View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

synchronize

The Federal Reserve



B a n k of St. L o u i s

1 999 A n n u a l

Report

C a u s e to o c c u r at t h e s a m e t i m e or r a t e of s p e e d




THE F EDERAL RESERVE RANK OF ST. LOUIS

The F e d e r a l R e s e r v e R a n k of St. Lo ui s is one o f 12 r e g i o n a l R e s e r v e R a n k s ,
w h i c h t o g e t h e r w i t h t he R o a r d o f G o v e r n o r s , ma ke up t he n a t i o n ’ s c e n t r a l b a n k .
The F e d c a r r i e s out U. S. m o n e t a r y p o l i c y , r e g u l a t e s c e r t a i n d e p o s i t o r y i n s t i t u ­
t i o n s , p r o v i d e s w h o l e s a l e - p r i c e d s e r v i c e s to b a n k s and a c t s as f i s c a l a g e n t f o r
t he U. S. T r e a s u r y .

The St. L o u i s Fed s e r v e s the Ei g h t h F e d e r a l R e s e r v e D i s t r i c t ,

w h i c h i n c l u d e s al l o f A r k a n s a s , e a s t e r n M i s s o u r i , s o u t h e r n I n d i a n a , s o u t h e r n
I l l i n o i s , w e s t e r n K e n t u c k y , w e s t e r n T e n n e s s e e and n o r t h e r n M i s s i s s i p p i .
R r a n c h o f f i c e s are l o c a t e d in Li t t l e R o c k , L o u i s v i l l e and M e m p h i s .







T

he front cover of this year's annual report s u g ges ts an am bitio us goal:
better synchron ize the Federal Reserve and the financial markets.

to

Just as trapeze

artists display a mastery of timing and co m m u n ica t io n to achieve an outstand in g

acrobatic feat, the Fed and financial markets could use similar skills to achieve an o u t ­

sta nd in g e c o n o m ic feat.

W h a t w ou ld such a feat require?

Ideally, that the Fed and

the financial markets receive the same information at the same time and interpret it
the same way.

The first part is easy.

For all practical purposes, the markets and the

Fed do receive the same data at the same time.

Deve lo pin g a c o m m o n interpretation,

t h o u g h , is not so easy.
The impa ct of such a synch ron izatio n w ould be significant.

The print, broadcast and

electronic media speculatio n that occurs before each mee ting of the Federal Open
Market C o m m i t t e e ( F O M C ) w o u ld become less intense.

The media w o u ld concentrate

on interpreting the data, rather than on interpreting the Fed.
The decreased news co ve rage w ou ld , however, be the least im portan t c o n s e q u e n c e
of a syn ch ron iz e d financial system.

Most important w o u ld be the impact that closer

s y n ch ron iza tio n w o u ld have on businesses and households.

The markets and the Fed

w o u ld both co ncentra te on the difficult task of u n d e rsta n din g the flo w of information,
with all its inherent uncertainties and am biguitie s.

Because of the difficulty of this

task, the Fed's and the markets' interpretations w ou ld not alw ays be correct, but they
w o u ld be close to one another.

Businesses and household s, therefore, w o u ld not make

mistakes because of their m is u n d ers ta n d in g of the Fed's intentions and interpretations.
In this report, we'll first take stock of the inefficiencies that arise in the present day
w hen the Fed and the markets are operating on different w a v e le n g th s .

We'll then

co nsid er w h a t w e at the St. Louis Fed believe can be done to bring ab o ut greater
s ynchrom city with financial markets.

Finally, we'll look at some of the steps that are

already under w a y to improve synchronicity.






P R E S I D E N T ’ S

M E S S A G E

Th is report was ad apted from two spe ech es d e liv e re d by W illiam Poole:
" Syn ch in g, Not S in kin g , the M arkets" and "C o m m u n ica tin g the S ta n ce of
M onetary Policy." The o p in io n s ex p re sse d here are not n e ce ssa rily those
o f the Federal R eserve System .

T

H

his year's annual report highlights the need for greater synchronicity between the Federal Reserve and financial

markets. By greater synchronicity, I mean a greater understanding of each other's expectations, interpretations and
actions. The Fed has long had a large staff devoted to deepening its understanding of how markets are likely to

respond to monetary policy actions, or lack thereof. Over time, the Fed has also increasingly recognized how important it
is that the markets understand how monetary policy is conducted. After all, for the Fed to understand the market, the Fed
must also understand the market's expectations about monetary policy. Clearly, both the market and the Fed have a prob­
lem if the market's expectations do not match the Fed's intentions.
All the attention to the stance of monetary policy is
perfectly understandable: There's an awful lot of money
at stake in today's financial marketplace. There is,
therefore, an intense— and completely proper— public
interest in correctly understanding the monetary policy­
making process. And since the ones who know the
most are the ones most directly involved in this process,
S U S A N

policy-makers like myself often find people hanging on our

w i l l i a m

S.

E L L I O T T ,

p o o l e

,

C H A I R M A N ,

p r e s i d e n t

a n d

AND
c e o

every word. We policy-makers are the ones responsible for providing as much information as we can. In fact, what is at
stake is more a matter of knowledge than of information. The public needs to understand how and why policy is made,
and not just the specifics of particular policy actions.
While I'm all for the increased communication that greater synchronicity demands, there are limits to what FOMC
members can say. Political accountability and economic efficiency require that the FOMC disclose as much as possible
without damaging the integrity of the decision-making process upon which sound policy depends. If, for example, FOMC
meetings were broadcast live on C-SPAN, the entire nature of the policy deliberations would be changed. Some critically
important issues could not be discussed freely and openly, and others would not be raised at all. While the FOMC's delib­
erations can't be found on cable TV, they are available to the public in transcript form, with a lag of about five years.
The goal for us at the Fed is, I believe, to strike a balance— to communicate as much as we are able as clearly as we can
without sacrificing the candor and completeness that policy-making discussions require. A daunting task, to be sure, but
one that's worthy of our best attempt. This report is dedicated to that goal.




OUR




CURRENT,
Different

views

IMPERFECT
and

different

SYSTEM

interpretations

the

biggest

are

obstacles

W

' hen the Fed and the markets are out of
synch, policy act ions taken by the F e d­

D I F F E R E N T I NFORMATION
The reality is that the markets and the Fed do

eral Open Market C o m m i t t e e can ge ner at e large

not have exactly the same i nf ormati on.

market responses.

inf ormati onal dif ferences are minor, they do exist.

These market responses reflect

While

errors in expectat ions of policy moves, which can

In individual markets, the participants themselves

lead to resource mi sal l ocat ion by i ndi vi dual s and

often have more c ompl et e and timely i nformati on

w
H H

busi nesses alike.

But while c han ge s in policy

direction are not necessarily u nd es i ra b le —
policy o u g h t to c h a n g e if it has drifted off

co ur s e— large fl uctuations

j

in market prices

f o l lo wi n g policy actions

i ndicate that

the markets and the

Fed are not
o pe ra ti ng
on the same
page.

A lack of s y n ­

chroni ci ty can be due to one
of three factors:

either the
market and
the Fed are op er­

ating on the basis
of different i n f o r ­
mation, they have different views about w ha t the
i nformati on means, or they have diff erent views
about the policy objectives.




than the Federal Reserve does.

The Fed attempts

to c omp ens at e for its ma rk et - by -m ar ke t d i s a d v a n ­
tage by carefully a na ly z in g statistical i nformati on
and by co ll ecti ng as much anecdotal informati on
about markets as possible t hr ough its cont act s
with business and labor leaders, fi nancial analysts
and many others.
When it comes to agg rega te information, however,
the Federal Reserve likely has some i nf ormati onal
a dv an ta g e over market participants.

The Federal

Reserve is one of the l argest and most skillful data
collection and processing orga ni zat ion s in the world.
While everyone receives the raw d at a— such as the
e mpl oyment report— at about the same time, the
Fed's army of economists is no doubt able to extract
additional i nformation from the available data.
What is the i mpl ic ati on of the Fed's i nf orma ti ona l
a d v a nt a g e on b ig - pi c tu r e data?

The Fed will some-

INSIDE AN FOMC MEETING
T h e f o c a l p o i n t o f e v e r y F O M C m e e t i n g is t h e f i n a l v o t e o n t h e i n t e n d e d f e d e r a l f u n d s
r at e t a r g e t , w h i c h o c c u r s at t h e m e e t i n g ' s e n d .

To r e a c h t h i s d e c i s i o n , c o m m i t t e e m e m b e r s

hear staf f b r ie f i n g s , e x a m in e data that have arrive d since the last m e e tin g and de lib e rate
a b o u t the a p p ro p r ia te m o n etary policy stance.
Before every FOMC meeting, Board staff and Reserve Bank staff brief the governors and Bank presidents
on economic news since the last meeting.

These briefings differ among Reserve Banks, depending on each

bank's traditions and each bank president's background.

Every briefing, however,

includes a discussion of what the incoming news implies for the mone­
tary policy stance. The Board staff prepares and circulates regular
briefings and, before each FOMC meeting, the Greenbook and the
Bluebook. The Greenbook contains the economic forecast for
the next year or two; the Bluebook includes a summary of
open market operations and financial market developments,
as well as a discussion of policy options.
FOMC meetings usually begin at 9 a.m. on a Tuesday
morning with presentations to the committee from the inter­
national and open market desks at the New York Fed. After
a discussion period, Board staff members
present the key elements in the Green­
book forecast.

Committee members then

offer their views about the state of the
economy and whether they think the incoming news
has shifted their opinions about the appropriate monetary policy stance.

Of course,

FOMC members may have different interpretations of the incoming data flow and the
appropriate policy responses.

In fact, the policy implications of a particular event are

rarely perfectly clear. Although economic theory provides tremendous guidance, it does not
provide calculations out to the second decimal place.
action is unclear.

Indeed, sometimes even the appropriate direction of policy

Nevertheless, it is insightful to think about policy as if there is some correct policy response to

each new piece of information that comes along, and that the aim of the central bank is to dial in that response
in a timely fashion.
After this first discussion round, a staff member who helped prepare the Bluebook provides a briefing on f inan­
cial markets, the monetary aggregates and policy options.
policy stance in a second go-around.

Committee members then state their views about the

The committee often discusses at length what to say publicly about the

probable, or possible, future policy direction.

The aim is always to determine the most constructive thing to say

to make policy more effective and not to confuse— even inadvertently— the markets.
the key decision:



the fed funds rate target.

Finally, a vote is taken on

times act or not act on the basis of this a d v a n ­
tage, taki ng the markets by surprise.

Under normal circumstances— meaning that
there are no special factors upsetting financial
markets— the committee faces four types of si t ­

Such

cases probably explain many routine, relatively
small, market reactions to FOMC policy actions.

uations, reflecting different combinations of i nfl a­
tion and economic outcomes.

