. Implement recommendations made by the
OIG in their report titled "Evaluation of
Service Credit Computations." This
would include performing periodic reconciliations of the census data between the
Board's system and the data used by the
actuary; reducing or eliminating the number of data transcriptions; requiring automated verifications for all census data
transmissions; and updating the existing
service credit form to clearly document
all prior government service.
Management Response
1.
Concur.
Management
will
strengthen its procedures for
review and approval of year-end
transactions for accounts payables
and year-end accruals. In addition
to strengthening our procedures,
organizational changes have been
made to enhance supervision in this
area and additional resources will
be devoted to this time-sensitive
process. Accounting staff will provide additional training for division
staff responsible for reporting yearend accruals and approval of
accruals will require more senior
staff approval both in the divisions
and Accounting.
2. & 3. Concur. We support the recommendation and work is underway to
enhance controls over these data.
Management is working with the
Office of Employee Benefits, the
Federal Reserve's actuary, and the
Federal Reserve's pension administrator to ensure data accuracy and
the presence of appropriate controls over the exchange of census
data among the various entities.
The Office of Inspector General
will review the work of the group
and, where appropriate, provide
comments to management on internal control issues. This same group
is working to implement fully the
recommendations provided by the
Office of Inspector General in its
report titled Evaluation of Service
Credit Computations, and management has directed the pension
administrator to implement appropriate changes to its automated systems and supporting processes.
310 92nd Annual Report, 2005
KPMGLLP
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, 2005 and 2004, 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 May 31 2006. 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 2005 financial
statements are free of material misstatement, we performed tests of the Board's compliance with ceitam
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, disclosed no instances of
noncompliance or other matters that arerequiredto bereportedunder Government Auditing Standards.
This report is intended solely for die information and use of the Board and its management, the Office of
Inspector General, the Government Accountability Office, and the U.S. Congress and is not intended to be
and should not be used by anyone other than these specified parties.
May 31,2006
311
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, 2005 and 2004.
o
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, 2005 and 2004,
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, 2005 and 2004, and the combined results of their
operations for the years then ended, on the basis of accounting described in Note 3.
March 23, 2006
Washington, D.C.
312
92nd Annual Report, 2005
FEDERAL RESERVE BANKS
COMBINED STATEMENTS OF CONDITION
December 31, 2005 and 2004
(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
2005
2004
$ 11,039
2,200
686
5,930
72
46,750
750,202
18,928
5,874
2,252
3,394
$847,327
$ 11,041
2,200
728
6,233
43
33,000
725,584
21,368
5,104
2,216
3,350
$810,867
$758,359
30,505
$719,437
30,783
19,043
4,573
393
5,039
1,784
913
281
820,890
24,043
5,912
332
5,306
329
891
290
787,323
13,536
12,901
26,437
$847,327
11,914
11,630
23,544
$810,867
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
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
313
FEDERAL RESERVE BANKS
COMBINED STATEMENTS OF INCOME
for the years ended December 31, 2005 and 2004
(in millions)
2005
2004
$28,959
283
7
29,249
$22,344
269
3
22,616
Interest expense
Interest expense on securities sold under agreements to repurchase
Net interest income
809
28,440
303
22,313
Other operating (loss) income
Income from services
Reimbursable services to government agencies
Foreign currency (losses) gains, net
Other income
Total other operating (loss) income
901
396
(2,723)
131
(1,295)
866
370
1,230
89
2,555
1,709
228
198
743
747
1,604
222
245
776
578
Total operating expenses
3,625
3,425
Net income prior to distribution
$23,520
$21,443
$
$
Interest income
Interest on US. government securities
Interest on investments denominated in foreign currencies
Interest on loans to depository institutions
Total interest income
Operating expenses
Salaries and other benefits
Occupancy expense
Equipment expense
Assessments by the Board of Governors
Other expenses
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
781
1,271
21,468
$23,520
The accompanying notes are an integral part of these combined financial statements.
582
2,783
18,078
$21,443
314 92nd Annual Report, 2005
FEDERAL RESERVE BANKS
COMBINED STATEMENTS OF CHANGES IN CAPITAL
for the years ended December 31,2005 and 2004
(in millions)
Capital
paid-in
Balance at January 1,2004
(176 million shares)
Transferred to surplus
Net change in capital stock issued
(61 million shares)
Balance at December 31, 2004
(238 million shares)
Transferred to surplus
Net change in capital stock issued
(32 million shares)
Balance at December 31, 2005
(270 million shares)
Surplus
Total
capital
$ 8,847
. ..
$ 8,847
2,783
$17,694
2,783
3,067
$11,914
...
3,067
$11,630
1,271
1,622
$13,536
$23,544
1,271
1,622
$12,901
$26,437
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.
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. Banks that are members
of the System include all national banks and any statechartered banks that apply and are approved for membership in the System. 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.
The System also consists, in part, of the Board of
Governors of the Federal Reserve System (Board of
Governors) and the Federal Open Market Committee
(FOMC). The Board of Governors, an independent federal agency, is charged by the Federal Reserve Act with a
number of specific duties, including general supervision
over the Reserve Banks. The FOMC is composed of
members of the Board of Governors, the president of the
Federal Reserve Bank of New York (FRBNY) and on a
rotating basis four other Reserve Bank presidents.
(2) OPERATIONS AND SERVICES
The System performs a variety of services and operations.
Functions include formulating and conducting monetary
policy; participating actively in the payments system,
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 and other entities; 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 Systm also provides certain
services to foreign central banks, governments, and international official institutions.
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 two Reserve Banks. The costs for the associated restructuring for the affected Banks have been included in footnote 10.
The FOMC, in the conduct of monetary policy, establishes policy regarding domestic open market operations,
oversees these operations, and annually issues authorizations and directives to the FRBNY for its execution of
Federal Reserve Banks Combined Financial Statements 315
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
transactions. The FRBNY is authorized to conduct operations in domestic markets, including direct purchase and
sale of U.S. government 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 executes these open
market transactions and holds the resulting securities,
with the exception of securities purchased under agreements to resell, 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. The FRBNY is authorized
by the FOMC to hold balances of, and to execute spot and
forward foreign exchange (F/X) and securities contracts
for, nine foreign currencies and to invest such foreign
currency holdings ensuring adequate liquidity is maintained. The FRBNY is authorized to maintain reciprocal
currency arrangements (F/X swaps) with two central
banks, and "warehouse" foreign currencies for the U.S.
Treasury and Exchange Stabilization Fund (ESF) through
the Reserve Banks. In connection with its foreign currency activities, the FRBNY may enter into contracts that
contain varying degrees of off-balance-sheet market risk,
because they represent contractual commitments involving future settlement and counterparty credit risk. The
FRBNY controls credit risk by obtaining credit approvals, establishing transaction limits, and performing daily
monitoring procedures.
Although Reserve Banks are separate legal entities, in
the interests of greater efficiency and effectiveness, they
collaborate in the delivery of certain operations and services. The collaboration takes the form of centralized
competency centers, operations sites, and product or service offices that have responsibility for the delivery of
certain services on behalf of the Reserve Banks. Various
operational and management models are used and are
supported by service agreements between the Reserve
Bank providing the service and the other eleven Reserve
Banks. In some cases, costs incurred by a Reserve Bank
for services provided to other Reserve Banks are not
shared; in other cases, Reserve Banks are billed for services provided to them by another Reserve Bank.
Beginning in 2005, the Reserve Banks adopted a new
management model for providing check services to
depository institutions. Under this new model, the Federal
Reserve Bank of Atlanta (FRBA) has the overall responsibility for managing the Reserve Banks' provision of
check services and recognizes total System check revenue
on its Statements of Income. FRBA compensates the
other eleven Banks for the costs incurred to provide
check services.
(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 various accounting standard-setting
bodies. The Board of Governors has developed special-
ized 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 and the financial statements have
been prepared in accordance with the Financial Accounting Manual.
