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President’s Letter

The Federal Reserve is an adapting, evolving, and learning organization. In the Federal Reserve Bank of
Cleveland’s 2012 Annual Report, we take a close look at how it has changed since its creation 100 years ago.
Our essay describes some of the seminal episodes that have influenced the Federal Reserve as we know
it today. Times have changed, economic theories have developed, and the Federal Reserve has adapted to
meet new demands. In fact, over the course of its 100 years, the Federal Reserve has proved not only a
willingness to change, but also an appetite for embracing and initiating change when necessary to carry out
our mission.
The Federal Reserve was founded in 1913 in response to a severe banking crisis in 1907. Policymakers of
the era believed that a central bank should be created to calm financial panics, supervise banks, and provide a
stable currency. Those responsibilities largely endure, but many details have been refined and others added to
reflect the growing complexity of the financial system in which the Federal Reserve operates. The evolution
has occurred within the framework of evolving public expectations of what a central bank can and should do.


A nnua l R ep o rt 2012

From a focus on financial stability to an explicit objective
for inflation—the Federal Reserve’s recent actions are
rooted in history. We cannot hope to understand modernday Federal Reserve policies without this context.
The principles that guide current policies originated in
lessons from the Great Depression, from stagflation in
the 1970s, and from the savings and loan crisis of the
1980s, among others. I think it is safe to say we are
still absorbing many lessons from the financial crisis
of 2008, even as we incorporate wisdom gained in
previous crises into our immediate response to this
most recent episode.
I have participated in this evolution at the Federal Reserve
Bank of Cleveland for the past 30 years, and I can attest
to the significant change in our approach to almost everything we do. I would also emphasize that working at the
Federal Reserve during the recent challenging economic
times has been a humbling experience. History clearly
shows the Federal Reserve has not been perfect. The last
century is marked by misjudgments and no shortage of
critics to point them out, but we have always strived to
learn and incorporate lessons from the past into policies
of the present.
The Federal Reserve Bank of Cleveland is a place of
learning and adapting as well. In the operations section
of this report beginning on page 33, First Vice President
and Chief Operating Officer Greg Stefani describes
how we as a Bank have transformed the way we do
business. From paper to electronic, from manual to
automated, we continue to evolve from an operationsbased to a knowledge-based organization.
Much of how the Federal Reserve Bank of Cleveland
has adapted and applied lessons learned throughout
its history is owed to the guidance of the Bank’s boards
of directors, in addition to our advisory councils across
the District. We have a history and tradition of strong
and sustaining leadership on our boards, and I’d like to
offer an expression of gratitude to all of our directors,
especially the four who completed their terms in office
at the end of 2012:

• C. Daniel DeLawder, chairman and CEO of Park
National Bank in Newark, Ohio, who has served
on the Cleveland board since 2007
• Daniel B. Cunningham, president and CEO of the
Long–Stanton Group, who has served on our
Cincinnati Branch board since 2007
• Robert A. Paul, chairman and CEO of Ampco–
Pittsburgh Corporation, who has served on the
Pittsburgh Branch board since 2007
Al Rankin deserves a special thank you. He has provided
strong leadership and support in numerous capacities
since joining the Cleveland board and in serving as its
chairman for the last three years. Al also enthusiastically
stepped beyond those posts to lead the Conference of
Chairs (a group of all the Federal Reserve Bank Board
chairs and vice chairs) this past year. The business
insight and expertise he brought to our board deliberations, and his active and genuine interest in the Fourth
District and the Federal Reserve System, have been
invaluable to me and our efforts.
I will miss all of our outgoing directors. All of them have
been, and I’m sure will continue to be, tremendous
advocates for the Federal Reserve.
One more thank you is in order—to our valued
employees. From housing research, to the supervision
of regional financial institutions, to helping evolve the
payments industry to better meet the needs of our
stakeholders, employees’ hard work, dedication, and
contributions made 2012 a successful year for the
Federal Reserve Bank of Cleveland.

Sandra Pianalto
President and Chief Executive Officer

• Alfred M. Rankin Jr., chairman, president, and CEO
of NACCO Industries, Inc., who has served on the
Cleveland board since 2006

A n n ual R epo rt 2 0 1 2


The Federal Reserve:
Adapting, Evolving, Learning

The Federal Reserve has adapted to
new information and
experience over its first
100 years, always with the
public interest at heart.

The Federal Reserve System is the nation’s central bank, but what does
that mean? Central banks are public institutions that are responsible for
ensuring that a nation’s financial system supports its commercial needs.
Today, central banks typically structure their monetary policy in pursuit of
specific goals, such as low inflation, full employment, financial stability,
and acting as the government’s bank.

The mission, goals, and specific practices of the Federal Reserve have
been contentious, in varying degrees, from its creation. And parts of the
Federal Reserve’s mission, goals, and specific practices have changed
since then as well. Americans have an understandably hazy notion of what the Federal Reserve is responsible
for, how it goes about its business, and to whom it is accountable for its actions. This essay does not address
all of these important matters, but it does seek to explain how today’s Federal Reserve is addressing the same
basic issues it was designed to address at its founding in 1913, even as its mission and policy tools have evolved
in response to experience and the country’s needs and economic goals.
Broadly speaking, the Federal Reserve’s purpose has always been the same—to support the economy. But
as the United States expanded, diversified, innovated, and globalized, so too did its economic and financial
system. To fulfill its goals, the Federal Reserve has adapted. Sometimes, these changes have come about through
Congressional directives. At other times, ongoing developments in economic theory and practical experience
have led the Federal Reserve to alter the way it defines its objectives and implements its policies.
Today, the Federal Reserve is engaged in a range of unprecedented actions as it continues to address fallout
from the 2008 financial crisis. Critics claim that the Federal Reserve now wields too much power and is trying
to do too many things, but to a large extent, these discussions are not new. The Federal Reserve has been
changing how and what it does since its creation 100 years ago. In each era, the changes have depended on
what was considered appropriate and sensible. In each case, the Federal Reserve has shown its willingness to
learn from experience and its resolve to act in the public interest.
Understanding the evolution of Federal Reserve policy requires that we understand the evolution in economic
thinking about what central banks can do and how they can do it, as well as understanding changes in the economic and financial environment in which it operates. In this essay, we describe four episodes in the Federal
Reserve’s evolution to illustrate how we got here and where we are going:

Leaving the gold standard
Adding countercyclical stabilization policy to our objectives, eventually as directed by the dual mandate
Introducing systematic behavior and communications policy tools
Establishing bank regulation and enhanced financial stability objectives

These episodes did not unfold exactly in chronological order, and they overlapped considerably, so it is best
to think of them thematically rather than sequentially.

A n n ual R epo rt 2 0 1 2


The Gold Standard Loses Luster

The gold standard eliminated the need for a discretionary central bank
to control the money supply.
Even so, central banks were known to work around the “rules” of the
gold standard according to their needs, and in the process undermined
the standard’s credibility.
The gold standard proved too inflexible during the crisis conditions
that prevailed during World War I and the Great Depression. It was
abandoned in stages around the globe thereafter, setting the stage
for a new era in central banking.

When Congress established the Federal Reserve
System in 1913, the concept of monetary policy as we
understand it today did not exist.
Instead of central bankers actively influencing the level
of bank reserves in pursuit of low inflation and full
employment, the job of keeping the money supply in
balance was left to the gold standard, a time-tested
system. Money backed by commodities, including gold,
had been the norm for millennia. Between 1870 and
1914, in fact, most of the world, including the United
States, was on a gold standard.
It is easy to understand why. Under certain conditions,
the gold standard has much to recommend it. Most
alluring is its potential for pre­venting central banks
and governments from generating inflation for purely
political ends. The gold standard by itself keeps the
money supply in check, so no modern-day monetary
policy is necessary. Unless—as events eventually
showed—the global financial system outgrows
the constraints of the relatively
inflexible gold standard.


A nnua l R ep ort 2 0 12

Gold’s Heyday
Here is how the gold standard is supposed to work:
Governments define their currencies in terms of gold,
agree to freely exchange their currencies for gold at that
official price, and allow the unfettered import and export
of gold. Countries’ official gold prices then establish
fixed exchange-rate parities among national currencies.
When, for example, Britain set an ounce of gold equal
to £4.24, and the United States fixed it equal to $20.67,
they automatically established an exchange-rate parity
of $4.88 per pound between their currencies. (The
exchange rate, $4.88 per pound, results from dividing
$20.67 per ounce by £4.24 per ounce.)
Actual exchange rates might fluctuate around these
parities, but they should more or less even out over
time. For example, if a nation’s currency should depreciate sufficiently because of high prices, low interest
rates, or trade imbalances, people would have a strong
financial incentive to exchange that nation’s currency
for gold and ship it abroad, where they could earn more
for their money. Their actions—not the discretionary
decisions of central bankers or Treasury officials—would
automatically bring prices in line with the world levels,
re-establish parity among
national currencies, and

restore the balance of payments (the record of a country’s
international transactions).
Under normal circumstances, using gold to fix exchange
rates would be no problem for central banks. However,
any economic development that generated public uncertainty about the adequacy of gold reserves could trigger
a rapid shift from notes and deposits into gold and an
outflow of gold. In this way, the gold standard sometimes
proved relatively unstable.
Because nations’ money stocks were multiples of their
gold reserves, a given loss of gold could contract countries’ money supply by substantially more. Consequently,
central banks and governments often managed gold
flows actively. Ideally, central banks were to adjust the
rates at which they lent to commercial banks and,
if necessary, undertake open-market-style operations
to reinforce the impact of gold flows on their money
stocks. For example, a gold outflow would lower the
money supply. By taking actions to reinforce the gold
loss, a central bank could achieve the same money
supply with a smaller gold loss.
Sometimes, compliance with the rules had a depressing
effect on the domestic economy. For that reason, when
gold outflows did not immediately threaten convertibility,
many central banks flouted the rules. A leading researcher
on the topic concluded that between 1880 and 1914,
central banks followed the rules only about one-third of
the time.

An Unsustainable System
Still, policymakers of the era generally considered the
economic costs and political consequences of maintaining convertibility small relative to potential gains from a
gold-standard commitment to price and exchange-rate
stability. As it happened, the period witnessed a substantial expansion of international commerce, which
fueled strong economic growth. Whereas 15 percent
of the world operated under the gold standard in 1870,
70 percent did so by 1913.
The United States adopted the gold standard in two
steps: In 1873, Congress defined the dollar in terms
of gold, excluding silver; in 1879, Congress agreed to
redeem “greenbacks”—fiat money issued during the
Civil War, but still in circulation—for gold.

