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Annual Report 2010

www.clevelandfed.org

The Federal Reserve System is responsible for formulating and implementing
U.S. monetary policy. It also supervises banks and bank holding companies and
provides financial services to depository institutions and the federal government.
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks in
the United States that, together with the Board of Governors in Washington, DC,
comprise the Federal Reserve System. The Federal Reserve Bank of Cleveland,
including its branch offices in Cincinnati and Pittsburgh, serves the Fourth
Federal Reserve District (Ohio, western Pennsylvania, the northern panhandle
of West Virginia, and eastern Kentucky).

www.clevelandfed.org

It is the policy of the Bank to provide equal employment opportunity for
employees and applicants without regard to race, color, religion, sex, national
origin, age, disability, genetic information, or sexual orientation.

Cleveland

1455 East Sixth Street
Cleveland, OH 44114
216.579.2000

Cincinnati

150 East Fourth Street
Cincinnati, OH 45202
513.721.4787

Pittsburgh

717 Grant Street
Pittsburgh, PA 15129
412.261.7800

Annual Report 2010

President’s Foreword

02

Price Stability: Why We Seek It and How Best to Achieve It

04

Frequently Asked Questions About Inflation

11

w How can inflation be considered low when food
and gas prices are so high? p.11

w How do we know when people are worried about
inflation? p.18

w Can the Federal Reserve control inflation in a
global marketplace? p.13

w Will rising commodity prices lead to rising
inflation? p.20

w Is an explicit inflation objective consistent with a
dual mandate? p.14

w Isn’t pursuing a low and stable inflation rate
going to cost the economy jobs? p.22

w How can the Federal Reserve keep all the money
it’s been “printing” from developing into runaway
inflation? p.16

Operational Highlights

24

Financial Statements

30

Officers and Consultants

57

Boards of Directors

60

Advisory Councils

64

Contents

02 | 03 Federal Reserve Bank of Cleveland

Richard K. Smucker
Deputy Chairman
Alfred M. Rankin Jr.
Chairman
Sandra Pianalto
President and Chief Executive Officer
Dale Roskom
First Vice President and Chief Operating Officer

President’s Foreword
To most Americans, inflation tends to be an abstract concept. Then suddenly, as gas and
food prices strain their weekly budgets, it becomes a topic of everyday conversation. At
the Federal Reserve, we constantly monitor the impact of price movements on underlying
inflation trends, and we adjust monetary policy accordingly.

Annual Report 2010

My policy decisions as president and CEO of the Federal
Reserve Bank of Cleveland are motivated by the dual mandate
of price stability and maximum employment. These are the
objectives that Congress has given the Federal Reserve.
For a long time, many observers doubted the central bank’s
ability to pursue the dual mandate successfully. Some believed
there was a tradeoff between low inflation and high unemployment. Those doubts have faded over the past 30 years as the
public has come to see that both employment growth and price
stability can be sustained over long periods of time.
In this year’s annual report essay, I discuss why now may be an
opportune time for the Federal Reserve to be more explicit about
its inflation objective. An explicit objective is not only consistent
with the Federal Reserve’s dual mandate, but could improve
our capacity for fulfilling it. Moreover, an explicit objective is a
natural step in the evolution of Federal Reserve communications.
The existence of an explicit numerical inflation objective has the
potential to make policy decisions more transparent and policymakers more accountable. In times of volatile commodity price
changes, the existence of an explicit inflation objective could go a
long way toward reassuring the public about our commitment to
controlling inflation.
In separate essays in this annual report, our Bank’s economists
address specific questions about inflation in the context of the
dual mandate. Taken as a whole, these essays are the latest in the
Federal Reserve Bank of Cleveland’s efforts to better connect
the work we do to the economic well-being of Americans.
w

w

w

The officers and staff of the Federal Reserve Bank of Cleveland are
committed to serving our region and nation through the Bank’s
three major functions: monetary policy, banking supervision
and regulation, and payment services. As we do our work, we are
enriched by the guidance and insights provided by our boards
of directors in Cleveland, Pittsburgh, and Cincinnati, as well as
by our business, consumer, and community banking advisory
councils across the District.

President's Foreword

• James Rohr, chairman and CEO of the PNC Financial
Services Group, Pittsburgh, who served three years as a
Cleveland director.
• Les Vinney, chairman of Cleveland HeartLab, who served
as a Cleveland director for six years.
• Margaret Irvine Weir, president of NexTier Bank in Butler,
Pennsylvania, who served more than three years on our
Pittsburgh board.
I am grateful to Paul Poston, director of the Great Lakes District of
NeighborWorks® America, Cincinnati, who served the Cincinnati
board with distinction. Sadly, we lost Mr. Poston to cancer in late
2010. His expertise in housing policy, his commitment to community, and most of all his kindness will be sorely missed.
I am also grateful for the leadership of Henry L. Meyer III,
chairman and CEO of KeyCorp in Cleveland, who completed
three years as the Bank’s representative on the Federal Advisory
Council in 2010.
w

w

w

I wish to express my thanks to Dale Roskom, who joined the
Federal Reserve Bank of Cleveland as first vice president and
chief operating officer in early 2010. Dale’s leadership and energy
are already making a difference. Finally, I would like to express
my sincere appreciation to all Bank officers and staff for their
dedicated service during the past year. Working collaboratively
as well as with our external stakeholders, the Bank’s employees
in Cleveland, Pittsburgh, and Cincinnati have fostered innovation in the nation’s payments system, have ably served the U.S.
Treasury, and have championed policies that promote economic
growth, price stability, and strength in the nation’s banking and
financial systems. This commitment to excellence, efficiency,
innovation, and sound public policy has empowered the Bank in
pursuing its vision: to promote financial stability and prosperity
in our neighborhoods, region, and country.

I would especially like to thank the following directors who
completed their terms of service on our boards in 2010:
• Roy Haley, chairman of Wesco International, Inc. in Pittsburgh,
who spent four years as chairman of our Pittsburgh board
before joining the Cleveland board in 2007.

Sandra Pianalto
President and Chief Executive Officer

04 | 05 Federal Reserve Bank of Cleveland

In 2011 and in the coming years, the
Federal Reserve will always strive to
fulfill its DUAL MANDATE of price
stability and maximum employment.

Annual Report 2010

price stability

Why We Seek It and How Best to Achieve It
By Sandra Pianalto
President and Chief Executive Officer
Federal Reserve Bank of Cleveland

In 2010, the unemployment rate fell, the pace of foreclosures declined, and the stock market rallied.
Still, as a Federal Reserve policymaker, I am far from satisfied. Too many Americans are still hurting—many are
out of work, many have seen the values of their homes plummet, and many see little hope of restoring their nest
eggs for retirement.
If these conditions are not challenging enough, we now have another issue to contend with: Inflation concerns
are mounting. On this developing front, I want to be crystal clear: In 2011 and in the coming years, the Federal
Reserve will always strive to fulfill its dual mandate of price stability and maximum employment.
This annual report is dedicated to the topic of inflation in the context of our dual mandate. We offer a collection
of frequently asked questions that we hear today about inflation and the inflation outlook, together with answers
from our Research Department economists. These short articles review recent movements in inflation, explain
how we develop our inflation forecast, and put the Federal Reserve’s job in a global context, among other topics.
In the next several pages, however, I want to give you my own views on controlling inflation in the context of the
Federal Reserve’s dual mandate. In doing so, I want to make two key points.
First, it is important to understand that the Federal Reserve’s commitment to price stability is entirely consistent
with promoting maximum employment. In fact, it is a necessary part of creating the economic conditions that
permit jobs to flourish over time.
Second, now may be an opportune time for the Federal Reserve to adopt an explicit numerical inflation objective.
The events of the past year—including a new round of monetary stimulus and the recent spike in commodity
prices—have underscored the potential benefits of a numerical inflation objective. Most Americans probably
are not even aware that the Federal Open Market Committee (FOMC) has no such explicit objective—or what
having one would entail.
As I will explain, putting a number on our inflation objective could enhance our communication capabilities
with the public, make the monetary policy formulation process more transparent, and increase the Federal
Reserve’s accountability. As a result, monetary policy will be better able to achieve both price stability and
maximum employment.

Price Stability

06 | 07 Federal Reserve Bank of Cleveland

The Dual Mandate: Why Price
Stability Is Consistent
with Maximum Employment
Conceptually, price stability can be thought of as an inflation
rate low enough and predictable enough that inflation does
not prominently enter into decisions by firms and consumers.
For example, to maximize economic efficiency, firms must be
confident enough about the general level of prices in the future
to be willing to make long-term agreements with their suppliers
and customers (although relative prices do, of course, need to
change over time). Individuals need the same confidence to
plan for retirement.
To many Americans, the costs of excessive inflation are familiar
from the 1970s, a decade in which consumer price inflation
averaged 8 percent per year. (By comparison, consumer price
inflation since then has averaged close to 3 percent.)1
Let’s break down the negative impacts of high inflation into
four areas:
• First, sustained high inflation erodes the purchasing power of
people on fixed incomes. Over the years, retirement savings
can decrease in value if inflation unexpectedly rises.
• Second, high inflation can lead consumers and firms to spend
time and money managing its consequences. For example,
consumers will devote more time tending to cash balances,
and firms will change their posted prices more frequently.

Conceptually, PRICE STABILITY
can be thought of as an inflation
rate low enough and predictable
enough that inflation does not
prominently enter into decisions
by firms and consumers.

• Third, high inflation muddies the information on supply and
demand reflected in prices, leading to inefficient spending
decisions. For instance, with substantial inflation, a business
will find it more difficult to determine if an increase in the price
of a new machine for its production line reflects inflation in
the overall price level or an increase in the price of the machine
relative to some other production input, such as steel. As a
result, the firm could misjudge the price change and make a
poor decision.
• Finally, because many components of federal and state tax
codes are not indexed to the cost of living, high inflation
creates adverse tax effects that can lead consumers and firms
to take actions they would otherwise not take.

1		 Data cited in this annual report reflect updates through April 30, 2011.

Annual Report 2010

Very low inflation creates different challenges. When inflation
is very low, as it has been recently, the Federal Reserve’s ability
to ease monetary policy is constrained if the federal funds rate
cannot be reduced further. That is why after cutting the target for
the federal funds rate to essentially zero in December 2008, the
FOMC had to take the unusual step of making large-scale asset
purchases of longer-term Treasury securities, agency debt, and
agency mortgage-backed securities. Although the strategy was
unusual, its purpose was the same as more traditional policy
easing: to activate the conventional channels of monetary
stimulus to the economy. It would be preferable, though, to be
able to employ more traditional policy tools, with which we have
more experience and with which the public is more familiar.
In an environment of very low inflation and interest rates,
monetary policy can become hamstrung in its ability to promote
stronger economic activity. The experiences of Japan in the last
two decades point to the real danger of low inflation—deflation,
which occurs when the overall price level falls as inflation rates
turn negative for extended periods. Deflation is more likely when
an already-weak economy deteriorates further.
Declining price levels might sound like a good thing—allowing
consumers to buy more of some goods. But sustained deflation
can have profoundly negative effects on the real economy. When
prices are expected to continue to fall, many consumers and firms
will delay purchases while waiting for lower prices. Deflation
also lowers wages as well as prices, and debts don’t decrease in
nominal terms, so actual debt burdens are higher. Deflation can
also create or worsen problems in the financial system. It reduces
the value of collateral, which makes borrowing more difficult.
This dynamic is especially relevant in a period following a severe
financial crisis, when asset values have fallen and credit channels
have already been impaired. For these reasons, Japan’s deflation is
widely thought to have hampered that nation’s monetary policy
and economy since the early 1990s.
Inflation that is high or too low is bad enough—but uncertain
and variable inflation introduces additional problems. One
consequence of variability is that unexpected changes in inflation
redistribute wealth between borrowers and lenders. For example,
if inflation proves higher than expected, a borrower can pay a
lender back with dollars that buy less than they would have
otherwise. If inflation proves to be lower than expected, the
lender benefits at the expense of the borrower. As a result of these
uncertainties, lenders incorporate an inflation risk premium in

interest rates, essentially making borrowing more expensive on
average than it normally would be. This risk premium reduces
borrowing for productive purposes, such as capital spending by
firms. Finally, uncertainty about future inflation can reduce the
willingness of firms to enter into long-term contracts that contribute to an efficient economic system.

Inflation that is high or too low is bad enough—
but uncertain and variable inflation introduces
additional problems.
Seen this way, the Federal Reserve’s objective of price stability is
fully complementary with its objective of maximum employment. The maintenance of price stability avoids problems that
can arise with either very low or excessively high inflation. As
a result, price stability helps to maximize economic efficiency
through a multitude of channels, from interest rates to the
provision of credit. Monetary policy promotes the fastest
sustainable rate of economic growth by minimizing the many
economic distortions that inevitably arise because of deviations
from price stability.

How a Numerical Objective
for Price Stability Could Help
Monetary Policy
Over the course of the business cycle, monetary policy affects
inflation, employment, and long-term interest rates. Over
longer periods, monetary policy is the sole determinant of the
average rate of inflation—but is only one of many factors affecting employment and long-term interest rates. Put another way,
in the long run, inflation is a monetary phenomenon (to paraphrase the late Milton Friedman), while trends in employment
and long-term interest rates depend on other forces, including
demographics and the productivity of the nation’s stock of
factories and machinery. As a corollary, central banks such as
the Federal Reserve can reasonably be expected to achieve a
pre-specified numerical inflation objective over time, but not so
for unemployment.

Price Stability

08 | 09 Federal Reserve Bank of Cleveland

In fact, many other central banks around the world do have
explicit numerical objectives for inflation to anchor their definitions of price stability. The Federal Reserve does not. At present,
the closest the Federal Reserve comes to stating an explicit
inflation objective is in the quarterly economic projections of the
FOMC in which its participants indicate their current estimate
of the rate to which inflation would converge under “appropriate
monetary policy” and in the absence of additional shocks.
FOMC members have raised the idea of establishing a numerical
objective several times over the years. Ben Bernanke, for example,
spoke about the potential utility of an explicit inflation objective
in improving economic outcomes back in 2003, when he was a
member of the Board of Governors but not yet its chairman.
I think it is an opportune time for the FOMC to establish an
explicit inflation objective. The potential benefits are large and,
in my mind, likely to help foster the Federal Reserve’s objectives
of price stability and maximum employment. Specifically, I
favor establishing a 2 percent inflation objective. In the interest
of economic stability, and to provide some flexibility to respond
to shocks, our intention would be to move as close as possible
to this target annually. In the event of shocks to the economy
that push inflation away from this target, the goal would be to
set policy so that inflation converges back to 2 percent over the
medium term, a period of perhaps two to four years, depending
on the size of the shocks.
The potential merits of a stated inflation objective seem particularly large at the moment, given the array of challenges bearing
down on the economy so far in 2011. Consider, for example,
that even though underlying inflation today is still at a low level,
people disagree about where it is heading. Even professional
forecasters differ more with one another about the longer-run
inflation outlook now than they did before the recession. 2
Why the uncertainty? On the one hand, with unemployment
very high and wages increasing very slowly, underlying inflation
could remain subdued. Working in the other direction, recent
increases in energy and other commodity prices are putting
upward pressure on inflation. Although these pressures have not
spilled over into consumer prices more generally, it is possible
that they could.

A Sampling of Central Banks with
Inflation Targets
Targeting
adoption date

Target (%)a

March 1990

1.0–3.0

Canada

February 1991

2.0

United Kingdom

October 1992

2.0

Czech Republic

January 1998

2.0

Euro Area

January 1999

< 2.0

June 1999

4.5

Mexico

January 2001

3.0

Norway

March 2001

2.5

January 2002

2.0

Romania

August 2005

3.0

Japan

March 2006

0–2.0

Ghana

May 2007

8.5

Country
New Zealand

Brazil

Peru

a. Some banks use different measures.
Sources: Federal Reserve Bank of Boston; Federal Reserve Bank of Cleveland.

2 Underlying inflation was only 1.2 percent in the 12 months ended in March 2011,
as measured by the Cleveland Federal Reserve’s median Consumer Price Index.

Annual Report 2010

Price Stability

Although I trust that the FOMC will act as needed to preserve
price stability, the perceived threat of inflation is very real in
many people’s minds. They see the expansion of the Federal
Reserve’s balance sheet, the federal government’s immense
borrowing needs, and rising global commodity prices as all
potentially contributing to rapidly rising inflation. If those
concerns intensified so strongly that broad measures of
longer-term inflation expectations escalated, actual inflation
could rise in the absence of an appropriate response from the
Federal Reserve.
Economic theory tells us that rising long-term inflation expectations (one of the key determinants of the actual inflation trend)
could push inflation higher. For example, expectations of a
pickup in inflation could lead firms to boost their prices to reflect
those expectations, contributing to a rise in inflation this year.
In these circumstances, the FOMC’s adoption of a concrete,
explicit numerical objective for inflation could be advantageous.
Numerical targets are proven to be highly effective in anchoring
inflation expectations. Studies comparing the United States to
some other countries with formal inflation targets have found
that these explicit objectives help to pin down long-term inflation
expectations at the rate the central bank has established as its
target.3 For example, in countries with explicit inflation targets,
private-sector forecasters are in greater agreement about the
inflation outlook.
I see three main gains from a numerical target, and they are
intertwined. First, better-anchored inflation expectations could

increase the federal reserve’s ability to
adjust monetary policy to stabilize the
economy. For example, when the economy is weak, the

FOMC could have more scope to ease monetary policy without
triggering an increase in longer-term inflation expectations that
would put upward pressure on inflation. The explicit objective
for price stability would help to assure the public that a more
expansive monetary policy was a temporary move to stabilize the
economy, without any implications for the longer-run inflation
objective. Thus, an explicit numerical inflation objective could
boost the stability of employment as well as inflation.

NUMERICAL TARGETS
are proven to be highly
effective in anchoring
inflation expectations.

3 See Refet S. Gürkaynak, Andrew T. Levin, and Eric T. Swanson, 2010, “Does Inflation
Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond
Yields in the U.S., U.K., and Sweden,” Journal of the European Economic Association,
8, 1208–42; Meredith J. Beechey, Benjamin K. Johannsen, and Andrew T. Levin,
2011, “Are Long-Run Inflation Expectations Anchored More Firmly in the Euro Area
than in the United States?” American Economic Journal: Macroeconomics, 3,
104–29; and Eric T. Swanson, 2006, “Would an Inflation Target Help Anchor U.S.
Inflation Expectations?” FRBSF Economic Letter, 20.

10 | 11 Federal Reserve Bank of Cleveland

An explicit numerical objective for inflation could also

enhance the accountability and transparency of monetary policy. With a numerical objective,

the public would know exactly what inflation outcome the
FOMC was trying to achieve. The public would then be better
able to evaluate the FOMC’s performance. The Federal Reserve
chairman’s semiannual reports to Congress would likely include
a discussion of inflation outcomes relative to the objective. Less
routinely, one can imagine Congress asking the chairman to
testify regarding the reasons why inflation had drifted from the
target for an unusual length of time.