Suppose that both

inflation and output have come in above expecta­

The bottom line on i nformati on about the e c o n ­
omy is that differences in the market's and the

tions and are projected to continue that way over
the short term.

In such a situation, no one will

be calling for a lower fed funds rate target.

But

Fed's i nformati on sets do exist, but they are a
minor issue.

even in this case, members will differ in their
projections and the certainty with which they are
held, so typically there will be some sentiment for

D I F F E RE NT VIEWS ABOUT WHAT

raising the target and some for awaiting further

THE I NFORMATION MEANS

developments.

The case in which both inflation

An ot he r way the markets and the Fed can

and real growth have come in below expectations
is parallel:

No one will want to raise the target.

The discussion will revolve around whether to
lower the fed funds rate target at the meeting,
or wait for further information. The difficult

be out of step is in how they interpret the
same informati on.

For example, suppose that

the Fed t hi nks econ omi c condi ti ons are s o f t e n ­

cases are those in which inflation comes in above

ing and that lower interest rates are a p p r o­

expectations, while output comes in below, or

priate.

vice versa.

time, it is usually because economists have mis­
judged the economy's underlying growth poten­
tial.

Believing that only modest stimulus is

If such situations go on for a long

In the 1 990s, for example, inflation has,

required, the Fed lowers the intended, or tar­
get, federal f unds rate by one-quar ter of a
percentage point.

The market, however, might

on average, come in
expectations, while

conc lude that the cut is the first of several.

the real economy

Based on this belief, the market bids longer-

has surprised
almost everyone
on the upside.




term rates, i ncludi ng the mo rt ga g e rate, down
by, say, half of a per cent age point.

The Fed

f inds that the stimul us to econ omi c activity is
greater than i ntended, and, in a f ew months,

it reverses the original rate cut.

Longer-term i nter­

tive time frames.

C o nf u si o n may arise, however,

est rates rise, and the market is tho rou gh ly c o n ­

because the Fed does not have a speci fic inflation

fused about the Fed's intentions.

objective.

A g ai n , purely hypothetically, assume the market

The objective is that i nflation should

be low and steady, but market part icipant s are

interprets the Fed's initial cut in the intended fed

left guessi ng as to exactly what level or range the

f unds rate as temporary.

In this case, longer-term

Fed regards as a ccept able at a given point in time.

The Fed discovers that

When it comes to e co n om ic gr ow th , however,

rates move little, if at all.

it has not provided e nough stimulus to the e conomy

the Fed is unable to set a speci fic o bj ect i ve — say,

and, in a few months, cuts the federal f unds rate

3 percent.

agai n.

output near its potential.

Longer-term interest rates eventually fall,

but valuabl e months have been lost.
In both examples, the lack of synchronicity

Here, the Fed can only attempt to keep
The growth of potential

is determined by labor force growth and productivity
growth, both of which are beyond the Fed's control.

between the markets and the Fed has resulted in

Because potential gr owth is not a Fed target, it

ineffi cienci es that adversely affect the economy.

is probably not wise for the Fed to e mp ha si z e a
specific numerical esti mate of potential growth.

D I F F E R E N T VIEWS ABOUT

Indeed, different pol ic y-ma ker s have different

POLICY OBJECTIVES

estimates of potential gr owth.

A final way the markets and the Fed can be out of

Nevertheless, Fed

officials have helped to s t rengt hen publ ic u n de r ­

synch is in the different views they have about the

s tandi ng of these important issues by of feri ng

prevailing policy objectives.

analyses of e mp loymen t and product ivi ty growth.

one of three areas:

This conf usi on occurs in

in the Fed's objectives for i nf l a­

Uncertainty about which of the Fed's objectives—

tion, in its objectives for economi c growth or in its

inflation or economic g r o w t h — is most important at

percepti ons of the interplay between the two.

any given time adds to the co nf u si o n a bout policy

When it comes to infl ation, the Fed has the

objectives.

For example, if ou tpu t gr ows more rap­

ability to choose an objective from a wide range of

idly than e xp ec te d — as we' ve seen during the last

options, i n c lu d i ng alternative indexes and a l t e r n a ­

four years— the public cannot be sure whether




the Fed will raise the fed funds target to prevent
inflation or whether the Fed will raise its forecast
of the growth in Gross Domestic Product (GDP).
In 1999, the Fed both a c k n o w l e d g e d the increase
in labor productivity g r o w t h — s u g ge s ti n g that
perhaps the FOMC's out put objective had been
raised— and raised the fed f unds rate target.

T

■ he gai ns to the

In any of the three cases, the lack of clarity
about policy objecti ves can lead to inef fi ciency

e c on omy of a s us t a i ned

and a lack of synchronicity.
Our current system, then, is ch arac te ri zed by

Fed poli cy to f os t er l ow

incomplete sy n ch r on iz at io n of the Fed and the
markets.

The i nc omp le te nes s reflects, to a small

degree, diff erences in i nformati on.

i nf l at i on are mani fest .

Different

interpretations of i nf orma ti on and different
views on policy objecti ves are more i mportant.

The task r e ma i ni ng

The next section of this report descri bes the
St. Louis Fed's proposal for ad dres si ng both of

is for the Fed to make

these reasons for i nc omp le te s yn ch ron iz at io n.




its i nf l at i on obj e ct i ve

more precise.




O

ne important step the Fed could take in pro­

index.

moting greater synchronicity between itself

provide a benchmark that would help put the cur­

An explicit multi-year objective would

and the markets is to clarify its long-term policy

rent policy situation in a longer-term perspective.

objective. Al th ou gh there has been a growing c o n ­

This is quite unlike the current situation in which

sensus that price stability— a low and steady inflation

each FOMC member has an individual view about

rate— is the primary goal of monetary policy, the

the operational definition of price stability. There

objective remains rather vaguely defined.

is no overall objective that has been adopted to

The Fed

also— as much as possible given the price stability

represent the consensus view.

goal— acts to stabilize the empl oyment and output

members may define price stability as 0 percent

levels. While these goals may appear to be c onf l i ct ­

inflation, based on the GDP chain price index,

ing at a particular moment in time, experience and

some may define it is as 2 percent inflation in the

developments in macroeconomi c theory have taught

Consumer Price Index (CPI), and still others may

us that the trade-off between empl oyment and infla­

not have a precisely defined view.

tion is temporary at best.

bers are likely to differ in their assessments about

Indeed, attempts to lower

unemployment by al lowi ng inflation to rise have

For example, some

Also, mem­

the probability of rising inflation or a recession.
Individual members form their own views of the
objectives and the current state of the economy

research at the Federal Reserve Bank

when deciding how to vote at FOMC meetings.

of St. Louis shows that, even if there were a short-

The nature of the committee process means that

run trade-off between inflation and output, the

the FOMC's objectives— as a body— are not clearly

adoption of an operational goal for long-term price

defined.

stability would e nhance the FOMC's ability to st abi ­

the committee can lead to subtle changes in the

lize these measures.

actual monetary policy objectives.

What do we mean by an opera ti on al goal for
long-term price stability?

We mean choosi ng a spe­

cific number or a narrow range for a particular price




Furthermore, changes in the makeup of

To see why clarification of the long-term o b j e c ­
tive is important for bri ngi ng about improved s yn ­
chronicity, consider the information problem that

THE FED FUNDS FUTURES MARKET:
S Y N C H E D WITH THE FOMC?
No one, i n c l u d i n g the Fed, knows what ma r k e t i n t e r e s t r at es wi l l be.
i n h e r e n t u n c e r t a i n t y , ma r k e t s have e me r g e d .

In the f a c e of such

One of t hes e is the f e d e r a l f u n d s f u t u r e s mar k e t .

Federal funds futures are contracts traded on the Chicago Board of Trade. The dollar amounts traded are large—
the trading unit is $5 million. All contracts mature on the last business day of a future month. The price at which
a contract trades depends on market participants' expectations of the daily average federal funds rate in the matu­
rity month. The higher the funds rate at maturity, the lower the final value of the contract.

Before maturity, the

contract price fluctuates as market
THE MARKET FAILS TO ANTI CIPATE POLI CY ACTI ONS

participants receive new information.
Purchased contracts can only be closed
out prior to maturity by selling an off­
setting contract of equal trading units
and maturity at the prevailing market
price of the contract, and vice versa.

>
_

The market rate for fed funds

Q
J
Q
.
*
->

futures incorporates market partici­

C

0
1
u
1
0
)
Q
_

pants' estimate of future FOMC policy
decisions. At each FOMC meeting, the
committee issues a directive, which
specifies a target for the federal funds
rate, to the New York Fed's open mar­
ket desk. The "Desk" then conducts
open market operations— buys and

5.75
5.50
September 1994
Federal Funds
Futures Rate

5.25

*
0
2

5.00

0
)

4.75

0
1

the actual federal funds rate in close

lished by the FOMC. The Desk is gen­
erally quite skilled at minimizing the

C

0
1
u

sells government securities— to keep

proximity to the target rate estab­

V

i_

CL

Aug. 16, 1994
FOMC Meeting

differences between the actual federal
4.50

funds rate and the target specified by

C
L

FOMC Intended
Federal Funds Rate

4.25
4.00

the FOMC.

In fact, on a monthly aver­

age basis, the actual fed funds rate
is very close to the target set by the

3.75

FOMC. Thus, the price at which fed­
NOTE: The data cover the period 30 days before to 30 days after the
date of the FOMC meeting.
SOURCE: Future Yields, The Wall Street Journal; Intended Federal
Funds Rate, Board of Governors




eral funds futures trade reflects mar­
ket participants' best guess as to what
the FOMC will do with the federal
funds rate target in future months.

the market would have to solve when the
policy objective is explicit and policy is " p e r ­
fect."

Policy would be perfect if the markets

Market participants sometimes anticipate the
and the Fed had a common understanding of

FOMC's action on the fed funds target correctly,
and sometimes not. An example of the latter
occurred in July 1 992.

three things:

the interpretation of new information and the

ing, the FOMC announced that it reduced the f ed­
eral funds rate target from 3.75 percent to 3.25
percent.

the monetary policy objectives,

At its July 1, 1 992, meet­

policy actions required to achieve the ob je c­

Before the meeting, the August funds
tives in light of the new information.

rate futures contract traded somewhat below
the old target level of 3.75 percent.

As the top

In these

circumstances, securities prices, for example,

chart shows, when the change in the target was

would respond to the new information itself

announced, the yield on the July futures contract
and not to the Fed's policy decisions.

quickly dropped down near the new target level.
In this case, it appears that the change in the fed

Each

policy decision would be an implication of

funds target was not widely anticipated, taking
the new information.

market participants by surprise.
At other times, however, the market is deadon in its anticipation of FOMC actions.

the state of the economy is inherently u npr e­

In August
dictable and, therefore, naturally takes the

1994, for example, market participants appeared
to anticipate the FOMC decision well in advance
of the committee's meeting.

markets by surprise.