Publishers of nineteenth-century sheet music like this song,
circa 1863, used illustrated covers to promote sales.
But the commitment proved shaky, especially in times
of crisis. World War I abruptly reversed the benefits and
costs of compliance with the gold standard. World trade
fell substantially and remained depressed long afterward,
as countries imposed restrictions on trade flows. With
the postwar extension of suffrage to more citizens
and the rise of the labor movement, prices and wages
became less flexible. This raised the costs of maintaining
convertibility, while the people who bore these costs
most directly gained a stronger political voice.
To be sure, after the war, policymakers maintained their
commitment to a gold standard, but not one for which
they would long sacrifice domestic policy objectives. To
maintain economic growth and employment, they were
more willing to offset gold flows, devalue their currencies, impose trade restraints and capital controls, or
abandon the gold standard—in other words, they increasingly violated the rules of the game. The gold standard of
the late 1920s lacked the credibility of its predecessor,
and events sparked fears that exchange-rate parities
might not hold. Speculators moved funds out of goldstandard countries—often with self-fulfilling results.

A n n ual R epo rt 2 0 1 2


The $100,000 gold certificate shown
here, the highest denomination ever issued
by the United States, was not intended for
general circulation and could not legally
be held by private individuals. It was used
instead as an accounting device between
branches of the Federal Reserve.

“The way I see it is the politicians took us off the gold standard prematurely before we economists understood how to
work what we call an inconvertible paper standard. And even though the gold standard was abandoned formally in the
early 1970s, for all intents and purposes, the Federal Reserve’s activities decades before that operated without much
attention to the gold-standard restraint. The politicians said, we’ve got to be able to do better than the gold standard,
but the economists in the early part of the century were not ready to manage the standard. Essentially, without the gold
standard, what we have is an economist standard—a standard that depends entirely on the understanding of a monetary
system that economists alone have been producing and that economists alone have some hope of understanding. It was
premature in the twentieth century to let it loose on the world.” 
Marvin Goodfriend, Carnegie Mellon University


A nnua l R ep o rt 2012

 From comments collected at the Federal Reserve Bank of Cleveland’s conference, Current Policy Under the

Lens of Economic History, Dec. 13-14, 2012. Watch clips at

gold—and used them instead of gold in official transactions to manage their exchange rates. To supply these
needed dollar reserves, the United States ran persistent
balance-of-payments deficits.

Franklin D. Roosevelt, seated, was the first president to visit the Federal
Reserve Board of Governors in 1937. In his remarks, he described as the
Fed’s purpose “to gain for all of our people the greatest attainable measure of
economic well-being, the largest degree of economic security and stability.”

The Great Depression dealt a major blow to the gold
stan­dard. Countries that tightly adhered to gold and
failed to ease their monetary policies saw unemployment levels mount as they slipped into depression.
Overall, these countries fared worse than those that
abandoned gold and eased their monetary policies.

By 1960, however, outstanding dollar liabilities exceeded
the US gold stock, creating a strong incentive for central
banks to convert their dollar liabilities into gold with the
Treasury. Resolving the situation would have required
the United States to tighten monetary policy and other
countries to ease monetary policy; but by the 1960s, no
nation was willing to subordinate their domestic objectives for price stability or growth and employment to
the rigors of fixed exchange rates. In August 1971, the
United States refused to convert official dollar reserves
into gold, and the major developed countries abandoned
fixed exchange rates by early 1973.

Into Uncharted Terrain
The world had completed the long transition from money
backed by gold to money backed by public confidence.
But the Federal Reserve’s transition to this new operating
environment was still in progress.

The dominoes began to fall. Britain abandoned the gold
standard in September 1933, and the pound quickly
depreciated. Many other countries followed. In the face
of domestic bank runs and outflows of gold, President
Franklin Delano Roosevelt suspended convertibility,
nationalized private holdings of gold, repealed gold
clauses, and prohibited private transactions in gold.

The Great Depression dealt a major
blow to the gold standard.
The Bretton Woods system—the international gold
standard that emerged after World War II—sought to fix
exchange rates. Policymakers viewed the exchangerate movements of the 1930s as detrimental to trade,
international cooperation, and global prosperity. The
system that they established contained an inherent
flaw. Countries needed gold reserves to manage their
exchange-rate parities, but the official gold price was
too low to encourage a sufficient supply of the metal.
Countries began holding US dollars—now linked to

 Watch the video at

A n n ual R epo rt 2 0 1 2


The Federal Reserve Takes an Active Hand
in Fostering Jobs and Stable Prices

After the gold standard was abandoned, it took some time for
economists and policymakers to settle on the Federal Reserve’s
official objectives and the best way to accomplish them.
Keynesian and monetarist schools offered competing visions of
what economic policy could achieve.
Learning from advancements in economic theory, the Federal
Reserve has grown more practiced in conducting countercyclical
monetary policy—smoothing out business-cycle fluctuations—to
achieve its dual mandate of price stability and maximum employment.

The demise of the gold standard as the “North Star”
for monetary policy created a vacuum: If the Federal
Reserve no longer aimed to maintain a fixed exchange
rate between the US dollar and gold, what should guide
its monetary policy decisions?
The ideas behind the eventually formalized objectives
of the Federal Reserve took shape in the 30 years after
World War II. At the time, policymakers were rightly
concerned that millions of soldiers were returning home
with no job prospects, especially given that military
production was set to decline sharply. In response,
Congress passed the Employment Act of 1946, which
called for all parts of the government—including the
Federal Reserve—to pursue “maximum employment,
production, and purchasing power.”

Keynesians vs. Monetarists
Despite these marching orders, it is fair to say that the
Federal Reserve officials of that era did not visualize
how they could contribute to maximum employment
and production by any means other than promoting a
stable currency. Soon, however, the budding Keynesian
school of economics provided a vision that quickly gained
adherents and influence.


A nnua l R ep o rt 2012

Keynesian economics’ impact was swift and profound.
It taught that governments’ monetary and fiscal policies
could be designed to smooth out business-cycle fluctuations and promote full employment—without causing
excessive inflation. Moreover, Keynesians de-emphasized
the role of monetary policy in the inflation process.
Keynesian policies’ newfound influence was evident in
the 1960s. The government cut taxes and simultaneously
stepped up spending on programs to address poverty
and outfit the military. As a result, unemployment stayed
low, while inflation gradually crept higher.
It is probably no coincidence that this period’s relatively
higher inflation coincided with the rise of an opposing
school of thought: monetarism.
In monetarist economics, the Federal Reserve can control
the money supply. In fact, growth in the money supply
over time is the chief determinant of inflation. Monetarists
warned that the unemployment rate consistent with maximum employment over time cannot be controlled through
monetary policy, and that the Federal Reserve should be
careful not to pursue an objective that was unattainable at
best and counterproductive at worst.

the Humphrey-Hawkins Act in honor of its sponsors,
specifically directed the Federal Reserve to “promote
full employment . . . and reasonable price stability.”
Although the Humphrey-Hawkins Act passed the House
and Senate with considerable support, it was enacted
amid an active debate among economists—not least the
Keynesians and monetarists—and politicians about the
relative importance and achievability of the employment
and inflation objectives. Ever since, the Federal Reserve
has been criticized at various times for paying either
too much, or not enough, attention to one objective or
the other.
During the 1980s, the Federal Reserve was understandably concerned with getting high and variable inflation
under control. Chairman Paul Volcker argued in 1981 that
the only viable path to achieving full employment was
the path that first brought inflation down and convinced
the public that it would stay down. In other words, the
circumstances of the day required that inflation be dealt
with as a precondition for achieving the dual mandate
over the longer run.

In January 2012, the Federal Open Market Committee established
an objective for stable prices of 2 percent inflation over the longer term.
Inflation is one of the concepts explained and traced at the Federal
Reserve Bank of Cleveland’s Learning Center and Money Museum,
shown above.

As the 1980s progressed, theoretical developments in
the design of monetary policy (discussed more fully in
the next section of this essay) reinforced the idea that
stabilizing inflation expectations is crucial to keeping
the economy on its maximum-employment trajectory.

“Two ingredients seem to have been essenWhile neither theory as expressed in the 1960s is
unconditionally embraced today, significant pieces of
each endure. The insights provided by Keynesians and
monetarists got policymakers asking the right questions
and set the stage for some eventful decades of putting
theory into practice.

tial precursors of the Employment Act. The
first was a deep concern that the problem
of peacetime unemployment had not been
solved. Although employment roared back
during the war, the memory of the Great
Depression was quite fresh, and considerable

The Dual Mandate
In the 1970s, the economy was hit by a sequence of
energy and food supply shocks that weakened economic performance. The unemployment rate rose, and
inflation accelerated dramatically. Congress grew more
concerned that the Federal Reserve was not doing
enough to manage economic performance. In 1978, the
Full Employment and Balanced Growth Act, often called

uncertainty attended the economic outlook.
Put simply, many feared that the economy
would slip back into depression. The second
element was the economic thinking of John
Maynard Keynes.”
Former Chairman Alan Greenspan, October 26, 2005

A n n ual R epo rt 2 0 1 2


Early drafts of the Employment Act—such as this one from
1945—contained policy prescriptions that worked backward
from estimates of full employment to specific numerical targets for
investment and fiscal policy. In the end, the numerical targets were
struck from the Act, and “full employment” became “maximum
employment, production, and purchasing power.” It wasn’t until the
1987 Full Employment and Balanced Growth Act that the Federal
Reserve was specifically directed to “promote full employment…
and reasonable price stability.”

“My view on the history of the Fed and the history of central banking is that there’s a lot of learning that takes place—
institutional learning. You have certain preconceived notions which you inherited from the past, the Fed did, about
what they were supposed to do. They were faced with a new reality. The Fed was set up in 1914—World War I came
along… The financial markets changed a lot from those of the nineteenth century. And again the Fed had to adjust
to that. So there’s learning that takes place. The learning is never simple. It’s never linear. There’s always nonlinearities,
there are mistakes that are made.” 
Michael Bordo, Rutgers University


A nnua l R ep o rt 2012

 From comments collected at the Federal Reserve Bank of Cleveland’s conference, Current Policy Under the

Lens of Economic History, Dec. 13-14, 2012. Watch clips at

Open Market Committee (FOMC) took a historic step
in January 2012: It formally pegged its long-run inflation
objective at 2 percent. In the FOMC’s own words, “Such
clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial
uncertainty, increases the effectiveness of monetary
policy, and enhances transparency and accountability,
which are essential in a democratic society.”
Note that the statement reflected the long-standing
academic and policy debate on the role of monetary
policy and made explicit the shared understanding of
the FOMC on these issues. In particular, the FOMC
acknowledged that “the inflation rate over the longer
run is primarily determined by monetary policy” but
that “[t]he maximum level of employment is largely
determined by nonmonetary factors that affect the
structure and dynamics of the labor market.”

In 2012, the Federal Open Market Committee
indicated it would continue its asset purchases until
the outlook for labor market conditions has improved
substantially in a context of price stability.