Reserve has had to put the dual mandate into practice ever since
Congress set forth the broad goals in 1977. I do not see an explicit
numerical inflation objective as anything other than another step
in that direction—a step based on good economics, our own
experience, and the experience of other central banks.

Finally, putting a number on the FOMC’s inflation objective
would help the fomc explain its actions to
the public. Suppose, for example, that the members agreed
on an inflation objective of 2 percent. Last November, having
had such an objective might have allowed the FOMC to better
explain the expansion of its purchases of longer-term Treasury
securities. I supported the action in part because I saw inflation
as simply too low. The underlying rate of inflation was below
1 percent and falling, pulling inflation yet further from the
FOMC’s implicit objective of 2 percent or a bit less (as
suggested by the FOMC’s economic projections). I think the
FOMC could have been clearer about its motivation to engage
in large-scale asset purchases if it had been able to reference its
2 percent inflation objective.
Similarly, looking ahead, I believe that having an explicit
numerical objective for inflation would help the FOMC explain
its eventual decision to tighten monetary policy. For instance,
once the economic recovery is sufficiently far along that the
FOMC expects inflation to begin gathering some momentum,
I think the timing and magnitude of our actions to tighten
policy would be more clearly understood by the public if we
could reference a numerical inflation objective. This would
be especially useful in the context of the FOMC’s alreadyestablished practice of publishing its economic projections.
Likewise, an explicit objective might put to rest the media trope
about inflation “hawks” and “doves,” as it would be evident that
all members shared the identical objective.
Finally, it is important to clarify that setting an explicit inflation
objective is merely a means to an end. It will enhance the Federal
Reserve’s ability to achieve its dual mandate of price stability
and maximum employment. Being explicit about the inflation
objective does not change the dual mandate at all. The Federal

A Timely Step FORWARD

In 1979, Federal Reserve Chairman Paul Volcker led what
became one of our signature monetary policy achievements—
the “Great Disinflation.” By taming runaway inflation, the
Federal Reserve regained the credibility it had lost in the 1970s
as the nation’s steward of price stability.
It is time to build on that hard-won credibility. Setting an explicit
inflation objective is in keeping with the times, enhancing the
Federal Reserve’s openness and accountability at a time when
the public is ever-more demanding of—and deserving of—
such openness and accountability. It will be good for monetary
policy. Most important, it will be good for the economy. w

FAQ

Annual Report 2010

Frequently Asked Questions About INFLATION...

How can inflation be considered low when food
and gas prices are so high?

Brent Meyer
Senior Economic Analyst

Mehmet Pasaogullari
Research Economist
How can inflation be considered low when food and
gas prices are so high? Because there is a difference between
inflation and relative price changes. Inflation is a general rise in
prices usually measured by tracking the prices of a broad basket
of goods and services, such as the Consumer Price Index (CPI).
The CPI is a weighted index of a typical consumer’s market
basket, which includes food and gas prices. Recently, there have
been growing price pressures for these items, which highlight the
importance of distinguishing between the two concepts.
Over the past year, the overall—or headline—inflation rate has
been gradually rising but remains modest by historical standards
(the CPI has risen just 2.7 percent). This may come as a surprise
to shoppers who have absorbed the swifter increases in some
relative prices such as food, gas, and other commodities. It’s well
understood that rising food and energy prices can put pressure
on household budgets, possibly causing painful tradeoffs,
especially since it is hard to substitute these items. Households
may decide to either cut back on food and gas or curb their
spending on other goods and services, which could cause price
changes elsewhere in the market basket. Although these tough
choices between food, gas, and other goods and services tell
us much about the welfare of individuals, they may not reveal
much about the path of inflation.
Increasing food and gas prices will affect the headline CPI
inflation directly to the extent of their share (roughly 20 percent)
in the consumer market basket. These relative price changes

may not be driven by inflation but, more likely, by fundamental
factors affecting supply and demand for each particular good.
Looking at the price change for one item or group, say gasoline
(which is up 27 percent over the past year), doesn’t tell you much
about how high inflation is—just as infant and toddler apparel
prices, which have declined 3.8 percent in the past 12 months, are
not an indicator of deflation. Inflation itself affects all prices and
wages, not just one or two particular items or markets.
The headline CPI, like all headline inflation measures, is subject
to short-term volatility that can arise from several sources:
mismeasurement, treatment of seasonal factors, and relative
price changes, which have little or nothing to do with inflation.
These transitory price fluctuations may cause the CPI to give a
misleading monthly signal of the inflation trend.
For example, in mid-2008, oil prices spiked, peaking at an average
of $134 a barrel that June. Measured at annualized rates, energy
prices in general jumped 102.4 percent that month, which
caused the CPI to spike up 11.7 percent, pushing its 12-month
change up to 5.0 percent. Five short months later, the bottom fell
out on oil and energy prices, causing the year-over-year percent
change in the CPI to dip well below zero. This is exactly the kind
of volatility that makes it difficult to monitor the headline CPI
for changes in the inflation trend. What we need are measures of
inflation that extract a signal about future prices.

FAQs

12 | 13 Federal Reserve Bank of Cleveland

Figure 1. Inflation and Oil Prices
6

12-month percent change

Dollars per barrel
150

5
4

CPI (left axis)

125

3

100

2

75

1
0

50

-1
-2

25

Domestic oil price (right axis)

-3
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Sources: U.S. Department of Labor, Bureau of Labor Statistics; Federal Reserve
Bank of Cleveland.

Median CPIa

2000

2002

2004

However, the “ex-food and energy” approach does not address
transitory price fluctuations in other components of the retail
market basket used to construct the CPI, such as mismeasurement and idiosyncratic shocks (excise taxes, inclement weather,
and government incentives to reduce the supply of used autos, for
example). Further, such an approach may mismeasure inflation if
there are long-term movements in food and energy prices relative
to other goods and services.
An alternative underlying approach is to eliminate monthly volatile
price movements from the CPI through the use of trimmed-mean
estimators, which eliminate the most volatile monthly price swings
(both increases and decreases). By eliminating high-frequency
noise, these measures provide a clearer signal of the inflation trend
than either the headline CPI or the core CPI.

Price statistics that attempt to distinguish the
inflation signal from the noise are often called
underlying measures of inflation. The Federal
Reserve Bank of Cleveland’s measures of
underlying inflation are currently quite low.

Figure 2. Consumer Price Index
12-month percent change
7
6
CPI
5
Core CPI
4
3
2
16% trimmed-mean CPIa
1
0
-1
-2
-3
1990 1992 1994 1996 1998

Price statistics that attempt to distinguish the inflation signal
from noise are often called underlying measures of inflation.
One well-known underlying inflation statistic excludes food and
energy prices from the CPI; this is what most economists refer
to as the “core CPI.” Food and energy prices tend to be the most
volatile components and regularly cause fluctuations in the CPI
that are not characteristic of the inflation trend.

2006 2008

2010

a. Calculated by the Federal Reserve Bank of Cleveland.
Sources: The Wall Street Journal; Bureau of Labor Statistics/Haver Analytics.

The Federal Reserve Bank of Cleveland reports two such
trimmed-mean measures—the 16 percent trimmed-mean CPI
and the median CPI—on a monthly basis. These measures are
much less volatile than either the CPI or the core CPI, making
them more useful in determining the current inflation trend and
in forecasting future inflation, as research here in our Bank and
elsewhere shows.4
As you can see from figure 2, these measures of underlying
inflation are currently quite low. In fact, they are all hovering near
post-World War II lows. The median CPI and the core CPI are
up just 1.2 percent over the past year. w

4		 See Michael F. Bryan, Stephen G. Cecchetti, and Rodney L. Wiggins II, 1997,
“Efficient Inflation Estimation,” Working Paper No. 9707, Federal Reserve Bank
		 of Cleveland (August).

Annual Report 2010

Can the Federal Reserve control inflation in
a global marketplace?
Owen Humpage
Senior Economic Advisor
Can the Federal Reserve control inflation in a global
marketplace? Yes, it can. The growing integration of world
markets has by no means diminished the Federal Reserve’s
ability to control inflation. If anything, the more intense
competition associated with global openness complements the
FOMC’s efforts to achieve price stability. Since 1980, as trade
and competition between nations has progressed, the rate of
inflation in the United States has fallen precipitously. Even as
commodity prices are rising here and internationally, domestic
inflation remains firmly under the Federal Reserve’s control.
One of the bedrock principles of economics is that trade is
mutually beneficial. When one nation profits from trade, it
does not necessarily mean the other loses—it is not a zero-sum
game. The concept holds when applied to prices. Cross-border
competition generally has a favorable impact on the level of
consumer prices, whether for steel or software.
Globalization provides firms with access to lower-cost inputs
while it reduces firms’ ability to mark up prices beyond what
is necessary to cover their costs and provide a competitive
rate of return. Separately, openness fosters specialization and
cross-border technological transfers, both of which reduce
prices through productivity gains. International trade also tends
to keep wage rates at competitive levels. Moreover, prices and
wages that evolve in such competitive environments tend to
adjust more flexibly to changes in underlying market conditions
than prices and wages that arise in less-competitive situations.
Still, with world commodity prices now on a sharp upward path,
and with inflation rising in some developing countries, notably
China, many observers wonder if higher import prices will serve
as the conduit to growing inflation in the United States. A sharp
rise in import prices—particularly in goods like oil that are used
in the production of other U.S. goods—can put upward pressure
on a broad swath of consumer prices.

These price strains will always prove transitory, provided that
the Federal Reserve System does not accommodate them
through a monetary expansion.
Increases in the prices of imports and in the prices of domestic
goods made with imports have two general impacts on the
economy. First, they cause consumers and businesses to switch
to cheaper alternatives whenever possible. This substitution
effect can cause the prices of the alternative goods to rise, of
course, but competition tends to limit their size. Second, the
rise in import and related prices reduces the purchasing power
of consumers’ income, much like a tax. This income effect
ultimately limits the scope of price increases—prices can rise
only so far before consumers completely stop buying those
products, given income constraints—unless, of course, income
somehow expands along with the price pressures.
The only way that can happen is for the Federal Reserve to ease
monetary policy. In fact, the FOMC often did so in the 1970s,
fearing that the income effect from sharply higher imported
oil prices would otherwise lower output and employment.
The results were disastrous, ushering in the unintended effect
of upward spiraling inflation and stagnant growth. Easing
monetary policy in an attempt to minimize output losses can
convert a broad-based relative price hike into inflation with—at
best—uncertain, temporary gains to employment and output.
Ultimately, the economy still must adjust to elevated import
prices, but having to adjust to a higher rate of inflation on top of
relative price increases is a recipe for recession.
Keeping the focus of monetary policy on a low and stable
inflation objective, in contrast, allows the economy to adjust
to higher relative import prices without the added uncertainty
about how and when the central bank will wrench it back out
of an inflationary environment. Commodity prices may grab
the headlines, but remember: The conduit of inflation is always
monetary policy. w

FAQs

14 | 15 Federal Reserve Bank of Cleveland

Is an explicit inflation objective consistent with
a dual mandate?

Mark Schweitzer
Senior Vice President and
Director of Research
Brent Meyer
Senior Economic Analyst

Is an explicit inflation objective consistent with a dual
mandate? It can be. An inflation objective can be implemented
even when a central bank has more than one mandate, which
the Federal Reserve does—to provide “maximum sustainable
employment” in “an environment of stable prices.” In fact, in
countries like the United States, where weight is given to variables
other than inflation, monetary policy performance may be even
more effective than if the central bank had only a single mandate.
In addition, the experiences of other countries that have worked
with an explicit numerical objective for many years suggest
that a flexible inflation targeting regime may actually be more
effective than a strict rule, even if price stability is the primary
concern. By “flexible,” we mean that the central bank identifies
factors that could cause it not to raise interest rates in response to
high inflation. Often the factors may indicate that the headline,
or overall, inflation increase is expected to be temporary.
New Zealand and Norway are two countries whose experiences
in implementing inflation targets illustrate that a flexible inflation
targeting regime works well, especially when central banks have
additional goals. Both countries are small, open economies:
New Zealand trades substantially with Asian markets and, as
an exporter of agricultural goods, is very sensitive to exchangerate movements. Norway—a major oil exporter—is heavily
exposed to fluctuations in oil prices, which cause economic
variability above and beyond exchange-rate volatility. These
sources of added volatility make setting appropriate monetary
policy even more challenging than in the United States, and
thus make these two countries interesting case studies.

New Zealand: The Reserve Bank of New Zealand (RBNZ)
started pursuing a strict inflation target in 1990 with the sole
purpose of price stability. It established a “hard” annual percent
target range in its CPI of 0 to 2 percent. At the time, the RBNZ
reacted so aggressively to inflation rates above its target range
that it was rumored its governor would lose his job should the
RBNZ fail to deliver on its promise. (An effective credibility
mechanism!) Unfortunately, such hawkish policy, instead of
leading to greater stability, was associated with a volatile period
for interest rates, exchange rates, and output.
In response, the RBNZ and the government of New Zealand
slowly edged away from a strict regime, becoming more flexible
in the approach toward inflation targeting over time. In fact,
the RBNZ’s mandate now reads, “In pursuing its price stability
objective, the Bank…shall seek to avoid unnecessary instability in output, interest rates, and the exchange rate.” In a way,
this change made the RBNZ’s objective closer to the Federal
Reserve’s dual mandate.
Figure 3 illustrates New Zealand’s flexibility, as the RBNZ has
at times either held or cut its main policy tool—the official
cash rate (OCR)—even when the annual trend in inflation
was above its stated target range. Greater flexibility has likely
contributed to reduced macroeconomic volatility, but the
RBNZ has still been successful at lowering inflation back into
its target range following significant economic shocks. While
increasing flexibility does come with the risk of losing credibility,
survey measures of inflation expectations have remained
within the RBNZ’s target range, evidence that expectations
remain anchored.

Annual Report 2010

Norway: The Norges Bank (the central bank of Norway) has
operated a “flexible inflation targeting regime” for the past
10 years. Under this set of rules, weight is given to stability in
inflation, employment, and output (similar to the Federal
Reserve’s current dual mandate). The Norges Bank’s operational
target for inflation is an annual CPI inflation rate of 2.5 percent
over the medium term. Should inflation deviate from its target
as a result of a shock to the economy, the specific length of time
it will take for inflation to return to its target will depend on the
type of shock that buffeted the economy.
With such flexibility, a central bank needs to communicate its
policy in a transparent and credible manner, lest the public lose
faith in the bank’s ability to deliver on its promises. The Norges
Bank does this by publicly announcing policy objectives,
providing its assessment of current economic conditions, and
releasing its forecasts for macroeconomic variables such as GDP
and inflation.
Norway has experienced significant shocks to its economy. For
example, in January 2003, its headline CPI—which has been
and continues to be more volatile than many other developed
countries—jumped to above 5 percent, largely due to a spike
in the relative price of household electricity stemming from
supply issues, only to fall below zero a year later. But despite
these episodes, the Norges Bank has succeeded at returning
inflation to its targeted level. Relative price swings do make it
hard to get an accurate reading on inflation, and even harder to
communicate to the public. However, since the Norges Bank
adopted an explicit inflation target in 2001, the longer-term
(three-year) trend in inflation has been relatively well anchored
near 2.5 percent.
Judging from the experiences of these two countries, moving to
an explicit numerical inflation objective can be consistent with
the Federal Reserve’s dual mandate. Indeed, these two countries
show that when inflation expectations are well anchored, the
central bank can be freer to take short-term stabilization actions,
if the public does not fear inflation. w

FAQs

Figure 3. New Zealand’s CPI
Annual percent change
20
18
16
14
12
10
8
6
4
2
0

CPI
Forecast
Target range

Apr 01: Cut OCR due to
global growth concerns

1985

1989

1993

“Ignoring” due to tax changes
and Canterbury earthquake

Jun 05: held OCR
expected growth slow

1997

2001

Sep 08:
cut OCR 50bps

2005

2009

2013

Sources: Statistics New Zealand; Reserve Bank of New Zealand.

Figure 4. Norway’s CPI
Annualized percent change
14
12
10
8
6
4
2
0
-2
-4
1985
1989
1993

12-month percent change
36-month percent change
Inflation target 2.5%

1997

Source: Statistics Norway/Haver Analytics.

2001

2005

2009

16 | 17 Federal Reserve Bank of Cleveland

How can the Federal Reserve keep all the money it’s
been “printing” from developing into runaway inflation?
John Carlson
Vice President and Economist

How can the Federal Reserve keep all the money it’s
been “printing” from developing into runaway inflation?
The short answer is that the Federal Reserve is unwaveringly
committed to price stability and has the tools to fight inflation
at every turn. The slightly longer answer follows.
Let’s start by revisiting the motivation for the Federal Reserve’s
“money printing,” which has resulted in a balance sheet that is
more than 2½ times larger than it was before the financial crisis.
The Federal Reserve’s balance sheet now contains assets of
almost $3 trillion, a record high that amounts to about $9,600 per
U.S. resident. When people talk about all the money the Federal
Reserve is printing, that’s what they mean.
The increase in assets served two key purposes. One was to
support market functioning. The other was to lower longerterm interest rates.
As the nation’s lender of last resort, the Federal Reserve is
responsible for providing backstop lending. When private credit
markets panicked and dried up in the fall of 2008, the financial
system likewise froze. The Federal Reserve accomplished its
backstop role by expanding access to credit facilities for a broad
array of financial institutions—including investment banks and
money market mutual funds—and by purchasing an increasing array of assets, including mortgage-backed securities and
commercial paper (figure 5). The increased lending served its
purpose: it stabilized markets, restored credit flows, and
supported the economic recovery.
Most assets associated with the emergency lending programs
have now rolled off the balance sheet. The more persistent
components were those intended to lower longer-term interest
rates. This program began in November 2008 with an FOMC
policy directive to make large-scale purchases of a range of

longer-term securities. The large-scale asset purchase program
(LSAP) was expanded in March 2009 and continued after
the economy began to grow in June 2009. Indeed, the FOMC
ordered another round of purchases in November 2010 as
economic indicators suggested a weaker-than-expected recovery
and the potential for menacingly low inflation. This most recent
effort is commonly called Quantitative Easing 2 (QE2) and has
received no shortage of attention in the press.
LSAP was a departure from the conventional Federal Reserve
policy tool of targeting the interest rates paid on overnight
borrowings between banks—known as the federal funds rate.
With the funds rate hitting the zero bound—when the FOMC
lowered the federal funds rate target to between zero and
¼ percent in December 2008—there was no more room to
go lower. But the goal of each tool, whether conventional or
unconventional, is the same: to provide monetary stimulus for
generating a sustainable expansion of economic activity.
In effect, the asset purchases have been funded by the creation
of bank reserves. It is this large supply of bank reserves (composed almost entirely of excess reserves) that has some analysts
worried about the potential for an increase in inflation.5 Excess
reserves, like currency, are immediate money, meaning they
can be spent instantly. Thus, analysts who are concerned about
inflationary pressures see the surge in excess reserves as a case of
“printing money.”
Unlike Federal Reserve notes, which are actually printed and
largely held by individuals, excess reserves remain idle and essentially exist only as entries on banks’ balance sheets. Nevertheless,
some fear that excess reserves could allow banks to expand credit
dramatically, and that could lead to inflationary pressures. Understanding this dynamic, the Federal Reserve began developing an
exit strategy well before LSAP was fully implemented.

