ANNUAL REPORT OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

93rd

2006

Board of Governors of the Federal Reserve Syst

2006
Board of Governors of the Federal Reserve System

93rd

2006
This publication is available from the Board of Governors of the Federal Reser

Publications Fulfillment, Mail Stop 127, Washington, DC 20551. It is also avail

Board’s web site, at www.federalreserve.gov.
Letter of Transmittal

Board of Governors of the Federal Reserve System

Washington, D.C.

June 2007

The Speaker of the House of Representatives:

Pursuant to the requirements of section 10 of the Federal Reserve 

I am pleased to submit the ninety-third annual report of the

Board of Governors of the Federal Reserve System.

This report covers operations of the Board during calendar year 20

Sincerely,

Ben Bernanke

Chairman
Overview of the Federal Reserve

As the nation’s central bank, the Federal

Reserve System has numerous, varied

responsibilities:

• conducting the nation’s monetary policy by influencing monetary and credit

conditions in the economy

• supervising and regulating banking institutions, to ensure the safety and

soundness of the nation’s banking and

financial system and to protect the

credit rights of consumers

• maintaining the stability of the financial system and containing systemic

risk that may arise in financial markets

• providing financial services to depository institutions, the U.S. government,

and foreign official institutions

The Federal Reserve is a federal system composed of a central, governmental agency—the Board of Governors—

and twelve regional Federal Reserve

Banks. The Board of Governors, located

in Washington, D.C., is made up of

seven members appointed by the President of the United States and supported

by a staff of about 1,850. In addition

to conducting research, analysis, and

policymaking related to domestic and

international financial and economic

matters, the Board plays a major role

in the supervision and regulation of the

U.S. banking system and administers

most of the nation’s laws regarding consumer credit protection. It also has broad

oversight responsibility for the nation’s

payments system and the operations and

activities of the Federal Reserve Banks.

The Federal Reserve Banks, which

combine public and private elements,

are the operating arms of the central

banking system. They carry out a variety of System functions, includ

ating a nationwide payment

distributing the nation’s curr

coin; under authority delegat

Board of Governors, superv

regulating bank holding comp

state-chartered banks that are 

of the System; serving as fis

of the U.S. Treasury; and pr

variety of financial services for 

sury, other government agen

other fiscal principals.

A major component of th

Reserve System is the Fede

Market Committee (FOMC), 

made up of the members of the 

Governors, the president of th

Reserve Bank of New York, 

dents of four other Federal 

Banks, who serve on a rotat

The FOMC establishes monet

and oversees open market o

the Federal Reserve’s main to

fluencing overall monetary a

conditions. The FOMC sets t

funds rate, but the Board ha

thority over changes in reserv

ments and must approve any 

the discount rate initiated by 

Bank.

Two other groups play ro

functioning of the Federal Re

pository institutions, throug

monetary policy operates, and 

councils, which make recomm

to the Board and the Reser

regarding System responsibilit

All federally chartered ban

law, members of the Federa

System. State-chartered banks 

come members if they me

requirements. 
Contents

Monetary Policy and Economic Development

3 MONETARY POLICY AND THE ECONOMIC OUTLOOK

5 Monetary Policy, Financial Markets, and the Economy in 2006 and Early 2

6 Economic Projections for 2007 and 2008

9 ECONOMIC AND FINANCIAL DEVELOPMENTS IN 2006 AND EARL

10 The Household Sector

13 The Business Sector

17 The Government Sector

20 The External Sector

22 The Labor Market

24 Prices

26 U.S. Financial Markets

30 International Developments

35 MONETARY POLICY REPORT OF JULY 2006

35 Monetary Policy and the Economic Outlook

39 Economic and Financial Developments in 2006

Federal Reserve Operations

63 BANKING SUPERVISION AND REGULATION

63 Scope of Responsibilities for Supervision and Regulation

64 Supervision for Safety and Soundness

73 Supervisory Policy

83 Supervisory Information Technology

84 Staff Development

84 Regulation of the U.S. Banking Structure

88 Enforcement of Other Laws and Regulations

89 Federal Reserve Membership

91 CONSUMER AND COMMUNITY AFFAIRS

91 Implementation of Statutes Designed to Inform and Protect Consumers

96 Supervision for Compliance with Consumer Protection and

Community Reinvestment Laws

107 Consumer Complaints

109 Advice from the Consumer Advisory Council

111 Consumer Education and Research

113 Promotion of Community Economic Development and Access to Financial 

in Historically Underserved Markets
119 FEDERAL RESERVE BANKS

119 Developments in Federal Reserve Priced Services

123 Developments in Currency and Coin

124 Developments in Fiscal Agency and Government Depository Services

126 Electronic Access to Reserve Bank Services

127 Information Technology

127 Examinations of the Federal Reserve Banks

128 Income and Expenses

129 Holdings of Securities and Loans

129 Volume of Operations

129 Federal Reserve Bank Premises

131 Pro Forma Financial Statements for Federal Reserve Priced Services

135 THE BOARD OF GOVERNORS AND THE GOVERNMENT PERFORM

AND RESULTS ACT

135 Strategic Plan, Performance Plan, and Performance Report

135 Mission

135 Goals and Objectives

139 FEDERAL LEGISLATIVE DEVELOPMENTS

139 Financial Services Regulatory Relief Act of 2006

146 Unlawful Internet Gambling Enforcement Act of 2006

147 Military Personnel Financial Services Protection Act

148 Financial Netting Improvements Act of 2006

Records

151 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS

151 Regulation D (Reserve Requirements of Depository Institutions)

151 Regulation E (Electronic Fund Transfers)

152 Regulation H (Membership of State Banking Institutions in the

Federal Reserve System) and Regulation Y (Bank Holding Companies a

Change in Bank Control)

152 Regulation K (International Banking Operations)

152 Regulation O (Loans to Executive Officers, Directors, and Principal Shareh

Member Banks)

152 Regulation Y (Bank Holding Companies and Change in Bank Control)

153 Regulation BB (Community Reinvestment)

153 Rules Regarding Equal Opportunity

153 Policy Statements and Other Actions

155 Discount Rates in 2006
157 MINUTES OF FEDERAL OPEN MARKET COMMITTEE MEETINGS

157 Authorization for Domestic Open Market Operations

159 Domestic Policy Directive

159 Authorization for Foreign Currency Operations

160 Foreign Currency Directive

161 Procedural Instructions with Respect to Foreign Currency Operations

161 Meeting Held on January 31, 2006

173 Meeting Held on March 27–28, 2006

181 Meeting Held on May 10, 2006

189 Meeting Held on June 28–29, 2006

197 Meeting Held on August 8, 2006

204 Meeting Held on September 20, 2006

211 Meeting Held on October 24–25, 2006

220 Meeting Held on December 12, 2006

229 LITIGATION

Federal Reserve System Organization

233 BOARD OF GOVERNORS

236 FEDERAL OPEN MARKET COMMITTEE

237 ADVISORY COUNCILS TO THE BOARD OF GOVERNORS

237 Federal Advisory Council

238 Consumer Advisory Council

239 Thrift Institutions Advisory Council

240 FEDERAL RESERVE BANKS AND BRANCHES

240 Officers of the Banks and Branches

241 Conference of Chairmen

241 Conference of Presidents

242 Conference of First Vice Presidents

242 Directors of the Banks and Branches

259 MEMBERS OF THE BOARD OF GOVERNORS, 1913–2006
Statistical Tables

264 1. Federal Reserve Open Market Transactions, 2006

268 2. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency 

December 31, 2004–2006

269 3. Federal Reserve Bank Interest Rates on Loans to Depository Institutio

December 31, 2006

270 4. Reserve Requirements of Depository Institutions, December 31, 2006

271 5. Banking Offices and Banks Affiliated with Bank Holding Companies

in the United States, December 31, 2005 and 2006

272 6. Reserves of Depository Institutions, Federal Reserve Bank Credit,

and Related Items

A. Year-End 1984–2006 and Month-End 2006

B. Year-End 1918–1983

280 7. Principal Assets and Liabilities of Insured Commercial Banks,

by Class of Bank, June 30, 2006 and 2005

281 8. Initial Margin Requirements under Regulations T, U, and X

282 9. Statement of Condition of the Federal Reserve Banks, by Bank,

December 31, 2006 and 2005

286 10. Income and Expenses of the Federal Reserve Banks, by Bank, 2006

290 11. Income and Expenses of the Federal Reserve Banks, 1914–2006

296 12. Operations in Principal Departments of the Federal Reserve Banks, 20

297 13. Number and Annual Salaries of Officers and Employees of the Federa

Banks, December 31, 2006

298 14. Acquisition Costs and Net Book Value of the Premises of the Federal 

Banks and Branches, December 31, 2006

Federal Reserve System Audits

301 AUDITS OF THE FEDERAL RESERVE SYSTEM

303 BOARD OF GOVERNORS FINANCIAL STATEMENTS

321 FEDERAL RESERVE BANKS COMBINED FINANCIAL STATEMENT

337 OFFICE OF INSPECTOR GENERAL ACTIVITIES

338 GOVERNMENT ACCOUNTABILITY OFFICE REVIEWS

340 MAPS OF THE FEDERAL RESERVE SYSTEM

345 INDEX
Monetary Policy and

Economic Developments
Monetary Policy and the Economic Outlook

The U.S. economy turned in another

solid performance in 2006, although the

pattern of growth was uneven. After

rebounding in the early part of the year

from hurricane-related disruptions in the

autumn of 2005, the pace of expansion

during the remaining three quarters

averaged somewhat below that of the

preceding two years, responding in part

to the removal of monetary policy accommodation since 2004. The housing

market cooled substantially, and, in the

latter part of 2006, the production of

light motor vehicles also stepped down.

Elsewhere in the economy, activity

remained strong. Consumer spending

increased vigorously in 2006 as households’ real income made strong gains.

Business investment rose at a solid rate

for the year as a whole, although it

decelerated late in the year in part because of some softening in purchases of

equipment related to construction and

motor vehicle manufacturing. Demand

for U.S. exports rose at a robust pace in

2006, supported by strong economic activity abroad. Against this backdrop,

businesses continued to add jobs at a

steady rate, and the unemployment rate

decreased further.

Total consumer price infl

clined in 2006 from its elevate

2005, as energy prices fell, on 

rising rapidly over the precedi

of years. Crude oil prices ro

the first half of 2006 but tur

sharply later in the year. As 

consumer price inflation clim

first half of the year before s

the second half. The sharp m

in prices of crude oil appea

affected not only prices of ga

other petroleum-based types 

but also prices of a broader 

goods and services that use p

based inputs. Partly as a re

sumer price inflation excluding 

energy—so-called core consu

inflation—moved up during th

of the year but eased subsequ

balance, core inflation was a 

over the four quarters of 200

2005. Measures of long-term 

expectations, however, rema

anchored.

The monetary policy decisi

Federal Open Market C

(FOMC) in 2006 were intende

sustainable economic expansi

promote a return to low and st

tion. In that regard, the econ

look for this year and nex

favorable. Although the cont

homebuilding has been a 

growth, that restraint seems 

diminish over 2007. Further 

real wages as well as ongoing 

in employment should suppo

rise in consumer spending. In 

at the beginning of 2007, ho

balance sheets appeared to b

shape. Whereas gains in hom

slowed last year, household 

Note: The discussion here and in the next

chapter consists of the text, tables, and selected

charts from the Monetary Policy Report submitted

to the Congress on February 14, 2007, pursuant to

section 2B of the Federal Reserve Act; the complete set of charts is available on the Board’s web

site, at www.federalreserve.gov/boarddocs/hh.

Other materials in this annual report related to

the conduct of monetary policy include the minutes of the 2006 meetings of the Federal Open

Market Committee (see the ‘‘Records’’ section)

and statistical tables 1–4 (at the back of this

report).
increased moderately as stock market

wealth grew and households lessened

their accumulation of debt. Delinquency

rates on consumer loans and on most

types of mortgages remained low,

although they increased markedly for

subprime mortgages with variable interest rates. As for businesses, balance

sheets are quite liquid, credit quality is

good, and most firms enjoy ready access

to funds. These favorable financial conditions, along with further expansion in

business output, user costs of capital

equipment that remain attractive, and

the potential for further gains in efficiency, should continue to spur business

investment. In addition, sustained

expansion in foreign economies ought

to maintain demand for U.S. exports. On

balance, growth of real gross domestic

product in the United States appears

likely to run slightly below that of the

economy’s potential over the next few

quarters and then to rise to a pace

around that of the economy’s long-run

trend.

Regarding inflation, increases in core

consumer prices are expected to moderate, on balance, over the next two years.

Along with inflation expectations that

are well anchored, some of the factors

that boosted inflation in recent years

seem likely to lessen. In particular, the

paths for prices of energy and other

commodities embedded in futures markets suggest that the impetus to core

inflation from these influences will diminish further. In addition, the outsized

increases in shelter costs that boosted

core inflation last year are not expected

to persist. Although unit labor costs in

the nonfarm business sector have been

rising, the average markup of prices

over such costs is high by historical

standards. The relatively high markup

suggests that further increases in costs

could be absorbed, at least to some

extent, by a narrowing of firms’ profit

margins rather than by passi

costs in the form of higher 

prices, especially if pressure

sources ease modestly as antic

The outlook for real econo

ity is uncertain. An upside ri

consumer spending, which 

especially buoyant in recen

may continue to expand at a 

would ultimately lead to an 

of pressures on resources an

Alternatively, prospects for r

construction, which are di

assess, may pose some down

Although residential real estat

have shown some recent 

stabilizing, homebuilders’ inve

unsold homes remain elevate

cutbacks in construction t

inventories toward more-co

levels could become steeper 

persistent than currently an

Moreover, if home values 

depreciate sharply, the resultin

of household wealth could 

appreciable restraint on 

spending.

Whether inflation will 

gradually as expected is also 

On the one hand, the nation’s 

to produce could increase mo

than anticipated, or product 

markets could work efficiently 

rates of utilization, either of wh

lead to a lower trajectory for 

than currently forecast. On 

hand, expanding global dem

threats to supply from actual a

tial disruptions pose upside 

energy prices. In addition, br

demand for non-energy mate

commodities could lead t

upward pressures on busine

Also, if inflation were to pers

the elevated average level o

three years, longer-run inflatio

tions could deteriorate, parti

pressures on resources were to 
At recent meetings, the FOMC indicated

that the risk that inflation will fail to

moderate as expected is its predominant

policy concern.

Monetary Policy, Financial

Markets, and the Economy

in 2006 and Early 2007

The FOMC firmed the stance of monetary policy 25 basis points at each of its

four meetings over the first half of

2006. The Committee raised its target

for the federal funds rate at its January

and March meetings as available information pointed to accumulating pressures on inflation and solid economic

growth. Although readings on core

inflation had remained favorable,

increases in energy prices and the relatively high level of resource utilization

threatened to add to existing inflation

pressures. Meanwhile, underlying aggregate demand, supported by robust

consumer spending and accelerating

business investment, appear

growing at a solid rate. By th

the May and June meetin

pointed to a moderation in the 

consumer spending and a fur

ing in the housing market. 

core consumer prices had ri

rapidly. Although the Committ

inflation expectations still to 

tained, it was mindful that 

prices of energy and other com

could impart greater in

momentum. Against this back

FOMC voted to increase the p

a further 25 basis points at bot

and June meetings, bringing t

funds rate to 51⁄4 percent. In 

ment accompanying its June 

the FOMC indicated that it bel

the moderation in economi

would help to limit inflation

sures over time but also noted 

upside inflation risks remain

had in its May statement, th

made clear in June that the e

1/28

3/16

5/4

6/30

8/10

9/21

11/10

12/14

2/2

3/22

5/3

6/30

8/9

9/20

11/1

12/13

1/31

3/28

5/10

6/29

8/8

9/20

10/25

12/1

2004 2005 2006 

Selected Interest Rates, 2004–07 

Target federal funds rate

Ten-year Treasury

NOTE: The data are daily and extend through February 7, 2007. The ten-year Treasury rate is 

maturity yield based on the most actively traded securities. The dates on the horizontal axis are th

meetings. 

SOURCE: Department of the Treasury and the Federal Reserve. 
timing of additional firming would

depend on the evolution of the outlook

for both inflation and economic growth

as implied by incoming information.

In the second half of the year, a further slowdown in residential construction activity and a contraction in motor

vehicle production created a significant

drag on economic activity. However,

consumer spending held up, and employment rose at a solid pace. Meanwhile, energy prices reversed much of

their increases of the first half of the

year, sending headline inflation lower.

Core inflation also eased somewhat, albeit to a rate above its year-earlier level.

Against this backdrop, the FOMC left

the stance of policy unchanged at its

final four meetings of 2006. Committee

discussions in those meetings focused in

part on developments in the housing

market and their implications for the

broader economy. Although the housing

market was weakening throughout this

period, the Committee judged that the

downturn had not spilled over significantly to consumer spending. The economy was expected to expand over coming quarters at a rate close to or a little

below its long-run sustainable pace. At

the same time, FOMC members noted

that, even though core inflation had

slowed from the very rapid rates of the

spring and summer, current rates remained undesirably high. Most members expected core inflation to moderate

gradually, but they were uncertain about

the likely pace and extent of that moderation. Thus, in statements accompanying each rate announcement over this

period, the FOMC reiterated that inflation risks remained and that the extent

and timing of any additional policy firming would depend on the outlook for

both inflation and economic growth implied by incoming information.

Over the period between the December 2006 and January 2007 FOMC

meetings, incoming data on inf

economic activity were gener

favorable. Core inflation reced

from the elevated levels reache

2006, and some indicators 

that the demand for housing 

stabilizing. Business investm

softened in the fourth quarter, a

trial production decelerated s

the fall, but consumer spendi

robust gains in the final month

At its January 2007 meeting, 

mittee again decided to leave 

for the federal funds rate u

reiterated concern about infla

and again cited the role of 

data in determining the exten

ing of any additional firming.

In recent years, the FO

worked to improve the transp

its decisionmaking process, 

Committee continues to 

whether further changes woul

its communications with the 

spring 2006, the Chairman ap

subcommittee to help the 

organize the discussion of a br

of communication issues. Th

began its consideration of th

at its August meeting and has 

them at several meetings sinc

Economic Projections

for 2007 and 2008

In conjunction with the FOMC 

in January, the members of the 

Governors and the Federal 

Bank presidents, all of whom p

in the deliberations of the FO

vided economic projections 

and 2008. The projections ind

the participants expect s

expansion of real economic ac

ing the next two years, ass

appropriate course for moneta

The central tendency of the FO

ticipants’ forecasts for the in
real GDP is 21⁄2 percent to 3 percent

over the four quarters of 2007 and

23⁄4 percent to 3 percent over the four

quarters of 2008. The central tendency

of their forecasts for the civilian unemployment rate is 41⁄2 percent to 43⁄4 percent in the fourth quarter both of this

year and of 2008. For inflation, the central tendency of the forecasts anticipates

an increase in the price index for personal consumption expenditures excluding food and energy—the so-called core

PCE price index—of 2 percent to

21⁄4 percent over the four quarters of

2007 and 13⁄4 percent to 2 percent over

the four quarters of 2008.

The economy is projected to expand

at a moderate rate. Although the cooling

of the housing market continues to damp

economic activity, the drag on economic

growth from declining construction activity is expected to diminish later this

year. Household spending for goods and

services should rise at a solid 

part as a result of ongoing ga

wages and employment and of 

strong household balance she

ness outlays for new equip

software are expected to incr

rate consistent with a modera

sion in business output and t

ported by continuing declines i

cost of high-technology capi

ment and by favorable financ

tions. In addition, the solid exp

economic activity abroad sho

tain the rising demand for U.

of goods and services.

Decreased pressures from th

energy and other commoditi

environment of moderate 

expansion and well-anchored l

inflation expectations, are ex

contribute to further easing in 

In addition, increases in pr

should help to limit cost press

Economic Projections of Federal Reserve Governors and Reserve Bank Presiden

for 2007 and 2008

Percent

Indicator Memo:

2006 actual

2007 2008

Range Central

tendency Range 

Change, fourth quarter

to fourth quarter1

Nominal GDP . . . . . . . . . . . . . . . . . 5.9 43⁄4–51⁄2 5–51⁄2 43⁄4–51⁄2 

Real GDP . . . . . . . . . . . . . . . . . . . . . 3.4 21⁄4–31⁄4 21⁄2–3 21⁄2–31⁄4 

PCE price index excluding

food and energy . . . . . . . . . . . 2.3 2–21⁄4 2–21⁄4 11⁄2–21⁄4 

Average level, fourth quarter

Civilian unemployment rate . . . . 4.5 41⁄2–43⁄4 41⁄2–43⁄4 41⁄2–5 

1. Change from average for fourth quarter of previous

year to average for fourth quarter of year indicated.
Economic and Financial Developments

in 2006 and Early 2007

The especially brisk pace of economic

activity in early 2006 primarily reflected

a rebound after hurricane-related disruptions in the autumn of 2005. During the

rest of the year, however, economic activity slowed to a pace somewhat below

the average rate of recent years. Real

GDP is reported to have increased at an

average annual rate of 23⁄4 percent over

the final three quarters of 2006, down

from the average 31⁄4 percent pace in

2004 and 2005. The slowdown principally was the result of the contraction in

residential construction, which intensified later in the year, and the marked

decline in production of light motor

vehicles in the second half of the year as

manufacturers took steps to trim dealers’ inventories. In other sectors of the

economy, consumer spending remained

strong as employment and income made

further solid gains, and business outlays

for new structures and equipment rose

considerably over much of 

Financial market conditions w

ally supportive of economic 

in 2006. Equity markets reco

able gains, and long-term inte

rose only modestly from histor

levels. Risk spreads on corpor

remained narrow or decline

Overall economic conditions 

that businesses maintained a st

of hiring, and the unemploy

moved down further.

Consumer price inflation, 

sured by the rise in the PCE pr

moved down in the second ha

after having stepped up in the 

Energy prices, which rose d

first half and turned sharply d

later in the year, played an 

role in shaping the contour 

consumer price inflation. In 

core PCE price inflation eased 

over the second half of 200

1

2

3

4

5

Percent, annual rate

2000 2002 2004 2006

Change in Real GDP, 2000–06 

NOTE: Here and in subsequent figures, except as

noted, change for a given period is measured to its final

quarter from the final quarter of the preceding period. 

SOURCE: Department of Commerce, Bureau of Economic Analysis. 

2000 2002 2004 

Change in PCE Chain-Type Price 

2000–06 

NOTE: The data are for personal 

expenditures (PCE). 

SOURCE: Department of Commerce, B

nomic Analysis. 

Total

Excluding food and energy
ently influenced by incoming data on

inflation and economic activity, measures of long-term inflation expectations rose early in the year but ended

the year slightly lower than at the beginning. Nonetheless, core PCE price inflation for the year as a whole—at

21⁄4 percent—was a bit higher than in

the preceding year, which perhaps reflected in part the high level of resource

utilization.

The Household Sector

Consumer Spending

The rapid increase in consumer spending in 2006 was supported by rising

employment, gains in real income,

increases in household wealth, and

favorable financial conditions. Over the

four quarters of 2006, real PCE rose

33⁄4 percent—faster than in 2005 and at

roughly the same rate as in 2004. The

rise in consumer outlays was particularly robust in the first quarter of 2006

but then moderated in the middle of the

year, when households’ gains in real

income slowed and consumer sentiment

softened. Consumer spending rose

briskly again in the fourth quarter of the

year as gains in real income picked up

and consumer confidence improved.

Household spending for n

vehicles slowed in 2006; 

16.5 million new light vehic

sport-utility vehicles, and pick

were below the average o

17 million sold in the prece

years. Moreover, households’ 

concerns about elevated gasol

particularly early in the year, s

composition of light vehi

toward more fuel-efficient a

away from light trucks and S

shift helped boost the share 

sales captured by foreign 

because they tend to offer m

efficient vehicles.

Real PCE for goods other th

vehicles rose 43⁄4 percent ove

quarters of 2006, about in lin

brisk average pace in the prec

years. Households increas

spending for a broad range of 

goods, though the rise was p

strong for electronic equipm

other durables. Real spending 

line remained about constant i

half of the year but increased i

ond half as prices fell. Consum

ing for services maintained a 

pace of growth; expenditure

category rose 23⁄4 percent in 20

the same average pace as in 

2005.

In 2006, real household in

boosted by gains in wage a

income and the increased p

power resulting from the dece

overall consumer prices. Labo

received by households rose 

cause of gains in real hourly w

because of sustained increase

ployment. However, the pick

after-tax income was damped 

tax payments made by h

increased at a rate greater tha

income. The acceleration in 

ments likely reflected, at lea

several factors: tax payments 

2

4

6

Percent, annual rate

2000 2002 2004 2006

Change in Real Income and Consumption, 

2000–06 

SOURCE: Department of Commerce, Bureau of Economic Analysis. 

Disposable personal income

Personal consumption 

expenditures
capital gains realizations, which are

excluded from income in the national

income and product accounts (NIPA);

gains in real income that moved some

households into higher tax brackets; and

possibly a further shift in the distribution of income toward high-income

households that typically face higher tax

rates. All told, real after-tax income rose

3 percent over the four quarters of 2006,

up from the negligible gain posted in

2005 but a little below the average rate

of increase in 2003 and 2004.

The rise in after-tax income in 2006

was outpaced by increases in household

spending. As a result, the personal saving rate declined further in 2006 and

averaged negative 1 percent for the year

as a whole. Households apparently were

inclined to increase their spending further above their disposable income, at

least in part, because their wealth continued to rise. The ratio of household net

worth to income, which has been trending higher since 2003, inched up further

in 2006. Although increases in the value

of homes slowed significantly, the value

of corporate equities held by households

both indirectly—such as in mutual funds

and retirement accounts—and directly

appreciated considerably.

Consumer sentiment deteriorated in

the first half of 2006, according to the

Reuters/University of Michigan Surveys

of Consumers (Reuters/Michigan). In

the spring, consumer confidence had

moved to its lowest level for the year,

probably in part because energy prices

had surged. The subsequent decline in

energy prices, along with the rise in the

stock market and reductions in the unemployment rate, boosted consumer

confidence in the second half of the

year. On net, the Reuters/Michigan index of consumer sentiment was a shade

higher at the end of 2006 than at the

beginning of the year; sentiment moved

up further in early 2007 to 

upper end of its range since 2

Residential Investment

The deterioration of conditio

housing market played a signi

in restraining the pace of 

expansion in 2006. The deman

and existing homes began to w

the middle of 2005, and the s

decline steepened through the 

of 2006. As a result, the inv

unsold new homes relative to 

sharply. Apparently prompted 

demand and excessive in

homebuilders began to cut ba

pace of new construction near 

ning of 2006, and the decline 

continued throughout the year

the year, however, some indica

hinting that the demand for ho

starting to stabilize.

By the middle of 2006, sal

new and existing homes had f

matically to a pace that w

15 percent below that of a ye

Concurrently, inventories o

homes relative to sales rose 

ably above the level that had 

during the period of robust ho

mand from the late 1990s into 

the third quarter of 2006, the b

unsold new homes had 

63⁄4 months’ supply, and the 

existing homes for sale had 

about 7 months’ supply—b

above the average of about 41⁄

supply of new and existing 

2005. By the end of 2006, 

there were tentative signs th

mand for homes was stabili

decline in sales of new and 

homes appeared to bottom o

summer, and sales were rou

stant over the later part of th

the fourth quarter, builders’ in

of unsold new homes were re
have edged down a bit from their thirdquarter level, while the stock of existing

homes for sale remained about the same

as in the third quarter. Despite these

developments, the extent of any improvement in the inventories of unsold

homes is obscured by the failure of these

figures to account for recorded sales of

new homes that are subsequently

canceled.

The drag on new residential construction in 2006 imposed by the contraction

in home sales and the buildup of inventories was significant. Both the number

of permits issued for new single-family

homes and the number of home starts

dropped sharply. As of the fourth quarter of 2006, new single-family homes

were started at an annual rate of

1.23 million units, almost 30 percent

below the average pace in 2005; permits

were down by a similar amount. In contrast to the marked slackening in construction of new single-family homes,

the rate of starts of new multifamily

homes in 2006, at 337,000 units, was

about the same as in the preceding several years.

Housing activity, as measured by real

expenditures on residential structures in

the NIPA, trimmed 1⁄4 percentage point

from the rate of real GDP growth in the

first half of 2006, but the dra

fied to subtract about 11⁄4 p

points from the annual rate o

in real GDP in the second half

as a whole, the contraction in 

dential investment lowered t

rate of growth in real GDP 3⁄

age point after having added 1⁄

age point, on average, to the 

2003 through 2005.

The rate of house-price ap

slowed substantially in 2006 

eral years of very rapid g

repeat-transactions index of ho

published by the Office of Fed

ing Enterprise Oversight 

increased at an annual rate 

11⁄2 percent in the third quarte

down substantially from aver

of about 10 percent in 2004 

The OFHEO index attempts 

for the quality of existing sing

homes sold by using prices 

involved in repeat transacti

increase in the OFHEO house

dex over the four quarters end

third quarter of 2006 (a calcu

smoothes through some of the 

volatility in the data) was 6 pe

smallest four-quarter increase 

late 1990s. The average price o

single-family homes sold, whi

lished by the National Asso

Realtors (NAR) and does not c

the types of homes sold, decli

2 percent over the four quarter

compared with average gains o

9 percent in 2004 and 2005. 

right decline in the NAR index 

prices relative to the decelerat

constant-quality OFHEO hom

dex suggests that the comp

existing homes sold shifte

lower-priced homes.

The cost of mortgage 

increased in the first half of 

rates decreased in the second 

average rate for a thirty-year 

.4

.8

1.2

1.6

Millions of units, annual rate

1994 1998 2002 2006

Private Housing Starts, 1993–2006 

Single-family

Multifamily

NOTE: The data are quarterly and extend through

2006:Q4. 

SOURCE: Department of Commerce, Bureau of the

Census. 
mortgage was 61⁄4 percent at the end of

2006, about the same as at the beginning

of the year. The average for a one-year

adjustable-rate mortgage declined also

in the second half and stood at 51⁄2 percent at the end of 2006, about 1⁄4 percentage point above the level at the start

of the year. According to respondents to

the Reuters/Michigan survey, relatively

low mortgage rates and the perception

that purchase prices were more favorable improved their assessment of

homebuying conditions in the second

half of 2006.

Household Finance

Household sector debt is estimated to

have slowed from the robust 113⁄4 percent increase posted in 2005 to a stillvigorous 81⁄4 percent in 2006. The deceleration reflected a drop in the pace of

mortgage debt growth from about

14 percent in 2005 to less than 9 percent

in 2006. Despite the reduction in mortgage borrowing, home equity lending

remained active, and the gross volume

of cash-out refinancing exceeded 2005

levels. Meanwhile, consumer debt

expanded only moderately in 2006.

Although household indebtedness

increased less rapidly in 2006 than in

2005, it still outpaced the growth of

disposable personal income. In addition,

the rise in interest rates contributed to

higher debt service payments, and the

household financial obligations ratio

continued its upward trend of the past

decade to reach a record high. Evidence

to date suggests that most households

have been able to meet their debt service

obligations, although there are indications of growing strains among some

borrowers. Delinquency rates on subprime residential mortgages with variable interest rates have increased markedly; still, delinquency rates on other

mortgages and consumer loans have

remained low. Household b

filings during 2006 ran at a 

below the average of the prece

eral years. Bankruptcies lik

damped in 2006 by the dec

some households to file b

implementation of more-string

ruptcy requirements in Octo

However, even allowing for 

effect, the recent pace is low 

pre-reform norms.

The Business Sector

Fixed Investment

Total real business fixed invest

63⁄4 percent over the four q

2006, up from a 51⁄2 percent i

2005 and about the same p

2004. In general, the fundame

porting business capital 

Perc

Change in Real Business Fixed In

2000–06 

Structures

Equipment and software

2000 2002 2004 2

NOTE: High-tech equipment consists 

and peripheral equipment and communi

ment. 

SOURCE: Department of Commerce, B

nomic Analysis. 

High-tech equipment 

and software

Other equipment excluding 

transportation
remained favorable in 2006: The strong

rise in profits continued to help firms

maintain substantial liquid assets, user

costs for equipment declined further, and

interest rates and credit spreads remained relatively low. Although the

pace of real business outlays for equipment and software slowed somewhat in

2006, investment in nonresidential structures rose 113⁄4 percent. Capital spending was quite robust during most of the

year, adding about 1 percentage point to

the annual rate of increase in real GDP

over the first three quarters, but it decelerated sharply in the fourth quarter. The

deceleration reflected, in part, a slowing

in spending for business structures from

its brisk pace earlier in the year, a drop

in outlays for transportation equipment,

and some weakness in purchases of

equipment related to construction and

motor vehicle manufacturing.

Real investment in high-technology

equipment rose 9 percent in 2006, about

the same average annual pace as in the

preceding two years. Further decreases

in the prices of high-technology equipment continued to reduce the user cost

of this type of equipment. Real business

spending for computing equipment

increased 141⁄2 percent, and software

spending posted an 8 percent gain, both

roughly comparable to their average

rates of increase in the previous two

years. Business outlays for communications equipment rose almost 7 percent in

2006. Spending for communications

equipment was particularly robust in the

early part of the year and was likely

boosted in part by spending to replace

equipment damaged by the hurricanes in

the autumn of 2005. Investment in communications equipment last year continued to be supported by demand from

telecommunications service providers

that were expanding their broadband

networks.

Real business investment in 

tation equipment—typically 

category of investment—was 

changed on net in 2006. For m

cles, business spending incre

than 1 percent over the year. 

of light vehicles weakened, 

cause of cutbacks in sales to re

panies. In contrast, business o

medium and heavy trucks acce

2006, reportedly in anticipatio

emissions regulations by the 

mental Protection Agency that 

effect at the beginning of 20

orders for medium and hea

reached new highs early in 2

production and sales remain

through the end of the year. O

new aircraft were brisk in ea

but they were depressed ove

mainder of the year; all told

investment declined more tha

cent for the year as a whole.

Real investment in equipm

than high-tech and tran

goods—a broad category that 

about half of total nominal 

spending for equipment and s

rose at an average annual rate o

cent during the first three q

2006. However, spending for t

tal goods softened in the final 

the year. Although the declin

fourth quarter were genera

based, they were led by dec

spending for equipment relate

struction and motor vehicle m

ing. However, the backlog of 

capital goods such as industria

ery and other types of heavy e

remained substantial at the end 

and it should sustain produ

shipments of these items in ea

Real outlays for nonreside

struction increased 113⁄4 perce

after having been little chan

2003. However, the rise in bus

struction spending slowed nea
of 2006 from its rapid pace earlier in the

year; outlays increased at an annual rate

of only about 3 percent in the fourth

quarter. For 2006 as a whole, sizable

gains were posted for office, retail, and

industrial buildings. In addition, outlays

for drilling and mining structures associated with energy exploration were

strong. At the end of 2006, forwardlooking indicators for nonresidential

construction activity appeared to be

favorable: Vacancy rates for buildings

in both the office and industrial sectors,

which peaked a few years ago, continued to drift down, and the vacancy rate

for retail buildings remained at the low

level that has prevailed since 2000.

Inventory Investment

In the first half of 2006, dealer stocks of

motor vehicles rose noticeably as sales

slowed, particularly for light trucks. The

increase in the prices of gasoline earlier

in the year appeared to have reduced

consumers’ demand for light trucks and

SUVs, which tend to be less fuel efficient. Dealers’ inventories of these vehicles reached an elevated 90 days’ supply

at the end of the second quarter. As a

result, motor vehicle manufacturers

scaled back the production of light

trucks over the second half of 2006,

which helped to reduce dealers’ inventories during that period. Nonetheless, at

the end of 2006, inventories of light

vehicles still appeared to be above desired levels. Manufacturers cut production further in January of this year, helping them make additional progress in

reducing the stock overhang.

Excluding motor vehicles, inventories

held by businesses in the manufacturing

and trade sectors appeared generally to

be well aligned with sales in the first

half of 2006. However, later in the year,

a variety of indicators suggested that

some businesses accumulated an undesired level of stocks. The boo

manufacturing and trade in

(excluding motor vehicles) ro

to sales from September 

November. The increases wer

larly noticeable for firms that 

construction and motor vehic

although increases were appa

few other sectors as well. Su

also suggested that inventories 

businesses were viewed as 

However, manufacturers outs

motor vehicles sector appear t

ing relatively prompt adjus

their production, which to dat

be limiting the extent of 

stockbuilding.

Corporate Profits and

Business Finance

Profits of nonfinancial cor

extended their upward move

the ratio of before-tax profits 

in this sector to nearly 14 pe

highest level reached since 19

third quarter, operating earn

share for S&P 500 firms came 

cent above levels of a year earl

two-thirds of firms in the S&P 

reported earnings for the four

Current market estimates of ea

share for S&P 500 firms call fo

10 percent growth in the four

over year-earlier levels. Earnin

was widespread across sectors i

was particularly strong for finan

Firms’ capital expenditures 

internal funds raised in 2006, 

tion that businesses funded in

not only with current cash flow 

with external funds and liqu

Borrowing by nonfinancial fir

up in 2006 in association with 

real investment as well as w

sive retirements of equity

resulted from record share re

and heavy merger and acquisi
ity. Net bond issuance proceeded at a

faster clip than in the past several years.

Similarly, commercial paper issuance

was the strongest it had been since 2000,

and commercial and industria

by banks was rapid as well. Th

Reserve’s Senior Loan Office

Survey on Bank Lending Pra

vealed that a significant net f

respondents to that survey ea

standards and terms on comm

industrial loans during 2006

indicated that they were resp

more-aggressive competiti

greater liquidity in the seconda

for such loans. Loan officer

ported that a contributing fact

increased tolerance for risk.

The expansion of commer

gage debt in 2006 remained 

historical standards but fell of

swift pace of 2005. The de

likely reflected the rise in 

rates and a net tightening of c

dards for these loans—an ex

consistent with responses to 

officer survey.

Gross public issuance of 

nonfinancial corporations 

roughly maintained the mode

of the past couple of years, a

equity issuance appears to ha

bit to finance buyouts and oth

turings. Still, net equity issuan

more negative as equity re

from cash-financed mergers an

tions and share repurchases 

considerably.

On balance, despite increase

ing and net equity retirem

strength of corporate earning

has left the credit quality of no

firms solid. Balance sheet 

remains high, and corporate l

near historical lows. In add

interest payments relative to 

remained near the low end of 

seen over the past two dec

six-month trailing bond defau

during the first half of the ye

faults by some large firm

troubled airline and automobi

200

+

_

0

200

400

600

Billions of dollars

1991 1994 1997 2000 2003 2006

Financing Gap and Net Equity Retirement 

at Nonfinancial Corporations, 1991–2006 

Net equity retirement

Financing gap

NOTE: The data are annual; the observations for 2006

are based on partially estimated data. The financing gap

is the difference between capital expenditures and

internally generated funds, adjusted for inventory

valuation. Net equity retirement is the difference

between equity retired through share repurchases,

domestic cash-financed mergers, or foreign takeovers of

U.S. firms and equity issued by domestic companies in

public or private markets. Equity issuance includes

funds invested by private equity partnerships and stock

option proceeds. 

SOURCE: Federal Reserve Board, flow of funds data. 

200

+

_

0

200

400

600

800

Billions of dollars, annual rate

2003 2004 2005 2006

Selected Components of Net Financing 

for Nonfinancial Corporate Businesses, 

2003–06 

Sum of selected

components

NOTE: The data for the components excluding bonds

are seasonally adjusted. The data for the sum of selected

components are quarterly. The data for 2006:Q4 are

estimated. 

SOURCE: Federal Reserve Board; Securities Data

Company; and Federal Financial Institutions Examination Council, Consolidated Reports of Condition and

Income (Call Report). 

Commercial paper

Bonds

Bank loans
in late 2005 dropped out of the series,

and it was near zero throughout the

second half of 2006. Delinquency rates

on business loans remained quite low.

The Government Sector

Federal Government

The deficit in the federal unified budget

narrowed further during the past year.

The unified budget recorded a deficit of

$248 billion in fiscal year 2006—

$70 billion smaller than in the previous

fiscal year. The federal deficit in fiscal

2006 was a bit less than 2 percent of

nominal GDP, significantly lower than

its recent fiscal year peak of more than

31⁄2 percent of GDP in 2004. In fiscal

2006, outlays rose about in line with

nominal GDP, but receipts increased at a

faster pace. From October through

December—the first quarter of fiscal

2007—the federal deficit was almost

$40 billion less than in the same period

a year earlier, as the rise in receipts

continued to outpace the growth in outlays. The latest projections from the

Congressional Budget Office and the

Administration anticipate that the unified deficit in fiscal 2007 will b

as a percentage of nominal GD

was in fiscal 2006. Although t

deficit has improved recently

eral budget will face the moun

sures of providing Social Sec

health benefits to a rapidly 

number of beneficiaries as 

boom generation ages in comi

In fiscal 2006, nominal f

ceipts rose 113⁄4 percent a

equivalent to almost 181⁄2 p

nominal GDP, substantially hi

their recent fiscal year low of 

cent of GDP in 2004. Incom

ceipts from individuals outpac

in taxable personal income (as 

in the NIPA), while surging 

tax payments about matched 

growth in profits. As noted a

increase in individual income t

ties relative to taxable incom

NIPA appears to have reflecte

in part, taxes on larger cap

realizations (which are exclu

NIPA income), the effect of 

payers moving into higher tax 

as their real incomes increased

sibly a further shift in the distr

income toward high-income h

that typically face higher tax 

the first quarter of fiscal 2007

were more than 8 percent grea

the same period a year earlie

individual and corporate tax 

continued to rise briskly.

Nominal federal outlays 

about 71⁄2 percent in fiscal 

were about 201⁄4 percent of 

GDP, well above their most re

year low of less than 181⁄2 p

GDP in 2000. Net interest 

increased 23 percent in fiscal 

interest rates rose and federal 

tinued to grow. Outlays for 

increased 101⁄2 percent, reflect

new benefits payments assoc

the Part D prescription drug 

16

18

20

22

24

Percent of nominal GDP

1986 1990 1994 1998 2002 2006

Federal Receipts and Expenditures, 

1986–2006 

Expenditures

Expenditures

ex. net interest

Receipts

NOTE: The receipts and expenditures data are on a

unified-budget basis and are for fiscal years (October

through September); GDP is for the four quarters ending

in Q3. 

SOURCE: Office of Management and Budget. 
which started in January 2006. At the

same time, outlays for Medicaid

declined a bit, to some extent because of

a shift of some Medicaid payments to

Medicare Part D. Spending for disaster

relief and national flood insurance was

almost $28 billion greater in fiscal 2006

than in the previous fiscal year, primarily owing to the federal government’s

response to the hurricanes in the autumn

of 2005. Outlays for defense in fiscal

2006 slowed to their lowest rate of

increase since fiscal 2001, although the

rise was still about 6 percent. In the first

quarter of fiscal 2007, total federal outlays were only 1 percent greater than

those in the same period a year earlier;

in this period, defense spending was

12 percent above its year-earlier level,

but outlays related to disaster relief and

flood insurance were markedly lower

than they were a year earlier.

As measured in the NIPA, real federal

expenditures on consumption and gross

investment—the part of federal spending that is a direct component of real

GDP—increased 21⁄2 percent over the

four quarters of calendar year 2006 and

contributed about 1⁄4 percentage point to

the growth rate of real GDP in that year.

The increase was the result of a pickup

in real defense purchases, which rose

more than 4 percent during calendar

2006 after two years of smaller

increases. At the same time, real nondefense purchases declined more than

1 percent after having risen, on average,

about 2 percent per year over the preceding two years.

The reduction in the unified deficit in

the past two years implies that the federal government required less national

saving to finance its operations. However, nonfederal saving, which excludes

borrowing by the federal government

from total net national saving, remained

relatively low. Although the saving rate

for private business and state and local

governments has increased 

years, the improvement has b

by declines in the personal sa

Total national saving, net of 

tion, was 2 percent of nomina

the third quarter of 2006. T

national saving rate is an imp

from the lows of a few years 

has been insufficient to avoid a

ing reliance on borrowing fro

to finance the nation’s capital 

Federal Borrowing

The Treasury responded to the 

in the federal deficit in 2006 

down Treasury bills over the 

the year and by trimming the g

ance of marketable Treasury c

curities. As of the third quarte

the quantity of federal debt h

public as a percentage of nom

had declined about 1⁄2 percent

to about 36 percent.

Early in the first quarter 

federal debt subject to the statu

reached the then-current c

$8.2 trillion. The Treasury 

various methods to avoid brea

Percent o

1966 1976 1986 1996 

Federal Government Debt Held 

by the Public, 1960–2006 

NOTE: The final observation is for 

previous years, the data for debt are as of 

the corresponding values for GDP are 

annual rate. Excludes securities held as i

federal government accounts. 

SOURCE: Federal Reserve Board, flow o
limit until the Congress increased it to

nearly $9 trillion in March. As of the

end of December, the total amount of

federal debt subject to the limit was

$8.6 trillion.

In February, the Treasury auctioned

thirty-year bonds for the first time since

2001. The offering was apparently well

received, as was the reopening of the

issue in August. The Treasury announced in August that it would issue

thirty-year bonds on a quarterly basis

beginning in 2007.

The acquisition of Treasury debt by

foreigners slowed further in 2006 from

its peak in 2004. However, outstanding

Treasury debt also grew more slowly,

leaving the share of outstanding debt

held by foreign investors little changed,

on balance, from its average level over

the preceding two years. According to

Treasury data on international capital

flows, foreigners (official and other)

purchased considerably fewer U.S. Treasury coupon securities in 2006 than in

2005. The average proportion of nominal coupon securities purchased by foreign and international investors at auctions in 2006 about matched the average

from the previous year at 16 percent, but

it was down noticeably from an average

level of 25 percent in 2004.

State and Local Government

The fiscal positions of state and local

governments improved further in 2006.

Apart from federal grants-in-aid, revenues rose at an annual rate of 7 percent

over the first three quarters of 2006 after

posting relatively strong gains in the

preceding two years. Receipts from

taxes on retail sales and on individual

and corporate incomes continued to rise

at a brisk pace; however, decreasing

gains in house prices slowed the rise in

property tax revenues in the third quarter of 2006 from the rapid pace in the

previous two years. The 

strength in total revenues, alon

efforts of states and localities 

spending for health care, ha

these jurisdictions to step up 

on other programs and still reb

reserve funds. As measured in 

net saving by state and loca

ments excluding social 

funds—a measure that is broad

to the surplus in an operating 

was almost $4 billion during 

three quarters of 2006. States a

ties generally have seen impro

their fiscal positions recentl

coming years most governm

have to face the budget pre

providing pension and health b

an expanding number of retire

ees, and the states’ costs for 

are expected to rise substantia

baby-boom generation ages.

Real expenditures by state 

governments on consumption 

investment, the component of 

ernments’ spending that enter

into the calculation of real G

3 percent over the four quarter

That increase was the largest s

and contributed about 1⁄4 p

point to the change in real GD

the year. Real expenditures f

ment rose 43⁄4 percent, largel

of a strong increase in real co

spending in the first half of 

Spending for current consum

real terms increased 21⁄2 per

the four quarters of 2006. H

state and local governments s

last year. Of the cumulative i

employment of 254,000 in 20

two-thirds of the jobs were in 

State and Local Governmen

Borrowing

Borrowing by state and loca

ments dropped below its ra
pace amid improved fiscal positions and

fewer advance refunding issues. Nonetheless, bond issuance for new capital

expenditures, particularly for education

and transportation, boosted long-term

borrowing. Credit quality in the state

and local sector rose substantially in

2006, as the number of credit-rating upgrades far exceeded the small number of

downgrades.

The External Sector

The U.S. current account deficit averaged $875 billion at an annual rate, or

about 61⁄2 percent of nominal GDP, in

the first three quarters of 2006 (the latest

available data). The deficit was wider

than in 2005, partly because of a larger

deficit on trade of goods and services. In

addition, net investment income, which

turned negative in the fourth quarter of

2005, remained negative in the first

three quarters of last year, further expanding the current account deficit.

International Trade

After widening through most of 2005,

the nominal trade deficit leveled out in

the first half of 2006, rose to 

high in August, and then narr

ticeably through November (

available data). On average, th

trade deficit was wider in 200

the previous year. Nominal i

goods grew more slowly tha

did early last year and, after 

late-summer peaks, dropped b

declines in both the price and 

imported oil. Meanwhile, impo

vices decelerated sharply in t

half of last year. In contrast

exports of goods and service

upward steadily throughout th

grew significantly faster than 

nal imports. Given that the le

ports was smaller than the lev

ports, the faster export grow

2006 was not enough to n

nominal trade deficit. Alth

nominal trade deficit last year 

November, annualized) was 

dollar terms, the trade deficit 

of GDP, at just under 6 per

about the same as in 2005.

Real exports of goods and 

grew a robust 91⁄4 percent las

the first quarter, growth was b

a catch-up of exports affected 

cane damage in late 2005. T

the year, exports were supp

strong foreign economic acti

exports of goods rose 101⁄4 pe

year, a little faster than in the 

year. Export growth was spr

evenly across all major end-u

ries, though exports of comp

semiconductors expanded n

more slowly than in 2005. B

tion, exports to China and oth

ing Asian economies grew ver

as did those to South Americ

to Mexico and western Europe 

more modest pace. Real expo

vices were up a solid 63⁄4 perc

year, double the pace of 2005

7

6

5

4

3

2

1

+

_

0

Percent of nominal GDP

2000 2002 2004 2006

U.S. Trade and Current Account Balances, 

1999–2006 

Trade

Current

account

NOTE: The data are quarterly. For the trade account,

the observation for 2006:Q4 is estimated. The data for

the current account extend through 2006:Q3. 

SOURCE: Department of Commerce. 
Prices of exported goods rose at a

31⁄2 percent rate last year, a little faster

than their pace in 2005. Reflecting the

effects of very large jumps in prices of

industrial supplies, particularly fuels and

metals, export prices moved up sharply

in the second and third quarters; they

decelerated toward the end of the year

as prices of exported fuels retreated

from their high levels and as prices of

exported metals moved up more slowly.

Real imports of goods and services

rose 3 percent last year, more slowly

than in the previous year. As with the

growth in real exports, real import

growth got off to a quick start last year

amid robust domestic growth. But import growth slowed, on average, in the

middle quarters of the year, along with

U.S. real GDP growth, and real imports

fell in the fourth quarter as a result of a

sharp drop in oil and natural gas imports. Despite some fourth-quarter

declines, for the year imports increased

in every major end-use category except

petroleum and natural gas. Imports of

services rose more than 5 percent last

year, a step-up from the previous year’s

sluggish pace.

Prices of imported non-oil goods

increased less than 1 percent, on balance, in 2006 despite some wide gyrations. After falling in the first quarter,

prices reversed course, surged upward,

and then cooled in the fourth quarter.

The quarterly pattern was driven by

movements in nonfuel commodity

prices, which soared in the second and

third quarters before leveling off in the

fourth quarter.

Metals figured prominently among

the nonfuel commodities that boosted

trade prices last year. Prices for a variety

of metals—including copper, aluminum,

nickel, and zinc—skyrocketed in the

second quarter. Factors contributing to

the surge in prices included growing

demand, particularly from developing

countries, low levels of inven

some metals, and perhaps 

speculative demand. Prices f

and zinc continued to move up 

out the year. In the second h

year, aluminum prices trended 

and copper prices moved do

their peaks as inventory and su

ditions improved somewhat. F

these metals, those price tre

continued this year. An exc

zinc, the price of which has pl

The spot price of West Texa

diate crude oil averaged $66 

in 2006, nearly $10 per bar

than in 2005; moreover, crude 

were especially volatile last 

spot price climbed from aroun

barrel at the end of 2005 to 

$77 per barrel in August as v

the Middle East, a shutdow

Prudhoe Bay oil field in Al

forecasts of an active hurrica

led to increased demand. In 

oil supply was affected far 

anticipated by these factors

prices declined over the 

months as demand dropped an

D

80

100

120

140

160

180

200

220

2003 2004 2005 2006 

Prices of Oil and of Nonfuel Com

2003–07 

January 2003 = 100

Oil

Nonfuel

commodities

NOTE: The data are monthly and ex

January 2007. The oil price is the spot 

Texas intermediate crude oil. The pric

commodities is an index of forty-f

commodity prices. 

SOURCE: For oil, the Commodity Res

for nonfuel commodities, International M
petroleum inventories were drawn

down. Oil demand for heating was depressed by above-average temperatures

in the Northern Hemisphere in the

fourth quarter and in the early weeks of

2007, and the spot price fell further, to

around $50 per barrel in mid-January,

before moving back up to $58 per barrel

at the end of the month. Far-dated futures prices began last year at about

$60 per barrel, moved in a pattern similar to spot prices throughout most of the

year, and averaged just over $61 per

barrel in January 2007.

Notwithstanding the decrease of global oil prices since August, several factors continue to support these prices at

historically elevated levels. Ongoing

violence has diminished oil production

in Iraq and Nigeria. The continuing dispute with Iran over its nuclear program

threatens a possible curtailment of Iranian exports. Energy investment by international oil companies has been hampered in some countries, such as Russia

and Venezuela, by increased government control of domestic energy industries. Moreover, in response to the recent

decline in oil prices, OPEC has reduced

its crude oil production to the lowest

level since 2004. Oil demand over the

past year has also increased modestly in

developing countries despite high prices.

The Financial Account

Foreign official inflows in the first three

quarters of 2006 were above their 2005

pace but remained below the record levels of 2004. Most of these official inflows were attributable to Asian central

banks and took the form of purchases of

U.S. government securities, primarily

bonds and mortgage-backed securities

issued by government-sponsored enterprises (GSEs). Preliminary data indicate

a slight easing of official purchases in

the fourth quarter of 2006. Net private

inflows slowed in the first q

have changed little since then

Foreign private purchases o

curities in the second and thir

of 2006 slowed slightly 

extraordinary pace set in the se

of 2005 and early 2006, but pr

fourth-quarter data show recen

to have been strong. More th

private flows last year took th

purchases of corporate bonds, 

of the remainder went towa

ment in GSE bonds and corpo

ties. On net, private foreig

chased few U.S. Treasuries

direct investment flows into t

States remained robust.

Net purchases of foreign sec

U.S. residents, a financial outf

record pace in the first three q

2006. Preliminary data show 

surge in net purchases in the fo

ter. Demand for foreign bond

residents slightly exceeded th

eign equities. After the expirat

partial tax holiday implemen

Homeland Investment Act of 2

direct investment abroad drop

to more normal levels.

The Labor Market

Employment and Unemplo

Labor markets remained stron

Nonfarm payroll employment 

186,000 per month, on averag

the second half of 2006, a r

tially the same as in the first h

year. Employment rose 111,00

ary of 2007. The unemployme

the fourth quarter of las

41⁄2 percent—was at its lowest 

level since 2001, and it w

changed in January 2007.

In response to the contr

homebuilding, hiring in the co

sector slowed considerably in 
ond and third quarters of 2006, and this

sector shed workers in the fourth quarter. Although hiring for nonresidential

building construction remained brisk for

most of the year, the steep decline in

housing starts curtailed the overall demand for construction workers. Employment in the manufacturing sector, which

rose in the first half of 2006, declined in

the second half as factory output slowed.

From July to December, many of the

factory layoffs were at makers of motor

vehicles and parts and at producers

closely tied to the construction industry.

Outside of the construction and manufacturing sectors, employment generally

increased at a solid pace in the second

half of 2006, and hiring was particularly

rapid in a number of service industries—

especially those providing education and

health services, professional and technical business services, and financial

services.

As a result of the continued expansion of labor demand in 2006, the unemployment rate fell further. After remaining around 43⁄4 percent in the first three

quarters of 2006, the unemployment rate

edged down to 41⁄2 percent in the fourth

quarter. The tighter labor market was

associated with a noticeable increase in

employment among individual

not been participating in the la

In line with this cyclical tigh

the labor market, the labor for

pation rate ticked up during 2

66 percent in the first q

661⁄4 percent in the fourth quar

1⁄4 percentage point rise dur

The recent rise in the particip

follows a period of decline be

the late 1990s that in part refle

longer-term secular trends in l

behavior. Those trends include

ing off in the participation 

women and an increase in th

tion of the workforce in o

groups, which have lower ave

ticipation rates.

Other indicators also sug

labor market conditions remain

ally favorable during the seco

2006. Layoffs remained low 

claims for unemployment 

fluctuated around a relatively 

level of 315,000 per week. In 

data reported by the Bureau 

Statistics showed a further inc

ing the later part of the year i

of job openings as a perc

private-sector employment.

Productivity and

Labor Compensation

The growth rate of labor prod

the nonfarm business sector, w

slowed in 2004 and 2005 from 

tionally rapid pace earlier in th

remained relatively subdued 

Over the four quarters of 200

per hour of work in the nonf

ness sector increased 2 perc

pared with about a 3 percen

annual rate of increase during 

half of this decade and the se

of the 1990s. During that earli

productivity gains were spurr

rapid pace of technological ch

100

+

_

0

100

200

Thousands of jobs, monthly average

2001 2003 2005 2007

Net Change in Payroll Employment, 

2001–07 

January

NOTE: Nonfarm business sector. 

SOURCE: Department of Labor, Bureau of Labor

Statistics. 
growing ability of firms to use information and other technology to improve

the efficiency of their operations, and

increases in the amount of capital per

worker. Despite the recent slowing in

productivity growth, these underlying

factors do not appear to have waned.

Accordingly, the recent slowdown in

labor productivity may be at least in part

a temporary cyclical response to the

moderation in the pace of economic activity in 2006 rather than a meaningful

downshift in the longer-run trend.

As the labor market tightened in

2006, the rise in hourly labor compensation, which includes both wages and

employer payments for employee benefits, stepped up for workers in the nonfarm business sector. In nominal terms,

compensation per hour increased almost

5 percent over the four quarters of 2006,

compared with an average 4 percent rise

in the preceding two years. After adjusting compensation for increases in the

PCE price index, real compensation per

hour rose 3 percent in 2006, up from an

average gain of about 1 percent in 2004

and 2005.

An alternative measure of 

compensation is the employm

index (ECI) for private nonf

nesses, which is based on a 

firms conducted by the Bureau 

Statistics. According to this 

nominal hourly compensation 

31⁄4 percent in 2006, 1⁄4 percen

faster than in 2005. In real t

ECI for hourly compensa

11⁄4 percent last year after av

1⁄2 percent increase over the 

two years. The nominal wages 

ries component of the ECI ros

cent in 2006, while the benefi

nent advanced 3 percent.

From the perspective of e

the acceleration in hourly com

in the nonfarm business secto

boosted the average labor cos

ated with producing a unit 

23⁄4 percent, up from increase

13⁄4 percent in both 2004 a

Although the rise in unit la

increased, firms’ profit ma

peared to remain elevated in 2

tive to longer-run standards.

Prices

Headline inflation slowed in 2

PCE chain-type price index ro

cent over the four quarters o

step-down from the 3 percen

recorded in 2005. The drop 

prices in the latter part of 

counted for the deceleration in 

line number. Core inflatio

higher in the first part of 200

eased toward the end of the 

balance, core PCE prices ro

21⁄4 percent over the four q

2006, a little faster than the 

increase in 2005. The mar

component of the core P

index—which excludes impu

that are not observed in marke

tions and that often change irre

1

2

3

4

5

Percent, annual rate

Change in Output per Hour, 1948–2006 

1948– 731974– 951996– 20002002 2004 2006

NOTE: Nonfarm business sector. Change for each

multiyear period is measured from the fourth quarter of

the year immediately preceding the period to the fourth

quarter of the final year of the period. 

SOURCE: Department of Labor, Bureau of Labor

Statistics. 
increased 2 percent in 2006, about

1⁄4 percentage point more than in the

previous year.

Energy prices recorded dramatic

swings during 2006. PCE energy prices

increased at an annual rate of about

15 percent in the first half of the year

and declined at an annual rate of almost

17 percent in the second half. The sharp

movements in consumer energy prices

in 2006 were associated primarily with

fluctuations in prices for crude oil. The

changes in energy prices also were amplified by a widening in the margin of

the retail price of gasoline over the associated cost of crude oil in the first half of

the year and by some narrowing of that

margin in the second half. On balance,

the PCE energy price index decreased

4 percent over the four quarters of 2006.

Food price inflation remained fairly

moderate in 2006. The PCE index for

food and beverages increased 21⁄4 percent, roughly the same pace as in the

preceding year. Retail prices of meat

and poultry rose modestly for 2006, as

robust demand was met by ample supplies of meat. Prices of wheat rose over

the course of the year, and pric

and soybeans spiked at the e

year in the wake of downward 

to estimates of crop producti

of corn also were boosted d

year by increased demand fo

produce ethanol. But the smal

wheat, corn, and soybeans in 

value of food production lim

effect on retail food prices. 

food consumed away from hom

are influenced importantly by 

of labor, energy, and other 

inputs, increased 31⁄4 percent 

more rapid pace than that for 

food consumed at home.

The core PCE price index a

to an annual rate of about 21⁄2 

the first half of 2006 on the s

pickups in the price indexes 

goods and services. In th

increases in housing rents wer

larly sharp. The rise may have 

in part a shift in demand tow

housing as rising mortgage 

lofty home prices made home 

less affordable. The pass-th

higher energy costs to a broad 

goods and services also prob

tributed to the acceleration in 

sumer price inflation in the fi

2006.

In the second half of 2006, 

price inflation edged down to 

rate of just below 21⁄4 percen

celeration was the result of a d

core goods prices, which likely 

in some measure the waning 

of energy prices. In contrast, 

vices inflation in the second h

year remained at about the sam

in the first half. Although hou

rose more slowly in the secon

the year, their effect on the PC

services was mostly offset 

price increases for medical c

number of other services.

Alternative Measures of Price Change,

2004–06

Percent

Price measure 2004 2005 2006

Chain-type

Gross domestic product (GDP) . 3.2 3.1 2.5

Gross domestic purchases . . . . . . 3.7 3.6 2.2

Personal consumption

expenditures (PCE) . . . . . . . . 3.0 3.1 1.9

Excluding food and energy . . . 2.2 2.1 2.3

Market-based PCE excluding

food and energy . . . . . . . . . . . 1.7 1.8 2.0

Fixed-weight

Consumer price index . . . . . . . . . . 3.3 3.7 1.9

Excluding food and energy . . . 2.1 2.1 2.6

Note: Changes are based on quarterly averages of

seasonally adjusted data.

Source: For chain-type measures, Department of

Commerce, Bureau of Economic Analysis; for fixedweight measures, Department of Labor, Bureau of Labor

Statistics.
The swings in energy costs in 2006

were apparent in the prices of inputs

used in the production and sale of final

goods and services, especially of items

for which energy costs represent a relatively large share of total production

costs, including industrial chemicals,

plastics, fertilizer, and stone and clay

products. In addition, the prices of some

commodities, such as a variety of metals, rose significantly in 2006 in

response to strong worldwide demand.

As a result, the core producer price index for intermediate goods, which

excludes food and energy, rose 51⁄4 percent in 2006, up from the 43⁄4 percent

increase in 2005. The index increased at

an annual rate of 71⁄4 percent in the first

half of 2006, but it decelerated to an

annual rate of about 31⁄4 percent in the

second half as energy costs declined.

For the year as a whole, measures of

long-term inflation expectations remained well anchored, although shortterm expectations were heavily influenced by fluctuations in energy prices.

The Reuters/Michigan survey measure

of the median expectation of households

for inflation over the next twelve months

was about 3 percent in December, down

from its peak of 33⁄4 percent in August.

Longer-term inflation expectations recorded in the Reuters/Michigan survey

showed less variability. The median survey respondent in December expected

the rate of inflation during the next five

to ten years to be 3 percent, down from

its peak of 31⁄4 percent in August. Other

indicators likewise suggest that longerrun inflation expectations have remained

contained. According to the Survey of

Professional Forecasters, conducted by

the Federal Reserve Bank of Philadelphia, expectations of inflation over the

next ten years remained at 21⁄2 percent

in 2006, a level that has been essentially

unchanged since 1998. In addition, inflation compensation implied by the

spread of yields on nominal 

securities over their inflation

counterparts stayed within the 

narrow range of 2 percent to 2

during the year.

U.S. Financial Markets

Financial conditions in the Un

supported economic growth 

Yields on long-term Treasury 

climbed a bit, on balance, b

low by historical standards, wh

corporate profits helped fuel s

gains in equity markets. Liqu

rate balance sheets and low 

leverage helped keep risk sp

corporate bonds narrow. M

business borrowing picked up 

pace, spurred in part by a rise 

and acquisition activity. In th

tial real estate sector, mortgag

ing slowed markedly, as hou

decelerated, especially in the se

of the year. Consumer credit 

at a moderate pace. Nonethele

hold debt growth outpaced th

of disposable personal incom

financial obligations of h

inched higher. Although h

generally appeared able to m

obligations, signs of financ

were apparent in subprime va

mortgages. The M2 monetary 

expanded at a moderate pace i

Interest Rates

Market interest rates rose mo

balance, in 2006—yields on 

ten-year nominal Treasury 

increased about 40 and 30 ba

respectively. Changes in inte

seemed largely tied to chang

outlook for economic growth 

tion. Rates across the maturity 

increased notably over the fir

the year, as incoming data o
and inflation came in higher than markets had expected and as the FOMC

raised the target federal funds rate

25 basis points at each of its first four

meetings. At the time of the June FOMC

meeting, interest rate futures market

quotes indicated that market participants

perceived considerable odds of an additional rate tightening by year-end. However, market interest rates declined, on

net, over subsequent months in response

to incoming data suggesting that inflation pressures were moderating and that

economic growth was slowing. Market

expectations for the trajectory of the

federal funds rate over the next several

years shifted down considerably during

the second half of the year. More

recently, market participants have

backed away from expectations of a substantial easing of monetary policy as

incoming data on economic activity

have been stronger than expected. Investors now expect the FOMC to ease policy only slightly over the next two years.

Although investors modestly revised

their medium-term policy expectations

over the course of the year, the Committee’s interest rate decisions were largely

anticipated in financial markets by the

time of each meeting. Throughout the

year, forward-looking measur

certainty about monetary polic

from interest rate options rema

the low end of historical range

Yields on inflation-indexed 

securities increased about as 

those on their nominal count

2006. Medium- and long-term 

compensation—measured from 

between yields on nom

inflation-indexed securities—w

unchanged to a little lower, o

during the year these measur

ited only modest swings in re

incoming inflation data and 

movements.

In the corporate bond mark

on investment-grade securiti

about in line with those on co

maturity Treasury securities. In 

yields on speculative-grade 

fell slightly, pulling risk spre

in that segment of the market

rowness of investment- and sp

grade spreads seems to reflect 

sanguine perceptions of corpo

quality over the medium ter

likely reflect in large part the s

1

2

3

4

5

Percent

2003 2004 2005 2006 2007

Interest Rates on Selected Treasury 

Securities, 2003–07 

Ten-year

Three-month

Two-year

NOTE: The data are daily and extend through February 7, 2007. 

SOURCE: Department of the Treasury. 

Pe

1999 2001 2003 2005 

Spreads of Corporate Bond Yield

Comparable Off-the-Run Treasur

1998–2007 

BBB

High-yield

AA

NOTE: The data are daily and ex

February 7, 2007. The ten-year high-y

BBB, and ten-year AA indexes are comp

ten-year Treasury yield. 

SOURCE: Derived from smoothed co

curves using Merrill Lynch bond data. 
business balance sheets and a benign

economic outlook. The term structure of

forward risk spreads for corporate bonds

supports this view, as forward spreads

one and two years ahead are low, while

the spreads further out the curve are

more in line with historical norms.

Equity Markets

Broad equity indexes soared 10 percent

to 20 percent in 2006, boosted by strong

growth in corporate earnings. Share

prices rose across a wide range of sectors, but increases in telecommunications and security brokerage stocks were

especially noteworthy. The difference

between the twelve-month forward

earnings-price ratio for the S&P 500 and

the long-term real Treasury yield—a

crude measure of the premium that investors require for holding equity

shares—was little changed on balance.

The implied volatility of the S&P 500

calculated from options prices spiked

temporarily in the late spring in connection with a period of strain in several

markets but remained near historical

lows for the remainder of the year. Net

inflows into domestic equity mutual

funds were quite modest in 2006, while

inflows into international equ

were exceptionally strong.

Market Functioning and

Financial Stability

Overall, financial markets f

smoothly over the year and pro

ient to several shocks. Equit

in the United States and cur

fixed-income markets in 

emerging-market economies 

enced heightened volatility l

second quarter, but the turbu

short lived. The liquidation 

sizable hedge funds attracted 

able attention for a time but 

discernible effect on the broad 

ing of markets. Even the liqu

Amaranth—a hedge fund 

wound down in the fall after r

loss in excess of $6 billion, 

energy trades—left little im

financial markets, although 

some concerns about risk-ma

practices. Implied volatilit

spreads, and various other 

measures of financial stress 

stayed at very low levels throu

year, suggesting that invest

comfortable taking on risk, lik

because they were confident 

economic and financial outloo

Throughout the year, bid-as

on the most actively traded 

securities remained within 

ranges. Some instances of qu

trading activities occurred in th

ary market for Treasury secur

the course of the year. The In

Working Group for Treasur

Surveillance monitored these 

closely.1 In November, the 

Reserve Bank of New York a

1. The group was established in 

includes representatives from the Boa

nors of the Federal Reserve System, t

the Securities and Exchange Comm

90

100

110

120

130

January 3, 2005 = 100

2005 2006 2007

Stock Price Indexes, 2005–07 

Russell 2000

Wilshire 5000

NOTE: The data are daily and extend through February 7, 2007. 

SOURCE: Frank Russell Company; Dow Jones

Indexes. 
meeting with all primary dealers to discuss developments in Treasury markets

and to encourage the firms to review

their internal oversight of trading operations. Subsequently, a private-sector

group sponsored by the Federal Reserve

Bank of New York released a draft report laying out a set of best practices for

firms active in the Treasury market on

topics such as appropriate trading strategies and internal controls.

In July, the Federal Reserve Board

implemented a revision to the treatment

of GSEs and certain international organizations under its Policy on Payments

System Risk. Under the change, interest

and redemption payments on securities

issued by these institutions are now released only when the issuer’s Federal

Reserve account contains sufficient

funds to cover the payments; that is,

these institutions no longer may employ

daylight credit to fund such payments.

The Board of Governors determined that

the change represents an appropriate

risk-management policy for the central

bank and is consistent with the general

practices of private issuing and paying

agents. In addition, GSEs and international organizations are now subject to a

penalty fee for daylight overdrafts resulting from general corporate payment

activity (activity other than interest and

redemption payments). This change

aligns the policy for GSEs and international organizations with that for other

Federal Reserve account holders that do

not have regular access to the Federal

Reserve’s discount window and thus are

not eligible for intraday credit. The transition to the new policy occurred

smoothly with minimal effects on the

functioning of the payments system and

no notable adverse effects on short-term

funding markets.

Following up on a meeting 

Federal Reserve Bank of New 

the fall of 2005, the largest pa

in the fast-growing market 

derivatives agreed to a series o

strengthen that market’s infra

Over the course of 2006, cred

tives dealers phased out the p

transferring positions to a 

counterparty without first obt

consent of the original cou

They also reduced by 85 pe

number of trade confirmations 

ing more than thirty days; the

the share of trades that are 

via an electronic platform, to 8

of total trade volume; and th

upon a new protocol for the 

of such derivatives after a cred

Debt and Financial Interme

by Banks

Total debt of the domestic no

sectors expanded an estimated 

cent in 2006, well below th

2005 but still faster than that o

income. Debt growth slowed 

in the household and govern

tors, but business debt acceler

About 30 percent of the 

nonfinancial sector debt in 

intermediated by the bankin

This share is about even with 

age over the past ten years an

5 percentage points above th

observed in the 1980s and ea

Commercial bank credit 

91⁄2 percent in 2006, supporte

growth in loans to business

credit also was boosted in the a

a consolidation of a substanti

of thrift assets onto a commerc

balance sheet that had resulte

internal reorganization at a l

holding company.

Bank lending to businesse

commercial and industrial 

Commodity Futures Trading Commission, and the

Federal Reserve Bank of New York.
creased at a rapid pace last year. The

growth was fueled by vigorous merger

and acquisition activity, rising outlays

for investment goods, ongoing inventory accumulation, and an accommodative lending environment. Bank loans

secured by commercial real estate,

though strong, decelerated over the

course of the year. The moderation in

commercial real estate lending was consistent with responses by large and

medium-sized banks to the Senior Loan

Officer Opinion Survey on Bank Lending Practices, which pointed to slowing

demand and a net tightening of credit

standards for such loans in the second

half of the year. Consumer loans and

residential mortgages held by banks

grew at a moderate rate for the year as a

whole. However, excluding the effects

of the thrift consolidation, residential

real estate lending slowed considerably

in the fourth quarter, no doubt reflecting

in part the downturn in the housing

market.

Commercial bank profits as a percentage of average assets were strong in

2006 and rose slightly above 2005 levels. Net interest margins declined a bit

further, likely in response to continued

competitive pressures and a modest inversion of the yield curve, but bank

profitability was supported by growth in

non-interest income and by wellcontained costs. Continued strong asset

quality also helped to support profitability in 2006 by allowing banks to reduce

their loan-loss provisioning. Robust asset quality was reflected in loan delinquency and charge-off rates that remained at low levels through the end of

2006.

The M2 Monetary Aggregate

and Reserves

M2 expanded at a 5 percent rate last

year, somewhat faster than in 2005.

Typically, as short-term inte

rise, deposit rates lag some

creasing the opportunity cost o

money. In 2006, this effect a

slowed money growth less th

have been expected on the ba

torical norms, and the veloci

rose only about 3⁄4 percent. Ret

market mutual funds and smal

posits, components of M2 wh

move most closely with mar

grew rapidly. However, liquid 

which constitute the largest c

of M2, and whose yields ad

gradually, were about flat on 

rency expanded a modest 31⁄

an increase similar to that in 

flecting weak, possibly negativ

mand from overseas.

Part of the Financial Service

tory Relief Act of 2006 gave th

Reserve authority, beginning i

2011, to pay interest on reserv

and to further reduce or elim

serve requirements. At the 

FOMC meeting, the Chairman 

staff to prepare for the imple

of this legislation.

International Developmen

Foreign economic growth was 

strong in 2006, as expansion 

in all major regions of the w

Japanese economy decelerat

what but maintained positiv

and the pace of activity in the 

picked up. Labor market con

both areas improved. Emergi

economies also recorded sol

last year and experienced no 

lasting ill effects from the brief 

financial market volatility tha

of them particularly hard in 

spring. Although there are 

steps taken to slow growth 

ment in China have been effe

Chinese economy continued 
rapidly. Rising energy prices boosted

consumer price inflation in many areas

of the world early last year, but monetary tightening appears to have prevented inflation from moving significantly higher, and the effects of higher

energy prices on core prices were

modest.

Industrial countries tightened monetary policy in 2006. Some countries

paused around the same time as the

Federal Reserve, and others continued

to tighten throughout the year. After

ending its policy of quantitative easing

in the spring, the Bank of Japan (BOJ)

raised its policy rate 25 basis points in

July. Weak consumer spending and low

inflation have apparently deterred the

BOJ from tightening since then. With

growth in the European economies firming, concerns over inflationary pressures

prompted the European Central Bank to

raise its policy rate five times last year,

to 3.5 percent. The Bank of Canada

tightened 75 basis points in several steps

over the first half of the year but has left

the overnight rate unchanged since then.

After keeping its policy rate constant in

the first half of the year, the Bank of

England tightened policy 25 basis points

in August and November 2006 and in

January 2007. The statements accompanying each tightening cited the upside

risks to inflation posed by low levels of

spare capacity.

During the first half of 2006, ten-year

sovereign yields in the euro area, Canada, and Japan rose sharply on balance:

Increases ranged from 45 basis points in

Japan to 75 basis points in Germany.

Yields on inflation-protected long-term

securities in these economies also rose

during the first half of 2006 but not as

much as nominal yields and thus implied a noteworthy rise in inflation compensation. These developments occurred

largely in reaction to continuing upward

pressures on inflation, which stemmed

from a further run-up in ener

and indications that global 

growth remained robust.

From their midyear highs

government benchmark bond 

noticeably until about the beg

December in most major 

economies, as investors re

moves in U.S. rates and eva

implications for the global ec

the economic slowdown that 

be under way in the United St

this period, yields on ten-yea

bonds declined by amounts th

from about 25 basis points in t

Kingdom to about 70 basis 

Canada. Yields on inflation-in

curities declined less; modes

in inflation breakeven rates w

uted in part to lower energy pr

second half of the year.

Since the beginning of D

however, nominal and indexe

ment bond yields have risen o

in most advanced economi

because new data releases ap

alleviate investors’ concerns t

economic growth might slow 

bly. Yields on both ten-year 

and indexed securities ha

15 basis points in Japan a

50 basis points in the euro 

United Kingdom, and Cana

their December lows. As a res

tion breakeven rates have b

changed.

The Federal Reserve’s broa

sure of the nominal trade

exchange value of the dollar 

33⁄4 percent from the beginni

year through early February of 

Over that period, the dollar ap

21⁄4 percent against the yen an

cent against the Canadian dol

depreciated about 9 percent

against the euro, almost 1

against sterling, and 4 perce

the Chinese renminbi. The r
rate of appreciation stepped up in late

2006 and early 2007, but daily fluctuations in the dollar-renminbi exchange

rate were very small.

Most of the dollar’s overall decline in

2006 occurred between mid-April and

early May. During this period, market

participants reportedly sensed that the

FOMC was approaching the end of its

series of policy tightenings, and interest

rate differentials moved against the dollar. Traders also refocused on the large

and persistent U.S. current account deficit, which was further boosted by crude

oil prices that had moved above $70 per

barrel. To date in 2007, the dollar’s

broad nominal exchange value has risen

1 percent on balance.

In the wake of strong advances in

2005, major global equity indexes

posted solid gains, on balance, in 2006

and in early 2007. After rising 5 percent

to 10 percent in the first quarter of 2006,

most global indexes fell sharply beginning in early May to reach intra-year

lows in mid-June. Market participants

attributed the drops in share prices to

increased uncertainty about prospective

inflation, caused in part by the run-up in

energy prices, and to a retreat from risktaking. Broad-based gains 

prices since midsummer app

associated with a scaling back 

tations for future tightening of 

policy in several countries 

declines in energy prices. S

June, broad stock market ind

gained 10 percent to 20 p

Europe, Japan, and Canada.

Industrial Economies

After increasing at an annu

roughly 2 percent in the fir

2006, Japanese real GDP g

3⁄4 percent in the third quarte

because of slower growth of 

tion. Capital spending was an 

contributor to growth o

throughout the year, supported 

corporate profitability. Labo

conditions continued to improv

employment rate was about 4 

December, its lowest level si

and the ratio of job offers to 

remained close to a thirteen-y

However, wage growth w

subdued, as firms contro

increases, and unit labor costs 

to fall. In 2006, consumer pric

to rise again, posting smal

month increases after June, 

prices in Japan’s six largest c

for the first time since 1991. 

the GDP deflator continued 

slowly.

Real GDP in the euro area a

somewhat in 2006, posting 

growth of 31⁄4 percent at an a

over the first three quarter

growth was supported in part 

consumer spending, which g

stantially faster than in 2

stronger performance of the 

was reflected in improving lab

conditions: The unemployme

the euro area fell 0.8 percent

during the year to reach 7.5 

90

100

110

Week ending January 2, 2004 = 100

2004 2005 2006 2007

U.S. Dollar Exchange Rate against 

Selected Major Currencies, 2004–07 

U.K. pound

Euro

Japanese yen

Canadian

dollar

NOTE: The data are weekly and are in foreign

currency units per dollar. The last observation for each

series is the average for February 5 through February 7,

2007. 

SOURCE: Bloomberg L.P. 
December, continuing a downward

movement that began in 2004. Wages

and salaries in the manufacturing and

services sector grew at an average

annual rate of 21⁄4 percent in the first

three quarters of the year—a bit lower

than their rate of growth in 2005. Higher

energy prices boosted euro-area consumer price inflation, which rose to

about 21⁄2 percent in the first half of

2006; late in the year, it dropped below

the European Central Bank’s target ceiling of 2 percent. Core inflation remained

near 11⁄2 percent.

Real GDP in the United Kingdom

grew 3 percent last year, and real GDP

in Canada grew 3 percent, on average,

through the first three quarters. Despite

declining consumer confidence in the

United Kingdom, the pace of consumption growth over the year was slightly

higher than in 2005, and consumer

spending in Canada, supported by moderate employment growth, also remained

robust. Declines in energy prices

brought Canadian consumer price inflation down after the middle of the year to

a twelve-month change of about 11⁄2 percent in December, below the Bank of

Canada’s 2 percent inflation target. Inflation in the United Kingdom edged up

throughout the year, partly because of

increases in electricity and natural gas

prices that were implemented in the fall.

Emerging-Market Economies

Real GDP growth in China remained

strong but moderated a bit in the second

half. The mild slowdown suggests that

the administrative measures put in place

by the Chinese authorities to cool investment have had an effect. The trade surplus recorded a substantial increase in

2006. Four-quarter inflation picked up

near the end of last year to over 2 percent, reflecting higher food prices.

Elsewhere in emerging A

nomic performance was gener

in 2006. In Korea, GDP grow

from the strong pace registere

partly because of monetary t

and consumer price inflation 

modest. The pace of growth 

countries stayed strong throug

as a result of robust export

some cases, strengthening dom

mand. Four-quarter inflation m

across the region. That m

resulted from the waning effe

lier reductions or removals of 

fuel subsidies, but the previou

ing of monetary policy in the r

an appreciation of exchange 

made a contribution. Capita

into several Asian emergin

economies—particularly Tha

late 2006 and early this year p

pressure on local currencies. 

taken by Thai authorities seem

ceed in limiting upward mov

the baht, but share prices in 

stock market fell sharply. Fina

kets in other countries in t

were less affected and showed 

able spillovers from events in 

Output growth in Mexico w

tionally strong in the first ha

year, especially in the manu

construction, and services 

Growth stepped down in th

half; construction activity rem

bust but was offset by a slow

exports of manufactured goo

United States. Mexican consu

inflation was elevated during t

half by higher food prices an

rates above the 4 percent upp

the central bank’s inflation tar

at year-end, inflation was still 

end of the range.

Brazilian output growth wa

the first quarter but slowed n

later in the year, partly becaus

manufacturing performance. 
four-quarter inflation fell markedly,

from almost 6 percent at the end of 2005

to just over 3 percent in December. In

Argentina, steady growth in investment

and consumption kept real GDP on a

solid uptrend throughout 2006. The Argentine government continu

tempt to bring down inflatio

voluntary price agreements wi

ers in several sectors; although 

had edged down to the single-d

by year-end, it was still high. 
Monetary Policy Report of July 2006

Monetary Policy and the

Economic Outlook

The U.S. economy continued to expand

at a brisk rate, on balance, over the first

half of 2006. Spending in the first quarter, which was especially robust, was

temporarily buoyed by several factors,

including federal spending for hurricane

relief and the effects of favorable

weather on homebuilding. The pace of

the expansion moderated in the spring,

to some degree because the influence of

these special factors dissipated. More

fundamentally, consumer spending

slowed as further increases in energy

prices restrained the real incomes of

households. In addition, home sales and

new homebuilding dropped back noticeably from the elevated levels of last

summer, partly in response to higher

mortgage interest rates. Outside of the

household sector, increases in demand

and production appear to have been well

maintained in the second quarter. Demand for U.S. exports was supported by

strong economic activity abroad, and

business fixed investment remained on a

solid upward trend. Early in the year, as

aggregate output increased rapidly, businesses added jobs at a relatively robust

pace, and the unemployment rate moved

down further. Since April, monthly

gains in payroll employment have been

smaller but still sufficient to keep the

jobless rate steady.

Thus far in 2006, inflation 

have been elevated. Higher 

crude oil contributed to a furth

in domestic energy costs; th

increases, combined with 

increases in 2004 and 2005, 

boosted the prices of gasoline 

ing fuel but also put upward p

the costs of production for a br

of goods and services. Partly 

of these cost pressures, the ra

consumer price inflation pi

Nevertheless, measures of 

expectations remained conta

the rate of increase in labor 

subdued, having been held 

strong gains in productivity an

ate increases in labor compens

Taking a longer perspective

economy appears to be in the 

transition in which the rate o

in real gross domestic product 

moving from a pace above t

longer-run capacity to a more 

and sustainable rate. An impo

ment in the transition is the lag

of the changes in monetary po

mid-2004, changes that have 

tended to keep inflation low a

mote sustainable economic 

by aligning real economic acti

closely with the economy’s p

potential. Moreover, longer-te

est rates have risen, contri

increased borrowing costs 

households and businesses. O

pressures on inflation should 

the pace of real activity mode

as futures markets suggest, the 

energy and other commoditie

stabilize. The resulting easing 

tion should help contain long-

tion expectations.

Note: The discussion in this chapter consists of

the text and tables from the Monetary Policy

Report submitted to the Congress on July 19,

2006; the charts from that report (as well as earlier

reports) are available on the Board’s web site, at

www.federalreserve.gov/boarddocs/hh.
Even as the rate of increase in real

economic activity moderates, the prospects for sustained expansion of household and business spending appear

favorable. Higher energy prices have put

strains on household budgets, but once

that effect fades, households should experience gains in real income consistent

with the ongoing expansion of jobs.

Household balance sheets remain generally sound; although some pockets of

distress have surfaced, average delinquency rates on mortgages and other

consumer debt are still low. Similarly, in

the business sector, balance sheets are

strong, credit quality is high, and most

firms have ready access to funds. Sustained expansion of the global economy,

along with the effects of the earlier

depreciation of the foreign exchange

value of the dollar, should support demand for U.S. exports. The potential for

efficiency gains, as well as further

declines in the relative cost of capital,

are likely to continue to spur capital

spending. Indeed, the ongoing advances

in efficiency should sustain solid growth

of labor productivity, providing support

for gains in real wages and income.

As always, considerable uncertainties

attend the outlook. Regarding inflation,

the margin between production and consumption of crude oil worldwide is quite

narrow, and oil markets are especially

sensitive to news about the balance of

supply and demand and to geopolitical

events with the potential to affect that

balance; adverse developments could

result in yet another surge in energy

costs. Indeed, futures markets provide

only imperfect readings on the prospects

for energy markets, as witnessed by the

fact that the surprises in crude oil prices

during the past few years have been

predominantly to the upside. In addition, a further rise in prices of other,

non-energy materials and commodities,

if it materializes, could also intensify

cost pressures. Another risk i

effect on imported-goods pric

lier declines in the foreign 

value of the dollar, which has 

ited to date, could become lar

broadly, if the higher rate of c

tion seen this year persists, it 

duce a deterioration in longer

tion expectations that, in tu

give greater momentum to 

However, the risks to the infl

look are not entirely to the ups

current environment of eleva

margins, competitive forces

domestic markets and from 

could impose significant restra

pricing decisions of businesse

Regarding risks to the outlo

activity, rates of increase in 

have been uneven during the 

complicating the assessment o

the pace of the economic exp

moving into line with its unde

tential rate. One possible ri

upside is that the softer ton

recent data on real activity w

transitory rather than mark a 

more sustainable underlying 

expansion. For example, slow

ing and hiring in recent mo

represent a shorter-lived adjus

higher level of energy prices 

unusually robust increases in 

activity earlier in the year. I

months, a sharp rebound in 

spending accompanied by an 

tion of capital spending could r

activity to a pace that would 

tainable over the longer run. B

side risks also exist. In parti

slowing in real estate markets 

summer has been moderate, an

ing of house-price inflation 

gradual. If the softening in th

for housing and in real esta

becomes more pronounced, the 

drop in construction activity 

erosion of household wea
weaken aggregate demand noticeably.

Consumer spending might be depressed

by the loss of income and wealth, and

that effect could be amplified if the

downturn is abrupt enough to shake

households’ confidence about their ability to finance spending or manage their

current financial obligations.

The Conduct of Monetary Policy

over the First Half of 2006

The Federal Open Market Committee

(FOMC) continued to firm the stance of

monetary policy over the first half of

2006. At the time of the January meeting, available information suggested that

underlying growth in aggregate demand

was solid at the turn of the year. The

expansion of real GDP in the fourth

quarter of 2005 was estimated to have

slowed temporarily, in part because of

the disruptions associated with last autumn’s hurricanes. Core inflation had

stayed relatively low, and inflation expectations had remained contained. With

rising energy prices and increases in

resource utilization having the potential

to add to inflationary pressures, the

FOMC decided to extend the firming of

policy that it had implemented over the

previous eighteen months by tightening

the policy rate 25 basis points, to

41⁄2 percent. The Committee indicated

that some further policy firming might

be needed to keep the risks to price

stability and to sustainable economic

growth roughly in balance.

By March, economic activity appeared to be expanding rapidly, propelled by robust consumer spending and

accelerating business investment. Although readings on core inflation for

January and February were generally

favorable, higher prices for energy and

other commodities, together with relatively tight labor and product markets,

threatened to add to existing inflation

strains. Against this backdrop, 

mittee raised the target fede

rate another 25 basis points, t

cent. The statement released 

of the meeting continued to po

possible need for further polic

Data received by the time o

meeting confirmed that the 

had expanded robustly in the 

ter, though both consumer spe

housing activity appeared to h

erated in late winter. In addit

tionary pressures had intensifi

consumer prices rose more r

March than in earlier months

expectations, as measured by 

veys and by comparisons of 

nominal and inflation-indexed 

securities, also rose in April. T

mittee still judged those expec

be contained, but it was mind

further increase could impart 

momentum to inflation, as 

surge in energy and other c

prices and the drop in th

exchange value of the dollar 

place in April and early May

greater assurance that inflation

would not intensify, the FOM

to raise the target federal f

another 25 basis points, brin

5 percent. The FOMC also in

the policy statement that som

policy firming could be requir

ever, the Committee was awar

cumulative effects of past mon

icy actions on economic activ

turn out to be larger than expe

cordingly, the FOMC stresse

extent and timing of any furth

would depend importantly on 

tion of the economic outlook a

by incoming data.

By the time of the June 

available data appeared to co

economic growth had moder

the strong pace evident earl

year. Consumer spending had 
and activity in housing markets had continued to cool gradually. Evidence of

inflationary pressures was accumulating, however, and core price inflation

had increased. In addition, the high levels of resource utilization and of the

prices for energy and other commodities

had the potential to spur further inflation. Consequently, the FOMC decided

to increase the target federal funds rate

an additional 25 basis points, to

51⁄4 percent. The Committee recognized

that the moderation in the growth of

aggregate demand that appeared to be

under way would help to limit inflationary pressures over time, but it judged

that, even after its policy action, some

upside inflation risks remained. Yet the

FOMC made clear that the extent and

timing of any additional firming needed

to address those risks will depend on the

evolution of the outlook for both inflation and economic growth as implied by

incoming information.

In recent years, the FOMC has

worked to improve the transparency of

its decisionmaking process, and it continues to seek further improvements.

Between the March and May meetings,

the Chairman appointed a subcommittee

to help the FOMC frame and organize

the discussion of a broad range of communication issues. At the June meeting,

the Committee discussed the subcommittee’s plans for work in coming

months and decided to begin its consideration of communication issues at its

August meeting and to lengthen meetings later this year to allow a fuller

discussion of these issues.

Economic Projections

for 2006 and 2007

In conjunction with the FOMC meeting

at the end of June, the members of the

Board of Governors and the Federal

Reserve Bank presidents, all of whom

participate in the deliberatio

FOMC, provided economic p

for 2006 and 2007. In broad 

participants expect a sustaine

ate expansion of real econom

during the next year and a 

central tendency of the FOM

pants’ forecasts for the increa

GDP is 31⁄4 percent to 31⁄2 pe

the four quarters of 2006 and 

to 31⁄4 percent in 2007. The ce

dency of their forecasts for th

unemployment rate is 43⁄4 p

5 percent in the fourth quart

year, and the jobless rate is ex

still be in that range at the end 

For inflation, the central tende

forecasts is an increase in the 

Economic Projections for 2006 an

Percent

Indicator

Federal Reser

an

Reserve Ban

Range 

20

Change, fourth quarter

to fourth quarter1

Nominal GDP ............ 51⁄2–61⁄2 

Real GDP ................ 3–33⁄4 

PCE price index excluding

food and energy ...... 21⁄4–3 

Average level,

fourth quarter

Civilian unemployment

rate . . . . . . . . . . . . . . . . . 41⁄2–5 

20

Change, fourth quarter

to fourth quarter1

Nominal GDP ............ 43⁄4–6 

Real GDP ................ 21⁄2–31⁄4 

PCE price index excluding

food and energy ...... 2–21⁄4 

Average level,

fourth quarter

Civilian unemployment

rate . . . . . . . . . . . . . . . . . 41⁄4–51⁄4 

1. Change from average for fourth quart

year to average for fourth quarter of year i
dex for personal consumption expenditures excluding food and energy (core

PCE) of 21⁄4 percent to 21⁄2 percent over

the four quarters of 2006; in 2007, the

forecast shows a slower rate of 2 percent

to 21⁄4 percent, which is similar to the

rate of core PCE price inflation in 2004

and 2005.

A slowing in activity now appears to

be under way in the housing sector,

where home sales and residential construction have receded from the elevated

levels of last summer. The associated

easing in house-price appreciation will

likely temper gains in household wealth,

which, over time, may be a factor in

damping consumer spending. However,

households’ financial positions should

receive a boost from an acceleration of

real income if energy prices stabilize as

suggested by futures markets. In the

business sector, participants view the

outlook for fixed investment over the

forecast period as positive. Although

outlays for new equipment and software

may increase a little more slowly with

the deceleration in real output, investment opportunities appear to remain attractive: The relative user cost of capital

for equipment, particularly hightechnology items, is expected to remain

favorable, and competitive pressures

should maintain strong incentives to exploit opportunities for efficiency gains

and cost reduction. At the same time,

nonresidential construction seems likely

to continue to move up. Finally, the

strong performance of the economies of

the United States’ major trading partners should continue to stimulate U.S.

exports of goods and services.

The more moderate pace of expansion and the stability in resource utilization, when coupled with less pressure

from the prices of energy and other commodities, should contribute to an environment in which inflation expectations

are contained and inflation edges lower.

Moreover, ongoing solid gain

ductivity should work to limit 

in unit labor costs.

Over the next year and a ha

participants expect the eco

achieve a sustainable rate of 

expansion. That rate will be d

in large part by the rate of in

productivity. Productivity has 

ing at a solid rate over the 

years, albeit more slowly than 

cially rapid pace that prevail

the first three years of the exp

strong trend in productivity is 

be maintained as businesses ta

tage of new investment in fac

equipment, as diffusion of te

continues, and as organizat

vancements and business pr

provements yield further inc

efficiency.

Economic and Financial

Developments in 2006

Although last year’s hurrican

the pace of aggregate econom

around the turn of the year to b

real GDP increased at an avera

rate of 3.6 percent in the final 

2005 and first quarter of 200

the same pace that prevailed d

preceding year and a half. 

period, payroll employment po

tional solid gains, and the u

ment rate declined further. 

months, the incoming inform

real activity has suggested tha

of the expansion is moderating

deceleration in spending mos

in the household sector. Still, 

year, resource utilization in lab

product markets remained hig

Inflation picked up over the 

months of the year, boosted im

by the effects of rising ener

Long-term inflation expectatio

ated over the period but rema
tained, and increases in unit labor costs

were subdued. Although short-term market interest rates rose in line with the

FOMC’s firming of monetary policy,

financial market conditions were still

generally supportive of economic

expansion in the first half of 2006.

Long-term interest rates rose but were

still moderate by historical standards,

and credit spreads and risk premiums

stayed narrow.

The Household Sector

Consumer Spending

After increasing at a robust rate around

the turn of the year, consumer spending

has been rising at a more moderate pace

in recent months. Over the first half of

2006, rising employment and the lagged

effect of increases in wealth continued

to provide support for spending by

households. However, consumers’ purchasing power was restrained by a further run-up in energy costs in the spring.

Sales of new cars and light trucks

bounced back sharply at the turn of the

year; those sales had slackened in late

2005 after manufacturers ended the special “employee discount” programs that

had boosted sales last summer. New

light vehicles sold at an annual rate of

16.8 million units between January and

April, about the same as the average rate

in 2004 and 2005. However, elevated

gasoline prices affected the composition

of demand, and consumers shifted their

purchases away from light trucks and

sport-utility vehicles (SUVs) and toward autos. That shift led to an increase

in the market share captured by foreign

producers. As households’ concerns

about the higher price of gasoline

weighed on their attitudes toward buying vehicles, sales dipped to an annual

rate of 16.2 million units in May and

June.

Spending for other househo

such as furniture, electronic e

food, and clothing, was quite 

the first quarter of 2006; real o

goods other than motor 

increased at an annual rate o

cent. Some moderation wa

expected after such a surge in 

Estimates of retail sales, w

available through June, sugges

expenditures for these goods 

slowly in the second quarter. I

to the uneven pattern of spe

goods, real outlays for cons

vices remained on a moderat

trend over the first half of 2

rose at an annual rate of 21⁄

from the fourth quarter of 200

May 2006.

Boosted by gains in nomi

and salary income, after-tax 

personal income rose at an a

of 4 percent over the first fiv

of 2006. However, the accel

consumer prices held real inco

constant. As a result, the stee

in the personal saving rate, wh

in 2004, extended into 200

2003, rising household we

provided important support f

ing, even as gains in real inc

been damped by increases 

prices. In 2005 and the firs

2006, much of the increase 

was the result of the rapid ap

in the value of homes.

According to the survey by 

versity of Michigan Survey 

Center (SRC), the run-up i

prices contributed importantly 

terioration in consumer confid

spring. Consumers’ pessimis

in May and then lessened som

average, in June and early Ju

theless, at midyear, househo

cated that they were still c

about the effect of the high 

energy on their financial sit
addition, households’ assessments of

current and expected business conditions remained considerably less optimistic than they were at the beginning

of the year.

Residential Investment

The demand for homes had begun to

soften in the summer of 2005, and, by

the spring of 2006, starts of new singlefamily homes were well below the very

rapid pace that had prevailed in the preceding two years. The reduced level of

activity in real estate markets also led to

some easing in house-price appreciation

early this year.

Sales of new and existing singlefamily homes, which had been climbing

steadily since 2003, stopped rising during the third quarter of 2005. By May,

sales of new and existing homes together were 71⁄4 percent below their

peak in June 2005. The cooling in sales

caused inventories of unsold homes to

rise. In May, the backlog of unsold new

homes equaled 51⁄2 months’ supply at

that month’s selling rate, and the backlog of existing homes on the market was

61⁄2 months’ supply; in 2005, the stocks

of both unsold new and existing homes

averaged roughly 41⁄2 months of supply.

An increase in mortgage rates contributed to the slackening in the demand for

housing. Since the middle of 2005, the

average rate for a thirty-year fixed-rate

mortgage has increased about 1 percentage point, to 63⁄4 percent, and the average for a one-year adjustable-rate mortgage has risen a bit more, to 53⁄4 percent.

According to respondents to the Michigan SRC survey, the rise in borrowing

costs has been an important consideration damping their assessment of buying conditions for homes since mid2005; the rise in home prices has

apparently also weighed on consumers’

attitudes.

Although recent increases 

prices have been smaller than 

accompanied the robust real e

kets of 2004 and 2005, the de

thus far appears to have bee

The repeat-transactions index 

prices, which is published by 

of Federal Housing Enterpr

sight, increased at an annua

71⁄4 percent in the first quarte

the smallest quarterly increase 

fourth quarter of 2001; that 

tempts to control for the qualit

ing single-family homes sold 

prices of homes involved in rep

actions (excluding refinancin

first-quarter reading brought 

over-year change in this meas

percent; in the second and thir

of 2005, purchase prices acc

this index were up 111⁄2 per

the level of a year earlier. An a

measure of house prices is th

price of existing single-fami

sold, which is published by the 

Association of Realtors. This 

which does not control for th

homes sold, showed that the y

year change in prices p

111⁄2 percent in August 2005 

fell to 4 percent in April and M

year. The greater deceleration 

ter measure suggests that, in a

some softening in prices, th

existing units sold may have 

ward lower-priced homes.

The effect of the slowdow

mand on new construction be

parent during the second half 

when the number of permits 

new single-family homes beg

This year, the decline in permi

was relatively steady from J

May. Nonetheless, new sing

homes were started at an exc

high annual rate of 1.75 mil

during the first quarter, when 

were able to begin work on 
projects earlier than normal because of

favorable weather conditions. With

some starts having been advanced into

the first quarter, single-family starts

dropped to an average rate of 1.57 million units in April and May. In contrast

to the recent trend in the single-family

sector, construction of new multifamily

homes averaged an annual rate of

360,000 units from January to May,

about where it has been for more than

four years.

Housing activity, as measured by real

expenditures on residential structures,

contributed almost 1⁄2 percentage point

per year to the annual rate of increase in

real GDP in 2004 and 2005. In the first

quarter of 2006, that contribution

dropped to 0.2 percentage point; with

the reduced pace of sales and construction since the winter, a decline in residential investment is likely to have held

down the rise in real GDP in the second

quarter.

Household Finance

Household debt expanded at an annual

rate of about 111⁄2 percent in the first

quarter of 2006, about the same pace as

in 2005. Despite the rise in mortgage

rates and the slowing in housing activity, home mortgage debt expanded rapidly again early in the year as homeowners apparently continued to extract some

of the substantial gains in equity that

they have accumulated on their homes

in the past several years. Indeed, according to industry estimates, although the

number of homeowners refinancing

their mortgages has remained well below that seen during the refinancing

boom of several years ago, a large fraction of homeowners who have refinanced so far this year have chosen to

withdraw equity from their homes. As

has been the case in recent years, this

mortgage-related borrowing likely replaced, in part, some consum

borrowing, which, at an annua

bit less than 3 percent, con

expand modestly in the first fiv

of 2006.