Economic performance improved in the 1980s and 1990s,
in terms of both inflation and unemployment. During this
period, operating under the formal guidance of the dual
mandate, inflation gradually declined and became low
and stable. The Federal Reserve became more practiced
in conducting countercyclical monetary policy, or, put
another way, smoothing out business-cycle fluctuations
while keeping inflation in check.

2012 may well be judged one of the
most action-packed, meaningful years
in Federal Reserve history. But it was
decades in the making.
Despite this solid record, the 2008 financial crisis
renewed debate about the suitability of the Federal
Reserve’s dual mandate. Some ask whether the Federal
Reserve has recently placed so much emphasis on its
employment mandate that it has expanded its balance
sheet to the point where high inflation is inevitable.
Federal Reserve officials are well aware of the risks and
have moved to mitigate them. Encouraged both by the
evolving academic results on the value of inflation targets
and the experience of other central banks, the Federal

Decisions Rooted in History
In this way, the Federal Reserve has synthesized
insights from a long-running academic debate into a
workable policy path. The FOMC’s current estimate of
the natural rate of unemployment is between
5.2 percent and 6 percent. Although the numerical
estimate for full employment may be adjusted from time
to time, the FOMC is just as committed to achieving it
over the medium term as it is to satisfying its inflation
objective. Experience in the United States and other
countries strongly suggests that a full-employment
objective need not compromise a central bank’s ability
to achieve price stability. In fact, as long as a nation’s
central bank can keep inflation expectations anchored,
its citizens can benefit if monetary policy does what it
can to keep the economy on its full-employment path.
By committing itself to achieving a set of numerical
objectives for maximum employment and price stability,
the FOMC has more clearly communicated to the public
what it is trying to achieve. At the same time, by being
so explicit, the FOMC has implicitly stepped up its
accountability for achieving its objectives.
Add it all up, and 2012 may well be judged one of the
most action-packed, meaningful years in Federal Reserve
history. But it was decades in the making.

A n n ual R epo rt 2 0 1 2


Toward a More Methodical, Transparent,
and Effective Federal Reserve

High inflation and unemployment in the 1970s coincided with the
development of new theories for maintaining economic stability.
The “rational expectations” revolution showed the importance of
setting clear and understandable policies.
Policy rules gave Federal Reserve officials guideposts for becoming
much more systematic and predictable about their actions in order to
make policy more effective.

During the 1970s and early 1980s, America saw inflation
and unemployment soar and public confidence in the
economy plummet. Much of the blame for this performance was pinned on the Federal Reserve, which most
certainly was not fulfilling its new mandates for price
stability and maximum employment. Prompted in part
by this episode, a sense of urgency grew to develop
theories based on better ways for achieving macroeconomic stability. Two strains of work took the lead: one
on “rational expectations” and the other on policy rules.
What happened next was a reshaping of how central
banks around the globe conducted monetary policy.

Rational Expectations
Hard as it may be to imagine, there was a time not
that long ago when economic policymakers cared little
about what the public expected. Then came the “rational
expectations” revolution. While many economists were
crucial to this revolution, Nobel Prize winner Robert
Lucas was at the fore.
Before the rational expectations revolution, typical
models of how the economy was thought to work either
ignored expectations about the future or treated them as
backward-looking. At the time, the conventional wisdom


A nnua l R ep o rt 2012

was that being secretive made monetary policy more effective. Although the pre-rational-expectations models did
not necessarily justify this conventional wisdom, they did
not do much to counteract it, either. In these models, the
simplistic treatment of expectations meant that the public
might be routinely surprised by monetary policy, which
was part of the reason secrecy was considered an asset
for the Federal Reserve.
By contrast, the idea behind rational expectations is that
firms and consumers fully understand the economy’s
structure and the behavior of monetary policy and form
their expectations of the future accordingly. While people
can still make errors in their forecasts, they do not make
systematic errors.
This concept was revolutionary because it helped
policymakers appreciate the importance of the public’s
expectations in determining the effectiveness of
monetary policy. Because of rational expectations,
modern macroeconomic models assume that firms and
consumers base their economic decisions on both today’s
federal funds rate and expectations of future federal funds
rates. And when people’s behavior is based partly on their
expectations, policymakers must pay close attention to
what they themselves say because it influences peoples’
expectations and, in turn, their behavior.

Federal Reserve Bank of Cleveland President Sandra Pianalto with then-Federal Reserve Chairman Alan Greenspan in 1997 and with current Chairman
Ben Bernanke in 2006.

A football analogy: Glancing at past statistics, an innovative but inexperienced coach might decide to call more
passing plays on offense, because those plays historically
gain more yards. But if the coach did implement that plan,
the opposition’s defenses would invariably adjust and
the pass-heavy offense would be less effective than the
old statistics led the coach to believe. A seasoned coach
anticipates that defenses will respond that way, and his
game plan takes that into account.

• In the early to mid-1990s, the Federal Reserve began
to publish statements after FOMC meetings to briefly
explain policy changes and to immediately disclose its
target for the federal funds rate.
• Recently, the Federal Reserve has increased the
frequency of its public forecasts, added some information on the expected path of monetary policy, and
launched quarterly press conferences to explain policy
decisions. Clear communications about future policy

It is far from a perfect analogy, as the central bank and
the public are not adversaries. But in general, the same
holds with policymaking—the public will modify its
behavior, raise wages, for example, if it thinks the Federal
Reserve is trying to increase inflation; it will not just stand
pat and be surprised. In that case, the Federal Reserve’s
efforts to stimulate the economy probably would not
result in more economic activity but only in higher prices.
Monetary policy that does not take people’s expectations
into account is doomed to fail.
Understanding rational expectations, policymakers
realized that if the Federal Reserve is to meet its goals
of price stability and maximum employment, the public
must view policy as highly credible and must have
a clear understanding of the goals of policy and the
economic and financial factors to which policy systematically responds. So the Federal Reserve embarked on
a decades-long communications effort that continues to
this day. A small sampling of changes includes these:
• Up until the mid-1960s, policy decisions were
announced with a one-year delay. In the mid-1970s,
responding to requests from Congress, the Federal
Reserve began to provide semi-annual reports on
monetary policy and to publish economic forecasts.

actions have also become an essential tool for the
Federal Reserve in providing accommodation while
the federal funds rate is at the zero lower bound.
• In 2012, as noted earlier in this essay, the Federal
Reserve established a numerical objective for price stability to formalize a long-run inflation goal of 2 percent
that some people viewed as implicit in previous Federal
Reserve policy actions and statements.

Policy Rules
Of equal impact on the practice of monetary policy was
the development of policy rules. Until recent decades,
the Federal Reserve’s approach to adjusting monetary
policy could hardly be called systematic; policy actions
were not guided by a consistent, overarching method.
Some might say the Federal Reserve was following a
“discretionary” approach to monetary policy. Federal
Reserve officials felt free to set policy as they saw fit
at each point in time, based on all available information
and on their judgment. By comparison, under a strictly
“rule-based” approach, policy would be set according to
a simple, publicly announced formula, with no deviation.

A n n ual R epo rt 2 0 1 2


Created in 1907, this political
cartoon depicts the disastrous panic
of the same year. In response to the
panic, Congress created the Federal
Reserve System.

“The first 100 years, as Mao said about the French revolution, it’s too early to tell. I think we’re reminded that the
Fed is a work in progress. There’s a lot of debate and controversy around the measures that the System is taking at
the moment in response to the financial crisis and slow recovery. But history reminds us that it’s not the first time the
Federal Reserve System has repeatedly evolved in response to events and in response to crises. That will continue.” 
Barry Eichengreen, University of California, Berkeley


A nnua l R ep o rt 2012

 From comments collected at the Federal Reserve Bank of Cleveland’s conference, Current Policy Under the

Lens of Economic History, Dec. 13-14, 2012. Watch clips at

The Federal Open Market Committee (FOMC) did not announce its decisions at all until then-Chairman Alan Greenspan issued the first post-FOMC statement
in 1994. Now, a statement is released immediately after each meeting, and Chairman Bernanke holds quarterly press conferences in which the FOMC releases the
Summary of Economic Projections.
By the 1980s, a convincing case was being made that
policy based on rules could deliver better macroeconomic
outcomes—with lower inflation and more economic
stability—than could be achieved under an entirely
discretionary approach.
Stanford University economist John Taylor became the
standard-bearer for the rule-based line of research. In
the 1990s, he famously observed that Federal Reserve
monetary policy under then-Chairman Alan Greenspan
could be captured very well by an equation relating the
federal funds rate to three terms: a constant reflecting
the average or normal real rate of interest, inflation
relative to a target of 2 percent, and real GDP relative
to the economy’s potential. For example, when inflation
moved up and/or GDP was running above potential, the
federal funds rate tended to move up. This suggested
that Greenspan’s Federal Reserve was, in practice,
following a systematic “lean against the wind” approach
to monetary policy. As it turned out, this approach was
good for the economy. Later research showed that
policy based on rules similar to what became known
as the Taylor rule fared well in stabilizing economic
activity and inflation.
Over time, many Federal Reserve policymakers came to
view the prescriptions of various policy rules as useful
guideposts. Nonetheless, policymakers recognized that
the economy was far more complex than the macroeconomic models in which Taylor-like rules performed
well. For example, a strict Taylor rule might not pick up on
the need for very accommodative monetary policy during
a credit crisis because it takes its cues only from inflation
and output.
Still, the recognition of policy rules’ value as guideposts probably helped monetary policy become more

systematic in responding to fluctuations in economic
activity and inflation. Arguably, the result was indeed
greater stability—in the form of the decades-long period
of low inflation and relatively steady growth known as
the Great Moderation. Even today, with policy rules less
helpful because they would prescribe negative interest
rates, which are impossible, the Federal Reserve has
adopted a systematic approach to using its unconventional policy tools. At present, the Federal Reserve is
buying Treasury bonds and mortgage-backed securities
to achieve a monthly target, under the proviso that the
target will be systematically adjusted in response to
changes in the economic outlook and financial conditions.

Lessons Applied
Forty years ago, the words “systematic” and “clear”
would not have been associated with Federal Reserve
policy. Quibblers might argue that the Federal Reserve
has not quite achieved that level of association even
today, although some progress has been made. The
Federal Reserve of the twenty-first century is leaps and
bounds ahead of its twentieth-century self in terms of its
systematic behavior and transparent communications.
It took the confluence of unwelcome economic events
and welcome economic theories to produce this new
approach. Policy rules help to guide public expectations,
and consistently adhering to policy rules reinforces those
expectations. Who knows what events or theories will
shape the future? Depending on the times or the thinking, there may be many ways for the central bank to
fulfill its objectives. The methods and approaches have
changed, but the goal of economic growth and price
stability has not.