Annual Report 2010

Figure 5. Federal Reserve’s Balance Sheet
3.0

Trillions of dollars
Lending to financial institutions

2.5

Support to specific
institutions

Assets

2.0
1.5
1.0

System open market account

Providing liquidity to key
credit markets

0.5

Other assets

Liabilities

0
0.5

Currency

1.0
1.5
2.0
2.5
3.0
Nov-07

Capital

Reserves

Other liabilities
Factors absorbing
reserves

May-07

Nov-08

May-08

Nov-09

May-09

Nov-10

Source: Federal Reserve Board.

As part of the exit strategy, Chairman Ben Bernanke has
emphasized that the FOMC remains unwaveringly committed
to low and stable inflation, and that it “has the tools to be able
to smoothly and effectively exit from the current highly accommodative policy stance at the appropriate time.”6
Congress gave the Federal Reserve one of the most important
exit strategy tools in 2008 with the authority to pay interest on
reserve balances at Federal Reserve Banks. This authority allows
the Federal Reserve to put upward pressure on short-term rates
and thus to tighten monetary policy even if bank reserves remain
high. Banks won’t want to trade with one another at or below the
rate by keeping their reserves on deposit at the Federal Reserve.
In addition, the Federal Reserve has developed other tools
that will allow it to absorb reserves, immobilizing them as
needed to allow a smooth withdrawal of policy accommodation when conditions warrant. Finally, the Federal Reserve
could also tighten policy by redeeming or selling securities in
the open market. w

5 Excess reserves consist of reserves over and above the levels that
banks are required to keep on deposit at the Federal Reserve.
6 Testimony before the Committee on the Budget, U.S. House of
Representatives, Washington, DC, February 9, 2011.

FAQs

18 | 19 Federal Reserve Bank of Cleveland

How do we know when people are worried
about inflation?
Joseph Haubrich
Vice President and Economist

How do we know when people are worried about
inflation? One way to gauge opinions on future inflation is
to ask people directly, and several well-respected surveys do
just that. The Reuters/University of Michigan Surveys of
Consumers ask the proverbial “man on the street” how much
he think prices will change in general terms, not relative to any
statistic. Others, such as the Survey of Professional Forecasters
or Blue Chip Economic Indicators, ask market professionals
about specific measures, including their predictions for the CPI.
Another way to quantify inflation expectations is to see if people
put their money where their mouth is. Several financial contracts
linked to inflation provide a sense of what “the market” expects
on the inflation front.
The most commonly used measure of inflation expectations
of this type is the “break-even inflation rate” derived from the
interest rates on two different types of Treasury securities. One
type of Treasury bond, Treasury Inflation Protected Securities
(TIPS), pays back more money if prices rise, and in that way
protects against inflation. Traditional, or nominal, Treasury
bonds do not—if the bond has a face value of $10,000, it will
deliver $10,000 at maturity. A TIPS of equal face value, by
contrast, will pay $11,000 if inflation runs at 10 percent over the
life of the bond. Because one bond is protected against inflation
and the other is not, the difference in their interest rates gives
the measure of expected inflation at which an investor would
“break even” no matter which option was chosen.
Another way to gauge expectations is with something called an
inflation swap. Here, two investors (or counterparties) agree to
a trade: One side pays a fixed, certain interest rate, and the other
agrees to pay whatever the inflation rate ends up being. So the

fixed payment should indicate the investor’s expected inflation.
In that sense, it is directly comparable to the break-even rate
from TIPS.
Plotted on graphs in figures 6 and 7, TIPS and inflation swaps
show remarkably similar patterns, though liquidity and other
differences between the instruments mean that they do not
match exactly. After a large drop to abnormally low levels in the
summer of 2010, expectations steadily increased back to levels
somewhat above where they were in early 2010.
The problem with these indicators is that both the TIPS- and
swaps-based measures overstate inflation expectations. Both
include a risk premium for inflation along with a measure of
expected inflation. That’s because investors demand a bit of
insurance to account for the fact that inflation might differ from
what they expect.

Another way to quantify inflation expectations
is to see if people put their money where their
mouth is.
A measure developed at the Federal Reserve Bank of Cleveland
uses a hybrid model that includes both financial data and survey
measures of inflation to remove this bias. It delivers a purer
measure of inflation expectations and can also extract inflation
expectations at a variety of horizons. Shown in figure 8, this
measure shows a fairly contained level of inflation at many
horizons, with expectations generally staying below 2 percent
for many years. w

Figure 6. Five-Year Break-Even Inflation Rate, TIPS
2.8

Percent

2.5
2.3
2.0
1.8
1.5
1.3
1.0
Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

Note: Calculated using TIPS break-even inflation rates.
Source: Federal Reserve Board.

Figure 7. Five-Year Break-Even Inflation Rate, Swaps
2.8

Percent

2.5
2.3
2.0
1.8
1.5
1.3
1.0
Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

Note: Calculated using inflation swaps.
Source: Bloomberg.

Figure 8. Expected Inflation Yield Curve
2.5

Percent
March 1, 2010

2.0

March 1, 2011
February 1, 2011

1.5
1.0
0.5
0
1 2 3 4 5 6 7 8 9 10

12

15
Horizon in years

Source: Federal Reserve Bank of Cleveland.

20

25

30

Annual Report 2010

FAQs

20 | 21 Federal Reserve Bank of Cleveland

Will rising commodity prices lead to
rising inflation?
Kenneth Beauchemin
Senior Research Economist

Will rising commodity prices lead to rising inflation? Not
necessarily. While the recent commodity price shock does pose
an upward risk to underlying inflation, we expect the effect to
be small and transitory.
Real, or relative, commodity prices are determined by the
Commodity Research Bureau’s (CRB) spot price index of all
commodities divided by the core consumer price index. They
include crude oil, metals, crops, and the like, and their spike
has been quite pronounced over the past year. Since the early
2000s, in fact, real commodity prices have generally moved
higher (see figure 9).
Inflation in the near- to medium term, in particular the underlying
inflation trends that help guide monetary policy, depends on a
variety of forces, including inflation expectations and the behavior
of economic activity. (Over the long term, monetary policy determines the trend of inflation.) For a more satisfying explanation of
why we expect only small and transitory effects from the recent
commodity price shock, we need to delve just a little deeper into
the economy’s structure to examine the role of commodity prices
in production costs.
In the mature and diverse economy of the United States, the
total number of goods produced far exceeds those that are
sold to consumers as “final” output. The prices for the items in
the CPI published by the Bureau of Labor Statistics (BLS), for
example, represent only a small fraction of prices posted and
paid in the economy.
In addition to consumer prices, there are also the prices for
“intermediate” goods—the industrial materials fashioned
from raw commodities that trade on global markets. But do

the prices of intermediate goods exist in a realm completely
separate from consumer prices?
Certainly not, as a time-honored textbook example makes
clear: Consider a loaf of bread on a supermarket shelf that sells
for $2.00. In the first stage of production, a farmer produces the
wheat required to produce the loaf and sells it to the flour mill
for $0.60. The mill converts the wheat to flour and sells it to the
bakery for $1.30. In the process, the mill has added $0.70 of value
to the farmer’s wheat. Subsequently, the bakery produces the loaf
and sells it to the grocer for $1.80 (in what is commonly called a
wholesale transaction), adding $0.50 of value to the bread. Finally,
the consumer purchases the bread for $2.00 (the retail transaction), which means that the retailer has added $0.20 in value.
This final transaction’s price is the only one that would enter into
an index of consumer prices (such as the CPI). The rest—all
prices determined in intermediate transactions—contribute to
the various measures of producer prices compiled by the BLS.
We take away from this example the simple notion that
consumer prices reflect the prices of all intermediate materials
used in production. In our little example, wheat is considered
a commodity, flour an intermediate material, and bread on the
grocer’s shelf the final output.
But this simple story disguises the contribution of a universal
and critical input to production: the labors of men and women
that transform raw and intermediate materials into materials
that are useful in the next stage of production. Also, the value
added by labor in each stage of production—from the farmer
toiling in the fields to the cashier ringing up your bread—turns
out to be far greater than the cost of materials. Furthermore,

Annual Report 2010

when the relative price of a material rises, firms can often substitute for a cheaper alternative. Substituting labor for materials
is not so straightforward. So what has been happening to labor
costs? Figure 10 charts the recent growth in unit labor costs (the
labor cost of producing a single unit of output), and it has been
anemic. While strong world demand for commodities coupled
with substantial supply disruptions have driven commodity
prices much higher over the past year or so, weak labor market
conditions in the United States coupled with strong productivity growth have led to concurrently falling unit labor costs
and historically low readings of underlying inflation. With the
unemployment rate at historically high levels, we do not expect
resurgent labor compensation growth anytime soon.
A commodity price shock also has its own implications for
economic activity and labor demand, particularly if that commodity is crude oil and energy commodities more generally.
Given that substitutes for fossil-fuel-generated energy are nearly
nil in just about any production process one can imagine, the
natural response of a profit-maximizing firm to higher energy
prices is to limit production, thereby reducing the demand for
labor and suppressing market wages in the process. So, higher
commodity prices act as a catalyst for both higher inflation, as
businesses pass through higher production costs, and lower
inflation, as compensation growth falls.
How do we sort out these complicated and opposing forces
to determine whether rising commodity prices will lead to
rising inflation? At the Cleveland Federal Reserve, we recently
developed a historically based forecasting model to evaluate the
question. The main experiment simulated a commodity price
shock of similar scale to the one experienced in 2007 and 2008.
The model showed only a small increase in the core CPI, about
0.3 percentage point at the worst point of the shock, and some
dampening of economic activity.
Even though changes in commodity prices can quickly hit
consumer pocketbooks, their ability to bring about a sustained
inflation is less robust. For commodity price shocks to generate
inflation, they must rise faster than the overall level of prices for
a protracted period. In that event, stable inflation expectations
could be placed in jeopardy, raising the risk of a sustained inflationary period—and a tougher monetary policy environment. w

FAQs

Figure 9. Real Commodity Prices Since 1986
160

Real CRB Spot Index (2005=100)

150
140
130
120
110
100
90
80
70
60
1986

1990

1994

1998

2002

2006

2010

2002

2006

2010

Source: Commodity Research Bureau.

Figure 10. Unit Labor Costs
6

Percent

5
4
3
2
1
0
-1
-2
-3
-4
1986

1990

1994

1998

Source: U.S. Department of Labor, Bureau of Labor Statistics.

22 | 23 Federal Reserve Bank of Cleveland

Isn’t pursuing a low and stable inflation rate
going to cost the economy jobs?

John Carlson
Vice President and Economist

Owen Humpage
Senior Economic Advisor

Isn’t pursuing a low and stable inflation rate going to cost
the economy jobs? On the contrary: Low and stable inflation
is an essential ingredient for growing jobs. It can help promote
maximum employment by eliminating uncertainty about the
evolution of monetary policy and by allowing relative prices to
act as clear signals to consumers.
It’s true that monetary policy has been highly stimulative for the
past couple of years, which could risk creating higher inflation
while creating higher employment. At first glance, it might
appear that efforts to place more policy focus on low and stable
inflation could cost jobs. In fact, many believe that we must
have higher inflation to have lower unemployment—this is the
premise of the Phillips curve, which shaped economic debate
for much of the last part of the 20th century.

The lower the inflation rate, the lower the
unemployment rate—contrary to what many
economists had once thought to be the case.
When monetary policy attempts to raise employment above
a level consistent with stable inflation, however, consumers,
businesses, and wage earners eventually catch on and begin to
anticipate the inflationary effects of the policy on all prices and
wages. Producers of goods discover that they can increase their
profit margins by raising prices at the cost of lower levels of

output and therefore demand fewer employees. So any tradeoff
between inflation and unemployment eventually breaks down,
resulting in permanently higher inflation, but no lasting gains in
employment.
Attempts to maintain a level of unemployment below the
economy’s full employment rate also create uncertainty about
the implications of such a policy for the relative prices of goods
and services. Thus, such policies interfere with efficient spending
choices by adding noise to price-setting decisions, and hence to
the signals consumers need to make their best choices.
The overall correlation between inflation and the unemployment rate since 1950 is weak, but it is nonetheless significant
and positive—not negative as a permanent tradeoff would
indicate. In other words, the lower the inflation rate, the lower
the unemployment rate—contrary to what many economists
had once thought to be the case. But the data also suggest
that, over short periods, monetary policy can be used to bring
employment in line with full employment levels, provided
inflation expectations remain stable.
Consider the 1970s: Excessively stimulative monetary policy
during this decade persistently failed to account for accelerating
inflation and its ultimate effect on inflation expectations. As
illustrated in figure 11, both inflation and unemployment rose
throughout the decade. After this dismal experience, many
central banks set numerical objectives for inflation in the

Annual Report 2010

Figure 11. U.S. Inflation and Unemployment Rate
16
14

Percent
Inflation rate
Unemployment rate

12
10
8
6
4
2
0
-2
-4
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Note: Inflation rate given as an annualized percent.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

neighborhood of 2 percent per year. This objective is broadly
accepted as being most consistent with maximum levels of
employment; 2 percent is a low enough target level to be credible
with the objective of price stability. Such credibility in turn creates
an environment in which monetary policymakers can aggressively ease to offset the negative consequences of shocks that
threaten economic stability. And, as figure 11 also shows, since

the 1980s, both U.S. inflation and unemployment have trended
lower until the 2007-09 recession.
To the extent that the recent policy measures to produce low and
stable inflation help speed economic activity and employment to
their potential levels, such policies would, if anything, add—not
cost—jobs. w

FAQs

24 | 25 Federal Reserve Bank of Cleveland

2010 Operational Highlights
As 2010 ushered in sweeping reforms to the U.S. financial regulatory structure,
the Federal Reserve Bank of Cleveland geared up to implement the impending
changes. At the same time, the Bank reaffirmed its commitment to excellence in
core responsibilities, including central banking, financial and Treasury services,
banking supervision and regulation, and outreach. Guiding these efforts were
the Bank’s refreshed strategic goals: financial system stability, economic growth,
and payments transformation.

Bank’s Strategic Goals

Financial
System
Stability

Economic
Growth

Payments
Transformation

Annual Report 2010

Contributions to Regional and
National Policy Issues

Operational Highlights

Led by Vice President and Community Affairs Officer Ruth
Clevenger, Community Development expanded the Bank’s collaboration with nonprofit organizations, government agencies,
academics, and other Reserve Banks. These efforts yielded a
national vacant property conference showcasing a presentation
of the Bank’s Neighborhood Stabilization Program research.
The function also provided key insights into the development of
a Community Reinvestment Act (CRA) proposal, contributing
early versions of the language and approach to the proposal that
was put out for public comment, and collaborated frequently with
Research and Supervision staff to design public outreach programs. Throughout the financial crisis and its aftermath, the team
maintained strong communication channels with its stakeholders,
hosting conferences and small group meetings throughout the
District to address issues concerning housing policy.

Vice President and Community Affairs Officer Ruth Clevenger, 2010 President’s
Award recipient, is shown here with President and CEO Sandra Pianalto and
First Vice President and COO Dale Roskom.

Throughout 2010, the Bank advanced its work on housing
policy and neighborhood stabilization through applied research
and leadership of System and District policy summits. The
Community Development function worked proactively to
recognize and respond to the housing and foreclosure issues
emerging in the Fourth District.

Community Development has become widely regarded as
a leader in the Federal Reserve System for its expertise on
housing issues associated with vacant and abandoned properties and for its proactive outreach efforts. As a result, the Federal
Reserve Bank of Cleveland became one of two Reserve Banks
to lead a Systemwide initiative on how to deal with distressed
properties, which led to a significant conference held at the
Federal Reserve Board.
For her leadership, commitment, and ability to deliver results in
addressing the aftereffects of the financial crisis, Clevenger was
awarded one of two 2010 President’s Awards, the Bank’s highest
employee honor.

The Community Development
function has become widely
regarded as a leader in the
Federal Reserve System for its
expertise on housing issues.

26 | 27 Federal Reserve Bank of Cleveland

Achievements in Payments Operations

The Bank’s Debit Gateway team received
a 2010 President’s Award for successfully
streamlining business processes that resulted
in significant savings for the U.S. Treasury
and the Federal Reserve.

The Bank continued to play a crucial role in supporting the U.S.
Treasury’s efforts to further streamline its electronic payments
processes by successfully implementing the Debit Gateway. The
Debit Gateway project consolidated the processing of check
and ACH debit transactions into a single centralized system that
resulted in greater efficiency.
Over the course of 15 months, the Debit Gateway team—
comprised of members of the Bank’s eGovernment function—
successfully designed, tested, and implemented two significant
software releases. By second quarter 2010, the Debit Gateway
was successfully launched, and payment processing began. The
system processes more than 250 million transactions totaling
over $2 trillion annually.

The successful implementation was an important milestone
for both the Cleveland Fed and the Treasury. A highly visible
project, the Debit Gateway became the first new application to be
integrated as part of the Treasury’s strategic vision, and signifies
the future of collections.
For their efforts in streamlining business processes and continuing to provide critical services and support to the Treasury,
the Debit Gateway team was awarded the second of the Bank’s
2010 President’s Awards. The eGovernment Department also
received the Treasury’s highest performance rating for the third
consecutive year.

The Debit Gateway became the first new application
to be integrated as part of the Treasury’s strategic
vision, and signifies the future of collections.

Annual Report 2010

Innovations in Public Outreach

Operational Highlights

The Bank’s public outreach initiatives focused on such issues as
small business lending, housing finance, and systemic risk. In 2010,
key messages from the Bank’s research were shared more broadly
across communication channels and media outlets and were
widely cited in the press. In particular, the Bank’s work on inflation,
the median CPI, Federal Reserve balance sheet developments, and
economic trends received considerable public attention.
Realizing the public’s desire to better understand the complex
economic issues confronting them every day, the Public
Information function saw a unique opportunity to provide
those sought-after answers while delivering key Bank messages
in a creative way. Working cross-functionally with the Research
function, the team—led by Assistant Vice President Todd
Morgano—developed the Drawing Board, a series of videos
comprised of “really bad drawings and real simple explanations.”

Todd Morgano, assistant vice president in Public Affairs, was presented
with the 2010 Chris Moore Spirit of Innovation Award for developing and
executing the Drawing Board concept.

The first installment in the series featured the Federal Reserve
Bank of Cleveland’s proposal for regulating systemically important institutions. A comprehensive media campaign that targeted
both traditional and social media channels was launched, which
garnered significant attention from national and local media for
the video. Another video in the series, which focused on Federal
Reserve independence, drew critical acclaim from the media.
Both videos continue to be viewed regularly on YouTube.
The Drawing Board series and media campaign conveyed the
Bank’s key messages clearly and accurately using common-sense
language, which allowed the Fed to reach new audiences. For
pioneering this new dimension of the Bank’s communications
strategy, Morgano was presented with the 2010 Chris Moore
Spirit of Innovation Award. The annual award, which honors the
legacy of the Bank’s late first vice president, recognizes a commitment to innovation through the implementation of creative
ideas that contribute to the Bank’s strategic goals.

