prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 1.

Report 1: Global defense posture is an enabler of U S  defense activities and military operations overseas and is a central means of defining and communicating U S  strategic interests to allies, partners, and adversaries  It is driven by a hierarchy of national-level and DOD-specific guidance, which includes the National Defense Strategy and the National Military Strategy  Under DOD Instruction 3000 12, global defense posture includes three elements: Forces: forward stationed or rotationally deployed forces, U S  military capabilities, equipment, and units (assigned or allocated)  Footprint: networks of U S  foreign and overseas locations, infrastructure, facilities, land, and prepositioned equipment  Agreements: treaties and access, transit, support, and status- protection agreements and arrangements with allies and partners that set the terms regarding the U S  military’s presence within the territory of the host country  EUCOM is one of six geographic combatant commands and is responsible for missions in all of Europe, large portions of Asia, parts of the Middle East, and the Arctic and Atlantic Oceans (see figure 1)  EUCOM evaluates the adequacy of posture in Europe to support relevant plans and achieve military objectives  EUCOM shares responsibility with the Chairman of the Joint Chiefs of Staff and the Office of the Secretary of Defense for U S  military relations with allies and partners in Europe and the North Atlantic Treaty Organization (NATO)  The number of U S  military sites located in EUCOM’s area of responsibility and the number of military personnel assigned to Europe have decreased substantially since the end of the Cold War, and two heavy combat brigades had been deactivated by the end of fiscal year 2014  As of May 2016, EUCOM supported one airborne infantry brigade and one Stryker brigade, as well as approximately 62,000 military personnel across approximately 250 sites  Since 2009, we have reported on issues related to DOD’s efforts to estimate and report on the total cost of its global defense posture  In 2009, we identified weaknesses in DOD’s approach for adjusting its global defense posture and recommended, among other things, that DOD issue guidance for estimating total costs for global defense posture and modify its annual report to Congress to include the total cost to complete each planned posture initiative  In February 2011, we reported that EUCOM lacked comprehensive cost data in a key posture planning document and that therefore decision makers lacked critical information that they needed to make fully informed posture decisions  We recommended that the Chairman of the Joint Chiefs of Staff revise the Joint Staff’s posture planning guidance to include direction on how the combatant commands should analyze costs and benefits when considering changes to posture and to require that posture plans include comprehensive cost estimates  DOD agreed with the recommendations in both reports and subsequently took steps to implement them  In June 2012, we reported that DOD did not fully understand the cost implications of two posture initiatives in Europe—including its decision to return two heavy brigades from Europe to the United States—and that key posture planning documents did not completely and consistently include cost data  We recommended that DOD fully estimate the cost implications of these two initiatives, clarify components’ roles and responsibilities for estimating costs, and develop a standard reporting format for cost data  DOD generally agreed with our recommendations and has taken steps to implement two of them  Following the President’s June 2014 announcement of ERI, EUCOM identified five lines of effort that it would pursue under ERI, as described in table 1  Three of ERI’s lines of effort are expected to enhance DOD’s posture in Europe  For example, DOD is using ERI to increase the forces present in Europe by rotating an armored brigade combat team and elements of a combat aviation brigade to Europe every nine months  DOD also plans to enhance its footprint in Europe by using ERI funding to make infrastructure improvements and establish locations for prepositioned equipment  Finally, in order to implement ERI’s lines of effort and support U S  activities, DOD is partnering with the State Department to negotiate host nation agreements that, among other things, establish protections for U S  military personnel and provide DOD the authority to improve host nation installations and infrastructure  DOD is also supporting additional exercises and training to improve interoperability with partner countries while providing them with the capability and capacity to defend themselves, but these efforts are not expected to affect DOD’s long-term posture in Europe  Since 2014, DOD has expanded ERI’s objectives, increased its funding, and planned enhancements to posture in Europe  In fiscal years 2015 and 2016, ERI’s objective was to provide short-term reassurance to allies, and the initiative had little funding for long-term enhancements to posture  DOD focused its efforts on bolstering the security and capacity of NATO allies and partners by funding training, conducting exercises, and temporarily rotating Army and Air Force units to Eastern Europe  In fiscal year 2017, DOD expanded ERI’s objectives to include deterring Russian aggression in the long term and developing the capacity to field a credible combined force should deterrence fail  Recognizing that ERI’s expanded objectives would require DOD to alter its posture in Europe, DOD has requested increased ERI funding  DOD will have requested approximately $4 5 billion in ERI funding for posture enhancements through the end of fiscal year 2017; about $3 2 billion of this was requested for use in fiscal years 2017  During the time of our review, EUCOM had identified a need for additional funding over the next several years for additional posture enhancements in Europe  Specific details about EUCOM’s future posture plans and funding requirements were omitted because they are classified  DOD has requested increased funding to support planned enhancements to all three posture elements—forces, footprint, and agreements—in Europe: Force deployments to Eastern Europe: In fiscal years 2015 and 2016, the Army deployed armored brigade combat teams to Eastern Europe to provide short-term reassurance to allies and partners, which DOD officials said included Estonia, Latvia, Lithuania, and Poland, among other countries  These short-duration deployments were intermittent and focused on demonstrating U S  commitment to allies and partners  Additionally, the Air Force deployed air units on 4- month rotations to help protect allies’ and partners’ air space  In the fiscal year 2017 budget justification materials provided to Congress, as ERI’s objectives expanded, DOD requested funding to retain Air Force fighter units in Europe  It also began deploying a rotational armored brigade combat team so that one such brigade would be present in Europe at all times (see figure 2)  The first deployment, in January 2017, included approximately 4,000 personnel, 90 Abrams tanks, 90 Bradley Infantry fighting vehicles, and 112 supporting vehicles  Additionally, DOD began procuring and prepositioning equipment for two planned armored brigades in Europe, one of which will include modernized tanks, as an additional deterrent  According to Army officials, these force enhancements in Europe give the Army the ability to quickly deploy a substantial ground force in the event of a conflict  As of April 2017, DOD was still evaluating force enhancements in Europe as part of its fiscal year 2018 budget submission  Specific details were omitted because they are classified  New locations and improvements to infrastructure: Since ERI was announced in 2014, DOD has established new enduring locations in Europe  An enduring location is designated by DOD and is a geographic site that DOD expects to access and use to support U S  security interests for the foreseeable future  During our review, DOD had not yet determined whether additional enduring locations would be needed to support ERI  In addition to establishing new enduring locations, DOD plans to improve installations and infrastructure  From fiscal years 2015 through 2017, DOD requested funding in its budget justification submissions to Congress for major military construction projects in nine European countries and to improve support infrastructure—such as roads, railheads, and airbasing—at these locations  Major military construction projects are those projects specified in National Defense Authorization Acts  During the time of our review, DOD was considering addition improvements to existing infrastructure, specific details of which are classified  According to DOD and State Department officials, DOD is also working with U S  allies and partners to determine what infrastructure improvements to roads, railroads, and bridges need to occur outside enduring locations to allow rapid response to a conflict  New host nation agreements: Since ERI was announced, DOD and the State Department have completed host nation agreements with six European nations in support of ERI efforts: Romania, Bulgaria, and Poland, implementing previous agreements, in order to facilitate U S  construction on installations and areas in the host country (June and July 2015 and June 2016)  Estonia, Latvia, and Lithuania, providing an overarching framework for protections for U S  personnel and U S  access to installations in host nations (January 2017)  DOD is using a separate process instead of its established posture planning process to plan for ERI’s posture initiatives because of the emergent nature of ERI requirements and their having been funded through the OCO budget  DOD has established global defense posture management and base budget development processes that plan for posture initiatives and collectively support the department’s efforts to establish priorities, evaluate resource requirements, and develop strategy and policy  As a result of its not using its established processes, DOD is not prioritizing posture initiatives funded under ERI against posture initiatives funded through its base budget, estimating these initiatives’ long-term sustainment costs, or communicating their future costs to Congress  DOD is planning ERI posture initiatives outside of its established processes and is funding these enduring initiatives—including rotational deployments and infrastructure projects—out of its OCO budget  We have previously identified risks associated with DOD’s practice of completing construction projects outside of its established processes  For example, in September 2016 we reported that DOD had not issued implementing guidance to establish a formal process for reevaluating ongoing contingency construction projects when missions change and that as a result DOD risked completing unnecessary construction projects  We also found that DOD lacked visibility into the amount of funding it was spending on operations and maintenance-funded construction projects in U S  Central Command and that this increased financial risk and duplication risk for the department  Like U S  Central Command, EUCOM is using DOD’s OCO budget to fund construction projects and is planning those projects outside of its established processes  Based on our analysis, DOD plans to spend approximately $503 million from fiscal year 2015 through the end of fiscal year 2017 on ERI-related construction projects—about $279 million for major military construction projects and $224 million for minor military construction and facilities maintenance and repair projects (hereafter, minor construction and repair), as shown in table 2  DOD has established global defense posture management and base budget development processes that plan for posture initiatives and collectively support the department’s efforts to establish priorities, evaluate resource requirements, and develop strategy and policy  According to DOD Instruction 3000 12, DOD’s global defense posture processes apply to DOD forces, footprint, and agreements that support joint and combined global operations and plans in foreign countries  According to the instruction, DOD’s components use these processes to address planning for global defense posture, resource requirements, and policy development, among other things  Further, it states that these processes are overseen by an executive council that provides recommendations, inputs, and expertise on global defense posture to key national strategy products  DOD’s Planning, Programming, Budgeting, and Execution Process serves as the annual resource allocation process for DOD and is intended to enable DOD to align resources to prioritized capabilities; balance necessary warfighting capabilities with risk, affordability, and effectiveness; and provide mechanisms for making and implementing fiscally sound decisions in support of the national security strategy and the national defense strategy  DOD is using a separate and evolving process to plan ERI’s posture initiatives—rather than following its established processes—because ERI is being funded through DOD’s OCO budget  According to officials from the Office of the Secretary of Defense, Cost Assessment and Program Evaluation, the department has recognized that the short-term planning process used to develop DOD’s OCO budget can create problems when it is used to plan for enduring initiatives  As a result, DOD has developed a separate process to plan for ERI  As part of the fiscal year 2018 planning process, EUCOM provided a prioritized list of