The ratio of household fina

gations to disposable inco

0.1 percentage point in the fir

to about 183⁄4 percent, narrowl

ing the top of its historical ran

theless, the evidence points to 

ited pockets of financial distr

household sector. Delinquency 

residential mortgages were lo

torical standards in the firs

though they have edged higher 

middle of last year, particula

subprime sector. Delinquency 

consumer debt also continued 

Meanwhile, household bankr

ings remained subdued in the 

of 2006, running at a pace w

the average of recent years. 

cies have likely been damped 

in part by the decision of som

holds in the fall of 2005 to 

their filings to avoid the imple

of a stricter bankruptcy law in 

More recently, they may also 

restrained by the greater costs 

ruptcy under the new law.

The Business Sector

Fixed Investment

Real business fixed invest

creased at a solid rate, on ave

ing the final quarter of 2005 an

quarter of 2006. Over that pe

business spending for new e

and software rose at an annu

93⁄4 percent, a pace similar to 

the first three quarters of 2005

tion, investment in nonresiden

tures, which had remained 

2005, turned up noticeably 

2006. The underlying determ
capital spending have stayed quite positive: Businesses have seen steady

increases in sales, robust profits, and

declining user costs for equipment; they

have ample liquid assets; and, despite

the rise in interest rates, credit quality is

strong.

Real outlays for equipment and software rose at an annual rate of

143⁄4 percent in the first quarter after

having risen at a 5 percent rate in the

fourth quarter of 2005. As can often be

the case, the timing of spending for a

number of types of equipment was uneven between these two quarters. Business purchases of cars and trucks slowed

in late 2005, after manufacturers reduced their special discounts on light

vehicles, and then recovered in the first

quarter. The first-quarter rebound was

strengthened by a further acceleration of

outlays for medium and heavy trucks.

According to industry analysts, businesses have been pulling forward these

purchases because the engines in the

2007 models will be required to meet

new emission regulations by the Environmental Protection Agency that will

make the new vehicles more costly to

operate. Deliveries of commercial aircraft to domestic customers also rebounded in the first quarter from a very

low level in the fourth quarter.

Demand for high-technology equipment stepped up noticeably in the first

quarter because of a sharp jump in outlays for communications equipment.

Providers of telecommunications services appear to be investing heavily in

fiber-optic networks, which will allow

them to offer a wider range of Internet

services; the recent spurt likely also

includes some replacement demand for

equipment damaged by last year’s hurricanes. In contrast, business demand for

computing equipment, while still increasing at a double-digit pace in real

terms, has been relatively modest by

historical standards so far 

Industry analysts suggest that 

be delaying investment in an

of introductions, later this ye

early 2007, of several product

allow faster and more energ

processing. Spending on e

other than transportation and 

goods continued to trend up 

pace, on average, during the f

first quarters. Demand was p

strong for metalworking an

industrial machinery as we

equipment used in constructio

extraction, and services indust

Demand for equipment and 

appears to have risen again i

ond quarter. The information 

manufacturers on their orders 

ments of nondefense capital g

the data on imports of capi

suggest that business spen

equipment other than transpor

high-tech items remained on 

upward trajectory in April and 

elevated backlog of unfilled 

domestic firms likely provide

for factory production of capi

ment in the second quarter. T

tors of demand for high-tech e

suggest that spending for co

tions equipment remained a

level, and real outlays for c

equipment were still rising slo

of medium and heavy trucks 

to be robust in the second 

although they eased slightly 

exceptional rate at the beginn

year.

Real expenditures for nonr

construction increased at an a

of 121⁄2 percent in the first qu

having edged up slightly dur

Last year, the small net increa

sector reflected a sharp upturn 

ing on structures used in 

energy exploration; constructi

office and industrial building
strained by elevated vacancy rates.

However, vacancy rates for office and

industrial properties gradually declined

over the course of 2005, and, by the

turn of the year, nonresidential construction began to firm. As a result, the

increase in nonresidential investment in

the first quarter of 2006 was broadly

based; it included pickups in outlays in

the office, retail, and industrial sectors

in addition to another steep rise in

spending on structures associated with

energy exploration.

Inventory Investment

Business inventories appear generally to

be well aligned with sales. In surveys

taken during the first six months of

2006, about two-thirds of purchasing

managers at manufacturing firms who

responded characterized the level of

their customers’ inventories as about

right. A similar proportion of respondents at nonmanufacturing firms reported that they were comfortable with

their own levels of inventories. However, dealer stocks of new light motor

vehicles, particularly trucks (including

SUVs), have risen noticeably as sales

have slowed; inventories of light trucks

reached an uncomfortable 89 days’ supply in May. In late June, a number of

manufacturers introduced a new round

of incentives aimed at reducing dealer

stocks in advance of the introduction of

their new models this fall.

Corporate Profits

and Business Finance

Corporate profits were again strong in

the first quarter of 2006, and earnings

per share for S&P 500 firms rose about

15 percent from the same time last year.

Gains were widespread but were especially large for firms in the energy sector. Before-tax profits of nonfinancial

corporations measured as a sha

tor GDP rose to about 14 perc

first quarter, above the prev

reached in 1997.

The expansion of busin

picked up to an annual rate 

10 percent in the first quart

year, and data in hand sugges

pace in the second quarter. A s

fraction of borrowing procee

edly went to finance mergers a

sitions in the first half of the 

bond issuance has been strong 

2006. Short-term borrowing 

nancial corporations stepped 

first quarter of 2006 after slow

what in the fourth quarter of la

appears to have remained stro

second quarter as well. Co

paper outstanding started risi

on balance, after edging lowe

Bank business loans ou

expanded at an annual rate of 

cent in the first quarter. Busin

efited from a more accommoda

ing environment: For exa

significant net fraction of resp

the Federal Reserve’s Senior L

cer Opinion Survey on Bank 

Practices in April 2006 noted 

institutions had eased both stan

terms on commercial and 

loans in the first three mont

year. The most commonly cite

for the easing of lending poli

more-aggressive competition f

banks and nonbank lenders, 

liquidity in the secondary m

business loans, and increased 

for risk.

Gross equity issuance has 

moderate so far this year, wh

evated level of cash-financed 

along with record share repurc

produced further sizable net 

tirements. Taken together, n

raised by nonfinancial corpo

the credit and equity markets 
slightly negative in 2006, an indication

that nonfinancial corporations have financed their increased investment

spending with internal funds.

With profitability strong and balance

sheets flush with liquid assets, credit

quality in the nonfinancial business sector generally has remained quite high.

The six-month trailing default rate on

corporate bonds dropped after some

large firms in the troubled airline and

automobile sectors defaulted during the

past fall and winter. Delinquency rates

on business loans have stayed near the

bottom of their historical range.

Commercial real estate debt expanded

briskly in the first half of 2006, albeit

not as quickly as during 2005. Spreads

on BBB-rated commercial-mortgagebacked securities have fallen this year.

The decline reversed an increase that

took place at the end of last year, when

issuance surged; these spreads are now

back in line with those of comparablequality corporate bonds. With rents

climbing and vacancy rates falling, delinquency rates on commercial real estate loans have been low, and credit

quality has remained generally good.

The Government Sector

Federal Government

The deficit in the federal unified budget

narrowed further during the past year.

Over the twelve months ending in June,

the unified budget recorded a deficit of

$276 billion, about $60 billion less than

during the comparable period last year.

The federal deficit over the twelve

months ending in June was approximately 2 percent of nominal GDP and

was significantly lower than its recent

fiscal year peak of 3.6 percent of GDP

in 2004. Although outlays increased

faster than nominal GDP over the past

year, the rise in receipts was even larger.

Thus, in its recent Mid-Sessio

of the budget, the Administr

mated that the federal govern

finish fiscal 2006 with a defic

billion; that figure marks a dec

the fiscal 2005 deficit of $3

and is much lower than mos

had projected at the beginnin

year.

During the twelve months 

June, federal receipts were 13

higher than over the same per

earlier and equivalent to 

181⁄4 percent of nominal GD

tax receipts from individuals 

paced the rise in nominal inco

tax payments on income from 

especially strong in April and 

porate tax payments continued 

a robust rate, even faster than 

profits.

Nominal federal outlays ro

cent between June 2005 and J

and were about 201⁄2 percent o

GDP. The rise in outlays was 

by increases in several comp

federal spending. Net interest 

increased 20 percent over the 

ing in June as federal debt co

rise and interest rates increas

care outlays were up 141⁄2 perc

the inception of the new Part D 

tion drug program in Januar

for benefits have added more 

billion to spending in this categ

islative actions related to the h

in the Gulf Coast region las

have added significantly to spe

disaster relief over the past te

Although defense spending h

from the annual double-digi

increase from 2002 to 2004, 

increased about 8 percent per y

past two years.

As measured in the nation

and product accounts (NIPA)

eral expenditures on consum

gross investment—the part o
spending that is a direct component of

real GDP—increased at an annual rate

of 33⁄4 percent, on average, during the

final calendar quarter of 2005 and the

first calendar quarter of 2006 and contributed roughly 0.3 percentage point to

the annualized change in real GDP over

the period. Over these two quarters, real

defense purchases were about constant,

on average, while spending related to

disaster relief from the hurricanes contributed importantly to a rise in real

nondefense purchases.

The narrowing of the federal deficit

recently has reduced its drain on national saving. However, net national saving excluding the federal government

has remained low relative to historical

norms. Although the saving rate for private business has moved up during the

past two years, the improvement has

been offset by the further decline in

personal saving. Overall, national saving, net of depreciation, stood at

21⁄2 percent of nominal GDP in the first

quarter of 2006. Although the recent

rate is a noticeable improvement from

the lows of the preceding few years, it

has been insufficient to avoid an increasing reliance on borrowing from abroad

to finance the nation’s capital spending.

Federal Borrowing

Federal debt rose at an annual rate of

13 percent in the first quarter, a bit less

than in the corresponding quarter of

2005. In February, federal debt subject

to the statutory limit reached the ceiling

of $8.184 trillion, and the Treasury resorted to accounting devices to avoid

breaching the limit. The Congress subsequently increased the debt ceiling to

$8.965 trillion in March. In the second

quarter, federal debt likely declined temporarily because of a surge in tax receipts. On net, the Treasury has raised

substantially less cash in the market so

far this year than in the co

period of 2005.

In February, the Treasury 

an auction of thirty-year bon

first time since 2001. The iss

ated strong interest, especia

investment funds; foreign inve

awarded only a small fracti

total. In general, foreign de

Treasury securities appears 

eased somewhat in 2006. Th

tion of nominal coupon 

bought at auction by foreign 

has continued to fall from it

24 percent in 2004; it avera

14 percent in the first six m

2006. Data from the Treasur

tional Capital system gener

gested subdued demand from 

eign private investors and 

official institutions over this p

amount of Treasury securitie

custody at the Federal Reserv

New York on behalf of foreig

and international accounts ha

little since the end of 2005.

State and Local Governments

The fiscal positions of states a

ties continued to improve thro

2006. In particular, revenues ar

to post a relatively strong g

third consecutive year. Tax rec

sales, property, and personal a

rate income were up 81⁄4 perce

the year ending in the first 

2006, a rate similar to the incre

preceding year. The sustained 

in revenues has enabled these 

tions to increase their nominal 

somewhat while rebuilding the

funds. On a NIPA basis, net 

state and local governments—

that is broadly similar to the 

an operating budget—rose to 

rate of $211⁄2 billion in the fir

of 2006 after having been clo
in 2005. Although most states have seen

improvement, a number of states are

still struggling with structural imbalances in their budgets, and those in the

Gulf Coast region are coping with demands related to damage from last

year’s hurricanes. In addition, local governments may face pressure to hold the

line on property taxes after the sharp

increases in the past several years, and

governments at all levels will have to

contend with the need to provide pensions and health benefits to a rising

number of retirees in coming years.

Real expenditures by state and local

governments on consumption and gross

investment, as estimated in the NIPA,

rose at an annual rate of 11⁄2 percent in

the first quarter of 2006 after having

increased roughly 1 percent per year in

2004 and 2005. Real expenditures for

investment turned up in the first quarter

after having fallen during the second

half of 2005. Real outlays for current

consumption posted a moderate increase

in the first quarter, and that trend

appears to have continued into midyear.

Hiring by state and local governments

was slow early in the year but appears to

have firmed in the spring. Of the cumulative increase in employment of

100,000 between December and June,

40 percent of the jobs were in education.

State and Local Government

Borrowing

Borrowing by state and local governments has slowed thus far in 2006. The

deceleration likely reflects the general

improvement in budget conditions and a

decline in advance refundings, which

have dropped below their 2005 pace

amid rising interest rates and a dwindling pool of eligible securities. Credit

quality in the state and local sector has

continued to improve, and upgrades of

credit ratings have far outnumbered

downgrades. Consistent with 

provement in credit quality, 

long-dated municipal bonds 

creased substantially less than 

comparable-maturity Treasur

ties, and the yield ratio has ac

fallen sharply.

The External Sector

The U.S. current account de

rowed in the first quarter of 

$835 billion at an annual rate

61⁄2 percent of nominal G

$892 billion in the fourth q

2005. The narrowing resulted f

factors. Unilateral transfer pa

foreigners dropped, largely be

decrease in government gr

trade deficit narrowed, prim

cause the value of imported oil 

ral gas declined. In additio

direct investment receipts a

direct investment payments 

an increase in the investmen

balance.

International Trade

Real exports of goods and 

increased 143⁄4 percent at an a

in the first quarter of 2006, 

than the 61⁄2 percent rate re

2005. The surge in export gro

first quarter resulted in par

recovery in exports of many 

industrial supplies following a 

hurricane-related disruptions 

year. Exports of capital go

increased rapidly in the firs

with deliveries of aircraft to fo

riers exhibiting particular stre

first-quarter increase in exp

widespread across destinations

robust economic activity in m

of the world, and exports to M

Canada showed especially 

creases. Real exports of serv
at an annual rate of about 61⁄2 percent in

the first quarter after increasing just

23⁄4 percent in 2005. Available data for

nominal exports in April and May suggest that the increase in real exports was

smaller in the second quarter, held down

in part by a drop in aircraft exports after

a strong first quarter.

Prices of exported goods increased at

an annual rate of 23⁄4 percent in the first

quarter of 2006, a pace somewhat faster

than in the second half of 2005. Prices

of non-agricultural industrial supplies

continued to increase steadily in the first

quarter, driven importantly by higher

prices for oil and metals. An acceleration in prices for finished goods, especially for capital and consumer goods,

contributed to the faster pace of export

price inflation in the first quarter. The

available data for the second quarter

point to further increases in export

prices on the strength of additional runups in the prices of non-agricultural

industrial supplies, especially metals.

Real imports of goods and services

rose at an annual rate of 103⁄4 percent in

the first quarter, slightly slower than in

the fourth quarter but still considerably

faster than the 51⁄4 percent rate observed

for 2005 as a whole. Robust growth of

real GDP in the United States supported

the first-quarter increase in imports.

Among categories of goods, large

increases in imports of consumer goods,

automotive products, and capital goods,

particularly computers, more than offset

declines in imports of oil and some other

industrial supplies. The rise in imports

in the first quarter was widely distributed across countries, and the increases

for China and Mexico were especially

large. Real imports of services jumped

at an annual rate of 81⁄2 percent in the

first quarter. Nominal imports in April

and May point to an abrupt slowing of

real imports in the second quarter from

the first quarter’s rapid pace.

Prices of imported goods 

oil and natural gas rose at an a

of about 1 percent in the first 

2006, 3⁄4 percentage point faste

pace in the second half of 20

of material-intensive goods, 

nonfuel industrial supplies a

increased steadily in the last 

2005 and in the first quarter 

Also in the first quarter, pric

ished goods, such as consum

and many kinds of capital goo

up slightly. Available data fo

ond quarter indicate that pric

ished goods kept rising at a 

pace. However, prices of 

intensive goods continued to 

sharply, a development reflect

prices for metals. The Int

Monetary Fund’s index of glo

prices rose 46 percent betwee

ber 2005 and May 2006, largel

of robust global demand. In Ju

prices retreated about 8 

although they remained well 

levels of earlier this year.

The spot price of West Texa

diate crude oil increased fro

$60 per barrel at the end of la

more than $75 per barrel in Ju

than the peak that followed l

hurricanes. Oil prices have be

sensitive to news about both s

demand, particularly in light o

row margin of worldwide spar

tion capacity. Global oil de

continued to grow as the for

nomic expansion has spread, a

oping countries have posted t

increases in oil consumption

events in the Middle East—

concerns over Iran’s nuclear 

violence in Iraq, and the recen

in Lebanon—have put 

upward pressure on oil prices

ria, attacks against oil infr

have reduced oil production fo

this year. Government interv
energy markets also raised concerns

about supply from some countries: In

recent months, Bolivia nationalized its

natural gas reserves, and Venezuela and

Russia continued to tighten governmental control of their energy industries.

The rise in the price of the far-dated

NYMEX oil futures contract (currently

for delivery in 2012) to more than $70

per barrel likely reflects a belief by oil

market participants that the balance of

supply and demand will remain tight

over the next several years.

The Financial Account

The U.S. current account deficit continues to be financed primarily by foreign

purchases of U.S. debt securities. Foreign official inflows in the first quarter

maintained the strength exhibited in

2005 but remained below the record

levels of 2004. As in recent years, the

majority of these official inflows were

attributable to Asian central banks and

have taken the form of purchases of U.S.

government securities.

Foreign private purchases of U.S. securities continued in the first quarter at

the extraordinary pace set in the second

half of 2005. Although private flows

into U.S. Treasury bonds were significantly smaller than in recent quarters,

this slowing was more than offset by

larger flows into agency bonds and equities. Preliminary data for April and May

suggest a slowdown in foreign purchases of U.S. securities relative to the

first quarter. Foreign direct investment

flows into the United States continued

in the first quarter near last year’s average levels.

Net purchases of foreign securities by

U.S. residents, which represent a financial outflow, strengthened slightly in the

first quarter and continued at a solid

pace in April and May. In addition, significant outflows were associated with

U.S. direct investment abroad, 

of some unusual inflows in t

half of 2005. These second-ha

were prompted by the partial ta

offered under the 2004 H

Investment Act (HIA), which 

the foreign affiliates of U.S. 

repatriate a portion of earlier 

that had been retained abroa

first quarter, the foreign affil

tially unwound the HIA-indu

by retaining an unusually larg

of their first-quarter earnings. 

merger activity abroad also 

direct investment outflows in 

quarter.

The Labor Market

Employment and Unemployme

Conditions in the labor 

continued to improve in the fi

2006, although the pace of h

slowed in recent months. 

payroll employment increased 

per month during the first qua

roughly in line with the relati

pace that prevailed during 

2005. During the second quar

slowed, and monthly gains in 

averaged 108,000 jobs per mo

the two quarters, the civilian u

ment rate edged down furth

lowest quarterly level of jobl

five years.

In the first quarter, with hom

quite strong, hiring continued 

ticularly robust at construction 

of this strength was the result 

able weather, which allowed m

struction activity than is typic

the winter months. Although 

dential construction activity w

by the spring, the pullback i

starts slowed the demand for r

contractors and workers in th

trades. As a result, monthly ad
construction industry payrolls declined

from more than 25,000 per month in the

first quarter to just 3,000 per month in

the second quarter. Cutbacks at retailers

also were an important factor holding

down the overall gain in employment in

the second quarter. After having been

stable early in 2006, employment at

retail outlets fell almost 30,000 per

month between March and June; most

of the cutbacks occurred at general

merchandisers.

In other sectors, employment remained on a solid upward trend during

the first half of the year. As has been the

case since mid-2004, establishments

providing education and health services,

those offering professional and technical

business services, and those involved in

financial activities, taken together,

added more than 60,000 jobs per month.

Employment in manufacturing, which

had turned up at the end of 2005, rose

further over the first half of 2006.

Expanding industrial production was

also associated with further job gains in

related industries, such as wholesale

trade and transportation. In addition, the

increase in energy production led to a

sustained rise in employment in the

natural resources and mining industry

over the first half of the year.

The increase in job opportunities so

far in 2006 led to a further reduction in

the civilian unemployment rate, from an

average of 5.0 percent in the second half

of 2005 to 4.7 percent in the second

quarter of 2006. Although hiring moderated in the spring, layoffs remained low.

New claims for unemployment insurance (UI) dipped below 300,000 per

week in January and February and then

fluctuated around a still-low level of

about 315,000 per week for most of the

period from March through early July.

Over the first half of 2006, longer-term

unemployment (fifteen weeks or more)

also moved down, and the proportion of

UI claimants who remained o

employment rolls until the exh

their benefits continued to rec

After having edged up dur

the labor force participation 

relatively stable over the fir

2006 despite the ongoing imp

in labor market conditions. 

most broad age groups w

changed from last year’s level

longer perspective, developm

ing the past decade highlight t

tance of structural as well a

influences on participation. T

the attachment of adult wom

workforce, which was a signif

tor in the secular rise in pa

over much of the post-Worl

period, appears to have leveled 

the aging of the population is 

the proportion of the workfor

55 years and older; it rose from 

12 percent in 1996 to 163⁄4 p

recent months. Although olde

have tended in recent years to 

labor force longer, their par

rate, at 38 percent in the secon

was less than half the rate fo

who are age 25 to 54. Thus, 

graphic shift to an older popu

already begun to reduce the o

of labor force participation an

set part of the rise in particip

has been associated with th

upturn in job creation. Th

forces that are slowing the exp

the labor force imply that the i

employment that is consiste

stable unemployment rate w

time, be smaller than it was d

period when labor force pa

was rising steadily.

Productivity and Labor Costs

After having advanced at an 

rapid rate from 2001 to mid-2

productivity in the nonfarm 
sector increased at a more moderate

annual rate of 21⁄2 percent from mid2004 to early 2006. Nonetheless, by historical standards, productivity performance recently has still been solid, with

gains at a rate matching those during the

second half of the 1990s. In an environment of a sustained expansion of aggregate demand, businesses have gradually

adjusted their use of labor, capital, and

services to achieve ongoing gains in

efficiency. Productivity has continued

to benefit importantly from investment

in new technologies, organizational

changes, and improvements in business

processes, although the contribution

from capital deepening has been smaller

in recent years than it was during the

capital investment boom of the late

1990s.

Broad measures of hourly labor compensation, which include both wages

and the costs of benefits, posted moderate gains over the year ending in early

2006 despite the run-up in headline price

inflation and the further tightening of

labor markets. Both the employment

cost index (ECI) and the estimate of

compensation per hour that uses data

from the national income and product

accounts increased 23⁄4 percent between

the first quarter of 2005 and the first

quarter of 2006.1 Both series had reported higher rates of change in hourly

labor compensation a year earlier.

The deceleration in labor compensation appears to have been associated

largely with smaller increases in employers’ benefit costs. The benefits component of the ECI was up just 3 percent

between March 2005 and March 2006,

compared with an increase of 5.5 percent between March 2004 and March

2005. The cost of health i

which typically accounts for a

fourth of overall benefit costs

43⁄4 percent during the year 

March 2006; between 2000 

these costs increased, on 

83⁄4 percent per year. Another l

tributor to the slower rise i

costs over the past year wa

employer contributions to thei

benefit pension plans; tho

dropped back somewhat after e

made sizable payments to bol

pension assets in 2004.

Indicators of the recent tre

wage component of worker c

tion have been providing mixe

As measured in the ECI, w

2.4 percent between March 

March 2006, slightly less th

preceding two years. In con

year-over-year change in avera

earnings of production or no

sory workers—which refers 

rower group of private nonfarm 

ees and has tended to show 

cyclical variation than the 

increased steadily over the p

years. Average hourly earn

3.9 percent over the twelve mo

ing in June 2006, compared 

increase of 2.7 percent over t

months ending in June 2005.

Prices

Inflation pressures were eleva

the first half of 2006. The c

price index for personal con

expenditures (PCE) rose at 

rate of 41⁄4 percent between 

2005 and May 2006. Over 

period, core PCE prices incre

annual rate of 2.6 percen

0.6 percentage point faster tha

twelve months of 2005.

Although energy prices eas

rarily in February, they tu

1. The Bureau of Labor Statistics (BLS) developed a new ECI series and has provided data for

the changes in that series beginning in 2001. The

BLS considers the new ECI to be continuous with

the old series.
sharply again from March to May; as a

result, the PCE price index for energy

increased 13 percent (not at an annual

rate) over the first five months of 2006,

a rise that marked a continuation of the

steep climb in prices that began in 2004.

This year, almost the entire rise in

energy prices has been associated with

higher prices for petroleum-based products. The PCE price index for gasoline

and motor fuel, which increased more

than 161⁄2 percent last year, climbed

another 24 percent (not at an annual

rate) by May. Although recent data from

the Department of Energy indicate that

gasoline prices fell back in June, they

moved up again in early July. Retail

prices of gasoline this year have risen

faster than the cost of crude oil in part

because of the additional cost of producing and distributing reformulated product with ethanol. Also, the demand for

fuel ethanol has been strong relative to

the current capacity to produce it. In

contrast, the consumer price of natural

gas has turned down this year as inventories have remained relatively high; the

price decline between January and May

almost completely reversed the steep

run-up that occurred last autumn.

Food price inflation remain

ate during the first five month

between December 2005 and M

the PCE price index for food a

ages increased at an annua

21⁄4 percent. Retail prices of 

poultry have fallen so far 

Domestic supplies of meat h

ample. Production has been e

at a time when export deman

has been soft largely because o

imports of U.S. beef by J

Korea. Prices of processed f

continued to rise at only a mod

despite higher prices for grai

demand for grains has been st

the price of corn has been b

demand from producers of 

Prices for food consumed a

home, which typically are i

heavily by labor and other 

costs, have continued to 

relatively rapidly, rising at a

rate of 33⁄4 percent over the 

months of the year.

The pickup in core inflati

first half of 2006 was evide

indexes for both goods and 

Prices of consumer goods 

food and energy, which were u

in 2005, edged up at an annu

3⁄4 percent this year. Prices of 

services also accelerated this 

a result, the PCE price index 

energy services increased at 

rate of 31⁄2 percent between 

2005 and May 2006, compar

rise of 23⁄4 percent in 2005. In 

months ending in May, inc

housing rents were especially 

rise may reflect, in part, a sh

mand toward rental units beca

purchases have become less a

Another contributor to the hig

tion rate for consumer service

the acceleration in the index fo

ket services to an annual rate 

cent over the first five mont

Alternative Measures of Price Change

Percent

Price measure

2004

to

2005

2005

to

2006

Chain-type (Q1 to Q1)

Gross domestic product (GDP) . 2.8 3.1

Gross domestic purchases . . . . . . 3.1 3.5

Personal consumption

expenditures (PCE) . . . . . . . . 2.7 3.0

Excluding food and energy . . . 2.2 1.9

Market-based PCE excluding

food and energy . . . . . . . . . . . 1.8 1.5

Fixed-weight (Q2 to Q2)

Consumer price index . . . . . . . . . . 3.0 4.0

Excluding food and energy . . . 2.1 2.4

Note: Changes are based on quarterly averages of

seasonally adjusted data.
year from 3 percent last year.2 More

broadly, the pickup in core consumer

price inflation over the first five months

of 2006 likely is the result of the passthrough of higher energy costs to a wide

range of goods and services.

The cost pressures from the increase

in energy costs during the past three

years have been apparent in rising prices

of inputs used in the production and sale

of final goods and services. The producer price index for intermediate

goods, excluding food and energy, rose

at an annual rate of 71⁄4 percent between

December 2005 and May 2006; this index rose 43⁄4 percent in 2005 and

81⁄4 percent in 2004. In particular, prices

of industrial chemicals, fertilizer, and

stone and clay products, for which

energy represents a relatively high share

of the total costs of production, accelerated over the past several years. The

costs of a number of important business

services, particularly transportation by

air, rail, and truck, have also been

boosted by higher energy costs. The

pass-through of the costs of energy to

consumer prices is clear for a few items,

such as airfares. For other components

of core consumer price indexes, however, the extent of the pass-through is

harder to trace. Quantifying the extent

of the pass-through is difficult, in part

because it is diffused through a wide

range of retail goods and services. In

addition, the cost of energy is a small

share of overall costs—and that share

has been declining over time as businesses adopt more energy-efficient technologies and households reduce their

consumption of energy. Nonetheless, the

cumulative rise in energy costs in recent

years has been large enough to show

through to pricing of final g

services even as businesses h

their labor costs, which 

roughly two-thirds of their cos

restrained.

Near-term inflation expectat

also influenced importantly ov

half of 2006 by movements 

prices, but, as of midyear, t

only slightly higher than the

the turn of the year. The Mich

survey measure of the median 

tion of households for inflatio

next twelve months held 

3 percent during the first thre

of the year but then rose s

4 percent in May as gasoli

climbed. By early July, this m

near-term inflation expectation

back to 3.1 percent. Longer-t

tion expectations remained w

ranges in which they have flu

recent years. On average ove

half of 2006, the median resp

the Michigan SRC survey con

expect the rate of inflation d

next five to ten years to be j

3 percent. In June, the Survey 

sional Forecasters, conducte

Federal Reserve Bank of Phi

reported expected inflation at 

21⁄2 percent over the next ten 

expectation that has been ro

changed for the past eight ye

tion compensation implied by 

of yields on nominal Treasury 

over their inflation-protected 

parts rose slightly, on net, ove

half of the year; in early July 

above 21⁄2 percent.

U.S. Financial Markets

U.S. financial markets f

smoothly in the first half of 20

the backdrop of increased vo

some asset prices. Yields on 

Treasury coupon securities r

2. These are services—such as foreign travel or

the financial services provided by banks—for

which no prices based on market transactions are

available; the Bureau of Economic Analysis must

impute or estimate these indexes.
70 basis points, on net, through early

July as investors came to appreciate that

economic conditions and inflation pressures required more monetary policy

tightening than they had expected at the

end of 2005. Equity prices advanced

until mid-May but then reversed those

gains. Apparently, evidence of increased

inflationary pressures and some softerthan-expected data on economic activity

induced market participants to revise

down their longer-term outlook for business profits and to perceive greater risks

to that outlook. With corporate balance

sheets remaining strong and liquid, risk

spreads on corporate bonds stayed low,

an indication that the revision to the

outlook had not sparked broad concerns

about credit quality. Firms had ample

access to funds, and business-sector debt

expanded rapidly in the first quarter.

The need to finance brisk merger and

acquisition activity was one factor that

reportedly induced nonfinancial businesses to tap the credit markets heavily.

Bond issuance picked up noticeably, and

commercial and industrial loans

increased robustly. Banks continued to

ease terms and standards on such loans.

Household debt expanded further in the

first quarter amid rising house prices

and brisk cash-out refinancing activity.

As was the case in 2005, the M2 monetary aggregate has advanced moderately

so far in 2006.

Interest Rates

The FOMC increased the target federal

funds rate 25 basis points at each of its

four meetings this year. These actions

brought the rate to 51⁄4 percent, about 60

basis points above the rate expected at

the end of last year for early July. In

contrast to the situation earlier in the

tightening cycle, when it was evident to

investors that considerable monetary

policy accommodation was in place and

had to be removed, market pa

more recently have had to f

greater degree on economic 

leases and their implications fo

look for economic growth and 

to form expectations about 

policy. Although the inform

rently available suggests that 

real output slowed appreciab

second quarter, incoming price 

pointed to greater-than-expec

tionary pressures throughout 

half of the year. Investors a

that the FOMC would act t

such pressures, and the expec

path moved upward, on bala

the first half of 2006. Neverthe

ket participants currently a

expect the target federal fun

ease after the end of the yea

investors’ apparent awaren

monetary policy decisions in

depend on the implications of 

information for the economic 

the implied volatility on s

Eurodollar rates calculated fro

prices has remained near the l

its historical range.

Yields on nominal Treasur

securities rose about 70 ba

across the maturity spectrum 

early July, in part because of t

tations for firmer policy. In a

appears that a modest reboun

premiums, including investor c

tion for inflation risk, may hav

uted to the rise in longer-te

still, estimated premiums rema

historical standards. Yields on 

indexed Treasury securities 

than those on their nominal 

parts, leaving inflation compe

medium- and long-term horiz

30 basis points higher than at t

the year.

In the corporate bond mark

on investment-grade securiti

about in line with those on co
maturity Treasury securities through

early July. In contrast, those on

speculative-grade securities rose only

about 40 basis points; as a result, risk

spreads were 30 basis points lower in

that segment of the market. The narrowness of high-yield spreads was likely a

reflection of investors’ sanguine views

about corporate credit quality over the

medium term, given the strength of business balance sheets and the outlook for

continued economic expansion.

Equity Markets

Broad equity indexes changed little, on

net, through early July. Stock prices

were boosted up to the first part of May

by an upbeat economic outlook and by

strong corporate earnings in the first

quarter. However, those gains were subsequently reversed as incoming data

clouded the prospects for economic

growth and continued to point to upward

pressures on inflation; the drop in share

prices was led by stocks that had logged

the largest gains in the previous months,

including those of firms with small capitalizations and of firms in cyclically sensitive sectors. A measure of the equity

risk premium—computed as the difference between the twelve-month forward

earnings–price ratio for the S&P 500

and an estimate of the real long-term

Treasury yield—has increased slightly

so far this year and remains near the

high end of its range of the past two

decades. The implied volatility of the

S&P 500 calculated from option prices

spiked temporarily in late May and early

June and remained somewhat elevated

compared with its levels earlier in the

year.

Net inflows to equity mutual funds

were very strong through April, as investors were evidently attracted by the

solid performance of the equity market

up to that point. In May and June, however, investors withdrew fund

prices began to sag.

Debt and Financial Intermedi

In the first quarter of 2006, the 

of domestic nonfinancial se

panded at an annual rate of 1

The household, business, an

government components all 

at double-digit rates, while 

local government debt adv

about a 6 percent pace. Pr

data suggest somewhat slow

of the debt of nonfinancial 

the second quarter. The slow

particularly noticeable in th

and state and local governmen

where strong tax receipts h

borrowing. The available 

point to somewhat reduced g

nonfinancial business debt in 

ond quarter.

Commercial bank credit in

an annual rate of about 11 perc

first quarter of 2006, a little f

in 2005, and picked up furt

almost 13 percent pace in th

quarter. A continued rapid in

business loans was likely sup

brisk merger and acquisition 

rising outlays for investment g

going inventory accumulation

accommodative lending env

Growth in commercial mortg

also strong, as fundamentals in 

tor continued to improve. D

slowing of housing activity 

months, residential mortgage 

expanded robustly. Howeve

short-term interest rates likel

uted to a runoff in loans dra

under revolving home-equity 

credit. Consumer loans adjust

curitizations decelerated in th

quarter after rising at a solid p

first quarter.
Bank profitability remained solid, and

asset quality continued to be excellent in

the first quarter. Profits were supported

by gains in non-interest income and reductions in loan-loss provisions that

more than offset a rise in non-interest

expenses. Delinquency and charge-off

rates remained low across all loan types.

Delinquency rates on residential mortgages on banks’ books edged lower in

the first quarter after moving up during

2005. Charge-off rates on consumer

loans declined to the lowest level seen

in recent years after a fourth-quarter

surge in charge-offs on credit card loans

that was associated with the implementation of the bankruptcy legislation in

October of last year.

As the policy debate about the possibility of curbing the balance sheet

growth of both Fannie Mae and Freddie

Mac continued, the combined size of the

mortgage investment portfolios at the

two government-sponsored enterprises

increased about 1 percent over the first

five months of 2006.

The M2 Monetary Aggregate

In the first quarter of 2006, M2 increased at an annual rate of about

61⁄2 percent, but its expansion moderated in the second quarter to a 23⁄4 percent pace, likely because of some slowing in the growth of nominal GDP.

Rising short-term interest rates continued to push up the opportunity cost of

holding M2 assets. Growth in liquid

deposits, whose rates tend to adjust sluggishly to changes in market rates, was

particularly slack. By contrast, the expansion in retail money market funds

and, especially, small time deposits was

brisk, as the yields on those instruments

kept better pace with rising market interest rates. Despite apparently modest demand from abroad, currency growth was

strong in the first quarter but has slowed

since. The velocity of M2 r

annual rate of 21⁄4 percent in 

quarter and appears to have co

rise in the second quarter.

International Developments

Foreign economic growth was 

the first quarter of 2006 as t

sion spread to all major regio

world. Accelerating domestic 

boosted growth in the foreign 

countries, especially Canada 

euro area. Emerging-market e

continued to benefit from rap

growth, and Chinese econom

was also spurred by a surge 

ment spending. Data for th

quarter suggest continued stro

abroad but with moderation 

countries. Rising energy pr

pushed up inflation in many 

this year, but upward pressur

inflation has generally contin

moderate.

Foreign monetary policy tig

the first half of this year in th

of solid growth and some h

inflation concerns. The Europ

tral Bank (ECB) raised its p

1⁄4 percentage point in March 

in June, citing rapid credit gr

the ECB’s expectation of ab

inflation. At its July policy me

Bank of Canada kept its targ

overnight rate unchanged at 41⁄

but it had increased its targ

overnight rate 1⁄4 percentage 

each of its previous seven po

ings. On July 14, the Bank 

(BOJ) ended its zero-interest-r

by raising its target for the c

rate to 1⁄4 percent for the first 

2001. Earlier, on March 9, 

announcing an end to its fiv

policy of quantitative easing, s

would set policy in the future 
inflation over the medium to long run,

defined as one to two years ahead.

Long-term bond yields abroad have

risen along with U.S. bond yields on

indications of robust global growth and

expectations of additional tightening of

monetary policy. Ten-year sovereign

yields have risen roughly 70 basis points

in the euro area since the end of last

year, while the increases on similar securities in Canada and the United Kingdom have been about 50 basis points.

Part of the rise in yields abroad has been

increased compensation for possible

future inflation as measured by the difference in yield between ten-year nominal and inflation-indexed bonds. Yield

spreads of emerging-market bonds over

U.S. Treasuries narrowed somewhat

early in the year, but that narrowing was

more than reversed in the second quarter

as investors apparently demanded

greater compensation for risk amid uncertainties about economic growth and

inflation.

The foreign exchange value of the

dollar has declined about 41⁄2 percent,

on net, this year against a basket of the

currencies of the major industrial countries but is down only about 1 percent,

on net, against the currencies of the

other important trading partners of the

United States. Much of the dollar’s

downward move occurred at times when

the market was focused on concerns

about global current account imbalances. The dollar has recovered some

ground since early May, as investors

reportedly have engaged in flightto-safety transactions into dollardenominated assets in conjunction with

the volatility in global commodity and

asset markets. On net, the dollar has

depreciated since the turn of the year

about 61⁄2 percent against the euro and

sterling, 3 percent against the Canadian

dollar, and 11⁄2 percent against the Japanese yen. In contrast, the dollar has risen

roughly 4 percent, on balanc

the Mexican peso this year. D

first half of this year, severa

countries experienced episode

stantial financial volatility tha

cases involved sharp deprec

the exchange value of their cu

Through the first four m

2006, a favorable economic ou

low interest rates supported 

equity prices in all major fore

tries. During May and early J

ever, equity prices registered w

declines, as market participa

more concerned about inflatio

tary policy, and global 

growth. More recently, develo

the Middle East have weigh

on stock prices. On net, eq

indexes are up between 1 pe

4 percent so far in 2006 in E

Canada, but they have fallen 

8 percent since year-end in Ja

American and Asian emergi

equity indexes, which had 

gained more than industrial-c

dexes early in the year, have fa

sharply since early May. Equi

in Mexico, Brazil, and Argen

dropped between 12 percent an

cent—leaving them still 

5 percent and 7 percent higher 

year—while stock prices in K

fallen about 9 percent, on ne

year.

Industrial Economies

The Japanese economy has co

strengthen this year, although 

growth has stepped down a bi

comparatively strong rate re

2005. Household consumpti

tained a solid rate of growth i

quarter, and private investmen

rose 11 percent. However, ne

which previously had been an 

source of strength, did not con
growth in the first quarter; the growth of

imports increased while export growth

remained firm. The labor market in Japan improved further in April and May:

The unemployment rate fell to 4 percent, and the ratio of job offers to applicants reached a thirteen-year high.

Although the GDP deflator has continued to decline, other signs indicate that

deflation is ending. In the first quarter of

2006, land prices in Japan’s six largest

cities rose 3.8 percent over their yearago level, the first increase since 1991.

Core consumer prices have shown small

twelve-month increases over the past

several months.

Real GDP in the euro area accelerated

in the first quarter, expanding 21⁄2 percent, a rate of growth somewhat above

its average in recent years. The acceleration was spurred by strength in domestic

demand, especially private consumption

spending, which increased in the first

quarter at double its pace in 2005. Retail

sales were also strong at the start of the

second quarter. The revival in household

spending has been supported by a small

rise in the growth rate of employment

and by an improvement in employer and

consumer perceptions of employment

prospects. Private investment spending

has remained strong in the euro area,

and business sentiment has continued to

brighten in recent months. Energy price

increases have pushed euro-area consumer price inflation to about 21⁄2 percent recently, a level above the ECB’s

2 percent ceiling, but core inflation has

remained near 11⁄2 percent.

In the United Kingdom, real GDP

expanded at an annual rate of 3 percent

in the first quarter after rising about

13⁄4 percent in 2005. Consumer spending grew about 11⁄2 percent, the same

moderate pace seen last year. House

prices, which remained relatively flat

during late 2004 and most of 2005,

picked up in late 2005 and have continued to rise in the first half of 

The twelve-month change in 

prices was 2.2 percent in M

sumer prices have been boost

tantly by increases in energy p

the past several months.

In Canada, real GDP gr

annual rate of nearly 4 perce

first quarter, an increase led b

in spending on consumer dur

housing. Investment in residen

tures grew at its fastest rate in 

two years, and business invest

tinued to exhibit the strength 

in the previous two quarters. 

for the second quarter point ge

a deceleration of GDP. Housin

the second quarter were signifi

low their elevated first-quart

the merchandise trade balance 

on balance, during the first fiv

of this year; and in the man

sector, the volume of new ord

shipments both fell in April. In 

in the second quarter, the lab

maintained its strength of the 

and the unemployment rate ha

6.2 percent, the lowest level 

than thirty years. Consumer p

2.8 percent in the twelve mont

in May.

Emerging-Market Economies

In China, growth of real ou

especially robust in the first 

nomic indicators suggest t

investment surged and tha

growth continued to be strong. 

growth of investment prompte

nese government to impose a 

new measures to slow capital 

including controls on credit an

and stricter criteria for approvi

ment projects. In addition, t

credit, which has soared m

15 percent over the past yea

central bank raised the one-y
lending rate in April and raised banks’

reserve requirements 1⁄2 percentage point

in June. The Chinese trade surplus widened in the first half of this year as

exports accelerated. Chinese consumer

price inflation is about 11⁄2 percent,

slightly above its pace in the second half

of last year but well below the more

than 5 percent rate seen in 2004.

Economic growth in India, Malaysia,

and Hong Kong also was quite strong in

the first quarter, although the pace of

activity of some of the other Asian

emerging-market economies has moderated a bit from last year’s rapid rate.

Concerns about inflationary pressures

have increased, largely because of rising energy prices. In response, monetary policy has been tightened in some

countries, including Korea, India, and

Thailand.

In Mexico, strong performance in the

industrial sector, an expansion in services output, and a recovery in agricultural production propelled real GDP

growth to more than 6 percent at an

annual rate in the first quarter. In addition, a surge in manufacturing exports

boosted Mexico’s trade and current

account balances noticeably. Industrial

production continued to increase early

in the second quarter. In June, Mexican

inflation was 3.2 percent, just above the

center of the Bank of Mexico’s target

range of 2 percent to 4 perc

easing policy nine times 

August and April, the Bank o

signaled in April that it would 

policy rate unchanged for a tim

Real GDP growth in Br

increased in the first quarter, 

53⁄4 percent, and was supporte

strong performances in manu

mining, and construction. Th

inflation has been declining fr

of 8 percent reached in April 

June, the twelve-month chang

edged down to 4 percent. In 

the central bank reduced its 

the overnight interest rate 

points, to 151⁄4 percent, bringi

mulative decline to 450 ba

since the current easing phase 

September. In the minutes o

May meeting, the policymak

mittee said that the onset of ma

tility over the past month had 

its uncertainty about the pro

inflation and had thus prom

ease less than it would have o

In Argentina, output grow

slightly in the first quarter. Am

ing capacity constraints, inflati

about 11 percent, up from 6 

2004. The Argentine govern

tried to hold down inflation, 

ited success, through volunt

agreements in several sectors. 
Federal Reserve Operations
Banking Supervision and Regulation

The Federal Reserve has supervisory

and regulatory authority over a variety

of financial institutions and activities. It

works with other federal and state supervisory authorities to ensure the safety

and soundness of supervised financial

institutions and the stability of U.S.

financial markets as a whole.

In 2006, U.S. banking organizations

reported record earnings despite tight

net interest margins resulting from a

persistently flat yield curve and heightened competition for deposits and loans.

Credit quality indicators remained historically strong, although nonperforming assets increased, particularly in residential real estate portfolios. For a

second consecutive year, there were no

failures of insured banks. Banking supervisors focused on banking activities

that could prove vulnerable in the event

of an economic downturn. In particular,

the federal banking agencies during the

year issued guidance for supervised

financial institutions on extensions of

credit for nontraditional residential mortgages and for commercial real estate.

Delinquencies among loans of these and

most other types remained low.

Federal Reserve staff continued to

work throughout the year with the other

federal banking agencies to prepare for

U.S. implementation of the Basel II capital accord.1 In September, the agencies

issued a joint notice of propo

making (NPR) describing pro

implementing the Basel II fram

the United States. In Decem

issued an NPR proposing re

capital requirements for trad

positions subject to the market 

tal rule. The agencies are also 

ing Basel II supervisory gui

examiners and the banking ind

Under the NPR implement

II, the new capital framework 

mandatory for large, internati

tive banking organizations an

for all others. Federal bankin

sors expect that the vast m

banking organizations will re

ject to the existing risk-base

framework (Basel I). To upda

and mitigate some of the con

of the differences between B

Basel II, the agencies in D

issued an NPR proposing chan

Basel I framework that wou

tional for banking organization

ject to Basel II.

Scope of Responsibilities 

Supervision and Regulatio

The Federal Reserve is the f

pervisor and regulator of all 

holding companies, including 

holding companies formed 

authority of the 1999 Gram

Bliley Act, and state-chartered 

cial banks that are members o

eral Reserve System. In overse

organizations, the Federal Res

1. The Basel II capital accord, an international

agreement formally titled “International Convergence of Capital Measurement and Capital Standards: A Revised Framework,” was developed by

the Basel Committee on Banking Supervision,

which is made up of representatives of the central

banks or other supervisory authorities of thirteen

countries. The original document was issued in

2004; the original version and an updated version

issued in November 2005 are avail

web site of the Bank for International 

(www.bis.org).
primarily to promote their safe and

sound operation, including their compliance with laws and regulations.2

The Federal Reserve also has responsibility for supervising the operations of

all Edge Act and agreement corporations, the international operations of

state member banks and U.S. bank holding companies, and the U.S. operations

of foreign banking companies.

The Federal Reserve exercises important regulatory influence over entry into

the U.S. banking system, and the structure of the system, through its administration of the Bank Holding Company

Act, the Bank Merger Act (with regard

to state member banks), the Change in

Bank Control Act (with regard to bank

holding companies and state member

banks), and the International Banking

Act. The Federal Reserve is also responsible for imposing margin requirements

on securities transactions. In carrying

out these responsibilities, the Federal

Reserve coordinates its supervisory activities with the other federal banking

agencies, state agencies, functional

regulators, and the bank regulatory

agencies of other nations.

Supervision for

Safety and Soundness

To promote the safety and soundness of

banking organizations, the Federal Reserve conducts on-site examinations

and inspections and off-site su

and monitoring. It also takes 

ment and other supervisory 

necessary.

Examinations and Inspectio

The Federal Reserve conducts 

tions of state member banks

branches and agencies of forei

and Edge Act and agreemen

tions. In a process distinct fro

nations, it conducts inspection

holding companies and their 

subsidiaries. Whether an exam

an inspection is being condu

review of operations entails 

sessment of the quality of the 

in place to identify, measure

and control risks; (2) an asse

the quality of the organization

(3) an evaluation of manage

cluding an assessment of inte

cies, procedures, controls, a

tions; (4) an assessment of 

financial factors of capital, ea

quidity, and sensitivity to ma

and (5) a review for compli

applicable laws and regulations

provides information on the exa

and inspections conducted by 

eral Reserve during the past fi

Inspections of bank holdin

nies, including financial holdin

nies, are built around a ratin

introduced in 2005 that reflec

cent shift in supervisory pra

these organizations away from 

torical analysis of financial 

toward a more dynamic, forw

ing assessment of risk-ma

practices and financial facto

the system, known as RFI 

fully termed RFI/C(D), holdin

nies are assigned a composite 

that is based on assessments 

components: risk managemen

nancial condition (F), and 

2. The Board’s Division of Consumer and

Community Affairs coordinates the Federal Reserve’s supervisory activities with regard to compliance with consumer protection and civil rights

laws. Those activities are described in the chapter

“Consumer and Community Affairs.” Supervision

for compliance with other banking laws and regulations, which is described in this chapter, is the

responsibility of the Board’s Division of Banking

Supervision and Regulation and the Federal Reserve Banks, whose examiners also check for

safety and soundness.
impact (I) of the parent company and its

nondepository subsidiaries on the subsidiary depository institution.3 The

fourth component, depository institution

(D), is intended to mirror the primary

regulator’s rating of the subsidiary depository institution.

In managing the supervisory process,

the Federal Reserve takes a risk-focused

approach that directs resources to

(1) those business activities posing the

greatest risk to banking organizations

and (2) the organizations’ management

processes for identifying, m

monitoring, and controlling r

key features of the supervision 

for large complex banking org

(LCBOs) are (1) identifyi

LCBOs that are judged, on th

their shared risk character

present the highest level of su

risk to the Federal Reserve 

(2) maintaining continual supe

these organizations so that th

Reserve’s assessment of each 

tion’s condition is current; (3) 

to each LCBO a supervisory t

posed of Reserve Bank staff 

who have skills appropriate for 

nization’s risk profile (the team 

the System’s central point of c

the organization, has respons

only one LCBO, and is sup

specialists capable of evalu

3. Each of the first two components has four

subcomponents: Risk Management—Board and

Senior Management Oversight; Policies, Procedures, and Limits; Risk Monitoring and Management Information Systems; and Internal Controls.

Financial Condition—Capital; Asset Quality;

Earnings; and Liquidity.

State Member Banks and Holding Companies, 2002–2006

Entity/Item 2006 2005 2004 2003 

State member banks

Total number . . . . . . . . . . . . . . . . . . . . . . . . . . 901 907 919 935 

Total assets (billions of dollars) . . . . . . . . . 1,405 1,318 1,275 1,912 

Number of examinations . . . . . . . . . . . . . . . 761 783 809 822 

By Federal Reserve System . . . . . . . . . . 500 563 581 581 

By state banking agency . . . . . . . . . . . . . 261 220 228 241 

Top-tier bank holding companies

Large (assets of more than $1 billion)

Total number . . . . . . . . . . . . . . . . . . . . . . . . 448 394 355 365 

Total assets (billions of dollars) . . . . . . 12,179 10,261 8,429 8,295 

Number of inspections . . . . . . . . . . . . . . . 566 501 500 454 

By Federal Reserve System1 . . . . . . . 557 496 491 446 

On site . . . . . . . . . . . . . . . . . . . . . . . . . 500 457 440 399 

Off site . . . . . . . . . . . . . . . . . . . . . . . . . 57 39 51 47 

By state banking agency ........... 9 5 9 8 

Small (assets of $1 billion or less)

Total number . . . . . . . . . . . . . . . . . . . . . . . . 4,654 4,760 4,796 4,787 

Total assets (billions of dollars) . . . . . . 947 890 852 847 

Number of inspections . . . . . . . . . . . . . . . 3,449 3,420 3,703 3,453 

By Federal Reserve System . . . . . . . . 3,257 3,233 3,526 3,324 

On site . . . . . . . . . . . . . . . . . . . . . . . . . 112 170 186 183 

Off site . . . . . . . . . . . . . . . . . . . . . . . . . 3,145 3,063 3,340 3,141 

By state banking agency . . . . . . . . . . . 192 187 177 129 

Financial holding companies

Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599 591 600 612 

Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 38 36 32 

1. For large bank holding companies subject to continuous, risk-focused supervision, includes multiple targeted reviews.
risks of LCBO business activities and

functions); and (4) promoting Systemwide and interagency informationsharing through automated systems.

For other banking organizations, the

risk-focused supervision program provides that examination procedures are

tailored to each banking organization’s

size, complexity, and risk profile. As

with the LCBOs, examinations entail

both off-site and on-site work, including planning, pre-examination visits,

detailed documentation, and examination reports tailored to the scope and

findings of the examination.

State Member Banks

At the end of 2006, 901 state-chartered

banks (excluding nondepository trust

companies and private banks) were

members of the Federal Reserve System. These banks represented approximately 12 percent of all insured U.S.

commercial banks and held approximately 14 percent of all insured commercial bank assets in the United States.

The guidelines for Federal Reserve

examinations of state member banks are

fully consistent with section 10 of the

Federal Deposit Insurance Act, as

amended by section 111 of the Federal

Deposit Insurance Corporation Improvement Act of 1991 and by the Riegle

Community Development and Regulatory Improvement Act of 1994. A fullscope, on-site examination of these

banks is required at least once a year,

although certain well-capitalized, wellmanaged organizations having total

assets of less than $250 million may be

examined once every eighteen months.

The Financial Services Regulatory Relief Act of 2006, signed into law in

October, authorized the federal banking

agencies to raise the total asset threshold

for certain institutions from $250 million to $500 million. Interim rules that

will incorporate this change i

ing regulations are being devel

Federal Reserve conducted 5

of state member banks in 200

Bank Holding Companies

At year-end 2006, a total of 5

bank holding companies were 

tion, of which 5,102 were top

holding companies. These org

controlled 6,106 insured co

banks and held approximatel

cent of all insured commer

assets in the United States.

Federal Reserve guideline

annual inspections of large ban

companies as well as comple

companies. In judging the fina

dition of the subsidiary banks 

holding companies, Federal R

aminers consult examinatio

prepared by the federal and s

ing authorities that have prima

sibility for the supervision 

banks, thereby minimizing d

of effort and reducing the su

burden on banking organizati

complex bank holding compa

consolidated assets of $1 billi

are subject to a special superv

gram that permits a more fle

proach.4 In 2006, the Federa

conducted 557 inspections of l

holding companies and 3,25

tions of small, noncomplex b

ing companies.

Financial Holding Companies

Under the Gramm-Leach-Bl

bank holding companies that 

tain capital, managerial, and 

4. The program was implemented 

modified in 2002. See SR letter 02-01 

sion of the factors considered in 

whether a bank holding company is 

noncomplex (www.federalreserve.go

srletters/).
quirements may elect to become financial holding companies and thereby

engage in a wider range of financial

activities, including full-scope securities

underwriting, merchant banking, and insurance underwriting and sales. The statute streamlines the Federal Reserve’s

supervision of all bank holding companies, including financial holding companies, and sets forth parameters for the

supervisory relationship between the

Federal Reserve and other regulators.

The statute also differentiates between

the Federal Reserve’s relations with

regulators of depository institutions and

its relations with functional regulators

(that is, regulators for insurance, securities, and commodities firms).

As of year-end 2006, 604 domestic

bank holding companies and 44 foreign

banking organizations had financial

holding company status. Of the domestic financial holding companies, 38 had

consolidated assets of $15 billion or

more; 121, between $1 billion and

$15 billion; 86, between $500 million

and $1 billion; and 359, less than

$500 million.

International Activities

The Federal Reserve supervises the foreign branches and overseas investments

of member banks, Edge Act and agreement corporations, and bank holding companies and also the investments by bank

holding companies in export trading companies. In addition, it supervises the activities that foreign banking organizations

conduct through entities in the United

States, including branches, agencies, representative offices, and subsidiaries.

Foreign Operations of

U.S. Banking Organizations

In supervising the international operations of state member banks, Edge Act

and agreement corporations, 

holding companies, the Federa

generally conducts its examin

inspections at the U.S. head 

these organizations where the 

responsibility for the foreign o

Examiners also visit the overse

of U.S. banks to obtain fina

operating information and, 

instances, to evaluate the orga

efforts to implement correct

sures or to test their adheren

and sound banking practices. 

tions abroad are conducted wi

operation of the supervisory a

of the countries in which 

place; for national banks, the 

tions are coordinated with the 

the Comptroller of the Currenc

At the end of 2006, 53 mem

were operating 675 branches 

countries and overseas area

United States; 34 national ba

operating 625 of these branch

state member banks were ope

remaining 50. In addition, 17 

ber banks were operating 21 b

foreign countries and oversea

the United States.

Edge Act and Agreement Corp

Edge Act corporations are int

banking organizations charter

Board to provide all segmen

U.S. economy with a means of 

international business, espec

ports. Agreement corporations 

lar organizations, state charter

erally chartered, that enter 

agreement with the Board 

from exercising any power t

permissible for an Edge Act co

Sections 25 and 25A of th

Reserve Act grant Edge Act a

ment corporations permission 

in international banking an

financial transactions. These 
tions, most of which are subsidiaries of

member banks, may (1) conduct a deposit and loan business in states other

than that of the parent, provided that the

business is strictly related to international transactions, and (2) make foreign

investments that are broader than those

permissible for member banks.

At year-end 2006, 71 banking organizations, operating 9 branches, were

chartered as Edge Act or agreement corporations. These corporations are examined annually.

U.S. Activities of Foreign Banks

The Federal Reserve has broad authority

to supervise and regulate the U.S. activities of foreign banks that engage in

banking and related activities in the

United States through branches, agencies, representative offices, commercial

lending companies, Edge Act corporations, commercial banks, bank holding

companies, and certain nonbanking

companies. Foreign banks continue to

be significant participants in the U.S.

banking system.

As of year-end 2006, 178 foreign

banks from 54 countries were operating

214 state-licensed branches and agencies, of which 8 were insured by the

Federal Deposit Insurance Corporation

(FDIC), and 45 OCC-licensed branches,

of which 4 were insured by the FDIC.

These foreign banks also owned

12 Edge Act and agreement corporations and 2 commercial lending companies; in addition, they held a controlling

interest in 62 U.S. commercial banks.

Altogether, the U.S. offices of these foreign banks at the end of 2006 controlled

approximately 19 percent of U.S. commercial banking assets. These 178 foreign banks also operated 85 representative offices; an additional 59 foreign

banks operated in the United States

solely through a representative office.

State-licensed and federally 

branches and agencies of fore

are examined on-site at least o

eighteen months, either by th

Reserve or by a state or oth

regulator. In most cases, on-s

nations are conducted at least 

ery twelve months, but the pe

be extended to eighteen mon

branch or agency meets certai

In cooperation with the oth

and state banking agencies, th

Reserve conducts a joint pro

supervising the U.S. operatio

eign banking organizations. 

gram has two main parts. On

volves examination of thos

banking organizations that h

tiple U.S. operations and is in

ensure coordination among th

U.S. supervisory agencies. T

part is a review of the fina

operational profile of each org

to assess its general ability to s

U.S. operations and to determ

risks, if any, the organizati

through its U.S. operations. 

these two processes provide c

formation to U.S. supervisors 

cal, uniform, and timely ma

Federal Reserve conducted o

pated with state and federal 

authorities in 339 examination

Anti-Money-Laundering

Examinations

The U.S. Department of the 

regulations (31 CFR 103) imp

the Bank Secrecy Act (BSA) 

require banks and other types 

cial institutions to file certa

and maintain certain records 

useful in criminal or regulatory 

ings. The BSA and separate B

lations require banking organiz

pervised by the Board to file 

suspicious activity related to 
violations of federal law, including

money laundering, terrorist financing,

and other financial crimes. In addition,

BSA and Board regulations require that

banks develop written programs on

BSA/anti-money-laundering compliance

and that the programs be formally approved by bank boards of directors. An

institution’s compliance program must

(1) establish a system of internal controls to ensure compliance with the

BSA, (2) provide for independent compliance testing, (3) identify individuals

responsible for coordinating and monitoring day-to-day compliance, and (4) provide training for personnel as appropriate.

The Federal Reserve is responsible

for examining its supervised institutions

for compliance with various antimoney-laundering laws and regulations.

During examinations of state member

banks and U.S. branches and agencies of

foreign banks and, when appropriate,

inspections of bank holding companies,

examiners review the institution’s compliance with the BSA and determine

whether adequate procedures and controls to guard against money laundering

and terrorism financing are in place.

Specialized Examinations

The Federal Reserve conducts specialized examinations of banking organizations in the areas of information technology, fiduciary activities, transfer agent

activities, and government and municipal securities dealing and brokering. The

Federal Reserve also conducts specialized examinations of certain entities,

other than banks, brokers, or dealers,

that extend credit subject to the Board’s

margin regulations.

Information Technology Activities

In recognition of the importance of information technology to safe and sound

operations in the financial ind

Federal Reserve reviews the 

tion technology activities of s

banking organizations as well 

independent data centers tha

information technology service

organizations. All safety and 

examinations include a risk-fo

view of information techno

management activities. During 

Federal Reserve was the lead 

1 cooperative, multiagency ex

of a large, multiregional data p

servicer.

Fiduciary Activities

The Federal Reserve has super

sponsibility for state member 

cial banks and depository tru

nies that together reported, at 

2006, $36 trillion of assets i

fiduciary or custodial capacit

tionally, state member nond

trust companies supervised by 

eral Reserve reported $33 trill

sets held in a fiduciary or 

capacity. During on-site exa

of fiduciary activities, an orga

compliance with laws, regula

general fiduciary principles a

tial conflicts of interest are 

its management and operation

ing its asset- and account-ma

risk-management, and audit an

procedures, are also evaluated

Federal Reserve examiners 

97 on-site fiduciary examinati

Transfer Agents and

Securities Clearing Agencies

As directed by the Securities 

Act of 1934, the Federal Res

ducts specialized examination

state member banks and ban

companies that are registered 

Board as transfer agents. Am
things, transfer agents countersign and

monitor the issuance of securities, register the transfer of securities, and exchange or convert securities. On-site examinations focus on the effectiveness of

an organization’s operations and its

compliance with relevant securities

regulations. During 2006, the Federal

Reserve conducted on-site examinations

at 15 of the 78 state member banks and

bank holding companies that were registered as transfer agents and examined

1 state member limited-purpose trust

company acting as a national securities

depository.

Government and Municipal Securities

Dealers and Brokers

The Federal Reserve is responsible for

examining state member banks and foreign banks for compliance with the Government Securities Act of 1986 and with

Department of the Treasury regulations

governing dealing and brokering in government securities. Twenty-five state

member banks and 8 state branches of

foreign banks have notified the Board

that they are government securities dealers or brokers not exempt from Treasury’s regulations. During 2006, the

Federal Reserve conducted 6 examinations of broker-dealer activities in government securities at these organizations. These examinations are generally

conducted concurrently with the Federal

Reserve’s examination of the state member bank or branch.

The Federal Reserve is also responsible for ensuring that both state member banks and bank holding companies

that act as municipal securities dealers

comply with the Securities Act Amendments of 1975. Municipal securities

dealers are examined pursuant to

the Municipal Securities Rulemaking

Board’s rule G-16 at least once every

two calendar years. Of the 20 entities

that dealt in municipal securit

2006, 9 were examined during 

Securities Credit Lenders

Under the Securities Exchan

1934, the Board is responsible 

lating credit in certain tra

involving the purchase or ca

securities. As part of its gener

nation program, the Federal 

examines the banks under its 

tion for compliance with the 

Regulation U (Credit by B

Persons other than Brokers o

for the Purpose of Purchasing 

ing Margin Stock). In addition

eral Reserve maintains a regis

sons other than banks, bro

dealers who extend credit s

Regulation U. The Federal Re

conduct specialized examin

these lenders if they are no

subject to supervision by 

Credit Administration, the 

Credit Union Administration 

or the Office of Thrift Su

(OTS).

At the end of 2006, 602 len

than banks, brokers, or dealers 

istered with the Federal Reser

federal regulators supervised 

these lenders, and the rema

were subject to limited Federa

supervision. On the basis of 

requirements and annual rep

Federal Reserve exempted 29

from its on-site inspection pro

securities credit activities of th

ing 102 lenders were subject 

biennial or triennial inspecti

inspections were conducted d

year.

Business Continuity

In 2006, the Federal Reserve 

its efforts to strengthen the res
the U.S. financial system in the event of

unexpected disruptions. Throughout the

year, the staff continued to work with

financial institutions to assess implementation of the sound practices identified in the April 2003 “Interagency Paper on Sound Practices to Strengthen the

Resilience of the U.S. Financial System,” a joint publication with the OCC

and the Securities and Exchange Commission (SEC). During 2006, the agencies provided additional guidance to

help institutions implement testing of

their business continuity plans. The

agencies continue to coordinate their

efforts to ensure a consistent supervisory approach for business continuity

practices.

Enforcement Actions and

Special Examinations

The Federal Reserve has enforcement

authority over the banking organizations

it supervises and their affiliated parties.

Enforcement actions may be taken to

address unsafe and unsound practices or

violations of any law or regulation. Formal enforcement actions include ceaseand-desist orders, written agreements,

removal and prohibition orders, and civil

money penalties. In 2006, the Federal

Reserve completed 37 formal enforcement actions. Civil money penalties totaling $212,050 were assessed. All civil

money penalties, as directed by statute,

are remitted to either the Department of

the Treasury or the Federal Emergency

Management Agency. Enforcement orders, which are issued by the Board, and

written agreements, which are executed

by the Reserve Banks, are made public

and are posted on the Board’s web

site(www.federalreserve.gov/boarddocs/

enforcement).

In addition to taking these formal enforcement actions, the Reserve Banks

completed 70 informal enforcement

actions in 2006. Informal en

actions include memoranda 

standing and board of directo

tions. Information about these 

not available to the public.

Surveillance and

Off-Site Monitoring

The Federal Reserve uses a

screening systems to monitor 

cial condition and performanc

member banks and bank holdin

nies between on-site examinati

monitoring and analysis helps 

amination resources to institu

have higher risk profiles. Scre

tems also assist in the planni

aminations by identifying c

that are engaging in new or 

activities.

In January 2006, the Federa

replaced its primary off-site m

tool, SEER (System to 

Examination Ratings), with th

sion and Regulation Statistica

ment of Bank Risk model (SR

Drawing primarily on the fina

that banks report on their R

Condition and Income (Call 

SR-SABR uses econometric t

to identify banks that report 

characteristics weaker than 

other banks assigned similar su

ratings. To supplement the S

screening, the Federal Res

monitors various market data, 

equity prices, debt spreads, ag

ings, and measures of expect

frequency, to gauge market p

of the risk in banking organiz

addition, the Federal Reserve 

quarterly Bank Holding 

Performance Reports (BHCPR

in monitoring and inspecting s

banking organizations. The 

which are compiled from data 

by large bank holding com
quarterly regulatory reports (FR Y-9C

and FR Y-9LP), contain, for individual

companies, financial statistics and

comparisons with peer companies.

BHCPRs are made available to the

public on the National Information

Center web site, which can be accessed

at www.ffiec.gov.

During the year, four major upgrades

to the web-based Performance Report

Information and Surveillance Monitoring (PRISM) application were completed. PRISM is a querying tool used

by Federal Reserve analysts to access

and display financial, surveillance, and

examination data. In the analytical

module, users can customize the presentation of institutional financial information drawn from Call Reports, Uniform Bank Performance Reports,

FR Y-9 statements, BHCPRs, and other

regulatory reports. In the surveillance

module, users can generate reports

summarizing the results of surveillance

screening for banks and bank holding

companies. The upgrades made more

regulatory data available for querying,

added the results of surveillance

screens (including SR-SABR), added

new search options, and improved the

user interface.

The Federal Reserve works through

the Federal Financial Institutions Examination Council (FFIEC) Task Force

on Surveillance Systems to coordinate

surveillance activities with the other federal banking agencies.5

Technical Assistance

In 2006, the Federal Reserve continued

to provide technical assistance on bank

supervisory matters to foreign central

banks and supervisory authorit

nical assistance involves visit

eral Reserve staff members t

authorities as well as consulta

foreign supervisors who visit 

or the Reserve Banks. Techn

tance in 2006 was concentrate

America, Asia, and former S

countries. The Federal Reser

with the OCC, the FDIC, 

Department of the Treasury, w

active participant in the Middl

North Africa Financial Re

Training Initiative, which is p

U.S. government’s Middle Ea

ship Initiative.

During the year the Federa

offered training courses exclu

foreign supervisory authorities 

ington, D.C., and a number o

jurisdictions. System staff also 

in technical assistance and tra

sions led by the International 

Fund, the World Bank, t

American Development Bank, 

Development Bank, the Basel 

tee on Banking Supervision

Financial Stability Institute.

The Federal Reserve is also 

ciate member of the Associati

pervisors of Banks of the 

(ASBA), an umbrella group o

pervisors from countries in th

Hemisphere. The group, head

in Mexico, promotes comm

and cooperation among bank 

sors in the region; coordinate

programs throughout the reg

the help of national banking su

and international agencies; an

help members develop bank

regulations, and supervisory 

that conform to international 

tices. The Federal Reserve c

significantly to ASBA’s orga

management and to its training 

nical assistance activities.

5. The federal banking agencies that are members of the FFIEC are the Federal Reserve Board,

the FDIC, the NCUA, the OCC, and the OTS.
Supervisory Policy

The Federal Reserve’s supervisory

policy function is responsible for developing guidance for examiners and banking organizations as well as regulations

for banking organizations under the Federal Reserve’s supervision. Staff members participate in supervisory and regulatory forums, provide support for the

work of the FFIEC, and participate in

international forums such as the Basel

Committee on Banking Supervision, the

Joint Forum, and the International Accounting Standards Board.

Capital Adequacy Standards

Risk-Based Capital Standards for

Certain Internationally Active

Banking Organizations

On September 25, 2006, the Federal

Reserve, OCC, FDIC, and OTS published a joint notice of proposed rulemaking (NPR) setting forth their views

on Basel II and seeking public comment

on the U.S. plan for implementing the

agreement. Under the proposal, the basic minimum risk-based capital ratio

format—regulatory capital divided by

risk-weighted assets—would be maintained, with the minimum for tier 1 capital set at 4 percent and the minimum for

total qualifying capital set at 8 percent.

The primary differences between the

current and proposed rules are the

internal-ratings-based methodologies

used to calculate risk-weighted assets

and the advanced measurement approach for operational risk under Basel II. Banking organizations using the

methods set forth in the NPR would also

be subject to certain public disclosure

requirements, to foster transparency and

market discipline. All banking organizations, including those using the internalratings-based approach for credit risk

and the advanced measure

proach for operational risk, w

tinue to be subject to the tier 

ratio requirement and the m

capital rule, if applicable, as w

prompt corrective action rules

Revisions to Market Risk Cap

On September 25, 2006, the 

issued for public comment a 

proposed rulemaking propos

sions to the market risk capital 

by the OCC, Board, and FD

1997 for banking organizatio

significant exposure to market 

der the market risk capital ru

banking organizations are re

calculate a capital requireme

general market risk of their 

positions and the specific ris

covered debt and equity posit

proposed revisions would en

rule’s risk sensitivity, require t

risk capital charge to reflect 

mental default risk of traded 

and require public disclosure 

qualitative and quantitative m

information. The comment p

end on January 23, 2007.

Risk-Based Capital Standards

for Banking Organizations

Not Subject to Basel II

On December 26, 2006, the 

agencies issued for public co

NPR proposing modifications 

that would be optional for bank

nizations not subject to Base

proposals aim to enhance risk 

without unduly increasing r

burden. They would expand th

of risk-weight categories, allo

of external credit ratings to ri

certain exposures, expand the 

recognized collateral and elig

antors, use loan-to-value (LT

to risk-weight residential m
increase the credit conversion factor for

certain commitments having an original

maturity of one year or less, assess a

capital charge for early amortizations in

securitizations of revolving credit exposures, and remove the 50 percent limit

on the risk weight for certain over-thecounter derivatives transactions. The

comment period for the NPR will end

on March 26, 2007.

Other Capital Issues

Board staff conduct supervisory analyses of innovative capital instruments and

novel transactions to determine whether

such instruments qualify for inclusion in

tier 1 capital.6 Much of this work in

2006 involved evaluating enhanced

forms of trust preferred securities that

bank holding companies developed in

order to be granted more credit for equity by the rating agencies under the

Board’s 2005 revisions to the rule on the

qualifying components of tier 1 capital.

Staff members also identify and

address supervisory concerns related to

supervised banking organizations’ capital issuances and work with the Reserve

Banks to evaluate the overall composition of banking organizations’ capital.

In this work, the staff often must

review the funding strategies proposed

in applications for acquisitions and

other transactions submitted to the Federal Reserve by banking organizations.

Accounting Policy

The supervisory policy function is also

responsible for monitoring major domestic and international proposals, standards, and other developments affecting the banking industry in 

of accounting, auditing, inte

trols, disclosure, and supervis

cial reporting. Federal Rese

members interact with key enti

accounting and auditing profe

cluding standards-setters and a

firms, the other banking agen

the banking industry, and 

pervisory guidance as appropr

During 2006, the Federal Re

gether with the other banking 

issued a comment letter to the 

Accounting Standards Board (

its then-proposed Statement of 

Accounting Standards titled 

Value Option for Financial A

Financial Liabilities.

7 The age

jointly issued guidance on loan 

losses and on limitations on th

of external auditors.

Policy Statement on the Allow

Loan and Lease Losses

In December the Federal 

FDIC, NCUA, OCC, and OT

“Interagency Policy Stateme

Allowance for Loan and Lease 

which updates and replaces ea

ance on the methodology for c

the allowance for loan and le

(ALLL). Revisions were made 

that policy is consistent with 

accepted accounting principles 

recent supervisory guidance 

the ALLL. Updated in the gui

the responsibilities of boards 

tors, management, and bankin

zation examiners; factors to b

ered in estimating the ALLL

objectives and elements of an 

loan review system, including 

credit-grading system. The 

6. Tier 1 capital comprises common stockholders’ equity and qualifying forms of preferred stock,

less required deductions such as goodwill and

certain intangible assets.

7. The FASB issued the final stan

ment of Financial Accounting Standa

in February 2007.
also reiterates the points of agreement

between the SEC and the banking agencies since 1999. To assist in application

of the revised guidance, the agencies

also issued a supplemental document

anticipating frequently asked questions.

Advisory on Limitations on the

Liability of External Auditors

The Federal Reserve, FDIC, NCUA,

OCC, and OTS in May issued “Interagency Advisory on the Unsafe and Unsound Use of Limitation of Liability

Provisions in External Audit Engagements.” The guidance addresses safety

and soundness concerns that may arise

when financial institutions enter into external audit contracts that limit the auditor’s liability for audit services. Specifically, the guidance informs financial

institutions that the inclusion of certain

auditor liability limitations in external

audit contracts (typically referred to as

engagement letters) for audits of financial statements, audits of internal control over financial reporting, or attestations on management’s assessment of

internal control over financial reporting

is generally unsafe and unsound.

Bank Secrecy Act and

Anti–Money Laundering

In 2006, the FFIEC updated the Bank

Secrecy Act/Anti–Money Laundering

Examination Manual issued in 2005 by

adding sections on risk assessment and

automated clearinghouse transactions,

updating the section on trade finance,

and incorporating regulatory changes.

The manual continues to contain an

overview of Bank Secrecy Act (BSA)

and anti-money-laundering requirements

and supervisory expectations, resource

materials, and examination procedures

and to emphasize a banking organization’s responsibility to establish and

implement a risk-based app

complying with the BSA.

In January, the Federal Re

Department of the Treasury’s 

Crimes Enforcement Network

other federal banking agenci

guidance on sharing Suspiciou

Reports (SARs) with head 

controlling companies. The 

confirmed that a U.S. branch 

of a foreign bank may disclose 

its head office outside the Uni

Similarly, a U.S. bank or sav

ciation may disclose a SAR t

trolling company, whether do

foreign.

In March, the Federal Rese

a final rule amending Regulat

ternational Banking Operation

form the Board’s regulations 

requirements and to clarify 

and agreement corporations 

branches, agencies, and repr

offices of foreign banks supe

the Federal Reserve must esta

maintain procedures reason

signed to ensure and monito

ance with the BSA and its imp

regulations.

In April, the Federal Reserv

other federal banking agencie

into a memorandum of unde

with the Office of Foreign As

trol within the Department of 

sury to facilitate informatio

and to further enhance interage

dination in implementing U.S. 

rules.

International Guidance on

Supervisory Policies

As a member of the Basel Com

Banking Supervision (Basel 

tee), the Federal Reserve parti

efforts to advance sound su

policies for internationally ac

ing organizations and to im
stability of the international banking

system. In 2006, the Federal Reserve

continued to work cooperatively on

Basel II, the 2004 accord to revise the

international capital regime, and to develop international supervisory guidance. The Federal Reserve also continued to participate in Basel Committee

working groups to address issues not

fully resolved in the Basel II framework.

Risk Management

The Federal Reserve contributed to supervisory policy papers, reports, and

recommendations issued by the Basel

Committee during 2006 that were generally aimed at improving the supervision of banking organizations’ riskmanagement practices.8

• “Enhancing Corporate Governance for

Banking Organizations,” final paper

issued in February, updating guidance

published in 1999

• “Basel II: International Convergence

of Capital Measurement and Capital

Standards: A Revised Framework—

Comprehensive Version,” published

in June

Core Principles for

Effective Banking Supervision

The Core Principles, developed by the

Basel Committee in 1997, have become

the de facto international standard for

sound prudential regulation and supervision of banks. In 2006, the Federal Reserve participated in a Basel Committee

effort to update the Core Principles in

light of the significant changes in international banking regulation and experience gained since the principles were

last revised in 1999. The revised guidance, “CorePrinciplesforEffec

ing Supervision,” was issued in 

Joint Forum

In 2006, the Federal Reserve 

tinued to participate in 

Forum—a group established 

aegis of the Basel Committee 

issues related to the banking, 

and insurance sectors, inclu

regulation of financial conglom

is made up of representativ

Basel Committee, the Interna

ganization of Securities Com

and the International Associat

surance Supervisors. The Fe

serve contributed to the follow

visory policy papers, repo

recommendations issued by 

Forum during 2006.9

• “Regulatory and Market Di

Issues and Observations,” 

May

• “The Management of Liqu

in Financial Groups,” issued 

• “High-Level Principles for 

Continuity,” issued in Augu

International Accounting

The Federal Reserve participa

Basel Committee’s Account

Force (ATF) and represents 

Committee at international me

accounting, auditing, and disc

sues affecting global banking 

tions. During 2006, Federal 

staff were involved in the dev

of two key Basel Committee d

issued to national supervisors 

of various comment letters 

accounting and auditing that 

mitted to the International A

8. Papers issued by the Basel Committee can

be accessed via the Bank for International Settlements web site at www.bis.org.

9. Papers issued by the Joint Fo

accessed via the Bank for Internat

ments web site at www.bis.org.
Standards Board and the International

Auditing and Assurance Standards

Board.

The Basel Committee document “Supervisory Guidance on the Use of the

Fair Value Option for Financial Instruments by Banks,” issued in June, provides guidance on the prudential supervision of banks in their implementation

of the fair value option included in the

amended International Accounting Standard (IAS) 39, which became effective

January 1, 2006. Under IAS 39, the fair

value option allows an organization to

irrevocably elect, at the date of purchase, a fair value measurement for certain financial instruments and to record

in current earnings the gains and losses

resulting from changes in fair value.

The Basel Committee document

“Sound Credit Risk Assessment and

Valuation for Loans,” issued in June,

provides guidance on assessing credit

risk and accounting for loan impairment. Specifically, the document addresses supervisory expectations for, and

supervisory evaluations of, a banking

organization’s establishment and support of its loan-loss-allowance accounts.

Response to Hurricane Katrina

Since Hurricane Katrina, the federal

banking agencies—the Federal Reserve,

FDIC, NCUA, OCC, and OTS—and the

state banking agencies in Alabama,

Louisiana, and Mississippi have worked

together to monitor and support the

recovery efforts of financial institutions

and their customers in the U.S. Gulf

Coast region. In 2006, the interagency

efforts included

• developing examiner guidance on the

agencies’ expectations related to assessments of the financial condition of

institutions affected by the hurricane;

• conducting a public service 

encouraging individuals af

Hurricane Katrina to con

lenders (and also issuing a 

encouraging financial insti

work with their borrowers 

them in their financial recov

• releasing “Lessons Learned 

ricane Katrina: Preparing Yo

tion for a Catastrophic Event

let describing financial in

experiences with Hurrican

and the lessons they learned 

institutions might find helpf

sidering their readiness fo

strophic event.

Credit Risk Management

The Federal Reserve works 

other federal banking age

develop guidance on the ma

of credit risk.

Real Estate Appraisals

Under the federal banking 

regulations on real estate a

regulated institutions must en

the appraisals they use in c

with federally related transac

here to the Uniform Standards 

sional Appraisal Practice (US

June 2006, the Federal Reser

NCUA, OCC, and OTS issued 

agency statement informing 

institutions that the Appraisal 

Board of the Appraisal Found

made significant revisions to 

effective July 1, 2006; prov

overview of the revisions; an

ing the ramifications of the rev

the institutions’ compliance 

regulations.

Home Equity Lending

In September, the Federal 

FDIC, NCUA, OCC, and OTS 
addendum to guidance issued in 2005—

“Interagency Credit Risk Management

Guidance for Home Equity Lending”—

that provided additional guidance on

managing the risks associated with

open-end home equity lines of credit

(HELOCs) that have interest-only or

negative amortization features. While

such HELOCs may give consumers

some flexibility, the agencies are concerned that consumers may not fully

understand the product terms and associated risks. The addendum addressed

the timing and content of communications with consumers that are obtaining

HELOCs having these features and

clarified the agencies’ expectations for

assessing borrower repayment capacity.

Nontraditional Mortgage Products

In September, the Federal Reserve,

FDIC, NCUA, OCC, and OTS issued

guidance, titled “Interagency Guidance

on Nontraditional Mortgage Product

Risks,” that addresses risk-management

and consumer disclosure practices that

institutions should employ to effectively

assess and manage the risks associated

with residential mortgage loans that

allow borrowers to defer repayment of

principal and, sometimes, interest (referred to as nontraditional mortgage

loans). Specifically, the guidance states

that regulated institutions should

• ensure that loan terms and underwriting standards are consistent with prudent lending practices (including, for

example, that they evaluate the borrower’s repayment capacity);

• recognize that many nontraditional

mortgage loans, particularly those that

have risk-layering features, are untested in a stressed environment and

warrant strong risk-management standards, capital levels commensurate

with risk, and allowances for loan and

lease losses that reflect the c

ity of the portfolio; and

• ensure that consumers have 

information to understand 

terms and the associated ris

they choose a product or a 

arrangement.

Commercial Real Estate

Concentrations

In December, the Federal 

FDIC, and OCC issued guida

“Interagency Guidance on C

tions in Commercial Real Est

ing, Sound Risk Management 

to remind institutions that str

management practices and a

levels of capital are important 

of a sound lending program, p

if the institution has a concen

commercial real estate loans. 

ance reinforced and enhance

regulations and guidelines for 

sound real estate lending. (For 

formation, see the box “Gui

Concentrations in Commercia

tate Lending.”)

Complex Structured Finance A

During the year, the Federal 

FDIC, OCC, OTS, and SEC p

final statement on sound pra

complex structured finance tra

(CSFTs). The statement, to be 

early 2007, describes the type

nal controls and risk-manage

cedures that financial institutio

use to identify, manage, and a

heightened legal and reputati

that may arise from certain 

(Excluded are most structure

transactions that are familiar 

pants in the financial markets 

well-established track records

standard public mortgage-back

ties and hedging-type transa
volving “plain vanilla” derivatives or

collateralized debt obligations.) Financial institutions that engage in CSFTs

should, as part of their process for approving transactions and new products,

establish and maintain policies, procedures, and systems that are designed to

identify elevated-risk CSFTs and should

ensure that transactions and new products so identified are subject to greater

review by appropriate levels of management. An institution should decline to

participate in an elevated-risk CSFT if it

determines that the transaction presents

unacceptable risks or would result in a

violation of applicable laws, regulations,

or accounting principles.

Banks’ Securities Activities

In December, the Board and the SEC

requested comments on joint proposed

rules that would help define the scope of

securities activities that a bank may conduct without registering with the SEC as

a securities broker. The Gramm-LeachBliley Act eliminated the blanket “broker” exception for banks that had been

contained in section 3(a)(4) of the Securities Exchange Act of 1934, but it

granted exceptions designed to allow

banks to continue to engage in securities

transactions for customers in connection

with their normal trust, fiduciary, custodial, and other banking operations. The

proposed rules would implement the

most important “broker” exceptions.

Comments on the proposal are due by

March 26, 2007.

Small Bank Holding Company

Threshold

In February, the Board issued a final

rule that raises, from $150 million to

$500 million, the asset-size threshold

used to determine whether a bank holding company qualifies for (1) the

Board’s Small Bank Holding 

Policy Statement and (2) an e

from the Board’s risk-based a

age capital adequacy guide

bank holding companies. The 

also modifies the qualitativ

used in determining whethe

holding company that is u

asset-size threshold neverthel

not qualify for the policy sta

the exemption. In addition, 

rule clarifies the treatme

the policy statement of sub

debt associated with trust 

securities.

Economic Growth and Reg

Paperwork Reduction Act o

The Economic Growth and R

Paperwork Reduction Act of 

quires that the federal banking 

review their regulations every 

to identify and eliminate any 

sary requirements imposed o

depository institutions. (In ad

Board periodically reviews e

regulations.) During 2006, th

Reserve, OCC, FDIC, and O

ducted the required review

other activities, they met with 

tatives of the banking indust

consumer groups around the c

hear their concerns and thei

tions for reducing regulatory 

The agencies expect to issu

report in 2007.

Bank Holding Company

Regulatory Financial Repor

The Federal Reserve requires 

bank holding companies pe

submit reports providing fina

structure information. This in

is essential to the supervisio

companies and the formulatio

lations and supervisory polic
also used in responding to requests from

Congress and the public for information

on bank holding companies and their

nonbank subsidiaries. Foreign banking

organizations are also required to periodically submit reports to the Federal

Reserve.

The FR Y-9 series of reports provides

standardized financial statements for

bank holding companies on both a consolidated basis and a parent-only basis.

The reports are used to detect 

financial problems, to revie

mance and conduct pre-i

analysis, to monitor and eva

profiles and capital adequacy, 

ate proposals for bank holding 

mergers and acquisitions, and 

the holding company’s overal

condition. The nonbank s

reports—FRY-11, FR 23

FR Y-7N—help the Federal 

Guidance on Concentrations in Commercial Real Estate Lendi

As any banker worth his or her salt knows, lending concentrations mu

carefully identified, monitored, and managed. It is one of the basics of bank

understand the consequences of placing all your eggs in one basket. Natu

supervisors from time to time have concerns about growing credit risk conce

tions at banks and bankers’ ability to manage them.

Susan Schmidt Bies, Member, Board of Gov

June 

In response to rising concentrations of

commercial real estate (CRE) loans at

many financial institutions, the Federal

Reserve, the Office of the Comptroller of

the Currency, and the Federal Deposit Insurance Corporation on December 12,

2006, issued guidance promoting sound

risk-management practices in this sector.1

In the guidance, titled “Concentrations in

Commercial Real Estate Lending, Sound

1. As defined by the guidance, CRE loans

include land development and construction loans

(including one- to four-family residential and

commercial construction loans) and other land

loans; loans secured by multifamily property;

and loans secured by nonfarm nonresidential

property for which 50 percent or more of the

source of repayment is third-party, nonaffiliated,

rental income or the proceeds of the sale, refinancing, or permanent financing of the property.

The guidance also applies to some loans to real

estate investment trusts and unsecured loans to

developers.

Risk Management Practices,” the 

recognize that financial institutio

vital role in funding real estate 

ment in their communities and can 

a profitable way. However, as a

tion’s concentration in CRE len

creases, management should unde

possible exposure to a downtur

CRE market or to other adverse m

economic events.

Supervisors have observed ove

decade that CRE concentrations h

rising at many institutions, esp

small and medium-size banks. 

1993 and 2005, CRE loans as a p

of total equity plus reserves r

145 percent to 280 percent for co

banks with assets between $10

and $1 billion and from 120 p

230 percent for commercial ba

assets of $1 billion to $10 billion

ence has shown that credit conce

add a dimension of risk that co

the simple risk inherent in individ
determine the condition of bank holding

companies that are engaged in nonbank

activities and also aid in monitoring the

volume, nature, and condition of the

companies’ nonbank subsidiaries.

In March, several revisions to the

FR Y-9C, FR Y-9LP, and FR Y-9SP

reports were approved for implementation during 2006. Effective March 31,

the asset-size threshold for filing

the FR Y-9C and FR Y-9LP reports

was raised from $150 m

$500 million, reducing the n

respondents by approximatel

cent. Other FR Y-9C revision

March 31 included the elimin

number of data items; the a

data items on loans for purch

carrying securities, regulator

and credit derivatives; and th

of the FR Y-9C filing requir

lower-tier bank holding comp

Further, supervisors are concerned that

risk-management practices at some institutions may not have kept pace with the

growth of CRE concentrations.

The agencies developed the 2006 CRE

guidance to remind financial institutions

that strong risk-management practices and

appropriate capital levels are important

elements of a sound CRE lending program,

particularly when an institution has a concentration in CRE loans or has experienced

rapid portfolio growth. The guidance provides the agencies’ examiners with two

supervisory screening criteria designed to

identify institutions whose CRE concentrations may require additional scrutiny:

• Total loans for construction, land development, and other land represent 100

percent or more of the institution’s total

capital; or

• Total CRE loans represent 300 percent or

more of the institution’s total capital, and

the outstanding balance of the institution’s commercial real estate loan portfolio has increased 50 percent or more

during the previous thirty-six months.

These screening criteria serve as a starting point for a dialogue between the agencies’ supervisory staff and an institution’s

management about the level and nature of

CRE concentration risk. The guidance focuses on CRE loans for which the risk of

default is sensitive to CRE market demand,

capitalization rates, vacancy rates, or rents.

The agencies recognize that 

types of CRE lending present diff

els of risk. For example, a well-s

loan for a multifamily housing 

would generally have a lower ri

than a loan for an office building t

on speculation. The guidance 

edges that institutions are in the b

tion to make such assessments 

level and nature of concentratio

their CRE portfolios.

Building upon the agencies’ 

regulations and guidelines for r

lending and loan portfolio man

the guidance describes the key 

that an institution should addre

areas of board and management o

portfolio management, managem

mation systems, market analysi

underwriting standards, portfoli

testing and sensitivity analysis, 

credit-risk review function.

The Federal Reserve recogn

commercial real estate lending i

cally important activity that has 

the “bread and butter” business 

small and medium-size banks. Su

emphasize that they did not in

guidance to limit commercial re

lending; rather, they expect that 

ance will encourage institutions to 

and maintain appropriate c

governance structures to address 

posed by their lending strategies.
ing total assets of $1 billion or more.

Revisions effective September 30 included new officer signature requirements and additional data items on mortgage banking activities and secured

borrowings.

Effective June 30, the asset-size cap

for the FR Y-9SP was raised from

$150 million to $500 million, increasing

the number of respondents by approximately 50 percent. Other FR Y-9SP revisions effective June 30 included the

addition of two items identifying the

total value of off-balance-sheet activities conducted directly or through a nonbank subsidiary and the total value of

debt and equity securities registered

with the SEC. Revised officer signature

requirements for the FR Y-9SP were

effective December 31.

In March, the Board also revised the

asset-size threshold for the quarterly

FR Y-11 and FR 2314 nonbank subsidiary reports, to make it consistent with

the revised threshold for the FR Y-9C

and to reduce reporting burden. Revising the threshold for the FR Y-11 reduced the number of quarterly respondents by approximately 30 percent; the

revision had no immediate effect on the

number of FR 2314 filers. Other

FR Y-11 and FR 2314 revisions effective March 31 included the addition of a

new equity capital component to the

balance sheet for reporting partnership

interest and, for the FR Y-11 only, the

expansion of the scope of several loan

items reported on the balance sheet

memoranda.

Effective December 31, a new report

was implemented: the Annual Report of

Merchant Banking Investments Held for

an Extended Period (FR Y-12A). The

report collects data concerning merchant banking investments that are approaching the end of the holding period

permissible under Regulation Y (Bank

Holding Companies and C

Bank Control).

Commercial Bank

Regulatory Financial Repor

As the federal supervisor of s

ber banks, the Federal Reser

with the other banking agencie

the FFIEC, requires banks 

quarterly Consolidated Report

dition and Income (Call Repo

Reports are the primary sourc

for the supervision and regu

banks and the ongoing assessm

overall soundness of the natio

ing system. Call Report data, w

serve as benchmarks for the 

information required by ma

Federal Reserve regulatory fin

ports, are widely used by state 

governments, state banking su

the banking industry, securitie

and the academic community.

For the 2006 reporting p

FFIEC implemented various 

to the Call Report to streamli

porting requirements and to 

items that focus on areas of 

supervisory concern. The prin

sions included the collection o

lated to the implementation o

insurance reform provisions

sources (Federal Home Lo

advances and other borrowi

mortgage banking activities. T

ture and attestation requirem

revised to add the chief financ

or equivalent, to the list of of

quired to attest to and sign 

Report.

In October, the FFIEC prop

sions for the 2007 reporting 

address new safety and sound

siderations and to facilitate su

Among the proposed revi

changes in data collection rela

deposit insurance assessment 
process; changes in generally accepted

accounting principles (including certain

financial instruments measured at fair

value and principles for accounting for

defined benefit pension and other postretirement plans); and nontraditional

mortgage products.

Supervisory Information

Technology

Information technology supporting Federal Reserve supervisory activities is

managed within the System supervisory

information technology (SSIT) function

in the Board’s Division of Banking

Supervision and Regulation. SSIT

works through assigned staff at the

Board and the Reserve Banks, as well

as through System committees, to

ensure that key staff members throughout the System participate in identifying requirements and setting priorities

for IT initiatives.

In 2006, the SSIT function worked on

the following strategic projects and initiatives: (1) align technology investments with business needs; (2) improve

security of information-sharing technologies and provide for seamless

collaboration in interagency efforts;

(3) identify and implement improvements in the accessibility of technology

to staff working in the field; (4) identify

opportunities to converge and streamline IT applications, including key

administrative systems, to provide consistent and seamless information;

(5) evaluate and implement technologies (such as portals, search engines,

and content management tools) to

integrate supervisory and management

information systems that support both

office-based and field staff; and

(6) enhance the information security

framework for the supervisory function,

improving both overall security and

compliance with best-pract

regulatory requirements.

National Information Cente

The National Information Cen

is the Federal Reserve’s comp

repository for supervisory, fina

banking structure data and su

documents. NIC includes co

sive data on banking structure 

out the United States; the Na

amination Database (NED

enables supervisory personnel 

banking authorities to access 

the Banking Organization 

Desktop (BOND), an applic

facilitates secure, real-time 

information-sharing and col

among federal and state banki

tors for the supervision of bank

nizations; and the Central Docu

Text Repository (CDTR), w

tains documents supporting th

sory processes.

The structure and supervi

systems are continually bein

to extend their useful lives an

business workflow efficiency

2006, the NED system was m

begin collecting Bank Sec

information in an automated 

support Federal Reserve en

activities. In 2006, the BO

CDTR systems were modifie

vide further integration with th

Reserve’s internal surveilla

gram, to provide additional su

the supervision of large finan

tutions, and to allow integ

examinations of technology 

providers. In addition, user a

tion software was upgraded fo

agency users, and use of th

and CDTR systems was ex

additional federal and state 

agencies.
Staff Development

The System Staff Development Program

trains staff members at the Board, the

Reserve Banks, state banking departments, and foreign supervisory authorities. Training is offered at the basic,

intermediate, and advanced levels in

several disciplines within bank supervision: safety and soundness, information

technology, international banking, and

consumer affairs. Classes are conducted

in Washington, D.C., as well as at

Reserve Banks and other locations. The

Federal Reserve System also participates in training offered by the FFIEC

and by certain other regulatory agencies.

The System’s involvement includes developing and implementing basic and

advanced training in relation to various

emerging issues as well as in specialized

areas such as international banking, information technology, anti–money laundering, capital markets, payment systems risk, and real estate appraisal. In

addition, the System co-hosts the World

Bank Seminar for supervisors from developing countries.

In 2006, the Federal Reserve trained

3,619 students in System schools, 952 in

schools sponsored by the FFIEC, and 24

in other schools, for a total of 4,595,

including 312 representatives of foreign

central banks and supervisory agencies

(see table). The number of training days

in 2006 totaled 23,321.

The System gave scholarship assistance to the states for training their examiners in Federal Reserve and FFIEC

schools. Through this program, 605 state

examiners were trained—308 in Federal

Reserve courses, 293 in FFIEC programs, and 4 in other courses.

A staff member seeking an examiner’s commission is required to take a

first proficiency examination as well as

a second proficiency examination in one

of two specialty areas: safety and soundness or consumer affairs. In 2

examiners passed the first p

examination, and 61 passed t

proficiency examination: 53 

and soundness exam, and 8 

sumer affairs exam.

Regulation of the

U.S. Banking Structure

The Federal Reserve administe

federal statutes that apply to b

ing companies, financial holdin

nies, member banks, and fore

ing organizations—the Bank 

Company Act, the Bank Merge

Change in Bank Control Act

eral Reserve Act, and the Int

Banking Act. In administer

statutes, the Federal Reserve 

variety of proposals that direct

rectly affect the structure of 

banking system at the local, 

and national levels; the interna

erations of domestic banking 

tions; or the U.S. banking ope

foreign banks. The proposal

bank holding company forma

acquisitions, bank mergers, 

transactions involving bank o

firms. In 2006, the Federal 

acted on 1,378 proposals, wh

sented 3,171 individual ap

filed under the five adm

statutes.

Bank Holding Company A

Under the Bank Holding Com

a corporation or similar leg

must obtain the Federal 

approval before forming a ban

company through the acquisiti

or more banks in the Unite

Once formed, a bank holding 

must receive Federal Reserve 

before acquiring or establish

tional banks. The act also ide
nonbanking activities permissible for

bank holding companies; depending on

the circumstances, these activities may

or may not require Federal Reserve

approval in advance of their commencement.

When reviewing a bank holding company application or notice that requires

prior approval, the Federal Reserve may

consider the financial and m

resources of the applicant, t

prospects of both the applican

firm to be acquired, the conven

needs of the community to b

the potential public benefits, 

petitive effects of the proposa

applicant’s ability to make av

the Federal Reserve informatio

Training Programs for Banking Supervision and Regulation, 2006

Program

Number of sessions cond

Total 

Schools or seminars conducted by the Federal Reserve

Core schools

Banking and supervision elements ............................... 8 

Financial analysis and risk management .......................... 8 

Bank management .............................................. 3 

Report writing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 

Management skills .............................................. 8 

Conducting meetings with management . . . . . . . . . . . . . . . . . . . . . . . . . . 14 

Other schools

Credit risk analysis ............................................. 5 

Examination management ....................................... 5 

Real estate lending seminar ...................................... 3 

Senior forum for current banking and regulatory issues ............ 2 

Basel II corporate activities ...................................... 3 

Basel II operational risk ......................................... 2 

Basel II retail activities .......................................... 3 

Principles of fiduciary supervision .............................. 2 

Commercial lending essentials for consumer affairs ............... 1 

Consumer compliance examinations I ............................ 2 

Consumer compliance examinations II ........................... 2 

CRA examination techniques .................................... 2 

CA risk-focused examination techniques ......................... 2 

Fair lending examination techniques ............................. 3 

Foreign banking organizations seminar ........................... 1 

Information systems continuing education ........................ 7 

Asset liability management (ALM1) ............................. 2 

Asset liability management (ALM2) ............................. 2 

Fundamentals of interest rate risk management ................... 8 

Trading and operations .......................................... 1 

Technology risk integration ...................................... 3 

Leadership dynamics ............................................ 6 

Fundamentals of fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 

Information technology seminars1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 

Seminar for senior supervisors of foreign central banks2

and 13 other international courses . . . . . . . . . . . . . . . . . . . . . . . . . . 34 

Self-study or online learning3

Orientation (core and specialty) .................................... ... 

Self-study modules (26 modules) ................................... ... 

Other agencies conducting courses4

Federal Financial Institutions Examination Council . . . . . . . . . . . . . . . . . . 78 

The Options Institute .............................................. 1 

1. Held at the IT Lab at the Chicago Reserve Bank.

2. Conducted jointly with the World Bank.

3. Self-study programs do not involve g

4. Open to Federal Reserve employees.
necessary to ensure compliance with

applicable law. In the case of a foreign

banking organization seeking to acquire

control of a U.S. bank, the Federal

Reserve also considers whether the foreign bank is subject to comprehensive

supervision or regulation on a consolidated basis by its home-country supervisor. In 2006, the Federal Reserve acted

on 638 applications filed by bank holding companies to acquire a bank or a

nonbank firm, or to otherwise expand

their activities.

Bank holding companies generally

may engage in only those nonbanking

activities that the Board has previously

determined to be closely related to banking under section 4(c)(8) of the Bank

Holding Company Act. Since 1996, the

act has provided an expedited priornotice procedure for certain permissible

nonbank activities and for acquisitions

of small banks and nonbank entities.

Since that time the act has also permitted well-run bank holding companies

that satisfy certain criteria to commence

certain other nonbank activities on a de

novo basis without first obtaining Federal Reserve approval.

A bank holding company may repurchase its own shares from its shareholders. When the company borrows money

to buy the shares, the transaction

increases the company’s debt and decreases its equity. The Federal Reserve

may object to stock repurchases by holding companies that fail to meet certain

standards, including the Board’s capital

adequacy guidelines. In 2006, the

Federal Reserve reviewed 7 stockrepurchase proposals by bank holding

companies.

The Federal Reserve also reviews

elections from bank holding companies

seeking financial holding company status under the authority granted by the

Gramm-Leach-Bliley Act. Bank holding

companies seeking financial holding

company status must file a wr

laration with the Federal Re

2006, 48 domestic financia

company declarations and 

bank declarations were approv

Bank Merger Act

The Bank Merger Act requir

proposals involving the m

insured depository institutions 

on by the appropriate federa

agency. The Federal Reserve 

mary jurisdiction if the instit

viving the merger is a state 

bank. Before acting on a me

posal, the Federal Reserve 

the financial and managerial 

of the applicant, the future pr

the existing and combined 

tions, the convenience and ne

community(ies) to be served

competitive effects of the 

merger. In 2006, the Federa

approved 65 merger applicati

the act.