Differences exist between the accounting principles
and practices in the Financial Accounting Manual and
those generally accepted in the United States (GAAP)
primarily due to the unique nature of the Reserve Banks'
powers and responsibilities as part of the nation's central
bank. The primary difference is the presentation of all
security holdings at amortized cost, rather than using the
fair value presentation requirements in accordance with
GAAP. Amortized cost more appropriately reflects the
Reserve Banks' security holdings given their unique
responsibility to conduct monetary policy. While the
application of current market prices to the securities holdings 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 may
involve transactions that result in gains or losses when
holdings are sold prior to maturity. Decisions regarding
security and foreign currency 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 securities and currencies are incidental to the
open market operations and do not motivate these activities or policy decisions.
In addition, the Board of Governors and the Reserve
Banks have elected not to present a Statement of Cash
Flows because the liquidity and cash position of the
Reserve Banks are not a primary concern given their
unique powers and responsibilities. A Statement of Cash
Flows, therefore, would not provide any additional meaningful information. Other information regarding the
Reserve Banks' activities is provided in, or may be
derived from, the Statements of Condition, Income, and
Changes in Capital. There are no other significant differences between the policies outlined in the Financial
Accounting Manual and GAAP.
The preparation of the 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 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.
316
92nd Annual Report, 2005
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
(A) Gold and Special Drawing Rights Certificates
The Secretary of the U.S. Treasury is authorized to issue
gold and special drawing rights (SDR) certificates to the
Reserve Banks.
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 U.S. Treasury's account is charged,
and the Reserve Banks' gold certificate accounts are
lowered. The value of gold for purposes of backing the
gold certificates is set by law at $42% a fine troy ounce.
The Board of Governors allocates the gold certificates
among Reserve Banks once a year based on the average
Federal Reserve notes outstanding in each Reserve Bank.
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
U.S. Treasury, and the Reserve Banks' SDR certificate
accounts are increased. The Reserve Banks are required
to purchase SDR certificates, at the direction of the U.S.
Treasury, for the purpose of financing SDR acquisitions
or for financing exchange stabilization operations. At the
time SDR transactions occur, the Board of Governors
allocates SDR certificate transactions among Reserve
Banks based upon Federal Reserve notes outstanding in
each District at the end of the preceding year. There were
no SDR transactions in 2005 or 2004.
(B) Loans to Depository Institutions
All depository institutions that maintain reservable transaction accounts or nonpersonal time deposits, as defined
in regulations issued by the Board of Governors, have
borrowing privileges at the discretion of each 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 the Board of Directors of
each of the Reserve Banks, subject to review and determination by the Board of Governors.
(C) US. Government Securities and Investments
Denominated in Foreign Currencies
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 amor-
tization of premiums or accretion of discounts on a
straight-line basis. Interest income is accrued on a
straight-line basis. 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 foreign currency 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 (losses) gains, net."
Activity related to U.S. government securities, including the related premiums, discounts, and realized and
unrealized gains and losses, is allocated to each Reserve
Bank on a percentage basis derived from an annual settlement of interdistrict clearings that occurs in April of each
year. The settlement equalizes Reserve Bank gold certificate holdings to Federal Reserve notes outstanding in
each District. Activity related to investments in foreigncurrency-denominated assets is allocated to each Reserve
Bank based on the ratio of each Reserve Bank's capital
and surplus to aggregate capital and surplus at the preceding December 31.
(D) Securities Purchased under Agreements to Resell,
Securities Sold under Agreements to Repurchase,
and Securities Lending
The FRBNY may engage in tri-party purchases of securities under agreements to resell (tri-party agreements).
Tri-party agreements are conducted with two commercial
custodial banks that manage the clearing and settlement
of collateral. Collateral is held in excess of the contract
amount. Acceptable collateral under tri-party agreements
primarily includes U.S. government securities, passthrough mortgage securities of the 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 agreement.
Securities sold under agreements to repurchase are
accounted for as financing transactions and the associated
interest expense is recognized over the life of the transaction. These transactions are carried in the Statements of
Condition at their contractual amounts and the related
accrued interest is reported as a component of "Other
liabilities."
U.S. government securities held in the SOMA are lent
to U.S. government securities dealers and to banks participating in U.S. government securities clearing arrangements in order to facilitate the effective functioning of the
domestic securities market. Securities-lending transactions are fully collateralized by other U.S. government
securities and the collateral taken is in excess of the
market value of the securities loaned. The FRBNY
charges the dealer or bank a fee for borrowing securities
and the fees are reported as a component of "Other
income" in the Statements of Income.
Activity related to U.S. government securities sold
under agreements to repurchase and securities lending
is allocated to each Reserve Bank on a percentage basis
derived from the annual settlement of interdistrict clear-
Federal Reserve Banks Combined Financial Statements 317
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
ings. Securities purchased under agreements to resell are
allocated to the FRBNY and not to the other banks.
(E) Foreign Currency Swaps and Warehousing
F/X swap arrangements are contractual agreements
between two parties to exchange specified currencies, at a
specified price, on a specified date. 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 the
foreign currencies it may need to intervene to support the
dollar and give the counterparty 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 counterparty (the drawer) and
must be agreed to by the drawee. The F/X swaps are
structured so that the party initiating the transaction bears
the exchange rate risk upon maturity. The FRBNY 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 U.S.
Treasury, U.S. dollars for foreign currencies held by the
U.S. 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 U.S. Treasury and ESF for
financing purchases of foreign currencies and related
international operations.
Foreign currency swaps and warehousing agreements
are revalued daily at current market exchange rates.
Activity related to these agreements, with the exception
of the unrealized gains and losses resulting from the daily
revaluation, is allocated to each Reserve Bank based on
the ratio of each Reserve Bank's capital and surplus to
aggregate capital and surplus at the preceding December 31. Unrealized gains and losses resulting from the
daily revaluation are allocated to the FRBNY and not to
the other Reserve Banks.
(F) 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 operating expense
in the year incurred. Capitalized assets, including software, buildings, leasehold improvements, furniture, and
equipment are impaired when it is determined that the net
realizable value is significatly less than book value and is
not recoverable.
Costs incurred for software, either developed internally
or acquired for internal use, during the application development 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.
(G) 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.
Assets eligible to be pledged as collateral security
include all Reserve Bank assets. 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. The par value of
securities pledged for securities sold under agreements to
repurchase is 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 for certain assets of the
Reserve Banks to be 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 currency issued to the Reserve Banks but not in
circulation, of $148,152 million and $128,933 million at
December 31, 2005 and 2004, respectively.
At December 31, 2005 all Federal Reserve notes outstanding were fully collateralized. All gold certificates,
all special drawing rights certificates, and $745,120 million of domestic securities and securities purchased under
agreements to resell were pledged as collateral. At
December 31, 2005 no loans or investments denominated
in foreign currencies were pledged as collateral.
(H) Items in Process of Collection and
Deferred Credit Items
The balance in the "Items in process of collection"
line in the Statements of Condition primarily represents
amounts that are attributable to checks deposited for
collection by a depository institution and that, as of the
balance sheet date, have not yet been collected from the
payor depository institution. Deferred credit items are the
counterpart liability to items in process of collection, and
the amounts in this account arise from deferring credit for
deposited items until the amounts are collected. The
balances in both accounts can fluctuate and vary significantly from day to day.
318 92nd Annual Report, 2005
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
(I) Capital Paid-in
(M) Taxes
The Federal Reserve Act requires that each member bank
subscribe to the capital stock of the Reserve Banks in an
amount equal to 6 percent of the capital and surplus of the
member bank. These shares are nonvoting with a par
value of $100 and may not be transferred or hypothecated. As a member bank's capital and surplus changes,
its holdings of Reserve Bank stock must be adjusted.
Currently, only one-half of the subscription is paid-in and
the remainder is subject to call. By law, each Reserve
Bank is required to pay each member bank an annual
dividend of 6 percent on the paid-in capital stock. This
cumulative dividend is paid semiannually. A member
bank is liable for Reserve Bank liabilities up to twice the
par value of stock subscribed by it.