A n n ual R epo rt 2 0 1 2


An Enhanced Objective—Financial Stability

The financial system has grown much more sophisticated
over the past century, as has the Federal Reserve’s approach
to keeping it safe.
Financial stability became a more prominent objective of
the Federal Reserve in the aftermath of the financial crisis.
The decisions and rules being hammered out today will
determine whether the new systemic view will be enough
to prevent future crises.

Before the Civil War, bank panics were an all-too-common
occurrence across young America. In response, the
National Banking Acts of 1863 and 1864 introduced two
new safeguards: a directive that US government bonds
backstop banknotes and the creation of the Office of the
Comptroller of the Currency to supervise the banks.

this point home, and a new solution emerged: a currency
that could expand to meet the demands of depositors
throughout the year, whenever they needed it—that is,
an “elastic currency.” The Federal Reserve Act of 1913
intended to provide just that, along with “a more effective supervision of banking in the United States.”

Both reforms had their merits but quickly proved lacking
as first conceived. Market developments soon enough
outpaced market regulators—an age-old pattern that
prevailed right up to the financial crisis of 2008.

Problem solved? Not quite. The Great Depression opened
with a series of too-familiar banking crises. It took the
nationwide bank shutdown in March 1933 to restore calm
and set the stage for a new round of regulatory response.

Bank regulation has always been the Federal Reserve’s
responsibility, and recently the Federal Reserve has been
given additional authority to safeguard the stability of the
entire financial system. A look back at 150 years of bank
panics and full-blown financial crises helps explain how
America’s central bank grew into its new role.

The resulting New Deal reforms—including federal
deposit insurance, separation of commercial from
investment banking, and interest rate caps on deposit
accounts—ushered in nearly three-quarters of a century
without a major banking panic. Deposit insurance helped
solve the problem of bank runs by giving depositors
confidence that their money would be protected, even
if their bank got into trouble. And separating commercial
from investment banking seemingly prevented banks
from engaging in risky high-finance activities. But just as
before, the economy was changing, and the old solutions became less effective.

Crisis, Response, Repeat
The Panic of 1873, which destroyed some 18,000 businesses and pushed unemployment above 14 percent,
showed that the Banking Acts were not adequate solutions, partly because deposits, rather than banknotes, had
become the dominant form of money. A series of severe
panics, culminating in the disastrous Panic of 1907, drove


A nnua l R ep o rt 2012

High inflation during the early 1980s made interest rate
ceilings, designed in part to keep banks from trying
to outdo each other in a risky pursuit of depositors,

The Great Financial Panic of 1873, as depicted in Frank Leslie’s illustrated newspaper,
October 4, 1873; the collapse of stock market values following the global economic crisis
from the front page of the Financial Times, September 30, 2008.

particularly painful. Depositors began looking for other,
“safe” investment vehicles to earn money, and markets
delivered with the invention of money market funds. A
domino effect ensued: Commercial banks lost market
share to investment banks. At the same time, a series of
regulatory changes, culminating in the Graham–Leach–
Bliley Act, allowed commercial banks to take on investment banking activities. A shadow banking system arose
beyond the control of existing regulators. By 2008, the
world was in the grip of a full-blown financial crisis.

The Financial Stability Mandate
In the aftermath of the most recent episode, the crisisresponse script played out as usual, with one exception;
unlike previous crises, which resulted in the formation
of major new financial regulators—the Comptroller of
the Currency, the Federal Reserve, the Federal Deposit
Insurance Corporation, and the Securities and Exchange
Commission—the financial crisis of 2008 mostly brought
a reorientation and redefinition of responsibilities.
These principles were laid out in the Dodd–Frank Wall
Street Reform and Consumer Protection Act of 2009,
which gave the Federal Reserve and other financial
market regulators more explicit responsibility for

promoting financial stability. It did not stipulate most
of the details necessary for accomplishing this target.
Instead, it provided a goal and established systemic
risk as a major consideration in the formation of policy.
The remaining open question is whether elevating
“financial stability” as a regulatory ambition will be
enough to prevent crises like that of 2008. The Dodd–
Frank Act did spell out some clear instructions, including
stronger capital buffers for the largest financial firms and
new regulatory oversight of the shadow banking system.
But much of the “how” was not specified. For all its
800-plus pages, the most important directive in Dodd–
Frank may be the establishment of “systemic risk” as
a standard of practice. The crisis reinforced the lesson
that a bank’s failure affects not only its depositors and
investors but other banks and businesses as well. That
is why the shift is sometimes described as a change
from “microprudential” regulation, concentrating on the
safety of individual banks, to “macroprudential” super­
vision, focused on the safety of the financial system.
Systemic risk is a sort of pollution: A risky bank can
upset the financial system, just as a coal plant can dirty a
neighborhood. So from now on, in considering measures
such as adequate capital buffers, regulators are thinking
not only about how to keep a bank safe, but also about
how to minimize the impact of its possible failure on the

A n n ual R epo rt 2 0 1 2


The Federal Reserve System is a decentralized central
bank. It consists of 12 Federal Reserve Bank districts
around the country, each with its own president, plus a
seven-member Board of Governors in Washington, DC.
Here, the Marriner S. Eccles Federal Reserve Board
Building, named after a former Chairman of
the Federal Reserve, under construction in 1937.

“[The Federal Reserve] is one of the finest research institutions, both at Washington and at the Reserve Banks, of
any institution in the United States. It managed over 100 years to never have a corruption scandal, which is quite an
achievement. It has a real esprit de corps; as an institution, it’s really a very good institution.
My complaints are not on the subject of how it operates but what it does, and I think it’s made major mistakes along
the way. The Great Depression. The Great Inflation, a lot of business cycles, and I think its policy now is heading us
toward disaster.” 
Allan Meltzer, Carnegie Mellon University


A nnua l R ep o rt 2012

 From comments collected at the Federal Reserve Bank of Cleveland’s conference, Current Policy Under the

Lens of Economic History, Dec. 13-14, 2012. Watch clips at

“In the decades prior to the financial crisis,
financial stability policy tended to be overshadowed by monetary policy, which had
come to be viewed as the principle function
of central banks. In the aftermath of the
crisis, however, financial stability policy has
taken on greater prominence and is now
generally considered to stand on an equal
footing with monetary policy as a critical
responsibility of central banks.”
Chairman Ben Bernanke, April 9, 2012

rest of the system. For example, a bank merger that
would give the public more branches but would create a
dangerously large, risky bank now faces more scrutiny.
That is, Dodd–Frank represents a shift in perspective as
much as a collection of new rules.
Taking a systemic view of financial stability also means
greater coordination of regulatory policy. To a large
extent, the worst financial crises are best described as
exits from bank debt. People try to move to a “safer”
form of money. In the 1800s, people caused a run on
the bank by exchanging their banknotes for gold; in the
Great Depression, they caused a run on the bank by
exchanging their deposits for cash; and in 2008, some
caused a run on their money market fund by exchanging
their shares for bank deposits.

A Durable Solution?
But the most important question is whether an enhanced
mandate for financial stability will translate into significantly less economic damage from the next crisis, if it
does not prevent it entirely. Not to dodge the question,
but it is too early to say. Although many of the rules that
Dodd–Frank requires have been completed, some new
rules are either in de­velopment or still under debate. As
of March 2013, no non-bank financial institutions had
been designated as systemically important. Even the
nation’s largest banks, which are automatically designated by Dodd–Frank as being systemically important,
have yet to learn of the enhanced supervisory standards
they may be subject to.
Exactly what other restrictions such institutions might
eventually be subject to had not yet been established,
either. For example, it’s unclear how much effect higher
capital requirements will have or in what cases mergers
will be cancelled or activities banned. Moreover, regulators may also have to weigh the benefits of limiting the
actions of systemically impor­tant firms against the
possible loss of economic growth.
Those are just a few of the question marks. The idea of
the Federal Reserve playing a prominent role in financial
stability is not new. Nevertheless, some might say that
providing the Federal Reserve with additional tools to
achieve that goal is long overdue. In any case, we are
in the thick of it today. Historians of the future will be
looking closely at the actions now being taken to explain
why we failed or succeeded.

Resolving, and ultimately preventing, these crises involve
both banking and monetary policy. This supports a role
for the central bank, which controls the money supply,
to wield extensive supervisory authority. With such
authority, the central bank, as lender of last resort, has
direct access to the best and most up-to-date information about the banks and non-bank financial institutions it
lends to.

 Watch the video at

A n n ual R epo rt 2 0 1 2


The Cleveland Federal Reserve Bank building has been restored
to its original beauty, while its spaces have evolved to meet the
needs of the future. See this report’s “Operations Evolution” on
page 33 for a closer look at how the Federal Reserve Bank of
Cleveland is evolving.

“…the Federal Reserve System that we know today has changed a lot over the last 100 years. Some of those changes came
from the lessons of experience learned inside the organization; some came from changes in economic thought; and some
changes resulted from Congressional legislation. There is no such thing as ‘the Fed for all time.’ The institution has evolved
and will continue to evolve, shaped by the same forces that have changed it in the past.” 
Mark Sniderman, Federal Reserve Bank of Cleveland


A nnua l R ep o rt 2012

 From comments collected at the Federal Reserve Bank of Cleveland’s conference, Current Policy Under the

Lens of Economic History, Dec. 13-14, 2012. Watch clips at

The ability of the Federal Reserve to
accomplish its objectives
in an increasingly complex
environment will depend
on its continued efforts to
adapt, evolve, and learn.

Over the past century, the Federal Reserve’s responsibilities have
expanded and its policy tools have become more sophisticated. Its
evolution mapped a progression in economic thinking, lessons from
practical experience, and shifts in national economic goals. Some of
the changes occurred gradually; others came with the sudden punch
of crisis.