At the Aug. 1 6, 1994,

Some surprises would be

larger; most would be small.

meeting, the FOMC announced that it increased

But, ideally, Fed

policy actions would not be surprises at all;

the fed funds rate target from 4.25 to 4.75 per­
cent.

New information on

Before the meeting, the September funds

given the new information, the market would

rate futures contract traded slightly below the
new target level of 4.75 percent.

know what policy action to expect.

As the bottom

chart shows, when the change in the target was

Even if perfect policy existed, we would still

announced, the yield on the September futures
contract changed only slightly.

have much disagreement about how the world

In this case, it

appears that the change in the target was widely

works.

anticipated as early as mid-July, and market par­

Markets would not know for sure how a

given piece of news would affect the short-run

ticipants were not surprised by the FOMC's action.

path of inflation, or whether it would trigger

If the Fed and the markets were better synchro­
nized, we'd see participants in the fed funds futures

a change in the Fed's policy stance.

Opinions

market make successful predictions like this more
about these short-run matters would differ, but

often than not.




I I

markets would kn ow the long-term price objective,

condi ti ons would normally require an increase in

and the objective would not ch an ge because of that

the fed f unds rate target.

news, or the Fed's short-term reaction to it.

FOMC did not raise the fed f u nd s rate target in
1996, the interest rate on one -yea r Treasury bills

Now suppose that the price stability objective is
vaguely stated, as it is now.

But even t ho u gh the

rose a full per cent age point in the first half of the

Market participants

do not kn ow whet her price stability means 3 per­

year.

A l t h o u g h the strong e c on o mi c gr owt h has

cent i nflation in the CPI, as we experi enced from

conti nued into 20 00, the 1996 increase in inflation

1991 to 1996, 2 percent inflation as we have seen

proved to be only temporary.
If the price stability objective were more specific

over the last three years, or 0 percent i nf l at io n —
after a l low in g for measurement errors in price

and credible, the Fed wou ld also not have to raise

i ndexes— as representatives of this bank have rec­

the fed funds rate target as much to l ower i nfl a­

ommended.

tion expectations.

Wi th ou t a precise l ong-term objective,

Wh at the Fed wou ld have to

markets not only have to f igure out how incoming

do with the t arget to achi eve its infl ation o b j e c - y

informati on affects the short-run infl ation path and

tive depends both on how st ron gl y people believe

the probability of future FOMC policy acti ons, they

the Fed is commi tt ed to price stabil ity and on what

also must decide how all of this will affect the

sort of e con om ic d is tu rb an ce s occur.

long-t er m objective.

disturbances, such as d r ou g ht s and oil price shocks,

If people believe the Fed is commi tted to price

E conomi c

will cause t emporary f l u c tu a ti o ns in price indexes.

stability, market interest rates would do much of

Pol icy-makers ca nn ot prevent such f l uc tu at io ns , nor

the st ab il i za ti on work.

should they wa nt to.

If the public truly believes

Wh at they shoul d do is pre­

that the Fed wou ld do whatev er is necessary to

vent these t emporary events from c h a n g i n g people's

achieve its l on g- ru n objective in response to a

longer-term i nflation e xp ec tat io ns .

pot ent ial ly i nf lat iona ry shock, the Fed may not have

cian whose first responsi bil ity is to do no harm,

to do a n yt hi n g or, at least, not anythi ng quickly.

the FOMC shoul d avoid d e s ta b il iz i ng the economy

D uri ng 1996, for exampl e, news about e co n om ic

by al l owi ng erratic c ha n g e s in expected inflation.

p er f or ma n ce and i nfl ation exceeded market part ic i ­

A l t h o u g h the Fed does not have direct control over

pants' e xp ec tat io ns .

m o n th - t o- m on t h c h a n g e s in the i nfl ation rate, it




Such a c h an ge in e co n om ic

A

Like the physi­

could help stabilize and s yn ch ron ize the process
by choosing a l ong-run infl ation target.
A central bank that has credi bi lity in m a i n t a i n ­
ing long-term price stabil ity also has more f l e x i ­
bility in dealing with short-term problems, such
as financial crises and recessions.

Cred ibi l it y is

an asset that pays high divi dends.

When the

Fed— responding to f i nan ci al d is rupti ons f o l l o w ­
ing the crisis in the Russian bond m a rk et — l o w ­

L

ike the physi ci an

wh o s e fi rst r e s pon s i b i l i t y

ered the fed f u nd s t ar ge t in the fall of 1998, the
markets' exp ec ta ti ons of co nt i nu e d low i nflation
remained rock solid.

In a not her era, the Fed

is to do no harm, the

might not have lowered the fed fu n ds target in
such a situation for fear that many might have

FOMC s houl d avoi d

interpreted the action as an indi cat ion that the
Fed was s of te ni ng its resolve to control i nflation.

d e s t a b i l i z i n g the

Low inflation and high credi bi lity e nh an ce the
Fed's range of opt ion s in t a ki ng policy acti ons

e c o n o my by a l l o w i n g

in the face of unusual ci rc umst an ce s.
The gains to the e c on o my of a sust ai ned Fed
policy to foster low inf lat ion are manifest.

The

erratic c h a n g e s in

task remaining is for the Fed to make its i nflation
objective more precise.




e x pec t ed i nf l at i on.




' ithout clear objecti ves, the task of g e t ­

W

tion about the economy that surprises markets will

ting the markets and the Fed in synch is

typically surprise the FOMC, as well.

ferent considerations have to be f ol ded into policy

the markets on the same page with the Fed.

decisions.

too, does the FOMC's release of information.

enormously difficult, especial ly since so many d i f ­ The track record of FOMC actions also helps put

For exampl e, at any given time, there

So,
Since

might be six i mpor tant c o ns i de r at io n s that point

February 1994, the FOMC has announced changes

toward policy easing and four that point t oward

in the fed funds target the same day that the d ec i ­

policy tig hte ni ng.

sions were made.

The FOMC must w ei gh c o m p e t ­

Six or seven weeks later— a few

ing considerations, a cc o un t for data i nac curac ies

days after the next scheduled meeti ng— the FOMC

and determine w he th er markets have already

then releases the minutes of the previous meeting.

responded to the f low of i nf or mat ion , ma ki ng a

These minutes reveal the topics discussed, s u m ma ­

Fed response unnecessary.

rize views about the state of the economy and
describe the reasons for dissenting votes.

That said, the markets and the Fed have made

The min­

great progress in recent years toward synchronicity.

utes are t horough, which provides an important

Market participants i nc re as in gl y possess a deep

vehicle for keeping the markets and the public

unde rs ta nd in g of monet ary policy.
H

wel l-inf or med about Fed thi nki ng.

In fact,

T hr ough congressi onal testimony, speeches,

much of the time, the Fed and the markets

articles in Fed publ ications and other ways, Fed

are in close a g r ee m en t ab ou t wha t policy

officials make every effort to keep the public

acti ons are required to keep the econ| M
m

\

\»

omy on a steady course.

informed.

Fed policy-

about Fed vagueness, the i nformation flow is, in

makers and market part ic ip an ts also

m V

fact, substantial.

use simil ar theori es and data to




Much of this v agueness is i nher­

ent in the difficulties of deal ing with imperfect

form their shor t-t erm expectations.

A lt ho u gh it is c ommonpl ace to joke

i nformati on.

So, i n c o m in g i n f o r m a ­

A

The accuracy of Fed e conomi c fore-

P O LICY FAILURES: WHEN THE FED AND THE
MARKETS WERE NOT IN SYNCH
The r i se of i n f l a t i o n in the p o s t - Wo r l d War II pe r i od is one of the mos t d r a m a t i c e x a m p l e s of
mo n e t a r y p o l i c y f a i l u r e in U.S. hi st or y.

P o l i c y - m a k e r s a l l o w e d i n f l a t i o n to a c c e l e r a t e to such

a hi gh r at e t hat pol l s of U.S. v o t e r s s howe d i n f l a t i o n to be the No. 1 p r o b l e m in t he c ount r y.
T h r o u g h o u t the 1 9 6 0 s and 1 970s , Fed p o l i c y - m a k e r s and ot her g o v e r n m e n t l e a d e r s s a i d t hey
wer e f i g h t i n g i n f l a t i o n , yet i n f l a t i o n g r e w h i g h e r wi t h each b u s i n e s s c yc l e.

MAJOR P OL I C Y C O R R E C T I O N S C O N F U S E M A R K E T S
'60s low and positive real rates

'80s high real rates

'70s negative real rates

October 19 79 M
Policy Chan g e f 1

2
k.
0
1
CL

/
1
I

■>
*
c

0)
u
1
—

V
Q
.

'

A

jf— l i t " !
l

^

1960

\t\

/ 7 A

x 1

^

\ J \ ^ \

/ V

A

\
1 | \y l, 1 1
1 f
1 1
I
r
K
1 i t 1 i 1 i 1 * J V 1 1 1 A\ ! ,Si1 1, jr i i i! i i i1 i i1 1 l 'i1 l IsT I # I i I iI iT—i—
1 K
\ \ .7 V
Actual Real Rate
of Return
--------

1956

if * X \1

ir

1964

1968

\ 7

1972

Expected Real Rate
of Return
1976

1980

1984

1988

1992

1996

NOTES: The chart shows real interest rates from 1956 to 1999. The actual real rate of return is the yield on the one-year
Treasury bill in January, minus the CPI inflation for that year. The expected real rate of return is the same T-bill yield,
minus the expected inflation as reported in the University of Michigan's Surveys of Consumers for that year.
SOURCE: U.S. Treasury, Bureau of Labor Statistics; University of Michigan, Surveys of Consumers

During the 1960s, there was a long-term rise in both inflation and market interest rates:

Inflation rose from

under 2 percent to about 5 percent, while the one-year Treasury bill rate rose from about 3 percent to 8 percent.
The accompanying chart shows the expected real rate of return and the actual real rate of return on an invest­
ment in a one-year Treasury bill.
inflation.

Such "real" interest rates are a measure of market interest rates, adjusted for

When the expected real rate of return is greater than the actual real rate of return, borrowers

benef i t

at the expense of lenders, and vice versa.
As the chart shows, real interest rates during the '60s were rather low, but generally positive.

In August

1971, the U.S. government adopted a comprehensive package of wage and price controls in an attempt to stem
the rising tide of inflation.

The markets no doubt expected the Fed to go along with the program.

however, allowed rapid money growth to continue.



The Fed,

casts, for example, is limited by the same lack
of knowl ed ge in the discipline of economics
that affects everyone else's forecasts.

