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ANNUAL REPORT 2013

WHY IT IS VERY LOW,
AND WHY IT MATTERS

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

Cleveland | 216.579.2000
1455 East Sixth Street, Cleveland, OH 44114
Cincinnati | 513.721.4787
150 East Fourth Street, Cincinnati, OH 45202
Pittsburgh | 412.261.7800
One Oxford Centre, Suite 3000, 301 Grant Street, Pittsburgh, PA 15219

Table of Contents

President’s Letter

INFLATION: WHY IT IS VERY LOW, AND WHY IT MATTERS



Very low inflation: A recent phenomenon



The causes of the disinflation



Monetary policy options for handling very low inflation

State of the Region

The Life and Times of Sandra Pianalto

Message from the First Vice President



Innovation, Expertise, Influence, Reach: The Cleveland Fed by the Numbers

Leadership



Boards of Directors



Advisory Councils



Officers and Consultants

Access the Federal Reserve Bank of Cleveland’s 2013 financial statements on our website
at www.clevelandfed.org/annualreport.

A N N U A L RE P O RT 2 0 1 3

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

2

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

Richard K. Smucker
Chairman, Board of Directors
Gregory L. Stefani
First Vice President and Chief Operating Officer
Sandra Pianalto
President and Chief Executive Officer
Christopher M. Connor
Deputy Chairman, Board of Directors

3

A N N U A L RE P O RT 2 0 1 3

Sandra Pianalto
President and Chief Executive Officer
Federal Reserve Bank of Cleveland

President’s Letter

One of the Federal Reserve’s mandates is maintaining stable prices. During my more than three decades in the
Federal Reserve System, the focus has been primarily on avoiding high and variable inflation, and over most of
that period, the Federal Reserve has successfully fulfilled its objective to keep inflation in check.
More recently, however, our attention has turned to a less familiar concern—persistently low inflation. While
high inflation has well-known costs for economic performance, the problems posed by persistently low
inflation can be equally harmful.
As its title promises, this year’s annual report essay examines why inflation is low, and why it matters.

4

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

First, our researchers explore the relatively new phenomenon of low inflation. High inflation rates have been the
focus of attention for the last several decades. It has been
only in the aftermath of the most recent financial crisis that
the Federal Reserve has had to look more carefully at how
to guard against both overshooting and undershooting our
inflation objective.
Our researchers explain why the US economy is currently
experiencing a bout of sustained low inflation. Using a range
of tools, our researchers have identified two main sources:
slow economic growth, which has put very little upward
pressure on prices and wages; and special, temporary forces
that have held back some prices, such as the deceleration
of medical care costs.

They provide the Federal Reserve with crucial, real-time
information about business conditions on the ground, help
us pick up trends before they are reflected in the data, and
help us make connections with other business leaders in
the region. Our directors also oversee many aspects of the
Bank, and in 2013 they were instrumental in helping to set
the Bank’s strategic direction. I would like to say a special
thank you to the four directors who completed their terms in
office at the end of 2013 and to our retiring Federal Advisory
Council member:
• Paul G. Greig, chairman, president, and CEO of FirstMerit
Corporation, who served three years on the Cleveland
board, and who will serve as the Bank’s Federal Advisory
Council representative in 2014
• Peter S. Strange, chairman of Messer, Inc., who served
six years on the Cincinnati Branch board, the last two
years as chairman

Finally, our researchers discuss appropriate monetary
policy responses to persistently low inflation. Crucially,
appropriate responses depend on the underlying forecast
for inflation. Our current forecast is that steady economic
growth should gradually push up inflation toward the
Federal Open Market Committee’s longer-run objective
of 2 percent, particularly as some temporary forces that
had been dampening inflation fade.

• Glenn R. Mahone, partner and attorney at law at Reed
Smith LLP, who served six years on the Pittsburgh Branch
board, the last two years as chairman
• Todd D. Brice, president and CEO of S&T Bancorp, Inc.,
who served on our Pittsburgh Branch board for six years

Over the past decade, the Bank's research staff has made
tremendous contributions to our understanding of inflation.
This year’s annual report essay synthesizes and updates
some of their most recent work, which we have also
put on display in our new Inflation Central website at
www.clevelandfed.org/inflation-central. I hope you
will find that site a valuable source of information on all
things inflation, and I am sure you will see why the Federal
Reserve Bank of Cleveland has developed a well-deserved
reputation for meaningful and impactful inflation research.
  

The Bank’s inflation research is just one example of how we
are fulfilling our mission to foster the stability, integrity, and
efficiency of the nation’s monetary, financial, and payments
systems. In fact, based on our employees’ wide range of
expertise, we rolled out in 2013 a new strategic plan that
capitalizes on their many talents. From bank supervision to
payments innovation to stakeholder engagement, the Bank’s
2014–2016 strategic plan is bold, aspirational, and focused
on the future. First Vice President Greg Stefani talks more
about the plan in his letter on page 26. I also invite you to
review our Bank “By the Numbers” following Greg’s letter,
and see how we stacked up in 2013. I think you’ll like what
you see.

• James E. Rohr, executive chairman of PNC Financial
Services Group, Inc., who served three years on our
Cleveland Board and three years as the Fourth District’s
representative to the Federal Advisory Council, of which
he served as chair in 2013
  

It has been 11 years since I participated in my first
meeting of the Federal Open Market Committee as the
incoming president and CEO of the Federal Reserve Bank
of Cleveland. Little did I know back then what was in store
for the nation’s economy. The financial crisis, severe
recession, and slow recovery have been a challenging
and humbling experience, and it has been an honor to
represent the Fourth Federal Reserve District during this
extraordinary period in our country’s economic history.
The one constant during my entire tenure at the Bank has
been the extraordinary dedication and professionalism of
the employees of the Federal Reserve Bank of Cleveland.
As I get ready to retire from the Bank, I know this fine
organization is in good hands.
It also gives me great comfort to know that I do not have
to say goodbye. We have a term for current and former
employees, directors, and advisory council members—
we are Fed Family. Once a member, always a member.

  

In 2013 as always, the Bank’s boards of directors in
Cleveland, Cincinnati, and Pittsburgh and its many advisory
councils were vital in guiding and supporting our progress.

Sandra Pianalto
President and Chief Executive Officer
5

A N N U A L RE P O RT 2 0 1 3

WHY IT IS VERY LOW,
AND WHY IT MATTERS

Edward S. Knotek II
Vice President of Economic Forecasting
Todd E. Clark
Vice President of Macroeconomic Policy

For the past 50 years or so, US policymakers frequently worried about—
and fought against—inflation rates running at higher-than-desired levels.
But since the financial crisis, they have had to deal with the opposite
problem—inflation that is too low.

Inflation fell below 1 percent in 2013, according to the personal consumption expenditures (PCE)
price index. At just under half the 2 percent longer-run objective of the Federal Open Market
Committee (FOMC), a very low inflation rate is not good news. Often, low inflation is a symptom
of an economy that is not firing on all cylinders. And when inflation is very low, deflation is only
one adverse shock away.
In this essay, we dissect the recent decline in inflation and lay out its implications for the future,
drawing on extensive research done here at the Federal Reserve Bank of Cleveland on inflation
measurement and forecasting.
We are reasonably confident that inflation will rise gradually over the next few years toward the
FOMC's longer-run objective of 2 percent. However, though the US economy has begun to regain
its footing, the inflation forecast could change if unexpected events occur. Our recent experience
with very low inflation has highlighted the need to guard against inflation rates that are too low as
vigilantly as we guard against inflation rates that are too high.

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F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

Figure 1. PCE inflation fell below 1 percent in 2013

Figure 2. Inflation’s falloff is evident in most PCE measures

Year-over-year percent change

0
-2
1960

Trimmed-mean PCE

PCE

FOMC's longer-run objective
Core PCE

0
FOMC's longer-run objective

1970

1980

-1
1990

2000

-2
2005

2010

Note: Grey shading indicates a recession.
Sources: Bureau of Economic Analysis; National Bureau of Economic Research (NBER).

2014

Note: Grey shading indicates a recession.
Sources: Bureau of Economic Analysis; Federal Reserve Bank of Dallas; NBER.

Very low inflation: A recent phenomenon
Inflation then
Our last big battle with inflation began in the 1960s (figure 1).
Prices began to rise steadily in the United States during
that decade, and high inflation rates became a hallmark
of the 1970s. During the 1970s and early 1980s, inflation
twice shot above 10 percent—higher than it had been
since the 1940s.
Then–Federal Reserve Chairman Paul Volcker has been
credited with bringing inflation back down in the early 1980s
by aggressively tightening monetary policy. Even with this
shift in policy, however, sustained low inflation rates did not
become the norm until the mid-1990s. Between 1995 and
2008, the FOMC succeeded in keeping inflation generally
low; PCE inflation averaged just above 2 percent over
this time.
This is not to say that inflation was completely conquered.
Even as recently as 2008, FOMC members were concerned
about the possibility of re-living the inflation patterns of the
1960s and 1970s. Memories of high inflation have a long life.
High inflation rates are problematic for an economy
because they create distortions that hamper economic
performance. For example, firms must constantly raise
prices to keep up, and consumers waste their time shopping for bargains and protecting their financial assets
from rising prices. Because of these distortions, it is clear
why neither the public nor central banks are keen on
high inflation.

Another problem with high inflation is that it is costly to get
inflation rates back down once they’re too high. Though
Volcker’s shift in monetary policy successfully broke the back
of high inflation, for example, the cost was a deep recession.

Inflation now
Since the most recent financial crisis, the story has been
different. While inflation typically falls in the immediate
aftermath of a recession, it usually rises during the ensuing
economic recovery (figure 1). This time around, inflation
has remained at very low levels for much of the past five
years. Despite a short-lived surge of inflation in 2011,
disinflation—when inflation decelerates—occurred again
in 2012 and 2013.
The falloff in inflation is evident in essentially the entire set
of consumer price measures that policymakers find helpful in
assessing inflation trends. PCE inflation—the FOMC’s single
preferred measure—fell from 2.5 percent in January 2012
to only 1.1 percent in December 2013. Some of this deceleration in PCE inflation has been driven by energy prices.
However, measures of the underlying inflation trend that
are less affected by energy prices—like the core PCE or the
trimmed-mean PCE—have also slowed significantly. Core
PCE inflation, which excludes the short-term volatility that
can come from food and energy prices, declined from 2.0
percent to 1.2 percent over the same period. Trimmed-mean
PCE inflation, which excludes the most extreme monthly
price changes, experienced a similar decline (figure 2).

