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THE R OA D M A P AND THE D E S T I N AT I O WO R DS A N: SAM O N E TA R Y POLICY T OOL 2014 A NNUAL R EPORT FEDERAL RESERVE BANK OF MINNEAP OLIS 2014 ANNUAL REPORT • FEDERAL RESERVE BANK OF MINNEAPOLIS PRESIDENT’S MESSAGE 3 THE ROADMAP AND THE D EST INAT IO N: WORDS AS A MONETARY PO LICY TO O L 5 MESSAGE FROM THE FIRST VIC E PRESIDE NT 28 COMMU NITY DEPOSITORY INST IT U T IO NS ADVISORY COU NC IL 34 TWIN C ITIES ADVISORY CO U NC IL 35 GREAT LAKES ADVISORY CO U NC IL 36 GREAT PLAINS ADVISORY CO U NC IL 37 MINNEAPOLIS BOARD OF D IR EC TO R S 38 HELENA BRANC H BOARD O F D IR EC TO R S 39 SENIOR MANAGEMENT 40 OFFIC ERS 41 THE REGION FEDERAL RESERVE BANK OF MINNEAPOLIS PO BOX 291 MINNEAPOLIS MN 55480-0291 EMAIL: LETTERS@MPLS.FED.ORG WEB: MINNEAPOLISFED.ORG EXECUTIVE EDITOR: KEI-MU YI SENIOR EDITOR: DAVID FETTIG EDITOR: DOUGLAS CLEMENT MANAGING EDITOR: JENNI SCHOPPERS DESIGNER: MARK SHAFER COVER PHOTO: JOE PACZKOWSKI The Region i s p ub l i s he d by the Federa l Reser ve B a n k of M in n ea polis. The v i ews ex p re ss e d he re a re not n ecessa r ily th ose of th e Federa l Reser ve B a n k of M in n ea polis o r t he Fe d e ra l Re s e rve Syste m . A r ticles may be repr inted if th e sou rce is credited a n d th e P ub l i c Af fa i rs D e p a rt me nt o f t h e M in n ea polis Fed is provided with copies. Pe rmi ss i o n to p ho to co py i s unrestr icted. Vo l um e 2 9 N umb e r 1 , I SS N 1 045 –3369 M ay 2 01 5 1 ACKERMAN+GRUBER PHOTOGRAPHY PR ES I D ENT ’ S MESSAGE The Federal Open Market Committee has placed communication about the evolution of monetary policy at center stage in recent years, during which the federal funds rate has been near zero. However, good communication is a key part of effective monetary policy even in more normal times with a higher federal funds rate. This year’s Annual Report essay is about one way that the FOMC could improve its communication about monetary policy. Most of the public conversation about monetary policy in the United States focuses on the question, “What’s going to happen to interest rates at the next few meetings?” Indeed, the Committee’s own communication often has this focus. But interest rates are only a tool or instrument for the FOMC to achieve its congressionally mandated objectives of price stability and maximum employment. The essay argues that the FOMC could be more effective if its communications about policy were more focused on the Committee’s macroeconomic objectives, and how its policy choices are specifically designed to facilitate the achievement of those objectives. This kind of goalbased communication would provide more clarity to households and firms about the future evolution of the economy, and help stabilize the economy against adverse shocks. The art and science of monetary policymaking are continuously evolving as policymakers learn from research and from historical experience. As policymakers, we have learned a lot about communication in the past few years. I believe this year’s essay is an outstanding example of a way forward for FOMC communication that builds on both research and historical experience. Narayana Kocherlakota President Federal Reserve Bank of Minneapolis 3 NIEDORF VISUALS THE R OA D M A P AND THE D E S T I N AT I O WO R DS A N: SAM O N E TA R Y POLICY T OOL SAM SCHU L H O F E R -W SENIOR V OHL ICE PRES I D I R EC TO DENT AN D R OF RES EARCH FEDERAL RESERVE BANK OF MINNE APOLIS PUBLIC UNCERTAINTY ABOUT THE ULTIMATE ECONOMIC DESTINATION CAN HINDER POLICYMAKERS’ EFFORTS TO ACHIEVE THEIR GOALS. COMMUNICATING THE DESTINATION, THEREFORE, IS JUST AS IMPORTANT AS COMMUNICATING THE ROADMAP. PUBLIC UNCERTAINTY ABOUT THE ULTIMATE ECONOMIC DESTINATION CAN HINDER POLICYMAKERS’ EFFORTS TO ACHIEVE THEIR GOALS. COMMUNICATING THE DESTINATION, THEREFORE, IS JUST AS IMPORTANT AS COMMUNICATING THE ROADMAP. The Region INTRODUC T IO N T he traditional monetary policy tool of central banks is interest rates. Central bankers move short-term interest rates up and down to influence the economy. But with the federal funds rate—the Federal Reserve System’s main policy rate—stuck at its effective lower bound since late 2008, the Fed has relied on two less traditional tools: communication and asset purchases. The Federal Reserve is no longer actively adding to its assets, but communication remains an active component of monetary policy (see Box 1 on page 8). Communications in recent years from the Federal Open Market Committee (FOMC), the Fed’s primary policymaking body, have focused largely, though not entirely, on the Committee’s expectations for the future course of interest rates and asset purchases. I argue in this essay that this communications approach has been useful, but is incomplete. Describing the likely future path of policy—the roadmap, if you will—is clearly helpful in steering the economy. If families and businesses have a clear idea how interest rates will evolve, for example, they will find it easier to make long-term decisions. But unless policymakers also communicate clearly about the economic goals they aim to achieve—the destination—communications about the likely policy path alone leave the public more uncertain than it needs to be. How much employment should people expect at different dates in the future? How much inflation? The answers to these questions are crucial information for consumers deciding how much to spend and for businesses deciding how much to invest and how many workers to hire. But a roadmap for policy tools does not provide these answers. In turn, public uncertainty about the ultimate economic destination can hinder policymakers’ efforts to achieve their goals. Communicating the destination, therefore, is just as important as communicating the roadmap.1 Of course, policymakers cannot perfectly forecast the future, so they cannot promise that a certain inflation rate or level of unemployment will be achieved in a particular year. Nonetheless, they can say what they are trying to accomplish. If all goes according to plan, in what year do they intend to bring inflation back to the FOMC’s 2 percent target? What labor market conditions do they expect will prevail at that time? The author thanks Cristina Arellano, Doug Clement, Ron Feldman, Jonathan Heathcote, Narayana Kocherlakota, Richard Todd, and Kei-Mu Yi for helpful discussions and suggestions. J O E PACZ KOWSK I P H OTO G RAP H Y 7 The Region BOX 1 MORE TO SAY Words are a more intensively used monetary policy tool than ever before. As this figure shows, the FOMC’s post-meeting policy statements are longer than at any time since the first statement was issued in 1994. 