As a result of enactment of 

cial Services Regulatory Reli

2006, the Federal Reserve is 

required for each proposed ba

to either request competitive f

ports from the other federal ba

thrift regulatory agencies or p

ports on competitive factors 

other agencies. The Federal 

now must consider only the vi

U.S. Department of Justice reg

competitive aspects of a prop

merger. In addition, the view

Department of Justice need no

ited for bank mergers involv

ated insured depository in

Before these statutory changes 

in the third quarter of 2006, th

Reserve had submitted 45

on competitive factors to 

agencies.
Change in Bank Control Act

The Change in Bank Control Act requires individuals and certain other parties that seek control of a U.S. bank or

bank holding company to obtain approval from the appropriate federal

banking agency before completing the

transaction. The Federal Reserve is responsible for reviewing changes in the

control of state member banks and bank

holding companies. In its review, the

Federal Reserve considers the financial

position, competence, experience, and

integrity of the acquiring person; the

effect of the proposed change on the

financial condition of the bank or bank

holding company being acquired; the

effect of the proposed change on competition in any relevant market; the completeness of the information submitted

by the acquiring person; and whether

the proposed change would have an adverse effect on the federal deposit insurance funds. In addition, with enactment

of the Financial Services Regulatory Relief Act of 2006, the Federal Reserve

must also consider the future prospects

of the institution to be acquired: a proposed transaction should not jeopardize

the stability of the institution or the

interests of depositors. During its review

of a proposed transaction, the Federal

Reserve may contact other regulatory or

law enforcement agencies for information about relevant individuals.

In 2006, the Federal Reserve approved 98 changes in control of state

member banks and bank holding

companies.

Federal Reserve Act

Under the Federal Reserve Act, a member bank may be required to seek Federal Reserve approval before expanding

its operations domestically or internationally. State member banks must obtain Federal Reserve approval 

lish domestic branches, and al

banks (including national ban

obtain Federal Reserve appro

tablish foreign branches. Whe

ing proposals to establish 

branches, the Federal Reserv

ers, among other things, the 

nature of the banking activit

conducted. When reviewing 

for foreign branches, the 

Reserve considers, among oth

the condition of the bank and t

experience in international ba

2006, the Federal Reserve acte

and merger-related branch pro

2,033 domestic branches an

prior approval for the establish

new foreign branches.

State member banks must a

Federal Reserve approval to 

financial subsidiaries. These su

may engage in activities that 

cial in nature or incidental to 

activities, including securities 

ance agency-related activities

1 application for a financial 

was approved.

Overseas Investments by

U.S. Banking Organization

U.S. banking organizations m

in a broad range of activities 

Many of the activities are 

indirectly through Edge Act a

ment corporation subsidiaries. 

most foreign investments are 

der general consent procedure

volve only after-the-fact notif

the Federal Reserve, large and 

nificant investments require 

proval. In 2006, the Federa

approved 29 proposals for s

overseas investments by U.S

organizations. The Federal Re

approved 16 applications to m

tional investments through 
Act or agreement corporation, 1 application to establish an Edge Act corporation, and 2 applications to extend the

corporate existence of an Edge Act

corporation.

International Banking Act

The International Banking Act, as

amended by the Foreign Bank Supervision Enhancement Act of 1991, requires

foreign banks to obtain Federal Reserve

approval before establishing branches,

agencies, commercial lending company

subsidiaries, or representative offices in

the United States.

In reviewing proposals, the Federal

Reserve generally considers whether the

foreign bank is subject to comprehensive supervision or regulation on a consolidated basis by its home-country supervisor. It also considers whether the

home-country supervisor has consented

to the establishment of the U.S. office;

the financial condition and resources of

the foreign bank and its existing U.S.

operations; the managerial resources of

the foreign bank; whether the homecountry supervisor shares information

regarding the operations of the foreign

bank with other supervisory authorities;

whether the foreign bank has provided

adequate assurances that information

concerning its operations and activities

will be made available to the Federal

Reserve, if deemed necessary to determine and enforce compliance with

applicable law; whether the foreign bank

has adopted and implemented procedures to combat money laundering and

whether the home country of the foreign

bank is developing a legal regime to

address money laundering or is participating in multilateral efforts to combat

money laundering; and the record of the

foreign bank with respect to compliance

with U.S. law. In 2006, the Fe

serve approved 19 application

eign banks to establish branch

cies, or representative offic

United States.

Public Notice of

Federal Reserve Decisions

Certain decisions by the Fe

serve that involve an acquisi

bank holding company, a bank 

change in control, or the esta

of a new U.S. banking prese

foreign bank are made know

public by an order or an annou

Orders state the decision, the 

facts of the application or n

the basis for the decision; a

ments state only the decision. 

and announcements are made p

mediately; they are subsequ

ported in the Board’s weekly H

tical release. The H.2 rele

contains announcements of ap

and notices received by the Fe

serve upon which action ha

been taken. For each pending 

tion and notice, the related H

tains the deadline for comm

Board’s web site (www.feder

gov) provides information on o

announcements as well as a 

U.S. and foreign banking org

that wish to submit applicatio

tices to the Federal Reserve.

Enforcement of

Other Laws and Regulati

The Federal Reserve’s enforc

sponsibilities also extend to t

sure of financial information 

member banks and the use of 

purchase and carry securities.
Financial Disclosures by

State Member Banks

State member banks that issue securities

registered under the Securities Exchange

Act of 1934 must disclose certain information of interest to investors, including

annual and quarterly financial reports

and proxy statements. By statute, the

Board’s financial disclosure rules must

be substantially similar to those of the

SEC. At the end of 2006, 17 state member banks were registered with the

Board under the Securities Exchange

Act of 1934.

Securities Credit

Under the Securities Exchange Act, the

Board is responsible for regulating

credit in certain transactions involving

the purchase or carrying of securities.

The Board’s Regulation T limits the

amount of credit that may be provided

by securities brokers and dealers when

the credit is used to trade debt and

equity securities. The Board’s Regulation U limits the amount of credit that

may be provided by lenders other than

brokers and dealers when the credit is

used to purchase or carry publicly held

equity securities if the loan is secured by

those or other publicly held equity securities. The Board’s Regulation 

these credit limitations, or m

quirements, to certain borrow

certain credit extensions, such 

obtained from foreign lender

citizens.

Several regulatory agencie

the Board’s securities cred

tions. The SEC, the National 

tion of Securities Dealers, 

national securities exchanges 

brokers and dealers for co

with Regulation T. With r

compliance with Regulation U

eral banking agencies exam

under their respective jurisdic

Farm Credit Administrat

NCUA, and the OTS examin

under their respective jurisdic

the Federal Reserve exami

Regulation U lenders.

Federal Reserve Member

At the end of 2006, 2,593 ba

members of the Federal Reserv

and were operating 53,938 

These banks accounted for 35 

all commercial banks in th

States and for 71 percent of all 

cial banking offices. 
Consumer and Community Affairs

Among the Federal Reserve’s responsibilities in the areas of consumer and

community affairs are

• writing and interpreting regulations to

implement federal laws that protect

and inform consumers;

• supervising state member banks to ensure compliance with the regulations;

• investigating complaints from the

public about state member banks’

compliance with regulations; and

• promoting community development in

historically underserved markets.

These responsibilities are carried out by

the members of the Board of Governors,

the Board’s Division of Consumer and

Community Affairs, and the consumer

and community affairs staff of the Federal Reserve Banks.

Implementation of Statutes

Designed to Inform and Protect

Consumers

The Board of Governors writes regulations to implement federal laws involving consumer financial services and fair

lending. The Board revises and updates

these regulations to address the introduction of new products and technologies, to implement legislative changes to

existing laws, and to address problems

consumers may encounter in their financial transactions. To interpret and clarify

the regulations, Board staff issue commentaries and other guidance.

During 2006, the Board published final amendments to its Regulation E,

which implements the Electro

Transfer Act, and the associa

mentary to make the regulatio

ble to payroll card accounts e

through an employer to provi

sumer with electronic fund tr

salary, wages, or other emplo

pensation on a recurring b

Board also amended Regula

clarify that a person, such as a 

must obtain a consumer’s aut

to collect returned-item fees 

cally from the consumer’s acc

Board engaged in several ru

and other activities with the 

eral banking agencies and th

Trade Commission (FTC). T

the Federal Deposit Insurance 

tion (FDIC), and the Offic

Comptroller of the Currenc

issued final guidance on the m

amendments to the agencies’ 

nity Reinvestment Act (CRA

tions. The Board also issued 

guidance with the OCC, the F

Office of Thrift Supervision (O

the National Credit Union A

tion (NCUA) to address the ris

ated with nontraditional mortg

ucts. In addition, the Board an

jointly issued a report to Co

the consumer dispute provisio

Fair Credit Reporting Act.

Furthermore, the Board r

dollar threshold that triggers 

requirements under the Hom

ship and Equity Protection 

raised the exemption thres

depository institutions require

lect data under the Home Mort

closure Act.
Amendments to Regulation E

(Electronic Fund Transfers)

Payroll Cards

In August, the Board published final

amendments to Regulation E that address payroll card accounts established

through an employer on behalf of a

consumer and to which recurring electronic fund transfers of salary, wages, or

other employee compensation are made.

Under the final rule, payroll card

accounts are subject to the same requirements that apply to traditional transaction accounts under Regulation E; these

requirements include a financial institution’s duty to provide payroll-card

account holders with initial disclosures,

periodic statements, and error-resolution

and liability provisions. For periodic

statements, however, the final rule

allows financial institutions to provide

the specified account information electronically, and in writing upon the consumer’s request, rather than through

paper statements.

Regulation E applies to financial institutions that (1) hold an account belonging to a consumer or (2) both issue

an access device (such as a debit card)

to a consumer and agree with the consumer to provide electronic fund transfer (EFT) services. The final rule clarifies that the depository institution

holding the consumer’s funds in a payroll card account is a financial institution under the regulation. The final rule

does not generally cover employers or

third-party service providers. The mandatory compliance date for the final rule

is July 1, 2007.

Returned-Item Fees

In December, the Board published a

final rule amending Regulation E and

its official staff commentary. These

amendments clarify the c

authorization requirements for 

tronic collection of returned-

The final rule states that a per

ing to collect a fee for a retur

or any other item must obta

sumer’s authorization to initia

to collect this fee. This re

applies to the person initiating 

not to the consumer’s accoun

financial institution. Consume

zation is obtained when (1) 

stating the specific amount o

(or explaining how the fee 

lated, if the fee may vary) an

ment that the fee will be col

an EFT is provided to the 

and (2) the consumer goes for

the transaction. For point-of-s

actions, the notice must be p

prominent and conspicuous 

and a copy of the notice mus

to the consumer to retain. Th

copy of the notice may be giv

consumer at the time of the t

or mailed to the consumer’s a

soon as reasonably practicable 

EFT has been initiated.

Joint Guidance on the Com

Reinvestment Act Regulati

In March, the Board, along 

FDIC and the OCC, issued j

guidance to implement chang

agencies’ CRA regulations, w

effective in September 2005. 

ance answers frequently asked 

about the new CRA rules, in

new rule that provides CRA 

nity development” consider

bank activities that revitalize o

designated disaster areas. The 

states that banks will receive 

ation for activities they condu

36 months of an area’s design

disaster area when such activ

to attract new, or to retain exis
nesses or residents to the area and are

related to disaster recovery.

The guidance also implements a new

rule that provides “community development” consideration for bank activities

that revitalize or stabilize underserved

or distressed middle-income rural areas.

The guidance describes the types of activities that will receive consideration as

well as how such activities will be

evaluated. In addition, the guidance discusses the new community development

test for intermediate small banks (banks

that have assets of between $250 million

and $1 billion).

Interagency Guidance

on the Risks of

Nontraditional Mortgage Products

In September, the Board, along with the

OCC, the FDIC, the OTS, and the

NCUA, issued final guidance to address

the risks associated with the growing

use of so-called nontraditional mortgage

products, such as interest-only mortgages and payment-option adjustablerate mortgages.1 These products, which

allow borrowers to defer repayment of

the loan’s principal and sometimes interest, are being offered to a wide spectrum

of borrowers. Among other issues, the

interagency guidance addresses concerns that some borrowers may not fully

understand the risks of these products,

including their potential for negative

amortization.

Specifically, the agencies provided

guidance in three primary areas: loan

terms and underwriting standards, portfolio and risk-management practices,

and consumer protection issues. The

first section of the guidance advises financial institutions to ensure that their

loan terms and underwriting standards

for nontraditional mortgage pr

consistent with prudent lend

tices, which include considerin

a borrower has the capacity t

loan. The second section ou

need for financial institution

strong risk-management stand

tal levels commensurate with 

their products and activities, a

lowance for loan and lease l

reflects the collectibility of 

portfolio. The third section 

recommended practices to en

financial institutions are provi

sumers with clear and balanced 

tion that allows them to unde

terms and associated risks o

before they choose a specific p

payment option. (See related b

traditional Mortgages—Balanc

vation, Regulation, and Educa

Report on Compliance with

Consumer Dispute Provisio

the Fair Credit Reporting A

In August, the Board and the F

a joint report to Congress pu

section 313(b) of the Fair and 

Credit Transactions Act of 

FACT Act). In addition 

changes, the FACT Act ame

Fair Credit Reporting Act (F

enhance the FCRA’s consum

provisions. The joint report 

the extent to which consumer 

agencies (CRAs) and furnisher

mation to CRAs comply with 

sumer dispute provisions of th

Before writing the report, the B

the FTC conducted a study t

ined several sources of inf

public comments from co

CRAs, and consumer and 

groups; consumer complaints 

federal financial institution 

agencies; bank examination 

FCRA compliance; and othe

1. See www.federalreserve.gov/boarddocs/press/

bcreg/2006/20060929/default.htm.
Nontraditional Mortgages—

Balancing Innovation, Regulation, and Education

Homeownership has long been viewed as a

fundamental step to furthering personal

and financial well-being. A home is often

the largest and most important asset

individuals and families acquire, and the

equity earned on a home can, over time,

provide homeowners with financial flexibility and security. Consumers have

benefited from public policies to encourage and facilitate homeownership, as well

as from innovations in the financial services industry that have increased both the

number of lenders and types of home loans

available. While increased competition and

product choice provide consumers with

new opportunities, they also present many

challenges for both borrowers, who must

be prepared to evaluate their options, and

for regulators, who seek to ensure

consumer protections without hindering

market innovation through overly restrictive regulation.

In recent years, so-called nontraditional

mortgages, including interest-only and

payment-option adjustable-rate mortgages,

have become increasingly popular. Originally designed as niche products to meet the

needs of certain borrowers, such as wealthy

customers or customers who have seasonal

or other fluctuations in their incomes, nontraditional mortgages are now commonplace among more-typical borrowers. In

2006, nontraditional mortgages accounted

for one-third of all mortgage originations,

compared with only one-tenth of mortgage

originations in 2003. Nontraditional mortgages can provide borrowers with greater

flexibility by allowing them to repay only

interest for a period of time or to choose

among other repayment options, in contrast

to a fully amortizing loan that requires

fixed payments throughout the loan term.

The interest rate and payments are adjusted

later in the term of a nontraditio

gage in order to recapture repa

principal. Because nontradition

gages typically allow a borrower 

lower payments early in the lo

loans have become increasingly p

high-cost housing markets.

But nontraditional mortgages 

carry significant risk, including 

amortization, which occurs w

amount of the loan increases over 

“payment shock,” which occu

interest rate adjustments result in 

higher payment later in the loan t

ther, reports of aggressive market

tices for these loans, as well as 

incidents of consumers receivi

equate or misleading loan disclosu

raised concerns among consume

financial institution regulatory 

and some lawmakers that nont

mortgages are inappropriately ma

and used by some borrowers. How

need to ensure that consumer pr

are in place for nontraditional m

must be balanced with the desire t

age innovation and flexibility in 

gage industry.

In 2006, the Federal Reserve B

a multifaceted approach to respo

consumer-related issues in today

gage market, including the risks 

by the growing use of nontraditio

gage products. During the sum

Board convened a series of public 

to discuss home equity lending 

and practices. After conducting in

reach to an array of interested gro

eral Reserve regulatory and rese

structured the hearings to includ

sion panels on the impact of 

changes to the Home Owner

Equity Protection Act (HOEP
lations, as well as panels on key issues in

the mortgage market. Topics included

trends and issues associated with complex

products, such as nontraditional mortgages

and reverse mortgages, as well as efforts to

provide consumers with pre- and postpurchase counseling and intervention,

lender “best practices” and the role of

mortgage brokers, and the results of research on state predatory lending laws. The

hearings also explored consumer behavior

in shopping for mortgage loans and discussed the challenges of designing more

effective and informative consumer disclosures. Both lenders and consumer advocates participated in the hearings, which

enabled diverse viewpoints on both the

benefits and pitfalls of nontraditional mortgages to be presented.

Lenders testified that nontraditional

mortgage loans are appropriately underwritten and have historically shown strong

performance. Consumer advocates and

state officials, on the other hand, testified

that aggressive marketing and the complexity of these products increase the risk that a

borrower will obtain a mortgage he or she

does not understand and might not be able

to afford. They also questioned whether

additional loan disclosures would only

overwhelm consumers, because the products are so complex. Board staff are considering the comments from these hearings, as

well as insights gained from consumer focus groups and other sources of information, as they evaluate potential revisions to

the mortgage disclosure requirements in

Regulation Z.

Recognizing the important role of education in understanding mortgage transactions, the Board partnered with other federal supervisory agencies to improve the

resources available to both consumers and

lenders on nontraditional mortgages. For

consumers, the Federal Reserve, in partnership with the Office of Thrift Supervision,

updated the “Consumer Handbook on

Adjustable-Rate Mortgages,” which includes an in-depth discussion of 

tional mortgages and illustration

loan payments may result in neg

ortization.1 The Board also pub

consumer information brochure, 

Only Mortgage Payments and 

Option ARMs—Are They for 

which includes a glossary of lendi

a mortgage shopping worksheet, 

of additional information source

consumers evaluate whether these 

loans are right for them.2 This pu

stresses the importance of unde

key mortgage loan terms, warn

risks consumers may face, and u

rowers to be realistic about whe

can handle future payment incr

addition, interagency guidance on 

tional mortgages, issued in Se

highlights the increased risk fo

and borrowers that nontradition

gages can present.3 The guidance 

the importance of (1) carefully m

the potential heightened risk le

the benefit of both lenders and b

(2) using prudent loan-structu

-underwriting standards; (3) cons

borrower’s repayment capacity; an

suring that consumers have suffici

mation to understand the terms 

before making a loan or payment 

The mortgage industry has pro

innovative in developing a wide 

mortgage credit products. Throug

pervisory responsibilities, resear

sumer education, and outreach to 

nities and lenders, the Federal 

will continue to strive to balance 

novation in the financial services 

with responsive oversight and 

protection.

1. www.federalreserve.gov/pubs/arms

english.htm

2. www.federalreserve.gov/pubs/mort

interestonly/default.htm

3. www.federalreserve.gov/boarddocs/

2006/20060929/default.htm
reports, and data conducted or maintained by the federal financial institution

regulatory agencies. The report found

that most CRAs appear to be processing

consumer disputes within the statutory

time frame; however, there was disagreement as to the adequacy of the

dispute investigations conducted by

CRAs and furnishers of information to

CRAs.

To ensure that the FACT Act provisions enhancing the consumer dispute

process are given enough time to be

effective, the Board and the FTC did not

recommend any additional administrative or legislative actions at this time.

However, as discussed in the report, the

FTC and the Board will continue to

monitor the performance of the dispute

process, explore possible enhancements,

and recommend actions, if appropriate.

Other Regulatory Actions

The Board also took the following regulatory actions during 2006:

• In August, the Board amended the

official staff commentary to Regulation Z to raise from $528 to $547 the

total dollar amount of points and fees

that triggers additional requirements

for certain mortgage loans under the

Home Ownership and Equity Protection Act. As prescribed by that statute,

the increased threshold (effective

January 1, 2007) reflects changes in

the consumer price index.

• In December, the Board amended the

official staff commentary to Regulation C to raise from $35 million to

$36 million the asset-size exemption

threshold for depository institutions

required to collect data under the

Home Mortgage Disclosure Act. As

prescribed by that statute, the

increased threshold reflects changes

in the consumer price ind

result, depository institut

have assets of $36 million or 

December 31, 2006, are exe

data collection, effective J

2007.

Supervision for Complian

with Consumer Protection 

Community Reinvestment 

Activities Related to the

Community Reinvestment A

The Community Reinvestm

(CRA) requires that the Federa

and other banking agencies 

financial institutions to help 

credit needs of the local comm

which they do business, consi

safe and sound operations. To 

this mandate, the Federal Rese

• examines state member ban

sess their compliance with t

• analyzes applications for me

acquisitions by state memb

and bank holding companie

tion to CRA performance; a

• disseminates information on 

nity development technique

ers and the public through c

affairs offices at the Reserve 

Examinations for Compliance

with the CRA

The Federal Reserve assesses 

the CRA performance of stat

banks in the course of examina

ducted by staff at the twelve 

Banks. During the 2006 

period, the Reserve Banks 

CRA examinations of 276 b

were rated Outstanding, 248 w

Satisfactory, none was rated 
Improve, and one was rated Substantial

Noncompliance.2

Analysis of Applications for

Mergers and Acquisitions in

Relation to the CRA

During 2006, the Board considered

applications for several significant banking mergers. The Board approved the

application by Capital One Financial

Corporation, McLean, Virginia, to acquire North Fork Bancorporation, Inc.,

Melville, New York, in November; this

acquisition was a major expansion of

Capital One Corporation’s relatively

new retail banking operations. In addition, three large bank holding companies, National City Corporation, in

Cleveland, Ohio; BB&T Corporation, in

Winston-Salem, North Carolina; and

Marshall & Ilsley Corporation, in Milwaukee, Wisconsin, each acquired two

large banking organizations in 2006.

Several other significant applications

are listed below.

• An application by Trustmark Corporation, Jackson, Mississippi, to acquire

Republic Bancshares of Texas, Inc.,

Houston, Texas, was approved in

August.

• An application by Wachovia Corporation, Charlotte, North Carolina, to

acquire Golden West Financial Corporation, Oakland, California, was approved in September.

• An application by Regions Financial

Corporation, Birmingham, Alabama,

to acquire AmSouth Bancorporation,

also of Birmingham, was approved in

October.

The public submitted comments on

each of these applications. Commenters

expressed concerns that minority applicants were being denied mortg

more frequently than nonmino

cants; other concerns described 

potentially predatory lending 

of subprime and payday lende

tial adverse effects of branch 

and lenders’ failure to addres

venience and needs of l

moderate-income communities

the comments referenced pric

mation on residential mortg

that was required to be report

ning with the 2004 Home Mor

closure Act (HMDA) data. C

ers’ concerns that minority 

were more likely than no

applicants to receive higher-pr

gages were largely based on 

tions of the 2004 and 2005 HM

ing data.3

In total, the Board acted o

four bank and bank holding 

applications that involved pr

members of the public conce

CRA performance of insured d

institutions. The Board also 

thirty-six applications involv

issues related to CRA, fair le

compliance with consumer c

tection laws.4

Other Consumer Complian

Activities

The Division of Consumer and 

nity Affairs supports and ov

supervisory efforts of the Rese

to ensure that consumer prote

and regulations are fully and 

2. The 2006 reporting period for examination

data was July 1, 2005, through June 30, 2006.

3. HMDA requires lenders to collec

mation on loans they originated in 

priced segment of the home-loan mark

priced mortgages” refers to mortgage 

annual percentage rates are 3 percenta

more over the yield on comparable Tr

rities on first-lien loans, and 5 percent

more over that yield on junior-lien lo

4. In addition, four applications in

sumer compliance issues were withdr
forced. Division staff provide guidance

and expertise to the Reserve Banks on

consumer protection regulations, examination and enforcement techniques, examiner training, and emerging issues.

The staff develop and update examination policies, procedures, and guidelines, as well as review Reserve Bank

supervisory reports and work products.

They also participate in interagency activities that promote uniformity in examination principles and standards.

Examinations are the Federal Reserve’s primary means of enforcing

compliance with consumer protection

laws. During the 2006 reporting period,

the Reserve Banks conducted 321 consumer compliance examinations—303

of state member banks and 18 of foreign

banking organizations.5

The Board periodically issues guidance for Reserve Bank examiners on

consumer protection laws and regulations. In addition to updating examination procedures and guidance in concert

with the other federal financial institution regulatory agencies, the Board

issued guidance on state member banks’

activities in disaster areas affected by

the 2005 hurricanes in the Gulf Coast

region.6 As put forth in the guidance,

state member banks located outside of

the hurricane disaster areas will receive

CRA consideration for their activities

that revitalize or stabilize the disaster

areas, if the banks have otherwise adequately met the needs of the

ment areas. (See “Response to 

Hurricanes” later in this chapt

Fair Lending

The Federal Reserve is com

ensuring that every institution 

vises complies fully with the f

lending laws—the Equal Cred

tunity Act (ECOA) and the Fai

Act. Fair lending reviews are 

regularly within the supervis

Additionally, examiners may 

fair lending reviews outside of 

supervisory cycle, if warrante

mote rigorous and consistent 

ing enforcement, the Division 

sumer and Community Aff

coordinate investigations of 

fair lending violations with 

Bank staff.

The Federal Reserve enf

ECOA and the provisions of 

Housing Act that apply to len

tutions. The ECOA prohibits 

from discriminating against a

cant, in any aspect of a cred

tion, on the basis of race, c

gion, national origin, sex, m

tus, or age. In addition, cred

not discriminate against an 

because the applicant receive

from a public assistance progr

exercised, in good faith, any r

the Consumer Credit Protec

The Fair Housing Act proh

crimination in residential re

related transactions, including 

ing and purchasing of mortga

on the basis of race, color, 

national origin, handicap, fam

tus, or sex.

Pursuant to the ECOA, if 

has reason to believe that a cr

engaged in a pattern or practi

crimination in violation of th

the matter will be referred to th

5. The foreign banking organizations examined

by the Federal Reserve are organizations operating

under section 25 or 25A of the Federal Reserve

Act (Edge Act and agreement corporations) and

state-chartered commercial lending companies

owned or controlled by foreign banks. These institutions are not subject to the Community Reinvestment Act and typically engage in relatively few

activities that are covered by consumer protection

laws.

6. The guidance was released in a letter (CA

06-5) to the Reserve Banks on February 24, 2006

(www.federalreserve.gov/boarddocs/caletters).
ment of Justice. If a violation of the

ECOA also constitutes a violation of

the Fair Housing Act and a referral is

not made to the Department of Justice,

the matter will be referred to the

Department of Housing and Urban

Development.

During 2006, the Board referred the

following matters to the Department of

Justice, on the basis of these findings:

• The Board determined that a mortgage company owned by a state

member bank had engaged in redlining—that is, discrimination against

potential borrowers on the basis of

the racial composition of their

neighborhoods—in violation of the

ECOA and the Fair Housing Act. The

mortgage company had adopted a

marketing strategy that was based on

negative racial stereotypes and, as a

result, excluded a cluster of minority

neighborhoods from its lending

activity.

• The Board found that a state member

bank had violated the ECOA and the

Fair Housing Act by discriminating

against several mortgage applicants on

the basis of race and national origin.7

The bank rejected several minority

applicants on the basis of “insufficient

collateral” without ordering an appraisal, even though, in contrast, the

bank did not deny any white applicants for insufficient collateral without ordering an appraisal.

• Two state member banks w

to have engaged in discrim

the basis of marital status 

pricing of auto loans, in vi

the ECOA. The banks used r

that expressly provided 

spousal co-applicants (appli

were not married to each oth

be charged higher interest ra

• The Board determined tha

member bank discriminate

basis of age, in violation of t

by offering customers over 5

age a special account with p

credit features. The “over 50

provided for an interest rate 

on consumer loans if pay

made through automatic d

interest rate reduction was n

to borrowers who did not 

“over 50” account. The ECO

ally prohibits creditors from 

ing age when evaluating cre

ness, except that a cred

consider the age of an 

62 years or older in the a

favor.

Since the addition of pricing 

tion to the data reported unde

the Federal Reserve has used t

data to facilitate its fair lendin

ment efforts. (See “Reporting 

Mortgage Disclosure Act Dat

this chapter.) The Federal Res

not rely on HMDA data alo

enforcement efforts, however

HMDA data do not inclu

potential determinants of loa

such as the borrower’s cred

and the loan-to-value ratio. In

Federal Reserve analyzes th

pricing data in conjunction w

fair lending risk factors—

discretionary pricing and ince

loan officers to charge higher p

identify lenders that are at risk 

7. The Board referred this case to the Department of Justice in December 2005. It was not

included in the 2005 Annual Report because the

referral occurred outside the reporting period for

the 2005 report (July 1, 2004, through June 30,

2005). It is included in the 2006 Annual Report,

which otherwise reports referrals occurring during

the 2006 calendar year.
ing discrimination.8 These lenders will

receive a targeted pricing review. During a targeted pricing review, examiners collect additional information

(including factors that are not available

in the HMDA data) to determine

whether a pricing disparity by race or

ethnicity is fully attributable to legitimate factors, or whether any portion of

the pricing disparity is attributable to

discrimination.

Flood Insurance

The National Flood Insurance Act imposes certain requirements on loans secured by buildings or mobile homes located in, or to be located in, areas

determined to have special flood hazards. Under the Federal Reserve’s Regulation H, which implements the act, state

member banks are generally prohibited

from making, extending, increasing, or

renewing any such loan unless the building or mobile home and any personal

property securing the loan are covered

by flood insurance for the term of the

loan. The act requires the Board and

other federal financial institution regulatory agencies to impose civil money

penalties when it finds a pattern or practice of violations of the regulation. The

civil money penalties are payable to

the Federal Emergency Management

Agency for deposit into the National

Flood Mitigation Fund.

During 2006, the Board imposed civil

money penalties against four state member banks. The penalties, which were

assessed via consent orders, totaled

$32,050.

Coordination with

Other Federal Banking Agenc

The member agencies of th

Financial Institutions Ex

Council (FFIEC) develop un

amination principles, standard

dures, and report formats.9 In 

FFIEC revised examination p

for the Fair Credit Repor

(FCRA). Section 604(g) of t

generally prohibits creditors 

taining and using medical in

in connection with any determ

a consumer’s eligibility, or 

eligibility, for credit unless per

regulation. The agencies ha

regulations creating exceptio

statute’s general prohibition; 

the FCRA examination proced

been revised to reflect these ne

tions. In addition, the FFIEC r

CRA examination procedures 

banks, small banks, who

limited-purpose banks, and ba

ating under strategic plans. 

sions incorporate the CRA 

changes that were approved in 

In 2006, the four banking 

(the FDIC; the Federal Res

OCC; and the OTS) convene

Interagency Consumer Affair

ence. The conference’s object

to (1) discuss the banking 

issues that affect consumers, 

mine more-effective ways for 

cies to share information abou

plaints they receive, and (3

best practices for communic

interacting with the public. Th

cies plan to hold regular 

8. See the Interagency Fair Lending Examination Procedures for a full discussion of fair lending

risk factors (www.ffiec.gov/PDF/fairlend.pdf).

9. The FFIEC member agencies a

of Governors of the Federal Reserve 

Federal Deposit Insurance Corporat

the Office of the Comptroller of th

(OCC), the Office of Thrift Supervisio

the National Credit Union Administrat
affairs conferences; the next conference

is scheduled for October 2007.

Finally, the Board, the OCC, and the

FDIC updated the host-state loan-todeposit ratios used to determine compliance with section 109 of the RiegleNeal Interstate Banking and Branching

Efficiency Act of 1994.10

Response to 2005 Hurricanes

In 2006, the Federal Reserve and the

other banking agencies continued initiatives to help financial institutions affected by the 2005 hurricanes in the

Gulf Coast. The Board, the FDIC, the

OCC, and the OTS sponsored an interagency forum, “The Future of Banking

in the Gulf Coast: Helping Banks and

Thrifts Rebuild Communities,” that focused on the short-term and long-term

challenges facing these financial institutions, including how they can help meet

the needs of their local communities. In

addition to officials from the sponsoring

agencies, senior executives from both

large and small financial institutions and

representatives from community development corporations and a number of

other federal agencies participated in the

forum.

The FFIEC member agencies and the

Conference of State Bank Supervisors

released a booklet, “Lessons Learned

from Hurricane Katrina: Preparing Your

Institution for a Catastrophic Event.”11

Using financial institutions’ experiences

and lessons learned during Hurricane

Katrina and its aftermath, the booklet is

intended to help other institutions plan

for an emergency or a catastrophic

event.

The FFIEC member agenc

with state financial institutio

tors, also conducted a publi

campaign to encourage bank

and credit unions to continue 

with borrowers affected by 

Katrina or Hurricane Rita. P

vice announcements (PSAs) 

tributed to radio stations and 

lications in geographic areas 

the highest concentrations of 

fected by the hurricanes. T

PSAs played more than 1,495 

thirty-one stations, reaching 

mated audience of 4.13 milli

in the targeted regions. The p

appeared more than sixteen tim

newspapers and other local pub

reaching approximately 565,00

Training for Bank Examine

Ensuring that financial institut

ply with laws that protect c

and encourage community rei

is an important part of the ba

nation and supervision proces

number and complexity of 

financial transactions grow, tr

examiners of the organizatio

the Federal Reserve’s superv

sponsibility becomes even mo

tant. The consumer complian

iner training curriculum cons

courses focused on various 

protection laws, regulations, a

ining concepts. In 2006, thes

were offered in ten sessions 

than 195 consumer complianc

ers and System staff members

Board and Reserve Bank s

larly review the core curriculu

aminer training, updating subj

and adding new elements as ap

During 2006, staff conducted 

lum reviews of the follow

courses in order to incorporate 

changes in policy and laws, a

10. See the June 13, 2006, press release

(www.federalreserve.gov/boarddocs/press/bcreg/

2006/).

11. The booklet is available on the FFIEC’s

web site (www.ffiec.gov/Katrina_lessons.htm).
changes in instructional delivery

techniques:

• Community Reinvestment Act Examination Techniques Course. Equips assistant examiners to participate in all

aspects of a CRA examination, including the evaluation of a bank’s CRA

program and the determination of its

CRA rating.

• Fair Lending Examination Techniques

Course. Provides assistant examiners

with the skills and knowledge to plan

and conduct the risk-focused fair lending portion of a consumer compliance

examination.

When appropriate, courses are delivered via alternative methods, such as the

Internet or other distance-learning technologies. The CRA course discussed

above uses a combination of instructional methods: (1) classroom instruction focused on case studies and

(2) specially developed computer-based

instruction that includes interactive selfcheck exercises. The computer-based

instruction is reinforced through daily

conference calls and discussions on

electronic bulletin boards. The Fair

Lending course discussed above also

uses computer-based training.

In addition to providing core training,

the examiner curriculum emphasizes the

importance of continuing professional

development. Opportunities for continuing development include special projects

and assignments, self-study programs,

rotational assignments, the opportunity

to instruct at System schools, mentoring

programs, and an annual senior examiner forum.

Reporting on Home Mortgage

Disclosure Act Data

The Home Mortgage Disclosure Act

(HMDA), enacted by Congress in 1975,

requires most mortgage lende

in metropolitan areas to co

about their housing-related le

tivity, report the data annua

government, and make the dat

available. In 1989, Congress 

the data required by HMDA 

information about loan applica

did not result in a loan origi

well as information about the 

and income of applicants and b

In response to the growt

subprime-loan market, the 

Reserve updated Regulation C 

The revisions, which became 

in 2004, require lenders to co

information for loans they ori

the higher-priced segment of 

loan market. When applicabl

report the number of percenta

by which a loan’s annual p

rate exceeds the threshold th

“higher-priced loans.” The th

3 percentage points or more 

yield on comparable Treasury 

for first-lien loans, and 5 p

points or more above that 

junior-lien loans. The HMDA 

lected in 2004 and released to 

lic in 2005 provided the firs

available loan-level data ab

prices. The FFIEC released 

HMDA data to the public in S

2006.

A September 2006 article 

by Federal Reserve staff in th

Reserve Bulletin uses the 200

describe the market for hig

loans and patterns of lending a

products, geographic markets

rowers and neighborhoods of 

races and incomes.12

As in 2004, relatively few 

accounted for most of the hig

12. The complete article is a

www.federalreserve.gov/pubs/bulletin

bull06hmda.pdf.
loan originations in 2005. Of the 8,850

home lenders reporting HMDA data,

1,120 of them made 100 or more higherpriced loans. The 10 home lenders that

had the largest volume of higher-priced

loans accounted for about 59 percent of

all such loans. Higher-priced lending is

also concentrated by price: in 2005, the

vast majority of higher-priced loans had

annual percentage rates within 3 percentage points of the reporting thresholds. As in 2004, the majority of all

loan originations were not higher priced

in 2005, however, the incidence of

higher-priced lending did increase

substantially—26.2 percent in 2005,

compared with 15.5 percent in 2004.

Some of the increase in the incidence

of higher-priced lending is attributed to

changes in the interest rate environment

from 2004 to 2005, as well as to

changes in borrower profiles and lender

practices.

Loan pricing is a complex process

that may reflect a wide variety of factors about the level of risk a particular

loan or borrower presents to the lender.

As a result, the prevalence of higherpriced lending varies widely. First, the

incidence of higher-priced lending varies by product type. For example,

manufactured-home loans show the

greatest incidence of higher-priced

lending, because these loans are considered higher risk. In addition, first-lien

mortgages are generally less risky than

comparable junior-lien loans, and the

pricing for these loans reflects their risk

profiles: 25.7 percent of first-lien refinance loans were reported as higherpriced in 2005, compared with 30.2

percent of comparable junior-lien loans.

Second, higher-priced lending varies

widely by geography. As in 2004, many

of the metropolitan areas that reported

the greatest incidence of higher-priced

lending were in the southern region of

the country. Several metropolitan areas

on the West Coast also had an 

incidence of higher-priced l

2005. For example, in many m

tan areas in the South, South

West, 30 percent to 40 perce

homebuyers who obtained con

loans in 2005 received high

loans.

Third, the incidence of hig

lending varies greatly among 

of different races and ethni

2005, as in 2004, blacks and 

were much more likely t

Hispanic whites and Asians 

higher-priced loans. For ex

2005, 55 percent of black b

and 46 percent of Hispanic b

received higher-priced home

loans, compared with only 17 

non-Hispanic white or Asian b

To a large extent, these diffe

flect a segmentation of the h

market, that is, black and Hisp

rowers were much more likely 

mortgage loans from institu

specialize in higher-priced len

Because HMDA data lack 

tion about credit risk and ot

mate pricing factors, it is not p

determine from HMDA da

whether the observed pricing 

and market segmentation re

crimination. When analyzed in 

tion with other fair lending ri

and supervisory information, 

the HMDA data can facilitate 

ing supervision and enforcem

“Fair Lending” earlier in this 

Agency Reports on Compli

with Consumer Protection 

The Board reports annually o

ance with consumer protectio

entities supervised by federal 

This section summarizes data 

from the twelve Federal Reser
the FFIEC member agencies, and other

federal enforcement agencies.13

Regulation B

(Equal Credit Opportunity)

The FFIEC agencies reported that

87 percent of the institutions examined

during the 2006 reporting period were in

compliance with Regulation B, compared with 85 percent for the 2005 reporting period. The most frequently

cited violations involved the failure to

take one or more of the following actions:

• abstain from inquiring about the race,

color, religion, national origin, or sex

of an applicant in connection with a

credit transaction unless permitted by

regulation

• collect information for monitoring

purposes about the race, ethnicity, sex,

marital status, and age of applicants

seeking credit primarily for the purchase or refinancing of a principal

residence

• note on the application form monitoring information regarding ethnicity,

race, and sex when an applicant

chooses not to provide the information

• provide a written notice of denial or

other adverse action to a credit applicant that contains the specific reason

for the adverse action, along with

other required information

During this reporting period, the OTS

issued one supervisory agreement to a

savings association for its alleged violations of the Equal Credit Opportunity

Act (ECOA) and Regulation B

as other consumer regulations. 

FFIEC agencies did not issue 

mal enforcement actions re

Regulation B during the rep

riod.

The other agencies that en

ECOA—the Farm Credit A

tion (FCA), the Department 

portation, the Securities and 

Commission (SEC), the Small 

Administration, and the Grai

tion, Packers and Stockyards 

tration of the Department 

riculture—reported substantia

ance among the entities they 

The FCA’s examination 

revealed that most Regulation 

tions involved either creditor

ing inadequate statements o

reasons for denial or credito

to request or provide inform

government monitoring purp

reported by the SEC, an ex

conducted by the National A

of Securities Dealers, Inc., f

violation of Regulation B at 

firm. The firm’s written su

procedures did not contain in

regarding the denial of cred

tomers. However, none of th

agencies initiated any forma

ment actions relating to Reg

during 2006.

Regulation E

(Electronic Fund Transfers)

The FFIEC agencies reported 

proximately 95 percent of th

tions examined during the 20

ing period were in complia

Regulation E, which is comp

the level of compliance for 

reporting period. The most 

cited violations involved the 

take one or more of the follo

tions:

13. Because the agencies use different methods

to compile the data, the information presented

here supports only general conclusions. The 2006

reporting period was July 1, 2005, through June

30, 2006.
• determine whether an error occurred,

within ten business days of receiving

a notice of error from a consumer

• give the consumer provisional credit

for the amount of an alleged error

when an investigation into the alleged

error cannot be completed within ten

business days

• provide initial disclosures that contain

required information, including limitations on the types of transfers permitted and error-resolution procedures, at

the time a consumer contracts for an

electronic fund transfer service

• when a determination is made that no

error has occurred, provide a written

explanation and note the consumer’s

right to request documentation supporting the institution’s findings

The Federal Trade Commission (FTC)

filed two complaints in federal district

court for alleged violations of Regulation E and federal statutes. Among other

allegations, one complaint alleged that

the defendants charged consumers’

credit cards or debited their bank

accounts, both on a recurring basis, to

pay for a discount health plan, without

obtaining the consumers’ authorization

for preauthorized electronic fund transfers. The other complaint alleged that

defendants enrolled consumers in a

mail-order program for dietary supplements and then automatically billed consumers on a recurring basis, without

obtaining their authorizations for the recurring debits. The FFIEC agencies and

the SEC did not issue any formal enforcement actions relating to Regulation

E during the period.

Regulation M (Consumer Leasing)

The FFIEC agencies reported that more

than 99 percent of the institutions examined during the 2006 reporting period

were in compliance with Regu

which is comparable to the lev

pliance for the 2005 reportin

The FFIEC agencies did not 

formal enforcement actions r

Regulation M during the perio

Regulation P (Privacy of Con

Financial Information)

The FFIEC agencies repo

98 percent of the institutions 

during the 2006 reporting perio

compliance with Regulation 

pared with 97 percent for the 

porting period. The most f

cited violations involved the 

take one or more of the 

actions:

• provide a clear and co

annual privacy notice to cus

• disclose the institution’s inf

sharing practices in initial, a

revised privacy notices

• provide customers with a 

conspicuous initial privacy n

accurately reflects the institu

vacy policies and practices

than when the customer rela

established

The FFIEC agencies did not 

formal enforcement actions r

Regulation P during the 

period.

Regulation Z (Truth in Lendin

The FFIEC agencies repo

85 percent of the institutions 

during the 2006 reporting perio

compliance with Regulation 

pared with 80 percent for the 

porting period. The most f

cited violations involved the 

take one or more of the 

actions:
• in closed-end credit transactions, accurately disclose the finance charge

and the security interest that the creditor has or will acquire in the property

identified

• ensure that disclosures reflect the

terms of the legal obligation between

the parties and, when any information

necessary for an accurate disclosure is

unknown, ensure that the creditor

states that the disclosure is an estimate

• on certain residential mortgage transactions, provide a good faith estimate

of the required disclosures before consummation, or not later than three

business days after receipt of the loan

application

In addition, 106 banks supervised by

the Federal Reserve and the FDIC were

required, under the Interagency Enforcement Policy on Regulation Z, to

reimburse a total of approximately

$1.5 million to consumers for understating the annual percentage rate or the

finance charge in their consumer loan

disclosures.

The OTS issued three supervisory

agreements for violations of a number

of consumer regulations, including

Regulation Z, during the reporting

period. The other FFIEC agencies did

not issue any formal enforcement

actions relating to Regulation Z during

the reporting period.

The Department of Transportation investigated one air carrier for its improper handling of credit card and cash

refunds for unused refundable tickets.

As a result of this investigation, the air

carrier made the required refunds and

entered into a consent order under which

it was directed to cease and desist from

further violations of the credit refund

requirements of Regulation Z. The air

carrier was assessed a civil penalty of

$50,000.

The FTC continued litigatio

a mortgage broker and its prin

their alleged violations of Reg

and federal statutes, in conne

advertisements for extremely 

gage rates. In 2004, the court 

stipulated preliminary injuncti

the defendants. In 2006, the de

chief executive filed for bankr

lowing his 2005 agreement to

other terms—pay the FTC $40

der a stipulated order releasing 

confinement for civil contem

2004 stipulated preliminary i

The FTC filed a proof of 

amounts it is owed in the u

federal district court action an

tempt action. Litigation is o

this case.

In 2006, the FTC settled ch

case alleging that a defendan

Regulation Z and federal sta

defendant allegedly engaged i

resentation about refunds for 

mation products. After accep

uct returns from consum

otherwise acknowledging tha

sumers were owed refunds, t

dant failed to credit the co

credit card accounts in a timel

Regulation AA (Unfair or Dec

Acts or Practices)

The FFIEC agencies reported 

than 99 percent of the instituti

ined during the 2006 reporti

were in compliance with R

AA, which is comparable to th

compliance for the 2005 

period. No formal enforceme

relating to Regulation AA w

during the reporting period.

Regulation CC (Availability of 

and Collection of Checks)

The FFIEC agencies repo

92 percent of institutions exam
ing the 2006 reporting period were in

compliance with Regulation CC, compared with 93 percent for the 2005 reporting period. The most frequently

cited violations involved the failure to

take one or more of the following

actions:

• make available on the next business

day the lesser of $100 or the aggregate

amount of checks deposited that are

not subject to next-day availability

• follow procedures when invoking the

exception for large-dollar deposits

• provide required information when

placing an exception hold on an

account

• make funds from local and certain

other checks available for withdrawal

within the times prescribed by regulation

The OTS issued one supervisory agreement for violations of a number of consumer regulations, including Regulation

CC. The other FFIEC agencies did not

issue any formal enforcement actions

related to Regulation CC during the reporting period.

Regulation DD (Truth in Savings)

The FFIEC agencies reported that 91

percent of institutions examined during

the 2006 reporting period were in compliance with Regulation DD, which is

comparable to the level of compliance

for the 2005 reporting period. The most

frequently cited violations involved the

failure to take one or more of the following actions:

• use the phrase “annual percentage

yield” in an advertisement disclosing

required additional terms and conditions for customer accounts

• provide account disclosures containing all required information

• provide account disclosure

and conspicuously, in writin

form that the consumer may 

The FFIEC agencies did not 

formal enforcement actions 

Regulation DD during the rep

riod.

Consumer Complaints

The Federal Reserve investig

plaints against state member b

forwards to the appropriate en

agency any complaints that i

that involved other creditors 

nesses. Each Reserve Bank in

complaints against state mem

in its District. In 2006, the Fe

serve received 641 consumer c

about regulated practices by s

ber banks—complaints were re

mail, by telephone, in person, 

tronically via the Internet.

Complaints against

State Member Banks

Of the 641 complaints about 

practices, 70 percent involved 

loans: 2 percent alleged discr

on a basis prohibited by law (r

religion, national origin, sex, m

tus, handicap, age, the fact th

plicant’s income comes from 

assistance program, or the fac

applicant has exercised a right 

Consumer Credit Protection 

the remainder concerned oth

related practices, such as fair 

porting; billing-error resolu

credit card rates, terms, a

Twenty-eight percent of the c

involved disputes about in

funds charges and procedures

withdrawn from a consumer’

funds availability, and other d

count practices, including 
fund transfers; the remaining 2 percent

concerned disputes about trust services

or other practices. (See tables.)

In 97.5 percent of the 641 complaints

against state member banks regarding

regulated practices that were investigated in 2006, the banks had correctly

handled the customer’s account. The

remaining 2.5 percent of the complaints

against state member banks re

finding that the bank had v

consumer protection regula

most common violations invo

estate loans, deposit accounts, 

tronic fund transfers.

Unregulated Practices

As required by section 18(f) o

eral Trade Commission Act, 

continued to monitor compla

banking practices that are not 

existing regulations and to 

those that concern possible 

deceptive practices. In 2006, 

eral Reserve received more t

complaints against state mem

that involved unregulated 

The most common complaints 

checking accounts and cred

Consumers most frequently co

about problems with either o

closing an account (113 co

issues involving fraud 

insufficient-funds charges an

dures (77), and concerns ove

interest rates, terms, and fees 

cards (70). The remainder of 

Consumer Complaints against State

Member Banks, by Classification, 2006

Classification Number

Regulation B (Equal Credit Opportunity) . . . . . 53

Regulation C (Home Mortgage Disclosure) . . . 0

Regulation E (Electronic Fund Transfers) . . . . 73

Regulation H (Bank Sales of Insurance) ...... 1

Regulation H (Flood Insurance) ............. 3

Regulation M (Consumer Leasing) ........... 1

Regulation P (Privacy of Consumer

Financial Information) . . . . . . . . . . . . . . . . . . 17

Regulation Q (Payment of Interest) .......... 0

Regulation Z (Truth in Lending) . . . . . . . . . . . . . 243

Regulation BB (Community Reinvestment) . . . 1

Regulation CC (Expedited Funds

Availability) . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Regulation DD (Truth in Savings) . . . . . . . . . . . 60

Fair Credit Reporting Act . . . . . . . . . . . . . . . . . . . 117

Fair Debt Collection Practices Act . . . . . . . . . . . 20

Fair Housing Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Regulations T, U, and X .................... 0

Real Estate Settlement Procedures Act . . . . . . . 10

Total ....................................... 641

Complaints against State Member Banks That Involve Regulated Practices, 2006

Subject of complaint

All complaints Complaints involving 

Number Percent Number 

Total ............................... 641 100 16 

Loans

Discrimination alleged

Real estate loans . . . . . . . . . . . . . . . 3 0.47 0 

Credit cards . . . . . . . . . . . . . . . . . . . . 4 0.62 0 

Other loans . . . . . . . . . . . . . . . . . . . . 3 0.47 0 

Other types of complaints

Real estate loans . . . . . . . . . . . . . . . 57 8.89 4 

Credit cards . . . . . . . . . . . . . . . . . . . . 342 53.35 3 

Other loans . . . . . . . . . . . . . . . . . . . . 41 6.40 1 

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 16.85 3 

Electronic fund transfers . . . . . . . . . . . . . 73 11.39 5 

Trust services . . . . . . . . . . . . . . . . . . . . . . . 1 0.16 0 

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.40 0 
plaints concerned a wide range of

unregulated practices involving credit

cards, including errors or delays in processing consumers’ payments, the

amounts banks charged for late payments, and overlimit fees and procedures.

Complaint Referrals to HUD

In accordance with a memorandum of

understanding between HUD and the

federal bank regulatory agencies that requires that a complaint alleging a violation of the Fair Housing Act be forwarded to HUD, in 2006 the Federal

Reserve referred three complaints to

HUD that alleged state member bank

violations of the Fair Housing Act. In

two of the three cases, the Federal Reserve’s investigations revealed no evidence of illegal discrimination. The remaining case was pending at year-end.

Advice from the

Consumer Advisory Council

The Board’s Consumer Advisory

Council—whose members represent

consumer and community organizations,

the financial services industry, academic institutions, and state agencies—

advises the Board of Governors on

matters concerning laws and regulations that the Board administers and on

other issues related to consumer financial services. Council meetings are held

three times a year, in March, June, and

October, and are open to the public.

(For a list of members of the council,

see the section “Federal Reserve System Organization.”)

During their March meeting, council

members discussed proposed changes to

Regulation E, which implements the

Electronic Fund Transfer Act (EFTA).

The proposed changes addressed payroll

card accounts, specifically the disclosure and notification require

financial institutions that pro

roll card account services to c

Under the interim final rule, 

institutions are granted relief 

requirement to provide consu

paper periodic statements—if 

vide the information in perio

ments to consumers through a

means (such as electronically 

phone). Both industry and 

representatives generally supp

proposed changes and agreed 

scope and approach effect

dressed consumer protectio

Several industry representati

that substituting alternative m

the delivery of account inform

propriately balances consume

and their need to access their 

on the one hand, with financi

tions’ potential compliance co

other. Some consumer repres

however, suggested that the 

statements are an important ed

tool for consumers and, there

sumers would benefit from 

paper periodic statements.

Council members also discu

posed changes to Regulation 

implements the Truth in Len

(TILA), at their March meeti

bers shared their views on w

Board should establish a stand

time for the crediting of pay

open-end credit accounts. Th

did not reach a consensus on 

cutoff time; however, memb

that such a cutoff would have 

consequences, including high 

increased interest rates, for c

who make late payments. Sev

bers suggested that the need t

consumers with more tra

about the costs and fees imp

result of late payments may b

than the need to establish cu

for the crediting of payments
members also discussed a TILA amendment that requires creditors that offer

open-end credit accounts to provide consumers with disclosures, on each periodic statement, about the effects of making only minimum payments on their

accounts. Members expressed a wide

range of views on whether such disclosures would be meaningful and useful to

consumers; members also shared concerns about ensuring the accuracy of the

disclosures.

During its March and June meetings,

the council discussed issues related to

the Board’s public hearings on the home

equity lending market, as well as the

adequacy of existing consumer disclosures and protections. Members discussed the Board’s 2002 revisions to the

Home Ownership and Equity Protection

Act (HOEPA) rules and their effect on

consumer protections and the availability of credit in the high-cost and

subprime-lending markets. The council

also discussed several issues related to

how consumers shop for credit and how

that process may affect the loan terms

they ultimately receive. Members discussed the increased role that mortgage

brokers play in the loan-making

process—and whether this role highlights a need for additional regulation of

brokers, specifically regulation on the

broker practice of directing potential

borrowers to certain mortgage products.

Members addressed the need to

strengthen consumer disclosures to ensure that borrowers understand key

credit terms and costs, particularly for

mortgage products that feature interestonly periods, prepayment penalties, and

adjustable or “teaser rates.” Several

members also expressed a need for additional research on consumer behavior in

the home mortgage market.

In June, the council discussed several

issues related to financial literacy,

including goals for financial education

programs, methods for educa

sumers, and how to measure a

ate the effectiveness of financ

tion programs. Members 

financial education as a fun

tool for helping consumers 

preserve assets. Because fin

eracy not only enhances the w

of individuals or households 

strengthens neighborhoods an

nities, council members su

making financial literacy a nat

lic policy priority and (2) cre

tional education initiatives a

formalized methods to train an

consumers.

At the October meeting, 

also discussed proposed regul

guidelines to implement prov

the Fair and Accurate Credit 

tions Act (FACT Act) that requ

cial institutions to identify “

for detecting possible cases o

theft. Most industry represent

pressed the need for mor

guidelines that would allow 

institutions to use a risk-based 

to address identity-theft risk

change rapidly. Consumer r

tives were concerned that the 

guidelines give covered institu

creditors too much discretion 

identity-theft prevention and 

policies. Council members al

their views on the implementa

proposed regulations, includin

training requirement and req

for covered institutions to de

implement a written identity-

vention program.

At their October meeting, 

discussed the importance of 

greater incentives to encoura

ment in affordable housing. H

ership is a fundamental part 

sumer’s asset-building stra

availability of affordable hou

neighborhood can create econ
portunities that, in turn, support future

investments in entrepreneurship and

education. Members noted that financial

institutions play a critical role by providing mortgage credit to consumers and

by financing the development of affordable housing. They highlighted the need

for federal bank regulators to play a

larger role by providing institutions with

greater incentives for (1) meeting affordable housing needs and (2) expanding

their outreach to local community organizations, as part of their community

reinvestment strategies.

During each of their meetings this

past year, council members discussed

interagency guidance on managing the

potential heightened risk of new and

emerging residential mortgage products,

often referred to as “nontraditional,” “alternative,” or “exotic” mortgage loans.

Members generally supported the guidance, noting its importance in light of

the recent proliferation and use of nontraditional mortgage products, especially

by consumers whose household incomes

are not keeping up with home-price

appreciation. Members generally agreed

that these products do not present problems for some borrowers. But the loans

are risky for consumers whose cash

flows or income projections may limit

their ability to repay, who may not have

the capacity or discipline to manage the

loan, or who are not fully informed

about the terms and conditions such

loans carry.

Several members expressed concern

that the guidance has given certain mortgage originators a competitive advantage, since the key principles of the

guidance apply only to banking and

thrift organizations and federal credit

unions. Others reiterated this concern by

emphasizing that the agencies are only

providing guidance rather than creating

requirements that could be enforced by

consumers or law enforcement agencies.

Members also commented on 

posed illustrations of consume

tion, which were part of the 

The illustrations are designe

borrowers better understand th

of nontraditional mortgages. T

cil was generally supportive o

trations. Members stated that 

trations highlight important inf

such as the costs, terms, fea

risks of a loan, for borrowers. 

members expressed a need t

additional loan information, s

formation on the risk of paym

to the consumer, the costs of 

documentation loans, prepaym

ties, and the potential for nega

tization of the loan.

Consumer Education

and Research

The Consumer Education and 

section produces the Board’s 

education materials and sup

Board’s consumer outreach i

Section staff also conduct re

support of the division’s policy 

ment and community developm

tions. For example, research 

lyze the annual HMDA data, 

then used in the monitoring an

ment of the fair lending laws.

The Federal Reserve mainta

sumer information web sit

federalreserve.gov/consumer.h

contains publications and ed

materials related to the Boa

sumer regulations. In 2006, 

duced or updated the followin

tions on nontraditional mortga

• “Interest-Only Mortgage 

and Payment-Option AR

They for You?” (a new pu

issued jointly with the FFI

cies, that includes a glossar

ing terms, a mortgage-shopp
sheet, and a list of additional

information sources)

• “Consumer Handbook on AdjustableRate Mortgages” (substantially revised and updated in conjunction with

the OTS to incorporate descriptions

and illustrations of how changes in

interest rates affect a consumer’s loan

payments, including an example of how

an increase in interest rates may actually increase the total loan amount)

In addition, the Board’s brochure “How

to File a Consumer Complaint about a

Bank,” was updated. (The brochure is

available in both English and Spanish.)

Print and web-based versions of these

publications are available on the web

site.

Throughout the year, Board staff participated in a number of financial education events, including events for

community members, federal employees, and congressional staff. The Board

continued to work with the interagency

Financial Literacy and Education Commission (FLEC); last year, staff helped

update and expand the FLEC’s

MyMoney.gov web site to incorporate

links to Reserve Bank consumer education resources. In their speeches and

other appearances, Board members

underscored the importance of financial

education to an individual’s economic

well-being. Former Governor Mark

Olson spoke at the press conference for

the announcement of FLEC’s National

Strategy for Financial Education in

April. Chairman Ben Bernanke testified

on the Federal Reserve’s role in financial education before the U.S. Senate

Committee on Banking, Housing, and

Urban Affairs in May.14

In cooperation with the Department

of Defense, the U.S. Army, and Army

Emergency Relief (a private 

organization), staff are studyin

a two-day financial education 

had an impact on how the pa

soldiers manage their finance

stage, baseline data have been 

and staff will be working 

follow-up data.

Research on Financial Info

and Disclosures

A financial institution is requir

vide consumers with disclosu

its products and services, incl

closures about its privacy pol

terms of a loan. The Federal R

one of seven agencies worki

velop more “consumer-friendl

sures, that is, disclosures writte

understandable language that p

formation a consumer can us

pare financial services provid

spring, the agencies released 

that summarized their research 

oping a comprehensible fina

vacy notice for consumers.15 T

cial Services Regulatory Reli

2006, which was signed in Oct

sequently required the federal 

regulatory agencies to develop 

privacy notice. The design, fo

language of the model notice 

easily understood and allow c

to compare the privacy policie

ent financial institutions.

As part of its overall effort t

consumer disclosures, the Boa

how consumers use different 

information sources—both th

and quality of the sources—an

this information affected their 

investment decisions. This 

addition to the research on pr

tices, will be used in the 

14. See www.federalreserve.gov/boarddocs/

testimony/2006/20060523/default.htm.

15. See www.federalreserve.gov/b

press/bcreg/2006/20060331/default.ht
review of the Board’s open-end credit

regulations. The Board has contracted

with a market research firm to conduct

formative and usability testing on credit

card disclosures, including the disclosures used in solicitation letters, applications, periodic statements, and changein-terms notices. Consumer testing will

continue in early 2007; the Board will

consider data collected in these sessions

as it develops new proposed rules under

Regulation Z.

Promotion of Community

Economic Development and

Access to Financial Services in

Historically Underserved

Markets

In 2006, the community affairs function

within the Federal Reserve System supported several initiatives to promote

community economic development and

fair access to credit for low- and

moderate-income communities and

populations. The function continued to

focus on improving the sustainability

and financial capacity of community development organizations, creating assetbuilding opportunities for low-income

individuals, and promoting initiatives to

help homeowners preserve this important asset and avoid foreclosure. Activities included publishing newsletters and

articles, sponsoring conferences and

seminars, conducting research, and supporting the dissemination of information

to both general and targeted audiences.

As a decentralized function, the Community Affairs Offices (CAOs) at each

of the twelve Reserve Banks design activities in response to the needs of communities in the Districts they serve in

conjunction with staff from the Board.

The CAOs focus on providing information and promoting awareness of

investment opportunities to financial

institutions, government agencies, and

organizations that serve l

moderate-income communi

populations. Similarly, the Boa

promotes and coordinates Sy

efforts, in addition to engaging 

ties and exploring issues that 

lic policy implications. In 

Board and the Reserve Bank

rated on a number of activitie

cused on asset-building for in

and strengthening community 

ment organizations, while c

their efforts to expand publ

standing of the need to enhan

to affordable credit in un

markets.

Collaborative Efforts

The Reserve Banks and the B

tinued their work on two subst

laborative efforts over the past 

System resumed its asset-bui

wealth-creation partnership 

CFED, a nonprofit organizat

cated to expanding access to 

opportunity by bringing toge

munity development practitio

lic policy analysts, and priv

representatives. In 2006, th

Reserve System and the CFED 

last three in a series of fiv

convening leaders in econom

community development, phi

and the financial industry. Sta

the initial forum in June 200

rums were convened to encou

individuals to engage in asse

activities, such as homeowne

trepreneurship, savings, and in

One session, held in Kansas 

cused on the unique challenge

oping asset-building program

communities; the forum wa

sored by the Reserve Banks 

City, Dallas, Minneapolis, and 

A second meeting, hosted 

Reserve Bank of Atlanta, explo
building for low- and moderate-income

savers, but from the perspective of

financial institutions. The discussions

focused on developing products to help

this population begin or expand its saving efforts. The final forum, hosted by

the Board of Governors, gathered a

roundtable of leaders in the assetbuilding field. The leaders reflected on

the results of the regional forums and

identified next steps to help the industry

progress.16

A related initiative, led by the San

Francisco Reserve Bank, was a call for

papers on asset-building issues and strategies. Twenty-eight of the more than

100 papers received were presented at a

research forum during CFED’s 2006

Assets Learning Conference, “A Lifetime of Assets: Building Families, Communities and Economies.” More than

1,000 participants attended; staff from

each Reserve Bank and the Board were

actively involved in planning the conference, including developing the agenda,

presenting research, and serving as moderators and participants in formal discussion groups. The Board’s Community

Affairs officer delivered a keynote address during the conference. Board staff

presented research on the asset portfolios of low-income households and

how these assets have changed over the

past fifteen years (from 1989 to 2004).

Staff also explored homeownership and

foreclosure patterns that affect the assetbuilding capabilities of low-income

households.17

Beyond the CFED partnership,

Reserve Banks have been active in the

promotion and development of regional

asset-building coalitions. Staff from the

Richmond Reserve Bank ch

planning committee for the So

lina Asset Development Coll

and staff from the San 

Reserve Bank facilitated bot

egon Asset Building Converg

the Washington State Asset 

Summit. Other Reserve Bank

ued to provide advisory ser

more than a dozen other stat

gional asset-building coalition

out the country, such as the 

Asset Building Coalition, M

Saves, and the Nashville Wea

ing Alliance.

Another Systemwide col

was a partnership with the As

tute, a national research and 

development organization. Th

this collaboration was to ide

tainable and scalable busines

that community development 

tions can use to more e

advance their goals. In 2006, th

Reserve System and the Aspe

cosponsored four conference

the country that explored a 

business models that have le

cessful community developme

programs. A forum at the San 

Reserve Bank highlighted fu

forts for community developm

cial institutions (CDFIs), indi

velopment account program

schools, and child care facilit

rum at the Chicago Reserve 

cused on collaborative effort

mote the earned-income tax 

helping low- to moderate-inco

lies prepare their taxes. Partici

forum at the New York Rese

examined several collaborati

undertaken by development 

tions, including efforts to sh

structure resources (facilitie

ment, etc.), collaborate on fu

and pool other resources and 

to increase their organizationa

16. Summaries of the forum sessions are available on the CFED web site (www.cfed.org/

focus.m).

17. The research papers presented at this conference are available at www.frbsf.org/community/

research/assets.html.
Finally, a forum at the Dallas Reserve

Bank focused on the formation of potential new sources of capital for CDFIs

and community development corporations. These forums generated ongoing

Systemwide research on various aspects

of public and private subsidies for community development. Staff from several

of the Reserve Banks and the Board are

currently involved in a research project

to measure the magnitude of the need

for public and private groups to subsidize community development, measure

how effectively these subsidies are utilized, and identify emerging strategies

for optimizing the leverage of subsidy

dollars.

Access to Financial Services

Staff from around the System have continued working on several initiatives to

enhance access to affordable credit in

currently underserved markets. In 2006,

the San Francisco Reserve Bank and the

Board partnered to study issues related

to the creation of a secondary market for

community development loans. The San

Francisco Reserve Bank devoted an

issue of its Community Development

Investment Review to an overview of the

community development finance industry, which included advice on best practices from industry practitioners. The

Board and the San Francisco Reserve

Bank followed up by hosting a conference in Washington, D.C., for lenders,

investors, and financial intermediaries,

in addition to policymakers and academics. The conference sought to (1) assess

the status of the industry and (2) discuss

ways to innovate and collaborate to

increase liquidity for community development lending. The next edition of the

Review included the conference proceedings and essays by conference participants laying out a possible road map

for the creation of a secondary market

for community developme

and included remarks by 

Kroszner, who keynoted the co

The Minneapolis Reserve 

taken the lead in another in

expand access to financial 

through its work with Native 

communities. On many reserv

cess to affordable credit is oft

by ambiguities and inconsis

the various tribal laws that g

cured transactions. In respons

apolis Reserve Bank staff hav

to help investors and lenders 

derstand the property rights 

Americans. For the past few 

Reserve Bank staff have work

ate an improved legal struc

tribes can use to facilitate their 

borrow from off-reservation p

other tribes. In 2005, staff wer

team that completed a dra

Tribal Secured Transactions A

for the National Conference 

missioners on Uniform St

(NCCUSL). Throughout 2006

ported education and dissemi

forts for the MTA by providin

cal assistance and making 

presentations, including one 

judges, on the benefits of triba

of the MTA. During the year, 

tribe adopted the MTA, three 

tribes in Montana passed reso

adopt it, and approximately fif

were in various stages of co

adoption of the MTA.

Resources, Advisory Servic

and Outreach

In 2006, the Board released an 

the Federal Reserve Fiscal Im

(FIT). First released in 2003

software helps users analyze 

impacts of economic develo

small- and mid-sized commun

supports economic developm
ning by producing a cost-benefit analysis of proposed development projects;

FIT estimates a project’s impact on local

sales and property tax revenues and on

costs to local government. To supplement this analysis, FIT integrates a wide

array of data, at the city, county, and

state levels, on incorporated locations in

the United States. The 2006 update contains more and newer data, along with a

module that allows for time discounting

and the calculation of a net present

value. The Board distributed more than

1,000 copies of the updated software in

2006. Users include state and local economic development organizations, academics, and consultants. A recent survey of users identified two communities—El Paso, Texas, and Lincoln,

Nebraska—that have employed FIT to

assist in setting limits on incentives for

development projects.

During the past year, the foreclosure

rate has risen for certain housing markets. Low- and moderate-income families and communities may be especially

at risk for foreclosure. Consequently,

the Board and the Reserve Banks have

enhanced their efforts to preserve homeownership among these populations.

The Board continued its involvement

with NeighborWorkst America (NeighborWorks), a national network of more

than 240 community-based organizations providing financial support, technical assistance, and training for community rehabilitation efforts. A member of

the Board of Governors serves on the

NeighborWorks board of directors, and

members of the Board’s staff serve on

the organization’s Center for Homeownership Education and Counseling. Staff

from the Reserve Banks have led regional collaborative efforts with NeighborWorks through their participation in

foreclosure-prevention training workshops for homeownership counselors.

The Banks have also provided support

to and endorsement of state-le

ties, for example, the Mi

Reserve Bank’s participation 

sota’s Emerging Market Ho

ship Initiative and the 

Reserve Bank’s promotion (th

Pittsburgh Branch) of the fo

mitigation efforts of the Pen

secretary of banking.

Over the past year, the Boa

ued its outreach activities to p

public with information a

Board’s responsibilities, to fac

derstanding of changes in bank

lations and their impact on b

consumers, to promote comm

velopment and consumer educ

to foster discussion of polic

Board staff periodically met w

cial institutions, community gr

other members of the public 

and informal settings. For exa

Board expanded its prior work 

eration HOPE, a national non

ganization dedicated to devel

implementing programs focuse

necting minority communi

mainstream, private-sector 

and to empowering underser

munities. The System has co

with Operation HOPE in pr

and the director of the Board’

of Consumer and Communi

serves on the Operation HO

Atlantic Advisory Board. 

Chairman Bernanke delivered 

address at the “Anacostia 

Summit,” a conference spon

Operation HOPE and the Distr

lumbia. (Anacostia is an under

neighborhood in southeast W

D.C.) The summit focused on 

encourage revitalization in thi

highlighted the importance of 

both targeted public and priva

ment to jump-start the develo

forts in this and other un

neighborhoods. In preparatio
conference, Chairman Bernanke toured

the Anacostia community with lenders,

community development leaders, and

local property developers to 

hand insight into the com

redevelopment. 
Federal Reserve Banks

In addition to contributing to the setting

of national monetary policy and supervising and regulating banks and other

financial entities (discussed in preceding chapters), the Federal Reserve Banks

provide payment services to depository

and certain other institutions, distribute

the nation’s currency and coin, and

serve as fiscal agents and depositories

for the United States.

Developments in

Federal Reserve Priced Services

The Federal Reserve Banks provide a

range of payment and related services to

depository institutions, including collecting checks, operating an automated

clearinghouse service, transferring funds

and securities, and providing a multilateral settlement service. The Reserve

Banks charge fees for providing these

“priced services.”

The Monetary Control Act of 1980

requires that the Federal Reserve establish fees for priced services provided to

depository institutions so as to recover,

over the long run, all direct and indirect

costs actually incurred as well as the

imputed costs that would have been incurred, including financing costs, taxes,

and certain other expenses, and the return on equity (profit) that would have

been earned if a private business firm

had provided the services. The imputed

costs and imputed profit are collectively

referred to as the private-sector adjustment factor (PSAF).1 Over the past ten

years, the Reserve Banks ha

ered 99.0 percent of their price

costs, including the PSAF (t

2006, the Board implemented 

to the method for calculating 

return on equity measure in th

Overall, the price index f

services increased 2.4 percent f

to 2006. Revenue from price

amounted to $908.4 million, 

come was $122.8 million, 

were $875.5 million, resultin

income from priced services 

million. In 2006, the Reserve 

covered 108.8 percent of tota

$947.5 million, including the 

1. In addition to income taxes and the return on

equity, the PSAF is made up of three imputed

costs: interest on debt, sales taxes, and assessments for deposit insurance by the Federal Deposit

Insurance Corporation (FDIC). Board of Governors assets and costs that are relate

services are also allocated to priced 

the pro forma financial statements a

this chapter, Board assets are part o

assets, and Board expenses are includ

ing expenses.

2. Effective December 31, 2006, 

Banks implemented the Financial 

Standards Board’s Statement of Fi

counting Standards No. 158, Employe

ing for Defined Benefit Pension and O

tirement Plans (FAS 158), which res

recognition of a $343.9 million reduct

related to the priced services’ benef

cluding this reduction in equity, whic

a decline in economic value, results in 

ery of 95.5 percent for the ten-year 

details on how implementing FAS 158 

pro forma financial statements, refer t

and 5 at the end of this chapter.

3. In 2005, the Board approved c

method from using the average of th

three analytical methods—the com

counting earnings model, the disco

flow model, and the capital asset pr

(CAPM)—to using only the CAPM.

4. Financial data reported thro

chapter—revenue, other income, co

enue, and income before taxes—can 

the pro forma financial statements a

this chapter. Other income is revenue 
Commercial Check Collection

Service

In 2006, operating expenses and imputed costs for the Reserve Banks’ commercial check collection service totaled

$716.9 million, of which $35.4 million

was attributable to the transportation of

commercial checks between Reserve

Bank check-processing centers. Revenue amounted to $745.0 million, of

which $34.2 million was attributable

to estimated revenues derived from

the transportation of commercial

checks between Reserve Bank checkprocessing centers, and other income

was $100.7 million. The resulting net

income was $128.7 million. Check service revenue in 2006 increased $4.7 million from 2005, largely because of price

increases and faster-than-anticipated

adoption of check-processing 

associated with the Check Cl

the 21st Century Act (Check 2

The Reserve Banks handled 

lion checks in 2006, a decrea

percent from 2005 (table). Th

in Reserve Bank check volum

sistent with nationwide tren

from the use of checks an

greater use of electronic paym

ods.6 Of all the checks presen

Reserve Banks to paying bank

14.0 percent of the checks we

ited and 4.3 percent were pre

ing Check 21 products, comp

1.8 percent and 0.0 percen

ment of clearing balances net of earnings credits,

an amount termed net income on clearing balances. Total cost is the sum of operating expenses,

imputed costs (interest on debt, interest on float,

sales taxes, and the FDIC assessment), imputed

income taxes, and the targeted return on equity.

5. The Reserve Banks’ Check 21 p

includes electronic alternatives to pape

lection, return, and presentment.

6. The Federal Reserve System’s 

ments research suggests that the numb

written in the United States has be

since the mid-1990s. For details, 

Reserve System, “The 2004 Fede

Payments Study: Analysis of Nonca

Trends in the United States, 

(December 2004). (www.frbservice

pdf/2004PaymentResearchReport.pdf

Priced Services Cost Recovery, 1997–2006

Millions of dollars except as noted

Year Revenue from

services1

Operating

expenses and

imputed costs2

Targeted return

on equity

Total

costs

C

(

1997 ...................... 818.8 752.8 54.3 807.1 

1998 ...................... 839.8 743.2 66.8 809.9 

1999 ...................... 867.6 775.7 57.2 832.9 

2000 ...................... 922.8 818.2 98.4 916.6 

2001....................... 960.4 901.9 109.2 1,011.1 

2002 ...................... 918.3 891.7 92.5 984.3 

2003 ...................... 881.7 931.3 104.7 1,036.1 

2004 ...................... 914.6 842.6 112.4 955.0 

2005 ...................... 994.7 834.7 103.0 937.7 

2006 . . . . . . . . . . . . . . . . . . . . . . 1,031.2 875.5 72.0 947.5 

1997–2006 . . . . . . . . . . . . . . . . 9,149.9 8,367.5 870.5 9,238.1 

Note: Here and elsewhere in this chapter, totals and

percentages may not reflect components shown because

of rounding.

1. For the ten-year period, includes revenue from services of $8,727.4 million and other income and expense

(net) of $422.5 million.

2. For the ten-year period, includes operating expenses

of $7,722.6 million, imputed costs of $296

imputed income taxes of $348.5 million.

3. Revenue from services divided by tot

4. For the ten-year period, cost recover

cent, including the reduction in equity relat

reported by the priced services in 2006.
tively, in 2005.7 Overall, the price index

for check services increased 3.6 percent

from 2005.

In response to the continuing decline

in check volume, the Reserve Banks in

2006 continued to reduce check service

operating costs through a combination

of measures, including consolidating

some check-processing sites. Check processing at New Orleans has now been

consolidated to Atlanta; New York’s

East Rutherford Operations Center to

Philadelphia; Columbus to Cleveland;

and Boston to Windsor Locks, Connecticut. Additional consolidations are

planned for 2007 and beyond.

Commercial Automated

Clearinghouse Services

Reserve Bank operating expenses and

imputed costs for commercial automated

clearinghouse (ACH) services totaled

$80.1 million in 2006. Revenue from

ACH operations totaled $80.5 million

and other income totaled $10.9 million,

resulting in net income of $11.3 million.

The Banks processed 8.2 billion commercial ACH transactions (worth $13.1

trillion), an increase of 12.

from 2005. Overall, the price 

ACH services decreased 9.

from 2005.

In 2006, the Reserve Ban

offering ACH risk-managemen

to all depository institutions. T

vices help originating institut

age the operational and credit 

ciated with originating ACH 

By the end of 2006, 76 financ

tions subscribed to these servi

Fedwire Funds and

National Settlement Service

Reserve Bank operating exp

imputed costs for the Fedw

and National Settlement Ser

taled $59.3 million in 2006. 

from these operations totaled $

lion and other income amount

million, resulting in net incom

million.

Fedwire Funds Service

The Fedwire Funds Service a

ticipants to draw on their r

clearing balances at the Reser

and transfer funds to other in

that maintain accounts at the 

2006, the number of Fedw

transfers originated by deposi

7. The Reserve Banks also offer non-Check 21

electronic presentment products. In 2006, 25.2

percent of the Reserve Banks’ deposit volume was

presented to paying banks using these products.

Activity in Federal Reserve Priced Services, 2004–2006

Thousands of items

Service 2006 2005 2004

Percent c

2005 to 2006 2

Commercial check . . . . . . . . . . . . . . . . . 10,982,367 12,195,301 13,904,382 –9.9 

Commercial ACH . . . . . . . . . . . . . . . . . . 8,230,782 7,338,950 6,486,091 12.2 

Funds transfer ..................... 136,399 135,227 128,270 0.9 

Multilateral settlement . . . . . . . . . . . . . 470 440 435 6.8 

Securities transfer . . . . . . . . . . . . . . . . . . 9,053 9,235 9,208 –2.0 

Note: Activity in commercial check is the total number of commercial checks collected, including processed

and fine-sort items; in commercial ACH, the total number

of commercial items processed; in funds transfer and

securities transfer, the number of transacti

online and offline; and in multilateral s

number of settlement entries processed.
tutions increased 0.9 percent from 2005,

to approximately 136.4 million. The

average daily value of Fedwire funds

transfers in 2006 was $2.3 trillion. Overall, the price index for the Fedwire

Funds and National Settlement Services

increased 3.4 percent from 2005.

Last year, the Reserve Banks collaborated with The Clearing House Payments Company to study the use of

funds transfers for business-to-business

payments. The study examined why

businesses select one payment type over

another and what changes are needed to

make funds transfers a more attractive

payment alternative. Key findings from

the study suggested that businesses

wanted a more streamlined process for

making funds transfers and favored the

inclusion of remittance information in

funds transfer orders.

National Settlement Service

The National Settlement Service is a

multilateral settlement system that

allows participants in private-sector

clearing arrangements to exchange and

settle transactions on a net basis using

reserve or clearing balances. In 2006,

the service processed settlement files for

approximately fifty-four local and national private arrangements, primarily

check clearinghouse associations. The

Reserve Banks processed slightly more

than 17,300 files that contained more

than 470,000 settlement entries for these

arrangements in 2006.

Fedwire Securities Service

The Fedwire Securities Service allows

participants to transfer electronically securities issued by the U.S. Treasury, federal government agencies, governmentsponsored enterprises, and certain

international organizations to other participants in the service.8 Rese

operating expenses and impu

for providing this service tota

million in 2006. Revenue from 

vice totaled $19.2 million, 

income totaled $2.6 million, re

net income of $2.7 million. O

price index for the service 

2.8 percent from 2005.

In 2006, approximately 9

non-Treasury securities trans

processed by the service, sligh

than in 2005. Last year, the 

Banks also implemented 

changes to the Fedwire Secu

vice applications to support c

the Federal Reserve Policy on 

System Risk (PSR). The PS

changes require that gov

sponsored enterprises and cer

national organizations fund 

and interest payments be

Reserve Banks distribute th

ments in order to limit the cr

sure of the Reserve Banks.

Float

The Federal Reserve had dail

credit float of $85.9 million 

compared with debit float of $

lion in 2005.9

8. The expenses, revenues, volum

reported here are for transfers of secu

by federal government agencies, g

sponsored enterprises, and certain 

organizations. The Reserve Banks p

sury securities services in their role 

Treasury’s fiscal agent. These serv

considered priced services. For deta

section “Debt Services” later in this c

9. Credit float occurs when the Re

present items for collection to the 

prior to providing credit to the depo

and debit float occurs when the Re

credit the depositing bank prior to pres

for collection to the paying bank.
Developments in

Currency and Coin

The Federal Reserve Banks distribute

the nation’s currency (in the form of

Federal Reserve notes) and coin through

depository institutions and also receive

currency and coin from circulation

through these institutions. As currency

flows into the Reserve Banks, the Banks

inspect the notes and destroy those that

are unfit for recirculation.

The Reserve Banks received 38.5 billion Federal Reserve notes from circulation in 2006, a 3.5 percent increase from

2005, and made payments of 39.1 billion notes into circulation in 2006, a

1.5 percent increase from 2005. They

received 59.7 billion coins from circulation in 2006, a 6.5 percent increase from

2005, and made payments of 73.9 billion coins into circulation, a 2.7 percent

increase from 2005.

In March, the Board approved a policy that provides incentives to encourage depository institutions to recirculate

fit currency to their customers rather

than return it to the Federal Reserve for

processing. Under the policy, the Federal Reserve implemented a custodial

inventory program that allows depository institutions to transfer a portion of

the currency holdings in their vaults to

the books of a Reserve Bank. As of

December 31, the Reserve Banks had

established twenty-nine custodial inventory sites with depository institutions. Beginning in July 2007, the

Reserve Banks will charge fees to institutions that, within a one-week period,

deposit fit $10 or $20 notes and reorder

currency of the same denomination,

above a de minimis amount, within the

same Reserve Bank office’s service

area.

In March, the Reserve Banks began

issuing the redesigned $10 Federal

Reserve note that includes enhanced security features and subtle ba

colors.

The Presidential $1 Coin 

quires, among other things, tha

eral Reserve and the Mint tak

ensure that an adequate supp

coins is available for commerc

end, the Federal Reserve wo

the United States Mint to d

effective distribution strategy 

dential $1 coins, the first of w

issued by the Mint in Febru

Consistent with the requireme

Presidential $1 Coin Act, th

Reserve and the Mint condu

reach to depository institution

users in an effort to gauge de

the coins and to anticipate and 

obstacles to the efficient circ

$1 coins.

The Reserve Banks conduc

sive testing of a prototype u

the high-speed currency-proce

chines. The Reserve Banks w

implementing the upgrades on 

chines in 2007; the upgrades 

uled to be completed in 2009.

The Federal Reserve deve

requirements for an automatio

to replace the current platform 

support and facilitate the Syst

vision of cash services. The 

Banks issued a preview reque

posal for development of the 

mation system and held an o

with potential vendors in Dece

The Reserve Banks complet

prehensive study of cost-effec

natives to the existing infrastr

providing cash services. T

resulted in the elimination of 

cessing at the Oklahoma City 

mingham offices in March 

respectively, and the replac

these offices with outsourced 

pots. In these cash depot arra

armored carrier facilities serve 

tion and distribution points fo
tory institutions’ currency deposits and

orders. The deposits and orders are

transported to and from the nearest

Reserve Bank by armored carrier for

processing.

Developments in

Fiscal Agency and

Government Depository Services

As fiscal agents and depositories for the

federal government, the Federal Reserve

Banks provide services related to the

federal debt, help the Treasury collect

funds owed to the federal government,

process electronic and check 

for the Treasury, maintain 

sury’s bank account, and inv

Treasury balances. The Reser

also provide limited fiscal ag

depository services to other en

The total cost of providi

agency and depository servic

Treasury and other entities 

amounted to $426.1 million, 

with $396.2 million in 200

Treasury-related costs were $3

lion in 2006, compared with $

lion in 2005, an increase of 7.

The cost of providing service

Expenses of the Federal Reserve Banks for Fiscal Agency and Depository Servi

2004–2006

Thousands of dollars

Agency and service 2006 2005 

Department of the Treasury

Bureau of the Public Debt

Treasury retail securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,931.4 86,503.2 1

Treasury securities safekeeping and transfer . . . . . . . . . . . . . 7,535.2 6,055.8 

Treasury auction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,594.9 17,553.5 

Computer infrastructure development and support . . . . . . . 3,853.1 2,575.5 

Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,578.7 1,806.5 

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,493.2 114,494.5 

Financial Management Service

Payment services

Government check processing . . . . . . . . . . . . . . . . . . . . . . . . 20,918.6 20,988.0 

Automated clearinghouse . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,823.1 5,709.5 

Fedwire funds transfers .............................. 123.1 109.4 

Other payment programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,696.8 49,366.0 

Collection services

Tax and other revenue collections . . . . . . . . . . . . . . . . . . . . 37,095.5 39,736.0 

Other collection programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,122.6 14,354.2 

Cash-management services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,320.2 40,496.7 

Computer infrastructure development and support . . . . . . . 67,046.4 67,703.3 

Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,414.8 2,332.2 

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,561.2 240,795.4 

Other Treasury

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,786.3 15,726.7 

Total, Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397,840.7 371,016.6 3

Other Federal Agencies

Department of Agriculture

Food coupons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,929.8 2,642.4 

United States Postal Service

Postal money orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,334.4 7,647.8 

Other agencies

Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,977.1 14,870.2 

Total, other agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,241.4 25,160.4 

Total reimbursable expenses ............................ 426,082.1 396,177.0 3
entities was $28.2 million, compared

with $25.2 million in 2005. In 2006, as

in 2005, the Treasury and other entities

reimbursed the Reserve Banks for the

costs of providing these services.

Debt Services

The Reserve Banks auction, provide

safekeeping for, and transfer Treasury

securities. Reserve Bank operating expenses for these activities totaled

$31.1 million in 2006, compared with

$23.6 million in 2005. The Banks processed 148,000 commercial tenders for

Treasury securities, compared with

169,000 in 2005. They originated

12.9 million transfers of Treasury securities in 2006, a 1.8 percent increase

from 2005. The Reserve Banks are developing a new Treasury auction application and infrastructure that will provide increased functionality and

security. The application will be operational in late 2007.

The Reserve Banks also operate computer applications and provide customer

service and back-office support for the

Treasury’s retail securities programs.

Reserve Bank operating expenses for

these activities were $73.9 million in

2006, compared with $86.5 million in

2005. The Reserve Banks operate

Legacy Treasury Direct, a program that

allows investors to purchase and hold

Treasury securities directly with the

Treasury through the Reserve Banks instead of through a broker. The program

held $72 billion (par value) of Treasury

securities as of December 31. Because

the program was designed for investors

who plan to hold their securities to maturity, it does not provide transfer services. Investors may, however, sell their

securities for a fee through Sell Direct, a

program operated by one of the Reserve

Banks. Approximately 13,000 securities

worth $678.9 million were sold through

Sell Direct in 2006, compa

14,000 securities worth $874

in 2005. The Banks printed a

more than 28.9 million saving

2006, a 10 percent decrease fr

They issued more than 5.3 m

ries I (inflation-indexed) bond

million Series EE bonds.

Payments Services

The Reserve Banks process b

tronic and check payments for 

sury. Reserve Bank operating 

for processing government 

and for payments-related pro

taled $96.6 million in 2006, 

with $76.2 million in 2005. T

processed 991.6 million ACH 

for the Treasury, an increase o

cent from 2005, and more tha

Fedwire funds transfers. They 

cessed 192 million paper go

checks, a decline of 11 per

2005. In addition, the Banks is

than 170,000 fiscal agency 

decrease of 17.4 percent from 

Collection Services

The Reserve Banks suppor

Treasury programs to colle

owed the federal government

Bank operating expenses relate

programs totaled $51.2 million 

compared with $54.1 million 

The Banks operate the Federa

Electronic Tax Application (FR

an adjunct to the Treasury’s 

Federal Tax Payment System 

EFTPS allows businesses and 

taxpayers to pay their taxes 

cally. It uses the automated 

house (ACH) to collect fund

payments must be scheduled a

day in advance. Some busine

ers, however, do not know 

liability until the tax due date
allows these taxpayers to use EFTPS by

providing a same-day electronic federal

tax payment alternative. FR-ETA collected $456.3 billion for the Treasury in

2006, compared with $409.2 billion in

2005.

In addition, the Reserve Banks operate Pay.gov, a Treasury program that

allows members of the public to pay for

goods and services offered by the federal government over the Internet. They

also operate the Treasury’s Paper Check

Conversion and Electronic Check Processing programs, whereby checks written to government agencies are converted into ACH transactions at the point

of sale or at lockbox locations. In 2006,

the Reserve Banks originated more than

2.6 million ACH transactions through

these programs, roughly the same number of transactions as in 2005.

Cash-Management Services

The Treasury maintains its bank account

at the Reserve Banks and invests the

funds it does not need for current payments with qualified depository institutions through the Treasury Tax and Loan

(TT&L) program, which the Reserve

Banks operate. Reserve Bank operating

expenses related to this program and

other cash-management initiatives totaled $48.3 million in 2006, compared

with $40.5 million in 2005. The investments either are callable on demand or

are for a set term. In 2006, the Reserve

Banks placed a total of $309.2 billion in

immediately callable investments, which

includes funds invested through retained

tax deposits and direct, special direct,

and dynamic investments, and $508 billion in term investments. The rate for

term investments is set by auction; the

Reserve Banks held 104 such auctions

in 2006, roughly the same number of

auctions as in 2005. In 2006, the Treasury’s income from the TT&L program

was $1.04 billion. In March, 

launched the Repurchase A

Program, a pilot program th

Treasury to place a portion of 

operating funds directly with T

positaries through a repurchas

tion for a set period at an 

interest rate. In 2006, the Rese

placed a total of $478.9 billion 

ments through repurchase agre

Services Provided to Other 

The Reserve Banks provi

agency and depository service

domestic and international ent

required to do so by the Secret

Treasury or when required or 

to do so by federal statute. Th

of the work is securities-relate

Electronic Access to

Reserve Bank Services

In 2006, the Federal Reser

completed the migration of t

Line DOS customers to FedLin

tage. About 6,200 customers 

verted to FedLine Advantage

based access delivery channel 

used by small and medium-siz

tory institutions to access cri

ment services, such as the 

Funds, Fedwire Securities, 

Settlement, and FedACH Se

addition, the Reserve Banks b

grating their high-volume c

interface customers, which are 

large depository institutions, t

Direct, an internet-proto

computer-to-computer access 

channel for critical payment 

Also in 2006, the Reserve B

nounced a new option, 

Command, a lower-cost com

computer access delivery ch

FedACH customers. The Rese

will continue to migrate cus
FedLine Direct and FedLine Command

in 2007.

Information Technology

In early 2006, the Federal Reserve

Banks initiated the first phase of the

Information Security Architecture

Framework (ISAF), a program that will

cost $30.5 million by the end of 2008,

when this phase of the program will be

completed. The ISAF program is intended to respond to the continuing and

increasingly sophisticated threats facing

information technology systems and to

improve information security at all

points in the Federal Reserve System’s

networks. ISAF is a portfolio of initiatives to improve (1) targeted security

services by ensuring that overall risks

are reduced and the residual risks of

these services are acceptable and (2) the

overall efficiency and coherence of the

provisioning of these services.

The System established a National

Information Security Assurance (NISA)

function in 2006 to enhance information

security governance. By managing and

coordinating information security at the

enterprise level, NISA will have an integrated view of information security

compliance across the Reserve Banks.

NISA will implement a businessoriented model of information security

responsibility and accountability and

will establish comprehensive information security standards and processes for

all the Reserve Banks.

In mid-2006, the Federal Reserve

System adopted the Technology Project

Standards (TPS), a set of standards for

managing information technology

projects. The standards are based on the

Project Management Book of Knowledge (PMBOK), a recognized industry

best practice. All Reserve Banks are

expected to train their staff members

who are involved in information technology projects and to fully tra

the TPS by January 1, 2008.

Also in 2006, the Federa

Bank of New York migrated i

dealers (banks and securitie

dealers) to the FedTrade ap

which provides increased fun

and security. The FedTrade a

is used to execute various form

market operations using electr

tions with the primary d

bidders.

Throughout 2006, the Rese

continued to focus on initiati

duce IT costs over the long 

standardizing processes, incre

ductivity, and strengthening th

Reserve’s ability to respond 

security threats.

Examinations of the

Federal Reserve Banks

Section 21 of the Federal Re

requires the Board of Governo

an examination of each Federa

Bank at least once a year. T

performs its own reviews and 

public accounting firm. Th

accounting firm performs an a

dit of the combined financial s

of the Reserve Banks (see th

“Federal Reserve Banks C

Financial Statements”) and a

annual financial statements o

the twelve Banks. The Reser

use the framework establishe

Committee of Sponsoring Org

of the Treadway Commission 

in assessing their internal con

financial reporting, including 

guarding of assets. The Reser

have further enhanced their as

under the COSO frame

strengthen the key control asse

cess and in 2006 met the req

of the Sarbanes-Oxley Act 

Within this framework, mana
each Reserve Bank provides an assertion letter to its board of directors annually confirming adherence to COSO

standards, and a public accounting firm

confirms management’s assertion and

issues an attestation report to the Bank’s

board of directors and to the Board of

Governors.

The firm engaged for the audits of the

individual and combined financial statements of the Reserve Banks for 2006

was PricewaterhouseCoopers LLP

(PwC). Fees for these services totaled

$4.2 million. To ensure auditor independence, the Board requires that PwC be

independent in all matters relating to the

audit. Specifically, PwC may not perform services for the Reserve Banks or

others that would place it in a position

of auditing its own work, making management decisions on behalf of the

Reserve Banks, or in any other way

impairing its audit independence. In

2006, the Reserve Banks did not engage

PwC for nonaudit services.

The Board’s annual examination of

the Reserve Banks includes a wide range

of off-site and on-site oversight activities conducted by the Division of

Reserve Bank Operations and Payment

Systems. Division personnel monitor the

activities of each Reserve Bank on an

ongoing basis and conduct on-site

reviews based on the division’s riskassessment methodology. The examinations also include assessing the efficiency and effectiveness of the internal

audit function. To assess compliance

with the policies established by the Federal Reserve’s Federal Open Market

Committee (FOMC), the division also

reviews the accounts and holdings of the

System Open Market Account at the

Federal Reserve Bank of New York and

the foreign currency operations conducted by that Bank. In addition, PwC

audits the schedule of participated asset

and liability accounts and the related

schedule of participated in

counts at year-end. The FOMC 

the external audit reports and 

on the division’s examination

Income and Expenses

The accompanying table summ

income, expenses, and distrib

net earnings of the Federal 

Banks for 2005 and 2006.

Income in 2006 was $38,41

compared with $30,729 millio

Expenses totaled $4,056 millio

million in operating expenses, 

lion in earnings credits grant

pository institutions, $301 mil

sessments for expenditures by 

of Governors, and $492 milli

cost of new currency). Reve

priced services was $908 mi

additions to and deductions fro

net income showed a net 

$159 million. The loss was d

rily to interest expense on secu

under agreements to repurcha

in part, by unrealized gains 

denominated in foreign curren

ued to reflect current market 

rates. Statutory dividends paid 

ber banks totaled $871 million

lion more than in 2005; the 

reflects an increase in the c

surplus of member banks and 

quent increase in the paid-

stock of the Reserve Banks.

Payments to the U.S. Treas

form of interest on Federal 

notes totaled $29,052 million 

up from $21,468 million in 

payments equal net income 

deduction of dividends paid a

amount necessary to equate th

Banks’ surplus to paid-in ca

implementation of FAS 158 r

reduction to surplus of $1,84

and increased the amount ne

equate surplus to paid-in capita
In the “Statistical Tables” section of

this report, table 10 details the income

and expenses of each Reserve Bank for

2006 and table 11 shows a condensed

statement for each Bank for the years

1914 through 2006; table 9 is a statement of condition for each Bank, and

table 13 gives the number and annual

salaries of officers and employees for

each Bank. A detailed account of the

assessments and expenditures of the

Board of Governors appears in the section “Board of Governors Financial

Statements.”

Holdings of Securities and Loans

The Federal Reserve Banks’ average

daily holdings of securities and loans

during 2006 amounted to $794,395 million, an increase of $32,886 million

from 2005 (table). Holdings of U.S. government securities increased $32,879

million, and holdings of loans increased

$7 million. The average rate of interest

earned on the Reserve Banks’ holdings

of government securities increased to

4.59 percent, from 3.80 percen

and the average rate of intere

on loans increased to 5.44 per

3.49 percent.

Volume of Operations

Table 12 in the ’’Statistical Ta

tion shows the volume of ope

the principal departments of th

Reserve Banks for the ye

through 2006.

Federal Reserve Bank Pr

In 2006, construction continu

Kansas City Bank’s new hea

building and construction beg

San Francisco Bank’s new 

Branch building after the B

proved the project’s final de

multiyear renovation progra

New York Bank’s headquarter

continued, as did facility r

projects at several Reserve Ba

to accommodate the consoli

check activities. A long-term f

Income, Expenses, and Distribution of Net Earnings

of the Federal Reserve Banks, 2006 and 2005

Millions of dollars

Item 2006 

Current income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,410 

Current expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,264 

Operating expenses1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,987 

Earnings credits granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276 

Current net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,147 

Net additions to (deductions from, − ) current net income ............... –159 

Assessments by the Board of Governors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 793 

For expenditures of Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 

For cost of currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492 

Net income before payments to Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,195 

Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 871 

Transferred to surplus2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,272 

Payments to Treasury3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,052 

1. Includes a net periodic pension expense of $53 million in 2006 and a net periodic pension credit of $11 million in 2005.

2. The implementation of FAS 158 in 2006 reduced

surplus by $1,849 million and increased the 

transfer required to equate capital and surp

3. Interest on Federal Reserve notes.
development program at the St. Louis

Bank continued. Construction of a new

pedestrian-screening vestibule was completed, and construction of an addition

to the Board’s headquarters building began.

Security enhancement programs continue at several facilities. One such

project is the recently completed external perimeter security improvement

project at the Boston Bank. In addition,

the Richmond Bank continued construction of additional security improvements

to its headquarters building. The Dallas

Bank completed the purchase of property behind its headquarters building for

the construction of a remote vehiclescreening and shipping/receiving facility. Planning continues for a similar

screening facility at the Philadelphia

Bank.

Also during 2006, the Board approved the Richmond Bank’s purchase

of property adjacent to its headquarters

building for construction of a new parking garage. The sales of the 

Bank’s former Detroit Branch 

the Kansas City Bank’s Oklah

Branch building, and the San 

Bank’s Portland Branch build

finalized. Efforts to sell the 

Bank’s Little Rock Branch bui

tinued, as did efforts by the Da

to sell excess land at its 

Branch.

Activities for the Portlan

were moved to leased facil

Kansas City Bank sold its O

City Branch building and i

space in the building for the 

administrative activity. The 

ham Branch check and cash o

were relocated to the head off

lanta. The Birmingham buil

house the remaining Branch 

and available space will be lea

Table 14 in the “Statistica

section of this report details th

tion costs and net book val

Federal Reserve Banks and Br

Securities and Loans of the Federal Reserve Banks, 2004–2006

Millions of dollars except as noted

Item and year Total

U.S.

government

securities1

L

Average daily holdings 3

2004 ....................................... 719,647 719,494 

2005 ....................................... 761,509 761,295 

2006 ....................................... 794,395 794,174 

Earnings4

2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,347 22,344 

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,966 28,959 

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,464 36,452 

Average interest rate (percent)

2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.11 3.11 

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.80 3.80 

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.59 4.59 

1. Includes federal agency obligations.

2. Does not include indebtedness assumed by the Federal Deposit Insurance Corporation.

3. Based on holdings at opening of business.

4. Earnings have not been netted w

est expense on securities sold under a

repurchase.
Pro Forma Financial Statements for Federal Reserve Priced S

Pro Forma Balance Sheet for Priced Services, December 31, 2006 and 2005

Millions of dollars

Item 2006 2005

Short-term assets (Note 1)

Imputed reserve requirements

on clearing balances ............ 821.7 993.2

Imputed investments . . . . . . . . . . . . . . . . . 7,245.7 8,626.4

Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 73.6 77.0

Materials and supplies . . . . . . . . . . . . . . . 0.9 1.3

Prepaid expenses . . . . . . . . . . . . . . . . . . . . 24.2 25.6

Items in process of collection . . . . . . . . 3,391.0 5,934.4

Total short-term assets . . . . . . . . 11,557.1 

Long-term assets (Note 2)

Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424.9 424.5

Furniture and equipment ............. 127.9 156.1

Leases, leasehold improvements, and

long-term prepayments . . . . . . . . . . 83.3 88.5

Prepaid pension costs ................ 399.0 796.8

Deferred tax asset . . . . . . . . . . . . . . . . . . . . 146.0 0.0

Total long-term assets . . . . . . . . . 1,181.0 

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . 12,738.1 

Short-term liabilities

Clearing balances and balances

arising from early credit

of uncollected items . . . . . . . . . . . . . 8,015.6 10,703.2

Deferred-availability items . . . . . . . . . . . 3,592.5 5,163.0

Short-term debt . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0

Short-term payables .................. 100.4 126.2

Total short-term liabilities . . . . . 11,708.4 

Long-term liabilities

Long-term debt . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0

Postretirement/postemployment

benefits obligation .............. 392.8 275.0

Total long-term liabilities ..... 392.8 

Total liabilities . . . . . . . . . . . . . . . . . . . . . . 12,101.2 

Equity (including accumulated other

comprehensive loss of

$343.9 million at

December 31, 2006) ............ 636.9 

Total liabilities and equity (Note 3) . . . 12,738.1 

Note: Components may not sum to totals because of

rounding.