potential requirements and an estimate of its annual costs by appropriation account to the Director for Cost Assessment and Program Evaluation  According to officials from the Office of the Secretary of Defense, Cost Assessment and Program Evaluation, DOD completed its review and provided recommendations to DOD’s senior leaders for approval in October 2016 and final decisions were made within DOD in April 2017  The specific criteria by which DOD assessed EUCOM’s potential requirements are classified  DOD is requesting funds for ERI’s posture initiatives as part of its OCO budget, which is generally intended to be short-term funding for ongoing contingency operations  In February 2009, the Office of Management and Budget, in collaboration with DOD, issued criteria to assist in determining whether funding properly belonged in DOD’s base budget or in its OCO budget  These criteria were updated in September 2010 and currently indicate that funding requests should be for specific geographic areas where combat or direct combat support operations occur (such as Iraq and Afghanistan)  Further, budget items must meet other criteria  For example, OCO funding requests may be for constructing facilities and infrastructure in the theater of operations in direct support of combat operations  In these cases, the level of construction should be the minimum needed to meet operational requirements, and construction completed at enduring locations must be tied to surge operations or major changes in operational requirements  In January 2017, we reported that DOD did not apply the OCO criteria to ERI prior to deciding to budget for its requirements using its OCO budget  We recommended that DOD, in consultation with the Office of Management and Budget, reevaluate and revise the criteria for determining what can be included in OCO budget requests  DOD concurred with our recommendation and noted that it plans to propose revised OCO criteria  As of May 2017, the department has not implemented our recommendation  DOD’s planning for ERI’s posture initiatives does not establish priorities for ERI initiatives relative to those in the base budget, estimate long-term sustainment costs for some posture initiatives funded under ERI, or communicate future ERI costs to Congress  When planning ERI’s posture initiatives, DOD establishes priorities among ERI’s initiatives but does not review posture initiatives funded under ERI relative to those funded in the military services’ base budgets  DOD’s posture management process is intended to establish priorities among global posture elements and is overseen by a Global Posture Executive Council  According to DOD Instruction 3000 12, the Executive Council is responsible for reviewing, prioritizing, and endorsing across the combatant commands key posture elements such as military construction projects and international agreements  The Executive Council’s endorsements inform the military services’ budget deliberations  For the fiscal year 2017 ERI budget, EUCOM requested funding for several posture initiatives, including the continuous, rotational deployment of an armored brigade combat team and the establishment of prepositioned equipment in Europe  Officials representing the Under Secretary of Defense for Policy and the Director, Cost Assessment and Program Evaluation said that as part of its planning process for ERI the Deputy’s Management Action Group evaluated and prioritized posture initiatives funded under ERI  However, DOD could not provide documentation that it had established priorities relative to posture initiatives funded through the base budget  Further, the Global Posture Executive Council did not review or prioritize posture initiatives funded under ERI relative to posture initiatives funded through DOD’s base budget  Similarly, as DOD prepared the fiscal year 2018 ERI budget request, the Global Posture Executive Council did not prioritize EUCOM’s proposed ERI posture initiatives relative to initiatives funded through DOD’s base budget  More detailed information about these proposals, and their potential funding requirements, are classified  According to officials from the Office of the Under Secretary of Defense for Policy and the Joint Staff, DOD did not prioritize posture initiatives funded under ERI against base-budget funded posture initiatives, because ERI is funded through DOD’s OCO budget—which does not directly affect the services’ base budgets  However, because it does not prioritize ERI initiatives against other initiatives funded through the base budget, DOD lacks an understanding of the relative importance of initiatives funded under ERI and may begin investing in projects that it would not support in the absence of funding from DOD’s OCO budget  For example, Army officials noted that if funding were to become unavailable in DOD’s OCO budget, the Army is unsure how initiatives funded under ERI would rank in importance relative to other posture initiatives funded in its base budget  Consequently, the Army would be forced to make critical—and potentially costly—decisions quickly and without a clear idea of which posture initiatives were most important to the department  In planning for posture initiatives funded under ERI, EUCOM and the military services have not fully estimated the long-term sustainment costs of ERI’s posture initiatives to establish prepositioned equipment and construct new facilities  DOD’s global defense posture guidance indicates that, when evaluating potential changes to posture, the combatant commands should work with the military services to estimate the full cost of planned posture initiatives, including sustainment costs  DOD’s guidance on economic analysis also notes the importance of understanding both the size and timing of costs  Finally, our prior work has demonstrated that comprehensive cost estimates of current and future resource requirements are critical to making funding decisions and assessing program affordability  DOD leadership emphasized throughout the fiscal year 2018 budget review process that the services would need to fund ERI posture sustainment costs through their respective base budgets, but DOD did not direct the services and EUCOM to estimate these costs as they would have under their established processes  Officials from the Office of the Secretary of Defense, Cost Assessment and Program Evaluation said that DOD leadership emphasized that the military services would need to fund all future sustainment costs for ERI projects from their base budgets  Based on DOD’s approach for calculating rough order sustainment costs, we determined that ERI sustainment costs for prepositioned equipment and construction could be substantial  Army and Air Force officials said that they were working to identify and incorporate these costs into future base budget submissions  DOD officials said that we correctly applied DOD’s approach for estimating sustainment costs, but noted that actual costs may be lower than the estimated costs, because the military services may not fully fund sustainment  Additionally, officials said that EUCOM is trying to negotiate burden sharing agreements with host nations; however, it is unclear whether these negotiations will be successful or how any resulting agreements would affect DOD’s future costs  Without comprehensive estimates of the sustainment costs for the prepositioned equipment and major military construction projects in Europe, DOD decision makers have been limited in their ability to evaluate the affordability of these initiatives  Further, in the absence of these estimates, the services have been limited in their ability to plan for costs in future budgets, because they have an incomplete understanding of the magnitude of those costs and of when they are likely to be incurred  The funding plan that DOD submits to Congress for ERI does not contain information about ERI’s future costs  This is in contrast to the way DOD submits its funding plan for its base budget, where DOD provides Congress with cost projections over a 5-year period, by appropriation, leaving Congress with a better understanding of how and when to allocate resources  In reviewing the fiscal year 2018 ERI request, the Director for Cost Assessment and Program Evaluation assessed future costs associated with posture initiatives funded under ERI  We previously reported that DOD was not developing enduring requirements funded through its OCO budget as part of its budget and programming process  Officials from the Office of the Under Secretary of Defense (Comptroller) and the Office of the Secretary of Defense, Cost Assessment and Program Evaluation told us that DOD has not been required to provide estimates for future OCO costs for ERI to Congress previously  An official from the Office of the Under Secretary of Defense (Comptroller) told us that DOD does not plan to provide these future costs to Congress along with its fiscal year 2018 ERI budget submission  Additionally, in preparing its posture requirements, EUCOM did not identify assumptions regarding host nation and NATO burden sharing  For example, officials from the Office of the Under Secretary of Defense for Policy said that DOD has submitted a request to the NATO Security Investment Programmé for $200 million in funding to build a facility in Poland to store Army equipment  Officials told us that, as a result, this construction project was identified as a lesser priority in EUCOM’s fiscal year 2018 request for funding  A senior Army officer told us that completion of a facility in Poland was critical to its plans in Europe  Officials from the U S  Mission to NATO told us that as of July 2016 NATO had approved funding to complete preliminary architectural and engineering design for this project  Officials expect additional funding will be made available in July 2017 to complete final design and site preparation and the full cost of the project will be approved in early 2019  However, these officials noted that additional funding beyond what has been approved by NATO may be required to meet U S -specific requirements  Similarly, EUCOM officials said that they are working to identify opportunities to defray future costs through host nation contributions, but it is unclear how much funding—if any—host nations will provide moving forward  Congress has expressed interest in knowing the future costs of enduring activities being funded through DOD’s OCO budget  The Senate Appropriations Committee’s report accompanying a bill for DOD’s fiscal year 2015 appropriations stated that the committee does not have an understanding of enduring activities funded by the OCO budget  The committee further noted that there is a potential for risk in continuing to fund non-contingency-related activities through the OCO budget  Both GAO’s and other federal standards emphasize that agencies should provide complete and reliable information on the costs of programs externally, so that decision makers can make informed decisions when allocating resources  DOD has not provided Congress projections of future costs for posture initiatives funded under ERI because it is reviewing those requirements outside of its budget and programming processes, and DOD officials said that the department is not required to provide this information  As a result, DOD is limiting congressional visibility into the resources needed to achieve ERI’s objectives  If DOD does not provide Congress with projections of the future costs of posture initiatives funded under ERI and information on its assumptions pertaining to host nation support and burden sharing, it will continue to impede congressional visibility into the resources that are needed to fully implement these initiatives  Russia’s annexation of Crimea and the subsequent threat of further aggression led DOD to establish and later expand ERI’s objectives and enhance posture in Europe to support a new U S  strategy toward Russia  DOD has requested funding for these enhancements using its OCO budget; however, the processes DOD uses to develop its OCO budget were not designed to plan for and fund long-term, enduring initiatives such as ERI  By following a separate planning process when funding ERI with OCO, DOD is taking on risk by not reviewing and prioritizing ERI posture plans against other posture initiatives, estimating the costs for sustaining ERI initiatives, and providing Congress with estimates of ERI’s future costs  DOD risks making decisions that lack a strategic vision in comparison to other DOD priorities and may fund initiatives that cannot be sustained over the long term  Furthermore, Congress is likely to face challenges in assessing DOD’s estimated costs for ERI and the affordability of initiatives funded under ERI over the long term  To better ensure that DOD can target resources to its most critical initiatives and establish priorities across its base budget and overseas contingency operations budget, we recommend that the Secretary of Defense prioritize posture initiatives under ERI relative to those funded in its base budget as part of its established posture-planning processes  (Recommendation 1) To better enable decision makers to evaluate the full long-term costs of posture initiatives under ERI, we recommend that the Secretary of Defense direct EUCOM and the military services to develop estimates for the sustainment costs of prepositioned equipment and other infrastructure projects under ERI and ensure that the services plan for these long-term costs in future budgets  (Recommendation 2) To support congressional decision making, we recommend that the Secretary of Defense provide to Congress, along with the department’s annual budget