7

A N N U A L RE P O RT 2 0 1 3

Figure 3. CPI inflation fell over 2012 and 2013

Figure 4. The median CPI has proven sensitive to OER
in this recovery

Year-over-year percent change

Year-over-year percent change
Median CPI

CPI
3

4
3
2

Core CPI

Trimmed-mean CPI

Median CPI
excluding OER

-1
-2
2005

0
2005

2014

Note: Grey shading indicates a recession.
Sources: Bureau of Labor Statistics; Federal Reserve Bank of Cleveland; NBER.

Disinflation is also visible in the more familiar inflation
measures based on the consumer price index (CPI). CPI
inflation typically runs about a half percentage point higher
than the PCE inflation rate. In other words, for PCE inflation
to be at 2 percent, CPI inflation would typically need to run
about 2.5 percent. CPI inflation fell sharply over the course
of 2012 and 2013, as did core CPI inflation—which, like the
core PCE measure, excludes food and energy prices. The
Cleveland Fed’s 16 percent trimmed-mean inflation series
declined by a similar amount (figure 3).

good. For one thing, it can be a sign that the economy is
performing under its potential—and in fact, low inflation may
actually be a contributing factor in the underperformance.
For another, it raises the risk that the economy could fall into
deflation. Deflation—where the general price level falls—
causes similar problems as inflation in that businesses and
consumers waste time and energy trying to work around its
consequences. Some analysts view Japan’s long period of
near-zero inflation and very low economic growth as a vivid
cautionary example of the dangers of extremely low inflation
sustained over a long period of time.

One measure of the inflation trend that has remained
relatively stable is the Cleveland Fed’s median CPI (figure 4).
Year-over-year inflation in the median CPI edged down from
2.2 percent at the start of 2012 to 2.1 percent at the end
of 2013.

The causes of the disinflation

In general, the median CPI tends to be a useful tool for
predicting future inflation trends, so its recent level
suggests that CPI inflation should rise closer to 2 percent.
But the median CPI may be misleading right now. Much
of the stability of median CPI inflation reflects a balance
between two divergent trends: first, an acceleration in the
biggest component of shelter costs, owners’ equivalent
rent (OER), which is very often the component in the middle
of the CPI; and second, broad disinflation among other
components. Recalculating the median inflation rate without
the OER component reveals a sharp slowing of underlying
inflation from early 2012 to the end of 2013 that is much
more in line with the other measures of inflation.
On the surface, very low inflation sounds like a good thing.
If inflation is running at very low levels, then the purchasing
power of a dollar is not diminished over time by significant
increases in prices. But very low inflation is not always

Whether very low inflation is problematic depends in part on
why it is low. Two complementary approaches can be used
to determine the source of the falloff. The first might be
characterized as a top-down approach: focus on overall
inflation and disentangle the causes of the fall. The second
might be characterized as a bottom-up approach: focus on
more detailed measures of inflation and identify individual
factors that pulled down important inflation components.
Our recent research using these approaches points to
several key forces at play in the 2013 disinflation. First, the
sluggish pace of the US economic recovery broadly helped
to limit most price pressures. Second, enough slack remains
in labor markets to keep the growth rate of labor costs very
low by historical standards. Third, there is little pressure on
consumer prices coming from commodities such as energy.
Finally, some special, temporary forces—such as a
deceleration of medical care inflation associated with
changes in laws—have put some short-lived downward
pressure on inflation.

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F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

inflation

101

MEET THE MEASURES

Consumer Price Index, or CPI
The CPI, compiled monthly by the Bureau
of Labor Statistics, measures the average
price of a set (or market basket) of goods
and services. The basket reflects all of the
items a typical family buys. The CPI does
not count the prices of all items equally,
but weights each according to its share
of total household expenses, so that
changes in the index from one period to
the next are broadly reflective of changes
in a household’s current cost of living.
The weightings are determined from
detailed expenditure information provided
by families and individuals on what they
actually bought.

CONSUMER
PRICE INDEX
2013 Market Basket

41.5 %

Housing

16.4 %

Transportation

14.9 %

Food and beverages

7.6 %

Medical care

7.1 %

Education | communication

5.8 %

Recreation

3.4 %

Apparel

3.3 %

Other goods and services

Core CPI
The core CPI excludes food and energy
prices, which tend to go up or down
quite a bit over a short time period. These
items’ sharp, short-term movements
can dominate the total, or headline, CPI
reading and obscure the more long-term
or underlying inflation trend.

Median CPI
The Federal Reserve Bank of Cleveland
created the median CPI as a way to
measure underlying trend inflation.
Instead of calculating a weighted
average of all goods and services
prices like in the CPI, the Cleveland
Fed looks at the median price change—
or the price change that’s right in
the middle of the long list of all price
changes. According to our research,
the median CPI provides a better signal
of the inflation trend than the CPI,
the CPI excluding food and energy,
and the core PCE.

largely on information from businesses,
detailing what they’ve sold to households,
to produce its weights.
Core PCE
The core PCE price index measures the
prices paid by consumers for goods and
services without the volatility caused by
movements in food and energy prices,
which can be useful in assessing underlying inflation trends.

Owners’ equivalent rent (OER) is the
biggest component of shelter costs, and
because of its importance, a measure
of OER is very often the median CPI
component. OER is published by the
Bureau of Labor Statistics to measure
implicit rent, or the amount a homeowner
would pay to rent or would earn from
renting his or her home in a competitive
market.
Trimmed-Mean CPI
The trimmed-mean CPI, reported
monthly by the Federal Reserve Bank
of Cleveland, is a measure of underlying
trend inflation excluding the components
in the CPI that show the most extreme
monthly price changes. Excluding
8 percent of the CPI components with
the highest and lowest one-month
price changes from each end of the
price-change distribution results in a
“16 percent trimmed mean” inflation
estimate. This measure is much less
volatile than either the CPI or the more
traditional core CPI.
Personal Consumption Expenditures, or PCE
The PCE price index, computed by the
Bureau of Economic Analysis, provides
a measure of the prices paid for goods
and services purchased by or on behalf
of households. It is a somewhat broader
measure of consumer prices than the
CPI, and, due to technical aspects of its
construction, the PCE is able to more
accurately capture how consumers adjust
their purchases in response to relative
price changes. The PCE index relies
9

PCE PRICE
INDEX
2013 Market Basket

22.3 %
9.8 %

Housing
Transportation

14.1 %

Food and beverages

20.9 %

Medical care

4.9 %

Education | communication

8.6 %

Recreation

3.3 %

Apparel

16.1 %

Other goods and services

Trimmed-Mean PCE
The trimmed-mean PCE inflation rate is
another measure of trend inflation using
the PCE price index. Like the trimmedmean CPI, the trimmed-mean PCE
inflation rate is constructed by excluding
the items that had the biggest increases
or decreases in a given month. Removing
the extreme price changes (both high and
low) helps to filter out very noisy price
changes in an effort to identify underlying
trends in the monthly PCE inflation data.
It is calculated by the Federal Reserve
Bank of Dallas, using data from the
Bureau of Economic Analysis.

A N N U A L RE P O RT 2 0 1 3

Figure 5. Inflation has been held in check by flat
commodity prices
4.5

Figure 6. Since early 2012, inflation in core PCE goods prices
has fallen by about 2 percentage points

Dollars per gallon

4.0

Retail gasoline

Year-over-year percent change

3
CPI core goods

3.5

Gasoline futures

3.0

2.5

Brent crude oil

2.0

-1

1.5
2011

-2
2012

2013

2014

PCE core goods
2005

2014

Note: Grey shading indicates a recession.
Sources: Bureau of Economic Analysis; Bureau of Labor Statistics; NBER.

Sources: Financial Times; Energy Information Agency; The Wall Street Journal.

The top-down approach

The bottom-up approach

One way to implement the top-down approach is to use a
forecasting model that characterizes the relationships among
inflation, economic activity, labor costs, import prices, energy
prices, and monetary policy. We use one such Cleveland
Fed model to assess the contributions of various forces to
the decline of core PCE inflation from the second quarter of
2012 through the fourth quarter of 2013.

One way to implement the bottom-up approach is to split the
price indexes into broad components. We split inflation into
several parts—food and energy prices, core goods, and core
services—and look at their recent behavior and key drivers.

Approximately three-fourths of the fall in core PCE inflation
can be explained by the behavior of the model’s inflation
determinants. Variables that directly capture economic
activity—GDP, employment, and unemployment—play the
largest role. On balance, over the 2012 and 2013 period,
GDP and employment grew more slowly than expected,
while unemployment fell more slowly than expected. These
shortfalls put downward pressure on inflation. Overall, real
economic activity accounts for about one-half of the fall in
inflation. Labor costs, import prices, and energy prices
account for another one-fourth or so.
The remaining one-fourth of the decline in inflation since
early 2012 cannot be explained by the model’s inflation
determinants. Instead, this portion of the decline in
inflation is the result of unexpected, temporary events
that are specific to inflation. Some of these forces are
evident from a more bottom-up analysis.

A key driver of overall inflation is volatile movements in food
and energy prices. The results of the decomposition show
that for much of 2012 and 2013, inflation has been held in
check by flat commodity prices. For example, retail gasoline
prices trended down for much of last year (figure 5). This trend
helped pull overall inflation below core inflation at times.
Inflation in core PCE goods prices, which exclude food and
energy goods, has fallen by about 2 percentage points since
early 2012 (figure 6). In an accounting sense, goods comprise
approximately one-fourth of the core basket of consumer
spending. Thus, the deceleration in goods’ prices implies a
reduction in core PCE inflation of about one-half of a percentage point, all other things equal.
Because a large number of goods are either imported to the
United States or have some imported content, there is a
significant connection between import prices and goods
prices. Over the last few years, the deceleration of core
goods prices has been driven in part by an even sharper
deceleration in prices of imported goods (figure 7). The falloff
in import prices likely reflects slow growth in the global
economy and the strength of the dollar.

