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Y2K and Monetary Policy:
Two Issues but One Goal

Jerry L. Jordan
President and Chief Executive Officer
Federal Reserve Bank of Cleveland
The Bluecoats
Annual Spring Dinner
Federal Reserve Bank of Cleveland

Monday, May 3,1999


Good evening, ladies and gentlemen.
It is my great pleasure to welcome the Bluecoats and your guests to
the Federal Reserve Bank of Cleveland. We are honored to have this
privilege of hosting your distinguished group for your Annual Spring
Dinner. I believe that having your dinner here in our facilities is quite
appropriate, given the common goal that our organizations share. We in the
Federal Reserve, like the men and women whose families you support, are
committed to serving the public and operating with the best interest of the
public in mind.

I hope that many of you were able to take part in the tours of our Bank
which were provided earlier. It is with great pleasure and pride that we open
our doors to you and other members of the community to show you our
facilities and our operations. But more importantly, it is to provide you with
a better understanding of the Federal Reserve System and the Federal
Reserve Bank of Cleveland. From time to time, through various occurrences
and situations, I am reminded that many people know very little about the
Federal Reserve and what we do. Some of that is our own doing, since the
Federal Reserve has historically maintained a low profile in the public eye.
But our “mysterious” role has also been due to the limited press that we have


received from the media - which is a good thing. Given the nature of news
reporting, our absence from the headlines is an indication to me that our
operations are running effectively and that there is nothing “newsworthy” to
report. However, there is a need to develop a greater understanding by the
general public of the role of the Federal Reserve in the economy because we
do - both directly and indirectly - have an impact on everyone’s lives. So
we are taking some actions - such as hosting meetings of organizations like
yours - to remove some of the mystery surrounding the Federal Reserve to
develop a better understanding of our role.
Two issues which have not escaped the attention of the media and that
I want to address this evening are the Year 2000 Century Date Change and,
what the Federal Reserve is probably best known for, monetary policy.
These two issues may seem totally unrelated, but in the Federal Reserve
System we address them with a single overarching goal in mind. That goal
is the preservation of a sound financial system - financial conditions best
suited to supporting sustainable economic growth.

I’ll begin with the Year 2000 issue.


I have no doubt that most of you have heard the wide range of
opinions and predictions about what will happen on January 1, 2000. From
my perspective, I am becoming increasingly confident that with respect to
the U.S. financial world, and the variety of systems that support it, not much
will happen.

The key factors in my level of confidence in the financial
industry's readiness for Y2K are the amount of effort and activity that has
gone into preparing for the century date change, and the fact that the
industry as a whole has an impressive record of successfully dealing with
operational challenges. From blizzards to power outages to major software
failures, the industry has remained flexible and has built sophisticated and
extensive back-up capabilities. The industry knows how to solve problems
when they occur, and how to resume operations as quickly as possible.

Glitches will certainly occur, maybe even large ones. But with
adequate contingency planning and event management, glitches can be


Each day over $2 trillion passes through Reserve Bank books
representing the settlement of the U.S. Government securities market, the
Eurodollar market, the dollar leg of all other foreign exchange transactions,
settlement for a wide variety of security and bond markets, about 66 million
checks and 16 million ACH payments, among other things. As such, we
recognize the important role that the Federal Reserve plays in the U. S. and
global financial industry. Thus, Federal Reserve concern from the beginning
has been that our systems and those of depository institutions be Year 2000
ready as soon as possible.

Reserve Banks began Y2K project efforts more than two years ago.
By the middle of 1998, all of the systems that Reserve Banks use to interface
electronically with depository institutions had been made Y2K compliant
and were ready for testing with customers. Early this year, nearly all our
systems, both external and internal, were renovated where necessary and
tested, and those systems are now in production. This means that the systems
that Reserve Banks use in providing financial services today are Y2K
compliant. These systems function today exactly as they will in the new


Moreover, these are the same systems that are being used in test mode
with depository institutions; thus they are also being stressed continually
with the variety of test scenarios used by those institutions. About 8,000
of the 12,000 depository institutions that connect electronically with
Reserve Banks, including virtually all major banks, have tested their
connections with us. These tests have been going well. Recognizing that
nothing can be fully guaranteed, I am as confident that Federal Reserve
systems and their customer connections will function without fail in the new

The Federal Reserve has also been working with the other federal
banking agencies to examine every federally insured depository institution in
the country for Y2K readiness - not just once but several times. The
banking agencies have established milestone dates for completing all phases
of Year 2000 preparations, including the completion of contingency plans by
June 30 of this year. We have found that banks are making excellent
progress in meeting these milestone dates, with close to 97 percent of all
banks making satisfactory progress. We are requiring banks to assess
customer and counter-party risk and take steps to mitigate those risks, and
we are overseeing major service providers and software vendors as well.