The accompanying notes are an integra

pro forma priced services financial stateme
Pro Forma Income Statement for Federal Reserve Priced Services, 2006 and 200

Millions of dollars

Item 2006 2005

Revenue from services provided

to depository institutions (Note 4) ...... 908.4 

Operating expenses (Note 5) ................ 803.5 

Income from operations .................... 104.8 

Imputed costs (Note 6)

Interest on float . . . . . . . . . . . . . . . . . . . . . . . . . –4.9 6.1

Interest on debt . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0

Sales taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.8 11.3

FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 5.9 0.0 

Income from operations after

imputed costs . . . . . . . . . . . . . . . . . . . . . . . . . 98.9 

Other income and expenses (Note 7)

Investment income ...................... 383.6 292.7

Earnings credits . . . . . . . . . . . . . . . . . . . . . . . . . –260.8 122.8 −199.0 

Income before income taxes ................ 221.8 

Imputed income taxes (Note 6) . . . . . . . . . . . . . 66.1 

Net income ................................ 155.7 

Memo: Targeted return on equity (Note 6) . . 72.0 

Note: Components may not sum to totals because of

rounding.

The accompanying notes are an integra

pro forma priced services financial stateme

Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 2

Millions of dollars

Item Total

Commercial

check

collection

Commercial

ACH

Fedwire

funds

Revenue from services

(Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . 908.4 745.0 80.5 63.6 

Operating expenses

(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . 803.5 658.2 74.7 52.9 

Income from operations ................ 104.8 86.8 5.8 10.7 

Imputed costs (Note 6) . . . . . . . . . . . . . . . . . 5.9 4.1 0.6 0.8 

Income from operations

after imputed costs . . . . . . . . . . . . . . . . 98.9 82.7 5.2 9.9 

Other income and expenses,

net (Note 7) . . . . . . . . . . . . . . . . . . . . . . 122.8 100.7 10.9 8.6 

Income before income taxes ............ 221.8 183.3 16.1 18.5 

Imputed income taxes

(Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . 66.1 54.6 4.8 5.5 

Net income ............................ 155.7 128.7 11.3 13.0 

Memo: Targeted return on

equity (Note 6) . . . . . . . . . . . . . . . . . . . 72.0 57.1 7.5 5.6 

Note: Components may not sum to totals because of

rounding.

The accompanying notes are an integra

pro forma priced services financial stateme
FEDERAL RESERVE BANKS

Notes to Pro Forma Financial Statements for Priced Services

(1) Short-Term Assets

The imputed reserve requirement on clearing balances

held at Reserve Banks by depository institutions reflects a

treatment comparable to that of compensating balances

held at correspondent banks by respondent institutions.

The reserve requirement imposed on respondent balances

must be held as vault cash or as non-earning balances

maintained at a Reserve Bank; thus, a portion of priced

services clearing balances held with the Federal Reserve

is shown as required reserves on the asset side of the

balance sheet. Another portion of the clearing balances is

used to finance short-term and long-term assets. The

remainder of clearing balances is assumed to be invested

in a portfolio of investments, shown as imputed

investments.

Receivables are (1) amounts due the Reserve Banks for

priced services and (2) the share of suspense-account and

difference-account balances related to priced services.

Materials and supplies are the inventory value of shortterm assets.

Prepaid expenses include salary advances and travel

advances for priced-service personnel.

Items in process of collection is gross Federal Reserve

cash items in process of collection (CIPC) stated on a

basis comparable to that of a commercial bank. It reflects

adjustments for intra-System items that would otherwise

be double-counted on a consolidated Federal Reserve

balance sheet; adjustments for items associated with nonpriced items, such as those collected for government

agencies; and adjustments for items associated with providing fixed availability or credit before items are received and processed. Among the costs to be recovered

under the Monetary Control Act is the cost of float, or net

CIPC during the period (the difference between gross

CIPC and deferred-availability items, which is the portion

of gross CIPC that involves a financing cost), valued at

the federal funds rate.

(2) Long-Term Assets

Consists of long-term assets used solely in priced services, the priced-service portion of long-term assets

shared with nonpriced services, and an estimate of the

assets of the Board of Governors used in the development

of priced services.

Effective December 31, 2006, the Reserve Banks

implemented FAS 158, which requires an employer to

record the funded status of its benefit plans on its balance

sheet, resulting in a reduction to the prepaid pension asset

related to priced services and the recognition of an associated deferred tax asset with an offsetting adjustment, net

of tax, to accumulated other comprehensive income

(AOCI) (see note 3).

(3) Liabilities and Equity

Under the matched-book capital structure for assets,

short-term assets are financed with short-term payables

and clearing balances. Long-term assets are financed with

long-term liabilities and clearing balances. As a result, no

short- or long-term debt is imputed. Other short-term

liabilities include clearing balances maintai

Banks and deposit balances arising from 

long-term liabilities consist of accrued po

postretirement, and nonqualified pension 

and obligations on capital leases.

In order to reflect the funded status of it

as required by FAS 158, the Reserve Ban

the deferred items related to these plans, 

prior service costs and actuarial gains or 

balance sheet. This resulted in an increase 

obligation related to the priced services an

adjustment, net of tax, to AOCI, which 

equity.

Equity is imputed at 5 percent of total a

(4) Revenue

Revenue represents charges to depository i

priced services and is realized from ea

through one of two methods: direct charge

tion’s account or charges against its accu

ings credits.

(5) Operating Expenses

Operating expenses consist of the direct, 

other general administrative expenses of 

Banks for priced services plus the expe

members of the Board of Governors worki

the development of priced services. The 

Board staff members were $7.5 million in 

million in 2005.

Effective January 1, 1987, the Reserve 

mented the Financial Accounting Stand

Statement of Financial Accounting Stand

Employers’ Accounting for Pensions (FAS 

ingly, the Reserve Banks recognized opera

for the qualified pension plan of $11.5 m

and a credit to expenses of $1.3 million in 

ing expenses also include the nonqualifie

pense of $3.2 million in 2006 and $1.0 m

The implementation of FAS 158 does n

systematic approach required by gener

accounting principles to recognize the ex

ated with the Reserve Banks’ benefit plans 

statement.

The income statement by service reflect

erating expenses, and imputed costs. Cer

overhead costs not closely related to any pa

service are allocated to priced services 

expense-ratio method. Corporate overhead 

among the priced services during 2006 

follows (in millions):

2006 

Check . . . . . . . . . . . . . . . . . . . . . 30.6 

ACH . . . . . . . . . . . . . . . . . . . . . . 4.1 

Fedwire funds . . . . . . . . . . . . . . 2.8 

Fedwire securities . . . . . . . . . . 1.5 

Total . . . . . . . . . . . . . . . . . . . . . . 39.0 
(6) Imputed Costs

Imputed costs consist of income taxes, return on equity,

interest on debt, sales taxes, the FDIC assessment, and

interest on float. Many imputed costs are derived from the

private-sector adjustment factor (PSAF) model. The cost

of debt and the effective tax rate, which reflect bank

holding company data as the proxy for a private-sector

firm, are used to impute debt and income taxes in the

PSAF model. The after-tax rate of return on equity is

based on the returns of the equity market as a whole and

is used to impute the profit that would have been earned

had the services been provided by a private-sector firm.

Interest is imputed on the debt assumed necessary to

finance priced-service assets; however, no debt was imputed in 2006 or 2005. The sales taxes and FDIC assessment that the Federal Reserve would have paid had it

been a private-sector firm are also among the components

of the PSAF.

Interest on float is derived from the value of float to be

recovered, either explicitly or through per-item fees, during the period. Float costs include costs for checks,

book-entry securities, ACH, and funds transfers.

Float cost or income is based on the actual float

incurred for each priced service. Other imputed costs are

allocated among priced services according to the ratio of

operating expenses less shipping expenses for each service to the total expenses for all services less the total

shipping expenses for all services.

The following list shows the daily average recovery of

actual float by the Reserve Banks for 2006 in millions of

dollars:

Total float –84.7

Unrecovered float 15.6

Float subject to recovery –100.3

Sources of recovery of float

Income on clearing balances –10.0

As-of adjustments –1.2

Direct charges 497.6

Per-item fees –589.1

Unrecovered float includes float generat

to government agencies and by other cen

vices. Float recovered through income on 

ances is the result of the increase in inve

balances; the increase is produced by a dedu

for cash items in process of collection, w

imputed reserve requirements. The incom

balances reduces the float to be recovered 

means. As-of adjustments and direct charge

that is created by interterritory check tran

the observance of non-standard holidays by 

tory institutions. Such float may be recov

depository institutions through adjustment

reserve or clearing balances or by billin

directly. Float recovered through direct ch

item fees is valued at the federal funds ra

recovered through per-item fees has been su

the cost base subject to recovery in 2006.

(7) Other Income and Expenses

Consists of investment income on clearing 

the cost of earnings credits. Investment inc

ing balances for 2006 and 2005 represen

coupon-equivalent yield on three-month 

plus a constant spread, based on the return 

of investments. In both years, the return is 

total clearing balance maintained, adjusted 

of reserve requirements on clearing balan

for earnings credits granted to depository 

their clearing balances are derived by ap

counted average coupon-equivalent yield o

Treasury bills to the required portion o

balances, adjusted for the net effect of re

ments on clearing balances.
The Board of Governors and the

Government Performance and Results Act

The Government Performance and

Results Act (GPRA) of 1993 requires

that federal agencies, in consultation

with Congress and outside stakeholders,

prepare a strategic plan covering a multiyear period and submit an annual performance plan and performance report.

Although the Federal Reserve is not

covered by the GPRA, the Board of

Governors voluntarily complies with the

spirit of the act.

Strategic Plan, Performance

Plan, and Performance Report

The Board’s strategic plan articulates

the Board’s mission, sets forth major

goals, outlines strategies for achieving

those goals, and discusses the environment and other factors that could affect

their achievement. It also addresses

issues that cross agency jurisdictional

lines, identifies key quantitative performance measures, and discusses performance evaluation. The most recent strategic plan covers the period 2006–09.

Both the performance plan and the

performance report are prepared biennially. The performance plan sets forth

specific targets for some of the performance measures identified in the strategic plan and describes the operational

processes and resources needed to meet

those targets. It also discusses data validation and results verification. The most

recent performance plan covers the

period 2006–07.

The performance report discusses the

Board’s performance in relation to its

goals. The most recent performance report indicates that the Board 

met its goals for 2004–05.

All of the aforementioned d

are available on the Board’s 

at www.federalreserve.gov/b

rptcongress. The Board’s mis

ment and a summary of th

Reserve’s goals and objectiv

forth in the most recently rele

tegic and performance plans, 

below.

Mission

The mission of the Board is to 

stability, integrity, and efficien

nation’s monetary, financial, 

ment systems so as to promo

macroeconomic performance.

Goals and Objectives

The Federal Reserve has six 

goals with interrelated and mu

inforcing elements.

Goal

To conduct monetary policy 

motes the achievement of 

sustainable long-term growth 

price stability that fosters that 

Objectives

v Stay abreast of recent dev

and prospects in the U.S. 

and financial markets, and 

abroad, so that monetary po

sions will be well informed.

v Enhance our knowledge of 

tural and behavioral relatio
the macroeconomic and financial markets, and improve the quality of the

data used to gauge economic performance, through developmental research activities.

v Implement monetary policy effectively in rapidly changing economic

circumstances and in an evolving

financial market structure.

v Contribute to the development of U.S.

international policies and procedures,

in cooperation with the U.S. Department of the Treasury and other

agencies.

v Promote understanding of Federal

Reserve policy among other government policy officials and the general

public.

Goal

To promote a safe, sound, competitive,

and accessible banking system and

stable financial markets

Objectives

v Promote overall financial stability,

manage and contain systemic risk, and

identify emerging financial problems

early so that crises can be averted.

v Provide a safe, sound, competitive,

and accessible banking system

through comprehensive and effective

supervision of U.S. banks, bank and

financial holding companies, foreign

banking organizations, and related

entities. At the same time, remain

sensitive to the burden on supervised

institutions.

v Provide a dynamic work environment

that is challenging and rewarding. Enhance efficiency and effectiveness,

while remaining sensitive to the burden on supervised institutions, by addressing the supervision function’s

procedures, technology, resource allocation, and staffing issues.

v Promote compliance by dom

foreign banking organizatio

vised by the Federal Res

applicable laws, rules, re

policies, and guidelines t

comprehensive and effectiv

sion program.

Goal

To effectively implement fed

designed to inform and protec

sumer, to encourage commun

opment, and to promote acces

ing services in historically un

markets

Objectives

v Take a leadership role in sh

national dialogue on consum

tion in financial services, a

the rapidly emerging issues 

today’s consumers, strengthe

sumer compliance supervi

grams when required, and 

sensitive to the burden on s

institutions.

v Promote, develop, and stren

fective communications and 

rations within the Board, th

Reserve Banks, and other 

and organizations.

v Increase public understandin

sumer protection and comm

velopment and the Board’

these areas through increased 

and by developing program

dress the information need

sumers and the financial 

industry.

v Develop a staff that is high

professional, innovative, an

providing career developm

portunities to ensure the 

of highly productive staff an

ing highly qualified an

employees.
v Promote an efficient and effective

work environment by aligning business functions with appropriate work

processes and implementing solutions

for work products and processes that

can be handled more efficiently

through automation.

Goal

To foster the integrity, efficiency, and

accessibility of U.S. payment and settlement systems

Objectives

v Develop sound, effective policies and

regulations that foster payment system integrity, efficiency, and accessibility. Support and assist the Board in

overseeing U.S. dollar payment and

securities settlement systems by assessing their risks and risk management approaches against relevant policy objectives and standards.

v Conduct research and analysis that

contributes to policy development and

increases the Board’s and others’ understanding of payment system dynamics and risk.

Goal

To provide high-quality professional

oversight of Reserve Banks

Objective

v Produce high-quality assessments and

oversight of Federal Reserve System

strategies, projects, and operations,

including adoption of technology to

the business and operational needs of

the Federal Reserve. The oversight

process and outputs should help Federal Reserve management foster and

strengthen sound internal control systems, efficient and reliable operations,

effective performance, an

project management and sho

the Board in the effective di

its oversight responsibilities

Goal

To foster the integrity, effici

effectiveness of Board program

Objectives

v Oversee a planning and bu

cess that clearly identifies th

mission, results in concise 

the effective accomplishme

erations, transmits to the st

formation needed to attain 

efficiently, and allows the 

measure our accomplishmen

v Develop appropriate polic

sight mechanisms, and me

criteria to ensure that the r

training, and retention of 

Board needs.

v Establish, encourage, and 

climate of fair and equitable 

for all employees regardles

creed, color, national origin

sex.

v Provide financial managem

port needed for sound 

decisions.

v Provide cost-effective an

information resource ma

services to Board division

divisional distributed-proce

quirements, and provide an

information technology issu

Board, Reserve Banks, othe

regulatory institutions, an

banks.

v Efficiently provide safe, mo

secure facilities and necessa

for activities conducive to 

and effective Board operatio
Federal Legislative Developments

The following federal laws enacted during 2006 affect the Federal Reserve System and the institutions it regulates: the

Financial Services Regulatory Relief

Act of 2006; the Unlawful Internet

Gambling Enforcement Act of 2006; the

Military Personnel Financial Services

Protection Act; and the Financial Netting Improvements Act of 2006.

Financial Services

Regulatory Relief Act of 2006

On October 13, 2006, President Bush

signed into law the Financial Services

Regulatory Relief Act of 2006 (Regulatory Relief Act), culminating more than

four years of work by Congress, the

Board, and other interested parties. The

act incorporates a number of significant

monetary policy, supervisory, and regulatory provisions that were proposed or

supported by the Board. These provisions should reduce unnecessary burden

on banking organizations and improve

operation of the financial system. The

most important provisions of the Regulatory Relief Act affecting the Federal

Reserve System and banking organizations supervised by the Federal Reserve

are discussed below. Except as noted

below, the act became effective on October 13, 2006.

Monetary Policy Provisions

Authority to Pay Interest

on Balances Held at Reserve Banks

and Greater Flexibility in Setting

Reserve Requirements

For monetary policy purposes, federal

law obliges the Board to establish reserve requirements on certain 

held at depository institut

mandates that the Board set 

of required reserves on tr

accounts above a certain p

(8 percent for amounts abov

called low reserve tranche, a

cent for amounts within the lo

tranche). Because the Federa

does not pay interest on balanc

Reserve Banks to meet reserv

ments, depositories have an in

reduce their reserve balances 

mum. To do so, they engage in 

of reserve-avoidance activitie

ing using “sweep” arrangem

move funds from accounts tha

ject to reserve requirements to 

and money market investmen

not. These sweep programs a

activities absorb resources and 

diminish banking system e

Depository institutions also m

tarily hold contractual clearing 

and excess reserve balances at 

Bank. These balances also do n

itly earn interest, although c

clearing balances implicitly ea

in the form of credits that ma

to pay for Federal Reserve 

such as check clearing.

The Regulatory Relief Act 

Federal Reserve the authority

as of October 1, 2011, to pa

interest on all types of balance

ing required reserves, excess 

and contractual clearing balan

by or for depository institut

Reserve Bank. Paying intere

quired reserve balances, on

rized, will remove a substanti

of the incentive for depos
engage in reserve-avoidance measures,

and the resulting improvements in efficiency should eventually be passed

through to bank borrowers and depositors.

Moreover, if the Board were to determine to pay explicit interest on contractual clearing balances, once authorized

to do so, the action could provide a

stable enough supply of voluntary balances to allow the Federal Reserve to

effectively implement monetary policy

using existing procedures without the

need for required reserves.

Importantly, the Regulatory Relief

Act gives the Board the discretion, effective as of October 1, 2011, to lower

the ratio of reserves that a depository

institution must maintain against its

transaction accounts below the ranges

currently established by law, including

potentially establishing a zero reserve

ratio. Thus, once these authorities

become effective, the Board could reduce

or even eliminate reserve requirements if

it determined that such action was consistent with the effective implementation of

monetary policy. Such action, if taken,

would reduce a significant regulatory

burden for all depository institutions.

Having the authority to pay interest

on excess reserves also will enhance the

Federal Reserve’s monetary policy toolkit. If the Board were to determine to pay

interest on such balances at some point in

the future, the rate paid would act as a

minimum for overnight interest rates

and, thus, could help mitigate potential

volatility in overnight interest rates.

Authority for Member Banks

to Use Pass-Through Reserves

The Regulatory Relief Act also eliminated the statutory provisions that prohibited banks that are members of the

Federal Reserve from counting as

reserves their deposits in other banks

that are “passed through” by those banks

to the Federal Reserve as re

serve balances. These ame

once implemented, will enabl

and state member banks to ta

tage of the same type of pas

reserve arrangements previou

able only to state nonmember 

Supervisory and

Regulatory Provisions

Rules Implementing the “Brok

Exceptions for Banks Adopted 

Part of the Gramm-Leach-Bli

Before the Gramm-Leach-B

(GLB Act) of 1999, banks had 

exception from the definition 

ker” in the Securities Exchan

1934. This meant that ban

engage in any type of securiti

permissible under federal 

banking laws without registe

the Securities and Exchange 

sion (SEC) as a broker and wit

plying with the SEC’s rules 

to registered brokers. In the 

Congress eliminated this blank

tion for banks from the def

“broker” and replaced it wi

exceptions for broad types of 

activities conducted by bank

new activity-focused excepti

designed and intended to allow 

continue to provide their custo

securities services as part of t

trust, fiduciary, custodial, a

banking functions. The SEC 

comment on rules that would i

these “broker” exceptions for 

2001 and 2004.

The Regulatory Relief Ac

that the SEC and the Board, w

days of enactment, jointly req

ment on a new “single set” o

implement the “broker” exce

banks that were adopted as p

GLB Act. The Regulatory R
also requires that the SEC and the Board

jointly adopt a “single set” of final rules

to implement these exceptions after consulting with, and seeking the concurrence of, the Office of the Comptroller

of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and

the Office of Thrift Supervision (OTS).

In addition, the act provides that the

single set of final rules adopted jointly

by the Board and the SEC shall supersede the rules previously issued by the

SEC to implement these exceptions.

On December 18, 2006—well before

the end of the 180-day period established by the Regulatory Relief Act—

the Board and the SEC issued and requested comment on joint proposed

rules to implement the “broker” exceptions for banks. See 71 FR 77,522

(Dec. 26, 2006). These joint proposed

rules—designated Regulation R—are

designed to accommodate the securities

activities that banks conduct as part of

their normal banking functions, consistent with the purposes of the GLB Act.

Expanded Eligibility for EighteenMonth Examination Schedule

for Small Banks

The Regulatory Relief Act expands the

number of well-capitalized and wellmanaged small insured depository institutions that may qualify for an eighteenmonth (rather than a twelve-month) onsite safety and soundness examination

schedule. Before the act, an insured

depository institution could qualify for

an extended eighteen-month safety and

soundness examination schedule only if

the institution had less than $250 million in total assets, was well capitalized

and well managed, and met certain other

supervisory criteria. See 12 USC

1820(d)(4). The act raised this $250 million asset threshold for an eighteenmonth exam cycle to $500 million,

thereby allowing additional sm

run institutions to potentially q

an extended examination sch

January 11, 2007, President 

signed into law a compleme

Pub. L. 109-473, that allows a

depository institution that m

new $500 million total assets 

to potentially qualify for an 

month on-site exam cycle if t

tion received a composite 

either a 1 or a 2 at its most rec

and soundness examination.

Nonwaiver of Privileges

The Regulatory Relief Act in

important provision that shou

tate the sharing of information 

banking organizations and fed

and foreign banking authoritie

cally, the act provides that any 

(for example, attorney-client 

product privilege) a person 

with respect to informatio

waived or destroyed if the pe

vides that information to “an

banking agency, state bank s

or foreign banking authority fo

pose in the course of the supe

regulatory process of such ag

pervisor, or authority.”

Voting State Representative Ad

the Federal Financial Institut

Examination Council

Another provision of the R

Relief Act adds a state represe

a voting member of the Fede

cial Institutions Examination 

(FFIEC). Specifically, the act 

for the current State Liaison C

of the FFIEC (which is com

five representatives of state su

agencies for depository instit

elect a chairperson, and a

chairperson as a full voting m

the FFIEC.
Elimination of Certain Reporting

Requirements Relating to

Insider Lending

The Regulatory Relief Act eliminated

certain reporting requirements previously imposed on banks and their executive officers and principal shareholders

that the federal banking agencies did not

find particularly useful in monitoring

insider lending or preventing insider

abuse. Specifically, the act eliminated

the statutory provisions that previously

required

• an executive officer of a bank to file a

report with the bank’s board of directors whenever the executive officer

obtained a loan from another bank in

an amount that exceeded the amount

the executive officer could obtain

from his or her own bank (12 USC

375a(g)(6)),

• a bank to file a separate report with its

quarterly Call Report concerning any

loans the bank made to its executive

officers since its previous Call Report

(12 USC 375a(g)(9)), and

• an executive officer or principal shareholder of a bank to file an annual

report with the bank’s board of directors if the officer or shareholder had a

loan outstanding from a correspondent bank of the bank (12 USC

1972(2)(G)).

Although the act eliminated these reporting requirements, it did not alter the

statutory and regulatory limits and restrictions on lending to insiders or the

ability of the federal banking agencies

to examine for potential insider lending

abuses as part of the supervisory process. On December 6, 2006, the Board

adopted, on an interim basis, and requested public comment on amendments

to the Board’s Regulation O (12 CFR

215) that implement the elim

these reporting requirements. S

71,472 (December 11, 2006).

Streamlining the Supervisory 

for Bank Merger Transactions

The Regulatory Relief Act st

the supervisory process for Ban

Act (12 USC 1828(c)) trans

two respects. First, it eliminate

for the responsible agency i

Merger Act transaction to req

port on the competitive effec

transaction from each of the 

eral banking agencies, as w

Attorney General. Instead, th

quires that the responsible a

quest a competitive factors re

from the Attorney General an

a copy of the request to the FD

not the responsible agency). S

Regulatory Relief Act al

reviewing agency for a Ban

Act transaction to avoid req

competitive factors report from 

federal banking agencies and 

ney General if the transaction 

affiliated institutions. The act a

nates the post-approval waiti

for bank mergers involving aff

stitutions, as these transaction

do not present any competiti

The act does not, however, al

way the reviewing agency’s 

to conduct a competitive ana

proposed Merger Act transacti

Amendment Allowing the Boa

Grant Exceptions from the At

Rule in Section 2(g)(2) of the 

Holding Company Act

Section 2(g)(2) of the Bank 

Company Act (BHC Act) 

1841(g)(2)) provides that in a

stances, a company is deemed 

any shares that are held by a tr

benefit of the company or its s
ers, members, or employees. This attribution rule was intended to prevent a

bank holding company from using a

trust established for the benefit of its

management, shareholders, or employees to evade the BHC Act’s restrictions

on the acquisition of shares of banks and

nonbanking companies. However, the

rule can create inappropriate results in

situations in which the bank holding

company does not have the ability to

control, directly or indirectly, the shares

acquired by the trust. Accordingly, the

Regulatory Relief Act allows the Board

to waive application of this attribution

rule if the Board determines that the

exception is appropriate in light of the

facts and circumstances of the case and

the purposes of the BHC Act. Such an

exception might be appropriate, for

example, if the shares are held by the

trust as part of a participant-directed and

widely held 401(k) plan and the plan’s

investment options are selected by an

independent fiduciary (and not by the

bank holding company or its officers,

directors, or employees).

Streamlining Reports of Condition

The Regulatory Relief Act requires the

Board and the other federal banking

agencies to conduct a review of the

Call Report forms within one year of

enactment, and at least once every five

years thereafter, and to eliminate any

information or schedule that the agencies determine is no longer necessary or

appropriate.

Increase in Asset Threshold for the

Small Depository Institution Exception

under the Depository Institution

Management Interlocks Act

The Depository Institution Management

Interlocks Act, among other things, generally prohibits a management official

of one depository organization from

serving as a management offic

other nonaffiliated depository 

tion if the organizations hav

located in the same metropoli

tical area. The act provides an 

from this restriction if eac

depository organizations inv

less than a specified amoun

assets. The Regulatory Relief 

this specified amount from $2

to $50 million, thus allowing 

number of small depository 

tions to qualify for the excepti

Protection of Confidential Inf

Received by Federal Banking 

from Foreign Banking Superv

The Regulatory Relief Act cl

authority of the Board and 

federal banking agencies to ma

confidentiality of information 

from a foreign regulatory or su

authority. Specifically, the ac

that a federal banking agency 

be compelled to disclose in

received from a foreign regu

supervisory authority if publ

sure of the information wou

the law of the foreign countr

federal banking agency obtain

formation in connection with t

istration and enforcement of t

banking laws or under a mem

of understanding between th

authority and the agency. The 

ever, would not authorize the 

to withhold such information f

gress or if the information w

under a court order in an actio

by the United States or the ag

Modification to Cross-Market

Restrictions Applicable to

Merchant Banking Investment

Another provision of the Regu

lief Act allows the depository 

subsidiaries of a financial hold
pany, with prior Board approval, to

engage in cross-marketing activities

through “statement stuffers” and Internet web sites with nonfinancial portfolio

companies held by the financial holding

company under the GLB Act’s merchant banking authority. Previously, the

depository institution subsidiaries of a

financial holding company were permitted to engage, with Board approval, in

these limited types of cross-marketing

activities only with portfolio companies

held by the financial holding company

under the GLB Act’s insurance company investment authority.

Change in Bank Control Act

Amendments

The Regulatory Relief Act expands the

factors that the Board and the other federal banking agencies may consider in

determining whether to disapprove, or

extend the time period for processing, a

notice filed under the Change in Bank

Control Act (CIBC Act). In particular,

the act allows the appropriate federal

banking agency to disapprove a CIBC

Act notice if the agency determines that

the future prospects of the institution to

be acquired might jeopardize the stability of the institution or the interests of

depositors. (Currently, the financial and

managerial factors in the CIBC Act focus on the resources of the acquiring

person, not the institution to be acquired.) In addition, the act allows an

agency to extend the time for processing

a CIBC Act notice for up to an additional two 45-day periods (beyond the

initial 60-day review period and discretionary 30-day extension) if the agency

determines that additional time is needed

to analyze (1) the future prospects of the

institution to be acquired or (2) the safety

and soundness of any plans by the acquiring person to make major changes in

the business, corporate structure, or management of the institution.

Amendments to Allow D.C.-C

Banks to Become State Memb

The Regulatory Relief Act m

eral technical changes to th

Reserve Act to allow banks ch

the District of Columbia to bec

member banks.

Enforcement-Related Provi

Amendments Expanding the A

Suspension Authority

The Federal Deposit Insurance 

Act) currently allows the a

federal banking agency to 

remove, or prohibit an in

affiliated party (IAP) from pa

in the affairs of the deposito

tion with which he or she is a

the IAP is charged with or co

certain crimes involving d

breach of trust, or money la

See 12 USC 1818(g)(1). The R

Relief Act expands this aut

allowing the appropriate fede

ing agency to suspend an IAP 

been charged with such a cr

participating in the affairs of a

tory institution (not just the ins

which the IAP then serves). In 

the act clarifies that the ap

agency may suspend, remove

hibit an IAP even if the IAP is 

associated with any deposito

tion at the time the action is ta

Restricting the Ability of Conv

Individuals to Participate in t

of a Bank Holding Company 

Edge Act or Agreement Corpo

Section 19 of the Federal Dep

ance Act (12 USC 1829) auto

prohibits a person that has b

victed of a crime involving dis

breach of trust, or money l

from participating in the affa
insured depository institution without

the consent of the FDIC. The Regulatory Relief Act extends this prohibition

so that persons convicted of such crimes

also may not participate in the affairs of

a bank holding company (other than a

foreign bank), an Edge or agreement

corporation, or a savings and loan holding company unless the individual receives the prior consent of the Board or

the OTS, as appropriate. The Regulatory

Relief Act also gives the Board and the

OTS additional discretionary authority

to remove a person convicted of such a

crime from, respectively, a nonbank subsidiary of a bank holding company or a

savings and loan holding company.

Authority to Enforce

Deposit Insurance Conditions

Section 8 of the Federal Deposit Insurance Act currently permits the appropriate federal banking agency for an insured depository institution to enforce a

written condition imposed by that

agency on the institution or an IAP of

the institution. The Regulatory Relief

Act amended section 8 of the FDI Act to

allow the appropriate federal banking

agency for an institution to enforce a

condition imposed on an insured depository institution by another federal banking agency. This will allow, for example, the Board (as the appropriate

agency for a state member bank) to enforce a condition imposed on a state

member bank by the FDIC in connection with the bank’s application for deposit insurance

Standards for Enforcing Written

Conditions and Written Agreements

The Regulatory Relief Act also amended

section 8 of the Federal Deposit Insurance Act to allow the appropriate federal banking agency for an insured

depository institution to enforce a written condition imposed on the 

or an IAP, or a written agree

tered into by the agency with t

tion or IAP, without demonstr

the institution or IAP was un

riched or acted in reckless di

the law or a prior agency or

larly, the act allows the approp

eral banking agency for an und

ized institution to enforce 

condition imposed on, or 

agreement entered into with, t

tion or an IAP without rega

limit in the FDI Act (

1831o(e)(2)(E)) that normally 

liability of a controlling shareh

der a capital restoration plan.

Clarifying the Ability of the B

Agencies to Enforce Condition

Imposed in Connection with

CIBC Act Notices

The Regulatory Relief Act am

tion 8(b) of the Federal Depo

ance Act to provide that the a

federal banking agency for a

depository institution may enf

ten conditions imposed in c

with “any action on any ap

notice, or other request” by th

tory institution or an IAP. Thes

are designed to clarify and co

agencies’ ability to enforce 

imposed in connection with a n

under the Change in Bank Con

Board Approval of

OCC Removal Actions

The Regulatory Relief Act s

provision in the FDI Act (see 

1818(e)(4)) that required the 

issue a final decision in any 

administrative action by the 

remove or prohibit an IAP of 

bank. Thus, the OCC now has 

authority as the Board, the F

the OTS to independently r
prohibit an IAP of an institution under

the agency’s jurisdiction.

Consumer-Related Provisions

Public Welfare Investments by

National and State Banks

The Regulatory Relief Act makes several important modifications to the statutes that authorize national and state

member banks to make “public welfare”

investments. See 12 USC 24 (eleventh)

and 338a. First, it raises, from 10 percent of capital and surplus to 15 percent

of capital and surplus, the aggregate

amount of “public welfare” investments

that a national or state member bank

may make under these authorities.1 In

addition, the act refocuses these investments on low- and moderate-income

(LMI) families and communities by providing that to be considered a “public

welfare” investment, an investment must

primarily benefit LMI families or communities (such as by providing housing,

services, or jobs). The act also clarifies

that each “public welfare” investment

made by a national or state member

bank, either directly or through a subsidiary, must benefit primarily LMI communities or families.

Development of Model

Privacy Disclosure Forms

The Regulatory Relief Act requires the

Board, the other federal banking agencies, the National Credit Union Administration, the Secretary of the Treasury,

the Securities and Exchange Commission, and the Federal Trade Commission

to jointly develop a model form that

may be used by financial insti

their option, to fulfill the i

annual privacy policy discl

quirements imposed by sectio

the Gramm-Leach-Bliley Act 

6803). The model form must 

in proposed form for public 

within 180 days of enactm

Board has been working ex

with the other relevant age

conducting consumer testing t

potential model privacy forms 

be used by financial institution

Studies and Reports

GAO Study of

Currency Transaction Reports

The Regulatory Relief Act d

Government Accountability 

(GAO) to conduct a study of th

of currency transaction repor

filed with the Secretary of the 

under the Bank Secrecy Act. 

must evaluate, among othe

(1) the extent to which deposi

tutions avail themselves of th

exemption system for CTRs, (

improve the current exemptio

for CTRs, and (3) the usef

CTRs to law enforcement age

Regulatory Relief Act also pro

the study should include reco

tions for changes to the CTR e

system that would reduce bur

out adversely affecting the repo

tem’s effectiveness. The GAO 

mit a report on its findings to 

by January 13, 2007.

Unlawful Internet Gambl

Enforcement Act of 2006

The Unlawful Internet Gam

forcement Act of 2006, Pub

347, (codified at 31 USC 536

prohibits a person engaged in 

1. As under current law, a national or state

member bank would have to obtain the approval

of the OCC or the Board, respectively, to make

"public welfare" investments that, in the aggregate, exceed 5 percent of the bank’s capital and

surplus.
ness of betting or wagering from knowingly accepting credit, electronic fund

transfers, checks, drafts, or similar instruments drawn on or payable through

any financial institution in connection

with the participation of another person

in unlawful Internet gambling (“restricted transactions”). The act generally

defines “unlawful Internet gambling” as

transmitting a bet by any means that

involves the use, at least in part, of the

Internet and where such bet or wager is

unlawful under any applicable federal or

state law in the state or tribal lands in

which the bet or wager is initiated, received, or otherwise made.

The act charges the Secretary of the

Treasury and the Board, in consultation

with the Attorney General, with developing regulations to require each payment system that the agencies determine

could be used to process restricted payments (as well as financial transaction

providers participating in such payment

systems) to establish “policies and procedures reasonably designed to identify

and block or otherwise prevent or prohibit the acceptance of restricted transactions.” In prescribing the regulations,

the Secretary and the Board must identify the types of policies and procedures,

including nonexclusive examples,

deemed by the agencies to be reasonably designed to identify and block restricted transactions. To the extent practical, any participant in a designated

payment system must be permitted to

choose among alternative means of

complying, including by relying on and

complying with the policies and procedures of the designated payment system,

so long as these policies and procedures

comply with the regulation. The act also

requires the Secretary and the Board to

grant exemptions from any requirement

imposed under the regulations to particular types of transactions or designated payment systems if the agencies

jointly find that it is not reason

tical to identify and block, or 

prevent or prohibit, such restric

actions. The regulations mus

lished by July 10, 2007.

Military Personnel Financ

Services Protection Act

The National Defense Authori

for Fiscal Year 2007, Pub. L. 

364, enacted on September 

imposes restrictions on and 

requirements for consumer c

vided to members of the mi

their families. The act charge

partment of Defense (DOD) w

ing “consumer credit” in its r

and permits the DOD to includ

sumer credit apart from residen

gages, loans to fund the purc

motor vehicle, and other perso

erty loans when the property 

from the proceeds of the loan 

collateral for the loan. Require

creditors include a 36 perce

percentage rate (APR) ca

includes all fees, along with A

lations and disclosures that d

the APR used in disclosures 

Truth in Lending Act (TILA

mandates that all credit di

including TILA disclosures, be 

both orally and in writing pr

extension of credit.

Moreover, the act imposes l

on lending to members of th

and their dependents, such as 

ing rollovers and refinancing

sumer credit by the same cre

prohibiting loans with prepay

alties and mandatory arbitratio

The act imposes criminal and 

penalties for knowing viola

voids contracts that are prohib

the statute. The legislation was 

at least in part, to address 

about payday loans, installm
that are secured by a motor vehicle

(other than loans for the purchase of a

motor vehicle), and other forms of shortterm credit to military members and

their dependents. In prescribing regulations for this legislation, the DOD must

consult with the Board, among other

federal agencies. The effective date of

the act is October 1, 2007, regardless of

whether the DOD adopts regulations.

This statute would become effective earlier if interim regulations are issued by

the DOD.

Financial Netting Improvements

Act of 2006

In 2005, Congress passed comprehensive legislation to revise the federal

bankruptcy laws (Bankruptcy Abuse

Prevention and Consumer Protection

Act of 2005, Pub. L. 109-8). Title IX of

that act contained amendments to banking laws and the Bankruptcy Code to

provide increased certainty that netting

and close-out of financial market contracts would be enforceable, even in the

event of a counterparty insolvency. Title

IX also clarified certain duties and

obligations of the FDIC as receiver or

conservator of an insured depository

institution.

The Financial Netting Improvements

Act of 2006 (Pub. L. 109-390), enacted

on December 12, 2006, makes technical

changes to the netting and fina

tract provisions that were add

vised by title IX of the 2005 

2006 act updates the descri

various financial contracts (“

contract,” “forward contra

“swap agreement”) in the Fe

posit Insurance Act, the Fede

Union Act (FCUA), and the B

Code to reflect current market 

latory practice. The 2006 ac

vises provisions in the Bankru

to clarify the rights of certain 

parties to exercise self-help fo

on-collateral rights, setoff ri

netting rights with respect to 

contracts with a debtor. The

sions conform the Bankrup

with parallel provisions in the 

and the FCUA. In addition, the 

amends the FDI Act and the 

clarify the conditions under w

ceiver of an insolvent deposito

tion can enforce a financial co

contains a “walkaway” clause 

that would otherwise allow 

participant to suspend, conditi

tinguish a payment obligation 

other party becomes insolv

2006 act also makes other tech

conforming revisions to the 

FCUA, Bankruptcy Code, Fe

posit Insurance Corporation 

ment Act of 1991, and Securit

tor Protection Act of 1970. 
Records
Record of Policy Actions

of the Board of Governors

Regulation D

Reserve Requirements

of Depository Institutions

[Docket No. R-1268]

On October 18, 2006, the Board approved amendments to reflect the annual

indexing of the low reserve tranche and

of the reserve requirement exemption

for use in 2007 reserve requirement calculations. The amendments decrease the

3 percent low reserve tranche for net

transaction accounts to $45.8 million

(from $48.3 million in 2006) and

increase the reserve requirement exemption to $8.5 million (from $7.8 million

in 2006).

Votes for this action: Chairman Bernanke,

Vice Chairman Kohn, and Governors

Warsh, Kroszner, and Mishkin. Absent

and not voting: Governor Bies.

Regulation E

Electronic Fund Transfers

[Docket No. R-1247]

On August 24, 2006, the Board approved amendments to Regulation E and

its official staff commentary to apply the

regulation to payroll card accounts

established to distribute employee

salaries, wages, or other compensation

on a recurring basis. The am

also provide financial institut

an alternative to sending perio

ments for payroll card accoun

make account information av

account holders by certain 

means. The amendments are 

July 1, 2007.

Votes for this action: Chairman 

Vice Chairman Kohn, and 

Bies, Warsh, and Kroszner.

[Docket No. R-1265]

On November 27, 2006, the 

proved amendments to Regula

its official staff commentary 

that the requirement to obtain 

authorization applies to any pe

intends to collect electronicall

a check or other item that is 

unpaid. The amendments als

guidance on the regulation’

ments concerning consumer no

a returned-item fee is collec

tronically or a transaction in

electronic check conversi

amendments, which are based 

tially on an interim final rule 

on August 24, 2006, are effec

ary 1, 2007; compliance wi

disclosure requirements for 

item fees collected in connec

point-of-sale transactions is de

til January 1, 2008.

Votes for this action: Chairman 

Vice Chairman Kohn, and 

Bies, Warsh, and Kroszner. A

not voting: Governor Mishkin.

Note: Full texts of the policy actions are available via the online version of the Annual Report,

from the “Reading Rooms” on the Board’s FOIA

web page, and on request from the Board’s Freedom of Information Office.
Regulation H

Membership of

State Banking Institutions

in the Federal Reserve System

Regulation Y

Bank Holding Companies

and Change in Bank Control

[Docket No. R-1087]

On February 2, 2006, the Board, acting

with the other federal bank regulatory

agencies, approved amendments to the

agencies’ market risk rules to reduce

the capital requirement for certain

securities-borrowing transactions collateralized with cash. The interagency rule,

which makes permanent and expands an

interim final rule approved in 2000, is

effective February 22, 2006.

Votes for this action: Chairman Bernanke,

Vice Chairman Ferguson, and Governors

Bies, Olson, and Kohn.

Regulation K

International Banking Operations

[Docket No. R-1147]

On March 15, 2006, the Board approved

amendments requiring Edge Act and

agreement corporations and the U.S.

branches, agencies, and representative

offices of foreign banks supervised by

the Board to establish and maintain procedures that ensure and monitor compliance with the Bank Secrecy Act and

related regulations. The amendments are

effective April 19, 2006.

Votes for this action: Chairman Bernanke

and Governors Bies, Olson, Kohn, Warsh,

and Kroszner. Absent and not voting: Vice

Chairman Ferguson.

Regulation O

Loans to Executive Officer

Directors, and Principal

Shareholders of Member B

[Docket No. R-1271]

On December 6, 2006, the B

proved an interim final rule

quest for comment, to imple

tion 601 of the Financial 

Regulatory Relief Act of 2006 

nating certain reporting req

that have not contributed signi

effective monitoring or prev

insider lending abuse. The int

rule is effective December 11, 

Votes for this action: Chairman 

Vice Chairman Kohn, and 

Bies, Warsh, Kroszner, and Mi

Regulation Y

Bank Holding Companies

and Change in Bank Contr

[Docket No. R-1235]

On February 22, 2006, the B

proved amendments to expand 

cability of its Small Bank Hold

pany Policy Statement an

exemptions from its consolida

adequacy guidelines on risk-b

leverage measures by incre

asset-size limitation specified 

icy statement from $150 millio

million. The amended policy 

does not apply, however, to b

ing companies with less than 

lion in assets that engage in s

nonbanking or off-balance-sh

ties or have a material amount 

equity securities registered wi

curities and Exchange Commi

amendments also clarify tha

nated debt related to the is

trust preferred securities 
would be treated as debt under the policy statement, subject to a five-year transition period. The amendments are effective March 30, 2006.

Votes for this action: Chairman Bernanke,

Vice Chairman Ferguson, and Governors

Bies, Olson, and Kohn.

Regulation BB

Community Reinvestment

[Docket No. OP-1240]

On March 1, 2006, the Board, acting

with the other federal bank regulatory

agencies, approved guidance intended to

aid implementation of recent changes to

the agencies’ regulations under the

Community Reinvestment Act (CRA).

The guidance discusses, among other

regulatory topics, (1) the criteria for determining if an area is distressed, is

underserved, or has suffered a disaster;

(2) the period of time that bank activities in those areas are eligible for consideration in a CRA evaluation; and (3) the

standards used by CRA examiners to

decide if such activities qualify as “community development.” The guidance

also explains how the new community

development test for intermediate small

banks (banks with assets between

$250 million and $1 billion) will be

applied. The interagency guidance is effective March 10, 2006.

Votes for this action: Chairman Bernanke,

Vice Chairman Ferguson, and Governors

Bies, Olson, Kohn, and Warsh.

Rules Regarding

Equal Opportunity

[Docket No. OP-1264]

On August 1, 2006, the Board approved

an interim rule, with request for comment, to extend eligibility for 

confidential supervisory infor

certain noncitizen employees

terim rule is effective Augus

and also applies to all grants 

made as of that date.

Votes for this action: Chairman 

Vice Chairman Kohn, and 

Bies, Warsh, and Kroszner.

Policy Statements

and Other Actions

Interagency Advisory on th

Unsafe and Unsound Use o

Limitation of Liability Prov

in External Audit

Engagement Letters

On January 30, 2006, the Boa

with the other federal financi

tory agencies, approved an ad

address safety and soundness 

associated with agreements by 

institutions that limit the liabili

external auditors. The adviso

to provisions that (1) indemn

ternal auditor against claims 

third parties (including puni

ages); (2) hold harmless or r

external auditor from liability 

or potential claims that mig

serted by the client financial i

or (3) limit the remedies availa

client financial institution. P

that waive the right of financi

tions to seek punitive damag

their external auditors are no

ered unsafe and unsound unde

sory. The interagency advisor

tive for engagement letters ex

or after February 9, 2006.

Votes for this action: Chairm

span, Vice Chairman Ferguson

ernors Bies, Olson, and Kohn.
Federal Reserve

Currency Recirculation Policy

[Docket No. OP-1164]

On March 17, 2006, the Board revised

the Federal Reserve System’s cash services policy, with the intention of

increasing the recirculation of fit currency by (1) initiating a custodial inventory program to encourage depository

institutions to hold $10 and $20 notes in

their vaults to meet customer demand

and (2) charging a fee to depository

institutions that deposit fit $10 or

$20 notes at a Reserve Bank and order

the same denominations, above a

de minimis amount, during the same

business week. The custodial inventory

program will begin in July 2006, and

fee assessments are expected to begin in

July 2007.

Votes for this action: Chairman Bernanke

and Governors Olson, Kohn, Warsh, and

Kroszner. Absent and not voting: Vice

Chairman Ferguson and Governor Bies.

Nontraditional Mortgage

Product Risks

[Docket No. OP-1246]

On September 27, 2006, the Board, acting with the other federal financial regulatory agencies, approved interagency

guidance on underwriting and managing

nontraditional mortgage products (loans

that allow borrowers to defer payment

of principal and in some cases interest)

in a safe and sound manner and on

clearly disclosing the potential risks of

those products.

Votes for this action: Chairman Bernanke,

Vice Chairman Kohn, and Governors

Bies, Warsh, Kroszner, and Mishkin.

Guidance on Concentration

Commercial Real Estate Le

Sound Risk-Management P

[Docket No. OP-1248]

On December 6, 2006, the Boa

with the other federal bank 

agencies, approved guidance in

reinforce sound risk-managem

tices for institutions that have 

increasing concentrations of co

real estate loans on their balan

The guidance includes supervi

ria to assist in identifying in

that have potentially significan

trations. The interagency guid

fective December 12, 2006.

Votes for this action: Chairman 

Vice Chairman Kohn, and 

Bies, Warsh, Kroszner, and Mi

Interagency Statement on

Sound Practices concerning

Elevated Risk Complex Str

Finance Activities

[Docket No. OP-1254]

On December 20, 2006, the B

ing with the Securities and 

Commission and the other fed

and thrift regulatory agencies, 

a statement that describes inte

trols and risk-management p

to assist financial institutions 

fying, managing, and addre

heightened legal and reputati

associated with certain 

structured finance transacti

interagency statement is effe

uary 11, 2007.

Votes for this action: Chairman 

Vice Chairman Kohn, and 

Bies, Kroszner, and Mishkin. A

not voting: Governor Warsh.
Discount Rates in 2006

Under the Federal Reserve Act, boards

of directors of the Federal Reserve

Banks must establish rates on loans to

depository institutions at least every

fourteen days, subject to review and determination by the Board of Governors.

Primary Credit

Primary credit is the Federal Reserve’s

main lending program. Primary credit is

made available with minimal administration for very short terms as a backup

source of liquidity to depository institutions that, in the judgment of the lending

Federal Reserve Bank, are in generally

sound financial condition. Primary

credit is extended at a rate above the

federal funds rate target set by the Federal Open Market Committee (FOMC).

During 2006, the Board approved

four increases in the primary credit rate,

bringing the rate from 51⁄4 percent to

61⁄4 percent. The Board reached its determinations on the primary credit rate

recommendations of the Reserve Bank

boards of directors in conjunction with

the FOMC’s decisions to raise the target

federal funds rate from 41⁄4 percent to

51⁄4 percent and related economic and

financial developments. Rising energy

prices coupled with high levels of

resource utilization contributed to

heightened inflation pressures over the

first half of the year. Those pressures

receded over the second half of the year

as energy prices dropped and weakness

in the housing sector weighed on economic activity. In light of these conditions, the Federal Reserve raised the

structure of policy rates at a measured

pace in the first half of the year and kept

those rates unchanged for the remainder

of the year. Monetary policy developments are reviewed more fully in other

parts of this report (see the section

“Monetary Policy and Econom

opments” and the minutes o

meetings held in 2006).

Secondary and Seasonal Cr

Secondary credit is available 

priate circumstances to deposi

tutions that do not qualify fo

credit. The secondary credit ra

a spread above the primary c

In 2006, the spread was set a

points.

Seasonal credit is available 

depository institutions to mee

needs that arise from regular 

their loans and deposits. Th

seasonal credit is calculated 

weeks as an average of selecte

market yields, typically resu

rate close to the federal funds r

At year-end, the secondary 

sonal credit rates were 63⁄4 pe

5.30 percent, respectively.

Votes on Discount Rate Ch

About every two weeks during 

Board approved proposals by t

Reserve Banks to maintain the 

for computing the secondary 

sonal credit rates. Details on 

actions by the Board to approv

in the primary credit rate are 

below.

January 31, 2006. Effective 

the Board approved actions tak

directors of the Federal Reser

of Boston, New York, Phi

Cleveland, Richmond, Atlanta

Kansas City, Dallas, and San 

to raise the rate on disco

advances under the primary c

gram by 1⁄4 percentage point, t

cent. The same increase was 

for the Federal Reserve Ba

Louis, effective February 1, 2
Board also approved an identical action

subsequently taken by the directors of

the Federal Reserve Bank of Minneapolis, effective February 2, 2006.

Votes for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn. Votes

against this action: None.

March 28, 2006. Effective this date, the

Board approved actions taken by the

directors of the Federal Reserve Banks

of Boston, New York, Philadelphia,

Cleveland, Richmond, Atlanta, Chicago,

Minneapolis, Dallas, and San Francisco

to raise the rate on discounts and

advances under the primary credit program by 1⁄4 percentage point, to 53⁄4 percent. The same increase was approved

for the Federal Reserve Bank of St.

Louis, effective March 29, 2006. The

Board also approved an identical action

subsequently taken by the directors of

the Federal Reserve Bank of Kansas

City, effective March 30, 2006.

Votes for this action: Chairman Bernanke

and Governors Bies, Olson, Kohn, Warsh,

and Kroszner. Votes against this action:

None.

May 10, 2006. Effective this date, the

Board approved actions taken by the

directors of the Federal Reserve Banks

of Boston, New York, Philadelphia,

Cleveland, Richmond, Atlanta, Chicago,

Minneapolis, Dallas, and San Francisco

to raise the rate on disco

advances under the primary c

gram by 1⁄4 percentage point, 

cent. The same increase was 

for the Federal Reserve Ba

Louis, effective May 11, 2

Board also approved an identi

subsequently taken by the di

the Federal Reserve Bank o

City, effective May 11, 2006.

Votes for this action: Chairman 

Vice Chairman Ferguson, and 

Bies, Olson, Kohn, Warsh, and 

Votes against this action: None

June 29, 2006. Effective this 

Board approved actions take

directors of the Federal Reser

of Boston, New York, Phi

Cleveland, Richmond, Atlanta

Minneapolis, and Dallas to rai

on discounts and advances 

primary credit program by 1⁄4 p

point, to 61⁄4 percent. The sam

was approved for the Federa

Bank of St. Louis, effective 

2006. The Board also approved 

actions subsequently taken by 

tors of the Federal Reserve 

San Francisco, effective June 

and Kansas City, effective July 

Votes for this action: Chairman 

Vice Chairman Kohn, and 

Bies, Warsh, and Kroszner. Vo

this action: None. 
Minutes of Federal Open Market

Committee Meetings

The policy actions of the Federal Open

Market Committee, contained in the

minutes of its meetings, are presented in

the Annual Report of the Board of Governors pursuant to the requirements of

section 10 of the Federal Reserve Act.

That section provides that the Board

shall keep a complete record of the

actions taken by the Board and by the

Federal Open Market Committee on all

questions of policy relating to open market operations, that it shall record therein

the votes taken in connection with the

determination of open market policies

and the reasons underlying each policy

action, and that it shall include in its

annual report to Congress a full account

of such actions.

The minutes of the meetings contain

the votes on the policy decisions made

at those meetings as well as a summary

of the information and discussions that

led to the decisions. The descriptions of

economic and financial conditions are

based solely on the information that was

available to the Committee at the time

of the meetings.

Members of the Committee voting for

a particular action may differ among

themselves as to the reasons for their

votes; in such cases, the range of their

views is noted in the minutes. When

members dissent from a decision, they

are identified in the minutes and a summary of the reasons for their dissent is

provided.

Policy directives of the Federal Open

Market Committee are issued to the

Federal Reserve Bank of New York as

the Bank selected by the Committee to

execute transactions for the System

Open Market Account. In th

domestic open market opera

Federal Reserve Bank of N

operates under instructions 

Federal Open Market Comm

take the form of an Authori

Domestic Open Market Opera

a Domestic Policy Directive

Domestic Policy Directive is a

each regularly scheduled me

the foreign currency area, th

Reserve Bank of New York 

under an Authorization for For

rency Operations, a Foreign 

Directive, and Procedural In

with Respect to Foreign Curr

erations. These policy instru

shown below in the form in w

were in effect at the beginning 

Changes in the instruments d

year are reported in the minut

individual meetings.

Authorization for Domest

Open Market Operations

In Effect January 1, 2006

1. The Federal Open Market 

authorizes and directs the Feder

Bank of New York, to the ext

sary to carry out the most recen

policy directive adopted at a mee

Committee:

(a) To buy or sell U.S. G

securities, including securities of 

Financing Bank, and securities tha

obligations of, or fully guaran

principal and interest by, any age

United States in the open market, 

securities dealers and foreign 

national accounts maintained at t

Reserve Bank of New York, on a 
lar, or deferred delivery basis, for the System

Open Market Account at market prices, and,

for such Account, to exchange maturing

U.S. Government and Federal agency securities with the Treasury or the individual agencies or to allow them to mature without

replacement.

(b) To buy U.S. Government securities,

obligations that are direct obligations of,

or fully guaranteed as to principal and interest by, any agency of the United States, from

dealers for the account of the Federal

Reserve Bank of New York under agreements for repurchase of such securities or

obligations in 65 business days or less, at

rates that, unless otherwise expressly authorized by the Committee, shall be determined

by competitive bidding, after applying reasonable limitations on the volume of agreements with individual dealers; provided that

in the event Government securities or agency

issues covered by any such agreement are

not repurchased by the dealer pursuant to the

agreement or a renewal thereof, they shall be

sold in the market or transferred to the System Open Market Account.

(c) To sell U.S. Government securities

and obligations that are direct obligations of,

or fully guaranteed as to principal and interest by, any agency of the United States to

dealers for System Open Market Account

under agreements for the resale by dealers

of such securities or obligations in 65 business days or less, at rates that, unless

otherwise expressly authorized by the Committee, shall be determined by competitive

bidding, after applying reasonable limitations on the volume of agreements with

individual dealers.

2. In order to ensure the effective conduct

of open market operations, the Federal Open

Market Committee authorizes the Federal

Reserve Bank of New York to lend on an

overnight basis U.S. Government securities

held in the System Open Market Account to

dealers at rates that shall be determined by

competitive bidding. The Federal Reserve

Bank of New York shall set a minimum

lending fee consistent with the objectives of

the program and apply reasonable limitations

on the total amount of a specific issue that

may be auctioned and on the amount of

securities that each dealer may borrow. The

Federal Reserve Bank of New York may

reject bids which could facilitate a dealer’s

ability to control a single issue 

mined solely by the Federal Reser

New York.

3. In order to ensure the effecti

of open market operations, while 

the provision of short-term inve

foreign and international accou

tained at the Federal Reserve Ba

York and accounts maintained at 

Reserve Bank of New York as f

of the United States pursuant to 

of the Federal Reserve Act, the Fe

Market Committee authorizes and 

Federal Reserve Bank of New Y

System Open Market Account, t

Government securities to such a

the bases set forth in paragraph 

agreements providing for the resa

accounts of those securities in 6

days or less on terms comparab

available on such transactions in 

and (b) for New York Bank acc

appropriate, to undertake with de

ject to the conditions imposed on 

and sales of securities in parag

repurchase agreements in U.S. G

and agency securities, and to arra

sponding sale and repurchase 

between its own account and su

international, and fiscal agency 

maintained at the Bank. Transact

taken with such accounts under 

sions of this paragraph may pro

service fee when appropriate.

4. In the execution of the C

decision regarding policy during 

meeting period, the Committee 

and directs the Federal Reserv

New York, upon the instruction of 

man of the Committee, to adjust 

in exceptional circumstances the 

pressure on reserve positions and 

intended federal funds rate. Any s

ment shall be made in the con

Committee’s discussion and dec

most recent meeting and the C

long-run objectives for price st

sustainable economic growth, an

based on economic, financial, 

tary developments during the in

period. Consistent with Comm

tice, the Chairman, if feasible, w

with the Committee before m

adjustment.
Domestic Policy Directive

In Effect January 1, 20061

The Federal Open Market Committee

seeks monetary and financial conditions that

will foster price stability and promote sustainable growth in output. To further its longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with increasing the

federal funds rate to an average of around

41⁄4 percent.

Authorization for

Foreign Currency Operations

In Effect January 1, 2006

1. The Federal Open Market Committee

authorizes and directs the Federal Reserve

Bank of New York, for System Open Market

Account, to the extent necessary to carry out

the Committee’s foreign currency directive

and express authorizations by the Committee pursuant thereto, and in conformity with

such procedural instructions as the Committee may issue from time to time:

A. To purchase and sell the following

foreign currencies in the form of cable transfers through spot or forward transactions on

the open market at home and abroad, including transactions with the U.S. Treasury, with

the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve

Act of 1934, with foreign monetary authorities, with the Bank for International Settlements, and with other international financial

institutions:

Canadian dollars

Danish kroner

Euro

Pounds sterling

Japanese yen

Mexican pesos

Norwegian kroner

Swedish kronor

Swiss francs

B. To hold balances of, and to have

outstanding forward contracts to receive or

to deliver, the foreign currencies listed in

paragraph A above.

C. To draw foreign currencies and to

permit foreign banks to draw dollars under

the reciprocal currency arrangements listed

in paragraph 2 below, provided that drawings by either party to any such arrangement

shall be fully liquidated within 

after any amount outstanding a

was first drawn, unless the C

because of exceptional circumst

cifically authorizes a delay.

D. To maintain an overall 

tion in all foreign currencies not 

$25.0 billion. For this purpose, 

open position in all foreign cu

defined as the sum (disregarding 

net positions in individual curre

net position in a single foreign 

defined as holdings of balances i

rency, plus outstanding contracts 

receipt, minus outstanding con

future delivery of that currency, 

sum of these elements with due 

sign.

2. The Federal Open Marke

tee directs the Federal Reserve 

New York to maintain reciproca

arrangements (‘‘swap’’ arrangeme

System Open Market Account for 

to a maximum of 12 months with 

ing foreign banks, which are am

designated by the Board of Gover

Federal Reserve System under Se

of Regulation N, Relations wi

Banks and Bankers, and with the 

the Committee to renew such arr

on maturity:

of 

Foreign bank (m

dolla

Bank of Canada . . . . . . . . . . . . . . . . . . . . . . . . . 

Bank of Mexico . . . . . . . . . . . . . . . . . . . . . . . . 

Any changes in the terms of exi

arrangements, and the proposed te

new arrangements that may be 

shall be referred for review and 

the Committee.

3. All transactions in foreign 

undertaken under paragraph 1

shall, unless otherwise expressly 

by the Committee, be at prevail

rates. For the purpose of providing 

ment return on System holdings 

currencies or for the purpose o

interest rates paid or received in 

with swap drawings, transaction

eign central banks may be und

non-market exchange rates.

1. Adopted by the Committee at its meeting

on December 13, 2005.
4. It shall be the normal practice to

arrange with foreign central banks for the

coordination of foreign currency transactions. In making operating arrangements

with foreign central banks on System holdings of foreign currencies, the Federal

Reserve Bank of New York shall not commit

itself to maintain any specific balance, unless authorized by the Federal Open Market

Committee. Any agreements or understandings concerning the administration of the

accounts maintained by the Federal Reserve

Bank of New York with the foreign banks

designated by the Board of Governors under

Section 214.5 of Regulation N shall be

referred for review and approval to the

Committee.

5. Foreign currency holdings shall be invested to ensure that adequate liquidity is

maintained to meet anticipated needs and so

that each currency portfolio shall generally

have an average duration of no more than

18 months (calculated as Macaulay duration). When appropriate in connection with

arrangements to provide investment facilities

for foreign currency holdings, U.S. Government securities may be purchased from foreign central banks under agreements for

repurchase of such securities within 30 calendar days.

6. All operations undertaken pursuant to

the preceding paragraphs shall be reported

promptly to the Foreign Currency Subcommittee and the Committee. The Foreign

Currency Subcommittee consists of the

Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of

Governors, and such other member of the

Board as the Chairman may designate (or in

the absence of members of the Board serving

on the Subcommittee, other Board members

designated by the Chairman as alternates,

and in the absence of the Vice Chairman of

the Committee, his alternate). Meetings of

the Subcommittee shall be called at the

request of any member, or at the request of

the Manager, System Open Market Account

(“Manager”), for the purposes of reviewing

recent or contemplated operations and of

consulting with the Manager on other matters relating to his responsibilities. At the

request of any member of the Subcommittee,

questions arising from such reviews and consultations shall be referred for determination

to the Federal Open Market Committee.

7. The Chairman is authorized

A. With the approval of th

tee, to enter into any needed ag

understanding with the Secretary o

sury about the division of respon

foreign currency operations betwe

tem and the Treasury;

B. To keep the Secretary o

sury fully advised concerning S

eign currency operations, and to c

the Secretary on policy matters 

foreign currency operations;

C. From time to time, t

appropriate reports and informa

National Advisory Council on In

Monetary and Financial Policies.

8. Staff officers of the Commi

thorized to transmit pertinent info

System foreign currency operation

priate officials of the Treasury De

9. All Federal Reserve Banks 

ticipate in the foreign currency 

for System Account in accordance 

graph 3G(1) of the Board of 

Statement of Procedure with Resp

eign Relationships of Federal Res

dated January 1, 1944.

Foreign Currency Directi

In Effect January 1, 2006

1. System operations in forei

cies shall generally be directed at 

disorderly market conditions, pro

market exchange rates for the 

reflect actions and behavior cons

IMF Article IV, Section 1.

2. To achieve this end the Sys

A. Undertake spot and for

chases and sales of foreign excha

B. Maintain reciprocal 

(“swap”) arrangements with selec

central banks.

C. Cooperate in other res

central banks of other countries 

international monetary institution

3. Transactions may also be un

A. To adjust System balanc

of probable future needs for curre

B. To provide means for m

tem and Treasury commitments in 
currencies, and to facilitate operations of the

Exchange Stabilization Fund.

C. For such other purposes as may be

expressly authorized by the Committee.

4. System foreign currency operations

shall be conducted:

A. In close and continuous consultation and cooperation with the United States

Treasury;

B. In cooperation, as appropriate, with

foreign monetary authorities; and

C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange

arrangements under IMF Article IV.

Procedural Instructions

with Respect to

Foreign Currency Operations

In Effect January 1, 2006

In conducting operations pursuant to the

authorization and direction of the Federal

Open Market Committee as set forth in the

Authorization for Foreign Currency Operations and the Foreign Currency Directive,

the Federal Reserve Bank of New York,

through the Manager, System Open Market

Account (“Manager”), shall be guided by the

following procedural understandings with respect to consultations and clearances with

the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee. All operations undertaken pursuant to such clearances shall be reported

promptly to the Committee.

1. The Manager shall clear with the Subcommittee (or with the Chairman, if the

Chairman believes that consultation with the

Subcommittee is not feasible in the time

available):

A. Any operation that would result in a

change in the System’s overall open position

in foreign currencies exceeding $300 million

on any day or $600 million since the most

recent regular meeting of the Committee.

B. Any operation that would result in a

change on any day in the System’s net position in a single foreign currency exceeding

$150 million, or $300 million when the

operation is associated with repayment of

swap drawings.

C. Any operation that might generate a

substantial volume of trading in a particular

currency by the System, even 

change in the System’s net posit

currency might be less than the li

fied in 1.B.

D. Any swap drawing prop

foreign bank not exceeding the 

(i) $200 million or (ii) 15 percent 

of the swap arrangement.

2. The Manager shall clear wit

mittee (or with the Subcommit

Subcommittee believes that c

with the full Committee is not fea

time available, or with the Chair

Chairman believes that consult

the Subcommittee is not feasible 

available):

A. Any operation that would 

change in the System’s overall op

in foreign currencies exceeding $

since the most recent regular mee

Committee.

B. Any swap drawing pr

a foreign bank exceeding the 

(i) $200 million or (ii) 15 perc

size of the swap arrangement.

3. The Manager shall also co

the Subcommittee or the Chair

proposed swap drawings by the S

about any operations that are not o

character.

Meeting Held on

January 31, 2006

A meeting of the Federal Ope

Committee was held in the off

Board of Governors of the 

Reserve System in Washingt

on Tuesday, January 31, 200

a.m.

Present:

Mr. Greenspan, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Ferguson

Mr. Guynn

Mr. Kohn

Mr. Lacker

Mr. Olson

Ms. Pianalto

Ms. Yellen
Mses. Cumming and Minehan, Messrs.

Moskow, Poole, and Hoenig, Alternate Members of the Federal

Open Market Committee

Messrs. Fisher, Stern, and Santomero,

Presidents of the Federal Reserve

Banks of Dallas, Minneapolis, and

Philadelphia, respectively

Mr. Reinhart, Secretary and Economist

Ms. Danker, Deputy Secretary

Ms. Smith, Assistant Secretary

Mr. Skidmore, Assistant Secretary

Mr. Alvarez, General Counsel

Mr. Baxter, Deputy General Counsel

Ms. Johnson, Economist

Mr. Stockton, Economist

Messrs. Connors, Eisenbeis, Judd, Kamin, Madigan, Sniderman, Struckmeyer, and Wilcox, Associate

Economists

Mr. Kos, Manager, System Open Market Account

Messrs. Oliner and Slifman, Associate

Directors, Division of Research

and Statistics, Board of Governors

Mr. Whitesell, Deputy Associate Director, Division of Monetary Affairs,

Board of Governors

Messrs. English and Sheets, Assistant

Directors, Division of Monetary

Affairs and International Finance,

respectively, Board of Governors

Mr. Simpson, Senior Adviser, Division

of Research and Statistics, Board

of Governors

Mr. Small, Project Manager, Division

of Monetary Affairs, Board of

Governors

Mr. Chaboud and Mses. Kusko and

Weinbach, Senior Economists, Divisions of International Finance,

Research and Statistics, and Monetary Affairs, respectively, Board of

Governors

Ms. Roush, Economist, Division of

Monetary Affairs, Board of

Governors

Mr. Luecke, Senior Financial Analyst,

Division of Monetary Affairs,

Board of Governors

Ms. Low, Open Market Secr

cialist, Division of 

Affairs, Board of Gover

Mr. Stone, First Vice Preside

Reserve Bank of Philad

Messrs. Fuhrer and Rosenblu

tive Vice Presidents

Reserve Banks of Bosto

las, respectively

Messrs. Evans and Hakk

Mester and Perelm

Messrs. Rasche, Rol

Steindel, Senior Vice 

Federal Reserve Banks o

Kansas City, Philadel

York, St. Louis, Minne

New York, respectively

Mr. Hetzel, Senior Econom

Reserve Bank of Richm

In the agenda for this meeti

reported that advices of the e

the following members and 

members of the Federal Ope

Committee for a term beginnin

31, 2006 had been received 

these individuals had execu

oaths of office.

The elected members and 

members were as follows:

Timothy F. Geithner, President o

eral Reserve Bank of New 

Christine M. Cumming, 

President, Federal Reserve 

New York as alternate.

Jeffrey M. Lacker, President of t

Reserve Bank of Richmond, 

E. Minehan, President of t

Reserve Bank of Boston as a

Sandra Pianalto, President of t

Reserve Bank of Clevel

Michael H. Moskow, Presid

Federal Reserve Bank of C

alternate.

Jack Guynn, President of th

Reserve Bank of Atlanta, wi

Poole, President of the Fede

Bank of St. Louis as alternat
Janet L. Yellen, President of the Federal

Reserve Bank of San Francisco, with

Thomas M. Hoenig, President of the

Federal Reserve Bank of Kansas City as

alternate.

By unanimous vote, the following

officers of the Federal Open Market

Committee were selected to serve until

the selection of their successors at the

first regularly scheduled meeting of the

Committee in 2007, with the understanding that in the event of the discontinuance of their official connection with

the Board of Governors or with a Federal Reserve Bank, they would cease to

have any official connection with the

Federal Open Market Committee:

Alan Greenspan Chairman2

Timothy F. Geithner Vice Chairman

Vincent R. Reinhart Secretary and

Economist

Deborah J. Danker Deputy Secretary

David W. Skidmore Assistant Secretary

Michelle A. Smith Assistant Secretary

Scott G. Alvarez General Counsel

Thomas C. Baxter, Jr. Deputy General

Counsel

Karen H. Johnson Economist

David J. Stockton Economist

Thomas A. Connors, Robert A. Eisenbeis,

John P. Judd, Steven B. Kamin, Brian F.

Madigan, Mark S. Sniderman, Charles

S. Struckmeyer, Joseph S. Tracy, John

A. Weinberg, and David W. Wilcox,

Associate Economists

In addition, it was agreed that the

Committee would conduct a notation

vote upon the swearing in of a new

Chairman of the Board of Governors to

elect Alan Greenspan’s successor as

Chairman of the Committee.3

By unanimous vote, Deborah J.

Danker, or her successor as Deputy Secretary, was elected to serve as Chief

Freedom of Information Act 

comply with an Executive Or

on December 14, 2005 that req

eral agencies to take certain a

lating to FOIA activities.

By unanimous vote, the C

amended its Program for Se

FOMC Information, primarily 

incorporation of the Board’s 

on access to confidential infor

non-citizens.

By unanimous vote, the 

Reserve Bank of New York wa

to execute transactions for th

Open Market.

By unanimous vote, Dino 

selected to serve at the pleas

Committee as Manager, Syst

Market Account, on the unde

that his selection was subject 

satisfactory to the Federal Res

of New York.4

By unanimous vote, the A

tion for Domestic Open Mark

tions was reaffirmed in the fo

below.

Authorization for Domestic 

Market Operations

(Reaffirmed January 31, 20

1. The Federal Open Market 

authorizes and directs the Feder

Bank of New York, to the exten

to carry out the most recent dome

directive adopted at a meetin

Committee:

(a) To buy or sell U.S. G

securities, including securities of 

Financing Bank, and securities tha

obligations of, or fully guaran

principal and interest by, any age

United States in the open market, 

securities dealers and foreign 

national accounts maintained at t

Reserve Bank of New York, o

2. Alan Greenspan was elected to serve for the regular, or deferred delivery bas

remainder of the day.

3. Secretary’s note: By notation vote completed

on February 1, 2006 the Committee unanimously

approved the election of Ben S. Bernanke as

Chairman of the Federal Open Market Committee.

4. Secretary’s note: Advice subse

received that the selection of Mr. Kos 

was satisfactory to the board of dire

Federal Reserve Bank of New York.
System Open Market Account at market

prices, and, for such Account, to exchange

maturing U.S. Government and Federal

agency securities with the Treasury or the

individual agencies or to allow them to mature without replacement;

(b) To buy U.S. Government securities,

obligations that are direct obligations of, or

fully guaranteed as to principal and interest

by, any agency of the United States, from

dealers for the account of the Federal Reserve Bank of New York under agreements

for repurchase of such securities or obligations in 65 business days or less, at rates that,

unless otherwise expressly authorized by the

Committee, shall be determined by competitive bidding, after applying reasonable limitations on the volume of agreements with

individual dealers; provided that in the event

Government securities or agency issues covered by any such agreement are not repurchased by the dealer pursuant to the agreement or a renewal thereof, they shall be sold

in the market or transferred to the System

Open Market Account.

(c) To sell U.S. Government securities

and obligations that are direct obligations of,

or fully guaranteed as to principal and interest by, any agency of the United States to

dealers for System Open Market Account

under agreements for the resale by dealers of

such securities or obligations in 65 business

days or less, at rates that, unless otherwise

expressly authorized by the Committee, shall

be determined by competitive bidding, after

applying reasonable limitations on the volume of agreements with individual dealers.

2. In order to ensure the effective conduct

of open market operations, the Federal Open

Market Committee authorizes the Federal

Reserve Bank of New York to lend on an

overnight basis U.S. Government securities

held in the System Open Market Account to

dealers at rates that shall be determined by

competitive bidding. The Federal Reserve

Bank of New York shall set a minimum

lending fee consistent with the objectives of

the program and apply reasonable limitations

on the total amount of a specific issue that

may be auctioned and on the amount of

securities that each dealer may borrow. The

Federal Reserve Bank of New York may

reject bids which could facilitate a dealer’s

ability to control a single issue as determined

solely by the Federal Reserve Bank of New

York.

3. In order to ensure the effecti

of open market operations, while 

the provision of short-term inve

foreign and international accou

tained at the Federal Reserve Ba

York and accounts maintained at 

Reserve Bank of New York as fisc

the United States pursuant to Se

the Federal Reserve Act, the Fe

Market Committee authorizes and 

Federal Reserve Bank of New Y

System Open Market Account, t

Government securities to such a

the bases set forth in paragraph 

agreements providing for the resa

accounts of those securities in 6

days or less on terms comparab

available on such transactions in 

and (b) for New York Bank acc

appropriate, to undertake with de

ject to the conditions imposed on 

and sales of securities in para

repurchase agreements in U.S. G

and agency securities, and to arra

sponding sale and repurchase agre

tween its own account and suc

international, and fiscal agency 

maintained at the Bank. Transact

taken with such accounts under 

sions of this paragraph may pro

service fee when appropriate.

4. In the execution of the C

decision regarding policy during 

meeting period, the Committee 

and directs the Federal Reserv

New York, upon the instruction of 

man of the Committee, to adjust 

in exceptional circumstances the 

pressure on reserve positions and 

intended federal funds rate. Any s

ment shall be made in the con

Committee’s discussion and dec

most recent meeting and the C

long-run objectives for price st

sustainable economic growth, an

based on economic, financial, an

developments during the in

period. Consistent with Committe

the Chairman, if feasible, will co

the Committee before ma

adjustment.

With Mr. Lacker dissenting, 

mittee approved the Authori

Foreign Currency Operations 
amendment to paragraph 5 which clarifies the language about permissible

investment activities for the foreign

portfolio and brings that language into

alignment with that present in the authorization for the domestic portfolio. Accordingly, the Authorization for Foreign

Currency Operations was adopted, effective January 31, 2006, as shown below.

Authorization for

Foreign Currency Operations

(Amended January 31, 2006)

1. The Federal Open Market Committee

authorizes and directs the Federal Reserve

Bank of New York, for System Open Market

Account, to the extent necessary to carry out

the Committee’s foreign currency directive

and express authorizations by the Committee

pursuant thereto, and in conformity with

such procedural instructions as the Committee may issue from time to time:

A. To purchase and sell the following

foreign currencies in the form of cable transfers through spot or forward transactions on

the open market at home and abroad, including transactions with the U.S. Treasury, with

the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve Act

of 1934, with foreign monetary authorities, with

the Bank for International Settlements, and

with other international financial institutions:

Canadian dollars

Danish kroner

Euro

Pounds sterling

Japanese yen

Mexican pesos

Norwegian kroner

Swedish kronor

Swiss francs

B. To hold balances of, and to have

outstanding forward contracts to receive or

to deliver, the foreign currencies listed in

paragraph A above.

C. To draw foreign currencies and to

permit foreign banks to draw dollars under

the reciprocal currency arrangements listed

in paragraph 2 below, provided that drawings by either party to any such arrangement

shall be fully liquidated within 12 months

after any amount outstanding at that time

was first drawn, unless the Committee, because of exceptional circumstances, specifically authorizes a delay.

D. To maintain an overall open position

in all foreign currencies not exceeding $25.0

billion. For this purpose, the ov

position in all foreign currencies 

as the sum (disregarding signs) o

tions in individual currencies. Th

tion in a single foreign currency is 

holdings of balances in that cur

outstanding contracts for future r

nus outstanding contracts for futu

of that currency, i.e., as the sum 

elements with due regard to sign.

2. The Federal Open Market 

directs the Federal Reserve Ban

York to maintain reciprocal cu

rangements (“swap” arrangemen

System Open Market Account for 

to a maximum of 12 months with 

ing foreign banks, which are am

designated by the Board of Gover

Federal Reserve System under Se

of Regulation N, Relations wi

Banks and Bankers, and with the 

the Committee to renew such arr

on maturity:

Foreign bank

A

ar

(

dolla

Bank of Canada . . . . . . . . . . . . . . . . . . . . . . . . . 

Bank of Mexico . . . . . . . . . . . . . . . . . . . . . . . . 

Any changes in the terms of exi

arrangements, and the proposed te

new arrangements that may be 

shall be referred for review and 

the Committee.

3. All transactions in foreign 

undertaken under paragraph 1

shall, unless otherwise expressly 

by the Committee, be at prevail

rates. For the purpose of providing 

ment return on System holdings 

currencies or for the purpose o

interest rates paid or received in 

with swap drawings, transaction

eign central banks may be und

non-market exchange rates.

4. It shall be the normal prac

range with foreign central banks 

ordination of foreign currency tr

In making operating arrangement

eign central banks on System h

foreign currencies, the Federal Re

of New York shall not commit itse

tain any specific balance, unless 

by the Federal Open Market Comm
agreements or understandings concerning the

administration of the accounts maintained by

the Federal Reserve Bank of New York with

the foreign banks designated by the Board of

Governors under Section 214.5 of Regulation N shall be referred for review and approval to the Committee.

5. Foreign currency holdings shall be

invested to ensure that adequate liquidity is

maintained to meet anticipated needs and so

that each currency portfolio shall generally

have an average duration of no more than

18 months (calculated as Macaulay duration). Such investments may include buying

or selling outright obligations of, or fully

guaranteed as to principal and interest by, a

foreign government or agency thereof; buying such securities under agreements for

repurchase of such securities; selling such

securities under agreements for the resale of

such securities; and holding various time

and other deposit accounts at foreign institutions. In addition, when appropriate in

connection with arrangements to provide

investment facilities for foreign currency

holdings, U.S. Government securities may

be purchased from foreign central banks

under agreements for repurchase of such

securities within 30 calendar days.

6. All operations undertaken pursuant to

the preceding paragraphs shall be reported

promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee,

the Vice Chairman of the Board of Governors, and such other member of the Board as

the Chairman may designate (or in the absence of members of the Board serving on

the Subcommittee, other Board members

designated by the Chairman as alternates,

and in the absence of the Vice Chairman of

the Committee, his alternate). Meetings of

the Subcommittee shall be called at the request of any member, or at the request of the

Manager, System Open Market Account

(“Manager”), for the purposes of reviewing

recent or contemplated operations and of

consulting with the Manager on other matters relating to his responsibilities. At the

request of any member of the Subcommittee,

questions arising from such reviews and consultations shall be referred for determination

to the Federal Open Market Committee.

7. The Chairman is authorized:

A. With the approval of the C

to enter into any needed agreemen

standing with the Secretary of th

about the division of responsibil

eign currency operations betwee

tem and the Treasury;

B. To keep the Secretary o

sury fully advised concerning S

eign currency operations, and to c

the Secretary on policy matters 

foreign currency operations;

C. From time to time, to tr

propriate reports and information 

tional Advisory Council on In

Monetary and Financial Policies.

8. Staff officers of the Commit

thorized to transmit pertinent info

System foreign currency ope

appropriate officials of the 

Department.

9. All Federal Reserve Banks sh

pate in the foreign currency ope

System Account in accordance 

graph 3G(1) of the Board of 

Statement of Procedure with Resp

eign Relationships of Federal Res

dated January 1, 1944.

With Mr. Lacker dissenting

eign Currency Directive was r

in the form shown below.

Foreign Currency Directive

(Reaffirmed January 31, 20

1. System operations in foreign 

shall generally be directed at coun

orderly market conditions, pro

market exchange rates for the 

reflect actions and behavior cons

IMF Article IV, Section 1.

2. To achieve this end the Syst

A. Undertake spot and fo

chases and sales of foreign excha

B. Maintain reciprocal 

(“swap”) arrangements with selec

central banks.

C. Cooperate in other res

central banks of other countries 

international monetary institution

3. Transactions may also be un

A. To adjust System balanc

of probable future needs for curre
B. To provide means for meeting System and Treasury commitments in particular

currencies, and to facilitate operations of the

Exchange Stabilization Fund.

C. For such other purposes as may be

expressly authorized by the Committee.

4. System foreign currency operations

shall be conducted:

A. In close and continuous consultation

and cooperation with the United States

Treasury;

B. In cooperation, as appropriate, with

foreign monetary authorities; and

C. In a manner consistent with the obligations of the United States in the International Monetary Fund regarding exchange

arrangements under IMF Article IV.

Mr. Lacker dissented in the votes on

the Foreign Currency Directive and

Authorization for Foreign Currency

Operations to indicate his opposition to

foreign currency intervention by the

Federal Reserve. In his view, such

intervention would be ineffective if it

did not also signal a shift in domestic

monetary policy. And if it did signal

such a shift, it could potentially compromise the Federal Reserve’s monetary

policy independence.

By unanimous vote, the Procedural

Instructions with Respect to Foreign

Currency Operations were reaffirmed in

the form shown below.

Procedural Instructions

with Respect to

Foreign Currency Operations

(Reaffirmed January 31, 2006)

In conducting operations pursuant to the

authorization and direction of the Federal

Open Market Committee as set forth in the

Authorization for Foreign Currency Operations and the Foreign Currency Directive,

the Federal Reserve Bank of New York,

through the Manager, System Open Market

Account (“Manager”), shall be guided by the

following procedural understandings with respect to consultations and clearances with

the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee. All operations undertake

to such clearances shall be reporte

to the Committee.

1. The Manager shall clear wi

committee (or with the Chairm

Chairman believes that consultati

Subcommittee is not feasible in 

available):

A. Any operation that would 

change in the System’s overall op

in foreign currencies exceeding $3

on any day or $600 million sinc

recent regular meeting of the Com

B. Any operation that would 

change on any day in the System

tion in a single foreign currency 

$150 million, or $300 million wh

eration is associated with repayme

drawings.

C. Any operation that might 

substantial volume of trading in 

currency by the System, even 

change in the System’s net posit

currency might be less than the li

fied in 1.B.

D. Any swap drawing prop

foreign bank not exceeding the 

(i) $200 million or (ii) 15 percent 

of the swap arrangement.

2. The Manager shall clear wit

mittee (or with the Subcommit

Subcommittee believes that c

with the full Committee is not fea

time available, or with the Chair

Chairman believes that consultati

Subcommittee is not feasible in 

available):

A. Any operation that would 

change in the System’s overall op

in foreign currencies exceeding $

since the most recent regular mee

Committee.

B. Any swap drawing prop

foreign bank exceeding the larger 

million or (ii) 15 percent of the 

swap arrangement.

3. The Manager shall also cons

Subcommittee or the Chairman 

posed swap drawings by the S

about any operations that are not o

character.

Among the organizationa

raised, the Committee indicat

intended to take up at a futur
the relationship between its formal vote

and the policy statement issued after

each meeting.

The Manager of the System Open

Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the

System’s account in the period since the

previous meeting. The Manager also reported on developments in domestic

financial markets and on System open

market transactions in government securities and federal agency obligations

during the period since the previous

meeting. By unanimous vote, the Committee ratified these transactions.

The information reviewed at this

meeting suggested that underlying

growth in aggregate demand remained

solid, even though the expansion of real

GDP was estimated to have slowed in

the fourth quarter. Household spending

rose smartly, outside of autos, and orders and shipments of nondefense capital goods in the business sector were

generally quite strong. Housing markets

showed some signs of cooling, but starts

and sales remained at high levels. Industrial production posted moderate gains,

even after excluding hurricane-related

rebounds in some production categories,

and private payrolls expanded at a firm

rate on average. Headline consumer inflation had been held down by falling

consumer energy prices; more recently,

however, crude oil prices climbed back

up to high levels. Meanwhile, core inflation had moved up a bit from low levels

seen last summer.

Labor demand expanded further in

the fourth quarter, as private nonfarm

payrolls showed large gains in November followed by more-modest gains in

December. The average increase over

those two months represented sturdy job

gains, even after accounting for the

likely catch-up in employment following Hurricanes Katrina and Rit

sectors, including manufactu

several service groups, added v

to payrolls in December, but th

the month was held down by 

ment declines in a number o

such as retail trade and con

where seasonal adjustment ca

cult this time of year. Aggreg

fell slightly in December ow

decrease in the workweek, but 

over the fourth quarter as a w

unemployment rate edged do

percent in part due to the la

participation rate ticking down

Industrial production rose n

November and December, b

partial recovery from the effe

hurricanes. Production in th

industry, which includes oil an

traction, increased sharply. Ut

put also popped up in Decemb

peratures turned unseasonabl

the first half of the month. A

from the effects of these speci

underlying activity in the indu

tor advanced moderately. Mo

duction increases in most man

categories in December, includ

tech, consumer goods, and 

equipment, outweighed produ

clines in the motor vehicles 

sector. The capacity utilizatio

manufacturing stood a bit abov

of one year ago and near its 

average.

Real personal consumption 

tures appeared to have incre

modestly in the fourth quarter, 

ing on motor vehicles was 

following a surge in the su

response to manufacturers’ pr

tives. Outside of motor vehi

sumption was brisk, supporte

growth, increases in persona

and the decline in energy pri

sumption was also likely sup

further gains in home values a
prices that raised the ratio of household

wealth to disposable income relative to

that seen earlier in 2005. Consumer sentiment measured by surveys moved up

in December and, judging by the preliminary reading of the Michigan Survey, edged up further in January.

Activity in the housing market

appeared to continue at high levels,

although there were some indications of

slowing. Single-family housing starts

decreased markedly in December; however, this decline may have been due in

part to unusually cold and wet weather

in some areas of the country. Multifamily housing starts increased in December. Sales of new and existing homes

remained at elevated levels but slowed

somewhat toward the end of the year.

Moreover, the stock of homes for sale

increased to the upper end of ranges

seen in recent years. Recent data on

mortgage applications and survey measures of homebuying attitudes also

pointed to some cooling in the housing

market.

Real outlays for equipment and software appeared to have slowed significantly in the fourth quarter, as expenditures for transportation and

communications equipment reversed

some of their earlier sharp increases.

With few exceptions, however, new orders appeared to be quite strong, and

order backlogs increased for several

goods in the transportation sector.

Underlying fundamentals continued to

support gains in capital spending as

business sector output expanded, firms

remained flush with funds, and relative

price declines pushed down the user

cost of capital equipment. Anecdotal reports and surveys also indicated that

businesses were optimistic about nearterm capital spending plans. Vacancy

rates for nonresidential properties

drifted lower as construction expenditures on commercial and manufacturing

structures remained well belo

peaks. However, spending o

and mining structures con

increase strongly. Business i

in real nonfarm inventories 

moderately in the fourth quarte

by a rapid accumulation of m

cle inventories. Outside of m

cles, stocks continued to ris

The restrained growth in inve

recent months suggested that 

side the motor vehicle sector w

tionally keeping stockbuild

however, it could also have re

unanticipated increase in sales 

interruptions following the h

last fall. That said, the level 

appeared reasonably well alig

demand in most industries.

After increasing further in 

the U.S. international trade d

rowed somewhat in Novembe

duction in the deficit reflected 

increase in exports and a sim

decrease in imports that owe

tantly to a decline in imports o

firm pace of third-quarter GD

in foreign economies generally 

to continue in the fourth quart

Core consumer price inf

mained moderate over the se

of last year. Core prices had 

string of very low increases 

mer, held down in part by fall

vehicle prices. In recent mo

creases in core prices had r

The overall consumer price in

down further in December in 

to substantial declines in it

energy price components. How

vey data pointed to large in

gasoline prices in January, w

due to the backup in crude 

Preliminary survey measures 

term inflation expectations fo

had nonetheless ticked down

ing the reversal of a sharp incr

the hurricanes last fall, and lo
inflation expectations had moved lower

as well. Input prices increased somewhat less in December, as upward pressure from previous energy price increases receded somewhat. Indeed, the

increase in core intermediate producer

prices over the year was estimated to be

considerably lower than over the previous year. At its December meeting, the

Federal Open Market Committee decided to increase the target level of the

federal funds rate 25 basis points, to

41⁄4 percent. In its accompanying statement, the Committee indicated that,

despite elevated energy prices and

hurricane-related disruptions, the expansion in economic activity appeared solid.

Core inflation had stayed relatively low

in recent months, and longer-term inflation expectations had remained contained. Nevertheless, the Committee

noted that possible increases in resource

utilization as well as elevated energy

prices had the potential to add to inflationary pressures. In these circumstances, the Committee believed that

some further measured policy firming

was likely to be needed to keep the risks

to the attainment of both sustainable

economic growth and price stability

roughly in balance.

Investors had largely anticipated the

Committee’s interest rate decision at the

December meeting and a change in the

portions of the statement characterizing

policy as accommodative. Accordingly,

the policy announcement elicited only

modest reactions in financial markets.

With mixed readings on economic activity and inflation over the intermeeting

period, the market’s expectations for the

path of monetary policy and yields on

Treasury coupon securities ended the

period little changed, on balance. Yields

on investment- and speculative-grade

corporate debt moved largely in line

with Treasury yields. Major stock price

indexes rose modestly, and the tradeweighted foreign exchange va

dollar depreciated slightly 

period.

Domestic nonfinancial se

appeared to have expanded a

what slower pace in the fourt

down from the rapid increa

third quarter. Household deb

likely moderated amid hints o

shift in mortgage borrowing 

robust third-quarter pace and a

decline in consumer credit, wh

in part to increased charge-

October’s spike in bankruptc

Business sector debt slowed 

in the fourth quarter, mainly re

runoff of commercial paper by 

tional firms that were reporte

repatriated foreign earnings to 

vantage of a recently enacted 

sion. M2 expanded at a somew

pace in the fourth quarter than 

predicted from historical rel

with income and opportunity 

part, the monetary aggregate w

boosted by payments to hurr

tims by the federal governme

surance companies.

The staff forecast prepared 

meeting suggested that, af

growth in the fourth quarter 

real GDP would expand at a 

bust pace over the first half of 

boosted in part by spending on 

activities associated with the h

Thereafter, real GDP gro

expected to moderate, impor

flecting a reduced impetus to 

tion from house price apprec

some slowing in residential ho

penditures. Core PCE infla

expected to be a touch higher 

than in 2005, largely becau

pass-through of higher energy 

fuel import prices, but, wit

prices leveling out, core infl

projected to drop back mo

2007.
In their discussion of the economic

situation and outlook, meeting participants noted the slowing in GDP growth

in the fourth quarter of 2005, but believed that it probably owed in large part

to transitory factors and that economic

growth would bounce back in the current quarter. In that regard, several high

frequency indicators of production,

labor markets, and private demand suggested greater underlying strength of

late than had been reflected in the most

recent GDP data. Over the next couple

of years, the economy seemed poised to

expand at a moderate rate in the neighborhood of its sustainable pace. Most

participants expected core inflation to

move up slightly in the near term, reflecting some pass-through of increased

energy and other commodity prices.

Although heightened inflation pressures

could also arise from possible increases

in resource utilization, the outlook for

economic growth and the stability of

inflation expectations suggested that

core inflation should remain contained

over time.

In preparation for the Federal Reserve’s semiannual report to the Congress on the economy and monetary policy, the members of the Board of

Governors and the presidents of the Federal Reserve Banks submitted individual

projections of the growth of GDP, the

rate of unemployment, and core consumer price inflation for the years 2006

and 2007. The forecasts of the rate of

expansion in real GDP for 2006 were in

a range of 31⁄4 to 4 percent, centered at

31⁄2 percent, while those for 2007 were

in a range of 3 to 4 percent, with a

central tendency of 3 to 31⁄2 percent.

These rates of growth were associated

with projections of the civilian unemployment rate in a range of 41⁄2 to

5 percent, with a central tendency of

43⁄4 to 5 percent, in both the fourth

quarter of 2006 and the fourth quarter of

2007. Expectations for the rat

tion, as measured by the core 

index, were in a range o

21⁄2 percent this year, centered 

2 percent, and in a range 

2 percent in 2007.

In their discussion of major 

the economy, meeting particip

that consumer spending in 

months of 2005 had been bu

the effects of hurricanes, 

energy prices, and reduced a

incentives. However, anecdot

contributed to a view that 

spending had been solid over 

day season and in recent wee

measures of consumer c

remained high. Nevertheless, 

slowing in the housing se

become more evident, and th

construction from hurricane-r

building now seemed likely to 

over the next couple of years r

being more concentrated in 

term. In some areas, home pr

ciation reportedly had slowe

ably, highlighting the risks to 

demand of a pullback in th

sector. For instance, the eff

leveling out of housing weal

saving rate were difficult to pr

in the view of some, potential

Rising debt service costs, owi

to the repricing of variable-r

gages, were also mentioned a

restraining the discretionary sp

consumers. The most likely 

however, was for a gradual m

in house price appreciation a

growth of consumption, whi

continue to be supported by in

jobs and incomes.

Participants generally a

fairly strong growth of capita

tures. Though firms had been 

about expanding their plant a

ment, business confidence was 

pacity utilization was tighte
companies were continuing to look for

investment opportunities that increased

productivity. As a result, the outlook

was for reasonably robust spending on

capital equipment even if economic

growth slowed a bit. Anecdotal reports

suggested that nonresidential real estate

markets were improving in some areas.

The slowdown in government spending in the fourth quarter was generally

seen as reflecting shifts in the timing of

outlays, rather than a change in the

underlying trend. However, fiscal stimulus was expected to diminish somewhat

by next year. By contrast, global demand had picked up of late and would

provide ongoing support for U.S. exports; indeed, the sharp increases in

commodity prices and rallies in world

equity markets suggested the possibility

of an even stronger path for demand

abroad.

Financial market conditions in the

United States, as well as those abroad,

suggested that investors were optimistic

about the economic outlook. The recent

strength in equity markets and the low

prevailing term premiums and bond

spreads perhaps reflected market assessments that economic risks were lower

than usual, as well as strong demands

for longer-term assets and an ample

supply of liquidity. The possibility that

term premiums and credit spreads could

return to more typical settings represented a downside risk for interestsensitive components of aggregate

demand.

A variety of indicators, along with

anecdotal reports, suggested that employment was expanding at a fairly good

pace and labor compensation was rising

moderately. Some participants remarked

on the uncertainties regarding the extent

of remaining capacity in labor markets

and the outlook for labor costs. In particular, developments affecting the participation rate in the labor force and the

pace of growth in productiv

importantly condition prospec

ployment and business cost pr

Participants noted that, w

pass-through of higher energy 

commodity prices to prices 

goods and services had rema

dued, there were continuing up

to inflation from these sourc

ever the size of such pas

effects, however, it was though

would probably be temporary 

and likely diminish as energy p

tened out, as long as inflation 

tions did not move higher. I

gard, participants were encour

despite recent energy price 

survey measures of inflation 

tions had notched down and lo

inflation compensation in fina

kets was little changed. Altho

profit margins could imply so

ing pricing power, they might 

vide a cushion to absorb so

cost increases. Indeed, anecdo

suggested that the ability of 

pass through higher input co

ally remained limited. Neverth

increased prices of energy 

commodities and the possib

further rise in resource utilizati

some members viewed as n

at present, represented c

risks, potentially adding to 

pressures.

In the Committee’s discu

monetary policy for the int

period, all members favored r

target federal funds rate 25 ba

to 41⁄2 percent at this meeting. 

recent economic data had bee

the economy seemed to be exp

a solid pace. Members were 

that, even after their action to

sible increases in resource 

and elevated energy prices ha

tential to add to inflation 

Although the stance of polic
close to where it needed to be given the

current outlook, some further policy

firming might be needed to keep inflation pressures contained and the risks to

price stability and sustainable economic

growth roughly in balance. In the view

of some members, the possibility of

additional policy moves was reinforced

by readings on core inflation and inflation expectations that were somewhat

higher than was desirable over the long

run. However, all members agreed that

the future path for the funds rate would

depend increasingly on economic developments and could no longer be prejudged with the previous degree of

confidence.

As this meeting marked Alan

Greenspan’s last as a member of the

Committee, meeting participants took

the opportunity individually and collectively to pay tribute to his many years of

outstanding service to the Federal

Reserve and to the nation. They expressed their appreciation for his collegial and successful leadership of the

Committee and of the Federal Reserve

System and emphasized the privilege

and honor they felt in having served

with him.

At the conclusion of the discussion,

the Committee voted to authorize and

direct the Federal Reserve Bank of New

York, until it was instructed otherwise,

to execute transactions in the System

Account in accordance with the following domestic policy directive:

The Federal Open Market Committee

seeks monetary and financial conditions that

will foster price stability and promote sustainable growth in output. To further its longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with increasing the federal funds rate to an average of around

41⁄2 percent.

The vote encompassed approval of

the paragraph below for inclusion in the

statement to be released shortl

meeting:

The Committee judges that so

policy firming may be needed t

risks to the attainment of both 

economic growth and price stabil

in balance. In any event, the Com

respond to changes in economic p

needed to foster these objectives.

Votes for this action: 

Greenspan and Geithner, 

Messrs. Ferguson, Guyn

Lacker, and Olson, Mses. P

Yellen. Votes against this ac

The confirmation of the d

next meeting of the Comm

postponed, pending the elec

successor Chairman.

The meeting adjourned at 1

Notation Vote

By notation vote completed o

ber 30, 2005, the Committ

mously approved the minut

Federal Open Market Commi

ing held on December 13, 200

Vincent R

Meeting Held on

March 27–28, 2006

A meeting of the Federal Ope

Committee was held in the off

Board of Governors of the 

Reserve System in Washingt

on Monday, March 27, 200

p.m. and continued on Tuesd

28, 2006 at 9:00 a.m.

Present:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Guynn

Mr. Kohn

Mr. Kroszner

Mr. Lacker
Mr. Olson

Ms. Pianalto

Mr. Warsh

Ms. Yellen

Mses. Cumming and Minehan, Messrs.

Moskow, Poole, and Hoenig, Alternate Members of the Federal

Open Market Committee

Messrs. Fisher and Stern, Presidents of

the Federal Reserve Banks of Dallas and Minneapolis, respectively

Mr. Stone, First Vice President, Federal

Reserve Bank of Philadelphia

Mr. Reinhart, Secretary and Economist

Ms. Danker, Deputy Secretary

Ms. Smith, Assistant Secretary

Mr. Skidmore, Assistant Secretary

Mr. Alvarez, General Counsel

Mr. Baxter, Deputy General Counsel

Ms. Johnson, Economist

Mr. Stockton, Economist

Messrs. Connors, Eisenbeis, Kamin,

Madigan, Sniderman, Struckmeyer, Tracy, Weinberg, and Wilcox, Associate Economists

Mr. Kos, Manager, System Open Market Account

Mr. Hambley,5 Assistant to the Board,

Office of Board Members, Board

of Governors

Messrs. Oliner and Slifman, Associate

Directors, Division of Research

and Statistics, Board of Governors

Mr. Whitesell, Deputy Associate Director, Division of Monetary Affairs,

Board of Governors

Mr. English, Assistant Director, Division of Monetary Affairs, Board of

Governors

Mr. Simpson, Senior Adviser, Division

of Research and Statistics, Board

of Governors

Mr. Orphanides, Adviser, Division

of Monetary Affairs, Board of

Governors

Mr. Small, Project Manager, Division

of Monetary Affairs, Board of

Governors.

Mr. Wright, Section Chief

of Monetary Affairs, 

Governors

Mr. Perli, Senior Economis

of Monetary Affairs, 

Governors

Mr. Luecke, Senior Financi

Division of Monetar

Board of Governors

Ms. Low, Open Market Secr

cialist, Division of 

Affairs, Board of Gover

Mr. Connolly, First Vice Pres

eral Reserve Bank of B

Messrs. Fuhrer and Rosenblu

tive Vice Presidents

Reserve Banks of Bosto

las, respectively

Messrs. Evans and Hakkio, M

and Messrs. Rasche, R

Rudebusch, Senior V

dents, Federal Reserve 

Chicago, Kansas City

phia, St. Louis, Minne

San Francisco, respectiv

Ms. Mosser, Vice Presiden

Reserve Bank of New Y

The Manager of the Syst

Market Account reported on 

velopments in foreign excha

kets. There were no open mar

tions in foreign currencies 

System’s account in the period 

previous meeting. The Manag

ported on developments in 

financial markets and on Sys

market transactions in governm

rities and federal agency o

during the period since the 

meeting. By unanimous vote, 

mittee ratified these transactio

The information reviewed 

meeting suggested that econo

ity was expanding strongly in 

quarter. Consumer spending 

5. Attended Monday’s session only. track to rise at a robust pace, 
ness purchases of equipment and software picked up appreciably. Warm

weather boosted housing construction in

January and February, although sales of

new homes dropped back and house

prices decelerated slightly. Private payrolls advanced solidly in the first two

months of the year. Headline consumer

price inflation jumped in January but

moderated in February as energy prices

moved down. Core inflation remained

contained.