submission, estimates of the future costs for posture initiatives funded under ERI and other enduring costs that include assumptions such as those pertaining to the level of host nation support and burden sharing  (Recommendation 3) We provided a draft of the classified report to DOD for review and comment  DOD partially concurred with all three of our recommendations, and we have reproduced DOD’s comments on the classified report in appendix II  DOD also provided technical comments, which we incorporated as appropriate  DOD partially concurred with our first recommendation to use its established posture-planning processes to prioritize ERI’s posture initiatives relative to those funded in DOD’s base budget  In its comments, DOD stated that it will continue to prioritize the negotiation of international agreements supporting ERI through the Global Posture Executive Council, and that an on-going Strategic Review will inform ERI and guide both EUCOM and the services in their program planning efforts  These are positive steps  DOD also stated it will adjudicate its ERI-funded force requirements through its global force management process, adding that it will continue to resource OCO funds for ERI requirements until there is a sufficient increase in DOD’s base budget to do so  However, we continue to believe, as noted in our report, that DOD could improve its planning for posture initiatives funded under ERI, whether or not they are funded through OCO, by using DOD’s established posture planning processes  Although DOD’s global force management process directly affects overseas military posture in the near term, this process is not designed to evaluate long-term posture priorities  If DOD does not prioritize the forces and infrastructure projects funded under ERI against those funded using the military services’ base budgets, it will continue to lack an understanding of the relative importance of the posture initiatives funded under ERI  Without such an understanding, DOD increases the risk that the services will need to make critical and potentially costly decisions without a clear idea of which posture initiatives are most critical to the department  DOD partially concurred with our second recommendation that EUCOM and the military services develop estimates for future sustainment costs and plan for these costs in future budgets  In its comments, DOD stated that its components will continue to estimate the sustainment costs for prepositioned stocks and other infrastructure projects during DOD’s annual program and budget review process  DOD also commented that without additional topline base budget funding, some portion of the associated sustainment costs will need to be financed with OCO funds  However, as we noted in our report, neither the Army nor the Air Force has fully estimated these potentially significant future costs, nor had either service incorporated them into their future budgets  Using OCO funds would mark a departure from DOD leadership’s emphasis that the services would need to fund ERI posture sustainment costs through their respective base budgets  Additionally, not developing robust estimates for sustaining these initiatives could increase long-term fiscal risk for the department if DOD shifts more ERI-associated enduring costs into its OCO budget  In the absence of robust cost estimates and deliberate planning to address those costs in future budgets, DOD will continue to be limited in its ability to evaluate the affordability of posture initiatives funded under ERI, and the military services may not plan adequate funding to sustain posture investments in Europe  DOD partially concurred with our third recommendation, to provide Congress with estimates of the future costs for posture initiatives funded under ERI and information on any underlying assumptions, such as those pertaining to the level of host nation support and burden sharing  In its comments, DOD stated that it does not currently prepare a formal 5-year Future Years Defense Program for OCO-related costs  Moreover, DOD commented that it factors in host nation support and burden sharing when preparing budget estimates for Congress  However, DOD does not state whether it will begin to provide Congress future estimates and any underlying assumptions with its budget submission  It is critical that DOD increase congressional visibility into ERI’s future costs and its underlying assumptions to facilitate congressional oversight and reasonably ensure that initiatives can be sustained over the long-term  We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, and the Commander, U S  European Command  In addition, the report is available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions about this report, please contact me at (404) 679-1816 or pendletonj@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff who made major contributions to this report are listed in Appendix III  The Army and Air Force identified approximately $224 million in unspecified minor military construction and facilities maintenance and repair projects (hereafter, minor construction and repair) that were programmed or obligated for the European Reassurance Initiative (ERI) in fiscal years 2015 through 2017  This includes $157 million for minor construction and repair projects identified by the Army and nearly $67 million for minor construction and repair projects identified by the Air Force  According to U S  European Command officials, Navy and Marine Corps construction projects funded under ERI were either major military construction or exercise-related construction projects  The tables below do not include Navy and Marine Corps exercise-related construction projects  Using the data provided by the military services, we compiled the programmed and obligated funding for these minor construction and repair projects by fiscal year, country, location, and project name in tables 3 and 4  The information in these tables was provided by U S  Army Europe and U S  Air Force Europe in response to our request for a list of minor military construction and repair projects  The data provided did not identify the appropriations used for each project  Accordingly, we have not conducted a review to examine whether funds were appropriately used for a given project  In addition to the contact named above, Kevin O’Neill, Assistant Director; Alex Winograd, Analyst-in-Charge; Scott Bruckner, Adrianne Cline, Martin De Alteriis, Joanne Landesman, Jennifer Leotta, Carol Petersen, Michael Shaughnessy, and Jena Sinkfield all made key contributions to this report 


Report 2: The Federal Reserve's (the Fed's) responsibilities as the nation's central bank fall into four main categories: monetary policy, provision of emergency liquidity through the lender of last resort function, supervision of certain types of banks and other financial firms for safety and soundness, and provision of payment system services to financial firms and the government  Congress has delegated responsibility for monetary policy to the Fed, but retains oversight responsibilities to ensure that the Fed is adhering to its statutory mandate of "maximum employment, stable prices, and moderate long-term interest rates " The Fed has defined stable prices as a longer-run goal of 2% inflation—the change in overall prices, as measured by the Personal Consumption Expenditures (PCE) price index  By contrast, the Fed states that "it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision " Monetary policy can be used to stabilize business cycle fluctuations (alternating periods of economic expansions and recessions) in the short run, while it mainly affects inflation in the long run  The Fed's conventional tool for monetary policy is to target the federal funds rate —the overnight, interbank lending rate  This report provides an overview of how monetary policy works and recent developments, a summary of the Fed's actions following the financial crisis, and ends with a brief overview of the Fed's regulatory responsibilities  In December 2008, in the midst of the financial crisis and the "Great Recession," the Fed lowered the federal funds rate to a range of 0% to 0 25%  This was the first time rates were ever lowered to what is referred to as the zero lower bound   The recession ended in 2009, but as the economic recovery consistently proved weaker than expected in the years that followed, the Fed repeatedly pushed back its time frame for raising interest rates  As a result, the economic expansion was in its seventh year and the unemployment rate was already near the Fed's estimate of full employment when it began raising rates on December 16, 2015  This was a departure from past practice—in the previous two economic expansions, the Fed began raising rates within three years of the preceding recession ending  Since then, the Fed has continued to raise rates in a series of steps to incrementally tighten monetary policy  The Fed raised rates once in 2016, three times in 2017, and four times in 2018, by 0 25 percentage points each time  The Fed has stated that "some further gradual increases in     the federal funds rate" are necessary to fulfill its mandate  The Fed describes its plans as "data dependent," meaning they would be altered if actual employment or inflation deviate from its forecast  Although monetary policy is now less stimulative than it had been at the zero lower bound, the Fed is still adding stimulus to the economy as long as the federal funds rate is below what economists call the "neutral rate" (or the long-run equilibrium rate)  To illustrate, the federal funds rate is currently similar to the inflation rate, meaning that the real (i e , inflation-adjusted) federal funds rate is around zero  However, there is uncertainty as to what constitutes a neutral rate today  By historical standards, a zero real interest rate would be well below the neutral rate, but the neutral rate appears to have fallen following the financial crisis, so that current rates may be close to the neutral rate today  Typically, the Fed keeps interest rates below the neutral rate when the economy is operating below full employment, at neutral levels when the economy is near full employment, and above the neutral rate when the economy is at risk of overheating  Indeed, the Fed identifies this as one of its "three key principles of good monetary policy " Because of lags between changes in interest rates and their economic effects, in the past, the Fed has often preemptively changed its monetary policy stance before the economy reaches the state that the Fed is anticipating  In this business cycle, the Fed has maintained a (progressively less) stimulative monetary policy throughout the expansion, boosting economic activity  In one sense, this policy could be viewed as having successfully delivered on the Fed's mandated goals of full employment and stable prices  The unemployment rate has been below 5% since 2015 and is now lower than the rate believed to be consistent with full employment  Other labor market measures are also consistent with full employment, with the possible exception of the still-low labor force participation rate  Economic theory posits that lower unemployment will lead to higher inflation in the short run, but inflation has not proven responsive to lower unemployment in recent years  After remaining persistently below the Fed's 2% target from mid-2012 to early 2018 as measured by core PCE, inflation has remained around 2% in 2018 as measured by headline or core PCE  Economic growth has also picked up beginning in the second quarter of 2017, after being persistently low by historical standards throughout the expansion  Contributing to the 2018 growth acceleration, a more expansionary fiscal policy (larger structural budget deficit) added more stimulus to the economy in the short run  Two notable policy changes contributing to fiscal stimulus in 2018 were the 2017 tax cuts ( P L  115-97 ) and the boost to discretionary spending in FY2018 and FY2019 agreed to in P L  115-123   The Fed did little to offset this fiscal stimulus, as the pace of monetary tightening in 2018 was only slightly faster than in 2017  Despite strong economic data (which is only available with a lag), the Fed announced in January 2019 that it would be "patient" before raising rates again in light of increased economic uncertainty and financial volatility  The Fed's intended policy path poses risks  If the Fed waits too long to raise rates again, the economy could overheat, resulting in high inflation and posing risk to financial stability  As an example of how overly stimulative monetary policy can lead to the latter, critics contend that the Fed contributed to the precrisis housing bubble by keeping interest rates too low for too long during the economic recovery starting in 2001  Critics see these risks as outweighing any marginal benefit associated with monetary stimulus when the economy is already so close to full employment  Raising rates more quickly would also provide more "headroom" for the Fed to lower rates more aggressively during the next economic downturn  The potential percentage point reduction in rates before hitting the zero bound is currently smaller than the rate cuts that the Fed has undertaken in past recessions  Alternatively, there is uncertainty about whether strong growth, low unemployment, inflation around 2%, and the generally benign economic environment will continue  Economic expansions do not "die of old age"; nevertheless, the current expansion is already the second longest on record and cannot last forever  The flattening of the yield curve (i e , long-term Treasury yields are similar to