What about financial services firms beyond commercial banks? Much
is being done there as well. Major securities firms actually began Y2K
efforts somewhat before the banking industry and have successfully
conducted at least two extensive tests of their systems.

The dependence of the financial sector on various utilities, especially
power and telecommunications, has been recognized by those charged with
national Y2K coordination. The President’s Year 2000 Conversion Council
has a financial sector workgroup, chaired by the Federal Reserve, that is
working closely with utilities to ensure problems are addressed and priorities
are clear. Reliable utility operations are expected especially from major
vendors, but less is known about small carriers and services in small
communities and rural areas.

U.S. Government agencies have been seen as challenged in several
reports, and some are thought to be behind schedule in fixing some missioncritical systems. However, those systems that most directly affect the
financial world - those in the Treasury and Social Security - appear to be in
good shape. Social Security systems are renovated and tested, and are now
fully in production in Y2K mode.

In general, foreign entities are seen to be behind their U.S.
counterparts in both the private and public sectors. The Gartner Group
reports that the United Kingdom and Scandinavia are on a par with the U.S.,
while Germany and Latin America are further behind. Not surprisingly,
developing countries are seen to be behind the developed world in their
progress to prepare for the century date change.

On an optimistic note, I view the relatively glitch-free implementation
of the Euro in January as an indication that Europe is likely to
be ready for Y2K. A number of systems in some institutions were made
Y2K compliant when the changes needed for the Euro were made. More
importantly, institutions demonstrated the ability to meet a time bound,
technologically complicated deadline albeit one with a more narrow impact.

In sum, then, Reserve Bank assessments, and reports and surveys
done by others on the state of Y2K readiness, all point in the same direction.
The financial sector - especially domestically - and the needed utilities that
support it - are highly likely to succeed in making a smooth transition to
the new century. Risks remain - most clearly in the foreign sector - and

glitches are inevitable, but with every passing day the likelihood of
success is greater.

Beyond the actual renovation of computer code and testing of
programs, recent effort to prepare for the year 2000 transition have focused
on contingency planning. The Federal Reserve has devoted much attention
to the matter of liquidity for individuals in the form of cash. While the
nation's major ATMs are generally compliant now, and the likelihood of
bank problems is small, we have recognized the public may choose to hold
more cash as a precautionary measure. To address that, Reserve Banks will
have extra cash available to increase the amount in circulation if needed.
Based on normal growth, U.S. currency in circulation should increase to
close to $500 billion by late 1999. About two-thirds of that is held in
foreign countries, so about $170 billion will be in circulation in the United
States at year-end. In addition, Reserve Bank vaults hold about $150 billion
in reserve. That amount will be increased by $50 billion by late 1999 simply
as a precautionary measure. We do not believe that the public needs to hold
excess cash. On the contrary, as Chairman Greenspan stated in recent
testimony, the safest place for individuals to keep their cash is in the banks,
where it is protected and insured. However, we recognize that there will


likely be some increased demand for cash, and we remain committed to
meeting any additional demands of the public. That means Reserve Banks
will have sufficient currency in reserve to more than double the amount in
circulation domestically, in the highly unlikely event that this is necessary.
One remaining issue that we're working hard on is how to ensure that this
large amount of valuable paper is where it is needed, rapidly and securely.
Plans have already been developed to address these storage and distribution

Finally, let me reiterate the necessity for continued focused attention
on Y2K. Despite my reassuring assessment, much remains to be done, and
there are no guarantees of total success. Everyone must concentrate on his
or her own piece of this effort. However, through careful planning and
adequate event management, we believe that the year 2000 transition will be
smooth, and that - like the Federal Reserve’s operations - the transition will
be newsworthy only to the extent that operations are running effectively and
that there is nothing to report.


Now, let me turn to monetary policy. I can assure you that the
attention that we are directing to the Y2K issue has not distracted us from
giving careful attention to this responsibility.

[Sandy Pianalto’s email on 4/28 said that Jerry Jordan would fill in this

Closing Comments
In closing, I’d to again thank you Bluecoats for the work that you do
and your commitment to those in need. I am truly pleased that you have
chosen the Federal Reserve to host your Annual Spring Dinner. I hope that
you will thoroughly enjoy your visit with us.

And now, if there is time, I’ll be glad to respond to a few questions.