Labor demand continued to increase

in the first two months of 2006, as private nonfarm payroll employment

showed large gains in both January and

February. With favorable weather conditions, employment growth was especially brisk in the construction sector.

Financial activities, business services,

and nonbusiness services also posted

solid payroll gains. Although the average workweek edged down in February,

the level of aggregate hours for production and nonsupervisory workers was

above its average for the fourth quarter

of 2005. The unemployment rate continued to decline and averaged 43⁄4 percent

over the first two months of the year.

Several other labor market indicators

also signaled a further tightening of

labor market conditions.

Industrial production picked up in

February after a modest decline in January. That pattern was attributable to

swings in utilities output, as temperatures were historically warm early in the

year before reverting to near seasonal

norms in February. Excluding utilities,

industrial production posted a sizable

gain in January before flattening out in

February, pointing to a solid rise in the

first quarter. Mining output—which

includes oil and natural gas extraction—

slipped in February after registering robust gains in each of the previous three

months. Manufacturing output was unchanged in February after a significant

increase in January. The rate o

utilization in the manufacturi

stood a bit above its long-run 

Consumer spending appeare

rebounded strongly in the fir

Motor vehicle purchases boun

in late 2005 and early 2006 

sluggish pace that followed t

the past summer’s “employee 

programs. Excluding motor 

consumption spending was ro

ported by continuing improv

the labor market and advance

and salary income. The annu

the pay of federal employees

living adjustments to Social 

benefits and other transfer 

and the initiation of the Med

scription Drug Plan boosted th

personal disposable income in 

Consumption was likely supp

by ongoing increases in home 

gains in the stock market. 

confidence as measured by 

remained consistent with 

increases in consumer spendin

Housing activity had m

somewhat from the robust pa

past summer. Although the 

single-family housing starts w

ally high in January and Febru

of this strength was likely the 

mild winter weather; new pe

ance extended the downward 

that began in October. After a

spike in January, multifamily 

starts dropped back in Februar

well within their historical ran

of new homes fell in the 

months of the year, while sale

ing homes turned up in Februa

first time since last August; b

sures were well below their 

mid-2005. The stock of home

was elevated compared with it

the last several years. Mortgag

tions continued to decline in 

and survey measures of homeb
titudes also maintained their recent

downward trend. Housing demand was

likely damped by rising mortgage rates,

which moved up further in late 2005 and

early 2006. House price appreciation

appeared to have slowed from the rapid

pace of the summer, but price increases

for both new and existing homes

remained well within the elevated range

that has prevailed in recent years.

Real outlays for equipment and software decelerated in the fourth quarter of

2005 but appeared to have gained

strength in early 2006. This pattern reflected sizable swings in outlays for

transportation equipment. The fundamentals underlying capital spending

continued to be supportive, as business

sector output expanded briskly, firms

remained flush with funds, and relative

price declines for high-tech equipment

continued to push down its user cost.

Although vacancy rates for nonresidential properties were well below the peaks

reached in the first quarter of 2004, real

spending on new construction had yet to

gain traction. In contrast, outlays for

drilling and mining structures continued

to rise rapidly and appeared poised to

increase further in the near term.

The book value of manufacturing and

trade inventories excluding motor vehicles rose at a moderate pace in the fourth

quarter of 2005, and inventories

appeared to have continued to build in

January. Much of the increase reflected

rising prices of goods held, and real

inventory accumulation was subdued.

The inventory-sales ratio declined

slightly in January, extending its longrun downward trend. Inventory stocks

appeared to be well aligned with demand in most industries.

The U.S. international trade deficit

rose in the fourth quarter and widened

further in January, as gains in exports of

goods and services were outweighed by

a substantially larger rise in imports.

Exports of industrial supplie

goods, and agricultural produ

up robustly in January, w

increase in imports was w

across most product categor

GDP growth in foreign industr

mies was mixed in the fourth 

economic activity slowed in 

area and in Canada while the 

economy expanded briskly an

in the United Kingdom firme

indicators of economic activity 

oping economies were gener

positive.

Readings on core consumer 

flation were favorable in recen

Nonetheless, the overall consu

index edged up in February a

tering a large increase in Jan

was driven mostly by a spike 

prices. While prices of food 

items recorded only modest in

February, energy prices fell b

increases in oil inventories a

sonably mild temperatures sin

ter part of December. Weekly 

March, however, indicated tha

prices rose sharply. Prices 

equipment inched up in Febru

more substantial gain in Janua

theless, prices of capital equip

celerated over the past twelv

Higher energy prices still seem

passing through to the prices 

ber of core intermediate 

although such increases were m

erate than those observed in th

ate aftermath of the hurricane

tumn. The increase in the em

cost index in the fourth quarte

was relatively modest. Com

per hour in the nonfarm busin

after having increased substa

the third quarter, was estimate

risen somewhat less in the fo

ter. Preliminary survey me

short-term inflation expect
March edged up, but longer-term measures remained steady.

At its January meeting, the Federal

Open Market Committee decided to

raise the target level of the federal funds

rate 25 basis points, to 41⁄2 percent. In its

accompanying statement, the Committee indicated that, although recent economic data had been uneven, the expansion in economic activity appeared solid.

Core inflation had stayed relatively low

in recent months, and longer-term inflation expectations had remained contained. Nevertheless, the Committee

noted that possible increases in resource

utilization as well as elevated energy

prices had the potential to add to inflation pressures. In these circumstances,

the Committee judged that some further

policy firming may be needed to keep

the risks to the attainment of both sustainable economic growth and price stability roughly in balance but reiterated

that it would respond to changes in economic prospects as needed to foster its

objectives.

Investors had largely anticipated both

the Committee’s interest rate decision at

the January meeting and the text of the

accompanying statement. Consequently,

the policy announcement elicited little

market reaction. Policy expectations and

yields on Treasury coupon securities

subsequently firmed, on net, over the

intermeeting period, as incoming data

indicated robust economic growth in the

United States and strengthening expansion abroad. Yields on investment-grade

corporate debt rose roughly in line with

those on comparable-maturity Treasury

securities, while yields on speculativegrade corporate debt were little changed.

Broad stock market indexes were modestly higher amid favorable economic

news and lower oil prices, and the tradeweighted foreign exchange value of the

dollar appreciated slightly over the

period.

Growth of domestic nonfina

tor debt appeared to have m

only a bit in the first quarte

robust pace in the fourth q

2005. Net issuance of corpor

and expansion of business loan

mercial banks had abated in 

and early March after robust 

January; commercial paper ou

was about flat in the first quart

hold mortgage borrowing wa

to have slowed somewhat in 

quarter in response to increa

gage interest rates. Consumer 

bounded some in January after 

ing in the fourth quarter b

elevated charge-offs related to 

in bankruptcy filings. Based o

Treasury statements, fede

seemed likely to have accelera

first quarter. On average, 

briskly in January and Februa

liquid deposits expanded m

small time deposits and reta

funds advanced strongly, sup

further increases in offering ra

The staff forecast prepared 

meeting showed real GDP e

briskly in the current quarter. 

growth was expected to mod

this year. The level of outp

current quarter was estimated t

to the economy’s potential an

ticipated to remain so over th

tion period. Core PCE infla

expected to move slightly high

because of cost pressures in

high energy and import pric

step back down in 2007 as 

pressures were anticipated to a

In their discussion of the 

situation and outlook, meetin

pants saw the economy as h

bounded strongly from the slo

the fourth quarter of last y

aggregate spending and em

expanding briskly in the curre

Growth was expected to mod
more sustainable pace later this year.

The ongoing cooling in the housing market would act to restrain residential construction and growth in consumption,

but business and household confidence

and supportive financial conditions

would help to foster growth in employment and incomes, keeping consumption and investment on a solid upward

track. Several meeting participants observed that, although the economy’s sustainable potential output could not be

observed directly or estimated with precision, historical patterns and recent data

suggested that current levels of labor

and product market resource utilization

were in a zone consistent with little or

no remaining economic slack. The

recent behavior of core consumer prices

seemed to indicate that any pass-through

of higher energy and other commodity

prices had been limited. In addition, productivity growth, moderate increases in

compensation, contained inflation expectations, and international competition were helping to restrain unit labor

costs and price pressures. Nonetheless,

meeting participants generally remained

concerned about the risk that possible

increases in resource utilization, in combination with the elevated prices of

energy and other commodities, could

add to inflation pressures.

Regarding the major sectors of the

economy, meeting participants noted

that consumer spending appeared to be

growing at a solid pace, notwithstanding

earlier rises in energy prices. Contacts in

the retail sector reported strong demand,

and lending to households seemed to be

robust. However, some automobile dealers reported subdued demand for domestic name-plate products. In coming quarters, consumer outlays were expected to

be supported by continued employment

gains, household income growth, and

relatively low long-term interest rates,

even if gains in housing wealth abated.

Meeting participants disc

some length signs of cooling i

dential real estate market. Publ

on housing starts showed little 

of a significant weakening in 

tion activity. However, anecdo

from several markets, surveys 

buyer attitudes, and data on in

home sales, and new home ca

rates all pointed to a moderatio

ing activity. It was noted tha

tively robust data on construct

ity could owe in part to uns

warm weather. Going forwar

pants expected a deceleration 

prices to contribute to an incre

household saving rate and to 

consumption growth. Aggrega

was also expected to be rest

rectly by a softening in the pac

building. Moreover, rebuildin

ing last year’s major h

appeared to be proceeding a

pace, and so would provide on

offset to the implications of m

mental developments in this m

Generally, however, the 

expansion appeared to be bro

Contacts indicated that certai

such as energy and semicond

duction, were particularly 

Against this backdrop, robust 

business spending was seen 

even as household spendin

moderated somewhat. Busine

expenditures, especially on e

and software, appeared to hav

erable momentum, supported 

corporate profits, exceptiona

balance sheets, and greater bu

timism. Some participants indi

nonresidential construction w

process of picking up and co

vacancy rates were declining 

regions.

Financial market conditions 

supportive of growth, with 

rates relatively low, risk sprea
porate debt markets narrow, and banks

seeking lending opportunities. Merger

and acquisition activity was strong and

infusions of private equity continued at

a rapid pace, but the domestic market

for initial public offerings was reported

to be quite weak. Although rates on

fixed-rate mortgages remained historically low, some ratcheting up of rates on

adjustable-rate mortgages was seen as a

factor weighing to some degree on the

housing market. More generally, the

effects on spending of the substantial

increase in short- and intermediate-term

rates since June 2004 had probably not

yet been fully felt.

There were reports of increased construction by state and local governments, which were benefiting from

strong tax collections. Federal defense

expenditures had leveled out. Foreign

economic growth appeared to have

strengthened of late, prompting some

firming of monetary policy by several

foreign central banks. Nonetheless,

increases in imports were expected to

continue to outpace increases in exports

in coming quarters, trimming the rate of

expansion of domestic output.

Meeting participants saw both upside

and downside risks to their outlook for

expansion around the rate of growth of

the economy’s potential. In the housing

market, for instance, some downshift

from the rapid price increases and strong

activity of recent years seemed to be

underway, but the magnitude of the

adjustment and its effects on household

spending were hard to predict. Some

participants cited stronger growth

abroad and robust nonresidential investment spending as potentially contributing more to activity than expected. It

was also noted that an abrupt rise in

long-term interest rates, reflecting, for

example, a reversion of currently low

term premiums to more typical levels,

could weigh on both house

business spending.

Several participants noted 

labor market had conti

strengthen, with payrolls incre

solid pace. The labor market 

showing some signs of tightne

tent with a relatively low job

There were anecdotal reports 

ages of skilled labor in a few 

such as health care, techno

finance. Still, participants exp

certainty about how mu

remained. Pressures on unit l

appeared contained, despi

health-care costs, amid continu

productivity growth and still

increases in several comprehen

sures of compensation growth

In their discussion of price

pants indicated that data over 

meeting period, including me

inflation expectations, sugge

underlying inflation was not i

cess of moving higher. Crude 

though volatile, had not risen 

bly in recent months on balan

flattening in energy prices w

ning to damp headline inflation

tion, core consumer inflation w

even a bit lower by some 

Some meeting participants 

surprise at how little of the pre

in energy prices appeared to ha

through into core inflation 

However, with energy prices 

high, and prices of some ot

modities continuing to rise, the 

least a temporary impact on c

tion remained a concern.

Participants noted that ther

yet few signs that any tightnes

uct and labor markets was 

inflation pressures. To date, 

costs were not placing pressur

tion, and high profit margins l

considerable buffer to absorb 

creases. Moreover, actual and 
competition from abroad could be restraining cost and price pressures,

though participants exchanged views on

the extent to which conditions in foreign

markets might be constraining prices domestically. However, participants observed that there was a risk that continuing increases in resource utilization

could add to inflationary pressures.

Some participants held that core inflation and inflation expectations were already toward the upper end of the range

that they viewed as consistent with price

stability, making them particularly vigilant about upside risks to inflation, especially given how costly it might be to

bring inflation expectations back down

if they were to rise.

In the Committee’s discussion of

monetary policy for the intermeeting

period, all members favored raising the

target federal funds rate 25 basis points

to 43⁄4 percent at this meeting. The economy seemed to be on track to grow near

a sustainable pace with core inflation

remaining close to recent readings

against a backdrop of financial conditions embodying an expectation of some

tightening. Since the available indicators showed that the economy could well

be producing in the neighborhood of its

sustainable potential and that aggregate

demand remained strong, keeping rates

unchanged would run an unacceptable

risk of rising inflation. Most members

thought that the end of the tightening

process was likely to be near, and some

expressed concerns about the dangers of

tightening too much, given the lags in

the effects of policy. However, members

also recognized that in current circumstances, checking upside risks to inflation was important to sustaining good

economic performance. The need for

further policy firming would be determined by the implications of incoming

information for future activity and

inflation.

With regard to the Com

announcement to be released 

meeting, members expressed 

ference in views about the a

level of detail to include in 

ment. In the end, they conc

the statement should note that 

growth had rebounded in th

quarter but that it appeared 

moderate to a more sustainab

coming quarters. Policymake

that the announcement sho

highlight the favorable outlook 

tion and summarize their re

that assessment, but that it sho

ate that possible increases in 

utilization, along with elevated 

commodity and energy prices

potential to add to inflation 

Changes in the sentence on th

of risks to the Committee’s 

were discussed. Several mem

concerned that market pa

might not fully appreciate the 

which future policy action w

on incoming economic data, 

when an end to the tightenin

seems likely to be near. Some 

expressed concern that retent

phrase “some further policy 

may be needed to keep th

roughly in balance” could 

construed as suggesting that 

mittee thought that severa

tightening steps were likely to 

sary. Nonetheless, all concurre

current risk assessment c

retained at this meeting.

The Committee also discus

perience with the two-day mee

ticipants agreed that the addit

had facilitated their discussi

economy, policy, and the word

announcement. It was agreed 

cause of scheduling conflicts

meeting of the Committee wou

on one day, Wednesday, May 

After experience with that an
the subsequent meeting that is already

scheduled for two days, a decision

would be taken about the general format

of future meetings.

At the conclusion of the discussion,

the Committee voted to authorize and

direct the Federal Reserve Bank of New

York, until it was instructed otherwise,

to execute transactions in the System

Account in accordance with the following domestic policy directive:

The Federal Open Market Committee

seeks monetary and financial conditions that

will foster price stability and promote sustainable growth in output. To further its longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with increasing the federal funds rate to an average of around

43⁄4 percent.

The vote encompassed approval of

the paragraph below for inclusion in the

statement to be released shortly after the

meeting:

The Committee judges that some further

policy firming may be needed to keep the

risks to the attainment of both sustainable

economic growth and price stability roughly

in balance. In any event, the Committee will

respond to changes in economic prospects as

needed to foster these objectives.

Votes for this action: Messrs. Bernanke

and Geithner, Ms. Bies, Messrs. Guynn,

Kohn, Kroszner, Lacker, and Olson,

Ms. Pianalto, Mr. Warsh, and Ms. Yellen. Vote against this action: None.

The meeting adjourned at 12:15 p.m.

Notation Vote

By notation vote completed on February

1, 2006, the Committee unanimously

approved the election of Ben S. Bernanke as Chairman of the Federal Open

Market Committee.

By notation vote completed on February 17, 2006, the Committee unanimously approved the minut

Federal Open Market Commi

ing held on January 31, 2006.

Vincent R

Meeting Held on

May 10, 2006

A meeting of the Federal Ope

Committee was held in the off

Board of Governors of the 

Reserve System in Washingt

on Wednesday, May 10, 200

a.m.

Present:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Guynn

Mr. Kohn

Mr. Kroszner

Mr. Lacker

Mr. Olson

Ms. Pianalto

Mr. Warsh

Ms. Yellen

Mr. Hoenig, Ms. Minehan, a

Moskow and Poole, 

Members of the Fed

Market Committee

Messrs. Fisher and Stern, Pr

the Federal Reserve Ba

las and Minneapolis, re

Mr. Stone, First Vice Preside

Reserve Bank of Philad

Mr. Reinhart, Secretary and 

Ms. Danker, Deputy Secreta

Ms. Smith, Assistant Secreta

Mr. Skidmore, Assistant Sec

Mr. Alvarez, General Couns

Ms. Johnson, Economist

Mr. Stockton, Economist

Messrs. Connors, Eisenbeis, 

min, Madigan, Sniderm

meyer, and Wilcox, 

Economists

Mr. Kos, Manager, System 

ket Account
Messrs. Oliner and Slifman, Associate

Directors, Division of Research

and Statistics, Board of Governors

Mr. Simpson, Senior Adviser, Division

of Research and Statistics, Board

of Governors

Mr. Orphanides, Adviser, Division

of Monetary Affairs, Board of

Governors

Mr. Small, Project Manager, Division

of Monetary Affairs, Board of

Governors

Mr. Wright, Section Chief, Division

of Monetary Affairs, Board of

Governors

Mr. Luecke, Senior Financial Analyst,

Division of Monetary Affairs,

Board of Governors

Ms. Low, Open Market Secretariat Specialist, Division of Monetary

Affairs, Board of Governors

Mr. Werkema, First Vice President,

Federal Reserve Bank of Chicago

Messrs. Fuhrer and Rosenblum, Executive Vice Presidents, Federal

Reserve Banks of Boston and Dallas, respectively

Messrs. Evans and Hakkio, Ms. Mester,

and Mr. Rasche, Senior Vice Presidents, Federal Reserve Banks of

Chicago, Kansas City, Philadelphia, and St. Louis, respectively

Mr. Hilton, Vice President, Federal

Reserve Bank of New York

Mr. Potter, Assistant Vice President,

Federal Reserve Bank of New

York

Mr. Weber, Senior Research Officer,

Federal Reserve Bank of Minneapolis

Mr. Hetzel, Senior Economist, Federal

Reserve Bank of Richmond

The Manager of the System Open

Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the

System’s account in the period 

previous meeting. The Manag

ported on developments in 

financial markets and on Sys

market transactions in governm

rities and federal agency o

during the period since the 

meeting. By unanimous vote, 

mittee ratified these transactio

With Mr. Lacker dissenting, 

mittee voted to extend for 

beginning in mid-December 

reciprocal currency (“swap”) 

ments with the Bank of Canad

Banco de Mexico. The arr

with the Bank of Canada 

amount of $2 billion equiva

that with the Banco de Mexic

amount of $3 billion equival

arrangements are associated 

Federal Reserve’s participati

North American Framework A

of 1994. The vote to renew the 

participation in the swap arra

maturing in December was tak

meeting because of the prov

each party must provide si

prior notice of an intention to 

its participation. Mr. Lacker 

because of his opposition, as 

at the January meeting, to 

exchange market interventio

Federal Reserve, which su

arrangements facilitate, and b

his opposition to direct lendi

eign central banks.

By unanimous vote, the C

delegated the authority to re

determine appeals of a denial 

to Committee records under F

other rules to the Board memb

nated as the primary and alte

ministrative Governors for Fr

Information and Privacy Ac

Also by unanimous vote, the C

established a FOIA Requeste

Center and designated Carol R

fulfill the associated responsib
The information reviewed at this

meeting suggested that economic activity expanded strongly in the first quarter

and that gains were widespread across

most categories of final sales. Consumer

spending posted a sizable increase,

driven by January’s bounceback in

motor vehicle purchases and an acceleration in spending on other goods at the

turn of the year. In addition, favorable

weather boosted housing construction

early in the quarter. Later in the quarter,

however, the pace of consumer spending

moderated, and housing starts retraced

their earlier run-up. Business investment

spending strengthened in the first quarter, in part because of a surge in the

purchases of transportation and hightech equipment and a step-up in nonresidential construction. Manufacturing production also posted solid gains in the

first quarter and payroll growth moderated a bit in April after robust gains in

employment in the first quarter. Overall

consumer prices jumped in March because of higher energy prices, while

core prices rose a bit more rapidly than

in earlier months.

Nonfarm payrolls increased by

138,000 jobs in April following robust

growth in March. The gains in April

were widespread: Manufacturing and related industries registered significant

increases, mining activity and employment were boosted by rising energy

prices, construction hiring posted a moderate gain, and a range of servicesproducing industries strengthened, with

the important exception of retail trade,

which more than reversed its March

gains. Average hours of production or

nonsupervisory workers on private nonfarm payrolls edged up in April. The

increases in the workweek and employment in April led to notable growth in

aggregate hours of production or nonsupervisory workers. The unemployment

rate edged down to 4.7 percent 

and remained at that level in A

Industrial production in M

panded at about the same stron

it did in February, with gai

across all major components 

dex. Manufacturing activity p

in March after a lull in Februa

manufacturing growth for the 

ter as a whole slowed from 

pace of the fourth quarter, it 

that of the previous year. Man

capacity utilization during th

was a bit above its long-run 

Mining output—which includ

natural gas extraction—streng

the first quarter as a whole. W

quarter, however, the boo

hurricane-related recovery s

ebb. While utility output surge

ruary and moved up a bit 

March, these increases on

reversed the weather-related 

January.

Growth of consumer 

appeared to moderate after po

able gains around the turn of 

Excluding motor vehicles, re

rose temperately in March, b

the continued rise in spendin

vices. Spending on goods 

motor vehicles posted a secon

monthly decline after robust g

the previous four months. Sal

vehicles held steady in M

picked up a bit in April, bri

average pace for the year w

that of the fourth quarter but a

with the rate of last year. Alth

tinued improvements in the l

ket had been generating co

gains in nominal wage an

income, rising gasoline pr

down the increase in real d

personal income in March 

expected to damp it in Apri

Ongoing increases in home p

additional gains in the stoc
however, further boosted household

wealth during the first quarter. Measures

of consumer confidence remained

consistent with moderate increases in

consumer spending.

The underlying pace of residential activity seemed to moderate in the first

quarter. After unseasonably warm

weather allowed a high level of singlefamily housing starts in January and

February, starts fell in March to their

lowest level in a year. New permit issuance for single-family homes also fell in

March, continuing its downward trend.

Multifamily starts recovered a bit in

March from their low rate in February

but remained well within their historical

range. Home sales also declined, on net,

in recent months. Although sales of existing single-family homes edged up in

February and March, the level of sales

for the first quarter as a whole was

notably below the record high in the

second quarter of last year. Sales of new

homes also moved up in March, but

their average in the first quarter was

down substantially from the peak in the

third quarter of last year. House price

appreciation appeared to have slowed

from the elevated rates seen over the

past summer. Growth in the average

sales price of existing homes in March,

versus a year earlier, decelerated

sharply, and the average price for new

homes in March fell compared to a year

earlier. In addition, other indicators,

such as months’ supply of both new and

existing homes for sale and the index of

pending home sales, supported the view

that housing markets had cooled in

recent months.

Real outlays for equipment and software surged in the first quarter after a

relatively subdued performance in the

fourth quarter of last year. Much of the

growth reflected a sharp jump in business purchases of transportation equipment, such as airplanes and motor vehicles. Spending on high-tech e

and software also improved 

tionally strong growth in exp

for communications equipm

than compensated for fairly s

ing on computers and peripher

software. Conditions in the no

tial construction sector improv

ably. Although spending on no

tial building construction rema

short of the robust levels se

2000, growth of expenditure

sector was at its fastest pace i

quarter in nearly six years. O

drilling and mining structures 

to climb in the first quarter, 

able data pointed to ongoing g

Real nonfarm inventories 

down in the first quarter, large

ing a decline in investment 

vehicle inventories. Excludi

vehicles, inventories increased 

well above that in the fourt

Over the past twelve month

tories relative to shipments 

had moved down moderately 

ance, extending the long-run d

trend.

The U.S. international tra

narrowed in February as 

decrease in imports more tha

modest fall in exports. The d

both categories were genera

spread across sectors with the 

of oil imports, which were 

imported services, which ros

ing data for foreign industri

mies were generally favor

pointed to continued expansio

able data showed continued 

GDP in the United Kingdom i

quarter, continuing strong dom

mand in Canada through Feb

going recovery in Japan, an

quarter rebound in euro-area 

performance.

Headline inflation turne

March. Although the price of n
had fallen because of continued plentiful inventories, retail gasoline prices

surged, leading to a jump in overall

energy prices for the month. Prices of

core goods and services also rose more

quickly in March, largely because of a

spike in the apparel component that unwound a decline in February and a onetime step-up in medical prices related to

changes in Medicare reimbursement

rules. During the twelve months ending

in March, overall inflation rose at a

slightly faster pace than that in the preceding twelve-month period, while core

prices for the same period increased a

bit more slowly than in the previous

year. Producer price inflation also

moved up in March, driven largely by

higher food and energy prices. Readings

on the growth in the cost of labor were

mixed. Over the three months ending in

March, the employment cost index for

hourly compensation of private industry

workers rose at its slowest pace in several years. Data on compensation per

hour in the nonfarm business sector,

however, pointed toward notably faster

growth in the first quarter. Some

financial-market and survey indicators

suggested that inflation expectations,

both for the upcoming year and for the

longer term, had moved up since the

March meeting.

At its March meeting, the Federal

Open Market Committee decided to

raise its target for the federal funds rate

25 basis points, to 43⁄4 percent. In its

accompanying statement, the Committee indicated that the slowing of the

growth of real GDP in the fourth quarter

of 2005 seemed largely to have reflected

temporary or special factors. Economic

growth had rebounded strongly in the

first quarter but seemed likely to moderate to a more sustainable pace. As yet,

the run-up in the prices of energy and

other commodities appeared to have had

only a modest effect on core inflation,

ongoing productivity gains h

to hold the growth of unit labo

check, and inflation expecta

remained contained. Still, the 

tee noted that possible inc

resource utilization, in combin

the elevated prices of energy 

commodities, had the potentia

inflation pressures. In these 

stances, the Committee jud

some further policy firming 

needed to keep the risks to t

ment of both sustainable 

growth and price stability r

balance, but reiterated that in 

the Committee would res

changes in economic pros

needed to foster these objectiv

Investors anticipated the FO

cision at its March meeting to 

target federal funds rate 25 ba

but the Committee’s post-mee

ment evidently led them to 

somewhat their expected pat

federal funds rate. Subsequ

path was pushed up further b

leases that were, on balance

than market participants had 

Speeches by Federal Reserve 

the minutes of the March me

Congressional testimony by t

man combined to restrain poli

tations some. On net, the a

path of the federal funds rate 

next two years nonetheles

upward. Yields on inflatio

Treasury securities moved up 

intermeeting period, but yields 

nal Treasury issues rose more

of yields on investment-gra

over those on comparable

Treasury securities were a

changed, while those on sp

grade bonds declined. Major s

indexes were up a bit over the 

ing period, as positive first-qu

ings reports more than offset 
tive effects of higher energy prices and

rising interest rates.

The trade-weighted exchange value

of the dollar against major foreign currencies fell since the March meeting.

Increased focus in public debate on the

risks posed by the large U.S. external

imbalance appeared to erode investor

support for the dollar.

Domestic nonfinancial sector debt

was estimated to have grown at a robust

pace in the first quarter, down only

slightly from the brisk pace of 2005.

Business sector debt appeared to have

expanded strongly, supported by significant net issuance of U.S. corporate

bonds and double-digit growth of business loans at commercial banks. In the

household sector, consumer credit continued to rise slowly, and the growth of

household mortgage debt was thought,

based on limited data, to have moderated somewhat in the first quarter

against a backdrop of higher mortgage

interest rates and some signs of a deceleration in house prices. M2 advanced at

a pace somewhat below that of nominal

GDP in the first quarter and was estimated to have expanded moderately in

April.

The staff forecast prepared for this

meeting showed real GDP growth moderating somewhat from the average pace

of the previous several quarters. The

projected deceleration of real GDP reflected the lagged effects of the tightening of monetary policy, the waning impetus from increases in household

wealth, and reduced stimulus from fiscal

policy. While higher energy prices were

expected to boost inflation in the near

term, structural productivity was strong,

and the influence of higher energy and

material costs was thought likely to

moderate. Thus, consumer prices, after

increasing at a faster rate in the first half

of the year, were expected to decelerate

later this year and next year.

In their discussion of the 

situation and outlook, meetin

pants saw the economy as h

bounded strongly so far this 

the slowing of growth in the fo

ter. The advance in output 

vigorous in the first quarter of 

with real GDP increasing at 

5 percent annual rate. Alth

expansion appeared likely to 

it evidently remained solid. 

pressures appeared to be 

greater than the Committee h

pated at the time of its March 

Consumer prices recently had 

pace noticeably above the av

over the previous twelve mon

prices of energy and many o

modities had climbed sharpl

and inflation expectations ap

have risen slightly. If econom

continued to moderate ove

quarters, as anticipated, pre

productive resources would m

continue to be limited. Most pa

expected that, after allowing 

possible near-term volatility 

the recent jump in energy 

commodity prices, core inflat

probably remain around the le

rienced on average over the 

However, recent developme

gested that upside risks to inf

risen somewhat since the tim

March meeting.

In their discussion of major 

the economy, some participa

that growth of household spen

likely to slow over the remain

year. Anecdotal information p

some cooling of housing mar

cooling was especially notic

high-end homes and for house

kets that previously had exper

steepest appreciation. Data 

sales, permits, and starts on 

likewise suggested that act

gradually diminishing. Som
indicated that speculative building of

homes had dropped off considerably, but

inventories of unsold homes still seemed

to be expanding. Although fresh comprehensive data were not available,

home prices on average appeared still to

be rising, but at a slower pace than over

the past few years. Going forward,

growth in consumption spending was

likely to be supported by gains in employment and personal income. But

slower appreciation of home prices and

the effects of the increases in energy

prices and interest rates that had already

occurred would likely act to restrain

consumption spending somewhat. Certain features of recently popular nontraditional mortgage products had the potential to cause financial difficulties for

some households and erode mortgage

loan performance for some lenders.

Nonetheless, the household sector

seemed likely to remain in sound financial condition overall. On balance, consumption spending was viewed as most

likely to expand at a moderate pace in

coming quarters.

Several participants remarked that

business investment spending was robust. Nonresidential construction was

accelerating notably, in the process absorbing some of the resources that were

being diverted from housing. Office vacancy rates were declining, spurring

construction of new office buildings.

Drilling and mining activity was said to

be particularly strong, propelled by the

high levels of energy prices. Investment

in equipment and software appeared to

be expanding at a solid rate. Capital

formation was likely to continue to be

supported by rising output, strong balance sheets in the business sector, and

ready availability of financing on attractive terms.

Some participants commented on the

recent surge in federal tax revenues, a

development that was being mirrored at

the state level. While the preci

for the increase in federal rece

not entirely clear, robust incom

was probably an important fac

case, the effect was to trim th

federal budget deficit noticeab

theless, the longer-run federal 

balance remained a serious co

Data on economic growth o

United States indicated that t

expansion was firming, a sen

fied by reports from internati

tacts. The apparent strengtheni

bal growth was likely to sup

exports and economic acti

would also tend to maintai

pressures on energy and co

prices.

Meeting participants expres

concern about recent price 

ments and their implications 

tion prospects. Core consume

lately had been a little hig

expected. Moreover, energy p

risen steeply in the period 

March meeting, and, althou

through apparently had been 

date, the most recent increases 

reflected to a greater degre

inflation in coming months. Pa

noted that prices of non-ene

modities, such as industrial m

building supplies, also had be

ing. The recent decline in the d

another factor that could add t

pressures, although the effec

changes in the foreign excha

of the dollar on core consum

had apparently been limited. 

contacts had reported continu

ages of certain types of skilled 

related wage pressures in som

tions, which would tend to bo

However, participants also c

factors that could be expected 

inflation. Although alternative 

of labor compensation provid

gent readings, growth of total 
sation on balance appeared to remain

moderate. And, even if nominal wages

should accelerate somewhat, relatively

wide profit margins could buffer the

effect on prices of final goods and services. While firms would seek to maintain those margins, recent experience

suggested that this might be accomplished in part through further productivity gains, which had remained fairly

strong on balance in recent quarters,

rather than through more rapid price

hikes.

Participants discussed in some detail

inflation expectations—a potentially important factor influencing future inflation trends. Some surveys suggested that

inflation expectations had risen in recent

weeks, but others implied that expectations were little changed. Measures of

inflation compensation based on the difference between yields on nominal Treasury securities and inflation-indexed

issues had edged higher. It was possible,

though, that investors’ uncertainty regarding inflation prospects, not just inflation expectations themselves, had

risen. On balance, participants judged

that inflation expectations had risen

somewhat—a development that would

have to be taken into account in policymaking and warranted close monitoring—but remained contained.

Although the Committee discussed

policy approaches ranging from leaving

the stance of policy unchanged at this

meeting to increasing the federal funds

rate 50 basis points, all members believed that an additional 25 basis point

firming of policy was appropriate today

to keep inflation from rising and promote sustainable economic expansion.

Recent price developments argued for

another firming step at today’s meeting.

Core inflation recently had been a bit

higher than had been expected, and several members remarked that core inflation was now around the upper end of

what they viewed as an a

range. Moreover, a number 

were augmenting the upside r

flation: the surge in energy 

modity prices, some recent we

the foreign exchange value of 

and the possibility that the 

increase in inflation expectatio

if it persisted, impart moment

flation. In addition, the 

appeared to be operating at a 

high level of resource utiliz

had been growing quite stro

whether economic growth wou

ate to a sustainable pace wa

clear. At the same time, mem

saw downside risks to econom

ity. For example, the cumula

of past monetary policy action

recent rise in longer-term inte

on housing activity and pri

turn out to be larger than expe

it seemed most likely that, wi

further policy action, inc

25 basis point firming today, 

activity would moderate gradu

coming quarters, pressures on 

would remain limited, and cor

would stay close to levels ex

over the past year.

Given the risks to growth 

tion, Committee members we

tain about how much, if an

tightening would be needed 

day’s action. In view of the ris

outlook for inflation could w

Committee decided to repeat t

tion in the policy statement 

after the March meeting that 

ther policy firming could be 

However, the Committee agre

phasize that “the extent and 

any such firming will depen

tantly on the evolution of the 

outlook as implied by incom

mation.” Members debated the 

ate characterization of inflation 

tions in the statement. Low a
inflation expectations were key to the

attainment of the Committee’s dual objectives of price stability and maximum

sustainable economic growth. However,

the apparent pickup in longer-term expectations, while worrisome, was relatively small. They remained within the

range seen over the past couple of years,

and the increase could well reverse before long. Accordingly, it appeared appropriate to characterize inflation expectations again as “contained.”

At the conclusion of the discussion,

the Committee voted to authorize and

direct the Federal Reserve Bank of New

York, until it was instructed otherwise,

to execute transactions in the System

Account in accordance with the following domestic policy directive:

The Federal Open Market Committee

seeks monetary and financial conditions that

will foster price stability and promote sustainable growth in output. To further its longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with increasing the federal funds rate to an average of around

5 percent.

The vote encompassed approval of

the paragraph below for inclusion in the

statement to be released shortly after the

meeting:

The Committee judges that some further

policy firming may yet be needed to address

inflation risks but emphasizes that the extent

and timing of any such firming will depend

importantly on the evolution of the economic outlook as implied by incoming information. In any event, the Committee will

respond to changes in economic prospects as

needed to support the attainment of its

objectives.

Votes for this action: Messrs. Bernanke

and Geithner, Ms. Bies, Messrs. Guynn,

Kohn, Kroszner, Lacker, and Olson,

Ms. Pianalto, Mr. Warsh, and Ms. Yellen. Votes against this action: None.

During the interval between the

March and May meetings, Chairman

Bernanke had appointed a su

tee on communications issu

chaired by Governor Kohn an

ing Presidents Stern and Y

today’s meeting, Governor K

cated that the objective of the 

mittee was to help the Commi

and organize discussion of a br

of such issues over coming m

The meeting adjourned at 1

Notation Vote

By notation vote completed on 

2006, the Committee unanim

proved the minutes of the Fed

Market Committee meeting 

March 27–28, 2006.

Vincent R

Meeting Held on

June 28–29, 2006

A meeting of the Federal Ope

Committee was held in the off

Board of Governors of the 

Reserve System in Washingt

on Wednesday, June 28, 200

p.m. and continued on Thurs

29, 2006 at 9:00 a.m.

Present:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Guynn

Mr. Kohn

Mr. Kroszner

Mr. Lacker

Ms. Pianalto

Mr. Warsh

Ms. Yellen

Ms. Minehan, Messrs. Mosk

and Hoenig, Alternate M

the Federal Open Marke

tee

Messrs. Fisher and Stern, Pr

the Federal Reserve Ba

las and Minneapolis, re
Mr. Stone, First Vice President, Federal

Reserve Bank of Philadelphia

Mr. Reinhart, Secretary and Economist

Ms. Danker, Deputy Secretary

Ms. Smith, Assistant Secretary

Mr. Skidmore, Assistant Secretary

Mr. Baxter, Deputy General Counsel

Ms. Johnson, Economist

Mr. Stockton, Economist

Messrs. Connors, Eisenbeis, Judd, Kamin, Madigan, Sniderman, Struckmeyer, Tracy, Weinberg, and Wilcox, Associate Economists

Mr. Kos, Manager, System Open Market Account

Messrs. Oliner and Slifman, Associate

Directors, Division of Research

and Statistics, Board of Governors

Ms. Zickler, Deputy Associate Director,

Division of Research and Statistics, Board of Governors

Mr. English, Assistant Director, Division of Monetary Affairs, Board of

Governors

Messrs. Dale6 and Simpson, Senior Advisers, Divisions of Monetary

Affairs and Research and

Statistics, respectively, Board of

Governors

Mr. Gross, Special Assistant to the

Board, Office of Board Members,

Board of Governors

Mr. Small, Project Manager, Division

of Monetary Affairs, Board of

Governors

Mr. Nelson, Section Chief, Division

of Monetary Affairs, Board of

Governors

Mr. Perli, Senior Economist, Division

of Monetary Affairs, Board of

Governor

Mr. Doyle and Ms. Judson, Economists,

Divisions of International Finance

and Monetary Affairs, respectively,

Board of Governors

Mr. Luecke, Senior Financial Analyst,

Division of Monetar

Board of Governors

Ms. Low, Open Market Secr

cialist, Division of 

Affairs, Board of Gover

Mr. Moore, First Vice Pres

eral Reserve Bank of C

Messrs. Fuhrer and Rosenblu

tive Vice Presidents

Reserve Banks of Bosto

las, respectively

Mr. Evans, Ms. Mester, an

Rasche, Rolnick, an

Senior Vice President

Reserve Banks of Chic

delphia, St. Louis, M

and Kansas City, respec

Ms. Mucciolo, Vice Preside

Reserve Bank of New Y

By unanimous vote, the C

approved a “Report and Pla

Federal Open Market Com

Improve FOIA Operations” 

proved a delegation of author

Chairman (or his designee) 

actions required under the Fr

Information Act.

The Manager of the Syst

Market Account reported on 

velopments in foreign excha

kets. There were no open mar

tions in foreign currencies 

System’s account in the period 

previous meeting. The Manag

ported on developments in 

financial markets and on Sys

market transactions in governm

rities and federal agency o

during the period since the 

meeting. By unanimous vote, 

mittee ratified these transactio

The information reviewed a

meeting suggested that the g

economic activity in the secon

slowed substantially from its r

quarter pace. The expansion 

6. Attended Thursday’s session only. sumer spending softened, and 
the housing market continued to cool. In

contrast, the underlying rate of business

spending remained strong and was well

supported by fundamentals. The demand

for labor appeared to moderate as hiring

stepped down in recent months. Consumer price inflation remained elevated

in April and May, reflecting sharp rises

in energy prices and more rapid increases in core prices.

Gains in nonfarm private payrolls

averaged 112,000 over the three months

ending in May, a pace considerably below the average of about 170,000 jobs

per month for the prior three-month

period. The slowing in hiring was most

pronounced in retail trade but was also

evident in construction and information

services. Establishments in professional

and business services, nonbusiness services, and wholesale trade continued to

add jobs at roughly the same pace as

earlier in the year. Average hours of

production or nonsupervisory workers

on private nonfarm payrolls edged up in

April but reversed these gains in May.

The unemployment rate was 4.6 percent

in May, near its average for the year so

far.

Industrial production edged down in

May after strong growth in April,

largely reflecting the patterns of manufacturing output. For the year to date,

manufacturing production advanced at a

rate significantly below its rapid fourthquarter growth rate but only a bit below

its average pace of expansion since mid2003. The mining sector, which includes

oil and natural gas extraction, expanded

solidly in April before falling back in

May. Utilities output also grew strongly

in April but retreated in May as temperatures returned to normal after having

been unseasonably warm in April. Capacity utilization in manufacturing

remained somewhat above its long-run

average in both April and May.

Real consumer spending ap

be on track to decelerate not

the current quarter after posti

growth in the first quarter. Th

reflected both a marked reduc

growth in real outlays for m

cles from an elevated first-qu

and a moderation in the advan

expenditures for other goods 

months. Underlying this slow

expansion of consumer exp

was a moderation in the fun

determinants of spending. Th

nominal wages and salaries be

the fourth quarter of 2005 w

down considerably, and rising 

prices held down the gains in 

posable income. Higher inte

also likely restrained spendin

theless, despite recent declines 

prices, the wealth-to-incom

remained well above its histor

age, and consumer sentime

dipped in May, rebounded som

June.

Residential construction acti

erated over the past few m

remained at a historically h

Single-family starts posted 

drop in May for the third co

month. Although a substantial 

May’s decline seemed to be 

payback for the elevated leve

early in the year, when weath

tions had been favorable, the u

pace of single-family housing 

tion appeared to have slowe

multifamily sector, starts in M

well within the typical range 

1995. Sales of both new and 

single-family homes in April 

were significantly below their 

the summer of 2005, though n

sales continued to regain som

after having fallen in Febru

most reliable measures of ho

indicated modest growth foll

rapid increases seen last year.
After a first-quarter surge, real spending on equipment and software appeared

on track for a much smaller gain in the

second quarter. Incoming data for the

current quarter suggested that spending

on transportation equipment reversed

the run-up that occurred in the first quarter. Spending on high-tech equipment

and software advanced at a slower pace

in the second quarter as a flattening out

of spending on communications equipment after a huge increase in the first

quarter offset some pickup in businesssector demand for computers and software. The construction of nonresidential

buildings picked up noticeably so far

this year, although activity remained

well short of its previous peak in mid2000. Outlays on drilling and mining

structures continued to climb in response to high projected energy prices.

The book value of manufacturing and

trade inventories excluding motor vehicles stepped up in April. The ratio of

book-value inventories to sales held

steady for the year so far after having

fallen considerably last year. In general,

inventories appeared to be well aligned

with demand, and business surveys suggested that firms were comfortable with

the level of inventories.

The U.S. international trade deficit

widened in April, reflecting a large

increase in imports coupled with a slight

decline in exports. Import growth was

led by sharp rises in the value of imported oil and natural gas and increased

imports of automotive products and

capital goods. Exports were restrained

in part by a decline in aircraft exports.

Expansion of economic activity in the

foreign industrial countries was solid in

the first quarter, but indications for the

second quarter were more mixed. Incoming data pointed to a possible slowing in Canada, but signs of further

expansion in the euro area and of continued growth in Japan were evident, notwithstanding sharp declines 

indexes in these countries.

Headline inflation picked u

and May, driven partly 

increases in the prices of p

based products. In contrast, n

prices continued to decline in 

to excess supply, fully reve

autumn’s rises. Higher oil pric

through to producer prices for 

of energy-intensive intermedi

Consumer food prices decelera

edly since January, reflectin

price increases for food aw

home and declines, on balan

prices of fruits and vegetab

price inflation rose less than 

inflation in April and May but 

pace earlier in the year. Co

were boosted in part by an ac

in shelter costs, especially 

puted for owner-occupied r

Readings on the growth of la

were revised down for the four

of 2005 and first quarter of 

recent data suggested a pick

second quarter. A number of 

of inflation expectations la

versed increases recorded in t

At its May meeting, the Fed

Market Committee (FOMC) d

raise its target for the federal 

25 basis points, to 5 percent. T

mittee’s accompanying statem

cated that economic growth 

quite strong so far this year. T

mittee saw growth as likely to 

to a more sustainable pace, 

flecting a gradual cooling of th

market and the lagged e

increases in interest rates an

prices. At that time, the run-

prices of energy and other com

appeared to have had only 

effect on core inflation. Ong

ductivity gains had helped to 

growth of unit labor costs in c

inflation expectations remai
tained. Still, possible increases in

resource utilization and the elevated

prices of energy and other commodities

had the potential to add to inflation pressures. In these circumstances, the Committee foresaw the possibility of a need

for some further policy firming to address inflation risks but emphasized that

the extent and timing of any such firming would depend importantly on the

evolution of the economic outlook as

implied by incoming information.

Investors anticipated the FOMC’s decision at its May meeting to raise the

federal funds rate target 25 basis points,

but near-term policy expectations edged

up, apparently in response to the accompanying statement. Subsequent data releases reporting higher-than-expected

inflation, the release of the FOMC minutes, and speeches by Federal Reserve

policymakers all led investors to push

up their expectations for the future path

of the federal funds rate. Yields on nearterm nominal Treasury securities rose in

line with policy expectations over the

intermeeting period, but those on longerdated securities moved up by smaller

amounts. Yields on inflation-indexed

Treasury securities increased by more

than those on nominal securities, and the

resulting decline in inflation compensation retraced a substantial share of the

rise that had occurred over the preceding intermeeting period. Major stock

price indexes fell sharply over the

period. Spreads of yields on corporate

bonds over those on comparablematurity Treasury securities widened

somewhat, while those on speculativegrade issues rose by more.

After changing little on balance during much of May, the dollar’s foreign

exchange value against other major currencies moved up in June and showed a

modest increase, on net, over the intermeeting period. The dollar appreciated

after comments by FOMC policymakers

that were interpreted by mark

pants as suggesting a higher 

of policy tightening at the Jun

meeting. Prices of precious a

trial metals, which had rise

since early March, particularl

reversed those gains later in 

meeting period.

Debt of the domestic no

sectors was estimated to hav

ated in the second quarter afte

first-quarter increase. Busine

debt advanced more slowly i

ond quarter, although the exp

business loans remained bris

issuance of corporate bonds w

In the household sector, mort

rowing slowed in response to 

dued housing activity and m

house-price appreciation. M2 

the second quarter was tepi

growth of nominal income h

ently softened and rising op

cost continued to dampen de

money.

The staff forecast prepared 

meeting indicated that, after th

cant deceleration of real GD

current quarter from the first 

2006, growth would proceed 

the end of 2007 at a pace a bit 

rate of growth of the econom

tial. The outlook for modest 

real GDP reflected a slowdo

housing market, the effects of 

icy tightening, and a diminishe

consumer spending from inc

household wealth. Core consu

inflation was projected to hav

up in the second quarter from 

age pace over the precedin

quarters but to then drop ba

what, albeit to a level higher t

ously forecasted, as energy a

prices flatten out and som

emerges in labor and product 

In their discussion of the 

situation and outlook, meetin
pants saw economic growth as having

moderated in the second quarter from its

robust pace in the first quarter, reflecting

a cooling of the housing market and the

lagged effects of increases in interest

rates and energy prices. Most participants expected output to advance over

the next year and a half at a pace close

to that which the economy can sustain

over time. All participants found the

elevated readings on core inflation of

recent months to be of concern and, if

sustained, inconsistent with the maintenance of price stability. However, contained inflation expectations, the abatement of upward pressure from past

increases in energy and other commodity prices, and the slowing in the growth

of economic activity that was under way

were expected to contribute to a moderation in core inflation in coming quarters.

Nonetheless, participants noted a risk

that the drop-back in inflation could be

slower or more limited than the Committee would find desirable since

resource utilization was currently tight

and the pickup in price increases had

been broadly based rather than being

limited to a few specific sectors that

could be linked to energy costs.

In preparation for the Federal Reserve’s semiannual report to the Congress on monetary policy, the members

of the Board of Governors and the presidents of the Reserve Banks submitted

individual projections of the growth of

GDP, the rate of unemployment, and

core consumer price inflation for 2006

and 2007, conditioned on the participants’ views of the appropriate path for

monetary policy. The forecasts of the

rate of fourth-quarter to fourth-quarter

expansion in real GDP for 2006 were in

a range of 3 to 33⁄4 percent, with a

central tendency of 31⁄4 to 31⁄2 percent,

and those for 2007 were in a range of

21⁄2 to 31⁄4 percent, with a central tendency of 3 to 31⁄4 percent. These rates of

growth were associated with 

unemployment rate in a range 

5 percent in the fourth quart

year and 41⁄4 to 51⁄4 percent in 

quarter of 2007, with a central 

at both horizons of 43⁄4 to 5 

Forecasts of the rate of inf

measured by the change in th

fourth-quarter core PCE pr

from a year earlier, ranged fr

3 percent for this year, with 

tendency of 21⁄4 to 21⁄2 percen

range and central tendency w

21⁄4 percent for next year.

In their discussion of the m

tors of the economy, partici

served that housing constructio

had declined notably in recen

as indicated by lower housing 

permits; moreover, higher inve

unsold homes, a sharp rise in 

tions of new home sales, an

from construction companies 

that the weakness was like

extended. Several participant

out that the decline was broad

with expectations in light of th

ing in monetary policy and 

run-up in home prices and r

construction in recent years. Pa

also observed that the eviden

indicated that the slowdown w

but were mindful of the possi

sharper downturn in the sector

The growth of consumer 

had dropped off significantly i

ond quarter from a robust pace 

the year. The slowdown was 

in part to higher energy price

to a likely downshift in ho

appreciation and higher intere

reduction in the attractiveness 

equity borrowing was mention

sibly contributing to the s

Some retailers, especially thos

to lower- and middle-income c

reported weaker growth in sa

sumer spending was expecte
vance modestly in coming quarters as

the effects of more moderate gains in

home prices and a gradual rebound in

the household saving rate from recent

historically low levels were offset by

further gains in employment and growth

in labor income. A few participants

noted that the surge in federal tax

receipts this year and a similar advance

in revenue at the state level could be a

sign of vigorous gains in income,

indicating that household spending may

expand more rapidly than many were

anticipating.

Participants interpreted the incoming

data on orders and shipments of durable

goods, positive readings on business

sentiment, and continued high levels of

corporate profitability as suggesting that

business investment would remain a

source of strength going forward. In a

shift from the pattern observed in the

past few years, some contacts suggested

that businesses were now directing their

capital expenditures toward expanding

capacity rather than increasing efficiency, a signal of the anticipation of

continued solid growth in demand. Business expenditures on nonresidential

structures also were seen to be advancing robustly in a number of markets,

possibly providing some offset to reduced residential construction activity.

Several participants observed that the

continued ready availability of credit

would support business expenditures.

Others, however, noted that the pullback

from risk-taking that had been observed

in some financial markets over the preceding few months could intensify, raising the cost of funds.

Participants observed that many foreign central banks had tightened monetary policy over the intermeeting period

in response to strengthening activity and

indications of inflation pressures.

Greater uncertainty about inflation pressures and the needed policy response

had perhaps contributed to a 

ment of risks by investors glo

spite the tighter policy, how

nomic growth in the Unite

major trading partners appea

to remain solid, supporting U.S

Participants also discussed th

global capacity utilization in 

tion process.

All meeting participants 

concern about recent elevated 

on core inflation. A key issu

extent to which this spring’s i

inflation reflected transitory 

tent influences. Many noted th

ber of factors were temporarily 

inflation. The pass-through o

stantial rise in energy pric

account for a considerable p

step-up in core inflation in re

ters. In addition, rising rents 

boosting the cost of shelter an

tributing to the increase in c

tion. However, energy pri

expected to level out, and re

difficult to forecast, were v

some participants as likely to 

in coming quarters. The mod

the economic expansion was 

to prevent pressures on resour

tion from intensifying. In sum

flation expectations contained 

labor costs held down by ongo

in productivity and modest ad

compensation, inflation was 

most participants as likely to e

Nevertheless, several fact

cited as potentially sustainin

pressure on inflation, and the 

participants’ forecasts for core 

in 2007 rose by 1⁄4 percent

relative to the range of forecas

February. Some participants n

businesses in their Districts we

encing difficulty hiring certain 

skilled workers, suggesting 

creased wage pressures migh

In addition, some business con
cated a greater ability to pass higher

costs on to customers, although other

businesses continued to report that their

pricing power remained limited. The

relatively taut resource markets and the

lagged effects of the increase in energy

prices raised the possibility that inflation could continue at somewhat elevated levels for some time. Higher levels of inflation, should they persist,

could become embedded in inflation expectations. In that vein, several participants noted that inflation expectations

had been sensitive to incoming data and

to communications regarding monetary

policy over the intermeeting period.

All Committee members agreed that

raising the target for the federal funds

rate 25 basis points, to 51⁄4 percent, at

this meeting was appropriate given the

recent readings on inflation and the associated deterioration in the inflation

outlook. Such an action would also help

preserve the decline in inflation expectations that had occurred over the intermeeting period and which appeared to

be conditioned on an outlook for a policy firming. Characterizing the resulting

stance of policy was quite difficult in the

view of most members; those who did

venture a judgment saw the stance as

ranging from modestly restrictive to

somewhat accommodative. Many members noted that significant uncertainty

accompanied the appropriate setting of

policy going forward, and one indicated

that the decision to raise the target federal funds rate at this meeting was a

close call.

In their discussion of the wording of

the statement to be released after the

meeting, members expressed a wide

range of views. Some members favored

a shorter statement that focused on the

Committee’s desire to see core inflation

decline from its recent elevated levels,

while others were inclined to provide

more information about the forces that

would likely influence the futu

policy. In light of the possibili

lessening of inflation pressure

more limited than consistent 

tained good performance of 

omy, members agreed to ind

“[a]lthough the moderation 

growth of aggregate demand sh

to limit inflation pressures ove

some inflation risks remain.” 

less, with the economy slo

some of the effects of past 

still in the pipeline, members r

the value of accumulating m

mation for determining wha

additional policy action w

needed following the tightenin

at the current meeting. To ind

policy action at future meeting

foreordained and would depe

forecasts for inflation and acti

medium term, the Committee 

state that “[t]he extent and tim

additional firming that may be 

address these risks will depe

evolution of the outlook for b

tion and economic growth, a

by incoming information.”

After consulting with the pa

the communications subcomm

ommended that the Committee 

discussions of communication

the FOMC meeting in Augus

the FOMC meetings schedule

this year be lengthened to allo

initial discussion of some 

issues. The Committee also 

briefly the schedule for FOMC 

next year and tentatively a

increase the number of two-d

ings to four.

At the conclusion of the d

the Committee voted to auth

direct the Federal Reserve Ban

York, until it was instructed 

to execute transactions in th

Account in accordance with th

ing domestic policy directive:
The Federal Open Market Committee

seeks monetary and financial conditions that

will foster price stability and promote sustainable growth in output. To further its longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with increasing the federal funds rate to an average of around

51⁄4 percent.

The vote encompassed approval of

the paragraph below for inclusion in the

statement to be released shortly after the

meeting:

Although the moderation in the growth of

aggregate demand should help to limit inflation pressures over time, the Committee

judges that some inflation risks remain. The

extent and timing of any additional firming

that may be needed to address these risks

will depend on the evolution of the outlook

for both inflation and economic growth, as

implied by incoming information. In any

event, the Committee will respond to

changes in economic prospects as needed to

support the attainment of its objectives.

Votes for this action: Messrs. Bernanke

and Geithner, Ms. Bies, Messrs. Guynn,

Kohn, Kroszner, and Lacker, Ms. Pianalto, Mr. Warsh, and Ms.Yellen. Votes

against this action: None.

The meeting adjourned at 11:10 a.m.

Notation Vote

By notation vote completed on May 30,

2006, the Committee unanimously approved the minutes of the Federal Open

Market Committee meeting held on May

10, 2006.

Vincent R. Reinhart

Secretary

Meeting Held on

August 8, 2006

A meeting of the Federal Open Market

Committee was held in the offices of the

Board of Governors of the Federal

Reserve System in Washingt

on Tuesday, August 8, 2006 at 

Present:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Guynn

Mr. Kohn

Mr. Kroszner

Mr. Lacker

Ms. Pianalto

Mr. Warsh

Ms. Yellen

Mr. Hoenig, Ms. Mineha

Moskow and Poole, 

Members of the Fed

Market Committee

Messrs. Fisher, Plosser, a

Presidents of the Feder

Banks of Dallas, Philad

Minneapolis, respective

Mr. Reinhart, Secretary and 

Ms. Smith, Assistant Secreta

Mr. Skidmore, Assistant Sec

Mr. Alvarez, General Couns

Ms. Johnson, Economist

Mr. Stockton, Economist

Messrs. Connors, Eisenbei

Madigan, Sniderman

meyer, and Wilcox, 

Economists

Mr. Kos, Manager, System 

ket Account

Mr. English and Ms. Liang

Directors, Divisions of 

Affairs and Resea

Statistics, respectively, 

Governors

Mr. Reifschneider, Deputy 

Director, Division of Re

Statistics, Board of Gov

Messrs. Dale and Orphanid

Advisers, Division of 

Affairs, Board of Gover

Mr. Gross, Special Assist

Board, Office of Board 

Board of Governors

Mr. Small, Project Manage

of Monetary Affairs, 

Governors
Mr. Luecke, Senior Financial Analyst,

Division of Monetary Affairs,

Board of Governors

Ms. Beechey, Economist, Division

of Monetary Affairs, Board of

Governors

Ms. Low, Open Market Secretariat Specialist, Division of Monetary Affairs, Board of Governors

Mr. Barron, First Vice President, Federal Reserve Bank of Atlanta

Messrs. Fuhrer and Rosenblum, Executive Vice Presidents, Federal Reserve Banks of Boston and Dallas,

respectively

Mr. Hakkio, Ms. Mester, Messrs. Rasche and Williams, Senior Vice

Presidents, Federal Reserve Banks

of Kansas City, Philadelphia,

St. Louis, and San Francisco,

respectively

Messrs. Peach and Krane, and Ms.

Weir, Vice Presidents, Federal Reserve Banks of New York, Chicago, and New York, respectively

Mr. Weber, Senior Research Officer,

Federal Reserve Bank of

Minneapolis

Mr. Hetzel, Senior Economist, Federal

Reserve Bank of Richmond

The Manager of the System Open

Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the

System’s account in the period since the

previous meeting. The Manager also reported on developments in domestic financial markets and on System open

market transactions in government securities and federal agency obligations

during the period since the previous

meeting. By unanimous vote, the Committee ratified these transactions.

The information reviewed at the

meeting suggested that the growth of

economic activity in the second quarter

slowed from its rapid pace in 

quarter. Residential investm

tracted as activity in the housi

continued to cool. Consumer 

and business investment d

after posting substantial increa

first quarter. The demand for l

erated, with hiring in recent m

low the pace of earlier this y

sumer price inflation remained 

in July, reflecting further inc

energy prices and shelter costs

Nonfarm payrolls increase

and July, but more slowly th

first quarter. The moderation 

was most pronounced in retail 

was also evident in constru

non-business services. Establis

professional and business serv

tinued to add jobs at roughly 

pace as that of earlier in the y

age hours of production or no

sory workers on private non

rolls edged up. The unemploy

rose to 4.8 percent in July, 

average over the first half of t

Industrial production pick

June. For the second quarter a

it grew at a robust rate that w

than its first-quarter pace. 

manufacturing production w

spread across industries. Th

sector, which includes oil an

gas extraction, expanded solid

although average growth in t

quarter was below that of the 

ter, in part because the recov

the disruptions caused by l

hurricanes neared completion

output grew strongly in th

quarter. The rate of capacity 

in the manufacturing sector s

in June and remained above it

average.

The growth of consumer 

slowed considerably in the sec

ter after the surge in purchas

the turn of the year. Spending 
excluding motor vehicles posted a modest increase in June after remaining flat,

on average, over the previous four

months. Although nominal wages and

salaries rose briskly in the first half of

the year, gains in real disposable income

were held down by rising consumer

prices. While past gains in household

wealth, particularly from home prices,

supported consumer spending, higher

interest rates and energy prices were

likely a restraining influence. Indicators

of consumer sentiment for July were

mixed.

Residential construction activity contracted in the second quarter. Singlefamily starts declined in June to a level

well below the average of the previous

twelve months. Construction in the multifamily sector remained steady, with

starts in June well within the typical

range seen since 1995. Sales of both

new and existing single-family homes

slowed in June and were significantly

below their peaks of the summer of

2005. Available measures of house

prices indicated that price increases had

moderated over the past four quarters.

After surging in the first quarter, real

spending on equipment and software

edged down in the second quarter. The

decline was accounted for primarily by

a drop in expenditures on communications and transportation equipment.

Spending on high-tech equipment and

software declined as well. The construction of nonresidential buildings moved

up at a solid pace over the first half of

the year, although activity remained well

short of its previous peak in mid-2000.

Outlays on drilling and mining structures continued to climb in response to

high energy prices, and spending on office construction edged up as vacancy

rates continued to trend down. Overall,

economic fundamentals and business

sentiment continued to support increased investment.

The book value of manufac

trade inventories excluding m

cles rose in May, and real 

inventories excluding motor 

appeared to be slightly high

second quarter than earlier in 

The ratio of book-value inve

sales edged down in May in 

trade and manufacturing sec

having remained relatively st

the previous three months. In 

facturing sector, however, in

ticked up again in June. In 

inventories appeared to be we

with demand, and business sur

gested that firms were comfor

the level of inventories.

The U.S. international tra

widened in May, reflecting 

increase in imports that more t

a sizable gain in exports. Impo

was heavily concentrated in o

ing both higher prices and q

other categories of imports fe

ance. Exports rose across almo

jor product categories; the lar

were in consumer goods an

goods, especially aircraft. Exp

economic activity in the adva

eign economies appeared to c

the second quarter at a pac

comparable to that of the fir

on net. Incoming data for th

quarter pointed to a pickup in 

growth in the euro area and 

indicated that growth slowed 

in Canada. Recent economic 

from the developing econom

mixed but, in general, sugge

moderation in growth from 

first-quarter pace.

Headline inflation continue

up, on balance, in recent mo

consumer prices increased a

pace in the second quarter tha

previous twelve months. C

energy prices, while declinin

in June, surged during the sec
ter, on net. Core consumer prices also

continued to rise, boosted by an acceleration in shelter costs, particularly

those for owner-occupied residences,

and some pass-through of energy cost

increases. Higher oil prices showed

through in producer prices for a variety

of energy-intensive intermediate goods.

Rising import prices, higher domestic

rates of capacity utilization, and strong

global demand for materials were factors underlying an acceleration in core

prices for intermediate materials. The

price of crude oil increased further over

the intermeeting period, and strong

weather-related demand caused the price

of natural gas to rise considerably. The

employment cost index rose somewhat

faster in the second quarter than over the

preceding three months, but the twelvemonth change was less than that of a

year ago. Survey measures of households’ inflation expectations in June and

July reversed their increases in April

and May.

At its June meeting, the Federal Open

Market Committee (FOMC) decided to

raise its target for the federal funds rate

25 basis points, to 51⁄4 percent. The

Committee’s accompanying statement

indicated that economic growth had

been moderating from its quite strong

pace earlier in the year, partly reflecting

a gradual cooling of the housing market

and the lagged effects of increases in

interest rates and energy prices. Readings on core inflation had been elevated

in recent months, but ongoing productivity gains had held down the rise in

unit labor costs, and inflation expectations remained contained. However,

high levels of resource utilization and

the high prices for energy and other

commodities had the potential to sustain

inflation pressures. Although the moderation in the growth of aggregate demand would help limit inflation pressures over time, the Committee judged

that some inflation risks rema

extent and timing of any additi

ing would depend on the ev

the economic outlook as impl

coming information.

Investors anticipated the FO

cision at its June meeting to 

federal funds rate 25 basis p

near-term policy expectatio

lower, apparently in response 

companying statement. Sub

data releases on real activity 

weaker than expected, the C

testimony on the semiannual 

Policy Report, and the relea

June FOMC minutes all led in

revise down their expectation

future path of the federal fu

Yields on nominal Treasury 

fell in line with policy expecta

the intermeeting period. Y

inflation-indexed Treasury 

declined a bit more than those 

parable nominal Treasury 

leaving inflation compens

slightly, albeit within recen

Spreads of yields on corpor

over those on comparable

Treasury securities were a

changed, while those on sp

grade bonds widened. Major s

indexes rose modestly. Th

exchange value of the dolla

other major currencies fell, on 

the intermeeting period.

Debt of the domestic no

sectors was estimated to hav

ated in the second quarter afte

first-quarter increase. Busin

debt increased briskly, as the 

of business loans remained 

the household sector, mortgag

celerated from the first quart

pace in response to higher 

rates and slower house-price 

tion. M2 growth dropped in t

quarter and remained modes

consistent with moderating g
nominal income and rising opportunity

cost.

The staff forecast prepared for this

meeting indicated that real GDP growth

would slow in the second half of 2006

and 2007, and to a lower rate than had

been anticipated in the prior forecast.

The marking down of the outlook was

largely attributable to the annual revision of the national income and product

accounts, which involved downward revisions to actual GDP growth in prior

years and prompted reductions in the

staff’s estimate of potential output. The

slowdown in the housing market, the

effects of higher energy prices on household purchasing power, the waning impetus of household wealth effects on

consumer spending, and the effects of

past policy tightening were expected to

hold economic growth below potential

over the next six quarters. Core consumer price inflation was projected to

drop back somewhat later this year and

next, mainly as the effects of higher

energy and import prices abated.

In their discussion of the economic

situation and outlook, meeting participants noted that the slowing of GDP

growth in the second quarter was generally in line with expectations, reflecting

the continued cooling of the housing

market, the restraining influence on demand of higher energy prices, and the

lagged effects of past increases in interest rates. Going forward, output was

expected to advance at a pace at or

slightly below the economy’s potential

rate of growth, but several participants

noted that the annual revision to the

national income and product accounts

suggested this growth rate likely was

lower than previously believed. Incoming information with regard to inflation

had not been encouraging. Still, most

participants thought that, with energy

prices possibly leveling out, aggregate

demand moderating, and long-term inflation expectations contained, 

inflation likely would decline 

from its recent elevated leve

the upside risks to inflat

significant.

In their discussion of the m

tors of the economy, participa

that residential construction ac

continued to recede over the 

months and cited the housing s

downside risk to the outlook fo

The rate of new home sale can

which was identified as an 

leading indicator by some c

the construction industry, ha

higher. Single-family housing 

permits continued to fall, a

tories of unsold housing ap

have risen significantly, pointi

tinued slowing in this sector. S

ticipants observed that the 

seemed to be orderly thus far, 

also noted that in some are

country housing construction 

rienced a relatively sharp fal

eral, participants expressed co

uncertainty regarding prospec

housing sector.

Meeting participants noted 

continued increases in energy 

borrowing costs appeared to 

strained consumer spending 

recent months. Contacts in the 

tor generally reported a contin

ing of growth in sales, alth

situation differed somewhat 

and type of good or service. 

comprehensive data were not 

able on recent house price m

but the rate of appreciation ap

be moderating and was likel

further in coming months. T

pace of increase in housin

would restrain consumption 

though by how much was 

However, the financial con

households, as judged by indic

as bankruptcy filings and lo
quencies, appeared to remain solid.

Overall, consumption spending seemed

likely to expand at a moderate pace in

coming quarters.

Although business fixed investment

in the second quarter was a little lower

than had been expected, participants

noted that this development appeared

mainly to reflect the timing of purchases, particularly of transportation

equipment, and not weakness in the

underlying trend. Some participants

noted that nonresidential construction

had continued to strengthen, offsetting

some of the contraction in residential

construction. Looking forward, strong

business balance sheets and high profitability were seen as supporting continued growth in expenditures on software

and equipment. However, it was noted

that if the reported slowing of increases

in retail sales continued, businesses

might trim capital spending plans.

With regard to the federal sector,

spending related to last year’s hurricanes appeared likely to abate, and federal expenditures overall would probably be providing less impetus to

aggregate demand going forward. Federal receipts had been increasing rapidly, a development that reflected

continued strong growth in labor and

non-labor income.

Some participants noted that global

demand remained strong, potentially

adding to worldwide pressures on

resources. Increased geopolitical risks,

particularly related to developments in

the Middle East, continued to put pressure on energy prices, and the prices of

many other commodities also had

firmed over the intermeeting period.

Central banks had been raising interest

rates globally, however, and this was

viewed as a factor that should help to

restrain global inflation pressures. But it

was also noted that the recent decline in

the foreign exchange value of the dollar

could lead to a weakening 

competition in the form of in

the prices of tradable good

United States.

As at the June meeting, a

pants expressed concern abo

ued elevated readings on core 

and inflation risks going forw

eral participants took note of 

sions to historical data that 

more worrisome picture of co

measures of unit labor costs 

marked up, reflecting upward 

to labor compensation and d

revisions to labor productiv

PCE inflation now appeared 

been running at or above a 

annual rate for more than t

with prices accelerating over 

half of 2006. Many participa

that the extent to which the in

core inflation so far this year 

transitory or persistent influ

mained unclear. The recent 

price increases appeared to 

based, and a number of busi

tacts reported greater ability 

through higher costs. Howev

types of price pressures were 

to continue to increase. The 

celeration in shelter costs, w

tributed substantially to the in

core inflation this year, cou

short-lived. Moreover, whil

prices had risen further in the 

ing period, energy prices c

level out in coming quarters. 

anticipated moderation in agg

mand implied that pressures on 

utilization likely would not inc

could abate to a degree going 

Finally, inflation expectations 

to have remained contained d

verse news about prices. In lig

factors, most participants exp

view that core inflation was 

decline gradually over the ne
quarters, although appreciable upside

risks remained.

In the Committee’s discussion of

monetary policy for the intermeeting

period, nearly all members favored

keeping the target federal funds rate at

51⁄4 percent at this meeting. In view of

the elevated readings on costs and

prices, many members thought that the

decision to keep policy unchanged at

this meeting was a close call and noted

that additional firming could well be

needed. But with economic growth having moderated some, most members anticipated that inflation pressures quite

possibly would ease gradually over

coming quarters and the current stance

of policy could well prove to be consistent with satisfactory economic performance. Under these circumstances,

keeping policy unchanged at this meeting would allow the Committee to accumulate more information before judging

whether additional firming would be

necessary to foster the attainment of

price stability over time. The full effect

of previous increases in interest rates on

activity and prices probably had not yet

been felt, and a pause was viewed as

appropriate to limit the risks of tightening too much. Following seventeen consecutive policy firming actions, members generally saw limited risk in

deferring further policy tightening that

might prove necessary, as long as inflation expectations remained contained.

All members agreed that the statement to be released after the meeting

should convey that inflation risks

remained dominant and that consequently keeping policy unchanged at

this meeting did not necessarily mark

the end of the tightening cycle. They

concurred that an indication that economic growth had moderated was appropriate, and a consensus favored citing the same reasons for that moderation

as in the June statement. Members also

agreed that the statement sh

mention factors contributin

likely moderation of inflation 

over time and reiterate the f

were seen as having the po

sustain inflation pressures.

At the conclusion of the d

the Committee voted to auth

direct the Federal Reserve Ban

York, until it was instructed 

to execute transactions in th

Account in accordance with th

ing domestic policy directive:

The Federal Open Market 

seeks monetary and financial con

will foster price stability and pr

tainable growth in output. To furth

run objectives, the Committee in 

diate future seeks conditions 

markets consistent with maintaini

eral funds rate at an average 

51⁄4 percent.

The vote encompassed ap

the text below for inclusion in 

ment to be released at 2:15 p.m

The Committee judges that som

risks remain. The extent and tim

additional firming that may be 

address these risks will depend on 

tion of the outlook for both in

economic growth, as implied by 

information.

Votes for this action: Messrs

and Geithner, Ms. Bies, Mes

Kohn, Kroszner, Ms. Pia

Warsh, and Ms. Yellen. Vo

this action: Mr. Lacker.

Mr. Lacker dissented becau

lieved that further tightening w

to bring inflation down mor

than would be the case if the p

were kept unchanged. The infl

look had deteriorated in the 

ing period; the recent surge in 

tion had persisted and appea

broad-based, while the revisi

national income and product 

indicated a recent upswing in c

tion and unit labor costs. Alth
growth was likely to be somewhat lower

in coming quarters, in his view it was

unlikely to moderate by enough to bring

core inflation down. He noted, moreover, that real short-term interest rates

had fallen in the intermeeting period and

were still low relative to rates typically

associated with sustained expansions.

The Committee then turned to a discussion of the goals and principles that

should guide the review of its approaches to policy communications that

it had recently undertaken. Participants

agreed that communication was important for democratic accountability and

could promote the effectiveness of policy. Although considerable strides had

been made in FOMC communications

over the past ten years or so, participants generally thought that further

advances were possible. In that regard,

consideration of how the Committee expressed both its economic objectives and

its assessments of expected progress toward those objectives was likely to be

particularly important. Conveying the

degree of uncertainty and conditionality

about Committee expectations of future

developments was seen as a major challenge. It was recognized that communications should support appropriate decisionmaking, including respect for the

diversity of views that contributed to

good decisions. Participants agreed to

continue the Committee’s review of

communications issues at the FOMC

meeting in October.

The meeting adjourned at 3:05 p.m.

Notation Vote

By notation vote completed on July 19,

2006, the Committee unanimously approved the minutes of the FOMC meeting held on June 28–29, 2006.

Vincent R. Reinhart

Secretary

Meeting Held on

September 20, 2006

A meeting of the Federal Ope

Committee was held in the off

Board of Governors of the 

Reserve System in Washingt

on Tuesday, September 20, 

8:30 a.m.

Present:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Guynn

Mr. Kohn

Mr. Kroszner

Mr. Lacker

Mr. Mishkin

Ms. Pianalto

Mr. Warsh

Ms. Yellen

Ms. Cumming, Mr. Hoenig, 

han, and Messrs. Mo

Poole, Alternate Memb

Federal Open Market C

Messrs. Fisher, Plosser, a

Presidents of the Feder

Banks of Dallas, Philad

Minneapolis, respective

Mr. Reinhart, Secretary and 

Ms. Danker, Deputy Secreta

Ms. Smith, Assistant Secreta

Mr. Skidmore, Assistant Sec

Mr. Alvarez, General Couns

Mr. Baxter, Deputy General 

Ms. Johnson, Economist

Mr. Stockton, Economist

Messrs. Connors, Eisenbei

Madigan, Sniderman

meyer, Tracy, Weinberg

cox, Associate Econo

Kos, Manager, System 

ket Account

Messrs. English and Slifman

Directors, Divisions of 

Affairs and Research 

tistics, respectively, 

Governors

Mr. Reifschneider, Deputy 

Director, Division of Re

Statistics, Board of Gov
Mr. Oliner, Senior Adviser, Division of

Research and Statistics, Board of

Governors

Mr. Gross, Special Assistant to the

Board, Office of Board Members,

Board of Governors

Mr. Small, Project Manager, Division

of Monetary Affairs, Board of

Governors

Mr. Durham, Section Chief, Division

of Monetary Affairs, Board of

Governors

Mr. Luecke, Senior Financial Analyst,

Division of Monetary Affairs,

Board of Governors

Ms. Low, Open Market Secretariat Specialist, Division of Monetary

Affairs, Board of Governors

Mr. Lyon, First Vice President, Federal

Reserve Bank of Minneapolis

Messrs. Fuhrer and Rosenblum, Executive Vice Presidents, Federal

Reserve Banks of Boston and Dallas, respectively

Mr. Evans, Ms. Mester, Messrs. Rasche,

Rolnick, Rudebusch, and Sellon,

Senior Vice Presidents, Federal

Reserve Banks of Chicago, Philadelphia, St. Louis, Minneapolis,

San Francisco, and Kansas City,

respectively

Ms. Mosser, Vice President, Federal

Reserve Bank of New York

The Manager of the System Open

Market Account reported on recent developments in foreign exchange markets. There were no open market operations in foreign currencies for the

System’s account in the period since the

previous meeting. The Manager also reported on developments in domestic

financial markets and on System open

market transactions in government securities and federal agency obligations

during the period since the previous

meeting. By unanimous vote, the Committee ratified these transactions.

The information reviewe

meeting suggested that econo

ity continued to decelerate 

months. Consumer and busine

ing held up well, and payrol

ment continued to rise mod

July and August. However, a 

tion in homebuilding was dam

economic expansion. Core 

price inflation eased some

nonetheless remained higher t

in 2005. Total consumer price 

moderated in August, reflecti

stantial slowing of the increase 

prices.

Nonfarm payrolls rose in A

pace similar to that recorded 

previous four months. Em

gains were widespread in th

sector, and the construction ind

added jobs, particularly in no

tial building. However, emplo

retail trade and manufacturing 

in August. Average hours of p

or nonsupervisory workers edg

The unemployment rate tic

down to 4.7 percent in Augu

remained within the narrow 

prevailed since the beginnin

year.

Industrial production rose i

edged down in August. Man

output was unchanged in Au

small increase in the prod

motor vehicles and parts was o

slight net decline in other sec

put of construction supplies, 

ple, dropped a little. In t

technology sector, the prod

computers rose tepidly through 

mer, while output of comm

equipment turned down in Au

increasing markedly during th

of the year. Semiconductor p

remained sluggish through Au

Consumer spending appea

rising at a moderate pace 

months. Spending on cars 
trucks increased somewhat in July after

a lackluster pace in the second quarter

but apparently weakened in August.

Consumer spending on goods excluding

motor vehicles increased modestly during the four months ending in July. Despite the sharp net increase in energy

prices, real disposable income rose further, with solid gains in June and July.

Increases in household wealth earlier in

the year continued to boost consumer

spending. However, consumer borrowing costs had risen since the beginning

of the year with the increase in shortterm interest rates. Recent readings on

consumer sentiment were mixed. The

personal saving rate fell further in July.

Residential construction activity continued to contract in recent months.

Single-family starts fell further in July

and August to a level well below the

peak in the third quarter of 2005. Construction in the multifamily sector also

fell back. Sales of both new and existing

single-family homes fell in July and

were significantly below the peaks of

last summer. A range of indicators suggested that housing market activity was

likely to slow further in the near term.

Pending home sales dropped noticeably

in July, and mortgage rates had

increased since the beginning of the

year. Available measures suggested that

prices of existing homes increased

through the second quarter at a much

lower rate than the one observed during

the same period last year.

After strong increases in the first half

of 2006, real spending on equipment

and software remained robust into the

summer against a backdrop of rising

business output, plentiful corporate cash

reserves, positive sentiment among executives, and falling relative prices for

high-tech equipment. Orders and shipments of communications equipment

leveled off in recent months after climbing earlier this year. Real computer

spending remained sluggish 

Business purchases of light 

picked up in August after a we

mance in July, and sales of me

heavy trucks remained brisk. 

data indicated that aircraft 

remained flat. Real spending 

ment outside the high-tech and 

tation sectors appeared to be 

moderately in the current quar

Book-value data for the m

ing and trade sectors sugge

inventory accumulation slow

modestly in July from a brisk p

second quarter. Outside the m

cle sector, inventories appea

well aligned with demand, an

indicated that firms continued 

erally comfortable with their 

inventories.

Both imports and exports in

the second quarter, but imports 

and exports decreased in July, 

the U.S. trade deficit. The g

imports was heavily concentra

reflecting higher petroleum p

in non-oil industrial supplies a

goods. Imports of services fe

Exports of capital goods and 

supplies declined after con

gains in June, but exports of te

nications equipment and a

products were strong. Expor

vices were unchanged in July.

Economic activity in the 

foreign economies decelerate

second quarter but remained 

fall in net exports held back 

in Japan and Canada, whi

domestic demand boosted gro

United Kingdom and the euro 

coming data suggested that ov

growth in these countries for t

quarter was dropping a bit 

second-quarter pace. Recent 

indicators from the emergin

economies generally pointed 

but moderating, growth.
The overall price index for personal

consumption expenditures rose relatively steeply in July and was estimated

to have increased further in August,

bringing the advance over the twelvemonth period above the year-earlier rise.

After July, though, crude oil and gasoline prices dropped back significantly,

and with inventories of natural gas

remaining near seasonal highs, natural

gas prices fell from their spike earlier

this summer. Core consumer prices

increased at a somewhat more subdued

pace over July and August, but despite

the recent moderation, the twelve-month

change in core prices remained above

the increase over the comparable period

twelve months earlier. The producer

price index for core intermediate materials rose significantly in July and August.

Substantial upward revisions to wages

and salaries boosted compensation per

hour in the first quarter. The increase

likely owed in part to the exercise of

stock options and cash bonuses; other

data that did not include such forms of

compensation pointed to more moderate

increases. Hourly compensation rose

further in the second quarter and recorded an increase of about 73⁄4 percent

from four quarters earlier. After more

favorable readings in June and July, survey measures of households’ inflation

expectations turned back up in August,

but preliminary September readings suggested a decline.

At its August meeting, the Federal

Open Market Committee (FOMC)

decided to maintain its target for the

federal funds rate at 51⁄4 percent. The

Committee’s accompanying statement

indicated that economic growth had

moderated from its quite strong pace

earlier in the year, partly reflecting a

gradual cooling of the housing market

and the lagged effects of increases in

interest rates and energy prices. Readings on core inflation had been elevated

in recent months, and the high 

resource utilization and of the 

energy and other commoditie

potential to sustain inflation 

However, inflation pressure

likely to moderate over time, 

contained inflation expectation

cumulative effects of moneta

actions, as well as reduced imp

higher energy and materials co

theless, the Committee judged 

inflation risks remained. The e

timing of any additional fir

may be needed to address th

would depend on the evoluti

outlook for both inflation and 

growth, as implied by 

information.

Investors had largely antic

FOMC’s decision at its Augus

to maintain the federal funds 

current level, and short-te

dropped only a bit in respons

quently, data on inflation t

weaker than expected, s

declines in oil prices, and the 

the minutes of the August FO

ing led investors to revise d

expectations for the future pa

federal funds rate. Over the int

period, yields on short- a

mediate-term nominal Treasu

ties fell, while yields on 

indexed Treasury secur

comparable maturity increas

what, pushing inflation com

considerably lower at those 

Nominal forward rates furthe

yield curve fell about the sam

as real forward rates, imply

change in far-forward inflation 

sation. Spreads of yields on in

and speculative-grade corpor

over those on Treasury secur

about unchanged. Major stock 

dexes posted solid gains. Th

exchange value of the dolla

other major currencies w
changed, on net, over the intermeeting

period.

Debt of the domestic nonfinancial

sectors in the third quarter was estimated to be rising at about the same

pace as in second quarter. Businesssector debt was increasing briskly, as the

expansion of business loans remained

robust. In the household sector, debt

expanded in the second quarter at a rate

slightly below that in the first quarter, as

mortgage debt decelerated somewhat.

M2 growth remained modest in August,

consistent with moderating growth of

nominal income and lagged increases in

opportunity cost.

The staff forecast prepared for this

meeting indicated that real GDP growth

would continue to slow into the second

half of 2006 before strengthening gradually thereafter. By 2008, output was projected to be expanding at a pace about

equal to the staff’s forecast of potential

output growth. The staff, however, had

again reduced its projection for potential

GDP growth, and the projected slow

pace of growth over the next several

quarters was thus consistent with an

opening of only a small gap in resource

utilization. In the near term, the cooling

of the housing market and lower motor

vehicle production were expected to

hold growth back. At the same time,

though, significantly lower energy

prices, sustained increases in labor

income, and favorable labor market conditions were anticipated to support

expansion through the end of the year.

Further ahead, the lagged effects of the

previous tightening of monetary policy

and waning stimulus from household

wealth and fiscal policy were anticipated to restrain growth, but the drag

from the downturn in residential construction was expected to abate. Core

consumer price inflation was projected

to drop back somewhat later this year

and next, reflecting the emergence of

slack in the economy and low

costs.

In their discussion of the 

situation and outlook, meetin

pants noted that the pace of t

sion appeared to be continuin

erate in the third quarter. In 

activity in the housing market 

be cooling considerably, whi

contribute to relatively subdu

over the balance of the yea

was likely to strengthen next y

housing correction abated, wi

also encouraged by the recent 

energy prices and still-support

cial conditions. In the view 

participants, economic expans

probably track close to the 

growth of the economy’s pote

year and in 2008. Many partici

noted that core inflation had 

ning at an undesirably h

Although most participants 

core inflation to decline gradu

stantial uncertainty attended 

look.

In their discussion of major 

the economy, meeting partic

cused especially on developme

housing market. Although the 

varied somewhat across th

housing activity was continuin

tract in most regions. Home 

slowed considerably, and ane

ports suggested that more bu

canceling contracts for purch

ticipants noted that inventori

sold homes had climbed sharpl

areas and that builders were 

number of measures to redu

tories. Both permits for new 

tion and housing starts had dec

nificantly. Available measures 

prices suggested that appreci

slowed considerably but price

areas were not falling, altho

sellers were reported to be 
various inducements to potential purchasers that reduced effective prices.

Thus far, the drop in housing market

activity appeared not to have spilled

over significantly to other sectors of the

economy. Indeed, consumer expenditures appeared to have been expanding

moderately over the previous few

months, buoyed by increases in employment, personal income, and household

wealth. Contacts in some Districts reported that retail sales had picked up a

little most recently. Meeting participants

noted that consumer spending going forward would be supported by the higher

levels of personal income indicated by

recent revisions to the national income

and product accounts, by further gains

in employment, and by the decline in

consumer energy prices over recent

months. However, considerable uncertainty was expressed regarding the ultimate extent of the downturn in the housing sector and the degree to which the

slowing in housing activity and the deceleration in home prices would affect

consumption and other expenditures going forward.

Business investment spending generally was seen as expanding at a reasonably good pace. Meeting participants

noted broad strength in manufacturing

of capital goods. Nonresidential

construction activity continued to

strengthen, and in the process was absorbing some of the resources that were

no longer employed in homebuilding.

Although some survey evidence suggested that some firms were trimming

capital spending plans, participants reported that their business contacts generally were quite positive about the economic outlook and the strength of

demand for their products. In this environment, investment spending would

likely continue to be supported by

expansion of overall output, strong balance sheets and profits, and the ready

availability of funding from 

markets and institutions.

Participants noted that the 

condition of federal and stat

ments continued to improve. I

tax revenues remained strong, 

with expanding personal incom

and business profits.

Economic activity abroad ap

be slowing a little from the 

rapid rate of the first half of th

still expanding at a reasona

pace overall. Foreign econom

was expected to continue, albe

at a somewhat slower pace 

pected by some outside foreca

tributing to increases in U.S. e

Participants took note of th

labor compensation in the fir

the year, but commented 

increase likely reflected in par

cise of stock options. Nonethe

participants viewed the recen

in overall compensation as p

upside risks to inflation. Partic

ported steady gains in emplo

various regions, roughly in 

expansion of the labor force. M

ness contacts continued to e

shortages of labor and ac

wages, particularly for certain 

professionals and skilled wor

in some areas, unskilled work

One participant highlighte

the staff forecast, labor forc

would begin to slow over the 

years as more members of 

boom generation retired. 

resource utilization rates w

changed, slower growth of 

force would mean that increas

ployment would be significan

on average, than those reg

recent years. In that case, th

growth of the labor force and 

ment implied that the expansi

tential GDP could be somew

than it had been earlier thi
Some participants commented, however,

that they viewed potential output

growth, as well as expansion of actual

output, as likely to remain solid over the

next several years.

Many meeting participants emphasized that they continued to be quite

concerned about the outlook for inflation. Recent rates of core inflation, if

they persisted, were seen as higher than

consistent with price stability, and participants underscored the importance of

ensuring a moderation in inflation. To

be sure, very recent data on inflation

suggested some improvement from the

situation in the late spring, partly reflecting slower increases in owners’ equivalent rent. Also, the considerably lower

level of energy prices of recent weeks, if

sustained, would help reduce overall inflation and damp increases in core

prices. Moreover, businesses would

meet more resistance to attempts to pass

through cost increases in the less robust

economic circumstances that were likely

to prevail at least for a time. However,

energy prices remained quite sensitive

to a wide range of forces, including

geopolitical developments, and might

well rebound. To date, the available evidence indicated that inflation expectations remained contained—indeed, expectations of price increases for the next

few years had fallen some as energy

prices declined. Nonetheless, several

participants worried that inflation expectations could rise and the Federal Reserve’s willingness to carry through on

its intention to seek price stability could

be called into question if cost and price

pressures mounted or even if there was

no moderation in core inflation. Looking forward, most participants thought

that the most likely outcome was a reduction in inflation pressures, but the

anticipated decline was only gradual and

the uncertainties around that forecast

were skewed toward higher r

lower inflation rates.

In the Committee’s discu

monetary policy for the int

period, nearly all members 

keeping the target federal fun

51⁄4 percent at this meeting. 

generally expected economic 

expand at a pace below th

growth of potential output in 

term before strengthening s

time. Moreover, given the un

in forecasting, significantly m

gish performance than anticipa

not be entirely ruled out. Alt

uncertainties were substantial

flation seemed most likely to e

ally from its elevated level, in 

ing to the waning effects 

increases in energy prices. T

pated expansion of economic 

a pace slightly below the rate 

of the economy’s potential wo

also play a role by easing pre

resources. Members noted th

developments of late—apprec

clines in energy prices, some s

cators of economic activity, an

lower readings on core in

pointed to a modestly better 

outlook and hence made the po

sion today somewhat less diff

it was in August, when it was 

particularly close call.

In view of the most recent 

tion on the economy, membe

that it was appropriate for 

meeting statement to charact

nomic growth as apparently c

to moderate. However, in vie

high energy and other commod

and elevated rates of resource 

as well as recent indications 

sible acceleration in labor co

bers continued to see a subst

that inflation would not decli

ticipated by the Committee

quently, the Committee agree
statement should again cite such risks to

inflation and explicitly reference the

possibility of additional policy firming.

At the conclusion of the discussion,

the Committee voted to authorize and

direct the Federal Reserve Bank of New

York, until it was instructed otherwise,

to execute transactions in the System

Account in accordance with the following domestic policy directive:

The Federal Open Market Committee

seeks monetary and financial conditions that

will foster price stability and promote sustainable growth in output. To further its longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with maintaining the federal funds rate at an average of around

51⁄4 percent.

The vote encompassed approval of

the text below for inclusion in the statement to be released at 2:15 p.m.:

Nonetheless, the Committee judges that

some inflation risks remain. The extent and

timing of any additional firming that may be

needed to address these risks will depend on

the evolution of the outlook for both inflation and economic growth, as implied by

incoming information.

Votes for this action: Messrs. Bernanke

and Geithner, Ms. Bies, Messrs. Guynn,

Kohn, Kroszner, and Mishkin, Ms. Pianalto, Mr. Warsh, and Ms. Yellen.

Votes against this action: Mr. Lacker.

Mr. Lacker dissented because he believed that further tightening was needed

to bring inflation down more rapidly

than would be the case if the policy rate

were kept unchanged. Recent data indicated that inflation remained above levels consistent with price stability. Moreover, the upswing in compensation and

unit labor costs in the first half of the

year indicated that inflation risks were

tilted to the upside. Although real

growth was likely to be moderate in

coming quarters, in his view it was unlikely to be slow enough to bring core

inflation down.

The meeting adjourned at 1

Notation Vote

By notation vote completed o

28, 2006, the Committee una

approved the minutes of th

meeting held on August 8, 20

Vincent R

Meeting Held on

October 24–25, 2006

A meeting of the Federal Ope

Committee was held in the off

Board of Governors of the 

Reserve System in Washingt

on Tuesday, October 24, 200

p.m. and continued on W

October 25, 2006 at 9:00 a.m.

Present:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Kohn

Mr. Kroszner

Mr. Lacker

Mr. Mishkin

Ms. Pianalto

Mr. Warsh

Ms. Yellen

Mr. Hoenig, Ms. Minehan, a

Moskow and Poole, 

Members of the Fed

Market Committee

Messrs. Fisher, Plosser, a

Presidents of the Feder

Banks of Dallas, Philad

Minneapolis, respective

Mr. Barron, First Vice Pres

eral Reserve Bank of A

Mr. Reinhart, Secretary and 

Ms. Danker, Deputy Secreta

Ms. Smith, Assistant Secreta

Mr. Skidmore, Assistant Sec

Mr. Alvarez, General Couns

Ms. Johnson, Economist

Mr. Stockton, Economist
Messrs. Connors, Eisenbeis, Judd, Kamin, Madigan, Sniderman, Struckmeyer, and Wilcox, Associate

Economists

Mr. Kos, Manager, System Open Market Account

Messrs. English and Slifman, Associate

Directors, Divisions of Monetary

Affairs and Research and Statistics, respectively, Board of Governors

Messrs. Gagnon and Wascher, Deputy

Associate Directors, Divisions of

International Finance and Research and Statistics, respectively,

Board of Governors

Messrs. Dale and Oliner, Senior Advisers, Divisions of Monetary Affairs

and Research and Statistics, respectively, Board of Governors

Mr. Gross, Special Assistant to the

Board, Office of Board Members,

Board of Governors

Mr. Small, Project Manager, Division

of Monetary Affairs, Board of

Governors.

Ms. Weinbach, Senior Economist, Division of Monetary Affairs, Board of

Governors

Messrs. Kumasaka7 and Luecke,8

Senior Financial Analysts, Division of Monetary Affairs, Board of

Governors

Ms. Low, Open Market Secretariat Specialist, Division of Monetary

Affairs, Board of Governors

Messrs. Fuhrer and Rosenblum, Executive Vice Presidents, Federal

Reserve Banks of Boston and Dallas, respectively

Mr. Evans, Ms. Mester, and Messrs.

Rasche and Sellon, Senior Vice

Presidents, Federal Reserve Banks

of Chicago, Philadelphia, St.

Louis, and Kansas City, respectively

Ms. Mucciolo and Mr. T

Presidents, Federal Res

of New York and Minn

spectively

Ms. McConnell, Assistant V

dent, Federal Reserve 

New York

Mr. Hetzel, Senior Econom

Reserve Bank of Richm

The manager of the Syst

Market Account (SOMA) re

recent developments in for

change markets. There were 

market operations in foreign 

for the System’s account in t

since the previous meeting. T

ager also reported on develo

domestic financial markets 

System open market transa

government securities and 

agency obligations during th

since the previous meet

unanimous vote, the Committ

these transactions.

The Manager also discussed 

Committee the results of a rece

of the management of the dom

curity holdings of the SOMA. 

ager noted that in 2000, in re

reduced issuance of Treasury 

limits were adopted on the 

holdings of individual Treasu

notes, and bills that ranged 

15 percent and 35 percent of 

outstanding. In recent years, th

had created occasional op

complications for the Tradi

Meanwhile, circumstances in 

sury securities market had cha

siderably, and the Manager not

intended to revert to the prev

tice of applying a single 35 per

across all issues.

The Chairman noted that 

dent had recently signed the 

Services Regulatory Relief Ac

which among its provisions 

7. Attended Tuesday’s session only.

8. Attended Wednesday’s session only.
Federal Reserve discretion, beginning

October 2011, both to pay interest on

reserve balances and to reduce further or

eliminate reserve requirements. The Act

potentially has important implications

for many aspects of the Federal Reserve’s operations and the Chairman

asked Vincent Reinhart, Director of the

Division of Monetary Affairs, to form a

committee of Federal Reserve System

staff to consider these issues.

The information reviewed at the

October meeting suggested that economic activity increased at a slow pace

in the third quarter. The contraction in

home construction remained a significant drag on economic activity, and

steep reductions in motor vehicle assemblies further weighed on growth in the

third quarter. Nonetheless, consumer

spending and business investment continued to hold up well. Payroll employment extended its moderate expansion,

on average, through September. Sharp

declines in energy prices reduced total

consumer price inflation in September,

but the twelve-month change in core

prices remained elevated relative to

year-earlier readings.

Nonfarm payrolls rose modestly in

September after a larger increase in

August, with some of the variation apparently a result of seasonal factors. In

September, job increases in the serviceproducing sectors were fairly widespread and were again led by the healthcare industry. The construction sector

also added jobs; the lift came from gains

associated with nonresidential building

that more than offset further losses in

the residential sector. Job cutbacks in

the retail trade and manufacturing sectors continued. Aggregate hours of private production or nonsupervisory

workers again edged lower. The unemployment rate ticked down to 4.6 percent in August.

After having been flat in 

industrial production declined 

tember, reflecting a sizable 

related decrease in the output 

and a fairly broad-based red

manufacturing output. These 

were partially offset by a rise 

in the mining sector that w

gains in crude oil extractio

mined construction supplies

stone, sand, and gravel. The 

motor vehicles and parts fell i

ber, as automakers continue

production of light trucks in re

bloated inventories. Output g

the high-technology sector s

bit in September relative to th

months, reflecting a smaller r

production of semiconducto

puter production continued to 

at a tepid rate, while output o

nications equipment turned u

ably after a decline in Augus

third quarter as a whole, g

industrial production modera

relative to the first half of 

stronger output in the high-te

sector and a pickup in the pro

business equipment partially 

steep contraction in the outpu

vehicles and parts and a slow

mining output.

Real consumer spending ap

regain some steam in Septemb

lackluster August. Although n

tail sales fell noticeably in S

the steep drop in gasoline pr

than accounted for the decline

ing sales at gasoline stations, t

in consumer spending was the 

faster sales of motor vehicles a

based strength in outlays for o

gories of goods, particularly 

Real disposable income rose m

in both July and August; the 

somewhat above its secon

average. Consumer spending 

to draw support from the lagg
of the increases in household wealth

over the past two years. But interest

rates on some types of household loans,

both short- and long-term, had risen this

year, on balance. The latest readings on

consumer sentiment had been positive,

perhaps reflecting the recent declines in

oil prices. The personal saving rate

edged up in August after a dip in July.

Residential construction activity

remained weak. Single-family starts

ticked up in September, but new permit

issuance slid further to its lowest level

in nearly five years. Construction in the

multifamily sector continued to fluctuate within the range that has prevailed

for several years. Sales of new singlefamily homes edged up in August, while

sales of existing homes held steady.

Pending home sales, which rose somewhat in August after a noticeable drop

in July, and the decline in mortgage

rates since July likely indicated some

support for housing demand in the near

term. Still, the overhang of unsold

homes remained historically high, and

price appreciation of existing homes

continued to slow through the second

quarter.

Real spending on equipment and software increased at a solid pace during the

summer as the fundamental influences

on such spending remained favorable

for the most part. In particular, although

business output had recently been rising

at a slower rate, corporate financial

reserves remained plentiful and the cost

of high-tech capital goods continued to

fall. In the high-tech sector, real outlays

on communications equipment likely

stabilized in August after having surged

earlier this year, and the available data

suggested that real computer spending

picked up in the third quarter. In the

transportation sector, business purchases

of motor vehicles were brisk of late; the

Environmental Protection Agency’s

regulations on truck emissions that are

scheduled to take effect in 20

pulled forward some spendin

dium and heavy trucks. Outla

craft appeared to have risen 

in the third quarter from their 

low second-quarter level. Real 

on equipment other than high

transportation items seemed to 

tained considerable momentu

third quarter. Activity in the no

tial construction sector con

strengthen in August.

Book-value data on manu

and trade inventories, which w

able through August, suggeste

rate of stockbuilding remained 

tial in the third quarter. A maj

tion was the motor vehicle sec

the cutbacks in assemblies 

began to reduce the inventory 

in that sector. Outside of the m

cle sector, inventories 

appeared to be well aligned 

mand. Although survey data i

ber showed a noticeable rise in 

of firms that viewed their inve

being too high, a large ma

mained comfortable with their 

The U.S. international tra

widened to another record in 

reflecting a surge in imports 

than offset a sizable jump in 

The sharp increase in imp

driven importantly by oil an

gas, but imports of capital g

non-oil industrial supplies, p

metals, also exhibited large g

ports of services fell back slig

increase in exports was led b

goods, with aircraft, comput

conductors, and other mach

climbing briskly. Exports of 

supplies and consumer goods 

strongly, while exports of 

expanded modestly.

Economic activity in the 

industrial economies continu

pand at a relatively solid pa
third quarter. Investment spending

boosted the expansion in Japan. In the

euro area, data on industrial production

and retail sales were consistent with robust growth in real activity. Mixed indicators in Canada and the United Kingdom suggested that output growth in

those countries remained around recent

rates. Incoming data across the

emerging-market economies continued

to point to moderating, but solid, growth

in economic activity in the third quarter.

Core prices for personal consumption

expenditures were expected to have

risen in September at the same pace as

in July and August, leaving the change

over the twelve months ending in September a bit higher than the year-earlier

period. Increases in shelter costs, which

accounted for a significant proportion of

the pickup in core inflation over the past

year, had slowed considerably in recent

months but remained well above the

rates that prevailed from 2003 to 2005.

The price index for total personal consumption expenditures was estimated to

have fallen markedly in September because of the steep decline in gasoline

prices, bringing its twelve-month increase to a two-and-one-half-year low.

Retail gasoline prices fell especially rapidly in September as crude oil prices

declined and as the historically high

level of gasoline inventories likely led

to a sharp narrowing of margins between

retail gasoline prices and crude oil

prices. The producer price index for core

intermediate materials rose only slightly

in September; the increase was well below its average monthly advance over

the preceding twelve months, reflecting

a drop in prices of some chemicals that

have a high energy content. Average

hourly earnings increased moderately in

both August and September after a

larger gain in July. Survey measures of

households’ year-ahead inflation expectations eased substantially in early October with the sharp drop in ener

Respondents’ longer-term inf

pectations changed little, rema

within the narrow range repo

the past year.