 10 

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

inflation

101

FOOD FOR THOUGHT

Meat, poultry, fish, and eggs cost more today than they did a year ago. Four
percent more, in fact. This is not necessarily inflation, though it’s hard to
wrap your head around this when you’re at the checkout.
Inflation is a general rise in prices across the board. It affects all prices, not
just a few. The bacon you bought that gave you sticker shock is just one
price, albeit a potentially important one for some households. Rising prices
in food, gas, or other commodities that keep your household running can
prompt us to make adjustments in our lives—perhaps squeezing in three
errands on one run to save on gas. While these choices can tell us something about how households are faring, they don’t tell us much about
inflation itself, which has much broader implications for the economy as
a whole.
Inflation is usually measured by tracking the prices of a broad basket of
goods and services, such as with the Consumer Price Index (CPI). The CPI is
a weighted index of a typical consumer’s market basket, which does include
food, though its weight is only roughly 15 percent of the basket. In that way,
rising food prices in general do affect the CPI, but there are a lot of other
components to consider as well (see “Meet the Measures” on page 9).
Food prices can also be affected by things like poor weather conditions:
the freezing temperatures in the Northeast, drought in the West, snow in
the Midwest. Bad weather can, for example, prevent the transportation of
food supplies to processors and retailers, driving up prices temporarily.
But that’s just it: These types of price changes are temporary, not an
indicator of a longer-term trend.
Another thing to keep in mind when it comes to commodity prices: basic
supply and demand. A shortage of, say, oranges because of drought in the
West prompts a price increase, encouraging people to buy fewer oranges.
Apples, on the other hand, may have a great harvest and be abundant; their
price goes down, encouraging people to buy them instead. In this way, a
balance is struck.
Inflation or not, rising food prices are frustrating for consumers, and something that economists do keep an eye on lest they turn into broader inflation.
If, for instance, drought continues and livestock levels don’t pick up in the
West, rising food prices may be more than just temporary and could feed
into the longer-term outlook for inflation.

 11 

A N N U A L RE P O RT 2 0 1 3

Figure 7. The deceleration of core goods prices has been driven
in part by falling imported goods prices
4

12-month percent change
PCE core goods (left axis)

3
2

12-month percent change

10.0

0.0

-1

-2.5

-2

-5.0

-3

-7.5
1998

2002

2006

5.0
2.5

1994

7.5

Nonpetroleum import
prices (right axis)

-4
1990

Figure 8. Services inflation has slowed since early 2012

2010

2014

Year-over-year percent change
CPI core services

3
2

PCE core services

1
0
2005

-10.0

2014

Note: Grey shading indicates a recession.
Sources: Bureau of Economic Analysis; Bureau of Labor Statistics; NBER.

Sources: Bureau of Economic Analysis; Bureau of Labor Statistics.

Compared with inflation in goods prices, inflation in services
prices has been much more stable. However, even core
PCE services inflation has slowed since early 2012, from
2.3 percent to 1.9 percent at the end of 2013 (figure 8).
Services comprise about three-fourths of the core PCE
basket, which means that this more modest reduction in
services inflation implies a roughly one-third percentage
point reduction in core inflation.
Because the primary cost in the provision of services is
labor, the low rate of services inflation is likely attributable
to the historically low rate of growth of labor costs that has
prevailed since the end of the recession (figure 9). From the
mid-1990s through 2007, labor costs as measured by the
Employment Cost Index (ECI) increased at an average rate
of more than 3 percent. But since 2009, the ECI has been
rising only about 2 percent per year.

the services component of the CPI to run above inflation in
PCE services.
Another important source of the CPI–PCE gap in services
inflation is medical care costs and the larger weight they
receive in PCE services. Inflation in medical care costs as
measured by the PCE index has slowed sharply, partly as a
result of downward pressures on Medicare prices associated
with the Affordable Care Act. As a result, the deceleration
of medical care costs has put more downward pressure on
PCE services inflation than on CPI services inflation.

Monetary policy options for handling
very low inflation

Using CPI instead of PCE inflation measures paints a mostly
similar picture, with a few key differences. Since early 2012,
inflation in the CPI for core goods has fallen sharply, in
lockstep with the corresponding PCE-based measure
(figure 6). However, inflation in the CPI for core services
has edged down only slightly since early 2012, while the
PCE-based measure slowed more significantly (figure 8).
Cleveland Fed research has attributed the widening gap
between PCE and CPI services inflation to several forces.
One important source of the gap is shelter costs, which have
a larger weight in CPI services and whose inflation rates
have been running above those of some other components
of services. Putting a relatively large weight on a component
with a relatively high rate of inflation—even if the rate of
inflation is not high in an absolute sense—causes inflation in

The FOMC’s longer-run inflation objective of 2 percent seeks
a balance between inflation being far enough away from zero
to make the threat of deflation low, and inflation being low
enough to mitigate many of the economic distortions associated with high inflation. An inflation rate of only 1 percent
therefore falls short of meeting the right balance between
these tradeoffs, especially in the current policy environment.
Basic macroeconomics and a large body of research
suggest that central banks should ease monetary policy
when inflation falls below or is expected to fall below
the central bank’s inflation objective. But since December
2008, the FOMC’s primary monetary policy tool, the
federal funds target rate, has been at 0 to 0.25 percent—
what is effectively the zero lower bound on nominal
interest rates. Thus, there exists a limit on the extent
to which monetary policymakers can provide additional
accommodation through normal channels.

 12 

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

inflation

101

MONETARY POLICY PRIMER

THE FEDERAL RESERVE IS
RESPONSIBLE FOR MAKING SURE
THERE IS ENOUGH MONEY AND
CREDIT TO SUPPORT ECONOMIC
GROWTH, BUT NOT SO MUCH
THAT OUR DOLLAR LOSES ITS
PURCHASING POWER. THIS IS THE
CORE OF MONETARY POLICY.

The goals of monetary policy—maximum employment and price stability—
were given to the Federal Reserve by Congress and are known as the Fed’s
dual mandate. These goals mean that we want as many Americans as possible
who want jobs to have jobs, and that we aim to keep the rate of increase in
consumer prices low and stable.
Price stability can be thought of as an inflation rate low enough and predictable
enough that it doesn’t play a big role when firms and consumers are making
financial decisions. Take, for example, a business that is considering whether
to enter into a long-term contract with a supplier. If this business is confident
enough about the general level of prices in the future, it can make the decision
more easily knowing it will get a fair deal both now, and later. With confidence
in the likely inflation rate, employers can give raises without fear, layoffs are
fewer because businesses remain profitable, and employment gets closer to
its maximum level.
People need the same confidence to do their longer-term planning, such as for
retirement, and for deciding when to make big purchases. Having confidence
in both price stability and job security encourages people to act now instead of
waiting until there are fewer uncertainties.

 13 

A N N U A L RE P O RT 2 0 1 3

Figure 9. Since 2009, the ECI has been rising only about
2 percent per year
8

Figure 10. Longer-term inflation expectations have been
roughly stable for some time

12-month percent change

4.0

University of Michigan

Consumer expectations for inflation, 5 to 10 years ahead

3.5

3.0

PCE core services

2.5
Employment cost index

2.0

1.5

1.0

0.5

Percent

1990

1994

1998

2002

2006

2010

10-year inflation expectations

Expected 10-year PCE inflation rates

0
2007

2014

Cleveland Fed

Survey of Professional Forecasters

2008

2009

2010

2011

2012

2013

2014

Sources: Bureau of Economic Analysis; Bureau of Labor Statistics.

Sources: University of Michigan; Federal Reserve Banks of Cleveland and Philadelphia.

As a result, the FOMC has been using other policy tools
to provide additional monetary accommodation. These
include large-scale asset purchases (buying large volumes
of an expanded set of eligible securities on the open
market) and forward guidance on future interest rate
policy (providing information about future policy decisions).
Countering a hypothetical adverse shock to the economy
that slowed the pace of recovery or pushed the economy
into recession would require using these other policy tools
to an even greater extent than the FOMC has so far.

The Cleveland Fed’s longer-term inflation expectations series
had been running at low levels throughout 2012 and the first
part of 2013. But more recently, these inflation expectations
have moved closer to 2 percent. The relative stability of longrun inflation expectations provides one reason to think that
the recent low inflation readings are likely to be temporary.

Making its way toward 2 percent
In thinking about how policy should respond to very low
inflation today, the forecast for inflation’s future trajectory
plays a crucial role. A forecast of falling or continued
stagnant inflation would call for different policy actions
than a forecast of rising inflation.
Recent historical behavior is often a good predictor of
future inflation. But inflation expectations, economic slack,
and a host of other factors influence the inflation process
as well and can offer some insights into where inflation is
likely to be in the future.

A second factor likely to lift inflation going forward is a
generally improving economy. The economy has grown at
a moderate pace since the end of the recession, but this
steady growth has reduced the amount of idle resources and
general slack in the economy. The labor market continues to
recover from the recession, and over the course of 2013 the
unemployment rate fell by more than 1 percentage point
and nonfarm businesses’ payrolls expanded by more than
2 million workers.
With inflation expectations remaining stable, the economy
continuing to grow, and some of the transitory factors that
weighed on inflation in 2013 unlikely to be repeated, most
forecasters call for a gradual rebound in inflation over the
next few years. In their assessment in March 2014, participants on the FOMC forecasted that PCE inflation would likely
step up by the end of 2014 and continue to rise in 2015 and
2016 until it neared the FOMC’s longer-run inflation objective
of 2 percent (figure 11).