The Reserve Banks are exempt from federal, state, and
local taxes, except for taxes on real property. Real propery taxes were $32 million and $33 million for the years
ended December 31,2005 and 2004, respectively, and are
reported as a component of "Occupancy expense."
(J) 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 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 at
a Reserve Bank, 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 U.S. Treasury in the following year. This amount is reported as "Payments to
U.S. Treasury as interest on Federal Reserve notes."
(K) Income and Costs Related to US. Treasury Services
The 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.
(L) Assessments by the Board of Governors
The Board of Governors assesses the Reserve Banks to
fund its operations based on each Reserve Bank's capital
and surplus balances. The Board of Governors also
assesses each Reserve Bank for the expenses incurred
for the U.S. Treasury to issue and retire Federal Reserve
notes based on each Reserve Bank's share of the number
of notes comprising the System's net liability for Federal
Reserve notes on December 31 of the previous year.
(N) Restructuring Charges
In 2003, the System began the restructuring of several
operations, primarily check, cash, and U.S. 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 and 2005.
Footnote 10 describes the restructuring and provides
information about the Reserve Banks' costs and liabilities
associated with employee separations and contract terminations. The costs associated with the write-down of
certain Reserve Bank assets are discussed in footnote 6.
Costs and liabilities associated with enhanced pension
benefits in connection with the restructuring activities
for all Reserve Banks are recorded on the books of the
FRBNY and those associated with enhanced postretirement benefits are discussed in footnote 9.
(4) U.S. GOVERNMENT SECURITIES, SECURITIES
PURCHASED UNDER AGREEMENTS TO RESELL,
SECURITIES SOLD UNDER AGREEMENTS
TO REPURCHASE, AND SECURITIES LENDING
The FRBNY, on behalf of the Reserve Banks, holds
securities bought outright in the SOMA.
Total securities held in the SOMA at December 31
were as follows (in millions):
2005
2004
Par value
US. government
Bills
Notes
Bonds
Total par value
$271,270
380,118
92,827
744,215
$262,970
360,832
94,017
717,819
Unamortized premiums
Unaccreted discounts
Total
8,813
(2,826)
$750,202
9,405
(1,640)
$725,584
The maturity distribution of U.S. government securities
bought outright, securities purchased under agreements to
resell, and securities sold under agreements to repurchase,
that were held in the SOMA at December 31, 2005, was
as follows (in millions):
Federal Reserve Banks Combined Financial Statements
319
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
Maturities of
securities held
Securities
purchased
under
U.S.
agreegovernment ments to
securities
resell
(Par
(Contract
value)
amount)
Within 15 days . . . $ 41,010
16 days to 90 days. 172,264
91 days to 1 year .. 186,283
Over 1 year to
5 years
210,745
Over 5 years to
10 years
56,699
Over 10 years
77,214
Total.... $744,215
=
=
Securities
sold
under
agreements to
repurchase
(Contract
amount)
$46,750
...
...
$30,505
...
...
...
_^j__
$46,750
...
_ L I ^
$30,505
=
=====
=
At December 31, 2005 and 2004, U.S. government
securities with par values of $3,776 million and
$6,609 million, respectively, were loaned from the
SOMA.
At December 31, 2005 and 2004, securities sold under
agreements to repurchase with a contract amount of
$30,505 million and $30,783 million, respectively, were
outstanding. At December 31, 2005 and 2004, securities
sold under agreements to repurchase with a par value of
$30,559 million and $30,808 million, respectively, were
outstanding
(5) INVESTMENTS DENOMINATED IN
Maturities of investments
denominated
in foreign currencies
s
w i t h i n 15 days
16 days to 90 days
fays t 0 1 y e a r
Over 1 year to 5 years
91
5
^
* " " t 0 10 ^
Total
''"
European Japanese
euro
yen
*—
3379 $ 2 , 6 17 $
$
2,574
679
2,089
1,007
2,855
3,712
* —
$10,913 $8,015
(6) BANK PREMISES, EQUIPMENT, AND SOFTWARE
A summary of bank premises and equipment at December 31 is as follows (in millions):
Remaining
useful
. (g
in_yearsj
Bank premises and
equipment
Land
Buildings
Building machinery and
N/A
1-50
C o o f f i K S progress'. \ N/A
Furniture and equipment . 1-19
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.
2005
2004
$ 5,424
$ 6,079
Subtotal
Accumulated
depreciation
Se
~S^re^
ZUUD
$ 295 $ 274
1,787
1,631
3
£
202
1,162 1,200
—
$3,717 $3,680
(1,465) (1,464)
Bank
premises and
equipment, net .
Depreciation expense,
for the
years ended
$2,252
$2*216
$ 175 $ 179
.
.
,
.
. „, . , ,
A T ^
Bank premises and equipment at December 31 include
^
^ o m t e \ J \ ^ that have been capitalm
n
^
i*ed (in millions):
European Union euro
Foreign currency deposits
*
$18,928
At
December 31, 2005 and 2004, there were no material open foreign exchange contracts.
At December 31,2005 and 2004, the warehousing facility was $5,000 million, with no balance outstanding.
Po—CURRENCIES
Total investments denominated in foreign currencies,
including accrued interest, and valued at current foreign
currency market exchange rates at December 31, were as
v
.„. .
°
£ „
follows (in millions):
Total
5,996
3,253
3,096
6,567
^ 9 5 ?P51
fiank
^
^
^
$1Q
$ n
1,928
2,142 Accumulated deprec7ati?n
J5)
J6)
3,561
3,947
$_5
$_5
Japanese yen
Foreign currency deposits
2,618
Government debt instruments ..
5,397
yotal
$ jg ^28
'
1,540
7,660
$21 368
*
Government debt instruments ..
The maturity distribution of investments denominated
jn foreign currencies at December 31, 2005, was as
follows (m millions):
Capitalized leases, net
Certain of the Reserve Banks lease space to outside
tenants with initial or remaining lease terms from 1 to
2 vears
^
- R e n t a l income from such leases was $23 million
and $21 million for the years ended December 31, 2005
and 2004, respectively. Future minimum lease payments
under noncancelable agreements in existence at December 31, 2005, were (inmilUons):
320
92nd Annual Report, 2005
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
2006.
2007 .
2008 .
2009 .
2010 .
Thereafter
Total
$ 21
17
16
15
14
60
$143
The Reserve Banks have capitalized software assets,
net of amortization, of $162 million and $170 million at
December 31, 2005 and 2004, respectively. Amortization
expense was $55 million and $56 million for the years
ended December 31, 2005 and 2004, respectively. Capitalized software assets are reported as a component of
"Other assets" and related amortization is reported as a
component of "Other expenses."
Several Reserve Banks have 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 check and cash restructurings of $50 million and $21 million for the periods
ending December 31, 2005 and 2004, respectively, were
determined using fair values based on quoted market
values or other valuation techniques and are reported as a
component of "Other expenses."
during 2005 and 2004, respectively. These commitments
are for goods and services to maintain currency machines,
for software licenses and maintenance, for services related
to check processing equipment and transportation, and
have variable and fixed components. The variable portion
of the commitments 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
2006
2007
2008
2009
2010
$50
52
38
32
27
The Reserve Banks are involved in certain legal actions
and claims arising in the ordinary course of business.
Although it is difficult to predict the ultimate outcome of
these actions, in management's opinion, based on discussions with counsel, the 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
(7) COMMITMENTS AND CONTINGENCIES
Retirement Plans
At December 31,2005, the Reserve Banks were obligated
under noncancelable leases for premises and equipment
with initital or remaining terms ranging from 1 to
18 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
$40 million and $70 million for the years ended December 31, 2005 and 2004, respectively. Certain of the
Reserve Banks' leases have options to renew.
Future minimum rental payments under noncancelable
operating leases, net of sublease rentals, with terms of
one year or more, at December 31, 2005, were (in
millions):
Operating
2006
2007
2008
2009
2010
Thereafter .