1000 F FF F F F F F F F F F F F F FF 900 800 700 WORD COUNT 600 F F F FF F F F F F F FF F F F F F F F F FF FF F FFFF F F F 500 400 F F F F FF F F F F F FF F F F F FF F F F F FF F F F F FF F FF F FF FFF F FFF F F F F F F F F F F F FFF F F F F F F F F F F F F FFF F FF F F FF F F F F F 300 200 F F FF 100 F 0 F F F FF F F F F FFFFFF FFFFFF FF FFFFF FF FFFFFF F FF 1994 1996 1998 2000 2002 2004 2006 2008 Source: Author’s calculations; FOMC statements from federalreserve.gov 8 2010 2012 2014 The Region The situation is like that of a bus company issuing a schedule for trips from Minneapolis to Chicago. The company must provide at least a basic roadmap—we’ll stop in Rochester and Madison—so passengers know where they can board the bus. But the company cannot commit to an exact map—to drive through downtown on a particular avenue—because traffic jams or construction projects might force the driver to choose a somewhat different route. What passengers really want to know, though, is that the bus is heading to Chicago and will arrive there at roughly such-and-such a time. And although this, too, is something the company can’t forecast perfectly, it can say something simple that answers the passengers’ question: We aim to get this bus to Chicago by 9 p.m. Similarly, central bank policymakers will be most effective if they communicate clearly not only what they intend to do, but what they intend to achieve—the destination as well as the path. The essay proceeds as follows. I begin by reviewing the basics of how communication about roadmaps and destinations can help achieve monetary policy goals. I then discuss how the FOMC has communicated in recent years. Next, I show how lessons learned from research and from the Fed’s recent experience demonstrate the importance of communicating about a policy destination. I conclude by describing ways that Federal Reserve communications might be improved. Views expressed here are my own, and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. An underlying assumption of this essay is that clear communication is a basic obligation of democratic policymakers. From this perspective, the question is not whether to communicate transparently, but rather how best to be transparent.2 I therefore do not explore whether nontransparent communications strategies might achieve better outcomes.3 HOW M O NETA RY POL I CY COM M U NI C ATI ONS I NF LU E NC E T H E ECO NO M Y The purpose of monetary policy communications is to explain the central bank’s actions to households and businesses, so that they can understand the policy choices being made on their behalf and can therefore form accurate, fully informed expectations about these choices. In fact, as Federal Reserve Board Chair Janet Yellen has emphasized, all monetary policy tools work in large part by influencing expectations.4 For example, a change in the federal funds rate, which is an interest rate on overnight loans, has an impact mainly because a change in today’s rate alters household and business expectations about the path of rates well into the future. Even if the Fed did not communicate at all, its actions alone might influence expectations because the public could learn from patterns in the Fed’s historical behavior. But communication enhances policymakers’ ability to move expectations—especially, though not only, in unusual times that have little historical precedent.5 Monetary policy tools must operate by influencing expectations because most economic decisions are medium- and long-term ones. The goals of monetary policy in the United States, 9 TH E PURPOS E OF MO NETARY PO LICY COMMUN IC ATIONS IS TO EXPLAIN T HE C E N TRA L BA N K’ S ACT IO NS TO HO USEHO LDS A N D B US IN E SS ES, SO T HAT T HEY CAN UND ERSTA N D TH E POLICY CHO ICES BEING MAD E O N TH E IR B E H A L F AND CAN T HEREFO RE FO RM ACC URATE , FULLY INFO RMED EXPECTAT IO NS A B OUT TH E S E CHO ICES. 10 The Region established by Congress, are the Federal Reserve’s “dual mandate”: maximum employment and stable prices. Monetary policy helps achieve these goals by affecting people’s demand for goods and services and by influencing how businesses set prices and wages, hire workers, and make capital investments. But decisions about buying goods and services, setting prices and wages, and making capital investments have long-term impacts, so households and businesses tend to base these decisions on their expectations for the future. A family that expects its income to grow may buy a larger house. A company will give its workers a larger annual raise if it expects demand for its products to rise at a healthy clip in the next year. Likewise, if the company is considering whether to expand, it will be more confident in doing so if it expects persistently high demand for its products. Expectations about the future are subject to uncertainty, because many different shocks can hit the economy. Monetary policy communications must account in some way for this uncertainty. In particular, policymakers cannot give a complete roadmap for their future actions—a fixed time path of interest rates, for example—because they will need to make adjustments in response to shocks. If inflationary shocks hit, the Committee may need to raise the path of interest rates. If demand falls, the Committee may need to lower the path of interest rates. A policy path that will achieve good results in one possible future will be undesirable in other possible futures. At the same time, because so many shocks are possible, there is no way for policymakers to lay out a contingent plan for responding to every conceivable shock. At its Aug. 21, 2001, meeting, the FOMC could not have contemplated that the United States would come under terrorist attack within three weeks—let alone developed and announced a contingent plan for a monetary policy response to such an attack. But a terrorist attack did come, and on Sept. 17, the Committee responded by reducing the federal funds rate. Should that monetary policy action be interpreted as an entirely random event? Or was there a way for the public to anticipate it—to know, even before the tragedy of Sept. 11, that the Federal Reserve would respond appropriately if an unanticipated bad shock were to arrive? In many theoretical economic models, monetary policymakers have no need to communicate to solve this problem. The public is assumed to know policymakers’ goals and rationally expects policymakers to act as appropriate to achieve those goals—whatever shocks may come. Thus, in these models, families and firms can put themselves in the shoes of policymakers, work out what choices the policymakers will make in any conceivable future, and thereby know the entire contingent plan, even though policymakers never announce it. In practice, however, making policymakers’ goals sufficiently clear so that the public can anticipate how the Fed would respond to shocks is exactly the difficulty. The Federal Reserve Act lays out a dual mandate for monetary policy, but does not define maximum employment or stable prices. It was not until 2012, some 35 years after Congress passed the dual mandate, that the FOMC, in a “Statement on Longer-Run Goals and Monetary Policy Strategy,” gave a quantitative interpretation to price stability: a 2 percent inflation rate. But even then, the J O E PACZ KOWSK I P H OTO G RAP H Y 11 POL ICY NEEDS TO REACT APPRO PRIAT ELY TO S HO CKS, AND T HE CERTAINTY T HAT POL ICYMAKERS SHO ULD PROVID E IS ABOUT TH E NAT URE O F T HAT REACT IO N. GIVEN TH E VAST VARIETY O F POSSIBLE SHO CKS , COMM UNICAT ING ABO UT T HE D ESIRED DE STINAT IO N IS AN EF F ICIENT WAY TO E XPLAIN HOW PO LICY WILL REACT. 