Find the Drawing Board series at www.clevelandfed.org/drawingboard.

28 | 29 Federal Reserve Bank of Cleveland

Response to Financial
Regulatory Reform
With the passage of the Dodd–Frank Wall Street Reform
and Consumer Protection Act in July 2010, several Federal
Reserve System banking supervision practices were revised to
focus on strengthening processes for systemically important
and large banking organizations. The Bank’s Supervision and
Regulation function successfully incorporated these changes
and enhanced its large-bank capital assessment processes. The
Bank also piloted elements of its enterprise risk management
framework at a large District banking organization.
The Office of Minority and Women Inclusion (OMWI)
was established consistent with the parameters outlined in the
Dodd–Frank Act. Although the legislation is new, the Bank’s
commitment to diversity and inclusion is not. OMWI supports
the Bank’s existing efforts to foster a more inclusive work
environment, build a workforce that is representative of our

communities and is consistent with the applicable job market,
and promote the Bank as an organization that values a collaborative and diverse environment.
To support OMWI’s goals, the Contracts and Procurement
function expanded its supplier diversity program. Human
Resources reviewed its recruiting practices to confirm that
diverse slates of candidates are considered for Fourth District
employment opportunities. The Community Relations
function incorporated additional diversity and inclusion
practices into its strategic plan for education and outreach
efforts, expanding the concept of community and allowing
the Bank to engage more diverse stakeholders.

OMWI
Office of Minority and Women Inclusion

Annual Report 2010

In all of their endeavors, employees
continued working toward the Federal
Reserve Bank of Cleveland’s renewed
vision of promoting financial stability
and prosperity in our neighborhoods,
region, and country.

Operational Highlights

30 | 31 Federal Reserve Bank of Cleveland

Management’s Report on Internal
Control Over Financial Reporting

31

Independent Auditors’ Report

32

Abbreviations

34

Financial Statements

35

Notes to Financial Statements

37

Auditor Independence

In 2010, the Board of Governors engaged Deloitte & Touche LLP (D&T) for the audits of the individual and
combined financial statements of the Reserve Banks and the consolidated financial statements of the limited liability
companies (LLCs) that are associated with Federal Reserve actions to address the financial crisis and are consolidated in the financial statements of the
Federal Reserve Bank of New York. Fees for D&T’s services are estimated to be $8.0 million, of which approximately $1.6 million were for the audits of the
LLCs.1 To ensure auditor independence, the Board of Governors requires that D&T be independent in all matters relating to the audit. Specifically, D&T 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
Reserve Banks, or in any other way impairing its audit independence. In 2010, the Bank did not engage D&T for any non-audit services.

1

Each LLC will reimburse the Board of Governors for the fees related to the audit of its financial statements from the entity’s available net assets.

Annual Report 2010

Cleveland, OH 44101 | 216.579.2000 | www.clevelandfed.org

Management’s Report on Internal Control Over Financial Reporting
To the Board of Directors of the Federal Reserve Bank of Cleveland:
The management of the Federal Reserve Bank of Cleveland (FRBC) is responsible for the preparation and fair presentation of the
Statements of Condition as of December 31, 2010 and 2009, and the Statements of Income and Comprehensive Income, and Statements
of Changes in Capital for the years then ended (the Financial Statements). The Financial Statements have been prepared in conformity with
the accounting principles, policies, and practices established by the Board of Governors of the Federal Reserve System as set forth in the
Financial Accounting Manual for Federal Reserve Banks (FAM), and, as such, include some amounts that are based on management judgments
and estimates. To our knowledge, the Financial Statements are, in all material respects, fairly presented in conformity with the accounting
principles, policies, and practices documented in the FAM and include all disclosures necessary for such fair presentation.
The management of the FRBC is responsible for establishing and maintaining effective internal control over financial reporting as it relates
to the Financial Statements. Such internal control is designed to provide reasonable assurance to management and to the Board of Directors
regarding the preparation of the Financial Statements in accordance with the FAM. Internal control contains self-monitoring mechanisms,
including, but not limited to, divisions of responsibility and a code of conduct. Once identified, any material deficiencies in internal control
are reported to management and appropriate corrective measures are implemented.
Even effective internal control, no matter how well designed, has inherent limitations, including the possibility of human error, and therefore
can provide only reasonable assurance with respect to the preparation of reliable financial statements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
The management of the FRBC assessed its internal control over financial reporting reflected in the Financial Statements, based upon the
criteria established in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, we believe that the FRBC maintained effective internal control over financial reporting as it relates to
the Financial Statements.

Federal Reserve Bank of Cleveland
March 22, 2011

Sandra Pianalto
President &
Chief Executive Officer

Dale Roskom
First Vice President &
Chief Operating Officer

Gregory L. Stefani
Senior Vice President &
Chief Financial Officer

Internal Control

32 | 33 Federal Reserve Bank of Cleveland

Independent Auditors’ Report
To the Board of Governors of the Federal Reserve System and the Board of Directors of the Federal Reserve Bank of Cleveland:
We have audited the accompanying Statements of Condition of the Federal Reserve Bank of Cleveland (“FRB Cleveland”) as of December
31, 2010 and 2009, and the related Statements of Income and Comprehensive Income, and of Changes in Capital for the years then ended,
which have been prepared in conformity with accounting principles established by the Board of Governors of the Federal Reserve System.
We also have audited the internal control over financial reporting of the FRB Cleveland as of December 31, 2010, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The FRB
Cleveland’s management is responsible for these Financial Statements, for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these Financial Statements and an opinion on the
FRB Cleveland’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United
States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the Financial Statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the Financial
Statements included examining, on a test basis, evidence supporting the amounts and disclosures in the Financial Statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audits provide a reasonable basis for our opinions.

Member of
Deloitte Touche Tohmatsu

Annual Report 2010

The FRB Cleveland’s internal control over financial reporting is a process designed by, or under the supervision of, the FRB Cleveland’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the FRB Cleveland’s board
of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of Financial Statements for external purposes in accordance with the accounting principles established by the Board of Governors of the Federal Reserve System. The FRB Cleveland’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the FRB Cleveland; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of Financial
Statements in accordance with the accounting principles established by the Board of Governors of the Federal Reserve System, and that
receipts and expenditures of the FRB Cleveland are being made only in accordance with authorizations of management and directors of
the FRB Cleveland; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the FRB Cleveland’s assets that could have a material effect on the Financial Statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections
of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Note 4 to the Financial Statements, the FRB Cleveland has prepared these Financial Statements in conformity with accounting
principles established by the Board of Governors of the Federal Reserve System, as set forth in the Financial Accounting Manual for Federal
Reserve Banks, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of
America. The effects on such Financial Statements of the differences between the accounting principles established by the Board of Governors
of the Federal Reserve System and accounting principles generally accepted in the United States of America are also described in Note 4.
In our opinion, such Financial Statements present fairly, in all material respects, the financial position of the FRB Cleveland as of
December 31, 2010 and 2009, and the results of its operations for the years then ended, on the basis of accounting described in Note 4.
Also, in our opinion, the FRB Cleveland maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

March 22, 2011

Auditors’ Report

34 | 35 Federal Reserve Bank of Cleveland

Abbreviations
ACH

Automated clearinghouse

AMLF

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

ASC

Accounting Standards Codification

BEP

Benefit Equalization Retirement Plan

Bureau

Bureau of Consumer Financial Protection

Dodd–Frank Act

The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010

ESF

Exchange Stabilization Fund

FAM

Financial Accounting Manual for Federal Reserve Banks

FASB

Financial Accounting Standards Board

Fannie Mae

Federal National Mortgage Association

Freddie Mac

Federal Home Loan Mortgage Corporation

FOMC

Federal Open Market Committee

FRBA

Federal Reserve Bank of Atlanta

FRBNY

Federal Reserve Bank of New York

GAAP

Accounting principles generally accepted in the United States of America

GSE

Government-sponsored enterprise

IMF

International Monetary Fund

MBS

Mortgage-backed securities

OEB

Office of Employee Benefits of the Federal Reserve System

OFR

Office of Financial Research

SDR

Special drawing rights

SERP

Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks

SFAS

Statement of Financial Accounting Standards

SOMA

System Open Market Account

STRIP

Separate Trading of Registered Interest and Principal of Securities

TAF

Term Auction Facility

TBA

To be announced

TDF

Term Deposit Facility

TIPS

Treasury Inflation-Protected Securities

TSLF

Term Securities Lending Facility

TOP

Term Securities Lending Facility Options Program

Annual Report 2010

Statements of Condition
As of December 31, 2010 and December 31, 2009 (in millions)
			
ASSETS
Gold certificates
$
Special drawing rights certificates		
Coin			
Items in process of collection		
Loans:
Depository institutions		
System Open Market Account:
Treasury securities, net		
Government-sponsored enterprise debt securities, net		
Federal agency and government-sponsored enterprise mortgage-backed securities, net		
Foreign currency denominated assets, net		
Central bank liquidity swaps		
Accrued interest receivable		
Bank premises and equipment, net		
Other assets		
		Total assets
$

2010		2009
463
$
237		
164		
89		

467
237
154
182

—		

753

36,250		
5,197		
34,135		
1,941		
6		
484		
157		
27		
79,150
$

31,842
6,612
36,305
1,861
757
499
162
24
79,855

LIABILITIES AND CAPITAL
Federal Reserve notes outstanding, net
$
38,601
$
System Open Market Account:
Securities sold under agreements to repurchase		
2,028		
Other liabilities		
—		
Deposits:			
Depository institutions		
18,152		
Other deposits		
4		
Interest payable to depository institutions		
1		
Accrued benefit costs		
133		
Deferred credit items		
410		
Accrued interest on Federal Reserve notes		
26		
Interdistrict settlement account		
15,854		
Other liabilities		
7		
Total liabilities		
75,216		
			
Capital paid-in		
1,967		
Surplus (including accumulated other comprehensive loss of $37 million
and $19 million at December 31, 2010 and 2009, respectively)		
1,967		
Total capital		
3,934		
		 Total liabilities and capital
$
79,150
$

The accompanying notes are an integral part of these financial statements.

37,387
3,071
24
15,198
4
2
108
422
23
19,789
7
76,035
1,910
1,910
3,820
79,855

Financial Statements

36 | 37 Federal Reserve Bank of Cleveland

Statements of Income and Comprehensive Income
For the years ended December 31, 2010 and December 31, 2009 (in millions)
				
INTEREST INCOME
Loans:
Depository institutions
$
System Open Market Account:
Treasury securities, net		
Government-sponsored enterprise debt securities, net		
Federal agency and government-sponsored enterprise mortgage-backed securities, net		
Foreign currency denominated assets, net		
Central bank liquidity swaps		
		 Total interest income		

2010		2009

—

$

18

937		
125		
1,595		
17		
1		
2,675		

896
80
804
22
158
1,978

INTEREST EXPENSE
System Open Market Account:
Securities sold under agreements to repurchase		
Deposits:
Depository institutions		
		 Total interest expense		

3		

4

41		
44		

65
69

		 Net interest income		

2,631		

1,909

NON-INTEREST INCOME
System Open Market Account:
Federal agency and government-sponsored enterprise mortgage-backed securities gains, net		
29		
35
Foreign currency gains, net		
41		
16
Compensation received for service costs provided		
27		
35
Reimbursable services to government agencies		
46		
48
Other income		4		8
Total non-interest income		
147		
142
OPERATING EXPENSES			
Salaries and benefits		
128		
130
Occupancy		16		16
Equipment		 8		10
Assessments:			
Board of Governors operating expenses and currency costs		
64		
52
Bureau of Consumer Financial Protection and Office of Financial Research		
3		
—
Other				
19		
24
Total operating expenses		
238		
232
Net income prior to distribution		
			
Change in funded status of benefit plans		
		 Comprehensive income prior to distribution
$

2,540		

1,819

(18)		
2,522
$

(3)
1,816

Distribution of comprehensive income:
Dividends paid to member banks
$
Transferred to surplus and change in accumulated other comprehensive loss		
Payments to Treasury as interest on Federal Reserve notes		
		Total distribution
$

115
$
57		
2,350		
2,522
$

100
358
1,358
1,816

The accompanying notes are an integral part of these financial statements.

Annual Report 2010

Notes to Financial Statements

Statements of Changes in Capital
For the years ended December 31, 2010 and December 31, 2009 (in millions, except share data)
Surplus
Capital paid-in
Balance at January 1, 2009
(31,041,908 shares)

$

Net change in capital stock issued
(7,166,154 shares)
Transferred to surplus and
change in accumulated other
comprehensive loss
Balance at December 31, 2009
(38,208,062 shares)

$

Net change in capital stock issued
(1,142,322 shares)
Transferred to surplus and
change in accumulated other
comprehensive loss
Balance at December 31, 2010
(39,350,384 shares)

$

1,552

Net income retained
$

1,568

Accumulated other
comprehensive loss
$

(16)

Total surplus
$

1,552

Total capital
$

3,104

358

—

—

—

358

—

361

(3)

358

358

1,910

$

1,929

$

(19)

$

1,910

$

3,820

57

—

—

—

57

—

75

(18)

57

57

1,967

$

2,004

$

(37)

$

1,967

$

3,934

The accompanying notes are an integral part of these financial statements.

Notes to Financial Statements
1. Structure
The Federal Reserve Bank of Cleveland (Bank) is part of the Federal Reserve System (System) and is one of the 12 Federal Reserve Banks
(Reserve Banks) 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. The Bank serves the Fourth Federal Reserve District, which includes Ohio and portions of Kentucky,
Pennsylvania, and West Virginia.
In accordance with the Federal Reserve Act, supervision and control of the Bank is exercised by a board of directors. The Federal Reserve
Act specifies the composition of the board of directors for each of the Reserve Banks. Each board is composed of nine members serving
three-year terms: three directors, including those designated as chairman and deputy chairman, are appointed by the Board of Governors
of the Federal Reserve System (Board of Governors) to represent the public, and six directors are elected by member banks. Banks that are
members of the System include all national banks and any state-chartered banks that apply and are approved for membership. Member
banks are divided into three classes according to size. Member banks in each class elect one director representing member banks and one
representing the public. In any election of directors, each member bank receives one vote, regardless of the number of shares of Reserve
Bank stock it holds.
In addition to the 12 Reserve Banks, the System also consists, in part, of the Board of Governors and the Federal Open Market Committee
(FOMC). The Board of Governors, an independent federal agency, is charged by the Federal Reserve Act with a number of specific duties,
including general supervision over the Reserve Banks. The FOMC is composed of members of the Board of Governors, the president of
the Federal Reserve Bank of New York (FRBNY), and, on a rotating basis, four other Reserve Bank presidents.

38 | 39 Federal Reserve Bank of Cleveland

2. Operations and Services
The Reserve Banks perform a variety of services and operations. These functions include participating in formulating and conducting
monetary policy; participating in the payment system, including large-dollar transfers of funds, automated clearinghouse (ACH) operations, and check collection; distributing coin and currency; performing fiscal agency functions for the U.S. Department of the Treasury
(Treasury), certain Federal agencies, and other entities; serving as the federal government’s bank; providing short-term loans to depository
institutions; providing loans to individuals, partnerships, and corporations in unusual and exigent circumstances; serving consumers and
communities by providing educational materials and information regarding financial consumer protection rights and laws and information
on community development programs and activities; and supervising bank holding companies, state member banks, and U.S. offices of
foreign banking organizations. Certain services are provided to foreign and international monetary authorities, primarily by the FRBNY.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), which was signed into law and became
effective on July 21, 2010, changed the scope of some services performed by the Reserve Banks. Among other things, the Dodd-Frank
Act establishes a Bureau of Consumer Financial Protection (Bureau) as an independent bureau within the Federal Reserve System that
will have supervisory authority over some institutions previously supervised by the Reserve Banks under delegated authority from the
Board of Governors in connection with those institutions’ compliance with consumer protection statutes; limits the Reserve Banks’
authority to provide loans in unusual and exigent circumstances to lending programs or facilities with broad-based eligibility; and vests
the Board of Governors with all supervisory and rule-writing authority for savings and loan holding companies.
The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations, oversees these operations,
and issues authorizations and directives to the FRBNY to execute transactions. The FOMC authorizes and directs the FRBNY to conduct
operations in domestic markets, including the direct purchase and sale of Treasury securities, Federal agency and government-sponsored
enterprise (GSE) debt securities, Federal agency and GSE mortgage-backed securities (MBS), the purchase of these securities under agreements to resell, and the sale of these securities under agreements to repurchase. The FRBNY holds the resulting securities and agreements
in a portfolio known as the System Open Market Account (SOMA). The FRBNY is authorized to lend the Treasury securities and Federal
agency and GSE debt securities that are held in the SOMA.
In addition to authorizing and directing operations in the domestic securities market, the FOMC authorizes the FRBNY to conduct
operations in foreign markets in order to counter disorderly conditions in exchange markets or to meet other needs specified by the
FOMC to carry out the System’s central bank responsibilities. Specifically, the FOMC authorizes and directs the FRBNY to hold balances of, and to execute spot and forward foreign exchange and securities contracts for, 14 foreign currencies and to invest such foreign
currency holdings, while maintaining adequate liquidity. The FRBNY is authorized and directed by the FOMC to maintain reciprocal
currency arrangements with the Bank of Canada and the Bank of Mexico and to “warehouse” foreign currencies for the Treasury and the
Exchange Stabilization Fund (ESF).
Although the Reserve Banks are separate legal entities, they collaborate in the delivery of certain services to achieve greater efficiency and
effectiveness. This collaboration takes the form of centralized operations and product or function offices that have responsibility for the
delivery of certain services on behalf of the Reserve Banks. Various operational and management models are used and are supported by
service agreements between the Reserve Banks. In some cases, costs incurred by a Reserve Bank for services provided to other Reserve
Banks are not shared; in other cases, the Reserve Banks are reimbursed for costs incurred in providing services to other Reserve Banks.
Major services provided by the Bank on behalf of the System and for which the costs were not reimbursed by the other Reserve Banks
include National Check Adjustments, Treasury Retail Services Technology, Cash Technology, Retail Payments Office, Financial Services
Policy Committee, National Check Automation Services, and National Server Management Transition.

3. Financial Stability Activities
The Reserve Banks have implemented the following programs that support the liquidity of financial institutions and foster improved
conditions in financial markets.
Large-Scale Asset Purchase Programs
The FOMC authorized and directed the FRBNY to purchase $300 billion of longer-term Treasury securities to help improve conditions in
private credit markets. The FRBNY began the purchases of these Treasury securities in March 2009 and completed them in October 2009.