$ 11
10
8
8
7
109
$153
At December 31, 2005, the Reserve Banks had other
commitments and long-term obligations extending
through the year 2017 with a remaining amount of
$397 million. As of December 31, 2005, commitments of
$185 million were recognized. Purchases of $144 million
and $124 million were made against these commitments
The Reserve Banks currently offer three 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 Office
of Employee Benefits of the Federal Reserve Employee
Benefits System employees participate in the Retirement
Plan for Employees of the Federal Reserve System (System Plan). Employees at certain compensation levels
participate in the Benefit Equalization Retirement Plan
(BEP) and certain Bank officers participate in the 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. No separate accounting is
maintained of assets contributed by the participating
employers. The FRBNY acts as a sponsor of the System
Plan and the costs associated with the Plan are not redistributed to other participating employers.
Following is a reconciliation of the beginning and
ending balances of the System Plan benefit obligation (in
millions):
Federal Reserve Banks Combined Financial Statements 321
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
2005
Estimated actuarial present value
of projected benefit
obligation at January 1
$4,524
Service cost—benefits earned
during the period
123
Interest cost on projected
benefit obligation
263
Actuarial loss
125
Contributions by plan participants ..
3
Special termination benefits loss . . .
6
Benefits paid
(259)
Estimated actuarial present value
of projected benefit
obligation at December 31 . . . . $4,785
2004
$3,930
$4,524
Discount rates reflect yields available on high quality
corporate bonds that would generate the cash flows necessary to pay the plan's benefits when due.
Expected return on assets was based on a combination
of methodologies including the System Plan's historical
returns, surveys of what other plans' expected rates of
return are, 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
for the System Plan for the years ended December 31 are
shown below (in millions):
2005
Following is a reconciliation showing the beginning
and ending balance of the System Plan assets, the funded
status, and the prepaid pension benefit costs (in millions):
2005
2004
Estimated fair value of plan
assets at January 1
$5,887
Actual return on plan assets
237
Contributions by the employer
• ••
Contributions by plan participants ..
3
Benefits paid
(259)
$5,703
428
•• •
3
(247)
Estimated fair value of plan
assets at December 31
$5,868
$5,887
Funded status
$1,083
Unrecognized prior service cost
149
Unrecognized net actuarial loss . . . . 1,496
$1,362
173
1,182
Prepaid pension benefit costs
$2,717
$2,728
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
Net periodic pension benefit credit
Special termination benefits
Net periodic pension benefit credit ..
2004
$ 123
$ 116
263
245
24
49
(476)
(17)
6
24
20
(462)
(57)
20
$ (11)
$ (37)
The recognition of special termination benefits is
the result of enhanced retirement benefits provided to
employees during the restructuring described in footnote 10.
Following is a summary of expected benefit payments
excluding enhanced retirement benefits (in millions):
Prepaid pension benefit costs are reported as a component
of "Other assets."
The accumulated benefit obligation for the System
Plan was $4,162 million and $3,894 million at December 31, 2005 and 2004, respectively.
The weighted-average assumptions used in developing
the pension benefit obligation for the System Plan as of
December 31 are as follows:
2005
Discount rate
Rate of compensation increase
5.75%
4.25%
2011-2015
Net periodic benefit costs are actually determined using
a January 1 measurement date. The weighted-average
assumptions used in developing net periodic benefit cost
for the System Plan for the years at January 1 are as
follows:
$2,737
The Federal Reserve System's pension plan weightedaverage asset allocations at December 31, by asset category, are as follows:
2005
Equities
Fixed income
Cash
Total
2005
Discount rate
Expected asset return
Rate of compensation increase
1,498
Total
2004
5.75%
4.50%
2006
2007
2008
2009
2010
2004
5.75%
8.25%
4.25%
6.25%
8.25%
4.00%
2004
65.9%
32.0%
2.1%
67.5%
30.0%
2.5%
100.0%
100.0%
322
92nd Annual Report, 2005
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
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
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 dealers 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 System Plan during 2006.
The Reserve Banks' projected benefit obligation and
net pension costs for the BEP and the SERP at December 31, 2005 and 2004, and for the years then ended, are
not material.
The Reserve Banks fund benefits payable under the
medical and life insurance plans as due and, accordingly,
have no plan assets,
Following is a reconciliation of beginning and ending
balances of the benefit obligation (in millions):
2005
Accumulated postretirement benefit
(Mgatom a t t a u a r y * A 'A "'
§
^ r i o d
Interest cost of accumulated
benefit obligation
Actuarial loss
Curtailment gain
Special termination loss
Contributions by plan participants
& m
2004
32
19
49
45
52
10
(2)
1
9
11
f ^ t ! ! ! ! ! ! ! ! ! ! ]!!!! ]!!! ] ] . .
(1)
12
Accumulated postretirement benefit
obligation at December 31
$869
$9*7
At December 31, 2005 and 2004, the weighted-average
discount rate assumptions used in developing the postretirement benefit obligation were 5.50 percent and
5.75 percent, respectively.
Discount rates reflect yields available on high quality
corporate bonds that would generate the cash flows necessary to pay the plan's benefits when due.
Following is a reconciliation of the beginning and ending
balance of the plan assets, the unfunded postretirement
benefit obligation, and the accrued postretirement benefit
costs (in millions):
2005
2004
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
each of the years ended December 31, 2005 and 2004,
and are reported as a component of "Salaries and other
benefits." The Reserve Banks match employee contributions based on a specified formula. For the years ended
December 31,2005 and 2004, the Reserve Banks matched
80 percent on the first 6 percent of employee contributionsforemployees with less than five years of service
and 100 percent on the first 6 percent of employee contnbutions for employees with five or more years of service.
Fair value of plan assets at January 1 . . . $ . . . $ . . .
Contributions by the employer
48 4 2
Contributions by plan participants
11
8
BmSta
V«id
J59)
J50)
Fair value of plan assets at
December 31
$• • •
$• - •
, .
. .. ^ , r
TT ,
lM
^ST
"
$4
97 $6
89
Unrecognized netcurtailment: gain . . . . . . . .
5
Unrecognized prior service cost
105
128
Unrecognized net actuarial loss
(277)
(247)
A c c m e d postretirement ^ f i t costs ... $775
$755
=
=
Accrued postretirement benefit costs are reported as a
(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
AND POSTEMPLOYMENT BENEFITS
component of "Accrued benefit costs."
For measurement purposes, the assumed health care
cost trend rates at December 31 are as follows:
Postretirement Benefits Other Than Pensions
2005
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.
Health care cost trend rate
assumed for next year
Rate to which the cost trend rate
is assumed to increase,
(the ultimate trend rate)
Year that the rate reaches the
ultimate trend rate
2004
9.00%
9.00%
5.00%
4.75%
2011
2011
Federal Reserve Banks Combined Financial Statements 323
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
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, 2005 (in millions):
One percentage
point increase
Effect on aggregate
of service and
interest cost
components of
net periodic
postretirement
$ 11
benefit costs
Effect on accumulated
postretirement
benefit obligation . .. 103
With
subsidy
$ 54
57
59
62
64
351
$ 49
52
53
56
58
308
Total
$(10)
Without
subsidy
2006
2007
2008
2009
2010
2011-2015
$647
$576
(86)
2005
2004
$ 32
$ 19
49
(21)
13
52
(17)
8
Total periodic expense
Curtailment gain
Special termination loss
73
(5)
. . .
62
(86)
1
Net periodic postretirement
benefit costs (credit)
$_68
$(23)
Net postretirement benefit costs are actuarily determined
using a January 1 measurement date. At January 1, 2005
and 2004, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 5.75 percent and 6.25 percent, respectively.
Net periodic postretirement benefit costs are -reported
as a component of "Salaries and other benefits."