12 The Region FOMC did not say how far or how long it would allow the economy to deviate from that target, and it added that it could not provide a fixed quantitative goal for employment. So the public must work hard to infer what policymakers are trying to achieve and, hence, how they are likely to act. The public’s lack of complete information about policymakers’ goals means that if policymakers communicate only about their planned actions, about their roadmap, they force the public to guess how they will react to shocks that the plan does not contemplate. By contrast, if policymakers also make clear the destination they are trying to reach—acknowledging, of course, that some shocks may prevent reaching it—then the public can better infer how policy will respond to any shock. Why care whether the public knows how policy will respond to shocks? First, conveying this knowledge is how policymakers move expectations and hence influence the economy. Second, if the FOMC is to achieve the goal of maximum employment, it must avoid creating unnecessary drags on economic activity. Uncertainty about how the FOMC itself will behave is one such drag, because households and firms will typically act more cautiously—saving more and spending and investing less—if they have more doubts about the future. Importantly, the best way to provide certainty about policy is not to establish a fixed policy that will not respond to shocks. Such a policy would be certain, but it would be certainly inappropriate. Policy needs to react appropriately to shocks, and the certainty that policymakers should provide is about the nature of that reaction. Given the vast variety of possible shocks, communicating about the desired destination is an efficient way to explain how policy will react. T HE F ED ERA L R ES E RV E ROA DM A PS A ND TH E I R PI T FA L L S The FOMC continually emphasizes in its statements and its members’ other communications that its policies depend on how the economy evolves. This data dependence, though crucial for effective policymaking, can be challenging to communicate: How can the FOMC concisely explain its potential reaction to each of the many shocks that might hit? The FOMC’s recent response to that challenge has been to focus instead on the likely path of its policy instruments. This communications strategy is clearly helpful for financial market participants, who can have billions of dollars riding on whether interest rates will change in June or September. But it is of limited benefit in helping ordinary households and businesses understand where the economy is headed. Box 2 highlights the FOMC’s recent communications about its plans, often referred to as “forward guidance.” Some examples are “calendar-based”; they talk about deploying interest rates or asset purchases for a particular period of time. Other examples are “state-based”; they talk about deploying interest rates or asset purchases until a particular state of the economy occurs, such as a 6.5 percent unemployment rate. Relative to calendar-based guidance, state-based guidance can give a better sense of the data-dependence of the Fed’s policies—at least to the extent that the Fed clearly communicates this guidance, and the public correctly interprets it. J O E PACZ KOWSK I P H OTO G RAP H Y 13 The Region BOX 2 THE FOMC’S FORWARD GUIDANCE SINCE THE CRISIS • DECEMBER 2008: The FOMC establishes a federal funds rate target of 0 to 25 basis points and says it “anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.” Later statements extend that horizon to “an extended period” and then to specified dates of mid-2013, late 2014, and ultimately mid-2015. • MARCH 2009, NOVEMBER 2010, SEPTEMBER 2011, AND JUNE 2012: The FOMC announces programs to buy specified quantities of assets over specified time periods. • SEPTEMBER 2012: The FOMC says it will buy $40 billion per month of mortgage-backed securities until the outlook for the labor market improves substantially “in a context of price stability.” • DECEMBER 2012: The FOMC stops forecasting a time period when exceptionally low interest rates will remain appropriate. Instead, it says it will keep the funds rate target at 0 to 25 basis points at least as long as unemployment exceeds 6.5 percent, assuming inflation remains under control. • DECEMBER 2013: The FOMC slows asset purchases and says it will likely reduce them in “further measured steps” if incoming data match expectations. • MARCH 2014: As unemployment nears the 6.5 percent threshold, the FOMC describes a “wide range of information” that will influence its decisions and says it anticipates that low interest rates will likely remain appropriate for a “considerable time” after the end of asset purchases. 14 The Region For economists and financial analysts well-versed in Fed-speak, it may even be possible to read between the lines and infer how the FOMC will behave in different scenarios. But these forecasts do not really tell families and businesses what to expect for the variables that matter most to their decisions—variables like prices, wages, the chance of finding a job, the likely demand for their products. In other words, both calendar-based and state-based forward guidance emphasize the roadmap for policy tools—not the economic destination. One pitfall of providing a policy map without a clear destination is that the public may misinterpret a midway stop as the ultimate destination. In December 2012, when the FOMC said it would keep interest rates effectively at 0 percent at least until the unemployment rate reached 6.5 percent, this unemployment number was intended merely as a threshold—a line that had to be crossed before the Committee would even consider raising rates.6 But some FOMC participants voiced concerns that the public would mistakenly view the 6.5 percent number as a trigger that would result in automatic rate increases.7 The two interpretations, threshold or trigger, imply significantly different economic destinations: If 6.5 percent unemployment is a trigger for rate increases, the FOMC must not be aiming for unemployment much below 6.5 percent, while if 6.5 percent unemployment is just a threshold for considering rate increases, the goal could be a much lower unemployment rate. The difference between those destinations could matter greatly for households and businesses. Should they plan to live in an economy with a long-run unemployment rate of 6.5 percent, or an economy with much less unemployment? By making the 6.5 percent number prominent in its communications without saying anything in its policy statements about its actual goal, the FOMC ran the risk that the public would mistake 6.5 percent for the goal and form expectations predicated on that mistake. Another pitfall of omitting the destination is that the public can come to question what the destination is. That uncertainty, in turn, could lead to bad economic outcomes. Consider, for example, a situation in which inflation has run below the FOMC’s 2 percent goal for several years. What will happen if the FOMC reacts to this situation by announcing that it will keep nominal interest rates low for a long time?8 The conventional prediction is that this policy roadmap for low interest rates will cause households and businesses to borrow and spend, stimulating the economy and raising inflation back to the 2 percent goal. But another outcome is also possible. In the long run, nominal interest rates tend to be lower when inflation is lower. The public could interpret the policy roadmap for low interest rates as an admission by the FOMC that inflation is not going to rise back to the 2 percent target. If households and businesses interpret the FOMC’s announcement that way, they will expect lower inflation in the future—and those low expectations, in themselves, will lead to further downward pressure on inflation, fulfilling the expectation that inflation will remain below target. So although the low-rates policy can lead to a destination of 2 percent inflation, it can also lead to a destination of much lower inflation.9 Making clear which destination is desired can help coordinate the public’s expectations and avoid an unintended outcome. 