short-term Treasury yields) is seen by some as a warning signal that rates are too high  Although there is a risk of stimulative monetary policy causing the economy to overheat, there is also a risk that tightening too quickly could be harmful if the economy slows  Some critics would prefer clear evidence that inflation is above the Fed's target or financial conditions are unstable before the Fed raises rates again  Monetary policy refers to the actions the Fed undertakes to influence the availability and cost of money and credit to promote the goals mandated by Congress, a stable price level and maximum sustainable employment  Because the expectations of households as consumers and businesses as purchasers of capital goods exert an important influence on the major portion of spending in the United States, and because these expectations are influenced in important ways by the Fed's actions, a broader definition of monetary policy would include the directives, policies, statements, economic forecasts, and other Fed actions, especially those made by or associated with the chairman of its Board of Governors, who is the nation's central banker  The Fed's Federal Open Market Committee (FOMC) meets every six weeks to choose a federal funds target and sometimes meets on an ad hoc basis if it wants to change the target between regularly scheduled meetings  The FOMC is composed of the 7 Fed governors, the President of the Federal Reserve Bank of New York, and 4 of the other 11 regional Federal Reserve Bank presidents serving on a rotating basis  The Fed targets the federal funds rate to carry out monetary policy  The federal funds rate is determined in the private market for overnight reserves of depository institutions (called the federal funds market)  At the end of a given period, usually a day, depository institutions must calculate how many dollars of reserves they want or need to hold against their reservable liabilities (deposits)  Some institutions may discover a reserve shortage (too few reservable assets relative to those they want to hold), whereas others may have reservable assets in excess of their wants  These reserves can be borrowed and lent on an overnight basis in a private market called the federal funds market  The interest rate in this market is called the federal funds rate  If it wishes to expand money and credit, the Fed will lower the target, which encourages more lending activity and, thus, greater demand in the economy  Conversely, if it wishes to tighten money and credit, the Fed will raise the target  The federal funds rate is linked to the interest rates that banks and other financial institutions charge for loans  Thus, whereas the Fed may directly influence only a very short-term interest rate, this rate influences other longer-term rates  However, this relationship is far from being on a one-to-one basis because longer-term market rates are influenced not only by what the Fed is doing today, but also by what it is expected to do in the future and by what inflation is expected to be in the future  This fact highlights the importance of expectations in explaining market interest rates  For that reason, a growing body of literature urges the Fed to be very transparent in explaining what its policy is, will be, and in making a commitment to adhere to that policy  The Fed has responded to this literature and is increasingly transparent in explaining its policy measures and what these measures are expected to accomplish  The Federal Reserve uses two methods to maintain its target for the federal funds rate: The Fed can also change the federal funds rate by changing reserve requirements, which specify what portion of customer deposits (primarily checking accounts) banks must hold as vault cash or on deposit at the Fed  Thus, reserve requirements affect the liquidity available within the federal funds market  Statute sets the numerical levels of reserve requirements, although the Fed has some discretion to adjust them  Currently, banks are required to hold 0% to 10% of customer deposits that qualify as net transaction accounts in reserves, depending on the size of the bank's deposits  This tool is used rarely—the percentage was last changed in 1992  Each of these tools works by altering the overall liquidity available for use by the banking system, which influences the amount of assets these institutions can acquire  These assets are often called credit because they represent loans the institutions have made to businesses and households, among others  The Fed's control over monetary policy stems from its exclusive ability to alter the money supply and credit conditions more broadly  The Fed directly controls the monetary base , which is made up of currency (Federal Reserve notes) and bank reserves  The size of the monetary base, in turn, influences broader measures of the money supply, which include close substitutes to currency, such as demand deposits (e g , checking accounts) held at banks  The Fed's definition of monetary policy as the actions it undertakes to influence the availability and cost of money and credit suggests two ways to measure the stance of monetary policy  One is to look at the cost of money and credit as measured by the rate of interest relative to inflation (or inflation projections), and the other is to look at the growth of money and credit itself  Thus, it is possible to look at either interest rates or the growth in the supply of money and credit in coming to a conclusion about the current stance of monetary policy—that is, whether it is expansionary (adding stimulus to the economy), contractionary (slowing economic activity), or neutral  During the high inflation experience of the 1970s the Fed placed greater emphasis on money supply growth, but since then, most central banks including the Fed have preferred to formulate monetary policy in terms of the cost of money and credit rather than in terms of their supply  The Fed conducts monetary policy by focusing on the cost of money and credit as proxied by the federal funds rate  A simple comparison of market interest rates over time as an indicator of changes in the stance of monetary policy is potentially misleading, however  Economists call the interest rate that is essential to decisions made by households and businesses to buy capital goods the real interest rate  It is often proxied by subtracting from the market interest rate the actual or expected rate of inflation  If inflation rises and market interest rates remain the same, then real interest rates have fallen, with a similar economic effect as if market rates (called nominal rates) had fallen by the same amount with a constant inflation rate  The federal funds rate is only one of the many interest rates in the financial system that determines economic activity  For these other rates, the real rate is largely independent of the amount of money and credit over the longer run because it is determined by the interaction of saving and investment (or the demand for capital goods)  The internationalization of capital markets means that for most developed countries the relevant interaction between saving and investment that determines the real interest rate is on a global basis  Thus, real rates in the United States depend not only on U S  national saving and investment but also on the saving and investment of other countries  For that reason, national interest rates are influenced by international credit conditions and business cycles  How do changes in short-term interest rates affect the overall economy? In the short run, an expansionary monetary policy that reduces interest rates increases interest-sensitive spending, all else equal  Interest-sensitive spending includes physical investment (i e , plant and equipment) by firms, residential investment (housing construction), and consumer-durable spending (e g , automobiles and appliances) by households  As discussed in the next section, it also encourages exchange rate depreciation that causes exports to rise and imports to fall, all else equal  To reduce spending in the economy, the Fed raises interest rates and the process works in reverse  An examination of U S  economic history will show that money- and credit-induced demand expansions can have a positive effect on U S  GDP growth and total employment  The extent to which greater interest-sensitive spending results in an increase in overall spending in the economy in the short run will depend in part on how close the economy is to full employment  When the economy is near full employment, the increase in spending is likely to be dissipated through higher inflation more quickly  When the economy is far below full employment, inflationary pressures are more likely to be muted  This same history, however, also suggests that over the longer run, a more rapid rate of growth of money and credit is largely dissipated in a more rapid rate of inflation with little, if any, lasting effect on real GDP and employment  Economists have two explanations for this paradoxical behavior  First, they note that, in the short run, many economies have an elaborate system of contracts (both implicit and explicit) that makes it difficult in a short period for significant adjustments to take place in wages and prices in response to a more rapid growth of money and credit  Second, they note that expectations for one reason or another are slow to adjust to the longer-run consequences of major changes in monetary policy  This slow adjustment also adds rigidities to wages and prices  Because of these rigidities, changes in the growth of money and credit that change aggregate demand can have a large initial effect on output and employment, albeit with a policy lag of six to eight quarters before the broader economy fully responds to monetary policy measures  Over the longer run, as contracts are renegotiated and expectations adjust, wages and prices rise in response to the change in demand and much of the change in output and employment is undone  Thus, monetary policy can matter in the short run but be fairly neutral for GDP growth and employment in the longer run  In societies in which high rates of inflation are endemic, price adjustments are very rapid  During the final stages of very rapid inflations, called hyperinflation, the ability of more rapid rates of growth of money and credit to alter GDP growth and employment is virtually nonexistent, if not negative  Either fiscal policy (defined here as changes in the structural budget deficit, caused by policy changes to government spending or taxes) or monetary policy can be used to alter overall spending in the economy  However, there are several important differences to consider between the two  First, economic conditions change rapidly, and in practice monetary policy can be more nimble than fiscal policy  The Fed meets every six weeks to consider changes in interest rates and can call an unscheduled meeting any time  Large changes to fiscal policy typically occur once a year at most  Once a decision to alter fiscal policy has been made, the proposal must travel through a long and arduous legislative process that can last months before it can become law, whereas monetary policy changes are made instantly  Both monetary and fiscal policy measures are thought to take more than a year to achieve their full impact on the economy due to pipeline effects  In the case of monetary policy, interest rates throughout the economy may change rapidly, but it takes longer for economic actors to change their spending patterns in response  For example, in response to a lower interest rate, a business must put together a loan proposal, apply for a loan, receive approval for the loan, and then put the funds to use  In the case of fiscal policy, once legislation has been enacted, it may take some time for authorized spending to be outlayed  An agency must approve projects and select and negotiate with contractors before funds can be released  In the case of transfers or tax cuts, recipients must receive the funds and then alter their private spending patterns before the economy-wide effects are felt  For both monetary and fiscal policy, further rounds of private and public decisionmaking must occur before multiplier or ripple effects are fully felt  Second, monetary policy is determined based only on the Fed's mandate, whereas fiscal policy is determined based on competing political goals  Fiscal policy changes have macroeconomic implications regardless of whether that was policymakers' primary intent  Political constraints have prevented increases in budget deficits from being fully reversed during expansions  Over the course of the business cycle, aggregate spending in the economy can be expected to be too high as often as it is too low  This means that stabilization policy should be tightened as often as it is loosened, yet increasing the budget deficit has proven to be much more popular than implementing the spending cuts or tax increases necessary to reduce it  As a result, the budget has been in deficit in all but five years since 1961, which has led to an accumulation of federal debt that gives policymakers less leeway to potentially undertake a robust expansionary fiscal policy, if needed, in the future  By contrast, the Fed is more insulated from political pressures, as discussed in the previous section, and experience shows that it is willing to raise or lower interest rates  Third, the long-run consequences of fiscal and monetary policy differ  Expansionary fiscal policy creates federal debt that must be serviced by future generations  Some of this debt will be "owed to ourselves," but some (presently, about half) will be owed to foreigners  To the extent that expansionary fiscal policy crowds out private investment, it leaves future national income lower than it otherwise would have been  Monetary policy does not have this effect on generational equity, although different levels of interest rates will affect borrowers and lenders differently  Furthermore, the government faces a budget constraint that limits the scope of expansionary fiscal policy—it can only issue debt as long as investors believe the debt will be honored, even if economic conditions require larger deficits to restore equilibrium  Fourth, openness of an economy to highly mobile capital flows changes the relative effectiveness of fiscal and monetary policy  Expansionary fiscal policy would be expected to lead to higher interest rates, all else equal, which would attract foreign capital looking for a higher rate of return, causing the value of the dollar to rise  Foreign capital can only enter the United States on net through a trade deficit  Thus, higher foreign capital inflows lead to higher imports, which reduce spending on domestically produced substitutes and lower spending on exports  The increase in the trade deficit would cancel out the expansionary effects of the increase in the budget deficit to some extent (in theory, entirely if capital is perfectly mobile)  Expansionary monetary policy would have the opposite effect—lower interest rates would cause capital to flow abroad in search of higher rates of return elsewhere, causing the value of the dollar to fall  Foreign capital outflows would reduce the trade deficit through an increase in spending on exports and domestically produced import substitutes  Thus, foreign capital flows would (tend to) magnify the expansionary effects of monetary policy