The 2005 service cost contains an adjustment by one
Reserve Bank that resulted from a review of plan terms
and assumptions. 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 established a prescription
drug benefit under Medicare (Medicare Part D) and a
federal subsidy to sponsors of retiree health care benefit
plans that provide benefits that are at least actuarially
equivalent to Medicare Part D. The benefits provided by
the Reserve Banks' plan to certain participants are at least
actuarially equivalent to the Medicare Part D prescription
drug benefit. The estimated effects of the subsidy, retroactive to January 1, 2004, are reflected in actuarial loss in
Following is a summary of expected benefit payments (in
millions):
One percentage
point decrease
The following is a summary of the components of net
periodic postretirement benefit costs for the years ended
December 31 (in millions):
Service cost—benefits earned during
the period
Interest cost of accumulated benefit
obligation
Amortization of prior service cost
Recognized net actuarial loss
the accumulated postretirement benefit obligation and net
periodic postretirement benefit costs.
The Reserve Banks offer benefits to former or inactive
employees. Postemployment benefit costs are actuarially
determined using a December 31, 2005, measurement
date and include the cost of medical and dental insurance,
survivor income, and disability benefits. The accrued
postemployment benefit costs recognized by the Reserve
Banks at December 31, 2005 and 2004, were $124 million and $128 million, respectively. This cost is included
as a component of "Accrued benefit costs." Net periodic
postemployment benefit costs included in 2005 and 2004
operating expenses were $14 million and $17 million,
respectively, and are recorded as a component of "Salaries and other benefits."
10.
BUSINESS RESTRUCTURING CHARGES
In 2003, several Reserve Banks announced plans for
restructuring to streamline operations and reduce costs,
including consolidation of check operations and staff
reductions in various functions of the Banks. In 2004 and
2005, additional consolidation and restructuring initiatives were announced in the check, cash, savings bonds,
marketing, purchasing, and Treasury operations. These
actions resulted in the following business restructuring
charges (in millions):
Total
estimated
costs
Employee separation .
Contract termination
.
Total
$61
Accrued
liability Total
12/31/04 charges
Employee
separation
Contract
termination . . .
Total
$60
1
$28
$6
1
$29
Total
paid
Accrued
liability
12/31/05
$(17)
$17
(1)
$6
$(18)
$17
324
92nd Annual Report, 2005
NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED
Adjustments due to unrecognized accrued liabilities were
offset against total charges. Without these offsets, total
charges would have been $11 million in 2005.
Total employee separation costs are primarily severance costs related to staff reductions of approximately
2,411, including 348 and 945 staff reductions related to
restructuring announced in 2005 and 2004, respectively.
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 Reserve 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
recorded on the books of the FRBNY as discussed in
footnote 8. Costs associated with enhanced postretirement
benefits are disclosed in footnote 9.
Future costs associated with the announced restructuring plans are estimed at $3 million.
The Reserve Banks anticipate substantially completing
their announced plans in 2007.
325
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, inspections, evaluations, 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
conducts and supervises activities, that
promote economy and efficiency and
prevent and detect waste, fraud, and
abuse in Board and Board-delegated
programs and operations, and 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 2005, the OIG completed
eleven audits, reviews, and other assessments and conducted a number of
follow-up reviews to evaluate action
taken on earlier recommendations. Some
of these projects resulted in multiple
reports. The OIG also closed seven
investigations and performed numerous
legislative and regulatory reviews.
Audits, Reviews, and Assessments Completed during 2005
Report title
Review of Configuration Management (Restricted Report)
Review of the Board's Workers' Compensation Program
Audit of the FFIEC's Financial Statements (Year Ended December 31, 2004)
Audit of the Board's Financial Statements (Year Ended December 31, 2004)
Audit of the Board's Fixed Asset Management Process
Review of Board's Implementation of Software Security Reviews
Review of the Bank of Ephraim Failure
Evaluation of Service Credit Computations (Internal Report)
Agreed Upon Procedures Engagement Regarding Certain Personnel-Related Controls
(Internal Report)
Audit of the Supervision and Regulation Function's Efforts to Implement
Requirements of the Federal Information Security Management Act
Audit of the Board's Information Security Program
Month issued
January
March
March
April
May
May
August
August
August
September
October
326
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 2005,
the GAO completed five reports on
selected aspects of Federal Reserve
operations (table). In addition, five
projects concerning the Federal Reserve
were in various stages of completion at
year-end (table). The Federal Reserve
also provided information to the GAO
during the year on numerous other GAO
investigations.
The reports are available directly
from the GAO.
Reports Completed during 2005
Report title
USA Patriot Act: Additional Guidance Could Improve Implementation
of Regulations Related to Customer Identification and
Information Sharing Procedures
Information Security Practices: Financial Market Organizations Have
Taken Steps to Protect against Electronic Attacks, But Could
Take Additional Actions
Industrial Loan Corporations: Recent Asset Growth and Commercial
Interest Highlight Differences in Regulatory Authority
Financial Audit: Bureau of the Public Debt's Fiscal Years 2005 and 2004
Schedules of Federal Debt
International Remittances: Information on Products, Costs,
and Consumer Disclosures
Report number
Month issued
(2005)
GAO-05-412
May
GAO-05-679R
June
GAO-05-621
September
GAO-06-169
November
GAO-06-204
November
Projects Active at Year-End 2005
Subject of project
Bank Secrecy Act examinations
Sections 330 and 361of the USA Patriot Act
Diversity in the financial services sector
Lending practices associated with alternative mortgage products
Consolidated supervision of financial institutions
Month initiated
January 2004
September 2005
October 2005
November 2005
November 2005
Maps of the
Federal Reserve System
328 92nd Annual Report, 2005
The Federal Reserve System
BOSTON
12
ISANRIANCISCO
n
CLEVELAND
10
4
M NEW YORK
PHLADELPHIA
$
RICHMOND
ST. LOUIS
8
ATLANTA
LEGEND
Both pages
• Federal Reserve Bank city
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 2005.