15 T HE I MPO RTA NCE O F T H E DE STI NAT I ON There are two major exceptions to the FOMC’s recent focus on roadmaps. These exceptions— as well as the research literature—show both the benefits of providing a destination and the importance of explaining that destination clearly. The first exception is the January 2012 announcement that price stability means a 2 percent inflation rate. This announcement freed the public from the need to guess what inflation rate the FOMC is aiming for. It plays a crucial role in anchoring inflation expectations at 2 percent even as realized inflation data continue to run below that target. But at the same time, it is far from being a complete destination. As the Federal Reserve Bank of Minneapolis’ president, Narayana Kocherlakota, has said, the public needs to know not only what inflation rate the Fed is aiming for, but how quickly the Fed aims to get there—the benchmark time horizon for achieving this goal.10 Households and businesses will make different decisions if they expect inflation to creep back to 2 percent over a decade than if they expect the target to be attained next year. What price increases should firms plan on this year? How good a deal is a five-year car loan at a 3 percent interest rate? The answers depend on how quickly inflation returns to the FOMC’s target. The second exception is the expanded asset purchase program that the FOMC began in September 2012. In launching that program, the Committee said: “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases … and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.” The program thus involved not only a roadmap, buying assets at a pace of $85 billion per month, but also a destination: a substantially improved outlook for the labor market. Still, this destination was not very precise. What indicators would represent substantial improvement in the labor market outlook? How rapidly does the FOMC intend to reach that goal? When the FOMC began to give more specifics, financial markets reacted sharply. In a June 19, 2013, press conference, then-Chairman Ben Bernanke said the Committee anticipated it would be appropriate to slow its asset purchases later that year if the labor market, economic growth, and inflation continued to improve in line with the FOMC’s expectations. Over that and the next four trading days, the yield on 10-year Treasury bonds jumped by four-tenths of a percentage point, one of a series of financial market jolts in spring 2013 that have come to be known as the “taper tantrum.” Market participants appeared to view the rising long-term interest rates as likely to reduce economic growth. In other words, markets viewed the announcement as revealing that the FOMC had changed the economic destination. But policymakers evidently did not intend this negative reaction—Governor Jerome Powell said that “market expectations began to lose touch with Committee intentions”11—and subsequently sought to persuade the country that they had not changed plans. Some have viewed the taper tantrum episode as demonstrating that state-dependent for- 16 The Region ward guidance and communications about the destination of monetary policy lead to undesirable volatility in interest rates and, by extension, the economy as a whole. I take the opposite lesson. The mismatch between public and FOMC expectations happened because the Committee described the destination only vaguely; markets became volatile when the Committee surprised the public with its choice of a more precise destination. It is as if a bus left New York with an announcement that it was headed for the West Coast, the passengers expected to go to San Francisco, but when the bus got to Salt Lake City, the driver turned a bit south and drove to Los Angeles. Of course the passengers would be surprised. If the destination had been clear from the outset—for example, if the FOMC had said in September 2012 that it would use its tools as appropriate to bring unemployment down to 7 percent within a year while moving inflation closer to the 2 percent target—much confusion could have been avoided. Academic research on central bank communications, while not entirely agreed on all points, largely supports the importance of credible signaling about goals as well as strategies, and the high costs of not communicating about goals. • THE VALUE OF COMMUNICATING A GOAL Orphanides and Williams (2004) investigate what happens if people do not know the central bank’s inflation target. They find that this imperfect knowledge causes the central bank to respond more sharply to deviations from the target; in essence, pushing inflation closer to the target than the central bank would normally desire helps the private sector learn the target. But this policy approach is costly, because the central bank must focus more on inflation stabilization, and less on output stabilization, than it ideally would. If the central bank could communicate its target to the private sector, outcomes would be better. • THE IMPORTANCE OF CREDIBILITY In a recent paper, Hachem and Wu (2014) offer a stark example of the importance of credibility. They model a central bank whose only tool is its ability to talk about its destination—in particular, an inflation target. They find that the central bank cannot announce an inflation target that is too far from the current inflation rate: If it does so, the target will be badly missed, which will cause the public to stop paying attention to the target announcements and ignore the central bank forevermore. • Much research on policy communications focuses on whether policymakers can credibly promise to follow policies they may later wish to change.12 Campbell et al. (2012) distinguish between two types of forward guidance: Delphic guidance, in which the central bank predicts how the economy will evolve and how policy will 17 The Region IF THE DESTINATION HAD BEEN CLEAR FROM THE OUTSET—FOR EXAMPLE, IF THE FOMC HAD SAID IN SEPTEMBER 2012 THAT IT WOULD USE ITS TOOLS AS APPROPRIATE TO BRING UNEMPLOYMENT DOWN TO 7 PERCENT WITHIN A YEAR WHILE MOVING INFLATION CLOSER TO THE 2 PERCENT TARGET—MUCH CONFUSION COULD HAVE BEEN AVOIDED. 18 The Region likely respond to that evolution, and Odyssean guidance, which commits the central bank to some future action that it may later wish it did not have to take.13 They argue that Odyssean forward guidance is powerful because a central bank that can commit to providing future stimulus can thereby stimulate the economy today. But the question of commitment is distinct from the focus of this essay. Even if a central bank cannot hold itself to promises of future actions, it can still explain its goals. STRENGTHENING THE FEDERAL RESERVE’S COMMUNICATIONS How might the FOMC convey its destination and not just its roadmap? One approach would be to add more details to the statement on longer-run goals, as Kocherlakota has suggested. I see expanding the longer-run goals statement as a potentially useful step forward. However, this statement is generally viewed as quasi-constitutional, a foundational document for the Committee’s activities rather than a description of what it is doing at any point in time. So, in addition, it is important for the FOMC to talk directly about its destination in its routine postmeeting communications. Staff at the Federal Reserve Bank of Minneapolis have experimented with alternative ways of writing the FOMC’s post-meeting statement to communicate more effectively. Box 3 (on page 21) shows an example based on the statement from January 2015. I emphasize that this example is intended to illustrate a different communications approach for the same policy decision—not any difference in the policy decision itself. The FOMC’s actual January 2015 statement begins with two paragraphs describing recent economic developments and the Committee’s economic outlook. The Committee then lays out a roadmap for the federal funds rate and states that the rate will be data dependent. The statement indicates that the Committee expects to be “patient” in normalizing policy, a word that the FOMC also used in its previous statement and that Yellen translated in a December 2014 press conference as indicating that the Committee was not likely to raise interest rates for at least the next two meetings. Thus, by repeating the word “patient” in January 2015, the Committee decided to extend by one meeting the period when it was not likely to