Annual Report 2010

Notes to Financial Statements

On August 10, 2010, the FOMC announced that the Federal Reserve will maintain the level of domestic securities holdings in the SOMA
portfolio by reinvesting principal payments from GSE debt securities and Federal agency and GSE MBS in longer-term Treasury securities.
On November 3, 2010, the FOMC announced its intention to expand the SOMA portfolio holdings of longer-term Treasury securities by
an additional $600 billion by June 2011. The FOMC will regularly review the pace of these securities purchases and the overall size of the
asset purchase program and will adjust the program as needed to best foster maximum employment and price stability.
The FOMC authorized and directed the FRBNY to purchase GSE debt securities and Federal agency and GSE MBS, with a goal to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally. The FRBNY was
authorized to purchase up to $175 billion in fixed-rate, non-callable GSE debt securities and $1.25 trillion in fixed-rate Federal agency
and GSE MBS. Purchases of GSE debt securities began in November 2008, and purchases of Federal agency and GSE MBS began in
January 2009. The FRBNY completed the purchases of GSE debt securities and Federal agency and GSE MBS in March 2010. The
settlement of all Federal agency and GSE MBS transactions was completed by August 2010.
Central Bank Liquidity Swaps
The FOMC authorized and directed the FRBNY to establish central bank liquidity swap arrangements, which could be structured as
either U.S. dollar liquidity or foreign currency liquidity swap arrangements. U.S. dollar liquidity swap arrangements were authorized with
14 foreign central banks to provide liquidity in U.S. dollars to overseas markets. The authorization for these swap arrangements expired
on February 1, 2010. In May 2010, U.S. dollar liquidity swap arrangements were reestablished with the Bank of Canada, the Bank of
England, the European Central Bank, the Bank of Japan, and the Swiss National Bank; these arrangements will expire on August 1, 2011.
Foreign currency liquidity swap arrangements provided the Reserve Banks with the capacity to offer foreign currency liquidity to U.S.
depository institutions. The authorization for these swap arrangements expired on February 1, 2010.
Lending to Depository Institutions
The Term Auction Facility (TAF) promoted the efficient dissemination of liquidity by providing term funds to depository institutions. The
last TAF auction was conducted on March 8, 2010, and the related loans matured on April 8, 2010.
Lending to Primary Dealers
The Term Securities Lending Facility (TSLF) promoted liquidity in the financing markets for Treasury securities. Under the TSLF, the
FRBNY could lend up to an aggregate amount of $200 billion of Treasury securities held in the SOMA to primary dealers on a secured
basis for a term of 28 days. The authorization for the TSLF expired on February 1, 2010.
The Term Securities Lending Facility Options Program (TOP) offered primary dealers the opportunity to purchase an option to draw
upon short-term, fixed-rate TSLF loans in exchange for eligible collateral. The program was suspended effective with the maturity of the
June 2009 TOP options, and authorization for the program expired on February 1, 2010.
Other Lending Facilities
The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) provided funding to depository institutions and bank holding companies to finance the purchase of eligible high-quality asset-backed commercial paper (ABCP) from money
market mutual funds. The Federal Reserve Bank of Boston administered the AMLF and was authorized to extend these loans to eligible
borrowers on behalf of the other Reserve Banks. The authorization for the AMLF expired on February 1, 2010.

4. Significant Accounting Policies
Accounting principles for entities with the unique powers and responsibilities of a nation’s central bank have not been formulated by
accounting standard-setting bodies. The Board of Governors has developed specialized accounting principles and practices that it
considers to be appropriate for the nature and function of a central bank. These accounting principles and practices are documented
in the Financial Accounting Manual for Federal Reserve Banks (FAM), which is issued by the Board of Governors. The Reserve Banks are
required to adopt and apply accounting policies and practices that are consistent with the FAM and the financial statements have been
prepared in accordance with the FAM.

40 | 41 Federal Reserve Bank of Cleveland

Limited differences exist between the accounting principles and practices in the FAM and accounting principles generally accepted in the
United States (GAAP), due to the unique nature of the Bank’s powers and responsibilities as part of the nation’s central bank and given the
System’s unique responsibility to conduct monetary policy. The primary differences are the presentation of all SOMA securities holdings
at amortized cost and the recording of such securities on a settlement-date basis. The cost basis of Treasury securities, GSE debt securities,
and foreign government debt instruments is adjusted for amortization of premiums or accretion of discounts on a straight-line basis, rather
than using the interest method required by GAAP. Amortized cost, rather than the fair value presentation, more appropriately reflects
the Bank’s securities holdings given the System’s unique responsibility to conduct monetary policy. Accounting for these securities on a
settlement-date basis, rather than the trade-date basis required by GAAP, more appropriately reflects the timing of the transaction’s effect
on the quantity of reserves in the banking system. Although the application of fair value measurements to the securities holdings may result
in values substantially greater or less than their carrying values, these unrealized changes in value have no direct effect on the quantity of
reserves available to the banking system or on the prospects for future 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 before maturity. Decisions regarding
securities and foreign currency transactions, including their purchase and sale, are motivated by monetary policy objectives rather than
profit. Accordingly, fair values, earnings, and gains or losses resulting from the sale of such securities and currencies are incidental to open
market operations and do not motivate decisions related to policy or open market activities.
In addition, the Bank does not present a Statement of Cash Flows as required by GAAP because the liquidity and cash position of the Bank
are not a primary concern given the Reserve Banks’ unique powers and responsibilities. Other information regarding the Bank’s activities is
provided in, or may be derived from, the Statements of Condition, Income and Comprehensive Income, and Changes in Capital. There are no
other significant differences between the policies outlined in the FAM and GAAP.
Preparing the financial statements in conformity with the FAM requires management to make certain estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Unique accounts
and significant accounting policies are explained below.
a. Consolidation
The Dodd-Frank Act established the Bureau as an independent bureau within the Federal Reserve System, and section 1017 of the
Dodd-Frank Act provides that the financial statements of the Bureau are not to be consolidated with those of the Board of Governors or
the Federal Reserve System. Section 152 of the Dodd-Frank Act established the Office of Financial Research (OFR) within the Treasury.
The Board of Governors funds the Bureau and OFR through assessments on the Reserve Banks as required by the Dodd-Frank Act. The
Bank reviewed the law and evaluated the design of and its relationship to the Bureau and the OFR and determined that neither should be
consolidated in the Bank’s financial statements.
b. Gold and Special Drawing Rights Certificates
The Secretary of the Treasury is authorized to issue gold and special drawing rights (SDR) certificates to the Reserve Banks. Upon
authorization, the Reserve Banks acquire gold certificates by crediting equivalent amounts in dollars to the account established for the
Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold owned by the Treasury. The Treasury may
reacquire the gold certificates at any time and the Reserve Banks must deliver them to the Treasury. At such time, the Treasury’s account
is charged, and the Reserve Banks’ gold certificate accounts are reduced. The value of gold for purposes of backing the gold certificates
is set by law at $42 2/9 per fine troy ounce. The Board of Governors allocates the gold certificates among the Reserve Banks once a year
based on the average Federal Reserve notes outstanding at each Reserve Bank.
SDR certificates are issued by the International Monetary Fund (IMF) to its members in proportion to each member’s quota in the
IMF at the time of issuance. SDR certificates serve as a supplement to international monetary reserves and may be transferred from one
national monetary authority to another. Under the law providing for U.S. participation in the SDR system, the Secretary of the Treasury
is authorized to issue SDR certificates to the Reserve Banks. When SDR certificates are issued to the Reserve Banks, equivalent amounts
in U.S. dollars are credited to the account established for the Treasury and the Reserve Banks’ SDR certificate accounts are increased. The
Reserve Banks are required to purchase SDR certificates, at the direction of the Treasury, for the purpose of financing SDR acquisitions
or for financing exchange stabilization operations. At the time SDR transactions occur, the Board of Governors allocates SDR certificate
transactions among the Reserve Banks based upon each Reserve Bank’s Federal Reserve notes outstanding at the end of the preceding
year. SDRs are recorded by the Bank at original cost. In 2009, the Treasury issued $3 billion in SDR certificates to the Reserve Banks, of
which $133 million was allocated to the Bank. There were no SDR transactions in 2010.

Annual Report 2010

Notes to Financial Statements

c. Coin
The amount reported as coin in the Statements of Condition represents the face value of all United States coin held by the Bank. The
Bank buys coin at face value from the U.S. Mint in order to fill depository institution orders.
d. Loans
Loans to depository institutions are reported at their outstanding principal balances, and interest income is recognized on an accrual basis.
Loans are impaired when current information and events indicate that it is probable that the Bank will not receive the principal and
interest that is due in accordance with the contractual terms of the loan agreement. Impaired loans are evaluated to determine whether an
allowance for loan loss is required. The Bank has developed procedures for assessing the adequacy of any allowance for loan losses using
all available information to identify incurred losses. This assessment includes monitoring information obtained from banking supervisors,
borrowers, and other sources to assess the credit condition of the borrowers and, as appropriate, evaluating collateral values. Generally,
the Bank would discontinue recognizing interest income on impaired loans until the borrower’s repayment performance demonstrates
principal and interest would be received in accordance with the terms of the loan agreement. If the Bank discontinues recording interest on
an impaired loan, cash payments are first applied to principal until the loan balance is reduced to zero; subsequent payments are applied as
recoveries of amounts previously deemed uncollectible, if any, and then as interest income.
e. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase, and Securities Lending
The FRBNY may engage in purchases of securities with primary dealers under agreements to resell (repurchase transactions). These
repurchase transactions are settled through a tri-party arrangement. In a tri-party arrangement, two commercial custodial banks manage
the collateral clearing, settlement, pricing, and pledging, and provide cash and securities custodial services for and on behalf of the Bank
and counterparty. The collateral pledged must exceed the principal amount of the transaction by a margin determined by the FRBNY
for each class and maturity of acceptable collateral. Collateral designated by the FRBNY as acceptable under repurchase transactions
primarily includes Treasury securities (including TIPS and STRIP Treasury securities); direct obligations of several Federal agency and
GSE-related agencies, including Fannie Mae and Freddie Mac; and pass-through MBS of Fannie Mae, Freddie Mac, and Ginnie Mae.
The repurchase transactions are accounted for as financing transactions with the associated interest income recognized over the life of
the transaction. Repurchase transactions are reported at their contractual amount as “System Open Market Account: Securities purchased under agreements to resell,” and the related accrued interest receivable is reported as a component of “Accrued interest receivable”
in the Statements of Condition.
The FRBNY may engage in sales of securities under agreements to repurchase (reverse repurchase transactions) with primary dealers and,
beginning August 2010, with selected money market funds, as an open market operation. These reverse repurchase transactions may be
executed through a tri-party arrangement, similar to repurchase transactions. Reverse repurchase transactions may also be executed with
foreign official and international account holders as part of a service offering. Reverse repurchase agreements are collateralized by a pledge
of an amount of Treasury securities, GSE debt securities, and Federal agency and GSE MBS that are held in the SOMA. Reverse repurchase transactions are accounted for as financing transactions, and the associated interest expense is recognized over the life of the transaction. These transactions are reported at their contractual amounts as “System Open Market Account: Securities sold under agreements to
repurchase,” and the related accrued interest payable is reported as a component of “Other liabilities” in the Statements of Condition.
Treasury securities and GSE debt securities held in the SOMA may be lent to primary dealers to facilitate the effective functioning of the
domestic securities markets. Overnight securities lending transactions are fully collateralized by Treasury securities that have fair values
in excess of the securities lent. The FRBNY charges the primary dealer a fee for borrowing securities, and these fees are reported as a
component of “Other income” in the Statements of Income and Comprehensive Income.
Activity related to securities purchased under agreements to resell, securities sold under agreements to repurchase, and securities lending
is allocated to each of the Reserve Banks on a percentage basis derived from an annual settlement of the interdistrict settlement account
that occurs in April each year.
f. Treasury Securities; Government-Sponsored Enterprise Debt Securities; Federal Agency and Government-Sponsored Enterprise
Mortgage-Backed Securities; Foreign Currency Denominated Assets; and Warehousing Agreements
Interest income on Treasury securities, GSE debt securities, and foreign currency denominated assets comprising the SOMA is accrued
on a straight-line basis. Interest income on Federal agency and GSE MBS is accrued using the interest method and includes amortization

42 | 43 Federal Reserve Bank of Cleveland

of premiums, accretion of discounts, and gains or losses associated with principal paydowns. Premiums and discounts related to Federal
agency and GSE MBS are amortized over the term of the security to stated maturity, and the amortization of premiums and accretion of
discounts are accelerated when principal payments are received. Paydown gains and losses represent the difference between the principal
amount paid and the amortized cost basis of the related security. Gains and losses resulting from sales of securities are determined by
specific issue based on average cost. Treasury securities, GSE debt securities, and Federal agency and GSE MBS are reported net of
premiums and discounts on the Statements of Condition and interest income on those securities is reported net of the amortization of
premiums and accretion of discounts on the Statements of Income and Comprehensive Income.
In addition to outright purchases of Federal agency and GSE MBS that are held in the SOMA, the FRBNY entered into dollar roll
transactions (dollar rolls), which primarily involve an initial transaction to purchase or sell “to be announced” (TBA) MBS for delivery in
the current month combined with a simultaneous agreement to sell or purchase TBA MBS on a specified future date. The FRBNY also
executed a limited number of TBA MBS coupon swap transactions, which involve a simultaneous sale of a TBA MBS and purchase of
another TBA MBS of a different coupon rate. The FRBNY’s participation in the dollar roll and coupon swap markets furthers the MBS
purchase program goal of providing support to the mortgage and housing markets and fostering improved conditions in financial markets more generally. The FRBNY accounts for outstanding commitments under dollar roll and coupon swaps on a settlement-date basis.
Based on the terms of the FRBNY dollar roll and coupon swap transactions, transfers of MBS upon settlement of the initial TBA MBS
transactions are accounted for as purchases or sales in accordance with FASB ASC Topic 860 (ASC 860), Transfers and Servicing, and the
related outstanding commitments are accounted for as sales or purchases upon settlement. Net gains (losses) resulting from dollar roll
and coupon swap transactions are reported as “Non-interest income: System Open Market Account: Federal agency and governmentsponsored enterprise mortgage-backed securities gains, net” in the Statements of Income and Comprehensive Income.
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 foreign currency denominated assets are reported as “Foreign currency gains, net” in
the Statements of Income and Comprehensive Income.
Activity related to Treasury securities, GSE debt securities, and Federal agency and GSE MBS, including the premiums, discounts, and
realized gains and losses, is allocated to each Reserve Bank on a percentage basis derived from an annual settlement of the interdistrict
settlement account that occurs in April of each year. Activity related to foreign currency denominated assets, including the premiums,
discounts, and realized and unrealized gains and losses, 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.
Warehousing is an arrangement under which the FOMC has approved the exchange, at the request of the Treasury, of U.S. dollars for
foreign currencies held by the Treasury over a limited period of time. The purpose of the warehousing facility is to supplement the
U.S. dollar resources of the Treasury for financing purchases of foreign currencies and related international operations. Warehousing
agreements are designated as held-for-trading purposes and are valued daily at current market exchange rates. Activity related to these
agreements 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.
g. Central Bank Liquidity Swaps
Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, can be structured as either U.S. dollar
liquidity or foreign currency liquidity swap arrangements.
Central bank liquidity swaps activity, including the related income and expense, is allocated to each Reserve Bank based on the ratio of
each Reserve Bank’s capital and surplus to aggregate capital and surplus at the preceding December 31. The foreign currency amounts
associated with these central bank liquidity swap arrangements are revalued at current foreign currency market exchange rates.
U.S. Dollar Liquidity Swaps
At the initiation of each U.S. dollar liquidity swap transaction, the foreign central bank transfers a specified amount of its currency to a
restricted account for the FRBNY in exchange for U.S. dollars at the prevailing market exchange rate. Concurrent with this transaction,
the FRBNY and the foreign central bank agree to a second transaction that obligates the foreign central bank to return the U.S. dollars
and the FRBNY to return the foreign currency on a specified future date at the same exchange rate as the initial transaction. The Bank’s
allocated portion of the foreign currency amounts that the FRBNY acquires is reported as “Central bank liquidity swaps” on the Statements of Condition. Because the swap transaction will be unwound at the same U.S. dollar amount and exchange rate that were used in
the initial transaction, the recorded value of the foreign currency amounts is not affected by changes in the market exchange rate.

Annual Report 2010

Notes to Financial Statements

The foreign central bank compensates the FRBNY based on the foreign currency amounts it holds for the FRBNY. The FRBNY
recognizes compensation during the term of the swap transaction and reports it as “Interest income: Central bank liquidity swaps” in the
Statements of Income and Comprehensive Income.
Foreign Currency Liquidity Swaps
The structure of foreign currency liquidity swap transactions involves the transfer by the FRBNY, at the prevailing market exchange rate,
of a specified amount of U.S. dollars to an account for the foreign central bank in exchange for its currency. The foreign currency amount
received would be reported as a liability by the Bank.
h. Interdistrict Settlement Account
At the close of business each day, each Reserve Bank aggregates the payments due to or from other Reserve Banks. These payments result
from transactions between the Reserve Banks and transactions that involve depository institution accounts held by other Reserve Banks,
such as Fedwire funds and securities transfers and check and ACH transactions. The cumulative net amount due to or from the other
Reserve Banks is reflected in the “Interdistrict settlement account” in the Statements of Condition.
i. Bank Premises, Equipment, and Software
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over
the estimated useful lives of the assets, which range from 2 to 50 years. Major alterations, renovations, and improvements are capitalized
at cost as additions to the asset accounts and are depreciated over the remaining useful life of the asset or, if appropriate, over the unique
useful life of the alteration, renovation, or improvement. Maintenance, repairs, and minor replacements are charged to operating expense
in the year incurred.
Costs incurred for software during the application development stage, whether developed internally or acquired for internal use, are capitalized based on the purchase cost and the cost of direct services and materials associated with designing, coding, installing, and testing
the software. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the software applications,
which generally range from two to five years. Maintenance costs related to software are charged to expense in the year incurred.
Capitalized assets, including software, buildings, leasehold improvements, furniture, and equipment, are impaired and an adjustment
is recorded when events or changes in circumstances indicate that the carrying amount of assets or asset groups is not recoverable and
significantly exceeds the assets’ fair value.
j. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United States. These notes, which are identified as issued to a specific Reserve
Bank, must be fully collateralized. All of the Bank’s assets are eligible to be pledged as collateral. The collateral value is equal to the book
value of the collateral tendered with the exception of securities, for which the collateral value is equal to the par value of the securities
tendered. The par value of securities sold under agreements to repurchase is deducted from the eligible collateral value.
The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize outstanding Federal
Reserve notes. To satisfy the obligation to provide sufficient collateral for outstanding Federal Reserve notes, the Reserve Banks have
entered into an agreement that provides for certain assets of the Reserve Banks to be jointly pledged as collateral for the Federal Reserve
notes issued to all Reserve Banks. In the event that this collateral is insufficient, the Federal Reserve Act provides that Federal Reserve
notes become a first and paramount lien on all the assets of the Reserve Banks. Finally, Federal Reserve notes are obligations of the
United States government.
“Federal Reserve notes outstanding, net” in the Statements of Condition represents the Bank’s Federal Reserve notes outstanding,
reduced by the Bank’s currency holdings of $7,304 million and $7,535 million at December 31, 2010 and 2009, respectively.
At December 31, 2010 and 2009, all Federal Reserve notes issued to the Reserve Banks were fully collateralized. At December 31, 2010,
all gold certificates, all special drawing right certificates, and $925 billion of domestic securities held in the SOMA were pledged as
collateral. At December 31, 2010, no investments denominated in foreign currencies were pledged as collateral.