In its first years, the Federal Reserve’s monetary and financial stability
objectives and policy instruments were far more limited than today’s.
The gold standard offered several advantages: It produced price stability over the very long run, and it minimized manipulation of the money supply if the government played by the
“rules.” However, during the lead-up to the Great Depression, some governments decided that staying on
the gold standard required them to accept economic conditions they found intolerable. The Federal Reserve
became responsible for ensuring stable purchasing power in a system tethered only to its own credibility.
Needless to say, it took some time to figure out how to accomplish this goal.
Following World War II, the nation sought to do a better job at keeping the economy at full employment and
smoothing the volatility inherent in business cycles; the Federal Reserve was expected to do its part. Using largescale computer models of the economy, the Federal Reserve generated forecasts based on alternative policy
choices, all with the goal of choosing the option most likely to produce both full employment and price stability.
The irony of the era was that the Federal Reserve’s legal mandate was changed in 1978 to specify a “maximum
employment” objective—just as inflation was spiraling out of control. Although some economic historians
attribute that failure to the broadening of the legal mandate, an equally or more likely explanation is that the
policymakers of the day simply—but disastrously—underestimated the degree of policy restraint required to
keep inflation in check.
From this experience, the Federal Reserve learned the importance of designing policies that would keep inflation expectations anchored while it acted to counter business-cycle fluctuations. The rational expectations era
was born. Many Federal Reserve officials recognized that monetary policy should no longer be considered a
series of “point in time” decisions made under a cloak of secrecy, but rather an entire sequence of actions
designed to accomplish objectives that were openly communicated to the public. More recently, the FOMC
assigned numerical values to its long-run goal for price stability and its estimate for maximum employment in
an effort to increase transparency and reduce uncertainty.
The roots of the Federal Reserve’s involvement with banking supervision and regulation can be traced back
to its founding. And, as with monetary policy, there has been significant evolution in the theory and practice
of banking regulation. The financial crisis and deep recession of 2007–09 prompted Congress to significantly
change the Federal Reserve’s responsibilities and legal authority, including enhancing the goal of financial
stability in the Federal Reserve’s mission. One could argue that with the financial landscape quite changed
since the 1910s, Congress was merely attempting to restore the Federal Reserve’s ability to promote financial
stability, as it did 100 years ago.
The arc of history suggests that it is far too soon to know how successful the Federal Reserve will be in meeting
the nation’s expectations for full employment, price stability, and financial stability. We still have a lot to learn
about how to operate in this new environment, and unforeseen challenges will undoubtedly arise. As we have
done from our founding, we are working with academics, industry professionals, and other central banks to
learn from experience and stay abreast of the new theories and tools we will need to accomplish our objectives.
In the meantime, a healthy debate about the merits of Federal Reserve policy action continues, as is proper
and necessary. We might also note that a little historical distance can produce insights not obvious in real time.
So let’s agree to check back in a decade or two; with the benefit of perspective, we can have an even betterinformed discussion about how central banks can best contribute to economic prosperity. 
A n n ual R epo rt 2 0 1 2


The committee that drew the lines around
the Fourth Federal Reserve District nearly
100 years ago would hardly recognize
the region today. The area once known
almost exclusively for manufacturing now
boasts several major research universities,
a thriving healthcare industry, and a
growing services sector.


A nnua l R ep o rt 2012

State of the Fourth District

The Fourth District’s economy has tracked national trends
fairly closely.
Some of the region’s labor markets are doing well—especially
in Pittsburgh and Columbus.
Most of the region’s sectors should see continued growth in 2013.

The US economy expanded at a very modest pace
in 2012. Output grew by 2.2 percent, unemployment
declined by 0.7 percentage points to 7.8 percent, and
inflation held slightly below 2 percent on a year-over-year
basis. This was an uneven performance. In short, 2012
continued the stop-and-go progress of the country’s
economy since the Great Recession ended in 2009.

2012. The unemployment rate was 7.2 percent at the
end of 2012, a decline of 3 percentage points from its
peak just after the end of the Great Recession. Notably,
the region’s unemployment rate declined more sharply
than the nation’s (see figure 1). At the same time, the
region’s employment growth throughout the recovery is
slightly below that of the nation as a whole.

The Fourth District’s post-recession progress looks a
lot like the broader national recovery, with declines in
unemployment, modest jobs growth, and an increase
in real per capita income. Employment reports suggest
that economic growth in the Fourth District slowed in
the second half of the year, but some sectors did show
strength. In fact, some Fourth District metropolitan areas
outperformed the nation.

One place where the region’s jobs market has especially
underperformed the nation’s is labor force growth. Among
the 12 Federal Reserve districts, the Fourth District
posted the second-weakest labor force growth in the
recovery. In fact, the region’s labor force has actually
contracted since 2009, a trend especially evident in Ohio.
The anemic labor force growth partly explains why the
Fourth District’s unemployment rates fell faster than
the nation’s, although the District’s overall employment
growth was modest. The District just hasn’t needed
to generate a high number of jobs in order to lower its
unemployment rate because the flow of new workers
and re-entrants into the labor force has not put significant
upward pressure on the unemployment pool. The decline
in the labor force is not present across all areas of the
District; Pennsylvania and Kentucky have reported

Our overall outlook as we head further into 2013 remains
cautious. The Fourth District’s economy continues to have
the same stop-and-go feel as the nation’s.

The Fourth District’s labor markets continued to make
slow but steady progress during the recovery and in

A n n ual R epo rt 2 0 1 2


Figure 1. The region’s unemployment rate declined
more sharply than the nation’s...

Figure 2. ...and private-building permits saw an uptick on
a year-over-year basis.


Millions of units*




Thousands of units*

Nation (left axis)







Fourth District

Fourth District (right axis)





Nation (minus the Fourth District)












Source: Bureau of Labor Statistics.
Shaded bars in figures 1 and 2 indicate recessions.

Over all, labor market performance varies widely across
the District. The metropolitan areas of Columbus,
Lexington, and Pittsburgh have outpaced the US as a
whole in employment growth. Columbus and Pittsburgh
rank in the top half of the 50 largest metropolitan areas
in the country for employment growth since 2007.
This pattern is not new—Columbus and Pittsburgh,
university towns with strong service sectors and ample
supplies of highly skilled labor, had seen relatively
strong growth before the recession, and these trends
appear to have been re-established during the recovery.
At the same time, the northeast Ohio metro areas
of Akron, Cleveland, and Youngstown have reported
slower-than-average employment growth. Their employment numbers remain between 3 percent and 6 percent
below their pre-recession peaks. In part, this reflects
the slower recovery of manufacturing employment in
these manufacturing-heavy cities, which also affects
nonmanufacturing-sector firms that provide services to
manufacturers and their employees.






A nnua l R ep o rt 2012


*Seasonally adjusted annual rate.
Source: Census Bureau.

The Fourth District’s housing market began moving in a
positive direction toward the latter half of 2012. Prices
firmed, and many cities saw increased construction
activity. Building permits finally saw an uptick on a yearover-year basis, the first in several years for many locales
in the District, although the pace of improvement trails
that of the nation overall (see figure 2).
Still, context is important. Building activity had been
treading water at very low levels since 2009, nationally
and in the Fourth District. The gains we are beginning to
see remain modest, and hiring in the sector is sluggish.
Certainly, the short-term trends are moving in the right
direction, buoyed by low interest rates. Household
formation picked up, after declining sharply during the
Great Recession, and income growth has been solid.
That said, many Ohio locales are working through significant foreclosure backlogs, which are likely to dampen
new construction activity in these markets.



Figure 3. The region’s services industries have grown
markedly since the recovery...

Figure 4. ...and its educational attainment rate for 25- to
34-year-olds ranks seventh of 12 Fed districts.

Mining, logging



Professional and business services

New York


Education and health services











Kansas City


San Francisco








St. Louis


Leisure, hospitality
Trade, transportation, utilities
Other services

Fourth District

Financial activities





10 15




Note: Aggregate of Fourth District states’ payrolls;
growth from June 2009 to December 2012.

Source: American Community Survey (five year).

Source: Bureau of Labor Statistics.

Industry Developments
The Fourth District remains strong in manufacturing,
even though manufacturing jobs grew only modestly
in 2012. Pennsylvania showed slight employment
expansions, while Ohio and especially Kentucky had
stronger growth due primarily to gains in transportation
equipment industries.
Today, the services industries make up the largest share
of employment. Professional and business services,
along with education and health services, have been
key contributors to strength in local labor markets (see
figure 3). In Columbus, for example, education and
health care services have grown by almost 20 percent—
or nearly 20,000 jobs—since the end of the recession,
accounting for 40 percent of Columbus’ employment
growth over the recovery period. We also saw solid
growth in education and health services in Pittsburgh,
Lexington, and Cleveland.
Regional energy production has risen sharply higher in
recent years, boosted by exploration and development
of the Marcellus and Utica shale gas resources. Western

Pennsylvania posted strong growth in natural resource
employment. Ohio, whose shale gas activity is in an
earlier stage than Pennsylvania’s, has felt a less direct
impact so far, but exploration and development are rising.
The open question is how much more employment
growth we can expect from shale gas developments.
Analysts remain quite divided on the future economic
impacts; the size of the employment spillovers will
depend critically on whether oil- and gas-related industries will locate in the Fourth District and how much of
the income created remains in local economies.

The State of Human Capital
Growth prospects for any region depend heavily on
workforce quality. On that front, the Fourth District
faces some short-term challenges. Its human capital, as
measured by the bachelor’s degree attainment rate of its
adult population, is relatively low; it ranks second-to-last
of the 12 Reserve Bank Districts. Not surprisingly, the
First (Boston) and Second (New York) Districts have the
highest share of adults with four-year college degrees.

A n n ual R epo rt 2 0 1 2


However, it’s important to note that the differences
across Districts reflect a range of factors that may not
tell the whole story.
For example, the Fourth District fares a bit better in the
educational attainment rate for younger working adults,
those aged 25–34 (see figure 4). If a region’s human
capital is improving, we would expect to see larger
impacts on its younger working cohort. In the Fourth
District, we see highly skilled, younger workforces in
metropolitan areas like Columbus and Pittsburgh.
Indeed, the educational attainment of Pittsburgh’s
young working cohort ranks twelfth among the 100
largest US metropolitan areas. Such improvements
in human capital bode well for longer-term growth in
these areas—assuming they can retain their skilled

The Year Ahead
The Fourth District’s economy, like the nation’s, is not
yet hitting on all cylinders. The specter of uncertainty
continues to threaten as we move through 2013. The
Federal Reserve Bank of Cleveland’s business contacts
cite uncertainty over the US fiscal situation and global
economic conditions as reasons for their diminished
optimism about hiring plans compared with this time
last year.
That said, the majority of our contacts still plan to expand
their payrolls, or at least maintain their current employment levels, in 2013. In addition, improvements in local
housing markets, the continued repair of Fourth District
households’ balanced sheets, and solid growth in real
per capita income should support continued expansion
of the Fourth District’s economy in 2013.


A nnua l R ep o rt 2012

Operations Evolution

Gregory L. Stefani
First Vice President and Chief Operating Officer

The Federal Reserve Bank of Cleveland’s many duties as a central bank include providing payment services,
supervising banks, and setting monetary policy. Over the past century, our Bank has continued to adapt,
evolve, and learn, resulting in changes in how we do our work. While these changes are evident across
all areas of our organization, they are most striking in the area of payments.
From paper to electronic, from manual to automated—in many ways, the evolution of payments processing
represents the evolution of all of our operating and support roles.
In what seems to be a blink of the eye, paper-based services like check processing became electronic.
But what now seems so natural—we check our bank account balances online, we use our debit card
instead of a checkbook—was decades in the making. Until fairly recently, check processing, clearing, and
settlement were predominantly manual tasks performed by throngs of workers. At its peak, hundreds of
workers at the Federal Reserve Bank of Cleveland processed literally 10 million checks per night.

A n n ual R epo rt 2 0 1 2


Cleveland Fed Operations: Then and Now

In 1943, check collection employees
worked five shifts around the clock to
meet the rising tempo of the war.