Maps of the Federal Reserve System
1-A
2-B
3-C
4-D
5-E
Pittsburgh
Baltimore
1/
Buffalo
6-F
•Cincinnati
mi
N'
*
NJ
BOSTON
329
NEW YORK
RICHMOND
CLEVELAND
PHILADELPHIA
7-G
8-H
•Nashville
Birmingham
Detroit*
ATLANTA
ST. LOUIS
CHICAGO
9-1
•Helena
m:
:•
MINNEAPOLIS
10-J
12-L
Dem
Portland
KANSAS CITY
11-K
Salt Lake City
•Los Angeles
DALLAS
SAN FRANCISCO
Index
333
Index
Accounting Task Force (ATF), 73
Agreement corporations, examinations of,
58, 59, 65-66
Anti-money laundering (AML)
Bank Secrecy Act/Anti-Money
Laundering (BSA/AML)
Examination Manual, 57-58, 70-71
Examinations, 61-62
Applications, notices, and proposals,
80-84, 92-93
Asset-backed commercial paper (ABCP)
programs, 69
Assets and liabilities
Board of Governors, 298
Commercial banks, 274
Federal Reserve Banks, 276-79, 312
Association of Supervisors of Banks of the
Americas (ASBA), 67
ATM (automated teller machine) use, 90,
91
Auditors' reports, 297, 306-7, 310, 311
Audits, reviews, and assessments
of Board of Governors, 295, 297-310,
325
of Federal Reserve Banks, 124, 295,
311-24,325
of Federal Reserve System, 295, 325,
326
by Government Accountability Office,
326
by Office of Inspector General, 325
Automated clearinghouse services, Federal
Reserve Banks, 115, 290
Availability of Funds and Collection of
Checks (Regulation CC), 103, 146
Balance sheets
Board of Governors, 298
Federal Reserve priced services, 128
Bank examiner training, 78-80, 96-97
Bank holding companies
Banks affiliated with, 265
Capital standards, 69
Inspections of, 59, 60-61
Number of, 59
Rating system, 70-71
Regulatory financial reports, 76-77
Bank holding companies—Continued
Small holding company threshold, 75
Surveillance and off-site monitoring of,
64-65
Bank Holding Companies and Change in
Bank Control (Regulation Y), 145-46
Bank Holding Company Act, 58, 80-81
Bank Holding Company Performance
Reports (BHCPRs), 64-65
Banking Organization National Desktop
(BOND), 78
Banking organizations, U.S. (See also Bank
holding companies and Commercial
banks)
Capital standards, 67-70
Examinations and inspections of, 59-61
Foreign operations, 65, 68, 82-83
Number of, 265
Regulation of, 80-84
Risk-focused supervision of, 60
Bank Merger Act, 58, 81-82
Bank of America Corporation, acquisition,
93
Bank-owned life insurance, 70
Bankruptcy Abuse Prevention and
Consumer Protection Act, 38, 57,
105-6, 137-41
Bank Secrecy Act Advisory Group
(BSAAG), 71
Bank Secrecy Act/Anti-Money Laundering
(BSA/AML) Examination Manual,
57_58, 70-71
Bank Secrecy Act (BSA), examinations,
61-62
Basel Committee on Banking Supervision,
62, 67, 72-73
Basel I framework, implementation, 58,
68-69
Basel II framework, implementation, 58,
62, 68-69, 72
Board of Governors (See also Federal
Reserve System)
Assets and liabilities of, 298
Audits, reviews, and assessments of,
295, 297-310, 325
Consumer Advisory Council, 104-7, 232
Decisions, public notice, 83-84
334 92nd Annual Report, 2005
Board of Governors—Continued
Ex officio members, 256
Federal Advisory Council, 231
FFIEC activities, 65, 74, 77, 80, 95-96
Financial statements of, 297-310
Government Performance and Results
Act, 133-36
Inspector General, Office of, audits,
reviews, and assessments, 325
Litigation, 223-24
Members and officers, 227-29, 253-56
Outreach activities, 111
Policy actions, 145-51
Thrift Institutions Advisory Council, 233
BOND (Banking Organization National
Desktop), 78
Branches {See Federal Reserve Banks)
Business continuity, 62
Business investment, profits, and finance,
12-15, 38-41
Call Reports, 64, 77
CAN-SPAM Act, 96
Capital accounts, Federal Reserve Banks,
276-79, 312
Capital One Financial Corporation,
acquisition, 93
Capital standards, 67-70, 72
Cash flows, Board of Governors, 300
Cash management services, Federal
Reserve Banks, 121
Central Document and Text Repository
(CDTR), 78
Change in Bank Control Act, 58, 82
Check Clearing for the 21st Century Act
(Check 21), 116-17
Check collection and processing, Federal
Reserve Banks, 113-15, 290
Citigroup, Inc., merger, 92-93
Collection of Checks and Other Items by
Federal Reserve Banks and Funds
Transfers through Fedwire
(Regulation J), 146
Collection services for federal government,
Federal Reserve Banks, 121
Combined financial statements, Federal
Reserve Banks, 311-24
Commercial banks
Assets and liabilities of, 274
Number of, 265
Regulatory financial reports, 77
Commercial paper, asset-backed, programs,
69
Commercial real estate (CRE), 75
Committee of Sponsoring Organizations of
the Treadway Commission (COSO),
124
Community Affairs Offices (CAOs), 107,
109-10
Community affairs {See Consumer and
community affairs)
Community economic development,
107-11
Community Reinvestment Act (CRA)
Applications, analysis in relation to,
92-93
Effectiveness of, 110
Examinations for compliance with, 92
Review of, 106
Rules revisions, 87, 89, 91, 106
Community Reinvestment (Regulation BB),
89, 91, 106, 147
Compliance examinations, 92, 94
Condition statements, Federal Reserve
Banks, 276-79, 312
Consumer Advisory Council, 104-7, 232
Consumer and community affairs
Community economic development,
107-11
Consumer Advisory Council advice,
104-7
Consumer complaints, 103-4, 105
Consumer financial education, 107-11
Consumer protection and community
reinvestment laws, 87-103
Outreach activities, 111
Consumer complaints, 103-4, 105
Consumer Credit Protection Act, 94
Consumer Leasing (Regulation M), 100
Consumer price index (CPI), 22-23, 47
Consumer prices, 22-23, 47-48
Consumer protection laws
Agency reports on compliance with,
98-103
Implementation of, 87-92
Supervision for compliance with, 92-98
Consumer spending, 9-10, 36-37
Controlling the Assault of Non-Solicited
Pornography and Marketing
(CAN-SPAM) Act, 96
Core Principles for banking supervision, 72
Corporate profits, 13-15, 40-41
CPI (consumer price index), 22-23, 47
Index
Credit, extensions to bank executive
officers, 84-85
Credit risk management, 74-75
Currency and coin, operations and
developments in, 118, 290
Current account, U.S., 18, 43
Debt
Corporate, 14-15, 40-41
Domestic nonfinancial sectors, 27, 50
Government, 16, 17, 42, 43
Household, 11-12, 38
Debt services for federal government,
Federal Reserve Banks, 120
Depository Institutions Disaster Relief Act,
73-74
Depository institutions (See also
Commercial banks)
Interest rates on loans by Federal
Reserve Banks, 263
Reserve requirements, 264
Reserves of, 266-73
Depository services to federal government,
Federal Reserve Banks, 118-21
Deposits
Commercial banks, 274
Federal Reserve Banks, 267, 269, 271,
273
Directors, Federal Reserve Banks and
Branches, 236-52
Disclosures by state member banks, 84
Discount rates (See also Interest rates),
149-51
Disposable personal income (DPI), 10, 37
Dollar exchange rate, 29, 51
Dollar Wi$e financial education program,
109
ECI (employment cost index), 22, 46
Economic Growth and Regulatory
Paperwork Reduction Act (EGRPRA),
75-76, 106
Economies, foreign, 28-31, 51-54
Economy, U.S.