44 | 45 Federal Reserve Bank of Cleveland

k. Deposits
Depository Institutions
Depository institutions’ deposits represent the reserve and service-related balances in the accounts that depository institutions hold at
the Bank. The interest rates paid on required reserve balances and excess balances are determined by the Board of Governors, based on
an FOMC-established target range for the federal funds rate. Interest payable is reported as “Interest payable to depository institutions”
on the Statements of Condition.
The Term Deposit Facility (TDF) consists of deposits with specific maturities held by eligible institutions at the Reserve Banks. The
Reserve Banks pay interest on these deposits at interest rates determined by auction. Interest payable is reported as “Interest payable to
depository institutions” on the Statements of Condition. There were no deposits held by the Bank under the TDF at December 31, 2010.
Other
Other deposits include foreign central bank and foreign government deposits held at the FRBNY that are allocated to the Bank.
l. Items in Process of Collection and Deferred Credit Items
“Items in process of collection” primarily represents amounts attributable to checks that have been deposited for collection and that, as of the
balance sheet date, have not yet been presented to the paying bank. “Deferred credit items” are the counterpart liability to items in process of
collection. The amounts in this account arise from deferring credit for deposited items until the amounts are collected. The balances in both
accounts can vary significantly.
m. Capital Paid-in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount equal to
6 percent of the capital and surplus of the member bank. These shares are nonvoting with a par value of $100 and may not be transferred
or hypothecated. As a member bank’s capital and surplus changes, its holdings of Reserve Bank stock must be adjusted. Currently, only
one-half of the subscription is paid in and the remainder is subject to call. A member bank is liable for Reserve Bank liabilities up to twice
the par value of stock subscribed by it.
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. To meet the Federal Reserve Act requirement that annual dividends be deducted from net earnings, dividends
are presented as a distribution of comprehensive income in the Statements of Income and Comprehensive Income.
n. Surplus
The Board of Governors requires the Reserve Banks to maintain a surplus equal to the amount of capital paid-in as of December 31 of
each year. Accumulated other comprehensive income is reported as a component of “Surplus” in the Statements of Condition and the
Statements of Changes in Capital. Additional information regarding the classifications of accumulated other comprehensive income is
provided in Notes 12 and 13.
o. Interest on Federal Reserve Notes
The Board of Governors requires the Reserve Banks to transfer excess earnings to the Treasury as interest on Federal Reserve notes after
providing for the costs of operations, payment of dividends, and reservation of an amount necessary to equate surplus with capital paid-in.
This amount is reported as “Payments to Treasury as interest on Federal Reserve notes” in the Statements of Income and Comprehensive
Income. The amount due to the Treasury is reported as “Accrued interest on Federal Reserve notes” in the Statements of Condition.
If earnings during the year are not sufficient to provide for the costs of operations, payment of dividends, and equating surplus and capital
paid-in, payments to the Treasury are suspended. A deferred asset is recorded that represents the amount of net earnings a Reserve Bank
will need to realize before remittances to Treasury resume. This deferred asset is periodically reviewed for impairment.
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
the Treasury in the following year.

Annual Report 2010

Notes to Financial Statements

p. Income and Costs Related to Treasury Services
When directed by the Secretary of the Treasury, the Bank is required by the Federal Reserve Act to serve as fiscal agent and depositary of the
United States Government. By statute, the Treasury has appropriations to pay for these services. During the years ended December 31, 2010
and 2009, the Bank was reimbursed for substantially all services provided to the Treasury as its fiscal agent.
q. Compensation Received for Service Costs Provided
The Federal Reserve Bank of Atlanta (FRBA) has overall responsibility for managing the Reserve Banks’ provision of check and ACH
services to depository institutions and, as a result, recognizes total System revenue for these services on its Statements of Income and
Comprehensive Income. Similarly, the FRBNY manages the Reserve Banks’ provision of Fedwire funds and securities services and recognizes total System revenue for these services on its Consolidated Statements of Income and Comprehensive Income. The FRBA and the
FRBNY compensate the applicable Reserve Banks for the costs incurred to provide these services. The Bank reports this compensation as
“Compensation received for service costs provided” in the Statements of Income and Comprehensive Income.
r. Assessments
The Board of Governors assesses the Reserve Banks to fund its operations and the operations of the Bureau and, for a two-year period, the
OFR. These assessments are allocated to each Reserve Bank based on each Reserve Bank’s capital and surplus balances as of December 31
of the prior year for the Board of Governor’s operations and as of the most recent quarter for the Bureau and OFR operations. The Board
of Governors also assesses each Reserve Bank for the expenses incurred by the Treasury to produce 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
prior year.
During the period prior to the Bureau transfer date of July 21, 2011, there is no fixed limit on the funding that can be provided to the
Bureau and that is assessed to the Reserve Banks; the Board of Governors must provide the amount estimated by the Secretary of the Treasury needed to carry out the authorities granted to the Bureau under the Dodd-Frank Act and other federal law. After the transfer date, the
Dodd-Frank Act requires the Board of Governors to fund the Bureau in an amount not to exceed a fixed percentage of the total operating
expenses of the Federal Reserve System as reported in the Board of Governors’ 2009 annual report. The fixed percentage of total operating
expenses of the System is 10% for 2011, 11% for 2012, and 12% for 2013. After 2013, the amount will be adjusted in accordance with the
provisions of the Dodd-Frank Act.
The Board of Governors assesses the Reserve Banks to fund the operations of the OFR for the two-year period following enactment of
the Dodd-Frank Act; thereafter, the OFR will be funded by fees assessed on certain bank holding companies.
s. Taxes
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property. The Bank’s real property taxes were
$2 million for each of the years ended December 31, 2010 and 2009, and are reported as a component of “Operating expenses: Occupancy” in the Statements of Income and Comprehensive Income.
t. Restructuring Charges
The Reserve Banks recognize restructuring charges for exit or disposal costs incurred as part of the closure of business activities in a
particular location, the relocation of business activities from one location to another, or a fundamental reorganization that affects the
nature of operations. Restructuring charges may include costs associated with employee separations, contract terminations, and asset
impairments. Expenses are recognized in the period in which the Bank commits to a formalized restructuring plan or executes the specific
actions contemplated in the plan and all criteria for financial statement recognition have been met.
Note 14 describes the Bank’s restructuring initiatives and provides information about the costs and liabilities associated with employee
separations and contract terminations. Costs and liabilities associated with enhanced pension benefits in connection with the restructuring
activities for all of the Reserve Banks are recorded on the books of the FRBNY.
The Bank had no significant restructuring activities in 2010 and 2009.

46 | 47 Federal Reserve Bank of Cleveland

u. Recently Issued Accounting Standards
In June 2009, FASB issued Statement of Financial Accounting Standards (SFAS) 166, Accounting for Transfers of Financial Assets – an
amendment to FASB Statement No. 140, (codified in ASC 860). The new standard revises the criteria for recognizing transfers of financial
assets as sales and clarifies that the transferor must consider all arrangements when determining if the transferor has surrendered control.
The adoption of this accounting guidance was effective for the Bank for the year beginning on January 1, 2010, and did not have a
material effect on the Bank’s financial statements.
In July 2010, the FASB issued Accounting Standards Update 2010-20, Receivables (Topic 310), which requires additional disclosures about
the allowance for credit losses and the credit quality of loan portfolios. The additional disclosures include a rollforward of the allowance
for credit losses on a disaggregated basis and more information, by type of receivable, on credit quality indicators, including the amount of
certain past due receivables and troubled debt restructurings and significant purchases and sales. The adoption of this accounting guidance
is effective for the Bank on December 31, 2011, and is not expected to have a material effect on the Bank’s financial statements.

5. Loans
Loans outstanding at December 31, 2010 and 2009, were as follows (in millions):
2010
Primary, secondary, and seasonal credit

$

TAF
Loans to depository institutions

—

2009
$

—
$

—

1
752

$

753

Loans to Depository Institutions
The Bank offers primary, secondary, and seasonal credit to eligible borrowers, and each program has its own interest rate. Interest is accrued
using the applicable interest rate established at least every 14 days by the Bank’s board of directors, subject to review and determination by
the Board of Governors. Primary and secondary credit are extended on a short-term basis, typically overnight, whereas seasonal credit may
be extended for a period of up to nine months.
Primary, secondary, and seasonal credit lending is collateralized to the satisfaction of the Bank to reduce credit risk. Assets eligible to
collateralize these loans include consumer, business, and real estate loans; Treasury securities; GSE debt securities; foreign sovereign
debt; municipal, corporate, and state and local government obligations; asset-backed securities; corporate bonds; commercial paper;
and bank-issued assets, such as certificates of deposit, bank notes, and deposit notes. Collateral is assigned a lending value that is deemed
appropriate by the Bank, which is typically fair value reduced by a margin.
Depository institutions that are eligible to borrow under the Bank’s primary credit program were eligible to participate in the TAF program.
Under the TAF program, the Reserve Banks conducted auctions for a fixed amount of funds, with the interest rate determined by the auction
process, subject to a minimum bid rate. TAF loans were extended on a short-term basis, with terms ranging from 28 to 84 days. All advances
under the TAF program were collateralized to the satisfaction of the Bank. All TAF loan principal and accrued interest was fully repaid.
Loans to depository institutions are monitored daily to ensure that borrowers continue to meet eligibility requirements for these
programs. The financial condition of borrowers is monitored by the Bank and, if a borrower no longer qualifies for these programs, the
Bank will generally request full repayment of the outstanding loan or, for primary or seasonal credit lending, may convert the loan to a
secondary credit loan.
Collateral levels are reviewed daily against outstanding obligations and borrowers that no longer have sufficient collateral to support
outstanding loans are required to provide additional collateral or to make partial or full repayment.

Annual Report 2010

Notes to Financial Statements

Allowance for Loan Loss
At December 31, 2010 and 2009, the Bank did not have any impaired loans and no allowance for loan losses was required. There were
no impaired loans during the years ended December 31, 2010 and 2009.

6. Treasury Securities; Government-Sponsored Enterprise Debt Securities; Federal Agency and GovernmentSponsored Enterprise Mortgage-Backed 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. The Bank’s allocated share of SOMA
balances was approximately 3.398 percent and 3.951 percent at December 31, 2010 and 2009, respectively.
The Bank’s allocated share of Treasury securities, GSE debt securities, and Federal agency and GSE MBS, excluding accrued interest,
held in the SOMA at December 31 was as follows (in millions):
2010
Unamortized
premiums

Par
Bills

$

626

$

—

Unaccreted
discounts
$

Total
amortized cost
—

$

626

Fair value
$

626

Notes

26,273

477

(26)

26,724

27,340

Bonds

7,807

1,112

(19)

8,900

9,845

Total Treasury securities

$

34,706

$

1,589

$

(45)

$

36,250

$

37,811

GSE debt securities

$

5,010

$

188

$

(1)

$

5,197

$

5,327

Federal agency and GSE MBS

$

33,709

$

479

$

(53)

$

34,135

$

34,859

2009
Unamortized
premiums

Par
Bills

$

728

$

—

Unaccreted
discounts
$

Total
amortized cost
—

$

728

Fair value
$

728

Notes

22,453

259

(39)

22,673

23,035

Bonds

7,500

966

(25)

8,441

9,115

Total Treasury securities

$

30,681

$

1,225

$

(64)

$

31,842

$

32,878

GSE debt securities

$

6,316

$

297

$

(1)

$

6,612

$

6,615

Federal agency and GSE MBS

$

35,888

$

478

$

(61)

$

36,305

$

36,122

The total of the Treasury securities, GSE debt securities, and Federal agency and GSE MBS, net, excluding accrued interest, held in the
SOMA at December 31 was as follows (in millions):
2010

2009

Amortized cost
Bills

$

Notes

$

786,575

Bonds
Total Treasury securities

18,422

Fair value

$

804,703

261,955
$

18,422

Amortized cost

$

$

573,877

289,757

1,066,952

18,423

Fair value

213,672

1,112,882

$

18,423
583,040
230,717

805,972

$

832,180

GSE debt securities

$

152,972

$

156,780

$

167,362

$

167,444

Federal agency and GSE MBS

$

1,004,695

$

1,026,003

$

918,927

$

914,290

48 | 49 Federal Reserve Bank of Cleveland

The fair value amounts in the above tables are presented solely for informational purposes. Although the fair value of security holdings
can be substantially greater than or less than the recorded value at any point in time, these unrealized gains or losses have no effect on the
ability of the Reserve Banks, as the central bank, to meet their financial obligations and responsibilities. The fair value of Federal agency
and GSE MBS was determined using a model-based approach that considers observable inputs for similar securities; fair value for all
other SOMA security holdings was determined by reference to quoted prices for identical securities.
The fair value of the fixed-rate Treasury securities, GSE debt securities, and Federal agency and GSE MBS in the SOMA’s holdings is
subject to market risk, arising from movements in market variables, such as interest rates and securities prices. The fair value of Federal
agency and GSE MBS is also affected by the rate of prepayments of mortgage loans underlying the securities.
The following table provides additional information on the amortized cost and fair values of the Federal agency and GSE MBS portfolio
at December 31, 2010 and 2009 (in millions):
Distribution of MBS
holdings by coupon rate

2010

2009

Amortized cost

Fair value

Amortized cost

Fair value

Allocated to the Bank:
3.5%

$

11

$

12

$

15

$

15

4.0%

5,697

5,722

6,721

6,548

4.5%

16,909

17,287

17,160

17,053

5.0%

7,863

8,071

7,721

7,760

5.5%

3,164

3,257

4,084

4,132

6.0%

438

454

502

510

6.5%
Total

53
$

56

34,135

$

341

$

102

34,859

$

352

$

104

36,305

$

363

$

36,122

SOMA:
3.5%

$

4.0%

365

167,675

168,403

170,119

165,740

4.5%

497,672

508,798

434,352

431,646

5.0%

231,420

237,545

195,418

196,411

5.5%

93,119

95,873

103,379

104,583

6.0%

12,910

13,376

12,710

12,901

6.5%
Total

$

1,558

1,656

1,004,695

$ 1,026,003

2,586
$

918,927

2,644
$

914,290

Financial information related to securities purchased under agreements to resell and securities sold under agreements to repurchase for
the years ended December 31, was as follows (in millions):
Securities purchased under
agreements to resell
2010
Allocated to the Bank:
Contract amount outstanding, end of year
Average daily amount outstanding, during the year

$

Maximum balance outstanding, during the year
Securities pledged (par value), end of year
SOMA:
Contract amount outstanding, end of year
Average daily amount outstanding, during the year
Maximum balance outstanding, during the year
Securities pledged (par value), end of year

2009
—
—

$

—
—

$

Securities sold under
agreements to repurchase

—
—
—
—

2010
—
137

$

3,034
—

$

—
3,616
80,000
—

2,028
2,079

2009
$

3,071
1,483

$

59,703
58,476
77,732
43,642

3,071
2,647
3,395
3,076

$

77,732
67,837
89,525
77,860

Annual Report 2010

Notes to Financial Statements

The contract amounts for securities purchased under agreements to resell and securities sold under agreements to repurchase approximate fair value. The FRBNY executes transactions for the purchase of securities under agreements to resell primarily to temporarily add
reserve balances to the banking system. Conversely, transactions to sell securities under agreements to repurchase are executed primarily
to temporarily drain reserve balances from the banking system.
The remaining maturity distribution of Treasury securities, GSE debt securities, Federal agency and GSE MBS bought outright, and
securities sold under agreements to repurchase that were allocated to the Bank at December 31, 2010, was as follows (in millions):
Within
15 days
Treasury securities (par value)

$

16 days
to 90 days

333

$

843

91 days
to 1 year
$

1,843

Over 1 year
to 5 years

Over 5 years
to 10 years

$

$

14,936

11,346

Over
10 years
$

5,405

Total
$

34,706

GSE debt securities (par value)

38

470

968

2,414

1,040

80

5,010

Federal agency and GSE MBS
(par value)

—

—

—

1

1

33,707

33,709

2,028

—

—

—

—

—

2,028

Securities sold under agreements
to repurchase (contract amount)

Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted average life of these securities at
December 31, 2010, which differs from the stated maturity primarily because the weighted average life factors in prepayment assumptions,
is approximately 4.2 years.
The par value of Treasury and GSE debt securities that were loaned from the SOMA at December 31, was as follows (in millions):
Allocated to the Bank
2010
Treasury securities
GSE debt securities

$

Total SOMA

2009

750
55

$

2010

810
44

$

22,081
1,610

2009
$

20,502
1,108

Other liabilities, which are related to purchases of Federal agency and GSE MBS, arise from the failure of a seller to deliver securities to the
FRBNY on the settlement date. Although the Bank has ownership of and records its investments in the MBS as of the contractual settlement
date, it is not obligated to make payment until the securities are delivered, and the amount reported as other liabilities represents the Bank’s
obligation to pay for the securities when delivered. Total other liabilities held in the SOMA were $601 million at December 31, 2009, of
which $24 million was allocated to the Bank. There were no other liabilities held in the SOMA at December 31, 2010.
The FRBNY enters into commitments to buy Treasury and GSE debt securities and records the related securities on a settlement-date
basis. There were no commitments to buy Treasury and GSE debt securities as of December 31, 2010.
The FRBNY enters into commitments to buy Federal agency and GSE MBS and records the related MBS on a settlement-date basis.
There were no commitments to buy or sell Federal agency or GSE MBS as of December 31, 2010.
During the years ended December 31, 2010 and 2009, the Reserve Banks recorded net gains from dollar roll and coupon swap related
transactions of $782 million and $879 million, respectively, of which $29 million and $35 million, respectively, was allocated to the Bank.
These net gains are reported as “Non-interest income: Federal agency and government-sponsored enterprise mortgage-backed securities
gains, net” in the Statements of Income and Comprehensive Income.