While the price controls caused a temporary
lull in the reported inflation rate, by 1973, severe

In the Fed, and certainly in this Reserve Bank,

shortages in many markets brought both an end to
interest in disclosure issues is high. While these

most controls and a rapid acceleration of inflation.
As the chart shows, real interest rates actually
became negative for much of the 1 970s.

issues are not simple, Fed officials are thinking

People
actively about disclosure issues and are fully

clearly did not expect inflation to be this high.
In both 1977 and 1 978, those who invested in

aware of their importance in helping to bring

Treasury securities lost money after adjusting for
inflation. Those who borrowed money when inter­

about greater synchronization with the markets.

est rates were low— as in the ' 6 0 s — and repaid
What would we expect to see if disclosure

their loans with inflated dollars made out like
bandits.

Lenders took the hit.

Clearly, the mar­

and market understanding were so complete

ket and the Fed were not in synch; market partici ­
that the Federal Reserve and the markets

pants did not know the Fed was going to allow
inflation to rise above 13 percent in 1979.

were synchronized?

The price level would be

On Oct. 6, 1 979, the Fed announced the b egin­
ning of a new resolve to reduce inflation.
market did not believe it.

stable, and the unemployment rate and real

But the

Interest rates remained

GDP growth rate would be relatively stable.

very high despite the sharp fall in inf lat ion— from
We would certainly not expect, however, the

about 13 percent in 1979 to about 4 percent in
1983.

Because financial markets were skeptical

federal f unds rate to remain forever constant

that the Fed really would keep inflation low, real
at an unch an ge d level.

interest rates remained high, compared with his­
torical averages, until the early 1 990s.

Investors

would have to be higher sometimes and lower

who loaned money in 1980 did very well because
inflation did not erode the value of their principal
as they had expected it would.

The fed f unds rate

sometimes to be consistent with the policy

Those who bor­
objectives.

rowed money in 1 980 were dismayed to find very
high real debt burdens.

How would the Fed decide when

and by how much to c ha ng e the federal f unds

Overall, everyone lost during the period from
rate target?

the '60s through the '80s. The gains made during
one decade were generally offset by the losses in

Federal Reserve staff and FOMC

members are cont inual ly exa mi ni ng the f low of

another, and vice versa. And the lack of Fed syn­
i ncoming i nf ormati on on the state of the econ-

chronicity with the markets was partially responsible.




I I

omy and w o rk i n g to decide which policy actions

Everyone should understand that interest rates

may be necessary to keep the economy on the

will not be perfectly stable if the Fed is successful

desired track.

in achi evi ng its goal of low and stable inflation.

Af ter processing the information,

the FOMC would take the appropriate policy action

Market interest rates have fl uc tu a te d substantially

at its next meeti ng.

in recent years, despite the fact that inflation has

The market, sharing the Fed's

analysis, woul d not be surprised by the policy

ch an ge d little.

As e c on omi c news arrives, the Fed

decision, whatever it might be.

must process the i nf ormati on and make the appro­
priate adjust ment s to the federal f unds rate target.

WHEN IT S OK TO BE A FOLLOWER
In recent history, it often seems that the Fed is
merely ratifying market expectations.

Some

The better the market u nde rs t an ds how and why
the Fed reaches its decisions, the better it will be
able to respond to new i nf ormati on in the same

observers cite this " f o l l o w i n g " behavior as evi dence

way the Fed responds to the i nf ormati on .

that the Fed is not exercising proper leadership.

result will be a smoother, and more efficient,

On the contrary, the market sh o u ld be able to pre­

t ransmissi on of monet ary policy c h a n g e s to the

dict what the Fed is going to do; the St. Louis Bank

economy' s product, labor and capi tal markets.

believes this synchronicity is what the Fed should
be striving for.

If monetary policy is to be fully

The

Suppose markets do, in fact, acc ura te ly forecast
decisions at FOMC meeti ngs.

Is that an indication

s uccessf ul, markets must understand the Fed's goals

that the Fed is simply f o l l o w i n g markets and not

and the procedures used to achieve them.

exercising its proper l eadership role?

When

Obviously,

monetary policy has been successful for an extended

this is not the case.

period, it should di sappear from the headlines.

FOMC act ions indi cates Fed succ es s both in design­

A l t h o u g h the market has ga in ed confi den ce in the

ing policies that achi eve social ly a c c ep t ab le goals

Fed to keep infl ation low and steady, we believe

and in c o m m u n i c a t i n g those g o al s to the public.

more can be done:

The ideal env iron men t is one in w hi ch the Fed

The Fed should be more explicit

a b ou t its inf lat ion objective.




Market succ es s in anticipating

and the markets are perfectl y sy n ch r on iz e d.

We at the St. Louis Fed are convi nced
that conti nued progress in achi evi ng greater
synchronicity will make a major cont ri but ion
to ending the s c ou rg es of i nflation and i n fl a ­
tion uncertainty, of unstabl e booms and
damaging busts.




he better the market

u nd e r s t a nd s how and

wh y the Fed reaches its

dec i s i ons , the better it

will be able to r espond

to new i nf or ma t i on in the

same w a y the Fed r es ponds

to the i nf or ma t i on.

S T .

L O U I S

B O A R D

OP

D I R E C T O R S

M I C H A E L A. A L E X A N D E R
Chairman

and

President

First

National

Bank

Mount

Vernon,

Illinois

C H A R L E S W. M U E L L E R

D e p u ty Chairman,
Federal Reserve Bank
o f St. L o u i s
Chairman,

Ameren
St.

President

and

Corp.

Louis,

Mi ssouri

T H O M A S H. J A C O B S E N
Chairman

Firstar

of t h e

Corp.

Milwaukee,

BERT

Board

Wisconsin

GREENWALT

Partner

Greenwalt
Hazen,

Co.

Arkansas

R O B E R T L. J O H N S O N
Chairman

and

Chief

Executive

Officer

Johnson

Bryce

Memphi s,

Tennessee




Inc.

CEO




G A Y L E P. W. J A C K S O N
Managing

Lange,
Global

Mullen

& Bohn

Financial
St.

Director

LLC

Solutions

Louis,

Mi s s our i

L U N S F O R D W. B R I D G E S
President

and

Executive

Metropolitan

Chief

Officer

National

Little

Rock,

Bank

Arkansas

J O S E P H E. G L I E S S N E R J R.
Executive

New

Directions

Director

Housing

Louisville,

Corp.

Kentucky

S U S A N S. E L L I O T T
Chairman, Federal Reserve
B a n k o f St. L o u i s
Chairman

and

Executive

Systems

Officer

Service

Enterprises
St.

Louis,

Chief

Inc.

Mi ssouri

L I T T L E
B O A R D

O F

R O S S M. W H I P P L E

Chairman
Summit

Bank

Arkadelphia,

Arkansas

R A Y M O N D E. S K E L T O N
Chief

Executive

Mercantile

Bank

of A r k a n s a s
Little

Rock,

Officer

N. A.
Arkansas

E V E R E T T T U C K E R I II
Moses

Nosari

Real

Estate

Little

Rock,

Tucker




Arkansas

ROCK
D I R E C T O R S




DIANA

T. H U E T E R

Chairman,

Federal Reserve Bank of
St. L o u i s , L i t t l e R o c k B r a n c h
President

and

Executive

Hueter

Chief

Officer

& Associates

Little

Inc.

Rock, Ar k a ns as

L A W R E N C E A. D A V I S J R.
Chancel l or
University

of A r k a n s a s
at

Pi ne

Pine

Bluff,

Bluff

Arkansas

V I C K M. C R A W L E Y
Plant

Baxter

Manager

Healthcare

Mountain

Ho me ,

Corp.

Arkansas

A. R O G E R S Y A R N E L L II
Pr es i dent
Yarnell

Ice

Cream

Co.

Inc.

Searcy,

Arkansas

L O U I S V I L L E
B O A R D

O F

D I R E C T O R S

E D W I N K. P A G E
Vi ce

President,

External

AP T e c h n o g l a s s
Elizabethtown,

Affairs

Co.

Kentucky

DEBBIE SCOPPECHIO
Chairman
Chief

and

Executive

Creative

Officer

Alliance

Louisville,

Inc.

Kentucky

J. S T E P H E N B A R G E R
Chairman,

Federal Reserve Bank of
St . L o u i s , L o u i s v i l l e B r a n c h
Executive

S e c r e t a r y - Tr e a s u r e r

Kentucky
District

State
Council

Carpenters,
Frankfort,




of

AFL-CIO

Kentucky




ROGER RE YN OLD S
President
Chief

Executive

Reynolds

Off i cer

Coatings

Louisville,

and

LLC

Kentucky

L A R R Y E. D U N I G A N
Chairman
Chief

Holiday

Executive

Offi cer

Management
Evansville,

and

Corp.
Indiana

ORSON OLIVER
Pr es i dent
Mid-America
of

Bank

Louisville

Louisville,

Kentucky

F R A N K J. N I C H O L S
Chairman,

President

Community

and

Financial

Services
Benton,

CEO

Inc.

Kentucky

ME MP H I S
B O A R D

OF

D I R E C T O R S

WAL TER L. MOR RI S JR.
Pr esi dent
H&M

Lumber

West

Helena,

Co.

Inc.

Arkansas

MI KE P. S T U R D I V A N T JR.
Chairman,
Federal Reserve Bank of
St. L o u i s , M e m p h i s B r a n c h
Partner

Due We s t
Glendora,

Mississippi

E. C. N E E L L Y III
Chief

Executive

First

American

Iuk a , Mississippi




Officer

National

Bank




G R E G O R Y M. D U C K E T T
Senior

Vice

President

Corporate

Baptist
Health

and

Counsel

Memorial
Care

Memphis,

Corp.

Tennessee

J A ME S A. E N G L A N D
Chairman,

President

Decatur

and

County

Decaturville,

CEO

Bank

Tennessee

J OHN C. K E L L E Y JR.
President,

Business

Financial

Services

First

Tennessee

Memphis,

Bank

Tennessee

C A R O L G. C R A WL E Y
Senior

Memphis

Vice

President

Area

Chamber

of
Memphis,

Commerce
Tennessee




30

\ i

We w o u l d l i k e t o e x p r e s s o u r d e e p e s t g r a t i t u d e t o t h o s e

m em b ers of the Eighth D istrict boards of d irectors who retired

at t h e e n d o f 1 9 9 9 .

go o u t t o :

Our a p p r e c i a t i o n and b e s t w i s h e s

W. D. G l o v e r a n d V e o P e o p l e s J r . , o f t h e St. L o u i s b o a r d ,

J a n e t M. J o n e s and M a r k S i m m o n s of the L ittle R o c k b o a r d , and




K a t i e S. W i n c h e s t e r o f t h e M e m p h i s b o a r d .




THE

FEDERAL

RESERVE

BANK

FINANCIAL
For

the

years

ended

December

OF

ST.