In evaluating these factors, the news has been reasonably
encouraging. For starters, take inflation expectations. Over
Thus, the most likely outcome for inflation is not further
time, inflation expectations help to anchor the inflation
process; that is, inflation tends to return to its expected rate. disinflation or outright deflation, but rather a gradual
increase in the rate of inflation. Because inflation in the
There are a variety of ways to measure inflation expectations future depends partly on monetary policy decisions today,
such a projection suggests that policymakers believe that
based on surveys of consumers, professional economists,
today’s policy settings are appropriate to return inflation to
and businesses; implicit measures of inflation derived from
the level that the FOMC has determined is most consistent
financial markets; and combinations of the two. Most of
these measures show that longer-term inflation expectations with the goal of price stability.
have been roughly stable for some time (figure 10).
 14 

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

inflation

101

AN INFLATION OBJECTIVE

Inflation is a general rise in the prices
of things we buy. When people have
the money to buy more products
than can be produced, it creates an
imbalance, prices go up, and the result
is inflation.
Inflation can reduce the purchasing
power of your money. With inflation
much higher than the FOMC’s
2 percent inflation objective, workers
whose wages don’t rise as fast as
prices may have problems paying their
bills. And people on fixed incomes can
suffer because their incomes might not
adjust completely and they would not
be able to buy as much as they could
before.

With inflation lower than the objective, it is likely that the economy isn’t
firing on all cylinders, and businesses
will try to reduce their costs to maintain
or regain profitability. One way they
might do this is by increasing efficiencies, such as through layoffs. Another
way could be through lower wage
growth. In the extreme, if this behavior
is replicated throughout the economy,
unemployment is likely to rise while
both wages and prices are lower.
Efficiencies and lower wage growth
can then reinforce the downward
movement of prices.

 15 

We do want to have a bit of inflation.
To borrow the theme from Goldilocks,
the FOMC’s 2 percent longer-run
inflation objective seeks a balance that
is “just right” to keep the economy
humming along. Not too hot (high
inflation) and not too cold (deflation).
A 2 percent objective sets an expectation and makes it less likely that the
economy will experience deflation if it
takes a turn for the worse.

A N N U A L RE P O RT 2 0 1 3

Figure 11. The FOMC forecasted that PCE inflation would
likely rise until it neared 2 percent
3.0

Figure 12. The most likely PCE inflation rate by the end of 2015 will be
around 1.7 percent

Q4 | Q4 percent change

4.0

FOMC March 2014
forecasts

2.5

Year-over-year percent change

3.5
3.0

2.0
1.5

FOMC's longer-run objective

2.0
1.5

1.0

Range

0.5
0

70% probability band

2.5

0.5

Central tendency
2009

2010

2011

2012

2013

2014

2015

2016

2013

Cleveland Fed staff forecast
Data

2014

2015

2016

Sources: Federal Reserve Board; Bureau of Economic Analysis.

Sources: Bureau of Economic Analysis; Federal Reserve Bank of Cleveland.

Of course, forecasts are inherently uncertain, and this is
especially true for inflation. What could occur that would
generate a higher or lower inflation trajectory? One possibility is a supply disruption in a major oil-producing economy
that causes the price of oil to soar, producing much higher
inflation than what is currently anticipated. A sharp pick-up
in the pace of economic growth could also produce higher
inflation, as firms become more confident in their ability to
raise prices to offset rising costs of production.

longer-run objective, consistent with a symmetric inflation
objective.

But shocks are also possible that would drive inflation
lower than anticipated, such as a renewed downturn in
the economy from a collapse in consumer confidence.
One Cleveland Fed forecasting model suggests that the
most likely inflation rate by the end of 2015 will be around
1.7 percent, but the uncertainty surrounding this projection
is high: The model suggests there is a 70 percent probability
that inflation will be between 0.25 percent and 3 percent
(figure 12). So clearly policymakers will have to watch the
data closely to see that inflation actually does evolve in
the desired fashion.

A symmetric inflation objective
The range of possible outcomes in figure 12 makes clear
that inflation could either sharply accelerate or remain at
very low levels for some time; in other words, the risks to
the inflation outlook are two-sided. Either of these scenarios
would likely warrant a monetary policy response. Recent
post-meeting statements show that the FOMC is committed to mitigating deviations of inflation on both sides of its

With the federal funds rate target already set to the range
of 0 to ¼ percent, providing additional monetary accommodation to combat fears of further disinflation would likely
require using other policy tools. One possibility could be
asset purchases—beginning a new program of purchases
of long-term assets if the current program has ended or
picking up the pace of purchases if the current program has
not yet ended. Alternatively, monetary policymakers could
impose strong forward guidance on the target for the federal
funds rate, suggesting that the target would not change
until inflation returns to a certain level. Imposing such an
inflation “floor” could add accommodation automatically
if the inflation outlook were to weaken, which would help
stimulate the economy and bring inflation back toward
the floor.
At the same time, the FOMC is prepared to remove accommodation quickly to combat a surge in inflation, if that were
to become necessary. Thus far, the historically large size
of the Federal Reserve’s balance sheet has failed to cause
high inflation rates, an experience shared over a longer time
span by the Bank of Japan. But a large balance sheet can
complicate the process of raising policy rates. To this end,
the FOMC has new tools—such as the term deposit facility,
fixed-rate overnight reverse repurchase agreements, and
the payment of interest on excess reserves—to assist in the
withdrawal of monetary accommodation at the appropriate
time and pace in order to help achieve its goals of maximum
employment in the context of price stability.

 16 

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

This essay has explained why low inflation can turn into “too
much of a good thing.” Our analysis suggests that today’s
low inflation is primarily the result of the economy taking
a long time to recover from the severe recession of 20072009. Over the long run, the Federal Reserve has the tools
to keep inflation from running too high as well as too low.
And over the past 30 years, it has a solid history of doing just
that. These factors, along with the progressively improving
economy, lead us to conclude that inflation is on a course to
gradually reach the FOMC’s 2 percent objective.

For more analysis of the research mentioned in this essay, visit Inflation
Central at www.clevelandfed.org/inflation-central. There, you can also find
up-to-date estimates of inflation expectations and much more.
“Behind Recent Disinflation: 2010 Redux?”
by Edward S. Knotek II and William Bednar
“Forecasting Implications of the Recent Decline in Inflation,”
by Todd E. Clark and Saeed Zaman
“Forecasting Inflation? Target the Middle,”
by Brent Meyer, Guhan Venkatu, and Saeed Zaman
“The Future of Inflation,”
by Joseph G. Haubrich

All data cited in this essay are as of March 27, 2014.

“What’s Up in Inflation? Shelter and OER,”
by Edward S. Knotek II and William Bednar
“When Might the Federal Funds Rate Lift Off? Computing the Probabilities of
Crossing Unemployment and Inflation Thresholds (and Floors),”
by Edward S. Knotek II and Saeed Zaman

CENTRAL
 Stay abreast of inflation trends with
our ongoing analysis

 Compare different price indexes over any
time period with customizable charts

 Get up-to-date estimates of inflation
expectations

 Learn more about forecasting and
measuring inflation

 Access the latest inflation figures,
including median CPI

 See all the work of our inflation researchers

 Know what inflation is today with
our Nowcast

www.clevelandfed.org/inflation-central

 17 

A N N U A L RE P O RT 2 0 1 3

STATE OF THE REGION
As of April 30, 2014

The Federal Reserve Bank of Cleveland serves the Fourth Federal
Reserve District, which comprises Ohio, western Pennsylvania,
eastern Kentucky, and the northern panhandle of West Virginia.
In 2013, the pace of recovery in the region’s labor market
began to lag the nation’s. Research suggests that employment
performance is linked to educational attainment, and that a
region’s longer-run economic prospects are tied to the value of
their workers’ skill levels.

 18 

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

Figure 1. Our region’s unemployment rate rose above the
nation’s in 2013

Figure 2. At the end of 2013, only three of the region’s MSAs
had unemployment rates lower than the nation’s

Percent
10
9
8
Fourth District

7
6

United States

5
4
3
2000

2002

2004

2006

2008

2010

Relative to the US, December 2013

Pittsburgh
Columbus
Lexington
Cincinnati
Akron
Cleveland
Dayton
Canton
Youngstown
Toledo
2012

2014

-0.5

Note: Grey shading indicates a recession.
Source: Bureau of Labor Statistics.

0.5

1.0

1.5

2.0

Source: Bureau of Labor Statistics.

2013 developments in the Fourth District’s
labor market
The pace of recovery in the Fourth Federal Reserve District’s
labor market slowed in 2013, while the nation’s picked up,
according to the most recently available data. This is a shift,
as the District’s unemployment rate had been below the
national average for much of the recovery. Time will tell
for sure which patterns will persist, as one of the biggest
challenges in assessing recent regional or local employment
performance is that the data are often subject to sizeable
revisions.
At the end of 2012, the District’s unemployment rate,
at 7.2 percent, was more than half a percentage point
lower than the US average of 7.8 percent. Only a few
months prior, the District’s unemployment rate was
almost a full percentage point lower than the national
average. But by the end of 2013, the District could no
longer boast the better unemployment rate: During the
year, the nation’s unemployment rate fell 1.2 percentage
points to 6.7 percent, while the District’s fell only
0.3 percentage points to 6.9 percent (figure 1).
Changes in unemployment rates across the District’s
metropolitan statistical areas (MSAs) during 2013 show,
like the District itself, less-robust improvement in labor
market conditions. Of the 19 MSAs located at least partly in
the District, nine are among the nation’s 100 most populous.
These nine, which we will call the District’s major MSAs,
accounted for almost 70 percent of its employment in 2013.
At the end of 2012, unemployment rates for seven of the
nine major MSAs were less than the national average.

However, a year later, this was true for only three of them—
Columbus, Pittsburgh, and Lexington. For the two MSAs that
had higher unemployment rates than the US at the end of
2012—Toledo and Youngstown—these changed from being
0.1 and 0.2 percentage points higher than the US average
at the time, respectively, to more than a percentage point
above it by December 2013 (figure 2).

By the end of 2013, the District could no longer
boast a better unemployment rate than the nation's.

We see similar patterns in another survey that tracks
employment. At the end of 2012, the District had seen
slightly stronger cumulative employment gains during the
recovery than the US, but because US employment grew
at a rate that was about twice as fast as that in the District
in 2013, this was no longer true by the end of last year. A
few District MSAs kept pace with the nation. For instance,
Columbus and Cincinnati experienced employment growth
of about 1.5 percent in 2013, close to the national growth
rate of roughly 1.7 percent. Akron grew faster than that
at about 2.1 percent. But two metro areas in the District
experienced outright employment declines: Pittsburgh’s
employment fell slightly in 2013, while Dayton’s declined
almost a full percent.