ground_truth: In response to Russia's annexation of Crimea in March 2014, the President announced the ERI, to reassure allies in Europe of U.S. commitment to their security. This initiative has been funded using OCO appropriations, which Congress provides in addition to DOD's base budget appropriations. The Joint Explanatory Statement accompanying the Continuing Appropriations and Military Construction, Veterans Affairs, and Related Agencies Appropriations Act, 2017, included a provision for GAO to review matters related to ERI. In this report, we (1) describe changes in ERI's objectives, funding under ERI, and DOD's posture in Europe since 2014 and (2) evaluate the extent to which DOD's planning processes for posture initiatives funded under ERI prioritize those initiatives, estimate their long-term costs, and communicate their estimated costs to Congress. GAO analyzed DOD strategy documentation, budget and cost analysis guidance, budget justification materials, and cost and obligations data. GAO also interviewed knowledgeable officials within the Office of the Secretary of Defense, U.S. European Command, the military services, and the State Department. Since 2014, the Department of Defense (DOD) has expanded the European Reassurance Initiative's (ERI) objectives, increased its funding, and planned enhancements to European posture. DOD expanded ERI's objectives from the short-term reassurance of allies and partners to include deterring Russian aggression in the long term and developing the capacity to field a credible combined force should deterrence fail. With respect to funding, DOD will have requested approximately $4.5 billion for ERI's posture enhancements through the end of fiscal year 2017 (about $3.2 billion for fiscal year 2017 alone), and in July 2016 EUCOM identified funding needs for future posture initiatives. The expansion of ERI's objectives has contributed to DOD's enhancing its posture in Europe. Specifically, DOD has increased the size and duration of Army combat unit deployments, planned to preposition Army equipment in Eastern Europe, added new enduring locations (e.g., locations that DOD expects to access and use to support U.S. security interests for the foreseeable future), improved infrastructure, and negotiated new agreements with European nations. As of April 2017, DOD was considering further force enhancements under ERI as part of the department's ERI budget request. DOD also was reviewing whether new enduring locations to support ERI were needed and was considering other improvements to existing infrastructure. DOD's process for planning ERI has not established priorities among posture initiatives funded under ERI relative to those in its base budget, nor estimated long-term sustainment costs for some posture initiatives funded under ERI, nor communicated future costs to Congress. ERI is being planned using a separate process from DOD's established processes and is funded from DOD's overseas contingency operations (OCO) appropriations. GAO found several weaknesses: Lack of prioritization : DOD establishes priorities among ERI posture initiatives but has not evaluated them against base budget initiatives using its posture management process. As a result, DOD lacks an understanding of the relative importance of ERI initiatives and may be investing in projects that it will not continue should OCO funding become unavailable. Lack of sustainment costs : EUCOM and the military services have not fully estimated the long-term costs to sustain equipment and construction funded under ERI. Based on DOD's approach for calculating rough order sustainment costs, GAO determined that these costs could be substantial. DOD officials said that GAO correctly applied DOD's approach for estimating sustainment costs, but noted that actual costs may be lower, because the military services may not fully fund sustainment. In the absence of comprehensive estimates, DOD has been limited in its ability to assess affordability and plan for future costs. Not communicating future costs : DOD limits Congress's visibility into the resources needed to implement ERI and achieve its objectives because it does not include future costs in its ERI budget request. This is a public version of a classified report issued in August 2017. Information on specific posture planning, guidance, and budget estimates that DOD deemed to be classified have been omitted from this report. GAO recommends that DOD prioritize ERI posture initiatives against initiatives in its base budget, develop cost estimates for sustaining initiatives, and communicate future costs to Congress. DOD partially concurred with GAO's recommendations. GAO continues to believe that these recommendations are warranted.

prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 2.



Report 2:  Fifth, fiscal policy can be targeted to specific recipients  In the case of normal open market operations, monetary policy cannot  This difference could be considered an advantage or a disadvantage  On the one hand, policymakers could target stimulus to aid the sectors of the economy most in need or most likely to respond positively to stimulus  On the other hand, stimulus could be allocated on the basis of political or other noneconomic factors that reduce the macroeconomic effectiveness of the stimulus  As a result, both fiscal and monetary policy have distributional implications, but the latter's are largely incidental whereas the former's can be explicitly chosen  In cases in which economic activity is extremely depressed, monetary policy may lose some of its effectiveness  When interest rates become extremely low, interest-sensitive spending may no longer be very responsive to further rate cuts  Furthermore, interest rates cannot be lowered below zero so traditional monetary policy is limited by this "zero lower bound " In this scenario, fiscal policy may be more effective  As is discussed in the next section, some argue that the U S  economy experienced this scenario following the recent financial crisis  Of course, using monetary and fiscal policy to stabilize the economy are not mutually exclusive policy options  But because of the Fed's independence from Congress and the Administration, the two policy options are not always coordinated  If Congress and the Fed were to choose compatible fiscal and monetary policies, respectively, then the economic effects would be more powerful than if either policy were implemented in isolation  For example, if stimulative monetary and fiscal policies were implemented, the resulting economic stimulus would be larger than if one policy were stimulative and the other were neutral  Alternatively, if Congress and the Fed were to select incompatible policies, these policies could partially negate each other  For example, a stimulative fiscal policy and contractionary monetary policy may end up having little net effect on aggregate demand (although there may be considerable distributional effects)  Thus, when fiscal and monetary policymakers disagree in the current system, they can potentially choose policies with the intent of offsetting each other's actions  Whether this arrangement is better or worse for the economy depends on what policies are chosen  If one actor chooses inappropriate policies, then the lack of coordination allows the other actor to try to negate its effects  When the United States experienced the worst financial crisis since the Great Depression, the Fed undertook increasingly unprecedented steps in an attempt to restore financial stability  These steps included reducing the federal funds rate to the zero lower bound, providing direct financial assistance to financial firms, and "quantitative easing " These unconventional policy decisions continue to have consequences for monetary policy today, as the Fed embarks on monetary policy "normalization " The bursting of the housing bubble led to the onset of a financial crisis that affected both depository institutions and other segments of the financial sector involved with housing finance  As the delinquency rates on home mortgages rose to record numbers, financial firms exposed to the mortgage market suffered capital losses and lost access to liquidity  The contagious nature of this development was soon obvious as other types of loans and credit became adversely affected  This, in turn, spilled over into the broader economy, as the lack of credit soon had a negative effect on both production and aggregate demand  In December 2007, the economy entered a recession  As the housing slump's spillover effects to the financial system, as well as its international scope, became apparent, the Fed responded by reducing the federal funds target and the discount rate  Beginning on September 18, 2007, and ending on December 16, 2008, the federal funds target was reduced from 5 25% to a range between 0% and 0 25%, where it remained until December 2015  Economists call this the zero lower bound to signify that once the federal funds rate is lowered to zero, conventional open market operations cannot be used to provide further stimulus  The Fed attempted to achieve additional monetary stimulus at the zero bound through a pledge to keep the federal funds rate low for an extended period of time, which has been called forward guidance or forward commitment   The decision to maintain a target interest rate near zero was unprecedented  First, short-term interest rates have never before been reduced to zero in the history of the Federal Reserve  Second, the Fed waited much longer than usual to begin tightening monetary policy in the current recovery  For example, in the previous two expansions, the Fed began raising rates less than three years after the preceding recession ended  With liquidity problems persisting as the federal funds rate was reduced, it appeared that the traditional transmission mechanism linking monetary policy to activity in the broader economy was not working  Monetary authorities became concerned that the liquidity provided to the banking system was not reaching other parts of the financial system  As noted above, using only traditional monetary policy tools, additional monetary stimulus cannot be provided once the federal funds rate has reached its zero bound  To circumvent this problem, the Fed decided to use nontraditional methods to provide additional monetary policy stimulus  First, the Federal Reserve introduced a number of emergency credit facilities to provide increased liquidity directly to financial firms and markets  The first facility was introduced in December 2007, and several were added after the worsening of the crisis in September 2008  These facilities were designed to fill perceived gaps between open market operations and the discount window, and most of them were designed to provide short-term loans backed by collateral that exceeded the value of the loan  A number of the recipients were nonbanks that are outside the regulatory umbrella of the Federal Reserve; this marked the first time that the Fed had lent to nonbanks since the Great Depression  The Fed authorized these actions under Section 13(3) of the Federal Reserve Act, a seldom-used emergency provision that allowed it to extend credit to nonbank financial institutions and to nonfinancial firms as well  The Fed provided assistance through liquidity facilities, which included both the traditional discount window and the newly created emergency facilities mentioned above, and through direct support to prevent the failure of two specific institutions, American International Group (AIG) and Bear Stearns  The amount of assistance provided was an order of magnitude larger than normal Fed lending, as shown in Figure 1   Total assistance from the Federal Reserve at the beginning of August 2007 was approximately $234 million provided through liquidity facilities, with no direct support given  In mid-December 2008, this