LOUIS

STATEMENTS
31,

1999

and

1998

MAR C H

3, 2 0 0 0

TO THE B O A R D

OF D I R E C T O R S :

The management of the Federal Reserve Bank of St. Louis (the "Bank") is responsible for the prepara­
tion and fair presentation of the Statement of Financial Condition, Statement of Income, and Statement of
Changes in Capital as of December 31, 1999 (the "Financial Statements"). The Financial Statements have
been prepared in conformity with the accounting principles, policies, and practices established by the Board
of Governors of the Federal Reserve System and as set forth in the Financial Accounting Manual for the
Federal Reserve Banks, and as such, include amounts, some of which are based on judgments and estimates
of management.
The management of the Bank is responsible for maintaining an effective process of internal controls over
financial reporting including the safeguarding of assets as they relate to the Financial Statements. Such
internal controls are designed to provide reasonable assurance to management and to the Board of Directors
regarding the preparation of reliable Financial Statements. This process of internal controls contains self­
monitoring mechanisms, including, but not limited to, divisions of responsibility and a code of conduct.
Once identified, any material deficiencies in the process of internal controls are reported to management,
and appropriate corrective measures are implemented.
Even an effective process of internal controls, no matter how well designed, has inherent limitations,
including the possibility of human error, and therefore can provide only reasonable assurance with respect
to the preparation of reliable financial statements.
The management of the Bank assessed its process of internal controls over financial reporting including
the safeguarding of assets reflected in the Financial Statements, based upon the criteria established in the
"Internal Control— Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this assessment, the management of the Bank believes that the
Bank maintained an effective process of internal controls over financial reporting including the safeguarding
of assets as they relate to the Financial Statements.
Federal Reserve Bank of St. Louis

William Poole, President and Chief Executive Officer
By:

W. LeGrande Rives, First Vice President and Chief Operating Officer




REPORT

OF

INDEPENDENT

ACCOUNTANTS

TO THE B O A R D OF D I R E C T O R S OF T H E
F E D E R A L R E S E R V E B A N K OF ST. L O U I S

We have examined management's assertion that the Federal Reserve Bank of St. Louis ("FRB St. Louis")
maintained effective internal control over financial reporting and the safeguarding of assets as they relate
to the Financial Statements as of December 31, 1999, included in the accompanying Management's Assertion.
Our examination was made in accordance with standards established by the American Institute of Certified
Public Accountants, and accordingly, included obtaining an understanding of the internal control over finan­
cial reporting, testing, and evaluating the design and operating effectiveness of the internal control, and
such other procedures as we considered necessary in the circumstances. We believe that our examination
provides a reasonable basis for our opinion.
Because of inherent limitations in any internal control, misstatements due to error or fraud may occur
and not be detected. Also, projections of any evaluation of the internal control over financial reporting to
future periods are subject to the risk that the internal control may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assertion that the FRB St. Louis maintained effective internal control
over financial reporting and over the safeguarding of assets as they relate to the Financial Statements as
of December 31, 1999, is fairly stated, in all material respects, based upon criteria described in "Internal
Control— Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission.

March 3, 2000
St. Louis, Missouri




r ep o r t

of

i n d e p e n d e n t

a c c o u n t a n t s

TO THE B O A R D OF G O V E R N O R S OF T H E F E D E R A L R E S E R V E S Y S T E M AND
THE B O A R D OF D I R E C T O R S OF T H E F E D E R A L R E S E R V E B A N K OF ST. L O U I S :

We have audited the accompanying statements of condition of The Federal Reserve Bank of St. Louis
(the "Bank") as of December 31, 1999 and 1998, and the related statements of income and changes in
capital for the years then ended. These financial statements are the responsibility of the Bank's manage­
ment. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evi­
dence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the over­
all financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 3, the financial statements were prepared in conformity with the accounting princi­
ples, policies, and practices established by the Board of Governors of The Federal Reserve System. These
principles, policies, and practices, which were designed to meet the specialized accounting and reporting
needs of The Federal Reserve System, are set forth in the "Financial Accounting Manual for Federal Reserve
Banks" and constitute a comprehensive basis of accounting other than accounting principles generally
accepted in the United States.
In our opinion, the financial statements referred to above present fairly, in all material respects, the finan­
cial position of the Bank as of December 31, 1999 and 1998, and results of its operations for the years then
ended, on the basis of accounting described in Note 3.

March 3, 2000
St. Louis, Missouri




FEDERAL

RESERVE

STATEMENTS

BANK

OF S T .

LOUIS

OF C O N D I T I O N

(in mi llion s)

As of December 3 1,
1999

1998

ASSETS

$

337
175
10
471
37
1 5,918
327
160
5,176
55
16

$

358
340
19
516
7
1 6,048
462
1 52
“
51
11

$

Gold certificates
Special drawing rights certificates

22,682

$

17,964

$

21,575

$

14,701

Coin
Items in process of collection
Loans to depository institutions
U S. government and federal agency securities, net
Investments denominated in foreign currencies
Accrued interest receivable
Interdistrict settlement account
Bank premises and equipment, net
Other assets
Total assets

LIABILITIES

AND

CAPITAL

Liabilities:

Federal Reserve notes outstanding, net
Deposits:
Depository institutions
Other deposits
Deferred credit items
Surplus transfer due U.S. Treasury
Interdistrict settlement account
Accrued benefit cost
Other liabilities
Total liabilities

692
4
398
31
1,841
48
7

440
1
272
19
51
8
$

22,366

$

17,722

Capital:
Capital paid-in
Surplus

158
1 58

121
121

Total capital

316

242

Total l iabilities and capital

$

22,682

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




$

17,964

BANK OF ST. LOUIS
STATEMENTS OF INCOME
fed eral r e s e r v e

(in m i l l i o n s )

For the years ended December 31,
1999

1999

Interest i n c om e:
Interest on U.S. g o v e r n m e n t an d f e d e r a l a g e n c y securi ti es

$

917
5
2

$

967
10
1

$

924

$

978

Interest on f o r e i g n c u r r e n c i e s
Interest on l o a n s to d e p o s i t o r y i n s t i t u t i o n s

Total interest income

Other operating income (loss):
Income from services
Reimbursable services to government agencies
Foreign currency gains (losses), net
U.S. government securities gains (losses), net
Other income
Total other operati ng income

42
19
(10)

41
17
44
1
-

(1)
1
$

Operating expenses:
Salaries and other benefits
Occupancy expense
Equipment expense
Assessments by Board of Governors
Other expenses

51

$

103

65
6
7
19
44

70
7
8
19
44

Total operati ng expenses

$

148

$

141

Net income prior to distribution

$

827

$

940

$

9
37
781

S

7

Distribution of net income:
Dividends paid to member banks
Transferred to (from) surplus
Payments to U.S. Treasury as interest on Federal Reserve notes
Payments to U.S. Treasury as required by statute
Total distributi on

“

$

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




(1)
266
668

827

$

940

FEDERAL RESERVE BANK OF ST. LOUIS
STATEMENTS OF CHANGES IN CAPITAL
for the years ended December 31, 1999 and December 31, 1998
(in millions)
Capital
Paid-in

Balance at January 1, 1998
(2.5 million shares)
Net income transferred from surplus

S

Net change in capital stock redeemed
(0.1 million shares)
Balance at December 31, 1998
(2.4 million shares)
Net income transferred to surplus

$

121

122
(1)

$

$

121

249
(1)

(6)
$

242

-

37

37

$

37
-

37

158

The accom panying notes are an integral part of these financial statements.




$

(6)

Net change in capital stock issued
(0.8 million shares)
Balance at December 31, 1999
(3.2 million shares)

127
-

Total
Capital

Surplus

$

158

$

316

FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION:
The Federal Reserve Bank of St. Louis ("Bank") is part of the Federal Reserve System ("System") created
by Congress under the Federal Reserve Act of 1913 ("Federal Reserve Act") which established the central
bank of the United States. The System consists of the Board of Governors of the Federal Reserve System
("Board of Governors") and twelve Federal Reserve Banks ("Reserve Banks"). The Reserve Banks are char­
tered by the federal government and possess a unique set of governmental, corporate, and central bank char­
acteristics. Other major elements of the System are the Federal Open Market Committee ("FOMC") and the
Federal Advisory Council. The FOMC is composed of members of the Board of Governors, the president of
the Federal Reserve Bank of New York ("FRBNY") and, on a rotating basis, four other Reserve Bank presidents.

Structure:
The Bank and its branches in Little Rock, Louisville and Memphis serve the Eighth Federal Reserve District,
which includes Arkansas, portions of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. In
accordance with the Federal Reserve Act, supervision and control of the Bank is exercised by a board of
directors. Banks that are members of the System include all national banks and any state chartered bank
that applies and is approved for membership in the System.

Board o f Directors:
The Federal Reserve Act specifies the composition of the board of directors for each of the Reserve Banks.
Each board is composed of nine members serving three-year terms: three directors, including those designat­
ed as Chairman and Deputy Chairman, are appointed by the Board of Governors, and six directors are elected
by member banks. Of the six elected by member banks, three represent the public and three represent mem­
ber banks. Member banks are divided into three classes according to size. Member banks in each class elect
one director representing member banks and one representing the public. In any election of directors, each
member bank receives one vote, regardless of the number of shares of Reserve Bank stock it holds.

2. OPERATIONS AND SER V ICE S:
The System performs a variety of services and operations. Functions include: formulating and conducting
monetary policy; participating actively in the payments mechanism, including large-dollar transfers of funds,
automated clearinghouse operations and check processing; distribution of coin and currency; fiscal agency
functions for the U.S. Treasury and certain federal agencies; serving as the federal government's bank; pro­
viding short-term loans to depository institutions; serving the consumer and the community by providing
educational materials and information regarding consumer laws; supervising bank holding companies, and
state member banks; and adm inistering other regulations of the Board of Governors. The Board of
Governors' operating costs are funded through assessments on the Reserve Banks.
The FOMC establishes policy regarding open market operations, oversees these operations, and issues
authorizations and directives to the FRBNY for its execution of transactions. Authorized transaction types
include direct purchase and sale of securities, matched sale-purchase transactions, the purchase of securities
under agreements to resell, and the lending of U.S. government securities. Additionally, the FRBNY is




FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
authorized by the FOMC to hold balances of and to execute spot and forward foreign exchange and securi­
ties contracts in fourteen foreign currencies, maintain reciprocal currency arrangements ( F/X swaps ) with
various central banks, and "warehouse" foreign currencies for the U.S. Treasury and Exchange Stabilization
Fund ("ESF") through the Reserve Banks.