 19 

A N N U A L RE P O RT 2 0 1 3

Differences in employment growth across
the District’s metro areas
To help understand what might be behind the District’s
recent employment performance, we take a longer look
back. Shorter-term fluctuations often obscure longer-term
drivers of employment growth differences, and it’s important
to identify these longer-term drivers because they will likely
remain meaningful as the recovery continues. As a result,
we will consider employment changes during the entire
recovery to this point, from mid-2009 to the end of 2013.
To identify the factors that have driven employment
changes during this period, one place to start is with
some of the key issues that were important in the recession. The boom and bust in housing prices, for example,
was arguably a precipitating cause of the recession, and
differences in the declines of residential real estate values
led to differences in the severity of employment losses
across America’s MSAs. Another example is the manufacturing sector, which was hard hit during the recession,
especially the transportation equipment subsector. The
Labor Department reported that transportation equipment
“lost the greatest number of jobs in manufacturing and
accounted for a disproportionate share of the jobs lost
in durable goods” production. In fact, the severity of the
recession forced two of the three major American automakers to restructure. Both manufacturing and motor-vehiclerelated production—a key component of the transportation
equipment subsector—have above-average concentrations
in the District.
During the recession (essentially 2008 through the middle
of 2009), these two factors—changes in an area’s housing
prices and its manufacturing intensity—did indeed explain a
fair amount of the variation in employment changes across
the nation’s major MSAs. Together, they accounted for about
25 percent of the variation in the 150 most populous metro
areas. Both factors were measured before the recession, so
the direction of causality is assumed to be from these factors
to employment changes during the recession, not the other
way around.
Within the District, home-price appreciation before the
recession was relatively modest. For the 10 District MSAs
that rank among the nation’s 150 largest, nominal increases
in home prices from 2000 to 2007 ranged from roughly
20 percent (Canton) to 36 percent (Pittsburgh), a fairly
narrow band, which was well below the median increase

(almost 50 percent) for this set of 150 metro areas. For
context, consider that about 20 percent of these metro
areas actually saw their home values more than double
during this period. Across all of these major American
MSAs, larger prior home-price increases predicted larger
employment declines during the recession. However, this
was not true in the Fourth District, partly because homeprice increases in the 10 major District MSAs were fairly
modest and closely clustered.
What mattered more in the District were differences in
manufacturing intensity. Historically, the District has been
home to many types of manufacturing. In fact, some of its
cities are still associated with the materials they became
known for producing around the turn of the century—glass
in Toledo, rubber in Akron, steel in Pittsburgh. Aerospace
production has been and continues to be important in the
District, as does automotive production, in which Ohio
ranks second nationally.
Many of the District’s MSAs remain above average in the
share of their workers devoted to the manufacturing sector.
Of the 10 we will consider, eight had a higher fraction of
employment in manufacturing than the national average of
about 10 percent in December 2007. The exceptions were
Columbus (8.0 percent) and Pittsburgh (8.6 percent). The
most manufacturing-intensive MSA among these 10 was
Canton (17.5 percent). In the District, as in all 150 major
MSAs, higher manufacturing intensity in December 2007
was associated with larger employment declines during
the recession.

Many of the District’s MSAs remain above average
in the share of their workers devoted to the
manufacturing sector.

Interestingly, while these two variables are important in
explaining employment changes during the recession, they
are not statistically significant predictors of employment
changes during the recovery. However, when we examine a
third variable in conjunction with the other two, the third one
— educational attainment — is statistically significant, and
thus a partial explanation for employment changes that

 20 

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

Figure 3. MSAs with higher BA attainment experienced stronger
employment gains during the recovery

For District MSAs, it seems likely that their economic
prospects will be tied to the value of their workers’
skill levels.

Employment change in recovery, percent

have taken place during the recovery. Specifically, MSAs that
had higher rates of adults holding undergraduate degrees
in 2010 tended to experience stronger employment gains
during the recovery. Indeed, within the District, places like
Lexington and Columbus, which have high shares of adults
with bachelor's degrees (BAs), have also seen some of the
strongest employment gains during the recovery (figure 3).

10
TOL

YOU

CLE
DAY

0
-5

COL
LEX
AKR
PIT

CIN

BA share, percent

The value of human capital
To be sure, we need to be careful when interpreting this
result: In a simple statistical model that includes BA
attainment, prior home prices, and manufacturing intensity,
there remains a fair amount of unexplained variation in
employment changes across metro areas during the
recovery. Nevertheless, this correlation is consistent with
other evidence on what drives income and employment
growth in subnational economies over the longer term,
such as Cleveland Fed research from 2005 on education
and innovation. This study highlights human capital—
whether measured directly as educational attainment or
indirectly through local patent production—as a key driver
of these differences throughout the better part of the
twentieth century. More recently, other research has
shown that areas known as “brain hubs” have tended
to post especially strong employment growth, while
manufacturing centers have tended to struggle. For
District MSAs, it seems likely that their economic
prospects will be tied to the value of their workers’ skill
levels. We have evidence of this over the longer term,
but that relationship is also apparent in this recovery.

All data cited in this essay are as of April 2014.

 21 

AKR: Akron
CIN: Cincinnati
CLE: Cleveland

COL:Columbus
DAY: Dayton
LEX: Lexington

Source: Bureau of Labor Statistics.

PIT:Pittsburgh
TOL: Toledo
YOU: Youngstown

A N N U A L RE P O RT 2 0 1 3

THE LIFE AND
TIMES OF
SANDRA PIANALTO

1985 Earns master’s
degree from the George
Washington University

1980 Joins staff
of the Budget
Committee of
the US House of
Representatives
1959 Sails from Valli del Pasubio,
Italy, to America, with her family;
settles in Akron, Ohio

1984 Promoted
to assistant vice
president of Public
Affairs

1978 Promoted to economist

1976 Graduates from the University of Akron
 Chairs of the Federal
Reserve System Board
of Governors
1960

Begins career at the Federal Reserve System
Board of Governors as a research assistant

1970

1980

William Martin
Wilbur Fulton

Braddock Hickman

1983 Joins the
Federal Reserve
Bank of Cleveland
as an economist

|Miller |

Arthur Burns

Willis Winn

Paul Volcker
|

Karen Horn

 Presidents of the
Federal Reserve Bank
of Cleveland

1985 Ohio Savings
and Loan Crisis

“It is possible to achieve great things from humble beginnings
when you utilize your talents and follow your passions.”
Sandra Pianalto

 22 

1987 Black Monday: Stock
Market Crash of 1987

|
|

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

Ten Milestones in Sandy Pianalto’s
Life at the Federal Reserve

1. First Day at the Federal Reserve
In August 1976, a newly hired research assistant named
Sandy Pianalto got a tour of the Federal Reserve Board
of Governors' Eccles Building in Washington, DC. The high
point of the tour was the board room where the Federal
Open Market Committee meets. For Pianalto, an immigrant
to the United States at age five who had decided early
on that she would dedicate herself to public service, it
was a career-changing moment. “I was impressed with
the huge mahogany table in the center of the room,” she
later said. “And I thought to myself, I would love to sit at
that table someday.”

Highlights from the more than three-decade
career of retiring Federal Reserve Bank of
Cleveland President and CEO Sandy Pianalto.

1995 Serves on the Federal
Reserve System Strategic
Planning Coordinating Group

1993 Named first vice
president and chief
operating officer

1988 Advances to
vice president and
secretary to the
board of directors

1996 Becomes
chair of the Federal
Reserve’s Conference
of First Vice Presidents

2003 Named president and
CEO of the Federal Reserve
Bank of Cleveland; becomes
member of the FOMC

1997 Appointed
staff director for the
Rivlin Committee

1990

2007 Becomes chair of the
Federal Reserve’s Conference
of Presidents

2000

Jerry Jordan

Y2K

2014 Retires as president of the
Federal Reserve Bank of Cleveland

2010

Alan Greenspan
Lee Hoskins

2009 Becomes chair of the
Federal Reserve System
Financial Services Policy
Committee

Ben Bernanke

| Janet Yellen

Sandra Pianalto

9/11

2013 100th
anniversary of
Federal Reserve
System

2005 Cleveland Fed
publishes landmark research
on education and innovation
1994 – 98 Major renovation
and construction of Cleveland
Fed’s historic building

2007 – 09 Great Recession

2008 FOMC begins
using unconventional
monetary policy tools

1994 Federal Reserve releases
first policy statement following
an FOMC meeting

2012 Federal Reserve
Banks adopt new
strategic direction for
financial services

FOMC adopts 2 percent
inflation objective

2011 Federal Reserve chairman
holds first press conference
following an FOMC meeting
 23 

A N N U A L RE P O RT 2 0 1 3

votes cast as
member of the
FOMC

age when
Sandy emigrated
from Italy

Pianalto herself spent New Year’s Eve
at the Bank along with dozens of
colleagues (sans champagne). They
rang in the New Year with nary a glitch.
In hindsight, there were people who
suggested that Y2K was never a
serious threat in the first place. But
Pianalto and others on the front lines
would be the first to say that the
reason it turned out to be a non-event—
within the financial services industry,
at least—was directly attributable to
the work done by the Federal Reserve
and the financial services industry more
broadly.