number reached a high of $1 6 trillion, with a near-high of $108 billion given in direct support  From that point on, it fell steadily  Assistance provided through liquidity facilities fell below $100 billion in February 2010, when many facilities were allowed to expire, and support to specific institutions fell below $100 billion in January 2011  The last loan from the crisis was repaid on October 29, 2014  Central bank liquidity swaps (temporary currency exchanges between the Fed and central foreign banks) are the only facility created during the crisis still active, but they have not been used on a large scale since 2012  All assistance through expired facilities has been fully repaid with interest  In 2010, the Dodd-Frank Act changed Section 13(3) to rule out direct support to specific institutions in the future  From the introduction of its first emergency lending facility in December 2007 to the worsening of the crisis in September 2008, the Fed sterilized the effects of lending on its balance sheet (i e , prevented the balance sheet from growing) by selling an offsetting amount of Treasury securities  After September 2008, assistance exceeded remaining Treasury holdings, and the Fed allowed its balance sheet to grow  Between September 2008 and November 2008, the Fed's balance sheet more than doubled in size, increasing from less than $1 trillion to more than $2 trillion  The loans and other assistance provided by the Federal Reserve to banks and nonbank institutions are considered assets on this balance sheet because they represent money owed to the Fed  With the federal funds rate at its zero bound and direct lending falling as financial conditions began to normalize in 2009, the Fed faced the decision of whether to try to provide additional monetary stimulus through unconventional measures  It did so through two unconventional tools—large-scale asset purchases (quantitative easing) and forward guidance  With short-term rates constrained by the zero bound, the Fed hoped to reduce long-term rates through large-scale asset purchases, which were popularly referred to as quantitative easing (QE)  Between 2009 and 2014, the Fed undertook three rounds of QE, buying U S  Treasury securities, agency debt, and agency mortgage-backed securities (MBS)  These securities now comprise most of the assets on the Fed's balance sheet  To understand the effect of quantitative easing on the economy, it is first necessary to describe its effect on the Fed's balance sheet  In 2009, the Fed's emergency lending declined rapidly as market conditions stabilized, which would have caused the balance sheet to decline if the Fed took no other action  Instead, asset purchases under the first round of QE (QE1) offset the decline in lending, and from November 2008 to November 2010, the overall size of the Fed's balance sheet did not vary by much  Its composition changed because of QE1, however—the amount of Fed loans outstanding fell to less than $50 billion at the end of 2010, whereas holdings of securities rose from less than $500 billion in November 2008 to more than $2 trillion in November 2010  The second round of QE, QE2, increased the Fed's balance sheet from $2 3 trillion in November 2010 to $2 9 trillion in mid-2011  It remained around that level until September 2012, when it began rising for the duration of the third round, QE3  It was about $4 5 trillion (comprised of $2 5 trillion of Treasury securities, $1 7 trillion MBS, and $0 4 trillion of agency debt) when QE3 ended in October 2014, and has remained at that level since  Table 1 summarizes the Fed's QE purchases  In total, the Fed's balance sheet increased by more than $2 5 trillion over the course of the three rounds of QE, making it about five times larger than it was before the crisis  This increase in the Fed's assets must be matched by a corresponding increase in the liabilities on its balance sheet  The Fed's liabilities mostly take the form of currency, bank reserves, and cash deposited by the U S  Treasury at the Fed  QE has mainly resulted in an increase in bank reserves, from about $46 billion in August 2008 to $820 billion at the end of 2008  Since October 2009, bank reserves have exceeded $1 trillion, and they have been between $2 5 trillion and $2 8 trillion since 2014  The increase in bank reserves can be seen as the inevitable outcome of the increase in assets held by the Fed because the bank reserves, in effect, financed the Fed's asset purchases and loan programs  Reserves increase because when the Fed makes loans or purchases assets, it credits the proceeds to the recipients' reserve accounts at the Fed  The intended purpose of QE was to put downward pressure on long-term interest rates  Purchasing long-term Treasury securities and MBS should directly reduce the rates on those securities, all else equal  The hope is that a reduction in those rates feeds through to private borrowing rates throughout the economy, stimulating spending on interest-sensitive consumer durables, housing, and business investment in plant and equipment  Indeed, Treasury and mortgage rates have been unusually low since the crisis compared with the past few decades, although the timing of declines in those rates does not match up closely to the timing of asset purchases  Determining whether QE reduced rates more broadly and stimulated interest-sensitive spending requires controlling for other factors, such as the weak economy, which tends to reduce both rates and interest-sensitive spending  The increase in the Fed's balance sheet has the potential to be inflationary because bank reserves are a component of the portion of the money supply controlled by the Fed (called the monetary base ), which grew at an unprecedented pace during QE  In practice, overall measures of the money supply have not grown as quickly as the monetary base, and inflation has remained below the Fed's goal of 2% for most of the period since 2008  The growth in the monetary base has not translated into higher inflation because bank reserves have mostly remained deposited at the Fed and have not led to increased lending or asset purchases by banks  Another concern is that by holding large amounts of MBS, the Fed is allocating credit to the housing sector, putting the rest of the economy at a disadvantage compared with that sector  Advocates of MBS purchases note that housing was the sector of the economy most in need of stabilization, given the nature of the crisis (this argument becomes less persuasive as the housing market continues to rebound); that MBS markets are more liquid than most alternatives, limiting the potential for the Fed's purchases to be disruptive; and that the Fed is legally permitted to purchase few other assets, besides Treasury securities  On October 29, 2014, the Fed announced that it would stop making large-scale asset purchases at the end of the month  Now that QE is completed, attention has turned to the Fed's "exit strategy" from QE and zero interest rates  The Fed laid out its plans to normalize monetary policy in a statement in September 2014  It plans to continue implementing monetary policy by targeting the federal funds rate  The basic challenge to doing so is that the Fed cannot effectively alter the federal funds rate by altering reserve levels (as it did before the crisis) because QE has flooded the market with excess bank reserves  In other words, in the presence of more than $2 trillion in bank reserves, the market-clearing federal funds rate is close to zero even if the Fed would like it to be higher  The most straightforward way to return to normal monetary policy would be to remove those excess reserves by shrinking the balance sheet through asset sales  The Fed does not intend to sell any securities, however  Instead, it is gradually reducing the balance sheet by ceasing to roll over securities as they mature, which began in September 2017—almost three years after QE ended  Initially, it allowed only $6 billion of Treasuries and $4 billion of MBS to run off each month, which was gradually increased to $30 billion of Treasuries and $20 billion of MBS per month, where it will remain until normalization is completed  The Fed believes that it would only cease shrinking the balance sheet or use QE again in the future if it its ability to stimulate the economy using reductions in the federal funds rate were insufficient  The Fed intends to ultimately reduce the balance sheet until it holds "no more securities than necessary to implement monetary policy efficiently and effectively " The Fed has stated that it foresees a balance sheet size that is consistent with this goal will be larger than it was before the crisis  In part, that is because other liabilities on the Fed's balance sheet are larger—there is more currency in circulation now than there was before the crisis, and the Treasury has kept larger balances on average in its account at the Fed  But the balance sheet will also be significantly larger because the Fed decided in January 2019 to continue using its new method of targeting the federal funds rate even after normalization is completed  Under the new method, the federal funds rate is not determined by supply and demand in the market for bank reserves, and the Fed would prefer to maintain abundant bank reserves so that it does not have to use open market operations to respond to changes in banks' demand for reserves  By contrast, if it went back to the pre-crisis method of targeting the federal funds rate, only minimal excess reserve balances would be necessary (but perhaps more than before the crisis), so its balance sheet could be much smaller  The Fed has not yet announced when the wind-down will be completed or how large the balance sheet would be upon completion, but the January 2019 FOMC minutes noted the wind-down could be completed as soon as this year  In that case, the balance sheet would not be much smaller than its current size of $4 trillion when normalization is completed—more than four times larger than its pre-crisis size  Although the Fed has stated that it intends to eventually stop holding MBS, the Fed would still have sizable MBS holdings in 2025, according to projections from the New York Fed  In order to raise the federal funds rate in the presence of large reserves, the Fed has raised the two market interest rates that are close substitutes—it has directly raised the rate it pays banks on reserves held at the Fed and used large-scale reverse repurchase agreements (repos) to alter repo rates  In 2008, Congress granted the Fed the authority to pay interest on reserves  Because banks can earn interest on excess reserves by lending them in the federal funds market or by depositing them at the Fed, raising the interest rate on bank reserves should also raise the federal funds rate  In this way, the Fed can lock up excess liquidity to avoid any potentially inflationary effects because reserves kept at the Fed cannot be put to use by banks to finance activity in the broader economy  In practice, the interest rate that the Fed has paid banks on reserves has been slightly higher than the federal funds rate, which some have criticized as a subsidy to banks  Reverse repos are another tool for draining liquidity from the system and influencing short-term market rates  They drain liquidity from the financial system because cash is transferred from market participants to the Fed  As a result, interest rates in the repo market, one of the largest short-term lending markets, rise  The Fed has long conducted open market operations through the repo market, but since 2013 it has engaged in a much larger volume of reverse repos with a broader range of nonbank counterparties, including the government-sponsored enterprises (such as Fannie Mae and Freddie Mac) and certain money market funds, through a new Overnight Reverse Repurchase Operations Facility  The Fed is currently not capping the amount of overnight reverse repos offered through this facility  There has been some concern about the potential ramifications of the Fed becoming a dominant participant in this market and expanding its counterparties  For example, will counterparties only be willing to transact with the Fed in a panic, and will the Fed be exposed to counterparty risk with nonbanks that it does not regulate? The Fed has distinct roles as a central bank and a regulator  Its main regulatory responsibilities are as follows: B ank regulation   The Fed supervises bank holding companies (BHCs) and thrift holding companies (THCs), which include all large and thousands of small depositories, for safety and soundness  The Dodd-Frank Act requires the Fed to subject BHCs with more than $50 billion in consolidated assets to enhanced prudential regulation (i e , stricter standards than are applied to similar firms) in an effort to mitigate the systemic risk they pose  The Fed is also the prudential regulator of U S  branches of foreign banks and state banks that have elected to become members of the Federal Reserve System  Often in concert with the other banking regulators, it promulgates rules and supervisory guidelines that apply to banks in areas such as capital adequacy, and examines depository firms under its supervision to ensure that those rules are being followed and those firms are conducting business prudently  The Fed's supervisory authority includes consumer protection for banks under its jurisdiction that have $10 billion or less in assets  P rudential regulat ion of nonbank systemically important financial institutions   The Dodd-Frank Act allows the Financial Stability Oversight Council (FSOC) to designate nonbank financial firms as systemically important (SIFIs)  Designated firms are supervised by the Fed for safety and soundness  Since enactment, the number of designated firms has ranged from four, initially, to none today  R egulation of the payment system   The Fed regulates the retail and wholesale payment system for safety and soundness  It also operates parts of the payment system, such as interbank settlements and check clearing  The Dodd-Frank Act subjects payment, clearing, and settlement systems designated as systemically important by the FSOC to enhanced supervision by the Fed (along with the Securities and Exchange Commission and the Commodity Futures Trading Commission, depending on the type of system)  M argin requirements   The Fed sets margin requirements on the purchases of certain securities, such as stocks, in certain private transactions  The purpose of margin requirements is to mandate what proportion of the purchase can be made on credit  The Fed attempts to mitigate systemic risk and prevent financial instability through these regulatory responsibilities, as well as through its lender of last resort activities and participation on the FSOC (whose mandate is to identify risks and respond to emerging threats to financial stability)  The Fed has focused more on attempting to mitigate systemic risk through its regulations since the financial crisis, and has also restructured its internal operations to facilitate a macroprudential approach to supervision and regulation 