7. Foreign Currency Denominated Assets
The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests in foreign
government debt instruments. These foreign government debt instruments are guaranteed as to principal and interest by the issuing
foreign governments. In addition, the FRBNY enters into transactions to purchase Euro-denominated government debt securities under

50 | 51 Federal Reserve Bank of Cleveland

agreements to resell for which the accepted collateral is the debt instruments issued by the governments of Belgium, France, Germany,
Italy, the Netherlands, and Spain.
The Bank’s allocated share of foreign currency denominated assets was approximately 7.451 percent and 7.364 percent at December 31,
2010 and 2009, respectively.
The Bank’s allocated share of foreign currency denominated assets, including accrued interest, valued at amortized cost and foreign
currency market exchange rates at December 31, was as follows (in millions):
2010

2009

Euro:
Foreign currency deposits

$

526

$

545

Securities purchased under
agreements to resell

184

191

Government debt instruments

343

363

Foreign currency deposits

289

251

Government debt instruments

599

511

Japanese yen:

Total allocated to the Bank

$

1,941

$

1,861

At December 31, 2010 and 2009, the fair value of foreign currency denominated assets, including accrued interest, allocated to the
Bank was $1,953 million and $1,876 million, respectively. The fair value of government debt instruments was determined by reference
to quoted prices for identical securities. The cost basis of foreign currency deposits and securities purchased under agreements to resell,
adjusted for accrued interest, approximates fair value. Similar to the Treasury securities, GSE debt securities, and Federal agency and
GSE MBS discussed in Note 6, unrealized gains or losses have no effect on the ability of a Reserve Bank, as the central bank, to meet its
financial obligations and responsibilities. The fair value is presented solely for informational purposes.
Total Reserve Bank foreign currency denominated assets were $26,049 million and $25,272 million at December 31, 2010 and 2009,
respectively. At December 31, 2010 and 2009, the fair value of the total Reserve Bank foreign currency denominated assets, including
accrued interest, was $26,213 million and $25,480 million, respectively.
The remaining maturity distribution of foreign currency denominated assets that were allocated to the Bank at December 31, 2010, was
as follows (in millions):
16 days
to 90 days

Within 15 days
Euro

$

Japanese yen
Total allocated to the Bank

404

$

306
$

710

224

91 days
to 1 year
$

42
$

266

151

Over 1 year
to 5 years
$

181
$

332

274

Total allocated
to the Bank
$

359
$

633

1,053
888

$

1,941

At December 31, 2010 and 2009, the authorized warehousing facility was $5.0 billion, with no balance outstanding.
There were no transactions related to the authorized reciprocal currency arrangements with the Bank of Canada and the Bank of Mexico
during the years ended December 31, 2010 and 2009.
There were no foreign exchange contracts outstanding as of December 31, 2010.
The FRBNY enters into commitments to buy foreign government debt instruments and records the related securities on a settlement-date
basis. As of December 31, 2010, there were $209 million of outstanding commitments to purchase Euro-denominated government debt
instruments, of which $16 million was allocated to the Bank. These securities settled on January 4, 2011, and replaced Euro-denominated
government debt instruments held in the SOMA that matured on that date.

Annual Report 2010

Notes to Financial Statements

In connection with its foreign currency activities, the FRBNY may enter into transactions that are subject to varying degrees of
off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The FRBNY controls these risks by
obtaining credit approvals, establishing transaction limits, receiving collateral in some cases, and performing daily monitoring procedures.

8. Central Bank Liquidity Swaps
U.S. Dollar Liquidity Swaps
The Bank’s allocated share of U.S. dollar liquidity swaps was approximately 7.451 percent and 7.364 percent at December 31, 2010 and
2009, respectively.
The total foreign currency held under U.S. dollar liquidity swaps in the SOMA at December 31, 2010 and 2009, was $75 million and
$10,272 million, respectively, of which $6 million and $757 million, respectively, was allocated to the Bank. All of the U.S. dollar liquidity
swaps outstanding at December 31, 2010, were transacted with the European Central Bank and had remaining maturity distributions of
less than 15 days.
Foreign Currency Liquidity Swaps
There were no transactions related to the foreign currency liquidity swaps during the years ended December 31, 2010 and 2009.

9. Bank Premises, Equipment, and Software
Bank premises and equipment at December 31 were as follows (in millions):
2010

2009

Bank premises and equipment:
Land and land improvements

$

Buildings

10

$

172

10
171

Building machinery and equipment

62

60

Furniture and equipment

54

53

298

294

(141)

(132)

Subtotal
Accumulated depreciation
Bank premises and equipment, net
Depreciation expense, for the years ended December 31

$

157

$

162

$

11

$

12

The Bank leases space to outside tenants with remaining lease terms ranging from one to fourteen years. Rental income from such leases
was $2 million and $1 million for the years ended December 31, 2010 and 2009, respectively, and is reported as a component of “Other
income” in the Statements of Income and Comprehensive Income. Future minimum lease payments that the Bank will receive under
noncancelable lease agreements in existence at December 31, 2010, are as follows (in millions):
2011

$

2

2012		2
2013		1
2014		1
2015		1
Thereafter		6
Total

$

13

52 | 53 Federal Reserve Bank of Cleveland

The Bank had capitalized software assets, net of amortization, of $9 million and $6 million at December 31, 2010 and 2009, respectively. Amortization expense was $2 million and $3 million for the years ended December 31, 2010 and 2009, respectively. Capitalized
software assets are reported as a component of “Other assets” in the Statements of Condition and the related amortization is reported as
a component of “Operating expenses: Other” in the Statements of Income and Comprehensive Income.

10.Commitments and Contingencies
Conducting its operations, the Bank enters into contractual commitments, normally with fixed expiration dates or termination provisions,
at specific rates and for specific purposes.
At December 31, 2010, the Bank was obligated under noncancelable leases for premises and equipment with remaining terms of one year.
Rental expense under operating leases for certain operating facilities and data processing and office equipment (including taxes, insurance, and maintenance when included in rent), net of sublease rentals, was $355 thousand and $300 thousand for the years ended
December 31, 2010 and 2009, respectively.
Future minimum rental payments under noncancelable operating leases, net of sublease rentals, with remaining terms of one year or
more, at December 31, 2010, were not material.
At December 31, 2010, there were no material unrecorded unconditional purchase commitments or obligations in excess of one year.
Under the Insurance Agreement of the Federal Reserve Banks, each of the Reserve Banks has agreed to bear, on a per incident basis, a share
of certain losses in excess of 1 percent of the capital paid-in of the claiming Reserve Bank, up to 50 percent of the total capital paid-in of all
Reserve Banks. Losses are borne in the ratio of a Reserve Bank’s capital paid-in to the total capital paid-in of all Reserve Banks at the beginning of the calendar year in which the loss is shared. No claims were outstanding under the agreement at December 31, 2010 or 2009.
The Bank is 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 Bank.

11. Retirement and Thrift Plans
Retirement Plans
The Bank currently offers three defined benefit retirement plans to its employees, based on length of service and level of compensation.
Substantially all of the employees of the Reserve Banks, Board of Governors, and Office of Employee Benefits of the Federal Reserve System
(OEB) participate in the Retirement Plan for Employees of the Federal Reserve System (System Plan). In addition, employees at certain
compensation levels participate in the Benefit Equalization Retirement Plan (BEP) and certain Reserve Bank officers participate in the
Supplemental Retirement Plan for Select Officers of the Federal Reserve Bank (SERP). In addition, under the Dodd-Frank Act, employees
of the Bureau can elect to participate in the System Plan. There were no Bureau participants in the System Plan as of December 31, 2010.
The System Plan provides retirement benefits to employees of the Federal Reserve Banks, Board of Governors, and OEB and in the future
will provide retirement benefits to certain employees of the Bureau. The FRBNY, on behalf of the System, recognizes the net asset or net
liability and costs associated with the System Plan in its consolidated financial statements. During the years ended December 31, 2010 and
2009, costs associated with the System Plan were not reimbursed by other participating employers.
The Bank’s projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31, 2010 and
2009, and for the years then ended, were not material.
Thrift Plan
Employees of the Bank participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System (Thrift Plan).
The Bank matches employee contributions based on a specified formula. Effective April 1, 2009, the Bank matches 100 percent of the
first 6 percent of employee contributions from the date of hire and provides an automatic employer contribution of 1 percent of eligible

Annual Report 2010

Notes to Financial Statements

pay. For the first three months of the year ended December 31, 2009, the Bank matched 80 percent of the first 6 percent of employee contributions for employees with less than five years of service and 100 percent of the first 6 percent of employee contributions for employees
with five or more years of service. The Bank’s Thrift Plan contributions totaled $5 million for each of the years ended December 31, 2010
and 2009, and are reported as a component of “Salaries and benefits” in the Statements of Income and Comprehensive Income.

12. Postretirement Benefits Other Than Retirement Plans and Postemployment Benefits
Postretirement Benefits Other Than Retirement Plans
In addition to the Bank’s retirement plans, employees who have met certain age and length-of-service requirements are eligible for both
medical benefits and life insurance coverage during retirement.
The Bank funds benefits payable under the medical and life insurance plans as due and, accordingly, has no plan assets.
Following is a reconciliation of the beginning and ending balances of the benefit obligation (in millions):
2010
Accumulated postretirement benefit obligation at January 1

$

2009

93.7

$

86.0

Service cost benefits earned during the period

4.2

3.6

Interest cost on accumulated benefit obligation

5.5

5.2

18.0

2.5

Net actuarial loss
Contributions by plan participants

0.7

0.6

Benefits paid

(4.7)

(4.5)

Medicare Part D subsidies

0.3

0.3

Accumulated postretirement benefit obligation at December 31

$

117.7

$

93.7

At December 31, 2010 and 2009, the weighted-average discount rate assumptions used in developing the postretirement benefit obligation
were 5.25 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):
2010
Fair value of plan assets at January 1

$

2009
—

$

—

Contributions by the employer

3.7

3.6

Contributions by plan participants

0.7

0.6

Benefits paid

(4.7)

(4.5)

Medicare Part D subsidies

0.3

0.3

Fair value of plan assets at December 31
Unfunded obligation and accrued postretirement benefit cost

$

—

$

—

$

117.7

$

93.7

0.1

$

Amounts included in accumulated other comprehensive loss are shown below:
Prior service cost

$

Net actuarial loss
Total accumulated other comprehensive loss

(37.1)
$

(37.0)

1.5
(20.8)

$

(19.3)

54 | 55 Federal Reserve Bank of Cleveland

Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs” in the Statements of Condition.
For measurement purposes, the assumed health care cost trend rates at December 31 are as follows:
2010

2009

Health care cost trend rate assumed for next year

8.00%

7.50%

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)

5.00%

5.00%

2017

2015

Year that the rate reaches the ultimate trend rate

Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A 1 percentage point change
in assumed health care cost trend rates would have the following effects for the year ended December 31, 2010 (in millions):

Effect on aggregate of service and interest cost components of net
periodic postretirement benefit costs

1 percentage
point increase

1 percentage
point decrease

$

$

Effect on accumulated postretirement benefit obligation

1.7
16.1

(1.4)
(13.3)

The following is a summary of the components of net periodic postretirement benefit expense for the years ended December 31
(in millions):
2010
Service cost-benefits earned during the period

$

2009
4.2

$

3.6

Interest cost on accumulated benefit obligation

5.5

5.2

Amortization of prior service cost

(1.4)

(2.3)

Amortization of net actuarial loss

1.7

Net periodic postretirement benefit expense

$

10.0

1.4
$

7.9

Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit expense
in 2011 are shown below:
Prior service cost

$

Net actuarial loss
Total

—
3.3

$

3.3

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2010 and 2009, the
weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 5.75 percent and
6.00 percent, respectively.
Net periodic postretirement benefit expense is reported as a component of “Salaries and benefits” in the Statements of Income and
Comprehensive Income.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug benefit under Medicare
(Medicare Part D) and a federal subsidy to sponsors of retiree health care benefit plans that provide benefits that are at least actuarially
equivalent to Medicare Part D. The benefits provided under the Bank’s plan to certain participants are at least actuarially equivalent to
the Medicare Part D prescription drug benefit. The estimated effects of the subsidy are reflected in actuarial loss in the accumulated postretirement benefit obligation and net periodic postretirement benefit expense.
Federal Medicare Part D subsidy receipts were $0.3 million in each of the years ended December 31, 2010 and 2009. Expected receipts
in 2011, related to benefits paid in the years ended December 31, 2010 and 2009, are $0.1 million.

Annual Report 2010

Notes to Financial Statements

Following is a summary of expected postretirement benefit payments (in millions):
Without subsidy
2011

$

5.2

2012

5.6

With subsidy
$

4.8
5.2

2013

5.9

5.5

2014

6.4

5.9

2015

6.9

6.4

42.7

39.0

2016 — 2020
Total

$

72.7

$

66.8

Postemployment Benefits
The Bank offers benefits to former or inactive employees. Postemployment benefit costs are actuarially determined using a December 31
measurement date and include the cost of medical and dental insurance, survivor income, disability benefits, and self-insured workers’
compensation expenses. The accrued postemployment benefit costs recognized by the Bank at December 31, 2010 and 2009, were
$12.1 million and $12.7 million, respectively. This cost is included as a component of “Accrued benefit costs” in the Statements of Condition. Net periodic postemployment benefit expense included in 2010 and 2009 operating expenses were $0.9 million and $6.1 million,
respectively, and are recorded as a component of “Salaries and benefits” in the Statements of Income and Comprehensive Income.

13. Accumulated Other Comprehensive Income and Other Comprehensive Income
Following is a reconciliation of beginning and ending balances of accumulated other comprehensive loss (in millions):
Amount related
to postretirement
benefits other than
retirement plans
Balance at January 1, 2009

$

(16)

Change in funded status of benefit plans:
Net actuarial loss arising during the year

(2)

Amortization of prior service cost

(2)

Amortization of net actuarial loss

1

Change in funded status of benefit plans - other comprehensive loss
Balance at December 31, 2009

(3)
$

(19)

Change in funded status of benefit plans:
Net actuarial loss arising during the year

(18)

Amortization of prior service cost

(2)

Amortization of net actuarial loss

2

Change in funded status of benefit plans - other comprehensive loss
Balance at December 31, 2010

(18)
$

(37)

Additional detail regarding the classification of accumulated other comprehensive loss is included in Note 12.

56 | 57 Federal Reserve Bank of Cleveland

14.Business Restructuring Charges
The Bank had no business restructuring charges in 2010 and 2009.
Additional announcements prior to 2009 included restructuring plans associated with Check Operations and Electronic Treasury
Financial Services.

Following is a summary of financial information related to the restructuring plans (in millions):
2008 and prior
restructuring plans
Information related to restructuring plans
as of December 31, 2010:
Total expected costs related to restructuring activity

$

Expected completion date

2.1
2010

Reconciliation of liability balances:
Balance at January 1, 2009

$

Payments
Balance at December 31, 2009

(0.9)
$

Adjustments
Balance at December 31, 2010

1.0

0.1
(0.1)

$

—

Employee separation costs are primarily severance costs for identified staff reductions associated with the announced restructuring
plans. Separation costs that are provided under terms of ongoing benefit arrangements are recorded based on the accumulated benefit
earned by the employee. Separation costs that are provided under the terms of one-time benefit arrangements are generally measured
based on the expected benefit as of the termination date and recorded ratably over the period to termination. Restructuring costs related
to employee separations are reported as a component of “Salaries and benefits” in the Statements of Income and Comprehensive
Income.
Adjustments to the accrued liability are primarily due to changes in the estimated restructuring costs and are shown as a component of
the appropriate expense category in the Statements of Income and Comprehensive Income.

15.Subsequent Events
On February 11, 2011, Treasury informed the Bank that the Treasury Retail Securities operations will be consolidated at the Federal
Reserve Bank of Minneapolis. Treasury plans to complete the consolidation by the end of 2011. The Bank is evaluating the consolidation
efforts and has not yet determined the effects on the 2011 financial statements. There were no other subsequent events that require adjustments to or disclosures in the financial statements as of December 31, 2010. Subsequent events were evaluated through March 22, 2011,
which is the date that the Bank issued the financial statements.

Annual Report 2010

Officers and Consultants

58

Boards of Directors
Cleveland

61

Cincinnati

62

Pittsburgh

63

Advisory Councils

64

Contents

58 | 59 Federal Reserve Bank of Cleveland

Officers and Consultants
As of December 31, 2010

Sandra Pianalto
President and
Chief Executive Officer
Dale Roskom
First Vice President and
Chief Operating Officer
Mark S. Sniderman
Executive Vice President and
Chief Policy Officer
Economic Research,
Community Development

Lawrence Cuy
Senior Vice President
Treasury Retail Securities,
eGovernment,
Information Technology
Stephen H. Jenkins
Senior Vice President
Supervision and Regulation,
Credit Risk Management,
Statistics and Analysis
Robert W. Price

Senior Vice President
Financial Services Policy Committee
Mark E. Schweitzer
Senior Vice President and
Director of Research
Regional Economics,
Macroeconomic Policy,
Money and Payments,
Banking and Finance
Gregory L. Stefani
Senior Vice President and
Chief Financial Officer
Financial Management,
Risk Management, Strategy

Anthony Turcinov
Senior Vice President
Cash, Facilities, District Check
Operations and Adjustments,
Information Security, Protection,
Business Continuity
Peggy A. Velimesis
Senior Vice President and
Chief of Staff
District Human Resources,
Office of Minority and
Women Inclusion,
Executive Information, Payroll,
EEO Officer, Harassment/
Ombuds Programs
Lisa M. Vidacs
Senior Vice President
Outreach, Community Relations,
Public Affairs
Andrew W. Watts
Senior Vice President and
General Counsel
Legal, Ethics Officer

Annual Report 2010

Douglas A. Banks
Vice President
Credit Risk Management,
Statistics and Analysis

Susan M. Kenney
Vice President
eGovernment Technical Support,
Pay.gov

Kelly A. Banks
Vice President
Community Relations,
Learning Center, Bankwide
Public Programs

Mark S. Meder
Vice President
Financial Support Services,
Strategic Management

John B. Carlson
Vice President and Economist
Money, Financial Markets,
and Monetary Policy

Stephen J. Ong
Vice President
Banking Supervision and
Policy Development

Todd E. Clark
Vice President and Economist
Macroeconomic Policy

Terrence J. Roth
Vice President
Financial Services Policy
Committee

Ruth M. Clevenger
Vice President and
Community Affairs Officer
Community Development

James G. Savage
Vice President and Public
Information Officer
Public Affairs

Cheryl L. Davis
Vice President and
Corporate Secretary
Office of the Corporate Secretary

Robert B. Schaub
Vice President
Pittsburgh Senior Regional Officer,
Branch Board of Directors,
Community Outreach

Timothy Dunne
Vice President and Economist
Regional Economics
William D. Fosnight
Vice President and
Associate General Counsel
Legal
Joseph G. Haubrich
Vice President and Economist
Banking and Finance
Amy J. Heinl
Vice President
Treasury Retail Securities
LaVaughn M. Henry
Vice President
Cincinnati Senior Regional Officer,
Branch Board of Directors,
Community Outreach
Suzanne M. Howe
Vice President
eGovernment Operations,
Treasury Electronic Check
Processing

Susan M. Steinbrick
Vice President and
General Auditor
Audit
James B. Thomson
Vice President and Economist
Banking and Financial Markets
Henry P. Trolio
Vice President
Information Technology
Michelle C. Vanderlip
Vice President
District Human Resources,
Human Resources Development
Jeffrey R. Van Treese
Vice President
Check Operations
Nadine M. Wallman
Vice President
Supervision and Regulation,
Applications

Tracy L. Conn
Assistant Vice President
Supervision and Regulation
Jeffrey G. Gacka
Assistant Vice President
Financial Support Services,
National Billing, Accounting

Officers and Consultants

Jerrold L. Newlon
Assistant Vice President
Supervision and Regulation,
Regional Banking
Anthony V. Notaro
Assistant Vice President
Facilities

George E. Guentner
Assistant Vice President
Information Technology

Timothy M. Rachek
Assistant Vice President
Cash

Felix Harshman
Assistant Vice President
Financial Support Services,
Expense Accounting/Budget

Robin R. Ratliff
Assistant Vice President and
Assistant Corporate Secretary
Strategic Communications,
Office of the Corporate Secretary

Bryan S. Huddleston
Assistant Vice President
Supervision and Regulation,
Community Banking
Paul E. Kaboth
Assistant Vice President
Supervision and Regulation,
Risk Supervision
Kenneth E. Kennard
Assistant Vice President
Protection
Jill A. Krauza
Assistant Vice President
Treasury Retail Securities
Dean A. Longo
Consultant
Information Technology,
Infrastructure Support
Evelyn M. Magas
Assistant Vice President
Supervision and Regulation,
Business Process Management
Martha Maher
Assistant Vice President
Retail Payments Office,
Financial Services Policy
Committee
Todd J. Morgano
Assistant Vice President
Public Affairs

John P. Robins
Consultant
Supervision and Regulation
Elizabeth J. Robinson
Assistant Vice President
Human Resources
Thomas E. Schaadt
Assistant Vice President
Check Automation Services
James P. Slivka
Assistant Vice President and
Assistant General Auditor
Audit
Diana C. Starks
Assistant Vice President
Diversity and Inclusion,
Office of Minority and
Women Inclusion
Michael Vangelos
Assistant Vice President
Information Security,
Business Continuity

60 | 61 Federal Reserve Bank of Cleveland

Federal Reserve Banks each have a main office board of nine directors. Directors supervise the Bank’s
budget and operations and make recommendations on the discount rate on primary credit. Also,
those directors who are not commercial bankers appoint the Bank’s president and first vice president,
subject to the Board of Governors’ approval.
In addition, directors provide the Federal Reserve System with a wealth of information on economic
conditions. This information is used by the Federal Open Market Committee and the Board of
Governors in reaching decisions about monetary policy.
Class A directors are elected by and represent Fourth District member banks. Class B directors are
also elected by Fourth District member banks and represent diverse industries within the District.
Class C directors are selected by the Board of Governors and also represent the wide range of
businesses and industries in the Fourth District. Two Class C directors are designated as chairman
and deputy chairman of the board.
The Cincinnati and Pittsburgh branch offices each have a board of seven directors who are appointed
by the Board of Governors and the Board of Directors of the Federal Reserve Bank of Cleveland.
Terms for all directors are generally limited to two three-year terms to ensure that the individuals who
serve the Federal Reserve System represent a diversity of backgrounds and experience.