raise interest rates. The statement also describes plans for asset holdings and concludes with a long-run roadmap for the funds rate. The experimental alternative statement shows that the original can easily be modified to emphasize the economic destination, without any change in the policy decision that the statement conveys.14 The alternative statement begins by stating the day’s policy action and what destination it is expected to achieve. (The description of the destination draws on Committee participants’ forecasts, published in the December 2014 Summary of Economic Projections, of likely economic outcomes under appropriate monetary policy.) The experimental alternative then gives details on the current policy roadmap. For interest rates, the roadmap avoids using “patient” as a code word and simply states that the Committee is unlikely to raise rates at its next two meetings. For asset holdings, the roadmap draws on the Committee’s September 2014 J O E PACZ KOWSK I P H OTO G RAP H Y 19 The Region statement on policy normalization principles. Finally, to help make the destination credible, the experimental alternative explains why the FOMC believes the roadmap will lead to the destination. Monetary policymakers in other places and times have also communicated effectively about their destinations. In July 2012, as a sovereign debt crisis threatened the stability of the single European currency, the euro, European Central Bank (ECB) President Mario Draghi said, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”15 Draghi did not say anything about what “it” would involve. Still, this clear statement about the outcomes the ECB sought to achieve increased confidence that those outcomes would, in fact, be achieved, and the euro rose 1.2 percent against the dollar on the day of Draghi’s speech.16 In 2013, Kocherlakota called for “goal-oriented monetary policy,” in which the FOMC would articulate a clear goal and do “whatever it took” to achieve that goal.17 He argued that U.S. policymakers successfully used such an approach to bring down rampant inflation in the early 1980s and ought to use it again to fight severe employment shortfalls in the present day. More broadly, though, communication about the destination need not be a tool deployed only in extraordinary circumstances. It may be tempting to think that because the Federal Reserve achieved good results for the two decades before the financial crisis without communicating about its destination, such communication will again be superfluous now that the crisis has passed and the recovery is well under way. But if the FOMC does not communicate its goals, the public must infer those goals from the FOMC’s actions. In the stable economic environment that existed before the crisis, such inferences were relatively easy. Today, by contrast, policymakers and the public face an unusual degree of uncertainty about economic fundamentals.18 Even in good economic times—which, after many years of recovery, 2015 may finally bring—explaining both the policy roadmap and the destination can help better align public expectations with policymakers’ goals. 20 BOX 3, PART 1 REWRITING THE FOMC STATEMENT TO BETTER COMMUNICATE POLICY Minneapolis Fed staff have experimented with alternative wording for the FOMC’s post-meeting statements to better communicate policy actions and rationales. On this page is the original text of the FOMC’s Jan. 28, 2015, statement. On the next page is a possible alternative wording of that same statement. ORIGINAL STATEMENT FOR JAN. 28, 2015 Information received since the Federal Open Market Committee both realized and expected—toward its objectives of maximum met in December suggests that economic activity has been ex- employment and 2 percent inflation. This assessment will take panding at a solid pace. Labor market conditions have improved into account a wide range of information, including measures of further, with strong job gains and a lower unemployment rate. On labor market conditions, indicators of inflation pressures and in- balance, a range of labor market indicators suggests that under- flation expectations, and readings on financial and international utilization of labor resources continues to diminish. Household developments. Based on its current assessment, the Committee spending is rising moderately; recent declines in energy prices judges that it can be patient in beginning to normalize the stance have boosted household purchasing power. Business fixed invest- of monetary policy. However, if incoming information indicates ment is advancing, while the recovery in the housing sector re- faster progress toward the Committee’s employment and infla- mains slow. Inflation has declined further below the Committee’s tion objectives than the Committee now expects, then increases longer-run objective, largely reflecting declines in energy prices. in the target range for the federal funds rate are likely to occur Market-based measures of inflation compensation have declined sooner than currently anticipated. Conversely, if progress proves substantially in recent months; survey-based measures of longer- slower than expected, then increases in the target range are likely term inflation expectations have remained stable. to occur later than currently anticipated. Consistent with its statutory mandate, the Committee seeks The Committee is maintaining its existing policy of reinvest- to foster maximum employment and price stability. The Com- ing principal payments from its holdings of agency debt and mittee expects that, with appropriate policy accommodation, agency mortgage-backed securities in agency mortgage-backed economic activity will expand at a moderate pace, with labor securities and of rolling over maturing Treasury securities at market indicators continuing to move toward levels the Com- auction. This policy, by keeping the Committee’s holdings of mittee judges consistent with its dual mandate. The Committee longer-term securities at sizable levels, should help maintain ac- continues to see the risks to the outlook for economic activity commodative financial conditions. and the labor market as nearly balanced. Inflation is anticipated When the Committee decides to begin to remove policy ac- to decline further in the near term, but the Committee expects commodation, it will take a balanced approach consistent with inflation to rise gradually toward 2 percent over the medium its longer-run goals of maximum employment and inflation of term as the labor market improves further and the transitory 2 percent. The Committee currently anticipates that, even after effects of lower energy prices and other factors dissipate. The employment and inflation are near mandate-consistent levels, Committee continues to monitor inflation developments closely. economic conditions may, for some time, warrant keeping the To support continued progress toward maximum employ- target federal funds rate below levels the Committee views as ment and price stability, the Committee today reaffirmed its normal in the longer run. view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress— 21 BOX 3, PART 2 REWRITING THE FOMC STATEMENT TO BETTER COMMUNICATE POLICY Minneapolis Fed staff have experimented with alternative wording for the FOMC’s post-meeting statements to better communicate policy actions and rationales. On the previous page is the original text of the FOMC’s Jan. 28, 2015, statement. On this page is a possible alternative wording of that same statement. A REWRITTEN STATEMENT FOR JAN. 28, 2015 SUMMARY On Jan. 28, 2015, the Federal Open Market Committee de- • FUTURE PLAN : At some time after it begins increasing cided to maintain the current levels of its monetary policy the