5. Rallying on 9/11

In many ways, days like September 11,
2001, were what the Fed was created
for—as a stabilizing force during trying
times. Financial markets across the
2. Appointed to No. 2 Post at the Federal
globe were impaired and consumer
Reserve Bank of Cleveland
confidence was threatened after the
terrorist attacks. Pianalto, who was
Pianalto’s journey to eventually get a
still the first vice president and COO at
seat at that table took a leap forward
the time, joined conference calls with
in 1993. To the surprise of many of her
colleagues across the Federal Reserve
more senior colleagues, Pianalto was
and made the decision locally with
named first vice president and chief
President Jerry Jordan to keep the
operating officer (COO) of the Federal
Federal Reserve Bank of Cleveland
Reserve Bank of Cleveland, the Bank’s
open for business. In the days that
second-highest ranking official. Having
6
followed, the Federal Reserve Bank
worked at the Bank for the previous 10
Fed chairs
of Cleveland lent millions of dollars
years with increasing responsibilities—
under which
4. Leading
through its discount window to
though no operations experience—
Sandy served
a Payments
banks impacted by the disruptions
Pianalto began with an ambitious vision.
Evolution, Part One
to financial markets that occurred
First up was changing the culture of
following the attacks. Throughout,
the tradition-bound institution. Some
In 1997, Pianalto was appointed staff
the Bank’s operations remained fully
of the differences were symbolic, such director for the Committee on the
functional, with no disruption in
as opening up the officers’ dining room Federal Reserve in the Payments
processing of currency,
to all employees. Others involved
Mechanism, a Federal Reservechecks, and electronic
driving new behaviors and were longer commissioned review chaired by
payments. Pianalto
in the making, such as moving away
Vice Chair Alice Rivlin, to study
90
observed: “It’s times
from a command-and-control style of
the future role the Federal Reserve
FOMC meetings
like this when we
management to a more participative,
attended
should have in the payments
truly
see that our Bank
collaborative style, and breaking down
system. The committee reached
motto,
‘Our people make
silos. The goal was to build an inclusive two general conclusions: The Federal
the difference,’ is more than
workplace where employees were
Reserve should remain a provider of
just
words
on paper—it’s a reality.”
encouraged to share their ideas.
both check collection and automated
clearing house services, while
ensuring access for all depository
6. Presidential Timbre
36
institutions; the Federal Reserve
3. Victory Over Y2K
years in the
should play a more active role in
On February 1, 2003, Pianalto became
Federal Reserve
It felt like a century’s worth of enhancing the efficiency of those
System
the 10th president and CEO of the
preparation crammed into a
payments services and helping to
Federal Reserve Bank of Cleveland,
few months. Everything was
evolve strategies for moving to the
succeeding the retiring Jerry Jordan.
tested—internal operations, software
next generation of payment instruThe announcement of her appointapplications, building systems, electroments. The Rivlin Committee was
ment in the Bank’s auditorium had
nic payments, check processing, and
lauded for drawing on the expertise
been met with raucous cheers. “I
cash processing. Across the Federal
of a range of subject matter experts
was excited but I was also worried,”
Reserve System, 90 million lines of
inside and outside of the Federal
Pianalto said. “I started to wonder,
code were examined, with about
Reserve System, reflecting a
‘Why are employees so excited for
10 percent remediated
collaborative spirit that would
me? What are they expecting?’ When
before the changeover.
become Pianalto’s hallmark.
I asked several employees, I got the
6
The Federal Reserve
positions
same answer, ‘We expect that you
held within
System distributed
won’t change, and that you will
the Fed
billions of dollars in
continue to care about employees.’”
currency as a backstop.
 24 

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

951
7. Check Consolidation

total full-time
employees Sandy
supervises at the
Bank*

For decades, the single
largest operation in the
Federal Reserve System was check
clearing. The Federal Reserve Bank of
Cleveland once processed 11 million
paper checks every night in the Fourth
District. But as technological innovation
made other forms of payment popular,
Americans simply stopped writing
paper checks like they used to. Starting
in 2003, check operations were consolidated across the Federal Reserve
System. The consolidation was painful
for employees who lost their jobs.
Pianalto noted that having to part with
valuable employees is always the most
difficult part of a CEO’s role. Throughout the consolidation, the Federal
Reserve Bank of Cleveland maintained
a leadership role in check processing.
In 2008, the Bank’s check function
was selected as the final paper check
processing site and the final site for
check adjustments for the entire
Federal Reserve System. Pianalto
observed at the time that the decision
reflected the Bank’s long-term commitment to efficiency, effectiveness,
and customer service. One positive
outcome of the consolidation was
that it led the Bank to focus not just
on operational excellence, but also on
thought leadership. The last paper
check was processed at the
Federal Reserve Bank of
31
years employed
Cleveland on December
at the Federal
31, 2012.

Reserve Bank of
Cleveland

8. Landmark Research on
Education and Innovation
Early into her tenure as president and
CEO of the Federal Reserve Bank
of Cleveland, Pianalto challenged her
staff of research economists to better
understand why the Fourth District
wasn’t growing as fast
as most of the regions
8

honorary
degrees Sandy
holds

11
in the country. In response, they
during 2008. Efforts like
years
as
looked at the 50 states over a
that ultimately helped
president and CEO
75-year period. During that entire
to prevent a financial
of the Cleveland
period two factors stood out as the
market meltdown. Also,
Fed
most important for driving income
creative and aggressive
growth: education and innovation.
monetary policies prevented
The message resonated strongly
a depression and helped to put the
with Pianalto. She has cited
economy on a path to recovery.
that landmark 2005 study in
9
Cleveland Fed
many of her speeches over
presidents
10. Leading a Payments Evolution,
the years, and the lesson
before Sandy
Part Two
from that study continues
to resonate across the region
In 2009, Pianalto took over as
in the form of growing recognition
chair of the Financial Services Policy
among policymakers and elected
Committee, the body responsible
officials about the importance of
for directing payments services at
supporting education and innovation.
the Federal Reserve Banks. Pianalto
looked forward to the challenge of
a world where technology was fast
expanding the possibilities for all sorts
1
of payments, and helping the Federal
Cleveland Fed
Reserve adapt to the new environpresident with longer
ment. The Financial Services Strategic
presidential tenure
Plan that the Committee unveiled in
2012 provided the framework for collaboration with the payments industry
9. Weathering the Financial Crisis
to further improve the speed, safety,
While traveling overseas in the summer and efficiency of modern-day payof 2007, Pianalto took a call from one of ments. “To succeed in improving our
the Bank’s directors. He was worried
nation’s payments system, we must
about slowly worsening conditions in
continue to engage and find ways to
financial markets. It was one of the first leverage our collective strengths and
hints of the crisis that would become
resources,” Pianalto told an annual
full-blown a year later. Pianalto said
conference of payments industry
later she felt humbled by the financial
leaders in 2013. Pianalto hands over
crisis, which prompted a realization that the reins with a well-laid
there were serious gaps in the Federal
foundation for leading
11
Reserve's field of vision. “I think it is
the development of
community boards
fair to say that the Federal Reserve was the next generation
and organizations on
too narrowly focused on banks and
of payments systems
which Sandy has
served
not the broader financial system,” she
in the United States.
said. “The crisis taught us differently.
There was a lot we didn’t know and
much we couldn’t control.” That said,
she took pride in the quick response
and aggressive actions taken across the
Federal Reserve System. At the Federal
Reserve Bank of Cleveland alone,
almost $100 billion was lent to institutions through its discount window
 25 

* as of December 31, 2013

A N N U A L RE P O RT 2 0 1 3

Gregory L. Stefani
First Vice President and
Chief Operating Officer
Federal Reserve Bank of Cleveland

Message from the First Vice President

BOLD. CLEAR. ASPIRATIONAL.
These three words describe the Federal Reserve Bank of Cleveland’s 2014−2016 Strategic Direction: a plan that will establish
us as a premier Reserve Bank and an influential voice in and for the Fourth Federal Reserve District—the region we serve.

 26 

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

In 2013, we set out to develop a strategic direction that
would capitalize on our knowledge and experience, engage
us with our stakeholders, and resonate with our employees.
We have built a strong hub of economic knowledge, particularly in inflation and household finance, and recognize our
ability to further support the regional and national economies
by increasing our focus in these fields. We have pioneered
new ways to identify and analyze systemic risk, and see
potential for advancing our knowledge of financial stability
by integrating our supervisory and research capabilities.
We have enhanced our revenue collection systems for
the US Treasury with greater functionality, and continue to
leverage new technologies. We have long been recognized
for our operational efficiency and effectiveness, and see
opportunities to become a driver of continuous improvement
within the Federal Reserve System. We also know that our
knowledge and experience are of little value in a vacuum,
and that our success in executing our strategy hinges on
how strong and relevant our voice is.
There are four key components to our plan—they are the
pillars that support our mission and vision:
 Voice of the Fourth District by being an influential voice
in our region and a leader in the Federal Reserve System

government agencies, exchanged nearly 6 billion currency
notes for member depository institutions, hosted close to
10,000 education program participants, conducted more than
150 examinations of financial institutions, published impactful research on inflation, labor markets, and housing, and
shared our knowledge in 150-plus speeches. You can learn
more about our employees’ successes—their innovations,
their expertise, their influence, and their reach—in our
“By the Numbers” infographic on the pages that follow.
  

The year 2013 ended with a significant milestone for the
Federal Reserve; on December 13, we began to commemorate our centennial—100 years of service to our region and
our nation. As part of the commemoration, we reaffirmed
our commitment to promote economic prosperity for all
Americans for the next 100 years, and beyond. The Federal
Reserve Bank of Cleveland is excited to have begun work in
2014 that will help us both fulfill our commitment and reach
our vision of being a premier Reserve Bank. We look forward
with great anticipation to the remainder of 2014 and to the
years ahead.
  

In closing, on behalf of our employees and our Boards of
Directors, I extend our sincere appreciation to Federal
Reserve Bank of Cleveland President and Chief Executive
Officer Sandra Pianalto. Sandy is scheduled to retire at the
end of May 2014. It was under her leadership that the
Cleveland Fed strengthened our policy focus and broadened our expertise to become more of a knowledge-based
organization. It was also by following her vision that we
developed our bold, new strategic direction.

 Promote Economic Growth and Development by
advancing research on key drivers of regional and
national economic growth to guide policy decisions
 Strengthen Financial Stability by influencing policy
decisions to strengthen our nation’s financial system
 Deliver Innovative Solutions by proactively identifying
and developing solutions to transform our Bank and
our services
Executing on a strategic plan of this magnitude requires
the commitment of talented, adaptable, and engaged
employees—employees who are invested in our mission
and vision and connected to our strategy. I am proud of our
employees and their accomplishments and sincerely believe
that our people make the difference. They drive our culture
of innovation and continuous improvement. They listen to
and inform our stakeholders and influence policy decisions
on issues important to our region and nation. They expand
our presence and serve as our ambassadors. Our employees
are the voice of the Fourth District—they are the Federal
Reserve Bank of Cleveland.