While still much of a manual process,
using rotary perforators in the mechanical
cancellation of securities, shown here in
this photo from 1951, was much safer.

But the work of processing checks is costly and labor
intensive. For that reason, the Federal Reserve sought
ways to improve the efficiency of its check operations—
to modernize its factory, so to speak. In 2003, the
Federal Reserve completed its four-year Check Modernization initiative, which overhauled the systems and
infrastructure for processing checks. A leader in reducing
the Federal Reserve’s check footprint, the Federal
Reserve Bank of Cleveland, working in partnership with
the Federal Reserve Bank of Atlanta, led the development and implementation of this ambitious project.
It standardized check processing at all Reserve Bank
offices, adopted a common software for processing and
researching check-adjustment cases, created a national
check-image archive and retrieval system, and delivered
check services to customers on a web-based platform.


A nnua l R ep o rt 2012

Currency sorting at mid-century was
much as it had been in the 1920s,
when the task was first mechanized by
introducing the federal bill counter.

The challenge of handling stacks of paper checks
remained, however, until we adopted image technology,
which helped transform payments from a paper-based,
hand-delivered process into an electronic process. This
helped establish the basis of what eventually became the
Check Clearing for the 21st Century Act. Check 21, as
the Act is commonly known, was designed to help banks
handle more checks electronically by allowing a check’s
image, rather than the physical check itself, to be moved
between banks. The Cleveland Fed, working on behalf
of the System’s Retail Payments Office, once again took
a leadership role by preparing for the requirements of
Check 21, designing a new suite of products and services,
and overseeing the project’s implementation.

The Treasury authorized Federal
Reserve Banks to cancel and destroy
silver certificates and US notes in 1953
and unfit Federal Reserve notes in
1966. Here, Federal Reserve Bank of
Cleveland Cash Department employees
throw bundles of unfit currency into the
gas-fired incinerator.

Since Pearl Harbor, every director,
officer, and employee of the Federal
Reserve Bank has been fingerprinted.
This photo is from 1943.

The main vault, no longer used to store
cash, is made of concrete and reinforced
with an intricate, interlaced type of
fabricated steel. The door is 5 feet thick
and weighs 100 tons but is so precisely
balanced that one person can swing
it closed.

With the passage of Check 21, it became obvious that
the Federal Reserve’s infrastructure for processing
checks was too big. As a consequence, the Federal
Reserve has consolidated its check services, eliminated
our extensive air- and ground-transportation network
for paper check delivery, and built an infrastructure that
moves billions of check images from collecting to paying
banks. Check 21 reduced clearing time for consumers,
businesses, and banks. It reduced costs for the banking
industry. And it improved safety and security. The Federal
Reserve Bank of Cleveland became the System’s sole
paper check processing site until the end of 2012, when
the Federal Reserve Bank of Atlanta began processing
the few remaining paper items.

moving from paper to electronic—our support for the

Check processing is only one of the Federal Reserve
services that the Cleveland Fed has had a hand in

As we moved into the twenty-first century, the

US Treasury is also evolving. The Federal Reserve is the
Treasury’s fiscal agent, or, in other words, we work on
behalf of the Treasury to make payments, collect funds
owed to the government, and manage relationships with
the government’s creditors.
Historically, the Federal Reserve Bank of Cleveland has
supported the Treasury primarily by issuing, redeeming,
and servicing savings bonds and marketable securities.
As with paper checks, hundreds of employees, in our
Pittsburgh Branch in this instance, worked several shifts
to process paper bonds. Over time, however, we have
evolved into much more than bond processors.

Cleveland Fed saw an opportunity to fill a gap. In 2001,

A n n ual R epo rt 2 0 1 2


Cleveland Fed Operations: Then and Now

Changes in the building have been
based on productivity, efficiency, and
sustainability. We undertook a major
mechanical/electrical renovation in
1956, completed a full remodel and
restoration in 1998, and achieved
Leadership in Energy and Environment
Design (LEED) certification in 2011.

Bank employees named the four robots
that now transport the cash: TT’s Little
Squirt, BIP, Bumble Bee, and shown
above, Farina.

the Cleveland Fed took a lead role in developing two
new electronic payments initiatives for the Treasury— and Paper Check Conversion. used
then-state-of-the art payments technology to authorize
and settle government payments over the internet.
Paper Check Conversion allowed the Treasury to move
checks into the more efficient automated clearinghouse.
This was just the start. The Federal Reserve Bank of
Cleveland’s eGovernment Department (eGov) is now
solely responsible for two key areas of the Treasury’s
revenue collection management. The visible side of
collections is still, the Treasury’s online platform
for nontax payments to federal agencies, and a key
component of the Treasury’s all-electronic initiative. The
other side is the Debit Gateway, the Treasury’s system
for settling all check and electronic payments to those
agencies. eGov continues to adapt to significant volume


A nnua l R ep o rt 2012

In the wake of riots in Cleveland on
May Day 1919, Bank leaders took
precautions in anticipation of opening
the Federal Reserve Bank of Cleveland’s
new building. The Bank hired, organized, and trained roughly 60 guards.
Over time, security staff has become a
federally commissioned police department, now known as the Bank’s Law
Enforcement Unit.

increases, expand its expertise, and deliver advanced
software. What started out as a payments collection
concept has now grown to processing over 250 million
transactions valued at over $550 billion annually.
With a focus on scalability and quality improvements,
eGovernment’s operating platform is being designed
to accommodate future growth and new or emerging
payment technologies.
The Federal Reserve Bank of Cleveland has supported
the evolution of financial services in many ways throughout our existence. Our President and CEO, Sandra
Pianalto, in her role as chair of the Financial Services
Policy Committee (FSPC), continues this tradition. The
FSPC is responsible for the overall direction of financial
services and related support functions for the Federal
Reserve Banks, as well as for providing Federal Reserve
leadership in dealing with the evolving US payments

Unfit, shredded notes that used to be
burned are now composted at Rosby’s
Berry Farm in Brooklyn Heights,
Ohio, as part of the Bank’s waste
management initiative.

The Bank’s Learning Center and Money
Museum underwent a refresh in 2012.
A new animated, interactive game
tracing the origins of the Federal Reserve
is shown here.

Spaces that were once used for production are now open work spaces that
allow for quick lines of communication
and are designed for project teams to
work collaboratively. eGovernment
employees are shown above.

system. In October 2012, the FSPC unveiled its financial
services strategic direction, a bold change in direction
focused on improving the speed, safety, and efficiency
of the payments system.
Historically, the Federal Reserve’s focus when it came
to financial services has been on the interbank market,
but its strategy today is to place greater emphasis on
the entire payments supply chain and end users. To put
it simply, our strategy is to focus on payments from
end-to-end in order to continue to support transformative
payment innovations.
For almost a century, we have adapted to changes in
our environment and have learned to take the initiative
in responding to them and planning for the future.
So while our role in processing traditional payments
has declined, our role in helping shape the future of
payments continues. We remain actively engaged

in adjusting our planning, product development, and
resources to capitalize on innovation in the marketplace.
And as a greater percentage of our workforce moves
from manual operations-focused work into more
knowledge-based roles supporting departments like
eGov, Research, and Supervision and Regulation, we,
as always, continue to adapt, evolve, and learn.

 Watch a 16 mm motion picture from 1950 depicting operations during a fictional day

at the Federal Reserve Bank of Cleveland at

A n n ual R epo rt 2 0 1 2


Boards of Directors,
Advisory Councils, and
Officers and Consultants

Boards of Directors
Federal Reserve Banks each have a main office board of nine directors. Directors help set the Bank’s strategic direction,
supervise the Bank’s budget and operations, and make recommendations on the discount rate on primary credit. 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 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 appointed 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.


A nnua l R ep o rt 2012

Cleveland Board of Directors
As of December 31, 2012

Back Row: Todd Mason, C. Daniel DeLawder,
Christopher M. Connor, Paul G. Greig,
Tilmon F. Brown, Harold Keller
Front Row: Richard K. Smucker,
Alfred M. Rankin Jr., Susan Tomasky

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

Richard K. Smucker
Board Deputy Chairman
Chief Executive Officer

The J.M. Smucker Company
Orrville, Ohio

Tilmon F. Brown
President and Chief Executive Officer
New Horizons Baking Company
Norwalk, Ohio

Christopher M. Connor
Chairman and Chief Executive Officer
The Sherwin–Williams Company
Cleveland, Ohio

C. Daniel DeLawder
Chairman and Chief Executive Officer
Park National Bank
Newark, Ohio

Paul G. Greig
Chairman, President, and Chief Executive Officer
FirstMerit Corporation
Akron, Ohio

Harold Keller

Ohio Capital Corporation for Housing
Columbus, Ohio

Todd Mason
President and Chief Executive Officer
First National Bank of Pandora
Pandora, Ohio

James E. Rohr
Federal Advisory Council Representative
Chairman and Chief Executive Officer
The PNC Financial Services Group, Inc.
Pittsburgh, Pennsylvania

Susan Tomasky
Energy Consultant and Former President
AEP Transmission
Columbus, Ohio

A n n ual R epo rt 2 0 1 2


Cincinnati Board of Directors
As of December 31, 2012

Back Row: Austin W. Keyser, Amos L. Otis,
Gregory B. Kenny
Front Row: Donald E. Bloomer, Peter S. Strange,
Daniel B. Cunningham
Not Pictured: Susan Croushore

Peter S. Strange
Board Chairman
Messer, Inc.
Cincinnati, Ohio

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

Susan Croushore
President and Chief Executive Officer
The Christ Hospital
Cincinnati, Ohio

Daniel B. Cunningham
President and Chief Executive Officer
The Long–Stanton Group
Cincinnati, Ohio


A nnua l R ep o rt 2012

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

Austin W. Keyser
Midwest Senior Field Representative
McDermott, Ohio

Amos L. Otis
Founder, President, and Chief Executive Officer
SoBran, Inc.
Dayton, Ohio

Pittsburgh Board of Directors
As of December 31, 2012

Back Row: Petra Mitchell, Charles Hammell III,
Todd D. Brice, Grant Oliphant
Front Row: Robert A. Paul, Glenn R. Mahone,
Dawne S. Hickton

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

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

Charles Hammel III

Pittsburgh, Pennsylvania

Petra Mitchell

Catalyst Connection
Pittsburgh, Pennsylvania

Grant Oliphant
President and Chief Executive Officer
The Pittsburgh Foundation
Pittsburgh, Pennsylvania

Robert A. Paul
Chairman and Chief Executive Officer
Ampco–Pittsburgh Corporation
Pittsburgh, Pennsylvania

Dawne S. Hickton
Vice Chair, President, and Chief Executive Officer
RTI International Metals, Inc.
Pittsburgh, Pennsylvania

A n n ual R epo rt 2 0 1 2


Business Advisory Councils
As of December 31, 2012

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, Columbus, 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.