At its September meeting, th

Open Market Committee 

decided to maintain its targe

federal funds rate at 51⁄4 per

Committee’s accompanying 

indicated that the moderatio

nomic growth had appeared t

tinuing, partly reflecting a coo

housing market. Readings on c

tion had been elevated, and 

levels of resource utilization a

prices of energy and other com

had the potential to sustain 

pressures. However, inflation 

seemed likely to moderate o

reflecting reduced impetus fro

prices, contained inflation exp

and the cumulative effects of 

policy actions and other factor

ing aggregate demand. Noneth

Committee judged that some 

risks remained. The extent and 

any additional firming that 

needed to address these risks 

pend on the evolution of the o

both inflation and economic g

implied by incoming informat

The FOMC’s decision at it

ber meeting to leave the targ

funds rate unchanged had be

anticipated by investors, and 

pectations for mid-2007 an

rose only slightly. Investo

quently revised down their ex

for the future path of the fed

rate in light of some data rel

indicated weaker-than-expec

nomic activity. However, thos

were then rolled back in the 

speeches by FOMC member

lease of the minutes of the S

FOMC meeting, and stron

expected economic data. Over 
meeting period, yields on nominal and

inflation-indexed Treasury coupon securities rose somewhat, on net. Inflation

compensation for 2007 declined modestly, perhaps reflecting the further drop

in spot energy prices, but was largely

unchanged at longer maturities. Spreads

of investment-grade corporate bond

yields over those on comparablematurity Treasury securities held steady,

while those on speculative-grade corporate bonds narrowed a little. Broad

equity indexes rose noticeably. The

trade-weighted index of the foreign

exchange value of the dollar versus major currencies rose somewhat on balance, and the gains were spread evenly

against most currencies.

Debt of the domestic nonfinancial

sectors in the third quarter was estimated to be expanding at around its

second-quarter pace. Business debt rose

more moderately as bank lending to

businesses slowed. In particular, bank

lending to finance commercial real estate activity waned in August and September, while commercial and industrial

loans, which had been expanding briskly

for many months, slowed sharply in

September. In the household sector, the

further slowing of the rate of increase of

house prices appeared to have continued

to weigh on the expansion of mortgage

debt in the third quarter. M2 grew

slowly in the third quarter, exhibiting

the lagged effects of earlier increases in

opportunity costs and the slow rise in

nominal spending.

The staff forecast prepared for this

meeting indicated that growth of real

GDP had slowed further in the third

quarter, reflecting both a significant drag

from the continuing contraction in residential construction and a steep decline

in motor vehicle assemblies. Looking

ahead, a gradual reduction in the restraining effects of the contraction in

residential investment and further solid

gains in consumer and busine

ing were expected to lead to a 

GDP growth through 2007 

2008. These gains in spend

likely to be supported by pas

in energy prices and continue

payroll employment and labo

Real GDP was expected to 

somewhat slower rate over the 

years than in 2006 in part as 

less impetus from househol

interest rates, and fiscal po

projected increase in real ou

the next year or so was a little 

staff’s estimate of potenti

growth, leading to a lessenin

sures on resource utilization. C

tion was anticipated to edge 

2007 and 2008 relative to th

half of this year because 

diminishing impetus from the 

energy and other commod

because of the modest e

resource utilization.

In their discussion of the 

situation and outlook, meetin

pants noted that incoming dat

relatively brief intermeeting p

come in broadly as anticip

most recent indicators sugge

economic growth had probab

more sharply in the third qu

had been expected at the tim

September meeting, but that ap

largely reflect the impact of 

influences. Participants con

expect the economy to expand 

close to or a little below the e

long-run sustainable pace ove

quarters. The ongoing adjustm

housing market was likely t

real activity in the near term

effect was expected to wane 

private final domestic purch

held up well in recent mo

looked set to expand at a r

good pace. Although recent m

flation readings indicated som
of core inflation from the very rapid

rates of spring and early summer, many

participants noted that current rates of

core inflation remained undesirably

high. Most participants expected core

inflation to moderate gradually, but they

were quite uncertain as to the likely

pace and extent of that moderation.

In their discussion of the major sectors of the economy, participants noted

that housing activity was likely to

remain a substantial drag on economic

growth over the next few quarters. Many

participants drew some comfort from

the most recent data, which suggested

that the correction in the housing market

was likely to be no more severe than

they had previously expected and that

the risk of an even larger contraction in

this sector had ebbed. But further adjustment in the housing market appeared

likely. Single-family housing permits

continued to fall and inventories of unsold homes remained at historically high

levels. Contacts in the building sector

suggested that construction firms were

attempting to reduce their backlogs of

unsold homes, both by cutting back

sharply on new construction and by offering substantial price incentives. Several meeting participants noted the considerable strain on some small- and

medium-sized residential construction

firms.

To date, weakness in the housing market and the associated downshift in

house price appreciation did not seem to

be spilling over into consumer spending,

which appeared to have grown at a

steady pace in recent months. Retail activity in most Districts had been relatively robust and contacts in the retail

sector were generally upbeat about the

outlook. Several participants noted,

however, that contacts within the transportation sector had reported that activity in anticipation of the holiday shopping season appeared to be softer than in

previous years. Meeting pa

judged that consumer expend

ing forward were likely to ex

steady pace a little below the 

disposable income, supported 

able financial conditions, 

increases in employment and 

and the recent decline in ener

Nonetheless, many particip

pressed concern that ongoing 

ments in the housing market c

a more pronounced impact on 

and other spending, especially 

prices declined significantly.

Investment spending also ap

be holding up well. Meeting pa

reported that their business 

were generally optimistic and 

the economic outlook as 

favorable. Several participa

that growth in nonresidential 

tion remained robust and was 

some of the resources displa

the residential sector. The st

corporate balance sheets and p

seen as likely to help mainta

profile for investment spendin

next year or so, despite some 

from the slower growth in fi

However, one participant obs

the uncertainty concerning th

severity of the current slowin

nomic growth could lead so

nesses to delay investment pla

In contrast to the steady exp

consumer and business in

spending in recent months, sev

components of output and 

appeared to have been somewh

than expected. In particular, a

uncomfortably high levels of in

within the auto sector had pr

sharp reduction in light vehicl

tion in the third quarter. Fede

ditures had been held down b

ingly weak defense outlays. A

growth in imports in July an

driven in part by a surge in oi
suggested that net exports probably

posed an arithmetic drag on economic

growth in the third quarter. However,

participants judged that the recent weakness in these components largely reflected temporary influences and was

not likely to depress the pace of economic expansion going forward. That

said, one participant did note the possibility that the recent decline in oil prices

may in part stem from weakness in global demand.

Both data and reports from businesses

indicated that the labor market remained

tight. Employment had continued to rise

at a steady pace, and participants reported that many of their contacts were

increasingly concerned about the difficulty of recruiting suitably qualified

workers. Shortages were most pronounced for certain types of professional and skilled workers. These reports of shortages and the associated

wage pressures had not unambiguously

shown through in the aggregate compensation data, which were giving contradictory signals about whether compensation increases were picking up.

However, the possibility that the tightness of the labor market could lead to a

sustained increase in wage pressure was

viewed by participants as an upside risk

to costs and their expectations of a

gradual decline in inflation. It was

noted, though, that continuing high

profit margins provided some scope for

increased labor costs to be absorbed

without necessarily leading to elevated

price pressures.

All meeting participants expressed

concern about the outlook for inflation.

Most participants expected core inflation to edge lower, in part as the effects

of the run-up in energy prices in recent

years waned. And shelter costs were not

expected to add materially to inflation

going forward. Moreover, moderate

growth in aggregate demand and the

associated modest easing of 

on resource utilization should 

tribute slightly to the slowin

inflation. Recent changes in c

had declined slightly from ear

year. Nonetheless, nearly all pa

viewed the current rates of cor

as uncomfortably high and st

importance of further modera

available measures sugges

medium- and long-term inflati

tations remained around the le

for the past several years, al

the view of some participants 

pectations were probably hi

would be consistent with the

ment of long-run price stabilit

pants were concerned that inf

pectations could begin to drif

if core inflation remained elev

protracted period. Any such ris

tion expectations and associate

pressure on inflation itself wo

prove costly to reverse. Altho

participants noted that the rec

ing in core inflation had helpe

their fears of a further sustaine

in inflation, all participants em

that the risks around the desir

ward path to inflation remain

upside.

In the Committee’s discu

monetary policy for the int

period, nearly all members 

keeping the target federal fun

51⁄4 percent at this meeting. T

mittee’s view of the outlook 

nomic growth and inflation ha

little since the previous meetin

all members expected that the 

would expand close to or a li

its potential growth rate and 

tion would ebb gradually fro

evated levels. Although subst

certainty continued to att

outlook, most members judge

downside risks to economic ac

diminished a little, and likew
members felt that the upside risks to

inflation had declined, albeit only

slightly. All members agreed that the

risks to achieving the anticipated reduction in inflation remained of greatest

concern. Members noted that a significant amount of data would be published

before the next Committee meeting in

December, giving the Committee ample

scope to refine its assessment of the

economic outlook before judging

whether any additional firming was

needed to address those risks.

Members agreed that the statement to

be released after the meeting should

continue to convey that inflation risks

remained the dominant concern and that

additional policy firming was possible.

The Committee concurred that the statement should mention both that economic

growth had slowed over the course of

the year and that, going forward, the

economy seemed likely to expand at a

moderate pace. With energy prices well

off the highs reached earlier in the year,

members felt that it was no longer appropriate to note that the high level of

energy prices had the potential to sustain inflation pressures.

At the conclusion of the discussion,

the Committee voted to authorize and

direct the Federal Reserve Bank of New

York, until it was instructed otherwise,

to execute transactions in the System

Account in accordance with the following domestic policy directive:

The Federal Open Market Committee

seeks monetary and financial conditions that

will foster price stability and promote sustainable growth in output. To further its longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with maintaining the federal funds rate at an average of around

51⁄4 percent.

The vote encompassed approval of

the text below for inclusion in the statement to be released at 2:15 p.m.:

Nonetheless, the Committee j

some inflation risks remain. The 

timing of any additional firming t

needed to address these risks will 

the evolution of the outlook for 

tion and economic growth, as 

incoming information.

Votes for this action: Messrs

and Geithner, Ms. Bies, Me

Kroszner, and Mishkin, Ms

Messrs. Poole and W

Ms. Yellen. Votes against t

Mr. Lacker

Mr. Lacker dissented becau

lieved that further tightening w

to help ensure that core 

declines to an acceptable rate 

quarters.

The Committee then continu

cussion of communication i

considered the advantages and 

tages of quantifying an inflati

tive. Participants stressed that 

step had to be consistent with 

tory objectives for monetary 

that regard, it was noted that 

price stability is a prerequisite 

mum employment and mode

term interest rates. However, 

sible specification of a numer

objective raised a number of 

and interrelated issues that req

siderable further discussion. T

mittee reached no decisions 

issues at this meeting, and pa

agreed to continue the Co

review of communication iss

meeting in January 2007.

The meeting adjourned at 1

Notation Vote

By notation vote completed 

ber 10, 2006, the Committ

mously approved the minut

FOMC meeting held on Sept

2006.

Vincent R
Meeting Held on

December 12, 2006

A meeting of the Federal Open Market

Committee was held in the offices of the

Board of Governors of the Federal

Reserve System in Washington, D.C.,

on Tuesday, December 12, 2006 at

8:30 a.m.

Present:

Mr. Bernanke, Chairman

Mr. Geithner, Vice Chairman

Ms. Bies

Mr. Kohn

Mr. Kroszner

Mr. Lacker

Mr. Mishkin

Ms. Pianalto

Mr. Warsh

Ms. Yellen

Ms. Cumming, Mr. Hoenig, Ms. Minehan, and Messrs. Moskow and

Poole, Alternate Members of the

Federal Open Market Committee

Messrs. Fisher, Plosser, and Stern,

Presidents of the Federal Reserve

Banks of Dallas, Philadelphia, and

Minneapolis, respectively

Mr. Barron, First Vice President, Federal Reserve Bank of Atlanta

Mr. Reinhart, Secretary and Economist

Ms. Danker, Deputy Secretary

Ms. Smith, Assistant Secretary

Mr. Skidmore, Assistant Secretary

Mr. Alvarez, General Counsel

Mr. Baxter, Deputy General Counsel

Ms. Johnson, Economist

Mr. Stockton, Economist

Messrs. Connors, Eisenbeis, Kamin,

Madigan, Sniderman, Struckmeyer, Weinberg, and Wilcox,

Associate Economists

Mr. Kos, Manager, System Open Market Account

Messrs. Clouse and English

Directors, Division of 

Affairs, Board of Gover

Ms. Liang and Mr. Slifman

Directors, Division of 

and Statistics, Board of 

Messrs. Gagnon and Wasch

Associate Directors, D

International Finance 

search and Statistics, re

Board of Governors

Mr. Dale, Senior Adviser

of Monetary Affairs, 

Governors

Mr. Gross, Special Assist

Board, Office of Board 

Board of Governors

Mr. Luecke, Senior Financi

Division of Monetar

Board of Governors

Mr. Driscoll, Economist, D

Monetary Affairs, 

Governors

Ms. Low, Open Market Secr

cialist, Division of 

Affairs, Board of Gover

Mr. Rasdall, First Vice Pres

eral Reserve Bank of K

Mr. Rosenblum, Executive V

dent, Federal Reserve 

Dallas

Mr. Hakkio, Mses. Mester 

muter, and Messrs. 

Rolnick, and William

Vice Presidents, Feder

Banks of Kansas City

phia, New York, St. Lou

apolis, and San Francis

tively

Messrs. Kahn and Sullivan, 

dents, Federal Reserve 

New York and Chicag

tively

Mr. Olivei, Senior Economi

Reserve Bank of Boston

The Manager of the Syst

Market Account (SOMA) re

recent developments in for
change markets. There were no open

market operations in foreign currencies

for the System’s account in the period

since the previous meeting. The Manager also reported on developments in

domestic financial markets and on

System open market transactions in

government securities and federal

agency obligations during the period

since the previous meeting. By unanimous vote, the Committee ratified these

transactions.

The information reviewed at the

December meeting suggested that economic activity was increasing at a subdued rate during the second half of the

year. The contraction in homebuilding

was continuing to restrain overall activity, and a step-down in motor vehicle

output held down industrial production.

In contrast, consumer spending and

business investment were increasing at a

moderate rate, and payroll employment

expanded solidly through November.

Additional sharp declines in energy

prices reduced total consumer price inflation in October, but the twelve-month

change in core prices remained above its

year-earlier level.

Indicators from the labor market were

generally strong through November.

Nonfarm payrolls increased at a solid

pace, while revisions to previous estimates showed a larger gain, on balance,

over the preceding two months. Employment in manufacturing and construction industries fell in November,

but hiring continued to be brisk in the

professional and nonbusiness service

industries. Aggregate weekly hours of

private production or nonsupervisory

workers edged up. The unemployment

rate had fallen to 4.4 percent in October

but ticked back up to 4.5 percent in

November, remaining below the average

of 4.7 percent during the first three quarters of the year.

Industrial production (IP) d

September but rose slightly in 

In October, total industrial p

was boosted by a weather-r

bound in electricity generati

output in the mining sector 

sizable gain as crude oil ext

Alaska returned to full produ

lowing pipeline repairs. Man

output fell in both months, 

cause of cutbacks in motor ve

duction as vehicle makers 

evated inventories in ligh

Although less pronounced th

motor vehicle sector, the recen

in factory output was also app

number of other sectors. A n

ception was production in 

industries, which posted ano

increase in October, reflecting 

in computer output and a rise 

conductor production attributa

rollout of a new generation 

processors.

The National Income and 

Accounts for the third quarte

rated an estimate by the Burea

nomic Analysis (BEA) that gr

of new motor vehicles incre

rapid pace in the third quarte

contrast to a drop in the IP 

motor vehicles (including par

tion) for that same period. Mu

difference could be attribute

BEA’s method of inferring m

cle output from separate data 

net international trade, and c

inventories rather than measur

directly using data on produ

addition, a large drop in the 

price index for light trucks in 

quarter resulted in a jump in t

implied unit values of light 

inventory. In the staff’s view, t

surement issues likely caused 

statement of the rate of increa

GDP in the third quarter, and th

unwinding of those effects wo
ably lead to an understatement of real

GDP growth over the next several

quarters.

Real consumer spending increased

strongly in October after a more modest

gain in September. Although purchases

of motor vehicles weakened in October,

outlays on a broad range of other categories of goods, including gasoline,

food, and apparel, rose briskly. Spurred

by sharp declines in consumer energy

prices, real disposable income also

increased rapidly in September and

October. Despite the further deceleration in house prices, the ratio of household wealth to disposable income

remained well above its historical average, buoyed by robust gains in the stock

market. Readings on consumer sentiment edged down in November and

early December but stayed above levels

seen in the summer.

Residential construction activity continued to be very weak. Single-family

housing starts dropped substantially in

October after a slight increase in September, while new permit issuance fell

to nearly its lowest level in the past ten

years. Construction in the much-smaller

multifamily sector continued to fluctuate within a range that had prevailed for

the past several years. Inventories of

unsold homes remained high in October

but were a bit lower than those in preceding months. Sales of new and existing homes showed tentative signs of

stabilizing, although at levels well below their mid-2005 peaks. Price appreciation of existing homes continued to

slow in the third quarter, and some price

measures showed outright declines.

Real spending on equipment and software continued to increase at a solid

pace in the third quarter, supported by

strong corporate cash positions and a

low cost of capital. Early indicators for

the fourth quarter, including survey

measures of business conditions, suggested a slowdown in spendin

reflecting the deceleration in 

output. Business purchases 

vehicles were likely to conti

boosted by an increase in sp

advance of the upcoming c

regulations on truck engines 

Environmental Protection 

Although spending on high-te

goods and software expanded 

pace in the third quarter, dat

orders and shipments in Octob

to more moderate growth in 

quarter. Growth of nonreside

struction spending appeared 

slowed from a rapid rate earl

year, responding in part to stil

cancy rates in the office and 

categories. The number of n

and petroleum drilling rigs in 

had moved down, on balance, 

tember in response to the mod

energy prices.

Unit stocks of light moto

dropped in the third quarter. O

motor vehicle sector, real 

inventories edged up, and th

book-value inventories to sale

the manufacturing and trade se

in September to levels last see

2005. Inventory imbalances 

more widespread than a few 

earlier, although business 

through November indicated th

majority of firms perceived 

customers’ inventories remaine

fortable levels.

The U.S. international tra

declined in September from 

level in August. The narrowi

rily reflected a sharp falloff in 

of imported oil, although no

ports, including industrial supp

tal goods, and automotive prod

declined. Export growth in S

was led by aircraft and indu

plies, while exports of automo

ucts, consumer goods, and sem
tors fell. The trade deficit shrank a bit

further in October.

Economic activity in the advanced

foreign economies rose at a moderate

rate in the third quarter. The expansion

in real activity in the euro area, although

slower than the staff had expected, was

supported by strong domestic demand.

Canada’s real GDP growth was dragged

down by weakness in inventories and

government spending, while slumping

private consumption weighed on growth

in Japan. The U.K. economy, buoyed by

strong investment, continued to expand

solidly. Recent economic indicators for

the developing economies were somewhat mixed but suggested generally

brisk growth in the third quarter.

The overall price index for personal

consumption expenditures fell in September and October, reflecting sharp

declines in energy prices in both

months; the declines left the change in

that index over the twelve months ending in October substantially lower than

over the preceding twelve-month period.

In contrast, the change in the core price

index for personal consumption expenditures over the twelve months ending

in October was still somewhat higher

than it was a year earlier, largely reflecting an acceleration in shelter costs over

that period. The producer price index for

core intermediate materials was flat in

October. Increases in average hourly

earnings had been moderate in recent

months, and compensation per hour in

the nonfarm business sector appeared to

have risen at a subdued rate in the third

quarter. The estimated increase in hourly

compensation for the second quarter had

been revised down substantially; hourly

compensation was now estimated to

have declined in the second quarter following the sharp gain recorded in the

first quarter. This uneven pattern suggested that the surge in hourly compensation in the first quarter had largely

been driven by transitory facto

compensation of private indus

ers, as measured by the em

cost index, increased at a 

faster rate in the three months 

September than it had in 

quarters.

At its October meeting, th

Open Market Committee (FO

cided to maintain its target fo

eral funds rate at 51⁄4 percent. 

mittee’s accompanying 

indicated that economic gro

slowed over the course of 

partly reflecting a cooling of 

ing market. Going forward, 

omy seemed likely to expand 

erate pace. Readings on core 

had been elevated, and the hig

resource utilization had the p

sustain inflation pressures. Ho

flation pressures seemed likel

erate over time, reflecting redu

tus from energy prices, 

inflation expectations, and th

tive effects of monetary polic

and other factors restraining 

demand. Nonetheless, the C

judged that some inflati

remained. The extent and timi

additional firming that might 

to address these risks would d

the evolution of the outlook 

inflation and economic grow

plied by incoming information

Investors had largely antic

FOMC’s decision at its Octobe

to leave the target federal f

unchanged and to make onl

changes in the accompanyin

statement. As a result, the a

ment of the decision elicited 

ket reaction, as did the subseq

lication of the minutes of the 

However, somewhat weaker-t

ipated economic data over the 

ing period apparently led to s

ening of investors’ perceptio
economic outlook. As a result, the likely

pace and extent of policy easing

expected by investors increased, and

yields on nominal and inflation-indexed

Treasury coupon securities fell. Inflation compensation measures were little

changed. Spreads of investment-grade

corporate bond yields over those of

comparable-maturity Treasury securities

remained about unchanged, while those

on speculative-grade corporate bonds

rose a bit. Broad equity indexes showed

solid gains. The foreign exchange value

of the dollar against other major currencies fell, on net, over the intermeeting

period, with pronounced declines

against the euro and sterling.

Debt of the domestic nonfinancial

sectors in the third quarter expanded at

around its second-quarter pace. Business debt rose slightly more slowly than

in the second quarter, in part reflecting

reduced borrowing in the bond and commercial paper markets. In the household

sector, mortgage debt increased at its

lowest pace since the late 1990s, reflecting the continued deceleration in house

prices. M2 rose more strongly in October and November than it had in preceding months.

The staff forecast prepared for this

meeting indicated that growth in economic activity had slowed to a pace

below that of the economy’s long-run

potential in the second half of 2006,

partly as a result of the ongoing adjustment of the housing sector. The rate of

increase in real GDP was expected to

pick up gradually as the drag from the

contraction in residential construction

diminished, returning towards the end

of 2007 to a rate close to the staff’s

estimate of potential output growth.

Core inflation was anticipated to edge

down in 2007 and 2008 in response to a

waning of the effects of higher energy

and import prices, a step-down in rent

increases, and the emergence 

amount of slack in the econom

In their discussion of the 

situation and outlook, meetin

pants noted that their assessme

medium-term prospects for 

growth and inflation were littl

from the previous meeting. 

indicators of near-term activity 

mixed, with some spending an

tion data pointing to a more 

picture than that suggested by 

solid labor market data. Man

pants judged that economic a

the second half of this year 

ably a touch softer than 

expected at the time of the 

meeting. But looking over the 

or so, participants continued 

the economy to expand at a ra

or a little below the economy’

sustainable pace. The ongoin

ment of the housing market w

to damp economic growth in 

term, but this effect was ex

dissipate, and spending in oth

ries looked set to expand at a r

good pace. Although reading

inflation had improved mode

the spring, price pressures we

viewed as convincingly on a d

trend. Most participants expe

inflation to moderate slowly o

but stressed that the risks to th

outlook remained to the upsid

In their discussion of the m

tors of the economy, participa

that developments in the housi

continued to weigh heavily on 

activity. Housing starts and p

new construction had droppe

in October, and contacts in th

sector reported that construct

were continuing to cancel o

land purchases. However, th

some indications that home sa

be starting to stabilize, aid

marked slowing in the rate o
of house prices and a decline in mortgage rates in recent months. Several participants also noted that a range of nonprice incentives and concessions were

being offered by construction firms to

bolster sales. But even if home purchases had begun to level off, residential

investment was likely to fall further in

coming quarters as homebuilders sought

to reduce their backlogs of unsold

homes.

Thus far, the adjustment of activity

and prices in the housing market did not

appear to have spilled over significantly

to consumer spending, which had

expanded at a steady pace in recent

months, buoyed by continued gains in

employment and by a decline in energy

prices. Retailers in most Districts

expected good sales over the holiday

season, although some contacts at package delivery and trucking firms reported

that activity was less busy than usual for

this time of year. Participants noted the

downward revision to the BEA’s estimate of personal income in the second

quarter of this year, but nonetheless continued to anticipate consumer expenditures to expand at a steady pace going

forward. Growth in consumer spending

was expected to be supported by favorable financial conditions and solid gains

in income from employment, outweighing any damping effect of sluggish

increases in housing wealth. Still, considerable uncertainty regarding the ultimate extent of the housing market correction meant that spillovers to

consumption could become more evident, especially if house prices were to

decline significantly.

Business investment appeared to have

decelerated recently, and surveys and

orders data pointed to a relatively slow

rise in equipment and software spending

over the next few quarters. Incoming

data on construction activity and employment also suggested that, following

very rapid growth earlier in 

increases in nonresidential co

spending could be moderating 

ably. However, the weaker cas

of these data contrasted with 

of optimism among business 

Moreover, several participants 

contacts within the construct

had reported that commercial 

activity remained robust, enco

lower vacancy rates, some f

rents, and accommodative fina

ditions. Looking further ahead

participants expected inves

expand at a solid pace, sup

strong corporate balance sh

profits and by the ready avai

funding from financial marke

stitutions, factors that were ex

be offset only partially by rest

slower growth in final sales.

Recent data suggested that 

demand in the rest of the w

likely to continue to expand a

what faster rate than in th

States. Participants noted 

strength of global demand and 

decline in the foreign exchang

the dollar should help to 

increases in U.S. exports.

The slowing in the pace of 

expansion in recent quarters 

by the business spending data 

apparent in measures of indu

duction. Much of the slowing i

tion had been concentrated in 

vehicle sector—as producers h

semblies in order to reduce hi

tory levels—and in constructi

sectors. But, more recently, in

had increased in a number of 

tors, and manufacturing produ

been trimmed in response. F

justments remained possible, s

an additional source of downs

economic growth in the near 

contrast, indicators of activity 
vices sector implied continued brisk

growth.

Participants noted that recent indicators provided mixed signals about the

strength of near-term activity. Solid

gains in employment over recent quarters stood in contrast to the softer pace

of economic expansion suggested by the

spending and production data. That difference most likely reflected lags

between movements in activity and employment, implying that growth in employment would probably slow over the

next quarter or so. Participants suggested that other forces might be at work

as well. The growth of structural labor

productivity could be weaker than currently thought, helping to reconcile the

steady growth in employment with more

subdued advances in spending and output. Moreover, the recent pace of activity may have been stronger than that

indicated by the spending and production data. With regard to this possibility,

it was noted that gross domestic income

had grown substantially more quickly

than measured GDP over the past year.

Incoming data and reports from businesses suggested that the labor market

remained tight. The unemployment rate

had moved slightly lower on balance

over recent months, and many business

contacts reported difficulties in recruiting suitably qualified workers, especially for certain types of professional

and skilled positions. The downward revision to the estimated increases in labor

compensation and unit labor costs earlier in the year had eased some participants’ concerns about the extent of the

pressures on labor resources. Nonetheless, the possibility that the tightness of

the labor market could lead to sustained

upward pressure on nominal labor costs

was viewed as an upside risk to the

expected moderation in inflation.

All meeting participants remained

concerned about the outlook for inflation. Although readings on c

tion had improved modestly 

spring, nearly all participant

core inflation as uncomfortably 

stressed the importance of fur

eration. Participants expected 

tion to edge lower over time, 

the pass-through of higher p

energy and other commoditi

course and as the moderate 

aggregate demand likely led to 

easing of pressures on resourc

participants also highlighted t

that movements in the price

vidual components of the pr

such as owners’ equivalent 

medical costs, could have on 

readings on core inflation. Mo

ally, participants stressed there 

siderable uncertainty as to the 

pace and extent of the mod

core inflation and that the ris

this desired downward path re

the upside. Moreover, partici

pressed concern that a failure 

tion to moderate as expected 

tail significant costs if an upwa

inflation expectations ensued.

In the Committee’s discu

monetary policy for the int

period, nearly all members 

keeping the target federal fun

51⁄4 percent at this meeting. Th

for economic growth and infl

thought to have changed relati

since the previous meeting. N

members felt that maintaining 

rent target for now was most 

foster moderate economic gro

gradual ebbing of core inflatio

elevated levels. Several memb

that the subdued tone of some 

indicators meant that the down

to economic growth in the nea

increased a little and become 

broadly based than previously 

Nonetheless, all members ag

the risk that inflation would fa
erate as desired remained the predominant concern.

In light of the data received over the

intermeeting period, members felt that

the statement should characterize the

cooling in the housing market as substantial and should note that recent indicators had been mixed. The Committee

thought that the statement should reiterate that the economy seemed likely to

expand at a moderate pace, while also

recognizing the possibility that measured GDP growth could be somewhat

uneven in coming quarters. Members

agreed that the statement should continue to convey that inflation risks

remained of greatest concern and that

additional policy firming was possible.

One member did not favor language that

referenced only the possibility of additional policy firming and believed that,

although the risks to inflation remained

the predominant concern, the statement

should emphasize that policy could be

adjusted in either direction depending

on the evolution of the outlook for inflation and economic growth.

At the conclusion of the discussion,

the Committee voted to authorize and

direct the Federal Reserve Bank of New

York, until it was instructed otherwise,

to execute transactions in the System

Account in accordance with the following domestic policy directive:

The Federal Open Market Committee

seeks monetary and financial conditions that

will foster price stability and promote sustainable growth in output. To further its longrun objectives, the Committee in the immediate future seeks conditions in reserve

markets consistent with maintaining the federal funds rate at an average of around

51⁄4 percent.

The vote encompassed ap

the text below for inclusion in 

ment to be released at 2:15 p.m

Nonetheless, the Committee j

some inflation risks remain. The 

timing of any additional firming t

needed to address these risks will 

the evolution of the outlook for 

tion and economic growth, as 

incoming information.

Votes for this action: Messrs

and Geithner, Ms. Bies, Me

Kroszner, and Mishkin, Ms

Messrs. Poole and Warsh

Yellen. Votes against th

Mr. Lacker

Mr. Lacker dissented becau

lieved that further tightening w

to help ensure that core 

declines to an acceptable rate 

quarters.

Meeting participants briefly 

some issues regarding comm

and the next steps in their c

discussion of the topic. At 

FOMC meeting, confirmed 

ary 30–31, 2007, the Comm

tended to consider the role 

nomic projections and forecast

in communicating information

The meeting adjourned at 1

Notation Vote

By notation vote completed o

ber 14, 2006, the Committ

mously approved the minut

FOMC meeting held on Octob

2006.

Vincent R
Litigation

During 2006, the Board of Governors

was a party in two lawsuits or appeals

filed that year and was a party in five

other cases pending from previous years,

for a total of seven cases; in 2005, the

Board had been a party in a total of

thirteen cases. As of December 31,

2006, five cases were pending.

Price v. Bernanke, No. 06-1569

(D.D.C., filed September 8, 2006), is an

employment discrimination action.

Texas State Bank v. United States, No.

05-1168 (U.S. Supreme Court, filed

March 10, 2006), was an appeal of a

decision of the Court of Appeals for the

Federal Circuit dismissing an action

challenging on constitutional grounds

the failure to pay interest on reserve

accounts held at Federal Reserve Banks.

On June 19, 2006, the Supreme Court

denied certiorari. 126 S. Ct. 2889.

Inner City Press/Community on the

Move v. Board of Governors, No. 05-

6162 (Second Circuit, filed November

21, 2005), is an appeal of the district

court’s order (No. 04-CV-8337, 380 F.

Supp. 2d 211 (S.D.N.Y. 2005)) granting

in part and denying in part the Board’s

motion for summary judgment in a Freedom of Information Act case. On September 11, 2006, the court o

affirmed in part and reversed i

ruling of the district court

manded the case. 463 F.3d 23

Price v. Bernanke, No. 05-5

Circuit, filed September 29, 2

an appeal of an order of the dis

(No. 04-CV-0973, 374 F. Supp

dismissing an employment d

tion action. On December 15, 

court of appeals affirmed th

court’s dismissal. 470 F.3d 38

Barnes v. Greenspan, No

1989 (CKK) (D.D.C., filed N

15, 2004), is a case under the 

crimination in Employment A

Jones v. Greenspan, No. 04

(RMU) (D.D.C., filed October 

is an employment discriminati

On December 13, 2005, the dis

granted in part and denied in 

Board’s motion to dismiss and 

mary judgment. 402 F. Supp. 

Artis v. Greenspan, No. 

(D.D.C., filed February 22, 20

employment discrimination a

identical action, No. 99-207

(D.D.C., filed August 3, 1999)

solidated with this action on A

2001. 
Federal Reserve System

Organization
Board of Governors

December 31, 2006

Members

Term expires

January 31,

Ben S. Bernanke, Chairman1 ..... 2020

Donald L. Kohn, Vice Chairman1 . . 2016

Susan S. Bies ..................... 2012

Kevin M. Warsh .................. 2018

Randall S. Kroszner ............ 2008

Frederic S. Mishkin .............. 2014

Officers

Office of Board Members

Michelle A. Smith, Director

WinthropP. Hambley, Assistant to the

Board and Director for Congressional

Liaison

Rosanna Pianalto-Cameron, Assistant to

the Board for Public Information

David W. Skidmore, Assistant to the

Board

Laricke D. Blanchard, Special Assistant

to the Board for Congressional Liaison

Brian J. Gross, Special Assistant to the

Board for Congressional Liaison

Robert M. Pribble, Special Assistant to

the Board for Congressional Liaison

Legal Division

Scott G. Alvarez, General Counsel

Richard M. Ashton, Deputy General

Counsel

Kathleen M. O’Day, Deputy General

Counsel

Stephanie Martin, Associate General

Counsel

Ann Misback, Associate General Counsel

Katherine H. Wheatley, Associate

General Counsel

Kieran J. Fallon, Assistant General

Counsel

Stephen H. Meyer, Assistant G

Counsel

Patricia A. Robinson, Assistant 

Counsel

Cary K. Williams, Assistant Ge

Counsel

Office of the Secretary

Jennifer J. Johnson, Secretary

Robert deV. Frierson, Deputy 

Margaret M. Shanks, Associat

Secretary

Division of

International Finance

Karen H. Johnson, Director

Thomas A. Connors, Senior As

Director

Richard T. Freeman, Associate 

Steven B. Kamin, Associate Di

Dale W. Henderson, Senior Ad

Joseph E. Gagnon, Deputy Asso

Director

Michael P. Leahy, Deputy Asso

Director

D. Nathan Sheets, Deputy Asso

Director

Ralph W. Tryon, Deputy Assoc

Director

Jon W. Faust, Assistant Directo

Trevor A. Reeve, Assistant Dir

John Rogers, Assistant Director

Division of Monetary A

Vincent R. Reinhart, Director

Brian F. Madigan, Deputy Dire

James A. Clouse, Associate Dir

Deborah J. Danker, Associate 

William B. English, Associate 

Athanasios Orphanides, Senio

Cheryl L. Edwards, Deputy As

Director

Andrew T. Levin, Assistant Dir

William Nelson, Assistant Dire

Jonathan H. Wright, Assistant 

1. The designations as Chairman and Vice

Chairman expire on January 31, 2010, and June

22, 2010, respectively, unless the service of these

members of the Board terminates sooner.
Board of Governors—Continued

Division of Research

and Statistics

David J. Stockton, Director

Patrick M. Parkinson, Deputy Director

David W. Wilcox, Deputy Director

Myron L. Kwast, Senior Associate

Director

J. Nellie Liang, Associate Director

Lawrence Slifman, Associate Director

Charles S. Struckmeyer, Associate

Director

Alice Patricia White, Associate Director

Glenn B. Canner, Senior Adviser

David S. Jones, Senior Adviser

Stephen D. Oliner, Senior Adviser

S. Wayne Passmore, Deputy Associate

Director

David L. Reifschneider, Deputy

Associate Director

Janice Shack-Marquez, Deputy

Associate Director

William L. Wascher III, Deputy

Associate Director

Joyce K. Zickler, Deputy Associate

Director

Michael S. Cringoli, Assistant Director

and Chief

Michael S. Gibson, Assistant Director

and Chief

Diana Hancock, Assistant Director

and Chief

Robin A. Prager, Assistant Director

and Chief

Douglas W. Elmendorf, Assistant

Director

Daniel E. Sichel, Assistant Director

Mary M. West, Assistant Director

Division of Banking Supervision

and Regulation

Roger T. Cole, Acting Director

Steven M. Roberts, Senior Adviser

William F. Treacy, Adviser

Sarkis Yoghourtdjian, Adviser

Deborah P. Bailey, Associate Director

Norah M. Barger, Associate D

Betsy Cross, Associate Director

Gerald A. Edwards, Jr., Assoc

Director

Charles H. Holm, Associate Di

Jack P. Jennings II, Associate D

Robin L. Lumsdaine, Associate 

Peter J. Purcell, Associate Dir

Chief Technology Officer

William G. Spaniel, Associate 

Molly S. Wassom, Associate Di

David M. Wright, Associate Di

Barbara J. Bouchard, Deputy A

Director

James A. Embersit, Deputy Asso

Director

Jon D. Greenlee, Deputy Assoc

Director

Arthur W. Lindo, Deputy Asso

Director

William C. Schneider, Jr., Dep

Associate Director

Robert T. Ashman, Assistant D

Kevin M. Bertsch, Assistant D

Stacy Lee Coleman, Assistant 

Robert T. Maas, Assistant Dire

Nina A. Nichols, Assistant Dire

Dana E. Payne, Assistant Direct

Nancy J. Perkins, Assistant Dir

Sabeth I. Siddique, Assistant D

Division of Consumer

and Community Affairs

Sandra F. Braunstein, Directo

Glenn E. Loney, Deputy Direct

Leonard Chanin, Associate Dir

Adrienne D. Hurt, Associate C

and Adviser

Mary T. Johnsen, Associate Dir

Tonda E. Price, Associate Direc

Maryann F. Hunter, Adviser

Timothy R. Burniston, Assista

Suzanne G. Killian, Assistant 

Sheila F. Maith, Assistant Dire

James A. Michaels, Assistant D
Board of Governors—Continued

Division of

Reserve Bank Operations

and Payment Systems

Louise L. Roseman, Director

Jeffrey C. Marquardt, Deputy Director

Paul W. Bettge, Senior Associate

Director

Kenneth D. Buckley, Associate Director

Dorothy LaChapelle, Associate Director

Jack K. Walton II, Associate Director

Jeff J. Stehm, Deputy Associate Director

Gregory L. Evans, Assistant Director

Lisa Hoskins, Assistant Director

Michael J. Lambert, Assistant Director

Office of Staff Director

for Management

Stephen R. Malphrus, Staff Director for

Management

Sheila Clark, Equal Employment

Opportunity Programs Director

Lynn S. Fox, Senior Adviser

Management Division

H. Fay Peters, Director

Darrell R. Pauley, Deputy Director

Stephen J. Clark, Senior Associate

Director

Todd A. Glissman, Senior Associate

Director

Marsha W. Reidhill, Senior Associate

Director

Billy J. Sauls, Senior Associate Director

Donald A. Spicer, Senior Associate

Director

Christine M. Fields, Associate Director

James R. Riesz, Deputy Associate Director

Keith F. Bates, Assistant Director

Elaine M. Boutilier, Assistant Director

Tara C. Tinsley Jones, Assistant Director

Charles F. O’Malley, Assistant Director

Division of

Information Technology

Marianne M. Emerson, Directo

Maureen T. Hannan, Deputy D

Tillena G. Clark, Assistant Di

Geary L. Cunningham, Assista

Director

Wayne A. Edmondson, Assistan

Po Kyung Kim, Assistant Direct

Susan F. Marycz, Assistant Dir

Sharon L. Mowry, Assistant Di

Raymond Romero, Assistant Di

Jill R. Rosen, Assistant Directo

Office of Inspector Gen

Barry R. Snyder, Inspector Ge

Anthony J. Castaldo, Assistan

General

Elizabeth A. Coleman, Assista

Inspector General

Laurence A. Froehlich, Assist

Inspector General

William L. Mitchell, Assistan

General
Federal Open Market Committee

December 31, 2006

Members

Ben S. Bernanke, Chairman, Board of

Governors

Timothy F. Geithner, Vice Chairman,

President, Federal Reserve Bank of

New York

Susan Schmidt Bies, Board of Governors

Donald L. Kohn, Board of Governors

Randall S. Kroszner, Board of

Governors

Jeffrey M. Lacker, President, Federal

Reserve Bank of Richmond

Frederic S. Mishkin, Board of Governors

Sandra Pianalto, President, Federal

Reserve Bank of Cleveland

Kevin M. Warsh, Board of Governors

Janet L. Yellen, President, Federal

Reserve Bank of San Francisco

Alternate Members

Christine M. Cumming, First Vice

President, Federal Reserve Bank of

New York

Thomas M. Hoenig, President, Federal

Reserve Bank of Kansas City

Cathy E. Minehan, President, Federal

Reserve Bank of Boston

Michael H. Moskow, President, Federal

Reserve Bank of Chicago

William Poole, President, Federal

Reserve Bank of St. Louis

Officers

Vincent R. Reinhart, Secretary 

Economist

Deborah J. Danker, Deputy Se

Michelle A. Smith, Assistant S

David W. Skidmore, Assistant S

Scott G. Alvarez, General Cou

Thomas C. Baxter, Jr., Deputy 

Counsel

Karen H. Johnson, Economist

David J. Stockton, Economist

Thomas A. Connors, Associate 

Robert A. Eisenbeis, Associate 

John P. Judd, Associate Econom

Stephen B. Kamin, Associate E

Brian F. Madigan, Associate Ec

Mark S. Sniderman, Associate 

Charles S. Struckmeyer, Asso

Economist

Joseph S. Tracy, Associate Econ

John A. Weinberg, Associate E

David W. Wilcox, Associate Ec

Dino Kos, Manager, System Ope

Account

During 2006 the Federal Open M

mittee held eight regularly sched

ings (see ‘‘Minutes of Federal Op

Committee Meetings’’ in this vol
Federal Advisory Council

December 31, 2006

Members

District 1—James C. Smith, Chairman and

Chief Executive Officer, Webster Bank,

N.A. and Webster Financial Corporation,

Waterbury, Conn.

District 2—Thomas A. Renyi, Chairman

and Chief Executive Officer, The Bank of

New York, New York, N.Y.

District 3—Ted T. Cecala Chairman and

Chief Executive Officer, Wilmington Trust

Company, Wilmington, Del.

District 4—George A. Schaefer, Jr.,

President and Chief Executive Officer,

Fifth Third Bancorp, Cincinnati, Ohio.

District 5—G. Kennedy Thompson, Chairman, President, and Chief Executive Officer, Wachovia Corporation, Charlotte,

N.C.

District 6—Fred L. Green III, Vice Chairman, Synovus Financial Corporation,

Columbus, Ga.

District 7—Dennis J. Kuester, Chairman

and Chief Executive Officer, Marshall &

Ilsley Corporation, Milwaukee, Wis.

District 8—J. Kenneth Glass, Chairman,

President, and Chief Executive Officer,

First Horizon National Corporation,

Memphis, Tenn.

District 9—Lyle R. Knight, President and

Chief Executive Officer, First Interstate

BancSystem, Inc., Billings, Mont.

District 10—David C. Boyles, 

Guaranty Bank and Trust 

Denver, Colo.

District 11—James Goudge, Cha

Chief Executive Officer, Broad

San Antonio, Tex.

District 12—Richard M. Ko

Chairman, President, and Chief 

Officer, Wells Fargo and Com

Francisco, Calif.

Officers

Thomas A. Renyi, President

Dennis J. Kuester, Vice Preside

James E. Annable, Secretary

The Federal Advisory Council, 

statutory body established under 

Reserve Act, consults with, and a

Board of Governors on all matters 

Board’s jurisdiction. It is compo

representative from each Feder

District, chosen by the Reserve B

District. The Federal Reserve A

the council to meet in Washingto

least four times a year. In 2006

February 9–10, May 11–12, Sept

and November 30–December 1. T

met with the Board on February 1

September 8, and December 1, 20
Consumer Advisory Council

December 31, 2006

Members

Stella Adams, Executive Director, North

Carolina Fair Housing Center, Durham,

N.C.

Dennis L. Algiere, Senior Vice President,

The Washington Trust Company,

Westerly, R.I.

Faith L. Anderson, Vice President—Legal

Compliance and General Counsel, American Airlines Federal Credit Union,

Fort Worth, Tex.

Dorothy Bridges, Chief Executive Officer

and President, Franklin National Bank of

Minneapolis, Minneapolis, Minn.

Tony T. Brown, President and Chief

Executive Officer, Uptown Consortium,

Inc., Cincinnati, Ohio

Sheila Canavan, Consumer Attorney, Law

Office of Sheila Canavan, Moab, Utah

Carolyn Carter, Attorney, National Consumer Law Center, Boston, Mass.

Michael Cook, Vice President, Wal-Mart

Stores, Inc., Bentonville, Ark.

Donald S. Currie, Executive Director,

Community Development Corporation of

Brownsville, Brownsville, Tex.

Anne Diedrick, Senior Vice President,

JPMorgan Chase Bank, New York, N.Y.

Hattie B. Dorsey, President and Chief

Executive Officer, Atlanta Neighborhood

Development Partnership, Atlanta, Ga.

Kurt Eggert, Professor of Law and Director of Clinical Legal Education, Chapman

University School of Law, Orange, Calif.

Deborah Hickok, Vice President,

MoneyGram Payment Systems, Inc.,

Ooltewah, Tenn.

Sarah Ludwig, Director, Neighborhood

Economic Development Advocacy

Project, New York, N.Y.

Mark K. Metz, Senior Vice President and

Deputy General Counsel, Wachovia

Corporation, Charlotte, N.C.

Bruce B. Morgan, Chairman, President,

and Chief Executive Officer, Valley State

Bank, Roeland Park, Kans.

Lance Morgan, President, Ho-Chunk,

Incorporated, Winnebago Tribe of

Nebraska, Winnebago, Neb.

Joshua Peirez, Senior Vice Pre

Associate General Counsel, M

International, Purchase, N.Y.

Anna McDonald Rentschler

cer, Central Bancompany, Jeff

Mo.

Faith Arnold Schwartz, S

President, Enterprise Risk M

and Public Affairs, Option One 

Corporation, Washington, D.C

Mary Jane Seebach, Managin

Public Affairs, Countrywide 

Corporation, Calabasas, Calif.

Edward Sivak, Director of P

Evaluation, Enterprise Corpora

Delta, Jackson, Miss.

Paul J. Springman, Chief Mark

cer, Equifax, Atlanta, Ga.

Forrest F. Stanley, Senior Vic

and Deputy General Counsel

National Association, Clevelan

Anselmo Villarreal, Executiv

LaCasa de Esperanza, Inc., Wau

Alan White, Supervising Attor

munity Legal Services, Philade

Marva E. Williams, Senior Vice 

Woodstock Institute, Chicago, 

Officers

Lori Swanson, Chair, Solicito

Office of the Minnesota Atto

eral, St. Paul, Minn.

Lisa Sodeika, Vice Chair, Exec

President—Corporate Affair

North America Holdings, Inc

Heights, Ill.

The Consumer Advisory Counci

tory body established pursuant t

amendments to the Equal Credit O

Act—advises the Board of Go

consumer financial services. Its 

who are appointed by the Boar

demics, state and local governme

and representatives of the financ

industry and of consumer and 

interests. In 2006, the council met 

bers of the Board on March 30, Ju

October 26.
Thrift Institutions Advisory Council

December 31, 2006

Members

Frank E. Berrish, President and Chief

Executive Officer, Visions Federal Credit

Union, Endicott, N.Y.

Craig G. Blunden, Chairman, President,

and Chief Executive Officer, Provident

Savings Bank, FSB, Riverside, Calif.

Alexander R.M. Boyle, Vice Chairman,

Chevy Chase Bank, Bethesda, Md.

Jeffrey H. Farver, President and Chief

Executive Officer, San Antonio Federal

Credit Union, San Antonio, Tex.

A. Thomas Hood, President and Chief

Executive Officer, First Federal Savings

and Loan Association, Charleston, S.C.

Kenneth Koranda, President, Mid

America Bank, Downers Grove, Ill.

Arkadi Kuhlmann, Chairman, President,

and Chief Executive Officer, ING

DIRECT USA, Wilmington, Del.

David E. Poulsen, President and Chief

Executive Officer, American Express

Centurion Bank, Salt Lake City, Utah

George Jeffrey Records, Jr., Chairman

and Chief Executive Officer, MidFirst

Bank, Oklahoma City, Okla.

Steven Swiontek, Chairman, 

and Chief Executive Officer, 

Bank, Fargo, N.D.

David Russell Taylor, Pres

Chief Executive Officer, Rahw

Institution, Rahway, N.J.

Roy M. Whitehead, President 

Executive Officer, Washingto

Savings, Seattle, Wash.

Officers

Roy M. Whitehead, President

David Russell Taylor, Vice Pr

The Thrift Institutions Advisory C

established by the Board of Go

consult with, and advise, the Boar

pertaining to the thrift industry an

matters within the Board’s juris

members, who are appointed by 

represent credit unions, savings 

associations, and savings banks. I

council met with the Board on 

July 7, and December 8.
Federal Reserve Banks and Branches

December 31, 2006

Officers

BANK or Branch Chairman1

Deputy Chairman

President

First Vice President

Officer

in charge of 

BOSTON2 .............. Blenda J. Wilson

Lisa M. Lynch

Cathy E. Minehan

Paul M. Connolly

NEW YORK2 .......... John E. Sexton

Jerry I. Speyer

Timothy F. Geithner

Christine M.

Cumming

Buffalo .................. Alphonso O’NeilWhiteKausar Ham

PHILADELPHIA . . . . . . . Doris M. Damm

William F. Hecht

Charles I. Plosser

William H. Stone, Jr.

CLEVELAND2 . . . . . . . . . Charles E. Bunch

Tanny B. Crane

Sandra Pianalto

R. Chris Moore

Cincinnati . . . . . . . . . . . . . . . James M. Anderson Barbara B. H

Pittsburgh . . . . . . . . . . . . . . . Roy W. Haley Robert B. S

RICHMOND . . . . . . . . . . . . Thomas J. Mackell, Jr.

Theresa M. Stone

Jeffrey M. Lacker

Sarah G. Green

Baltimore ............... William C. Handorf David Beck

Charlotte . . . . . . . . . . . . . . . . Jim Lowry Jeffrey S. K

ATLANTA............... David M. Ratcliffe

V. Larkin Martin

Vacant

Patrick K. Barron3

Birmingham . . . . . . . . . . . . . W. Miller Welborn Lee C. Jone

Jacksonville.............. Linda H. Sherrer Christopher 

Miami. . . . . . . . . . . . . . . . . . . . Brian E. Keeley Juan del Bu

Nashville................. David Williams II Melvyn K. P

New Orleans. . . . . . . . . . . . . Ben Tom Roberts Robert J. M

CHICAGO2 ............. Miles D. White

John A. Canning, Jr.

Michael H. Moskow

Gordon Werkema

Detroit . . . . . . . . . . . . . . . . . . . Roger A. Cregg Glenn Hans

ST. LOUIS............... Walter L. Metcalfe, Jr.

Irl F. Engelhardt

William Poole

David A. Sapenaro

Little Rock............... Sonja Yates Hubbard Robert A. H

Louisville ................ John L. Huber Maria Gerw

Hampt

Memphis. . . . . . . . . . . . . . . . . Russell Gwatney Martha Peri

MINNEAPOLIS......... Frank L. Sims

James J. Hynes

Gary H. Stern

James M. Lyon

Helena . . . . . . . . . . . . . . . . . . . Dean Folkvord Samuel H. G
Officers—Continued

BANK or Branch Chairman1

Deputy Chairman

President

First Vice President

Officer

in charge of 

KANSAS CITY . . . . . . . . . Robert A. Funk

Lu M. Cordova

Thomas M. Hoenig

Richard K. Rasdall, Jr.

Denver . . . . . . . . . . . . . . . . . . . Thomas Williams Michael Orl

Oklahoma City .......... Richard K. Ratcliffe Chad Wilke

Omaha . . . . . . . . . . . . . . . . . . . James A. Timmerman Jason Hende

DALLAS . . . . . . . . . . . . . . . . Ray L. Hunt

Anthony R. Chase

Richard W. Fisher

Helen E. Holcomb

El Paso. . . . . . . . . . . . . . . . . . . Ron C. Helm Robert W. G

Houston. . . . . . . . . . . . . . . . . . Lupe Fraga Robert Smit

San Antonio ............. Elizabeth Chu Richter D. Karen D

SAN FRANCISCO2 .... David K.Y. Tang

T. Gary Rogers

Janet L. Yellen

John F. Moore

Los Angeles . . . . . . . . . . . . . James L. Sanford Mark L. Mu

Portland. . . . . . . . . . . . . . . . . . James H. Rudd Mary E. Lee

Salt Lake City . . . . . . . . . . . William C. Glynn Andrea P. W

Seattle. . . . . . . . . . . . . . . . . . . . Mic R. Dinsmore Mark A. Go

1. The chairman of a Federal Reserve Bank serves, by

statute, as Federal Reserve agent.

2. Additional offices of these Banks are located at

Windsor Locks, Connecticut; Utica at Oriskany, New

York; East Rutherford, New Jersey; Des M

Midway at Bedford Park, Illinois; and Pho

3. Served as acting president as of Oc

following the retirement of Jack Guynn.

Conference of Chairmen

The chairmen of the Federal Reserve Banks

are organized into the Conference of Chairmen, which meets to consider matters of

common interest and to consult with and

advise the Board of Governors. Such meetings, also attended by the deputy chairmen,

were held in Washington, D.C., on May 31

and June 1, and on November 29 and 30,

2006.

The members of the executive committee of the Conference of Chairmen during 2006 were John E. Sexton, chair; Charles

E. Bunch, vice chair; and Robert A. Funk,

member.

On November 30, the conference elected

its executive committee for 2007, naming

Robert A. Funk as chair; V. Larkin Martin as

vice chair; and Miles D. White as the third

member.

Conference of Presidents

The presidents of the Federa

Banks are organized into the 

of Presidents, which meets peri

consider matters of common in

to consult with and advise the 

Governors.

Cathy E. Minehan, president o

eral Reserve Bank of Boston, serv

of the conference in 2006, a

Pianalto, president of the Feder

Bank of Cleveland, served as 

Jacqueline P. Palladino, of th

Reserve Bank of Boston, served a

and Gregory L. Stefani, of th

Reserve Bank of Cleveland, serve

tant secretary.

On November 1, 2006, the 

elected Sandra Pianalto as chair f

and Jeffrey M. Lacker, president 

eral Reserve Bank of Richmon

chair.
Conference of

First Vice Presidents

The Conference of First Vice Presidents of

the Federal Reserve Banks was organized in

1969 to meet periodically for the consideration of operations and other matters.

Helen E. Holcomb, first vice president of

the Federal Reserve Bank of Dallas, served

as chair of the conference in 2006, and James

M. Lyon, first vice president of the Federal

Reserve Bank of Minneapolis, served as vice

chair. Harvey R. Mitchell, of the Federal

Reserve Bank of Dallas, served as secretary,

and Sheryl Britsch, of the Federal Reserve

Bank of Minneapolis, served as assistant

secretary.

Directors

Each Federal Reserve Bank has a ninemember board: three Class A and three

Class B directors, who are elected by the

stockholding member banks, and three

Class C directors, who are appointed by the

Board of Governors.

Class A directors represent the stockholding member banks in each Federal Reserve

District. Class B and Class C directors represent the public and are chosen with due, but

not exclusive, consideration to the interests

of agriculture, commerce, industry, services,

labor, and consumers; they may not be officers, directors, or employees of a

bank holding company. In additio

directors may not be stockhold

bank or bank holding company.

For the election of Class A an

directors, the member banks of 

eral Reserve District are clas

three groups. Each group, which 

banks with similar capitalization, 

Class A director and one Class 

Annually, the Board of Governors 

one of the Class C directors a

the board and Federal Reserve 

each District Bank, and it designa

Class C director as deputy chair.

Federal Reserve Branches have 

or seven directors, a majority of 

appointed by the parent Feder

Bank; the others are appointed by 

of Governors. One of the director

by the Board is designated annua

of the board of that Branch in 

prescribed by the parent Feder

Bank.

The chairs and deputy cha

Reserve Bank boards of directo

chairs of the Branches, are listed 

ceding table, titled ‘‘Officers.’’ Th

of the Banks and Branches are li

following table. For each directo

of directorship, the director’s prin

nizational affiliation, and the date 

tor’s term expires are shown.
Directors

Bank or Branch, Category

Name Title T

DISTRICT 1—BOSTON

Reserve Bank

Class A

Peter A. Blyberg ........... President and Chief Executive Officer,

Union Trust Company, Ellsworth, Maine

Ronald E. Logue ........... Chairman and Chief Executive Officer,

State Street Corporation, Boston, Massachusetts

Kathleen C. Marcum ....... President and Chief Executive Officer, Millbury

National Bank, Millbury, Massachusetts

Class B

Kirk P. Pond . . . . . . . . . . . . . . . . Former President, Chief Executive Officer,

and Chairman, Fairchild Semiconductor International,

South Portland, Maine

Robert K. Kraft ............. Chairman and Chief Executive Officer,

The Kraft Group, Foxborough, Massachusetts

Michael T. Wedge . . . . . . . . . . Former President and Chief Executive Officer,

BJ’s Wholesale Club, Inc., Natick, Massachusetts

Class C

Lisa M. Lynch .............. William L. Clayton Professor of International

Economic Affairs, The Fletcher School of Law

and Diplomacy, Tufts University, Medford,

Massachusetts

Samuel O. Thier, M.D. ..... Professor of Medicine and Professor of Health Care

Policy−Harvard Medical School, Massachusetts

General Hospital, Boston, Massachusetts

Blenda J. Wilson . . . . . . . . . . . Former President and Chief Executive Officer,

Nellie Mae Education Foundation,

Quincy, Massachusetts

DISTRICT 2—NEW YORK

Reserve Bank

Class A

Sanford I. Weill ............ Chairman Emeritus, Citigroup Inc., New York,

New York

Jill M. Considine ........... Chairman, The Depository Trust Company,

New York, New York

Charles V. Wait ............. President, Chief Executive Officer, and Chairman,

The Adirondack Trust Company,

Saratoga Springs, New York

Class B

Indra K. Nooyi ............. President and Chief Executive Officer,

PepsiCo, Inc., Purchase, New York

Richard S. Fuld, Jr. ......... Chairman and Chief Executive Officer,

Lehman Brothers, New York, New York

Jeffrey R. Immelt ........... Chairman and Chief Executive Officer,

General Electric Company, Fairfield, Connecticut
Directors—Continued

Bank or Branch, Category

Name Title T

Class C

Jerry I. Speyer .............. President and Chief Executive Officer, Tishman Speyer,

New York, New York

John E. Sexton . . . . . . . . . . . . . President, New York University, New York, New York 

Denis M. Hughes ........... President, New York State AFL-CIO, New York,

New York

Buffalo Branch

Appointed by the

Federal Reserve Bank

Maureen Torrey Marshall . . Vice President, Torrey Farms, Inc., Elba, New York 

Peter G. Humphrey ......... President and Chief Executive Officer,

Financial Institutions, Inc. and Five Star Bank,

Warsaw, New York

Vacancy ..................... 

Joseph J. Ashton ........... Regional Director−Region 9, United Auto Workers,

Amherst, New York

Appointed by the

Board of Governors

Alphonso O’Neil-White .... President and Chief Executive Officer,

HealthNow New York Inc., Buffalo, New York

James P. Laurito ............ President and Chief Executive Officer,

Rochester Gas and Electric Corporation and New

York State Electric and Gas Corporation, Rochester,

New York

Vacancy ..................... 

DISTRICT 3—PHILADELPHIA

Reserve Bank

Class A

Eugene W. Rogers .......... Director and Chief Executive Officer, Newfield

National Bank, Newfield, New Jersey

Wayne R. Weidner ......... Chairman, National Penn Bancshares, Inc.,

Boyertown, Pennsylvania

John G. Gerlach ............ President and Chief Executive Officer, Pocono

Community Bank, Stroudsburg, Pennsylvania

Class B

Garry L. Maddox ........... President and Chief Executive Officer, A. Pomerantz &

Company, Philadelphia, Pennsylvania

P. Coleman Townsend, Jr. . . Chairman and Chief Executive Officer, Townsends,

Inc., Wilmington, Delaware

Vacancy ..................... 

Class C

William F. Hecht ........... Retired Chairman, President, and Chief Executive

Officer, PPL Corporation, Allentown, Pennsylvania

Doris M. Damm ............ President and Chief Executive Officer, ACCU Staffing

Services, Cherry Hill, New Jersey

Charles P. Pizzi ............. President and Chief Executive Officer, Tasty

Baking Company, Philadelphia, Pennsylvania
Bank or Branch, Category

Name Title T

DISTRICT 4—CLEVELAND

Reserve Bank

Class A

Stephen P. Wilson .......... Chairman, President and Chief Executive Officer,

Lebanon Citizens National Bank, Lebanon, Ohio

Henry L. Meyer, III ........ Chairman and Chief Executive Officer,

KeyCorp, Cleveland, Ohio

Bick Weissenrieder ......... Chairman and Chief Executive Officer,

Hocking Valley Bank, Athens, Ohio

Class B

V. Ann Hailey . . . . . . . . . . . . . . Executive Vice President, Corporate Development,

Limited Brands, Columbus, Ohio

Les C. Vinney . . . . . . . . . . . . . . President and Chief Executive Officer,

STERIS Corporation, Mentor, Ohio

Edwin J. Rigaud ............ President and Chief Executive Officer,

Enova Partners, LLC, Cincinnati, Ohio

Class C

Tanny B. Crane ............. President and Chief Executive Officer, Crane Group

Company, Columbus, Ohio

Charles E. Bunch ........... Chairman and Chief Executive Officer,

PPG Industries, Inc., Pittsburgh, Pennsylvania

Alfred M. Rankin, Jr. ...... Chairman, President and Chief Executive Officer,

NACCO Industries, Inc., Cleveland, Ohio

Cincinnati Branch

Appointed by the

Federal Reserve Bank

Charlotte W. Martin ........ President and Chief Executive Officer, Great Lakes

Bankers Bank, Gahanna, Ohio

James H. Booth ............ President, Czar Coal Corporation, Lovely, Kentucky 

Janet B. Reid ............... Managing Partner, Global Lead Management

Consulting, Cincinnati, Ohio

Glenn D. Leveridge ........ President, Lexington Market, JPMorgan Chase Bank,

NA, Lexington, Kentucky

Appointed by the

Board of Governors

Charles Whitehead ......... Retired President, Ashland Inc. Foundation,

Covington, Kentucky

Herbert R. Brown . . . . . . . . . . Senior Vice President, Western and Southern Financial

Group, Cincinnati, Ohio

James M. Anderson ........ President and Chief Executive Officer, Cincinnati

Children’s Hospital Medical Center, Cincinnati, Ohio

Pittsburgh Branch

Appointed by the

Federal Reserve Bank

Kristine N. Molnar . . . . . . . . . Executive Vice President, WesBanco Bank, Inc.,

Wheeling, West Virginia
Directors—Continued

Bank or Branch, Category

Name Title T

Michael J. Hagan ........... President and Chief Executive Officer,

Iron and Glass Bank, Pittsburgh, Pennsylvania

Sunil T. Wadhwani ......... Chief Executive Officer and Co-founder,

iGATE Corporation, Pittsburgh, Pennsylvania

Georgiana N. Riley ......... President and Chief Executive Officer,

TIGG Corporation, Bridgeville, Pennsylvania

Appointed by the

Board of Governors

James I. Mitnick ............ Senior Vice President, Turner Construction Company,

Pittsburgh, Pennsylvania

Robert O. Agbede .......... President and Chief Executive Officer, ATS-Chester

Engineers, Inc., Pittsburgh, Pennsylvania

Roy W. Haley .............. Chairman and Chief Executive Officer, WESCO

International, Inc., Pittsburgh, Pennsylvania

DISTRICT 5—RICHMOND

Reserve Bank

Class A

Ernest J. Sewell ............ Senior Advisor, FNB Southeast, Greensboro,

North Carolina

Kathleen Walsh Carr ....... President, Cardinal Bank Washington, Washington,

D.C.

Hunter R. Hollar ........... President and Chief Executive Officer, Sandy Spring

Bancorp, Sandy Spring Bank, Olney, Maryland

Class B

Kenneth R. Sparks ......... President and Chief Executive Officer,

Ken Sparks Associates LLC, White Stone, Virginia

Harry M. Lightsey, III ...... State President−South Carolina, BellSouth,

Columbia, South Carolina

Dana S. Boole .............. President and Chief Executive Officer,

Community Affordable Housing Equity Corporation,

Raleigh, North Carolina

Class C

Lemuel E. Lewis . . . . . . . . . . . Director, Landmark Communications, Inc.,

Norfolk, Virginia

Theresa M. Stone ........... President (Retired), Lincoln Financial Media,

Greensboro, North Carolina

Thomas J. Mackell, Jr. ..... Warrenton, Virginia 

Baltimore Branch

Appointed by the

Federal Reserve Bank

Kenneth C. Lundeen ....... President, Environmental Reclamation Company,

Baltimore, Maryland

Michael L. Middleton ...... Chairman and President, Community Bank

of Tri-County, Waldorf, Maryland

Donald P. Hutchinson ...... President and Chief Executive Officer,

SunTrust Bank, Maryland, Baltimore, Maryland
Bank or Branch, Category

Name Title T

Biana J. Arentz ............. President and Chief Executive Officer,

Hemingway’s Inc., Stevensville, Maryland

Appointed by the

Board of Governors

William C. Handorf ........ Professor of Finance, George Washington University,

Washington, D.C.

William R. Roberts ......... President, Verizon Maryland Inc., Baltimore, Maryland 

Cynthia Collins Allner ..... Principal, Miles & Stockbridge P.C., Baltimore,

Maryland

Charlotte Branch

Appointed by the

Federal Reserve Bank

Michael C. Miller .......... Chairman and President, FNB Corp. and First National

Bank and Trust Company, Asheboro, North Carolina

Donald K. Truslow ......... Chief Risk Officer, Wachovia Corporation, Charlotte,

North Carolina

Barry L. Slider ............. President and Chief Executive Officer, First South

Bancorp, Inc., First South Bank,

Spartanburg, South Carolina

James H. Speed, Jr. ......... President and Chief Executive Officer, North Carolina

Mutual Life Insurance Company,

Durham, North Carolina

Appointed by the

Board of Governors

Jim Lowry . . . . . . . . . . . . . . . . . . Automotive Consultant, High Point,

North Carolina

Anthony J. DiGiorgio ...... President, Winthrop University, Rock Hill,

South Carolina

Linda L. Dolny . . . . . . . . . . . . . President, PML Associates, Inc., Greenwood,

South Carolina

DISTRICT 6—ATLANTA

Reserve Bank

Class A

William G. Smith, Jr. ...... Chairman, President, and Chief Executive Officer,

Capital City Bank Group, Inc., Tallahassee, Florida

James F. Beall .............. Chairman, President, and Chief Executive Officer,

Farmers & Merchants Bank, Centre, Alabama

L. Phillip Humann .......... Chairman and Chief Executive Officer, SunTrust

Banks, Inc., Atlanta, Georgia

Class B

Teri G. Fontenot ............ President and Chief Executive Officer,

Woman’s Hospital, Baton Rouge, Louisiana

Lee M. Thomas . . . . . . . . . . . . Past President and Chief Operating Officer,

Georgia-Pacific Corporation, Atlanta, Georgia

Egbert L.J. Perry ........... Chairman and Chief Executive Officer,

The Integral Group, LLC, Atlanta, Georgia
Directors—Continued

Bank or Branch, Category

Name Title T

Class C

D. Scott Davis .............. Chief Financial Officer and Vice Chairman, United

Parcel Service, Atlanta, Georgia

David M. Ratcliffe ......... Chairman, President, and Chief Executive Officer,

Southern Company, Atlanta, Georgia

V. Larkin Martin ........... Managing Partner, Martin Farm, Courtland, Alabama 

Birmingham Branch

Appointed by the

Federal Reserve Bank

Samuel F. Dodson .......... Business Manager, International Union of Operating

Engineers–Local 312, Birmingham, Alabama

Bobby A. Bradley .......... Managing Partner, Lewis Properties, LLC and

Anderson Investments, LLC, Huntsville, Alabama

John B. Barnett III ......... Monroeville President, BankTrust,

Monroeville, Alabama

John H. Holcomb III ....... Chairman and Chief Executive Officer, Alabama

National Bancorporation, Birmingham, Alabama

Appointed by the

Board of Governors

W. Miller Welborn ......... President, Welborn and Associates, Inc.,

Lookout Mountain, Tennessee

Maryam B. Head . . . . . . . . . . . President, Ram Tool and Supply Company, Inc.,

Birmingham, Alabama

James H. Sanford ........... Chairman of the Board, HOME Place Farms, Inc.,

Prattville, Alabama

Jacksonville Branch

Appointed by the

Federal Reserve Bank

Robert L. Fisher ............ President and Chief Executive Officer,

MacDill Federal Credit Union, Tampa, Florida

Ellen S. Titen ............... President, E.T. Consultants, Winter Park, Florida 

Jack B. Healan, Jr. ......... President, Amelia Island Plantation Company,

Amelia Island, Florida

Alan Rowe . . . . . . . . . . . . . . . . . . President and Chief Executive Officer,

First Commercial Bank of Florida,

Orlando, Florida

Appointed by the

Board of Governors

Linda H. Sherrer ........... President and Chief Executive Officer,

Prudential Network Realty, Jacksonville, Florida

H. Britt Landrum, Jr. ....... President and Chief Executive Officer,

Landrum Human Resource Companies, Inc.,

Pensacola, Florida

Fassil Gabremariam ........ President and Founder, US–Africa Free Enterprise

Education Foundation, Tampa, Florida
Bank or Branch, Category

Name Title T

Miami Branch

Appointed by the

Federal Reserve Bank

Miriam Lopez .............. Chairman and Chief Executive Officer,

TransAtlantic Bank, Miami, Florida

Dennis S. Hudson III . . . . . . . Chairman and Chief Executive Officer, Seacoast

Banking Corporation of Florida, Stuart, Florida

Francis V. Gudorf .......... President/Executive Director, Jubilee Community

Development Corporation, Miami, Florida

Thomas H. Shea . . . . . . . . . . . . Regional Chief Executive Officer–Florida/Caribbean,

Right Management, Fort Lauderdale, Florida

Appointed by the

Board of Governors

Brian E. Keeley ............ President and Chief Executive Officer,

Baptist Health South Florida, Coral Gables, Florida

Gay Rebel Thompson ...... President and Chief Executive Officer,

Cement Industries, Inc., Fort Myers, Florida

Edwin A. Jones, Jr. ......... President, Angus Investments, Inc.,

Port St. Lucie, Florida

Nashville Branch

Appointed by the

Federal Reserve Bank

James W. Spradley, Jr. ..... President and Chief Executive Officer,

Standard Candy Company, Inc., Nashville, Tennessee

Daniel A. Gaudette ......... Senior Vice President, North American Manufacturing

and Supply Chain Management, Nissan North

America, Inc., Smyrna, Tennessee

M. Terry Turner ............ President and Chief Executive Officer, Pinnacle

Financial Partners, Nashville, Tennessee

Michael B. Swain . . . . . . . . . . Chairman, First National Bank, Oneida, Tennessee 

Appointed by the

Board of Governors

David Williams II . . . . . . . . . . Vice Chancellor and General Counsel,

Vanderbilt University, Nashville, Tennessee

Debra K. London ........... President and Chief Executive Officer,

St. Mary’s Health System, Knoxville, Tennessee

Richard Q. Ford ............ President and Chief Executive Officer, The Sage Group,

Brentwood, Tennessee

New Orleans Branch

Appointed by the

Federal Reserve Bank

Lawrence E. Kurzius ....... President, U.S. Consumer Foods, McCormick &

Company, Incorporated, Baltimore, Maryland

Christel C. Slaughter ....... Partner, SSA Consultants, LLC, Baton Rouge, Louisiana 

David E. Johnson ........... Chairman and Chief Executive Officer, The First

Bancshares, Inc., and The First, A National Banking

Association, Hattiesburg, Mississippi

J. Herbert Boydstun ........ President and Chief Executive Officer,

Capital One, N.A., New Orleans, Louisiana
Directors—Continued

Bank or Branch, Category

Name Title T

Appointed by the

Board of Governors

Ben Tom Roberts ........... President, Roberts Brothers Commercial and Property

Management, Inc., Realtors, Mobile, Alabama

Dave Dennis . . . . . . . . . . . . . . . . President and Chief Executive Officer,

Specialty Contractors & Associates, Inc.,

Gulfport, Mississippi

Earl L. Shipp . . . . . . . . . . . . . . . President—Dow India, Middle East and Africa,

Global Vice President for Oxides and Glycols,

The Dow Chemical Company, Dubai,

United Arab Emirates

DISTRICT 7—CHICAGO

Reserve Bank

Class A

Michael L. Kubacki ........ Chairman, President, and Chief Executive Officer,

Lakeland Financial Corporation,

Warsaw, Indiana

Jeff Plagge .................. Chairman, Chief Executive Officer, and President,

Midwest Heritage Bank, Clive, Iowa

William A. Osborn ......... Chairman and Chief Executive Officer, Northern Trust

Corporation and The Northern Trust Company,

Chicago, Illinois

Class B

Mark T. Gaffney ............ President, Michigan AFL-CIO, Lansing, Michigan 

Vacancy ..................... 

Valerie B. Jarrett ........... Managing Director and Executive Vice President,

The Habitat Company, Chicago, Illinois

Class C

W. James Farrell ............ Retired Chairman and Chief Executive Officer,

Illinois Tool Works, Inc., Glenview, Illinois

Miles D. White ............. Chairman and Chief Executive Officer, Abbott,

Abbott Park, Illinois

John A. Canning, Jr. ........ Chairman and Chief Executive Officer,

Madison Dearborn Partners, LLC, Chicago, Illinois

Detroit Branch

Appointed by the

Federal Reserve Bank

Ralph W. Babb, Jr. ......... Chairman, President, and Chief Executive Officer,

Comerica Incorporated, Detroit, Michigan

Michael M. Magee, Jr. ..... President and Chief Executive Officer,

Independent Bank Corporation, Ionia, Michigan

Tommi A. White ........... Chief Executive Officer, ER-One, Inc.,

Livonia, Michigan

Linda S. Likely ............. Director of Housing & Community Development,

Kent County Community Development Department

& Housing Commission, Grand Rapids, Michigan
Bank or Branch, Category

Name Title T

Appointed by the

Board of Governors

Roger A. Cregg . . . . . . . . . . . . Executive Vice President and Chief Financial Officer,

Pulte Homes, Inc., Bloomfield Hills, Michigan

Irvin D. Reid . . . . . . . . . . . . . . . President, Wayne State University, Detroit, Michigan 

Timothy M. Manganello . . . Chairman and Chief Executive Officer, BorgWarner

Incorporated, Auburn Hills, Michigan

DISTRICT 8—ST. LOUIS

Reserve Bank

Class A

David R. Pirsein ............ President and Chief Executive Officer, First National

Bank in Pinckneyville, Pinckneyville, Illinois

Lewis F. Mallory, Jr. ....... Chairman and Chief Executive Officer,

Cadence Financial Corporation, Starkville,

Mississippi

J. Thomas May . . . . . . . . . . . . . Chairman and Chief Executive Officer,

Simmons First National Corporation, Pine Bluff,

Arkansas

Class B

A. Rogers Yarnell, II ....... President, Yarnell Ice Cream Company, Inc.,

Searcy, Arkansas

Paul T. Combs . . . . . . . . . . . . . . President, Baker Implement Company,

Kennett, Missouri

Jay Fitzsimmons . . . . . . . . . . . . Sr. Vice President of Finance and Treasurer,

Wal-Mart Stores, Inc., Bentonville, Arkansas

Class C

Walter L. Metcalfe, Jr. ..... Partner, Bryan Cave LLP, St. Louis, Missouri 

Irl F. Engelhardt ............ Chairman, Peabody Energy, St. Louis, Missouri 

Cynthia J. Brinkley ......... President, AT&T Missouri, St. Louis, Missouri 

Little Rock Branch

Appointed by the

Federal Reserve Bank

Raymond E. Skelton ....... Retired Regional President, U.S. Bank,

North Little Rock, Arkansas

Sharon Priest . . . . . . . . . . . . . . . Executive Director, The Downtown Partnership,

Little Rock, Arkansas

Robert A. Young III ........ Chairman, Arkansas Best Corporation,

Fort Smith, Arkansas

Phillip N. Baldwin ......... President and Chief Executive Officer, Southern

Bancorp, Arkadelphia, Arkansas

Appointed by the

Board of Governors

C. Sam Walls ............... Chief Executive Officer, Arkansas Capital Corporation,

Little Rock, Arkansas
Directors—Continued

Bank or Branch, Category

Name Title T

Sonja Yates Hubbard ....... Chief Executive Officer, E-Z Mart Stores, Inc.,

Texarkana, Texas

Cal McCastlain ............. Partner, Pender & McCastlain, P.A., Little Rock,

Arkansas

Louisville Branch

Appointed by the

Federal Reserve Bank

Gordon B. Guess . . . . . . . . . . . Chairman, President, and Chief Executive Officer,

The Peoples Bank, Marion, Kentucky

Steven E. Trager ........... Chairman and Chief Executive Officer, Republic

Bank & Trust Company, Louisville, Kentucky

L. Clark Taylor, Jr. ......... Chief Executive Officer, Ephraim McDowell Health,

Danville, Kentucky

John C. Schroeder .......... President, Wabash Plastics, Inc., Evansville, Indiana 

Appointed by the

Board of Governors

Norman E. Pfau, Jr. . . . . . . . . President and Chief Executive Officer, Geo. Pfau’s

Sons Company, Inc., Jeffersonville, Indiana

Gary A. Ransdell ........... President, Western Kentucky University,

Bowling Green, Kentucky

John L. Huber . . . . . . . . . . . . . . President and Chief Executive Officer,

Louisville Water Company, Louisville, Kentucky

Memphis Branch

Appointed by the

Federal Reserve Bank

David P. Rumbarger, Jr. .... President and Chief Executive Officer, Community

Development Foundation, Tupelo, Mississippi

Thomas G. Miller .......... President, Southern Hardware Company, Inc.,

West Helena, Arkansas

Levon Mathews ............ President, Regions Bank, Memphis, Tennessee 

Hunter Simmons ........... President and Chief Executive Officer,

First South Bank, Jackson, Tennessee

Appointed by the

Board of Governors

Russell Gwatney ........... President, Gwatney Companies, Memphis, Tennessee 

Charles S. Blatteis . . . . . . . . . . Member (Partner), The Bogatin Law Firm, PLC,

Memphis, Tennessee

Meredith B. Allen . . . . . . . . . . Vice President, Marketing, Staple Cotton Cooperative

Association, Greenwood, Mississippi

DISTRICT 9—MINNEAPOLIS

Reserve Bank

Class A

Douglas C. Morrison ....... Chief Financial Officer, Citibank (South Dakota) N.A.,

Sioux Falls, South Dakota

John H. Hoeven, Jr. . . . . . . . . Chairman, First Western Bank & Trust,

Minot, North Dakota

Peter J. Haddeland ......... President and Chief Executive Officer,

First National Bank, Mahnomen, Minnesota
Bank or Branch, Category

Name Title T

Class B

D. Greg Heineman ......... Chairman, Williams Insurance Agency,

Sioux Falls, South Dakota

Todd L. Johnson ............ President and Chief Executive Officer, Reuben

Johnson & Son, Inc. & Affiliated Companies,

Superior, Wisconsin

Randy Peterson ............. Facility Director, Lake Superior State University,

Sault Ste. Marie, Michigan

Class C

James J. Hynes . . . . . . . . . . . . . Executive Administrator, Twin City Pipe Trades

Service Association, St. Paul, Minnesota

Frank L. Sims . . . . . . . . . . . . . . Corporate Vice President, Transportation, Cargill, Inc.,

Wayzata, Minnesota

John W. Marvin . . . . . . . . . . . . Chairman and Chief Executive Officer, Marvin

Windows and Doors, Warroad, Minnesota

Helena Branch

Appointed by the

Federal Reserve Bank

Marilyn F. Wessel .......... Retired Dean and Director, Museum of the Rockies,

Bozeman, Montana

Joy N. Ott . . . . . . . . . . . . . . . . . . Regional President and Chief Executive Officer,

Wells Fargo Bank Montana, N.A., Billings, Montana

John L. Franklin ............ President and Chief Executive Officer, 1st Bank,

Sidney, Montana

Appointed by the

Board of Governors

Dean Folkvord .............. President and Chief Executive Officer, Wheat Montana

Farms and Bakery, Three Forks, Montana

Lawrence R. Simkins . . . . . . President, Washington Corporations, Missoula,

Montana

DISTRICT 10—KANSAS CITY

Reserve Bank

Class A

Mark W. Schifferdecker .... President and Chief Executive Officer, Girard National

Bank, Girard, Kansas

Robert C. Fricke ............ President and Chief Executive Officer, Farmers &

Merchants National Bank, Ashland, Nebraska

Rick L. Smalley ............ Chief Executive Officer, Dickinson Financial

Corporation, Kansas City, Missouri

Class B

Kevin K. Nunnink .......... Chairman, Integra Realty Resources, Westwood, Kansas 

Frank Moore ................ President, Spearhead Ranch Company,

Douglas, Wyoming

Dan L. Dillingham ......... Chief Executive Officer, Dillingham Insurance,

Enid, Oklahoma
Directors—Continued

Bank or Branch, Category

Name Title T

Class C

Robert A. Funk ............. Chairman and Chief Executive Officer,

Express Personnel Services, Oklahoma City,

Oklahoma

Terry L. Moore ............. President, Omaha Federation of Labor,

Omaha, Nebraska

Lu M. Cordova . . . . . . . . . . . . . Chief Executive Officer, Corlund Industries;

Chairman, CTEK Angels, Boulder, Colorado

Denver Branch

Appointed by the

Federal Reserve Bank

James A. Helzer ............ President and Chief Executive Officer,

Unicover Corporation, Cheyenne, Wyoming

John D. Pearson . . . . . . . . . . . . Real Estate Broker/Owner, Pearson Real Estate

Co., Inc., Buffalo, Wyoming

Michael R. Stanford ........ President and Chief Executive Officer,

First State Bancorporation,

Albuquerque, New Mexico

Bruce K. Alexander ........ President and Chief Executive Officer, Vectra Bank

Colorado, Denver, Colorado

Appointed by the

Board of Governors

Thomas Williams ........... President and Chief Executive Officer,

Williams Group LLC, Golden, Colorado

Kristy A. Schloss ........... President and Chief Executive Officer,

Schloss Engineered Equipment, Inc.,

Aurora, Colorado

Diane Leavesley ............ President, Mercy Loan Fund, Denver, Colorado 

Oklahoma City Branch

Appointed by the

Federal Reserve Bank

Barry H. Golsen ............ Board Vice-Chairman, President and Chief Operating

Officer, LSB Industries, Inc., Oklahoma City,

Oklahoma

Robert R. Gilbert, III ....... President, Chief Operating Officer, and Director,

The F&M Bank & Trust Company, Tulsa, Oklahoma

Terry M. Almon ............ President and Chief Executive Officer, Arkansas

Valley State Bank, Broken Arrow, Oklahoma

Fred M. Ramos . . . . . . . . . . . . . Executive Director, State Hispanic Chamber of

Commerce, Oklahoma City, Oklahoma

Appointed by the

Board of Governors

Richard K. Ratcliffe ........ Chairman, Ratcliffe’s Inc., Weatherford, Oklahoma 

Steven C. Agee ............. President, Agee Energy, LLC,

Oklahoma City, Oklahoma

Michael A. Cawley . . . . . . . . . President and Chief Operating Officer,

The Samuel Roberts Noble Foundation, Inc.,

Ardmore, Oklahoma
Bank or Branch, Category

Name Title T

Omaha Branch

Appointed by the

Federal Reserve Bank

Rodrigo Lopez .............. President and Chief Executive Officer, AmeriSphere

Multifamily Finance, LLC, Omaha, Nebraska

Michael J. Nelson .......... Chairman, FirsTier Bank, Kimball, Nebraska 

Cynthia Hardin Milligan . . . Dean–College of Business Administration,

University of Nebraska-Lincoln, Lincoln, Nebraska

Mark A. Sutko .............. President and Chief Executive Officer,

Platte Valley State Bank, Kearney, Nebraska

Appointed by the

Board of Governors

Charles R. Hermes ......... President, Dutton-Lainson Company,

Hastings, Nebraska

Lyn Wallin Ziegenbein . . . . . Executive Director, Peter Kiewit Foundation,

Omaha, Nebraska

James A. Timmerman . . . . . . Chief Financial Officer, Timmerman

and Sons Feeding Company,

Springfield, Nebraska

DISTRICT 11—DALLAS

Reserve Bank

Class A

Matthew T. Doyle . . . . . . . . . . Vice Chairman and Chief Executive Officer,

Texas First Bank, Texas City, Texas

David S. Barnard ........... Chairman and Chief Executive Officer, The

National Banks of Central Texas, Gatesville, Texas

Richard W. Evans, Jr. ...... Chairman and Chief Executive Officer,

Cullen/Frost Bankers, Inc., San Antonio, Texas

Class B

Judy Ley Allen ............. Partner, Allen Investments, Inc., Houston, Texas 

Robert A. Estrada .......... Chairman, Estrada Hinojosa & Company, Inc.,

Dallas, Texas

James B. Bexley . . . . . . . . . . . . Associate Professor, Finance, Sam Houston

State University, Huntsville, Texas

Class C

Anthony R. Chase .......... Chairman and Chief Executive Officer, ChaseCom, LP,

Houston, Texas

Ray L. Hunt . . . . . . . . . . . . . . . . Chairman, President, and Chief Executive Officer,

Hunt Consolidated, Inc., Dallas, Texas

James T. Hackett . . . . . . . . . . . Chairman, President, and Chief Executive Officer,

Anadarko Petroleum Corporation, Houston, Texas

El Paso Branch

Appointed by the

Federal Reserve Bank

Gerald J. Rubin ............. Chairman, President, and Chief Executive Officer,

Helen of Troy Limited, El Paso, Texas
Directors—Continued

Bank or Branch, Category

Name Title T

F. James Volk . . . . . . . . . . . . . . Regional President, State National Bank, El Paso, Texas 

Pete Cook . . . . . . . . . . . . . . . . . . . President and Chief Executive Officer, First National

Bank of Alamogordo, Alamogordo, New Mexico

Fred J. Loya . . . . . . . . . . . . . . . . Chairman, Fred Loya Insurance, El Paso, Texas 

Appointed by the

Board of Governors

William V. Flores .......... Provost, New Mexico State University,

Las Cruces, New Mexico

Cecilia Ochoa Levine ...... President, MFI International Mfg., LLC,

El Paso, Texas

Ron C. Helm . . . . . . . . . . . . . . . Owner, Helm Land and Cattle Company,

Van Horn, Texas

Houston Branch

Appointed by the

Federal Reserve Bank

Timothy N. Bryan .......... Chairman and Chief Executive Officer,

The First National Bank of Bryan, Bryan, Texas

Jodie L. Jiles ............... Managing Director, RBC Capital Markets,

Houston, Texas

S. Reed Morian ............. Chairman, President, and Chief Executive Officer,

DX Service Company, Inc., Houston, Texas

Peter G. Traber, M.D. ...... President and Chief Executive Officer, Baylor College

of Medicine, Houston, Texas

Appointed by the

Board of Governors

Nancy T. Chang ............ Chairman, Tanox, Inc., Houston, Texas 

Douglas L. Foshee ......... President and Chief Executive Officer,

El Paso Corporation, Houston, Texas

Lupe Fraga ................. Chairman and Chief Executive Officer, Tejas Office

Products, Inc., Houston, Texas

San Antonio Branch

Appointed by the

Federal Reserve Bank

Steven R. Vandegrift ....... Founder and President, SRV Holdings, Austin, Texas 

G.P. Singh . . . . . . . . . . . . . . . . . . Chairman and Chief Executive Officer,

Karta Technologies Inc., San Antonio, Texas

Matt F. Gorges ............. Chairman and Chief Executive Officer, Valley

International Cold Storage, Inc., Harlingen, Texas

Guillermo F. Trevino . . . . . . . Vice President, Southern Distributing,

Lorado, Texas

Appointed by the

Board of Governors

J. Dan Bates ................ President, Southwest Research Institute,

San Antonio, Texas

Ricardo Romo .............. President, The University of Texas at San Antonio,

San Antonio, Texas

Elizabeth Chu Richter ...... Chairman and Chief Executive Officer,

Richter Architects, Corpus Christi, Texas
Bank or Branch, Category

Name Title T

DISTRICT 12—SAN FRANCISCO

Reserve Bank

Class A

Kenneth P. Wilcox ......... President and Chief Executive Officer, Silicon

Valley Bank, Santa Clara, California

Richard W. Decker, Jr. ..... Chairman and Co-Founder, Belvedere Capital

Partners LLC, San Francisco, California

Candace Hunter Wiest ..... President and Chief Executive Officer, West Valley

National Bank, Avondale, Arizona

Class B

Barbara L. Wilson .......... Consultant; and Regional Vice President (Retired),

Qwest Corporation, Boise, Idaho

Jack McNally ............... Principal, JKM Consulting, Sacramento, California 

Karla S. Chambers . . . . . . . . . Vice President and Co-Owner, Stahlbush Island Farms,

Inc., Corvallis, Oregon

Class C

T. Gary Rogers ............. Chairman and Chief Executive Officer,

Dreyer’s Grand Ice Cream, Inc., Oakland, California

David K.Y. Tang ........... Partner, Preston Gates & Ellis LLP, Seattle, Washington 

Charles H. Smith . . . . . . . . . . . Former President and Chief Executive Officer,

AT&T West, San Ramon, California

Los Angeles Branch

Appointed by the

Federal Reserve Bank

D. Linn Wiley .............. President and Chief Executive Officer,

Citizens Business Bank, Ontario, California

Karen B. Caplan ............ President and Chief Executive Officer,

Frieda’s, Inc., Los Alamitos, California

Dominic Ng ................ Chairman, President and Chief Executive Officer,

East West Bank, Pasadena, California

Peter M. Thomas ........... Managing Partner, Thomas & Mack Co.,

Las Vegas, Nevada

Appointed by the

Board of Governors

Anita Santiago .............. Chief Executive Officer, Anita Santiago Advertising,

Santa Monica, California

James L. Sanford . . . . . . . . . . . Corporate Vice President and Treasurer, Northrop

Grumman Corporation, Los Angeles, California

Ann E. Sewill . . . . . . . . . . . . . . President, Community Foundation Land Trust,

California Community Foundation, Los Angeles,

California

Portland Branch

Appointed by the

Federal Reserve Bank

Robert D. Sznewajs ........ President and Chief Executive Officer,

West Coast Bancorp, Lake Oswego, Oregon

Alan V. Johnson ............ Regional President, Wells Fargo Bank, Portland,

Oregon
Directors—Continued

Bank or Branch, Category

Name Title T

William D. Thorndike, Jr. . . Chairman and President, Medford Fabrication,

Medford, Oregon

George J. Puentes .......... President, Don Pancho Authentic Mexican Foods, Inc.,

Salem, Oregon

Appointed by the

Board of Governors

David Y. Chen .............. Partner, OVP Venture Partners, Portland, Oregon 

James H. Rudd . . . . . . . . . . . . . Chief Executive Officer and Principal, Ferguson

Wellman Capital Management, Inc., Portland,

Oregon

Peter O. Kohler, M.D. ...... President, Oregon Health & Science University,

Portland, Oregon

Salt Lake City Branch

Appointed by the

Federal Reserve Bank

Annette K. Herman . . . . . . . . Vice President, Strategic Initiatives, Uniprise,

UnitedHealth Group, Salt Lake City, Utah

Michael M. Mooney . . . . . . . President, Farmers & Merchants Bank, A Bank of the

Cascades Company, Boise, Idaho

A. Scott Anderson .......... President and Chief Executive Officer, Zions Bank,

Salt Lake City, Utah

Deborah Bayle Nielsen ..... President and Chief Executive Officer,

United Way of Salt Lake, Salt Lake City, Utah

Appointed by the

Board of Governors

William C. Glynn .......... President, Intermountain Industries, Inc., Boise, Idaho 

Gary L. Crocker ............ Chairman of the Board, Merrimack Pharmaceuticals,

Inc., Salt Lake City, Utah

Clark D. Ivory .............. Chief Executive Officer, Ivory Homes, Ltd.,

Salt Lake City, Utah

Seattle Branch

Appointed by the

Federal Reserve Bank

Helvi K. Sandvik ........... President, NANA Development Corporation,

Anchorage, Alaska

Blake W. Nordstrom ....... President, Nordstrom, Inc., Seattle, Washington 

Kenneth M. Kirkpatrick .... President, Washington State, U.S. Bank,

Seattle, Washington

H. Stewart Parker .......... President and Chief Executive Officer, Targeted

Genetics Corporation, Seattle, Washington

Appointed by the

Board of Governors

David W. Wyckoff ......... Chairman and Chief Executive Officer,

Wyckoff Farms, Inc., Grandview, Washington

Mic R. Dinsmore . . . . . . . . . . . Chief Executive Officer, Port of Seattle,

Seattle, Washington

James R. Gill . . . . . . . . . . . . . . . President, Pacific Northwest Title Holding Company,

Seattle, Washington
Members of the Board of Governors, 1913–2006

Appointed Members

Name Federal Reserve

District

Date initially took

oath of office Other dates1

Charles S. Hamlin Boston Aug. 10, 1914 Reappointed in 1916 and 1926

until Feb. 3, 1936.2

Paul M. Warburg New York Aug. 10, 1914 Term expired Aug. 9, 1918.

Frederic A. Delano Chicago Aug. 10, 1914 Resigned July 21, 1918.

W.P.G. Harding Atlanta Aug. 10, 1914 Term expired Aug. 9, 1922.

Adolph C. Miller San Francisco Aug. 10, 1914 Reappointed in 1924. Reappoi

1934 from the Richmond D

Served until Feb. 3, 1936.2

Albert Strauss New York Oct. 26, 1918 Resigned Mar. 15, 1920.

Henry A. Moehlenpah Chicago Nov. 10, 1919 Term expired Aug. 9, 1920.

Edmund Platt New York June 8, 1920 Reappointed in 1928. Resigne

1930.

David C. Wills Cleveland Sept. 29, 1920 Term expired Mar. 4, 1921.

John R. Mitchell Minneapolis May 12, 1921 Resigned May 12, 1923.

Milo D. Campbell Chicago Mar. 14, 1923 Died Mar. 22, 1923.

Daniel R. Crissinger Cleveland May 1, 1923 Resigned Sept. 15, 1927.

George R. James St. Louis May 14, 1923 Reappointed in 1931. Served u

1936.3

Edward H. Cunningham Chicago May 14, 1923 Died Nov. 28, 1930.

Roy A. Young Minneapolis Oct. 4, 1927 Resigned Aug. 31, 1930.

Eugene Meyer New York Sept. 16, 1930 Resigned May 10, 1933.

Wayland W. Magee Kansas City May 18, 1931 Term expired Jan. 24, 1933.

Eugene R. Black Atlanta May 19, 1933 Resigned Aug. 15, 1934.

M.S. Szymczak Chicago June 14, 1933 Reappointed in 1936 and 1948

May 31, 1961.

J.J. Thomas Kansas City June 14, 1933 Served until Feb. 10, 1936.2

Marriner S. Eccles San Francisco Nov. 15, 1934 Reappointed in 1936, 1940, an

Resigned July 14, 1951.

Joseph A. Broderick New York Feb. 3, 1936 Resigned Sept. 30, 1937.

John K. McKee Cleveland Feb. 3, 1936 Served until Apr. 4, 1946.2

Ronald Ransom Atlanta Feb. 3, 1936 Reappointed in 1942. Died De

Ralph W. Morrison Dallas Feb. 10, 1936 Resigned July 9, 1936.

Chester C. Davis Richmond June 25, 1936 Reappointed in 1940. Resigne

1941.

Ernest G. Draper New York Mar. 30, 1938 Served until Sept. 1, 1950.2

Rudolph M. Evans Richmond Mar. 14, 1942 Served until Aug. 13, 1954.2

James K. Vardaman, Jr. St. Louis Apr. 4, 1946 Resigned Nov. 30, 1958.

Lawrence Clayton Boston Feb. 14, 1947 Died Dec. 4, 1949.

Thomas B. McCabe Philadelphia Apr. 15, 1948 Resigned Mar. 31, 1951.

Edward L. Norton Atlanta Sept. 1, 1950 Resigned Jan. 31, 1952.

Oliver S. Powell Minneapolis Sept. 1, 1950 Resigned June 30, 1952.

Wm. McC. Martin, Jr. New York Apr. 2, 1951 Reappointed in 1956. Term ex

Jan. 31, 1970.

A.L. Mills, Jr. San Francisco Feb. 18, 1952 Reappointed in 1958. Resigne

1965.

J.L. Robertson Kansas City Feb. 18, 1952 Reappointed in 1964. Resigne

1973.

C. Canby Balderston Philadelphia Aug. 12, 1954 Served through Feb. 28, 1966

Paul E. Miller Minneapolis Aug. 13, 1954 Died Oct. 21, 1954.
Appointed Members—Continued

Name Federal Reserve

District

Date initially took

oath of office Other dates1

Chas. N. Shepardson Dallas Mar. 17, 1955 Retired Apr. 30, 1967.

G.H. King, Jr. Atlanta Mar. 25, 1959 Reappointed in 1960. Resigne

1963.

George W. Mitchell Chicago Aug. 31, 1961 Reappointed in 1962. Served u

Feb. 13, 1976.2

J. Dewey Daane Richmond Nov. 29, 1963 Served until Mar. 8, 1974.2

Sherman J. Maisel San Francisco Apr. 30, 1965 Served through May 31, 1972

Andrew F. Brimmer Philadelphia Mar. 9, 1966 Resigned Aug. 31, 1974.

William W. Sherrill Dallas May 1, 1967 Reappointed in 1968. Resigne

1971.

Arthur F. Burns New York Jan. 31, 1970 Term began Feb. 1, 1970. Res

Mar. 31, 1978.

John E. Sheehan St. Louis Jan. 4, 1972 Resigned June 1, 1975.

Jeffrey M. Bucher San Francisco June 5, 1972 Resigned Jan. 2, 1976.

Robert C. Holland Kansas City June 11, 1973 Resigned May 15, 1976.

Henry C. Wallich Boston Mar. 8, 1974 Resigned Dec. 15, 1986.

Philip E. Coldwell Dallas Oct. 29, 1974 Served through Feb. 29, 1980

Philip C. Jackson, Jr. Atlanta July 14, 1975 Resigned Nov. 17, 1978.

J. Charles Partee Richmond Jan. 5, 1976 Served until Feb. 7, 1986.2

Stephen S. Gardner Philadelphia Feb. 13, 1976 Died Nov. 19, 1978.

David M. Lilly Minneapolis June 1, 1976 Resigned Feb. 24, 1978.

G. William Miller San Francisco Mar. 8, 1978 Resigned Aug. 6, 1979.

Nancy H. Teeters Chicago Sept. 18, 1978 Served through June 27, 1984

Emmett J. Rice New York June 20, 1979 Resigned Dec. 31, 1986.

Frederick H. Schultz Atlanta July 27, 1979 Served through Feb. 11, 1982

Paul A. Volcker Philadelphia Aug. 6, 1979 Resigned Aug. 11, 1987.

Lyle E. Gramley Kansas City May 28, 1980 Resigned Sept. 1, 1985.

Preston Martin San Francisco Mar. 31, 1982 Resigned Apr. 30, 1986.

Martha R. Seger Chicago July 2, 1984 Resigned Mar. 11, 1991.

Wayne D. Angell Kansas City Feb. 7, 1986 Served through Feb. 9, 1994.

Manuel H. Johnson Richmond Feb. 7, 1986 Resigned Aug. 3, 1990.

H. Robert Heller San Francisco Aug. 19, 1986 Resigned July 31, 1989.

Edward W. Kelley, Jr. Dallas May 26, 1987 Resigned Dec. 31, 2001.

Alan Greenspan New York Aug. 11, 1987 Resigned Jan. 31, 2006.

John P. LaWare Boston Aug. 15, 1988 Resigned Apr. 30, 1995.

David W. Mullins, Jr. St. Louis May 21, 1990 Resigned Feb. 14, 1994.

Lawrence B. Lindsey Richmond Nov. 26, 1991 Resigned Feb. 5, 1997.

Susan M. Phillips Chicago Dec. 2, 1991 Served through June 30, 1998

Alan S. Blinder Philadelphia June 27, 1994 Term expired Jan. 31, 1996.

Janet L. Yellen San Francisco Aug. 12, 1994 Resigned Feb. 17, 1997.

Laurence H. Meyer St. Louis June 24, 1996 Term expired Jan. 31, 2002.

Alice M. Rivlin Philadelphia June 25, 1996 Resigned July 16, 1999.

Roger W. Ferguson, Jr. Boston Nov. 5, 1997 Resigned Apr. 28, 2006.

Edward M. Gramlich Richmond Nov. 5, 1997 Resigned Aug. 31, 2005.

Susan S. Bies Chicago Dec. 7, 2001

Mark W. Olson Minneapolis Dec. 7, 2001 Resigned June 20, 2006.

Ben S. Bernanke Atlanta Aug. 5, 2002 Resigned June 21, 2005.