Business sector, 12-15, 38-41
Debt, 27, 50
External sector, 18-20, 43-45
Financial markets, 5-6, 24-28, 48-51
Government sector, 15-17, 41-43
Household sector, 9-12, 36-38
Interest rates, 5, 24-26, 49
Labor market, 20-22, 45-47
335
Economy, U.S.—Continued
M2 monetary aggregate, 28, 50-51
Outlook and projections, 3-4, 7, 33-34,
35-36
Prices, 19-20, 22-24, 44, 47-48
Edge Act corporations, examinations of,
58, 59, 65-66
Education, consumer financial, 107-11
Electronic access to Federal Reserve Bank
services, 122
Electronic Federal Tax Payment System
(EFTPS), 121
Electronic Fund Transfer Act (EFTA), 87,
90-92, 105
Electronic Fund Transfers (Regulation E),
87, 90-91, 100, 105, 145
Emerging-market economies, 30-31, 53-54
Employment, 20-21, 45-46
Employment cost index (ECI), 22, 46
Energy prices, 19-20, 23-24, 44, 48
Enforcement actions
Federal Reserve System, 64
Other federal agencies, 98, 100-103
Equal Credit Opportunity Act (ECOA),
94-95
Equal Credit Opportunity (Regulation B),
94, 98, 100
Equal opportunity rules, 148
Equity markets and prices, 26-27, 50
Examinations and inspections
Anti-money laundering, 61-62
Bank holding companies, 59, 60-61
Community Reinvestment Act,
compliance with, 92
Consumer protection laws, compliance
with, 94-96
Edge Act and agreement corporations,
58, 59, 65-66
Federal Reserve Banks, 124
Fiduciary activities, 62-63
Financial holding companies, 61
Foreign banks, 66-67
Information technology activities, 62
International banking activities, 65-67
Securities clearing agencies, 63
Securities credit lenders, 63-64
Securities dealers and brokers,
government and municipal, 63
State member banks, 59, 60, 65
Transfer agents, 63
336 92nd Annual Report, 2005
Examiners
Post-employment restrictions on, 141,
148
Training, 78-80, 96-97
Expenses (See Income and expenses)
Exports, 18, 43-44
External sector, developments in, 18-20,
43-45
Fair and Accurate Credit Transactions
Act (FACT Act), 87, 89-90, 96
Fair Credit Reporting Act (FCRA), 96
Fair Credit Reporting (Regulation V), 90,
146
Fair Housing Act, 94-95
Fair lending laws, compliance with, 94-95,
98,99
Fair value option (FVO) rule, 73
Federal Advisory Council, members and
officers, 231
Federal agency securities and obligations
Commercial bank holdings, 274
Federal Reserve Bank holdings, 266,
268, 270, 272
Federal Deposit Insurance Corporation
Improvement Act, 60, 76, 138
Federal Financial Institutions Examination
Council (FFIEC), 65, 74, 77, 79, 80,
95-96
Federal funds rate, 3-4, 5-6, 33, 34-35,
169-70, 177-79, 185-86, 194-95,
200-201, 207-8, 214-15, 221-22
Federal government
Federal Reserve Bank services to,
118-21
Spending, receipts, and borrowing,
15-17, 41-42
Federal Open Market Committee (FOMC)
Authorizations, 153-55, 155-56, 160-61,
163-64
Domestic policy directives, 155, 170,
178-79, 186, 194-95, 201, 207-8,
215, 222
Foreign currency directives and
procedural instructions, 156-58,
162-63
Meetings, minutes of, 153-222
Members and officers, 230
Notation votes, 170, 179, 187, 195, 201,
208, 215, 222
Federal Open Market Committee—Continued
System Open Market Account, 154-57,
160-64, 171-72, 180, 188, 196,
202, 209, 216
Federal Reserve Act, 82
Federal Reserve Banks
Assessments by Board of Governors,
284, 286, 288
Assets and liabilities of, 276-79, 312
Audits, reviews, and assessments of,
124, 295, 311-24, 325
Automated clearinghouse services, 115,
290
Branches of, 234-35
Capital accounts, 276-79, 312
Chairmen, Conference of, 235
Credit outstanding, 266, 268, 270, 272
Deposits, 267, 269, 271, 273
Directors of, 236-52
Discount rates, 149-51
Electronic access to services, 122
Examinations of, 124
Examiners, post-employment restrictions
on, 141, 148
Examiner training, 78-80, 96-97
FedLine Advantage, 122
Financial statements of, combined,
311-24
First Vice Presidents, Conference of, 236
Fiscal agency services, 118-21
Government depository services, 118-21
Income and expenses of, 124-25,
280-89
Information technology developments,
122-24
Interest rates on loans to depository
institutions, 263
Noncash collection service, 117, 148
Officers and employees, number and
salaries of, 291
Officers of (list), 234-35
Operations, volume of, 290
Payments to U.S. Treasury, 125, 282-83
Premises of, 126-27, 292
Presidents, Conference of, 235
Priced services, 113-17, 128-31
Reserve balances, 267, 269, 271, 273
Salaries of officers and employees, 291
Securities and loans, holdings of,
125-26, 262, 266, 268, 270, 272
Statements for priced services, 128-31
Statements of changes in capital, 314
Index
Federal Reserve Banks—Continued
Statements of condition, 276-79, 312
Statements of income, 313
Federal Reserve Electronic Tax Application
(FR-ETA), 121
Federal Reserve System (See also Board of
Governors and Federal Reserve
Banks), 67
Audits, reviews, and assessments of,
295, 325, 326
Banking structure, U.S., regulation of,
80-84
Basel Committee activities, 62, 67,
72-73
Consumer protection responsibilities,
87-96
Decisions, public notice of, 83-84
Enforcement actions, 64
Hurricanes, response to, 57, 73-74, 107,
122-23
Maps of, 328-29
Membership, 85
Safety and soundness responsibilities,
58-67
Supervisory information technology,
77-78
Supervisory policy, 67-77
Surveillance and off-site monitoring,
64-65
Technical assistance, 67
Training and staff development, 78-80,
96-97
Federal sector, developments in, 15-17,
41^2
Federal tax payments, 121
FedLine Advantage, 122
Fedwire Funds Service, 115
Fedwire Securities Service, 116-17
FFEEC (Federal Financial Institutions
Examination Council), 65, 74, 77, 79,
80, 95-96
Fiduciary activities, supervision of, 62-63
Finance
Business, 13-15, 40-41
Household, 11-12, 38
Financial account, U.S., 20, 44-45
Financial Crimes Enforcement Network
(FinCEN), 57, 70-71
Financial education, consumer, 107-11
Financial holding companies, 61
Financial Institutions Supervisory Act, 223
Financial intermediation, 27, 50
337
Financial markets, 5-6, 24-28, 48-51
Financial statements
Board of Governors, 297-310
Federal Reserve Banks, combined,
311-24
Federal Reserve priced services, 128-31
First American Bank, merger, 92-93
First Community Capital Corporation,
acquisition, 93
Fiscal agency services, Federal Reserve
Banks, 118-21
Float, 117, 266, 268, 270, 272
Flood insurance, 95
FOMC (See Federal Open Market
Committee)
Foreign banks, U.S. activities of, 66-67
Foreign currency operations
Authorization for conduct of, 155-56,
160-61
Directives, 156-57, 162
Procedural instructions for, 157-58,
162-63
Foreign economies, 28-31, 51-54
Foreign operations of U.S. banking
organizations, 65, 68, 82-83
Foreign trade, 18-20, 4 3 ^ 4
GDP (gross domestic product), 7, 9, 16,
35-36, 41-42
Gold stock, 266, 268, 270, 272
Government
Federal, spending, receipts, and
borrowing, 15-17, 41-42
Federal Reserve Bank services to,
118-21
State and local, spending, receipts, and
borrowing, 17, 4 2 ^ 3
Government Accountability Office (GAO),
326
Government National Mortgage
Association (GNMA), 77
Government Performance and Results Act
(GPRA), 133-36
Government securities dealers and brokers,
examination of, 63
Gramm-Leach-Bliley Act, 58, 61, 81,
106-7
Hibernia Bancorporation, acquisition, 93
Home equity lending (See also Household
sector), 74
Homeland Investment Act, 20
338 92nd Annual Report, 2005
Home Mortgage Disclosure Act (HMDA),
87, 91, 93, 95, 97-99, 106-7, 110-11
Home Mortgage Disclosure (Regulation C),
91, 95, 106
Home Ownership and Equity Protection
Act (HOEPA), 87, 91
Household sector, developments in, 9-12,
36-38
Housing and Urban Development,
Department of, complaint referrals,
104
Hurricane damage and response, 57, 73-74,
107, 122-23,
Imports, 18-19, 43-44
Income and expenses
Board of Governors, 299
Federal Reserve Banks, 124-25, 280-89
Federal Reserve priced services, 129
Industrial economies, 29-30, 52-53
Inflation, 3-4, 7, 9, 22-24, 33-35, 47-48
Information security standards, 148-49
Information technology
Developments in, 122-24