Charles Brown
Vice President and Secretary

Christopher Cole
Chief Executive Officer

Jim Huff
Chairman Emeritis of Huff Realty

Robert Buechner

Kay Geiger
President, Greater Cincinnati/
Northern Kentucky

Vivian Llambi

Toyota Motor Engineering
& Manufacturing, NA, Inc.
Erlanger, Kentucky

Buechner Haffer Meyers
and Koenig Co., LPA
Cincinnati, Ohio

Calvin Buford
Partner, Corporate Development
Dinsmore & Shohl LLP
Cincinnati, Ohio

James Bushman
President and Chief Executive Officer
Cast-Fab Technologies, Inc.
Cincinnati, Ohio


Terry Grundy
Director, Community Impact

United Way of Greater Cincinnati
Cincinnati, Ohio

Jose Guerra

L5 Source
Cincinnati, Ohio

Vivian Llambi & Associates, Inc.
Cincinnati, Ohio

Joseph Rippe

Rippe and Kingston
Cincinnati, Ohio

Carl Satterwhite
RCF Group
Hamilton, Ohio

Albert M. Green
Chief Executive Officer

Kevin M. McMullen
Chairman and Chief Executive Officer

Maryann Correnti
Chief Financial Officer

Christopher J. Hyland
Executive Vice President and
Chief Financial Officer

David Megenhardt
Executive Director

Warrensville Heights, Ohio

Jenniffer Deckard
Fairmount Minerals
Chardon, Ohio

Jack Diamond

Bennan, Manna, and Diamond, LLC
Akron, Ohio

Gary Gajewski
Vice President, Finance
Moen, Inc.
North Olmsted, Ohio

A nnua l R ep o rt 2012

The PNC Financial Services Group
Cincinnati, Ohio

HUFF Commercial Group
Ft. Mitchell, Kentucky

Cedric Beckett
President and Chief Executive Officer
Optimum Supply, LLC
Cleveland, Ohio


Mason, Ohio

Kent Displays, Inc.
Kent, Ohio

Hyland Software, Inc.
Westlake, Ohio

OMNOVA Solutions, Inc.
Fairlawn, Ohio

United Labor Agency
Cleveland, Ohio

Michael Keresman
Chief Executive Officer

Bob Patterson
Executive Vice President and
Chief Operating Officer

Andrew Logan
President and Chief Executive Officer

Rasesh Shah

Cardinal Commerce Corporation
Mentor, Ohio

Logan Clutch Corporation
Cleveland, Ohio

Gena Lovett
Chief Diversity Officer

Alcoa Forging and Extrusions
Cleveland, Ohio

PolyOne Corporation
Avon Lake, Ohio

The Andersons Rail Group
Maumee, Ohio


David W. Berson
Senior Vice President and
Chief Economist
Nationwide Insurance
Columbus, Ohio

Tim Burga

Columbus, Ohio

William Carter
Chief Financial Officer and
Vice President of Investor Relations
and Public Affairs


Michael Dalby
President and Chief Executive Officer

Jordan Miller
President and Chief Executive Officer

Paul Desantis
Chief Financial Officer

Andy Rose
Vice President and
Chief Financial Officer

Columbus Chamber of Commerce
Columbus, Ohio

Bob Evans Farms
Columbus, Ohio

Everett Gallagher
Senior Vice President and Treasurer
Abercrombie & Fitch
New Albany, Ohio

Fifth Third Bank, Central Ohio
Columbus, Ohio

Worthington Industries
Columbus, Ohio

Mark Thresher
Executive Vice President and
Chief Financial Officer
Columbus, Ohio

Columbus, Ohio

Mike Gonsiorowski
Regional President, Central Ohio
Columbus, Ohio

Edward Blake
Senior Partner
Chief Executive Officer, MV
Commercial Group; and CFO,
Miller-Valentine Group

Larry Klaben
President and Chief Executive Officer

Gregory Stout
Chief Financial Officer

Phil Parker
President and Chief Executive Officer

Christopher Wallace
Senior Vice President,
Corporate Banking

Miller-Valentine Group
Dayton, Ohio

Bryan Bucklew
President and Chief Executive Officer
Greater Dayton Area Hospital
Dayton, Ohio

Christopher Che
President and Chief Executive Officer
Hoovan-Dayton Corp.
Dayton, Ohio

Morris Furniture Co., Inc.
Fairborn, Ohio

Dayton Area Chamber of Commerce
Dayton, Ohio

Jenell Ross

Bob Ross Auto Group
Centerville, Ohio

Michael Shane

Voss Auto Network
Centerville, Ohio

PNC Financial Services
Dayton, Ohio

Mark Walton
Vice President and CRA Manager
Fifth Third Bank
Dayton, Ohio

Lastar, Inc.
Moraine, Ohio

Bruce Feldman

Economy Linen & Towel Service
Dayton, Ohio

A n n ual R epo rt 2 0 1 2



Cle Austin

Gary L. Clark
Board Member

Chris Scott
Vice President

Matthew Baldwin
Vice President

Martin J. Farrell

Tim Shuttleworth
President and Chief Executive Officer

Jim Berlin
Chief Executive Officer

William Hilbert Jr.

Phil Tredway
President and Chief Executive Officer

Terrence W. Cavanaugh
President and Chief Executive Officer

Marsha Marsh

William Farmer
President and Chief Executive Officer

Wayne Masterman

Kevin Smith
President and Chief Executive Officer

Paula Hanson
Director of Tax Services

Ann McBrayer

David Switzer
Executive Director

Ed Holmes

Rebecca Mobley

E. E. Austin & Son, Inc.
Erie, Pennsylvania

Baldwin Brothers, Inc.
Erie, Pennsylvania

Logistics Plus
Erie, Pennsylvania

Erie Insurance
Erie, Pennsylvania


United Way of the Bluegrass
Lexington, Kentucky

Dean Dorton Allen Ford
Lexington, Kentucky

EHI Consultants
Lexington, Kentucky

Glenn Leveridge
Market President

Central Bank
Winchester, Kentucky

David Magner
Business Director - Manufacturing
Ingersoll Rand
Lexington, Kentucky


A nnua l R ep o rt 2012

Reed Mfg. & Erie Bank
Erie, Pennsylvania

Infinity Resources, Inc.
Erie, Pennsylvania

REDDOG Industries, Inc.
Erie, Pennsylvania

Scott Enterprises
Erie, Pennsylvania

Eriez Magnetics
Erie, Pennsylvania

Erie Molded Plastics, Inc.
Erie, Pennsylvania

Marsha Marsh Real Estate Services
Erie, Pennsylvania

Port Restaurants, LLC
Lexington, Kentucky

Kentucky Eagle, Inc.
Lexington, Kentucky

Turf Town Properties, Inc.
Lexington, Kentucky

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

Robert L. Quick
President and Chief Executive Officer
Commerce Lexington Inc.
Lexington, Kentucky

Community Ventures Corporation
Lexington, Kentucky

Kentucky Thoroughbred
Association, Inc.
Lexington, Kentucky

Kenneth Troske
Chair, Department of Economics
University of Kentucky
Lexington, Kentucky

Holly Wiedemann
AU Associates
Lexington, Kentucky


James C. Cooper

Robert Glimcher

Sean McDonald
President and Chief Executive Officer

John H. Dunn

Anthony M. Helfer

Stefani Pashman
Chief Executive Officer

Kathryn Z. Klaber
President and Executive Director

Gregory Spencer
President and Chief Executive Officer

Dennis Meteny
President and Chief Executive Officer

Doris Carson Williams
President and Chief Executive Officer

Lisa Allen
President and Chief Executive Officer

Joel Mazur
President and Chief Executive Officer

Erikka Storch
Chief Financial Officer

P. Michael Bizanovich

David H. McKinley
President and Managing Partner

Ronald L. Violi
Managing Director

John Clarke
Business Representative

Lee C. Paull IV
Executive Vice President and
Associate Broker

Sterling Contracting LLC
Pittsburgh, Pennsylvania

J D Dunn Company
Sewickley, Pennsylvania

William Fink

Paragon Homes Inc.
McKees Rocks, Pennsylvania

Stephanie DiLeo

Homer City Automation
Homer City, Pennsylvania

Glimcher Group
Pittsburgh, Pennsylvania

United Food & Commercial Workers
Local 23
Canonsburg, Pennsylvania

Marcellus Shale Coalition
Canonsburg, Pennsylvania

Cygnus Manufacturing Company
Saxonburg, Pennsylvania

Audrey Palombo Dunning
Chief Executive Officer

Precision Therapeutics, Inc.
Pittsburgh, Pennsylvania

Three Rivers Workforce
Investment Board
Pittsburgh, Pennsylvania

Randall Industries
Pittsburgh, Pennsylvania

African American Chamber of
Commerce of Western Pennsylvania
Pittsburgh, Pennsylvania

Pittsburgh, Pennsylvania


Ziegenfelder Company
Wheeling, West Virginia

Technology Services Group, Inc.
Wheeling, West Virginia

IBEW Local #141
Wheeling, West Virginia

John L. Kalkreuth

Kalkreuth Roofing & Sheet Metal, Inc.
Wheeling, West Virginia

Robert Kubovicz

United Electric
Wheeling, West Virginia

Wheeling Corrugating Company
Wheeling, West Virginia

McKinley Carter Wealth Services
Wheeling, West Virginia

Ohio Valley Steel Company
Wheeling, West Virginia

R & V Associates
Pittsburgh, Pennsylvania

Paull Associates Insurance/Real Estate
Wheeling, West Virginia

Richard Riesbeck

Riesbeck Food Markets
St. Clairsville, Ohio

Jim Squibb
Chief Executive Officer

Beyond Marketing
Wheeling, West Virginia

A n n ual R epo rt 2 0 1 2


Community Depository Institutions Advisory Council
As of December 31, 2012

The Community Depository Institutions Advisory Council is composed of representatives from commercial banks, thrift institutions, and credit unions
in the Fourth Federal Reserve District.
Council members meet with the Bank president and senior officers at least twice yearly to provide information and insight from the perspective of community
depository institutions. These meetings provide anecdotal information that is useful in the formulation of supervisory and monetary policy direction.
The chair of each District Bank’s council also has the responsibility of reporting twice yearly to the Federal Reserve Board of Governors in Washington, DC.