Donald L. Kohn Kansas City Aug. 5, 2002

Ben. S. Bernanke Atlanta Feb. 1, 2006

Kevin M. Warsh New York Feb. 22, 2006

Randall S. Kroszner Richmond Feb. 27, 2006

Frederic S. Mishkin Boston Sept. 5, 2006
Appointed Members—Continued

Name Term

Chairmen3

Charles S. Hamlin Aug. 10, 1914–Aug. 9, 1916

W.P.G. Harding Aug. 10, 1916–Aug. 9, 1922

Daniel R. Crissinger May 1, 1923–Sept. 15, 1927

Roy A. Young Oct. 4, 1927–Aug. 31, 1930

Eugene Meyer Sept. 16, 1930–May 10, 1933

Eugene R. Black May 19, 1933–Aug. 15, 1934

Marriner S. Eccles Nov. 15, 1934–Jan. 31, 1948 4

Thomas B. McCabe Apr. 15, 1948–Mar. 31, 1951

Wm. McC. Martin, Jr. Apr. 2, 1951–Jan. 31, 1970

Arthur F. Burns Feb. 1, 1970–Jan. 31, 1978

G. William Miller Mar. 8, 1978–Aug. 6, 1979

Paul A. Volcker Aug. 6, 1979–Aug. 11, 1987

Alan Greenspan Aug. 11, 1987–Jan. 31, 20065

Vice Chairmen3

Frederic A. Delano Aug. 10, 1914–Aug. 9, 1916

Paul M. Warburg Aug. 10, 1916–Aug. 9, 1918

Albert Strauss Oct. 26, 1918–Mar. 15, 1920

Edmund Platt July 23, 1920–Sept. 14, 1930

J.J. Thomas Aug. 21, 1934–Feb. 10, 1936

Ronald Ransom Aug. 6, 1936–Dec. 2, 1947

C. Canby Balderston Mar. 11, 1955–Feb. 28, 1966

J.L. Robertson Mar. 1, 1966–Apr. 30, 1973

George W. Mitchell May 1, 1973–Feb. 13, 1976

Stephen S. Gardner Feb. 13, 1976–Nov. 19, 1978

Frederick H. Schultz July 27, 1979–Feb. 11, 1982

Preston Martin Mar. 31, 1982–Apr. 30, 1986

Manuel H. Johnson Aug. 4, 1986–Aug. 3, 1990

David W. Mullins, Jr. July 24, 1991–Feb. 14, 1994

Alan S. Blinder June 27, 1994–Jan. 31, 1996

Alice M. Rivlin June 25, 1996–July 16, 1999

Roger W. Ferguson, Jr. Oct. 5, 1999–Apr. 28, 2006

Note: Under the original Federal Reserve Act, the

Federal Reserve Board was composed of five appointed

members, the Secretary of the Treasury (ex officio chairman of the Board), and the Comptroller of the Currency.

The original term of office was ten years; the five original

appointed members had terms of two, four, six, eight, and

ten years. In 1922 the number of appointed members was

increased to six, and in 1933 the term of office was raised

to twelve years. The Banking Act of 1935 changed the

name to the Board of Governors of the Federal Reserve

System and provided that the Board be composed of

seven appointed members; that the Secretary of the Treasury and the Comptroller of the Currency continue to

serve until Feb. 1, 1936; that the appointed members in

office on Aug. 23, 1935, continue to serv

1936, or until their successors were appo

qualified; and that thereafter the terms o

fourteen years and that the designation of 

Vice Chairman of the Board be for four ye

1. Date following ‘‘Resigned’’ and ‘‘Re

final day of service.

2. Successor took office on this date.

3. Before Aug. 23, 1935, Chairmen an

men were designated Governor and Vice G

4. Served as Chairman Pro Tempore 

1948, to Apr. 15, 1948.

5. Served as Chairman Pro Tempore f

1996, to June 20, 1996.
Ex Officio Members

Name Term

Secretaries of the Treasury

W.G. McAdoo Dec. 23, 1913–Dec. 15, 1918

Carter Glass Dec. 16, 1918–Feb. 1, 1920

David F. Houston Feb. 2, 1920–Mar. 3, 1921

Andrew W. Mellon Mar. 4, 1921–Feb. 12, 1932

Ogden L. Mills Feb. 12, 1932–Mar. 4, 1933

William H. Woodin Mar. 4, 1933–Dec. 31, 1933

Henry Morgenthau, Jr. Jan. 1, 1934–Feb. 1, 1936

Comptrollers of the Currency

John Skelton Williams Feb. 2, 1914–Mar. 2, 1921

Daniel R. Crissinger Mar. 17, 1921–Apr. 30, 1923

Henry M. Dawes May 1, 1923–Dec. 17, 1924

Joseph W. McIntosh Dec. 20, 1924–Nov. 20, 1928

J.W. Pole Nov. 21, 1928–Sept. 20, 1932

J.F.T. O’Connor May 11, 1933–Feb. 1, 1936
Statistical Tables
1. Federal Reserve Open Market Transactions, 2006

Millions of dollars

Type of security and transaction Jan. Feb. Mar. 

U.S. Treasury Securities1

Outright transactions 2

Treasury bills

Gross purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,563 1,308 1,228 

Gross sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 

Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,302 68,077 79,509 

For new bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,302 68,077 79,509 

Redemptions ............................................... 0 0 0 

Others within 1 year

Gross purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 1,200 0 

Gross sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 

Maturity shifts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,599 11,858 8,000 

Exchanges ................................................. –13,594 –10,989 –8,334 

Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,321 0 0 

1 to 5 years

Gross purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,809 2,498 2,136 

Gross sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 

Maturity shifts ............................................. –13,599 –4,775 –4,500 

Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,830 9,306 8,334 

5 to 10 years

Gross purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,505 25 174 

Gross sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 

Maturity shifts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 –5,205 –3,500 

Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 841 0 

More than 10 years

Gross purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 924 90 

Gross sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 

Maturity shifts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 –1,878 0 

Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,765 841 0 

All maturities

Gross purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,082 5,955 3,628 

Gross sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 

Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,321 0 0 

Net change in U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . 4,761 5,955 3,628 

For notes see end of table.
1.—Continued

May June July Aug. Sept. Oct. Nov. Dec. 

0 0 1,649 0 0 0 0 0 

00 0 00 0 00 

75,196 95,728 70,972 90,885 72,636 65,400 85,342 69,275 

75,196 95,728 70,972 90,885 72,636 65,400 85,342 69,275 

00 0 00 0 00 

1,375 0 0 415 0 1,757 220 0 

00 0 00 0 00 

24,441 6,667 6,614 20,379 6,861 7,427 14,046 0 

–15,746 –7,997 –10,078 –13,535 0 –16,498 –15,441 0 

1,217 0 3,931 0 0 3,749 335 0 

2,317 2,650 549 1,454 1,320 1,395 3,151 4,979 

00 0 00 0 00 

–21,298 –3,167 –3,784 –13,673 –6,861 –5,246 –11,009 0 

13,452 7,997 7,254 10,421 0 15,086 13,147 0 

101 1,080 0 0 548 33 411 445 

00 0 00 0 00 

949 –3,500 –2,830 –5,149 0 –2,181 2,073 0 

2,294 0 1,588 1,557 0 1,412 2,294 0 

0 0 0 0 228 0 780 1,072 

00 0 00 0 00 

–4,092 0 0 –1,557 0 0 –5,110 0 

0 0 1,235 1,557 0 0 0 0 

3,793 3,730 2,198 1,869 2,096 3,185 4,562 6,496 

00 0 00 0 00 

1,217 0 3,931 0 0 3,749 335 0 

2,576 3,730 -1,733 1,869 2,096 -564 4,227 6,496 
1. Federal Reserve Open Market Transactions, 2006—Continued

Millions of dollars

Type of security and transaction Jan. Feb. Mar. 

Federal Agency Obligations

Outright transactions 2

Gross purchases .............................................. 000

Gross sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 000

Redemptions ................................................. 000

Net change in federal agency obligations .................. 000

Temporary Transactions

Repurchase agreements 3

Gross purchases .............................................. 185,750 157,000 204,250 

Gross sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206,750 151,250 209,000 

Reverse repurchase agreements 4

Gross purchases .............................................. 504,837 445,563 558,568 

Gross sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498,351 446,346 560,306 

Net change in temporary transactions ..................... –14,514 4,967 –6,488 

Total net change in System Open Market Account ........... –9,752 10,922 –2,860 

Note: Sales, redemptions, and negative figures reduce

holdings of the System Open Market Account; all other

figures increase such holdings. Components may not sum

to totals because of rounding.

1. Transactions exclude changes in compensation for

the effects of inflation on the principal of inflationindexed securities. Transactions include the rollover of

inflation compensation into new securities.

2. Excludes the effect of temporary 

repurchase agreements, matched sale–pu

ments (MSPs), and reverse repurchas

(RRPs).

3. Cash value of agreements, which are 

by U.S. government and federal agency sec

4. Cash value of agreements, which are 

by U.S. Treasury securities.
1.—Continued

May June July Aug. Sept. Oct. Nov. Dec. 

00000000 

00000000 

00000000 

00000000 

200,750 182,000 177,000 178,000 128,000 178,000 194,500 176,500 

194,250 181,500 178,000 178,000 136,750 169,750 186,500 173,500 

531,844 567,926 584,190 642,084 554,480 649,172 665,558 586,711 

532,338 572,488 584,959 640,413 557,372 651,821 662,802 585,277 

6,006 –4,061 –1,769 1,671 –11,643 5,601 10,756 4,434 

8,582 –331 –3,502 3,540 –9,547 5,037 14,983 10,930 
2. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securi

December 31, 2004–2006

Millions of dollars

Description

December 31 Ch

2006 2005 2004 2005 to

2006

U.S. Treasury Securities

Held outright1 .................................... 778,915 744,215 717,819r 34,700 

By remaining maturity

Bills

1–90 days ....................................... 193,034 187,370 179,748 5,664 

91 days to 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,985 83,900 83,222 85 

Notes and bonds

1 year or less ................................... 129,594 128,287r 116,443 1,307 

More than 1 year through 5 years ................ 224,177 210,745r 208,269 13,432 

More than 5 years through 10 years . . . . . . . . . . . . . . 67,645 56,699r 54,372 10,946 

More than 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,479 77,215r 75,765 3,264 

By type

Bills .............................................. 277,019 271,270 262,970 5,749 

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402,367 380,118 360,832r 22,249 

Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,528 92,827 94,017r 6,701 

Federal Agency Securities

Held outright1 .................................... 0 0 00 

By remaining maturity

1 year or less ...................................... 0 0 0 0 

More than 1 year through 5 years .................. 0 0 0 0 

More than 5 years through 10 years ................ 0 0 0 0 

More than 10 years ................................ 0 0 0 0 

By issuer

Federal National Mortgage Association ............. 0 0 0 0 

Temporary Transactions

Repurchase agreements 2 .......................... 40,750 46,750 33,000r –6,000 

Matched sale–purchase agreements ............... 0 0 00 

Foreign official and international accounts ........ 0 0 0 0 

Dealers ......................................... 0 0 0 0 

Reverse repurchase agreements 3 .................. 29,615 30,505 30,783r –890 

Foreign official and international accounts . . . . . . . . 29,615 30,505 30,783r –890 

Dealers ......................................... 0 0 0 0 

Note: Components may not sum to totals because of

rounding.

1. Excludes the effect of temporary transactions—

repurchase agreements, matched sale–purchase agreements (MSPs), and reverse repurchase agreements

(RRPs).

2. Cash value of agreements, which are 

by U.S. government and federal agency sec

3. Cash value of agreements, which are 

by U.S. Treasury securities.

r. Revised.
3. Federal Reserve Bank Interest Rates on Loans to Depository Institutions,

December 31, 2006

Reserve Bank Primary credit1 Secondary credit 2 Seaso

All Federal Reserve Banks . . . . . . . . . . . . . . . . . . 6.25 6.75 

Note: For details on rate changes over the course of

2006, see the section on discount rates in the chapter

“Record of Policy Actions of the Board of Governors.”

1. Primary credit is available for very short terms as

a backup source of liquidity to depository institutions that

are in generally sound financial condition in the judgment

of the lending Federal Reserve Bank.

2. Secondary credit is available in appropriate circumstances to depository institutions that do not qualify for

primary credit.

3. Seasonal credit is available to help re

depository institutions meet regular seaso

funds that arise from a clear pattern of intra

ments in their deposits and loans. The di

seasonal credit takes into account rates char

sources of funds and is reestablished on the 

day of each two-week reserve maintenance 
4. Reserve Requirements of Depository Institutions, December 31, 2006

Type of deposit

Requirements

Percentage of deposits Effectiv

Net transaction accounts1

$0 million–$8.5 million 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 12-21

More than $8.5 million–$45.8 million 3 . . . . . . . . . . . . . . . . . 3 12-21

More than $45.8 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 12-21

Nonpersonal time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 12-27

Eurocurrency liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 12-27

Note: Required reserves must be held in the form of

vault cash and, if vault cash is insufficient, also in the

form of a deposit with a Federal Reserve Bank. An

institution that is a member of the Federal Reserve System must hold that deposit directly with a Reserve Bank;

an institution that is not a member of the System can

maintain that deposit directly with a Reserve Bank or

with another institution in a pass-through relationship.

Reserve requirements are imposed on commercial banks,

savings banks, savings and loan associations, credit

unions, U.S. branches and agencies of foreign banks,

Edge corporations, and agreement corporations.

1. Total transaction accounts consists of demand

deposits, automatic transfer service (ATS) accounts,

NOW accounts, share draft accounts, telephone or preauthorized transfer accounts, ineligible banker’s acceptances, and affiliate-issued obligations maturing in seven

days or less. Net transaction accounts are total transaction

accounts less amounts due from other depository institutions and less cash items in the process of collection.

For a more detailed description of these 

see Form FR 2900 at www.federalreserve.g

reportforms/.

2. The amount of net transaction accoun

reserve requirement ratio of 0 percent (th

amount”) is adjusted each year by statute. T

amount is adjusted upward by 80 percent o

year’s (June 30 to June 30) rate of inc

reservable liabilities at all depository 

No adjustment is made in the event of a de

liabilities.

3. The amount of net transaction accoun

reserve requirement ratio of 3 percent is th

tranche.” By statute, the upper limit of th

tranche is adjusted each year by 80 perce

vious year’s (June 30 to June 30) rate o

decrease in net transaction accounts held by 

institutions.
5. Banking Offices and Banks Affiliated with Bank Holding Companies (BHCs

United States, December 31, 2005 and 2006

Type of office Total

Commercial banks 1

Total 

Member

Nonmembe

Total National State

All banking offices

Banks

Number, Dec. 31, 2005 . . 7,853 7,484 2,696 1,794 902 4,788 

Changes during 2006

New banks . . . . . . . . . . . . . . 190 187 41 24 17 146 

Banks converted

into branches ....... –290 –284 –132 –92 –40 –152 

Ceased banking

operation 2 .......... –21 –18 –8 –7 –1 –10 

Other 3 .................. 0 –1 –4 –23 19 3 

Net change ........... –121 –116 –103 –98 –5 –13 

Number, Dec. 31, 2006 . . 7,732 7,368 2,593 1,696 897 4,775 

Branches and

Additional Offices

Number, Dec. 31, 2005 . . 77,830 74,681 53,122 39,155 13,967 21,559 

Changes during 2006

New branches . . . . . . . . . . . 2,765 2,694 2,071 1,546 525 623 

Branches converted

from banks . . . . . . . . . 290 287 131 94 37 156 

Discontinued 2 ........... –2,009 –1,832 –1,645 –1,417 –228 –187 

Other 3 . . . . . . . . . . . . . . . . . . 0 53 259 286 –27 –206 

Net change . . . . . . . . . . . . 1,046 1,202 816 509 307 386 

Number, Dec. 31, 2006 . . 78,876 75,883 53,938 39,664 14,274 21,945 

Banks affiliated with BHCs

Banks

Number, Dec. 31, 2005 . . 6,265 6,143 2,336 1,540 796 3,807 

Changes during 2006

BHC-affiliated

new banks . . . . . . . . . . 183 174 58 38 20 116 

Banks converted

into branches ....... –244 –239 –112 –76 –36 –127 

Ceased banking

operation 2 .......... –18 –17 –7 –6 –1 –10 

Other 3 .................. 0 0 0 –18 18 0 

Net change ........... –79 –82 –61 –62 1 –21 

Number, Dec. 31, 2006 . . 6,186 6,061 2,275 1,478 797 3,786 

Note: Includes banking offices and BHCs in U.S.

territories and possessions.

1. For purposes of this table, banks are entities that are

defined as banks in the Bank Holding Company Act, as

amended, which is implemented by Federal Reserve

Regulation Y. Generally, a bank is any institution that

accepts demand deposits and is engaged in the business

of making commercial loans or any inst

defined as an insured bank in section 3(h

Act. Covers entities in the United States an

and possessions (affiliated insular areas).

2. Institutions that no longer meet the 

definition of bank.

3. Interclass changes and sales of branch
6A. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Relat

Year-End 1984–2006 and Month-End 2006

Millions of dollars

Period

Factors supplying reserve funds

Federal Reserve Bank credit outstanding

Gold

stock

Special

drawing

rights

certificat

account

Securities

held

outright 1

Repurchase

agreements 2 Loans Float

Other

Federal

Reserve

assets

Total

1984 ...... 167,612 2,015 3,577 833 12,347 186,384 11,096 4,618 

1985 ...... 186,025 5,223 3,060 988 15,302 210,598 11,090 4,718 

1986 ...... 205,454 16,005 1,565 1,261 17,475 241,760 11,084 5,018 

1987 ...... 226,459 4,961 3,815 811 15,837 251,883 11,078 5,018 

1988 ...... 240,628 6,861 2,170 1,286 18,803 269,748 11,060 5,018 

1989 ...... 233,300 2,117 481 1,093 39,631 276,622 11,059 8,518 

1990 ...... 241,431 18,354 190 2,566 39,880 302,421 11,058 10,018 

1991 ...... 272,531 15,898 218 1,026 34,524 324,197 11,059 10,018 

1992 ...... 300,423 8,094 675 3,350 30,278 342,820 11,056 8,018 

1993 ...... 336,654 13,212 94 963 33,394 384,317 11,053 8,018 

1994 ...... 368,156 10,590 223 740 33,441 413,150 11,051 8,018 

1995 ...... 380,831 13,862 135 231 33,483 428,543 11,050 10,168 

1996 ...... 393,132 21,583 85 5,297 32,222 452,319 11,048 9,718 

1997 ...... 431,420 23,840 2,035 561 32,044 489,901 11,047 9,200 

1998 ...... 452,478 30,376 17 1,009 37,692 521,573 11,046 9,200 

1999 ...... 478,144 140,640 233 407 34,799 654,223 11,048 6,200 

2000 ...... 511,833 43,375 110 795 36,896 593,009 11,046 2,200 

2001 ...... 551,685 50,250 34 698 36,885 639,552 11,045 2,200 

2002 ...... 629,416 39,500 40 832 38,574 708,363 11,043 2,200 

2003 ...... 666,665 43,750 62 211 40,214 750,901 11,043 2,200 

2004 ...... 717,819 33,000 43 927 42,161 793,950 11,045 2,200 

2005 ...... 744,215 46,750 72 891 39,319 831,247 11,043 2,200 

2006 ...... 778,915 40,750 67 –326 39,885 859,290 11,041 2,200 

For notes see end of table.
6A.—Continued

Factors absorbing reserve funds

Currency

in

circulation

Reverse

repurchase

agreements 4

Treasury

cash

holdings 5

Deposits with Federal Reserve Banks,

other than reserve balances Required

clearing

balances

Other

Federal

Reserve

liabilities

and

Treasury Foreign Other capital

183,796 0 513 5,316 253 867 1,126 5,952 

197,488 0 550 9,351 480 1,041 1,490 5,940 

211,995 0 447 7,588 287 917 1,812 6,088 

230,205 0 454 5,313 244 1,027 1,687 7,129 

247,649 0 395 8,656 347 548 1,605 7,683 

260,456 0 450 6,217 589 1,298 1,618 8,486 

286,963 0 561 8,960 369 242 1,960 8,147 

307,756 0 636 17,697 968 1,706 3,946 8,113 

334,701 0 508 7,492 206 372 5,897 7,984 

365,271 0 377 14,809 386 397 6,332 9,292 

403,843 0 335 7,161 250 876 4,196 11,959 

424,244 0 270 5,979 386 932 5,167 12,342 

450,648 0 249 7,742 167 892 6,601 13,829 

482,327 0 225 5,444 457 900 6,679 15,500 

517,484 0 85 6,086 167 1,605 6,781 16,354 

628,359 0 109 28,402 71 1,261 7,482 17,256 

593,694 0 450 5,149 216 1,382 6,332 17,962 

643,301 0 425 6,645 61 820 8,525 17,083 

687,518 21,091 367 4,420 136 1,152 10,534r 18,977 

724,194 25,652 321 5,723 162 717 11,829r 19,793 

754,877 30,783 270 5,912 80 1,285 9,963 26,378 

794,014r 30,505 202 4,573 83 2,144 8,650r 30,466 

820,204 29,615 252 4,708 98 958 6,842 36,231 
6A. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Relat

Year-End 1984–2006 and Month-End 2006—Continued

Millions of dollars

Period

Factors supplying reserve funds

Federal Reserve Bank credit outstanding

Gold

stock

Special

drawing

rights

certificat

account

Securities

held

outright 1

Repurchase

agreements 2 Loans Float

Other

Federal

Reserve

assets

Total

2006

Jan . . . . . . 748,824 25,750 40 1,796 40,285 816,694 11,044 2,200 

Feb . . . . . 754,676 31,500 38 1,466 37,675 825,355 11,044 2,200 

Mar . . . . . 758,542 26,750 566 –836 39,046 824,068 11,043 2,200 

Apr . . . . . 759,690 24,250 138 –1,084 41,283 824,277 11,041 2,200 

May . . . . . 762,411 30,750 207 1,028 39,151 833,547 11,041 2,200 

Jun . . . . . . 766,364 31,250 291 –1,032 40,133 837,005 11,041 2,200 

Jul . . . . . . 764,811 30,250 361 48 41,103 836,574 11,041 2,200 

Aug . . . . . 766,739 30,250 349 –606 38,436 835,168 11,041 2,200 

Sep . . . . . 768,924 21,500 322 –1,104 40,063 829,705 11,041 2,200 

Oct . . . . . 768,493 29,750 157 2,604 40,672 841,677 11,041 2,200 

Nov . . . . . 772,604 37,750 102 –411 37,409 847,455 11,041 2,200 

Dec . . . . . 778,915 40,750 67 –326 39,885 859,290 11,041 2,200 
6A.—Continued

Factors absorbing reserve funds

Currency

in

circulation

Reverse

repurchase

agreements 4

Treasury

cash

holdings 5

Deposits with Federal Reserve Banks,

other than reserve balances Required

clearing

balances

Other

Federal

Reserve

liabilities

and

Treasury Foreign Other capital

782,356 24,019 216 5,606 83 281 8,710 31,667 

789,289 24,802 185 5,024 82 279 8,015 32,510 

788,769 26,540 209 5,455 84 217 7,731 32,894 

790,794 24,108 182 4,784 86 278 6,696 33,807 

799,103 24,603 196 2,637 86 242 7,580 34,508 

797,157 29,164 174 5,525 142 226 7,162 34,886 

792,624 29,933 148 4,546 88 320 7,028 35,688 

797,545 28,263 171 4,907 89 259 6,791 35,677 

790,582 31,155 150 5,451 98 236 6,987 36,027 

796,047 33,805 179 5,617 104 344 6,933 36,955 

806,375 31,049 164 4,373 90 278 6,832 36,163 

820,204 29,615 252 4,708 98 958 6,842 36,231 

Note: Components may not sum to totals because of

rounding.

1. Includes U.S. Treasury and federal agency securities. U.S. Treasury securities include securities lent to

dealers, which are fully collateralized by other U.S. Treasury securities. Federal agency securities are included at

face value.

2. Cash value of agreements, which are collateralized

by U.S. Treasury and federal agency securities.

3. Includes currency and coin (other than gold) issued

directly by the Treasury. The largest components are

fractional and dollar coins. For details see ‘

and Coin Outstanding and in Circulation,’’ 

letin.

4. Cash value of agreements, which are 

by U.S. Treasury securities.

5. Coin and paper currency held by th

well as any gold in excess of the gold cert

to the Reserve Bank.

6. Excludes required clearing balance

ments to compensate for float.

r. Revised.
6B. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Relate

Year-End 1918–1983

Millions of dollars

Period

Factors supplying reserve funds

Federal Reserve Bank credit outstanding

Gold

stock 6

Speci

drawin

right

certific

accou

Securities

held

outright 1

Repurchase

agreements 2

Loans Float 3 All

other 4

Other

Federal

Reserve

assets 5

Total

1918. . . . . . 239 0 1,766 199 294 0 2,498 2,873 . . . 

1919. . . . . . 300 0 2,215 201 575 0 3,292 2,707 . . . 

1920. . . . . . 287 0 2,687 119 262 0 3,355 2,639 . . . 

1921. . . . . . 234 0 1,144 40 146 0 1,563 3,373 . . . 

1922. . . . . . 436 0 618 78 273 0 1,405 3,642 . . . 

1923. . . . . . 80 54 723 27 355 0 1,238 3,957 . . . 

1924. . . . . . 536 4 320 52 390 0 1,302 4,212 . . . 

1925. . . . . . 367 8 643 63 378 0 1,459 4,112 . . . 

1926. . . . . . 312 3 637 45 384 0 1,381 4,205 . . . 

1927. . . . . . 560 57 582 63 393 0 1,655 4,092 . . . 

1928. . . . . . 197 31 1,056 24 500 0 1,809 3,854 . . . 

1929. . . . . . 488 23 632 34 405 0 1,583 3,997 . . . 

1930. . . . . . 686 43 251 21 372 0 1,373 4,306 . . . 

1931. . . . . . 775 42 638 20 378 0 1,853 4,173 . . . 

1932. . . . . . 1,851 4 235 14 41 0 2,145 4,226 . . . 

1933. . . . . . 2,435 2 98 15 137 0 2,688 4,036 . . . 

1934. . . . . . 2,430 0 7 5 21 0 2,463 8,238 . . . 

1935. . . . . . 2,430 1 5 12 38 0 2,486 10,125 . . . 

1936. . . . . . 2,430 0 3 39 28 0 2,500 11,258 . . . 

1937. . . . . . 2,564 0 10 19 19 0 2,612 12,760 . . . 

1938. . . . . . 2,564 0 4 17 16 0 2,601 14,512 . . . 

1939. . . . . . 2,484 0 7 91 11 0 2,593 17,644 . . . 

1940. . . . . . 2,184 0 3 80 8 0 2,274 21,995 . . . 

1941. . . . . . 2,254 0 3 94 10 0 2,361 22,737 . . . 

1942. . . . . . 6,189 0 6 471 14 0 6,679 22,726 . . . 

1943. . . . . . 11,543 0 5 681 10 0 12,239 21,938 . . . 

1944. . . . . . 18,846 0 80 815 4 0 19,745 20,619 . . . 

1945. . . . . . 24,252 0 249 578 2 0 15,091 20,065 . . . 

1946. . . . . . 23,350 0 163 580 1 0 24,093 20,529 . . . 

1947. . . . . . 22,559 0 85 535 1 0 23,181 22,754 . . . 

1948. . . . . . 23,333 0 223 541 1 0 24,097 24,244 . . . 

1949. . . . . . 18,885 0 78 534 2 0 19,499 24,427 . . . 

1950. . . . . . 20,725 53 67 1,368 3 0 22,216 22,706 . . . 

1951. . . . . . 23,605 196 19 1,184 5 0 25,009 22,695 . . . 

1952. . . . . . 24,034 663 156 967 4 0 25,825 23,187 . . . 

1953. . . . . . 25,318 598 28 935 2 0 26,880 22,030 . . . 

1954. . . . . . 24,888 44 143 808 1 0 25,885 21,713 . . . 

1955. . . . . . 24,391 394 108 1,585 29 0 26,507 21,690 . . . 

1956. . . . . . 24,610 305 50 1,665 70 0 26,699 21,949 . . . 

1957. . . . . . 23,719 519 55 1,424 66 0 25,784 22,781 . . . 

1958. . . . . . 26,252 95 64 1,296 49 0 27,755 20,534 . . . 

1959. . . . . . 26,607 41 458 1,590 75 0 28,771 19,456 . . . 

For notes see end of table.
6B.—Continued

Factors absorbing reserve funds

Member bank

reserves 9

Currency

in

circulation

Treasury

cash

holdings 8

Deposits with

Federal Reserve Banks,

other than reserve balances Other

Federal

Reserve

accounts 5

Required

clearing

balances

Other

Federal

Reserve

liabilities

and

capital Treasury Foreign Other 5

With

Federal

Reserve

Banks

Currency

and

coin10

Re

quire

4,951 288 51 96 25 118 0 0 1,636 0 1,5

5,091 385 51 73 28 208 0 0 1,890 0 1,8

5,325 218 57 5 18 298 0 0 1,781 0 

4,403 214 96 12 15 285 0 0 1,753 0 1,6

4,530 225 11 3 26 276 0 0 1,934 0 

4,757 213 38 4 19 275 0 0 1,898 0 1,8

4,760 211 51 19 20 258 0 0 2,220 0 2,1

4,817 203 16 8 21 272 0 0 2,212 0 2,2

4,808 201 17 46 19 293 0 0 2,194 0 2.2

4,716 208 18 5 21 301 0 0 2,487 0 2,4

4,686 202 23 6 21 348 0 0 2,389 0 2,4

4,578 216 29 6 24 393 0 0 2,355 0 2,4

4,603 211 19 6 22 375 0 0 2,471 0 2,3

5,360 222 54 79 31 354 0 0 1,961 0 1,9

5,388 272 8 19 24 355 0 0 2,509 0 1,9

5,519 284 3 4 128 360 0 0 2,729 0 1,8

5,536 3,029 121 20 169 241 0 0 4,096 0 2,2

5,882 2,566 544 29 226 253 0 0 5,587 0 2,7

6,543 2,376 244 99 160 261 0 0 6,606 0 4,6

6,550 3,619 142 172 235 263 0 0 7,027 0 5,8

6,856 2,706 923 199 242 260 0 0 8,724 0 5,5

7,598 2,409 634 397 256 251 0 0 11,653 0 6,4

8,732 2,213 368 1,133 599 284 0 0 4,026 0 7,4

11,160 2,215 867 774 586 291 0 0 12,450 0 9,3

15,410 2,193 799 793 485 256 0 0 13,117 0 11,1

20,499 2,303 579 1,360 356 339 0 0 12,886 0 11,6

25,307 2,375 440 1,204 394 402 0 0 14,373 0 12,7

28,515 2,287 977 862 446 495 0 0 15,915 0 14,4

28,952 2,272 393 508 314 607 0 0 16,139 0 15,5

28,868 1,336 870 392 569 563 0 0 17,899 0 16,4

28,224 1,325 1,123 642 547 590 0 0 20,479 0 19,2

27,600 1,312 821 767 750 106 0 0 16,568 0 15,5

27,741 1,293 668 895 565 714 0 0 17,681 0 16,5

29,206 1,270 247 526 363 746 0 0 20,056 0 19,6

30,433 1,270 389 550 455 777 0 0 19,950 0 20,5

30,781 761 346 423 493 839 0 0 20,160 0 19,3

30,509 796 563 490 441 907 0 0 18,876 0 18,6

31,158 767 394 402 554 925 0 0 19,005 0 18,9

31,790 775 441 322 426 901 0 0 19,059 0 19,0

31,834 761 481 356 246 998 0 0 19,034 0 19,0

32,193 683 358 272 391 1,122 0 0 18,504 0 18,5

32,591 391 504 345 694 841 0 0 18,174 310 18,6
6B. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Relate

Year-End 1918–1983—Continued

Millions of dollars

Period

Factors supplying reserve funds

Federal Reserve Bank credit outstanding

Gold

stock 6

Speci

drawin

right

certific

accou

Securities

held

outright 1

Repurchase

agreements 2

Loans Float 3 All

other 4

Other

Federal

Reserve

assets 5

Total

1960. . . . . . 26,984 400 33 1,847 74 0 29,338 17,767 . . . 

1961. . . . . . 30,478 159 130 2,300 51 0 31,362 16,889 . . . 

1962. . . . . . 28,722 342 38 2,903 110 0 33,871 15,978 . . . 

1963. . . . . . 33,582 11 63 2,600 162 0 36,418 15,513 . . . 

1964. . . . . . 36,506 538 186 2,606 94 0 39,930 15,388 . . . 

1965. . . . . . 40,478 290 137 2,248 187 0 43,340 13,733 . . . 

1966. . . . . . 43,655 661 173 2,495 193 0 47,177 13,159 . . . 

1967. . . . . . 48,980 170 141 2,576 164 0 52,031 11,982 . . . 

1968. . . . . . 52,937 0 186 3,443 58 0 56,624 10,367 . . . 

1969. . . . . . 57,154 0 183 3,440 64 2,743 64,584 10,367 . . . 

1970. . . . . . 62,142 0 335 4,261 57 1,123 67,918 10,732 400 

1971. . . . . . 69,481 1,323 39 4,343 261 1,068 76,515 10,132 400 

1972. . . . . . 71,119 111 1,981 3,974 106 1,260 78,551 10,410 400 

1973. . . . . . 80,395 100 1,258 3,099 68 1,152 86,072 11,567 400 

1974. . . . . . 84,760 954 299 2,001 999 3,195 92,208 11,652 400 

1975. . . . . . 92,789 1,335 211 3,688 1,126 3,312 102,461 11,599 500 

1976...... 100,062 4,031 25 2,601 991 3,182 110,892 11,598 1,200 

1977...... 108,922 2,352 265 3,810 954 2,442 118,745 11,718 1,250 

1978...... 117,374 1,217 1,174 6,432 587 4,543 131,327 11,671 1,300 

1979...... 124,507 1,660 1,454 6,767 704 5,613 140,705 11,172 1,800 

1980...... 128,038 2,554 1,809 4,467 776 8,739 146,383 11,160 2,518 

1981...... 136,863 3,485 1,601 1,762 195 9,230 153,136 11,151 3,318 

1982...... 144,544 4,293 717 2,735 1,480 9,890 63,659 11,148 4,618 

1983...... 159,203 1,592 918 1,605 418 8,728 172,464 11,121 4,618 

Note: For a description of figures and discussion of

their significance, see Banking and Monetary Statistics,

1941–1970 (Board of Governors of the Federal Reserve

System, 1976), pp. 507–23.

Components may not sum to totals because of

rounding.

1. In 1969 and thereafter, includes securities loaned—

fully guaranteed by U.S. government securities pledged

with Federal Reserve Banks—and excludes securities

sold and scheduled to be bought back under matched

sale–purchase transactions. On September 29, 1971, and

thereafter, includes federal agency issues bought outright.

2. On December 1, 1966, and thereafter, includes

federal agency obligations held under repurchase

agreements.

3. In 1960 and thereafter, figures reflect a minor

change in concept; see Federal Reserve Bulletin, vol. 47

(February 1961), p. 164.

4. Principally acceptances and, until Au

industrial loans, the authority for which e

date.

5. For the period before April 16, 1969

total of Federal Reserve capital paid in, 

capital accounts, and other liabilities and 

dends, less the sum of bank premises and 

and is reported as ‘‘Other Federal Reserv

thereafter, ‘‘Other Federal Reserve assets

Federal Reserve liabilities and capital

separately.

6. Before January 30, 1934, includes 

Federal Reserve Banks and in circulation.

7. Includes currency and coin (other tha

directly by the Treasury. The largest co

fractional and dollar coins. For details see ‘

and Coin Outstanding and in Circulation,’’ 

letin.
6B.—Continued

Factors absorbing reserve funds

Member bank

reserves 9

Currency

in

circulation

Treasury

cash

holdings 8

Deposits with

Federal Reserve Banks,

other than reserve balances Other

Federal

Reserve

accounts 5

Required

clearing

balances

Other

Federal

Reserve

liabilities

and

capital Treasury Foreign Other 5

With

Federal

Reserve

Banks

Currency

and

coin10

Re

quire

32,869 377 485 217 533 941 0 0 17,081 2,544 18,9

33,918 422 465 279 320 1,044 0 0 17,387 2,544 18,9

35,338 380 597 247 393 1,007 0 0 17,454 3,262 20,0

37,692 361 880 171 291 1,065 0 0 17,049 4,099 20,6

39,619 612 820 229 321 1,036 0 0 18,086 4,151 21,6

42,056 760 668 150 355 211 0 0 18,447 4,163 22,8

44,663 1,176 416 174 588 −147 0 0 19,779 4,310 24,3

47,226 1,344 1,123 135 563 −773 0 0 21,092 4,631 25,9

50,961 695 703 216 747 −1,353 0 0 21,818 4,921 27,4

53,950 596 1,312 134 807 0 0 1,919 22,085 5,187 28,1

57,903 431 1,156 148 1,233 0 0 1,986 24,150 5,423 30,0

61,068 460 2,020 294 999 0 0 2,131 27,788 5,743 32,4

66,516 345 1,855 325 840 0 0 2,143 25,647 6,216 32,0

72,497 317 2,542 251 1,419 13 0 0 2,669 27,060 6,781 35,2

79,743 185 2,113 418 1,275 13 0 0 2,935 25,843 7,370 37,0

86,547 483 7,285 353 1,090 0 0 2,968 26,052 8,036 35,1

93,717 460 10,393 352 1,357 0 0 3,063 25,158 8,628 35,4

103,811 392 7,114 379 1,187 0 0 3,292 26,870 9,421 37,6

114,645 240 4,196 368 1,256 0 0 4,275 31,152 10,538 42,6

125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,2

136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,5

144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,1

154,908 429 5,033 328 1,033 0 436 4,990 26,053 16,666 41,3

171,935 479 3,661 191 851 0 1,013 5,392 20,413 17,821 39,1

8. Coin and paper currency held by the Treasury, as

well as any gold in excess of the gold certificates issued

to the Reserve Bank.

9. In November 1979 and thereafter, includes reserves

of member banks, Edge Act corporations, and U.S. agencies and branches of foreign banks. On November 13,

1980, and thereafter, includes reserves of all depository

institutions.

10. Between December 1, 1959, and November 23,

1960, part was allowed as reserves; thereafter, all was

allowed.

11. Estimated through 1958. Before 1929, data were

available only on call dates (in 1920 and 1922 the call

date was December 29). Since September 12, 1968, the

amount has been based on close-of-business figures for

the reserve period two weeks before the report date.

12. For the week ending November 15, 1972, and

thereafter, includes $450 million of reserve deficiencies

on which Federal Reserve Banks are allowed to waive

penalties for a transition period in connection with bank

adaptation to Regulation J as amended, effective November 9, 1972. Allowable deficiencies are as follows (beginning with first statement week of quarter, in millions) :

1973—Q1, $279; Q2, $172; Q3, $11

1974—Q1, $67; Q2, $58. The transition 

with the second quarter of 1974.

13. For the period before July 1973, in

deposits of domestic nonmember banks 

owned banking institutions held with mem

redeposited in full with Federal Reserve 

nection with voluntary participation by non

tutions in the Federal Reserve System pro

restraint.

As of December 12, 1974, the amoun

nonmember bank and foreign-agency and b

at Federal Reserve Banks that are as

marginal reserves is no longer reported. 

amounts are reported: (1) deposits volun

reserves by agencies and branches of foreig

ating in the United States and (2) Eurodoll

14. Adjusted to include waivers of penal

deficiencies, in accordance with change in 

effective November 19, 1975.

. . . Not applicable.
7. Principal Assets and Liabilities of Insured Commercial Banks, by Class of B

June 30, 2006 and 2005

Millions of dollars, except as noted

Item Total

Member banks

Total National State

2006

Assets

Loans and investments . . . . . . . . . . . . . . . . . . . 6,782,584 5,298,487 4,224,793 1,073,694 

Loans, gross . . . . . . . . . . . . . . . . . . . . . . . . . . 5,177,276 4,018,755 3,218,246 800,509 

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,175,292 4,017,598 3,217,313 800,285 

Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,605,308 1,279,731 1,006,547 273,184 

U.S. Treasury and federal agency

securities ...................... 285,687 162,185 102,455 59,730 

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,319,621 1,117,546 904,092 213,454 

Cash assets, total ........................ 277,134 219,429 182,292 37,137 

Liabilities

Deposits, total . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,255,716 3,987,644 3,185,042 802,603 

Interbank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,201 74,038 60,177 13,861 

Other transaction ...................... 679,778 485,240 386,663 98,577 

Other nontransaction . . . . . . . . . . . . . . . . . . 4,487,738 3,428,366 2,738,202 690,164 

Equity capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 949,489 760,868 624,281 136,587 

Number of banks . . . . . . . . . . . . . . . . . . . . . . . . 7,453 2,672 1,776 896 

2005

Assets

Loans and investments . . . . . . . . . . . . . . . . . . . 6,253,909 4,891,946 3,885,394 1,006,552 

Loans, gross . . . . . . . . . . . . . . . . . . . . . . . . . . 4,713,929 3,690,671 2,955,356 735,315 

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,712,060 3,689,551 2,954,491 735,060 

Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,539,980 1,201,275 930,038 271,238 

U.S. Treasury and federal agency

securities ...................... 300,837 182,559 120,732 61,827 

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,239,144 1,018,717 809,306 209,411 

Cash assets, total ........................ 262,672 209,055 172,007 37,048 

Liabilities

Deposits, total . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,844,523 3,691,818 2,941,861 749,958 

Interbank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,546 66,730 55,023 11,707 

Other transaction ...................... 702,873 504,424 396,555 107,869 

Other nontransaction . . . . . . . . . . . . . . . . . . 4,061,104 3,120,664 2,490,283 630,381 

Equity capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 872,023 700,699 570,770 129,929 

Number of banks . . . . . . . . . . . . . . . . . . . . . . . . 7,527 2,762 1,862 900 

Note: Includes U.S.-insured commercial banks located

in the United States but not U.S.-insured commercial

banks operating in U.S. territories or possessions. Data

are domestic assets and liabilities (except f

ponents reported on a consolidated basis o

nents may not sum to totals because of rou
8. Initial Margin Requirements under Regulations T, U, and X

Percent of market value

Effective date Margin

stocks

Convertible

bonds

Sho

T 

1934, Oct. 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25–45 . . . 

1936, Feb. 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25–55 . . . 

Apr. 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 . . . 

1937, Nov. 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 . . . 

1945, Feb. 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 . . . 

July 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 . . . 

1946, Jan. 21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 . . . 

1947, Feb. 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 . . . 

1949, Mar. 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 . . . 

1951, Jan. 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 . . . 

1953, Feb. 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 . . . 

1955, Jan. 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 . . . 

Apr. 23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 . . . 

1958, Jan. 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 . . . 

Aug. 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 . . . 

Oct. 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 . . . 

1960, July 28 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 . . . 

1962, July 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 . . . 

1963, Nov. 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 . . . 

1968, Mar. 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 50 

June 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 60 

1970, May 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 50 

1971, Dec. 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 50 

1972, Nov. 24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 50 

1974, Jan. 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 50 

Note: These regulations, adopted by the Board of

Governors pursuant to the Securities Exchange Act of

1934, limit the amount of credit that may be extended for

the purpose of purchasing or carrying ‘‘margin securities’’ (as defined in the regulations) when the loan is

collateralized by such securities. The margin requirement,

expressed as a percentage, is the difference between the

market value of the securities being purchased or carried

(100 percent) and the maximum loan value of the

collateral as prescribed by the Board. Reg

adopted effective October 1, 1934; Regula

tive May 1, 1936; and Regulation X, effect

1, 1971. The former Regulation G, which 

effective March 11, 1968, was merged into 

effective April 1, 1998.

1. From October 1, 1934, to October 

requirement was the margin ‘‘customarily 

brokers and dealers.
9. Statement of Condition of the Federal Reserve Banks, by Bank,

December 31, 2006 and 2005

Millions of dollars

Item

Total Bos

2006 2005 2006 

Assets

Gold certificate account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,037 11,039 486 

Special drawing rights certificate account . . . . . . . . . . . . . . . 2,200 2,200 115 

Coin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 801 686 27 

Loans

To depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 72 10 

Securities purchased under agreements

to resell (triparty) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,750 46,750 0 

U.S. Treasury securities

Bought outright1 ....................................... 778,915 744,215 37,169 

Held under repurchase agreements ...................... 0 0 0 

Total loans and securities .......................... 819,731 791,036 37,178 

Items in process of collection . . . . . . . . . . . . . . . . . . . . . . . . . . 4,276 6,834 97 

Bank premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,953 1,827 117 

Other assets

Denominated in foreign currencies 2 . . . . . . . . . . . . . . . . . . . . 20,482 18,928 491 

Other 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,015 18,579 782 

Interdistrict settlement account . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 124 

Total assets ........................................... 878,494 851,130 39,416 

Liabilities

Federal Reserve notes outstanding (issued to Bank) ..... 958,680 906,511 39,020 

Less: Notes held by Federal Reserve Bank ........... 175,661 148,152 3,020 

Federal Reserve notes, net ............................. 783,019 758,359 36,000 

Securities sold under agreements to repurchase . . . . . . . . . . 29,615 30,505 1,413 

Deposits

Depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,699 19,043 549 

U.S. Treasury, general account . . . . . . . . . . . . . . . . . . . . . . . . . 4,708 4,573 0 

Foreign, official accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 83 1 

Other 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,496 2,168 42 

Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,002 25,867 592 

Deferred credit items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,602 5,943 352 

Other liabilities and accrued dividends 5 . . . . . . . . . . . . . . . . . 5,608 4,019 267 

Total liabilities ........................................ 847,846 824,693 38,624 

Capital Accounts

Capital paid in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,324 13,536 396 

Surplus (including accumulated other

comprehensive income) . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,324 12,901 396 

Total liabilities and capital accounts .................. 878,494 851,130 39,416 

Federal Reserve Note Statement

Federal Reserve notes outstanding ...................... 958,680 906,511 . . . 

Less: Held by Banks not subject to collateralization . . . 175,661 148,152 . . . 

Collateralized Federal Reserve notes .................. 783,019 758,359 ... 

Collateral for Federal Reserve notes

Gold certificate account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,037 11,039 . . . 

Special drawing rights certificate account . . . . . . . . . . . . . . . 2,200 2,200 . . . 

Other eligible assets ................................... 0 0 . . . 

U.S. Treasury and federal agency securities ............. 769,782 745,120 . . . 

Total collateral ........................................ 783,019 758,359 ... 

For notes see end of table.
9.—Continued

New York Philadelphia Cleveland Richm

2006 2005 2006 2005 2006 2005 2006 

4,139 4,357 463 432 446 453 853 

874 874 83 83 104 104 147 

47 47 53 34 73 55 78 

0 00 0 0 0 0 

40,750 46,750 0 0 0 0 0 

288,297 295,107 33,817 26,401 33,633 31,439 64,704 

0 00 0 0 0 0 

329,047 341,857 33,817 26,401 33,633 31,439 64,704 

70 625 649 586 451 820 237 

212 207 58 53 158 158 170 

5,707 5,514 1,152 473 1,569 1,712 5,625 

7,099 8,740 1,055 672 759 718 1,502 

–29,471 −45,332 836 6,148 –2,264 833 4,858 

317,724 316,889 38,166 34,883 34,929 36,293 78,174 

341,947 327,194 38,658 37,426 36,516 36,539 75,090 

56,821 43,521 6,957 6,130 6,709 5,081 11,394 

285,126 283,673 31,700 31,296 29,807 31,457 63,695 

10,961 12,096 1,286 1,082 1,279 1,289 2,460 

6,609 6,389 584 485 954 658 2,748 

4,708 4,573 0 0 0 0 0 

69 55 2 1 3 4 11 

821 523 1 4 32 82 121 

12,207 11,539 587 490 990 743 2,880 

111 797 718 363 405 581 384 

1,864 1,414 255 164 275 196 569 

310,270 309,519 34,547 33,395 32,756 34,266 69,987 

3,727 3,685 1,810 744 1,087 1,013 4,093 

3,727 3,685 1,810 744 1,087 1,013 4,093 

317,724 316,889 38,166 34,883 34,929 36,293 78,174 

... ... ... ... ... ... ... 

... ... ... ... ... ... ... 

... ... ... ... ... ... ... 

... ... ... ... ... ... ... 

... ... ... ... ... ... ... 

... ... ... ... ... ... ... 

... ... ... ... ... ... ... 

... ... ... ... ... ... ... 
9. Statement of Condition of the Federal Reserve Banks, by Bank,

December 31, 2006 and 2005—Continued

Millions of dollars

Item

Atlanta Chic

2006 2005 2006 

Assets

Gold certificate account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,023 945 947 

Special drawing rights certificate account . . . . . . . . . . . . . . . 166 166 212 

Coin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 89 100 

Loans

To depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 7 24 

Securities purchased under agreements

to resell (triparty) ................................. 000

U.S. Treasury securities

Bought outright1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,208 57,576 71,520 

Held under repurchase agreements ...................... 000

Total loans and securities . . . . . . . . . . . . . . . . . . . . . . . . . . 65,211 57,583 71,544 

Items in process of collection . . . . . . . . . . . . . . . . . . . . . . . . . . 324 1,281 241 

Bank premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 232 206 

Other assets

Denominated in foreign currencies 2 . . . . . . . . . . . . . . . . . . . . 1,382 830 1,357 

Other 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,430 1,276 1,481 

Interdistrict settlement account . . . . . . . . . . . . . . . . . . . . . . . . . . 12,404 10,086 –3,742 

Total assets ........................................... 82,264 72,489 72,346 

Liabilities

Federal Reserve notes outstanding (issued to Banks) . . . . . 98,175 84,653 79,818 

Less: Notes held by Federal Reserve Banks . . . . . . . . . . . 23,938 19,039 14,202 

Federal Reserve notes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,237 65,614 65,616 

Securities sold under repurchase agreements . . . . . . . . . . . . 2,479 2,360 2,719 

Deposits

Depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,980 1,626 1,395 

U.S. Treasury, general account ......................... 000

Foreign, official accounts .............................. 323

Other 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 13 105 

Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,046 1,641 1,503 

Deferred credit items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473 763 276 

Other liabilities and accrued dividends 5 . . . . . . . . . . . . . . . . . 476 326 515 

Total liabilities ........................................ 79,711 70,704 70,630 

Capital Accounts

Capital paid in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,276 892 858 

Surplus (including accumulated other

comprehensive income) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,276 892 858 

Total liabilities and capital accounts .................. 82,264 72,489 72,346 

Note: Components may not sum to totals because of

rounding.

1. Includes securities loaned—fully guaranteed by U.S.

Treasury securities pledged with Federal Reserve Banks—

and excludes securities purchased under agreements to

resell.

2. Valued daily at market exchange rates

3. The System total includes depository in

drafts of $2 million for 2006 and 2005.
9.—Continued

St. Louis Minneapolis Kansas City Dallas San 

2006 2005 2006 2005 2006 2005 2006 2005 2006 

328 327 211 212 324 318 575 549 1,242 

71 71 30 30 66 66 98 98 234 

39 43 31 22 62 61 81 68 117 

0 0 22 16 7 11 0 3 1 

00 0 0 0 0 0 0 0 

24,747 23,094 15,835 15,543 22,808 21,050 34,957 36,654 86,218 

00 0 0 0 0 0 0 0 

24,747 23,094 15,857 15,560 22,815 21,060 34,957 36,657 86,219 

196 217 219 339 560 591 348 535 884 

80 70 116 119 159 84 260 261 185 

223 379 380 409 271 246 236 217 2,089 

552 524 348 338 480 441 751 786 1,777 

1,807 2,010 –237 38 4,734 2,422 3,537 −2,693 7,414 

28,045 26,735 16,955 17,067 29,469 25,290 40,844 36,477 100,160 

29,169 28,096 17,442 17,854 30,770 27,832 57,150 50,474 114,925 

3,175 3,494 2,549 2,789 3,717 5,016 19,391 17,163 23,787 

25,994 24,602 14,893 15,065 27,053 22,816 37,759 33,311 91,138 

941 947 602 637 867 863 1,329 1,502 3,278 

434 482 455 388 546 655 705 811 1,741 

00 0 0 0 0 0 0 0 

01 1 1 1 1 0 0 4 

24 108 18 25 32 22 37 31 200 

458 591 474 414 579 678 742 843 1,946 

103 151 288 353 435 457 306 303 749 

217 156 147 107 183 128 284 212 556 

27,713 26,447 16,404 16,576 29,117 24,941 40,420 36,172 97,667 

166 144 276 245 176 175 212 153 1,247 

166 144 276 245 176 175 212 153 1,247 

28,045 26,735 16,955 17,067 29,469 25,290 40,844 36,477 100,160 

4. Includes international organization deposits of

$144 million for 2006 and $125 million for 2005.

5. Includes exchange-translation accoun

monthly revaluation at market exchange ra

exchange commitments.

. . . Not applicable.
10. Income and Expenses of the Federal Reserve Banks, by Bank, 2006

Thousands of dollars

Item Total Boston New York Philadelphia 

Current Income

Loans ......................... 12,038 551 1,597 14 

U.S. Treasury securities ........ 36,452,265 1,712,534 14,520,198 1,454,413 

Foreign currencies ............. 368,905 12,756 103,272 19,564 

Priced services . . . . . . . . . . . . . . . . 908,363 0 65,846 0 

Compensation received for

services provided1 ......... 572,329 46,466 37,091 32,272 

Other . . . . . . . . . . . . . . . . . . . . . . . . . 96,527 2,395 61,125 1,918 

Total ......................... 38,410,427 1,774,702 14,789,129 1,508,181 

Current Expenses

Salaries and other personnel

expenses .................. 1,407,617 76,544 286,428 67,218 

Retirement and other benefits . . . 427,673 19,968 81,799 22,285 

Net periodic pension benefit

expense2 .................. 65,601 1,071 57,394 374 

Fees .......................... 114,852 2,860 9,949 1,422 

Travel ......................... 67,247 2,988 8,717 2,356 

Software expenses ............. 142,574 4,174 18,653 8,775 

Postage and other shipping

costs ..................... 94,173 1,596 3,489 1,815 

Communications ............... 39,339 2,036 3,193 513 

Materials and supplies . . . . . . . . . 55,909 3,532 8,945 3,762 

Building expenses

Taxes on real estate ............ 33,260 4,572 4,841 1,551 

Property depreciation .......... 94,732 5,884 17,604 4,056 

Utilities ....................... 38,389 3,653 7,444 2,787 

Rent .......................... 42,392 1,261 16,021 371 

Other . . . . . . . . . . . . . . . . . . . . . . . . . 34,195 1,277 6,661 1,775 

Equipment

Purchases ..................... 30,100 2,484 5,507 1,023 

Rentals ........................ 4,160 266 1,873 350 

Depreciation ................... 96,727 4,737 8,600 5,115 

Repairs and maintenance ....... 85,982 5,023 9,559 4,693 

Earnings credit costs . . . . . . . . . . . 276,389 12,765 80,953 12,508 

Compensation paid for

services costs incurred1 ... 572,329 0 29,073 0 

Other . . . . . . . . . . . . . . . . . . . . . . . . . 79,957 23,526 57,522 11,633 

Recoveries .................... –92,292 –13,459 –11,060 –2,409 

Expenses capitalized3 .......... –21,075 –1,270 –9,580 –315 

Total ......................... 3,690,228 165,488 703,586 151,657 

Reimbursements ............. –426,384 –23,368 –85,297 –30,547 

Net expenses .............. 3,263,844 142,120 618,289 121,110 

For notes see end of table.
10.—Continued

Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas S

412 431 3,031 1,112 2,582 1,159 164 

2,861,861 2,888,396 3,216,671 1,111,823 721,055 1,021,749 1,621,236 

97,807 23,987 24,389 4,364 6,959 4,866 4,254 

0 787,847 54,670 0 0 0 0 

44,012 469 58,784 21,996 74,126 70,644 59,750 

7,665 4,474 4,488 1,593 910 1,266 1,944 

3,011,757 3,705,604 3,362,033 1,140,888 805,632 1,099,685 1,687,348 

191,575 129,149 108,688 73,743 74,153 91,041 83,001 

64,130 41,586 32,966 22,130 23,075 22,588 28,771 

760 1,295 402 626 720 762 475 

59,317 8,064 5,974 9,225 1,553 4,189 3,688 

9,829 7,882 6,851 3,591 3,042 4,871 3,911 

53,282 3,460 3,641 7,625 3,230 4,220 4,780 

3,334 57,295 3,954 2,357 2,860 2,053 3,810 

23,241 1,648 1,427 1,279 1,036 1,081 1,514 

5,897 6,709 4,467 2,669 2,440 2,962 4,558 

2,232 3,197 3,507 518 3,153 1,206 3,366 

8,496 9,130 11,083 5,150 4,679 4,166 8,527 

3,621 3,806 2,456 1,734 1,894 794 4,358 

14,272 622 2,423 1,708 251 3,653 159 

3,399 3,925 4,568 1,005 1,472 485 4,016 

6,457 2,455 1,874 1,449 1,730 2,538 1,292 

286 393 300 182 22 42 53 

35,919 8,747 4,430 3,325 2,759 4,893 5,090 

18,944 10,670 7,009 2,990 2,470 3,212 5,601 

52,610 17,434 26,003 5,100 5,329 8,173 6,080 

0 543,255 0 0 0 0 0 

–256,628 19,562 42,951 75,530 22,613 17,538 36,101 

–29,564 –3,985 –8,758 –1,867 –1,056 –3,866 –7,025 

–3,041 0 –456 –2,372 –384 –652 –705 

268,368 876,298 265,759 217,697 157,042 175,949 201,422 

−28,208 −14,613 −4,646 −115,598 −26,347 −10,472 −13,686 

240,159 861,685 261,113 102,100 130,694 165,476 187,736 
10. Income and Expenses of the Federal Reserve Banks, by Bank, 2006—Cont

Thousands of dollars

Item Total Boston New York Philadelphia 

Profit and Loss

Current net income ............ 35,146,583 1,632,582 14,170,841 1,387,071 

Additions to and deductions

from (−) current net income 4

Profits on foreign exchange

transactions . . . . . . . . . . . . . . . 1,185,560 31,981 330,788 65,609 

Other additions . . . . . . . . . . . . . . . . 7,286 7 23 2 

Total additions . . . . . . . . . . 1,192,847 31,989 330,811 65,610 

Interest expense on reverse repurchase agreements –1,342,144 –65,129 –505,075 –55,771 

Other deductions ............... –9,550 0 0 0 

Total deductions ........ –1,351,694 –65,129 –505,075 –55,771 

Net addition to or

deduction from (–)

current net income ........ –158,847 –33,141 –174,264 9,840 

Cost of unreimbursed Treasury

services . . . . . . . . . . . . . . . . . . . –20 1 –3 

Assessments by Board

Board expenditures5 ............ 301,014 7,379 81,676 21,904 

Cost of currency ............... 491,962 31,062 106,608 29,515 

Net income before payment to

U.S. Treasury . . . . . . . . . . . . . 34,194,762 1,560,999 13,808,291 1,345,494 

Dividends paid ................ 871,255 21,592 221,339 80,190 

Payments to U.S. Treasury

(interest on Federal

Reserve notes) ............ 29,051,678 1,453,044 11,977,585 175,737 

Transferred to/from surplus ..... 4,271,828 86,363 1,609,367 1,089,567 

Adjustments to surplus6 ........ –1,848,716 –7,094 –1,567,462 –23,790 

Surplus, January 1 ............. 12,901,176 316,824 3,685,179 744,048 

Surplus, December 31 .......... 15,324,288 396,093 3,727,084 1,809,826 

Note: Components may not sum to totals because of

rounding.

1. During 2005, the Federal Reserve Bank of Atlanta

was assigned the overall responsibility for managing the

Reserve Banks’ provision of check services and recognizes total System check revenue on its Statements of

Income. In 2006, this policy was extended to ACH services managed by the Federal Reserve Bank of Atlanta,

as well as to Fedwire funds transfer and securitites transfer services, which are managed by the Federal Reserve

Bank of New York. The Federal Reserve Bank of Atlanta

and the Federal Reserve Bank of New York compensate

the other Reserve Banks for the costs incurred in providing these services.

2. Reflects the effect of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions (SFAS

87). The System Retirement Plan for employees is recorded on behalf of the System on the books of the

Federal Reserve Bank of New York, re

increase in expenses of $53,150 thousand. 

related to the Retirement Benefit Equaliza

the Supplemental Employee Retirement Pla

by each Federal Reserve Bank.

3. Includes expenses for labor and ma

ized and depreciated or amortized as charg

in the periods benefited.

4. Includes reimbursement from the U.S

uncut sheets of Federal Reserve notes, gain

the sale of Reserve Bank buildings, counte

that is not charged back to the depositing i

stale Reserve Bank checks that are written 

5. For additional details, see the chap

Governors Financial Statements.’’

6. The implementation of FAS 158 in 20

adjustment in the amount of $1,848,716 

accumulated other comprehensive income

ported as a component of surplus.
10.—Continued

Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas S

2,771,597 2,843,919 3,100,920 1,038,788 674,938 934,209 1,499,612 

322,377 79,152 78,502 13,225 22,097 15,658 13,679 

3 20 44 0 0 1,291 0 

322,380 79,172 78,546 13,225 22,097 16,949 13,679 

–109,366 –110,361 –122,680 –42,409 –27,460 –38,987 –61,610 

0 0 –610 –555 0 –8,386 0 

–109,367 –110,361 –123,289 –42,964 –27,460 –47,372 –61,610 

213,013 –31,189 –44,743 –29,738 –5,363 –30,424 –47,931 

0 0 0 00 0 0 

80,873 20,742 19,585 3,254 5,427 3,874 3,688 

40,241 65,067 51,165 17,276 12,383 17,174 24,924 

2,863,497 2,726,921 2,985,426 988,520 651,765 882,737 1,423,068 

240,681 64,625 52,280 9,205 15,064 10,502 11,959 

1,764,199 2,251,659 2,910,601 935,913 594,235 864,852 1,323,733 

858,617 410,636 22,546 43,402 42,466 7,382 87,377 

–72,769 –26,515 –40,756 –21,196 –12,026 –5,795 –28,263 

3,307,452 892,166 876,301 144,000 245,322 174,757 152,628 

4,093,301 1,276,288 858,091 166,206 275,762 176,344 211,742 
11. Income and Expenses of the Federal Reserve Banks, 1914–2006

Thousands of dollars

Federal Reserve Bank

and period

Current

income

Net

expenses

Net additions

or

deductions (−)1

Assessmen

Board of Go

Board

expenditures

All Banks

1914–15 . . . . . . . . . . . . . . . . . . . . . . . 2,173 2,018 6 302 

1916. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,218 2,082 −193 192 

1917. . . . . . . . . . . . . . . . . . . . . . . . . . . 16,128 4,922 −1,387 238 

1918. . . . . . . . . . . . . . . . . . . . . . . . . . . 67,584 10,577 −3,909 383 

1919........................... 102,381 18,745 −4,673 595 

1920........................... 181,297 27,549 −3,744 710 

1921........................... 122,866 33,722 −6,315 741 

1922. . . . . . . . . . . . . . . . . . . . . . . . . . . 50,499 28,837 −4,442 723 

1923. . . . . . . . . . . . . . . . . . . . . . . . . . . 50,709 29,062 −8,233 703 

1924. . . . . . . . . . . . . . . . . . . . . . . . . . . 38,340 27,768 −6,191 663 

1925. . . . . . . . . . . . . . . . . . . . . . . . . . . 41,801 26,819 −4,823 709 

1926. . . . . . . . . . . . . . . . . . . . . . . . . . . 47,600 24,914 −3,638 722 

1927. . . . . . . . . . . . . . . . . . . . . . . . . . . 43,024 24,894 −2,457 779 

1928. . . . . . . . . . . . . . . . . . . . . . . . . . . 64,053 25,401 −5,026 698 

1929. . . . . . . . . . . . . . . . . . . . . . . . . . . 70,955 25,810 −4,862 782 

1930. . . . . . . . . . . . . . . . . . . . . . . . . . . 36,424 25,358 −93 810 

1931. . . . . . . . . . . . . . . . . . . . . . . . . . . 29,701 24,843 311 719 

1932. . . . . . . . . . . . . . . . . . . . . . . . . . . 50,019 24,457 −1,413 729 

1933. . . . . . . . . . . . . . . . . . . . . . . . . . . 49,487 25,918 −12,307 800 

1934. . . . . . . . . . . . . . . . . . . . . . . . . . . 48,903 26,844 −4,430 1,372 

1935. . . . . . . . . . . . . . . . . . . . . . . . . . . 42,752 28,695 −1,737 1,406 

1936. . . . . . . . . . . . . . . . . . . . . . . . . . . 37,901 26,016 486 1,680 

1937. . . . . . . . . . . . . . . . . . . . . . . . . . . 41,233 25,295 −1,631 1,748 

1938. . . . . . . . . . . . . . . . . . . . . . . . . . . 36,261 25,557 2,232 1,725 

1939. . . . . . . . . . . . . . . . . . . . . . . . . . . 38,501 25,669 2,390 1,621 

1940. . . . . . . . . . . . . . . . . . . . . . . . . . . 43,538 25,951 11,488 1,704 

1941. . . . . . . . . . . . . . . . . . . . . . . . . . . 41,380 28,536 721 1,840 

1942. . . . . . . . . . . . . . . . . . . . . . . . . . . 52,663 32,051 −1,568 1,746 

1943. . . . . . . . . . . . . . . . . . . . . . . . . . . 69,306 35,794 23,768 2,416 

1944........................... 104,392 39,659 3,222 2,296 

1945........................... 142,210 41,666 −830 2,341 

1946........................... 150,385 50,493 −626 2,260 

1947........................... 158,656 58,191 1,973 2,640 

1948........................... 304,161 64,280 −34,318 3,244 

1949........................... 316,537 67,931 −12,122 3,243 

1950........................... 275,839 69,822 36,294 3,434 

1951........................... 394,656 83,793 −2,128 4,095 

1952........................... 456,060 92,051 1,584 4,122 

1953........................... 513,037 98,493 −1,059 4,100 

1954........................... 438,486 99,068 −134 4,175 

1955........................... 412,488 101,159 −265 4,194 

1956........................... 595,649 110,240 −23 5,340 

1957........................... 763,348 117,932 −7,141 7,508 

1958........................... 742,068 125,831 124 5,917 

1959........................... 886,226 131,848 98,247 6,471 

For notes see end of table.
11.—Continued

Dividends

paid

Payments to U.S. Treasury

Transferred

to surplus

(section 13b)

Tra

to 

Statutory (se

transfers 2

Interest on

Federal Reserve notes

217 . . . . . . . . . 

1,743 . . . . . . . . . 

6,804 1,134 . . . . . . 

5,541 . . . . . . . . . 4

5,012 2,704 . . . . . . 

5,654 60,725 . . . . . . 

6,120 59,974 . . . . . . 

6,307 10,851 . . . . . . 

6,553 3,613 . . . . . . 

6,682 114 . . . . . . −

6,916 59 . . . . . . 

7,329 818 . . . . . . 

7,755 250 . . . . . . 

8,458 2,585 . . . . . . 

9,584 4,283 . . . . . . 

10,269 17 . . . . . . −

10,030 . . . . . . . . . −

9,282 2,011 . . . . . . 

8,874 . . . . . . . . . 

8,782 . . . . . . −60 

8,505 298 . . . 28 

7,830 227 . . . 103 

7,941 177 . . . 67 

8,019 120 . . . − 419 

8,110 25 . . . − 426 

8,215 82 . . . −54 

8,430 141 . . . − 4 

8,669 198 . . . 50 

8,911 245 . . . 135 4

9,500 327 . . . 201 4

10,183 248 . . . 262 

10,962 67 . . . 28 

11,523 36 75,284 87 

11,920 . . . 166,690 . . . 

12,329 . . . 193,146 . . . 

13,083 . . . 196,629 . . . 

13,865 . . . 254,874 . . . 

14,682 . . . 291,935 . . . 4

15,558 . . . 342,568 . . . 4

16,442 . . . 276,289 . . . 

17,712 . . . 251,741 . . . 

18,905 . . . 401,556 . . . 

20,081 . . . 542,708 . . . 

21,197 . . . 524,059 . . . 

22,722 . . . 910,650 . . . −
11. Income and Expenses of the Federal Reserve Banks, 1914–2006—Continue

Thousands of dollars

Federal Reserve Bank

and period

Current

income

Net

expenses

Net additions

or

deductions (−)1

Assessmen

Board of Go

Board

expenditures

1960. . . . . . . . . . . . . . . . . . . . . . . 1,103,385 139,894 13,875 6,534 

1961....................... 941,648 148,254 3,482 6,265 

1962. . . . . . . . . . . . . . . . . . . . . . . 1,048,508 161,451 −56 6,655 

1963. . . . . . . . . . . . . . . . . . . . . . . 1,151,120 169,638 615 7,573 

1964. . . . . . . . . . . . . . . . . . . . . . . 1,343,747 171,511 726 8,655 

1965. . . . . . . . . . . . . . . . . . . . . . . 1,559,484 172,111 1,022 8,576 

1966. . . . . . . . . . . . . . . . . . . . . . . 1,908,500 178,212 996 9,022 

1967. . . . . . . . . . . . . . . . . . . . . . . 2,190,404 190,561 2,094 10,770 

1968. . . . . . . . . . . . . . . . . . . . . . . 2,764,446 207,678 8,520 14,198 

1969. . . . . . . . . . . . . . . . . . . . . . . 3,373,361 237,828 −558 15,020 

1970. . . . . . . . . . . . . . . . . . . . . . . 3,877,218 276,572 11,442 21,228 

1971. . . . . . . . . . . . . . . . . . . . . . . 3,723,370 319,608 94,266 32,634 

1972. . . . . . . . . . . . . . . . . . . . . . . 3,792,335 347,917 −49,616 35,234 

1973. . . . . . . . . . . . . . . . . . . . . . . 5,016,769 416,879 −80,653 44,412 

1974. . . . . . . . . . . . . . . . . . . . . . . 6,280,091 476,235 −78,487 41,117 

1975. . . . . . . . . . . . . . . . . . . . . . . 6,257,937 514,359 −202,370 33,577 

1976. . . . . . . . . . . . . . . . . . . . . . . 6,623,220 558,129 7,311 41,828 

1977. . . . . . . . . . . . . . . . . . . . . . . 6,891,317 568,851 −177,033 47,366 

1978. . . . . . . . . . . . . . . . . . . . . . . 8,455,309 592,558 −633,123 53,322 

1979. . . . . . . . . . . . . . . . . . . . . . . 10,310,148 625,168 −151,148 50,530 

1980. . . . . . . . . . . . . . . . . . . . . . . 12,802,319 718,033 −115,386 62,231 

1981. . . . . . . . . . . . . . . . . . . . . . . 15,508,350 814,190 −372,879 63,163 

1982. . . . . . . . . . . . . . . . . . . . . . . 16,517,385 926,034 −68,833 61,813 

1983. . . . . . . . . . . . . . . . . . . . . . . 16,068,362 1,023,678 −400,366 71,551 

1984. . . . . . . . . . . . . . . . . . . . . . . 18,068,821 1,102,444 −412,943 82,116 

1985. . . . . . . . . . . . . . . . . . . . . . . 18,131,983 1,127,744 1,301,624 77,378 

1986. . . . . . . . . . . . . . . . . . . . . . . 17,464,528 1,156,868 1,975,893 97,338 

1987. . . . . . . . . . . . . . . . . . . . . . . 17,633,012 1,146,911 1,796,594 81,870 

1988. . . . . . . . . . . . . . . . . . . . . . . 19,526,431 1,205,960 −516,910 84,411 

1989. . . . . . . . . . . . . . . . . . . . . . . 22,249,276 1,332,161 1,254,613 89,580 

1990. . . . . . . . . . . . . . . . . . . . . . . 23,476,604 1,349,726 2,099,328 103,752 

1991. . . . . . . . . . . . . . . . . . . . . . . 22,553,002 1,429,322 405,729 109,631 

1992. . . . . . . . . . . . . . . . . . . . . . . 20,235,028 1,474,531 −987,788 128,955 

1993. . . . . . . . . . . . . . . . . . . . . . . 18,914,251 1,657,800 −230,268 140,466 

1994. . . . . . . . . . . . . . . . . . . . . . . 20,910,742 1,795,328 2,363,862 146,866 

1995. . . . . . . . . . . . . . . . . . . . . . . 25,395,148 1,818,416 857,788 161,348 

1996 . . . . . . . . . . . . . . . . . . . . . . 25,164,303 1,947,861 −1,676,716 162,642 

1997 . . . . . . . . . . . . . . . . . . . . . . 26,917,213 1,976,453 −2,611,570 174,407 

1998 . . . . . . . . . . . . . . . . . . . . . . 28,149,477 1,833,436 1,906,037 178,009 

1999 . . . . . . . . . . . . . . . . . . . . . . 29,346,836 1,852,162 −533,557 213,790 

2000 . . . . . . . . . . . . . . . . . . . . . . 33,963,992 1,971,688 −1,500,027 188,067 

2001 . . . . . . . . . . . . . . . . . . . . . . 31,870,721 2,084,708 −1,117,435 295,056 

2002 . . . . . . . . . . . . . . . . . . . . . . 26,760,113 2,227,078 2,149,328 205,111 

2003 . . . . . . . . . . . . . . . . . . . . . . 23,792,725 2,462,658 2,481,127 297,020 

2004 . . . . . . . . . . . . . . . . . . . . . . 23,539,942 2,238,705 917,870 272,331 

2005 . . . . . . . . . . . . . . . . . . . . . . 30,729,357 2,889,544 −3,576,903 265,742 

2006 . . . . . . . . . . . . . . . . . . . . . . 38,410,427 3,263,844 −158,846 301,014 

Total, 1914–2006 .......... 710,889,641 53,347,257 4,041,796 4,704,801 
11.—Continued

Dividends

paid

Payments to U.S. Treasury

Transferred

to surplus

(section 13b)

Tra

to 

Statutory (se

transfers 2

Interest on

Federal Reserve notes

23,948 . . . 896,816 . . . 

25,570 . . . 687,393 . . . 

27,412 . . . 799,366 . . . 

28,912 . . . 879,685 . . . 

30,782 . . . 1,582,119 . . . − 4

32,352 . . . 1,296,810 . . . 

33,696 . . . 1,649,455 . . . 

35,027 . . . 1,907,498 . . . 

36,959 . . . 2,463,629 . . . 

39,237 . . . 3,019,161 . . . 

41,137 . . . 3,493,571 . . . 

43,488 . . . 3,356,560 . . . 

46,184 . . . 3,231,268 . . . 

49,140 . . . 4,340,680 . . . 

52,580 . . . 5,549,999 . . . 

54,610 . . . 5,382,064 . . . 

57,351 . . . 5,870,463 . . . 

60,182 . . . 5,937,148 . . . 

63,280 . . . 7,005,779 . . . 

67,194 . . . 9,278,576 . . . 

70,355 . . . 11,706,370 . . . 

74,574 . . . 14,023,723 . . . 

79,352 . . . 15,204,591 . . . 

85,152 . . . 14,228,816 . . . 1

92,620 . . . 16,054,095 . . . 1

103,029 . . . 17,796,464 . . . 1

109,588 . . . 17,803,895 . . . 

117,499 . . . 17,738,880 . . . 1

125,616 . . . 17,364,319 . . . 

129,885 . . . 21,646,417 . . . 1

140,758 . . . 23,608,398 . . . 1

152,553 . . . 20,777,552 . . . 2

171,763 . . . 16,774,477 . . . 4

195,422 . . . 15,986,765 . . . 3

212,090 . . . 20,470,011 . . . 2

230,527 . . . 23,389,367 . . . 2

255,884 5,517,716 14,565,624 . . . 6

299,652 20,658,972 0 . . . 8

343,014 17,785,942 8,774,994 . . . 7

373,579 . . . 25,409,736 . . . 4

409,614 . . . 25,343,892 . . . 4,1

428,183 . . . 27,089,222 . . . 5

483,596 . . . 24,495,490 . . . 1,0

517,705 . . . 22,021,528 . . . 4

582,402 . . . 18,078,003 . . . 2,7

780,863 . . . 21,467,545 . . . 1,2

871,255 . . . 29,051,678 . . . 4,2

8,738,777 44,113,958 573,927,960 −4 21,2
11. Income and Expenses of the Federal Reserve Banks, 1914–2006—Continue

Thousands of dollars

Federal Reserve Bank

and period

Current

income

Net

expenses

Net additions

or

deductions (−)1

Assessmen

Board of Go

Board

expenditures

Aggregate for each Bank,

1914–2006

Boston . . . . . . . . . . . . . . . . . . . . 37,823,486 3,416,852 -48,223 207,260 

New York . . . . . . . . . . . . . . . . . 249,731,575 8,384,9314 833,624 1,168,193 

Philadelphia . . . . . . . . . . . . . . . 26,369,964 2,776,143 112,671 198,455 

Cleveland . . . . . . . . . . . . . . . . . 42,583,372 3,269,494 297,125 342,922 

Richmond . . . . . . . . . . . . . . . . . 54,923,061 4,585,203 691,529 669,078 

Atlanta . . . . . . . . . . . . . . . . . . . . 40,448,737 6,527,615 290,459 350,725 

Chicago . . . . . . . . . . . . . . . . . . . 85,257,610 6,465,618 613,784 525,507 

St. Louis . . . . . . . . . . . . . . . . . . 24,240,701 2,597,202 42,722 115,126 

Minneapolis . . . . . . . . . . . . . . . 12,223,622 2,549,119 129,352 140,300 

Kansas City . . . . . . . . . . . . . . . 25,486,625 3,401,053 103,704 146,764 

Dallas . . . . . . . . . . . . . . . . . . . . . 32,411,865 3,448,353 338,948 218,444 

San Francisco . . . . . . . . . . . . . 79,389,024 5,925,674 636,099 622,028 

Total ..................... 710,889,641 53,347,257 4,041,796 4,704,801 

Note: Components may not sum to totals because of

rounding.

1. For 1987 and subsequent years, includes the cost of

services provided to the Treasury by Federal Reserve

Banks for which reimbursement was not received.

2. Represents transfers made as a franc

1917 through 1932; transfers made under 

the Federal Reserve Act from 1935 throu

transfers made under section 7 of the Feder

for 1996 and 1997.
11.—Continued

Dividends

paid

Payments to U.S. Treasury

Transferred

to surplus

(section 13b)

Tra

to 

Statutory (se

transfers 2

Interest on

Federal Reserve notes

410,646 2,579,504 30,051,671 135 5

2,176,006 17,307,161 212,590,458 –433 6,1

407,602 1,312,118 19,437,229 291 1,9

649,488 2,827,043 33,884,049 –10 1,3

1,403,928 3,083,928 39,972,837 –72 5,1

617,505 2,713,230 28,273,211 5 1,5

916,679 4,593,811 71,087,653 12 1,2

208,306 1,833,837 18,917,298 –27 2

256,828 416,227 8,400,348 65 4

248,040 1,249,703 19,924,327 –9 2

350,811 1,510,802 26,405,056 55 3

1,092,938 4,686,594 64,983,822 –17 1,6

8,738,777 44,113,958 573,927,960 −4 21,2

3. The $21,266,676 thousand transferred to surplus

was reduced by direct charges of $500 thousand for

charge-off on Bank premises (1927), $139,300 thousand

for contributions to capital of the Federal Deposit Insurance Corporation (1934), $4 thousand net upon elimination of section 13b surplus (1958), and $106,000 thousand (1996), $107,000 thousand (1997), and

$3,752,000 thousand (2000) transferred to the Treasury as

statutorily required; and was increased by transfer of

$11,131 thousand from reserves for contingencies (1955).

The implementation of FAS 158 in 200

adjustment to accumulated other compreh

of $1,848,716 thousand, which is reported 

nent of surplus, leaving a balance of $15,

sand on December 31, 2006.

4. This amount is reduced by $2,717

for expenses of the System Retirement Pla

table 10.

. . . Not applicable.
12. Operations in Principal Departments of the Federal Reserve Banks, 2003–20

Operation 2006 2005 2004 

Millions of pieces

Currency processed . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,694 36,463 36,242 

Currency destroyed . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,766 6,551 6,748 

Coin received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,705 56,080 55,655 

Checks handled

U.S. government checks . . . . . . . . . . . . . . . . . . . . . 192 215 234 

Postal money orders . . . . . . . . . . . . . . . . . . . . . . . . . 171 176 187 

All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,983 12,195 13,904 

Securities transfers1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 22 20 

Funds transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 132 125 

Automated clearinghouse transactions

Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,231 7,339 6,486 

Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 992 964 941 

Millions of dollars

Currency processed ............................ 664,592 639,832 625,127 

Currency destroyed . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,742 83,187 90,943 

Coin received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,779 5,412 5,403 

Checks handled

U.S. government checks ..................... 231,314 250,865 277,649 

Postal money orders . . . . . . . . . . . . . . . . . . . . . . . . . 28,066 28,395 29,045 

All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,628,348 14,379,874 14,287,740 

Securities transfers1 ............................ 377,258,592 368,896,819 313,425,252 2

Funds transfers2 ............................... 572,645,790 518,546,733 478,946,947 4

Automated clearinghouse transactions

Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,124,434 12,801,914 12,543,907 

Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,474,364 3,156,556 2,913,189 

1. The title of this category has changed from previous

years, but the composition of the category is the same;

therefore, the data here are comparable with data reported

in previous years.

2. Amounts in bold are restatements.
13. Number and Annual Salaries of Officers and Employees of the Federal Rese

December 31, 2006

Federal Reserve

Bank (including

Branches)

President1 Other officers Employees T

Salary

(dollars) 2

NumberSalaries

(dollars) 2

Number

Salaries

(dollars) 2

Number

FulltimeParttime

Boston .......... 374,100 62 10,567,765 837 70 57,522,048 970 

New York . . . . . . . 381,000 279 54,289,191 2,454 54 198,746,036 2,791 

Philadelphia ..... 276,500 56 8,595,200 982 34 53,274,392 1,073 

Cleveland ....... 281,400 60 9,200,500 1,491 34 72,454,563 1,586 

Richmond ....... 276,500 72 10,764,700 1,681 40 95,642,478 1,794 

Atlanta . . . . . . . . . . Vacant3 78 12,948,880 1,912 40 106,293,498 2,031 

Chicago ......... 374,100 86 13,118,406 1,310 59 84,242,032 1,456 

St. Louis ........ 311,000 75 10,910,680 954 58 53,627,203 1,088 

Minneapolis ..... 374,100 43 6,422,280 1,155 101 62,186,058 1,300 

Kansas City ..... 340,600 73 11,504,000 1,218 19 67,284,920 1,311 

Dallas . . . . . . . . . . . 276,500 53 8,337,504 1,219 18 65,143,411 1,291 

San Francisco . . . 326,900 75 13,691,634 1,656 28 111,625,788 1,760 

Federal Reserve

Information

Technology . . . . 39 5,947,200 719 6 59,314,205 764 

Office of

Employee

Benefits . . . . . . . 8 1,618,400 33 0 2,669,126 41 

Total ............ 3,592,700 1,059 177,916,340 17,621 561 1,090,025,758 19,256 

1. Under current policies, the appointment salaries of

Federal Reserve Bank presidents are normally 85 percent

of the salary-range midpoint (an 85 compa-ratio), with

the exception of the New York Reserve Bank president,

whose appointment salary normally is set at a 95 comparatio. The Board has discretion to approve a higher

starting salary if requested by a Reserve Bank’s board of

directors.

On January 1 each year, all presidents receive salary

increases equal to the percentage increase in the midpoint

of their respective salary ranges. In addition, on every

third-year anniversary of his or her initial appointment

(through year 9), each president receives a salary increase

that results in a compa-ratio as follows: year 3, 95 (for the

New York Bank, 105); year 6, 105 (New York, 115);

year 9, 115 (New York, 125).

There continue to be tiered salary range

Bank officers, including presidents, reflecti

in the costs of labor in the head-office citi

reviews Reserve Bank officer salary range

Bank placement in the salary tiers annually

York and San Francisco were in tier 1, 

midpoint for presidents’ salaries of $362

Philadelphia, Richmond, Atlanta, Chicago

and Dallas were in tier 2, which had a 

presidents’ salaries of $325,300. Clevela

and Kansas City were in tier 3, which had 

presidents’ salaries of $296,200.

2. Annualized salary liability based on sa

on December 31, 2006.

3. Atlanta president retired in October 2

. . . Not applicable.
14. Acquisition Costs and Net Book Value of the Premises of the Federal Reser

and Branches, December 31, 2006

Thousands of dollars

Federal Reserve

Bank or

Branch

Acquisition costs

Net

book

value

Land

Buildings

(including

vaults)1

Building machinery and

equipment

Total 2

BOSTON . . . . . . . . . . . . . 27,293 127,979 28,019 183,290 117,283 

NEW YORK . . . . . . . . . . 20,103 254,486 66,929 341,517 211,798 

Buffalo . . . . . . . . . . . . . . . . 0 0 0 0 0 

PHILADELPHIA . . . . . . 2,779 84,976 13,545 101,300 57,782 

CLEVELAND . . . . . . . . . 4,219 124,865 25,386 154,470 112,851 

Cincinnati . . . . . . . . . . . . . 2,593 32,466 11,624 46,683 24,993 

Pittsburgh . . . . . . . . . . . . . 1,739 19,488 14,503 35,730 20,349 

RICHMOND . . . . . . . . . . 22,649 107,558 38,279 168,486 118,391 

Baltimore . . . . . . . . . . . . . 6,482 29,566 5,828 41,876 24,081 

Charlotte . . . . . . . . . . . . . . 3,130 31,498 6,847 41,475 27,295 

ATLANTA . . . . . . . . . . . 22,735 149,625 16,367 188,727 166,998 

Birmingham . . . . . . . . . . 5,347 11,744 1,525 18,616 12,323 

Jacksonville . . . . . . . . . . . 1,730 20,987 3,810 26,527 16,960 

Miami . . . . . . . . . . . . . . . . . 4,254 22,143 4,869 31,266 20,746 

Nashville . . . . . . . . . . . . . . 603 5,690 3,532 9,825 4,843 

New Orleans . . . . . . . . . . 3,785 8,827 5,231 17,843 9,924 

CHICAGO . . . . . . . . . . . . 4,512 165,149 20,268 189,929 115,789 

Detroit . . . . . . . . . . . . . . . . 9,980 72,293 10,690 92,962 90,657 

ST. LOUIS . . . . . . . . . . . . 8,392 73,386 12,578 94,356 65,315 

Little Rock . . . . . . . . . . . . 0 0 0 0 0 

Louisville ............. 0 0 0 0 0 

Memphis . . . . . . . . . . . . . . 2,472 14,127 5,164 21,763 14,975 

MINNEAPOLIS . . . . . . . 15,666 104,652 13,834 134,153 106,397 

Helena . . . . . . . . . . . . . . . . 2,890 9,716 943 13,549 9,587 

KANSAS CITY . . . . . . . 29,460 114,121 0 143,580 143,580 

Denver . . . . . . . . . . . . . . . . 3,511 9,167 4,502 17,179 8,525 

Oklahoma City . . . . . . . . 0 108 0 108 108 

Omaha . . . . . . . . . . . . . . . . 3,559 7,374 1,726 12,658 6,390 

DALLAS . . . . . . . . . . . . . . 35,638 111,106 23,715 170,459 123,479 

El Paso . . . . . . . . . . . . . . . . 262 3,584 1,553 5,400 1,616 

Houston . . . . . . . . . . . . . . . 23,754 101,555 8,088 133,397 129,024 

San Antonio . . . . . . . . . . . 826 7,917 2,674 11,418 6,335 

SAN FRANCISCO . . . . 20,129 96,419 22,370 138,919 80,904 

Los Angeles . . . . . . . . . . . 6,306 71,935 13,009 91,250 57,911 

Portland . . . . . . . . . . . . . . . 0 0 0 0 0 

Salt Lake City . . . . . . . . . 1,294 4,680 1,385 7,360 3,083 

Seattle . . . . . . . . . . . . . . . . 8,191 37,798 4,545 50,534 42,639 

Total .................. 306,282 2,036,985 393,340 2,736,606 1,952,930 

Note: Components may not sum to totals because of

rounding.

1. Includes expenditures for construction at some

offices, pending allocation to appropriate accounts.

2. Excludes charge-offs of $17,699 thousand before

1952.

3. Covers acquisitions for banking-house 

Bank premises formerly occupied and being 

sale.

. . . Not applicable.
Federal Reserve System Audits
Audits of the Federal Reserve System

The Board of Governors, the Federal

Reserve Banks, and the Federal Reserve

System as a whole are all subject to

several levels of audit and review. The

Board’s financial statements, and its

compliance with laws and regulations

affecting those statements, are audited

annually by an outside auditor retained

by the Board’s Office of Inspector General. The Office of Inspector General

also conducts audits, reviews, and investigations relating to the Board’s programs and operations as well as to Board

functions delegated to the Reserve

Banks.

The Reserve Banks’ finan

ments are audited annually by 

pendent outside auditor retain

Board of Governors. In add

Reserve Banks are subject 

examination by the Board. As 

in the chapter ‘‘Federal Reserv

the Board’s examination includ

range of ongoing oversight 

conducted on and off site by s

Board’s Division of Reserve 

erations and Payment Systems

Federal Reserve operations 

subject to review by the Go

Accountability Office. 
Board of Governors Financial Statements

The financial statements of the Board for 2006 and 2005 were audited

by KPMG LLP, independent auditors.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTE

BALANCE SHEETS

As of Decem

2006 

Assets

Current Assets

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,030,706 

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,625,907 

Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,260,507 

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,917,120 

Noncurrent Assets

Property and equipment, net (Note 4) ...................................... 151,205,386 

Total noncurrent assets ............................................. 151,205,386 

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $218,122,506 

Liabilities and Cumulative Results of Operations

Current Liabilities

Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,950,470 

Accrued payroll and related taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,421,666 

Accrued annual leave . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,334,512 

Capital lease payable (current portion) ..................................... 327,663 

Unearned revenues and other liabilities ..................................... 366,304 

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,400,615 

Long-term Liabilities

Capital lease payable (non-current portion) ................................. 108,755 

Accumulated retirement benefit obligation (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . 1,354,662 

Accumulated postretirement benefit obligation (Note 6) . . . . . . . . . . . . . . . . . . . . . 8,111,829 

Accumulated postemployment benefit obligation (Note 7) . . . . . . . . . . . . . . . . . . . 6,515,301 

Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,090,547 

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,491,162 

Cumulative Results of Operations

Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,844,168 

Unfunded long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,325,986) 

Net investment in property and equipment .................................. 150,768,968 

Accumulated other comprehensive income (loss) (Note 8) . . . . . . . . . . . . . . . . . . . (1,655,806) 

Total cumulative results of operations ............................... 168,631,344 

Total liabilities and cumulative results of operations .................. $218,122,506 

See accompanying notes to financial statements.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTE

STATEMENTS OF REVENUES AND EXPENSES

AND CHANGES IN CUMULATIVE RESULTS OF OPERATIONS

For the years ended D

2006 

Board Operating Revenues

Assessments levied on Federal Reserve Banks for Board

operating expenses and capital expenditures ........................ $301,013,500 $

Other revenues (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,508,949 

Total operating revenues ........................................ 309,522,449 

Board Operating Expenses

Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,239,595 

Retirement and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,853,297 

Contractual services and professional fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,944,564 

Depreciation, amortization, and net losses on disposals. . . . . . . . . . . . . . . . . . . 13,058,667 

Utilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,185,840 

Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,820,503 

Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,637,765 

Postage and supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,560,368 

Repairs and maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,634,459 

Printing and binding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,505,470 

Other expenses (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,435,067 

Total operating expenses ........................................ 295,875,595 

Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,646,854 

Issuance and Redemption of Federal Reserve Notes

Assessments levied on Federal Reserve Banks

for currency costs................................................. 491,962,202 

Expenses for currency printing, issuance,

retirement, and shipping .......................................... 491,962,202 

Currency Assessments over (under) Expenses......................... 0 

Total Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,646,854 

Cumulative Results of Operations, Beginning of year ................. 156,640,296 

Other Comprehensive Income

Adjustment to initially apply FASB Statement No. 158 (Note 8) . . . . . . . . . 1, ( ) 655,806 

Total Other Compehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, ( ) 655,806

Cumulative Results of Operations, End of year........................ $168,631,344 $

See accompanying notes to financial statements.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

STATEMENTS OF CASH FLOWS

For the years ended D

2006 

Cash Flows from Operating Activities

Results of Operations ................................................. $13,646,854 

Adjustments to reconcile results of operations

to net cash provided by (used in) operating activities:

Depreciation and net losses on disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,058,667 

Increase in assets:

Accounts receivable, and prepaid expenses and other assets ............ (812,482) 

Increase (decrease) in liabilities:

Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,955,880) 

Accrued payroll and related taxes .................................... 561,094 

Accrued annual leave ................................................ 878,028 

Unearned revenues and other liabilities ............................... (417,407) 

Accumulated retirement benefit obligation ............................ 541,165 

Accumulated postretirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . 1,874,539 

Accumulated postemployment benefit obligation . . . . . . . . . . . . . . . . . . . . . . 1,403,936 

Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,655,806) 

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,122,708 

Cash Flows from Investing Activities

Proceeds from disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,212 

Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,829,712) 

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,822,500) 

Cash Flows from Financing Activities

Capital lease payments ................................................... (239,937) 

Net cash used in financing activities ............................... (239,937) 

Net Increase (Decrease) in Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,060,271 

Cash Balance, Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,970,435 

Cash Balance, End of year ................................................ $60,030,706 

See accompanying notes to financial statements.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

NOTES TO FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2006 AND 2005

(1) Structure

The Federal Reserve System was established by Congress in 1913 and consists of the Board of Governors

(Board), the Federal Open Market Committee, the twelve

regional Federal Reserve Banks, the Federal Advisory

Council, and the private commercial banks that are members of the System. The Board, unlike the Reserve Banks,

was established as a federal government agency and is

supported by Washington DC based staff numbering approximately 1,800, as it carries out its responsibilities in

conjunction with other components of the Federal Reserve System.

The Board is required by the Federal Reserve Act to

report its operations to the Speaker of the House of

Representatives. The Act also requires the Board, each

year, to order a financial audit of each Federal Reserve

Bank and to publish each week a statement of the financial condition of each such Reserve Bank and a consolidated statement for all of the Reserve Banks. Accordingly, the Board believes that the best financial disclosure

consistent with law is achieved by issuing separate financial statements for the Board and for the Reserve Banks.

Therefore, the accompanying financial statements include

only the results of operations and activities of the Board.

Combined financial statements for the Federal Reserve

Banks are included in the Board’s annual report to the

Speaker of the House of Representatives.

(2) Operations and Services

The Board’s responsibilities require thorough analysis

of domestic and international financial and economic

developments. The Board carries out those responsibilities in conjunction with other components of the Federal

Reserve System. The Board also supervises and regulates

the operations of the Federal Reserve Banks, exercises

broad responsibility in the nation’s payments system, and

administers most of the nation’s laws regarding consumer

credit protection. Policy regarding open market operations is established by the Federal Open Market Committee. However, the Board has sole authority over changes

in reserve requirements, and it must approve any change

in the discount rate initiated by a Federal Reserve Bank.

The Board also plays a major role in the supervision

and regulation of the U.S. banking system. It has supervisory responsibilities for state-chartered banks that are

members of the Federal Reserve System, bank holding

companies, foreign activities of member banks, and U.S.

activities of foreign banks.

(3) Significant Accounting Policies

Basis of Accounting—The financial statements have

been prepared on the accrual basis of accounting.

Revenues—Assessments for operating 

additions to property are based on expected 

Issuance and Redemption of Federal Re

The Board incurs expenses and assesse

Reserve Banks for currency printing, iss

ment, and shipping of Federal Reserve 

assessments and expenses are separately r

statements of revenues and expenses bec

passed through the Board account and a

operating transactions.

Property, Equipment, and Software—

property, buildings, equipment, and softwa

cost less accumulated depreciation and am

preciation and amortization is calculated on 

basis over the estimated useful lives of the 

range from 3 to 10 years for furniture an

10 to 50 years for building equipment and 

2 to 10 years for software. Upon the sale o

sition of a depreciable asset, the cost and re

lated depreciation or amortization are rem

accounts and any gain or loss is recognized

Art Collections—The Board has collect

of art, historical treasures, and similar asse

lections are maintained and held for public 

furtherance of public service. Proceeds fro

collections are used to acquire other items f

As permitted by Statement of Financial Ac

dards Number 116, Accounting for Con

ceived and Contributions Made, the cost 

purchased by the Board is charged to expen

purchased and donated collection items are 

The value of the Board’s collections 

determined.

Estimates—The preparation of financial 

conformity with accounting principles gene

in the United States requires management 

mates and assumptions that affect the report

assets and liabilities and the disclosure 

assets and liabilities at the date of the finan

and the reported amounts of revenues and 

ing the reporting period. Actual results cou

those estimates.

Reclassifications—Certain 2005 amoun

reclassified to conform with the 2006 prese

Implementation of FASB Statement No. 

ers’ Accounting for Defined Benefit Pensi

Postretirement Plans—The Board initiall

provisions of FASB Statement No. 158, E

counting for Defined Benefit Pension and 

tirement Plans, at December 31, 2006. Th

standard requires recognition of the overfun

funded status of a defined benefit postretir

the Balance Sheets, and recognition of c

funded status in the years in which the 

through comprehensive income. The trans

implementing the standard require applyi

sions as of the end of the year of initial im

with no retrospective application.
(4) Property and Equipment

The following is a summary of the components of the

Board’s property and equipment, at cost, net of accumulated depreciation and amortization.

As of December 31,

2006 2005

Land . . . . . . . . . . . . . . . . $ 18,640,314 $ 18,640,314

Buildings and

improvements . . . 147,504,169 135,152,735

Furniture and

equipment . . . . . . . 47,271,434 39,926,270

Software in use . . . . . . 13,681,508 12,415,000

Software in process . . . 941,912 575,050

Construction in

process .......... 360,966 13,928,149

228,400,304 220,637,518

Less accumulated

depreciation and

amortization . . . . . (77,194,918) (65,195,965)

Property and

equipment, net . . . $151,205,386 $155,441,553

Furniture and equipment includes $1,230,000 each year

for capitalized leases as of December 31, 2006 and 2005.

Accumulated depreciation includes $867,000 and

$612,000 for capitalized leases as of December 31, 2006

and 2005, respectively. The Board paid interest related to

these capital leases in the amount of $54,000 and $83,000

for 2006 and 2005, respectively.

Construction in process includes costs incurred in 2006

and 2005 for long-term security projects and building

enhancements.

The future minimum lease payments required under

the capital leases and the present value of the net minimum lease payments as of December 31, 2006, are as

follows:

Year

ending

December 31 Amount

2007 $ 463,491

2008 138,279

2009 . . .

Total minimum lease

payments ............. 601,770

Less: Amount representing

maintenance included

in total amounts above . . (130,540)

Net minimum lease

payments ............. 471,230

Less: Amount representing

interest . . . . . . . . . . . . . . . (34,812)

Present value of net

minimum lease

payments ............. 436,418

Less: Current maturities

of capital lease

obligations . . . . . . . . . . . . (327,663)

Long-term capital lease

obligations . . . . . . . . . . . . $ 108,755

(5) Accumulated Retirement Benefits

The following information provides disc

ments contained in Statement of Financi

Standards No. 132, Employers’ Disclosur

sions and Other Postretirement Benefits.

Substantially all of the Board’s employ

in the Retirement Plan for Employees o

Reserve System (System Plan). The Sys

multi-employer plan which covers emp

Federal Reserve Banks, the Board, and 

Employee Benefits. No separate accounting 

of assets contributed by the participating e

Federal Reserve Bank of New York acts a

the System Plan, and the costs associated 

are not redistributed to other participating 

Employees of the Board who became e

to 1984 are covered by a contributory de

program under the System Plan. Employee

who became employed after 1983 are 

non-contributory defined benefits program 

tem Plan. Contributions to the System Plan 

determined and funded by participating em

on actuarial calculations, it was determined 

funding contributions were not required 

2006 and 2005, and the Board was not ass

bution for these years. Because the plan 

multi-employer plan, information as to ve

vested benefits, as well as plan assets, as i

to the Board, is not readily available.

Effective January 1, 1996, Board empl

under the System Plan are also covered un

Equalization Plan (BEP). Benefits paid und

limited to those benefits that cannot be 

System Plan due to limitations impo

tions 401(a)(17), 415(b), and 415(e) of the 

nue Code of 1986. Activity for the BEP 

2005 is summarized in the following table

2006 

Change in projected

benefit obligation

Benefit obligation at

beginning of year . . $ 536,339 

Service cost . . . . . . . . . . . . 185,483 

Interest cost . . . . . . . . . . . . 45,004 

Plan participants’

contributions . . . . . . 0 

Plan amendments ....... 0 

Actuarial (gain)/loss . . . . 596,114 

Benefits paid . . . . . . . . . . . 8, ( 278)

Benefit obligation at

end of year . . . . . . . . $1,354,662 

Change in plan assets

Fair value of plan assets

at beginning

of year ............ $ 0 

Actual return on plan

assets . . . . . . . . . . . . . 0 

Employer contributions. . 8,278 

Plan participants’

contributions . . . . . . 0 

Benefits paid . . . . . . . . . . . 8, ( 278) 

Fair value of plan assets

at end of year ..... $ 0 
2006 2005

Reconciliation of funded

status at end of year

Funded status . . . . . . . . . . $(1,354,662) $ (536,339)

Unrecognized net

actuarial (gain)/

loss . . . . . . . . . . . . . . . 580,386 (15,728)

Unrecognized prior

service cost . . . . . . . (247,417) (261,430)

Unrecognized net

transition

obligation . . . . . . . . . 0 0

Prepaid/(Accrued)

pension cost ....... $(1,021,693) $ (813,497)

Amounts recognized in

the financial statements

consist of

Prepaid benefit cost .... $ 0 $ 0

Accrued benefit

liability . . . . . . . . . . . (1,021,693) (813,497)

Intangible asset ......... 0 0

Accumulated other

comprehensive

income ............ (332,969) 0

Net amount

recognized ........ $(1,354,662) $ (813,497)

Information for pension

plans with an

accumulated benefit

obligation in excess of

plan asset:

Projected benefit

obligation . . . . . . . . . $ 1,354,662 $ 536,339

Accumulated benefit

obligation . . . . . . . . . $ 546,854 $ 278,252

Weighted-average

assumptions used to

determine benefit

obligation as of

December 31

Discount rate . . . . . . . . . . . 5.75% 5.75%

Rate of compensation

increase . . . . . . . . . . . 4.50% 4.50%

Components of net

periodic benefit cost

Service cost—benefits

earned during the

period . . . . . . . . . . . . . $ 185,483 $ 193,209

Interest cost on

projected benefit

obligation . . . . . . . . . 45,004 35,964

Expected return

on plan assets . . . . . 0 0

Amortization of

prior service cost . . (14,013) (14,013)

Amortization of

(gains)/losses . . . . . . 0 5,982

Amortization of initial

(asset)/obligation . . 0 0

Net periodic benefit

cost (credit) ....... $ 216,474 $ 221,142

Additional information:

Increase in minimum

liability included in

other comprehensive

income ............ $ 0 $ 0

2006 

Weighted-average

assumptions used to

determine net periodic

benefit cost for years

ended December 31

Discount rate . . . . . . . . . . . 5.75% 

Rate of compensation

increase . . . . . . . . . . . 4.50% 

A relatively small number of Board emp

pate in the Civil Service Retirement Syste

the Federal Employees’ Retirement Sy

These defined benefit plans are administer

Office of Personnel Management, which d

required employer contribution levels. The 

tributions to these plans totaled $334,000 an

2006 and 2005, respectively. The Board h

for future payments to retirees under these 

is not accountable for the assets of the plan

Employees of the Board may also par

Federal Reserve System’s Thrift Plan. 

butions to members’ accounts are based 

percentage of each member’s basic 

and were $8,964,000 and $8,617,000 in 2

respectively.