federal funds rate target, the Committee will reduce its instruments. The Committee extended by one meeting the asset holdings by stopping reinvestment of principal pay- period when it is not likely to increase the federal funds ments. In the long run, the Committee will hold primarily rate target. The Committee expects that its plan for the fed- Treasury securities. eral funds rate and asset holdings will return the economy RATIONALE to maximum employment this year and to an inflation rate The Committee determines how to attain its statutory man- near 2 percent within two to three years. date of maximum employment and price stability by re- POLICY STANCE viewing information on resource utilization and inflation. FEDERAL FUNDS RATE RESOURCE UTILIZATION • CURRENT LEVEL: The target range remains 0 to 1/4 The labor market has improved further, with strong job percent. gains and a lower unemployment rate. Risks to the outlook • FUTURE PLAN: The Committee is not likely to increase for resource utilization appear nearly balanced. the target range at either of its next two meetings. The Committee will continue to set the target range based on INFLATION realized and expected progress toward its inflation and em- Falling energy prices have pushed inflation further below ployment objectives. The Committee will use a wide range the Committee’s longer-run objective of 2 percent. Market- of information to assess this progress and will take a bal- based measures of inflation compensation have declined anced approach to the two goals. Even after employment substantially in recent months. However, survey-based and inflation are near the objectives, the Committee may measures of longer-term inflation expectations have re- temporarily need to keep the target federal funds rate below mained stable. Inflation will probably fall more in coming normal levels in order to achieve the dual mandate. months before rebounding as the labor market improves and transitory influences dissipate. ASSET HOLDINGS • CURRENT ACTIVITY: The Committee will continue re- POLICY DECISION investing principal payments from agency debt and agency The Committee determined that its outlook for employment mortgage-backed securities in agency mortgage-backed se- and inflation over the medium term, coupled with stable sur- curities. The Committee will continue rolling over matur- vey-based measures of longer-run inflation expectations, jus- ing Treasury securities at auction. tifies maintaining the current stance of monetary policy. 22 The Region ENDNOTES 1 The metaphor of roadmaps and destinations is inspired by Andrew Levin’s use of global positioning system-based devices for generating driving directions as a metaphor for monetary policy communications in remarks at the 2014 Bank of Canada Annual Research Conference. But where Levin called for more attention to turn-by-turn directions, this essay emphasizes ultimate outcomes. 2 See Stein (2014). 3 For a contrasting perspective, see Stein (1989). 4 See, for example, Yellen (2013). 5 See Yellen (2013) for more on this point. 6 The Committee did leave open the possibility that it would raise interest rates before unemployment fell to 6.5 percent if inflation was projected to be unduly high or inflation expectations became unanchored. 7 See Bullard (2012) and Federal Open Market Committee (2012). One participant, Federal Reserve Bank of Philadelphia President Charles Plosser, later called for the threshold to be converted to a trigger; see Plosser (2013). 8 The nominal interest rate is the rate a borrower pays a lender; it is not adjusted for inflation. 9 See Benhabib, Schmitt-Grohé, and Uribe (2002) and Cochrane (2015). 10 See Kocherlakota (2014). 11 See Powell (2013). 12 See Kydland and Prescott (1977). 13 The terms refer to the Oracle of Delphi, a priestess renowned for her prophesies, and to the Greek king Odysseus, who had himself tied to the mast of his ship so he could resist the temptation of the sirens’ song. 14 Because the experimental statement is designed to reflect the FOMC’s actual policy decision in January 2015, it does not necessarily reflect the views of Kocherlakota, who is not a voting member of the FOMC in 2015. 15 See Draghi (2012). 16 But the ECB’s recent experience also shows the limits of communicating about the destination. ECB officials have said repeatedly that they are aiming for inflation close to 2 percent. Nonetheless, both the inflation rate and market-based measures of inflation expectations slid significantly in the eurozone in 2014. Communication about a destination will persuade the public to expect that destination only if the central bank also shows by its other actions that it will indeed do what it takes to get there. 17 See Kocherlakota (2013). 18 Witness the current academic debate about “secular stagnation,” the possibility that the economy’s long-run growth rate will be much lower than in the past. (See Teulings and Baldwin 2014.) Such stagnation, to the extent it occurs, will tend to require lower interest rates for any given level of inflation and employment. But with little agreement among leading experts about whether secular stagnation is occurring, it will be challenging for the public to infer the meaning of any particular interest rate choice by the FOMC: Does it signal a change in the Committee’s assessment of the risks of secular stagnation, a change in the Committee’s desired paths for inflation and employment, or some other change? 23 The Region REFERENCES Benhabib, Jess, Stephanie Schmitt-Grohé, and Martin Uribe. 2002. “Avoiding Liquidity Traps.” Journal of Political Economy 110 (3): 535-63. Bullard, James. 2012. “Making Sense of Thresholds, Triggers, Twists, and Timelines.” Presentation to 147th Annual Meeting of the Little Rock Regional Chamber of Commerce, Little Rock, Ark., Dec. 3. Campbell, Jeffrey R., Charles L. Evans, Jonas D.M. Fisher, and Alejandro Justiniano. 2012. “Macroeconomic Effects of Federal Reserve Forward Guidance.” Brookings Papers on Economic Activity 44 (1): 1-54. Cochrane, John H. 2015. “The New-Keynesian Liquidity Trap.” Manuscript, University of Chicago. Draghi, Mario. 2012. Speech at the Global Investment Conference, London, England, July 26. Federal Open Market Committee. 2012. “Minutes of the Federal Open Market Committee, Dec. 11-12, 2012.” Hachem, Kinda, and Jing Cynthia Wu. 2014. “Inflation Announcements and Social Dynamics.” Working Paper 20161, National Bureau of Economic Research. Kocherlakota, Narayana R. 2013. “A Time of Testing.” Speech to the Rotary Club of Houghton, Mich., Sept. 26. Kocherlakota, Narayana R. 2014. “On the Objectives of Monetary Policy.” Speech to the Economic Club of Marquette County, Marquette, Mich., Sept. 22. Kydland, Finn E., and Edward C. Prescott. 1977. “Rules Rather than Discretion: The Inconsistency of Optimal Plans.” Journal of Political Economy 85 (3): 473-92. Orphanides, Athanasios, and John C. Williams. 2004. “Imperfect Knowledge, Inflation Expectations, and Monetary Policy.” In Ben S. Bernanke and Michael Woodford, eds., The Inflation-Targeting Debate. Chicago: University of Chicago Press. Plosser, Charles I. 2013. “Assessing Monetary Policy.” Speech to the Global Interdependence Center’s Fifth Annual Rocky Mountain Economic Summit, July 12. Powell, Jerome H. 2013. “Communications Challenges and Quantitative Easing.” Speech at the 2013 Institute of International Finance Annual Membership Meeting, Washington, D.C., Oct. 11. Stein, Jeremy C. 1989. “A Theory of Imprecise Policy Announcements.” American Economic Review 79 (1): 32-42. Stein, Jeremy C. 2014. “Challenges for Monetary Policy Communication.” Speech to the Money Marketeers of New York University, New York, N.Y., May 6. Teulings, Coen, and Richard Baldwin, eds. 2014. Secular Stagnation: Facts, Causes and Cures. London: Centre for Economic Policy Research. Yellen, Janet. 