3. SIG NIFICAN T ACCOUNTING PO LICIES:
Accounting principles for entities with the unique powers and responsibilities of the nation's central bank
have not been formulated by the Financial Accounting Standards Board. The Board of Governors has devel­
oped specialized accounting principles and practices that it believes are appropriate for the significantly dif­
ferent nature and function of a central bank as compared to the private sector. These accounting principles
and practices are documented in the "Financial Accounting Manual for Federal Reserve Banks" ("Financial
Accounting Manual"), which is issued by the Board of Governors. All Reserve Banks are required to adopt
and apply accounting policies and practices that are consistent with the Financial A ccounting Manual.
The financial statements have been prepared in accordance with the Financial A ccounting Manual.
Differences exist between the accounting principles and practices of the System and generally accepted
accounting principles in the United States ("G A A P "). The primary differences are the presentation of all
security holdings at amortized cost, rather than at the fair value presentation requirements of GAAP, and
the accounting for matched sale-purchase transactions as separate sales and purchases, rather than secured
borrowings with pledged collateral, as is required by GAAP. In addition, the Bank has elected not to present
a Statement of Cash Flows or a Statement of Comprehensive Income. The Statement of Cash Flows has
not been included as the liquidity and cash position of the Bank are not of primary concern to the users of
these financial statements. The Statement of Comprehensive Income, which comprises net income plus or
minus certain adjustments, such as the fair value adjustment for securities, has not been included because
as stated above the securities are recorded at amortized cost and there are no other adjustments in the
determination of Comprehensive Income applicable to the Bank. Other information regarding the Bank's
activities is provided in, or may be derived from, the Statements of Condition, Income, and Changes in
Capital. Therefore, a Statement of Cash Flows or a Statement of Comprehensive Income would not provide
any additional useful information. There are no other significant differences between the policies outlined
in the Financial Accounting Manual and GAAP.
The preparation of the financial statements in conformity with the Financial A ccounting Manual requires
management to make certain estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reporting period. Actual results could differ from
those estimates. Unique accounts and significant accounting policies are explained below.

a. Gold Certificates
The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks to monetize gold
held by the U.S. Treasury. Payment for the gold certificates by the Reserve Banks is made by crediting equiv­
alent amounts in dollars into the account established for the U.S. Treasury. These gold certificates held by
the Reserve Banks are required to be backed by the gold of the U.S. Treasury. The U.S. Treasury may reac­
quire the gold certificates at any time and the Reserve Banks must deliver them to the U.S. Treasury. At




FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
such time, the U.S. Treasury's account is charged and the Reserve Banks' gold certificate accounts are low­
ered. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 a fine troy
ounce. The Board of Governors allocates the gold certificates among Reserve Banks once a year based
upon Federal Reserve notes outstanding in each District at the end of the preceding year.

b. Special D raw ing Rights Certifica tes
Special drawing rights ("S D R s ") are issued by the International Monetary Fund ("Fund") to its members
in proportion to each m em bers quota in the Fund at the time of issuance. SDRs serve as a supplement to
international monetary reserves and may be transferred from one national monetary authority to another.
Under the law providing for U.S. participation in the SDR system, the Secretary of the U.S. Treasury is
authorized to issue SDR certificates, somewhat like gold certificates, to the Reserve Banks. At such time,
equivalent amounts in dollars are credited to the account established for the U.S. Treasury, and the Reserve
Banks' SDR certificate accounts are increased. The Reserve Banks are required to purchase SDRs, at the
direction of the U.S. Treasury, for the purpose of financing SDR certificate acquisitions or for financing
exchange stabilization operations. The Board of Governors allocates each SDR transaction among Reserve
Banks based upon Federal Reserve notes outstanding in each District at the end of the preceding year.

c. Loans to D e p o s ito ry In stitu tio n s
The Depository Institutions Deregulation and Monetary Control Act of 1980 provides that all depository insti
tutions that maintain reservable transaction accounts or nonpersonal time deposits, as defined in Regulation D
issued by the Board of Governors, have borrowing privileges at the discretion of the Reserve Banks. Borrowers
execute certain lending agreements and deposit sufficient collateral before credit is extended. Loans are evalu
ated for collectibility, and currently all are considered collectible and fully collateralized. If any loans were
deemed to be uncollectible, an appropriate reserve would be established. Interest is recorded on the accrual
basis and is charged at the applicable discount rate established at least every fourteen days by the Board of
Directors of the Reserve Banks, subject to review by the Board of Governors. However, Reserve Banks retain
the option to impose a surcharge above the basic rate in certain circumstances.
The Board of Governors established a Special Liquidity Facility ("SLF") to make discount window credit
readily available to depository institutions in sound financial condition around the century date change
(October 1, 1999, to April 7, 2000) in order to meet unusual liquidity demands and to allow institutions
to confidently commit to supplying loans to other institutions and businesses during this period. Under
the SLF, collateral requirements are unchanged from normal discount window activity and loans are made
at a rate of 150 basis points above FOMC's target federal funds rate.

U.S. G o vern m en t a n d Federa l A g e n c y Securities and Investm ents Denominated
in Foreign C u rrencie s
The FOMC has designated the FRBNY to execute open market transactions on its behalf and to hold the
resulting securities in the portfolio known as the System Open Market Account ( SOMA ). In addition to
authorizing and directing operations in the domestic securities market, the FOMC authorizes and directs th
FRBNY to execute operations in foreign markets for major currencies in order to counter disorderly condi




FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
tions in exchange markets or other needs specified by the FOMC in carrying out the System's central bank
responsibilities.
Purchases of securities under agreements to resell and matched sale-purchase transactions are accounted
for as separate sale and purchase transactions. Purchases under agreements to resell are transactions in
which the FRBNY purchases a security and sells it back at the rate specified at the commencement of the
transaction. Matched sale-purchase transactions are transactions in which the FRBNY sells a security and
buys it back at the rate specified at the commencement of the transaction.
Effective April 26, 1999 FRBNY was given the sole authorization by the FOMC to lend U.S. government
securities held in the SOMA to U.S. government securities dealers and to banks participating in U.S. gov­
ernment securities clearing arrangements, in order to facilitate the effective functioning of the domestic
securities market. These securities-lending transactions are fully collateralized by other U.S. government
securities. FOMC policy requires FRBNY to take possession of collateral in amounts in excess of the market
values of the securities loaned. The market values of the collateral and the securities loaned are monitored
by FRBNY on a daily basis, with additional collateral obtained as necessary. The securities loaned continue
to be accounted for in the SOMA. Prior to April 26,1999 all Reserve Banks were authorized to engage in
such lending activity.
Foreign exchange contracts are contractual agreements between two parties to exchange specified cur­
rencies, at a specified price, on a specified date. Spot foreign contracts normally settle two days after the
trade date, whereas the settlement date on forward contracts is negotiated between the contracting parties,
but will extend beyond two days from the trade date. The FRBNY generally enters into spot contracts, with
any forward contracts generally limited to the second leg of a swap/warehousing transaction.
The FRBNY, on behalf of the Reserve Banks, maintains renewable, short-term F/X swap arrangements with
authorized foreign central banks. The parties agree to exchange their currencies up to a pre-arranged maxi­
mum amount and for an agreed upon period of time (up to twelve months), at an agreed upon interest rate.
These arrangements give the FOMC temporary access to foreign currencies that it may need for intervention
operations to support the dollar and give the partner foreign central bank temporary access to dollars it may
need to support its own currency. Drawings under the F/X swap arrangements can be initiated by either the
FRBNY or the partner foreign central bank, and must be agreed to by the drawee. The F/X swaps are structured
so that the party initiating the transaction (the drawer) bears the exchange rate risk upon maturity. The FRBNY
will generally invest the foreign currency received under an F/X swap in interest-bearing instruments.
Warehousing is an arrangement under which the FOMC agrees to exchange, at the request of the Treasury,
U.S. dollars for foreign currencies held by the Treasury or ESF over a limited period of time. The purpose of
the warehousing facility is to supplement the U.S. dollar resources of the Treasury and ESF for financing pur­
chases of foreign currencies and related international operations.
In connection with its foreign currency activities, the FRBNY, on behalf of the Reserve Banks, may enter into
contracts which contain varying degrees of off-balance sheet market risk, because they represent contractual
commitments involving future settlement, and counter-party credit risk. The FRBNY controls credit risk by
obtaining credit approvals, establishing transaction limits, and performing daily monitoring procedures.




FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
While the application of current market prices to the securities currently held in the SOMA portfolio
and investments denominated in foreign currencies may result in values substantially above or below their
carrying values, these unrealized changes in value would have no direct effect on the quantity of reserves
available to the banking system or on the prospects for future Reserve Bank earnings or capital. Both the
domestic and foreign components of the SOMA portfolio from time to time involve transactions that can
result in gains or losses when holdings are sold prior to maturity. However, decisions regarding the securi­
ties and foreign currencies transactions, including their purchase and sale, are motivated by monetary policy
objectives rather than profit. Accordingly, earnings and any gains or losses resulting from the sale of such
currencies and securities are incidental to the open market operations and do not motivate its activities or
policy decisions.
U.S. government and federal agency securities and investments denominated in foreign currencies com­
prising the SOMA are recorded at cost, on a settlement-date basis, and adjusted for amortization of premi­
ums or accretion of discounts on a straight-line basis. Interest income is accrued on a straight-line basis
and is reported as "Interest on U.S. government and federal agency securities" or "Interest on foreign cur­
rencies," as appropriate. Income earned on securities lending transactions is reported as a component of
"Other income." Gains and losses resulting from sales of securities are determined by specific issues based
on average cost. Gains and losses on the sales of U.S. government and federal agency securities are report­
ed as "U.S. government securities gains (losses), net." Foreign currency denominated assets are revalued
monthly at current market exchange rates in order to report these assets in U.S. dollars. Realized and unre­
alized gains and losses on investments denominated in foreign currencies are reported as "Foreign currency
gains (losses), net." Foreign currencies held through F/X swaps, when initiated by the counter party, and
warehousing arrangements are revalued monthly, with the unrealized gain or loss reported by the FRBNY
as a component of "Other assets" or "Other liabilities," as appropriate.
Balances of U.S. government and federal agencies securities bought outright, investments denominated
in foreign currency, interest income, amortization of premiums and discounts on securities bought outright,
gains and losses on sales of securities, and realized and unrealized gains and losses on investments denomi­
nated in foreign currencies, excluding those held under an F/X swap arrangement, are allocated to each
Reserve Bank. Effective April 26, 1999 income from securities lending transactions undertaken by FRBNY
was also allocated to each Reserve Bank. Securities purchased under agreements to resell and unrealized
gains and losses on the revaluation of foreign currency holdings under F/X swaps and warehousing arrange­
ments are allocated to the FRBNY and not to other Reserve Banks.

e. Bank Prem ises and Equ ipm en t
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated
on a straight-line basis over estimated useful lives of assets ranging from 2 to 50 years. New assets, major
alterations, renovations and improvements are capitalized at cost as additions to the asset accounts.
Maintenance, repairs and minor replacements are charged to operations in the year incurred.

f. In te rd istrict S e ttle m e n t A cco u n t
At the close of business each day, all Reserve Banks and branches assemble the payments due to or from
other Reserve Banks and branches as a result of transactions involving accounts residing in other Districts




FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
that occurred during the day’s operations. Such transactions may include funds settlement, check clearing
and automated clearinghouse (" A C H " ) operations, and allocations of shared expenses. The cumulative net
amount due to or from other Reserve Banks is reported as the Interdistrict settlement account.

g. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United States. These notes are issued through
the various Federal Reserve agents to the Reserve Banks upon deposit with such Agents of certain classes
of collateral security, typically U.S. government securities. These notes are identified as issued to a spe­
cific Reserve Bank. The Federal Reserve Act provides that the collateral security tendered by the Reserve
Bank to the Federal Reserve Agent must be equal to the sum of the notes applied for by such Reserve Bank.
In accordance with the Federal Reserve Act, gold certificates, special drawing rights certificates, U.S. gov­
ernment and agency securities, loans, and investments denominated in foreign currencies are pledged as
collateral for net Federal Reserve notes outstanding. The collateral value is equal to the book value of
the collateral tendered, with the exception of securities, whose collateral value is equal to the par value
of the securities tendered. The Board of Governors may, at any time, call upon a Reserve Bank for addi­
tional security to adequately collateralize the Federal Reserve notes. The Reserve Banks have entered into
an agreement which provides for certain assets of the Reserve Banks to be jointly pledged as collateral for
the Federal Reserve notes of all Reserve Banks in order to satisfy their obligation of providing sufficient
collateral for outstanding Federal Reserve notes. In the event that this collateral is insufficient, the Federal
Reserve Act provides that Federal Reserve notes become a first and paramount lien on all the assets of the
Reserve Banks. Finally, as obligations of the United States, Federal Reserve notes are backed by the full
faith and credit of the U.S. government.
The "Federal Reserve notes outstanding, net" account represents Federal Reserve notes reduced by
cash held in the vaults of the Bank of $4,869 million, and $2,589 million at December 31, 1999 and
1 998, respectively.

h. Capital Paid-in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve
Bank in an amount equal to 6% of the capital and surplus of the member bank. As a member bank's cap­
ital and surplus changes, its holdings of the Reserve Bank's stock must be adjusted. Member banks are
those state-chartered banks that apply and are approved for membership in the System and all national
banks. Currently, only one-half of the subscription is paid-in and the remainder is subject to call. These
shares are nonvoting with a par value of $100. They may not be transferred or hypothecated. By law, each
member bank is entitled to receive an annual dividend of 6% on the paid-in capital stock. This cumulative
dividend is paid semiannually. A member bank is liable for Reserve Bank liabilities up to twice the par value
o f stock subscribed by it.

/. S u rp lu s
The Board of Governors requires Reserve Banks to maintain a surplus equal to the amount of capital paidin as of December 31. This amount is intended to provide additional capital and reduce the possibility that
the Reserve Banks would be required to call on member banks for additional capital. Reserve Banks are




FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
required by the Board of Governors to transfer to the U.S. Treasury excess earnings, after providing for the
costs of operations, payment of dividends, and reservation of an amount necessary to equate surplus with
capital paid-in.
The Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66, Section 3002) codified the existing
Board surplus policies as statutory surplus transfers, rather than as payments of interest on Federal Reserve
notes, for federal government fiscal years 1998 and 1997 (which ended on September 30, 1998 and 1997,
respectively). In addition, the legislation directed the Reserve Banks to transfer to the U.S. Treasury addi­
tional surplus funds of $107 million and $106 million during fiscal years 1998 and 1997, respectively.
Reserve Banks were not permitted to replenish surplus for these amounts during this time. Payments to
the U.S. Treasury made after September 30, 1998, represent payment of interest on Federal Reserve
notes outstanding.
The Consolidated Appropriations Act of 1999 (Public Law 106-113, Section 302) directed the Reserve Banks
to transfer to the U.S. Treasury additional surplus funds of $3,752 million during the federal government's
2000 fiscal year. The Reserve Banks will make this payment prior to September 30, 2000.
In the event of losses, payments to the U.S. Treasury are suspended until such losses are recovered through
subsequent earnings. Weekly payments to the U.S. Treasury may vary significantly.

j. Income and Cost Related to Treasury Services
The Bank is required by the Federal Reserve Act to serve as fiscal agent and depository of the United States.
By statute, the Department of the Treasury is permitted, but not required, to pay for these services. The costs
of providing fiscal agency and depository services to the Treasury Department that have been billed but not
paid are immaterial and included in "Other expenses."

k. Taxes
The Reserve Banks are exempt from federal, state and local taxes, except for taxes on real property, which
are reported as a component of "Occupancy expense."

4. U.S. GOVERNMENT AND FED ER AL AGEN CY SECU RITIES:
Securities bought outright and held under agreements to resell are held in the SOMA at the FRBNY.
An undivided interest in SOMA activity, with the exception of securities held under agreements to resell
and the related premiums, discounts and income, is allocated to each Reserve Bank on a percentage basis
derived from an annual settlement of interdistrict clearings. The settlement, performed in April of each
year, equalizes Reserve Bank gold certificate holdings to Federal Reserve notes outstanding. The Bank s
allocated share of SOMA balances was approximately 3 .2 8 9 % and 3 .5 1 4 % at December 31, 1999 and
1998, respectively.




FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
The Bank's allocated share of securities held in the SOMA at December 31, that were bought outright,
were as follows (in millions):
1999

Par value:
Federal agency
U.S. government:
Bills
Notes
Bonds

6

$

1998

$

12

5,806
7,186
2,730
1 5,728
299
(109)

Total par value
Unamortized premiums
Unaccreted discounts
Total allocated to Bank

6,845
6,603
2,441
1 5,901
259
(112)

15,918

$

$

16,048

Total SOMA securities bought outright were $483,902 million and $456,667 million at December 31, 1999
and 1998, respectively.
The maturities of U.S. government and federal agency securities bought outright, which were allocated to
the Bank at December 31, 1999, were as follows (in millions):
Par value

Maturities of Securities Held

Within 15 days
16 days to 90 days
91 days to 1 year
Over 1 year to 5 years
Over 5 years to 10 years
Over 10 years
Total

U.S. Government
Securities

Federal Agency
Obligations

1 52
3,024
4,601
4,084
1,681
2,180
15,722

Total

1 52
3,025
4,602
4,084
1,685
2,180
$

15,728

At December 31, 1999, and 1998, matched sale-purchase transactions involving U.S. government secu­
rities with par values of $39,182 million and $20,927 million, respectively, were outstanding, of which
$1,289 million and $735 million were allocated to the Bank. Matched sale-purchase transactions are
generally overnight arrangements.




FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
5. INVESTM ENTS DENOMINATED IN FOREIGN CURRENCIES:
The FRBNY, on behalf of the Reserve Banks, holds foreign currency deposits with foreign central banks
and the Bank for International Settlements and invests in foreign government debt instruments. Foreign
government debt instruments held include both securities bought outright and securities held under agree­
ments to resell. These investments are guaranteed as to principal and interest by the foreign governments
Each Reserve Bank is allocated a share of foreign-currency-denominated assets, the related interest
income, and realized and unrealized foreign currency gains and losses, with the exception of unrealized
gains and losses on F/X swaps and warehousing transactions. This allocation is based on the ratio of each
Reserve Bank's capital and surplus to aggregate capital and surplus at the preceding December 31. The
Bank's allocated share of investments denominated in foreign currencies was approximately 2.02 8% and
2 .3 3 3 % at December 31, 1999 and 1998, respectively.
The Bank's allocated share of investments denominated in foreign currencies, valued at current exchange
rates at December 31, were as follows (in millions):
1998

1999

German Marks:
Foreign currency deposits
Government debt instruments including
agreements to resell
European Union Euro:
Foreign currency deposits
Government debt instruments including
agreements to resell
Japanese Yen:
Foreign currency deposits
Government debt instruments including
agreements to resell
Accr ued i nterest
Total

$

$

244

-

88

-

51

-

7

16

180
1
$

55

145
2

327

$

462

Total investments denominated in foreign currencies were $16,140 million and $19,769 million at
December 31, 1999 and 1998, respectively. The 1998 balance includes $15 million in unearned interest
collected on certain foreign currency holdings that is allocated solely to the FRBNY.




FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
The maturities of investments denominated in foreign currencies that were allocated to the Bank
at December 31, 1999, were as follows (in millions):
Maturities of Investments Denominated in Foreign Currencies
Within 1 year
Over 1 year to 5 years
Over 5 years to 10 years
Total

$

^06
^

$

327

At December 31, 1999 and 1998, there were no open foreign exchange contracts or outstanding F/X swaps.
At December 31, 1999 and 1998, the warehousing facility was $5,000 million, with nothing outstanding.

6. BANK PREMISES AND EQUIPMENT:
A summary of bank premises and equipment at December 31 is as follows (in millions):
1999

Bank premises and equipment:
Land
Buildings
Building machinery and equipment
Construction in progress
Furniture and equipment

$

$

$

55

3
31
12
1
44
91
(40)

101
(46)

Accumulated depreciation
Bank premises and equipment, net

4
34
12
1
50

1998

$

51

7. COMMITMENTS AND CONTINGENCIES:
At December 31, 1999, the Bank was obligated under noncancelable leases for premises and equipment
with terms ranging from 1 to approximately 4 years. These leases provide for increased rentals based upon
increases in real estate taxes, operating costs or selected price indices.
Rental expense under operating leases for certain operating facilities, warehouses, and data processing
and office equipment (including taxes, insurance and maintenance when included in rent), net of sublease
rentals, was $1 million for the years ended December 31, 1999 and 1998, respectively. Certain of the
Bank's leases have options to renew.
Under the Insurance Agreement of the Federal Reserve Banks dated as of March 2, 1999, each of the
Reserve Banks has agreed to bear, on a per incident basis, a pro rata share of losses in excess of 1% of
the capital paid-in of the claiming Reserve Bank, up to 50% of the total capital paid-in of all Reserve Banks.
Losses are borne in the ratio that a Reserve Bank's capital paid-in bears to the total capital paid-in of all
Reserve Banks at the beginning of the calendar year in which the loss is shared. No claims were outstand­
ing under such agreement at December 31, 1999 or 1998.




FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
The Bank is involved in certain legal actions and claims arising in the ordinary course of business. Although
it is difficult to predict the ultimate outcome of these actions, in management's opinion, based on discussions
with counsel, the aforementioned litigation and claims will be resolved without material adverse effect on the
financial position or results of operations of the Bank.

8. RETIREMENT AND THRIFT PLANS:
Retirem ent Plans:
The Bank currently offers two defined benefit retirement plans to its employees, based on length of ser­
vice and level of compensation. Substantially all of the Bank's employees participate in the Retirement Plan
for Employees of the Federal Reserve System ("System Plan") and the Benefit Equalization Retirement Plan
("BEP"). The System Plan is a multi-employer plan with contributions fully funded by participating employ­
ers. No separate accounting is maintained of assets contributed by the participating employers. The Bank's
projected benefit obligation and net pension costs for the BEP at December 31, 1999 and 1998, and for the
years then ended, are not material.