On a more personal note, Sandy and I have both spent more
than three decades here at the Cleveland Fed, and I’ve been
especially privileged as first vice president to work alongside
her for the past three years. She has not only been my
trusted colleague, but also an advisor, a confidante, and a
coach. All of us affiliated with the Federal Reserve Bank of
Cleveland are forever grateful for Sandy’s leadership and
friendship, and we wish her the best in her future pursuits.

I invite you to see for yourself their impact—how they make Gregory L. Stefani
the difference, every day. Last year alone, we collected more First Vice President and Chief Operating Officer
than $600 billion dollars on behalf of the US Treasury for

 27 

A N N U A L RE P O RT 2 0 1 3

THE CLEVELAND FED BY THE NUMBERS
FOR THE YEAR 2013
consecutive years the Cleveland Fed has been
14 a NorthCoast 99 winner, which honors great
workplaces for top talent in Northeast Ohio
3

years recognized by Commission on Economic
Inclusion as Best-in-Class for supplier diversity

time the Cincinnati Branch hosted
then-Chairman Ben Bernanke in 2013

301

218,000,000

address of the new Pittsburgh Branch at One
Oxford Centre on Grant Street
transactions collected by the Debit Gateway on
behalf of the US Treasury

561,000,000,000 dollars processed through the Debit Gateway

115,000,000,000

revenue collected through Pay.gov on behalf of
the US Treasury

59,000 customer calls fielded by Pay.gov reps

155 exams conducted at financial institutions

papers either published or accepted in
peer-reviewed journals

259,937,000 currency notes shredded

951

5,986,552,000 currency notes exchanged

Federal Reserve Bank of Cleveland
employees
25,992

visitors screened for safety by Cleveland Fed
officers

7,280 visits from armored courier vehicles

 28 

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

Innovation
Expertise
25 percent new minority hires

Influence

178

Reach

3,107

percent improvement in pool of qualified,
diverse vendors
subscribers to community development
e-updates

meetings with regional workforce development
35 stakeholders to understand employment
challenges
530

teachers reached through Cleveland Fed
programs

532,429

copies of Great Minds Think: A Kid’s Guide to
Money distributed since publication in 2007

Fourth District cities represented in the high
school writing contest on the future of money

9,276

participants in onsite Cleveland Fed education
programs

2,796

students who engaged in Cleveland Fed
programs

170

trees saved by the 10 tons of paper recycled by
the Cleveland Fed

65 tons of construction waste recycled

291,799

dollar amount our 951 employees pledged to
United Way

1
25,700 Twitter followers

Federal Reserve Bank of Cleveland

157 public speeches given

700

 29 

substantive media stories mentioning the
Cleveland Fed

A N N U A L RE P O RT 2 0 1 3

LEADERSHIP

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.

 30 

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

Cleveland Board of Directors
As of December 31, 2013

Richard K. Smucker

Christopher M. Connor

Tilmon F. Brown

Claude E. Davis

Board Chairman

Board Deputy Chairman

Chief Executive Officer

Chairman and Chief Executive Officer

Chief Executive Officer

President and Chief Executive Officer

The J.M. Smucker Company
Orrville, Ohio

The Sherwin-Williams Company
Cleveland, Ohio

New Horizons Baking Company
Norwalk, Ohio

First Financial Bancorp
Cincinnati, Ohio

Paul G. Greig

Chairman, President, and Chief
Executive Officer
FirstMerit Corporation
Akron, Ohio

Harold (Hal) Keller

Todd A. Mason

John P. Surma

President

President and Chief Executive Officer

Executive Chairman

Ohio Capital Corporation for Housing
Columbus, Ohio

First National Bank of Pandora
Pandora, Ohio

United States Steel Corporation
Pittsburgh, Pennsylvania

James E. Rohr

Susan Tomasky

Energy Industry Consultant and
Former President

Federal Advisory Council
Representative

AEP Transmission
Columbus, Ohio

Executive Chairman
The PNC Financial Services Group, Inc.
Pittsburgh, Pennsylvania

 31 

A N N U A L RE P O RT 2 0 1 3

Cincinnati Board of Directors
As of December 31, 2013

Peter S. Strange

Donald E. Bloomer

Charles H. Brown

Deborah A. Feldman

Board Chairman
Chairman

President and Chief Executive Officer

Vice President and Secretary

President and Chief Executive Officer

Messer, Inc.
Cincinnati, Ohio

Citizens National Bank
Somerset, Kentucky

Toyota Motor Engineering and
Manufacturing, N.A.
Erlanger, Kentucky

Dayton Children’s Hospital
Dayton, Ohio

Gregory B. Kenny

Austin W. Keyser

President and Chief Executive Officer

Midwest Senior Field Representative

General Cable Corporation
Highland Heights, Kentucky

AFL-CIO
Columbus, Ohio

Amos L. Otis

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

 32 

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

Pittsburgh Board of Directors
As of December 31, 2013

Todd D. Brice

Glenn R. Mahone

Charles L. Hammel III

Dawne S. Hickton

Board Chairman
Partner and Attorney at Law

President and Chief Executive Officer

President

Reed Smith LLP
Pittsburgh, Pennsylvania

S&T Bancorp, Inc.
Indiana, Pennsylvania

PITT OHIO
Pittsburgh, Pennsylvania

Petra Mitchell

Sean McDonald

Grant Oliphant

President and Chief Executive Officer

President

President and Chief Executive Officer

Precision Therapeutics, Inc.
Pittsburgh, Pennsylvania

Catalyst Connection
Pittsburgh, Pennsylvania

The Pittsburgh Foundation
Pittsburgh, Pennsylvania

 33 

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

A N N U A L RE P O RT 2 0 1 3

Business Advisory Councils
As of December 31, 2013

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.

Cincinnati

Stuart Aitken
Chief Executive Officer
dunnhumby USA
Cincinnati, Ohio

Kay Geiger
President
PNC Bank, Greater Cincinnati/
Northern Kentucky
Cincinnati, Ohio

O’dell Owens
President
Cincinnati State Technical and
Community College
Cincinnati, Ohio

Terry Grundy
Director, Community Impact
United Way of Greater Cincinnati
Cincinnati, Ohio

Joseph Rippe
Principal
Rippe and Kingston
Cincinnati, Ohio

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

José Guerra
President
L5 Source
Cincinnati, Ohio

William Robinson III
Member
Frost Brown Todd LLC
Florence, Kentucky

James Bushman
Chairman
Cast-Fab Technologies, Inc.
Cincinnati, Ohio

Jim Huff
Chairman Emeritus
Huff Realty
Ft. Mitchell, Kentucky

Carl Satterwhite
President
RCF Group
West Chester, Ohio

Christopher Cole
Chief Executive Officer
Intelligrated
Cincinnati, Ohio

Vivian Llambi
President
Vivian Llambi & Associates, Inc.
Cincinnati, Ohio

Terry Segerberg
President and Chief Executive Officer
Mesa Industries
Cincinnati, Ohio

Cedric Beckett
Chief Sales Officer
Xact Spec Industries, LLC
Chagrin Falls, Ohio

Albert M. Green
Chief Executive Officer
Kent Displays, Inc.
Kent, Ohio

Kevin M. McMullen
Chairman and Chief Executive Officer
OMNOVA Solutions, Inc.
Fairlawn, Ohio

Maryann Correnti
Chief Financial Officer
Heinen’s
Warrensville Heights, Ohio

Christopher J. Hyland
Executive Vice President and
Chief Financial Officer
Hyland Software, Inc.
Westlake, Ohio

David Megenhardt
Executive Director
United Labor Agency
Cleveland, Ohio

Robert Buechner
Shareholder
Buechner, Haffer, Meyers,
Koenig Co., LPA
Cincinnati, Ohio

Cleveland

Jenniffer Deckard
President
Fairmount Minerals
Chardon, Ohio
Jack Diamond
President
Bennan, Manna, and Diamond, LLC
Akron, Ohio
Gary Gajewski
Vice President, Finance
Moen, Inc.
North Olmsted, Ohio

Michael Keresman
Chief Executive Officer
Cardinal Commerce Corporation
Mentor, Ohio

Bob Patterson
Executive Vice President and
Chief Operating Officer
PolyOne Corporation
Avon Lake, Ohio

Andrew Logan
President and Chief Executive Officer
Logan Clutch Corporation
Cleveland, Ohio

Rasesh Shah
President
The Andersons Rail Group
Maumee, Ohio

Gena Lovett
Chief Diversity Officer
Alcoa Forging and Extrusions
Cleveland, Ohio

 34 

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

Columbus

David W. Berson
Senior Vice President and
Chief Economist
Nationwide Mutual Insurance
Columbus, Ohio
Tim Burga
President
Ohio AFL-CIO
Columbus, Ohio
William Carter
Executive Vice President and
Chief Financial Officer
Momentive Performance Materials
Columbus, Ohio
Michael Dalby
President and Chief Executive Officer
Columbus Chamber of Commerce
Columbus, Ohio

Dayton

Edward Blake
Senior Partner; Chief Executive Officer,
MV Commercial Group; and Chief
Financial Officer, Miller-Valentine Group
Miller-Valentine
Dayton, Ohio
Bryan Bucklew
President and Chief Executive Officer
Greater Dayton Area Hospital
Association
Dayton, Ohio
Christopher Che
President and Chief Executive Officer
Hoovan-Dayton Corp.
Dayton, Ohio
David Evans
President and Chief Executive Officer
TESSEC
Dayton, Ohio
Bruce Feldman
President
Economy Linen & Towel Service
Dayton, Ohio

Paul Desantis
Chief Financial Officer
Bob Evans Farms, Inc.
Columbus, Ohio

Jordan Miller
President and Chief Executive Officer
Fifth Third Bank, Central Ohio
Columbus, Ohio

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

Andy Rose
Vice President and
Chief Financial Officer
Worthington Industries, Inc.
Columbus, Ohio