2013. “Communication in Monetary Policy.” Speech to the Society of American Business Editors and Writers 50th Anniversary Conference, Washington, D.C., April 4. 24 J OE PACZKOWSKI P HOTOGRAPHY 2014 F E DE RA L R E S E RV E BAN K O F M I N N E AP O L I S OPERATIONS REPORT The Region M E SSAGE F ROM T H E F I RST V I C E PRE SI DE NT In 1913, Congress created the Federal Reserve System and gave it the mission to provide the United States with a safer, more flexible, and more stable monetary and financial system. As part of the new Federal Reserve System, the Federal Reserve Bank of Minneapolis opened for business in 1914 in leased space in the Minnesota Loan and Trust building with a total staff of eight employees. The subsequent 100 years has been a period of remarkable growth and change for our country and economy. Over this time, the Federal Reserve has also grown and changed as Congress has revised and expanded its responsibilities. But despite the enormous differences between the situation today and that of 100 years ago, the Federal Reserve is connected to its past through its focus on fulfilling its mission and an unwavering commitment to always act in the public interest. At the Federal Reserve Bank of Minneapolis, we work hard every day to put our core values into practice as we strive to contribute to the System’s fulfillment of its mission to foster the stability, integrity, and efficiency of the nation’s monetary, financial, and payments systems. We will begin 2015 with a staff of about 1,100 and an operating budget of a little over $200 million. At least as significant as the growth in the size of the Bank has been the increase in the diversity of our activities and our staff. Given that the Bank’s responsibilities include operational, supervisory, research, and support functions, the employees of the Bank represent a rich and diverse tapestry of backgrounds, skills, and points of view. To ensure our continuing success in the face of change, we must be able to fully utilize our diverse skills and perspectives. It is for this reason that the Bank has been working hard to foster a culture of inclusion. Research shows that diverse teams make better decisions, but only if they operate in a context of inclusiveness and trust. In terms of its operating results, the Bank had a strong year in 2014. We achieved our strategic objectives and our operational metrics. Our expenses were below budget, and we had no significant compliance issues. The accompanying “2014 by the Numbers” highlights the scope of some of the Bank’s operations. In a variety of areas, such as the FedACH, the 28 1 2014 BY THE NUMBERS IN 2014 THE FEDERAL RESERVE BANK OF MINNEAPOLIS PROCESSED n 13.4 billion ACH (Automated Clearing House) payments worth approximately $24.8 trillion. FedACH is a nationwide system, developed and operated by Minneapolis staff on behalf of the entire Federal Reserve System, which provides the electronic exchange of debits and credits. n $11.5 billion of currency deposits from financial institutions, destroyed $5.9 billion of currency not fit for circulation, and shipped $13.4 billion of currency to financial institutions. n 132,000 transactions for the 50 million investors who hold $176 billion in U.S. Savings Bonds and answered 408,000 calls and written inquiries from investors as the Treasury Retail Securities site for the Federal Reserve System. n 218,000 customer support calls and issued 51,000 credentials for Federal Reserve payment and information services as one of two national Customer Contact Centers. n 296,600 calls and created 321,900 tickets by the National Service Desk; Minneapolis is one of two sites that provide frontline IT support for the Federal Reserve System. 29 1 The Region Customer Contact Center, and the National Service Desk, we have operational responsibilities that support the System more broadly. In a similar vein, as the Federal Reserve Treasury Retail Securities site, we support the Bureau of the Public Debt’s retail program by servicing electronic and paper U.S. Savings Bonds and Treasury marketable securities. Managing these consolidated operational responsibilities requires effective coordination and collaboration with numerous stakeholders across the System and beyond. In 2014, we met all of our supervision and regulation mandates and conducted a robust industry outreach program. In the policy arena, our research staff showcased their scholarship through numerous publications and conference presentations. In addition, Bank officers and staff made material contributions to the development of various System supervisory policies. Effective outreach efforts across the Ninth District allow us to maximize the benefits afforded by the regional structure of the Federal Reserve. Last year, we continued to work with communities, nonprofit organizations, lenders, educators, and others in the district and across the nation to encourage financial and economic literacy, address housing problems, promote equal access to credit, and advance economic and community development. The Bank’s Office of Minority and Women Inclusion established under Section 342 of the Dodd-Frank Act continued its work to ensure equal opportunity and racial, ethnic, and gender diversity in our workforce and senior management and the participation of minority- and women-owned businesses in our procurement activities. These efforts reinforce the Bank’s longstanding and ongoing commitment to diversity and inclusion in our workforce and suppliers. As we look to the future, we will continue to be guided by a focus on fulfilling our mission and an unwavering commitment to always act in the public interest. James M. Lyon First Vice President 30 1 2014 FINANCIAL STATEMENTS FEDERAL RESERVE BANK OF MINNEAPOLIS federalreserve.gov/monetarypolicy/files/BSTMinneapolisfinstmt2014.pdf federalreserve.gov/monetarypolicy/bst_fedfinancials.htm AUDITOR INDEPENDENCE The Federal Reserve Board engaged Deloitte & Touche LLP (D&T) to audit the 2014 combined and individual financial statements of the Reserve Banks and Maiden Lane LLC. 1 In 2014, D&T also conducted audits of internal controls over financial reporting for each of the Reserve Banks. Fees for D&T’s services totaled $7 million, of which $0.4 million was for the audit of Maiden Lane LLC. To ensure auditor independence, the Board requires that D&T be independent in all matters relating to the audits. Specifically, D&T may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making management decisions on behalf of the Reserve Banks, or in any other way impairing its audit independence. In 2014, the Bank did not engage D&T for any non-audit services. 1 In addition, D&T audited the Office of Employee Benefits of the Federal Reserve System (OEB), the Retirement Plan for Employees of the Federal Reserve System (System Plan), and the Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The System Plan and the Thrift Plan provide retirement benefits to employees of the Board, the Federal Reserve Banks, the OEB, and the Consumer Financial Protection Bureau. 