Annual Report 2010

Cleveland Board of Directors
As of December 31, 2010

Henry L. Meyer III
Federal Advisory Council
Representative
Chairman and
Chief Executive Officer
KeyCorp
Cleveland, Ohio

(standing) James E. Rohr, Les C. Vinney, Tilmon F. Brown, Alfred M. Rankin Jr., Richard K. Smucker, Roy W. Haley, C. Daniel DeLawder
(seated) Susan Tomasky, Charlotte W. Martin

Alfred M. Rankin Jr.
Chairman
Chairman, President, and
Chief Executive Officer
NACCO Industries, Inc.
Cleveland, Ohio

Richard K. Smucker
Deputy Chairman
Executive Chairman and
Co-Chief Executive Officer
The J.M. Smucker Company
Orrville, Ohio
Tilmon F. Brown
President and
Chief Executive Officer
New Horizons Baking Company
Norwalk, Ohio

C. Daniel DeLawder
Chairman and
Chief Executive Officer
Park National Bank
Newark, Ohio
Roy W. Haley
Chairman
WESCO International, Inc.
Pittsburgh, Pennsylvania
Charlotte W. Martin
President and
Chief Executive Officer
Great Lakes Bankers Bank
Worthington, Ohio

James E. Rohr
Chairman and
Chief Executive Officer
The PNC Financial Services
Group, Inc.
Pittsburgh, Pennsylvania
Susan Tomasky
President
AEP Transmission
Columbus, Ohio
Les C. Vinney
Chairman
Cleveland HeartLab
Cleveland, Ohio

Boards of Directors

62 | 63 Federal Reserve Bank of Cleveland

Cincinnati Board of Directors
As of December 31, 2010

(standing) Paul R. Poston,* Daniel B. Cunningham, Donald E. Bloomer, Peter S. Strange, Gregory B. Kenny
(seated) James M. Anderson, Janet B. Reid

James M. Anderson
Chairman
Advisor to the President
Cincinnati Children’s Hospital
Medical Center
Cincinnati, Ohio

Daniel B. Cunningham
President and
Chief Executive Officer
Long–Stanton Manufacturing
Companies
Cincinnati, Ohio

Donald E. Bloomer
President and
Chief Executive Officer
Citizens National Bank
Somerset, Kentucky

Gregory B. Kenny
President and
Chief Executive Officer
General Cable Corporation
Highland Heights, Kentucky

* Regrettably, Paul R. Poston, director, Great Lakes District, NeighborWorks® America, Cincinnati, Ohio, passed away in November 2010.

Janet B. Reid
Managing Partner and Director
Global Novations, LLC
Cincinnati, Ohio
Peter S. Strange
Chairman
Messer, Inc.
Cincinnati, Ohio

Annual Report 2010

Pittsburgh Board of Directors
As of December 31, 2010

Sunil T. Wadhwani
Chairman
Co-founder
iGATE Corporation
Pittsburgh, Pennsylvania

Howard W. Hanna III
Chairman and
Chief Executive Officer
Howard Hanna Real Estate Services
Pittsburgh, Pennsylvania

Todd D. Brice
Chief Executive Officer
S&T Bancorp, Inc.
Indiana, Pennsylvania

Glenn R. Mahone
Partner and Attorney at Law
Reed Smith LLP
Pittsburgh, Pennsylvania

(standing) Howard W. Hanna III, Margaret Irvine Weir,* Sunil T. Wadhwani, Robert A. Paul, Glenn R. Mahone
(seated) Todd D. Brice, Petra Mitchell

*Margaret Irvine Weir, president, NexTier Bank, Butler, Pennsylvania, resigned from the Pittsburgh Board of Directors in November 2010.

Petra Mitchell
President
Catalyst Connection
Pittsburgh, Pennsylvania
Robert A. Paul
Chairman and
Chief Executive Officer
Ampco–Pittsburgh Corporation
Pittsburgh, Pennsylvania

Boards of Directors

64 | 65 Federal Reserve Bank of Cleveland

Business Advisory Councils
As of December 31, 2010
Business Advisory Council members are a diverse group of Fourth District businesspeople who advise the president and senior officers on current business conditions.
Each council—in Cincinnati, Cleveland, Dayton, Erie, Lexington, Pittsburgh, and Wheeling—meets with senior Bank leaders at least twice yearly. These meetings provide
anecdotal information that is useful in the consideration of monetary policy direction and economic research activities.

CINCINNATI

Charles H. Brown
Vice President of Accounting and
Finance and Secretary
Toyota Motor Engineering and
Manufacturing, North America, Inc.
Erlanger, Kentucky
Robert Buechner, Esq.
Buechner Haffer Meyers & Koenig
Cincinnati, Ohio
Calvin D. Buford
Partner, Corporate Development
Dinsmore & Shohl LLP
Cincinnati, Ohio
James E. Bushman
President and
Chief Executive Officer
Cast-Fab Technologies, Inc.
Cincinnati, Ohio

CLEVELAND

Cedric Beckett
President and
Chief Executive Officer
Optimum Supply LLC
Cleveland, Ohio
Maryann Correnti
Chief Financial Officer
Heinen’s Fine Foods, Inc.
Warrensville Heights, Ohio
Gary Gajewski
Vice President, Finance
Moen Inc.
North Olmsted, Ohio
Christopher J. Hyland
Chief Financial Officer
Hyland Software Inc.
Westlake, Ohio

Christopher Cole
Chief Executive Officer
Intelligrated
Mason, Ohio
Carol J. Frankenstein
President
BIOSTART
Cincinnati, Ohio
Kay Geiger
Regional President
PNC Bank
Cincinnati, Ohio
Terry Grundy
Director, Community Impact
United Way of Greater Cincinnati
Cincinnati, Ohio
Jose Guerra
President
L5 Source
Cincinnati, Ohio

Gary A. Lesjak
Chief Financial Officer
The Shamrock Companies Inc.
Westlake, Ohio
Gena Lovett
Director of Manufacturing, Forgings
Cleveland Works, Alcoa Forgings
and Extrusions
Cleveland, Ohio
Rodger W. McKain
Vice President,
Government Programs
Rolls-Royce Fuel Cell Systems
(U.S.) Inc.
North Canton, Ohio
Kevin M. McMullen
Chairman and
Chief Executive Officer
OMNOVA Solutions Inc.
Fairlawn, Ohio

Jim Huff
President and
Chief Executive Officer
HUFF Commercial Group
Ft. Mitchell, Kentucky
Vivian J. Llambi
President
Vivian Llambi & Associates, Inc.
Cincinnati, Ohio
Joseph L. Rippe
Principal
Rippe & Kingston
Cincinnati, Ohio
Carl Satterwhite
President
RCF
Hamilton, Ohio

Michael J. Merle
President and
Chief Executive Officer
Ray Fogg Building Methods Inc.
Cleveland, Ohio
Bob Patterson
Senior Vice President and
Chief Financial Officer
PolyOne Corporation
Avon Lake, Ohio
Frederick D. Pond
President
Ridge Tool Company
Elyria, Ohio
Jack H. Schron Jr.
President and
Chief Executive Officer
Jergens Inc.
Cleveland, Ohio

Annual Report 2010

DAYTON

Bryan Bucklew
President and
Chief Executive Officer
Greater Dayton Area Hospital
Association
Dayton, Ohio
Christopher Che
President and
Chief Executive Officer
Hoover-Dayton Corporation
Dayton, Ohio
Bruce Feldman
President
Economy Linen & Towel Service
Dayton, Ohio
Toni Gillispie
Director, External Affairs
AT&T
Centerville, Ohio

ERIE

Clemont Austin
President
E. E. Austin and Son, Inc.
Erie, Pennsylvania
Matthew Baldwin
Vice President
Baldwin Brothers, Inc.
Erie, Pennsylvania
Jim Berlin
Chief Executive Officer
Logistics Plus
Erie, Pennsylvania
Terrence W. Cavanaugh
President and
Chief Executive Officer
Erie Insurance
Erie, Pennsylvania
Gary L. Clark
Vice President and
Chief Administrative Officer
Snap-tite, Inc.
Erie, Pennsylvania

Greg Johnson
Executive Director
Dayton Metro Housing Authority
Dayton, Ohio
Larry Klaben
President
Morris Furniture
Fairborn, Ohio
Phil Parker
President
Dayton Area Chamber
of Commerce
Dayton, Ohio
Jennell Ross
Dealer Operator and Vice President
Bob Ross Dealerships
Dayton, Ohio

Joel Deuterman
President and
Chief Executive Officer
Velocity Network
Erie, Pennsylvania
Martin Farrell
President
Infinity Resources, Inc.
Erie, Pennsylvania
William Hilbert Jr.
President
REDDOG Industries Inc.
Erie, Pennsylvania
Marsha Marsh
Owner
Marsha Marsh Real Estate Services
Erie, Pennsylvania

Michael Shane
Chairman and
Chief Executive Officer
Lastar, Inc.
Moraine, Ohio
Greg Stout
Chief Financial and
Operating Officer
Voss Auto Network
Dayton, Ohio
Christopher Wallace
Senior Vice President,
Corporate Banking
PNC Bank
Dayton, Ohio
Mark Walton
Vice President
Fifth Third Private Bank
Dayton, Ohio

Chris Scott
Vice President
Scott Enterprises
Erie, Pennsylvania
Tim Shuttleworth
President and
Chief Executive Officer
Eriez Magnetics
Erie, Pennsylvania
Phil Tredway
President and
Chief Executive Officer
Erie Molded Plastics, Inc.
Erie, Pennsylvania

Advisory Councils

66 | 67 Federal Reserve Bank of Cleveland

LEXINGTON

Paula Hanson
Director of Tax Services
Dean, Dorton, Ford
Lexington, Kentucky

Rebecca S. Mobley
Partner
Turf Town Properties, Inc.
Lexington, Kentucky

Ed Holmes
President
EHI Consultants
Lexington, Kentucky

P.G. Peeples Sr.
President and
Chief Executive Officer
Urban League of Lexington–
Fayette County
Lexington, Kentucky

Glenn Leveridge
Market President
Central Bank
Winchester, Kentucky
David Magner
Air Handling Plant
Operations Leader
Ingersoll Rand
Lexington, Kentucky
Ann McBrayer
President
Kentucky Eagle, Inc.
Lexington, Kentucky

PITTSBURGH

Jay Cleveland Jr.
President
Cleveland Brothers Equipment
Co. Inc.
Murrysville, Pennsylvania
Stephanie DiLeo
President
Homer City Automation
Homer City, Pennsylvania
William Fink
President
Paragon Homes, Inc.
Pittsburgh, Pennsylvania
Robert Glimcher
President
Glimcher Group
Pittsburgh, Pennsylvania
Charles Hammell III
President
PITT OHIO Express
Pittsburgh, Pennsylvania

Robert Quick
President and
Chief Executive Officer
Commerce Lexington
Lexington, Kentucky
Kevin Smith
President and
Chief Executive Officer
Community Ventures Corporation
Lexington, Kentucky

Eric A. Hoover
President
Excalibur Machine Company Inc.
Conneaut Lake, Pennsylvania
John R. Laymon Jr.
President/Owner
JRL Enterprises Inc.
Pittsburgh, Pennsylvania
Dennis Meteny
President and
Chief Executive Officer
Cygnus Manufacturing
Company LLC
Saxonburg, Pennsylvania
Dominique E. Schinabeck
Chairwoman and President
ACUTRONIC USA Inc.
Pittsburgh, Pennsylvania

David Switzer
Executive Director
Kentucky Thoroughbred
Association, Inc.
Lexington, Kentucky
John Taylor
President and
Chief Executive Officer
American Founders Bank
Lexington, Kentucky
Kenneth Troske
Director
Center for Business and Economic
Research, University of Kentucky’s
Gatton College of Business and
Economics
Lexington, Kentucky
Holly Wiedemann
President
AU Associates
Lexington, Kentucky

Stephen V. Snavely
Chairman and
Chief Executive Officer
Snavely Forest Products Inc.
Pittsburgh, Pennsylvania
Mark A. Snyder
Corporate Secretary
Snyder Associated Companies Inc.
Kittanning, Pennsylvania
Thomas N. Walker III
President
T.N. Walker Inc.
Pittsburgh, Pennsylvania
Doris Carson Williams
President and
Chief Executive Officer
African American Chamber of
Commerce of Western Pennsylvania
Pittsburgh, Pennsylvania

Annual Report 2010

WHEELING

John Clarke
Business Representative
International Brotherhood
of Electrical Workers Local #141
Wheeling, West Virginia
Lisa M. Dusz
Vice President of Finance
Mull Group, Inc.
Wheeling, West Virginia
John L. Kalkreuth
President
Kalkreuth Roofing &
Sheet Metal, Inc.
Wheeling, West Virginia
Robert Kubovicz
President
United Electric
Wheeling, West Virginia

David H. McKinley
President and Managing Partner
McKinley Carter Wealth Services
Wheeling, West Virginia

Jim Squibb
Chief Executive Officer
Beyond Marketing
Wheeling, West Virginia

Lee C. Paull IV
Executive Vice President and
Associate Broker
Paull Associates Insurance/
Real Estate
Wheeling, West Virginia

Erikka Storch
Chief Financial Officer
Ohio Valley Steel Company
Wheeling, West Virginia

Richard Riesbeck
President
Riesbeck Food Markets
St. Clairsville, Ohio
Doug Robbins
Vice President
Wheeling Corrugating Company
Wheeling, West Virginia

Jeff Taips
Controller
Wheeling Island
Wheeling, West Virginia
Ronald L. Violi
Principal
R & V Associates
Pittsburgh, Pennsylvania

Consumer Advisory Council
As of December 31, 2010
The Federal Reserve System’s Consumer Advisory Council advises the Federal Reserve’s Board of Governors on the exercise of the Board’s responsibilities under various
consumer financial services laws and on other related matters.
The council membership represents interests of consumers, communities, and the financial services industry. Members are appointed by the Board of Governors and serve
three-year terms. The council meetings, held three times a year in Washington, DC, are open to the public.
The following members represent the Fourth Federal Reserve District on the Consumer Advisory Council:

Mike Griffin
Senior Vice President
KeyBank
Cleveland, Ohio

Mark Wiseman
Principal Assistant Attorney General
Consumer Protection Section
Ohio Attorney General’s Office
Cleveland, Ohio

Advisory Councils

Acknowledgments
Executive Editor

Contributors

Advisory Panel

Robin Ratliff
Assistant Vice President and
Assistant Corporate Secretary

Kenneth Beauchemin
Senior Research Economist

James Savage
Vice President and
Public Information Officer

Managing Editor
Amy Koehnen
Strategic Communications
Editor
Doug Campbell
Strategic Communications
Managing Designer
Michael Galka
Strategic Communications
Designer
Natalie Bashkin
Strategic Communications

John Carlson
Vice President and Economist
Todd Clark
Vice President and Economist
Joseph Haubrich
Vice President and Economist
Owen Humpage
Senior Economic Advisor
Michele Lachman
Editor
Brent Meyer
Senior Economic Analyst

Mark Schweitzer
Senior Vice President and
Director of Research
Mark Sniderman
Executive Vice President and
Chief Policy Officer
Lisa Vidacs
Senior Vice President
Portrait Photography
Chris Pappas Photography, Inc.

Mehmet Pasaogullari
Research Economist
Abigail Zemrock
Communications Specialist

This annual report was prepared by the Public Affairs and Research departments of the Federal Reserve
Bank of Cleveland.
For additional copies, contact the Research Library, Federal Reserve Bank of Cleveland, PO Box 6387,
Cleveland, OH 44101, or call 216.579.2050. Portions of the report as well as additional commentary
on inflation-related topics appear in the spring issue of the Federal Reserve Bank of Cleveland’s policy
publication, Forefront, available at www.clevelandfed.org/forefront.
We invite your comments and questions. Please email us at editor@clev.frb.org.

Follow the Cleveland Fed on

The Federal Reserve System is responsible for formulating and implementing
U.S. monetary policy. It also supervises banks and bank holding companies and
provides financial services to depository institutions and the federal government.
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks in
the United States that, together with the Board of Governors in Washington, DC,
comprise the Federal Reserve System. The Federal Reserve Bank of Cleveland,
including its branch offices in Cincinnati and Pittsburgh, serves the Fourth
Federal Reserve District (Ohio, western Pennsylvania, the northern panhandle
of West Virginia, and eastern Kentucky).

www.clevelandfed.org

It is the policy of the Bank to provide equal employment opportunity for
employees and applicants without regard to race, color, religion, sex, national
origin, age, disability, genetic information, or sexual orientation.

Cleveland

1455 East Sixth Street
Cleveland, OH 44114
216.579.2000

Cincinnati

150 East Fourth Street
Cincinnati, OH 45202
513.721.4787

Pittsburgh

717 Grant Street
Pittsburgh, PA 15129
412.261.7800

Annual Report 2010

www.clevelandfed.org