Report 2:  When interested entities contact VA to request information on the CHIP-IN pilot, VA officials told us they find the entities are often surprised by the donation commitment  For example, two entities that responded to VA’s RFI told us they were not clear about the donation requirement or the expected level of donation, or both  One respondent did not understand the pilot required a donation and would not provide an opportunity for a financial return on investment  Another respondent indicated that when they asked VA for clarification about the expected project’s scope, personnel from a headquarters office and the local VA medical center could not fully answer their questions  VA officials acknowledged these challenges and said they have changed their outreach efforts to focus on certain potential CHIP-IN locations, rather than RFIs aimed at a broader audience  Further, VA officials said that when speaking with potential donors going forward, they plan to involve a small group of officials who are knowledgeable about the pilot and its donation approach  Internal communication  While VA initially experienced some challenges in ensuring that all relevant internal stakeholders have been included in the pilot’s implementation, according to officials, the agency has taken recent steps to address this concern and involve appropriate internal offices  For example, officials from the Capital Asset Management Office said they could have assisted ORP in narrowing the list of potential projects in the RFIs but were not consulted  Later, after revising the marketing approach, ORP reached out to the Capital Asset Management Office and other relevant offices for help in determining priority locations for additional CHIP-IN projects, according to an ORP official  Officials from the Capital Asset Management Office told us that with improved engagement they were able to participate more actively in discussions about the pilot  In addition, initial plans for the CHIP-IN steering committee did not include VHA representation  However, in summer 2018 ORP expanded the planned steering committee to include VHA representatives, a plan that some other VA offices told us is needed to ensure that the pilot addresses the agency’s healthcare needs and that VHA offices are informed about pilot efforts  Based on the experience with the Omaha project, the CHIP-IN donation approach can result in potential cost and time savings—through the leveraging of private-sector funding, contracting, and construction practices—according to VA officials and the Omaha donor group  Regarding cost savings, one VA official stated that using donations makes VA’s appropriated funds available to cover other costs  In addition, based on the experience with the Omaha project, other VA officials told us that a CHIP-IN project can potentially be completed for a lower cost because of practices resulting from private sector leadership  Specifically, VA estimated that the Omaha ambulatory care center would cost about $120 million for VA to build outside of a donation partnership—as a standard federal construction project  Under the CHIP-IN pilot, however, the total estimated cost of the Omaha facility is $86 million—achieving a potential $34 million cost savings  Regarding time savings, CHIP-IN projects can potentially be completed at a faster pace because of the use of certain private sector practices and because projects can be addressed earlier than they otherwise would be, according to VA officials  The use of private-sector building practices can result in cost and time savings in a number of ways, according to VA officials and the Omaha donor group, as follows: The use of private-sector building standards contributed to cost savings for the Omaha project, according to VA officials and donor group representatives  VA and the donor group negotiated a combination of industry and VA building standards  A CFM official told us that using this approach and working with the private sector donor group encouraged the design team to think creatively about the risk assessment process and about how to meet the intent of VA’s physical security standards, but at a lower cost than if they were required to build a facility using all of VA’s building standards as written  For example, when assessing the safety and physical-security risk, the donor group and VA identified a location where two sides of the facility will not have direct exposure to the public or roadway traffic  Prohibiting exposure to roadways on two sides of the facility will mean spending less money to harden (i e , protect) the facility against threats such as vehicular ramming  According to VA officials, using the combined standards did not compromise security on the Omaha project  Involving the general contractor early on in the design for the Omaha project, an approach VA does not typically take, contributed to both time and cost savings  VA officials told us that engaging the general contractor during the project’s design stage allowed the project to begin more quickly and was also helpful in obtaining information about costs and keeping the project within budget  However, VA officials said that depending on the project and contracting method used, it might not be possible to apply this contracting practice to VA construction projects outside of the pilot program  A private-sector design review method helped to save time  The Omaha donor group used a software package that allowed all design- document reviewers to simultaneously review design documents and then store their comments in a single place  VA officials said this approach was more efficient than VA’s typical review method and cut about 18 weeks from the project’s timeline  VA officials also said use of this software was a best practice that could be applied to VA construction projects more broadly  In addition, the donor group and VA employed fewer rounds of design reviews than VA typically uses; this streamlining also helped to save time during the design process, according to VA officials  Further, VA officials said that the CHIP-IN donation approach can allow VA to address projects more quickly because they are addressed outside of VA’s typical selection and funding process  For example, VA officials told us that because of the agency’s current major construction backlog, using the CHIP-IN donation approach allowed work on the Omaha project to begin at least 5 years sooner than if the CHIP-IN approach had not been used  The Omaha project’s priority was low relative to other potential projects, so that it was unlikely to receive additional funding for construction for several years  For example, one agency official noted that even if the project was at the top of VA’s priorities, there is a backlog of 20 major construction projects worth $5 billion ahead of it—meaning the Omaha project would probably not be addressed for at least 5 years  VA officials also told us that as they consider future CHIP-IN projects, they are looking for other projects that, like the one in Omaha, are needed, but may not be a top priority given available funding and could be moved forward with a private sector donation  In addition, use of the CHIP-IN donation approach and decision to pursue an ambulatory care center contributed to an earlier start on a project to address veterans’ needs  However, as mentioned earlier, VA officials said that future construction projects will be necessary to address some needs that were part of the original replacement medical center plan  A main challenge to establishing pilot partnerships is the reliance on large philanthropic donations, according to VA officials, the Omaha donor group, and RFI respondents  In general, the potential donor pool may not be extensive given the size of the expected donations—in some cases tens or hundreds of millions of dollars—and the conditions under which the donations must be made  For example, as discussed earlier, VA officials said that when interested entities contact them about the pilot, they are often surprised by the donation commitment  When we spoke with two entities that responded to VA’s RFI, one told us that they “could not afford to work for free” under the pilot while another told us that developers are more likely to participate in the pilot if they see an incentive, or a return on their financial contribution  Also, VA officials told us that some potential project locations have not received any appropriations—making the projects’ implementation less appealing to potential donors  The Omaha donor group noted that a VA financial contribution at or above 50 percent of a project’s estimated cost is essential for demonstrating the agency’s commitment and for leveraging private-sector donations  To address challenges involving the philanthropic nature of the pilot, ORP officials told us that VA has tried to identify strategies or incentives that could encourage donor involvement  For example, the CHIP-IN steering committee is considering what incentives might be effective to encourage greater participation  One ORP official told us that such incentives could include potential naming opportunities (that is, authority to name items such as facility floors, wings, or the actual facility), although offering such incentives may require changes in VA’s authority  Further, because it may be difficult to secure donations for larger, more costly projects, some VA officials, donor group representatives, and one RFI respondent we spoke to suggested that VA consider developing less costly CHIP-IN projects—giving VA a better chance of serving veterans by filling gaps in service needs  Other VA officials, however, said they wanted to focus on larger projects because the pilot allows only five projects  Another challenge is that VA generally does not possess marketing and philanthropic development experience  VA officials told us that this makes the inherent challenge of finding donors more difficult  While VA officials have used the assistance of a nonprofit entity that has marketing expertise, they also said that going forward it would be helpful to have staff with relevant marketing and philanthropic development experience to assist with identifying donors  VA officials said this expertise could possibly be acquired through hiring a contractor, but funding such a hire may be difficult within their existing resources  As discussed above, the CHIP-IN pilot presents an uncharted approach to VA’s implementation of projects, and using CHIP-IN has aspects of an organizational transformation in property acquisition for the agency because it leverages donation partnerships and streamlines VA’s typical funding process  We have found that a key practice of organizational transformation includes a dedicated implementation team to manage the transformation process and that leading practices for cross-functional teams include clear roles and responsibilities, and committed members with relevant expertise  VA officials and Omaha donor group representatives acknowledged that a dedicated CHIP-IN team could help focus pilot implementation—and that no such team existed within the agency  ORP officials told us that the newly formed CHIP-IN steering committee would provide the necessary leadership for pilot implementation  They anticipate that a working group will be part of the committee and serve as a dedicated team for the pilot  However, as discussed below, roles and responsibilities have not been defined and staff resource decisions have not been made  Clear and documented roles and responsibilities  Several VA officials told us that responsibility for managing the overall pilot effort had not been assigned, and that they had different interpretations of which office had responsibility for leading the pilot  Some officials identified ORP as the leader, while others thought it was CFM or the Center for Strategic Partnerships  One CFM official told us that a clear definition of responsibilities is needed under the pilot along with a dedicated office or person with the ability to make decisions when an impasse across offices exists  Similarly, a senior VHA official told us that leadership roles and responsibilities for the pilot are not fully understood within