Howard T. Boyle II
President and Chief Executive Officer

James O. Miller
Chairman, President, and Chief Executive Officer

Bick Weissenrieder
Chairman and Chief Executive Officer

Patrick Ferry

Robert Oeler
President and Chief Executive Officer

Charlotte Zuschlag
President and Chief Executive Officer

Paul M. Limbert
President and Chief Executive Officer

Gary Soukenik
President and Chief Executive Officer

William C. Marsh
Chairman, President, and Chief Executive Officer

Eddie Steiner
President and Chief Executive Officer

Hometown Bank
Kent, Ohio

Members Heritage Federal Credit Union
Lexington, Kentucky

WesBanco Bank, Inc.
Wheeling, West Virginia

Farmers National Bank
Emlenton, Pennsylvania


A nnua l R ep o rt 2012

The Citizens Banking Company
Sandusky, Ohio

Dollar Bank
Pittsburgh, Pennsylvania

Seven Seventeen Credit Union
Warren, Ohio

CSB Bancorp, Inc.
Millersburg, Ohio

Hocking Valley Bank
Athens, Ohio

ESB Financial Corporation
Ellwood City, Pennsylvania

Officers and Consultants
As of December 31, 2012

Sandra Pianalto
President and Chief Executive Officer

Cheryl L. Davis
Vice President and Corporate Secretary

Jeffrey G. Gacka
Assistant Vice President

Gregory L. Stefani
First Vice President and Chief Operating Officer

Timothy Dunne
Vice President

Bryan S. Huddleston
Assistant Vice President

Mark S. Sniderman
Executive Vice President and Chief Policy Officer

Joseph G. Haubrich
Vice President

George E. Guentner
Assistant Vice President

Suzanne M. Howe
Vice President

Felix Harshman
Assistant Vice President

Paul E. Kaboth
Vice President and Community Affairs Officer

Matthew D. Hite
Assistant Vice President

Susan M. Kenney
Vice President

Evelyn M. Magas
Assistant Vice President

Edward S. Knotek II
Vice President

Martha Maher
Assistant Vice President

Jerrold Newlon
Vice President

Timothy M. Rachek
Assistant Vice President

Stephen J. Ong
Vice President

Elizabeth J. Robinson
Assistant Vice President

Thomas S. Sohlberg
Vice President

Thomas E. Schaadt
Assistant Vice President

James B. Thomson
Vice President

James P. Slivka
Assistant Vice President

Henry P. Trolio
Vice President

Diana C. Starks
Assistant Vice President

Jeffrey R. Van Treese
Vice President

Jason E. Tarnowski
Assistant Vice President

Nadine Wallman
Vice President

Michael Vangelos
Assistant Vice President

LaVaughn M. Henry
Vice President and Senior Regional Officer

Carolyn M. Williams
Assistant Vice President

William D. Fosnight
Senior Vice President and General Counsel
David W. Hollis
Senior Vice President
Stephen H. Jenkins
Senior Vice President
Mark S. Meder
Senior Vice President and General Auditor
Terrence J. Roth
Senior Vice President
Mark E. Schweitzer
Senior Vice President and Director of Research
Susan M. Steinbrick
Senior Vice President
Anthony Turcinov
Senior Vice President
Peggy A. Velimesis
Senior Vice President
Lisa M. Vidacs
Senior Vice President

Douglas A. Banks
Vice President
Kelly A. Banks
Vice President
John B. Carlson
Vice President
Todd E. Clark
Vice President

Robert B. Schaub
Vice President and Senior Regional Officer

Maria A. Bowlin
Assistant Vice President

Dean A. Longo
John P. Robins

Tracy L. Conn
Assistant Vice President

Iris E. Cumberbatch
Vice President and Public Information Officer

A n n ual R epo rt 2 0 1 2


Financial Statements

Auditor Independence
The Board of Governors engaged Deloitte & Touche LLP (D&T) to audit the 2012 combined and
individual financial statements of the Reserve Banks and those of the consolidated LLC entities.1
In 2012, D&T also conducted audits of internal controls over financial reporting for each of the
Reserve Banks, Maiden Lane LLC, Maiden Lane III LLC, and TALF LLC. Fees for D&T’s services
totaled $7 million, of which $1 million was for the audits of the consolidated LLC entities. To
ensure auditor independence, the Board requires that D&T be independent in all matters relating
to the audits. 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
the Reserve Banks, or in any other way impairing its audit independence. In 2012, the Bank did not
engage D&T for any non-audit services.



In addition, D&T audited the Office of Employee Benefits of the Federal Reserve System (OEB), the Retirement Plan for
Employees of the Federal Reserve System (System Plan), and the Thrift Plan for Employees of the Federal Reserve System
(Thrift Plan). The System Plan and the Thrift Plan provide retirement benefits to employees of the Board, the Federal Reserve
Banks, and the OEB.

A nnua l R ep o rt 2012

Cleveland, Ohio 44101

Management’s Report on Internal Control Over Financial Reporting
March 14, 2013
To the Board of Directors of the Federal Reserve Bank of Cleveland:
The management of the Federal Reserve Bank of Cleveland (Bank) is responsible for the preparation and fair presentation of the Statements of Condition as of December 31, 2012 and 2011, 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 Bank is responsible for establishing and maintaining effective internal control over financial
reporting as it relates to the financial statements. The Bank’s internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external reporting purposes in accordance with the FAM. The Bank’s internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the Bank’s assets; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with FAM, and that the Bank’s
receipts and expenditures are being made only in accordance with authorizations of its management and directors;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Bank’s assets that could have a material effect on its financial statements.
Even effective internal control, no matter how well designed, has inherent limitations, including the possibility of human
error, and therefore can provide only reasonable assurance with respect to the preparation of reliable financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
The management of the Bank assessed its internal control over financial reporting 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 Bank maintained effective internal control over
financial reporting.
Federal Reserve Bank of Cleveland

Sandra Pianalto
President &
Chief Executive Officer

Gregory L. Stefani
First Vice President &
Chief Operating Officer

Susan M. Steinbrick
Senior Vice President &
Chief Financial Officer
A n n ual R epo rt 2 0 1 2


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 financial statements of the Federal Reserve Bank of Cleveland (“FRB Cleveland”), which are
comprised of the statements of condition as of December 31, 2012 and 2011, and the related statements of income and comprehensive income, and of changes in capital for the years then ended, and the related notes to the financial statements. We also have
audited the FRB Cleveland’s internal control over financial reporting as of December 31, 2012, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Management’s Responsibility
The FRB Cleveland’s management is responsible for the preparation and fair presentation of these financial statements in accordance
with accounting principles established by the Board of Governors of the Federal Reserve System (the “Board”) as described in
Note 3 to the financial statements. The Board has determined that this basis of accounting is an acceptable basis for the preparation
of the FRB Cleveland’s financial statements in the circumstances. The FRB Cleveland’s management is also responsible for the
design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements
that are free from material misstatement, whether due to fraud or error. The FRB Cleveland’s management is also responsible for its
assertion of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting.
Auditors’ Responsibility
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 of the financial statements in accordance with auditing
standards generally accepted in the United States of America and in accordance with the auditing standards of the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and we conducted our audit of internal control over financial reporting
in accordance with attestation standards established by the American Institute of Certified Public Accountants and in accordance
with the auditing standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material misstatement and whether effective internal control over
financial reporting was maintained in all material respects.
An audit of the financial statements involves performing procedures to obtain audit evidence about the amounts and disclosures in
the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material
misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the FRB Cleveland’s preparation and fair presentation of the financial statements in order to design audit procedures
that are appropriate in the circumstances. An audit of the financial statements also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements. An audit of internal control over financial reporting involves obtaining an understanding

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A nnua l R ep o rt 2012

of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.
Definition of Internal Control Over Financial Reporting
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. 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, 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 and correction of unauthorized acquisition, use, or disposition of the FRB Cleveland’s assets that could have a material effect on the financial statements.
Inherent Limitations of Internal Control Over Financial Reporting
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 and corrected 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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the FRB
Cleveland as of December 31, 2012 and 2011, and the results of its operations for the years then ended in accordance with the
basis of accounting described in Note 3 to the financial statements. Also, in our opinion, the FRB Cleveland maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2012, based on the criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis of Accounting
We draw attention to Note 3 to the financial statements, which describes the basis of accounting. The FRB Cleveland has prepared
these financial statements in conformity with accounting principles established by the Board, as set forth in the Financial Accounting
Manual for Federal Reserve Banks, which is a 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 and accounting principles generally accepted in the United States of America are also described in Note 3 to the financial
statements. Our opinion is not modified with respect to this matter.

March 14, 2013
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As of December 31, 2012 and December 31, 2011 (in millions)
Gold certificates





Special drawing rights certificates


















Accrued interest receivable



Bank premises and equipment, net





System Open Market Account:
Treasury securities, net (of which $232 and $408 is lent as of December 31, 2012 and
2011, respectively)
Government-sponsored enterprise debt securities, net (of which $18 and $34 is lent as of
December 31, 2012 and 2011, respectively)
Federal agency and government-sponsored enterprise mortgage-backed securities, net
Foreign currency denominated assets, net
Central bank liquidity swaps
Other investments

Items in process of collection
Interdistrict settlement account
Other assets
Total assets
Federal Reserve notes outstanding, net













System Open Market Account:
Securities sold under agreements to repurchase
Other liabilities









Depository institutions
Other deposits
Interest payable to depository institutions



Accrued benefit costs



Deferred credit items



Accrued interest on Federal Reserve notes



Interdistrict settlement account



Other liabilities





Capital paid-in



Surplus (including accumulated other comprehensive loss of $20 and $11
at December 31, 2012 and 2011, respectively)





Total liabilities

Total capital
Total liabilities and capital
The accompanying notes are an integral part of these financial statements.*


A nnua l R ep o rt 2012





For the years ended December 31, 2012 and December 31, 2011 (in millions)

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



























System Open Market Account:
Securities sold under agreements to repurchase
Depository institutions
Total interest expense
Net interest income
System Open Market Account:
Treasury securities gains, net
Federal agency and government-sponsored enterprise mortgage-backed securities gains, net



Compensation received for service costs provided

Foreign currency translation (losses) gains, net



Reimbursable services to government agencies















Board of Governors operating expenses and currency costs



Bureau of Consumer Financial Protection



Total non-interest income
Salaries and benefits


Office of Financial Research







Net income before interest on Federal Reserve notes expense remitted to Treasury



Interest on Federal Reserve notes expense remitted to Treasury





Change in prior service costs related to benefit plans



Change in actuarial (losses) gains related to benefit plans



Total operating expenses

Net income

Total other comprehensive (loss) income
Comprehensive income





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

A n n ual R epo rt 2 0 1 2


For the years ended December 31, 2012 and December 31, 2011 (in millions, except share data)

Net income

Capital paid-in

other comprehensive loss


Total capital

Balance at December 31, 2010











Net change in capital stock issued






Net income


Other comprehensive income










Dividends on capital stock


Net change in capital










Comprehensive income:

Balance at December 31, 2011











Net change in capital stock issued






Net income






Other comprehensive loss
















Comprehensive income:

Dividends on capital stock
Net change in capital
Balance at December 31, 2012





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

* Read the accompanying notes on our website at


A nnua l R ep o rt 2012