(6) Accumulated Postretirement Ben

The following information provides disc

ments contained in Statement of Financi

Standards No. 106, Employers’Accounting 

ment Benefits Other Than Pensions.

The Board provides certain life insurance 

its active employees and retirees. Activity 

2005 is summarized in the following table

2006 

Change in benefit

obligation

Benefit obligation at

beginning of year . . $ 8,273,831 

Service cost . . . . . . . . . . . . 230,567 

Interest cost . . . . . . . . . . . . 470,256 

Plan participants’

contributions . . . . . . 0 

Plan amendments ....... 0 

Actuarial (gain)/loss . . . . (603,500) 

Benefits paid ........... (259,325) 

Benefit obligation

at end of year . . . . . $ 8,111,829 

Change in plan assets

Fair value of plan

assets at beginning

of year ............ $ 0 

Actual return on

plan assets . . . . . . . . 0 

Employer contribution . . 259,325 

Plan participants’

contributions . . . . . . 0 

Benefits paid ........... (259,325) 

Fair value of plan

assets at end

of year ............ $ 0 
2006 2005

Reconciliation of

funded status

at end of year

Benefit obligations . . . . . $(8,111,829) $(8,273,832)

Unrecognized net

actuarial

(gain)/loss . . . . . . . . . 0 2,145,920

Unrecognized prior

service cost . . . . . . . 0 (109,378)

Amount recognized

at end of year . . . . . $(8,111,829) $(6,237,290)

Amounts recognized in

the financial statements

consist of:

Liability . . . . . . . . . . . . . . . $(8,111,829) $ 0

Accrued benefit cost . . . . 0 (6,237,290)

Accumulated other

comprehensive

income ........... 0 0

Net amount recognized . . $(8,111,829) $(6,237,290)

Amounts recognized in

accumulated other

comprehensive income

consist of:

Net actuarial loss/

(gain) . . . . . . . . . . . . . $1,422,398 $ 0

Prior service cost/

(credit) . . . . . . . . . . . . (99,560) 0

Transition obligation/

(asset) ............ 0 0

Deferred curtailment

(gain)/loss . . . . . . . . . 0 0

$1,322,838 $ 0

Expected cash flows

Expected employer

contributions:

2007 .............. $ 274,901

Expected benefit

payments:

2007 .............. $ 274,901

2008 .............. $ 296,030

2009 .............. $ 325,793

2010 .............. $ 350,050

2011 .............. $ 364,265

2012-2016 . . . . . . . . $ 2,132,108

The liability and costs for the postretirement benefit

plan were determined using discount rates of 5.75 percent

as of December 31, 2006 and 2005. Unrecognized losses

of $2,145,920 as of December 31, 2005 result from

changes in the discount rate used to measure the liabilities. The assumed salary trend rate for measuring the

increase in postretirement benefits related to life insurance was an average of 4.50 percent.

The above accumulated postretirement benefit obligation is related to the Board-sponsored life insurance programs. The Board has no liability for future payments to

employees who continue coverage under the federally

sponsored life and health programs upon retiring. Contributions for active employees participatin

sponsored health programs totaled $9

$8,933,000 in 2006 and 2005, respectively

(7) Accumulated Postemployment Ben

The following information provides disc

ments contained in Statement of Financi

Standards No. 112, Employers’ Accountin

ployment Benefits.

The Board provides certain postemploy

to eligible former or inactive employees an

dents during the period subsequent to em

prior to retirement. Costs were projected u

discount rates as were used for projecting 

costs. The accrued postemployment benef

nized by the Board for the years ended 

2006 and 2005, were $1,963,000 an

respectively.

(8) Accumulated Other Comprehensiv

Following is a reconciliation of beginni

balances of accumulated other comprehens

Amount related

to defined benefit

retirement plans

Am

to p

be

th

Balance

January 1,

2006 . . . . . . . . $(1,021,693) $(

Adjustment to

initially apply

Statement

No. 158 . . . . . (332,969) (

Balance

December 31,

2006 . . . . . . . . $(1,354,662) $(

Tota

othe

sive 

Balance

January 1,

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . $(

Adjustment to

initially apply

Statement

No. 158 . . . . . . . . . . . . . . . . . . . . . . . (

Balance

December 31,

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . $(

Additional detail regarding the classific

mulated other comprehensive income i

note 6.

(9) Other Revenues and Other Expen

The following are summaries of the c

Other Revenues and Other Expenses.
For the years ended

December 31,

2006 2005

Other revenues

Data processing

revenue . . . . . . . . . $4,180,692 $3,788,217

Rent . . . . . . . . . . . . . . . . . 2,450,576 2,433,833

Subscription

revenue ......... 716,294 782,743

Reimbursable

services to

other agencies . . . 599,827 664,755

Board sponsored

conferences ..... 0 250,650

Miscellaneous ........ 561,560 600,144

Total other

revenues . . . . . . . . $8,508,949 $8,520,342

Other expenses

Tuition, registration,

and membership

fees . . . . . . . . . . . . . $2,676,871 $2,573,028

Contingency

operations . . . . . . . 1,087,429 956,476

Public transportation

subsidy ......... 988,950 872,467

Subsidies and

contributions . . . . 706,497 656,150

Meals and

representation . . . 529,557 518,640

Equipment and

facilities rental . . . 393,122 336,342

Administrative

law judges ...... 105,587 268,228

Security

investigations . . . . 236,448 184,880

Former employee

related

payments . . . . . . . . 19,296 319,461

Miscellaneous ........ 691,309 800,486

Total other

expenses . . . . . . . . $7,435,067 $7,486,158

(10) Commitments and Contingencies

Leases

The Board has entered into several operating leases to

secure office, training, and warehouse space for remaining periods ranging from one to four years. Minimum

annual payments under the operating leases having an

initial or remaining noncancelable lease term in excess of

one year at December 31, 2006, are as follows:

2007 ............... $ 176,807

2008 ............... 183,880

2009 ............... 191,235

2010 ............... 198,884

2011 . . . . . . . . . . . . . . . 84,218

$ 835,024

Rental expenses under the operating leases were

$193,000 in 2006 and $157,000 in 2005.

Commitments

The Board has entered into an agreem

Federal Deposit Insurance Corporation and 

the Comptroller of the Currency, throug

Financial Institutions Examination Counci

cil’’) to fund a portion of enhancements an

fees for a central data repository project 

Estimated Board expense to support this eff

lion.

Litigation

The Board is subject to contingent lia

include litigation cases. These contingent l

in the normal course of operations and 

disposition is unknown. Based on informa

available to management, it is management

the expected outcome of these matters, ind

the aggregate, will not have a materially ad

the financial statements. Management belie

has substantial defenses and that the lik

adverse judgement is remote.

One action currently pending in U.S. Dis

the District of Columbia alleges discrimina

of a class of African American secretarie

under Title VII of the Civil Rights Ac

amended. On January 31, 2007, the action 

for failure to exhaust administrative remed

tiffs have moved to alter or amend judg

ruling; that motion is pending. Should the 

stated either as a result of the pending mot

ing appeal, the Board believes it has substa

and intends to defend the case vigorously.

Four additional actions are pending in the 

District Court for the District of Columbia u

of the Civil Rights Act of 1964, as amend

Age Discrimination in Employment Act. 

believed to be without merit and are bei

contested.

Five additional matters alleging employm

nation are currently pending administrati

One case is related to, and likely will be 

case currently pending in district court. In 

other case there has not yet been an invest

Therefore, management is unable at this 

mine the potential for a materially adverse 

financial statements. Management believes 

hood of an unfavorable outcome in the re

cases is remote.

(11) Federal Financial Institutions

Examination Council

The Board is one of the five membe

the Council, and currently performs certain 

functions for the Council. The five agenc

represented on the Council are the Board, F

Insurance Corporation, National Credit Un

tration, Office of the Comptroller of the 

Office of Thrift Supervision. The Board’s f

ments do not include financial data for 

Activity related to the Board and Council 

2005 is summarized in the following table
2006 2005

Board paid to the

Council:

Assessments for

operating expenses

of the Council ..... $ 109,760 $ 83,811

Central Data

Repository ......... 740,003 1,096,062

Uniform Bank

Performance

Report ............. 204,617 202,666

Total Board

paid to the

Council . . . . . . . . . $1,054,380 $1,382,539

Council paid to the

Board:

Data processing

related services . . . . $3,429,499 $3,572,816

Administrative

services . . . . . . . . . . . 183,000 175,000

Total Council

paid to the

Board . . . . . . . . . . . $3,612,499 $3,747,816

Accounts receivable

due from the

Council ............ $ 395,551 $ 277,589

Accounts payable

due to the

Council . . . . . . . . . . . . $ 54,870 $ 104,864

(12) Federal Reserve Banks

The Board performs certain functions for the Reserve

Banks in conjunction with its responsibilities for the

Federal Reserve System, and the Federal Reserve Banks

provide certain administrative functions to the Board.

Activity related to the Board and Reserve Banks for 2006

and 2005 is summarized in the following table:

2006 

Board paid to the

Reserve Banks:

Assessments for

employee benefits . . $ 2,380,474 

Data processing and

communication .... 2,161,298 

Contingency site ........ 1,087,429 

Total Board paid

to the Reserve

Banks ........... $ 5,629,201 

Reserve Banks paid

to the Board:

Assessments for

currency costs ..... $491,962,202 

Assessments for

operating expenses

of the Board ....... 301,013,500 

Data processing ........ 731,999 

Total Reserve Banks

paid to the

Board ........... $793,707,701 

Accounts receivable

due from Federal

Reserve Banks ..... $ 854,142 

Accounts payable

due to Federal

Reserve Banks ..... $ 12,417 

(13) Noncash Financing Activities

In 2005, the Board billed a federal gover

$1,096,557 for rent and leasehold improvem

the federal government agency provided eq

ware, and services valued at $392,301 to 

paid the balance of $704,256 in 2006. In 20

billed the same agency $143,772 for rent, a

provided telecommunication equipment an

ued at $124,720 to the Board and paid t

$19,052 in 2006.


Exhibit I

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Significant Deficiency

December 31, 2006

Improvement is needed in Internal Controls over Financial Reporting

Management is responsible for developing

and maintaining effective internal controls to

provide reasonable assurance that the Board

has the ability to initiate, authorize, record,

process, and report financial data reliably in

accordance with generally accepted accounting principles. Internal controls help ensure

that reliable and timely information is obtained, maintained, reported, and used for

decision making.

Appropriate internal controls should be

integrated into each policy and procedure

established by the Board to direct and guide

its operations. Monitoring the effectiveness

of internal controls should occur in the normal course of business throughout the year.

Periodic reviews, reconciliations, or comparisons of data should be included as part of

staff’s regularly assigned duties. In addition,

periodic assessments should be integrated

into management’s continuous monitoring of

internal controls to help provide assurance

that weaknesses in the design or operation of

internal control, which could adversely affect the Board’s ability to meet its financial

reporting objectives, are prevented or detected in a timely manner.

Board management is committed to improving its internal control environment as

demonstrated by its ability to resolve prior

year findings.

The following paragraphs discuss weaknesses noted in the Board’s internal control

over financial reporting that could adversely

affect the Board’s ability to produce accurate

and timely financial statements. None of

these deficiencies individually would be considered a significant deficiency. However,

the combination of these deficiencies is considered to be a significant deficiency.

Recording Accounts Payable, A

abilities, and Prepaid Expenses

During 2006, the Managemen

identified and processed transa

journal entries to reclassify/and 

several transactions that were init

to a different general ledger acc

corded in a different accounting 

noted that the original transaction

tially reviewed and approved by a 

and all the required changes were 

fied during this initial review as f

• Two disbursements totaling $11

115 disbursement transactions t

ing $18,473,927, were initially 

different general ledger accoun

2007 transactions that were r

2006 transactions. One trans

$5,980 was identified and adju

management’s review prior to 

and one transaction for $5,250 

rected as a post closing entry.

• Two accounts payable transactio

$45,709, of the 21 accounts p

voices tested totaling $2,969,59

ceived in 2006 for services to b

in 2007. These were initially r

accounts payable in 2006. Bo

tions were corrected as a post cl

• One prepaid expense totaling $

the 19 prepaid expenses test

$1,758,579, was a 2007 invoic

paid in 2006 and was initially r

2006 expense. This was subsequ

tified and adjusted during ma

review prior to year end.

We commend the Board for ident

of these entries prior to year end

the Board should strengthen its 

for posting and reviewing all en

sure initial posting to the proper ac

accounting period.
Posting Accrued Annual Leave

We noted that the annual leave accrual was

overstated by $301,600 at December 31,

2006, because the annual leave report did not

reflect the proper year end information for all

employees. The Board subsequently recorded

a post closing entry to reflect the appropriate

amounts.

Billing of Accounts Receivable

We noted that the Board did not record a

year-end receivable from the Bank for International Settlements (BIS) for $157,317 representing services performed in 2006. Although the invoice for the 2006 services was

not finalized, recorded, and submitted until

2007, this amount should have been recorded

as a receivable at December 31, 2006. As a

result of our audit, the Board recorded a post

closing entry for this amount.

Monitoring Miscellaneous Receivables

During our audit, we noted that the Board

does not have specific policies and procedures for monitoring miscellaneous receivables related to relocation expenses to determine if amounts are considered collectible

and appropriately recorded. As a result of our

audit, the Board recorded post closing entries

to write off three accounts receivables

amounting to $105,599 for relocation expenses that were not considered collectible.

Recording Property Transactions

During our audit of property and equipment,

we noted that the Board inappropriately processed property and equipment additions and

adjustments as follows.

• Two assets purchased for $113,016 in 2006

were recorded at an acquisition value of

$109,259. As a result, the asset was overstated by $3,757.

• Three assets valued at $329,375 were put

into service with the incorrect in-service

dates. As a result, the 2006 depreciation

expense was overstated by $25,700.

• One asset was placed in service on March

1, 2006 for $811,756, but did not have any

depreciation recorded in 2006. As a result,

the Board’s depreciation expense was understated by $20,294.

• Three adjustments related to 22 

quired via trade-in were overst

depreciation schedule in 2005. 

depreciation for 2005 was ov

$27,294 and correspondingly 

by the same amount in 2006.

During our physical inspection te

property and equipment, we noted 

the 22 items inspected, valued a

was included on the asset listi

Board’s contingency site, althou

physically located in the Board’

ton, DC, facility. Our inspection 

that the asset tag number for one i

at $7,042 was not identified in t

financial system.

Recording Financial Statement D

During our audit, we noted insta

the Board needs to improve its 

and review process for the fina

ments as follows.

• Assets traded in for other assets 

rectly recorded as Proceeds from 

and Capital Expenditures in the 

of Cash Flows. The entrie

$159,519, represent non-cash t

and should not have been inclu

Proceeds from Disposals or t

Expenditures sections of the St

Cash Flows.

• In Footnote 4, Property and 

Construction in Process was i

ported as zero, and in the cor

roll-forward schedule, the ba

$360,966.

• In Footnote 7, Accumulated P

ment Benefit Plan, the Board i

derstated the accrued postemplo

efits costs for FY2006. T

originally reported $1,828,000

this amount did not reflect th

actuary’s revised calculation, 

sulted in an upward adju

$134,000.

The Board subsequently made al

adjustments in the financial statem

Recommendations

To strengthen internal controls ov

reporting, we recommend that the 
• Strengthen the control process over the

initial input and review of disbursement

transactions to ensure that they are properly coded and recorded in the general

ledger. We also recommend that management conduct periodic training for all relevant personnel, including end users, to

help ensure the proper use of general ledger accounts.

• Enhance the process for determining the

accrued annual leave to ensure that the

reports generated include the appropriate

amounts as of the end of the reporting

period. The process should include matching a selection of employees’ leave balances and other information included in the

report to data in the Board’s Human Resources system.

• Implement policies and procedures that require the calculation and reconciliation of

amounts due from BIS on a regular basis.

Once amounts due are determined, the applicable adjustments should be promptly

recorded in the general ledger.

• Enhance its policies and procedures to include a documented periodic review and

analysis of all accounts receivables, to determine if an allowance is required or if the

amounts should be written off. Further, management should also review the accounting

treatment required for all transactions.

• Strengthen its policies and procedures to

improve communication between the divisions and the accounting staff to ensure the

appropriate accounting entries f

transactions are recorded timely 

eral ledger. The communicati

include, but not be limited to

asset was placed in service, the 

asset, the asset’s location and t

and any additional information 

for the accounting division to 

appropriate entries. The Board 

enhance its review and appro

dures over property transaction

that the appropriate entries 

recorded.

• Strengthen its process over the 

and review of the financial sta

ensure information is accurately 

Management’s Response

KPMG offers six recommendation

strengthening the Board’s intern

over financial reporting. In its di

these recommendations and the 

audit findings, KPMG does not co

individual finding to be a signif

ciency. In combination, howev

concludes that the audit findings 

significant deficiency. While m

does not concur with this conclus

agree that KPMG’s recommend

strengthen the Board’s system 

controls, and we will implement 

mended actions.
Exhibit II

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

STATUS OF PRIOR YEAR REPORTABLE CONDITION

December 31, 2006

Reported Issue Prior Year Recommendation 2006 

Improvement is needed in Internal Control over Financial Reporting

Control over accounts

payable and accrued

liabilities

1. Establish policies and procedures for processing year-end accounts payables and accruals to

include the requirements for management to

review and approve all entries and supporting

documents before they are recorded. Management should also perform a review of the yearend accounts payable listings and subsequent

disbursements to ensure that the transactions

reported at year end are appropriately stated.

Further, a reconciliation of the GSA account

should be performed timely, to identify any

discrepancies on the invoices received.

Significant D

(see revised 

Exhibit I).

Control of Census Data 2. Confirm the data used by the actuary in the

pension liability calculation prior to recording

the entries in the general ledger.

Completed.

3. Implement recommendations made by the OIG

in their report titled “Evaluation of Service

Credit Computations.” This would include

performing periodic reconciliations of the census data between the Board’s system and the

data used by the actuary; reducing or eliminating the number of data transcriptions; requiring

automated verifications for all census data

transmissions; and updating the existing service credit form to clearly document all prior

government service.

Substantially 

See revised 

the 2006 ma

letter.


Federal Reserve Banks

Combined Financial Statements

The combined financial statements of the Federal Reserve Banks were au

by PricewaterhouseCoopers LLP, independent auditors, for the years end

December 31, 2006 and 2005.

Report of Independent Auditors

To the Board of Governors of the Federal Reserve System

and the Board of Directors of the Federal Reserve Banks:

We have audited the accompanying combined statements of condition 

Federal Reserve Banks (the ‘‘Reserve Banks’’) as of December 31, 2006 and 

and the related combined statements of income and changes in capital for the 

then ended, which have been prepared in conformity with the accounting 

ciples, policies, and practices established by the Board of Governors of the F

Reserve System. These combined financial statements are the responsibility 

Reserve Banks’ management. Our responsibility is to express an opinion on 

combined financial statements based on our audits.

We conducted our audits in accordance with auditing standards gen

accepted in the United States of America. Those standards require that we pla

perform the audit to obtain reasonable assurance about whether the com

financial statements are free of material misstatement. An audit includes ex

ing, on a test basis, evidence supporting the amounts and disclosures 

financial statements. An audit also includes assessing the accounting prin

used and significant estimates made by management, as well as evaluatin

overall financial statement presentation. We believe that our audits prov

reasonable basis for our opinion.

As described in Note 3, these combined financial statements were prepa

conformity with the accounting principles, policies, and practices establish

the Board of Governors of the Federal Reserve System. These principles, po

and practices, which were designed to meet the specialized accountin

reporting needs of the Federal Reserve System, are set forth in the Fin

Accounting Manual for Federal Reserve Banks and constitute a compreh

basis of accounting other than accounting principles generally accepted 

United States of America.

In our opinion, the combined financial statements referred to above p

fairly, in all material respects, the combined financial position of the R

Banks as of December 31, 2006 and 2005, and the combined results of 

operations for the years then ended, on the basis of accounting described in N

March 30, 2007

Washington, D.C.
FEDERAL RESERVE BANKS

COMBINED STATEMENTS OF CONDITION

(in millions)

Decem

Assets 2006 

Gold certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,037 

Special drawing rights certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200 

Coin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 801 

Items in process of collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,486 

Loans to depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 

Securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,750 

U.S. government securities, net ....................................................... 783,619 

Investments denominated in foreign currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,482 

Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,761 

Bank premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,376 

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,785 

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $873,364 

Liabilities and Capital

Liabilities

Federal Reserve notes outstanding, net ............................................. $783,019 

Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,615 

Deposits

Depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,699 

U.S. Treasury, general account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,708 

Other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349 

Deferred credit items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,813 

Interest on Federal Reserve notes due to U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 908 

Accrued benefit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,314 

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291 

Total liabilities ............................................................... 842,716 

Capital

Capital paid-in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,324 

Surplus (including accumulated other comprehensive loss

of $1,849 million at December 31, 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,324 

Total capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,648 

Total liabilities and capital .................................................... $873,364 

The accompanying notes are an integral part of these combined financial statements.
FEDERAL RESERVE BANKS

COMBINED STATEMENTS OF INCOME

(in millions)

For the y

Decem

2006 

Interest income

Interest on U.S. government securities ............................................... $36,452 

Interest on investments denominated in foreign currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369 

Interest on loans to depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 

Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,833 

Interest expense

Interest expense on securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . 1,342 

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,491 

Other operating income (loss)

Income from services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 908 

Reimbursable services to government agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426 

Foreign currency gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,186 

Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 

Total other operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,664 

Operating expenses

Salaries and other benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,880 

Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 

Equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 

Assessments by the Board of Governors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 793 

Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 835 

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,960 

Net income prior to distribution ....................................................... $34,195 

Distribution of net income

Dividends paid to member banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 871 

Transferred to surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,272 

Payments to U.S. Treasury as interest on Federal Reserve notes . . . . . . . . . . . . . . . . . . . . . . . 29,052 

Total distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,195 

The accompanying notes are an integral part of these combined financial statements.
FEDERAL RESERVE BANKS

COMBINED STATEMENTS OF CHANGES IN CAPITAL

for the years ended December 31, 2006 and 2005

(in millions)

Surplus

Capital

paid-in

Net

income

retained

Accumulated

other

comprehensive

loss

Total

surplus

Balance at January 1, 2005

(238 million shares) ............ $11,914 $11,630 $ . . . $11,630 

Net change in capital stock issued

(32 million shares) . . . . . . . . . . . . . 1,622 . . . . . . ... 

Transferred to surplus. . . . . . . . . . . . . . . . 1,271 ... 1,271 

Balance at December 31, 2005

(270 million shares) ............ $13,536 $12,901 $ . . . $12,901 

Net change in capital stock issued

(36 million shares) . . . . . . . . . . . . . 1,788 . . . . . . ... 

Transferred to surplus . . . . . . . . . . . . . . . 4,272 . . . 4,272 

Adjustment to initially apply

FASB Statement No. 158 ....... . . . ... (1,849) (1,849) 

Balance at December 31, 2006

(306 million shares) ............ $15,324 $17,173 $ (1,849) $15,324 

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

Notes to the Combined Financial Statements of the Federal Reserve 

(1) Structure

The twelve Federal Reserve Banks (“Reserve Banks”) are

part of the Federal Reserve System (“System”) created by

Congress under the Federal Reserve Act of 1913 (“Federal Reserve Act”), which established the central bank of

the United States. The Reserve Banks are chartered by the

federal government and possess a unique set of governmental, corporate, and central bank characteristics.

In accordance with the Federal Reserve Act, supervision and control of each Reserve Bank are exercised by a

board of directors. The Federal Reserve Act specifies the

composition of the board of directors for each of the

Reserve Banks. Each board is composed of nine members

serving three-year terms: three directors, including those

designated as chairman and deputy chairman, are appointed by the Board of Governors of the Federal Reserve

System (“Board of Governors”) to represent the public,

and six directors are elected by member banks. Banks that

are members of the System include all national banks and

any state-chartered banks that apply and are approved for

membership in the System. Member banks are divided

into three classes according to size. Member banks in

each class elect one director representing member banks

and one representing the public. In any election of directors, each member bank receives one vote, regardless of

the number of shares of Reserve Bank stock it holds.

The System also consists, in part, of the Board of

Governors and the Federal Open Market Committee

(“FOMC”). The Board of Governors, an independent

federal agency, is charged by the Federal Reserve Act

with a number of specific duties, including general supervision over the Reserve Banks. The FOMC is composed

of members of the Board of Governors, the president of

the Federal Reserve Bank of New York (“F

on a rotating basis four other Reserve Bank 

(2) Operations and Services

The Reserve Banks perform a variety of 

operations. Functions include participation 

and conducting monetary policy; participat

ments system including large-dollar trans

automated clearinghouse (“ACH”) operatio

collection; distribution of coin and currency

of fiscal agency functions for the U.S. Tr

federal agencies, and other entities; serving 

government’s bank; provision of short-t

depository institutions; service to the con

community by providing educational mater

mation regarding consumer laws; and super

holding companies, state member banks, an

of foreign banking organizations. The Rese

provide certain services to foreign central b

ments, and international official institution

The FOMC, in the conduct of monetary 

lishes policy regarding domestic open mark

oversees these operations, and annually iss

tions and directives to the FRBNY for it

transactions. The FRBNY is authorized an

the FOMC to conduct operations in dom

including the direct purchase and sale of U.

securities, the purchase of securities under 

resell, the sale of securities under agreem

chase, and the lending of U.S. government 

FRBNY executes these open market trans

direction of the FOMC and holds the resul

with the exception of securities purchased 
Notes to the Combined Financial Statements of the Federal Reserve Banks—

ments to resell, in the portfolio known as the System

Open Market Account (“SOMA”).

In addition to authorizing and directing operations in

the domestic securities market, the FOMC authorizes and

directs the FRBNY to execute operations in foreign markets for major currencies in order to counter disorderly

conditions in exchange markets or to meet other needs

specified by the FOMC in carrying out the System’s

central bank responsibilities. The FRBNY is authorized

by the FOMC to hold balances of, and to execute spot and

forward foreign exchange (“FX”) and securities contracts

for, nine foreign currencies and to invest such foreign

currency holdings ensuring adequate liquidity is maintained. The FRBNY is authorized and directed by the

FOMC to maintain reciprocal currency arrangements

(“FX swaps”) with two central banks, and “warehouse”

foreign currencies for the U.S. Treasury and Exchange

Stabilization Fund (“ESF”) through the Reserve Banks.

In connection with its foreign currency activities, the

FRBNY may enter into transactions that contain varying

degrees of off-balance-sheet market risk that results from

their future settlement and counter-party credit risk. The

FRBNY controls credit risk by obtaining credit approvals, establishing transaction limits, and performing daily

monitoring procedures.

Although the Reserve Banks are separate legal entities,

in the interests of greater efficiency and effectiveness they

collaborate in the delivery of certain operations and services. The collaboration takes the form of centralized

operations and product or service offices that have responsibility for the delivery of certain services on behalf of the

Reserve Banks. Various operational and management

models are used and are supported by service agreements

between the Reserve Bank providing the service and the

other eleven Reserve Banks. In some cases, costs incurred

by a Reserve Bank for services provided to other Reserve

Banks are not shared; in other cases, the Reserve Banks

are billed for services provided to them by another

Reserve Bank.

During 2005, the Federal Reserve Bank of Atlanta

(“FRBA”) was assigned the overall responsibility for

managing the Reserve Banks’ provision of check services

to depository institutions and, as a result, recognizes total

System check revenue on its Statements of Income. Because the other eleven Reserve Banks incur costs to

provide check services, a policy was adopted by the

Reserve Banks in 2005 that required that the FRBA

compensate the other Reserve Banks for costs incurred to

provide check services. In 2006 this policy was extended

to the ACH services, which are managed by the FRBA, as

well as to Fedwire funds transfer and securities transfer

services, which are managed by the FRBNY. The FRBA

and the FRBNY compensate the other Reserve Banks for

the costs incurred to provide these services.

(3) Significant Accounting Policies

Accounting principles for entities with the unique powers

and responsibilities of the nation’s central bank have not

been formulated by various accounting standard-setting

bodies. The Board of Governors has developed specialized accounting principles and practices that it considers

to be appropriate for the nature and functio

bank, which differ significantly from those 

sector. These accounting principles and 

documented in the Financial Accounting 

Federal Reserve Banks (“Financial Accoun

which is issued by the Board of Governo

Reserve Banks are required to adopt and a

ing policies and practices that are consi

Financial Accounting Manual and the f

ments have been prepared in accordance w

cial Accounting Manual.

Differences exist between the account

and practices in the Financial Accounting 

generally accepted accounting principles 

States of America (“GAAP”), primarily due 

nature of the Reserve Banks’ powers and r

as part of the nation’s central bank. The p

ence is the presentation of all securitie

amortized cost, rather than using the fair v

tion required by GAAP. Amortized cost m

ately reflects the Reserve Banks’ securities 

their unique responsibility to conduct mo

While the application of current market 

securities holdings may result in values 

above or below their carrying values, th

changes in value would have no direct 

quantity of reserves available to the bankin

the prospects for future Reserve Bank earni

Both the domestic and foreign components 

portfolio may involve transactions that res

losses when holdings are sold prior to matu

regarding securities and foreign currency 

including their purchase and sale, are motiv

tary policy objectives rather than profit. 

market values, earnings, and any gains or l

from the sale of such securities and curre

dental to the open market operations and d

these activities or policy decisions.

In addition, the Board of Governors an

Banks have elected not to present a State

Flows because the liquidity and cash p

Reserve Banks are not a primary concer

unique powers and responsibilities. A Stat

Flows, therefore, would not provide any ad

ingful information. Other information 

Reserve Banks’ activities is provided in

derived from, the Statements of Condition

Changes in Capital. There are no other sig

ences between the policies outlined in 

Accounting Manual and GAAP.

The preparation of the financial s

conformity with the Financial Accoun

requires management to make certain 

assumptions that affect the reported amo

and liabilities, the disclosure of continge

liabilities at the date of the financial statem

reported amounts of income and expens

reporting period. Actual results could diff

estimates. Certain amounts relating to the p

been reclassified to conform to the current-

tion. Unique accounts and significant accou

are explained below.
Notes to the Combined Financial Statements of the Federal Reserve Banks—

(A) Gold and Special Drawing Rights Certificates

The Secretary of the U.S. Treasury is authorized to issue

gold and special drawing rights (“SDR”) certificates to

the Reserve Banks.

Payment for the gold certificates by the Reserve Banks

is made by crediting equivalent amounts in dollars into

the account established for the U.S. Treasury. The gold

certificates held by the Reserve Banks are required to be

backed by the gold of the U.S. Treasury. The U.S. Treasury may reacquire the gold certificates at any time and

the Reserve Banks must deliver them to the U.S. Treasury. At such time, the U.S. Treasury’s account is charged,

and the Reserve Banks’ gold certificate accounts are

reduced. The value of gold for purposes of backing the

gold certificates is set by law at $42 2/9 a fine troy ounce.

The Board of Governors allocates the gold certificates

among Reserve Banks once a year based on the average

Federal Reserve notes outstanding in each Reserve Bank.

SDR certificates are issued by the International Monetary Fund (“Fund”) to its members in proportion to each

member’s quota in the Fund at the time of issuance. SDR

certificates serve as a supplement to international monetary reserves and may be transferred from one national

monetary authority to another. Under the law providing

for United States participation in the SDR system, the

Secretary of the U.S. Treasury is authorized to issue SDR

certificates, somewhat like gold certificates, to the

Reserve Banks. When SDR certificates are issued to the

Reserve Banks, equivalent amounts in dollars are credited

to the account established for the U.S. Treasury, and the

Reserve Banks’ SDR certificate accounts are increased.

The Reserve Banks are required to purchase SDR certificates, at the direction of the U.S. Treasury, for the purpose

of financing SDR acquisitions or for financing exchange

stabilization operations. At the time SDR transactions

occur, the Board of Governors allocates SDR certificate

transactions among Reserve Banks based upon each

Reserve Bank’s Federal Reserve notes outstanding at the

end of the preceding year. There were no SDR transactions in 2006 or 2005.

(B) Loans to Depository Institutions

Depository institutions that maintain reservable transaction accounts or nonpersonal time deposits, as defined in

regulations issued by the Board of Governors, have borrowing privileges at the discretion of each of the Reserve

Banks. Borrowers execute certain lending agreements and

deposit sufficient collateral before credit is extended.

Outstanding loans are evaluated for collectibility, and

currently all are considered collectible and fully collateralized. If loans were ever deemed to be uncollectible, an

appropriate reserve would be established. Interest is accrued using the applicable discount rate established at

least every fourteen days by the Board of Directors of the

Reserve Bank, subject to review and determination by the

Board of Governors.

(C) U.S. Government Securities and Investments

Denominated in Foreign Currencies

U.S. government securities and investments denominated

in foreign currencies comprising the SOMA are recorded

at cost, on a settlement-date basis, and adju

tization of premiums or accretion of di

straight-line basis. Interest income is a

straight-line basis. Gains and losses result

of securities are determined by specific is

average cost. Foreign-currency-denomina

revalued daily at current foreign cur

exchange rates in order to report these 

dollars. Realized and unrealized gains a

investments denominated in foreign curr

ported as “Foreign currency gains (losses

Statements of Income.

Activity related to U.S. government secu

ing the premiums, discounts, and realized 

gains and losses, is allocated to each o

Banks on a percentage basis derived fro

settlement of interdistrict clearings that occ

each year. The settlement equalizes Reser

certificate holdings to Federal Reserve not

in each District. Activity related to investm

nated in foreign currencies is allocated to 

Bank based on the ratio of each Reserve 

and surplus to aggregate capital and surplus 

ing December 31.

(D) Securities Purchased under Agreemen

Securities Sold under Agreements to R

and Securities Lending

The FRBNY may engage in tri-party purch

ties under agreements to resell (“tri-party 

Tri-party agreements are conducted with tw

custodial banks that manage the clearing 

of collateral. Collateral is held in excess o

amount. Acceptable collateral under tri-par

primarily includes U.S. government sec

through mortgage securities of the Govern

Mortgage Association, Federal Home L

Corporation, and Federal National Mortgag

STRIP securities of the U.S. Government, 

securities of other government agencies. 

agreements are accounted for as financing 

with the associated interest income accrue

of the agreement.

Securities sold under agreements to r

accounted for as financing transactions and 

interest expense is recognized over the life 

tion. These transactions are reported in the 

Condition at their contractual amounts an

accrued interest payable is reported as a 

“Other liabilities.”

U.S. government securities held in the S

to U.S. government securities dealers in ord

the effective functioning of the domestic s

ket. Securities-lending transactions are fu

ized by other U.S. government securities a

eral taken is in excess of the market value o

loaned. The FRBNY charges the dealer a f

ing securities and the fees are reported as a 

“Other income.”

Activity related to securities sold under 

repurchase and securities lending is alloca

the Reserve Banks on a percentage basis de
Notes to the Combined Financial Statements of the Federal Reserve Banks—

annual settlement of interdistrict clearings. Securities purchased under agreements to resell are allocated to the

FRBNY and not to the other Reserve Banks.

(E) FX Swap Arrangements and Warehousing Agreements

FX swap arrangements are contractual agreements

between two parties, the FRBNY and an authorized foreign central bank, to exchange specified currencies, at a

specified price, on a specified date. The parties agree to

exchange their currencies up to a pre-arranged maximum

amount and for an agreed-upon period of time (up to

twelve months), at an agreed-upon interest rate. These

arrangements give the FOMC temporary access to the

foreign currencies it may need to intervene to support the

dollar and give the authorized foreign central bank temporary access to dollars it may need to support its own

currency. Drawings under the FX swap arrangements can

be initiated by either party acting as drawer, and must be

agreed to by the drawee party. The FX swap arrangements are structured so that the party initiating the transaction bears the exchange rate risk upon maturity. The

FRBNY will generally invest the foreign currency received under an FX swap arrangement in interest-bearing

instruments.

Warehousing is an arrangement under which the

FOMC agrees to exchange, at the request of the U.S.

Treasury, U.S. dollars for foreign currencies held by the

U.S. Treasury or ESF over a limited period of time. The

purpose of the warehousing facility is to supplement the

U.S. dollar resources of the U.S. Treasury and ESF for

financing purchases of foreign currencies and related

international operations.

FX swap arrangements and warehousing agreements

are revalued daily at current market exchange rates. Activity related to these agreements, with the exception of

the unrealized gains and losses resulting from the daily

revaluation, is allocated to each Reserve Bank based on

the ratio of each Reserve Bank’s capital and surplus to

aggregate capital and surplus at the preceding December

31. Unrealized gains and losses resulting from the daily

revaluation are allocated to the FRBNY and not allocated

to the other Reserve Banks.

(F) Bank Premises, Equipment, and Software

Bank premises and equipment are stated at cost less

accumulated depreciation. Depreciation is calculated on a

straight-line basis over the estimated useful lives of the

assets, which range from two to fifty years. Major alterations, renovations, and improvements are capitalized at

cost as additions to the asset accounts and are depreciated

over the remaining useful life of the asset or, if appropriate, over the unique useful life of the alteration, renovation, or improvement. Maintenance, repairs, and minor

replacements are charged to operating expense in the year

incurred.

Costs incurred for software during the application development stage, either developed internally or acquired

for internal use, are capitalized based on the cost of direct

services and materials associated with designing, coding,

installing, or testing software. Capitalized software costs

are amortized on a straight-line basis over the estimated

useful lives of the software applications, which range

from two to five years. Maintenance co

software are charged to expense in the yea

Capitalized assets including software, bu

hold improvements, furniture, and equip

paired when events or changes in circumst

that the carrying amount of assets or asset 

recoverable and significantly exceeds their 

(G) Federal Reserve Notes

Federal Reserve notes are the circulating c

United States. These notes are issued throu

Federal Reserve agents (the chairman of 

directors of each Reserve Bank and their de

Reserve Banks upon deposit with such agen

classes of collateral, typically U.S. governm

These notes are identified as issued to a sp

Bank. The Federal Reserve Act provides t

eral tendered by the Reserve Bank to the Fe

agent must be equal to the sum of the notes 

such Reserve Bank.

Assets eligible to be pledged as collatera

the Reserve Banks’ assets. The collateral va

the book value of the collateral tendered, w

tion of securities, for which the collateral va

the par value of the securities tendered. Th

securities pledged for securities sold under 

repurchase is deducted.

The Board of Governors may, at any tim

Reserve Bank for additional collateral fo

Reserve notes. To satisfy the obligation to 

cient collateral for outstanding Federal Res

Reserve Banks have entered into an agree

vides for certain assets of the Reserve Bank

pledged as collateral for the Federal Reserv

to all Reserve Banks. In the event that th

insufficient, the Federal Reserve Act prov

eral Reserve notes become a first and para

all the assets of the Reserve Banks. Fi

Reserve notes are obligations of the United 

backed by the full faith and credit of the 

government.

“Federal Reserve notes outstanding, net

ments of Condition represents Federal R

outstanding, reduced by the currency 

Reserve Banks but not in circulation, of $1

and $148,152 million at December 31, 20

respectively.

At December 31, 2006, all Federal Rese

fully collateralized. All gold certificates, al

ing right certificates, and $769,782 millio

securities and securities purchased under 

resell were pledged as collateral. At Decem

no loans or investments denominated in f

cies were pledged as collateral.

(H) Items in Process of Collection and

Deferred Credit Items

“Items in process of collection” in the 

Condition primarily represents amounts 

checks that have been deposited for collecti

of the balance sheet date, have not yet bee
Notes to the Combined Financial Statements of the Federal Reserve Banks—

the paying bank. “Deferred credit items” are the counterpart liability to “items in process of collection,” and the

amounts in this account arise from deferring credit for

deposited items until the amounts are collected. The

balances in both accounts can vary significantly.

(I) Capital Paid-In

The Federal Reserve Act requires that each member bank

subscribe to the capital stock of the Reserve Banks in an

amount equal to 6 percent of the capital and surplus of the

member bank. These shares are nonvoting with a par

value of $100 and may not be transferred or hypothecated. As a member bank’s capital and surplus changes,

its holdings of Reserve Bank stock must be adjusted.

Currently, only one-half of the subscription is paid-in and

the remainder is subject to call. By law, each Reserve

Bank is required to pay each member bank an annual

dividend of 6 percent on the paid-in capital stock. This

cumulative dividend is paid semiannually. A member

bank is liable for Reserve Bank liabilities up to twice the

par value of stock subscribed by it.

(J) Surplus

The Board of Governors requires the Reserve Banks to

maintain a surplus equal to the amount of capital paid-in

as of December 31 of each year. This amount is intended

to provide additional capital and reduce the possibility

that the Reserve Banks would be required to call on

member banks for additional capital.

Accumulated other comprehensive income is treated as

a component of surplus in the Statements of Condition

and the Statements of Changes in Capital. The balance of

accumulated other comprehensive income is comprised

of expenses, gains, and losses related to defined benefit

pension plans and other postretirement benefit plans that

under accounting principles are included in comprehensive income but excluded from net income. Additional

information regarding the classifications of accumulated

other comprehensive income is provided in Notes 8, 9,

and 10.

(K) Interest on Federal Reserve Notes

The Board of Governors requires the Reserve Banks to

transfer excess earnings to the U.S. Treasury as interest

on Federal Reserve notes, after providing for the costs of

operations, payment of dividends, and reservation of an

amount necessary to equate surplus with capital paid-in.

This amount is reported as a component of “Payments to

U.S. Treasury as interest on Federal Reserve notes” in the

Statements of Income and is reported as a liability in the

Statements of Condition. Weekly payments to the U.S.

Treasury may vary significantly.

In the event of losses or an increase in capital paid-in at

a Reserve Bank, payments to the U.S. Treasury are suspended and earnings are retained until the surplus is equal

to the capital paid-in.

In the event of a decrease in capital paid-in, the excess

surplus, after equating capital paid-in and surplus at

December 31, is distributed to the U.S. Treasury in the

following year.

Due to the substantial increase in capital paid-in at one

Reserve Bank, surplus was not equated to capital at

December 31, 2005. The amount of additional surplus

required due to these events exceeded the 

ings in 2005.

(L) Income and Costs Related to U.S. Trea

The Reserve Banks are required by the Fe

Act to serve as fiscal agents and depos

United States. By statute, the Department o

is permitted, but not required, to pay for th

(M) Assessments by the Board of Governo

The Board of Governors assesses the Res

fund its operations based on each Reserve 

and surplus balances as of December 31 o

year. The Board of Governors also assesses 

Bank for the expenses incurred for the U.

issue and retire Federal Reserve notes b

Reserve Bank’s share of the number of not

the System’s net liability for Federal Res

December 31 of the previous year.

(N) Taxes

The Reserve Banks are exempt from fede

local taxes, except for taxes on real prop

taxes on certain construction projects. Real 

were $33 million and $32 million for th

December 31, 2006 and 2005, respectivel

ported as a component of “Occupancy exp

(O) Restructuring Charges

In 2003, the Reserve Banks began the re

several operations, primarily check, cash, a

sury services. The restructuring included st

management and support structures, redu

creasing the number of processing location

ing processing capacity in some locations. 

turing activities continued in 2004 through 

Note 11 describes the restructuring and p

mation about the Reserve Banks’ costs 

associated with employee separations and c

nations. The costs associated with the i

certain of the Reserve Banks’ assets are dis

6. Costs and liabilities associated with enh

benefits in connection with the restructurin

all of the Reserve Banks are recorded on th

FRBNY as discussed in Note 8. Costs 

associated with enhanced post-retiremen

discussed in Note 9.

(P) Implementation of FASB Statement No

Employers’ Accounting for Defined B

and Other Postretirement Plans

The Reserve Banks initially applied the 

FASB Statement No. 158, Employers’ A

Defined Benefit Pension and Other Postret

at December 31, 2006. This accounting sta

recognition of the overfunded or underfund

defined benefit postretirement plan in the 

Condition, and recognition of changes i

status in the years in which the changes 

comprehensive income. The transition ru

menting the standard require applying the p
Notes to the Combined Financial Statements of the Federal Reserve Banks—

the end of the year of initial implementation with no

retrospective application. The incremental effects on the

line items in the Statement of Condition at December 31,

2006, were as follows (in millions):

Before

Application of

Statement

158

Adjustments

After

Application of

Statement

158

Other Assets . . . . . . $ 3,277 $ (1,492) $ 1,785

Total assets . . . . $874,856 $ (1,492) $873,364

Accrued benefit

costs . . . . . . . . 957 357 1,314

Total liabilities . $842,359 $ 357 $842,716

Surplus . . . . . . . . . . . 17,173 (1,849) 15,324

Total capital . . . . $ 32,497 $ (1,849) $ 30,648

(4) U.S. Government Securities, Securities

Purchased under Agreements to Resell,

Securities Sold under Agreements

to Repurchase, and Securities Lending

The FRBNY, on behalf of the Reserve Banks, holds

securities bought outright in the SOMA.

Total securities held in the SOMA at December 31,

were as follows (in millions):

2006 2005

Par value

U.S. government

Bills .................... $277,019 $271,270

Notes . . . . . . . . . . . . . . . . . . . 402,367 380,118

Bonds . . . . . . . . . . . . . . . . . . 99,528 92,827

Total par value . . . . . . 778,914 744,215

Unamortized premiums . . . . . . . 8,708 8,813

Unaccreted discounts ......... (4,003) (2,826)

Total . . . . . . . . . . . . . . . $783,619 $750,202

At December 31, 2006 and 2005, the fair value of the

U.S. government securities held in the SOMA, excluding

accrued interest, was $795,900 million and $767,472

million, respectively, as determined by reference to

quoted prices for identical securities.

Although the fair value of security holdings can be

substantially greater or less than the carrying value at any

point in time, these unrealized gains or losses have no

effect on the ability of the Reserve Banks, as a central

bank, to meet its financial obligations and responsibilities, and should not be misunderstood as representing a

risk to the Reserve Banks, their shareholders, or the

public. The fair value is presented solely for informational purposes.

The maturity distribution of U.S. government securities

bought outright, securities purchased under agreements to

resell, and securities sold under agreements to repurchase,

that were held in the SOMA at December 31, 2006, was

as follows (in millions):

U.S.

government

securities

(Par

value)

Securitie

purchased

under

agreements to

resell

(Contrac

amount)

Within 15 days . . . $ 40,588 $40,750

16 days to 90 days . 180,893 . . . 

91 days to 1 year . 185,132 . . . 

Over 1 year to

5 years ...... 224,177 . . . 

Over 5 years to

10 years . . . . . 67,645 . . . 

Over 10 years . . . . 80,479 ... 

Total . . . $778,914 $40,750 

At December 31, 2006 and 2005, U.S

securities with par values of $6,855 millio

million, respectively, were loaned from the 

At December 31, 2006 and 2005, the 

amount of securities sold under agreements 

was $29,615 million and $30,505 million

At December 31, 2006 and 2005, securit

agreements to repurchase with a par valu

million and $30,559 million, respectively, w

ing. The contract amount for securities sol

ments to repurchase approximates fair valu

(5) Investments Denominated in

Foreign Currencies

The FRBNY, on behalf of the Reserve 

foreign currency deposits with foreign cen

with the Bank for International Settlements 

foreign government debt instruments. Fo

ment debt instruments held include both sec

outright and securities purchased under 

resell. These investments are guaranteed a

and interest by the issuing foreign governm

Total investments denominated in forei

including accrued interest, and valued at c

currency market exchange rates at Decemb

follows (in millions):

2006 

European Union euro

Foreign currency deposits . . . . . $ 6,24

Securities purchased under

agreements to resell . . . . . . 2,21

Government debt instruments . . 4,07

Japanese yen

Foreign currency deposits . . . . . 2,60

Government debt instruments . . 5,35

Total . . . . . . . . . . . . . . . . . . $20,48

At December 31, 2006 and 2005, the fa

total System investments denominated in f

cies, including accrued interest, was $20,43

$18,965 million, respectively. The fair val

ment debt instruments was determined by 
Notes to the Combined Financial Statements of the Federal Reserve Banks—

quoted prices for identical securities. The cost basis of

foreign currency deposits and securities purchased under

agreements to resell, adjusted for accrued interest, approximates fair value. Similar to the U.S. government

securities discussed in Note 4, unrealized gains or losses

have no effect on the ability of a Reserve Bank, as a

central bank, to meet its financial obligations and responsibilities.

The maturity distribution of investments denominated

in foreign currencies at December 31, 2006, was as

follows (in millions):

European

euro Japanese

yen Total

Within 15 days . . . . . . . . . . . $ 4,359 $2,601 $ 6,960

16 days to 90 days . . . . . . . . 2,378 1,208 3,586

91 days to 1 year . . . . . . . . . 2,442 2,213 4,655

Over 1 year to 5 years . . . . . 3,351 1,930 5,281

Over 5 years to 10 years . . . . . . . . . ...

Over 10 years ............. . . . . . . ...

Total . . . . . . . . . . . . $12,530 $7,952 $20,482

At December 31, 2006 and 2005, there were no material open foreign exchange contracts.

At December 31, 2006 and 2005, the warehousing facility was $5,000 million, with no balance outstanding.

(6) Bank Premises, Equipment, and Software

A summary of bank premises and equipment at December 31 is as follows (in millions):

2006 2005

Bank premises and

equipment

Land . . . . . . . . . . . . . . . . . . . . . . . . . $ 306 $ 295

Buildings . . . . . . . . . . . . . . . . . . . . . 1,817 1,787

Building machinery and

equipment . . . . . . . . . . . . . . . . 393 387

Construction in progress . . . . . . . 220 86

Furniture and equipment . . . . . . . 1,156 1,162

Subtotal . . . . . . . . . . . . . . . . . . 3,892 3,717

Accumulated depreciation ........ (1,516) (1,465)

Bank premises and equipment,

net . . . . . . . . . . . . . . . . . . . . . . . . . $2,376 $2,252

Depreciation expense, for the

year ended

December 31 . . . . . . . . . . . . . . . $ 186 $ 175

The Federal Reserve Bank of Kansas City (FRBKC) is

constructing a new building to replace its head office.

Approximately $29 million of costs associated with the

acquisition of land and site preparation for the new

building are included in the “Land” account, and approximately $114 million of costs associated with the construction of the new building are included in the “Construction

in progress” account. In July 2005, the FRBKC completed the sale and leaseback of its head office, and will

lease the space from the purchaser until the new building

is completed in 2008.

Bank premises and equipment at December 31 include

the following amounts for leases that have been capitalized (in millions):

2

Leased premises and equipment

under capital leases . . . . . . . . . . . . . 

Accumulated depreciation ........... 

Leased premises and equipment

under capital leases, net ......... 

Certain of the Reserve Banks lease sp

tenants with remaining lease terms rangin

fourteen years. Rental income from such l

million and $23 million for the years ended 

2006 and 2005, respectively, and is reporte

nent of “Other income.” Future minimum l

that the Bank will receive under nonca

agreements in existence at December 31

follows (in millions):

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Total . . . . . . . . . . . . . . . . . . . . . . . . . 

The Reserve Banks have capitalized so

net of amortization, of $155 million and $

December 31, 2006 and 2005, respectively

expense was $66 million and $55 million 

ended December 31, 2006 and 2005, respe

talized software assets are reported as a 

“Other assets” and the related amortization 

a component of “Other expenses.”

Several of the Reserve Banks have impai

result of the System’s restructuring plan, a

Note 11. Impaired assets include softwa

leasehold improvements, furniture, and equ

impairment losses related to the check and 

turings of $15 million and $50 million f

ending December 31, 2006 and 2005, resp

determined using fair values based on q

values or other valuation techniques and ar

component of “Other expenses.”

(7) Commitments and Contingencies

At December 31, 2006, the Reserve Banks 

under noncancelable leases for premises a

with remaining terms ranging from one to 

seventeen years. These leases provide for in

payments based upon increases in real esta

ating costs, or selected price indices.

Rental expense under operating leases fo

ating facilities, warehouses, and data proc

fice equipment (including taxes, insuranc

nance when included in rent), net of sublea

$31 million and $26 million for the years 

ber 31, 2006 and 2005, respectively. C

Reserve Banks’ leases have options to rene

Future minimum rental payments under 

operating leases, net of sublease rentals, w

terms of one year or more, at December 3

follows (in millions):
Notes to the Combined Financial Statements of the Federal Reserve Banks—

Operating

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12

2008 ......................................... 9

2009 ......................................... 8

2010 ......................................... 8

2011 ......................................... 7

Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

Future minimum rental payments .............. $146

At December 31, 2006, the Reserve Banks had other

commitments and long-term obligations extending

through the year 2017 with a remaining amount of $336

million. As of December 31, 2006, commitments of $219

million were recognized. Purchases of $92 million and

$98 million were made against these commitments during

2006 and 2005, respectively. These commitments are for

goods and services to maintain currency machines, for

software licenses and maintenance, for services related to

check processing equipment and transportation, and have

variable and/or fixed components. The variable portion of

the commitments is for additional services above fixed

contractual service limits. The fixed payments for the

next five years under these commitments are as follows

(in millions):

Fixed

commitment

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

The Reserve Banks are involved in certain legal actions

and claims arising in the ordinary course of business.

Although it is difficult to predict the ultimate outcome of

these actions, in management’s opinion, based on discussions with counsel, the aforementioned litigation and

claims will be resolved without material adverse effect on

the financial position or results of operations of the

Reserve Banks.

(8) Retirement and Thrift Plans

Retirement Plans

The Reserve Banks currently offer three defined benefit

retirement plans to their employees based on length of

service and level of compensation. Substantially all of the

Reserve Banks’, Board of Governors’, and the Office of

Employee Benefits of the Federal Reserve System’s employees participate in the Retirement Plan for Employees

of the Federal Reserve System (“System Plan”). Employees at certain compensation levels participate in the Benefit Equalization Retirement Plan (“BEP”) and certain

Reserve Bank officers participate in the Supplemental

Employee Retirement Plan (“SERP”).

The System Plan is a multi-employer plan with contributions funded by participating employers. Participating

employers are the Federal Reserve Banks, the Board of

Governors, and the Office of Employee Benefits of the

Federal Reserve Employee Benefits System. No separate

accounting is maintained of assets contributed by the

participating employers. The FRBNY acts as the sponsor

of the System Plan and the costs associated 

are not redistributed to other participating 

Following is a reconciliation of the b

ending balances of the System Plan benefit 

millions):

2006 

Estimated actuarial present value

of projected benefit

obligation at January 1 . . . . . . . $4,78

Service cost—benefits earned

during the period . . . . . . . . . . . . . 13

Interest cost on projected

benefit obligation . . . . . . . . . . . . 27

Actuarial loss . . . . . . . . . . . . . . . . . . . . . 13

Contributions by plan participants . . 

Special termination benefits loss . . . 

Benefits paid ..................... (25

Plan amendments . . . . . . . . . . . . . . . . . 6

Estimated actuarial present value

of projected benefit

obligation at December 31 . . . . $5,14

Following is a reconciliation of the b

ending balance of the System Plan asset

status, and the prepaid pension benefit cost

2006 

Estimated fair value of plan

assets at January 1 . . . . . . . . . . . $5,86

Actual return on plan assets . . . . . . . 71

Contributions by the employer ..... ..

Contributions by plan participants . . 

Benefits paid ..................... (25

Estimated fair value of plan

assets at December 31 . . . . . . . . $6,33

Funded status . . . . . . . . . . . . . . . . . . . . . $1,18

Unrecognized prior service cost . . . . 

Unrecognized net actuarial loss . . . . 

Prepaid pension benefit costs . . . . . . 

Amounts included in accumulated

other comprehensive

loss (in millions)

Prior service cost . . . . . . . . . . . . . . . (1

Net actuarial loss . . . . . . . . . . . . . . . (1,30

Total accumulated other

comprehensive loss . . . . . . . . . . $(1,4

Prepaid pension benefit costs are repor

assets’’ in the Statements of Condition.

The accumulated benefit obligation fo

Plan, which differs from the estimated ac

value of the projected benefit obligation 

based on current rather than future compe

was $4,522 million and $4,162 million at 

2006 and 2005, respectively.

The weighted-average assumptions used 

the projected pension benefit obligation f

Plan as of December 31 were as follows:

200

Discount rate . . . . . . . . . . . . . . . . . . . . . . . 6.00

Rate of compensation increase . . . . . . 4.50
Notes to the Combined Financial Statements of the Federal Reserve Banks—

Net periodic benefit expenses are actuarially determined using a January 1 measurement date. The

weighted-average assumptions used in developing net

periodic benefit expenses for the System Plan for the

years at January 1 were as follows:

2006 2005

Discount rate . . . . . . . . . . . . . . . . . . . . . . . 5.75% 5.75%

Expected asset return . . . . . . . . . . . . . . . 8.00% 8.25%

Rate of compensation increase . . . . . . 4.50% 4.25%

Discount rates reflect yields available on high-quality

corporate bonds that would generate the cash flows necessary to pay the plan’s benefits when due. The expected

long-term rate of return on assets was based on a combination of methodologies including the System Plan’s

historical returns, surveys of other plans’ expected rates

of return, building a projected return for equities and

fixed income investments based on real interest rates,

inflation expectations, equity risk premiums, and, finally,

surveys of expected returns in equity and fixed income

markets.

The components of net periodic pension benefit expense (credit) for the System Plan for the years ended

December 31 are shown below (in millions):

2006 2005

Service cost—benefits earned

during the period . . . . . . . . . . . . . . $ 134 $ 123

Interest cost on projected

benefit obligation . . . . . . . . . . . . . 278 263

Amortization of prior service

cost . . . . . . . . . . . . . . . . . . . . . . . . . . 23 24

Amortization of actuarial

loss . . . . . . . . . . . . . . . . . . . . . . . . . . 75 49

Expected return on plan assets ...... (460) (476)

Net periodic pension expense/

(credit) . . . . . . . . . . . . . . . . . . . . . . 50 (17)

Special termination benefits losses . . 3 6

Total periodic pension expense/

(credit) . . . . . . . . . . . . . . . . . . . . . . . $ 53 $ (11)

Estimated amounts that will be

amortized from accumulated

other comprehensive loss

into net periodic pension

expense in 2007

(in millions):

Prior service cost . . . . . . . . . . . . . . . . . . $ 29

Actuarial loss . . . . . . . . . . . . . . . . . . . . . 66

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 95

The recognition of special termination benefits losses

is the result of enhanced retirement benefits provided to

employees during the restructuring described in Note 11.

Following is a summary of expected benefit payments

(in millions):

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

2012–2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

The Federal Reserve System’s pension p

average asset allocations at December 31, 

gory, were as follows:

200

Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . 64.

Fixed income . . . . . . . . . . . . . . . . . . . . . 34.4

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0

The System’s Committee on Investmen

(CIP) contracts with investment manager

sponsible for implementing the System Pla

policies. The managers’ performance is me

a trailing 36-month benchmark of 60 perce

value weighted index of predominantly la

tion stocks trading on the New York Stock 

American Stock Exchange, and the Nation

of Securities Dealers Automated Quotation 

ket System and 40 percent of a broad

investment-grade fixed income index 

monthly). The managers invest plan fund

established guidelines for investment in equ

income instruments. Equity investment

between 40 percent and 80 percent of 

Investments, however, cannot be concentra

lar industries and equity securities holdin

company are limited. Fixed income secu

investment grade and the effective duratio

income portfolio must remain within a ran

cent and 150 percent of a broadly diversifie

grade fixed income index. CIP guidelines 

gin, short sale, foreign exchange, and 

trading as well as investment in bank, 

company, savings and loan, and governm

dealers’ stocks. In addition, investments 

denominated securities are prohibited; how

portion of the portfolio can be invested 

Depositary Receipts/Shares and foreign-

denominated fixed income securities.

Contributions to the System Plan may 

using different assumptions than those requ

cial reporting. The System does not expect 

contribution to the System Plan during 200
Notes to the Combined Financial Statements of the Federal Reserve Banks—

The Reserve Banks’ projected benefit obligation,

funded status, and net pension expenses for the BEP and

the SERP at December 31, 2006 and 2005, and for the

years then ended, are not material.

Thrift Plan

Employees of the Reserve Banks may also participate in

the defined contribution Thrift Plan for Employees of the

Federal Reserve System (“Thrift Plan”). The Reserve

Banks’ Thrift Plan contributions totaled $66 million and

$63 million for the years ended December 31, 2006 and

2005, respectively, and are reported as a component of

“Salaries and other benefits” in the Statements of Income.

The Reserve Banks match employee contributions based

on a specified formula. For the years ended December 31,

2006 and 2005, the Reserve Banks matched 80 percent on

the first 6 percent of employee contributions for employees with less than five years of service and 100 percent on

the first 6 percent of employee contributions for employees with five or more years of service.

(9) Postretirement Benefits Other Than Pensions

and Postemployment Benefits

Postretirement Benefits Other Than Pensions

In addition to the Reserve Banks’ retirement plans, employees who have met certain age and length-of-service

requirements are eligible for both medical benefits and

life insurance coverage during retirement.

The Reserve Banks fund benefits payable under the

medical and life insurance plans as due and, accordingly,

have no plan assets.

Following is a reconciliation of beginning and ending

balances of the benefit obligation (in millions):

2006 2005

Accumulated postretirement benefit

obligation at January 1 . . . . . . . . . . $ 947 $869

Service cost—benefits earned during

the period . . . . . . . . . . . . . . . . . . . . . . 27 32

Interest cost of accumulated

benefit obligation . . . . . . . . . . . . . . . 54 49

Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . 188 45

Contributions by plan participants . . . . 13 11

Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . (60) (59)

Plan amendments ................... (5) ...

Accumulated postretirement benefit

obligation at December 31 . . . . . . $1,164 $947

At December 31, 2006 and 2005, the weighted-average

discount rate assumptions used in developing the postretirement benefit obligation were 5.75 percent and 5.50

percent, respectively.

Discount rates reflect yields available on high-quality

corporate bonds that would generate the cash flows necessary to pay the plan’s benefits when due.

Following is a reconciliation of the beginning and

ending balance of the plan assets, the unfunded postretirement benefit obligation, and the accrued postretirement

benefit costs (in millions):

2

Fair value of plan assets

at January 1 .................. $. 

Contributions by the employer . . . . . . 

Contributions by plan participants . . . 

Benefits paid ...................... 

Fair value of plan assets at

December 31 ................. $ 

.

Unfunded postretirement benefit

obligation . . . . . . . . . . . . . . . . . . . . . $1,

Unrecognized prior service cost . . . . . 

Unrecognized net actuarial loss ..... 

Accrued postretirement benefit costs . 

Amounts included in accumulated

other comprehensive

loss (in millions):

Prior service cost . . . . . . . . . . . . . . . . . . . $ 

Net actuarial loss . . . . . . . . . . . . . . . . . . . (4

Deferred curtailment gain ............ 

Total accumulated other

comprehensive loss ............. $(

Accrued postretirement benefit costs are 

component of “Accrued benefit costs” in t

of Condition.

For measurement purposes, the assume

cost trend rates at December 31 are as follo

200

Health care cost trend rate

assumed for next year . . . . . . . . . . 9.00

Rate to which the cost trend rate

is assumed to decline

(the ultimate trend rate) . . . . . . . . 5.00

Year that the rate reaches the

ultimate trend rate . . . . . . . . . . . . . 20

Assumed health care cost trend rates hav

effect on the amounts reported for health 

one percentage point change in assumed h

trend rates would have the following effec

ended December 31, 2006 (in millions):

One percentage

point increase

On

po

Effect on aggregate

of service and

interest cost

components of

net periodic

postretirement

benefit expense . . . . . $ 12 

Effect on accumulated

postretirement

benefit obligation . . . 128 

The following is a summary of the comp

periodic postretirement benefit expense 

ended December 31 (in millions):
Notes to the Combined Financial Statements of the Federal Reserve Banks—

2006 2005

Service cost—benefits earned during

the period . . . . . . . . . . . . . . . . . . . . . . . . $ 27 $ 32

Interest cost on accumulated benefit

obligation . . . . . . . . . . . . . . . . . . . . . . . . 54 49

Amortization of prior service cost . . . . . . (23) (21)

Amortization of actuarial loss . . . . . . . . . . . 22 13

Total periodic expense . . . . . . . . . . . . . . . . . 80 73

Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . (5) ...

Net periodic postretirement

benefit expense . . . . . . . . . . . . . . . . . . . $ 80 $ 68

Estimated amounts that will be

amortized from accumulated

other comprehensive loss

into net periodic benefit

expense in 2007

(in millions):

Prior service cost . . . . . . . . . . . . . . . . . . . . . (22)

Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . 45

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23

Net postretirement benefit expense is actuarially determined using a January 1 measurement date. At January 1,

2006 and 2005, the weighted-average discount rate assumptions used to determine net periodic postretirement

benefit expense were 5.50 percent and 5.75 percent,

respectively.

Net periodic postretirement benefit expense is reported

as a component of “Salaries and other benefits” in the

Statements of Income.

The 2005 service cost contains an adjustment by one

Reserve Bank that resulted from a review of plan terms

and assumptions. A plan amendment that modified the

credited service period eligibility requirements created

curtailment gains in 2005. A deferred curtailment gain,

which was recorded in 2006 as a component of accumulated other comprehensive loss, is expected to be recognized in net income in 2008 when the related employees

terminate employment.

The Medicare Prescription Drug, Improvement and

Modernization Act of 2003 established a prescription

drug benefit under Medicare (“Medicare Part D”) and a

federal subsidy to sponsors of retiree health care benefit

plans that provide benefits that are at least actuarially

equivalent to Medicare Part D. The benefits provided

under the Reserve Banks’ plan to certain participants are

at least actuarially equivalent to the Medicare Part D

prescription drug benefit. The estimated effects of the

subsidy, retroactive to January 1, 2004, are reflected in

actuarial loss in the accumulated postretirement benefit

obligation and net periodic postretirement benefit

expense.

The Reserve Banks account for the Medicare subsidies

as a reduction to benefits payments. The Reserve Banks

expect to receive approximately $4 million in subsidies in

the year ending December 31, 2007 that relate to benefit

payments made in the year ended December 31, 2006.

Following is a summary of expected postretirement

benefit payment (in millions):

Witho

subsid

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63 

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 

2012–2016 . . . . . . . . . . . . . . . . . . . . . . . 476 

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $843 

Postemployment Benefits

The Reserve Banks offer benefits to form

employees. Postemployment benefit costs 

determined using a December 31, 2006 mea

and include the cost of medical and den

survivor income, and disability benefits. 

postemployment benefit costs recognized b

Banks at December 31, 2006 and 2005 wer

and $124 million, respectively. This cost is 

component of “Accrued benefit costs” in t

of Condition. Net periodic postemployme

pense included in 2006 and 2005 operating 

$20 million and $14 million, respectively, a

as a component of “Salaries and other be

Statements of Income.

(10) Accumulated Other Comprehen

Following is a reconciliation of beginnin

balances of accumulated other comprehens

to

Defined

Benefit

Retirement

Plans

Amount

Amount Related

Related to Postretiremen

Benefits

Other

than

Pensions

Balance at

December 31,

2005 .......... $ . . . $...

Adjustment to

initially apply

FASB Statement

No. 158 . . . . . . . . (1,492) (357) 

Balance at

December 31,

2006 . . . . . . . . . . $ (1,492) $ (357 ) 

Additional detail regarding the classific

mulated other comprehensive income is inc

8 and 9.

(11) Business Restructuring Charges

In 2003, several Reserve Banks announ

restructuring to streamline operations and 

including consolidation of check operati

reductions in various functions of the B

through 2006, additional consolidation and 
Notes to the Combined Financial Statements of the Federal Reserve Banks—

initiatives were announced in the check, cash, purchasing,

and Treasury operations. These actions resulted in the

following business restructuring charges (in millions):

Total

estimated

costs

Employee separation . . . . . . . . . . . . . . . . . . . . . . . $49

Contract termination . . . . . . . . . . . . . . . . . . . . . . . . 1

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $51

Year-ended

12/31/2006

Accrued

liability

12/31/05

Total

charges

Total

paid

Accrued

liability

12/31/06

Employee

separation . . . . $17 $9 $(12) $14

Contract

termination . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . $17 $9 $(12) $14

Adjustments to the accrued liability due to changes in

the estimated restructuring costs were offset against total

charges. Without these offsets, total charges would have

been $10 million in 2006.

Employee separation costs are primar

costs related to identified staff reduction

mately 1,949, including 286 and 292 st

related to restructuring announced in 20

respectively. Costs related to staff reduction

ended December 31, 2006 and 2005 are 

component of “Salaries and other benefits

ments of Income. Contract termination co

charges resulting from terminating exist

other contracts and are shown as a compon

expenses.” Other costs include the cont

noncancelable lease agreement and asso

maintenance and are shown as a compon

pancy expenses.”

Restructuring costs associated with impa

tain Reserve Bank assets, including softw

leasehold improvements, furniture, and e

discussed in Note 6. Costs associated w

pension benefits for all Reserve Banks ar

the books of the FRBNY as discussed in 

associated with enhanced postretirement be

closed in Note 9.

Future costs associated with the announ

ing plans are estimated at $4 million.

The Reserve Banks anticipate substantia

their announced plans in 2008.

Office of Inspector General Activities

The Board of Governors’ Office of Inspector General (OIG) functions in accordance with the Inspector General Act

of 1978, as amended. In addition to

retaining an independent auditor each

year to audit the Board’s financial statements, the OIG plans and conducts audits, reviews, and investigations relating

to the Board’s programs and operations

and its delegated functions at the Federal Reserve Banks. The OIG also reviews existing and proposed legislation

and regulations for their impact on the

economy and efficiency of the Board’s

programs and operations. It recommends

policies, and it supervises and conducts

activities to promote economy and efficiency and to prevent and detect waste,

fraud, and abuse in Board an

delegated programs and oper

well as in activities administe

nanced by the Board. The O

the Congress and the Chairm

Board of Governors fully 

about serious abuses and de

and about the status of any 

actions.

During 2006, the OIG c

eight audits, reviews, and oth

ments and conducted a nu

follow-up reviews to evalua

taken on earlier recommendat

OIG also closed eight investig

performed numerous legisla

regulatory reviews.

OIG Audits, Reviews, and Assessments Completed during 2006

Report title Mo

External Quality Control Review of the National Science Foundation Inspector General

Audit Organization ...................................................................... Fe

Audit of the FFIEC’s Financial Statements (Year Ended December 31, 2005) . . . . . . . . . . . . . . . . . . M

Inspection of the Board’s Security Services Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M

Audit of the Board’s Implementation of Electronic Authentication Requirements . . . . . . . . . . . . . . . M

Audit of the Board’s Financial Statements (Year Ended December 31, 2005) . . . . . . . . . . . . . . . . . . M

Audit of the Board’s Information Security Program .......................................... Se

Security Control Review of the Common Document and Text Repository System

(Internal Report) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . O

Audit of the Board’s Payroll Process ........................................................ D
Government Accountability Office Reviews

Under the Federal Banking Agency

Audit Act (Public Law 95–320), most

Federal Reserve System operations are

under the purview of the Government

Accountability Office (GAO). In 2006,

the GAO completed six reports on selected aspects of Federal Reserve operations (table). In addition, seven projects

concerning the Federal Reserv

various stages of completion a

(table). The Federal Reserve 

vided information to the GA

the year on numerous oth

investigations.

The reports are available 

from the GAO.

Reports Completed during 2006

Report title Report number Mo

Credit Cards: Customized Minimum Payment Disclosure

Would Provide More Information to Consumers, but

Impact Could Vary .................................................. GAO-06-434 A

Bank Secrecy Act: Opportunities Exist for FinCEN and the

Banking Regulators to Further Strengthen the

Framework for Consistent BSA Oversight ............................ GAO-06-386 M

Information Security: Federal Reserve Needs to Address

Treasury Auction Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GAO-06-659 A

Alternative Mortgage Products: Impact on Defaults Remains

Unclear, but Disclosure of Risks to Borrowers Could

Be Improved ....................................................... GAO-06-1021 Se

Minority Banks: Regulators Need to Better Assess

Effectiveness of Support Efforts ...................................... GAO-07-6 O

Credit Cards: Increased Complexity in Rates and Fees Heightens

Need for More Effective Disclosures to Consumers ................... GAO-06-929 O

Projects Active at Year-End 2006

Subject of project Month 

Consolidated supervision of financial institutions ........................................ Novem

Prompt Corrective Action (PCA) program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 

Basel II Capital Accord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 

Financial markets preparedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 

Financial regulatory agencies’ performance pay systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 2

Financial regulatory agencies’ compensation programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 2

Hedge funds and federal regulatory oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Octob
Maps of the

Federal Reserve System
The Federal Reserve System

Note

The Federal Reserve officially identifies

Districts by number and by Reserve

Bank city (shown on both pages) and by

letter (shown on the facing page).

In the 12th District, the Seattle

Branch serves Alaska, and the San Francisco Bank serves Hawaii.

The System serves commonwealths

and territories as follows: The New York

Bank serves the Commonw

Puerto Rico and the U.S. Virgi

the San Francisco Bank serv

can Samoa, Guam, and the 

wealth of the Northern Marian

The maps show the boundar

the System as of year-end 200

CHICAGO

K C ANSAS ITY

HAWAII

ALASKA

MINNEAPOLIS

DALLAS

S F AN RANCISCO

S L T. OUIS

CLEVELAND

RICHMON

ATLANTA

PHIL

10

12

11

9

8

6

7

2

3

5

4

Legend

Both pages Facing page

Federal Reserve Bank city • Federal Reserve Branch ci

Board of Governors of the Federal

Reserve System, Washington, D.C.

Branch boundary
NM

NH

CT

AR

New Orleans

Miami

PA

OH

WV

KY

PA NJ

DE

NY

NY NJ

MA

RI

ME

VT

CT

GA

AL

FL

MS

TN

LA

MO

IL 

MS

IN

WI

MI

IA

IL

CA

OR

NV

WA

HAWAII

ALASKA

ND

MT

SD

WI

MN

MI

TX

LA

NM

CO

WY

NE

MO

KS

OK

10–J

1–A 2–B 3–C 4–D 5–E

7–G 8–H

9–I

11–K

12–L

6–F

BOSTON N Y EW ORK PHILADELPHIA CLEVELAND RICH

CHICAGO S L T. O

MINNEAPOLIS

K C ANSAS ITY

DALLAS S F AN RANCISCO

ATLANTA

Cincinnati

Pittsburgh

Buffalo

Birmingham

Jacksonville

Nashville

Little

Rock

M

Detroit

Seattle

Portland

Los Angeles

Sal

Helena

San Antonio

Houston El Paso

Omaha

Denver

Oklahoma City

WV

S

Ba

Index
Index

Accounting policy, 74–75

Accounting Task Force (ATF), 76

Affordable housing, incentives for, 110–11

Agreement corporations, 64, 67–68, 87–88

Allowance for loan and lease losses

(ALLL), 74–75

AmSouth Bancorporation, acquisition, 97

Anti–money laundering

Bank Secrecy Act/Anti–Money

Laundering Examination

Manual, 75

Examinations, 68–69

Applications, notices, and proposals,

84–88, 97

Aspen Institute, 114

Assets and liabilities

Board of Governors, 304

Commercial banks, 280

Federal Reserve Banks, 282–85, 322

Association of Supervisors of Banks of the

Americas (ASBA), 72

Auditors’ reports, 303, 313–14, 319, 321

Audits, reviews, and assessments

of Board of Governors, 301, 303–19,

337

of Federal Reserve Banks, 127–28, 301,

321–35, 337

of Federal Reserve System, 301, 337,

338

by Government Accountability Office,

301, 338

Interagency Advisory on the Unsafe and

Unsound Use of Limitation of

Liability Provisions in External

Audit Engagement Letters, 75, 153

by Office of Inspector General, 301,

337

Automated clearinghouse (ACH) services,

Federal Reserve Banks, 121, 125–26,

296

Availability of Funds and Collection of

Checks (Regulation CC), 106–7

Balance sheets

Board of Governors, 304

Federal Reserve priced services, 131

Bank examiner training, 84, 85, 101–2

Bank holding companies

Assets, 65

Banks affiliated with, 271

Capital instruments, 74

Inspections of, 64–65, 66

Number of, 65

Regulatory financial reports, 7

Small holding company thresh

Surveillance and off-site monit

71–72

Bank Holding Companies and Ch

Bank Control (Regulation Y

Bank Holding Company Act, 64, 

142–43

Bank Holding Company Perform

Reports (BHCPRs), 71–72

Banking Organization National D

(BOND), 83

Banking organizations, U.S. (See 

holding companies and Com

banks)

Capital standards, 73–74

Examinations and inspections 

Foreign operations, 67, 87–88

Number of, 271

Structure, regulation of, 84–88

Bank Merger Act, 64, 86

Bankruptcy Abuse Prevention an

Consumer Protection Act, 1

Bank Secrecy Act/Anti–Money La

Examination Manual, 75

Bank Secrecy Act (BSA)

Automated format for informa

Examinations, 68–69

Overview, 75

Basel Committee on Banking Su

72, 75–77

Basel I framework, implementati

73–74

Basel II framework, implementat

73–74, 76

BB&T Corporation, acquisition, 

Board of Governors (See also Fe

Reserve System)

Assets and liabilities, 304

Audits, reviews, and assessmen

301, 303–19, 337
Board of Governors—Continued

Consumer Advisory Council, 109–11,

238

Decisions, public notice of, 88

Federal Advisory Council, 237

FFIEC activities, 72, 73, 82–83, 84,

100–101, 102, 104–7, 141

Financial statements, 303–19

Goals and objectives, 135–37

Government Performance and Results

Act, 135–37

Income and expenses, 305

Inspector General, Office of, audits,

reviews, and assessments, 301, 337

Litigation, 229

Members and officers, 233–35, 259–62

Mission, 135

Outreach activities, 111, 115–17

Policy actions, 151–56

Strategic plan, performance plan, and

performance report, 135

Thrift Institutions Advisory Council, 239

BOND (Banking Organization National

Desktop), 83

Branches (See Federal Reserve Banks)

Business continuity, 70–71

Business investment, profits, and finance,

13–17, 39, 42–45

Call Reports, 71–72, 82, 143

Capital accounts, Federal Reserve Banks,

282–85, 322

Capital One Financial Corporation,

acquisition, 97

Capital standards, 73–74

Cash flows, Board of Governors, 306

Cash-management services, Federal

Reserve Banks, 126

Central Document and Text Repository

(CDTR), 83

CFED, Federal Reserve partnership with,

113–14

Change in Bank Control Act, 64, 87, 144

Check Clearing for the 21st Century Act

(Check 21), 120

Check collection and processing, Federal

Reserve Banks, 120–21, 296

Collection services for federal government,

Federal Reserve Banks, 125–26

Commercial banks (See also Member

banks and State member banks)

Assets and liabilities, 280

Commercial banks—Continued

Number of, 271

Regulatory financial reports, 8

Commercial real estate lending, g

on, 78, 80–81, 154

Committee of Sponsoring Organi

the Treadway Commission (

127–28

Community affairs (See Consume

community affairs)

Community Affairs Offices (CAO

Community development corpora

(CDCs), 115

Community development financi

institutions (CDFIs), 114–15

Community economic developme

113–17

Community Reinvestment Act (C

Applications, analysis in relati

Examinations for compliance w

96–97

Rules revisions, 91, 92–93, 10

Community Reinvestment (Regul

153

Complex structured finance trans

(CSFTs), 78–79, 154

Compliance examinations, 96–97

Condition statements, Federal Re

Banks, 282–85, 322

Confidential information protecti

Consumer Advisory Council, 109

Consumer and community affairs

Community economic develop

113–17

Consumer Advisory Council a

109–11

Consumer complaints, 107–9, 

Consumer financial education, 

111–13

Consumer information web sit

Consumer protection and comm

reinvestment laws, 91–96

Financial Services Regulatory 

provisions, 146

Outreach activities, 111, 115–1

Research on financial informat

disclosures, 112–13

Consumer complaints, 107–09, 1

Consumer Credit Protection Act, 

Consumer information web site, 

Consumer Leasing (Regulation M

Consumer prices, 3, 24–26, 35, 5
Consumer protection laws

Agency reports on compliance with,

103–7

Implementation of, 91–96

Supervision for compliance with,

96–103

Consumer reporting agencies, 93, 96

Consumer spending, 10–11, 40–41

Core Principles for banking supervision,

76

Corporate profits, 15–17, 44–45

Credit by Banks and Persons other than

Brokers or Dealers for the Purpose of

Purchasing or Carrying Margin Stock

(Regulation U), 70, 89, 281

Credit risk management, 77–79

Cross-marketing restrictions, 143–44

Currency and coin, 123–24, 272–79, 296

Currency recirculation policy, Federal

Reserve, 154

Currency Transaction Reports, 146

Current account, U.S., 20, 47, 49

Debt

Corporate, 15–17, 44–45

Domestic nonfinancial sectors, 29–30,

55–56

Government, 18–19, 19–20, 46, 47

Household, 13, 42

Debt services for federal government,

Federal Reserve Banks, 125

Depository Institution Management

Interlocks Act, 143

Depository institutions (See also

Commercial banks)

Interest rates on loans by Federal

Reserve Banks, 269

Reserve requirements, 270

Reserves of, 272–79

Depository services to federal government,

Federal Reserve Banks, 124–26

Deposits

Commercial banks, 280

Federal Reserve Banks, 272–79

Directors, Federal Reserve Banks and

Branches, 242, 243–58

Disclosures, research on, 112–13

Discount rates, 155–56, 269

Disposable personal income (DPI), 10–11,

40, 42

District of Columbia banks, 144

Dollar exchange rate, 31–32, 36, 57

Earned-income tax credit, 114

ECI (employment cost index), 24

Economic Growth and Regulator

Paperwork Reduction Act, 7

Economies, foreign, 30–34, 56–5

Economy, U.S.

Business sector, 13–17, 39, 42

Debt, domestic nonfinancial se

29–30, 55–56

External sector, 20–22, 47–49

Financial markets, 5–6, 26–30

Government sector, 17–20, 45–

Household sector, 10–13, 40–4

Interest rates, 9, 26–28, 35, 40

Labor market, 22–24, 49–51

M2 monetary aggregate, 30, 5

Outlook and projections, 3–5, 

35–37, 38–39

Prices, 3, 21–22, 24–26, 35–36

51–53

Edge Act corporations, 64, 67–68

Education, consumer financial, 11

Electronic access to Federal Rese

services, 126–29

Electronic Check Processing, Tre

Department program, 126

Electronic Federal Tax Payment 

(EFTPS), 125

Electronic Fund Transfer Act (EF

109

Electronic Fund Transfers (Regul

91, 92, 104–5, 109, 151

Emerging-market economies, 30–

33–34, 58–59

Employment, 22–23, 39, 49–50

Employment cost index (ECI), 24

Energy prices, 3, 21–22, 24–26, 

48–49, 51–53

Enforcement actions

Federal Reserve System, 71, 9

Other federal agencies, 103–7

Equal Credit Opportunity Act (E

98–100, 104

Equal Credit Opportunity (Regul

104

Equal opportunity, rules regardin

Equity markets and prices, 28, 55

Examinations and inspections

Anti–money laundering, 68–69

Bank holding companies, 64–6

Community Reinvestment Act

compliance with, 96–97
Examinations and inspections—Continued

Consumer protection laws, compliance

with, 97–101

Edge Act and agreement corporations,

64, 67–68

Federal Reserve Banks, 127–28

Fiduciary activities, 69

Financial holding companies, 66–67

Foreign banks, 68

Information technology activities, 69

International banking activities, 67–68

Securities clearing agencies, 69–70

Securities credit lenders, 70

Securities dealers and brokers,

government and municipal, 70

State member banks, 64, 65, 66

Transfer agents, 69–70

Examiners, training, 84, 85, 101–2

Expenses (See Income and expenses)

Exports, 20–21, 47–48

External sector, developments in, 20–22,

47–49

Fair and Accurate Credit Transactions

Act (FACT Act), 93, 96, 110

Fair Credit Reporting Act (FCRA), 91, 93,

96, 100

Fair Housing Act, 98–99, 109

Fair lending laws, compliance with, 98–100

Fair value option, 74, 77

Federal Advisory Council, 237

Federal agency securities and obligations

Commercial bank holdings, 280

Federal Reserve Bank holdings, 129,

130, 268, 272–79

Open market transactions, 264–67

Federal Banking Agency Audit Act, 338

Federal Deposit Insurance Act (FDI Act),

66, 144–45, 148

Federal Deposit Insurance Corporation

Improvement Act, 66

Federal Financial Institutions Examination

Council (FFIEC), 72, 73, 82–83, 84,

100–101, 102, 104–7, 141

Federal funds rate, 5–6, 37–38, 159,

172–73, 180–81, 188–89, 196–97,

203, 210–11, 218–19, 226–27

Federal government

Federal Reserve Bank services to,

124–26

Spending, receipts, and borrowing,

17–19, 45–46

Federal Housing Enterprise Over

Office of (OFHEO), 12, 41

Federal Open Market Committee 

Authorizations, 157–58, 159–6

Decisionmaking transparency, 

Domestic policy directives, 15

181, 189, 196–97, 203, 2

227

Foreign currency directives an

procedural instructions, 16

166–67

Meetings, minutes of, 157–227

Members, alternate members, 

officers, 236

Notation votes, 173, 181, 189, 

211, 219, 227

System Open Market Account

157–58, 159–60, 161, 163

165–66, 166–67, 212

Federal Reserve Act, 67, 87, 127

Federal Reserve Banks

Assessments by Board of Gov

290–95

Assets and liabilities of, 282–8

Audits, reviews, and assessmen

127–28, 301, 321–35, 337

Automated clearinghouse servi

125–26, 296

Branches of, 240–41, 243–58

Capital accounts, 282–85, 322

Cash-management services, 12

Chairmen, Conference of, 241

Check collection and processin

120–21, 296

Condition statements, 282–85, 

Credit outstanding, 272–79

Currency and coin, operations 

developments in, 123–24, 

Debt services for federal gover

125

Depository services to federal

government, 124–26

Deposits, 272–79

Directors of, 242, 243–58

Discount rates, 155–56, 269

Electronic access to services, 1

Examinations of, 127–28

Examiner training, 84, 85, 101

FedLine Advantage, 126

FedLine Command, 126–27

FedLine Direct, 126–27

Fedwire Funds Service, 121–2
Federal Reserve Banks—Continued

Fedwire Securities Service, 122, 126

Financial statements, combined, 321–35

First Vice Presidents, Conference of, 242

Fiscal agency services, 124–26

Government depository services, 124–26

Income and expenses of, 128–29,

286–89, 290–95, 323

Information technology developments,

127

Interest rates on loans to depository

institutions, 269

National Settlement Service, 121–22,

126

Officers and employees, number and

salaries of, 297

Officers, list of, 240–41

Operations, volume of, 129, 296

Payments services, 125

Payments to U.S. Treasury, 129, 288–89

Premises of, 129–30, 298

Presidents, Conference of, 241

Priced services, 119–22, 131–34

Reserve balances, 272–79

Salaries of officers and employees, 297

Securities and loans, holdings of, 129,

130, 268, 272–79

Statements for priced services, 131–34

Statements of changes in capital, 324

Statements of condition, 282–85, 322

Statements of income, 323

Federal Reserve Board (See Board of

Governors)

Federal Reserve Electronic Tax Application

(FR-ETA), 125–26

Federal Reserve Fiscal Impact Tool (FIT),

115–16

Federal Reserve System (See also Board of

Governors and Federal Reserve

Banks)

Audits, reviews, and assessments, 301,

337, 338

Banking structure, U.S., regulation of,

84–88

Basel Committee activities, 72, 75–77

Consumer protection responsibilities,

91–96

Decisions, public notice of, 88

Enforcement actions, 71 , 98–100

Hurricanes, response to, 77, 98, 101

Information technology developments,

127

Federal Reserve System—Contin

Maps of, 340–41

Membership, 89

Safety and soundness responsi

64–72

Supervisory information techno

Supervisory policy, 73–83

Surveillance and off-site monit

71–72

Technical assistance, 72

Training and staff developmen

101–2

Federal sector, developments in, 

45–46

Federal tax payments, 125–26

FedLine Advantage, 126

FedLine Command, 126–27

FedLine Direct, 126–27

Fedwire Funds Service, 121–22, 

Fedwire Securities Service, 122, 

FFIEC (Federal Financial Institut

Examination Council), 72, 7

84, 100–101, 102, 104–7, 14

Fiduciary activities, supervision o

Finance

Business, 15–17, 44–45

Household, 13, 42

Financial account, U.S., 22, 49

Financial Accounting Standards B

(FASB), 74

Financial education, consumer, 1

111–13

Financial holding companies, 64, 

Financial information and disclos

research on, 112–13

Financial intermediation, 29–30, 

Financial Literacy and Education

Commission (FLEC), 112

Financial markets, 5–6, 26–30, 5

Financial Netting Improvements 

Financial services, access to, 115

Financial Services Regulatory Re

30, 66, 86, 87, 112, 139, 21

Consumer-related provisions, 1

Enforcement-related provisions

Monetary policy provisions, 13

Studies and reports, 146

Supervisory and regulatory pro

140–44

Financial Stability Institute, 72

Financial statements

Board of Governors, 303–19
Financial statements—Continued

Federal Reserve Banks, combined,

321–35

Federal Reserve priced services, 131–34

Fiscal agency services, Federal Reserve

Banks, 124–26

FIT (Federal Reserve Fiscal Impact Tool),

115–16

Float, 122, 272–79

Flood insurance, 100

FOMC (See Federal Open Market

Committee)

Foreign banks, U.S. activities of, 68, 88

Foreign Bank Supervision Enhancement

Act, 88

Foreign currency operations

Authorization for conduct of, 159–60,

165–66

Directives, 160–61, 166–67

Procedural instructions for, 161, 167

Foreign economies, 30–34, 56–59

Foreign operations of U.S. banking

organizations, 67, 87–88

Foreign trade, 20–22, 47–49

GDP (gross domestic product), 7, 9,

17–18, 35, 36, 37, 38, 45

Golden West Financial Corporation,

acquisition, 97

Gold stock, 272–79

Government (See Federal government and

State and local governments)

Government Accountability Office (GAO),

146, 301, 338

Government depository services, Federal

Reserve Banks, 124–26

Government Performance and Results Act

(GPRA), 135–37

Government Securities Act, 70

Government securities dealers and brokers,

examination of, 70

Gramm-Leach-Bliley Act, 63, 66, 79, 86, 146

Home equity lending, 77–78 (See also

Household sector)

Homeland Investment Act (HIA), 22, 49

Home Mortgage Disclosure Act (HMDA),

91, 96, 97, 99–100, 102–3

Home Mortgage Disclosure (Regulation C),

96, 102

Home Ownership and Equity Protection

Act (HOEPA), 91, 96, 110

Household sector, 10–13, 40–42

Housing and Urban Developmen

Department of, complaint re

109

Hurricane damage and response, 

98, 101

Imports, 20–22, 48–49

Income and expenses

Board of Governors, 305

Federal Reserve Banks, 128–2

290–95, 323

Federal Reserve priced service

Industrial economies, 31, 32–33, 

57–58

Inflation, 4–5, 24–26, 35, 36, 38–

53

Information Security Architecture

Framework (ISAF), 127

Information technology

Federal Reserve examination o

in Federal Reserve operations, 

supporting Federal Reserve sup

83

Inspections (See Examinations an

inspections)

Inspector General, Office of (OIG

337

Insured commercial banks (See

Commercial banks)

Interagency Working Group for T

Market Surveillance, 28–29

Interest rates (See also Discount 

Federal funds rate), 5, 26–2

54–55, 269

International Accounting Standar

39, 77

International Accounting Standar

(IASB), 76–77

International Banking Act, 64, 88

International banking activities, s

of, 67–68, 73, 75–77

International Banking Operations

(Regulation K), 75, 152

International Monetary Fund, ind

global metals prices, 48

International trade, 20–22, 47–49

Investment

Business sector, 13–15, 42–44

Overseas, by U.S. banking org

87–88

Residential, 11–13, 41–42
Joint Forum, 76

Labor market, 22–24, 49–51

Large complex banking organizations

(LCBOs), supervision of, 65–66

Legislation, federal, 139–48

Liabilities (See Assets and liabilities)

Litigation involving Board of Governors

Artis, 229

Barnes, 229

Inner City Press/Community on the

Move, 229

Jones, 229

Price, 229

Texas State Bank, 229

Loans, Federal Reserve Bank holdings,

129, 130, 272–79

Loans to Executive Officers, Directors, and

Principal Shareholders of Member

Banks (Regulation O), 152

Local governments, 19–20, 46–47

Maps, Federal Reserve System, 340–41

Margin requirements, 281

Market risk capital rule, 73

Marshall & Ilsley Corporation, acquisition,

97

Member banks (See also State member

banks)

Assets and liabilities, 280

Examination of foreign operations, 67

Number of, 271

Reserves, 277, 279

Members and officers

Board of Governors, 233–35, 259–62

Consumer Advisory Council, 238

Federal Advisory Council, 237

Federal Open Market Committee, 236

Federal Reserve Banks and Branches,

240–41

Thrift Institutions Advisory Council,

239

Membership of State Banking Institutions

in the Federal Reserve System

(Regulation H), 100, 152

Middle East and North Africa Financial

Regulators’ Training Initiative, 72

Mid-Session Review, 45

Military Personnel Financial Services

Protection Act, 147–48

Model Tribal Secured Transactions Act

(MTA), 115

Monetary aggregate (M2), 30, 56

Monetary Control Act, 119

Monetary Policy Reports to the C

February 2007, 3–34

July 2006, 35–59

Monetary policy (See also Federa

Market Committee), 3–6, 35

Money-laundering prevention, 68

Mortgage interest rates, 12–13, 4

Mortgage products, nontraditiona

93, 94–95, 111–12, 154

Municipal securities dealers and 

examination of, 70

MyMoney.gov, 112

National Association of Realtor

price index, 12, 41

National Association of Securitie

Inc., 104

National City Corporation, acqui

National Defense Authorization A

National Examination Database (

National Flood Insurance Act, 10

National Flood Mitigation Fund, 

National income and product acc

(NIPA), 11, 17, 19, 45–47

National Information Center (NIC

National Information Security As

(NISA), 127

National Settlement Service, 121

NeighborWorks America, 116

Nonmember banks

Assets and liabilities, 280

Foreign operations, 67

Number of, 271

North Fork Bancorporation, Inc.,

acquisition, 97

Notes, Federal Reserve (See also 

and coin), 282–85

Notice of proposed rulemaking (N

73–74

Office of Federal Housing Ente

Oversight (OFHEO), 12, 4

Office of Inspector General (OIG

337

Oil prices (See Energy prices)

Open market operations

Authorization for conduct of, 1

163–64

Volume of transactions, 264–6

Operation HOPE, 116–17
Operations, volume of, Federal Reserve

Banks, 129, 296

Outreach activities, 111, 115–17

Paper Check Conversion, Treasury

Department program, 126

Pay.gov, 126

Payments services, Federal Reserve Banks,

125

Payments System Risk, Federal Reserve

policy, 29, 122

Payments to U.S. Treasury, Federal Reserve

Banks, 129, 288–89

Payroll card accounts, 92

PCE (personal consumption expenditures),

9, 10, 24–25, 38–39, 51–53

Performance Report Information and

Surveillance Monitoring (PRISM), 72

Policy actions

Board of Governors, 151–56

Federal Open Market Committee,

157–227

Premises, Federal Reserve Banks, 129–30,

298

Presidential $1 Coin Act, 123

Priced services, Federal Reserve Banks,

119–22, 131–34

Prices

Consumer, 3, 24–26, 35, 51–53

Energy, 3, 21–22, 24–26, 35–36, 48–49,

51–53

Equity, 28, 55

Exports and imports, 21–22, 48–49

PricewaterhouseCoopers LLP, 128, 321

Primary credit rate, 155, 269

PRISM (Performance Report Information

and Surveillance Monitoring), 72

Privacy of Consumer Financial Information

(Regulation P), 105

Private-sector adjustment factor (PSAF),

119, 134

Productivity, 23–24, 50–51

Profits, corporate, 15–17, 44–45

Project Management Book of Knowledge,

127

Public notice, Federal Reserve decisions,

88

Real estate

Appraisals, 77

Lending, 78, 80–81, 154

Regions Financial Corporation, a

97

Regulations

B, Equal Credit Opportunity, 1

C, Home Mortgage Disclosure

D, Reserve Requirements of D

Institutions, 151

E, Electronic Fund Transfers, 9

104–5, 109, 151

H, Membership of State Banki

Institutions in the Federal 

System, 100, 152

K, International Banking Oper

152

M, Consumer Leasing, 105

O, Loans to Executive Officers

Directors, and Principal

Shareholders of Member 

152

P, Privacy of Consumer Financ

Information, 105

U, Credit by Banks and Person

than Brokers or Dealers f

Purpose of Purchasing or 

Margin Stock, 70, 89, 281

Y, Bank Holding Companies a

in Bank Control, 152–53

Z, Truth in Lending, 96, 105–6

AA, Unfair or Deceptive Acts 

Practices, 106

BB, Community Reinvestment

CC, Availability of Funds and 

of Checks, 106–7

DD, Truth in Savings, 107

Reports of Condition and Income 

Reports), 71–72, 82, 143

Republic Bancshares of Texas, In

acquisition, 97

Reserve requirements, depository

institutions, 270

Reserve Requirements of Deposi

Institutions (Regulation D), 

Residential investment, 11–13, 4

Returned-item fees, 92

Revenue (See Income and expen

Riegle Community Development 

Regulatory Improvement Ac

Risk-focused supervision, Federa

System, 65–66

Risk management, 65–66, 77–79

154
Salaries, Federal Reserve Bank officers

and employees, 297

Sarbanes-Oxley Act (SOX), 127–28

Secondary and seasonal credit rates, 155,

269

Securities (See also Federal agency

securities and obligations and

Treasury securities)

Banks’ activities, 79

Clearing agencies, examination of, 69–70

Credit lenders, examination of, 70

Government and municipal, examination

of dealers and brokers, 70

Transfer agents, 69–70

Securities credit, 70, 89, 281

Securities Exchange Act, 69, 70, 79, 89

SEER (System to Estimate Examination

Ratings), 71

Senior Loan Officer Opinion Survey on

Bank Lending Practices, 16

Small bank holding company threshold, 79

Sound Practices concerning Elevated Risk

Complex Structured Finance

Activities, interagency statement, 154

Special drawing rights certificate account,

272–79

SSIT (See System supervisory information

technology)

Staff development, Federal Reserve, 84, 85,

101–2

State and local governments, 19–20, 46–47

State member banks (See also Member

banks)

Assets and liabilities, 65

Complaints against, 107–9

D.C.-chartered banks, 144

Examinations of, 64, 65, 66

Fair lending violations, 98–99

Financial disclosures, 88–89

Number of, 65, 271

Surveillance and off-site monitoring of,

71–72

Stocks

Margin requirements, 281

Price indexes, 28 55

Supervision and regulation responsibilities,

Federal Reserve System, 63–89,

96–107

Supervision and Regulation Statistical

Assessment of Bank Risk (SR-SABR),

71–72

Surveillance and off-site monitor

71–72

Suspicious Activity Reports (SAR

Swaps, 159, 165

System Open Market Account (S

(See Federal Open Market C

and Open market operations

System supervisory information t

(SSIT), 83

System to Estimate Examination 

(SEER), 71

Tax collection, electronic, 125–2

Technical assistance to foreign b

authorities, 72

Technology Project Standards (T

Thrift Institutions Advisory Coun

Trade, international, 20–22, 47–4

Training and development, Feder

staff, 84, 85, 101–2

Transfer agents, examination of, 

Treasury, U.S. Department of the

Cash holdings, 272–79

Currency outstanding, 272–79

Paper Check Conversion and E

Check Processing program

Payments to, by Federal Reser

129, 288–89

Services provided to, by Feder

Banks, 124–26

Treasury securities

Commercial bank holdings, 28

Federal Reserve Bank holding

130, 268, 272–79

Open market transactions, 264

Treasury Tax and Loan (TT&L) 

126

Trustmark Corporation, acquisitio

Truth in Lending Act (TILA), 10

Truth in Lending (Regulation Z), 

105–6, 109–10

Truth in Savings (Regulation DD

Unemployment, 7, 22–23, 38, 49

Unfair or Deceptive Acts or Prac

(Regulation AA), 106

Uniform Bank Performance Repo

Unlawful Internet Gambling Enfo

Act, 146–47

Unregulated practices, state mem

108–9
Unsafe and Unsound Use of Limitation of

Liability Provisions in External Audit

Engagement Letters, interagency

advisory, 75, 153

Wachovia Corporation, acquisi

West Texas intermediate crude oi

21, 48

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