Mike Gonsiorowski
Regional President
PNC Bank, Central Ohio
Columbus, Ohio
Kenny McDonald
Chief Economic Officer
Columbus 2020
Columbus, Ohio

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

Art Harlan
Executive Vice President
Henny Penny Corporation
Eaton, Ohio

Gregory Stout
Chief Financial Officer
Voss Auto Network
Centerville, Ohio

Larry Klaben
President and Chief Executive Officer
Morris Furniture Co., Inc.
Fairborn, Ohio

Christopher Wallace
Senior Vice President, Corporate Banking
PNC Bank
Dayton, Ohio

Phil Parker
President and Chief Executive Officer
Dayton Area Chamber of Commerce
Dayton, Ohio

Mark Walton
Director of Community and
Economic Development
Fifth Third Bank
Dayton, Ohio

Jenell Ross
President
Bob Ross Auto Group
Centerville, Ohio
Michael Shane
Chairman
Lastar, Inc.
Moraine, Ohio

 35 

A N N U A L RE P O RT 2 0 1 3

Erie

Lexington

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

William Hilbert Jr.
President
REDDOG Industries, Inc.
Erie, Pennsylvania

Chris Scott
Vice President
Scott Enterprises
Erie, Pennsylvania

Matthew Baldwin
Vice President
Baldwin Brothers, Inc.
Erie, Pennsylvania

Marsha Marsh
Owner
Marsha Marsh Real Estate Services
Erie, Pennsylvania

Tim Shuttleworth
President and Chief Executive Officer
Eriez Magnetics
Erie, Pennsylvania

Jim Berlin
Chief Executive Officer
Logistics Plus
Erie, Pennsylvania

Desmond McDonald
President and Chief Executive Officer
Solenoid Solutions, Inc.
Erie, Pennsylvania

Phil Tredway
President and Chief Executive Officer
Erie Molded Plastics, Inc.
Erie, Pennsylvania

Terrence W. Cavanaugh
President and Chief Executive Officer
Erie Insurance
Erie, Pennsylvania

Marco Monsalve
Chief Executive Officer
McManis & Monsalve
Erie, Pennsylvania

Martin J. Farrell
President
Infinity Resources, Inc.
Erie, Pennsylvania

James Rutkowski Jr.
General Manager and Treasurer
Industrial Sales & Manufacturing, Inc.
Erie, Pennsylvania

William Farmer
President and Chief Executive Officer
United Way of the Bluegrass
Lexington, Kentucky

Wayne Masterman
Owner
Port Restaurants, LLC
Lexington, Kentucky

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

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

Ann McBrayer
President
Kentucky Eagle, Inc.
Lexington, Kentucky

David Switzer
Executive Director
Kentucky Thoroughbred Association, Inc.
Lexington, Kentucky

Glenn Leveridge
Market President
Central Bank
Winchester, Kentucky

Rebecca Mobley
Partner
TurfTown Properties, Inc.
Lexington, Kentucky

David Magner
Vice President of Operations at Trane
Ingersoll Rand
Lexington, Kentucky

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

Kenneth Troske
Senior Associate Dean for
Administration, Faculty and Research
Sturgill Professor of Economics
University of Kentucky
Lexington, Kentucky

 36 

Holly Wiedemann
President
AU Associates
Lexington, Kentucky

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

Pittsburgh

Wheeling

Daniel Bruno
Chief Financial Officer
DMI Companies, Inc.
Pittsburgh, Pennsylvania

William Fink
President
Paragon Homes Inc.
McKees Rocks, Pennsylvania

Kathryn Z. Klaber
Chief Executive Officer
The Klaber Group
Sewickley, Pennsylvania

James C. Cooper
President
Sterling Contracting LLC
Pittsburgh, Pennsylvania

William Generett
President and Chief Executive Officer
Urban Innovation 21
Pittsburgh, Pennsylvania

John H. Dunn
President
J D Dunn Company
Sewickley, Pennsylvania

Robert Glimcher
President
Glimcher Group
Pittsburgh, Pennsylvania

Stefani Pashman
Chief Executive Officer
Three Rivers Workforce
Investment Board
Pittsburgh, Pennsylvania

Audrey Palombo Dunning
Chief Executive Officer
Summa
Pittsburgh, Pennsylvania

Anthony M. Helfer
President
United Food & Commercial Workers
Local 23
Canonsburg, Pennsylvania

Lisa Allen
President and Chief Executive Officer
Ziegenfelder Company
Wheeling, West Virginia

Robert Kubovicz
President
United Electric
Wheeling, West Virginia

Jim Squibb
Chief Executive Officer
Beyond Marketing
Wheeling, West Virginia

P. Michael Bizanovich
President
Technology Services Group, Inc.
Wheeling, West Virginia

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

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

John Clarke
Business Representative
IBEW Local #141
Wheeling, West Virginia

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

Ronald L. Violi
Managing Director
R & V Associates
Pittsburgh, Pennsylvania

John L. Kalkreuth
President
Kalkreuth Roofing & Sheet Metal, Inc.
Wheeling, West Virginia

Richard Riesbeck
President
Riesbeck Food Markets
St. Clairsville, Ohio

 37 

Kathleen Sarniak
Chief Executive Officer
Jeannette Specialty Glass
Jeannette, Pennsylvania
Gregory Spencer
President and Chief Executive Officer
Randall Industries
Pittsburgh, Pennsylvania

A N N U A L RE P O RT 2 0 1 3

Community Depository Institutions Advisory Council
As of December 31, 2013

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.

Eddie Steiner
Council Chair
President and CEO
CSB Bancorp, Inc.
Millersburg, Ohio
Mark Brennan
President and Chief Executive Officer
Clearview Federal Credit Union
Moon Township, Pennsylvania
Patrick Ferry
President and Chief Executive Officer
Members Heritage Federal Credit Union
Lexington, Kentucky
Paul M. Limbert
President and Chief Executive Officer
WesBanco Bank, Inc.
Wheeling, West Virginia
William C. Marsh
Chairman of the Board,
President, and Chief Executive Officer
Farmers National Bank
Emlenton, Pennsylvania

James O. Miller
President and Chief Executive Officer
The Citizens Banking Company
Sandusky, Ohio
Robert Oeler
President and Chief Executive Officer
Dollar Bank
Pittsburgh, Pennsylvania
Gary Soukenik
President and Chief Executive Officer
Seven Seventeen Credit Union
Warren, Ohio
Bick Weissenrieder
Chairman and Chief Executive Officer
Hocking Valley Bank
Athens, Ohio
Charlotte Zuschlag
President and Chief Executive Officer
ESB Financial Corporation
Ellwood City, Pennsylvania

 38 

F E D E RAL R E S E R VE BAN K O F C LE VE LAN D

Officers and Consultants
As of December 31, 2013

Sandra Pianalto
President and Chief Executive Officer

Joseph G. Haubrich
Vice President

George E. Guentner
Assistant Vice President

Gregory L. Stefani
First Vice President and Chief Operating Officer

LaVaughn M. Henry
Vice President and Senior Regional Officer

Felix Harshman
Assistant Vice President

Mark S. Sniderman
Executive Vice President and Chief Policy Officer

Suzanne M. Howe
Vice President

Matthew D. Hite
Assistant Vice President

Paul E. Kaboth
Vice President and Community Affairs Officer

Bryan S. Huddleston
Assistant Vice President

William D. Fosnight
Senior Vice President and General Counsel

Susan M. Kenney
Vice President

David E. Johnston
Assistant Vice President

David W. Hollis
Senior Vice President

Edward S. Knotek II
Vice President

Martha Maher
Assistant Vice President

Stephen H. Jenkins
Senior Vice President

Evelyn M. Magas
Vice President

Timothy G. McFadden
Assistant Vice President

Mark S. Meder
Senior Vice President and General Auditor

Stephen J. Ong
Vice President

Timothy M. Rachek
Assistant Vice President

Terrence J. Roth
Senior Vice President

Thomas S. Sohlberg
Vice President

Elizabeth J. Robinson
Assistant Vice President

Mark E. Schweitzer
Senior Vice President and Director of Research

Jeffrey R. Van Treese
Vice President

Thomas E. Schaadt
Assistant Vice President

Susan M. Steinbrick
Senior Vice President

Guhan Venkatu
Vice President and Senior Regional Officer

James P. Slivka
Assistant Vice President

Anthony Turcinov
Senior Vice President

Nadine Wallman
Vice President

Diana C. Starks
Assistant Vice President



Peggy A. Velimesis
Senior Vice President
Lisa M. Vidacs
Senior Vice President




Jason E. Tarnowski
Assistant Vice President

Maria A. Bowlin
Assistant Vice President

Michael Vangelos
Assistant Vice President

Michael D. Coldwell
Assistant Vice President

Carolyn M. Williams
Assistant Vice President

Douglas A. Banks
Vice President

Tracy L. Conn
Assistant Vice President

Kelly A. Banks
Vice President

Brian C. Dragoo
Assistant Vice President

Dean A. Longo
Consultant

John B. Carlson
Vice President

Jenni M. Frazer
Assistant Vice President

John P. Robins
Consultant

Todd E. Clark
Vice President

Jeffrey G. Gacka
Assistant Vice President

Iris E. Cumberbatch
Vice President and Public Information Officer

Kenneth T. Green
Assistant Vice President

Cheryl L. Davis
Vice President and Corporate Secretary

 39 



Acknowledgments
Mark Schweitzer
Senior Vice President and Director of Research
Lisa Vidacs
Senior Vice President, Outreach, Community Relations, Public Affairs
Iris Cumberbatch
Vice President and Public Affairs Officer
Todd E. Clark
Edward S. Knotek II
Guhan Venkatu
Contributing Authors
Amy Koehnen
Editor
Michele Lachman
Maureen O’Connor
Associate Editors
Natalie Bashkin
Graphic Designer
Greg Johnson
Frederick Friedman-Romell
Web Designers
William Bednar
Doug Campbell
Laura Flaugh
Myndi Liva
Nelson Oliver
Contributors

Portrait Photography
Alejandro Rivera Photography
Chris Pappas Photography
Eric Mull Photography

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Full text of Annual Report of the Federal Reserve Bank of Cleveland : 2013 Annual Report

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