Thrift Plan:
Employees of the Bank may also participate in the defined contribution Thrift Plan for Employees of the
Federal Reserve System ("Thrift Plan"). The Bank's Thrift Plan contributions totaled $2 million for the years
ended December 31, 1999 and 1998, respectively, and are reported as a component of "Salaries and other
be nefits."

9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS AND POSTEMPLOYMENT BENEFITS:
P ostretirem ent B en efits o ther than Pensions:
In addition to the Bank's retirement plans, employees who have met certain age and length of service
requirements are eligible for both medical benefits and life insurance coverage during retirement.
The Bank funds benefits payable under the medical and life insurance plans as due and, accordingly, has no
plan assets. Net postretirement benefit cost is actuarially determined using a January 1 measurement date.
Following is a reconciliation of beginning and ending balances of the benefit obligation (in millions):
1999

Accumulated postretirement benefit obligation at January 1
Service cost-benefits earned during the period
Interest cost of accumulated benefit obligation
Actuarial (gain)
Contributions by plan participants
Benefits paid
Accumulated postretirement benefit obl igati on at December 31




1993

$

43.8
1.0
2.6
(3.9)
0.1
(1.7)

$

38.6
0.9
2.6
3.0
0.2
(1.5)

$

41.9

$

43.8

FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
Following is a reconciliation of the beginning and ending balance of the plan assets, the unfunded postretirement benefit obligation, and the accrued postretirement benefit cost (in millions):
1999

Fair value of plan assets at January 1
Contributions by the employer
Contributions by plan participants
Benefits paid
Fair value of plan assets at December 31

Unfunded postretirement benefit obligation
Unrecognized prior service cost
Unrecognized net actuarial gain
Accrued postretirement benefit cost

$

$

1998

1.5
0.1
(1.6)

$

-

$

1.3
0.2
(1.5)

$

41.9
0.8
4.1

$

43.8
0.9
0.1

$

46.8

$

44.8

Accrued postretirement benefit cost is reported as a component of "Accrued benefit cost."
The weighted-average assumption used in developing the postretirement benefit obligation as of
December 31, 1999 and 1998 was 7.5% and 6 .2 5 % , respectively.
For measurement purposes, an 8 .7 5 % annual rate of increase in the cost of covered health care benefits
was assumed for 2000. Ultimately, the health care cost trend rate is expected to decrease gradually to
5 .5 0 % by 2006, and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for health care
plans. A one percentage point change in assumed health care cost trend rates would have the following
effects for the year ended December 31, 1999 (in millions):
1 Percentage
Point Increase

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




1 Percentage
Point Decrease

0.9

0.7

8.4

8.5

FEDERAL RESERVE BANK OF ST. LOUIS
NOTES TO FINANCIAL STATEMENTS
The follow ing is a summary of the components of net periodic postretirement benefit cost for the years
ended December 31 (in millions):
1999

Service cost-benefits earned during the period
Interest cost of accumulated benefit obligation
Amortization of prior service cost
Recognized net actuarial loss
Net periodic postretirement benefit cost

1998

$ 1 . 0
2.6

$

0.8
2.6

$

$

3.4

3.6

Net periodic postretirement benefit cost is reported as a component of "Salaries and other benefits."

P o stem ploym ent B enefits:
The Bank offers benefits to former or inactive employees. Postemployment benefit costs are actuarially
determined and include the cost of medical and dental insurance, survivor income, and disability benefits.
Costs were projected using the same discount rate and health care trend rates as were used for projecting
postretirement costs. The accrued postemployment benefit costs recognized by the Bank at December 31,
1999 and 1998, were $4 million and $3 million, respectively. This cost is included as a component of
"Accrued benefit cost." Net periodic postemployment benefit costs included in 1999 and 1998 operating
expenses were $1 million, for each year.




ADVISORY COUNCILS

FINANCIAL SERVICES ADVISORY

& BANK OFFICERS

GROUP MEMBERS

FEDERAL ADVISORY
COUNCIL MEMBER

Camden Fine
President
Midwest Independent Bank
Jefferson City, Missouri

Katie S. Winchester
President, Chief Executive
Officer and Director
First Citizens National Bank
Dyersburg, Tennessee

Barbara McKenzie
Executive Vice President and CFO
Banterra Corp.
El Dorado, Illinois

BANK OFFICERS

DISTRICT ADVISORY COUNCIL
Paul Combs
Vice President
Baker Implement Co.
Kennett, Missouri

Robert A. Cunningham
Valley Farms
Bigbee Valley, Mississippi

Joseph H. Spalding
Lebanon, Kentucky
Gerald W. Clapp Jr.
President/Owner
Clapp Oldsmobile
Clarksville, Indiana
William D. Crawley
President
Southern Sales & Service
Memphis, Tennessee
Chris Krehmeyer
Beyond Housing
St. Louis, Missouri
Ann Ross
Association of Retail Paper Stores
St. Louis, Missouri




ST. LOUIS OFFICE

Phil Porter
President
Arvest Bank Operations Inc.
Lowell, Arkansas
Judy R. Loving
Chairman
The Bank of Yellville
Yellville, Arkansas
Reynie Rutledge
Chairman
First Security Bank
Searcy, Arkansas
Carolyn Betsy Hudson
Senior Vice President
Bank of Benton
Benton, Kentucky
Don Hughes
President
FCB Services
Farmers Capital Bank Corp.
Frankfort, Kentucky
James Clayton
President
Planters Bank and Trust Co.
Indianola, Mississippi
Rowe M. Belcher Jr.
Executive Vice President
Trust One Bank
Germantown, Tennessee

William Poole
President and
Chief Executive Officer
W. LeGrande Rives
First Vice President and
Chief Operating Officer
Karl W. Ashman
Senior Vice President

Henry H. Bourgaux
Senior Vice President

Joan P. Cronin
Senior Vice President
Mary H. Karr
Senior Vice President,
General Counsel and Secretary

Robert H. Rasche
Senior Vice President and
Director of Research

Richard G. Anderson
Vice President

John P. Baumgartner
Vice President
John W. Block Jr.
Vice President
Timothy A. Bosch
Vice President
Marilyn K. Corona
Vice President

Cletus C. Coughlin
Vice President

William T. Gavin
Vice President
R. Alton Gilbert
Vice President

N. Lynn Greenwood
Vice President

Jean M. Lovati
Vice President

Elizabeth A. Hayes

Robert E. Kellar Jr.

Assistant Vice President

Operations Officer

Michael J. Mueller

Edward A. Hopkins

Vice President

Assistant Vice President

W. Scott McBride
Assistant Counsel

Kim D. Nelson

Patricia A. Marshall

Vice President

Assistant Vice President, Assistant
Counsel and Assistant Secretary

Paul M. Nunnally
Vice President

Michael D. Renfro
General Auditor
David A. Sapenaro
Vice President

Steven N. Silvey
Vice President

William Sneed
Vice President
Randall C. Sumner
Vice President and
Assistant Secretary
Daniel L. Thornton
Vice President

Jerome J. McGunnigle
Assistant Vice President
John P. Merker
Assistant Vice President
Frances E. Sibley
Assistant Vice President
Harold E. Slingerland
Assistant Vice President
Leisa J. Spalding
Assistant Vice President and
Assistant General Auditor
Robert James Taylor
Assistant Vice President

David C. Wheelock

Kathleen O'Neill Paese
Operations Officer
Patricia S. Pollard
Research Officer
Todd J. Purdy
Accounting Officer
Mark D. Vaughan
Supervisory Officer
Jeffrey L. Wann
Chief Technology Officer
LITTLE ROCK BRANCH
Robert A. Hopkins
Vice President & Branch Manager

Thomas R. Callaway
Assistant Vice President

Assistant Vice President

William D. Little
Operations Officer

Carl K. Anderson
Supervisory Officer

LOUISVILLE BRANCH

Assistant Vice President

Barkley Bailey
Supervisory Officer

Thomas A. Boone
Vice President & Branch Manager

Timothy C. Brown
Assistant Vice President

Bernard E. Berns Jr.
Public Affairs Officer

Vice President

James B. Bullard
Assistant Vice President

Assistant Counsel

Thomas 0. Short
Assistant Vice President

Assistant Vice President

Susan K. Curry
Operations Officer

Gerard V. Mattingly
Operations Officer

Judith A. Courtney
Assistant Vice President

Supervisory Officer

MEMPHIS BRANCH

Jeffrey M. Dale
Assistant Vice President

Michael J. Dueker
Research Officer

Vice President & Branch Manager

Hillary B. Debenport
Assistant Vice President

Gary J. Juelich
Supervisory Officer

John W. Mitchell
Assistant Vice President

Andrea S. Eddy
Assistant Vice President

Visweswara R. Kaza
Operations Officer

John G. Holmes
Assistant Vice President

Dennis W. Blase
Assistant Vice President

Daniel P. Brennan

Martin J. Coleman




Diane B. Camerlo

Michael Wayne DeClue

Ronald L. Byrne

Martha Perine Beard

SUMMARY OF OPERATIONS
S u m m a r y o f Ke y O p e r a t i o n S t a t i s t i c s f o r S e r v i c e s P r o v i d e d
to D e p o s i t o r y I n s t i t u t i o n s a n d t he T r e a s u r y

Number of Items

Dollar Amount

(Thousands)

(Millions)

1999

1998

1999

1998

22,894

26 ,5 4 9

$ 22,100

$ 23,166

22 5 , 8 5 3

212,691

29,1 18

28 , 4 6 9

1,062,774

99 7, 2 62

537,430

51 1,055

1 5 5 ,87 7

148, 700

279,070

268,435

C ur r en cy Processed

1 , 0 07 , 59 3

957,650

13,921

12,540

Funds Transfers

4,791,747

5 , 0 35 , 46

3,524,052

3,444,509

595

826

2,656

923

13 7 , 6 4 4

16 4, 870

851,898

381,857

55 ,9 1 5

9 8 ,5 4 6

282

504

3,051

3, 3 08

1

1

Government Checks Processed
Postal Money Orders Processed
C o mm e rc i al C h e c k s Processed
A C H Commerci al Items Originated

Loans to Depository Institutions
Transfer of G o ve r nm en t Securities
Food C o u p o n s Destroyed
Treasury C o u p o n s Processed







THE FEDERAL RESERVE BANK OF ST. LOUIS
411 Locust Street
Saint Louis, Missouri 63102
314.444.8444

LITTLE ROCK BRANCH
325 West Capitol Avenue
Little Rock, Arkansas 72201
501.324.8300

LO U ISV ILLE BRANCH
410 South Fifth Street
Louisville, Kentucky 40202
502.568.9200

MEMPHIS BRANCH
200 North Main Street
Memphis, Tennessee 38102
901.523.7171

THIS REPORT IS ALSO AVAILABLE ON THE
INTERNET AT WWW.STLS.FRB.ORG.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102