the agency, which has made establishing partnerships under the pilot a challenge  For example, both VA officials and Omaha donor group representatives identified the lack of a senior-level leader for the pilot as a challenge and emphasized the need for strong pilot leadership going forward  Now that a CHIP-IN steering committee is being formed to provide pilot leadership, ORP officials intend to discuss committee members’ roles and responsibilities  This discussion was planned for the first committee meeting but was rescheduled for the next meeting in October 2018  ORP officials, however, told us that they do not expect to assign individual members’ roles and responsibilities until a future date  VA officials did not have a timeline for when committee or individual members’ roles and responsibilities would be formally documented  ORP officials said that roles and responsibilities for the pilot have not been defined because after enactment of the CHIP-IN Act, their first priority was to engage the Omaha donor group and negotiate an agreement  Later, after the Omaha project was progressing, ORP officials said they turned their attention to formalizing the pilot program and identifying additional donation partnerships  While it is important to concentrate on completion of individual projects, it is also important to plan for the overall pilot’s implementation—to help ensure that the pilot’s purpose and goals are met and in a timely manner  We have found that clarifying roles and responsibilities is an important activity in facilitating strong collaboration and building effective cross-functional teams  In addition, we have found that articulating roles and responsibilities is a powerful tool in collaboration and that it is beneficial to detail such collaborations in a formal, written document  Committed team members  Various VA offices and staff members have worked on the CHIP-IN pilot in addition to their other responsibilities, but several VA officials told us the resources currently dedicated to the pilot are insufficient  During our review, an ORP official told us that two ORP staff each spent about 4 to 6 hours per week on the pilot, as collateral duties  However, since that time, one of these two staff members has left the agency  A senior VA official told us that ORP and the Center for Strategic Partnerships could each use two to three more dedicated staff members to work solely on the pilot  While one ORP official said that additional staff would likely be assigned after other CHIP-IN projects are identified, a Center for Strategic Partnerships official said a specified percentage of staff time should be dedicated now to identifying potential donors  As mentioned above, VA officials told us they anticipate a working group will be part of the CHIP-IN steering committee and will serve as the dedicated team to implement the pilot  However, VA has not yet documented how it will staff the working group, including how it will obtain the needed expertise within its existing resources  According to one VA official, staff had not been initially dedicated to the pilot because the CHIP-IN Act did not provide resources to fund a dedicated team for the pilot, so VA has needed to implement the pilot within its existing resources  This VA official also told us that they were not certain VA could support a dedicated team with existing resources  Another official indicated that VA would need to consider how to incorporate CHIP-IN into the agency’s operations if the pilot program were expanded beyond the initial pilot and then dedicate needed resources  Dedicating a strong and stable implementation team is important to ensuring that the effort receives the focused, full-time attention needed  Team members with relevant knowledge and expertise  As previously discussed, VA officials told us that it would be helpful for a CHIP-IN team to include stakeholders with certain expertise, such as marketing and philanthropic development experience  In addition, representatives from the Omaha donor group said going forward, proactive public relations expertise is needed from VA headquarters (in particular, for external communications outside of the partnership) to quickly and positively address any incidents that could negatively impact VA’s ability to encourage donor participation in the pilot at the local level  For example, in the event of critical news reports about a local VA facility, such as what occurred in Omaha, donor group representatives said that additional public relations support would be helpful  VA officials also told us that a CHIP-IN team should be a collaborative effort across several offices  Specifically, one senior VA official said a cross-functional team with representation from ORP, CFM Operations, the Center for Strategic Partnerships, VHA, and the Office of Asset Enterprise Management (which has budget and finance expertise) would be useful in focusing and implementing the pilot  Leading practices for cross-functional teams include having members with a wide diversity of knowledge and expertise  Having a dedicated team or working group that consists of committed members with clear roles and responsibilities could assist VA in implementing the CHIP-IN pilot  For example, the working group could focus time and attention on strengthening design of the pilot program as a whole, instead of implementing projects on a piecemeal basis  Further, clearly identifying and documenting roles and responsibilities could help relevant stakeholders define and agree upon pilot objectives as well as an assessment methodology and evaluation plan  In addition, including stakeholders with relevant expertise on the dedicated team may assist VA in identifying viable projects and negotiating partnership agreements more readily  The CHIP-IN pilot is a unique, time-limited opportunity for VA to test a new way of building needed medical facilities by using non-federal funding sources—donors—to leverage federal funds  Though the first project is still under way, stakeholders have already noted benefits of the donation partnership approach, including potential cost and time savings as well as learning about private sector practices that could be applied more broadly to VA construction  However, VA is not yet collecting the information it needs to support decisions by VA or Congress about the pilot  Without a strengthened pilot design—including measurable objectives, an assessment methodology, and an evaluation plan—that can help inform decisions about the scalability of the pilot, it may not be clear to VA and Congress whether the CHIP-IN approach could be part of a longer-term strategy or how lessons learned could enhance other VA construction efforts  While leadership for the pilot had not been previously assigned, a newly formed CHIP-IN steering committee is meant to focus on the pilot’s implementation  Defining and documenting roles and responsibilities for this committee—and identifying the resources needed to effectively implement the pilot—could assist VA in partnering with additional donors and creating new opportunities to meet the urgent needs of veterans  We are making the following three recommendations to VA  The Secretary of VA should ensure that internal stakeholders—such as the CHIP-IN steering committee’s members—agree to and document clear, measurable objectives for the CHIP-IN pilot that will help inform decisions about whether and how to scale the program  (Recommendation 1) The Secretary of VA should ensure that internal stakeholders—such as the CHIP-IN steering committee’s members—develop an assessment methodology and an evaluation plan that are linked to objectives for the CHIP-IN pilot and that help inform decisions about whether and how to scale the program  (Recommendation 2) The Secretary of VA should ensure that the CHIP-IN steering committee documents the roles and responsibilities of its members and identifies available staff resources, including any additional expertise and skills that are needed to implement the CHIP-IN pilot program  (Recommendation 3) We provided a draft of this report to VA for comment  In its written comments, reproduced in appendix I, VA concurred with our recommendations and stated that it has begun or is planning to take actions to address them  VA also provided a general comment on the role of VHA in the CHIP-IN pilot, which we incorporated in our report  We are sending copies of this report to the appropriate congressional committees, the Secretary of Veterans Affairs, and other interested parties  In addition, the report is available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions regarding this report, please contact me at (213) 830-1011 or vonaha@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff who made key contributions to this report are listed in appendix II  In addition to the contact named above, Cathy Colwell (Assistant Director), Kate Perl (Analyst in Charge), Melissa Bodeau, Jennifer Clayborne, Peter Del Toro, Shirley Hwang, Terence Lam, Malika Rice, Crystal Wesco, and Elizabeth Wood made key contributions to this report 

ground_truth: Congress has delegated responsibility for monetary policy to the Federal Reserve (the Fed), the nation's central bank, but retains oversight responsibilities for ensuring that the Fed is adhering to its statutory mandate of "maximum employment, stable prices, and moderate long-term interest rates." To meet its price stability mandate, the Fed has set a longer-run goal of 2% inflation. The Fed's control over monetary policy stems from its exclusive ability to alter the money supply and credit conditions more broadly. Normally, the Fed conducts monetary policy by setting a target for the federal funds rate, the rate at which banks borrow and lend reserves on an overnight basis. It meets its target through open market operations, financial transactions traditionally involving U.S. Treasury securities. Beginning in 2007, the federal funds target was reduced from 5.25% to a range of 0% to 0.25% in December 2008, which economists call the zero lower bound. By historical standards, rates were kept unusually low for an unusually long time to mitigate the effects of the financial crisis and its aftermath. Starting in December 2015, the Fed has been raising interest rates and expects to gradually raise rates further. The Fed raised rates once in 2016, three times in 2017, and four times in 2018, by 0.25 percentage points each time. In light of increased economic uncertainty and financial volatility, the Fed announced in January 2019 that it would be "patient" before raising rates again. The Fed influences interest rates to affect interest-sensitive spending, such as business capital spending on plant and equipment, household spending on consumer durables, and residential investment. In addition, when interest rates diverge between countries, it causes capital flows that affect the exchange rate between foreign currencies and the dollar, which in turn affects spending on exports and imports. Through these channels, monetary policy can be used to stimulate or slow aggregate spending in the short run. In the long run, monetary policy mainly affects inflation. A low and stable rate of inflation promotes price transparency and, thereby, sounder economic decisions. The Fed's relative independence from Congress and the Administration has been justified by many economists on the grounds that it reduces political pressure to make monetary policy decisions that are inconsistent with a long-term focus on stable inflation. But independence reduces accountability to Congress and the Administration, and recent legislation and criticism of the Fed by the President has raised the question about the proper balance between the two. While the federal funds target was at the zero lower bound, the Fed attempted to provide additional stimulus through unsterilized purchases of Treasury and mortgage-backed securities (MBS), a practice popularly referred to as quantitative easing (QE). Between 2009 and 2014, the Fed undertook three rounds of QE. The third round was completed in October 2014, at which point the Fed's balance sheet was $4.5 trillion—five times its precrisis size. After QE ended, the Fed maintained the balance sheet at the same level until September 2017, when it began to very gradually reduce it to a more normal size. The Fed has raised interest rates in the presence of a large balance sheet through the use of two new tools—by paying banks interest on reserves held at the Fed and by engaging in reverse repurchase agreements (reverse repos) through a new overnight facility. In January 2019, the Fed announced that it would continue using these tools to set interest rates permanently, in which case the balance sheet may not get much smaller than its current size of $4 trillion. With regard to its mandate, the Fed believes that unemployment is currently lower than the rate that it considers consistent with maximum employment, and inflation is close to the Fed's 2% goal by the Fed's preferred measure. Even after recent rate increases, monetary policy is still considered expansionary. This monetary policy stance is unusually stimulative compared with policy in this stage of previous expansions, and is being coupled with a stimulative fiscal policy (larger structural budget deficit). Debate is currently focused on how quickly the Fed should raise rates. Some contend the greater risk is that raising rates too slowly at full employment will cause inflation to become too high or cause financial instability, whereas others contend that raising rates too quickly will cause inflation to remain too low and choke off the expansion.