Federal Reserve examination of, 62
Supervisory, 77-78
Inspections (See Examinations and
inspections)
Inspector General, Office of (OIG), 325
Insured commercial banks (See
Commercial banks)
Interest rates (See also Discount rates and
Federal funds rate), 5, 24-26, 49, 263
International Accounting Standards Board
(IASB), 67, 73
International Banking Act, 58, 83
International banking activities, supervision
of, 65-67, 68, 72-73
International Organization of Securities
Commissioners (IOSCO), 69, 72
International trade, 18-20, 43-44
Investment
Business sector, 12-13, 38-40
Overseas, by U.S. banking organizations,
82-83
Residential, 10-11, 37-38
Jobs and Growth Tax Relief
Reconciliation Act (JGTRRA),
15-16, 41
Joint Forum, 72-73
Labor market, 20-22, 45-47
Large complex banking organizations
(LCBOs), supervision of, 60
Legislation, federal, 137-41
Liabilities (See Assets and liabilities)
Life insurance, bank-owned, 70
Litigation involving Board of Governors
Artis, 224
Barnes, 223
Bazy, 223
Diehl McCarthy, 223
Fakolujo, 223-24
Fraternal Order of Police, 224
Inner City Press/Community on the
Move, 223
Jones, 224
Price, 223
Sciba, 224
Texas State Bank, 224
Thomas, 223
Ulrich, 223
Loans
Federal Reserve Bank holdings, 125-26,
266, 268, 270, 272
Insured commercial bank holdings, 274
State member banks to executive
officers, 84-85
Local governments, 17, 42-43
Maps, Federal Reserve System, 328-29
Margin requirements, 275
MBNA Corporation, acquisition, 93
Medical information, 89-90, 146-47
Member banks (See also State member
banks)
Assets and liabilities, 274
Examination of foreign operations, 65
Number of, 265
Reserves, 271, 273
Members and officers
Board of Governors, 227-29, 253-56
Consumer Advisory Council, 232
Federal Advisory Council, 231
Federal Open Market Committee, 230
Federal Reserve Banks and Branches,
234-35
Thrift Institutions Advisory Council, 233
Membership of State Banking Institutions
in the Federal Reserve System
Index 339
Middle East and North Africa (MENA)
Financial Regulators' Training
Initiative, 67
Monetary aggregate (M2), 28, 50-51
Monetary Policy Reports to the Congress
February 2006, 3-31
July 2005, 33-54
Monetary policy {See also Federal Open
Market Committee), 3-6, 33-35
Money-laundering prevention, 61-62,
70-71
Mortgage interest rates, 11, 37-38
Mortgage products, nontraditional, 74-75,
107
Municipal securities dealers and brokers,
examination of, 63
MyMoney.gov, 108
National Examination Database (NED),
78
National Rood Insurance Act, 95
National Information Center (NIC), 78
National Settlement Service, 115-16
Noncash collection service, Federal
Reserve Banks, 117, 148
Nonmember banks, assets and liabilities,
274
Notes, Federal Reserve {See also Currency
and coin), 276-79
Obtaining and Using Medical
Information in Connection with
Credit (Regulation FF), 90, 146-47
Office of Foreign Assets Control (OFAC),
70-71
Office of Inspector General (OIG), 325
Officers {See Members and officers)
Oil prices {See Energy prices)
Open market operations
Authorization for conduct of, 153-55,
163-64
Volume of transactions, 258-61
Overdraft-protection services, 75, 88-89,
148
Pay.gov, 121
Payments services, Federal Reserve Banks,
120-21
Payroll card accounts, 91, 105
PCE (personal consumption expenditures),
10,36
Performance Report Information and
Surveillance Monitoring (PRISM), 65
Policy actions
Board of Governors, 145-51
Federal Open Market Committee,
153-222
Premises, Federal Reserve Banks and
Branches, 126-27, 292
Priced services, Federal Reserve Banks,
113-17, 128-31
Prices
Consumer, 22-23, 47-48
Energy, 19-20, 23-24, 44, 48
Equity, 26-27, 50
Primary credit rate, 149
PRISM (Performance Report Information
and Surveillance Monitoring), 65
Privacy of Consumer Financial Information
(Regulation P), 100-101
Private-sector adjustment factor (PSAF),
113
Productivity, 21-22, 46-47
Profits, corporate, 13-15, 40-41
Public Company Accounting Oversight
Board (PCAOB), 76
Public notice, Federal Reserve decisions,
83-84
Qualified financial contracts (QFCs),
137-39
Quantitative Impact Study (QIS-4), 62, 68
Quantitative risk management, 62
Real estate appraisals, 74
Regulations
B, Equal Credit Opportunity, 94, 98, 100
C, Home Mortgage Disclosure, 91, 95,
106
D, Reserve Requirements of Depository
Institutions, 145
E, Electronic Fund Transfers, 87, 90-91,
100, 105, 145
H, Membership of State Banking
Institutions in the Federal Reserve
System, 145
J, Collection of Checks and Other Items
by Federal Reserve Banks and
Funds Transfers through Fedwire,
146
M, Consumer Leasing, 100
P, Privacy of Consumer Financial
Information, 100-101
V, Fair Credit Reporting, 90, 146
340 92nd Annual Report, 2005
Regulations—Continued
Y, Bank Holding Companies and Change
in Bank Control, 145-46
Z, Truth in Lending, 91, 101-2, 105-7
AA, Unfair or Deceptive Acts or
Practices, 102-3
BB, Community Reinvestment, 89, 91,
106, 147
CC, Availability of Funds and Collection
of Checks, 103, 146
DD, Truth in Savings, 88-89, 103,
147-48
FF, Obtaining and Using Medical
Information in Connection with
Credit, 90, 146-47
Reports of Condition and Income (Call
Reports), 64, 77
Repurchase agreements, Federal Reserve
Banks, 266, 268, 270, 272
Reserve requirements, depository
institutions, 264
Reserve Requirements of Depository
Institutions (Regulation D), 145
Residential investment, 10-11, 37-38
Revenue (See Income and expenses)
Reverse repurchase agreements, Federal
Reserve Banks, 267, 269
Riegle Community Development and
Regulatory Improvement Act, 60
Risk-focused supervision, Federal Reserve
System, 60, 68-69
Risk management, 62, 72, 74-75
Salaries, Federal Reserve Bank officers
and employees, 291
Sarbanes-Oxley Act (SOX), 76
Savings bonds, 119
Secondary and seasonal credit rates, 149
Securities credit, 63-64, 84
Securities (See also Treasury securities)
Clearing agencies, examination of, 63
Credit lenders, examination of, 63-64
Government and municipal, examination
of dealers and brokers, 63
SEER (System to Estimate Examination
Ratings), 64
Small bank holding company threshold, 75
Special drawing rights certificate account,
266, 268, 270, 272
Staff development, Federal Reserve, 78-80,
State and local governments, 17, 42-43
State member banks (See also Member
banks)
Complaints against, 103-4, 105
Examinations of, 59, 60, 65
Extensions of credit to executive
officers, 84-85
Financial disclosures, 84
Number of, 59, 265
Surveillance and off-site monitoring of,
64-65
Stocks
Margin requirements, 275
Price indexes, 26, 50
Supervision and regulation responsibilities,
Federal Reserve System, 57-85, 92-96
Supervisory information technology (SIT),
77-78
Surveillance and off-site monitoring, 64-65
Swaps, 137, 155, 157-58
System Open Market Account (SOMA)
(See Federal Open Market Committee
and Open market operations)
System to Estimate Examination Ratings
(SEER), 64
Tax collection, electronic, 121
Technical assistance to foreign banking
authorities, 67
Thrift Institutions Advisory Council, 233
Trade, international, 18-20, 43-44
Training and development, Federal Reserve
staff, 78-80, 96-97
Transfer agents, examination of, 63
Treasury, U.S. Department of the (See also
Treasury securities)
Cash holdings, 267, 269, 271, 273
Currency outstanding and in circulation,
266-73
Payments processed for, 120-21
Payments to, by Federal Reserve Banks,
125, 282-83
Treasury Direct, 120
Treasury securities
Commercial bank holdings, 274
Federal Reserve Bank holdings, 125-26,
262, 266, 268, 270, 272
Interest rates on, 25-26, 49
Open market transactions, 258-59
Repurchase and reverse repurchase
Index 341
Treasury Tax and Loan (TT&L) program,
121
Truth in Lending Act (TILA), 105-7, 140
Truth in Lending (Regulation Z), 91,
101-2, 105-7
Truth in Savings (Regulation DD), 88-89,
103, 147-48
0606
Unemployment, 7, 20-21, 45-46
Unfair or Deceptive Acts or Practices
(Regulation AA), 102-3
Wells Fargo & Co., acquisition, 93
West Texas intermediate (WTI) prices, 19,
44
@FedFRASER