31 J O E PACZKOWSKI P HOTO GRAP HY 2014 F E DE RA L R E S E RV E BAN K O F M I N N E AP O L I S DIRECTORS ADVISORY COUNCILS SENIOR MANAGEMENT OFFICERS COMMUNITY DEPOSITORY INSTITUTIONS ADVISORY COUNCIL RICHARD ODENTHAL STEVEN GROOMS BRIAN JOHNSON DAVID WILLIAMS CRYSTAL HATCHER GREG BORMANN LORA BENRUD RAYMOND SMITH KEVIN MAYER BRIAN JOHNSON (CHAIR) CEO CHOICE FINANCIAL GRAND FORKS, NORTH DAKOTA STEVEN GROOMS CEO 1ST LIBERTY FEDERAL CREDIT UNION GREAT FALLS, MONTANA RICHARD ODENTHAL PRESIDENT CENTRAL MINNESOTA CREDIT UNION MELROSE, MINNESOTA LORA BENRUD CEO WESTCONSIN CREDIT UNION MENOMONIE, WISCONSIN ERIC HARDMEYER NOT PICTURED PRESIDENT AND CEO BANK OF NORTH DAKOTA BISMARCK, NORTH DAKOTA RAYMOND SMITH PRESIDENT AND CEO FIRST NATIONAL BANK IN PHILIP PHILIP, SOUTH DAKOTA GREG BORMANN PRESIDENT AND CEO FARMERS STATE BANK STICKNEY, SOUTH DAKOTA CRYSTAL HATCHER SENIOR VICE PRESIDENT VENTURE BANK GOLDEN VALLEY, MINNESOTA DAVID WILLIAMS PRESIDENT AND CEO UPPER PENINSULA STATE BANK ESCANABA, MICHIGAN MARK BRAGELMAN NOT PICTURED PRESIDENT LIBERTY SAVINGS BANK ST. CLOUD, MINNESOTA KEVIN MAYER CEO RICHLAND FEDERAL CREDIT UNION SIDNEY, MONTANA NI E DOR F V I SUALS 34 TWIN CITIES ADVISORY COUNCIL SCOTT CRUMP DARIN LYNCH JEROME GERBER DALE ANDERSEN SARAH CARUSO LEM AMEN TERRY NELSON GARY LEE LEM AMEN (CHAIR) PRESIDENT AND CEO VIKING ENGINEERING & DEVELOPMENT FRIDLEY, MINNESOTA JEROME GERBER VICE PRESIDENT-STRATEGIC SOLUTIONS AWARD STAFFING BLOOMINGTON, MINNESOTA DARIN LYNCH PRESIDENT IRISH TITAN MINNEAPOLIS, MINNESOTA DALE ANDERSEN PRESIDENT AND CEO DELKOR SYSTEMS ST. PAUL, MINNESOTA GARY LEE PRESIDENT AND CHIEF EXECUTIVE OFFICER RAHR CORP. SHAKOPEE, MINNESOTA TERRY NELSON SECRETARY TREASURER PAINTERS DISTRICT COUNCIL 82 LITTLE CANADA, MINNESOTA SARAH CARUSO PRESIDENT AND CEO GREATER TWIN CITIES UNITED WAY MINNEAPOLIS, MINNESOTA JOY LINDSAY PRESIDENT STARTEC INVESTMENTS MINNEAPOLIS, MINNESOTA SCOTT CRUMP CEO STRATASYS EDEN PRAIRIE, MINNESOTA 35 RAJIV TANDON NOT PICTURED CHAIRMAN AND CEO ADAYANA MINNEAPOLIS, MINNESOTA JOY LINDSAY GREAT LAKES ADVISORY COUNCIL RUSSELL DERICKSON PAUL BAUER STACEY FOWLER TODD MANDEL ELAINE HANSEN DON MAKI BRIAN HITI (CHAIR) MINING COORDINATOR IRON RANGE RESOURCES AND REHABILITATION BOARD EVELETH, MINNESOTA PAUL BAUER CEO ELLSWORTH CREAMERY COOPERATIVE ELLSWORTH, WISCONSIN JOHN CORDES NOT PICTURED OWNER CORDES CROP INSURANCE COMSTOCK, WISCONSIN BRIAN HITI STACEY FOWLER SENIOR VICE PRESIDENT SCHWAN FOOD COMPANY BLOOMINGTON, MINNESOTA RON KIRSCHT PRESIDENT DONNELLY CUSTOM MANUFACTURING ALEXANDRIA, MINNESOTA ELAINE HANSEN DIRECTOR UMD CENTER FOR ECONOMIC DEVELOPMENT DULUTH, MINNESOTA DON MAKI COMMISSIONER FEDERAL MEDIATION AND CONCILIATION SERVICE HANCOCK, MICHIGAN MELISSA HINKSON NOT PICTURED MANAGER MILL CREEK ASSISTED LIVING AND MEMORY CARE CENTERS MARQUETTE, MICHIGAN TODD MANDEL COMMUNITY DEVELOPMENT DIRECTOR COULEECAP LA CROSSE, WISCONSIN RUSSELL DERICKSON HIGHWATER ETHANOL MINNESOTA SOY BEAN PROCESSORS LAMBERTON, MINNESOTA ra u+ ba r b e r RON KIRSCHT 36 GREAT PLAINS ADVISORY COUNCIL BRETT RIDDLE TOM HEINE PETER HEGG PRAIRIE ROSE SEMINOLE ARLON FRANZ CLARK COLEMAN GLEN CRAWFORD TOM JOHNSON KENT ELLIS BRETT RIDDLE (CHAIR) CEO RIDDLE’S GROUP RAPID CITY, SOUTH DAKOTA ARLON FRANZ OWNER FRANZ CONSTRUCTION SIDNEY, MONTANA JOHN MCDONNELL NOT PICTURED VICE PRESIDENT CIRCLE S SEEDS THREE FORKS, MONTANA CLARK COLEMAN PRESIDENT D.J. COLEMAN BALDWIN, NORTH DAKOTA PETER HEGG CHAIRMAN HEGG COMPANIES SIOUX FALLS, SOUTH DAKOTA PRAIRIE ROSE SEMINOLE STRATEGIC PREVENTION SPECIALIST BOYS AND GIRLS CLUB OF THE THREE AFFILIATED TRIBES NEW TOWN, NORTH DAKOTA GLEN CRAWFORD ABERDEEN, SOUTH DAKOTA TOM HEINE OWNER TOM HEINE CATTLE COMPANY YANKTON, SOUTH DAKOTA KENT ELLIS AURORA ENERGY SOLUTIONS BISMARCK, NORTH DAKOTA TOM JOHNSON PRESIDENT CHANGING TIMES WATERTOWN, SOUTH DAKOTA 37 MINNEAPOLIS BOARD OF DIRECTORS RANDY NEWMAN KENNETH PALMER LAWRENCE SIMKINS HOWARD DAHL MAYKAO HANG CATHERINE KELLY CHRISTINE HAMILTON KENDALL POWELL RANDALL HOGAN CLASS A DIRECTORS CLASS B DIRECTORS CLASS C DIRECTORS (ELECTED BY MEMBER BANKS TO REPRESENT MEMBER BANKS) (ELECTED BY MEMBER BANKS TO REPRESENT THE PUBLIC) (APPOINTED BY THE BOARD OF GOVERNORS TO REPRESENT THE PUBLIC) CATHERINE KELLY PRESIDENT AND CEO MINNESOTA BANK AND TRUST EDINA, MINNESOTA HOWARD DAHL PRESIDENT AND CEO AMITY TECHNOLOGY FARGO, NORTH DAKOTA MAYKAO HANG (DEPUTY CHAIR) PRESIDENT AND CEO AMHERST H. WILDER FOUNDATION ST. PAUL, MINNESOTA RANDY NEWMAN CHAIRMAN AND CEO ALERUS FINANCIAL & ALERUS FINANCIAL CORP. GRAND FORKS, NORTH DAKOTA CHRISTINE HAMILTON MANAGING PARTNER CHRISTIANSEN LAND AND CATTLE KIMBALL, SOUTH DAKOTA RANDALL HOGAN (CHAIR) CHAIRMAN AND CEO PENTAIR MINNEAPOLIS, MINNESOTA KENNETH PALMER CHAIRMAN, PRESIDENT AND CEO RANGE FINANCIAL CORP. & RANGE BANK NEGAUNEE, MICHIGAN LAWRENCE SIMKINS PRESIDENT AND CHAIRMAN WASHINGTON CORPORATIONS MISSOULA, MONTANA KENDALL POWELL CHAIRMAN AND CEO GENERAL MILLS MINNEAPOLIS, MINNESOTA rau+ ba r be r 38 HELENA BRANCH BOARD OF DIRECTORS BARBARA STIFFARM DAVID SOLBERG THOMAS SWENSON MARSHA GOETTING DUANE KUROKAWA MARSHA GOETTING (CHAIR) PROFESSOR AND EXTENSION FAMILY ECONOMICS SPECIALIST MONTANA STATE UNIVERSITY BOZEMAN, MONTANA DUANE KUROKAWA PRESIDENT WESTERN BANK OF WOLF POINT WOLF POINT, MONTANA DAVID SOLBERG (DEPUTY CHAIR) OWNER SEVEN BLACKFOOT RANCH CO. BILLINGS, MONTANA BARBARA STIFFARM EXECUTIVE DIRECTOR OPPORTUNITY LINK HAVRE, MONTANA THOMAS SWENSON PRESIDENT AND CEO BANK OF MONTANA AND BANCORP OF MONTANA HOLDING CO. MISSOULA, MONTANA FEDERAL ADVISORY COUNCIL MEMBER PATRICK DONOVAN PRESIDENT AND CEO BREMER FINANCIAL CORP. ST. PAUL, MINNESOTA 39 2014 SENIOR MANAGEMENT CLAUDIA SWENDSEID NIEL WILLARDSON RON FELDMAN DUANE CARTER NARAYANA KOCHERLAKOTA LINDA GILLIGAN SAM SCHULHOFER-WOHL JIM LYON DOROTHY BRIDGES NARAYANA KOCHERLAKOTA PRESIDENT JIM LYON FIRST VICE PRESIDENT DOROTHY BRIDGES SENIOR VICE PRESIDENT DUANE CARTER SENIOR VICE PRESIDENT, DIRECTOR OF OFFICE OF MINORITY AND WOMEN INCLUSION & EQUAL EMPLOYMENT OPPORTUNITY OFFICER RON FELDMAN EXECUTIVE VICE PRESIDENT & SENIOR POLICY ADVISER LINDA GILLIGAN SENIOR VICE PRESIDENT & GENERAL AUDITOR SAM SCHULHOFER-WOHL SENIOR VICE PRESIDENT & DIRECTOR OF RESEARCH CLAUDIA SWENDSEID SENIOR VICE PRESIDENT NIEL WILLARDSON SENIOR VICE PRESIDENT, GENERAL COUNSEL & CORPORATE SECRETARY DECEMBER 31, 2014 ra u+ ba r be r 40 2014 OFFICERS PETER BAATRUP VICE PRESIDENT, ASSISTANT GENERAL COUNSEL & SYSTEM PRIVACY COORDINATOR KARIN BEARSS VICE PRESIDENT SHERYL BRITSCH VICE PRESIDENT MICHELLE BRUNN VICE PRESIDENT BARBARA COYLE VICE PRESIDENT TIMOTHY DEVANEY VICE PRESIDENT PAUL RIMMEREID VICE PRESIDENT & CHIEF FINANCIAL OFFICER DAVID SCHWIETZ VICE PRESIDENT SHARON SYLVESTER VICE PRESIDENT TERRY FITZGERALD VICE PRESIDENT & SENIOR ECONOMIST CHRISTINE GAFFNEY VICE PRESIDENT MICHAEL GARRETT VICE PRESIDENT KENNETH HEINECKE VICE PRESIDENT JACQUELINE KING VICE PRESIDENT DEBRA KNILANS VICE PRESIDENT BARBARA PFEFFER VICE PRESIDENT MARK RAUZI VICE PRESIDENT AMY KYTONEN ASSISTANT VICE PRESIDENT CHAD LAUBER ASSISTANT VICE PRESIDENT TODD MAKI ASSISTANT VICE PRESIDENT RICHARD TODD VICE PRESIDENT DIANN TOWNSEND VICE PRESIDENT JOHN YANISH VICE PRESIDENT & DEPUTY GENERAL COUNSEL JOSEPH FAHNHORST VICE PRESIDENT DAVID FETTIG VICE PRESIDENT & DIRECTOR OF PUBLIC AFFAIRS ELIZABETH KITTELSON ASSISTANT VICE PRESIDENT HELENE MANN ASSISTANT VICE PRESIDENT FREDERICK MILLER ASSISTANT VICE PRESIDENT LUANNE PEDERSON ASSISTANT VICE PRESIDENT, ASSISTANT GENERAL COUNSEL & ASSISTANT CORPORATE SECRETARY KENNETH BEAUCHEMIN ASSISTANT VICE PRESIDENT & SENIOR ECONOMIST RANDY ST. AUBIN ASSISTANT GENERAL AUDITOR BRADLEY BEYTIEN ASSISTANT VICE PRESIDENT ROBERT SAUVÉ ASSISTANT VICE PRESIDENT JACQUELYN BRUNMEIER ASSISTANT VICE PRESIDENT THOMAS TALLARINI ASSISTANT VICE PRESIDENT & POLICY ADVISER MESUDE CINGILLI ASSISANT VICE PRESIDENT GREGORY CUTSHALL ASSISTANT VICE PRESIDENT MATTHEW DIETTE ASSISTANT VICE PRESIDENT RAMON FLORES ASSISTANT VICE PRESIDENT MICHAEL GROVER ASSISTANT VICE PRESIDENT SCOTT THOMAS-FORSS ASSISTANT VICE PRESIDENT DARIAN VIETZKE ASSISTANT VICE PRESIDENT MARK VUKELICH ASSISTANT VICE PRESIDENT SUSAN WOODROW ASSISTANT VICE PRESIDENT HELENA BRANCH OFFICER DECEMBER 31, 2014 PAMELA HASENBERG ASSISTANT VICE PRESIDENT CHRISTOPHER JOHNSON ASSISTANT VICE PRESIDENT 41